8,085 Veitch Options for carbon regulation of the European industry Veitch, Alex 8,085 Veitch Options for carbon regulation of the European car industry

Alex Veitch Energy Saving Trust London – UK

Keywords carbon, , regulation, emissions, trading, voluntary agree- achieved by 2009 by JAMA and KAMA and by 2008 by ACEA

ment, CO2 (EC 2006).

ARE THE ASSOCIATIONS ON TRACK TO MEET THE TARGETS? Abstract Th e annual reduction rate required if the targets are to be met Th e current voluntary agreement between automotive manu- by the agreed year is around 3 % for ACEA and JAMA and facturers and the European Commission to reduce new-car nearer 4 % for KAMA. In their Monitoring Report for the year average CO is structurally fl awed and is in serious danger 2 2003 (published in 2005) the EC assert that ACEA and JAMA of failure. Th is paper explains why carbon regulation for new are on track to meet the 140 g target, but acknowledge that the passenger cars would be a politically popular measure that is pace of CO2 reduction must increase (EC 2005a). Th e picture necessary to provide industry with genuine certainty. Th e pa- for KAMA is less positive, with the EC admitting “Th ere is a per goes on to discuss key ways to frame the regulation, such real risk that KAMA will not meet its 2004 intermediate target as whether to adopt a model-range – rather than sales-based range of 165 to 170 g/km, seeing that only one year is left to – average, and how to integrate a trading mechanism to the close the gap of 9 g/km” (EC 2005a). regulation. Th e paper examines the options and concludes that It can be argued that the EC are taking a rather optimistic

a company-specifi c CO2 target with fl exibility for higher- CO2 view, to say the least. In the UK, average new-car CO2 emissions producers provided by a “utility” target or percentage improve- stood at 169.4 in 2005, down by 1.2 % from 2004 to 2005 – an ment approach appears to be the most attractive option. improvement on the decrease of just 0.4 % from 2003 to 2004 (SMMT 2005, 2006a). If this pace of change is replicated across Will the 2008 / 2009 target be met? the EU, then it is unlikely that the voluntary agreement targets will be met. While offi cial EU fi gures for 2004 and 2005 are not BACKGROUND TO THE AGREEMENTS available, analysis by the environmental group T&E using com- mercially-available European car sales data concludes that the Th e European Commission (EC) has established voluntary ACEA average for 2005 was 160 gCO /km, which is a reduction agreements on new-car carbon dioxide (CO ) emissions with 2 2 of only 1 per cent from the previous year. the European (European Automobile Manufacturers’ Associa- If these fi gures are correct, then ACEA members would need tion – ACEA), the Japanese (Japan Automobile Manufactur- an unprecedented improvement rate of 4.3 per cent per year ers’ Association – JAMA) and Korean (Korean Automobile for the next three years to meet their commitment. To date, Manufacturers’ Association – KAMA) automobile industries. the best performance was 2.9 per cent, recorded in 2000 (T&E Th e agreements call for the average of new passenger cars sold 2006). Th e key offi cial statistics on current progress toward the in the European Union to be 140 gCO per km. Th is is to be 2 target are summarised in the table below. It is worth noting

ECEEE 2007 SUMMER STUDY • SAVING ENERGY – JUST DO IT! 1647 8,085 VEITCH PANEL 8. TRANSPORT AND MOBILITY

Auto manufacturer average CO2, and annual rate required to meet the voluntary target

