Transparency Issues with ACEA Agreement: Are investors driving blindly?

Summary:

The ACEA Agreement target in 2008 will entail costs for the industry that are likely to to distributed differently between the member companies. Yet these costs, along with their competitive implicatications, remain hidden from the public.

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The ACEA Agreement is a voluntary agreement by the European automobile manufacturers association and the European Commission to reduce carbon dioxide (CO₂) emissions rates of vehicles sold in the European Union to a fleet average of 140 grams of CO₂ per kilometer (gCO₂/km) by 2008. If the industry fails to meet the 2008 target, the Commission is expected to adopt formal regulations to reduce CO₂ emissions from new passenger vehicles.

Key findings

Unfortunately for investors, two important aspects of the ACEA Agreement have not been disclosed to the public

Individual company commitments to bring the industry to this target are unknown.The lack of transparency about how companies will meet the ACEA Agreement target leaves investors in the dark because there is insufficient information to understand the financial implications of the Agreement on specific Original Equipment Manufacturers (OEMs).

Data on company CO₂ performance has not been disclosed. Investors need this data to understand the likely costs and competitive implications each company faces to meet the obligations of the Agreement and to track OEM progress towards meeting their commitments.

We performed a basic cost analysis for two scenarios by which the industry could reach the 140 gCO₂/km target in 2008. These two interpretations, including corporate average and uniform percent improvement approaches, capture the opposite extremes of how CO₂ emissions reductions could be distributed throughout the industry. These approaches reflect the costs OEMs may face if they are serious about meeting the 2008 target, or will likely face under regulations should the industry fail to meet its commitment.

OEMs face different ranges of possible cost exposures. BMW, PSA Peugeot Citröen, Fiat and DaimlerChrysler(DC) stand out as having the greatest variability in potential costs under the two scenarios analyzed. These scenarios could have very different implications for individual OEM’s capital expenditures. BMW and DC fair best under the uniform percent increase approach while fairing poorly in the corporate average approach. The opposite is true for Fiat and PSA.

Without full disclosure of all relevant information about CO₂ reduction strategies, investors in any of these OEMs could face unforeseen risk. Even without a formal mechanism within the ACEA Agreement, OEMs have committed to reaching the target as an industry and therefore should have a strategy to reduce the CO₂ intensity of their fleet by 2008. However with the exception of BMW, neither these strategies, nor relevant data to support them, were disclosed in OEM’s 2003 annual reports.