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Tighter E.U. CO2 Rules Will Cost Industry €12 billion

Germany Wins “Supercredits” Increase, Delay.

VW Faces Biggest Challenge.

Environmentalists heaped derision on the E.U. agreement to tighten cars’ carbon dioxide emissions, but investors pointed out that despite the delay in reaching the 95 g/km target and the implementation of “supercredits”, the industry will have to spend a total of €12 billion to comply.

The original deal was dumped by German Chancellor Angela Merkel just before the election in September. Merkel sought to delay the proposed 2020 deal and include so-called “supercredits”, which would allow sales of battery-only, hybrid or plug-hybrid cars to count for more than regular cars. This would enable BMW, Mercedes and VW’s Audi to continue selling high-profit margin gas-guzzlers and still meet the tough rules.

In the event, Germany seems to have been partly successful. Only 95 per cent of new cars will have to achieve the average 95 g/km target by 2020, with 100 per cent delayed until 2021. As for supercredits, the old agreement set a limit of 2.5 grams per year. The new deal sets a cap of 7.5 grams of CO2 for 2020 to 2022. A manufacturer could opt to use all the flexibility in the first year. The deal has to signed off by E.U. member states and the European Parliament.

Greg Archer from Brussels based Transport & Environment was angry, but then conceded that at least it meant some certainty had been established.

“It is disgraceful that the heavy-handed lobbying of Germany has paid off in weakening the 95 g/km target. Still, this revised deal will provide much needed regulatory certainty and ensure cars continue to reduce their CO2 emissions and improve fuel efficiency,” Archer told Reuters.

Massive cost
International Strategy and Investment analyst Arndt Ellinghorst said the deal would offer a bit of flexibility to manufacturers, but the overall cost would be massive.

“The supercredit scheme will allow for greater leeway until 2022. Overall the message is unchanged though – the industry will likely face cumulative costs of €12 billion to reach CO2 compliance,” Ellinghorst said.

In a report published before the announcement, Ellinghorst said VW is facing the biggest challenge, but other E.U. mass manufacturers are at material risk given their thin financial cushions. Premium makers will face fewer problems meeting their targets.

Ellinghorst said mass manufacturers generate roughly only €200 to €300 profit per vehicle, and CO2 rules will add €1,000 to the cost of every car. Most manufacturers have already reached the 2015 target of 130 g/km.

“The distance to 95 g/km is, however, very significant; 95 g/km equates to average fuel consumption of 4.1 l/100 km petrol or 3.6 l/100 km. Unsurprisingly, future cost curves are upward sloping with much of the low-hanging fruit already harvested. Thanks to the law of diminishing returns, material improvements in fuel economy will become harder. Light weight materials, further improvements in internal combustion engines and electrified power trains will be need,” Ellinghorst said.

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