In two recent posts (here and here), I examined EPA’s and the National Highway Traffic Safety Administration’s (NHTSA’s) rationale for establishing first-ever fuel-economy standards for trucks. Today’s post provides additional evidence that what the agencies call the trucking industry’s “under-investment” in fuel-saving technology is an unintended (although not unforseen) consequence of EPA’s ever-tightening diesel-engine emission standards. The declining fuel economy of 18-wheelers is a case of government failure, not market failure. Conveniently, EPA’s role in holding back heavy-truck fuel economy is never discussed in the agencies’ proposed rule.

The trucking industry is highly competitive, profit-margins are thin, and fuel is the single biggest operating expense. Consequently, truckers, especially those who haul freight long distances in ”combination tractors” (semis), have a strong incentive to purchase vehicles incorporating cost-effective improvements in fuel economy. Hence manufacturers also have a strong incentive to produce such vehicles. Yet the average fuel economy of semis declined by 1.2% annually over the past decade, according to the Department of Energy’s Transportation Energy Data Book (p. 5-2).

How can this be?

EPA and NHTSA present five “potential hypotheses” to explain why truckers ”under-invest” in fuel-saving technology and why, supposedly, the agencies must compel the industry to act in its own best interest. The first of my earlier posts shows that none of the agencies’ explanations demonstrates a “market failure.” In fact, two of the hypotheses suggest that truckers are simply acting like prudent buyers. The agencies estimate that the technologies required to meet their proposed fuel-economy standards will increase the costs of a semi by $5,896 in model year 2014. [Draft Regulatory Impact Analysis, p. 7-3] Before incurring such an expense, truckers want real-world information on how the new technologies affect truck reliability and maintenance costs. They also want credible data on whether the fuel savings are as large as advertised.

The second post outlines an alternative hypothesis, albeit one that dovetails with the prudent buyer explanation. In a nutshell: EPA’s emission-control standards for diesel trucks caused the very problem – stagnant or even declining fuel economy — that the agencies now propose to solve with more rules.

What led me to this hypothesis was none other than EPA’s year 2000 Regulatory Impact Analysis of its diesel-truck emission-control program. The RIA estimated that:

1. Engine manufacturers would have to spend $385 million on R&D over five years to comply with EPA’s increasingly stringent particulate matter (PM) and nitrogen oxide (NOx) emission standards.
2. Each of 11 major engine manufacturers would need to spend $7 million annually to deploy a ”team of more than 21 engineers and 28 technicians to carry out advanced engine research.”
3. The requisite emission-control technologies would add as much as $7,000 to the cost of a new vehicle in model year 2007.
4. The PM filter would reduce engine fuel efficiency by 1%.

The implications are obvious. Thanks to EPA’s emission standards, over a five-year period, 539 engineers and technicians would spend all or much of their time developing emission-control technology rather than fuel-saving technology. Engine manufacturers would have $385 million less to spend for R&D of fuel-saving technology. Truckers would have $7,000 less per vehicle to spend on rigs with better fuel economy. Slow or non-existent improvement in heavy-truck fuel economy would thus very likely be an opportunity cost of EPA’s PM and NOx regulations.

EPA’s  year 2000 RIA forecast that the 1% fuel-efficiency decline due to the PM filter would be “more than offset” by fuel-efficiency gains from other emission-control technologies. However, this “don’t worry, be happy” assurance is not very reassuring. An RIA, after all, is a form of self-evaluation, a report card in which an agency grades itself. Grade inflation is the norm.

At the end of the second post, I made a request for information. How much did engine manufacturers actually spend to develop the technologies required to meet EPA’s emission standards — about $385 million, more, less? How much was that as a percentage of total engine manufacturer R&D – less than 10%, about 50%, more than 90%? How much extra did truckers have to spend per vehicle for trucks with the requisite emission controls — about $7,000, more, less? Finally, what was the net direct effect of the new emission-control technologies on heavy-truck fuel economy — positive, as EPA forecast, or negative?

I don’t have complete or definitive answers yet. However, reports by the Government Accountability Office (GAO) and NERA Economic Consulting suggest that EPA’s regulations, both directly and via their market impacts, held back heavy-truck fuel economy.

EPA Regulation of Diesel Truck Emissions: Case Study of Unintended Consequences

Despite its bland title, Air Pollution: EPA Could Take Additional Steps to  Help Maximize the Benefits of the 2007 Diesel Emission Standards, GAO’s March 2004 report leaves little doubt that EPA regulations and enforcement actions hindered manufacturers from making and truckers from buying vehicles with better fuel efficiency.

EPA has been implementing progressively tougher diesel emission standards since 1984. Because of widespread concern that EPA-approved emission-control technologies impaired both fuel economy and engine reliability, engine manufacturers sold and installed devices that “bypass, defeat, or render inoperative” an engine’s emission control system. “These devices altered the engines’ fuel injection timing and, while this improved fuel economy, it also increased nitrogen oxide emissions by two to three times the existing regulatory limits,” GAO comments [p. 11].

Although illegal under the Clean Air Act, selling and installing “defeat devices” was a perversive practice. From 1987 to 1998, seven of the nation’s largest engine manufacturers, accounting for almost 90% of the U.S. heavy-duty diesel engine market, sold 1.3 million trucks equipped with defeat devices. [GAO, p. 1] To create such a big market for unlawful devices, the EPA-approved emission-control systems must have imposed a significant fuel-economy penalty on truckers.

Rather than question the wisdom of its emission standards, EPA in 1998 launched what it called “the largest Clean Air Act enforcement action in history” against the manufacturers. The case was settled via consent decrees under which the seven manufacturers agreed to “(1) pay civil penalties of about $83 million, the largest civil  penalty for an environmental violation as of that date; and (2) collectively invest $109.5 million towards research and development and other projects to lower nitrogen oxide emissions.” [GAO, pp. 11-12] The total tab may have been much bigger. According to GAO, ”The manufacturers also agreed to collectively spend $850 million or more to produce significantly cleaner engines by October 1, 2002.” [GAO, p. 12].

In short, at EPA’s behest, industry may have spent nearly $1 billion in the early 2000s on penalties and R&D related to emission-control technology. How could that not crowd out significant investment in R&D of fuel-saving technology? How could it not divert significant engineering talent from fuel-economy innovation to emission-control innovation?

Lower fuel economy, a booming market for unlawful defeat devices, smaller-than-forecast emission reductions — such were the unintended consequences of EPA’s diesel-truck emission standards. EPA’s enforcement action had additional unintended consequences.

