2016

Swati Singh, Piyush Virmani, & William Tyler

Business in The European Union

3/25/2016

European Environmental Regulations in the Automotive Industry

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Abstract Cars are currently responsible for about 12 % of all CO2 emissions in the EU. Road transport contributes about one-fifth of the EU's total emissions of carbon dioxide (CO2), the main greenhouse gas. In view of the fact that road transport is one of the largest contributors to greenhouse gas (GHG) emissions in the EU, the EU regulation on passenger cars aims to reduce these emissions by setting limits for ‘new’ passenger cars. The good news is that the original 2015 target of 130 grams of CO2

emitted per kilometer was not only met, it surpassed expectations by five grams. The bad news is that getting all countries moving in lockstep with union wide policies. The purpose of this report is to analyze the effectiveness of the mandate to reduce CO2 emissions through three pillars: Manufacturers, States and Consumers.

Introduction

Air pollution impacts human health, responsible for global warming and damages ecosystems. New scientific findings show that even lower concentrations of air pollution have an effect on human health if citizens are exposed steadily to these low concentrations. More over a recent review of evidence on health aspects of air pollution confirmed that effects on human health from air pollution can occur when concentration levels are below the thresholds established by the WHO Air Quality Guidelines. Up to a third of Europeans living in cities are exposed to air pollutant levels exceeding EU air quality standards. And around 90% of Europeans living in cities are exposed to levels of air pollutants deemed damaging to health by the WHO’s more stringent

guidelines. EU legislation limits the pollutants and sets maximum levels for concentration of these pollutants in the air.[1] The origins of this regulation lie in a strategy adopted by the EU in 1995 aimed at reducing CO2 emissions through three pillars: a voluntary commitment by car manufacturers to reduce emissions; promoting fuel-efficient cars through fiscal measures; and consumer information achieved through labels showing a car’s CO2 emissions. [2] Germany, Sweden and Poland currently have the highest carbon emission output on new cars while France, The Netherlands and Denmark have the lowest output. [Figure 1] The difference between the countries with high output and low output is two-fold. The first difference is tax structure. Germany, Sweden and Poland do not have an aggressive tax structure for the purchase of non-electric cars while countries like France, The Netherlands, and Denmark do. There are also no incentive programs on electrical vehicle purchases in high carbon emitting countries. The other reason is industry trends. Germany is home to some of the largest automobile manufacturers in the world (Audi, Daimler, Opel, and Volkswagen). Sweden has its own local car brands as well (Volvo and Saab). While Poland is not home to major car companies, it is like other typical Eastern or Central European countries because it is a rapidly growing economy with a new middle class eager to purchase cars. The Netherlands, France, and Denmark don’t have major automotive brands stemming from their nations and they are more developed-focusing more on the service sector rather than manufacturing.

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Brief look of the governance in Germany, Poland and Sweden for Plug-in Vehicles In 2015, Volkswagen was caught installing defeat devices which manipulated emissions policies, it not only highlighted the corporate governance of Volkswagen; it highlighted the fact the relationship German automotive manufacturers have with the German government. According to the European Automotive Manufacturers Association, “The annual circulation tax for cars registered as from 1 July 2009 is based on CO2 emissions. It consists of a base tax and a CO2 tax. The base tax is 2.00 Euros per 100 cc (petrol) 9.50 Euros 100 cc (diesel) respectively. The CO2 tax is linear at 2.00 Euro per g/km emitted above 95 g/km. Cars with CO2 emissions below 95 g/km are exempt from the CO2 tax component.” While the tax policies incentivizes individuals to purchase cleaner cars, there are no incentives for German auto manufacturers to produce greener cars. In May 2010, under its National Program for Electric Mobility, Chancellor Angela Merkel set the goal to bring 1 million electric vehicles on German roads by 2020.[3] However, the government also announced that it will not provide subsidies to the sales of plug-in electric cars but instead it will only fund research in the area of electric mobility.[4] . In March 2015, the Federal Government scrapped a plan to provide tax breaks to auto companies interested in producing electric cars because the government stood to lose revenue. A new proposal aims to provide up to 5,000 euros in rebate to the German car buyers but the automakers might have to foot 40% of the bill.[5]

