[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



                     IMPROVING THE NATION'S ENERGY
                    SECURITY: CAN CARS AND TRUCKS BE
                       MADE MORE FUEL EFFICIENT?

=======================================================================

                                HEARING

                               BEFORE THE

                          COMMITTEE ON SCIENCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 9, 2005

                               __________

                            Serial No. 109-3

                               __________

            Printed for the use of the Committee on Science


     Available via the World Wide Web: http://www.house.gov/science


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                                 ______

                          COMMITTEE ON SCIENCE

             HON. SHERWOOD L. BOEHLERT, New York, Chairman
RALPH M. HALL, Texas                 BART GORDON, Tennessee
LAMAR S. SMITH, Texas                JERRY F. COSTELLO, Illinois
CURT WELDON, Pennsylvania            EDDIE BERNICE JOHNSON, Texas
DANA ROHRABACHER, California         LYNN C. WOOLSEY, California
KEN CALVERT, California              DARLENE HOOLEY, Oregon
ROSCOE G. BARTLETT, Maryland         MARK UDALL, Colorado
VERNON J. EHLERS, Michigan           DAVID WU, Oregon
GIL GUTKNECHT, Minnesota             MICHAEL M. HONDA, California
FRANK D. LUCAS, Oklahoma             BRAD MILLER, North Carolina
JUDY BIGGERT, Illinois               LINCOLN DAVIS, Tennessee
WAYNE T. GILCHREST, Maryland         RUSS CARNAHAN, Missouri
W. TODD AKIN, Missouri               DANIEL LIPINSKI, Illinois
TIMOTHY V. JOHNSON, Illinois         SHEILA JACKSON LEE, Texas
J. RANDY FORBES, Virginia            BRAD SHERMAN, California
JO BONNER, Alabama                   BRIAN BAIRD, Washington
TOM FEENEY, Florida                  JIM MATHESON, Utah
BOB INGLIS, South Carolina           JIM COSTA, California
DAVE G. REICHERT, Washington         AL GREEN, Texas
MICHAEL E. SODREL, Indiana           CHARLIE MELANCON, Louisiana
JOHN J.H. ``JOE'' SCHWARZ, Michigan  VACANCY
MICHAEL T. MCCAUL, Texas
VACANCY
VACANCY


                            C O N T E N T S

                            February 9, 2005

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Sherwood L. Boehlert, Chairman, 
  Committee on Science, U.S. House of Representatives............    10
    Written Statement............................................    11

Statement by Representative Bart Gordon, Minority Ranking Member, 
  Committee on Science, U.S. House of Representatives............    12
    Written Statement............................................    12

Prepared Statement by Representative Jerry F. Costello, Member, 
  Committee on Science, U.S. House of Representatives............    13

Prepared Statement by Representative Eddie Bernice Johnson, 
  Member, Committee on Science, U.S. House of Representatives....    13

Prepared Statement by Representative Michael M. Honda, Member, 
  Committee on Science, U.S. House of Representatives............    14

Prepared Statement by Representative Russ Carnahan, Member, 
  Committee on Science, U.S. House of Representatives............    14

Prepared Statement by Representative Sheila Jackson Lee, Member, 
  Committee on Science, U.S. House of Representatives............    15

                               Witnesses:

Hon. William K. Reilly, Aqua International Partners
    Oral Statement...............................................    17
    Written Statement............................................    19
    Biography....................................................    24
    Financial Disclosure.........................................    26

Mr. Paul R. Portney, President, Resources for the Future
    Oral Statement...............................................    27
    Written Statement............................................    29
    Biography....................................................    32

Mr. K.G. Duleep, Managing Director of Transportation, Energy and 
  Environmental Analysis, Inc.
    Oral Statement...............................................    33
    Written Statement............................................    36
    Biography....................................................    41

Mr. Michael J. Stanton, Vice President of Government Affairs, 
  Alliance of Automobile Manufacturers
    Oral Statement...............................................    42
    Written Statement............................................    43
    Biography....................................................    46

Dr. David L. Greene, Oak Ridge National Laboratory, Center for 
  Transportation Analysis, National Transportation Research 
  Center
    Oral Statement...............................................    47
    Written Statement............................................    50
    Biography....................................................    60
    Financial Disclosure.........................................    61

Discussion.......................................................    61

             Appendix 1: Answers to Post-Hearing Questions

Hon. William K. Reilly, Aqua International Partners..............    84

Mr. Paul R. Portney, President, Resources for the Future.........    87

Mr. K.G. Duleep, Managing Director of Transportation, Energy and 
  Environmental Analysis, Inc....................................    89

Mr. Michael J. Stanton, Vice President of Government Affairs, 
  Alliance of Automobile Manufacturers...........................    91

Dr. David L. Greene, Oak Ridge National Laboratory, Center for 
  Transportation Analysis, National Transportation Research 
  Center.........................................................    93

             Appendix 2: Additional Material for the Record

Statement of Dr. David L. Bodde, Professor and Director of 
  Innovation and Public Policy, International Center for 
  Automotive Research, Clemson University........................    98

Statement of Dr. Gal Luft, Executive Director, Institute for the 
  Analysis of Global Security (IAGS).............................   101

Letter to The Honorable Sherwood Boehlert from Timothy C. 
  MacCarthy, President and CEO, Association of International 
  Automobile Manufacturers, Inc., dated February 23, 2005........   106

Ending the Energy Stalemate, A Bipartisan Strategy to Meet 
  America's Energy Challenges, The National Commission on Energy 
  Policy, December 2004..........................................   108

Executive Summary, National Academy of Sciences, 2003............   131

 
  IMPROVING THE NATION'S ENERGY SECURITY: CAN CARS AND TRUCKS BE MADE 
                          MORE FUEL EFFICIENT?

                              ----------                              


                      WEDNESDAY, FEBRUARY 9, 2005

                  House of Representatives,
                                      Committee on Science,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 2:30 p.m., in Room 
2318 of the Rayburn House Office Building, Hon. Sherwood L. 
Boehlert [Chairman of the Committee] presiding.


                            hearing charter

                          COMMITTEE ON SCIENCE

                     U.S. HOUSE OF REPRESENTATIVES

                     Improving the Nation's Energy

                    Security: Can Cars and Trucks Be

                       Made More Fuel Efficient?

                      wednesday, february 9, 2005
                          2:30 p.m.-4:30 p.m.
                   2318 rayburn house office building

Purpose

    On February 9, the Committee on Science will hold a hearing on the 
availability of technologies to improve fuel economy in cars and trucks 
and the potential for fuel economy improvements to reduce the Nation's 
dependence on foreign oil.
    The U.S. depends on imports to meet nearly 60 percent of its oil 
needs, much of it from troubled countries or regions of the world, 
including Nigeria, Venezuela, Russia, and the Middle East. The gasoline 
burned by cars and trucks accounts for about 45 percent of the Nation's 
oil consumption. Total U.S. daily oil consumption is expected to rise 
from 20 million barrels today to 29 million barrels by 2025, mostly as 
a result of increasing consumption for transportation.
    The hearing will focus on the pros and cons of tightening federal 
fuel economy standards for cars and light trucks (known as Corporate 
Average Fuel Economy, or CAFE standards) and reforming the program as a 
way to reduce U.S. oil consumption and encourage the use of new 
technologies. But witnesses have also been asked to discuss more 
generally how the Federal Government could promote the deployment of 
fuel-saving technologies. Other options include tax incentives, fuel 
taxes, and research, development and demonstration programs.
    More specifically, the hearing will review and update the findings 
of the National Academy of Sciences on CAFE standards issued in 2002. 
The Academy report, which was commissioned by the Congress, concluded 
that the technology exists to significantly improve the fuel economy of 
cars and light trucks without reducing safety.
    In December, the National Commission on Energy Policy, a bipartisan 
group of leaders from business, government, and academia that included 
experts in national security, energy, and the environment released a 
set of recommendations for U.S. energy policy. The recommendations 
included a call to raise CAFE standards to enhance the Nation's energy 
security. The privately funded group was chaired by William Reilly, who 
was Administrator of the Environmental Protection Agency (EPA) under 
President George H.W. Bush, and John Holdren, the Teresa and John Heinz 
Professor of Environmental Policy at Harvard University.
    The Committee plans to explore the following overarching questions 
at the hearing:

        1.  To what extent can improving fuel economy in cars and 
        trucks improve the economic and energy security of the Nation?

        2.  What technologies are available or will soon be available 
        to improve fuel economy in cars and trucks? How much could 
        these technologies improve fuel economy without compromising 
        safety or the economy?

        3.  What policy options are available to Congress to encourage 
        the adoption of automobile efficiency technologies? What are 
        the advantages and disadvantages of each?

Witnesses:

1.  William Reilly co-chaired the National Commission on Energy Policy, 
which in December released a report entitled Ending the Energy 
Stalemate: A Bipartisan Strategy to Meet America's Energy Challenges. 
Mr. Reilly is founding partner of the investment firm Aqua 
International Partners and was the Administrator of EPA under President 
George H.W. Bush.

2.  Paul Portney was Chairman of the National Academy of Science's 
Committee on the Effectiveness and Impact of Corporate Fuel Economy 
(CAFE) Standards, which authored the 2002 report. An economist, he is 
the President of Resources for the Future, a D.C.-based energy and 
environmental policy research institute.

3.  K.G. Duleep is Transportation Managing Director of the energy and 
environmental consulting firm Energy and Environmental Analysis, Inc. 
He is an internationally recognized expert on vehicular fuel economy 
and emissions issues. He has been involved with automotive technology, 
fuel economy, and emissions issues for over 20 years.

4.  Michael Stanton is Vice President of Government Affairs at the 
Alliance of Automobile Manufacturers, a trade association representing 
the BMW Group, DaimlerChrysler, Ford Motor Company, General Motors, 
Mazda, Mitsubishi Motors, Porsche, Toyota, and Volkswagen.

5.  David Greene is a Corporate Fellow at the National Transportation 
Research Center, Oak Ridge National Laboratory. He has spent 25 years 
researching transportation and energy policy issues.

Issues:

          Has the Corporate Average Fuel Economy (CAFE) law 
        worked? Congress created the CAFE program in 1975 after the 
        Arab oil embargo, which resulted in a tripling of the price of 
        oil in the early 1970s. Average new car fuel economy rose from 
        12.9 miles per gallon (mpg) in 1974 to 27.6 mpg in 1985--
        slightly more than the 27.5 mpg required by the CAFE standards 
        that year. (The average for new light trucks, the category that 
        now includes pickups, SUVs and mini-vans, rose to 19.5 mpg over 
        the same time period.) Today, the standards stand at 27.5 mpg 
        for cars and 21.0 mpg for light trucks.

           Experts argue over the extent to which the increase in fuel 
        economy in the 1970s and 1980s can be attributed to CAFE or to 
        high fuel prices. Some say that the sudden hike in prices in 
        the 1970s and the threat of competition from Japanese 
        automakers (who were entering the U.S. market with more fuel 
        efficient cars) were the predominant forces driving the 
        increase in domestic fuel economy. But the National Academy of 
        Sciences panel concluded that CAFE standards have played a 
        leading role in preventing fuel economy levels from dropping as 
        much as they otherwise would have as fuel prices declined in 
        the 1990s, and that fuel use by cars and trucks today is 
        roughly one-third lower than it would have been had fuel 
        economy not improved since 1975.

           Experts also argue whether, regardless of their 
        effectiveness, CAFE standards are the most efficient and 
        effective way to increase fuel economy.

          Why has the fuel economy of new vehicles been on a 
        downward trend since 1987? The average fuel economy of new 
        vehicles sold in the U.S. has declined since reaching a peak in 
        1987. The major reason is the explosive growth in SUVs, mini-
        vans, and pickup trucks, which must meet a fuel economy 
        standard that is lower than that for passenger cars. The number 
        of light trucks sold has more than tripled since 1980, while 
        the number of passenger cars has declined slightly over the 
        same period. Today more than half the new cars sold are light 
        trucks. At the same time, CAFE standards have remained 
        stagnant. The fuel economy standard for new cars has not 
        changed since 1990. And until this year, the standard for new 
        light trucks had not changed since 1996.

           The fact that the average fuel economy has declined since 
        1987 does not mean that no new cars or light trucks use newer, 
        more fuel-efficient technologies. But any improvements in fuel 
        economy in a particular model have been offset by declines in 
        fuel economy in other models (or by increased sales of models 
        with lower fuel economy), allowing the average--which is based 
        on sales of all makes and models--to drop. Proponents of CAFE 
        standards argue that government action is the only way to raise 
        the average by pushing improvements across automakers' fleets.

           Automakers point out that they have made cars and trucks 
        more efficient, pound for pound, in recent years. They note 
        that they have significantly increased the power and size of 
        vehicles without much change in fuel economy. And they argue 
        that customers prefer power, size and luxury over fuel 
        efficiency. As a result, average vehicle weight has increased 
        by 24 percent since 1981 and average horsepower has increased 
        by 93 percent.

          Does the technology exist to improve the fuel economy 
        of cars and trucks? The National Academy of Sciences report 
        identified 14 technologies that were readily available in 2002 
        to improve the efficiency of automotive engines, transmissions, 
        and overall design (such as a vehicle's aerodynamics and 
        rolling resistance). The Academy also identified nine emerging 
        technologies, some of which had already been introduced in 
        European or Japanese markets, but not in the U.S.

           The Academy concluded that the technologies it identified, 
        in combination, would allow fuel economy increases of 12 to 27 
        percent for cars and 25 to 42 percent for light trucks without 
        any reduction of safety. (The technologies would also pay for 
        themselves in fuel savings, the Academy found. See attachment.)

           The Academy did not include hybrid vehicles among the 
        technologies it identified because they had just been 
        introduced into the American market when the Academy conducted 
        its study. Sales of hybrids have continued to grow since the 
        Academy issued its report. The National Commission on Energy 
        Policy report, released late last year, found that the ability 
        of hybrid technologies to make substantial improvements in fuel 
        economy has been clearly demonstrated.

           Automakers question whether consumers will be willing to pay 
        for efficiency technologies. Even if the technology pays for 
        itself in gasoline savings over the life of the vehicle, they 
        say, many consumers do not consider those kinds of long-term 
        benefits when choosing a vehicle.

          Can fuel economy be improved without eroding 
        passenger safety? The relationship between fuel economy and 
        safety is fiercely debated. Even the National Academy of 
        Sciences panel was split on this issue. A majority found that 
        when automakers in the 1970s and 1980s made vehicles more 
        efficient by making them smaller and lighter, they also likely 
        increased the number of crash fatalities by several percent. 
        (Two members of the panel believed the relationship between 
        weight, size and safety to be too uncertain to determine 
        whether any additional casualties occurred due to fuel economy 
        improvements during that time.)

           The Academy panel concluded unanimously, however, that fuel 
        economy could be increased in the future without any detriment 
        to safety. The Academy said that the technologies it had 
        identified for improving fuel economy would not reduce safety 
        and could even increase it. The panel also called for a 
        reduction in the weight of the heaviest vehicles in the light 
        truck category as a way to increase safety and fuel economy 
        simultaneously. The Academy found that if the weight and size 
        of the heaviest vehicles, particularly those over 4,000 pounds, 
        were reduced, vehicle safety would improve by reducing the 
        damage caused by those vehicles in crashes.

          Would raising fuel economy standards disadvantage 
        domestic manufacturers? The National Academy of Sciences report 
        concluded that CAFE regulations could have different effects on 
        different manufacturers, but that those effects could be 
        minimized. The sales and especially the profits of General 
        Motors, Ford, and the Chrysler division of DaimlerChrysler, are 
        much more dependent on light trucks than are their competitors. 
        If fuel economy standards were raised for light trucks, but not 
        for cars, U.S.-based companies would likely suffer. (This 
        assumes that redesigning light trucks to improve fuel economy 
        would either raise the prices of the vehicles, driving 
        customers away, or require automakers to absorb some of the 
        costs of redesign, eating into profits.) Conversely, if 
        standards were raised for cars only, U.S.-based companies might 
        be advantaged. But fuel economy increases in light trucks would 
        produce greater oil savings.

           To minimize the costs of improving fuel economy, both the 
        National Academy of Sciences and the National Commission on 
        Energy Policy recommended reforming CAFE regulations to allow 
        manufacturers to trade fuel economy credits with one another in 
        much the same way that electric utilities trade pollution 
        allowances. Under such a system, an automaker that could not 
        improve its average fuel economy to the extent required by CAFE 
        standards could purchase credits from an automaker that had 
        exceeded CAFE standards. (The government could also sell 
        credits.) Tradable CAFE credits would give manufacturers an 
        incentive to exceed the standards since they could then sell 
        the credits to others. And it could minimize the overall cost 
        of the program by ensuring that the auto industry as a whole 
        made the most economical improvements in fuel economy.

           Even under a CAFE program that allowed tradable credits, 
        however, domestic automakers, which sell the largest and least 
        fuel efficient vehicles, would likely have to invest the most, 
        either in purchasing credits from other manufacturers or in 
        developing fuel efficient technologies.

           That is one reason why the National Commission on Energy 
        Policy further recommended that an increase in CAFE standards 
        be coupled with a tax incentive program to encourage the 
        domestic production of vehicles with fuel efficient 
        technologies like hybrid and diesel technologies.

           The Academy also recommended that Congress eliminate the 
        separate categories for cars and light trucks. That would 
        enable CAFE standards to allow automakers more flexibility 
        because they could meet a single CAFE standard for their entire 
        fleet in more ways. An automaker could choose to meet a tighter 
        CAFE standard either by improving the fuel mileage of cars or 
        light trucks or both. However, eliminating the current 
        categories would likely severely disadvantage U.S.-based 
        automakers because their fleets are so weighted toward light 
        trucks that the bulk of any fuel economy improvements would 
        still have to be made in that class of vehicles. However, new 
        categories based on weight, size or horsepower, might go a long 
        way toward leveling the playing field.

          How would higher fuel economy standards likely affect 
        workers in the automotive industry? The National Academy of 
        Sciences panel believed that fuel economy standards could be 
        raised without negative consequences on employment if the 
        increase were implemented with enough lead-time. Even existing 
        technologies, the report said, could take four to eight years 
        to penetrate the market.

           The Academy panel pointed out, however, that larger scale 
        trends have a much greater effect on employment than do CAFE 
        standards. Employment in the auto industry increased from 
        little over 600 million in the early 1980s to over one million 
        in 1999, largely because of foreign-owned companies' decisions 
        to build manufacturing plants in the U.S. Over the same time 
        period, however, organized labor lost almost half of its 
        members due to the domestic manufacturers' improvements in 
        automobile production, shifts of parts production overseas, and 
        loss of market share to foreign-owned manufacturers. (Workers 
        in their plants, even those in the U.S., generally are not 
        unionized.)

           The National Commission on Energy Policy argued that its 
        recommendation for tax incentives for the domestic production 
        of hybrid and diesel vehicles would help staunch this flow. The 
        Commission argued that some jobs would be lost in any event as 
        foreign manufacturers expand their efforts to introduce hybrid 
        and diesel vehicles in the U.S. market. But the Commission 
        calculated that its tax incentives would result in about 25 
        percent fewer jobs being lost.

          How much oil would an increase in fuel economy save? 
        According to the National Commission on Energy Policy, 
        improving car and light truck fuel economy by 10, 15, and 20 
        percent by 2015 would result, by 2025, in an estimated fuel 
        savings of approximately two, three, and 3.5 million barrels of 
        oil a day respectively. Such savings represent a 25 to 40 
        percent reduction in the additional amount of oil by which U.S. 
        demand is currently projected to grow by that time, absent 
        other policy interventions.

Background:

Origins of the CAFE Program
    The early 1970s saw the price of oil triple, an increase 
precipitated by an embargo orchestrated by the oil cartel OPEC 
(Organization of Petroleum Exporting Countries). The crisis threw into 
stark relief the fuel inefficiency of U.S. manufactured automobiles, 
and consumers began switching to relatively fuel efficient imported 
vehicles. Congress passed the Energy Policy and Conservation Act in 
1975 with the goal of reducing the Nation's dependence on foreign oil, 
which established, among other things, the Corporate Average Fuel 
Economy (CAFE) program to raise the fuel economy of the U.S. fleet.
    The CAFE program requires the fuel economy of an automaker's entire 
product line of cars and light trucks sold in the U.S., averaged across 
all models and weighted by sales, to meet a miles-per-gallon level set 
by the government. Under the 1975 law, Congress sets the target for 
passenger cars, which rose from 18 mpg in 1978 to 27.5 mpg in 1990, 
where it remains today. Congress delegated the authority to set fuel 
economy standards for light trucks to the National Highway 
Transportation Safety Administration (NHTSA). Light truck standards 
rose from 17.5 mpg in 1982 to 20.7 mpg in 1996. Beginning this year, 
the standard for light trucks is to rise gradually to 22.2 mpg in 2007. 
The increase this year is the first since 1996, in part, because 
language added to appropriations bills forbade NHTSA from raising the 
standard between 1996 and 2000.
    When Congress created the CAFE program, light trucks accounted for 
a small portion of vehicle sales and generally included trucks used on 
farms or at construction sites. According to the Congressional Research 
Service, the number of new passenger cars sold each year in the U.S. 
has decreased somewhat since 1980, but the number of light trucks sold 
has more than tripled, from 2.2 million in 1980 to 8.7 million in 2001.
    Domestic manufacturers still dominate the light truck market, but 
their share has declined from 86 percent in 1993 to less than 77 
percent in 2002 as foreign automakers have aggressively targeted this 
popular sector of the U.S. market, focusing on somewhat smaller, more 
fuel efficient models.

Recent Actions
    In 2003 NHTSA issued a final rule to boost the CAFE standard for 
light trucks by 1.5 miles per gallon by 2007. NHTSA estimates that the 
increase will save approximately 75,000 barrels of oil a day between 
2006 and 2012, or less than 0.4 percent of current consumption.
    In 2003 NHTSA also issued an Advance Notice of Proposed Rule-making 
inviting comments on a wide variety of potential ways to change the 
CAFE program to address a number of criticisms that have been made, 
including those made by the National Academy of Sciences panel. For 
example, NHTSA has invited comments on whether it ought to discard the 
distinction the program makes between cars and light trucks (which 
would require a statutory change); establish separate fuel economy 
standards for various classes of light trucks based on weight, size, or 
some other attribute; or extend fuel economy standards to light trucks 
weighing up to 10,000 pounds (since such vehicles are currently not 
subject to fuel economy standards). NHTSA has set no date for when it 
might propose actual reforms based on these comments.

Questions Asked of the Witnesses:

    The witnesses were asked to address the following questions in 
their testimony:

Mr. Reilly:
    Please describe the Commission's recommendation to improve fuel 
economy (particularly those related to Corporate Average Fuel Economy 
(CAFE) Standards), and address the following questions:

        1.  What are the expected economic and energy security benefits 
        from reducing the Nation's dependence on oil? If we are to 
        reduce our dependence on oil, how important is it to improve 
        the fuel economy of cars and light trucks?

        2.  What effect would your recommendations have on the relative 
        competitiveness of American and foreign-owned automobile 
        manufacturers, on American workers in the automotive industry 
        and on automotive safety?

Mr. Portney:
    Please describe the findings of the Academy report, with particular 
emphasis on the following questions:

        1.  Have Corporate Average Fuel Economy (CAFE) standards been 
        effective at saving the country oil?

        2.  How much of an increase in fuel economy did your panel find 
        was technologically possible? How much did you find could pay 
        for itself in gasoline savings to the consumer?

        3.  To what extent could the technologies to improve fuel 
        economy described in the report be adopted without eroding 
        safety?

        4.  What are the Academy report's recommendation's for 
        improving the CAFE law?

Mr. Duleep:

        1.  What technologies are available now or are emerging that 
        provide the best opportunities for automakers to boost fuel 
        efficiency? How much could they improve fuel economy?

        2.  What are the prospects that hybrid technologies and diesel 
        vehicle technologies, in particular, will achieve a large 
        degree of market penetration? How much could they contribute to 
        improving overall fuel economy?

        3.  To what extent can any of these technologies be used to 
        improve fuel economy without eroding safety?

        4.  What steps could the government take to accelerate market 
        penetration of these technologies?

Alliance for Automobile Manufacturers Representative:

        1.  Do you agree with the findings of the National Academy of 
        Sciences regarding the availability and performance of 
        technologies to increase fuel economy?

        2.  What potential do hybrid technologies and new diesel 
        technologies have to reduce fuel consumption?

        3.  Do you believe that the U.S. should reduce its dependence 
        on foreign oil? If so, what steps should the government take to 
        accomplish this?

        4.  What do you believe is the best way the government can 
        encourage greater adoption of technologies to improve fuel 
        economy?

Dr. Greene:

        1.  What are the policy options for encouraging the adoption of 
        fuel efficient technologies in the marketplace and the 
        advantages and disadvantages of each?

        2.  Can the government encourage the adoption of technologies 
        to improve fuel economy without leading automakers to make 
        vehicles less safe?

        3.  Can the government encourage the adoption of technologies 
        to improve fuel economy without giving any individual automaker 
        a significant advantage?

Attachment



    Chairman Boehlert. I want to welcome everyone here for this 
important hearing on fuel economy.
    This committee has a special responsibility to review this 
issue, because part of our charge is to ensure that new energy 
technologies are developed and that they make their way into 
the marketplace.
    And new fuel economy technologies are not making their way 
into the market, at least not to an acceptable extent because 
of market failures and, quite frankly, political failures.
    Correcting those failures should be of surpassing interest 
to every citizen of our country, because fuel economy is not 
just an energy issue, it is not just an environmental issue, it 
is, first and foremost, a national security issue.
    Our nation is ever more dependent, stunningly dependent on 
the world's most unstable region for the energy that is the 
lifeblood of our economy. Could anything be more critical? We 
are like a patient in critical care who needs a daily 
transfusion and can only hope to get it from an iffy, black 
market supplier.
    And yet we act as if everything will be healthy forever. We 
are doing next to nothing to reduce our reliance on foreign 
oil. About 60 percent of the oil we consume each day is used 
for transportation; 45 percent of it is just for cars and light 
trucks. We can not reduce our oil consumption meaningfully 
unless we address transportation. That is a simple, unarguable 
fact.
    And yet while many areas of the economy have been 
significantly more energy efficient over the past three decades 
or so, our nation's fuel economy is worse than it was 15 years 
ago. That ought to be unacceptable.
    It ought to be especially unacceptable, intolerable, 
really, when we have the technology to improve fuel economy 
without reducing safety, without harming the economy, and 
without reducing the options people have in the automobile 
showroom.
    I think we will learn today that there really is no debate 
about whether we have the technology we need to improve fuel 
economy. The only debate is whether we are willing to do 
something about it, and that we will hear more of today.
    But while we listen to the experts before us today, I want 
everyone to remember the costs of inaction: they can be 
measured in dollars, particularly in the funds we spend on the 
military and homeland security, and they can also be measured 
in lives, as we can see in daily news reports. We need to 
consider the very real costs of being utterly dependent on 
unstable regions to carry out our most basic daily tasks.
    I am not arguing, by the way, that we can become entirely 
energy independent or that fuel economy is the sole answer to 
our energy woes. That would be silly. We will markup a bill 
tomorrow that reflects the full range of steps we need to take 
in energy research and development to improve our energy 
profile, and they involve work on energy efficiency and 
renewable energy, but also on fossil fuels and nuclear energy; 
and they involve supply as well as demand.
    But we ought to do everything we can to reduce our demand. 
That is in our national interest. It is an interest we share as 
a society, but one that is not reflected adequately in 
individual decisions in the marketplace, a classic market 
failure that cries out for corrective government action. But 
the government has not risen to the task, and we are all in 
greater danger as a result.
    We have a very distinguished and balanced panel of experts 
before us. I am especially gratified that my old friend, former 
EPA Administrator Bill Reilly is here to tell us the results of 
the bipartisan study he co-chaired. Mr. Administrator, welcome.
    And I am also very pleased to have Paul Portney with us to 
review the National Academy of Sciences study that was 
requested by Congress and that should be the foundation for any 
discussion of CAFE standards. Unfortunately, the Academy study 
was released right as the Energy Bill debate was starting 4 
years ago, and it never received the full and fair airing it 
deserved. Today, with a new Energy Bill debate pending, we have 
a chance to make up for our previous missed opportunities.
    In my view, we need more stringent CAFE standards, and we 
need them now, for the reasons I have discussed. But the exact 
level and timing of the standards and how the CAFE program 
should be administered, that is all up for grabs, and I hope we 
can have a full discussion of those issues today. I look 
forward to hearing from our panel. And I thank them all for 
being witnesses and sharing their expertise with us.
    Mr. Gordon.
    [The prepared statement of Chairman Boehlert follows:]

          Prepared Statement of Chairman Sherwood L. Boehlert

    I want to welcome everyone here for this important hearing on fuel 
economy. This committee has a special responsibility to review this 
issue because part of our charge is to ensure that new energy 
technologies are developed and that they make their way into the 
marketplace.
    And new fuel economy technologies are not making their way into the 
market, at least not to an acceptable extent, because of market 
failures and political failures.
    Correcting those failures should be of surpassing interest to every 
citizen of our country because fuel economy is not just an energy 
issue, it's not just an environmental issue, it is, first and foremost, 
a national security issue.
    Our nation is ever more dependent--startlingly dependent--on the 
world's most unstable regions for the energy that is the lifeblood of 
our economy. Could anything be more critical? We are like a patient in 
critical care who needs a daily transfusion and can only hope to get it 
from an iffy, black-market supplier.
    And yet we act as if we will be healthy forever. We are doing next 
to nothing to reduce our reliance on foreign oil. About 60 percent of 
the oil we consume each day is used for transportation; 45 percent of 
it just for cars and light trucks. We cannot reduce our oil consumption 
meaningfully unless we address transportation. That is a simple, 
inarguable fact.
    And yet while many areas of the economy have become significantly 
more energy efficient over the past three decades or so, our nation's 
fuel economy is worse than it was 15 years ago. That ought to be 
unacceptable.
    It ought to be especially unacceptable--intolerable, really--when 
we have the technology to improve fuel economy without reducing safety, 
without harming the economy, and without reducing the options people 
have in the automobile showroom.
    I think we'll learn today that there really is no debate about 
whether we have the technology we need to improve fuel economy. The 
only debate is whether we're willing to do something about it, and that 
we'll hear more of today.
    But while we listen to the experts before us today, I want everyone 
to remember the costs of inaction--they can be measured in dollars, 
particularly in the funds we spend on the military and homeland 
security, and they can also be measured in lives, as we can see in 
daily news reports. We need to consider the very real costs of being 
utterly dependent on unstable regions to carry out our most basic daily 
tasks.
    I am not arguing, by the way, that we can become entirely energy 
independent or that fuel economy is the sole answer to our energy woes. 
That would be silly. We will markup a bill tomorrow that reflects the 
full range of steps we need to take in energy research and development 
(R&D) to improve our energy profile, and they involve work on energy 
efficiency and renewable energy but also on fossil fuels and nuclear 
energy; and they involve supply as well as demand.
    But we ought to be doing everything we can to reduce our demand. 
That's in our national interest. It's an interest we share as a 
society, but one that is not reflected adequately in individual 
decisions in the marketplace--a classic market failure that cries out 
for corrective government action. But the government has not risen to 
the task, and we are all in greater danger as a result.
    We have a very distinguished and balanced panel of experts before 
us. I'm especially gratified that my old friend, former EPA 
Administrator Bill Reilly is here to tell us the results of the 
bipartisan study he co-chaired.
    And I'm also very pleased to have Paul Portney with us to review 
the National Academy of Sciences study that was requested by Congress 
and that should be the foundation for any discussion of CAFE standards. 
Unfortunately, the Academy study was released right as the Energy Bill 
debate was starting four years ago, and it never received the full and 
fair airing it deserved. Today, with a new Energy Bill debate pending, 
we have a chance to make up for our previous missed opportunities.
    In my view, we need more stringent CAFE standards and we need them 
now, for the reasons I've discussed. But the exact level and timing of 
the standards and how the CAFE program should be administered, that's 
all up for grabs, and I hope we can have a full discussion of those 
issues today. I look very forward to hearing from our panel.
    Mr. Gordon.

    Mr. Gordon. Thank you, Mr. Chairman. As you pointed out, 
the topic that we are here to discuss today is very important 
on many levels. Energy security is now synonymous with national 
security. The U.S. uses a quarter of the world's oil and over 
60 percent of that oil is imported, primarily from unreliable 
and politically unstable regions of the world. The slightest 
movement in the energy markets can have substantial impacts on 
our economy. That is not to mention the disastrous effect that 
it might have on the disruption of oil supply around the world.
    While reserving judgment on any one solution, I am 
appreciative of you for having this hearing and look forward to 
learning more.
    [The prepared statement of Mr. Gordon follows:]

            Prepared Statement of Representative Bart Gordon

    Thank you Mr. Chairman for holding this hearing today on an issue 
that is particularly important given the flurry of activity in Congress 
on energy legislation. It appears that we will see a House energy bill 
on the Floor very soon and I look forward to tomorrow's markup of the 
Science Committee's contributions.
    The topic we're here to discuss today is important on many levels. 
Energy security is now synonymous with national security. The U.S. uses 
a quarter of the world's oil and over 60 percent of that oil is 
imported, primarily from unreliable and politically unstable regions of 
the world.
    The slightest movements in energy markets can have substantial 
impacts on the economy. That's not to mention the disastrous effect 
that a major disruption in oil supply would have on the world, but most 
especially the U.S. While we do use oil for a variety of industrial and 
heating purposes, about 80 percent goes into the transportation sector, 
and almost half of the oil we consume goes into cars and light trucks--
moms taking kids to soccer practice and suburban commuters driving to 
work.
    This thirst for oil comes at a price. Not only is it a weak link in 
our national security chain, but the harmful health effects of air 
pollution from fossil fuel use are yet to be fully understood. I don't 
believe anyone would argue that we can continue at our present rate of 
oil consumption, but the steps we take must be very calculated. CAFE 
standards were responsible for successfully doubling the fuel economy 
in the 1980's, but those too can have unforeseen economic 
repercussions.
    We should take care that, in our quest to lessen our dependence on 
oil, we do not put excess burden on the industries that have made this 
economy what it is today.
    While reserving judgment on any one solution, I welcome the 
discussion today of mechanisms such as tax incentives, tradable CAFE 
credits, re-categorization of car and light truck standards, and 
weight-based reclassifications schemes.
    If increasing of CAFE standards is inevitable, as many believe it 
is and should be, we should recognize both the limitations and the 
technological achievements of individual automakers. In this regard, 
some companies perform better than others. The Union of Concerned 
Scientists' ranking of automakers by pollution impact places Honda and 
Nissan at the top of the list.
    Nissan, for example, produces the Pathfinder SUV in my district. 
Despite not having a hybrid gas-electric vehicle on the market, it has 
surpassed Toyota in the UCS rankings I spoke of. Even while 
transforming itself into a full-line automaker, Nissan is incorporating 
a suite of existing cutting edge technologies, such as Continuously 
Variable Transmission, to increase their overall fleet fuel economy. 
This hints at how complex the range of CAFE-related technology options 
can be for automakers.
    And there is an army of scientists and researchers outside of the 
auto companies, discovering ways to revolutionize the transportation 
sector with fuel efficient technologies. For example, Dr. Cliff 
Ricketts at Middle Tennessee State University has transformed a 
standard Nissan pickup truck into an emissions free alternative fuel 
electric-hybrid vehicle.
    I would like to thank the witnesses for coming to Washington to 
testify on technologies supporting the Corporate Average Fuel Economy 
of cars and trucks. Thank you again, Mr. Chairman for this important 
hearing.

