Emissions and ZEV credits

How do fleet targets and credits work?

In the EU, each carmaker has a target for the average CO2 emissions of the new cars it registers each year. For every gram per kilometre above the target, it pays an excess emissions premium of €95 for each new car registered, unless it pools with other manufacturers whose fleets are below their targets; for 2025 to 2027, the rules allow compliance to be averaged over the three years. In the US, federal greenhouse gas and fuel economy standards and some states' ZEV programmes create credits that manufacturers earn by beating standards or selling zero-emission vehicles, and that they can trade. China's dual-credit policy works in a similar way for new energy vehicles.

How does a carmaker account for a shortfall?

The obligating event is registering or selling vehicles that take the fleet above its target, so the obligation builds up during the year as sales are made, not at the year end. Under IAS 37, the carmaker recognises a provision measured at the best estimate of the cost to settle it: the lower of the penalty and the cost of credits or pooling it expects to use. Where compliance is averaged over several years, the carmaker judges whether a shortfall in one year will be made up by sales of cleaner vehicles later, and provides for the shortfall it expects over the period. See IAS 37 provisions.

Emissions credits: settling an EU shortfall by pooling

A carmaker registers 400,000 new cars in the EU, with average emissions 2 g/km above its target. The penalty would be €95 × 2 × 400,000 = €76 million. An electric vehicle maker offers to pool with it for €40 million, which brings the combined fleet within its target.

Because pooling is cheaper and the carmaker expects to use it, the provision is €40 million, recognised during the year as the cars are registered, and charged to cost of sales. If the pooling agreement were not yet in place, the carmaker would consider how likely it is to secure one at that price; if it could not, the provision would be measured at the penalty. The electric vehicle maker recognises €40 million of income for joining the pool.

How are credits bought accounted for?

Credits bought from other manufacturers to settle an obligation are usually recognised as intangible assets at cost under IAS 38, or treated as reimbursement rights against the provision, and derecognised when surrendered. Many carmakers use the same approach as companies in emissions trading schemes; see emissions allowances. Credits bought for future years are held at cost, less impairment if their value falls, for example because the rules change.

How are credits earned or granted accounted for?

Credits a carmaker earns by selling zero-emission vehicles are given by the government at no cost. IAS 20 allows non-monetary government grants to be recognised at a nominal amount or at fair value; most carmakers recognise them at nil, so no asset appears until the credits are sold or used. Some groups use their own surplus credits to cover shortfalls elsewhere in the group, in which case the provision is reduced accordingly.

How are sales of credits recognised?

A manufacturer that regularly sells credits to other carmakers treats the sales as part of its ordinary activities: revenue is recognised under IFRS 15 when control of the credits passes to the buyer, usually on transfer in the regulator's registry, and payments for joining a pool are recognised as the pooling commitment is fulfilled for the compliance period. Occasional sales may be presented as other income instead. Multi-year contracts to deliver credits in future years are recognised as each year's credits are transferred, with consideration allocated to each year. Changes in rules, such as the removal of US civil penalties for missing fuel economy standards in 2025, can sharply reduce the value of credits and of contracts to sell them.

How does US GAAP differ?

US GAAP has no specific guidance either. Electric vehicle makers recognise regulatory credit sales as revenue under ASC 606 when the credits are transferred, and buyers expense the cost or record an intangible asset, with obligations accrued under ASC 450. Disclosures of credit revenue have become important because it can be a large share of some manufacturers' profits. See automotive accounting.

This guide is general information. It is not tax or legal advice for your situation.