As decision makers design their SSR, the broader challenges and trade-offs that can influence its effectiveness should be considered. This section highlights key system-level issues that decision makers should consider addressing to ensure their regulation is both achievable and impactful. Use this section to:
- Understand how different design elements interact, especially how the inclusion of flexibilities may weaken or complicate the regulation.
- Anticipate how auto manufacturers might respond to your regulation and recognize how their actions can influence its effectiveness or lead to unintended consequences.
- Consider interactions with other policies already in place in your region to avoid conflict and maximize policy coherence.
Decision makers should use these insights to balance enforcement capacity, political feasibility, and regulatory ambition. Doing so is critical to developing an SSR that is not only technically sound but also politically and operationally viable.
Stringency
What are the trade-offs between flexibility and stringency to achieve real emissions reductions?
While flexibility in SSRs offers several benefits, such as accommodating industry heterogeneity, encouraging gradual compliance, and reducing immediate costs, excessive flexibility can reduce the realized benefits of the policy. For flexibilities such as averaging, banking, and trading, the implementation of these design elements does not impact real-world emissions reductions. However, off-cycle credits, multipliers, and deficit banking can undermine headline targets. This disconnect between regulatory compliance and actual environmental impact weakens incentives for innovation and meaningful progress.
In contrast, achieving environmental and efficiency targets is paramount in SSR design, especially when countries face severe challenges like high pollution, public health crises, or resource depletion. In such cases, swift and decisive action requires increasing the stringency of standards—such as aggressive emission limits and higher fuel efficiency requirements—to drive the rapid adoption of cleaner technologies. Greater stringency often comes with shorter compliance timelines and fewer flexibility mechanisms, such as limited credit trading or banking, ensuring that real results are achieved rather than allowing deferred compliance. To support these efforts, governments may also need to impose stricter penalties for non-compliance, enhance monitoring and enforcement infrastructure, and incentivize innovation through subsidies or direct support for clean technology adoption.
What has been done in other regions?
Table 19 presents examples of regulations with differing levels of regulatory stringency.
Table 19. Levels of stringency within SSRs
| Country example (Stringency level) | Key SSR measures | Enforcement, penalties, and flexibilities | Outcome/effect |
|---|---|---|---|
| China (High stringency) | China's New Energy Vehicle (NEV) standard requires automotive manufacturers to increase the share of NEVs in their production, with NEV credit targets rising to 18% in 2023. This standard is integrated with a Corporate Average Fuel Consumption (CAFC) credit system. | Enforcement: The Ministry of Industry and Information Technology (MIIT) monitors compliance through annual and pre-reports, public disclosure, and inspections. Flexibilities: China's system offers limited flexibility, with fewer mechanisms for credit trading or banking, reflecting the high urgency of achieving emissions reduction quickly. | China has become the largest market for electric vehicles globally, partially driven by the rapid shift toward cleaner vehicle production under strict monitoring and penalties. |
| United States–Federal Level (Moderate stringency) | The Corporate Average Fuel Economy (CAFE) Standards at the federal level set fuel efficiency targets based on vehicle size and type, with flexibility mechanisms allowing gradual compliance. | Enforcement: The Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) monitor and enforce CAFE Standards through manufacturer reporting, fines, and credit mechanisms. Penalties: Fines for failing to meet fuel efficiency targets. However, manufacturers can offset penalties through credit trading, banking, and pooling systems, offering more leniency. Flexibilities: The federal CAFE Standards provide significant flexibility through credit trading, banking, pooling, and off-cycle credits to help manufacturers gradually comply with the regulations. | The CAFE Standards have improved fuel efficiency across the U.S. vehicle fleet. |
| United States–State Level: California (High stringency) | California's Zero-Emission Vehicle (ZEV) standard requires automakers to sell 100% zero-emission vehicles as part of its Advanced Clean Cars II Program. | Enforcement: The California Air Resources Board (CARB) strictly monitors ZEV compliance, imposing fines and restrictions on non-compliant vehicles. Penalties: Fines and restrictions on the sale of non-compliant vehicles. CARB also enforces stricter penalties on automakers that fail to meet ZEV targets. Flexibilities: California's ZEV standard has fewer flexibility mechanisms compared to the federal level, focusing on direct compliance with emission and vehicle production targets. | California's ZEV standard has accelerated zero-emission vehicle production, positioning the state as a leader in clean transportation and influencing other states to adopt similar regulations. |
Simplicity versus flexibility
What is the right balance between simplicity and flexibility to ensure effective, enforceable SSRs?
Flexibility mechanisms in SSRs provide regulated entities with various options for complying with vehicle standards. These measures are designed to accommodate different capabilities and circumstances among regulated entities, allowing them to meet regulatory goals in more adaptable and cost-effective ways.
