The report offers a plethora of data and analysis, and several commentators have already weighed in with various interpretations (see Bryan Walsh at TIME). But one of the key conclusions worth highlighting is that the driving force behind the U.S. “clean economy” over the last decade has been emerging energy technologies –- not in other “green” sectors related to buildings and home weatherization, energy-saving consumer products, or efficient appliances (as some advocates predicted). In other words, emerging energy technologies appear to have the greatest job and export growth potential, and this carries important implications for U.S. policy priorities — a conclusion recently echoed in Google’s energy innovation report.

Brookings defines the “clean economy” as a very broad range of goods and services that provide environmental benefit, including everything from electric vehicle technologies to organic foods and waste management (see list below). As it explains, the report is “the first study of the U.S. clean economy to provide timely information that is both comprehensive enough in its scope and detailed enough in its categorization to inform national, state, and regional leaders on the recent employment dynamics of the U.S. low-carbon and environmental goods and services super-sector…”

According to the data, the highest job growth and export intensity in the overall clean economy between 2003-2010 was primarily in emerging energy technologies. Out of the 39 measured sectors, the top eight with the greatest relative job growth were all energy-related: wave/ocean power, solar thermal, wind, carbon storage and management, solar PV, fuel cells, biofuels, and smart grid.   In terms of export intensity, seven of the top eight sectors were energy technologies: biofuels/biomass, electric vehicle technology, battery technology, wind, solar PV, and fuel cells. The most export-intensive “category” of sectors was renewable energy technologies, at $64,884 in exports per job, compared to only $20,129 for the aggregate clean economy.

(Click to view larger images)

The report highlights this growth trend in its second conclusion:

“The clean economy grew more slowly in aggregate than the national economy between 2003 and 2010, but newer “cleantech” segments produced explosive job gains… 78 percent of all job gains between 2003 and 2010 came from establishments born in 2003 or later… Along these lines, four of the five fastest-growing segments during this seven-year period were in renewable energy… Young, technology-heavy segments were also adding jobs at elevated rates each year over the period.”

The concluding section similarly notes (emphasis added):

“Already the aggregate clean economy employs more people than the fossil fuels and biotech industries. More importantly, a dozen or so “hot” segments – mostly dynamic renewable energy categories like wind energy, solar photovoltaic, and smart grid – doubled and tripled in size in the last decade, answering the hype that has surrounded them despite extremely difficult recent market and finance conditions.”

This rapid growth in clean-tech contrasts with building-related and other sectors (emphasis added):

“The slowest growing segments, by contrast… took place in older building- and building infrastructure-related segments… including, for example: water efficient products (e.g. plumbing and bathroom equipment); green chemical products (house paint); appliances; and energy-saving consumer products (office equipment, glass, home weatherization services). Hydropower and nuclear energy also experienced weak growth, with the former actually losing jobs.”

The implication is this: if the U.S. wants to prioritize job and export growth in the “clean economy,” it should put primary emphasis on new, technology-intensive, energy-related sectors. U.S. federal and state policies to advance the aggregate clean economy should focus especially on energy innovation – on the research, development, manufacture, demonstration, and commercialization of new energy technologies, as well as supporting infrastructure and advanced human capital. Indeed, on the latter item, the report also finds that “the clean economy employs a higher percentage of scientists, architects, and engineers (10.1 percent) than the national economy (5.4 percent),” which points to need for a national energy science and engineering education program, such as RE-ENERGYSE.

The report offers three overarching policy recommendations to advance the clean economy – categorized as market creation (i.e. support for deployment), finance, and innovation – which are largely consistent with this assessment. In terms of innovation policy, the report drives home the existing consensus on the need to increase federal energy RD&D from its current level of only $3-5 billion up to $15-25 billion annually. In the near-term, it suggests incremental growth in DOE’s new energy R&D program budgets – the Energy Frontier Research Centers, ARPA-E, and the Energy Innovation Hubs – “including a tripling of the ARPA-E budget, the creation of new hubs, the creation of a water sciences innovation center, and the establishment of a regional clean economy consortium initiative.” It also recommends that states expand their RD&D and cluster development programs, pointing to the New York State Energy R&D Agency (NYSERDA) and Ohio’s Nortech as models.

In terms of finance, the report emphasizes the needs to reform existing subsidies to prioritize innovative technologies, similar to the recommendations in “Post-Partisan Power” (a 2010 report by American Enterprise Institute, Brookings, and Breakthrough Institute). Its primary recommendation is the creation of an emerging technology deployment finance entity to address the “commercialization Valley of Death,” between the demonstration/scale-up and commercial roll-out stage of new technologies.  It goes on to recommend “a push to rationalize and reform the myriad tax provisions and incentives that currently encourage capital investments in clean energy projects… Such reform might well pair selective extensions of key production, investment, and manufacturing tax credits as well as the Treasury grant cash-back program with staged, technology-specific phase-outs, which would at once provide new industries support, predictability, and a nudge toward innovation and cost-reduction.”  It also suggests creating more state-based finance programs, such as revolving loan funds like California’s Infrastructure & Economic Development Bank.

Staying true to Metro Program’s mission, the report calls for all these policy reforms — in innovation, finance, and deployment — to be crafted in the context of regional cluster development.  This will require renewed attention and research into the details of local industry dynamics and regional growth strategies: “Regional actors, meanwhile, should take the lead in using data and analysis to understand the local clean economy in detail; identify competitive strengths; and then move to formulate strong, “bottom-up” strategies for overcoming key clusters’ binding constraints.”

Beyond these recommendations, another area for further exploration is the role of advanced manufacturing and its policy implications. The data shows that the clean economy is particularly manufacturing-intensive — 26% of clean economy jobs are in manufacturing establishments compared to just 9% in the broader economy — but the report recommendations don’t contain much on manufacturing policy. Growing evidence suggests that manufacturing is a vital stage in the innovation process, and R&D dollars will follow manufacturing capacity overseas if the U.S. doesn’t compete for these facilities. (For example, see ITIF’s recent report, “The Case for a National Manufacturing Strategy.”)

Of course, the Brookings report contains much more information and certainly merits a full review. But this key finding on the importance of energy innovation for driving the overall clean economy warrants particular attention from energy, climate, and growth advocates. This conclusion aligns well with the policy priorities of Americans for Energy Leadership and our allies, and it plays well to the United States’ comparative advantage in innovation. With the right policy support for advanced and emerging energy technologies, the U.S. can continue to unleash the potential of the clean economy — and regain our global leadership.

Americans for Energy Leadership was proud to support this effort, joining dozens of universities and high-tech companies in signing a letter supporting ARPA-E. Now we move on to the Senate appropriations bill, where we expect to achieve a larger budget and eventually come out somewhere inbetween the House and Senate version at conference.

