Will COVID-19 undermine European regulations on CO2 emissions from cars?

This article was originally published in our "Décryptage Mobilité" newsletter. To receive future articles by email as soon as they are published, Subscribe now. By Stéphane Amant – Senior Manager

In the last week of March, the European Automobile Manufacturers' Association (ACEA) [1]—which brings together Europe’s largest automakers—along with CLEPA [2], which represents their suppliers, wrote to European Commission President Ursula von der Leyen to request a postponement of their new obligations regarding CO2 emissions from passenger vehicles [3]. European lobby groups representing automakers and their suppliers argue that the crisis has made it impossible for them to develop less polluting vehicles within the prescribed timeframe. At this stage, the European Parliament opposes this, denouncing it as an attempt to exploit the pandemic. What can we make of this standoff?

A Look Back at European CO2 Regulations in 2020

First, it’s important to keep in mind that automakers (particularly German ones) have used all their lobbying power in Brussels for years to weaken European regulations on CO2 emissions. What are these standards, and what do they mean for automakers? The regulation on CO2 emissions from cars (which account for 14% of the EU’s total greenhouse gas emissions and 70% of the EU’s road transport emissions) is the main European policy aimed at reducing the growing impact of automobiles on the climate. The first significant target, following years of rising CO2 emissions, took effect on January 1, 2020: the average emissions of new passenger cars registered in the EU during 2020 must be equal to or less than 95g of CO2 per km. This target is broken down by manufacturer based on the average weight of its sales, and the calculation method includes a few nuances: notably, the weighting of electric and plug-in hybrid vehicles, bonuses granted for eco-innovations, and finally the “phase-in.” This “phase-in” means that the 2020 average is calculated based on 95% of a manufacturer’s lowest-emitting vehicle registrations. The target will then apply to 100% of sales in 2021. While the emissions trajectory measured between 2007 and 2015 might have suggested that the target would be achievable for the industry, the outbreak of the Volkswagen scandal (which affected diesel car sales), coupled with the prevailing strategy of promoting SUV sales (to boost margins), has put the industry “off track,” making it very difficult—if not seemingly impossible—to meet the target [4]. The graph below illustrates this perfectly.

If automakers fail to comply with this regulation, they will face substantial fines—amounting to several billion euros—starting in 2020, as we mentioned in a previous article [5]. This helps explain the stakes for ACEA regarding the CO2 regulation, which is prompting the organization to call on European authorities to reconsider the implementation date of this regulation. ACEA explains that “[Editor’s note: Due to new priorities related to the health crisis] No production, development, testing, or certification work is currently taking place. This disrupts the plans we had established to prepare for compliance with existing and future European laws and regulations within the applicable deadlines set by those regulations.”

Is this argument by the manufacturers valid?

The first thing to keep in mind is that the target of 95g of CO2 per km is an average target. Therefore, the decline in car sales in 2020 should not affect compliance, for technical reasons. Only a shift in the types of vehicles sold—not the absolute number of sales—can affect compliance [6]. Second point to keep in mind: this is a CO2 emissions target, not a target for electric vehicle sales (even though selling an EV does, of course, make it easier to meet the first target). Initially, the regulations were not necessarily designed to prioritize electric cars (the market for which was virtually nonexistent at the time), but rather to promote the development of fuel-efficient internal combustion engine vehicles. However, because automakers have prioritized sales of heavier, more fuel-intensive SUVs since 2010 to increase their profit margins (see chart below), emissions from their fleets have stopped declining, even though the rule taking effect in 2020 was well known.

Electric cars are therefore now the preferred option for many automakers to comply with regulations, which can lead to absurdities such as the marketing of electric SUVs so heavy and imposing that people are starting to call them “electric tanks” [7]. However, in 2020 and beyond, smaller cars, as well as reasonably sized sedans—all of which are more affordable than SUVs—can certainly help automakers meet compliance requirements. In fact, if we look back at the past—and in particular the last global economic crisis of 2008—we saw that households turned to smaller, less powerful (and therefore lower-emission) cars. In 2009, CO2 emissions from new cars fell by 5.1% [6], thanks to government scrappage programs that encouraged the purchase of cleaner vehicles. There are currently at least 35 internal-combustion engine models on the market with emissions below 95 gCO2/km. Furthermore, the first two months of 2020 saw record sales of EVs in the EU, as their market share more than doubled, rising from 3% to over 6% (e.g., 8% in France and 7% in Germany). However, the NGO Transport & Environment has estimated that EV sales in Europe would need to account for about 5% of all new vehicle sales for manufacturers to comply with the regulations. Thus, without the need to develop new models or seek additional type approvals—using only the models already available on the market—European automakers already have sufficient resources to meet the target assigned to them. Finally, as part of the automotive industry’s recovery plan, governments will likely consider measures to support demand for cars, particularly scrappage programs. If these measures are designed with CO2 criteria in mind, they can ensure that the market continues to move in the right direction.

There is no reason why CO2 regulations should bear the brunt of the crisis

Our conclusion is that the request by European automakers to postpone the effective date of their new CO2 requirements does not seem legitimate to us. Indeed:

1. On the one hand, meeting the 2020 CO2 targets does not depend on the absolute number of vehicles sold, but on the type of vehicles sold,
2. On the other hand, automakers already have models in their lineups that can meet these targets, including the first electrified vehicles and low-emission internal-combustion vehicles,
3. Finally, during an economic crisis, demand will most likely shift toward these types of vehicles, particularly due to the direction of public policy

It is also true that automakers’ profitability is at high risk this year due to the repercussions of the COVID-19 crisis. The appropriate level of government support from member states will undoubtedly be key to overcoming this challenge, which, in principle, does not call into question the relevance of CO2 regulations—especially if the conditions imposed by public authorities remain consistent with the goal of reducing emissions.Finally, it should be noted that our assessment appears to be supported by the stance taken by the three major German automakers (Volkswagen, Daimler, and BMW), which—for once—have publicly stated that they do not intend to challenge the current regulations [8] [9].

Sources: [1] ACEA [2] CLEPA [3] ACEA [4] France Strategy [5] Carbon 4 [6] T&E [7] Automotive Business [8] Handelsblatt [9] Volkswagen