Cars are the challenge de jour on several obvious levels. 

   1. There’s no currently discernable path to profitability for G.M. and Chrysler and thus no exit strategy for the bailout funds they need.  So G.M. and Chrysler are like suicide terrorists wandering around the business community threatening to blow up both themselves and everyone else in the room.  Nobody knows whether to feed them or shoot them. 

   2. Cars cause America’s “oil addiction” which in turn has caused so much of America’s balance of payments and foreign policy and military pains - with no end in sight. 

   3. CO2 emissions from cars is a substantial contributor to the risks of global warming - also with no end in sight.

If cars are the cause of such vital U.S. problems then it follows that the solution must be changes in the car world.  The Obama team and Congress can make change happen by providing short-term and medium-term incentives for very high fuel efficiency cars made in the U.S. to be sold in great numbers.   Doing that would give the U.S. car makers an opportunity to become profitable through sustainable high levels of profitable sales; it would hasten the transition of the U.S. fleet to higher fuel efficiency thus reducing our oil addition more rapidly; and it would hasten the reduction of CO2 emissions.

One way to accomplish all this is rather straightforward.  First, decide to feed G.M. and ignore Chrysler.  Chrysler is owned by Private Equity which cannot be bailed out, so to hell with it; guaranteeing a more healthy G.M. means Chrysler can’t kill us by going under.  Second, adopt a ten-year plan of incentives for U.S. car consumers as follows:

   - establish a rising level of unacceptable and super-acceptable fuel efficiency standards over ten years.   For example, the starting level of unacceptable might below 18 mpg and the starting level of super-acceptable might be above 35 mpg.  These numbers would each rise steadily over a ten year period. 

   - tax all cars sold in the U.S. or imported by end users into the U.S. that have unacceptable fuel efficiency.  Set the tax rate to increase over time, along with the mpg rating that is “unacceptable”.   So, for example, cars with under 18 mpg in 2009 might carry a $3,000 tax.  Cars with under 20 mpg in 2011 might carry a $4,000 tax.  

   - pay a cash rebate to buyers of super-acceptable models that are produced (assembled, at least) in the U.S.  Again the mpg rating and tax rebate would increase over time.  So in 2009 cars with over 35 mpg in might get a $3,000 rebate and cars with over 37 mpg in 2011 might get a $4,000 rebate.   Or maybe it should be a sliding scale so cars above 35 mpg get $X, cars above 45 get more, etc. 

   - offer a cash purchase price - maybe $2,000 - for all cars traded in that are over a certain age (say 10 years) and under a certain fuel efficiency (say 13 mpg).  The government would then scrap those cars and recover some of those funds.

The rebates would give car makers more profit on their fuel efficient cars since they could be priced higher (offset by the rebate).   That would put the car companies on a sustainable path (at least for ten years) since the smaller fuel efficient cars  that now cause losses would become more profitable.

Being a medium-term (10 year) commitment, the incentives will give car makers the assurance of future viability for efficient cars that will motivate them to design and produce even more fuel efficient cars for sale in the medium term. It matters not whether the fuel efficiency comes from new cheaper battery technologies or new oil-based fuel efficiency, hybrids or plug-in hybrids.  A given fuel efficiency is just as good for lowering oil independence and reducing GHG emissions no matter how it is produced.      

A “bridge” loan will still be needed by G.M. to get them through their current negative cash flow operating structure.  But it will be made with the realistic potential of paying off in the future.  Moreover, the government should get options on a huge part of the equity in G.M., thus potentially getting the taxpayers’  money back at some point.  The company will still need contractual restructuring to eliminate legacy costs that now make it uncompetitive.  That means the bailout funds should come in as part of a pre-packaged restructuring that abrogates G.M.’s current legal obligations to its unions, dealers, and suppliers.  

The program will create many good U.S. jobs because it will increase U.S.-made car sales as consumers get better cars for less money.  Consumers will have the confidence to buy from G.M. because of the government involvement.   In fact, G.M. would become a company that is in effect owned by the whole country - thus providing an element of self interest for U.S. consumers to buy their cars. 

