FCA to pay $US2 billion for emissions credits

Car-making conglomerate Fiat Chrysler Automobiles is set to become one of Tesla’s most important cash cows.

The Italian-American car-maker has announced it plans to spend $US2 billion to buy “regulatory” or emissions credits over the next two years.

The worst positioned of all the significant European players to cope with a transition to hybrid and EV technology, FCA is spending the money to minimise its CO2-emissions fines in both Europe and the US.

While FCA refused to say how much the emissions-credit swap deal with Tesla cost, its chief financial officer Richard Palmer last week told analysts it spent $US674 million on credits and fines last year.

But European penalties for failing to meet average CO2 emissions targets are set to escalate with the new EU7 laws in 2020-21.

According to published EC data, FCA’s CO2 emissions target in Europe is 120g/km now, but will fall to just 91.8g/km in 2021. Even if it squeezes it down to 98.5g/km by 2021, as FCA predicts, it would still face a $US780 million fine.

Palmer admitted to business analysts that FCA had committed another $US2 billion to Tesla – and other rival car-makers – to buy emissions credits over the next two to three years while its own electrified efforts turn into production cars.

Plug-in hybrid versions of the Jeep Compass and Renegade are slated for early next year in Europe, to be followed by 10 EV launches in the next two years, including an electric version of the ageing cult car, the Fiat 500.

The emissions-swap system in the US is managed by its Environmental Protection Agency (EPA), which reports that FCA had spent $US1.1 billion up until the end of 2017.

By comparison, the FCA 2018-2022 business plan lays out a scheme to spend $US10 billion on electrifying its line-up.

Car-makers can earn the credits with low- and zero-emission vehicles of their own, and if they sell enough of them to pull their fleet average CO2 emissions under their mandated target, they can sell the balance on to less advanced companies.

That puts Tesla in a particularly favourable position to sell credits and it clocked more than $US200 million in credit revenue – even if providing a CO2 emitter with a get-out-of-jail card hardly fits with its vaunted mission.

The possible hiccup here for Tesla’s revenues is that if its sales fall in Europe and America, so will the credits it has available for sale to dirty car-makers.

Also, as other car-makers roll their own plug-in hybrids and EVs into their line-ups, they can sell their own credits, too.

“[Credit swaps] are designed to minimise 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,” FCA boss Mike Manley told analysts.

“It 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.”

Manley insisted car-makers would have to sell their EVs at a loss to avoid fines for excess CO2 emissions, which would effectively underwrite the credit-swap market.

FCA will wear a fine of $US134 million in Europe and the Middle East this year, but the costs will rise next year.

Without the Tesla agreement, Manley told analysts the fines would have been $US436 million.