California ARB mods to ZEV regulations for IVMs would result in ~1.9% drop in total ZEV/TZEV units 2018-2025; no impact on air quality requirements

20 October 2014

Early in September, the California Air Resources Board (ARB) announced it would consider in a 23-24 October meeting amendments to the Zero Emission Vehicle (ZEV) regulation that would modify the requirements for intermediate volume manufacturers (IVMs) selling into the state to allow them more time to come into the market. (Earlier post.)

Among the proposed changes were additional production lead time; a reduced compliance obligation (i.e., lower numbers of ZEVs); an opportunity to pool compliance obligations in ZEV states; and additional time to make up ZEV credit deficits. ARB staff estimated the proposed modifications could reduce total California deliveries of ZEVs (fuel cell and battery-electric vehicles) and TZEVs (Transition Zero Emission Vehicles, i.e., plug-in hybrids) by a total of about 26,000 units in the 2018 through 2025 timeframe out of the originally estimated 1,400,000 ZEVs and TZEVs for that period under the current regulation—i.e., by about 1.9%. (For MY 2026 and following, the reduced compliance obligation goes away.)

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However, in the environmental analysis of the impact of the proposal, ARB noted that despite that projected reduction in ZEV and TZEV volume, because the ZEV amendments do not modify the in-place fleet average emission standards established by the other elements of the Advanced Clean Cars (ACC) package (earlier post), the air quality benefits of the ACC program as analyzed in 2011 will still be realized. In other words, the automakers still have to meet the fleet-based emissions requirements through their sales mix.

Last week, ARB staff issued a correction to the staff report on the changes issued as part of the September announcement; the earlier report had included text from an earlier version of the ZEV regulation, but the substance of the proposed amendments were not affected. However, the corrections do make the mechanism and impact more clear.

Background. ARB first adopted the ZEV Regulation in 1990. Its goal was and is to reduce the environmental impact of light-duty vehicles through the gradual introduction of ZEVs into the California fleet. The ZEV Regulation has been amended multiple times since its inception (most recently in January 2012 and October 2013) to reflect the pace of ZEV development, the emergence of new ZEV and near-ZEV technologies, and the need to provide clarifying language in an increasingly complex regulatory system.

The ZEV regulations, which are now part of California’s comprehensive Advanced Clean Cars (ACC) program which also includes the LEV III tailpipe emissions standard, is the “technology-forcing piece” of the state’s regulatory package for light-duty vehicles. Put another way, the ZEV regulations are driving to force the creation of a market for those vehicles in a much shorter time frame than would normally occur.

In an article in the Winter 2012 edition of Issues in Science and Technology, Daniel Sperling, founding Director of the Institute of Transportation Studies at the University of California, Davis (ITS-Davis) and ARB Board member; and Mary Nichols, ARB chairman, wrote:

Although climate change is a global problem that will require global action, transportation is essentially a local concern. International cooperation will be necessary to resolve problems in maritime and air transport, but action on cars and trucks can be taken at a national or state level.

In addition, although many experts say that the solution to our energy and climate problems is sending the correct price signals to industry and consumers, the transport sector’s behavior is highly inelastic in that it does not change significantly in response to changes in fuel prices, at least in the range that is politically acceptable. Europe has gasoline taxes over $4 per gallon and still finds the need to adopt aggressive performance standards for cars to reduce GHGs and oil use. These high fuel taxes certainly have an effect in reducing the average size and power of vehicles and leading people to drive less, but the resulting reductions in fuel use and GHGs still fall far short of the climate goals. … we are saying that much progress can, and probably will, be made in the transport sector in the next decade without international agreements and without getting the prices right. California is leading the way with policies that address three critical elements of the transportation system: vehicles, fuels, and mobility.

… California has a much more ambitious long-term policy commitment to EVs. In 1990, California adopted a zero-emission vehicle (ZEV) requirement, mandating that the seven largest automotive companies in California “make available for sale” an increasing number of vehicles with zero tailpipe emissions. The initial sales requirement was 2% of car sales in 1998 (representing about 20,000 vehicles at the time), increasing to 5% in 2001 and 10% in 2003.

