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Policy Options to Reduce 5 Transportation’s Energy Use and Greenhouse Gas Emissions There is a scientific consensus that deep cuts in emissions of carbon diox- ide (CO2) and other greenhouse gases (GHGs) will be needed over the next half century to limit the risks of global climate change. However, science cannot advise on how much or how quickly emissions should be reduced in any specific country or in any individual sector of the econ- omy. Where and how emissions should be reduced are choices that will need to involve many nonscientific considerations, such as the effects of alternative mitigation strategies on equity and the economy, as well as pragmatic aspects of policy implementation. The scientific consensus suggests that deferring these policy actions and allowing emissions to continue to rise unabated will increase the challenge of stabilizing atmo- spheric concentrations of GHGs at less risky levels. Transportation Policies in the National Context From the standpoint of national policy, a carbon pricing system is widely viewed as having the potential to affect emissions in the broadest and most economically efficient manner. Pricing emissions of CO2 and other GHGs, whether through the adoption of a national cap-and-trade pro- gram, a carbon tax, or a hybrid approach, would increase the cost of using all carbon-rich energy sources across all sectors of the economy. The higher prices, however, would affect individual sectors differently. [A Congressional Budget Office report provides a comparison of carbon 133

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134 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation pricing options (CBO 2008).] In the transportation sector, the higher- priced gasoline, diesel fuel, and jet fuel would prompt greater interest in vehicles that are designed and operated to be more efficient, fuels having lower carbon-cycle impacts, and less energy- and emissions-intensive transportation modes. Similar responses would occur in other sectors, but to varying degrees depending largely on the cost and options for sub- stituting lower-carbon energy sources. Various economic models are used to predict the carbon prices needed to achieve different emissions reductions across the economy over time. All of the models, which estimate the costs associated with reducing emis- sions in each sector, assume that the least costly means of cutting emis- sions are pursued first. Figure 5-1 shows the modeled emissions prices (stated in terms of constant dollars per CO2-equivalent metric ton)1 that would be required to achieve CO2-eq emissions trajectories leading to a 50 to 80 percent reduction in U.S. annual emissions by 2050. The estimated prices are calculated by the Stanford University Energy Modeling Forum (EMF-22) on the basis of runs from several economic models, each using different assumptions about the costs associated with developing and deploying emissions-reducing technologies (Fawcett et al. 2009). Accord- ing to these models, prices starting at $25 to $75/CO2-eq t and rising to $225 to $500/CO2-eq t would be required to achieve an 80 percent reduc- tion in emissions by 2050. Even to achieve a 50 percent reduction, carbon prices would need to reach $100 to $300/CO2-eq t by 2050. Table 5-1 shows how a $50 carbon price would affect the retail price of various fossil fuels used in the national economy today. Crude oil prices would go up about 40 percent compared with August 2010 levels,2 caus- ing gasoline prices to increase by about $0.50 per gallon, which is 15 to 20 percent higher than August 2010 gasoline prices. In effect, each $1/CO2-eq t increase in price would cause crude oil prices to increase by about $0.43 per barrel and retail gasoline prices to increase by about $0.01 per gallon. In comparison, a $50/CO2-eq t price would bring about a 140 percent increase for the electric power sector in the cost per ton 1 Carbon prices are stated throughout this chapter in terms of dollars per CO2-equivalent metric ton ($/CO2-eq t). See Chapter 1 (page 30) for a definition of CO2-equivalent. 2 Commodity prices fluctuate; hence, the figures quoted in this section are illustrative only.

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500 ADAGE 450 MRN-NEEM 400 EPPA IGEM 350 $/CO2-eq t (2005 U.S. $) MERGE (opt) 300 MiniCAM (base) 250 200 150 100 50 0 2020 2025 2030 2035 2040 2045 2050 (a) 500 ADAGE 450 MRN-NEEM 400 EPPA IGEM 350 $/CO2-eq t (2005 U.S. $) MERGE (opt) 300 MiniCAM (base) 250 200 150 100 50 0 2020 2025 2030 2035 2040 2045 2050 (b) figure 5-1 Emissions prices ($/CO2-eq t) required to achieve annual emissions trajectories leading to an (a) 80 percent and (b) 50 percent annual emissions reduction by 2050, according to various climate change economic models studied by the Stanford Energy Modeling Forum. The 80 percent and 50 percent pathways are representative of cumulative emis- sions budgets of 167 Gt CO2-eq and 203 Gt CO2-eq budgets for the period 2010 to 2050. SOURCE: Fawcett et al. 2009.