    Chairman Boehlert. Thank you very much, Mr. Gordon. And all 
Members will have the opportunity to have their statements 
inserted in the record at this juncture.
    [The prepared statement of Mr. Costello follows:]

         Prepared Statement of Representative Jerry F. Costello

    Good afternoon. I want to thank the witnesses for appearing before 
our committee to examine available technologies to improve the fuel 
economy in cars and trucks, while also working towards reducing the 
Nation's dependence on foreign oil.
    Congress passed the Energy Policy and Conservation Act in 1975, 
with a goal to reduce the Nation's dependence on foreign oil. As a 
result, the Corporate Average Fuel Economy (CAFE) program raised the 
fuel economy of the U.S. fleet, hoping that Congress's objective would 
be met. Thirty years later, we are still working towards achieving this 
goal. Today we depend on imports to meet nearly 60 percent of our oil 
needs. Gasoline burned by cars alone, constitutes about 45 percent of 
the Nation's oil consumption. Looking towards the future, in 2025, it 
is projected that the U.S. will consume 29 million barrels of oil a 
day, mostly on transportation. According to the National Commission on 
Energy Policy, improving car and light truck fuel economy by 10, 15, 
and 20 percent by 2015 would result, by 2025, in an estimated fuel 
savings of approximately up to 3.5 million barrels of oil a day. At the 
same time, there are good arguments as to why we need to approach any 
new CAFE standards carefully. If we have the technology today to 
significantly improve the fuel economy of cars and light trucks, 
without reducing safety, we must balance these advancements in a way 
that does not place constrictive regulations on the automotive 
industry, causing them to suffer economically. I am pleased to learn 
that a National Commission on Energy Policy report from last year found 
that the ability of hybrid technologies to make substantial 
improvements in fuel economy has been clearly demonstrated.
    As we look for ways to reduce our foreign dependence on foreign oil 
and rely more on other domestic energy sources, such as coal, hydrogen, 
and ethanol it is critical that we utilize the technological 
advancements we have today to improve fuel efficiency, without 
disregarding the legitimate concerns of the workers in the automotive 
industry.
    I look forward to hearing from our panel of witnesses.

    [The prepared statement of Ms. Johnson follows:]

       Prepared Statement of Representative Eddie Bernice Johnson

    Thank you, Mr. Chairman. I am very grateful you have decided to 
call a hearing today on our nation's energy security. I also wish to 
thank our distinguished witnesses who have submitted testimony and have 
agreed to answer our questions.
    Corporate Average Fuel Economy [CAFE] standards were enacted into 
law by Congress in 1975 as a part of the ``Energy Policy Conservation 
Act,'' [EPCA]. This Act, passed in response to the 1973-74 Arab oil 
embargo, was established to double new car fuel economy for passenger 
cars and light trucks by model year 1985.
    It has been stated that raising CAFE stands could potentially save 
more oil than our Persian Gulf imports, thereby reducing our dependency 
on Mid-Eastern imports and also curb global warming.
    Unfortunately, some theorize that making cars more fuel efficient 
will lead to greater safety concerns, reduced American auto choices and 
a loss of American Auto job to overseas plants.
    Everyday we, as Members of Congress, must make tough choice as to 
how we deal with the issues such as the protection of our environment 
(this is the only planet we have) and the safety of our highways. The 
responsibility of weighing the pros and cons of every can be a life or 
death matter.
    Hopefully our witness here today can clear up these issues. We 
appreciate your input.

    [The prepared statement of Mr. Honda follows:]

         Prepared Statement of Representative Michael M. Honda

    I commend Chairman Boehlert and Ranking Member Gordon for convening 
this hearing on fuel economy.
    I continue to be amazed by the response of many people in this 
country to the prospect of conserving energy. We know that fossil fuel 
supplies both here and abroad are limited--they are fossil fuels, 
remnants from biological processes that took place centuries ago but 
which are not occurring now. These fuels will run out eventually. There 
may be legitimate debate about exactly when that will happen, but the 
fact is that they will run out.
    Since our nation is nearly completely dependent on a finite source 
of energy, it seems to me that what we need to do in the short-term is 
reduce our levels of consumption of our finite energy supplies to make 
them last longer, and for the long-term, develop renewable sources of 
energy to meet our future needs.
    But in complete opposition to common sense, Vice President Cheney 
has indicated that conservation is a ``personal virtue,'' but not a 
sufficient basis for a sound energy policy. I might almost be convinced 
to buy into this if reducing energy consumption meant everyone had to 
stay at home, in the dark, either too cold or too hot depending on 
where they live. But that is not necessary. We have the technologies 
available to us to day to reduce energy consumption in our vehicles, in 
our homes, and in our offices, but because there is an up-front cost 
associated with these new technologies, their adoption has been 
stalled. No one factors in the long-term costs to public health and our 
environment of not being energy efficient, though. If they did, 
economics could be the driver. But instead, we need something else to 
encourage efficiency.
    CAFE standards are an excellent way of improving fuel economy in 
vehicles. By requiring vehicles to be efficient, the government can 
stand up for the long-term health of our nation and planet. Standards 
have not increased over the years, however, because of industry 
insistence that increased standards would make U.S. manufacturers less 
competitive and would make vehicles less safe.
    I am glad that we are having this hearing today so we can learn 
about existing technologies that can increase fuel economy, and 
strategies for implementing higher standards that would not compromise 
the safety of our vehicles. I believe it is essential for our national 
security to take all steps we can to reduce our consumption of fossil 
fuels.

    [The prepared statement of Mr. Carnahan follows:]

           Prepared Statement of Representative Russ Carnahan

    Mr. Chairman, thank you for taking the initiative to hold this 
important hearing on improving automobile fuel efficiency technologies 
and considering raising CAFE standards. We are lucky to have a leader 
that recognizes the role that new technologies play in securing our 
nation, bringing us closer to energy independence and protecting our 
environment.
    There is clearly a benefit to introducing new technologies to 
increase fuel efficiency. I am most curious in hearing today what 
policy options are available to us to take these important steps 
forward.
    I look forward, in particular, to Mr. Stanton's testimony and hope 
to gain a better understanding of how the auto industry feels about 
potential policy options. It is my hope that Congress can not only work 
with the industry and energy providers, but also incorporate the 
opinions of auto workers and citizens concerned about the environment 
who also have a strong interest in our policy decisions.
    Chrysler is an important employer to our region. I am proud to have 
a strong American auto manufacturer in the midst of my district and 
also to represent many of the plant's hardworking Americans.
    I urge everyone to pay particular attention to balancing the 
increase of CAFE standards while keeping our American auto companies 
strong and viable.
    I look forward to hearing the testimony of the panelists. Thank you 
very much for being here today.

    [The prepared statement of Ms. Jackson Lee follows:]

        Prepared Statement of Representative Sheila Jackson Lee

Chairman Boehlert, Ranking Member Gordon,

    I want to thank you for organizing this important hearing on fuel 
efficiency standards for cars and light trucks. As we prepare to 
discuss the Energy Bill, we all appreciate the importance of energy 
efficiency as an essential component of the policies that affect our 
nation's economy and security. The Department of Energy's Energy 
Information Agency (EIA) reports that since 1985, the transportation 
sector's consumption of primary energy sources has been second only to 
the energy consumption used for electric generation. Between 2001 and 
2004, light duty vehicles consumed nearly 60 percent of the primary 
energy sources used for transportation. Clearly, effective national 
policies to control the consumption of fuel used by light duty vehicles 
would have a significant positive impact on the Nation. Over the past 
three decades, national policies for vehicle fuel efficiency have 
included both regulatory and ``technology-push'' approaches.
    In response to the then-restricted world supply of oil, the 
Congress enacted the Energy Policy and Conservation Act of 1975, which 
was intended, among other things, to induce automobile manufacturers to 
improve the fuel economy of their cars. The Act set a Corporate Average 
Fuel Economy (CAFE) standard for passenger cars that increased several 
times and then leveled off at 27.5 miles per gallon for model years 
1985 and beyond.
    Congress authorized the National Highway Traffic Safety 
Administration (NHTSA) to raise or lower the standard for a particular 
model year in order to achieve the ``maximum feasible average fuel 
economy,'' taking into account technological feasibility, economic 
feasibility, the effect upon fuel economy of other federal motor 
vehicle standards, and the need of the Nation to conserve energy.
    CAFE standards are calculated separately for a manufacturer's 
domestic and import car fleet. In 1988 the NHTSA was concerned that the 
27.5 mpg standard might lead American automobile manufacturers to shift 
some of their large-car manufacturing overseas in order to average the 
fuel economy of those cars with more of their small cars, thereby 
raising the average fuel economy of their domestic fleets and lowering 
the comfortably high average fuel economy of their non-domestic fleets.
    The possible shift of large car manufacturing to off-shore plants 
raised concerns of domestic job losses. Anticipating possible job 
losses and ``potential economic harm,'' the NHTSA lowered the CAFE 
standard in 1988 for MY 1989 from 27.5 mpg to 26.5 mpg. In 1989, 
however, the agency terminated the MY 1990 aspect of the rule-making 
without changing the CAFE standard for that year based on the agency's 
conclusion that retention of the 27.5 mpg standard for MY 1990 not have 
a significant adverse effect on U.S. employment or on the 
competitiveness of the U.S. auto industry.
    CAFE standards affect manufacturers differently. Those with full 
product lines will be burdened more than manufacturers specializing in 
small to medium size vehicles. Policy analysts may argue that would 
force the marketing of smaller cars as they believe CAFE intends. 
However, this ignores the engineering differences between some large 
and small cars. For example, Ford's Crown Victoria is one of the few 
cars now sold that built as a ``body on frame'' design--in contrast to 
the unibody construction used on virtually all small to medium size 
cars. ``Body on frame'' designs are inherently heavier than unibody 
construction, but the durability this provides under harsh driving 
conditions makes ``body on frame'' the preferred vehicle design for 
police cars and taxicabs.
    In addition to the distinction that CAFE makes between domestic and 
imported passenger cars, there is also separate classification for 
light duty trucks, whose standards are set by the NHTSA rather than by 
statute. The present standard for light duty trucks is 20.7 miles per 
gallon. The determination about what is considered a car or a truck can 
be confusing--some of the NHTSA and EPA regulations define certain 
kinds of trucks as those vehicles that look similar to a 1977 Jeep or a 
1977 Land Cruiser,\1\ with `trucks' generally defined as those vehicles 
having a flat cargo floor. Thus, the regulatory scheme allows for the 
classification of the Dodge Neon as a compact car and the Chrysler PT 
Cruiser as a truck for the purposes of fuel economy standards even 
though both are built on the same vehicle platform.
---------------------------------------------------------------------------
    \1\ 40 C.F.R.  600.002-85; 40 C.F.R.  600.002-93; 49 C.F.R.  
533.4.
---------------------------------------------------------------------------
    In addition to mandatory vehicle fuel economy standards specified 
in federal laws and regulations, Congress and the Executive Branch have 
supported research programs to develop new technologies intended to 
enable the development of vehicles with increased fuel economy or 
reduced emissions.
    Beginning in 1991, the Department of Energy partnered with the 
domestic car companies and electric utilities to form the U.S. Advanced 
Battery Consortium (USABC), a research and development initiative to 
develop batteries that would enable the deployment of practical 
electric cars. In 1993, a number of federal agencies led by the 
Department of Commerce again joined Detroit's Big-3 to form the 
Partnership for a New Generation of Vehicles (PNGV) to build prototype 
five-passenger vehicles capable of 80 MPG fuel economy. In 2000, the 
Department of Energy led ``21st Century Truck,'' a government-industry 
partnership in the development of technologies to enable more fuel 
efficient large trucks. In 2002, the Department of Energy, 
DaimlerChrysler, Ford, and General Motors created ``FreedomCAR,'' a 
research initiative to develop technologies to enable petroleum-free 
cars and light trucks. Federal funding for these initiatives range from 
hundreds of millions of dollars for USABC to several billions of 
dollars for PNGV and FreedomCAR.
    Both of these approaches have had mixed results. Some will argue 
that CAFE has shifted the market for family-sized vehicles away from 
station wagons to the somewhat heavier and less aerodynamic mini-vans, 
sport utility vehicles, and ``king cab'' pick-up trucks. U.S.-funded 
``technology push'' initiatives need also to be evaluated against 
privately-funded vehicle development programs in Japan that have 
deployed the first three hybrid electric vehicle models commercially 
sold in the U.S., Asia, and Europe.
    The National Academy of Sciences studied the issue of increasing 
vehicle fuel economy in considerable detail. While finding that the 
CAFE regulations were effective in maintaining fleet fuel economy above 
what it would have been with falling gasoline prices in the early 
1980s, the Academies noted that ``there is a marked inconsistency 
between pressing automotive manufacturers for improved fuel economy 
from new vehicles on the one hand and insisting on low real gasoline 
prices on the other.'' The Academies' study included ``cost efficient'' 
analyses to illustrate how rational consumers will balance fuel cost 
savings with the added expenses associated with fuel saving 
technologies in the selection of the vehicles they buy and how many 
miles they drive--analyses that are not considered by either regulatory 
or technology-push approaches. The National Academies also addressed 
demand reduction policies--including gasoline taxes, carbon taxes, and 
carbon cap-and-trade systems. These approaches do address consumer 
demand for fuel, but many have criticized these approaches for a 
variety of reasons, including they have the characteristics of a 
regressive tax.
    Successful policies may include an integrated combination of 
regulations, technology development, and energy demand reduction 
policies. Today's hearing will help to address these approaches.

    Chairman Boehlert. Let me introduce our first and only 
panel of the day, and it is a very distinguished panel: the 
Honorable William Reilly, Aqua International Partners; Mr. Paul 
Portney, President, Resources for the Future; Dr. David Greene, 
Oak Ridge National Laboratory, Center for Transportation 
Analysis, National Transportation Research Center; Mr. K. G. 
Duleep, Managing Director of Transportation, Energy and 
Environmental Analysis, Incorporated; and Mr. Michael Stanton, 
Vice President of Government Affairs, Alliance of Automobile 
Manufacturers.
    Gentlemen, the floor is yours, and we will go in the order 
introduced. We ask that you try to summarize in 5 minutes or 
so, but those of you who have been here before, and Mr. Reilly, 
you have been here many times, know that we are all offended by 
the proposition that you are going to take a very important 
subject like this and condense it into 300 seconds. But--so 
don't get nervous if that green turns to caution and then red. 
If you have got a point to make or you have got a thought to 
complete, please do it.
    With that, I present Mr. Reilly.

      STATEMENT OF THE HONORABLE WILLIAM K. REILLY, AQUA 
                     INTERNATIONAL PARTNERS

    Mr. Reilly. Thank you. Thank you very much.
    And my congratulations and my compliments to you, sir, and 
to this committee for scheduling this hearing on a matter that 
I fully agree with you is vital to our national security, vital 
to our economy, and I think also vital to our environment.
    I want to present my statement to you in summary, and I ask 
that my written testimony be inserted in the record at this 
time, if I might.
    Chairman Boehlert. And without objection, so ordered. And I 
want to advise all of our panelists that your complete record 
will be part of the complete testimony and will be available to 
all of the Members for their examination.
    Mr. Reilly. Thank you.
    As you mentioned, I have, over the past 21/2 years, served 
as co-chairman of the National Commission on Energy Policy, 
which released this report, Ending the Energy Stalemate: A 
Bipartisan Strategy to Meet America's Energy Challenges, in 
early December. This report, which was financed in large part 
by the Hewlett Foundation, involved some $10 million from them 
and also support from the MacArthur Foundation, the Pew 
Charitable Trust, and the Packard Foundation, was conceived to 
try to address some of the most intractable problems 
confronting our energy situation in the United States and in 
the world and to develop some consensus solutions, drawing on 
the experiences and insights of a very diverse group of 
members.
    I was the Co-chair of this Commission. My fellow co-chairs 
were John Holdren, a Professor at the Kennedy School, and John 
Rowe, the Chairman and CEO of Excelon Corporation, one of the 
Nation's largest electric power utilities based in Chicago. It 
included the Chief Economist of Ford Motor Company, Group Vice 
President, Marty Zimmerman. It included the Chairman of 
ConocoPhillips Corporation, the country's largest refiner of 
oil and gas. It included the Chairman of the Board of Consumers 
Union and a representative from the United Steelworkers of 
America Union, and the head of the energy program for the 
Natural Resources Defense Council. It was, in all respects, I 
think, as balanced, as diverse, as representative of the 
different sectors of the economy, the non-governmental 
community, the scientific community--we had a Nobel prize 
winning scientist as a member, Mario Molina--that you could 
find. And I think the significance of much of what I will say 
is not so much in the novelty of what we recommend as it is in 
the backgrounds of the people who supported it. And the 
recommendation that I am going to discuss with you was the 
product of a consensus in our Commission.
    We placed, in this Commission, oil security at the top of 
our energy priorities. And I would say that one of the most 
interesting charts in our report, and it is included in my 
submitted testimony, is one that shows that over the next 20 
years, the United States and the world at large anticipate a 50 
percent-plus increase in oil demand. That is a very large 
number. If you look back at the 20 years from 1980 to the year 
2000, it was a time of tremendous innovation in technology, new 
development capacity on the part of the oil industry. It was 
the period when the oil industry learned to reduce, or rather 
to increase the amount of hydrocarbons it got from a field, 
from 20 percent to 50 percent. It was a period when deep-water 
oil exploration and development became possible in the Gulf and 
other places to go beyond 5,000 feet deep. It was a period when 
there was a lot of new technology that allowed drilling from 
one well to go out into several fields from that single point.
    Nevertheless, with all of that innovation, with all of that 
new technology, with all of that effort, the oil industry 
worldwide experienced a 20 percent increase in production over 
that 20-year period. As we look ahead to the next 20 years, 
seeing a 50 percent expected demand increase, it just isn't 
there. We are going to have to find new efficiencies, new 
opportunities to be more productive in our use of liquid fuels, 
alternative fuels, and try to put an economy together, for 
transportation particularly, that respects a new energy 
environment.
    There has been, over the last 30 years, significant 
improvements in the efficiency of our economy with respect to 
oil. It takes significantly less oil to produce $1,000 of GDP. 
However, in recent years, we have seen an important slowdown in 
those improvements. The intensity improvements have waned.
    We note, and you have noted in your opening remarks, the 
transportation sector has had the fastest growth in greenhouse 
gas emissions over the past two decades. Two key solutions we 
recommend: increases in investment to spur global oil 
production, and reductions in demand domestically.
    We reviewed at the Commission several options, a gas tax, 
CAFE increases, alternative fuels. In our view, CAFE increases 
provided the largest demand reduction by far. New technologies 
like hybrids and diesels will enter the fleet slowly and be 
used, we believe, in large part to increase power, weight, and 
other performance attributes instead of fuel economy absent 
increases in CAFE.
    In summary, we recommended that Congress should instruct 
the National Highway Traffic Safety Administration to 
significantly strengthen automobile fuel requirements. New 
standards, we propose, should be phased in between 2010 and 
2015. We did not, frankly, reach agreement, but we discussed 
several possibilities. We recommended a significant increase in 
mandatory automobile fuel efficiency.
    There is some direction given in the report on appropriate 
or plausible CAFE levels to take full advantage of current and 
emerging technologies, including hybrids and passenger diesels.
    Our proposal is specifically designed to address political 
and technical objections to traditional CAFE increases which 
are: one, impacts on competitiveness of domestic manufacturers; 
two, impacts on domestic jobs; and three, safety concerns. 
These are the big three that are raised as objections to 
increases in CAFE.
    To deal with some of these concerns, U.S. manufacturers and 
jobs, we would propose reducing compliance costs by allowing 
trading of compliance credits across companies. This is not now 
permitted. According to the Office of Management and Budget, 
this would net you a 17 percent reduction in the overall cost 
of compliance with this program.
    We recommended that future costs of compliance with CAFE 
requirements be kept through the use of what we call a ``safety 
valve'' to ensure that industry is protected if technology 
costs exceed government projections.
    And finally, we would propose to offer manufacturer 
incentives to retool existing domestic auto plants to produce 
hybrids and advanced diesels, and we proposed that this be at 
the level of $1.5 billion over five years.
    With respect to safety, hybrids can significantly boost 
mileage per gallon with the same vehicle size and equal or 
better performance, in our judgment. And we have seen enough 
experience with hybrids to know that the concerns about 
downsizing and downweighting as the only option available to 
the auto manufacturers to meet higher standards are misplaced.
    Finally, I would just say the stakes for our Nation, as you 
have pointed out, are tremendous. Our security, economy, and 
environment will all benefit considerably if we seize the 
opportunity to significantly increase the fuel economy of our 
vehicle fleet.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Reilly follows:]

                Prepared Statement of William K. Reilly

    Good afternoon Chairman Boehlert. My thanks to you and to the 
Members of the Committee for organizing this hearing on a matter of 
great importance for our country.
    I am one of three co-chairs of the National Commission on Energy 
Policy. My other Co-chairs are John Rowe, CEO of Excelon, and John 
Holdren, a professor at the Kennedy School at Harvard. We are an 
independent bipartisan group of 16 persons who came together in 2002 
with support from the Hewlett Foundation and several other leading 
foundations: The MacArthur Foundation, Packard Foundation, and the Pew 
Charitable Trusts. The Commission released a report at the end of last 
year entitled Ending the Energy Stalemate: A Bipartisan Strategy to 
Meet America's Energy Challenges. The first chapter of this report is 
about enhancing oil security. The placement of oil security first among 
all issues reflects the Commission's view that improving our nation's 
oil security is the most significant near term energy challenge we 
face. I'm pleased to have an opportunity to summarize the Commission's 
recommendations on vehicle fuel economy.
    Consistent with the focus of this hearing, I will direct the bulk 
of my remarks to the Commission's proposals to significantly increase 
vehicle fuel economy. However, I must note that try as we might, our 
Commission could not construct a plausible scenario in which U.S. and 
global oil demand does not increase over the next twenty years. For 
this reason, we also propose a series of measures designed to increase 
the global production of oil during this same time period. I will 
submit our entire report and ask that it be made part of the record.

Rationale for Action

    From the Commission's perspective, there are three considerations 
that reinforce the need to strengthen passenger vehicle fuel economy:

    FIRST, both domestic and global demand for oil is projected to grow 
by roughly 50 percent by 2025. This rate of growth is at more than 
double the historical rate since 1980 (Figure 1-1). At the same time, 
spare capacity to compensate for supply disruptions has fallen to a 
mere two percent of global demand. Left unchanged, these factors 
suggest that the U.S. economy will continue to suffer from high and 
volatile oil prices and is at risk of more frequent and serious supply 
disruptions. The energy sector has for several years experienced a 
consistent and growing gap between oil production and the discovery of 
replacement reserves.
    SECOND, the rate of improvement in U.S. oil economic intensity has 
slowed in recent years. Oil economic intensity is a measure of how much 
oil is required for the U.S. economy to produce a dollar of economic 
output. This measure is important because the ability of the U.S. 
economy to weather oil price shocks improves as oil's share of our 
economic output decreases. Since 1970, the U.S. oil economic intensity 
has dropped by half--a tremendous achievement--largely due to CAFE 
standards in the late 1970s and early 1980s, and to a shift in the 
electricity sector away from the use of petroleum. Further improvements 
would further insulate the U.S. economy from oil price shocks (Figure 
1-2).
    THIRD, hybrid and passenger diesel vehicles hold the promise for 
dramatic improvements in vehicle fuel economy. But historical trends 
suggest that potential fuel economy gains may be undermined unless 
government acts to reinforce the need for improved vehicle fuel 
economy.
    Although U.S. fuel economy has been stagnant sine 1987, the vehicle 
industry has made considerable strides in efficiency. However, these 
efficiency improvements have been used to increase vehicle horsepower 
and weight, while still complying with Corporate Average Fuel Economy 
(CAFE) standards. This trend--favoring horsepower, weight and other 
attributes over fuel economy improvements--is likely to continue absent 
government action. If we as a nation are serious about addressing our 
dependence upon oil, we must seize the opportunity presented by hybrids 
and passenger diesels (Figure 1-3) to improve the fuel economy of our 
vehicle fleet.

The Importance of Strengthening Fuel Economy Standards

    During its deliberations, the Commission considered a variety of 
both major and minor transportation policy measures. These included 
many of the usual suspects: a gasoline tax, a CAFE increase, 
alternative fuels, as well as some new ideas: heavy-duty tractor 
trailer fuel economy, efficiency standards for replacement tires, 
congestion charges in urban areas. We examined these policy measures 
against four criteria: (1) the ability to save one million barrels per 
day of oil by 2025, (2) the cost per barrel of oil saved, (3) 
administrative complexity, (4) political feasibility. Of all the 
policies reviewed by the Commission, passenger vehicle fuel economy 
improvements represented the largest opportunity for oil savings over 
the next 20 years.
    Accordingly, the Commission recommended that Congress instruct the 
National Highway Traffic Safety Administration (NHTSA) to significantly 
strengthen CAFE standards, giving due consideration to vehicle 
performance, safety, job impacts, and competitiveness concerns 
consistent with statutory requirements. We recommended that new 
standards be phased in over a five-year period beginning no later than 
2010. The Commission did not reach agreement on a specific increase in 
fuel economy.
    Of course, it would be naive to make recommendations about a CAFE 
increase without considering how to break the current political 
stalemate on fuel economy standards. The Commission identified three 
issues that have dominated past debates about raising CAFE standards 
and which we believe are largely responsible for the current stalemate: 
(1) uncertainty over impacts on the competitiveness of domestic 
manufacturers; (2) fear that more stringent standards will lead to 
smaller, lighter vehicles and increased traffic fatalities; and (3) 
concerns that higher standards will lead to losses in domestic jobs.

Competitiveness and U.S. Jobs

    To address concerns about competitiveness impacts on U.S. domestic 
manufacturers and U.S. auto workers, the Commission recommends that a 
significant increase in CAFE standards be accompanied by reforms to the 
current program that would increase compliance flexibility and reduce 
compliance costs, together with manufacturer incentives designed to 
promote the domestic manufacture of hybrid-electric and advanced diesel 
vehicles.
    Specifically, the Commission recommends that the current program be 
altered to allow manufacturers to trade compliance credits with one 
another and across their car and light truck fleets. The Congressional 
Budget Office has estimated that this reform alone would reduce the 
cost of the CAFE program by about 17 percent. An additional reform that 
should be considered in concert with higher standards is a cost-capping 
mechanism similar to the ``safety valve'' the Commission is 
recommending in connection with a tradable permits system for 
greenhouse gas emissions. In this case, the government could make 
additional CAFE compliance credits available to manufacturers at a pre-
determined price. Such a mechanism would have the effect of protecting 
automakers and consumers if the regulatory estimates used to set new 
standards understate true costs and thus holds promise for overcoming 
the inevitable and inherently irresolvable disagreements about future 
technology development that have stymied past CAFE debates.
    With respect to manufacturer incentives, the Commission is 
specifically recommending a program of tax incentives for U.S. 
manufacturing facilities that are re-tooled to produce hybrid-electric 
and advanced diesel vehicle with superior fuel economy. Consistent with 
international trade agreements, the incentive would be available to 
both domestic and foreign companies, including both assembly plants and 
parts supplies. The recommended subsidy level would total $1.5 billion 
over ten years, with the amount of credit set to reflect up to two-
thirds of the capital investment associated with producing vehicles or 
vehicle components. Commission analysis indicates that federal outlays 
under such a program would be more than offset by increased tax 
receipts as a result of maintaining domestic manufacturing jobs.

Relationship between Safety and Fuel Economy

    A paramount concern for us when seeking to improve vehicle fuel 
economy has been to ensure that there is no reduction in overall 
vehicle safety. This is the concern so often expressed: That mandating 
higher fuel economy will require production of less safe, lighter 
vehicles and compromise vehicle performance. Our Commission considered 
this concern and tested it against currently marketed hybrid vehicles. 
Hybrids and passenger diesels offer the potential to boost fuel economy 
while maintaining vehicle size and performance. The Ford Escape, Honda 
Civic hybrid, the Honda Accord hybrid, and the forthcoming Toyota 
Highlander hybrid, all achieve substantial fuel economy improvements 
while maintaining or increasing horsepower (by as much as 17 percent) 
compared to their conventional counterparts, and without reductions in 
weight or size. These vehicles clearly demonstrate that substantial 
fuel economy improvements can be achieved using already-available 
technologies and without compromising vehicle performance and safety.

Conclusion

    Hybrids and advanced diesels potentially change the game. They 
offer the uncompromised features of conventional vehicles while 
improving dramatically automobile fuel economy. It should be national 
policy to foster early introduction on a significant scale of these 
technologies for they promise to make a major contribution to U.S. 
energy security.
    Figures from Ending the Energy Stalemate: A Bipartisan Strategy to 
Meet America's Energy Challenges, National Commission on Energy Policy 
(2005).




                    Biography for William K. Reilly

    William Kane Reilly is President and Chief Executive Officer of 
Aqua International Partners, an investment group that finances the 
purification of water and waste water in developing countries, and 
invests in projects and companies that serve the water sector. Aqua 
International is sponsored by the U.S. Overseas Private Investment 
Corporation and is part of the Texas Pacific Group, an investment 
partnership based in Fort Worth and San Francisco, which invests in 
environmental, airline, apparel, health, wine, technology and other 
companies in the United States, Latin America and Asia. During the 
1993-94 academic year, Mr. Reilly served as the first Payne Visiting 
Professor at Stanford University's Institute for International Studies 
and delivered five public lectures on the challenges to the global 
community.
    From 1989 to 1993, he served as the seventh Administrator of the 
U.S. Environmental Protection Agency. With 18,000 employees and a $7 
billion budget, EPA is an independent federal regulatory agency charged 
with improving and protecting public health and the environment.
    Prior to becoming EPA Administrator, he held five environment-
related positions over two decades. He was President of World Wildlife 
Fund (1985-1989) and President of The Conservation Foundation (1973-
1989). Those two organizations joined formally in 1985 at which time 
Reilly became President of both. He was Executive Director of the 
Rockefeller Task Force on Land Use and Urban Growth from 1972 to 1973. 
From 1970 to 1972, he served as a senior staff member of the 
President's Council on Environmental Quality and, from 1968 to 1970, as 
Associate Director of the Urban Policy Center and the National Urban 
Coalition. He served as Chairman of the Natural Resources Council of 
America, an association of all major conservation groups, from 1981 to 
1983.
    Reilly has written and lectured extensively on environmental 
issues. He has served on the boards of numerous public and private 
sector organizations and received a number of awards and medals for his 
contributions to environmental progress. He currently serves on the 
boards of Dupont, Eden Springs, Ltd., ConocoPhillips, Ionics, and Royal 
Caribbean International, and is a member of the Advisory Board of ERM 
CVS. His service to non-profit organizations includes chairmanship of 
the Board of World Wildlife Fund and of the Board of Advisors of the 
Goldman School of Public Policy at the University of California, 
Berkeley, and membership on the Boards of Trustees of the American 
Academy in Rome, National Geographic Society and The Packard 
Foundation. By appointment of the President, Reilly serves as one of 
the seven trustees of the Presidio Trust, with responsibility for 
running the Presidio National Park of San Francisco.
    An alumnus of Yale University, Reilly holds a law degree from 
Harvard University and a Master's degree in urban planning from 
Columbia University. He was born in Decatur, Illinois, on January 26, 
1940, and attended high school in Fall River, Massachusetts. He served 
in the U.S. Army to the rank of Captain in 1966 and 1967.
    He is married to Elizabeth ``Libbie'' Bennett Buxton Reilly. They 
have two daughters, Katherine Buxton Reilly, an environmental lawyer 
with Beveridge and Diamond in San Francisco, and Margaret Mahalah 
Reilly, Megan, a student at Harvard Business School. The family resides 
in San Francisco, California, and Alexandria, Virginia.


    Chairman Boehlert. Thank you very much, Mr. Reilly.
    Dr. Portney.

