The trade in carbon credits is a free pass to make polluting cars – the industry needs to pull its socks up says Ben White

Tags: #government-ev-policies

Carbon credits, which can be bought to offset emissions that would otherwise breach national or international regulations, have been around for over a decade. However, as the average tailpipe emissions of new cars registered in the UK increases, isn’t it about time that the industry quit its reliance on this cynical trade and push low- and zero-emissions cars instead?

I’m going to stick my neck out here and state from the start that I think the trade in carbon credits is cynical. At a time when we are officially in a climate crisis, the notion that businesses would sooner offset their excess rather than addressing it is troubling. The trade in credits has also created an entirely new economy of its own, where the buying and selling of (effectively) a measure of harmful gas is added to the profit and loss sheet of businesses.

To me, against the backdrop with which we find ourselves, it’s wrong.

Of course, I understand fully why carbon credits exist and why the trade in them is helping some companies avoid crippling fines as they steer themselves towards greener ways of working. But I’m not going to be an apologist for any company that hasn’t got its act together already – least of all in the car industry.

What’s the state of play?

Under a strict new EU directive, which car makers have known about for some time, they must cut their average fleet emissions to less than 95g/km of carbon dioxide – a figure that will apply to 95 per cent of that brand’s fleet. This emissions figure is based on the measured tailpipe emissions in the WLTP assessment cycle. However, for a variety of reasons that have emerged in recent years, almost all major car brands and groups are potentially in a spot of bother.

Since 2015, brands such as BMW, Daimler Group, PSA, VW and Renault have seen their fleet emissions actually increase – despite significant advances in combustion and EV technology. A major reason for this is the decline in diesel sales since the VW emissions scandal which came to the fore in 2015. Suddenly diesel, which typically emits less CO2 than an equivalent petrol vehicle, was demonised and across the continent sales plummeted – down 36 per cent in Europe. Petrol picked up much of the slack, thus increasing fleet CO2.

Another factor has been the move to the WLTP test (Worldwide Harmonised Light Vehicle) from the old NEDC (New European Drive Cycle). WLTP is designed to be more representative of real-world driving conditions and more difficult to ‘game’. As such official CO2 figures have slightly increased.

The final element of the trifecta is the massive increase in SUV sales in the past few years which in the UK make up three of the top 10 best-selling cars of 2019. Across the globe estimated global sales of SUV type vehicles have grown by the best part of three million in 2019 alone  on top of an already buoyant market – outpacing the growth in sales of EVs which is predicted to have increased by somewhere south of three million during2019.

What about the growth in alternatively fuelled vehicle registrations?

In the UK during 2019, the growth in AFV sales was good, but not brilliant, taking 7.4 per cent of the market. EVs were the star of the show, up 144 per cent and overtaking plug-in hybrids, which dropped 17.8 per cent to just 1.5 per cent of the market. EVs took 1.6 per cent.

Whilst the growth in EV sales is good, the level of decline in PHEVs was thoroughly avoidable, as the biggest factor at play was the government’s removal of the plug-in car grant from this type of zero emissions-capable vehicle. Mike Hawes, SMMT Chief Executive said: “A stalling market will hinder industry’s ability to meet stringent new CO2 targets and, importantly, undermine wider environmental goals. We urgently need more supportive policies: investment in infrastructure; broader measures to encourage uptake of the latest, low and zero emission cars; and long-term purchase incentives to put the UK at the forefront of this technological shift.”

In the past, the SMMT has accurately labelled the removal of the grant from PHEVs as “short sighted”.

The carbon credit trade

The fact that many car manufacturers are either running around to get their act together and launch eco-friendly cars to market, or just buying up carbon credits before the 95g/km deadline hits says one thing: the industry has failed to pull its socks up. And instead of getting its collective rear into gear, it’s buying time by throwing money at the problem.

