DLC | Blueprint Magazine | March 23, 2004 Tailpipe Revolution By Roger Ballentine and Jan Mazurek Stop stalling! Instead of haggling over CAFE standards and a distant hydrogen future, we should use strong market incentives like tailpipe emissions trading to put more clean cars on the road today. Tailpipe exhaust from cars, trucks, and increasingly popular sport utility vehicles is a leading source of air pollution in the United States. It accounts for roughly one-third of the nation's emissions of carbon dioxide (CO2), a key contributor to global warming. But the main tool Congress uses to curtail tailpipe emissions -- corporate average fuel efficiency (CAFE) standards -- wasn't properly designed for the job. Lawmakers created CAFE standards in response to the energy crisis of the 1970s to save oil, not the environment. So the CAFE debate, which repeats itself on Capitol Hill with Groundhog Day regularity but only frustrating results, is really just about the input side of the equation -- miles per gallon. How much fuel should vehicles be allowed to consume in order to travel a given distance? To curb emissions more effectively, the law should instead focus on the other side of the equation -- vehicles' output: How much tailpipe exhaust can the environment handle? California enacted a law with that approach in 2002. It could serve as a model for the nation. The California law sets benchmarks for the total acceptable volume of greenhouse gas emissions from tailpipes. Federal policymakers can take that approach one step further. They should create an economic incentive for auto manufacturers to innovate and improve fuel efficiency by establishing a tailpipe emissions credit-trading system. Under such a system, automakers would be rewarded with credits when their vehicles surpass baseline standards. They would be able to generate extra revenue by selling those credits to carmakers whose emissions are too high. Manufacturers whose models don't meet baseline standards would have to buy those credits, or pay fines to the government. Either way, in a "tailpipe-trading" system, inefficient vehicles would lose profits, and the overall environmental objective -- a set level of total emissions -- would be achieved. The CAFE system of the 1970s has, of course, produced important environmental benefits; burning less fuel means releasing lower levels of carbon and other harmful pollutants. But today's comparatively stable oil supply and low gas prices have undermined consensus for tough action to reduce consumption. Lawmakers are often reluctant to ratchet up miles-per-gallon requirements because automakers complain that CAFE standards require costly trade-offs in vehicle performance and safety and force them to build vehicles consumers don't want. Little wonder that after the latest CAFE debate, Congress rejected a proposal that would have significantly raised vehicle fuel-efficiency standards for the first time in decades. This, despite war in the Middle East, ongoing threats from terrorists, and continuing problems with the undemocratic Arab regimes we depend on for most of our foreign oil. Instead, in a display of daunted courage, Congress is poised to direct the National Highway Traffic Safety Administration (NHTSA) to study the issue. Meanwhile, President Bush has cast his lot solely with promising, but still-distant, hydrogen technology as a replacement fuel for oil. He has completely abdicated his responsibility for the near-term problem by refusing to tackle fuel economy and tailpipe emissions head-on. Congress and the administration should do more to make use of available technologies that American taxpayers have helped fund over the past decade -- such as alternative fuels and hybrid-electric engines that can dramatically increase fuel efficiency. But we must provide the right incentives to ensure they are widely adopted. These technologies make it possible to give consumers the cars they want, while reducing oil consumption right away. If history is any guide, the auto industry will at first resist a major policy shift. But it would be in U.S. carmakers' own interest to move faster to embrace the challenge of leading the world in the development and deployment of advanced and clean vehicles. The Japanese and German auto industries have seen the writing on the wall and are rushing to get ahead of the fuel-efficiency curve, starting with hybrid cars. Keeping the U.S. market sheltered from fuel-efficiency trends would be shortsighted protectionism. Instead, the United States should press forward quickly with a bold strategy to begin dramatically reducing our costly dependence on oil, to clean our air, and to help build a stronger and more modern U.S. auto industry. We should: Phase out our current fuel economy regulations and shift to a carbon tailpipe reduction standard that allows tailpipe trading to reward companies that bring cleaner cars to market. During the transition to a new system, close ill-conceived loopholes, such as standards that let SUVs get lower fuel economy than passenger vehicles because they are classified as "light trucks." Create new tax incentives that are performance-based, technology-neutral, and big enough to entice both manufacturers and consumers to adopt "clean cars" that burn less fuel or run on alternatives such as bio-diesel fuels. Such a strategy is fully detailed in a report from the Progressive Policy Institute. It would effectively apply California's path-breaking approach to the rest of the country. It would also allow us to make real progress in addressing climate change -- despite the Bush administration's contorted back-flips on the issue. Creating a tailpipe-trading system would not require many changes in the existing CAFE program, because the system already gives manufacturers credits from the federal government that they can bank and save in case their fleets fall short of future standards. Tailpipe trading would simply take the banking provision one step further; it would allow manufacturers to trade not only among themselves but also with petroleum producers, once Congress passes and the president signs a system to make CO2 reduction mandatory. The Climate Stewardship Act, proposed in January 2003 by Sens. Joseph Lieberman (D-Conn.) and John McCain (R-Ariz.), serves as a good model for an extended nationwide trading system. Lawmakers certainly should support robust research into hydrogen power for the long term, including significant federal investments in fuel cell technology, hydrogen production, transportation, and storage, and the training of a skilled work force to run a future hydrogen economy. But in the near term, Congress should also assign NHTSA and the Environmental Protection Agency the task of developing the testing protocols and standards that will be necessary to completely phase in a tailpipe-trading program. If new standards and protocols are properly implemented, we can smoothly shift to a new and simpler regime that will help deliver tomorrow's cars to today's consumers. Roger Ballentine is a senior fellow in the Center for Innovation & the Environment at the Progressive Policy Institute and the president of Green Strategies, Inc. He served as the deputy assistant to the president for environmental initiatives from 1999 to 2001. Jan Mazurek directs the Center for Innovation & the Environment at PPI.