EC CO2 Debate Heats Up as German Chancellor and ACEA Oppose Mandatory Target

The squabble over the European Commission (EC)'s plan to introduce mandatory carbon dioxide (CO2) emission limits for cars has taken a new turn after German Chancellor Angela Merkel threw her weight into the battle by publicly denouncing the EC's proposals. The European Automobile Manufacturers Association (ACEA) has also warned that a general emission limit covering all vehicles indifferently would undermine the European automotive sector's competitiveness and repeated that an integrated approach including tax harmonisation and increasing of the availability of alternative fuels would be more suitable. After delaying its initial decision on the mandatory rules, the EC is likely to bow further to industry demands by proposing less radical cuts and shifting the focus of its plan to combat climate change from more efficient engines to alternative fuels. 

The German Chancellor stepped onto the battlefield to support the country's powerful automotive industry by pledging to resist the EC's proposal to impose a mandatory CO2 emissions limit of 120 grams per km (g/km) for 2012. Merkel said that although it was regrettable that European car manufacturers  would not meet the targets they had set themselves under the ACEA voluntary commitment, it would be wrong for a general solution to be imposed as a result. The German Chancellor went on to say "The government will do everything it can to reach a sector-wide reduction," and explained that preserving the diversity of the automotive industry was paramount. 

Merkel's comments parallel similar arguments put forward by the heads of BMW, DaimlerChrysler (DCX) Volkswagen (VW) Group, Ford of Europe and General Motors (GM) Europe and also Germany's Economy Minister that imposing mandatory targets on the industry would result in massive job losses in Europe. In fact, the main concern is that an imposed target would hit German carmakers the hardest, as they are by far the largest producer of large, high-consumption premium models. French and Italian carmakers, which specialise in smaller car segments and pushed technical advances in diesel technologies, are less concerned about the EC's proposal. They also depend heavily on markets that are less sensitive to vehicle performance but more interested in the economics and longevity of their cars. 

As has been recommended by the multi-stakeholder CARS 21 study, the ACEA advocates an integrated approach to tackle the complex problem of reducing greenhouse gas emissions in Europe. Measures should include a harmonised and firmly CO2-related taxation of cars, as well as clear measures to increase the availability of alternative fuels, influence consumer and driver behaviour, adjust infrastructure and continue to support research and development of vehicle technology.

Outlook and Implications

The possibility of seeing a harmonised tax policy based on CO2 emissions between the 27 member states is remote. Although such a step would potentially have the largest impact on curbing CO2 emissions by shaping consumer demand and setting economic incentives to which vehicle manufacturers and fuel suppliers will respond, such a step would be very difficult to implement across the EU. As explained by the ACEA, at present, nine of the EU member states (Austria, Belgium, Cyprus, Denmark, France, the Netherlands, Portugal, Sweden and the United Kingdom) have elements in their car and/or fuel taxation systems that are totally or partly based on CO2 emissions and/or fuel consumption. However, the systems differ strongly across the EU and fail to send clear market signals. Moreover, this mean that car manufacturers face a fragmented EU market, where they are unable to exploit economies of scale, to the detriment of their competitiveness.

The timing of the EC's plan to come up with a firm and binding legislation that would require carmakers to reduce CO2 emissions of new cars to an industry average of 120g/km  in 2012 was also not in its favour. Germany has the European Union (EU) Presidency for the next six months and with the German chancellor and economy minister opposing such plans, it is difficult to imagine a swift conclusion to the conflict. 

The EC has already been forced to delay its decision on whether to impose mandatory rules to limit CO2 emissions from new cars sold in the EU as key European commissioners disagreed on what would be an adequate approach and it is believed that the new proposal will include less severe targets. According to the Financial Times (FT), the EC is now considering forcing carmakers to work toward a target of around 130 g/km by 2012 and also raising the mandatory use of biofuels in cars from 10% to 12.5%. However, the EC is also set to present today new legislation to force oil companies to blend biofuel into gasoline (petrol), signalling that carmakers will not bear the sole responsibility for cutting greenhouse gas emissions and other industrial sectors will be included in the general fight against climate change. The EC may get away with a consensual legislation but in the end the EU's inability to work together on fiscal and tax issues will continue to undermine the credibility of Europe's goal to cut greenhouse gases 20% by 2020 and its ambition to be perceived as a leading force supporting the fundamentals of the Kyoto Protocol. It also pushes further the possibility of creating a truly unified internal market which would support higher competitiveness in several industrial sectors.

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