Standard setting gives the advantage to the technical experts of car companies. And they have tied knots in the standards for 35 years. That problem has a simple fix, but let’s ignore it. Perhaps this time, tighter standards will survive the experts. If they do, there’s some often-overlooked good news. But we’re still missing a huge opportunity.

Stricter CAFE standards will reduce the price of oil. That’s good for us—and for the whole world. But here’s what puzzles me. We’re fighting climate change with CAFE standards. These lower the price of oil for China among others. We’re desperate for a climate deal with the Chinese, and they’re desperate for low oil prices. But we don’t mention oil during climate talks. Never. Why is that? Why hit them with sticks, when we have this carrot?

We’re cutting off our nose to spite our face. Most environmentalists are not speaking to energy security advocates because of the likes of Sarah Palin. As a consequence, we’re missing the best opportunity to fix the climate. Here’s why.

1. China and the U.S. have a strong common interest.

2. Climate-friendly measures such as CAFE standards are most effective against oil price spikes.

3. We need each other.

4. The payoff is far more immediate and tangible than a cooler climate in 50 years.

A common interest. The Chinese have gone from importing 25 percent to importing 50 percent of their oil in the last nine years. So, as the DOE tells us, “The Chinese government’s energy policies are dominated by the country’s growing demand for oil and its reliance on oil imports.” We’re both addicted to oil, and both need to prevent oil price spikes.

Climate policy cuts oil prices. It’s right there in DOE’s 1998 report on the Kyoto Protocol. DOE found that Kyoto would lower the world price of oil by almost 5 to 1. A 1 percent cut in world demand for oil would cause almost a 5 percent drop in the price of oil. They did not talk it up, but it’s in their numbers. This effect can be found in every climate model that asks the question, though the numbers vary. I’ve analyzed the implications based on the lowest number I could find (1.5 to 1) and found that a global climate policy could pay for our policy costs for the next decade or two, simply by reducing the price of imported oil.

Before the $145 oil price spike in 2008, the International Energy Agency (IEA) predicted “global demand, particularly in China, could grow much more quickly than projected. … a supply-side crunch in the period to 2015, involving an abrupt run-up in prices, cannot be ruled out.” It did not take that long. Nothing has changed, and a repeat performance should be expected. In the IEA’s High Growth (for China) Scenario, a 1% demand reduction causes a 12% reduction in the world price of oil. That’s huge.

We need each other.  Our CAFE standards benefit China. In fact we get less than 1/3 of the total oil-price benefit from acting along. Right now, China gets even less of the benefit if it acts alone—because it imports less oil. Instead of giving away our ace, we should go to China and say: “Cooperation will help us both. Agree to climate policies that are similar to ours (but not a cap) and together we will organize all of the big oil users to cut carbon. We will emphasis oil, since that will pay for this policy. But if you don’t cooperate, we won’t be able to do much.”

Did they really forget China’s oil problem?  I have made a close study of this for almost three years. Even where you would most expect to find oil being mentioned, for example in the Roadmap for U.S.-China Cooperation on Energy and Climate Change (co-chaired by Steven Chu), there is not one mention of China’s oil problem, let alone its connection with climate policy.

Leading the world is a fine idea, but leadership requires understanding our partners and making use of common interests. And it requires looking at the global picture. That picture includes China, and it includes energy security.

Eventually, when we are all driving electric cars, reducing the price of oil will save us no money. But for the next few decades, it could save us a great deal. This calculation shows that, at least up to a 30 percent reduction in CO2, a global climate policy is likely to be essentially free to the United States—paid for, in effect, by reduced payments to foreign oil companies.

This simplified example of a global climate-change program uses round numbers, which roughly reflect U.S. emissions and oil use in 2008 and 2009.

Buying hybrid cars, paying extra for wind power in place of coal, and so on costs consumers an extra $45 billion per year. But consumers save $55 billion per year on imported oil. That savings is mailed to consumers as part of their untax refund checks in June of each year. As a result, the climate program consisting of a $50-per-ton untax on CO2 is more than paid for by foreign oil companies.

Consumers will also pay $25 per barrel less for the 8 million barrels a day purchased from domestic oil producers. This provides an additional savings of $74 billion per year, which is generally not counted by economists because it is mostly a loss to American oil companies. But those not owning oil-company stock will enjoy their additional untax refunds.

China and India have nixed caps. Without these caps, Kyoto fails. What can be done?

Carbonomics explains "wrecking" the economy, "peak oil," caps, carbon taxes, and Kyoto.