Transportation

As European CO2 Rules Bite, Auto Manufacturers Will Suffer While Public Anger Builds


By 2030, when EU rules demand 92 average miles per gallon for cars and SUVs, the European industry is likely to be on its knees, citizens will be forced to take the bus to work because cheap cars have been priced out of the market, while the unemployed in auto manufacturing will be demanding an explanation from politicians.

They will be told, sorry, but it’s all being done to save you from the climate emergency. When they find out that in fact after all this pain and sacrifice, the amount of carbon dioxide (CO2) saved was relatively tiny, expect a political upheaval.

That isn’t the overwhelming opinion. Some reckon that if the European auto industry starts to reel from the burden of over-tight regulation, governments will step in to protect jobs. Others say care for the environment must take precedence over lifestyle, no matter how uncomfortable that makes it for citizens.

The EU has mandated average fuel economy across manufacturers’ fleets the equivalent of about 57 miles per U.S. gallon in 2020/2021, up from 41.9 mpg in 2015. It rises again by 15% in 2025, and hits 92 mpg by 2030. Failure to meet these targets will result in swingeing fines. Expect measures from EU governments to curb traditional internal combustion engine (ICE) motoring. And new EU Commission leader Ursula von der Leyen announced current targets for emissions reduction of 40% below 1990 levels by 2030, should be raised to at least 50%. That points to even harsher emissions goals.

This all mean curbs on car use like restrictions on city center access, higher tax on gasoline, curbs on long-distance car commuting, and an end to the school run.

Investors are worried by the current CO2 regime, but are furious that these harsh targets might well be raised again, with the implication that complete electrification is being pursued by stealth. Imposing new technology is all very well, but if it is too expensive and inconvenient compared with current methods, there’s going to be trouble. EU bureaucrats must dream that if only electric cars were like mobile phones, a revolutionary technology that was grabbed by consumers because it enhanced their lives.

According to Bernstein Research analyst Max Warburton the current CO2 rules present a struggle for the manufacturers.

“But it looks like the EU may be about to tighten them further. Much further,” Warburton said.

Warburton said the EU will publish details of the enhanced regime in August, with new standards being announced in June 2021. He thinks the 2025 and 2030 standards will be raised and may aim for near full electrification.

“The economics of these new 2030 rules look fearsome and will likely require a fundamental change in auto industry technology, industrial footprint, employment and corporate structure,” he said.   

Meanwhile as the current regulations kick in, big auto makers face balance-sheet threatening fines if they can’t meet them. Fines will wipe out hard won profits and incur massive expenses to actually develop the technology to make battery electric vehicles (BEVs) and plug-in electric hybrids (PHEV). (PHEVs have batteries with a range of some 30 miles before ICE kicks in.) Bottom lines will be threatened. It will be an existential risk for some.

According to the OECD’s International Energy Agency (IEA), even if the market share of battery-electric cars reaches nearly 25% by 2040 from about 2% currently, it won’t be enough to curb the growth of auto CO2 emissions. Other sectors like aircraft, ships and trucks will outweigh progress on cars.

“A much steeper transition is necessary – a 3 times higher electric car fleet – for being aligned with a scenario compliant with Paris Agreement and energy efficiency, electrification and the development of low carbon fuels like biofuels and hydrogen would play a key role for decarbonizing all energy sectors,” the IEA said in a email reply to questions.

According to the consultancy IHS Markit, global sales of battery-electric vehicles will have a market share of only 14.8% in 2030. Many big carmakers like Volkswagen plan for much bigger numbers. VW reckons 25% of its global sales will be all-electric by 2025.

Professor Stefan Bratzel of the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany said by 2030 BEVs and PHEVs will have a market share in Germany of between 40 and 50% with the rest still being accounted for by ICE vehicles. Electric cars will still be much more expensive than ICE ones.

Bratzel said because electric cars are cheaper to make than traditional ones, and because of worries about the future, unemployment in the German auto industry is rising. But any attempt to tighten the EU CO2 rules further by Brussels and von der Leyen will be resisted.

John Wormald, analyst with British automotive consultancy Autopolis, doesn’t expect electric cars to make much of an impact before 2030. They are too inconvenient, when the public has become used to instant availability and flexibility.

“If we want to cut emissions by 50%, then we need to drive smaller and lighter cars, less fast, less far, and with less start-and-stop. Yes, more driving bans in city centers but ultimately much more severe constraints on driving as a whole. Universal tolling. Much higher fuel taxes. Outright bans. No more long-distance car commuting or driving children to school. The end of the fun of motoring, of the car as means of transport, object of worship, sporting good, rolled into one. Transport austerity,” Wormald said.

“We need to regulate the volume and form of demand for individual transport. That will be incredibly challenging. But society has to face up to its own responsibility. Will it happen in an organized, progressive way, or via panic measures? Watch China, the party and the government have the power to do it. Either way, I think the current industry is ultimately doomed. In large part because it’s actually so good at what it does, so heavily invested in it, that it can’t change its spots by itself,” Wormald said.

By 2030, will the European industry be simply a mirror of 2020, with roughly the same amount of traffic, but most of it whizzing around under electric power?

Unlikely, says Professor Peter Wells, Professor of Business and Sustainability at Cardiff Business School, unless governments step in with subsidies. And expect more takeovers, mergers and alliances.

“The ‘business as usual plus electric powertrain’ scenario is one that incumbent industry players and senior policy protagonists appear relatively comfortable with,” Wells said.

“In this scenario the plethora of new entrants and start-ups premised on electric mobility will either be absorbed by the existing industry leaders, be confined to selected niche applications, or fail. The drift from ownership to user-ship will continue. The problem is that this scenario is unlikely to support all the existing industry without a parallel program of scrappage incentives, research support, and restructuring support. The transition costs are likely to be high, and beyond the scope of the existing industry, just as market volumes will in any case fall. The expedient solutions will therefore be favored: expect many more joint developments, shared investments, and corporate M&A events over the next ten years,” Wells said.

Wells said volume brands will come under pressure with a scramble to be perceived as a premium producer. He agrees that governments are likely to intervene in support of companies perceived as crucial to the economy like Renault-Nissan and Volkswagen. The idea that driving around in certain upmarket brands is a good thing, while participating in shared ownership, short-term renting is a negative, should stop.

“It is necessary to disassociate mobility from success, freedom, or quality of life. This is the dilemma faced by modern industrialized societies all over the world: How do we meet the environmental imperatives while retaining our lifestyle expectations,” Wells said.

Volkswagen, Europe’s biggest carmaker, has famously said because of the EU rules by 2030 it will be impossible to make small, cheap cars like the Up and Polo, economically. This will remove people on average incomes from the new car market and force them on to public transport,    

CAM’s Bratzel points out it is already clear from Norway’s experience that electric cars are bought by the most affluent. He agrees that electric mobility will only get more expensive and ICE car accessibility for those on average incomes might be limited to car sharing, and ride hailing. This is likely to generate much resentment and trouble for politicians.

“At the moment the outlook for the industry is hard to predict because everything is in transition. The rising expense of electric mobility could force some people out of cars and on to trains or buses because they have to get to their workplace. They aren’t going to be happy about this,” Bratzel said. 



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