How automakers plan to avoid CO2 fines in Europe

For Europe's automakers, a great leap into the unknown began on New Year's Day, when European Union emissions standards that require a fleet average of 95 grams per kilometer of CO2 took effect. The numbers are stark. According to the EU, fleet emissions in 2018 were 120g/km, which means automakers need a 21 percent reduction overall to avoid fines that could total as much as 33 billion euros this year, according to some estimates. Each gram over the limit, per vehicle, will cost automakers 95 euros.

Each automaker has a different target, based on the average mass of the vehicles they sell, and only 95 percent of sales are measured in 2020, meaning that some high-polluting cars won't count. Even so, analyst ISI Evercore has warned that the "2020-21 CO2 regulation poses the biggest risk to the auto industry in recent memory."

To reach their targets, every brand has turned to electrification, from 48-volt mild hybrids all the way up to full-electric cars. Cars with emissions of 50g/km or less, generally either battery-electric cars or plug-in hybrids, are eligible for so-called "supercredits," a benefit that will be phased out in two years. It's unclear how consumers will react, given higher prices and worries about range and charging station availability.
According to the European Alternative Fuels Observatory, an EU statistical service, battery-electric vehicles made up about 1.7 percent of total European registrations through October 2019. Plug-in hybrids fared even worse with just 1 percent of registrations -- the same as in 2018.

The emissions gap has not changed in the last year, analysts said. "Given the CO2 cliff the industry is facing, and as we have written before, one would have hoped for a smooth transition toward improved fuel efficiency," ISI's Arndt Ellinghorst said in a note in December. "Instead, we continue to observe very little improvement."

Ellinghorst and his colleagues at ISI say the risks of fines are very real. "The current CO2 performance is simply not good enough and we continue to flag that carmakers run the risk of facing considerable fines if more is not done," he said.

But the lack of progress on CO2 emissions might be strategic, argued Al Bedwell, who is director of global powertrain forecasting at LMC Automotive. "We shouldn't be surprised that the CO2 trend has not yet started to move in a positive direction for many automakers," he said in a note. "There is no incentive for automakers to start selling their most fuel-efficient products before January," especially those that may be less profitable, such as plug-in hybrids, than conventional internal combustion cars.

For automakers operating in Europe, convincing consumers to buy cars that they have shunned in the past is a bit like playing chess in three dimensions: There are many moves they can make, whether in sales, marketing, production and even registration. On top of that are national incentive programs that vary widely from country to country.

Cautiously confident

In interviews with Automotive News Europe this autumn, top executives at brands that are sold in Europe were mostly confident that they would not be paying any emissions fines. But they expressed a bit of uncertainty as to how the overall market would reach its target.

"We are preparing to supply electric vehicles in sufficient volume and to deliver them without long delivery times to our customers," said Thomas Schmidt, the head of Hyundai's European operations. "However, everyone has to sell many more battery-electric vehicles. That raises some questions: Does the European market have that many customers who want to buy a full-electric car? How long will it take for the national governments to put in place a strategy to roll out a sufficient number of charging stations?" Hyundai's low-emissions lineup includes the Ioniq compact sedan, in electric or plug-in versions and the Kona small SUV in an electric version.

PSA Group CEO Carlos Tavares has been adamant that none of his company's brands, including Peugeot, Citroen, Opel and DS, will be liable for any emissions fines. "For us, it's an ethical and not just a financial matter" to meet CO2 targets, he told ANE. He did not offer any details, however, on how the brands would meet a target of 7 percent of sales of electric and plug-in hybrid vehicles.

"We have a very precise process -- I can't say a lot about it because it's highly competitive -- that involves our production, our order book, and making our dealers actors in what we are doing, not just followers," Tavares said. PSA has just started a big push into electrification, with electric versions of the Peugeot 208 small hatchback and 2008 small SUV, the Opel/Vauxhall Corsa small hatchback and the DS 3 Crossback small SUV about to go on sale. Plug-in models include the Peugeot 3008, Opel/Vauxhall Grandland and DS 7 Crossback compact SUVs, and the Peugeot 508 midsize sedan and station wagon.

