“I cannot guarantee that we will be compliant in 2021”. Those were the words of Dieter Zetsche, Daimler’s CEO, in January 2018 when a reporter asked him whether Daimler would be able to reach the European Union’s 2021 limit for CO2 emissions. At the time, it was common knowledge that most carmakers were not on track to comply with this regulation, facing potentially tremendous fines. However, one year after Dieter Zetsche’s announcement, things are getting even worse for the automobile industry. Just this Monday, December 17th, 2018, the European Union announced new tougher thresholds for CO2 emissions: the limit will be reduced by 15% from 2025, lowering it to roughly 81gCO2/km, and by 37.5% starting from 2030, lowering it to roughly 60gCO2/km. As a reminder, cars sold by a carmaker within the EU in 2021 must not emit more than 95gCO2/km on average (for light passenger vehicles), to avoid facing a fine equal to EUR 95 per gCO2/km above the limit and per vehicles sold. For example, a carmaker that sells 2m light passenger vehicles across the EU in 2021 with an average level of emissions of 100gCO2/km would have to pay a EUR 950m fine. With the same level of fines between 2021 and 2030 for carmakers that do not comply, the costs could become unbearable for the industry.
On its way to reach – or at least to try get as close as possible of – such limits, the automobile industry is facing a few challenges. First, carmakers hoped that sales of diesel-powered cars (which emit 15% to 20% less CO2 than their gas equivalent) would keep rising, making it easier to comply with EU regulations. However, the Dieselgate controversy caused a significant loss in popularity for such motorisations, even making it non-grata in years to come in a few European metropoles, while pushing public authorities to reinforce their controls on carmakers (the Worldwide harmonised Light vehicle Test Procedure a new procedure to control CO2 emissions on vehicles- finds on average 5% higher CO2 emissions than the former procedure).
On the other hand, the thirst of consumers for SUVs, sportscars, and more generally cars embedded with the latest state-of-the-art (and always more energy-intensive) technologies do not seem to end, making the carmakers’ product range automatically CO2-intensive. For years, the use of technological innovations such as reducing the engines’ size while maintaining performance or using lighter materials allowed carmakers to keep meeting customer’s expectations, while being able to produce “cleaner” vehicles every year. However, it seems now that they are reaching the limit of what is technically feasible with ICEs, causing a slowdown on emission reduction since 2013 (see figure below). Further significant CO2 emissions reductions would necessitate the customers to accept a drastic change in the line of products they are being offered: smaller vehicles, less horsepower, etc. Yet, consumers don’t seem willing to change the expectations that carmakers have inspired for the past decades.
CO2 Emissions Reductions of Vehicles
Facing the difficulty to reduce its emissions on thermal motorisations fast enough to reach the 2021 – and now 2025 and 2030 - objective, the automobile industry is now moving at a fast pace toward electric and electrified vehicles (EVs), hoping to considerably reduce the average emissions of the vehicles sold in the EU. It is probably worth specifying that the calculated EV CO2 emissions will not take into account the energy mix of the countries where they were sold, thus making their emissions artificially low under any circumstances.
To maximise their chances to sell enough electric vehicles by 2021, brands are investing billions in research and development and infrastructure, pressuring their margins and sometimes causing profit warnings, as is the case for BMW, while some brands like Fiat have yet no EVs at all in their product range and are desperately trying to catch up before 2021.
However, a brutal rise in EV sales could have undesirable effects for carmakers. First, an electric vehicle requires on average 60% less parts than an ICE vehicle, thus reducing the need in manpower and causing fear amongst stakeholders regarding potential loss of employment and restructuration. Second, batteries would account for 30% to 50% of EV prices, transferring large parts of a carmaker’s added value to its suppliers, or causing the need for larger investments to avoid becoming dependent on battery suppliers. And third, EVs are a still young but already controversial technology, due to the high environmental costs of lithium extraction, and since the electricity mix surrounding EVs is not clearly considered in most CO2 emissions calculations, creating uncertainties about its long-term image.
We should also point out the governance risks associated to this complex transition. In 2015, it came to light that, due to the fear of upcoming CO2 emissions limits and the fines targeting incompliant companies, several carmakers resorted to fraud, making their levels of emissions appear much lower than they were. A couple of years later, in 2017, the European Commission realised that carmakers were resorting to fraud again… this time making their levels of emissions appear higher than they really were, with the hope that the Commission would use those overestimated levels while setting the reduction objective for 2025. Considering everything that is at stake for the automobile industry and its former attitude toward this situation, cynics could flag the risk of a new fraud on an industry scale…
The overall situation for the automobile industry is quite representative of the complexity of ESG matters, and solving this will necessitate its actors to adopt a holistic approach to face a situation that could completely reshape the whole industry.
Ronan Lecarpentier, ESG Analyst
Sources: Beyond Ratings, ADEME