Have you been waiting for clarity on the ZEV Mandate?

Clarity on the ZEV Mandate

Good news is that we have an update. Bad news is that further consultation is required, and the complexities of the proposal will potentially lead to a new high stakes car(d) trading game.

The Government published it's Powering Up Britain plan as the latest policy statement on the decarbonisation of the UK economy. Hidden amongst thousands of pages is an update on the Zero Emission Vehicle consultation undertaken in 2022. It's potentially extremely consequential for car manufacturers, dealers and leasing companies so here are the key points and what they might mean.

Qualification

To qualify as a ZEV, products must:

• Emit no CO2 or any other targeted greenhouse gas emissions.
• Have a minimum range of 120 miles (WLTP).
• Offer an 8 year or 100,000-mile battery warranty with replacement of any battery that dips below 70% of its original capacity.

Trajector

The UK has previously stated that 2030 would see a ban on the sale of new ICE vehicles. At least that is the way it has been reported. However, the latest proposals are suggesting only an 80% ZEV compliance at that point. And full 100% compliance by 2035 which drags us more in-line with the European Union.

The mooted 22% target for ZEV registrations in 2024 seems to be firming up and given that is only 21 months away, it will seem a tall order for many OEMs. We speculated on the outcomes of this target in our recent paper https://www.macintyrehudson.co.uk/insights/article/mission-zero-and-what-it-means-for-uk-automotive.

However, in a sensible concession the government seems to be suggesting a transition period which will allow manufacturers the ability to avoid large fines by banking, borrowing or trading ZEV credits over the first three years of the mandate.

Banking - Overachievement of ZEV target will allow banking credits for future years. Banked credits will expire after three years to allow supply of credit for trading (see below).

Borrowing - OEMs will be able to borrow ZEV credits to avoid a penalty, but they will pay back with interest set at 3.5% in order to maintain carbon savings. The amount of borrowing credit will start at 75% in 2024 (16.5% of total registrations) and decrease in 25% increments. Any debts must be repaid by end 2027.

Trading - OEMs may trade ZEV credits on an open market basis which means that Tesla may be able to sell its over performance to other OEMs who are lagging in the electrification of their fleets. Government is suggesting valuation of these credits should be left to the market to decide.

Consequence

Whilst this transition period offers some hope to OEMs who have very low BEV penetration, in 2023 the sting is that government is suggesting that payments for non-compliance (fines) are significant. Although this document is not law it proposes per unit payments of £15,000 for a non-ZEV car and £18,000 for a non-ZEV van.

Not only does that mean that non-ZEV units would be sold unprofitably but it would severely impact on the profitability of compliant cars and vans.

Concessions

Unlike in the EU there is no mention of exemptions for E-fuels. There are exemptions for small manufacturers (sub-2500) units per annum.

There are also proposals that may allow additional credits for vehicles that have special purposes (e.g. wheelchair accessible) or vehicles registered to Car Clubs which reduce overall carbon emissions via sharing. In these instances, there will be a 50% weighting applied to ZEV units.

Complexity

Amongst the proposals are also mechanisms that allow the ZEV mandate to sit in harmony with the existing CO2 emissions regulation.

This means that OEMs will be able to use excess ZEV credits to offset their fleets CO2 emissions. This is a bit like Tesla can do today by selling credits to other OEMS. I'll spare you the detail but integration with existing legislation, whilst complex is a wise move.

Outcomes

It must be noted that this is a further consultation document and not committed policy. However, much of the original proposal remains and seems to have 'firmed up' in its thinking. The sector needs clarity and we do not yet have this. To be in a position 21 months out from law implementation and not be 100% sure of the rules shows government's lack of commercial reality.

Acknowledging that a transition period is required certainly helps but from an OEM perspective the complexity of volume planning and marketing increased.

Normally when that happens, we get further away from delivering outcomes that are in the consumer interest.

Decarbonising transport was always going to be huge challenge and now we are gradually seeing the fog lift and the path to 2030 (2035) becomes a little clearer.

We will give a more detailed assessment of what this might mean for the retail car sector in a future update.

Please do not hesitate to contact us to discuss further.

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