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3 Transportation Policy Landscape Chapter 2 shows the immense scope of the U.S. transportation system and the extent to which it is woven into the economy and the daily lives and activities of people. Tens of millions of households, businesses, and government entities own and operate passenger cars and light trucks. Tens of thousands more own and operate much larger commercial trans- portation vehicles, from heavy trucks and buses to aircraft, locomotives, and ships. Most of these vehicles are manufactured by a few hundred large multinational firms, but many require specialized fittings and equip- ment that are supplied by thousands of other firms. Most of the fuel used in transportation is supplied by about a dozen large oil companies, but thousands of other businesses deliver, distribute, and retail it. The transportation enterprise in the United States consists of various passenger and freight modes that have much in common but also many fundamental differences. The physical infrastructure on which the fleet of mostly private vehicles operates is provided largely by governments across all jurisdictional levels. All states and thousands of county, city, and regional entities own and operate most of the nation’s highways and streets. The most heavily used ports and airports are run by state, local, and regional authori- ties, while the federal government owns and operates the air traffic control system and maintains and operates most inland waterways and harbor channels. Freight railroads own, operate, and maintain their rights-of-way, track, terminals, and other infrastructure, whereas most urban passenger transit systems are owned and operated by local and state governments. 79

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80 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation The transportation sector’s scale and diversity present obstacles to attempts to reduce the sector’s total energy use and emissions through the adoption of mode- and vehicle-specific measures aimed at increasing the efficiency of vehicles and their operating environment, diversifying the mix of fuels used, and reducing the amount of transportation activity. Targeting various measures to specific modes, vehicles, and operating environments must involve many actors and interests, both public and private. The decentralized nature of policy making adds to the challenge. The federal government, for example, sets fuel economy standards for new cars and light trucks, but motor vehicle registration, operating requirements, and inspection and maintenance regulations are largely state responsibilities. The authority to tax transportation energy use resides at the federal, state, and local levels, as does ownership of much of the physical infrastructure used for transportation operations. The decen- tralization of decision-making authority presents challenges not only for coordinating policies but also for ensuring that government policies and practices are compatible with one another. An understanding of the array of decision makers and actors influ- encing the transportation sector is essential in assessing alternative strategies to reduce energy use and greenhouse gas (GHG) emissions. For example, reducing automobile use to any significant degree by increasing the density of new housing and commercial development will require actions by states to induce or compel the participation of the many thousands of towns, counties, and municipalities that regulate local land use. Similarly, the benefits of federal regulations governing the fuel economy of heavy trucks and aircraft may be countered by inadequate investment in the maintenance and operations of highway and air traffic control systems, which could lead to increases in energy consumption. Accordingly, the major decision makers and actors in the transportation sector are discussed in the next section, along with key factors influencing their choices with respect to energy use. The second half of the chapter reviews current federal, state, and local policies that have meaningful effects on the transportation sector’s energy use and GHG emissions, including discussion of how these policies came about. The policy landscape is fluid, as new policies and programs are being introduced, debated, withdrawn, and adopted. The chapter concludes

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81 Transportation Policy Landscape by discussing some new and proposed policies intended to reduce energy use and GHG emissions in transportation. Overview of Decision Makers and Actors In the nation’s passenger and freight modes, three broad groups of actors influence transportation energy use and emissions: (a) the suppliers of transportation vehicles, fuel, and infrastructure; (b) the owners and operators of the vehicles and providers of transportation services; and (c) the end users of transportation services. The composition, interests, and roles of each group often differ among modes. Strategies and policies to influence transportation energy use and emissions must recognize the varying incentives, interests, and capabilities of these actors. The main actors from each of these three groups in the domestic modes that con- tribute most of the sector’s energy use and GHG emissions—light-duty vehicles (cars and light trucks), freight-carrying trucks, and commercial aviation—are discussed below. suppliers of vehicles, fuel, and infrastructure Vehicle Manufacturers In 2008, more than 70 million cars and trucks, including heavy trucks, were produced worldwide. Each year between 10 million and 15 million cars and light trucks are sold in the United States, the vast majority manu- factured by fewer than two dozen automotive companies. The relatively small number of firms manufacturing automobiles (at least in relation to the number who own them) has increased the practicality of regulat- ing and enforcing standards for vehicle design and performance in areas ranging from safety and emissions to fuel economy. Aircraft manufactur- ing is even more concentrated, especially for the large jet aircraft used for most scheduled passenger and freight service. Two aircraft manufacturers, Boeing and Airbus, make most of the large airliners used by U.S. carriers, while a half dozen other manufacturers provide the majority of small- and medium-size jet airliners. Although they are not subject to national energy efficiency standards, these manufacturers are heavily regulated for safety and must comply with standards for emissions of air pollutants such as oxides of nitrogen. As in the case of the automotive sector, the small number

