Carmakers are bracing for a hybrid electric car price war this year as they try to avoid steep EU fines for carbon dioxide emissions.

2020 set to be year of the electric car, say industry analysts Read more

Some carmakers are struggling to hit tough new EU carbon emission rules introduced in January, which force them to reduce the amount of carbon dioxide their vehicles emit. This may force auto firms to slash prices on lower-emitting plug-in hybrid electric vehicles (PHEVs) to encourage consumers to buy them, according to the investment bank UBS.

Average CO 2 emissions of almost all cars sold in the EU during the next two years must fall below 95g a kilometre, with heavy fines for carmakers that miss individual targets designed to meet the goal. The rules include the UK until at least 1 January 2021.

Around €8.4bn (£7.1bn) will be wiped from carmakers’ profits over the next two years as they try to comply with the regulations. That’s €1bn more than previously expected, due to electric car delays and consumers’ desire for more polluting SUVs, according to calculations by UBS analysts led by Patrick Hummel. Sales of PHEVs, which can be charged from an external source without using the internal combustion engine, need to grow sevenfold between 2019 and 2021, they said.

“As [carmakers] likely need to aggressively push PHEVs to their customers, we see risk of a price war in the course of 2020,” wrote Hummel.

Germany’s Daimler, the maker of Mercedes Benz cars, and France’s Renault are particularly at risk of missing their targets and having to pay large fines. Fiat Chrysler Automobiles is also at risk, despite a deal thought to be worth hundreds of millions of euros to “pool” its emissions with Tesla’s zero-emissions cars. While legal, the deal has been heavily criticised by campaigners.

Jaguar Land Rover, owned by India’s Tata Motors, is also exposed, with costs of £179m expected over the next two years. Britain’s largest carmaker, which has just launched a second round of tough cost-cutting as it struggles with electric investments, needs to increase its hybrid sales rapidly, UBS said.

The green credentials of some hybrid cars are controversial because of their continued use of polluting internal combustion engines alongside battery motors.

Julia Poliscanova, clean vehicles director at Transport & Environment, a Brussels-based thinktank, said there is evidence that plug-in hybrids rarely achieve the emissions reductions predicted by lab tests because users fail to charge them.

“In the real world, their emissions are often two or three times higher,” she said, referencing findings from the Miles Consultancy which said many business users never used their charging cables.

If plug-in hybrids are not charged, they can even emit more carbon dioxide and air pollution than the equivalent car without a battery, because a smaller engine is pulling more weight and therefore running less efficiently.

Nevertheless, plug-in hybrids, which can be charged from external sources, are a key part of carmakers’ emission-reduction efforts, because they can use the same factories in which they have already sunk billions of euros in investment.

The emissions limits could hardly have come at a worse time for the car industry, with China’s market suffering two years of recession even before the coronavirus outbreak and sales of their profitable diesel cars in freefall following the “dieselgate” emissions cheating scandal. At the same time, consumer confidence is weakening across some key European markets and Brexit uncertainty has dented sales in Britain.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

“The new car market is soft at the moment so dealers are having to work hard,” said Mike Hawes, the chief executive of the Society of Motor Manufacturers and Traders SMMT, the UK car industry’s lobby group. “It’s a buyer’s market.”

The costs of complying with the regulations are expected to vary across carmakers, which have radically different strategies. For instance, Volkswagen, the world’s largest carmaker by volume, has launched an all-out electric assault, with plans to produce 1m battery electric cars by the end of 2023. Rival executives believe the company panicked after its reputation was sullied by the dieselgate scandal. Rival manufacturers such as BMW and Daimler have instead focused in the short term on hybrids, which are easier to produce using existing factories and avoid problems such as shortages of lithium ion batteries.

Car executives argue that hybrids are essential to reduce society’s emissions. However, they are also particularly attractive from a regulatory perspective. All hybrids that emit less than 50g of CO 2 per kilometre under test conditions qualify for “supercredits” for the next two years. This means they count double under the EU regulations, so carmakers are equally incentivised to sell hybrids and battery electric vehicles.

“Plug-in hybrids are a short-term compliance strategy for vehicle manufacturers,” said Poliscanova. “They are unavoidably costly because you are locked into two engines and a motor. They should not be part of the future.”