Highlighted below are some of the common flexibility mechanisms (for more information on flexibility mechanisms, see each dedicated section):
- Credit trading: Manufacturers who exceed emission or efficiency standards can earn credits, which they can sell to other manufacturers who are struggling to meet the targets. This creates a market for compliance, where entities with lower emissions/high efficiency can profit while those with higher emissions/lower efficiency can buy their way into compliance.
- Credit & deficit banking: Credits earned by exceeding standards can be saved ("banked") for future use, within an expiration date set by regulators. This allows manufacturers to plan their compliance strategies over a period, smoothing out the impacts of year-to-year variations in performance.
- Credit pooling: Manufacturers can join together and pool their emissions or efficiency results, allowing them to collectively meet the regulatory targets. This is especially beneficial for smaller manufacturers who may struggle to meet the standards independently.
- Multipliers: Certain types of vehicles, like EVs or other ZEVs, may count as more than one vehicle towards meeting sales compliance, efficiency, or GHG targets. This encourages the production and sale of cleaner technologies.
- Off-cycle credits: Credits are given for technologies that reduce emissions in real-world driving conditions but are not captured in standard testing cycles (e.g., improved air conditioning systems or aerodynamic features).
These flexibility mechanisms can ease the financial and operational burden on companies, encouraging broader compliance with regulations. However, they complicate monitoring and enforcement, requiring regulators to use more advanced tools to ensure that these measures don't undermine emission reduction goals by allowing for delayed or partial compliance.
What has been done in other regions?
Table 20 provides examples of regions with differing regulatory flexibilities and discusses the outcome/effect on stringency.
Table 20. Levels of flexibility within SSRs
| United States (High flexibility) | The U.S. uses a flexible approach to CO2 vehicle emissions regulations through the Corporate Average Fuel Economy (CAFE) Standards. Key flexibility mechanisms include credit trading, credit banking, pooling, and super credits (multipliers). Manufacturers can trade credits, save them for future use, and earn credits for off-cycle innovations that reduce emissions in real-world conditions | Enforcement: The Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) monitor compliance through manufacturer reporting, oversight, and penalties. Flexibilities: Significant flexibility exists in credit trading, banking, pooling, and off-cycle credits, allowing gradual compliance and adaptation to the regulation over time. | The U.S. flexibility mechanisms encourage broader compliance by allowing manufacturers to adapt to regulatory goals cost-effectively. However, it also requires more advanced monitoring to ensure these mechanisms do not undermine emission reduction targets. Overall, this has driven improvements in fuel efficiency, but with concerns about inflated credit values. |
| Australia (Low flexibility) | Australia's Australian Design Rules (ADRs) regulate vehicle emissions and fuel efficiency standards. Credit trading and banking are allowed, but multipliers and off-cycle credits are not provided. This creates a more rigid regulatory approach compared to the U.S. | Enforcement: The Department of Infrastructure, Transport, Regional Development, Communications and the Arts (DITRDCA) oversees compliance under the Road Vehicle Standards Act 2018. Flexibilities: Limited flexibility is provided, with some allowance for credit trading and banking but no multipliers or off-cycle credits, focusing on direct compliance. | Australia's more rigid regulatory approach ensures direct compliance, particularly for importers of new and used vehicles. This method simplifies enforcement but may challenge smaller or less advanced manufacturers who struggle to meet stringent standards. |
Auto industry response to supply-side regulations
Multiple stakeholders are regulated under SSRs including auto manufacturers (the primary regulated entity), importers, and alternative fuel vehicle converters. These stakeholders, along with other industry members impacted by these regulations, respond to regulations through market and non-market strategies. Getting 'buy in' from regulated entities can be an important factor in the success of the regulation, and resistance to these policies may represent a barrier to passenger vehicle electrification. Understanding the industry's non-market responses to SSRs may inform decision makers of the strategies and arguments employed by the auto industry to shape regulations. The aim of this section is to provide decision makers with a better understanding of the common responses of the auto industry to SSRs so that they may be better prepared when engaging with these key stakeholders.
As auto manufacturers are the primary regulated entity, they have a vested interest in these regulations. Auto manufacturers and the associations that represent them also have power to influence the policy process owing to the resources and information available to them. As auto manufacturers have high levels of interest and power, close attention should be given to the potential for this stakeholder group to shape the creation of SSRs. This section provides a brief review of two bodies of literature: Firm influence on policy through corporate political activities and auto manufacturer responses to SSRs. Based on the literature review, we provide some guiding principles for decision makers when engaging with the auto industry on SSR matters.
In addition to the literature review below, throughout the ZEV pathway: Policy design manual and the GHG/FE pathway: Policy design manual, there is discussion around potential ways in which auto manufacturers may influence the design of the policy. This discussion is contained in the 'Notes to the policymaker' subsection of each design element.
