It may seem unfair that someone who does not comply to given rules can effectively buy its way out of trouble.
On April 7th it was publicized that Fiat Chrysler Automobiles (FCA), which is struggling to comply to the EU’s greenhouse gas policy, spent hundreds of millions of euros to buy CO2 emission rights from Tesla, an electric carmaker.
With this trick, FCA pooled their own fleet of cars with that of Tesla and, because Tesla’s cars don’t emit CO2, this lowered their average CO2 figure to a permissible level. By purchasing these rights, they effectively avoided paying a hefty fine.
The sum FCA that pays Tesla is marginal compared to the cost of investing in eco-friendlier technology. FCA is lacking to adapt to the standards imposed by the EU and they temporarily managed to relieve their stress of adapting to trends of electrification and autonomous driving, but they can’t endlessly continue this cat-and-mouse game.
Nowadays, car manufacturers face enormous pressures to invest in new technologies and adapt to promising trends such as car-sharing, but many are struggling.
Striving towards a more sustainable future is urgent and the overhead bodies, such as the EU, have great responsibility in steering this because of their influential reach. However, finding the most effective method has proven to be heavily disputable and this slows down the necessary environmental development.
The so-called ‘pooling’ of emission rights is permitted by the EU, but the counterintuitive news raises the question if the set-up of this system is really the most effective method towards a more sustainable future.
Pooling is part of the EU Emissions Trading System (EU ETS), which is intended as a policy to combat climate change. It is the world’s first and largest greenhouse-gases trading program and it does not only cover the automotive industry, but also industries concerned with power, energy-intensive production and aviation. For the EU it is a key tool to cost-effectively reduce greenhouse gas emissions.
It operates through a ‘cap and trade’ system, which is meant to give the private sector the flexibility to reduce emissions while stimulating technological innovation and economic growth. An emissions cap (a ceiling on the maximum amount of emissions) is set by the European Union and the trade of EU Emission Allowances (EUA) is facilitated. These EUA’s are either distributed for free or auctioned. In this way, the EU hands over the responsibility to the producers to take action or purchase EUA’s depending on its price. Emitters with lower reduction costs than the EUA price are encouraged to take further action. Emitters with higher reduction costs are able to purchase EUA’s in order to comply with the EU’s greenhouse gas policy.
Contrary to the consensus in the EU, within the United States’ administration the pros and cons of the most popular solutions, a direct carbon tax versus an indirect cap-and-trade system, remain heavily debated. Weary of this rigidity some states, such as California, have started their own federal emission trading systems, with promising results. While there are legitimate reasons to favour one form of pricing carbon over the other, if well designed, both a carbon tax and a cap-and-trade program can be the centrepiece in reducing greenhouse gas emissions.
The EU prefers the cap-and-trade system over a direct carbon tax, because of its flexibility. It is divided into phases to configure the scheme. The system is currently in its third phase. The fourth phase, commencing in 2021, will introduce an increase in the annual reduction in allowances of 2.2% to lower the cap more quickly. By lowering the cap each phase, the EU can directly influence the amount of emissions. The system is successfully working as intended. According to EU reports, the emissions from sectors covered by the system will be 21% lower than in 2005, when the system was implemented. In 2030, under the revised system, this is expected to be 43% lower.
Thus, the EU allows the pooling of emissions so that manufacturers with low average emissions can help slow adapting and high emission manufacturers by trading their CO2 emission rights. It perceives the combat of climate change as a collective effort.
And actually, this rationale isn’t as counterintuitive as it sounded earlier on. If FCA would have to pay a fine, this money would disappear into the EU’s immense budget. This way, FCA will have to pay a smaller amount to a carmaker which is directly involved in the development of electric vehicles, batteries and solar power. It is therefore effectively subsidizing the sales of Tesla’s more environmentally friendly cars. For Tesla, the sale of their emission rights amounts for major part of their own finance, which is a struggle since its founding in 2003.
Ideally, FCA would have spent the money on building its own fleet of hybrid and electric cars, but for a lot of car manufacturers, there is no guarantee that there will be enough demand. Volkswagen AG’s boss, Herbert Diess, showed that in some cases it is more expensive for firms to make cars more efficient than to pay the fine. However, with the EU lowering the cap each phase, the fines will become more and more hefty. Unfortunately, there aren’t a lot of Tesla imitators to help out other carmakers in the future. This will prove to be a worrying dynamic for many car manufacturers.
The climate change goals of the EU are ambitious and necessary, but will inevitably carry some problems. The EU sees pooling as a collective effort towards a more sustainable environment, but the question remains if they will be able to collectively steer us towards this future. Carmakers will have to adapt to EU’s policies and work together to make this happen.