Background

This briefing gives an overview of the benefits of regulating new car fuel efficiency and CO2 emissions and examines whether past claims made by the automotive industry about the impact of such legislation actually came true. 

Context

In 2009, the EU set legally-binding targets for new cars to emit 130 grams of CO2 per km by 2015 and 95g in 2020. The regulation also required the Commission to carry out a review of “…the modalities for reaching, by the year 2020, a long-term target of 95 g CO2/km in a cost-effective manner…” On 11th July 2012, the Commission announced its proposal giving details of how the 2020 target should be reached.

How does the EU’s car CO2 law work?

The new legislation will define how to reach a target of 95 g/km limit for new cars sold in Europe in 2020. The rules are an update to the EU’s original legislation on binding CO2 targets agreed in 2008 (Regulation No 443 /2009).

The targets are to be achieved on average across all new cars sold in 2020. Individual cars can be above or below the limit. Vehicle manufacturers have to ensure that the average of their new sales meets these levels. Each manufacturer gets an individual annual target linked to the size (measured by weight) of all its new cars registered in the EU in a given year.

If car manufacturers exceed these limits they are obliged to pay fines of 95 EUR per vehicle per gram/km over the target.

What are the main benefits of more fuel efficient cars?

Fuel efficient cars bring enormous benefits: lower fuel bills for drivers, encouraging high-tech investment and jobs in Europe, lowering oil imports (and even a lower oil price) and reducing greenhouse gas emissions. The money saved by drivers in lower costs of vehicle ownership will also be used to boost local economies.

What is the link between car fuel consumption and CO2 emissions?

The amount of CO2 a car emits is directly related to the amount of fuel it consumes. A car that emits 130g CO2 per kilometer, as tested on the EU’s standardized test procedure, would consume around 5.2 litres of fuel to travel 100km. This would be reduced to around 3.7 litres/100km with a 95g CO2 target or 3.2 litres/100km3 if the 80g CO2 target advocated by T&E was achieved.

While overall greenhouse gas emissions have decreased by 15% between 1990 and 2007, those from transport have increased by 36% in the same period. The European Environment Agency estimates that cars are responsible 12% of the EU’s total CO2 emissions; and are the largest single source of total transport emissions. This increase in transport emissions has happened despite improved vehicle efficiency because the amount of personal and freight transport has increased. The improvements in vehicle efficiency have not been able to keep pace with the growth in vehicle use – further progress is needed.

How much could the average driver save if cars were made more efficient?

A large proportion of households’ budget is now dedicated to buying fuel and lower carbon, fuel efficient vehicles lower the costs of driving significantly. If the average car emitted 95g CO2/km (the EU target for 2020), the average driver in Europe would save around EUR 500 a year, based on today’s pump prices compared to current vehicles. If T&E’s 80g/km was adopted instead of the current Commission proposal an average car would save an additional 0.5 l/100kms and save around EUR 650 a year. More fuel efficient vehicles are also likely to benefit from higher resale values.

By lowering fuel costs motorists will have more disposal income they can spend in buying local goods and services – benefiting the EU economy. The European Commission4 estimate that avoided fuel use will progressively rise to €36Bn per annum in the period 2025-30.

Savings of 500 EUR a year for drivers will cumulatively pump 36 billion Euros into the EU economy instead of fuel tanks.

Won't more fuel efficient cars be much more expensive?

No. Future costs of technology are always over-estimated but the Commissions consultants estimate that the additional manufacturing cost could be just EUR 760. T&E believes that past experience shows that the actual figure is likely to be lower than this – significantly less than 500 EUR.

Around half of new cars are bought by fleets. These companies are not concerned just about the purchase price but the total cost of ownership. Low carbon vehicles have a lower cost of ownership through lower insurance, lower fuel bills. IF the costs of technology to improve the efficiency of the vehicle are passed onto the buyer at least a third of this will be passed onto the second owner in a higher resale value. Many leasing companies that buy 40% of new cars support the 95g/km target.

T&E estimate that lower fuel costs and higher resale values for more fuel efficient vehicles will provide a payback period of around 12 months for the average buyer of a new gasoline driven car and 7 months for a new diesel. Typically private new car buyers retain the vehicle for around 5 years, fleets for around 3 years. For new car buyers the costs of vehicle ownership will fall as a result of introducing more fuel efficient vehicles.

The vast majority of car buyers do not buy new cars but purchase second hand vehicles. Analysis of one of the EU’s largest car markets, the UK, shows that 3 out of 4 car purchases each year are on the second-hand market. Second-hand car buyers will get the benefit of substantially cheaper fuel bills.

Is a 95g CO2 target enough?

No. Since 2008 when the 95g target was proposed, carmakers have made rapid progress in cutting emissions. The costs of technology have also fallen. The industry had warned that cars would become unaffordable as a result of the targets, but the retail price of cars has actually dropped in real terms. In light of this progress and the fact that fuel efficient cars are needed more than ever in a weakened economy, the EU should go further.