STATEMENT OF MR. PAUL R. PORTNEY, PRESIDENT, RESOURCES FOR THE 
                             FUTURE

    Mr. Portney. Chairman Boehlert, Members of the Committee, 
thank you very much for having me here today, and thank you, 
also, Mr. Chairman, for your kind words about the 2001 National 
Research Council report on fuel economy standards. I appreciate 
that. As you mentioned, it was somewhat overtaken by the debate 
in the Energy Bill, but a month and a week later, overtaken by 
the events of September 11, 2001, to which I will come back in 
my testimony here.
    I will summarize, as you have indicated, my remarks here 
today. Thank you for allowing me to put my complete remarks 
into the record.
    I am testifying before you today principally in my capacity 
as having been chairman of the National Academy of Sciences 
2001 report on the effectiveness and impact of Corporate 
Average Fuel Economy standards. Let me also say that nothing I 
should say today should be construed or attributed to Resources 
for the Future. I am appearing in my--as an individual and in 
my role as the chairman of the National Academy of Sciences 
committee.
    I thought what I would do for you is very briefly summarize 
for you the findings of that National Academy report. Some time 
has passed since that report. Because it has been 31/2 years, I 
would also like to reflect back on what has changed during the 
past 31/2 years. Those views will be my own. I can purport to 
speak for the whole committee, because we haven't met during 
that period of time, but I thought it might be useful for me to 
reflect on the recommendations of the committee in light of the 
events over the last 31/2 years.
    So let me start by giving you sort of very quickly the 
basic conclusions that that National Academy of Sciences 
committee reached in 2001.
    First of all, we found that CAFE has played an important 
role in boosting the fuel economy of the new vehicle fleet in 
the United States. That occurred principally between the period 
1978 or so until the early 1980s. And the committee was very 
careful to say that while CAFE, in the view of the committee 
members, indisputably played a role in the improvements in fuel 
economy that happened during that period of time. Of course, 
also during that period of time, gasoline prices had increased 
dramatically so that there became, on the part of the public, a 
demand for more fuel-efficient vehicles to which car makers 
responded.
    And because these two events happened more or less 
contemporaneously, both pushing in the direction of improved 
fuel economy, we couldn't separate out how much of the 
improvement in fuel economy was due to higher prices and how 
much was due to the CAFE standards. We will note, however, that 
after about 1982, when gasoline prices collapsed, fuel economy 
did not go back to its old level, suggesting that the 
improvements that we got were permanent improvements that we 
might not have gotten had we not instituted a CAFE program 
during that period of time.
    The committee also found that CAFE had some adverse 
effects. You were--we were requiring car makers to devote 
resources to improving fuel economy. These are resources that 
they could not devote to improving the performance 
characteristics of vehicles or to doing other things with those 
resources during that period of time. And, and I can't 
emphasize how important this point is, because car makers were 
required to boost fuel economy by almost 50 percent in a 
relatively short period of time, they didn't have the option of 
rolling in a lot of new fuel-saving technologies. Rather, the 
way they chose to meet much tougher fuel economy standards in a 
short period of time was by making cars smaller and lighter. 
And the CAFE committee, with two exceptions, was of the mind 
that this accelerated very quick reduction--or improvement in 
fuel economy through downsizing had adverse effects on the 
safety of the vehicle fleet. We predicted, or estimated, that 
an additional 1,300 to 2,600 fatalities by 2003 would have--or 
took place that wouldn't have taken place if car makers had not 
had to quickly downsize and downweight vehicles to meet the 
fuel economy standards.
    Again, this was not a unanimous view of the committee. 
David Greene, one of the two committee members who dissented 
from that particular conclusion of the panel, is here today, 
and he will have an opportunity to speak for himself later.
    Third, we found that technologies clearly exist or, at that 
time, were in the process of being developed that would make it 
possible to improve the fuel economy of the new vehicle fleet 
at a cost, certainly, but nevertheless a cost that would be 
more than offset by the fuel economy savings that would result 
from these more fuel-efficient vehicles over the next 14 years. 
The estimated improvements that would be possible by putting 
into widespread use in the new vehicle fleet ranged from 12 to 
25 percent for passenger cars and from 25 to 42 percent for 
light-duty trucks. That comprises minivans, pick-up trucks, and 
sport utility vehicles. And, importantly, if car makers were 
given enough time to meet these new fuel economy goals, and by 
enough time, we were looking in the range of 10 to 12 to 15 
years, then these improvements would be capable of being made 
without downsizing or without downweighting, and therefore, 
without adverse effects on the safety of the fleet.
    I can't emphasize how important it is, in the view of the 
committee, that in contemplating tightening fuel economy 
standards that you do so over a long enough period of time that 
the car makers have an opportunity to take advantage of these 
technologies that are out there and are currently being 
developed so that they don't have to engage in a, and I don't 
intend to bad pun here, a crash program to improve fuel economy 
that might compromise safety.
    Reinforcing one point that Bill Reilly has already made, 
the committee felt very, very strongly that the credits that 
can currently be earned in a very limited way in the CAFE 
program ought to be made fully tradable so that someone who 
beats their fuel economy standards can not only use those 
credits themselves in a later year, they can trade across 
passenger car and light-duty truck fleets, or they could sell 
these credits to other car companies that are falling short of 
hitting their targets.
    Let me give you my brief update of things that have 
happened in the 31/2 years since the committee report that I 
think are material to your deliberations.
    First of all, September 11 happened one month and one week 
after the committee issued its final report. Since that time, 
quite unsurprisingly, oil security is--looms much more 
importantly in the national debate. And if the committee were 
doing its work today, it is conceivable that we might give an 
even greater value to reduced oil consumption on account of the 
potential for macroeconomic disruptions associated with 
fluctuations in oil import and oil domestic produced--
domestically produced oil prices.
    Second, during the period of time since the issuance of the 
report, gasoline prices have gone up between 20 and 25 percent. 
This pushes the car companies in the direction of making more 
fuel-efficient vehicles, because passengers have an incentive 
to demand more fuel-efficient cars the more expensive the price 
of gasoline is. I actually think we are seeing some evidence of 
this. But for this price effect to continue, consumers have to 
believe that prices will remain high, not slip down to the 
$1.60 a gallon that they were when the National Academy 
committee was doing its work.
    Third, in the 31/2 years since we have issued our report, 
hybrids have penetrated much more significantly into the new 
vehicle market than we anticipated at the time. I think we were 
probably too conservative in our report about the potential for 
hybrids. Recent estimates suggest that by 2008/2009 there could 
be as many as 800,000 hybrids sold in the United States. Last 
year, I think the total was between 45,000 and 50,000. And if 
that number of hybrids sold grows dramatically, the cost per 
hybrid sold comes down, and that could make a big difference in 
the costs associated with meeting tighter fuel economy 
standards.
    I would also like to emphasize that in the 31/2 years since 
we completed our report, much progress has been made on a new 
generation of clean diesel engines. And I think this is very 
important for the fuel economy debate, because diesel engines, 
all of the things being constant, hold out the possibility of 
improvements of 25 to 40 percent in fuel economy. If we were 
writing that report today, I think we would pay more attention 
to the potential for these clean diesels to help in the fuel 
economy challenge.
    And finally, research has been done since that time on the 
so-called rebound effect. I won't go into great detail on this, 
but this suggests that as people own cars that get better fuel 
economy, they may drive those cars more. And some of the 
adverse effects associated with more vehicle miles traveled, 
depending on the way you value those, actually have the 
potential to cancel out some or all of the beneficial effects 
of improved fuel economy.
    So that is my quick summary of what has happened in the 
time we have done the report. Thank you, again, for having me 
here. And I would be happy to take any questions later.
    Thanks.
    [The prepared statement of Mr. Portney follows:]

                 Prepared Statement of Paul R. Portney

    Good afternoon, Mr. Chairman and Members of the Committee. I am 
Paul R. Portney, President of Resources for the Future. In 2001 I 
served as Chair of the Committee on Effectiveness and Impact of the 
Corporate Average Fuel Economy (CAFE) Standards of the National 
Research Council (NRC). The Research Council is the operating arm of 
the National Academy of Sciences, the National Academy of Engineering, 
and the Institute of Medicine, charted by Congress in 1863 to advise 
the government on matters of science and technology. My comments today 
reflect my own views and, to the best of my abilities, those of the NRC 
committee members. They do not reflect the views of Resources for the 
Future, an independent and non-partisan research organization that 
takes no institutional positions on legislative matters.
    It is a pleasure to be here to discuss with you the NRC's 2001 
report. This study was requested by Congress to provide assistance in 
its decisions related to fuel economy standards. I would like to 
provide a brief overview of the report, while noting that it was 
detailed and cannot be done justice to in a few minutes. Therefore I 
request that we include the Executive Summary of that report as part of 
the record. (See Appendix 2: Additional Material for the Record.) 
Following my overview of the 2001 report, I will make a few remarks 
about developments in the three-and-a-half years since the committee 
did its work. Let me say here, as I will again later, that I will not 
be speaking for the committee in offering this update.
    The NRC committee had a three-part mission in 2001 when it did its 
work:

        1.  Determine the effect that CAFE standards have had on fuel 
        economy, and their impact on the industry, consumers, safety, 
        and other issues;

        2.  Estimate the impact that changes to CAFE standards might 
        have in the future; and

        3.  Evaluate the structure of the CAFE program and recommend 
        potential improvements.

Review of the Then-Current CAFE Program

    Our review of the impacts of CAFE standards through mid-2001 
convinced us that the program had significantly reduced fuel 
consumption. Other factors also have been important, especially the 
reaction of consumers and the automotive industry to higher fuel prices 
in the 1970s and early 1980s. The committee could not apportion 
responsibility among these factors, but noted that CAFE was clearly 
important. In the years since the early- to mid-1980s, CAFE 
indisputably played an important role in maintaining higher fuel 
economy than otherwise would have resulted, especially during periods 
when gasoline prices were much lower than those prevailing today.
    There have been adverse consequences associated with the CAFE 
program as well. Safety is most important. The majority of the 
committee concluded in 2001 that the downsizing and downweighting that 
occurred in the late 1970s and 1980s (partially in response to CAFE) 
resulted in an additional 1,300 to 2,600 fatalities in 1993. While 
fatalities were declining in this period, most committee members 
believe that they would have declined this much more had the 
downweighting and downsizing not occurred. Two members of the committee 
dissented from this view. They believed that the data did not support 
this conclusion, and that the net effect on highway fatalities of the 
increases in fuel economy may have been zero.
    An additional impact, although one we were unable to quantify, had 
to do with restrictions on consumer choice. Requiring automotive 
manufacturers to focus on fuel economy diverted their resources from 
improving other attributes valued by consumers, such as acceleration 
and carrying capacity.

Impact of Higher Standards

    First let me note that the committee did not recommend whether or 
by how much the government should tighten the current fuel economy 
standards. We believed that is a decision belonging to Congress, the 
President, and appointed officials because it involves tradeoffs among 
factors very important to the people of this country--the costs of 
driving, the environment, national security, consumer choice, safety, 
and others. In so far as possible, the committee identified these 
tradeoffs, but a full analysis was not possible within the short time 
allotted to this study.
    The committee believed that it is incumbent on decision-makers to 
understand the benefits of fuel economy improvements and to ensure that 
the costs associated with these improvements don't outweigh the 
benefits. The two main benefits the committee considered were the 
macro-economic gains associated with reduced exposure to fluctuating 
world oil markets and reduced emissions of the greenhouse gases that 
may be linked to global climate change. Analysts have assigned a wide 
variety of values to reducing these externalities. The committee 
considered this range and ultimately chose values which, in total, are 
equivalent to about 30 cents/gallon of fuel. That is, each gallon of 
gasoline consumed has adverse economic and environmental consequences 
that, when combined, amount to as much as $0.30. I mention this figure 
not because the committee endorsed it (indeed other analysts might 
chose values much higher or lower), but because it helps to understand 
how hard one can push on fuel economy.
    With that as context, the committee concluded that significant 
improvements in fuel economy are quite possible at reasonable cost. A 
variety of technologies to improve fuel economy are available for cars 
and light trucks. Many have been developed and are being implemented in 
Europe and Japan where fuel prices are much higher than here. 
Specifically, Variable Valve Lift and Timing can reduce fuel 
consumption by 3-8 percent. Continuously variable transmissions can 
achieve another 4-8 percent. Other technologies are under development 
and will be available for wide scale use within 15 years. Fuel economy 
can be raised more for heavier vehicles than for light ones, and the 
resulting fuel savings will be much higher for the heavier vehicles as 
well. For example, the fuel economy of a mid-size SUV could be improved 
by 34 percent (from 21 to 28 miles per gallon). Over the lifetime of 
the vehicle, these improvements would save nearly 2,000 gallons, which 
would more than pay for their incremental cost.
    As with the current CAFE program, raising standards will have other 
consequences as well, with safety again being the most contentious. Any 
increase in fatalities will depend on how manufacturers meet higher 
standards. While the technologies examined by the committee generally 
appear to be more cost-effective than weight reduction, CAFE standards, 
as currently structured, do not preclude any methods. Thus some 
manufacturers might include some weight reduction, which the majority 
of the committee believed could involve some safety consequences. 
However, it is also possible that weight reductions could be 
concentrated in the heavier vehicles. This would reduce the weight 
disparity in the fleet, which could have beneficial consequences for 
safety. This could occur because the greater risk for the occupants of 
the downsized vehicles would be more than balanced by the lessened risk 
for other road users.
    A key point to make here is that the committee felt strongly that 
automakers must be given sufficient time to accommodate more stringent 
fuel economy standards. The less time they are given to meet new 
requirements, especially significantly more stringent ones, the more 
likely it is that they will respond not through the introduction of 
fuel-saving technologies but rather through down-weighting and/or down-
sizing. This could have adverse consequences for safety.

Recommendations on the Structure of the CAFE Program

    First, it was the committee's view that there is a marked 
inconsistency between raising fuel economy standards while keeping fuel 
taxes low. The committee certainly did not recommend raising taxes to 
the level of European countries (or to any specific level for that 
matter), but the members believed strongly that efforts to raise fuel 
economy would work much better if consumers had more motivation from 
higher fuel prices. Since the 2001 report was written, gasoline prices 
in the United States have risen roughly 20 percent. If consumers 
perceive this increase to be permanent, it will begin to affect their 
new-vehicle purchases. In fact, there is some anecdotal evidence to 
suggest that it already has.
    The committee recommended that a tradable credit program be part of 
any regulatory program on fuel economy. Even if the current structure 
of CAFE is maintained and the standards not raised, the program can be 
made more efficient and effective with tradable credits. All 
manufacturers would have incentive to raise the economy of all their 
vehicles, and the results are likely to be less costly than the current 
approach of treating each manufacturer and each vehicle segment 
separately. Tradable credits have worked well in reducing the costs of 
sulfur dioxide emissions from coal-fired power plants, and the 
committee believes they will work as well on fuel economy.
    Finally, the committee recommended that consideration be given to 
modifying the current structure of the CAFE program in such a way that 
the applicable fuel economy standards for varying types of vehicles 
depend at least in part on their attributes--that is, their weight, 
interior size, or some combination of characteristics. I would note 
that the National Highway Traffic Safety Administration is giving 
thought to this approach now. The committee also recommended the 
elimination of both the two-fleet rule that distinguishes between the 
domestic and foreign ``content'' of vehicles and the granting of extra 
fuel economy credits for the production of dual-fuel vehicles.

Update

    Three and a half years have passed since the NRC committee on CAFE 
did its work. I thought it might be useful for me to reflect on 
developments since August of 2001 and what they might mean for the fuel 
economy debate. It should be clear that I am speaking for myself here 
and not for the members of the NRC committee.
    The CAFE committee issued its report about a month before the 
horrific events of September 11, 2001. Those events and their ongoing 
aftermath have made us think much more seriously than before about the 
consequences of U.S. oil consumption and our growing dependence for 
imported oil on nations that are unstable and/or may bear us ill will. 
Were the 2001 NRC committee meeting today, its members might assign an 
even larger value to reducing oil consumption so as to reduce our 
economic vulnerability to oil price shocks, either accidental or 
deliberate.
    Next, oil prices have risen considerably since the time of the 2001 
report, principally a reflection of rapidly growing demand for oil in 
the developing world (especially China and India), coupled with slower 
growth in production. If sustained, these higher prices will act as a 
stimulus to the production of more fuel-efficient vehicles, for the 
simple reason that people will demand better fuel economy. However, the 
externalities associated with oil consumption and its effect on both 
the economy and the environment would still justify government 
intervention to further improve fuel economy.
    Third, in its deliberations on new technologies that might be used 
to improve future fuel economy, the 2001 NRC committee gave little 
consideration to either gasoline-electric hybrids or diesel-powered 
passenger cars and light-duty trucks. The former, the committee felt, 
were too expensive to make a significant difference in fleet-wide fuel 
economy over the next ten to fifteen years, while the latter faced 
stiff challenges related to vehicle emissions standards for both oxides 
of nitrogen and also fine particulate matter.
    We may have been too conservative in both these assessments. Hybrid 
vehicle sales have grown faster than anyone expected--to 86,000 in the 
U.S. in 2004. According to industry experts, hybrid sales could amount 
to 400,000-500,000 by the 2008-09 model year, with significant 
penetration in both the passenger car and light-duty truck segments of 
the market. Similarly, considerable progress is being made in the 
development of much cleaner diesel engines; this is important because 
diesel-powered vehicles get 30 percent better fuel economy than 
conventional internal combustion gasoline engines. If the cost penalty 
associated with hybrids falls significantly because of larger-than-
expected volumes, and if car makers find a way to produce diesel 
engines that are capable of meeting tougher emissions standards in 
California and the rest of the U.S. for the lifetime of vehicles, 
things could be different. That is, it might be possible to meet more 
stringent fuel economy standards at lower costs for less than the 
committee foresaw in 2001. Once again, this is speculation on my part 
alone; this view should not be attributed to the 2001 committee.
    Finally, looking back on our 2001 report, I wish we had had the 
time to pay closer attention to the so-called ``rebound effect'' (this 
refers to the additional miles motorists may drive in vehicles that get 
better fuel economy). Some recent research by my colleagues at 
Resources for the Future suggests that the negative consequences 
resulting from the added congestion, air pollution and accident risks 
could cancel out the beneficial economic and environmental effects of 
improved fuel economy, depending on how all these effects are valued. I 
take responsibility for having given this important issue less 
attention than I believe it deserves, and I urge the committee to 
consider it in future deliberations over the CAFE program.
    Thank you, Mr. Chairman and Members of the House Science Committee. 
That concludes my prepared remarks. I would be happy to answer any 
questions you have.

                     Biography for Paul R. Portney

    Paul R. Portney is President of Resources for the Future (RFF), an 
independent, non-partisan research and educational organization 
specializing in natural resources and the environment. Portney joined 
the staff of RFF in 1972; from 1986-1989 he headed two of its research 
divisions; in 1989 he became its Vice President, and was named 
President in 1995. In 1977, he took leave to become a Visiting 
Professor at the Graduate School of Public Policy at the University of 
California at Berkeley. Between 1992-1996, he was a Visiting Lecturer 
at Princeton University's Woodrow Wilson School. In 1979-1980, Portney 
was Chief Economist at the Council on Environmental Quality in the 
Executive Office of the President.
    Portney received his B.A. in economics in 1967 from Alma College 
(Michigan), and his Ph.D. in economics from Northwestern University. He 
is currently a member of the Sustainable Forestry Board and the Board 
of Directors of The Johnson Foundation, where he chairs the Finance and 
Investment Committee. He recently joined the Advisory Council of the 
Comptroller General of the United States. In 2001, he was chairman of a 
National Academy of Sciences' Committee on the future of Corporate 
Average Fuel Economy standards. From 1994-97, he was a member of the 
Executive Committee of EPA's Science Advisory Board (SAB) and Chairman 
of the SAB's Environmental Economics Advisory Committee. He has 
published widely on the costs and benefits of environmental regulation, 
including the 2nd edition of his book, Public Policies far 
Environmental Protection, used in college and university classrooms 
around the country. He also lectures frequently on developments in U.S. 
and international environmental policy.

Education

Ph.D. in economics, Northwestern University, 1973.

B.A. in economics, Alma College, 1967.

Professional Experience

          President, Resources for the Future, 1995-present.

          Vice President, Resources for the Future, 1989-1995.

          Senior Fellow, Resources for the Future, 1980-
        present.

          Director, Resources for the Future, Center for Risk 
        Management, 1987-1992.

          Director, Resources for the Future, Quality of the 
        Environment Division, 1986-1987.

          Visiting Lecturer, Princeton University, 1992-1995.

          Senior Staff Economist, Executive Office of the 
        President, Council on Environmental Quality.

          Visiting Professor, University of California at 
        Berkeley, Graduate School of Public Policy, 1977.

          Senior Research Associate, Resources for the Future, 
        1973-1977.

          Dissertation Fellow, The Brookings Institution, 1971-
        1972.

Journal Articles

On Valuing Nature, Raymond J. Kopp, N.E. Bockstael, A.M. Freeman III, 
        Paul R. Portney, and V.K. Smith, Environmental Science and 
        Technology, 2000, Vol. 24, No. 8, pp. 1384-1389.

    Chairman Boehlert. Thank you very much, Mr. Portney. And I 
want to thank both you and Administrator Reilly for focusing on 
the fact that this is, first and foremost, a national security 
issue. Then it is a consumer economy issue. It also happens to 
be an issue of importance to those of us concerned about the 
environment. And I would submit that most of us are concerned 
about the environment. I don't want it to be portrayed as the 
greens against the rest of the world. It is not the case at 
all.
    So--and the other thing I am glad you made reference, as I 
did in my opening statement, to the debate in '01 just prior to 
9/11, because it was just within hours of the issuance of your 
report that Congress began the debate. And I would suggest in 
many respects, it was not an informed debate, because the 
Congress did not have the benefit of a thorough examination of 
your outstanding work.
    So thank you for what you have done.
    Am I indicating to some of my fellow colleagues my 
preference in this issue?
    Mr. Duleep.

      STATEMENT OF MR. K.G. DULEEP, MANAGING DIRECTOR OF 
    TRANSPORTATION, ENERGY AND ENVIRONMENTAL ANALYSIS, INC.

    Mr. Duleep. Mr. Chairman, thank you for having me here.
    The Committee's staff has asked me to focus on technology 
issues, and that will be the focus. They asked me four specific 
questions. I will try and summarize my comments and have the 
written testimony submitted to the record.
    The first question I will focus on is what technologies are 
available to improve fuel economy. I have a chart in there on 
what I call conventional technologies that you can go out and 
actually buy on some car made today. So you can actually just 
walk into a dealership and buy one of these. They haven't yet 
penetrated the fleet. They are in just a few cars now, and we 
estimate that if you take all of those technologies, and I have 
a table in my written testimony, and you put them onto one car 
or one truck, you can get something like 24 or 25 percent 
improvement from these technologies in the fuel economy. They 
would add about $800 to $1,000 on the price of a vehicle, the 
retail price.
    If you look at how much fuel they save and what the value 
of it, they pretty much pay for themselves over 50,000 miles of 
use, so a consumer buying these technologies would get paid 
back in three or four years. That is a typical measure used by 
auto companies to judge whether, in fact, they are to introduce 
these technologies.
    One of the important points on this is that I believe that 
most of these technologies will be adopted, or could be 
adopted, in most cars by the manufacturers just on the free 
market, just on a competitive basis, largely because they make 
sense. If they pay for themselves, why not? We have looked at 
many of the public announcements made by General Motors and 
Ford and so on, and we can see all of these technologies coming 
in the next few years.
    At the same time, I don't want to imply that this means 
that fuel economy will improve by 25 percent in the next 10 
years, largely because the consumers are buying more 
performance, larger vehicles, and so on. So I expect about half 
of the improvements will actually be lost to consumers buying 
more vehicles, four-wheel-drive, and so on. And that is 
assuming that gas prices stay about where they are today, about 
$2 a gallon.
    Next, I will briefly discuss the issue that Dr. Portney 
raised, which is the issue of diesel engines and hybrids. At 
the time the National Academy met, there was a lot of debate 
about whether the diesel could meet U.S. emissions standards. 
There is still some debate today, but having spoken to a lot of 
the leading diesel engine manufacturers in the world, I am 
fairly confident that they will meet these standards in the 
next three or four years.
    The diesel engine can improve--just by itself, can improve 
vehicle fuel economy by something like 35 to 40 percent, and 
they are widely used in Europe. If you add some of the other 
conventional technology improvements, the vehicle fuel economy 
can go up by more than 50 percent. So it is a huge fuel economy 
improvement possibility, but the cost of the diesel engine is 
pretty high. A four-cylinder diesel engine with all of the 
advanced emission controls will add something like $2,200 to 
the price of a car. If you use a V6 or a larger engine, it will 
add something like $3,500 to the price of a truck.
    At those prices, you don't get the payback. It won't pay 
for itself, but I think consumers will still value things like 
it has a lot of torque so it can tow trailers and so on, and it 
has at least the image of great durability so it can run maybe 
a half a million miles without a major overhaul. Consumers 
value that, and they appear to certainly prefer diesel engines 
in the larger pick-up trucks even today.
    Going back to the hybrid, that has become very popular now, 
but there are lots of different kinds of hybrids. At the one 
end, we have the Toyota Prius, and I think Ford uses a very 
similar design, and some people call that a full hybrid. 
Somewhere in between, we have the Honda Accord and Honda Civic, 
which uses a much smaller motor and the battery than the Toyota 
Prius. Then we have other designs by General Motors and 
DaimlerChrysler. And all of these are different implications 
for fuel economy. So when people use the word ``hybrid,'' they 
don't use it in a very consistent way, and there are lots of 
flavors of them.
    But there is one common characteristic that hybrids have. 
Most of their fuel economy improvement occurs in city driving. 
So it has to be stop-and-go driving. On the highway, hybrids 
don't give you much, whereas with the diesel engine, the fuel 
economy gains are more robust across all of the driving 
conditions.
    One of the things I do want to point out is that there has 
been a lot of attention paid to the Toyota Prius, and rightly 
so. It is a wonderful car. But if you look at how much it costs 
to make, and you assume that manufacturers take their standard 
profit margins and pay back their cost of capital and so on, we 
estimate that, at today's prices, if you built a Toyota hybrid-
like mid-sized car, the retail price should go up about $6,000. 
It gives you about a 50 to 55 percent fuel economy improvement. 
And clearly, that--you are not going to make that money back in 
fuel savings.
    But the other thing that the press does not seem to notice 
is that there are other very smart ways to do it. Honda, for 
example, as I mentioned, uses a motor that is maybe half the 
size of the one in the Prius, a battery that is less than half 
the size, and they get fuel economy numbers that are almost as 
good as the Prius. So there are very advanced ways to exploit 
synergies between the engine, the electric motor, and the 
transmission that may cut the costs tremendously. So we see 
something like the cost coming down below $2,000, at which 
point it starts to make sense to the consumer.
    I would also mention that we know some companies are 
working on diesel hybrid combinations in Europe, and we expect 
to see them in something like 2008.
    One of the continuing issues has been this issue of safety 
and fuel economy. Others on this panel will comment on it. But 
a lot of those issues that the panel--that people on this panel 
talk about is what happens after the crash has occurred. I 
think this committee should be made aware that there are really 
amazing changes in new technology in preventing crashes from 
occurring in the first place. These are technologies like blind 
spot warning, pre-crash sensing, lane departure warning, night 
vision, and so on. In fact, I think in--perhaps five or 10 
years down the road, a vehicle will be able to brake itself 
before it hits anything else, and so the whole issue of safety 
and fuel economy links becomes almost moot.
    Lastly, I was asked to address issues regarding government 
policy in fuel economy. Like Dr. Portney, I agree that the CAFE 
standards did achieve some goals. But I think that it did 
disadvantage the domestic manufacturers, because all 
manufacturers, regardless of what you produce, have to meet the 
same MPG number, even if you build large cars or small cars, 
whatever your mix is.
    Dr. Greene and I have done some studies looking at some 
other forms of standards, and I expect Dr. Greene will address 
this more fully, but the basic fact is there are different ways 
of doing this that are, perhaps, more equitable in this 
treatment of manufacturers.
    Second, I want to just briefly touch on the issue of 
consumer response. Here I would take some issue at the 
Honorable Reilly's recommendations from the National Commission 
on Energy, which were all focused on manufacturers. Here we 
have a situation, as you know, even with record prices last 
year, light truck market share reached a new record in 2004: 55 
percent of all vehicles bought in the U.S. were light trucks. 
Today, we see cars with 400, 500, and even 600 horsepower that 
are meant for street use. So clearly consumers are going in the 
direction that needs some restraint, and I would suggest that 
an important part of energy policy has to be--has to include 
the consumer or has to be some form of consumer education.
    Another point that I would like to touch on is this issue 
that Dr. Portney, again, briefly touched on, which is many 
economists continue to believe that if you raise fuel prices, 
that is going to solve the problem. We have to remember that 
five years ago, gas was $1.20 a gallon. Last year, it was 
almost $2.00 a gallon, and that is a 50 percent price increase. 
Yet if I look at the numbers in terms of fuel economy, what 
people are buying, the vehicle miles of travel, it is hard to 
see that there has been a big effect. I personally feel that 
the estimates that were put forward by the National Academies 
were, perhaps, an order of magnitude too large in this issue.
    Lastly, I would touch on subsidies and fees for technology. 
Here I think the experience has shown that it is probably not a 
good idea to subsidize specific technologies. I would mention 
in this--example the issue between, say, the Toyota Prius and 
the Honda design, if you can figure out a smarter, cheaper way 
of doing something, it may not be covered by the specific 
definition used to subsidize a technology. I would certainly 
advocate that tax rebates or subsidies for fuel-efficient 
vehicles be independent of the kind of technology used to get 
there, whether it be diesel or some very advanced type of 
gasoline engine or some hybrid, because ultimately, we want to 
reduce fuel use, and that should be the goal of the subsidy. 
These subsidies could be phased out over some period. The 
principle idea behind the subsidy would be to reduce 
manufacturer risk of investing in something that we have no 
idea whether the consumers are going to buy.
    Thank you for your attention. I will be pleased to answer 
your questions.
    [The prepared statement of Mr. Duleep follows:]

                   Prepared Statement of K.G. Duleep

Mr. Chairman and Members of the House Science Committee,

    Thank you for inviting me to participate in this hearing on the 
topic of vehicle fuel efficiency. I am the Managing Director at Energy 
& Environmental Analysis (EEA), a consulting firm. EEA has been 
involved in analyzing this topic for the last 25 years and has provided 
the Department of Energy with many analyses of technologies over this 
period. EEA has also worked for a number of foreign governments, 
notably Canada and Australia, on this issue. The views expressed by me 
at this hearing, however, are my own and do not reflect the views of 
the DOE or any of my other clients. I was instructed by the Committee's 
staff to respond to four questions, and I will focus on these questions 
in my testimony. I have highlighted the key points in my written 
testimony

CONVENTIONAL TECHNOLOGY IMPROVEMENTS

    The first question posed was on the identification of technologies 
available to improve light-duty vehicle fuel economy and their 
potential benefit. This is a question that has received much attention 
and most analyses separate ``conventional'' technologies that are 
evolutionary improvements to existing technology from ``revolutionary'' 
technologies that involve new types of engines and/or fuels. In this 
context, hybrid and diesel vehicles could be described as revolutionary 
and their benefits are described in the response to the second 
question. All of the fuel economy benefits cited are on the EPA 
combined city-highway test unless an alternative is specifically 
mentioned.
    The available conventional technologies have been extensively 
researched and I can state that there is a consensus among engineers 
regarding these technologies and their costs and benefits. Table 1 
(attached) provides such a listing and is restricted to conventional 
technologies that are sold in at least one mass-market model in the 
U.S. as of 2005, to avoid any controversy about technology readiness 
for the market place. In addition, I have ignored the potential for 
weight reduction through the use of alternative materials because of 
the unfortunate controversy over the link between weight and safety. 
The data in the table suggests that a total fuel economy improvement of 
about 26 percent in small cars to 28 percent in larger cars and light 
trucks is possible for much of the new car fleet with no weight 
reduction whatsoever. At the same time it should be noted that all of 
the technologies are (by definition) in some vehicles, so that the 
fleetwide benefit available relative to 2004 model year vehicles is 
about two percent lower than the estimate in the table. If one were to 
choose only those technologies that pay for themselves in terms of fuel 
savings over 50,000 miles ( a measure used by manufacturers to gauge 
consumer acceptance), then the gasoline direct injection system would 
not be included in the list. However, direct injection with lean 
combustion could be cost effective as it could double the fuel economy 
benefit from this technology alone and eliminate the need to employ 
cylinder de-activation or variable valve lift. Hence, the available 
improvement from cost effective conventional technology would be about 
24 to 26 percent. Half of the improvement is associated with engine 
technology. The technologies would add about $800 to $1,000 to the 
retail price of a vehicle while the value of fuel saved over 50,000 
miles at $2/gallon would be in the same range.
    These estimates are a little lower than the ones derived by the 
National Academy of Sciences for two reasons. First, the choice of only 
those technologies already in the market as of 2005 is more restrictive 
than the definition used by the NAS. Adding most of the excluded 
technologies like ``camless valve actuation'' or `` variable 
compression ratio'' will increase the total available benefit but will 
not change the listing of cost-effective technology as these excluded 
technologies are typically quite expensive for the benefit delivered. 
Second, the NAS study was completed four years ago and some of the 
technologies on their list have already been widely adopted in the 
interim period. However, it can be argued that the costs of these 
excluded technology improvements could come down in the future. A 
comparison of studies on fuel economy completed since 1985 suggests 
that at any given point in time, there always appears to be the 
potential to increase fuel economy by 25 to 30 percent in a cost-
effective way. As available technologies are adopted into most new 
cars, new technologies are developed to lead to this conclusion.
    More importantly, I also believe that all of the cost-effective 
technology in the table could be adopted under free market conditions 
in most vehicles by 2015 if gasoline prices do not decline 
significantly, simply due to the fact these technologies pay for 
themselves. As examples, GM has publicly announced that most of the V-8 
and V-6 engines will have cylinder cutout in the future. GM and Ford 
are collaborating on a six speed automatic transmission that will be 
used on most of their front wheel drive cars by 2012. DaimlerChrysler's 
new four-cylinder engine will be equipped with variable valve timing. 
Most current Honda models offer variable valve lift systems. These 
examples confirm our computations of cost-effectiveness. At the same 
time, this does not imply that 2015 fuel economy under free market 
conditions will be 25 percent higher than it is today. We estimate that 
about half of the improvement will counterbalanced by consumers buying 
more luxurious and larger vehicles, SUV models and four-wheel drive 
even if fuel prices remain at around $2 per gallon. If gasoline prices 
decline in the future to $1.25 per gallon, there may be no improvement 
in fleet fuel economy at all as some technologies become cost 
ineffective.

HYBRID AND DIESEL TECHNOLOGY

    The second question asks about the prospects for diesel and hybrid 
technology, and their expected contribution to fuel economy. Dr. Greene 
of Oak Ridge National Laboratory and I completed a study of these 
technologies last year on this very question, but because technological 
changes are happening quickly, I have modified my answers to reflect 
new data. I will focus on technology issues and let Dr. Greene respond 
to market penetration issues. Both technologies offer the prospect for 
fuel economy improvements of 40 to 50 percent, more than double the 
total available from all cost effective conventional technology.




    Diesel engines are not a new technology and half of all new cars 
sold in Europe are diesel powered. They are revolutionary only in the 
U.S. context due to the difficulty in meeting emissions standards in 
force here. Although much has been made of the diesel's emissions, I am 
now reasonably confident that the diesel engine will be able to meet 
the stringent new Tier 2 emission standards in most vehicles in the 
near future. Existing diesel engines can definitely meet this standard 
with an urea-SCR system and particulate trap, but vehicles need 
periodic refueling with urea. Distributing urea to refueling stations 
is not an insurmountable problem, but is of some concern to the EPA. 
Other solutions that do not require urea like the NOX adsorber are also 
close to meeting emission standards but extract a fuel economy penalty 
of three to five percent. More exciting developments are in emission 
control by modifying the combustion process itself. There are three 
approaches being pursued, and the U.S. EPA has developed one. Last 
week, Ford and EPA announced an agreement to develop this technology 
for production, demonstrating its potential.
    Modern diesel engines with direct injection and turbocharging can 
improve fuel economy by 38  5 percent relative to a gasoline engine of 
equal size.\1\ These engines can provide 40 to 50 percent more mid-
range torque than the gasoline engine and near equal horsepower. In 
addition, there is evidence from Europe that diesel vehicles perform 
better on the road than gasoline vehicles and real-world (as opposed to 
EPA test) fuel economy may be about 50 percent better than a gasoline 
vehicle. However, the diesel engine (with advanced emission control) 
will have a price premium of about $2200 for a four cylinder engine 
used in a compact car to about $3400 for a large V-6 used in a pickup 
truck. At these prices, the fuel savings over 50,000 miles will not pay 
for the full cost, but consumers value the torque and durability of the 
engine. I should also note that the ``conventional'' technologies not 
related to the gasoline engine in Table 1 are also applicable to diesel 
powered vehicles, so that the vehicle fuel economy potential is about 
50  6 percent. Our study estimated the ultimate market potential of 
the diesel in the 2015 time frame at about 30 percent of the market if 
there is no hybrid competition.
---------------------------------------------------------------------------
    \1\ Europeans often quote a diesel fuel consumption (the inverse of 
fuel economy) benefit of 25 to 30 percent, and this is equal to a fuel 
economy benefit of 33.3 to 42.85 percent.
---------------------------------------------------------------------------
    The hybrid gasoline--electric vehicle has received much attention, 
but there are many kinds of hybrids and the terminology to describe 
them is both confusing and biased. The Toyota Prius is one reference 
sometimes referred to as a ``full'' hybrid, and it uses two high 
powered electric motors, a gasoline engine and a high power battery. 
(Ford's Escape hybrid uses a similar system.) The Honda Civic and 
Accord hybrids use a different and simpler system with one motor of 
relatively low power and a smaller battery than the one used in the 
Toyota Prius. GM and DaimlerChrysler currently offer a system in a 
hybrid pickup truck conceptually similar to the Honda system but with a 
much lower power battery. GM also plans to introduce a fourth type of 
system, called a Belt drive Alternator Starter (BAS) system that is 
significantly cheaper than any of the other systems. All of these types 
are hybrids but have quite different price and performance 
implications.
    In general, all hybrids improve fuel economy in city (or stop-and-
go) driving by significant amounts, but offer little or no improvement 
in fuel economy under highway (steady high speed) conditions. In 
addition, the hybrid vehicle's fuel economy benefits, even under city 
driving conditions, are a function of trip length and ambient 
conditions. In contrast, the fuel economy benefit of the diesel is more 
robust across all driving conditions.
    It is difficult to provide a single fuel economy benefit number to 
hybrids even of a particular type since it is a function of the 
performance trade-offs chosen by the manufacturer. ``Full'' Hybrids 
using a two electric motor design similar to that used by Toyota and 
Ford can provide a 50 to 55 percent improvement in composite fuel 
economy if optimized for maximum fuel efficiency. This improvement 
includes the effect of the conventional technologies listed in Table 1 
and the benefit of hybridization alone is about 25 to 30 percent. Such 
hybrids provide comparable low speed acceleration but reduced 
continuous power for hill climb or trailer towing. Vehicles that offer 
no compromise in continuous power and significantly better low speed 
acceleration will offer a benefit of 30 to 35 percent (again including 
most conventional technologies). In a mid-size car for example, we 
estimate that the additional hybrid related components will add $5,600 
to retail price currently if manufacturers utilize standard retail 
markup and expect to earn an average profit margin on these vehicles. 
There are significant cost reductions likely to be realized over the 
next five years and we estimate that by 2010 prices can be below 
$3,900. Since the fuel savings over 50,000 miles are only on the order 
of $1,300 to $1,500, many believe that this technology will never 
succeed in the market even after cost reductions are realized.
    These issues regarding the ``full'' hybrid have been debated 
publicly, but the potential of other hybrid designs has received much 
less attention in the press. Honda has introduced three hybrid vehicles 
in the U.S. that have a single electric motor of less than half the 
power of the motors in the Toyota Prius, and an advanced battery that 
is half the size of the one in the Prius. Yet, the fuel economy gains 
in the Honda hybrid vehicles are almost as good as the ones from the 
Toyota hybrids. Honda has cleverly managed to exploit synergies between 
engine, transmission and electric motor technology to maximize fuel 
economy. We estimate the cost of these hybrids to be less than half the 
cost the ``full'' hybrid designs, so that future prices will be 
relatively close to the value of fuel saved. Other innovative designs 
using ultra-capacitors have been shown by Continental of Germany that 
could be a low cost solution for some types of vehicles. These 
alternative types of hybrid designs in synergy with engine technologies 
could provide fuel economy gains of 30 to 35 percent with no loss in 
performance, and will be cost effective in terms of fuel savings over 
the life of the vehicle. Dr. Greene's analysis suggests that hybrids of 
different types can capture 25 percent of the market by 2015, and this 
figure could be higher with some of the more innovative designs under 
study now.
    Some analysts have discounted the diesel engine and hybrid 
powertrain combination as too expensive, but I do not agree. Some 
alternative cheaper hybrid designs could make sense with advanced 
diesel engines by eliminating the need for costly emission control 
equipment like NOX adsorbers, partially offsetting hybrid costs. I have 
heard that several European manufacturers are developing hybrid-diesel 
combinations and I anticipate that the first models will be available 
in the U.S. by 2008.

