Mega fines loom for auto giants as EV demand declines

• The major car companies in Europe seem to be growing more worried about the possibility of significant penalties, especially as the demand for electric vehicles declines before the upcoming tightening of carbon regulations.
• New vehicles sold in the EU must meet stricter emission standards next year, with an average CO2 emissions limit of 93.6 grams per kilometer.
• Last month, Renault CEO Luca de Meo reportedly stated that if EV sales continue at current levels, the European auto industry may face financial penalties of 15 billion euros ($16.5 billion).

The major car companies in Europe seem to be growing more worried about the possibility of significant penalties, especially as the demand for electric vehicles declines before the upcoming tightening of carbon regulations.

From next year, automakers in Europe will have to meet stricter emission standards as the EU sets a new average emissions target of 93.6 grams of CO2 per kilometer (g/km), which is a 15% decrease from the 2021 baseline of 110.1 g/km.

Failing to adhere to the agreed limits, established in 2019 as part of the 27-nation bloc's goal to achieve climate neutrality by 2050, may result in significant penalties.

The senior sector economist for transport and logistics at Dutch bank ING, Rico Luman, stated that Europe's carmakers had valid reasons to worry about the magnitude of the financial penalties.

The fines are substantial, with millions being calculated based on the volumes they produce, as Luman stated via videoconference to CNBC.

According to Reuters, Renault CEO Luca de Meo stated last month that if EV sales continue at their current rate, the European auto industry may face financial penalties of 15 billion euros ($16.5 billion) or be forced to halt the production of over 2.5 million vehicles.

The European Automobile Manufacturers' Association (ACEA) claims that the industry lacks the necessary conditions to facilitate the transition to zero-emission vehicles, as concerns about meeting the 2025 CO2 emission reduction targets for cars and vans continue to mount.

The car lobby group, comprising BMW, Ferrari, Renault, Volkswagen, and others, cautioned that the EU's current regulations do not reflect the significant changes in the geopolitical and economic landscape that have occurred in recent years.

ACEA, representing European auto manufacturers, urged the EU institutions to act swiftly and implement relief measures before the new CO2 targets for cars and vans take effect in 2025, according to a statement published on Sept. 19.

In a press briefing last month, Tim McPhie, a spokesperson for the European Commission, stated that the auto industry has 15 months to meet the new targets and it is premature to predict the magnitude of the potential penalties.

McPhie stated on Sept. 24 that the policies were designed to allow the industry and economic ecosystem to adapt, while being mindful of the challenges being faced.

'A massive struggle'

The top European automakers are facing a range of challenges on their journey towards full electrification, including the absence of affordable electric vehicles, a slower-than-expected expansion of charging infrastructure, and the possibility of European tariffs on EVs manufactured in China.

In Europe, carmakers such as Volkswagen, Ford, and Mercedes-Benz Group have announced plans to postpone earlier targets for phasing out sales of internal combustion engine (ICE) vehicles.

ING's Luman stated that manufacturers are primarily concentrating on conventional hybrids and ICE vehicles because they are more profitable.

""Although they must compete with new players and restructure their organizations in the long run, this transition may not be profitable in the short term, making it a significant challenge," he stated."

The EU's battery electric market share has decreased to 12.6% this year from 13.9% in 2023, while car sales remain 18% lower than pre-pandemic levels in 2019, according to the ACEA.

S&P Global Mobility's associate director of sustainable mobility, Xavier Demeulenaere, stated that all European OEMs have a "strong motivation" to increase their own EV sales in order to reduce their average fleet emissions and meet regulatory targets.

According to Demeulenaere, the slowdown in electrification in 2024, caused by a deteriorating economic climate in Europe and the withdrawal or reduction of subsidies in certain countries, presents a challenging situation for most OEMs as it results in a demand issue.

If demand is not present, pooling will be the primary mechanism to avoid financial penalties in 2025, as stated.

Car manufacturers collaborate to be viewed as a single entity when assessing their CO2 emissions performance against a target.

Crisis? What crisis?

Not all individuals believe that the sales challenge experienced by Europe's automotive industry qualifies as a crisis for the entire industry.

The current state of play in the EV market should be viewed as a "transitional phase" where manufacturers adjust to new regulations and shifting market dynamics, according to a Transport & Environment analysis published on Wednesday.

Since 2019, the European car industry has been required to plan for the next year's CO2 target. To avoid paying large fines, manufacturers can increase their sales of hybrids and fuel-efficient cars.

Car manufacturers can benefit from regulatory flexibility that artificially lowers their CO2 emissions, as well as the option to pool their emissions with other car manufacturers, according to them.

"The objective of the car CO2 regulation is to reduce the number of big polluting SUVs sold by profitable European carmakers."

In the EU, road transport is the primary source of CO2 emissions, with passenger cars and light commercial vehicles contributing approximately 15% of the total.