Can Detroit Live With New Fuel Rules?

Automakers will have to design lighter- weight vehicles, hybrid electric cars and clean diesel engines, as well as learn to use biofuels, to be able to meet the new fuel-economy standards just set by Congress. Once President Bush signs the legislation, those standards will climb 30% to 35 miles per gallon by 2020. But while the auto industry has reluctantly accepted the new federal regulations, it is still balking at even more stringent rules that are being set in a growing number of states.

California and 20 other states have enacted laws calling for limits on greenhouse gas. California's greenhouse law alone calls for a 43-miles-per-gallon fuel-economy standard, which will require even more drastic change in the vehicles Americans drive. The automakers, including Detroit's Big Three, Asian giants such as Toyota and Honda and European carmakers, have been fighting a legal battle against such rules. The automakers have lost a string of engagements in court. Last week a U.S. District Judge in Fresno, Calif., ruled in a pivotal four-year-old lawsuit that California has the right to set its own standards on greenhouse gas emissions from motor vehicles. "Both EPA [the Environmental Protection Agency] and California... are equally empowered through the Clean Air Act to promulgate regulations that limit the emissions of greenhouse gases, principally carbon dioxide, from motor vehicles," the judge ruled.

In the latest twist, the Environmental Protection Agency Wednesday sided with the carmakers, rejecting California request for a waiver that would approved the state's greenhouse gas regulations. "California's current waiver request is distinct from all prior requests," said EPA Administrator Stephen L. Johnson in a statement issued after the President had signed the new energy legislation. "The Bush Administration is moving forward with a clear national solution — not a confusing patchwork of state rules — to reduce America's climate footprint from vehicles," Johnson added. "President Bush and Congress have set the bar high, and when fully implemented, our federal fuel economy standard will achieve significant benefits by applying to all 50 states."

Officials in California and environmental groups immediately attacked with the EPA and vowed to fight it. "New CAF standards, if they go into effect, do not fully phase in until 2020," said Jim Martson general counsel for Environmental Defense. "The California greenhouse gas limits will occur earlier, beginning in to 2009 and be fully phased in by 2016." Earlier, in the day, the European Union, which also has a large say in the design of new vehicles, had sided with California and issued tough new regulations on carbon dioxide emissions that included stiff fines for any company's violating the rules.

What is most worrisome for manufacturers is that California's greenhouse-gas legislation applies the standards to all vehicles — unlike the corporate-average-fuel economy (CAFE) standards just approved by Congress, which sets up separate categories for cars and trucks. Says one top GM executive: "GM can probably offset most of the impact from the new CAFE legislation by selling 300,000 or 400,000 Volts," the company's plug-in electric vehicle, which is now due in 2010. Meeting the California standards, however, would pose more a formidable challenge and would probably require a significant downsizing of vehicles that would reach across the company's entire vehicle line.

The auto industry is likely to argue in court that the greenhouse rules are an illegal effort by the states to promote tougher fuel-economy standards, largely because the only sure way to limit emissions of carbon dioxide is for vehicles to use less fuel. "Under federal law, only the federal government can set fuel economy standards for all 50 states," says Dave McCurdy, president of the Alliance of Automobile Manufacturers. "We need a consistent national policy for fuel economy, and this nationwide policy cannot be written by a single state or group of states — only by the federal government."

Still, says Tom Stephens, the executive in charge of General Motors' Powertrain group, "We'll try to do whatever we can to satisfy the customer base. Obviously we'll do it inside whatever regulatory activity we're forced to live with." Satisfying the customer base has gotten complicated recently. With the price of oil hovering near $100 per barrel and the U.S. dollar taking a beating on global markets, tougher fuel economy standards had become linked to national security. And Detroit's Big Three automakers have finally concluded that their opposition to new federal fuel-economy standards was only hurting their image with younger buyers. And so, even as it fights state legislation, the industry is welcoming what has come out of Washington as the lesser of evils.

The federal legislation, however, comes at a sensitive time for GM, Ford and Chrysler. None of the three are profitable and all have announced a new round of restructuring and cutbacks for 2008. Meanwhile, demand for new cars and trucks is softening, making it harder for the domestic carmakers to come up with the seed capital needed for investments in new technology. "Storm clouds hovering over the U.S. automobile market will not dissipate" during the coming year," says Joseph Barker, senior manager of North American Sales Forecasting at CSM Worldwide, which has predicted that light-vehicle sales will drop to a 10-year low of 15.8 million units in 2008. "The market will linger in a cyclical contraction phase."

For environmentalists, meanwhile, the new standards represent a huge victory. "Americans demanded action on energy security and global warming and Congress responded," says Phyllis Cuttino, director of the Pew Charitable Trusts Campaign for Fuel Efficiency. The new federal standards, she says, "shows how powerful these issues have become — and they're not going away." Says Cuttino: "Just two years ago, 62 members of the Senate opposed any increase in fuel efficiency. Just six months ago, the auto industry was saying 35 miles per gallon was 'unachievable.' Today, in a triumph of policy, process and politics, an energy bill has passed the House that will save 1.1 million barrels of oil a day, $25 billion for consumers annually at the pump in 2020." And she congratulated the automakers. "It makes the... industry the first major sector of the American economy that will reduce its global warming pollution — by the equivalent of taking 28 million cars off the road." Detroit and Co. probably wish the states were as sympathetic.