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1

A critical analysis of the voluntary fuel economy agreements, established between the

automobile industry and the European Commission, with regard for their capacity to

protect the environment.

Sarah Keay-Bright1

Draft paper for ECPR, Joint session, Grenoble 6-11 April 2001.

Panel #1: New Environmental Policy Instruments.

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. The onset of

global warming implies that the world needs to control its carbon budget. This applies to

the EU passenger car sector. While the EU passenger car fuel economy fleet average

improved after the oil shocks of the 1970s due to increased oil prices, it has increased

since the 1980s due to factors that have added weight to the vehicle. These factors include

an increasing trend for consumers to purchase larger, faster, more powerful and therefore

more fuel inefficient cars, as well as vehicle-related legislation relating to say safety or

pollution control. In addition, 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, the establishment of the Single European Market (CEC

1998b), a continued increase of vehicle numbers and increasing mileage per vehicle per

annum. At the same time, society assumes this new-found mobility freedom to be a right.

This is the dilemma that policy-makers face in attempting to regulate CO2 from passenger

cars.

Carbon dioxide is the most important greenhouse gas as regards global warming potential,

both in general and from passenger cars2. The percentage of the EU’s total CO2 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%

1 The research was carried out as part of the requirements for the MSc on Environmental Change and

Management at Oxford University (1999) and the study has since been published by the European

Environmental Bureau (Brussels 2000). 2 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 ).

2

of total EU CO2 emissions (CEC 1999a).

With an EU commitment to the UNFCC Kyoto Protocol (1997) to reduce greenhouse gas

emissions by 8% below 1990 levels by 2008-2012, the European Commission has

attempted to tackle CO2 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 manufacturers3), JAMA (Japanese manufacturers

4) and

KAMA (Korean manufacturers5). By such analysis, several factors influencing the

decision-making process have been identified and the capacity for the voluntary agreement

to safeguard the environment has been evaluated. 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.

The Evolution of the Voluntary Fuel Economy Agreements

The origins of an initiative to address CO2 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 CO2 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

3 The European Automotive Manufacturers’ Association: 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 4 The Japanese Automotive Manufacturers’ Association: Toyota, Mitsibushi, Mazda, Nissan, Honda (+other

small companies). 5 The Korean Automotive Manufacturers Association: Daewoo and Hyundai.

3

Emissions Group6 (MVEG) was entrusted by the Commission with the task of putting

forwards a politically acceptable policy proposal (Ends Report 1992 No. 215).

Several competing options emerged from the Member States. It became clear that the

diversity of national market composition characteristics and conditions complicated

attempts 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 CO2 emissions per kilometre, in order to achieve a 40% fuel economy

improvement for new cars by 20057 (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 DG118, received little support from DG3

9, DG21

10 and

MVEG, as rates would have needed to be unacceptably high11

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).

Table 1 Member State legislative proposals to reduce CO2 from passenger cars.

Country

Proposal

Comment

Germany

(The ENDS

Report 215

Dec 1992)

CO2 emission limits to be imposed on

different size bands of car

Would not discourage consumers from purchasing larger

high emission vehicles. Legislating by ‘bands’ based on

a particular can be vulnerable to ‘borderline effects’ as a

manufacturer might increase the model’s weight to

move it into a heavier category where it would suffer

less penalisation

France

(The ENDS

Report 215

Dec 1992)

An average CO2 emission standard.

Companies exceeding this average

would pay a fine, while those beating it

would be offered some financial

benefit.

Difficulty in setting limit as internal industry

information is needed. Also difficult to set fines and

rebates at an effective level. Potential for high

transaction costs.

Italian

Delegation

Proposals to

MVEG

18.7.91

Variable car purchase tax based on

actual CO2 emissions. Below a

threshold set initially at 100g of

CO2/km in 1994, no tax would be

payable on a new car. Above a ceiling

The tax may have to be extremely high to be effective

and could 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

6 MVEG was composed of a group of national officials and motor industry representatives drawn together in

the mid-1980s to address road transport emissions. 7 The proposal involved purchase charges that would be weight and gCO2/km based, set at zero in 1995 for

cars operating at no more than 160gCO2/km and reduced each year by 5g so that 110gCO2/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). 8 DG 11: Directorate General for the Environment, Nuclear Safety and Civil Protection of the European

Commission, now renamed DG ENV 9 DG 3: Directorate General for Industry of the European Commission, now renamed DG Enterprise

10 DG 21: Directorate General for Customs and Indirect Taxation of the European Commission

11 Rates in the region of £4000-£8000 for a car emitting two and half times as much CO2 as the limit set were

envisaged (The ENDS Report1993, No.225).

4

set initially at 400g/km no extra tax

would be payable. Between these two

values the tax rate would rise in steps

exponentially.

a Ford fiesta.

UK Delegation

to MVEG1991

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.

Depends on creating a true competitive market, setting

the correct limit values so that companies have real

incentives to improve fuel economy. May be difficult to

police the system, complex to administer and could be

difficult to set fines at an effective rate. Potential for

high transaction costs. Fluctuations in cost or

availability of credits might make planning very

difficult. Such a scheme might also conflict with

WTO/GATT.

Dutch

Delegation to

MVEG

10.1.91

1. Setting of stepwise strengthened

emission requirements over time.

2. Emissions requirement approach -

based on vehicle weight or engine size,

possibly supplemented by other

factors.

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.

The Commission then invited the MVEG sub-group to consider the option of an annual

circulation car tax based on CO2 emissions. The issue of the difficulty in attaining tax

harmonisation came to the fore, especially in the context of requiring unanimity from

Council12

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 13.3.97). 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 9th

December 1992 (The ENDS Report 1992, No. 215).

Not only was there division between Member States on the issue of legislating CO2 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 preferred the circulation 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 CO2 from passenger

cars significantly reduced the Commission’s bargaining power in the voluntary agreement

negotiations with ACEA which followed in 1996 and 1997. The absence of an agreed

legislative method meant that the Commission had no ‘stick with which to threaten

industry. Further, it was clear to all involved, including industry, that the Commission did

not want to return to the fruitless discussions of the early nineties.

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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.

5

ACEA’s response

In immediate response to the Commission’s interest to address CO2 from passenger cars,

ACEA offered to reduce the sales weighted CO2 emissions of the EU new car fleet by

10% on a voluntary basis within the period 1993-1995 (ACEA 1991; Europe Environment

7.1.92). 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 CO2 reduction benefits of

direct injection diesel technology (ACEA 1992a). While arguing that fuel efficiency

improvements had been offset by various factors outside their control, ACEA was also

promoting non-technical ways to reduce CO2 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 CO2 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

CO2 emissions can reach up to 100% in each weight class for various reasons13

. The

automobile organisation demanded that the tax would 1) replace existing taxes, 2) be

solely CO2 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 States12

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.

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 having realised that fiscal policies could not be used as stand-alone

measures to regulate CO2 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 Commission’s communication

COM(1995)689 (CEC 1995), encompasses a voluntary agreement with industry, a

framework for fiscal measures and a fuel economy consumer information scheme

13

Factors such as inter alia, engine displacement and output, transmission configuration, aerodynamics,

seating and loading capacity and performance.

6

As the Council was demanding a 35% improvement on the fleet average fuel economy by

2005 (Council of the European Union 1996b), the Commission stated that it was willing to

accept a 25% improvement from industry by 2005 through a voluntary agreement. The

extra 10% would be gained though the fiscal framework and consumer information

scheme (CEC 1995).

Between the Commission’s failure to reach consensus on a method to legislate CO2 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 nineties also witnessed the publication of the 5th

Environmental Action Programme which stated the Community’s aim “to broaden the

range of instruments used for policy-making”. 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 policy instrument for regulating CO2 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 CO2 from passenger cars, its declared over-enthusiasm,

encouraged by Council, to increase the use of ‘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’. The authors warn that expressing preference for voluntary solutions at an

early stage can be counter productive, because the governmental ‘potential for threats’ is

weakened and delays in the form of a ‘stamina contest’ are provoked.

1995-1997: Fruitless voluntary agreement technical negotiations

The initial attitude of ACEA to an EU-wide voluntary initiative was not particularly

enthusiastic. ACEA made its displeasure known that the Commission made public its first

contact with ACEA regarding such a voluntary agreement (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 Sweden14

, saw no

reason why they had to go any further with an EU-wide commitment (Interview 3).

14

PSA and Renault offered the French government 150gCO2/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

4.10.96; ENDS Daily 20.4.98.

7

Meanwhile, despite the inter-DG deadlock following the discussions in the early nineties

on how to regulate CO2 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 which developed, was

generally regarded by most involved as an excellent example of inter-DG co-operation

(Interviews 1, 2, 3 and 4).

The working level meetings were held on average once a month throughout 1996 and

1997, between two desk officers of DG3 and DG11 and two Ford engineers representing

ACEA. With just two Ford engineers representing ACEA, it appears that ACEA members

were inadequately represented. In addition, neither NGOs nor Member State experts were

involved in the discussions or negotiations. Further, it was not until the agreement with

ACEA had been established, that the Commission initiated negotiations with the non-EU

manufacturers KAMA and JAMA.

Specific investigations and studies, seemingly orientated towards ACEA’s defence, were

carried out e.g. studies to challenge Commission calculations; analyses to prove

Greenpeace’s SmiLe car was no different from an ordinary prototype and would not be

suitable for commercial production (refer to The ENDS Report No259 August 1996);

investigations to question global warming uncertainties (Interviews 5 and 6). Other issues

were also discussed at the request of industry, such as: anti-diesel tax campaigns, air

quality requirements, the necessity for cleaner fuel, safety and recycling policy

requirements (Interview 5).

The Commission could not attest ACEA’s findings as it had conducted no technical

studies of its own, thus its bargaining power was considerably diminished. ACEA

admitted that the Commission desk officers would have benefited from technical support.

At the same time the two Commission desk officers did not receive much in the way of

higher-level political support and were very much left to their own devices (Interviews 1,

2 and 4). In addition, the voluntary agreement had to compete for priority with the air

quality Directives that were high on the Commission’s agenda during this time (Interview

3).

Due to time and financial constraints, DG 11 believes the Commission could not have

conducted its own technical and economic analyses, but moreover believes that attempting

to establish consensus between differing technical analyses of the Commission and

industry would be near impossible and likely to result in deadlock (Interviews 1 and 5).

