Sarah Keay-Bright. European Environmental Bureau. Brussels, December EEB document N 2000/021

Transcription

1 A critical analysis of the voluntary fuel economy agreement, established between the European automobile manufacturers and the European Commission, with regard for its capacity to protect the environment. Sarah Keay-Bright European Environmental Bureau Brussels, December 2000 EEB document N 2000/021 1

2 A critical analysis of the voluntary fuel economy agreement, established between the European automobile manufacturers and the European Commission, with regard for its capacity to protect the environment. By Sarah Keay-Bright European Environmental Bureau December 2000 Author: Editor Responsible: Sarah Keay-Bright John Hontelez 34 Boulevard de Waterloo Boulevard de Waterloo 34 B1000 Brussels B1000 Brussels Belgium Belgium Tel: Tel: Fax: Fax: cleanair@eeb.org info@eeb.org Reproduction of all or part of the document is encouraged with acknowledgement of the source 2

3 Author s Foreword This paper aims to explore the evolution and form of the voluntary fuel economy agreement, established between the European automobile industry and the European Commission, to better understand the factors influencing the decision-making and with regard for its capacity to safeguard the environment. Much of the data has been obtained through personal communication with the actors involved in the negotiating process. Thanks is extended to all those who gave their time to be interviewed for this study. While the general thrust of the paper supports the position of the European Environmental Bureau on the voluntary fuel economy agreements, established between the European Commission and the automobile industry, certain aspects may be solely the views of the author. 3

4 ACEA CAIR CEC CEMT CLEPA CO CO2 CONCAWE COP DETR DG 3* DG 4* DG 7* DG 11* DG 12* DG 17* DG 21* ECMT EU EUCAR EUROPIA FT FoE GATT IPCC JAMA KAMA MEP MIRA MVEG NAFTA NGO NOx R&D SEM UNFCC WHO WTO List of Acronyms European Automobile Manufacturers Association Cardiff Automotive Industry Research Commission of the European Communities (French Equivalent for ECMT) European Association of Automotive Suppliers Carbon monoxide gas Carbon dioxide gas The oil companies' European organisation for environment, health and safety. Conference of the Parties (to the UNFCC) Department of Environment, Trade and the Regions. Commission of the European Communities Directorate-General for Industry Commission of the European Communities Directorate-General for Competition Commission of the European Communities Directorate-General for Transport Commission of the European Communities Directorate-General for Environment, Nuclear Safety and Civil Protection. Commission of the European Communities Directorate-General for Science, Research & Development. Commission of the European Communities Directorate-General for Energy Commission of the European Communities Directorate-General for Customs and Indirect taxation. European Conference of Ministers of Transport The European Union The European automotive R&D programme established by ACEA European Oil Industry Association Financial Times (newspaper) Friends of the Earth General Agreement on Trade and Tariffs Intergovernmental Panel on Climate Change Japanese Automobile Manufacturers Association Korean Automobile Manufacturers Association Member of European Parliament Motor Industry Research Association Motor Vehicle Emissions Group North American Free Trade Association Non-governmental organisation Nitrogen oxides Research and Development Single European Market United Nations Framework Convention on Climate Change The World Health Organisation The World Trade Organisation *NOTE: As many of the events discussed in this paper took place before the re-naming of each Directorate- General (DG), the previous numerical format (as above) has been used to refer to the Commission s DGs throughout this paper. 4

5 Executive Summary Objectives and methods This paper aims to explore and analyse the evolution and form of the voluntary fuel economy agreement, established between the European automobile industry and the European Commission. By such analysis, factors influencing the decision-making process were identified and the capacity for the automobile industry s voluntary agreements to safeguard the environment was evaluated. Using the case study of the voluntary agreements established by the Commission with ACEA (European automobile manufacturers), JAMA (Japanese automobile manufacturers) and KAMA (Korean automobile manufacturers), conclusions were drawn as regards the appropriateness and effectiveness of voluntary agreements as a tool for environmental policy making. Relevant documentation was analysed and supplemented by personal communication with many individuals directly involved, or with a relevant interest, in the voluntary agreement negotiations. Background: Evolution of the voluntary agreements From 1991 to 1992, the Commission investigated methods for regulating CO 2 from cars. The two main proposals under consideration involved a purchase tax and an annual circulation tax. The Commission was divided on these proposals and Council rejected them both. The Commission then decided to address CO 2 from cars in 1995 through a three pillar strategy (COM(95)689, CEC 1995) composed of a voluntary agreement, a fiscal framework and a consumer information scheme. The Council called for a 35% improvement in the automobile industry s average fuel economy by 2005 while the Parliament called for a 35% improvement by 2005 and a 50% improvement by The Commission, however, pursued a 25% improvement from industry and decided the Council s demand for an extra 10% would be achieved through the fiscal framework and consumer information package. In 1997, ACEA offered the Commission an 11% improvement by 2005, which was rejected by all three EU institutions. In March 1998, ACEA and the Commission agreed to a 25% improvement (i.e. 140gCO 2 /km) in the fleet s average fuel economy by 2008 and an intermediate target of gco 2 /km by The terms of the agreement were then agreed. As part of the agreement with ACEA, the Commission initiated similar negotiations in 1998 with the Korean and Japanese manufacturers, KAMA and JAMA respectively. JAMA and KAMA agreed to similar commitments to those of ACEA, although KAMA has until 2004 to achieve the intermediate target, JAMA s 2003 intermediate target range is wider at gco 2 /km, and both JAMA and KAMA have an extra year to achieve the final 140gCO 2 /km target. The Commission and the automobile industry will jointly monitor the commitments of the latter. If factors are thought to be preventing progress, one of three options can be pursued: a remedy can be sought; the objectives can be renegotiated; or the situation can be monitored. If there is disagreement between the industry and the Commission as to the factors which have prevented the industry from fulfilling their commitments, either the agreement can continue as before while the situation is monitored and assessed by technical studies, or legislation can be introduced. Factors influencing the evolution of the voluntary agreements Council enthusiastically initiated the debate on targets to be set for the automobile industry, calling for a target of 120gCO 2 /km as early as Despite a change in test-cycles, which meant that 120gCO 2 /km under the new test-cycle was more ambitious than under the old-test 5

