Is sponsoring Formula 1 racing compatible with halting climate change? The question, asked by a German journalist at BMW's annual accounts press conference, produced the first genuine belly-laugh from group chairman Norbert Reithofer.

"I don't think 20 racing cars is going to make a whole lot of difference," he said. But another question, from Financial Times journalist Richard Milne, was perhaps more worrying - had the group's campaign against the European Commission plans to cap carbon dioxide emissions given the German car industry a bad name?

As the world's largest maker of luxury cars, BMW has a problem. The company's very existence depends on encouraging people to drive cars that cause more carbon emissions than average.

In the UK, transport contributes 26 per cent of carbon emissions and is the only major sector in which emissions are predicted to rise until 2020.

A recent study by Oxford's Environmental Change Institute discovered that the highest emitters were mostly men who earned more than £40,000 a year. While air travel accounted for 70 per cent of the sector's climate change impact, cars were responsible for 25 per cent. Gordon Brown bowed to pressure from environmentalists yesterday when he increased road tax on cars such as the BMW X5 to £300 next year and £400 the year after.

In the light of all this, perhaps the biggest belly-laugh should have come when Dr Reithofer said: "Mid-size and luxury vehicles must not be compared with small and micro-cars. We call for different carbon dioxide emission limits for different vehicle classes and sizes. Anything else is not physically possible and is not economically sound."

But he is deadly serious. Following intensive lobbying by BMW and other luxury car makers - which believe the average figure penalises them unfairly - the EC reduced its target to 130gm of carbon dioxide per kilometre as the average for all new cars by 2012. That is equivalent to fuel consumption of 5.3 litres per 100 km, or 44.3 mpg.

Dr Reithofer defended the company's campaign, saying it had a responsibility to its 100,000 employees as well as to the environment. He said: "We raised our voice when we thought it was the right time."

The EC says the reduction is possible through increased use of biofuels, better tyres, and measures to ensure drivers change gear at the right time. However, Dr Reithofer said the proposals - yet to be approved by member states and the European Parliament - were unworkable and surrounded by "hype".

Legislation is unlikely to be drafted until 2008. However, if we are serious about halting climate change, large cars will be in the firing line. Car manufacturers had previously argued for self-regulation, and took on self-imposed target of reaching 140gm by 2008. The EC made its proposal in response to the industry's failure to live up to the commitment, as carbon dioxide emissions from new cars sold in 2005 averaged about 160gm - a figure which is still rising, thanks to our appetite for large, fast cars.

The emissions figures are an average, and industry analysts believe they will lead the industry to invest in more "cleaner" models to compete with the Toyota Prius. BMW has invested in a model called the Hydrogen 7, a fact which caused more hilarity in Munich when Dr Reithofer admitted there were no plans to produce it for sale.

Riding to the rescue of BMW is the one car whose green credentials are plain to see - the new diesel version of the Mini Cooper, launched at the Geneva Motor Show earlier this month. It will have such low emissions that it will be one of the few cars to escape the London congestion charge.

Dr Reithofer pointed out that the new engine, produced in collaboration with Peugeot, will emit just 118 gm per km. Replacing the Mini One D's combined fuel consumption of 58.9mpg, the Cooper D is capable of 64.2mpg.

As production at Cowley ramps up to 240,000 following a Christmas shutdown and £1m investment to adapt to the new generation models, BMW is playing a clever game to preserve the "exclusivity" of the brand.

Asked about long waiting times for customers who order a new Mini, BMW board member Michael Ganal said: "We are not building for inventories. Our cars are produced to meet sales demand." Having sold Rover in 2000, BMW has turned its back on the mass market to focus on premium brands, and is determined to keep secondhand prices high by ensuring that demand exceeds supply.

However, BMW admitted it was looking for ways to step up production of the Mini still further. Production director Frank-Peter Arndt said: "If we are pushed we could get to a theoretical maximum of 300,000. We can find ways of reaching that figure within our existing plants."

He ruled out adapting BMW factories in the US to build Minis, saying: "The UK is the home of the Mini, and it will remain the home of the Mini." However, he said that efficiency gains meant that the workforce would not grow at the same rate as production.

The US, where the original Mini never took off, is now the biggest market, with around 40,000 sold last year, just ahead of the UK. Last year BMW sold 2,050 Minis in China - a figure it expects to grow rapidly over the next few years.

Tasmania is a good example of a country which was fond of the old Mini - and is even fonder of the new one, which takes six places in its top ten car sales league. Two huge markets remain - Brazil and India.

Even at 300,000 a year, the Mini is a minor part of BMW's 1.3m annual car sales.

However, with the one millionth Mini set to roll off the assembly line later this spring, six years after production started, the car is playing a more and more important role in the group for three reasons - it appeals to younger buyers, it brings down the group's average carbon emissions, and it makes money.

Dr Reithofer said: "Mini remains without any doubt the most successful premium brand in the small car segment."