Corporate political activities
Firms engage in both market and non-market strategies with the goal of maximizing profits. Political influence exerted through corporate political activities (CPA) can be thought of as a non-market strategy and are attempts by firms to influence government policies in a way that is competitively advantageous to a firm. CPA includes activities such as lobbying, submission of public comments, submissions at public hearings, and litigation.
The degree to which an industry participates in CPA is dependent on the number of firms and the strength of regulations in that industry. Firms in a concentrated industry with few players tend to engage more in lobbying activities1. Sectors that are strongly regulated tend to engage more in political influence strategies to influence public policy and defend their competitive advantage2. Industry concentration and strong regulation are both characteristics of the auto industry, indicating that auto manufacturers likely engage heavily in CPA.
The degree to which a firm participates in CPA relates to the firm's dependency on a given government. Firms that are more dependent engage more heavily in CPA. In the context of the auto manufacturing industry, dependence on government can be thought of as the proportion of an auto manufacturers' revenue generated in that country or region. To this point, foreign firms are less likely to participate in CPA compared with domestically owned firms3.
Auto manufacturer responses to regulations
Few studies look at market and non-market responses of the auto industry to regulation. Modeling firm responses under a 30% ZEV sales standard in Canada, Bhardwaj et al. found that auto manufacturers will increase EV model variety, engage in intra-firm cross price subsidizing (i.e. make ICEVs more expensive), and increase R&D investment to comply with the regulation4. Their results show that auto manufacturers could see a reduction in profits between 7% and 44%; However, year-on-year profits will still increase. Looking at auto manufacturer responses to the California ZEV sales standard, Wesseling et al. found that auto manufacturers became less defensive to the policy over time, while auto manufacturer associations remained relatively defensive5. Building on this analysis, Wesseling et al. included market responses to the California ZEV sales standard in their analysis and found that auto manufacturers were able to increase their firm's innovation over time to adapt to the regulation6.
Decision makers engaging with industry should consider the following points:
- As profit maximizers, auto manufacturers will implement market and non-market strategies that maintain their competitive advantage. These strategies may not align with optimal environmental outcomes. For example, auto manufacturers may sell a small number of ZEVs and offset this by selling a large number of inefficient or emissions intensive ICEVs.They may still be compliant with the standard but may not be compliant with the spirit of the regulation.
- Auto manufacturers may try to relax regulatory stringency by pushing for certain flexibilities, rather than change the headline sales, GHG or efficiency targets. For example, an auto manufacturer that sells a high proportion of PHEVs may push to increase the PHEV multiplier so as to be compliant without changing their market strategy.
- Engaging with individual auto manufacturers instead of the associations that represent them may reduce the influence of the industry on the regulation. This is because individual auto manufacturers may have less power or push less than industry associations.
- Engaging with a wider selection of stakeholders (i.e. utility companies, renewable energy companies etc) during the policy proposal phase may lead to a regulation that is more representative of the full spectrum of industry needs and attitudes. Auto manufacturers are just one stakeholder among many. Understanding the point of view of a broad range of stakeholders will produce a better context relevant regulation.
Footnotes
1 Hillman, A. J., Keim, G. D., & Schuler, D. (2004). Corporate Political Activity: A Review and Research Agenda. Journal of Management, 30(6), 837–857. https://doi.org/10.1016/j.jm.2004.06.003
2 Brulle, R. J. (2018). The climate lobby: A sectoral analysis of lobbying spending on climate change in the USA, 2000 to 2016. Climatic Change, 149(3), 289–303. https://doi.org/10.1007/s10584-018-2241-z
3 Hansen, W. L., & Mitchell, N. J. (2000). Disaggregating and Explaining Corporate Political Activity: Domestic and Foreign Corporations in National Politics. American Political Science Review, 94(4), 891–903. https://doi.org/10.2307/2586214
4 Bhardwaj, C., Axsen, J., & McCollum, D. (2021). Simulating automakers' response to zero emissions vehicle regulation. Transportation Research Part D: Transport and Environment, 94, 102789. https://doi.org/10.1016/j.trd.2021.102789
5 Wesseling, J. H., Farla, J. C. M., Sperling, D., & Hekkert, M. P. (2014). Car manufacturers' changing political strategies on the ZEV mandate. Transportation Research Part D: Transport and Environment, 33, 196–209. https://doi.org/10.1016/j.trd.2014.06.006
6 Wesseling, J. H., Farla, J. C. M., & Hekkert, M. P. (2015). Exploring car manufacturers' responses to technology-forcing regulation: The case of California's ZEV mandate. Environmental Innovation and Societal Transitions, 16, 87–105. https://doi.org/10.1016/j.eist.2015.03.001