US industry can't ignore an energy-conscious world

It's no secret that the United States is the world's biggest consumer of energy. The US alone produces one-quarter of total global CO2 emissions. This is only slightly less than the combined total from Western Europe, Japan, Latin America, and Africa. The average Americans are responsible for creating more than twice as much CO2 as their West European counterparts. Internationally, the US is also a leader in per capita consumption of electricity and water.

One reason for America's high consumption of resources is its comparatively low energy prices. The price of gasoline in some West European countries (the United Kingdom, for instance) is more than three times as high as in the United States, because of taxes.

Another reason is that many American consumers still don't have an environmental mindset (partly, of course, because energy and resources are so cheap). Nonstop air conditioning and gigantic refrigerators are just two cases in point.

At heart, politics is primarily responsible for the US's pronounced appetite for energy. In the past, American politicians have provided few incentives to conserve energy or to use natural resources more efficiently. Cheap energy has traditionally been an objective of US policy, and the environment has taken a back seat. On the international stage, the US withdrawal from the Kyoto protocol demonstrates environmental policy's marginal role in America.

Nevertheless, Americans are likely to pay more attention to environmental issues in the medium term. The main reason is that US industry will be compelled sooner or later to use energy more efficiently in both production processes and products; this holds especially for sectors that produce internationally traded goods.

In the automobile industry, the need to rethink is increasingly apparent. In 2000, only 10 percent of US-produced vehicles were exported - with far more than half the exports going to Canada. Other countries export much more. Japan exported nearly 45 percent of the cars it manufactured in 2000; the figure for Germany approaches 70 percent.

There are many reasons for this discrepancy, such as design and sales strategy. But it is surely impossible to ignore the fact that the gas-guzzling sport-utility vehicles and flashy cars produced by US makers are difficult to sell abroad because of their enormous fuel consumption and the much-higher prices at the pump outside the US. This becomes a particular problem for US carmakers when the domestic market declines, as it did in 2001, because it's not possible to offset weak domestic sales with higher exports.

Recently, though, it has become apparent in the US that fuel consumption matters to drivers as soon as the price of a fillup crosses a certain pain threshold. From roughly early 2000 until late summer 2001, the price of gasoline in the US was - by American standards - very high. And in both of those years, German and Asian automakers chalked up much better results in the US than did the domestic producers, even though the "Big Three" had launched sales drives with hefty financial incentives.

Disregarding other factors (such as exchange-rate effects and quality differences), the non-US producers' success is no doubt partly attributable to their lower average fuel consumption.

Sooner or later, the trend emerging in the auto industry is likely to become a reality in other sectors such as electrical engineering, mechanical engineering, and chemicals. The ability to save energy and manufacture energy-efficient, low-emission, low-noise, recyclable products is a growing factor in an international competition that America is far from winning.

Anyone who fails to change tack in the long run will face difficulties going head to head with foreign competitors. US manufacturers are becoming aware of this. They are (gradually) seeing that their products sell better abroad if they take into account the higher energy costs there, and that this also makes them more competitive in the home market.

US manufacturers realize that investments to reduce energy consumption pay off relatively quickly, especially since energy prices are scarcely likely to decline in the medium to long term. For that reason, some American companies are already much more farsighted on environmental protection and energy policy than are the politicians and some old-fashioned vested interests in industry.

So isn't it about time Washington also changed policies to encourage greater energy savings and took up the challenge to become an international leader on environmental issues?

Norbert Walter is chief economist of Deutsche Bank Group.

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