Explainer: New Vehicle Efficiency Standard

Australia entered a new automotive era on January 1, 2025.

The arrival of a carbon-dioxide (CO2) reduction scheme added a new and important influence on what new vehicles will be available in Australia in coming years and what they will cost.

You’re probably already aware of the New Vehicle Efficiency Standard’s introduction given the amount of debate that went on leading up to its legislation in late 2024.

There was plenty of disinformation (that’s just plain lies, folks) and misinformation (stuff that’s wrong, but not intentionally so) and that’s to be expected given how much lobbying, arguing and proposing of alternatives was going on. Selling cars in Australia generates big bucks, don’t worry about that.

In the end, the stark reality is this. Climate change is real, the impact of transport CO2 emissions is a significant contributor to that and Australia needs to play its part in reducing it. After all, the USA has had fuel economy rules (CO2 reduction by another name) since the 1970s. Up until January 1, it was pretty much only us and the Russians amongst developed economies who didn’t worry about this stuff.

Which means, basically, we’ve got a long way to go to catch up.

Here, we’ve compiled an NVES explainer, which we’ve tried to keep as simple and understandable as possible.

Answer: The NVES is meant to reduce CO2 emissions from new light vehicles powered by internal combustion engines and therefore encourage car companies to offer Australian car buyers more choice in terms of more fuel-efficient vehicles and EVs.

A: Passenger cars, SUVs, utes, small vans up to 4.5 tonnes gross vehicle mass (GVM). We’re talking the sort of vehicles you and I can shop for in a dealership, not the big vans, trucks and buses used entirely for commercial purposes.

A: Carbon dioxide is what’s called a greenhouse gas. That means it traps heat in the atmosphere, triggering rising global temperatures. The more we pump into our atmosphere, the more temperatures rise and the environmental scale gets tilted towards disaster – so-called ‘one in 100 years’ storms and bushfires happen quite often now. Light vehicles are estimated to contribute 10 per cent of all CO2 emitted into the atmosphere by Australia each year. The federal government has announced a net zero CO2 emissions target by 2050. The NVES is integral to achieving that.

A: The combined emissions average of each model in an automotive brand’s line-up is measured against the CO2 emissions target set by the NVES. The target reduces annually.

The CO2 combined emissions average for each model is based on testing to achieve Australian Design Rule (ADR) certification – not manufacturer estimates.

The total number of each model incorporated into the combined CO2 calculation is based on how many unique Vehicle Identification Numbers (VIN) are issued by the federal department of transport’s Register of Approved Vehicles (RAV) within the audit period – so how many are imported, not sold.

Carbon credits are issued for beating the target – the more you undercut it by the more credits you get. Dollar fines are issued for exceeding the target. The more you exceed it the more it costs.

Essentially, across a brand, if your combined CO2 output is less than your combined CO2 target then you’re in the clear. And if you have excess credits you can sell them to brands facing fines.

A: Yep. Here’s an extreme example: an EV-only brand like Tesla that issues zero emissions will generate heaps of credits, while a diesel-centric brand such as Isuzu will likely generate heaps of fines.

It’s important to note that while the NVES kicked off on January 1, vehicle emissions won’t be judged for credits and fines until July 1. It’s a bit of a warm-up period for everyone involved. Basically guys, it’s time to get your act together.

Even then the NVES Regulator will be measuring vehicle emissions over a three-year period. Sure, progress will be constantly monitored (by both the regulators and the car companies themselves), but a car company will have another two years to rectify its emissions and dollars fines won’t be issued until February 2028.

A: Well, it means a brand could sell some really dirty vehicles in the first couple of years of the NVES and then go all-EV in year three to balance emissions over the three years. It gives brands time to adjust.

A: Exactly. The credits could really bolster a business’ bottom line. Just consider Tesla has generated $10 billion from selling off carbon credits to brands that can’t hit US limits. For a while it was the only way Tesla made money!

For the debtors the idea is to try and get back in the black within two years and/or buy the credits you need for less than the fines handed out after year three.