6 cycle, Council managed to hold on to its proposed target of 120gCO 2 /km. However the threat to industry was later watered down when the Commission designed the three pillar strategy such that the fiscal framework and the consumer information scheme would contribute to achieving this target and thus relieve some of the burden on manufacturers. At the same time, the Member States enthusiasm was not coupled with action. In the early nineties, Member State experts could not agree on the various proposals for regulating CO 2 emissions from passenger cars and accused each other of favouring national industries. Member States also failed to give their political support to the Commission s proposals for a purchase tax or an annual circulation tax. Perhaps the Commission should have foreseen that such fiscal proposals were unlikely to be adopted by Council as the voting procedure requires unanimous agreement from all Member States, but DG 11 s excessive support of fiscal measures was fuelled to a considerable extent by inter-dg competition. Following the signing of the Maarstricht Treaty and the publication of the 5 th environmental action programme, the Commission and the Council were seen to be preoccupied with voluntary agreements as a policy tool for the new approach or third way. Such enthusiasm for the voluntary approach may be an explanation as to why the pros and cons of alternative measures to regulate CO 2 from passenger cars were not more fully investigated at this time, including that of the voluntary agreement. The failure of the Commission to achieve consensus on a policy method to legislate CO 2 from passenger cars in the early nineties, not only set back the intention to tackle the issue by several years, but weakened the Commission s position with respect to the voluntary agreement negotiations as the Commission had no stick with which to threaten industry. The automobile industry knew that the Commission was very keen to ensure that the voluntary agreements would be a success and that there existed no alternative in the way of a binding legislative proposal. These factors, in addition to the lack of technical support for the Commission desk officers, opaque technical negotiations dominated by industry technical experts and the Commission s absence of commitment from senior officials, culminated in a particularly unambitious offer from ACEA in 1997 which was immediately rejected by the EU institutions. In reaction to ACEA s unambitious offer in 1997 of 167gCO 2 /km (an 11% improvement) the Commission adopted a non-technical political approach and began negotiating at higher level, involving the Commissioners, their cabinets and directors. Due to commitment from the top, the Commission was able to achieve a more ambitious target in March 1998 of 140gCO 2 /km by 2008 (a 25% improvement). The voluntary agreement negotiations were also given extra momentum due to the EU commitment, agreed under the UNFCC Kyoto Protocol 1 in December 1997, to reduce EU greenhouse gas emissions by 8% relative to 1990 levels by The Kyoto Protocol also provided the negotiations with a timeframe. The voluntary agreement negotiations were also considerably influenced by the personalities of the negotiators involved and their inter-relationships with one another. The influence of the individuals involved was also much greater than might normally be expected as so few people were involved in the negotiations. Major concerns As the EU s Kyoto Protocol commitments require an 8% greenhouse gas emission reduction below 1990 levels by , the passenger car sector s shortfall will have to be met by other sectors and/or Member State transport policies and/or some form of emissions trading. Estimates from different sources, suggest that the agreement will stabilise emissions at somewhere between 20% and 30% above 1990 levels for CO 2 from 1 The EU has committed to the UNFCC COP 3 (Kyoto 1997) to reduce greenhouse gas emissions by 8% below 1990 levels by The Kyoto Protocol has yet to be ratified. 6

7 passenger cars, depending on the assumptions used. However, such estimations are overly optimistic, as simulations carried out have not taken into account the unrealistic driving simulation of the official test-cycle as well as the extra weight that is added to the model used for the test-cycle, in the way of accessories such as air-conditioning and electric windows, before it is sold to the consumer. If the voluntary agreements would be binding, they would be enforceable. As they are nonbinding they can only be enforced by applying penalties, sanctions or sticks of some sort. However, the Commission does not have adequate tools at its disposal and has not even prepared a binding legislative proposal - which could be an effective stick - to replace the voluntary agreements in case they should break down. The voluntary agreements are clearly a risky instrument to use for addressing CO 2 from passenger cars, particularly as the European Union s commitments under the Kyoto Protocol are binding, once ratified. In addition, the impacts of global warming may not be reversible. The voluntary agreements established between the Commission and the automobile industry raise some legal concerns. First, provisions already exist for bringing into force binding legal measures to regulate CO 2 emissions from cars (e.g. Article 175 of the EC- Treaty (ex-article 130s), Article 5 of Directive 91/441/EC). Rather than use these mechanisms the Commission chose to use non-binding Recommendations. These seem to entail underlying commitments from the Commission. As such they would appear to have potentially binding elements and so it could be argued that they should not have been brought into force by the use of non-binding Recommendations. These underlying commitments are evidenced by the fact that, for example, the Commission will only legislate should the voluntary agreements fail and that it will obtain similar commitments from other non-acea manufacturers. Second, there is a gap in EU law with regards to the negotiation and legal framework for Community level voluntary agreements of this type. The adoption of such an important policy measure, using an untried legal formula could be open to criticism, especially as this strategy effectively limited the involvement of the Council and Parliament. Only Parliament and NGOs raised concerns with the need to establish post-2012 targets when far greater emissions reductions will be necessary in order to minimise the damage of global warming. The auto-industry needs to be given the right signals so that it can begin planning well in advance due to the lengthy lead-times necessary. Another major shortfall of the voluntary agreement is the lack of transparency and democracy as stakeholders were hardly involved. NGOs and Parliament were bypassed, and to a lesser extent Council was also excluded from the negotiations. The co-decision procedure is a far more democratic decision-making procedure than the nature of the voluntary agreement negotiations carried out between the Commission and the automobile industry. As the Commission used a Recommendation of the Commission, it passed up the opportunity for greater involvement of the Council and Parliament as it could have developed a Recommendation of the Council and Parliament. Additional concerns The agreed 2008 target and terms of the agreement are designed to support internal combustion technologies and do little to support alternative powertrains and technologies, or fuels other than petrol or diesel. The objectives of the agreement are vulnerable to renegotiations as there is a high risk that the assumptions of the agreement will not hold true. The Commission and the automobile industry will need to reach agreement during the monitoring procedure as to whether the agreements assumptions are being borne out: 7