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82 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation of aircraft suppliers makes regulation of manufacturers more practical than it would be for an industry consisting of hundreds or thousands of manufacturers. However, individual aircraft involve a fair amount of customization and configuring for their anticipated applications and market requirements. Setting standards for aircraft energy and emissions efficiency, therefore, presents a challenge fundamentally different from setting them for automobiles. Manufacturers of heavy-duty trucks are even more varied than makers of automobiles and aircraft, since trucks are often built and configured in stages by multiple manufacturing and customization firms. A truck manufacturer, for example, may make and assemble the chassis, drive- train, and cab, while a second company builds and integrates the body and a third outfits the vehicle with specialized vocational equipment such as cranes, tanks, and mixers. As discussed in Chapter 2, because heavy trucks have a wide range of duty cycles, a single truck model may serve as the platform for dozens of truck types that differ dramatically in weight, aerodynamics, rolling resistance, and other attributes that affect energy performance. In addition, the trailers and containers that are hauled by trucks are typically made by another set of manufacturers, often built to the specifications of those whose goods are being shipped. Accordingly, trailers and tractors are often not optimized as a system for energy efficiency. Fuel Suppliers Gasoline is used by most light-duty vehicles, while diesel fuel is used by most heavy trucks and buses. According to the American Petroleum Institute, about 140 oil refineries process 15 million barrels of crude oil per day in the United States. About half of this product is refined by the largest 25 refineries, and 75 percent is refined by the largest 50.1 Six oil companies account for about half of U.S. refinery production.2 The petro- leum fuels supplied by these refineries are delivered by pipeline and truck to a distribution network consisting of about 170,000 retail and wholesale fuel outlets. Many outlets are owned and operated by oil companies, but 1 http://www.api.org/Newsroom/upload/09_September_Petroleum_Facts_at_a_Glance.pdf. 2 http://www.eia.doe.gov/neic/rankings/refineries.htm.

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83 Transportation Policy Landscape most are independent businesses that purchase fuel for resale to the public. The cost of producing and delivering the fuel includes the cost of the crude; its refining, marketing, and distribution; and taxes. The prices paid by consumers at the pump reflect these costs, plus the profits of the retailers. According to the Energy Information Administration,3 if the market price of crude oil is $50 per barrel, then the crude oil will account for about half of the price charged for a gallon of gasoline at the pump when that price is $2.25 per gallon. Federal, state, and local taxes would account for 20 to 25 percent of the retail price, and refining, distribution, marketing, and retailer profits would make up the remaining 20 to 25 percent. Diesel fuel has comparable cost, tax, and price relationships. Because of the relatively small number of refiners and importers of gasoline and diesel fuel, most federal, state, and local fuel taxes are imposed on the refinery (or on the importer of refined products), which enables more efficient revenue collection. Ethanol fuel is produced in half the states, most in the Corn Belt region of the Upper Midwest. Collectively, ethanol refiners produced about 9 billion barrels of the fuel in 2008, equivalent to 3 to 4 percent of total energy derived from gasoline consumption.4 Most of the product was consumed by cars and light trucks in blends with gasoline. Ethanol is now blended in virtually every gallon of gasoline sold in the country. Ethanol is used as a primary fuel to a much more limited degree, usually in blends of up to 85 percent (E-85) with gasoline; however, only about 7 million cars and light trucks are so-called flexfuel vehicles that can run on this high blend. About 2,000 filling stations are capable of dispensing E-85, most of them located in the Midwest. Currently, nearly all ethanol used in the United States is produced from corn starch. A major R&D challenge is to produce the alcohol from cellulose, which is the main component of plant cell walls. An ability to make ethanol and other biofuels from cellulose would greatly expand the types and amount of biomass available for the fuel’s production, allowing the use of corn stover, rice straw, wood, and switch grasses. Other fuels 3 http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/primer_on_gasoline_ prices/html/petbro.html. http://www.ethanolrfa.org/industry/statistics/#EIO. 4

