| A Three‐Lane Road to Recovery for the U.S. Auto Industry |
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| Thursday, 19 March 2009 09:06 |
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By Irving Mintzer, Senior Advisor to Potomac Energy Fund Frederick, MD – March 19, 2009 – The problems facing the Big Three automakers continue to threaten the entire U.S. economy. If even one goes bankrupt, millions of Americans could become unemployed. But Congress rejected their appeal for billions of dollars in federal bailouts last November because their CEOs offered no credible plan for recovery. There is, however, a way to recreate the profitable and sustainable car companies America needs. U.S. automakers must create a fleet of clean vehicles that preserves the mobility of American families while limiting U.S. oil imports. Factors that we have long ignored—such as the security costs of relying on unstable oil exporters and the environmental costs of driving—must be captured in the pricing of cars and fuel. The road to recovery has three lanes and can deliver multiple benefits. Immediate Congressional action to open this road can make U.S. automakers once again the world’s technological leaders while simultaneously enhancing energy efficiency, improving energy security, and protecting the environment. The “fast” lane accelerates the removal of dirty vehicles, paving the way for the auto industry to sell more efficient ones. In this lane, Congress should institute a federal bounty on aging, in‐service vehicles that is earned when dirty vehicles are recycled for scrap. If a vehicle five years old or more, with a U.S. EPA mileage rating below the current CAFE standard, were sold for scrap, its owner would earn a cash rebate of $100 to $3,500, depending on the vehicle’s age and inefficiency. Providing these rebates directly to consumers will encourage them to take dirty vehicles off the road as soon as the rebate’s financial value exceeds the convenience value of maintaining their old, inefficient car. The road to recovery’s “middle” lane rewards automakers for building safe, gas‐sipping vehicles and penalizes those building gas‐guzzlers. To enter this lane, Congress should immediately pass a corporate tax credit that acts as an “efficiency bonus” for automakers. When a car dealer buys a passenger vehicle from a manufacturer that is more fuel‐efficient than the following year’s CAFE standard, the manufacturer will earn a tradable tax credit of $1,000 for each mpg by which that vehicle betters next year’s standard. By contrast, for each vehicle that fails to meet the current CAFE standard, its manufacturer will accrue a “pollution charge” of $2,000 per mpg below the standard. Encouraging automakers to build their new vehicles in America will expand auto sector employment, strengthen the broader economy, and reduce the environmental consequences of shipping cars across the oceans. Congress could achieve these goals by reducing the manufacturer’s efficiency bonus—or increasing the pollution charge—by ten percent for each vehicle sold but not assembled in North America, and for each vehicle assembled here that doesn’t meet current U.S. requirements for domestic content. In order to shape the new fleet and help consumers make the best purchase decisions, each car sold at retail should display these efficiency bonuses and pollution charges on its window sticker, alongside the price. Each car company receiving federal financial support (whether loans, grants, subsidies, guarantees, tax credits, or joint development contracts) should be required to pass on at least half of its efficiency bonuses and pollution charges to retail customers. In the future, Congress could adjust these efficiency bonuses and pollution charges to slow or accelerate repayment of any agreed bailout and—once U.S. taxpayers have been repaid—could make the bonuses and charges revenue‐neutral. The “right‐hand” lane on the road to recovery further rewards efficient vehicles while encouraging safe, thrifty, and environmentally‐sound driving habits. For this lane, Congress should immediately increase today’s federal excise tax on gasoline and diesel fuels by $0.25 per gallon. This should be accompanied by additional monthly increases of $0.02 per gallon for four years. Thus, after 48 months, the price of gasoline will be $1.21 per gallon above the average price at the end of January 2009, but still below its August 2008 peak. Additionally, the federal government should encourage domestic oil production, enhance energy security, and reduce the environmental impacts of transporting fuels across the oceans. To do so, Congress should institute a ten percent surcharge on crude oil and refined products sold in the United States but extracted from resources outside North America, thus increasing the attractiveness of enhanced oil recovery from existing domestic wells. The resulting price rise will encourage drivers to consolidate trips and reduce vehicle miles traveled, lowering the environmental impacts of driving, and decreasing some of the public costs of vehicle pollution. The charges will also enhance U.S. energy security and allow the federal government to recover up to $150 billion per year that would otherwise be transferred to foreign fuel suppliers in price increases. If the increased excise tax burden on low‐income and farm families were returned each quarter in cash, the transfer from foreign to federal coffers could still reach $120 billion per year. To encourage the production of advanced, flex‐fuel vehicles, Congress should reward alternative fuels that reduce carbon dioxide emissions. The first step is to require fuel producers to display on the retail pump the full well‐to‐wheels emissions generated by their product under standard test conditions. Any alternative transportation fuel that meets California’s Low Carbon Fuel Standard and lowers CO2 emissions on a lifecycle basis (relative to petroleum‐based gasoline or diesel) will earn a proportional reduction in its federal excise tax. Those with higher emissions will pay higher taxes. As these changes are phased in, other fuel‐specific subsidies could be phased out. This three‐lane road to recovery could guide the automobile industry back to profitability and ensure that American taxpayers are repaid in full for pulling troubled car companies out of the ditch. If it is well‐executed, the auto industry could again become a driver of prosperity for Americans. The process could jump‐start the U.S. economy; create stable, long‐term jobs in America; and enhance America’s energy security and environment. Irving Mintzer is Senior Advisor to the Potomac Energy Fund. About Potomac Energy Fund
Potomac Energy Fund is a clean technology venture fund that invests in leading companies across four broad themes: alternative energy, energy efficiency, infrastructure development and resource management. For more information, please visit www.potomacenergyfund.com.
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