Automakers could be hit with billions of euros in fines for missing the European Union’s fleet CO2 emissions reduction target that starts to take effect next year. That is the conclusion of analysts after CO2 emissions rose to their highest level since 2014.
The estimated total penalty payment is 34 billion euros, according to a report this month from JATO Dynamics, which based its figure on CO2 data from last year. Volkswagen Group and PSA Group, the two largest automakers by volume in Europe, could face the loss of up to half of their combined net profits, JATO said.
The fine is 95 euros per gram of CO2 over the limit, multiplied by the number of cars sold in 2020 and 2021, although 5 percent of the highest-emissions vehicles will not be counted in 2020. The fleet CO2 target is 95 grams per kilometer.
JATO said in March that overall 2018 CO2 emissions in the 23 European markets it analyzed were 120.5g/km, compared with 118.1g/km in 2017. (The European Environmental Agency’s final 2017 figure is 118.5g/km.)
Analysts attribute that increase to multiple factors. They include the growing popularity of SUVs, which tend to be heavier and less aerodynamic -- and thus less fuel efficient -- than their sedan equivalents; bans on older diesels in some European cities; and the continuing fallout from the Volkswagen Group’s emissions-cheating scandal. The bans and the VW scandal have weakened confidence in diesels, causing consumers to switch to gasoline engines, which are less efficient.
“Companies are going to have to speed up to meet the targets,” said Michael Schweikl, an automotive expert at PA Consulting in Germany and an author of the company’s annual report on automakers’ progress toward emissions targets. “I think they underestimated the effort of changing from internal combustion engines to other alternatives,” he added. “The market is pulling in one direction and they underestimated how long it will take to steer it in a new direction” toward zero- and low-emissions vehicles.
Targets set by fleet weight
Although the EU has mandated a 2021 fleet average of 95g/km of CO2, each automaker has a different target based on the average mass of its vehicles. Fiat Chrysler’s 2021 target is 91.8g/km, for example, the lowest of all automakers, because it sells a high percentage of small cars, while Daimler’s target is 102.8g/km.
The investment bank UBS suggested in a report this month that this “limit value” has made it less likely automakers will use “lightweighting” technology to lower emissions.
Fleet weight may be a factor in whether Ford achieves its 2021 target, Schweikl said. The automaker has recently announced a strategy to reduce the number of cars in its lineup in favor of SUVs. That could make it even harder for Ford to lower emissions -- but at the same time, a heavier average fleet weight would raise their target emissions figure, Schweikl said. He added that Ford’s decision to change it strategy one and half years before the deadline means “it will be a really big job to do it successfully.”
Profits likely to take a hit
UBS said this month that while it expects all automakers except Fiat Chrysler to meet their targets, the cost of compliance -- through new technologies such as plug-in hybrids -- will dent combined profits by up to 7.4 billion euros. That could mean a 25 percent hit on earnings per share at PSA and 20 percent at Fiat Chrysler, UBS said.
About 75 percent of those costs will be borne by automakers, UBS said, with buyers asked to shoulder the rest through higher prices.
“Under normal circumstances, companies and consumers would share the burden,” Schweikl said, “but in the last two or three years, automakers have lost the trust of consumers” because of the VW cheating scandal and other factors, and it will be more difficult to pass along price increases, he added.
A report in the Financial Times this weekend, however, suggests that Fiat Chrysler Automobiles may try to close the gap by entering an “open pool” emissions arrangement with Tesla. By doing so, Fiat Chrysler can offset CO2 emissions from its cars against Tesla’s sales of its full-electric vehicles, lowering FCA’s average figure to a permissible level. Another pool includes Toyota and Mazda.
Dave Leggett, who is automotive editor at analytics company GlobalData, said in a note Monday: "As the time horizon to 95g/km shortens, other companies are sure to consider pooling as a strategy for avoiding large fines. The sum FCA may be paying Tesla for the pooling privilege has not been disclosed. It is not surprising that zero-emissions Tesla is alert to the revenue raising pooling opportunity emerging in Europe. It has also made money trading zero-emission credits in the US in the past."
In 2018, Fiat brand’s CO2 emissions were 119.2g/km, according to JATO, therefore analyst firm Evercore ISI calculates that the brand would need to reduce emissions to less than 89g/km to comply with the targets. Assuming the 30g/km gap and applying the 95 euro fine for noncompliance, the potential fine at current levels would be roughly 3 billion euros, Evercore ISI estimates.
Many automakers have also elected to create closed pools of their own brands.
PA Consulting is less optimistic than UBS that the 2021 targets will be reached. Under the most optimistic forecast, Ford and FCA will miss targets, while VW Group and PSA will be right at the limit, PA Consulting said. Under a more conservative scenario, the only carmakers that will be under their targets are hybrid-heavy Toyota, Volvo and the Renault-Nissan-Mitsubishi alliance.
VW Group is in danger of having to pay emissions fines despite having just announced it would invest 19 billion euros in electric vehicles from 2019 to 2023, Schweikl said. “They waited one or two years too long to develop their products,” he said. “Can they absorb a fine of, say, 1.X billion euros? Yes, they can, but the problem is not the money, it’s more their reputation if they miss a known target.”
More EVs and PHEVs are coming
Analysts said that although the emissions situation may look grim for many automakers based on 2017 sales and provisional 2018 figures, the market will start to look very different toward the end of this year as more electric vehicles and plug-in hybrids become available. Big players such as VW Group, PSA and Daimler have not yet started selling mass-market electric vehicles.
“Key CO2-saving models need to be on the market already from the beginning of 2020,” UBS said, noting that, on average, automakers still need to reduce emissions by 19 percent, or 23g/km.
Top executives say they are confident that they can reach their emissions goals, even if the figures show that many automakers have taken a step backward.
“Paying any sanction or any fees is just not an option,” Renault CEO Thierry Bollore said at the Geneva auto show last month. “And we have designed our strategy as such.”