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136 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation table 5-1 Estimated Effect of an Emissions Price of $50/CO2-eq t on Key Fuel Prices Market Price in Added Cost ($) from GHG Fuel August 2010 ($) Contribution ($50/CO2-eq t) Total End-User Price ($) Crude oil 55.12/bbl 21.40/bbl 76.52 (up 39% over market price) Gasoline 2.54/gal 0.44/gal 2.98/gal (up 17%) product Utility coal 46.00/short ton 110.53/short ton 156.53/short ton (up 140%) NOTE: According to the Energy Information Administration, utility coal in the United States averages about 207 lb of CO2 per million Btu. Gasoline and diesel fuel average 160 lb of CO2, and natural gas averages 117 lb of CO2 per million Btu. http://www.eia.doe.gov/cneaf/coal/quarterly/co2_article/co2.html. SOURCE: EIA August 2010 Monthly Energy Review (http://www.eia.doe.gov/mer/overview.html). of coal, which is currently a relatively inexpensive hydrocarbon, but one that is carbon-intensive. Table 5-2 summarizes EMF-22 model runs that estimate the emissions response from transportation that would be needed to bring about 50 to 80 percent emissions reductions by 2050. The models produce varying estimates of transportation’s contribution, but all consistently predict that transportation will contribute less to emissions reductions than most other energy-using sectors. The reason is that all of the models assume that other sectors have less costly means of responding to the higher-priced emissions by reducing energy use or substituting energy alternatives. Runs of the U.S. Department of Energy’s National Energy Modeling System (NEMS) offer a more detailed picture of the anticipated trans- portation response to carbon emissions pricing. Table 5-3 shows NEMS- generated results from a recent study by Resources for the Future and the National Energy Policy Institute (RFF-NEPI) in which prices are assumed to reach $50/CO2-eq t by 2030. The $50 price was selected for analytical purposes only, but it is consistent with the price that the EMF-22 model runs indicate would be needed in the near term to put the United States on a trajectory to reduce national emissions by half by midcentury. The RFF-NEPI study calculates that an emissions price of $50/CO2-eq t will cause gasoline prices to increase by about $0.35 per gallon, or by nearly

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137 Policy Options table 5-2 Emissions Changes Needed from Transportation Sector to Achieve Alternative U.S. Carbon Emissions Reduction Targets, According to Models Run in Stanford EMF-22 Study Model’s Estimated Percentage Change in Annual Transportation Emissions, Model 2010–2050 80 Percent Reduction Target −33 ADAGE (RTI International) −6 EPPA (Massachusetts Institute of Technology) −22 MiniCAM (Joint Global Change Research Institute ) −17 MRN-NEEM (CRA International) 50 Percent Reduction Target ADAGE 17 EPPA 28 −22 MiniCAM −11 MRN-NEEM SOURCE: Fawcett et al. 2009. 10 percent. This percentage increase is much smaller than the percentage increase in the price of coal. Accordingly, the RFF-NEPI modeling runs predict that CO2-eq emissions from the coal-intensive electric power sec- tor would fall by nearly 30 percent by 2030. In comparison, emissions from transportation are predicted to fall by less than 5 percent by 2030. These model results portray the broader national context in which GHG reductions will need to occur. They indicate how reducing emis- sions in one sector will affect the amount of reductions that will be needed from other sectors. Accordingly, sector-specific policies, which seek emissions reductions from one sector at a time, may not be the most effective or economically efficient means of bringing about economywide emissions reductions. Although this report acknowledges the importance of using carbon prices to create incentives for long-term and economywide reductions in GHG emissions, it is focused on examining other policies that can yield energy and emissions savings specifically from the transportation sector. There are many reasons for considering sector-based policies.

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table 5-3 RFF-NEPI Projections of U.S. Energy Consumption and GHG Emissions from Major Economic Sectors Assuming Emissions Pricing and Comparison with Projections from AEO 2009 Reference Case 2015 2020 2025 2030 Percent Change Percent Change Percent Change Percent Change Amount from AEO 2009 Amount from AEO 2009 Amount from AEO 2009 Amount from AEO 2009 16.33 23.34 33.35 47.65 Assumed CO2-eq price (2007$ per CO2-eq t) Real gross domestic 13.4 15.3 17.5 19.8 −0.2 −0.3 −0.4 −0.5 product (trillions 2007$) 6,852 6,827 6,833 6,750 Total CO2-eq emissions −5 −8 −11 −15 (millions of CO2-eq t) Electricity 2,158 2,160 2,083 1,875 −9 −12 −18 −29 Transportation 1,910 1,883 1,893 1,939 −1 −1 −3 −4 Industrial 941 929 921 879 −1 −2 −4 −7 Primary Energy Consumption (quadrillion Btu) Petroleum 38.4 0 38.0 38.3 38.8 −1 −2 −3 Natural gas 21.7 0 21.7 22.9 22.2 −2 −4 −8 Coal 21.1 21.2 19.9 18.1 −11 −13 −19 −29 Nuclear 8.7 0 9.4 3 10.6 15 12.4 34 Renewables 10.2 8 11.7 13 13.2 17 15.3 31 S OURCE: Krupnick et al. 2010.

