The Congress seems poised to pass the first increase in fuel efficiency mandates in a generation. The Democratic leadership has been meeting behind closed doors to hash out the remaining issues surrounding their energy plan. Among the most contentious of these is what to do about automobile mileage. The Senate passed language that would raise standards for all vehicles to 35 miles per gallon by 2020. The House-passed bill did not establish a new standard, but two competing pieces of legislation – one raising standards to 35mpg by 2018, the other raising them to 32mpg by 2022 – each had more than 150 co-sponsors. Any of the three plans would mean drastic changes for American automakers.

No single automaker seems as poorly positioned for a changed environment, however, as Chrysler. This is due primarily to how these standards actually operate. Most people, Members of Congress included, do not realize that efficiency standards do not apply to vehicles made, but rather to vehicles sold. Each manufacturer must adjust their vehicle mix to ensure that the average fuel economy of the vehicles they sell meets the standard set by the government. If, for example, General Motors sells more Chevy TrailBlazer SUVs than Chevy Aveo subcompacts, they have to ensure that their pick-ups are relatively efficient. If, by contrast, Toyota sells more Priuses than Tundras, they can afford to have less efficient Tundras.

Chrysler has a vehicle mix heavily weighted toward relatively lower gas mileage “muscle cars” (the Dodge Viper, the Chrysler 300) and trucks (the entire Jeep line, Dodge Ram). The Senate language makes no room for vehicle type – 35mpg for a vehicle fleet will hit trucks and SUVs hard. Chrysler likely will have more difficulty adjusting to higher standards than its competitors. Chrysler has already announced, seemingly in anticipation of these new rules, that it intends to cancel the Crossfire, Magnum, and Pacifica models; announced the sale of Smart cars; and announced the eventual importation of China’s Chery subcompact cars to be sold under the Dodge label.

The future business decisions of Chrysler might be pushed in one direction or another based largely on whether cars and light trucks are separated in any new fuel efficiency arrangement.

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In a landmark decision, the Ninth Circuit Court of Appeals overturned automobile fuel economy standards issued by the National Highway Traffic Safety Administration (NHTSA) on climate change grounds. Center For Biological Diversity v. National Highway Traffic Safety Administration, No. 06-71891 (9th Cir. November 15, 2007). Citing climate change as an economic and environmental issue that NHTSA must consider when it issues new rules, the court made it clear that consideration of climate change in rulemaking proceedings is no longer optional for federal agencies.

The case involved a challenge to the most recent fuel economy standards for so-called “light trucks” – a category that includes mini-vans, sport-utility vehicles, and most pick-up trucks. NHTSA issued new standards for light trucks in 2006, calling for a modest increase in fuel economy, to be implemented for model years 2008-2011.

The plaintiffs challenged the standards on several grounds, the most significant of which concerned the process used by the agency to balance the costs and benefits of enacting a new standard. The lead plaintiff, the Center for Biological Diversity, argued that NHTSA’s failure to assign a monetary value to the reduction of carbon dioxide emissions resulting from increased fuel economy made the agency’s action arbitrary and capricious. The Ninth Circuit agreed, holding that federal law requires NHTSA to consider energy conservation when balancing the costs and benefits of fuel economy standards – including the value of the carbon dioxide emissions that would be reduced by setting the fuel economy standards at different levels.

The court also held that NHTSA’s decision that the rules would not have a substantial impact on the environment violated the National Environmental Policy Act (NEPA), and ordered that the agency to produce an Environmental Impact Statement addressing the role that vehicle emissions play in global climate change.

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China issued a new policy on natural gas utilization at the end of August to regulate the use of natural gas and alleviate a shortage of supply. The policy became effective on August 30, 2007, after approval by the State Council.

The new policy issued by the National Development and Reform Commission (NDRC) classifies natural gas utilization into four categories: residential and urban gas use, industrial fuel, power generation and chemical feedstock, and labels them as categories of Given priority, Permitted, Limited, and Banned respectively.

The new policy bans the use of natural gas as raw material to produce methanol, the construction of gas-fueled power plants at large coal production bases, and the use of natural gas produced by large and medium-sized gas fields as raw material for Greenfield LNC projects.

These prohibitions, as well as other limits stipulated by the new policy, are to curb gas demand and for better conservation and higher usage.

The guideline state that urban residential gas use is the most favored option. Beijing municipal government started from November 13, 2007 to provide subsidies to residential household natural gas users in Beijing.

Existing gas-based petrochemical projects, especially fertilizer production, will remain in operation. Approved and under-construction projects which have signed long-term gas-purchase contracts won’t be affected, the NDRC said.

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