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[Senate Hearing 110-15]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 110-15
 
                 TRANSPORTATION SECTOR FUEL EFFICIENCY

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   on

  TRANSPORTATION SECTOR FUEL EFFICIENCY, INCLUDING CHALLENGES TO AND 
 INCENTIVES FOR INCREASED OIL SAVINGS THROUGH TECHNOLOGICAL INNOVATION 
                       INCLUDING PLUG-IN HYBRIDS

                               __________

                            JANUARY 30, 2007

                       Printed for the use of the
               Committee on Energy and Natural Resources

                      U.S. GOVERNMENT PRINTING OFFICE
34-537 PDF                  WASHINGTON  :  2007
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Washington, DC 20402-0001 

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    CRAIG THOMAS, Wyoming
TIM JOHNSON, South Dakota            LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana          RICHARD BURR, North Carolina
MARIA CANTWELL, Washington           JIM DeMINT, South Carolina
KEN SALAZAR, Colorado                BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida
                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
            Frank J. Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel
                         Michael Carr, Counsel
           Kathryn Clay, Republican Professional Staff Member

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Anderman, Menahem, Ph.D., President, Advanced Automotive 
  Batteries, Oregon House, CA....................................    20
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     1
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     5
German, John, Manager, Environmental and Energy Analysis, Product 
  Regulator Office, American Honda Motor Company, Inc............    12
Greene, David L., Corporate Fellow, Engineering Science and 
  Technology Division, Oak Ridge, TN.............................    33
Logue, William J., Executive Vice President, FedEx Express.......    26
Lowery, Elizabeth, Vice President, Environment and Energy, 
  General Motors Corporation.....................................     7
McManus, Walter, Director, Automotive Analysis Division, 
  University of Michigan Transportation Research Institute, Ann 
  Arbor, MI......................................................    29
Murkowski, Hon. Lisa, U.S. Senator from Alaska...................     2
Sanders, Hon. Bernard, U.S. Senator from Vermont.................     3
Stabenow, Hon. Debbie, U.S. Senator from Michigan................     3

                                APPENDIX

Responses to additional questions................................    55

                 TRANSPORTATION SECTOR FUEL EFFICIENCY

                              ----------                              

                       TUESDAY, JANUARY 30, 2007

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:31 p.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. Why don't we go ahead and get started. I am 
advised that Senator Domenici is delayed in a meeting but will 
be here as soon as he is able to.
    Today we have a very important hearing on the state of fuel 
efficiency technology in the transportation sector and our 
prospects for reducing our reliance on oil in the U.S. economy. 
I have heard this reliance described as the oil intensity of 
our economy and this may be a useful way to capture what is an 
attainable goal for us in the near term.
    In various ways we have been trying to reduce how much oil 
we use since the oil shocks of the 1970's. Those oil shocks 
focused the Nation's collective attention on the problem of the 
dramatic imbalance between our domestic supply and the 
consumption of oil in this country. We have had some modest 
successes. We have largely removed oil from power generation. 
We have reduced our use in home heating, and for about a 
decade, not the last decade but for a decade, we reduced our 
use in cars and trucks.
    Since the mid-1980's, however, we have been losing ground 
in fuel efficiency. The transportation sector is now the 
leading consumer of energy in the United States. It accounts 
for over 80 percent of forecast increased oil demand in this 
country in the future. Consumers are paying more at the pump. 
Our environment is threatened as we risk triggering a dangerous 
warming cycle and our economic wellbeing and national security 
depend largely on unstable parts of the globe. So clearly we 
are not on a sustainable path at the current time.
    Biofuels will be a part of the solution and a part that we 
will examine in depth on Thursday of this week in a workshop or 
conference that we are having in the committee. But since a 
typical vehicle only has an efficiency of about 20 percent, it 
seems clear that the best opportunity is to try to increase 
efficiency. Recent news about the development of new battery 
technologies, advanced concept vehicles with fuel economy 
ratings as much as two or three times what we have today, give 
us hope that the right Federal policies could help us make 
substantial progress on this front in the near future.
    Questions that we are going to be looking at are how much 
progress on fuel economy can we realistically hope for in the 
near term with these advanced technologies? Second, how quickly 
can we get these new technologies deployed in this country? 
Third, what policies and programs at the Federal level will 
best encourage getting these technologies deployed?
    Before we go to the witnesses from out of town, and we have 
many of them today, I wanted to recognize Senator Stabenow, who 
is the distinguished Senator from Michigan and is very focused 
on this set of issues and has been since she has come to the 
Senate. She does a great job representing Michigan in many, 
many ways. We welcome her and look forward to any comments she 
has.
    [The prepared statements of Senators Murkowski and Sanders 
follow:]
  Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska
    Thank you Mr. Chairman for scheduling this hearing.
    My belief is that we need a balanced policy to address the nation's 
energy need. That we need to promote renewable and alternative fuels, 
push fuel conservation and energy efficiency and promote more domestic 
sources of fossil fuels to meet this nation's energy needs.
    Today's hearing certainly focuses on promoting alternative fuels 
and promoting energy efficiency. Given that nearly 70 percent of the 
oil we consume today goes to fuel the transportation sector--a 
percentage that could rise in the future--it is vital that we address 
transportation, by both encouraging efficiency and technology 
breakthroughs to reduce our dependence on imported oil.
    I certainly am a supporter of raising the mileage that vehicles get 
for the fuel they consume. I support an increase in Corporate Average 
Fuel Efficiency (CAFE) standards. I'm sure most of us do. The question 
is how far we raise CAFE and how fast.
    I recently introduced legislation, a companion bill to legislation 
introduced by my senior colleague Ted Stevens, that would raise CAFE to 
40 miles per gallon by 2017, assuming that is technologically and 
economically feasible. My bill (S. 298) will also require that CAFE 
rating reflect the real-world performance likely from most vehicles. 
And the bill requires a study of extending a CAFE standard to 
commercial trucks--a provision that I am delighted to see one of the 
witnesses, FedEx, in his testimony also espouses.
    My bill would provide additional funding for research into the 
battery issues inherent if we are to move toward plug-in hybrid 
vehicles. I gather that the $100 million I proposed in my bill is 
merely a downpayment on the likely cost of research to solve the 
research issues related to lithium-ion batteries that will be presented 
at this hearing.
    I certainly am a supporter of the expanded use of bio-fuels, fuel 
that can be made in America and not have to be imported from overseas. 
Having said that I will be very interested in what makes sense, both 
economically and environmentally, in how far and how fast we push 
development of fuels like ethanol, made from corn, of cellulosic 
ethanol that could be made from a variety of fibers, and those other 
alternative fuels, from bio-diesels to methanol or butanol, not to 
mention hydrogen fuels.
    In the Energy Policy Act we mandated that we use 7.5 billion 
gallons of ethanol by 2012, enough to replace other additives and 
provide a 10 percent content in gasoline in many air-attainment areas. 
It likely will require even more ethanol for it to make up 10 percent 
of all gasoline sold nationwide. E-85, fuel containing 85% ethanol and 
15% hydrocarbon components, may also make sense. But I certainly will 
like to see more information on how well 85 does in cold climates, for 
example, and how much ethanol made from different base crops will be 
required to propel vehicles a given mileage. I know corn-based ethanol 
provides less energy per gasoline that gasoline. Does cellulosic 
ethanol have similar problems?
    There are a lot of important issues to be addressed at this 
hearing. I look forward to hearing the testimony. Thank you.
                                 ______
                                 
 Prepared Statement of Hon. Bernard Sanders, U.S. Senator From Vermont
    Chairman Bingaman, Ranking Member Domenici, today's hearing is so 
important. Our constituents want to get more out of every buck they put 
into their gas tanks; our environment is in trouble because of the 
greenhouse gas emissions spewing from the tailpipes of our cars; our 
national security is weakened by the fact that we import so much oil; 
and quite frankly, our domestic auto industry--and the economies and 
families dependent on it--is crumbling because they haven't been 
thinking with an eye toward the future. For all of these reasons, we 
must make our cars and trucks more efficient and we must do it soon.
    In fact, I will not mince my words: a lack of federal leadership to 
increase mileage standards is a huge failure. It should be a source of 
embarrassment for all of us and I will talk to each and every one of my 
colleagues in the Senate about the dire need for action.
    I appreciate the witnesses appearing in front of the Committee 
today and look forward to getting some important answers from them.

 STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM MICHIGAN

    Senator Stebenow. Well, thank you, Mr. Chairman. I first 
want to thank you for your leadership and for all of the 
important work that the committee has done and will do. I look 
forward to working with you. We are really in this together 
about where we need to go as a country. So I appreciate the 
opportunity to be here to talk about a critical issue for those 
of us in Michigan, for our American automakers and really for 
the country.
    I want to welcome three Michigan witnesses. I said to our 
chairman that, you are going to get an overdose of Michigan 
today, but we are very proud to offer our perspectives because 
of the important leadership that is being done in Michigan: 
Betty Lowery from General Motors in Detroit; John German from 
Honda in Ann Arbor; and Dr. Walter McManus from the University 
of Michigan.
    I am very proud to represent people who work hard every day 
in this industry, and the auto industry is the linchpin of 
Michigan's economy, making up 22 percent of our State's work 
force. The Big Three employ nearly 400,000 Americans in 176 
major facilities in 34 States. I think it is not an 
exaggeration to say that the automobile industry created the 
middle class of this country. As we move forward together, we 
need to achieve our goals and also allow them to continue to be 
strong and an important part of our middle class wage base.
    Motor vehicle and auto parts are the biggest export from 
the United States, with $87 billion. In 2005 the Big Three 
exported 1.1 million cars and trucks. The auto industry has 
made efficiency a priority. It is very exciting to go to the 
North American Auto Show and see the technologies that are 
being introduced. My priority is to help them be able to do 
that as quickly as possible.
    They are taking a number of steps to increase fuel 
efficiency. They are very important. The Big Three announced in 
June of last year that they will double their production of 
vehicles that use biofuels by 2010 and that is a very important 
step in achieving oil savings and moving us forward to energy 
independence.
    I would like to submit a copy of a letter, Mr. Chairman, 
for the committee's record that indicates their commitment.
    The Chairman. We will be glad to include that in our 
record. Thank you.
    Senator Stebenow. Thank you.
    I also would indicate that it is going to be critical for 
us to make sure that the pumps at consumer-friendly service 
stations are available for those of us who are anxious to 
purchase or have purchased flex-fuel vehicles. Part of making 
this successful for consumers, of course, is something that the 
committee has looked at, which is addressing what happens in 
terms of the availability of pumps.
    But just to give you just a quick moment about each of the 
Big Three automakers, one of the most exciting developments at 
General Motors is the new Volt, which is a plug-in hybrid car 
that is expected to be available in the next 3 years. I think 
we can have an important role in helping to make sure that 
happens. Not only does the Volt run on pure electricity, but 
its flex-fuel engine can be powered by E-85 ethanol, enabling 
the Volt to get 525 miles for every gallon of gasoline used in 
the E-85 blend.
    Of course, the critical element here is battery technology 
and we need to be doing everything we can to support I think 
and, excuse the pun, jump-start this advanced technology to see 
how we can move this to the marketplace as quickly as possible.
    Last September the U.S. Army became the first customer of 
GM's latest fuel cell technology with the Chevrolet Equinox 
fuel cell vehicle fleet. These vehicles will be used for non-
tactical purposes on military bases in Virginia and California. 
They provide 186 miles of petroleum-free operating range and 
will save millions of dollars in fuel and refueling supply 
chain costs. It is exciting to see the first 100 hydrogen fuel 
cell vehicles that have been turned over to the Army. But there 
obviously is tremendous capacity, much more that we need to be 
doing.
    If you go downtown to the Washington Auto Show--I hope you 
will have a chance--you will see the Ford Edge, the first 
driveable plug-in hydrogen fuel cell vehicle. The car is 
powered by compressed hydrogen and a plug-in battery pack that 
can be charged with a standard power cord. The Edge combines 
multiple advanced technologies to produce zero tailpipe 
emissions.
    Our friends at Daimler-Chrysler have put their first fuel 
cell vehicles on the road, with more than 100 in operation 
worldwide. Most recently, Daimler-Chrysler announced that more 
than 20 Dodge Sprinter plug-in hybrid electricals will be 
placed in the United States over the next year to research 
further the needs for these vehicles in real world service.
    Clearly the automakers are committed to alternative fuels 
and new fuel efficient technologies and I really believe that 
they are. Regardless of how we have gotten here, the focus is a 
laser focus on how we move these new technologies to market. 
The real question I would ask is what we can do to make it 
easier to create and implement the new technologies as quickly 
as possible both for American families so they have the 
vehicles that they want and the fuel efficiency that they need.
    I believe the slowest route would be for Congress to again 
fight over CAFE standards, Mr. Chairman. I think there is a 
faster way to achieve the goal. We have already taken a 
critical step in establishing and using biofuels through the 
renewable fuel standard in the Energy Policy Act of 2005 and it 
is working. Now it is time to take this aggressively to the 
next level. We need to aggressively invest in biofuels 
research, establish the necessary infrastructure so that 
average consumers can pull up to the pump and choose American-
grown fuel to fill their car.
    We also need to expand our portfolio of biofuels and not 
rely completely on E-85 ethanol. Michigan State University, my 
alma mater, is an example of leading international research on 
cellulose ethanol and biofuels, which we need to aggressively 
invest in.
    I am excited about the new farm bill, Mr. Chairman, and our 
will work with Chairman Harkin and those of us on the 
Agriculture Committee that care deeply about this, we have an 
opportunity to dramatically beef up an energy title that we put 
into the farm bill 5 years ago.
    I also strongly believe that the Federal Government must 
make a real commitment to purchasing vehicles. The industry 
needs to know the market will be there so that they retool 
plants, which takes more than 1 year, and we have to 
opportunity, not only through the military but through others, 
to create that market. I believe we should set a standard for 
purchasing vehicles and that we should aggressively move 
forward.
    We also know we need to invest in tax incentives, and I 
will not go through all of those, but we know that consumer tax 
credits, a manufacturing tax credit for retooling plants, as 
well as focusing on a number of other tax policies, will make a 
real difference in terms of an incentive.
    Mr. Chairman, I would just say in closing that I really 
believe the Energy Committee and the Agriculture Committee and 
the Finance Committee working together can develop a very 
comprehensive national policy that allows us to do what we all 
want to do in terms of energy independence, fuel efficiency, 
moving us in the direction as a country that we need to go as 
it relates to biofuels and advanced technology vehicles.
    There is a tremendous amount that we can do together. I 
believe we are up to the task. I hope that we will be able to 
act boldly and be able to require and assist that we move 
forward in a way that will allow us to achieve what I believe 
everyone wants to achieve.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much. Thanks for your 
leadership on this and thanks for being here today to 
participate.
    Senator Stebenow. Thank you.
    The Chairman. Why don't we excuse you and bring forward the 
six witnesses who have come from industry primarily and some 
from academic settings to give us their views. While they are 
coming up, let me see if Senator Domenici has an opening 
statement that he wanted to make.

       STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Domenici. Senator, did you give an opening 
statement?
    The Chairman. Yes, I did.
    Senator Domenici. They are getting seated and I will make 
one. It will be brief, if you do not mind.
    First, it is great to note the presence of some members of 
the committee that have not been able to attend heretofore. I 
am glad to see them. They are on your side. They are new faces 
that make this a very exciting committee for the foreseeable 
future, at least until we have another election. But then we do 
not want to have any impact on any of you. You are going to be 
in good shape by that time, having served your time here.
    The Chairman. I do not know where we are going to put all 
the other chairs over here, Mr. Chairman, after the next 
election.
    [Laughter.]
    Senator Domenici. Well, that is a good point, Senator. We 
do not know. We might have to put some of yours in a back room 
while we have ours out here. I do not know.
    But in any event, I want to add my thanks to the 
distinguished panel that is here before us for participating 
today. In his recent State of the Union address, the President 
laid out a rather worthy schedule with a goal to reduce our 
consumption of gasoline by 20 percent in 10 years. This is not 
the first time he has focused attention on transportation 
energy. At last year's State of the Union address, the 
President focused attention on the importance of reducing our 
Nation's Middle East oil dependence.
    Our dependence on foreign oil has been growing for years. 
The number of miles that Americans drive has grown by about 3 
percent every year since 1950. Today one out of every nine 
gallons consumed in the world, believe it or not, in the world, 
goes to American cars, trucks, and buses.
    Now, I am not one who wrings his hands about that. The 
truth of the matter is we are a very highly productive country 
and therefore use a lot of transportation fuel. But I do think 
the opportunity is with us now to do something to reduce the 
amount and do it in such a way that we have a minimal effect on 
the lifestyle of Americans and the business of American 
companies.
    More and more, the petroleum that fuels America's drivers 
is produced abroad. We imported only 20 percent in 1960. By 
2005, 60 percent of petroleum came from overseas.
    I believe it is a mistake to pit production measures and 
conservation measures against each other. We need to do both. I 
support policies to increase domestic petroleum, natural gas 
production, and I have come to believe that it is time for 
Congress to do something to improve transportation efficiency 
in this country.
    The average fuel economy of a passenger automobile on the 
road today is 27.5 miles per gallon. It has been the same since 
1985. One reason it has been the same for so long is that the 
fuel economy numbers were actually put up into the statute. The 
result has been years of deadlock while we could have been 
making real progress as new automobiles became available.
    I believe that part of the solution is to give authority to 
set CAFE standards for our passengers to the Executive Branch. 
This is consistent with the approach we have already taken on 
trucks. The Secretary of Transportation should be required to 
set standards after balancing the need for energy security, 
environment, environmental concerns, and safety and cost. Both 
are hard, and will require bold action, but must be balanced 
with production measures as well as bold initiatives to 
diversify.
    I support research on a broad range of vehicle technology 
and we are going to hear some of that today, some very exciting 
from those so-called plug-in hybrids. We need the whole story 
on the plug-ins, including what happens when the battery wears 
out, which comes--produces a rather startling surprise and 
shock to the owner. But certainly the cars, that kind of car, 
is becoming something very important. Energy companies and many 
other stakeholders are putting their resources behind them, and 
it is going to take a lot of hard work.
    I look forward to your testimony and I thank you again, all 
of you, for coming and helping us as you are doing so willingly 
today.
    Thank you very much, Mr. Chairman. Fellow Senators, it is 
good to be with you.
    The Chairman. Thank you very much.
    Why don't we start with Beth Lowery, who is the vice 
president for Public Policy for Energy and the Environment with 
General Motors in Detroit. We are glad to have you here.
    If each of you could take 5 to 7 minutes and summarize the 
main points you think we need to be aware of, that would be 
appreciated. We will put your full statement in the record as 
if it were testified to.

STATEMENT OF ELIZABETH LOWERY, VICE PRESIDENT, ENVIRONMENT AND 
               ENERGY, GENERAL MOTORS CORPORATION

    Ms. Lowery. Good afternoon, Mr. Chairman, members of the 
committee. It is a pleasure to be here. My name is Beth Lowery, 
vice president for General Motors for environment and energy. I 
am pleased to speak to you regarding GM's plans for development 
and implementation of advanced technologies. Senator Stabenow 
added some already to the record, but to go into a little more 
detail.
    Today's automotive industry provides more in the way of 
opportunity and challenges than we have seen in our entire 
history. On the challenge side, there are serious concerns 
about energy supply, energy availability, sustainable growth, 
the environment, and even national security issues. We 
collectively refer to these as energy security.
    The key is energy diversity, in which we can help displace 
quantities of oil that are consumed by U.S. vehicles today. 
This is a huge assignment for us. It is also an extraordinary 
opportunity. By developing alternative sources of energy and 
propulsion, we have the chance to mitigate many of these issues 
surrounding energy availability. This means we must continue to 
improve the efficiency of the internal combustion engine as we 
have for decades. But it also means we need to dramatically 
intensify our efforts to displace petroleum-based fuels by 
building more vehicles that run on alternatives such as E-85 
ethanol and, very importantly, by significantly expanding and 
accelerating our commitment to the development of electrically 
driven vehicles.
    First let me speak just a few minutes about biofuels. We 
have made a major commitment to vehicles that run on E-85 
ethanol. Last year we committed to double our production of 
vehicles capable of running on fuels by 2010 and that is about 
almost one million E-85-capable vehicles a year by the end of 
the decade, the single largest commitment to renewable fuels in 
the Nation's history.
    But that is not all. Late last year we also said that we 
are prepared to make fully half, 50 percent, of our annual 
vehicle production biofuel capable by 2012 provided there is 
ample availability and distribution of E-85 as part of our 
overall national energy strategy.
    But as you know, flex-fuel vehicles alone will not get the 
job done. So we are also partnering with government, fuel 
providers, and fuel retailers across the United States to help 
grow the E-85 ethanol fueling station infrastructure. Since May 
2005 GM has helped add 175 new E-85 fueling stations in 11 
States, with more to come.
    Now let me turn to a potentially even more exciting 
opportunity for the future of our products, electrification of 
the automobile. Over the last few months GM has made several 
announcements related to our commitment to electrically driven 
vehicles. It is a continuum of electrification of vehicles. We 
are working the entire range. For example, what most people 
think of as electric vehicles are pure battery-powered 
vehicles, which generally have been hampered by the inability 
to include enough battery power on the vehicle to provide 
adequate driving range. Then there are gas-electric hybrids, 
which are not per se electric vehicles but which in part are 
electrically driven. This type of conventional hybrid vehicle 
has an internal combustion engine and electric drive. It can be 
powered by both systems simultaneously or by either system 
independently.
    The electric energy in a conventional hybrid vehicle is 
created by the vehicle and stored on board in a battery. GM's 
heavy-duty diesel-hybrid transmissions used in transit buses 
and the Saturn Vue Greenline on the road today are hybrids such 
as that.
    GM is also introducing later this year our advanced two-
mode hybrid on our full-sized SUVs and pickups. At the LA Auto 
Show we announced the plug-in hybrid, a conventional hybrid 
vehicle with an important difference: The battery will be much 
more advanced, storing significantly more energy, and of course 
it will be able to be plugged into a standard 110-volt outlet 
for recharging. The result will be significantly better fuel 
economy based on the petroleum consumption of the vehicle and 
the ability to use diverse energy sources.
    No major OEM has built a plug-in hybrid for retail sale 
because the required battery technology does not yet exist. In 
fact, given what we know today, it is pretty clear that it will 
take several years to see if the battery technology will occur 
and be able to bring it to market. It must meet the 
expectations of the customers, things like safety, reliability, 
durability, driving range, recharge time, and affordability.
    In this vein, earlier this month we unveiled the Chevrolet 
concept vehicle the Chevrolet Volt at the Auto Show in Detroit. 
The Chevrolet Volt is designed to be powered by GM's next 
generation electric propulsion system, the E-Flex system. The 
concept Chevrolet Volt can be charged by plugging into the 
standard 110-volt outlet approximately 6 hours a day. When the 
advanced lithium ion battery is fully charged, the Volt is 
expected to deliver 40 city miles of pure electric range.
    When the battery pack is close to depletion, the small 
engine spins at a constant speed to create electricity and 
replenish the battery pack. To make this concept a reality, we 
need a low-cost lithium ion battery pack that is proven to be 
reliable and durable in the many different environments in 
which our vehicles operate.
    There are other types of electrically driven vehicles that 
we expect to see in the future as well, including hydrogen fuel 
cell vehicles. As part of a comprehensive deployment plan named 
Project Driveway, we are building more than 100 next generation 
fuel cell vehicles that will operate and refuel in California, 
New York, and Washington, D.C.
    So the technology front and the vehicle development and 
design looks very exciting and promising. As we pursue these 
technologies and more energy diversity, there are steps the 
Government can take to help. First, the Government should fund 
a major effort to strengthen domestic advanced battery 
capabilities. Governments in other countries are already 
working on this issue with their own domestic manufacturers. We 
should do the same. Government funding should increase for R&D 
in this area and develop new support for domestic manufacturing 
of advanced batteries.
    Second, biofuel production and infrastructure should be 
significantly expanded. Government should continue incentives 
for the manufacturer of biofuel capable vehicles, increase in 
biofuel production, increases for R&D into cellulosic ethanol, 
and increase support for broad-based infrastructure conversion.
    Third, government funding should continue and expand in 
development and demonstration for hydrogen and fuel cell 
vehicles. Funding should continue for hydrogen and fuel cell 
R&D and demonstration activities at the Department of Energy.
    Fourth, government purchasing should set an example. The 
Government should continue to purchase flex-fuel vehicles, 
demand maximum utilization of E-85 in the Government flex-fuel 
fleets, use Federal funding to stimulate publicly accessible 
pumps, provide funding for purchase of electric, plug-in and 
fuel cell vehicles into Federal fleets as they become 
available.
    Finally, there should be further incentives for advanced 
automotive technologies so that these technologies may be 
adopted by consumers in large numbers. Consumer tax credits 
should be focused on technologies that have the greatest 
potential to actually reduce petroleum consumption.
    In summary, we believe tomorrow's automobiles must be 
flexible enough to accommodate many different energy sources, 
from conventional gasoline and diesel fuel to biofuels that can 
displace them like E-85 and biodiesel, to electricity, whether 
it is stored or generated on the vehicle, with an internal 
combustion engine or a hydrogen fuel cell. We see a logical 
journey from stand-alone largely mechanical automobiles that we 
have today to vehicles that run on electricity.
    Thank you very much.
    [The prepared statement of Ms. Lowery follows:]
Prepared Statement of Elizabeth Lowery, Vice President, Environment 
and 
                   Energy, General Motors Corporation
    Good afternoon. My name is Elizabeth Lowery and I am Vice President 
for Environment and Energy at General Motors. I am pleased to be able 
to speak to you today regarding GM's plans for development and 
implementation of advanced technologies.
    Today's automotive industry provides more in the way of 
opportunities--and challenges--than we have seen in its entire history. 
On the challenge side, there are serious concerns about energy supply, 
energy availability, sustainable growth, the environment, and even 
national security issues that, collectively, have come to be called 
``energy security.'' And the fact of the matter is that it is highly 
unlikely that oil alone is going to supply all of the world's rapidly 
growing automotive energy requirements. For the global auto industry, 
this means that we must--as a business necessity--develop alternative 
sources of propulsion, based on alternative sources of energy in order 
to meet the world's growing demand for our products. The key is energy 
diversity, which can help us displace substantial quantities of oil 
that are consumed by U.S. vehicles today.
    This is a huge assignment. But it's also an extraordinary 
opportunity. By developing alternative sources of energy and 
propulsion, we have the chance to mitigate many of the issues 
surrounding energy availability. We will be able to better cope with 
future increases in global energy demand. We will minimize the 
automobile's impact on the environment.
    This means that we must continue to improve the efficiency of the 
internal combustion engine, as we have for decades. But, it also means 
we need to dramatically intensify our efforts to displace petroleum-
based fuels by building more vehicles that run on alternatives, such as 
E-85 ethanol, and, very importantly, by significantly expanding and 
accelerating our commitment to the development of electrically driven 
vehicles.
    First let me speak about biofuels. We believe that the biofuel with 
the greatest potential to displace petroleum-based fuels in the U.S. is 
ethanol. We have made a major commitment to vehicles that can run on E-
85 ethanol. We now have more than 2 million E-85 capable vehicles on 
the road. Last year, we committed to double our production of vehicles 
capable of running on renewable fuels by 2010. That's almost one 
million E-85 capable vehicles a year by the end of the decade--the 
single largest commitment to renewable fuels in our nation's history. 
But that's not all. Late last year, we also said that we are prepared 
to make fully half of our annual vehicle production biofuel--capable by 
2012--provided there is ample availability and distribution of E-85, as 
part of an overall national energy strategy.
    But as you know, flex-fuel vehicles alone will not get the job 
done. Right now, there are about 170,000 gas stations in the United 
States and only about 1,000 E-85 pumps. So, we are also partnering with 
government, fuel providers, and fuel retailers across the U.S. to help 
grow the E-85 ethanol fueling station infrastructure. Since May of 
2005, we've helped add 175 E-85 fueling stations in 31 states with more 
to come.
    Now let me turn to potentially the even more exciting opportunity 
for the future of our products electrification of the automobile. Over 
the last few months, GM has made several announcements related to our 
commitment to electrically driven vehicles. The benefits of electricity 
include the opportunity to diversify fuel sources ``upstream'' of the 
vehicle. In other words, the electricity that is used to drive the 
vehicle can be made from the best local fuel sources--natural gas, 
coal, nuclear, wind, hydroelectric, and so on. So, before you even 
start your vehicle, you're working toward energy diversity. Second, 
electrically driven vehicles--when operated in an all-electric mode--
are zero-emission vehicles. And when the electricity itself is made 
from a renewable source, the entire energy pathway is effectively 
greenhouse gas emissions free. Third, electrically driven vehicles 
offer great performance--with extraordinary acceleration, instant 
torque, and improved driving dynamics.
    There is a continuum of electrification of vehicles--and we are 
working along that entire range. For example, there are what most 
people think of as ``electric vehicles''--pure battery-powered 
vehicles, such as GM's EV1. The EV1 ran solely on electricity that was 
generated outside the vehicle and was stored onboard the vehicle, in 
lead-acid and nickel-metal-hydride batteries.
    Then there are gas-electric hybrids--which are not, per se, 
electric vehicles--but which are, in part, electrically driven. This 
type of conventional hybrid vehicle has both an internal combustion 
engine and an electric drive. And, it can be powered by both systems 
simultaneously or by either system independently. The electric energy 
in a conventional hybrid vehicle is generated by the vehicle itself and 
stored onboard in a battery.
    We have several kinds of hybrid vehicles, either on the road or 
under development--from the heavy duty hybrid that is used in more than 
550 transit buses--to the Saturn VUE Green Line (which uses our high-
value ``belt alternator starter'' system and gets the highest highway 
fuel economy of any SUV on the market)--to our advanced ``two-mode'' 
hybrid system (which will begin to show up on our full-size SUVs and 
pickups later this year).
    At the Los Angeles auto show, we announced work on another type of 
hybrid, the Saturn VUE ``plug-in hybrid.'' A plug-in hybrid will be a 
conventional hybrid vehicle with an important difference--the battery 
will be much more advanced--storing significantly more energy and, of 
course, being able to be plugged into a standard outlet to recharge it. 
The result will be significantly better ``fuel economy''--based on the 
petroleum consumption of the vehicle--and the ability to use diverse 
energy sources.
    No major OEM has built a plug-in hybrid for retail sale because the 
required battery technology doesn't yet exist. In fact, given what we 
know today, it's pretty clear that it will take several years to see if 
the battery technology will occur that will let us bring to market, a 
plug-in hybrid that will meet the expectations and real-world 
performance standards that our customers expect--things like safety, 
reliability, durability, driving range, recharge time, and 
affordability.
    The Saturn VUE plug-in hybrid will use an advanced battery, like 
lithium-ion. Production timing will depend on battery technology 
development. But, based on our work with EV1 and our different 
conventional hybrid-electric vehicles, we already have a lot of 
experience developing and integrating advanced battery technology into 
our vehicles, and we're already working today with a number of battery 
companies to develop the technology necessary to build a plug-in 
hybrid. The technological hurdles are real, but we believe they're also 
surmountable. I can't give you a date certain for our plug-in hybrid, 
but I can tell you that this is a top priority program for GM, given 
the huge potential it offers for oil consumption improvements.
    Earlier this month, we unveiled the Concept Chevrolet Volt at the 
North American International Auto Show in Detroit. The Chevrolet Volt 
is designed to be powered by GM's next-generation electric propulsion 
system, the E-flex System. The E-flex System can be configured to 
produce electricity for mechanical propulsion from gasoline, ethanol, 
biodiesel or hydrogen. The Volt uses a large high energy battery pack 
and a small, one liter turbo gasoline engine to produce electricity.
    The Concept Chevrolet Volt can be charged by plugging it into a 
110-volt outlet for approximately six hours each day. When the advanced 
lithium-ion battery pack is fully charged, the Volt is expected to 
deliver 40 city miles of pure electric vehicle range. When the battery 
pack is close to depletion, the small engine spins at a constant speed 
to create electricity and replenish the battery pack.
    One technological breakthrough required to make this concept a 
reality is the large lithium-ion battery pack. This type of electric 
car, which the technical community calls an ``EV range-extender,'' 
would require a battery pack that weighs nearly 400 pounds.
    There are other types of electrically driven vehicles that we 
expect to see in the future as well, including hydrogen fuel cell 
vehicles, such as the Chevrolet Sequel concept vehicle. A hydrogen fuel 
cell vehicle is, in fact, an electric vehicle. It drives on electricity 
that is created by the fuel cell. The fuel cell is little more than a 
battery that stores electricity in the form of hydrogen. The beauty of 
a fuel cell vehicle like the Sequel is that the electricity is 
generated onboard the vehicle without using petroleum-based fuel, and 
without emissions. And like electricity, hydrogen can be made from 
diverse energy sources before it ever powers a vehicle. As part of a 
comprehensive deployment plan dubbed Project Driveway, we are building 
more than 100 next-generation Chevrolet Equinox Fuel Cell vehicles that 
will operate and refuel with hydrogen in California, New York, and 
Washington D.C.
    GM is developing a prototype fuel cell variant of the Chevy Volt 
that mirrors the propulsion system in the Chevrolet Sequel (fuel cell 
vehicle). Instead of a big battery pack and a small engine generator 
used in the Volt concept vehicle, we would use a fuel cell propulsion 
system with a small battery to capture energy when the vehicle brakes. 
Because the Volt is so small and lightweight, we would need only about 
half of the hydrogen storage as the Sequel to get 300 miles of range. 
In fact, we continue to make significant progress in this area, and we 
continue to see fuel cells as the best long-term solution for reducing 
our dependence on oil.
    So, the technology front in automobile development and design looks 
very exciting. And, as we pursue these technologies--and more energy 
diversity--there are steps the government can take to help.

