Prices of new and used cars are about to increase, AGAIN!

This week, the Albanese government announced that from the 1st of January 2025, car manufacturers will need to have an average CO2 output 60% below the current average by the end of the decade. This threshold average will apply across the total model lineup of a car importer.  

Chris Bowen the Climate Change Minister says that Australian drivers will save $1000 a year in fuel and that ICE vehicles will not go up in price. I disagree.

While the policy makes sense and is likely to reduce the CO2 emissions of new cars sold in Australia, it is wrong to say there won’t be any impact on Australian consumers. Of course, there will be, that is the point - isn’t it?  

Take, for example, Toyota. Australia’s largest seller of cars and in most years sells one-quarter of all cars sold in this country. They have a vehicle in almost every model segment and are hugely influential in the market. Their Landcruisers and Hilux Utes dominate the 4WD and commercial market and are currently powered by diesel and are likely well above the CO2 threshold that the government will set. Once the legislation comes into force, the popularity of these models is likely to put pressure on Toyota’s total average CO2 output.

Toyota being a rational business will likely try to dampen the demand for these higher polluting cars by increasing the price and hence their gross margin. They will then use this increased margin to subsidise their hybrids and EVs to increase their volume and hence lower their average CO2 output to avoid the government-mandated fines. As a diversified OEM, Toyota has the ability to play with its sold model mix to ultimately sell more cars by using internal methods.

For those brands that aren’t diversified and sell mostly ICE models above the threshold, then their only option will be to trade their liability with another OEM that mostly sells EVs to avoid the fines. The effect on the price of ICE is the same, the internal cost to sell an ICE car will go up and the cost to sell an EV will go down.

The reality is, that despite the environmental rationale to buy an EV that there might be, there is still consumers who want and need an ICE vehicle. These cars will still be popular and will certainly go up in price. In fact, EVs are generally still more expensive to produce and therefore all cars on average will be more expensive.

This will inevitably lead to increased prices for used cars as the affordability of new cars reduces. This dynamic always pushes consumers towards more affordable used cars, which were originally sold before the legislation. Therefore, the price of used cars will generally go up leading up to and after the 1st of January 2025. This pressure will be particularly evident in large 4WD and Utes.      

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