The world''s automakers, already straining under the pressure of saturated demand in major markets and intense global competition, now face a longer term threat to their financial performance: stringent environmental legislation to reduce vehicle emissions and increase fuel efficiency.

Tightening vehicle emissions legislation in the world''s major car markets pose a significant threat to the credit quality of global automakers, says a new report published by Standard & Poor''s Ratings Services, Can Global Automakers Meet Emissions Limits Without Steering Off The Road?

With many automakers suffering declining profits or operating losses, the proposed emissions standards-estimated to cost between $1,300 and $1,900 per vehicle in the US and between €600 and €3,000 in Europe-could seriously undermine profitability.

"We consider there is a real risk to global automakers'' financial performance, particularly as some are already under pressure from razor-thin margins," said Standard & Poor''s credit analyst Maria Bissinger.

Even BMW AG (A+/Stable/A-1), the most profitable automaker, generating about €2,200 in operating profits per vehicle, may be confronted with higher costs to meet the proposed new standards due to the high carbon dioxide (CO2) emissions of its fleet. Many European volume automakers achieve less than €500 profits per vehicle (excluding earnings from financial service operations), but are closer to the proposed future emissions target.

For the US automakers General Motors Corp. (GM; B/Negative/B-3) andFord Motor Co. (B/Negative/B-3), as well as the Chrysler unit of DaimlerChrysler AG (BBB/Stable/A-2), struggling with the more immediate concerns of reducing legacy costs and stemming huge cash losses from their North American automotive operations, shifts on the much longer-term regulatory horizon would only become a key factor in the credit ratings once substantial progress is made in their respective turnarounds, the report says.

What''s more, their ability to make the massive investments necessary for cleaner or more fuel-efficient vehicles will depend to a great degree in how successful they are in returning to sustained profitability over the next few years.

In the US, the Bush administration''s plan to cut gasoline consumption by 20 per cent over the next 10 years was followed last month by the Supreme Court that said the Environmental Protection Agency (EPA) must regulate greenhouse gas emissions from vehicles unless it had a scientific basis to avoid doing so.

In Europe, in February, the EU proposed tough legislation to limit emissions of CO2 from new cars to 120 grams per kilogram (g / km) by 2012, representing a 25 per cent cut from the current average 160g / km. And in Japan, the world''s third-largest world auto market, the government is considering tightening fuel efficiency standards by nearly 30 per cent as of 2015.

The auto industry, however, argues the current regulatory focus on CO2 emissions, which are directly correlated to the amount of gasoline and diesel a vehicle burns, detracts from advances already made in reducing other emissions from auto tailpipes, which are mainly aimed at improving air quality.

Among the substances are carbon monoxide (CO), hydrocarbons (HC), nitrogen oxides (NOx), and particulate matter (PM). The European Automobile Manufacturers Association (ACEA) says there is a trade-off between emissions reduction and fuel consumption, and hence CO2.

For example, engineering advances made to reduce NOx emissions to meet the Euro 5 emission regulations planned to take effect in Europe in 2009, could increase fuel consumption, and therefore CO2 emissions, by several percentage points.

Stricter environmental regulations could affect the burgeoning auto markets in China and India. "Further regulations in target markets such as Europe to meet planned CO2 requirements could represent a significant additional hurdle to the export ambitions of burgeoning auto industries in China and India," said Bissinger.