More Gas Pains for Detroit?

America's automakers don't like the idea of tougher fuel-economy standards, but there's probably not much they can do to avoid them

When Nebraska Republican Lee Terry said in June that he planned to bring a proposal to the House of Representatives to toughen fuel-economy regulations, it was a clear sign the auto industry's seven-year blockade on an increase in gas-mileage laws was about to break. Terry rarely votes in favor of environmental legislation. But the growing concern over the nation's reliance on foreign oil and rising energy prices has lawmakers like Terry saying it's time to get tough on fuel economy.

The upshot: Tougher regulations are probably coming. The debate is over just how tough they will be. The battle will start when two proposals go before the House for a vote, which may happen as soon as July 31. The first, a more aggressive amendment sponsored by U.S. Reps. Edward J. Markey (D-Mass.) and Sherwood Boehlert (R-N.Y.), would force automakers to sell pickups, sport utility vehicles, and minivans with a fleet average of 27.5 miles per gallon -- the current standard for passenger cars -- over five years. Right now, trucks must meet an average of 20.7 mpg. The other proposal, this one backed by Michigan Democrat John Dingell, calls for a measly increase in truck fuel economy regulations of at least 1 mpg in total from 2004 to 2010.

Both sides expect a battle. A spokesperson for Dingell, who generally supports the auto industry, says the congressman won't support Boehlert's proposal. Dingell feels that the fuel economy regulations, known as Corporate Average Fuel Economy, or CAFE, are a decent minimum standard. But the regulations shouldn't be raised aggressively because it would cost the domestic automakers too much. They would face the possibility of paying millions in fines and the negative publicity associated with breaking the law. Also, Dingell supports Detroit's position that imposing fines on the Big Three for selling more SUVs would stop sales of domestic-branded SUVs and allow foreign automakers to take more of the profitable truck market.


  There's some truth to that. General Motors, Ford, and DaimlerChrysler AG's Chrysler Group all have been near the truck CAFE ceiling for several years, says David E. Cole, director of the Center for Automotive Research in Ann Arbor, Mich. That means that they can't sell too many more large pickup trucks and SUVs that miss the CAFE targets without paying a fine.

GM, for example, sells plenty of Chevrolet Tahoe SUVs, a model which gets 15 mpg on the road but is credited at about 17 mpg for regulatory purposes. To sell more of those, GM would have to sell vehicles that beat the CAFE standards by a few mpg. Foreign automakers, on the other hand, sell few big pickup and sport utilities, so they could sell many more such vehicles before they get close to exceeding the limits. And lately, Japanese and European automakers have been gaining market share in the SUV market. Says Cole: "The Japanese would be the only ones who could build a lot more big vehicles."

That argument may not fly. Boehlert says the auto industry has routinely opposed laws that force it to make safer, more fuel-efficient cars. And carmakers always said the cost to meet such laws would be too steep. But Detroit always managed to meet the standards, Boehlert says. Moreover, environmentalists argue that the auto industry has made great strides over the past decade in improving engine performance -- but they've only used their ingenuity to boost horsepower instead of improving fuel economy. "This is very modest," says Boehlert. "I could make a case to go to 40 mpg. But we can't overreach."


  Another hot point will be one of the law's existing loopholes. Currently, the law gives automakers CAFE credits for selling vehicles that run on either gasoline or ethanol. With not many more than than 100 ethanol filling stations in the country, these so-called "flexible fuel vehicles" run mostly on gasoline. But the credits can push up automakers' CAFE fleet average by up to 1.2 mpg.

Environmentalists gripe that this loophole has allowed the Big Three to miss their truck CAFE targets without being fined, while several foreign automakers have paid millions of dollars. Boehlert's proposal would let that loophole expire in 2004, while Dingell's would extend it until 2008.

Who's going to win? Neither side will make predictions. But the National Academy of Sciences may sway some votes when it briefs Congress on its CAFE study on July 30. The report will say that a significant increase in CAFE standards is warranted and that the auto industry can get fuel-economy improvements with existing technology. The report also states that the flexible fuel-vehicle credits undermine the effectiveness of the regulations. The Bush Administration and some lawmakers say that they're waiting for the report before making a final decision on CAFE. "I think we've got an even shot," says Dan Becker, head of the Sierra Club's global warming team and a supporter of the Boehlert-Markey bill. "It depends on how many moderate Republicans we can get."

The auto industry has been lobbying to keep a CAFE increase to a minimum. GM has dispatched fuel-economy experts to about 15 cities trying to make its case to the media that CAFE is a flawed policy and shouldn't be increased. Meanwhile, CEO Richard Wagoner Jr. is heading to Washington this week to amplify the same case against a big CAFE increase with the press and members of Congress.

All that lobbying may attract attention, but it looks like CAFE is moving up. It's just a matter of how much.

By David Welch in BusinessWeek's Detroit bureau

Edited by Beth Belton

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