Two events occurred this week which, if not an insight into the future of U.S. energy policy, were certainly an insight into the tools that will be available to implement that policy in the future.  The first was the budget debt ceiling agreement, which promises $2.5 trillion dollars of savings over ten years--a promise that will impact every aspect of government spending, including spending on energy policy initiatives.  The second was the agreement on new, tighter CAFE standards.  CAFE standards are a mandate and do not involve government spending.  The new CAFE standards show signs of moving quickly through Congress and will probably do more to shape the future of American motor vehicles than any other government initiative.

Given the growing importance of CAFE standards to energy policy, it is a shame that energy security and vehicle electrification supporters were not more involved in their negotiation.  This was a function of the curious history of CAFE standards.  Enacted in the wake of the first Oil Embargo, Congress intended CAFE standards to protect U.S. energy security by decreasing petroleum consumption.  Over the years, however, CAFE standards have come to focus more on reducing automotive emissions.  Properly understood, the new standards are designed primarily to reduce greenhouse gas emissions, not to promote energy security.  While reducing emissions is an important goal, it is a far cry from the energy security concerns that underlay the intent of the original CAFE legislation.

What this emphasis on emissions reductions means for vehicle electrification is unclear.  Deploying a larger number of heavy electric vehicles (pure EV’s and PHEV-40+’s) will reduce overall vehicle emissions.  But on a bang for the buck basis, heavy vehicle electrification is probably not the most cost effective way of doing so or, for that matter, the most cost effective way of reducing overall petroleum consumption.  The real benefit of vehicle electrification lies in its ability to diversify the fuel supply of the national vehicle fleet.  For this purpose electric vehicles are the most cost effective tool in the shed.

As I have previously noted in this column, energy efficiency and energy diversity are different goals.  The goal of energy efficiency addresses a need to reduce emissions and total gasoline use.  The goal of energy diversity, however, addresses more fundamental strategic and economic concerns.  Reducing total gasoline consumption would be beneficial for many reasons.  But until the pricing monopoly that petroleum producers enjoy on the U.S. transportation sector is broken, no amount of fuel efficiency will break the strategic trap in which the United States is caught or relieve consumers from the financial burden of ever higher petroleum costs.  As long as petroleum producers hold a monopoly on vehicle fuel, they will simply raise prices as we become more fuel efficient and use less petroleum. Fuel efficiency without more brings little strategic or economic advantage.

Focusing CAFE standards solely on emissions-focused fuel economy, to the exclusion of fuel diversity, is unwise and is not consistent with their original legislative purpose. Recognizing  this fact, the National Highway Traffic Safety Administration and the Environmental Protection Agency (EPA) published a Supplemental Notice of Intent on July 29, 2011 in which the EPA proposed to give an incentive multiplier for pure EV’s and fuel cell vehicles (FCV’s), permitting manufacturers to count each such vehicle as two vehicles in 2017, phasing down to 1.5 vehicles by 2021.  PHEV’s would start with an incentive multiplier of 1.6 vehicles in 2017, phasing down to 1.3 vehicles in 2021.  Each EV, PHEV and FCV would be counted as having no tailpipe emissions.  The purpose of the incentive multipliers is to incent manufacturers to produce EV’s, PHEV’s and FCV’s by giving them some measure of relief from their CAFE obligations in exchange for doing so.

The incentive multipliers for EV’s, PHEV’s and FCV’s have been criticized by many who view CAFE standards primarily as a means for reducing vehicle emissions.  But that criticism is wrong for two reasons.  First, it is wrong because CAFE standards are also an important tool for achieving fuel diversity.  And second, it is wrong because it is not clear what the ultimate effect of the incentive multipliers will be.  Since there is no separate reward for fuel diversity, manufacturers may well decide, notwithstanding the incentive multiplier, that it is still more efficient to reduce emissions by selling more fuel efficient internal combustion engine (ICE) cars than by producing EV’s, PHEV’s and FCV’s.

The problem with the new CAFE standard is that it tries to compare apples to oranges, which rarely makes for good policy.  EV’s/PHEV’s/FCV’s, on one hand, and efficient ICE’s, on the other hand, play important but different roles in an effective national energy strategy.  The first primarily addresses fuel diversity, the second fuel economy.  Achieving both goals through a policy based solely on reducing greenhouse gas emissions might work.  But if it does, it will work by accident.

The structure of CAFE standards needs to be rethought.  CAFE standards should address separately the two energy policy goals that they were designed to achieve: energy efficiency and energy diversity.  One goal should not be a trade-off for the other.  As CAFE standards and other mandates become increasingly important policy tools in a budget-constrained environment, energy security and electrification supporters must be careful that their interests are not subordinated and forgotten in the battle against greenhouse gas emissions.