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Will California's Zero-Emissions Mandate Alter the Car Landscape?

Expect More EVs and Fuel-Cell Vehicles, But Not Everywhere

(updated May 27th, 2015)

Depending on which side you take in the political argument over government automobile regulation, California is either a champion of clean air and improved fuel efficiency or a ravening beast determined to destroy the auto industry and our freedom to choose the cars and trucks we want.

The state's latest update to its zero-emissions vehicle rules, usually called the ZEV (Zero Emission Vehicle) mandate, won't resolve the argument, but it will bring big changes to the mix of cars on sale in California, not to mention at least nine other states that collectively make up nearly a third of the U.S. market for new-car sales. You may be a car buyer in Vermont, but California is deciding what cars you might be seeing on dealer lots.

By the 2025 model year, automakers that sell vehicles in California will have to make 15.4 percent of them ZEV. That's an estimated annual output for one state of 270,000 EVs, plug-in hybrids and fuel-cell electrics, based on projected 2025 statewide sales of 1.75 million new cars and light trucks. Plug-in hybrids with extended all-electric range are expected to account for about two-thirds of the total.

California's ZEV mandate is designed to rapidly expand the number of electric vehicles available to consumers.

California's ZEV mandate is designed to rapidly expand the number of electric vehicles available to consumers.

California Not Alone

California isn't riding solo into this new frontier of battery and fuel-cell cars and trucks. Federal law permits other states to adopt California automotive emissions rules when they are stricter than federal regulations. And the ZEV mandate is stricter because it has no federal counterpart. So far, nine other states and the District of Columbia all have said they will follow California's lead with ZEV requirements of their own.

The "ZEV regions" are California, Connecticut, D.C., Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont. Because they account for nearly a third of the nation's annual new-car sales, they are a force the auto industry cannot ignore.

It's not certain that the cars and trucks made to satisfy the mandate will be available beyond the ZEV states. But if automakers believe they can recoup some of their development and production costs for these expensive-to-build vehicles by spreading them around to non-ZEV states, that's what will happen. And several major car companies, including Ford, General Motors and Nissan, are thinking that way.

Even if the new crop of emissions-free vehicles were limited to ZEV states, the total annual requirement by 2025 would be almost 800,000 zero-emissions vehicles.

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What Is a Zero-Emissions Vehicle?

By the 2025 deadline, there may be some as-yet-untried technology that will meet the criteria for being a zero-emissions vehicle. But for now, the definition of a zero-emissions vehicle encompasses two advanced technology vehicles.

One is a vehicle that will use an electric-drive system powered by rechargeable batteries. The other is an electric-drive vehicle with fuel cells that make electricity from compressed hydrogen gas fuel in an onboard electrochemical process. California looks at tailpipe emissions to determine ZEV status. The amount of emissions generated by the production of the fuel that the vehicles use isn't considered. Also, plug-in hybrids get credits for the portion of travel powered solely by their onboard batteries, before their internal combustion engines or generators kick in.

Emissions Goals

The ZEV mandate was designed to work with federal fuel-efficiency rules so automakers wouldn't have conflicting regulations to deal with. The federal rules, called the National Plan, have the aim of lowering greenhouse gas emissions and reducing petroleum consumption. Federal rules for 2017-'21 have been finalized and rules for the 2022-'25 model years have been tentatively set, subject to a future review.

If adopted unchanged, the rules would establish a 54-mpg fleetwide average fuel efficiency standard to be met by the 2025 model year — equivalent to 38-40 mpg in real-world fuel economy.

The upshot is that by combining its ZEV mandate with the National Plan, California will require by 2025 that every vehicle sold in the state use far less petroleum fuel and emit far fewer toxins, smog-causing chemicals and greenhouse gases than do present vehicles.

With its Advanced Clean Cars program, California is seeking a 47 percent reduction in automotive greenhouse gas emissions (principally CO2) by the end of the 2025 model year compared to today's levels, according to the California Air Resources Board, which wrote the ZEV mandate. That lowering of total tailpipe emissions would be the equivalent of taking 8 million of today's cars and trucks off the road. Additionally, the requirements will cut smog-forming emissions from passenger cars and light trucks by 75 percent from 2016 levels, according to the state air board.

Price vs. Cost

Economists for the state air board estimate that the technologies required by the ZEV mandate would add $1,900 to the price of the average new vehicle sold in the state in 2025. But consumers would earn that back with three years of fuel savings, according to the board.

While there presently are state and federal incentives for purchasing most battery- and fuel-cell electric vehicles, there's nothing in the ZEV mandate that continues the state's rebate program after it expires in 2016. There's also no assurance that Congress will continue any federal incentives when the present tax rebate plan expires. The plan now applies to the first 200,000 qualifying vehicles sold by each automaker.

The Updated Mandate

The 2017-'25 ZEV mandate is the sixth generation of a set of rules that were first laid down in 1990 as part of the state's original Low Emissions Vehicle law.

The newest requirements take effect in 2017 and are in effect through 2025. From now through 2017, the rules require major automakers in California to collectively produce about 60,000 zero-emissions vehicles, starting with 4,000 this year. The numbers ratchet up sharply when the new regulations hit.

