# Presentation: 704954

## Global Competitiveness in Fuel Economy and Greenhouse Gas Emission Standards for VehiclesFebruary 10th, 2005Amanda SauerWorld Resources Institute

**World **
**Resources**
**Institute**

## Overview of Presentation

- Climate change and automobiles
- Comparison of fuel economy and GHG emissions regulations around the world
- Impacts of these regulations on competitiveness and value creation in the auto industry

## Climate Change and Automobiles

- Auto industry in policymakers’ crosshairs because of CO2 emissions released from burning of fuel:
- Transport accounts for 30% of OECD CO2 emissions
- Cars and light trucks account for 20% of U.S. emissions.
- Industry is part of the _problem_...
- Light trucks, “SUV phenomenon”
- Disregard for fuel economy
- ...but also part of the _solution:_
- New hybrid and diesel technologies, and ultimately fuel cells

**3**

## Climate Change and Automobiles

- Pressure to reduce vehicle CO2 emissions
- Direct vehicle use emissions make up 75% of CO2 releases
- Related fuel production emissions make up a further 14%
- EU, Japan, California, Canada all focused on vehicle use emissions

- Assembly

- Materials

- Vehicle Use

- Fuel production

##      Fuel Economy and GHG Emissions Regulations in the World’s Major Auto Markets

**European Union****:** “ACEA agreement” seeks 25% reduction in vehicle CO2 emissions levels by 2008 (from 1995 levels). Agreement may be extended an additional 10% by 2012.
**Japan****:** requires 23% reduction in vehicle CO2 emissions by 2010 (from 1995 levels).
**Australia****:** voluntary commitment to improve fuel economy by 18% by 2010.
**Canada****:** has proposed a 25% improvement in fuel economy by 2010.
**China****:** Introduced new fuel economy standards in 2004; weight-based standards to be introduced in 2 phases (2005 and 2008).
**California****:** CARB approved GHG emissions reductions for automobiles, currently under legislative review.
**New York****:** Clean Cars Bill proposing to follow California standards is currently in committee. Several other NE states have indicated they will follow CA’s lead.

**5**

- An and Sauer, 2004 for the Pew Center on Global Climate Change

## Overview of Vehicle Fuel Efficiency and GHG Standards Around the World

- An and Sauer, 2004 for the Pew Center on Global Climate Change

## Issues of Comparing Vehicle Standards around the World

- Differences in test driving cycles
- Fuel economy vs. fuel consumption vs. CO2 emissions
- Regulatory vs. voluntary
- Differences in vehicle categories and weight-classes
- Corporate fleet averages vs. minimum requirements

- An and Sauer, 2004 for the Pew Center on Global Climate Change

## Conversion factors to CAFE-equivalent MPG and EU-equivalent CO2 emission rate of g/km 

- An and Sauer, 2004 for the Pew Center on Global Climate Change

## Methodology to Compare Fuel Economy Standards Worldwide

**2. Convert fuel economy/GHG standards into fleet averages **(assume that fleet composition remains constant for weight/size or vehicle type targets and that all voluntary targets will be met)

**3. Choose reference standards **(in this example, US CAFE)

**5. Countries/regions now converted to reference standards and are comparable**

**1. Research country/region-specific fuel economy/GHG standards and future targets**

**4. Apply conversion factors **(from table on preceding slide)

- An and Sauer, 2004 for the Pew Center on Global Climate Change

## Comparison of Fuel Economy and GHG Emission Standards

- An and Sauer, 2004 for the Pew Center on Global Climate Change

## Impacts on the Automobile Industry: Risks and Opportunities

| Financial Driver | Risk | Opportunity |
| --- | --- | --- |
| Cost structure | Carbon constraints could raise costs, from R&D to design to production. | More efficient OEMs could have a relative cost advantage. |
| Brand | Lagging behind in development of cleaner technologies could harm brand. | Being viewed as a leader on climate change could enhance brand equity. |
| Innovation | Carbon constraints puts pressure on innovation capacity. | Leadership in low carbon technologies could translate into first-mover advantages. |
| Product segmentation | OEMs that depend on carbon-intensive segments could see sales and profits fall. | OEMs producing lower-carbon vehicles could see sales and profits grow. |

## Lower-carbon Technology Options

- Carbon constraints will force OEMs to add new technologies, some of which may lead to competitive gains
- Key technologies:
- Incremental Technologies (fuel injection, continuously variable transmission etc.)
- Diesel Technology (compression-ignition)
- Hybrid Technology
- Fuel Cell Technology

## Carbon Reduction PotentialKey engine technologies that provide mid- to long-term reductions of vehicle carbon emissions 

**6**

## Carbon-intensity of SalesDependency of 2002 sales in US, EU and Japan on vehicles of high-, medium- and low-carbon intensity

- High: worse than 20.7 on-road mpg; Low: better than 27.5 on-road mpg; Medium: between 20.7 and 27.5 on-road mpg

**7**

## Aggregate Value ExposureEstimated cost per vehicle to meet “most likely” carbon constraint scenarios in US, EU and Japan

**25x difference in Value Exposure across the industry**

**8**

## Management Capacity for Low-Carbon Technologies Measure of OEMs’ capacity to develop and commercialize main low-carbon technologies:  hybrids, diesels & fuel cells

**9**

## Carbon Positioning of Leading OEMsSuccess in a carbon-constrained market will require moving into the top-right quadrant 

**Carbon Positioning of Leading OEMs****Success in a carbon-constrained market will require moving into the top-right quadrant**** **

**Decreasing Carbon Risks **(estimated cost per vehicle to meet new carbon constraints)

**Increasing Carbon Opportunities **(management capacity score on low-carbon technologies)

**Honda**

**Renault**

**Nissan**

**Toyota**

**DaimlerChrysler**

**GM**

**Ford**

**BMW**

**VW**

**PSA**

**10**

## Implications of Carbon Constraints for Future EarningsEstimated changes in forecast earnings from inclusion of carbon constraint factors; ranges reflect alternative regulatory scenarios in US, EU and Japan. 

**11**

## Conclusions

- The European Union (EU) and Japan have the most stringent standards in the world.
- The fuel economy and greenhouse gas emission performance of the U.S. automobile fleet -- both historically and projected based on current policies -- lag behind most other nations.
- These GHG and fuel economy regulations create financial risks and opportunities for automobile companies.
- In our analysis, we found the financial implications of these regulations to range from +10% to -14% of operating income.
- Overall, the automobile industry is becoming increasingly global in scope with these regulations are becoming increasingly stringent (with the exception on the U.S.). Therefore fuel economy will become a major driver in the financial performance of automobile companies.

**16**

## Contact Information

**Amanda Sauer**
- Associate
- 202 729 7689
- amanda@wri.org
***Changing Drivers***** report available at:**
- _[http://capitalmarkets.wri.org](http://capitalmarkets.wri.org/)_
***Comparison of Fuel Economy and GHG Emissions Standards ***
**report available at:**
- _[http://www.pewclimate.org](http://www.pewclimate.org/)_

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