EC proposals: an example of how regulation can drive innovation

The European Commission has proposed forcing carmakers to cut the CO2 emissions from new cars by 18%, by 2012. It says it is planning legislation to ensure that all new cars emit no more than 130g of CO2 per kilometre, compared with an average of 162g/km for cars sold in 2005. This has led to predictable uproar: car-makers say that the limit is “arbitrary” and will hurt their business; environmentalists say that it doesn’t go far enough. Both are missing the point.

Better emissions standards are of course better for the environment.  They will also cause short-term disruption to the lives of those in the automotive industry (although they must have known that they were coming), but from the point of view of innovation, this is a great example of intelligent regulation that could position Europe’s car industry for explosive growth when the rest of the world catches up with the Commission’s proposals.

As Luke Georghiou makes clear in Demanding Innovation, performance-based regulations like this can force the EU’s industries to develop world-leading technologies that can position them for rapid dominance when those technologies become more widely demanded. Correctly implemented, this move could prove a living case study of the impact of intelligent regulation on stimulating innovation.

Comments

[Graham Hill]

Richard

It all sounds so simple. But it isn't. Your suggestion that "regulation ... could position Europe’s car industry for explosive growth when the rest of the world catches up with the Commission’s proposals" assumes of course that the Eurocrats in Brussels have correctly second-guessed the future evolution of the world-wide market for low-emission engines.

Governments around the world have a lamentable record of understanding the workings of markets and thus, of second-quessing how they are like to evolve. They have an equally lamentable record of grand-standing for public consumption, particularly on issues which whilst important are still poorly understood.

We will have to wait and see how the proposals turn into action, and whether the innovation they demand is environmentally and economically valuable.

Graham Hill

[Richard Halkett]

Graham – “picking winners” is certainly a dirty phrase in policy circles. You’re right that the past is littered with poor choices by the public sector. That said, VHS and Betamax was a problem (and some say a wrong choice) created entirely by the private sector. By comparison, GSM (so essential to the development of Nokia and Ericsson) was a good move by various governments (see “Demanding Innovation”). I think that the important point is that picking products tends to be a bad idea: stimulating new products through setting standards and regulation can be a good one. You are right to say “wait and see” as to the outcome of this particular policy but setting the target and then letting the market work its magic (as this regulation should) could perhaps be a good strategy. And I think that it is relatively safe to say that lower-emissions vehicles are likely to grow in importance throughout the world over the coming decade or so.