The effect of the carbon dioxide target on the car market

Strict EU requirements on carbon emissions from the automotive industry have been in place since 2021. Although the transition to electric cars has been slower than expected, most manufacturers have so far avoided fines. But with even tougher targets from 2025, major challenges await the industry.

The transport sector accounts for around a quarter of total carbon dioxide emissions in Europe. To accelerate innovation and the pace of electrification, a carbon dioxide emissions target was introduced for car manufacturers with sales in the EU in 2021. The target states that the manufacturer's average carbon dioxide emissions according to the WLTP test cycle may not exceed 95 g CO2/km among the cars it sells during the year, adjusted for the weight of the car models. For each gram in excess, the company is penalized with a fine of 95 euros.

– Since the number of cars manufactured per year is counted in the hundreds of thousands, these are high sums, says Karl Wahlin, analyst at Bilpriser.

Is 2025 a good year to buy an electric car?

The pace of transition to an electrified fleet has not been as fast as legislators and automakers had hoped, he says. This is due, among other things, to the pandemic and the resulting component shortages, the war in Ukraine and its effects on retail chains and confidence in the future – and the rising interest rate path.

– So far, however, manufacturers have been able to largely avoid fines, including by forming coalitions with electric car manufacturers and thus lowering average emissions, explains Karl Wahlin.

But from 2025 onwards, the carbon dioxide emissions target will be tightened by 15 percent. This means that the average carbon dioxide emissions according to the WLTP test cycle may not exceed 81 g CO2/km. Car manufacturers must therefore hurry to reduce their average emissions to avoid high fines.

– For consumers, this could mean that 2025 will be a good year to buy a new electric car. Because we should expect more electric car models in the lower price segments, and the price war to intensify. At the same time, new price cuts risk hitting the price level on the used market hard.

Fewer plug-in hybrids sold could benefit the used market

However, manufacturers will not want consumers to choose fossil-fueled models.
– We can expect the model range to shrink and the price level to rise, says Karl Wahlin, and believes that this should lead to a rise in used prices for petrol and diesel car models.

– Plug-in hybrids are also a type of car that we must expect to be affected. Although modern plug-in hybrids can drive over ten kilometers on electricity alone, their emissions according to the WLTP driving cycle are estimated to be so high that they negatively affect the manufacturers' average emissions.

Therefore, plug-in hybrids are also expected to decline in new sales, which strengthens used prices.

If manufacturers are fined, however, it could lead to price increases for new cars, which in turn risks driving up prices on the used market as well.

– Or will the EU be forced to reassess the climate target to avoid worsening the already stressed economic situation in the automotive industry? Regardless of the outcome, 2025 looks set to be an eventful year for the automotive industry, concludes Karl Wahlin.