New European vehicle CO2 emissions performance standards and opportunities for manufacturers of electric vehicles

Unlike under the system in the U.S. where vehicle manufacturers sell emissions credits directly to other vehicle manufacturers, in Europe vehicle manufacturers may enter into partnerships with other vehicle manufacturers to consolidate their fleets for emissions compliance purposes through pooling arrangements. For example, Fiat Chrysler Automobiles ("FCA") recently agreed to pay Tesla, Inc. to pool their fleets in Europe thereby enabling FCA to avoid emissions compliance fines.

Indicative average EU fleet-wide emissions targets

(a) New passenger cars: The indicative average EU fleet-wide emissions target for new passenger cars for the calendar year 2019 is 130 g CO2/km. From 1 January 2020 this target will be reduced to 95 g CO2/km. From 1 January 2020 until 31 December 2024 this target will be complemented by additional measures corresponding to a reduction of 10 g CO2/km. Between 2025 and 2029 the target will be 15% stricter compared to 2021. From 1 January 2030, the target will be equal to a 37.5% reduction of the target in 2021.

The European Commission adjusts the Specific Emissions Target each year for each manufacturer on the basis of the average mass of the relevant passenger cars using a limit value curve. This is laid down in Implementing Decisions.

Manufacturers of passenger cars are given additional incentives to put on the European market zero and low-emission passenger cars emitting less than 50 g/km through a "super-credits" system. These are taken into account for the calculation of a manufacturer's Specific Average Emissions. Such passenger cars are to be counted as 2 vehicles in 2020, 1.67 vehicles in 2021, 1.33 vehicles in 2022, and 1 vehicle from 2023 onwards.

(b) New light commercial vehicles (vans): The indicative average EU fleet-wide emissions target for new light commercial vehicles for the calendar year 2019 is 175 g CO2/km. From 1 January 2020 this target will be reduced to 147 g CO2/km. Between 2025 and 2029 the target will be 15% stricter compared to 2021. From 1 January 2030, the target will be equal to a 31% reduction of the target in 2021.

(c) Heavy-duty vehicles (lorries, buses and coaches): Emissions of heavy-duty vehicles registered in the EU will for the first time be measured and monitored in a standardised way with a reference period from 1 July 2019 to 30 June 2020. There will be a 15% reduction target compared to this reference period for average fleet emissions of new trucks by 2025 and a 30% reduction target by 2030 (subject to review in 2022).

Potential value of CO2 emissions credits

There is an excess emissions premium of €95 for each CO2 g/km of excess per vehicle registered (whether for new passenger cars or for new light commercial vehicles). Therefore, the potential value to an electric vehicle manufacturer in 2019 of the sale of CO2 emissions credits to a purchaser under a CO2 emissions pooling arrangement could be €95 multiplied by the number of vehicles registered by that vehicle manufacturer in 2019 multiplied by the distance in CO2 g/km to the Specific Emissions Target for 2019.

In the future, the value of these credits to electric vehicle manufacturers could increase as: (a) the number of vehicles registered by the manufacturer increases, (b) the Specific Emissions Targets for manufacturers become more stringent, (c) following Diesel-gate, there is a general shift from the use of diesel to petrol in vehicles and as petrol emits more CO2 than diesel it will become more difficult for manufacturers of internal combustion engine vehicles to meet their Specific Emissions Targets, and (d) vehicle manufacturers prefer to enter into pooling arrangements as opposed to paying fines to the European Commission for reputational reasons.

However, in practice, the value of CO2 emissions credits is typically less than the amount of the penalty for exceeding emissions limits. The potential revenue from the sale of emissions credits will correlate to the strength of demand. 

Timelines and requirements

The duration of the pooling arrangement may not exceed 5 calendar years and must be entered into on or before 31 December in the first calendar year
for which emissions are to be pooled (i.e. it is not possible for a vehicle manufacturer to retro-actively pool figures for the calendar year 2018 nor previously).

In practice, once there is political will between the parties to form a pool, it should be possible to complete the process of drafting the agreement to form a pool and drafting the standard form declaration to the European Commission in around 2 to 3 months.

In forming a pool, manufacturers need to take into account the rules for information exchange under competition law and should not exchange information other than Specific Average Emissions, Specific Emissions Targets and the total number of vehicles registered.

It is possible to have pooling arrangements between, for example, manufacturers of new passenger cars, or between manufacturers of new light commercial vehicles. However, it is not possible for manufacturers to pool new passenger cars with new light commercial vehicles.