The state of emissions reduction in the automotive industry

It is no secret that the automotive industry has significantly contributed towards greenhouse gas (GHG) emissions. According to various reports, transport contributes to around 25% of the European Union’s GHG emissions, 29% in the United States (of which 81% is from road vehicles), and 8.1% for the whole Asia Pacific region.

Globally, transport is the second highest contributor to GHG emissions and emits about 23% of energy-related CO₂ that contributes towards global warming, so it is no surprise that the automotive sector has seen an immense amount of pressure from governments and the public at large to crack down on their emissive output. And so, with increasing regulatory, consumer, and environmental demands to push automotive into the sustainable bracket, how is the industry currently faring?

What is driving the demand for emissions reduction?

We have long known that car emissions have been damaging to the environment and people. Putting aside other factors of pollution, such as noise, and focusing purely on emissions, the GHGs (such as carbon monoxide, carbon dioxide, nitrogen dioxide) produced by cars contribute to the Earth’s global warming and poor air quality, which has a plethora of damaging consequences – including, but not limited to, more severe and frequent natural disasters, loss of wildlife, acid rain, and droughts.

There are also the adverse effects of pollution on humans. Increased air pollution lowers air quality with carcinogens and other toxins that can lead to multiple health complications, stretching from minor to severe. According to data estimates from the World Health Organization (WHO), in 2019, 4.2 million people died as a result of ambient (outdoor) air pollution, and 99% of the global population was living in areas that did not meet the WHO’s air quality guideline levels.

Of course, in light of these findings, a general consumer consensus shift has moved consumer demands towards sustainable business practices, which has put pressure on the automotive industry to follow suit to remain competitive. However, it is not just the consumer demand that is forcing the hand of automotive giants; governments, NGOs, and other third-party entities have put increasing emphasis on sustainable industry, which leads us to the next point.

What is the impact of environmental regulations on the automotive industry?

Around the world, governments and regulatory bodies have been implementing policies and regulations aimed at reducing emissions in the automotive industry. In the United States, the Biden administration unveiled the newest phase of heavy-duty vehicle emissions standards designed to substantially decrease greenhouse gas emissions. These standards set performance benchmarks based on grams of greenhouse gases emitted per mile. While not as stringent as the Environmental Protection Agency’s initial proposal, these regulations are still expected to cut carbon dioxide emissions by over 7 billion metric tons and provide approximately $100 billion in annual net benefits to society, including significant public health benefits and reduced fuel costs for drivers. By accelerating the adoption of cleaner vehicle technologies, the standards are expected to bolster the U.S. auto industry, create good-paying union jobs, and strengthen American global competitiveness.

Similarly, the European Union (EU) has taken ambitious steps to curb emissions in the automotive sector. Interim targets of 55% CO2 emission reductions for new cars and 50% for new vans from 2030 to 2034 compared to 2021 levels, alongside a proposed ban on the sale of new petrol and diesel cars by 2035. This, and many other initiatives, come under the umbrella of The European Green Deal, a large-scale effort to ensure that there are no net emissions of greenhouse gases by 2050 – the same overall goal as the Paris Agreement, too.

Moreover, governments are exploring market-based mechanisms to incentivise emissions reduction. The EU's plans to expand its Emissions Trading System to include road transport is a prime example. The EU Emissions Trading System (EU ETS) is a critical mechanism in the EU's efforts to combat climate change, functioning on a 'cap and trade' principle. Covering various industries and sectors across EU member states and EEA-EFTA states, it sets a cap on greenhouse gas emissions and gradually reduces it to align with climate targets. Polluters must purchase emission allowances, encouraging emission reductions, while surplus allowances can be traded. Revenue generated from this system is used to finance green initiatives and support the transition to a low-carbon economy.

Recent reforms (such as tightening emission caps, expanding coverage to maritime transport, and establishing new funds) reflect the EU's commitment to more ambitious climate goals, aligning with the European Climate Law aiming for carbon neutrality by 2050. As part of the system’s 2023 revisions, ETS2 was established as a separate but complementary system that targets CO2 emissions from building, road transport, and additional sectors previously unaddressed. By putting a price on carbon, this approach encourages innovation and the adoption of cleaner technologies. However, infrastructure support is equally vital. Investments in charging and alternative fuel infrastructure are necessary to facilitate the transition to electric and hydrogen vehicles. Harmonising consumer incentives across regions is also crucial to promote widespread adoption.

Additionally, transparency is being enhanced through reporting requirements. The EU's Corporate Sustainability Reporting Directive (CSRD) compels large automotive companies to regularly disclose their environmental and social impacts, pushing them towards more sustainable practices. However, policymakers must balance environmental objectives with industry competitiveness to avoid overly burdensome regulations that could hamper innovation and economic growth.

How is the automotive industry navigating ESG?

Automotive professionals face quite a challenge. Across the globe, the extensive array of regulations and deadlines—the EU alone boasts over 150 regulations and 30 directives—puts a lot of weight on sector professionals' shoulders. However, progress has been made, and the star of it all? Electric Vehicles (EVs).

According to the World Resources Institute’s ‘State of Climate Action 2023’, “This year’s State of Climate Action finds that progress made in closing the global gap in climate action remains woefully inadequate — 41 of 42 indicators assessed are not on track to achieve their 2030 targets.” The report provides a roadmap designed to see how the gap in climate action is being closed across all sectors, and it seems that the one outlier in the report’s disappointing findings is automotive’s push for EVs. It finds that in the last five years, there has been a remarkable surge in the proportion of electric vehicles (EVs) sold in the passenger car market - with an average annual increase of 65%. In 2018, EVs accounted for only 1.6% of car sales, but by 2022, this figure had risen significantly to 10%.

All is not done and dusted, however. While EVs have made progress in cutting emissions, there are still wolves in the hen house. Despite the progress, there are concerns about the slowing rate of EV adoption. These concerns have prompted questions about whether relying solely on EVs will be sufficient for the automotive industry to meet its emissions reduction targets, underscoring the need for the industry to explore additional sustainability strategies to ensure it stays on course towards its environmental goals.

Then there is the other wolf: the questions being raised about the ethics of EV production and its sustainability. The mining and refining of raw materials like lithium, cobalt, and nickel is water-intensive and requires a lot of energy, and toxic fumes can be released during the process. This also stands beside the point that mining as a practice has significant environmental impacts during the actual extraction process itself, and the increased share that EVs have on the market puts a strain on the global supply of minerals required for the batteries.

The ethics of mineral extraction have also come under fire from reports of dangerous and exploitative labour practices found at the mining sites. Claims of poor wages, dangerous working conditions, and child labour have caused an outcry of public concern, leading many to believe the ethicality of EVs is not all that it has been chalked up to be.

At the end of the lifecycle, EV’s widely used lithium-ion batteries have caused concerns over their toxicity and pollution to the environment if not disposed of correctly. The rush to produce more electric vehicles has seen success, but the supporting industries around them have not necessarily caught up; the infrastructure for widespread lithium-ion batteries to be recycled has some ways to go if it is to meet the recycling demands of this generation's EV batteries once they die.

What happens next?

The regulations and policies put in place to curb the amount of emissions are a significant first step towards a more sustainable automotive landscape, but it is only the first step. The ball is now in the court of automotive organisations to follow suit all the way down the value chain – from mineral extraction to final production. The emissions target deadlines are fast approaching, and the question of whether the industry is on track to meet them is contested. Ultimately, only time will tell whether the deadlines are met or if there will be another extension. Either way, the time to act is now.

For more insights from RSM’s specialists or if you would like to get in touch, please visit our Automotive page.