INNOVATION IN POLLUTION CONTROL IN AUTOMOBILES

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INNOVATION IN POLLUTION

CONTROL IN AUTOMOBILES

CASE STUDY OF THE LEGISLATION OF THE EUROPEAN COMMISSION

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CHAPTER 1 INTRODUCTION

After four years of studying economics, I started looking for a thesis subject. I looked for a socially relevant subject, which I found in environmental economics. Together with my supervisor, D. Wiersma, I decided to focus on the emissions of vehicles. This is a socially relevant and actual subject. The focus is on innovation in pollution control technology by auto manufacturers. Agents involved in the vehicle industry do not have the right incentives to take into account the social costs of air pollution when they make decisions affecting the quality of air. This results in an environmental problem, the depletion of clean air. Since the transportation sector contributes significantly to the global and local air pollution, policy must be optimal designed to reduce the environmental problems from vehicles emissions. This policy must force innovation in pollution control technology. The European Commission sets regulation on the automobile industry in order to provide incentives for innovation.

This thesis evaluates the policy of the European Commission on the automobile industry. The policy is evaluated with respect to the incentives provided for innovation in pollution control in vehicles. The policy of the European Commission is in two parts. The first parts sets emission limits on the vehicles emission for Nitro Oxygen (NOx), Carbon Monoxide (CO), Particulate

Matter (PM), Hydro Carbon (HC) and Carbon Dioxide (CO2). The second part of the policy

consists of a voluntary agreement on CO2 emissions between the European Commission and the

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CHAPTER 2 ECONOMICS OF INNOVATION IN POLLUTION CONTROL

2.1. I

NTRODUCTION

In this chapter the economic theory of the innovation in pollution control is reviewed. A distinction is made between the demand and the supply side of innovation in pollution control. The demand for innovation in pollution control comes from regulation, usually set by the government. The supply side comes from firms which innovate in pollution control. The supplying firms can be subdivided into two main groups: firms in the pollution sector and firms outside the polluting sector.

The marginal abatement costs of the firms in the pollution sector are different from social marginal costs. The existence of this externality will result in underinvestment of innovation in pollution control by firms without environmental policy. As a result, the level of abatement of pollution is lower than socially optimal. The government wants to prevent this underinvestment with regulatory instruments, which provide incentives for firms to innovate in pollution control technology. Interaction between the supply and the demand side completes the model of innovation in pollution control. In the interaction part, firms can react on decisions of the government and vice versa.

This theoretical chapter starts of with the general notion of innovation in economics and the difference between market innovation and environmental innovation. In paragraph 2.3, models of the demand for innovation in pollution control will be discussed, starting with the model of Downing and White (1986). Next, important extensions of this model are presented using the follow-up model of Milliman and Prince (1989). In paragraph 2.4, the supply side of the innovation of pollution control is presented. At last follows a conclusion

2.2. E

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2.2.1.INNOVATION

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function is attributed to technological change. This finding stresses the importance of innovation in technology for output growth.

Schumpeter (1942) provided economists with a foundation of innovation. He introduced the notion of creative destruction. In his notion, entrepreneurs are willing to introduce new products on the market because of the potentially resulting high profits. However, after a while a competitor introduces a new product, which destructs the profits of the previous creative innovation. The process of innovation is subdivided into three steps: invention, innovation and diffusion. Invention is the initial idea. Most inventions will never end in an innovation, which is the second step. This is the process of making the product available to the market. The third step is the diffusion process, in which the innovation becomes available to other products. Schumpeter (1942) concludes that the existence of technological innovation depends on the market structure. Markets with complete competition will have less chance for innovation than monopolistic markets. Firms in monopolistic markets make profits, which generate possibilities for financing their innovation. In a complete competitive market the profits in the long term are always reduced to zero, which makes investing in innovation less attractive. Kamien and Schwartz (1975) conclude that relative R&D expenditure tends to increase with firm size up to a point. After that point the relative R&D will level off or decline. They extend this view in 1982 by claiming that the structure of the market is constantly changing as a consequence of the process of technical advance. Dasgupta and Stiglitz (1980) use the game theory to test the relationship between the concentration of firms and the R&D expenditure. They use a cournot model, in which firms set quantities (output, R&D). They conclude that there is a positive correlation between the industry wide R&D effort and the concentration of the industry, which support the theory of Schumpeter. .

2.2.2.INNOVATION IN POLLUTION CONTROL

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demand for innovation in pollution control comes from the government. In contrary to market based innovation, where the demand for innovation is market driven. The supply of environmental innovation comes from heterogeneous companies. In the neo-classical models of innovation in pollution control, presented in the next paragraph, the decision to adopt a new technology depends on an economic cost benefit analysis. The costs of the innovation are compared with the benefits of innovation.

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Downing and White (1986) provide a clear overview of the economics of innovation in pollution control. They discuss different regulatory mechanisms and their effect on the rate and direction of technical change. Milliman and Prince (1989) build on the model of Downing and White (1986) by adjusting some assumptions and consider the entire process of innovation in pollution control. These two models provide the basis for the extensions which adjust some of the basic model assumptions. Firstly, an overview of the available regulatory instruments, available to the governments is presented. Next, the model of Downing and White (1986) is provided, followed by the model of Milliman and Prince. The nest section provides some important extensions to these two models, such as free riding and heterogeneous firms.

2.3.1.REGULATION INSTRUMENTS

Environmental policy instruments are usually divided into two main groups: market based instruments and direct instruments. Market based instruments use price or other economic variables to provide incentives for polluters to reduce harmful emissions. Direct policies use explicit directives regarding polluting control levels or pollution control methods.

2.3.1.1. MARKET BASED REGULATION

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were marginal abatement costs equal the subsidy rate. If the abatement of a unit pollution will costs more than the subsidy per unit pollution control, the firm will no longer invest in innovation in pollution control (Milliman and Prince, 1989). If governments use tradable permits, they determine a permissible level of pollution. This permissible level will be divided over firms by grandfathering or auction. A market for permits is established and permits can be traded among firms. Firms that maintain their level of emission below the allotted level can sell or lease their surplus allotments to other firms. Grandfathered permits are given away based on the existing proportion in the industry. Auctioned permits are sold in auction rooms. Market friction reduction enhances the well functioning of the market and can take three forms: market creation, liability rules and information programs (Stavins, 2002). All programs reduce the market friction between the consumer and the producer, leading to socially optimal outcomes.

