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Stop the Green Carjacking

Thursday, November 20, 2008

Will environmentalists be permitted to transform the Detroit bailout? If so, automakers and taxpayers will suffer.

Always eager to shove their agenda into a seemingly unrelated policy discussion, the green movement has joined the debate over bailing out the Big Three automakers.

House Speaker Nancy Pelosi wants to tie federal assistance to a requirement that Detroit make more fuel-efficient, eco-friendly cars. “Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol,” demands New York Times columnist Thomas Friedman. Writing in The Washington Post, Columbia University economist Jeffrey Sachs calls for a “major industry restructuring to position the United States to lead the world in producing cars that get 100 miles or more per gallon.” (Sachs is pinning his hopes on plug-in hybrid vehicles, “fuel-cell cars,” and the much-ballyhooed—but not yet seen or priced—Chevy Volt.)

In other words, at a time when the top Detroit automakers are desperate for financial aid, the federal government should force them to sell more expensive cars that are less profitable. Make sense to you? Me neither.

It’s hard to see how greening Detroit will help car companies, car drivers, or American taxpayers. Greener vehicles are more expensive to make and bring in less profit than other cars. They cost more to finance, more to repair, and more to insure. Their sales depend heavily on tax incentives—which means that selling more of them will require more taxpayer dollars. The National Renewable Energy Laboratory (NREL) estimates that plug-in hybrid vehicles cost $3,000 to $7,000 more than regular hybrids, even though the performance differences between the two models are slight, and the really fuel-efficient hybrids cost $12,000 to $18,000 more than the conventional brand.

If the green movement succeeds in carjacking the Detroit bailout, automakers will be forced to sell costlier and less profitable vehicles.

Consider the Chevy Volt. When it was first announced, the price estimate from General Motors (GM) was $30,000. That soon jumped to $35,000. Now GM’s president says that the actual price could be closer to $40,000, and that GM will still lose money on the sale. As for fuel cells, GM’s prototype fuel-cell car runs on hydrogen and emits nothing but water vapor. It’s hard to get greener than that—but it’s also hard to find a more expensive car: the prototypes cost $1.5 million to produce.

Hybrids are also more expensive to insure. Online insurance broker Insure.com shows that it costs $1,374 to insure a Honda Civic but $1,427 to insure a Honda Civic Hybrid. Similarly, it costs $1,304 to insure a Toyota Camry but $1,628 to insure a Toyota Camry Hybrid.

What explains the higher rates? According to State Farm, hybrids cost more to insure because their parts are more expensive and repairing them requires specialized labor, thus boosting the after-accident payout. Even conventional small cars are more expensive to insure than larger vehicles, because the former are involved in more accidents that produce extensive injuries. According to a recent article in The Wall Street Journal, the same driver would pay $412 more to insure a Honda Civic compact that gets 36 mpg on the highway than he would to insure a Honda CR-V (Honda’s mini-SUV) that gets 27 mpg.

President-elect Barack Obama wants to give a $7,000 tax credit to Americans who buy a plug-in hybrid vehicle. He says that such a tax credit will help carmakers sell a million plug-in hybrids over the next seven years. If Obama is right, that means the government will spend around $7 billion in taxpayer money to promote the sale of plug-in hybrids. Replacing all American cars with plug-in hybrids would require tax incentives worth roughly $1.8 trillion dollars (assuming each car would cost the government $7,000).

If the green movement succeeds in carjacking the Detroit bailout, automakers will be forced to sell costlier and less profitable vehicles. Before allowing that to happen, policymakers should consider the consequences of higher car prices, namely, reduced sales, slower fleet turnover, and longer operation of aging vehicles that emit more pollution and break down more frequently than newer automobiles.

They should also consider how higher car prices will affect Americans in the midst of a nasty—and possible long—recession. Finally, they should ask themselves: Is this really the way to make U.S. automakers more financially secure and globally competitive?

Kenneth P. Green is a resident scholar at the American Enterprise Institute.

Image by Dianna Ingram/The Bergman Group.

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