May 29, 2009

Fuel Economy Standards are Only Half a Solution

In a remarkably bold regulatory move, the Obama administration is setting new, aggressive fuel efficiency standards for cars and trucks. The new goal will be 39 miles per gallon by a 2016 (which is around the corner in car model development time). This is big environmental news this week and for good reason. But as important wide-reaching as this kind of rule is, it seems like only half a solution.

The arguments against the ruling are of course being vociferously proclaimed from the usual suspects. But it's not easy to write them all off. It will cost more to make the technological changes, all at a time that the U.S. automakers are on life support. I tend to think the claims of expense from new standards that force innovation are generally overstated by alot...but it won't be costless to producers. The total cost of ownership to customers should go down with these kinds of fuel efficiency improvements, but that only matters if they buy the cars. And this brings us to the real problem -- what's the incentive for consumers. This concern, voiced by the industry and others, is far harder to dismiss. Unless gas is over $4/gallon, or we pay consumers to buy greener cars, why will they buy these new vehicles?

I've wondered since the car bailout packages why we didn't just take that money and commit to buying greener vehicles. GM wants $20 billion -- ok, we'll put $20,000 towards 1 million Chevy Volts as fast as you can make them. The government could buy them for government vehicles (imagine every FBI agent with a Volt -- if the bad guys saw one, I guess they'd know an agent was coming, but then again, they wouldn't hear it coming).

Remarkably, the industry is not responding quite as negatively as you'd think to all of this. they're happy not to face California's rules -- and then 49 other state regs. One national standard is preferable. And a very optimistic piece in the Wall Street Journal says "Car Makers Expect to Hit Fuel Goals."

But will they really hit the goals without the demand side pushing for it? It seems like a good time to have an even tougher conversation about what we can do to help consumers buy green. We have a remarkable consensus brewing that we need to move off of fossil fuels. The report from retired generals and admirals that just came out in the last few days was astonishing. As BusinessWeek reported, these military leaders believe fossil fuel, if it included the costs of transport and security, would run the army (and all of us) hundreds of dollars a gallon. Only 10% of the oil supporting the troops is actually moving the vehicles -- the other 90% went to "other vehicles delivering and protecting fuel and forces." As the report sums up, "This is the antithesis of efficiency." In a telling passage, the article reported:

"Our energy posture is not sustainable. It can be exploited by those who want to do us harm," retired Air Force Lieutenant General Larry Farrell, a co-author of the report, said in an interview. Finding a suitable alternative fuel and scaling it up to the size of the U.S. economy "is a 30-year project," Farrell said. "We've got to get started now."

It seems that starting with cars and trucks now would be a good idea then -- at the very least, maybe it frees up fuels for uses that are harder to avoid like flight and military. But we won't get there if people don't buy the cars. And why would they at $2 a gallon? With even the military saying we need some massive shifts, can we actually talk seriously now about giant subsidies to car buyers or, better yet, a tax on gas that puts a $4 floor on the price? Without those demand-side measures, we have only half a solution.

[This first appeared on Huffington Post]

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