What you need to know about NVES

COMMENT

Fuel efficiency standards have been in place in markets like Europe and the US for decades. As they have become more stringent, they have shaped both vehicle and powertrain choices.

They have largely been put in place to decrease CO2 (carbon dioxide) emissions. CO2 is a by-product of burning fossil fuels.

In their most extreme form – that is, zero CO2 emissions – fuel efficiency standards are driving markets like Europe towards a (largely) battery-electric vehicle future.

Australia’s first fuel efficiency standard has wide-reaching implications. It has the potential to not only change long-standing powertrain default settings (think dual-cab = diesel) and, perhaps, the cars many of us choose, but it could even see established brands exit the Australian market and/or fast-track the growth and influence of relative newcomers.

The federal government announced its intention to introduce the New Vehicle Efficiency Standard (NVES) in early February. Since then, key auto industry bodies and brands have had their ‘say’.

The government is currently considering the submissions but already the rhetoric and responses have had effects.

Strident media outreach that foretold significant price hikes for some popular vehicles from the Federal Chamber of Automotive Industries (FCAI) has already seen two EV brands leave the peak industry body.

Insiders say the anti-NVES and potentially anti-EV rhetoric has prompted at least two other brands (established mainstream, wide product portfolio brands) to also consider departing.

Even if they stay (it’s 50:50, the same insiders say), in both cases, senior executives are ready to step down from key FCAI roles in protest to the organisation’s approach so far.

In general terms, discussion has largely settled on which of the three scenarios proposed by government is the best way forward or indeed how the scenarios need to be tweaked. Additional calls have been made, variously, to water-down the whole idea of a fuel efficiency standard or to delay the introduction.

Based on the current political winds, NVES in some form will be implemented – and quickly. In combination with The Greens and independent MPs and senators, the Labor government has the numbers in hand.

The same sources state that the more stringent NVES is at point of legislation, the more likely it will have the minor parties’ support. In short, NVES is a given. It’s not going away – only its final form remains up for debate.

So here are a few NVES nuggets that I think we should all know. They’ve be gleaned from various bodies’ submissions in response to NVES and briefings carsales editors have attended, including one with ex-General Motors executive and fuel efficiency standards expert, Barbara Kiss.

Ms Kiss has been in Australia assisting national motor trades and automotive dealer associations with their respective responses to NVES. That said, having worked through the introduction of fuel efficiency standards and emissions credit trading schemes in the US, her experience is unrivalled.

The discussion paper created around NVES includes three scenarios, with the government’s favoured scenario the “fast but flexible” Option B.

Brands such as Volkswagen and Hyundai have put their weight behind this option, which sees aggressive emissions targets implemented on an equally aggressive timetable.

In most cases, brands have qualified their support for intermediate Option B, albeit with tweaks.

Perhaps the biggest change off the bat is realigning large 4x4 SUVs’ emissions with light commercial vehicles (ie: dual-cabs). Currently, the federal government’s proposal has these vehicles subject to passenger car levels of fuel economy.

My own observation is that this is likely an easy concession for the pollies to make. So easy, it looks like it is there as a bargain chip…

The proposed efficiency standard is aligned with US regulations but hits harder – as Australia (the pollies say) has more ground to make up.

Much has been said about Australia’s lack of any mandatory efficiency standard. The delay in its implementation (governments of both persuasions have proposed them since the late-noughties) means there’s a significant gap between where our fleet sits and comparable vehicles in the US.

In speaking with carsales, Barbara Kiss described NVES as it sits (even Option B) as one of the most aggressive set of changes proposed globally. While the key US efficiency standard (there are two) is targeting 1.5 per cent improvement in efficiency per annum, NVES is much higher – around four per cent.

At its basic level, Option B would see average passenger car CO2 emissions reduced from 141g/km in 2025 to 58g/km in 2029. The targets for LCVs are 199 down to 81. Current averages are circa-150 and 220 respectively…

For now, each brand/OEM will be regulated individually. Bundling (think Volkswagen/Audi Group) is still to be confirmed under a formal scheme. OEMs will be pushing hard for this.

How Australia’s independent importers (think Ateco Group) will be regulated and/or comply with NVES is still unclear, say sources at the Motor Trades Association of Australia (MTAA). Who will be responsible for paying penalties if targets are not met? Conversely, who will benefit from the credits that low emitters can trade?

It’s important to note that vehicles imported under the Specialist and Enthusiast Vehicle Scheme (SEVS) are not regulated under the NVES proposal. There are also minimum volumes levels for NVES to apply.

A separate but related issue – SEVs could be problematic as there is no current cap on the number of vehicles that can be imported via this scheme. And, frankly, most are not in the spirit of the regulation.

