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Fiat Chrysler to spend $2 billion on CO2 fines and credits

MILAN — Fiat Chrysler Automobiles plans to spend $2 billion in the next three years to buy so-called regulatory credits to minimize the amount of emission-related fines it will pay in Europe and the U.S.

The figure was revealed by CFO Richard Palmer on May 3 during a conference call with analysts to discuss FCA’s first-quarter results.

Including $674 million spent in 2018, FCA is poised to spend at least $2.7 billion from 2018 through 2021 on emission fines and regulatory-credit purchases. Based on what Palmer told analysts on the conference call, this is the complete picture:

After various deals with Tesla and other carmakers, FCA has committed about $2 billion to buy regulatory credits over three years, 2019-21. This year FCA will bear compliance costs of $134 million in Europe, the Middle East and Africa. Those costs will be higher next year, although the pooling agreement with Tesla is expected to significantly mitigate the increase. FCA CEO Mike Manley told analysts that without that agreement with Tesla, the EMEA compliance costs would have been close to $436 million in 2019. Last year FCA had cash outlays, between credits and compliance payments, of about $674 million. That figure, which includes the U.S., will rise “moderately” this year.

According to analysts from PA Consulting Group, FCA's carbon dioxide emissions in Europe will fall to 98.5 g/km by 2021 from 120 g/km now, meaning the automaker will miss its regulatory target of 91.8 g/km. This leaves FCA at risk of an European Union fine of $780 million in 2021, PA Consulting said in a report.

The agreement signed with Tesla on pooling CO2 emissions in Europe significantly reduces this risk. The final result for FCA, though, will depend on how successful Tesla will be in Europe.

FCA sold 21,446 cars in Europe in the first quarter, according to JATO Dynamics. Sales more than tripled from 6,228 in 2018, thanks to the successful launch of the Model 3 midsize sedan.

According to Chrysler Group reports and Automotive News calculations, FCA had already spent more than $1.1 billion in regulatory credits through 2017, mainly buying from Tesla within the U.S. regulatory credit-trading system managed by the Environmental Protection Agency.

In the first quarter of 2019 alone, Tesla booked $200.6 million in revenue from the sale of regulatory credits.

The sum spent by FCA in fines and credit purchases compares with $10 billion that it has promised to invest in the electrification of its product range within the 2018-22 business plan.

'Strong hedge'

Manley told analysts that the credit purchases “are designed to minimize FCA’s cost of compliance and provide it with a strong hedge against a potential for a lower price recovery in the market than the cost of the technology.”

Following the strategy worked out by the late Sergio Marchionne, Manley thinks carmakers will initially have to sell electric vehicles at a loss, making the strategy of buying credits and paying the residual fines financially more viable.

Manley told analysts that the purchase of CO2 credits “is a complementary action to our investment and deployment of our electrified fleet, which will reach 17 nameplates by 2022. And it will bridge the period until we see the market acceptance, technology cost and infrastructure development reaching the point that may make the sale of heavily electrified vehicles more financially rational.”

As for the Europe, Middle East and Afica region, Manley said the Jeep Renegade and Compass plug-in hybrids will start production in early 2020, to be followed by the new Fiat 500 BEV and 10 additional launches of EVs over the following two years.

No mention was made of mild hybrids (gasoline engines with a starter/alternator powered by a 48-volt battery), which had a relevant role in the plan presented last June in Balocco, Italy. The first of those vehicles — the Ram 1500 pickup — was launched last year in the U.S.  

Declining need for credits

How will the new technologies and purchases of regulatory credits split the burden of reaching CO2 compliance levels in Europe?

This year, Manley said, most of the burden will fall on purchasing credits (80 percent) and the rest on  technological improvements to the current product range. As electrified vehicles are launched in 2020, their role will grow.

By 2021, Manley said, 40 percent of the compliance will come from conventional technology, 45 percent from electrification and 15 percent from purchased credits. By 2022, he said, the need for pooling deals will be “very, very small.”

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