EU car loan call puts spotlight on CO2 costs

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Reuters, 10 October 2008 - European car makers are probably using their call for 40 billion euros ($55 billion) of loans from the European Union to develop green vehicles as a lever to enter talks with the regulator regarding CO2 legislation, analysts say.

Reuters, 10 October 2008 - European car makers are probably using their call for 40 billion euros ($55 billion) of loans from the European Union to develop green vehicles as a lever to enter talks with the regulator regarding CO2 legislation, analysts say.

The loan, which has been widely dismissed as unlikely to be granted, also brought to the fore the high costs involved in cutting vehicle emissions.

One industry source said the ACEA -- the automotive industry trade association -- was probably trying to open communication lines on the yet to be written legislation.

"But the idea was to start a debate, and maybe it will give them some bargaining power on the legislation itself," the source said.

The ACEA could also seek to strike a deal with EU policymakers giving them more time to implement CO2 limits or to introduce better scrapping incentives, the source said.

Nomura analyst Michael Tyndall described the move as "the art of negotiation", noting the 40 billion euros request was unlikely to be granted.

The loan request and the CO2 limit were two separate issues, said Global Insight senior market analyst Sarah Kingsbury, noting "there is a certain amount of jockeying for position, and looking for mitigating circumstances to reduce the burden -- ie the cost of CO2 reducing technologies -- on manufacturers."

The issue of cutting carbon emissions in vehicles remained both topical and potentially fractious.

French president Nicolas Sarkozy wants to have the debate sewn up within that nation's EU presidency.

On Thursday he announced 400 million euros of public financing would be made available for research into clean vehicles over the next four years.

He also called for a revision of rules governing how EU member states could help car manufacturers adapt to environmental challenges.

DILEMMA OF CHANGE

Car makers face the dilemma of needing to invest more than ever in improving their green technology to combat rising CO2 emissions, while sales numbers were sliding.

As it stands, passenger cars accounted for 12 percent of man-made CO2 in Europe, European Commission figures from 2004, the latest available, showed.

European new vehicle registrations declined 3.9 percent in the first eight months of the year on the back of falling consumer confidence, high fuel prices and the world economic crisis.

The cost of moving towards emissions of 130g/km by 2012 -- the latest target proposed -- would average about 3000 euros for each vehicle, ACEA said, citing data collected by research organisation TNO.

Car manufacturers in Europe were already struggling to meet their margin targets, faced with high raw material prices and labour costs as sales decline.

Unlike their U.S. counterparts, European manufacturers were all still profitable, making their bid for funding even less likely to succeed, especially when containing the turmoil in financial sector had pushed their plight further down the list of priorities.

Among European manufacturers, PSA Peugeot Citroen, despite having an advanced fleet in terms of low CO2 emissions, might face the biggest challenge in adapting to the new legislation, analyst Juergen Pieper at Metzler Equities said.

"Its operating margin is among the lowest of the Europeans, it is facing negative market share trends and limited cash resources. It is not in a bad situation but compared with the others it is not as good."

"In terms of emissions levels it looks OK but for the next technological step it will face the same level of R&D as everyone else," he said.

Europe's second biggest car maker achieved an operating margin of 3.6 percent in the first half of the year, compared with 4.1 percent for Renault and 7.2 percent for Volkswagen. It sticking by its target of 5.5-6.0 percent in 2010.

Manufacturers that traditionally make smaller vehicles may also face further pressure in the coming years if makers of larger vehicles downsize into their territory in response to tightening CO2 legislation, Pieper said.

"In an odd way I'm not sure how relevant EU legislation is anyway. Local taxation and a high oil price are already reshaping demand. People are already looking for more fuel efficient cars," Tyndall said.

LOAN CALL

ACEA's call for EU help -- mirroring the $25 billion in low-cost loans the U.S. government last week agreed to provide for its struggling automotive industry -- comes just days after a report that ACEA member Fiat SpA was on the brink of leaving the group over concerns the organisation was not representing its interests properly in the CO2 debate. A Fiat spokesman declined to comment on the report, which was first published in trade magazine Automotive News Europe.

Fiat Chief Executive Sergio Marchionne, who pushed for the ACEA loan call, has previously spoken out about his frustrations over the issue.

He said the latest version of the EU proposal, which envisaged carmakers cutting average CO2 emissions by 18 percent to 130g by 2012, favoured makers of large cars like BMW and Mercedes because it linked emissions caps to weight.

Marchionne said last month the proposals equated to "setting a different finish line for contestants in the same race" as Fiat would have to cut its fleet average emissions to a lower level than some other manufacturers of heavier vehicles in order for the wider European industry to meet its fleet average targets.

The prospect of Fiat following through with its threat to leave ACEA was viewed with as much scepticism as the prospect that the EU would grant European carmakers such a huge sum of money, but both developments highlighted how much was at stake for the manufacturers in the coming months.

(Reporting by Helen Massy-Beresford)

Sourced from the Reuters InterActive Carbon Markets Community - a free, gated online network for carbon market and climate policy professionals.