8 - Account must be taken of legislated vehicle-related policies which might neutralise fuel economy improvements, as they may add extra weight to the average car which results in an increase in fuel consumption. - EU-wide availability of higher quality fuel than has been legislated by Auto-Oil 1 is assumed. The agreement s monitoring process will have to take into account the impact on industry s 2003 and 2008 targets, of the variation in fuel quality throughout the EU relative to ACEA s assumptions. However, should the sulphur content of fuel be reduced further from 50ppm, it must be noted that the monitoring procedure may award the automobile industry with CO 2 emissions reductions due to the improved fuel even though the CO 2 emissions have been transferred to the refinery sector which emits more CO 2 in order to produce the lower sulphur fuel. - As the automobile industry is to achieve 90% of its Commitment through technology, 10% can be achieved through non-technological means such as downsizing. However gains attributable to the latter will have to be separated out from gains due to the fiscal framework and the consumer information scheme. - The monitoring procedure will have to consider any factors which hamper the diffusion of technologies into the market. - Impacts on financial performance, competition and employment due to the voluntary agreements will have to be taken into account. - Come 2008, ACEA may also regard KAMA and JAMA s extra year to achieve the 140gCO 2 /km target as an unfair advantage and thus call for an extra year to achieve their target. - Not only will the Commission and the automobile industry have to achieve consensus on many issues, which like the agreement negotiations may be influenced by the personalities of the various individuals, but there is considerable scope for statistical discrepancies between the data collected by the Commission and by industry. The Commission will need considerable capacity and resources to adequately carry out the monitoring process, especially if technical studies are required to verify claims of industry. The area of the Commission responsible for monitoring the agreement s progress currently lacks adequate capacity and resources and this situation is not foreseen to improve. While the Commission will not want to see the targets and timeframes watered down due to concern to maintain its credibility in the face of pressure from Parliament, Council and NGOs, the Commission will be more concerned that the voluntary agreements do not collapse. Collapse of the agreements with the auto-industry could significantly damage the reputation of voluntary agreements as an EU policy instrument. The Commission s concern to prevent the collapse of the agreements could potentially reduce its bargaining power during the monitoring negotiations. If the Commission has to belatedly resort to legislation, this could also be to the detriment of environmental protection. The Commission will find it difficult to know when to deploy legislation, but it is likely to be near to 2008 when it is clear that the target will not be met. Environmental protection could be weakened by the additional time needed to allow for the development and implementation of enforceable legislation i.e. two or more years. As the Commission still has no legislative proposal prepared in case the voluntary agreements should fail, even more time may be needed for the development of such a proposal. The capacity of such a legislative proposal to protect the environment will depend on whether the objectives are further tightened during the legislative procedure and when the legislation is deployed. 8

9 Addressing CO2 from passenger cars: the voluntary approach Vs binding measures Proponents of the voluntary approach argue that the instrument provides incentives to the business sector for the development of efficient, innovative and environmentally-friendly solutions. It is also argued that voluntary agreements are much quicker to develop than legislative acts which must pass through each of the EU institutions, in accordance with lengthy procedures. However, this paper argues that the legislative procedure (i.e. in most cases for the achievement of environmental objectives, the co-decision procedure is used) is no less time-consuming or resource intensive and is more democratic than a voluntary agreement. Proponents also argue that binding legislation can dictate technology. This paper argues that ACEA in fact dictated the technological development of the automobile industry through the establishment of certain terms for the agreement. It is also the case that binding legislation can be designed so as not to dictate technology. Some Member States enforce non-binding agreements by issuing sanctions or penalties. DG ENV is currently developing a Regulation on environmental agreements which shall provide environmental agreements with a legal framework. At the same time the issue of enforceability of at Community-level voluntary agreements will also need to be resolved, as the Commission does not currently have adequate tools at its disposal to redress breach of agreements. Some argue that Parliament and Council would not reach agreement under the co-decision procedure for legislation addressing CO 2 from cars, but this argument is unfounded. Both Parliament and Council have clearly demonstrated a positive attitude to the issue of regulating CO 2 from cars by supporting more ambitious targets than those agreed to by the Commission and by calling for proposals for binding legislation in case the negotiations should fail. The barrier to agreement between the three institutions is more likely to be the method to be used, as an alternative to the voluntary agreement, to regulate the fuel economy of new passenger cars. With adequate investment of capacity and resources, the various options could be better analysed which should result in a satisfactory solution. The negotiations between the Commission and the automobile industry, as described by this paper, provide many examples of distrust between the negotiating parties. The defensive approach of industry was largely due to its highly competitive nature. A major concern for the automobile industry was that actions to regulate fuel economy might threaten their most profitable market segments which generally consist of cars that are more luxurious, larger, more powerful, faster and therefore more fuel inefficient than the average car. The automobile industry is so competitive that ACEA s members were divided as to what contribution each would make (and thus what the collective target would be). The division within ACEA nearly brought the negotiations to a halt in 1997, and the specific contributions to be required from each manufacturer have still not been agreed. Voluntary agreements should not be applied to industries whose market trends are moving in the opposite direction to that which is desired in order to achieve environmental objectives, 9

