Getting Off

Our cars and trucks should not be improved—they should be revolutionized. They must be made to go farther on a gallon of fuel, but we must also have more choices of fuel. We can no longer be hostages to oil. This will involve two separate and equally critical areas of policy development.

First, we should increase the mileage we get from every gallon of gas in the cars we drive through improved fuel efficiency. Second, we must develop new ways of fueling our cars and trucks to reduce carbon emissions and free ourselves from volatile oil markets, which drain the lifeblood of our economy. The new options will include a diverse range of next-generation fuels. Those include cellulosic ethanol from a wide assortment of feed stocks, from switchgrass to wood fiber. Other potential fuels are diesel from canola, soybeans, and even algae.

We need to accelerate the commercialization of plug-in hybrids. This will be good for GM if we can help it make good on the promise to be the first company to roll out a plug-in, flex-fuel model, the Volt. It will also be good for new U.S. companies like A123 Company, an MIT spin-off that is positioned to provide the incredibly powerful lithium batteries to power the Volt.

Start Deploying the Next Generation of Transportation Today

Mandate oil savings. It is essential that we develop rules with teeth that guarantee that American cars take less gasoline to run. We have three potentially achievable choices that would produce an immediate increase in auto efficiency; it is less important which option we choose than that we move forward in a way that mandates a reduction in oil use while applying policies that preserve jobs in the auto industry. First, we could simply increase the corporate average fuel economy, or CAFE, standard. Second, we could mandate a percentage increase for each company above its current levels. Or, third, Congress could require that oil consumption be reduced by a certain percentage each year and delegate authority for implementation to the executive branch agencies and their rule making. Each of these choices has clear environmental and energy benefits and clear political difficulties. Settling on a mechanism for requiring that we save oil will be a political negotiation, but we must have a stronger baseline requirement. Any of these approaches will be effective in saving oil, but they should also be implemented in parallel with policies that save jobs.

CAFE standards have been so highly successful in improving mileage that it would be easy to think they offer an easy policy course. After all, they raised the entire fleet average by about 60 percent in the 1970s and 1980s.17 However, because U.S. manufacturers are now so heavily concentrated in the production of large cars and trucks and will have a harder time improving fuel economy, there is strong political opposition from U.S. industry to raising standards. But the failure of U.S. car companies to move effectively into more fuel-efficient vehicle lines could also result in the loss ofjobs and market share for these same firms unless the transition is managed rapidly.

An alternative approach to raising the floor of CAFE standards would be to require each manufacturer to ratchet up the fuel economy annually for its entire fleet. This could break the congressional impasse, and it would be beneficial to full-line producers that manufacture large vehicles. Raising the bar by just 4 percent per year on a consistent basis would be good for American manufacturing, but it would face opposition from foreign car makers that are already building more fuel-efficient cars.

The third possibility, for Congress to pass a mandate that the president take such regulatory measures as required to meet designated fuel savings targets, could be a way to work around congressional opposition to touching the CAFE standard. It would depend, unfortunately, upon presidential will (or won't).

It is clear that we must act through one of these mechanisms. A voluntary approach has failed for two decades. Experience has shown that we are remarkably insensitive to rising gas prices, altering our buying choices only in the case of astronomical price spikes. Economists call this inelasticity. We can call it the lesson of experience—the only way mileage will go up is if it is required to. Only meaningful standards well implemented can save oil while saving jobs.

Of course, as we move toward cleaner fuels, it will no longer be enough to look at just miles per gallon. Since entirely new forms of fuel are coming into use, we will have to move toward a whole new system based on measuring carbon emissions per mile rather than miles per gallon. Former Senate majority leader Tom Daschle has proposed a new CAFE system, a "carbon alternative fuel equivalent" standard, to get at the roots of climate change. The state of California has announced its intent to create a low-carbon fuel standard, in addition to regulating tailpipe emissions of CO2, a measure now challenged in court by industry. All of these measures will reduce the climate impacts of automobile transportation.

