The European Commission has finished umming and ahhing about CO2 and has finally proposed limits for carmakers trading in Europe. As expected, targets have been softened from the 120g/km originally envisaged for 2005 and delayed twice. Instead the cap is for 130g/km with "complementary measures" to trim emissions by a further 10g/km, including "efficiency improvements for car components with the highest impact on fuel consumption, such as tyres and air conditioning systems". While good for automakers, this compromise is not so good for consumers. Some tyre makers have already pointed out that lowering rolling resistance also lowers grip, and thus safety.

The EC doesn't create laws, but proposes legislation, so the measures still have to be approved by the European Parliament and EU member states.

The cap applies as an average, so for every car over the limit a maker will have to ship another car under the limit to avoid fines. Fines will be worked out by assessing the number of g/km over the average a maker is, and then applying a fine across every vehicle sold. The proposed penalty starts at €20 per g/km in 2012, €35 in 2013, €60 in 2014 and €95 in 2015. These fines don't sound like much but could really hurt. A maker selling a million cars in 2012 and missing the average by just 10g/km would be fined €200m. The UK Society of Motor Manufacturers and Traders has already complained that this puts a price on CO2 for the motor industry that's much steeper than the carbon trading cost in other polluting industries.

Carmakers will be allowed to pool their efforts, so it's likely that we will see co-operative deals between makers of predominantly frugal and profligate cars. The EC warns that pooling will not exempt makers from competition law - colluding to force less powerful rivals out of the market, say, will not be any more or less illegal than before. It seems likely, however, that the proposed legislation will shift the economics of the industry and could provoke new and unexpected joint ventures and mergers. It will also incentivise makers to create electric cars, which count as zero-CO2 vehicles under the legislation. Even a minority of zeros will help to drag a bloated CO2 average down.

Low-volume makers selling fewer than 10,000 vehicles per year are not exempt but can apply for an individual target or join a pool.