The Road to a Greener Car Market

During his time as Governor of the Bank of England, Mark Carney has been a leading voice in encouraging policymakers, business and investors to recognise the key role of markets, financial and otherwise, in tackling climate change.

Global targets and national legislation will not of themselves lower emissions unless the behaviour of markets is understood and effectively incentivised. This applies particularly to the car market.

CO2 emissions from cars and trucks account for a significant proportion of global warming. However, efficiency is improving. New cars emit, on average, 29% less CO2 than models produced in 2000.  But battery electric vehicles (BEVs) emit no CO2 at all from their exhaust.

The case for increasing the take-up of new electric vehicles is indisputable, but while the UK is ahead of France and Germany, progress is slow. Electric vehicles have been on the market for nearly a decade and still only 1.6% of new car sales are battery electric. Why is this?

Motorists have understandable concerns. More charging points and/or longer range technologies are urgently needed. But of equal importance is the need to develop a properly functioning used car market. For that to happen, second-hand values of electric vehicles must be far more predictable. At present, this small market is dogged by uncertainties about battery life span and disposal regulations, and the risk that residual values could be undermined by innovative new models.  

Creating the right conditions for this used car market to thrive will require the motor industry, the finance industry and the Government to work together in a new partnership. But the blueprint for success already exists.

Almost 88% of private new car sales financed by FLA members are obtained using either Personal Contract Purchase or Personal Contract Hire products, the price for both of which involves estimating the future residual value of the vehicle. So, the greater the confidence the lender has in the accuracy of this estimation, the better the price for the customer.

The FLA would like to see the Government and British Business Bank develop a risk sharing scheme to remove some of the uncertainty for lenders when estimating residual values for low emission vehicles, and to reduce the cost of borrowing for a used electric car.  

In addition, extending to the used car market the incentives already available for new electric vehicles would certainly help uptake – as would a trusted and authoritative tool that shows the total cost of ownership of a low carbon vehicle compared to a conventional car. 

Finally, a strong market needs a straightforward legal framework that supports innovation. Unfortunately, the motor finance industry has to rely on the 46 year old Consumer Credit Act, whose outdated provisions inhibit the development of new financial products.

As we embark on a new decade – the one in which we must finally tackle climate change – it is clear that partnerships will be needed between governments, industries, consumers, investors and lenders to deliver the necessary reforms. In the UK, there is clearly a coordinating role for Government. The FLA and our motor finance members are standing ready to play a full part.

Stephen Haddrill


Published 16 Jan 2020

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