BUSINESSWEEK ONLINE : AUGUST 14, 2000 ISSUE
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Commentary: The Japanese Are Making the Right Bet on Hybrids


When the subject of greener cars comes up, Detroit always has the same answer: Americans won't buy them. U.S. motorists, the industry says, want the broad-shouldered, gas-hungry hulks that are usually shown screaming across the landscapes environmentalists fight to protect. Besides, carmakers say, we can't get the mileage up to where environmentalists want it--the technology isn't there.

Uh-oh. Here come a couple of cool, high-tech cars that customers want to buy. These gas-electric hybrids not only deliver snappy performance but also get up to 65 miles per gallon. When Detroit was formulating its denunciation of green cars, it apparently forgot to send the memo to Japan. Toyota Motor Corp. (TM) and Honda Motor Co. (HMC) accomplished what Detroit said was impossible. And environmentalists are giddy.

''It's everything we can do to bite our tongues and not say, 'We told you so,''' says Daniel F. Becker, director of the Sierra Club's global warming and energy program. ''We're very enthused about hybrid cars and think that they are the wave of the present.'' The Sierra Club, which had never in its 108-year history honored a product, created an award for excellence in environmental engineering and gave it to both Honda's Insight and Toyota's Prius.

COSTLY REBATES. The critical issue for environmentalists is whether hybrids can help reduce the threat of global warming. All gas-burning cars emit carbon dioxide, one of the principal culprits. Better mileage means fewer emissions. American cars and trucks burn 120 billion gallons of gasoline a year, producing more than 1 billion tons of carbon dioxide, according to the Sierra Club. Part of the problem is the cars Americans drive. The Sierra Club calculated that the colossal Ford Motor Corp. (F). Excursion sport-utility vehicle is responsible for 134 tons of carbon dioxide during a 124,000-mile lifetime. A Honda Insight driven the same distance generates only 25 tons.

Hybrid cars offer a painless way to cut carbon dioxide emissions. But they can't do it fast enough. Nations will be meeting at The Hague in November to consider further progress toward reducing carbon dioxide emissions. And the U.S. will be under pressure to take action. But hybrid vehicles are not likely to grab a big share of the U.S. market for at least another decade.

The reason is that Honda and Toyota are giving consumers a hidden, costly rebate with each hybrid car they sell. Analysts estimate that Honda is losing $8,000 on each Insight. Toyota is also believed to be subsidizing each Prius. The auto makers won't make a bigger push to sell hybrids until those costs come down. ''I think with luck we can get to a million or so vehicles over a decade,'' says John M. DeCicco, a mechanical engineer and auto-policy specialist at the American Council for an Energy Efficient Economy in Washington. ''I don't see the costs coming down fast enough'' to sell any more than that.

In the meantime, if the U.S. wants to cut its emissions, it must boost the fuel efficiency of conventional cars, minivans, and light trucks. A gas tax is one way to do that. It would cut gasoline use--thereby reducing carbon dioxide emissions. It would encourage moves to alternative fuels, reduce dependence on foreign oil, and make hybrid cars far more attractive. The tax could be offset with a reduction in income taxes, say, so that it would end up costing the public nothing. It's a rational solution--the kind that economists like. But it has no chance of adoption in Washington's antitax climate.

An alternative is to raise fuel-economy standards. This strategy has been proven to work. The standards were tightened in the early 1980s, and the actual fuel economy of cars and light trucks rose to an average 26 miles per gallon. But the auto industry blocked any further attempt to change the standards. And now the average fuel economy of U.S. cars and light trucks has fallen back to where it was in 1980, shortly after the system was established (chart).

U.S. auto makers are betting they can continue to block tougher fuel-economy standards and delay the arrival of greener cars and trucks. With the Insight and the Prius, Honda and Toyota are making a different bet. They are positioning themselves as the carmakers of the future. They are getting valuable experience in the production of sleek, affordable, environmentally friendly cars. That makes it easy for environmentalists to take sides.

By Paul Raeburn
Senior Writer Raeburn covers science and the environment.

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