Yet even while we “celebrate” salvaging a $180 million budget for ARPA-E in the House, we recognize this amount falls fall short of what ARPA-E needs to achieve its potential.  Indeed, ARPA-E merits a much larger budget for its investments, which can spur the development of entirely new industries and technological breakthroughs, create high-skilled jobs, support small businesses, improve U.S. energy security, and enhance our competitiveness in the advanced energy industry.  As the Information Technology & Innovation Foundation recently concluded in a report, “A Model for Innovation: ARPA-E Merits Full Funding“:

“In many ways, [ARPA-E] represents public-private innovation at its finest, both for what it does and how it does it: this is not your grandfather’s politicized bureaucracy. It’s a fresh and nimble organization that operates at the intersection of fundamental and applied research, bringing science research and technology development together under one roof. And we’re already beginning to see early returns: ARPA-E projects, worth approximately $360 million in public funding, have to date obtained $285 million in follow-on private investment and led to 17 patent filings, and the program is still very young. But ARPA-E has only just started to spur successful innovation—and we have yet to see what this innovation engine can really do.”

Yet the $180 million House budget appropriation falls far short of the $1.5 billion recommendation from the American Enterprise Institute, Brookings Institution, and Breakthrough Institute; the $1 billion National Academies recommendation; the administration’s $550 million budget request; and the $300 million Congressional authorization for FY2011.  It is even less than the Heritage Foundation’s recent $300 million recommendation, in a report which essentially called for dismantling the Department of Energy (which we critiqued in two counterpoint memos with ITIF and Breakthrough Institute: “Counterpoint: Heritage Foundation Backgrounder” and “The Misconceptions of Heritage’s Energy Proposal“). The Heritage Foundation proposal noted:

“Although the mission of ARPA-E may be a laudable one, the $650 million budget request for FY 2012 should be cut to $300 million (the amount the President requested for FY 2011), especially since the American Recovery and Reinvestment Act of 2009 includes $400 million for ARPA-E. This cut would save $350 million.”

Even while we continue fighting for ARPA-E today, this should serve as yet one more sign that the energy innovation community needs to get much better organized over the long term, especially as we look for opportunities in the post-2012 landscape. Americans for Energy Leadership looks forward to continue working on that effort in the months and years ahead.

Last week, these three organizations released a point-by-point analysis of the inaccuracies and misrepresentations of Heritage’s proposal.  Today, we are releasing a new report on the fundamental misconceptions of Heritage’s approach.

Download: “All About the Fundamentals: Three Misconceptions of the Heritage Foundation’s Deficit/Energy Proposal” [PDF]

The report highlights three major problems with the Heritage proposal:

1. The proposal fails to meaningfully reduce the deficit now or in the future.

Even though the proposal advocates cutting DOE research budgets in the name of deficit reduction, the Department of Energy represents a tiny portion of the federal budget and contributes little to the deficit and national debt. Moreover, the proposal fails to distinguish between government spending and productive public investment in science and technology, which drives innovation and economic growth.

2. Heritage fails to understand where technological innovations come from.

Heritage wrongly assumes that “when it comes to energy policy, the free market works” and is best suited to develop new technologies. In fact, the energy sector is anything but free, and has always been characterized by extensive regulations and subsidies, natural monopolies, and other divergences from the free-market ideal held by Heritage. Moreover, Heritage ignores the long history of public support for innovation and assumes the private sector will invest sufficiently in energy innovation. For decades, the energy sector has consistently underinvested in R&D, and market failures plague the energy innovation process at each stage of development, from lab to market launch. There is a broad expert consensus that public investment and public-private partnerships are essential to moving new, innovative technologies into the marketplace.

3. The proposal ignores the immediacy and enormity of U.S. energy challenges.

While Heritage pays lip service to energy security, its recommendations would undermine many of the best efforts underway to achieve it. The Department of Defense has recognized the critical role that innovative clean energy technologies will play in enhancing their strategic and tactical abilities, as well as the nation’s energy security. DOD also views the DOE as a strategic partner in its effort to reduce its own vulnerability from relying on fossil fuels. If Heritage had it their way, DOD would lose a key partner in the long-term effort for greater force effectiveness and security through better energy management.

Download the full report here.

Download the point-by-point rebuttal here.

Eisenhower’s aspirations of building an interstate highway system were in some ways similar to Obama’s current rail aspirations. The interstate highway system was a huge investment spread over multiple decades. Like a national passenger rail system, our highway system would be much less useful if it only went through states with pro-infrastructure governors. Also on par with current rail proposals, the federal government fronted about 90% of our highway system’s cost, while states funded the remaining 10%, as stipulated in the Federal Highway Act of 1956.  Florida’s $2.4 billion of rail funds would have required matching funds of $280 million, or 10.4% of the projected total cost.

Unlike current passenger rail projects, however, there is little indication that individual governors attempted to send back federal funds or otherwise resist the construction of highways in their states. This may be in part because the interstate highway system was understood as important to national security. It may also be true that infrastructure investment was, in the 1950’s, seen as patriotic in a way it no longer is today. Prevailing economic theory has also shifted in the past half-century. These and a dozen other factors point to the conclusion that a plan to simply dish out federal funding, while it may have been successful in 1956, will not work today.  Seeing a national passenger rail network through to completion requires that we understand why the foundation model is no longer appropriate, and what the possible alternatives look like.

Below are six strategies that may aid rail efforts both on a national scale and, specifically, in states with reluctant governors:

Seek Private Financing

Passenger rail could be of great economic value to businesses in Florida. If the state of Florida prefers not to shoulder 10% of the project’s cost, they should shop the idea around to corporations such as Disney. Aside from the obvious tourism value, a corporation like Disney might find rail an attractive investment for advertising space and as a commuter option for its employees. Even modest private financing could reduce a state government’s cost burden significantly. This option is such a potentially simple fix that it should be among the first strategies explored.

Re-frame the Conversation

For some reason, governors and civilians alike tend to become squeamish about rail as soon as they realize it’s not going to turn a profit in its nascent years. In this New York Times Economix entry, for instance, economist Edward Glaeser estimates that passenger rail between Dallas and Houston will run a not-insignificant deficit unless ridership significantly exceeds expectations. He calls this “the cruel arithmetic faced by people, like me, who would love to be pro-rail.” The error, however, lies in the assumption that passenger rail must work the same way as a profitable business. Eisenhower didn’t sell America and Congress on the interstate highway system by claiming it would turn an annual profit; it was understood to be a vital system for transporting a growing population around its country. The White House needs to re-frame passenger rail as transportation infrastructure, not a private business.

Circumvent State Government

According to this Huffington Post article, the Department of Transportation is already considering its options for going ahead with the Florida rail project despite the state’s lack of cooperation. Although this might not be ideal from a political perspective, it might send an important message to those who doubt passenger rail and high-speed rail are major components of America’s future. The fear here seems to be that if one state gets its rail system free of cost, others might hold out for similarly sweetened deals.

