EC Debates Carbon Trading for Auto Industry; Proposes Effort-Sharing Directive

While most countries agree it’s important to reduce greenhouse-gas emissions worldwide, the question of which methods to employ is generating far less consensus, particularly when it comes to vehicle emissions.

Even the European Commission, the European Union’s executive body and longtime hawk on the need for governmental and international organizations to fight climate change, says the jury is out on whether road transport should be incorporated in carbon trading.

Better known as cap-and-trade in the U.S., the scheme is being promoted by Republican presidential candidate John McCain, among many others, including some auto industry leaders.

Cap-and-trade provides a way to reduce greenhouse emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold internationally at the prevailing market price.

But while supporters have not been able to get carbon trading on the statute book for any industry in America, European support is far greater. Indeed, a system has operated since 2005.

Yet, the EC’s reluctance to include the auto industry reflects the challenge in defining what parties are responsible for vehicle emissions.

In a new directive proposed in late January laying out how the EU carbon-trading plan should work from 2013, commissioners wrote: “Although greenhouse-gas emissions from road transport and shipping are still increasing, more detailed analysis, including a comprehensive cost-benefit analysis, is necessary in order to allow the Commission to decide on whether emissions trading is the most appropriate means to deal with these issues.”

France has instituted incentives program to push car buyers toward high-mileage vehicles.

It’s not as if the EC has been sitting on its hands over this issue. Intense discussions took place throughout 2007. But while the system works fine for brick-and-mortar facilities – such as power stations where it’s clear who is responsible for releasing emissions – the situation is more complex for the vehicle-manufacturing sector.

Auto makers are responsible for the greenhouse gases produced by their factories, but what about the vehicles they produce? Should responsibility be shared between the manufacturer, the dealer and customer?

And how can you determine within an emissions-trading system the relative importance of how much carbon dioxide a particular car is expected to average per kilometer, according to the manufacturer, with how it is driven by the owner.

These questions so far have stumped the EC, and there is every indication answers will not be reached in the foreseeable future. Therefore, the Commission has proposed a parallel directive, alongside its revised emissions-trading scheme, referred to as an “effort-sharing” directive.

Assuming this new legislation is approved by the European Parliament, as well as the European Union Council of Ministers representing the 37 member states, the new law will place legal responsibility for reducing greenhouse-gas emissions on sectors not included in the carbon-trading plan.

EU auto makers already are mandated to cut CO2 emissions by new passenger cars from 160 g/km to 130 g/km (roughly 45 mpg) in 2012 through improving engine technology. And a further 10 g/km reduction is expected to come from other technologies, such as tires, as well as a shift towards a greater use of biofuels and more widespread use of eco-driving.

But the Commission wants more. Transport is explicitly mentioned in the proposed directive, as are the food, construction and other sectors deemed too complex to trade greenhouse-gas emissions.

For Europe’s vehicle-producing countries, there are significant targets.

In the U.K., the effort-sharing directive calls for reducing greenhouse emissions 16% by 2020, compared with 2005. For France and Germany that figure is 14%. For Italy it’s 13%, Sweden 17% and Spain 10%.

However, the mandate shows more leniency toward Eastern European countries, where the EC is prepared to see an increase in emissions as manufacturing sectors ramp up: Romania’s greenhouse emissions will be allowed to rise 19%, Czech Republic 9% and Poland 14%.

The Commission’s new directive allows national governments to “define and implement policies and measures” to achieve their mandated emissions between the various sectors concerned whatever way they like.

It’s clear, especially for the Western European countries with their large auto sectors, there will be further legal and political pressure for additional reductions in greenhouse-gas emissions associated with the manufacturing, selling and use of cars, vans and trucks.

The good news is the EC is willing to lighten emissions restrictions based on the ability of EU governments to provide subsidies to their favored local industries as part of an environmentally friendly investment.

France, for example, has instituted an incentives program to push car buyers toward vehicles that burn less fuel. Known as “bonus/malus,” the scheme rewards buyers of high-mileage cars with a discount of up to €1,000 ($1,466), which come from penalties of up to €2,600 ($3,810) collected from owners of gas hogs.

However, such subsidies and other investment programs will continue to be tightly policed by the Commission to ensure a level playing field between companies operating within the EU’s supposedly single marketplace.

Auto makers no doubt will push for more benefits from the effort-sharing legislative package as it is debated by Parliament and EU ministers on its way to approval – probably in the year’s second half.

For its part, the European Association of Automobile Manufacturers (ACEA) tells Ward’s the industry would be willing to accept “an open emissions-trading scheme” that allowed it to trade permits with other industries.

However, “the industry opposes a system that would make (auto) manufacturers trade with each other,” an ACEA official says in an email. Including the auto industry within an emissions-trading system should be used “only as an alternative to, or replacement of legislation,” presumably such as the recently mandated CO2 cap.

The ACEA official also says emissions trading should take into account the role of consumers.

“Technology, alone, will not do the trick, as we see with decreasing CO2 emission levels from new cars,” he says, noting car ownership, the number of miles driven and traffic congestion also are factors.

“The industry, therefore, advocates an integrated approach,” he says, “combining vehicle technology with infrastructure improvements, traffic management, more alternative fuels, CO2-related taxation of cars and alternative fuels and changes in driving style (eco-driving).”