UK government consults on Zero Emission Vehicle mandate

On 30 March 2023, the UK Government announced a range of new and updated energy security and net zero transition policies through its ‘Powering Up Britain’ policy papers.

Alongside these policy papers, it also launched a consultation seeking views on its proposed Zero Emission Vehicle (ZEV) mandate. This blog considers the key proposals and outlines the next steps for industry and the Government.

Zero Emission Vehicle mandate

In its 2021 Net Zero Strategy (which was successfully challenged last year by non-profit and climate groups on the basis that the proposals were too vague and the Strategy did not contain enough detail), the Government introduced plans for a new ZEV mandate which would require manufacturers’ sales to be made up of an increasing proportion of ZEVs each year from 1 January 2024.

The 2021 Net Zero Strategy did not indicate what proportion of a manufacturer’s sales would need to be made up of ZEVs. However, the consultation document published last week now provides this information, and also introduces two mechanisms designed to introduce flexibility into the scheme: (i) if a manufacturer exceeds its ZEV targets, it will be permitted to trade the excess ZEV mandate allowances to other manufacturers; and (ii) a manufacturer may, from 2024-2026, borrow ZEV allowances from future periods in the event that they are unable to meet the ZEV mandate for the relevant year.

ZEV sales

The Government notes that zero emission car sales in the UK are already strong (12% in 2021) and will be required to make up 100% of car sales in the UK from 2035. Based on feedback from stakeholders, its suggested targets for ZEV car sales shares, as explained in an earlier technical consultation, have now been set at 22% in 2024, rising to 38% in 2027, 80% in 2030, 92% in 2033 and 100% in 2035 (though the targets for 2031 onwards have not yet been fixed by legislation).

The consultation describes the market for zero emission vans as “less mature” and states that the proposed trajectory for mandating ZEV van sales in the UK will initially be lower than that for ZEV car sales, before rapidly increasing from 2026. Its suggested targets for ZEV van sales shares have now been set at 10% in 2024, rising to 22% in 2026, 34% in 2027, 70% in 2030, 88% in 2033 and 100% in 2035 (again, the targets for 2031 onwards have not yet been fixed by legislation).

Manufacturers who form part of larger “connected entities” within the meaning of the Income Tax Act 2007 and the Corporation Tax Act 2010 may choose to form a “closed pool” and be treated as a single participant within the ZEV mandate, allowing ZEV allowances to be pooled together.

In the event that a manufacturer is unable to comply with the ZEV mandate in a particular year (through sales of ZEVs, buying excess ZEV mandate allowances and/or deferring its ZEV compliance requirements), it will be required to pay a penalty to the government of £15,000 per excess activity (ie non-ZEV sale) in the car scheme and of £18,000 per excess activity in the van scheme.

Trading of excess ZEV mandate allowances

The consultation indicates that manufacturers will be able to trade ZEV allowances on a permissive basis: there will be no restrictions on the price of allowances (though the Government has indicated that, in practice, it anticipates that allowances will not be sold for an amount which is greater than the penalty price to be paid to the government in the event of non-compliance with the ZEV mandate).

Manufacturers will be required to notify the scheme administrator of ZEV mandate allowance trades, including the number of allowances purchased and the price paid per allowance. However, when the scheme administrator publishes information on the net number of allowances each participant in the scheme has added or lost throughout a particular trading period, it will not publish details of the amounts paid in relation to the trades, nor the number of allowances traded in each transaction.

Deferring ZEV compliance requirements

The consultation recognises that “some vehicle manufacturers face challenges meeting targets” as their business model shifts towards ZEVs. It states that, therefore, manufacturers which are unable to comply with the ZEV mandate in the 2024-2026 trading periods will be able to “borrow” allowances from future trading periods.

The number of allowances which can be borrowed will be subject to a cap of 75% of the ZEV target in 2024, 50% in 2025 and 25% in 2026 and, to “reflect the lost environmental benefit to society of delaying the deployment of a ZEV in a given year”, a 3.5% compounding interest rate will be applied to a manufacturer’s allowance deficit for each year that it is not repaid.

Any allowance deficit carried forward from 2026 must be repaid with allowances from the 2027 trading period (including through trading), otherwise the manufacturer will be required to make a payment to the government.

Next steps

The reaction from industry bodies has so far been mixed. Whilst some have welcomed the setting of ambitious ZEV targets, others have criticised the continuing uncertainty concerning the categorisation of hybrid technology and noted that the relatively late publication of the mandate has made planning extremely challenging for manufacturers.

The consultation will close on 24 May 2023. Affected businesses, in particular those which contemplate making use of the allowance trading and/or deferral scheme, should consider participating in the consultation. After the consultation closes, the Government will take the feedback into account when finalising the design of the ZEV mandate. Once the Government has considered the feedback, it intends to put in place legislation to support the finalised policy, which is scheduled to take effect from 1 January 2024.