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84 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation besides ethanol could be made from cellulose, including fuels that more closely resemble gasoline and diesel fuel. Together, gasoline, diesel fuel, and corn-based ethanol account for more than 99 percent of the liquid fuels used in transportation. The only other liquid fuel with appreciable usage is biodiesel, which is used by a relatively small number of trucks and buses. Biodiesel is typically made in the United States from soy oil and contains no petroleum but is usu- ally blended with regular diesel. About 450 million gallons of biodiesel was sold in the United States in 2007, mostly in 5 to 20 percent blends with diesel fuel.5 Research is also under way to test the use of biojet fuel blends made from algae and other biomass. A consortium made up of Boeing, jet engine makers, Air New Zealand, Continental Airlines, and Japan Airlines has flown test aircraft using several kerosene blends of up to 50 percent biofuel. The consortium is exploring new feedstocks and processes to reduce GHG emissions throughout the fuel’s production and use life cycle. Infrastructure Providers The mostly private owners of transport vehicles and suppliers of transport services operate over a built infrastructure of roads, airports, waterways, and airways that are to a great extent owned, maintained, and operated by government. A major exception is freight railroads, which own and operate their own networks. The configuration, management, and opera- tions of the publicly owned transportation networks can significantly affect modal energy use by influencing the circuity, speed, and efficiency of vehicle operations. Of the more than 2 million miles of paved roadway in the United States, nearly all is owned by state and local governments, who decide where additional investments in capacity are needed. For the most part, access to the road network is unrestricted, although various forms of user charges, such as fuel taxes and tolls, are levied to finance the network. Commercial airports are likewise provided mostly by state and local authorities, although the federal government helps fund and operates much of the airside infrastructure, including runways, radar, and tower services. The federal government has sole authority over the 5 http://www.biodiesel.org/pdf_files/fuelfactsheets/backgrounder.pdf.

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85 Transportation Policy Landscape use of the nation’s airspace and thus owns and operates the air traffic control system. In this capacity, it influences airline operating efficiency by affecting the routing, speed, and altitude of aircraft in the system. The extensive government involvement in the supply and regulation of transportation infrastructure is important because infrastructure operations affect the energy intensity of transportation services. Govern- ments are responsible for making investments in energy- and time-saving traffic management technologies, such as computer-controlled traffic management systems that can relieve urban traffic congestion. New technologies that promise energy savings by better integrating vehicle and highway operations will therefore require strong public- and private- sector connections. The integration of aircraft and airspace systems is already occurring as part of the Next Generation Air Transportation System, which is expected to give airlines greater freedom to choose routes and speeds that can reduce their energy consumption. The challenge to the public sector, which must pursue multiple goals from its investments in transportation infrastructure (e.g., safety, equity, and efficiency), will be in finding ways to ensure that its investments are compatible with other policies intended to motivate users of the infra- structure to conserve energy. For example, decisions about where to locate, how to finance, and where to add capacity to public transportation infrastructure can affect mode choice (e.g., using transit or driving) and contribute to broader changes in land use and urban form over time. vehicle owners Cars and light trucks are the primary means of personal transportation in the United States. About 85 percent of these light-duty vehicles are owned by the country’s nearly 100 million households. According to 2007 data from the Bureau of Labor Statistics Consumer Expenditure Survey, each U.S. household own an average of nearly two cars and spends $8,200 per year (or about 13 percent of household pretax income) on them, includ- ing car payments, registration fees, maintenance expenses, and fuel pur- chases, which averaged $2,400 per household.6 6 http://www.bls.gov/cex/csxann07.pdf.

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86 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation The high rate of vehicle ownership means that policy changes threat- ening to raise the cost of owning and operating vehicles can be difficult for elected officials to achieve. In many respects, the private car has come to be viewed as a consumer good rather than as a source of revenue like a commercial vehicle. Automobile styling, acceleration, handling, and capacity are important attributes for individuals purchasing vehicles, and they often take precedence over characteristics that affect vehicle operating cost such as energy performance. The diversity of the trucking business makes it difficult to generalize about the incentives of owners and users of medium and light trucks. National and regional trucking companies own fleets consisting of hundreds or thousands of tractors and trailers used in providing trans- portation services for others. These motor carriers take a strong interest in the energy performance of their vehicles in view of the extensive operations of their fleets, often averaging more than 125,000 miles per truck. As a result, fuel expenditures, along with labor, are among their largest operating costs, and carriers that successfully reduce their energy expense per ton-mile can gain additional business and profits by offering lower rates to shippers. The ownership and uses of the remainder of the nation’s truck fleet are too varied to summarize here. However, many medium and large vehicles are used as work trucks, not just for goods transportation. These trucks are not driven as far, and therefore energy performance may not be as important as other attributes such as their functional capabilities and durability. The nation’s fleet of commercial aircraft is far smaller in number than the fleet of cars and trucks. The former, however, are operated at high levels of intensity. The primary operators of jet airplanes and other turbine aircraft are the mainline and regional airlines, which carry passengers and freight in scheduled service, and corporations that fly business aircraft.7 The approximately 10,000 turbine aircraft that are operated by airlines account for most of the energy used in commercial air transportation because of their intensity of use. Consequently, airlines care a great deal about energy efficiency, as discussed in the previous chapter. 7 Another class of operators is air taxis, which use some small jets and turboprops for short- to medium- haul, on-demand passenger and cargo transportation. They are a niche segment of air transportation and thus are not discussed further in this report.

