Short intro to my Msc dissertation (2008/9)

1. Academic year 2008 2009
UNIVERSITY OF ANTWERP
FACULTY OF APPLIED ECONOMICS
Externalities of the car industry
and
the road to more sustainable mobility.
Serena Boccardo
Master’s Thesis submitted to obtain the
degree of: Master of Applied Economic
Sciences: Business Administration
Promoter:
Prof. dr. Hans Verboven
Content

2. 1. The environmental and social externalities of our mobility
1.1 The car industry: an industry in distress or transition?
1.2 The externalities of our mobility
Pollution
Health issues
1.3 Conclusions
2. Alternative resources and new technologies
2.1 Introduction
2.2 Renewable alternative energy resources
2.2.1 Biofuels
Environmental externalities
Social externalities
Conclusion
2.2.2 Hydrogen
2.2.3 Electricity
2.2.4 Conclusion
2.3 New technologies and behavioural changes
2.3.1 New technologies
2.3.2 Behavioral changes
3. Government intervention and legislation aimed at tackling externalities.
3.1. Manufacturer-oriented legislation
3.1.1 The EURO I-VI-classification
3.1.2 The EU CO2-goal
3.1.3 Recycling legislation
3.1.3.1 European legislation
3.1.3.2 The End-Life Vehicle Directive (2000/53/EC)
3.1.3.3 Implementation in Belgium

3. 3.1.3.4 Implementation in Italy
3.1.3.5 Implementation in Germany
3.1.3.6 Conclusion
3.2 Consumer-oriented taxation and incentives
3.2.1 Incentives for green(er) cars
3.2.1.1 The Italian bonus system
3.2.1.2 The Belgian bonus system
3.2.1.4 The German bonus system
3.2.1.4 Critical appraisal of the three incentive bonus systems
3.2.2 Taxation systems and their environmental use or value
3.2.2.1 The Italian taxation system
3.2.2.2 The Belgian taxation system
3.2.2.3 The German taxation system
3.2.2.4 Conclusion
4. Final remarks
5. Bibliography

4. CHAPTER I
THE ENVIRONMENTAL AND SOCIAL EXTERNALITIES OF OUR MOBILITY
1.1 The car industry: an industry in distress or transition?
Coordinated production of cars is more than 100 years old. Starting in Germany and France,
it came of age with the mass production techniques of Henry Ford. Vehicle volumes,
efficiency, safety, features and choice have grown steadily throughout the industry's history.
It is so synonymous with 20th century industrial development, and so intertwined with its
twin marvels, mass production and mass consumption, that it has been called the "industry
of industries."
But, all is not well in the automotive world. Worldwide, average margins have fallen from
20% in the 1920s to 5% now, with many companies losing money.1 This poor profitability
performance is reflected in the industry's market capitalization: despite its huge revenues
and employment, the automotive industry accounts for only 1.6% of the stock market in
Europe, and 0.6% in the U.S.2
The overall performance of the industry can be traced to overcapacity and mature markets
in developed countries. In the U.S., Europe and Japan, which account for 80% of world sales,
growth has been stalling for many years. But things got worse over the last two years. At the
moment global automotive industry faces a double challenge: it has to invest billions of euro
to shape the transition from combustion engines to alternative drive systems. But it is also
heavily affected by the current economic recession and the dramatic decrease in sales.
Not only the economic recession and poor margins are bothering the car industry. The most
important issue is the road to more sustainable mobility. We believe that those
manufactures that are able to make the shift towards more sustainable mobility will
outperform their competitors in future.
The number of cars on the road and thus pollution is increasing rapidly. In 1950, the world’s
automobile population numbered about 70 million. Today, the figure is about 900 million,
and 2 billion vehicles are expected for the year 2050 (Van den Heuvel, 2009). Car
manufacturers and society are facing enormous challenges by this immense growth.
1 OICA Production Statistics (2007).Turnover in Automotive Industry and Economy. Retrieved 14th March 2009,from http://oica.net/category/production-statistics/2007-statistics/
2 Y. Papatheodorou, M.Harris (2007, 27th October). The Automotive Industry: Economic Impact AndLocation issues. IndustryWeek online.

