GOVERNMENTS HAVE A choice of methods when it comes to persuading industries to reduce the environmental impact of their products. One way is to set standards, which may be voluntary or legally binding. When we buy a fridge or freezer, for example, EU law requires that we are told how energy efficient it is, and as the lowest levels of performance have now been made illegal, we only have the choice to buy a fridge or freezer which is at least reasonably efficient.

Things get harder in the case of cars, as there are always going to be larger and smaller cars, and faster and slower cars. So EU regulators look at the ‘average car’ sold by each manufacturer, or the industry as a whole. In 2005 the average EU car emitted 162 grams of CO2 per kilometre (g/km), far in excess of the agreed voluntary target for 2008 of 140g/km. So the European Commission recently proposed new laws that would force car manufact-

urers to achieve 130g/km by 2012 – to predictable howls of industry protest.

The problem faced here by the car industry is that people who buy new cars tend to prefer larger, faster models. So while car engines have become more efficient, cars have also become heavier and more powerful. Business is mainly about making money, so most car manufacturers have put sales before voluntary standards. The honourable exception is Fiat, which has already met the 140g/km standard, while Citröen and Renault are on track to meet it in 2008.

So what is the best way to get car manufacturers to move to more efficient models? Is it even reasonable to expect all manufacturers to meet the same standard, when some make smaller cars (such as Fiat and Renault), and others make larger cars (such as Audi, Volvo and BMW)? An alternative approach would be to move towards a market-based mechanism.

For example, the EU could impose a Car Inefficiency Levy on the sale of the least efficient cars based on the deviation from a target efficiency level. This could be a simple fund-raising tax (reducing the EU’s take of national VAT receipts). Or it could be revenue-

neutral, using the money raised from sales of gas-guzzlers to subsidise the most efficient cars and so make them a more attractive purchase. Such a system would do wonders to push manufacturers towards more efficient models.

A more sophisticated approach, suggested by Mike McCracken of the Climate Institute in Washington DC, is that car manufacturers should, every year, have to show sufficient permits to cover the CO2 emissions of all the vehicles they have made that are being driven on US roads. These tradable permits would initially be handed out to manufacturers at no charge, based on historical data; they would carry on from year to year, but would be subject to an annual volume decrement. Flexibility would be achieved by allowing companies to borrow allowances from future years, subject to an interest rate that would impose a real cost to do so.

For the sector as a whole, the system would be revenue-neutral, but among the individual car manufact-

urers there would be winners and losers. The winners would be those that introduced more fuel-efficient models, the losers those that continued to sell large, inefficient cars and SUVs. Ultimately the costs faced by the industry would work through to consumers, with more efficient cars gaining a significant price advantage. Manufacturers would also have an incentive to buy up and retire their old vehicles – gas-

guzzlers in particular – since these would represent a continuing cost to them.

Either of these approaches would have advantages over the relatively crude regulatory approach now being considered, as they would allow manufacturers and consumers to exercise free choice in the marketplace, while creating incentives to reward them for ‘right’ choices, and penalties for ‘wrong’ ones.

The McCracken approach in particular has the best prospect for bringing an end to the huge growth in vehicle emissions across the EU, which grew from 21% to 28 % of the EU total from 1990 to 2004, as the emissions cap in the system would be absolute, rather than relative to car numbers. His system could lead manufacturers to contract with owners, whether individuals or fleet managers, to limit their annual mileage, much as car hire companies do today – again, rewarding the frugal at the expense of the profligate.