the co2 challenge for passenger cars in europe by patrick ten brink of ieep lyon 5 december 2006

The CO2 Challenge for Passenger Cars in Europeand the Potential Role and Impacts of Emissions

Trading

Patrick ten BrinkSenior Fellow and Head of Brussels Office

Institute for European Environmental Policy (IEEP)[email protected]

www.ieep.eu

Elements build on work by the IEEP Transport TeamMalcolm Fergusson & Ian Skinnerand partners TNO, CAIR and LAT

Lyon5 December 2006

Presentation Structure

• Context – history and emissions from transport• The strategy and its measures• The performance and the remaining challenge• Insights on instruments, targets and costs

A Brief History

• 1990s: Fuel economy not improving

• 1993: EU ratifies Framework Convention on Climate Change

• 1995: Commission publishes passenger car CO2 strategy• target 120g/km by 2005 (or 2010 at latest)

• 1997: Carmakers threatened with legislation

• 1998/9: Voluntary Agreements with manufacturers’ associations

• 2000: Monitoring Mechanism (1753/2000) established

• 2001: CO2 Labelling required (1999/94)

• 2005/6: Review of Passenger Car CO2 Strategy

Source: Malcolm Fergusson

Transport Sector GHG emissions

http://dataservice.eea.europa.eu/atlas/viewdata/viewpub.asp?id=2104

A Diverse Europe - Trends in transport GHGemissions by country (1990-2003)


Growth in Road Transport contributions


Within transport, cars are the main energy user

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Source: T&E Presentation by Jos Dings building on DGENV presentation

Transport and GHG emissions – a problem sector

Source: T&E Presentation by Jos Dings; originally from EEA TERM Energy Factsheet

Transport pollutants – GHGs a key challenge


Passenger Cars CO2 Strategy: 3 pillars

Annual Communications to the Council and Parliament - seeCommission web pages: EU CO2 and cars strategy:EU CO2 and cars strategy:http://ec.europa.eu/environment/co2/co2_home.htmhttp://ec.europa.eu/environment/co2/co2_home.htm

EU objective: To achieve a fleet average of new passenger car of 120 g CO2/km by2012 (equivalent to 4.5 l/100 km diesel or 5l/100km gasoline)

Three pillarsAgreements with car industry

Negotiated in 1999/2000 with the European, Japanese and Korean car manufacturersassociations (resp. ACEA, JAMA & KAMA)Member States provide independent monitoring data on new cars soldTarget: 140g CO2/km by 2008/2009 Annual Joint Reports

Consumer informationDirective 1999/94/EC adopted in December 1999 and amended in 2003Possible future improvements: harmonised label with energy efficiency classes, and inclusionof light commercial vehicles in addition to cars

Fiscal measuresJuly 2005 Commission proposal for a Council directive (COM(2005)261) aims at requiring MSthat have taxes to base their calculation on CO2 emissionsCurrently being discussed in Council

Source: DGENV Presentation

Consumer informationsystem (1999/94/EC)

• labelling of fuel consumption and CO2emissions

• the production of a fuel consumptionand CO2 emissions guide

• displaying posters in car showrooms

• the inclusion of fuel consumption and CO2emissions data in advertising, brochures,etc.

Danish Energy Label

Fiscal Measures –Fiscal Measures – nation wide and local nation wide and localFuel tax; car tax schemes and the London’s congestion chargeFuel tax; car tax schemes and the London’s congestion charge

www.t-e.nu

London Congestion chargeLondon Congestion chargeStarted in February 2003Started in February 2003

Run by Transport for London, TRun by Transport for London, TffLL

Covers 21km², 1.3% of greater LondonCovers 21km², 1.3% of greater London

Fuel TaxesFuel TaxesUK fuel price escalatorUK fuel price escalator

Petrol and diesel tax differentialsPetrol and diesel tax differentials

Car taxesCar taxesUK - registration taxes moved to CO2 ratingUK - registration taxes moved to CO2 rating

Being expanded and price going upBeing expanded and price going up

The ‘CO2 Agreement’ with Carmakers

• Community target was 120g/km by 2005/2010• Commission negotiated with Associations• Agreement reached on 140g/km

• ACEA by 2008; JAMA & KAMA by 2009; Interim targets 2003/4

• Monitoring Mechanism (1753/2000) established

EU targets ininternational context

All going in the samedirection

Japan early leader; EUplan to go further.


