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2016

European Environmental Regulations in the Automotive Industry

Swati Singh, Piyush Virmani, & William Tyler


Business in The European Union
3/25/2016

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 WHOs 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 cars 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 dont
have major automotive brands stemming
from their nations and they are more
developed-focusing more on the service
sector rather than manufacturing.

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
Manufacturers 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 CO 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 CO
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
Manufacturers
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
Manufacturers 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 CarsConsumers & 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 Carsharing 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 resourceefficient 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
4

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 carsharing 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 Unions 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
5

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 vehicles 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.

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 dont necessarily meet the
European Commissions 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 manufacturing 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.

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.