Association 2003 Average Fleet Emissions Improvement from 2002 Annual improvement to meet 140 g target ACEA 163 g/km 1.2 % 2.8 % JAMA 172 g/km 1 % 3.1 % KAMA 179 g/km 2.2 % 3.6 % Source: EC 2005a that reporting on the voluntary agreements is frustratingly a time when that company had only a one per cent share of slow, with monitoring reports typically two years out of date, the passenger car market in the EU (German Advisory Coun- despite the fact that EU car sales data are readily available from cil, 2005). Nevertheless, this does set a dubious precedent that commercial providers1. Th ere are also discrepancies between needs to be avoided. reporting from the auto industry, and member states2. LACK OF TRANSPARENCY What will replace the current agreements? Neither the industry associations nor the EC publish individual As the agreement period comes to an end, the question of manufacturers’ progress on new-car CO . Th is limits trans- “what comes next” is looming large. On the basis of the current 2 parency, causing problems for sustainable investment groups evidence, it is possible to voice strong doubts that the current and stakeholders alike (SAM / WRI 2005). Interestingly, the voluntary agreement targets will be met, which in turn casts EC originally said that its intention was to use its monitoring doubt on the whole voluntary approach. As the EC point out, scheme to demonstrate the contributions of each manufacturer KAMA are not currently on track, and if they fail to meet their to their common commitment (T&E 2005). Unfortunately, and target then “this could aff ect the whole approach on CO ” (EC 2 to the detriment of the scheme, this intention has not translated 2005a). In the original agreement, the EC reserved the right to into action. regulate if the voluntary commitments are not met3, and regu- Th e voluntary agreement targets are based on the sales- lation would presumably apply to the entire industry not just weighted average across each association, rather than an av- one Association. Th e remainder of this paper discusses possible erage of models produced. Th is reduces the control that the options for this regulation. car industry has over the success or failure of their agreement. Motor manufacturers strongly infl uence purchase decisions Structural problems with the current agreement through their vast advertising budgets – indeed, the motor sector as a whole spent more on advertising in the UK than INDUSTRY ASSOCIATION APPROACH IS FLAWED any other sector in 2003, spending a total of £ 934.6 million Th e vehicle manufacturers associations (ACEA, JAMA and (WARC 2005). However, they cannot actually control the cars KAMA) have no control over individual car companies’ pro- customers buy! duction decisions. Th is allows car manufacturers in each asso- ciation to “free-ride” on the achievements of others. An ACEA AN ALTERNATIVE EXPLANATION: MASS AND ENGINE CAPACITY member, for instance, may simply be able to rely on other An alternative explanation frequently cited to explain why the Voluntary Agreement targets are off track is that cars are get- members reducing average CO2 emissions instead of cutting their own. Indeed, a very detailed report, commissioned by ting heavier with large engines. However the trends in these the EC, into possible carbon regulation in the auto sector con- areas vary by manufacturer association. cluded that manufacturer associations are not appropriate legal • For ACEA members, average car mass, engine power and entities for regulation since they do not control production and engine capacity showed an increase for both petrol and die- that CO targets should be set by regulation at the manufacturer 2 sel from 2003 to 2004. However, disaggregating the average level (IEEP / TNO 2005). car capacity fi gures shows that diesel engine capacity fell to its lowest level in the entire monitoring period from 1995. RISK OF COMPANIES LEAVING THE ASSOCIATION Th ere is a further risk that individual manufacturers may sim- • JAMA showed increases of both mass and weight from 2003 ply leave their relevant association and, therefore, avoid their to 2004 data. Petrol car mass increased by 5 % and diesel cars 2 %, and average engine capacity and power both in- CO2 obligations. Th is is, admittedly, a low risk and has hap- pened only once: when Rover left ACEA on 30 April 2002, at creased by just over 1 %. Over the whole reporting period of 1995 to 2004 mass rose by 15 %, average engine capacity increased by 3.4 % and engine power increased by 15 %. 1. See for example the data used in IEEP/TNO 2005 and T&E 2006 • KAMA shows a diff erent trend to the other two associa- 2. The 2003 monitoring report notes that, if data collected by ACEA were taken, its tions, with the mass of petrol cars decreasing by over 12 % average specifi c CO2 emissions would be 161 g/km as opposed to the 162 g/km reported by Member States between 2003 and 2004, and the mass of diesel cars dropping 3. The introduction to the Agreement between ACEA and the EC states “the Com- by over 8 % over the same period. Th e average engine capac- mission intends to present a legislative proposal on CO2 emissions from passenger cars, should ACEA fail to achieve the CO2 emission objective for 2008 in its Com- ity also decreased by 4.0 % from 2003-2004. Average engine mitment or not make suffi cient progress towards this objective…and…should the power fell by 3 % for petrol engines between 2003 and 2004 Commission not be satisfi ed that such failure is due to factors for which ACEA cannot be held accountable;” Agreement with ACEA, 1999, ref (1999/125/EC) and by 2 % for diesel engines over the same period. http://europa.eu.int/comm/environment/co2/99125/en.pdf