Source: DGENV presentation CO2 & Cars

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ACEA JAMA KAMA EU-15

ACEA (required) JAMA (required) KAMA (required)

EU objective: 120 gCO2/km

EU15 level in 1995:186 gCO2/km Voluntary

commitments: 140 g CO2/km in 2008/9

Voluntary Commitments:major efforts still needed…

12.4% reduction in 2004 compared to 1995, out of total 25% required by 2008/9…

Progress to DateSome, but it looks like the targets will be missed

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ACEA target ACEAJAMA target JAMA/KAMAKAMA EU target 2010trend ACEA trend JAMAtrend KAMA EU target 2012

Source: T&E Presentation by Jos Dings

How well are manufacturers on track? Different challenges for different manufacturers

Source: Oct 25 T&E brand by brand progress report

The CO2 challengeIncreasingly serious concern that the current agreement

targets will not be reached

Increasing realisation that a new self commitment will notlikely result in the 120g/km target being achieved.

Increasing political discourse on need for strict targets.

But how, much will this cost, and what can help reduce thecost?

Studies for DGENV by IEEP, TNO and CAIR

Study for DGENT by TNO, IEEP and LAT

The Study for DGENV by IEEP et alService contract to carry out economic analysis and business impact

assessment of CO2 emissions reduction measures in the automotivesector

Patrick ten BrinkIan Skinner

Malcolm FergussonDawn Haines

IEEP - Institute for European Environmental Policy

Richard SmokersErik van der Burgwal

Raymond GenseTNO, The Netherlands

Peter WellsPaul Nieuwenhuis

CAIR - Centre for Automotive Industry Research,Cardiff Business School, Cardiff University, UK

See http://ec.europa.eu/environment/co2/pdf/cars_ia_final_report.pdf

Aim of the work

The aim of the service contract was to assess the impacts of tradingscheme(s) that would allow the target of 120g/km average specificCO2 emissions from new registrations of passenger cars to be met by2012.

Assessment of impact on manufacturers, society and consumer covered the followingaspects:

• Manufacturer: costs, potential problems of vehicles not meeting requirements andnot being allowed on the market, trading costs and benefits

• Society: as above, including the value of fuel savings but excluding taxes• Consumer: impact on availability of vehicles, up front price effect and savings.• Environment: CO2 and fuel savings.

Targets and Instruments

The work looked at 3 types of targets and three instruments:• Targets

• a % reduction from a reference year,• a sloped target curve linked to utility criteria (several variations

assessed),• and a fixed emissions target to be met by all (120g/km)

• Instruments:• Emission reduction requirements for individual vehicles;• a manufacturer’s bubble (ie the manufacturer as a whole can

meet the target, effectively allowing burden within themanufacturer’s fleet); and

• a trading scheme (ie that allows trading between allmanufacturers and hence effectively sharing the burden across theindustry as a whole).

Utility function and potential target

y = 8.4146x

y = 5.7998x

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Utility (V^2/3*P^1/3)

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CO2 [g/km] of cars on the market in 2002Utility based limit values petrol 2012Utility based limit values diesel 2012Linear (CO2 [g/km] of cars on the market in 2002)Linear (Utility based limit values petrol 2012)

Specific CO2emissions

Utility(source: IEEP et al (2004), building on data from Polk(source: IEEP et al (2004), building on data from Polk

Technological options for reducing emissions Petrol vehicles Diesel vehicles

Reduced engine friction losses Reduced engine friction losses DI / homogeneous charge (stoichiometric) 4 valves per cylinder DI / Stratified charge (stoichiometric) Piezo injectors DI / Stratified charge (lean burn / complex strategies)

Mild downsizing with turbocharging Mild downsizing Medium downsizing with turbocharging Medium downsizing Strong downsizing with turbocharging Strong downsizing Variable Valve Timing Variable valve control Cylinder deactivation Cylinder deactivation Variable Compression Ratio Optimised cooling circuit* Optimised cooling circuit* Advanced cooling circuit + electric water pump* Advanced cooling circuit + electric water pump*

