Toyota has so far only sold about 270 hydrogen fuel cell cars in the state.
Toyota’s zero-emission vehicle sales in California this year amount to a drop of hydrogen in an ocean of gasoline.
The world’s largest automaker has so far sold about 270 hydrogen fuel cell cars in the state, where it delivered nearly 400,000 gas-powered vehicles last year, according to an Edmunds.com analysis of IHS Markit data. Toyota tm does not currently sell an electric vehicle.
And yet the automaker will have no trouble meeting California’s zero-emission vehicle mandates — because it can satisfy those obligations with state-awarded environmental credits instead of current zero-emission vehicle sales.
The Toyota example underscores how the California’s complex credit system has left the state well off the pace needed to meet its clean-car sales goals. The state has estimated its regulations would result in zero-emission vehicles, or ZEVs, making up about 15% of all California auto sales by 2025, but the current share has been stuck at 3% since 2014.
Toyota and other automakers have amassed stockpiles of credits through past ZEV sales or by purchasing credits from competitors that produce more zero-emission cars, such as Tesla Motors or Nissan Motor nsany . Some automakers have enough credits to satisfy state mandates for years without selling a single zero-emission vehicle, according to a new analysis from the Natural Resources Defense Council.
The system also masks a more fundamental problem with the business of selling zero-emission vehicles – weak demand from consumers.
The California Air Resources Board, which regulates greenhouse gas emissions, plans to take up ZEV program changes by December, with a likely focus on the credit system, the backbone of its policy. That prospect has ignited tensions between traditional automakers and Tesla, the Silicon Valley electric car maker.
State regulators are caught in the middle, taking criticism from both sides. Mary Nichols, chair of the state board, acknowledged the sluggish sales of ZEVs, which include electric, plug-in hybrid and hydrogen fuel cell vehicles. She said regulatory changes could be needed to meet state sales goals.
“I’m concerned,” Nichols told Reuters in an interview. “It’s a very ambitious goal and would require – if you look at where we are today and where we need to go – a big change in what consumers are seeing and what they’re buying.”
Any policy changes will be closely watched globally by automakers, regulators and environmentalists, many of whom view California as the leading laboratory for green-car policy.
Tesla Chief Executive Elon Musk recently told investors that state regulators “should damn well be ashamed of themselves” for failing to require major automakers to produce more zero-emission vehicles.
Others in the industry argue car makers have only limited control over how quickly consumers embrace vehicles that – at least for now — are inherently expensive or impractical.
“It’s a mandate for us to produce vehicles, but there is no mandate for customers to buy them,” said Michael Lord, an executive engineer at Toyota who manages regulatory affairs.
‘It Just Takes Time’
Tesla has benefited from some automakers’ decisions to buy more credits instead of build more cars: The electric car maker has to date reported more than $600 million in environmental credit sales.
The credits and related subsidies have helped finance Tesla’s success so far in creating consumer demand for high-end electric cars, but the company has yet to turn a profit from selling $100,000 sedans and crossovers. Its long-term growth depends on widespread consumer acceptance of more affordable battery-powered cars.
Now, Toyota and Honda Motor hmc are building their own expensive, futuristic vehicles, ones that will net the companies far more credits than sales.
Both automakers recently unveiled hydrogen fuel cell cars, which convert the fuel into electric power. They are essentially electric cars that can be refueled instead of recharged, which can take hours.
Neither Toyota nor Honda expects these fuel cells to find a mass market. Hydrogen stations are nearly impossible to find outside of Los Angeles or San Francisco, and both cars start at about $60,000.
But the Toyota Mirai and the Honda Clarity will pay off handsomely in credits — nine of them for each sale, compared to four credits the state now gives a Tesla Model S or the three it gives a Nissan Leaf.
The credits are currently worth about $3,000 to $4,000 each, according to a source with knowledge of the private credit-trading market among automakers. But they are worth far more to Toyota and Honda as a mechanism to satisfy state mandates while continuing to sell hundreds of thousands of gasoline-powered vehicles each year in California, the nation’s biggest auto market.
The credits also buy time to develop more viable zero-emissions cars, said Honda’s Robert Bienenfeld, assistant vice president for energy and the environment. The credits, he said, make it easier to carry out the difficult and expensive development work required to bring zero-emission vehicles into a tough market.
“Things do not always go smoothly,” he said.
Toyota has spent two decades and billions of dollars on research and development of hydrogen fuel cells, and the company believes deeply in the technology, Lord said. But he does not expect hydrogen cars to serve a substantial market for at least five or ten more years.
In the short term, that may mean fewer ZEV sales as a tradeoff for developing higher-quality vehicles with longer driving ranges. Getting the cars on the street, even in small numbers, is essential to jump-starting consumer demand and the hydrogen-fueling infrastructure needed for wider adoption, Lord said.
“It just takes time,” he said. “Just as with hybrids, every generation is better the one that came before.”
Short Range Problems
Building the cars may be easier than selling them, especially with falling gas prices and rising gas mileage of traditional vehicles. Nationally, zero-emission vehicles still account for less than one percent of U.S. auto sales.
Most customers continue to shun electric cars because of their limited driving range — often less than 100 miles — and long recharging times.
Tesla tsla and Chevrolet are planning new models that both companies say will start at about $35,000 and travel 200 miles on a charge, raising hopes of overcoming consumer concerns. Tesla’s Model 3 is scheduled to begin deliveries late in 2017, following the Chevy Bolt late this year.
Toyota has been a global leader in pushing vehicle electrification, but with a focus on gas-electric hybrids, such as the Prius, more than all-electric cars.
Toyota also believes in a middle ground between the two — plug-in hybrids, which can travel some distance on all-electric power before a gas engine kicks in.
California plans to give automakers fewer credits for plug-in hybrids after 2018, a move Lord called ill-advised.
“We think plug-in hybrids have a bigger role to play, particularly in this transitional phase of electrification,” he said. “It removes that range anxiety issue.”
The credit glut is the main concern of regulators, Tesla and environmental advocates. The Natural Resources Defense Council study predicts the industry’s zero-emission offerings will only reach 6% of annual sales by 2025, even after a planned tightening of regulations in 2018.
Nichols, California’s top auto regulator, said she likes the idea of limiting the number of credits any automaker could redeem in any given year, which could force companies to sell more zero-emission cars. It could also devalue the credits, however, which would hurt Tesla’s bottom line.
Tesla has a different proposal – one that would boost the value of its credit bank. The electric car maker proposes quadrupling the number of credits automakers need to satisfy state mandates.
Earlier this month, Tesla’s Diarmuid O’Connell, vice president of business development, sparred with lobbyists for major automakers during a conference near Traverse City, Mich. He chided the industry for fielding electric cars that don’t sell because they are slow and have all the panache of household “appliances.”
John Bozzella, head of a group that represents several Asian and European auto makers, countered that most consumers don’t want electric vehicles — and pointedly wished Tesla well in its quest to achieve profitability.
Many automakers, having made major investments in part based on California policy, are wary of any substantial changes. Nissan makes the all-electric Leaf, along with a fleet of gasoline models, and so it has incentives to argue both sides of the debate. But the automaker would prefer if the state board left the program alone.
“Nissan is concerned with any proposal that materially changes a regulation midstream,” said Ken Srebnik, senior manager, Corporate Development at the company.
Nichols said it’s “not impossible” that the state could meet its goals for zero-emission car sales under current rules. But it’s not going to be easy, either.
“I certainly can’t tell you I have a vision of exactly how it happens,” she said.