   First, the government should fund a major effort to 
        strengthen domestic advanced battery capabilities. Advanced 
        lithium-ion batteries are a key enabler to a number of advanced 
        vehicle technologies--including plug-in hybrids. Government 
        funding should increase R&D in this area and develop new 
        support for domestic manufacturing of advanced batteries.
   Second, biofuels production and infrastructure should be 
        significantly expanded. The market response to renewable fuels 
        is encouraging, but it needs to reach a self sustaining level 
        that is not lessened when gasoline prices fall. Steps to 
        increase the availability of biofuels should help increase its 
        use. Government should continue incentives for: the manufacture 
        of biofuel-capable flex fuel vehicles; increases in biofuels 
        production; increases for R&D into cellulosic ethanol; and 
        increased support for broad-based infrastructure conversion.
   Third, government funding should continue and expand 
        development and demonstration of hydrogen and fuel cells. 
        Tremendous progress has been made this decade on fulfilling the 
        promise of hydrogen powered fuel cells. The U.S. needs to stay 
        the course on the President's hydrogen program and begin to 
        prepare for the 2010-2015 transition to market phase. Funding 
        should continue for hydrogen and fuel cell R&D and 
        demonstration activities at DOE. The government should also 
        commit to early purchases by government fleets and support for 
        early refueling infrastructure in targeted locals in the 2010-
        2015 timeframe.
   Fourth, government purchasing should set the example. 
        Government fleets can help lead the way to bringing new 
        automotive technology to market and bringing down the cost of 
        new technologies. The government should continue to purchase 
        flex fuel vehicles; demand maximum utilization of E-85 in the 
        government flex fuel fleets; use federal fueling to stimulate 
        publicly accessible pumps; provide funding to permit purchase 
        of electric, plug-in and fuel cell vehicles into federal fleets 
        as soon as technology is available.
   Finally, there should be further incentives for advanced 
        automotive technology so that these technologies may be adopted 
        by consumers in large numbers to help address national energy 
        security. Well crafted tax incentives can accelerate adoption 
        of new technologies and strengthen domestic manufacturing. 
        Consumer tax credits should be focused on technologies that 
        have the greatest potential to actually reduce petroleum 
        consumption and provide support for manufacturers/suppliers to 
        build/convert facilities that provide advanced technologies.

    In summary, we believe tomorrow's automobiles must be flexible 
enough to accommodate many different energy sources. And a key part of 
that flexibility will be enabled by the development of electrically 
driven cars and trucks. From conventional gasoline and diesel fuel--to 
biofuels that can displace them, like E85 and biodiesel--to 
electricity--whether it is stored or generated on the vehicle, with an 
internal combustion engine or a hydrogen fuel cell--we see a logical 
journey from stand-alone, largely mechanical automobiles to vehicles 
that run on electricity.

    The Chairman. Thank you very much.
    Next we have John German, who is the manager of 
Environmental and Energy Analyses with the Product Regulator 
Office of American Honda Motor Company in Ann Arbor, Michigan. 
Thank you for being here.

  STATEMENT OF JOHN GERMAN, MANAGER, ENVIRONMENTAL AND ENERGY 
   ANALYSIS, PRODUCT REGULATOR OFFICE, AMERICAN HONDA MOTOR 
                         COMPANY, INC.

    Mr. German. Thank you. Good afternoon, Mr. Chairman, 
members of the committee.
    I agree with Beth Lowery that the industry is in a period 
of unprecedented technology development. This encompasses 
everything from gasoline engines and transmissions to diesels, 
hybrid electric vehicles, fuel cells, and alternative fuel 
vehicles. Since 1987 technology has gone into the fleet at a 
rate that could have improved fuel economy by almost 1.5 
percent per year if it had not gone to other attributes valued 
more highly by consumers, such as performance, luxury, utility, 
and safety. There is no reason why this technology trend of 
improved efficiency should not continue in the future.
    This is illustrated by the light duty truck CAFE increases 
required by NHTSA of about 1.2 percent per year from 2005 to 
2011. The challenge is to implement it through fuel economy 
instead of other customer attributes.
    Gasoline technology development is still progressing 
rapidly. Even with the efficiency improvements of the last 25 
years, the energy efficiency of the typical gasoline vehicle is 
still less than 20 percent during normal driving. My written 
testimony includes a list of conventional gasoline technologies 
that have already been introduced into the market and can be 
spread across other vehicles in the future.
    Honda's overall philosophy is to be a company that society 
wants to exist. This is illustrated by our leadership in 
vehicle technology, including emission controls, conventional 
vehicle efficiency, and hybrid vehicle development. For 
example, Honda pioneered variable valve duration lift and now 
uses that on all of our vehicles, while penetration in the rest 
of the vehicle fleet is only a percent or two. Technology 
leadership is what makes our vehicles more fuel efficient.
    Honda has announced plans to introduce two new gasoline 
engine efficiency technologies within the next 2 years. We will 
add continuously variable valve lift and timing to our four 
cylinder i-VTEC technology and we will improve variable 
cylinder management technology for six cylinder engines. Each 
technology should improve efficiency by more than 10 percent.
    Even longer term are gasoline technologies such as 
homogeneous charge compression ignition, camless valve 
actuation, and variable compression ratio. While production 
time lines are uncertain, these advance technologies offer the 
potential to increase gasoline engine efficiency to near-diesel 
levels.
    Diesel engines have also seen dramatic improvements in 
recent years and several manufacturers, including Honda, have 
announced production plans for diesel vehicles that meet the 
latest emission standards. Honda's next generation diesel 
engine features the world's first NOx reduction catalyst that 
both traps nitrogen oxides and stores and uses ammonia to turn 
NOx into harmless nitrogen, all without the need for urea.
    Honda is the only company that continues to offer a 
dedicated compressed natural gas vehicle, the third generation 
Civic GX. We recently introduced a natural gas home refueling 
system, called Phill, which will expand the market beyond 
fleets to retail customers. This experience with gaseous home 
refueling provides the know-how that can help us succeed with 
distributed hydrogen infrastructure in the long term.
    Hybrid electric vehicles are in their second and third 
generation, with many recent introductions. Honda's latest 
hybrid, the 2006 Civic hybrid, incorporated significant 
improvements to the battery, electric motor, and hybrid 
operating strategy to improve both efficiency and performance. 
Honda's next step in hybrid vehicle development will be the 
introduction of an all-new hybrid car to be launched in North 
America in 2009. This new model will be sold only with a 
dedicated hybrid power train and will have a target price lower 
than that of the current Civic hybrid.
    Plug-in hybrid vehicles have a lot of promise to displace 
oil consumption and are being evaluated by a number of 
manufacturers, including Honda. They need and deserve future 
research--further research and development. However, there are 
a number of technology, consumer acceptance, environmental, and 
cost issues that still need to be addressed.
    The principal issue is that the durability of the battery 
pack must be significantly improved while simultaneously 
slashing the cost. The American Council for an Energy Efficient 
Economy recently published a report assessing fuel savings and 
costs for plug-in hybrids. Even if the battery pack cost is 
reduced by 80 percent and the durability is also improved to 
last the life of the vehicle, at $3 per gallon the payback 
period is still about 6 years compared to a similar 
conventional vehicle and about 13 years compared to a similar 
hybrid vehicle.
    While some customers value fuel savings more highly, as Dr. 
Greene will explain, the average new vehicle customer only 
values the fuel savings for roughly 2 to 3 years. Thus it is 
difficult to see a substantial market for plug-in hybrids 
unless fuel shortages occur or there is a genuine breakthrough 
in energy storage.
    Development of all technologies is accelerating in response 
to growing concerns about energy security and global warming. 
Fuel cells might be the final solution some day, but hydrogen 
production, transport, and storage will be extremely 
challenging. Biofuels are promising and can replace some fuel 
use, but even development of cellulosic ethanol only has the 
potential to displace at most about 20 percent of the world's 
oil demand. Also in order to achieve significant market 
penetration, any alternative technology must be at least as 
cost effective as gasoline and diesel engines.
    The point is that there is no magic bullet. To achieve 
energy sustainability we need rapid development and 
implementation of as many feasible technologies as possible. To 
put this into context, a 10 percent market penetration for 
plug-in hybrids would only save as much fuel as a 3 percent 
increase in CAFE standards.
    Different companies are working on different technologies, 
which is the optimal way. It makes good competition. 
Technology-specific mandates disrupt this process and are 
counterproductive. Previous attempts to mandate specific 
technologies have a poor track record, such as the attempt to 
promote methanol in the 1990's and the California electric 
vehicle mandate. The Government should not try to pick winners 
and losers.
    As Honda has previously announced, we believe it is time 
for the Federal Government to take action to improve vehicle 
economy. Given the rapid changes in technology, performance-
based requirements and incentives are essential to moving the 
ball forward. For example, the NHTSA already has the authority 
to regulate vehicle efficiency and Honda has called upon the 
agency to increase the stringency of the fuel economy 
requirements. At the same time, Congress should develop a 
program of broad performance-based incentives to stimulate 
demand in the market for efficient vehicles.
    I appreciate the opportunity to present Honda's views. I 
would be happy to address any questions you may have.
    [The prepared statement of Mr. German follows:]
 Prepared Statement of John German, Manager, Environmental and Energy 
Analysis, Product Regulatory Office, American Honda Motor Company, Inc.
    Good afternoon Mr. Chairman and members of the Committee. My name 
is John German and I am Manager of Environmental and Energy Analysis 
with American Honda Motor Company. We thank you for the opportunity to 
provide Honda's views on the subject of transportation sector fuel 
efficiency and the potential for increased oil savings through 
technological innovation.
                              introduction
    The automotive industry is in a period of unprecedented technology 
development, encompassing everything from gasoline engines and 
transmissions to diesels, hybrid-electric vehicles, plug-in hybrids, 
fuel cells, and vehicles powered by alternative fuels. In part, this is 
because technology has been steadily improving ever since the first oil 
crisis in the early 1970s and the easy improvements have already been 
done. Up until now this new technology has been employed primarily to 
respond to vehicle attributes demanded by the marketplace, such as 
performance, luxury, utility, and safety, rather than to increase fuel 
economy. The figure on the left shows the changes in vehicle weight, 
performance, and proportion of automatic transmissions since 1980 in 
the passenger car fleet. Even though weight increased by over 500 
pounds from 1987 to 2000, 060 performance improved by about 5 seconds 
(from just under 15 seconds to under 10 seconds), and the proportion of 
manual transmissions dropped in half, fuel economy remained relatively 
constant.
    It is clear that technology has been used for vehicle attributes 
which consumers have demanded or value more highly than fuel economy. 
The figure on the right compares the actual fuel economy for cars to 
what the fuel economy would have been if the technology had been used 
solely for fuel economy instead of performance and other attributes. If 
the current car fleet were still at 1981 performance, weight, and 
transmission levels, the passenger car CAFE would be almost 38 mpg 
instead of the current level of 28.1 mpg. The trend is particularly 
pronounced since 1987. From 1987 to 2006, technology has gone into the 
fleet at a rate that could have improved fuel economy by almost 1.5% 
per year, if it had not gone to other attributes demanded by the 
marketplace.
    There is no reason why this technology trend of improved efficiency 
should not continue in the future. Even with the efficiency 
improvements of the last 25 years, the energy efficiency of a typical 
gasoline vehicle is still less than 20% during typical driving, so 
there is a lot of room for improvement given sufficient leadtime for 
technology development. This is supported by the LDT CAFE increases 
required by NHTSA for the 2005 through 2011 model years of about 2.1% 
per year. The challenge is to implement it to improve fuel economy 
instead of attributes valued more highly by consumers.
                      gasoline vehicle technology
    Gasoline technology development is still proceeding rapidly. Many 
of the technologies in the current fleet are only offered on a 
relatively small portion of vehicles. Following is a list of 
conventional gasoline vehicle technologies that have already been 
introduced in the market and can be spread across other vehicles in the 
future:

   Variable valve timing and lift
   4-valve per cylinder overhead cam engines
   Reduced engine friction
   Direct injection engines, both with and without 
        turbocharging
   5-speed, 6-speed, 7-speed, and even 8-speed transmissions
   Continuously variable automatic transmissions (CVT)
   Dual-clutch automated manual transmissions (works like an 
        automatic, but more efficient)
   Lightweight materials
   Low rolling resistance tires
   Improved aerodynamics
   Cylinder deactivation (for example, an 8-cylinder engine 
        shuts off 4 cylinders during cruise conditions)
   Idle-off (the engine stops at idle)
   Improved auxiliary pumps (power steering, water, oil, fuel) 
        and air conditioning systems

    Assessing the overall fuel economy improvements from these 
technologies is a difficult task and is beyond the scope of our 
comments. However, the 2002 National Academy of Science report on CAFE 
did a reasonable job of assessing the benefits and costs of most of 
these technologies and is a useful summary.
    Honda has a long history of being a technology and efficiency 
leader. Our overall philosophy is to be a company that society wants to 
exist. One of the results of this philosophy is Honda's leadership on 
vehicle technology, including emission controls, conventional vehicle 
efficiency, and hybrid vehicle development. For example, while 
virtually all Honda engines have been aluminum block with overhead 
camshafts and 4-valves per cylinder since 1988, this technology is 
still used on less than 70% of the entire vehicle fleet. Another 
technology pioneered by Honda is variable valve timing and lift (i-
VTEC). While Honda is now using variable valve timing and lift in all 
of our vehicles, penetration in the rest of the vehicle fleet is only a 
percent or two. Honda is also a leader in the use of high-strength 
steel. Technology leadership is what makes our vehicles more fuel 
efficient.
    For the future, Honda has announced plans to introduce two new 
efficiency technologies within the next two years. One is a more 
advanced version of Honda's four-cylinder i-VTEC technology. Honda has 
improved its VTEC (Variable Valve Timing and Lift Electronic Control 
System) technology with the development of the Advanced VTEC engine, 
which provides high performance along with outstanding fuel economy and 
lower emissions. The new engine combines continuously variable valve 
lift and timing control with the continuously variable phase control of 
VTC (Variable Timing Control) to achieve a world-leading level of 
performance and a 13% improvement in fuel efficiency versus our current 
VTEC engine.
    The second is a more advanced Variable Cylinder Management (VCM) 
technology for six-cylinder engines with up to an 11 percent 
improvement in fuel efficiency.
    Even longer term is work on gasoline technologies such as 
Homogeneous-Charge Compression-Ignition (HCCI), camless valve 
actuation, and variable compression ratio. HCCI can improve efficiency 
up to 30%, but control of the self-ignition is very difficult. The 
self-ignition region needs to be expanded and it may require camless 
valve actuation, such as electro-magnetic valves.
    Camless valves would eliminate throttling losses and significantly 
improve efficiency. They would enable additional combustion efficiency 
improvements by switching from HCCI operation at light load to Atkinson 
cycle at medium load and Otto cycle for maximum performance.
    Variable compression ratio increases compression ratio at lighter 
loads to improve efficiency, while maintaining power by reducing 
compression ratios at high loads. This technology may be especially 
effective when combined with turbocharging.
    While production timelines are uncertain, these advanced 
technologies offer the potential to increase gasoline engine efficiency 
to near-diesel levels.
                                diesels
    Diesel engines have seen dramatic improvement in recent years and 
several manufacturers, including Honda, have announced production plans 
for diesel vehicles meeting the US Tier 2 bin 5 emission standards. 
Honda will introduce a 4-cylinder diesel in the U.S. market in 2009. We 
are also working on the development of V6 diesel engine technology, 
which is a key development goal for Honda.
    Gasoline engines presently employ three-way catalytic converters 
that offer NOx reduction rates as high as 99 percent, but this 
performance is possible only at stoichiometric air-fuel ratio. In the 
oxygen-rich environment of a lean-burn diesel engine, three-way 
catalytic converters only reduce NOx levels by approximately 10 
percent. Honda's next-generation diesel engine employs a revolutionary 
NOx catalytic converter that efficiently reduces NOx in a lean-bum 
atmosphere. This catalytic converter features the world's first 
innovative system using the reductive reaction of ammonia generated 
within the NOx catalytic converter to ``detoxify'' nitrogen oxide (NOx) 
by turning it into harmless nitrogen (N2).
    The new catalytic converter utilizes a two-layer structure: one 
layer adsorbs NOx from the exhaust gas and converts a portion of it 
into ammonia, while the other layer adsorbs the resulting ammonia, and 
uses it later in a reaction that converts the remaining NOx in the 
exhaust into nitrogen (N2). Ammonia is a highly effective 
reagent for reducing NOx into N2 in an oxygen-rich, lean-bum 
atmosphere. This ability to generate and store ammonia within the 
catalytic converter has enabled Honda to create a compact, lightweight 
NOx reduction system for diesel engines. The system also features 
enhanced NOx reduction performance at 200-300 C, the main temperature 
range of diesel engines.
    Honda designed the catalytic converter for use with its 2.2 i-CTDi 
diesel engine, which has earned widespread praise for quiet, clean 
operation and dynamic performance since its introduction in 2003 on the 
European Accord model.
    By further advancing combustion control, the 2.2 i-CTDi delivers 
cleaner exhaust to the NOx catalytic converter. Honda achieved this by 
optimizing the combustion chamber configuration, reducing fuel 
injection time with a 2,000-bar common rail injection system and 
boosting the efficiency of the EGR (exhaust gas recirculation) system. 
Thanks to these improvements, Honda has reduced the amount of NOx and 
soot normally found in engine exhaust, while increasing power output.
    Along with developing superior technology for cleaning exhaust gas, 
Honda plans to address other technical challenges in developing clean 
diesel engines. Two key challenges are meeting U.S. on-board diagnostic 
system requirements and the lower cetane number in diesel fuel, which 
is unique to the U.S.
                      alternative-fueled vehicles
    Honda is the only company that continues to offer a dedicated 
compressed natural gas vehicle, the third generation Civic GX. We 
recently co-marketed a natural gas home refueling station, called 
Phill, which will expand the market beyond fleets to retail customers. 
Phill is maintenance free, quiet, easy to use, certified for home use 
with 110 volt, and includes gas detection safety equipment.
    Development of battery-electric vehicles continues and they have 
found a niche in neighborhood vehicles for closed communities.
    Honda is strongly supportive of biomass fuel development. Honda has 
developed an E100 vehicle for sale in Brazil and is evaluating the 
market for flexible fuel vehicles in the U.S. Also, as we announced 
last year, Honda has achieved exciting advances in biotechnology 
research to increase yields in bio-ethanol production by using the 
stalks and leaves of plants that would normally be discarded. This 
improves the potential for wider application of ethanol-powered 
vehicles and for further CO2 reductions. We plan to maintain 
this comprehensive focus on both vehicles and fuels in our ongoing 
research and development.
    Honda believes the most optimal use of the ethanol that we are 
currently producing is to blend it with gasoline at up to 10% levels 
(``E-10''). All vehicles on the road today are capable of burning E-10 
and, unlike E-85, E-10 does not require a new fueling infrastructure or 
vehicles specially engineered to run on that fuel. If methods are 
developed to produce ethanol from cellulosic feedstocks with 
economically viable processes, the investment into infrastructure and 
vehicles might be a promising course for the nation. Congress has 
appropriately allocated significant resources for research into the 
production of ethanol from cellulosic materials.
                           fuel cell vehicles
    Fuel cells are being heavily researched and developed. Honda was 
the first company to certify a fuel cell vehicle with the EPA and the 
first to lease a fuel cell vehicle to an individual customer.
    The fully-functional Honda FCX Concept vehicle features a newly 
developed compact, high-efficiency Honda FC Stack as well as a low-
floor, low-riding, short-nose body. Limited marketing of a totally new 
fuel cell vehicle based on this concept model is to begin in 2008 in 
Japan and the U.S.
    The FCX Concept is equipped with a V Flow fuel cell platform 
consisting of a compact, high-efficiency fuel cell stack arranged in an 
innovative center-tunnel layout. This has allowed designers to create 
an elegant, low-riding, sedan form that would have been difficult to 
achieve in a conventional vehicle. This new fuel cell stack is smaller, 
lighter, and more powerful than the current FCX FC Stack. The result is 
a travel range approximately 30 percent greater than the current FCX 
with an energy efficiency of around 60 percent--approximately three 
times that of a gasoline-engine vehicle and twice that of a hybrid 
vehicle.
    The fuel side continues to be challenging. Honda's experience with 
home refueling for our compressed natural gas vehicle is helping in 
development of infrastructure technology for hydrogen refueling. 
Honda's research on the experimental Home Energy Station (HES) is on 
its third generation of development. This station aims to provide a 
home-based refueling environment capable of providing sufficient fuel 
to power a fuel cell vehicle while providing electrical energy needs 
for an average size home.
                                hybrids
    Hybrid-electric vehicles are in their 2nd generation at Honda and 
several other manufacturers have also recently introduced hybrid-
electric vehicles.
    Honda introduced the first hybrid vehicle in the US in 1999, the 
Honda Insight. This vehicle was designed to showcase the potential of 
hybrids and advanced technology. The Civic Hybrid, introduced in 2002, 
was the first hybrid powertrain offered as an option on a mainstream 
model. The Accord Hybrid was the first V6 hybrid. The 2006 Civic Hybrid 
incorporated significant improvements to the battery, electric motor, 
and hybrid operating strategy to improve both efficiency and 
performance. For example, we added the ability to cruise on the 
electric motor alone at low speeds, increased the motor output by 50%, 
increased regenerative braking energy recovery, and reduced the size 
and weight of the battery pack and power electronics.
    Taking what we have learned, Honda's next step in hybrid vehicle 
development will be the introduction of an all-new hybrid car to be 
launched in North America in 2009. This new hybrid vehicle will be a 
dedicated, hybrid-only model with a target price lower than that of the 
current Civic Hybrid. We are targeting an annual North American sales 
volume of 100,000 units, mostly in the United States, and 200,000 units 
worldwide.
                                  phev
    Plug-in hybrid vehicles are being evaluated by a number of 
manufacturers, including Honda. Plug-in hybrids have a lot of promise, 
especially to displace oil consumption. Before plug-in vehicles can be 
viable, however, there are a number of technology, consumer acceptance, 
environmental and cost issues that still need to be addressed. The 
extra batteries add considerable weight and take up considerable space, 
which decreases performance and vehicle utility. Systems to plug the 
vehicle in to the electric grid must be safe and easy to use and the 
customer needs a garage or secure spot to plug in. Performance must be 
preserved, which means that either the electric motor and energy 
storage must provide performance equivalent to the engine; or the 
engine must be started and used with the electric motor for harder 
accelerations and higher speeds.
    If the engine is not turned on for high accelerations, the vehicle 
is entirely dependent on the electrical system for acceleration. This 
requires a much larger electric motor and power electronics, which adds 
cost and weight and requires more cooling. The high electrical demand 
during high accelerations also generates high battery temperatures and 
accelerates battery deterioration, especially when the battery is at a 
low state of charge. If the engine is turned on only during high 
accelerations, emissions become an issue because of the difficult in 
keeping the catalyst at normal operating temperatures.
    However, the principal issue is energy storage cost and durability. 
Some industry analysts have been critical of hybrids because they cost 
more and the fuel savings are not recoverable in the short term. 
Although current hybrid vehicles have relatively small battery packs, 
the battery pack is still the single largest cost of the hybrid system. 
Further, energy flow in conventional hybrids is carefully monitored and 
controlled to ensure maximum battery life. High and low battery charge 
conditions, where more deterioration occurs, are avoided. Battery 
temperatures are carefully monitored at many points inside the battery 
pack and system operation is limited when necessary to keep the 
temperature low and minimize deterioration. Also, the duty cycle of a 
conventional hybrid is very mild and does not include deep discharges.
    The battery pack must be many times larger for a plug-in hybrid, 
even with just a 20-mile electric range. This adds thousands of dollars 
to the initial price of the vehicle, not to mention the impact the 
extra batteries have on weight and interior space. Further, the battery 
pack is now subjected to deep discharge cycles during electric-only 
operation and to much higher electrical loads and temperatures to 
maintain performance. This will cause much more rapid deterioration of 
the battery pack.
    The American Council for an Energy Efficient Economy (ACEEE) 
recently published a report (September 2006) assessing the annual fuel 
savings and the short and long term incremental costs for PHEVs. At $3 
per gallon, the annual fuel savings for a compact-sized vehicle is only 
$705 over a comparable conventional vehicle and only $225 over a 
comparable hybrid vehicle. Even if the Lithium-ion battery can be 
reduced to $295 per kW-hour and last the life of the vehicle, the 
payback period is still 6.4 years compared to a similar conventional 
vehicle and 12.9 years compared to a similar hybrid vehicle. This 
ignores the tradeoff between electric motor size and emissions, the 
performance penalty from the additional weight of the batteries, the 
space needed for the batteries, the increased risk of battery 
replacement due to the deep discharge cycles, and the cost of safe off-
board charging systems.
    Customer discounting of fuel savings is another long-term barrier 
that will also need to be overcome. While some customers value fuel 
savings more highly, the average new vehicle customer only values the 
fuel savings for roughly his or her period of ownership. This is 
supported by a consumer inferred payback period of only 1.5 to 2.5 
years, as determined by a May 2004 DOE survey. This means that, even at 
$3 per gallon, the average new vehicle customer would only value a 
plug-in hybrid at about $1,500 over a similar conventional vehicle 
(about two years of fuel savings at $705 per year) or about $500 over a 
similar hybrid vehicle (about two years of fuel savings at $225 per 
year).
    Certainly there are customers that value fuel savings more highly 
and other customers that will likely value the ability to recharge from 
home on electricity. Thus, if lithium-ion battery development meets the 
long-term targets specified in the ACEEE report ($295 per kW-hour while 
lasting for the life of the vehicle), a niche market for PHEVs should 
develop. However, from a mainstream customers' point of view, there is 
no business case unless fuel prices rises to substantially more than $3 
per gallon, fuel shortages occur, plug-in hybrids are heavily 
subsidized, or there is a breakthrough in energy storage.
    By far the most important action the government can take is 
research into improved energy storage. The Department of Energy is 
already developing plans to identify plug-in hybrid research needs and 
solutions. The Department of Energy held a Workshop on Plug-In Hybrid 
Electric Vehicles on May 4-5, 2006 to discuss issues and questions on 
plug-in hybrid research needs. The paper issued in advance of the 
workshop presented an excellent outline of the advantages of plug-in 
hybrids, the challenges faced, especially energy storage, the technical 
gaps, and the questions that need to be answered. The paper is an 
excellent resource for planning future research and development for 
plug-in hybrids and should be read by everyone interested in promoting 
plug-in hybrid vehicles.
    The government may also wish to explore ways to incentivize the 
full useful life savings to manufacturers or customers.
                            recommendations
    Development of all technologies is accelerating in response to 
growing concerns about energy security and global warming. Global 
demand for transportation energy is so immense that no single 
technology can possibly be the solution. Fuel cells have the most 
promise to address both climate change and energy sustainability issues 
in the long term. Honda is making great advancements in fuel cell 
technology and is working with the Department of Energy, the California 
Fuel Cell Partnership, and others to help lay the groundwork necessary 
to move toward commercial deployments. However, the challenges of 
hydrogen production, transport, and storage will take continued effort 
to solve and implement, especially on the volume demanded for 
transportation worldwide. Biofuels are promising and can replace some 
fuel use, but even development of cellulosic ethanol only has the 
potential to displace, at most, 10 to 20 percent of the world's oil 
demand. The point is that there is no magic bullet--we are going to 
need rapid development and implementation of as many feasible 
technologies as possible. Honda is developing technology that meets 
both the needs of our customers and those of society. Thus we are 
constantly exploring a variety of technologies to achieve energy 
sustainability.
    Different companies are working on different technologies, which is 
the optimal way and makes good use of competition. Development of 
specific technologies, including plug-in hybrid vehicles, needs to be 
viewed within this context. In order to achieve significant market 
penetration any alternative technology must be able to compete, in 
terms of cost, performance and utility, with advanced gasoline and 
diesel engines. With respect to hybrids and, especially, plug-in 
hybrids, the most important factor is to reduce the cost, size, and 
weight of the battery pack. We have found that the early hybrid 
customers are most interested in fuel cost savings. But at this 
juncture, mainstream customers do not value the fuel savings as highly 
and hybrid sales represent only about 1.5% of annual sales. Market 
penetration will increase as the costs are reduced in the future.
    As Honda has previously announced, we believe it is time for the 
Federal government to take action to improve vehicle economy. Given the 
rapid changes in technology, performance-based incentives are the best 
way to move the ball forward. It is impossible to predict the pace of 
technology development and when breakthroughs will or will not occur. 
Accordingly, technology-specific mandates cannot get us where we need 
to go. In fact, previous attempts to mandate specific technologies have 
a poor track record, such as the attempts in the 1990s to promote 
methanol and the California electric vehicle mandate. The primary 
effect of technology-specific mandates is to divert precious resources 
from other development programs that likely are much more promising. If 
there are to be mandates, they should be stated in terms of performance 
requirements, with incentives and supported by research and 
development.
    One example would be to increase the CAFE standards. The NHTSA 
already has the authority to regulate vehicle efficiency and Honda has 
called upon the agency to increase the stringency of the fuel economy 
requirements and has supported efforts to reform the passenger car 
standards. At the same time, Congress should develop a program of 
broad, performance-based incentives to stimulate demand in the 
marketplace to purchase vehicles that meet the new requirements.
    The other effective action the government can take is research into 
improved energy storage. The success of electric drive technologies, 
including hybrids, plug-in hybrids, and fuel cells, depends on our 
ability to build less expensive, lighter and more robust energy storage 
devices.
    I appreciate the opportunity to present Honda's views and would be 
happy to address any questions you may have.

