September 21. 2023. 3:25

The Daily

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On Euro 7, the Commission must proceed with caution

Any further restrictions on auto emissions need to be imposed carefully and only after serious deliberation, with concern shown for both manufacturers and consumers.

No matter which politician you ask, they will all claim to be somehow committed to a sustainable European economy, which includes a sustainable automotive industry. However, the crucial difference is whether the proposals are merely well-intentioned or genuinely realistic. Recently, the European Commission introduced Euro 7, a new set of emissions standards for vehicles that is set to be implemented in 2025. We Conservatives wholeheartedly agree with the Commission’s goal of reducing emissions, however, also we recognise that these are complex issues that, while urgent, nevertheless require policymakers to act with care and caution.

This is because the Euro 7 standards, while well-intentioned, will undoubtedly have negative effects on European consumers and car manufacturers in their current form, which should not be overlooked in the debate as they are disproportionate to the positive environmental effects. With the Commission facing opposition from a block of eight countries in the Council of the European Union, it is clear that difficult negotiations lie ahead before a final proposal can be agreed upon. Here are some issues and areas where we believe there to be room for improvement:

First, the new emissions standards are bound to raise costs across the entire supply chain, which will ultimately result in higher retail prices for consumers. The Association of European Car and Truck Manufacturers (ACEA) has estimated that, if the Euro 7 standards are imposed, the average petrol car will become more than €1800 more expensive than it is today. For diesel cars, the situation is even worse, with an expected price increase of over €2600.

This would price many low-income consumers, who have already been hard hit by inflation and the resulting cost-of-living crisis, out of the private vehicle market, and negatively affect in particular the rural and less developed regions in the Union. At a time when inflation appears to finally be easing, the Commission’s proposal if unchanged, may inadvertently add fuel to this dying fire.

Second, Euro 7 will, if implemented in 2025 as planned, require massive and rapid investments. Auto manufacturers will flock en masse to the credit market, all attempting to raise the necessary billions of euros needed to make the transition in time for the deadline. Making matters worse, they will endeavour to raise this money without being able to prove to investors that there will be a positive financial return on the investments they are making – because there won’t be.

This is because the funds raised will be used to cover the higher regulatory compliance costs associated with Euro 7, and will not result in higher sales or profits. In short, manufacturers will not be raising money to invest, but to comply, and the interest rates charged by creditors will no doubt reflect this reality. By allowing a longer transition period, this issue can at least partially be mitigated.

One may of course reason that price increases and expensive investments are sacrifices worth making for the sake of the environment. To some extent, this is no doubt the case. Unfortunately, there is a high likelihood that Euro 7 will backfire in this very respect: Euro 7 would see the EU’s regulatory regime diverge substantially from the rest of the world’s, and rather than deal with expensive double standards, many manufacturers may choose to move production out of the EU altogether, and into countries such as China where environmental standards are substantially lower.

Manufacturers unable to raise the necessary funds mentioned in the previous paragraph will be outright forced to leave Europe, and may never return. Already the Commission’s decision to ban internal combustion engine vehicles from 2035 is set to inadvertently provide a massive boost to the Chinese economy and by extension to Chinese global power, as China dominates the electric vehicle market. If the Commission were to agree to modify Euro 7 to be closer in line with the standards of the rest of world, for example by abandoning plans to extend the Real Driving Emissions regime for cars and vans to heavy-duty vehicles, compliance and adaption costs could be substantially reduced. Furthermore, if plans to require extensive monitoring systems and technologies were scrapped, this would go a long way in reducing the amount of technical expenses necessary, and thus lower the amount of funds manufacturers need to raise.

In any case, even if auto manufacturers are able to raise the necessary funds, this investment in complying with Euro 7 will as a matter of necessity crowd out and reduce other investments that these manufacturers have undertaken in recent years, most importantly investments into battery technology and electric vehicles. With manufacturers forced to allocate a significant share of their R&D budgets to Euro 7 compliance, there will be less money left for other investments that may be just as or more important to reaching the overarching goal of carbon neutrality. Allowing a longer transition period can partially alleviate this issue.

Giving auto manufacturers more time is not just necessary from a financial viewpoint, but also as a matter of technological feasibility. As things stand, the Euro 7 standards greatly rely on emerging and unproven testing, surveillance and emission control technologies, not least when it comes to the aforementioned Real Driving Emissions regime, which the Commission, in an unprecedented move, seeks to extend to heavy-duty vehicles. A change that would incur considerable costs for only a negligible environment impact over the current testing regime. This is but one of many examples of how Euro 7 deviates from global standards, forcing manufacturers to develop unique products, test standards and surveillance technologies specifically for the EU market. This is a costly and, just as importantly, time-consuming process. Even if auto manufacturers wish to comply and are able to raise the funds to do so, technological feasibility is a hard limitation that policy-makers have to grapple with.

In summary, despite the merits and noble intentions behind Euro 7, the Commission’s timeline for implementation is too short from both an economic and technological point of view. 2025 is just over one and a half years away, and many layers of secondary legislation setting out the technical, procedural and administrative modalities will be needed before Euro 7 can become a reality. It is unclear how long it will take to draft and pass all this legislation. In a worst case scenario, we could end up in a situation where auto manufacturers have just a few months to adapt, as the details provided by the secondary legislation may take until next year (or beyond) to be finalised.

None of this is to say that the EU should do nothing; but it is clear that further dialogue with the Parliament, Member States as well as industry and consumer groups are necessary before Euro 7 can be introduced. New regulations on auto manufacturing need to be implemented gradually, arguably with at least 36 months from the legislation being in place until the regulation is enforced, to allow manufacturers to adapt and plan ahead, and reduce the risk of unintended side effects such as those mentioned above. My group and I welcome the intention behind Euro 7, and we stand ready to negotiate and work constructively with the Commission to improve the proposal.

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