2.3.1.2. DIRECT REGULATION

Direct regulation instruments set standards for firms. Standards are set with respect to performance or technology. Technology standards specify the method and sometimes the actual device that a firm must use to comply with the actual regulation. A performance standard sets a uniform standard; there is freedom in how this target is met. Firms will not have to weigh the costs of pollution control against the benefits of pollution reduction, since they cannot determine their level of emission reduction.

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emission reduction, compliance time and uncertainty are incorporated in the utility function of the environmental regulator. Abatement costs are modelled as a constraint, in which abatement costs may not exceed a certain threshold value. Nentjes et al. (2007) define a set of technologies which are already tested with low emission reduction and new technologies with possible higher emission reductions. These new technologies are more uncertain and costly. The authors construct an envelope curve, which represent the relationship between costs and emission reduction. This envelope also embraces not yet discovered technologies, surrounded by uncertainty. This results in an increasing uncertainty with the amount of emission reduction. Uncertainty is also determined by the time allowed for installation of new technologies. The longer the compliance time, the less uncertainty it will involve. Note that the perception of the regulator may differ from the industry, because of asymmetrical information.

Nentjes et al (2007) emphasize that the costs of innovation can be reduced by extending the R&D period. By maximizing the utility function, Nentjes et al. (2007) conclude that in the case of non binding constraints on the cost ceiling, the incentive for technology forcing will be high if the regulator time preference and degree of risk aversion is low. Now, consider the case with a cost ceiling. If the emission reduction is stringent, the process of innovation will slow down.

2.3.2.DOWNING AND WHITE (1986)

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authority does not adjust to these changes. In the last case, the government adjusts to the change in the marginal conditions.

The underlying figure represents the case were the marginal situation does not change. The firms can only choose between innovating or not.

Figure 2.1 – Marginal costs and benefits of emission reduction, with no change in marginal conditions (Downing and White (1986)).

A tax of P1 per emission unit will result in maximum costs savings of OAE for the firm when it innovates. The innovation reduces both tax payments and emissions. The costs savings from tax payments are represented by AECD. Costs savings of the formal level of abatement are represented by 0AB. This is due to more efficient technology, which can reduce emission at lower marginal costs. The extra incurred costs are the costs of the firm’s higher level of emission control, CDBE. Under an emission reduction subsidy, the incentives are the same. The firm receives more subsidies because of the increased level of abatement. The costs savings in former control level and the extra incurred costs are the same under subsidies and taxes. Under direct control, the extra costs savings due to an increased level of abatement are lower. The favourable effects, for example of the reduction in taxes because of higher abatement levels will not change under direct control mechanisms. Under direct control the costs savings of innovation are represented by OAB.

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lower than under market mechanisms, it is socially desirable to adopt the innovation. However, firms under direct control fail to adopt the innovation which costs more than OAB, this makes the direct regulation instruments socially less desirable than market based regulation.

In the second situation, the marginal conditions change, a dynamic setting is created. The change in marginal conditions changes the social optimal value of the emission reduction. The dynamic setting can be split into two different situations. The first situation is the case were the government does not respond to the changed situation. In the second situation, the government makes the appropriate adjustment to the changed situation. The dotted line represents marginal social revenues of pollution abatement.

Figure 2.2 – Marginal costs and benefits of emission reduction, with a change in marginal conditions (Downing and White, 1986). The vertical axe, represent the emission reduction in percentages. The horizontal axes represent the costs of emissions. MCer is the initial marginal abatement costs function. MC’er is the marginal abatement cost function when the firm adopted new technology.

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technology if the costs are lower than OAB. However, because of the decreasing social value of emission reduction, the socially optimal level of emission reduction is OG.

When the government adjusts to the changed situation, the tax on abatement is lowered to P2. If the firms invest in the innovation, its costs savings are OMF. If the costs of the innovation are lower than the costs savings, the firm will invest in the innovation. This investment will lead to an increase in abatement to OG, which represents the socially optimal level of abatement. If the government uses marketable permits, the outstanding amount of permits will be decreased to GJ. In case of subsidies, the firm will get fewer subsidies per unit of reduction. Firms will receive fewer revenues from selling permits or from subsidies, which decreases their incentive to innovate. Direct control will, just like marketable permits and subsidies, leads to too few incentives to innovate.

2.3.3.MILLIMAN AND PRINCE (1989)

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Figure 2.3 – Ranking of the regulatory regimes, with respect to their incentives to innovate (Milliman and Prince, 1989)

Figure 2.3. summarizes the findings of Milliman and Prince (1989). The table provides information about the relative ranking of each regulatory regime in different situations. The table ranks the five regulatory regimes with respect to incentives they provide for stimulating innovation in pollution control. Regulatory regimes ranked with 1 provide the most incentives to innovate.

Following from the table, Milliman and Prince (1989) conclude that free permits and direct controls generally yield less costs savings, and thus less incentive to innovate than other instruments. Auctioned permits always yield the best outcome when we consider the diffusion phase of innovation. When Milliman and Prince (1989) consider an optimal agency response, all regimes except emission taxes loose, except if the innovation takes place outside the firms and is patented. The loosing regimes induce tighter standards, lower subsidies or lower permits, which negatively affects the cost structure of the firm. This negative impact on the cost structure will result in fewer incentives to innovate. When Milliman and Prince (1989) consider the entire process of technical change, emission taxes and auctioned permits create the biggest costs reduction in abatement control for a non-patented innovation.

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comparison to other regimes. When innovation is supplied by an outside supplier, the results do not differ from an inside supplier. However, the control instruments necessary for this reduction differs.

Milliman and Prince (1989) conclude that emission taxes and auctioned permits generally induce more incentives to innovate than other regulatory regimes. Emission taxes induce promotion of control adjustment, which results in rapid realized social gains. Subsequently, conflicts between firms and regulators may be reduced. However, since adjustment means lowering tax, this action could lead to increasing pollution and may be opposed by environmental special interest groups. In the case of auctioned permits, the gains of innovations are maximized in the diffusion process. In the control adjustment process, there are still net benefits to innovation. Milliman and Prince (1989) give a short indication of the interaction between firms and regulatory agencies. In a tax regime, firms will overstate their costs reductions in order to promote over adjustment. Firms will attempt to understate costs reduction in case of auctioned permits.

