Slow greening will cost carmakers billions in European fines

23 October 2017 Consultancy.uk

Large car-manufacturers such as BMW, Volkswagen, Fiat, Chrysler and Peugeot Citroën risk major fines, to the tune of hundreds of millions, if they don’t radically improve their CO2 footprint. In total, seven out of eleven large carmakers are on course to miss the new European targets, according to a new report – while the UK lags behind in the development of electric vehicles, as it struggles to make its 2040 deadline for banning the sale of combustion engine-powered vehicles. 

Europe is making collective efforts to improve the sustainability of the car industry – with the European Commission setting key goal to reduce CO2 emissions. Now, the EU has introduced a new regulation that by 2021 forces carmakers to reach more stringent CO2 emissions criteria. Under the new targets, carmakers must reduce the average emissions of the cars they sell to below 95g of CO2 per km.

These new guidelines have sent the automotive industry into panic however, following an analysis which has shown that only four out of eleven large car manufacturers will meet the European CO2 emission targets by 2021. The remaining seven are potentially facing huge fines, amounting to €95 per gram of CO2 above the emission limit, multiplied by the number of cars that the manufacturer sells in 2020.

How carmakers rank on Co2 emissions

At the current rate, Volkswagen, which owns the Audi and Porsche brands, is expected to face the biggest fine, facing a €1.7 billion fine according to the researches. Volkswagen, which is still facing the consequences of its diesel emissions scandal, is aware of the challenge, and has therefore launched ‘Together’, its strategy to 2025 which it bills as the biggest change in its history. The new strategy focuses on automation, battery development and the production of electric vehicle to improve its CO2 footprint. The change will, however say PA, only have a real impact after 2020, meaning that the fines over CO2 targets is a realistic facing. 

In PA’s analysis, which each company has its own individual target, as the EU target takes into account the types of vehicles sold, meaning that a company with smaller average vehicles will face more stringent targets than a group focused mainly on large cars. Under the system, carmakers also receive "super-credits" for every fully electric car they sell, allowing them to offset the impact of more polluting vehicles.

BMW and Fiat Chrysler

Not surprisingly, German rival BMW also are facing a potentially hefty fine, estimated at €600 million, on the back of its slow progress to electrification – sales number of green vehicles are not picking up fast enough to offset the demand for its popular premium and larger petrol and diesel vehicles). The group are forecast to miss their 2021 target by 4g CO2 per km. 

The second largest fine would meanwhile sting Fiat Chrysler for €1.2 million. The popularity of Jeep, coupled with heavy weights and high emission rates, and the lack of an alternative drivetrain strategy or options means FCA has increased their average CO2 emissions three times in the last five years (with only a very small reduction in 2016). As a result, they are likely to miss their targets by the highest margin of all the carmakers. They are still only taking small steps towards electrification meanwhile, despite a number of European economies including the UK planning to outlaw the sale of fossil fuelled cars by 2040 

The biggest fall from grace, according to the consultants, who advise many of the manufacturers in the car industry, is Peugeot Citroen, which was set to meet EU emissions targets but now is facing different fortunes. Following the merger with Opel and Vauxhall this year, last year’s top performer is fifth and forecast to miss their 2021 target by 3g CO2 per km. This reflects the relatively polluting footprint Opel and Vauxhall vehicles have, with the aim that from 2023 85% of PSA’s portfolio will be electric driven or hybrids coming too late to meet the 2021 target. 

Co2 Emissions from cars in selected countries in the EU

Volvo is the best performer, jumping to first position from seventh last year. This dramatic change is largely a response to the fact that Volvo rocked the automotive industry by stating that it wants to only produce electric and hybrid vehicles by 2019. This significant step toward the electrification of their fleet also features a plan to introduce at least four plug-in hybrid vehicles by that year, gradually increasing its share of purely electric vehicles after.

Toyota remains second, having also significantly improved its CO2 performance for 2021. Other notable companies include Renault-Nissan and Jaguar Land Rover, which for the first time in PA's benchmark are no longer orange, but green. 

Commenting on the findings of the report, Thomas Göttle, Head of Automotive solutions at PA Consulting Group, said, “Carmakers across Europe need to make radical changes in order to meet the EU CO2 emissions targets for 2021. Many of them need to focus now on developing new models that will appeal to the consumer and help them meet their targets. There is nothing less than a revolution facing the car industry and those manufacturers who fail to keep up face potential fines in the billions."

Frank Witter, Chief Finance Officer at Volkswagen, has previously said to the Financial Times that the costs of complying with the CO2 targets are the biggest pressure on the group's R&D budget, calling it the "overarching issue" for the company. He added, "The other items, investing and developing new technologies, autonomous driving, connectivity, electrification, are certainly important, but the most critical one is CO2 compliance."

Real driving Co2 emisions are higher then measured in the NEDC tests

Progress by country

Examining the situation from a national perspective, Norway performs best, with the country’s manufacturers exhibiting the lowest CO2 emissions (94.2g CO2 / km) and the largest share of newly sold plug-in hybrid and electric cars (29.1%). Norway is also well on-course to ban the combustion engine from 2025. The Netherlands sits in second place in the EU. The emission level seen in the Netherlands was 2017g CO₂ / km in 2016 while 5.9% of all new cars sold were electric.

The United Kingdom will need to up efforts to realise the ambitions to eradicate the combustion engine by 2040, however. While the time-frame still seems lengthy, the automotive industry is still heavily dependent on conventional engines, and in the meantime, the UK is heading to the bottom of the list of European countries. The development of alternatives in the UK also lags behind other countries. The United Kingdom currently produces 2.5 million internal combustion engines, 15% of the European total, making it difficult for them to switch to electrical options rapidly without upsetting the market.

Tracking the improvements? 

For the European Union and the regulators, the race of the industry towards greener footprint poses challenge how they track the advancements. CO2 emissions performance was derived from a test cycle known as the New European Driving Cycle – a standardised procedure designed to compare different vehicles under similar conditions. It has now been replaced in the EU by Worldwide Harmonised Light Vehicles Test Procedure, which is designed to provide a more accurate representation of real conditions; longer duration, higher speed and including more acceleration and deceleration.

With the tests in mind, carmakers are continuously looking at performing as best as they can in the tests, however that might not reflect performance on the road. Analysis also shows that the gap between CO2 emissions and NEDC tests has more than doubled over the past decades: the gap is currently 35% and continues to increase. In the majority of cases car producers are seemingly getting their footing right, however because of this notable gap between tests and results, there remains a large worry that manufacturers may be cheating the tests, as with the recent diesel emissions scandal, bringing the industry’s reputation into disrepute, while making the EC seem notably weakened as it attempts to set an example to developing economies when dealing with climate change.

Related: Brexit likely to hit UK automotive manufacturers hard.

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