The transport sector accounts for about 30% of CO2 emissions in OECD countries. Moreover, global energy demand for transportation is projected to grow by 2.5% per year to 2020, a higher pace than for overall energy demand.
However, growing carbon constraints "could significantly affect earnings and competitiveness" in the global car industry, according to a report by Sustainable Asset Management and US environmental research body the World Resources Institute.1 Most notably, "companies producing low-carbon vehicles and possessing superior carbon-reducing technologies should see market share increase and competitive advantage grow."
The report, aimed at investors and portfolio managers, looks at the position of ten leading car manufacturers. It focuses on three key markets which account for 70% of current new car sales - the EU, Japan and the USA - and the prospect of constraints on vehicle CO2 emissions in the years to 2015.
Carbon constraints are already in place in the first two markets, in the shape of a voluntary agreement with car manufacturers and legislation setting out fuel economy improvements for 2010. No comparable measures are in place in the US, but the report says that proposed fuel economy regulations in California and other states could have "profound implications" for vehicle manufacturers (ENDS Report 331, pp 8-9 ).
The report found that companies have a widely differing profile in terms of the carbon intensity of their current product mix. General Motors and Ford derive more than 90% of their profits from vehicles which achieve less than 20 miles per gallon, largely because of their dominant position in the US market. In contrast, Peugeot Citroen, Renault and VW derive 90% of their profits from relatively efficient vehicles.
One key issue is the uncertainty about which emerging technologies will take firm hold over the next couple of decades. The report argues that successful companies will need to devise "an innovation strategy that is robust across multiple possible technology pathways" - and that first movers will secure market advantage by helping to determine technology standards.
The report suggests that hybrid electric vehicles and advanced diesels will be the key technologies until 2015 at least. It takes a relatively cautious line on the speed with which fuel cell vehicles may come to market - but warns that companies "cannot afford to discount the possibility that such an important and potentially disruptive technology will eventually enter the marketplace."
The report uses two complementary analyses to assess the impact of carbon constraints on each company - a "value exposure assessment" which estimates the costs of meeting likely CO2 standards by 2015, and a qualitative "management quality assessment" which ranks the companies' strategies and expertise on low-carbon technologies (see figure).
Japanese manufacturers emerge well from the analysis - Honda has the least value exposure because of the current high fuel efficiency of its vehicles, while Toyota has a "strong position in all three technologies likely to confer technological advantage." Both are about to embark on their second generation of hybrid vehicles. Renault and Nissan are also strongly positioned.
BMW appears to have the greatest value exposure. This may be rather misleading - the company specialises in premium vehicles and should have a greater ability to pass costs on to customers.
Ford and General Motors are poorly positioned, with low fuel efficiency for their current vehicles, a bias towards heavy vehicles and below-average positioning on hybrid and diesel technology "which may limit their near-term competitiveness in non-US markets". DaimlerChrysler scores better because of its lead on fuel cell technology.
The report argues that these profiles could have a significant effect on shareholder wealth creation. Carbon constraints could increase discounted earnings between 2003-15 by perhaps 8% for Toyota, and by 3-4% for Renault, Nissan and Honda. In contrast, earnings for Ford and GM could be reduced by 10% and 7%, respectively.
The report focuses on carbon constraints - but points out that these may be an important indicator of the companies' ability to respond to other pressures. "Consumer and policy responses to energy market shocks may play out considerably more rapidly than the steady progress of carbon regulations envisaged in this report," it warns, "potentially making adjustments more awkward" - and exacerbating the impacts on car companies' competitiveness.
However, it says relatively little on the key issue of how manufacturers' response to carbon constraints could affect their ability to compete in emerging markets. Developing countries are likely to account for half of new car sales in 2020, up from a quarter in 2000.