Green Car Mirage

Pete Geddes, executive director of the Foundation for Research on Economics and the Environment (FREE), has a sharp column explaining "The Inconvenient Truth About Cars."

U.S. energy policy is best described as "keep it cheap." It's ironic that our political class is berating the Big Three for building the vehicles Americans bought in response. Congress is now poised to mandate that Detroit manufacture electric and hybrid vehicles. This approach is bound to fail, for these are cars consumers (a) don't want and (b) even if they did, can't afford. The recent plunge in the price of gas at the pump has not helped. November sales of hybrid cars fell 50 percent. U.S. hybrid sales are now back where they were in 2005. (Ford's best selling product in November was the F-150 pickup.) Only when electric and hybrid vehicles really do provide more value to consumers than the alternatives will they succeed.

There is a straightforward way to transition the U.S. auto fleet to a greener future. Place a gradual tax on gasoline such that in five years it reaches a floor of $5 per gallon. Nothing else will work, certainly not the Rube Goldberg approach Congress has taken since the 1970s, best exemplified by the Corporate Average Fleet Economy (CAFÉ) standards.

In a masterstroke of special-interest politics, the UAW used CAFÉ's "two fleet" rule to forbid Detroit from importing smaller cars from its foreign operations. Forced to build small cars in domestic plants, with above market labor costs, Detroit could not make a profit. (In 2007, Toyota made 9.37 million vehicles and GM about the same. Toyota made a profit of about $1,874 per car, while GM lost $4,055.) Even Japanese and European carmakers rely on sedans with moderate fuel economy for profits. Small, super-efficient cars remain a niche product. Here's an inconvenient truth: forcing Detroit to build fuel-efficient cars in UAW factories is inconsistent with viable, sustainable manufacturing.

Critics often portray the Detroit automakers as "greedy, short-sighted profit seekers." To claim Detroit is refusing to sell cars consumers "really" want, compared with the cars they actually purchase, is a stretch. Is there a simpler explanation? Perhaps alternative cars are simply not ready for prime time?

The Financial Times reports on a French government study that analyzed the options for building cleaner, more fuel-efficient cars by 2030. After reviewing a leaked copy, the FT notes: "It [the report] concludes…there is not much future in…all electric-powered cars. Instead, …the traditional combustion engine powered by petrol, diesel, ethanol or new biofuels…offers the most realistic prospect of developing cleaner vehicles. … {T}he overall cost of an all-electric car is unviable at around double that of a conventional vehicle. Battery technology…still…severely limits performance both in terms of range and speed."

The Wall Street Journal's Holman Jenkins' coverage of this issue nails it: "Ford and GM in Europe successfully sell cars that are small, but not cheap. Europeans are willing to pay top dollar for a refined small car that gets excellent mileage, because they face gasoline prices as high as $9. … In the U.S., except during bouts of high gas prices or in the grip of a Prius fad, the small cars that American consumers buy aren't bought for high mileage, but for low sticker prices. And the Big Three, with their high labor costs, cannot deliver as much value in a cheap car…. {Legislators] won't repeal CAFE because they fear the greens. They won't repeal CAFÉ's "two fleet" rule…because they fear the UAW. They won't hike gas prices because they fear voters."

It should be noted that most auto industry observers believe that Toyota has never made a profit on its Prius hybrid. President-elect Obama has promised to put 1 million plug-in hybrids on American roads by 2015.  How? By bribing consumers with a $7,000 tax credit for each car. Since there are about 250 million passenger vehicles in the U.S., that would mean that such hybrids would total less than one half of a percent of the cars on American roads. 

Whole Geddes column here. 

Disclosure: I have had the happy experience of having FREE pay my travel expenses several times to participate in the organization's superb conferences.