Eventually the government would be able to sell its G.M. stock, end the incentive programs, and get out of the car business.  At that point it would have transformed the U.S. car fleet into a far more fuel efficient and cleaner fleet thus reducing both the oil dependency and the global warming problems to the extent they are car-related - possibly even at a profit to the tax payers.    Most importantly, the government actions would give the economy a more rapid bridge to a stronger economic future.

How do we know a government-controlled G.M. would be smarter than the old one?   We don’t, but we do know two things.  One: new management could hardly be dumber than the past management.  Two: we’ve just elected maybe the smartest President in history - so giving him the opportunity to pick the people who will make the G.M. decisions at least  provides us with a glimmer of hope.  His recent choices for leadership positions should give us confidence in his judgement.

The above prescription was suggested to me in part by a recently published brilliant history of G.M., by an analysis of future fuel efficiency options, and by comments from a number of readers.   No doubt my suggested plan has flaws and can be improved.  But the logic behind it is correct:  if cars are the problem then cars must also be the solution.   If any reader has connections to the Obama people and thinks these ideas have merit, don’t hesitate to pass them along.

A similar program to what I am suggesting is being pursued by the Chinese.  As the Wall Street Journal reported today, China is supporting BYD, the Chinese company Warren Buffet bought into last September, in its program to bring a plug-in hybrid electric car to market rapidly.  It will be sold to fleets in China and they intend to market it in the U.S. in 2010.  We don’t know exactly what subsidies and incentives the Chinese government is going to use, but the exact way of doing it is less important that the fact of doing it.  So another reason for our government to get behind new U.S. car technology pronto is that we don’t want the Chinese to dominate the car technology of the future.  The U.S. needs to be at the forefront of the car of the future.

Here’s the Journal report on BYD:

• DECEMBER 15, 2008

BYD to Introduce China’s First Electric Car

By NORIHIKO SHIROUZU

SHENZHEN, China — A Chinese auto maker plans to unveil the country’s first homegrown electric vehicle for the mass market, at least a year ahead of similar efforts around the world.

On Monday, BYD Co. plans to show reporters in Shenzhen the new F3DM, which runs off batteries that can be charged from a regular electrical outlet. BYD began marketing the F3DM this month to cab operators and other potential fleet customers, and plans to have it in showrooms by the end of this month, said Henry Li, a senior company executive. BYD plans to sell the car in the U.S. market as early as the second half of 2010.

Associated Press

The F3DM runs on batteries and is charged at a regular electrical outlet.

China’s government intends to support the electric vehicle push through research-and-development subsidies for auto makers and tax breaks and other incentives for consumers, as well as with plans to build battery-charge stations and other public infrastructure. The government hasn’t said how much it will spend.

Though essentially an electric car, the F3DM also has a small gasoline engine that is used to generate electricity if the battery runs dry. Some people question whether the leap to electric cars makes sense in China, in part because most of China’s electricity comes from “dirty” coal-burning power plants.

BYD plans to sell as many as 10,000 F3DMs in 2009, according to Mr. Li. The car is to be priced at less than 150,000 yuan, or about $22,000, toward the low end of the price range for a typical midsize sedan in China.

General Motors Corp. and Toyota Motor Corp. are both developing similar battery-powered cars. But Toyota won’t launch its version until late 2009 and plans to sell it in the U.S. and Japan, not in China. GM is expected to launch its Chevy Volt in late 2010 in the U.S., but the company’s financial struggles have left plans unclear. Nissan Motor Co., which is weighing the launch of an electric car in China as early as 2012, believes that battery-powered cars could account for as much as 30% of all automobile sales in China by 2020.

The city of Shenzhen, where BYD is headquartered, is expected to announce Monday that it is buying some 20 F3DMs.

—Ellen Zhu in Shanghai and Gao Sen in Beijing contributed to this article.

Write to Norihiko Shirouzu at norihiko.shirouzu [Email address: norihiko.shirouzu #AT# wsj.com - replace #AT# with @ ]

Tags: peak oil investments

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