Poland currently has no tax for fossil fuel consuming automobiles and is considered to be the most polluted country in Europe. While there are talks about taxing new car purchases based on emissions levels in Poland, nothing substantial is being done to do this. Poland is also home to many automakers and has benefited from the foreign direct investment of companies like General Motors and Opel. As it happens, the demand for new cars in Poland is by and large weak because consumer prefer cheaper used cars. Older cars may not necessarily meet emission standard goals that the European Union has for 2021. Regardless of whether Poland implements a new tax regime for car consumption, its desire to catch up to its Western European neighbors economically is probably preventing a new tax initiative from being passed. According to the European Automobile Manufacturer’s Association the Swedish tax on new cars is as follows: “The annual circulation tax for cars starts at 111 g/km of CO2 which starts at four Euros for gasoline cars and is multiplied by 2.37 for diesel cars.” There is a five year tax credit for greener car as and an extra tax on cars made prior to 2008. The tax is passed down to the consumer but the manufacturer in Sweden has no tax on fossil fuel consuming vehicles and no tax break on producing ecofriendly vehicles. In September 2011 the Swedish government approved a 200 million kr program, effective starting in January 2012, to provide a subsidy of 40,000 kr per car for the purchase of electric cars and other "super green cars" with ultra-low carbon emissions (below 50 grams of carbon dioxide per km). There is also an exemption from the annual circulation tax for the first five years from the

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date of their first registration that benefits owners of electric vehicles with an energy consumption of 37 kWh per 100 km or less, and hybrid vehicles with CO2 emissions of 120 g/km or less.[6] This resulted in a sharp increase of sales of EVs but it also led to the exhaustion of the funds in two years times with over 5000 cars registered. The government has shared no plans to fund the scheme further.

Brief look of the Governance in Netherlands, Denmark and France on Plug-in Vehicles In 2013, the Netherlands had the lowest CO2 emissions from new cars in the European Union, because of its tax regime favoring fuel economy and low-carbon vehicles. In 2008, they also had the second best overall reduction across Europe since the introduction of binding CO₂ limits for new cars. This performance is largely due to a registration tax that is steeply differentiated by fuel economy, as well as exemptions from circulation tax for very low-carbon vehicles including electric cars. The Netherlands also has a strong differentiation against CO₂ emissions of the taxation of ‘benefit in kind’ payments for company cars, which were further revised downwards in 2012 and subsequently continue to incentivize the purchase of the lowest-emitting cars.[7]

According to the European Automotive Manufacturers Association, Cars emitting maximum 50 g/km are exempted from the annual circulation tax.[8] France levies both automobile acquisition tax at the time of purchase and automobile tax throughout the course of vehicle possession. Rates of automobile tax are calculated according to the horsepower of the vehicle as

determined by a formula in the Tax Law, which takes into account the amount of CO2 emissions. For electric vehicles, natural gas vehicles, and LPG vehicles, local governments are authorized to give full or partial tax credits. Also, owners of these vehicles are allowed a special write-down on income tax and corporate tax.[9]According to the European Automobile Manufacturer’s Association the French tax on new cars is as follows: Under a bonus-malus system, a premium is granted for the purchase of a new electric or hybrid electric vehicle (car or LCV) when its CO2 emissions are 110 g/km or less. The maximum premium is € 6,300 (20 g/km or less). An additional bonus of € 200 is granted when a vehicle of at least 15 years old is scrapped. A malus is payable for the purchase of a car when its CO2 emissions exceed 130 g/km. The maximum tax amounts to € 8,000 (above 250 g/km). 2) Cars emitting more than 190 g/km pay a yearly tax of € 160. The company car tax is based on CO2 emissions. Tax rates vary from € 2 for each gram emitted between 50 and 100g/km to € 27 for each gram emitted above 250g/km.[10] According to the European Automobile Manufacturer’s Association the Danish tax on new cars is as follows: The annual circulation tax is based on fuel consumption. - Petrol cars: rates vary from 580 Danish Kroner (DKK) for cars driving at least 20 km per liter of fuel to DKK 20,160 for cars driving less than 4.5 km per liter of fuel. Diesel cars: rates vary from DKK 240 for cars driving at least 32.1 km per liter of fuel to DKK 30,360 for cars driving less than 5.1 km per liter of fuel. Registration tax (based on price): An allowance of DKK 4,000 is granted for cars for every kilometer in excess of 16 km (petrol) respectively 17.5 km (diesel) they can run on one liter of fuel. A supplement of DKK 1,000 is payable for cars for every kilometer less than 16 km (petrol)