    The Chairman. Well, thank you very much.
    Next, Dr. Menahem Anderman, president of Advanced 
Automotive Batteries, from Oregon House, California. Thank you 
for being here.

   STATEMENT OF MENAHEM ANDERMAN, PH.D., PRESIDENT, ADVANCED 
             AUTOMOTIVE BATTERIES, OREGON HOUSE, CA

    Dr. Anderman. Good afternoon, Mr. Chairman and members of 
the committee. My name is Menahem Anderman. I am the president 
of Advanced Automotive Batteries, a consulting firm 
specializing in energy-storage technology for advanced 
vehicles. I was invited by the chairman to brief the committee 
about the status of battery technology for hybrid electric 
vehicles, including plug-in hybrid electric vehicles, and much 
appreciate the opportunity.
    Hybrid cars today offer a range of technologies, including 
micro, mild, moderate, strong, and plug-in hybrids, each 
characterized broadly by the extent to which electrical power 
is used for propulsion in the vehicle. In contrast to fuel 
cell-powered electric vehicles, which are largely at the 
research stage with no path for high-volume production in sight 
yet, hybrid electric vehicles are already on the market and 
their future growth predominantly depends on cost reduction. To 
date the most successful hybrids on the market are the moderate 
and strong hybrids.
    The debate over the right level of hybridization has 
recently intensified. Central to the debate is the big box that 
stores the energy to propel the electric motor, the battery. It 
is evident that the battery is the key to achieving or failing 
to achieve technical and commercial success with any of the 
hybrid architectures. In fact, the battery is responsible for 
25 to 75 percent of the increased weight, volume, and cost 
associated with the various hybrid configurations.
    Currently, essentially all moderate and strong hybrids 
employ a nickel-metal hydride battery as their main electrical 
energy storage device. Its price is $600 to $3,000 per vehicle. 
While the nickel-metal hydride is currently the most economical 
and only proven power source for the application, there is 
limited potential for cost reduction as production volume 
increases. Lithium ion batteries offer higher power and energy 
per unit weight and volume than nickel-metal hydride batteries, 
making possible the use of smaller and lighter batteries in 
given applications. However, the reliability of the lithium ion 
technology for automotive application is not yet proven and its 
current cost is higher than that of nickel-metal hydride.
    At some point in the future, lithium ion is likely to 
become the battery of choice for most hybrid applications. We 
expect it to enter the market within the next 3 years. But its 
growth will depend on a sizable reduction in its costs and on 
proven reliability in the field.
    That is the market of conventional hybrid electric 
vehicles. Concerning plug-in hybrids and the battery 
requirements, in the plug-in hybrid application the battery is 
recharged from an electrical outlet and is designed to propel 
the vehicle in an all-electric mode for some range. For a 20-
mile range and allowing some margin for life, we estimate, 
perhaps optimistically, that a 10 kilowatt-hour battery would 
be required. This 10 kilowatt-hour battery would have six times 
the energy capacity of today's conventional hybrid batteries, 
which brings out several significant issues.
    One, its larger size will essentially fill the trunk of an 
average sedan. Two, its cost to carmaker using present 
technology, but assuming much higher volume, would be $5,000 to 
$7,000 per vehicle. That is three to five times the average 
cost of today's strong hybrid batteries. Its lifetime in the 
plug-in application using either technology, nickel-metal 
hydride or lithium ion, is not known. Since the usage profile 
in this application is considerably more demanding than that of 
conventional hybrids, there is a significant risk that the 
battery in the plug-in hybrid application will not last for the 
life of the car.
    Four, if a lithium ion battery is used there is a potential 
for hazardous failure, which would be a concern since this 
large battery would have to be charged in a residential garage.
    Items two and three above, that is cost and life, compound 
each other, making the cost of replacing the battery 
prohibitive.
    It is our opinion, which is shared by many of the leading 
professionals in the relevant high-volume manufacturing 
industry, that widespread commercialization of plug-in hybrid 
with an electrical range of 20 miles or more is only possible 
if there is a notable improvement in battery performance, 
proven longevity and reliability, establishing comprehensive 
lab and field testing over several years, and a significant 
reduction in battery cost.
    Concerning government initiatives, U.S. Government 
initiatives to promote the growth of the hybrid market through 
subsidies, incentives, fuel taxation, or tighter fuel 
efficiency regulation will all encourage further industry 
investment in fuel efficient transportation. Direct investment 
in battery development is also likely to advance the technology 
and in turn the viability of hybrids. Lithium ion battery 
chemistry is clearly the most promising in terms of supporting 
future conventional hybrids and approaching the target 
requirements of plug-in hybrids.
    It is also our opinion that as far as electric drive and 
electrically assisted drive technologies are concerned the 
conventional hybrid technology is the only one mature enough 
for its market growth to have an impact on the Nation's energy 
usage in the next 10 years. Pending significant improvements in 
battery technology and an increase in fuel costs, plug-in 
hybrid could possibly start making an impact in about 10 years, 
while vehicles powered by fuel cells are unlikely to enter the 
high-volume production in the next 20 years.
    Leadership in the development of advanced rechargeable 
batteries migrated to Japan in the 1980's and has remained 
there since. Today Japanese suppliers provide about 60 percent 
of the world lithium ion battery demand, estimated at $5 
billion for 2006, and Korean and Chinese suppliers share the 
vast majority of the remaining 40 percent. While North America 
and Europe maintain strong competence in battery research, 
major producers in Japan and more recently Korea have opened a 
significant gap in advanced battery manufacturing expertise 
between them and other parts of the world.
    To the degree that the U.S. Government is interested in 
supporting the establishment of a domestic supply of hybrid 
batteries, thought should be given to addressing how this gap 
might be bridged.
    Thank you for the opportunity to brief the committee. For 
us in the advanced automotive energy storage field, it is an 
exciting time. Battery technology has recently advanced enough 
to start making an impact on the Nation's use of transportation 
fuel. To speed up this development, it is important that 
government policies strongly support the technically proven, 
but barely affordable, conventional hybrid technology, and 
address the underlying challenges faced by the plug-in version 
so that in due course they too can impact the Nation's fuel 
consumption.
    I hope that the discussion this afternoon will help in 
developing such policies. Thank you.
    [The prepared statement of Dr. Anderman follows:]
  Prepared Statement of Menahem Anderman, Ph.D., President, Advanced 
                 Automotive Batteries, Oregon House, CA
                              introduction
    My name is Menahem Anderman; I have worked in the battery industry 
for 24 years, with both technology and business management 
responsibilities. I am the president of Advanced Automotive Batteries, 
a firm that provides consulting services in the area of energy-storage 
technology for advanced vehicles. Our activities include--among 
others--publishing multi-client industry and technology assessment 
reports, and organizing what is widely regarded as the foremost annual 
conference in this industry. I was invited by this committee's 
honorable chairman to brief the committee about the status of battery 
technology for hybrid electric vehicles, including plug-in hybrid 
electric vehicles, and am very appreciative of this opportunity.
                        hybrid electric vehicles
    Hybrid Electric Vehicles (HEVs) are propelled by combining 
mechanical power from an internal-combustion engine with electrical 
power from a battery. Fifteen hybrid car models offered in several 
vehicle classes are now available in dealerships across the United 
States, Europe, and Asia. Sales of no less than 350,000 new hybrid 
electric cars, representing over 0.7% of the total new car \1\ 
production in the world, were reported in 2006, 60% of which were in 
the U.S. market, accounting for 1.3% of total car sales. Coverage of 
the hybrid-vehicle technology by the media has increased substantially, 
and the average Japanese and North American consumer is now well aware 
of this new breed of vehicle. The technological and commercial success 
of the 2004 model year Prius--the third generation of this flagship 
hybrid--combined with the steep rise in oil prices during 2005/2006, 
the growing concerns about a diminishing world energy supply, and the 
increased awareness of the relevance of CO2 emissions from 
vehicles to the potential for global warming have all intensified the 
automotive industry's efforts to develop and introduce hybrid electric 
cars.
---------------------------------------------------------------------------
    \1\ In this report, the term `car' is used generically to include 
all types of `household' vehicles--cars, light trucks, vans, SUVs, etc.
---------------------------------------------------------------------------
    As the realization spreads that fuel-cell vehicles are unlikely to 
enter mass production within the next twenty years or more, and the 
pressure to reduce vehicle emissions and fuel consumption continues to 
rise, hybrid electric vehicles seem to offer a timely solution that is 
both technically proven and economically viable (or almost viable). 
However, other technologies with some environmental benefits, including 
ultra-efficient IC engines, clean turbo-diesel engines, ethanol-fueled 
IC engines, and advanced hydrocarbon fuel technologies, are also 
evolving. In most cases, these alternative technologies are less 
expensive and appear less risky to the automakers, which explains their 
interest in pursuing them in parallel to, or instead of, the hybrid 
approach. However, in the competitive race to improve drivability, 
comfort, and safety, while reducing fuel consumption and emissions, 
automotive engineers are discovering that many of the prospective 
solutions to these problems will require increased electrical power, 
which reinforces the desirability of at least some level of vehicular 
hybridization.
    Hybrid cars today cover a range of technologies, each characterized 
broadly by the extent to which electrical power is used for propulsion 
in the vehicle. At one end of the spectrum is the `micro-hybrid', a car 
that features a ``beefed-up'' starter, in which fuel is saved during 
vehicle idle stop, and mechanical energy is captured during braking. At 
the other end of the range--which also includes mild, moderate, and 
strong hybrids--is the `plug-in hybrid', in which a 40- to 100-kW 
electric motor is capable of propelling the car on its own for, say, 5 
to 50 miles, and supplements the power of the internal combustion 
engine in most acceleration events. To date the most successful hybrids 
on the market are the strong (sometimes referred to as `full') hybrids. 
These vehicles employ a 30 to 70-kW electric motor that is engaged 
frequently during the drive cycle and is powered by an advanced high-
power battery, which is charged on board by the IC Engine and by the 
kinetic energy captured during deceleration and braking of the vehicle.
    The debate over the `right' level of hybridization has recently 
intensified. While many automakers are searching for a reduced--
although measurably beneficial--level of hybridization (to cut the high 
incremental cost of the hybrid powertrain), governments, many utility 
companies, and environmental groups, frequently supported by the media, 
are pointing in exactly the opposite direction, favoring the 
introduction of plug-in hybrids that will offer significantly reduced 
fuel consumption, pollutants, and CO2 emissions, but with a 
large price tag and other drawbacks.
                   hybrid electric vehicle batteries
    Central to the discussion regarding the relative merits of the 
various hybrids is the big box that stores the energy to propel the 
electric motor--the battery. It is evident that the battery is a key to 
achieving (or failing to achieve) technical and commercial success with 
any of the various hybrid architectures. In fact, the battery is 
responsible for 25-75% of the increased weight, volume, and cost 
associated with the various hybrid configurations. Even more critical 
are battery life, reliability, and behavior under abuse as they present 
the largest threat to the commercial success of hybrid technology.
    Batteries store electrical energy, which is measured in kWh. 
Today's mild, moderate, and strong (`full') hybrids on the market 
utilize batteries with rated capacities of 0.6 to 2 kWh. In general 
mild hybrids require smaller batteries than do strong hybrids. The 
rated energy capacity of the battery is dictated by the battery's level 
of usage (the duty profile), and includes a significant margin for 
life, to meet the 10-year minimum life requirement of the automotive 
market. In today's hybrid batteries, only about 10% of the rated 
battery capacity is used frequently, and up to an additional 30% is 
accessed under extreme driving conditions. The remaining capacity is in 
place to ensure adequate service life.
    Currently, essentially all hybrids with moderate to significant 
powertrain hybridization employ a NiMH battery as the main electrical-
energy storage device. NiMH batteries are a reliable power source for 
hybrid cars; their manufacturing base is expanding, and field results 
suggest long life. However, NiMH batteries are not an ideal energy-
storage device for hybrid cars. Their limitations include moderate 
energy conversion efficiency, which translates to some energy loss and 
significant heat production in normal usage, reduced life with high 
depth-of-discharge (DOD) cycling, and unsatisfactory performance at 
high and low temperatures. NiMH battery packs for HEVs are priced at 
$900 to $1500 per kWh, which brings the price of today's pack to 
between $600 and $3,000 per vehicle.
    The 2006 NiMH battery market for HEVs is estimated at $600 million. 
Although NiMH is currently the most economical (and only proven) power 
source for the application, it has limited potential for cost reduction 
as production volume further increases, particularly in light of recent 
substantially higher nickel prices--nickel, in several metallic forms 
and compounds, being the battery's main component.
    Lithium-ion batteries offer higher power and energy per unit weight 
and volume, and better charge efficiency than NiMH batteries. Thus, if 
they can maintain performance over life, smaller and lighter batteries 
can be used in given applications. These attributes allowed them to 
capture a major part of the portable rechargeable battery market--which 
requires a battery life of only 2 to 3 years--within a few years of 
their introduction, and to generate global sales estimated at $5 
billion in 2006. Nevertheless, the reliability of lithium-ion 
technology for automotive applications is not proven--unfriendly 
failure modes, for example, are a concern--and its current cost is 
higher than that of NiMH.
    Over the last five years, most automakers have started to evaluate 
the suitability of lithium-ion batteries for HEV applications, and two 
Japanese automakers even embarked on sizable in-house lithium-ion 
battery development projects. In the U.S., significant progress has 
been made under the auspices of the U.S. Advanced Battery Consortium, a 
collaborative effort between the U.S. Department of Energy, the auto 
industry, and battery developers. Sometime in the future, lithium-ion 
technology is likely to become the battery of choice for most hybrid 
applications, although the recent reliability problems experienced with 
lithium-ion batteries in portable devices may delay its acceptance. 
Nevertheless, following extensive system-verification tests, lithium-
ion batteries are still expected to enter the HEV market in 2 to 3 
years, and their use to grow thereafter, provided no major negative 
surprises arise.
    Lithium-ion HEV batteries are likely to initially carry a slightly 
higher price than NiMH batteries but price parity is expected to occur 
as volume reaches that of the NiMH business. Moreover, they hold better 
potential for further cost reduction through improvements in technology 
and economies of scale.
    It is useful to note here that world investment in lithium-ion 
battery technology R&D continues to increase and is estimated at well 
over $1 billion annually, which is several times the total investment 
in R&D for all other battery technologies combined. We estimate that 
there are over a hundred materials, chemicals, and battery companies, 
several thousand academic researchers, and hundreds of scientists in 
government-owned laboratories involved in various aspect of lithium-ion 
battery technology R&D.
             plug-in hybrids and their battery requirements
    While the development of plug-in hybrid vehicles by car 
manufacturers is still at an early stage, industry experience with all-
electric vehicles on the one hand, and with conventional hybrid 
electric vehicles on the other, is sufficient to provide general 
guidelines for their battery requirements.
    In an all-electric vehicle, the battery is the only power source on 
board and is used in the so-called `charge-depletion' mode, i.e. the 
battery is fully charged externally (typically at night) and is 
depleted at a steady rate during driving. In this case, the battery 
usually provides only one charge-discharge cycle per day, with the 
depth of discharge depending on the battery capacity and the driving 
range. In a conventional HEV, the battery is operated in the so called 
`charge-sustaining' mode, i.e. the battery is charged and discharged on 
board around an intermediate state of charge, typically about half-way 
between fully charged and fully discharged. In this application, the 
battery may be called upon to provide hundreds or more shallow cycles 
per day, never approaching the fully-charged or fully-discharged state.
    In a classical plug-in HEV, the battery is fully charged 
externally, typically on a daily basis. When the vehicle is driven 
after charging, the battery operates in the charge-depletion mode, just 
like an EV battery. Later, as the battery reaches some predetermined 
low state of charge, the vehicle switches to a charge-sustaining mode, 
in which the battery will be used like that of a conventional HEV. 
Because of these dual functions the battery's usage profile in a plug-
in HEV is considerably more demanding than that of either a full EV 
battery or a conventional HEV battery, with obvious negative 
implications for battery longevity.
    For a plug-in hybrid electric vehicle the requirement that dictates 
its battery capacity is the range of electric drive for which the 
vehicle is designed (Note: some `plug-in' architectures do not 
emphasize electric drive, but to keep this discussion simple, we will 
consider an architecture that requires it). Depending on its weight, 
aerodynamic design, and driving pattern, a typical mid-size vehicle 
with an electric motor will utilize 0.2 to 0.4 kWh of energy per mile 
driven, which means that 1 kWh of energy will propel a car for between 
2.5 and 5 miles. For the sake of simplicity we will assume a 3-4 mile 
range per kWh of used energy. Thus, for a 20-mile range of electric 
drive, the car will use 5-7 kWh of energy. However, since the duty 
cycle of the application is considerably more severe than that of HEV 
or EV batteries, to even stand a chance of meeting life requirements 
using today's technology it will be necessary to design a battery with 
1.5 to 2 times the energy capacity required for the drive. In other 
words, a plug-in vehicle with a 20-mile range will require a battery 
with a rated energy capacity of 8 to 14 kWh. Again for the sake of 
simplicity we will assume a battery capacity of 10kWh for the rest of 
the analysis.
    Since the average capacity of today's strong hybrid batteries is 
1.7 kWh, the above calculation shows that the 20-mile plug-in battery 
will need an energy capacity 6 times higher than that of today's 
average HEV battery. This brings out several significant issues:

          1. The plug-in battery will be about 3 to 5 times the size of 
        today's conventional HEV batteries, essentially filling the 
        cargo space of an average sedan.
          2. The weight of this battery will add 200 to 300 lb. to that 
        of the car, which will adversely affect vehicle performance and 
        efficiency.
          3. If the plug-in battery vehicle contains a lithium-ion 
        battery, which is to be given a full charge every night in a 
        residential garage, there is a much more serious concern about 
        hazardous failure than with the smaller batteries of 
        conventional HEVs, which are always kept at an intermediate 
        state of charge.
          4. The cost of this plug-in battery (at pack level) to 
        carmakers, using present technology, will be 3 to 5 times the 
        average cost of today's HEV batteries, i.e. around $5,000 to 
        $7,000 per pack.
          5. The life of either battery technology, NiMH or lithium 
        ion, in the plug-in application is not known. There is a 
        significant risk that its life will be shorter than that of 
        conventional hybrid-car batteries.

    Unfortunately, items 4 and 5 above compound each other, making the 
cost of replacing the battery prohibitive (should the battery need to 
be replaced during the life of the car).
    It is our opinion that wide-spread commercialization of plug-in 
hybrids with a range of 20 miles or more is only possible if there is 
notable improvement in battery performance, proven battery longevity 
and reliability in well-designed lab and field tests--which, in 
combination, are likely to require 3 to 5 years--along with a 
significant reduction in battery cost.
                         government initiatives
    U.S. government initiatives to promote the growth of the HEV market 
through subsidies, incentives, taxation, or tighter fuel-efficiency 
regulations will all encourage further industry investment in fuel-
efficient transportation. Because batteries are critical to the 
potential success of the hybrid-vehicle business, direct investment in 
battery technology is also likely to advance the technology and in turn 
the viability of HEVs. Lithium-ion battery chemistry is clearly the 
most promising in terms of supporting future conventional HEVs as well 
as in approaching the target requirements of plug-in HEVs. While 
lithium-ion technology will continue to evolve as a consequence of the 
large worldwide investment in this technology, U.S. Government 
regulations that support the growth of the HEV market and/or its 
funding of lithium-ion battery development would certainly accelerate 
progress. In our opinion, such enhanced progress could allow lithium-
ion battery technology to enter the conventional U.S. HEV market 
earlier than without it, thereby increasing the attractiveness of these 
vehicles and stimulating their market growth. In the longer term--
perhaps in about 10 years--accelerated progress may gradually close the 
gap between the targeted battery requirements for plug-in HEV and the 
state and cost of battery technology, thus facilitating the 
introduction of plug-in hybrid vehicles as well.
    It also is our opinion that as far as electric drive and electric-
assist drive technology is concerned, conventional HEV technology is 
the only one mature enough for its market growth to have an impact on 
the nation's energy usage in the next 10 years. Pending significant 
improvements in battery technology, plug-in hybrids could possibly 
start making an impact in about 10 years, while vehicles powered by 
fuel cells are unlikely to enter high-volume production in less than 20 
years.
                          other considerations
    Leadership in the development of advanced rechargeable batteries 
migrated to Japan in the eighties and has remained there since. Today's 
Japanese suppliers provide over 60% of the world's lithium-ion battery 
demand, and Korean and Chinese suppliers share the vast majority of the 
remaining 40%.
    Regarding batteries used in today's high-volume hybrids, two 
Japanese battery producers, Panasonic EV Energy, a joint venture 
between Toyota Motor Company and Panasonic Batteries, and Sanyo, share 
over 95% of today's $600 million HEV battery market (currently nearly 
all NiMH). A single U.S. supplier, Cobasys, supplies NiMH batteries for 
the 2007 mild-hybrid Saturn Greenliner. Both Japanese battery giants 
are also developing lithium-ion battery products for the HEV market, 
where over a dozen additional battery makers from Japan, Korea, and the 
U.S. intend to compete.
    While North America and Europe maintain strong competence in basic 
battery research, including in materials and electrochemistry, major 
producers in Japan, and more recently Korea, have opened a significant 
gap between them and other parts of the world in advanced-battery 
manufacturing expertise. The manufacturing of high-volume, low-cost, 
and high-reliability lithium-ion batteries for the portable market is 
challenging, and established producers have paid dearly to move up the 
learning curve (and down the cost curve). The manufacturing of low-
cost, high-power lithium-ion batteries for HEV is considerably more 
demanding, when one considers the higher voltage and the larger size of 
the battery on the one hand, and the long life expectancy and harsh 
operating environment on the other.
    To the degree that the U.S. Government is interested in supporting 
the establishment of a domestic supply of HEV batteries, thought should 
be given to addressing this significant gap in high-volume lithium-ion 
manufacturing expertise between U.S. developers and their Japanese and 
Korean counterparts, in addition to supporting the development of 
battery materials and improved cell design.
    Thank you for the opportunity to brief the committee. I hope that 
this presentation will help direct attention to the apparently most 
promising and affordable technologies for reducing fuel consumption and 
the impact of vehicles on the environment, yet without sacrificing 
vehicle functionality and affordability, or threatening human safety.

    The Chairman. Thank you very much.
    Our next witness is Mr. William Logue, who is the executive 
vice president of FedEx Express in Memphis. We are glad to have 
you here. Thank you.

STATEMENT OF WILLIAM J. LOGUE, EXECUTIVE VICE PRESIDENT, FEDEX 
                            EXPRESS

    Ms. Lowery. Mr. Chairman and members of the committee: 
Thank you for your kind invitation to testify today on the 
important subject of improving efficiency in the transportation 
sector.
    As executive vice president of Operations and System 
Support for FedEx Express, my responsibilities encompass our 
worldwide air operations, our U.S. pickup and delivery oil and 
gas, our U.S. airport and hub operations, as well as the 
planning and engineering of our network. I am here today to 
tell you that this initiative is urgently needed, eminently 
achievable, and economically viable. Trucks along consume more 
than 50 billion gallons of fuel per year and aircraft 
approximately 20 billion gallons. Thus the opportunities of 
fuel savings and the environmental benefits are enormous.
    I commend Chairman Bingaman and this committee for its 
attention to this very important subject, not only for the 
well-being of the Nation's energy and environmental resources, 
but its economic and national security interests.
    A few years ago FedEx embarked on an historic project with 
Environmental Defense to design and build a hybrid truck that 
would marry our very strict performance standards with 
extraordinary fuel savings and environmental benefits. The 
FedEx Opti-Fleet F--excuse me--E700 hybrid electric vehicle 
operates in several communities across the country today, 
including here in Washington, D.C., and is shown to increase 
fuel economy by 40 percent while decreasing particulate 
emissions by 90 percent and greenhouse gases by more than 25 
percent. This shows that significant gains can be made now.
    These 93 vehicles, which look identical from the outside to 
our standard pickup and delivery truck, have traveled more than 
840,000 miles in revenue service. We would like nothing more 
than to put many of these incredible vehicles on the road. 
However, they are very expensive. The Opti-Fleet E700 costs 
almost twice as much as a standard pickup and delivery truck 
and, while we embarked on this program with a rallying call for 
others in the transportation sector to get on board, very few 
companies have committed to the technology, and the main reason 
is cost.
    As the committee with jurisdiction over these issues, you 
have the opportunity to create public policies that improve 
transportation in the commercial sector. In 2005 the Energy 
Policy Act tax credits were made available for commercial 
hybrid vehicles. However, the Department of Treasury has yet to 
finalize the guidance for claiming the tax credits. I firmly 
believe that if incentives were available to help reduce the 
costs more companies like FedEx would embrace this outstanding 
technology. This would cause manufacturers to produce more 
vehicles and the competitive realities of the market would kick 
in. These vehicles could then become a real alternative, much 
like what you have seen occur in the passenger car sector.
    These short-term tax credits could help seed the 
development and adoption of this technology in the commercial 
vehicle market. Let me give an example of the benefits we could 
see with these changes. If 10,000 hybrid electric commercial 
vehicles were on the road rather than the standard truck, smog-
causing emissions would be reduced by 1700 tons annually, the 
equivalent of taking passenger cars off the streets of New York 
for 25 days. Carbon dioxide emissions would be reduced by 
83,000 tons annually and diesel fuel usage would be reduced by 
7.2 million gallons.
    While trucks are an enormous component of our operation, we 
are taking strides in energy conservation and fuel savings in 
other areas. In August 2005, we opened California's then 
largest corporate solar electric hub system in our hub in 
Oakland, California. In the first year it has provided more 
than one million kilowatt-hours of renewable energy generated 
by sunlight, thereby avoiding the release of 342 tons of carbon 
dioxide into the atmosphere.
    We are also modernizing our aircraft fleet. Over the next 
10 years we are planning to retire our Boeing 727s and replace 
them with the much more fuel efficient 757. The 757 has a 
payload grade 20 percent greater, but uses 36 percent less 
fuel. In addition, the 777 is our long haul freighter for the 
future, which results in obviously an increased payload as 
well, but also operates with 18 percent less fuel.
    The Nation's energy crisis and finding ways to reduce fuel 
consumption is so important to FedEx that our chairman, 
Frederick W. Smith, is co-chairing the Energy Security 
Leadership Council, an initiative of the nonpartisan 
organization Securing America's Future Energy, or SAFE. I know 
this council has met with this committee and has developed an 
ambitious set of policy recommendations toward reducing U.S. 
oil dependence.
    FedEx is very supportive of the call to raise energy 
efficiency in commercial vehicles, the need to invest in 
alternative fuel sources as well, and to make changes in the 
air traffic control routings which would result in tremendous 
savings in jet fuel annually.
    In conclusion, I would like to offer a few recommendations. 
No. 1, set fuel efficiency standards annually for medium and 
light-duty trucks. This would help stimulate the production of 
hybrid electrics within the medium truck sector, such as our 
pickup and delivery fleet. It would also drive alternatives for 
improved fuel efficiency in heavy-duty trucks.
    The committee should also look into instructing the 
Department of the Treasury to finalize the guidance for the 
hybrid electric commercial vehicle tax credits under the 2005 
Energy Policy Act, because nearly 2 years have lapsed, and 
these tax credits should be retroactive and be extended to 
2012.
    We also need the FAA to implement improvements in 
commercial air traffic routing in order to improve aviation 
efficiencies and reduce fuel consumption.
    Finally, provide increased funding to NASA for the research 
and development of a new aviation engine technology that will 
reduce emissions, noise, and increase fuel efficiency.
    Thank you for this opportunity to come before this 
committee. I am happy to answer any questions.
    [The prepared statement of Mr. Logue follows:]
   Prepared Statement of William J. Logue, Executive Vice President, 
                             FedEx Express
    Mr. Chairman and Members of the Committee, thank you for your kind 
invitation to testify today on the important subject of improving 
efficiency in the transportation sector. I am here today to tell you it 
is urgently needed, imminently achievable and economically viable. 
Trucks alone consume more than 50 billion gallons of diesel fuel and 
gasoline and airlines consume approximately 20 billion gallons of fuel 
per year, thus the opportunities for fuel savings and environmental 
benefit are enormous.
    I commend Chairman Bingaman and this committee for the attention to 
this very important subject--not only for the well-being of the 
nation's energy and environmental resources but its economic and 
national security interests.
    FedEx is part of the fabric of society--we operate in every 
community across the United States and serve more than 220 countries 
around the globe. In order to serve 95 percent of the world's GDP in 
24-48 hours, it takes a lot of fuel. In fiscal year 2006, FedEx Express 
consumed more than 1.3 billion gallons of fuel and thanks to some fuel 
saving initiatives, that figure is actually down 3 percent from the 
previous two years for vehicle fuels. But this is far from where we 
want to be.
    A few years ago, FedEx embarked on a historic project with 
Environmental Defense to design and build a hybrid truck that would 
marry our very strict performance standards with extraordinary fuel 
saving and environmental benefits. The FedEx Express Opti-Fleet E700 
hybrid electric vehicle--operated in several communities across the 
country, including Washington, DC--increases fuel economy by more than 
40 percent while decreasing particulate emissions by 90 percent and 
green house gases by more than 25 percent. This shows that significant 
gains can be made now.
    These 93 vehicles--which look identical from the outside to our 
standard FedEx pick up and delivery truck--have traveled more than 
840,000 miles in revenue service. We would like nothing more than to 
put more of these incredible vehicles on the road but they are very 
expensive.
    The Opti-Fleet E700 costs up to twice as much as a standard pick up 
and delivery truck and while we embarked on this program with a 
rallying call for others in the transportation sector to get on board--
very few companies have committed to the technology. And the main 
reason is cost.
    As the Committee with jurisdiction over these issues, you have the 
opportunity to devise and instruct public policies that further drive 
improved transportation in the commercial sector. In the 2005 Energy 
Policy Act tax credits were made available for commercial hybrid 
vehicles, however, the Department of Treasury has yet to finalize the 
guidance for claiming the tax credits. I firmly believe that if 
incentives were available to help reduce the costs, more companies like 
FedEx would embrace the technology. If more companies embraced the 
technology, manufacturers would see the value, the competitive 
realities of the market would kick in and these vehicles could become a 
real alternative--much like what you've seen occur in the passenger car 
sector. Put simply, these short-term tax credits can help seed the 
development and adoption of this technology in the commercial vehicle 
market.
    For example, if 10,000 hybrid electric commercial vehicles were on 
the road rather than standard commercial vehicles, substantial 
reductions in emissions and fuel use would occur annually:

   Smog-causing emissions of nitrogen oxides would be reduced 
        by 1,700 tons annually--the equivalent of taking passenger cars 
        off New York City roads for 25 days.
   Carbon dioxide emissions would be reduced by 83,000 tons 
        annually the equivalent to planting 2 million trees.
   Diesel fuel usage would be reduced by 7.2 million gallons, 
        which requires 1 million barrels of crude oil to produce.

