U.S. automakers grapple with emissions, fuel economy

General Motors (GM) North America President Troy Clarke said last week that the automaker planned to make half of its U.S. cars “ethanol capable” by 2012.

Washington and Detroit have begun to come to grips with growing public disquiet about the prospect of climate change; Congress last year mandated that the Corporate Average Fuel Economy (CAFE) standard rise to 35 miles per gallon by 2020. Detroit opposed the move, arguing that increased gasoline taxes were a better means to cut fuel consumption.

After several years of resisting the need to act on climate change, public concern is gradually forcing Washington to consider how to reduce carbon dioxide emissions. However, the means employed to achieve such cuts remain controversial. The domestic U.S. automakers are in intense economic distress; General Motors, Ford and Chrysler are slashing production and laying off tens of thousands of workers. Therefore, the industry has fiercely resisted congressional attempts to mandate higher fuel-economy standards, and makes a case for higher gasoline taxes.

Industry case

Detroit maintains that boosting fuel economy standards on U.S. vehicles is painfully slow because consumers demand heavier vehicles. They believe that only a fuel tax that made large pickups and sport utility vehicles (SUVs) prohibitively expensive would shift U.S. consumption to European-style small cars:

• Ineffective fuel taxation. Washington has never attempted to alter U.S. fuel consumption patterns significantly through taxation. The rise of gasoline prices to $3 per gallon has made consumers complain, but does not appear to have significantly shifted purchases to smaller cars. In most Western European countries, gasoline costs roughly $8 per gallon, which is sufficient to make fuel consumption a major factor in what people buy. One of the largest-selling vehicles there is the Ford Focus hatchback, a car that is less than mid-size even by European standards, and not a patch on the U.S. behemoths.

• Demand dictates size. At the Detroit Motorshow last month, the most heavily touted vehicles were the new Dodge Ram and Ford F-150 pickups. The Ford, which is the best-selling vehicle in the United States and hence the world, is so tall that it must be fitted with fold-away ladders forward and aft, so that an owner can actually use it.

• No incentive to change. When Detroit complains about the new CAFE standards, which require the manufacturers to make vehicles that do an average of 35 miles per gallon by 2020, it is not because this mandate is technologically challenging or expensive. GM and Ford make plenty of cars in Europe that conform to this standard. Rather, the companies argue that U.S. consumers will simply not abandon large vehicles when gasoline remains relatively cheap.  The average daily U.S. commute is approximately 40 miles, which consumes some $6 worth of gasoline; switching from a pickup truck to the compact Chevrolet Malibu would save only $2.

• High research costs. Therefore, from Detroit’s point of view, the increased CAFE regulation simply makes it harder for U.S. automakers to compete in the North American market, because they must invest exceptional sums to make large cars perform as well as small ones. Ford, GM and Chrysler have estimated that the total research bill for this task will reach $100 billion by 2012. Generating lightweight materials and more efficient gasoline engines for obsolete vehicle types may add to the burden on the distressed industry.

Emissions reduction research

Yet despite these industry complaints, there are several different technologies, designed to reduce emissions, which are being enthusiastically pursued by Detroit:

• GM as bellwether. GM is perhaps the bellwether U.S. manufacturer in this regard, because it is simultaneously pursuing almost all of the available emissions reduction technologies and alternative fuels, and has the largest engine and transmission manufacturing capability in the world. Therefore, it should have among the lowest unit costs for any new engines — assuming that its progress negotiating lower labor costs with the unions continues.

• Zero-emission vehicles. Within the next few years, GM plans to begin selling battery-driven cars recharged by an onboard hydrogen fuel cell — its preferred long-term technological solution. It is currently testing a fleet of 100 Chevrolet Equinox cars, which have hydrogen fuel cells accompanied by highly efficient lithium batteries. Only water is produced in the exhaust from hydrogen cells.

Media reports indicate that even these early hydrogen-driven cars make for a pleasurable drive; the lack of mechanical engine noise and high torque (electric) acceleration make for a powerful vehicle, which is capable of appealing to the U.S. consumer. However, Detroit remains concerned that it will take years to reduce selling prices to the point where consumers will opt for zero-emission cars.

• More efficient hybrids. Therefore, GM is seeking to beat the Japanese makers to market with an interim solution — plug-in hybrids. These cars use lithium batteries to drive an electric motor, supplemented by an on-board liquid-fuel (gasoline, diesel, or ethanol) “generator.” The batteries are supposed to be recharged from the household electric mains overnight — when more than 70 percent of the power generation network is otherwise idle — making the car more efficient than first-generation hybrids such as the Toyota Prius. The gasoline engine is only employed as an on-the-move battery charger when the batteries have expired, after approximately 40 miles of travel. Developed as the Chevrolet Volt, GM’s car is expected to hit the market in 2010.

Outlook

There are two major obstacles to both of the U.S. automakers’ preferred routes to reducing carbon dioxide emissions:

• Technological limitations. None of the technological solutions designed by the automakers are perfect. Generating electric power in the United States mostly involves fossil fuels. Generating ethanol needs copious amounts of electricity, the corn-based U.S. input consumes huge government subsidies and drives up the price of food, and burning ethanol releases carbon dioxide. Hydrogen production is electricity-intensive. Even battery production requires manufacturing processes with a heavy carbon footprint. However, all of these processes are becoming more efficient.

• Resistance to taxation. Vehicle or gasoline-related taxation is a political live wire in the United States. This public resistance is partly due to cultural factors — U.S. citizens love their large cars — but is also driven by necessity. In a huge country with little public transport outside the Northeastern states, where urban areas are surrounded by sprawling suburbs, vehicle ownership is a necessity; the poor are especially dependent on their cars. Attempts to boost vehicle or gasoline taxation have produced famous “tax revolts” in California, Washington state and Arkansas. The latter event resulted in former President Bill Clinton’s ejection from his seat as Arkansas governor in 1980 (which he later recaptured) — one of his rare electoral setbacks.

Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See www.oxan.com .