The consent decrees compelled the manufacturers “to accelerate by 15 months the schedule for meeting new, more stringent engine standards to October 2002 instead of the original mandatory date of 2004.” [GAO, p. 1] Truckers responded with a strategy known as “pre-buying” — purchasing new vehicles with older emission-control technology before the new emission standards kick in. Companies did this for three main reasons: (1) trucks equipped with older engines cost several thousand dollars less than trucks with the new emission-control technologies; (2) the new technologies had not been adequately road-tested to determine their effects on truck durability and maintenance; and, (3) the technologies were expected to reduce fuel economy.

The requirement to comply 15 months early with 2004 emission standards was the most disruptive aspect of EPA’s enforcement action. According to GAO, “Trucking companies maintain they need 18 to 24 months to road test an engine’s reliability in all weather and operating conditions and to develop their future purchasing plans.” [GAO, p. 6] The consent decrees did not allow time for adequate road-testing of the new technologies, and many truckers experienced engine problems:

For example, one company reported that roughly one-half of its 140 new heavy-duty engines experienced an engine valve failure prior to 50,000 miles. In addition, these officials noted that roughly 20 percent of their heavy-duty vehicles with the new engines are out of service at any given time due to maintenance concerns, compared to 5 percent for the remainder of their fleet. Several of these officials expressed a concern that some companies may have difficulty absorbing increased costs from such maintenance problems. [GAO, p. 20]

In the months preceding the October 2002 deadline, demand for new vehicles with older technology surged. Roughly 19,000 to 24,000 (20%-26%) of the 93,000 large semis (Class 8 trucks) produced during April to September 2002 were pre-buys. [GAO, p. 19]  Before October 2002, “demand was so great, according to some engine manufacturers, they could not keep up with it, despite hiring hundreds of temporary employees and running production lines 24 hours a day, 7 days a week. According to all five of the engine manufacturers we contacted, the pre-buy could have been much larger, but the engine manufacturing industry did not have the capacity to fill the demand.” [GAO, p. 20]

After the deadline passed, however, demand for non-compliant vehicles collapsed, resulting in idle capacity, losses, and layoffs:

These truck-purchasing decisions in response to the consent decrees had a ripple effect on engine manufacturers, according to representatives of the five engine manufacturers subject to the consent decrees that we contacted. These representatives told us that, to meet the increased demand for old technology trucks before October 2002, their companies hired new workers and increased operations, concurrently increasing sales. But, after the deadline, engine orders dropped—at least until leveling off again by the end of fiscal year 2003—and the manufacturers let go many new hires and suspended operations at some plants. Such instability resulted in increased costs and a net loss of revenue for some manufacturers, according to their representatives. [GAO, p. 5]

Manufacturers that produced cleaner engines also took their lumps in the marketplace, because such engines “had inherent disadvantages relative to the existing engines that made them difficult to sell.” Makers of cleaner engines lost market share to manufacturers who marketed new trucks with older engines. [GAO, p. 22]

Just as EPA’s emission standards created a market for defeat devices that led to smaller emission reductions than EPA had forecast, so the requirement to comply 15 months early with 2004 emission standards created a pre-buy market that led to lower clean engine sales than EPA had forecast. Data for the first 13 of the 15 months “show that about 148,000 fully or partially compliant heavy-duty diesel engines are on the road, compared to EPA’s estimate of 233,000 such compliant engines for the entire 15-month time frame.” [GAO, p. 23]

Similarly, whereas EPA estimated that the consent decrees would require truckers to adjust the computers on 865,000 older trucks to reduce NOx emissions (a procedure known as “reflashing”), GAO found that, “As of September 2003, almost 60,000 trucks had been reflashed under the consent decrees’ mandatory program and another 43,000 under the voluntary incentive programs, about 12 percent of EPA’s projected total.” [GAO, p. 24]

Deja Vù All Over Again

GAO’s March 2004 report cautions that even larger market disruptions, pre-buying, and gaps between forecast and actual emission reductions could result from EPA’s “2007 Rule” — the rule EPA finalized in January 2001 that specifies diesel-truck emission standards through model year 2007:

In addition, because the technologies needed to meet the 2007 standards are much more advanced than those associated with prior upgrades, the trucking companies are concerned that the new engines will cost much more and decrease fuel efficiency much more than EPA predicted in 2000 when it was developing the standards. Consequently, according to representatives of 9 of the 10 trucking companies we contacted, companies most likely will once again decide to buy trucks before the deadline, but in larger numbers than they did in response to the consent decrees. This could again disrupt markets and postpone needed emissions reductions. [GAO, p. 7]

Once again, a key industry concern is the potentially adverse effect of tougher emission-control requirements on fuel economy:

Because the technology to meet the 2007 standard is more advanced than prior upgrades, some trucking companies are concerned that the new engines will cost more and decrease fuel efficiency more than EPA has predicted. Consequently, according to representatives of nine of the ten trucking companies we contacted, companies will likely once again pre-buy trucks, potentially disrupting markets and postponing needed emissions reductions. [GAO, p. 25]

Specifically, trucking industry representatives opined that the 2007 standards would reduce fuel efficiency by 3-5%. That’s a scary prospect for an industry where fuel is the single biggest operating expense and profit margins can be as low as 2 cents per dollar earned:

In addition, these officials are concerned that the 2007 trucks will experience another 3 to 5 percent loss in fuel economy—added to the 3 to 5 percent loss resulting from the consent decrees—that could increase their companies’ fuel costs by millions of dollars per year. Even minor increases in business costs can have adverse effects in the trucking industry, according to trucking industry officials we contacted, because these companies’ profit margins are very narrow—sometimes only 2 cents per dollar earned. The officials claim that the highly competitive nature of the trucking business precludes companies from passing such significant cost increases to their customers. [GAO, p. 33]

In short, industry representatives estimated the 2007 Rule combined with the consent decree could lower heavy-truck fuel economy by as much as 10%. And that’s just the potential direct effect of emission-control systems on the fuel efficiency of diesel engines.

If we also factor in the opportunity costs of EPA’s emission standards program — foregone investment in fuel-saving technology R&D,  foregone purchases of more fuel-efficient trucks – it is entirely plausible that EPA’s regulatory and enforcement actions account for all of the 1.2% annual decline in heavy-truck fuel economy during 1998-2008. Were it not for truckers’ use of regulatory avoidance strategies – installing defeat devices in the 1990s and pre-buying older engines in the 2000s — heavy-truck fuel economy would likely have declined even faster.

Road-Tested Results

NERA’s November 2008 report examines customer behavior in response to EPA’s 2007 Rule and the implications of EPA’s 2010 NOx standard. It confirms in spades that EPA’s diesel-emissions program imposes a significant opportunity cost on truckers. NERA found that EPA’s 2007 Rule increased the unit cost of a Class 8 truck by $7,000 between the 2006 and 2007 model years. [NERA, p. 13] That additional expense is money truckers could not spend to purchase vehicles with better fuel economy.

