Detroit, we have a problem.

Congress is demanding you build more fuel-efficient cars, especially hybrids, and as soon as feasible, plug-in hybrids. Even battery electric cars are back on the agenda. And you've got until April 1, 2009 to come up with definitive, workable plans on how to do it.

The government's call comes at what might be regarded as the worst possible moment. Any consumer incentive to shift to green cars has just had the steam let out of it as gasoline prices at the pump here in America have fallen to where they were the morning of September 11, 2001. Americans can top off their fuel tanks again for a $20 bill, instead of having to rob Peter to pay Hugo. It was low gasoline prices that helped stimulate demand for Detroit's highly-profitable gas guzzlers, and may do so again, it is feared.

The conundrum Detroit is facing is this: it knows it needs to build greener, more fuel efficient vehicles in order to continue to garner support in Congress for its proposed technology shift, but the very cars it is being asked to build will, for some time to come, be significantly more expensive than less efficient, less pricey and more profitable models.

Simply stated, Detroit cannot become profitable again by building unprofitable vehicles that few consumers are willing to buy. Yet, those are the very vehicles Congress is demanding they build.

Concerned about their own personal finances and future, American consumers are either postponing their car purchases or are going with less costly choices. The two most popular vehicles now being bought in North America are the Toyota Corolla and Honda Civic, both relatively fuel efficient and priced thousands less than their hybrid counterparts.

The Civic Sedan retails for between $15,505 and 23,655 depending on how it's equipped. The Hybrid model starts at $23,650 and tops out at nearly $27,000. The Civic DX is rated at 26 mpg in the city and 34 mpg on the highway, while the hybrid model turns in 40 city and 45 highway. Weighing the price and mileage differences, most American buyers usually opt for the non-hybrid model. You can buy a lot of gasoline, they will argue, for the difference in sticker prices, vehicle taxes and accumulative finance charges.

To solve the problem, carmakers have to find ways to narrow the price gap between their green vehicles and the not-so-green models. Here there are two bright spots on the near horizon.

Honda claims that is has found ways to seriously cut the cost of its hybrid technology to the point where it will be on an even par with its non-hybrid models. The new Insight, a four-passenger, dedicated hybrid sedan due to go on sale Spring 2009, is rumored to be under $20,000; and speculation places it as low as $18,500. The company has not formally announced its MSRP yet, but a sub-$20,000 Honda hybrid is going to pose a serious challenge to the competition.

The second encouraging sign -- unless you're a beleaguered Detroit automaker -- is the introduction of the BYD F3DM, the world's first commercially mass-produced, range-extended electric car. Equipped with proprietary battery technology, the Chinese-built sedan can travel 60 miles as an electric car, and another 240 miles as a hybrid. The key to the F3DM -- and succeeding models -- is its battery pack, which the company claims is good for some 2,000 charges. That's enough recharging cycles to drive the car, the company claims, over half a million miles in electric and hybrid mode. But the exciting news is that the car sells in China for just under $22,000, meaning BYD has found a way to dramatically lower the cost of its battery manufacturing.

These two developments taken together -- lower cost hybrid drive technology from Honda and lower cost, high-performance batteries from BYD -- indicates there are ways to close the technology price gap, just as India's Tata found ways to manufacture a car for $2,500.

But narrowing the cost difference won't be enough to entice cautious consumers worried about buying new, unproven technology that will save a few more gallons of cheap gasoline. Here government has a very important role to play by not only providing financial guarantees to help American carmakers retool to emulate Honda, BYD and Tata, but also go beyond just passing more consumer incentives like the $7,500 tax credit on plug-in hybrids like the Chevy Volt.

What Congress needs to do now -- for the sake of nation, its auto industry and taxpayer-funded loan guarantees and grants -- is to enact energy policy that does all or much of the following:

(1) Affixes the true economic and environmental cost of carbon consumption on both producers and consumers in the form of a carbon tax, carbon cap & trade system or similar mechanism. Carbon producers like coal, oil and gas companies would be charged on a per BTU basis, while consumers would either be charged for the carbon they used or credited with the carbon they avoided, thus neutralizing any producer cost pass-through's, while providing incentives to cut their carbon consumption.

(2) Sets a floor on the per barrel price of oil and imported, refined gasoline below which the market price cannot fall. Most knowledgeable experts see that floor at $40-50 a barrel. Saudi King Abdullah favors $75 a barrel. I favor $70 a barrel with a $10/barrel import tariff, effectively giving the king $60 a barrel, while putting $120 million a day into American green energy projects.

(3) Enacts a gradual increase over five years in the price of gasoline at the pump through federal or other tax mechanisms until it reaches parity with European nations. And those funds can only be used for projects that further improve the nation's energy efficiency and international competitiveness in green technologies.

(4) Requires that all new automobiles sold in America be flex-fuel capable by 2012, plug-in capable by 2015 and vehicle-to-grid (V2G) capable by 2020. V2G allows the car to share its stored battery energy with the electric grid, giving it the potential to provide value-added services for which a utility is willing to compensate monetarily.

(5) Gradually eliminate trade tariffs on biofuels imported from developing nations, especially in the Western Hemisphere, at a rate of one cent per gallon per million flex-fuel vehicles sold. This will encourage economic development where it's needed most, as well as shifting biofuel production into regions of the planet better suited for it.

By encouraging carmakers and consumers to migrate to greener transportation and energy technologies through constructive, formative policymaking, Congress can help solve the green car conundrum. In the end, American drivers will spend no more on transportation costs then they do now, while helping wean the nation away from an over-dependence on a limited resource better used for purposes other than polluting the planet.

Reprinted with permission from EVWorld