SAFETY RELATED EFFECTS

    The data presented above for conventional and revolutionary 
technology do not include any weight or size reduction, so there are no 
reasons to be concerned for safety. In addition, both the diesel and 
hybrid vehicle weigh three to five percent more than conventional 
vehicles, so that there could be positive benefits if weight is indeed 
a factor. I am not a safety expert, but recent analyses sponsored by 
Honda suggest that size rather than weight is more important for 
safety.
    In addition, the safety relationship to weight and size is debated 
in the context of injury after a crash has occurred. This committee 
should be made aware of amazing new advances in active crash prevention 
technologies. Technologies being introduced into the marketplace in the 
near-term include:

        --  Blind Spot Warning through radar or infra-red detection

        --  Pre-Crash sensing using radar or vision based technology

        --  Lane Departure Warning using camera based technology

        --  Active Lane Keeping systems

        --  Stability control, soon to be standard on most vehicles

        --  Rollover prevention on trucks and SUV models

        --  Rear Vision and Night Vision systems

        --  Drowsy Driver Detection systems

    Indeed, there are plans to incorporate systems to completely sense 
the vehicle driving environment and warn the driver or prevent a crash. 
I believe that active safety technology has the potential to completely 
change the safety debate and remove any link between fuel economy and 
safety, and hope that this committee will examine these technologies 
more closely.

GOVERNMENT POLICIES

    I was also asked to comment on government policies to accelerate 
technology introduction. I am aware of public initiatives to raise CAFE 
standards with the premise that this policy has worked in the past. 
While the CAFE standards did achieve the goals, there is no question 
that the current form of the standard requiring all manufacturers to 
meet the same MPG target disadvantaged domestic manufacturers. Dr 
Greene and I have investigated other forms of the standard such as size 
or weight based standards and these seem to be more equitable in 
treatment of different manufacturers. However, no form of standard is 
without some drawbacks, and all are susceptible to ``gaming.'' I am 
also hesitant to suggest the European method that set a ``voluntary'' 
fuel consumption improvement target for all manufacturers and let the 
manufacturers negotiate individual targets between themselves. I 
understand some strains are being caused between European manufacturers 
by this agreement, and intra-industry agreements could be construed as 
anti-competitive behavior under U.S. laws. I will let others on the 
panel comment on standards and focus my attention on promoting 
technology for fuel economy.
    The consumer side of the equation should also not be neglected. 
Consumers appear to value other attributes, notably size, luxury 
features and performance over fuel economy, and the appeal for SUV 
models has not diminished much even at the current gasoline price of $2 
per gallon. The market share for light trucks continues to increase and 
reached a record of almost 55 percent of the total light vehicle market 
in 2004. Cars and light trucks with astounding horsepower ratings of 
400, 500 and 600 HP are in demand in a country where the national speed 
limit rarely exceeds 70 mph. These trends will serve to eventually 
erase the benefits of any amount of technology introduction. Hence, 
future fuel economy related efforts should include efforts directed at 
consumer motivation to purchase more efficient rather than more 
powerful or larger vehicles. This has always been a difficult area for 
Congress, as any restriction on consumer choice appears politically 
unacceptable.
    Just a few years ago, many economists believed that raising fuel 
prices alone would solve this problem of consumer motivation. Some 
computations purported to show that gasoline savings equivalent to a 25 
percent increase in CAFE standards could be obtained by raising the 
fuel price to $1.75 (or by about 50 cents) at that time. It can now be 
demonstrated from U.S. data from 2003-2004 that the assumed 
elasticities of consumer response to gasoline prices for vehicle choice 
and vehicle use were in error, by almost an order of magnitude. The 
Canadian experience with high fuel prices for the last 20 years also 
proves the same point. Hence, increasing taxes on gasoline as the 
primary conservation measure is not a particularly powerful strategy 
unless very large price increases ($2 to $3) are contemplated. At the 
same time, higher gasoline prices do make some modest contribution to 
saving fuel and can set the stage for making higher priced fuel 
efficient technology more palatable to the consumer, i.e., it may be a 
necessary but not a sufficient condition.
    Subsidies and fees for fuel efficiency or fuel-efficient technology 
to motivate consumer purchase are a common suggestion, and there are 
some subsidies now available for hybrid vehicles. I believe that the 
experience has shown technology specific credit or subsidy programs to 
be quite unpredictable in supporting the best outcome. For example, 
California's current ZEV mandate provides credits to hybrid vehicles as 
a function of electric motor power and battery voltage, independent of 
the actual fuel economy or emissions results attained by a specific 
design. In future, this could have the effect of promoting more 
expensive designs and disfavoring less expensive but more innovative 
designs that provides a similar outcome. I also believe that diesel and 
hybrid technologies are not in direct competition, as the primary 
benefits of hybrids accrue to passenger vehicles which operate mostly 
under city driving conditions. Diesel technology is most useful for 
vehicles that carry loads, tow trailers occasionally, and/or operate 
primarily on the highway. Hence, the availability of both diesel and 
hybrid technologies in the marketplace would extend benefits to 
different groups of consumers with different needs.
    I would suggest tax rebates or subsidies for fuel efficient 
vehicles that are independent of technology, be it advanced diesel, 
gasoline direct injection, hybrid or some combination. These subsidies 
could be phased out over a 10-year period, and the main purpose would 
be to reduce manufacturer's risk of investing in the production of a 
high fuel economy technology that is rejected by the consumer.
    Thank you for your attention. I will be pleased to answer any 
questions the committee may have for me.

                       Biography for K.G. Duleep

    As Managing Director at EEA, Mr. K.G. Duleep has been involved with 
automotive technology, fuel economy, and emissions issues for nearly 25 
years. He has directed a number of studies evaluating new technologies 
for vehicular engine and fuel combinations (including methanol, natural 
gas, and other alternative fueled vehicles). These studies have 
compared the technical feasibility, economics, performance, 
maintenance, and air emissions impacts of alternative vehicle 
technologies. Mr. Duleep has completed projects for the U.S. Federal 
and State governments, and for several other countries (notably Canada 
and Australia) where his technology evaluations and forecasts have 
formed the basis for fuel economy related initiatives and regulations. 
Mr. Duleep has testified on transportation technology issues for the 
U.S. Congress during debates on the Clean Air Act and CAFE (fuel 
economy) standards during the 1990s.
    In 2000, Mr. Duleep supported the National Academy of Sciences' 
Committee on the Effectiveness and Impact of CAFE Standards by 
providing information to the committee on the availability, cost and 
benefit of several automotive technologies. Much of the data on the 
cost of fuel economy and alternative fuel technology available in the 
public domain can be traced to his work for the Department of Energy. 
He also provides technology analysis support to auto-manufacturers and 
Tier 1 suppliers.
    Mr. Duleep has a Masters' degree in Engineering from the University 
of Michigan and an MBA from Wharton.

    Chairman Boehlert. Thank you very much.
    Mr. Stanton.

    STATEMENT OF MR. MICHAEL J. STANTON, VICE PRESIDENT OF 
    GOVERNMENT AFFAIRS, ALLIANCE OF AUTOMOBILE MANUFACTURERS

    Mr. Stanton. Thank you, Mr. Chairman.
    I represent the Alliance of Automobile Manufacturers, which 
is BMW, DaimlerChrysler, Ford, GM, Toyota, Mazda, Mitsubishi, 
Porsche, and Volkswagen of America. So it is a broad group of 
international manufacturers.
    And the Alliance supports efforts to create an effective 
energy policy based on broad market-oriented principles. 
Policies that promote research and development and accelerate 
the deployment of advanced technologies by providing customer-
based incentives should be the foundation for these efforts. 
This focus leverages the intense competition of automobile 
manufacturers worldwide. Competition drives automakers to 
develop and introduce technologies as rapidly as possible to 
meet the demands and needs of customers.
    The auto industry is committed to developing and utilizing 
emerging technologies to produce cleaner, safer, and more fuel-
efficient cars and light trucks. The NAS, in its 2001 report to 
Congress, cited a number of promising technologies that are 
being developed for use in vehicles. The report notes that they 
fall into a variety of categories, from production intent to 
emerging. In many cases, the production intent technologies are 
already in vehicles. The emerging technologies are ones that 
may achieve significant penetration in the market if economic 
and regulatory conditions permit, and in some cases, if there 
are engineering breakthroughs. All of this suggests that 
purchasing a course of--or pursuing a course of incentivizing 
the introduction of technologies to accelerate their 
implementation would be more effective than attempting to 
effectively mandate their use.
    Auto manufacturers are working on advanced longer-term 
technologies, such as hybrid, clean diesel, and internal 
combustion engines and fuel cells. These efforts may lead to 
substantial improvements in efficiency and emissions 
performance, all, we hope, without sacrificing safety, utility, 
comfort, or performance. Fuel cell technology, or liquid 
hydrogen powered ICEs, also serve as a potential path to move 
away from a petroleum-dependent transportation sector. 
Successful introduction of these new and emerging technologies 
all share the need for cooperative efforts that bring together 
all of the stakeholders, including auto makers, energy 
providers, government policymakers, and most important, 
consumers.
    The Alliance supports enactment of consumer tax credits for 
the purchase of these advanced technology vehicles. These 
credits will help offset the initial higher cost until greater 
volumes make them less expensive to produce and purchase. The 
Alliance believes that the overall concepts and provisions for 
consumer tax incentives found in last year's conference report 
for the Energy Bill are the right approach and would benefit 
consumers. And I am pleased to say that yesterday Congressman 
Camp introduced similar legislation, and we hope that the 
Committee Members would be able to support it.
    CAFE levels are critical to auto makers for a variety of 
reasons. First, if standards are too high, they will preclude 
vehicle attributes that can put the manufacturer at odds with 
their customers. Second, the level of CAFE standards can result 
in unintended consequences, such as the adverse safety 
consequences of pushing manufacturers to making vehicles 
lighter and smaller. Third, there are competitive implications 
for some manufacturers relative to others due solely to the mix 
of vehicles that are offered and sold. For instance, a 
manufacturer specializing in large, high-performance vehicles 
will have a more difficult challenge than a full-line 
manufacturer, and that full-line manufacturer will have a more 
difficult challenge than a limited-line manufacturer on 
compacts and sub-compact vehicles. And finally, for consumers 
sensitive to costs, fuel economy gains must be compared to the 
increased costs for their new vehicle purchase decisions.
    To summarize, Mr. Chairman, the Alliance believes that we 
must continue our efforts to reduce our dependence on foreign 
oil, which is one of the reasons we support the President's 
Hydrogen Fuel Initiative. In the near term, Alliance members 
will continue to compete with advanced technology vehicles, 
such as hybrids, clean diesel, and alternative fuel vehicles. 
Meanwhile, we will continue to work with NHTSA as it fulfills 
its congressional mandate to set new light truck vehicle CAFE 
standards at their maximum feasible level.
    Mr. Chairman, this concludes my statement. Thank you.
    [The prepared statement of Mr. Stanton follows:]

                Prepared Statement of Michael J. Stanton

Mr. Chairman,

    Thank you for the opportunity to testify before the Committee on 
Science regarding fuel efficient technologies for motor vehicles. I 
represent the Alliance of Automobile Manufacturers, a trade association 
of nine car and light-truck manufacturers. Our member companies include 
BMW Group, DaimlerChrysler Corporation, Ford Motor Company, General 
Motors Corporation, Mazda, Mitsubishi, Porsche, Toyota Motor North 
America and Volkswagen of America.
    Alliance member companies have more than 600,000 employees in the 
United States, with more than 230 manufacturing facilities in 35 
states. Overall, a University of Michigan study found that the entire 
automobile industry creates more than 6.6 million direct and spin-off 
jobs in all 50 states and produces almost $243 billion in payroll 
compensation annually.
    The Alliance supports efforts to create an effective energy policy 
based on broad, market-oriented principles. Policies that promote 
research and development and accelerate the deployment of advanced 
technologies by providing customer-based incentives should set the 
foundation for these efforts. This focus on ``accelerating the 
implementation of advanced technologies'' leverages the intense 
competition of the automobile manufacturers worldwide. Competition 
drives automakers to develop and introduce breakthrough technologies as 
rapidly as possible to meet the demands and needs of consumers.
    According to EPA data, the results of these efforts have been 
steady fuel efficiency increases of nearly two percent per year on 
average from 1975 to 2003 for both cars and light trucks. Fuel 
efficiency is a measure of the energy needed to move a given mass a 
specified distance. Fuel efficiency has been increased through 
improvements in aerodynamics, powertrains and reductions in accessory 
losses--in essence, through the use of the technologies of concern to 
the Committee and mentioned in reports by the National Academy of 
Sciences (NAS). As a result, the average vehicle each year, everything 
else being equal, consumes about two percent less fuel than it did the 
year previously.
    To accomplish these great results, the auto industry spending on 
R&D each year is approximately $18.4 billion, with much of it in the 
high tech sector. In fact, the University of Michigan study noted 
earlier stated the following: ``The level of automotive R&D spending 
and the relatively high employment of research scientists and engineers 
in the U.S. auto industry has traditionally earned a place in any U.S. 
Government listing of high technology industries generally thought to 
be central to the long-term performance of the U.S. economy.''
    The auto industry is committed to developing and utilizing 
``emerging'' technologies to produce cleaner, safer, and more fuel 
efficient cars and light trucks. The NAS, in its 2001 report to 
Congress, ``Effectiveness and Impact of Corporate Average Fuel Economy 
(CAFE) standards,'' cited a number of promising technologies that are 
being developed for use in vehicles. The report notes that they fall 
into a variety of categories--from ``production intent'' to 
``emerging.'' In many cases, the production intent technologies have 
already begun to be introduced into vehicles. The ``emerging'' 
technologies are ones that may achieve significant penetration into the 
market over 10 or more years, IF economic and regulatory conditions 
permit and at times ONLY IF engineering ``breakthroughs'' are achieved. 
All of this suggests to us that pursuing a course of incentivizing the 
introduction of technologies to accelerate their implementation would 
be more effective than attempting to effectively mandate their use.
    Auto manufacturers are also working on advanced longer-term 
technologies such as hybrid, clean diesel, and hydrogen powered 
vehicles, including fuel cells and internal combustion engines (ICE). 
These efforts may lead to substantial improvements in efficiency and 
emissions performance--all, we hope, without sacrificing safety, 
utility, and performance. Fuel cell technology, or liquid hydrogen 
powered vehicles using an ICE, also serve as a potential to move away 
from a petroleum dependent transportation sector. Successful 
introduction of these new and emerging technologies all share the need 
for cooperative efforts that bring all the key stakeholders together. . 
.including the automakers, energy providers, government policy makers 
and most importantly, the consumers.
    The NAS summarized the diversity of demand and priorities in the 
marketplace when it stated that ``automotive manufacturers must 
optimize the vehicle and its powertrain to meet the sometimes-
conflicting demands of customer-desired performance, fuel economy 
goals, emissions standards, safety requirements and vehicle cost within 
the broad range of operating conditions under which the vehicle will be 
used.''
    What this says is a fact that the auto industry must deal with 
every day in designing and producing vehicles--the customer is in the 
driver's seat. This helps explain why, when fuel efficiency has been 
increasing by two percent per year, fuel economy (the miles per gallon 
a vehicle obtains) has not kept pace. Consumers are not placing as high 
a value on fuel economy as they are on other vehicle attributes (e.g., 
price and safety). Thus, while vehicles continue to get more fuel 
efficient, the miles per gallon obtained by a given vehicle or the 
vehicle fleet as a whole, has not increased as much because consumers 
are either choosing larger and heavier vehicles or choosing vehicle 
attributes such as larger engines and advanced safety equipment, that 
dampens the increase in fuel economy.
    Market-based incentives ultimately will help consumers deal with 
the initial higher cost barriers of advanced technologies during early 
market introduction. The important consideration here is to increase 
demand, bringing more energy efficient vehicles into the marketplace. 
This will help drive cost reduction as economies of scale are achieved 
in a timelier fashion.
    As a result, the Alliance supports enactment of consumer tax 
credits for the purchase of advanced technology vehicles. These credits 
will help offset the initial higher costs of advanced technology and 
alternative fuel vehicles until further technological advancements and 
greater volumes make them less expensive to produce and purchase. The 
Alliance believes that the overall concepts and provisions for consumer 
tax incentives found in last year's energy bill conference report are 
the right approach and would benefit American consumers.
    Unfortunately, there have also been Congressional efforts in the 
past to consider amendments to the energy bill to increase CAFE 
standards. The Alliance has opposed these attempts to Congressionally 
set arbitrarily higher CAFE levels. The original CAFE program was 
designed to allow the Department of Transportation to set new standards 
by conducting rule-makings that consider the ``maximum feasible fuel 
economy level'' that is achievable for a given model year.
    Two years ago, the National Highway Traffic Safety Administration 
(NHTSA) used this authority to set higher standards for the 2005-07 
model year light trucks. The NHTSA rule increased the standards by 1.5 
mpg over that period--to 22.2 mpg by 2007--the largest increase in 20 
years. NHTSA set these standards after considering key elements such as 
technological feasibility, cost, safety, emissions controls, consumer 
choice, the need of the Nation to conserve energy, and the effect on 
American jobs. While the standard for 2007 may not be viewed by some as 
sufficiently ``aggressive,'' NHTSA stated in the preamble to the final 
rule that it will pose a ``substantial challenge'' to at least one of 
our member companies.
    In its rule-making, NHTSA noted that advanced fuel saving 
technologies, such as hybrid electrics and advanced clean diesels, 
could substantially enhance the average fuel economy of the American 
light vehicle fleet as even more advanced technologies, such as fuel 
cells, are being developed.
    Where CAFE levels are set is critical to automakers for a variety 
of reasons. First, there are competitive implications for some 
manufacturers, relative to others, due solely to the mix of vehicles 
that are offered and sold. The current system emphasizes these 
disparate impacts by more severely challenging manufacturers that 
already provide vehicles in the heavier and larger segments of the 
vehicle fleet, such as full-size SUVs and pick-up trucks. While there 
are approaches to restructuring the CAFE program that can help address 
these concerns, the details of implementing them are critical and must 
be fully explored to avoid creating a system with new competitive 
consequences. The Administration is currently examining a number of 
CAFE restructuring proposals through rule-making and the Alliance and 
its Member companies are actively involved in the process.
    Second, the level of CAFE standards can result in unintended 
consequences, such as the adverse safety consequences of pushing 
manufacturers to make vehicles lighter and smaller. The NAS report 
noted the increased fatalities that are attributable to the impacts of 
downweighting and downsizing due to past CAFE standards and urged care 
in setting future levels to avoid aggravating this effect. The report 
said, ``If an increase in fuel economy is effected by a system that 
encourages either downweighting or the production and sale of more 
small cars, some additional traffic fatalities would be expected. For 
fuel economy regulations not to have an adverse impact on safety, they 
must be implemented using increased fuel efficiency technology.''
    Third, the emphasis of customers on improving the safety of the 
vehicles they purchase results in automakers adding more equipment to 
provide safety in collisions. Safety improvements continuously add 
weight to vehicles, and the heavier the vehicle, the more energy it 
takes to move it down the road, resulting in a decrease in fuel 
economy. This is a classic dilemma and reflects the tradeoffs that 
automakers face constantly in designing vehicles to achieve 
improvements in safety, fuel efficiency and emission performance.
    Finally, for consumers sensitive to cost, fuel economy gains must 
be compared to the increased investment costs and risks in their new 
vehicle purchase decision. Assuming a fuel cost of $2 per gallon, a 20 
percent increase in vehicle fuel efficiency offers an annual fuel 
savings of under $150. This cost must be weighed against the 
convenience, utility and performance of the alternative. As automakers, 
we are keenly aware of the importance of consumer choices and the 
challenges we have to deliver new technologies that meet their 
affordability, performance and utility needs.
    So where is the industry headed:

Fuel Cell Vehicles
    A promising long-term technology offers breakthrough fuel economy 
improvements, zero emissions and a shift away from petroleum-based 
fuels. From a vehicle perspective, hydrogen-fueled fuel cells offer the 
biggest improvement in efficiency and emissions but at high cost and 
with major infrastructure challenges. On-board hydrogen storage also 
presents some difficulty. The gasoline infrastructure is well 
established, but gasoline reformers are the least developed and the 
most costly of reformer technology.
    A robust fuel cell commercialization plan incorporates 
breakthroughs and complementary research in stationary power units. A 
primary challenge in the introduction of fuel cells into America's 
light vehicle passenger and truck fleets are the packaging restrictions 
of size and weight.

Hybrid-Electric Vehicles
    Hybrid-electric vehicles offer significant improvements in fuel 
economy and in tailpipe emissions. These products capture power through 
regenerative braking. When decelerating an internal combustion vehicle, 
the brakes convert the vehicle's kinetic energy into heat, which is 
lost to the air. By contrast, a decelerating hybrid vehicle can convert 
kinetic energy into stored energy that can be reused during the next 
acceleration. Hybrid vehicles do not require additional investment in 
fuel infrastructure which helps reflect their potential for near-term 
acceptance.

Advanced Lean Burn Technology Vehicles
    Vehicles that are powered by advanced lean burn technology such as 
clean, direct injection diesels offer greater fuel economy and better 
performance. The auto industry is working now to introduce technologies 
that will allow diesel automobiles to meet the EPA's Tier 2 emissions 
regulations. These types of vehicles, widespread in Europe today, could 
provide fuel economy gains in excess of 25 percent above comparable 
conventional vehicles.

Internal Combustion Engine powered by liquid hydrogen
    Another promising and enabling technology towards a hydrogen 
economy are hydrogen-powered ICEs. The concept of using hydrogen in 
internal combustion engines offers several advantages: near zero 
emissions, maintaining the utility, flexibility, and driving dynamic of 
today's automobile and helping to promote a hydrogen fueling 
infrastructure.

Battery Electric Vehicles
    Vehicles that utilize stored energy from ``plug-in'' rechargeable 
batteries offer zero emissions from the vehicle. However, battery 
electric vehicles continue to face weight, energy density, and cost 
challenges that limit their customer range and affordability.
    Beyond gasoline, the auto industry is working with a variety of 
suppliers of alternative fuels. In fact, the industry already offers 
more than 25 vehicles powered by alternative fuels. Approximately three 
million of these vehicles are on the road today and more are coming. 
Today, we find vehicles that use:

          Natural gas, which reduces carbon monoxide emissions;

          Ethanol, a renewable fuel domestically produced with 
        the longer term potential to substantially reduce greenhouse 
        gases;

          Liquefied petroleum gas (propane), the most prevalent 
        of the alternative fuels, which reduces VOC emissions; and

          For the future, liquid hydrogen, which has the 
        potential to emit nearly zero pollutants depending on 
        feedstock.

    One of the key hurdles to overcome in commercializing alternative 
fuel vehicles is the lack of fueling infrastructure. For nearly a 
century, infrastructure has focused primarily on gasoline and diesel 
products. Infrastructure and fuel incentives will help the distributors 
overcome the costs to establish the alternative fuel outlets and 
support distributors during initial lower sales volumes as the number 
of alternative fuel vehicles increases.
    As you can tell, the automobile companies are constantly competing 
for the next breakthrough innovations. All manufacturers have advanced 
technology programs to improve vehicle fuel efficiency, lower emissions 
and increase motor vehicle safety. These are not ``pie in the sky'' 
concepts on a drawing board. In fact, many companies have advanced 
technology vehicles in the marketplace right now or have announced 
production plans for the near future. That is why now is the perfect 
time for the enactment of consumer tax credits to help spur the 
purchase of these new vehicles which years of research and development 
have made possible.
    Thank you.

                    Biography for Michael J. Stanton

    Michael J. Stanton, Vice President, Government Affairs, is 
responsible for implementing and coordinating the Alliance of 
Automobile Manufacturers (Alliance) and its members' programs to assure 
that their views on federal issues are appropriately communicated to 
Members of Congress and their staffs, executive departments and federal 
agencies and other associations and organizations. He is also 
responsible for international relations to ensure that U.S. automakers 
interests are represented throughout the world.
    Mr. Stanton was named to his present position in 1999 when the 
Alliance was formed. Prior to the Alliance, he served as Director of 
Federal Relations for eight years with the American Automobile 
Manufacturers Association (AAMA). Before joining AAMA, Mr. Stanton was 
responsible for federal and State legislation for the Motor Vehicle 
Manufacturers Association.
    Mr. Stanton has more than 25 years experience representing auto 
manufacturers before federal and State legislatures.
    Mr. Stanton spent two years as an officer in the Navy, serving 
aboard the U.S.S. America during the Vietnam War. A native of 
Washington, D.C., Mr. Stanton holds a Master's Degree from George 
Washington University.

    Chairman Boehlert. Thank you very much, Mr. Stanton.
    Dr. Greene.

     STATEMENT OF DR. DAVID L. GREENE, OAK RIDGE NATIONAL 
   LABORATORY, CENTER FOR TRANSPORTATION ANALYSIS, NATIONAL 
                 TRANSPORTATION RESEARCH CENTER

    Dr. Greene. Thank you, Mr. Chairman. Good afternoon, and 
good afternoon to Members and staff and guests here.
    I am pleased to be here, and I hope I can help advance the 
discussion.
    Could I have the first slide, please?
    [Slide.]
    I have been asked three questions that pertain to policy.
    The first question, essentially, is what are the policy 
options and what are their pluses and minuses. I have dealt 
with this, or tried to, at some length in my testimony. I will 
just try to hit some high points here.
    The second question is directly aimed at whether or not the 
government can encourage adoption of fuel-efficient 
technologies without leading manufacturers to make vehicles 
less safe. My simple answer to that is yes, but I will 
elaborate on that in a moment.
    And can the government encourage the adoption of 
technologies to improve fuel economy without significant 
negative impacts on manufacturers? And this is more 
complicated, but I think things can be done to improve the 
current system, let me say that.
    Next, please.
    [Slide.]
    Well, there are lots of standards that can be used, and 
there are lots of policies that can be used to encourage fuel 
economy improvement. And countries--almost every developed 
country around the world has some form of fuel economy 
standards, and almost all of them are different. We have the 
CAFE standards. Japan has weight-based standards. China is 
adopting weight-based standards. The European Union has 
comprehensive voluntary standards, which has some advantages 
for them. My bottom line here is I think there are many ways to 
do this and to do it effectively. There are some pluses and 
minuses.
    For example, I think the one criticism of the CAFE 
standards that stands up to analysis is that they did have 
differential competitive impacts, which were more onerous for 
the Big Three U.S. manufacturers to meet than for foreign 
manufacturers. On the other hand, the situation in the auto 
market has changed considerably. The largest manufacturers now 
are much more supplying vehicles across the board, as compared 
with back in 1975 when the foreign manufacturers were highly 
specialized in small vehicles. So these differential impacts 
will be inherently smaller today than they were back then, and 
there are further ways to mitigate them by having class-based 
standards or attribute-based standards.
    The chief problem I see with the CAFE standards is that 
once you meet the standards, then you stop. There is not a 
continuing incentive to improve fuel economy to add 
technologies as they come along. This kind of problem can be 
addressed by market-based incentives, such as feebate systems, 
which consist of a fee charged for vehicles that are below a 
pivot point or a certain fuel economy level and a rebate or 
incentive that are given to vehicles above that level. Pivot 
points can be chosen, such there is one for the entire 
marketplace, one for passenger cars, one for light trucks, or 
perhaps many classes of vehicles. This provides ongoing 
incentives to continue to adopt fuel economy technology in 
order to avoid a fee or gain a rebate.
    Other market-based approaches include gasoline taxes, and I 
would like to say that our National Research Council report, 
once again, recommended higher fuel taxes. I think that is 
still a good idea. It may be unpopular, but I think it is 
incumbent on people like myself and like my colleague, Dr. 
Portney, to recommend such things when we get the opportunity.
    Next, please.
    [Slide.]
    I would like to spend a moment trying to elaborate on the 
point that the Chairman made earlier that there is market 
failure in the market for fuel economy and to see if I can help 
us understand what the nature of that is.
    What matters to the consumer of an automobile is not the 
total value of fuel savings that fuel-efficient technology will 
provide, nor is it solely the price increase that will come 
about when these technologies are added to the vehicle. Rather, 
it is the difference between the two, the net value: the fuel 
savings minus the price increase. I show here on the higher 
graph data from our own National Research Council study. The 
dotted red line is the cost of improving the fuel economy using 
the technologies we described in the study of a typical 28-
mile-per-gallon passenger car. The solid black line is the 
discounted present value of fuel savings that would be realized 
over the life of the car. I see some people are already eyes 
glazing over with that kind of terminology. But essentially, 
that is the value of these fuel savings to a perfectly rational 
economic consumer who calculates out exactly what he is going 
to do and how much he is going to save over the life of the 
car. By the way, the evidence is there probably are no such 
consumers out there.
    But in any case, what is of interest to the consumer is the 
difference between the two, which is that lower curve, which 
doesn't vary by more than plus or minus $200 or $250 over 
approximately 50 percent increase in fuel economy. I think this 
explains, given the uncertainty in the consumer's mind about 
what those fuel economy numbers on the car really mean and what 
the future price of gasoline is going to be. It is no surprise 
that this is not an important issue to the typical car buyer. 
This is way down the list of things that are of importance.
    On the other hand, to achieve this kind of dramatic 
improvement in fuel economy, manufacturers have to completely 
redesign their vehicles, invest billions of dollars in 
retooling, and it is a very risky, expensive proposition for 
something that their customers are barely interested in. This, 
I think, is the principle reason why fuel economy technologies 
today do not get incorporated into vehicles for the purpose of 
improving fuel economy.
    Now many in the industry believe that consumers only count 
the first three years of fuel savings and not the fuel savings 
over the life of the car. The lower graph shows that same net 
value curve if you only count the first three years of fuel 
savings, and obviously at that point, there is nothing worth 
doing. So that explains, if that is your perspective, on why 
you would not improve the fuel economy of vehicles.
    Next slide, please.
    [Slide.]
    Turning to this question of whether the government can 
encourage fuel-efficient technology without harming safety, 
first, let me say the question of fuel economy and weight 
reduction is greatly exaggerated. According to data published 
by the Environmental Protection Agency, the average light-duty 
vehicle, combined passenger car and light truck fleet vehicles, 
sold in 2004 weighed six pounds more than the average light-
duty vehicles sold in 1975. Yet it got 58 percent, almost 60 
percent better fuel economy. So we have improved the fuel 
economy of vehicles over 1975 levels by 60 percent. The 
vehicles weigh six pounds more than they did back then. The 
issue that weight reduction is the chief method of improving 
fuel economy is, using Mark Twain's phrase, greatly 
exaggerated.
    Now there is still this issue of whether they are 
downsizing weight reduction, which did occur in the early years 
following the passage of the Fuel Economy Standards in 1975 and 
the price shocks in '73 and '74, whether that was harmful to 
safety. At the time the National Research Council report was 
written, there were no scientific studies contradicting the 
prevailing view that increasing fuel economy led to smaller, 
lighter cars, which led to greater fatalities. There are now 
four scientific studies that have been published, which do 
contradict that view, and these studies indicate that, one, 
there is no link between fuel economy and traffic safety, and 
two, that, in the case of the studies done by DRI and supported 
by Honda of America, it indicates that increasing the weight of 
vehicles while maintaining size would be--actually be harmful 
to safety. Decreasing the weight of vehicles somewhat while 
maintaining the size of vehicles would be beneficial to safety.
    So now I think we have something we didn't have at the time 
of the NRC report, which is scientific evidence that this link 
is not what we thought it was and that we can proceed to 
improve fuel economy without harming safety.
    Next slide, please.
    [Slide.]
    This is just a slide which illustrates the point. The upper 
line shows total highway traffic fatalities, which, by and 
large, decreased over time, while fuel economy was improving. 
Your eyes don't deceive you: fuel economy increased, traffic 
fatalities went down. And the issue is a lot more complicated 
than that, but I think that does summarize, reasonably well, 
what was achieved.
    Final slide, please.
    [Slide.]
    With respect to differential impacts, there are many things 
that can cause differential impacts on firms from a fuel 
economy standard or any kind of market-based fuel economy 
policy as well. The one that I think is most salient is the 
product mix, which does differ, to some extent, across 
manufacturers and will be an issue. There are ways to mitigate 
this with class-based standards, attribute-based standards, and 
adding flexibility features, like tradable credits that we 
recommended in the National Research Council report.
    Final slide, please.
    [Slide.]
    I think all I wanted to say from this slide is to reiterate 
what Dr. Portney said. That is that it is extremely important 
to allow adequate lead time for design changes so that 
manufacturers have time to do the proper engineering and the 
resources to do the proper engineering and to turn over their 
productive capital in an orderly fashion. It is also important 
to set the standards at levels that are close to being cost-
effective from the point of view of fuel savings so that they 
do not create excessive market distortions.
    [Slide.]
    With that, let me go to the last slide and just say thank 
you very much, and I will be happy to answer any questions.
    [The prepared statement of Dr. Greene follows:]
                 Prepared Statement of David L. Greene

1.  WHAT ARE THE POLICY OPTIONS FOR ENCOURAGING THE ADOPTION OF FUEL 
EFFICIENT TECHNOLOGIES AND THEIR ADVANTAGES AND DISADVANTAGES?

    There are many ways to structure policies to achieve significant 
increases in fuel economy effectively and efficiently. I will focus on 
five below. It is possible to create policies that are reasonably 
effective, efficient, and fair. Our own experience with our CAFE 
standards and difficulties we have had updating the CAFE law indicates 
that we should also prefer policies that provide a continuing incentive 
to improve fuel economy.
    Following the oil crises of the 1970s, nearly every developed 
economy in the world adopted fuel economy standards in some form (IEA, 
1984; 1991). Though the forms and means of implementing standards 
varied, and although fuel economy standards have been criticized on a 
variety of grounds, all these standards were effective in raising fuel 
economy levels. Fuel economy standards contributed to curbing the 
growth of world oil demand in the 1980s and, in combination with the 
market response to higher oil prices led to the OPEC cartel's loss of 
control over world oil markets in 1986. We do know how to reduce 
dependence on petroleum and we have done so effectively in the past. 
The combination of higher oil prices and policies aimed at increasing 
energy efficiency led to almost 15 years of low oil prices (Figure 1). 
Unfortunately, after these efforts were successful and oil prices 
crashed in 1986, we stopped trying. With OPEC nations holding more than 
two thirds of the world's proven oil reserves and more than half of the 
world's ultimate conventional oil resources, and with growing demand 
for oil for transportation in developed and developing economies, it 
was only a matter of time before they regained control of world oil 
markets.
    Potentially effective fuel economy policies range from standards to 
market-based measures. Developed economies that have recently tightened 
their fuel economy or carbon emission standards for motor vehicles 
include Japan, the entire European Union (EU) and Australia. China has 
also recently adopted fuel economy standards with the aim of curbing 
their rapidly growing demand for oil (An and Sauer, 2004). Each country 
has a different form of standard, and each one is different from our 
own Corporate Average Fuel Economy (CAFE) Standards. Japan and China 
have mandatory standards that vary (in different ways) across vehicle 
weight classes. The EU and Australia negotiated voluntary standards 
with automobile manufacturers collectively that are based on the sales-
weighted average emissions of carbon dioxide per vehicle kilometer.