10 especially if they can not be enforced. Once ratified, the Kyoto Protocol will be binding and some of the impacts of global warming may be irreversible. Thus, unenforceable voluntary agreements should also not be applied to problems which require guaranteed environmental objectives. Alternatives to the voluntary approach for addressing CO 2 from passenger cars By considering the nature of the automobile industry and the global warming problem, targets need to guarantee environmental objectives and should be sufficiently stringent to move the industry to the limit of existing technological potential within an appropriate timeframe that allows for planning. In addition to the 140gCO 2 /km target set for 2008, with a view to achieving 120gCO 2 /km by 2012, long-term targets or indicators to achieve the ultimate environmental objectives deemed necessary to stay within safe ecological limits should have also been set, so that manufacturers can begin planning now. Studies show that fiscal measures are effective, to varying degrees, in reducing car use, influencing car purchase choice and in curbing the rebound effect. Thus fiscal measures can be useful complements to vehicle fuel economy regulation, especially if combined with consumer information schemes. It is unlikely that fiscal policies can be used as stand-alone measures to legislate CO 2 from cars, as severe fiscal measures can suffer from political unacceptability, as witnessed recently throughout Europe by the protests against high fuel prices. Unfortunately it seems unlikely that effective Community-level fiscal policies will be adopted in the future if the unanimous voting procedure continues to be used for deciding fiscal policies. While binding limit value legislation would guarantee a specific fleet average fuel economy, it can affect car types differently and will therefore be unpopular with manufacturers and Member States. A tradeable credit scheme applied to manufacturers could be a more flexible and particularly cost-effective alternative for regulating the fleet s fuel economy but it would not necessarily guarantee achieving a specified fleet average fuel economy (depending on the effectiveness of implementation). In most cases, regulating vehicle fuel economy by setting CO 2 emission limits according to a certain parameter can give rise to perverse effects as cars can be designed to avoid the legislation s intention while not yielding the required environmental improvement. But even enforced limit value legislation, aimed at achieving a certain averaged fuel economy for manufacturers sales, can not guarantee a specified CO 2 emissions reduction from the EU passenger car sector. This is due to the trends of increasing mileage per car owner and increasing car ownership as well as an increasing market share of more powerful, faster and larger cars. It is the author s view that the Domestic Tradeable Quotas (DTQs) scheme, developed by Fleming, is a possible alternative to regulating the average fuel economy of the car fleet. The DTQ scheme is an economic policy tool based on the idea of per capita carbon budgets aimed at reducing national carbon emissions. The nation implementing the scheme would set a carbon budget to be reduced over time. The carbon units making up the budget would be issued to individuals and organisations. Each individual would receive an equal and unconditional entitlement of carbon units; organisations would acquire the units they need from tender (a form of auction modelled on the issue of government debt). Low users could then sell their surplus on the national market to higher users. 10

11 The DTQ policy tool could provide a transparent and equitable alternative to vehicle fuel economy regulation, overcoming the problems of perverse effects and the unequal treatment of different car types (manufacturers). The scheme would also provide the much needed market driving forces for improved fuel efficiency and renewable energies, which for the transport sector, would drive R&D agendas and the need for fuel efficient cars, public transport, as well as facilities for cycling and pedestrians. The policy tool should also suffer less consumer resistance compared to fiscal measures as the DTQ scheme is transparent and is based on the principle of equity. However, the DTQ concept requires and deserves further research and development. 11

12 Table of Contents 1. INTRODUCTION THE EVOLUTION OF THE VOLUNTARY FUEL ECONOMY AGREEMENTS THE ORIGINS OF AN INITIATIVE TO ADDRESS CO 2 FROM PASSENGER CARS ACEA S RESPONSE THE COMMISSION UNITES ON A THREE PILLAR STRATEGY COM(1995) : FRUITLESS VOLUNTARY AGREEMENT TECHNICAL NEGOTIATIONS THE BIRTH OF AN AGREED TARGET ANALYSIS OF THE ACEA VOLUNTARY AGREEMENT THE TARGET AND CO 2 ACCOUNTING Is 140gCO 2 /km technically ambitious? Industry s commitments in CO 2 terms The CO2 test cycle: How a vehicle s fuel economy is over-estimated TERMS OF THE AGREEMENT Fuel quality Fiscal measures Vehicle related legislation that may affect fuel economy Competition issues The commitments of non-acea members The negotiations with KAMA The negotiations with JAMA Monitoring EVALUATION OF THE VOLUNTARY AGREEMENT THE CAPACITY OF ACEA S VOLUNTARY AGREEMENT TO ENSURE CO 2 REDUCTIONS FROM THE PASSENGER CAR SECTOR THE VOLUNTARY AGREEMENT AS AN ENVIRONMENTAL POLICY TOOL FOR APPLICATION AT EU LEVEL The legal aspects The Role of the Commission, Parliament, Council and NGOs METHODS TO REGULATE CO 2 FROM CARS Economic and regulatory measures to influence the motorist Regulating vehicle fuel economy standards The case for binding regulation as opposed to the voluntary approach Methods of regulating vehicle fuel economy Achieving guaranteed CO 2 emission reductions from passenger cars BIBLIOGRAPHY ANNEX 1 THE ACEA COMMITMENT

