Bush's Cold CAFE?

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President Bush on Jan. 23 asked Congress in his State of the Union address to help the nation reduce gasoline consumption during the next 10 years, outlining an energy plan that would seek increased fuel economy standards from the auto industry -- something to which the industry has long been loathe to agree.



The Bush idea is to raise the fuel efficiency of passenger cars and light trucks by an estimated 4% annually into the middle of the next decade. The fuel economy increase isn't set at a specific number, but would result from part of a plan to cut U.S. gas use 20% in the next 10 years through better mileage and the increased use of gasoline substitutes such as ethanol. The proposal would set the amount of ethanol and other alternative fuels to be blended into the fuel supply at 35 billion gallons by 2017, up from 7.5 billion gallons in 2012. The standard would be expanded beyond ethanol to include oil alternatives such as biodiesel, methanol, butanol, and hydrogen.



These standards, known as Corporate Average Fuel Economy [CAFE], were first enacted by Congress in 1975, after the 1973 oil crisis, to regulate the average fuel economy of cars and trucks. They are the sales-weighted average fuel economy, expressed in miles per gallon, of a carmaker's fleet of passenger cars or light trucks. The standards are established and regulated by the National Highway Traffic Safety Administration and the Environmental Protection Agency.



Upstaging the Democrats

While it sounds like the ultimate oil-patch President has gone green, a closer examination shows that while there's substance in the proposal, and hope for the staunchest environmentalists, there are also political considerations meant to make the President look good and put pressure on the Democrats to deliver environmental reform that even they have had a hard time supporting.



Little in the way of an energy policy has been crafted in six years under Bush. His Administration and the Republican Congress have installed mining and oil lobbyists at the EPA. And they even famously went so far as to extend a tax provision that created incentives for white-collar workers such as realtors and accountants to buy -- instead of fuel-efficient cars -- gas-guzzling SUVs that could be written off income tax returns, as part of the tax code originally crafted for farmers and contractors to be able to buy the big trucks many of them need.



As green as this week's proposals are, they will run squarely into the political kitchen of Representative John Dingell [D-Mich.], who's the new chairman of the House Energy & Commerce Committee, and whose constituents at home are General Motors (GM), Ford (F), DaimlerChrysler's (DCX) Chrysler division, and the United Auto Workers [UAW] union. If Bush's ambitious plans don't materialize in the way of legislation, the President will have the satisfaction of looking green for proposing them and the Democrats will look like out-of-touch Rust Belt traditionalists protecting the status quo.



Toyota Advantage?

Dingell said he will examine the Bush proposal and discuss it with the auto makers, following what "doctors of medicine say: 'First, do no harm.'" Dingell added: "I'm going into this thing with an open mind. I'm going to listen to everything they say, but this thing drips questions."



The 27-term representative has a lot of power to prevent legislation he doesn't like from ever coming to a floor vote. And he's a staunch and tough defender of the auto companies. A review of Federal Election Commission records of political donations shows that while most prominent high-ranking Detroit auto executives send their personal contributions to Republicans, Dingell is often the one Democrat on their giving list.



Not surprisingly, other Michigan politicians rose to the defense of the Big Three. Representative Joe Knollenberg [R-Mich.] says a CAFE increase will only play into the hands of Toyota (TM). The surging Japanese auto giant will sell more pickups and SUVs and use the CAFE credits it has built up over years of selling smaller vehicles to avoid fines. He says there are better ways to reduce the nation's dependence on foreign oil than through regulatory policy.



Drained in Detroit

Knollenberg wants the tax credits for hybrids and other technologies to be made a permanent part of the tax code. They currently expire in 2010. Says Trent Wisecup, Knollenberg's chief of staff: "The Congressman's position is we need to reduce our dependence on foreign oil. But you need to do it by promoting alternative energy."



General Motors, Ford, and Chrysler are all hurting financially now. And the UAW is losing tens of thousands of jobs, especially in Michigan, as the three companies downsize. The union, the auto makers, and Dingell have long opposed federal dictates to increase fuel economy because they view the prevailing regulations as wrongheaded and because precipitous shifts in fuel economy, they say, cost jobs as demand for trucks and SUVs falls. Having to hurry fuel-saving technology along with investments in new plants and products at a time when Ford and Chrysler aren't making any profits, and GM is struggling to make any, would be burdensome. Toyota, which earns more than $10 billion per year, can pretty much cope with any changes.



One likely scenario has the federal government pumping a lot of new subsidy money into expansion of the ethanol infrastructure and into auto makers to hurry along lithium ion battery technology for plug-in electric cars. Plug-ins would allow consumers to drive between 25 miles and 40 miles a day on electric power before gasoline was needed to recharge the battery. GM showed one such car at this month's North American International Auto Show. It's a much more promising breakthrough than hydrogen-powered cars to reduce demand for gasoline and carbon emissions [see BusinessWeek.com, 1/7/07, "Chevy's Volt Has the Juice"].