The Commission also viewed that it would have been difficult to ensure the independence

of such technical studies as it is the automobile industry that possesses the technical

knowledge (Interview 5).

While the expectations of both sides were well understood by both parties, both

negotiating parties agreed that “bridging the gap” by accepting each other’s approach was

the most difficult aspect of the negotiations. The two Commission desk officers found that

ACEA’s representatives adopted a very technical and bottom-up approach, far removed

from the political way of the European institutions. Meanwhile ACEA’s representatives,

who were engineers by profession, found the lack of understanding of the automobile

industry by the Commission “extremely frustrating”.

8

According to the negotiators, both the industry and the Commission knew throughout

1996 the key elements and numbers to ensure a deal, including the 140gCO2/km target. An

agreement was nearly reached at the beginning of 1997 as the Commission was

particularly keen to give DG11 Commissioner Bjergaard something to take with her to the

UNFCC Third Conference of the Parties (COP3) in Kyoto in December of that year.

However, the deal fell through in early 1997 as some manufacturers, including the

Germans, believed that the outcome of COP3 would not require them to act (Interviews 3

and 6). As a result, ACEA decided that Ford and Renault worked on estimating a target

(before COP3) through technical studies which would be based on the use of existing

technology, an unaffected economic situation and the consideration of factors which could

potentially negate fuel efficiency improvements.

The automobile industry is particularly competitive (see Table 2) and is suffering from

considerable over-capacity15

. With an EU market approaching saturation, and squeezed

profit margins, the industry will not likely welcome additional spending if a competitive

advantage is not to be gained. Manufacturers are also likely to be very protective of their

most profitable market segments which generally consist of more luxurious cars which are

often larger, faster, more powerful, and therefore more fuel inefficient than the average

car. In effecting the technical studies on behalf of ACEA, it would have been in the

competitive interest of Renault16

and Ford, and indeed all car manufacturers, to withhold

information as to what could truly be achieved under various time-frames or economic

scenarios. Further, as Renault and Ford were acting on behalf of ACEA members, they

also needed to defend the lowest common denominator.

Table 2 Market share (%) of new passenger car manufacturers for 1999 EU

registrations

Source: ACEA website

Ranking Manufacturer % Market Share

1 Volkswagen 19.0

2 PSA Peugeot Citroen 12.1

3 Ford 11.7

4 JAMA 11.5

5 General Motors 11.4

6 Renault 10.9

7 Fiat 9.9

8 Diamler Chrysler 5.5

9 BMW Rover 4.6

10 KAMA 3.1

11 Other 0.3

TOTAL 100

In June of 1997, ACEA offered the Commission a fleet average fuel economy target of

167gCO2/km by 2005 with certain conditions relating to: a joint strategic research

programme; future legislation in relation to vehicle safety, environmental standards and

15

Financial Times 15.1.98. Survey of world motor industry: Growth runs into a jam - overcapacity still

hovers at around 25-30% with too many car companies making too small profits. 16

Renault assisted ACEA in carrying out the technical studies.

9

fuel quality; the market share of diesel cars; and fiscal matters (CEC 1997b). The offer

was equivalent to a 10% improvement on the baseline of 186gCO2/km of 1995 i.e. almost

identical to the percentage improvement offered by ACEA in 1991 (ACEA 1991; see

Figure 1 below). DG11 insists that the aggregate of the ACEA member national targets14

already offered exceeded ACEA’s offer, while ACEA contests that the difference was not

significant.

The EU institutions all rejected ACEA’s offered target and terms which they felt were

clearly geared towards the business-as-usual scenario (Interviews 1, 2 and 5). The

Commission felt that the conditions accompanying the target would have inappropriately

restrained the Commission particularly with respect to its ability to develop any other

policies relating to vehicles (CEC 1997b).

One of the main reasons for the unambitious target and conditions of the June 1997 offer

was due to the intense competition between ACEA members as they could not agree to the

individual contributions each would make (CEC 1997b). The Commissioner for the

Environment (DG 11), Bjergaard, therefore declared she would write to the environment

ministers to urge them to raise the issue with their national manufacturers (ENDS Daily

16.10.97). The effort was fruitless for ACEA’s second attempt to produce an offer at an

ACEA board meeting on the 1st December of 1997 also failed. It was then uncertain how

and whether the ACEA position would develop, thus the Environment Council proposed a

deadline of March 1998 (Council of the European Union 1997b). Despite the attainment of

an official agreement, there is still no clear consensus within ACEA over individual

contributions to be achieved by each manufacturer (Interviews 3 and 4) and both the

Commission and ACEA still remain unclear as to what constitutes ACEA member

‘equivalent efforts’.

Figure 1 The fuel economy fleet average for the EU 1980-1995.

Source: The European Environmental Bureau website

10

With no technical basis provided by any of the EU institutions for their proposed targets17

,

and no technical studies to challenge or verify ACEA’s 167gCO2/km offer of June 1997,

the automobile organisation stuck to its unambitious offer (Ends Daily 18.11.97; ACEA

1997). ACEA published its justification for the offer in its own newsletter:

“While it is technically possible to achieve 120gCO2/km it is impossible for the whole fleet

to achieve 120gCO2/km, such a change would imply radical downsizing of the whole fleet

with cars that would be neither affordable nor meet the requirements of most car users .....

it would be possible to achieve an average 150-160gCO2/km by 2005….... and the

Commission has admitted that a longer time horizon may be necessary. ACEA welcomes

increased research. We believe that this time should be put to good use in order to

investigate the many scientific uncertainties concerning the nature and reality of global

warming and climate change.” (ACEA 1997)

By late 1997 a report was presented by Arthur D Little on behalf of ACEA, illustrating the

impacts of trying to achieve 120gCO2/km by 2005 with findings including loss of jobs,

adverse trade balances, contraction of the industry and necessary restructuring (Interview

3). The report was shared with the Commission and governments in early 1998.

The birth of an agreed target

There is no doubt that the establishment of the UNFCC Kyoto Protocol at COP3 in

December 1997 was a major driving force which helped to bring the negotiations to their

final conclusion in July 1998 (Interviews 1 and 2). This is because COP3 provided the

negotiations with additional momentum and a timeframe.

In late 1997, following the rejection of ACEA’s unambitious offer, the negotiations moved

from working level to higher level and several new actors joined the scene. The presidency

of ACEA changed hands from Renault to BMW, with Pischetsrieder taking the helm from

Schweizter. The Commissioner for the Environment, Bjergaard, and the Commissioner for

Industry, Bangemann, with the support of their cabinets, were now communicating

regularly with Pischetsrieder and his team of auto-industry Director-level representatives.

There existed, amongst these new actors, both the skills and the political will to overcome

the problems. However, the Commission now had the advantage, as the negotiating

approach was now political and non-technical.

Pischetsrieder represented BMW; a company which is not a market-leader and would be

vulnerable to the demands of limit-value legislation (refer Table , page 8). Pischetsrieder

therefore recognised the need to finalise a deal that would be favourable for the German

manufacturers (Interview 3). The German industry was also familiar with the voluntary

approach. Despite remaining divisions within ACEA - as some companies such as

Volkswagen and Peugeot, were more in favour of legislation than others such as BMW

and Daimler-Chrysler (Interviews 1 and 7) – the negotiations progressed rapidly. Several

feel that Pischetsrieder’s own personality and approach made a significant contribution to

moving the negotiations forward (Interviews 1, 2 and 3).

17

The Commission was calling for a 25% improvement by 2005, the Council was pushing for 120gCO2/km

by 2005 or 2010 at the latest and Parliament set targets of 120gCO2/km by 2005 and 90gCO2/km by 2010

with Austria stating that Parliament’s 90gCO2/km should be a maximum (ENDS Daily 16.10.97).

11

In 1999, the ACEA presidency passed from Pichetsrieder to Piëch of Volkswagen. Piëch

adopted a more confrontational approach compared to Pischetrieder. This was illustrated

when Piëch persuaded the German Chancellor Schroeder, a former Volkswagen

supervisory board member, to stall the passing of the end-of-life vehicle legislation

although Council had already come to an agreement (Financial Times: Simonian 29.6.99

and Smith 16.6.99). DG11 reports, however, that ACEA’s approach to the voluntary

agreement has not altered with changes in ACEA’s presidency.

In an effort to encourage industry to adopt an ambitious target, the Commission presented

several legislative options as alternatives to the voluntary approach, should the voluntary

agreement negotiations fail. These legislative options were presented at a workshop held

in Strasbourg in March 1998, which was attended by all stakeholders with a relevant

interest in the voluntary agreement negotiations with the automobile industry. This was the

first time that legislative proposals had been seriously discussed since the brain-storming

sessions of MVEG in the early nineties. However, a concrete legislative proposal never

materialised.

On rejection of ACEA’s 1997 offer of a 10% improvement, the Commission reaffirmed its

demand for a 25% improvement and made clear that 140gCO2/km would be the acceptable

minimum (Interview 1). Having declared the minimum it would accept, the Commission

was unlikely to achieve any more than the stated 140gCO2/km, but it refused to

compromise and the 140gCO2/km target for 2008 was officially agreed in March of 1998.

There was general satisfaction from DG3 and DG11 that 140gCO2/km moved beyond

business-as-usual and was politically acceptable (Interviews 1, 2 and 5; CEC 1998k; CEC

1998l). However, concessions were clearly awarded to industry through the drafting of the

terms of the agreement.

The commitment also included an intermediate target range of 165-170 gCO2/km by 2003

and some members of ACEA have committed to introducing models to the market by

2000 with a fuel economy of 120gCO2/km or less. However, the achievement of the latter

commitment was already assured when the agreement was established. ACEA’s

commitments will be jointly monitored by the Commission and ACEA. A joint review in

2003 shall assess the industry’s progress relative to the intermediate target range and at the

same time ACEA shall review the potential to achieve the Community’s goal of

120gCO2/km by 2012.

The final agreement was officially presented to the Commission by ACEA on 28th

July

1998 and the Commission responded the following day with the Communication

COM(1998)495 (CEC 1998d). The Commission officially ‘welcomed’ ACEA’s

agreement through a Recommendation in February the following year (CEC 1999b). On

the establishment of the agreement with ACEA, the Commission then began negotiations

with the Japanese (JAMA) and Korean (KAMA) manufacturers with the intention of

obtaining similar commitments.

