Could car manufacturers selling vehicles in Europe soon be facing billions of Euros in fines?

The EU has been one of the most progressive governmental bodies in its commitments to tackling climate change. With transport emissions being the second largest emitter by sector of CO2 in the EU in 2017 (European Environmental Agency, 2019), it is clear that no comprehensive climate action taken by the EU is complete without also tackling car emissions. The EU’s answer to this first came in 2009, in the form of emissions standards. In 2011, they also set standards for vans. Under these standards, any new vehicle sold in the EU had to meet these emissions levels. Stagnant total emissions from transport vehicles showed that these standards did not go far enough in playing a role in the EU’s climate approach.

In response to this, the EU replaced these standards with newer ones that came into effect in 2020 (Regulation (EU) 2019/631), which targeted a 23% decrease in road transport emissions from 2005 levels (Cabuzel, 2017). The main aims of these standards are reducing emissions levels of transport vehicles, increasing fuel efficiency for consumers, and stimulating the competitiveness of European vehicle manufacturers. These standards came in the form of fleet average grams of CO2 per km driven, which would gradually decrease in order to give the industry time to react.

Market Trading Elements

The regulation also has some market trading elements embedded in it. For the first two years (until the end of 2021), any cars sold in the EU with emissions below 50g/km (i.e., very efficient hybrids and electric cars) qualify for so called “supercredits”, which are fully trade-able and may be purchased by other manufacturers to deflate their fleet average emissions levels. Fiat Chrysler for an example has struck a deal with Tesla to purchase supercredits from Tesla (Sigal, 2020).

A real danger to car manufacturers

In 2020, the standard was set at 95g/km. This was a very significant standard, as the fleet average in CO2 emissions across manufacturers was 120g/km in 2018. Some estimates put fines for not complying in the range of 33 billion euros. Such large fines have led to swift reactions from car manufacturers; but many analysts fear these may not have come quickly enough to avoid fines (Sigal, 2020). Manufacturers have long been working on decreasing emissions and increasing fuel efficiency in combustion cars but have emissions have plateaued. The strict emissions standards coming into force in 2020 has created a perverse incentive for manufacturers to hold off on any emissions advancements until the standards are fully in effect, so advancements could still come. It seems car manufacturers cannot meet these standards without some level of electrification. If 120g/km is as low as combustion powered fleets can go, 21% of their fleets would have to be fully electric, which is far below prediction for even 2021 (15% (Lewis, 2020)).

Comprehensive enough model?

While car manufacturers may now be heavily incentivized to sell more electric and hybrid vehicles, that only accounts for one side of the equation. The big question now is whether there will be enough demand to buy these electric vehicles? Demand for electric cars is tied to complimentary products like charging networks and have historically been heavily to range anxiety, which are two factors emissions standards do not affect. I think while this standard sets very strong supply side incentives, it will be interesting to see whether the demand is there to support the shift towards electrification.

Conclusion

As I discovered in ECON371, standards can be the best way to have set concrete emission reduction commitments, and without knowing the structure of markets, can guarantee a certain reduction in emissions. Market trading systems allow firms to take a market-based approach to reduce emissions and rewards them for reducing their emissions. I personally think the emissions standards are a great start. By providing hard goals to meet that are very measurable, the car industry is finally being held accountable for its role in the emissions its products cause. The downfall of standards is often how measurable and enforceable they are. Car emissions standards are fairly easy to measure and enforce, suggesting this standard will succeed. The European car makers do not have a great history of following emissions standards. This ambitious standard may be just what the EU needs in order to move towards a cleaner and greener future.

References

Cabuzel, T. (2017, November 06). CO₂ emission performance standards for cars and vans (2020 onwards). Retrieved December 24, 2020, from https://ec.europa.eu/clima/policies/transport/vehicles/regulation_en

European Environmental Agency. (2019, December 19). Greenhouse gas emissions by aggregated sector. Retrieved December 24, 2020, from https://www.eea.europa.eu/data-and-maps/daviz/ghg-emissions-by-aggregated-sector-5

Lewis, M. (2020, October 12). Electric cars will triple market share in Europe in 2020. Retrieved December 24, 2020, from https://electrek.co/2020/10/12/electric-cars-will-triple-market-share-in-europe-in-2020/

Sigal, P. (2020, January 06). How automakers plan to avoid CO2 fines in Europe. Retrieved December 24, 2020, from https://europe.autonews.com/automakers/how-automakers-plan-avoid-co2-fines-europe