Despite improvements in fuel efficiency, CO2 emissions from road transport across the EU increased by 26% between 1990 and 2004, and now account for almost a third of the EU's total emissions. When it became apparent that voluntary car industry reduction targets would not be met, the European Commission proposed new legislation to impose enhanced emissions performance requirements. The new regulation sets the first legally-binding standards for CO2 emissions from passenger cars, requiring reductions from current levels to an EU average for new cars of 130g of CO2 per kilometre travelled through the adoption of improvements in motor technology. A further 10g per kilometre reduction in emissions will be sought through additional measures, including the increased use of sustainable biofuels and more efficient vehicle features such as better air-conditioning systems or tyres.

Emissions targets to be phased in

The new regulation is much less demanding than the European Commission's original proposal, which had sought to impose significant financial penalties for missing targets that would have applied in full from 2012. The car industry argued strongly that lead-in times for new car development would have made complying with the proposed targets within this timeframe impossible.

The obligations will now be phased in between 2012 and 2015. From 2012, on average 65% of a manufacturer's newly registered cars will need to comply, with the manufacturer's target. This will grow to 75% in 2013, 80% in 2014 and 100% from 2015 onwards. Additional credit will be given for very low emission vehicles, and in certain circumstances for biofuel-capable cars, until 2016. The target for each manufacturer will be set by reference to a limit value curve, with manufacturers of heavier cars being allowed higher emissions than those of smaller cars, but also being required to make steeper cuts from current fleet average emission levels.

Manufacturers (including companies within the same manufacturing group) may agree to pool together to meet the emissions targets. In that case, a nominated pool manager is responsible for paying any penalties, and evidence must be provided that it is sufficiently financially robust to do so. In order to discourage cartel behaviour amongst pool members that are not part of the same group of companies, pools must allow open, transparent and non-discriminatory participation on commercially reasonable terms, and the usual anti-competition rules apply. Pool members are not allowed to share information (eg, on pricing or research developments) other than that which directly relates to compliance with their targets. This does not preclude collaboration agreements which are unconnected with the pooling agreement (and are otherwise unobjectionable).

Derogations for small-scale and niche manufacturers

The possibility of lower targets is provided for small-scale manufacturers (registering fewer than 10,000 cars per year) and for niche manufacturers (registering fewer than 300,000 cars per year):

  • small-scale manufacturers may put forward a reduction target consistent with their reduction potential in light of economic, technological and market considerations, but such reduced targets are only available for a maximum of five years; and
  • for niche manufacturers, instead of having a target set by reference to the limit curve, they are able to apply for a lower target of a reduction of 25% from 2007 emission performance levels. These lower targets must still be achieved by 2012 and the same financial penalties apply as for larger manufacturers.

Manufacturers may seek to gain credit of up to 7g of CO2 per kilometre travelled for eco-innovations shown to improve CO2 emissions performance, provided the improvements go beyond what is otherwise required by the regulation. However, over time, eco-innovations (and in particular reductions in car weight) will be subsumed into required standards and no extra credit will be given.

Penalties of up to €95 per g/km of excess emissions

The penalty system has also been amended from the original proposal, so that manufacturers who miss the target by a small margin are penalised less severely. The fines will now be €5 per gram per new car registered for the first gram per kilometre over target, €15 for the second gram per kilometre over tar-get, €25 for the third gram per kilometre and €95 for each gram above three grams until 2019. After 2019 the full penalty of €95 for each gram per kilometre above the target will apply across the board.

From 2011 onwards manufacturers will be notified by the Commission of any shortfall in meeting their targets for the previous year. Inaccuracies can be challenged and the notice will be confirmed by 31 October of the relevant year. Details of each manufacturer's performance will be published.

A longer-term target is specified

A longer-term target of 95 grams of CO2 per kilometre travelled by 2020 is also specified in the regulation. Mechanisms for meeting this goal and penalties for missing it will be set following a review of the regulation which will be completed by 2013. That review will encompass a review of all targets applying from 2012 and the small-scale manufacturer and niche market derogations. It will also include an overall assessment of the impact of the regulation on the car industry and dependent industries such as parts providers.

Manufacturers relying on financial support

The new CO2 car emissions regulation comes at a sensitive time for car manufacturers across Europe, for whom the effects of the current economic crisis have been especially tough. In the UK, year on year car sales to March 2009 were down 30.5%, car plants closed temporarily over Christmas, and workers at major manufacturers such as Toyota, Nissan, and Vauxhall have had their working hours reduced or been offered voluntary redundancy in a bid to avoid more serious job losses. The burden of implementing changes now to enable future compliance with the new environmental regulations, at a time when the research and development funding required to achieve new standards is scarce, has led manufacturers to seek state help. As part of a €7 billion aid package to facilitate investments in greener technologies, the European Investment Bank recently approved government-guaranteed loans worth £340 million to Jaguar Land Rover to reduce its vehicle fleet's average emissions by 25% by 2012, and £370 million to Nissan. Spanish and French governments have promised €4 billion and €6 billion respectively in financial aid to their ailing car industries.