Obtaining similar commitments from non-ACEA members

It was originally intended that the negotiations with ACEA would be in parallel with non-

ACEA members. Both JAMA and KAMA state that they expressed willingness to

participate when they were contacted in 1996. However, the negotiations with KAMA and

12

JAMA did not begin until late 1998, after an agreement had been established between

ACEA and the Commission (Interview 10). JAMA and KAMA were displeased with such

an arrangement as it would mean “take it or leave it” for their members (Interview 10 and

17).

Initially there was considerable confusion throughout the Commission, as well as JAMA

and KAMA, as to what constituted an ‘equivalent effort’. KAMA had a 1995 fleet fuel

economy average of 206gCO2/km while JAMA had a fleet average of 193-202gCO2/km

(Interview 1, 2, 10 and 17). To achieve 140gCO2/km, both KAMA and JAMA would

therefore need to reduce their fleet average fuel economies by more than 25%. Both

JAMA and KAMA had the opinion that an ‘equivalent effort’ would mean a 25%

improvement by 2008 (Interview 10 and 17), but the Commission was insisting on a

‘mirror-image’ agreement of 140gCO2/km within the same time-frame, with the same

assumptions, and with variations only if justified (Interview 1, 2 and 17). The

manufacturers of JAMA and particularly KAMA also argued that with far fewer members

than ACEA, they did not have as much flexibility as ACEA (Interviews 10 and 17).

KAMA was reluctant to agree to an average of 140gCO2/km. KAMA argued that the

Korean industry was going through some painful restructuring18

, was suffering financially,

did not have the technology and did not want to commit to more than 25% (Interviews 1, 2

and 17). But the Commission argued that: the Korean models were inefficient compared to

European models; that the Koreans had previously bought technology from companies

such as Nissan, General Motors, Mercedes and others and could do so again; and that

Daewoo and Hyundai, as two of the richest companies in Asia, were planning to expand

considerably throughout Europe (Interviews 1, 2, 4 and 10). In addition Daewoo and

Hyundai with its limited model range would only have to introduce a ‘mini’ or ‘hyper-

efficient’ car to achieve most of its target (Interview 10).

For several weeks the negotiations were under deadlock, which caused ACEA great

anxiety as negotiation breakdown could have meant the possibility of general legislation

(Interview 1 and 2; CEC 1999c). The Koreans assumed wrongly that an agreement had

already been reached with JAMA, and representing just 3.1% of the European market felt

considerable pressure to close a deal (Interview 10 and 17). The Koreans eventually

offered 140gCO2/km by 2010 (Interview 17). A compromise of 2009 was swiftly reached

(Interviews 1, 2 and 17). KAMA will also be expected to achieve the same intermediate

target as ACEA of 165-170gCO2/km, by 2004 (instead of 2003) at which time they will

also undertake their review of progress. The Commission was very satisfied with the

outcome and ACEA was content (Interview 1).

The negotiations with JAMA did not get off to a good start as the French automotive

association AAA who had supplied data for the calculation of ACEA’s fleet average fuel

economy, would not supply the data for JAMA. It was only after consultants hired by

JAMA estimated a fuel economy average of 202gCO2/km, that AAA issued a figure of

193gCO2/km. As a result consensus was not achieved on a single figure (Interviews 1, 2

and 10; CEC 1999d).

18

(The Economist 20.8.99) South Korea’s government will allow Daewoo, the country’s second-largest

chaebol, to be broken up. Many of its businesses will be sold off in the hope of realising at least half of its

debts of around $50 billion.

13

To make allowance for ACEA and JAMA’s different starting points, due to JAMA’s

distorted market composition because of trade barriers (which is expected to approach the

ACEA market composition with the lifting of trade barriers in 2000), it was suggested by

the Commission that the target of 140gCO2/km be based upon an index linking the current

Japanese ‘market mix’ to the ACEA ‘market mix’ (Interviews 2, 10 and 12). By this

method the difference between the ACEA and Japanese market compositions could be

linked by a weighting index and could thus be compared (Interviews 2, 10 and 12).

However, JAMA felt the term ACEA ‘market mix’ had not been clearly defined

(Interviews 2, 10 and 12) although the Commission was happy with the imprecise concept

at this stage. JAMA was therefore extremely reluctant to ask its members to sign up to an

agreement with vague assumptions and details. Nevertheless approval was reluctantly

obtained from the chief executive officers of the Japanese manufacturers on 20th

May

1999 (Interviews 2 and 10).

When the final offer was presented to the Commission on 27th

May 1999, in the faith that

the contents were the requirements of the Commission, the representatives of the various

levels within the Commission were confused as to the acceptability of the offer with

regard to JAMA’s definition of ACEA ‘market mix’, (which was more detail than the

Commission had wanted at this stage) (Interviews 1 and 2). A loophole was recognised by

ACEA and seen as a potential threat to European competivity that could undermine the

environmental objectives. The shortcoming was acknowledged and accepted by the

Commission and JAMA (Interviews 2 and 10; CEC 1999d). Indeed, the Commitment as

written could have permitted JAMA to officially achieve the 140gCO2/km target but in

reality achieve no more than possibly 160gCO2/km.

While JAMA insisted that it had not realised the shortfall of the text (Interviews 2 and 10),

the Commission negotiators were split in their support for JAMA. The Japanese

manufacturers pointed to their already fulfilled intention to expand their small and

medium sized sectors throughout Europe, as several European transplants are already

established, in preparation of the lifting of trade barriers in 2000. It had also been expected

by most parties that it would be relatively easy to establish an agreement with JAMA as

the automotive association had adopted a positive attitude from the beginning of the

negotiations to the concept of a commitment (CEC 1999c).

The insensitive attitude from parts of the Commission and the aggressive attitude of

ACEA as well as the ambiguous terms of the Commitment, all contributed to reduce

JAMA’s support for the voluntary approach. At this point, the negotiations were close to

breaking down and JAMA was considering the option of binding legislation (Interview

10).

On 22nd

July 1999, the Commission and JAMA came to a compromise agreement with the

only differences of a target of 140gCO2/km by 2009 instead of 2008 to allow for JAMA’s

distorted market mix and a higher intermediate target than ACEA of 165-175gCO2/km, to

be achieved by 2003. The agreement was reached in September 1999 and the Commission

presented JAMA with its Recommendation 2000/304/EC on the 13th

April 2000.

14

Analysis of the Target and Terms of the Voluntary Agreements

The target and CO2 accounting

Is 140gCO2 /km technically ambitious?

There is a general consensus among academic studies (although they use various

assumptions and bases for their estimations) that a 40-50% improvement in an average

car’s fuel economy using existing commercial technologies would be possible by 2010, at

little extra cost over 10-15 years (Martin and Michaelis 1992; De Cicco and Ross 1993;

Binsbergen et al 1994; Michaelis 1996; CEC 1995; Poulton 1997). Thus the target of

140gCO2/km by 2008 (25% improvement), as agreed by the Commission and the

automobile industry, appears to be technically unambitious.

The cost of improving a vehicle’s fuel economy can vary for each vehicle depending on its

type and design (e.g. weight, engine size). As vehicles have different fuel economy

reduction potentials per unit cost, the cost-effectiveness for achieving fuel economy

improvements depends on the way in which the car fleet is regulated, which is discussed

later.

Paying for improved fuel economy technology is one way of internalising the costs of the

car’s pollution to the environment and society. Consumers might also be more accepting

of paying for the cost of improved technology than of paying taxes aimed at regulating

their driving and purchasing behaviour.

ACEA expects certain factors to ‘offset’ fuel economy improvements. For example,

ACEA says that while the fuel economy of the EU fleet has improved some 8% between

1983 and 1997, it had actually improved by 28% but was offset due to factors that added

weight to the vehicle (e.g. safety, noise, toxic emissions requirements, consumer

demands). In calculating the 1997 offer of 167gCO2/km, ACEA declared that 50% of the

possible improvement would be offset by such factors. However, it can be argued that the

internal combustion engine should not be excused from attaining fuel economy targets due

to other vehicle-related legislated requirements, because this discriminates against other

more environmentally optimal technologies that are available.

15

Industry’s commitments in CO2 terms

With respect to the automobile industry’s commitments, there is little information

available in the way of CO2 modelling for passenger cars. However, two studies carried

out for the Netherlands Presidency in 1997 (see Table 3) and for the Commission’s Auto-

Oil II project19

(CEC 2000d; see Figure 2) estimate that attaining the Council’s target of

120gCO2/km will assist to stabilise emissions from the passenger car sector, but in the

region of 10-25% above 1990 levels. These estimates are also considerably optimistic as

they fail to consider the unrepresentative nature of the test-cycle which over-estimates a

vehicle’s fuel economy. Not only does a vehicle driven on the road carry considerably

more weight compared to the test model (e.g. due to the extra weight of accessories such

as air conditioning, electric motors for windows, radio, luggage, passengers) but the test-

cycle’s simulated ‘driving test’ is widely criticised as being unrepresentative of ‘real-life’

driving.

According to the Commission (CEC 1995), a 40% improvement of the fleet’s 1995

average fuel economy, would reduce emissions by 6.9% compared with 1990 levels20

.

This is more in line with the EU’s commitments to the UNFCC Kyoto Protocol.

Figure 2 Auto-Oil II Emissions Forecast

CEC (2000)

19

The Auto-Oil II base-case assumes an increase in passenger car demand of some 26% and of freight

transport by some 29%. The automobile industry’s commitments have been included in the simulation and

while the freight/commercial vehicle sector is not legislated and has not agreed to commitments like the

European passenger car manufacturers, the Commission has optimistically assumed a significant

improvement in this sector’s fuel economy. 20

This estimation takes into account growth in the vehicle fleet and mileage, as without such considerations

the 40% fuel economy improvement would reduce CO2 emissions by 30.1% in 2010 compared to 1990

levels.

60

80

100

120

1980 1990 2000 2010 2020 2030

Year

Ind

ex

1995=

100

16

Table 3 CO2 reduction gain estimations for the EU passenger car sector

Source: The Expert Group’s work on EU Common and Coordinated Policies and

Measures edited by GJM Phylipsen, K Blok, H Merkus for the Netherlands’s Presidency

1997

Scenario Description Mtonnes CO2 % above

1990 CO2

levels in

2010 1990 2005 2010

Reference The SFC remains constant at the present level

upto 2010

380 486 536 41

Scenario 1 The SFC decreases linearly from 2002 to the EU

target in 2010.

