Effects Of Co2 Emission Legislation Economics Essay

The global climate conditions are incessantly changing which has become a threat and one of the greatest challenges faced by the international community. Transport is amongst one of the main factor causing one fifth of greenhouse gas emissions and also a large share of air pollution and noise nuisance (Braithwaite and Drahos, 2000). Additionally it divides natural areas into small patches that lead to severe consequences on the landscape which makes it detrimental to environmental sustainability. The number of vehicles worldwide is projected to increase from around 700 million at present to 1.1 billion by 2020, so if anything, the problems caused by cars will get worse not better, unless dramatic changes are made (Burns et al 2002). In response to the mounting concerns and substantial evidences over global warning, a suite of climate change legislation has been introduced. According to the Kyoto protocol the European Union must reduce greenhouse gas emission by 8%. International manufacturing is dominated by car industry and the vehicle production is considered as the world’s largest manufacturing sector. With internationally integrated investment, production and sales; the automotive industry has the supremacy to manage environmental damage. The authoritative positioning of car industry spawns two contrasting viewpoints; (i) the industry’s products are a major source of global environmental damage; (ii) industry’s persistently determined to strike a balance between the imperatives of profitability and environmental sustainability. Safety measures have been introduced and legislations have been put forward by the traditional car producing countries for reducing the specific emission for vehicles and to increase fuel efficiency of cars. The study expounds on the various aspects that encompasses the need for CO2 emission legislation and its pertinent ambiguities. The study further investigates the response of EU car industry by critically analysing its strategic approach to fight against the challenges it faces due to proposed legislation and constantly evolving economic conditions.

1.1 ENVIRONMENTAL DAMAGE BY AUTOMOTIVE INDUSTRY

Transport industry is responsible for several activities that one way or another cause environmental damage and these may include; fuel extraction, processing and transport, manufacturing and 90 percent of all carbon monoxide emissions are also cause by cars. In addition to this, cars are also a major cause of acid rain. Following are some facts and figures compiled by examining the existing data that accounts for ample evidence of the environmental damage caused by cars;

Amongst all land-based modes of transport, cars are the most energy intensive with petrol-powered cars consuming in aggregate more energy and producing more greenhouse gas emissions than any other type of vehicle (International Energy Agency 1993).

Annually seven billion pounds of scrap and waste is produced by international car industry (Elster,1989)

Cars are a prime cause of the depletion of the world’s resources (Freund and Martin, 1993).

About 25 percent of total CO2 emissions are caused by transportation industry out of which up to 85 percent is caused by road transport (UNEP 2003).

On average, road transport accounts for 48 percent of NOx emissions in OECD countries and around 60 percent of this is done by cars (Paterson, 2000).

1.2 ANALYZING THE NEED FOR CO2 EMISSION LEGISLATION

The CO2 emissions in the EU grew by 32% between 1990 and 2005 unlike other sectors accomplished to reduce their emissions by 9.5% on average over the same period (World Values Survey, 2003). Earlier, the share of CO2 emissions by transport was 21% in the year 1990 which rose up to 27% by 2005 (UNEP, 2003). Passenger cars and vans are responsible for over half of the CO2 emissions. Kyoto indicates that transport is the worst performing sector that seriously jeopardises the achievement of the targets. Under Kyoto protocol the European Union is committed to reduce greenhouse gas emissions by 8 per cent by 2008-2012 compared to the 1990 level (UNEP, 2003). Approximately 20% cut in its greenhouse gas emissions by 2020 has been committed by the EU and around 30% cut provided that the other countries follow suit when a new climate deal is agreed. The EU has also adopted a target of improving energy efficiency in the European Union by 20% by 2020 (UNEP, 2003). The legal implementation of these targets along with climate and energy package was adopted in December 2008. The package of emissions trading scheme contains laws for carbon capture and storage, renewable energy, transport fuel quality, and car emissions (Held et al, 1999).

1.3 ASSESSING THE LOOPHOLES OF LEGISLATION

The enforcement of CO2 emissions legislation will take place through a system of fines. For every g/km a manufacturer exceeds its company target, it has to pay a €95 fine per vehicle sold, in principle. However, there have been some ambiguities in the commandment indicated in several studies and when all these ambiguities are put together in practice then it signifies that the target for 2015 is close to 140 g/km, rather than 130 g/km (Paterson, 2000). The detected loopholes in the law include:

For currently unmeasured and undefined eco-innovations, up to 7 g/km credits that could be exchanged for measured reductions;

For very low-emission cars there are super credits, which would count for more than one car and hence water down overall CO2 reductions which are based on fleet averages;

Much lower penalties for small surpassing of the target until 2018. The penalties for the first, second and third g/km of surpassing are only €5, 15 and 25 per g/km respectively instead of €95;

Exemptions for small-volume carmakers.