T&E is calling for an 80g CO2 target for 2020 and an additional 60g CO2 target for 2025.

Have existing fuel efficiency standards worked?

Yes. Before legally-binding standards were introduced, between 2000 and 2007, emissions of the average new car (as tested on the standard test procedure) dropped by just 1.2% per year, on average. But since legislation was first announced in 2007 (it was formally agreed in 2009), the rate of progress has been 4% per year, on average. By the end of 2010, Toyota, Peugeot-Citroen and Fiat had virtually already met their targets for 2015; other carmakers were on track to reach their targets by the deadline.

Won't achieving the 95g/km target require a huge increase in electric vehicles?

No, but more ambitious targets, including for 2025, could provide a significant stimulus to the market. CLEPA (the organization representing European automotive suppliers) estimate that in 2020 just 2 - 5% of vehicles will be electric. Fuel efficiency legislation is the most effective tool to guarantee a market for high tech, low-CO2 technologies and to spur investment in research, development and manufacturing.

There is ample technology available to achieve the 95g/km target as confirmed by CLEPA5 that states the 95g/km target “can be reached with available technologies by 2020”. Most manufacturers will achieve the target through downsizing engines with turbo-chargers, improved aerodynamics, stop-start systems etc. There will be some hybrid vehicles (estimated by CLEPA5 to be 5-15% of new car sales, mainly in the larger vehicle segments, but fewer than were originally expected even a few years ago.

Stricter fuel efficiency standards will still lead to improvements in conventional petrol and diesel cars. But deep cuts are most likely to be achieved by a gradual electrification of drivetrains, including electric cars. This requires billions of investment. Carmakers will only make that investment if they have certainty that the investments will not be in vain, and if all their competitors make them too. The 95g/km target is unlikely to be sufficiently demanding to achieve a strong supply or demand for ultra-low carbon vehicles. This is one reason T&E advocates an 80g/km target for 2020 and 60g/km for 2025 target that will provide a stronger stimulus.

Don't we need subsidies to support the market for electric vehicles?

CO2 standards are the best tool to offer investment security for carmakers and, importantly, their suppliers. Subsidies, for buyers of electric cars, or for research (especially when government resources are so constrained) cannot deliver the same level of investment security as strict fuel efficiency standards would. Simply put, the future of the electric car, depends on progressively tighter standards for fuel efficiency, to ensure the necessary technology investments.

Incentives such as super-credits within the proposed regulation simply create “hot-air” weakening the proposed 95g/km target by inventing sales of ultra-low carbon vehicles that have not actually been made (for each sale of a vehicle under 35g/km counts for 1.3 sales under the proposed legislation up to a maximum of 20,000 vehicles per manufacturer). Super-credits just encourage the supply of ultra-low carbon vehicles by manufacturers. But this is not the principal issue that there is currently little demand for these vehicles because the purchase price and costs of ownership for the first owner are still currently too high.

Is Europe at risk of losing its leadership of low carbon vehicle technology?

Yes. Thanks to new standards put in place by the Obama administration, the technology being used in American vehicles by 2025 will be more advanced and achieve bigger improvements in fuel efficiency than in typical European vehicles. There is a real danger that Europe is going to lose its competitive edge in low carbon vehicles if manufacturers here don't get a big enough push to introduce the latest technologies. Jean-Marc Gales, CEO of the European car suppliers' association CLEPA has backed regulation toward lower carbon telling Reuters, "Europe's industry is considered a world leader. We need regulation to keep that advantage." Renault recently stated “Without strong regulation the car industry will not move at the right speed.”

In a recent response to the CARS21 report (Competitive Automotive Regulatory System for the 21st Century) Mr. Peter Tyroller, CLEPA President and Member of the Board of Management of Robert Bosch GmbH said, “The automotive suppliers employ 5 million people in Europe making it a leading creator of wealth on our continent. By further investing in safety and environmental performance we will strengthen the global technology leadership of the whole industry.”

Smart regulations drive innovation and countries globally are setting increasingly stringent CO2 or fuel economy targets. By developing lower carbon vehicles EU suppliers and manufacturers can supply fuel efficient vehicles and technologies into emerging, growing markets.

If Europe used less oil, would that have an impact on the oil price itself?

Yes. Every year, at current oil prices, Europe imports approximately €300 billion worth of oil, one third of it for cars. Cars are the single biggest consumer of oil in the EU. In times of austerity, importing EUR 300 billion of oil every year is a massive waste of money that could be invested within the continent developing and mass manufacturing advanced fuel efficiency technologies.

Europe is one of the world’s biggest oil consumers. If we used half as much, it would cause global oil demand to drop, which would lead to lower oil prices on the world market. Which means even more savings for drivers and businesses. The International Energy Agency says that if the world cut its oil use by only 8%, oil prices would come down by 16%. The lower price effect triples the savings compared to lower consumption alone.