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87 Transportation Policy Landscape users of transportation services Except in some commercial applications such as taxi service, the owner of a car or light truck is usually the same as the user. Chapter 2 explains how these light-duty vehicles are used by households for trip-making purposes. The airlines own (or lease) aircraft, but the end users are passen- gers and freight shippers. The services that are demanded by these users, therefore, have a major influence on an airline’s decisions about aircraft characteristics. To illustrate, business travelers do not have the same priorities with respect to flight frequency as do leisure travelers. Business travelers value more frequent flights because of the high value they place on total travel time. Meeting this schedule demand has led to airlines’ using smaller aircraft such as regional jets in many markets because these aircraft are easier to fill when frequent flights are scheduled. Smaller aircraft, however, tend to use more energy per passenger mile than do larger airliners when both have high rates of occupancy. Thus, airlines must balance their interest in reducing fuel costs with their interest in meeting the service demands of customers. Shippers of freight also have service demands that influence the energy intensity of the transportation services they choose. Manufacturers and distributors of high-value goods are interested in service timeliness, reliability, and security, whereas shippers of bulk commodities, such as coal, grains, and chemicals, tend to be more concerned with keeping transportation costs down for their lower-value cargoes. Accordingly, the former shippers are more inclined to demand air cargo and truck services, while the latter tend to use more energy-efficient rail services for their long-distance transportation needs. policy implications Table 3-1 enumerates, generally, the array of actors in each of the three large energy-using transportation modes with respect to the supply of vehicles, fuel, and infrastructure and the ownership, operations, and use of vehicles. In all three modes—light-duty vehicles, trucking, and aviation— the users of transportation services number in the millions. The suppliers of vehicles, fuels, and infrastructure are far fewer in number. This numerical difference is one reason why many energy policies, such as mandates for the supply of renewable fuels and fuel economy regulations, are targeted to

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88 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation table 3-1 Approximate Numbers of Actors in the Main Energy-Using Modes of Transportation Cars and Light Trucks Heavy Trucks Passenger Aircraft Vehicle suppliers Dozens of Hundreds of Dozens of manufacturers manufacturers manufacturers and builders Fuel suppliers Dozens of major oil Dozens of major Dozens of major companies; tens of oil companies; oil companies; thousands of fuel tens of thousands hundreds of fuel outlets of fuel outlets outlets Infrastructure Thousands Thousands Hundreds (airports); (way and terminal) one (Federal Aviation providers Administration) for airways Vehicle owners and Hundreds of millions Tens of thousands Dozens operators Users of transportation Hundreds of millions Hundreds of Tens of millions services thousands or millions the latter group. The same can be said for policies designed for other pur- poses, such as transportation safety. Particularly in the case of cars and light trucks, there can be a great deal of risk involved in taking actions that are viewed as constraining the choices of the millions of consumers who own and operate these vehicles. As Crandall et al. (1986, 2) observed more than 20 years ago when they examined the regulation of the auto- mobile, the proliferation of cars to where they are the principal means of transportation has led to a U.S. policy framework that is, to a large extent, “designed to civilize this mode of transportation rather than to encourage wholesale substitution for it.” Most of the policies that are now in effect to control energy use and emissions in U.S. transportation remain consistent with this earlier description, as discussed in the next section. Current Policies to Reduce Energy Use and Emissions Various public policies and programs usually thought of as beyond the realm of transportation policy making can be construed as influencing transportation energy use and GHG emissions. For example, it is often

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89 Transportation Policy Landscape argued that the federal income tax deduction for home mortgage interest has increased demand for bigger homes on larger lots, which has led to more spread out metropolitan areas that are conducive to travel by car rather than by walking or public transit. However, a review of these and other policies that could be affecting transportation energy use and GHG emissions in the United States is not practical. Instead, only major policies and programs whose main goal is to reduce transportation energy use and emissions are reviewed. federal policies At the federal level, the most prominent examples of policies intended to reduce transportation energy use and emissions are automobile fuel economy standards, mandates for the supply of renewable fuels, tax incen- tives to promote electric vehicles, R&D support for the development of fuel cell and battery technologies, public funding for mass transit and carpool lanes, and fuel tax exemptions for ethanol and other biofuels. Automobile Fuel Economy Standards A long-standing federal program to reduce transportation energy use is the Corporate Average Fuel Economy (CAFE) program. Created by Congress in 1975, CAFE is administered by the U.S. Department of Transportation through the National Highway Traffic Safety Admin- istration (NHTSA). The U.S. Environmental Protection Agency (EPA) is responsible for testing vehicles and calculating their fuel economy values for NHTSA. For the light-duty sector, CAFE is the most signifi- cant means by which the federal government seeks to control energy use. The standards require automobile manufacturers to meet specific sales-weighted average fuel economy levels for the cars and light trucks they sell in the United States. The model year 2010 standard is 27.5 and 23.5 miles per gallon (mpg) for passenger cars and light trucks, respectively. In addition, the federal government imposes the so-called “gas-guzzler” tax on cars with the lowest fuel economy values and requires mpg label- ing for new cars and light trucks. EPA publishes a Green Vehicle Guide, and the U.S. Department of Energy (DOE) publishes a Fuel Economy Guide to inform consumers about the emissions and energy performance of new vehicles.

