The proposals -- part of EU efforts to fight climate change -- are likely to boost potential demand for diesel hybrid and fuel cell powered cars, which have yet to hit the market and are significantly more expensive than conventional cars.

The cost of meeting the new CO2 standards -- such as developing technology to make engines and transmissions more efficient -- could add hundreds, if not thousands, of euros to prices of conventionally powered cars, industry experts say.

Diesel hybrids, which reduce fuel consumption by linking a standard diesel engine to an electric motor and batteries so it can run on electricity alone at low speeds, may no longer be priced out of the market.

A diesel engine typically costs up to 10 percent more than its petrol-driven cousin of similar power -- not to mention thousands of dollars more for an electric motor, batteries and the electronics to run them in hybrid form.

"Diesel-electric hybrids could move from cost-stunted concept to hot-selling technology in Europe if the European Union decides to tax cars based on carbon dioxide emissions," Swiss investment bank UBS said in a recent research note.

SMALL BUT GROWING

French carmaker PSA Peugeot Citroen has been pressing ahead on this front. It showed a diesel hybrid Citroen concept car at the Paris car show in September and aims to sell tens of thousands of diesel hybrids a year from 2010.

A diesel hybrid can cut fuel consumption by a quarter versus a standard diesel. The challenge, PSA said a year ago, is to cut the cost difference between the two to 2,000 euros (US$2,600) or less from around 8,000 euros at the time.

Rivals such as Ford and DaimlerChrysler are also embracing diesel hybrids, but for big cars such as the Jaguar S-type and the Mercedes-Benz E-Class executive car.

Non-conventional powertrains account for less than 1 percent of the overall European new car market of 15 million units, but that market share is set to rise.

Al Bedwell at consulting group JD Powers-LMC forecast sales of diesel hybrids in Europe would start in 2010/2011 and that around 150,000 would be sold annually by 2013.

Including no more than 100,000 gasoline hybrids such as Toyota Motor Corp.'s Prius, total hybrid sales would still be under 2 percent of the market by 2013, he estimated.

"From there, numbers could go up steeply assuming production costs can result in a cost premium versus regular diesel of no more than 15 percent," he said.

FUEL CELLS TO THE FORE

Cars powered by fuel cells leapfrog the CO2 issue by using the chemical interaction between hydrogen and oxygen to generate electricity while emitting only water vapour.

Proponents insist that 5 million to 10 million fuel cell cars could be on the road within 15 years, with the number ballooning to 350 million worldwide by 2050.

But while the technology is making great strides, it still costs far too much and lacks the widespread infrastructure that motorists will need to fill their tanks with hydrogen.

DaimlerChrysler, a market leader with around 100 fuel cell vehicles on the street for testing, estimates that fuel cell cars will make their commercial debut between 2012 and 2015 in limited numbers.

Costs, reliability and durability remain serious challenges.

For instance, fuel cell cars need to have an operating life of about 5,000 hours to compete effectively but at this stage only last around 2,000 hours, a DaimlerChrysler spokeswoman said.

Prices have to fall drastically as well if automakers expect buyers to switch to hydrogen-powered cars, because history shows consumers won't pay more for vehicles whose performance lags what is already on the road.

"We think fuel cell cars will very likely have a price premium of around 5 percent versus a (conventional) car, but then you have the great advantage that the car itself has no emissions," the DaimlerChrysler spokeswoman said.