Storm clouds are brewing over Canada's Zero-Emission Vehicle (ZEV) mandates, formally known as the Electric Vehicle Availability Standard (EVAS) at the federal level, and in British Columbia defined by the Zero-Emission Vehicles Act and accompanying regulations. The ZEV mandate, taking effect at the federal level with the model year 2026 for new vehicles, will ramp up from a 20% sales target to a 100% sales target in 2035 (see table below). BC's ZEV mandate is already operating since 2019. ZEVs include pure Battery-Electric Vehicles (BEVs), Plug-in Hybrid-Electric Vehicles (PHEVs), as well s Fuel-Cell Vehicles (FCVs). With EV sales slowing, in part due to the lack of federal purchase incentives that ran out of funding in January of 2025, the viability of the ambitious sales targets for EVs has been called into question. Some politicians have even called for outright rescission of the mandate. That steps is utterly premature and counterproductive. Canada needs to accelerate its electric mobility transition, not slow it down. But there are problems with the current design of the mandate. It needs reform. Without reform, it may not survive politically.

The leader of the Conservative Party of Canada has already maligned the ZEV mandate as being akin to "banning rural way of life" in Canada. That, of course, is hyperbole. However, supporters of climate action need to heed the warning that there is a kernel of truth in that hyperbole. Motorists in Prince George or Fort St. John have different driving needs than motorists in Vancouver or Victoria. I just spent some time in Northern BC this summer, driving long distances and gaining some first-hand experience of these differences. As driving needs differ regionally, EV policies need to address that.

EV fast chargers provided by B.C. Hydro in Prince George. — Image credit: Werner Antweiler

The ZEV mandate works with a compliance credit mechanism. Each manufacturer who falls below the sales target will face a penalty based on the number of compliance credits they owe. A manufacturer owes one credit for each new vehicle times the compliance ratio, as shown in the table below. Each ZEV sales earns a credit, depending on the ZEV class (BEV or PHEV). In some instances, credits can also be earned through other activities such as deploying EV charging stations. A manufacturer must buy any compliance credits it still owes from other manufacturers that are over-complying (such as BEV-only makers) or from the government at a prescribed rate ($20,000 in the federal scheme). A manufacturer's fleet-wide higher costs from non-compliance will get passed through to motorists—although not naively at a $20,000 markup, but at the discretion of the manufacturer who can split higher costs across different models in response to market conditions.

A common misconception is that after 2035 the sales of ICEVs will be banned. That is false. People can still buy ICEVs, but likely at a higher cost as manufacturers may have to buy compliance credits. In a market equilibrium, they may actually end up cross-subsidize ICEVs at that point if demand for ICEVs persists. Even though the ZEV mandate is not an ICEV ban, it is may be erroneously perceived as such. Motorists don't like choice being taken away from them, especially if they believe that an EV is not a feasible option given their particular circumstances.

As opinion polling shows, strong reservations about buying an electric vehicle remain. Affordability features first and foremost, and the strong reaction to the sudden discontinuation of federal purchase incentives reveals that buyers are quite sensitive to purchase prices. Electric vehicles tend to have a higher upfront purchase price compared to ICEVs, and this is a hurdle for many buyers. In many instances, an EV is actually already cheaper on a life-cycle basis, especially for those with high annual mileage. Per kilometer driven, electricity is much cheaper than gasoline. This trade-off—higher upfront cost against lower operating cost—is often misperceived and not fully factored into purchases. The result is EV under-adoption. EV purchase incentives have tried to correct this. Because of the emissions from ICEVs, there is a social cost of ownership in excess of the private cost of ownership: a negative externality. It should be priced, but as carbon pricing on motor fuels was abolished in April 2025 in Canada, carbon pollution is not priced anymore. The external cost of pollution simply gets externalized—to the entire planet. How large is this external cost?

In addition to affordability, range anxiety (limited EV range combined with insufficient public charging infrastructure) and inability to charge at home (to take full advantage of low electricity costs, and make charging convenient) remain the other two major obstacles. Many motorists who live in a multi-unit residential building (MURB) simply lack the ability to charge at home. While the province has made good progress enabling strata (condominium) buildings to investigate deploying EV charging, more needs to be done for rental buildings where landlords do too little to enable EV charging. What is needed urgently is an EV charging mandate for rental buildings (more about this in a future blog).

