March 12, 2003

Cars and the Environment: A Look at The Effect of the Auto Industry on the Bush Administration’s Stance on the Kyoto Protocol

By Eric Johnson

Introduction:

The Kyoto protocol is a key piece of policy regarding the future of the world’s environment. The agreement is a commitment by both industrialized and developing countries to cut environmental pollution. Each developed country involved in the Kyoto agreement committees to reducing the greenhouse gases by five percent. Despite the positive nature of this treaty, the Bush administration has withdrawn the previously strong support of the United States. Instead, the Bush administration has proposed its own environmental plan. Bush’s plan has been viewed by many as highly ineffective and a plan that caters to the United States automobile industry. Ultimately, Bush’s plan to protect and industry over the environment may hurt the automobile industry if they cannot regain market share in the hybrid industry.

The Bush administration will not embrace the Kyoto Protocol because they are afraid that they will do damage to the economy and as a result, hurt the U.S. auto industry. While hybrids would be an effective solution to reducing emissions and making progress to the emissions levels set forth in the protocol, Bush knows that U.S. automakers are not prepared to mass-produce hybrid cars that would be needed to meet the required guidelines. Instead, the auto industry has moved the other direction. They have turned to the production of high profit sport utility vehicles (SUVS) with very low fuel efficiency. Furthermore, Japanese automakers have begun changing the majority of their fleets to hybrids and they would be positioned to take over a majority of the U.S. auto market if the U.S. accepted Kyoto and moved towards fuel efficient and environmentally friendly cars.

Kyoto:

In December 1997, the Kyoto protocol was unanimously adopted at the third session of the Conference of Parties[1]. The Conference of Parties is the governing body of the Convention on Biological Diversity and holds periodic meeting where they make decisions regarding United Nations environmental policies. The Kyoto protocol was an attempt to reduce the worldwide emissions of greenhouse gases. Greenhouse gases are a bundle of six various pollutants that include carbon dioxide (CO₂), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), nitrous oxide (N₂0), sulphur hexafluoride (SF₆) and methane (CH₄)[2]. The protocol called for the reversing of the upward trend in green house gas emissions that have been produced by these countries for the last 150 years.

By 2012, the Kyoto agreement plans to have developed countries commit themselves to reducing their collective emissions of the six key greenhouse gases by at least five percent. Achieving this five percent decrease would occur because of the different countries abating different amounts the combined greenhouse gas emissions. For example, Switzerland, most Central and East European states, and the rest of the European Union set a goal of eight percent reduction. In addition, Canada, Hungary, Japan, and Poland agreeded on a seven percent reduction and at the time the United States agreed to a seven percent decease. Other countries like Russia, New Zealand, and Ukraine were to stabilize their emissions while Australia would abate by eight percent and Iceland by ten.

The emission targets that are set by the respective contries had to be met between 2008 and 2012. However, countries will have a some flexibility in how they make and measure their emissions reductions. In particular, an international "emissions trading" system will be established allowing industrialized countries to buy and sell emissions credits among themselves. They will also be able to get "emission reduction units" by financing certain kinds of projects in other developed countries through a program known as Joint Implementation. In addition, a "Clean Development Mechanism" for promoting sustainable development will enable industrialized countries to finance emissions-reduction projects in developing countries and receive credit for doing so.

The Kyoto protocol is a landmark achievement that signified the majority of the world’s concern over the environment and it helps these countries create the unity that it necessary to solve these problems. The Protocol encourages governments to cooperate with one another, improve energy efficiency, reform the energy and transportation sectors, and promote renewable forms of energy. It also helps to phase out inappropriate fiscal measures and market imperfections and it protect forests and other carbon "sinks" because of its abilty to allow trading of permits and creataion of a worldwide pollution market.

. For the Kyoto Protocol to become a binding treaty, it had to be ratified by the industrialized countries that represent fifty five percent of the total greenhouse gas emissions of all industrialized countries combined. The treaty would become effective ninety days after the fifty five percent requirement is met. After being opened for signatures in March of 1998, the Kyoto Protocol was finally ratified in May of 2002

Bush:

In March of 2001, President Bush declared that "Kyoto is dead"[3] and announced that the United States would not move to ratify the treaty. The administration’s position was a drastic reversal of the previous administration. In fact, only a few days before Bush’s announcement, his top environmental official, head of the Environmental Protection Agency Christine Whitman, had endorsed the protocol. Bush credited his rejection of the protocol to the fact that it exempts 80 percent of the world, including major population centers such as China and India. He contented that the approach taken under the Kyoto protocol would have required the United States to make serve cuts to the economy to meet an arbitrary target. It would have cost the economy up to $400 billion and would have lost 4.9 million jobs. He maintained that he and his administration still “support a comprehensive and balanced national energy policy that takes into account the importance of improving air quality[4].”

