Diesel is the way to go,,,
The Diesel engine from a Smart would be a dumb idea. They are too small, rare and expensive. A tiny Diesel from a euro VW lupo would be perfect. You can get the mass-produced VW drivetrain complete for cheap on eBay. Sure, the mounts would need to be fabricated from scratch, but that is the case with ANY engine transplant.
Removing the battery pack would actually make some luggage space! It looks like there is plenty of room for a conventional drivetrain once you remove all the junk in the engine compartment...
There is no reason a Diesel in a car that light would not get 70+ MPG.
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