Achieving European Fleet Average CO2 Targets Pushes the EU to Consider Tougher Targets

2021 is the first year that the European Union will levy fines on automotive manufacturers for missing Corporate Average CO2 targets. The targets are based on achieving 95g across the auto fleet, compared to 2020 CO2 performance. At the beginning of 2020, achieving these targets looked like a huge challenge. The situation was compounded by the COVID-19 pandemic that closed vehicle production for months and sales effectively stopped and have only returned slowly.

However, despite this setback, it now looks as is most manufacturers will either meet or be close to meeting their targets. Brussels-based consultants, Transport and Environment (T&E), recently reported their analysis of manufacturers performance from the first half of 2020 (read Mission (almost) Accomplished).

Current State

In the first half of 2020, sales of electric cars -- includes battery electric cars, battery electric vehicles (BEVs) and plug-in hybrid cars (PHEVs) -- reached 8% of total sales, that's three times the sales in the same period in 2019. The leaders were Volvo (23%), BMW (13%), Hyundai-Kia (11%) and Renault (8%).

PSA Group and Fiat Chrysler (FCA) met their targets. PSA Group did this by a mix of electric vehicle sales (6%) and improved internal combustion powertrain efficiency in mostly small lightweight cars.

FCA have met their targets by pooling their CO2 emissions with Tesla.

In the second half of 2020, several countries including Germany and France increased the purchase incentives for electric vehicles and many more vehicle options were launched; this means sales momentum in Europe is likely to maintain, with T&E projecting sales potentially rising to 15% in 2021 (compared to 3% in 2019).

Real-World CO2 Reduction Numbers

Below the headline numbers, however, there are some important considerations. Achieving compliance has been a composite of several regulatory factors:

95% Phase in – Auto manufacturers can exclude their worst 5% emitting vehicles
Super Credits – In 2020, Zero Emissions Vehicles (below 50g CO2) credits had a 2X benefit factor, which reduced to 1.67 in 2021
ECO-Innovation Credits – Off test cycle benefits that can be credited to the fleet CO2
Pooling – High CO2 emitters can pool with low CO2 auto manufacturers, most notably FCA and Tesla

All of this indicates that the real-world CO2 reduction is lower than the stated figures. There is also an increasing concern that many PHEV vehicles are rarely plugged in and as a result emit significantly more emissions.

There are also concerns that electric vehicle sales in Europe will now stagnate because the same CO2 target now remains until 2025 (15% reduction in CO2) and then remains stable until 2030 (37% reduction).

As a result of the successful achievement of the targets and the extent to which the legislation provisions and limitations have been exploited, there is a growing pressure within the EU to relook at the targets and set more ambitious targets for 2025 and 2030.

Future Impact

This is likely to have a significant impact on automotive manufacturers' strategies: closing down regulatory flexibilities and focusing on actual CO2 reductions will demand further technology developments across the vehicle and ensuring plug-in vehicles are used as expected or risk being reclassified.

It has been speculated that the European CO2 target for 2030 will change from 37% to 50%. At this level, it is likely that only Battery Electric Vehicles and Plug-in Hybrid vehicles can meet the targets and that the PHEV's will need to operate electrically for a significant part of their operation.

There are two other recent changes that may also create further disruption in the market:

1. New U.K. Policy

The first is the U.K. government announcing that it is pulling forward the end of sales of internal combustion powered vehicles from 2040 to 2030. This is an update to a policy that is less than two years old. While the U.K. only represents 2.5-3% of the global auto market, it is a strong statement that is likely to influence other countries in the run up to COP 26 in late 2021, hosted in the UK.

A 10-year horizon falls well within the framework for technology planning and implementation and the U.K.'s position on its own creates a further complexity in the future picture OEMs are trying to plan for.

2. U.S. Administration Change

The second change is the outlook of the new administration in the U.S. The Biden presidency campaigned on a strong environmental policy – this has the potential to change the dynamics of the shift to electrification globally.

All studies to date have assumed that the U.S. will be slower at switching to electrification due, in large part, to low oil costs. If government policy changes and demand in the U.S. accelerates, it is entirely possible that the demand for vehicles – and more specifically the demand for materials to build batteries – will outstrip supply.

These policy changing factors have an influence well within the boundaries of strategic planning within auto businesses and will have a significant influence on technology selection and development. The businesses that will prosper in this dynamic environment are the ones that can understand the opportunities and risks under different scenarios.

A Word for Manufacturers and Suppliers

Manufacturers and suppliers need to run multiple scenarios and keep re-running these scenarios as new policy changes occur. Within this , they need to identify key features and metrics that indicate the consequences of how the market will move; this enables plans to be constructed that minimize risk and potentially highlight fast developing technological opportunities. It also requires that plans are structured to manage cost commitment alongside certainty and that programs can be assessed for progress and continued relevance on a frequent basis.

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