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139 Policy Options One major reason is transportation’s near total dependence on oil, with its environmental and national security implications (as discussed else- where). In addition, there is no guarantee that a national carbon pricing program will be instituted soon, and thus sector-based interventions may be the next best means of achieving emissions savings over the near to medium term. Transportation-Specific Policy Options The remainder of this chapter considers the following six types and tar- gets of policy interventions that are candidates for reducing U.S. trans- portation’s use of petroleum and emissions of GHGs: 1. Transportation fuel taxes, 2. Vehicle efficiency standards, 3. Feebates and other financial incentives to motivate interest in efficiency, 4. Low-carbon standards for transportation fuels, 5. Measures to curb private vehicle use, and 6. Measures targeted to the other main passenger and freight modes. These six items encompass a mix of pricing and regulatory measures but by no means cover all possible policy tools and designs. For example, the many ways in which government tax incentives, subsidies, and sup- ply mandates can be used to promote the development and introduc- tion of specific types of vehicle and energy technologies such as electric cars, biofuels, and hydrogen are not considered. This report does not examine the advantages and disadvantages of furthering specific vehicle or energy technologies as a way to reduce transportation’s use of energy and emissions of GHGs. Policy approaches that are used to favor specific technological solutions, therefore, are not examined here. Similarly, the discussion does not consider the various means by which government can support technology R&D. A companion report (TRB 2009c) exam- ines R&D needs in this area. How government can support R&D is not a transportation-specific matter and has been examined in many other studies (for example, NRC 2001).

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140 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation Transportation Fuel Taxes Fuel taxes are long-standing sources of government revenue for the construction, maintenance, and operation of the nation’s transportation infrastructure, particularly the highway system. These taxes, which vary by mode, are applied on a per gallon basis to gasoline, diesel fuel, jet fuel, and other refined petroleum products. As discussed in Chapter 3, the current federal tax on gasoline used by motor vehicles is $0.184 per gal- lon, and state gasoline and diesel taxes average about the same, leading to a combined tax of around $0.35 per gallon. The federal government and many states impose taxes on the fuels used by vessels operating on the inland waterways, railroads, domestic airlines, and commercial and general aviation. In some states, operators may also pay an ad valorem tax based on the retail price of the fuel, rather than (or in addition to) the more typical fixed levy per gallon. A policy that increased the taxes on the fuels used in each transpor- tation mode or that imposed a broader-based tax on each barrel of oil sold would lead to higher-priced fuel, which would increase consumer demand for more efficient vehicles and operations. Depending on the size of the tax, it would also have a moderating effect on transportation demand while prompting interest in less energy-intensive modes. projected effects of higher fuel taxes on transportation energy demand A number of studies have examined the potential effect of higher-priced fuel on transportation fuel consumption and GHG emissions. The afore- mentioned 2010 study by RFF-NEPI (Krupnick et al. 2010), which examined a range of policies for reducing GHG emissions and oil con- sumption, used a modified version of NEMS to assess various policy options and their effects on both oil consumption and CO2 emissions. The study’s examination of an oil tax assumes that a constant tax per unit of energy is applied across all refined oil. The tax is assumed to begin at a rate equivalent to adding $1.27 per gallon to the price of gasoline and then to increase by 1.5 percent per year, totaling $1.73 in taxes by 2030. As might be expected, this broader-based tax on oil was found to be far more effective in reducing total petroleum use and CO2 emissions (across all

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141 Policy Options modes and sectors) than a tax of equivalent size levied only on the gaso- line and diesel fuel used by cars, buses, and trucks. It yielded cumulative reductions of 7.4 percent in oil use and 3.8 percent in CO2 emissions, whereas the tax increase confined to motor vehicle fuel led only to half this reduction. Because of the design of the NEMS model,3 the projected energy and emissions savings result largely from reductions in vehicle miles traveled (VMT) rather than from increases in vehicle efficiency. In the case of the oil tax, for example, VMT was 6 percent lower in 2030 than projected by the AEO 2009 reference case. In another study of policy options, Morrow et al. (2010) used NEMS to predict how gasoline use by cars and light trucks would respond to an escalating gasoline tax that is coupled with a national carbon price. By gradually increasing the gasoline tax and assuming a $0.46 per gallon carbon price, the study estimates how high gasoline prices must rise to cause gasoline consumption to be 25 percent lower by 2030 than the level projected in the AEO 2009 reference case. The calculated price is $8.70 per gallon, achieved through a combination of market price increases, higher gasoline taxes, and a carbon price. Morrow et al. characterize the tax increases that would be needed to achieve this price as aggressive, especially when the minimal success in raising gasoline taxes during the past two decades is considered. Apart from the questions about the economic and equity effects of such high gasoline prices and whether they could be implemented (as a practical matter), all of these studies, and the models they use, acknowl- edge the uncertainty associated with how consumers and businesses are likely to respond to escalating fuel prices. The NEMS model con- tains assumptions about how consumers will respond, but this response remains an area of controversy despite a body of literature on the subject. The next subsection reviews some of this literature. Particular attention is given to studies of how private motorists and motor carriers respond to higher gasoline and diesel fuel prices, since they account for about 85 percent of transportation fuel use. 3 A shortcoming of using NEMS is that the model already assumes that vehicle efficiency will increase over the next decade because of legislatively mandated increases in vehicle fuel economy standards. Fuel prices, therefore, are assumed to have little effect on the level of efficiency of the fleet.