CAFE OR UNIFORM PERCENTAGE INCREASES (UPI)

    Our CAFE standards were effective in raising passenger car and 
light truck fuel economy and curbing the growth of petroleum demand. 
They have been criticized on many grounds, but the one criticism that 
stands up to analysis is that they created a more severe burden for the 
``big three'' domestic manufacturers than for much of their 
competition. Differential competitive impacts are inherent in the CAFE 
system whenever manufacturers specialize in different market segments 
because it requires each manufacturer to meet the same MPG target, 
regardless of its product mix. Manufacturers emphasizing larger light 
trucks and passenger cars will clearly have a more difficult task than 
those concentrating in smaller vehicle market segments. This problem 
was ameliorated but not eliminated in the CAFE law by defining separate 
targets for passenger cars and light trucks. Another provision to 
increase flexibility allows manufacturers to average their fuel economy 
numbers over a six year moving window (three years forward, three 
back). The economic efficiency of the CAFE law could be improved 
further by allowing manufacturers to trade fuel economy credits as 
recommended by the National Research Council (NRC, 2002) CAFE report. 
Still, these trades will result in income transfers among firms unless 
credits are initially allocated to firms in a way that compensates in 
advance for such transfers. That might be difficult to do because it 
effectively amounts to giving money to some firms and not others.
    UPI have been proposed as an alternative to CAFE. This system 
requires each manufacturer to achieve not the same MPG level, but the 
same percentage increase in MPG. The UPI system essentially produces a 
mirror image of the differential competitive impacts of CAFE (Greene 
and Hopson, 2004; Plotkin et al., 2002), putting smaller vehicle 
manufacturers and manufacturers that have already adopted advanced fuel 
economy technologies at a disadvantage. A UPI system would also 
discourage manufacturers from adopting more fuel economy technology 
than was absolutely required, since exceeding the standard might later 
lead to having to meet a more difficult standard. In addition, while 
CAFE can discourage manufacturers from abandoning smaller vehicle 
production, UPI can discourage small vehicle manufacturers from moving 
into larger vehicle markets.

ATTRIBUTE-BASED STANDARDS

    Attribute-based standards set fuel economy standards based on 
measurable vehicle attributes, such as weight or size. This can help 
reduce, but probably cannot eliminate (see, e.g., Plotkin et al., 2002, 
Ch. 6), the competitive impacts of CAFE or UPI style fuel economy 
standards. Japan has had successful weight-class fuel economy standards 
for decades, and China has just adopted a weight-based system. Weight-
based standards take account of the product mix but do not recognize 
differences in manufacturers' current use of fuel economy technology. 
They do not recognize the possibility that different manufacturers may 
be serving customers with different preferences for fuel economy. For 
these reasons, some degree of differential competitive impacts will 
occur even under a weight-based system. Finally, weight-based 
standards, depending on how there are designed, may or may not provide 
an incentive for substituting advanced lightweight materials in 
vehicles as a way of increasing fuel economy.
    Size-based standards are a promising but largely untested 
alternative to weight-based standards. Size-based standards could be 
based on dimensions such as wheelbase times track width, or interior 
volume. Such standards would have the advantage of preserving the 
option of reducing vehicle weight to increase fuel economy without 
sacrificing vehicle size. There is some recent evidence to indicate 
that moderate reductions in vehicle weight while maintaining basic 
vehicle dimensions would be beneficial to highway safety (Van Auken and 
Zellner, 2004). Because there is no experience with size-based fuel 
economy standards, the engineering and design implications of such 
standards should be carefully studied before they are formulated and 
implemented.

VOLUNTARY STANDARDS

    Voluntary fuel economy standards were effective in Europe in the 
1970s and 1980s, and the current EU-ACEA carbon dioxide emissions 
standard also appears to be headed for success in meeting its 2008 
target. Canada also adopted voluntary standards, but they mirrored the 
U.S. CAFE standards which essentially guaranteed their success. 
According to economic theory, voluntary standards can be effective if 
there is a credible threat of mandatory standards. Voluntary standards 
can take any of the forms of mandatory standards.
    The EU-ACEA voluntary standards are worthy of note because they 
apply to the entire industry, leaving the determination of individual 
firms' responsibilities to negotiations among the firms. While this 
certainly has risks, it also creates the opportunity for firms to 
allocate responsibilities in an efficient and fair manner by setting 
each firm's target at the same level of marginal cost per gallon of 
fuel saved. Because compliance is achieved voluntarily, there is no 
need for transfers of income among firms. Thus, economic efficiency, 
fairness and minimal competitive impacts can all be achieved 
simultaneously. No other system can claim all three advantages.

FEEBATES

    Feebates are an entirely market-based approach. Vehicles above a 
chosen ``pivot'' level of fuel consumption (best measured as the 
inverse of fuel economy, i.e., gallons per mile or liters per 100 
kilometers) pay a fee, while those below receive a rebate (Davis et 
al., 1995). The most efficient approach is to set both fees and rebates 
at a fixed rate in terms of dollars per 0.01 gallons per mile (or 
equivalent). This provides the same economic incentive to save a gallon 
of gasoline for all vehicles (assuming equal miles of use).
    The economic response to feebates is solely a function of the rate 
and not the pivot points because the rate determines the marginal value 
of increasing fuel efficiency. The pivot points determine the transfer 
of revenues. This allows the creation of revenue-neutral feebate 
systems that pay out as much as they take in. Feebate systems can be 
designed with one pivot point or with vehicle class-specific pivot 
points. Analysis of feebate systems has shown that the transfer of 
revenues among manufacturers can be reduced significantly by a two 
pivot point system that distinguishes between cars and light trucks 
(Greene et al., 2005). The benefits of greater numbers of pivot points 
is unclear, and increasing the number of pivot points increases the 
opportunity to ``game'' the system by moving vehicles from one class to 
another to attain a more easily achieved pivot point.
    A key advantage of feebate systems is that they provide a 
continuing incentive to adopt fuel economy technologies as long as they 
remain in effect. Whereas once a CAFE target is met there is no further 
incentive to increase fuel economy, the feebate rate always offers an 
additional economic incentive to avoid a dollar of fee or gain a dollar 
of rebate. In view of the difficulty of raising CAFE standards over the 
past 20 years, this could be an extremely valuable feature in the U.S. 
political context.
    The United States currently has in place half of a feebate system 
on half of the vehicles, in the form of the gas guzzler tax. The rate 
of the gas guzzler tax is very high, and as a result, it has nearly 
eliminated gas guzzling passenger cars. Guzzler taxes or rebates alone 
cannot be as effective as a comprehensive feebate system (Greene et 
al., 2005). A gas-guzzler tax on passenger cars and not light trucks 
undoubtedly decreases the numbers of larger heavier passenger cars 
without similarly affecting light trucks. Given the current CAFE law, 
the gas-guzzler tax also produces no benefit in terms of raising 
passenger car fuel economy.

GASOLINE TAXES

    If the market for automotive fuel economy operated efficiently, 
increasing the tax on gasoline would be the most economically efficient 
way to increase fuel economy. Over the years, higher gasoline taxes 
have proven to be unpopular, but that is not an argument against their 
desirability from an economic efficiency standpoint. There are, 
however, good reasons to believe that the market for fuel economy is 
not efficient and, therefore, that standards have an important role to 
play.
    First, even nations with gasoline prices two to three times higher 
than those in the United States have felt it necessary to have fuel 
economy standards. This includes the entire EU and Japan. If the market 
for fuel economy were efficient, gasoline prices in the range of $3 to 
$5 per gallon should be sufficient to raise vehicle fuel economy. 
Still, the EU and Japan found it necessary to have fuel economy 
standards.
    Second, the net value to consumers of technology-based fuel economy 
improvements appears to be small over a wide range of fuel economy 
levels. In general, advanced fuel economy technology costs more that 
conventional technology. The benefit to consumers is therefore the 
present value of fuel saved minus the initial higher cost of the 
technology. The two graphs below show the estimated price increase and 
value of fuel savings for an average U.S. passenger car as fuel economy 
is increased from 28 to 45 miles per gallon. The data are taken from 
the 2002 NRC CAFE study. In Figure 2, the customer is assumed to count 
fuel savings over the full life of the vehicle, yet there is no more 
than a  $250 difference in net value (fuel savings minus price 
increase) over a range of zero percent to 50 percent increase in fuel 
economy. Considering the uncertainty in what the customers' true fuel 
economy number will be, what the future price of fuel will be, and what 
the consumer is likely to actually pay for higher fuel economy, it is 
no wonder that fuel economy is not high on the consumers' list of 
things to consider when buying a car. From the manufacturers' 
perspective, however, a large increase in fuel economy is a long-term, 
high-cost, high-risk decision, requiring nearly complete vehicle 
redesign and substantial retooling--all for something customers are 
essentially indifferent about.
    The second graph (Figure 3) displays the net value if consumers 
count only the first three years of fuel savings. In this case, there 
is no economic incentive for consumers to demand higher fuel economy or 
for manufacturers to supply it.
    Third, recent evidence from surveys indicates that consumers are 
indeed undervaluing fuel economy. First, survey evidence, generally 
supported by automobile manufacturers, indicates that consumers expect 
an expenditure on fuel economy technology to be paid back in fuel 
savings within 2-4 years, far less than the full lifetime of a modern 
automobile. A recent study by the University of California at Davis 
(Turrentine and Kurani, 2005) conducted in-depth interviews with 60 
households in California. Few even considered fuel economy in their 
purchase decisions. None explicitly calculated the potential value of 
fuel savings by any method. In short, there was no evidence whatsoever 
of textbook, economically rational behavior with respect to fuel 
economy.
    Despite the apparent imperfection of the market for fuel economy, 
increasing the price of gasoline would be a sound and beneficial 
policy. It would signal consumers of the importance of reducing fuel 
use, making it somewhat easier for manufacturers to sell higher fuel 
economy vehicles. It would mitigate and could eliminate the rebound 
effect, the tendency for motorists to drive a little more when higher 
fuel economy reduces the fuel cost per mile of travel. Finally, a 
higher tax on gasoline would make up for revenues that would otherwise 
be lost to the highway trust fund in the future when higher levels of 
fuel economy reduce the demand for motor fuel.




2.  CAN THE GOVERNMENT ENCOURAGE THE ADOPTION OF TECHNOLOGIES TO 
IMPROVE FUEL ECONOMY WITHOUT LEADING AUTOMAKERS TO MAKE VEHICLES LESS 
SAFE?

    The government can encourage the adoption of technologies to 
improve fuel economy without leading automakers to make vehicles less 
safe. First, there are many technologies that can be used to improve 
fuel economy that should have no impact on vehicle safety. Technologies 
such as variable valve timing and lift control, displacement on demand, 
reduced aerodynamic drag, continuously variable transmissions, and 
engine friction reduction should be independent of vehicle safety. 
Several reports have developed lists of such technologies and estimate 
their likely impacts on vehicle costs and fuel economy. The 2002 NRC 
study of the CAFE standards provides an extensive analysis of how such 
technologies could be used to cost-effectively increase passenger car 
and light truck fuel economy. Given the availability of such 
technologies, manufacturers should be able to respond to the demands of 
a higher fuel economy standard without compromising safety.
    The argument that fuel economy improvement inevitably leads to 
weight reduction which inevitably leads to increased fatalities and 
injuries is not correct. The role of weight reduction versus technology 
in achieving the fuel economy improvements of the past thirty years has 
been greatly exaggerated. Weight reduction was indeed an early strategy 
for increasing fuel economy. Vehicle weight reduction began before the 
CAFE standards went into effect, probably a response to the fuel 
shortages and higher prices caused by the first oil crisis of 1973-74. 
It continued after fuel economy standards went into effect in 1978 but 
ended in 1981. Fuel economy continued to improve through 1987 while 
weight increased. Since then, weight has increased while the average 
fuel economy of new light-duty vehicles has gradually declined, in 
large part due to the increasing market share of light trucks. 
According to data published by the Environmental Protection Agency, the 
average 2004 model year light-duty vehicle actually weighed six pounds 
more than the average light-duty vehicle sold in 1975. The average fuel 
economy of a new light-duty vehicle sold in 2004 was 58 percent higher 
than in 1975 (Figure 4). Clearly, none of this increase can be 
attributed to weight reduction since today's new light-duty vehicles 
are actually slightly heavier than their 1975 counterparts.
    It has been argued, however, that further increases in fuel economy 
standards would inevitably lead to downsized or down-weighted vehicles 
and that smaller, lighter vehicles are inherently less safe. By and 
large, this objection has focused on weight reduction as the principal 
threat to safety. Reducing vehicle mass is certainly one way, though by 
no means the only way or even the most effective way, to increase fuel 
economy.\1\ In a dissent to the 2002 NRC CAFE report, Marianne Keller 
and I pointed out that the evidence for a causal link from fuel economy 
to weight reduction to increase traffic fatalities and injuries was 
highly dubious. Since that report, our position has been strengthened 
by four scientific studies. With the support of Honda, Van Auken and 
Zellner (2002) attempted to replicate Kahane's (1997) path-breaking 
analysis of the relationship between vehicle weight and crash 
fatalities using more recent data from a somewhat different subset of 
states. They found that a reduction in the weight of passenger cars and 
light trucks of 100 pounds would not increase net highway fatalities. 
In an extension of this study in which they separately estimated the 
impacts of weight versus size (wheelbase and track width), Van Auken 
and Zellner (2003) found that reducing weight while holding vehicle 
size constant would improve safety somewhat, while increasing weight at 
constant size would be harmful to safety. Kahane (2003) has since 
published a new study using a modified methodology that contradicts the 
findings of the first Van Auken and Zellner study and concludes that 
weight reduction accompanied by size reduction would be harmful to 
safety, but Kahane's new study still does not distinguish between the 
effects of size and weight.
---------------------------------------------------------------------------
    \1\ In general, a one percent reduction in vehicle weight at 
constant performance can produce a 0.6 percent to 0.7 percent increase 
in fuel economy on the U.S. test cycle.



    In a paper forthcoming in Accident Analysis and Prevention, Wenzel 
and Ross (2005) demonstrate two key points. First, they show that, in a 
crash between vehicles, heavier vehicles may provide additional 
protection to their own occupants but this comes at the expense of the 
occupants of the vehicles with which they collide. This is important 
because it is consistent with the simple physics of elastic collisions 
which imply that increasing the weight of one vehicle in a crash is a 
zero sum game: the heavier vehicle gains safety at the expense of the 
lighter vehicle.\2\ Wenzel and Ross (2005) also show that light trucks 
with chassis-on-frame construction tend to be exceedingly aggressive in 
collisions with other vehicles and that the harm they do to other 
vehicles outweighs the benefit of their additional weight to their 
occupants. These vehicles and roll-over-prone SUVs turned out, on net, 
to be harmful to overall traffic safety.\3\
---------------------------------------------------------------------------
    \2\ These same simple laws of physics imply that a proportional 
down-weighting of both vehicles would have no effect on the outcome of 
the crash. The predictions of Kahane's 1997 analysis were also 
consistent with these simple laws, as Keller and I demonstrated in our 
dissent to the NRC 2002 report.
    \3\ The fact that heavier vehicles benefit their occupants in a 
collision at the expense of occupants of the vehicles with which they 
collide creates what economists call an externality. The implication is 
that individuals will buy heavier vehicles than they would if they 
considered the impacts on others.
---------------------------------------------------------------------------
    Perhaps the seminal study linking fuel economy, weight and safety 
was that of Crandall and Graham (1989). This study, however, was based 
on the very limited experience with significant fuel economy changes 
that was available at the time the analysis was carried out. It 
included data from 1947 to 1981, but the CAFE law was not passed until 
1975, took effect in the 1978 model year, and affected only new 
vehicles and not the entire fleet. More recently, Noland (2004) 
examined the relationship between fuel economy, fatalities and injuries 
using a time series of data for states covering the period 1975 to 
1998. Instead of regressing fatalities or injuries against vehicle 
weight, he regressed directly against fuel economy. This is significant 
because, as pointed out above, weight reduction is far from the only 
means of raising vehicle fuel economy. For example, reducing engine 
power is also beneficial to fuel economy.\4\ By using fuel economy 
instead of weight as an independent variable, Noland was able to 
reflect all the possible paths by which fuel economy improvements might 
have influenced vehicle design and thereby safety. What Noland found 
was that the relationship between fuel economy and safety was not 
stable over time. It appeared that in the 1970s fuel economy was 
positively related to (increased) traffic fatalities, but that in later 
years there was no statistically significant relationship. Indeed, 
Noland found that, unless the years 1975 to 1977 were included in the 
analysis, no statistically significant relationship could be found.
---------------------------------------------------------------------------
    \4\ A one percent reduction in horsepower, all else equal, would 
produce a 0.2 percent to 0.3 percent increase in fuel economy.
---------------------------------------------------------------------------
    At the 2005 Transportation Research Board Meetings, I presented the 
results of a statistical analysis of the relationship between national 
average passenger car and light truck fuel economy and total U.S. 
traffic fatalities for the period 1966 to 2002 (Ahmad and Greene, 2005) 
(see Figure 5). Testing a wide array of possible models and other 
contributing factors, our analysis demonstrated that the only 
statistically significant relationships between fuel economy and 
traffic fatalities indicated that increasing fuel economy was 
associated with lower traffic fatalities, not higher. For a number of 
reasons we cover in detail in the paper, we do not conclude that 
increasing fuel economy will reduce traffic fatalities. Rather we 
conclude that the aggregate national traffic fatality and fuel economy 
statistics provide no support for the hypothesis that increasing fuel 
economy led to increased traffic fatalities over the period 1966 to 
2002. While these results contradict the earlier findings of Crandall 
and Graham (1982), we believe this is because of the longer record of 
experience available to us today.
    Major improvements in light-duty vehicle fuel economy will require 
major vehicle design changes. Safety is always an issue when vehicle 
designs change. This strongly argues for insuring that manufacturers 
have sufficient time to carry out redesigns with the usual level of 
care and attention to detail. There need be no compromise in safety, 
provided that fuel economy targets are set at levels close to what can 
be achieved with approximately cost-effective technologies.




3.  CAN THE GOVERNMENT ENCOURAGE THE ADOPTION OF TECHNOLOGIES TO 
IMPROVE FUEL ECONOMY WITHOUT GIVING ANY INDIVIDUAL AUTOMAKER A 
SIGNIFICANT ADVANTAGE?

    While it is possible for the government to encourage the adoption 
of technologies to improve fuel economy without giving any individual 
automaker a significant advantage, most of the policies described above 
will be more easily complied with by some manufacturers than others. 
However, there are ways to reduce competitive impacts and improve the 
fairness of fuel economy policies.
    What makes a system fair from a competitive perspective? This 
question could be answered in many ways. I suggest the following 
definition. A fair policy is one that (1) requires each manufacturer to 
spend the same amount at the margin to reduce the fuel consumption of 
each car by one gallon per mile and (2) does not otherwise redistribute 
revenues among manufacturers.\5\ A CAFE system with tradable credits 
could satisfy the first criterion, as would other market-based 
mechanisms such as a feebate system or gasoline tax, but they could 
satisfy the second only with a complex and probably controversial 
redistribution of revenue.\6\
---------------------------------------------------------------------------
    \5\ Assuming that every car travels the same number of miles, this 
would ensure that manufacturers and consumers were spending the same 
marginal cost for each gallon of gasoline saved.
    \6\ There is also good reason to doubt that the market in tradable 
credits would be an open and competitive one. In all likelihood, there 
would be two to three large buyers facing two to three large sellers, 
an oligopsony facing an oligopoly. Rubin et al., however, have shown 
that even in this situation most of the potential efficiency benefits 
of credit trading would probably be realized.
---------------------------------------------------------------------------
    In my opinion, the EU-ACEA voluntary fuel economy agreement 
probably comes closest to meeting both criteria. It appears to me that 
manufacturers have allocated the responsibility for meeting the 
industry target to individual firms in such a way as to equalize the 
marginal costs per liters/100 kilometers, and there appear to be no 
inter-firm transfer payments. However, this is no more than my opinion 
since the firms have not disclosed the details of their agreement.
    Four main factors give different firms different capabilities to 
increase fleet average fuel economy:

        1.  The technological capability of the firm

        2.  The firm's current adoption of fuel economy technology in 
        its products

        3.  The preferences of the customers served by the firm

        4.  The firm's product mix

    There are differences in the ability of firms to use specific fuel 
economy technologies, but in general, technology is a fungible 
commodity in the automotive market place. Firms can buy technology from 
suppliers and from other firms, generally, but not always at 
competitive prices. Since being technically capable is essential to 
being able to compete in today's marketplace, it is probably best not 
to attempt to address this issue in creating a fair fuel economy 
policy.
    Some firms make greater use of technologies to increase fuel 
economy than others. This has special relevance if fuel economy metrics 
such as the uniform percentage increase are being considered. A UPI 
system would make achieving fuel economy goals more costly for those 
firms currently making the greatest use of technologies to increase 
fuel economy. Their marginal costs per gallon saved would therefore be 
higher than those of firms using less fuel economy technology. Firms 
may make greater use of fuel economy technologies as a matter of 
corporate policy or because they serve a segment of the market that 
places a higher value on fuel economy. In the latter case, a CAFE 
system would disadvantage manufacturers who served consumers less 
interested in fuel economy. There appears to be little publicly 
available research on this subject.
    Finally, fuel economy policies can have different impacts on firms 
that specialize in large or small, high or low power vehicles. Although 
there has been substantial convergence over time in the product 
offerings of major manufacturers, differences still remain. Systems 
like CAFE, UPI, and feebates will have differential impacts on 
manufacturers. Setting individual targets for vehicle types (e.g., 
passenger cars vs. trucks) and size classes can mitigate these 
differential impacts, but at the cost of creating opportunities for 
``gaming'' by shifting vehicles from one class to another to acquire a 
less stringent standard. A reasonable but not perfect balance can be 
achieved with these systems. Steps that can be taken to minimize 
differential competitive impacts are listed below.

        1.  Give adequate lead time

                a.  Time to first possible redesign

                b.  Time for orderly redesign and retooling

        2.  Allow for differences in the mix of vehicles sold

                a.  Vehicle classes

                b.  Attribute-based formulas

        3.  Build in flexibility

                a.  Carry-forward, carry-back windows

                b.  Credit trading with caps on credit prices

                c.  Administrative review

        4.  Insure that goals are feasible with approximately cost-
        effective, fungible technologies

                a.  Technical analysis

                b.  Review other regulations for compatibility

    As has been noted above, it is possible but not certain that a 
voluntary agreement that allows manufacturers to allocate fuel economy 
improvement responsibilities can achieve equal marginal costs of 
compliance and no revenue transfers among firms. With a feebate system 
or tradable credit CAFE system, it is also possible to allocate initial 
credits in such a way as to mitigate the differential financial impacts 
that would otherwise occur. Such allocations are likely to be 
controversial, however, since they will amount to substantial payments 
to some firms and not others.

REFERENCES

Ahmad, S. and D.L. Greene. 2005. ``The Effect of Fuel Economy on 
        Automobile Safety: A Re-examination.'' TRB05-1336, presented at 
        the 84th Annual Meetings of the Transportation Research Board, 
        Washington, DC, January.
An, F. and A. Sauer. 2004. Comparison of Passenger Vehicle Fuel Economy 
        and Greenhouse Gas Emission Standards Around the World, The Pew 
        Center on Global Climate Change, Arlington, Virginia. Available 
        at http://www.pewclimate.org/global-warming-in-depth/all--
        reports/fuel-economy/index.cfjm
Crandall, R.W. and J.D. Graham. 1989. ``The Effect of Fuel Economy 
        Standards on Automobile Safety,'' Journal of Law and Economics, 
        Vol. 32, pp. 97-118.
Davis, W.B., M.D. Levine, K. Train and K.G. Duleep. 1995. Effects of 
        Feebates on Vehicle Fuel Economy, Carbon Dioxide Emissions, and 
        Consumer Surplus. DOE/PO-0031, Office of Policy, U.S. 
        Department of Energy, Washington, DC, February.
Greene, D.L. and J.L. Hopson. 2004. ``Analysis of Alternative Forms of 
        Fuel Economy Standards for the United States,'' Transportation 
        Research Record 1842, Paper No. 03-3945, Transportation 
        Research Board, Washington, DC.
Greene, D.L., P.D. Patterson, M. Singh and J. Li. 2005. ``Feebates, 
        Rebates and Gas Guzzler Taxes: A Study of Incentives for 
        Increased Fuel Economy,'' Energy Policy, 33:757-775.
Hellman, K.H. and R.M. Heavenrich. 2004. Light-Duty Automotive 
        Technology and Fuel Economy Trends 1975 Through 2004. EPA420-R-
        04-001, Office of Transportation and Air Quality, U.S. 
        Environmental Protection Agency, Ann Arbor, Michigan.
(IEA) International Energy Agency. 1991. Fuel Efficiency of Passenger 
        Cars. Organisation for Economic Cooperation and Development 
        (OECD), Paris.
(IEA) International Energy Agency. 1984. Fuel Efficiency of Passenger 
        Cars. Organisation for Economic Cooperation and Development 
        (OECD), Paris.
Kahane, C. 1997. Relationships between Vehicle Size and Fatality Risk 
        in Model Year 1985-93 Passenger Cars and Light Trucks. DOT HS 
        808 570, National Highway Traffic Safety Administration, U.S. 
        Department of Transportation, Washington, DC.
Kahane, C.J. 2003. Vehicle Weight, Fatality Risk and Crash 
        Compatibility of Model Year 1991-99 Passenger Cars and Light 
        Trucks. DOT HS 809 662, National Highway Traffic Safety 
        Administration, U.S. Department of Transportation, Washington, 
        DC.
(NRC) National Research Council. 2002. Effectiveness and Impact of 
        Corporate Average Fuel Economy (CAFE) Standards. Committee on 
        the Effectiveness and Impact of Corporate Average Fuel Economy 
        (CAFE) Standards, National Academy Press, Washington, DC.
Noland, R. 2004. ``Motor Vehicle Fuel Efficiency and Traffic 
        Fatalities,'' The Energy Journal 25, No.4:1-22.
Plotkin, S., D. Greene, K.G. Duleep. 2002. Examining the Potential for 
        Voluntary Fuel Economy Standards in the United States and 
        Canada. ANL/ESD/02-5, Argonne National Laboratory, Argonne, 
        Illinois.
Rubin, J., P. Leiby, D. Greene. 2005. ``Analysis of Tradable Corporate 
        Average Fuel Economy Credit Systems.'' Presented at the 84th 
        Annual Transportation Research Board Meeting, Washington, DC, 
        January 9-13.
Turrentine, T.S. and K. Kurani. 2005. ``Automotive Fuel Economy in the 
        Purchase and Use Decisions of Households,'' Presented at the 
        84th Annual Meeting of the Transportation Research Board, 
        Washington, DC, January.
Van Auken, R.M. and J.W. Zellner. 2004. A Review of the Results in the 
        1997 Kahane, 2002 DRI, 2003 DRI, and 2003 Kahane Reports on the 
        Effects of Passenger Car and Light Truck Weight and Size on 
        Fatality Risk. DRI-TR-04-02, Dynamic Research, Inc., Torrance, 
        California, March.
Van Auken, R.M., J.W. Zellner. 2003. A Further Assessment of the 
        Effects of Vehicle Weight and Size Parameters on Fatality Risk 
        in Model Year 1985-98 Passenger Cars and 1985-97 Light Trucks. 
        DRI-TR-03-01, Dynamic Research, Inc., Torrance, California, 
        January.
Van Auken, R.M. and J.W. Zellner. 2002. An Assessment of the Effects of 
        Vehicle Weight on Fatality Risk in Model Year 1985-98 Passenger 
        Cars and 1985-97 Light Trucks. DRI-TR-02-02, Dynamic Research, 
        Inc., Torrance, California, February.
Weiss, M.A., et al. 2000. On the Road in 2020. MIT Energy Laboratory 
        Report MIT EL 00-003, Massachusetts Institute of Technology, 
        Cambridge, Massachusetts.
Wenzel, T.P. and M. Ross. 2005. ``The Effects of Vehicle Model and 
        Driver Behavior on Risk,'' accepted for publication and 
        forthcoming, Accident Analysis and Prevention.

                     Biography for David L. Greene

    A Corporate Fellow of Oak Ridge National Laboratory (ORNL), David 
Greene has spent 25 years researching transportation energy and 
environmental policy issues. Dr. Greene received a B.A. degree from 
Columbia University in 1971, an M.A. from the University of Oregon in 
1973, and a Ph.D. in Geography and Environmental Engineering from The 
Johns Hopkins University in 1978. After Joining ORNL in 1977, he 
founded the Transportation Energy Group in 1980 and later established 
the Transportation Research Section in 1987. Dr. Greene spent 1988-89 
in Washington, DC, as a Senior Research Analyst in the Office of 
Domestic and International Energy Policy, U.S. Department of Energy 
(DOE). He has published more than one hundred seventy-five articles in 
professional journals, contributions to books and technical reports, 
and has authored or edited three books (Transportation and Energy, 
Transportation and Global Climate Change, and The Full Costs and 
Benefits of Transportation). Dr. Greene served as the first Editor-in-
Chief of the Journal of Transportation and Statistics, and currently 
serves on the editorial boards of Transportation Research D, Energy 
Policy, Transportation Quarterly, and the Journal of Transportation and 
Statistics. Dr. Greene has been active in the Transportation Research 
Board (TRB) and National Research Council (NRC) for over 25 years, 
serving on several standing and ad hoc committees dealing with energy 
and environmental issues and research needs. He is past Chairman and 
member emeritus of the TRB's Energy Committee, past Chair of the 
Section on Environmental and Energy Concerns and a recipient of the 
TRB's Pyke Johnson Award. In recognition of his service to the National 
Academy of Science and National Research Council, Dr. Greene has been 
designated a lifetime National Associate of the National Academies.




