The Automotive sector: are market forces sufficient to reduce GHG emissions, or must regulation step in?

01 May 2008

Amy Williams, Linda Fletcher

Road transport is the second largest source of greenhouse gas (GHG) emissions in the EU, after power generation.[1] The automotive sector currently contributes one fifth of all man-made carbon dioxide (CO2) emissions in the EU, of which approximately 12% is produced by private motor cars in the EU.[2]

The average CO2 emissions for new cars are approximately 185 grams per kilometre (g/km) but the EU is discussing plans to reduce this to 100 g/km by 2020[3] - a reduction of nearly half in little over a decade. The proposal does not originate in the recent oil price surge. It does not appear to derive from known consumer preferences. Law and regulation are driving profound changes in the markets.

The Stern Report described climate change as "the greatest and widest-ranging market failure ever seen."[4] The automotive sector could be seen as an example of such failure, in that manfacturers' and consumers' interests do not of themselves lead to more environmentally-friendly vehicles.

The design of a vehicle largely determines how it will affect the environment. According to several major manufacturers,[5] about 10% of the lifetime GHG emissions of a motor vehicle can be attributed to its production. How the consumer uses the vehicle, and how that vehicle is disposed of at the end of its life,[6] make up the balance of emissions.

What considerations are relevant when a manufacturer designs a new vehicle? On the one hand, consumers want vehicles of certain sizes that are comfortable, safe, and look good. In a competitive market, manufacturers will design accordingly. On the other hand, to bring new emissions-reducing technology to vehicles takes time and money. If the consumer demand for such vehicles is not there, where is the incentive to produce them? Should regulation therefore step in to adjust the market?

With high oil prices and with current concerns about possible economic recession, consumers might now be expected to demand ever more efficient vehicles, thus economic self-interest and environmental considerations would coalesce. The risk is that when the economy recovers, that may no longer hold true.

There are several different problems to solve. First, research and development into new technology is very expensive. Second, a suitable and economically viable fuel to replace crude oil-based fuels is notstraightforward, raising issues as to distribution of such new fuels and design changes to car engines. Third, the industry needs to provide consumers with information necessary for them to make an informed choice about vehicles based on their emissions, whilst themselves being encouraged to produce more efficient vehicles. We look at each of these in turn.

Research and development

In the UK, the Department for Transport, in conjunction with the Technology Strategy Board, has pledged an investment of £70 million into a Low Carbon Vehicle Integrated Delivery Programme. It is anticipated that the programme will receive a further £140 million over the next five years, with industry matching this sum. The Delivery Programme, due to be launched this Autumn, will fund research and development to accelerate the introduction of low carbon vehicles into the market. A further £23 million has already been pledged to 16 specific research, development and demonstration projects through the Low Carbon Vehicles Innovation Platform, which was set up in Autumn 2007.

Within the EU the Risk-Sharing Finance Facility exists, jointly launched by the European Commission and the European Investment Bank, being a €1 billion fund designed to improve access to financing for the promoters of research and innovation projects. Funding is also available through the Seventh Framework Programme (FP7) and the European Social Fund.

The desired result is that vehicles will become more efficient users of fuel. There are two considerations: first, engines to be designed to use fuel more efficiently. Secondly, since the size and weight of the car is directly related to the amount of energy which a vehicle consumes, lighter materials could be substituted. Aluminium and fibre glass are increasingly being used in preference to steel to reduce the weight so as to increase efficiency. Manufacturers have acknowledged that they could use lighter components in almost all of their vehicles without compromising safety, quality or performance.[7]

New fuels?

The type of fuel which is used to run vehicles has been a major area of research and development. There is a move, particularly with the high price of oil, and as a result of regulation over the use of renewables, to using more 'clean' fuels. Some power sources currently under consideration and in trials include hydrogen, electricity and hybrid fuels.[8] These new sources would involve costly changes to the way vehicles are powered.

