This topic discusses the implications of the EU CO2 regulation which was amended on April 2023 on Volkswagen. The regulation sets the following;
In 2025, the CO2 emissions target for passenger cars will be reduced by 15% over the 2021 baseline level to 93.6 g CO2 /km while that of vans will be lowered to 153.6 g CO2 /km.
From 2030 to 2034, a reduction to 49.5 g CO2/km for cars and 90.6 g CO2/km for vans is planned.
Beyond 2035, a 100% emission reduction is planned.
Automakers that fail to meet their statutory targets will face a fine of €95 per g/km of target exceedance for every vehicle registered in the EU.
I don’t expect the EU to ease the 2025 emission target or waive the penalty associated with it since a number of car makers are close to achieving the target. Also, through pooling, automakers can meet their targets. Additionally, ACEA is not against the targets.
According to my projections Volkswagen could meet its passenger cars statutory target of 96 g CO2/km in 2025 by doing the following;
Increasing Europe deliveries of passenger cars by 2% to 3,341,771 units between 2023 and 2025.
Increasing its BEV share in Europe to 16.7% in 2025 from 12% in 2023.
Pooling with another BEV manufacturer, a scenario that will bring in 403,181 BEVs from another manufacturer.
The above scenario is possible (75% confidence level). However, Volkswagen will have to meet the cost of pooling. The cost of past Volkswagen pooling contracts were not disclosed but Tesla-Fiat contract enabled Fiat to reduce its fines by around 80%. Going by the same cost estimates, Volkswagen will only pay around 1.1 billion euros to a pooling partner instead of 5.3 billion euros emission fine.
The above projections are only for the passenger cars. I estimate that Volkswagen Vans could miss the emission statutory target by 4 g CO2/km in 2025. This will attract a penalty of around 191 million euros. Through pooling, this penalty will be very negligible.
A potential 5 billion penalty even with a higher 16.7% BEV share is reached sounds quite problematic to me. (Without pooling)
Interesting calculations. I think most of them are correct and give us an important first indication of scales of impact.
Please always make sure to make your calculations as logical and simple as possible so that you can lead the reader through your math with ease.
If in doubt add new lines and split more complicated formulas into simple and easy to understand steps.
This principle of simplicity will be esp. important when working with a larger community because we want as much people as possible to follow or even question our logic.
A few additional remarks regarding key assumptions:
Apart from EVs Volkswagen wants to make its ICE cars more CO2 effective. How can we bake this into our calculations?
How certain are you that there will be no political change in targets? I think assessing this part correctly has the highest importance.
Why do you think pooling a fleet would only cost 20% of the penalty? Are you confident that enough fleets to pool are available for all manufacturers that would need pooling or might there be heavy competition for the pooling with way higher costs to be payed?
I don’t think it’s quite problematic given the options available. In 2021, it was facing a penalty of 9.2 billion euros emission fine according to Jato Dynamics estimates but was able to meet its emissions target thanks to doubling of BEV deliveries and pooling. The 16.7% market share is not too high in my opinion given that Volkswagen wants to grow its worldwide BEV share to 20% by 2025. This implies a BEV share of around 30% in Europe (in 2023, Europe BEV share was around 50% higher than the worldwide BEV share).
According to Forbes, Volkswagen wants to improve fuel efficiency by 10-15% in every vehicle redesign. Assuming fuel efficiency of 1.5 million passenger cars registered in Europe in 2025 are improved by 12.5% and market share of BEVs improves to 16.7% in 2025, Volkswagen passenger cars will miss the emission target by 9.05. This will lower the penalty to 2.8 billion euros from 5.3 billion euros (arrived at without improving CO2 efficiency) and Volkswagen will need a pooling partner to provide 219,358 EVs instead of 403,181. The company will pay a pooling fee of 575 million euros as a result.
I don’t think the demand for pooling in 2025 will exceed that of 2021. This is because 2021 emission targets were tougher than those of 2025. Companies such as Stellantis, Hyundai, Volvo, BMW, which were far away from achieving their emission target in 2021 are now close to meeting their 2025 target. Also, the regulation allows pooling with multiple partners, hence eliminating instances where supply of EV pools is limited. For instance, Fiat and Honda separately entered into a pooling agreement with Tesla. Likewise, Volkswagen entered into a pooling agreement with Aiways, LEVC, Next.e.Go, and SAIC.
I haven’t been able to find insights on whether there could be a change in political stance with regard to the emission targets. At the moment (30% confidence level), I don’t expect any political change until 2026 when the commission will review the effectiveness of the CO2 standards. Also, much of the political contention (from German government) on the emission targets have been on the exemption of e-fuels from 2035 and not the 2025 targets.
Automakers are confident of beating their CO2 emission targets in 2025, consider pooling as an option
CEO Oliver Blume said they are optimistic that they will achieve their target and that pooling is an option.
“We still have a gap to close, first of all, on the other side, it’s very promising. The order intake we do have on BEVs, which doubled in the first half of this year comparing to last year. And we are launching this year over 30 new models and the half of them are our BEVs and they are entering in the market right now. And the first products are getting very positive feedback,” he said during their Q2 earnings call.
" And so first of all we have big potential with all our groups and the new models we are bringing to the market. We want to help ourselves and only secondly, we will balance other measures like pooling emissions but always leveraging expenditures on the one hand side and benefits on the other side," he pointed out.
Mercedes-Benz CEO Ola Kallenius also said in Q2 earnings call that pooling is an option.
“For 2025, we need to take a step up in Europe. We will take a step up in Europe. Should it not be enough, then you would have to look at pooling solutions, but that’s too early to tell.”
Renault CEO (who is also the president for ACEA) believes Renault could beat the target but is calling for more coordinated support from EU regulators.