                               Discussion

    Chairman Boehlert. Thank you very much. And thank all of 
you for your outstanding testimony.
    Let us address something right off the bat that I think is 
very important. We have all been through this drill before. We 
know the arguments pro and con. I am going to make a statement 
and ask each of the witnesses if they agree or disagree with 
this statement. And the statement is this: the only way to 
increase CAFE standards is to make vehicles lighter and 
therefore less safe. Do you agree or disagree with that 
statement?
    Mr. Reilly.
    Mr. Reilly. You mean the only way to improve fuel economy, 
right?
    Chairman Boehlert. Exactly.
    Mr. Reilly. Right. No, I disagree with that.
    Chairman Boehlert. Dr. Duleep.
    Mr. Duleep. I disagree.
    Chairman Boehlert. Mr. Stanton.
    Mr. Stanton. I am confused. Could you tell me one more 
time?
    Chairman Boehlert. All right. The only way to increase fuel 
efficiency, using increased CAFE standards, is to make vehicles 
lighter and therefore less safe.
    Mr. Stanton. Disagree.
    Chairman Boehlert. Thank you.
    Dr. Greene.
    Dr. Greene. Disagree.
    Chairman Boehlert. Thank you very much.
    All right. Mr. Portney and--Dr. Portney and Mr. Duleep, you 
both state the percentages by which fuel economy could safely 
be improved by deploying a number of technologies ranging from 
more efficient transmissions to diesel and hybrid engines, and 
incidentally, try to buy a hybrid today, and they will tell you 
to stand in line. But presumably, those are percentages by 
which an individual model, or even a class of vehicles, could 
be improved. Tell me how those figures would translate into 
fleet-wide averages. By how much would it be possible for 
Congress, should it choose to do so, raise the CAFE standards, 
and in what time frame?
    Dr. Portney.
    Mr. Portney. I will let Mr. Duleep go first.
    Mr. Duleep. Mr. Chairman, the key assumption would be what 
happens with the consumer demand. In other words, are consumers 
buying the same kinds of cars today and in 2015 and how--what 
would you assume on that? And if you make the assumption that 
people buy the same mix of vehicles and the same kind of 
horsepower and the same features, then I believe that, just 
with conventional technology on cars, you can get up to about 
32 or 33 miles per gallon with just conventional, no hybrids or 
diesels, and for the light trucks, you would get up in the 
neighborhood of 231/2 or 24 miles per gallon.
    Unfortunately, as I mentioned, that is--people are buying 
more and more attributes. That is they want four-wheel-drive, 
and they want cars that ride high and more cup holders and a 
bigger stereo and so on. And so that is going to take away from 
these numbers. And clearly, I would expect that about half of 
the improvement would go away, and perhaps even more. It might 
go away and consumers are just buying more vehicle. If you add 
in, say, the diesel and hybrid, with reasonable market 
penetrations, like the kinds that Dr. Greene computed, which is 
about 20 percent of the market, then they can do another two or 
three miles per gallon.
    So some number in the neighborhood of 35 or 36 miles per 
gallon for cars and some number like 26 or 27 miles per gallon 
may be possible. But again, the backsliding issue is, like, a 
major one.
    Chairman Boehlert. In using existing technology?
    Mr. Duleep. No, sir; the--this would use hybrid and diesel, 
perhaps diesels for the trucks and----
    Chairman Boehlert. That is existing technology, right?
    Mr. Duleep. That is all--yeah.
    Chairman Boehlert. Dr. Portney.
    Mr. Portney. Well, I am going to espouse an unpopular view. 
I think several of my colleagues on the panel have disagreed 
with it, and I realize it is a particularly difficult view for 
those of you in Congress. But I want to say that there is a 
problem with using CAFE standards as a way to improve fuel 
economy in contrast to increasing, say, the federal excise tax 
on gasoline. And it is important for everybody to understand 
this distinction. If I have a car that gets 50 miles per 
gallon, but I drive that car 50,000 miles per year, I use more 
gasoline than if I have a car that gets 10,000--or 10 miles per 
gallon that I only drive 5,000 miles per year.
    So it is not just the fuel economy of the car, it is also 
the number of vehicle miles traveled that the--that determine 
how much gasoline we use, and therefore how much we are 
contributing to the greenhouse gas burden in the atmosphere or 
how insecure our energy supply is becoming. And so, while no 
one likes to vote for tax increases, I mean, you need to keep 
in mind that just requiring that cars be more fuel-efficient 
only gets at part of this. And when cars become more fuel 
efficient, it becomes cheaper to drive each mile, so you lose a 
little bit, because people cheat and drive more miles, because 
they have more fuel-efficient cars.
    Now I notice you shaking your head----
    Chairman Boehlert. Well, no, that would be the subject of 
considerable debate, and I--you know, a good, healthy, honest 
debate----
    Mr. Portney. Well, and----
    Chairman Boehlert.--because, you know, I think most people 
just don't go out, like we used to when I was a kid, for a 
Sunday drive. People drive from their home to their place of 
work, or if they have a limited time off home to recreate 
someplace, I don't think people just go out and drive a lot 
depending upon the price of gasoline.
    So we--I mean, the desire is to make the automobiles more 
fuel-efficient. That is to the advantage of consumers. That is 
in our national security interests.
    And let me go to Mr. Stanton. You know, I watched the Super 
Bowl, and I must confess, a lot of people did. I will tell you, 
when you talk about consumer demand, I would say I have to 
commend your industry, one member of it, that ad that Ford put 
on for the new Mustang was one of the stars of the whole 
commercials. And I think a lot of people watch the Super Bowl 
just to watch the commercials, and they don't give a darn about 
the Patriots or the Eagles. But it seems to me that the 
industry, if--you can help drive consumer demand by your 
marketing and advertising approach. And I don't know if there 
are any examples of members of your Alliance selling safety or 
selling fuel efficiency. But I will tell you this, I have been 
around this town long enough to remember when a hot shot young 
vice president from Ford came to town and told the Congress, 
and I was on the staff at that time, ``If you mandate seat 
belts, that will have a devastating negative impact on the 
industry I represent.'' Fast forward several years, that guy 
then was chairman of the board of another automobile company 
and was on saying, you know, ``Buy our product. We have got 
airbags to protect you, and no one requires it, but we are 
concerned for your safety.'' So I would suggest that a lot of 
this has to do with your marketing approach.
    And we all have to be sensitive to your industry. It is a 
very vital part of our overall economy. And for us to put undue 
burdens on the auto industry is counterproductive. But I think 
to impose some reasonable burdens and work cooperatively with 
you, not say we need something by 8:30 tonight, but you know, 
with a lead time frame, as Mr. Reilly has testified, as Dr. 
Portney has emphasized in the report, I think is a reasonable 
approach. I could--I am on my high horse, and I have got the 
advantage of the microphone----
    Mr. Stanton. Could I have it for a minute?
    Chairman Boehlert. Sure, by all means, Mr. Stanton. Yeah.
    Mr. Stanton. For someone who spent 51/2 lobbying the States 
for mandatory safety belt use laws, our industry has changed a 
lot. There is just absolutely no question about it. I can't 
tell you how proud I am to say that we have got national safety 
belt usage up to 85 percent. We have got a long ways to go 
still, but at least we are making progress.
    I was also very pleased to watch the Super Bowl, and I 
noticed that three of our members had three drastically 
different commercials. One of the members had, in addition to 
Ford, a commercial on power and acceleration. And then another, 
which you probably really recognize, had a commercial about the 
Prius. So we had three very different target audiences, and 
that is I think the--what I heard in all of the testimony today 
is how complex an issue it is to get what we all want, and I 
really want to emphasize this. We all want to reduce our 
dependence on foreign oil. The only difference of opinion, I 
think, is how to go about doing it.
    Chairman Boehlert. Thank you very much.
    With that, Mr. Gordon.
    Mr. Gordon. Mr. Reilly, you said that your Commission 
recommended that there be significantly higher CAFE standards, 
but you also said that you I guess intentionally did not try to 
say what those standards would be. You know, having worked with 
this group and what you know, what would you say would be the 
minimum of a higher standard?
    You need to--you----
    Mr. Reilly. I don't want to go beyond where the Commission 
itself has come out. This was one of the----
    Mr. Gordon. Well, that is why I was asking you, as an 
individual who has assimilated all of this information. What 
would be the minimum?
    Mr. Reilly. Well, let me just say that this was a 
particularly contentious and concerning issue that our 
Commission addressed. We looked at a lot of options. We looked 
at their advantages, their costs. We did propose these consumer 
incentives as well as manufacturer incentives to encourage more 
fuel efficient, advanced diesel and hybrids. The consultant 
studies on which we relied strongly suggested that a 10- to 20-
mile-per-gallon increase in CAFE would be cost effective and a 
desirable policy. When I say ``significant,'' when the 
Commission said a ``significant increase,'' I think it is 
reasonable to infer from those studies and from the language of 
our report that that is the range that most of us were 
contemplating.
    Mr. Gordon. So when you say ``range,'' would 10 be a 
minimum then?
    Mr. Reilly. Ten would be a number that I believe most----
    Mr. Gordon. That most folks would----
    Mr. Reilly.--members of the Commission would endorse.
    Mr. Gordon. Okay. And Mr. Stanton, what is your opinion as 
to how long it would take the automobile industry and how 
feasible is it to obtain a 10 percent--or a 10-mile CAFE 
increase?
    Mr. Stanton. A lot of it would depend upon market forces, 
obviously. I think that we have just seen the biggest increase 
in light truck fuel efficiency standards, which was between 
2005 and 2007. And that was a 71/2 percent increase. That was 
supposedly determined by NHTSA with the congressional criteria 
of looking at all of the factors that are important, including 
employment and production cycles, et cetera.
    One of the problems that we have with looking forward to 
whatever the time frame is that a substantial time frame builds 
uncertainty into the standard--into the process for us. We 
don't know where consumers are going to be. We don't know where 
the demands are going to be. We are--we do not, and would not, 
recommend that we set standards separate from where--or 
different from where our customer base is. And this goes back 
to the comments that were made here, too. We need to get the 
consumer somehow in the equation, because right now, just as we 
were talking about with the Super Bowl ads, we have got 
customers out there that want power. And if we want to sell 
vehicles, we will sell power. And that--you see that in the 
marketplace. But we are also doing an awful lot on the advanced 
technology side of it in an effort to maintain those attributes 
that our customers want and, at the same time, get a major 
increase in fuel efficiency.
    Mr. Gordon. But I am talking more of the technology. You 
know, I mean--you know, in terms of you have to have a 
reasonable time to come out with new models and so to get a 10-
mile increase, what kind of lead time--again, is that possible, 
and if so, what kind of lead time is necessary to keep it in 
that--and I guess the question is what is a reasonable, you 
know, increase. So what kind of--are we talking five years, 20 
years?
    Mr. Stanton. The dilemma that I face is I just really don't 
know the answer if that is the right number in a given period 
of time. If we could make some certain assumptions that, you 
know, 50 percent of the vehicles would be hybrids or gas prices 
would be some place else, then we could chart a path that would 
make sense to get there. But I don't know how to answer those 
questions.
    Mr. Gordon. Well, let me ask you this. Is the Alliance--
have you taken a position on tradable CAFE compliance credit 
programs?
    Mr. Stanton. Actually, we like the idea of increased 
flexibility in the program. And in preparation for the hearing, 
we tried to figure out what exactly was meant by the tradable 
credits program that had been espoused by a number of my 
colleagues here. And we found out that we didn't fully 
understand all of the ramifications of it, but it is something 
we certainly would be willing to do.
    Mr. Gordon. What do you think it will take to help you to 
understand that better?
    Mr. Stanton. Some pretty healthy discussions, I think.
    Mr. Gordon. Is there a forum for that?
    Mr. Stanton. No, sir.
    Mr. Gordon. And does anyone here have a suggestion on what 
would be a necessary forum? And also, I think in that 
discussion, the statistic that you pointed out that was a 17 
percent reduction in the costs by having this, what would be an 
appropriate forum for that discussion? Anyone? Go right ahead.
    Mr. Portney. I would be happy to convene a group of auto 
makers and analysts who have floated this idea of tradable 
credits at Resources for the Future any time to have a talk 
about this and try to explain the idea in more detail so that 
even the analysts could better understand what the pros and 
cons are. I would be happy to do that.
    Mr. Gordon. I think that would be helpful for us if there 
could be some groundwork laid on something like that. I mean, 
hopefully--that might be very well an area of consensus within 
the--between the industry and those folks that are, you know, 
want an increase in the fuel efficiency.
    Thank you, Mr. Chairman.
    Chairman Boehlert. Thank you very much.
    Ms. Biggert.
    Ms. Biggert. Thank you, Mr. Chairman.
    The National Highway and Traffic Safety Administration is 
considering ways to reform the CAFE system, and one of the--one 
method is the weight-based standard. In my District, we have a 
company that is just newly developing a process--a reactor in 
process to produce titanium. It is called International 
Titanium Powder, in a very useful forum, and they are actually 
working with the military now and looking at the weight of 
tanks and the weight of Humvees. Is NHTSA considering advances 
in materials, like I have just described with respect to 
titanium as it contemplates reform to the CAFE program? Mr. 
Stanton? Or is this something that you would see in--rather 
than just looking at the CAFE standards and the weight to look 
at advanced materials in deciding how to raise those standards? 
Dr. Greene.
    Dr. Greene. One thing about weight-based standard can be 
formulated in any number of ways. It can be formulated to 
encourage weight increasing in cars. It can be formulated to 
discourage it. And so if it were formulated to discourage 
increasing the weight of cars, that would encourage material 
substitution of the kind you are describing. I think this gets 
at the real issue in auto safety and weight, which is the 
energy that has to be absorbed in a crash in order to minimize 
the maximum deceleration that is experienced by the people in 
the car, and the ability of the materials to handle that. The 
heavier the car, the more energy has to be absorbed, and so 
there is a trade-off there. But advanced materials ought to be 
able to play a role in making safer and lighter cars.
    Ms. Biggert. Because if this material is lighter and yet it 
is just as strong, it is--it would reduce the fuel consumption. 
And you talked about the cars' size versus weight and said that 
there can be lighter cars, which are just as safe, depending on 
the size.
    Dr. Greene. Yeah, on--the study done by--sponsored by Honda 
essentially took the same approach as the National Highway 
Traffic Safety Administration and Dr. Kahain did in his study, 
but tried to separate the effect of size from the effect of 
weight, which Dr. Kahain did not try to do, and came to the 
conclusion that making cars the same size but a bit lighter 
would be beneficial to safety.
    Ms. Biggert. Thank you.
    Mr. Stanton.
    Mr. Stanton. Yeah. Just to follow up on one--well, two 
points, actually. One is that, by all means, we are always into 
advanced technologies, and if you have someone in your 
District, then we would love to talk to them if they have got a 
promising technology, and by all means, we can make that 
happen.
    The second point is on the size and mass. We are still 
learning an awful lot on safety. But basically, it is our 
opinion anyway, that at the present time that it is a function 
of both mass and volume or size. We have got to remember that 
we are talking about a whole fleet out there. And the 
question--the public policy question we are trying to struggle 
with is how do we increase the safety for all of the driving 
public? We can't sacrifice some safety for someone to improve 
safety for someone else. We can do that, but we don't think 
that is the right public policy.
    Ms. Biggert. With regard to NHTSA, the regulatory process, 
and they have had the process for raising CAFE standards for 
light trucks, and it seems to have been working. It was going 
up. It went unimpeded by Congress. Is--do you agree that--well, 
particularly Mr. Stanton, do you agree that this would continue 
if we hadn't put a hold on the raising of those standards?
    Mr. Stanton. Not only would I agree, it would have to, 
under the law that Congress has passed, that NHTSA has to set 
the maximum feasible standard for light trucks for each and 
every year. I think you are absolutely correct. And we 
anticipate that it will continue.
    Ms. Biggert. Thank you. Thank you, Mr. Chairman.
    Chairman Boehlert. Mr. Lipinski.
    Mr. Lipinski. Thank you.
    A number of you had touched upon this, but I don't know if 
you really wanted--it is a little bit off of the question 
exactly of technology, but I want to see if anyone wanted to 
just take a stab at this. What do we really know about 
consumers' habits in regard to purchasing vehicles, their 
driving habits? I have heard, you know, different things, 
suggestions about what may--what changes may occur in the 
vehicles purchased or, you know, how they drive. They get 
better mileage, are they going to drive differently? Or perhaps 
even, you know, if they got feedback on what their mileage is 
that they are getting, do people actually respond to that. And 
so what do we know? You know, if we are working at this, you 
know, through a free market, what can we do in that regard? Go 
ahead.
    Dr. Greene. Given the importance of this subject of fuel 
economy and car purchases, there has been remarkably little 
research on this subject. There has been, however, recently 
completed by the University of California Davis, in-depth 
interviews of households, their complete history of automobile 
purchase decisions, and getting at where fuel economy came into 
those decisions, and when they did consider it, how did they go 
about doing it. And what those researchers found is that a 
small minority of the people considered fuel economy at all in 
making their car-buying decisions. And of those who did, none 
of them made any explicit calculations about what the value the 
fuel saving would be worth and what the car would cost. And 
nobody thought in terms of paying more to get a more fuel-
efficient car. They thought in terms of paying less to get a 
smaller, lighter, less-efficient car. So this idea of adding 
technology to improve efficiency is not in the consumer's mind 
when he goes to buy the car. That is something that happens on 
the manufacturer's side in designing the vehicle.
    Now a great deal is known about travel behavior, and we 
have entire Transportation Research Board meetings every 
January in which there are thousands of papers presented, half 
of them or so on subjects related to that. But is it well 
understood? Well, I think most of them would say no, it is not. 
There are still, sort of, some mysteries there.
    But one of the things that has been studied fairly 
carefully is this rebound effect. And we know that if you look 
back historically, the rebound effect is probably somewhere in 
the range of 10 to 20 percent, meaning if you improve the fuel 
economy of the vehicle by 50 percent, then people will drive, 
maybe, five to 10 percent more in the long run. And we--I 
suspect that the rebound effect decreases over time, as the 
cost of fuel becomes less and less and less important in the 
monetary costs of operating a vehicle and including, also, the 
value of a person's time.
    So I think the rebound effect is a small effect, but it is 
real, and it is probably decreasing over time, as people's time 
becomes more valuable. This was confirmed by a recent study 
from the University of California, again out of Irvine, 
Professor Kent Small.
    Mr. Stanton. Briefly that--and I was looking in my 
briefcase to see if we--if I had brought it with me, but there 
are a number of polls that are out there on what consumers 
value when they search for a new vehicle. Usually the first 
item is reliability and then it goes down to cost and other 
attributes. I think verifying what the panel is saying here is 
in the past, fuel efficiency wasn't even on the list, and it is 
there now as number 13 on the 2004 poll that I had seen.
    Mr. Lipinski. And does this mean that, in essence, have to 
forget about the consumer side when we are, you know, trying 
to, you know, save fuel? Does it all have to then come from, 
you know, the manufacturer side and, you know, are they going 
to the people? If consumers don't care about it, then, you 
know, what incentive do they have to be--you know, make more 
fuel-efficient vehicles, and does that come down to incentives 
that the government may have to give them to be more fuel 
efficient, such as the CAFE standards and that is the only 
thing that is going to move them?
    Mr. Reilly. Well, sir, the National Commission on Energy 
Policy considered that incentives are necessary, incentives 
both to the manufacturers and the parts suppliers to them and 
also incentives to the consumers themselves. There is currently 
a tax deduction of up to $2,000. It is worth between $400 and 
$600 to the average taxpayer, and that is provided to consumers 
who purchase new hybrid electric vehicles. That starts phasing 
out--expires after 2006. The Commission supports extending that 
tax incentive for five years, 2007 to 2011, but altering the 
mechanism from a simple deduction to a variable credit of up to 
$3,000 based on vehicle fuel economy, and also expanding the 
scope of the allowance of the program to include advanced 
diesel vehicles, from which we expect quite a lot of fuel 
efficiency in the years to come.
    Chairman Boehlert. Thank you. The gentleman's time is 
expired.
    Mr. Sodrel.
    Mr. Sodrel. I think you have answered a lot of my questions 
as I sit here. I am a free market person. I mean, I believe in 
the marketplace. I believe it produces products that consumers 
want. And my question really went to what marketing--and maybe 
it is best for Mr. Stanton. What marketing--we talked a little 
bit about the Super Bowl and the convertible with the frozen 
guy sitting at the wheel. What kind of marketing programs have 
the automobile manufacturers undertaken to try to sell fuel 
economy to their customers and to the marketplace?
    Mr. Stanton. Well, I think that the best, and probably the 
most efficient program, as you look at the most fuel-efficient 
vehicles, and they are also the least expensive, so I mean, it 
is--other than pricing, and I think it is pretty well known 
that on a lot of the smaller vehicles, the manufacturers are 
pretty much giving them away. It is very difficult to make--to 
compete successfully in that marketplace.
    Mr. Sodrel. Yes, sir.
    Mr. Portney. If I can weigh in on this, first of all, I am 
glad we are staying away from BigDaddy.com commercials here. 
I--on this--the issue of the free market in all of this, I 
absolutely agree with you: we all benefit from a free market 
that produces shoes and pencils and everything else, and I 
think it is for--goods and services for which all of the costs 
are borne by the producers and the consumers, it is, by far, 
the best way to organize an economic system. The one 
justification you can make for having the government involved 
in this particular case, either through higher taxes or through 
mandated fuel economy standards, is that when I go buy a car, 
typically I count in the cost of that thing how much the 
purchase price of the car is and what it will cost me over my 
lifetime. Typically, people don't take into account the fact 
that the gasoline that they use is contributing to the 
atmospheric burden of carbon dioxide. They don't take into 
account, in their own purchase decisions, this dependence on 
imported oil, and that is why, in a case where you wouldn't get 
involved if there weren't these external costs, that there is a 
good reason for economic efficiency that you can justify some 
form of government involvement in the fuel economy--in the case 
of fuel economy. We can certainly argue about what is the best 
way to do it, but I think there is a case there that, because 
there is a form of market failure, that you need some kind of 
government intervention.
    Chairman Boehlert. Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman.
    Just a couple questions. Mr. Stanton, you mentioned that 
your association supports the President's hydrogen fuel cell 
proposal. This committee had hearings in the last Congress on 
that proposal, and there seemed to be a great deal of 
skepticism that there is not an ample supply of hydrogen out 
there, we just need to find a way to use it, that, in fact, the 
hydrogen has to come from other fossil fuels, has to be 
stripped out, that it is not a particularly clean process to do 
that. It doesn't really free us from our dependency on 
foreign--on fossil fuels. We seem to be pursuing that to the 
exclusion of other alternative fuels, and we have some massive 
amount of money tied up in a liquid fuel in transporting liquid 
fuels and having it available. My question to you is have 
things changed in the last couple of years on that proposal? Do 
we--where would the hydrogen come from if we really 
dramatically changed from a fossil to a hydrogen economy?
    Mr. Stanton. Well, I think we all believe that somewhere 
down the line it has got to come from renewables if we are 
going to work our way out of this. It is really the goal, I 
think, that we would like to see, and we recognize that. And I 
hope everybody understands that. As the industry, we agree that 
dependence on foreign oil is a national issue. And the question 
is what is the best path out of that. And we are struggling 
with exactly what is the best path. Certainly research--
additional research and development, the things that this 
committee has done in the past or things that we have 
supported, part of our members are involved in FutureCar and 
FreedomCAR. I personally was involved in the PNGV program. 
Those kinds of programs are the kind of research and 
development that we are going to need to solve this conundrum 
that we find ourselves in.
    Mr. Miller. Mr. Portney, you seemed to be nodding your head 
to that question, so did you have anything you wanted to add 
or----
    Mr. Portney. Just that, you know, I think everyone is 
optimistic about anything that has the potential technological 
promise of hydrogen of being a completely clean energy source, 
but I think we need to do something sooner than the time frame 
in which hydrogen will become the major propulsion for motor 
vehicles. I mean, I think that is really 15 or 20 years off. I 
would love to be more optimistic than that. I think we can't 
wait 15 or 20 years before we try to do something, regardless 
of what it might be, to try to improve the fuel economy of the 
overall fleet, whether it is through higher taxes or 
technological fuel economy requirements or whatever. I would 
hate to just put all of our eggs in the hydrogen basket and not 
do anything for 20 years in the hopes that that will be 
available and to solve the problem.
    Mr. Miller. Mr. Stanton, you seemed to describe a two-step 
process: figure out, one, how to make hydrogen work, then, two, 
figure out where we are going to get the hydrogen. How long--
Mr. Portney--Dr. Portney suggested that that would be a 15- or 
20-year proposal. Do you see it as being substantially more 
than that or less than that?
    Mr. Stanton. Yeah, actually, we have some members that are 
very high on bringing fuel cell vehicles to the fleet now, but 
the question is what are the numbers and what is the impact 
going to be. And we certainly agree with Paul that we need 
something in between, and that is why we are supporting and 
working hard on the hybrid vehicles and the clean diesel, 
because that is the interim path that we see to getting us to 
the hydrogen----
    Mr. Miller. One of the criticisms in the hearings that we 
held in the last Congress was that the proposal--President's 
proposal, I believe it was $3 billion, was to the exclusion of 
other alliterative fuels. But from what you have just 
described, we obviously need to be doing both. Do you think we 
are doing enough to develop other alternative fuels from which 
we would get hydrogen, as well as having those alternative 
fuels to use in the meantime?
    Mr. Stanton. Mr. Miller, you are beyond my expertise on 
all----
    Mr. Miller. Okay.
    Mr. Stanton. I think we, generally, as an industry, are 
looking at all of the paths, and we are just trying to find 
what is the right one and work with the right people to get 
there.
    Mr. Miller. Okay. Dr. Portney, I think I saw you nodding 
again. Did you have anything to----
    Mr. Portney. I am going to hold my head----
    Mr. Miller. You may just have a tick, I don't know.
    Mr. Portney.--very still in the future here. I--let me just 
say, I am always worried when the government or the private 
sector or anybody puts all of its eggs in one basket. And I 
think what we ought to do is have a goal for a fuel economy for 
the fleet without specifying the technology, whether it is 
diesel or hybrid or hydrogen or improved internal combustion 
engines. I always worry where we sort of anoint a winner and 
put all of our R&D dollars and other efforts into that.
    Mr. Miller. So Mr. Reilly, you did more than nod.
    Mr. Reilly. If I might add to that, thank you.
    Our Commission, in that opening statement I gave about the 
crunch that is coming in liquid fuels need versus production 
capacity over the coming years and the current shortfall, a 
very limited capacity that exists of less than two percent of 
excess capacity, we looked at the need for a whole range of new 
interventions and of new efficiencies, fuel sources, and the 
rest, but strongly supported ethanol as a fuel derived 
primarily from cellulosic material, corn stover, switch grass, 
forest cuttings, and things of that sort as an important 
solution to part of our problem. The oil industry has tended to 
regard ethanol as an additive over the years past. It is only 
two percent of our gas supply now. And I think that is 2.8 
billion gallons a year. We see the need to boost that 
considerably and offer a number of incentives to do that, but 
that has got to be part of our future, I think, and 
particularly, with the phase-out, the banning of MTBE as an 
oxygenate in many of our states, including my own State of 
California.
    Chairman Boehlert. The gentleman's time has expired.
    Mr. Gilchrest.
    Mr. Gilchrest. Thank you, Mr. Chairman.
    First, I want to welcome the person who, on the Eastern 
Shore, is affectionately known as Bill ``Wetlands'' Reilly. 
Back in the late '80s, early '90s, we had a full range of 
issues dealing with wetlands, and as EPA Administrator, Mr. 
Reilly was a friend of the State of Maryland, especially the 
Eastern Shore, and I just wanted to make those comments, Bill.
    It is--Mr. Chairman, it seems to me that we have an issue 
that we have been dealing with for a number of decades that is 
environmental, it deals with energy security, it deals with 
safety, and it deals with economics. And when we look at that, 
and we hear the information that has been given to us, both 
from your testimony, from the NRC report, Bill, from what you 
have done with your research. I am looking at this either from 
a global marketplace or an international marketplace issue. If 
we look at it from a global marketplace issue, this is free 
market, do what you want, the bottom line, the top line is the 
profit margin. But I think this has to be an international. 
This has to be an issue with the marketplace, which gives us 
most of our ingenuity and our initiative, on new technologies, 
and the government's understanding, and you might want to 
comment on this, that there is a factor with CO2 and 
global warming. There is a factor with our security and energy 
dependence, especially with countries like China moving to 
create a huge demand on energy. And can we resolve the issue of 
safety? And can we do it economically feasibly so we have a 
dynamic economy that continues to be prosperous?
    So I sort of frame that issue to ask just four quick 
questions. One is, Bill, and a number of you, mentioned 
increase production as part of a whole package. Is that looking 
both foreign and domestic or just domestic? Number two, Mr. 
Stanton, you said something interesting about petroleum-
dependent transportation sector, or I think I heard you say you 
are moving away from the petroleum-dependent transportation 
sector. And that sounds like it is pretty good news. How long 
do you think that will take, and what can we do to speed that 
up? And then, Mr. Greene--Dr. Greene and a number of people 
have mentioned the idea of CAFE standards versus a number of 
new technologies, weight-based standard versus CAFE standard. 
So where are we on that, and is that a recommendation specific 
to us? The last one is, Bill, you mentioned, you know, burning 
corn and those kinds of things, ethanol. Where are we, and can 
we move in certain sectors of our country, especially in the 
rural areas, to add more soy oil to diesel fuel?
    Those are my questions, Mr. Chairman.
    Chairman Boehlert. Who are you directing your question to, 
or do you want to provide the answer, also?
    Mr. Gilchrest. I don't have my--I don't have the answers. I 
am just--if anybody would like to comment on that, or any of 
those----
    Mr. Reilly. I would just comment quickly, first of all to 
say I know nothing about the capacity of soy oil to be a fuel, 
but I have been impressed in the course of our research over 
the past 21/2 years that even turkey parts are being used in 
Carthage, Missouri to create liquid fuels. I think you can make 
alcohol out of virtually anything, and we are beginning to find 
more imaginative ways and cheaper ways and more--ways that are 
more efficient in the use of energy and manufacturing, and that 
is what some of these ethanol possibilities are, I think.
    You mentioned China. That first question you had, is it a 
U.S. or is it a worldwide number? The number that I began with 
is an excess--in excess of 50 percent of new production will be 
required over the next 20 years. It is, I think, 43 percent for 
the United States in liquid fuels, in oil and in gas, 
basically, gasoline. That compares with a 20 percent increase 
in production worldwide over the period 1980 to 2000. Those 
contrasting numbers, a very significant difference, suggests to 
me that we are not going to make it. We really do need 
virtually all of the possibilities that we can explore and 
bring on with some degree of cost effectiveness.
    Mr. Duleep. On the issue of soy-based diesel, I--there has 
been a lot of research on that, and it does look like a 
relatively expensive option, so it is a tough sell at $1.50 or 
$2.00 a gallon for diesel fuel, but it----
    Mr. Gilchrest. It is a tough sell because of----
    Mr. Duleep. The cost of production.
    Mr. Gilchrest.--the cost of production, even though you 
might be in an area where soybean production is large? It would 
still--the cost of production to turn soybeans into soy oil is 
still not competitive with traditional fossil fuels?
    Mr. Duleep. Relative to what you can sell the soybeans in 
the market for, it would be a difficult--it is just a hard 
thing to do. But I understand there are other types of 
agricultural products they are looking at to make diesel fuel 
from. Now ethanol is a completely different animal.
    Chairman Boehlert. The gentleman's time has expired.
    Ms. Lofgren.
    Ms. Woolsey. Woolsey is my name.
    Chairman Boehlert. Lofgren. Woolsey. I am looking here, and 
then I am looking there, and I am seeing two different things.
    Ms. Woolsey.
    Ms. Woolsey. Well, first of all, I would like to welcome 
Mr. Gilchrest to this committee. I am glad you are here, except 
for now you have made my questions seem simplistic.
    I want to talk about consumers and getting consumers into 
the equation. And I will start with Mr. Stanton. I mean, we 
talked about a target audience on the Super Bowl ads, but there 
is something about supply and demand, so we know that consumers 
are actually waiting for hybrid cars. So if we don't--and we 
also know that Americans don't like to wait for anything, but 
they are actually waiting for these cars, and more would buy 
them, I believe, if there--it was more convenient for them to 
just get one off the lot, like other automobiles. So why do you 
think when these cars are popular that there aren't enough of 
them yet?
    Mr. Stanton. Well, I think there are a couple of reasons, 
and I want to give credit to one of my members, particularly 
Toyota, because they are just going gangbusters on this, and 
they have just announced that they are going to double 
production again. And I think that is wonderful. We are finding 
out that things like single occupant HOV use in Virginia or 
California seems to be a great incentive for these things, and 
we are generally for incentives to encourage the production and 
then, of course, the purchase of these advanced-technology 
vehicles.
    If I look at our membership in the Alliance, we have some 
members who, right now, are going very strong on hybrids, and 
other members are going very hard on clean diesel. And I think 
it was Mr. Portney who said it earlier, I mean, we don't think 
Congress ought to try to pick winners and losers in 
technologies, but the race is there. That is the point.
    Who is going to win the race? I--we don't know. I mean, 
hybrids are inherently more expensive, because they have got 
two power plants. You have got the internal combustion engine, 
and then you have got the battery. So clean diesel has some 
emission challenges. Thanks to Congress, we are going to have 
15 parts per million sulfur-fueled beginning in 2006. We hope 
that is an enabler that will allow us to put the after-
treatment on the diesel--on the clean diesels so that we will 
be able to certify those vehicles and they will meet the 
stringent tier two emission standards to--that come into effect 
or being phased in now.
    So who wins? The consumer wins eventually. What we have 
proposed, and what we would like to see, is very complex. I 
mean, as we talk about how to do this, Mr. Camp's bill or the 
consumer credits that were in the Energy Bill last year, I 
mean, it was an attempt to balance the degree of technology, 
the fuel economy increase, and the gallons saved for hybrids 
versus diesel and come up with a package where everyone thought 
that that was relatively neutral in supporting both 
technologies. And that is what we would like to see happen. And 
then the consumer becomes the big winner.
    Ms. Woolsey. Well, and the industry becomes a winner.
    Mr. Stanton. Absolutely.
    Ms. Woolsey. It doesn't cost--I mean, the automobile 
industry doesn't lose money on hybrid cars, do they?
    Mr. Stanton. They sure do in the beginning.
    Ms. Woolsey. Well----
    Mr. Stanton. There is no question that--you know, our 
industry is spending $18 billion on research a year. I don't 
want to say long lead time, but lead time extremely important. 
There are major investments in new technology. And you tend to, 
you know, want to go a little slower than faster unless you 
know that you have a winner. And I think you are seeing in the 
marketplace now that the hybrid turns out to be a winner. I 
have got an article on my desk that shows that we are going to 
have 50 hybrid models by 2010. This is phenomenal.
    Ms. Woolsey. So how does--how do R&D credits work into 
that? I mean----
    Mr. Stanton. Well, the tax credits work in, because the 
incremental cost increase is going to be less than the tax 
credit, but we need a way to get the new technology into the 
marketplace. And if we want to accelerate the introduction--and 
we all recognize that there is going to be a cost differential. 
If we can get the cost differential down to where it is--the 
purchase price is roughly similar to a comparable internal 
combustion engine, then we will get the volumes up, and with 
the volumes up, the price comes down.
    Ms. Woolsey. Well, thank you.
    And you did say that consumers don't really care that much. 
I represent Marin and Sonoma Counties, just north of the Golden 
Gate Bridge, if it matters.
    Mr. Stanton. Not all consumers, how about--we will put the 
qualification there.
    Ms. Woolsey. Thank you very much.
    Chairman Boehlert. Thank you very much.
    Mr. Schwarz. Dr. Ehlers.
    Mr. Ehlers. Thank you, Mr. Chairman.
    Several comments before I get to questions. First of all, 
on the issue of hydrogen, everyone assumes when you are talking 
hydrogen that it has to be fuel cell, and I agree with Mr. 
Portney: they will leave the options open. Those are two 
separate issues, and there are other ways of using hydrogen 
besides fuel cell. The--but the main factor there with hydrogen 
is simply don't get it from fossil fuels. There are abundant 
sources. H2O happens to be fairly abundant. 
Unfortunately, it is a very tight chemical bond, but again, 
that may be an appropriate place for high-temperature nuclear 
reactors and getting away from fossil fuels.
    I would also like to comment about the statement about 
market forces. A number of people have talked about this as if 
somehow these are some magic, independent things that 
automatically lead to good results. And that assumes--that kind 
of model assumes that people genuinely react to these market 
forces. But that ignores certain things, and I have always had 
a--I have had a bone to pick with the auto industry for a long 
time. In fact, I am the only Member of Congress from Michigan 
who has consistently voted against the freezing CAFE standards, 
not that I am that enamored of higher CAFE standards, but we 
have to face this issue. And the auto companies simply refuse 
to face it. And my bone with them was they kept talking about 
market forces. ``We are just making what the people want.'' And 
I simply remind them of their advertising budget. How much do 
you spend advertising SUVs compared to how much do you spend 
advertising low-cost, high fuel economy vehicles? It is very 
disproportionate. And we are not talking peanuts here. If I buy 
a new car, I am paying about $400 for the advertising that they 
bought to persuade me to buy the car.
    And so market forces don't operate in a vacuum. I think the 
auto industry has taken a pass on that. They can greatly 
influence the choices consumers make through education, through 
advertising. A part of the problem, and part of the reason 
market forces don't work very well is the public simply does 
not understand energy. They can't see it, they can't touch it, 
they can't taste it, they can't feel it, and it is frustrating 
to me, as a physicist, because that is one thing I do 
understand. But I have often said I wish energy were purple. If 
energy were purple and people could see it and they are driving 
down the highway and a Toyota Prius comes by with just a little 
purple around it, and it is followed by an SUV with a big 
purple cloud, people are going to say, ``Hey, you know, I am 
going to get one of those Prius,'' because they could see it. 
They could see the impact. As it is, their only tie to reality, 
in terms of the energy, is the price at the gas pump. And that 
is a little too ephemeral to directly affect their purchases.
    I--now enough ranting for a while, except that I wish the 
automobile companies would try to influence purchases.
    I--Mr. Stanton, in your testimony, you state their 
approaches to restructuring the CAFE program, that would--can 
help address competitiveness concerns. And as I told you, I am 
not enamorant of the CAFE program, but I would be interested in 
what you meant by that. What ideas do you have? What mechanisms 
are available to more--to affect consumer choices so that they 
are more likely to choose energy-efficient vehicles? I would 
appreciate your comments on that, and then I am going to ask 
the rest of the panel, too.
    Mr. Stanton. Mr. Ehlers, thank you.
    Yeah, I think that there are ways to improve the program. I 
think that it was referenced earlier that, certainly, we have 
had 30 years of experience, and we all recognize that it is 
less than perfect. NHTSA is currently looking at an attribute-
based system. The NAS is looking at an attribute-based system. 
There are certain pluses and certain minuses. Those are ways to 
do it. The complexity of the program, and from Michigan, you 
understand, certainly, that issues like two fleet credit and 
credit trading and some people like that very much and other 
people don't like that very much, depending upon which side of 
the fence you sit. But we are looking for ways to further the 
fuel efficiency, and I hear you on the advertising--the 
advertisement, as you and I have discussed before.
    Mr. Ehlers. I would like other comments. What alternatives 
are there to CAFE standards that you really think would be 
workable in today's marketplace that would really affect 
consumer choices? Dr. Greene.
    Dr. Greene. I think that a leading contender to fuel 
economy standards are these feebate systems in which we have, 
at present, a gas-guzzler tax, which is kind of a half of a 
feebate system. It is just a tax. And that gas-guzzler tax is 
quite steep. It is so expensive that there virtually aren't any 
gas-guzzler passenger cars sold. There is no comparable tax on 
light trucks, so we have a strange asymmetrical situation 
there. But it is very, very likely that a feebate system would 
work well, encouraging both consumers to buy more efficient 
cars and light trucks, and encouraging manufacturers to adopt 
the technology to avoid fees and gain rebates. And so I think 
as a market-based incentive, that deserves a careful look as an 
alternative to CAFE standards.
    Mr. Ehlers. Would you--are you saying you should--that we 
should try to apply something like that across the whole market 
spectrum?
    Dr. Greene. Well, there are two components of a feebate 
system. One is the pivot point. That is, what MPG level defines 
whether you get charged a fee or you get a rebate? You can have 
a pivot point for cars and a different one for trucks. You 
could have one for smaller cars or larger cars, smaller trucks. 
You can have as many as you like. What provides the incentive 
to the manufacturers, especially, to adopt technology is the 
rate. That is usually specified in terms of dollars per 0.01 
gallons per mile so that every gallon of gasoline gets the same 
rate--weight in this incentive. And a feebate system of $500 to 
$1,000 per 0.01 gallons per mile, that is about the difference 
between a 20- and a 25-mile-per-gallon vehicle. It would 
provide a very strong incentive, both to the manufacturers and 
to the consumers to get a more efficient vehicle. These systems 
can be designed so the pivot points make the system revenue 
neutral, that is you take in as much as you pay out.
    Chairman Boehlert. Thank you very much.
    The gentleman's time has expired.
    Mr. Schwarz.
    Mr. Schwarz. We have talked about--first, let me say that 
my District is right next to Congressman Ehlers' District. And 
my District--in my District, General Motors is building the 
largest plant that they have built in the last 20 years, and I 
am delighted to have them there. It is the Delta Township 
plant, the Delta plant just outside of Lansing, Michigan. You 
have talked about methyltertiary butylether gone away. You 
can't use that anymore. Ethanol is expensive stuff, not 
generally accepted by the population, by the motoring 
population yet. Biodiesel is a great idea. There are some 
places--where I live in Michigan, they are actually using it 
and selling it, the B20 with biodiesel from soy and some of it 
from restaurant grease and other things of that nature. At some 
point, the industry has got to get from petrofuels to the 
hydrogen society, the hydrogen environment.
    So my question is briefly this, as someone who has 
thousands of people in his District working in the automotive 
industry, and someone from the State of Michigan, what is the 
best policy that the Federal Government should develop or 
maintain toward the industry that gets you from petrofuels to 
hydrogen the most quickly that it possibly can? Less 
regulation? More regulation? Change the rules? Leave CAFE 
standards the way--what gets us there quickest?
    Mr. Stanton. Well, I will take the first stab at that. 
Certainly the research and development that this committee has 
been supportive of in the past, and we need to continue that 
and increase that. We think that the tax credits for advanced-
technology vehicles is certainly a good way to go, too. We are 
not saying no increases in CAFE. We are just saying make sure 
we do the CAFE increases right so we don't divert resources 
from our main goal to having to meet incremental increases, 
which is not going to be the big bang for the buck at the end 
of the day.
    Mr. Portney. If I could, Mr. Schwarz, thank you.
    I agree with Mike that there are two pieces to this puzzle 
to hasten the onset of the hydrogen economy, if it turns out 
that that really is the energy wave of the future. The first is 
more investment in research and development, because individual 
companies don't have a sufficient incentive to invest in new 
technologies, because other people can then ape the 
technologies that they invent, and they don't get all of the 
benefits. So there is underinvestment. But I think there also 
needs to be some incentive that--something that motivates the 
consumer to demand more fuel-efficient cars, and that can 
either take the form of higher gasoline prices or tighter fuel 
economy standards that the car companies have to meet.
    If I could add one more thing, I actually think 2005 will 
be the most important year for people who pay attention to fuel 
economy that we have seen, and the reason I say that is that if 
one looks at the hybrid vehicles that we have had in the past, 
the Honda Insight, the original version of the Prius, tend to 
be cars that give you great fuel economy and this hybrid 
technology but not a lot of other amenities. So you have kind 
of sacrificed on the amenity side to get improved fuel economy. 
This year, we will see the Ford Escape SUV. We will see the 
Toyota or the Lexus HX-400, a very elegant SUV hybrid. We see 
the Honda Accord now hybridized, and we will see the--both 
Volkswagen and DaimlerChrysler with advanced diesel engines in 
much more upscale cars. And if we see this year great consumer 
acceptance of those vehicles, then I think it will be an 
unmistakable signal to car makers across the line, both in the 
passenger car and the light-duty truck segment of the fleet, 
that this is something that the public is willing to pay for 
and fuel economy really does have a strong consumer demand. And 
I think that is going to go a long way toward creating a great 
incentive for improved fuel economy, even without government 
intervention, which, I would argue, probably still needs to 
take place.
    Dr. Greene. Let me endorse both of those recommendations 
that have been made, and also add that if we want a--if we want 
hydrogen from renewable sources, then we probably need to have 
a policy for controlling carbon emissions, cap and trade 
system, some kind of way of penalizing vehicles that emit 
greenhouse gases.
    Chairman Boehlert. Thank you very much. You are right on 
time. The gentleman's time has expired.
    Excuse me. I think we have pretty well established that we 
have the technology right now to make cars and trucks get 
significantly better fuel economy without any detriment to 
safety. I think that is agreed by all.
    The question is still on the table, it seems to me, and 
there are two of them. First, what are the pros and cons of 
using CAFE standards to get that technology into the hands of 
consumers rather than just depending on the markets? And the 
second one, how can we put CAFE standards into place without 
disproportionately burdening U.S. manufacturers? A tall order. 
Who wants to take the first crack at it?
    Mr. Duleep. Let me----
    Chairman Boehlert. The centrist in the panel.
    Mr. Duleep. Let me just answer the first part of it, which 
is how can we get these technologies. I think, as I pointed out 
in my opening statement, and as Mr. Stanton pointed out, a lot 
of these are going to come in, regardless of any actions by the 
Congress or not. That--I think that many of these technologies 
pay for themselves and make sense in the marketplace. I think 
where there is a market failure in this constantly increasing 
consumer demand for attributes that are rapidly eroding some of 
these benefits of the technologies, and there has been 
reference made to it. And I think that is where there is 
perhaps more disagreement on how one might capture the 
technology benefits in terms of fuel economy benefits rather 
than benefits in acceleration performance or other attributes.
    And the second part of it, on the CAFE issue, I am fairly 
certain, and I think Dr. Greene will back me up on this, is 
that if the--meeting a single-number target for all companies 
is definitely--creates distortions in terms of competitive 
impacts between manufacturers. And any attribute-based 
standard, we have found in our research, is somewhat better 
than the current CAFE standard. But we also came to the 
conclusion that there is no real perfect way to do it, and that 
almost anything you do involves some degree of compromise. And 
so I think it is just a matter of defining those compromises 
and--rather than the fact we are ready to accept them.
    Chairman Boehlert. Mr. Reilly.
    Mr. Reilly. The question of whether or not the onset of 
hybrids does disadvantage American auto manufacturers is one 
that we took very seriously. And I must say, coming into that 
conversation, I was skeptical that it would. We concluded--our 
consultants concluded that there is a risk of loss of U.S. jobs 
to American manufacturers and that the reason for that is--in a 
word is because the technologies that we are talking about 
here, advanced diesel and hybrids, are German, primarily, and 
Japanese, primarily. They are--when they are brought to this 
united--these United States, they are, very often, under 
contract or franchised with some of those who have developed 
those technologies.
    Chairman Boehlert. Is that because they have regulations 
that require that in Japan and Germany?
    Mr. Reilly. It is possible that that has played a role. It 
certainly has stimulated much more attention to some of these 
issues on a more urgent basis, I think, particularly in Japan. 
But for that reason, we did propose significant manufacturer 
incentives of a billion and a half dollars over 10 years to 
manufacturers for producing these vehicles in the United 
States, for all manufacturers, Toyota included to the extent 
that they manufacture in the U.S. We had those proposals vetted 
by trade lawyers to determine whether or not these were 
consistent with international trade agreements, with the World 
Trade Organization. They concluded that they were, that they 
are, and that this is an important way to get the introduction 
of the technologies. And I think they are game changing 
technologies. I have been involved with this issue for a long 
time. What is truly new now is we have technologies available 
to us that can get significant improvements in automobile fuel 
efficiency that we didn't have 10 years ago. So I think finding 
a way to get them introduced with the least disadvantage to 
American manufacturers and workers is the way to go, and that 
is the reason for the incentives that we proposed. We also had 
consumer incentives that I mentioned.
    Chairman Boehlert. What--you know, let me just ask. It is--
I think it is a national security imperative to reduce oil 
demand, and I think we all--can all accept that. Can we just 
rely on market forces to do that, or is there something more 
than market forces that we have to engage in? And you are 
recommending--obviously, you are recommending something more 
than market forces, and I think Dr. Portney is, too.
    Mr. Reilly. Well, I strongly prefer the use of market 
forces, because that aligns the interests of consumers with the 
interests of manufacturers.
    Chairman Boehlert. Well, I understand that, and we all do.
    Mr. Reilly. Right.
    Chairman Boehlert. I mean, I don't think you will get any 
disagreement there. Everybody raise their hand. We prefer 
market forces, but if market forces aren't doing what needs to 
be done, and we have a national security imperative to reduce 
demand for oil and look at the emerging giants in India and 
China, the demand, you know--there is not an unlimited supply 
of oil around the world. And you--well----
    Mr. Reilly. Well, if the question is if you could not use 
higher prices as a way to create demand for more fuel efficient 
vehicles, do I think that there is an appropriate role for the 
government, through tightening CAFE standards. I do, but there 
I would come back to the point that I made before, that I would 
only do that if I gave up on the use of market forces, which I 
am not prepared to do, and it is so important that car makers 
be given sufficient time to do this, rather than be required to 
get unrealistically high improvements in unrealistically short 
periods of time, because then we are back to downsizing and 
downweighting, which was a counterproductive way to go about 
this, I think, in the first place.
    Chairman Boehlert. And we established the fact that it is 
not necessary to downsize and downweight to get the increased 
fuel efficiency that we are looking for. We have established 
that fact.
    Mr. Reilly. Well, we have established that----
    Chairman Boehlert. You know, I can remember well.
    Mr. Reilly. Yeah, we have established that if the car 
makers are given a sufficient period of time. If you said we 
are going to----
    Chairman Boehlert. And we all agree that they--what they 
should be given, so, you know----
    Mr. Reilly. But in that case, fine----
    Chairman Boehlert.--a period of time. We can't say, ``Do it 
tomorrow.''
    Mr. Reilly.--I absolutely--right. Right.
    Chairman Boehlert. I mean, what--you know, I applauded the 
President last January 14 when he announced his space 
exploration initiative, and you know, he took an agency where 
they are still wearing black arm bands in the aftermath of the 
demise of the Columbia, and they were in a collective funk, and 
he said, you know--he inspired them, you know, for future space 
exploration. But to his credit, he said, ``We are not going to 
do it tomorrow, and don't write me a blank check.'' And I am 
very mindful of the people that Mr. Stanton represents. I don't 
want to just shove something down the throat of the industry 
and say, ``We have got to do it right away.'' We have got to be 
sensitive to their very legitimate concerns. But what comforts 
me today is the positive approach saying that we have got to 
work together to accomplish something that we agree is a 
legitimate national security objective. Now we might have some 
differences on timetable, but we are not focusing from one side 
of the argument all our energy on fighting something that we 
all agree is necessary. Now we may have some differences on 
timetable.
    And finally, I would say on customer demand, and everybody 
keeps talking about customer demand, and I agree, but I will 
tell you, I think, I feel strongly that customer demand is 
ignited, in large measure, by what all of us are exposed to in 
advertising. And I would--and I go back to, once again, the 
auto industry came forward with airbags before they were 
mandated by the government. And a lot of the captains of 
industry were on television selling safety. And you know what, 
in my house, like a lot of houses across the country, my wife 
said, ``Boy, that is something I want for me and for our kids 
and grandkids.''
    So I think we are all in this together. I hope that--Dr. 
Portney, I am going to take you up on your offer. We will 
follow it up in writing. You said you would be glad to convene 
something and maybe we can get, you know--from people in the 
auto industry and the Alliance to sit down and sort of talk 
together to try to sort this thing out. It is very, very 
important. And I know one of the things you are including in 
your market forces is increasing taxes, and I will tell you 
this, we are very skittish about that, and with legitimate 
reason, because there are ways to accomplish the same objective 
without increasing taxes. So--but I understand that is one of 
the market forces that is an option that you would suggest we 
take a look at. And let me say we should look at all options.
    But with that, let me say thank you very much. You know, we 
will follow up, probably, with a few questions for each of you, 
and we would appreciate a timely response. But this has been a 
very good panel. Not everyone has been in agreement. We have 
had some good back and forth--good participation from up here. 
I really appreciate it. We did something worthy of note here 
today.
    The hearing is adjourned.
    [Whereupon, at 4:30 p.m., the Committee was adjourned.]