2.3.4.EXTENSIONS TO BASIC MODELS

One extension of the model of Milliman and Prince (1989) concern the role of uncertainty in the regulatory decision making process pointed out by Ashford et al (1985). Another extension is the existence of heterogeneous firms and is elaborated by Jung et al. (1996). Requate et al. (2003) introduced free riding behaviour and governments which can give an optimal response to the upcoming innovation. Fisher et al. (2000) introduced the ability for firms to imitate the innovation or pay royalties to obtain the innovation in the third paragraph. The last paragraph takes growth into account, which can be an important element in theories about innovation in pollution control technology. Therefore, a short notion of economic growth and innovation in pollution control with the theory of Magat (1978) is given.

2.3.4.1. UNCERTAINTY AND STRINGENCY

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regulation. Furthermore, the internal structure of regulation will alter the effect on technological change. They point out to six different aspects of the internal structure: form, mode, time for compliance, uncertainty, stringency and existence of other economic incentives. They state that stringency is the most important factor, which influences innovation. A regulation is either stringent because it requires a significant reduction, compliance is costly or it requires significant technological change. Ashford et al. (1985) suggest that the regulatory agency should make some considerations before making the regulation. The first is determining which response is desirable. The second is which industrial sector is most likely to innovate and thirdly what kind of regulation is most likely to elicit the required response. The evaluation of the stringency can be both in terms of the extent to which it reduces risks and the extent to which it forces the development of new technology. Regulation which does not require new technology falls short in achieving the maximum protection. Ashford et al. (1985) further investigate the effects of innovation waivers. Innovations waiver extends the deadlines during trial periods. These innovation waiver mostly involve technology forcing and do not stimulate diffusion. Ashford et al. (1985) show in some cases that standard setting can be both encouraging to innovation as well as diffusion for both product and process change.

Uncertainty of regulation also affects the efficiency of regulation. If there is much uncertainty this can deter innovation. Firms will choose for low-risk solution, which results in diffusion and not in actual innovation.

2.3.4.2. HETEROGENEOUS FIRMS

Jung et al. (1996) build on the Milliman and Prince (1989) framework by extending the comparative approach of Milliman and Prince (1989) from the firm to the industry level. Instead of focusing on firm level changes, they focused on heterogeneous firms and modelled the market level incentive created by various instruments. This is motivated by the fact that regulatory institutions usually are interested in the incentives for the development of pollution control technology in an entire industry.

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pollution control for the firm, followed by taxes and subsidies, free permits and performance standards.

Parry (1998) and Denicolò (1999) elaborated on the results of Milliman and Prince (1989). They conclude that auctioned permits provide greater incentives to pollution control than freely allocated permits. Taxes are considered to be more effective. With permits systems, prices of the permits decrease if innovation occurs. This reduces the incentive of the participating firms to adopt new technologies. Parry (1998) finds that the difference between an emission tax and a tradable permit depend on the potential size of the innovation. If the innovation reduces the abatement costs by ten percent or less, the R&D efficiency is six percent lower under tradable permits than under taxes. This efficiency gap increases when the innovation reduces the abatement costs even more. Furthermore Parry (1998) indicates that the efficiency of the innovation market will decline if imitation is easy. Denicolò (1999) specifies this claim by stating that taxes are a better regulatory mechanism when the environmental externality is large.

2.3.4.3 FREE RIDING AND GOVERNMENT ANTICIPATION

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permits. In the second case, Requate et al. (2003) assume that the government can anticipate on the new technology. They consider two scenarios. In the first scenario the regulator is the first mover in setting his regulatory instrument and the level of the instrument. In this scenario, a unique equilibrium under taxes and permits arises. In the second scenario the timing is reversed, government first chooses the instrument, than firms invest and pollute and subsequently the government sets the level of the regulatory instrument. In this scenario, there is only a unique equilibrium under permits.

2.3.4.4. ROYALTIES AND IMITATION

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innovation. The adoption price effect can be explained by considering the imitation and the patented technology. If the non innovator uses the imitation, it will have to pay for the additional permits. If the permit price decreases because of the reduction in emission from the innovator, the payments for additional permits will decrease and thus the willingness to pay for the new technology. Fisher et al. conclude that the ranking of the policy instrument depend on four different aspects: the scope for imitation, the costs of innovation, the relative level and scope of the marginal environmental benefit function and the number of firms producing emissions. However, if the intertemporal flexibility of the policy instrument is high enough, there in no great difference between the instruments.

2.3.4.4. ECONOMIC GROWTH

Milliman and Prince (1989) and Downing and White (1987) do not take into account economic growth. Economic growth will result in more emission as the production increases. Magat (1978) takes growth into account in his model of pollution control. He assumes that firms can choose to invest in abatement technology or in production technology. They can also decide to invest in both. Magat uses a simple model in which firms produce a single output and use a single input. The by-product of the production process is pollution. The pollution can be reduced using another input to abate the pollution, which can be adjusted variable. Magat uses an innovation possibility frontier, which is a variant of the production possibilities frontier. Trade is possible between output product augmentation and effluent abatement. In his next article (1979) he compared the effects of different government regulation instruments. He states that taxes, standards, subsidies and marketable permits have the same incentive on innovation in abatement technology and innovation in output technology.

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polluter which is also the only supplier of environmental technology, there is no incentive to innovate if the regulator has based the standards on the current available technology. This is because the firm can expect that the government will change its standard if they innovate in their abatement technology. If the government does announce a policy change, there will be incentive to innovate. In a case of more firms, the outlook of raising the competitor’s costs increases the firm’s incentives to innovate. The other part of supply, supply of outsiders, has lots of incentive to innovate. Their core business is providing new technology and they want to market their innovation. If the government’s standard is set by the available technology, than the outside supplier can show the innovation to the government, which reduces the government’s uncertainty about the achievability of a new standard. As a consequence, the regulator will accept the new technology as standard and forces firms to take this innovation.

Jaffe et al. (2000) describe two ways in which polluters decide whether to invest in R&D or not. In the first approach, the firm invests with the intention to produce profitable products and processes. In the second approach, firms use rules of thumb and routines to decide whether to in invest in R&D and how much to invest. In this case a constraint by the government would not necessarily reduce profits.

