Small is beautiful
To make gasoline engines more efficient without sacrificing performance, automakers are designing smaller engines equipped with turbochargers and direct injection.
"There are clear incentives for automakers to push direct-injection turbos because they are more profitable, they cost less and offer closer and closer CO2 performance [to diesel]," Rinkel said.
Ford followed this strategy with its EcoBoost engines. The automaker says its new three-cylinder 1.0-liter turbocharged gasoline direct-injection engine accounted for 30 percent of Focus sales this year.
Ford also will use the engine in its B-Max and larger C-Max minivans.
The 1.0-liter turbo will replace Ford's 1.6-liter naturally aspirated engine in the seven-seat Grand C-Max. With it, the Grand C-Max will generate 119g/km of carbon dioxide.
Other automakers are following the same strategy. Opel has announced a family of turbocharged gasoline engines starting with a three-cylinder 1.0-liter unit due in 2014.
Renault has introduced a three-cylinder 900cc turbocharged gasoline engine in the Clio, and Fiat commercialized a two-cylinder turbo in its TwinAir versions of the 500 and Panda minicars.
In fact, 20 of the top 25 automakers selling in Europe have decreased their average engine displacement since 2006, according to JATO Dynamics. Only Mini, Dacia, Chevrolet, Citroen and Mitsubishi have bucked the downsizing trend.
EVs and hybrids
The rising cost of oil could tip the economic balance in favor of hybrid-powered vehicles, says Ford's Winstanley.
"If your diesel costs are getting higher and higher, then the way to achieve the lowest fuel economy is to electrify the gasoline engines," he said.
But so-called "full" hybrids, which can run a short distance on electric power only, have been slow to catch on in Europe.
Last year, Toyota sold just 24,750 Prius gasoline-electric hybrids, according to JATO Dynamics. And in the first eight months of 2012, sales are down 8.9 percent.
However, Toyota expects that sales of its new Auris compact will be split evenly between gasoline, diesel and hybrid power-trains, and the company has launched a new plug-in Prius hybrid to exploit an emerging market for so-called PHEVs (plug-in hybrid electric vehicles).
Ford will introduce a plug-in C-Max next year, while Mitsubishi will roll out a plug-in Outlander compact crossover in Europe in summer 2013. Already on sale are the Opel/Vauxhall Ampera and Chevrolet Volt.
With their limited battery range bolstered by a backup gasoline or diesel engine, plug-ins could generate global sales of 4.7 million units by 2020, according to the International Energy Agency.
The agency estimates that plug-ins would outsell pure EVs, which would generate global sales of 2.5 million units by 2020. Manufacturers would have extra incentive to promote plug-ins and EVs if European regulators approve a proposal in the 2020 legislation to offer automakers "super-credits" for selling cars that emit less than 35g/km of CO2.
For the first three years, each of the first 20,000 ultra-low emission cars sold by any automaker would count as 1.3 vehicles. That would make it considerably easier for automakers to meet their CO2 targets.
But EVs are still costly, and the lack of consumer demand makes them a risky bet for automakers.
To ease the high cost of electric cars, Renault will lease the battery pack for the Zoe subcompact EV, which debuts late this year.
"That's when we will know if battery leasing will work," said Paul Willcox, head of European sales and marketing for Nissan, Renault's alliance partner. "The biggest challenge is explaining the concept. It's a big communication job because you don't own the batteries."
Fuel cells are still in their infancy, but several European governments have committed to building a network of hydrogen fueling stations. Earlier this year, Germany announced it would build 50 stations by 2015 with the help of Daimler and other partners.
That might give a boost to fuel cells, which are getting cheaper as automakers refine the technology. The cost of fuel cells is expected fall 90 percent by 2020, according to a report published by McKinsey last year. By 2025, the total cost of ownership for a fuel cell vehicle is projected to match that of a car with a combustion engine.
During the Paris auto show, Daimler's Zetsche confirmed that fuel cells are getting cheaper. By mid-decade, fuel cells will cost about as much as diesel hybrids, he said.
At that price, fuel cells would be a niche market. By comparison, the Peugeot 508 diesel hybrid costs 39,200 euros in France ($51,400).
Other companies are developing fuel cells, too. At the Pariss show Nissan unveiled the Terra fuel cell crossover concept.
Nissan said the Terra "signals that Nissan is ready to mass-produce fuel cell electric vehicles whenever hydrogen becomes widely available."
The bottom line? There is no "silver bullet" technology that can single-handedly meet future emission standards. Automakers expect to use a variety of technologies, and they will see how the market develops.