The United Nations Framework Convention on Climate Change (UNFCCC) is an environmental treaty that looks to prevent man-made changes to the climate system.
Out of this comes the Kyoto Protocol where many nations have agreed legally binding targets for reducing greenhouse gases. This has introduced trading in greenhouse gases, where credits can be purchased to offset reduction targets.
As governments worldwide strive to lower their country’s emissions, there are knock-on effects to many industries, including the automotive industry.
These effects have implications on vehicle manufacturers, and implications to customers purchasing the vehicles. One would like to think that these are harmonised across nations but unfortunately, this is not so. It is a complex picture of CO2 and fuel consumption that, at the end of the day, influences model line-up and vehicle sales. For the larger markets, there are penalties that an OEM would need to pay if their vehicles do not meet emissions or fuel consumption targets.
This article reviews the EU market as an example however, the next edition of proActive will take a look at two other major markets that apply regulatory penalties, namely US and China.
Testing and Certification:
Each vehicle type must undergo emissions testing to certify for fuel consumption, CO2 and criteria emissions. This sets the ‘official’ certified figures for each vehicle. In the case of CO2, the tested value must be within 4% of the certified or manufacturer declared figure.
Penalties for OEMs in the EU
The EU is one of the regions that apply penalties to vehicle manufacturers. From 2012 onwards, legislation has been in force that states a target level of emissions for a given vehicle mass.
The fleet average mass therefore has an associated target of tailpipe emissions of CO2, in g/km. There is a penalty in Euros (EUR) per gramme of CO2 that the target is missed by. So if a manufacturer matches or betters their target, no penalty needs to be paid. There is also a staggered approach where the 1st gramme over target costs EUR 5, the second EUR 15, the third EUR 25 and the forth and over is EUR 95. From 2019, every gramme over the target will cost EUR 95.
Emissions limits are set according to the mass of the vehicle, using a limit value curve (actually, a straight line). The limit value curve is set in such a way that a fleet average of 130 grammes of CO2 per kilometre is achieved by 2015. The limit value curve means that heavier cars are allowed higher emissions than lighter cars while preserving the overall fleet average. Only the fleet average is regulated, so manufacturers are still able to make vehicles with emissions above the limit value curve provided these are balanced by vehicles below the curve.
The fleet average of 130 g/km will be phased in between 2012 and 2015. In 2012, an average of 65% of each manufacturer’s newly registered cars must comply with the limit value curve.
This will rise to 75% in 2013, 80% in 2014 and the full 100% from 2015 onwards. There is a long term target to further reduce the fleet average emissions to 95 g/km for the year 2020 however; this proposal requires approval by the European Parliament and Council to become law.
It is recognised that small volume manufacturers (SVMs) do not have the R&D budgets that large manufacturers have and they are less likely to be able to invest in technologies that will reduce tailpipe CO2. SVMs are defined as manufacturers that sell less than 10,000 vehicles in the EU and as such, they can apply for a derogation. This derogation effectively sets a higher CO2 target than the regulation based purely on vehicle weight alone, and is a much more manageable target to meet. The derogation lasts up to five years and can be re-negotiated however; it would not be taken gladly if an SVM is not seen to be making changes to reduce their overall CO2 emissions.
Many SVMs for example Porsche and Ferrari, are embracing the latest hybrid technologies and manufacturing sports cars that blend performance with reduced CO2 levels, albeit on ‘halo’ products with premium pricing.
Lotus has a current derogation which finishes at the end of 2016 and so to avoid penalties from 2017 onwards, the derogation will be re-negotiated.
There are additional details and clauses in the ruling such as ‘super credits’ and ‘eco-innovations’.
There are more incentives for car manufacturers to produce vehicles with very low emissions (sub 50 g/km) where each low-emitting car counted as 3.5 vehicles in 2012 and 2013, 2.5 vehicles in 2014, 1.5 vehicles in 2015 and then 1 vehicle from 2016 onwards.
Manufacturers that sell pure EVs will therefore have an additional means to reduce their fleet average.
For eco-innovations, certain technologies cannot demonstrate their CO2 reducing effects under the test procedures used for type-approval.
However, manufacturers can use independently verified data to be granted credits equivalent to up
to 7 g/km for their fleet if eco-innovations are in place.
EU customer taxes
The method of applying penalties is harmonised across all member states of the EU however, the taxes a customer pays are not.
This creates a complex and somewhat confusing picture, making it difficult for a vehicle manufacturer to commonise vehicle models to suit all EU tax classifications and levels. Every member state has VAT applicable at point of sale, however, the rate is not common, it varies from around 15% to up to 27%. Per country there are additional taxes that may be one-off or recurrent, based on a number of metrics that differ country to country.
