17 Feb 17

EU regulation drive leads to extinction, not innovation, say car manufacturers

By 2020, average emissions of new passenger cars in the EU will need to be reduced by 39% compared to their 2005 level. That contrasts with a reduction of 10% imposed by the EU on other non-ETS sectors such as buildings, agriculture and waste treatment; and to a 21% by ETS sectors such as power stations and combustion plants – all within the same time frame. 

So says a new study on the Regulation and Competitiveness of the EU Automotive Industry commissioned by ACEA, the European association of car manufacturers. The organisation says the automobile industry remains dedicated to achieving its goal, but the study shows the much greater lengths to which the industry will need to go to achieve the mandated result. 

Twin ambitions
The study points out that the European Commission's twin ambitions, to increase industry’s share of GDP from 15% in 2013 to 20% in 2020 and transform the EU into a low-carbon economy by 2050, place particular stress on the automotive industry, which contributes 7% to EU GDP and employs 5% of the total labour force. 

Although car manufacturing is virtually emissions-free, the vehicles themselves contribute nearly 18% to the EU's total carbon emissions (the power generation industry accounts for 29%). 

The EU-mandated effort to curb greenhouse gas emissions is proportional to both the technological and the economic potential of the various sectors. The power generation industry, for example, will have to be virtually carbon-emissions-free by 2050, manufacturing has to reduce emissions by about 85% and transport by about 60%.

Emission Trading Scheme
Decarbonisation is driven in part by the Emission Trading Scheme (ETS), which reduces the caps on emissions allowances for certain industries at a progressively lower level each year. Car manufacturing is covered by ETS, but road transport is not – at least not directly: the progressive caps on emissions for new cars and LCVs are supposed to carry forward the reduction in emissions by the transport industry.

Considering that new vehicles form a relatively small part of Europe's total fleet - the 13 million new registrations in 2014 comprise only about 5% of the approximately 250 million vehicles on the EU roads – the vehicle manufacturers argue that the burden they carry for decarbonisation is disproportionally large. 

For it is the manufacturers who must research and develop the technology that will reduce the emissions, and it is they who are subject to ever stricter emissions targets. As the study points out, by 2020, average emissions of new passenger cars will need to be reduced by 39% compared to their 2005 level – as mentioned above, a much higher rate of reduction than other sectors. The most stringent scenario put forward by the European Commission even calls for a 57% reduction in passenger car emissions by 2030.

Punitive effect
Car manufacturers have already made great strides in reducing carbon emissions by new vehicles: - 22% between 2005 and 2013. But, as the study shows, over-reliance on new vehicles as the means to deliver CO2 emissions reductions is not only a slow process, but also an expensive one. 

It has been demonstrated that the power-generating industry has a greater potential for emissions reductions, which – as suggested by empirical evidence – is much easier to pass on to the end users than in the transport sector.  

The punitive effect on the automotive industry is all the greater as the industry is already burdened by more regulation than most other industries, with laws and directives aimed at safety, the environment, taxation and homologation all adding to manufacturing costs. 

Additional production cost
According to a McKinsey study, regulations of all kind have imposed an additional 3-4% on automotive production cost for every year between 1998 and 2011. Recent environmental regulations may add up to 16% to average manufacturing cost by 2020. New CO2 standards, currently being prepared by the Commission for the period after 2020, will put additional burdens on the industry. 

However, car prices have in general only increased in line with inflation. As a result, the profitability of car manufacturing in the EU has suffered significantly. 
In 2007, Europe was the most profitable region for car manufactuers, generating €15 billion in profits. By 2012, Europe was the worst region, showing losses – even though some manufacturers turned a profit, the losses by others more than compensated for this. In aggregate, sales within the EU generated a €1 billion net loss in 2012.

€13 billion
The 2020 target is estimated to impose an additional €1,000-2,000 manufacturing cost per passenger car on the industry. Even calculating with the lower end of this range, these estimates translate into a fleet-wide capital cost of €13 billion.

In short, the ACEA study says, further regulation will make a bad problem worse, and could accelerate the process whereby plants are closing in Europe, and opening in Asia and South America.  

Image: Bahnfrend, CC BY-SA 3.0


Authored by: Frank Jacobs