A critical element of any increase in standards for fuel economy will be to preserve the two-fleet rule, which calculates the fuel economy of domestically produced and imported vehicles within the same manufacturer's fleet separately. This seeming technicality ensures that a portion of the advanced-technology, alternative-fuel, lightweight, and smaller cars are produced here in the United States. Without the two-fleet rule, manufacturers would be content to move all of their high-mileage car production offshore, since they could do so and still receive "credit" in just one overall fleet. Measuring a company's performance across two fleets ensures that the company will maintain a balance in domestic production.

Analysis by the Apollo Alliance showed that $30 billion in investment tax credits and loan guarantees to accelerate retooling in the domestic auto industry (to ensure that higher standards would not mean fewer jobs) would result in the creation or retention of nearly 130,000 jobs across the economy, with GDP gains of $42 billion over ten years. It is possible to design policies that both improve standards for oil savings and drive new job-creating investment into the economy. With sound investments, this is not a zero-sum game; in fact, it is the root of sustaining our future national competitiveness.18

Support the transition in industry. It is in our national interest to help provide a bridge across troubled waters for the U.S. auto industry, both because it will help preserve companies and good jobs in the industry and because it will help smooth the passage of these underlying policies. We need to solve the legacy health care crisis in the auto industry. U.S. car makers currently spend more money on health care than they do on steel. The Health Care for Hybrids bill, now pending in both chambers of Congress, is one method for taking on this issue, by leveling the playing field with European and Asian competitors that do not have to pay for the legacy costs of retired workers, while directing new investment into next-generation fuel-efficient cars. This bill would create a voluntary program in which domestic automakers could receive federal financial assistance covering 10 percent of their approximately $6.2 billion in annual legacy health care costs through 2017, provided that the companies invest at least 50 percent of their health care savings in manufacturing fuel-efficient cars. That means both lower costs for business and consumers and greater investment in our productive manufacturing base.19

We must also provide loan guarantees or investment tax credits to manufacturers to directly help reduce the cost of capital for retooling equipment and retraining workers to produce energy-saving cars. Consumer preference for high-efficiency hybrid and advanced diesel vehicles is increasing in an era of skyrocketing gasoline prices. In 2004, the University of Michigan Transportation Research Institute estimated that a facilities conversion investment tax credit of 67 percent to incen-tivize production of these vehicles in the United States would cost just under $1.1 billion spread out from 2005 to 2009. The credit could switch half of all powertrains and 25 percent of vehicle imports to U.S. production, providing the treasury with $7.16 billion in new tax revenues and preserving 59,500 jobs over a ten-year period.20

Require production of flexible-fuel vehicles. Today there are six million flexible-fuel vehicles (FFVs) on the road capable of running on either gasoline or a blend of 85 percent ethanol and 15 percent gasoline; that is roughly equal to the number of diesels on the road.21 These cars have been produced due to a loophole in the fuel economy standard that allows a credit for oil savings to cars capable of running on ethanol, regardless of whether the fuel is used. Currently, there is a chicken-and-egg problem with getting both a new fueling infrastructure and a new fleet of vehicles on the road simultaneously. Brazil, however, was able to go from virtually no FFVs on the road to over 70 percent FFVs in the new car fleet within three years.22 A simple mandate that at least 50 to 70 percent of new cars be produced to accommodate E85, along with clear labeling of the vehicles, would go a long way toward creating a viable market for biofuels. The additional cost of about $100 to include flex-fuel capability at the time of manufacture is peanuts to the manufacturers and would prevent the sorry situation of developing the capacity to produce vast quantities of ethanol with no customers to buy it.

Harness the purchasing power of government to create a market for plug-in hybrids and other advanced-tech vehicles. Collectively, the federal, state, and local governments are the largest users of gasoline in the country. Government is the five-hundred-pound gorilla of procurement. It should use that power.

Dramatically expand research, development, and deployment funding for new technology. The lesson of the Wright Brothers is that little guys with big ideas can do grand things. The A123 Company is on the cusp of making the world's most efficient battery, but when you talk to the company's executives, they express frustration that they have to surmount the hurdles of being both small and early in the game. They have a hard time getting huge corporations to trust that they can deliver. Here is one place where targeted R&D could really make a difference. Establishing more effective grant programs is one of the best investments Uncle Sam could make.