1648 ECEEE 2007 SUMMER STUDY • SAVING ENERGY – JUST DO IT! PANEL 8. TRANSPORT AND MOBILITY 8,085 VEITCH

Average CO2 emissions: Top20 selling car companies in the UK2005 350

300

250

200

Average CO2 (g/km) 150

100

ai ini Kia ord MW M F Rover B Audi oyota tCars Mazda T Hyund Vauxhall Land Volvo Cars Honda Cars Nissan Motor Renaul Mercedes Cars Volkswagen Cars Skoda Auto UK Ltd Sales-Weighted Model Range

Source: EST analysis of data from SMMT and VCA

In conclusion, mass and engine capacity increases could gets – in the UK at least – the major manufacturers benefi t help explain historically poor performance on average CO2 to from the sales-based approach, selling more low-carbon than some extent. However both ACEA and KAMA appear to have the high-carbon cars in their range. addressed these issues. Th erefore mass and engine capacity Critically, a sales-weighted approach will push car manu- increases can not, alone, explain the failure of the voluntary facturers to use their marketing budgets to promote their agreements. lower-carbon models. Motor manufacturers strongly infl uence purchase decisions through their vast advertising budgets – in- deed, the motor sector as a whole spent more on advertising A new approach to regulation in the UK than any other sector in 2003, spending a total of £ 934.6 million (WARC 2005). WHY REGULATE? Th ere is a clear public good in requiring cars to achieve higher fuel economy, not only in terms of carbon emissions but also Options for framing the regulation in reducing oil imports and cutting fuel costs for consumers.

Th ere is strong public support for regulation; in a 2005 poll MAXIMUM CO2 LIMIT of 970 consumers, 70 % agreed with the statement: “Car mak- In other sectors (e.g. domestic boilers), market transformation ers should be legally required to make cars that get high MPG in energy effi ciency is driven by setting minimum effi ciency (miles-per-gallon)” (Energy Saving Trust 2005). Setting clear standards, supplemented by other fi scal and information meas- carbon reduction goals through regulation could therefore be ures (such as the Energy Effi ciency Commitment on household a politically popular step, providing required industry stability. energy suppliers). Similar minimum standards could be intro- Regulations already exist in the major automotive markets of duced for passenger cars. Indeed, cars already meet minimum Europe, the U.S. and Japan, and will soon enter into force in standards for noise and regulated pollutants. China. One clear drawback of this approach is that the impact on average emissions of reducing the high-emitting ‘tail’ of the ve- TARGETS: MODEL RANGE OR SALES-WEIGHTED? hicle parc would initially be small (see chart on the next page

As noted above, the current regime is based on sales-weighted showing the distribution of car sales in the UK by CO2 emis- average CO2, which to some extent puts success or failure in the sions). However, if the threshold were progressively reduced hands of consumers rather than manufacturers. Interestingly, over time, it would provide a clear incentive to introduce low however, in the fi rst quarter of the fi nancial year (2005-06) the carbon technologies. sales-weighted average was lower than the non-sales-weighted A more fundamental problem is that it would probably put a average: in other words almost every car company sold more number of car companies out of business. Small niche produc- low-carbon models than high-carbon models4 (see chart above ers such as Porsche, and, possibly, even companies like for details from 20 large car companies). Arguably, while it Mercedes and BMW may fi nd it hard to adapt to a world of would be simpler to use a model range average to set CO2 tar- maximum CO2 regulations. Th ese brands are built on fast, pow-

erful, high- CO2, high-value automobiles. A maximum CO2 limit, while simple and potentially eff ective in carbon terms, 4. The non-sales-weighted average is found by counting the number of models with may be too politically sensitive to progress. certain CO2 emissions (e.g. the number of models with emissions of 160 g/km), then by calculating the production of CO2 and the number of models, and dividing the sum of the products by the total number of models. The sales-weighted average is calculated the same way, except that sales of cars of certain CO2 emissions are added up, rather than the number of models.