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studies made simplification assumptions. In the extensions, free riding and heterogeneous firms are incorporated into the models of innovation in pollution control (Jung et al., 1996; Requate et al., 2003). Most authors conclude that taxes and permits systems generally provide the most incentive to innovate in pollution control.

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CHAPTER 3 DEMAND AND SUPPLY INNOVATION IN POLLUTION CONTROL

AUTOMOBILES

3.1. I

NTRODUCTION

In chapter 2, the theoretical models of demand and supply of innovation in pollution control are discussed. In this chapter, the practical side of the demand and supply of innovation in pollution control in the automobile industry is reviewed. The demand side consists of the government regulation and the supply side is represented by the automobile industry. In order to make a comparison between regulations, the regulation of the US, California and the European Commission are described.

In the first three paragraphs, the demand side of the innovation in pollution control is discussed, which starts with the regulation in California. In paragraph 3, an overview is given of the regulation in The United States, followed by an overview of the legislation set by the European Commission. In the subsequent paragraphs an overview is given of the supply side of the innovation in pollution control in automobiles. In these paragraphs a clear view on the political game between the regulatory agency and the regulated firms is presented. In the fifth paragraph, the supply side of innovation in pollution control of vehicles in the Unites States is surveyed. This is followed by an overview of the supply side in Europe in the sixth paragraph. In the seventh paragraph a comparison of the regulation in Europe, The United States and California is given. Lastly, a conclusion is given in the eighth paragraph.

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The foundation of the Californian Air Recourse Board (CARB) and the emission levels set between 1970 and 1990 are discussed in paragraph 3.2.1. In paragraph 3.2.2., a short overview is given of the Low Emission Vehicle Programs. The last paragraph provides a short overview about the regulation on greenhouse gasses of vehicles in the future. In Appendix 1, more information is provided on the Californian legislation.

3.2.1.CALIFORNIAN AIR RESOURCES BOARD

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global warming and local pollution. The state of California was the first government to implement control on the emission of road vehicles. It implemented the first tailpipe emission standards for vehicles on HC and CO in 1966. In 1967, CARB was established and started implementing stricter standards through the Clean Air Act of 1970. The emission programs of CARB served as a guide for country wide legislation in the United States, which is developed by the Environmental Protection Agency (EPA). The Clean Air Act of 1970 mandated a 90% reduction in HC and CO of vehicles emissions to be achieved in 1975. The same percentage reduction was mandated for NOx in 1976. These standards were accompanied by a fine of

$10,000 on each car sold in the manufacturer’s model line, which did not pas the Federal Test

procedure. These new standards on NOx (3,0 gram/mile), CO (15 gram/mile) and HC (1,5 gram

/mile) could not be met with the standard technology in vehicles. They lead to the introduction of the oxidation catalytic converter (Meade, 1997). CARB set new standards in 1977, which lowered the initial emission standards with 30% in comparison to 1975. These standards were even more tightened in 1980s, which in turn led to an increase in efficiency and durability of the emission control techniques (Meade, 1997).

3.2.2.LOW EMISSION VEHICLE PROGRAM

In 1990, CARB approved new standards for low and zero emission vehicles. These standards would apply from 1994 to 2003 and were implemented in the Low Emission Vehicle (LEV 1) Program. This program was based upon the introduction of four classes of vehicles, with increasingly stringent emission requirement:

• Transitional Low Emission Vehicle (TLEV)

• Low Emission Vehicle (LEV)

• Ultra Low Emission Vehicle (ULEV)

• Zero Emission Vehicle (ZEV)

Manufacturers have to meet a fleet average standard of Non Methane Organic Gas (NMOG). This standard is tightened every year. Manufacturers can freely choose any combination of the four classes of vehicles, as long as they meet the fleet average NMOG standard.

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will be subject to the same standards. However, diesel cars have to meet an additional PM standard, which requires a reduction of ninety percent starting in 2007 (Lloyd et al, 2001).

Striking changes are the reduction of NOx standard for Low and Ultra Low Emission Vehicles

with 75% and the extension of the durability from vehicles of 100,000 to 120,000 miles. The program also provides credits for vehicles that achieve near zero emission (hybrid cars) in the new Super Ultra Low Emission Vehicle (SULEV) standard. The TLEV standard is removed from the program.

3.2.3.GREENHOUSE GAS EMISSIONS

CARB introduces a greenhouse gas emission standard starting in 2009. These standards will result in a reduction of greenhouse gas emission of new Californian cars and light trucks of 22% in 2012 and 30% in 2016, compared to the model year 2004. The standard is defined in grams per mile CO2 equivalent emission. The CO2 emission equivalent is based on two driving cycles test: a

city test and a high way tests. Standards are set for fleet averages for two types of cars. The first group is passenger cars and light duty trucks with a weight below 3750 lbs. The second category are light duty and medium duty trucks with a weight between 3750 and 10000 lbs. manufacturers can obtain credits by producing a fleet average below the standard for the model years 2000 – 2008. These credits can be used up to one year after the end of the phase in at full value. In the second and the third year the credits can be used against a discounted rate.

3.3. U

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The legislation in the United Stated is made by the Environmental Protection Agency (EPA). However, states are allowed to design their own complementary legislation, like California. In the first section, 3.3.1., an overview is given of the history of most important developments in the legislation of mobile sources, which start with the Corporate Average Fuel Economy (CAFE) standard in 1975. Paragraph 3.3.2, elaborates on the Tier 1 program, which phased in between 1994 and 1997. The third paragraph, 3.3.3., provides information about the National Low Emission Vehicle Program. This paragraph closes with the Tier 2 program, which phases in between 2004 and 2009. More information on the regulation in the United States can be found in appendix 2.

3.3.1.CORPORATE AVERAGE FUEL ECONOMY

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economy (CAFE) standard in response to the oil crisis in 1973-1974. The Program required all manufacturers selling more than 10,000 autos per year in The United States to have a sales-weighted fuel economy. On average all vehicles sold by a single manufacturer have to meet the standard set by CAFE. The Environmental Protection Agency (EPA) is responsible for calculating the average fuel economy for each manufacturer. The producers of passenger’s cars must meet the CAFE standards separately for domestic and imported fleets.