Create a National Fund

The interstate highway project had something Obama’s rail plans lack: a crisp plan for funding itself. The Federal Highway Act of 1956 set up a fund issuing bonds that would later be repaid by income from the gas tax. One has to admire the symmetry and poeticism of this system; America’s new highway system would be financed by the activity it allowed Americans to pursue. More importantly, this fund was sure to outlive any single presidential administration. The Obama administration should arm passenger rail with an equally clear funding plan. Future revenue from rail-side billboards, or increases in the value of real estate that will be rendered exponentially more valuable by its proximity to new railway stations would be two options. The specifics of the plan would be less important than the knowledge that rail projects will continue even if America one day no longer has a Democratic president.

Disperse the Risk

The governors of Wisconsin, Ohio, and Florida have all cited concerns over high operating costs among their rationale for rejecting federal rail money. These governors are understandably hesitant to commit their states to projects that they alone will be responsible for sustaining, at unknown cost to the state. In the manufacturing world, both risk and profits of new ventures are sometimes distributed among various levels of the supply chain, dampening hesitation for any single party. The federal government might assuage many fears by committing to cap or at least share potential operating deficits and unforeseen costs with states.

Think Ryanair

Simply reducing operating costs would assuage fears in exactly the same way. Discount airlines such as Ryanair have proven the viability of near-free air travel by subsidizing economy tickets with extra-expensive first class tickets, and otherwise stripping frills or cutting costs wherever possible. If this Irish airline can dominate the European market while selling international plane tickets for as low as five and ten Euro, the White House can certainly find ways to reduce the operating costs of passenger rail.

Although skeptical governors may at present seem a difficult hurdle for rail plans to overcome, their reluctance during such an early phase may be a blessing in disguise. The White House’s current, passive approach to creating a national rail network is wrong for 2011, and not just because it gives fiscally conservative governors a veto.  Hopefully these initial setbacks will produce a more comprehensive strategy for achieving a national passenger rail network.

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Tim Krueger is a Policy Fellow in AEL’s New Energy Leaders Project and will be a regular contributor to the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.

In September, the United Steelworkers Union (USW) filed a 5,800 page complaint with the US Trade Representative against China. The USW argued that China’s renewable energy policies violated international trade agreements by favoring domestic manufacturers.  The USW released a statement saying:

“These practices include discriminatory laws and regulations, technology transfer requirements, restrictions on access to critical materials, and massive subsidies that have caused serious prejudice to U.S. interests. Together, these practices have given Chinese producers an upper hand in accessing investment, technology, raw materials and markets, while foreclosing these same opportunities to U.S.producers.”

The USTR investigated the USW’s claims and in December filed an official complaint with the World Trade Organization against China’s wind power subsidies. The complaint lodged by the USTR specifically refers to China’s “Special Fund for Wind Power Manufacturing.” Under this program grants are available to Chinese manufacturers of wind turbines and manufacturers of parts and components for wind turbines ranging from $6.7 million and $22.5 million. Recipients can receive multiple grants as the size of the wind turbine model increases and the USTR estimates that since 2008 the grants awarded under this program could total several hundred million dollars. The USTR claims this program violates WTO regulations because the grants awarded are dependent upon Chinese wind power equipment manufactures using components made in China as opposed to foreign products.

China’s Commerce Ministry responded by saying:

“All countries are developing new energy sources to deal with the climate changes. China’s measures on wind power development help save energy, reduce emission, and protect environment, which are important measures for sustainable development, and comply with WTO rules. China show grave concern on U.S. request , and will make serious study of it., and deal with the request based on WTO rules, and also reserves her relevant rights.”

After a complaint is lodged with the WTO, the two parties have 60 days to resolve the dispute on their own. If the two parties do not come to a mutually agreeable resolution on their own, the WTO will review both parties’ arguments before making a ruling. The WTO panel’s review process can take anywhere from a year to 15 months. Should the WTO side with the U.S., then the U.S. would be allowed to impose penalty tariffs on Chinese goods to make up for lost revenue. On the other hand, should the WTO find that China’s wind grant program is not in violation of international trade agreements; it could be an embarrassment for the U.S., not to mention a waste of resources and time.

There is certainly truth and merit to the USTR’s complaint, but given that countries around the world, including the U.S., regularly favor their domestic manufacturing with policy, the complaint comes off as a little hypocritical. As AEL reported earlier this month, President Obama recently signed a military authorization law that includes a “Buy American” clause, requiring the Department of Defense to purchase domestically manufactured solar panels. Surely no one in America is arguing against our military supporting the domestic solar industry, yet the reactive policy threatens to escalate the emerging trade dispute.

I am certainly not advocating that China be exempt to international trade rules; China is a member of the WTO and therefore subject to the organization’s rules and regulations. Nor am I arguing that the U.S. should not do what is within its means and rights to rectify practices that put it at a competitive disadvantage; however, it would be more productive for the Obama administration to put forth their own energy agenda rather than get caught up in a dispute with China over its energy policies. The two parties should strive to resolve the dispute without WTO involvement, which would be in the best interest of both countries. America and China are the two largest economies in the world, the two largest greenhouse gas emitters, and the two largest energy consumers. As such, they have the responsibility and opportunity to forge partnerships working towards more sustainable and cleaner energy usage in both countries and around the world.

The U.S and China have already begun to move forward on energy issues. In November 2009, President Obama and China’s President Hu announced a number of measures to strengthen cooperation on clean energy issues. One of these measures included a U.S- China Clean Energy Research Center, which will “facilitate joint research and development of clean energy technologies” and has received $150 million in funding.  Other initiatives include an electric vehicles initiative, shale gas initiative, and 20^th century goal to promote cooperation on cleaner uses of coal.

Many Chinese and American companies are forging energy partnerships as well. In my last article , I mentioned some of these partnerships and discussed Chinese investment into the U.S. wind energy industry. On the eve of President Hu’s visit to America, a series of Chinese and American companies announced clean energy partnerships. U.S. based Alcoa and China Power Investment Corp. announced collaboration on a range of projects that could total $7.5 billion in investments. American Electric Power Co, an Ohio utility company, is partnering with China Huaneng, the largest power-generation company in China, to evaluate carbon capturing technology. Duke energy and China’s ENN Group said they will work together to develop China’s first “eco-city” outside of Beijing.

The complaint with the WTO may likely amount to nothing, which is probably what the numerous American energy companies that work in China are hoping for. The worst outcome would be that the U.S imposes sanctions and the situation escalates to a trade war. This is not very likely, but would be bad not only for the companies who have collaborations in China, but also for all of us who are waiting for China and America to take the lead in fighting climate change. These two superpowers have a great opportunity to work together to reduce their emissions and develop clean technologies that would benefit the world. The U.S-China energy partnership is in its infancy, and the Obama administration should continue to encourage the growth of this relationship. Hopefully, the WTO dispute will not disrupt the progress that has been made.

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Natalie Relich is a Contributor in AEL’s New Energy Leaders Project and her work will be regularly featured on the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.

Coda Automotive's Kevin Czinger (left) discusses electric-car batteries in Tianjin, China, with U.S. Commerce Secretary Gary Locke (middle).