13 Table of Figures FIGURE 1 MAJOR EU SOURCES OF EU CO 2 EMISSIONS FROM FOSSIL FUELS FIGURE 2 FACTORS WHICH HAVE OFFSET FUEL ECONOMY IMPROVEMENTS FROM FIGURE 3 ACEA MEMBERS FIGURE 4 THE EVOLUTION OF THE VOLUNTARY AGREEMENT FIGURE 5 OUTLINE OF THE CONTENT FOR THE TECHNICAL DISCUSSIONS BETWEEN THE COMMISSION SERVICES AND ACEA FIGURE 6 MARKET SHARE (%) OF NEW PASSENGER CAR MANUFACTURERS FOR 1999 EU REGISTRATIONS FIGURE 7 THE FUEL ECONOMY FLEET AVERAGE FOR THE EU FIGURE 8 CO 2 REDUCTION GAIN ESTIMATIONS FOR THE EU PASSENGER CAR SECTOR (GRAPH) FIGURE 9 AUTO OIL II EMISSIONS FORECAST FIGURE 10 THE NEW TEST CYCLE OF DIRECTIVE 93/116/EEC IN COMPARISON WITH DIRECTIVE 80/ FIGURE 11 HIGHER FUEL QUALITY ASSUMPTIONS FIGURE 12 NON-ACEA MEMBERS FIGURE 13 FACTORS TO BE TAKEN INTO CONSIDERATION BY THE MONITORING PROCEDURE FIGURE 14 THE CARBON BUDGET FIGURE 15 PROPORTION OF EXTERNAL AND INFRASTRUCTURE COSTS COVERED BY REVENUES IN TRANSPORT (1991) FIGURE 16 CONTRACTION AND CONVERGENCE FIGURE 17 THE MARKET FOR DOMESTIC TRADABLE QUOTAS FIGURE 18 ENVIRONMENTAL CITIZENSHIP FIGURE 19 THE ACEA COMMITMENT Table of Tables TABLE 1 MEMBER STATE LEGISLATIVE PROPOSALS TO REDUCE CO 2 FROM PASSENGER CARS TABLE 2 POTENTIAL FUEL ECONOMY IMPROVEMENT ESTIMATES TABLE 3 THE COMMISSIONS REPORT ON TECHNOLOGICAL POTENTIAL AND COST TABLE 4 THE OPERATIONAL AND CAPITAL COSTS OF ALTERNATIVE TECHNOLOGIES COMPARED TO EXISTING TECHNOLOGIES TABLE 5 CONTRIBUTIONS FROM ALTERNATIVE POWERTRAINS AND NEW FUELS TO ATTAINING THE TARGET TABLE 6 CO 2 REDUCTION GAIN ESTIMATIONS FOR THE EU PASSENGER CAR SECTOR (TABLE) TABLE 7 EXAMPLES OF MEASURES TO REGULATE CO 2 FROM CARS BY INFLUENCING CONSUMER USE AND CHOICE

14 Introduction 1. INTRODUCTION The car occupies an incredibly powerful force in our society as it has given us much freedom and can satisfy not only our needs but some of our desires too. Society assumes this newfound freedom to be a right. At the same time, the onset of global warming implies that the world needs to control its carbon budget. This also applies to the EU passenger car sector, which now has some 700 million vehicles on the road, a number that continues to increase. But efforts to improve the fleet s fuel economy fly in the face of market trends which show a shift towards larger, faster, more powerful and therefore more fuel inefficient cars. Fuel economy is not high on the list of many car purchasers priorities, so is not a market driving force. This is the dilemma that policy-makers face in attempting to regulate CO 2 from passenger cars. The EU passenger car fuel economy fleet average improved after the oil shocks of the 1970s due to increased oil prices, but has increased since the 1980s due to factors that that have added weight to the vehicle (see Figure 2). Thus ACEA estimates that some 70% of the improvement in EU passenger car fuel economy between 1983 and 1997 has been offset by factors such as EU legislation relating to noise, safety and emissions but also due to consumer demands such as comfort, electric motors (windows), air conditioning, extra power and faster speed 2. Growth in EU transport emissions has now outstripped the economic growth of the EU due to factors such as, inter alia, higher standards of living, a shift away from public transport and the establishment of the Single European Market (CEC 1998b). Carbon dioxide is the most important greenhouse gas as regards global warming potential, both in general and from passenger cars 3. The percentage of the EU s total CO 2 emissions attributable to the transport sector has increased from 19% in 1985 to 26% in 1995 (CEC 1998b). Passenger cars account for 50% of the EU s transport related emissions and 12% of total EU CO 2 emissions (CEC 1999a). The transport sector s CO 2 emissions, as the fastest growing major source of EU CO 2 emissions (see Figure 1 below), are expected to increase 22% above 1990 levels by 2000 and 39% by 2010 (CEC 1999a). While EU greenhouse gas emissions had decreased by some 4% below 1990 levels by 1994, such emissions have again risen to 1990 levels (CEC 1998a). Thus steep reductions will have to be sought from all EU CO 2 producing sectors if the current CO 2 growth trend is to be reversed. With an EU commitment to the UNFCC Kyoto Protocol (1997) to reduce greenhouse gas emissions by 8% below 1990 levels by , the European Commission has attempted to tackle CO 2 from passenger cars with a three pillar strategy as set out by COM(1995)689 (CEC 1995). This policy package comprises a voluntary fuel economy agreement between the European Commission and the vehicle manufacturers selling cars in the EU (including non- European manufacturers), a fiscal framework for Member States and a consumer information scheme. This paper aims to explore and analyse the evolution and form of the voluntary fuel economy agreement, established between the Commission and the automobile industry represented by ACEA (European manufacturers), JAMA (Japanese manufacturers) and KAMA (Korean manufacturers). By such analysis, it is intended that factors influencing the decision-making process will be identified and the capacity for the voluntary agreement to safeguard the environment shall be evaluated. It is hoped that lessons can be drawn from this case study as 2 Vans and SUVs doubled their European market share reaching 5.2% in 1998.(FT Automotive Quarterly Review 1999). There is a linear correlation between engine capacity and carbon dioxide emissions. Car engines have been getting bigger and specific output per litre engine capacity has been increasing in recent decades (Holman 1992). 3 Carbon dioxide is not the most powerful greenhouse gas but is the most volumous and so contributes 58% to global warming (IPCC 1996). While carbon monoxide, volatile organic compounds and nitrous oxide compounds are also released through hydrocarbon combustion and all directly or indirectly contribute to global warming, carbon dioxide has the greatest global warming potential from passenger car exhausts (Wade et al 1994 ). 14

