What are the consequences of the EU tightening vehicle emissions requirements and threatening car makers with heavy fines? The manufacturers may be forced to raise prices and remove bigger engine options or run a discount race on rechargeable cars to try to escape fines.
Next year, the EU is ringing in the world's toughest emissions targets after a phase-in period this year. Then what applies is usually called the 95-gram target. The weight of the car fleet is considered, so the exact targets vary.
But still, car companies are expected to fail. The outlook is worse now than a year ago according to analysis from PA Consulting, which for the fifth year mapped the car industry's ability to reduce its carbon dioxide emissions. The previous downward trend has reversed, and emissions are increasing. This is explained by the increase in sales of SUVs and large cars with higher fuel consumption and that many customers have switched from diesel to gasoline.
PA's assessment now is that all car manufacturers will miss the target in 2021 and receive juicy fines - EUR 14.6 billion in total, or SEK 154 billion.
“We see car makers aren’t sticking to their schedules for electrification. At the same time, more and more SUVs are being sold. Both sides must rethink. Both customers and manufacturers,” says Michael Schweikl, responsible for the study at PA Consulting.
He sees it as impossible that car manufacturers would be able to increase the number of electric cars enough without rapid changes. Having a strategy for Europe where large engines are removed is one way, as are more collaborations.
For car manufacturers, it is a dilemma that they make the most money on cars with large engines and they need the revenue to finance the costly electrification. However, selling too many fossil cars raises the fine.
“It is always the customers who ultimately have to pay the bill. This may lead to higher prices for cars, but the price issue is complicated. If prices are too high for petrol and diesel cars, companies risk losing market share. You will weigh the risk of fines against volume,” says Michael Schweikl.
The higher price of rechargeable cars has so far been an obstacle for many customers. Volkswagen expects to reach a mass market when it starts delivering its ID3 later this year. In its cheapest version, it should cost around the same as a diesel car - SEK 350,000.
It’s expected that manufacturers would subsidize their electric cars, but nobody wants to put themselves in a situation where the profitability of future products becomes too low.
“Providing discounts for electric cars is a way to increase sales and thus reduce the risk of fines. This is something that all car manufacturers are counting on,” says Michael Schweikl.
According to PA Consulting, Volkswagen risks a fine of SEK 47 billion, which is one-third of the company's operating profit in 2018. However, VW expects to meet the target with the help of electric cars and mild hybridisation of the internal combustion engines.
“Already this year we see an increase in clean electric cars from one to four per cent of our sales. And this development will only accelerate. We are working intensively to meet the CO2 targets in Europe, which is a major challenge both this year and next,” says Marcus Thomasfolk, Head of Information at VW Sweden.
Volvo Cars, which was previously due to meet its targets, has now fallen behind and is expected to be fined SEK 4 billion.
Yet Volvo expects to double the proportion of sold hybrids from 10 to 20 per cent. In Sweden, even more - 30 per cent. Volvo will also start delivering its first electric car after the summer. Also helpful is that the new electrified brand Polestar is included in Volvo's figures.
Who will pay if you get a fine?
“I am very confident that we will meet the goal of an increase in plug-in hybrids. I don't save any money to pay fines," says Jon Wakefield, CEO of Volvo Car Sweden.
Volvo will press extra to get more plug-in hybrids, but some big discounts are not expected.
“The price discussion may be done in a longer perspective. We have a good hybrid offering and it is primarily about educating customers to understand the value of being able to drive on electricity,” says Jon Wakefield.
One concern is the long delivery times. Anyone ordering an XC40 plug-in hybrid may have to wait until early June.
"We will reduce waiting times during the year to 3-4 months, which is ideal," says Jon Wakefield.
The challenges of meeting emission requirements can also lead to more mobility services where manufacturers use their electric cars to offer customers access to cars.
"By packing the services smartly, the car companies can make more money from it than by selling the cars," says Michael Schweikl.
EU emission requirements
By 2020, 95 per cent of a manufacturer's fleet must meet the target, which is generally 95 grams of carbon dioxide per kilometer on average. In reality, each manufacturer has its own goals based on the weight of the fleet.
In 2021, 100 per cent of a manufacturer's cars are counted.
The EU fine is about SEK 100 for every gram over, multiplied by the number of cars sold in 2020.
Cars that emit less than 50 grams of CO2 per kilometer are counted double in 2020, as 1.67 vehicles in 2021 and as 1.33 vehicles in 2022.
Small manufacturers with less than 1,000 cars sold in the EU per year are excluded. Manufacturers selling fewer than 300,000 cars per year in the EU can apply for exemptions.
The money from the fine goes into the EU general budget.
In 2018, the average emissions for new cars in the EU was 120 grams per kilometer.