And there’s no relief in sight. NERA estimates that EPA’s 2010 NOx standard will increase the cost of a Class 8 truck by $7,000-$10,000. [NERA, p. 3]

In line with GAO’s expectations, NERA found that truckers engaged in massive pre-buying as the 2007 Rule phased in. In 2005-2006, truckers purchased about 120,000 more trucks with older engines than EPA had forecast, and in 2007-2008, they purchased about 183,000 fewer trucks with new engines than EPA had forecast. [NERA, p. 13] Consequently, the 2007 rule also produced smaller environmental benefits than EPA had forecast.

NERA expects that technological uncertainties and cost increases will similarly reduce the environmental benefits and cost-effectiveness of EPA’s 2010 NOx standard. NERA (writing in November 2008) recognized that the 2008-2009 recession could curb all vehicle sales, including pre-buys. [NERA, p. 17]

Don’t Expect Candor

Not once in EPA and NHTSA’s 300-page proposed rule to establish first-ever fuel-economy standards for heavy trucks do the agencies acknowledge the longstanding tension or trade-off between making diesel engines cleaner and making them more fuel efficient. They discuss five “potential hypotheses” to explain industry’s alleged “under-investment” in fuel-saving technology without ever wondering whether the regulatory environment in which truckers operate might have something to do with it.

EPA’s enforcement actions and regulations distorted the market for heavy trucks. If GAO and NERA know this, then EPA certainly does. EPA’s emission standards induced truckers to buy 120,000 more older engines than EPA forecast in 2005-2006, and 180,000 fewer new engines than EPA forecast in 2007-2008. Those standards also appear to have another massive unintended consequence, namely, hindering market-driven development and diffusion of fuel-saving technologies.

Maybe it would be unreasonable to expect EPA to stand up and take the blame for the very problem it now seeks more power over industry to solve. But is it also too much to ask EPA just to address the issue and at least make a case that its diesel-emission program did not undercut heavy-truck fuel economy? Apparently so.

The proposed standards, which phase in during model-years 2014–2018, apply to three types of HD vehicles: (1) “combination tractors” (semi-trucks), (2) large pickups and vans, and (3) “vocational trucks” (a wide-ranging assortment of trucks and buses).  The agencies estimate that the technologies needed to comply with the proposed standards will cost $7.7 billion but that the rule will generate $27 billion or $41 billion in net benefits (depending on whether future benefits are discounted at 7% or 3%).

Here’s the curious thing that jumps out at you from the getgo. Although the ostensible objective of the rule is to reduce GHG emissions and oil imports, the overwhelming share of the claimed benefits (fuel savings for truckers) has nothing to do with either climate change or energy security. For example, based on the unverifiable assumption that each ton of carbon dioxide (CO2) emitted has a “social cost” of $22.00, the agencies attribute only $2.3 billion — about 6% — of the rule’s net benefits to its CO2 reductions and climate impact (p. 355). 

Six percent!

Sound familiar? Just as proponents of cap-and-trade tried to sell their stealth energy tax as a “green jobs” program when they couldn’t sell it as climate protection, so EPA and NHTSA now try to sell their save-the-planet-beyond-petroleum rule as a fuel-savings bonanza for owners and operators of big rigs, dump trucks, buses, vans, and pickups. 

Is Small Really Beautiful?

The agencies boast that the standards will reduce GHG emissions by 250 million metric tons (mmt) and save 500 million barrels of oil over the lives of vehicles manufactured during the program’s first five years (2014-2018). Such tiny changes can have no detectable effect on the alleged perils of either global warming or oil import dependence.

Let’s put those numbers in perspective. The agencies consider 10 years to be the ”useful life” of medium- and heavy-truck engines (p. 58).  U.S. emissions topped 7,000 mmt in 2008, so cumulative U.S. emissions over a 10-year period are likely to be at least 70,000 mmt. Cutting HD vehicle emissions by 250 mmt would reduce total U.S. emissions by a mere 0.7%. The climate change “benefit,” if any, would exist only on paper. There would be no discernible evidence of it in the real world.

EPA’s calculations (p. 284)  implicitly confirm this. By 2100, the proposed GHG standards are estimated to reduce atmospheric CO2 concentration by 0.732 parts per million, which in turn is estimated to avert 0.002-0.004°C of global warming and 0.012-0.048 centimeters of sea-level rise. Such changes would be too small for scientists to distinguish from the ”noise” of natural climate variability.  

NHTSA estimates (p. 357) that its fuel economy standards will reduce oil imports by 0.177 million barrels per day (bpd) in 2020 — about 65 million barrels lower than the baseline projection for that year.  The U.S. imported 4,267 million barrels in 2009, so the rule would avoid the equivalent of about 1.5% of current oil imports. Note that oil demand and imports may fluctuate by substantially more than that from year-to-year. For example, from 2008 to 2009, U.S. oil imports declined by 460 million barrels. Okay, let’s see a show of hands — who thinks this fluctuation materially weakens Al Qaeda, the Iranian mullahs, or the Taliban? 

Net oil imports account for about 54% of current U.S. petroleum consumption. The proposed rule will not get us even close to where things stood in 1973, when oil imports accounted for 35% of U.S. consumption (see Figure 2.2). A few simple questions: Was 1973 a good year for peace in the Middle East? Was it a time when OPEC was a shy and retiring actor on the world stage? Was it an innocent age that knew not hijackings, bombings, and the rise of international terror organizations? No, no, and no. The notion that EPA and NHTSA can make America safer by engineering a downtick in U.S. petroleum imports defies history and logic.

In terms of their stated rationales (mitigate climate change and enhance U.S. energy security), the proposed GHG/fuel economy standards are an empty suit.

Bureaucrats Are Smarter!

So what’s the point? The new standards will save truckers a bundle of money, EPA and NHTSA contend. According to their calculations, the rule will compel industry to invest $7.7 billion in fuel-saving technologies (p. 36), which will cut fuel consumption by 500 million barrels, which will save truckers $28 billion (assuming a 7% discount rate) or $42 billion (assuming a 3% discount rate). In the agencies’ words (p. 315), “the application of fuel-saving technologies in response to the proposed standards would, on average, yield private returns to truck owners of 140% to 420%.”

Now, this should immediately raise a red flag. Trucking companies are in business to make money. The industry is competitive and fuel is a major operating expense. If every dollar invested to improve fuel economy yields returns of 140% to 420%, why aren’t truckers already making those investments? If the EPA/NHTSA-recommended package of fuel-saving technologies is such a great bargain, why do truckers need a regulation compelling them to buy it? 

The proposed rule implies that truckers are penny wise and pound foolish. Indeed, it suggests that truckers are too dim or lazy to make lots of easy money without a bureaucrat bending their ears and twisting their arms. Its core premise is the Nanny State notion that adults, like children, can’t be trusted to discern and pursue their best interest.