The intent was to accelerate the commercialization of electric (and other advanced) technology, but batteries and fuel cells did not advance as fast as regulators hoped. The ZEV rule, after surviving industry litigation and multiple adjustments to reflect the uneven progress of hybrid, fuel cell, and battery technologies, now bears little resemblance to the original. Although some consider the ZEV mandate a policy failure, others credit it with launching a revolution in clean automotive technology. The actual numbers of vehicles sold to consumers as a result of the ZEV program are certainly not what CARB originally expected. Only a few thousand EVs were sold in the United States in the first decade of this century, most of them by start-ups such as Tesla.

… Could another policy have accomplished the same at less cost with less conflict? Who knows? What’s certain is that the ZEV program accelerated worldwide investment in electric-drive vehicle technology. The benefits of those accelerated investments continue to sprout throughout the automotive world, and California policy was the catalyst.

In May 2014, Nichols remarked that:

Everyone understands that going into new technology requires a commitment from auto companies, and they don’t normally turn a profit as quickly as everyone would like. But through a sustained commitment, they will. We’re coming to this collaboration as a way of helping companies. They’ve done a great job of producing great cars. We want them to succeed and want them to make money on this.

The current ZEV requirements for MY 2018 and following focus the program on ZEVs (battery-electric and fuel cell vehicles) and transitional ZEVs (TZEV)—typically plug-in hybrid electric vehicles (PHEV). ARB calculates that by 2025, compliance with the requirements will likely result in more than 15% of new sales being ZEVs and TZEVs.

One key to understanding the evolution of the ZEV regulations and the periodic tweaks made to it is to realize that while ARB establishes aggressive targets, it also works continuously with automakers to try to make achievable targets as well. This is the basis for the changes proposed for the Intermediate Volume Manufacturers (IVM) under consideration this week.

LVMs, IVMs, SVMs. ARB basically groups manufacturers into three buckets, based on their sales in the state: large volume (LVM); intermediate volume (IVM); and small volume (SVM). In the 2009 version of the ZEV regulations, SVMs (4,500 units or less) were not subject to the regulation; IVMs (4,501 to 60,000 units) were subject to the regulations, but could meet the whole requirement with PZEVs; and large volume manufacturers were subject to the full brunt of the ZEV regs.

The 2012 amendments to the ZEV reg adopted as part of the ACC package reduced the California sales upper bound for IVMs from 60,000 units to 20,000 per year beginning with the 2018 model year. They concurrently changed the IVMs’ ZEV obligations from being able to meet the mandate with super clean conventional partial zero emission vehicles (PZEVs) to transitional ZEVs (TZEVs or plug in hybrids).

An example of the impact of the 2012 amendments on automakers selling into California, using 2013 data from ARB, if the transition from IVM to LVM was based on sales numbers alone. With these type of sales numbers, the effect is to propel Subaru and Mazda into the LVM tier. Click to enlarge.

At the hearing for the 2012 amendments, the Board directed ARB staff to review how the new regulation affected IVMs who would suddenly find themselves transitioning into large volume manufacturer (LVM) requirements in the 2018 model year and to return to the Board by 31 December 2014, with a recommendation regarding more fair treatment of these manufacturers, ensuring all manufacturers would be successful in commercializing ZEV technologies.

ARB staff subsequently determined that vehicle sales alone is not sufficiently useful in assessing a manufacturer’s ability to bring advanced technology vehicles to market. After consulting with manufacturers, ARB staff decided that a better indicator of this ability is “robust global revenue in conjunction with the established manufacturer sales threshold”.

Staff then proposed a global revenue threshold of $40 billion (calculated from the average of the three consecutive fiscal years immediately preceding the determination). Specifically:

If, in the 2018, 2019, or 2020 fiscal years, an intermediate volume manufacturer would otherwise be subject to the requirements for a large volume manufacturer based on California production volume, and if the intermediate volume manufacturer’s average annual global revenues for that fiscal year, based upon the immediately prior and consecutive three fiscal years, is no greater than 40 billion dollars, then that manufacturer will continue to be considered an intermediate volume manufacturer conditional upon the manufacturer submitting to the Executive Officer, in writing, a report that demonstrates the types and numbers of ZEVs and TZEVs the manufacturer will deliver to California subsequent to the 2020 fiscal year to meet the requirements specified in subdivision 1962.2(b)(1)(A).

The global revenue test is only available to IVMs for the 2018 through 2020 model years. Beginning in the 2021 model year, a manufacturer exceeding the 20,000 vehicle threshold will need to prepare to bring ZEVs to market per the LVM requirements; ARB staff expects most IVMs will make ZEVs available for sale by the 2026 model year.