Gas-Tax Boosters

Currently, CAFE standards treat passenger cars one way and trucks and SUVs another. The current CAFE regulation for cars is 27.5 mpg, which auto makers have to meet by averaging the fuel economy of their car lineup. Trucks' and SUVs' CAFE rating for an auto maker is determined by a sliding scale for such vehicles, which have to meet certain fuel economy based on their weight.



Auto makers have long complained that dictating an average fuel economy regulation is a terrible way to boost fuel economy. Most would prefer that the government establish a gasoline tax that would simply make gasoline permanently expensive, which would lead to changes in consumers' buying patterns.



This is the way the European Union responded to excessive pollution in its cities. In Europe, the cost of gasoline can run the equivalent of $6 per gallon, which has boosted the popularity of small cars and clean diesel fuel, which gives many cars fuel economy above 40 mpg.



"It would be much more effective if consumers had skin in the game," said GM Chairman G. Richard Wagoner Jr. in a recent interview. GM issued a corporate statement in response to Bush's speech, saying it would try and ensure that "any fuel economy increases are technically achievable and do not compromise safety, performance, or limit consumer choice."



Political Suicide?

Some lobby groups were quick to react to the President's speech, and reflect the political dog fighting that will go on in the months to come. The SUV Owners of America [SUVOA] quickly issued a press release after the speech decrying higher fuel economy as a path to greater traffic fatalities. "History shows us that when the government has raised fuel economy standards, it has forced auto manufacturers to make more unsafe smaller vehicles in order to comply with the regulation, which puts drivers at far greater risk of death or injury in crashes," said SUVOA President Barry McCahill. "Thousands of lives already have been lost as a result of previous CAFE increases, and we will lose thousands more if some of the current proposals are enacted." This conclusion, though, is very dubious, and reflects analysis of government crash data after the CAFE regulation was enacted 30 years ago.



Still, it's true that so many pickups and SUVs have been sold in the last 20 years that many consumers will have to be wrenched out of their huge vehicles no matter how high gas prices climb, because they don't want to be out on the road in a small car in a sea of behemoths.



While a tax that would make gasoline permanently expensive, most industry executives and economists agree, is the most effective way to change consumer demand for more fuel-efficient vehicles, it has so far been a political nonstarter in Washington. No representative or senator wants to try and run for re-election having advocated and voted for a tax on gasoline. Consumers simply don't like a gas tax, and have been trained to react with hostility to any new tax, no matter its intended use.



Going for the Green

So the burden is placed on auto makers to make more and more fuel efficient the large, roomy cars, pickups, and SUVs that U.S. consumers favor over small cars. GM Vice-Chairman Robert Lutz has declared this approach to increasing fuel economy the equivalent of fighting obesity by halting the manufacture of large-size clothes.



Meantime, environmental groups have long complained that auto makers can make even SUVs much more fuel efficient through the use of existing engine technology, weight reduction, and even the kinds of tires they put on vehicles. Ford's Explorer, for example, says the Union of Concerned Scientists [UCS], could be made 71% more fuel-efficient with existing technology without sacrificing size or performance.



"SUVs aren't the problem; poor auto maker designs and weak government standards are," says David Friedman, director of research for UCS's Clean Vehicles Program. Friedman and his colleagues designed an improved version of the Explorer they call the "UCS Guardian." With off-the-shelf components, including a six-speed automatic transmission, an integrated starter-generator that shuts off the vehicle in traffic jams, and "smart" seat belts, the Guardian, Friedman says, would also be safer. The improved version of the Explorer would cost $735 to $2,960 more. Ford disputes the group's findings and arithmetic.



Bush's proposals are just that. There will be a lot of wrangling over the details. But it's hard to miss the importance of the fact that Bush's environmental and energy ideas are more aggressive than those of most Democrats. And they come in a week that found Bush's nemesis, former Vice-President Al Gore, his 2000 opponent whom many believe really won a close Presidential election over Bush, nominated for two Academy Awards for his documentary about global warming, An Inconvenient Truth.



Kicking the Addiction

Optimists might say that Bush has finally realized that the key to peace in the Middle East, especially in Iraq and Iran, is for the most energy-hungry society in the world to stop needing so much Middle East oil. After all, the U.S. policy toward that region for a century can be summed up thusly: That's our oil under your sand. That mentality, what Bush has called America's "addiction" to oil, has caused this Administration and others going back to the 1920s to make terrible foreign policy judgments all in the cause of keeping oil flowing at prices acceptable to American consumers.



"I think there's an awareness, and an understanding going forward on everyone's part, that even if we're enjoying cheaper gas today that that's a temporary state of things, and that all of our plans for future products must center around greater fuel economy and the assumption that oil is going to be scarcer and scarcer," said Ford President of the Americas Mark Fields at this month's North American International Auto Show.



Indeed, that may be the one conclusion about which both parties can agree.