380 478 479 26


target in 2010

380 459 453 19.2


target in 2005 and remains constant thereafter

380 440 419 10.2


target in 2005 and decreases further onwards.

380 440 401 5.5

Assumptions: In the period up to 1986 specific fuel consumption of new cars dropped by 2% a year. Since

then this specific fuel consumption has more or less stabilised21

(ECMT 1996; Schipper 1995); passenger car

transportation grows by 2% per annum22

; the average lifetime of cars is 12 years; these calculations do not

include the rebound effect23

, which can be avoided through use tax e.g. fuel duty.

Note: In reality, the C02 emissions reduction scenario for the passenger car sector is unlikely to follow that

of Scenario 3 or 4 above, as ACEA has stated that the improvement is likely to be non-linear - slow at first

with an acceleration later (Interview 4; Point 3 in the Technical Annex of the Commitment (ACEA 1998)).

Thus a scenario that is somewhere in-between Scenarios 1 and 2 is most likely.

Terms of the agreement

Following the adoption of the 140gCO2/km target in March 1998, the drafting process for

the Commitment took some 4 months, during which time the Commission amended the

document drafted by ACEA (Interview 2). In drafting the Commitment text, the first bone

of contention centred upon ACEA’s demand for certain conditions: no negative measures

against diesel fuelled cars; full availability of improved fuels by 2005 especially with low

sulphur content; importers to make equivalent commitments and major manufacturing

countries to implement similar policies (Interview 2). These conditions were similar to

those demanded by ACEA in June 1997. In an effort to keep the right to apply its own

initiative in developing policies and to allow more flexibility, the Commission redefined

21

This may not be the case for all Member States. 22

This leads to a growth of CO2 emissions in the reference scenario of 2% a year (no energy efficiency

improvement). This is a somewhat higher growth rate of CO2 emissions in passenger transport than the

growth rate of total transport emissions. No separate figures for passenger transport are available. Note that

this growth rate can be influenced by policy measures. 23

Several studies have observed a rebound effect (i.e. people driving more due to the lower cost of driving)

due to improved fuel economy after the oil shocks of the 1970s, particularly as a result of the fuel economy

regulation system, CAFÉ, used in the US (Greene 1997), but the size of such an effect is uncertain

(Michaelis 1996), and depends on the policies used.

17

conditions as assumptions (CEC 1998d). Confusion then developed as to the

differentiation between condition and assumption (Interview 3).

It appears that assumptions may provide flexibility over conditions, as alternatives and

solutions to problems can be sought before resorting to a re-negotiation of the agreement

(Interview 1). Nevertheless, it is clear that ACEA’s commitments are subject to certain

terms and essentially the objectives will have to be renegotiated if negative impacts are

proven to nullify the fuel economy improvements.

Fuel quality

ACEAs justification for fuel with a low sulphur content was that the fuel would enable the

introduction of advanced technologies which would be fuel efficient as well as capable of

meeting EU vehicle emission limits for other pollutants. ACEA claims that sulphur

poisons exhaust gas cleaning technology such as NOx storage catalysts and particulate

traps or filters. The oil industry argue that the overall CO2 balance would be worse if

refineries would be forced to remove even more sulphur (Interview 13). EUROPIA also

presented the argument that some technologies are more sulphur tolerant than others. The

Auto-Oil 1 legislation (Council of the European Union 1998d) requires EU-wide

availability of fuel with a sulphur content of 150ppm for petrol and 350ppm for diesel by

2000, and 50ppm for both petrol and diesel by 2005.

The outcome of Auto-Oil I, resulted in the inclusion of various assumptions in the

Commitment:

(Points I and II of Point 2 of ACEA’s Commitment (ACEA 1998))

I. Some diesel plus with a maximum sulphur content of 30ppm are provided in 2000

on the whole EU market in a sufficient volume and geographical cover

II. In 2005, the full availability on the EU market of gasoline with a maximum

sulphur content of 30ppm and of a maximum aromatic content of 30%, and of

diesel with a maximum sulphur content of 30ppm and a cetane number of

minimum 58”.

DG1724

insists that these assumptions will not be borne out. Due to the differences

between the Auto-Oil 1 legislation and ACEA’s assumptions, DG 17 accuses ACEA of

trying to manipulate the outcome of the Auto-Oil 1 negotiations and of using the issue of

fuel quality as a tactic to protect itself from the Commitment (Interviews 13 and 15).

While, DG17 explicitly accuses DG3 and DG11 of being subject to the influence of

ACEA (Interviews 13 and 15), DG3 and DG11 believe DG17 was heavily influenced by

EUROPIA (Interview 2).

The Member States are currently at different stages as regards sulphur content in fuel.

Several Scandinavian countries, the UK and Germany, have already made moves to

introduce low sulphur fuels, while countries such as Spain, Portugal and Greece state that

they will struggle to reach 50ppm by 2005 as required by Auto-Oil 1. The latter countries

24

DG 17: Directorate General for Energy, of the European Commission. Now merged with the Directorate

General for Transport and re-named DG TREN.

18

claim that their national refining industries suffer lack of investment and are economically

vulnerable, especially as the industry suffers from considerable over-capacity (Simonian,

Financial Times 20.8.98; Boulton 17.2.98; Financial Times 4.6.99).

The results of the Auto-Oil 11 programme have revealed that more will have to be done to

meet the EU’s air quality objectives. Thus the Commission invited stakeholders to submit

evidence for the need for improved fuel quality. As the Commission is currently

considering this evidence, there is a chance, but no guarantee, that fuel of 30ppm or even

10ppm sulphur content will be introduced by 2008, when the automobile industry is to

achieve its target of 140gCO2/km. Such efforts may not be adequate as the industry

requests full EU-wide availability of fuel with a 30ppm sulphur content by 2005, which

can only be achieved if all Member States take their own initiative to ensure fuel of such

quality is available or if the Commission adjusts the current legislation which is unlikely.

If fuel with a maximum sulphur content of 30ppm is not fully available EU-wide by 2005,

ACEA and the Commission will have to reach agreement as to the impact on the auto-

industry’s commitments. But if the sulphur content of fuel is to be further reduced below

50ppm by 2008, it should be noted that the automobile industry may be awarded CO2

emissions reductions for emissions which are transferred to the oil refineries that emit

more CO2 emissions in order to produce the fuel of improved quality for the automobile

industry.

Fiscal measures

ACEA believes it can attain 140gCO2/km without any help from Member State fiscal

policies. It is stated in ACEA’s agreement that the Commitment provides “complete and

sufficient substitute for all new regulatory measures to limit fuel consumption or CO2

emissions, and for any additional fiscal measures in pursuit of the CO2 objectives of this

Commitment” (ACEA 1998). Meanwhile the Commission is in the process of developing

the fiscal framework, which ACEA assumed would be introduced after the review in 2003

and not before, when it would be known whether or not ACEA could achieve the

120gCO2/km target by 2012 through technology only (Interview 12).

ACEA argues that fiscal measures, which encourage downsizing, will negatively impact

the automobile manufacturers of larger cars who are also making significant investments

in fuel economy improvements. In addition, the organisation argues that the diversity of

the product range will be reduced, thus harming manufacturers’ competivity.

Notwithstanding, the auto-industry’s main concern with regard to downsizing is that the

profit margins are greater for the larger and more luxurious cars which are more powerful,

faster and therefore more fuel consumptive than smaller cars. As there is an increasing

trend for consumers to purchase such cars (FT Automotive Quarterly Review 1999)

downsizing could threaten profits. Yet the downsizing of the entire car fleet would not

only reduce fuel consumption but would also reduce the fleet disparities in size and weight

and would favour safety. Thus, with regard to passenger car fuel consumption, regulators,

manufacturers and consumers are all pulling in different directions. Purchase taxes are also

unfavourable with the automobile industry as they can potentially slow the parc turnover,

as in Denmark. The automobile industry also takes a very strong line against fuel duty if it

is unfavourable to diesel.

19

Due to pressure from ACEA, the Commission agreed to base the Commitment on the

assumption of “an unhampered diffusion of car CO2 efficient technologies into the market

via competition amongst ACEA members and other market participants which is expected

to result in market mix changes” (ACEA 1998).

There is sure to be conflict between the Commission and the automobile industry as to

what constitutes ‘unhampered diffusion’ or ‘hampered diffusion’. While allowance is

made in the Commitment for measures that might ‘hamper’ diffusion, the Commission

again bowed to ACEA pressure and expressed its willingness to review the Commitment

‘under certain circumstances’ should fiscal measures interfere with the particular fuel

efficient technologies which the manufacturers are trying to promote. At the same time,

some ACEA members wish to contribute to the Commitment through downsizing, which

is why it is stated in the Commitment that 10% of the fuel economy improvement can

originate from non-technological means. These gains due to downsizing will have to be

separated from the Commission’s efforts to encourage downsizing through its fiscal

framework and consumer information scheme aimed at achieving the extra 20gCO2/km

called for by Council (Council of the European Union 1996a). The Commission has

admitted this may cause difficulty25

. Further, the impact of the Member States’ fiscal

policies on the industry’s economic performance and employment situation will also be

taken into account by the monitoring procedure.

The Commission’s willingness to take into account the impact of fiscal measures does

little to promote environmentally optimal technologies. If Member States introduce fiscal

measures to address, for example, noise or adverse health effects as well as fuel economy,

such measures could be regarded as discriminatory against the technologies which ACEA

has chosen to promote.

Vehicle related legislation that may affect fuel economy

Fuel economy improvements can be off-set by various factors such as, inter alia, policies

addressing safety, recycling, noxious emission reduction and other measures that can

affect the weight of a car and thus its fuel economy. Debates surrounding prioritisation of

policy objectives are likely to arise in the future. The difficulty will be that vehicle-related

policies to address problems such as air quality or safety will be developed as binding

legislation. Unlike the voluntary fuel economy objectives, such binding legislation can not

be so readily adjusted.

As previously explained, ACEA claims that fuel economy improvements of recent

decades have been negated by many factors adding weight to the vehicle e.g. consumer

demands, legislation relating to safety, noise, toxic emissions. The Commitment provides

that the impacts of such factors on the achievement of the fuel economy objectives will be

taken into account and the Commitment will be adjusted if necessary in “good faith”.

