Reforming Canada’s ZEV Mandate: How the EV Compliance Credit System Can Strengthen Canada’s Industrial Base

Executive Summary 

Canada’s Zero Emission Vehicle (ZEV) mandate is a critical piece of Canada’s climate competitiveness strategy. However, the current compliance credit system inadvertently privileges companies like Tesla over Canadian manufacturers and fails to capitalize on Canada’s supply chain advantages. Rather than abandoning the policy, Canada should reform the compliance credit system to reward supply chain investments, creating a more flexible framework that supports domestic industrial capacity while accelerating the adoption of clean transportation. 

The federal government has already established the precedent for non-vehicle credits through its infrastructure investment credit system, which awards one credit per $20,000 invested in charging infrastructure. This same framework can be expanded to include investment in Canada’s battery supply chain and innovation system. This would redirect compliance costs from foreign competitors toward building Canadian industrial capacity while producing benefits for automakers. The proposed reform would transform a political liability into a strategic asset. 

 

Key Recommendations: 

• Maintain the ZEV mandate while increasing flexibility to meet targets. 

• Expand the ability of automakers to meet credit obligations with a new supply chain investment compliance credit system that rewards investments in: 

• Critical minerals extraction 

• Battery materials processing and refining 

• Battery components 

• Battery cell and pack manufacturing 

• R&D and the innovation ecosystem  

• Integrate the ZEV mandate into a broader policy mix that forms a cornerstone of Canada’s climate competitiveness strategy.

 

Supply Chain Investment Compliance Credits would: 

• Build Canadian industrial capacity across the battery value chain from mines to mobility. 

• Create high-paying jobs in mining, processing, and manufacturing sectors. 

• Enhance North American supply chain security.  

• Position Canada as a global leader in sustainable transportation and responsible resource development. 

 

Context and the Current System 

Prime Minister Mark Carney’s government has paused Canada’s ZEV mandate, waiving the sales target for 2026, and launched a 60-day review to evaluate the program [1]. When questioned, the Prime Minister noted that the review will explore the entire ZEV policy mix as part of a broader “climate competitiveness” strategy [2].

The decision follows intense lobbying from automakers that argued they would be unable to meet the 2026 mandate. Canadian Vehicle Manufactures’ Association CEO Brian Kingston has criticized the current system as “nonsensical” because it forces Canadian manufacturers to purchase compliance credits from Tesla, a company with no Canadian assembly plants [3]. All of this came in the wake of the government pausing the consumer EV rebate program in January 2025, removing up to $5,000 incentives for EVs. 

Much of this discussion misses the ZEV mandate’s potential role in Canada’s industrial strategy. The ZEV mandate could be used to drive upstream investment like the EV Supply Chain Investment Tax Credit (ITC) which provides a 10% credit for buildings. The ITC is specifically limited to taxpayers who have claimed the Clean Technology Manufacturing ITC across all three supply chain segments: electric vehicle assembly, electric vehicle battery production, and cathode active material production [4]. This policy smartly incentivizes investments across the supply chain to drive upstream and midstream investment. In contrast, the current compliance credit system inadvertently privileges companies like Tesla over Canadian manufacturers and fails to support an industrial strategy that delivers on Canada’s unique upstream and midstream advantages. 

The current Canadian ZEV credit system awards credits based on vehicle type and electric driving range.  

 

Table 1. Credits Generated by BEV and PHEV under the Electric Vehicle Availability Standard [5]

Year	All-electric range	Seating capacity	Credits
Any	80+	Any	1
2026	35–49 km	Any	0.15
	50–64 km	Less than seven	0.75
	65–79 km	Less than seven	1
	50–79 km	Seven or more	1
2027	50–79 km	Less than seven	0.75
	50–79 km	Seven or more	1
2028	50–79 km	Any	0.75

 

Under the current system, companies that cannot meet their sales targets can utilize two flexibility mechanisms [6]:

1. Purchase credits from other manufacturers: Companies can buy and sell credits with one another. This system primarily benefits Tesla and other EV-focused companies likely to have a surplus of credits.
2. Invest in charging infrastructure: Companies receive one credit per $20,000 invested in charging infrastructure. This pathway is limited to 10% of compliance obligations and is valid only until 2030. 

 

The charging infrastructure option provides important precedent for non-vehicle credits but remains severely limited in scope and duration. 

Tesla’s dominance stems from the fact that it only products long range EVs, so every vehicle generates a credit. In Quebec, where a credit system is already in place, Tesla sold nearly 32,000 credits between 2020 and 2024.vii This creates a wealth transfer from Canadian manufacturers to a foreign competitor, with costs potentially passed to consumers through higher prices. 

 

Proposal: Credits for Supply Chain Investment 

Reforming the ZEV mandate compliance credit system to reward supply chain investments will strengthen Canada’s industrial base while signaling a strong commitment to electrifying transportation. 

Since 2019, Mines to Mobility has provided the basis of Canada’s EV industrial policy.viii This is the sole sector where Canada has had a coherent, publicly stated strategy. The strategy aims to build end-to-end supply chains connecting Canadian raw materials to domestic manufacturing rather than exporting resources for foreign processing and reimporting them as finished goods. The strategy integrates with the Canadian Critical Minerals Strategy, launched in 2022, which aims to boost copper, nickel, graphite, lithium, cobalt, and rare earths mining and processing.ix 

Here, I propose expanding the flexibility mechanisms in the compliance system to include upstream investments. This is one step in a broader evaluation. Canada’s ZEV mandate should not be evaluated in isolation but as part of a comprehensive review of all policy instruments in the battery and electric vehicle industrial strategy. This integrated assessment would examine how the mandate interacts with investment tax credits, critical minerals policies, manufacturing incentives, trade measures, and infrastructure programs to ensure coherent policy alignment. Rather than treating the mandate as a standalone environmental regulation, policymakers must assess how it can be optimized alongside other tools to maximize industrial development. 

