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Habeck wants the EU to offset the 2025 CO2 penalties with overfulfillment in 2026 and 2027
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Christian DĂŒrr, head of FDP parliamentary group is against Habeckâs views that 2025 CO2 fines should be compensated by overfulfillment in 2026 and 2027 but wants the regulation to be totally abolished.
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Wopke Hoekstra, EU climate chief said they are not considering changing the CO2 targets despite a call from the EPP-the largest lawmaker group to relax the laws.
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Tesla enters into CO2 pooling agreement with a number of automakers, reducing Volkswagenâs strategic options
Tesla will enter into a CO2 pooling with a number of automakers such as Toyota, Stellantis, Ford, Mazda, Subaru, Peugeot, etc, leaving little room for Volkswagen to participate in its pool.
Similarly, Volvo will pool with Mercedes.
âIn any case, we think the strategic options for VW and Renault have shrunk with yesterdayâs announcements,â analyst Patrick Hummel of UBS wrote.
Hummel said Volkswagen and Renault may be forced to sell more margin-dilutive EVs, leading to a downside risk of 10% on earnings before interest and taxes.
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ACEAâs new president calls for adjustments in EUâs CO2 targets
The European Automobile Manufacturersâ Association (ACEA) calls for adjustments in EUâs CO2 targets.
âWe need a realistic path to decarbonize the European auto industry - one that is market-driven and not punitive,â Ola KĂ€llenius, the new ACEA president and CEO of Mercedes-Benz wrote in a letter to the European Commission.
EU Commission President Ursula von der Leyen had said at the end of November 2024 that she will start a dialogue on the future of the automotive industry with carmakers and other stakeholders this month.
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Recent stance from high-profile individuals suggest that the EU Commission could suspend the 2025 targets, amendment of the law may take until the end of the year to complete
StĂ©phane SĂ©journĂ©, EU Commissionâs vice president for Prosperity and Industrial Strategy said last month that he was opposing fining automakers for failing to meet the CO2 target.
EU Commission president, Ursula von der Leyen told automotive representatives last month, that the industry is her top priority, adding that a plan to support it will be released on March 5. She added that although the system ought to be fair since some automakers have invested in meeting the targets, Europe also needs âthe necessary degree of flexibility and pragmatism.â
European countries are mostly against the fines. For instance, Italy, Czech, Austria, Bulgaria, Romania and Slovakia have expressed their concerns.
The European Automobile Manufacturersâ Association (ACEA) has suggested a âphase inâ the 2025 target, where automakers will be held accountable to 90% compliance in 2025 with full compliance in 2026 or an average compliance over 2025-2029, arguing sluggish demand for EVs.
The EU Commission could propose an amendment to the CO2 regulation, but the proposal could take months to over a year to be passed. However, given the support it could be passed by the end of the year (according to GPT Deep Research). The commission could also provide a grace period for automakers, where fines will be calculated but not fined. Scholz pointed out that finding a way against paying the fines is not âstraightforwardâ.
Yesterday, EU Commission vice-president Teresa Ribera vowed to loosen rules for companies.
âCompetitiveness is the focus right now because itâs simply a crisis. We are achieving decarbonisation in Europe through deindustrialisation.â
Election of Merz, a proponent of suspending the CO2 fines will add to this new stance.
Assessment
Considering the change in CO2 stance, I think the possibility of changing the regulation to favor automakers this year is highly likely.
Since, politicians have hinted that urgent measures need to be taken to support automakers, I expect the EU commission to give automakers the way forward on Wednesday. Since automakers have already made plans on electromobility and the EU Commission will want to support automakers without deviating much on its Green goals, itâs highly unlikely that the CO2 regulation will abolished. Therefore, I expect either elimination of the 2025 penalty at the end of the year (after amendments to the regulation are made) or average compliance between 2025 and 2029 combined with grace period on the penalties (mostly likely). If the later is used, the average penalty will be paid in 2029.
Eliminating the 2025 penalty at the end of the year will not help Volkswagen much since it will have incurred an headwind from EV price reduction.
Given the new stance, I arrived at a weighted headwind of 635 million euros in 2025, which is significantly lower than the 1.5 billion euros guided by the management.
Given the change in Volkswagenâs strategy to continue producing ICEs longer than planned, itâs highly unlikely that the average compliance between 2025 and 2029 will benefit it since it will likely continue to miss on the targets.
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EU Commission proposes automakers be given 3 years to meet the CO2 target
EU Commission president, Ursula von der Leyen said they will propose that car makers be given three years to meet the CO2 target instead of the 2025 deadline.
She said that the CO2 emission targets would remain unchanged.
âInstead of annual compliance, companies will get three years â this is the principle of banking and borrowing; the targets stay the same; they have to fulfil the targets,â says von der Leyen.
She added that the the Commission âwill explore direct support for EU battery producersâ whose conditions will be somewhat similar to the Inflation Reduction Act in the US.
Volkswagen shares gained 4% following the report.
Assessment
Pricing probably made up the largest percentage in the 1.5 billion euros CO2 headwind guided by the management since my estimate for the pooling fee was 582 million euros only. Todayâs announcement means that Volkswagen will be able to avoid reducing prices of EVs in order to attract demand and this will probably save it almost 1 billion euros in 2025 (1.5 billion euros less 582 million euros). However, in the next three years, Volkswagen will be faced with another CO2 problem if it doesnât double the share of its EVs. Doubling the share of BEVs in 2027 will be hard given Volkswagenâs change in strategy to continue producing ICEs for longer. As such, this is probably good news for the short-term only.
Hmm, the way i read this is that the targets would stay the same but car manufacturers would be able to combine three years together.
