Off the hook: Europe's current ZLEV proposal would allow CO2 emissions of new combustion engine vehicles to increase

Posted Thursday, 21 June 2018, 09:22

Peter Mock, Nic Lutsey, Uwe Tietge

In order to promote the uptake of electrified vehicles, the European Commission included targets for zero-and low-emission vehicles (ZLEV) in its recent regulatory proposal for the time period up to 2030. Even though the targets are an innovative approach for the EU standards, they are at best toothless if implemented as proposed, and at worst could actually undercut the climate benefit of the regulation. For the ZLEV targets foreseen are voluntary for manufacturers, with no penalties in case of non-compliance and therefore little effect on actual product planning. But if the targets were made binding as presently conceived, that would provide an incentive for manufacturers to increase the average CO2 emissions of whatever combustion engine vehicles they continue to build. Fortunately, with some slight modifications to the original proposal the EU regulators could effectively promote both fuel efficiency and electrification at the same time.

One of the key objectives of the European Commission's regulatory proposal, which we summarized here, is to support the production and uptake of electric vehicles in the EU. In pursuit of that aim the proposal includes ZLEV targets alongside the CO2 standards. The proposed CO2 standards require the new vehicle fleet to reduce gram-per-kilometer CO2 emissions by 15% from 2021 to 2025 and 30% from 2021 to 2030. The ZLEV targets essentially provide leniency on the CO2 standards (by up to 5%) for any automaker that surpasses 15% electric vehicles in 2025 or 30% in 2030.

The figure below shows how this system would work in theory. The more electric vehicles a manufacturer brings to the market, the higher the allowed CO2 emission level of its remaining (combustion engine vehicle) fleet. And, going from 15% to 20% electric vehicles in 2025 or 30% to 35% in 2030, the allowable level of CO2 for the non-electric vehicle fleet jumps upwards, representing the leniency built into the system as an incentive for manufacturers to meet the ZLEV targets.

Electric vehicle shares 2025 and 2030

This sounds sort of reasonable, to give up 5% of CO2 benefit to launch the electric vehicle market, right? But that is not how it will work in practice, because of two issues.

The first issue is that the ZLEV targets are voluntary. This means automakers will be influenced only to a very limited extent in how many, or how few, electric vehicles they actively market. Some companies, such as BMW, Nissan, Renault, Mitsubishi, Mercedes, and Volkswagen Group, have announced plans to sell 15%–30% electrified vehicles by 2025. However, without binding regulation we have no guarantee that actual investments will follow and that any of the announcements will become reality, as the proposed 2025 and 2030 CO2 targets could be met with far fewer electrified vehicles than foreseen by the ZLEV targets.

The second issue is that the ZLEV targets and CO2 requirements as currently proposed are simply inconsistent with one another. Manufacturers that are anywhere near the ZLEV target would not have to reduce CO2 emissions of their remaining combustion vehicles. If an automaker met the targets by selling 20% zero-emission vehicles in 2025 and then 35% in 2030, it could essentially keep the remaining combustion-powered majority of its fleet above 102 g/km through 2030. That is already the case even without the ZLEV credit, simply because the tailpipe CO2 emissions of ZLEV count as zero or close to zero in the context of the EU vehicle regulation. The credit amplifies the effect: with it, the same company could increase combustion vehicles’ CO2 emissions to 107 g/km in 2030. That is, not only would this company need to make few efficiency improvements, it could actually significantly increase the CO2 emissions of its combustion engine vehicles from 2021 to 2030.

Permitting combustion vehicles to emit more CO2 in 2030 than in 2021, essentially letting them off the hook, would leave technology potential untouched and fail to promote cost-effective available technologies. There are simply too many low-cost technologies in engines, transmissions, lightweighting, etc for it to make sense that automakers should do nothing for nearly a decade to improve the fuel efficiency of combustion vehicles. To be clear, we are not referring to innovative combustion engine technologies that would require significant investments into R&D, but to mature technologies available off-the-shelf to automakers that have also decided to go heavily for electrification.

Even though the current proposal’s CO2 and ZLEV targets do not make much sense together, the framework could be sensible if two straightforward modifications are made.

First, penalizing manufacturers that fail to meet the ZLEV targets, not only rewarding manufacturers that do, would ensure that electrification becomes an integral part of each manufacturers' product planning process, including those manufacturers that have not yet committed to a future electrification of their fleet. This option was described as a two-way adjustment in the European Commission's impact assessment and was actually the preferred option for the design of the ZLEV provision.

Second, a minimum CO2 improvement backstop seems necessary to ensure that average CO2 emissions of combustion vehicles continue to fall after 2021. Requiring a 1%–2% per year annual CO2 reduction is a reasonable business-as-usual improvement (in line with the annual CO2 reduction rate before the introduction of the first vehicle CO2 standards in Europe) that even companies focused on electric vehicles could attain, considering all the cost-effective combustion-efficiency technologies in the market. The figure below illustrates the effect that this small modification, introducing a backstop, would have. The CO2 emission level of the combustion-engine fleet would not be allowed to rise indefinitely with increasing shares of electric vehicles. Instead, it would level out at about 88 g/km in 2025 and 79 g/km in 2030—very reasonable levels, if you consider that a Toyota Prius hybrid vehicle today emits only about 70–80 g/km of CO2.

Electric vehicles 2025 and 203 with CO2 standard

However, with the introduction of a backstop it becomes even more evident that the ZLEV targets currently are not in line with the overall CO2 reduction ambition of the proposed regulation. The chart above shows that in scenario (a), the European Commission's proposed reduction targets of 15% by 2025 and 30% by 2030, no manufacturer would in practice have an incentive to meet the ZLEV targets. This is because a lot fewer electric vehicles would be sufficient to meet the overall reduction target. In 2025, an electric vehicle share of less than 10% would meet the reduction target (compared to the ZLEV target of 15%–20%), and in 2030 the required share is still less than 20% (compared to the target of 30%–35%).

This picture completely changes if the required overall reduction level is increased to 30% by 2025 and 50% by 2030, as shown in scenario (b). These are the minimum ambition levels at which the proposed ZLEV targets would work in practice, while at the same time preventing the remaining combustion engine vehicles from falling back behind the 2021 business-as-usual technology development. And, of course, increasing the ambition level would also help to put the transport sector more in line with Europe’s climate change mitigation goals, as we pointed out in an earlier blog post.

Might the Commission embrace such changes? Our own reading of the Commission proposal and its analytical support documents certainly shows an openness and justification to do so. The accompanying impact assessment of the European Commission already concludes that a two-way adjustment for the ZLEV targets is the preferred option. And with respect to the overall CO2 reduction level, the three Members of the European Parliament leading the discussions there all recommended in their respective reports to increase the ambition level from 30% by 2030 (as originally suggested by the European Commission) to 50%–75% CO2 reduction by 2030. We expect that the European Parliament and also the EU member states will each arrive at a joint position after the summer break, so that by October the final negotiations between Commission, Parliament, and member states would begin. We hope that a strengthened ZLEV target system will be part of those negotiations, to promote both efficiency and electrification of new vehicles at the same time.