Friday, June 28, 2013

CO2 Regulation - the Role of "Super-Credits"

The German government is responsible for blocking the vote on EU regulation aiming to reduce CO2 emissions of cars. The plan was to reduce the amount of carbon dioxide produced on average by new automobiles from 130 g (CO2) per kilometer to 95 g/km in 2020. The primary reason for this decision was that Merkel did not agree with the plan of how to implement the so called "super-credits" (SC) - a scheme to allow for zero (and very low) emission cars to be counted twice until the year 2020. By 2023 the current plan gets rid of SC. Merkel wants higher and longer lasting SC. The decision of the German government  to prevent this new regulation of coming to effect is absolutely correct (probably the first time I wholeheartedly agree with Merkel).

There is not much potential left to make conventional engines more efficient, and the closer we get to the optimum the more expensive innovation becomes, and the less progress it yields. Currently, there is, because of regulation, a worldwide trend to hybrids which have a much higher potential of reducing fuel consumption in the NEDC test cycle than in real life. I would say that a realistic goal for the current mix of petrol and diesel cars will be about 130 g(CO2)/km (120 g(CO2)/km for hybrids) on average by 2020. To reach the 95 g (CO2)/km there is no way around zero emission vehicles.

Especially BMW and Daimler would have been affected by the new regulation, since they produce mostly "premium" aka large, powerful, and expensive vehicles. AUDI, being a brand of VW, would not have had such problems since the average emissions are measured over the whole company fleet of produced cars.

This policy is trying to get rid of SUVs of course it is supported by the German green party - unthinkingly, as always. Party whip Künast called Merkels action "torpedoing" and "smashing" the compromise. It is actually really sad that these people are unable to think straight then it comes to the automotive industry, since higher and longer lasting SC in Europe would support the development of electric cars, and additionally companies would have incentives to make them cheaper to support larger vehicles. BMW and Daimler would most likely even accept some losses on electric cars, since that would allow them to sell more premium vehicles like the X6 or the GLK, while still being able to remain within the new regulation. The current plan is especially wrongheaded since the companies would be able to sell these cars in other countries. It would not make sense to increase capacity in Europe, so production will be reduced in Europe and overall the worldwide emissions would not be reduced significantly.
Let's see what effect SC would have on a car producer: our company produces 100 cars - 90 of which are conventional vehicles with an average emission of 130 g/km and 10 are zero emission vehicles. So the calculation for SC of 2 would be (130 g/km x 90 cars + 0 x 10 cars)/ (90 cars + 10 x 2 zero emission cars). The company would therefore have a current average of around 106 g/km. To achieve the goal of 95 g/km our firm could either produce 70 % more electric vehicles or by increasing the price of their conventional cars and increase the waiting time for European customers so they only sell 56 instead of 90. Increasing the SC to 3 would bring our company down to 97.5 g/km so they would only have to try to increase the sales by 10 %. Assuming the proposal numbers for 2023 our company would have to more than triple the electric car production.

Of course, we currently do not know how well electric cars will be received. In my above example I assume a little over 10 % . That would be a great success. Super credits have the potential to increase the production capacity of zero emission vehicles, and also give companies an incentive to accept lower profit margins on these, therefore Merkel was right to stop the current proposal. By 2023 we will be only seeing the second generation of zero emission vehicles from large companies, it is unrealistic to assume that they will make up over 30 % of the total production by then, and it would only be reasonable to expect that in 10 years the laws of physics still apply, so 95 g(CO2)/km can only be achieved through super credits. Of course, it will not be real 95 g(CO2) /km, but the proposal is not based in reality either. It is just not possible to get to that number in ten years. I really like BMW's i3 please give it an actual chance.

Krugman commented a few days ago on Obama's environmental policy: "Well, ask yourself first how, exactly, pollution regulations are supposed to destroy jobs." Well, Professor if one decides to get rid of larger cars altogether with not giving any way out while other countries like the USA and China actually do offer the possibility to support SUVs and large luxory sedans via zero emission vehicles, then you will endanger jobs in Germany. So the EU is again an example of awful - this time - environmental policy with an actual potential to destroy jobs in Europe. Now to be fair Krugman was talking about the US, who do have a decent policy when it comes to electric cars. Please, EU do the right thing for once, and implement higher super credits over a longer time frame.

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