Various Mercedes-Benz vehicles are assembled in the “Factory 56” production hall.
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Car manufacturers have a number of ways to mitigate the impact of the European Union stricter emission targetsalthough analysts say all options are likely to come at a significant cost.
The prospect of high fines for non-compliance with the new emissions standards in the Union has encouraged heated debate within the automotive industry, especially given that the sector is currently it’s not on the way to achieve this year’s goal.
A perfect storm of challenges at the way to full electrification has ensured that the major original equipment manufacturers (OEMs) will have a rough time in 2024 — and few expect 2025 to be much better.
The European Union’s average emissions cap from new vehicle sales falls to 93.6 grams of carbon dioxide per kilometer (g/km) in 2025, reflecting a 15% reduction from the 2021 baseline of 110.1 g/km.
Exceeding those limits — which were agreed in 2019 and form part of the 27-member bloc’s ambition to achieve climate neutrality by 2050 — can lead to fines in the amount of several billion euros.
“Everyone is in the dark about this issue,” Rico Luman, senior sector economist for transportation and logistics at Dutch bank ING, told CNBC via video call.
“It’s such a big deal because they’re still struggling to make a shift and restructure, as we’ve seen with everything that’s going on in VW over the past few weeks and months as we’ve been adapting the organization to a new world,” Luman said.
“There’s a long-term interest in terms of keeping up with the competition. I mean, the direction is pretty clear. So eventually they’ll have to achieve that, but in the short term, it’s not that attractive for them because it hurts them multiple times,” he added.
What can be done?
Most of Europe’s leading car giants are currently far from meeting the EU’s new CO2 target, ING’s Luman said, meaning action is needed to mitigate the impact of financial penalties.
Some of the options on the table include boosting sales of battery electric vehicles (EVs) by introducing more affordable models and lowering prices, reducing production of conventional internal combustion engines (ICEs) in favor of plug-in EVs and hybrid models, and “teaming up” with competitors that already meet goal. Alternatively, car companies can simply pay the fines.
Pooling refers to the process by which car manufacturers join together to be considered as one entity when calculating their performance against the CO2 emissions target.
Currently, Sweden Volvo it is considered the only major car manufacturer to meet the target, along with the American manufacturer of electric vehicles Tesla and some Chinese companies.
A Volvo emblem is seen on the front bumper of a vehicle at the Volvo Cars of Austin dealership on September 4, 2024 in Austin, Texas.
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Stephen Reitman, head of European automotive research at Bernstein, said carmakers operating in Europe face a “big drop in emissions” this year as EU regulations tighten.
“Now they can mitigate that by partnering with companies that have excess greenhouse credits. But those companies are one, Tesla, and the other is the big Volvo, which is owned by [China’s] Geely,” Reitman told CNBC “Squawk Box Europe“on Thursday.
“Many of the cars that Tesla sells in Europe, which generates its greenhouse credits, come from China. So basically, you’re seeing a transfer of money from European automakers to Chinese entities or companies that have originated in China, which may not be the best outlook for the EU and for national government,” he added.
A heated discussion
Some European OEMs have expressed concern on the tightening of regulations on carbon emissions in Europe, especially due to the drop in demand for electric vehicles.
The European Automobile Manufacturers Association (ACEA), an industry lobby group, has called from the European Commission to provide “urgent relief measures” regarding the new rules, while German Chancellor Olaf Scholz he said there should be no penalties for car companies that do not comply with the new standards.
Joint press conference of the President of the European Commission Ursula von der Leyen, the President of the European Council Antonio Costa and the Prime Minister of Hungary Viktor Orban after the end of the European Council Summit, the meeting of EU leaders at the European Union headquarters in Brussels, Belgium on December 19, 2024.
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For some, any move to relax or delay tougher EU carbon rules would be tantamount to scrapping the regulation altogether.
Julia Poliscanova, senior director for vehicles and e-mobility supply chains at the Transport & Environment campaign, told CNBC last month that the rules are designed to make carmakers more competitive – even if it comes at the expense of some of their higher profit margins in in the short term.
“We’re behind on electrification. So, how on earth does delaying the goal and us falling further behind help the industry? I don’t get it. I just don’t see how it helps the transition they have to go through,” Poliscanova said.
President of the European Commission Ursula von der Leyen he said at the end of last year that they will convene a strategic dialogue on the future of the European automotive industry.
The dialogue, which is due to be officially launched this month, is designed to quickly implement measures that the sector urgently needs.