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respectively 18 km (diesel) they can run on one liter of fuel.[11]

By 2020, Denmark is planning to tax electric cars like other vehicles. According to provisions in the 2016 budget draft, the country is also thinking of make diesel vehicles more attractive by canceling a pollution levy. The government is defending these measures by saying that they will help in saving business money and creating more jobs.

European Mandates on Taxing Cars- Consumers & Manufacturers At this time there is little harmonization between commission wide policies and domestic policies regarding the tax of new cars. This is the reason as to why goals between individual nation states’ taxation policy varies greatly from country to country. In fact, the only thing EU member states can agree upon are taxes on imported cars from outside of the EU that was ratified in the early 1980s.

Part of the difficulty in implementing European Union wide reforms on taxing new cars is that the local states, for better or worse, have taken the taxation upon themselves. Trying to overturn numerous tax policies of individual member states is quite complex. Also, each nation has its own agenda. Countries like Poland, Sweden, and Germany rely heavily on the auto industry for tax revenue and job creation. Going after the automobile industry in member states such as those would be challenging at the very least.

Impact and Evaluation of Emissions Policies

Consumers, manufacturers and local governments will feel the biggest impact of these automotive policies. Consumers could see prices of cars increase and have been adapting new ways to overcome these increased prices with car sharing schemes. On the EU level, automotive manufacturers could face fines and increased taxes for noncompliance to emissions levels but for the time being, they are being sheltered by local governments. Local governments could respond to these EU policies by increasing public transportation and creation of initiatives which will move public transport from being fossil fuels based to green energy based. Consumers To help drivers choose new cars with low fuel consumption, EU Member States are required to ensure that relevant information is provided to consumers, including a label showing a car's fuel efficiency and CO2 emissions. The car labeling directive aims to raise consumer awareness on fuel use and CO2 emission of new passenger cars. By doing so consumers should be incentivized to purchase or lease cars which use less fuel and thereby emit less CO2.[12]

Consumers are also turning towards options for energy efficient mobility through car sharing. For example, in Europe, MOMO Car-sharing projects sought to establish and increase car-sharing as part of a new mobility culture. Car-sharing combined with alternative transport modes offers many people a more intelligent and resource-efficient transport solution than car ownership. With car-sharing, transport can be organized more rationally and more energy-efficient. They were also raising awareness about car-sharing and made

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recommendations on how to develop and establish new car-sharing offerings. As a direct result of the project around 4000 people and nearly 600 companies joined car-sharing services.[13]

Manufacturers This new policy stimulates innovation and maintain the competitiveness of the EU automotive industry by creating a market for technologies that improve fuel efficiency. They deliver substantial green- house gas savings at a negative societal cost; the money saved by drivers on fuel is spent in other economic sectors stimulating local economies and creating jobs.[14] One car manufacturer observed that in 2003, environmental regulation was seen as a threat not an opportunity. Also the challenge lies in the attitude of the car makers. With a well-established market share in traditional and premium car manufacturing, there is often a hesitancy to take risk to face failure. This could also be the reason why the European Automakers are not in the top 5 EV selling companies in the world.[15] Repeated claims by ACEA (the European representative organization of carmakers) that regulation will devastate their competitiveness have been repeatedly shown to be not supported by any evidence. For example; in 2007, Sergio Marchionne, then President of ACEA and CEO of Italian car maker Fiat, declared that, the recent proposal from the European Commission, which demands a mandatory target for new cars of 130 grams CO2 emissions per kilometer by 2012, is too costly and will force the industry out of Europe. 11 Despite these claims, Fiat and every other European carmaker reached its 130g/km target early.[16] But it has definitely costed their competitiveness in the international