    While trucks are an enormous component of our operation, we are 
taking strides in energy conservation and fuel savings in other areas:

   In August 2005, we opened California's then largest 
        corporate solar electric system at the FedEx Express regional 
        hub in Oakland. In the first year, it has provided more than 1 
        million kilowatt hours of renewable energy generated by 
        sunlight thereby avoiding the release of 342 tons of carbon 
        dioxide into the atmosphere--equivalent to 96 acres of forest 
        saved or not driving for 850,000 miles.
   We are modernizing our aircraft fleet. Over the next 10 
        years we have plans to retire the Boeing 727s and replace them 
        with more efficient 757s. The 757 is 20 percent larger but uses 
        36% less fuel.
   We are also adding the 777 freighter to our fleet for long-
        haul flights which will result in being able to carry more 
        payload while burning 18% less fuel compared to the aircraft in 
        today's fleet.

    The nation's energy crisis and finding ways to reduce fuel 
consumption is so important to FedEx that our chairman, Frederick W. 
Smith, is co-chairing the Energy Security Leadership Council, an 
initiative of the nonpartisan organization Securing America's Future 
Energy (SAFE). I know the Council has met with this committee and has 
developed an ambitious set of policy recommendations toward reducing 
U.S. oil dependence. FedEx is very supportive of the call to raise 
energy efficiency in commercial vehicles, invest in alternative fuel 
sources and make changes in Air Traffic Control routings which would 
result in tremendous savings in jet fuel annually.
    Recommendations:

   The Committee should instruct the Department of Treasury to 
        finalize guidance for hybrid electric commercial vehicle tax 
        credits under 2005's Energy Policy Act. Because nearly two 
        years have lapsed these tax credits should be retroactive and 
        be extended to 2012.
   Set fuel efficiency standards annually for medium and heavy-
        duty vehicles. This would help stimulate the production of 
        hybrid electrics within the medium-duty vehicle sector, such as 
        our pickup and delivery fleet, (Classes 3 through 6) and 
        alternatives for improved fuel efficiency in the heavy-duty 
        vehicles.
   Increase allowable weight to 97,000 lbs. gross vehicle 
        weight for tractor-trailer trucks that have a supplementary 
        sixth axle to improve payload while not compromising safety.
   Allow the Federal Aviation Administration (FAA) to implement 
        improvements within commercial air traffic routing in order to 
        improve aviation efficiencies and reduce fuel consumption.
   Provide increased funding to the NASA for the research and 
        development of new aviation engine technologies that will 
        reduce emissions, noise and increase fuel efficiency.

    Thank you for the opportunity to come before this esteemed 
committee. I am happy to answer any questions.

    The Chairman. Thank you very much for your testimony.
    Next is Dr. Walter McManus, who is president of the 
Automotive Analysis Division at the University of Michigan 
Transportation Research Institute in Ann Arbor. Thank you for 
being here.

  STATEMENT OF WALTER McMANUS, DIRECTOR, AUTOMOTIVE ANALYSIS 
   DIVISION, UNIVERSITY OF MICHIGAN TRANSPORTATION RESEARCH 
                    INSTITUTE, ANN ARBOR, MI

    Dr. McManus. Thank you, Mr. Chairman, Senators.
    A consensus seems to be emerging around sustainability and 
reducing gasoline consumption that has not been here for the 
past several years. I think we all agree now that we need to 
dramatically reduce our gasoline consumption and head toward a 
sustainable energy future. The question is how to do it.
    There are many proposals that are being considered and that 
are out there, but I want to make one point very clear today. I 
believe that Federal leadership is needed to get the kinds of 
reductions in gasoline consumption that we need. The reason I 
believe that is that the market for fuel economy has not worked 
and in the future it will not work to get the kinds of 
reductions that we are talking about.
    Consumers do indeed value fuel economy, and I will be 
talking about some research that shows that. In the past decade 
or so, markets failed to work to give them the fuel economy 
that they wanted. It is not likely to work in the future to 
dramatically reduce fuel consumption to the extent that we need 
to have it done.
    In the past 6 years, 8 years, the price of gasoline rose 
100 percent, but it was not until the last 2 years that people 
responded by buying different vehicles. Does that mean that it 
took a tipping point or some number for them to respond? No. 
They actually did respond well before that, but it was in the 
form of not having as much demand, and the automakers responded 
by cutting prices.
    At the same time that the fuel prices were going up, 
vehicles that had lower fuel efficiency were having their 
prices cut much more than other vehicles. The difference was 
unprecedented and basically offset all of the reductions in 
fuel--sorry--all of the increases in fuel costs over the life 
of the vehicle.
    Now, Detroit has consistently failed to recognize new 
knowledge that comes in the form of new data about the 
consumer. Just one example. For a long time, for years, the 
number one complaint about large SUVs has been that they have 
poor fuel economy. Well, Detroit usually rationalizes that by 
saying: They knew what they were buying; what did they expect? 
At the same time, instead of building SUVs with more fuel 
efficiency in order to improve their compliance with CAFE, they 
moved trucks into classifications that were not covered, about 
8500 pounds, that have even less fuel efficiency.
    Most recently, we have done some research on the impact on 
Detroit and in particular on the Big Three of higher prices. A 
couple of years ago we predicted that prices at $3.37 would 
result in the Big Three losing about $11 billion. Well, we have 
had that now. Prices were close to that for almost a year and a 
half. And we were wrong. They were much more vulnerable than we 
thought. They actually have lost now about $25 billion.
    So if they had had the vehicles that were fuel efficient in 
this last few years, they would be in much better financial 
position than they are. So fuel efficiency is not only 
important for sustainability and for our national security, it 
also will contribute to the health, financial health, of the 
auto industry and of the communities that rely on them.
    In the future, the market is also not likely to do it 
again. I say that because Detroit failed to sense and then to 
respond to changes in consumer demand. I worked in the industry 
for about 15 years and it is common to discount any evidence 
that consumers valued fuel economy, because we know better than 
the consumer does what they want.
    In addition, Toyota and Nissan--some people say, well, 
leave it to Toyota and Nissan to provide our fuel efficient 
vehicles. But they are today moving rapidly into the same large 
SUVs and pickup trucks that got the Big Three in trouble.
    So in conclusion, I just want to say that of all the 
multiple proposals that are out there--there really is no 
shortage of proposals--we would like to assist in understanding 
them and helping to understand the impact on greenhouse gas 
emissions, sustainability, and the auto industry and the 
employment in the United States.
    Thank you.
    [The prepared statement of Dr. McManus follows:]
   Prepared Statement of Walter McManus, Ph.D., Director, Automotive 
   Analysis Division, University of Michigan Transportation Research 
                        Institute, Ann Arbor, MI
    A year ago President Bush declared that America is addicted to 
oil--an addiction that poses great risks to our nation's security, 
economy and environment. In this year's State of the Union, he outlined 
a plan to reduce our projected gasoline consumption in 2017. With the 
new Congress, there is an opportunity to devise an effective and 
rational national policy on automotive fuel economy that can do more 
than just decrease our future projected increase in gasoline 
consumption. A smart set of policies can dramatically reduce our 
national addiction to oil, while putting Detroit automakers on more 
solid financial ground and Americans on the path to a safer, cleaner 
future.
    There are many who say we should just let the market take care of 
it. Carmakers only make what consumers want to buy and until now 
consumers have not wanted fuel economy. As gasoline prices rise, 
consumers will move to more fuel-efficient cars, as they have over the 
last year.
    Research and analysis conducted by the University of Michigan's 
Transportation Research Institute Automotive Analysis division reveals 
why the market has not worked over the last decade, why the market did 
not give consumers as much fuel economy as they were willing to buy and 
why the market will not push fuel economy to the extent it needs to go 
to significantly decrease our nation's gasoline consumption or stop the 
financial freefall for Detroit.
                       why the market didn't work
    Judging from recent public statements, advertisements, and some 
concept cars at this year's auto shows, it would seem that Detroit 
automakers now understand consumers want fuel economy. Hurricane 
Katrina, Rita and other oil supply disruptions sent the price of 
gasoline skyrocketing in the last year. Consumers reacted and stopped 
buying fuel inefficient SUVS and pickups. So the market works.
    But the price of gasoline has risen by over 102% since 1998. Why 
did it take the spike in 2005 to change demand? It didn't. Our research 
shows for almost a decade consumers have placed a much higher value on 
fuel economy than Detroit automakers has given it. But Detroit 
automakers ignored even their own data.
    Since the 1990s, the reigning conventional wisdom in Detroit has 
been that consumers would not pay for fuel economy and this view 
dominated Detroit's thinking about its customers so thoroughly, that 
any evidence that challenged it was rationalized away or ignored, even 
when the contradictory evidence came from Detroit's consumers 
themselves.
    Detroit automakers spend many millions of dollars collecting data 
and building models of their customers' needs and wants so they can 
design products their customers want and build them in quantities that 
are profitable. To develop predictions about future market conditions 
that product decision makers can act upon, a market forecaster analyzes 
patterns in historical data and develops models and forms opinions 
about how the market works. New useful knowledge has only two sources: 
from observing new data or from thinking about historical data in new 
ways.
    With respect to the consumer value of fuel economy, Detroit failed 
to recognize new knowledge of both types that it should have, and that 
could have helped Detroit avoid the dismal financial results of the 
last two years.
    Detroit failed to recognize new knowledge in the form of new data 
about the consumer value of fuel economy.
    When asked what they liked and disliked about their new vehicles, 
more buyers of large SUVs have said they disliked the vehicle's poor 
fuel economy than said they disliked any other feature. (J.D. Power and 
Associates, APEAL Study 1996-2005). Instead of addressing their 
customers' top complaint by improving the fuel economy of large SUVs, 
the automakers dismissed the complaint since it contradicted the 
conventional wisdom (``they bought a large SUV, what did they 
expect?''). At the same time automakers expanded their offerings of 
super-heavy SUVs to take advantage of a gap in CAFE (SUVs weighing over 
8,500 lb do not count toward CAFE compliance until MY2011).
    As a forecaster, I know that forecasting is as much an art as it is 
a science. The art of forecasting is what guides forecasters as they 
adjust the raw output from a statistical analysis to make better 
predictions. In nearly all of Detroit's internal and external market 
research studies, the raw output would imply that consumers put a 
fairly high value on fuel economy. However, the conventional wisdom is 
so strong that these raw estimates are nearly always adjusted downward.
    Detroit also failed to recognize new knowledge in the form of novel 
patterns in historical data in the relationship between gasoline prices 
and vehicle sales.
    By 2005 gasoline prices had been steadily rising for several years. 
From 1998 to 2006, the average price per gallon of regular gasoline 
rose from $1.27 (adjusted for inflation) to $2.57--a 102% increase over 
eight years. For comparison, the first oil shock, which led Congress to 
create CAFE standards, involved a 73% increase over eight years in the 
price regular gasoline. (Adjusted for inflation, a gallon of regular 
gasoline cost $1.76 in 1973 and $3.06 in 1981.)
    The duration and magnitude of the rise in gasoline prices make the 
apparent lack of a consumer response until 2005 puzzling. In the face 
of steadily rising gasoline prices, why did consumers not change their 
new vehicle choices before 2005 and 2006? Is there a ``tipping point'' 
that gasoline prices must pass before consumers respond?
    We addressed these questions in a research study we recently 
completed (forthcoming in Business Economics, Jan 2007). We examined 
the impact of the rise in gasoline prices on consumer demand for fuel 
economy using data on the sales, actual transaction prices, and 
attributes of all vehicles sold in the U.S. for the years 2002 through 
2005. We used a statistical methodology called hedonic regression that 
models the real price paid for a vehicle as a function of the real 
price of gasoline, fuel economy, and other factors.
    Our study found that the consumer value of fuel economy rose each 
year in direct proportion to the rise in the real price of gasoline. 
Without some action to offset this trend, demand would have shifted 
away from large SUVs as early as 2003. What Detroit did (starting 
immediately after 9/11) was cut their vehicles' prices, and the least 
fuel-efficient vehicles had the biggest price cuts. These cuts in 
prices offset the fall in what consumers would pay for their vehicles 
as gasoline prices rose. Consumers would have switched earlier, but 
Detroit kept making better and better offers they could not refuse as 
gasoline prices rose from 2002 to 2005. And, as a result, while sales 
continued to look good, Detroit was experiencing a massive erosion of 
profits.
    Hurricanes Katrina and Rita sent regular gasoline prices shooting 
over $3 per gallon (nominal) in 2005 and the expectation of other 
supply disruptions kept the price high (nominal, year over year) for 
much of 2006. This time Detroit could not offer enough discounts and 
incentives to prevent a dramatic and sudden shift of American new-
vehicle buyers from gas guzzling SUVs and large cars to fuel-efficient 
cars, crossover vehicles, and hybrids. For the first time since 1981, 
the truck share of sales fell in 2005 and 2006. (From 1981 to 2004 the 
truck share grew from 19% to 56%. The truck share fell to 55% in 2005 
and to 52% in 2006.) More significantly, for the first time since 1991, 
the actual number of trucks sold fell in 2005 (by 79 thousand units) 
and again in 2006 (by nearly 2 million units).
    This began a financial freefall for Detroit that has implications 
for the entire U.S. economy. Less than two years ago, UMTRI released a 
study that focused on Detroit's vulnerability to rising fuel prices. 
Both the industry and the media dismissed our findings. We predicted 
that if gasoline were to hit $3.37 per gallon it would cause $11 
billion in losses for Detroit. We underestimated Detroit's 
vulnerability--so far the gasoline price spike has cost close to $25 
billion in losses, along with thousands of jobs.
   why the market will not work to meet america's fuel economy needs
    In theory, we could let the market simply continue replacing 
American vehicles with fuel-efficient foreign vehicles. There are 
several reasons why this theory will not lead to the kind of reductions 
in fuel consumption our nation needs to achieve in the time we have to 
achieve it.
    In America, we have 240 million passenger cars and light trucks on 
the road which we drive 2.9 trillion miles in a year. Every car and 
truck produced is part of our fleet for 15 years or more. Automakers 
are making decisions today about the cars and trucks that will roll off 
the assembly line five years from today.
    Detroit failed to sense and respond to the change in consumer 
demand before and there is a danger Detroit still doesn't understand 
how much consumers value fuel economy. Recently, as gas prices have 
drifted down, Detroit automakers have worried out loud that consumers 
will not want fuel-efficient vehicles. Foreign automakers may make 
similar mistakes about American consumers. Toyota and Nissan have been 
selling large SUVs and trucks in the U.S. for a number of years, and 
Toyota is currently launching their largest and least fuel-efficient 
American-assembled trucks.
    Each new vehicle represents an investment of at least a billion 
dollars and five years of development before the first unit (``job 
one'') rolls off the assembly line. While technologies that are under 
the hood today could dramatically increase fuel economy if deployed 
fleet wide, Detroit simply does not have the capital it needs to 
implement such a deployment. In the meantime, Detroit automakers are 
continuing to produce another generation of gas-guzzlers that will 
hamper efforts to reduce gasoline consumption for years to come.
    Finally, if Americans import (or buy from foreign-owned automakers) 
advanced technology vehicles, we would just trade oil dependence for 
technology dependence. The national security implications of this would 
need to be examined to determine whether we would be more or less safe.
    This fall we released a study that showed proactive fuel economy 
increases would strengthen Detroit financial footing and America's 
economic, energy and environmental future. From a greenhouse gas 
emissions consideration alone, there is an urgent need to reduce 
American fuel consumption quickly. Today it is my opinion that this 
cannot happen without federal leadership.
    There are multiple fuel economy proposals on the table but a dearth 
of solid analysis on which to base sound policy decisions. The 
University of Michigan will be conducting this analysis in the coming 
months. We look forward to assisting you as you craft a powerful legacy 
for future generations.

    The Chairman. Thank you very much.
    Our final witness here is Mr. David Greene, who is with the 
National Transportation Research Center at Oak Ridge National 
Laboratory in Knoxville. Thank you very much for being here.

  STATEMENT OF DAVID L. GREENE, CORPORATE FELLOW, ENGINEERING 
         SCIENCE AND TECHNOLOGY DIVISION, OAK RIDGE, TN

    Dr. Greene. Thank you, Senator. Thank you for inviting me 
to discuss the need to formulate effective policies to increase 
motor vehicle fuel economy. I will try to summarize my 
testimony and will refer to a couple of illustrations contained 
in it. Of course, the views I offer today are my own and not 
necessarily those of Oak Ridge National Laboratory or the 
Department of Energy.
    New passenger car and light truck fuel economy has not 
increased in 20 years. At the same time, technology that could 
have increased fuel economy has instead been used to increase 
horsepower by 85 percent and vehicle mass by 25 percent. In 
large part this is because the marketplace does not fully value 
fuel economy.
    How do I know that is so? First consumers say so. In 
response to survey questions, consumers indicate they require 
payback periods for fuel economy improvements of about 2 years, 
far less than the full savings over the life of the vehicle. 
Second, manufacturers say so. Auto manufacturers generally say 
that consumers are willing to pay for fuel economy improvements 
that will repay their initial investment in 2 to 4 years. 
Third, scientific research says so. Researchers at the 
University of California at Davis interviewed 57 California 
households about their entire history of car ownership. Not one 
had ever calculated the value of future fuel savings. Most did 
not even consider fuel economy in their car purchases.
    The economist's ideal consumer, comparing the discounted 
present value of fuel savings to its cost, was simply nowhere 
to be found.
    It is not that consumers are irrational or uninformed. It 
is the nature of the problem. First, the rational consumer is 
interested in the net value of higher fuel economy, the 
discounted present value of future fuel savings minus the 
increased vehicle price. In fact, the net value of higher fuel 
economy generally varies little over a wide range of miles per 
gallon.
    Figures 2 and 3 in my written testimony use the data and 
assumptions of the National Research Council Committee on the 
CAFE Standards to illustrate this point. At $2 a gallon, there 
is little difference in net value between a car getting 31 
miles per gallon and higher MPG numbers all the way up to 41 
miles per gallon. The difference is about $100, on a par I 
would say with floor mats. The same applies at $1.50 a gallon.
    Second, the car buyer is faced with great uncertainty. What 
will the future price of gasoline be? How many miles per gallon 
will I really get with this car? What am I actually paying for 
this better fuel economy? Indeed, it would be surprising if the 
market for fuel economy did function efficiently.
    But although higher fuel economy may not be a high priority 
for consumers, the benefits in reduced greenhouse gas emissions 
and increased energy security are of great value to society. So 
what can we do? What policies will work? Fuel economy 
standards, for one. We have the CAFE standards. The European 
Union has a voluntary greenhouse gas emissions agreement. Japan 
and China have weight-based standards and indeed Japan just 
established successful weight-based standards for medium and 
heavy trucks, as Mr. Logue has recommended today.
    Australia and Canada also have standards. Nearly every 
major economy does. They work.
    But there is always room for improvement and I believe the 
footprint-based reforms implemented by NHTSA for light trucks 
are potentially a major improvement. However, I wish NHTSA had 
had a thorough engineering analysis of possible unintended 
consequences. I think that analysis still needs to be done, 
although I think it will prove that the standards will work.
    Feebates also an work. Feebates are a market-based policy 
that circumvents the failure of the market economy by levying 
fees on low fuel economy vehicles and providing rebates to high 
fuel economy vehicles at the time of purchase. We have an 
incomplete feebates system in the form of gas guzzler taxes, 
which strangely apply only to passenger cars and not light 
trucks.
    The chief advantage of feebates is that, unlike fuel 
economy standards, they provide a continuing incentive to adopt 
the latest technology and apply it to improve fuel economy, 
perhaps another way around the gridlock that Senator Domenici 
referred to.
    And yes, there is raising the tax on gasoline. Now, this is 
an unpopular proposal, but raising the tax on gasoline sends a 
consistent signal to consumers that reducing petroleum 
consumption is important, and it offsets the very small 
tendency for vehicle travel to increase as fuel economy is 
increased. It can be phased in as fleet fuel economy improves, 
having the added advantage therefore of maintaining the funding 
for our highway system.
    Finally, there is research, development, and demonstration. 
As amazing as today's technologies are, they are still not up 
to the challenge of climate change or of achieving sustainable 
energy for the world's growing mobility demands. Even greater 
energy efficiency and the ability to effectively use abundant, 
clean energy sources are needed.
    I thank you for your attention and look forward to 
questions.
    [The prepared statement of Mr. Greene follows:]
     Prepared Statement of Dr. David L. Greene, Corporate Fellow, 
    Engineering Science and Technology Division, Oak Ridge National 
                               Laboratory
    Good afternoon. Thank you for inviting me to discuss the need to 
formulate effective policies to significantly increase motor vehicle 
fuel economy. The views I express today will be entirely my own and do 
not necessarily reflect the views of Oak Ridge National Laboratory or 
the Department of Energy.
    Our transportation system consumes more petroleum than any other 
country in the world, on average 6,300 gallons of oil per second. It 
produces more climate changing carbon dioxide emissions than any other 
country in the world except China. There is good reason to be concerned 
about the sustainability of conventional petroleum as a source of 
energy for the world's transportation system. More than one fourth of 
all the petroleum consumed in all of human history was consumed in the 
past ten years. Both the International Energy Agency (IEA, 2006) and 
the ExxonMobil Corporation have predicted that by 2010 conventional oil 
production outside of OPEC nations will peak or reach a plateau. If we 
continue on our present path, only OPEC or more carbon intensive 
unconventional fossil energy sources will be able to supply the world's 
growing demand for liquid fuels.
                  why do we need fuel economy policy?
    For too long we have ignored the urgent need to reduce our 
petroleum dependence, protect the global climate and chart a course 
toward a sustainable energy system. For the past twenty years we have 
spent the technology that could have been used to raise fuel economy to 
instead increase horsepower and vehicle mass. Since 1987 horsepower is 
up 85% and mass over 25%. In part, this is because consumers value 
acceleration and speed. But it is also because car buyers undervalue 
fuel economy. Raising the fuel economy of passenger cars and light 
trucks will not by itself solve our energy dependence, greenhouse gas 
emissions and sustainable energy problems. But significantly increasing 
vehicle efficiency is an essential component of any meaningful strategy 
to address these important goals.
    How do we know that consumers undervalue fuel economy? Consumers 
say so.
    Consumers' responses to survey questions indicate a willingness to 
pay for only about 2 years of fuel savings. Half of a random sample of 
U.S. households was asked how much they were willing to pay for a fuel 
economy improvement that would save them $400 per year in fuel costs. 
The other half was asked how much money they would have to save each 
year in fuel costs to justify a $1,200 increase in the price of a 
vehicle. The average payback periods implied by consumers' answers to 
these questions were roughly 2-2.5 years, regardless of which way the 
question was posed. The published literature on consumer payback 
periods for fuel economy improvements is almost non-existent. However, 
such short payback periods are entirely consistent with the larger 
literature on consumers' preferences for other energy-using durable 
goods.
    Figure 1.* Consumers Inferred Payback Periods for Fuel Economy 
Improvements Source: Opinion Research Corporation, Caravan Survey for 
the U.S. Department of Energy, May 20, 2004.
---------------------------------------------------------------------------
    * Figures 1-3 have been retained in committee files.
---------------------------------------------------------------------------
    Manufacturers say so. Some say that consumers consider only the 
first 50,000 miles of fuel savings. Other manufacturers have told me 
they believe payback periods of 2-4 years accurately reflect consumers' 
willingness to pay. I have yet to find a manufacturer who believes that 
consumers value the discounted present value of fuel savings over the 
full lifetime of a vehicle. What manufacturers think consumers are 
willing to pay is important because it is they who make the decisions 
about vehicle design and the use of fuel economy technologies.
    Scientific research says so. What little scientific research has 
been done on the subject provides strong evidence that the simple model 
of an economically optimizing consumer who compares the cost of 
improved fuel economy to the discounted present value of fuel savings 
does not apply to consumers' decisions about fuel economy. Detailed 
interviews of 57 vehicle-owning households in California covering the 
complete histories of their car-buying decisions found not one that did 
any comparison of the value of fuel savings versus its cost. The U.C. 
Davis researchers concluded: ``When consumers buy a vehicle, they have 
neither the motivation nor the basic building blocks of knowledge to 
make a calculated decision about fuel costs.'' (Turrentine and Kurani, 
2004, p. 2)
    It's not that consumers are irrational or uninformed. In fact, 
there is relatively little net gain (or loss) for consumers from 
increased fuel economy over a wide range of higher fuel economy levels. 
The National Research Council (NRC, 2002) Committee's estimates of the 
cost of increasing the fuel economy of an average passenger car, 
together with the present value of future fuel savings are plotted in 
figures 2 and 3 for gasoline prices of $1.50 and $2.00 per gallon 
(constant 2000 $). The economically rational consumer is concerned with 
the net value of the fuel economy improvement: the present value of 
fuel savings minus the increased vehicle price. If the price of 
gasoline is $2/gallon, as shown in Figure 2, almost $500 in net value 
can be gained by increasing miles per gallon from 28 to 32. But there 
is very little difference in net value between 32 and 41 mpg, about 
$100 or so. Figure 3 shows the same calculations at $1.50 per gallon. 
There is perhaps a difference of $250 in net value between 28 and 40 
miles per gallon. Of course, the consumer doesn't know what the future 
price of gasoline will be any more than I do.
    Figure 2. Net Value of Fuel Economy Improvement to Car Buyer Using 
the NRC 2002 Fuel Economy Cost Estimates and Assuming Gasoline Costs 
$2.00 (Constant 2000 $).
    Figure 3. Net Value of Fuel Economy Improvement to Car Buyer Using 
the NRC 2002 Fuel Economy Cost Estimates and Assuming Gasoline Costs 
$1.50 (Constant 2000 $).
    In addition, it is rare that a consumer finds a clear trade-off 
between fuel economy and cost. Higher fuel economy may come with a 
smaller engine, a manual transmission, or a completely different model. 
It's up to the consumer to infer what the price of higher fuel economy 
really is. Finally there is substantial uncertainty about the actual 
fuel economy a car will get on the road. Even if the EPA estimate is 
accurate on average, any given motorist might get 7 mpg less or 7 mpg 
more in actual use.
    From the manufacturer's perspective, moving from a sales-weighted 
average of 28 to 40 miles per gallon would require completely 
redesigning all product lines, a project that would take 8-10 years and 
billion of dollars for engineering and retooling; all for a fuel 
economy increase about which individual car buyers are likely to be 
indifferent.
    The NRC (2002) fuel economy study considered the undervaluing of 
fuel economy in their cost-efficient fuel economy calculations. (A fuel 
economy increase was considered cost-efficient if the marginal cost of 
the increase was less than or equal to the marginal benefit in fuel 
savings to the consumer). In estimating the cost-efficient levels of 
fuel economy achievable by near-term technologies, the NRC report 
considered two alternative ways consumers might value fuel economy. One 
assumed that car buyers compare the discounted present value of fuel 
savings over the full life of a vehicle to increased cost of fuel 
economy technologies needed to achieve it. The other assumed car buyers 
were willing to pay for technologies with a simple payback period of 
three years or less. Using the full lifetime method and assuming 
gasoline priced at $1.50 (constant 2000 $) per gallon, the NRC 
Committee estimated that fuel economy improvements of 12% to 27% were 
cost-efficient for passenger cars, and from 25% to 42% for light 
trucks; the larger the vehicle, the larger the estimate percent fuel 
economy improvement. However, using the simple 3-year payback rule, the 
cost-efficient fuel economy changes ranged from -3% to +3% for cars and 
2% to 15% for light trucks. Valuing fuel economy as both consumers and 
manufacturers say they do, little or no improvement was justified.
    In June of 2006, at the request of Senators Biden, Lugar and Obama, 
I recalculated cost-efficient fuel economy levels using the NRC 
Committee's spreadsheet model but assuming gasoline prices of $2.50 and 
$3.05 (current $) per gallon and accounting for the discounted present 
value of fuel savings over the full lifetime of a vehicle. At these 
prices, the overall cost-efficient fuel economy improvements for the 
light-duty vehicle fleet were 41% and 50%, respectively.
    Finally, the consumption of oil produces additional costs that are 
of great significance to us as a nation but are generally not 
considered by individuals in their car purchase decisions:

          1. Economic costs of oil dependence
          2. Military, strategic and foreign policy costs of oil 
        dependence
          3. Climate change impacts of carbon dioxide emissions
          4. Other environmental impacts

    By my estimates, the economic costs of oil dependence alone 
exceeded $300 billion last year. Military and foreign policy costs are 
extremely difficult to measure in dollars but in my opinion they are at 
least as great a problem for our nation. All of these additional costs 
of oil use are what economists call public goods (or bads). In general, 
consumers give them little or no weight in their individual purchase 
decisions. Such problems must be addressed by public policy if they are 
to be solved.
                        what policies will work?
    While there are many policies that can reduce transportation 
petroleum consumption and greenhouse gas emissions, I will focus on 
those that can have the greatest impact on new vehicle fuel economy: 
fuel economy regulation, fuel economy fees and rebates (``feebates''), 
the price of gasoline, and research and development of new automotive 
technologies.
    If the market for fuel economy were efficient, taxing gasoline 
would be an efficient solution. Since the market for fuel economy is 
not efficient, many governments have chosen to adopt fuel economy 
standards. The European Union, Japan, China, Canada, Australia, South 
Korea and the United States all have fuel economy standards for light-
duty vehicles (An and Sauer, 2004). Japan has also recently 
successfully implemented fuel economy standards for heavy trucks. In 
many of these countries gasoline prices exceeded $4 and even $5 per 
gallon last year (EIA, 2006, table 11.8). Yet fuel economy standards 
are still needed because of the inefficiency of the market for fuel 
economy and because markets are not concerned with the public goods, 
such as energy security and preserving the global climate. Raising 
gasoline taxes is a less effective way to increase fuel economy than 
standards or feebates. Nevertheless, higher fuel taxes are an important 
complementary policy because they send a consistent message to 
consumers that reducing fuel consumption is important, they mitigate 
against the very small increase in driving that fuel economy increases 
would otherwise produce, and they can be used to offset the loss of 
revenues to maintain and improve transportation infrastructure that 
would otherwise occur.
    Fuel economy and greenhouse gas emissions standards can take many 
forms. Japan and China's fuel economy standards vary with vehicle 
weight. The EU's greenhouse gas standards are a voluntary agreement on 
an industry-wide target between the government and industry. The U.S. 
Corporate Average Fuel Economy Standards require the sales weighted 
harmonic mean fuel economy of a manufacturer's imported and domestic 
passenger car fleets to meet a single fuel economy target. The target 
is the same for all manufacturers regardless of the types of vehicles 
they sell. The newly reformed light truck fuel economy standard assigns 
each manufacturer a different target depending on the ``footprint'' 
(wheelbase time track width) of the trucks it sells. The new reformed 
standard is likely, in my opinion, to prove to be an important and 
valuable innovation that could be extended to include the passenger car 
standards in a unified system. Unfortunately, the NHTSA did not do a 
thorough study of how vehicle designs might change under the new 
reformed standards and what the consequences of such changes might be. 
This study still needs to be done if we are to be confident that the 
new reformed system will not have significant unintended consequences.
    Feebates are a market-based policy that circumvents the market 
failure of undervaluing fuel economy. A feebate system imposes fees on 
high fuel consumption vehicles and gives rebates to low fuel 
consumption vehicles. Fees increase in proportion to the gallons per 
mile by which a vehicle exceeds a target value and rebates increase in 
proportion to the gallons per mile by which a vehicle's fuel 
consumption is below the target value. Because the market signal is 
given at the time of vehicle purchase, feebates avoid the market 
failure that makes gasoline taxes relatively ineffective in promoting 
fuel economy. Today we have a partial feebate system in the form of 
gas-guzzler taxes that apply only to passenger cars.
    Feebates have certain advantages over fuel economy standards. 
Because a fee avoided or a rebate gained is always valuable, there is a 
continuing incentive for manufacturers to adopt the latest technologies 
and apply them to improving fuel economy. Published studies show that 
feebates, like fuel economy standards, will work almost entirely 
through the adoption of fuel economy technology rather than by shifting 
the mix of vehicles sold. Feebate systems can be designed to be revenue 
neutral, revenue enhancing or a net cost to the government and net 
subsidy to industry and consumers. An appropriately designed feebate 
system can actually increase the sales revenues of vehicle 
manufacturers.
    Feebates have the disadvantage that the quantity of fuel economy 
improvement is not certain, as it is with a fuel economy standard. 
Also, depending on how the feebate system is designed, some 
manufacturers will be net receivers of rebates while others will be net 
payers of fees. Such effects can be reduced by designing attribute 
based feebate systems, in the same way that the current light-truck 
fuel economy standards are adjusted according to the sizes of light 
trucks.
    Future technological advances will expand the possibilities for 
efficiency improvement and substitution of clean alternative energy 
sources if industry, academia and government aggressively pursue 
research and development. I will not dwell on the importance of 
research and development of advanced automotive technologies but simply 
note that continued technological progress is essential. The 
technologies available today are amazing improvements over technologies 
available three decades ago. Still, they are not up to the task of 
reducing transportation's greenhouse gas emissions to acceptable levels 
nor of achieving sustainable, secure energy for transportation in the 
21st century. To accomplish these goals we will need advanced vehicle 
and fuel technologies, and the sooner the better.
                               references
    1. An, F. and A. Sauer, 2004. ``Comparison of Passenger Vehicle 
Fuel Economy and Greenhouse Gas Emission Standards Around the World'', 
Pew Center on Global Climate Change, Arlington, Virginia, December, 
2004.
    2. International Energy Agency (IEA), 2006. World Energy Outlook 
2006, OECD, Paris.
    3. National Research Council (NRC), 2002. Effectiveness and Impact 
of Corporate Average Fuel Economy (CAFE) Standards, National Academies 
Press, Washington, D.C.
    4. Turrentine, T. and K. Kurani, 2005. ``Automotive fuel economy in 
the purchase and use decisions of households'', presented at the 2005 
Annual Meeting of the Transportation Research Board, Washington, D.C., 
January, 2005.
    5. U.S. Department of Energy, Energy Information Administration, 
2006. Annual Energy Review 2005, DOE/EIA-0384(205), Washington, D.C.
    6. U.S. Environmental Protection Agency (EPA), 2006. ``Light-Duty 
Automotive Technology and Fuel Economy Trends: 1975 through 2006'', 
EPA420-R-06-011, Office of Transportation and Air Quality, Ann Arbor, 
Michigan, July, 2006.

    The Chairman. Thank you very much.
    Why don't we do 5-minute rounds, and then if people still 
have questions we will do another 5-minute round.
    Let me get started. Dr. Anderman, you in your testimony 
make reference to this U.S. Advanced Battery Consortium, and I 
think also urge that the Government, the Federal Government, do 
much more to promote battery, advanced battery development for 
use in vehicles. What has been the problem with getting that, 
making the necessary progress? You indicate that we are behind 
Japan, we are behind Korea, and we are behind these other 
countries. Is it just a lack of Federal funds that are going 
into this or is there some other failure that is a little 
harder to get to?
    Dr. Anderman. I will start saying that under the U.S. 
Advanced Battery Consortium significant advances have been made 
with lithium ion battery technology. I also said that at the 
cell level chemistry U.S. and European expertise is quite high, 
and Canadian. The problem here is that there is really no high-
volume manufacturing of lithium ion batteries in the United 
States. It does not exist. And the step to go from a cell 
chemistry to competitive high-volume manufacturing of lithium 
ion batteries is a very big step. Nobody has done it in the 
United States yet.
    So the funds have been used well and there has been 
significant improvement. Companies that received some of the 
funds made significant steps forward. The car companies 
increased their understanding of how the technology works. But 
we still do not have U.S. manufacturing.
    The other comment I will make is that the difference 
between the requirement to make a conventional hybrid work and 
a plug-in hybrid work is very large, and I think we are right 
on the edge of having lithium ion being a viable technology for 
conventional lithium ion. That is not the case for plug-in.
    The Chairman. Thank you.
    Mr. Logue, let me ask you. You say, one of your 
recommendations is that the Congress should set fuel efficiency 
standards annually for medium and heavy-duty vehicles. You are 
essentially embracing something akin to CAFE, where we say this 
is the standard and we are not giving the administration 
discretion to change it or anything else, but to implement it.
    Mr. Logue. Absolutely. What we are looking for is to set 
the efficiency standards for both emissions as well as the fuel 
economy, because what we have seen recently in the past years 
is as the efficiencies have improved on emissions it has come 
out of the fuel economy. So we are looking for both. We want to 
have regulations that require not only continued emissions 
improvement, but also fuel economy improvement at the same 
time, which will require and drive a lot of change towards the 
hybrids and so forth, which can turn that product around.
    At the same time, on the large trucks the reality is 
hybrids at this point here on large trucks are not out there. 
We are looking on the large to try to find a way to continue to 
improve emissions on the large trucks and fuel economy, which 
will drive alternate solutions going forward on the large 
trucks.
    The major focus for us is on that medium truck, which is 
our pickup and delivery type, and try to find ways to keep both 
going up, because it will cost us more. We understand that from 
a capital perspective. But ideally, operating costs will come 
down as you improve your mile per hour and so forth. And that 
improvement comes right back to us on our stops per hour and so 
forth.
    The Chairman. Let me ask Ms. Lowery and any of the rest of 
you that want to comment. California is working to develop what 
they are calling a low carbon fuel standard, which is a new 
concept to me, but seems to try to get at the emissions issue, 
but also I believe would have a substantial impact on vehicle 
fuel efficiency. Are you familiar with that proposal and if so 
do you think it makes sense as a way to begin regulating this 
if CAFE is not the right way to go?
    Ms. Lowery. I am familiar with it. The executive order was 
pretty broad and general, so we will look for further details. 
They are sending it back to the agencies to look at what could 
be accomplished there. But when you focus on fuels it is very 
helpful, just like the discussion we have had here on 
renewables fuels. If we really want to look at energy diversity 
as a country, we do have to look at both fuels and the 
technology on the vehicles. So directionally it makes a lot of 
sense to try to create momentum around renewable fuels, which 
is what the low carbon focus would do.
    The Chairman. Do you think it would also result in 
significant vehicle fuel efficiency?
    Ms. Lowery. Well, it certainly would reduce greenhouse 
gases, and it would also displace petroleum because of the low 
carbon content, that you would have more E-85, biodiesel, E-10. 
You would have a lot more diversity in the fuels for 
transportation sector. So how it all plays out with respect to 
the specific fuel efficiency, we would have to see the details 
of that.
    The Chairman. Anyone else want to comment on that? Yes, Dr. 
Greene?
    Mr. Greene. I think first of all it is a good approach 
because it is a performance-based standard and it allows the 
fuel suppliers to figure out what the best way to do it is. To 
the extent that the low carbon fuels added or blended with 
petroleum fuels are alcohols like ethanol, it will actually 
decrease fuel economy on a volume basis somewhat because of the 
lower energy content of alcohols.
    The Chairman. Thank you very much.
    My time is up.
    Senator Domenici.
    Senator Domenici. Thank you very much, Mr. Chairman. Might 
I say that, for those who really want to pay attention and 
follow up, this is an extraordinary record. I compliment you 
for the quality of the witnesses. I contributed a couple of 
thoughts, but most of them were thought up by you and your 
staff, and they are terrific. I think what has gone on record 
should just be the beginning. We could use them a little more. 
I am sure they would be glad to have that happen if they saw it 
being worthwhile.
    Ms. Lowery, your testimony says that the automobile 
industry is in need of some tax credits of some type so they 
can move ahead in the battery area. What are you talking about? 
Does General Motors need some tax incentives that we are 
unaware of to move ahead in this, in the field of battery, the 
growth of new kinds of batteries and getting them operative 
into the American market?
    Ms. Lowery. There are actually a couple pieces of 
incentives necessary. So we need government incentives with 
respect to the battery research and development as well as 
manufacturing, which is critical because, as the testimony 
shows, it is based in China, Japan, and Korea right now.
    Senator Domenici. What is?
    Ms. Lowery. Battery development----
    Senator Domenici. All right, battery development.
    Ms. Lowery [continuing]. With respect to actual high-volume 
manufacturing. The chemical work is going on here through U.S. 
ABC and a number of the fine companies that are working very 
hard on lithium ion. But more research and more incentives for 
manufacturing of the supplier of batteries is very important 
for the energy storage type of battery for plug-in and for----
    Senator Domenici. Would you stop right there?
    Have you submitted this kind of request to some part of the 
U.S. Government before today so that they are working on this? 
Or where are we in terms of USA versus General Motors 
communication, communicating with reference to this problem?
    Ms. Lowery. Sure. Ford, General Motors, and DCX have been 
working through the U.S. ABC Consortium and looking where 
funding could be used to develop batteries and do the 
manufacturing piece. There was a submittal to Mr. Al Hubbard 
that gave some information with respect to what would be 
helpful in R&D and manufacturing. Then there was additional 
discussion among the companies to what would be the best use of 
those funds.
    Senator Domenici. Now, has anything come of that 
discussion?
    Ms. Lowery. Not that I am aware of.
    Senator Domenici. How long ago was the discussion? I hate 
to sound like a cross-examining attorney, but did you give it 
to Hubbard a few months ago?
    Ms. Lowery. I believe it was a few months ago. I would have 
to check on the exact date. I was not part of the submittal 
process.
    Senator Domenici. Well, ma'am, let me suggest on behalf of 
this committee, if the chairman does not think this is 
untoward, you ought to submit it to us.
    Ms. Lowery. Absolutely.
    Senator Domenici. We are going to have to pass it. We do 
not find very much volunteerism on the part of this 
administration when it comes to incentives. We have to write 
them and pass them with precision or we never get them used. So 
just an idea of what we are up against. If you are talking 
about tax credits, it takes forever to get out of OMB. They 
have a propensity, for some reason, to find it extraordinarily 
appropriate to sit on their butts when we ask them for 
something to do with tax credits. We cannot find them. Senator, 
they are busy.
    But we are going to--we have to find them because we do not 
have any money going into where it should be going. Here is 
another area that we have not heard about.
    Now, John--how do you say your last name?
    Mr. German. ``JERR-man,'' just like the people.
    Senator Domenici. German. That is a good name, right?
    Mr. German. My father thought so.
    Senator Domenici. Did you say something in your testimony 
about the Federal Government putting some incentives forth in 
this area?
    Mr. German. There is a lot of potential ways to do 
incentives. The devil is in the details. It really depends on 
what you want to accomplish. Certainly advanced batteries, 
advanced energy storage, are going to help not just plug-ins, 
but also fuel cells and conventional hybrids. It is certainly 
an area of high priority.
    Senator Domenici. Well, we are having a hearing today. We 
have all of you here and the whole purpose of the chairman 
calling it is to find out how we can do a better job of getting 
more miles per gallon in automobiles and trucks, in our 
transportation sector. The purpose of bringing you here is to 
ask you how to do that, what we should do.
    Mr. German. In terms of battery research, the Department of 
Energy held a workshop last year outlining the needs. They did, 
in our view, they did an excellent job of defining the 
challenges and what should be done, and I think Congress simply 
needs to support them.
    Senator Domenici. Well, I guess we, Mr. Chairman, ought to 
find out what that is. I do not know what they are doing, but 
that does not mean they are not doing something very wonderful.
    I will wait and do mine later after you have given them a 
round.
    The Chairman. All right, thank you.
    Senator Menendez is next.
    Senator Menendez. Thank you, Mr. Chairman. I want to thank 
all the panelists for their testimony.
    Ms. Lowery, I notice that your testimony does not say 
anything about CAFE standards and I wanted to know what GM's 
position is on the Government raising fuel economy standards?
    Ms. Lowery. Actually, I do mention that we have a strong 
commitment to improving the internal combustion engine fuel 
efficiency, which the men and women at General Motors, 
engineers, are working hard on that all the time.
    With respect to CAFE, it is a very complex subject and it 
is very difficult to just pick a number. But with respect to 
what has been discussed so far, we do think that the truck 
reform was a very extensive rulemaking, which we did get into 
this attribute-based, which we think is a much fairer system, 
and that we would be willing to look at reform of car CAFE as 
well.
    Senator Menendez. So does that mean that GM supports the 
possibility of raising CAFE standards or opposes it?
    Ms. Lowery. We do not have a specific number with respect 
to where we think we should go. We think that in order to 
reduce petroleum consumption we need to look at all of the 
various aspects of the vehicle. So we have some limitations 
with CAFE, given some of the inequities that have been in the 
system for some time with respect to a full line manufacturer 
such as General Motors.
    Senator Menendez. You know, I always am concerned because I 
read the administration's initiatives. I think the New York 
Times today called it a ``faith-based fuel initiative.'' That 
basically I think describes it pretty well. In the past, I've 
looked at some of the testimony that has been offered here and 
it seems that we call upon the Government to fund major efforts 
in battery and fuel cell research, we want them to expand 
biofuel infrastructures, and do a whole host of other things. 
But it seems that we are expected to do so without very much in 
return in the form of higher efficiency standards by the 
industry, and I think this is a shared responsibility.
    I hope we do not hear that it is a consequence to the 
industry. The last time we heard those statements, we actually 
had an industry that, notwithstanding an increase in fuel 
efficiencies, cars kept getting bigger and heavier and heavier, 
and at the end of the day in some respects the industry when it 
was challenged had a rebirth. Your industry can do amazing 
things when it is challenged. But when it is not challenged it 
seems not to pursue it. So we would love to continue to pursue 
that conversation with you and others in the industry as well.
    I have a question particularly on the hydrogen versus the 
plug-in hybrid efficiencies. For those who may have some 
expertise in this, maybe you can elucidate it for me. Has 
anyone looked at the overall efficiencies of fuel cells versus 
plug-in hybrids? It seems to me that if we do not use fossil 
fuels, fuel cells require taking electricity, using it to split 
water into hydrogen, compressing and transporting the hydrogen, 
then using the hydrogen to generate electricity on the back 
end. And each part of those steps obviously involves some loss 
of energy, not to mention the costs of developing a hydrogen 
fueling infrastructure.
    So with plug-in hybrids you generate electricity, you 
transmit it over existing lines, and you bring it straight into 
the car. There is some transmission loss, but it seems to me 
like that is a more efficient process overall. So has anyone 
looked at the overall costs and efficiencies of the two 
processes head to head?
    Mr. German. Not that I am aware of. But keep in mind that 
the transmission losses in electricity generation can be very 
large. In some cases only about a third of the energy actually 
gets to the end. But as you correctly pointed out, both the 
plug-in hybrid vehicle itself and the hydrogen vehicle, the 
vehicles are highly efficient. Fuel cells are 60 percent 
efficient. There is not that much loss in the end. It is the 
upstream, what does it cost to make it, transport it, is the 
real issue.
    So if you are looking in terms of simply global warming or 
total energy, there is not necessarily a lot of savings to 
them, but what you do get is a lot of fuel displacement. It is 
using something besides oil to provide the energy. That is the 
primary benefit.
    Senator Menendez. Dr. Anderman.
    Dr. Anderman. There is work in the national labs both in 
Argonne National Lab and the National Renewable Energy 
Laboratory in Colorado looking at that. The complexity here is 
it depends what is the source of electricity and it depends how 
you make hydrogen. So it is impossible to give a single answer.
    I will just say that ballpark the efficiency when you look 
at the total system, depending on what is the source of 
electricity and what is the source of hydrogen, they are very 
similar. If you consider the considerable investment, risk, 
infrastructure, unknown in fuel cell compared to plug-in 
hybrid, it is definitely less likely to help our energy 
security in the next 20 years.
    Senator Menendez. Thank you, Mr. Chairman. I hope that we 
will look at this issue before we go down the path of spending 
a lot of money on something that, unless we have the comparison 
to get a real hold of understanding what is most efficient and 
pursuing this, we can spend a lot of money and find out that we 
are not necessarily headed in the best direction.
    Thank you.
    The Chairman. I think you make a very good point.
    Senator Smith.
    Senator Smith. Thank you, Mr. Chairman.
    Ladies and gentlemen, thank you for being here. You 
answered a number of my questions already with your testimony, 
but, Dr. McManus, I wonder if you have researched the cost of 
owning and maintaining advanced technology vehicles over the 
life of the vehicle? Dr. Anderman indicated that some of these 
technologies will not last the life of the car. What does that 
mean in practical dollars and cents terms to a consumer?
    Dr. McManus. Well, I have not done that kind of research on 
what the costs could be. But there is speculation about 
batteries in particular costing a lot to replace. I do not know 
that we have actually had that happen with the current 
generation of hybrids that are out there, that they have 
actually been replaced. John German might be able to answer 
that if they have.
    But there is an uncertainty about what the costs are going 
to be. For example, the Automotive Lease Guide Company would 
not put a residual for the Prius because they were not sure; it 
was a new technology. However, research that we did when I was 
at J.D. Power and Associates suggested that the residual for 
the Prius was about 2 to 3 percent higher than the residual for 
a Camry, and that is quite significant. But it was the--it 
actually had a better residual in the used vehicle market. I 
think that is an indicator of the value and how long people 
think it will last.
    Senator Smith. Well, you know, to Senator Menendez's 
question, another one that I have been asking myself in 
listening to you relates to infrastructure, whether it is 
hydrogen or electricity, and perhaps the age of plug-in 
vehicles. There are large regions of this country as we speak 
right now that are always on the edge of blackouts, and I do 
not know if anyone has put a pencil to what it means in terms 
of power loads that will be necessary to get us to being able 
to support this kind of thing.
    I mean, everyone wants energy at an affordable price, but 
nobody wants it produced near them. So we have a heck of a time 
getting the infrastructure in terms of power. Shoot, they are 
even talking about tearing out hydroelectric dams in my part of 
the world.
    Do any of you know of any research on what is out there in 
terms of what we are going to have to do as a Congress to get 
this infrastructure? Dr. Greene, do you?
    Mr. Greene. Yes, this has been addressed recently in 
studies by the University of California-Berkeley and the 
Electric Power Research Institute. Both presented papers at the 
recent Transportation Research Board meeting. It depends 
entirely on when the customer chooses to recharge the vehicle.
    Senator Smith. You probably have to do it at night.
    Mr. Greene. If you recharge at night, then there is plenty 
of capacity. If you recharge during the peak periods, then you 
have to build new capacity.
    Senator Smith. Dr. Greene, you say that consumers generally 
do not consider fuel efficiency when they buy a car, which 
probably argues why the Federal Government ought to be pushing 
the industry to increase technology.
    To your point, Dr. McManus, you discuss the financial 
problems the Big Three are in right now. I wonder what kind of 
financial health other companies are that do produce fuel 
efficient vehicles. How does GM compare to Toyota right now?
    Dr. McManus. Not very favorably.
    Senator Smith. So have we done them backhanded harm by not 
pushing CAFE standards or some other mix of incentives to get 
them--are there not a lot of auto workers in Detroit who would 
be employed today if we had done this?
    Dr. McManus. Well, I do not know if it is that simple, but 
they would be better off if they were making more fuel 
efficient vehicles now. I think the down side of having fuel 
efficient vehicles in your fleet is less serious than the down 
side of having inefficient vehicles in your fleet, and 
especially when you look at the fact that the large SUVs that 
are the biggest gas guzzlers are produced here and they really 
only have a market here. So when the market here slows down a 
little bit with the fuel price, we are hit very hard. 
Communities and workers are hit hard, whereas other companies 
can move vehicles or can source vehicles from other countries. 
We cannot sell those vehicles in other countries in large 
enough numbers. We are very inflexible here in terms of what we 
make, and that is not healthy.
    But I do not know if that can be addressed just by looking 
at their health now.
    Senator Smith. Well, it probably can not. It is probably 
more complex than that and I probably ought to give Beth Lowery 
and John German a chance to answer that, because it does seem 
to me that maybe we need to help you help yourselves by pushing 
this, these standards in some new mix. I know CAFE is a very 
blunt instrument, but it surely seems to me that we are not 
helping you by backing off from pushing you.
    Ms. Lowery. Well, certainly we have had our challenges at 
General Motors. We are in the midst of a major turnaround 
addressing a number of issues. It is important with respect to 
the record we have on fuel economy. We have more models that 
get 30 miles per gallon on the highway than any other 
manufacturer. We are a broad portfolio of vehicles. So we have 
from a small vehicle to very large vehicles.
    So we tend to get painted as someone that does not 
understand fuel efficiency. We understand it very much. We have 
people that are working very hard every day to improve the 
internal combustion engine and transmissions and putting large 
investments in all the advanced technologies, including what we 
can do today.
    But it is not as simple as that. CAFE is the mix of what is 
sold in the market. Certainly people have valued functionality, 
safety, performance, and markets are a very difficult thing to 
predict and certainly when the high price of gasoline happened 
there was a major shift very quickly. You know, in our industry 
it is not easy to turn very quickly to a totally different 
portfolio.
    But certainly we do have the focus on fuel efficiency. 
Again, the issues that we have been dealing with are not simply 
about whether General Motors is selling fuel efficient vehicles 
or not. We certainly have issues of legacy costs, health care, 
the currency issues, the trade imbalances. There is a whole 
list of issues that we are addressing one by one and obviously, 
with help from government, are making progress on a number of 
those as well, and we look forward to continuing to work 
together.
    But we need to make sure we stay close to the market and 
close to what the U.S. consumer is interested in.
    The Chairman. Mr. German, did you wish to make a comment?
    Mr. German. From Honda's point of view, we just have a 
culture of being a technology leader. We are consistently 20, 
25 percent over the CAFE standards. We are not affected by 
them. Even if you adjust for size, if you look at the NHTSA's 
reformed light truck standard for 2011, our 2006 light truck 
fleet essentially meets that size-adjusted 2011 standard. So 
that is just our philosophy, is to be a technology leader.
    The Chairman. Senator Salazar.
    Senator Salazar. Thank you very much, Chairman Bingaman. 
Thank you for holding this hearing on this important subject.
    Let me first ask a question to Mr. Logue. For me, when I 
look at all this energy debate that we have had here for the 
last several years and maybe the energy debate in the last 30 
years, there are a lot of ideas and sometimes people would say 
a lot of hot air and sometimes a lot of inaction that takes 
place.
    Let me commend your company because with the 100 hybrid 
vehicles that you have out on the road--I was reading the 
information that was given to me. You have these vehicles, 42 
percent better fuel economy, 30 percent reduction in 
CO2 emissions, 96 percent reduction in particulate 
matter. So I think you are leading the way.
    I am disappointed, frankly, as even though we try to work 
as well as we can on a bipartisan basis--the 2005 Energy Policy 
Act came out of this committee I think with only one no vote 
and a bipartisan vote coming out of the Senate, I think with 82 
votes. And yet, 2 years later we do not have a Department of 
Transportation that has moved forward with the promulgation of 
the rules that would implement the tax credit for commercial 
vehicles so that you can buy hybrids, so we can further 
penetrate that market.
    So it seems to me that what we have here is an Executive 
Branch agency that essentially is thumbing its nose at what 
this committee did and what this Senate did. How would these 
Federal tax credits, if they were available to FedEx, how would 
they incentivize your company to do more of the good things 
that you are doing?
    Mr. Logue. Well, I think first of all, I understand they 
are in the final stages of getting that approved, which is 
encouraging. The important thing here is that it is an 
incentive that would allow us to go out there and participate 
in the market. But also, I think we also look at it as a way to 
stimulate the market if we had the tax credits. It is very 
difficult for companies our size and anybody in the medium 
truck range to go out there and buy at the rates that these 
hybrid trucks, the costs that they are today.
    So it is twofold: One, I think it incents us to go out and 
want to participate and buy more. At the same time, we are 
really looking forward to make a market that is going to incent 
the manufacturers to want to go out there and obviously 
participate in that market. I also believe that the 
manufacturers will need some sort of support as well, tax 
incentive or whatever, to also get into that, into the market. 
That is why I tied it to the issue that we also need to make 
sure we are raising the fuel economy regulations as well as the 
emissions, because as you do that you cannot get fuel economy 
when you are trying to take the--when you are driving your 
emissions performance up by taking out of the fuel economy as a 
way of getting there.
    So we need to make sure that we put it on both, and then 
from there with the tax credits it would allow us to go out 
there and participate more. Again, we look at it on both sides 
of the coin. We want the manufacturers to be incented to buy 
them, because again at today's prices it is not cost effective 
for a company to go out there and purchase those trucks at that 
level.
    We did it to make sure that we understood, could these 
trucks work for us, are they really that efficient, and more or 
less be a proving ground to validate. We have done that, and we 
believe now it is time to make sure that we have the support to 
change the industry. The numbers speak for themselves. They do 
work and we need to make sure that we are driving--we view our 
role to be the catalyst driving that behind it, and again we 
look for your support.
    I think this committee here, it is a great opportunity for 
you to really make a difference I think in this part of the 
industry. Again, we are very small in the scheme of things 
compared to the automotive, but at the end of the day we do 
burn a lot of fuel and there is an opportunity to make some 
significant savings with today's technology.
    Senator Salazar. Thank you very much, Mr. Logue.
    I know we have another round of questions that I hope we 
end up getting to. But there are a number of bills that have 
been introduced in this Senate by a whole host of people. Many 
members of this committee are co-sponsors with Senator Bingaman 
of legislation that came out of an effort called Set America 
Free and it is S. 339, which essentially helps incentivize the 
renewable fuels and the distribution of renewable fuels as well 
as higher efficiencies with vehicles, and it includes a broad 
measure of the Senators from Republican to Democrats, 
conservatives to progressives.
    I would like each of you, if you can in one or two 
sentences, because I do not have much time, to tell me what it 
is you think we as a Congress could do to most achieve the 
objectives of enhancing renewable fuels and their use as well 
as fuel efficiency? You do not have much time, so one sentence 
each, basically. Beth?
    Ms. Lowery. Support for renewable fuels I think is the most 
important thing for displacing petroleum and really making a 
difference in getting a diversity of supply for transportation.
    Senator Salazar. John.
    Mr. German. Honda is on record as supporting increases in 
the CAFE standards. We think this is the most effective way to 
reduce fuel use. On the fuel side, we are certainly supportive 
of renewable fuels, but until we see how development of 
cellulosic material goes that is limited, so it is something 
that we need to watch and could be effective, but is not nearly 
as certain as CAFE.
    Senator Salazar. May I have 1 more minute, Mr. Chairman?
    The Chairman. Yes.
    Senator Salazar. The question to you, Mr. Anderman, the 
same question.
    Dr. Anderman. Incentivize the growth of the hybrid vehicles 
market so we can actually get to the level where we have an 
impact on energy security in the next 10 years, and build the 
understanding of the technologies that possibly from there we 
can go to plug-in as well, because the best incentive you can 
give for plug-in is create the industry by moving the lithium 
ion into the regular hybrid market. This will get the capital 
out there looking at that if there is a lithium ion market and 
we invest and then you can move to plug-in.
    Senator Salazar. Mr. Logue.
    Mr. Logue. Set fuel efficiency standards for the medium and 
heavy-duty trucks, continue to push the tax credits that are 
out there for us so that we can make sure these medium trucks 
become cost competitive.
    Senator Salazar. Mr. McManus.
    Dr. McManus. I think the most important thing that can be 
done is to provide incentives for supplier companies to develop 
the technologies, because that is where it is going to be 
developed and they are--they then can sell anywhere, to any 
manufacturer.
    Senator Salazar. Mr. Greene or Dr. Greene.
    Mr. Greene. I think the first thing would be higher fuel 
economy standards, maybe 30 to 50 percent improvement by 2017, 
hopefully with a unified car and truck system based on the 
footprint approach. But as I said, a study needs to be done to 
make sure that there is not stretching of the wheelbase and 
track width with unintended consequences.
    I also think we should go for fuel economy standards for 
medium and heavy trucks, at least as much as the Japanese have 
done with their weight-based standards, which is 15 percent.
    An alternative to all of that is a feebate system, which I 
agree is less likely because it is untested.
    Senator Salazar. Thank you, Dr. Greene.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Thank you to all the panelists today. Some very interesting 
discussion and positive and constructive proposals out there, 
which I think it is fair to say we greatly appreciate.
    Mr. McManus, I want to ask my first question of you. You 
had indicated, I think you said, that it is common to discount 
the evidence that the consumers want fuel economy standards. 
Good discussion raised by Senator Smith in that vein. Everyone 
is talking about increased CAFE right now. The President 
mentioned it in his speech last week. I am a co-sponsor of 
legislation that would increase the passenger car standard to 
40 miles per gallon by 2017.
    Is this doable? Is this too aggressive? Is this--is it 
going to do damage to the industry? Will they produce vehicles 
that the public will not accept? Just give me in your 
experience whether this is a doable goal?
    Dr. McManus. Well, I am not sure about the specific number 
and if it applies to cars and trucks.
    Senator Murkowski. Cars.
    Dr. McManus. Just cars.
    Senator Murkowski. What we are looking at is a study for 
the----
    Dr. McManus. Right, the passenger cars. Then I think that 
is certainly attainable and it would actually help make the 
domestic industry more competitive worldwide.
    Senator Murkowski. What about the safety issues that could 
be raised? I think, Mr. Greene, you kind of hinted in your last 
response there that we must look to that aspect of it, of 
course. Dr. McManus, if we move to the 40 mile per gallon 
standard do we suffer anything from the safety perspective in 
your opinion?
    Dr. McManus. Well, I think it depends on what happens on 
the truck side, too, because what is deadly is variance in the 
weight when vehicles interact. So if the trucks stay bigger and 
the cars get smaller, that--that is where the concern over 
safety arises. So I think it has to be comprehensive. You have 
to look at both cars and trucks, fuel economy and safety 
together.
    Senator Murkowski. Mr. German, you mentioned that Honda 
does support increased CAFE. Have they said--have they set a 
standard? Is 40 miles per gallon attainable from their 
perspective?
    Mr. German. What we have said is that the standard should 
be set by an expert agency like NHTSA. They are the ones who 
can evaluate the tradeoffs between--the rate of technology 
development is very unpredictable. They can see how it is 
going. They can assess that. Lead time is extremely important. 
All these can be balanced off against the safety and the need 
for the Nation to conserve energy and all that.
    But the issues are so complicated that it really takes an 
expert agency like NHTSA to sort them out. And they change over 
time as well.
    Senator Murkowski. Let me ask you, Mr. Logue, because you 
mentioned very clearly your support for a CAFE standard for the 
commercial trucks in your testimony. I am glad that there are 
folks here that are bragging on your company. I was noting in 
your testimony your vehicle fuel usage declined by 3 percent 
from fiscal year 2004 from last year. Knowing how many trucks 
you have out on the road, you guys are certainly figuring it 
out and we want to recognize that.
    I have introduced a bill that would require NHTSA to report 
back to Congress within 2 years on the benefits and the costs 
of imposing such a standard. Do you agree with that approach or 
do you think we just need to move ahead with imposing the 
standard on the trucks?
    Mr. Logue. I think without doubt we need to put standards 
in for the medium and large trucks. We need to set specific 
objectives so that the manufacturers have that objective to go 
out there and meet as we work on their efficiency well. The 
emissions are very important. We all agree with that 100 
percent. But we have got to make sure that it is not a 
tradeoff.
    So we firmly believe that we will not get where we need to 
be unless we set the standards on both sides, which then in our 
opinion will drive the hybrid performance. In hybrid trucks it 
will drive the performance that we all need in the production 
as well as the limitations of the emissions.
    Senator Murkowski. One last question and this is for you, 
Mr. German. This is more of a technical question as it relates 
to ethanol. I understand that it provides less power than 
gasoline. Somewhere between 20, 28 percent more ethanol fuel is 
required to produce as much power as gasoline. My question is 
whether or not that is, my understanding, is correct? And if it 
is correct, is this--does this hold true for cellulosic as 
well? Does it also suffer--buzzers are going crazy here.
    I mean, that is going to make a difference to a consumer if 
they think that they have got to fill up more or they are not 
going to be getting as much power from this cellulosic powered 
vehicle.
    Mr. German. We need to separate the feedstock from the end 
product. Corn, cellulosic material, sugar cane, those are all 
feedstocks, and they can be made into a variety of end 
products, of which ethanol is only one of the end products. 
Another one, British Petroleum and Dupont are building a plant 
in England that will produce nutonal from sugar beets instead 
of ethanol.
    So ethanol, it does not matter what you make it out of. 
Ethanol is ethanol. It has 28 percent lower energy content than 
gasoline, E-85 has 28 percent lower energy content. Ethanol has 
33 percent lower. This means 28 percent lower fuel economy. It 
means 40 percent more trips to the fuel station.
    Honda is very supportive of biomass development. We even 
announced that we are working with an independent company on 
developing cellulosic processes. But we are puzzled by the rush 
to judgment on E-85. There are a lot of potential end products. 
Butanol can be shipped through pipelines, ethanol cannot. 
Butanol has higher energy content. It may prove to be a much 
better fuel in the long run, and for the time being, if you 
look at ethanol from corn, we can easily absorb that into 10 
percent ethanol blends, E-10. There is no need to rush into E-
85 infrastructure right now.
    So what our recommendation is is that the current 
production of ethanol go into E-10 and that we evaluate the 
process of cellulosic development, which would produce a lot 
more fuels that we need to now go into higher blends, but also 
the process of other possible end products such as butanol, 
which would have significant advantages.
    Senator Murkowski. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    We have been informed we have two votes starting up here 
right away. So Senator Sessions has indicated he does not have 
questions right now. I will call on Senator Cantwell for her 
questions and then we will adjourn this hearing, and we 
appreciate all of you being here.
    Senator Cantwell. Thank you, Mr. Chairman. I am sorry my 
colleague from Oregon left because I know that we have had a 
lot of discussion about the electricity grid and about plug-
ins, and I just want to point out that the Pacific Northwest 
Lab just recently released a report saying that the current 
electricity grid capacity could provide capacity for 70 percent 
of our fleet of cars, pickup trucks, vans, and sport utilities. 
So that is a pretty amazing number when you think about it. It 
could basically amount to about the equivalent of 50 percent of 
our imported oil and cut greenhouse gas emissions by an 
estimated 20 percent. Using the current electric capacity that 
is already out there, that is unused. So I think that that 
speaks to, obviously, what we have tried to do before on plug-
ins and maybe where we can go in the future.
    Mr. McManus, you were pretty direct with your testimony. I 
would like to ask you something even more direct. Do you think 
the difference in profitability between Honda and GM had to do 
with these companies' focuses on the choices in car 
manufacturing that they have pursued?
    Dr. McManus. I think there are a lot of factors that make 
them different. It is--right to start, Honda is not as full a 
line manufacturer as GM is. So there is a big difference there. 
However, it was those vehicles that Honda does not make that 
provided GM with most of its profit for a long time, and they 
were the ones that were the most vulnerable.
    So if you look at the different companies in terms of who 
is vulnerable to fluctuations in fuel prices, Honda is probably 
the least vulnerable to highs and lows of fuel prices. They 
will make money and profits during--no matter what happens to 
fuel price. GM and Ford are probably the most vulnerable to 
fuel prices.
    Senator Cantwell. Because they did not, because they did 
not manufacture a line of hybrid cars or alternatives for the 
consumer?
    Dr. McManus. Well, not that. It is because they are 
manufacturing the SUVs, the big SUVs, that have no other market 
in the world than here, and they have very poor fuel economy.
    Senator Cantwell. So just poor fuel economy choices led to 
the two different paths that we are seeing here?
    Dr. McManus. Yes, it was part of it certainly.
    Senator Cantwell. I have a question about composites. We 
did not talk about composites much. The 787 Boeing plane is a 
lighter weight material, 60 percent of the design with lighter 
weight materials, making it much more fuel efficient. I do not 
know if any of the panelists want to talk about this--I thought 
I saw something at Detroit where somebody was coming out with a 
model that might have integrated with some composites.
    I think the Rocky Mountain Institute said that alternative 
fuels and lighter weight materials were key to our getting off 
of foreign oil. Does anybody want to speak to this?
    Ms. Lowery. Sure. I would mention, I think the vehicle you 
are referring to was our Chevrolet Volt concept vehicle. We 
worked with GE Plastics on some new lightweight materials that 
they have in research and development to really make it a 
lightweight vehicle, which obviously does improve fuel economy.
    There is a big difference between the airplanes and use of 
composites and the everyday robustness of our cars and trucks 
on the road. But certainly Rocky Mountain Institute and a 
number of people are doing some research on lightweight 
materials, and certainly at General Motors we have a commitment 
looking at the lightweight materials and how they could be 
incorporated over a period of time into vehicles to improve the 
mass and efficiencies of the vehicle.
    Senator Cantwell. So what is the plan for that car, the 
concept car that you put out?
    Ms. Lowery. The Volt concept car right now is, we are doing 
the product development while the battery development is under 
way. So the lithium ion battery development we have talked 
about so much today is a very important part of that, and as 
that development is taking place we are also doing the product 
engineering. We do not have a specific time frame because of 
the battery development.
    Senator Cantwell. Wal-Mart is committed to increasing its 
efficiency in the truck fleet by 25 percent over the next 3 
years. I think you were talking about something on a larger 
horizon. So are they ahead of you?
    Ms. Lowery. No, we are actually--hybrid vehicles are the 
ones that are showing that, the type of performance that I 
quoted in my earlier statements. They have 90 percent more--
fewer particulates and 40 percent improvement in the fuel 
efficiency and so forth. Those are the hybrids. We are trying 
to get to--we are trying to go out there and stimulate the 
environment to go out there and move.
    We have like 98 hybrids today. We are trying to move so 
that the manufacturer will produce them, because right now they 
are very cost-ineffective and bottom line is if we can continue 
to stimulate that. We know the performance is there and we show 
on these trucks that we can get that type of performance.
    Senator Cantwell. Mr. German, since you have the mantra 
above you to continue to be the technology leader, and you in 
your testimony had some comments about diesel engines, what do 
you see for the biodiesel fuel market? I think at one point in 
time we did in the past administration have an agenda on diesel 
technology that was cancelled when this administration took 
over.
    Do you think we have missed something there? Is Honda ready 
to invest in that line of car investment?
    Mr. German. As far as the diesel----
    The Chairman. Mr. German, why do you not go ahead and 
answer that question. Then Senator Sessions did indicate he has 
thought of some questions, and we have started the vote. So we 
will give him just a few minutes to ask his questions, too.
    Go ahead.
    Mr. German. Just as far as the diesel vehicles, we will be 
bringing out a four-cylinder diesel in about 2 years. We have 
also announced development plans for a V-6 diesel which will go 
into some of our light trucks. We are very optimistic that 
there is a viable diesel market in the United States.
    The biodiesel I am not sure we have time to get into right 
now. I can try if you want.
    Senator Cantwell. Maybe I will follow up.
    Senator Sessions. You can use my time on that because I was 
going to ask about diesels also. Briefly on the biodiesel?
    Mr. German. The advantages of biodiesel is that they can be 
blended into higher concentrations than ethanol can be into 
gasoline. The down side right now of biodiesels is that there 
is no standards for the fuel quality of the biomaterial. So 
that is one thing that is needed.
    There is also a potential concern in that all the 
feedstocks are moving to ethanol, and so right now the 
potential to produce a lot of biodiesel just is not there.
    Senator Cantwell. Could I just put for the record, Mr. 
Chairman, since we broke ground in Washington State--there was 
not 100 million gallons produced in the country, but this 
facility will produce 100 million gallons of biodiesel this 
year. So I think the market is changing and I am glad to hear 
that we need standards because maybe that is something we could 
do.
    The Chairman. Thank you very much.
    Senator Sessions, go ahead.
    Senator Sessions. Well, on biodiesel, I visited an Alabama 
plant. Another one is about to start. The plant that exists has 
I think grown fourfold in the last 3 or 4 years in production. 
But I think you are right, there is a limit to how far that can 
go.
    But on the question of diesel, Ms. Lowery and Mr. German, I 
understand that Europe is now 50 percent diesel and that the 
new diesel engines that the Europeans are using are 25 to 40 
percent more efficient. So how do you respond to that, and 
maybe if there is any legal impediments in the United States 
that slows our ability to utilize more diesel?
    Ms. Lowery. Diesels are a very important technology for 
addressing CO2, and in Europe there is a balance 
between the emissions requirements and the CO2 
requirements that encouraged the production of diesel. There is 
also policies with respect to diesel fuel on the pricing. So 
there was very much an incentive to have diesels in the 
marketplace and you see the results of that.
    Here in the United States, we have the challenging emission 
requirements and so the diesel market is slow to grow here. But 
certainly if we are going to address CO2 emissions 
in this country, it is a technology that needs to be given a 
fair shake with respect to incentives and making sure we are 
doing the right balance on emissions requirements and the 
CO2 piece.
    Senator Sessions. You mentioned the CO2, but it 
would also reduce presumably imports of oil, which would reduce 
our dependency, a national security question. It would also 
help by reducing the amount of wealth transferred out to 
purchase this oil. It would help our economy also, would it 
not?
    Ms. Lowery. Right, and our diesels are certified for 5 
percent biodiesel and we are working on the standards for the 
20 percent biodiesel. So that would be something that would 
certainly help the development of biodiesel in this country as 
well. A very important piece of the fuel picture.
    Senator Sessions. With any legal impediments or problems?
    Mr. German. I just wanted to add quickly on what she said. 
Diesel fuel in Europe is cheaper than gasoline is in Europe; 
differential taxation. So a lot of people buying diesels in 
Europe are buying them to get to the cheaper fuel.
    The other thing that happened is that the emissions 
standards for diesels in Europe are less stringent, and that 
has also helped. Here the standards are the same.
    One other comment----
    Senator Sessions. Is it the particulate emissions that are 
the problem?
    Mr. German. Actually, the particulate emissions problems 
has been largely solved by the particulate traps. It is NOx, 
that is the problem.
    The other thing that has happened, though, is that this 
huge buildup in light duty diesels in Europe has led to a 
refinery imbalance and Europe now has refined gasoline that 
nobody wants. They ship it to the United States, and that is 
why gasoline in the United States is now cheaper than diesel 
fuel here is. So unless that----
    Senator Sessions. And we are shipping diesel fuel to 
Europe, I understand.
    Mr. German. Not much.
    Senator Sessions. Not much.
    Mr. German. It is primarily the influx. So there is 
actually an inversion of the prices of the fuels and that is 
going to make it more difficult to introduce diesels in the 
United States as well. We are still optimistic, but the kind of 
situations that created this huge market in Europe do not exist 
here.
    Senator Sessions. I see the Washington, DC buses running on 
clean natural gas. I understand that natural gas does burn much 
cleaner even as to CO2, produces a lot less 
CO than oil does. That is a domestically produced 
item that does not require an importation and a purchase by the 
American consumer from a foreign source. And it sort of has 
irritated me that we are utilizing so much natural gas for 
electricity. It seems to me since--does natural gas--I will 
just say it this way: Does natural gas have a future in fleets 
like city buses in Washington, DC, and could that reduce some 
of our problems if we did that?
    Mr. German. You are certainly correct, natural gas has a 
higher proportion of hydrogen in it, which means that there is 
less CO2 emissions from it. It also burns extremely 
clean. It is cleaner than gasoline. So there is two major 
advantages.
    The problem you have with it is that you do need central 
refueling stations, you do need expensive storage tanks. 
Fleets, buses, are a great application. But Honda is not in 
that business, so I cannot really respond to why more of it is 
not happening.
    Ms. Lowery. I would just mention that hybrid electric 
buses, we have Allison Transmission, who has been doing a 
hybrid, diesel hybrid, which has great performance as well. So 
that is another alternative to CNG buses that would be helpful 
to reduce dependence on petroleum.
    Senator Sessions. Mr. Chairman, thank you.
    The Chairman. Let me thank all of you. This has been very 
useful testimony. We will try to follow up on some of your 
excellent recommendations.
    Thank you, and that will end the hearing.
    [Whereupon, at 4:22 p.m., the hearing was adjourned.]
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