One way of reforming the ZEV mandate is to soften the targets. Overly ambitious targets that are ultimately rejected by the electorate are worse than softer targets that voters can accept and rally around. Along that way it is important to understand that EV adoption is rather different across regions. EV adoption is still primarily an urban phenomenon, with uptake in rural areas low. I was just driving in the Peace region around Prince George in northern BC, and EVs are simply not the ideal solution when you drive long distances there. Range-limited EVs are not a suitable option for many motorists, let alone the need for heavier vehicles to transport goods and working tools. To acknowledge the reality of EV adoption at different speeds, we need sales targets that are different for urban, suburban, and rural areas. The table above shows concrete numbers that I propose as an alternative. In urban areas, there would be a much slower pace than currently envisioned, ending at a ZEV sales target of 85%. ZEV sales targets for 2035 in suburban and rural areas would be 65% (about two thirds) and 35% (about one third). Because most motorists live in urban areas, the ZEV sales targets would still have a significant impact on emissions. Driving up EV sales in urban ares to 40% by 2030 looks feasible given current trends, with more rapid uptake in the following decade.

In my proposed reform, vehicle sales would be identified by the owner's residence as falling into either of the three zones described above. In turn, zones would be identified by standard definitions of what constitutes urban/suburban (census metropolitan area or census aggregations) and rural areas (outside CMAs and CAs and with population densities below 400 people per square kilometre). Differentiating between urban and suburban areas is somewhat trickier.

Manufacturers would still earn credits the same way as before, but their credits owed would be calculated based on the local compliance ratios and their local vehicle sales. It would give manufacturers the ability to balance trades internally, for example if they are over-complying in urban areas and under-complying in rural areas, or vice versa. Introducing regional differentiation would be a straight-forward adjustment to the existing legislation. Aggregate sales targets at the provincial level would also differ as there are different levels of urbanization across Canada.

Many climate activists will likely bemoan my proposed new ZEV sales targets as too soft, too slow, and too unambitious. Frankly, I would like to see stronger, faster, sooner action too. But if the alternative is between slow progress or no progress, I choose slow progress. The political ship only sails as fast as the wind blows, and the wind for climate action is more a breeze than a gale at the moment. Overambition may ultimately set us back a step rather bring us forward. It is easy to point at Norway, where EV adoption has already surpassed the 90% sales level. Yes, it can be done! But Norway had the great fortune and fiscal stamina to solve the problem with huge subsidies, while not having to worry about the fate of local car producers.

The ideal ZEV mandate is the one that isn't binding. Technological progress is expected to drive down the cost of batteries, extrapolating the current trend. As batteries and EVs get cheaper, eventually price parity is reached. In China, local EV manufacturers have already reached that point: EVs are now cheaper than their gasoline counterparts. When purchase price parity is reached, the switch to EVs will be maintained by market forces alone.

Another key reform of the ZEV mandate could involve putting PHEVs at par with BEVs, especially as PHEVs have increased in range in recent years. Current plans call for PHEVs to be eligible for full credit if they have a range of 80 kilometres by the 2029 model year. Current PHEV models often have shorter range. The average daily driving range is 35 kilometers, so even a shorter range of 50 kilometers means that most PHEV drivers will be able to drive in electric mode almost all of the time. At 80 kilometers range a full credit is justified, and a shorter range should qualify proportionately to that range. This should not be a binary eligibility condition, but a gradual standard. A 50-km range PHEV should get 5/8-th of a full credit. Keep in mind that when a PHEV owner is able to charge conveniently at home, driving electric is always cheaper than driving with gasoline. PHEVs are therefore a sensible choice to compensate for range anxiety and charging infrastructure deficits.

Is a ZEV mandate really needed if there are sufficient EV purchase incentives? Why put one policy on top of another? A better way forward may be to combine the two policies. I have some ideas about how to do that below.

Every new internal combustion engine vehicle (ICEV) will emit, on average, approximately 24 tonnes of carbon dioxide over its lifetime. That is a conservative estimate. The federal government has pegged the social cost of carbon, the climate damage from carbon emissions, at about $250/tonne. Thus, the lifecycle carbon cost over a 12-year lifespan of a vehicle, discounted at 5% annually, is equivalent to $4,500. Vehicle emissions of local air pollutants such as nitrogen oxides and volatile organic compounds (VOCs) will add to this cost, particularly in urban areas with high concentrations of vehicles and people. Essentially, without a carbon price, the buyer of an ICEV inflicts a $4,500 social cost on all of their fellow citizens. One way of dealing with this is through an upfront price adjustment. Economically, this is rather less efficient than through carbon pricing because the actual use of a vehicle varies, whereas a flat upfront fee is an average.

