Car Makers: The New Greens

Robert A. Manning is a senior fellow, and Susan Lynne Tillou is a research associate, at the Council on Foreign Relations

When Lee A. Iacocca is hawking electric vehicles and General Motors chief John F. Smith Jr. predicts that no auto maker will succeed in the 21st century if it relies on internal-combustion engines, you know something funny is going on. In fact, there is a quiet revolution underway in the auto industry, spurred in part by California's zero-emissions laws. It is likely to change the face of private transportation by the year 2020 and leave enviros scratching their heads. How the hard-nosed auto industry suddenly "got religion" on the environment is a tale revealing the importance--and the limits--of environmental pressure and government regulation, on the one hand, and the power of market-driven competition, on the other.

Before California enacted its zero-emissions laws--that 2% of the cars sold in the state this year have zero emissions and that this number must rise to 10% in 2003--the auto companies were hiring lawyers to fight higher mileage standards while Japanese firms like Toyota were hiring engineers to design more efficient and environment-friendly cars. Worries about pollution and global warming were reflected in federal and state regulations, and Detroit fought them every step of the way. But that was then.

The federal Clean Air Act and California's introduction of zero-emissions requirements, later adopted by New York and other Northeastern states, got Detriot's attention. Research and development since the early 1990s, some with the aid of government programs, have revolutionized the thinking and market strategies of the world's seven largest auto makers, now vying to be on the cutting edge of new technologies. Today's low-emission vehicles are bridging the transition to zero-emissions vehicles (ZEVs). By reducing tailpipe emissions, they will dramatically cut smog and partly lessen greenhouse carbon-dioxide emissions. Over the coming decade, zero-emissions technologies, like fuel-cell and electric cars, will become commercially viable.

Already, we are getting a sneak preview of the future. How else to explain Toyota's monthly production of 2,000 new Prius models, hybrid gas/fuel-cell cars that get 66 miles a gallon. Toyota also has developed an electric sport-utility vehicle and a small electric two-seater. Honda has sold more than 130,000 lower-emission Civics and Accords in the past four months. Ford has invested some $500 million in a joint venture with Daimler-Benz that aims to market 100,000 family-size fuel-cell cars annually by 2004. General Motors plans to hit the market by 2002 with an 80-mile-a-gallon car, while Chrysler boasts a 70-mile-a-gallon diesel/electric hybrid version of the Intrepid. One senior auto executive predicted that by 2015 barely half the cars will have internal-combustion engines.

There is one problem. The California law calls for zero-emissions vehicles to make up at least 10% of sales by 2003. Yet, the 1990 requirements were based on the now questionable assumption that electric vehicles were the only way to a greener future. Eight years later, these zero-emissions electric vehicles still do not meet the performance requirements set by the state. What's more, the law did not anticipate the new technologies, and thus gives no credit to auto makers even if they produce cars that reduce emissions by 90%. It's all or nothing.

This predicament raises the question of how to recast a law that is a victim of its own success. To its credit, California acknowledges the new realities and is altering its law accordingly. In 1996, the state and the auto companies signed a memorandum of agreement that waived the 2% zero-emissions car requirement this year and offered credits for electric-battery vehicles put in operation over the next five years to apply toward the 2003 goal of 10%. In addition, the California Air Resource Board is expected to approve credits for Super ULEVs--gas-powered vehicles with very low emissions--toward the 2003 goal when it considers the issue this fall. This is imminently sensible. The point, after all, is net reductions of emissions.

According to a provision of the Clean Air Act, states must adopt either federal regulations for vehicle emissions or the stricter California requirements. Thirteen Northeastern states, represented by a regional group formed to manage air quality, adopted the California standard. Of these, only New York has clung to the 2% goal. Moreover, it is imposing stricter limits than California's even though it does not have the infrastructure (off-site recharging stations, etc.) to implement the higher standards.

In part, New York's appetite for cleaner air is politics-driven. While this issue is in court, Gov. George Pataki, running for reelection, has remained silent, apparently fearing he will be perceived as "caving in" to big business. The Greens have portrayed recent gestures by the auto makers, like the National Low Emission Vehicles (NLEV), as merely attempts to compromise New York's standards. But the Greens fail to comprehend the market's imperatives.

To dissuade Northeastern states from adhering to the 2% quota, the auto industry proposed that all states voluntarily accelerate compliance with the NLEV program. Under this program, the companies would equip their 1999 model-year vehicles with more advanced catalytic converters, resulting in cars that burn 70% cleaner than current models. These savings on emissions would offset the 2% requirement and allow car companies more time to focus on the 2003 target. Every state but Massachusetts, New York, Maine and Vermont accepted. With 45 states on board, the car companies will proceed with the program.

The auto industry would not be close to marketing 80-mile-a-gallon cars if the laws didn't push them to. Although new fuel-cell and hybrid technologies have been advanced by government-private sector partnerships, research and development have overwhelmingly been privately funded. So much for those who contend that an unfettered market is the engine of progress.

Yet, free-marketeers and government interventionists can both claim some credit. Present trends demonstrate market competition is fueling the quest for more eco-friendly technologies. Indeed, the impact of private-sector innovation, whether or not the Senate ratifies the Kyoto accord on global warming, will be substantially greater than expected. But the great irony is this: If the auto makers had been in the driver's seat, the new technologies changing their industry would not be emerging now. But the environmentalist-inspired regulations that have put auto makers into the race to produce cleaner-burning vehicles now threaten to impede progress.

The government needs to shift to the demand side of the clean-air equation, as President Bill Clinton has proposed, by offering tax credits to buyers of reduced-emission autos. Such incentives, so long as they do not become permanent, can help stimulate public acceptance of new technologies.

Whether the future is in fuel-cell, electric or other technologies remains unclear. But whatever the outcome, its ripple effects across the economy will be unmistakable. Gas stations may become energy stations. Projections of oil demand in the United States may shrivel, with far-reaching foreign-policy implications. Green activists will claim credit, while others will credit the invisible hand of the marketplace. But auto companies will make profits and the future will be more livable. If there's a lesson in this, it's in defining a government role in the economy with the proper respect for both the power, and the limits, of the market.

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