Global Warming to Change our Motor Industry
March 2007
Global warming has become one of the most talked topics in recent years. As the ice in both poles are melting in accelerating speed, temperatures in the seven continents set new records, heat waves killed thousands of people and the change of global climate caused even more lives, losses and extinction of species, global warming has been commonly recognized as the biggest crisis human are facing. Recently, even the usually selfish US government has changed its tone, admitting human activities are the reasons behind global warming and agreed the urgency to solve the problem.

Among all nations, European Union is the most important motivator of greenhouse gas reduction. In 1997, it signed the Kyoto agreement and committed to a reduction of 8 percent greenhouse gas by 2012 compare with the 1990 level. This would require the cooperation of all industries, especially the motor industry. Around 12 percent of the greenhouse gas in EU countries is contributed by vehicles. No wonder European Commission put a lot of pressure on car makers to reduce emission. 8 years ago, they reached an agreement with most European car makers to set a voluntary emission target of 140g /km for their average fleet emission by 2008. What does this mean ? take an example, suppose a car maker sell 100,000 units of model A and 400,000 units of model B in a year, while the emission of A and B are 120g /km and 150g /km respectively, then its average fleet emission will be (120 x 100,000 + 150 x 400,000 ) / 500,000 = 144g /km.

With this target, European car makers invested a lot of money and effort into green technologies. In a few years time, the market is flooded with advanced diesel engines, direct gasoline injection, variable valve timing, turbocharging, electric power steering, on-demand oil / water pumps, automatic start-stop etc. Unfortunately, despite of the effort, most cars bar the smallest ones still fail to meet the emission target. For example, today a Fiat Panda 1.2 emits 133g /km, a Grande Punto 1.4 16V emits 145g /km, a Volkswagen Golf 1.6FSI at 168g /km, a BMW 330i at 210g /km, a Mercedes E350 at 244g /km, S500 at 279g /km, S600L at 340g /km and Lamborghini Murcielago at 500g /km. According to the latest figure obtained in 2004, the average emission for European new cars was 163g /km. Today it could be a little lower, but with only one year left, the target of 140g /km is going to be missed by quite a margin.

Is the target really infeasible ? not exactly. Car makers said we have the technologies today, but the problem is consumers don’t want to pay for them. Renault estimated that to meet the 130 g/km target will add €3000 on the cost of each car, which is impossible to be swallowed by consumers. A few years ago, Audi’s all-aluminum A2 1.2TDI achieved 81g /km, but the car was so expensive and compromised in dynamics that few people were interested. Audi lost substantial money in the project and eventually stopped producing it. It goes without saying that car makers won’t do whatever unprofitable.

However, the European Commission did not listen. Recently, it proposed to set a compulsory limit at 130g /km by 2012. The proposal is criticized by most European car makers as “unrealistic”. Predictably, German premium car makers Mercedes-Benz and BMW are most opposed to the plan, as their rich mix of luxury cars in their fleet will make meeting the 130g /km target impossible. If European Commission stand its decision, German motor industry could be destroyed in one night !

One can easily see that a fixed emission limit is unfair to luxury car makers - you can’t require a Mercedes limousine to emit the same amount of greenhouse gas as a Daihatsu K-car, can you? The legislators may say they are not requiring every car to meet the limit, but the average emission of all the cars produced by the car maker. That means, while BMW is overpolluting with its M5, M6 and 760il, it can counter-balance by producing large amount of ultra-clean Mini. The problem is, I don’t think it is wise to force BMW and Mercedes, especially the latter, to shift their focus from luxury cars to small cars which they are not good at and which are not associated with their image. Ask the costly German factories to produce Hyundai-rivaling small cars will only kill the German premium car makers, costing tens of thousands of jobs and arising political shock waves. I don’t believe European Commission will really do that.

The proposal by European Commission does not present a fair game. Firstly, only high volume car makers fall into the scope thus it will give low volume car makers a competitive edge. Secondly, the average emission limit is imposed on the basis of “manufacturers” instead of brands. For example, Audi will not be seen as a manufacturer but a division of the manufacturer Volkswagen AG. With so many Volkswagen small cars to drag down the average emission figure, Audi can continue making powerful luxury cars, leaving the independent BMW and (soon) Mercedes dead. The same goes for the Lexus division of Toyota. Again this will be an unfair game.

Instead of a fixed emission limit, a better way to reduce emission is to tax cars according to emission amount or fuel consumption. The taxation system will make low emission cars cheaper than today’s level and high emission cars more expensive, thus will attract consumers to shift to lower emission cars. Currently, car makers said no one want to buy low emission cars. But in the proposed system, market demand will be the power to drive car makers to develop lower emission vehicles, whether by downsizing their cars or by introducing greener technologies. In this way, we can achieve the target of reducing greenhouse gas while providing all car makers a fair competition environment. Car makers will no longer worry that their substantial investment into green technology get no return. Moreover, the taxation system conforms to the “Polluter Pays Principle”. Bosses can still buy a Mercedes limousine, but they will have to pay more and fewer of them will be able to afford.

Apparently, controlling greenhouse gas emission by means of taxation is much better than introducing emission limit. So why didn’t European Commission adopt it ? the answer is politics related. Each EU member state has its own financial policies. To change its taxation system drastically, its government could face huge political pressure from the opposition parties and the public, especially those benefited from the existing system. Therefore EU’s legislators want to do in the easiest way – to force car makers to reduce emission by themselves. But as I have mentioned, without the invisible hand of market demand, the government’s intervention will only distort the market and causes conflicts of interests between car makers and consumers. We should learn from the lesson of Audi A2 – without any incentives to purchase a low emission car, people would rather to buy a bigger and cheaper conventional car.

Since 2002, UK has been adopting a taxation system according to CO2 emission level. However, the system only applies to company cars and the tax rate only varies between 10-35%. Without expanding to all cars on the road, without increasing the scale and span of tax rate, the effectiveness of this taxation system will be very limited. Last month, German government revealed its intention to apply a taxation system according to CO2 emission to all new cars. It is deemed to be a counter proposal to EU’s fixed emission limit and has already got the support from DaimlerChrysler.

No matter which system, legislation against greenhouse gas emission will definitely change the view of our motor industry. Who will be the winners and losers ? how will our cars in the future look like ? please wait for the Part 2 of this editorial…

Mark Wan

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