1. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Voluntary Agreements as Drivers of Technological Change in the Transport Sector Lewis M. Fulton International Energy Agency Annex I Expert Group Meeting Transport Roundtable OECD Headquarters, February 18, 1999

2. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Talk will cover: Background on Existing Voluntary Agreements Case Study: The European Union / ACEA agreement What does the EU/ACEA VA mean for other regions? Questions for Discussion

3. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Background - Why VAs ? Fuel Economy Improvement could provide significant reduction in GHG emissions from light-duty vehicles in Annex I countries by 2010 Technologies are available to reduce average new vehicle fuel intensity by 25% or more, with potential reductions of 50% or more after 2010. Vehicle manufacturers lack a strong incentive to build vehicles with low energy intensity, since available technologies can also be used to improve vehicles in other ways that are more important to many consumers

4. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE The Potential Value of a VA Manufacturers perceive a high cost to unilateral fuel economy improvement above that level demanded by consumers due to losses in market share and profits If all manufacturers agree to move in the same direction, some of this market risk is removed Manufacturers can work in concert to send signals to consumers through vehicle offerings, marketing and pricing.

5. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Existing Voluntary Agreements

6. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Evolution of Average New Vehicle Fuel Intensities, Selected Annex I Countries

7. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Weaknesses in Existing VAs ? Have involved single countries and relatively small vehicle markets Have not had especially ambitious targets Have not had significant governmental support in the form of reinforcing policies

8. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Case Study: The EU/ACEA VA October 1998, agreement in which European automakers pledged to reduce average emissions of CO2 from new cars 25% by 2008 relative to 1995 level Automakers will look at potential for additional reductions and report by 2003 Agreement is contingent on a number of actions that must be taken by the EU

9. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE EU/ACEA Contingency Factors Availability of “enabling fuels” (30 PPM Sulphur gasoline and diesel) Preventions of “distortions of competition” “Unhampered diffusion” of new technologies into the market

10. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE What makes the EU/ACEA VA Different? Involves several countries, large market Active participation from automakers from around the world Metric is CO2, not fuel intensity Ambitious CO2 reduction goals Explicit contingencies High Stakes - Kyoto links

11. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE What Technologies are Available? New Engines (TDI diesel, DI gasoline, hybrids, fuel cells?) “Incremental” Vehicle technologies  weight reduction  friction reduction (lubricants, tires, aerodynamics)  drive train improvements (e.g electronic transmissions)  more efficient accessories  regenerative braking

12. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Cost-effective Fuel Economy Improvement Potential: Germany Note: CECP=cost effective at current fuel prices Source: IEA Policies and Measures Study

13. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Required Fuel Economy Improvements by 2010, Germany

14. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Fuel Economy Improvement Potential, Germany (Indicative Estimates)

15. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Implications: A Need for Reinforcing Measures Half or more of the CO2 reduction from technical efficiency improvements may be lost to increased vehicle size, weight, and power Manufacturers have a limited ability (and incentive) to prevent consumers from shifting purchase patterns

16. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Potential Reinforcing Measures Many possible measures, but two market-oriented ones could be:  fuel economy (or CO2 emissions) based vehicle fees or “feebates”  incentives for the adoption of specific advanced technologies on vehicles

17. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Fees and Feebates CO2-based fees can provide a powerful signal to consumers Many countries already have a substantial vehicle purchase tax that could be converted (in all or part) to a CO2-based tax A “feebate”, i.e. Fee + rebate system can be applied that is revenue neutral, where fees from “guzzlers” offset rebates for “sippers”

18. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Purchase Fees v. Fuel Taxes For a vehicle owner who drives 15,000km/year, a vehicle purchase fee of $200 per L/100km could send as strong a signal to purchase a more fuel efficient vehicle as a fuel tax increase of $0.25/litre. An existing 20% vehicle purchase tax could realistically be converted to a tax that increases by $1000 for each L/100KM increase in fuel consumption rating.

19. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Incentives for Adoption of Advanced Technologies High cost of advanced technologies will likely come down with volume and experience Incentives can speed this process by overcoming hurdle costs and risk averse behaviour Incentives can be technology specific or directed at very low fuel-intensity vehicles

20. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Examples of Technology Incentives Japan has a price incentive on the order of $3500 for hybrid electric vehicles US Administration has proposed an incentive for hybrids based on their efficiency improvement relative to comparable conventional vehicles:  $1000 for 25% reduction in fuel consumption  $2000 for 40% reduction  $3000 for 50% reduction  $4000 for 67% reduction

21. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE What could the EU/ACEA Mean for other VAs? Provides a very clear set of goals and requirements for success Will provide spillover benefits if successful Manufacturers may be more willing to undertake similar agreements elsewhere

22. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Potential Questions for Discussion What is the appropriate role for VAs in the policy mix for greenhouse abatement in the transport sector? How important is technological change? Is VA a good model for greenhouse abatement in this sector? How do past experiences relate to this agreement? How much CO2 reduction are different countries (including non-EU countries) assuming from the EU VA as it now stands? What policies have countries put in place to reinforce effectiveness of VAs? What are the main barriers they address? How important is the relationship between fuel quality d fuel efficiency? How can these issues be addressed in an integrated manner?