The new European vehicle CO2 emissions targets and opportunities for manufacturers to trade CO2 emissions credits

1. Overview

In Europe vehicle manufacturers may enter into partnerships with other vehicle manufacturers to consolidate their fleets for emissions compliance purposes through pooling arrangements. This can help manufacturers of internal combustion engine vehicles to avoid receiving CO2 emissions compliance fines from the European Commission. This can also present a lucrative opportunity for manufacturers of electric vehicles (“EVs”) to sell CO2 emissions credits to the pool.

Examples of such pooling agreements include those between Fiat Chrysler Automobiles (now Stellantis) and Tesla, Toyota Motor Europe SA with Mazda Motor Corporation and Volkswagen with SAIC Motor Europe B.V. Such consolidation is possible between fleets of passenger cars or between fleets of new light commercial vehicles for which there is separata parallel legislation. However, it is not possible for manufacturers to pool new passenger cars with new light commercial vehicles.

2. 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 years 2025 to 2029 is to be reduced by 15% compared to the target for 2021 (which was 95 g CO2/km). From 1 January 2030 the target will be equal to a 55% reduction of the target in 2021. From 1 January 2035 the target will be equal to a 100% reduction of the target in 2021.

(b) New light commercial vehicles (vans): The indicative average EU fleet-wide emissions target for new light commercial vehicles for the calendar years 2025 to 2029 is to be reduced by 15% compared to the target for 2021 (which was 147 g CO2/km). From 1 January 2030, the target is to be equal to a 50% reduction of the target in 2021. From 1 January 2035 the target will be equal to a 100% reduction of the target in 2021.

(c) Heavy-duty vehicles (“HDVs”) (lorries, buses and coaches): Emissions of HDVs registered in the EU will be measured and monitored in a standardized 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 HDVs from 2025 to 2029 equating to 44.83 g/tkm. For reporting period 2030 onwards, the reduction will be 45% equating to 29.01 g/tkm. For reporting period 2035 onwards, the reduction will 65% equating to 18.46 g/tkm. For reporting period 2040 onwards, the reduction will be 90% equating to 5.275 g/tkm.

3. Adjustment of the Specific Emissions Target for each manufacturer by the European Commission

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

4. Super Credits

From 2025 to 2029 manufacturers of passenger cars and new light commercial vehicles will be given additional incentives to put on the European market zero and low-emission vehicles (“ZLEVs”) (vehicles with emissions between 0 and 50 g CO2/km) if their share of new ZLEVs in the fleet registered in a given year exceeds 25% for passenger cars and 17% for vans. A one percentage point exceedance of the ZLEV benchmark will increase a manufacturer’s CO2 emissions target (in g CO2/km) by one percent with the target relaxation capped at a maximum of 5%.

5. Penalties and potential value of CO2 emissions credits

(a) Passenger vehicle and new light commercial vehicles: There is currently 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 maximum potential value to an EV manufacturer of the sale of CO2 emissions credits to a purchaser under a CO2 emissions pooling arrangement could hypothetically be €95 multiplied by the number of vehicles registered by that EV manufacturer in the calendar year multiplied by the distance in CO2 g/km to the Specific Emissions Target for that EV manufacturer for the calendar year.

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

In the future, the value of these credits to EV 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.

(b) HDVs: For HDVs the new rules envisage direct trading between manufacturers as opposed to CO2 emissions credit pooling arrangements.

In the case of the transfer of zero-emission HDVs between manufacturers not belonging to a group of connected manufacturers, the number of zero-emission HDVs transferred to a manufacturer may not exceed 5 % of all its new HDVs registered in a given reporting period.

HDV manufacturers will be obliged from 2025 to 2029 to pay a penalty of €4250 to the European Commission for each subsequent CO2 g/tkm per registered vehicle of excess emissions. From 2030 onwards, HDV manufacturers will be obliged to pay a penalty of €6800 to the European Commission for each subsequent CO2 g/tkm per registered vehicle of excess emissions.

6. 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.

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, the total number of vehicles registered, and information strictly related to the formation of a pool.

7. Strategy

EV manufacturers could consider advertising the option for other manufacturers to join an open pooling arrangement by using the European Commission’s CIRCABC system. They could also consider using a third party, such as a law firm, to pro-actively approach potential pooling partners on a no-names basis with an investment teaser which explains the rules and opportunities arising from a pooling arrangement. If this piques the interest of a potential pooling partner, then the parties could sign a non-disclosure agreement and discuss financial modelling.

8. Conclusion

This is potentially a very lucrative opportunity for EV manufacturers. For example, Fiat Chrysler (now Stellantis) previously paid hundreds of millions of Euros to Tesla to avoid getting hit by European Commission fines for failing to meet European vehicle CO2 emissions targets.

Get in touch

Lawrence Freeman
Senior Counsel, Bird & Bird, Brussels

lawrence.freeman@twobirds.com

About the author: Lawrence Freeman is a Senior Counsel based in Bird & Bird's Brussels office with over 30 years of experience handling issues of European regulatory, competition, and commercial law both in private practice and in-house roles.

Lawrence joined Bird & Bird in 2018 after having spent 5 years as European Counsel of Tesla, Inc. where he founded the European legal department. At Tesla Lawrence advised both on day-to-day and on highly strategic legal and regulatory issues and developed a unique expertise in regulatory issues regarding electric, connected and autonomous vehicles.

Lawrence is admitted as a Solicitor (England and Wales) and is a member of the Brussels Bar.