While the impact of binding legislation on fuel economy will have to be taken into account

by the monitoring procedure, there is also the risk that the flexible voluntary agreement

could in the future be responsible for watering down other vehicle-related legislation.

ACEA is already noting offsets due to legislation developed since the adoption of the

25

The Commission has stated 26.10.98: “It is also recognised that the decision to whether a market change

is linked to new technology or not will not always be easy to make, ” in response to questions from JAMA

concerning details of the agreement.

20

Commitment and recently remarked on the end-of-life vehicles Directive. The Directive

requires manufacturers to take back vehicles free of charge from the last owner26

and lays

down provisions for collecting, processing, recycling, and recovering vehicles. ACEA

stated that the end-of-life vehicles Directive will have a significant effect on fuel economy

as the recycling requirements, for example, will mean that manufacturers can not use

certain light-weight materials (Interview 4).

Competition issues

DG11 and DG3 intended that ACEA, KAMA and JAMA operate as three ‘bubbles’ such

that the representative organisations, ACEA, JAMA and KAMA, would be responsible for

ensuring acceptable contributions from the individual manufacturers. DG4, however, has

made it clear that there will be no ‘burden sharing’ as this could contravene competition

rules if companies collaborate and arrange for some manufacturers to contribute more than

others to their own benefit. Thus all the manufacturers will be required to demonstrate an

’equivalent effort’.

The issue of defining ‘equivalent efforts’ initiated a conflict within ACEA as to whether a

percentage improvement or an absolute target value should be pursued. BMW and

Mercedes-Benz, as producers of heavier than average cars, were advocating a percentage

improvement, as an absolute target of say 140gCO2/km would be well out of their range

and would require an improvement of more than 25%. The French (PSA, Renault) and

Italian (Fiat) manufacturers, however, were advocating an absolute target, over a

percentage improvement, as the former would be easier for them to achieve14

. For

example, PSA and Renault had a fleet average fuel economy of 162gCO2/km in 1996

(Environment Watch: Western Europe 4.10.96), thus the attainment of 140gCO2/km

constitutes a fuel economy improvement of just 13.5%. Smaller manufacturers also argued

that producers of larger than average cars, which generally yield greater profits, would be

able to pass the extra cost for advanced technology on to the consumer more easily

(Interview 1, 3 and 4).

Adequacy of manufacturer contributions as regards ‘equivalent effort’ will be left to the

subjective judgement of the ACEA board and the Commission. ACEA members have still

not discussed the contributions expected from each other (Interviews 3 and 4). This very

issue nearly led to the collapse of the negotiations in 1997 and 1998. According to ACEA,

manufacturer contributions are “not quantifiable” and “will depend on many factors”

(Interview 4). Thus, a situation could later arise where manufacturers might not agree that

each is making an ‘equivalent effort’ and this may be a reason for some to claim

‘economic harm’ due to the Commitment. If the monitoring procedure finds that the

impacts of the Commitment on the industry’s competitiveness and employment situation

are detrimental, then ACEA and the Commission will review the situation and make any

necessary adjustments in “good faith” (ACEA 1998). At the same time, the ‘economic

harm’ to manufacturers due to the Commitment, will also have to be separated from other

factors that may affect sales. This will be no easy task.

26

The last holder/owner of a vehicle is entitled to deliver a vehicle to a treatment centre free of charge and

producers are required to bear all or most of the costs for applying these measures and/or to take back the

end-of-life vehicles without there being any costs involved for the last holder/owner. The European

Parliament and the Council agreed to a start date of 1.1.01 for vehicles put on the market after this date, and

starting from 1.1.07 for vehicles put on the market before 1.1.01

21

The automobile industry’s commitments also require that the Community will use its best

efforts to ensure car CO2 reduction ‘equivalent efforts’ from other manufacturing. This is

an unrealistic demand as the percentage CO2 reduction required by the UNFCC Kyoto

Protocol varies considerably from 5% for the USA, 7% for Japan, 8% for the EU to 0% for

Korea. Therefore, the various countries will focus differently on each of their CO2

producing sectors and may need to apply policies unique to their own situation.

The commitments of non-ACEA members

ACEA has already pointed out that the one extra year given to JAMA and KAMA to

achieve the 140gCO2/km target could be a competitive disadvantage for ACEA (Interview

4). The Koreans should be able to move a considerable distance towards the intermediate

and final targets by introducing just one successful fuel efficient model (Interview 3). As

Japanese manufacturers are planning to increase their market share which is already

considerable at 11.5% despite trade restrictions (compared to the Korean market share of

3.1%), ACEA will become increasingly protective of its own competivity. The

competition within the automotive industry is also enhanced by the fact that the European

market is reaching saturation point and running at over-capacity27

(Financial Times

15.1.98; Wells & Newenhius 1997). Further, due to well-established Japanese regulations

designed to promote smaller, more fuel efficient cars, Japanese technology is advanced

and R&D programmes are well developed (Interview 10). Indeed, Toyota launched the

world’s first commercial hybrid in 1997.

The Koreans would not be required to commit to the production of a 120gCO2/km vehicle

by 2000 (Interviews 1, 2 and 17) as lead times for production are a minimum of 3 years. In

any case this requirement was already fulfilled by ACEA when the Commitment was

drafted in 1998. As not all ACEA members will be producing a 120gCO2/km car by 2000,

it would appear unfair to expect the same from the two manufacturers represented by

KAMA.

The ambiguous terms of the Commitment, the insensitive attitude from parts of the

Commission and the aggressive attitude of ACEA, all contributed to reduce JAMA’s

support for the voluntary approach. At one stage the negotiations were close to breaking

down; it has been indicated by the negotiators that there was a 50% chance that JAMA

might have withdrawn from the negotiations and opted for legislation (Interview 10).

Research

One of the conditions proposed by ACEA for both the 1997 and 1998 offers concerned

extra funding for further research. However, the Commission was firm that efforts would

be aimed at capitalising from the technological potential and the research programmes that

already exist (1995).

27

(Nakamoto 15.1.98) “Japan carmakers renew their offensive: report of surging Japanese imports into

Europe with transplants and a concern with over-capacity in Europe and the ability of the Japanese to bring

cars to the market much quicker than Europeans”.

22

Monitoring

The holistic and statistical monitoring are to be administered jointly by both ACEA and

the Commission in order to monitor ACEA’s progress and allow scrutiny of the

assumptions underlying the Commitment. For this purpose, the Commission proposed the

Decision on monitoring CO2 emissions from new passenger cars which was adopted in

summer of 2000 (CEC 1998c; CEC2000b).

The Parliament was successful in introducing several changes to the Decision proposal

which would increase Parliament’s involvement in future voluntary agreement

negotiations and in the monitoring of agreements. Most particularly, Council agreed to

accept Parliament’s proposal to urge the Commission to look at the need for a legal

framework, including the issue of sanctions, for voluntary environmental agreements to be

entered into in the future. However, such a legal framework would not be applied

retroactively to existing agreements. Parliament also proposed that Member States report

on how CO2 emissions change and whether reductions are due to manufacturer technical

measures or changes in consumer behaviour.

The Commission shall report to the European Parliament and to the Council by the end of

2002 at the latest on the operation of the monitoring scheme. The Commission will also

have to report annually to Council and Parliament on the data submitted by Member States

to the Commission. ACEA insists that the statistics for individual manufacturers should

not be quoted publicly (Interview 4)28

and the Commission supports this view and has

expressed its intention to keep its distance from the internal politics of ACEA (Interview

5). Nevertheless, disclosure of information for individual manufacturers would allow the

public and NGOs to compare the manufacturers and thus encourage competivity and

proactivity29

.

The Commission should have an EU database established by 2001 which will contain

statistical data obtained from Member States (Interview 1). At the same time, ACEA,

JAMA and KAMA, will obtain data from its members. Obtaining the same data from

different sources is intended to satisfy the Commission’s guidelines on environmental

agreements (CEC 1996b) which requires the data to be independently verified. Yet in

some cases, data obtained separately by the Commission and the industry will have

originated from the same source (Interview 4).

According to the Commission’s Communication COM(1998)348 (CEC 1998c) there are

several potential sources for error. These include human error in the conversion of data

contained in the ‘paper’ type-approval documentation to a digital form, the selection of the

correct ‘version-specific’ data from such electronic databases of type-approval

information, human error during the transfer of data from the ‘paper’ Certificate of

Conformity to the electronic registration file during vehicle registration and the transfer of

28

The Commission will be receiving data on individual manufacturers but it will not necessarily make such

data public. 29

A member of the public or an NGO could, although only with considerable effort, gather the information

necessary to illustrate the progress of the individual manufacturers. NGOs and the public may, however, be

able to obtain access to the information relayed by the Commission to the Parliament and Council through

the annual reports required under 2000D1753 (CEC 2000c), but the data may not necessarily include data

specific to manufacturers.

23

incorrect data from manufacturers and dealers during automated vehicle registration

(ECMT 1997).

While there is much scope for statistical discrepancies between the monitoring procedures

of the Commission and industry, the joint holistic monitoring is likely to encounter more

difficulties as consensus will need to be sought on the interpretation and acceptance of the

findings that affect the status of the assumptions that underpin the industry’s

commitments. The monitoring procedure requirements will also be resource intensive for

the Commission, especially if the Commission has to carry out studies to verify

automobile industry’s claims for factors which are negating progress. The effectiveness of

the monitoring procedure will also depend on existing actors and new faces to the scene.

While the turnover of Commission officials is varied (from very short term to long term),

the ACEA president rotates annually by manufacturer, in contrast to MEPs and

Commissioners that are elected every 5 years30

.

The legal aspects

Council Directive 91/441/EEC of June 199131

(Council of the European Union 1991)

requires that the Council shall decide on measures designed to limit CO2 emissions from

motor vehicles, acting by a qualified majority on a proposal from the Commission. In

addition, Article 175 of the EC-Treaty states that “the Council, in accordance with the co-

decision procedure, and having consulted to Economic and Social Committee and the

Committee of the Regions, shall decide what action is to be taken by the Community in

order to achieve the environmental objectives of the EC-Treaty”. It would appear that the

Council should decide on measures to regulate CO2 emissions from motor vehicles, while

it can also be argued that as these measures aim at achieving the UNFCC’s Kyoto Protocol

targets (an environmental objective), that the Parliament should be implicated under

Article 175 of the EC Treaty. Instead the Commission, with the support of Council,

developed the voluntary agreements with ACEA, JAMA and KAMA.

