UK Government consults on updates to regulation of vehicles’ CO2 emissions allowances

On 30 March 2023, the UK Government launched a consultation on a new framework for regulating CO2 emissions of cars and vans made available in the UK from 2024 onwards, alongside its consultation on proposals for the UK’s zero emission vehicle (ZEV) mandate (covered in our recent blog post here).

Until now, the regulation of CO2 emissions produced by cars and vans in the UK has largely mirrored the EU scheme. Average CO2 emissions allowances relating to vehicles sold in the UK are set by the Vehicle Certification Agency (VCA) and, in order to avoid exceeding the allowance (and incurring a fine), manufacturers are permitted to pool – ie share – their CO2 emissions allowances. Such pools could be “closed”, meaning members of the pool are all connected entities within the same corporate group, or they could be “open”, and so include members from different corporate groups.

Under the Government's new proposals, CO2 emissions allowances for cars and vans which do not meet the criteria to be considered exempt ZEVs will still be set by the regulator, and the same fine for exceeding the allowance is proposed to apply (£86 per gram of CO2 above the allowance, multiplied by the total number of non-ZEV cars or vans sold). However, some key divergences from the EU scheme have now been proposed as part of the consultation (although we note that regulation of vehicle CO2 emissions in the EU is also evolving, with the latest European Regulation available here).

Allowances to be tailored to individual manufacturers

Firstly, CO2 emissions allowances will be set for each manufacturer individually, by reference to the average CO2 emissions of their vehicles sold in previous periods. The baseline targets to be used from 2024, the first year of the new scheme, are intended to be calculated by reference to manufacturers' vehicles sold in 2021. Specifically, the consultation notes that this would be the average of the CO2 emissions (using the WLTP test cycle and subtracting any CO2 savings from approved eco innovations) of all cars or vans sold by that manufacturer in 2021, excluding any vehicle with a WLTP CO2 rating of 0g. However, if a manufacturer exceeded their CO2 emissions target in 2021 and therefore incurred a penalty, their baseline target for 2024 would be the target that applied in 2021, rather than their actual fleetwide average.

Manufacturers who sell both cars and vans in the UK market will have separate targets for each segment.

Allowances to be fixed between 2024-2030

Secondly, the Government proposes to maintain the same CO2 emissions allowance between 2024 and 2030, rather than gradually adjust targets year-on-year as under the current system. The Government’s approach here is intended to recognise that manufacturers have limited R&D budgets and that the overall objective of the legislation will be for manufacturers to shift their production to ZEVs, rather than invest in increasing the efficiency of the non-ZEV fleet.

CO2 pools to be replaced by allowance trading scheme

Thirdly, under the new scheme, manufacturers will be allowed to trade their CO2 allowances. As such, the consultation notes that open pooling is no longer necessary and would be duplicative of this new trading system. This means that 2023 will be the final year in which open CO2 pools will operate in the UK.

The proposal notes that there will be no conditions on the price for which allowances may be sold, however trade details, including price, must be notified to the regulator. The regulator will publish information concerning the net amount of CO2 allowance which has been added or disposed of during a particular trading period by each manufacturer, however the amounts paid and the details of specific trades will be kept confidential.

Both the CO2 emissions allowance and the ZEV mandate allowance can be traded in this way, and allowances earnt under the ZEV mandate can be converted to become CO2 allowances. The consultation proposes that the rate of conversion should reflect the average CO2 emissions of non-ZEV new cars and vans, as measured in the WLTP cycle, in 2021. For example, if all new non-ZEV cars sold in 2021 had average CO2 emissions of 135 g CO2/km, then a ZEV mandate allowance earnt in 2024 could be exchanged for allowances for 135 g CO2/km for new non-ZEV cars sold in 2024.

The Government has also proposed to offer increased flexibility by counting ongoing improvements in non-ZEV emissions toward ZEV mandate targets, to be applied only in the first three years of the scheme (until the end of 2026). This proposal is made alongside an acknowledgment that manufacturers will have made multi-year investments targeting improvements in internal combustion engine efficiency, hybrid vehicles and plug-in hybrid vehicles as a way to meet CO2 targets, which may yield additional improvements in non-ZEV efficiency in the near future. The proposed 2026 cut-off can be seen as an effort to direct future investment toward ZEVs, rather than improvements in non-ZEV efficiency.

Specifically, the consultation proposes that manufacturers will be able to convert unused CO2 emissions allowances into credits in the ZEV mandate scheme, at a rate of 167 non-ZEV CO2 allowances per ZEV mandate credit in the car scheme, and 216 non-ZEV CO2 allowances per ZEV mandate credit in the van scheme. The consultation explains that these exchange rates are based on real-world differences in CO2 emissions from an average non-ZEV car or van, compared to a ZEV.

Should manufacturers choose to operate closed pools for the purpose of the ZEV mandate, they will also be required to participate as a pool for the purpose of the non-ZEV CO2 emissions standard.

Next steps

The consultation will close on 24 May 2023. Affected businesses, in particular those which will consider making use of the allowance trading scheme, should consider participating in the consultation. After the consultation closes, the Government will take the feedback into account when finalising the system of CO2 emissions regulation for non-ZEV cars and vans. 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.