Electrification or Bust: How OEMs Can Meet 2025 CO2 Goals

• The EU will significantly tighten CO₂ emission targets for car manufacturers in 2025.
• Non-compliance with CO₂ limits can result in hefty fines, potentially amounting to hundreds of millions of euros for large OEM groups.
• Achieving the new targets will require a substantial increase in the sales of BEVs and PHEVs, amidst subsidy cuts and market scepticism.
• OEMs must adopt strategies like CO₂ pooling, price adjustments, and increased CO₂ monitoring to navigate the upcoming challenges.

2025: A Turning Point for CO₂ Emissions

In 2025, the EU will significantly tighten CO₂ targets for car manufacturers. For passenger cars, average emissions of new vehicle sales must drop below 93.6 g/km, down from 116 g/km in 2024 – a 19% reduction. Light commercial vehicles (LCVs) up to 3.5 tons will see targets decrease from 185 to 154 g/km, a 17% reduction.

Hefty Fines Await Non-Compliant Manufacturers

Exceeding CO₂ limits can lead to substantial fines. These are calculated as EUR 95 multiplied by the excess CO₂ in g/km and the registration volume. For large OEM groups, this can result in penalties amounting to hundreds of millions of euros.

Combustion Engines Stall CO₂ Progress

Despite ambitious targets, progress has been minimal this year. The first six months of 2024 have shown higher emissions than the full year 2023. BEVs and PHEVs offer the greatest reduction potential, but subsidy cuts have hindered their transition to the volume market. From January to June 2024, the European car market (EU-27 + IS + NO) grew by nearly 243,000 new registrations (+4.3%), while BEV and PHEV registrations softened by 9,000 units. More than half of the growth came from full hybrids, which, while more fuel-efficient, still have emissions exceeding the average for passenger cars.

OEMs: Who’s Ahead and Who’s Lagging?

However, the situation is entirely different for 2025. Among all manufacturers with ICEs in their model range, only Geely (Volvo, Polestar, etc.) and SAIC Group (MG) are below the 93.6 g/km threshold. Following them, Toyota (105 g/km) and BMW (106 g/km) need a comparably moderate reduction, but everyone else will have to make significant efforts. This is particularly true for VW Group and Ford. Given their heavier-than-average cars, their individual 2024 targets rose to 121 and 124 g/km, respectively, providing some leeway. However, this weight adjustment will be omitted in 2025 as the weight factor in the equation becomes negative.

Electrification: The Path to Compliance

To reduce average CO₂ emissions next year, each OEM will have their own strategies, all involving more electrified cars. Based on current fuel type-specific emissions, an OEM without full hybrids in its portfolio will need 37% of BEVs and PHEVs in its sales mix. With full hybrids, the task becomes seemingly easier. In a scenario with a 55% HEV share, the necessary BEV/PHEV proportion is reduced to 23%. However, OEMs with a heavy focus on HEVs typically sell fewer BEVs. Apart from that, the EU regulation allows to weigh BEV registrations higher, when the cars are sold in markets with comparably low electrification shares.

CO₂ Pooling: A Strategic Lifeline

Another option for CO₂ compliance is CO₂ pooling. There wasn’t much need for pooling over the last two years, but in 2021, the former FCA group teamed up with Tesla and Honda to reduce their CO₂ average. Dataforce expects a revival in 2025, where EV-only manufacturers can sell emissions certificates to other groups.

The Importance of CO₂ Monitoring

Moreover, CO₂ targets will be an important part of annual targets, just as sales targets. With monthly monitoring of emissions, OEMs can identify the markets or segments that have the highest positive or negative impact and thereby steer the sales strategy towards CO₂ compliance with sufficient time to react.

Boosting BEV Adoption: Strategies and Challenges

From the current perspective, achieving such high electrification shares seems out of reach. However, electrification is not a linear process; it occurs in steps. In the past, the leap from 2019 to 2020 was surprisingly strong. The current setback is also influenced by the abrupt phase out of EV incentives in Germany, Europe’s largest BEV market by volume.

That said, the situation is different now, as it has become harder to convince additional customers to opt for BEVs instead of ICEs. This will only work with changes in the price structure. The current drops in lithium and battery prices allow some price cuts through the supply chain, but OEMs will also need to cut costs elsewhere to stay profitable. Scaling up production and replacing expensive NMC batteries with LFP batteries can be alternative options. OEMs are also likely to phase out promotions on ICEs and focus on BEVs. Last but not least, smaller and more affordable models will help make the transition into the mass market.