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90 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation The Energy Independence and Security Act of 2007 (EISA) led to changes in CAFE. The law mandates that the sales-weighted average fuel economy for new cars and light trucks (combined) be set at 35 mpg by model year 2020, a 30 percent increase over 2010 levels. The 35-mpg value is characterized as a minimum requirement, since NHTSA is always required to set the standard for any model year at the “maximum feasible” level on the basis of technological feasibility, economic practicality, and other considerations. EISA also requires automobile manufacturers to label new cars and light trucks with both their fuel economy and their GHG emissions performance ratings. NHTSA is required to educate the public about the benefits of alternative fuels and to establish a fuel efficiency rating system for tires used on passenger cars. Energy Efficiency Standards for Larger Trucks EPA administers a number of voluntary programs in collaboration with the trucking industry that are intended to promote energy conservation, such as the SmartWay Partnership Program, which certifies products and services that reduce freight transportation–related energy use and emissions. EPA estimates that trucks certified by SmartWay are 20 percent more energy efficient than the average truck in the heavy fleet. However, this voluntary federal role in promoting freight energy efficiency may be changing. EISA mandates that NHTSA establish fuel economy regulations for medium- and heavy-duty vehicles. To inform its regulatory program, NHTSA asked the National Research Council to conduct an assessment of fuel economy technologies for such vehicles. The results of that study (NRC 2010) are being used by NHTSA in the development of the required regulations. Moreover, in May 2010, the Obama administration directed NHTSA to work with EPA to create a national policy to increase the fuel efficiency and GHG performance of trucks for model years 2014–2018.8 That policy plan was still being developed at the time of this study. Tax Incentives for Alternative Fuels and Vehicles To encourage the development and deployment of energy-efficient and alternative-fuel vehicles, the federal government also uses various tax 8 http://www.whitehouse.gov/the-press-office/president-obama-directs-administration-create- first-ever-national-efficiency-and-em.

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91 Transportation Policy Landscape incentives. A tax credit of 10 percent (up to $4,000) has been available to purchasers of electric cars and other clean-fuel hybrid, diesel, battery- electric, alternative fuel, and fuel cell vehicles.9 In 2009, buyers of plug-in hybrid electric vehicles were eligible for a tax credit ranging from $2,500 to $7,500. The 2009 American Recovery and Reinvestment Act made the tax credit available to 200,000 cars per manufacturer. It also provides $2 billion in grants for entities manufacturing advanced batteries for cars and provides a credit for buyers of small “neighborhood” electric cars, electric motorcycles, and three-wheeled electric cars. The law increases the tax credit for gas stations and other businesses that install fueling stations dispensing E-85, electricity, and natural gas. Renewable Fuels Mandate EISA also expands requirements for the use of biofuels. Congress had previously required EPA to implement a renewable fuel standard to ensure that gasoline contains a minimum volume of renewable fuel, which was set at 2.78 percent. EISA mandates that EPA increase the volume of renewable fuel required to be blended into gasoline to be used for motor fuel from 9 billion gallons in 2008 to 36 billion gallons by 2022. It fur- ther mandates that 21 billion of the 36 billion gallons come from sources meeting GHG performance requirements. For 2010, EPA requires that 8 percent of the total gasoline and diesel pool consist of renewable con- tent, although mostly from corn-based ethanol. The agency is required by EISA to establish life-cycle standards for GHG impacts of biofuels, including emissions from changes in land use due to fuel production. The life-cycle GHG emission reduction threshold for ethanol was set at 20 percent below petroleum gasoline. These emission reduction thresholds, however, were set at 50 percent or more for advanced biofuels, biomass diesel, and cellulosic biofuels. Consistent with EISA, the new standard requires that a larger percentage of the renewable fuel supply consist of these advanced biofuels, reaching 60 percent by 2022. In this way, the federal requirement for renewable fuels is intended to contribute to a reduction in transportation GHG emissions and oil imports. 9 There is a 60,000-vehicle limit per manufacturer before a phase-out period begins, which has already been reached by some car models.