ECEEE 2007 SUMMER STUDY • SAVING ENERGY – JUST DO IT! 1649 8,085 VEITCH PANEL 8. TRANSPORT AND MOBILITY

UKCar Sales - Distribution byCO2 emissions (g/km)

25%

20%

15%

10% Market Share 5%

0%

120 140 160 180 200 220 240 260 280 300

under 100 1997 2000 2005 Source: SMMT

COMPANY AVERAGE APPROACH standards for light trucks, combined with the growth in light truck sales to around 58 % of new vehicle sales (Alliance of United States: CAFE standards American Automobile Manufactures, 2005) means that actual

A straightforward approach to regulating passenger car CO2 fuel economy is at its lowest point since the early 80’s (Sierra emissions would be to impose a company average regulation, Club 2007). Th e Union of Concerned Scientists estimate that where automakers are required to sell vehicles such that the increasing new-passenger-vehicle fuel economy to 40 mpg by sales-weighted average arrives at an overall average CO2 stand- 2012 and to 55 mpg by 2020 would reduce greenhouse-gas ard. Such an approach would essentially replicate the Corpo- emissions from cars and light trucks by 273 million tons by rate Average Fuel Economy (CAFE) regulations in the United 2010 (UCS 2007). States. CAFE is the sales weighted average fuel economy, ex- pressed in mpg, of a manufacturer’s fl eet of passenger cars or Incorporating fl exibility into the corporate average approach light trucks, manufactured for sale in the United States, for any As noted above, the CAFE system in the U.S. attempts to create given model year (NHTSA 2007). some fl exibility for manufacturers by allowing credits for ex- Flexibility is provided in two ways: fi rst, by allowing compa- ceeding the targets, and allowing penalties to be paid instead of nies to pay a fi ne rather than meet the mpg requirements5. Most meeting them. Th ere are numerous other options for fl exibility

European manufacturers pay CAFE penalties ranging from less in a corporate average fuel economy or CO2 regulation, several than $ 1 million to over $ 20 million annually, while Asian and of which are being examined by the European Commission. U.S. manufacturers have never paid a civil penalty (NHTSA Leading options are discussed below. 2007). Th e second method is providing “CAFE credits”, which are earned if a company’s mpg average exceeds the target in a Vehicle categories and percentage reductions given year, and can be used to compensate for failure to meet One option to increase fl exibility for companies would be to the target for up to three years prior to or subsequent to the require CO2 reductions on specifi c size or weight categories of model year in which the credits are earned6 (NHTSA 2007). No vehicle (or a combination of both). Th is approach is being used trading of CAFE credits is currently allowed between compa- in China, which has introduced fuel economy standards for nies, although, according to industry sources, the U.S. Depart- new cars in various weight categories (WRI 2004). However, ment of Transportation recently considered adding credit trad- there is currently no agreed European defi nition of vehicle ing to the light truck rule before deciding not to do it (Alliance categories, so either a new classifi cation system would need to of Automobile Manufactures, 2006). be developed, or an existing system such as the NCAP safety Th e main environmental drawback of CAFE is the fact that ratings could be adopted7. Another option would be for each the average mpg targets are extremely weak. CAFE standards company to be required to achieve a percentage improvement are now 27.5 mpg for cars and 22.2 mpg for light trucks (NHT- in average CO2 from an agreed baseline year. SA 2007). Th ese standards are basically the same as they have Both these options are suggested and discussed in detail in been for over twenty fi ve years (Sierra Club 2007). Th e lower the IEEP / TNO report for the EC. Th eoretically, they could de- liver the same outcome as a straightforward company average approach, provided targets were set accurately, and IEEP / TNO

