U.S. Markets closed

Automakers Face Tough New Standards In EU

Jon LeSage

The long-awaited light-duty vehicle emission rules will hit light-duty vehicle makers working in EU member countries on January 1.

Vehicle manufacturers will have to sell many more hybrid and electric vehicles or pay costly fines, a situation similar to China's rules. For automakers with product lineups with few EV offerings, they'll need to sell lots of conventional cars and trucks, and use the profits to pay the fines. Industry analysts expect plug-in hybrid, battery electric vehicle, and hybrid vehicle sales to soar in the near future.

Earlier this year, the EU approved carbon emissions targets for 2030 that will be 37.5 percent lower than the 2020-21 fleet limit of 95 grams per km. The auto industry had lobbied for a more reasonable reduction target of 20 percent, arguing that they needed more time to prepare and to avoid taking huge financial hits.

Automakers and their supplier partners argued that starting the process over 2020-21 and through the 2030 target will cause a very costly switch over to electrified vehicles in their lineup of new vehicles sold.

Commercial truckmakers will be next. In Europe, heavy-duty trucks will have to emit 30 percent less greenhouse gases by 2030. EU regulators say that about 20 percent of Europe’s carbon dioxide and greenhouse gases come from light-duty vehicles, and heavy-duty trucks add to that emissions share even more.

Shareholders worry that profit will be hurt as these electrified vehicles can’t be sold at higher prices than conventional gasoline and diesel models. For them, it means they won’t be profitable until battery costs come down; and there are other costly expenses such as installing charging stations and switching over to maintaining these vehicles that the vast majority of consumers and fleets have never experienced.

Related: Why The Saudis Suddenly Agreed To This Mega Oil Deal

When the new rules take hold at the start of 2020, automakers must meet strict new exhaust emission rules or face substantial fines. The upper limit is set at 95 grams of carbon dioxide for every kilometer of driving. Going over that limits will mean a fine is given at 95 euros ($106.44) for every gram per kilometer above the limit, multiplied by the total number of cars sold by the manufacturer. For example, if the new rules had been in place during 2018, automakers would have owed more than 33 billion euros ($36.9 billion).

Automakers have been given a big incentive to bring EVs to their dealerships. Every car sold that emits less than 50 grams of carbon dioxide per kilometer gets double credit in the regulatory scheme.

But that won’t be happening for some companies — they’ll have to build the cost into their business plans for coming years. Felipe Muñoz at automotive consulting firm Jato Dynamics says some automakers will still need to sell lots of conventional gas-and-diesel-powered vehicles and use the profits to pay the fines. They really have little choice under the stringent new rules.

“It is very difficult for carmakers to change manufacturing infrastructure in such a short period of time,” Muñoz said.

Automakers are postponing ramping up for high volumes of hybrid and electric vehicles until they have to, adds Julia Poliscanova, the clean vehicles director at the European Federation for Transport and Environment.

“What they’re planning to produce is more or less what they need to hit their CO2 targets,” Poliscanova said.

The US will have to continue to wait and see how the Trump administration is ruling on light-duty vehicles and later on medium- and heavy-duty vehicles — though it certainly will be at a less strict standard.

Related: How Tech Is Making Oil Work Safer

On August 28, 2018, the US Environmental Protection Agency and the National Highway Traffic Safety Administration proposed the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule. That would freeze motor vehicle carbon dioxide and fuel economy standards at the 2020 model year levels — and it will rescind California’s power to regulate emissions of vehicles sold in the state.

The EPA and NHTSA later decided to break the revised rule into two stages. On Sept. 27, 2019, Part One was published which determined one national standard would be followed and that California’s tailpipe carbon dioxide emission standards are void and of no force. This set of a wave of legal actions by California and other states, and a split among major automakers backing California or the Trump administration’s new standards.

Part Two has yet to be finalized. It will revise the Obama administration’s tailpipe carbon dioxide and mileage standards for 2020-2026 model year vehicles. Unconfirmed reports say that the standards will be raised year-over-year, but it will be softer and less rapid than the Obama-era rules.

The argument being made in the SAFE rules is that relaxing the fuel economy rules should help limit the cost increases that block millions of middle-income consumers out of the market for these newer, cleaner, safer, and more fuel-efficient vehicles. Critics say that it’s really about gutting strict emissions rules and taking away roadblocks for selling more gasoline and diesel.

By Jon LeSage for Oilprice.com

More Top Reads From Oilprice.com:

Read this article on OilPrice.com