The European Commission’s Joint Research Centre (JRC) also estimate that the improved energy security derived from lowering oil demand as a result of improving vehicle efficiency would be worth 20Bn EUR between 2020 and 2030.

Does the EU need to cut emissions from transport?

Yes. In 2009 and 2011 the EU’s 27 heads of state agreed that the Union should reduce overall emissions by 80-95% by 2050, compared to 1990 levels.

The European Commission’s white paper on transport of March 2011 calculated that in order to meet that overall objective, transport would have to cut emissions by at least 60% by 2050 compared with 1990 levels (which is a 70% reduction compared with today’s levels). Reducing CO2 emissions from new cars is one of the simplest and most important ways of cutting transport emissions.

Is it right that manufacturers of heavier cars are allowed a higher target than those of smaller vehicles?

No, this is an historical anachronism and needs to be phased out. The proposal allows each manufacturer to receive an individual annual target linked to the average weight of new cars it registers in the EU in a given year. If car manufacturers exceed these limits they are obliged to pay fines. The Regulation states the “slope of the line” that relates the CO2 emissions target that are allowed to be emitted per kilogram of average weight for each manufacturer.

The ‘slope’ for achieving the 95g/km target by 2020 hitting 130 g/km by 2015 is 0.0333 (3.33 g/km per 100kg). In other words: a carmaker who makes cars that are on average 100 kg heavier than the fleet average receives a target of 134.57 g/km for 2015.

Comparing vehicles on the basis of their weight reduces incentives for making vehicles lighter – effectively eliminating an important mechanism to making vehicles more efficient. In the US targets are set on the basis of the vehicles footprint (area) beneath the wheels and as a result vehicles are becoming much lighter.

T&E also wants to see the benefit given to larger vehicles progressively reduced – by 2025 or 2030 all manufacturers should have the same target and those producing larger, premium vehicles should need to deploy more technology to ensure that targets are met.

What do you make of eco-innovations?

Eco-innovations are technologies that improve the efficiency of the vehicle in real-world driving but not on the test cycle. T&E believes the test-cycle and testing procedures needs to be updated so that it is more representative of real-world driving and the effectiveness of all technologies can be measured through the new cycle. Until the cycle is updated we can accept the need for eco-innovations so long as the current robust assessment procedure is maintained and the total contribution that eco-innovations can make to the target is capped at 3g/km.

What does the industry say?

Fuel efficiency standards will make cars unaffordable

“For many consumers, cars could become unaffordable.”

ACEA commenting on EU plans to introduce fuel efficiency standards for the first time, ACEA website, 2007

False. Cars have become almost 15% cheaper since 2002. It is estimated that the costs of achieving the 95 gram target will pay back within 2-3 years in lower fuels costs – saving money for the driver. For second-hand car drivers the benefits amount to several thousand euros over the lifetime of the car.

We can't do it

“A vehicle-related target of 130 grams CO2/km as proposed by the Commission, is not feasible."

ACEA President Sergio Marchionne, 2007

Toyota, Fiat and Peugeot-Citroen have already achieved average CO2 emissions below 130g CO2/km, four years ahead of the target date. Renault has committed to achieve 100g/km by 2016, Daimler 125g/km by 2016 and VW 120g/km by 2015 and 95g/km by 2020. 

Factories will close

“If this decision is taken, we will be forced to close our factories in which class C, E and S are made.”

Erich Klemm, Daimler board member, FT Deutschland, Jan 28, 2007

Not true. In 2007 when fuel efficiency standards were being debated, the industry repeatedly warned of job losses and factory displacement if the EU went ahead. Daimler, who warned that it would have to shut factories (see above) made €4.5 billion in net profit in 2010.

Jobs will be lost

“Opting for (vehicle fuel efficiency standards) only will lead to … a loss of jobs and relocation of production outside Europe.”

ACEA press release, Jan 26, 2007

Jobs will be created. Fuel efficiency targets create new high-tech jobs by steering investment towards developing these readily-available technologies for the mass market. According to McKinsey and Company, the global market for automotive powertrains will more than double by 2030 to EUR 460 billion, creating 420,000 new jobs worldwide. In July 2011, the German engineering association estimated that there was a shortfall of engineers in Germany of around 77,000, an all-time high. In 2011, BMW announced it was hiring 800 people to develop efficient hybrid and electric vehicles, while Volvo, similarly was set to recruit 1200 R&D jobs.

World-leading fuel efficiency legislation also allows European carmakers to exploit a competitive edge. Emerging economies can definitely out-compete Europe on costs, but European carmakers have the edge on quality of which fuel efficiency is now a crucial element.

We need more time

The car industry pressured the European Commission into watering down its proposed emissions reduction target and also successfully lobbied to delay the entry into force from 2012 to 2015.
In fact, carmakers are ahead of schedule to meet the 2015 target. European carmakers are also on track to meet the 95g target by 2020, whilst Asian manufacturers are making the slowest progress.