Demands for lower C02 emissions are swallowing an astonishing 50% of R&D spending at European carmakers.

A threat to put tailpipe emissions targets even lower may break the industry's back.

European automakers are resisting pressure from the EU to toughen the industry's self-imposed goal of 140 grams CO2 emissions per kilometre by 2008.

A second round of talks may lead to the industry trying to reduce emissions to 120 grams per kilometre by 2012.

"It is an unreasonable target," Renault CEO Louis Schweitzer, told Automotive News Europe. Schweitzer is head of ACEA, the European car manufacturers' association.

European carmakers and suppliers are investing heavily to meet their self-imposed limits.

Carmakers are investing up to 50% of their research and development budgets to improve fuel efficiency, say engineers. And carmakers and suppliers are developing a wide range of new technologies and systems to improve fuel economy to meet the industry's goal.

The 2008 targets require consumption to drop to 5.3 litres per 100 kilometres for a diesel, and 5.8 litres per 100 kilometres for petrol engines.

The industry is attacking the problem with near desperation --- applying new generations of turbochargers, petrol and diesel high pressure direct injection systems, new transmissions systems such as dual clutch transmissions, starter-alternators, electric steering and new air-conditioning systems.

Imperfect tool

Suppliers say carmakers are looking for systems that offer several percentage points of fuel efficiency gains. They are not interested in advances that offer a mere one or two percentage points.
But if the economic incentives are wrong for consumers, the industry's technical virtuosity could come to nothing.

Average fleet economy targets are an imperfect tool for delivering CO2 reduction. So far, consumers appear to be choosing higher output powertrains with greater efficiency. ACEA says 2002 emissions were 165g/km - a slight rise from the 2001 figure of 164g/km.

It's Economics 101 - issues like CO2 reduction are a classic case for the 'free-rider' problem.

While it makes sense for everyone else to improve their fuel economy, the calculus can be quite different for an individual consumer. Many consumers opt to take the benefits of better fuel economy in higher performance engines rather than maintaining the same power output and saving money.

Without further large hikes in fuel taxes in Europe, consumers will likely continue to go for the fun option rather than the environmentally friendly one.

But rather than confront this reality, regulators are considering further regulations - a reduction in particulate emissions, for example, or a shift to CO2 air-conditioning systems that will make it even more difficult to achieve the CO2 reduction targets.

"Today's cars are clean, but the people in Brussels want more," said one development executive.

Cars have also become heavier and less fuel-efficient as more equipment is added to meet safety regulations.

The industry feels that it is running up against the limit of what it can do. If regulators recognise this (a big 'if' at present) this will mean that we are reaching the apogee of the pay-off for environmentally friendly technologies.