Back in 2019 Tesla sold $420m worth of carbon credits to Fiat Chrysler Automobiles (FCA) – because FCA is lagging due to a lacklustre attitude to emissions-free-capable powertrains. It’s only recently begun to make tentative steps towards mass-market hybrids, PHEVs and EVs and its CEO, Mike Manly, has even stated that the group may just pull its worst offending cars from the showrooms altogether. Toyota, Honda and Nissan-Mitsubishi hold more than half of the available industry credits, meaning brands with a negative balance may need to go cap in hand to offset emissions.

Failing to meet the 95g/km limit will hit the industry right where it hurts – in the wallet, as for every gram of CO2 that their fleet exceeds this they get charged €95 – multiplied by the number of cars sold. VW CEO, Herbert Diess, reckons it could sting the industry by €30bn and, alongside other brands facing fines, has warned investors that they may not hit profit forecasts.

The reason for this is two-fold. Firstly, the brands must weigh up what’s worse; the fine for breaching the emissions target and all of the negative publicity this might result in, or the cost to the bottom line by expediting the production and sale of low and zero emissions vehicles. EVs, for example, have very fine profit margins – single percent figures – and in some cases are even sold at a loss.

Peugeot and PSA CEO, Carlos Tavares told the Financial Times: “Either you increase the price of your vehicles, and clean mobility becomes elitist, and you possibly do not meet the numbers you need to avoid penalties… or you sell at a loss and you need to restructure your company to compensate.”

Secondly, there is the issue that the buying public may have the appetite on paper for low and zero emissions cars, but this hasn’t necessarily translated to sales. But as a counterpoint, we can bring this back to Toyota, which got rid of diesel and focussed on expanding its hybrid range. It has been so successful that it’s revised its forecast up from 50 to 60 per cent of all sales being hybrids by 2021. This demonstrates that if the public is being presented with low emissions vehicles (without significant cost penalty) as the best option, they will move over to them.

However, car manufacturers are old hands at exploiting leniency in the systems designed to push them towards cleaner vehicles. Car makers can earn ’super credits’ whereby for each car they sell that emits less than 50g/km, they can flog two ‘normal’ cars in 2020 without penalty. This will be gradually reduced to 1.67 ‘normal’ cars per low emissions car in 2021, 1.33 in 2022 and one in 2023. But again, this flexibility opens the system to ‘gaming’, whereby manufacturers artificially flood a market with sub-50g/km cars (for example in manufacturer fleets) in order to continue selling polluting cars without penalty.

If this get-out-of-jail-free card was taken away and true fleet emissions based simply on the sale of cars were used, many more big name manufacturers would find themselves in deep water at the end of the year. As it is, whilst fines will inevitably be handed out, the trade in carbon credits, exploitation of super credits and general skulduggery will see the ramifications being far less than they could have been. Far less than should be foisted upon brands.

Where does this leave us?

Multiple car brands failing to hit the 95g/km limit without spending money on carbon credits or artificially flooding a market with super credit-earning cars is a truly sorry state of affairs, and one which could have been avoided if car makers had acted with urgency rather than apathy. Of course, many are fast-tracking their efforts, others are well on their way already, and some, like Renault, have simply said that whatever it takes, they’ll meet the emissions target in time.

But let’s be brutal about this; it’s not good enough. And nor is the continuing trade in carbon credits – the currency printed by the ‘least worst’ offenders and in-turn traded with the worst. As we enter the third decade of the 21^st century, the industry should be leading by example and not scrabbling around to pay for its harmful impact.

Furthermore, the carbon trade is a bubble economy that can be burst at the drop of a new climate agreement, so you’d think it’d be good business to avoid it regardless. And where the UK is concerned, the spectre of Brexit may well cause massive upheaval, as Jim Holder at Autocar so eloquently points out.  

Whilst I’m being cynical, it does make you wonder; how many brands are hurrying MHEVs, hybrids and PHEVs to market simply to avoid a fine rather than a genuine desire to move towards a greener future?

If you want to read more, leading European clean transport campaign group, Transport & Environment, released its report ‘CO2 Emissions from cars: The Facts’ in April 2018. It makes for an eye-opening read, providing additional facts and context related this opinion piece.