                              Appendix 1:

                              ----------                              


                   Answers to Post-Hearing Questions


Responses by Hon. William K. Reilly, Aqua International Partners

Questions submitted by Representative W. Todd Akin

Q1.  If the CAFE program has been successful, could you please explain 
why we are more dependent on foreign oil today and consuming more 
gasoline in our vehicles than we were when the program was originally 
put into place? And if that is the case, how will increasing the CAFE 
requirements to higher levels reverse this trend and accomplish the 
original goals of CAFE?

A1. Was CAFE successful? In a study published in 2002 entitled 
``Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) 
Standards,'' the National Academy of Sciences found that fuel use by 
passenger vehicles is roughly one-third lower today than it would have 
been had fuel economy not improved since 1975. CAFE was identified as a 
``major reason'' for the fuel economy improvement. The NAS estimated a 
2.8 million barrel per day savings between 1975 and 2000, or 14 percent 
of current U.S. consumption (?20 million barrels per day).
    If CAFE was successful, why are we consuming more oil? We are 
consuming more oil because vehicle miles traveled (a function of 
increasing numbers of vehicles on U.S. roadways and the trend towards 
driving greater distances each year) have outstripped the oil savings 
achieved by improved fuel economy in the late 1970s and 1980s. The 
figure to the right from the NAS report shows vehicle miles traveled 
(VMT) increasing steadily since 1966. Fuel use declined between 1978 
and 1983 due to improved vehicle fuel economy and a decline in the use 
of oil by electric utilities, but has risen steadily since then as 
passenger vehicle fuel economy levels have stagnated. Source of Figure: 
NAS CAFE report at page 19.



    If CAFE was successful, why are oil imports increasing? Oil imports 
are increasing because domestic production has declined steadily since 
1970, and domestic consumption has continued to grow, although at 
slower rate than what might have been given CAFE and other factors. The 
figure to the right is from EIA's Annual Energy Review (2003) which 
provides statistics on petroleum production, consumption by sector, 
trade, storage, prices, refinery activities and the Strategic Petroleum 
Reserve. Since the peak of U.S. crude oil production in 1970 of 9.6 
MBD, domestic production has declined 40 percent and now rests at 5.7 
MBD. Over the next twenty years, the Energy Information Administration 
in its Annual Energy Outlook 2005 forecasts a slight increase in U.S. 
oil production over the next five years, followed by a slow but steady 
decline until 2025.



    How will increasing CAFE reverse the trend of increasing 
consumption and rising oil imports and thus accomplish its original 
goals? The fact that the U.S. economy has not gone into a recession 
despite $50 for a barrel of crude oil is in part because efforts over 
the last thirty years to begin to wean our economy off oil have been 
successful. The figure to the left excerpted from the Commission's 
report shows that the oil economic intensity of the U.S. economy (that 
is, the amount of oil needed to produce a dollar of GDP) was halved 
over the last 30 years. Increasing CAFE can reverse the trends of 
increasing consumption and rising imports, but the increase would have 
to be larger than two percent per year to offset the annual rise in 
VMT. But the point here is that even a more modest increase in CAFE can 
help insulate the economy from future oil price shocks and generally 
high oil prices.


                   Answers to Post-Hearing Questions

Responses by Paul R. Portney, President, Resources for the Future

Questions submitted by Chairman Sherwood L. Boehlert

Q1.  In your testimony you said that recent research by your colleagues 
suggests that the ``rebound'' effect--people driving more because 
improvements in fuel economy make it cheaper to do so--might cancel out 
the economic and environmental benefits of improving fuel economy. To 
what extent were the energy security benefits of improving fuel economy 
taken into account?

A1. The rebound effect has only to do with how much gasoline will be 
saved by tighter standards--it does not bear on the question of the 
good that is done by reducing consumption. If people drive a little 
more because their cars get better fuel economy (and hence the cost of 
driving an additional mile are reduced), that just means that we'll 
save less gasoline through tighter CAFE standards than appears at first 
blush.
    The NAS committee indeed took into account energy security 
benefits--assigning them a ``shadow value'' of $5/barrel of oil 
consumed, which at the time was about 20 percent of the price of a 
barrel of oil (more like 10 percent now). This is a very important 
question, of course, but it is unrelated to the debate over the rebound 
effect.

Q2.  In discussing the potential of technology to reduce fuel 
consumption, you emphasized the importance of the ability of the 
individual consumer to recoup the additional costs of fuel efficient 
technology through gasoline savings. But if reducing the Nation's 
dependence on oil is a public good, why not emphasize the level of fuel 
savings that maximizes the benefit to the public as a whole? Why not 
think of fuel economy standards as similar to pollution emissions 
requirements, in which individual consumer repayment is not as 
important a consideration?

A2. In fact, the right way to think about the benefits of improved fuel 
economy is to combine the benefits to the consumer from reduced 
gasoline consumption with the social benefits from internalizing the 
climate change and oil import dependence externalities. The NAS 
Committee thought it was worthwhile, though, to analyze the effects of 
tighter standards purely from the standpoint of the car buyer. 
Depending upon the period over which gasoline savings are calculated, 
and upon the discount rate used to compare future savings with present 
outlays, tighter standards look attractive purely on economic grounds 
alone.
    This is somewhat deceiving, however, because a rational car buyer 
might think to herself, ``Fine, I'll save more gasoline over the life 
of this car than I'll have to shell out in a higher purchase price. But 
what if the car companies could use the money they are required to 
spend on tighter fuel economy instead on developing other conveniences 
for me? It's at least possible that I'd like those new features even 
more than the fuel economy savings I'll be getting now.''
    This isn't an unrealistic scenario, though it gets more and more 
unrealistic as gasoline gets more and more expensive. In other words, 
the higher the cost of gasoline, the less likely it is that car buyers 
will prefer heated cup-holders or whatever other options might be 
invented to improved fuel economy.

Questions submitted by Representative W. Todd Akin

Q1.  You served as Chair of the NAS panel that reviewed the CAFE 
program in 2001. Did your panel recommend any specific CAFE standards? 
Could you explain some of the complexities and policy tradeoffs that 
must be considered in taking information on future technologies and 
assessing the increases in vehicle and fleet fuel economy that may be 
possible from implementing those technologies?

A1. The NAS Committee did not recommend any specific CAFE standards. 
Determining those standards involves a set of complicated tradeoffs 
that can only be made by elected or appointed officials of the Federal 
Government.
    The complicated tradeoffs include such things as the safety of 
vehicle occupants, the cost and reliability of new vehicles, the fuel 
savings that would result from tighter standards, the reduced emissions 
of greenhouse gases associated with improved fuel economy and many 
other factors that are spelled out clearly in the report.

Q2.  If the CAFE program has been successful, could you please explain 
why we are more dependent on foreign oil today and consuming more 
gasoline in our vehicles than we were when the program was originally 
put into place? And if that is the case, how will increasing the CAFE 
requirements to higher levels reverse this trend and accomplish the 
original goals of CAFE?

A2. This is an easy one. The fact that we consume more gas today than 
we did before the CAFE standards were put in place does NOT necessarily 
indicate that the program was unsuccessful. That depends on how much 
gasoline we consume today compared to the level that would exist had we 
not implemented CAFE standards in the late 1970s. It was very clear to 
the NAS panel that while fuel consumption has gone up significantly 
since then, it would have gone up by much more had the CAFE program not 
been put in place--particularly after the fall in gas prices during the 
1980s.
    While there are clearly pros and cons to even tighter standards--
again, all spelled out in some detail in the NAS report, no one doubts 
that they would reduce the amount of gasoline used. Some believe that 
the savings wouldn't be worth the costs, while others have a different 
view. But NO ONE argues that tighter CAFE standards in the future will 
fail to reduce gasoline consumption relative to the current baseline.

                   Answers to Post-Hearing Questions

Responses by K.G. Duleep, Managing Director of Transportation, Energy 
        and Environmental Analysis, Inc.

Questions submitted by Chairman Sherwood L. Boehlert

Q1.  In your testimony you called the demand for 400, 500 and 600 
horsepower engines ``astounding'' since the speed limit in this country 
rarely exceeds 70 miles per hour. What effect do you believe this 
increase in horsepower will have on fuel economy? On safety?

A1. Large increases in horsepower do affect fuel economy and safety if 
vehicles. Typically a 10 percent increase in horsepower decreases fuel 
economy by 2.5 percent if the vehicle technology level is unchanged and 
the horsepower gain is achieved by engine upsizing. Larger increases in 
horsepower of 20 percent or more also require improvements to the 
brakes, tires and the drive line, thereby increasing vehicle weight and 
causing additional losses in fuel economy over and above the effect of 
engine upsizing. The doubling of horsepower that has occurred over the 
last 20 years has led to an implied loss in fuel economy of about 30 to 
35 percent.
    It is more difficult to provide a quantitative estimate on safety 
effects, since the vehicle safety statistics are profoundly influenced 
by driver behavior. In the past, high horsepower engines were typically 
associated with sports cars, which have a poor safety record. Now, very 
powerful engines are being offered in many conventional cars but it is 
not clear if their accident and fatality rates will be similar to those 
of sports cars with similar engines, due to differences in the types of 
consumers who drive these vehicles. I would still expect some increase 
in accident and injury rates since it is much easier to drive these 
powerful vehicles aggressively.

Q2.  You have emphasized the importance of the ability of the 
individual consumer to recoup the additional costs of fuel efficient 
technology through gasoline savings. But if the government chose to 
improve fuel economy to benefit the Nation by reducing our dependence 
on oil, why shouldn't it approach the issue more like it does the 
setting of requirements to control pollution emissions, in which 
consumer repayment is not a consideration?

A2. My testimony did emphasize the ability of consumers to recoup the 
costs of technology through savings from reduced fuel consumption, and 
I do not believe the situation is the same as setting emission 
standards for criteria pollutants. The committee appeared most 
interested in achieving increased fuel economy by setting fuel economy 
standards that auto manufacturers must comply with, but have no direct 
effect on consumer demand. Moreover, there appears to be little 
appetite in Congress for restricting consumer choice of vehicle size 
and power. Hence, manufacturers faced with consumer demand for larger, 
more powerful cars and lack of consumer interest in fuel economy will 
have considerable
    difficulty in selling technology that is perceived by the consumer 
to cost-ineffective. In contrast, emissions of criteria pollutants are 
not a function of vehicle size and power (due to the catalyst cleaning 
up 99 percent of engine-out emissions) and meeting emission standards 
is effectively de-coupled from the issue of consumer choice of vehicle 
attributes. The California zero-emissions vehicle mandate departs from 
historical emission standards by requiring a certain percentage of 
vehicles sold by each manufacturer to be a hybrid or electric vehicle. 
This regulation presents problems similar to those posed by fuel 
economy regulations, especially if hybrids are perceived as cost-
ineffective by a majority of consumers.

Questions submitted by Representative W. Todd Akin

Q1.  Since all of the automakers are in different places in terms of 
the current use, potential use and even applicability of the various 
technologies you have identified to their products, can you explain how 
you are able to evaluate the potential for increasing the fleet fuel 
economy levels? Aren't there going to be ``winners'' and ``losers'' in 
the process of dramatically increasing CAFE standards as some have 
suggested?

A1. We recognize that different manufacturers are in different 
positions with regard to technology deployment and vehicle sales mix, 
but we do track technology and fuel economy at the vehicle make and 
model level and can derive fuel economy potential for each 
manufacturer. The fleet fuel economy improvements cited in my testimony 
are simply a sales-weighted average of individual manufacturer 
capability but my testimony also makes the point that a single fuel 
economy standard for all manufacturers could disadvantage many 
manufacturers. The current CAFE standard imposes a single standard for 
cars and another for all light trucks, regardless of the mix of cars or 
trucks sold by any specific manufacturer. Historically, this single 
standard approach has created problems for GM, Ford, Chrysler and 
European luxury car manufacturers. This could continue to be true in 
the future, but the magnitude of the effect is declining due to mergers 
and acquisitions in the industry. In addition, the Japanese and Korean 
manufacturers are gradually entering all market segments including low 
fuel economy segments like fullsize pickup trucks and SUV, where no 
imports were offered in the past. Dr. Greene of Oak Ridge National 
Laboratory and I have explored other types of standards such as size 
class or weight specific fuel economy standards, and these appear to be 
better than the single standard approach used in the historical period.

Q2.  If the CAFE program has been successful, could you please explain 
why we are more dependent on foreign oil today and consuming more 
gasoline in our vehicles than we were when the program was originally 
put into place? And if that is the case, how will increasing the CAFE 
requirements to higher levels reverse this trend and accomplish the 
original goals of CAFE?

A2. Many detailed analyses of the CAFE standard conducted by the 
government conclude that it was effective in reducing gasoline 
consumption during the 1980-1990 period. Of course, the CAFE standards 
for cars set in 1975 by Congress are still in force today at the same 
level of 27.5 mpg while light-truck CAFE standards have also continued 
for the last 20 years with almost no change. Hence, the benefits of 
these standards have long since been swamped by population growth, 
increases in car ownership, and increased driving per car. Future 
increases in CAFE standards will also have only a short-term effect if 
the standards are left unchanged for decades. It is also possible that 
historical increases in car ownership will not occur as we approach 
saturation, and future increases in travel per vehicle may be much 
lower due to increasing congestion and traffic. If historical growth 
rates of these parameters are reduced in the future, then the benefits 
of CAFE standards may be more durable.

                   Answers to Post-Hearing Questions

Responses by Michael J. Stanton, Vice President of Government Affairs, 
        Alliance of Automobile Manufacturers

Questions submitted by Chairman Sherwood L. Boehlert

Q1.  You suggest in your testimony that to advance the adoption of new 
technologies to improve fuel economy, the government should enact tax 
credits for the purchase of advanced technology vehicles. However, if 
CAFE standards were to remain constant, since they are based on a 
fleet-wide average, the purchase of advanced high efficiency vehicles 
could be off-set by the sale of more fuel inefficient vehicles or the 
deployment of these technologies for greater power or size, resulting 
in little or no change in the overall consumption of fuel by the fleet. 
How do we avoid this outcome when supporting incentives for the 
purchase of advanced vehicles?

A1. Your question gets to the heart of one of the problems of the CAFE 
program. There is nothing that says the consumer must purchase ``fuel 
economy.'' The CAFE program only says that vehicle manufacturers must 
produce a fleet that averages a certain fuel economy level regardless 
of what consumers want or choose to purchase. The auto industry today 
makes over 100 models that achieve 30 or better miles per gallon on the 
highway, yet the sales of these vehicles are very low.
    The purpose of the incentives is to make it economical for the 
manufacturer to offer these advanced technology vehicles, since there 
is a premium to produce these vehicles. The proposed consumer tax 
incentives are for a very limited time. They will help increase 
production volumes and consequently reduce costs, enabling 
manufacturers to provide highly fuel-efficient vehicles with the 
attributes consumer's value.
    We can't change consumer-purchasing habits, but we can make some of 
these advanced technology vehicles in the most popular vehicle lines. 
There are already two hybrid-electric SUVs available and more are 
planned for production. There is also a diesel-powered SUV available. 
It is the manufacturers task to introduce advanced technologies in 
vehicles that consumers want to purchase.

Q2.  You have emphasized the importance of the ability of the 
individual consumer to recoup the additional costs of fuel-efficient 
technology through gasoline savings. But, if the government chose to 
improve fuel economy to benefit the Nation by reducing our dependence 
on oil, why shouldn't it approach the issue more like it does the 
setting of requirements to control pollutant emissions, in which 
consumer repayment is not a consideration?

A2. There are two important distinctions between the national program 
to control tailpipe emissions and the CAFE program. Over the past four 
decades, manufacturers developed and implemented very effective 
emission control technology. In fact, today's vehicles have 99 percent 
fewer smog-forming pollutants than vehicles of the 1970s.
    These emission reductions were achieved in a way that was invisible 
to the consumer.
    Unlike smog-forming pollutants, there are no ``catalysts'' that can 
be put on a vehicle to improve its fuel economy. Although several 
technologies to improve fuel efficiency have been introduced in the 
fleet, it can take 20 years to develop and implement a single new 
technology.
    The other main way to improve fuel economy is to make vehicles 
lighter. This involves either making vehicles smaller or using advanced 
materials for constructing the vehicle, which may not be cost-
effective. Unfortunately, history shows that consumers do not value or 
purchase in large numbers small cars with good fuel economy.
    Once consumers purchase these vehicles and get some experience, 
Consumer incentives to purchase advanced technology vehicles will spur 
the sale of these vehicles resulting in greater consumer acceptance and 
greater consumer willingness to invest in these technologies.

Questions submitted by Representative W. Todd Akin

Q1.  The House has considered amendments to legislatively increase the 
CAFE standards during consideration of each of the past two energy 
bills. Does the Auto Alliance support such legislative attempts to 
increase CAFE standards? Are legislative changes necessary? What would 
you recommend instead?

A1. No, the Alliance does not support legislative increases to CAFE 
standards. Congress clearly assigned the task of setting CAFE standards 
to NHTSA. NHTSA has the expertise and a great deal of experience in 
carrying out its statutory obligation to set maximum feasible standards 
considering technological feasibility, economic practicability, the 
effect of other motor vehicle standards, and the need of the U.S. to 
conserve energy. NHTSA enacted the largest increase ever for light 
trucks when it set standards for the 2005-2007 model years. Now, NHTSA 
is working on a proposal that will set standards and revamp the CAFE 
program for 2008 and later models years.

Q2.  If the CAFE program has been successful, could you please explain 
why we are more dependent on foreign oil today and consuming more 
gasoline in our vehicles than we were when the program was originally 
put into place? And if that is the case, how will increasing the CAFE 
requirements to higher levels reverse this trend and accomplish the 
original goals of CAFE?

A2. The CAFE program has been successful--the average fuel economy of 
the passenger car fleet doubled from around 13 mpg in the mid 1970s to 
27.5 mpg in 1985. However, programs that succeed in reducing oil demand 
have always increased, in percentage terms, the world's dependence on 
the most insecure sources of supply. As demand falls, the market share 
of high-cost non-OPEC producers falls, and the market share of low-cost 
Middle Eastern OPEC producers rises.
    In terms of overall fuel consumption, there are many unintended 
consequences of the CAFE program. When consumers are able to buy cars 
that get better mileage, in a low fuel price environment, consumers 
will drive more miles. Vehicle miles traveled have been increasing 
exponentially over the last decade or more. Since the enactment of the 
original CAFE standards, consumers have purchased more light trucks, 
which are now over 50 percent of the market. These vehicles are 
generally less efficient than passenger cars, but they provide greater 
carrying capacity and the ability to tow heavy loads, which most 
passenger cars today can't.
    Increasing the CAFE standards as they are currently structured will 
not reverse this trend, because the same unintended consequences will 
occur. The CAFE standards are a requirement for manufacturers to make 
more fuel-efficient cars and light trucks, but there is nothing that 
says consumers have to buy more fuel-efficient vehicles. The auto 
industry today makes over 100 models that achieve 30 mpg or more on the 
highway, but sales of these vehicles are relatively low compared to the 
overall fleet. NHTSA should be left with the job of weighing all of the 
competing demands placed on the industry and setting a standard that 
takes all of that into account.

                   Answers to Post-Hearing Questions

Responses by David L. Greene, Oak Ridge National Laboratory, Center for 
        Transportation Analysis, National Transportation Research 
        Center

Questions submitted by Chairman Sherwood L. Boehlert

Q1.  In his testimony, Dr. Portney said that recent research by his 
colleagues suggests that the ``rebound'' effect--people driving more 
because improvements in fuel economy make it cheaper to do so--might 
cancel out the economic and environmental benefits of improving fuel 
economy. Do you agree? Would consideration of the energy security 
benefits of improving fuel economy affect your answer?

A1. I do not agree that the rebound effect would cancel the benefits of 
fuel economy improvements brought about by higher fuel economy 
standards set at an appropriate level.
    In general, a reduction in the cost of operating a car brought 
about by improving fuel economy will be partially to entirely offset by 
an increase in the price of the vehicle. This is an extremely important 
point that is generally overlooked in analyses of the rebound effect. 
The premise of the rebound effect is that increasing fuel economy 
reduces the cost of operating a vehicle by reducing the amount of fuel 
required per mile of travel. Estimates of the rebound effect published 
in the economics literature measure the effect of reduced fuel cost per 
mile of travel (price per gallon divided by miles per gallon) on the 
amount of travel, other things equal. However, when manufacturers raise 
fuel economy in response to higher standards they do so primarily by 
adding more expensive fuel economy technology, thereby increasing the 
cost of the vehicle. Whether the increased cost of this technology will 
be less than or greater than the value of fuel saved is usually a 
subject of heated debate, and in any case will depend on how high the 
standards are set. Regardless, in the long run the cost of operating a 
vehicle depends on the cost of the vehicle as well as the cost of fuel 
(plus other costs such as insurance, maintenance, etc., some of which 
may increase with vehicle price). Thus, in the long run, the rebound 
effect due to lower fuel costs will be at least partially and possibly 
entirely offset by the increased cost of fuel economy technology. I 
will provide a simple illustration below to show how important this 
effect can be.
    Second, when fuel economy increases significantly, motor fuel tax 
revenues drop dramatically. Since motor fuel taxes are overwhelmingly 
user fees that finance the construction and maintenance of highways, 
Federal and State governments must find some way to replace the lost 
revenue. Historically, they have done this by raising motor fuel tax 
rates. Current federal and State motor fuel taxes average $0.38 per 
gallon (excl. sales taxes). If fuel economy standards were raised by 50 
percent, for example, the increase in fuel economy would eventually 
cause tax revenues to drop by 1/3. To restore the lost revenue the 
total tax would have to increase to $0.57, an increase of $0.19 or 
about 10 percent of the price of gasoline (at $2/gallon). Such a tax 
increase would further erode the rebound effect, as I will illustrate 
below.
    Finally, while historical estimates of the rebound effect (the 
elasticity of travel with respect to fuel cost per mile) are in the 
vicinity of ^0.2, the rebound effect has been decreasing over time, (1) 
as fuel costs have decreased as a share of total vehicle operating 
costs, and (2) as consumers' incomes rise. In 1985, fuel costs 
comprised 20 percent of total vehicle operating costs; in 2003, fuel 
accounted for only 12 percent of operating costs. As fuel becomes a 
smaller share of the cost of driving, motorists become less sensitive 
to both fuel prices and fuel economy. In addition, as consumers' 
incomes rise, they become less sensitive to fuel costs. The most recent 
analysis of the rebound effect by Professors Kenneth Small and Kurt Van 
Derider of the University of California at Irvine found a long-run 
rebound elasticity for the U.S. of ^0.24 for the period 1966-2001. This 
is quite similar to my 1999 study of this subject which found a long-
run elasticity of ^0.23. However, for the most recent five-year period 
using values of income for the State of California Small and Van Dender 
found the long-run rebound effect had fallen to ^0.09. Projecting 
future income growth in California, they calculated expected rebound 
values of ^0.08 for 2005 and ^0.04 for 2020. The current value of the 
long-run rebound elasticity is therefore probably close to ^0.1, with 
smaller values appropriate for evaluating future fuel economy impacts.
    It is instructive to combine these elements in a sample 
calculation. Suppose fuel economy regulations require a 50 percent 
increase in light-duty vehicle fuel economy. This will produce a 33 
percent decrease (1/1.5 = 0.67) in fuel cost per mile. Evaluated using 
alternative rebound elasticity values of ^0.2 and ^0.1, this would 
imply a 6.7 percent or a 3.3 percent increase in vehicle travel, 
respectively. If we assume that the increase in vehicle price for 
technologies to achieve these fuel economy gains will be two thirds of 
the value of fuel saved, then the net decrease in long-run vehicle 
operating costs would be only 11 percent. This would produce an 
increase in vehicle travel between 1.1 percent and 2.2 percent. If we 
add to this the assumption that motor fuel taxes will increase by $0.19 
per gallon, and that this amounts to 9.5 percent of the cost of 
gasoline at $2.00/gallon, then the total long-run decrease in the 
operating cost of a vehicle is 1.5 percent, for which we would estimate 
a rebound effect of between 0.3 percent and 0.15 percent. Obviously, 
the numbers used in this example are approximations. Nevertheless, 
taking into account the fact that increased fuel economy will increase 
the price of vehicles together with the likelihood that governments 
will respond to losses in highway revenues by raising motor fuel taxes 
can reduce the rebound effect to a truly negligible factor.
    From the above example it is clear that the smaller the price 
increase caused by higher fuel economy standards is relative to the 
fuel savings they produce, the larger the rebound effect will be. If 
the price increase is larger than the value of fuel savings, the 
rebound effect could be negative (i.e., an increase in vehicle 
operating costs and a decrease in miles traveled). My point is that one 
cannot have it both ways. Either fuel economy standards cause a net 
decrease in vehicle operating costs, in which case there is a rebound 
effect but also a substantial economic benefit to car buyers, or there 
is a net increase in operating costs, in which case there should be no 
rebound effect. If the fuel economy standards are set near the point at 
which the value of fuel savings equals the price increase, the rebound 
effect should be negligible.
    Finally, I believe that Dr. Portney was referring to not just the 
environmental impacts of the rebound effect, but to the full range of 
potential external costs of vehicle travel, which in previous studies 
by RFF have included congestion and safety externalities, among others. 
According to Harrington and McConnell (2003) non-environmental external 
costs may be several times the environmental external costs. In my 
view, we should not let the existence of safety, congestion and air 
pollution problems prevent us from addressing our oil dependence 
problem. Instead, we should address all these problems with appropriate 
and well targeted solutions.

Q2.  In discussing the potential of technology to reduce fuel 
consumption, you emphasized the importance of the ability of the 
individual consumer to recoup the additional costs of fuel efficient 
technology through gasoline savings. But if reducing the Nation's 
dependence on oil is a public good, why not emphasize the level of fuel 
savings that maximizes the benefit to the public as a whole? Why not 
think of fuel economy standards as similar to pollution emissions 
requirements, in which individual consumer repayment is not as 
important a consideration?

A2. Thank you for the opportunity to clarify my view on this subject. I 
entirely agree that reducing oil dependence is a public good and that 
the value to the Nation of reducing oil dependence should be a key 
factor in determining the appropriate level of vehicle fuel economy. 
However, in studying the costs of improving light-duty vehicle fuel 
economy I have observed two relevant phenomena. First, it appears that 
technology costs increase rapidly beyond the point at which the total 
cost of an increase in fuel economy exceeds the total present value of 
fuel savings. This is usually significantly above the fuel economy 
level at which the marginal value of fuel savings equals the marginal 
cost. Second, trying to increase fuel economy by using pricing to shift 
vehicle sales in favor of higher mpg configurations (rather than using 
fuel economy technology) appears to be a very expensive strategy. My 
intent in making the observation that the level of fuel economy 
standards should be set close to the level at which the total value of 
fuel saved equals the total cost of technology used to achieve those 
savings was to suggest a reasonable range in which the socially optimal 
level of fuel economy is likely to be found. In my opinion, this will 
be above the point at which the marginal cost of improving fuel economy 
equals the marginal value of fuel saved but below the point at which 
the total value of fuel saved equals the total cost of improving fuel 
economy. Of course, technology is constantly changing and therefore the 
most beneficial level of fuel economy from a societal perspective will 
change, as well.

