Plug-in hybrid electric vehicles (PHEVs) occupy a particular position in European CO2 regulation.
Their certified emissions depend on a regulatory Utility Factor (UF), which determines the assumed share of driving performed in electric mode. Evidence from real-world driving has shown that this share was substantially overestimated, leading European regulators to revise the UF from 2025 onward. This reform changes the compliance role of PHEV for car manufacturers facing the EU emission standards.
This paper quantifies the market, environmental and welfare consequences of this reform.
We estimate a structural model of demand and multi-product supply for the French and German new-car markets over 2020–2024, incorporating manufacturer-specific CO2 standards and regulatory pooling. We use the model to distinguish the effect of correcting PHEV emissions accounting from that of tightening the fleet-wide CO2 target.
Correcting the UF alone increases the regulatory cost of PHEVs, lowers BEV prices, and shifts demand from PHEVs toward BEV. The reform reduces CO2 emissions and generates positive welfare effects.
Its effects become much larger when combined with the tighter 2025 fleet target: the stricter target increases the incentive to sell low-emission vehicles, while the UF reform changes which technologies provide compliance value. Welfare costs under a fixed product set are substantial, but fall sharply when additional BEV models are available. Finally, the pooling arrangements observed in 2025 significantly reduce manufacturers’ statutory penalties, at the cost of a reduction in emissions abatement.