The Commission’s adoption of voluntary agreements at Community level raises legal

concerns. It might be suggested that the Commission has usurped the power of the Council

by taking the voluntary route and not using the apparently available legal regime of Article

175 or Directive 91/441/EC. However, the matter is complex. The Commission

experienced technical and political difficulties in the early nineties when attempting to

draft binding legislative proposals which would be applicable to all cars sold in the EU.

Thus the Commission decided to consider setting an average fuel economy target for the

entire fleet of new passenger cars sold in the EU, leaving it up to the groups of

manufacturers (i.e. ACEA, JAMA and KAMA) to decide how this would be achieved. But

there were difficulties in making such a measure binding. The use of a Regulation, which

is of general effect, or a Directive, which is addressed to Member States would probably

not be appropriate if the target was a discrete group of car manufacturers. The Council and

Parliament could have addressed a Decision(s) to ACEA, JAMA and KAMA. But a

Decision, as with any proposed Regulation or Directive would have needed binding targets

for the sake of legal clarity. This apparently could not be achieved and so the non-binding

30

1999 has witnessed a change of Parliament and Commissioners. Bjergaard of DG11 has been replaced by

Wallstrom and Bangmann of DG3 by Liikanen 31

Council Directive 91/441/EEC of June 1991, amending Directive 70/220/EEC on the approximation of the

laws of the Member States relating to measures to be taken against air pollution by emissions from motor

vehicles

24

route was chosen. However, as is argued below, if the Commission has arrived at an

agreement which is in effect ‘binding’ then the legality of the voluntary route becomes

more doubtful.

As a policy tool, the scope for such non-binding agreements had already been foreseen.

According to COM(1996)561, these can take a previously used format i.e.:

1) industry commitments recognised by the Commission i.e. unilateral non-binding

commitments

2) any other form of a non-binding understanding (e.g. exchange of notes, letters of

intent, declarations signed in the presence of a Member of the Commission)

However, doubts remain as to their proper legal basis. The EC–Treaty is silent on the

mandate required by the Commission to negotiate an agreement with an industry sector,

and while this is not fatal to their formation, the scope of their negotiation and use falls

within a ‘grey zone’ of community law. By analogy, Article 300 of the EC-Treaty imposes

a prior mandate, according to the provisions of this article, for the ‘negotiation’ and

‘conclusion’ of international agreements. However, it cannot be argued that the

Community level voluntary agreements with the automobile industry fall within the scope

of Article 300.

The Commission’s response to this apparent lacunae in EU law is to adopt the

environmental agreements by use of Recommendations. Article 211 of the EC-Treaty

gives the Commission the absolute right to adopt Recommendations “if it considers

necessary”, yet it should be noted that under Article 249 such Recommendations will have

no binding force. A serious concern with the automobile industry’s agreements is that

there appears to be some form of underlying commitment from the Commission. For

example, in the preamble to the Recommendation 1999/125 concerning ACEA’s

Commitment, it is stated that the Commission will: only legislate should the voluntary

agreement prove unsuccessful; obtain commitments from other non-ACEA car

manufacturers; jointly, with industry, monitor and review industry’s progress;

acknowledge that no further fiscal measures are needed beyond the Commitment and so

will take their impacts into account (CEC 1999b). The question is whether these seeming

commitments on behalf of the Commission have in fact produced a de facto binding

measure. Has the Commission, using non-binding Recommendations, effectively tied the

hands of the European Union as to the action it may take? This is a question that only the

European Court of Justice as the ‘guardian of the Treaties’ can answer definitively.

However, from a political perspective, it is likely that should the Commission fail to

uphold its ‘commitments’ under the Recommendation, that there would be an adverse

reaction on behalf of the automobile industry.

If it is accepted that these voluntary agreements are not binding, it may still have been

more appropriate to have arranged their introduction through a Recommendation of the

Parliament and the Council rather than of the Commission. This would have allowed for

the involvement of all three institutions in the development and adoption of the voluntary

agreements.

25

The Commission is currently developing a Regulation which will provide a legal

framework for environmental agreements. The new Commissioner for the Environment,

Wallström, declared in November 1999 that she would not negotiate or propose any

further environmental agreements until the framework for their operation had been

clarified. At the same time, DG TREN32

(the newly combined DG7 and DG17) has taken a

different position to DG ENV and has recently initiated negotiations with, for example, the

maritime industry for a voluntary agreement on maritime safety (Environment Watch

15.9.00).

The Role of the Commission, Parliament, Council and NGOs

Council clearly had the political will to address CO2 from cars as it was Council that

initiated the debate on targets to be set for the automobile industry in the early nineties,

calling for a target of 120gCO2/km by 2005. At the same time as promoting ambitious

targets, the Member States were failing to agree on methods to limit CO2 emissions from

cars, partly due to bias towards their own national industries. Member States were also

failing to give their political support to the Commission’s proposals to regulate CO2 from

cars by application of fiscal measures. However, the Commission should have foreseen

that the proposals for fiscal measures would be unlikely to achieve approval in Council as

the unanimous voting procedure is used for deciding fiscal policy. The explanation that the

potential problem was not identified ahead of time may be because the use of fiscal

measures was pushed excessively from within certain parts of the Commission, which

appeared to be fuelled by inter-DG competivity. Nevertheless, it is clear that more effort

should have been invested into alternative policies to regulate CO2 from cars, instead of

relying on the political bravery of Member States to apply fiscal policies.

When the initiative to regulate CO2 from cars was restarted in 1995, yet again the various

alternative methods to regulate vehicle fuel economy seemed to be too readily dismissed

without allocating adequate resources to weighing up the pros and cons of each, including

the voluntary agreement. The various proposals submitted to the Commission’s MVEG

group in the early 1990s could have provided a useful starting point.

Council’s preference for non-binding measures to legally binding ones is clear from

statements in documents such as the Council Conclusions of 1992 (Council of the

European Union 1992) and the 5th

environmental action plan, and through the ratification

of the Treaty of Maarstricht, which placed much emphasis on the principle of subsidiarity.

This may be part of the reason why little effort was given to exploring the merits of

different schemes to regulate CO2 from passenger cars.

The failure of the Commission to achieve consensus on a policy method to legislate CO2

from passenger cars in the early 1990s not only set back the intention to tackle the issue by

several years, but weakened the Commission’s bargaining position in the voluntary

agreement negotiations. With no developed legislative proposal, the Commission had no

‘stick’ with which to threaten industry. This power imbalance contributed to the

Commission’s failure to achieve an ambitious target in 1997. Other factors which also

played a role in the Commission’s failure included: the lack of technical support for the

Commission desk officers; opaque negotiations dominated by industry technical experts;

32

DG TREN: Directorate General of the European Commission for Transport and Energy. DG 7 (Transport)

and DG 17 (Energy) were combined in 1999 to form DG TREN.

26

an absence of ‘commitment from the top’ in the Commission; and the Commission and

Council’s preoccupation with the voluntary approach as a ‘third way’.

The Council demonstrated its commitment to a meaningful target by rejecting ACEA’s

offer of 167gCO2/km in 1997 as “quite inadequate” and insisted the motor industry take

action to ensure a satisfactory outcome of the negotiations (Council of the European Union

1997). The Commission and Parliament also took this view. In retaliation to industry’s

unambitious offer of 167gCO2/km (by 2005) coupled with the pressure of the EU’s agreed

greenhouse gas reduction target and timeframe under the Kyoto Protocol, the Commission

began negotiating at higher level. The higher level negotiators adopted a strictly non-

technical and political approach. Due to a much stronger ‘commitment from the top’ and a

changed approach, the Commission was able to achieve a considerably more ambitious

target in March 1998 of 140gCO2/km (by 2008), which the Council “noted with interest”

(Council of the European Union 1998a).

Having achieved the target, ACEA and the Commission then had to finalise the drafting of

the ‘assumptions’ of the Commitment. Recognising the difficulties, the Council “stressed

the need to resolve ambiguities and outstanding issues in the ACEA draft Commitment”,

and urged the Commission and industry to urgently conclude their negotiations (Council

of the European Union 1998b).

While the Commission and Council were evidently keen to establish a voluntary

agreement with the auto-manufacturers, the Council appeared to take a tougher line on the

targets and terms of the agreement to which the Commission could accede. The Council

repeatedly requested the Commission to prepare binding legislation should the

negotiations break down at any time (Council of the European Union 1997b, 1998c) and

stressed the importance of the shortest possible timeframes, intermediate targets, a

monitoring scheme and a fiscal framework (Council of the European Union 1996b,

1998c). While the Commission looked to the Council for guidance and approval, it did not

always take its concerns or demands fully into account, particularly with respect to

drafting an alternative binding proposal. However, it is clear the Commission gave even

less consideration to the position of Parliament and environmental NGOs.

While the Parliament generally supported the thrust of the Commission’s ‘three pillar

strategy’ (Interview 14), the various Parliamentary Committee reports reveal much

discontent as regards the adequacy of a voluntary agreement as a policy instrument. The

Parliament’s concerns included inter alia (Interview 14; European Parliament 1997a,

European Parliament 1998; Europe Environment 9.7.96):

a) The exclusion of Parliament from the decision-making process

b) The lack of an ambitious target

c) The lack of post-2012 targets

d) The lack of arrangements for a continuation with the commitment should one or more

of the assumptions on which ACEA and the Commission have based it not hold true

e) The imprecise nature of the intermediate target which is too weak as a sole indicator of

progress

f) The lack of procedure details for a revision in 2003

27

g) The inadequacy of a reference to future arrangements for monitoring to be agreed

through an exchange of letters

h) No provision made for the eventuality if ACEA members fail to comply

Parliament therefore called for an amendment to Directive 70/220/EEC to ensure an EU

fuel economy fleet average of 120gCO2/km by 2005 with a further step to improve the

fleet’s average fuel economy to 90gCO2/km33

by 2010 (European Parliament 1997a).

The NGO community also echoed many of Parliament’s concerns, and foresaw, ahead of

other parties, many of the shortcomings that would result from the establishment of the

voluntary agreement. For example, as early as 1996, the EEB had issued a Resolution on

environmental agreements (EEB 1996) which clearly warned against establishing

voluntary agreements at EU level because of the Commission’s inability to apply

sanctions. Of the many points listed in the resolution, several were especially relevant to

the agreements with the automobile industry, including:

- Council and Parliament should set environmental targets or objectives which can not

be negotiated by industry,

- The ultimate targets should be quantitative and long-term while intermediate targets

and deadlines must be defined. (Despite having an ‘intermediate’ target of 165-

170gCO2/km for 2003, ACEA’s 140gCO2/km target for 2008 is still an intermediate

target with regard to achieving long-term environmental objectives.)