There is strong environmental rationale for the proposed credits. Supply chain investment credits will accelerate EV affordability for Canadian consumers by building the domestic industrial scale necessary to drive down battery costs—the single largest component of EV pricing. Currently, Canadian automakers import expensive battery components from Asia, passing these costs to consumers through higher vehicle prices. 

Moreover, supply chain localization reduces vulnerability to currency fluctuations, trade disruptions, and foreign supply chain bottlenecks that currently inflate EV prices for Canadian consumers. A reformed ZEV mandate thus creates a virtuous cycle: compliance incentives drive supply chain investments, which achieve manufacturing scale, which reduces battery costs, which makes EVs more affordable, which increases consumer adoption and further drives scale. 

The reformed compliance credit system should award credits for substantial investments across the entire battery value chain, from critical minerals extraction through processing to manufacturing. This expansion builds directly on the existing infrastructure credit precedent while leveraging Canada’s unique upstream advantages. 

Here is how the proposal might work: companies could get 1 credit per $20,000 spent, just as they do on infrastructure, for any investment across the supply chain: 

• Critical minerals extraction 

• Minerals processing and refining 

• Battery components manufacturing (e.g. separators) 

• Battery cell/module manufacturing 

• R&D and innovation ecosystem investments 

 

In addition, automakers could receive base manufacturing credits for producing EVs in Canada, even if they were sold abroad.  

Companies would earn compliance credits for investments that generate intrinsic business value—such as equity stakes in potentially valuable Canadian mining operations or battery component facilities they need for their own production. This alignment transforms regulatory compliance from a cost burden into strategic investments that enhance competitiveness while building Canadian industrial capacity. I propose four kinds of credits:  

 

Critical Minerals Extraction Credits 

• Scope: New or expanded mining operations for battery-critical minerals (lithium, nickel, cobalt, copper, graphite, manganese, rare earth elements) 

• Credit Value: 1 credit per $20,000 invested 

• Eligibility: Minimum $50 million investment, operational within 5 years 

• Bonus Multipliers:  

• 1.25x for operations in Northern and Indigenous communities 

 

Processing and Refining Credits  

• Scope: Battery-grade materials processing, cathode active materials, precursor chemicals, electrolyte production 

• Credit Value: 1 credit per $20,000 invested (matching infrastructure precedent) 

• Bonus Multipliers: 

• 1.5x for supply chain integration using Canadian-sourced raw materials 

 

Manufacturing Integration Credits  

• Scope: Canadian domestic battery cell/pack production 

• Credit Value: 1 credit per $20,000 invested  

• Eligibility: >70% Canadian critical minerals content 

 

Research and development ecosystem credits 

• Scope: Research and development activities for battery technologies, minerals processing, advanced materials, manufacturing processes, battery management systems, and recycling innovations conducted at Canadian facilities. 

• Credit Value: 1 credit per $20,000 invested  

• Bonus Multipliers:  

• 1.25x for partnerships with Canadian universities or national laboratories. 

 

The 1.25x multiplier for critical minerals projects in Northern and Indigenous communities reflects Canada’s commitment to ensuring Indigenous communities benefit directly from critical minerals development on their traditional territories. This approach aligns with the United Nations Declaration on the Rights of Indigenous Peoples Act and supports Indigenous economic reconciliation by incentivizing meaningful partnerships rather than simple consultation.  

In addition, the government could extend banking of credits to match project lifetimes, so investments in battery factories create 20 years of compliance credits. Cumulatively, the supply chain compliance credits could also be capped at a percentage of annual compliance obligations. The cap could start high and come down over time.  

How would this proposal change compliance? Consider the impact of VW’s battery factory: 

 

VW PowerCo Battery Factory Credit Calculation 

Investment Details: 

• VW’s Direct Investment: CAD $7 billion 

• Credit Rate: 1 credit per $20,000 invested 

• Credit Calculation: 

• Total Credits Generated: $7,000,000,000 ÷ $20,000 = 350,000 credits 

 

Since this is a long-term facility (operating 2027-2050+) credits should be spread over the facility lifetime: 

• Total credits over facility lifetime: 350,000 credits 

• Credit allocation: 17,500 credits per year (based on 20-year operational period) 

 

Impact on Compliance: 

• For a company needing ~25,000 credits annually (20% of ~125,000 vehicle sales)x 

• Annual Credits from PowerCo battery factory: 17,500 credits 

• Coverage: 70% of total ZEV requirement 

• Estimated ID.4 sales in 2024: 8,640.xi 

 

Result: Full compliance at 2024 sales rates including the battery factory investment credits.  

 

Conclusion 

Canada’s ZEV mandate represents sound environmental and industrial policy that should be strengthened, not abandoned. The current compliance credit system, however, fails to support climate competitiveness. Reformed credits would build Canadian industrial capacity while maintaining environmental objectives. 

The existing infrastructure credit precedent demonstrates that the regulatory framework can reward investments. By expanding this approach to include critical minerals extraction, processing, and integrated manufacturing, Canada can create a more flexible and strategically beneficial compliance system. 

The system would transform a policy liability into a strategic asset, ensuring that Canada’s transition to zero-emission vehicles strengthens, rather than undermines, our domestic industrial base. This approach aligns environmental goals with economic development, creating a comprehensive framework for Canada’s clean energy future.