Much of the dialogue surrounding Chinese President Hu’s visit this week, at least from a media reporting perspective, has centered around Sino-U.S. energy deals—including players like Boeing, GE, Duke Energy, who launched China partnership announcements timed to coincide with Hu’s visit and the Brookings U.S.-China Strategic Forum on Clean Energy Cooperation. While there is much to cheer in these agreements, especially when it comes to job creation, there is also much to question as we move forward.

These energy agreements pose some rather obvious risks, in that U.S. companies will be sharing intellectual property with Chinese firms—and that any collaboration with China in an industry integral to U.S. national security presents some level of risk. But the deals also represent a laudable, long-awaited step forward in the Sino-U.S. relationship, affording market access and substantive China learning opportunities to U.S. firms.

While welcoming the collaboration that these announcements represent, it is perhaps important to recognize that the US-China narrative is multilayered—that these well-trumpeted corporate announcements come in the midst of some thought-provoking setbacks for some notable US-based energy companies which extended China operations over the past few months.

One of these companies is CODA Automotive, a US electric car company based in Santa Monica. CODA has been an intriguing story for journalists. The company was formed in 2009; that fall, CODA representatives came to Beijing to participate in the U.S. Department of Energy’s first US-China Electric Vehicles Forum, spearheaded by DOE Assistant Secretary for Policy and International Affairs, David Sandalow.

As you might imagine, CODA’s vision seemed especially apropos to Americans in Beijing in late 2009: China’s Chery Automobile was producing new models left and right, and China’s BYD (which has since experienced some notable setbacks) had announced its investment from Warren Buffet’s Berkshire Hathaway a little over 6 months prior. At that time, Americans in the region were left looking for a leader on the other side of the Pacific.

What struck many then was the innovative, forward-thinking, collaborative nature of the company. CODA is a US-based EV startup, but has a seemingly extraordinarily functional joint venture with Lishen Battery (a Chinese lithium ion battery company, the largest holder of which is China’s National Offshore Oil Company [CNOOC]). CODA’s batteries and vehicle chasses are made in China, yet 35% of the CODA car is made in the US, and the US end does the final inspections.

CODA explicitly recognizes this vision in its corporate materials: “Our heart is in America and our family of partners is global,” says CODA. A lofty goal, backed up by a pragmatic, disciplined model and a management team thought capable of delivering quickly made CODA a media darling. More recently, CODA’s goal of opening factories in Ohio, a manufacturing-dependent state hurt by the financial crisis, resonated well with commentators and journalists.

Yet despite its position as a role model for cross-national cooperation, CODA recently pushed back its initial sales date for its EV sedan to the third quarter of 2011, presumably as a result of executive-level shufflings, including losing the well-regarded Kevin Czinger as Chief Executive in November 2010. Earlier this month, CODA announced that it had closed a round of venture funding valued at USD76 million.  For CODA, a volatile few months make this funding, which brings Coda’s total invested capital to over USD200 million, much-needed good news.

The steep competitive landscape for EVs has become something of an issue for CODA, especially given CODA’s late 2010 pricing for its new sedan, whose initial tag is higher than competitors’ by a few thousand dollars (before factoring in tax rebates). These developments, plus manufacturing setbacks and the management shakeup, make the additional round of venture funding a welcome development.

It’s unclear what the impact of the pipeline setbacks, new funding, and executive changes will ultimately mean for CODA at a functional level. But, especially in the wake of Evergreen Solar’s move to China, it would be unfortunate to see CODA, a company which has demonstrated such exceptional and timely leadership of thought—and navigated the well-recognized complexities of a China joint venture so productively and ably—be beset by significant roadblocks now.

CODA’s setbacks are by no means the fault of China—nor a reason not to cheer this week’s Sino-U.S. cooperation agreements. Yet they are a reminder that, even for the most well-planned and seemingly functional of Sino-U.S. ventures, uncertainties are all but certain.

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Elizabeth Campbell is a Policy Fellow in AEL’s New Energy Leaders Project and will be a regular contributor to the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.

A Chinese high-speed rail station in Tianjin.

The energy and emissions savings associated with better fuel economy are large and obvious, as I covered in my last piece, but driving more efficiently is not synonymous with reducing our nation’s transportation fuel consumption.  In addition to promoting more efficient cars, we should create transportation options that enable Americans to drive less altogether.

According to a report from the U.S Department of Transportation, transportation currently accounts for 29% of America’s greenhouse gas emissions.  Similarly, transportation accounts for about 27% of America’s energy consumption.  Given that our country’s population will grow about 35% to an estimated 420 million by 2050, lowering or even maintaining our transportation emissions is going to involve more than just modest technology upgrades.

Rather than just pursuing marginal advances in fuel efficiency and alternative power sources for cars, in the next four decades we will need to rethink the assumptions underlying our transportation infrastructure.  After all, the structure of our transportation not only affects the amount and type of energy we use for transit, but also shapes our metropolitan areas.  If private vehicles and airplanes are still the hegemons of both intra- and inter-regional transportation by 2050, it will be difficult to curb not just transit emissions but the crippling affects of sprawl as well.

Evolving our transportation systems and moving away from the car is always a politically charged matter, and seems to have emerged as even more of a poignant sort of culture war in recent months.  Anti-cyclist angst seems to be on the rise and, of course, the new governors of Wisconsin and Ohio recently sent back about $1.2 billion in federal rail funding.  The stated reasons for canceling these rail plans were that the passenger rail projects would have been costly and weren’t expected to turn profits in their initial years.  Indeed, many have referenced the “hidden” and “not-so-hidden” costs of passenger rail as cause for worry.  To be sure, revamping America’s transit infrastructure is a large undertaking, and we should be frank about the level of investment it will require.  But why don’t we also talk about the hidden and not-so-hidden costs of not investing in rail?  What about the hidden costs of driving, such as car maintenance, congestion, and the missed opportunity cost of the valuable urban real-estate we devote to parking?  Certainly these matters deserve consideration as well.  Below I’ll outline what many see as some of the “hidden” or “not-so-hidden” economic benefits of a more advanced American rail system.

Higher Productivity

Rail will afford us more productive time as a percentage of our lives.  The economic benefits of productivity are significant in a nation whose competitive advantage is human capital.  Each billion travel-hours we can shift from unproductive driving time to productive time on a train will bring immediate economic benefit.  High-speed rail likely provides more productive time than flying between U.S. cities as well, since the aviation boarding process is far more streamlined.  Making trains wireless is also quite simple, whereas installing wireless internet access on planes is more costly and complicated.

Centripetal Force and Economic Clustering

Whereas automobiles enable sprawl, rail tends to exert a centripetal (or contracting) force on the shape of a metropolitan area.  Cities in the U.S. and other countries grew densely and efficiently before the rise of the car, and regions with effective rail networks still experience less sprawl than many U.S. cities.  This benefit is probably associated more closely with light rail than long-range rail, but even long-range passenger rail will have some centralizing effect on cities.  Because high-speed rail will have just one station in each metro area, in the heart of that city’s downtown area, these stations can ensure that travelers spend time downtown.  Major rail stations also tend to trigger flurries of investment and development in the surrounding blocks.  In other words, the centralizing effects of rail could generate economic activity in urban cores and also cut energy consumption by reducing sprawl.