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92 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation R&D Support The federal government has a number of programs that sponsor R&D on advanced transportation technologies aimed at improving energy efficiency and reducing emissions. They include DOE’s FreedomCar and Fuel Partnership programs, which focus on high-risk research to further technologies such as fuel cells, advanced hybrid propulsion, and advanced internal combustion engines. DOE also supports research on hydrogen fuel cells and biofuels and the 21st Century Truck Partnership, which seeks dramatic improvements in truck energy efficiency and reductions in emissions. At its laboratories in Ann Arbor, Michigan, EPA develops and assists in commercialization of clean and fuel-efficient vehicle tech- nologies, including hydraulic hybrids and clean diesel combustion. A number of other R&D programs and projects that seek to improve transportation energy efficiency, reduce emissions, and create a more diversified energy base are scattered among other federal agencies. Examples include the research conducted by the National Aeronautics and Space Administration on energy-efficient wing designs, the Federal Highway Administration (FHWA) on intelligent systems to improve traffic flow, the Federal Railroad Administration on train handling to reduce locomotive fuel use, the Federal Transit Administration (FTA) on electric-drive buses, and the Federal Aviation Administration on air traffic management technologies and procedures to conserve fuel. Federal Fuel Taxes and Infrastructure Funding Federal funding of transportation infrastructure has both direct and indirect effects on transportation energy use. The main source of federal aid to state and local governments for development of transportation infrastructure is the federal excise taxes imposed on transportation fuels. By far the largest source of these funds is the taxes levied on gaso- line and diesel fuel used by cars and trucks. According to the Ameri- can Petroleum Institute, the nationwide average tax on gasoline was 47 cents per gallon as of July 2009 (Table 3-2). The federal tax on gaso- line accounts for 18.4 cents of this total. The average state gasoline excise tax was 18.5 cents. Other taxes (such as applicable sales taxes, county and local taxes, underground storage tank fees, and other miscellaneous environmental fees) totaled 10.2 cents per gallon. The federal diesel tax

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93 Transportation Policy Landscape table 3-2 Gasoline Motor Fuel Taxes (cents per gallon), July 2009 Total State Region State Excise Other State Total State and Federal Northeast 23.0 5.5 28.5 46.9 Mid-Atlantic 12.4 17.9 30.4 48.8 South Atlantic 13.1 12.1 25.2 43.6 Midwest 21.8 6.5 28.3 46.7 South 19.3 0.8 20.1 38.5 Mountain 22.9 0.2 23.0 41.4 West 20.5 19.0 39.5 57.9 United States 18.5 10.2 28.6 47.0 SOURCE: http://www.api.org/statistics/fueltaxes/upload/State_MotorFuel_ExciseTax_Summary_7-2009.pdf. is 24.4 cents per gallon, and this tax is also accompanied by comparable state and local taxes. Although most motor fuel taxes were introduced decades ago to finance road improvements—and not to motivate fuel conservation— they raise the retail price of gasoline and diesel by about 25 percent and thereby encourage some additional energy conservation. The federal gaso- line tax has remained unchanged since 1993, when it was last increased by 4.3 cents per gallon. In real terms, the value of the tax increase has declined by about 20 percent over the past two decades. Notably, alcohol fuels and other fuels that contain a blend of alcohol are taxed at a lower rate by the federal government and some states. The federal tax credit of 51 cents for every gallon of pure ethanol blended in gasoline represents a federal tax expenditure of about $9 billion per year.10 Federal taxes are also imposed on fuel used for general aviation, trains, and vessels traversing the inland waterways. Most federal motor fuel tax revenues are returned to the states for highway and mass transit improvements. FHWA and FTA oversee the use of this federal aid to build and improve public transportation and 10 Ethanol producers are protected from foreign competition by tariffs and taxes. They also receive a federal tax credit worth $0.45 per gallon. Producers of cellulosic ethanol receive a credit of $1.01 per gallon.

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94 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation highway systems. One of the programs funded through the federal-aid program is the Congestion Mitigation and Air Quality (CMAQ) Program, which provides funds to state and local governments for projects that are intended to reduce congestion and improve air quality. Some of the CMAQ activities presumably yield the collateral benefit of reducing transportation energy use and GHG emissions. For example, state and local governments can use CMAQ funds to promote carpooling, telecommuting, and public transit use; to purchase clean-fuel buses; to build pedestrian and bicycle paths; and to upgrade traffic signals to improve traffic flow. state and local policies Many policies and programs to reduce transportation GHG emissions are being pursued at the state and local levels as these governments exer- cise their decision-making authority in the areas of land use planning and infrastructure financing, investment, and operations. Because many important policy levers reside within state and local governments, these entities can serve as test beds for many policy instruments (Lutsey and Sperling 2008). To strengthen their influence, a number of states are also working together on energy and emissions reduction programs. State and Local Fuel Taxation As explained earlier, all states impose taxes on motor fuel, primarily to pay for transportation infrastructure. These tax programs could, in theory, be exploited for other purposes such as to create incentives for energy efficiency and conservation. However, most states, like the federal govern- ment, have found it difficult to raise fuel taxes, even to improve highway and transit systems. States have enjoyed greater success in enacting tax incentives to encourage the use of alternative fuels such as ethanol. About half the states impose lower taxes on ethanol and other biofuels. A few Corn Belt states have mandated increased use of biofuels. Massachusetts offers a fuel tax exemption for biofuels that yield a 60 percent reduction in life-cycle GHG emissions relative to the gasoline displaced. State Energy and Emissions Performance Standards In seeking to establish their own energy and GHG performance stan- dards for products such as motor vehicles and appliances, states have long

