Zero-emission vehicles regulation under the Canadian Environmental Protection Act

On December 20, 2023, the Government of Canada announced new regulations that require a specified percentage of manufacturers’ and importers’ fleets of new light-duty vehicles offered for sale in Canada to be zero-emission vehicles (ZEVs). The ZEV regulation requires that 100% of passenger car and light-truck sales be ZEVs by 2035, with interim requirements of at least 20% by 2026 and at least 60% by 2030. The ZEV regulation follows the 2022 publication of the Government of Canada’s Emissions Reduction Plan, which aims to meet at least a 40% reduction from 2005 greenhouse gas (GHG) emissions levels by 2030 and to achieve net-zero emissions by 2050 (as discussed in a previous blog post).

The stated purposes of the ZEV regulation are to reduce GHG emissions in the transportation sector and to establish emissions standards and test procedures aligned with federal requirements in the United States.

This blog post discusses the key aspects of the ZEV regulation and implications for industry  moving forward.

The ZEV regulation

The ZEV regulation is an amendment to the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations under the Canadian Environmental Protection Act, 1999, which has existed with limited compliance obligations and credit trading opportunities for ZEVs since 2010.

Under the ZEV regulation, beginning in 2026, at least 20% of a company’s combined fleet of new light-duty vehicles offered for sale are required to be ZEVs, which are defined to mean an electric vehicle, a plug-in hybrid electric vehicle (PHEV) or a fuel cell vehicle. The ZEV requirements increase in percentage terms annually and, by 2035, 100% of new light-duty vehicles sold must be ZEVs.

The ZEV regulation provides specific sales targets by model year:

Compliance credits

In order to facilitate the transition to the ZEV targets, the ZEV regulation includes a credit system. Companies that exceed their ZEV sales targets earn compliance credits which they can “bank” for up to five model years after the model year in which the credits were obtained, to offset future compliance deficits or trade. Companies that generate a deficit in model years 2026 to 2034 are required to offset their non-compliance within three model years after the year in which the company incurred the deficit, and by 2035.

The ZEV regulation permits manufacturers to earn early action credits for ZEV sales in model years 2024 and 2025. In order to qualify for early action credits, a company’s fleet must have at least 8% ZEVs in model year 2024 and 13% in model year 2025.

The ZEV regulation also contains changes to crediting for PHEVs, as compared to the draft version of the ZEV regulation published on December 31, 2022. PHEVs with an all-electric range of 80 km or more will generate one credit in all compliance years. PHEVS with all-electric ranges less than 80 kilometres will receive partial credits for model years 2026 to 2028, but model years 2029 and later will not qualify for credits unless they are at or above the 80-km all-electric threshold. PHEVs can also earn early action credits in model year 2024 and 2025 based on the all-electric range and seating capacity in model year 2026. A company’s total compliance obligation that can be met by PHEV’s is capped at 45% in 2026, 30% in 2027 and 20% in 2028 and later.

Charging infrastructure

The ZEV regulation also permits auto manufacturers to earn credits for investments in charging infrastructure for the initial compliance years up to and including 2030. Companies are permitted to generate one credit for every investment of $20,000 in new, fast-charging infrastructure projects that meet specific requirements. Proposals for development of charging stations can be submitted to the Minister of the Environment and Climate Change for approval by December 31, 2027. Charging station projects can involve third parties, but only regulated companies will be authorized to create ZEV charging station credits. To be eligible for charging station credits, charging stations must be located in Canada and be

• capable of electrical outputs at a rate of 150 kW
• operational between January 1, 2024, and December 31, 2027
• operational within two years of receiving approval from the Minister
• publicly available with equal pricing for all compatible ZEVs (including with adaptors)
• available for use 24 hours per day, 7 days per week or, if located on the property of a business, during normal operating hours
• operational for at least five years following the start of operation

Notably, a charging station project must not be used to create compliance credits under another federal regulatory project or be funded by any other governmental investment program during its lifespan (federal, provincial or municipal), including, for example, under the Clean Fuel Regulations, the Zero Emission Vehicle Infrastructure Program and programs offered by the Canada Infrastructure Bank.

Through early action credits and compliance units from investments in charging infrastructure, manufacturers would be able to offset up to 10% of their overall compliance requirement for 2026.

Implications for industry stakeholders

The objective of the ZEV regulation is to reduce GHG emissions in the transportation sector, focusing on passenger cars and light trucks, which account for 40% of the transportation sector’s GHG emissions. The GHG emissions reductions are intended to "help Canada meet its international GHG emission reduction commitments by 2030 and 2050." As explained in the Environment and Climate Change Canada (ECCC) Backgrounder, the ZEV regulation will advance climate change goals in Canada “by preventing 362 megatonnes of cumulative GHG emissions.”

The ZEV regulation is also intended to establish emissions standards that “keep pace with the United States, the United Kingdom, the European Union and several other major economies which are all taking action to lower emissions and put more electric vehicles on the roads.”^[1] As noted in the Government of Canada’s Regulatory Impact Analysis Statement, ECCC and the U.S. Environmental Protection Agency are continuing to collaborate to implement “aligned regulatory standards and joint compliance programs” in order to “maximize efficiencies in the administration of the respective programs in the two countries.” The ZEV regulation retains fleet average GHG emission standards that are aligned with the requirements set out in the U.S. EPA 2021 Final Rule Making [PDF].

In recognition of the need for charging infrastructure, the Government of Canada has allocated over $1.2 billion to deploy more charging stations across the country. Funding by the federal government is complemented by private sector funding and development. For example, seven global auto manufacturers have announced they are building “a new ‘high-powered’ electric vehicle charger network of at least 30,000 direct current fast chargers across North America” beginning in 2024.^[2]

It is recognized that the increased number of ZEVs will result in a corresponding increase in demand on the electricity grid. By 2035, ZEVs’ electricity demand is projected to account for 5% of total electricity demand, increasing to 9.5% of overall electricity demand by 2050. Consequently, an increase in demand for electricity may lead to a demand on provincial electricity grids and a corresponding increase in electricity prices as additional generation is required. ECCC has acknowledged that investments may be required “to increase the peak kilowatt hour load capacity.”

Lastly, the Government of Canada has recognized that the ZEV regulation could disproportionately impact those living in rural and northern communities with less access to public charging infrastructure. Northern communities will likely face greater challenges with the transition to ZEVs because of prolonged periods of colder temperatures and issues with battery performance in cold weather. To mitigate the impact on rural and northern communities, the Government of Canada has expressed a commitment to work on policies that ensure ZEV accessibility despite economic and regional differences.

There remains some uncertainty whether the ZEV regulation will be challenged, considering stated opposition from certain provinces, most notably Alberta, whose premier released a statement indicating that the “Government of Alberta will do everything within its legal jurisdiction to thwart implementation of these unconstitutional regulations in our province.” This uncertainty is heightened in the context of two recent court decisions declaring other pillars of the federal government’s environmental strategy unconstitutional, namely (i) the Federal Court of Canada’s decision that quashed the federal Cabinet’s order adding “Plastic Manufactured Items” to the list of toxic substances in Schedule 1 of CEPA and (ii) the Supreme Court of Canada’s judgment finding Canada’s Impact Assessment Act unconstitutional in part.   

If you require assistance or have any questions regarding compliance with the ZEV regulation, please contact a member of Osler’s Regulatory, Indigenous and Environmental Group.