Last year, we predicted that U.S. auto companies would face serious challenges to their SUV-based business strategies. In fact, driven by gasoline prices and increasing environmental concerns, SUV sales declined precipitously. Ford SUV and light truck sales were down over 50 percent and GM's were down by 34 percent. Hybrid sales, on the other hand, have continued to climb rapidly. Both companies are in financial trouble. GM paper has been reduced to "junk" status.

California has adopted strong fuel economy standards, and nine other states — New York, Maine, Vermont, Massachusetts, Rhode Island, New Jersey, Pennsylvania, and Oregon — have said they will follow the California standards. If the auto industry's litigation against those standards is not successful, the U.S. market will effectively move beyond the weak federal standard. The same man who launched the Subaru in the United States is now getting ready to import Chinese automobiles that will be highly fuel efficient and sell for a price below $10,000.

A line up of gas guzzlers isn't the only problem for Ford and GM; they attribute their difficulties to "legacy" issues — pensions and health care. But no remedy to these problems will help in the absence of cars that consumers want, and everything points to higher prices and concerns about carbon in the future.

Oil prices, energy security issues, and carbon concerns will drive an increasingly important strategic debate about the future of transportation fuels: hydrogen or biofuels?

Brazil, for example, already has an ethanol program from sugar cane that has avoided 574 million tons of carbon emissions and saved them about $100 billion in hard currency by avoiding the need for oil imports. The Brazilians think their program is both a climate program and an energy security program, and it's been enormously successful.

Comparison on fuel economy and greenhouse gas emissions standards around the world.