- It must be possible to re-negotiate the rules and targets of the agreement after a

reasonable period of time if necessary (from an environmental perspective). Tacit

extension of an agreement must not be possible.

The EEB closely followed the progress of the negotiations. The main message of the

NGO federation, with respect to the Commission’s negotiations with ACEA, was that

other CO2 emitting sectors of industry would have to make up for the passenger car

sector’s shortcomings with respect to the EU’s Kyoto Protocol commitment and that the

derogation awarded to the passenger car sector would send the wrong signals to other

sectors. The EEB was also concerned that the voluntary agreement negotiations were

undemocratic and opaque.

Thus a major shortfall of the ACEA voluntary agreement was the lack of transparency and

democracy as stakeholders were hardly involved and their opinions were not considered.

NGOs and Parliament were bypassed, and Council was also excluded but to a lesser

degree than the former. The exclusion of Council, Parliament and NGOs meant that with

regard to negotiating the targets and terms of the agreements, most of the institutional

power lay with the Commission. In reality, the ACEA voluntary agreement negotiations

were conducted by a select few individuals who influenced the negotiations to varying and

sometimes significant degrees. In addition, just as the negotiations were shown to be both

positively and negatively influenced by the personalities, approaches and inter-

relationships of the negotiating actors, the monitoring procedure will likewise be subject to

similar influences.

33

Originally proposed by the Donnelly report on the EU Automobile industry JOC 269 16.10.95.

28

The co-decision procedure, which according to Article 175 of the EC-Treaty is required

for the deciding of what actions are to be taken to achieve EU environmental objectives, is

a far more democratic decision-making procedure in comparison to the voluntary

agreement negotiations. Further, the situation was worsened as the Commission chose to

adopt a Recommendation of the Commission and not a Recommendation of the Council

and Parliament. The latter option would have allowed for the involvement of all three

institutions in the development and conclusion of the agreements.

Alternative methods to the voluntary approach to regulate CO2 from cars

The following chapter briefly discusses measures which can be used as alternatives to the

voluntary approach to regulate CO2 emissions from passenger cars. Such policy measures

can either be designed to influence the purchasing and driving behaviour of motorists or to

set standards for the fuel economy of the vehicle.

Various studies show that a wide variety of fiscal measures can effectively influence

motorist behaviour to varying degrees. However, the outcome of the debate to legislate

CO2 from cars in the early 1990s was that fiscal measures could not be used as a stand-

alone measure to legislate CO2 from cars. Indeed, leading authors such as Greene (1997)

argue that economic policies or fiscal measures are essential if policies are to be

economically efficient but they are most efficient and effective if used in conjunction with

fuel economy standards. Fiscal policies as stand-alone measures may require high rates to

be environmentally effective such that the rates would risk being politically unacceptable.

The recent backlash of motorists against high fuel prices throughout Europe reinforces this

point (The Guardian 16.9.00; Ends Daily 6.9.00).

While fiscal measures and information to the public have a very important role to play in

reducing CO2 from cars, the following will focus on methods for setting standards for

industry as alternatives to voluntary agreements.

The case for binding regulation as opposed to the voluntary approach

While the Commission believes that the voluntary approach offers greater flexibility to

manufacturers and avoids dictating technology34

, it can be argued that objectives set by

both binding and non-binding legislation can be either elastic or inflexible. Flexibility

depends on the objectives set, how they are set, and according to what time-frame. To the

contrary, it can be argued that the voluntary agreements established with the automobile

industry are a good example of how technology can be dictated by industry through non-

binding commitments as it is specified in the agreements that “ACEA will aim at a high

share - to the point of 90% of new cars sold being equipped with CO2 efficient direct

injection gasoline and diesel technologies” (ACEA 1998).

The major advantage of binding legislation is that it can guarantee the achievement of

environmental objectives because it is enforceable. Carefully designed binding legislation

34

The Commission states in COM(1996)561 (CEC 1996b) that an important benefit of Environmental

Agreements is that they leave greater freedom to industry at company or sectoral level to decide on how to

reach the environmental targets than does legislation which prescribes or implies, for instance the use of a

certain technology.

29

can also avoid dictating technology and can achieve environmental objectives cost-

effectively e.g. a tradeable credit scheme.

Proponents of the voluntary approach argue that it provides incentives to the business

sector for the development of efficient, innovative and environmentally-friendly solutions.

However, much of today’s technology for reducing CO2 from cars, has been available for

many years. In addition, much could be gained if consumers simply purchased less

powerful, smaller cars with less modern conveniences. Instead, market trends are going in

the opposite direction.

The case of the voluntary agreements established with the automobile industry

demonstrates the difficulties in applying the voluntary approach to an industry whose

market trends are moving in the opposite direction to that which regulators would like to

see. For example, the negotiations were dogged with events revealing lack of trust

between both the Commission and the automobile industry but also between

manufacturers themselves due to the competitive and thus defensive attitude of the

automobile industry. The negotiations nearly came to a halt as manufacturers could not

agree as to what ‘equivalent effort’ would mean for each of them, and this problem is still

not solved. The lack of trust was well illustrated by industry’s unambitious offer in 1997,

which was the result of two years of negotiations between the industry and the

Commission and which was rejected immediately by all three EU institutions. As many

writers claim that ‘trust’ is essential in establishing effective agreements between industry

and a regulating body (EEA 1997; Gouldson and Murphy 1998; Glasbergen 1998;

Rennings et al 1997; Sergesen and Miceli 1998), voluntary agreements clearly need to be

compatible with market forces.

The Commission claims in Point 9 of its communication on environmental agreements

COM(1996)561 (CEC 1996b) that the conclusion of environmental agreements can be

considerably quicker than the adoption of legislation. It has taken some four years to

develop and conclude the three voluntary agreements with the automobile industry. Yet

the legislative process in accordance with the co-decision procedure often takes less than

four years from its origins in the Commission to the final agreement between Parliament

and Council. In addition, claims that agreements bear less administrative costs are also not

founded, as the negotiating process was a time-consuming, labour-intensive and costly

exercise.

If CO2 emissions from passenger cars are to be legislated in the future, the ultimate

legislative compromise of the institutions is unlikely to be less stringent than that already

agreed through the voluntary agreement. This is largely because the Council was in pursuit

of a fleet fuel economy average of 120gCO2/km by 2005 or 2010 at the latest, while

Parliament was advocating 120gCO2/km by 2005 and 90gCO2/km by 2010. It was the

Commission that proposed the target of 140gCO2/km for industry, with the extra

20gCO2/km to be achieved through the fiscal framework and the consumer information

scheme. In addition, the Council stated in 1996 that the ‘three pillar strategy’ might not be

sufficient to adequately reduce CO2 from cars and so reserved the right to consider the

need for additional measures, if necessary, which could include binding measures (Council

of the European Union 1996a). In addition, the legislative procedure to reduce CO2 from

passenger cars would be according to the co-decision procedure as required by Article 175

of the EC-Treaty such that powers between the Commission, Council, Parliament would

30

be reasonably balanced and a compromise between the institutions would have to be

reached.

Some argue that consensus within Council would be difficult to achieve, in developing

fuel economy legislation, due to the desire for Member State governments to protect

national industries. Yet half of the Member States have no industries to protect and all EU

Member States have greenhouse gas reduction commitments under the Kyoto Protocol to

fulfil. There are also concerns that the presidency of Council will delay readings of

legislative proposals but as the presidency rotates every six months, this is likely to prove

only a temporary impediment.

During the voluntary agreement negotiations, both the Council and Parliament insisted

that the Commission develop a binding legislative proposal to regulate CO2 from

passenger cars should the voluntary agreement negotiations fail and to provide the

industry with a threatening ‘stick’ to assist the negotiations. Yet the Commission failed to

produce such a proposal. It was not until after the rejection of ACEA’s offer in 1997 that

the Commission began to put some thought into such a proposal.

At the Commission’s workshop held in Strasbourg in February 1998, which was attended

by negotiators and stakeholders with an interest in the voluntary agreement, the

Commission presented five options for regulating vehicle fuel economy 35

(CEC 1998j).

The options included: binding limit values graduated according to a certain parameter (e.g.

engine capacity) designed to yield a fleet average fuel economy of 140gCO2/km and

130gCO2/km by 2010; indicative standards, complemented with economic disincentives

for the consumer, graduated according to a specific parameter and lowered over time (fee-

bate system or economic disincentive system); indicative standards plus tradeable credits

to be applied such that each car falling below the standard earns credits relative to the

degree by which it falls under the standard and cars above the standard similarly earn a

debt of credits; a scheme whereby Member States would be recommended to ensure that

by a certain date, a certain share of the fleet would consist of Enhanced Fuel-Efficient

Cars (EFEC).

The Commission’s basic assessment of the various options to regulate the fuel economy of

manufacturers' car sales, concluded that binding limit value legislation would be of limited

cost effectiveness, be technology-fixing and would not provide incentives for

overachievers. The uneven impact of binding limit values on manufacturers and certain car

types was also recognised, especially as binding limit values could result in the banning of

certain cars from the market. In addition, if emission limits are set by relating emissions to

one or more vehicle parameters, manufacturers can ‘tune’ the vehicle’s performance to

achieve the limit value with sometimes negative or counter-productive effects. For

example, relating CO2 emissions to vehicle weight could be counter-productive as some

manufacturers may respond by increasing the weight to make room for more power

(Kageson 2000).

The Commission presented fee-bates, economic incentives and tradeable credits as having

the potential to significantly improve the cost effectiveness of regulation compared to

35

The Commission stressed clearly that the scenarios presented at the workshop were based on preliminary

data and work by the Commission Services and were subject to substantial uncertainties. It was also made

clear that the scenarios did not present any decisions taken by the Commission Services.

31

binding limit values. While such measures would not necessarily guarantee a set fleet

average fuel economy target, much would depend on the use of financial incentives.