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142 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation Evidence of the Response by Private Motorists to Higher Gasoline Prices There is a considerable literature on how private motorists respond to higher gasoline prices. As discussed in Chapter 4, Small and Van Dender (2007) have modeled how changes in gasoline prices affect fuel demand, separating the effects on VMT and on vehicle fuel economy. In analyz- ing data covering 1966 to 2001, they found that the short-run response to a 10 percent increase in gasoline prices is a 0.9 percent reduction in gasoline consumption. About half the consumption decline is caused by a reduction in driving, while the other half is attributable to an increasing share of VMT from more fuel-efficient vehicles. Findings for the longer- run response, consisting of a time span in which motorists can make more substantive changes in their vehicles and driving patterns, suggest that each 10 percent increase in gasoline prices reduces fuel consumption by 4 to 5 percent. Again, about half of the consumption decline derived from a reduction in driving, while the other half derived from an increase in vehicle fuel efficiency. These estimates of long-run fuel price elasticity as it relates to VMT are comparable with the elasticity values in NEMS (which assumes that each 10 percent increase in gasoline prices yields a 3 percent decrease in VMT). By extending their analysis for the period 2000 to 2004, Small and Van Dender assessed whether fuel price elasticities have been changing over time. They found that elasticities have been diminishing: during this period each 10 percent increase in fuel prices led to a 0.4 percent decline in gasoline consumption in the short run and a 2.3 percent decline in the long run. The major reason for the weakened response is that VMT barely declined in response to higher gasoline prices (going down by only 0.1 percent in the short run and about 0.6 percent in the longer run). The authors surmised that higher household incomes have rendered higher fuel costs less significant to motorists than the savings in travel time that cars and light trucks offer relative to switching to other travel options such as walking and public transit. This “income effect” is an important consideration for policy mak- ing. If the amount of driving by motorists is becoming less responsive to higher fuel costs as incomes go up, then fuel taxes may need to be raised to higher levels to have the desired effects on total fuel consumption.

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143 Policy Options Similarly, vehicle fuel efficiency gains will need to be even larger to com- pensate for the weaker VMT response. However, these price elasticity estimates were derived from a period during which fuel prices were rela- tively low and stable. Extrapolation of this observed VMT response to a period in which fuel prices are assumed to be rising much faster and to much higher levels may not be appropriate. How higher-priced fuel affects consumer demand for vehicle fuel effi- ciency is another topic of interest for fuel tax policy. In general, a rational consumer would be expected to seek higher vehicle fuel economy when gasoline prices are high and expected to rise. Presumably, the consumer would be willing to pay for fuel-saving technologies that in present-value terms produce net savings in fuel expenditures over a vehicle’s service life. There is a commonly held view, however, that consumers do not rec- ognize or take into account all of the lifetime fuel savings offered by more fuel-efficient vehicles. These views have been persuasive for the modelers of NEMS, which assumes that consumers only consider the first 3 years of a car’s prospective fuel costs in making car purchase decisions and even discount these costs at an annual rate of 15 percent. The practical outcome of this assumption is a modeled consumer who is not willing to invest heavily in fuel-saving technologies.4 The assumption of NEMS modelers that consumers place a low value on the fuel-saving potential of a new car is consistent with and may derive from the literature in the energy economics field that finds an energy-efficiency gap whereby households and businesses tend to under- invest in energy-saving technologies. For example, in one of the earliest papers on the subject, Hausman (1979) found that consumers purchas- ing appliances applied discount rates of about 25 percent per year to the stream of future energy savings. In the years since, a number of other studies of energy-saving choices have found similar (and even higher) implied discount rates for a number of consumer products (Gillingham et al. 2006). 4 To illustrate the implications of these assumptions, Small (2010) assessed the long-run responsiveness of the fleet fuel economy to fuel price changes built into NEMS for 2030. In 2030, the fuel price is 82 percent higher than in 2010, and the implied long-run elasticity of fuel efficiency with respect to fuel price is 0.10. In comparison, a literature review by Parry and Small (2005) found a central value for this elasticity of 0.33. Thus, the responsiveness of fuel efficiency of the fleet in NEMS is lower than in the rest of the literature.

