This report does not constitute a rating action.
What's Happening
EU Commission President Ursula von der Leyen anticipates taking a softer regulatory stance toward the imposition of penalties on automakers missing CO2 emissions targets in the EU in 2025. Ms. von der Leyen is set to unveil the proposal in the Strategic Dialogue on the Future of the European Automotive Industry on March 5, 2025.
At this stage, S&P Global Ratings understands that there will be no substantial change to the CO2 emissions targets per se. The 15% reduction in CO2 emissions for cars and vans compared to the 2021 baseline still holds, but automakers will now have until 2027 to comply. Neither the 2030 target--a reduction of 50% for vans and 55% for cars compared to the 2021 baseline--nor the 2035 ban on the sale of all vehicles with tailpipe emissions are changing.
Most importantly, automakers' earnings will not be constrained by penalties until 2027. This will support their margins and cash flow metrics in 2025-2026.
The development appears to:
- Acknowledge legacy original equipment manufacturers' (OEMs') commitment to launch clean mass-market vehicles, most of which will hit the market between 2025 and 2027. These include Citroen C3, Renault 5, VW ID2, and Twingo electric. Without any regulatory pressure, we deem it unlikely that the market would have spontaneously supported the mass adoption of electric vehicles (EVs). This is evident from the hesitance of high-caliber manufacturers like Tesla to launch an entry-level battery electric vehicle (BEV) so far.
- Prevent a flow of funds from high-CO2-emitting OEMs to either Chinese OEMs (subject to trade tariffs on vehicles produced in China and imported into the EU) or emerging OEMs, such as Tesla and other start-ups. Legacy automakers may use the funds to enhance their operational efficiency and technological capabilities in order to compete more effectively with emerging rivals in Europe.
Why It Matters
Prior to Ms. von der Leyen's announcement, car and van manufacturers in the EU were facing potential fines of up to €16 billion--25%-30% of the EU auto industry's annual research and development spending--or material compliance costs. This is at a time when legacy manufacturers are having to compete with cost-competitive auto manufacturers in China and Tesla in Europe.
On average, automakers would need about 20%-25% of new vehicle sales to be BEVs or plug-in hybrids to ensure compliance with the 2025 targets. Based on their 2024 financial results, only BMW and Volvo Car are close to either achieving or exceeding the target (see chart), but even so, uncertainties over EV traction loom this year.
The news is positive for all rated automakers with operations in Europe. However, for a few of them, it removes the opportunity to bolster earnings with the proceeds from the sale of CO2 credits. This is the case for Volvo Car and Tesla, which are low-CO2-emitting brands. At the same time, the materiality of this extra revenue stream remains relatively limited for their credit metrics.
For other rated auto manufacturers, namely Volkswagen, Ford, and to a lesser extent, Mercedes, Toyota, and Stellantis, the revised regulatory stance removes a burden from their 2025 earnings. However, although the credit impact is positive for their margins and cash flow, it is not the primary driver of the ratings. Most of these automakers have different degrees of exposure to U.S. import tariffs from March 4, 2025, and to ferocious competition in the Chinese market.
The credit impact is highest for Renault. In the absence of exposure to developments in China and the U.S., Renault may take advantage of a gradual increase in its EV mix over 2025-2027 as it deploys its BEV portfolio. For Renault, we had estimated the 2025 regulatory cost being high as €500 million, more than 10% of Renault's S&P Global Ratings-adjusted EBITDA for 2025.
What Comes Next
The revised regulatory stance will help clarify to what extent the current EV premium is responsible for consumers' hesitance to transition to electric mobility. We expect a larger choice of BEVs at reasonable prices to become available over 2025-2027, and if consumers are still reluctant to buy these, it could force the EU to reimagine the transition to EVs and its 2035 ambitions.
Related Research
- Industry Credit Outlook 2025: Autos, Jan. 14, 2025
| Primary Contact: | Vittoria Ferraris, Milan 390272111207; vittoria.ferraris@spglobal.com |
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