The European Union’s strict new emissions rules may bring £2.1 billion fines – and stock price pain – to car manufacturers in 2020.
The regulations became effective on January 1 and investors are carefully watching automaker stocks as a result.

Tight New EU Emissions Rules

Strict new emissions controls across the E.U. are expected to affect major car manufacturers with hefty fines in 2020. The regulation is effective as of 1 January, but electric vehicle sales have been disappointing until now. The fines linked with new car sales are expected to deal another blow to the auto sector that has already faced considerable struggles.
The regulations require vehicle manufacturers to meet new CO2 emissions controls averaging 95 grams per kilometer on all new car sales. The European Union’s data shows that this represents a fuel consumption rate of about 4.1 litres of petrol per 100 kilometers, and 3.6 litres of diesel per 100 kilometers.

Substantial Penalties for Automakers

Failing to comply with this target will mean a £81 (€95) fine per vehicle for every gram per kilometer by which the target has been missed.
Despite efforts to manufacture and sell zero-emission electric vehicles, sales have been low. This has placed the emissions target out of reach of many of the major auto manufacturers.
Moody’s ratings agency calculations show that 12 of the largest car makers in Europe are already aligned for £2.1 billion in fines for the failure to comply with the new emissions limits.
“This year will be critical as we still see most manufacturers having to launch a large number of new models and incentivise customers to purchase electrified vehicles in order to avoid penalties. So we would still see a similar sort of gap that the companies have to close, in the face of significant delivery risk,” said the agency’s analysts.

Feeling the Pain

To increase the appeal of electric vehicles, auto makers may be forced to deeply discount those cars to shrink overall fleet emissions. A strategy of that nature would likely tank profits in a sector already suffering from shrinking profits.
Electric cars are currently viewed as low- to zero-margin products for several of the top automakers because of substantial manufacturing and technology development costs. Though they are becoming more popular, they still represent only 1.5 percent of British car sales in 2019.
Still, a Financial Times report pointed out that 5 percent of vehicles will be excluded from the emissions calculations, making it possible for some of the most profitable (and most polluting) vehicles to continue sales to some extent. Moreover, “supercredits” will be applied to plug-in hybrid and fully electric cars, offsetting some of the polluting vehicles their manufacturers sell. That said, the value of those supercredits will be reduced over years to come.
With £2.1 billion in fines still headed in their direction, as well as a chance of reduced and less profitable sales, analysts expect car giant stock positions to suffer. To what extent this will occur will become more evident as the year unfolds.