Flexibility or uncertainty? Risks of the proposed changes to the UK Zero Emission Vehicle Mandate

The UK Department for Transport (DfT) published the outcome of the consultation on its zero-emission vehicle (ZEV) regulation last month and it generally signals more flexibility and some relaxation of the policy. Let’s take a look at a few reasons to celebrate, a few areas of concern, and a few key points where the yet-to-be-determined details will make a big difference. 

I’ll start with some good news: There are no changes to the regulation’s annual targets for 2025–2030. Regardless of flexibilities, the annual targets set the pace for reductions in emissions, and the targets are staying at 80% ZEVs for cars and 70% ZEVs for vans in 2030. (Here ZEVs include battery electric vehicles and hydrogen fuel-cell electric vehicles, but not plug-in hybrids or vehicles using e-fuels.) This remains a world-leading regulation. The United Kingdom also remains committed to 100% ZEV sales for cars and vans in 2035, as DfT reiterated that there are no exceptions to that target. 

Now, about the newly proposed flexibilities. The regulation includes two “big” ones: (1) transfer of credits for sales of non-ZEVs with lower carbon dioxide (CO₂) emissions and (2) borrowing. Both were extended through 2029, rather than expiring after 2026, as originally planned. In terms of the borrowing flexibility, the limits for cars in the extended years are relatively low—20% in 2027, 15% in 2028, and 10% in 2029 (roughly aligned with the ICCT’s suggestions). All borrowed allowances must be repaid by 2030 and there’s no mention of lowering or removing the 3.5% “interest rate” applied when these are used. Maintaining that interest for the duration of the policy would be critical for encouraging timely compliance and sticking to the United Kingdom’s legally binding carbon budgets. 

A large opening for PHEVs 

The much bigger change is to the ability to earn credit in the ZEV scheme by reducing the average CO₂ emissions of non-ZEVs. This flexibility was originally strictly limited: It was only available in 2024, 2025, and 2026, and these sales could only account for a declining fraction of a manufacturer’s overall ZEV mandate compliance. This reflected the reality that automakers had already invested in hybrids and plug-in hybrid electric vehicles (PHEVs) and couldn’t change their product mixes dramatically in the near term. It allowed them to get credit for the reduced emissions from those vehicles while still requiring a focus on ZEVs in the medium term. Table 1 shows both the original (current) limits and the newly proposed limits on how much manufacturers can use this flexibility for cars as a percentage of their annual ZEV credit requirement.  

As you can see, the consultation outcome allows for a relatively high portion of transfers through 2029. The changes to compliance with the ZEV sales requirement make the overall regulation function more like a technology-neutral CO₂ standard, at least for the next 3 years or so. This is bad news for any certainty regarding future ZEV sales (and hurts the case for investing in charging infrastructure and ZEV supply chains), but the impact on total CO₂ savings from the regulation is difficult to forecast. That’s in part because of the way PHEVs are treated in the consultation outcome.  

Although the United Kingdom is adopting new PHEV utility factors in line with the Euro 6e emission standard, it will allow manufacturers to submit the “old” PHEV CO₂ scores, which are known to be artificially low, for the purposes of complying with the non-ZEV CO₂ score. And it’s not clear how long this will last. When combined with the relaxed limits on non-ZEV CO₂ transfer, this has the effect of making PHEVs a very compelling option for compliance. PHEVs would effectively provide more than 0.5 ZEV credits per vehicle, especially as more longer-range PHEVs are coming on the market. So, while PHEVs don’t count as ZEVs, the regulation now rewards their sale much more than before, particularly in the early years. 

How could this look in practice? The figure below illustrates a scenario in which manufacturers maximize the credit transfers and sell more PHEVs. Here all PHEVs match the specifications of the Volkswagen Tiguan eHybrid, which was the best-selling PHEV in the United Kingdom in the first quarter of 2025, and we assume that manufacturers do not use any borrowing. Manufacturers may also sell PHEVs to comply with the non-ZEV CO₂ standard (which does not require any reductions from 2021–2030), but these cannot be double-counted in the ZEV standard and are not shown in the figure. The new changes to the UK regulation mean that in 2025, hardly any ZEV sales would be required at all, and through 2029, manufacturers could comply by selling more PHEVs than ZEVs. 

Figure 1. Maximum contribution of PHEVs to ZEV mandate compliance before and after proposed changes

Important decisions are still to come

Of course, the ZEV mandate isn’t the only policy influencing the market. If PHEVs don’t receive fiscal incentives or tax benefits, most manufacturers are unlikely to pursue a PHEV-heavy compliance pathway. Thus, whether the flexibilities create a sort of PHEV “lock-in” in the United Kingdom is probably going to depend on when DfT switches to using the new utility factors and how PHEVs are taxed.

Because the consultation remains “subject to further engagement with industry on detailed legislation,” switching to the Euro 6e PHEV utility factors as soon as possible, and no later than January 1, 2028, is an important opportunity to strengthen the policy. It’s also worth exploring whether the limits on flexibilities could be tightened more quickly, and it’s important to maintain the interest rate on borrowing.

Taken as a whole, this regulation keeps the United Kingdom among the global leaders. When thinking in terms of long-term climate goals, the most important opportunity is to lock in the 100% ZEVs by 2035 ambition by finalizing the regulation for 2031–2035. This would provide a solid signal of the medium- and long-term trajectory of the market and ensure that all stakeholders—including vehicle manufacturers, fleets, charging providers, and electricity grid operators—are ready to invest and make the United Kingdom’s ZEV transition a success.