How ZEV Mandate Credit Trading Actually Works

The ZEV mandate is usually described as a rule that forces car makers to sell electric cars, with fines if they do not. That description is true but incomplete. Underneath the headline targets sits a full trading system, with allowances, credits, exchange rates and an interest rate. Manufacturers can buy and sell compliance, borrow it from their own future, or earn it by making their petrol cars more efficient.

If you have ever wondered why one brand discounts its electric cars hard while another barely bothers, the trading system is usually the answer. Here is how it works.

The starting point: allowances, not sales targets

The legal machinery is set out in the Vehicle Emissions Trading Schemes Order 2023, known as VETS. It creates four linked trading schemes: a car ZEV mandate scheme, a van equivalent, plus a CO2 standard for each. The car ZEV target was 22% of registrations in 2024, rising to 28% in 2025, 33% in 2026 and 80% by 2030.

The clever part is how the target is enforced. Rather than demanding a set number of electric sales, the system caps the number of non-electric cars a manufacturer can register. Each manufacturer receives allowances covering its permitted share of petrol, diesel and hybrid cars, and it must surrender one allowance for every non-ZEV car registered. A manufacturer that sells lots of electric cars uses few allowances and ends up with spare ones. A manufacturer that sells mostly petrol cars runs out and has to find more.

Those spare allowances are the currency of the whole system, and they can be traded at any price between manufacturers.

What the first year showed

The first full compliance report, covering 2024, was published by the Department for Transport in March 2026. The headline car target was 22%, yet ZEVs made up 19.8% of new car registrations in 2024. The gap was closed without a single manufacturer paying a fine.

Three flexibilities did the work. CO2-to-ZEV conversion, which rewards making petrol and hybrid cars more efficient, generated the equivalent of an additional 4.7% of ZEV registrations. Borrowing against future years added another 1.2%. Actual trading between manufacturers was comparatively modest: car makers traded around 39,000 car allowances, equal to 2.1% of total car registrations, and about two thirds of those were banked for future years rather than needed for 2024 compliance.

The report also revealed that prices sit well below the fine: traded prices for car allowances in 2024 were less than a third of the £12,000-per-car compliance payment that applies from 2025.

Banking, borrowing and exchange rates

Beyond straight trading, the scheme has a full toolkit of flexibilities, set out in the GOV.UK guidance on the VETS order.

Banking lets a manufacturer that over-complies carry excess allowances forward for up to three years, an obvious hedge given that targets step up from 33% in 2026 to 52% in 2028.

A manufacturer that misses its target can borrow allowances from its own future allocation, subject to annual caps and repayment with 3.5% annually compounding interest by 2030. The caps tighten as the deadline approaches: 8.25% of car registrations in 2026, falling to zero by 2030.

Conversions link the four schemes at fixed exchange rates. One ZEV car allowance converts into 135 CO2 car allowances, and CO2 allowances convert back at 167 to one. Car and van schemes interlink too, at 0.4 van credits per car allowance. These rates are what make CO2 efficiency worth real money: a manufacturer that cuts the average emissions of its petrol fleet effectively mints ZEV credits.

Winners, laggards and the price of delay

The trading system does not treat all manufacturers equally, and the second year of data shows the divide. Analysis by Transport and Environment found that BEVs took 23.4% of new registrations in 2025, against the 28% headline target, with the flexibilities again closing the distance.

At one end sits Ford, which T&E reports exceeded the 28% target in 2025 without using the flexibilities at all, helped by competitive pricing and the electric Puma becoming one of the year's best-selling affordable EVs. At the other sits Toyota, which borrowed credits equal to 4,900 BEV sales in 2024 and 12,500 in 2025, around 19% of its total UK sales across the two years. A manufacturer with one electric model ends up renting compliance from its own future, with interest.

That is the system working as designed, in one sense. The mandate was built with flexibilities precisely so that companies on different transition timelines would not face a cliff edge in year one. But the same flexibilities mean the headline targets overstate how many electric cars must be sold in any given year. The real question for 2026 is whether the gap between the 33% headline and the effective floor keeps shrinking as intended.

Why this matters to buyers

Credit trading sounds like an accounting exercise for head offices, but it shows up on the forecourt in two ways.

First, it explains the discounting. A manufacturer facing a shortfall can cut the price of its electric cars to lift sales, buy credits from a rival, or pay the £12,000-per-car compliance payment. Discounting a slow-selling EV by a few thousand pounds is often the cheapest of those options, which is why electric deals have been so aggressive through 2025 and 2026. The June figures we covered in our half-year review showed that pressure at work, with a record 30% BEV share achieved alongside sustained discounting.

Second, it explains the timing. Quarter-end and year-end surges in electric registrations are not coincidences. Manufacturers manage their compliance position across the year, and the final weeks of each quarter are when the incentive to move metal peaks. A buyer walking into a showroom in late September or late December is often negotiating with a manufacturer that has an accounting reason to deal.

The system also has honest limits. Trading works only while some manufacturers over-comply and others do not, and the credits on sale reflect real electric cars sold somewhere in the market. As targets climb towards 80% in 2030, borrowing caps fall away and banked allowances run down. The market for compliance gets tighter every year, which is the design intent: the flexibilities are a glide path, not a permanent escape hatch. We look at the van and car schemes, and where the pressure points sit, in ZEV mandate flexibilities explained.

The wider story of how far the market sits from its targets is tracked in The EV Mandate Gap. Credit trading is the mechanism inside that gap, and understanding it turns the monthly registration numbers from noise into something you can actually read.