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If there is a single industry in the UK which is at the forefront of high-tech R&D then it is the automotive business and car manufacturing is resurgent despite the recession. However not all is rosy in the garden.

Last week Rolls Royce announced it is lending money to one of its suppliers to ease its cash flow problems. There is also a problem with money being available for investment in smaller technological firms. The difficulty does not arise from a lack of cash – the private equity world – is awash with it, but rather the automotive business model.

Developing products is often a long-term and funding-heavy operation, and the extended cycle of bringing vehicles to markets does not neatly fit in with the short-term need of many private investors to quickly release cash from those firms they support.

Nor are there clear exit strategies. Unlike the high-profile computer and telecoms IPOs, these are few and far between in the car industry, thus presenting investors with a double whammy: an inability to take cash out of the business while they own it and few options for selling it on when they are ready to turn their attentions elsewhere.

Not that the problems are limited to a shortage of financial capital. There are also concerns about a scarcity of intellectual capital. At a breakfast meeting this morning some of the bigger car makers said that while they generally managed to attract as many engineers as they needed it was often at the cost of other firms further down the supply chain.

As an aside somebody noted that Lloyds Bank had actually started sending some of their managers on an engineering course – not so they could change careers, but so they could better evaluate calls from those in the automotive sector for loans. Surely that is some progress?

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Another year passes and with it comes another significant annual drop in the CO2 emissions of the new cars sold in the UK.

According to the 2012 Society of Motor Manufacturers and Traders’ New Car CO2 Report, “emissions fell to a new low of 138.1 g/km in 2011, down 4.2% on 2010.”

The SMMT study shows emissions are down 27% on 2000 levels. 70% of that progress has come in the past four years.

The key point is that this improvement is not the result of alternative-powered vehicles swamping the roads – sales of new cars powered by electricity and hybrid technology are still only a tiny fraction of the total – but because of huge strides in the refinement of internal combustion engines.

The real debate is about where we should be going next. According to the SMMT chief executive Paul Everitt, “Considerable progress has to be made to deliver the challenging 2020 pan-EU CO2 target of 95g/km.”

Yet others think this obstacle is too easily hurdled and the eco-performance of the new car fleet should be rather better. In a letter last month to EU Commission President José-Manuel Barroso, Greenpeace and the Transport and Environment Group pleaded for any assistance to the European car makers to be linked to “a tightening of legislative standards for fleet average emissions to 80 gCO2/km by 2020 and the inclusion of a new target of 60 gCO2/km by 2025.”

The technical evidence suggests these alternative goals could be achieved. The questions are whether it is imperative they are met and if so how?

If the answer to the first question is yes, then in theory you could simply legislate to reach the required goal. If targets became legal requirements and manufacturers were punitively sanctioned for breaching CO2 levels then the chances are things would change despite the grumbling. Equally, if consumers were nudged – indeed shoved – towards buying low carbon cars through mouth-watering incentives then change would also result.

At the moment the subsidies available from government are all focused on ultra-low carbon cars, but what if buyers of the best-performing vehicles in their class all got a nice round £1,000 from ministers? The 2007 King Review of low-carbon cars concluded this measure alone could “reduce emissions by 10-25% over time.”

These matters of policy are all up for debate, but today’s report should offer us some reassurance. For all the negative environmental impacts associated with road transport, it is perhaps the one sector which is best placed to respond to the challenge. Indeed, it is already doing so.

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