5. The fi ne is set at $ 5.50 per tenth of a mile per gallon for each tenth under the target value, multiplied by the total volume of those vehicles manufactured for a given model year. 6. Credits cannot be passed between fl eets, e.g., from domestic passenger cars 7. European New Car Assessment Programme (Euro NCAP) has a star rating, pro- to light trucks. viding best in class data for six vehicle classes – see http://www.euroncap.com/

1650 ECEEE 2007 SUMMER STUDY • SAVING ENERGY – JUST DO IT! PANEL 8. TRANSPORT AND MOBILITY 8,085 VEITCH

Comparison: Average CO2 andestimatedlifetime emissions,2005

300 12

250 10

200 8

150 6

100 4 Million tonnes CO2

Sales-weighted CO2 average 50 2

0 0

a s ta Kia o Audi Mini Ford Fiat BMW Cars oy Cars uxhall Mazd T n eugeot Citroen lvo Car Hyundai ge Va P an Motor to UK Ltd Land Rover Vo Honda enault Cars u Niss R Mercedes Cars aA Volkswa Skod

Source: SMMTdata.200,000kmvehicle lifetime. Average CO2 Es t ima t e d Life t ime CO2 Emis s ions

conclude that both options would off er high- CO2 manufactur- 2005 with an estimated lifetime CO2 emissions of vehicle sold ers some much-needed fl exibility, allowing them to gradually in that year. improve CO2 performance without drastic changes to their Once a total carbon footprint was calculated for each com- model range (IEEP / TNO 2005). pany, it would then be necessary to allocate responsibility for reducing these emissions. Placing the responsibility on private Allow trading between automotive manufacturers individuals would entail high transaction costs, and could A trading scheme limited to automotive manufactures would probably only be done within a broader system of personal provide credits to companies that have exceeded their CO2 tar- carbon quotas. Clearly, such a scheme is years away, if not gets, and allow them to trade these with other companies. Th is completely unrealistic. So it would be more sensible from an type of scheme could allow manufacturers to reduce new-car environmental point of view to retain the current emphasis on

CO2 without radically changing their product ranges. However, vehicle effi ciency, and take additional measures to curb trans- there are problems with this approach. Th e IEEP / TNO report port CO2 emissions, for example by promoting lower-carbon notes that companies earning credits may contrive to reduce transport choices. liquidity in the system, pushing up the price of credits beyond their real market value (so-called “hamstering”) (IEEP / TNO Conclusions 2005). Th e voluntary agreements between the car manufacturing Allow trading with other sectors associations and the European Commission are structurally A solution to the lack of liquidity that would be found in an fl awed. Th e industry associations are the wrong parties to the intra-industry trading scheme would be to allow car manu- agreement, as they have no formal control over production facturers to enter existing carbon trading markets such as the and marketing of their member companies. Th is leads to “free EU Emission Trading Scheme. However, there are a number rider” problems and a lack of transparency. In contrast, a regu- of problems with this approach, the most fundamental being latory approach to fuel effi ciency, as this will provide certainty the need to calculating lifetime carbon emissions from each to industry, and a competitive advantage for European manu- company’s products. Th is would necessary because life-cycle facturers in an increasingly carbon-constrained sector. In ad- analyses estimate that around 80 % of carbon emissions from dition, opinion polling shows that carbon regulation for new cars result from the use phase, with around 15 % from produc- passenger cars would be a popular measure with the public and tion and around 5 % from disposal (SMMT 2006b). is necessary to provide industry with genuine certainty. A sales-weighted target should be retained, as this will en- Taking full lifetime CO2 emissions into account off ers a diff erent perspective on companies’ relative environmental courage manufacturers to put their marketing budgets fully be- hind the promotion of low-carbon cars, and regulations should impacts. Smaller, “niche” producers with high average CO2 sell a comparatively low number of cars, while “mainstream” provide fl exibility to industry to reduce the cost burden. Th is fl exibility can be provided without resorting to emissions trad- manufacturers with moderate average CO2 emissions sell so many cars that their overall carbon footprint is much higher. ing, which has serious limitations when applied to the automo- Th e graph above illustrates this point by comparing the sales- tive sector: Intra-industry trading leads to lack of liquidity and higher costs, while Trading with other sectors would require a weighted average CO2 of the top 20 car sellers in the UK in full carbon “footprint” to be developed, which is fraught with