In addition to the requirement to meet fleet average targets, manufacturers also need to be aware of the vehicle tax bands in different markets as the declared CO2 value can have a significant impact on sales’
The many different methods of taxation within the EU member states create a complex system that is difficult to convey in a short summary. Therefore, what follows are examples of how vehicles are taxed in a few of the major EU markets:
There is VAT applicable at a rate of 20%. There is a first registration fee that varies from region to region, based on official government tables of fiscal horsepower. There is an annual tax for keeping a vehicle which is a flat rate of EUR 160 if the tailpipe CO2 emissions exceed 190 g/km. Below this figure it is EUR 0. The largest tax a customer pays however, is in addition to those already mentioned and is from the ‘Bonus-Malus’ scheme operating in France. This is a table of fees payable based on the CO2 value of the car. For the least emitting vehicles, a tax credit is paid to a customer and for zero emitting vehicles this can be as high as EUR 6,500. Credits are paid at varying levels until 90 g/km. Between 90 g and 130 g; there is a band of zero credits or taxes. Above 130 g, the customer starts to have to pay taxes with the first band being EUR 150 and the most expensive, for the most polluting vehicles (200 g and above) at EUR 8,000.
There is VAT applicable at 20% and a first registration fee of GBP 55. Then there is the Vehicle Excise Duty or ‘Tax disc’. The rate payable is based on the CO2 emissions of the vehicle, starting at GBP 0, with bands of increasing values up to GBP 1,065 for the first year. Subsequent annual renewals are generally less expensive but still based on the 13 bands of CO2 emissions, with the most expensive for vehicles over 255 g/km set at GBP 490. The VED bands and rates are reviewed regularly by the UK Government and changes usually announced as part of the Chancellor’s annual budget statement.
VAT equivalent at 19%. Annual tax based on engine size. Another annual tax based on tailpipe CO2 for vehicles over 95 g/km. This tax is set at EUR 2 per g/km over 95 g.
VAT at 22%. There are 3 new registration fees, two of them fixed, one that varies based on the power of the car. There are 2 annual road taxes, one based on the EU poisonous emissions level, fuel and power. The second annual tax is a ‘supertax’ of EUR 20 for every kW of power above 185 kW.
What can be done to lessen the penalties and tax burdens?
It’s testament to the development skills of engineers that generally, cars have become heavier, more laden with content, yet with better fuel economy than ever before.
Downsized, pressure-charged direct injection gasoline engines are now commonplace and benchmarking studies show that when compared with ‘old’ multi-point injection, a typical benefit of 15 to
20 g/km CO2 can be seen.
Diesel engines continue to be more fuel-efficient and refined. Stop start systems are starting to be considered the norm.
There are still improvements to be had with ‘conventional engineering’ not just with powertrains but the whole vehicle as well.
Rolling resistance, aerodynamic drag and friction reduction are all being considered, with a possible 30% improvement to be gained as all of these small individual improvements start to add up.
One area where fuel economy and emissions improvements are demonstrated is with models that incorporate hybrid and electric technologies.
Toyota has been the market leader for over a decade, building up their technology from the first Prius in 1997. The development of the Prius continued with each generation of the model, each one improving on the last. It’s only (relatively) recently that the hybrid powertrain has been rolled out across their standard range of vehicles and currently Toyota have six models available with hybrid drive.
There is room in the market for many solutions and derivatives. There are examples where manufacturers choose to hybridise or electrify their combustion counterpart, usually by integrating off the shelf hybridised transmissions from ‘traditional’ gearbox manufacturers, such as ZF. There are also examples such as the BMW i3 and i8 where an entirely new sub-brand has been created as a platform for hybrid and electric powertrains.
For the EU, the CO2 regulation is well understood and harmonised for all member states.
On the other hand, the customer taxes are not harmonised at all. This makes it difficult, if not impossible, for a manufacturer to optimise a vehicle model that would suit all member states. The situation forces manufacturers to have diverse model range and vehicle specifications.
The clever bit is to be able to offer this diversity and still have the economies of scale that commonised components and systems will provide.
It can be seen with large OEMs, that they are creating additional models that further segment the vehicle classes, for example, Audi now have a model range consisting of many more models compared with their line-up just 10 years ago. A similar message is given out by BMW when their current model line-up is compared to 10 years ago.
Additionally, in-depth knowledge of current and future legislation and taxes needs to dovetail into product planning strategy so that the vehicle specifications, model line-up and marketing will all be factors in minimising the penalties for the OEMs and the tax burdens for the customers.
The next edition of proActive will review the situation in China and the US, taking a look at how the fuel consumption and tailpipe CO2 regulations are structured and how the penalties are applied. Additionally, the customer taxation will be reviewed for these markets and will bring up some interesting information, particularly in China regarding sales price points.
Writer: Phil Barker ⎢Chief Engineer for Hybrid and Electric Vehicles