[Co-Author: Ranulf Barman]
New mandatory UK CO2 emissions targets are set to come into effect from 1 January 2021. Whilst these rules replicate the previous EU emissions targets and penalties, their effect when assessed on a UK only basis may result in radical shifts in the types of vehicles being offered for sale in the UK.
Mandatory European CO2 emissions limits have been in place since 2009 for new cars, and since 2011 for new vans. Regulation (EU) 2019/631 (the "Regulation") is the latest legal instrument setting out those emissions limits for new passenger cars and vans, with stringent targets and penalties applicable to manufacturers in 2020.
The 2020 EU fleet-wide CO2 emissions limit is set at:
- 95 g CO2/km for new passenger cars; and
- 147 g CO2/km for vans.
To put these limits into context, according to EU data, average fleet emissions in 2018 were 120 g CO2/km for passenger cars, and 158 g CO2/kg for vans, respectively. More stringent limits are envisaged by the Regulation in 2025 and 2030. Many automakers are therefore already faced with having to alter their strategies in order to avoid non-compliance with EU limits.
The penalty for non-compliance with these mandatory CO2 limits is a fine of €95 for each g/km of excess per vehicle registered (for new passenger cars and for new vans); this is a marked increase from previous penalties and has led one commentator to predict that total fines under the EU regime could amount to €33 billion in 2020 alone.
The picture looks even more daunting for the UK market in particular, the love affair with Sports Utility Vehicles (SUVs) and concurrent decline in the popularity of diesel models (which produce lower CO2 than petrol versions) seeing the UK's average fleet emissions hit almost 128 g CO2/kg (cars) in 2019. Manufacturers have so far been able to offset such high values against their better emissions records in certain other European countries, such as Italy, Norway and the Netherlands, where smaller, and increasingly electric vehicles, are favoured.
However, at the end of the Brexit transition period (currently scheduled for 31 December 2020), a manufacturer's vehicle emissions record in the UK looks set to stand alone, the option to offset broader EU emissions no longer being available. Coupled with the UK Government's plans to adopt the same CO2 targets and fine structure as the EU, this could see a radical shift in the types of vehicles being offered for sale in the UK, as fines make it unsustainable from a commercial and reputational perspective for manufacturers to continue selling the same higher-polluting vehicles that UK consumers have been buying to date.
Aside from decarbonising vehicle fleets, which will be a key aim for manufacturers, one option available and which is envisaged by the Regulation, is the forming of open pooling arrangements with other manufacturers. Subject to competition law, manufacturers are allowed to enter into open pools with other automotive manufacturers in order to combine and pool their fleet's emissions. Where manufacturers form an open pool they are deemed to have met their targets under the Regulation provided that the average emissions of the pool as a whole do not exceed the specific emissions target for the pool.
As well as providing an opportunity for manufacturers to avoid substantial fines for non-compliance, open pools represent an attractive commercial opportunity for manufacturers with better emissions profiles since they can commercialise their surplus emissions headroom; in effect, the higher emitting manufacturer can pay the lower emitting manufacturer to pool emissions, the fees representing better value than a potential fine and the associated negative publicity. But open pooling relies on there being manufacturers in the market with surplus emissions headroom to sell, which may not be the case if market wide average emissions are above the limits.
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