A Bold Step: The EU Accelerates Targets For Zero-Emission Vehicles

The European Commission has unveiled its proposed "Fit for 55" legislation to accelerate the EU's goal of reducing greenhouse gas emissions. The new reduction target is 55% by 2030, up from the previous target of 40%. The EU has it sights set on Europe becoming the world's first climate neutral continent with net-zero emissions by 2050.

The EU's approach consists of the implementation of regulatory, tax and trade policies designed to expand the market for clean energy and accelerate the reduction of greenhouse gas emissions. Overall, the Commission proposes: (1) tightening the current EU Emissions Trading Scheme and establishing a new emissions trading system for fuel distribution for road transport and buildings; (2) taxing high-carbon imports, aviation and shipping fuel; (3) revising the Effort Sharing Regulation to set binding national greenhouse gas targets for each EU member state; and (4) strengthening carbon dioxide emissions standards for vehicles and requiring that charging capacity for zero-emission vehicles be expanded.

Implications for the Automotive Industry

The proposed measures will require that all new vehicles be zero-emission from 2035 onwards, effectively banning the sale of new petrol and diesel vehicles. While manufacturers have already been taking major steps to transition to zero emission vehicles, these proposed measures are intended to further accelerate that process. Audi, Ford and Opel have already committed to discontinuing the sale of combustion engine vehicles in the EU by 2033, 2030, and 2028, respectively. Volvo has announced its goal of becoming a fully electric car company in the EU by 2030. Daimler has just announced that it will spend more than €40 billion between 2022 and 2030 to develop battery electric vehicles and be ready for an all-electric vehicle market by 2030. Its ultimate goal is to offer customers a carbon neutral new vehicle fleet by 2039.

Others like Volkswagen and Stellantis have set ambitious targets for electric vehicle sales in the EU. Volkswagen recently announced it will stop selling combustion engine vehicles in Europe by 2035 and Stellantis has pledged to invest more than €30 billion on electrifying its vehicles by 2025. Consultancy firm AlixPartners estimates that vehicle manufacturers will invest approximately $330 billion USD globally between 2021 and 2025. 

Europe has become the world's largest market for plug-in vehicles, yet only one in nine new vehicles sold in Europe last year was electric or plug-in hybrid. To increase the demand for zero-emission vehicles and encourage production, the revised Alternative Fuels Infrastructure Regulation will require that public charging points be installed every 60 kilometres for electric vehicles and every 150 kilometres for hydrogen refuelling. The EU anticipates the installation of 3.5 million stations by 2030, and 16.3 million stations by 2050. The cost of such installation is estimated at € 80-120 billion by 2040.

To assist its member states in addressing the social impacts arising from the new EU emissions trading system, a Social Climate Fund, worth up to €72.2-billion, will be established and made available between 2025 to 2032. Funding will be provided to member states in an effort to support investments in clean energy, including new heating and cooling systems, as well as to improve access to zero and low-emission transportation. To be eligible for funding, the measures and investments must principally benefit vulnerable households, micro-enterprises or transport users.

The Road Ahead

While these proposed measures are important and far-reaching, there are many challenges ahead.

First, these measures will require ratification by all 27 EU Member States and the European Parliament in order to become law. That approval process could take approximately two years. There are anticipated to be challenges from member states, given their varied energy production capabilities. There has already been push back - France and Germany have voiced resistance to the plan, opposing the phasing out of combustion engine cars by 2035, and calling for more lenient targets and for plug-in hybrid vehicles to remain on the market for a longer period. France has warned of a loss of approximately 100,000 of its automotive jobs and the shutdown of a number of manufacturing facilities should the proposed measures be ratified.

Second, it must be remembered that the EU's 27 member states account for only 8% of global carbon emissions. While it is hoped that the EU's bold plan will elicit similar action from other countries at the next United Nations Climate Change Conference in November, the significant costs associated with investing in clean energy are an impediment for many countries. Bloomberg NEF estimates that investments in clean energy needed to reach the 2030 targets will top €1.2 trillion in the EU alone. Given these costs, it remains to be seen whether other nations will follow the EU's lead. Of particular concern is China, which accounts for 28% of global carbon emissions, but which has been slow to adopt economic measures to reduce emissions, despite pressure from its international counterparts. On the positive side, Britain has already announced a ban on the sale of new gasoline and diesel vehicles and vans from 2035, and larger diesel and gasoline trucks weighing more than 26 tonnes from 2040, or earlier if a faster transition is feasible. Canada and the United States, which collectively account for 17% of global carbon emissions, have recently announced important measures to fund net-zero initiatives and encourage consumer demand.

Third, the EU has already included an important caveat - if manufacturers struggle to meet the announced targets, the deadline for the production of zero-emission only vehicles can be postponed to 2040.

While the EU proposed measures are both encouraging and positive, it remains an open question if they will become law and, if so, maintained. There remains much to be done by governments around the world to implement measures to encourage demand for clean vehicles and to drive the transition to zero emissions in the automotive sector.

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