The US (and Candadian) car companies make profits and very good larger cars. Others are better (profitable) making small and efficient cars.

Instead of letting each manufacturer concentrate at what they do well, the law is trying to force every manufacturer to have the same average efficiency on very different products.

Think if you wanted to force Toyota or Honda to create a hybrid 12+ passenger van – something they have never made and have no engineering experience. Or build large trucks or something else.

Or force Microsoft to create a version of Windows for cell phones – corporate average code economy.

It will cost jobs, result in bad products, and hurt profits.

The new vehicle might be something you would buy, but you cannot force it down every consumer’s throat. Or you (and everyone else) will simply buy the similar vehicle from a more experienced (foreign) manufacturer bankrupting the US company. You can’t make Ford be Toyota or Toyota be Ford, but that seems to be what you want.

1) Sunk costs. The US had invested significant plant/training in heavy vehicles. Regulations reduced the value of past investments and/or required new investments. Production lines for autos can easily have paybacks of 5+ years.

2) Market structure and competitive advantage. If it were _just_ the US companies, they might have been less opposed to cafe. However, US companies recovered from the Japanese onslaught by focusing on a new market segment (for SUVs and light trucks) that emerged as gas prices plummeted during the 1980s strong dollar era. A cafe standard would have harmed the US companies relatively more than competitors who built better small cars (and had brands that owned the small car space).

US companies consistently and deliberately positioned themselves in the big car space. Defenders of the big three have argued this is because they could not make money on small cars (because their labor costs exceeded foreign comapnies) and therefore needed to focus on the more profitable large vehicle segments. These defenders will also note that the Big Three even delivered some small cars below total average cost in order to allow their fleet to meet CAFE standards.

So if I were an apologist for US automakers, I would say that unions drove up their costs of production to the point that they could only make money on profitable big cars and SUVs. Thus, CAFE forced US automakers to sell small cars at a loss in order to permit sales of big profitable cars.

Except it wasn’t so much labor rate costs, as health care costs and legacy costs (Japan has universal health care, and cost is lower per person in any case). And this makes no mention of the competitive mess caused by dealer proliferation (and the out-of-control franchise system). And the incredible ignorance, short term focus, and arrogance the big 3 exhibited for 30 straight years. And, of course, US consumers.

Also, immediate implementation (along with obvious benefits) does create unanticipated economic shocks. A better approach might be a phased-in tax increase, which gives consumers and businesses some lead time to plan for the change and alter their behavior accordingly.

Having said that, I do agree with your ranking of solutions.