The agencies don’t put things that way, of course. They offer five “potential hypotheses” (pp. 316-323) drawn from economics literature to explain why trucking companies “under-invest” in fuel economy. None of these explanations provides solid evidence of “market failure.” In fact, some suggest that truckers are just behaving like prudent buyers. Let’s look at each in turn.

(1) Inadequate or Unreliable Information in the Original Sales Market. One possible reason for the supposed under-investment is that fuel-economy information available in the HD sales market is “inadequate or unreliable.” Quoting the National Academy of Sciences, EPA and NHTSA report that “Reliable, peer-reviewed data on fuel saving performance is available only for a few technologies in a few applications.” Okay, then how do EPA and NHTSA know that investing in fuel economy will yield returns of 140% to 420%? And if EPA and NHTSA know this despite the dearth of reliable, peer-reviewed data, how come the industry with a bottom-line interest in such information doesn’t know? The agencies do not address these obvious questions.

EPA boasts that its SmartWay program provides “information on fuel-efficient, low-carbon technologies and operational practices to help accelerate their deployment.” The program is a partnership between EPA and the freight goods industry, which includes “large, national trucking fleets.” One might suppose that with all the information EPA is providing them, semi-truck owners would exhibit the smallest gap between actual investment in fuel economy and what the agencies consider optimal. Yet that’s where the gap appears to be largest. EPA and NHTSA estimate that mandating fuel-economy improvements will save semi-truck owners 18 times as much as vocational truck owners and nearly 30 times as much as HD pickup and van owners (p. 337). Those with the most information are furthest away from the promised bonanza awaiting those who attain the proposed fuel-economy standards.

In short, the hypothesis fails to explain companies’ alleged under-investment in fuel economy. In fact, the agencies’ discussion inadvertently calls into question the notion that companies under-invest.

(2) Inadequate or Unreliable Information in the Secondary Resale Market. The agencies hypothesize that ”the resale market may not reward the addition of fuel-saving technology to vehicles adequately to ensure their original purchase by new truck buyers,” the main reason, again, being a presumed lack of “reliable information about the fuel economy that potential purchasers of used trucks will experience.” This is odd. Would EPA and NHTSA say that the resale market does not reward the addition of technologies that enhance vehicle safety, performance, comfort, and amenities? That would be patently ridiculous, because people are willing to pay more for a better vehicle, whether it’s new or used.

Maybe fuel-saving technology doesn’t add much to the price of used vehicles because its money-saving potential is unproven or over-rated. Nah, that can’t possibly be why it’s not a big selling point in the secondary market. It’s got to be because fuel economy is different, special, not like other attributes buyers consider when purchasing a used vehicle. Here’s a simpler explanation. EPA and NHTSA make a fetish of fuel economy and most truckers do not. 

(3) Split Incentives in the Medium- and Heavy-Duty Truck Industry. According to this hypothesis, the trucking industry under-invests in fuel economy because truck owners and operators have different incentives. Fuel purchases are made by operators, who have “strong incentives to economize on its use.” In contrast, owners may place a higher priority on capital investment that “improves vehicles’ durability or reduces their maintenance costs.” Maybe so. But it does not necessarily follow that owners under-invest in fuel economy.

There are tradeoffs — opportunity costs — in every investment decision. Whether it is smart to invest more or less in fuel economy relative to vehicle durability or any other competing interest depends on each firm’s unique circumstances. EPA and NHTSA are in no position to divine an appropriate tradeoff for the industry as a whole, because the right tradeoff varies from firm to firm, and within each firm at different times.

Besides, just because truck operators make the actual fuel purchases does not mean that owners ignore fuel costs. An owner (or CEO of a publicly traded company) may delegate many purchasing decisions for many things to other people. He is nonetheless responsible for his firm’s bottom line. The tradeoffs he makes between fuel economy and other investments inevitably show up in the bottom line.

(4) Uncertainty About Future Cost Savings. Another possible reason companies don’t adopt fuel-saving technology as fast as EPA and NHTSA would like is ”uncertainty about future fuel prices or truck maintenance costs.” The agencies explain:

When purchasers have less than perfect foresight about future operating expenses, they may implicitly discount future savings in those costs due to uncertainty about potential returns from investments that reduce future costs. In contrast, the immediate costs of the fuel-saving or maintenance-reducing technologies are certain and immediate, and thus not subject to discounting.

Exactly! The costs of investment in fuel-saving technology are certain and immediate. In contrast, the payoff depends on unknown quantities — the future price of gasoline and, perhaps more importantly, the “lifetime, expected use, and reliability of the vehicle” (p. 321). Companies are just being prudent when they invest less in fuel economy than they would if EPA and NHTSA were guaranteeing a 420% return! As the agencies acknowledge (p. 322), the proposed rule ”requires purchasers to assume a greater level of risk than they would in its absence, even if the future fuel savings predicted by a risk-neutral calculation actually materialize.”

(5) Adjustment and Transactions Costs. The agencies opine that ”truck owners and fleets may like to see how a new technology works in the field, when applied to their specific operations, before they adopt it.” No kidding! Companies want real — market-tested — information about alternative investments. They’ll listen to what EPA and NHTSA have to say, but very likely take the agencies’ assessments with a grain of salt. They look to the trial-and-error process of the marketplace to winnow out fact from hype. Nothing irrational or childish about that. It’s what prudent buyers do.

Contrary to the image they assiduously cultivate, EPA and NHTSA are not honest brokers. Each is a dog in the fight. Each has an organizational interest in exaggerating the benefits and understating the risks of fuel-economy mandates, because each agency’s control over the private sector grows each time it promulgates a new standard or tightens an existing one. There is also more than a dollop of green ideology in the now decades-old fuel-economy campaign, and ideology is not usually a sound basis for making business decisions (Duh!).

All of which is to say, the market is not failing when businesses choose to be guided by real-world results rather than by EPA and NHTSA’s self-serving, ideologically-charged proselytizing.   

To their credit, the agencies acknowledge that “there may be no market failure” in the risk-aversion induced by adjustment and transition costs, which, unlike the promised payoffs from fuel-economy investments, “are typically immediate and undiscounted.”

Future of the Fetish

EPA bases its authority to establish GHG standards for HD vehicles on its Endangerment Rule, the trigger and precedent for a cascade of GHG regulations via the Clean Air Act. In June, the Senate rejected, by 47-53, a resolution to overturn EPA’s Endangerment Rule, but all 41 Senate Republicans voted for it. With six new Rs joining the Senate, and with a GOP majority in the House, the 112th Congress may take another shot at the Endangerment Rule. Meanwhile, the Coalition for Responsible Regulation is attempting to overturn all of EPA’s GHG rules in the D.C. Circuit Court of Appeals. If either Congress or the Court overturns the Endangerment Rule, an enormous cloud of uncertainty will be lifted from the U.S. economy.