In response to criticism Bush and his advisors developed their own voluntary plan environmental plan. This was called the Clear Skies legislation. He choose to use a market-based approach to cutting pollution rather than a regulatory approach. The approach set a goal to reduce greenhouse gas intensity emissions per unit of economic activity by eighteen percent by the year 2012, preventing the emission of over 500 million metric tons of pollutants. Ultimately, the plan was designed to cut sulfur dioxide emissions by 73 percent, nitrogen oxide emissions by 67 percent[5]. In addition, for the first time ever cap emissions of mercury, cutting them by 69 percent[6]. These cuts were designed to be completed over two measured phases, with one set of emission limits for 2010 and for the other for 2018.

While Bush supporters hail his plan as one of the biggest steps in U.S. environmental policy, the truth is that the Clear Skies legislation is highly ineffective in reducing actual emissions. Bush’s plan calls for the reduction of eighteen percent of “emission intensity”. Emission intensity is defined as yearly emissions divided by Gross Domestic Product or yearly income. Ultimately, this means that there can be a reduction in emission intensity without an actual reduction in emissions if there is enough growth in the countries GDP. In fact, the amount of emissions can actually increase over time. Take for example the average annual GDP growth rate during the ‘90s was 3.2 percent[7]. This increase would actually allow 1.2% increase in emissions and still be considered an 18% reduction in emissions intensity[8]. According to Bush’s plan, there would have to be little or no decrease in the rate of emissions growth if the GDP growth rate was 2% or above.[9] Bush’s plan is both ineffective and misleading. He hides the true spirit of the plan within its details. Much like rejection of the Kyoto protocol, he uses his voluntary pollution reduction plan to further protect oil and other big industries.

The Auto Industry:

In 2002, the GDP of the Auto Industry was $10,422.1 billion or approximately 1.2 percent of total GDP[10]. The U.S. auto industry employs over 139,448,000 people[11]. This means that the auto industry is very significant part of the total GDP and is a key constituency to Bush’s reelection hopes.

The auto industry would be one of the most effected industries if the US adopted the Kyoto. However, at the same time the auto industry is one the main ways for the US to reduce emissions and comply with Kyoto. The gasoline-electric system emits as much as 40 percent less carbon dioxide than the traditional combustion engine. In addition to reducing emissions, Hybrid vehicles would decrease the U.S.’s dependence on oil. Hybrids and fuel cell technology are the future of the auto industry. U.S. automakers are very fall behind the Japanese in the development and implementation of these vehicles. As a result, the U.S. market is very vulnerable to the saturation of Japanese hybrids. Therefore, we see Bush’s rejection of the Kyoto protocol since such a commitment would create the need for such vehicles.

There is stubbornness by the U.S. big three automakers: Ford, GM, and Chrysler, and other domestic automakers about building hybrids. They are only implementing hybrid technology in small numbers to start. For example, they are starting with a limited amount of trucks and SUVs, vehicles that show the lowest impact with the new hybrid technology. GM plans to introduce and hybrid version of their high selling Sliverado and Sierra trucks. Chrysler will unveil a new hybrid Dodge Ram that only has an increased fuel efficiency of one mile per gallon. Lastly, the new hybrid Ford Explorer will cost $2,000 more and saves less than 1 mpg. These auto companies suspect marketing strategy is not conducive to creating demand for hybrids or utilizing it optimally. None of these automakers have incentive to create and demand for hybrids and as a result they packaged the new technology in a way where consumers would not receive the full benefit on fuel efficiency nor are they priced in a manner to attract a large amount of buyers. This lack of incentive clearly comes from the fact that if U.S. automakers create a demand for hybrids, then they would be losing their business to Japanese automakers. The U.S. automakers only have themselves to blame for this situation. When the Japanese automakers first started working on hybrid engines they decided that hybrid cars were not the future the automotive industry. Instead, they concentrated their efforts on building a hydrogen fuel cell car. The Clinton administration invested over $1.5 billion to U.S. automakers, especially GM, to create an 80 miles per gallon hydrogen fueled car before the program was scrapped by the Bush administration. However, the auto industry has been working on this car for the few last decades and despite some recent success, they are still saying that mass production is at least ten years away. In the meantime, they are forced to buy hybrid technology frin Toyota and hope that Bush’s new environmental policy will allow them to not lose a big part of their market share to Japanese manufactures.