Example in principle: Letâs say company A is
they donât have to pay a fine.
If they are above their target in the three years combined they still have to pay the same fines.
Is this understanding correct? How far is Volkswagen from their targets? Do you think they can go less aggressive on EVs or need to go the same speed just to hope to be better in year 3 and avoid fines this way? According to your predictions will Volkswagen be able to avoid fines with this new system in the next 3 years?
Yes, thatâs right. But that can only work if thereâs progress in meeting the CO2 targets i.e. year over year improvement in BEV sales. For now, I donât see such traction. Volkswagen Group BEV share in Europe last year was 11.9%, down from 12.5% in 2023. To meet the target, it must increase its BEV share to around 23.3% (as per my calculation). Their decision to continue producing ICEs they had marked to terminate, makes the progress towards the target much harder.
Volkswagen brand will bring nine new models by 2027 including the ID.2 and ID.2 all priced at 25,000 and 20,000 respectively. However, considering the current EV demand situation and the fact that production usually starts slowly, I donât expect the production of these models to pick up until 2028-2029. Even if we assume that the new models will add 200,000 units to the BEV pools and the existing models add 100,000 units, Volkswagen could still incur a penalty of around 500 million euros (excluding pooling). Given that Volkswagen Group currently sells around 20 EV models, achieving sales of 200,000 units for new EVs within a short time will not be easy.
So yeah, unless they continue with discounts for EVs and even consider pooling with other EV makers, beating their target using the âbanking and borrow systemâ alone will be hard.
Alright good to know. In this case the new system might not have any positive impact for Volkswagen at all?
(The only thing which is positive then from the news is that the EU is starting to change itâs position and might ease more in the future)
Yes, the other positive thing is the planned subsidies for battery producers. Von der Leyen said the subsidy will somewhat similar to the Inflation Reduction Act in the US. The Inflation Reduction Act provides subsidy in the amount of $35 per kilowatt-hour (kWh) for battery cells and $10 per kWh for battery modules. That will be significant considering that battery costs makes up almost 35% of the cost of producing an EV.
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EU Commission said it will stick to its CO2 targets for 2035 and 2025
The EU Commission said it will stick to its CO2 targets for 2035 and 2025.
âWe stick to the 2035 targets, which means that we stick to the 2025, 2030 and, of course, the 2035 targets,â Transport Commissioner Apostolos Tsitsikostas told a press conference.
Apostolos added that the commission will review the phase-out of combustion engine vehicles in 2025 instead of 2026.
âThe European Commission will accelerate work on the preparation of the foreseen review of the Regulation. The review will be based on a fact-based analysis, taking into account all relevant technological developments, and the importance of an economically viable and socially fair transition towards zero-emission mobility,â the EU Commission statement reads.
The commission said the EU will earmark 1.8 billion euros to help secure supply chains for battery raw materials.
The CO2 regulation includes a provision that allows for the possibility of amending the legislation based on the findings of the review.
Some lawmakers expected the commission to address the issue as part of the legislative amendment scheduled for this month (the âSimplification Omnibusâ, which aims to foster a more business-friendly environment within the EU)
Assessment
The decision to address the issue in the next legislative review instead of the âSimplification Omnibusâ review scheduled for this month suggests that the commission wants more hard facts first. Therefore the upcoming review of the CO2 targets will be crucial in determining whether to adjust the targets. The extension of the compliance period from one year to a three-year span (2025-2027) is probably meant to give automakers flexibility before the review is done while todayâs announcement that the EU will stick to the targets is likely meant to maintain the commissionâs credibility in the Green goals.
Volkswagen Group is in a good position to be CO2 compliant in 2025-2027, price headwind appears minimal
Given the EU Commissionâs proposal to average the CO2 compliance between 2025 and 2027, the key question is now whether Volkswagen can absorb the price reduction for BEVs by increasing prices for ICEs, and whether the price reduction will drive more BEV sales. Assuming they achieve their target of 20% BEV share in 2025, growing their BEV share to 23% and 25.5% in 2026 and 2027 respectively will enable them to achieve CO2 neutrality in 2025-2027. The main challenge will be in 2025 since they will have to increase their BEV sales by around 49% or 250,000 vehicles. However, I now believe that they can meet the 2025 BEV share target due to their strong product portfolio and the pricing discounts (âŹ3,500) they are offering. They said their BEV order intake in Europe is up 80% year-on-year, thanks to the discounts. In 2026 and 2027, they will only have to increase BEV sales by 16% and 12% year-on-year respectively so as to achieve the average compliance. As per my estimates, reducing the prices of BEVs by âŹ3,500 will make them increase prices of ICEs by an average of âŹ700 in order to achieve price neutrality in 2025. This is a medium price increase, and they should have more room to increase prices for ICEs to compensate for their expected flat growth in sales and revenue growth of 5% in 2025. However, the extent to which they can increase prices for ICEs will also depend on the pricing trend in the industry. If competitors are not increasing prices for ICEs, Volkswagen may not have enough leeway to do so. @Magaly insights on Europe pricing trend in 2025 will help.
Has not been able to find any insights regarding new price developments in 2025 for Europe, unfortunately, there is not a established source reporting this similar to the US
Due to the petrolâs registrations decline in January, it makes me think the pricing power for everyone is also not great. But this is only 1 month, and we will need to wait for additional data.
The decline in ICE sales was probably due to automakers trying to push up sales for EVs as seen by the +34% growth in BEV sales. Thatâs why Volkswagen expects Q1 to be significantly weaker in terms of sales and margins. Have you checked what Volkswagen competitors in Europe are saying regarding the trajectory of pricing in 2025?
EU could change other aspects of the CO2 regulation, in addition to adjusting the 2025 target