Engi

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Exhaust heat recovery* Optimised gearbox ratios 6-speed manual/automatic gearboxPiloted gearbox Piloted gearbox Continuous Variable Transmission Continuous Variable Transmission

Tran

s-m

issi

on

Dual-Clutch Dual-Clutch

Start-stop function Start-stop functionRegenerative braking Regenerative braking Mild hybrid (motor assist) Mild hybrid (motor assist) H

ybrid

Full hybrid (electric drive) Full hybrid (electric drive capability) Improved aerodynamic efficiency Improved aerodynamic efficiencyMild weight reduction Mild weight reduction Medium weight reduction Medium weight reduction B

ody

Strong weight reduction Strong weight reduction Low rolling resistance tyres Low rolling resistance tyresElectrically assisted steering (EPS, EPHS)* Electrically assisted steering (EPS, EPHS)* Advanced aftertreatment DeNOx catalyst O

ther

Particulate trap / filter source: TNO et al 2006source: TNO et al 2006

Cost Curves – a simple concept, but a bit morecomplex in reality and to model

Medium petrol CO2 vs. costs

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costCO2

In the cost modelling a more complexmix of packages was used to create

more detailed cost curves.

source: IEEP et al 2004 (TNO inputs)source: IEEP et al 2004 (TNO inputs)

Fuel and size related cost curves - 6

Some results – Net Costs to Society

• Net societal costs per car to meet 120g/km are of the order of 1-2%of the cost of a car.

• An average cost can be as low as 127 Euros/car or 252 Euros/caraverage depending on what discount rate is used (0% or 5% realrespectively).

• The costs for society as a whole amounts to a total of 1.84 billionEuros/year under the lower cost targets and instruments (tradingroute).

• This used conservative oil prices (lower than current)• This excludes benefits of reducing CO2 and other pollutants

Cost to Manufacturers

• Manufacturer costs of meeting the 120g/km target amountto on average 577 Euros/car for the lowest costtarget/instrument.

• This amounts to 8.36 billion Euros/year for newregistrations in EU-15 in 2012.

• These figures assume that no costs are passed through toconsumers, nor does it reflect that potential for costreductions of measures over time.

• Therefore, real costs to manufacturers will probably besignificantly lower, and in cases, if and where full passthrough is possible, then costs are considerably lower.

• Pass through is facilitated by consumer benefits

Targets and Manufacturer costs - Euros/carno pass-through of costs

5775775773 fleet average

700605-6355802 manufacturer’saverage

9877415911 every car

absolute targetrelative target% improvementFlexibility(Regulated entity)

Costs to consumers

• In many cases, the cost to the consumer is negative – ie thechanges bring a net financial benefit.

• Car prices are expected to rise by on average around1200Eur (full pass through of costs + taxes and margins),

• for the cheaper options the fuel savings benefits outweighthe costs at the 0% discount rate.

• In reality, however, consumers probably apply a rather highdiscount rate to future benefits, so may not fully appreciatethis benefit.

• On the other hand the consumer benefit is extremelysensitive to fuel price assumptions;

• with fuel prices at current levels, more of the options yieldnet benefits than the study, and consumer acceptanceshould increase as a result.

Impact of Fuel Price on Consumer Cost

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each car - uniform target

each car - all other targets

per manufacturer - all targets

all cars (trading) - all targets

Source: IEEP/TNO/CAIR

Data: Polk Marketing Systems

Insights on Trading

• CO2 credits are traded among manufacturers in g/km per vehicle units– ie different units than in the EU-ETS.

• Trading can reduce vehicle costs (excl. taxes and margins) by up to410 Euros/car which = nearly 6 bn Euros/year. (cf 120 g/km fixed percar target)

• The advantages of trading are much more moderate for other targets,ranging from close to zero for the % reduction options to 400 – 2,500million Euro for the other target-instrument combinations.

• Trading volumes range between 201 million Euro with % reductioncase, up to 2.57 billion with a fixed target.

• Note that trading volumes relate to targets defined at the manufacturerlevel. There is substantially more internal trading within eachmanufacturer, which underlines the benefits of a bubble approachrelative to the car/segment specific approach.

