Challenges facing NEV industry under EU carbon credits regime

As part of the EU’s efforts to reduce carbon emissions in response to the global climate crisis, the European Commission adopted Regulation (EU) 2019/631 (new passenger cars and new light commercial vehicles) and Regulation (EU) 2019/1242 (new heavy-duty vehicles).

These regulations concern emission reduction requirements and a carbon credit regime for automobile manufacturers in a bid to catalyse development of the new energy vehicle (NEV) industry. This article focuses on Regulation (EU) 2019/631 and its companion policies and commercial arrangements, which provide emission reduction obligations for new passenger cars and new light commercial vehicles.

CURRENT LEGAL FRAMEWORK

Regulation (EU) 2019/631 sets the targets for average carbon emissions in the EU automobile industry in three stages: (1) from 2020 to 2024, the regulation sets a fleet-wide target of 95g CO2/km (grams of carbon dioxide per kilometre) for the average emissions of new passenger cars, as well as 147g CO2/km for new light commercial vehicles; (2) from 2025 to 2029, new passenger cars and light commercial vehicles must have a 15% fleet-wide reduction in CO2 emissions compared to the 2021 target; (3) starting from 2030, new passenger cars and light commercial vehicles must have a fleet-wide reduction of 37.5% and 31% in CO2 emissions compared to the 2021 target, respectively.

To achieve the above-mentioned industry targets, as well as the individual targets of each automobile manufacturer (not simply equated with original equipment manufacturer [OEM], as defined by the regulation), the EU has set calculation formulas for specific emission targets in stages, with the formulas and parameters potentially varying for each stage.

In the current stage (2021-2024), new light commercial vehicles and passenger cars share the same calculation formula, albeit with slightly different parameters: Specific emissions target = WLTP (worldwide harmonised light-duty test procedure) reference target + a [(Mø – M0) – (Mø 2020 – M0 2020]

To break down the above-mentioned formula:

1. 1. WLTP reference target is equal to WLTP CO2 in 2020, multiplied by the NEDC (new European driving cycle) 2020 target, divided by NEDC CO2 in 2020. This reflects the EU having taken into account the manufacturers’ needs for a smooth transition from NEDC to WLTP;
   2. The “a” = 0.0333;
   3. “Mø” is the average of the mass in running order in the relevant target year, while Mø 2020 refers to the 2020 data;
   4. M0 is 1,379.88 in 2021 (and 1398.50 for 2022 to 2024); and
   5. Mø 2020= 1,379.88.

Given increasingly stringent EU requirements on emission reduction, even the manufacturers principally engaged in NEVs will find it increasingly difficult to meet specific emission targets as long as they are still selling fossil fuel vehicles.

Failure to meet these targets may subject automakers to massive fines. A manufacturer may be fined EUR95 (USD101) per vehicle for each gram per kilometre of average emissions in excess of the target.

Taking Volkswagen as an example, according to a report from handelsblatt.com dated 21 January 2020, it could face a fine of more than EUR100 million for failing to meet its specific emission target.

As far as countermeasures go, the authors introduce the following two approaches to address the challenge.

PUSH FOR AMENDMENTS

Since its promulgation on 25 April 2019, Regulation (EU) 2019/631 has been amended five times, with the latest draft amendment awaiting the approval of the European Council, and the latest initiative having passed the review of the expert group being released for public consultation by 14 February 2023 this year.

Each amendment has the power to induce substantial changes in automakers’ earnings and compliance obligations. Engagement of professional legal counsel could go a long way in helping automakers monitor changes in relevant regulations and interpret their impact on the company’s rights and obligations.

In addition, automakers can enlist the help of lawyers, industry associations and other institutions to push for regulations to be amended in their favour. Within the industry, Regulation (EU) 2019/631 is generally perceived to be poorly written, as the calculation formula for automakers’ carbon emissions failed to take into account many circumstances. Therefore, the European Commission has been fairly open to amendments.

In this regard, the authors have assisted clients in drafting proposals to amend EU regulations, facilitated the connection between clients and industry associations, and drafted litigation documents suing the European Commission for unreasonable content in regulations. It is feasible to maximise the interests of automobile manufacturers by pushing for amendments, whether through directly approaching the European Commission for consultation, lobbying via trade associations, or judicial remedies.

POOLING

NEV manufacturers can profit by trading carbon credits under pooling agreements. While it seems perfectly beneficial, pooling may trigger unnecessary legal hazards if compliance and business risks are overlooked.

When forming or joining a pool, manufacturers should pay due attention to the carbon emission data of the members and/or the whole pool in previous years. Although the pool information and the core carbon emission data of each manufacturer are publicly available, automakers are still advised to actively exchange relevant data with fellow pool members.

According to the European Commission’s performance in data disclosure, manufacturers will likely gain no access to any data before the deadline for annual pool filing from the commission. In addition, members in an open pool may be subject to unnecessary legal risks if they fail to keep up with all new additions. Naturally, data exchange should be done within the boundary of laws and regulations, and disclosure should not be made beyond the required scope.

No standard template for the pooling agreement is currently available in the industry. Manufacturers should engage a professional team of lawyers to prepare the agreement, or review those provided by other members. One of the authors’ prior clients can serve as a negative example, as it paid a hefty price for the business team’s unfamiliarity with contractual obligations and relevant preconditions, suffering massive potential losses for breach of contract when the gains had been “at their fingertips”.

Summit Chen is a senior partner at Dentons China. He can be contacted by phone at +86 21 5878 6985 or by email at chen.feng@dentons.cn
Wang Wufei is an associate at Dentons China. She can be contacted by phone at +86 21 2028 2403 or by email at wufei.wang@dentons.cn