Peugeot brand CEO Jean-Philippe Imparato said his brand had been preparing for the changeover by "monitoring every high-emissions car that is in stock" or in the dealer network. "I don't know how other automakers will manage their operations," he told ANE, "but we will be compliant in January."
But not every executive is so confident about avoiding fines. Michael Jost, chief strategist at Volkswagen Group -- which faced issues in 2018 meeting deadlines for the new Worldwide harmonized Light vehicle Test Procedure, or WLTP -- said, "Next year and 2021 might be challenging since we will be ramping up our EV models," including the highly anticipated ID3 full-electric compact hatchback. "We will work hard to be CO2 compliant and we are pretty sure we will reach all the goals set for the passenger cars," Jost said.

Indeed, the ID3 is expected to be the bellwether for mass acceptance of full electric vehicles in Europe, as its development was supported by billions of investment from VW Group, and it is roughly the same size as the VW Golf, Europe's best-selling car. "The ID3 is going to be kind of pivotal," said Jonathon Poskitt, LMC's head of global forecasting. "If it doesn't hit the sales it's supposed to, then maybe that's a signal that the market is just not there yet."
 

Yasuhiro Aoyama, the head of Mazda in Europe, which will start selling the MX-30 full-electric crossover this summer, said the Japanese company was in a "transition period between two generations of technology. When we have completed the transition, including the electrification of our product portfolio, our goal is to pay no fines for CO2 emissions." He added, "We will have to sell as many battery-electric vehicles as possible so that we can reduce our potential of facing a CO2 penalty."

Analysts said some of the tactics to increase sales could include self-registration of slow-selling electric or plug-in hybrids, favorable lease deals for employees, sales to short-term rental services and aiming for fleet sales, where running costs are often more important than the dealership price. Fiat Chrysler Automobiles has agreed to pay Tesla hundreds of millions of euros to join an emissions pool to benefit from sales of the Silicon Valley company's electric cars in Europe.

But those carry inherent risks, especially with ever-stricter targets looming in 2025 and 2030, said Martin Benecke, an analyst at IHS Markit. "What will you do next year, or the following years?" he said. "You can't self-register a lot of vehicles if nobody will buy them."

Surprise solution?

One solution, at least for 2020 and 2021, may be hiding in plain sight: diesels. After diesel's market share fell sharply in the last several years following VW Group's admission that it cheated diesel emissions tests, sales appear to be holding steady at about 30 percent to 32 percent of the European market. "We see a stabilizing in diesel share," Benecke said. "It's a good tool to reduce CO2 levels for now, and for company cars or larger SUVs, diesel remains the only option" for lower emissions. But, he warned, any future emissions gains for diesels will be marginal and expensive.

LMC's Bedwell said diesel sales would be flat in 2020, which "in the context of a likely 600,000 unit decline in 2019 is very positive." In fact, he said, "Already we are seeing signs of reversal in the declining diesel share of some models," and some automakers are replacing high-emitting gasoline models with diesels, including Audi's high-performance S range. In the long term, he said, cars such as the Audi SQ5 will be "prime candidates" for battery-electric power, "but right now diesel, or gasoline plug-in hybrid, makes a lot of sense."

Last month LMC said the European market was already starting to see seasonal distortion as a result of impending regulatory hurdles.  LMC said it expected automakers would take measures to move registrations of high-CO2 emitting cars from 2020 into the last quarter of 2019. "Our default position is that automakers will do everything in their power not to miss CO2 targets," LMC said. Besides fines, automakers would not want to take the "potentially unquantifiable losses that would stem from image damage in these environmentally conscious times," LMC said. "The pulling forward of sales from 2020, coming on top of other confidence-sapping factors, leads us to forecast a rather disappointing 2020 Western Europe car market just over one percentage point lower than that seen in 2019."

Even bigger challenges loom as CO2 rules will get even tougher for automakers operating in Europe. The new European Commission said last month it will propose revising legislation on CO2 emissions standards for cars and vans "to ensure a clear pathway from 2025 onward toward zero-emissions mobility," it said in a document called the European Green Deal. The revision is set to happen by mid-2021.