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Europe’s Auto Makers Face Existential CO2 Threat

Europe’s Auto Makers Face Existential CO2 Threat.

Brexit, China, Tariff, Recession Problems? Small Fry. This One Is Serious.

“Even if there were 300 million electric cars, with the current power generation system, the impact in terms of CO2 emissions is less than 1% – nothing,”

Forget Brexit, China, tariff wars, weakening markets and the cost of new technology; European auto makers face a more imminent and massive challenge in 2020 from harsh new European Union (EU) fuel economy rules which threaten to wipe out profits, and then some.

The severity of the regulations means the European industry is being forced to offer more and more battery electric cars, and some interim plug-in hybrid electric ones, that will price the ordinary buyer out of the new car market, and cause all kinds of unintended consequences including exposing laggard manufacturers to unwanted takeover bids as their stock market valuations crash along with their sales and profits.

According to a report from investment researcher Jefferies, if the auto industry makes no progress from 2018 towards meeting the EU’s 2020/21 regulations, it faces fines totalling 32 billion euros ($36 billion), twice its estimated profits, and be forced to raise prices up to 10%. And if you think the industry is making steady progress towards meeting the rules, hear this.

The European Car Manufacturers Association, known by its French acronym ACEA, has said 2018 carbon dioxide (CO2) emissions actually rose 1.6%, as sales of diesel-powered vehicles slid, and demand for bigger gas-guzzling SUVs spiked.

The EU demands that by 2021, each carmaker must produce a fleet of cars and SUVs with an average CO2 fuel economy of the equivalent of 57.4 miles per U.S. gallon. This increases by a step through 2025 to an improbable 92 miles per U.S. gallon average by 2030. 

No more affordable small cars
As the rules begin to bite, the European car buying public will finally get to see what is being done in their name by distant politicians and bureaucrats in Brussels. For instance, VW has said by 2030 it will be too expensive to make small cars like the Up and Polo. First time buyers may be forced into buying limited range and cheap little electric runabouts like Sweden’s Uniti or the Citroen Ami One. They will be told this is being done to save the planet.

The Paris-based International Energy Agency (IEA) says the advent of electric cars actually won’t make much difference to the output of CO2, even after predicting there will be 300 million electric cars on the world’s roads by 2040.

“Even if there were 300 million electric cars, with the current power generation system, the impact in terms of CO2 emissions is less than 1% – nothing,” IEA economist Fatih Birol told the World Economic Forum in Davos last January.

Global electric vehicle sales reached 2.1 million in 2018, 64 % higher than for 2017.  This includes all battery-electric (BEV) and plug-in hybrid electric cars and SUVs (PHEV), according to

“If you don’t decarbonize (power), CO2 emissions will not be going down. It may be helpful for the local pollution, but for global emissions it is not,” Birol said.

Brussels-based lobby group Transport & Environment begged to differ, saying electric vehicles would increasingly drive down demand for fossil fuels, which would ultimately remain in the ground on the grounds of expense.

EU regulations are bearing down fast on auto makers, which will have to increase sales of BEVs and PHEVs by 3 times in the next 6 months, according to Jefferies.

Prices will jump
“The real challenge is how much and fast (manufacturers) can collapse the average CO2 of second half production to make inventory compliant by year end. The outcome should be less consumer choice and higher prices – electrification cost alone may add 8-10% to average prices vs 2% historic auto price inflation,” Jefferies analyst Philippe Houchois said. 

“Should compliance fail, we see all the ingredients for a policy crisis, complete with recriminations from industry, regulators, consumers and lobbies with governments missing their own targets,” Houchois said.

And if you think the new rules can be changed any time soon, dream on, said lead bang-drummer on the issue, investment researcher Evercore ISI. 

Evercore ISI there was no chance of repealing or diluting the EU regulations because it would take years, and require a huge effort to find a new consensus. Manufacturers will have to withdraw high profit margin gas guzzlers and push cheaper models, maybe at a loss. It wasn’t enough to produce PHEVs, because by 2025, the tightening rules would require more BEVs. Companies like Toyota and PSA, currently relying on hybrids and ahead of the game, would find this inadequate for the late 20s.

Evercore ISI, which estimated the penalty potential very close to Jefferies’ estimate, at 32.7 billion euros, pointed to BMW and Mercedes as being slow to bring BEVs to market.

Jefferies said Renault of France and Mercedes were notable laggards in the CO2 race. 

“To get there (to meet the rules) we assume hybridization carries an additional cost of €1,500 ($1,700), PHEV’s €3,000 ($3,360), and BEVs €8,000 ($9,000), possibly taking average EU post tax prices from €29,000 ($32,500) to €32,000 ($35,850). The increase compares with 2% a year historically over the past 15 years. Even with continuing low interest rates and creative leasing offers incorporating fuel savings, consumers could resist such price increases,” the report said.

This all might well become a political crisis, maybe of the “gilets jaunes” scale in France, where voters took to the streets to protest what they consider to be arbitrary treatment.

“Should compliance not be achieved, we think CO2 regulation contains all the ingredients of a policy crisis, pitting industry against regulators and States,” the report said.

Arguments will rage between auto industry, regulators, governments and public opinion, with companies demanding governments supply the electric charging infrastructure, or insist fines finance the charging, according to Jefferies.


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