Over the last decade, Tesla and other automotive manufacturers
have successfully harnessed the opportunity to convert
overperformance of existing CO2 emissions and fuel
consumption regulatory standards to valuable revenue streams.
Future opportunities to monetize overperformance to vehicle
regulatory standards hinge both on emissions performance of the
future vehicle fleet as well as the stringency of future standards.
In late December 2021, the US Environmental Protection Agency (EPA)
finalized tightening of the US greenhouse gas (GHG) standards for
light-duty vehicles, representing a cumulative 28% increase in
stringency over the 2023-26 model year period. These new standards
in the United States, along with the July 2021 EU proposal for a
55% decrease in allowable passenger car CO2 emissions by
2030, have reshaped the outlook for regulatory credit trading over
the next 5-10 years in these two markets. Meanwhile, mainland China
is midway through its fifth phase of reducing allowable fuel
consumption and the fifth year of mandatory growth in sales of
so-called New Energy Vehicles (NEVs). The dynamic regulatory
environments in these regions prompt a current look at where the
credit market opportunities may be found.
This report examines the forecast of future standards and
manufacturer compliance performance to identify where ongoing
opportunities for revenue from regulatory credit trading will
continue. The opportunities for existing manufacturers and
EV-focused new entrants to generate revenue through credit trading
or pooling vary by market because of their distinct regulatory
standards.
Key implications
Mainland China emerges as the market with the most vibrant
opportunity for regulatory credit trading in the next decade owing
to the structure of its regulatory programs. The regulatory design
and stringency create a relative balance between credit supply and
demand, with a sustainable trading market in the foreseeable
future. While the United States has been at the forefront of
automotive regulatory credit trading, this market may have matured
and is not expected to grow significantly.
- In the United States, new GHG standards extend
opportunities for GHG credit trading through at least model year
2026. New entrants may find some potential, although it
will be limited by strong competition from some legacy
manufacturers able to offer credits at a larger scale. Credit
trading opportunities within the Corporate Average Fuel Economy
(CAFE) program hinge upon the outcome of the Biden Administration's
upcoming revised CAFE standards for model years 2024-26; assuming
the more stringent option (requiring 10% per year increases in fuel
efficiency) in the recent CAFE proposal, a viable credit trading
environment would exist through at least model year 2026. - In the European Union,pooling
opportunities will be strongest in the next few years, with
diminishing opportunity after 2025. Pooling agreements
between manufacturers can allow new EV-focused market entrants to
monetize their strong compliance position. However, with most
manufacturers planning a significant shift toward electrified
products, most of the pooling market is expected to be captured by
legacy manufacturers. The market for pooling is destined to
gradually disappear if the European Commission proposal for zero
tailpipe emissions by 2035 is enacted, putting an end to any
overcompliance that could be monetized. - In mainland China, a dual credit system encompassing
simultaneous required reductions of average fuel consumption and
mandatory increasing sales of NEVs creates an active market for
tradeable credits. Credits generated by exceeding the NEV
sales mandate can be used to satisfy either of the dual program
requirements, making these credits particularly valuable and
stimulating surplus NEV sales beyond the minimum requirements. The
government's transparency in publishing official credit transaction
and pricing data confirm a vibrant and buoyant credit market with
historically high transaction volumes and credit prices in recent
years.
Read our complimentary 30-page whitepaper which discusses the
selling of credits as a lucrative revenue stream for EV makers.
