ZEV credits are the regulatory units California uses to measure whether automakers are selling enough zero-emission vehicles. Manufacturers earn them by delivering qualifying electric and fuel cell vehicles in California and the states that follow its emission rules, and they must hold enough of them each year to cover a rising percentage of their sales. Surplus credits can be banked or sold to competitors. Shortfalls trigger penalties of $20,000 per missing credit under the Advanced Clean Cars II (ACC II) regulation, which took effect with the 2026 model year.1Alternative Fuels Data Center. Zero Emission Vehicle (ZEV) Production Requirements
How a Vehicle Earns a Credit
ACC II replaced the older “credits” terminology with “values” and simplified the formula. A battery electric vehicle or fuel cell vehicle delivered for sale now earns one value, flat. The old system (model years through 2025) awarded between one and four credits per EV depending on driving range, and between 0.4 and 1.3 credits per plug-in hybrid, so a long-range car counted for several times what a short-range one did. That range-weighted math is gone for pure zero-emission vehicles.
Plug-in hybrids are treated differently. To earn a full value under ACC II, a PHEV must certify to at least a 70-mile all-electric range.2Legal Information Institute. Cal Code Regs Tit 13, 1962.4 – Zero-Emission Vehicle Requirements for 2026 and Subsequent Model Year Passenger Cars and Light-Duty Trucks Shorter-range PHEVs (43 to 70 miles) can still generate partial values through 2028 as a transitional allowance, after which that partial crediting expires. And no matter how many PHEVs a manufacturer sells, values from them can only satisfy up to 20% of the annual requirement. The rest has to come from fully zero-emission vehicles.
The Annual Sales Targets Behind the Credit Market
Credits exist because manufacturers have a quota to meet. For the 2026 model year, 35% of each manufacturer’s new light-duty vehicle sales must be zero-emission.1Alternative Fuels Data Center. Zero Emission Vehicle (ZEV) Production Requirements The percentage rises every year on a fixed schedule, hitting roughly 60% by 2030 and 100% in 2035.
Those escalating targets are what give credits their value. A manufacturer running ahead of schedule banks the surplus or sells it. A manufacturer running behind has to buy credits from someone else or pay a penalty. Because the quota keeps climbing, the gap for slow adopters widens every year, and the market for credits tightens along with it.
Which Manufacturers Have to Comply
Any automaker delivering more than 4,500 light-duty vehicles per year in California is subject to the full ZEV value requirements under ACC II. The previous regulation split manufacturers into “Large Volume” and “Intermediate Volume” categories, with easier terms for the intermediate group. ACC II dropped that distinction. Everyone above 4,500 vehicles now faces the same percentage targets. Manufacturers below the threshold are exempt through 2034 but can still earn, bank, and trade values voluntarily. In 2035, when the 100% requirement takes effect, even small-volume manufacturers must comply.
The program reaches well beyond California. Under Section 177 of the federal Clean Air Act, any state with an approved clean-air plan may adopt California’s vehicle standards, provided the standards are identical and adopted at least two years before the applicable model year.3Office of the Law Revision Counsel. 42 US Code 7507 – New Motor Vehicle Emission Standards in Nonattainment Areas Twelve states plus the District of Columbia have adopted ACC II. Seven began enforcing it in the 2026 model year, with five more scheduled for 2027. Values must be tracked and reported separately for each jurisdiction, so a manufacturer selling across all of them is running parallel compliance ledgers.
One caveat worth knowing: California’s authority to set these standards comes from an EPA waiver under 42 U.S.C. ยง 7543(b), and that waiver has been politically contested.4Office of the Law Revision Counsel. 42 USC 7543 – State Standards It was revoked in 2019 and reinstated in 2022.5U.S. Environmental Protection Agency. Vehicle Emissions California Waivers and Authorizations If it were revoked again, the Section 177 states that depend on it would lose their legal basis to enforce ACC II.
How Credits Are Banked and Traded
A manufacturer that produces more zero-emission vehicles than its quota requires accumulates surplus values. Those can be held for future years when the required percentage is higher, or sold to a manufacturer that fell short. This secondary market has become a serious revenue line.
Tesla is the clearest example. Because it sells only electric vehicles, it has no compliance obligation of its own, and every vehicle it delivers generates a tradable value. In the first three quarters of 2024, Tesla booked over $2 billion in regulatory credit revenue, which in 2023 worked out to roughly $990 per vehicle sold. Traditional automakers pay these amounts because buying credits costs less than the penalty for coming up short.
Credit prices are not public. Transactions happen privately between manufacturers, and while final transfers are reported to CARB, the dollar amounts stay confidential. As the required percentage climbs toward 100%, credits get harder to come by for manufacturers still leaning on combustion vehicles, which tends to push prices up. Under the pre-ACC II regulation, credits could move between a West Region pool and an East Region pool of Section 177 states, but cross-pool transfers took a 30% haircut on their value. ACC II streamlined some of this trading mechanics for 2026 and beyond.
Certification and Reporting
Credits are not awarded automatically. Each vehicle model has to be certified by CARB before any of its deliveries count. The application for a battery electric or fuel cell model requires technical data on battery or fuel cell configuration, motor setup, expected battery degradation over the vehicle’s useful life, and energy consumption measured under CARB’s test procedures.2Legal Information Institute. Cal Code Regs Tit 13, 1962.4 – Zero-Emission Vehicle Requirements for 2026 and Subsequent Model Year Passenger Cars and Light-Duty Trucks Plug-in hybrids face additional requirements, including proof that the vehicle can operate on electric power under aggressive driving conditions.
After the model year, manufacturers report delivery-for-sale figures to CARB, with each VIN tracked to prevent double-counting across states. Discrepancies against actual registration data can trigger audits or rejection of the credit application. Once the numbers clear review, CARB posts the earned values to the manufacturer’s account in the credit registry. From there, they can be applied against the current year, banked, or offered for trade.
What a Shortfall Costs
Under ACC II, the penalty for each missing ZEV value is $20,000, up from $5,000 per credit through the 2025 model year. For a large manufacturer running a few percentage points behind its target, that math reaches into the hundreds of millions. The penalty is set high on purpose. The whole program depends on manufacturers finding it cheaper to build or buy clean vehicles than to pay the fine.
Short of paying, a manufacturer facing a gap can draw on banked credits from a prior surplus year, buy values from a competitor, or in limited cases request a compliance extension while production ramps up. None of these are open-ended. Banked credits eventually expire, trading partners can charge premium prices as credits get scarce, and extensions are unlikely for manufacturers that have not made meaningful investments in electrification.
Environmental Justice Values
ACC II created a separate category of credit tied to equity. Manufacturers can earn “environmental justice values” by participating in approved community-based clean mobility programs that direct vehicles and resources into neighborhoods disproportionately affected by air pollution.6California Air Resources Board. Advanced Clean Cars II CARB also convenes a Zero-Emission Vehicle Equity Task Force and runs a Community Mobility Program that connects automakers with partners offering vehicle discounts in underserved communities. For a manufacturer, these programs are both a compliance tool and a way to generate values outside the standard sales count.