15 Introduction regards the appropriateness and effectiveness of voluntary agreements as a tool for environmental policy making at EU-level but also with regard to effectively regulating CO 2 from cars. Relevant documentation has been analysed and supplemented by personal communication with many individuals directly involved, or with a relevant interest, in the voluntary agreement negotiations. Figure 1 Major EU sources of EU CO 2 emissions from fossil fuels Source: DG7 EUROSTAT (CEC 1998g) Figure 2 Factors which have offset fuel economy improvements from Source: ACEA website Publications: addressing climate change Figure 3 ACEA members BMW AG; Daimler-Benz-Chrysler AG; Fiat Auto S.p.A.; Ford of Europe Inc.; AB Volvo (became part of Ford 1998); General Motors Europe AG; Dr. Ing. H.c.F.Porsche AG; PSA Peugeot Citroen; Renault SA; Volkswagen AG 15

16 The Evolution 2. THE EVOLUTION OF THE VOLUNTARY FUEL ECONOMY AGREEMENTS Figure 4 below outlines the evolution of the voluntary agreements established between the Commission and automobile industry, since their origins in Figure 4 The evolution of the voluntary agreement 1991 Council Directive 91/441 EEC calls for proposals to reduce CO 2 from passenger cars 1991 DG 11 conducts analyses of legislative proposals 1992 Purchase tax proposed by MVEG sub-group to MVEG is rejected 1992 Circulation tax proposed by MVEG to European Council is rejected 1992 Consensus within Commission that CO 2 from passenger cars is too difficult to legislate 1995 Voluntary agreement proposed as part of three pillar strategy COM (1995) 689 Early 1996 Commission enters into technical discussions with ACEA June 1997 ACEA offers 167gCO 2 /km which is rejected by the European institutions December 1997 UNFCC COP3, Kyoto, Japan February 1998 Strasbourg workshop brings together negotiators to discuss regulating CO 2 from passenger cars March gCO 2 /km accepted, but Commission expresses caution with regard to conditions June 1998 Auto-Oil 1 legislation passed. Parliament uses co-decision procedure to bring implementation forward by five years. July 1998 ACEA and Commission finalise terms of agreement July 1998 ACEA presents a Commitment and the Commission responds with COM (1998) 495 presented 5 th February 1999 Commission presents ACEA with Recommendation 1999/125/EC May 1999 Negotiations with KAMA completed. KAMA given one extra year to achieve intermediate and final targets May 1999 Commission and JAMA dispute over the term market mix. JAMA s Commitment proposal rejected. July 1999 JAMA and Commission agree on an extra year for final target of 140gCO 2 /km and a wider intermediate target range of gCO 2 /km as opposed to gCO 2 /km 12 th October 1999 Environment Council supports the Commission s intention to accept the agreements of JAMA and KAMA 13 th December Adoption of the Directive on Fuel efficiency labelling of cars Directive /94/EC 13 th April 2000 The Commission presents Recommendations for JAMA and KAMA, 2000/304/EC and 2000/303/EC respectively. August 2000 The Decision on Monitoring of CO 2 emissions from new passenger cars D1753 (2000) is adopted ACEA must be within the intermediate target range of gCO 2 /km and JAMA within gCO 2 /km. ACEA and JAMA will also undertake a review of the progress made and the potential to achieve 120gCO2/km by KAMA must be within intermediate target range of gCO 2 /km. KAMA will also undertake a review of the progress made and the potential to achieve 120gCO 2 /km by ACEA must achieve a fleet average of 140gCO 2 /km 2009 KAMA and JAMA must attain a fleet average of 140gCO 2 /km 16

17 The Evolution 2.1 The origins of an initiative to address CO 2 from passenger cars Article 5 of the Directive 91/441 EEC (Council of the European Union 1991) requires that the Council shall decide on measures designed to limit CO 2 from passenger cars, through acting by a qualified majority on a proposal from the Commission. Member States were therefore invited by the Commission to suggest policy options and the Motor Vehicles Emissions Group 4 (MVEG) was entrusted by the Commission with the task of putting forwards a politically acceptable policy proposal (Ends Report 1992 No. 215). Table 1 Member State legislative proposals to reduce CO 2 from passenger cars. Country Proposal Comment Germany (The ENDS Report 215 Dec 1992) France (The ENDS Report 215 Dec 1992) Italian Delegation Proposals to MVEG UK Delegation to MVEG1991 Dutch Delegation to MVEG CO 2 emission limits to be imposed on different size bands of car Absolute emission limit Average CO 2 emission standard. Companies exceeding this average would pay a fine, while those beating it would be offered some financial benefit (ENDS Report 207 April 1992). Variable car purchase tax based on actual CO 2 emissions. Below a threshold set initially at 100g of CO 2/km in 1994, no tax would be payable on a new car. Above a ceiling set initially at 400g/km no extra tax would be payable. Between these two values the tax rate would rise in steps exponentially. Tradable emission credits which would be bought and sold among manufacturers according to whether their models met a specified and progressively tightened fuel efficiency standard. 1. The covenant type approach setting of stepwise strengthened emission requirements over a period of time 2. The emissions requirement type approach - on basis of vehicle weight or engine size, possibly supplemented by other factors Would do nothing to discourage consumers from purchasing larger high emission vehicles (which happen to be produced in volume in Germany). Legislating by bands based on a particular parameter e.g. weight, is also vulnerable to borderline effects as a manufacturer might opt to increase the weight of a model so it might move up into a heavier category where it would suffer less penalisation As the standard would be tightened so the permits would become more expensive thus increasing the incentives for improving fuel efficiency. Similar to tradable permits - see UK. Difficulty in setting limit as internal industry information is needed. Also difficult to set fines and rebates at an effective level. High transaction costs. The tax may have to be extremely high to be effective and would thus be politically unacceptable. Manufacturers of heavier cars would argue unfair discrimination with falling sales and that consumer needs design the car i.e. a family of five needs more than a Ford fiesta. A tradable permits system would be extremely complex. High transaction costs. The system has worked well in the US, but cars are a very different system to stationary sources of industrial plants. Depends on creating a true competitive market, setting the correct limit values so that companies have real incentives to improve fuel economy. Also might be difficulty to police the system and may be difficult to set fines at an effective rate. Fluctuations in cost or availability of credits might make planning very difficult. Such a scheme may also conflict with WTO/GATT. Difficulty on setting limits - requires internal knowledge of industry to be truly effective. As for Germany - setting limits by a certain criteria may fall vulnerable to borderline effects. Several competing options emerged from the Member States. It became clear that the diversity of national market composition characteristics and conditions complicated attempts 4 MVEG was composed of a group of national officials and motor industry representatives drawn together in the mid-1980s to address road transport emissions. 17