1.4 EU CAR INDUSTRY VS CO2 EMISSION LEGISLATION

In accordance with the CO2 emission legislation it has been anticipated that its implementation would be fruitful enough to gain at least 20% cut in domestic EU emissions and at most 30% is the target to attain (The Economist, 2002). Scientists believe that about 40% targets are essential to hit the EU’s maximum 2 degrees warming (The Economist, 2002). The climate policy is going off track where the substitution of reduction in real emission has been counterbalanced by the effort sharing and ETS laws and the renewable energy law on the other hand, allows bio fuels which could cause the transport emissions to intensify. Transport is also critical in the debate on Europe’s energy dependence. By mid-2008, approximately €1 billion worth of oil has been imported by Europe per day (Leveque, 1996). The noticeable fact is that EU recognises cars as the single biggest consumer utilizing around 4.4 million barrels per day and is also responsible for 40 per cent of imports which constitutes that car MNCs have a very strong and economically powerful position (World Values Survey, 2003). In order to put political pressure on governments against environmental regulations car MNCs have consistently lobbied governments against emission controls to reduce greenhouse gases on the basis that this would lead to severe economic impacts (Bradsher, 2002).

PROPOSED STRATEGY FOR THE EU CAR INDUSTRY

Despite of the strict regulations by European Commissions that may impose financial loss to the EU car industry, even then they could gain. In accordance with the strategy suggested by Porter, selling poorly performing, unsafe, or environmentally damaging products is not a route to real competitive advantage in sophisticated industry and industry segments, especially in a world where environmental sensitivity and concern for social welfare are rising in all advanced nations (Porter 1990). The proposed strategic model also supports this vision together with the UNEP, World Resources Institute and World Business Council for Sustainable Development; which sees competitive advantages for businesses that voluntarily adopt environmentally sustainable strategies (United Nations Environment Programme and World Business Council for Sustainable Development 2002).

2.1 PESTLE ANALYSIS

European Automotive industry is greatly influenced by the global economic circumstances, political scenarios, changing market trends and revolutionizing technological conditions (Hutton, 2002). All these factors put an impact both directly and indirectly upon the subsistence of the industry. This PESTLE analysis is a significant instrument to illustrate the political, economic, socio- demographic, technological and legislative aspects for managers to develop a strategic approach in order to reduce CO2 emissions in compliance with the legislation.

POLITICAL

The automotive industry is greatly influenced by European Union that will continue to introduce new legislation and modify the existing ones. The political scenario of EU is exacerbated by the fuel tax which is ineffective to address the environmental issues rather working as a tool for governments to raise revenues (Ostrom, 1990). The European Commission’s Auto Oil II programme illustrated in the Table 01, indicates the inefficiency of fuel tax CO2 savings if fuel duty was increased by 20% above 1999 UK levels by 2002 which are unlikely for political reasons;

Table: 01

Finland

-0.43%

France

-0,43%

Germany

-0,61%

Greece

-2,14%

Ireland

-1,52

Italy

-0,54

Netherland

-0,52

Spain

-1,41

United Kingdom

-0,55

Source: European Commission

2.1.2 ECONOMIC

There is a vast scope for improvements in efficiency and environmental sustainability within the automotive industry. The increased use of low carbon technologies in accordance with the CO2 emission legislation creates value and offer secure jobs in the automotive industry. Furthermore, it reduces the €30bn fuel bill that Europe’s businesses, particularly small and medium-sized enterprises, currently pay every year to fill up their vans and this account for a net benefit to the consumer (O’Brien et al, 2000). Small and medium sized enterprises in particular stand to benefit from the fuel savings resulting from this legislation.

SOCIO-DEMOGRAPHIC

In future, China and Latin America are expected to account for the bulk of new car sales worldwide and the ability of the EU to enter these markets is restricted. Most of the revenue generated by the big three American firms is through the sales of pick-up trucks and sports utility vehicles (SUVs) which are considered tarnished due to their size, load and high fuel consumption however, European and Japanese manufacturers are producing similar gas-guzzlers to compete for market share in this sector (Storm Clouds over Detroit 2002; Ford’s Troubles 2003; Bradsher 2002).

TECHNOLOGY

For developing a low carbon emission strategy for sustaining business competitiveness, the EU automotive industry must enable cost effective reductions in carbon emissions from production, distribution and energy use across the production process (Dicken, 1998). There is a need for well-timed investment in technologies which are eco-friendly and vital enough to minimise the cost of making the conversion and will provide the potential for business to get the most out of market opportunities.