An integral part of today’s auto market is the Corporate Average Fuel Economy (CAFE) standard. The CAFE standard was a result of the Energy Policy and Conservation Act of 1975. This standard created a fuel efficiency level that each manufacturer was required to meet for their entire fleet. Today, the CAFE for passenger cars is 27.5 miles per gallon. The CAFE for light trucks is 20.7 mile per gallon. The light trucks category includes more than just pickup trucks it also include SUVS and minivans in this classification. Allowing SUVS to be categorized as light trucks allows automakers to save money by not requiring them to meet stricter standards. If automakers were forced to invest money increasing fuel standards they be forced to invest in new technology and lower their profits. The CAFE standard also contains loopholes that automakers have been exploiting for the last couple of years. If a SUV weighs more than 6,000 pounds or has a certain amount of payload space, the vehicle is considered heavy-duty industrial and is exempt from fuel standards. As result, vehicles like the Yukon and the Excursion who average around 10-12 miles per gallon are exempt. As a result, today’s nation fuel efficiency is at its lowest level since 1980 at 20.7 miles per gallon[12].

Today’s hybrids achieve far greater fuel efficiency and would improve the overall fuel efficiency of the United States. Toyota’s hybrid, the Prius, has the best U.S. Environmental Protection Agency rating for 2002 cars with 52 miles per gallon in highway driving and 45 for city driving. While the Prius has impressive fuel efficiency, the highest rating among all vehicles was awarded to the Honda Insight that had a fuel efficiency of 57 mpg and 56 mpg[13].

Effective Hybrid technology exists in today’s auto market. Honda and Toyota have it. They have sold over 150,000 hybrids worldwide.[14] Since the introduction of Prius, Toyota has sold over 100,000 hybrids.[15] In Japan, Toyota has sold over 60,000 of the fuel-efficient vehicle, while in the U.S. they have sold around 40,000.[16] Last year the sales of Hybrids made up .6 percent of their total worldwide sales, while sales of the Prius in the U.S. increased by 29.3 percent.[17] By 2012, Toyota plans to use the gasoline hybrid engines in all of their vehicles in an attempt to increase fuel efficiency. Last March Honda entered the hybrid market with a hybrid version of the Civic. Sales of the Civic have been averaging around 2,000 cars per month since it was introduced in the spring of 2002. These increasing sales are a clear demonstration to increasing demand in the U.S.

Conclusion

Ultimately, hybrids and more fuel-efficient fleets would allow the US to reduce emissions and be part of the Kyoto protocol. Hybrids would increase the fuel efficiency of the national fleet and help lower the U.S.’s dependency on oil. However, Bush and U.S. automakers are more concerned about today’s economy and producing highly profitable gas guzzling SUVs then protecting the environment. They believe that the future car is not a hybrid, but a fuel cell car. As a result, they are not perusing the hybrid market as actively as the Japanese and they have left themselves in a vulnerable economic position if Americans start buying hybrids because the Japanese have cornered the market. Ultimately, despite the sacrifices made by the Bush administration the U.S. economy might suffer in the long run as Japanese automakers take over the U.S. automakers share of the market and the U.S. economy loses one of its most important industries.

References:

Francisco Veloso, Rajiv Kumar. Automotive supply chain : global trends and Asian perspectives. Manila: Asian Development Bank, 2002.

Goodstein, Eban S. Economics and the Environment. New York: John Wiley & Sons, Inc, 2002.

Goulder, Larry. “The Bush Administration’s Climate Plan.” October 22, 2002.

McKibbin, Warwick J., Wilcoxen, Peter J. Climate change policy after Kyoto : blueprint for a realistic approach. Washington, D.C. : Brookings Institution Press, 2002

Westbrook, M.H. The electric car: development and future of battery, hybrid and fuel-cell cars. London : Institution of Electrical Engineers, 2001.

Office of Automotive Affairs, www.ita.doc.gov/td/auto/

Automotive Digest, www.automotivedigest.com

Businessweek, www.businessweek.com

CNN, www.cnn.com

The Environmental Protection Agency, www.epa.gov

The Sierra Club, www.sierraclub.org

Toyota, www.toyota.com

The U.S. Commerce Dept., www.doc.gov

The White House, www.whitehouse.gov

[7] Goulder, Larry. “The Bush Administration’s Climate Plan.” October 22, 2002.

[8] Goulder, Larry. “The Bush Administration’s Climate Plan.” October 22, 2002.

[9] Goulder, Larry. “The Bush Administration’s Climate Plan.” October 22, 2002.

[10] Office of Automotive Affairs, www.ita.doc.gov/td/auto/

[11] Office of Automotive Affairs, www.ita.doc.gov/td/auto/