The trucking industry, however, would still have to bend to the will of the fuel-economy fetishists. NHTSA’s authority to set fuel-economy standards for HD vehicles comes from a separate statute, the mis-named Energy Independence and Security Act (EISA) of 2007. An HD vehicle program administered solely by NHTSA would be administratively simpler, but truckers would have to invest in the same technologies. As the agencies acknowledge, CO2 emissions represent 99% of all HD vehicle GHG emissions (p. 13), and the amount of CO2 emitted is “highly correlated” with amount of fuel consumed (p. 219). Hence, EPA’s CO2 standards and NHTSA’s fuel-efficiency standards are essentially interchangeable.

Congress could, of course, amend EISA. That’s more likely to happen if the trucking industry raises a rucus. So far it hasn’t. In fact, last week the American Trucking Association (ATA) commended the Obama Administration for its “focus on reducing carbon output and improving fuel efficiency from our sector,” stating that, ”we look forward to working with both agencies throughout the rulemaking.” 

But that was then. A big change has just occurred in the composition and leadership of Congress. Maybe ATA will rethink their position. 

What should energy realists ask Congress to do? In addition to overturning the Endangerment Rule, the 112th Congress should make NHTSA’s HD fuel-economy standards voluntary. Let the agencies make their case that every dollar companies invest in fuel economy will generate returns of 140%-420%. But let markets decide whether EPA and NHTSA are peddling smart advice or hype.

Space prohibited me from making an additional point.  Even if there is no rebound effect, my colleague Pat Michaels finds that global temperatures will only be reduced by 0.005 degrees Celsius by 2050 and 0.0078 degrees Celsius  by 2100 once you plug those emissions reductions into the computer models used by the IPCC.  (These are thousandths of a degree, mind you.) Of course, proponents contend that U.S. action on fuel efficiency will lead to like action abroad.  Well, good luck with that.  But even if all of the signatories to the Kyoto Protocol adopted Obama’s proposed fuel economy standards, global temperatures would be reduced by only 0.038 degrees Celsius by 2050 and 0.071 degrees Celsius by 2100.  If you tried to monetarize those benefits, you would be hard pressed to come up with an defensible number of consequence.

So what should be done instead?  Nothing! At the risk of sounding political irrelevant, there is no good case for government to reduce U.S. gasoline consumption via fuel economy standards or fuel taxes, an argument I made at length in a study I co-authored almost two years ago with my colleague Peter Van Doren. In challenging the rationales for higher gasoline taxes, I concluded:

Oil is not disappearing, and when it becomes more expensive, market agents will substitute away from gasoline to save money. The link between oil price shocks and recessions, although real in the 1970s, has been much more benign since 1985 because of the termination of price controls. Market actors properly account for energy costs in their purchasing decisions absent government intervention. Pollution taxes, congestion fees, and automobile insurance premiums more closely related to vehicle miles traveled are better remedies for the externalities associated with automobile travel than a simple fuel tax. Gasoline consumption does not necessarily distort American foreign policy, impose military commitments, or empower Islamic terrorist organizations.

I also advocated a different approach to road-usage revenue than state and federal gasoline taxes:

State and federal gasoline taxes should be abolished. Local governments should tax gasoline only to the extent necessary to pay for roads when user charges are not feasible. If government feels compelled to more aggressively regulate vehicle tailpipe emissions or access to public roadways, pollution taxes and road user fees are better means of doing so than fuel taxes. Regardless, perfectly internalizing motor vehicle externalities would likely make the economy less efficient—not more—by inducing motorists into even more (economically) inefficient mass transit use.

Now this is quite a mouthful, but please peruse the August 2007 paper and provide your comments. I still like my arguments.

The Supreme Court case of Massachusetts v. EPA  (April 2, 2007) has set the stage for a policy disaster. Mass v. EPA’s second anniversary rapidly approaches, and in a Power Point presentation leaked to Greenwire last week, EPA reveals how it plans to respond to the Court. But first, some background on the case and the Pandora’s Box it has created.

BACKGROUND

ICTA Petition

In October 1999, a gaggle of environmental groups led by the International Center for Technology Assessment (ICTA) petitioned EPA to regulate greenhouse gas (GHG) emissions from new motor vehicles under CAA Sec. 202. 

Although Clinton EPA officials asserted EPA’s authority to regulate GHG emissions (as early as March 1998), and preached the gospel of climate doom, they took no action on the petition, leaving it for the Bush Administration to deal with.

In January 2001, Bush’s EPA issued a request for comment on the  ICTA petition. In late August 2003, EPA General Counsel Robert Fabricant issued a memorandum concluding that the CAA does not authorize GHG regulation. Two weeks later, EPA published its denial of the ICTA petition in the Federal Register. 

Mass v. EPA

In October 2003, the ICTA gang,  joined by the attorneys general of Massachusetts and 11 other states, challenged EPA’s decision in the D.C. Circuit Court of Appeals. Parties filed briefs during June-December 2004.  In July 2005, the appelate court held that EPA acted lawfully in denying the petition, but it did not rule on the core legal issue: whether the CAA authorizes EPA to regulate GHG emissions.

Petitioners appealed to the Supremes, who, on April 2, 2007, by 5-4, overturned the appellate court’s decision. The Court held that GHGs are “air pollutants” within the meaning of the CAA, and gave EPA three options: (1) issue a finding that GHG-related “air pollution” “may reasonably be anticipated to endanger public health or welfare,” (2) issue a finding of no endangerment, or (3) provide a “reasonable explanation” why the agency cannot or will not exercise its discretion to make such a determination.

The Court further held that if EPA makes a finding of endangerment, then it has a duty, under CAA Sec. 202, to develop and adopt GHG emission standards for new motor vehicles.

Bush’s Response

The Bush Administration at first was gung-ho to make an endangerment finding. In his 2006 State of the Union Address, President Bush declared that “America is addicted to oil.”  He set a goal of reducing U.S. oil imports 20% in 10 years, and by executive order directed EPA and the Departments of Energy, Transportation, and Agriculture to develop rules  increasing federal fuel economy and renewable fuel standards. No law on the books explicitly authorizes EPA to revise the existing standards. No problem, said Bush’s advisors, an endangerment finding would give EPA CAA authority to implement the President’s ”20-in-10“ program. The endangerment finding and associated regulations would also satisfy EPA’s obligations to the Court–a twofer!

Regulatory Cascade

There was just one problem. The CAA is a highly interconnected statute. As Attorney Peter Glaser cautioned in congressional testimonies, once you start regulating CO₂ under one provision of the Act, you end up having to regulate CO₂ under multiple provisions. The endangerment finding would initiate a regulatory cascade that could give the greenhouse lobby everything it had ever demanded–and more.  Bush’s EPA could tee up Al Gore’s regulatory agenda on steroids but without any of Gore’s allies on the Hill voting for it or taking responsibility for the compliance burdens and economic fallout, energy realists warned.

