California may cap ZEV-credit sales; why it matters to Tesla, and for electric cars

Changes to California's zero-emission vehicle (ZEV) rules could soon cut a major source of income for Tesla.

California emission rules require high-volume automakers to sell either battery-electric or hydrogen fuel-cell cars in proportion to their overall sales.

Some manufacturers build "compliance cars" purely to satisfy this mandate, while others buy credits from automakers that sell more zero-emission vehicles than required by the rules. (A few do both.)

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Since Tesla builds only electric cars, it has a large surplus of credits to sell.

A portion of the company's income in recent years has come from those sales, though CEO Elon Musk has said the company doesn't bank on that revenue going forward.

But now California regulators are considering changing the rules to make it harder for carmakers to meet targets by simply buying credits, rather than building their own zero-emission cars, according to Bloomberg.

With Tesla and a handful of other companies building large numbers of electric cars, regulators fear there are now too many credits available.

The California Air Resources Board (CARB) previously predicted that zero-emission vehicles would achieve a 15.4-percent market share by 2025.

But there are now enough credits available for carmakers to meet the law's requirements if battery-electric and fuel-cell cars make up just 6 percent of sales, CARB estimates.

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The earlier 15-percent estimate was made before Tesla announced its goal of building 500,000 cars per year by 2018.

At the same time, more automakers are producing enough of their own electric cars to comply with ZEV mandate.

In other words, they're doing exactly what the mandate was intended to encourage—but also generating enough excess ZEV credits that regulators believe they could actually dampen the future growth of the segment.

CARB boss Mary Nichols told Bloomberg that she hadn't decided yet how to deal with the glut of credits.

Among the options: the agency could increase the number of credits required for carmakers to comply with the mandate, or cap the number of credits individual carmakers could earn.

Any changes to the rules would likely be met with resistance from carmakers, though.

MORE: All Hydrogen Fuel-Cell Cars Are Compliance Cars, For Now (Nov 2015)

Capping credits would be "punishing people who are doing the most" to put electric cars on the road, Tesla's vice president of business development Diarmuid O'Connell told Bloomberg.

"It's bizarre to say we need make the regulation more stringent" while they are spurring carmakers to build more zero-emission vehicles, according Honda's assistant vice president for U.S. environmental strategy, Robert Bienenfeld.

CARB plans to conduct a review of the ZEV mandate in the fourth quarter of this year.

That review will arrive during discussions of the mid-term review of Federal Corporate Average Fuel Economy (CAFE) standards that's expected to be released this year as well.

Regulators and carmakers will gauge progress toward meeting the 54.5-mpg fleet average mandated fro 2025, which is equivalent to about 38 or 39 mpg on the window sticker.

While the industry consensus on the mid-term CAFE review is that little will change, achieving its goals may be more difficult as buyers move en masse to SUVs and crossover utility vehicles due to continuing low gasoline prices.

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