“The EV market is currently stuck at 15%, and to meet the 2025 targets, we need to be above 20%. Renault is well-positioned with a high mix of hybrids and new EV products. However, the industry as a whole may struggle to meet these targets without more flexibility or coordinated support from regulators,” he said. “Flexibility in regulations, similar to what was done in 2020, could help the industry meet these ambitious targets without incurring significant fines,” he said during recent earnings call.
BMW CEO Oliver Zipse is confident that they will hit their target, pointing out that they are already on the right track.
“Looking at 2024, which is more or less based on the result of 2023, where we were below the official CO2 target in Europe by more than 20%. So the year 2024, we will lower our CO2 emission but will be far below the official targets. And that we achieved by an additional mix of electric cars,” he said.
“2025, the average fleet emissions will go down by 15%. So it will be tougher for everybody to achieve the targets. But we’ve just been executing our preliminary plans for 2025, and that shows that we will also reach that target. So the product mix we have here in Europe will lead that we achieve these targets.”
Assessment
Considering von der Leyen’s vow not to weaken EU’s efforts to fight against climate change and the fact that most automakers are not complaining against the targets but are rather confident that they will beat them, I am maintaining my projections for a 575 million euros pooling payment for Volkswagen in 2025. It’s good to point out that if Volkswagen pools with a partner in need of pooling as well, the expense could be lower.
In a recent interview with Welt am Sonntag, CEO Oliver Blume said the emissions target for 2025 is a “high hurdle” for them but pointed out that they will fight to increase the proportion of EVs.
He is optimistic though for 2026 since they will have more EVs on the market by then.
In a recent report, UBS said the 2025 CO2 targets for Volkswagen is challenging since it has to double its EU EV share to 25% in 2025 from 13% in 2023 to reach CO2 compliance.
“It is unrealistic that VW will achieve its CO2 targets on its own. The jump is far too big for that,” said Patrick Hummel, Head of European Autos Research at UBS.
“VW urgently needs pooling partners. And even then it will be tight,” predicts Hummel. Tesla, Volvo, Toyota, SAIC and BYD are possible candidates. But only Tesla is in a position to bridge the gap at VW as the sole partner. Mercedes and Stellantis have already formed pools with Smart and Leapmotor."
As a result, it expects aggressive pricing discounts for EVs from Volkswagen and other European automakers that lacks behind the targets.
“We expect an EV price war evolving in the course of next year as (manufacturers) VW above all, will have to aggressively push their EVs,” he said.
“According to our calculations, VW will lose around ten percent of its operating profit in 2025 due to the adjustment to the new CO2 targets. That corresponds to around two billion euros before taxes,” explained Hummel.
He doesn’t see signs that the EU will push back on the 2025 targets unless the price discounts doesn’t revive the demand for EVs.
I=3
Buy, €140: Analyst Philippe Houchois of Jefferies said the details of EU CO2 targets are more challenging than initial announcements indicate. He pointed out that Volkswagen is in a worst state in meeting them.
In a recent interview, Luca De Meo, CEO of Renault and president of ACEO said European automakers faces a fine of up to 15 billion euros in 2025 for missing the CO2 targets.
“If electric vehicles remain at today’s level, according to our calculations the European industry may have to pay 15 billion euros in fines or abandon the production of more than 2.5 million vehicles,” Meo said in an interview with the French broadcaster France Inter.
He called for more flexibility from regulators in attaining the targets.
“We need to be given a little more flexibility. It is very dangerous to set deadlines and fines without having the possibility to make this more flexible,” he said.
A recent analysis by Dataforce established that at current share of BEVs and Plug-In Hybrids, Volkswagen faces a fine of between four to five billion euros in 2025.
Alleged ACEA draft proposal wants the European Union to extend 2025 CO2 targets by two years
ACEA has drafted a proposition asking the European Union to use its emergency regulation to delay the 2025 CO2 targets by two years, Bloomberg reported.
“The EU is in a crisis caused by low consumer demand for EVs and unfair competition from third country EV manufacturers, meaning that the EU industry will not be able to meet these reduction targets,” the informal draft said.
“EU industry will have little choice but to significantly cut production, which threatens millions of jobs in the EU, harms consumers, and adversely impacts the EU’s competitiveness and economic security.”
Its spokesperson said ACEA hasn’t taken a formal stance on the matter nor issued a position paper.
I=5
The German Association of the Automotive Industry (VDA) wants the European Union to bring forward its 2026 review of CO2 regulation by one year so as to initiate countermeasures quickly.
“Overall, we see that the gap between ambitious targets in fleet regulation and supportive framework conditions is widening,” VDA President Hildegard Müller said
I=2
VW supervisory board chairman Hans Dieter Pötsch called on the EU to relax the CO2 targets.
“Electromobility will prevail, but it will take more time. That is why the CO2 targets for 2025, 2030 and 2035 need to be adjusted and adapted to reality,” he said.
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Federal Transport Minister Volker Wissing has called on the EU to review their CO2 targets.
“Europe is losing credibility because it sets targets that it cannot achieve itself,” he said at the IAA transportation trade fair for commercial vehicles.
I=4 European People’s Party asks the EU Commission to revise the ban of ICEs in 2035
The center-right European People’s Party has called on the EU Commission to revise its plan to ban new combustion vehicles from 2035 citing growing crisis in the automotive industry.
The EPP and groups further to the right have the majority members in the EU parliament to support any changes in the regulation but the EU’s 27 member states would also need to agree.
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Stellantis CEO Carlos Tavares is against postponement of the 2025 CO2 targets saying it will make European automakers fall further behind their Chinese rivals.
“We will be compliant without the purchasing of credits,” he said.