Create Real Fuel Choice by Kicking the Oil Habit

Require oil companies to install alternative fuel pumps. The oil companies will not install ethanol pumps unless they are required to do so. The big oil companies are not eager to compete with Idaho farmers like Ray Hess and his cellulosic ethanol or the folks in Grays Harbor County, Washington, who are ready to sell biodiesel. The government could easily mandate that oil and gas companies that have twenty-five or more stations must install E85 pumps at 10 percent of their stations by the year 2010 and 50 percent of their stations within ten years. This simple formula would create widespread access to fueling options for owners of flexible-fuel vehicles and would make biofuels a viable choice for consumers. The financial impact of this mandate could be softened by an expanded tax break to cover a large portion of the investment necessary for the installation or conversion of a new pump, and the focus on large retail chains would prevent this mandate from creating an undue burden on mom-and-pop gas stations.

Increase the Renewable Fuel Standard and carve-outs for cellulosic ethanol and biodiesel. The Energy Policy Act of2005 established the first national requirement for renewable energy. By the year 2012, 7.5 billion gallons of ethanol must be used in our nation's fuel supply, with 250 million gallons coming from cellulosic ethanol. The creation of this requirement set in motion the conditions for the growth of the industry. Refineries got financing because of the guaranteed market, farmers allocated crops for the production of grain for energy supplies, and today we are on track to meet the target substantially in advance of the deadline.

But the bar is not high enough. An analysis from the University of Tennessee estimates that ultimately we could strive for 65 to 85 billion gallons of advanced biofuels in our nation's energy system—nearly ten times the 2005 mandate as we move beyond traditional ethanol.23

But these sorts of numbers cannot be met using corn-based ethanol. We need to carve out a specific and robust requirement for the next generation of biofuels, increasing the portion of the mandate that is set aside for sustainably produced cellulosic ethanol and biodiesel.

Provide loan guarantees to commercial-scale cellulosic ethanol plants. Everyone wants to be the second investor to finance the construction of a cellu-losic plant. The federal government can light the match for the cellu-losic revolution by funding loan guarantees that can be the key to unlocking the financing for the first cellulosic plants. Iogen Company is ready, willing, and able to build its plant in Idaho once that guarantee is signed. Smaller-scale early commercialization plants below the current 30-million-gallon minimum should be eligible for loan guarantees as well, to encourage a diversity of technologies and business models.

Separate incentives should also be offered for traditional plants that substitute cellulosic material for natural gas as a source of process heat, to provide an early market for cellulose as a new farm commodity.

Create an aggressive program of incentives for local ownership of renewable energy facilities and biorefineries, following the Minnesota model. Locally owned wind farms and ethanol plants can provide significantly larger returns than the status quo for communities and create meaningful economic development for the nation's hard-hit rural communities. We saw this clearly in the experiences of Benson and Luverne, Minnesota. Federal incentives that are established to promote the development of biofuels and wind should offer additional incentives and higher direct producer payments to promote community- and farmer-owned facilities, as well as targeting incentives to small and midsize production scales.

Certify the sustainable production of biofuels and reward low-carbon fuels. A shift to renewable fuels should be accompanied by a program that certifies the sustainability of the production process of those fuels and rewards low-carbon choices. The processes that create biofuels need to be rated for how much CO2 they create. This can be done following the model of public information tools, like the EPA Energy Star or USDA organic labels. California has advanced a mandatory low-carbon fuels standard that will guarantee that an increasing portion of the fuel mix in the state will have reduced climate impacts, and that all fuels will be graded on their carbon content. This is a critical tool for sustainably moving away from oil dependence in our transportation fleet and should be a major tenet of our national fuels policy

Expand R&D funding for over-the-horizon alternative fuels. Great promise has been shown in research applications for producing biofuels from very simple plants like algae, as well as various forms of products in the urban waste stream. A robust program for research and development should be sustained for developing future generations of fuel that require fewer fossil-fuel inputs and offer ever improving carbon characteristics.

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