Tesla sells European emissions law lifeline to Fiat Chrysler

2/km—a figure that works out at roughly 57mpg for gasoline vehicles, or 76mpg for diesel-powered vehicles.

From 2020, 95 percent of an automaker’s new cars sold in the EU have to meet this target, with the remaining 5 percent falling under the law in 2021. And the penalties for failing are draconian: a €95 ($107) “excess emissions premium” per gram of CO₂ over the target, for every single car registered in the EU that year.

For some OEMs, this has the potential to be ruinous; if FCA’s portfolio were the same in 2021 as it was in 2018, the automaker would have to pay some €2.77 billion ($3.12 billion), out of total net global profits of €3.63 billion ($4.1 billion).

Some OEMs are going all-out in their efforts to electrify in order to meet the new rules; VW’s Roadmap E should be viewed in this context, for example. But for others, the road to electrification is not so simple. Although FCA announced a bold, €9 billion ($10.5 billion) plan to electrify its lineup by 2022, its actual plug-in portfolio is currently limited to the Chrysler Pacifica Hybrid (which is not sold in the EU) and the Fiat 500e, a car thought to lose the brand many thousands of dollars for each one sold.

Although the exact financial terms of the deal are unknown, the says it the agreement is in the range of “hundreds of millions of euros.” Interestingly, the also reports that Tesla had extended the offer to other OEMs to join this emissions pool but that none had accepted by the March 25th deadline. For Tesla, this will no doubt be a welcome financial lifeline. Each of Tesla’s four profitable quarters since the company was founded in 2003 have depended heavily upon the sale of Zero Emissions Credits in California. Although the company has yet to release its results for Q1 2019, we do know that it suffered a precipitous drop in sales during the first three months of the year, particularly among the high-margin Model S and Model X electric cars.

Furthermore, the company has had to dip into its cash reserves to meet a hefty $920 million bond payment, with more debt coming due soon. And if that wasn’t enough, the company needs to develop and then build the Model Y electric crossover, which will require heavy investment in capital expenditures. (This kind of spending has fallen heavily of late as Tesla has slashed its budget wherever it can in an attempt to improve its financial performance for the market.)

However, it’s unlikely to be a long-term panacea; at some point, FCA’s electrification has to happen (or it has to withdraw from selling vehicles in the EU). In the meantime, it now needs Tesla to sell as many EVs in Europe as it possibly can.