• Buyers and sellers are often very different depending on the target andinstrument type.

Cost of Reducing CO2

• For options with trading the value of the traded credits = themarginal costs of further CO2 reduction (expressed inEuro/(g/km).

• The marginal costs vary little between target / instrument mixes– around 50 Euro/(g/km).

• Marginal costs to society are 141 to 174 Euros/tonne CO2 withtrading (interest rate 0% and 5% respectively),

• The average costs are much lower at 34 to 67 Euros/tonneCO2 (interest rate 0% and 5% respectively).

• Prices are higher than currently under the ETS – hence whilethere are benefits of trading generally, joining any automotivetrading scheme to EU ETS would lead to the automotiveindustry not meeting the 120g/km target. Also complications ofdifferent use of terms under trading schemes.

Subsequent Study – for DG Enterprise

Review and analysis of the reduction potential and costs oftechnological and other measures to reduce CO2-emissions

from passenger cars

Richard Smokers, Robin Vermeulen,Robert van Mieghem & Raymond Gense

TNO Science and Industry

Ian Skinner, Malcolm Fergusson,Ellie MacKay & Patrick ten Brink

IEEP - Institute for European Environmental Policy

George Fontaras & Prof. Zisis SamarasLaboratory of Applied Thermodynamics

Aristotle University of Technology

See http://ec.europa.eu/enterprise/automotive/pagesbackground/pollutant_emission/index.htm

‘DGENT Updated results of DGENV study’For most target-measure combinations the manufacturer costs

for reaching a 2012 target of 120 g/km are around €1700 pervehicle compared to average costs of the 2008/9 baselinevehicle emitting 140 g/km. This translates into an additionalretail price of €2450 per vehicle.

These are significantly higher than the study for DGENV.

cost curves (manufacturer costs)

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cost curves (retail price increase)

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Why are they higher ?

• The translation from retail price data obtained from literature tomanufacturer costs has been done with a different factor (1.44 instead of2.0), resulting in higher input on the manufacturer costs;

• Note that this has no effect on cost to consumers

• The effects of autonomous weight increase have been modelled with adifferent formula resulting in a higher amount of additional CO2-emissions to be compensated;

• This assumes continued move toward heavier cars

• Cost and CO2-reduction data for individual options have been newlyestimated taking into account new literature data, information fromindustry and evolved expert judgement;

• The resulting overall CO2-reduction of packages of measures that targetengine and powertrain efficiency has been assessed moreconservatively

• This assumes that manufacturers will less often be able to choose to most costeffective efficient package of option

Weakness of the approach

• Ex ante assessment of costs have almost systematically beenshown to overestimate the costs - ex-post studies have shownthis true retrospectively.

• Cost data tends to takes no or little account of innovation /learning – based on costs now

• Oil price scenarios used are relatively conservative

• Some conservative estimates used, pushing prices up.

• Assumptions on future weight growth may or may not end upbeing true – if not then the costs are an over-estimate. (and if we gofor heavier cars even faster then an underestimate of course).

• Focuses on costs to one set of industry players. Others will makemoney on it. Certainly less dramatic a cost to Europe plc, and in factnot necessarily a cost.

General conclusions

• Reducing CO2 from transport-passenger cars is vital• It is a major technological and social challenge• The existing policy instruments are not proving as effective as hoped• There is a need for additional measures• A range of instruments and targets exist• Costs can be high for manufacturers, society and consumers – yet

costs to consumers, given fuel savings, are sometimes negative.• Trading can help reduce costs – there are different winners and losers

depending on targets and instruments• Trading prices most likely to be higher than EU-ETS.• IF there is to be a car CO2 trading scheme best to keep separate –

different units, and link will reduce reductions from automotive sector +note also more CO2 leakage to outside EU from EU-ETS than cars ET.

• There is still controversy over exactly how much it will cost.• There is no controversy that cars specific CO2 needs reducing further.

The CO2 Challenge for Passenger Cars in Europeand the Potential Role and Impacts of Emissions

Trading

Thank You!Any Questions?

Patrick ten BrinkSenior Fellow and Head of Brussels Office

Institute for European Environmental Policy (IEEP)[email protected]

www.ieep.eu