CAFE OLE!:

Energy: Ignoring the Obvious Fix: Industry lobbying against higher fuel economy standards is fierce. Yet that remains the best way to cut U.S. dependence on foreign oil (Thane Peterson, 6/20/05, Business Week)

The Corporate Average Fuel Economy (CAFE) program -- requiring manufacturers to steadily increase the average fuel economy of new cars and trucks they sold -- was first introduced during the mid-1970s energy crisis. "An energy crisis is going to slap us in the face again if we don't do something," predicts John Heywood, director of MIT's Sloan Automotive Laboratory and Center of 21st Century Energy.

Granted, CAFE standards haven't worked as well as they might have. But that's largely because special interest groups succeeded in twisting the rules. For instance, foreign and domestically produced vehicles were treated differently to avoid excessive job losses. The standards were looser for trucks than cars, helping foster the boom in gas-guzzling SUVs. And regulators' ability to update tests and standards was severely limited, which is one reason official mileage estimates are up to 25% higher than what vehicles achieve in real use.

Worse, lawmakers didn't keep the pressure on. Federal mileage standards -- 20.7 mpg for light trucks and 27.5 mpg for cars last year -- are little changed since 1985 (though the light-truck standard is slated to rise to 22.2 mpg by 2008). As a result, the average mileage of U.S. passenger vehicles peaked in 1988 and has fallen slightly since. And because gasoline prices remained low until recently, some of the potential energy savings were eaten up because drivers simply drove more as vehicles got more efficient.

A broad consensus is developing in Washington that the nation must move faster. Indeed, prominent security hawks and neoconservatives such as former National Security Council Director Robert McFarland, former Assistant Secretary of Defense Frank Gaffney, and ex-CIA director R. James Woolsey have joined together with conservative Christian leader Gary Bauer and the environmental group Natural Resources Defense Council (NRDC) to form a new coalition called Set America Free (www.setamericafree.org) to lobby for greater national energy independence.

SIMPLE SYSTEM. Unfortunately, the group plans to remain neutral on revising federal mileage standards. "It's a political hot potato. We need to get beyond the CAFE debate," says Anne Korin, Set America Free's co-chairperson. Instead the coalition is backing incentives to promote alternative, hybrid, and flexible-fuel vehicles that would be powered by everything from ethanol and methanol to biomass and electricity. The version of the energy bill passed by the House includes some similar provisions, such as consumer tax credits of up to $4,000 to promote sales of alternative-energy vehicles.

Raising federal mileage standards would be a far more effective -- and free-market-oriented -- approach. Conservative critics may deride CAFE standards as command-and-control big government. But the truth is that as long as the same mileage standard applies to every company, competition will flourish, and executives will have enormous latitude in deciding how to meet the goal. By contrast, using tax credits to favor certain alternative fuels smacks of the government trying to pick winners and losers among the technologies available.

It's ideal--just set a high standard but leave it up to the market how they meet it and start surcharging owners of older cars that stay on the road that don't meet it.

Posted by Orrin Judd at June 20, 2005 3:52 PM