Because they have the biggest annual sales volumes in California, only Chrysler, Ford, General Motors, Honda, Nissan and Toyota initially will be affected by the updated mandate. They also are the only automakers affected by the present plan. Beginning in 2017, however, BMW, Hyundai and its Kia subsidiary, Mazda, Mercedes-Benz and Volkswagen and its Audi unit also will fall under the new rules.

The idea behind the ZEV mandate is that cars and trucks contribute to air pollution, so the state can clean up the environment by requiring a significant portion of them to be fueled by something that doesn't cause them to emit smog-forming and toxic chemicals.

When electricity is the main alternative fuel, a large part of the pollution is simply moved from the cars to the power plants. But the net result is still cleaner air — especially in states like California, which generate electricity by using relatively clean fuels such as natural gas and renewable sources such as water, wind and solar power.

The cumulative tally of zero-emissions vehicles on California roads by 2025 is expected to be 1.4 million, and the annual sales total that year would be almost 250,000 vehicles. After 2025, automakers would have to produce sufficient ZEVs for the California market to equal 15.4 percent of each year's total new passenger vehicle sales.

When One ZEV Counts as Many

One provision of the ZEV mandate intended to ease the burden on automakers is the "travel rule." It anticipates that battery-charging and hydrogen-fueling infrastructures will be installed in some states, such as California, long before making it to others, such as Vermont and Maine. So the plan initially permits automakers to "travel" credit for cars sold in California in a proportional basis to the other ZEV states.

For example, if 2018's total new-car sales in New York are 90 percent of new-car sales in California, and Vermont sales are 40 percent of California's, then 40 ZEVs sold in California that year will count as 36 ZEVs toward meeting New York's requirement and as 10 ZEVs in Vermont.

The net result will be fewer ZEVs than the absolute numbers would seem to dictate in the first few years of the plan. But automakers still will have to sell some ZEVs in each state until the travel policy for battery-electric vehicles expires in 2017. After that, all the requirements will have to be met in each of the states.

Because hydrogen fuel infrastructure is expected to be more difficult to spread nationally, automakers will be allowed to continue to "travel" proportional credits for fuel-cell electric vehicles through 2025.

The ZEV Credit Market

Another element of the rules already in effect is the ZEV credit provision, which lets automakers earn credits based on all-electric range for vehicles that don't have gasoline engines, such as the Nissan Leaf, the Ford Focus EV and the Hyundai Tucson fuel-cell SUV. Automakers earn fewer credits for partial zero-emissions vehicles, such as the plug-in hybrid Chevrolet Volt and the Toyota Prius Plug-In.

Automakers are required to amass a certain number of credits each year and they can meet the requirement in one of two ways. One is to build the required number of vehicles. If they can't or won't build as many as required, they can make up the difference by purchasing excess credits from automakers that have exceeded their base requirement.

Tesla Motors has been amassing ZEV credits for several years, and American Honda has been buying them to offset its own ZEV production deficit.

Nissan North America, which started selling the Leaf at the end of 2010, has said it has excess credits and probably will sell some to help offset the cost of developing its EV.

Different Zero-Emissions Vehicle Strategies

Not every automaker required to build zero-emissions vehicles for California will offer them in other states. Honda, for instance, made only 1,100 of its Fit EV subcompacts and offered them on a lease-only basis in just two states, California and Oregon. Toyota also limited the availability of some of its ZEV-compliant vehicles.

"There are a bunch [of automakers] in the middle — including Toyota — that are not sure how to make this work and are trying multiple paths," says Mike Love, national regulatory affairs manager for Toyota Motor Sales, U.S.A.

Toyota launched the Prius plug-in and the RAV4 EV and the subcompact Scion iQ electric city car, both now discontinued, to help comply with the ZEV rules and also has fuel-cell plans, Love says. "It is not hard to make these cars, but it is hard to make money selling them. We are just not sure yet what will be most acceptable to the public."

There are different launch strategies depending on the vehicle, he says. Will the cars roll out in all 50 states, just the ZEV states, or only states with good infrastructure?

"Basically, you want to go where the customers are," Love says. "If the ZEV markets receive these vehicles well, then we'll see them in other states." But Love says it's not possible to predict if the cars will be well received, or how quickly that might happen.

Some automakers see going national as the best strategy. Nissan began selling its Leaf in all 50 states in 2012, as did Chevrolet with the Volt. Ford markets its Focus EV and the C-Max and Fusion plug-in hybrids in all states.

"From Ford's perspective, we don't look at the ZEV mandate as anything that shapes what we will sell in any state," said Michael Tinsky, the company's associate director of vehicle electrification. Ford's ZEVs, he said, "are market vehicles, not regulatory vehicles."

More ZEV Variety Soon

As automakers start fielding hydrogen fuel-cell electric vehicles later in the program, the variety of zero-emissions vehicles will grow. Honda, Hyundai and Toyota all have said they'll have fuel-cell vehicles in the retail market by 2016.

That may be seen as an example of the mandate's effects. It is what policy-makers call a "technology-forcing program": It requires automakers to field specific types of vehicles in order to meet goals for reducing emissions and petroleum use. As Tinsky points out, it's ultimately market forces that will decide the vehicles' fate.

In the meantime, the ZEV mandate will hasten their development and their exposure to car buyers — in California and beyond.

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