Volkswagen:EU CO2 Regulation

Return to: Volkswagen | Discussions

Summary

Based on the research, we calculate that if Volkswagen were to increase its BEV share to 16.7% from 12% in 2020, it will incur a CO2 penalty of 5.3 billion euros. However, it could avoid the penalty by improving efficiency of its ICEs by 12.5% from the 2023 level and pooling in around 219,358 BEVs from another manufacturer. However, it will have to pay the cost of pooling certificate which would be around 575 million euros. On a positive side, if Volkswagen increases its passenger car EU BEV share to around 23.4% by 2025 and improves efficiency of its passenger ICE vehicles by 12.5% between 2023 and 2025, it wouldn't need any pooling to meet the EU CO2 statutory targets for 2025.

About the regulation

In 2019, the EU came up with a regulation to help reduce the emissions of carbon dioxide (CO2). The EU Commission estimates that passenger cars and light vehicles are responsible for 16% and 3% of the emissions, respectively. The regulation was amended on April 2023 to reflect the EU's ambitions to reach climate neutrality by 2035. Here are the contents of the regulation:

• Between 2020 and 2024, the regulation aims to cut the emission levels to 95 g CO2/km for cars based on NEDC emission test (115.0g CO2/km based on WLTP) and 147 g CO2/km for vans based on NEDC emission test (177.9g/km based on WLTP).
• From 2025 to 2029, it targets to reduce the emission levels to 93,6 g CO2/km (2025-2029) for cars (around 15% reduction compared to 2021 baseline of 110.1g CO2/km ) and 153,9 g CO2/km (2025-2029) for vans based WLTP test.
• 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, the EU targets to have 100% emission reduction.
• Failure to comply with the regulation will lead to a fine of €95 per g/km of target exceedance for every vehicle registered in the EU.
• Automakers are allowed to pool their fleet to meet the regulation targets.
• The regulation will come into effect on 1 July 2025.

The above targets are just reference targets. Each car maker has a difference conversion factor for 2025 based on their average WLTP and NEDC emissions in 2020. As such the EU mass adjustment figure in 2025 is expected to be reduced by 21%.

T&E estimates that carmakers would have to increase their BEV share (based on 2023 sales) to 24% in 2025 in order to achieve the emission target.

EU said it will carry out a review in 2026 to assess the progress on the move to achieve climate neutrality.

Pooling of EVs

How does pooling works

In "pooling", automakers count their fleet as one. Pooling is of two forms:

• Closed pooling- Here, different linked brands combine their fleet. For example, offsetting emissions from Porsche and Audi by combining their fleet with those of Skoda, SEAT and Volkswagen Passenger Cars.
• Open pooling-This is where automakers that are unrelated combine their fleet. For example, in 2021 Volkswagen pooled its fleet with the likes of SAIC, Geely and AIWays. On the other hand, Fiat Chrysler joined a pool with Tesla.

Examples of pooling in the past

Tesla-Fiat Pooling

• In 2019, Fiat announced that it will enter into a 1.8 billion euros pooling agreement with Tesla.
• Fiat said the pooling will run from 2020 to 2021 with two-thirds of the pooling expenses expected to be incurred in 2020 (1.2 billion euros). FCA was expected to miss its CO2 target by 29g/km in 2020.
• Its CEO said the pooling agreement will enable it to reduce 80% of the expected fines.

Volkswagen-SAIC Pooling

• MG Motors entered into a pooling agreement with Volkswagen in 2020.

How far is Volkswagen in meeting the CO2 2025 target

• Based on 2023 sales, T&E estimates that Volkswagen 24 g/km gap in meeting the 2025 regulation; hence will need to reduce EV emissions by around 20%.
• T&E notes that automakers are currently prioritizing high margin vehicles which are more polluting.
• Volkswagen could reduce the emission level by selling more BEVs, increasing the number of hybrid vehicles, reducing the number of combustion vehicles or by pooling with another car maker such as Volvo or Tesla.
• CEO Oliver Blume recently said pooling is an option for Volkswagen to avoid paying the emission penalty. He added that incentives to sell more low emission vehicles was another option.

Source: T&E

• At the end of 2023, CO2 emissions of Volkswagen's European new passenger car fleet was 119 g/km (WLTP).
• Volkswagen's new light commercial vehicles in the EU had an average emission of 187 g/km at the end of 2023.
• Volkswagen Group assumes that its new passenger cars and light commercial vehicles fleet in the EU will meet the 2025 statutory target.
• In 2021, Volkswagen's statutory target was 121.6 g/km (based on WLTP). Statutory targets are differs from the EU emission targets since it takes into account pooling. If the statutory target reduces by 15% in 2025, it means Volkswagen still has a gap of 15.6 g/km for passenger cars.
• Volkswagen said they have a statutory target of less than 100g/km and 180 g/km for passenger cars and light commercial vehicles, respectively in 2025. According to Digital Ocean, Volkswagen's specific target for passenger cars in 2025 will be 96 g/km

Source: Volkswagen 2023 annual report, page 165

Strategies that Volkswagen can employ to avoid paying fine in 2025 according to Digital Ocean

According to Digital Ocean which has taken into account T&E estimates, Volkswagen can avoid paying the 2025 penalty by employing the following strategies;

• Increasing its BEV share of unit deliveries to 24% in 2025 from 12% in 2023 and only growing ICEs slightly. Volkswagen has a strategic target of 20% BEV share worldwide by 2025 (translating to around 29% BEV share in the European area).
• Reducing the number of most polluting vehicles, increasing the share of MHEVs to 46% in 2025 (from 12% in 2023) and increasing the share of BEVs to 21%.
• Pooling with Volvo cars and increasing BEV share to 19%.
• Pooling with Tesla, increasing BEV share to 15% and increasing ICEs only slightly.
  

Criticisms and support for the EU emission regulation targets

• In February 2024, the head of ACEA Luca de Meo said the association wants no part in arguing “against the regulation." “We are not contesting 2035,” he said.
• Volkswagen CEO Oliver Blume wants the EU to soften the emission targets while retaining their plan to end the sale of ICEs in 2035. “It doesn’t make sense that the industry has to pay penalties when the framework conditions for the EV ramp up aren’t in place,” Blume said. “Depending on the framework we have in the different markets, it’s important to adjust the CO2 targets, and to think what is realistic," he added.
• BMW CEO Oliver Zipse wants a comprehensive review of the legislation. "We believe a comprehensive review of CO2 fleet legislation in the EU is essential," Zipse said in March. "By the end of 2025 the world will note that it's not that easy," he said.