LEGISLATION

A number of legislative directives and government policies followed by the growing awareness of climate change issues are aimed at reducing the negative environmental impact of the EU automotive industry. The End of Life Vehicles Directive (ELV) is a complex piece of legislation that aims to increase the levels of re-use and recycling of vehicles that are to be scrapped to improve environmental standards and also limit the use of material harmful to the environment in new vehicles (Martin and Raes, 2002). Moving to low carbon fuel will require a technology shift for both fuel and vehicle technology.

2.2 PORTER’S FIVE FORCE MODEL

To develop a wholesome model for competitive rivalry risk-adjusted rates of return should be invariable across the business. The structure of an industry explains how it may sustain different levels of profitability (Hasenclever, Mayer and Rittberg, 1997). Porter’s model is a helpful contrivance to develop a well thought out and a competitive strategic plan that congregates the opportunities and threats of the external environment of the organizations. For an ideal stratagem the understanding of industry structures and their ways of evolution is extremely important. The following Porter’s five force analysis of EU car industry is intended to propose a valuable strategic approach that is profitable and also tends to comply with the CO2 emission regulations.

Potential Entrants

Supplier Power

Buyer Power

Competitive Rivalry

Substitute of Products

2.2.1 BARGAINING POWER OF SUPPLIERS

A significant proportion of the total number of vehicles in EU will continue to be outside warranty age thus generating business for the maintenance and repair sub-sector of the automotive industry but cars are likely to be less efficient potentially damaging the industry’s environmental agenda (O’Brien et al, 2000). On the other hand the legislation consents for basing car taxation on environmental characteristics of the vehicle however, supplier’s choice is equally important regarding vehicles for development and promotion. To gain an eco-friendly development and promotion policy economic incentives to suppliers is much more effective and the consumers can be framed to meet the required targets. The adapted version of tradable CO2 performance scheme proposed by California could be beneficial to European automotive industry (O’Brien et al, 2000).

2.2.2 BARGAINING POWER OF BUYERS

Consumers help to encourage rivalry through their consumption decisions and switching behaviour however, they currently require the data about the environmental footprint of new and existing automotive products to make fully informed choices. Considering the consumers frame of mind a mixture of regulatory instruments and economic incentives should be launched by the automotive industry and attention should be drawn towards the trade of new cars as well as the usage of the vehicle supply. The public procurement directives could be a step forward to institute a lead market for EU automotive industry for environmentally enhanced vehicles.

2.2.3 THREATS OF POTENTIAL ENTRANTS

The strict CO2 emission regulations do not unavoidably hinder competitive advantage against foreign rivals (Ordeshook, 1993). The EU automotive sector should situate determined environmental standards for its market as potential new entrants from Asia including China and India adopt EU car emission rules and hence progressive standards will put the EU automotive industry in a leading position to make the first move.

2.2.4 SUBSTITUTE OF PRODUCTS AND SERVICES

Due to the highly technical environment of the automotive sector across the globe; the key challenge for European car industry is to introduce more inventive products in the markets. The revenues of electronics and catalyst firms of the automotive sector will be damaged if compromises are made over environmental standards for vehicles (Green and Shapiro, 1994). Moreover; it is not in the interest of the EU as a whole to become ever more dependent on oil imports. Dominance of the international players like US and China is often considered as a market barrier but the competitiveness of EU automotive industry depends on utilising its potential. It is also imperative to note that he demand for service and mechanical repairs has been evidently reduced due to improved reliability of cars which lead to cutting the labour hours by 32% and the total number of service and repair outlets has fallen by 5,500, to a total of 24,700 in 2004 (Paterson, 2000).

2.2.5 COMPETITIVE RIVALRY

The interpretation of competitiveness in EU is heavily prejudiced towards creating monetary benefits for the car industry. The automotive sector of EU must recognise the significance of the soaring competition and rivalry and should adopt the norms of democratic society which demands self-confronting and integrates all stakeholders equally. The competitiveness of this knowledge-based economy can be improved if the car industry gives up its lobbying against the environmental regulations and develop an eco-friendly stratagem (Holliday, Schmidheiny and Watts 2002).

CONCLUSIVE REMARKS

The introduction of CO2 emissions legislation comes with both negative and positive externalities, information asymmetries and significant uncertainty that subsequently erect barriers. The strategic approach of EU automotive industry to persuade reduced carbon emissions in compliance with the CO2 emission legislation; needs to be addressed in a balanced and appropriate manner taking into account of relevant drivers of change such as market trends, consumer behaviour, the technological conditions and financial facet of the automotive industry. There is an evidence that strong environmental policy, indeed stronger than the rest of the world’s, does not hurt the industry and but improves rather than deteriorates its competitive position and this is illustrated by the voluntary commitments by EU car manufacturers to reduce fleet average CO2 emissions to140g/km by 2008 (ACEA 2002).