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168 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation with payments made at each vehicle refueling. These incremental fees are intended to provide drivers with a direct signal about the effect of each additional mile driven on the risk of having an accident. Such a mileage-based means of paying for accident insurance would likewise cause motorists to have increased awareness of the costs inherent in driv- ing an additional mile and thus greater monetary incentive to conserve on mileage. Pay-as-you-drive insurance is being tested in Oregon and used in a number of places, including locations in Israel, the Netherlands, and the United Kingdom (Greenberg 2009). A Brookings Institution study (Bordoff and Noel 2008) estimates that if motorists paid for acci- dent insurance through such a program, they would average $0.07 per mile in insurance fees and reduce their total driving by about 8 percent. Measures Targeted to Freight and Passenger Service Medium- and heavy-duty trucks account for about 20 percent of the energy used in the transportation sector, which makes trucking the sec- tor’s second-largest user of energy and contributor of GHG emissions. Airlines carrying passengers and cargo account for nearly 10 percent of transportation energy use. Many of the policies already examined in this chapter, such as transportation fuel taxes and vehicle efficiency standards, could be applied to trucks and conceivably to aircraft. Indeed, Congress has required the development of fuel efficiency standards for trucks, and EPA is likely to institute GHG efficiency standards for these vehicles and perhaps other large transportation vehicles at a future date. Some of the challenges associated with designing and administering vehicle efficiency standards for trucks and aircraft have already been noted. Because of the sensitivity of motor carriers and airlines to fuel costs, higher taxes on diesel and jet fuels appear to hold the greatest potential for prompting reductions in energy use and emissions in these modes. In the absence of such energy pricing, the various incremental measures described below may be helpful in achieving marginal reduc- tions in trucking and aviation energy use and emissions. However, the measures are not likely to spur fundamental changes in the energy use and emissions patterns of these freight and passenger modes.

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169 Policy Options harmonizing other modal policies with efficiency goals Policies to reduce energy use and emissions in trucking and aviation should take into account how the array of regulatory and tax policies may be influencing the energy and emissions characteristics of these modes. For example, trucks are subject to federal and state size and weight regula- tions. On the one hand, these regulations can have a direct impact on the energy performance of trucks to the extent that they preclude the use of aerodynamic features such as boat tails, hybrid power trains, and exhaust energy recovery systems because of their implications for overall truck length and weight. Perhaps more important, truck size and weight limits can lead to higher energy consumption per freight ton-mile, since the energy efficiency of trucking tends to increase for vehicles having larger hauling capacity. Of course, truck size and weight limits were enacted for many reasons, most notably to ensure traffic safety and to guard against pre- mature road wear and bridge damage. The aforementioned NRC (2010b) report on reducing the fuel consumption of medium- and heavy-duty vehicles recognizes the role that these size and weight regulations have in preventing safety hazards and excess road damage. The report never- theless recommends that explicit consideration be given to the energy and emissions implications of these regulations when they are adjusted, as they are periodically. Another area where harmonization of existing policies and energy- and emissions-saving goals may be desirable is in the setting of National Ambient Air Quality Standards (NAAQS) applicable to transportation vehicles. Both trucks and aircraft have long been subject to the NAAQS established by EPA under the Clean Air Act (CAA). To date, however, the standards apply only to the so-called “criteria” pollutants such as par- ticulate matter, hydrocarbons, carbon monoxide, and oxides of nitrogen (NOx). The recent decision to regulate GHG emissions under the CAA will therefore presumably require a balancing of interests in finding ways to reduce all of these regulated emissions, which can involve trade-offs. For example, improvements in the fuel efficiency (and thus carbon effi- ciency) of trucks has slowed in recent several years, partly because of the controls required for limiting emissions of NOx and particulate matter. Changes in the design and performance of diesel engines to meet these

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170 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation standards have tended to degrade engine thermal efficiency and, in the process, reduce fuel efficiency. Similarly, increasing the energy efficiency of jet engines can lead to the production of more NOx emissions as a result of higher peak engine temperatures. The tax treatment of trucks may also be a candidate for more coordina- tion with energy and emissions policy making. Consideration, for exam- ple, may be given to how truck excise taxes and registration fees affect the rate of fleet turnover and the willingness of trucking companies to invest in more expensive vehicles designed with energy-saving features. Struc- turing these taxes and fees so that they do not inadvertently discourage the introduction of more efficient vehicles and the retirement of inefficient vehicles will be important. Substituting other charges based on vehicle use and fuel consumption for these taxes and fees, for example, may be more compatible with national energy- and emissions-saving goals. infrastructure investment and management for efficient operations The federal government provides the navigation aids and manages the airways in which passenger and cargo airlines fly. It also provides aid to state and local governments for the construction and operation of the highway system and airport runways. State and local governments own, maintain, and operate the vast highway system and most of the nation’s commercial airports. Hence, government decisions about how these facili- ties and systems are configured, maintained, and managed affect the effi- ciency of both trucking and air carrier operations, including their energy and GHG performance. Because trucks use the public highways, government management of and investments in this infrastructure can be critically important to truck operating efficiencies. At the operational level, state and local governments establish the rules governing traffic flow on the highways, including travel speeds. A number of countries require that large trucks operating on public roads travel at speeds lower than those of cars and light trucks and mandate the use of speed-governing systems. All mod- ern trucks used for long-haul transportation are equipped with such systems, which can be programmed by fleet owners or preset in the factory to limit maximum speed. The European Union limits the maxi-

