New European Commission CO2 Emission Limits Cause Uproar within Auto Industry

Carmakers Given Just Four Years to Meet New Proposals

Yesterday, the European Commission unveiled its proposed legislation that aims to reduce average carbon dioxide (CO2) emissions of new passenger cars by 25% from today's level of around 160 grams per kilometre (g/km). Disappointingly, even after lengthy discussions there remain significant gaps in the proposals, including how the effects of ”complementary“ fuel-saving measures will be calculated and what dispensation will be given to the well-to-wheel CO2 savings derived from biofuels. The Commission said that it intends to reveal these details at a later date.

The proposed legislation stands in its original form, with average CO2 emissions to be capped at 120 g/km by 2012, including 10 g/km from ”complementary measures”, which could include biofuels and efficiency improvements for car components with the potential to reduce fuel consumption, such as tyres and air conditioning systems. The European Parliament's suggestion of a limit of 125 g/km by 2015 with no dispensation for supplementary measures has thus been ignored (seeEurope: 25 October 2007: European Parliament Gives Auto Industry More Time in Return for Bigger Emission Cuts). The target that the Commission has decided on can be considered particularly tough, not so much because the limits have been set very low, but because carmakers are being given so little time to reach them.

Sliding Scale

The Commission has defined what it describes as a ”limit value curve” of CO2 emissions whereby the emission caps become more lenient as the cars get heavier. This effectively means that manufacturers of heavier cars will have to reduce their emissions proportionately more than those of lighter cars, but smaller cars will have tougher absolute targets to meet than their larger counterparts. The average emissions of all of these cars is calculated to come out at 130 g/km.

Each manufacturer must ensure that by 2012 measured fleet average emissions are below the limit value curve, when all vehicles manufactured and registered in a given year by the manufacturer in question are taken into account. This means that manufacturers will still be able to make cars with emissions above the limit value curve provided these are balanced by cars which are below the curve as long as the fleet average remains at 130 g/km. Manufacturers' progress will be monitored each year by the European Union (EU) member states on the basis of new car registration data.

For those car companies not meeting their targets, tough financial penalties will be incurred. They will have to pay a fine based on the number of g/km that an average vehicle sold by the manufacturer is above the curve, multiplied by the number of vehicles sold by that company. A premium of 20 euro per g/km has been proposed for 2012, rising to 35 euro in 2013, 60 euro in 2014, and 95 euro in 2015. In a statement, the Commission said that ”most manufacturers are expected to meet the target set by the legislation, so significant penalties should be avoided”.

However, an estimate calculated by the trade association representing Europe's auto industry, ACEA, claims that in the worst-case scenario, the penalties could total as much as 1.4 billion euro (US$2.02 billion) for Europe's largest vehicle manufacturer, the Volkswagen (VW) Group, equivalent to around half of the company's net income last year.

A Lifeline to the OEMs

European bureaucrats would have known that these new rules would upset much of the European vehicle manufacturing industry, which has repeatedly warned that too much and too stringent regulation could reduce the competitiveness of the region's auto industry and ultimately lead to job losses.

One lifeline for the OEMs therefore is that under the proposed legislation, several manufacturers will be able to group together "to form a pool which can act jointly in meeting the specific emissions targets", Manufacturers in this pool will be required to abide by the rules of the competition law, the Commission stated.

Get-out clauses apply to those independent manufacturers that sell fewer than 10,000 vehicles per year. Those that cannot or do not wish to join a pool can apply to the Commission for an individual target. Special-purpose vehicles such as those designed to accommodate wheelchair access are also excluded from the scope of the legislation.