For starters, establishing GHG emission standards for new motor vehicles would by definition make CO₂ a CAA-regulated air pollutant. As such, CO₂ would automatically be ”subject to regulation” under the Act’s Prevention of Significant Deterioration (PSD) pre-construction permitting program. Under the CAA, any firm that plans to build a new “major stationry source,” or modify an existing source in a way that would significantly increase emissions, must first obtain a PSD permit from EPA or a state environmental agency.

A PSD source is “major” if it is in one of 28 listed categories and has a potential to emit 100 tons per year (TPY) of a CAA-regulated air pollutant, or if it is any other type of establishment and has a potential to emit 250 TPY. 

And there’s the rub. Whereas only large industrial facilities have a potential to emit 250 TPY of air contaminants such as sulfur dioxide or particulate matter, an immense number and variety of entities–office buildings, hotels, big box stores, enclosed malls, small manufacturing firms, even commercial kitchens–have a potential to emit 250 TPY of CO₂. A U.S. Chamber of Commerce study estimates that 1.2 million previously unregulated buildings and facilities actually emit 250 TPY of CO₂. All would be vulnerable to new PSD regulation, controls, paperwork, and penalties.

To obtain a PSD permit, firms must document their compliance with ”best available control technology” (BACT) standards. Even apart from any technology investments needed to comply with BACT, the PSD permitting process is costly and time-consuming.  In 2007, each permit on average cost $125,120 and 866 burden hours for a source to obtain, and $23,280 and 301 hours for EPA or a state agency to process, EPA estimates. No small business could operate subject to the PSD administrative burden.

An even larger number of entities could be swept into the CAA Title V operating permits program, which defines as “major” any source with a potential to emit 100 TPY of a CAA-regulated pollutant. Title V permits typically do not impose new obligations on sources, because the program’s purpose is to facilitate compliance with other CAA provisions. But most of the entities potentially subject to Title V for CO₂ have no other CAA obligations. They would be filling out pointless paperwork. And for their pains, they’d also have to pay emission fees (the going rate is $43.30 per ton) for every ton of CO₂ in excess of 100 tons.

Petitioners in Mass v. EPA denied the case posed any risks to the U.S. economy, claiming, for example, that, “The NAAQS [National Ambient Air Quality Standards] program is entirely separate from the mobile source program at issue in this case” (Initial Brief of Petitioners, August 31, 2006, p. 28). Not so. 

As just explained, GHG regulation of motor vehicles would activate PSD regulation of stationary sources, and PSD is an essential adjunct of the NAAQS program. PSD’s central purpose is to prevent significant deterioration of air quality in areas that comply with NAAQS.

More importantly, the endangerment finding prerequisite to establishing GHG emissions standards for new motor vehicles would be precedential for similar endangerment findings under other CAA provisions, including CAA Sec. 108, the cornerstone of the NAAQS program. 

A NAAQS is an allowable pollution concentration standard. It determines how many parts per million (or billion) of a targeted pollutant are permissible in the ambient air. Petitioners in Mass v. EPA asserted that current GHG levels already harm public health and welfare. Similarly, a spate of endangerment petitions filed since Mass v. EPA (to regulate GHG emissions from aircraft, marine vessels, off-road engines, etc.) assert that GHG emissions already harm public health and welfare. These allegations raise an obvious policy question–what kinds of measures would be required to lower GHG concentrations below current levels?

The Kyoto Protocol, even if implemented by all industrialized countries, including the United States, would only barely slow the increase in GHG concentrations. Actually reducing GHG concentrations below today’s levels (~385 ppm) may well exceed human capability in this century. Even outright de-industrialization of the United States might not be enough to lower GHG levels, since most emissions growth in the 21st century is projected to occur in developing countries.

Yet, the CAA requires EPA to ensure that areas designated to be in non-attainment with a “primary” or health-based NAAQS come into attainment within five years, or at most 10 years if EPA grants an extension. Because GHGs are well-mixed throughout the global atmosphere, GHG NAAQS set below current atmospheric levels would turn the United States (indeed, the world) into a single giant non-attainment area. 

One consequence of the nation’s non-attainment with NAAQS for GHGs is that EPA would have to regulate major stationary CO₂ sources under the Non-Attainment New Source Review (NNSR) pre-construction permitting program, which is more stringent than PSD. The NNSR cutoff for regulation as a major source is 100 TYP, not 250 TPY as would be the case for most PSD-regulated stationary sources. NNSR-regulated entities must comply with Lowest Achievable Emission Rate (LAER) standards, the most stringent in EPA’s arsenal. Moreover, major sources would have to “offset” any emissions increase from a new or modified source by reducing emissions from an existing source somewhere else. Roughly speaking, nothing could be built or expanded anywhere in the United States unless something else shuts down–a de-facto moratorium on growth.

Most troubling, under CAA 110(a)(2)(D), sources in one state are prohibited from contributing to NAAQS non-attainment in another state. Given the long residence time of GHGs in the atmosphere, an argument could be made that almost any quantity of emissions anywhere contributes to NAAQS non-attainment everywhere. Hence, to avoid contributing to NAAQS non-attainment in other states, most sources would simply have to shut down!

Bear in mind that under established legal interpretation, EPA is forbidden to take compliance costs and economic impacts into account when setting NAAQS. In short, applying the NAAQS program to CO₂ could turn the CAA into the equivalent of an economic suicide pact.

 Absurd, you say? Yes, but the fault lies not in my analysis, but in the premises adopted by the majority in Mass v. EPA. The majority interpreted CAA Sec. 302(g) to mean that anything “emitted” into the ambient air is by definition an “air pollutant” and, thus, potentially subject to EPA regulation. But on that reading, even pollution-free, absolutely-clean air is an “air pollutant,” if it is emitted. That is absurd. Nonetheless, that formalistic definition of “air pollutant,” whereby a thing can be a pollutant even if it does not pollute the air, was the lynchpin of the majority’s (and petitioners’) argument.  (For more detail on this, see pp. 5-7 of my comment on the ANPR.)

More importantly, the real issue in Mass v. EPA was not, as petitioners and the majority argued, whether CAA Sec. 302(g) could be interpreted (or tortured) to justify regulating GHG emissions from one subset of mobile sources (new motor vehicles) under one provision of the Act (CAA Sec. 202). The real issue, rather, was whether Congress, when it enacted and amended CAA Sec. 202 in 1970 and 1977, authorized EPA to implement a Super-Kyoto regime under the CAA as a whole. To state this question, is to answer it. Sadly, that question was never squarely before the Court.