Long-term Jobs

Little information is available by the way of a direct comparison between the long-term jobs associated with rail versus the automotive and aerospace industries.  A report from the Apollo Alliance, however, finds that rail manufacturing currently takes places in 35 states, with the most firms located in New York, Pennsylvania, Illinois, and California.  Another report from the Economic Policy Institute calculates the jobs impact of federal transportation funding, most of which are good paying jobs for Americans without college degrees.  This report from Northeastern University and the Worldwatch Institute concludes that:

“The United States could gain over 79,000 jobs in rail and bus manufacturing and related industries if public transit were funded at a level that would double transit ridership in 20 years, and more than 250,000 jobs if the country were to invest as much in transit as China does.”

Moreover, job creation in rail would not necessarily hurt jobs in automotive and aerospace.  Americans are unlikely to give up their cars; building viable rail would just provide an alternative as needed.  Also, most suppliers participate in multiple supply chains, meaning many firms that now build components for cars and planes will likely build components for passenger trains as America becomes more serious about rail.  In fact, this type of supply chain diversification is healthy because it helps small firms survive even when one particular industry experiences a slump.

Expanding Labor Markets

A report by the Martin Prosperity Institute points out that viable high-speed rail would enable easy and productive intercity commutes for workers, in turn giving business access to broader pools of human capital.  This would be especially true in the Northeast, the Midwest, and Southeastern Canada- regions that are characterized by constellations of large and mid-sized cities spaced between 100 and 300 miles from each other.

The Erie Canal Effect

The current debate over passenger and high-speed rail is quite similar to the debate over the Erie Canal in the 1820’s.  Americans at the time saw it as hugely costly, and were unsure of the exact effects it would produce.  After President Jefferson rejected the idea for its cost, New York Governor DeWitt Clinton was able to wrangle $7 million in funding from the New York state legislature.  As a result, people called the canal “Clinton’s Folly” while it was under construction.  Soon after the canal opened in 1825, however, it became clear that the investment had been wise.  On the western end, the canal both allowed Midwestern farmers to export their goods internationally and sparked a wave of westward settlement.  On the eastern end, the canal transformed New York City into the nation’s most important port:

“Prior to the construction of the canal, New York City was the nation’s fifth largest seaport, behind Boston, Baltimore, Philadelphia and New Orleans.  Within 15 years of its opening, New York was the busiest port in America, moving tonnages greater than Boston, Baltimore and New Orleans combined.”

Thus, even though the Erie Canal was rendered significantly less useful with the expansion of railroads a half-century later, the initial infrastructure investment permanently transformed both New York City and the Midwest.

Our current investment in rail will likely trigger similar patterns.  It will be seen as costly and risky, but it will allow us to deal with a growing population and it will link our cities together in a way that makes America more effective and competitive for decades to come.  Just as the Erie Canal gave New York City a competitive edge over other cities, a national passenger rail system will keep America competitive in the international arena.

In short, the case for rail would be less clear if the United States had a static or shrinking population like some parts of Europe.  Given that we are still experiencing population growth, connecting our nation with rail is becoming a logistical necessity.  As we enter the age of Megaregions, a viable rail system will help avoid traffic well above what our cities and infrastructure are built to handle.

On top of the purely economic benefits, the emissions savings associated with rail are significant, although dependent on ridership levels.  Assuming 70% ridership, this report ascribes high-speed rail travel an emissions factor of .26 CO2 pounds per passenger mile, compared to .62 pounds for a 70% full airplane and .53 pounds for a car with 1.6 passengers.

As was the case with the Erie Canal, it may be difficult to predict the precise ways in which rail will transform our country.  Yet, investing in a more advanced and high-speed rail system could provide the infrastructure necessary to make breakthroughs in transportation efficiency, regional development, and economic competitiveness.  Without an advanced rail system, America risks yet another economic disadvantage to the EU, Japan, China, and a host of other emerging nations.

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Tim Krueger is a Policy Fellow in AEL’s New Energy Leaders Project and will be a regular contributor to the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.

Although reports on China’s efforts to nurture cleantech industries can be dismaying, such as the work by AEL’s Daniel Goldfarb on Chinese land hand-outs for manufacturing and contributor Leigh Ewbank additional commentary on the emerging Chinese, American trade dispute, it is important to note that America has not yet lost the renewable energy deployment battle. While growth in the Chinese wind market surpassed the US by almost 4,000 MW in 2009, America leads the world in wind power capacity by almost 10,000 MW (China is currently #2). Similarly, while China is investing heavily in renewable energy generation, Chinese solar power capacity stood at only 150 MW in 2008 compared to an EIA estimate of ~540 MW of in the United States. As is the case for wind, China is moving to aggressively increase solar capacity, targeting 2,000 MW by 2011. Geothermal appears to be a lonely bright-spot: America is far and away the world leader in geothermal generation, with more than 3,000 MW of existing capacity and an additional 4,500 MW in the pipeline. China ranks 17th, with less than 100 MW of geothermal capacity.

While the Race for Megawatts captivates the public, deployment is much more than a matter of national pride. Deployment drives both innovation, reducing technology cost through ‘learning-by-doing’, and economic growth, not only creating jobs through project development but rippling through ecosystem of suppliers, distributors, and manufacturers. A clear path to deployment is also critical if entrepreneurs are expected to invest the time and capital necessary to bring a new technology to market. As can clearly be seen in China (or Germany, Spain, and Japan), strong state support is the single most important factor currently driving the introduction of renewable energy onto the grid.

The good news is that the Bureau of Land Management has been evaluating the renewable energy resource potential of public lands since 2003 and now estimates that public lands have the potential to generate 2.9 million MW of solar, 206,000 MW of wind, and 39,000 MW of geothermal energy. An increasing number of proposals for large scale developments are progressing to the permitting and public participation stages of BLM review. The scale of these proposed projects is immense. The smallest fast-track solar energy project listed on the BLM website is larger than all but three existing solar power plants in America. The individual potential output of four proposed projects exceeds the total combined nameplate capacity of all existing solar plant in service in America. And that’s only the tip of the iceberg – sitting in the pipeline is the generating potential of future projects in the BLM’s 24 proposed “Solar Energy Zones” (recently released Draft PEIS available here).

However, as David Brower and the Sierra Club rose to oppose the Bureau of Reclamation during the American “Big Dam” era, a new generation of druids has risen to defend their beloved deserts and coastlines. Battles have already erupted over BrightSource and First Solar projects in the Mojave, while the Quechan Tribe recently won an injunction against Tessera’s Imperial Valley Solar Project in California.

This discord highlights the diverging paths of renewable energy deployment in China and the United States. Despite Secretary Salazar’s best efforts to play a modern-day Floyd Dominy, the disparate union of American States and interests simply cannot match the bulldozer efficacy of the Chinese State. Not only is all land in China essentially state owned, 90% of generating companies and 100% of transmission is government owned. Equally important are the cultural differences – China is a land where “not in my back yard” has not yet found a voice.