CAFE standards are two sets of standards. Passenger cars represent the first category and light duty trucks the second category. Light trucks are vehicles with a gross vehicle weight rating from 6,000 to 8,500 lbs. With the introduction in 1975, passenger cars had to have an average fuel economy of 18.0 miles per gallon. The mileage standard increased to 27.5 mpg for passenger cars in 1985 and after a temporary reduction in the standard between 1985 and 1990, the fuel mileage standard remained the same up form 1990. The second category of CAFE are light duty trucks. Essentially, two separate standards were set for the fuel economy of four-wheel drive and two-wheel drive light duty trucks. Since 1982 one standard applied for all light duty trucks. This standard increases slightly each year. In 2011 a new CAFE program will be adopted for light trucks and for medium weight trucks with a gross vehicle weight up to 10000 lbs. This new program requires manufacturers to meet CAFE based on target levels set according to vehicle size. This size is determined by the distance between the centrelines of the tires and the distance between the centres of the axes. As this footprint increase, the economy fuel targets decrease. Generally this means that bigger cars have to meet less stringent fuel efficiency standard.

Testing the fuel economy is done by some laboratory test to measure the exhaust emissions (FTP-75). Car producers with a fleet average below the CAFE standard receive a penalty of $5,50 per each tenth of mpg under the target value times the total volume of the vehicles manufactured for a given model year. Most penalties are paid by European manufacturers. They pay from 1 million up to 27 million for penalties annually. Manufacturers from Asia and the United States never had to pay a penalty.

3.3.2.TIER 1

Tier 1 phased in between 1994 and 1997. This program includes all new light duty vehicles; minivans, sport utility cars, passenger cars, and pick up trucks. The program set standards for CO, NOx and PM. The PM standards not applied to petrol cars, only to diesel cars. The light duty

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3.3.3.NATIONAL LOW EMISSION VEHICLE PROGRAM

In 1997 the Environmental Protection Agency implemented new regulation for the National Low Emission Vehicles (NLEV). This National Low Emission Vehicle Program is an agreement between the north eastern states and auto manufacturers. In this new regulation new cars and other light duty vehicles had to meet more stringent tailpipe emission standards in 1999 (north eastern states) or 2001 (national) than the standards which are agreed upon in 2004 by the EPA in the Tier 2 program. When the auto manufacturers and the north eastern states agreed, the National Low Emission Vehicle (NLEV) made the new standards enforceable. The program made the emission standards of motor vehicles comparable to the California Low Emission Program, but lagging behind in their implementation.

3.3.4.TIER 2

The second set of standards is the Tier 2 program, which phases in between 2004 and 2009. Tier 2 sets standards for light duty vehicles (LDV), light duty trucks (LDT) and medium duty passenger vehicles (MDPV). LDT are subdivided into light light duty trucks (LLDT), with a gross weight vehicle ratio (GWVR) up to 6000 lbs, and heavy light duty trucks (HLDT) with a GWVR starting from 6000 lbs. LDV and LDT have a weight below 8500 lbs GWVR. MDPV have a weight between 8500 lbs and 10000 lbs, which means that cargo trucks and vans remain certified as heavy weight vehicles. The standards for LDV and LLDT phased in 2004. Full implementation is regulated for the 2007 model year. The standards of MDPV’s and HLDT phase in beginning in 2008 and require a full compliance in 2009. Eventually, in 2009, all passenger and light trucks are required to meet the same standards.

In the Tier 2 Program, manufacturers will ultimately have to achieve a corporate average of 0.07 gram NOx / mile over 120.000 miles. The manufacturers have flexibility in reaching this

corporate average. Cars can be certified in different bins, which contain different emission standards. The manufacturer is free to choose a combination of bins, as long as it meets the corporate average standard of 0,07 gram NOx / mile. The manufacturer’s corporate average is

below 0,07 gram NOx / mile, it can obtain credits, which it can sell to other manufacturers or use

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to meet the temporary requirement of 0,30 gram NOx / mile. HLDT and MDPV have to meet a

temporary standard of 0,20 gram NOx / mile on average during the interim period 2004-2008.

Because these emissions standards are expressed in grams of pollutant per mile, large vehicles are required to use more advanced emission control techniques, since they usually pollute more per mile driven.

The Tier 2 program has three evaluation moments. Before production the cars are certified prior to the sales. In the production process the vehicles are again evaluated and the vehicles in use are evaluated. The Tier 2 program is accompanied by a new test cycle, which will be implemented in 2008. In this test cycle, fast acceleration is taken into account and air conditioning system. The Tier 2 program requires cleaner fuels, which is necessary for the functioning of catalyst and filters in the vehicles. Cleaner fuels are specified in two categories: diesel fuel and gasoline. Diesel fuels with a maximum sulphur level op 15 ppm are available on highways in 2006. Furthermore, a reduction in sulphur in gasoline was legislated by the EPA for 2007-2010. In 2004 the standard for the average quantity sulphur in gasoline was 120 ppm. In 2006 this standard has been lowered to 30 ppm.

3.4. R

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The European regulation for emissions of new light vehicles (passenger cars and light commercial vehicles) was first specified in the directive 70/220/EEC of the European Economic Community in 1971. This basis directive specified the limiting value of CO and HC. This basis directive was amended several times; tightening the limiting values and adding other limiting values for other substances, like NOx. In the first paragraph an overview is given of the regulation

set on automobile emission by the European Commission in the Euro Standards. In the second section, 3.4.2, an overview is given of the fuel standards in the European Union. The following section, 3.4.3, is devoted to the information supply program and the last section will elaborate on the voluntary agreement between the European Auto Manufacturer Association (ACEA) and the European Commission. The emission regulation of the European Commission is presented in appendix 3.

