Business Week Online [Printer-friendly version] December 19, 2007 ENERGY BILL HAS ONLY HALF A TANK; By David Kiley The Energy Independence & Security Act, passed by the U.S. Senate last week and expected to be signed by the White House as early as this week [it was signed Dec. 19 -- Rachel's editors], is a step in the right direction to reduce America's addiction to fossil fuels. But those who are suspicious of a bill green-lighted by both houses of Congress, the auto and oil industries, and an oil-patch White House are probably right to withhold applause. The main focus of the bill is to raise the fuel-economy standards for the auto industry to 35 mpg by 2020, 10 mpg beyond where it is now. The measure is estimated to save the U.S. about 1.1 million barrels of oil per day by the time the standard is reached -- 13 years from now. Some experts estimate that depending on how expensive oil becomes, U.S. consumers could save $22 billion a year with 200 million fewer tons of greenhouse gas emissions. The increase in fuel economy is no small mission. Consider that today, Ford and Chrysler do not make a single vehicle for the U.S. that tops 35 mpg. But two things to keep in perspective about this new fuel- economy standard: The European vehicle fleet today already achieves more than 40 mpg. Remember the words of former Defense Secretary Donald Rumsfeld when France and Germany would not assist in the Iraq War? He called those countries "Old Europe." Which part of the world looks old now? Vehicular Trade-offs To achieve the higher fuel economy, General Motors, Ford, and Chrysler will have to sell more fuel-efficient cars than they have been selling, to offset the trucks and SUVs they will continue to sell. But here is the wild card: Americans continue to prefer larger vehicles to small ones. True, an increasing number of people are trading away from gas-thirsty, truck-based SUVs such as the Ford Explorer and Chevy TrailBlazer, to car-based SUVs. But this is not a huge sacrifice by consumers. If an Explorer owner, for example, switches to a Ford Edge crossover, he or she has gone from a vehicle that gets 13 mpg city/18 highway to one that gets 16 city/22 highway. That's about a 22% increase in fuel- economy performance -- but pardon me if the actual numbers don't feel like a moon shot. That kind of trade-off won't get automakers to 35 mpg. But consider the transformation of the fleet when you consider a switch to clean diesel and full hybrids. A Dodge minivan gets about 18-19 mpg in combined city/highway fuel economy. General Motors sells a smaller minivan in Europe, the Zafira, whose fuel economy with a gas engine is about 27 mpg. The diesel version, though, gets 41 mpg. While most Americans still get anxious about the idea of diesel, I just don't hear many Europeans complaining about the diesel engine or the smaller vehicle, which has three rows of seats. Toyota's Prius, a legitimate alternative to a Toyota Camry or Ford Fusion, gets nearly 50 mpg depending on real-world driving use. And truthfully, a lot of Edge owners would get along fine with a Prius as well, or even a Ford Escape Hybrid, which gets around 30 mpg. Incentives and Diesel Education What's missing from this energy bill are sufficient carrots and sticks for automakers, oil companies, and consumers to make this transition happen. "I honestly don't know how we are supposed to reach the 35-mpg standard," says GM Vice-Chairman Robert Lutz. "I'm not sure anyone knows." GM is banking on increasing the fuel economy of all its vehicles, plus an influx of plug-in cars whose fuel economy is yet to be rated. It will be an interesting political battle to see how plug-ins are counted toward each company's CAFE [corporate average fuel economy] rating. Also missing from the energy bill are continued incentives for consumers, still wary or unsure about hybrids and diesels, to keep buying them. Diesels, in fact, were never part of the incentive program of tax credits allowed to buyers of Toyota Priuses and Ford Escape Hybrids, which phase out after a certain number of those vehicles are sold. Clean diesel fuel, which is available now in the U.S., could be a huge game-changer in the U.S., as it has been in Europe. But one of the sticking points for automakers is the technology to meet U.S. and California emissions requirements, as well as the lack of interest by consumers, most of whom don't understand diesel engines. Consider a measure that would have made a lot of sense in the energy bill, but got no conversation in Washington: What if the U.S. government allocated $1 billion to promote clean diesel and educate the public. The Feds have done this previously with ad campaigns to promote, for example, "Just Say No" to drugs. There are still no peer- reviewed papers showing those ads deter kids from using drugs. None. But it is a fair assumption that, with Europe as a model, $1 billion to educate people about clean diesel would actually have some impact. Something to Talk About The energy bill was passed by the Senate last week after it stripped out tax hikes on oil companies and preserved huge ethanol subsidies to agribusiness. And it was done just as the U.S. was looking especially bad at a 190-nation conference that convened on the Indonesian island of Bali to hammer out an accord to fight global warming in the next decade. The U.S., the world's biggest carbon producer, had been fighting participation in the agreement. Said House Speaker Nancy Pelosi [D-Calif.] about the bill: "It sends a message to world leaders meeting in Bali that the United States is serious about addressing global warming." Here is a prediction. This energy bill, even after it's signed by President Bush, will be revisited in the next few years, amended, tweaked, and ultimately made even less effective than it is now. And here is another prediction. Unless American consumers are led by their government to a new energy age, which will require them to make sacrifices and change their thinking about how they power their cars, houses, and planes, the only change will be increased prices of automobiles, home heating bills, and plane tickets. That's because too many consumers will decide they'd rather have the costs of those things go up as automakers, utility companies, and airlines end up paying fines instead of complying with the new laws. There is, as we know, a wide-open and raucous Presidential election under way. The idea of "shared sacrifice" has only been occasionally uttered by a few of the candidates -- notably New Mexico Governor Bill Richardson and Illinois Senator Barack Obama, both Democrats. But talking to Iowans, New Hampshirites, and South Carolinians about driving fewer pickups and SUVs "doesn't focus-group well," a Democratic campaign strategist told me. "Right now," says the strategist, "the energy bill has something for everyone to talk about." And that, it seems, was the point all along.