Much has also been said and written about biofuels, which in the UK are currently required to make up 2.5% of petrol and diesel sold in station forecourts.[9] Although biofuels (carbon-neutral fuels derived from plants) might provide climate change benefits and provide energy security, their production might equally damage natural ecosystems and therefore cause other environmental damage, as well as taking land out of production for food, with the consequential effect of rising food prices and shortages of supply. The Royal Society's paper "Sustainable Biofuels: Prospects and Challenges"[10] notes the importance of carefully monitoring the production and use of biofuels.[11]

Fuel efficiency laws?

In December 2007 the European Commission adopted a proposal for legislation to limit the CO2 emissions of new motor vehicles sold in the EU. As noted earlier, the average emissions for cars are approximately 185 g/km[12] with the proposal being to limit this to 120 grams per kilometre by 2012. The manufacturers considered this unfair and impossible. Following heated negotiation, the final proposal was for a 130g/km limit, together with complementary measures which could contribute a further emissions cut of 10g/km, so that the overall average emissions were sufficiently reduced to meet the EU objective of 120g/km. Complementary measures could include improving the efficiency of elements which have high energy consumption, such as the tyres and air conditioning systems.

In July 2008, the UK Government opened a consultation on the EU proposals, which closes on 3 October 2008. Anyone wishing to respond is urged to do so as soon as possible.

Of particular note are the UK Government's own proposals. The UK Government would like the EU to adopt a longer-term target of 100 g/km by 2020, reducing CO2 emissions by a further five million tonnes every year. It has also expressed a concern that the EU proposals would create an unlevel competitive playing field. The suggestion is that different targets for manufacturers producing small numbers of vehicles would be set. How these proposals develop will have a major effect on the development of the automotive sector in the EU.

Consumer information

A further EU Directive[13] requires that information relating to the fuel economy and CO2 emissions of new motor vehicles (i.e. after September 2005) be made available to consumers to enable them to make an informed choice. This Directive is currently under review by the Commission as part of a renewed Community strategy on CO2 emissions from cars.

In the UK the manufacturers considered that the initial implementation was insufficient as the information presented was too complicated. As a result, UK car manufacturers voluntarily and unanimously agreed as an industry to implement a more "consumer-friendly," colour-coded label displaying amongst other things, CO2 emission levels on all new cars sold after September 2005.



[2] Communication from the Comission to the Council and European Parliament - Results of the review of the Community Strategy to reduce CO2 from passenger cars and light utility vehicles. COMM (2007) 19.

[3] The proposal COM(2007)856 has been communicated to the Council and to the European Parliament as part of the co-decision legislative procedure.


[5] Including Ford Motor Company, Renault, Volkswagen AG and BMW Group.

[6] Ford Report on the Business Impact of Climate Change.

[7] Ford Motor Compant - Blueprint for Sustainability: "Between 2012 and 2020, we'll focus on improving furl efficiency by reducing weight. Substantial vehicle weight reductions will enable us to use smaller displacement engines that provide secondary efficiencies, such as lighter chassis and suspension components, which in turn, will lower vehicle weight even further. This type of change can be done for millions of vehicles without compromising safetly, quality, interior room or performance."

[8] Ineos has recently developed a method of producing fuel (bioethanol) from municipal solid waste, agricultural waste and organic commercial waste.

[9] Renewable Transport Fuel Obligation - 2.5% of diesel and petrol (5% by 2010) must come from biofuels.

[10] Sustainable biofuels: prospects and challenges. The Royal Society (14.01.08).

[11] See also the article on patents and biofuels in this Alert.

[12] The proposal COM(2007)856 has been communicated to the Council and to the European Parliament as part of the co-decision legislative procedure.

[13] Directive 1999/94/EC of the European Parliament and the Council of 13 December 1999 relating to the availability of consumer information on fuel economy and CO2 emissions in respect of the marketing of new passenger cars.