VW braces for EU fine for missing CO2 emissions reduction target

Volkswagen Group expects to be fined by the European Union this year for failing to achieve its CO2-reduction target for its new-car fleet -- despite the automaker's deal to pool emissions with Chinese-owned UK brand MG Motor.

"We cannot provide a clear commitment at this point that we will achieve compliance. It will be a difficult race," VW Group sales chief Christian Dahlheim said during the automaker's third-quarter earnings call on Oct. 29.

VW had hoped its new ID3 full-electric compact hatchback would help ensure carbon compliance, but software issues plagued its September launch. Current orders for the ID3 were a little more than 40,000, Dahlheim said.

VW CFO Frank Witter told financial analysts that the automaker has set aside funds to cover the likely costs of the fine.

"We have [booked] a couple hundred million in provisions to be on the safe side," he said.

Witter said the fine would only represent a "snapshot" in time because the automaker was "quite comfortable" about compliance next year and in the longer term for the European market.

Through 2029, Volkswagen will have launched 75 different full-electric models across the group's brands, which include Porsche, Audi, Bentley, Skoda and Seat, and sold a cumulative 26 million battery-driven vehicles, mainly built on its MEB architecture.

"Certainly it would be great to already be compliant in 2020, but we are talking a 10-year horizon at the end of the day," Witter said. "If there was a small miss, it would not be great, but it would not be the end of the world."

Since VW already provisioned for the eventuality -- an accounting measure only allowed when a cost is deemed likely -- earnings in the fourth quarter would not be affected. "There is no negative EBIT effect to be expected. Any risk that potentially could occur has been taken care for," Witter told analysts.

VW CEO Herbert Diess said the automaker will be within only "a gram or so" of its EU target. "We haven’t given up yet, but it will be very tight to achieve the fleet targets," he told the Financial Times in an interview published on Tuesday. VW could meet the target if sales of low-emission cars continued to pick up in the last months of the year, Diess said.

VW in September formed a pooling arrangement with MG Motor, a subsidiary of VW’s Chinese joint venture partner SAIC. The deal, for which financial conditions haven't been undisclosed, would incorporate the UK brand’s electric vehicle sales into VW's European fleet.

The Transport & Environment lobby group said in a report that the VW-MG pool will have a limited impact on VW's compliance because of MG's low sales volume in Europe, reducing VW Group's fleet average emissions by just 0.3 grams per km in the first half.

As part of its strategy to reduce CO2 emissions, which are partly blamed for climate change, the EU has mandated automakers selling cars in Europe reduce overall fleet emissions from new cars to 95 g/km for 2020 or face fines. Each automaker has an individual target based on the weight of their fleet. Average emissions were 122.4 g/km in 2019.

Other automakers with high emissions are pooling with rivals that have lower fleet emissions, a move allowed by EU regulations.

Ford Motor said on Oct. 29 it will pool its CO2 output with Volvo Cars to avoid a fine.

Renault has filed notice with the European Commission that it is accepting partners for its emissions pool.

Fiat Chrysler Automobiles has pooled its emissions with EV maker Tesla. Honda said on Monday that it has joined Fiat Chrysler in pooling its fleet with Tesla's to comply with the EU's target.

Jaguar Land Rover has set aside 90 million pounds ($118 million) to pay a likely EU fine for failing to meet its CO2 target.