Selling credits is a lucrative revenue stream for EV makers

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.

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