Whether it is a ‘New Sputnik’ or a “strategic inflection point,” we must recognize that the countries that develop the “green” technologies of today will be in a position to dominate the energy industry of tomorrow. However, China today has more in common with America’s robber baron era than with the current age of environmental impact statements and public review – China’s path to renewables is in many ways a refrain from our own Cuyahoga past and cannot be our path into the future. Additionally, although driving deployment today is critical to ensure that we develop experience in the energy technologies of the future, the demographic arithmetic does not favor America in the race for renewable megawatts. The rising demands of a hungry society of 1.5 billion will inevitably exceed even the most extravagant consumption of 300 million. While currently an export industry, China’s push to develop energy technology is not just aimed at industry domination – Chinese regulators are laying the foundation to ensure that development is not accompanied by the blackouts and power shortages that have plagued other developing nations.

Though China’s progress is enviable, America should focus on maximizing development the American Way rather than aping the success of a rising competitor. Despite the bureaucratic hoops, America has a strong business culture and climate and ranks 5th in the world on the World Bank’s “Ease of Doing Business” Index. Importantly, the US ranks 5th in protecting investors and 8th in enforcing contracts. China is far down the list at 79th overall, 93rd at protecting investors and 15th in enforcing contracts.

Companies cannot afford to ignore the rapid development of the Chinese market, as the New York Times Keith Bradsher reported in December. Still, they are beginning to understand that entry into China comes at the risk of training the next generation of competition. Renewable energy is a global industry and many of the multinationals that are exploring China have already invested in America; the fast-track BLM projects noted above include proposals by the Dutch Shell Energy and the Spanish Iberdrola. America must recognize that our open business climate is a great strength, and given the history of technology appropriation in the energy industry, perhaps the greatest selling point for developers comparing China and America.

In this respect, only the glacial pace of project permitting holds us back. The 10-year odyssey of Cape Wind – and the millions involved in paperwork and litigation throughout the process – stands in stark contrast to the rubber-stamped projects of China. The Department of the Interior appreciates this contrast and is working to accelerate the leasing process. Just as the BLM’s Solar Energy Zones are targeted at expediting solar leasing, the “Smart from the Start” wind initiative recently unveiled by Secretary Salazar is aimed at reducing the approval process to two years from the previous 7-10.

Expedited project approval is a start, but we can do more. The Department of the Interior should provide incentives to ensure that America’s renewable energy pipeline is actually developed and that leased lands are put to use. The BLM should fully transition away from the historical first-come, first-serve distribution of renewable energy leases to an auction system. This will ensure that the lands with the greatest potential are distributed to those with the greatest interest in development. Beyond this, the DOI should act to nudge current lease holders towards development. For example, an addendum that escalates lease cost in the absence of active development could be added to lease terms to increase the cost of squatting. This is particularly critical for the high-potential lands identified by the BLM. America’s greatest renewable resources should not be held hostage by speculators.

Opponents of public-land renewable energy have argued for distributed generation, envisioning a world of solar rooftops rather than solar farms in the desert. But large utility-scale projects are necessary to generate the economies of scale that will eventually drive down technology prices to the point where distributed generation becomes accessible to the masses and not just Tesla-driving elites. Distributed generation is the future and has an important role to play even today–but change is measured in MW not kW. The Department of the Interior is working now to make this change a reality.

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Dean Chuang is a Policy Fellow in AEL’s New Energy Leaders Project and will be a regular contributor to the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.

Guest contribution by Leigh Ewbank

On the heels of filing a complaint with the WTO against China’s subsidies for its domestic wind turbine manufacturers, President Obama signed an appropriations law that requires the Department of Defense to purchase American-made solar panels. The move appears to be the first instance of America leveraging its WTO complaint to boost its clean technology industry, and shows that the US is beginning to take clean energy competitiveness seriously.

Some will argue that the ‘buy American’ provision smacks of hypocrisy—that the administration is as guilty of the same behavior it has criticized China for. Others will argue that the measure counters the Chinese subsidies and is a legitimate way to bolster the US clean energy sector in an uneven playing field. Regardless of your position on the matter, the move shines a spotlight on the role of military procurement.

Mandating the Defense Department to purchase of ‘American made’ solar panels is likely to comply with international trade rules. Article XXI of the General Agreement on Tariffs and Trade 1994 stipulates that military procurement is excempted from rules designed to prevent preferential treatment of local industries and trade protectionism. While the US government’s preference for US-made photovoltaic cells might anger China and other nations with a stake in the global solar market, there is little recourse for them.

Military procurement serves an important purpose in the domestic political environment beyond its ability to circumvent WTO rules. Key Republicans serving on defense-related committees—Rep. Todd Akin (R-MO), Buck McKeon (R-CA), and Rep. Randy Forbes (R-VA)—have all shown an unwillingness to cut the national defense budget, even marginally. Defense purchases allow the US government to invest in the nascent clean tech sector and escape the wrath of the deficit-obsessed conservatives.

The ‘buy American’ provision taps the US military’s good track record of bringing down the costs of new technologies. As the Breakthrough Institute points out in “Where Good Technologies Come From”, the Department of Defense’s sustained demand for microchips resulted in dramatic cost reductions.

NASA’s procurement of the purpose-built Apollo Guidance Computer microchips during the space race of the 1960s had a similar impact. NASA’s appetite for microchips was so large that manufacturers “…were able to achieve huge improvements in the production process, driving the price of the Apollo microchip down from $1000 per unit to between $20 and $30 per unit in the span of a few years.”

Comparable cost reductions could potentially be achieved for solar PV, in which case American’s would have a more energy independent military, as well as the spillover benefits of cheaper photovoltaic cells and a rejuvenated manufacturing sector.

DOD procurement of clean energy technologies might also be used to pilot the ‘competitive deployment’ policies outlined in the joint Breakthrough/Brookings/AEI report Post Partisan Power. Such an approach aims not only to drive deployment of existing technologies, but also to drive technological innovation and steady reductions in the price of clean energy technologies as they are deployed. This model harnesses America’s strength as a high-tech innovation powerhouse and seeks to create a virtuous cycle for achieving ever cheaper clean energy.

After much inaction America has recently made some swift moves in the clean energy race. How will China respond?

See also: “A New Energy Economics and Security Consensus” By Daniel Goldfarb

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Leigh is a former Breakthrough Generation Fellow.  You can follow him at his blog “The Real Ewbank“. The views expressed are those of the author and do not necessarily reflect the position of AEL.

It is fitting that the first week of 2011 ushered in a new series of federal fuel standards, meaning passenger cars sold this year must achieve at least 30.2 miles per gallon.  This alone is nothing big: the previous standard for passenger cars was 27.5 MPG, it had been on the books since 1985, and the Obama administration’s 2011 standards are even slightly less ambitious than those the Bush administration had been toying around with in 2008.  Far more significant is that the 2011 standards kick-start an annual progression that will bring us to passenger car averages of 39.5 MPH by 2016.  With light trucks required to improve their fuel economy from 24.1 MPG this year to 29.8 by 2016, industry-wide averages five years from now should exceed 35.5 MPG.  The Union of Concerned Scientists calculates that these standards will “reduce U.S. oil consumption by 1.2 million barrels per day by 2020, more petroleum than the United States presently imports from Saudi Arabia and Kuwait combined,” and in terms of carbon emissions will represent “the equivalent of taking nearly 31 million of today’s cars and light trucks off the road” over the next ten years.

