Keeping it clean: Reflections on EU Regulations on CO2 Emissions for Automotive Manufacturers

Keeping it clean: Reflections on EU Regulations on CO2 Emissions for Automotive Manufacturers

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Author: Jonathan Smart

In recent weeks the US Department of Justice and U.S. Environmental Protection Agency announced a substantial settlement with the car manufactures Hyundai and Kia.

The car manufacturers agreed to pay $100 million penalty as a settlement, arising from a complaint that the car companies sold nearly 1.2 million vehicles whose design did not conform to the greenhouse gas emission requirements in the US, alongside complaints that inaccurate information had been given about the fuel economy of some vehicles.

European Regulations

Whilst the US settlement may be of only passing interest to the automotive industry in the UK, interesting parallels can be drawn to the increasing levels of regulation in Europe.

EU Regulation, 443/2009 (the Regulation) sets binding emission targets for car manufacturers selling vehicles within the EU. The aim of the Regulation was to create incentives for the car industry to invest in new technologies and the Regulation sets out a comprehensive monitoring system for assessing CO2 emissions.

Targets for CO2 emissions

Each manufacturer is given an individual emissions target using a complicated formula based on the average mass of new cars registered. The Regulation had a gradual lead in for manufacturers to achieve the initial target of 130g CO2/km.

In 2012 only 65% of manufacturers' vehicles had to (on average) achieve this target. This increased to 75% in 2013 and 80% in 2014. However, 2015 will see manufacturers need to achieve this average target across 100% of vehicle production.

The initial target of 130g CO2/km is set to reduce further so that by 2020 average CO2 production will need to reduce all the way to 95g of CO2/km, a reduction of more than 26% in the next five years.

To help achieve the average targets manufacturers are given "credits" for passenger cars with very low emissions (such as electric cars) or if they incorporate innovative technologies (that have been to be approved by the European Commission). This has led many leading manufactures to encourage sale of fuel efficient models to help meet targets and help subsidise sales of heavier SUVs and other less efficient models.

EU penalties

The EU Regulation states that if the average gram of CO2 per kilometer exceeds the target the manufacturer will have to pay an excess premium for every car registered. The existing penalties are as follows:

Breach Penalty as of 2014 
First gram of CO2 per km above target  5(EUR)
Second gram of CO2 per km above target  15(EUR)
Third gram of CO2 per km above target  25(EUR)
Each additional gram of CO2 per km above target  95(EUR)

To date manufacturers have worked hard to achieve these targets. However there will be further tests over the next few years as the CO2 targets reduce further. The pressure will intensify as the financial penalties also set to increase also. By 2020 manufacturers will be paying a penalty of #95 per vehicle they manufacture if the target is breached by as little as 0.1 of a gram.

Looking at these penalties and considering the volumes of vehicles many manufacturers produce it remains entirely conceivable that the EU could see significant financial sanctions in the next few years that mirror the settlement recently seen in the US.

What next?

The US settlement should be seen as a warning shot across the bows of automotive industry manufacturers and a reminder of the tightening EU Regulations Europe see in 2015, 2018 and beyond.

Average UK new car CO2 emissions have fallen successively for 17 years. Whilst the industry has historically done well in achieving ever decreasing targets, steeper reductions between 2015 and 2020 will require the market to embrace alternative technology to achieve the necessary reductions.

The International Council on Clean Transportation already considers the EU to have the toughest new car CO2 regulations in the world. With a 26% reduction in CO2 emissions required over the next five years it is likely that incorporating the technology necessary to achieve these targets will be an expensive task for Europe's car makers. This will undoubtedly impact the cost of new vehicles making their way on to Europe's forecourts, disturbing the automotive industry's fragile recovery.

If you are in any doubt about the applicability of the Regulation to your business, or have questions relating to it, please get in touch.

About the Author

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Jonathan Smart

Senior Associates

03700 868848

Jonathan is a solicitor in the Dispute Resolution and Compliance team in Thames Valley. He advises on a broad range of commercial disputes with a particular focus on IT disputes, the automotive sector and commercial insurance.

He has significant experience of all forms of dispute resolution, including mediation, arbitration and litigation and is experienced in supporting technically complex and document intensive disputes. Jon works with clients to look for practical solutions to disputes from an early stage and acts on all areas of commercial disputes as well as supporting the commercial insurance team.

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