Analyzing the profitability impact of EU CO2 standards on German carmakers

Abstract

This study investigates the impact of EU’s 2019/631 CO2 emission performance standards on the profitability of the three largest German carmakers by analyzing their financial data using a quantitative approach and selected profitability metrics. This topic is still relatively unexplored in existing literature, although some studies have shown that this type of regulation adversely affects the profitability of car manufacturers. However, the profitability metrics, which are the key element of this study, have been extensively studied in previous accounting literature. This study incorporates these profitability metrics into the topic of regulatory pressure in the European automotive industry and finds that while the three German carmakers have incurred additional costs to adhere to the emission standards, their per-vehicle and overall profitability have not decreased. In other words, the regulation has not had a significant negative impact on their profitability or the negative effects have been offset by other more positive factors. Furthermore, it shows that traditional carmakers are reasonably capable of adapting to demanding emission standards. The main limitation of this study is the difficulty of isolating the effect of the regulation from other factors that affect profitability. It is also possible that other profitability metrics could indicate differing results compared to the specific metrics selected for this study. Further studies could therefore utilize a wider selection of profitability metrics and account for more internal and external factors affecting company profitability.