3.4.1.EURO STANDARDS

The most important amendment to the 70/220/EC directive are the Euro standards:

• Euro 1 (also know as the EC 93 standards, including directives 91/441/EEC and

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• Euro 2 (also known as the EC 96 standards, including directives 94/12/EC and 96/69/EC)

• Euro 3/4 ( consist of Directive 98/69/EC and a further amendments in 2002/80/EC)

• Euro 5/6 (consist of Proposed Euro 5 regulation COM(2005) 683 published in December

2005. Proposed Euro 6 limits published by the European Parliament [T6-0561/2006] in December 2006 )

Before Euro 1, the government set different emission limits for three categories of cylinder capacities (directive 88/436/EC): larger than 2 litres, between 1.4 and 2 litres and a capacity smaller than 1.4 litres (small cars). In directive 89/458/EC the emission limits for small cars were tightened in accordance to the norms which were applicable in the United Stated and Japan. In practice this meant the emission limits demanded the use of three-way-catalysis. In comparison to the previous guidelines, this demand was obligatory. The directives of Euro 1 expanded the emission limits of directive 89/458/EC to all new model cars per 1 July 1992. Per 1 December 1992, these limits were applicable to all newly registered cars. All cars had to be equipped with a three-way-catalysis. The next years the limiting values of CO, HC and NOx were tightened. Next

to these tightening, limits for the emission of CO when letting idle, emission of carter gasses and volatile organically substances and the durability of facilities preventing air pollution were introduced. The test-driving procedure improved and the emission limits of PM form diesel cars were adjusted.

The Euro 2 included more stringent demands for car-emissions. Different emission limits were set for diesel cars, because of their relative fuel economy advantages compared to petrol engines. Less stringent emission standards were set for cars with direct fuel injection, because the technology was promising.

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Directive 2006/40/EC regulates air conditioning systems. In 2007 the European Commission defines provisions for type approval of vehicles and a harmonized leakage test for measuring the leakage rate of HFC-134a form air conditioners. After this provision, the type approval will only be granted to new model cars if the leakage will be less than either 40 gram HFC-134a/year in the case of a simple evaporator and 60 grams HFC-134a/year for a dual evaporator. In 2009, the simple leakage limits will be mandatory for all new cars. In 2017 is will be banned for all new vehicles.

In the Euro 5 proposal, the European Commission proposes new emission limits for passenger cars and light commercial vehicles. These limits reduce the emission of PM from diesel cars by 80% compared to the Euro 4 standards. Furthermore emission of CO, HC, PM and NOx are

further restricted. The standard will apply in 2009 for all new models and 2011 for al new cars. It is proposed that as from 2010 a particular filter will be required as standard equipment for diesel cars and light commercial vehicles. Euro 5 has been mild on the requirement with respect to the emission of nitro oxygen of diesel engines, to prevent diesel cars and light commercial vehicles form necessarily implementing a NOx -catalyst. The Euro 6 proposal sets limits for 2014.

3.4.2.FUELS

Different aspects of the substances in fuels are legislated in the environmental regulation of the European Commission. The first directive 75/716/EC sets limits to the grade of sulphur in diesel and other gas oils. This directive was set considering the harmonization of the markets. Before, the harmonization was hindered by different limits set in the member states. Directives were implemented to decrease sulphur oxygen in air pollution. Starting on 1 October 1994 (93/12/EC) the maximum amount of sulphur in gas oils was set at 0,2 % of the total weight. As from 1 October 1996, diesel fuels may not exceed the maximum amount of 0,05% sulphur in total weight. In 2008, the weight index of gas oils will be lowered to 0,01 %.

The most important aspect of the directives on the fuel quality was further specification of quality parameters for petrol and diesel. The first phase came into effect in 2000, which prohibited the sale of leaded petrol. Little amount of leaded petrol may be traded in favour of the old-timers cars. The member states need to introduce diesel and petrol with a sulphur degree of maximum 10 milligram per kilogram, in a geographically well-balanced spreading. As from 1 January 2009, no petrol or diesel with a higher sulphur degree than 10 mg/kg may be traded. Member states are responsible for the compliance with the directives.

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2011 and 2020 by suppliers. To enable a higher volume of bio fuels, a separate petrol blend will be permitted with a higher permitted content of oxygen-containing additives including 10% ethanol. To compensate for the increase in emission from the greater use of ethanol the commission will propose for the mandatory introduction of vapour recovery equipment such as particle filters on diesel vehicles.

The European Commission set a directive concerning the use of biofuels in 2003. This directive 2003/30/EC has the goal to stimulate the use of biofuels in transport. The directive aims for 5% in 2005 and 5,75 % in 2010 of biofuels percentage of total transport fuels. These percentages are not compulsory. The member states are obliged to inform the commission on the measures which they have taken to reach these percentages. Directive 2003/96/EC support this directive to allow member states to exempt bio fuels from excise duties.

3.4.3.INFORMATION PROGRAM CO2 EMISSION AND FUEL EFFICIENCY

Directive 1999/94/EC is part of the European Unions strategy to decrease the CO2 emissions of

new cars. The goal of the directive is to ensure information about CO2 emission to the consumers.

This directive consists of four parts, which all improve the information supply concerning the fuel consumption and the CO2 emissions of newly purchased cars. The first part is a label, which has

to be applied on the vehicle in the salesroom. This label specifies the official fuel consumption and the official CO2 emission. Next to that, the label points to the free guide on emissions and

fuel consumption and the problems of the greenhouse effect. Furthermore it points out that driving behaviour and other non technical factors have influence on the fuel consumption. The second part of the directive is a poster in the showroom which shows all the official specific fuel consumption and CO2 emission for all the cars which are sold or leased from the specific car

dealing company. The poster needs to indicate the other aspects which affect fuel consumption and the importance of the greenhouse effect. The third part of the directive 1999/94/EC is the guide concerning the fuel consumption. This guide needs to list the fuel consumption and the official CO2 emissions of all models available in the member state. Next to that, it needs to list the

ten most fuel efficient new model cars, ascending in CO2 emissions. The last part of the

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3.4.4.VOLUNTARY AGREEMENT

Directive 1999/94/EC is part of the strategy to decrease the output of CO2 of passenger vehicles

and improve fuel returns. This strategy was published in December 1995 and was originally a part of the directive 91/441/EC, discussed in the previous section. The goal was reducing CO2

emissions from vehicles with 25% by 2005. The voluntary agreement defines a fleet average CO2

emission standard for new cars which are sold by the European Automobile Manufacturers Association (ACEA) in the European Union. The agreement was reached in 1998. ACEA has set two targets with respect to the emission of CO2. The first (intermediate) target is set for 2003 on