5. Individual mobility and goods transport are prerequisites for growth and prosperity in every
society. But with depleting natural resources and increasing environmental externalities, the
only way to do so will be by means of sustainable mobility. With the words of Erik Van den
Heuvel, Director Press and Communications of Mercedes-Benz Benelux, the road to more
sustainable mobility is about “making use of natural resources to fulfil diverse human
requirements without restricting the actions of our children and grandchildren. We translate
this vision by making our current engines more efficient, by reducing significantly all type of
emissions throughout a vehicle’s lifecycle, by making careful use of materials that we use in
manufacturing cars, vans, trucks and buses. It also means developing alternatives to
traditional fuels, and giving thought to new drive concepts and the future of our
transportation systems.” (Van den Heuvel, 2009)
1.2 The externalities of our mobility
Since World War II, cars and transport have had a heavy impact not only on our lifestyle but
also on the environment and our health. Various studies have been carried out in order to
assess and quantify car externalities and concerning costs. Among the issues that car
industry faces are safety and security on the road, the use of environmental unfriendly raw
materials in the assembly process (such as aluminium, titanium, carbon fibres, polymers,
etc.), and disposal of old cars, batteries and their components.
The average fuel consumption per year per car is around 1401 litres of fuel, assuming an
average annual distance driven per car of 17862 Km and a fuel consumption of 12.75 Km per
litre.3 Naturally these figures are questionable, but since today there are around 1.023 cars
per person in USA4 (but only 9 cars for every 1000 people in China) and given the fact that
demand from China and India, the most populated countries, is going to increase
significantly, we may have a rough idea of the extent of the issues.
Pollution
The most known issue is that of air pollution: only in the EU, passenger cars alone are
responsible for around 12% of CO₂ emissions. (Markovic-Chenais, 2001, p.12) Although there
have been significant improvements over recent years in vehicle technology - particularly in
fuel efficiency, which translates into lower CO₂ emissions – these have not been enough to
3 International Road Federation, Australian Bureauof Statistics (2009), fromhttp://www.abs.gov.au/ausstats/
4 Observations on the U.S. AutomobileFuel Consumption Debate, 2007 November 23, fromhttp://abcnews.go.com/

6. neutralize the effect of increases in traffic and car size. In general one can state that the
bigger the car, the more pollution it releases in the air, due to the more amount of fuel it
needs to burn in order to produce mechanic energy. Pollution derives also from air
conditioning system, that often is an optional required by consumers when they buy a new
car; urban trips cause a much higher impact than rural trips, mainly because the higher
population density in urban areas results in more people being exposed to the health effects
of air pollution. They depend also upon geographic and climatic conditions.
Substances emitted into the atmosphere, called greenhouse gases (GHG), are the cause of
many current and potential environmental problems, such as climate change and health
problems; the most dangerous of them is CO₂, because it is the main contributor to climate
change, and fossil fuel burning has produced approximately three-quarters of the increase in
CO₂ from human activity in last 20 years. Though CO2 seems to have become the main
focus of environmental actions, it is not the only polluter associated with our transport. And
moreover, people tend to forget that transport is only responsible for a small about one fifth
of total CO2-production. So one important challenge for the future is how to reduce the
other 80 % effectively as well. According to the Intergovernmental Panel on Climate
Change, anthropogenic CO2 emissions – those caused by human activity – are one cause of
global warming along with other so-called greenhouse gases. Road traffic worldwide
accounts for around 20 % of these anthropogenic CO2 emissions. The remaining
approximately 80 percent of worldwide CO2 emissions derive from other sources.
As these figures show, the problem cannot be solved by focusing on the automotive sector
alone. Nowadays the focus is mainly on the car industry, which tries with all technical and
economically feasible measures to reduce its share of CO2 emissions. However, it can only
influence global warming if all other parties responsible for emissions play their role as well.
(Van den Heuvel, 2009) As figure 2 shows, the projected increase in C02-emssions from the
emerging markets are quite dramatic and need to be addressed as well, since it makes no
sense that the West reduce C02-emissions at high cost, when at the same time a few
thousand kilometres further there are still electricity plants on charcoal without filters.

7. Fig.1: Sectorial CO2-emissions (Source : IEA, 2004) Fig. 2: CO2-emissions growth (
www.theoildrum.com,2009)5
The other pollutants from petrol, diesel and alternative fuel engines are mainly: carbon
monoxide, oxides of nitrogen, un-burnt hydrocarbons and fine particles. The first three are
gases and are invisible. Unlike CO₂, emissions of these pollutants are not directly linked to
fuel consumption. Pollutant levels are more dependent on vehicle technology and the state
of maintenance of the vehicle. Other factors, such as driving style, driving conditions and
ambient temperature also affect emission of pollutants. Emissions of the above pollutants
are being reduced by improving the quality of fuels and by setting increasingly stringent
emission limits for new vehicles. As an example, it would take 50 new cars to produce the
same emissions per kilometer as a vehicle made in 1970.6
Compared to improvements in the emissions of toxic pollutants, there has been less
progress on reducing CO₂ from cars. For a given type of fuel the CO₂ emissions of a car are
directly proportional to the quantity of fuel consumed. Until recently the average fuel
consumption of new cars was unchanged relative to that in the mid 1980’s. However, in the
last few years, average fuel consumption has begun to drop in response to voluntary
agreements by vehicle manufacturers to reduce CO₂ emissions and government incentives
and tax punishments. Average CO2-emissions of new cars in Belgium dropped 17 % over a
ten year period form 186 to 154 gr./km. (FEBIAC, 2007, p. 10)
Fig. 3: Carpark, total distance and CO2-emissions in Belgium (1990=100) (Source: FEBIAC, 2007, p. 6)
5 The Oil Drum website, 2009. http://www.theoildrum.com/story/2005/12/12/18171/178
6 Carfuel Data, official UK source for Car FuelConsumption andExhaust Emissions Figures, 2009, http://www.vcacarfueldata.org.uk/information/cars-and-air-pollution.asp

