Canada: Jumpstarting Zero-Emission Vehicle Adoption In Canada – Federal Government Publishes Final Regulations To Reach 100% ZEVs By 2035

On December 20, 2023, Canada published final regulations amending the Passenger Automobile and Light Truck Greenhouse Gas Emissions Standards that will require 100% of new passenger cars and light trucks (light-duty vehicles, "LDVs") sold from 2035 to be zero emission vehicles (the "Amendments").¹ A zero-emission vehicle ("ZEV") is defined as an "automobile that is an electric vehicle, a plug-in hybrid electric vehicle or a fuel cell vehicle."² The purpose of the Amendments is to phase out all non-ZEV LDVs.³ To achieve these objectives the Amendments impose yearly minimum percentage of fleets of ZEV vehicles offered for sale ("sales target") for manufacturers and importers, a credit system to help manufacturers and importers meet interim targets, and reporting requirements to track progress towards the 100% mandate.

How it works

The Amendments require manufacturers and importers to meet minimum ZEV sales targets for LDVs from the 2026 model year onwards. The targets progressively increase to 100% ZEV sales by 2035.

Table 1: New ZEV manufacturer sales targets from 2026 expressed as a percentage of sales.

As of 2026, manufacturers and importers exceeding the ZEV requirement threshold for a given model year will receive "compliance units" for that year.⁴ Likewise, manufacturers and importers will incur a "deficit" if they fall short of the ZEV target for that model year.⁵ Deficits must be offset with (1) early compliance units, (2) regular compliance units from previous years or (3) charging station units.⁶

• (1) Early compliance units can be obtained if there are already ZEVs in a company's 2024 and 2025 model year fleets. Early compliance units can be banked for future use but cannot be transferred to another company. Early compliance units are only valid until the 2027 model year.
• (2) Regular compliance units are obtained by overcompliance with the minimum ZEV sale targets starting in 2026. Regular compliance units can be banked or transferred to another company. Regular compliance units are valid until 2035.
• (3) Charging station unit credits are obtained by contributions to the fast-charging infrastructure in Canada and are discussed in more detail below.

Manufacturers and importers must submit an "end of model year report" containing information regarding their fleet, a breakdown of how many vehicles are electric or plug-in hybrid vehicles, a summary of compliance units and any offsets, and other information required for enforcement of the Regulations.⁷ The Amendments allow companies to include allowances in their calculations for any "innovative technologies" that result in measurable CO2 emission reductions.⁸ Canada pulls the definition of "innovative technology" from the US federal legislation on the same issue. The reports are due by no later than May 1st of the calendar year following the model year.

Addressing the charging infrastructure gap with charging infrastructure credits

An often-lobbed criticism of Canada's plan to reach the 100% ZEV mandate is the lack of charging infrastructure in Canada. As part of the Amendments, manufacturers and importers can earn compliance credits for contributions to fast-charging infrastructure in Canada.⁹ Manufacturers and importers must submit an application with the details of the charging station project and then they will be allocated credits based on a formula accounting for the amount of their investment in the charging stations (as a general rule, one (1) credit per $20,000 invested), the number of investors, and the rated power capacity of the charging stations.¹⁰ Any investment in charging infrastructure after January 1, 2024 until December 31, 2027 is eligible for charging infrastructure credits.¹¹ Charging infrastructure credits can be banked for future use or transferred to another company, but are only valid until the end of the 2030 model year.

Aligning Standards with the United States

The Amendments go beyond the 100% ZEV mandate. They also aim to reduce the regulatory burden for companies operating in both Canada and the United States, by ensuring the administrative requirements for greenhouse gas vehicle emission standards up to model year 2026 are aligned between the two jurisdictions.¹²

Conclusion

This federal mandate enhances the provincial regimes encouraging consumer adoption and growth in the sale of ZEVs, notably in British Columbia and Québec. It is aligned with the federal government's Emissions Reduction Plan published in March 2022, and signals a gradual shift from a carrot to a stick approach. Notably, while the Government of Canada has invested over $2 billion in ZEVs purchase incentives since 2019, these incentives are set to expire on March 31, 2025.

Footnotes

1. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275.

2. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 1 (s. 1(1) of the amended regulation).

3. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 2 (s. 2 of the amended regulation).

4. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 13 (s. 30.14(1) of the amended regulation).

5. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 13 (s. 30.14(2) of the amended regulation).

6. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 13 (s. 30.15(3) of the amended regulation).

7. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 14 (s. 33(4) of the amended regulation).

8. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 9 (s. 18.3(1) of the amended regulation).

9. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 13 (s. 30.17 of the amended regulation).

10. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 13 (s. 30.21 of the amended regulation).

11. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 13 (s. 30.21 of the amended regulation).

12. Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, SOR/2023-275 s. 6 (s. 17 of the amended regulation).

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024