165 gram CO2/km. The ultimate target is to reach 140 gram CO2/km in 2008. These targets were

set in directive 93/116/EC. Next to this target, ACEA promised to bring new models to the

markets, which are individually able to reach the 120 gram CO2/km limit in 2010. However, the

supply of these vehicles was with reservations. ACEA will only supply these cleaner vehicles if cleaner fuels (chiefly with respect to the level of sulphur oxygen) would be completely available in 2005. At the moment, CO2 emissions are the only emissions covered in the voluntary

agreement between the auto industries. The European Commission intends to extend the voluntary agreements with more ambitious emission targets. The voluntary agreement applies to the fleet of new passenger cars which are produced or imported into the European Union. Japanese manufacturers (JAMA) and Korean manufacturers (KAMA) have similar commitments as the ACEA. There are slight differences. Both KAMA and JAMA have postponed the target of 140 gram CO2 / km to 2009. Furthermore, the JAMA intermediate target for 2003 has a wider range of 165 to 175 gram CO2/km. KAMA intermediate is 165-170 gram/kg but is delayed for one year to 2004.

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effective solutions for public policy issues. Provinging credible information, consensus positions and providing an interface with other organizations and coalition are the other goals of the AAM. While the AAM generally support the legislation in the Unites States and California, they do put forward that the CAFE standards alone, are not sufficient to improve the fuel economy of the CO2

emissions. They state that the CAFE alone is a one dimensional approach. U.S. automobile sector needs an intergraded approach, which affects all stakeholders. Stakeholders will make decisions which contribute to the goals of lowering the CO2 emissions and increasing the fuel economy.

This integrated approach points to several different aspects. It should foster more alternative fuel choices and enhance the fuel infrastructure. Furthermore, the government should empower research and development and encourage economic investment in the automobile industry. Lastly, the government should motivate consumers to save fuel and to buy more fuel efficient cars (AAM, 2007a). The AAM shows a pro active attitude in the climate issue. They support the development of new technologies and the deployment of cost-effective energy strategies.

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3.6.1.LOBBYING ACTIVITIES ACEA

The regulation of the European Union, affects the situation of the manufacturers of automobiles. However, since they represent a large industry, which is economically important, they have a strong negotiation position. February 7th 2007, ACEA (ACEA, 2007a) states that CO2 emission

standards are to arbitrary and too severe. ACEA states that the proposals are not well balanced and eventually the proposal will damage the European economy in terms of wealth, unemployment and growth. They state that the European Commission focuses too much on the technology side, whereas there are more and better means of reducing emissions. Putting the burden on the car industry is the most expensive and least cost efficient method. ACEA states that the reduction in emission of CO2 form passenger cars has declined with 13% since 1998.

However, consumer demand for larger cars has increased. They state that an integrated approach is necessary, which will lead to increased demand for fuel efficiency, through CO2 related

taxation of cars and alternative fuels. This announcement followed on the earlier publication of January the 26th in 2007 (ACEA, 2007b). ACEA states that the integrated approach involves further improvements in vehicle technology, development and availability of low carbon fuels, infrastructure adjustments, changing drive style and increased demand for fuel efficiency through harmonized CO2 related taxation of cars and alternative fuels. Another policy publication was

published on December the 13th in 2006 (ACEA, 2006) in which ACEA claims that the Euro 5

and 6 standards are extremely challenging. They state the emission standards are not based on proper and transparent impact assessments, which have led to an underestimation of the related costs by 33%. ACEA states that further reduction of CO2 emission becomes increasingly more

challenging, because the transport sector is becoming more and more regulated. Standards on safety and other air pollutions have hampered the reduction of CO2 emissions. Next to that there

is a weak demand from CO2 efficiency and a growing demand for larger and safer cars. The

increase in size and safety will increase the weight of the vehicle and will have a reverse effect on the CO2 emission. Furthermore, the trend of de-urbanization will result in consumers driving

more.

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3.6.2.INFORMATION ACTIVITIES ACEA

The ACEA provides information about the automobile industry. ACEA describes their industry as engine of Europe, because it has played an important historical role in the development of the continent as major leading employer in the car manufacturing industry. The car manufacturers invest 20% of their turnover in R&D, which is about 20 billion euro. ACEA had a yearly production of 21 million cars, from which 16,5 million are produced in Europe. 14,2 million passenger cars are produced in Europe. The production of motor vehicles represents 32% of the total vehicle production, which makes the European manufacturers the biggest car producers. In passenger cars, the European share is even bigger, and represents 40% of the total world passenger vehicle production. These are all figures from 2005. ACEA employs 2 million workers in Europe. Furthermore, they support about 12 million workers in the European Union. The turnover of the ACEA members worldwide is 452 billion euro and the ACEA members in Europe have 271 euro turnover.

3.7. C

OMPARISON

In this section the regulation of the United States, California and the European Commission is compared, starting with a comparison of the timing of the emission regulations. In the second section, 3.7.2., the regulation with respect the CO2 emission is compared. In the third section,

3.7.3., an overview of the differences and resemblances between the regulations is given with respect to the CO, HC, NOx and PM standards.

3.7.1.TIMING REGULATION

The first regulation with respect to the emission of vehicles was set in California. This regulation was implemented in 1966 and concerned tailpipe emission standards for HC and CO. The

standards on emissions of NOx, CO, HC, which made the introduction of the catalyst necessary,

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Looking at the implementation of the regulation with respect to the CO2 emission, The United

States seems to be a frontrunner. They first established a standard for the average fuel economy of the passenger and light duty vehicle fleet of manufacturer in 1975. This standard increased till

1990. The European Commission reached the voluntary agreement on CO2 emission with

European manufacturers in 1998. The European Commission was more than 20 years later in adopting regulation on the emission of CO2.

3.7.2.CO2REGULATION

The regulation in the US, California and European Union differs with respect to emission demands and the degree to which the standards of CO2 are mandatory. In the United States the

relevant standard for the CO2 emission is CAFE standard. This standard specifies the average

number of miles which have to be driven on one gallon of fuel for passenger cars and light trucks. The fuel economy is directly related to the emission of greenhouse gasses. CAFE standard is set for the fleet average of each manufacturer of automobiles. The European Commission sets an emission standard directly on the grams of CO2 emission per kilometre in a voluntary agreement

between the European Commission and the ACEA. The target set in this agreement, establishes an industry-wide target for new vehicle sold in Europe.

