Synergies between Climate Action and Industrial Policy: Towards Fuel Efficiency in Thailand

Although Thailand is a major vehicle producer in Southeast Asia, it is the only country that does not yet have fuel efficiency standards for light-duty vehicles. While other vehicle efficiency measures have been introduced in the past, such as a car CO2 label, a CO2-based excise tax and industry subsidies for the production of efficient vehicles, these are not enough to enable the country to meet its ambitious climate targets.

Thailand aims to achieve net-zero greenhouse gas (GHG) emissions by 2065 at the latest. To get there, Thailand has proposed strong interim climate targets for 2030. In the transport sector, the country aims to reduce emissions by 45 Mt CO2 compared to the baseline. Even though this baseline was established before COVID, it is a difficult and challenging task to achieve these targets. Corporate Average Fuel Economy (CAFE) standards could help the domestic industry to meet its international commitment, but also help the domestic industry to remain competitive and transition to e-mobility.

A little-known fact is that Thailand is the world’s tenth largest producer of light-duty vehicles (LDVs). The Southeast Asian kingdom has been attracting investment in the automotive industry since the 1990s. Thailand is known as a champion in the production of pick-up trucks, but smaller vehicles are also produced. About 60 per cent of the vehicles produced are sold domestically and the rest are exported, mainly to Australia (pick-ups), other Southeast Asian countries (e.g. the Philippines) and Japan.

Figure 1: Nine out of ten top car manufacturing countries have established fuel economy or GHG emission standards (Source: International Organization of Motor Vehicle Manufacturers, OICA)

The automotive industry in Thailand is currently dominated by Japanese carmakers, who take advantage of Thailand’s favourable conditions, such as lower wages than in Japan or Australia, good education and the size of the domestic market. However, these manufacturers and the associated value chain have so far relied 100% on ICE vehicles. Similar to Germany, there is a big economic risk for Thailand to lose market share and jobs as more and more electric vehicles are sold. So how can the government help the industry transform?

Three strategies for transforming the automotive industry

Currently, the relevant agencies are exploring three ways to help the industry transform: First, they want to attract Chinese carmakers to produce electric vehicles. The country is subsidising the introduction of electric vehicles and aims to achieve a 30% share of car production and a 50% share of domestic sales of electric vehicles by 2030. This would diversify the automotive industry, but it is a challenge to keep the value chain in the country. Around 80% of the value chain for ICE vehicles is currently located in the country.

In 2023, about 80,000 electric cars have been sold in Thailand. They are present in the roads of Bangkok (Picture by Daniel Bongardt)

Second, the government is incentivising the purchase of more fuel-efficient cars. A CO2-based excise tax is designed to make vehicles with lower CO2 emissions more attractive. However, the threshold for tax reductions is not very low and is still based on the old New European Driving Cycle (NEDC). The expected reduction is therefore very limited.

Thirdly, the government plans to encourage the production of more efficient cars. This discussion is still at an early stage. One option would be to introduce Corporate Average Fuel Efficiency standards, which could support both goals, more efficient vehicles and more electric vehicles. However, the detailed design of such a standard is challenging, as it would need to meet the needs of the existing automotive industry in Thailand and not favour Chinese EV manufacturers too much.

On 29 May, GIZ and Thailand’s Office of Transport and Traffic Policy and Planning (OTP) officially launched their collaboration to promote fuel efficiency in Thailand. The two-year project is funded by the German Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV) as part of its International Climate Initiative. Participants from various government agencies, industry and Germany discussed how Thailand can improve the fuel efficiency of its vehicle fleet.

At the launch event, Martin Schmied, head of the Division I “Environmental Planning and Sustainability Strategies“ at the German Federal Environmental Agency (UBA) presented the experiences in Europe and Germany (Picture by Tonkla Pairoh)

Stakeholder engagement is key to a just transition

Like Germany, Thailand is discussing how to achieve its ambitious climate targets in the transport sector. Both countries are concerned about a just transition for their automotive industries and want to share ways to make this happen. Of course, there are many differences between Germany and Thailand, but both countries rely on an automotive industry that currently produces ICE vehicles and exports them to other countries.

One important market for Thailand is Australia. The Australian government announced earlier this year that it would introduce a fuel economy standard and has published three possible options. In this context, the proposal of a fuel economy standard in Thailand could help the domestic industry to keep pace with other markets. The discussion on the introduction of a fuel economy standard is a good opportunity for formal dialogue between industry and government to ensure that standards are designed in a way that does not harm jobs and economic growth, but rather stimulates innovation.

The advantage of such an approach is that a standard can make a significant contribution to achieving climate targets in the transport sector, as well as to the environmental and economic transition of the Thai automotive industry. The first step of the joint project is to analyse the vehicle data and potential impacts on GHG emissions, as well as the economic and social consequences. Germany can benefit from this dialogue to learn for its own just transition, but also to find allies for more ambitious climate action in the transport sector.

The IMPROVE project is implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and is funded through the International Climate Initiative (IKI) of the German Federal Ministry for Environment, Nature Conservation and Nuclear Safety (BMUV).


Martin Schmied

10 Principles for Sustainable Urban Transport