ECEEE 2007 SUMMER STUDY • SAVING ENERGY – JUST DO IT! 1651 8,085 VEITCH PANEL 8. TRANSPORT AND MOBILITY diffi culties. It would and would create uncertainty over respon- T&E 2006, “Car industry failing on climate pledge” (Press sibility for reducing emissions. release issued April 19, 2006), Th e simplest option would be to avoid carbon trading al- http://www.transportenvironment.org/Article185.html together. A company-specifi c CO2 target would be clear and Transport Research Ltd, 2004, Sustainable resource use in the relatively easy to frame, with fl exibility provided by setting a motor industry: a mass balance approach percentage improvement approach for each company. Another , 2004, Environmental and Social Report alternative is to set targets for specifi c weight and/or size cat- Union of Concerned Scientists (UCS), Drilling in Detroit egories, similar to the Chinese system. Th is may be a good op- http://www.ucsusa.org/clean_vehicles/fuel_economy/drilling- tion, but more complex than a company-specifi c approach. in-detroit.html World Advertising Resource Centre (WARC) 2005, Th e Euro- pean Marketing Pocket Book References World Resources Institute (WRI), 2004, Taking the high (fuel Alliance of Automobile Manufactures, 2006, Statement of the economy) road: What do the new Chinese fuel Alliance of Automobile Manufacturers before the economy standards mean for automakers?, 2004 http://pdf. Committee on Energy and Commerce, May 3 2006 wri.org/china_the_high_road.pdf http://autoalliance.org/archives/Alliance%20Testimony%205 .03.06.pdf Alliance of Automobile Manufactures 2005, Light Truck Country http://www.autoalliance.org/download/LightTruck.pdf ENDS Environment Daily 2005, Issue 1998 Energy Saving Trust 2005, Omnibus Survey by Ipsos Mori for EST, Base 1,001 EUCAR, 2002, “LIRECAR” Project European Commission (EC) 2005a, Implementing the Com-

munity Strategy to Reduce CO2 Emissions from Cars: Fift h annual Communication on the eff ectiveness of the strategy European Commission (EC) 2005b, Annex, Implementing

the Community Strategy to Reduce CO2 Emissions from Cars: Fift h annual Communication on the eff ectiveness of the strategy EC 2006, Objectives of the agreements concluded with the automobile industry, EC Website, updated January 16, 2006 http://europa.eu.int/comm/environment/co2/co2_ agreements.htm Friends of the Earth, 10 November 2005, Press Release

German Advisory Council 2005, Reducing CO2 Emissions from Cars National Highway Traffi c Safety Administration (NHTSA), CAFE Overview - Frequently Asked Questions http://www.nhtsa.dot.gov/cars/rules/CAFE/overview.htm Sustainable Asset Management (SAM) / World Resources Institute (WRI), 2005, Transparency Issues with the ACEA agreement: Are investors driving blindly? Society of Motor Manufacturers and Traders (SMMT), 2005,

UK New Car Registrations by CO2 Performance: Report on the 2004 market

SMMT 2006a, UK New Car Registrations by CO2 Perform- ance: Report on the 2005 market SMMT 2006b, UK Automotive Sector Towards Sustainability: Production Consumption and Disposal – Seventh Industry Report http://lib.smmt.co.uk/articles/ homepagearticle/HomePageArticles/ 7th%20Sustainability%20report%20200906.pdf Sierra Club 2005, Th e Biggest Single Step (Factsheet) Sierra Club 2007, Clean Car Campaign Q&A http://www.sier- raclub.org/globalwarming/cleancars/q_a.asp

T&E 2005, Reducing CO2 Emissions from New Cars

1652 ECEEE 2007 SUMMER STUDY • SAVING ENERGY – JUST DO IT!