market due to their inability to bring down their costs and range capabilities. State government The countries that we looked at: Poland Germany, Sweden, Netherlands, Denmark and France have their own take on the European Union’s desire to reduce fossil fuels. In the highest polluting countries, we find that there is little being done at the local level. Countries like Denmark, one of the lowest polluting countries in European terms of automobile pollution have been proactive in tackling automobile pollution. Not only is Denmark taxing the fossil fuel cars, they are also taxing electric cars because the energy used to charge the electric cars come from a non-green source.

The European Union has been focusing on the beginning (auto manufacturer) and end (customer) of the automobile supply chain in regards to implementing regulations and taxes; whether the European Union policy has teeth to implement these new measures is of course, a question that needs to be answered.

Recommendation & Conclusion

There are two factors that will effect environmental policies of automobiles in the EU in the future. Those factors include taxes/tax incentives for electric vehicles and balancing the sustainable policies that the European Commission implements with maintaining a business friendly environment for car manufacturers.

As mentioned above, the current tax structure is a burden to consumers who have no control over what cars are being manufactured. The manufacturers are not taxed based on emissions but the consumers

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are. Not only is that unfair, it stifles innovation especially in countries where there is a tight relationship between car manufacturers and the local government. One example that the EU as a whole and Germany, Poland, and Sweden could follow is that of the United Kingdom. In 2011, the United Kingdom rolled out the “Plug-in Car Grant” which provides a 25% grant towards the cost of new plug-in cars capped at £5,000. In 2015, the grant instituted a 35% discount on the vehicle’s recommended retail price if the car exceeds £5,000 (If an electrical car costs £30,000, then the discount would be (5000X.35)-30,000). The Plug-in Car Grant is effective because of its ability to reduce costs for both the manufacturer and the consumer.

The current method used to encourage consumers to purchase pricey electric cars is via tax incentives and increases. This has proven to be a challenge because some governments rely on the automotive industry for a chunk of their tax revenue. They are afraid taxes and regulations will hurt automotive manufacturers operating in their country and repel potential investors in the industry. What we would recommend is a European Union wide car scrappage program. This would stimulate the automotive sector while improving the environment.

One country that has instituted a scrappage program is Spain. In 2015 alone, new car purchases rose 21%. Under the Spanish policy, car owners who scrap their cars and buy a new one received 2,000 euros, half of which is provided by the government and half from the carmaker. In 2009, France and Germany both implemented similar programs that were also successful.

This car scrappage program would be ideal for Poland because they house many car manufacturing facilities but the cars are usually exported to its fellow member states because Polish consumers prefer purchasing used cars which don’t necessarily meet the European Commission’s emission curbing goals.

Also not all member states followed suit of incentive programs to increase the sales of EV. This shows the high disparity in the economic capabilities of the states to support the European Commission mandate.

Today the cost of EVs is higher than that of traditional fossil fuel based cars. This makes the offer unattractive to the consumers. Also the European carmakers are suffering from an intensive competition by foreign car makers. The European Commission needs to fuel innovation amongst the car makers by sponsoring initiatives in battery manufa-cturing and other technologies to lower the costs and meet the expectations of the consumers. Today the innovation costs are borne by the car makers who are less responsive since their traditional cars sales is still a priority for them. Although stricter regulations have forced them to meet the emission standards but the car makers are not proactive and inspired enough to take a leap.

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