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95 Transportation Policy Landscape encountered resistance from manufacturers and threats of preemption from the federal government. Only California has been granted author- ity under the federal Clean Air Act (CAA) to establish its own emissions performance standards for automobiles, although to do so it must obtain a waiver from EPA. No other state has similar authority, but federal law allows other states to adopt California’s EPA-approved standards in place of the federal standards. In 2002, California enacted the so-called Pavley law (Assembly Bill 1493) calling for GHG-based performance standards for new cars and light trucks sold in the state. The law directs the California Air Resources Board (CARB) to set regulations that achieve the maximum feasible and cost-effective reduction of GHG emissions from cars and light trucks. CARB’s regulation governing GHG performance in 2016 vehicles would have been equivalent to a fuel economy standard of about 35 mpg. CARB has considered additional regulations that would lead to a 45 percent reduction in GHG emissions per mile by 2020 model year vehicles, which would be equivalent to achieving 43 mpg.11 CARB has estimated that adoption of this 2020 standard would reduce vehicle GHG emissions by 18 percent.12 More than a dozen states chose to adopt California’s 2016 standards,13 but EPA originally denied California’s request for a waiver. As discussed in more detail below, EPA has since allowed the waiver and issued a notice indicating its intention to regulate GHG emissions from light-duty vehicles in a manner that would meet the Pavley standard. In addition to the Pavley law, California Assembly Bill 32, enacted in 2006, aims to cap California’s GHG emissions at 1990 levels by 2020.14 Along with California, about half the states have set GHG emissions reduc- tion targets, typically aimed at statewide emissions that are 75 percent or more below current levels by 2050. Although most state targets are only guidelines, a few states have passed laws mandating regulations and 11 California’s standards are stated as grams of GHGs per mile and do not directly equate to miles per gallon. The 43-mpg figure is estimated by CARB. 12 http://www.cleancarscampaign.org/web-content/cleanairact/docs/pavleycafe_reportfeb25_08.pdf. 13 Arizona, Connecticut, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington. 14 This long-range goal is reflected in California Executive Order S-3-05 that requires an 80 percent reduction of greenhouse gases from 1990 levels by 2050.

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96 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation government programs to meet them. Again, California has been espe- cially active in this regard. Assembly Bill 32 requires CARB to develop a detailed plan indicating how GHG emissions cuts will be achieved in the state and to take specific actions for this purpose.15 CARB has therefore established a number of regulations affecting large trucks and buses. For example, trailers moved through the state are required to be fitted with aerodynamic efficiency components (such as side skirts) and low– rolling resistance tires. CARB also created a Goods Movement Emission Reduction Program in which local authorities, such as air quality districts and port authorities, can apply for state funds to be used for financial rewards to carriers and shippers who upgrade to cleaner and more efficient technologies. More generally, CARB is putting in place a low-carbon fuel standard (LCFS) for fuels used by cars and trucks. California’s LCFS seeks a 10 per- cent reduction in the carbon intensity of transportation fuels from 2011 to 2020 by accounting for GHG emissions during each step in fuel production, distribution, and consumption.16 Several other states are considering a similar regulatory approach to reducing the carbon intensity of transpor- tation fuels. For example, the governors of 11 Midwestern states tasked a special working group to recommend the design of a regional LCFS.17 The governors of several Northeastern and Mid-Atlantic states have also declared their interest in developing a regional LCFS program.18 Local Actions Local governments can influence transportation energy use and emis- sions in a number of ways because they, along with states, are responsible for roadway operations, the supply of on-street parking, the provision of pedestrian and bicycle lanes, and the planning and zoning of land use. In addition to operating local street networks, counties and municipalities 15 http://www.arb.ca.gov/cc/scopingplan/document/psp.pdf. 16 Depending on the circumstances, GHG emissions from each step can include carbon dioxide, methane, nitrous oxide, and other GHG contributors. Furthermore, the overall GHG contribution from each particular step is a function of the energy that the step requires. Thus, GHG intensity is typically expressed in terms of grams of carbon dioxide equivalent per megajoule. 17 http://www.midwesterngovernors.org/MGA%20Energy%20Initative/LCFS/LCFS.htm. http://www.mass.gov/?pageID=eoeeapressrelease&L=1&L0=Home&sid=Eoeea&b=pressrelease 18 &f=090105_pr_lcfs&csid=Eoeea.