In California the Green House Gas (GHG) emission standards are in grams per mile. Note that, the relationship between Green House Gas emissions and fuel consumption is very strong. The CO2 emission are very strong related to the fuel economy of the car and is the most important and

biggest source of Green House Gas emissions (An and Sauer, 2004).

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Figure 3.1 Comparison of Emission Standards, An and Sauer, 2004.

The voluntary agreement between ACEA and the European Commission is stricter than the standards set by the CARB and the EPA. The agreement between the European Automobile Manufactures is voluntary, whereas the standard set by the CARB and the EPA are mandatory and accompanied with a fine.

3.7.3.REGULATION NOX,CO,HC AND PM

An important difference between the regulation on NOx, CO, HC and PM emission of vehicles

are the different emissions standards set on diesel and petrol vehicles in the European Union and in the Unites States in the Tier 1 program. The next vehicles emission program in The United States does not make the distinction between diesel vehicles and petrol vehicles any more. Standards on CO are since the implementation of the Euro 2 legislation by the European Commission lower on diesel vehicles than the CO standards in The Unites States and California. The CO standards on petrol vehicles by the European Commission are lower since implementation of the Euro 3 standards. This means that the European Union sets stricter standards on the emission of CO. The European Commission sets emission limits on every new vehicle sold in the European car market. In contrary to the emission standards in The United States, who sets standards on the average emissions of the vehicle fleet of an individual car manufacturer.

NOx standards are higher in the European Union since 2004. Before that period, some emission

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Union. With respect to the emission limits on diesel cars, the European Commission sets limits which are ten times as high as the emission limits set in The United States and California. Just like the CO standards, the standards in the Unites States and California apply for the average vehicle fleet of individual manufacturers, whereas the limits set by the European Commission apply to every sold vehicle on the European market.

Standards on PM set by the European Commission on diesel vehicles are higher than the standards on PM in California and The United States. PM standards on petrol vehicles by the European Commission will be first set starting in 2009. Diesel vehicles in the United States may emit more PM than the emission standards, as long as they are compensated by lower emission of PM of other vehicles.

Standards on HC are difficult to compare. The European Commission first used standards on HC + NOx. Separate standards for HC are only set by the European Commission for light duty petrol

trucks since 2000. The Californian government set emission standards on formaldehyde (HCHO) and The Unites States sets standards on non methane hydro carbons the tier 1 program. In the tier 2 program, the standards are set on the emission of HCHO.

Overall, the standards mandated in the European policy on CO are stricter than the standards in the United States and in California. The regulation in NOx and PM is stricter in the United States

and California. The design of the regulation differs. The United States use different bins, in which different standards for emissions are set and regulates the transition phase. California uses type classification, which is comparable to the bins identified by EPA, and regulates the transition. This transition phase and vehicle categories with respect to their emission are not designed by the regulation of the European Commission..

3.8. C

ONCLUSION

Comparing the main characteristics of the legislations in California, the United States and the European Union, four main differences come above. The first is CO2 emissions mandate, which is

mandatory in the United States and California and voluntary in the European Union. Note that the standards in the European Union are set for the average CO2 emissions of the whole fleet of

passenger cars. In California and in The United States’ emission standards are set for the average greenhouse gas emissions or fuel economy of a specific automobile manufacturer. Second, The United States and California seem to be initiators of the policies with respect to vehicle emission reduction. In case of the legislation, which required the implementation of the catalyst, the

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Commission in stricter than the regulation of The United States. However, these standards only applied up from 1998, whereas The United States have set standards on the fuel economy since 1975. The current regulation of the European Commission is less strict on NOx and PM emissions

than the standards set by California and The United States. The standards on CO are stricter in the European Union. The third important difference is the regulation during the transition phase. California and the United States regulate a gradual tightening of the emission standards, the European Commission does not regulate a transition phase. The fourth difference is that the United States and California set fleet average standards, whereas the European Commission sets vehicles specific standards. Note that it is difficult to compare the emission standards, since each region uses different test procedures.

The supply sides of the United States and the European Union does not differ much with respect to its industry characteristics. Both automobile associations are large employers in their country and represent a large part of the auto manufacturers industry. However, ACEA seems to position itself more in opposite to the regulator is stead of working together to find new ways of reducing the emission of vehicles.

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CHAPTER 4 INNOVATION IN POLLUTION CONTROL

4.1. I

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ISTORY

This paragraph discusses the evolution of emission control techniques of the last 35 years. Since European and American manufacturers are active worldwide and provide cars as well for The United States as for the European Union, the innovation can not be subdivided into categories for the United States and the European Union. Many innovations were first applied in The United States, because stricter regulation in the United States made the implementation of the new techniques necessary. This first paragraph reviews catalysts types, which discusses the catalyst, filters and on board diagnostics. Catalysts and filters are used to reduce the emissions of CO, HC, NOx and PM in the evaporative gasses of the vehicle. The second paragraph discusses hybrid

vehicles. The last paragraph discusses innovation in the fuel economy of vehicles, which is directly related to the emissions of CO2.

4.1.1.CATALYST

The first important innovation with respect to the emission reduction of petrol vehicles was the catalyst. The first generation of catalyst was first installed in 1975 and controlled emission of CO and HC (BEST, 2001). In 1981 the three way catalyst, which regulates NOx, CO and HC

emissions, was introduced in the United States to meet the stricter emission standards set by the Californian government. This catalyst needs a closed loop to simultaneously reduce NOx, CO and

HC. In this closed loop, the air to fuel has to be accurately controlled to ensure the functioning of the three-way catalyst. The air to fuel ratio is controlled by an oxidation sensor in the exhaust system and an electronic control unit. The signals of the oxidation sensor are send to the electronic control unit, which ensures air-to-fuel ratios around the optimal value (DiCicco, 2001;

OECD, 2004). Three way catalysts are responsible for 99% of the reduction of HC, CO and NOx

in comparison to the 1960s emission levels of these evaporative gasses of vehicles (MECA, 2007). At the time of the implementation of the catalyst in vehicles, attention was put on lead concentrations in fuels. Lead poisons the catalyst and reduces the effect of catalyst on emission control. This leaded to policies demanding lead-free fuels.

INNOVATION IN POLLUTION CONTROL IN AUTOMOBILES