Several weeks after the Strasbourg workshop, DG 236

of the Commission presented a

discussion paper to a Commission ENVECO meeting37

which showed that the potential

economic cost savings of tradeable credits could be large. The studies showed that a

tradeable credit system compared with the ‘second-best alternative’ option of graduated

limits coupled with economic disincentives for the consumer, would save between 300-

800 million Euro annually.

The US has used its Corporate Average Fuel Economy tax (CAFE) since 1978 to set

minimum standards for fuel economy. Under the US CAFE system, manufacturers must

ensure that the average fuel economy of their sales meets a specified fuel economy limit.

Fines of $5 per vehicle for every 0.1 mpg below the established standard are levied on

manufacturers failing the limit value, but to be efficient the fine levied should exceed the

extra profit gained due to selling a more fuel inefficient car.

Various authors have written about the effectiveness of the CAFE standards with some

arguing for its success and others claiming detrimental effects such as economic harm to

manufacturers, lighter vehicles that resulted in increased traffic injuries and fatalities, a

rebound effect due to increased driving and slower scrappage rates. Greene (1997) has

reviewed the literature available and concludes that CAFE was effective in improving fuel

economy, despite losses due to the rebound effect, which could have been curbed by

economic incentives such as a fuel tax. More could have been achieved from CAFE if the

limit values would have been tightened over time.

The CAFE system could not be as efficiently applied to indivuidual European

manufacturers as their fleet profiles, or rather fleet average fuel economy figures vary too

much, such that manufacturers would be unevenly affected. However some form of a

tradeable credit system could be applied to all manufacturers with sales in the EU. The

success of a tradeable credit system would depend on creating a true competitive market

and setting the correct limit values so that companies would have real incentives to

improve fuel economy.

However, there are drawbacks and these were raised in the MVEG group. It is feared that

a tradeable permit system could be extremely complex and involve very high transaction

costs. It might also be difficult to police the system and to set fines at an effective rate.

Fluctuations in cost or availability of credits might also make planning very difficult and

such schemes may come into conflict with WTO/GATT. To be politically acceptable, the

design would also have to appear equitable to all manufacturers such that larger cars are

not favoured more than small cars and vice versa. At the same time it can be argued that

small cars should be favoured because they are inherently more fuel efficient than larger

cars and they are less able to pass extra costs on to the consumer compared with

manufacturers of larger cars. However, despite the drawbacks, many argue that the cost

benefits could far outweigh the administrative complexities (Hockenstein et al 1997; UK

Delegation to MVEG 1991).

36

DG 2: Directorate-General for Economic and Financial Affairs 37

The paper entitled, " Flexibility for efficiency. Achieving a fuel-efficient car fleet in Europe: the potential

for a tradable credit system" was presented at an ENVECO meeting, 23-24 April 1998 in Brussels.

ENVECO meetings are held roughly twice a year. For these meetings, the Commission's DG ENV and

ECFIN invite Environmental economists from the national ministries plus the OECD on an informal basis.

32

The Commission justifies abandoning the various legislative options as it believes efforts

to investigate binding alternatives are no longer necessary as agreements with industry

have been established. The Commission also had the view that if voluntary commitments

could not be obtained from non-ACEA manufacturers, they would be separately legislated

(Interview 12). As the negotiations with JAMA encountered difficulties, DG11 prepared a

legislative proposal to regulate JAMA only, with the intention to maintain ACEA and

KAMA under the voluntary agreement (Interview 12). In the end the proposal was shelved

as JAMA and the Commission reached consensus on the terms for a voluntary agreement

(Interview 12). However, it is improbable that such proposals would have complied with

GATT/WTO rules. Indeed the proposal had encountered ‘technical difficulties’ in the

Commission’s legal department. Yet, there is still a significant chance that an alternative

to the voluntary agreement, in the way of a legislative proposal, may be necessary should

the agreements with the automobile industry break down.

If binding legislation is to be developed as an alternative to the voluntary Commitments,

the set-back of the objectives as agreed for the Commitments will depend on when the

legislative instrument is deployed. Manufacturers demand a minimum of three years for

planning and the nearer to 2008 that legislation is deployed, the greater the time-frame

extension may have to be beyond 2008.

Achieving guaranteed CO2 emission reductions from passenger cars

While binding limit value legislation may guarantee a specific fleet average fuel economy,

it does not guarantee CO2 emission reductions from the passenger car sector because of

factors such as increasing car ownership and car mileage, as well as trends towards more

vehicle accessories (which add more weight to the car) and driving behaviour not

represented by the test-cycle. A method is likely to be needed, particularly in the future

when greater emission reductions will be called for, which can guarantee greenhouse

reductions. At the same time, such a method has to be politically acceptable to consumers

such that the government can implement it.

Based on the idea of per capita carbon budgets aimed at reducing national carbon

emissions, Fleming has developed the economic policy tool, Domestic Tradeable Quotas

(DTQs) (Fleming 1996, 1997, 1998a, 1998b). 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.

Such a system should also be acceptable to industry as consumers could choose to

purchase fuel-inefficient vehicles for reasons of utility or aesthetics, but their use would be

limited unless savings could be made elsewhere (e.g. household electricity from renewable

energies) or unless extra credits could be purchased on the market. In addition, the DTQ

scheme guarantees CO2 reductions from the passenger car sector and does not suffer from

any of the ‘perverse effects’ of the limit value legislative options which relate emissions to

one or more vehicle parameters.

Based on personal responsibility, the scheme would provide the market driving forces

necessary to introduce advanced technology and to drive R&D agendas more effectively

33

because fuel efficiency would become a dominant ‘need’. In the case of the transport

sector, such market forces would increase the demand for public transport and provisions

or facilities for cyclists and pedestrians. The concept indeed requires further development

and evaluation but its potential to efficiently reduce CO2 emissions is clearly significant.

At the same time, additional economic measures will still be required to supplement the

scheme in order to internalise costs to the environment and society that are not internalised

through the DTQ scheme e.g. congestion, toxic emissions, noise, accidents, infrastructure

deterioration. However, through effective application of the DTQ scheme, less fossil fuel

would be burned and many of the problems associated with these aforementioned

additional external costs would at the same time be considerably reduced.

Governments may fear that introducing a scheme based on per capita carbon quotas would

be politically unacceptable. Yet any policy aimed at regulating individual behaviour will

experience public resistance to a degree. Relative to other measures, the DTQ scheme

should in theory be more politically acceptable as it is based on the principle of equity.

The willingness of the public to accept policies which directly affect their behaviour,

depends on society’s awareness, acceptance of environmental problems, acceptance of the

contribution of the individual to such problems and the preparedness of individuals to

adjust their behaviour for community benefits.

Conclusions

While the Council initiated the debate on targets to be set for the automobile industry, its

enthusiasm was not supported with action during the early nineties due to political

disagreements between the Member States. At the same time, the Commission failed to

invest the necessary resources into exploring alternative legislative options adequately.

DG 11’s excessive support of fiscal measures was fuelled to a considerable extent by

inter-DG competition. By the mid-nineties both the Commission and Council were keen to

apply the voluntary approach as a ‘third way’ which at the same time offered a way-out to

returning to the political deadlock of the early nineties.

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 response to ACEA’s unambitious offer in 1997 of 167gCO2/km (an 11% improvement)

the Commission adopted a non-technical political approach and began negotiating at

higher level. Due to ‘commitment from the top’, the Commission was able to achieve a

more ambitious target in March 1998 of 140gCO2/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 Protocol38

in December 1997, to reduce EU

38 The EU has committed to the UNFCC Kyoto Protocol agreed at COP 3 to reduce greenhouse gas emissions by 8%

below 1990 levels by 2008-2012. The Kyoto Protocol has yet to be ratified.

34

greenhouse gas emissions by 8% relative to 1990 levels by 2008-2012. The Kyoto

Protocol also provided the negotiations with a timeframe. Considering the long planning

times that automobile manufacturers require, it is also necessary to indicate to industry the

long-term environmental objectives that are required. Parliament was alone in calling for

post-2012 targets.

The voluntary agreement negotiations were clearly 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.

The negotiations between the Commission and the automobile industry, as described by

this paper, provide many examples of distrust between and within the negotiating parties

due to the industry’s highly competitive nature. It can be concluded that voluntary

agreements should not be applied to industries whose market trends are moving in the

opposite direction to that desired for the achievement of environmental objectives,

especially if the commitments can not be enforced.

It is clear that the target of 140gCO2/km is not sufficiently ambitious to make use of the

available fuel economy potential that technologies already offer today. Studies estimate

that the agreement will only stabilise emissions at some 10-25% above 1990 levels for

CO2 from passenger cars which is far from the spirit of the Kyoto Protocol. As the Kyoto

Protocol is binding once ratified, the voluntary approach is clearly a risky instrument to

use if it is not enforceable, especially as the agreements aim to achieve objectives which

conflict with current market trends. The lack of a concrete alternative to the voluntary

agreements considerably reduced the Commission’s bargaining power during the

negotiations with industry, and could also weaken its position in the future with respect to

the joint monitoring process. The absence of an alternative proposal may introduce

considerable delay for the achievement of the objectives, should the voluntary agreements

collapse as there will no prepared proposal to replace it. Some Member States will also be

relying heavily on the agreements to deliver CO2 emission reductions from the passenger

car sector.

The terms of the agreement are biased towards the needs of internal combustion engine

technology and do little to favour environmentally optimal technologies. The many vague

‘catch all’ terms of the agreement also lay the target and timeframe particularly vulnerable

to renegotiations. The Commission and the automobile industry will have to achieve

consensus on issues raised during the monitoring procedure, which like the agreement

negotiations will be influenced by the personalities of the various individuals. In addition,

there exists considerable scope for statistical discrepancies between the data collected by

the Commission and the 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.

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 CO2 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

35

mechanisms the Commission chose to use non-binding Recommendations. These seem to

entail underlying commitments from the Commission and appear to have potentially

“binding” elements. Thus, it can be argued that they should not have been brought into

force by the use of non-binding Recommendations. 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 two EU legislative decision-makers, Council and Parliament.

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 industry in

fact dictated the technological development of the automobile industry through the

establishment of certain terms for the agreement.

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. But even enforceable limit value legislation, aimed at achieving a certain

averaged fuel economy for manufacturers’ sales, can not guarantee a specified CO2

emissions reduction from the EU passenger car sector. This is due to a rise in mileage per

car owner, increasing car ownership as well as an expanding 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 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, this concept requires and deserves considerable further

research and development.

36

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