EU rules require automotive manufacturers to limit carbon dioxide (CO2) emissions from their vehicles. The limits apply to the average emissions of a manufacturer’s entire fleet, rather than individual vehicles.
Manufacturers who make vehicles with higher CO2 emissions can offset these emissions by pooling with other manufacturers. However, such arrangements are fraught with legal and regulatory risk, particularly around competition law, so need careful consideration before anyone signs on the dotted line.
Fleet CO2 limits
These are currently set out in Regulation (EU) 2019/631, which applies to both passenger cars and light commercial vehicles.
All manufacturers must ensure that the average CO2 emissions of their vehicle fleets do not exceed the set limit. This is currently around 95g of CO2 per km (CO2/km) for cars and 147g CO2/km for light commercial vehicles.
All vehicles that are newly registered per calendar year in the EU, Norway, Iceland and Liechtenstein are taken into account.
When determining the fleet values, the factors considered include not only the official CO2 values of each vehicle but also:
- ‘super credits’ that the manufacturer receives when electric, plug-in hybrid or hydrogen vehicles are registered;
- benefits when using ‘eco-innovations’, such as energy-saving LED headlights; and
- sanctions in the form of a ‘correction factor’ if new European driving cycle (NEDC) results have not been satisfactorily converted to the worldwide harmonised light vehicle test procedure (WLTP) standard.
If the limits are exceeded in a calendar year, there is a risk of having to make (under certain circumstances severe) ‘penalty payments’ to the EU. The amount of the fine in the passenger car sector is currently €95 for each gram of CO2/km beyond the set limit, multiplied by the number of vehicles registered by the manufacturer in the relevant year. In the worst cases, this can add up to penalties of hundreds of millions of euros.
In order to make it easier for manufacturers to comply with the fleet targets, they can join forces in ‘pools’. All manufacturers in a pool are then viewed as a single manufacturer for the purposes of CO2 emissions regulation, allowing manufacturers with low fleet emissions to offset the high fleet emissions of other manufacturers.
There are two types of pools: closed and open.
In closed pools, linked manufacturers can join forces, such as all the different passenger car brands of the VW group: VW, Audi, Seat, Skoda, etc. Closed pools are not subject to any significant legal requirements.
In open pools, two or more vehicle manufacturers independent of one another join forces. Such arrangements must grant any other vehicle manufacturer transparent and non-discriminatory access on economically reasonable terms. Competitors of the original contracting parties can therefore demand to become a contracting party to the pool themselves under the same conditions.
Open pooling is a highly complex regulatory and contractual matter. When advising car manufacturers on open pooling, we have seen the following issues arise.
- Despite its complexity, the open-pooling arrangement needs to be ‘translated’ into workable contractual language.
- The allocation mechanism needs to be compatible with the requirements of the regulation and consider the mutual interests of the contracting parties.
- Robust governance structures are needed for the pool, both internally and externally.
- The contract must be structured in a way that considers the interests, rights and obligations of the original parties as well as any new ones.
- The exchange of data within the pool must comply with competition law.
Further regulatory challenges ahead
Since 2019, further EU rules on CO2 emissions have been implemented and more are to come in the near future. Just recently in March 2021, the EU Commission's Implementing Regulation (EU) 2021/392 on the monitoring and reporting of data relating to CO2 entered into force. Thus, CO2 emissions from passenger cars and light commercial vehicles remain a challenging area of regulatory law.