Euro CAFE

It's hardly news that Europe and the US have different approaches on energy and the environment. Some of that may be changing, but in the area of automobile efficiency standards, the differences are fascinating. The US has had federal fuel economy regulations since the 1970s: the Corporate Average Fuel Economy standards, or CAFEs. I'm not sure how many people realize that the closest European counterpart to this hasn't been a government regulation, but rather a voluntary pact that the auto industry made with the EU in the late 1990s. Perhaps the EU assumed that with fuel taxed to more than double its price in the US, consumers would naturally find their way to more efficient cars. Although the target looked pretty strict, equating to 40.5 miles per gallon for new cars by 2008, it had no teeth. That is about to change, and the new EU rules on vehicle CO2 emissions are likely to be noticed on both sides of the Atlantic.

Despite a growing European emphasis on energy security, it is clear that concerns about climate change are driving the bus. Even the old, voluntary efficiency target was expressed in terms of grams of CO2 emitted per kilometer (km), rather than the normal European fuel economy units of liters per 100 km. The EU and carmakers are currently debating a new, official target at a level severe enough to create serious concerns for the manufacturers of Europe's larger cars, many of which come from Germany. BMW, Mercedes and Audi will have a very hard time getting their fleet averages down to the 120 or 125 gram/km level proposed for new cars sold in 2012. Since a gallon of gasoline emits 20 pounds of CO2, that works out to 45-47 mpg. Converting to diesels only takes you so far, and hybrids haven't yet hit the mainstream, as they are starting to here.

Unsurprisingly, the few carmakers that are on track to meet both targets generally make smaller cars than those that are lagging, though even VW probably won't meet the 140 gram voluntary limit for next year. But as if the prospect of a tough official target with penalties for failing to meet it weren't enough, many of Europe's top auto firms and import brands are being subjected to scathing ads and adverse publicity for their lack of progress under the voluntary system. To put this in perspective, the average fuel economy of several of the companies identified as "failing"--including GM's European subsidiaries Opel and Vauxhall--already meets the 2017 level of the revised US CAFEs proposed in the State of the Union Address.

This is going to be a real test for the EU's commitment to climate change, since car manufacturing is the mainstay of the German economy, and the recovering German economy is critical to overall EU economic growth. France and Italy, whose biggest carmakers look set to achieve the new standard, are unlikely to concede their lead easily. It presents a nice little conundrum for Chancellor Merkel during her turn at both the EU and G-8 Presidency. And if the European Commission can push through its proposed 120 gram/km standard, regulators in California and elsewhere may be tempted to go for a bigger stretch goal in this area than they might otherwise have done.