Climate Change Risks and Opportunities

As evidence mounts about the effects of climate change, the urgency to act increases. The next few years will likely see both comprehensive U.S. climate legislation and a new global climate change treaty. Concerns about climate change and growing constraints on the use and availability of carbon-based fuels affect our operations, our customers, our investors and our communities. The issue warrants precautionary, prudent and early actions to enhance our competitiveness and protect our profitability in an increasingly carbon-constrained economy. Thus, the risks and opportunities for Ford presented by the climate change issue have never been more important. These risks and opportunities include the following.

Markets

Our markets changed dramatically during 2008. The serious global recession has depressed auto sales across all markets. Record oil prices in the first half of the year accelerated the shift from larger vehicles and light trucks to smaller, more fuel-efficient vehicles (including cars and crossovers) and diesel-powered vehicles. Oil prices then plunged during the second half of the year, which may have dampened interest in hybrid and other vehicles with superior fuel economy. However, we anticipate – and many of our customers believe – that volatile and increasing energy costs are likely to continue to drive the market for fuel-efficient vehicles in the long run. Energy security is also a major concern in several markets in which we operate.

Within these broad trends, there are regional differences. In North America, new regulations (discussed below and in the Climate Change Policy and Partnerships section), volatile fuel prices and energy security concerns are encouraging the sales of smaller and more fuel-efficient vehicles. In emerging markets, the growth in vehicle sales is raising concerns about emissions and congestion. In Europe, the long-term trend of high-priced fuel and more fuel-efficient vehicles has led to a major shift toward diesel-powered vehicles, which now make up more than half of all new vehicle sales. This trend is reinforced by sales incentives in some European countries designed to encourage new vehicle sales, with the aim of reducing carbon dioxide emissions from older, less-efficient vehicles. Some of these incentives are bound to upper limits of CO2 emissions of 160 g/km and less, which has boosted sales of small cars. Other schemes are linked to regulatory emissions standards (e.g. Euro 4).

These market shifts are very significant to our Company. Everywhere we operate, the future financial health of our Company depends on our ability to predict market shifts of all kinds and to be ready with the products and services our customers demand.

Our product globalization strategy is designed to help us respond to changing markets and regional preferences. We are leveraging our best technology from around the world to create global platforms that offer superior fuel economy, safety, driving dynamics and customer features. We then tailor each global platform to national or regional preferences and requirements. New technology is also cutting the time required to bring new vehicles to market, which helps us respond more effectively to the ever-increasing pace of change in our markets.

Please see the Economy section for further discussion of our changing markets and how we are responding to them.

Regulations

Climate-related legislation and regulation increasingly affect our business, including our manufacturing facilities, the emissions from our vehicles and, less directly, our markets. In the United States, for example, the new Obama Administration is committed to passing comprehensive federal climate legislation, which would affect both our vehicles and our operations.

At the end of 2008, the European Parliament passed legislation that will result in the regulation of the CO2 emissions of our fleet of vehicles in Europe. In addition, the EU's Emission Trading Scheme regulations apply to eight Ford and Volvo facilities in the UK, Belgium, Sweden and Spain. Ford anticipated the start of this trading scheme and established internal business plans and objectives to maintain compliance with the regulatory requirements. These issues are discussed in more detail in the Climate Change Policy and Partnerships section.

In Asia, Japan, South Korea and Taiwan have adopted fuel-efficiency targets. For example, Japan established fuel-efficiency targets for 2010 passenger car and commercial trucks, with incentives for early adoption. Also, the Chinese government has introduced weight-based fuel-consumption standards for passenger cars and light-duty commercial vehicles. Ford's product offerings comply with the standards in all of these markets.

We have established global roles, responsibilities, policies and procedures to help ensure compliance with emissions requirements, and we participate in trading initiatives worldwide.

Investment Community

Both mainstream investment analysts and those who practice socially responsible investing are assessing companies in the auto sector for their exposure to climate risks and their positioning to take advantage of opportunities created by the issue. The Carbon Disclosure Project, for example, provides investors with a standard set of disclosures about company responses to climate change. We have participated in the project since its inception and have submitted six publicly available reports.

Ford's ability to comply with climate-related regulations and respond to markets influenced by the issue is of increasing interest to investors. Thus, providing climate-change-relevant information to investors and shaping our business strategy with climate change in mind are important elements of maintaining access to capital.

Physical Risks

Global climate change raises the potential for shifting patterns of extreme weather and other risks to our facilities. For insurance purposes, we assess the risks each of our facilities faces (with input from third-party engineers) at least annually. This risk assessment is updated based on new data and takes into account the risk of exposure to hurricanes, tornadoes, other storms, flooding and earthquakes. As a result of this process, we believe we have a good understanding of the physical risks faced by our facilities and how those risks are changing over time.

Extreme weather has the potential to disrupt the production of natural gas, a fuel necessary for the manufacture of vehicles. Supply disruptions raise market rates and jeopardize the consistency of vehicle production. To minimize the risk of production interruptions, Ford has established firm delivery contracts with natural gas suppliers and installed propane tank farms at key manufacturing facilities as a source of backup fuel. Higher utility rates have prompted Ford to revisit and implement energy-efficiency actions that previously did not meet our internal rate of return.