Europe’s lost decade: About the importance of interim targets

The European CO2 regulation for new passenger cars appears to be a complete success story. In 2020, the share of electric vehicles rose from 3% to 11%, the average type-approval CO2 emission level decreased from 122 g/km to about 97 g/km, and none of the manufacturers will be subject to noteworthy penalties as all of them are on track for compliance with the regulatory targets.

That the regulation would be a success was not always that clear, however. In reality, it was a rocky road to get to where the European vehicle market is today. Once it became clear that the European Union would implement its first regulation for new car CO2 emission levels, the rate of emissions reduction increased from about 1.2% per year to 3.5% per year by 2008 (Figure 1). At that pace, it was easy for manufacturers to comply with the first regulatory target of 130 g/km by 2015. Unfortunately, only a part of the CO2 reductions achieved during this first regulation’s time period were real, with the majority attributed to manufacturers aggressively gaming the test procedure.

Once the 2015 target had been met, manufacturers showed little interest in further reducing the CO2 emissions of their vehicles. Between 2016 and 2019, type-approval emissions even increased, from 118 g/km to 122 g/km. It was only from January 2020 onwards that manufacturers changed course. Within one year, the official new car CO2 emissions fell by 20.5%, which is more than during the entire 2008-2019 timeframe. The electric vehicle market share more than tripled within one year, easily outpacing other markets such as China and the United States.

Figure 1. Historic development of new car CO2 levels in Europe and future targets according to currently adopted policies.

This fluctuation reveals one weakness of the EU’s CO2 regulation: Unlike in the United States, the European policymakers did not set annual targets, but instead opted for five-year target intervals. As a result, the 2015 CO2 target applied during the entire 2015-2019 time period until the next regulatory target took effect in 2020. Manufacturers clearly took advantage of this regulatory weak spot by optimizing their vehicle fleet mix in 2016–2019 towards profits, largely ignoring CO2 emissions and delaying the launch of some electric vehicle models until 2020. At the same time, the breathtaking change in the market composition in 2020 highlights a strength of the manufacturers: With the right regulatory instruments in place, vehicle manufacturers can quickly adapt their product portfolio and marketing strategy in such a way that tripling electric vehicle shares and reducing CO2 more than 1% per month becomes possible.

Unfortunately, we Europeans are on a pathway to repeat our mistakes of the past. The currently adopted policies require manufacturers to reduce the average CO2 emission level of new cars by 15% by 2025 and by 37.5% by 2030, all relative to a 2021 baseline. The resulting annual CO2 reduction of about 5% is significantly lower than what manufacturers achieved in 2020 (20.5%) and close to the annual 3.5% reduction in the early years of the first CO2 regulation. These policies fail to account for the significant technological advances in the industry, with electrification enabling much faster emission reductions than combustion engine efficiency improvements. In order to be on a pathway that is compatible with the EU’s longer-term climate protection objectives, what we really need by 2030 is a reduction in average new car CO2 emission levels by at least 70%, instead of 37.5%.

But it is not only the target levels themselves that are problematic. The fact that there are no current interim targets entails the great risk that manufacturers will play games again, delivering the CO2 reductions required only at last minute, while holding technology levels constant in the intervening years. Such an approach is detrimental from a climate protection perspective because the sooner new car CO2 emission levels fall, the faster annual fleet-wide CO2 emissions decline and the higher cumulative CO2 benefits are, relative to a business-as-usual scenario.

Aside from the climate protection angle, there is a very important industrial angle to this as well. At a time when politicians across Europe are working hard to persuade companies to increase battery development and manufacturing capacities within Europe, it is of utmost importance to ensure market stability for planning the necessary investments in factories and workers. Without interim targets, such stability is lacking, as the following assessment shows.

In 2020, the new registration share of zero- and low-emission vehicles (ZLEVs) was 11%. Applying a discount factor for plug-in hybrid vehicles, the weighted ZLEV share was about 9%. Leaving any regulatory credits aside, the average new internal combustion engine (ICE) vehicle in 2020 emitted about 117 g/km of CO2 in the New European Driving Cycle (NEDC).

Manufacturers can meet the current 2025 CO2 reduction target of 15% solely by improving the efficiency of conventional combustion engines and transitioning towards mild hybrid vehicles. Emissions from ICE vehicles would decrease by about 4% per year to 96 g/km in NEDC terms. Credits for eco-innovations and an exploitation of the flexibilities of the new Worldwide harmonized Light vehicles Test Procedure (WLTP) would further help comply with the 2025 target. Following this pathway, an increase in the market share of electric vehicles would not be necessary until as late as 2029. (Figure 2).

In the case that manufacturers instead opt for a pathway focused more on electric vehicles, they could increase the weighted market share of ZLEVs to 20% by 2025. This would secure a 5% ZLEV compliance bonus that, in return, would allow them to keep the CO2 emission level of their ICEs constant with no technology improvements beyond 2020.

Manufacturers could also meet the 2030 CO2 reduction target of 37% with a share of 23%-40% ZLEVs, depending on whether they chose the ICE or EV pathway. In any case, the uptake of electric vehicles could happen at the last minute, assuming that manufacturers could manage to triple their electric vehicle shares within one year, as they did in 2020.

Figure 2. Estimated uptake of electric vehicles in Europe in accordance with CO2 target levels.

If the European regulation is adapted in such a way that CO2 emissions of new cars have to be 50% lower by 2030, instead of 37.5%, it would not change the situation in 2025. Only from 2028 onwards would manufacturers have to increase the ZLEV share to 38% if choosing the ICE pathway or 51% if choosing the EV pathway. This assumes that manufacturers would need two years instead of one to ramp up the necessary EV sales, as the required increase is more than the tripling in market share they successfully accomplished in 2020.

The resulting market disruptions could turn out to be massive. Following the ICE pathway, the share of electric vehicles could remain at the 2020 level until as long as 2029. After securing a great head start, Europe would find itself in the middle of a ‘lost decade’ during which manufacturers would opt to market electric vehicles elsewhere in the world where regulatory framework conditions provide stronger push-pull mechanisms to support the uptake of new technologies.

Adding interim targets would avoid losing these years. Defining annual target values, possibly in combination with a banking system, would seem the most optimal approach to take, but even a lighter touch could help. When the European Commission comes forward with its new regulatory proposal this summer, it should strengthen the 2025 and 2030 CO2 targets for new cars and introduce at least one interim target for 2027.

If the current 2030 CO2 reduction target of 37.5% is pulled forward to 2027, and the 2025 and 2030 CO2 reduction targets are strengthened to 20% and 50% (a scenario we assessed in an earlier paper), manufacturers choosing the ICE pathway will have to gradually increase the share of electric vehicles from 9% in 2020, to 14% in 2025, 23% in 2027, and finally to 38% in 2030. Manufacturers choosing the EV pathway will have to increase the share to 22% in 2025, 40% in 2027, and 51% in 2030.

Such a steady uptake of electric vehicles would not only be beneficial for the climate but would also help to secure investments into battery and electric components production in Europe, as well as in the upscaling of the raw material supply chain. In addition, a steadier uptake of electric vehicles would certainly facilitate the roll-out of charging infrastructure and training of skilled workers. The upcoming months will show whether we Europeans can learn from our past experience and keep up the great pace in electric vehicle uptake and CO2 emission reduction we have achieved throughout 2020.