A: The way they are calculated it can be pretty onerous. Essentially it will cost $50 or $100 per gram per kilometre of CO2 each vehicle sold is over the target. The lower figure applies if the brand pays when the infringement notice turns up. Challenge it legally and lose and it’s the higher figure.

The potential fines will add up quickly for a big seller like a popular diesel ute, especially if you haven’t got vehicles to redress the emissions balance.

This is a very extreme example, but say you import 10,000 examples of a model range that average 70g/100km over the limit. That’s 10,000 x 70 x 100 (worst case scenario) = a $70,000,000 fine!

But remember, a brand might end up paying nothing or even being in the positive overall if it imports enough low and especially zero emissions vehicles to Australia that undercut the target.

A: Of course! Brands can try to tilt the balance more in their favour by clumping their emissions results into larger automotive ownership groups. For instance, Stellantis has some high emissions brands including Jeep, but has also just launched the electrified brand Leapmotor in Australia, which will generate credits.

And don’t forget, emissions become ever-more stringent over the next five years and both the rate and timing of the reduction has been a bone of contention throughout the heated debates ahead of the introduction of the NVES. Some brands are still complaining now.

Also, the federal government has split vehicles subject to the NVES into two classes. Class 1 is for passenger cars and soft-roader SUVs. Class 2 is for large 4x4s that are body on frame construction and can tow more than 3.0 tonnes.

Within the two categories the vehicles will be split into sub-groups dependant on weight to determine their increasingly stringent emissions targets.

A: It’s a reflection of the fact that so many Australians buy diesel utes and SUVs that emit heaps of CO2.

Think of Toyota and the many diesel LandCruisers, Prados and HiLuxes it sells.

It will claw back carbon credits with its hybrids and expanding number of EVs, but it will still have a lot of diesel emissions fines to deal with.

While Toyota would survive whatever happens, other brands could even disappear from the market if the restrictions prove too onerous too soon to keep their model ranges profitable.

A: Opponents of the NVES say yes and some say by quite a lot. Backers say no.

Meeting the NVES targets could mean importers have to sell vehicles here that have more expensive technology – so prices would go up. Fines could eventually drive prices up for some dirty vehicles too, but that could take years to shake out remembering the NVES works in three-year cycles.

On the positive side, the credits accrued by low- and zero-emitting vehicles could help reduce their prices. The profits from selling those credits could be passed on to consumers in the form of price reductions. Yep, nice theory.

Remember, the normal trend of new vehicle recommended retail prices is ‘up’, NVES or no NVES. Car companies sell their cars for the maximum the market can bear, not the minimum.

A: Yes – if brands can’t make a profit selling them and it hurts their sustainability too much of course they will.

Sad to say for all you lovers of diesel SUVs and utes, but they are prime candidates for the chop in coming years. Stuff like the plug-in BYD Shark 6 and Ford Ranger PHEV are precursors of what’s to come in this space.

A: Almost certainly.

In a presentation backed by the Motor Trades Association of Australia and the Australian Automotive Dealers Association last year, US fuel standards expert Barbara Kiss outlined seven levers the car companies can pull in response to the NVES:
• Reduce the number of thirsty models in your line-up
• Import fewer examples
• Increase the price of thirsty models
• Swap to cleaner powertrain tech
• Buy credits
• Pay fines
• Exit the market

But if you think the number of brands in the Australian market will be significantly reduced, remember there are a bunch of low- and zero-emissions Chinese brands lining up to get into Australia.

A: No, but it will drive up their prices if new car prices go up or popular but dirty models disappear from the market. Think how COVID impacted Toyota LandCruiser 200 Series supply and what it did to the market. Crazy times.

A: Yes, it’s already happened with Toyota moving its passenger car line-up to all-hybrid. It might have been doing that anyway, but it did come without a price rise for the hybrids that stayed. Trouble is, they were already more expensive grade-for-grade than the pure ICE models that disappeared.

A: Because of safeguards built into the legislation, it’s more likely to have aspects eased than axed. It also will depend on the make-up of the Senate. If the Greens control the balance of power it would be hard to see anything drastic happening.

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