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171 Policy Options mum road speed for trucks to 90 km/h (56 mph). Since each mile per hour increase in speed above 55 mph increases fuel use by more than 1.5 percent, government-mandated use of road speed limiters and aggressive enforcement of speed limits may represent an early means by which public policies can help reduce truck fuel use. Whether such speed limits would be useful would depend on the implications for traffic flow and safety. Nevertheless, this is an area in which early actions could further the goal of reducing transportation energy use and emissions. There may be other opportunities to increase system energy efficiency. For example, long-haul trucks operating at lower speeds and in longer combinations may function more efficiently and with greater safety in dedicated truck lanes, especially when they travel through transportation corridors with heavy traffic. In deciding on the merits of such infrastruc- ture investments, the implications for transportation system energy use and emissions would deserve attention. Truck operations are already a focus area for state and federal investments in the many advanced tech- nologies and automated systems that make up intelligent transportation systems (ITS). Compared with building new physical infrastructure, ITS has been viewed as an inexpensive means of increasing highway capacity and operating efficiency. Investments in real-time traffic information, integrated traffic control systems, and automated toll collection, for example, can reduce congestion and make truck operations more energy efficient in the process. In the case of aviation, the federal government’s role in managing the national airspace and associated infrastructure can have a substantial impact on airline energy use. The federal influence over airline opera- tions is far greater than over truck operations, because airline operations are strictly controlled by Federal Aviation Administration regulations and air traffic control services. Traffic congestion, both in the airways and at airports, increases airline energy use. Thus, investments and actions that increase system operating efficiency and capacity can be comple- mentary to the goal of reducing sector energy use and emissions. These actions may range from improved coordination by airlines and air traffic controllers in the selection of the most fuel-efficient routes and cruise speeds to major public investments in the national infrastructure of run- ways, taxiways, and air traffic control systems.

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172 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation public investments to shift traffic to less energy-intensive modes Many of the opportunities discussed above to improve the operating effi- ciency of the highway and aviation systems would probably also make these modes more appealing for passenger and freight service. In this respect, the improvements could increase the competitive advantage of trucks and airlines over other modes that are more energy efficient for long-distance passenger and freight service. The main competitors of airlines for inter- city passengers are cars and light trucks, as well as motor coaches and rail to a much more limited degree. In these intercity passenger markets, any improvements to aviation infrastructure and operations could lead to modal diversion away from driving, which may or may not lead to more energy-efficient travel. For trucks, however, the main competitor for long- distance freight hauling is railroads, which are very energy efficient. Thus, any diversion from rail to trucking could lead to increased energy use on a systemwide basis. The effect of public highway investments on the com- petitive advantage of trucking over rail has been an issue in transportation investment policy making for decades (TRB 1996). Ensuring that transportation infrastructure policies do not inadver- tently favor the more energy-intensive modes may require that special attention be given to opportunities for improving the efficiency of the entire freight system. For example, railroads and trucks increasingly share in the movement of some freight, as railroads provide the line-haul service for intermodal containers and “piggybacked” trailers while trucks move these containers and trailers locally. To aid in providing such ser- vices, railroads have made significant capital investments in their main- line capacity and in building support facilities for containers and trailers. However, in practice, government assistance is often needed to facilitate these large and complex intermodal projects, since they often require coordinated improvements to private rail facilities and public waterways and highways, including local access roads and streets (TRB 2009a). Even a relatively small diversion of truck freight to rail could have major implications for railroad capacity and operations. For example, the higher value commonly moved by truck requires much more timely movement than is typical for freight moved by rail. Serving this time-sensitive freight could put more stress on railroads because of the need to dedicate tracks

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173 Policy Options and trains. Hence, railroads have sought government incentives and assistance in meeting certain capital needs, such as increasing tunnel and bridge clearances for double-stacked containers and eliminating railroad– highway grade crossings. A number of public–private funding partner- ship programs already exist for such projects, such as credit assistance programs and private activity bond financing, and railroads have advo- cated tax credits to help pay for some capacity-enhancing infrastructure. Additional government support of this type would probably be required to accommodate much larger shifts of truck traffic to rail. Summary Assessment Six general types of policy approaches are considered in this chapter as options for reducing transportation’s use of energy and emissions of GHGs: Fuel taxes are a long-standing source of government revenue for the construction, maintenance, and operation of the nation’s transportation infrastructure. Raising fuel taxes would generate responses comparable with those of carbon pricing. The higher-priced fuel would encourage the use of more energy-efficient vehicles and adoption of more energy-efficient operating practices. It would also temper demand for energy-intensive transportation activities. If the tax is structured to favor low-carbon fuels, it could also assist in lowering the carbon contribution from the transporta- tion fuel supply. However, there is much uncertainty about how consumers and businesses would respond to higher fuel prices. At least among private motorists, there is evidence that responsiveness to changes in fuel costs may be decreasing as household income and the value of time rise (favoring faster automobile travel over other modes). Findings that VMT, in particular, is becoming less sensitive to higher fuel

