Auto giants are getting nervous about the prospect of mega fines as EV demand falters

Europe's top car giants appear to be increasingly concerned about the prospect of massive fines, particularly as electric vehicle demand falters ahead of the next tightening of carbon regulations.

Automakers operating in Europe face stricter emission targets from next year as the EU cap on average emissions from new vehicles sales falls to 93.6 grams of CO2 per kilometer (g/km), reflecting a 15% decrease from a 2021 baseline of 110.1 g/km.

Exceeding those limits — which were agreed in 2019 and form part of the 27-nation bloc's ambition to reach climate neutrality by 2050 — can result in hefty fines.

Rico Luman, senior sector economist for transport and logistics at Dutch bank ING, said Europe's carmakers had every reason to be concerned about the scale of the financial penalties.

"The fines are massive actually. When you calculate it … it easily comes to many millions based on the volumes they produce," Luman told CNBC via videoconference.

Renault CEO Luca de Meo said last month that if EV sales remain at current levels, the European auto industry may have to pay 15 billion euros ($16.5 billion) in financial penalties or give up the production of over 2.5 million vehicles, Reuters reported, citing an interview with French radio.

The European Automobile Manufacturers' Association, or ACEA, says the industry is missing "crucial conditions" to support the zero-emission transition, "with concerns about meeting the 2025 CO2 emission reduction targets for cars and vans on the rise."

The car lobby group, which represents the likes of BMW, Ferrari, Renault, Volkswagen and Volvo, warned that the EU's current rules "do not account for the profound shift in the geopolitical and economic climate" in recent years.

"European auto manufacturers, united in ACEA, therefore call on the EU institutions to come forward with urgent relief measures before new CO2 targets for cars and vans come into effect in 2025," ACEA said in a statement published Sept. 19.

Tim McPhie, a spokesperson for the European Commission, the EU's executive arm, said in a press briefing late last month that the auto industry still has 15 months to meet the new targets, adding it is "too soon to speculate" on the scale of the potential fines.

"We have designed these policies in a way that the industry has time to adapt, that the overall economic ecosystem has time to adapt but, of course, we are sensitive to the challenges that are being faced," McPhie said on Sept. 24.

Europe's top automakers are contending with a perfect storm of challenges on the path to full electrification, including a lack of affordable models, a slower-than-anticipated rollout of charging points and the potential impact of European tariffs on EVs made in China.

Crisis-stricken Volkswagen and several other carmakers, including Ford and Mercedes-Benz Group, have all announced plans to delay earlier targets to phase out sales of internal combustion engine (ICE) vehicles in Europe.

"Manufacturers are pretty much focused on conventional hybrids and ICE vehicles because they are much more profitable," ING's Luman said.

"In the long run, they need to compete with the new players and restructure their organizations by making the shift to the transition but that's not that profitable in the short run," he continued. "So, that's a massive struggle."

The ACEA says that the EU's battery electric market share has fallen to 12.6% this year, down from 13.9% in 2023, while the bloc's car sales remain around 18% lower than pre-pandemic levels in 2019.

Xavier Demeulenaere, associate director of sustainable mobility at S&P Global Mobility, said all of Europe's original equipment manufacturers (OEMs) have a "strong incentive" to boost their own EV sales to lower their average fleet emissions and comply with the regulated target.

"The slowdown in electrification we are seeing in 2024, due to a worsening economic situation across Europe and the removal or reduction of subsidies in some countries, makes the situation challenging for most OEMs as it creates a demand issue," Demeulenaere told CNBC via telephone.

"But if demand is not there, pooling remains one of the main mechanisms to mitigate once again these potential financial penalties that are expected in 2025," he added.

Pooling refers to the process in which car manufacturers team up to be considered as one entity when calculating their performance against a CO2 emissions target.

Not everyone is convinced that the sales challenge that Europe's car industry faces constitutes an industry-wide crisis.

Campaign group Transport & Environment said in an analysis published Wednesday that the current state of play should instead be considered a "transitional phase" in which manufacturers adapt to new regulations and changing EV market dynamics.

Analysts at Transport & Environment said the European car industry has had since 2019 to plan for next year's CO2 target and manufacturers can avoid having to pay large fines by selling more hybrids and more fuel-efficient cars.

"Carmakers also benefit from flexibilities in the regulation that further (artificially) lower their CO2 emissions, as well as the option to pool their emissions with other carmakers," they added.

"The profitable European carmakers may need to sell fewer big polluting SUVs, but then that is the aim of the car CO2 regulation."

Road transport is the main contributor to transport emissions of CO2 in the EU, with passenger cars and light commercial vehicles accounting for nearly 15% of total emissions.