Achieving this 30% improvement in five years will not have been unprecedented.  Legislation passed just after the 1973 Arab Oil Embargo held our automotive industry to a timeline that nearly doubled fuel efficiency within a decade.  Average fuel economy rose from 13 MPG in the mid 1970’s to the current 27 MPG by about 1982.  The EPA changed the way it calculates fuel economy in 2008, meaning that a vehicle claiming 27 MPG is slightly more fuel efficient now than it was in the past, but nonetheless, improvements in recent decades have been almost negligible.

Given that the automotive companies have had little incentive to improve the fuel efficiency of their American cars over the past thirty years, it might seem that the industry should be sitting atop three decades’ worth of technological improvement, ready to be applied toward fuel efficiency.  This is true in some senses.  While the U.S. has not raised its fuel economy standards in quite some time, other countries have.  China’s standard was 43 MPG by 2008, and the EU’s standard will be 47 MPG by next year.  Because the same major auto manufacturers sell cars in most of these markets, the technology for higher fuel economy exists in some form or another.  Whether automotive companies think the current forms of these technologies, namely smaller and more costly cars, are palatable to the American consumer is a different story.

Thus, the impending challenge lies in creating high fuel economy cars and- more daunting yet- trucks that Americans will buy.  Because the American consumer’s eventual willingness to compromise on size and cost is difficult to gauge, meeting our new fuel economy standards will require technological innovation that goes beyond what has been done to produce fuel efficient fleets in Europe and Asia.  Even if Ford thought it could sell its 65 MPG Fiesta Econetic in North America – Ford currently only sells this car in Europe, which is not likely to change – it could not simply start selling that model here tomorrow.  The car would need to be produced at much higher volumes and many of the parts would need to be built in different cities or countries, by different workforces with different current skills.  We are, in short, not logistically or technologically prepared to manufacture and sell fuel-efficient cars to Americans.

Nor is it a foregone conclusion that all automotive manufacturers will be able to engineer cars and trucks that achieve requisite fuel efficiency while appearing the same.  Indeed, there is much hemming and hawing over the extent to which manufacturers will be able to implement the proper improvements within the appropriate time period – that is, without upsetting American consumers.  Although the automotive companies have dropped their lawsuits against higher standards, they remain less than enthusiastic over the task ahead.  “It’s a tough task, but we’re facing it as grown-ups” seems to be the sentiment in the General Motors full-sized truck division.

This uncertainty raises two important sets of questions.  First, if not through significant size reductions or cost increases, how will American cars become 30% more fuel-efficient by 2016?  Will manufacturers be able to pull off a full transition without sacrificing form or will the American consumer need to meet them half way?  Second, the necessary product development, manufacturing transformation, and risk associated with potentially unpopular vehicles will cost the industry at least $46.7 billion according to 2008 estimates by the federal Department of Transportation.  So how will this impact the whole industry?  How will this overhaul affect the financial stability of U.S. and foreign automakers, the wage structure of their workforces, and the geographic distribution of their supply chains?

Achieving Necessary Improvements

Improvements to fuel economy will fall into two main categories: powertrain efficiency and lightweight material technology.

Powertrain efficiency refers to how well a vehicle’s engine can harness the raw energy put into it.  There are a number of ways to improve the powertrain efficiency of conventional gasoline cars, such as reducing the number of cylinders in an engine, or adding computers that time gear-shifting more precisely and shut the engine off while stopped.  Most of the short-term strategies for improving powertrain efficiency involve minor adjustments like these.

However, another way to improve powertrain efficiency is to abandon the conventional gasoline engine altogether.  Battery electric vehicles (BEV’s), Hybrid Electric Vehicles (HEV’s), and Plug-in Hybrid Electric Vehicles (PHEV’s) are all examples of cars with powertrains more efficient than conventional gasoline cars (these vehicles are referred to collectively as xEV’s).  EnerDel, a lithium-ion battery manufacturing company, estimates that by 2020, 30% of the vehicles sold in America will be xEV’s.  This means 23% of vehicles on the road in 2020 are expected to be xEV’s, of which 12% will be HEV’s, 7% will be PHEV’s, and 4% will be BEV’s.  By the same predictions, conventional gasoline vehicles will be phased out of production around 2040.  We seem to be on the edge of a long and permanent market transformation.

The process of new technology flooding a market usually triggers rapid price reductions.  Flurries of competition, innovation, and intellectual property leakage are the forces that typically drive down the cost of new technology.  Initial price reductions then drive further production, and more production brings down the cost of producing each item, creating a cycle of expansion.  Unfortunately, there are many indications that the cost of xEV’s may not obey these principles.  A recent Wall Street Journal article explains that “more than 30% of the cost of batteries comes from metals such as nickel, manganese, and cobalt.”  These raw materials will not become cheaper due to innovation or intellectual property leakage, and indeed may even grow more expensive as demand for electric vehicle batteries grows.  Other battery components used in cell phones and computers already experienced a 35% price reduction in the past decade, making further cost reductions for these components unlikely.

This would not be as huge a hurdle if the battery for an electric car did not cost about as much as a whole conventional car.  The battery for Nissan’s plug-in Leaf, released last month, costs $15,600, constituting about half of the vehicle’s overall cost.  Consequently, Nissan does not expect to turn a profit on this vehicle in the near future.

All of this is not to say that the cost of plug-in vehicles will not come down over time; only that these reductions will not likely be dramatic enough for xEV’s to serve as the cornerstone of improved fuel economy by 2016.

Finding ways to replace steel with lighter materials will be the other chief strategy for improving fuel economy without having to compromise on overall vehicle size.  The relationship between weight and mileage is strong: a 10% reduction to vehicle weight translates into a 7% improvement in fuel economy.  Noting the fuel-saving potential on this front, the federal Department of Energy has set a goal of developing the materials necessary to reduce the average weight of vehicle “structure and subsystems” by 50% over the next nine years.

Challenges associated with lightweight vehicles are the usual culprits: the higher costs of materials such as aluminum and carbon-fiber composites, the logistical difficulties of joining those materials together, and our manufacturing sector’s lack of experience working with such materials.  Building a vehicle with more lightweight material is not without cost, but compared to xEV’s is a cheaper and more technologically straightforward approach to improving fuel economy.  As a result, this will likely anchor much of the improvement to fuel economy over the next five years.

