By Jennifer Kho

Car manufacturers should not be penalized for selling large vehicles, said Neel Kashari, senior advisor to U.S. Department of Treasury Secretary Hank Paulson, Tuesday at the Cleantech Venture Forum in San Francisco.

He said the Corporate Average Fuel Economy (CAFE) standard, which has required manufacturers’ fleets to average 27.5 miles per gallon since 1990, is a “one-size-fits-all requirement” that does just that.

Manufacturers that make smaller vehicles already surpass the standard, and it forces manufacturers that make larger vehicles to sell smaller cars—sometimes at a loss—in order to justify selling the larger, more profitable vehicles.

“It does nothing to incentivize smaller vehicle manufacturers, and it’s a big financial pain for larger manufacturers,” he said. “Also, there are real problems with safety. We can literally balance deaths with mpg.”

Instead, the department supports different mileage requirements for different types of vehicles “to avoid unfairly penalizing the U.S. auto industry,” he said.

The proposal is part of a three-step plan to increase energy security, which Mr. Kashari said is a big economic risk for the country that also has brought diplomatic and military costs. “Volatile prices hurt families and businesses,” he said. “Terrorists view the global oil infrastructure as an attractive target and hit us.”

Aside from reducing consumption, the plan includes increasing alternative fuels with a renewable fuels standard that requires 35 billion gallons per year by 2017—about 15 percent of the nation’s fuel consumption—and doubling the strategic petroleum reserve. The plan would reduce gasoline consumption 20 percent in the next decade, and reduce oil consumption by 2 million barrels per day, Mr. Kashari said.

“It’s about slowing price growth by reducing consumption and increasing supply,” he said.

But many Cleantech Venture Forum attendees said the plan doesn’t go far enough, and some said the CAFE standard should be much stricter.

“That was the biggest load of poppycock I’ve heard in a long time,” complained one conference-goer as she left the room early.

Felix Kramer, founder of CalCars, a group that advocates hybrids that can be plugged into electrical outlets to extend mileage, said the plan isn’t bold enough.

“The proposals they’re making hardly moves the needle,” he said. “We have technologies now that could double the energy efficiency. I’m disappointed.”

Others said the plan doesn’t do much to reduce imported oil.

“We still will import a lot of our oil in 2017, but that misses the point,” Mr. Kashari answered. “We’re going to have a lot of alternatives for people.”

He said it doesn’t matter whether oil is bought abroad or at home, because it’s the net world demand for oil that controls prices. “The only way to hit [our enemies] is to lower the prices of oil, and their profits.”

Rafael Coven, managing director at Chesapeake Strategic Partners, a management consulting and venture development firm in Maryland, said he thinks the only way to effectively reduce fuel consumption is to increase fuel prices, not lower them.

As long as fuel prices don’t take the real price of oil extraction, and pollution, into account, the market isn’t able to realistically compare fossil fuels to renewable fuels, he said. “Renewables become much more price competitive when you factor in all the externalities,” he said. “Who knows? They might be cheaper now.”

Still, Tyler Griffith, an analyst with Savvian Advisors, said he agrees with Mr. Kashkari that the source of the oil doesn’t matter, because using any oil raises worldwide oil prices. “I don’t know why people kept challenging him on that,” he said. “It’s about diversifying the fuel source.”

He also agrees that a segment of the population needs to have larger vehicles and trucks. “I don’t believe in dictating to car companies that they must produce X number of light vehicles; I don’t believe that’s the answer,” he said.

At the same time, Mr. Griffith said, Mr. Kashkari came across as “a little bit green—not as in environmental, but new on the job.” Of course, he added, “he’s got a tough crowd.”

“The plan made sense given the scope of the problem as he defined it, the oil problem, but it doesn’t go further into the larger issue—it’s the environment,” he said.