18 The Evolution to develop legislative options. The options presented to the Commission were particularly criticised for supporting national manufacturing interests (ENDS Report 1992 No. 207) (see Table 1)). Each proposal had its positive and negative points and consensus on a single policy option was not achieved. In November 1992, a MVEG sub-group, which had been formed to discuss fiscal measures, proposed a purchase tax, based on a combination of the weight of each new vehicle and its CO 2 emissions per kilometre, in order to achieve a 40% fuel economy improvement for new cars by (The ENDS Report, No. 225). There were objections from Member States, particularly from the UK, that MVEG lacked the competence to discuss fiscal issues (The ENDS Report, No. 215). The proposal presented in December 1992, championed strongly by DG11, received little support from DG3, DG21 and MVEG, as rates would have needed to be unacceptably high 6 to achieve the desired effect (Interview 1; The ENDS Report, No. 225). There was also concern that such rates, as experienced in Denmark, would slow new car sales and age the vehicle car parc, thus defeating the policy objective of improving the average fuel economy of the entire fleet (The ENDS Report, No. 215). The Commission then invited the MVEG sub-group to consider the option of an annual circulation car tax based on CO 2 emissions. The issue of the difficulty in attaining tax harmonisation came to the fore, especially in the context of requiring unanimity from Council 7 and taking account of the diversity of current vehicle fiscal policy throughout the EU. All Member States would therefore have to agree to the high tax rates deemed necessary to achieve the environmental objectives. In addition, some states such as Luxembourg and the UK, would probably have vetoed such a proposal in support of the principle of subsidiarity on fiscal measures. This was well demonstrated by the EU s attempt to introduce the carbon tax in 1997 (ENDS Daily ). Member States also have different quantitative commitments under the UNFCC Kyoto Protocol which will require varied policy measures. The circulation tax proposal was rejected at the Environment Council meeting on 9 th December 1992 (The ENDS Report 1992, No. 215). Not only was there division between Member States on the issue of legislating CO 2 from passenger cars with harmonised fiscal policies, but the Commission was divided too. While DG11 was strongly championing both of MVEG s tax proposals, DG21 rejected both proposals and DG 3 was not especially keen on either but supported the circulation tax more than the purchase tax (Interviews 1 and 2). Thus there emerged a competitive issue as to which DG would win (Interviews 1 and 2). The failure of the Commission to reach consensus on how to regulate CO 2 from passenger cars significantly reduced the Commission s bargaining power in the voluntary agreement negotiations with ACEA which followed in 1996 and As a result, the Commission could not threaten ACEA with binding legislation and it was clear to all involved, including industry, that the Commission did not want to return to the fruitless discussions of the early nineties. 5 The proposal involved purchase charges that would be weight and gco 2/km based, set at zero in 1995 for cars operating at no more than 160gCO 2/km and reduced each year by 5g so that 110gCO 2/km would be the limit for 2005 (the limit of current technology). The legislation would be implemented by a Directive stating the minimal rates but giving the Member States flexibility in application (The ENDS Report 1993 No. 225). 6 Rates in the region of for a car emitting two and half times as much CO 2 as the limit set were envisaged (The ENDS Report1993, No.225). 7 EU fiscal measures require unanimity from Council (under Article 100A of the EU Treaty (Horspool 1998)) which means a Member State can veto a proposal. By adoption of a framework with such minimum limits, many Member States could then under the principle of subsidiarity choose to tax at higher levels to achieve their environmental aims. This scenario is at odds with the principle of fiscal harmonisation and the establishment of the single market, which is strongly supported by ACEA. 18