Questions submitted by Representative W. Todd Akin

Q1.  If the CAFE program has been successful, could you please explain 
why we are more dependent on foreign oil today and consuming more 
gasoline in our vehicles than we were when the program was originally 
put into place? And if that is the case, how will increasing the CAFE 
requirements to higher levels reverse this trend and accomplish the 
original goals of CAFE?

A1. Establishing fuel economy standards was effective in raising fleet 
average fuel economy, reducing U.S. petroleum consumption, and reducing 
our oil dependence. During the years in which we required continuous 
increases in light-duty vehicle fuel economy (from 1978 to 1985) our 
oil dependence steadily decreased. When oil prices (not coincidentally) 
collapsed in 1986, we abandoned that successful strategy. By leaving 
the fuel economy standards essentially constant for the past 20 years 
we have allowed growing travel demand to overtake the new vehicle fuel 
economy gains achieved by 1985. The principal factors driving the 
growth of travel demand have been increasing population, increasing 
levels of income and economic activity, and the continuing geographical 
dispersion of both people and the built environment.
    Our oil dependence problem has worsened considerably since 1985 
because we stopped requiring fuel economy to increase while at the same 
time our ability to produce petroleum domestically continued to 
decline. The amount of oil we import equals the amount we consume minus 
what we produce. U.S. production has been falling since 1970 due to 
depletion of our oil resources. In 1970, the U.S. produced 11.3 million 
barrels per day of petroleum (crude oil plus natural gas liquids); in 
2003 we produced only 7.5 million barrels per day.\1\ U.S. petroleum 
consumption in 1970 was 14.7 million barrels per day. Petroleum use 
increased to 18.8 million barrels per day in 1978, the first year in 
which the CAFE standards were in force. From that level, U.S. petroleum 
consumption decreased to 15.7 million barrels per day in 1985, for 
practical purposes the last year in which the CAFE standards increased. 
The reduction in petroleum consumption from 1978 to 1985 was achieved 
despite a 15 percent increase in miles traveled by light-duty vehicles 
over the same period (from 1,426 billion vehicle miles in 1978 to 1,637 
billion in 1985).\2\ Because it takes more than 10 years to turn over 
most of the stock of light-duty vehicles, the benefits of higher new 
vehicle fuel economy persisted beyond 1985 even though the rate of 
growth in vehicle travel exceeded the rate of increase in fuel economy. 
By 1992, the turnover of the stock of vehicles was nearly complete and 
on-road light-duty vehicle fuel economy reached a plateau of 
approximately 19.5 miles per gallon. Had light-duty vehicle fuel 
economy remained at the 1978 level of 13.6 mpg, the 2,078 billion miles 
traveled by passenger cars and light trucks in 1992 would have required 
46 billion gallons (three million barrels per day) more petroleum than 
it did.
---------------------------------------------------------------------------
    \1\ U.S. Department of Energy, Energy Information Administration, 
``Annual Energy Review 2003,'' DOE/EIA-0384 (2003), Table 5.1, 
September 2004, Washington, DC.
    \2\ U.S. Department of Transportation, Federal Highway 
Administration, ``Highway Statistics 2002,'' Table VM-1, Washington, 
DC.
---------------------------------------------------------------------------
    Depending on the fuel economy standards chosen, raising fuel 
economy standards alone may or may not be sufficient to reverse the 
trend of increasing oil dependence. In general, increasing energy 
efficiency alone is not a complete strategy for addressing oil 
dependence. Increasing domestic petroleum and alternative fuel supplies 
is equally important, and harnessing market forces to promote both 
efficiency of energy use and increased energy supply is key. Equally 
important to these strategies is continuously expanding the 
technological potential to increase energy efficiency and substitute 
alternative energy sources for petroleum through research. In my 
opinion, raising the fuel economy standards is an essential part of an 
effective energy security strategy but not a sufficient strategy by 
itself.

References

1.  Small, K.A. and K. Van Dender. 2004. ``A Study to Evaluate the 
Effect of Reduced Greenhouse Gas Emissions on Vehicle Miles Traveled,'' 
Department of Economics, University of California, Irvine, December 6.
2.  Greene, D.L., J. Kahn and R. Gibson. 1999. ``Fuel Economy Rebound 
Effect for U.S. Household Vehicles,'' The Energy Journal, Vol. 20, No. 
3, pp. 1-31.
3.  Harrington, W. and V. McConnell. 2003. ``Motor Vehicles and the 
Environment,'' RFF Report, Resources for the Future, Washington, DC, 
April.
                              Appendix 2:

                              ----------                              


                   Additional Material for the Record


                Prepared Statement of Dr. David L. Bodde
Professor and Director of Innovation and Public Policy, International 
        Center for Automotive Research, Clemson University

    Thank you, Mr. Chairman, for the opportunity to comment on 
Corporate Average Fuel Economy (CAFE) standards and their capacity to 
encourage fuel-saving innovation in automobiles and light trucks. The 
thoughts that follow are my own and not necessarily the views of 
Clemson University or its International Center for Automotive Research.
    In summary, my thesis rests on three points:

          Near-term improvements in fuel economy can most 
        likely be achieved through more stringent CAFE standards. But 
        these gains will soon dissipate unless efficiency-enhancing 
        innovation becomes an ongoing process.

          CAFE standards, by themselves, cannot move light 
        vehicles from mere compliance to continuous improvement. This 
        is true for two reasons:

                  CAFE standards operate on the supply side of the 
                market. They do nothing to promote consumer demand for 
                more fuel-efficient vehicles.

                  CAFE standards take no cognizance of the 
                entrepreneurial sector of the economy. Therefore they 
                are irrelevant to the most dynamic force for change in 
                a free society, the wellspring of ``creative 
                destruction'' that has led technological revolutions in 
                fields as diverse as telecommunications, computing, and 
                medicine.

          If more aggressive CAFE standards are authorized, 
        then I would suggest consideration be given to policies that 
        could supplement regulation with incentives for continuous 
        innovation.

    In what follows, I will set out the evidence that supports this 
thesis.

The Limits of Standards in Promoting Ongoing Fuel Efficiency Innovation

    The balance of evidence supports two premises as true. The first is 
that the original CAFE standards contributed to the sharp increase in 
vehicle fuel efficiency that occurred in the decade from 1975 to 1985. 
To be sure, analysis cannot clearly distinguish the effects of the 
regulation from the effects of the fuel price increase over that same 
period. But at the very least, the CAFE standards contributed to the 
improvement--and they surely prevented a decline in efficiency as fuel 
prices fell in the late 1980s.
    Second, the evidence strongly supports a conclusion that the 
technology required for meaningful improvement is readily at hand. For 
example, the 2002 report of the National Research Council\1\ found that 
technologies capable of meaningful improvements in fuel efficiency now 
exist but are not applied to passenger cars and light duty vehicles. 
Other statements presented to this Committee corroborate this view.\2\ 
And yet, if this Committee were to hold these hearings 10 years from 
now, the same would be said--the ongoing advance of science in many 
fields will ensure that the frontier of the possible remains well ahead 
of what is actually achieved. The key issue then concerns how to 
achieve rapid and continuous application of these results.
---------------------------------------------------------------------------
    \1\ U.S. National Research Council, Committee on the Effectiveness 
and Impact of Corporate Average Fuel Economy (CAFE) Standards, 
Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) 
Standards, National Academies Press, 2002.
    \2\ For example, Duleep, K.G. Testimony of Mr. K.G. Duleep at the 
Hearing on Improving the Nation's Energy Security: Can Cars and Trucks 
Be Made More Efficient? Committee on Science, U.S. House of 
Representatives, 9 February, 2005.
---------------------------------------------------------------------------
    These premises hold important implications. The current situation 
does not differ markedly from that of 1975, when the Energy Policy and 
Conservation Act first put fuel efficiency standards in place. Then, as 
now, the public need for fuel efficiency was far stronger than could be 
expressed by price in the marketplace. Then, as now, technologies 
offering potential improvement were available, but not in use. Then as 
now, the evidence suggested some differential impact on auto 
manufacturers. Thus, we can reasonably expect that a new, more 
aggressive set of standards would achieve similar results: a onetime, 
marked improvement in vehicle fuel performance, followed by a period of 
much diminished gains.
    If that outcome is satisfactory, then CAFE alone would be 
satisfactory. But if the aim of energy policy is to achieve something 
more, then consideration should also be given to ways of nurturing 
fuel-saving innovation as an ongoing process. And to that subject that 
we now must turn.

The Process of Innovation: Implications for Fuel Efficiency

    At the beginning, it might be helpful to review some general 
principles regarding technological innovation and how it advances 
performance throughout the economy. We should begin by understanding 
technology from the customer perspective--not as a ``thing,'' but as a 
service.
    Technology Viewed as a Service: Fuels and vehicles have little 
value in themselves, but enormous utility as providers of mobility 
services. For road transportation, these valued services include 
performance vectors like:

          time saving: will the vehicle travel far enough that 
        the driver does not waste time with frequent refueling?

          safety: how well does the vehicle protect its 
        occupants, both by its ability to avoid accidents and by its 
        ability to survive them?

          comfort: can the vehicle mitigate the stress and 
        hassles of road travel for the driver and passengers?

          image: what does driving this particular vehicle say 
        about its occupants?

          ancillary services: does the vehicle have enough 
        generating capacity to meet the growing demand for on-board, 
        electricity-based services?

    At any time, consumers emphasize some of these performance 
dimensions while sacrificing along others. Consider the consumer 
preferences revealed by an EPA analysis of automobile performance from 
1981 to 2003. Over this period, average horsepower nearly doubled (from 
102 to 197 horsepower), weight increased markedly (from 3201 to 3974 
lbs.), and the time required to accelerate from zero to 60 mph dropped 
by nearly 30 percent. One task of policy should be the addition of fuel 
efficiency to the competitive performance dimensions for road 
transportation.
    Technology-based Innovation: Accumulating Technological innovations 
can be grouped into two general classes: those that advance performance 
by accumulating incremental improvements, and those that offer 
discontinuous leaps in performance. The term accumulating applies to 
technologies that advance performance along dimensions already 
recognized and accepted by customers. Each improvement might be 
incremental, but the cumulative effect compounds to yield markedly 
improved performance--consider the improvements in processor speed for 
computers, for example. Auto manufacturers are accustomed to competing 
along these dimensions, and the cumulative effect can lead to important 
advances--but only if the technology competition continues long enough 
for the gains to accumulate. Most of the fuel saving technologies 
discussed at this hearing are incremental in nature, and so nurturing 
this kind of innovation could become an important policy goal.
    Technology-based Innovation: Discontinuous: In contrast, 
discontinuous technologies introduce performance dimensions quite 
distinct from what the mainstream customers have come to value, 
sometimes offering inferior performance along the accustomed 
dimensions. Because of their inferior mainstream performance, these 
technologies initially gain traction only in niche markets. With 
continued use and improvement, however, discontinuous technologies gain 
adequacy along the original dimensions and then enter the mainstream 
markets.
    Consider the electric car, for example. Many analysts have written 
off electric vehicles because of their inferior performance in 
mainstream auto markets--acceleration, range, and recharge time. Yet 
electric vehicle technologies are emerging in an important niche: the 
market for personal transportation. This includes golf carts, all-
terrain vehicles, touring vehicles for resorts, transportation within 
gated communities, and so forth. In that market, the chief performance 
dimensions are convenient access, economy, and ease of use--and style. 
The current state of electric vehicle technology is adequate for the 
limited range and acceleration requirements of this niche. But, could 
electric vehicle technology advance to the point of entry into 
mainstream markets? Or, could it compete effectively in personal 
transportation markets in developing countries--say Thailand or China? 
That is, of course, unknowable. But, please recall that the personal 
computer was once considered a hobbyists toy, inherently without enough 
power to enter mainstream applications.
    Discontinuous innovation tends to be the province of the 
entrepreneur, and the companies that such persons found become 
platforms for the innovations that radically change all markets. Yet 
entrepreneurs often have low visibility relative to the market 
incumbents in policy discussions, and their companies are far from 
household words.\3\ This is because the entrepreneurs' story is about 
the future, not the present; about what could be and not about what is. 
For that reason, policies that encourage entrepreneurship in 
technologies relevant to reducing fuel use should become part of the 
energy policy conversation.
---------------------------------------------------------------------------
    \3\ Consider, for example, Zap!, a company founded 10 years ago in 
response to the zero-emissions vehicle market emerging in California. A 
description can be found at: http://www.zapworld.com/index.asp
---------------------------------------------------------------------------

Policy Options to Promote Fuel Saving Innovations

    Two general strategies could be considered to supplement the CAFE 
approach by encouraging ongoing innovation in fuel-efficient 
technologies: building market demand for these innovations, and 
nurturing the entrepreneurial sector to supply them.
    Building Market Demand: The price of the fuel offers most obvious 
way to encourage fuel saving innovations, and motor fuel taxes provide 
the most direct leverage if this component of policy is to be 
considered. We must, however, distinguish among short-term and long-
term effects, and include consideration of consumer expectations.
    For the short-term, consumers can respond to increased motor fuel 
prices in only two ways: by changing their driving patterns, or by 
paying more for fuel and reducing their consumption in other areas. The 
evidence suggests some mix of these responses. For the longer-term, 
consumers can exchange their capital stock--the vehicles they drive--
for more fuel efficient models. In both cases, this adaptive behavior 
will depend upon consumer expectations for the magnitude and duration 
of the fuel price increase. Adaptive behavior diminishes to the extent 
that consumers believe the price increase will prove impermanent. We 
should observe also that every country relying on fuel economy 
standards also matches them with meaningful motor fuel taxes.
    The so-called ``freebates'' program offers an alternative to taxes. 
This has been capably discussed elsewhere,\4\ and needs no further 
comment here. The effectiveness of income tax deductions for the 
purchase of fuel-efficient vehicles will depend upon the tax status of 
the individual purchaser. The incentive is further blunted by the 
complexities of the tax code and by the delay in receipt of the 
benefit.
---------------------------------------------------------------------------
    \4\ Greene, Dr. David L. Hearing on Improving the Nation's Energy 
Security: Can Cars and Trucks Be Made More Efficient? Committee on 
Science, U.S. House of Representatives, 9 February, 2005.
---------------------------------------------------------------------------
    In general, any policy that increases consumer incentives to 
purchase fuel efficient vehicles will provide an incentive for ongoing 
innovation--provided that the policy is perceived as permanent. 
Entrepreneurs and innovators respond primarily to opportunity; but that 
opportunity must be durable for the 10-year cycle required to establish 
a new high-growth company.
    Nurturing an Entrepreneurial Culture in Fuel Saving: Policies to 
build the market for fuel saving technologies operate on the ``demand'' 
side of entrepreneurship and innovation. In addition, several policies 
could be considered to build an entrepreneurial climate on the 
``supply'' side. These include:

          Special tax consideration for investors in new 
        ventures offering products relevant to fuel savings. The intent 
        would be to increase the amount of venture capital available to 
        startup companies.

          Commercialization programs might enable more 
        entrepreneurs to bring their nascent technologies up to 
        investment grade. For example, an enhanced and focused Small 
        Business Innovation Research (SBIR) program might increase the 
        number of participating entrepreneurs participating in fuel-
        relevant markets. A portion of the Advanced Technology Program 
        (ATP) could be focused in like manner.

          Outreach from the National Laboratories to 
        entrepreneurs might be improved. Some laboratories, the 
        National Renewable Energy Laboratory (NREL) for example, offer 
        small, but effective programs. But more systematic outreach, 
        not to business in general, but to entrepreneurial business, 
        would also increase the supply of market-ready innovations.

                   Prepared Statement of Dr. Gal Luft

Executive Director, Institute for the Analysis of Global Security 
        (IAGS)

Mr. Chairman, Members of the Committee:

    It is an honor to be invited to submit this testimony to this 
distinguished Committee on the important issue of improving the fuel 
efficiency of America's vehicle fleet. I currently serve as executive 
director of the Institute for the Analysis of Global Security (IAGS), 
an energy security research institution. I'm also representing the Set 
America Free coalition, a coalition of national security, foreign 
policy and environmental groups dedicated to promote a blueprint for 
energy security which focuses on reduction of U.S. oil demand in the 
transportation sector. Among the groups involved in the coalition are 
IAGS, the National Defense Council Foundation, the Hudson Institute, 
the Foundation for the Defense of Democracies, the Center for Security 
Policy, and the Natural Resources Defense Council.
    I would like to address the strategic context of our current 
dependence on imported oil and its implications on national security 
and offer new approaches to the fuel efficiency debate.

The Strategic Impact of Our Oil Dependence

    In 2004 oil prices have grown by close to 40 percent. As a result, 
the United States spent more than $18 million per hour on foreign oil. 
In the same period of time, OPEC's oil export revenues grew by 42 
percent to $338 billion. According to the U.S. Energy Information 
Administration (EIA) throughout 2005 oil prices will continue to stay 
high and OPEC will rake $345 billion in revenue. This transfer of 
wealth of historical proportions is not only exacting a hidden tax on 
the American economy but is also undermining our national security and 
the security of the world at large. It is unfortunate that most major 
oil producing countries are either politically unstable and/or at odds 
with the U.S. Some of the world's largest oil producing nations are 
sponsors of or allied with radical Islamists who foment hatred against 
the U.S. The petrodollars we provide such nations contribute materially 
to the terrorist threats we face. In time of war, it is imperative that 
our national expenditures on energy be redirected away from those who 
use them against us.
    Beyond the underwriting of terror, our present dependency creates 
unacceptable vulnerabilities. As we have learned from Osama bin Ladin's 
messages, al Qaeda terrorists know that oil is the Achilles heel of the 
world economy and disrupting the world's oil supply is central to their 
efforts to defeat the U.S. and its democratic allies. In Iraq and Saudi 
Arabia, America's enemies have demonstrated that they can advance their 
strategic objective by attacking critical oil infrastructure and 
personnel. In Iraq alone there have been more than 200 attacks against 
pipelines and oil installations in the past 20 months. These targets 
are readily found not only in the Mid East but also in other regions to 
which Islamists have ready access such as the Caspian Basin and Africa. 
Over time, these attacks are sure to become more sophisticated and 
their destructive effects could be difficult, costly and time-consuming 
to undo.
    In the longer run America's national security can be adversely 
influenced by China's growing demand for oil. Chinese oil consumption 
is increasing seven times faster than that of the U.S. and its imports 
have grown by over 35 percent per year for two consecutive years. All 
signs indicate that China's appetite for oil will continue to grow in 
the years to come. According to the International Energy Agency, by 
2030 China will import more oil than the U.S. does today. There is no 
doubt that China's robust economic growth has already been felt on the 
global energy scene and has been a major contributor to last year's 
spike in prices. More importantly, China's demand for energy and other 
raw materials and its hunt for steady oil supplies in areas where the 
U.S. has strategic interests could undermine Sino-American relations. 
The U.S.-China Economic and Security Review Commission, a group created 
by Congress to examine the national security implications of the 
bilateral trade and economic relationship between the two countries, 
warned in its 2004 report that China's growing dependence on imported 
oil is a key driver of its relations with terrorist-sponsoring 
governments. The report said: ``China's approach to securing its 
imported petroleum supplies through bilateral arrangements is an 
impetus for non-market reciprocity deals with Iran, Sudan, and other 
states of concern, including arms sales and WMD-related technology 
transfers that pose security challenges to the United States.'' There 
is growing recognition within the oil industry that the rise of China 
will bring about a bidding war for Middle East supply between East and 
West. Dave O'Reilly, chief executive of ChevronTexaco warned recently 
against alliances formed between Asian countries and Middle East 
entities, calling for the U.S. Government to recognize and understand 
the implications of such a geopolitical shift. Without a comprehensive 
strategy designed to prevent China from becoming an oil consumer on par 
with the U.S., the U.S. might find itself in the future facing 
aggressive competition from China over access to Middle East oil with 
grave implications for global security.

U.S. Approach to Oil Dependence

    In light of intensifying military involvement in the Middle East, 
terrorist attacks on oil infrastructure, persistently high global oil 
prices, and the rise of China, oil dependence has become an incipient 
national security emergency. To address the problem of our dependence 
on volatile suppliers, the U.S. has pursued a three-part strategy:

          Diversifying sources;

          Managing inventory in a strategic reserve;

          Increasing the transportation sector's energy-
        consumption efficiency

    The first pillar of our strategy is no more than a stopgap 
solution. In May 2001, when the Bush administration released its 
National Energy Policy, it proposed to reduce dependence on Middle East 
oil dependence by targeting alternative oil-supplying nations for 
government investment and closer alliances, including Angola, 
Azerbaijan, Colombia, Kazakhstan, Nigeria, Russia, and Venezuela. All 
of these nations are undemocratic, vulnerable to global terrorism and 
face significant political and social instability. Increasing U.S. 
reliance on these states would do little to address U.S. security and 
economic threats stemming from oil dependency. Given the integrated 
nature of the world economy we accomplish nothing if we merely shift 
our own purchases of oil from one of the world's regions to another. An 
oil crisis will affect all our economies, regardless of the source of 
our own imports. Furthermore, non-OPEC reserves are being depleted 
almost twice as fast as OPEC's. This will ensure that our dependence on 
OPEC will only grow as time goes by. With OPEC countries sitting in the 
driver's seat with respect to the world's oil supply and oil prices, 
the world's economic and political future will be compromised.
    Inventories are a critical element of energy security. But they are 
limited in scale and only useful to address a short term supply 
disruption. However, at this moment most major oil consuming nations do 
not have significant strategic petroleum reserves. This means that a 
supply disruption will still send international oil prices to the roof 
regardless of how much stock is kept in the U.S. Though over time it 
would be advisable to see more countries developing robust strategic 
petroleum reserves, such action at the point of high oil prices would 
only create additional demand and hence drive prices up even further.
    Since the Arab oil embargo in 1973 several sectors of the economy 
significantly reduced their dependence on oil. The power sector is a 
particular example: today, only two percent of U.S. electricity is 
generated from oil. The transportation sector accounts for 2/3 of U.S. 
oil consumption, about 2/3 of that being gasoline and most of the rest 
diesel. Improving fuel efficiency in U.S. vehicles is the only course 
of action which carries no negative consequences. On the contrary, 
studies show that by reducing demand for oil in the transportation 
sector and transitioning the economy into an economy based on next 
generation fuels and automobiles, the U.S. could generate millions of 
new jobs and billions of dollars worth of investment opportunities.

New Approach to Fuel Efficiency

    In the past three decades the debate on improving fuel efficiency 
has focused mainly on the tension between auto manufacturers, consumers 
and the government. Though everybody agrees that the U.S. should reduce 
its oil bill neither Detroit nor the American consumer is willing to do 
so for the greater good. The U.S. auto industry shies away from 
embarking on revolutionary changes in its designs and production lines 
and by and large resists significant rise in CAFE standards. The 
American consumer is growingly minded to the need to reduce oil 
dependence but is still unwilling to accept compromise on cost, 
comfort, power or performance. To end the stalemate in the fuel 
efficiency issue we need to change the terms of the debate. Today when 
it comes to CAFE the auto industry shoulders the entire burden. But 
long-term security and economic prosperity depends on technological 
transformation not only at the vehicle level but also in the fuel that 
powers it. In other words, to get people to travel more miles per 
gallon of gas one need not focus only on redesigning the car, making it 
lighter or improving its engine. We should think in terms of gallon 
stretchers--making our fuel more efficient. For example, a number of 
commercially available fuel additives can enhance combustion efficiency 
by up to 20 percent. Most of these additives are made from organic 
materials and are environmentally friendly. By reducing the size of the 
oil droplets they bring to more efficient combustion. Such additives 
can be blended into gasoline, diesel and bunker fuel.
    An even better way of reducing the content of gasoline in the fuel 
tank can be done by mixing gasoline with alternative fuels and using 
the blend in flexible fuel vehicles (FFVs) that can be readily 
available at low marginal cost and that require no change in auto 
design. FFVs are designed to burn on alcohol, gasoline, or any mixture 
of the two. About four million FFVs have been manufactured since 1996. 
The only difference between a conventional car and a flexible fuel 
vehicle is that the latter is equipped with a different control chip 
and some different fittings in the fuel line to accommodate the 
characteristics of alcohol. The marginal additional cost associated 
with such FFV-associated changes is currently under $150 per vehicle. 
That cost would be reduced further as volume of FFVs increases, 
particularly if flexible fuel designs were to become the industry 
standard.

  Alcohol fuels that can be used in FFVs:

          Ethanol is currently produced in the U.S. from corn. 
        In 2004, the U.S. produced over 3.2 billion gallons of ethanol, 
        and the market has increased on the average of 25 percent per 
        year over the past three years. Almost all our ethanol comes 
        from corn and is being used either as an additive to gasoline 
        or as E-85. Upping production of ethanol would be achieved by 
        continuing to advance the corn-based ethanol industry but, more 
        importantly, by commercializing the production of ethanol from 
        agricultural and municipal waste and dedicated energy crops. 
        Progress has been made on a process that produces ethanol from 
        biomass using genetically modified biocatalysts and a Canadian 
        company, Iogen, has just entered commercial production.

          P-Series fuel (approved by the Department of Energy 
        in 1999) is an energy-efficient blend of ethanol, natural gas 
        liquids and ether made from biomass waste. About 20 percent of 
        the blend is MeTHF, an ether derived from lignocelullosic 
        biomass--paper sludge, wastepaper, food waste, yard and wood 
        waste, agricultural waste, and so on. P-Series fuels can help 
        solve a problem all municipalities are facing today: waste 
        disposal. Using feedstock with a negative cost--that means 
        waste that municipalities would otherwise pay to have hauled 
        away--allows the fuel's selling price to be about the same as 
        mid-grade gasoline.

          Methanol (also known as wood alcohol) is today for 
        the most part produced from natural gas. Expanding domestic 
        production can be achieved by producing methanol from coal, a 
        resource with which the U.S. is abundantly endowed. The 
        commercial feasibility of coal-to-methanol technology was 
        demonstrated as part of the DOE's ``clean coal'' technology 
        effort. For almost a decade, a commercial scale demonstration 
        plant in Kingsport, Tennessee has been producing methanol from 
        coal at under $0.50 a gallon. Methanol can also be produced 
        from biomass using gasification technology.

    Alcohol fuels are relatively easy to introduce to the market 
because of the low infrastructure costs involved. It only costs about 
$20,000 to enable an existing gasoline or diesel tank at a gas station 
to accommodate one of the above fuels and about $60,000 to add a new 
fuel pump to an existing refueling station. By introducing a fleet of 
FFVs and actually fueling them with blends of say 20 percent alcohol 
and 80 percent gasoline we can save more oil than through the entire 
CAFE program. For example, a hybrid car like the Toyota Prius that is 
also an FFV running on a blend of 85 percent ethanol and 15 percent 
gasoline can get nearly 300 miles per gallon of gasoline.

Electricity as a Fuel

    Electricity is seldom referred to as a transportation fuel, but it 
is. Less than two percent of U.S. electricity is generated from oil, so 
using electricity as a transportation fuel would greatly reduce 
dependence on imported petroleum. Tens of thousands of hybrid electric 
vehicles are already on America's roads combining hybrid engines 
powered in an integrated fashion by liquid fuel-powered motors and 
battery-powered ones. Such vehicles increase gas-consumption efficiency 
by 30-40 percent. While hybrids gather charge to their batteries by 
capturing breaking energy, their only external source of energy is 
liquid fuel. ``Plug-in'' hybrid electric vehicles take the concept one 
step further, by allowing us to draw charge not only from the engine 
and captured braking energy, but also directly from the electrical grid 
by being plugged into standard electric outlets when not in use. They 
have liquid fuel tanks and internal combustion engines, so they do not 
face the range limitation posed by electric-only cars. Since fifty 
percent of cars on the road in the United States are driven 20 miles a 
day or less, a plug-in with a 20-mile range battery would reduce fuel 
consumption by, on average, 85 percent. Plug-in hybrid electric 
vehicles can reach fuel economy levels of 100 miles per gallon of 
gasoline consumed. Overall, plug-ins can reduce gasoline use by 85 
percent. This is so dramatic a reduction that a plug-in SUV actually 
would consume less gasoline than a standard compact car. Plug-in hybrid 
vehicles would be charged at night in home garages--a time-interval 
during which electric utilities have significant excess capacity. The 
Electric Power Research Institute estimates that up to 30 percent of 
market penetration for plug-in hybrid electric vehicles with 20-mile 
electric range can be achieved without a need to install additional 
electricity-generating capacity. Plug-ins will soon make their debut. 
DaimlerChrysler is currently introducing a plug in version of its 
Sprinter van. Though a plug-in would be initially more expensive up 
front than an ordinary car, the total cost over the life of the vehicle 
would be less due to lower operating costs and gasoline saving. As 
battery technologies improve the cost of plug-ins will drop further.
    If a vehicle combines hybrid technology with a flexible fuel 
internal combustion engine, the effect of next generation fuels can be 
multiplied with substantial fuel efficiency gains. A plug-in hybrid 
vehicle that is also a flexible fuel vehicle can be powered by blends 
of alcohol fuels, gasoline, and electricity. If fueled by a blend of 80 
percent alcohol, 20 percent gasoline, and electricity, fuel economy 
could reach 500 miles per gallon of gasoline.
    According to the Set America Free Coalition if by 2025, all cars on 
the road are hybrids and half are plug-in hybrid vehicles, U.S. oil 
imports would drop by eight million barrels per day (mbd). Today, the 
United States imports 10 mbd and it is projected to import almost 20 
mbd by 2025. If all of these cars were also flexible fuel vehicles, 
U.S. oil imports would drop by as much as 12 mbd.

Recommendations for Congress:

  Provide incentives to auto manufacturers to produce and consumers to 
purchase, hybrid vehicles, plug-in hybrid electric vehicles and FFVs 
across all vehicle models. Producing fuel-efficient, advanced 
technology vehicles will requires automakers and their suppliers to 
retool their factories. Hybrid vehicles rely on advanced equipment such 
as battery packs, electric motors and generators, and electronic power 
controllers. Advanced diesel drivetrains require sophisticated fuel 
injection systems, turbochargers and after treatment systems.

  Provide incentives for auto manufacturers to increase fuel efficiency 
of existing, non-FFV auto models. Many off-the-shelf technologies exist 
to improve today's cars, including variable valve engine timing, 
continuously variable transmissions, and lightweight, high strength 
materials.

  Call for substantial incorporation of plug-ins hybrids, standard 
hybrids, and FFVs into federal, State, municipal and covered fleets, 
and ensure that these FFVs are actually fueled with alcohol blends.

  Provide investment tax incentives for corporate fleets and taxi 
fleets to switch to plug-ins, hybrids and FFVs.

  Encourage gasoline distributors to blend combustion enhancers into 
the fuel.

  Provide incentives for existing fueling stations to install 
alternative fuel pumps and mandate that all new gas stations be so 
equipped with such pumps.

  Encourage new players, such as utilities, to enter the transportation 
fuel market. Utility companies have traditionally viewed themselves as 
providers of ``power'' for lighting homes or powering computers. Using 
electricity as a fuel can allow them to become key players in the 
transportation energy sector and introduce much needed competition in 
the fuel market.

  Provide incentives for the construction of commercial scale 
demonstration plants to produce non-petroleum based liquid fuels from 
domestic energy resources, particularly from waste. Two billion dollars 
in federal funding utilizing public-private cost sharing partnerships 
could build roughly 25 demonstration plants. Such program would spur 
innovation, development, and demonstration projects aimed at making 
non-petroleum fuels cost-effective for consumers while weeding out 
unfeasible technologies.

  Apply efficiency standards for heavy-duty trucks. Most of our effort 
to improve fuel efficiency is focused on light-duty vehicles. But 
improving the fuel economy of heavy-duty trucks offers no smaller 
opportunity for oil savings. The heavy-duty trucks sector is 
responsible for the consumption of close to three million barrels per 
day of oil. Over two-thirds of this energy is consumed by the heaviest 
trucks, such as tractor-trailers weighing over 33,000 lbs. Technology 
assessments by the American Council for an Energy-Efficient Economy 
(ACEEE) found that conventional technology improvements including 
enhancements to aerodynamics, weight reduction, improved engine fuel 
injection and the introduction of hybrid gasoline-electric or diesel-
electric drive trains can achieve truck fuel-efficiency advances of 26 
to 70 percent at cost-effectiveness. Congress should therefore begin to 
apply some of the standards for the small cars to the larger vehicle 
classes especially heavy trucks from 8,500 to 10,000 lbs. Tremendous 
amounts of fuel are used by truck drivers during idling. Drivers idle 
their trucks for days in a row to heat or cool their sleeping cabin and 
run electrical appliances. This practice is extremely wasteful since 
large diesel engines are designed to move heavy loads, not run 
auxiliary systems. Idling can be reduced by installing auxiliary power 
units and providing electricity in rest areas.

  Invest in Public Education. Consumers still rank fuel efficiency way 
below power, performance, cost and safety in their car buying 
considerations. As a result the Nation's fuel efficiency standards have 
remained stagnant while our oil dependence continues to grow. Barring a 
catastrophic oil disruption this could only change if the public is to 
become more aware of the huge impact oil dependence has on our national 
security. Reduction of our oil bill should be viewed by consumers as a 
patriotic duty, not pure economic calculation. There is clear need for 
public education program to connect the dots between our behavior on 
the road and our national security, between the number of Hummers on 
the road and the number of Humvees in the Persian Gulf. Another issue 
on which public education is desirable is the true cost of oil. The 
most recent estimates suggest that in a non-war year the United States 
spends $20 to $40 billion in military costs to secure access to Middle 
East oil supplies, which means that the American taxpayer is paying at 
least an additional $4 to $5 a barrel for crude oil above market price. 
These extra dollars are being paid by consumers through their income 
tax but are not reflected at the price at the gas station. If Americans 
were more aware of what they pay outside the gas station it would be 
politically easier to introduce legislative efforts to transfer that 
tax burden from an indirect mechanism such as income tax to a direct 
pay-as-you-go tax at the pump.

In sum

    America takes pride in offering choice in every aspect of our 
lives. Yet, when it comes to transportation fuels we are offered 
nothing but petroleum products. We must embark on an effort to 
diversify our fuel market by introducing domestically produced fuels 
that are made from waste products or other resources the U.S. is rich 
in, and that are clean and affordable. The U.S. is no longer rich in 
oil or natural gas. It has, however, a wealth of other energy sources 
from which transportation fuel can be safely, affordably and cleanly 
generated. Among them: hundreds of years worth of coal reserves, 25 
percent of the world's total (especially promising with Integrated 
Gasification and Combined Cycle technologies); billions of tons a year 
of biomass, and further billions of tons of agricultural and municipal 
waste. Vehicles that meet consumer needs like ``plug-in'' hybrids can 
tap America's electrical grid to supply energy for transportation, 
making more efficient use of such clean sources of electricity as 
solar, wind, geothermal, hydroelectric and nuclear power.
    Because of the national security imperative we have no time to wait 
for commercialization of immature technologies such as fuel cells. I 
believe that automotive fuel cells hold great potential and should 
definitely be pursued. But far too much focus is being placed on them 
at the expense of more quickly available solutions. We should focus on 
real world solutions and implement technologies that exist today and 
are ready for widespread use. We also don't have the time and money to 
embark on massive infrastructure changes. The focus should be on 
utilizing competitive technologies that do not require prohibitive or, 
if possible, even significant investment in changing our transportation 
sector's infrastructure. Instead, we should permit the maximum possible 
use of the existing refueling and automotive infrastructure. Finally, 
we need to remember that oil dependence is a global issue which should 
be addressed internationally. Even if the U.S. was no longer dependent 
on foreign oil, if the rest of the world still remains beholden to the 
small club of oil producers the national security problems discussed 
before will not go away. Only a global effort led by the U.S. to reduce 
demand for petroleum by distributing the above-mentioned technologies 
will bring about prosperity and strengthen global security.



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