EPA’s Advanced Notice of Proposed Rulemaking

It’s unclear when the Bush team decided to mothball the endangerment finding and associated regulations, but a key event was enactment of the Energy Independence and Security Act (EISA) in December 2007. EISA directs federal agencies to implement new fuel economy and renewable fuel standards similar to those proposed in Bush’s 20-in-10 plan.  The statute directly and immediately gave the Bush team the authority they needed to curb oil imports. So they put EPA’s draft endangerment analysis and the associated motor vehicle emission regulations under wraps, much to the consternation of Sen. Boxer (D-CA), Rep. Waxman (D-CA), Rep. Markey (D-MA), and numerous environmental groups. 

Turnabout is fair play, and  just as the Clinton Administration punted the ICTA petition to Bush, so the Bush Administration punted EPA’s Mass v. EPA response to Obama.  But whereas Clinton’s EPA simply ducked the ICTA petition, Bush’s EPA in July 2008 published an Advanced Notice of Proposed Rulemaking (ANPR) exploring numerous options and issues connected with potential GHG regulation under the CAA.

The usual suspects denounced the ANPR as a “climate delayer” tactic. However, any fair-minded reader (the ANPR spans 166 pages in the Federal Register plus 11 technical support documents) will see that CAA regulation of GHG emissions abounds with administrative conundrums and economic risks never addressed by petitioners in Mass v. EPA. Bypassing this crucial exploratory analysis would have preempted public debate on the full range of legal, economic, and scientific issues.  When EPA published its ANPR and opened a 120-day comment period, it struck a small blow for “good government.”

Not that the ANPR is anti-regulatory or skeptical about climate alarmism. For example, the ANPR warns that global warming will increase smog-related mortality, even though EPA’s own data and reports show three decades of steady progress in reducing smog despite increasing urban air temperatures, and even though EPA regulations already on the books or in the pipeline will eliminate most U.S. air quality problems regardless of how the climate changes.

It’s also obvious from the ANPR that EPA relishes the prospect of dominating federal fuel economy regulation (GHG emission standards being de-facto mpg standards) and is hot to establish New Source Performance Standards (NSPS) for CO₂ emissions from power plants and refineries. 

Although far more forthcoming than petitioners in Mass v. EPA, the ANPR repeatedly downplays the economic risks of applying CAA regulatory provisions to CO₂. 

For example, the ANPR estimates that designating CO₂ as a regulated air pollutant would produce a tenfold increase in the number of PSD permit applications–from about 200-300 per year to 2,000-3000 per year. This, the ANPR acknowledges, could “overwhelm” the administrative resources of EPA and other agencies, and firms seeking to build or modify sources would “face new costs, uncertainty, and delay.”

But this considerably understates the risks. If just 1% of the 1.2 million facilities that would become “major stationary sources” of CO₂ undertake new construction or modifications, EPA and its state counterparts would have to process 12,000 PSD permits per year. The ensuing administrative quagmire would bring new construction and economic development to a screeching  halt. PSD for CO₂ potentially turns the CAA into a gigantic Anti-Stimulus package. 

The ANPR outlines several administrative remedies to shield small entities from PSD requirements, all of doubtful legality. For example, the ANPR proposes to redefine “major” source as a source with a potential to emit 10,000, 25,000, or even 100,000 TPY even though the statute says 250 TPY. Under Chevron v. NRDC, EPA has considerable discretionary authority in interpreting the CAA where the statute is “silent or ambiguous with respect to the specific issue.” But there is nothing ambiguous about 250 TPY.

The ANPR also suggests that an endangerment finding under CAA Sec. 202 need not set a precedent for NAAQS regulation of GHGs, because CAA Sec. 108 lists three factors triggering a NAAQS rulemaking, one of which is that the agency “plans” to produce an analysis known as an air quality  ”criteria” document. Thus, the ANPR opines, all EPA needs to do to avoid setting NAAQS for GHGs is simply not plan to do the requisite analysis.

This won’t wash.  It is tantamount to saying that EPA can avoid the obligation to establish NAAQS to control “air pollution” from “numerous or diverse mobile or stationary sources” that it has determined ”endangers public health or welfare” just by declining to do the paperwork.

In the 1970s, EPA Administrator Russell Train tried this dodge, claiming that EPA did not have to set NAAQS for lead emissions, because he had “no plan” to produce a criteria document for lead. The Second Circuit Court of Appeals rejected Train’s interpretation, finding that it would make EPA’s mandatory duties under the NAAQS program discretionary at the will of the Administrator. In other words, it would gut the NAAQS program. 

What these and several similar (though less blatant) examples in the ANPR reveal is that EPA cannot regulate CO₂ under the CAA and avoid the risk of severe economic damage without assuming legislative powers and effectively amending the Act. Mass v. EPA has set the stage for a constitutional crisis, because EPA may have to violate the separation of powers in order to avoid wreaking havoc on the economy.

The key constitutional point, though, is this: We could end up with a regulatory regime more onerous and intrusive than any climate bill Congress has rejected or declined to adopt, yet without the people’s elected representatives ever casting a vote.

WHERE THINGS STAND NOW

EPA’s leaked presentation reveals that the agency will propose an endangerment finding on April 30. There will be a 60-day comment period. Unlike all previous endangerment findings, EPA will not concurrently propose new regulations, but defer the latter to a future rulemaking or rulemakings. 

NAAQS Threat

Two things are noteworthy. First, EPA plans to find that “air pollution” related to GHG emissions endanger both health and welfare. This is a departure from the ANPR, in which EPA tried to make a case for finding endangerment only in relation to public welfare. 

Bush’s EPA had hoped that if the agency only makes a welfare-based endangerment finding, it would only have to establish a “secondary” NAAQS for GHGs. The hoped-for advantage is that unlike a primary NAAQS, which states must attain in five or at most 10 years, a secondary NAAQS has no prescribed attainment date. Secondary NAAQS must be attained as “expeditiously as practicable,” which, in the case of GHGs, might be 50 years or longer. 

But Obama’s EPA will propose endangerment on both health and welfare grounds. This inevitably will encourage litigation to establish primary as well as secondary NAAQS for GHGs, with all the economic peril that entails.

As you’d expect, petitioners in Mass v. EPA still deny that the public has anything to worry about. CAA provisions are not self-executing, they note. EPA must either initiate action under those provisions, or be compelled to do so by litigation. And according to them, nobody–not industry, not EPA, not the “environmental community”–wants to apply PSD to thousands of small sources, or promulgate NAAQS for GHGs. 

What this overlooks is that the major environmental groups do not have a monopoly on CAA litigation. There are legions of NIMBY (“Not In My Backyard”) activists who would not hesitate to petition EPA to apply PSD and BACT requirements to halt or delay construction of big box stores, shopping malls, fast-food restaurants, and other development they find offsensive or contrary to “smart growth.”