     Responses of Walter McManus to Questions From Senator Sanders
    Question 1. You assert that Detroit ignored consumer demand for 
more fuel efficient vehicles, to their financial detriment, and to our 
national detriment, in terms of jobs, national security and the 
environment. You conclude that higher prices for fuel caused consumers 
to want more efficient vehicles, but Detroit officials were in denial 
that fuel efficiency is important to consumers, just as they used to 
assert that safety would never sell. Then Detroit cut the prices of 
their least efficient SUVs to maintain the market for these gas 
guzzlers. Do you think their $25 billion in losses will make Detroit 
come to their senses in time to prevent economic, environmental 
catastrophe? Do currently lower fuel prices make them think that they 
can ride out this rough spot and keep selling gas hogs'?
    Answer. The industry seems much more willing to accept that fuel 
economy is important than in the past, so the $25 billion in losses 
have had some effect. Whether this means they would and could act in 
time to prevent a catastrophe is impossible to tell. There has indeed 
been some backsliding because of lower fuel prices, but it has been 
focused more on concern that consumers may not buy hybrids and other 
fuel-efficient vehicles than on whether the industry can continue 
business as usual.
    Question 2. Please respond to Senator Menendez' excellent question 
regarding the relative efficiencies of fuel cell electric vehicles 
versus plug in hybrid electric cars. That is, how much original 
electricity from a solar panel on the roof of an American home is lost 
in delivering power to split water to make hydrogen, to compress this 
hydrogen and make a fuel cell vehicle run versus the same electricity 
delivered to a plug in hybrid electric vehicle?
    Answer. I hope you have asked this question of Mr. German of Honda. 
I am an economist not an engineer, and am afraid I am unable to answer.
     Responses of Walter McManus to Questions From Senator Cantwell
    Question 1. Mr. Green and McManus, has any of your research 
calculated the current levels of subsidies for fuel or feedstock 
producers, expressed as $ per gallon, for both bio diesel and ethanol 
fuels? And given the intrinsic advantages of diesel engines in fuel 
economy and the ``refinery mix'' constraints mentioned in testimony 
does this suggest to you that we need to look at refinery constraints 
as a limiting factor on fuel economy in mid to long term?
    Answer. My research has not addressed the first question on 
subsidies for bio fuels.
    The refinery mix constraints are significant and must be taken into 
account in fuel economy improvements that can be derived from diesel 
fuels. The mix constraint is intrinsic and so would affect long term 
gains.
     Responses of Walter McManus to Questions From Senator Bingaman
    Question 1. You make the case that domestic manufacturers are more 
vulnerable economically due to their--in your view--under-emphasis on 
fuel efficiency. which is much more in demand in the international 
marketplace. Have you done any analysis on the competitive position of 
domestic manufacturers regarding advanced fuel efficiency technologies? 
If the U.S. marketplace were to place greater emphasis on fuel 
efficiency, either through consumer choice or regulation, would U.S. 
automakers be competitive?
    Answer. Our study, ``Can Proactive Fuel Economy Strategies help 
Automakers Mitigate Fuel Price Risks?'', which we provided to the 
Committee, directly addresses these questions. For your convenience, I 
reproduce the executive summary below.
                           executive summary
    The high oil and gasoline prices we have experienced over the past 
two years have dramatically increased the attention paid to vehicle 
fuel economy by drivers, new car buyers, and the government. Detroit 
automakers, who have long depended on the least fuel-efficient vehicles 
to provide most of their profits (and some of who have argued that fuel 
economy did not matter very much to their customers) are seeing their 
sales and profits evaporate, as new vehicle buyers switch to more fuel-
efficient vehicles. Management apparently assumed that (1) fuel prices 
would stay low forever, and/or that (2) their customers would not 
change their vehicle choices because of high fuel prices.
    Events of the past two years have demolished both assumptions. The 
price of gasoline soared in 2005 and again in 2006, but more 
importantly the real price of gasoline has been rising at a 10% annual 
pace since 1999, and at a faster 16% annual rate since 2002. The price 
of gasoline ($2.70/gallon average so far in 2006) is 98% above what it 
was in 1999 and 83% above what it was in 2002. By lowering vehicle 
purchase prices (in cash, zero or low interest-rate loans, employee 
pricing for all), Detroit managed to maintain the sales of their 
profitable SUVs and pickups in units, if not revenue or profit. By the 
last quarter of 2005, the automakers' ability (or willingness) to cut 
prices again and again simply to sell the same number of units 
collapsed. Since then, consumers have migrated to more fuel-efficient 
options, primarily at the expense of Detroit automakers' share and 
profits.
    In this study, we examine the economic viability of improving fuel 
economy as a strategy to mitigate the risk of high fuel prices and to 
gain a competitive advantage.
    By adopting a ``game theory'' approach to representing the 
competitive interactions among the automakers and using different 
scenarios to represent the risks automakers face with respect to fuel 
prices and consumer demand, we are able to identify which strategies 
maximize profits for the automakers and support U.S. auto industry 
employment.
Rising fuel prices are a primary contributing factor to rapid erosion 
        of Detroit automaker market share, profits and jobs.
   While GM, Ford, and DaimlerChrysler have significant cost 
        disadvantages compared to their Japan-based competitors, some 
        of which can be attributed to issues beyond the control of 
        current management (exchange rates, health care and pension 
        costs), poor fuel economy decisions by management have 
        contributed significantly to their situation.
   Automakers that are highly leveraged in truck-based products 
        (truck-based SUVs and pickups) are especially vulnerable to 
        higher fuel prices since these products are less fuel-
        efficient.
   Detroit automakers have earned a high portion of their 
        profits from truck-based products. In 2004, Ford earned 62% (GM 
        61%, DaimlerChrysler 44%) of variable profits from trucks and 
        SUVs, versus 36% for Nissan and 28% for Toyota (Honda 0%). 
        Consequently, when higher fuel prices restricted truck-based 
        product prices and profits, Detroit automaker profits were 
        disproportionately affected.
   Since January 1999, fuel prices have been rising, and the 
        ability of automakers to maintain prices and profits of trucks 
        has steadily declined. However, since Detroit automakers were 
        heavily committed to trucks, and switching production from 
        trucks to cars is costly, they accepted lower profits rather 
        than lower unit sales of trucks.
   In 2005, the price of gasoline rose 19% above its 2004 
        level, and the share of variable profits from pickups and SUVs 
        fell 4.0 percentage points for both Ford and GM. This profit 
        erosion continued in the first half of 2006--GM's share of 
        variable profits from pickups and SUVs fell an additional 5.0 
        percentage points (Ford's fell 1.0 percentage point). The cash 
        cows are rapidly dying off.
   New-vehicle dealers, because they are closer to the retail 
        market than the automakers are, have more accurately read the 
        market's shift away from gas-guzzlers than have the automakers. 
        Dealers have only indirect influence on the new products they 
        get from the automakers, but they directly control the mix of 
        used vehicles that they sell alongside the new vehicles. They 
        obtain used vehicles to sell from wholesale auctions. Prices at 
        wholesale auctions reflect dealers' collective judgment about 
        what consumers are willing to pay (before adding a competitive 
        mark up). Since January 2000, the auction price of used full-
        size SUVs has fallen from 185% of the average auction price of 
        all vehicles to 133% (June 2006)--a 52-percentage point 
        dropwhile the real price of gasoline rose 88% from $1.55/gallon 
        to $2.92/gallon. The implied relationship is strong: a 1.0% 
        increase in the real price of gasoline is associated with a 7 
        percentage-point reduction in the wholesale auction price of 
        full-size SUVs versus the average auction price of all 
        vehicles.
   GM and Ford's dependence on truck-based products is eroding 
        their market share. Larger Japan-based automakers (Toyota, 
        Honda, and Nissan) are seeing share and profit growth, and are 
        increasing their North American capacity because they have a 
        larger selection of fuel-efficient vehicles that are attractive 
        to Americans. However, because both GM and Ford committed to 
        rolling out new large SUVs more than four years ago, they are 
        not significantly cutting their capacity to produce these gas-
        guzzlers. Instead as their operations contract due to declining 
        sales, they are cutting capacity to produce mid-size and 
        smaller vehicles.
Technological Options
    What options do automakers have to improve fuel economy by 2010? In 
this study, we assume that the basic product portfolio of any 
manufacturer is mostly fixed. However, within the fixed product 
portfolio, a manufacturer has the option of improving the fuel economy 
of its vehicle models by adopting improved engine, transmission, and 
other fuel saving technologies.
    For simplicity, we analyze two distinct fuel economy strategies, 
``Business as Usual'' (BAU) and ``Proactive'' (PROA). An automaker 
following the BAU strategy is assumed to make only those improvements 
in fuel economy that would be necessary for future CAFE standards. An 
automaker following the PROA strategy is assumed to make those fuel 
economy improvements beyond CAFE that consumers would value (and pay 
for). Developing these scenarios requires an engineering assessment of 
what fuel economy technologies are available and a detailed forecast of 
each manufacturer's future product plans including when individual 
models would have an opportunity to integrate new technology.\1\
---------------------------------------------------------------------------
    \1\ We derive these strategies by combining a detailed baseline 
2010 sales forecast by manufacturer, model, engine, transmission, and 
body style from The Planning Edge) with an engineering analysis by Dr. 
Feng An (an expert in fuel economy technologies).
---------------------------------------------------------------------------
    Our data include 1,145 separate make, model, engine, transmission, 
and body style configurations in 2010. Of these, 154 configurations 
(13%) are expected to have new engines by 2010 that are potentially 
eligible for the advanced or moderate fuel-saving packages and 931 
configurations with carry-over engines are eligible for foregoing 
projected improvements in horsepower downsizing.\2\ Since the 
automakers understandably protect information about the future products 
and powertrains, our base assumptions for 2010 come from a forecast by 
The Planning Edge. It is possible that some automakers have already 
decided to implement some of the improvements we apply in the PROA 
strategy. However, since our base average fuel economy for Detroit 
automakers in 2010 is equal to what CAFE will require of them, and 
since the fuel economy of the Detroit automakers has historically not 
exceeded the requirement, Detroit automakers are not likely to have 
decided to implement our complete PROA packages.
---------------------------------------------------------------------------
    \2\ We excluded as ineligible for improvement hybrids, diesels, and 
a few gasoline engines (60 configurations in all).
---------------------------------------------------------------------------
    Based on this assessment, we determined that if all automakers were 
to follow a PROA fuel economy improvement strategy and implement the 
fuel-saving packages we identified:

   Overall fuel economy would increase 6.0% above baseline 2010 
        fuel economy or 7.4% above model year 2005 estimated fuel 
        economy of 24.5 mpg (EPA 2005). The 7.4% increase over today's 
        level is consistent with the 4.0%-8.2% range we derived from a 
        review of other studies and amounts to a modest 1.5% annual 
        increase between 2006 and 2010
   Ford has the greatest opportunity to apply advanced 
        technologies (34% of its base 2010 sales). DaimlerChrysler can 
        apply advanced technologies to entries accounting for 30% of 
        its sales and GM can apply advanced technologies to entries 
        accounting for 19% of its sales. The Detroit automakers have 
        more opportunity to improve the fuel economy of their vehicles 
        than do Nissan (16%), Toyota (8%), and Honda (6%).
Methodology & Scenario Analysis
    The impact of alternative fuel economy strategies and fuel prices 
on total sales by the industry is estimated using a simplified model of 
the total market demand for vehicles. To assess the change in market 
share for individual vehicle models under different fuel economy 
strategies and fuel price scenarios, we use an econometric model of 
discrete choice along with estimates of consumers' willingness-to-pay 
for attributes of vehicles. Discrete choice models match the intuitive 
notion that a vehicle is a bundle of attributes and that the vehicle's 
value to a consumer is derived from the value the consumer places on 
the attributes. The demand for vehicles is seen as a derived demand 
arising from the demand for vehicle attributes.
    In this study we enhanced the model we used previously (McManus et 
al. [2005]), by incorporating measures of the key vehicle attributes of 
performance and size, along with the attributes examined in that study, 
fuel economy and retail purchase price. We updated our estimates of the 
model's parameters with 2005 data, using econometric techniques that 
exploit the correlation between vehicle price and vehicle attributes to 
derive data-based estimates of consumers' willingness to pay for fuel 
economy, performance, and size.
    We used scenario analysis to compare automaker profits in four 
market-demand scenarios defined by fuel prices ($2.00/gallon and $3.10/
gallon) and consumer discount rates (0% and 7%). The consumer discount 
rate measures the rate at which consumers discount future operating 
savings and costs to make them comparable to today's purchase price. 
Technically, the discount rate equals the prevailing market rate of 
interest minus the rate of expected inflation in fuel prices, and can 
be positive or negative (if consumers expected 14% annual percent 
inflation in fuel prices and the market interest rate were 7%, then the 
discount rate should be -7%). The lower the discount rate, the more 
value future savings of fuel are worth. We limited the lower bound on 
the discount rates in our simulations to 0% to be conservative.
    We assume that automakers aim to maximize profits and decide 
whether to pursue PROA increases in fuel economy with that aim in focus 
as well as in light of uncertainties regarding future fuel economy 
standards, fuel price, and other automakers' fuel economy strategies. 
CAFE standards put a lower limit on each automaker's average fuel 
economy, but do not prevent any automaker from exceeding the standard.
    To identify each automaker's optimal strategy under these 
uncertainties, we adopt a ``game theory'' approach. We model five 
automaker-competitors (individual Detroit, Japanese Big Three, and 
other), and we assume that each must choose either an aggressive or a 
BAU fuel economy strategy. An outcome in the simulation, of which there 
are 128, is defined by the fuel price, the consumer discount rate, and 
the choices of each of the five competitors. Letting this process run 
until it results in a stable outcome in which no automaker could gain 
by switching strategies given what the other automakers choose (Nash 
equilibrium), we find that the optimal strategy for each automaker is 
to pursue PROA improvements in fuel economy. This conclusion is quite 
robust; it holds when neither fuel price nor consumer discount rates 
are known; and it also holds when fuel price and consumer discount 
rates are known (among the four demand scenarios).
    Another way to find the solution of the simulation is to apply the 
maximin principle of game theory (choose the strategy that maximizes 
the worst case one can expect). Four market demand scenarios, five 
competitors, and two strategies yield 128 possible outcomes, 32 
outcomes in each of the four market demand scenarios. The maximin 
principle reaches the same solution; all automakers should choose PROA.
Results: Increasing Fuel Economy Performance Increases Expected Profits
_______________________________________________________________________

    The surprising conclusion of our analysis is:

          Each automaker should pursue proactive improvements in fuel 
        economy that exceed what CAFE requires, regardless of the fuel 
        economy strategies of other automakers, for fuel prices between 
        $2.00/gallon and $3.10/gallon consumer discount rates between 
        0% and 7%.

_______________________________________________________________________
            Detroit Automakers' Profits are Highly Sensitive to Fuel 
                    Prices under Business-As-Usual Fuel Economy 
                    Scenarios
   Detroit automakers' profits are much more sensitive to fuel 
        prices than the Japanese automakers. These results are 
        consistent with the findings in McManus et al. [2005]. Detroit 
        automakers lose $3.1-$3.6 billion in variable profits when fuel 
        costs $3.10/gallon compared to $2.30/gallon, accounting for 72-
        77% of the total industry losses. In contrast, the three 
        biggest Japanese manufacturers (Toyota, Honda, and Nissan) also 
        see a reduction in variable profits, but at a much lower level, 
        $0.8 billion.
   Conversely, if fuel prices drop to $2.00/gallon, Detroit 
        automakers do better than the Japanese automakers. Detroit's 
        variable profits increase by $1.2 to $1.4 billion when fuel 
        costs $2.00/gallon compared to $2.30/gallon. In contrast, the 
        three biggest Japanese manufacturers only gain a total of $0.3 
        billion.
   The differences in Detroit's profits between high and low 
        consumer discount rates are small compared to the differences 
        generated by fuel prices. The variable profits of the three 
        largest Japan-based automakers (Toyota, Honda, and Nissan) are 
        much less sensitive to both fuel prices and consumer discount 
        rates than Detroit's are.
   These results are driven by two critical factors. First, if 
        fuel prices increase to $3.10/gallon, overall sales decline by 
        3.5%. At $2.00/gallon, overall sales increase by 1.3%. Second, 
        higher fuel prices decrease consumer demand for fuel-
        inefficient products, especially truck-based SUVs, and increase 
        demand for more fuel-efficient options, including crossovers, 
        minivans, and cars. At lower fuel prices, the reverse is true. 
        Consequently, since Detroit automakers sell a much larger 
        fraction of less efficient truck-based vehicle products, they 
        are much more vulnerable to variable fuel prices than the 
        Japan-based automakers are.
            Proactively Increasing Fuel Economy would Benefit Detroit 
                    Automakers
    The results of our simulations were surprising, even to us. In all 
four market-demand situations we evaluated (defined by fuel price and 
consumer rate of time discount), proactively increasing fuel economy 
would be the optimal strategy for all automakers, in that it would 
result in the highest variable profit that each automaker could be 
assured of earning, no matter what price of fuel (between $2.00-$3.10/
gallon), consumer rate of time discount (between 0%-7%), or actions by 
its competitors were realized.
    What was especially surprising was that the Detroit automakers (GM, 
Ford, and DaimlerChrysler) have more to gain from pursuing the 
aggressive fuel economy improvement strategy than do the three largest 
Japan-based automakers (Toyota, Honda, and Nissan). This is because the 
Detroit automakers face more risk (are more vulnerable) if they pursue 
BAU than the Japan automakers do. The Detroit automakers also have more 
opportunities for improvement, since Detroit automakers currently have 
lower average fuel economy than the Japan automakers do.

   Detroit automakers would benefit from raising the fuel 
        economy of their vehicles regardless of fuel prices and 
        consumer discount rates. Our results show that a PROA, 
        industry-wide program to increase fuel economy performance 
        would increase the profits of Detroit automakers by $0.8-$2.0 
        billion per year (depending on the market-demand situation).
   While the gains are greatest in the case of high fuel prices 
        with low consumer discount rate and smallest in the case with 
        low fuel prices and high consumer discount rate, the gains are 
        nevertheless positive in all four potential market-demand 
        situations we evaluated.
   Ford stands to gain the most in annual profits, more than 
        twice as much as GM or DCX, by proactively pursuing fuel 
        economy performance. Ford's gains are from $0.5-$1.4 billion, 
        depending on the market-demand situation. GM's gains are from 
        $0.2-$0.5 billion, depending on the market-demand situation. 
        DCX's gains are $0.1 billion (There are differences in DCX's 
        gains between market-demand situations, but not sufficient to 
        register at this level).
   On the other hand, the three largest Japan-based automakers 
        show very different results from those of Detroit. The Japan-
        based manufacturers actually see a reduction in their profits 
        of $0.1-$0.6 billion. In large part this is due to the fact 
        that the Japan-based automakers have more fuel-efficient fleets 
        than the Detroit automakers have, and therefore have less room 
        for improvement. Under a PROA fuel economy strategy, Detroit-
        based manufacturers narrow the gap in fuel economy performance 
        between their fleets and the fleets of the three largest Japan-
        based automakers.

    These surprising results are driven by the following factors:

   The higher fuel economy level of the fleet helps to insulate 
        total industry sales from declining under the high fuel price 
        scenarios. That is, the entire industry makes more profit under 
        high fuel prices if fuel economy levels are higher, ($1.2-$1.4 
        billion). More surprising is our prediction that under low fuel 
        prices, total industry profits are higher by $0.8-$0.9 billion 
        if all automakers following PROA. This is because at $2.00/
        gallon, some of the fuel economy technologies are still cost-
        effective. This assessment is consistent with recent National 
        Research Council findings on fuel economy (NRC [2002]).
   The key factor that explains the advantages to Detroit-based 
        automakers of adoption of a PROA fuel economy strategy is 
        opportunity--the Detroit-based automakers have lower fuel 
        economy than the three largest Japan-based automakers and thus 
        have more room for improvement. In the technological options 
        section of this report we identified a larger set of 
        improvement opportunities (for both new and carry-over 
        powertrains) for the Detroit-based than for the three largest 
        Japan-based automakers. (We excluded improvements that were not 
        valued by consumers, and such technically possible but not 
        valued improvements were more likely to be excluded for the 
        Japan-based than for the Detroit-based automakers.)
   The three largest Japan-based automakers could, in 
        principle, maintain their fuel economy advantage by applying 
        more technologies to more vehicles, but they would do so at the 
        cost of profits. It is important to note that, while the 
        Detroit automakers could narrow their fuel economy disadvantage 
        relative to the Japan 3 automakers through a proactive fuel 
        economy strategy, the Japan 3 automakers would still have an 
        advantage.
   Our study concludes that the Detroit automakers would 
        benefit from pursuing PROA fuel economy improvements above what 
        CAFE requires. This does not imply that raising CAFE 
        requirements would benefit the Detroit automakers. That 
        question was not directly addressed in the study, and it is 
        important to understand that when we speak of an industry-wide 
        or market-wide proactive fuel economy improvement strategy, we 
        do not mean a higher CAFE standard, we mean the situation in 
        which all automakers have chosen the PROA fuel economy 
        strategy.
            Proactively Increasing Fuel Economy would Protect American 
                    Jobs
    We estimated the impact of strategic choices by automakers on U.S. 
employment using the well-known model developed and maintained by 
Regional Economic Models, Inc. (REMI). The REMI model takes the latest 
national input-output coefficients, which show how much each industry 
buys from every other industry, and tunes them to particular 
geographies using trade-flow data generated from the US Census of 
Transportation.

   Under high fuel prices, a market-wide PROA fuel economy 
        improvement strategy would create 15,000-35,000 new jobs 
        (throughout the whole economy) due to increased production by 
        Detroit automakers. Decreased production by foreign-owned 
        transplants would offset 10,000-19,000 jobs, for a net increase 
        of 5,000-16,000 new jobs.
   Under low fuel prices, but with low consumer discount rates 
        as well, the net gain in new jobs is smaller (168 net new 
        jobs), as 11,000 new jobs due to increased production by 
        Detroit automakers are nearly fully offset by reduced 
        production by foreign-owned transplants.
   Only in the case with low fuel prices and high consumer 
        discount rate would the market-wide proactive fuel economy 
        increases result in job losses.
                       public policy implications
    In light of our conclusion that the optimal strategy for all 
automakers is aggressive fuel economy improvement, even with $2.00/
gallon fuel, why has it taken a steadily rising fuel price for five 
years, billions in lost profit, and tens of thousands of job losses to 
stimulate action by the Detroit automakers? What are the barriers to 
implementing the optimal strategy?
    Deploying new technologies takes time and money to accomplish, and 
time and money are in short supply in Detroit. The cumulative effects 
of declining market share, rising fuel prices, and uncompetitive 
product development are forcing drastic and costly changes at Ford, GM, 
and DaimlerChrysler. For the first time in more than 20 years, their 
survival is in doubt. GM and Ford may have just enough cash for one 
cycle of product development to bring new versions of their full 
product lines to market. Items seen as important but secondary to new 
vehicle designs are not getting funded.
    Public policy actions that will be accepted by Detroit automakers 
in the current situation will be actions that enhance their ability to 
respond to changing market conditions. Our research shows that 
increased fuel economy has the potential to enhance their flexibility, 
but pressing concern about what are seen as bigger issues make 
achieving progress challenging.
    To adequately address public policy concerns about fuel economy in 
the current economic environment requires the active, direct 
involvement of industry, labor, government, and other organizations in 
the search for policies that are generally acceptable to all interested 
parties and, more importantly, that work. New policies are inevitable. 
If industry leaders do not become engaged with other stakeholders, it 
is very likely that the new policies will be more onerous.
    Improving the fuel economy of America's light vehicle fleet would 
help reduce our dependence on oil (much of which is in the hands of 
unstable or hostile regimes) and contribute significantly to reducing 
emissions of pollutants and greenhouse gases. Our research indicates 
that improving the fuel economy of Detroit automakers' fleets would 
also reduce the risks to profits and American jobs of volatility in 
fuel prices. Reducing fuel consumption has become a national priority 
for leaders from both political parties. An emerging consensus sees 
reducing fuel consumption as a means to enhance national security, 
increase the market flexibility of American workers and communities, 
and help address climate change.
    There are four areas that a formal coalition of stakeholders with a 
federal mandate to develop policies should address: improving fuel 
economy, enhancing regulatory rationality and certainty, supporting the 
development of advanced technologies, and building a domestic supply 
chain for advanced technology fuel-efficient vehicles. These need to be 
considered in conjunction with the key policy leverage points at which 
interventions can have significant effects: the decision by consumers 
to purchase a vehicle, the decision by automakers of the range of 
vehicles with different attributes to produce, and the decision by 
suppliers of which technologies to develop and provide to the 
automakers.
    No one would question the importance of purchase price (capital 
cost) in consumers' vehicle choices. Tax incentives to encourage 
consumers to purchase fuel-efficient vehicles are already part of our 
policy environment, as are tax incentives to purchase inefficient SUVs 
and trucks. Most observers believe that an increase in the federal 
excise tax on motor fuels would not find sufficient support in 
Congress, yet the recent experience with higher fuel prices has 
demonstrated the power of raising operating costs to influence 
consumers' vehicle choices and thereby improve aggregate fuel economy.
    However it is difficult for consumer-focused instruments alone 
(incentives and/or fuel taxes) to achieve dramatic improvements in fuel 
economy. Automakers cannot radically alter their product mix very 
rapidly, nor do all consumers switch from one type of vehicle to 
another overnight. We have seen significant evidence of the beginning 
of a move from SUVs to cars by consumers, and some automakers have 
acknowledged it, but the present composition of the fleet is not going 
to change radically in the near term. Encouraging the development of 
technologies that improve the fuel economy all vehicle segments across 
the entire market, are needed to produce significant improvements in 
fuel economy.
    Encouraging advanced technologies across the entire fleet of 
vehicles calls for instruments that increase the portfolio of fuel-
saving technologies available, make the technologies now or soon to be 
in the portfolio more attractive to automakers, and/or enhance the 
ability of suppliers to develop and commercialize new technologies.
    Question 2. As someone who has looked at the effectiveness of CAFE 
standards and other systems for increasing fuel efficiency, do you have 
an opinion about which types of policy would be most effective in 
pushing the technological envelope on fuel economy?
    Answer. I suggest the following as options that ought to be 
considered:

          1. Tax credits for suppliers of technologies to convert 
        facilities in the U.S. would ensure that we own the 
        technologies rather than be required to import them. American 
        suppliers could sell advanced technologies globally and help 
        with the trade deficit.
          2. Taxes on fuels or taxes on carbon. I know these are 
        unpopular, but they would be effective because they would make 
        consumers demand more efficient vehicles.
          3. Carbon (or fuel) cap and trade programs would define the 
        total economy-wide reduction in carbon and then let markets 
        allocate them to make the reductions in the most efficient 
        manner possible.
          4. Feebates would pay rebates to consumers buying efficient 
        vehicles and charge fees to consumers buying inefficient 
        vehicles. A feebate system could be self-financing, with the 
        buyers of inefficient vehicles paying into a fund that would be 
        used for the rebates. It would also be more effective in 
        changing buying patterns than rebates alone and would enlist 
        all consumers in demanding more fuel-efficient vehicles.
                                 ______
                                 
      Responses of William Logue to Questions From Senator Sanders
    Question 1. Please respond to Senator Menendez' excellent question 
regarding the relative efficiencies of fuel cell electric vehicles 
versus plug in hybrid electric cars. That is, how much original 
electricity from a solar panel on the roof of an American home is lost 
in delivering power to split water to make hydrogen, to compress this 
hydrogen and make a fuel cell vehicle run versus the same electricity 
delivered to a plug in hybrid electric vehicle?
    Answer. FedEx has not been made aware of the relative total cycle 
energy efficiency of either fuel cell or plug-in hybrid electric 
vehicles primarily because neither technology will be commercially 
available for our fleet applications in the foreseeable future. We have 
utilized both technologies--several years ago we operated a fuel cell 
vehicle in Tokyo, Japan for one year, and we have been operating a 
plug-in hybrid electric vehicle in Paris, France for the past few 
months. Neither technology has been available for purchase.
    Unfortunately, we seem to be in a situation where the nation is 
forgoing improvement now while waiting on new technologies, such as 
plug-in hybrid electric and fuel cell vehicles. In reality, there will 
always be tempting technologies for which we as a nation could wait. 
And, these ambitious long-term technological goals are important, but 
near-term technological and operational solutions are necessary now. 
These near-term solutions can include both hybrid electric vehicles and 
increased fuel economy for the range of on-road vehicles, from 
passenger vehicles through commercial Class 8 heavy trucks.
    Question 2. Please tell me more about your fleet of hybrid electric 
trucks. You say that it gets 40% better fuel efficiency but costs twice 
as much as your regular trucks--but given that the fuel savings will 
more than pay for the upfront costs of the vehicle over its lifetime, 
why in your opinion, aren't other companies making similar investments?
    Answer. FedEx Express and Environmental Defense initially believed 
that market demand for more fuel efficient hybrid electric vehicles 
would act to spur the development and production of these vehicles. It 
did spur the development of them, as our 93 hybrid electrics in revenue 
service demonstrate. However, it has not been sufficient to drive the 
full production of them. Reasons are complex: (1) commercial vehicle 
sales' volumes are lower than passenger vehicle sales, so there is less 
potential return for research and development into new technologies; 
(2) competition among commercial vehicle manufacturers is not as broad 
as the passenger vehicle market, given only a handful of commercial 
vehicle manufacturers; (3) the market has become more vertically 
integrated, yet the innovations in these areas come from other 
companies (for example, the hybrid power train FedEx uses comes from 
Eaton Corporation, who does not produce vehicles themselves); (4) 
commercial vehicle manufacturers must meet very stringent vehicle 
emission standards that are ramping down significantly through 2010; 
(5) and, as importantly, commercial vehicle manufacturers are simply 
not required to produce vehicles that meet any fuel economy goals or 
standards. In fact, commercial vehicle manufacturers receive no 
regulatory benefit in increasing fuel economy of their vehicles, given 
the U.S. EPA emission measurement: grams/brake horsepower--hour. To 
explain, under U.S. EPA regulations, a vehicle with 10 miles per gallon 
(MPG) in fuel economy is viewed as identical to one that uses the same 
engine with 20 MPG in fuel economy--even though the 20 MPG vehicle 
would emit only 50 percent of the carbon as the 10 MPG vehicle.
    Simply put, market pressures from fleet operators are not 
sufficiently strong to counter the intense pressure commercial vehicles 
manufacturers are under to meet federal emission standards. As such, 
they are sacrificing fuel economy to meet vehicle emission standards, 
and not focusing upon new technologies that can increase fuel economy.
      Response of William Logue to Question From Senator Bingaman
    Question 1. With the costs of hybrid trucks running so much more 
than the standard vehicle, how much do tax credits have to be to give 
sufficient incentive for significant purchases? Would a strong CAFE 
standard achieve the same goal?
    Answer. FedEx believes that both tax incentives and fuel economy 
standards for commercial vehicles are necessary. The fuel economy 
standards are necessary to drive commercial vehicle manufacturers to 
innovate and bring new, more fuel-efficient vehicles to market. 
However, these vehicles will inevitably carry a higher purchase price. 
As such, operators willing to act as early adopters for these 
technologies in the formative years of development and integration 
should benefit by the receipt of tax incentives to offset higher 
capital costs. The nation spends billions of dollars in R&D for new 
technologies, but needs to do better in transitioning new, promising 
vehicle technologies from the laboratory to the road. Tax incentives 
can help do this.
                                 ______
                                 
       Response of David Greene to Question From Senator Sanders
    Question 1. Please respond to Senator Menendez excellent question 
regarding the relative efficiencies of fuel cell electric vehicles 
versus plug in hybrid electric cars. That is, how much original 
electricity from a solar panel on the roof of an American home is lost 
in delivering power to split water to make hydrogen, to compress this 
hydrogen and make a fuel cell vehicle run versus the same electricity 
delivered to a plug in hybrid electric vehicle?
    Answer. Dr. Anderman can provide a more expert opinion than I about 
the current and potential future efficiencies of electrolysis and fuel 
cells. Undoubtedly, it would be far more energy efficient to store the 
electricity from a solar cell directly in a battery and use that to 
power a vehicle via an electric motor than to uses the electricity to 
electrolyze hydrogen, convert the hydrogen back into electricity via a 
fuel cell and then use it to power an electric drive. The difference in 
efficiency would be on the order of a factor of two.
    Of course, there are other, more efficient ways to produce 
hydrogen. A comparison of the overall energy cycle efficiency of 
hydrogen made from natural gas, coal or biomass to electricity 
generated from the same sources would put the fuel cell vehicle in a 
much more favorable light.
       Response of David Greene to Question From Senator Cantwell
    Question 1. Mr. Greene and McManus has any of your research 
calculated the current revels of subsidies fir fuel or feedstock 
producers. expressed as $ per gallon for both bio diesel and ethanol 
fuels? And given the intrinsic advantages of diesel engines in fuel 
economy and the ``refiner mix'' constraints mentioned in testimony, 
does this suggest to you that we need to look at refiner constraints as 
a limiting factor on fuel econony in mid to long term?
    Answer. I have not done research calculating the levels of 
subsidies being given to producers of feedstocks for biodiesel and 
ethanol for use as a motor fuel.
    While it is true that diesel engines have an inherent fuel economy 
advantage over gasoline engines, I do not believe that refinery 
constraints will pose a serious problem for more widespread adoption of 
diesel engines in U.S. light-duty vehicles in the mid-to long-term. I 
believe that diesels will find a sizable market segment to occupy in 
the U.S. but will not become as dominant as they are now in the 
European Union. Given time to respond, the global refinery system will 
very likely be able to accommodate any resulting increase in U.S. 
diesel demand.
    Diesel vehicles will be more expensive than conventional gasoline 
vehicles, chiefly due to their high-pressure fuel injection systems and 
partly due to the more costly emissions control equipment that our Tier 
II standards require of them. This will limit their share of the 
market. There will also be strong competition from gasoline hybrid 
electric vehicles which will likely offer even better fuel economy at a 
slightly higher price. Advanced conventional gasoline vehicles with 
turbo-charged direct injection engines will offer a smaller fuel 
economy improvement but will also be less costly.
    Diesels will have an inherent advantage in market segments that 
favor torque for towing and for heavy-duty applications. Hybrids will 
have an advantage in urban stop and go driving. Advanced gasoline 
internal combustion engines will have an advantage with cost-conscious 
car buyers. In my view, we will see a light-duty market with diverse 
power trains serving different needs, not a market dominated by diesel 
engines. This will require some adjustment by refiners but not likely 
one that will constrain the market in the mid- to long term.
      Responses of David Greene to Questions From Senator Bingaman
    Question 1. Both you and Dr. McManus point to the market failure 
that has led to an under valuation of fuel economy in the car and truck 
marketplace. You further point out that gas taxes are less economically 
efficient than other approaches due to the dynamics of the U.S. market. 
In your view, what is the most economically efficient way to repair 
this market failure?
    Answer. In my opinion, the problem with the market for fuel economy 
stems from a failure by consumers to consider the full value of future 
fuel savings when vehicles in their purchase decisions. As a 
consequence, manufacturers fail to incorporate into vehicles all the 
fuel economy that is cost-effective. Raising the price of fuel by means 
of a tax on gasoline or petroleum would increase consumer interest in 
fuel economy and undoubtedly raise fuel economy levels somewhat. 
However, it is not likely that it would correct the failure to 
adequately consider the full lifetime value of fuel savings. Fuel 
economy standards circumvent the problem by requiring manufacturers to 
achieve certain fuel economy levels regardless of consumer demand. 
Feebates are an interesting market-based alternative that circumvent 
the problem by putting the economic incentive to increase fuel economy 
on the price of the vehicle rather than on future fuel savings. 
Feebates provide progressively larger rebates for vehicles with lower 
rates of fuel consumption per mile and progressively larger fees for 
vehicles with higher fuel consumption rates. Like NHTSA's reformed CAFE 
standards for light trucks, feebates can be tied to attributes like a 
vehicle's footprint. Unlike fuel economy standards feebates do not 
guarantee the achievement of a certain level of fuel economy. Rather, 
they provide manufacturers with an additional economic incentive to 
make vehicles more fuel efficient. An advantage of feebates is that 
they provide a continuing incentive to adopt new fuel economy 
technologies as they are developed. Both fuel economy standards and 
feebates can be economically efficient. With fuel economy standards, 
efficiency depends on choosing the right level of fuel economy and the 
right form of the standard. Allowing trading of fuel economy credits 
within manufacturers' product lines and across manufacturers enhances 
the economic efficiency of fuel economy standards. With feebates, 
efficiency depends on choosing the right feebate rate, in dollars per 
gallon per mile (the inverse of miles per gallon).
    Question 2. As someone who has looked at the effectiveness of CAFE 
standards and other systems for increasing fuel efficiency, do you have 
an opinion about which types of policy would be most effective in 
``pushing the technological envelope'' on fuel economy?
    Answer. Fuel economy standards will require the adoption of fuel 
economy technologies up to the point at which the standards are met. 
Beyond that point, there is no incentive for manufacturers to implement 
advanced technologies to improve fuel economy. Fuel economy standards 
send manufacturers a mixed message about inventing new fuel economy 
technologies. If manufacturers are convinced that fuel economy 
standards will be raised in the future, they will carry out research 
and development to be prepared for the higher standards to come. On the 
other hand, manufacturers may fear that if they invent a new technology 
it would only inspire regulators to adopt more stringent standards. 
Feebates, on the other hand, send a clear and consistent signal. If a 
new fuel economy technology can gain a rebate or avoid a fee cost-
effectively, it will be adopted. Inflation indexed feebates would 
provide a consistent and continuing incentive both to invent and adopt 
advanced technologies to improve fuel economy. In this sense, they 
should be more effective at ``pushing the technology envelope'' on fuel 
economy.
                                 ______
                                 
       Responses of John German to Questions From Senator Sanders
    Question 1. The bill I recently introduced with Sen. Boxer and 9 
other of my colleagues to combat global warming--S. 309--includes 
CO2 emissions standards for vehicles, the same standards 
already in place in California. Can you please comment on what your 
company is doing to meet these requirements or to fight these 
requirements?
    Answer. Climate change is an issue that requires serious attention 
throughout the economy and in that context, motor vehicle manufacturers 
must do their share to address the issue. Because there is a direct 
relationship between the amount of greenhouse gas emissions and fuel 
economy, Honda has been an advocate for higher fuel economy standards 
(CAFE). It supported higher CAFE standards for light trucks and has 
urged the National Highway Traffic Safety Administration to increase 
the standards for passenger cars as well. Honda believes that 
greenhouse gas regulation can only be successful if it is addressed at 
the federal, rather than the state, level.
    Honda's fleet of vehicles achieves the highest fuel economy of any 
major manufacturer. It has adopted its own target to reduce greenhouse 
gas emissions from its products worldwide--10% grams/km between 2000 
and 2010.
    Question 2. Please respond to Senator Menendez' excellent question 
regarding the relative efficiencies of fuel cell electric vehicles 
versus plug in hybrid electric cars. That is, how much original 
electricity from a solar panel on the roof of an American home is lost 
in delivering power to split water to make hydrogen, to compress this 
hydrogen and make a fuel cell vehicle run versus the same electricity 
delivered to a plug in hybrid electric vehicle?
    Answer. If one assumes that the energy for both fuel cell vehicles 
and electric vehicles comes from electricity available at the home, it 
is true that losses in splitting water to make hydrogen, compressing 
the hydrogen, and fuel cell operation are somewhat higher than the 
losses in charging a battery pack and electric motor operation. 
However, this is not the right way to compare the technologies, as it 
is only part of the story:

   A fuel cell vehicle only operates on hydrogen, while a plug-
        in hybrid has limited all electric range and, thus, will 
        operate much of the time on gasoline.
   The plug-in hybrid vehicle must be at home and plugged in 
        during the day, which is not typical, in order for the 
        batteries to be recharged with renewable energy from the solar 
        panel. Hydrogen can be produced from the solar panel even when 
        the vehicle is not present.
   Hydrogen can be used in a co-generation system to provide 
        very high efficiency electricity and heat for the home.
   Hydrogen can also be produced from natural gas or even 
        biogas, with similar or even higher full-cycle efficiency, and 
        lower GHG per mile in a Fuel Cell Vehicle, versus the use of 
        the national electric grid (using coal and natural gas fueled 
        power plants) to charge an electric vehicle battery and drive 
        it the same distance.