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174 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation costs suggest that fuel tax increases will need to be high to affect overall energy demand—rising by $5.00 per gallon to reduce gasoline consump- tion on the order of 25 percent over the next two decades. How sustained higher fuel prices would affect energy use by the other energy-intensive modes of freight and passenger transportation, trucking and aviation, is also unclear because of limited experience with such high prices. Never- theless, because these modes are highly competitive and sensitive to costs, they have tended to be responsive to changing energy prices. A number of practical issues warrant consideration in assessing fuel taxes as a policy candidate for reducing energy use and GHG emissions. Perhaps the most important one is the long-standing reluctance of elected officials at all levels to raise fuel taxes even marginally. To many observ- ers, this experience suggests that raising fuel taxes substantially to curtail energy demand and emissions would be a nearly insurmountable chal- lenge. However, sustained higher fuel taxes would generate substantial government revenues that could be used to replace other taxes or provide other government services. Indeed, it is difficult to envision a scenario in which policy makers could generate public support for higher fuel taxes without offering a compelling plan for use of the revenues. At least in recent years, raising vehicle efficiency standards has proved to be more practical than raising fuel taxes to any substantial degree. Efficiency standards have long been the principal means by which the federal government has sought to reduce oil use by cars and light trucks and, more recently, to control emissions of GHGs. Such standards are likely to be applied in other transportation modes. Recent increases in automobile fuel economy standards, coupled with GHG performance standards, are likely to contribute significantly to stabilizing petroleum use and emissions from the light-duty vehicle fleet over the next decade or more. Vehicles with much higher fuel economy will cost less to drive (in terms of fuel expenses), which may prompt an increase in VMT, espe- cially if fuel prices do not increase significantly. If vehicle energy efficiency goes up faster than fuel prices, motorist demand for energy savings may weaken further, complicating efforts to raise the efficiency standards over time. Preventing such an outcome may prove crucial in sustaining public support for efficiency standards. Finan- cial incentives such as feebate programs may motivate greater interest

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175 Policy Options in energy and emissions efficiency, among both buyers and suppliers of vehicles and energy. LCFS programs and others that encourage energy providers to innovate and develop new fuels to diversify the fuel supply may prove helpful in achieving the much longer-term goal of a fuel sup- ply having limited impacts on the carbon cycle. To temper growth in VMT may require policies that work hand-in- hand with energy pricing and vehicle efficiency standards, such as land use planning and transportation investments that emphasize compact development and alternative modes of travel. In this area, however, many of the relevant policy levers are held by local governments. Coordinating the decisions of the dozens of local governments that make up each metropolitan area complicates VMT reduction through these means. Whether incentives for regionwide VMT targets can be cre- ated by the financial and regulatory programs of federal and state govern- ment is now being explored in California. Similar experiments in other jurisdictions will be vital in assessing whether these policy actions can have a complementary role in reducing transportation energy use and emissions. References abbreviations CBO Congressional Budget Office NRC National Research Council TRB Transportation Research Board Allcott, H., and N. Wozny. 2009. Gasoline Prices, Fuel Economy, and the Energy Paradox. Department of Economics, Massachusetts Institute of Technology, Cambridge, Nov. Bandivadekar, A., K. Bodek, L. Cheah, C. Evans, T. Groode, J. Heywood, E. Kasseris, M. Kromer, and M. Weiss. 2008. On the Road in 2035: Reducing Transportation’s Petroleum Consumption and GHG Emissions. Laboratory for Energy and the Environment, Massachusetts Institute of Technology, Cambridge. Beresteanu, A., and S. Li. 2011. Gasoline Prices, Government Support, and the Demand for Hybrid Vehicles in the United States. International Economic Review, Vol. 52, No. 1, pp. 161–182. Boarnet, M. G., R. B. McLaughlin, and J. I. Carruthers. 2011. Does State Growth Management Change the Pattern of Urban Growth? Evidence from Florida. Regional Science and Urban Economics, Vol. 41, No. 3, pp. 236–252.

