In 2021 the European Union will levy its first fines on automotive original equipment manufacturers (OEM's) for failing to meet the European automotive fleet average CO2 target of 95g/km. [1] All OEM's have invested massively in the past five years in order to comply, introducing a whole range of technologies including mild and full hybrid vehicles and the increasing range of battery electric vehicles now appearing on the market.
However, it is likely that most if not all manufacturers will now fail to achieve their respective targets despite significant improvements in CO2 for the last decade. Several factors are influencing this, increasing customer preference for larger SUVs, a drop in diesel sales post Dieselgate and the cost of electrified vehicles.
Each manufacturer has an individual target in the range 92gms to 130gms, and the fines are calculated at 95 Euro per gram miss multiplied by the OEM's European sales in 2020. A recent analysis report released by PA Consulting [2] has analyzed the likely outcome and has suggested that the top 13 manufacturers are likely to be fined in excess of 14.5Bn Euro's. This level of fine, applied annually will have a significant impact on the profitability of a number of the OEM's
In 2020 the manufacturers benefit from super credits for low emission vehicles (vehicles with less that 50g CO2/km) increasing the value of hybrid and electric vehicles. In 2020 these vehicles count as two vehicles. This credit decreases to 1.67 in 2021, 1.33 in 2022 and 1 in 2023.
In 2025 the targets are set to reduce by a further 15% and are likely to be based on the more representative Worldwide Harmonized Light Vehicle Test Procedure (WLTP) introduced in 2018.
This situation provides challenges and opportunities for the OEMs and the supply base.
Reduce time for technology development and mass implementation
Historically OEM's deploy new technology after an extended development phase and then tend to deploy in high margin variants and cascade through the fleet as cost reduces. Technologies where the development lead time can be shortened, and large-scale fleet implementation that can be achieved quickly now carry a significant premium.
Re-developing and speeding up the technology development process has proven stubbornly difficult. It requires reconsidering many aspects of a complex process, from the strategy management of a company's innovation portfolio to all aspects of the engineering and logistics of the development process itself.
Focus on Eco-Innovation Credit Developments
These are credits for technologies that are shown to reduce CO2 in the real world but do not demonstrate CO2 improvements when run on the official certification test cycles (off-cycle improvements). The EU allows up to 7 gms of fleet credits for an OEM. To date, the impact of credits has been small, but as the cost of compliance increases this opportunity will increase in value.
The systems for granting an Eco Innovation Credit is complicated but is open to both OEMs and suppliers giving suppliers the opportunity to develop a technology that can be applied by multiple OEMs
Boost actions to reduce the cost of Electric Vehicles
Significant progress has been made in reducing the cost of Electric Vehicles, but much more progress is needed in technology development. OEMs are looking at vertical integration, in-house manufacture of batteries and building platform scale through sharing and co-operations. The recent announcements by VAG group and its MEB platform are examples of this. [3]
It is still unclear however that customer demand really exists for the estimated 2.5 million electric vehicles per year that would be necessary to achieve full compliance in Europe. The combination of high cost and lack of charging infrastructure are key concerns, 75% of public charging in Europe is based in five countries only.
Faced with this situation, it is important that governments maintain incentives for the purchase of low emission vehicles and continue to encourage the development of public charging infrastructure.
The Covid-19 pandemic response is having a huge negative impact on many industries and this includes the auto industry with sales dropping dramatically and manufacturing plants closing across Europe. It is looking increasingly likely that the disruption will continue for months. Clearly, this has a highly disruptive effect on sales plans, and as explained, will massively disrupt OEM's compliance planning. It is interesting to speculate if this might prompt the European Union to delay the imposition of CO2 Non-Compliance fines for a year as part of a recovery plan for the auto industry in 2021.
References
[1]European Commission, "Reducing CO2 emissions from passenger cars - before 2020," [Online]. Available: https://ec.europa.eu/clima/policies/transport/vehicles/cars_en. [Accessed 28 April 2020].
[2]PA Consulting, "CO2 Emissions are Increasing; Car Makers Must Act," PA Consulting, [Online]. Available: https://www.paconsulting.com/insights/2019/co2-emissions-are-increasing/. [Accessed 28 April 2020].
[3]Volkswagen, "Volkswagen open to electric collaboration," January 2019. [Online]. Available: https://www.volkswagenag.com/en/news/stories/2019/01/volkswagen-offers-electric-cooperations.html#. [Accessed 28 April 2020].