Also, as noted in a previous post, NASA scientist James Hansen, the world’s leading voice of climate alarm, argues that atmospheric CO₂ levels should be reduced to 350 ppm or lower.  This viewpoint is gaining traction among eco-litigation groups, notably the Center for Biological Diversity, which recently launched a $17 million litigation campaign to ensure that existing environmental statutes (CAA, Clean Water Act, National Environmental Policy Act, Endangered Species Act) are “fully implemented to regulate greenhouse gas emissions” (emphasis added).

Legislative Thuggery

The second noteworthy feature about Obama EPA’s endangerment finding is that it will be the first ever not to be accompanied by proposed regulation. In part, the Obama Administration wants to use the prospect (threat) of future CAA regulation as a spur for Congress to enact cap-and-trade legislation. Energy realists have worried for some time that the greenhouse lobby would use the specter of litigation-driven CO₂ regulation under the CAA to frighten industry and congressional fence-sitters into supporting cap-and-trade legislation. The message to cap-and-trade opponents would go something like this: “Pretty nice economy you used to have. Shame if something bad were to wreck what’s left of it. Everybody needs protection. You need protection. It’s called Lieberman-Warner.”

This is legislative thuggery, and energy realists should pounce it whenever it rears its ugly head. Our response should be always, “Take that gun away from our head, and then we’ll debate the merits of your cap-and-trade bill.”

We should be of good courage, because there’s probably another reason Obama’s EPA will issue a stand-alone endangerment finding. The  Obama team has to know that EPA cannot control the regulatory cascade once it starts. They also must know that the economic repercussions could be devastating and that they won’t be able to blame G.W. Bush.

So if team Obama wants to play chicken, threatening CAA regulation if we won’t support cap-and-trade, then I say, call their bluff. They don’t want to take ownership of a regulatory nightmare. If they open Pandora’s Box, there will be political hell to pay, and they know it.

And energy policy is now threatening to intersect with economic policy, first, as rising unemployment suggests to many that renewable energy subsidies offer an attractive use of funds but also as the government considers assistance for the US automobile industry (at least the home-grown sections of it). But in offering money to the Big Three, politicians are being urged to set certain conditions, such as ‘guidance’ concerning appropriate uses of the money.

The pundits have already weighed in, whether it is the scions of John Rockefeller calling on ExxonMobil to abandon their successful business strategy or Thomas Friedman arguing that “Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.” (NYT 11/11/08)

What is most distressing is that this is a near repeat of the mistakes made during the energy crises of the 1970s. Then, short-term problems caused higher prices, but the cause was misinterpreted by nearly everyone—industry, most academics and the huge number of instant pundits—as being resource scarcity, which would mean ever higher prices and economic problems into the future. The oil industry listened then and diversified into department stores, solar energy, and electric motor producers. Chrysler, for its part, abandoned its large car line, to its regret, while oil prices declined as if every pundit, (nearly) every computer model, and (nearly) all the economists had not predicted otherwise. [This roughly corresponds to Charles MacKay’s story of the London astrologers who found that the Thames failed to flood the town as they had predicted. Extraordinary Delusions and the Madness of Crowds.]

Amazingly, the auto industry has bought into the pundits’ argument, despite their own experience. The auto industry now seeks massive government aid because, as the CEO of Ford said, “We focused on trucks instead of fuel efficient vehicles.” On NPR,[1] the CEO of GM described his biggest mistake as abandoning the EV1, a vehicle that was not even close to being commercially viable.

In fact, the failure of the auto industry primarily was its inability to quickly shift from large to small vehicles when oil prices unexpectedly rose. (Although many pundits claimed they foresee the increase, the root causes—the Iraq War, the strike against Petroleos de Venezuela, and the unrest in the Nigerian delta—were not those predicted by the oil bulls. Indeed, in its 2005 Annual Energy Outlook, the US Department of Energy survey of long-term forecasts found that no one—including this author—expected prices to rise above $30 before 2025.)

The production of trucks and SUVs was not bad strategy as they were in fact incredibly profitable for years. The US industry could not produce fuel-efficient vehicles at competitive prices, so they did not (rather than rack up huge losses). Why they couldn’t—high labor costs, big retiree benefits, and/or high health costs—certainly reflects bad management to a degree, but also the different political economy of the US industry.

A major industry failing, arguably, was that instead of investing in more efficient production, some companies focused on corporate restructuring and acquisitions (Ford buying Volvo, for example, Chrysler’s merger with Daimler, subsequently reversed) but also on silver bullets. Most notably, all of the three major US companies have put significant efforts into developing hydrogen fuel cell vehicles, a technology that is clearly decades away, but which a decade ago was claimed to be on the verge of economic viability. A consortium including Ford, for example, set a 1997 target of ten to fifty thousand hydrogen fuel cell vehicles on the road by 2004. As of now, none of the technical problems has come close to being resolved.

Equally disturbing is the argument that electric vehicles are the solution to the US auto industry’s problems. The fact that proponents of electric vehicles have long oversold the technology seems to escape nearly every one. In the late 1970s, there were numerous glowing articles about the prospects for electric cars, despite the very obvious drawbacks, technical and economic, and they have continued to appear to this day. Years ago, an auto magazine editor sardonically commented that the electric car had been described as just around the corner for his entire career, and was still just around the corner.

The point is that the electric car is substantially more expensive than the internal combustion engine, about $40,000 for a small car that has limited range (which shrinks alarmingly if power drains like air conditioners and heaters are used), takes much longer time to ‘refuel’ than a gasoline car and at best only marginally reduces the impact on the environment (aside from the scary nature of the contents of the batteries) by transferring emissions from the car’s engine to the electric power sector.

The idea that this electricity could be ‘clean’ is irrational or unrealistic. Renewable energy—solar and wind—amount to only 0.8 percent of US power generation, while coal represents more than half. Changing that significantly would cost trillions—not something that seems desirable with today’s budget constraints.

So in effect, electric cars are not a solution to either the problems of the automobile industry or society: a very large expense achieves a very minor environmental effect. They are a technology that is not yet ready for prime time, and will only waste large amounts of public—and the automobile industry’s—money. Undoubtedly, the Chevrolet Volt will occupy a place in automotive history—right next to the diesel Oldsmobile, which was also premature and also failed spectacularly.

When, three, five or ten years from now, reality sets in and the electric vehicle is acknowledged as not yet viable, will the auto industry ask for another bailout? Will electric car proponents blame ‘brain-washed’ consumers for not buying a terrible product? Will consumer advocates accuse the, respectively, power and auto industries, of passing on their high costs for a) renewable energy and b) electric vehicles. One thing is certain: proponents of the yet another ‘silver bullet’ solution will claim that if only the industry had adopted their not-ready-for-prime-time technology, its problems would all be solved.