Industry Reaction

The industry reaction has been mixed, but predictable. The German carmakers in particular feel that they have cause to complain, while environmental campaign groups have condemned the proposals for not going far enough. The following is a summary of some of the industry reaction so far:

• German Government: "Whatever motive led a majority of commissioners to decide this, we consider the solution to be wrong, we consider the solution to be very harmful and will do everything to force changes", a government spokesperson was quoted by Reuters as saying. "This is industrial policy at Germany's expense. It is senseless to impose a penalty that bears no relation to the actual cost of carbon dioxide emissions", German Chancellor Angela Merkel has been reported as saying.
• German Automotive Trade Association (VDA): "With the current proposal...neither the cause of environmental protection nor economic reason is being served. The compensation payments...are way too high and exceed comparable payments from other sectors by as much as 23 times. Such payments are hostile to innovation and do not help the climate", said VDA President Matthias Wissman.
• Volkswagen AG: "We would have wished for rules that were fair, realistic and able to be implemented in time and which did not hit German manufacturers more than their European rivals", a company spokesperson told Reuters.
• BMW: "Premium manufacturers are being disproportionately burdened and makers of small cars have to do little", a spokesperson told Reuters, adding that the proposals were "naive in relation to the environmental goals". The only good thing about them is that the steps are only proposals, he said, adding: "The plans have to be improved."
• Pan-European Automotive Trade Association (ACEA): "We are extremely disappointed with the process, disappointed with the content but we going to work with the council and European Parliament to make sure the final outcome is much more balanced. It's a bad decision. It is not balanced...The level of penalties is totally unacceptable, up to 100 times higher than what is paid by other industries. There is no reason why this industry should be treated differently than other industries. This is absolutely unprecedented, it's ridiculous”, ACEA secretary-general Ivan Hodac was quoted by Reuters as saying.
• PSA Peugeot-Citroen: "These plans, and they are still preliminary as there is still a long way to go with the European Parliament and government leaders, are a big disappointment, obviously. They are anti-ecological, anti-social, anti economical and anti-competitive in relation to non-EU carmakers", Reuters quoted a spokesperson as saying, who added that they create a ”ticket to pollute”.
• Greenpeace: "The Commission has let carmakers drive away with a proposal that sets a weak, short-term standard, lacks any longer-term targets, and offers an open road to heavy, gas-guzzling vehicles", a Greenpeace transport campaigner told Reuters.
• Friends of the Earth: "The European Commission's plans would abandon a decade-old target for cutting emissions, give companies building heavier cars a favorable deal and impose inadequate penalties on manufacturers that do not meet their targets", Friends of the Earth said in a statement.

Outlook and Implications

It is clear that although each manufacturer and country is trying to look after its own interests, one current cause of complaint is running through the industry, and that is that car manufacturers have been unfairly targeted when compared with the emission limits applied to other industries.

For example, ACEA, which is of course representing the interests of the auto industry, complains that there is no link between the penalties being proposed for the car industry and the price of carbon applied to other industries through the European emissions trading scheme (ETS). The proposed penalties price a tonne of carbon produced by cars at up to 475 euro, whereas the ETS market price will evolve towards about 33 euro per tonne, according to Commission estimates, from today’s price of less than 5 euro. This price of 475 euro is based on the assumption that a car drives 200,000 km over its lifetime, and one gram of CO2 emitted above target corresponds to 200 kg of excess emissions, or 0.2 tonne of CO2. So if the car industry were to be fined 95 euro per gram above target, this would equal a payment of 475 euro (5 X 95) for each tonne of CO2, which is far higher than in any other sector, ACEA quite rightly points out. The trade association also notes that penalties for the car industry would be significantly higher than any cartel fine paid in EU competition cases, where such fines concern illegal competition law infringements with huge damages for consumers. Compensation payments in the United States and Japan are much lower, it adds: U.S. corporate average fuel economy (café) fines stand at about 10-15 euro per gram of excess CO2 and in Japan at about 6,000 euro per manufacturer.

It is obvious why the German auto industry in particular is so upset by these proposals, although it must be pointed out that the Commission has taken into account many of its requests, not least that heavy and large cars be allowed to emit proportionally higher levels of CO2 than smaller and more lightweight cars. It could also be the case that buyers of German brands such as BMW, Mercedes, and Audi are more affluent than buyers of small cars from Peugeot and Fiat, for example, and therefore the manufacturers of larger cars will have less trouble passing the extra cost that will inevitably ensue onto customers. Previously, the EU has estimated that these proposals could raise new car prices in Europe by around 1,300 euro in average, although some of this cost will be offset by lower fuel bills.