EU defines the itinerary for the bus market

The EU aims for climate neutrality by 2050. Focusing on road heavy-duty vehicles (HDVs), is crucial to achieve the goal. While HDVs make up just 2% of vehicles, they account for 28% of transport emissions. To ensure that each sector contributes proportionately to their share of the challenge, the EU launched and approved the first regulation on CO2 emissions standards for HDVs in 2019. This legal measure aims to reduce emissions in the HDV sector by setting targets for the average fleet emissions of each individual original equipment manufacturer (OEM). Since then, this initial regulation has been revised and updated to better align with industry developments and decarbonization targets.

On May 13, 2024, the European Council approved the updated emissions performance standards for new HDVs, including city buses. The most significant changes include:

i) New emissions reduction targets for HDV: 43% by 2030, 64% by 2035, and 90% by 2040.

ii) City buses and coaches have their own category separated from other HDV, with city buses having a sales target instead of emission reduction target.

iii) Reduced fines for non-compliant OEMs from 2030 onward.

Zooming in on the impact of these standards on buses, city buses[1] are subject to a zero-emission sales target. By 2030, 90% of all city buses sold must be zero-emission vehicles, and by 2035, this target increases to 100% (see figure 1). This means that by 2035, all new city buses sold must be zero-emission vehicles. On the other hand, the target for coaches is based on reducing average yearly emissions of newly registered vehicles. That means that by 2030, the average emissions of all newly registered coaches must be 43% lower than in 2025 (see figure 2).

[1] City buses and coaches are categorized based on their weight and intended mission profile (purpose). The main physical difference between them is that city buses accommodate standing passengers, whereas coaches do not. For a more detailed definition see Annex I of regulation.

Regarding the reduction of fines for excess CO2 emissions by HDVs, initially, in 2019, the regulation proposed fines for OEMs of EUR 4,250 for each gram of CO2 per metric ton kilometer (gCO2/tkm[2]) above the limit until 2030. After 2023, the fines were set to increase to EUR 6,800 gCO2/tkm, estimated as an average of the OEM fleet. Under the revised text, the fines have been set at a fixed rate of EUR 4,250 per gCO2/tkm. This rate will apply starting from the year when the emissions targets are officially enforced. The objective of the fine is to ensure that the cost of implementing technologies to reduce emissions is lower than the cost of paying the fines.

To facilitate the transition, the legislation includes a credit and debt system. In essence this system benefits OEMs that transition faster than the targets set by the regulation by allowing them to earn credits, which can later be used to offset potential debts in the future. For example, a bus company that reaches the 100% target of zero-emission city bus sales before 2035 can earn credits to offset any future debts incurred from selling polluting city buses or coaches. It’s important to note that this system applies only to buses, trucks have a separate credit and debt system.[3]

The inclusion of buses in the legislation pushes a transition that is already well underway for city buses and provides momentum to the zero-emission coaches market segment. This legislation links two markets that are growing at different speeds, perhaps in the hope that one will help propel the other. As extensively covered in our previous publication Fast track to green: European city buses ahead of schedule, the city bus market has been moving decisively toward zero-emission mobility. In contrast, coaches which are harder to electrify due to longer distances without stops requiring heavier batteries, have progressed considerably slower.

[2] Measures the grams of CO2 emitted when moving one ton of cargo across one kilometer.

[3] See ICCT analysis on the market for trucks.

When penalties are involved, the first question that springs to mind is: How significant could the economic impact be on OEMs if they fail to comply with the targets? To address this question, we have built a representative OEM model to simulate its progression in meeting the regulatory emissions targets. We used two core assumptions. Firstly, we assumed a total fleet size of 7,000 vehicles a year, comprising 1,400 city buses and 5,600 coaches. Sales were distributed as 30% city buses and 70% coaches, reflecting EU bus market trends. This is consistent with the stable market size of 750,000 vehicles, which includes 535,000 coaches and 215,000 city buses. Secondly, we assumed that all non-zero-emission city buses emit greenhouse gases at an average rate of 26 gCO2/pkm.[4] Likewise, coaches were assumed to emit 33.6 gCO2/pkm on average.[5] Finally, for simplicity, we assumed that all manufactured vehicles would either be zero-emission (less than 1 gCO2/pkm) or emit at the aforementioned average rates.