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176 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation Bordoff, J. E., and P. J. Noel. 2008. Pay-as-You-Drive Auto Insurance: A Simple Way to Reduce Driving-Related Harms and Increase Equity. Brookings Institution, Wash- ington, D.C. http://www.brookings.edu/papers/2008/07_payd_bordoffnoel.aspx. Borenstein, S. 2008. The Implications of a Gasoline Price Floor for the California Budget and Greenhouse Gas Emissions. Working paper CSEM WP 182. University of California, Berkeley. CBO. 2008. Policy Options for Reducing CO2 Emissions. Publication 2930. Washington, D.C., Feb. http://www.cbo.gov/ftpdocs/89xx/doc8934/02-12-Carbon.pdf. Fawcett, A. A., K. V. Calvin, F. C. de la Chesnaye, J. M. Reilly, and J. P. Weyant. 2009. Overview of EMF 22 U.S. Transition Scenarios. Energy Economics, Vol. 31, pp. S198–S211. http://emf.stanford.edu/files/res/2369/fawcettOverview22.pdf. German, J., and N. Lutsey. 2010. Size or Mass? The Technical Rationale for Selecting Size as an Attribute for Vehicle Efficiency Standards. International Council on Clean Transportation. German, J., and D. Meszler. 2010. Feebate Review and Assessment: Best Practices for Feebate Program Design and Implementation. International Council on Clean Transportation. Gillingham, K., R. G. Newell, and K. L. Palmer. 2006. Energy Efficiency Policies: A Retrospective Examination. Annual Review of Environment and Resources, Vol. 31, pp. 161–192. Greenberg, A. 2009. Designing Pay-per-Mile Auto Insurance Regulatory Incentives. Transportation Research D, Vol. 14, No. 6, pp. 437–445. Greene, D. L. 2009. Feebates, Footprints and Highway Safety. Transportation Research D, Vol. 14, No. 6, pp. 375–384. Greene, D. L. 2010. How Consumers Value Fuel Economy: A Literature Review. Techni- cal Report EPA-420-R-10-008. U.S. Environmental Protection Agency, March. Greene, D. L. 2011. Uncertainty, Loss Aversion, and Markets for Energy Efficiency. Energy Economics, Vol. 33, No. 4, pp. 608–616. Greene, D. L., P. D. Patterson, M. Singh, and J. Li. 2005. Feebates, Rebates and Gas- Guzzler Taxes: A Study of Incentives for Increased Fuel Economy. Energy Policy, Vol. 33, pp. 757–775. Hausman, J. A. 1979. Individual Discount Rates and the Purchase and Utilization of Energy Using Durables. Bell Journal of Economics, Vol. 10, No. 1, pp. 33–54. Krupnick, A. J., I. W. H. Parry, M. A. Walls, T. Knowles, and K. Hayes. 2010. Toward a New National Energy Policy: Assessing the Options. Resources for the Future, Washington, D.C., Nov. Langer, A., and N. Miller. 2008. Automobile Prices, Gasoline Prices, and Consumer Demand for Fuel Economy. Economic Analysis Group Discussion Paper EAG 08-11. Department of Economics, University of California at Berkeley, Dec.

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177 Policy Options Lee, J. J., S. P. Lukachko, I. A. Waitz, and A. Schäfer. 2001. Historical and Future Trends in Aircraft Performance, Cost, and Emissions. Annual Review of Energy and the Environment, Vol. 26, pp. 167–200. Lewis, R., G.-J. Knaap, and J. Sohn. 2009. Managing Growth with Priority Funding Areas: A Good Idea Whose Time Has Yet to Come. Journal of the American Planning Association, Vol. 75, No. 4, pp. 457–478. Morrow, W. R., K. Sims-Gallagher, G. Collantes, and H. Lee. 2010. Analysis of Policies to Reduce Oil Consumption and Greenhouse Gas Emissions from the U.S. Transportation Sector. Energy Policy, Vol. 38, No. 3, pp. 1305–1320. National Surface Transportation Infrastructure Financing Commission. 2009. Paying Our Way: A New Framework for Transportation Finance. http://financecommission. dot.gov/Documents/NSTIF_Commission_Final_Report_Mar09FNL.pdf. National Surface Transportation Policy and Revenue Study Commission. 2007. Trans- portation for Tomorrow: Report of the National Surface Transportation Policy and Revenue Study Commission. http://transportationfortomorrow.com/final_report/ index.htm. NRC. 2001. Energy Research at DOE: Was It Worth It? Energy Efficiency and Fossil Energy Research 1978 to 2000. National Academy Press, Washington, D.C. NRC. 2010a. Real Prospects for Energy Efficiency in the United States. National Academies Press, Washington, D.C. NRC. 2010b. Technologies and Approaches to Reducing the Fuel Consumption of Medium- and Heavy-Duty Vehicles. National Academies Press, Washington, D.C. Parry, I. W. H., and K. A. Small. 2005. Does Britain or the United States Have the Right Gasoline Tax? American Economic Review, Vol. 95, No. 4, pp. 1276–1289. Shoup, D. 1997. The High Cost of Free Parking. Journal of Planning Education and Research, Vol. 17, pp. 3–20. http://www.uctc.net/papers/351.pdf. Shoup, D. 2005. Parking Cash Out. American Planning Association, Chicago, Ill. Shoup, D. 2006. Cruising for Parking. Transport Policy, Vol. 13, No. 6, Nov., pp. 479–486. Shoup, D. 2007. Gone Parkin’. New York Times. http://www.nytimes.com/2007/03/29/ opinion/29shoup.html?ex=1332820800&en=cdabf3ece6c4a862&ei=5088& partner=rssnyt&emc=rss. Small, K. A. 2010. Energy Policies for Automobile Transportation: A Comparison Using the National Energy Modeling System. Resources for the Future and National Energy Policy Institute, June. http://www.rff.org/Documents/Features/ NEPI/RFF-BCK-Small-AutoPolicies.pdf. Accessed June 29, 2010. Small, K. A., and K. Van Dender. 2007. Fuel Efficiency and Motor Vehicle Travel: The Declining Rebound Effect. Energy Journal, Vol. 28, No. 1, pp. 25–51. Small, K. A., and C. Winston. 1999. The Demand for Transportation: Models and Applications. In Essays in Transportation Economics and Policy (J. A. Gómez-Ibáñez,

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