It’s important to understand that the aggregated fuel economy of a brand’s portfolio of models is what will be measured and regulated – broken into passenger car and light commercial vehicle (LCV) categories.

Notwithstanding the tweaks proposed above, SUVs are categorised as passenger cars.

A manufacturer with a high number of fuel-efficient hybrid passenger cars will likely fare well under the proposed Option B – even with heavy-duty diesel SUVs in the mix. However, that may not help them avoid penalties if they have a thirsty, LCV model mix.

EV models will likely earn efficiency credits that may offset thirstier vehicles. EV-only brands (Tesla, Polestar, for example) may have the ability to earn significant revenue via trading credits with brands that need them in order to avoid paying hefty fines.

Many brands with mixed portfolios will need to keep their credits to balance their model mix.

Every zero CO2 tailpipe tech vehicle (think battery-electric and fuel-cell) sold will earn its brand credits that can offset the emissions of conventional vehicles. There’s even multiplier factors proposed, which compounds the benefit to a brand.

If you are an EV-only brand, these credits are not required… But they can potentially be sold. Logically, the price the credits can be sold at would sit under the level of the penalty applied.

Tesla is famous for having derived significant revenue from selling credits in the US market. The company generated $US1.79 billion from carbon credit sales last year, according to its Q4 2023 and annual financial report. This brings its total earnings from such credits since 2009 to nearly $US9 billion.

Some consumers are confusing a fuel efficiency standard such as NVES with looming new emission regulations, such as Euro 6.

Making a diesel vehicle cleaner in terms of tailpipe emissions – for instance, adding pre-treatment like AdBlue – may deliver a ‘cleaner’ EU6 emissions certification, but it does not carry that that will also improve or even change its fuel economy.

NVES is mandating a reduction in CO2 emissions via a reduction in fuel use and, potentially, fuel type. Litre for litre, burning diesel in an engine emits more CO2.

On the basis NVES is inevitable, there are seven ‘levers’ brands can ‘pull’ to meet NVES targets – some short-term but most longer-term.

They are (in order of likely implementation):

Exiting the Australian market is a real possibility in the case of marginal brands.

In a word: maybe… While NVES could potentially make electric vehicles cheaper, this is far from certain. Brands with a mix of EV and ICE will be doing everything they can to keep that mix profitable.

Pure EV brands are already low-margin businesses, and although there will be revenue from credits (potentially), it’s far from certain they’ll reduce prices.

In reference to the above levers and prices, the MTAA says: “Which option an OEM will take depends on their global plans, their investment in low- and zero-emission technology, and how important Australia is to their operations. What is certain, however, is that if an OEM is paying a penalty or buying credits, this will have to be factored into costs and the price of the vehicle will rise. Under the government’s preferred option, we anticipate such price rises will be inevitable.”

I’d add one additional observation: new tech is seldom cheap…

The obvious winners in the implementation of fuel efficiency standards are those brands already well advanced with low- and zero-emissions technology and/or brands whose products are inherently efficient – ie: focused on small passenger cars.

There are some potential losers but it’s fair to say all non-EV brands will have work to do – especially when it comes to meeting 2029 targets if they remain as is.

The most obvious are brands with high reliance on sales of diesel LCVs and large 4x4 SUVs – particularly those that do not have passenger car volume or EVs to offset the thirstier model line-ups.

Ford Australia’s heavy reliance on Ranger and Everest volume means it will need to be canny. Toyota’s brand has been built on HiLux and LandCruiser but, in contrast to Ford, it has substantial hybrid small car and SUV volume to balance the ledger.

Mazda is flagged in the MTAA’s submission to have challenges both on the passenger car and LCV ends of its portfolio. Other brands likely watching next NVES steps very closely include Isuzu Ute and even Australian market stalwarts like Subaru.

Most pundits are tipping used car prices to rise in response to NVES – some are suggesting it’s already started to happen. Perhaps with the exception of EVs.

New car prices have a direct effect on used car prices. So does supply. It logically follows if high-demand vehicles such as SUVs and LCVs get more expensive or are restricted in supply (remember those seven ‘levers’ that brands can employ), the used vehicles of that type will get more expensive.

There are calls for a number of other legislative and regulatory changes to accompany NVES introductions.

One key change is the scrapping or at least modification of Australian Design Rules (ADRs).

Compliance to ADRs is required for new vehicles to be sold Down Under. They apply to almost every aspect of a new car – even such items as child seat tethers.

Even if cars are sold in developed markets such as Europe and the US, there is still the above requirement. As such, brands have to go through an expensive process to certify every new model.

Brands have called this out as a blocker – restricting access to the Australian market for new models.

Many quarters are calling for Australia to dump ADRs or at least accept comparable developed-market standards, specifically, European, Korean, Japanese and US. Pointedly, the Chinese certification standards have been excluded from most organisations’ suggestions.

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