Low- and zero-emission vehicle mandates
Governments can require that car and vehicle makers produce and sell a minimum percentage of Low- and Zero- (tailpipe) Emission Vehicles (LZEVs) through mandates. These mandates aim to ensure that investments to manufacture and market LZEV technologies are mobilised to ramp up production volumes more rapidly, triggering economies of scale and decreasing technology costs. Mandates typically become more stringent over time and may be adapted as technologies evolve. Policy designs of mandates can also integrate systems that allow automakers to create manufacturer pools to meet regulatory targets (e.g. an over-compliant manufacturer may pool with a non-compliant manufacturer, resulting in this pool of manufacturers being compliant with the requirements). Mandates should come with significant non-compliance fees, higher than the technology costs of the technologies that they aim to promote.
A frequent metric used to assess compliance is g CO2/km, measured at the vehicle's tailpipe and according to clearly defined test procedures like the worldwide harmonised light vehicle test procedure, WLTP. LZEV regulations on tailpipe CO2 emissions should be part of a set of policies that ensure that CO2 emissions can be reduced across the whole life cycle of both vehicles and fuels. A holistic assessment of CO2 emissions becomes increasingly important with an increased uptake of electric vehicles that produce zero tailpipe emissions.
Where LZEV mandates are defined using the g CO2/km metric, they are technology-neutral, meaning they do not specify which technology a vehicle manufacturer should pursue. Instead, the manufacturers can decide the best strategy to reach the mandate and the respective g CO2/km thresholds.
LZEV regulations reduce tailpipe emissions of CO2 from drivers who would have otherwise purchased a conventional (petrol or diesel-powered) vehicle. LZEVs use of electricity can significantly reduce emissions from a life-cycle perspective. Thanks to the energy efficiency of electric motors, more energy diversification of the electricity mix and a tendency of electricity generation to move towards more cost-competitive renewable energy, this is already a reality in most global markets and for most battery-electric vehicles types. This effect holds true despite CO2 emissions generated from battery manufacturing and the remaining reliance of many markets on non-renewable energy for electricity generation. The potential of life-cycle emission reductions from fuel cell vehicles has not yet materialised to a similar degree because hydrogen is produced mainly from fossil resources. Also, fuel cell vehicles have limited energy efficiency improvements compared with battery-electric ones.
The exact magnitude of the current and potential life-cycle CO2 emission reduction for LZEVs, battery-electric or other, will depend on various factors, including:
- Vehicle size: the efficiency gap between small ICE vehicles and small BEVs is lower for small vehicles.
- Specific vehicle attributes like battery sizes, with greater net savings for small batteries.
- Other supply-chain characteristics, including battery materials and battery manufacture.
As the impact of LZEV mandates will heavily depend on the carbon intensity of energy sources in the future, and as energy mixes are becoming cleaner around the world, the CO2 mitigation potential of LZEV mandates is set to increase over time.
Implementation costs associated with LZEV regulations include the up-front fixed costs of stakeholder engagement and the variable costs of enforcing the regulation. LZEV regulations may generate revenue for the public purse if non-compliant automakers pay fines.
To raise funds for an LZEV transition or mitigate financial risks from climate change, vehicle manufacturers may increase prices on regular vehicles or shift their product mix towards higher-value vehicles. These actions can result in increased average vehicle purchase costs in the short term. In the longer run, costs for new technologies typically decrease, as is expected to be the case with LZEVs. Automakers may then also decide to reflect such decreases in sales prices.
Given the impacts of LZEV mandates on pricing structure, vehicle manufacturers may try to 'just' reach the mandated objective but not exceed it. LZEV mandates should, therefore, be combined with other policy measures that help ensure continuous and fleet-wide emissions reductions (see further below).
Vehicle buyers will usually benefit from lower vehicle operating costs than conventional vehicles of some LZEVs - particularly battery-electric vehicles - throughout the vehicle ownership period. Net saving from currently higher purchase costs and lower operational costs is already possible in battery-electric and plug-in hybrid vehicles on a total cost of ownership basis for specific use cases. Prospects for reductions of upfront purchase costs of LZEVs also point to a broadening and strengthening of this effect soon across a broad range of vehicle users. Studies suggest that declining battery costs will make electric vehicles less expensive than conventional vehicles before 2030.
LZEV regulations help reduce local air pollution and accelerate technological innovation that lowers the costs of LZEVs globally.
Technical and cost Improvements in batteries and electric motors for cars will also support the transition towards electrification for lighter vehicles, including motorcycles, scooters and emerging micro-mobility modes, such as electric kick scooters and bicycles.
LZEV owners usually enjoy a lower marginal cost of driving, and therefore may drive more and contribute to other externalities such as congestion and road fatalities (McConnell, 2019). Furthermore, LZEV mandates may dissuade consumers from replacing old, highly polluting vehicles as long as upfront costs and other barriers - like access to charging infrastructure - remain higher than the costs of comparable conventional vehicles.
Automakers may resist LZEV regulations, arguing that they are "technology forcing" and less cost-effective than more flexible regulations or economic measures. They may also argue that a move to alternative powertrains jeopardises their competitiveness given their long-standing know-how and expertise in international combustion engine vehicles. However, there is a growing consensus that LZEV mandates that reduce total vehicle ownership costs can ensure that manufacturers do not lose market share. The mandates can allow better access to capital and raise revenues from digital services like integrating EVs with the electricity grid. LZEV mandates can also help the automotive industry maintain and enhance its competitiveness through new revenue streams and technologies. Regulators should consider carefully how LZEV regulations might help or harm local automakers, depending on their capacity to produce LZEVs and long-term implications on the economy and environment.
Many policy measures have synergistic or complementary effects on LZEV mandates:
- Pairing LZEV mandates with fuel economy/vehicle efficiency standards can effectively ensure that a vehicle sales transition towards LZEVs also delivers fleet-wide CO2 emission reductions. Whether mandates or standards are more effective in accelerating the decarbonisation of road transport depends on the specific policy designs and local circumstances, including electricity production.
- Differentiated taxation on vehicle registration and/or circulation (or feebate programmes) can complement regulatory requirements and support a shift in consumer choices.
- Prioritising LZEVs for public procurement programmes can help increase supply and secure demand, enabling scale increases and cost reductions.
- Clean miles standards, requiring the achievement of GHG emission reductions on a per km travelled basis, can help ensure LZEVs prioritise vehicles with high lifetime travel. These vehicles will benefit most from a lower total cost of ownership.
- Awarding extra credits for LZEVs in carsharing systems can encourage carpooling and public transport use while concentrating LZEV sales in high-intensity activities. Credits can also be advantageous for already cost-competitive schemes.
- Using electric vehicles and smart grids can help LZEVs provide several grid services - like frequency regulation, local network stability and load shifting - provided the electricity markets enable participation by aggregators of demand-response services.
- Investing in electric vehicle charging - or refuelling - infrastructure is essential for battery-electric vehicles and can help make them more marketable.
- Regulatory measures can help reduce the carbon content of the energy used through renewable electricity quotas, low-carbon energy mandates and low-carbon fuel standards.
- Regulatory requirements on the carbon embedded in vehicle and component manufacturing processes, recyclability requirements and sustainable sourcing of materials, will help achieve a better environmental performance of LZEVs over their whole life-cycle.
- Taxes on fuels with high carbon content increase the cost competitiveness profile of LZEV with high energy efficiency, as they widen the operational cost advantages that they enjoy.
- Low- or zero-emission zones encourage people and businesses to switch to zero-tailpipe emissions vehicles.
ITF (2021) Transport Climate Action Directory – Low- and zero-emission vehicle mandates
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