With automakers starting to tally the costs of the coronavirus crisis, one of the key questions is whether the European Union's ambitious emissions targets should remain in place once restrictions are lifted and car buyers can return to showrooms.
To recap: Automakers must reach a fleet average of 95 grams per kilometer of CO2, with the target adjusted up or down for each company based on the average weight of its lineup. In 2020, 95 percent of sales count toward the target; next year it will be 100 percent. Fines of 95 euros ($104) per gram over the limit, per vehicle, mean that some automakers could be liable for billions in penalties.
The fastest way to reach those targets is through costly electrification technology, especially battery electric vehicles and plug-in hybrids. Those powertrains are more complicated and expensive to build right now -- and it's not yet clear whether enough buyers can afford them, even before the coronavirus crisis threw economies into an instant recession and eliminated millions of jobs, at least temporarily.
The industry has already signaled that it would not be unhappy if emissions rules were modified in some way. "No production, development, testing or homologation work occurs for the time being," major trade groups said in a late March letter to European Commission President Ursula von der Leyen. "This upsets the plans we had made to prepare ourselves for complying with existing and future EU laws and regulations within the applicable deadlines set in these regulations."
But to do so now could be short-sighted, even if it would temporarily ease the burden on automakers and stimulate demand by making it possible to offer more less-expensive but higher-emitting models.
First, automakers have been preparing for the new emissions targets for years, orienting their lineups, production, supply chains and sales strategies toward EVs and plug-in hybrids. Most of those costs have already been baked into each automaker's revenue forecasts, and to change course now might even be more expensive, Harald Hendrikse of Morgan Stanley said in a recent note to investors. Some automakers, including VW, BMW and PSA have said that they want the rules to remain in place, because they are able to meet their targets.
Second, the auto industry has taken a beating on environmental issues since the VW emissions-cheating scandal. To ask for an exemption now -- when every company, large or small -- is also suffering, would neither play well politically nor with consumers.
And third, there is a growing awareness that coronavirus restrictions on movement and industry around the world have resulted in much lower levels of air pollution. This is good news, especially, for people who suffer from asthma and other respiratory conditions, not to mention the health of the planet. Environmentalists can point to air quality improvements as evidence that fewer cars on the road is better for everyone.
Compromise on fines
But there is a compromise solution: Keep the CO2 targets in place, but reduce or defer any fines this year. As Xavier Mosquet of Boston Consulting Group said, it would be difficult for governments to justify heavy fines on automakers who have just received billions in government aid to pay workers who were laid off because of the crisis.
For his part, Hendrikse of Morgan Stanley thinks it unlikely that the targets themselves will be loosened. But, he noted: "We also consider it unlikely that in the event automakers face sharp liquidity draws and balance sheet deterioration in the 2020 fiscal year, the EU and European governments would levy significant penalties in 2021. These could be deferred or restructured."
European sales figures from January, February and even March show that automakers were on the right track, emissions-wise, before showrooms closed and factories shuttered. That momentum was hard-won -- and if it's lost, it could be just as hard to revive.
As Hendrikse says, battery-electric vehicles "are not going away. They are the future, whatever their merits."