California’s Zero-Emissions Program is Struggling Due to its Structure

Even though Toyota sold less than 300 hydrogen fuel-cell vehicles in California this year, and even though it doesn’t sell an EV, it still will almost certainly meet California’s zero-emission vehicle mandate.

That’s because Toyota can use state-issued environmental credits to meet the mandate, instead of relying on current vehicle sales.

Thanks to the Golden State’s intricate credit system, California lags behind the pace it would need to meet its sales goals for zero-emission vehicles (ZEVs). Initially, California had guessed that its regulations regarding ZEVs would lead to ZEV sales making up 15 percent of all auto sales in the state by the year 2025. The number has sat at around 3 percent since 2014, however.

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This is because automakers can compile credits based on past ZEV sales, or they can buy them from competing makes – particularly competing automakers that deal more heavily with battery electric vehicles, makes such as Tesla, which sells only EVs, or Nissan, which sells the electric Leaf. Automakers have been so keen on stocking credits that the Natural Resources Defense Council performed an analysis which showed that some automakers won’t need to sell a ZEV in the state for years because they have enough credits to meet the mandates.

Weak consumer demand is a problem, too. Credits or not, automakers would certainly invest more in ZEV products if buyers were more interested.

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The California Air Resources Board (CARB), the state’s regulator for greenhouse gas emissions, plans to discuss changes to its ZEV programs by December of this year. There’s a good chance the focus will be on the credit system, and that could lead to spats between legacy automakers and the start-up Tesla.

Regulators are, of course, in the middle of such corporate fights. The head of CARB, told Reuters that she’s aware of the sales issues concerning ZEVs, a category that includes EVs, plug-in hybrids, and hydrogen fuel-cell vehicles.

“I’m concerned,” CARB chair Mary Nichols said to Reuters. “It’s a very ambitious goal and would require – if you look at where we are today and where we need to go – a big change in what consumers are seeing and what they’re buying.”

She added that regulatory changes might be needed in order to spur sales.

California is often viewed as the vanguard on environmental regulations by key influencers outside of the state, from regulators in other states to automakers to activists to environmentalists. As such, that means any changes will be closely watched and monitored by outsiders.

The battle lines are being drawn between startups like Tesla and older, more-established automakers. Tesla CEO Elon Musk had strong words for regulators, saying they “should damn well be ashamed of themselves” for not using regulations to force automakers to build more ZEVs, while others in the industry say that they can’t make consumers purchase ZEVs, especially since at this juncture, many EVS are either costly, impractical, or both.

“It’s a mandate for us to produce vehicles, but there is no mandate for customers to buy them,” Michael Lord, a top engineer at Toyota who works with regulators, said.

On the other hand, Tesla can benefit from selling credits – the small automaker has reported over $600 million in credit sales to this point. Even with that money funding its operations, Tesla still isn’t profitable, in part because its only two current models are a high-end sedan and a luxury SUV. Tesla will need to sell to a broad audience, which it plans to do with the upcoming Model 3. If that car is a success, consumer acceptance of ZEVs may broaden.

Meanwhile, industry giants Toyota and Honda are both working on fuel-cell vehicles, and regardless of how well they sell, production of those vehicles will earn credits for both automakers. That’s key, as fuel-cell vehicles have sold in tiny numbers in limited market areas to this point. In the case of these two vehicles, both are being launched in the Los Angeles and San Francisco areas, as the hydrogen stations that are needed for refueling are impossible to find nearly anywhere else. Neither vehicle will be cheap, either, with projected pricing for both at around $60,000, which is firmly in luxury-car territory.

Toyota has said the Northeast is the next major market for Mirai in the next couple of years, but industry watchers have expressed more than their share of skepticism as battery electric gain range and costs come down.

Toyota has said the Northeast is the next major market for Mirai in the next couple of years, but industry watchers have expressed more than their share of skepticism as battery electrics gain range and costs come down.

The two cars, Toyota Mirai and Honda Clarity, will snag nine credits each per sale, compared to four per sale for the Tesla Model S or three per sale for the Nissan Leaf that California currently awards. Each credit is worth $3,000 to $4,000, according to Reuters. But with California being the nation’s largest market for cars and with both Honda and Toyota selling large numbers of gasoline-powered cars (over 400,000 last year for Toyota), those credits will be even more valuable to the automakers as a way to satisfy mandates.

It also buys the automakers time to work on developing ZEVs. Even after over 20 years of research and development, Toyota does not expect hydrogen fuel-cell cars to have a strong market for another five to ten years. Lord told Reuters that the credits could be used to buy the automakers time to develop fuel-cell vehicles with longer driving ranges, and even if the market is small at first, having some of these vehicles available will help spur consumer demand – and the development of the needed infrastructure.

“It just takes time,” Lord said. “Just as with hybrids, every generation is better the one that came before.”

There are several reasons that ZEVs make up less than 1 percent of American auto sales. Gas prices are falling, electric-car ranges are still short, gasoline-powered cars are improving when it comes to range, and recharge times remain long for electric vehicles. Chevrolet and Tesla may cause more consumer demand for electric cars next year, when both launch affordable EVs with promised 200-mile ranges.

Toyota has focused on hybrids and plug-in hybrids instead of EVs (plug-in hybrids run on electric power for a short distance until a gas engine kicks in), and California is looking to reduce credits for plug-in hybrids after 2018. Toyota isn’t happy about the plan, as the automaker feels that plug-ins will help consumers transition to EVs, thanks to their longer ranges.

With the National Resources Defense Council predicting that ZEVs will only account for 6 percent of sales by 2025 instead of the hoped-for 15 percent, other proposals are on the table. One would limit the number of credits a single automaker could redeem in a single year. That might spur more ZEV development, but it would take money out of Tesla’s pocket, so naturally the startup has proposed quadrupling the number of credits needed to achieve the mandate – a move that would increase the value of the company’s credits while possibly also incentivizing more ZEV work from other automakers.

Tesla has tweaked other OEMs by calling their EVs “appliances,” while other automakers argue that the consumers don’t want EVs, period. Caught in the middle are companies like Nissan, which sell both EVs and gas-powered cars in California, and therefore would like to leave the current rules as-is.

“Nissan is concerned with any proposal that materially changes a regulation midstream,” Ken Srebnik, senior manager, corporate development told Reuters.

Reuters