    We believe that fuel cell electric vehicles have the most promise 
to address both climate change and energy sustainability issues in the 
long term.
       Response of John German to Question From Senator Cantwell
    Question 1. There seems to be a spread of opinion on the maturity 
of Lithium-ion batteries suitable for plug-in hybrid use. Mr. German's 
testimony suggested that we need to wait ten years, building a market 
for the technology via the conventional hybrid market before plug-in 
hybrid battery technology is mature enough for market. I have several 
questions relative to this context:
    Ms. Lowery, Mr. German, and Dr. Anderman, a recent study by Pacific 
Northwest National Laboratory showed that the existing U.S. electrical 
system has sufficient excess capacity to provide charge to a plug-in 
hybrid fleet that could save a very significant fraction of our oil 
imports. Calculations based on this study also showed that the cost of 
the electricity that would be used in charging would the equivalent of 
about $1.00 per gallon gasoline. Given that plug-in hybrids have this 
strong of comparative advantage versus gasoline, do you believe that 
current targets for plug-in battery performance might be relaxed 
somewhat, thus accelerating delivery to the market?
    Answer. We agree that the existing U.S. electrical system has 
sufficient excess capacity to provide charge to a significant plug-in 
hybrid fleet. We also agree that the cost of the electricity would be 
the equivalent of about $1.00 per gallon gasoline. However, the targets 
for plug-in battery performance already reflect these factors.
    Key targets for PHEV battery technology include usable energy 
density (size and weight), durability, safety, and cost. Most customers 
will only pay for a few years of fuel savings, so the incremental cost 
of the system must be reasonable. More importantly, customers that pay 
for mobility expect an operating life comparable to today's 
alternatives. Relaxing any of the battery targets would damage the 
reputation of the new technology and market acceptance.
      Responses of John German to Questions From Senator Bingaman
    Question 1. You believe a battery does not yet exist for a ``plug-
in hybrid'' that can meet the performance criteria you need and is 
affordable for the consumer. Is there a specific ratio of power and 
energy to price at which plug-ins become viable?
    Answer. Currently, conventional hybrids carry a price premium of 
roughly $2000 to $4000 over a conventional vehicle. The market has 
demonstrated that this price premium is too large relative to the fuel 
savings for most customers. The conventional hybrid market is currently 
about 1.5% of the entire new vehicle market and is unlikely to increase 
to more than 3% or so without significant cost reductions.
    According to ACEEE's September 2006 report on plug-in hybrid 
vehicles, at $3.00 per gallon a hybrid vehicle saves about $480 per 
year in fuel over a comparable conventional vehicle. By comparison, a 
plug-in hybrid vehicle only saves an additional $225 per year over a 
comparable hybrid vehicle--less than half the fuel cost saved with a 
conventional hybrid. This suggests that the price premium for a plug-in 
hybrid vehicle over a conventional hybrid must be less than half the 
price premium for a hybrid over a conventional vehicle.
    Based on experience with conventional hybrids and the relative fuel 
savings, slashing battery costs by about 80%, to less than $300 per kW-
hour, and increasing durability to last the life of the vehicle should 
enable a niche market for plug-in hybrids. Keep in mind that battery 
improvements will also reduce the cost of conventional hybrids. Very 
few customers will compare plug-in hybrids to conventional vehicles--
customers considering plug-in hybrids will be comparing them to the 
improved, cheaper conventional hybrids.
    For plug-in hybrids to supplant conventional hybrids and go 
mainstream requires either energy storage to drop to something less 
than $100 per kW-hour (roughly 95% reduction from current levels) or 
fuel shortages. Many customers will pay a substantial premium for 
utility and convenience, as demonstrated by the strong demand for four-
wheel drive vehicles. If sustained fuel shortages occur, home refueling 
will become a highly-valued feature, with plug-in hybrids competing 
with compressed natural gas and fuel cell vehicles.
    Question 2. You've outlined some of the technological challenges to 
bringing advanced technology vehicles to U.S. consumers. What market 
challenges do you see to mainstreaming fuel-efficient vehicles and what 
can be done at the federal level to address these challenges?
    Answer. There are two primary challenges to mainstreaming fuel 
efficient vehicles--competition and leadtime.
    The first challenge is the nature of market competition. The 
vehicle market is extremely competitive and is becoming more 
competitive every year. Every manufacturer looks to find competitive 
advantages in the market, such as reduced cost, better reliability, 
better quality, distinctive designs, more utility, more luxury, better 
performance, better safety, and better fuel economy. Engineering 
resources are limited and expensive, as is tooling and design. Thus, 
every manufacturer tries to spend their engineering time and tooling/
design budget on the features that will matter most to customers. If 
one manufacturer focuses on mainstreaming fuel efficient vehicles, this 
reduces the resources available to work on other attributes. If their 
competitors use their resources instead to offer features more highly 
valued by most new vehicle customers, such as improved performance and 
more luxury, the manufacturer that focused on fuel efficient vehicles 
will be at a competitive disadvantage.
    This is precisely why CAFE standards and/or a feebate program are 
necessary. A CAFE program removes the competitive disadvantage from 
mainstreaming fuel efficient vehicles, as all manufacturers would be 
required to invest resources in efficiency technologies. A feebate 
program works directly by providing monetary incentives to 
manufacturers who develop and use efficiency technologies. Either 
system can effectively bring efficiency technologies to the market.
    Increasing the price of fuel is another effective way to reduce 
fuel use. CAFE and feebates work primarily by spreading efficiency 
technologies throughout the fleet. Higher fuel prices promote customer 
acceptance of the efficiency technologies, as well as reductions in 
vehicle travel and the type of vehicle selected by purchasers. While 
directly raising fuel taxes is politically difficult, it could be more 
acceptable if presented with an off-setting tax reduction or as a cost 
shift. Examples include a reduction in income taxes or pay-at-the-pump 
vehicle insurance. The later would reduce vehicle insurance premiums 
and collect the difference at the gas pump. This would also have the 
advantage of collecting money at the pump from drivers operating a 
vehicle without insurance, which would further reduce insurance 
premiums.
    The second challenge to mainstreaming fuel-efficient vehicles is 
leadtime. Due to the competitive nature of the market, there are huge 
risks to widespread adoption of new technologies. If a manufacturer 
invests in a technology that ultimately proves to be more expensive, 
they will be put at a cost disadvantage compared to their competitors. 
Even worse is widespread adoption of a technology that does not meet 
the customer expectations for performance and reliability. Not only 
does this hurt the manufacturer's reputation, it can also set back 
acceptance of the technology for all manufacturers. Thus, it is 
extremely important to implement new technology on normal development 
cycles. To ensure quality and reliability, new technologies go through 
a rigorous product development process and are put into production 
initially on a limited number of vehicles. This not only allows proof 
of quality and durability, it is also necessary for cost 
considerations. The cost of new technologies always goes down with 
higher volumes and additional development. However, the rate of the 
cost reduction is highly variable. One technology may drop dramatically 
in cost with high volume production and further development, while 
another may prove to be far more difficult to reduce costs. An orderly 
development process is needed to adjust technology deployment in 
response to learning.
    Costs also increase dramatically if normal development cycles are 
not followed. Most products are on a 5-year development cycle and some 
are considerably longer. Forced development and implementation of new 
technologies on a faster timeline is extremely disruptive and greatly 
increases development costs, tooling costs, and the risk of mistakes.
    Question 3. As someone who has looked at the effectiveness of the 
CAFE standards and other systems for increasing fuel efficiency, do you 
have an opinion about what types of policy would be most effective in 
``pushing the technological envelope'' on fuel economy?
    Answer. As discussed in our response to question 2, the only 
policies that would be effective in ``pushing the technology envelope'' 
on fuel economy are CAFE and feebates. Feebates have an advantage in 
that they automatically address the leadtime constraints--technologies 
will be developed and implemented as soon as they are cost effective, 
but implementation of technologies that are not ready or cost effective 
would not be required. The downside is that the ultimate amount of fuel 
economy increase is not certain under a feebate system.
    CAFE can also effectively bring fuel economy technology into the 
fleet. The major problem with CAFE is that the rate of technology 
development cannot be forecasted. There are times when technology 
development progresses rapidly and other times where promising 
technologies do not pan out. This is why it is important for an expert 
agency, such as NHTSA, to monitor technology progress. When technology 
breakthroughs occur, NHTSA should increase the CAFE standards to compel 
more rapid implementation of the technology breakthroughs. Should 
technology development hit unexpected problems, NHTSA should adjust the 
CAFE standards to prevent unintended market and competitive problems. 
Congress should specify the criteria used by NHTSA to make CAFE 
adjustments, but a rational adjustment mechanism is needed in order to 
implement technology at the maximum feasible rate without market 
disruptions. NHTSA has the technical expertise and experience to make 
these judgments.
    Mandates for specific technologies rarely work in pushing the 
technology envelope. There are a vast multitude of possible 
technologies in development at any time, all with highly uncertain 
costs and other attributes. In fact, most technologies never make it 
into high volume production, either because they do not work out as 
anticipated or because they wind up being replaced by even better 
technologies. Thus, mandates have two risks. The first is that they 
require massive amounts of engineering resources and money to be spent 
on a technology that doesn't work out as anticipated. The second is 
that they divert resources and money away from the development of even 
better technology. It is difficult even for manufacturers to assess 
which technologies deserve development and resources--and we constantly 
reassess and change technology development and implementation. If 
manufacturers, whose very existence depends on making the right 
decisions, have difficultly determining the most promising 
technologies, the chance that Congress can pick the right technology to 
mandate is very poor. This is demonstrated by past failures in 
California to mandate methanol and electric vehicles. Congress needs to 
establish performance requirements or incentives and let the experts 
develop the best mix of technologies to meet society's needs.
    There are two other points that should be kept in mind with respect 
to mandates. One is that no technology reduces fuel consumption much 
unless it can be spread across most of the fleet. For example, a 10% 
market penetration for plug-in hybrids would only save as much fuel as 
a 3% increase in CAFE standards and would have less GHG benefit. There 
is no magic bullet--we need development of a wide range of technologies 
as rapidly as possible.
    The second point is that there is also nothing magical about energy 
switching. Using electric to power vehicles instead of gasoline reduces 
oil imports. But improving the efficiency of a gasoline vehicle also 
reduces oil imports--and does it without the need to increase other 
kinds of power generation. Vehicle efficiency improvements are the best 
way to reduce oil consumption and GHG emissions. Performance 
requirements or incentives are the best way to bring efficiency 
improvements into the fleet.
                                 ______
                                 
       Responses of Beth Lowery to Questions From Senator Sanders
    Question 1. While it is gratifying to see that GM plans to build 
100 fuel cell vehicles as part of Project Driveway, when will this 
happen? And when will we do the same for plug-in hybrids like GM's 
Chevy Volt, which I saw at the DC Auto Show last Friday (January 26th)?
    Answer. GM will build more than 100 Chevrolet Equinox Fuel Cell 
vehicles and will begin placing them with customers in the fall of 
2007, as part of a comprehensive deployment plan dubbed ``Project 
Driveway.'' Designed to gain comprehensive learnings on all aspects of 
the customer experience, Project Driveway constitutes the first 
meaningful market test of fuel cell vehicles anywhere. A variety of 
drivers--in differing driving environments--will operate these vehicles 
and refuel with hydrogen in three geographic areas: California, the New 
York metropolitan area and Washington D.C.
    As for the Chevy Volt, one of the key enablers for plug-in hybrid 
vehicles is the advanced battery pack that can provide all of the 
energy and power needs of such vehicles. We need advanced battery packs 
that are proven to be durable, reliable, and cost effective, as well as 
providing the expected driving ranges. Battery technology is maturing 
quickly. Consequently, we are accelerating engineering development of 
the E-Flex technology, which will enable us to take advantage of 
advances in batteries as they occur. When the battery is ready, we plan 
to be too. In the meantime, we are producing a driveable version of the 
Volt using existing battery technology. This will allow us to gain 
valuable experience with the packaging of the technology in a more 
limited range vehicle, while we wait for the battery packs that will 
allow the vehicles to achieve the targets we envision for it.
    Given what we know today, it will take several years to bring a 
plug-in hybrid to market that will meet the expectations and real-world 
performance standards that our customers expect. The government can 
help by increasing R&D in this area and developing new support for 
domestic manufacturing of advanced batteries.
    Finally, advanced automotive technologies will not address national 
energy security issues unless they are adopted by large numbers of 
consumers. Well crafted tax incentives can accelerate adoption of new 
technologies and strengthen domestic manufacturing. The government can 
focus consumer tax credits on technologies that reduce petroleum 
consumption and provide support for manufacturers/suppliers to build/
convert facilities that provide advanced technologies.
    Question 2. You also called for the government to support new 
technologies by purchasing these vehicles to create a market and jump 
start new technologies. When can we expect the Chevy Volt to be 
available to purchase so that the federal government can buy them?
    Answer. We are unable to predict when the Chevrolet Volt will come 
to market. Battery technology is maturing quickly. We are accelerating 
engineering development of the E-Flex technology, which will enable us 
to take advantage of advances in batteries as they occur. When the 
battery is ready, we plan to be too.
    Government purchasing should set the example for advanced 
technologies currently available as well. Government should continue to 
purchase flex fuel vehicles and hybrids, and demand maximum utilization 
of E85 in the government flex fuel fleets. Federal fueling can also 
stimulate development of publicly accessible pumps, and provide 
adequate funding to permit purchase of electric, plug in and fuel cell 
vehicles in federal fleets as soon as technology is available.
    Question 3. The bill I recently introduced with Sen. Boxer and nine 
of my colleagues to combat global warming--S. 309--includes 
CO2 emissions standards for vehicles, the same standards 
already in place in California. Can you please comment on what your 
company is doing to meet these requirements or to fight these 
requirements?
    Answer. The California CO2 requirements for vehicles are 
in conflict with federal law and are excessive. The automotive industry 
has said as much during the entire process of the passage of the 
California law and the development of the regulatory program to 
implement those requirements. The California matter is currently stayed 
indefinitely, pending resolution of other cases/administrative 
proceedings.
    As to any current or new CO2 emission requirements for 
vehicles, the auto industry has been subject to CO2 
constraints for over 30 years under the Corporate Average Fuel Economy 
(CAFE) program. The miles per gallon standards for the CAFE program and 
any CO2 limits on gasoline vehicles are exactly the same 
thing, because the emissions of CO2 are directly related to 
the consumption of gasoline in such vehicles. In effect, 
``CO2 emissions requirements'' are just another way of 
saying ``fuel economy.''
    Over the years, we have attempted to balance the consumer 
expectations for improved safety, comfort, utility, performance, etc., 
with improvements in energy efficiency. Simply setting arbitrary fuel 
economy or CO2 emission targets is not consistent with this 
goal of meeting American consumer needs. It is also not consistent with 
the technological and economic realities of vehicle design, 
engineering, certification and production. Instead, policies that 
displace petroleum with low-carbon biofuels and electricity can more 
effectively address the growth of energy consumption in the U.S. (which 
is primarily due to growing population and increased driving)--and 
avoid creating undue economic limitations and competitive impacts among 
manufacturers.
    Question 4. Please respond to Sen. Menendez' excellent question 
regarding the relative efficiencies of fuel cell electric vehicles 
versus plug in hybrid electric cars. That is, how much original 
electricity from a solar panel of the roof on an American home is lost 
in delivering power to split water to make hydrogen, to compress this 
hydrogen and make a fuel cell vehicle run versus the same electricity 
delivered to a plug in hybrid electric vehicle?
    Answer. One of the goals of developing advanced technology and 
alternative fuel vehicles is to help displace or reduce the gasoline 
consumption in the U.S. We believe that pursuing a variety of different 
paths will help us develop greater energy diversity.
    Some people believe that focusing on hybrid electric and plug-in 
hybrid electric vehicles are the best steps to accomplish this. 
Unfortunately, these hybrids are still dependent on gasoline usage to 
some degree. And, given the driving patterns of many Americans, 
consumption of gasoline in hybrid and plug-in hybrid vehicles will 
remain high.
    Fuel cell hybrid vehicles powered by hydrogen offer yet another 
choice. The hydrogen does require energy to create, but future sources 
of hydrogen production may be able to rely even less on oil than simply 
focusing on hybrid and plug-in hybrid vehicle technology. Wind, solar, 
renewables and even nuclear power can be used to produce the hydrogen.
    We hope that all of these technology options can be developed to 
the point that we can see how large and how effective a role they can 
play.
      Responses of Beth Lowery to Questions From Senator Cantwell
    Question 1. What do you believe is the expected time to have a 
viable plug-in hybrid vehicle assuming a $3000 per vehicle tax credits 
are passed soon to incentivize the market? Would greater incentives 
serve to accelerate this time frame?
    Answer. This is a priority program for GM, given the potential it 
offers for fuel economy improvement. Given what we know today about 
advanced battery availability, it will take several years or more to 
bring a plug-in hybrid to market that will meet the expectations and 
real-world performance standards that our customers expect . . . things 
like safety, durability, driving range, recharge time, operating 
temperature range, and affordability.
    Advanced lithium-ion batteries are a key enabler. The government 
can help by increasing R&D in this area and develop new support for 
domestic manufacturing of advanced batteries.
    Regarding incentives, advanced automotive technologies will not 
address national energy securities issues unless adopted by large 
numbers of consumers. A consumer tax incentive of $3000 will certainly 
help advance the prospects of plug-in hybrids. But, a much greater 
incentive may be needed to overcome the expected high initial costs of 
the battery packs and advanced electronics needed in these vehicles. 
Incentives that are 2-3 times the current levels for advanced hybrid 
vehicles may be needed to really accelerate the early growth of plug-in 
hybrid vehicles.
    Question 2. A recent study by Pacific Northwest National Laboratory 
showed that the existing U.S. electrical system has sufficient excess 
capacity to provide charge to a plug-in hybrid fleet that could save a 
very significant fraction of our oil imports. Calculations based on 
this study also showed that the cost of the electricity that would be 
used in charging would have the equivalent of about $1.00 per gallon 
gasoline. Given that plug-in hybrids have this strong of comparative 
advantage versus gasoline, do you believe that current targets for 
plug-in battery performance might be relaxed somewhat, thus 
accelerating delivery to market?
    Answer. One of the conceptual flaws of many studies regarding the 
availability of electricity for use in vehicles is that there is ample 
excess capacity at a low cost. The ``excess capacity'' is usually off-
peak power (i.e., night time). But owners of electric and plug-in 
electric hybrid vehicles are not going to only plug in these vehicles 
at night. They will look to keep the batteries charged to a high level 
by plugging in the vehicles whenever and wherever they can. So, 
realistically, as the volume of these vehicles increases, the 
electricity demand associated with charging them will be at all times--
on-peak as well as off-peak. More analysis needs to be done, and the 
infrastructure and energy providers should be encouraged to continue 
this type of research.
    Regarding the desirability of relaxing the targets for plug-in 
vehicle performance (notably driving range on electric drive only), 
that may well be worth considering as we see how advanced battery 
development and production are progressing.
      Responses of Beth Lowery to Questions From Senator Bingaman
    Question 1. You believe a battery does not yet exist for a ``plug-
in hybrid'' that can meet the performance criteria you need and is 
affordable for the consumer. Is there a specific ratio of power and 
energy to price at which plug-ins become viable?
    Answer. Due to the early state of the development of the battery 
pack that would be used in a plug-in hybrid, we have not yet set a 
power and energy to price ratio. Early cost estimates of the battery 
pack show it to be very expensive, but as the production volume of 
lithium-ion battery packs increases, there will be a reduction in the 
cost of the pack.
    Advanced batteries are the key enabler to a whole array of future 
advanced technology vehicles that we would like to be able to produce--
vehicles that will use little to no gasoline in routine driving and 
which will produce even lower levels of tailpipe and greenhouse gas 
emissions. Development of reliable, durable, cost effective advanced 
batteries--like the lithium-ion batteries that are being explored in 
all of the major auto producing countries of the world--should be 
accelerated if possible, and the U.S. should look to make sure adequate 
supplies of these batteries are produced in the U.S. It would be 
unfortunate for the U.S. to trade our dependence on foreign oil for a 
dependence on foreign supplies of a new critical component of future 
vehicles.
    The US Advanced Battery Consortium (USABC) is helping direct the 
research needed to develop battery packs for vehicle applications and 
the government needs to start now to determine what incentives will be 
most effective in encouraging U.S. production of these batteries.
    Question 2. You and other automakers have advocated for a 
significant federal investment in battery technology to get us to the 
next step in efficiency. As we have heard here, real advances in 
efficiency have been made in the past, but they have been applied to 
increase power rather than to save fuel. How do you recommend we ensure 
the taxpayers get a fair return in fuel savings on their investment in 
advanced vehicle technologies?
    Answer. Automobile design is a matter of striking the right balance 
of maximizing the fuel efficiency as well as all the other attributes 
customers expect from each vehicle in our product portfolio. As with 
past advancements in technology, various automakers have used them in 
different ways to create the vehicles they believe consumers will want 
while making improvements in fuel efficiency and safety. As a result, 
there is a wide array of hybrid vehicles in the market, both in the 
light-duty market as well as in the transit bus market. The auto 
companies aggressively compete with each other to provide the best 
balance of these attributes. Ultimately, our customers decide who has 
done the best job and they pick the winners by their purchase 
decisions. We expect that providing improved fuel efficiency will be 
valued by consumers. We urge the government to rely on market forces, 
competition and consumer purchase decisions to guide the proper 
application of the technologies that are developed using government 
funding.
                                 ______
                                 
    Responses of Menahem Anderman to Questions From Senator Bingaman
    Question 1. You indicated that in order to make the leap from 
today's hybrids to a plug-in hybrid requires a technological advance in 
power density (actually in energy density--comment from M. Anderman) 
and a significant reduction in cost. Where are we technologically? Do 
technologies exist that have yet to be sufficiently field tested or are 
we still awaiting fundamental breakthroughs in the lab?
    Answer. I do not believe that any technology exists, at any state 
of development, which can support the present commercialization of 
PHEVs. Battery volume (energy density) and battery cost (even assuming 
very large PHEV volumes) are clearly inadequate. Battery life, 
reliability, and safety are also significant challenges.
    Question 2. Regarding costs: I understand the component cost of 
nickel may limit how cheaply a NiMH (``nickel-metal-hydride'') battery 
can be produced. Do lithium ion batteries face the same inherent cost 
problem, or is the problem there one of not yet having sufficient 
production facilities to drive down costs? How much cost reduction can 
we reasonably expect from large-scale manufacturing?
    Answer. The cost barrier for Li-Ion batteries is large but somewhat 
different than for NiMH batteries. The former is generally driven by 
the technology's requirement for very pure processed materials and very 
tight manufacturing tolerances and controls. However, cell 
manufacturing for the portable battery business is already at very high 
volume (over 1 billion cells per year) and consumes very large amounts 
of those materials. The Japanese/Korean Li-Ion battery industry has 
gone through the steep part of the learning curve and we expect a slow 
continuous cost reduction in the future. The pricing of $500 to $700 
per kWh, which I have used in my briefing, is based on today's 
technology but at PHEV battery pack volumes of hundreds of thousand 
packs per year.
    Li-Ion technology is evolving--regardless of the particular 
automotive application--with new materials being introduced into 
commercial products. However, there are multiple drivers for new 
materials, including increasing energy content, reducing cost, 
supporting longer life, and improving safety and reliability. While 
notable improvement in one or two of the four parameters above is quite 
possible, it is unlikely that materials that will significantly improve 
all four parameters--which is what will be required to change the value 
equation for the PHEV application--will be developed in less than ten 
years, and it often happens that improvement in one parameter, such as 
cost for example, comes at the expense of another, such as energy 
density or/and life.
    As a reference, notebook computer battery packs are sold at volumes 
on the order of 50 million packs per year at a current high-volume OEM 
pack pricing of around $500/kWh. My estimate of $500 to $700 per kWh 
for the PHEV battery may still be somewhat optimistic, considering that 
many of the material cost drivers in computer cells and HEV or PHEV 
cells are the same, but that the higher power, more demanding duty 
cycle, and longer life requirement of the PHEV application will put 
upward pressure on battery cost per kWh.
     Response of Menahem Anderman to Question From Senator Sanders
    Question 1. Please respond to Senator Menendez' excellent questions 
regarding the relative efficiencies of fuel cell electric vehicles 
versus plug-in electric cars. That is, how much original electricity 
from the solar panel on the roof of an American home is lost in 
delivering power to split water to make hydrogen, to compress this 
hydrogen and make a fuel cell vehicle run versus the same electricity 
delivered to a plug-in electric vehicle?
    Answer. The grid to electric motor efficiency through making H2 in 
electrolysis and powering a fuel-cell vehicle with this hydrogen is 
only about 25 to 30%.
    A typical breakdown of the various steps includes:

          i) Water electrolysis at about 65%,
          ii) Compressing the hydrogen at about 85% to an accumulative 
        efficiency of 55%,
          iii) Losses in powering ancillary fuel-cell pumps: about 15% 
        to an accumulated efficiency of 47%, and
          iv) Fuel cell hydrogen to electricity efficiency of 60%, to 
        an accumulated efficiency of 28%.

    The efficiency of charging a Li-Ion battery and outputting it to an 
electrical motor is in the range of 80%. Thus the efficiency advantage 
of storing the electricity in a battery versus using H2 is two to three 
times, or more significantly, the losses associated with the FC 
compressed hydrogen route of 70 to 75% are about three times the losses 
associated with the battery route of about 20%. Both schemes will have 
similar additional losses upfront for electrical energy generation and 
final losses related to converting the electrical energy to mechanical 
torque in the vehicle.
    Responses of Menahem Anderman to Questions From Senator Cantwell
    Question 1. Ms. Lowery and Dr. Anderman, what do you expect is the 
expected time to have a viable plug-in hybrid vehicle assuming a $3000 
per vehicle tax credit are passed soon to incentivize the market? Would 
greater incentives serve to accelerate this market?
    Answer. I do not believe PHEVs are viable for mass 
commercialization at the current technological status and fuel pricing, 
and tax incentives of $3,000 will not do nearly enough to effect a 
genuine change. My estimate--in line with that of many technologists 
from the relevant high-volume manufacturing industry--is that the cost-
based pricing of PHEVs with a 20-mile electric range is about $10,000 
to $15,000 higher than that of strong hybrids (this difference would be 
even higher for a PHEV with a higher electric range). The incremental 
initial cost of the former over that of the latter is on the order of 
$6,000. In addition, the net present value of at least one battery 
replacement will have to be added to the price of the PHEV (at about 
1.5 times the OEM battery price), since no battery company will provide 
a warranty for PHEV applications covering the useful life of the car 
(or even a significant fraction of it).
    The net present value of the fuel savings to the customer over the 
life of the car versus the cost in fuel of operating a strong hybrid 
such as the Toyota Prius, evaluated--for PHEVs with a 33-mile range--by 
the very same Northwest National Laboratory study quoted by Senator 
Cantwell in the next question,\1\ is estimated at between zero and 
$1,000 (at $2.50/gallon of fuel and electricity priced at $0.08/kWh to 
$0.12/kWh). Thus, the fuel savings above contribute but little to 
overcoming the cost disadvantage noted in the prior paragraph.
---------------------------------------------------------------------------
    \1\ Michael J. Scott, Michael Kintner-Meyer, Douglas B. Elliot, and 
William M. Warwick, Pacific Northwest National Laboratory, ``Impacts 
Assessment of Plug-in Hybrid Vehicles on Electric Utilities and 
Regional U.S. Power Grids: Part 2: Economic Assessment''.
---------------------------------------------------------------------------
    PHEVs should be looked upon as a potential long-term solution that 
is more technologically and commercially feasible than fuel-cell 
vehicles and offers equivalent or better energy savings and emission 
benefits. PHEVs could support a reduction in the nation's petroleum 
consumption when the value of saving a gallon of petroleum is three or 
more times the current U.S. gasoline pricing.
    Question 2. Ms. Lowery, Mr. German, and Dr. Anderman, a recent 
study by Pacific Northwest National Laboratory showed that the existing 
U.S. electrical system has sufficient excess capacity to provide charge 
to a plug-in hybrid fleet that could save a very significant fraction 
of our oil imports. Calculations based on this study also showed that 
the cost of the electricity that would be used in charging would the 
equivalent of about $1.00 per gallon gasoline. Given that plug-in 
hybrids have this strong of comparative advantage versus gasoline, do 
you believe that current targets for plug-in battery performance might 
be somewhat relaxed, thus accelerating delivery to the market?
    Answer. I believe that targeting the initial entry of PHEVs into 
the market with a moderate 10-mile range or so may be somewhat 
beneficial as it would allow the introduction of PHEVs on existing 
platforms--although at the current price of fuel it still would not 
work. For PHEVs with a range beyond 10 miles, automakers will have to 
design a new vehicle platform from the ground up--to accommodate the 
much larger battery--as is proposed by GM for the Chevrolet Volt. The 
associated engineering and tooling cost of having to build a dedicated 
platform for a vehicle that does not currently have a sustainable 
business case adds an additional barrier to commercialization.
    The commercial barrier to developing electrical transportation, be 
it EV or PHEV (rather than electrically-assisted transportation, as 
with strong hybrids) is that the savings in fuel are considerably 
smaller than the cost of depreciating the battery over its useful life. 
Note that the annual fuel cost savings provided by a PHEV with a 10-
mile range against the fuel cost of operating a Toyota Prius--at 
today's typical gasoline pricing ($2.5/gallon) and electricity pricing 
($0.10/kWh)--will only amount to $100 or less. Such marginal savings 
are too small to outweigh the numerous disadvantages and generate 
customer interest.

                                    

      
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