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Volkswagen and Ford risk high fines for failing to meet CO2 reduction targets.

Volkswagen and Ford are the vehicle manufacturers most exposed to sanctions because they are far from meeting the CO2 reduction targets set by the European Union (EU) for the year 2025, according to a study published by the data consultancy Dataforce.

The report titled Electrification or Failure: How Original Equipment Manufacturers Can Meet CO2 Targets for 2025, highlights that in 2025, the EU will significantly tighten the CO2 targets for car manufacturers. For passenger cars, the average emissions of new vehicle sales must fall below 93.6 g/km, compared to 116 g/km in 2024, representing a 19% reduction. For light commercial vehicles (LCVs) up to 3.5 tons, the targets will be reduced from 185 to 154 g/km, a 17% reduction.

Dataforce warns that exceeding these CO2 limits can result in hefty fines, calculated by multiplying the excess CO2 in g/km by the volume of registrations by 95 euros. For large groups of original equipment manufacturers, this could mean fines in the hundreds of millions of euros.

The situation for the coming year looks concerning for most automotive groups in the EU, as only Geely (Volvo, Polestar) and SAIC Motor (MG) are below the 93.6 g/km threshold among manufacturers with internal combustion engines in their model range. Following them, Toyota (105 g/km) and BMW (106 g/km) require a comparatively moderate reduction, but all others (Stellantis, Renault, Nissan, Mitsubishi, Hyundai, Daimler) will need to make significant efforts.

Dataforce points out that this is especially true for the German Volkswagen Group and the American Ford. Given that their cars are heavier than average, their individual targets for 2024 have increased to 121 and 124 g/km, respectively, giving them some leeway. However, this weight adjustment will be omitted in 2025, as the weight factor in the equation becomes negative.

Despite ambitious targets, progress this year has been minimal, according to the data consultancy. The first six months of 2024 have seen more emissions than all of 2023.

Battery electric vehicles and plug-in hybrids offer the greatest potential for reduction for brands, but cuts in subsidies have hindered their transition to the mass market, Dataforce notes. From January to June 2024, the European car market (EU-27+ IS+NO) grew by almost 243,000 new registrations (+4.3%), while registrations of battery electric vehicles and plug-in hybrids moderated by 9,000 units.

More than half of the growth came from full hybrids, which, although more fuel-efficient, still have emissions above the average for passenger cars.

To reduce average CO2 emissions next year, Dataforce reminds that each original equipment manufacturer will have their own strategies, all related to more electric cars. Depending on the specific current emissions of the fuel type, an original equipment manufacturer, for example, without full hybrids in their portfolio will need 37% of battery electric vehicles (BEV) and plug-in hybrids (PHEV) in their sales mix.

With full hybrids, the task seems simpler: in a scenario with a 55% share of electric hybrids, the required proportion of battery electric vehicles and plug-in hybrids is reduced to 23%, the consultancy explains.

However, manufacturers focusing on electric hybrids tend to sell fewer battery electric vehicles. Besides, EU regulations allow for more weighting of BEV registrations when cars are sold in markets with comparatively low electrification rates.

Dataforce notes that another option to meet CO2 emissions standards is CO2 pooling. In the last two years, there was little need for pooling, but in 2021, the former FCA group partnered with Tesla and Honda to reduce their CO2 average.

The consultancy expects a recovery in 2025, when manufacturers that only sell electric vehicles can sell emission certificates to other groups.

Additionally, it points out that CO2 targets will be an important part of annual goals, just like sales targets. By monitoring emissions monthly, original equipment manufacturers can identify the markets or segments with the greatest positive or negative impact and adjust their sales strategy towards meeting CO2 standards in time to react.

„From the current perspective, achieving such high electrification rates seems unattainable. However, electrification is not a linear process but occurs in stages. In the past, the jump from 2019 to 2020 was surprisingly strong. The current setback is also influenced by the abrupt elimination of incentives for electric vehicles in Germany, the most important battery electric vehicle market in Europe by volume,“ the study points out.

Dataforce adds that now the situation is different, as it has become more challenging to convince more customers to opt for battery electric vehicles over internal combustion ones.

„This will only work with changes in pricing structure. Current drops in lithium and battery prices allow for some cuts along the supply chain, but manufacturers will also have to cut costs in other areas to remain profitable.“

It also advocates for increasing production and replacing costly NMC batteries with LFP batteries as alternative options. It also notes that automotive manufacturers are likely to gradually phase out promotions for internal combustion engines and focus on battery electric vehicles.

„Finally, but not least, smaller and more affordable models will help transition to the mass market,“ concludes the study.

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