Based on current market dynamics, we assume that by the start of 2025, 70% of new city buses sales will be zero-emission vehicles, while all new coach sales will be diesel only. This base case scenario is shared by both the leading OEM and the laggard OEM (see figure 3). After the initial starting point, the two OEMs diverge in their development paths. The leading OEM (solid line in figure 3) immediately begins changing its sales composition, reducing diesel city bus sales by 15% annually, aiming for a complete transition to zero-emission buses by 2040. For coaches, the leading OEM’s coach division starts at 0% zero-emission sales, increasing at a rate of 16% annually, reaching 90% zero-emission vehicles by 2040. In contrast, the laggard OEM (dotted line in figure 3), starting from the same position as the leading OEM, does not change its fleet composition until the penalty system is introduced in 2030. From that point on, this OEM matches the leading OEM’s rate of change.[6]

Figure 3 illustrates the theoretical paths of both OEMs within the debt and credit system. The blue area represents the zone where OEMs can earn credits by decarbonizing their production faster than required by regulations. The orange area represents emissions that exceed regulatory requirements. This area is adjusted at the start of each new target year. The gray area in the middle is the zone in which OEMs neither earn credits nor incur debt.

[4] Taken from the Vehicle Energy Consumption calculation Tool (VECTO), a simulation tool developed by the European Commission to determine CO2 emissions from HDVs.

[5] Greyhound factsheet 2020.

[6] A consistent growth rate of zero-emission vehicle sales ensures that the leading OEM remains within the credit range, avoiding fines.

Being in the orange area does not automatically result in fines. Fines are only imposed if the average emissions exceed 5% of the manufacturer’s specific CO2 emission target, multiplied by the number of HDVs sold during the period. On the other hand, there is no limit to the credits that can be earned; they are awarded for every gram of CO2 below the required target and have a validity of seven years. In addition, the EU allows for a transfer of vehicles between manufacturers. In the scenario depicted in figure 3, the leader OEM, besides avoiding fines, can also transfer up to 5% of its sales to the laggard OEM.

For example, in 2030 a laggard OEM could ‘’receive’’ 350 zero-emission vehicles from a leading OEM. This transfer would help the laggard OEM reduce its average emissions. For OEMs that produce 100% zero-emission vehicles, this could be an interesting source of cooperation. They could benefit financially by transferring vehicles to non-compliant OEMs, provided both parties agree to financial compensation. However, the market is not designed to be a liquid secondary market. The maximum transfer is capped at 5% of the receiving company’s fleet, and transfers occur through bilateral contracts facilitated by the European Commission.

For the laggard OEM, fines can accumulate quickly in our scenario, reaching a total of EUR 1bn over the 10 years from 2030 to 2040 (see figure 4). On average, the fine per diesel vehicle sold is about EUR 40,000 in our case study,[7] although it can vary significantly each year depending on how much the OEM exceeds the emission targets set for that year. To put this in context, a EUR 40,000 fine would represent about 10% of a vehicle’s value. This would likely result in significantly reduced margins or a substantial price increase for diesel vehicles. On the other end of the spectrum, an OEM that sells 100% electric vehicles could theoretically benefit by transferring some of its vehicles to the laggard OEM. This could result in a gain of EUR 50m, assuming a 1:1 price exchange in a bilateral contract.[8]

Even if the long-term effect of the updated emissions standard policy is to reduce emissions by at least 90%, some diesel buses will still be sold in the EU during the transition phase. The number of diesel buses entering the market will depend on the level of cooperation among OEMs within the vehicle transfer system. Higher cooperation means that individual average emissions will go down, supported by zero-emission sales.

A side effect of the vehicle transfer system is potential carbon leakage from international OEMs. As mentioned in our previous report Electric city buses: Trade and technological dynamics shape the sector, Chinese and Turkish competitors are entering the zero-emission market. This raises the question: Could foreign OEMs selling only zero-emission vehicles in the EU but diesel ones elsewhere, shift pollution to other regions?

[7] Estimated by dividing the total fine by the number of non-zero emissions vehicles.

[8] The laggard OEM pays the leading OEM the same amount it would have paid to the European Commission to cover the fines.