Restructuring the Industry

As mentioned, the automotive industry is in the midst of some rather expensive transformations.  Emissions standards are not the sole cause of these transformations and expenses.  By 2008, the global automotive industry was building far more cars than it needed to, and in America these cars were overwhelmingly inefficient.  The U.S. manufacturing industry had also been slow to adopt continuous improvement techniques prevalent in foreign manufacturing sectors, eroding America’s competitive edge.  Additionally, for two decades the American approach to cost-cutting had relied heavily on outsourcing production instead of learning how to dd value at home.  Thus, it is important to recognize that in the wake of the 2008 financial crisis, the global automotive industry- including and especially the American automotive industry- is now beginning to undertake its long-delayed arrival to the 21^st century.  That increases to America’s fuel economy standards coincide with this massive transformation is actually fortuitous, as it provides some reassurance that a single renegade company will not be able to preclude industry-wide momentum by flooding the American market with cheap and inefficient models.

Still, the impending transformation will have a price tag.  Some of this cost will be passed on to American consumers.  Specifically, the EPA has estimated that the new efficiency standards will add $476 to the average 2012 vehicle, and $1091 to the average vehicle sold in 2016.  The money Americans will eventually save from driving these fuel-efficient vehicles, however, eclipses the added initial cost three times over.

The picture is slightly different for automakers themselves.  The combination of developing so many new products and selling them for slim (or no) profits will prevent some manufacturers from coming up with the revenues they may have otherwise liked.  Of equal importance will be billions of dollars made and lost as various automakers gain and lose fractions of the American automotive market.  As noted, understanding how America’s willingness to buy fuel-efficient cars and trucks will evolve in the upcoming years is a murky business, and no automaker can know at this point whether its fuel-efficient fleets will find traction with the American consumer.  As the fates of various auto manufacturers rise and fall over the next five years, the greener automotive market will begin to produce some new winners and losers.  For the losers, the cost of this transformation will have become far more complicated than just research and development costs.

In recent decades, U.S. automakers have dealt with rising costs by off-shoring production, mechanizing production with robots, seeking tax breaks, lowering wages, and demanding cost reductions from their suppliers.  These techniques may help an individual company survive, but none of them is particularly healthy for America’s economy on the whole.  America thus has a strong vested in convincing Americans to buy fuel-efficient cars in the next five years.  To avoid the devastating outcomes above, the U.S. should take appropriate measures to shore up confidence in the high fuel-efficiency vehicle market and help ensure that these vehicles can be reasonably profitable.  Two of the most important areas to focus on are:

1) Reducing some of the uncertainty associated with selling fuel-efficient vehicles.  It is important to distinguish between the uncertainties that matter a great deal and those that do not.  As noted above, for instance, it is unclear whether automakers will be able to build 29.8 MPG trucks that boast the same size and power of today’s trucks.  This is probably a less important uncertainty.  If all automakers concede to physics and end up selling slightly smaller trucks to meet the standards, Americans will simply end up buying slightly smaller trucks.  The number of cars and trucks America buys in a year is not completely inelastic – we have seen in recent years that it can rise and fall in accordance with our economic tides – but we will continue to buy them in large numbers nonetheless.  The far more relevant uncertainties are whether it will take five years or fifteen years for the cost of lithium-ion batteries to come down; whether American automakers will hesitate, fall behind, and lose significant market share in the contest over the fuel-efficient vehicle market; how many of the parts for these vehicles will be manufactured in the U.S.  As it is, the average fuel economy of Toyota, Nissan, and Honda passenger cars sold in the U.S. (36.4, 34.8, and 34.7 MPG respectively) all surpass those of Ford, GM, and Chrysler vehicles sold here (32.3, 30.6, and 28.0, respectively).  This is an indication that the Big Three may have more difficulty manufacturing fuel-efficient fleets in the next five years, and would be the greatest beneficiaries of some prodding and reassurance.

A few modest steps on the part of federal, state, and even local governments will go a long way to ease some of these uncertainties and provide some of this confidence.  Getting more serious about charging infrastructure would clear up a number of questions about how soon electric cars will be convenient and reliable for daily transit.  More U.S. cities should join the C40 Electric Vehicle Network that came out of the COP15 summit as a forum for international collaboration on electric vehicle infrastructure networks.  The initiative currently includes 14 cities worldwide, of which Chicago, L.A., and Houston are three.  A Senate bill that would help expedite the development of EV infrastructure was proposed in June of 2010, but the future of that bill seems unclear and probably will not represent a timely enough strategy for achieving necessary progress.  The federal government does offer up to $2000 in tax rebates for installing EV charging stations at personal residences, and up to $50,000 for businesses.

One of the most important steps the federal government could take to give the Big Three an added incentive boost would be to become more vocal about where fuel economy standards will go after 2016.  Although some believe it unlikely that we will see the kind of 60-62 MPG standards that seemed at one point to be on the table for 2025, we can almost certainly expect the actual figure to keep us on a steady, 3-5% per year rate of efficiency improvements.  While the Obama administration will not formally announce these figures until July of 2012, they can accomplish much by highlighting the matter publicly in the next 18 months.

2) Creating an economic environment that will maximize the profitability of fuel-efficient vehicles.  Aggressive rebates for fuel-efficient vehicles are a great start, and the U.S. is doing rather well on this front.  Rebates can currently amount to between $7500 and $9000 per vehicle, depending on which state one lives in and which type of vehicle one buys.  Conversely, the U.S. Renewable Fuel Standard almost exclusively incentivizes ethanol, which is not more efficient than gasoline and is unable to provide a significant proportion of America’s transportation energy.  Re-defining the Renewable Fuel Standard to incentivize xEV’s would be far more effective than continuing to subsidize ethanol.

Whether the price of gasoline rises significantly over the next five years will be a decisive factor in automotive industry’s ability to pull off a successful transformation.  If gasoline is still $3 per gallon in 2016, the risk is that Americans will resist the transition to fuel-efficient vehicles, and some automakers might be cast into financial distress.  As was evident when American’s went back to buying inefficient cars as soon as the price of gas dropped in late 2008, consumers do not necessarily understand or engage in long-term calculations when considering what vehicles to buy.  Although it may be politically difficult, some in the automotive industry seem to be in favor of raising the gas tax.  Mike Jackson, chief executive of the largest Automotive retailer in the U.S., thinks $4 per gallon is the threshold below which Americans will not understand the need to spend slightly more on energy-efficient vehicles.  Raising the gas tax is not the only way to keep gasoline prices from dropping too far, however.  Continuing to ratchet up limitations and regulations on both new and existing domestic, offshore drilling will help prevent the price of oil from dropping too far.  Of course, ecological benefits of costlier oil and less offshore drilling would be enormous as well.

The successful transformation of America’s automotive manufacturing industry is no trivial matter.  A 2008 report from the Center on Automotive Research explains how the three major American automotive companies and their suppliers employ over 3 million people, which represents around 2% of the jobs in our country.  The industry seems to be an arm’s length from the brink of total collapse it flirted with two years ago, but is also far from having “recovered.”  Successfully developing and selling fuel-efficient vehicles will be of great benefit to both our environment and our economy, whereas the failure to do so would be a major setback on both accounts.

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Tim Krueger is a Policy Fellow in AEL’s New Energy Leaders Project and will be a regular contributor to the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.