Carbon Dioxide Emissions and Global Outlook
CO2 emissions are a critical factor for auto industry regulations. Emissions due to road transport are a significant share of CO2 emissions and are growing rapidly in China, which has the largest share of global CO2 emissions. CO2 and fuel consumption regulations in most countries in the world are slated to tighten considerably by 2025. In the US, there is potential that 2020-2026 regulations may be relaxed. The US EPA, NHTSA, and California’s Air Resources Board are in the process in negotiating final rules.
Although vehicle CO2 and fuel consumption regulations are tightening, the gap between real-world and drive cycle emissions is growing. In Europe, the real-world gap grew from 10% to 35% from 2002 to 2014. In the US for 2017, NHTSA adjusted fuel economy figures show a 22.8% gap between adjusted and 2-cycle emissions levels. In China, the gap between real-world driving and the CAFC certification level is reported to be 31% by iCET.
Complying with regulatory requirements is having significant impacts on automakers. Automakers are deploying technology rapidly to meet future regulatory standards. If an automaker can’t deploy technologies fast enough then they must pay penalties or purchase credits from other manufacturers. These costs of compliance can be high. Between 2011 and 2015, six OEMs traded NHTSA CAFE credits which ITB estimated were worth $830M. The ITB Group also estimated that FCA bought $290M worth of credits from 2010-2014. FCA purchased Tesla’s EPA GHG credits in 2015/16 that were valued at $132M. Toyota, FCA, and Ford purchased most of Tesla’s California ZEV credits for 2016 and 2017, which had an estimated value of $200M. Furthermore, the costs of compliance are expected to increase. ITB forecasts that several OEMs will use up their emissions credit banks by the 2020 timeframe and therefore will need to deploy technologies at higher rates or risk paying fines.
There are many technology pathways to meeting future emissions and fuel consumption regulations. First are conventional powertrain technologies. These technologies offer significant further benefits at relatively modest costs. A good example is the 2018 Toyota Camry redesign. This conventional vehicle, without a start-stop system, offers an 18.6% reduction in emissions vs. the previous model. The set of advanced technologies used for the Camry is shown in the exhibit below. The 2018 Camry meets 2022 US emissions targets and with incorporation of A/C and off-cycle credits would be able to meet 2024 targets. As shown below, only a small portion of 2017 conventional gasoline vehicles can meet 2022 standards and only electrified vehicles can currently meet 2025 standards. ITB expects that a significant share of conventional vehicles will be able to meet 2025 US standards and electrified vehicles will be used to offset conventional vehicles which are not capable of meeting emissions and fuel economy standards.
A second pathway is powertrain electrification. In Europe, mild hybrid powertrains are a mainstream direction to achieve the 95 gCO2/km 2021 reference standard and the proposed 15% further reduction by 2025. European manufacturers will utilize plug-in vehicle “super credits” to help comply with these world leading targets. In China, New Electric Vehicles (NEVs = PHEV, BEV, FCEV) have been chosen as a key way to reduce transport related emissions. NEVs can reduce Corporate Average Fuel Consumption (CAFC) compliance values by up to 60%. Furthermore, China has set NEV credit quotas starting in 2019. In the United States, California’s Zero Emissions Vehicle (ZEV) standard, which is followed by nine other states representing about 30% of the US market, sets quotas for such vehicles, and is driving the development of battery electric vehicles.
A third important pathway for meeting regulations are A/C and off-cycle technology credits, which have been growing rapidly. Some of these technologies have a high fundamental value and the credit value may offset a significant portion of a technology’s cost. These technologies provide real-world benefits in areas like passenger comfort and rapid systems warm-up which are not recognized by regulated drive cycles. The US has the most mature A/C and off-cycle credit regime. ITB estimates that 18% of US light vehicle fleet compliance could come from technology credits in 2025. Companies like JLR and FCA which need the most credits are already using technology credits worth over $1000 to address up to 8% of their emissions compliance value. The European eco-innovation technology credit scheme is currently limited to powertrain technologies, but could be expanded to passenger comfort technologies after 2025. China is also developing A/C and off-cycle technology credits, but such credits are uncertain and secondary to China’s NEV “super credit” scheme.
Regulations are affecting OEMs differently. Different regions have unique regulatory regimes and the US standards are uncertain. To learn more about how regulations may impact your business or how you can leverage regulations for growth, please contact the ITB Group.