19 The Evolution 2.2 ACEA s response In immediate response to the Commission s interest to address CO 2 from passenger cars, ACEA offered to reduce the sales weighted CO 2 emissions of the EU new car fleet by 10% on a voluntary basis within the period (ACEA 1991; Europe Environment ). This was set against demands such as those of the UK s transport secretary of the time, Mr Rifkind, and the UK s Royal Commission of Environmental Pollution (RCEP 1994), urging manufacturers to pursue a 40-50% improvement in fuel efficiency by 2005 (The ENDS Report No. 207). ACEA was even at this time placing much emphasis on the CO 2 reduction benefits of direct injection diesel technology (ACEA 1992a). While arguing that fuel efficiency improvements had been offset by various factors outside their control (see Figure 3, page 15), ACEA was also promoting non-technical ways to reduce CO 2 from cars i.e. driver behaviour campaigns, improved public transport, technical inspection of in-use vehicles, cleaner fuels and traffic management (ACEA 1992b). In response to the MVEG proposals for a purchase tax and circulation tax, ACEA proposed a CO 2 emission tax levy to be fully harmonised in the Member States (ACEA 1992b). ACEA argued that legislation based on weight would be unfair as the spread of CO 2 emissions can reach up to 100% in each weight class for various reasons 8. The automobile organisation demanded that the tax would 1) replace existing taxes, 2) be solely CO 2 based and 3) would not be penal on particular segments of the market. However, such a tax would face the same problems as a purchase tax or circulation tax as proposed by MVEG. As mentioned previously, a harmonised tax rate would be dictated by the Member States proposing the least ambitious demands such that unanimous agreement among the Member States 7 could be achieved. Further, replacing other taxes would remove taxes that aim to internalise various other environmental and social costs. And finally, a tax addressing fuel economy can not avoid penalising larger cars, as they are generally more fuel inefficient than smaller cars because they are heavier. 2.3 The Commission unites on a three pillar strategy COM(1995)689 The idea of a voluntary agreement was initially suggested and strongly championed by DG3 (Interviews 1 and 2). This raised the inter-dg competivity issue again, but this time between DG3 and DG11 as the Danish Commissioner for the Environment, Bjergaard, initially took the Danish line of weak support for the voluntary approach (Interviews 1 and 2). Eventually deadlock was broken as DG11 feared returning to the complex legislative option debate (refer to chapter 2.1, page 17) having realised that fiscal policies could not be used as stand-alone measures to regulate CO 2 from passenger cars (Interview 1). The adoption of the voluntary approach by the Commission was regarded as a personal victory for DG3 (Interviews 1 and 2) but meanwhile DG11 took control of the board by proceeding with the development of the three-pillar strategy which was very much Bjergaard s initiative (Interview 2). The strategy, described in the communication COM(1995)689 (CEC 1995), encompasses a voluntary agreement with industry, a framework for fiscal measures and a fuel economy consumer information scheme The Commission was prepared to accept a 25% improvement by 2005 (para 34 of COM(1995)689, CEC 1995), but the Council was demanding a 35% reduction by 2005 (Council of the European Union 1996b). The Commission therefore expressed its intention to achieve the extra 10% though the fiscal framework and consumer information scheme (COM(1995)689; CEC 1995). 8 Factors such as inter alia, engine displacement and output, transmission configuration, aerodynamics, seating and loading capacity and performance. 19

20 The Evolution Between the Commission s failure to reach consensus on a method to legislate CO 2 from passenger cars in the late eighties and the year 1995 when the three pillar strategy was proposed, important events took place which altered the Commission s approach to environmental policy-making. In 1992, the Treaty of Maarstrict was signed and ratified. The Treaty amendments gave the principle of subsidiarity much greater emphasis and the Council made clear that the interpretation of its provisions would see that the Community would only legislate if it would be more effectively carried out at Community level than at national level, to the extent necessary and as simply as possible (Pallemaerts 1999). The Council also made clear that Directives would be preferable to Regulations and where appropriate non-binding measures would be preferred to legally binding ones (Council of the European Union 1992). The early 90s also witnessed the publication of the 5 th Environmental Action Programme which stated the Community s aim to broaden the range of instruments used for policymaking. The Commission also states in this publication that perhaps too great a reliance was placed on regulation of the command and control type and that the legislative approach may not always be the best choice as the first step. Council s strong support of the new voluntary approach meant that the Commission was provided with a politically supported alternative option for legislating CO 2 from cars. The Commission was at the same time presented with an opportunity to put the new Community philosophy into practice. But while the Commission at last managed to move forwards on legislating CO 2 from passenger cars, its declared over-enthusiasm, encouraged by Council, to increasingly use new instruments such as environmental agreements as part of its new approach or third way, significantly contributed to diluting the Commission s bargaining power. The conclusion of a study of voluntary agreements in Germany by Rennings et al (1997) makes reference to precisely the shortcomings that the Commission would later experience throughout the negotiations due to such over-enthusiasm and the lack of an alternative legislative binding proposal: If a decision to give preference to voluntary solutions in general is made or if a decision in favour of such solutions is taken at an early stage, this too is counter productive, because the substance of negotiated solutions, the governmental potential for threats, is weakened and delays in the form of a stamina contest are provoked. (Rennings et al 1997) : Fruitless voluntary agreement technical negotiations The initial attitude of ACEA to an EU-wide voluntary initiative was not overly enthusiastic. ACEA made its displeasure known that the Commission made public its first contact with ACEA regarding such a Commitment (Interview 1). While ACEA reminded the Commission of its 1991 voluntary offer, those manufacturers who had in the meantime made national voluntary offers such as Germany, France and Sweden 9, saw no reason why they had to go any further with an EU-wide commitment (Interview 3). Meanwhile, despite the inter-dg deadlock following the discussions in the early nineties on how to regulate CO 2 from passenger cars, unity within the Commission developed once the voluntary approach had been accepted by DG11 (Interviews 1 and 2). Two desk officers from DG11 and DG3 were made responsible for implementing the three-pillar strategy at working level. The inter-dg working relationship has been generally regarded as an excellent example of inter-dg co-operation (Interviews 1, 2, 3 and 4). 9 PSA and Renault offered the French government 150gCO 2/km by 2005; Volvo offered the Swedish government a fleet fuel economy improvement of 25% by 2005; and the German manufacturers offered the German government a fleet fuel economy improvement of 25% by 2005 (CEC 1995); Environment Watch ; ENDS Daily