How to boost gas mileage and get better cars

American car companies need a radical incentive to raise the efficiency bar.

Earlier this month "we the people" bought GM. As a part of the company's new majority ownership, a few of us would like to suggest a way to speed the return of our automaker to global competitiveness: a carrot policy that incentivizes and enables struggling American automakers to produce radically efficient cars.

Hoping to spark transformation in American automaking, President Obama recently tightened the "Corporate Average Fuel Economy" (CAFE) standards to 35.5 mpg by 2016.

That's great.

But to truly unleash American automakers' technical prowess and innovative potential, the federal government should complement that stiff stick with a carrot so fat and juicy that those automakers strive not just to meet, but to leapfrog the newly raised efficiency bar.

Under the existing CAFE legislation, if automakers surpass the annual minimum efficiency requirement, then they receive "credits," which can be used to offset deficiencies in subsequent or prior years. But that's not a carrot – it's more like a stick painted orange! Consider that from 1995 to 2007, the Big Three's combined CAFE never once exceeded the minimum standards by even 1 mpg.

Here's a more enticing policy: Offer American automakers financial compensation for each "extra-efficient" vehicle they produce and sell domestically. Base it on the unpriced societal value of the oil that that vehicle will save over its lifetime (compared to a minimally CAFE-compliant model).

The more extra-efficient a vehicle is, the greater the additional societal savings it affords, the greater the compensation would be. And those extra-efficient cars needn't even cost more to build (because their simpler manufacturing and smaller engines can offset the extra cost of their lighter, stronger materials).

American car buyers already consider the value of saving oil. That's why in mid-2008, when gas prices soared to upward of $4 gallon, the 46-mpg Prius outsold every SUV model in the country except one (the Honda CR-V).

But saved barrels of oil are worth enormously more than just their gasoline price. They also avoid hidden societal costs, including defending oil supplies, government subsidies, price volatility, dirty air, and climate change.

Conservative estimates put these costs around the range of $40 to $170 a barrel (and this doesn't begin to take into account oil's role in eroding national security, principles, reputation, and diplomatic effectiveness; and other weakening of democracy and the national economy).

Compared with a 35.5-mpg car, an extra-efficient 55-mpg car sold in the same year would save approximately 40 barrels of oil over its lifetime. That's worth a lump sum of at least $1,000 – $5,500 to society in avoided hidden costs.

If the federal government dangled that carrot in front of automakers' noses, they'd be strongly motivated to shift innovation into high gear and promptly sell as many extra-efficient cars as possible.

With rebounding sales, stronger balance sheets, and state-of-the-art, extra-efficient product lineups, American automakers would not only regain their competitive standing, they would become far more likely to thrive long-term.

And there's a precedent: At the start of World War II, Detroit switched in just six months from making 4 million cars a year to making the tanks and aircraft that won the war, and that wrenching conversion to "the great arsenal of democracy" laid the foundations for its global automotive dominance for the next half century.

If a similar transformation doesn't happen now, the dramatic efficiency gains currently emerging from the nimble foreign competition will eventually re-collapse Detroit, and all the bailouts, bankruptcies, and reorganizing will have been for naught.

To compete, prosper, and ultimately win in the global auto industry, American automakers must make radically efficient cars – the sooner the better. So let's catalyze that transformation now – empowering today's American automakers to become as bold as they were in 1942 and 1943 – with a policy that internalizes the value of the hidden costs that can save us all.

Amory Lovins is chief scientist at Rocky Mountain Institute (RMI) and author, most recently, of "Winning the Oil Endgame: Innovation for Profits, Jobs, and Security." Mark Gately is a research fellow at RMI, and Laura Schewel is a former RMI transportation consultant.

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