Reforming the ZEV mandate could take another direction altogether. We have two policies—the ZEV mandate and EV subsidies. Why not fold them together? This would be more practical, and ultimately more sustainable fiscally. As discussed earlier, there is an external cost of driving an ICEV. This means there should be an equivalent price wedge between ZEVs and ICEVs. In other words, ICEVs should be penalized and ZEVs should be subsidized. This can be done in a revenue-neutral way: through a bonus-malus scheme. Consider a surcharge \(S\) on ICEVs and a rebate \(R\) on ZEVs. Let \(\theta\) denote the ZEV share. Revenue neutrality therefore implies \[ \theta\cdot S = (1-\theta)\cdot R \] The scheme must also maintain a fixed cost wedge \(X\), defined by the externality. This means the sum of rebate and surcharge must add to that wedge: \[ X = R + S \] Consequently, a revenue-neutral bonus-malus scheme has \[ R = (1-\theta)\cdot X \quad\mathrm{and}\quad S= \theta\cdot X\] For example, if EV sales are 25% and a cost wedge of $4,500 is needed, a $1,125 surcharge on ICEVs combined with a $3,375 rebate for ZEVs will be revenue neutral. The numbers would be reversed for the 75% sales target: a $3,375 ICEV surcharge against a $1,125 ZEV rebate. Surcharge and rebate would be applied to the manufacturers, who would pass on costs or savings to their customers. Essentially, the EV rebate would shrink over time, while the ICEV surcharge would increase over time.

The mechanism above is a simple bonus-malus scheme where the government would set rates \(R\) and \(S\), but the outcome \(\theta_t\) may differ from the intended ZEV sales target \(\theta^\ast_t\) that the regulator used to calculate the revenue neutral \(R_t\) and \(S_t\). In period \(t\), the government may end up with either a positive or negative balance \[ B_t = (1-\theta_t)\cdot S_t-\theta\cdot R_t=(\theta^\ast_t-\theta_t)X \] This balance is positive when the manufacturers under-comply, that is, \(\theta_t<\theta^\ast_t\). To maintain revenue neutrality, and strengthen the incentive for ZEV purchases, next year's budget balance would be \[ R_{t+1}+S_{t+1} = \max\{0,X + B_t\}\] and thus ZEV rebates would increase. The scheme would terminate when over-compliance has been achieved, i.e., when \(B_t<0\).

A revenue-neutral bonus-malus scheme blends the best features of an EV subsidy with those of a ZEV mandate. It provides a clear financial incentive for manufacturers, giving them the ability to structure sales based on fleet-wide performance. Revenue neutrality ensures that the policy does not become a drag on financial resources as EV uptake increases. The sudden loss of federal incentives has already shown how damaging sudden policy discontinuation (or interruption) can be. As governments only deal with manufacturers rather than individual buyers or dealerships, it simplifies administrative overhead. No compliance credit trading is needed. The scheme is also self-correcting for under-compliance, raising the EV-ICEV incentive wedge automatically to drive EV uptake. EV sales targets can still be differentiated regionally to calculate average province-wide or nation-wide. Manufacturers can balances sales when they over-comply in one market and under-comply in another.

Federal and provincial EV purchase incentive have evolved in recent years with some desirable targeting mechanisms. In British Colubmia, EV purchase incentives were conditioned on income. The federal government conditions eligibility on vehicle sales price. Both approaches were trying to direct limited funds where they would be most effective: improving affordability of EVs for those most liquidity-constrained, while avoiding incentivizing the purchase of luxury EVs. It may appear that a bonus-malus scheme would preclude that targeting. This ignores the role of manufacturers. The scheme gives them a fleet-wide budget, and they would allocate it judiciously along the lines of price elasticities of demand. This means that they would adjust their pricing to maximize their profits, which would entail some degree of cross-subsidization. They would tend to keep prices affordable for lower-cost vehicles in market segments that are more price-elastic. The market will take care of the optimal allocation of incentives.

Of course, there is no free lunch here. Ultimately, the buyers of ICEVs will have to pay a little more until EVs reach purchasing price parity. But a bonus-malus scheme appears as the most sturdy option on the policy menu. Politicians would still have to tell voters that pollution is costly. Getting rid of carbon pricing on motor fuels hasn't made those fuels any less polluting. While carbon pricing was designed to be revenue neutral, and in fact many lower-income households ended up better off, the policy was utterly misperceived as not being revenue neutral. A bonus-malus scheme is likely more resistant to misconceptions because motorists can make an informed choice about buying either an EV or ICEV. Buy an ICEV and pay the penalty for pollution, or buy an EV and receive the benefit from climate action.

Some journalists were already asking the question whether Canada's ZEV mandate is doomed. It is not yet. But the time window for getting needed reforms on the way is short. The new federal government has an opportunity to push through needed reforms to the ZEV mandate, while BC and other provinces could take cover in the politial wind shadow and harmonize policies with new federal targets. Canada cannot afford to lose the ZEV mandate, or EV purchase incentives, or some combination thereof. Above I made the case for my preferred approach: a revenue-neutral bonus-malus scheme.