To accommodate product development lead time, ARB staff is proposing to extend the lead time to 5 three-year averages commencing once the first three-year average exceeds 20,000 vehicles. This provides IVMs a minimum of 5 years and a maximum of 7 years to bring a vehicle to market. This lead time is similar to the lead time provisions established for IVMs that transitioned to LVM status prior to 2018 in ZEV regulation versions prior to the 2012 amendments.

Reducing the ZEV percentage requirement. The current regulation establishes a minimum ZEV credit percentage requirement for manufacturers for the 2018 through 2025 and subsequent model years. The requirement represents the percentage of passenger cars and light duty trucks produced by a manufacturer and delivered for sale in California that must be ZEVs (credit-weighted based on the advanced vehicle technology chosen).

As noted above, the current version of the ZEV Regulation allows an IVM to meet its pre-2018 model year ZEV obligation solely with partial zero emission allowance vehicles (PZEV). The regulation requires an IVM to begin delivering ZEVs in 2018 and subsequent model years.

In recognition of the lower number of vehicle models offered by the typical IVM (each of the IVM5 manufacturers offers 3 to 4 passenger car models while the LVMs offer an average of 12 passenger car models) and their lesser RD capabilities, the ZEV Regulation allows an IVM to meet its entire ZEV obligation with TZEVs.

ARB staff then decided that the modification would compound the problem for IVMs:

While the intention was to decrease the burden on IVMs, the existing regulation has the practical effect of establishing a double hurdle for IVMs starting in 2018. First, an LVM has had several years to develop ZEV offerings and accrue credits from placement of those ZEVs. For example, LVMs received early introduction multipliers for vehicles introduced in advance of requirements. LVMs also received extended service credit for allowing consumers to either extend a lease or exercise a purchase option at the end of a lease. Neither of these opportunities exists for IVMs under the current regulation. In comparison, the IVMs face the comparatively difficult technological challenge of transitioning from compliance solely with PZEVs to compliance with TZEVs. Second, without the RD and economic means that LVM have to concurrently develop both TZEVs and greater credit ZEVs, an IVM must plan to offer a significantly greater portion of its sales (potentially in excess of 40 percent in 2025) as TZEVs to meet its obligation. At a time when conventional hybrid market share in California is around 7 percent, this rate of participation in the advanced clean car market does not appear to be realistic for IVMs.

ARB staff thus proposed adjusting downward the total ZEV credit obligation for IVMs in the 2018 through 2025 model years. (This is under consideration this week.) The proposed obligation would be set at a credit level equivalent to the entire LVM optional (maximum) TZEV obligation plus one-fifth of the LVM pure ZEV obligation. This results in an IVM having an advanced technology vehicle sales percentage (based on a likely compliance scenario) more closely aligned to that of the LVMs.

Based on these revised percentages, ARB staff projected future sales, and found that under a likely compliance scenario California could see about 26,000 fewer ZEVs and TZEVs delivered in the 2018 through 2025 model years than would be delivered under the existing regulation: the 1.9% noted above.

Section 177 pooling (the ZEV states). Under Section 177 of the federal Clean Air Act, other states can opt in to California’s emission standards, including ZEV. Currently, nine states have done so: Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Vermont.

The 2012 changes established a new optional Section 177 State compliance path. Those provisions allow manufacturers to place extra ZEVs in the Section 177 states one and two years prior to the 2018 model year. In exchange for early placement of these “extra” ZEVs, manufacturers can pool credits across state lines within and between two regional pools. They also earn a reduced TZEV obligation in exchange for early ZEV placement.

Currently, ARB staff notes, only one IVM has a ZEV product or plans to bring a ZEV to market prior to the 2018 model year, so in practice only LVMs have been able to make use of these provisions. However, the IVMs say they need this same ability to pool ZEV and TZEV credits across state lines because some of them have few dealers in some of the Section 177 States.

To accommodate that, ARB staff is proposing additional flexibility for IVMs by allowing them to place extra ZEVs in Section 177 States in the two model years prior to the start of their LVM requirements should they transition into LVM status—but they may take an additional two years to place these extra ZEVs. The IVMs will also be allowed to pool TZEV credits to meet total annual percentage obligations in each Section 177 State. They will not be allowed a reduced TZEV obligation.