8. Fig. 4. The evolution of CO2-emissions of new cars in Belgium (Source: FEBIAC, 2007, p. 10)
Health issues
The first and most obvious externality of transport are the casualties as a result of road
accidents. According to the European Environmental Agency, in the year 2000 “...they
account for the 29% share of total external costs of driving a car, assuming medical care costs,
suffer and grief, opportunity costs of society derives from insurance payments and other
components.” (Markovic-Chenais, 2001, p.12) Health problems are also due to deteriorating
environmental conditions and exposure to hazardous substances. It is estimated that poor
environmental quality is directly responsible for around 25% of all preventable ill-health,
with acute respiratory infections heading the list. (B. Kay, 1999)
Noise and congestion cause additional time spending and stress, especially in urban areas.
1.3 Conclusions
The external costs of transport are large (estimated at about 8 % of EU GDP (INFRAS,
2000)) but the estimates are uncertain and there is currently no unique, commonly accepted
methodology for estimating external costs, hence it’s hard to compare different studies and
methodologies; in this particular in the study I took in consideration, some main
distinctions have been done between: external and internal costs of transport, where the

9. first are “…those that affect society” and the latter those which are born “directly by the
individual user of transport services” (for example, the costs of car purchase, fuel, taxes,
maintenance, etc.). (Markovic-Chenais, 2001, p. 15)
We take into account only external costs,7 which may be fixed and variable, and total and
average costs. Total costs arise from the variable costs (that vary with the actual use of any
means of transport, e.g. km travelled) plus fixed costs (e.g. environmental costs arising when
producing the fuels, during production/dismantling of any kind of vehicle, or during
rail/road/airplane/harbor infrastructure construction). Economic evaluation of the
environmental impacts of transport is made in terms of the consumers’ willingness to pay to
avoid a given expected damage due to some kinds of pollution or the willingness to accept a
compensation for suffering a given damage (e.g. expected agricultural yield losses due to
high ozone concentrations; health damage due to exposure to particulates). Although there
are too many variables that account in these calculations and the results of different studies
may differ substantially, qualitative conclusions can be made. Further, we will focus only on
the environmental externalities and not on health and safety issues.
A) Externalities of transport derives in a substantial part from road transport (mainly
constitutes by road transport, which dominates overall mobility volumes, and which is
responsible for more than 90 % of total external costs). Road vehicles usually also show
relatively higher average external costs per passenger-km and freight-km than other modes.8
B) The most dangerous effects of road transportation are accidents, air pollution and climate
change;
C) Fuel burning causes the biggest amount of CO₂ emissions in the air, and transport is the
second biggest source of GHG emissions in the world after electricity generation;
D) CO₂ emissions are one of the major contributors to the degradation of the environment,
and then they are a big threat to our health and to the maintenance of the environmental
conditions that assure our permanence on the Earth.
7 The external costs of transport are those that affect society, but are not directly born by the transport user which has caused them. They may consist of: Environmental costs (e.g. damage due to air pollution, climate
change, noise, electromagnetic fields, other upstream and downstream environmental effects) / Fragmentation of landscape, land take and ecological separation / Urban separation / Non-covered accident costs (such as
grief and suffering) / Congestion (time loss inflicted to others), (Markovic-Chenais, 2001).
8 Average CO2 emissions from different modes of transport, g/pers -1 km-1 : Car: 111, Plane: 169, Train: 15, Coach: 24, Urban Bus: 41, Motorized 2-wheeler: 41. (Nicholas & David, 2007)

10. Fig. 5: Distribution of external costs ( Source: INFRAS-IWW, 2000)
Fig 6: Share of external cost categories (Source: INFRAS-IWW, 2000)