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97 Transportation Policy Landscape often own and operate airports, marine ports, public transit systems, and intermodal freight and passenger facilities. They also manage large fleets of government vehicles. Local governments and their metropolitan planning organizations already have important roles in reducing local air pollution and traffic congestion, which are implemented through various means ranging from ridesharing programs and transit investments to ordinances governing truck and bus idling. Some localities are con- fronting the integration of climate policy into their land use and trans- portation planning processes. A few localities, such as Portland, Oregon, and Arlington, Virginia, have enacted comprehensive programs involving land use planning, transit investment, and parking policies. The programs are intended to reduce, or confer the side benefit of reducing, traffic congestion, energy use, and vehicle emissions. Notably, California’s 2008 Senate Bill 375 directs CARB to establish targets for reducing emissions from passenger vehicles for each of the state’s 18 metropolitan planning organizations for 2020 and 2035. If these metro- politan regions develop integrated land use, housing, and transportation plans that meet the Senate Bill 375 targets, new projects in these regions can be relieved of certain review requirements of the California Environmental Quality Act. New and Proposed Policies Attempting to identify and explain all of the many energy and emissions mitigation measures proposed at the federal, state, and local levels is impractical because the proposals are constantly in flux. However, the Obama administration has supported the concept of national carbon pricing as a means of GHG mitigation, along with the aforementioned financial incentives for energy efficiency and alternative fuels and the creation of GHG performance standards for vehicles. carbon pricing proposals The two competing methods of carbon pricing have long been considered to be carbon taxes and cap-and-trade programs. Both methods of pricing can create incentives for cost-effective emissions reductions. The former, which imposes a tax per unit of carbon dioxide (CO2) emitted, would

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98 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation need to be set and periodically adjusted to achieve desired emissions cuts. The latter would set a national quota, or cap, on emissions and create a limited number of emissions permits to be purchased by emitters. For a time, the cap-and-trade concept was the favored approach in congres- sional proposals, in part because such programs already exist in some regions of the country19 and abroad (for example, the European Union’s Emission Trading Scheme). Smaller-scale emissions trading programs had also been used successfully in the electric utilities industry to reduce sulfur emissions. President Obama, in his first address to a joint session of Congress on February 24, 2009, called for a national cap-and-trade program to reduce GHG emissions. However, federal cap-and-trade legis- lation has languished, and federal interest in carbon pricing generally was waning as this report was being drafted. other policy approaches While legislative debate over carbon pricing proceeded, the CAA was taking on a more prominent role as a potential vehicle for reducing GHG emissions in transportation and other sectors. The CAA has long given EPA authority to set fuel quality and vehicle standards (including stan- dards for aircraft and other nonhighway vehicles) to reduce emissions of air pollutants that endanger public health or welfare. GHGs were not previously regulated as such a pollutant. In April 2007, however, the U.S. Supreme Court ruled that the CAA authorizes EPA to regulate GHG emis- sions if the agency determines that these emissions cause or contribute to air pollution that may reasonably be anticipated to endanger public health or welfare. In December 2009, the EPA administrator issued a finding that current and projected atmospheric concentrations of greenhouse gases, including CO2, threaten the public health and welfare of current and future generations. As mentioned earlier, EPA has already used its CAA authority to set GHG performance standards for cars and light trucks. This legisla- tive authority is expected to be used by the agency in the near future to control emissions from other transportation vehicles such as heavy-duty trucks and from stationary sources such as electric power plants. 19 The first U.S.-based trading system was the Regional Greenhouse Gas Initiative in the Northeast, which has been in operation since January 2009.

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99 Transportation Policy Landscape Summary Assessment The transportation sector presents both challenges and opportunities for taking actions to reduce energy use and GHG emissions. The amount of energy used in transportation is a function of many factors, including the energy intensity of the vehicles, the environment in which they operate, and the extent to which they are used. The sector’s emissions of GHGs are further influenced by the types of energy used and their GHG impacts during consumption and production. Transportation consists of three broad groups of actors: (a) the suppliers of transportation vehicles, fuel, and infrastructure; (b) the owners and operators of the vehicles and providers of the transportation services; and (c) the users of transportation services. The composition, interests, and roles of each differ, and they can vary greatly by mode. Thus, strategies and policies to influence transportation energy use and emissions must take these decision makers and their differing incentives, interests, and capabilities into account. Although many federal, state, and local policies and programs affect transportation’s use of energy and emissions of GHGs, most were estab- lished for purposes other than GHG mitigation. The most relevant poli- cies are those seeking to improve the energy and GHG performance of vehicles and their operations, further the development and use of alternative energy sources, and reduce transportation fuel consumption by promoting the least energy-intensive modes of transportation. During the past decade, California, in particular, has been aggressively pursuing policies to reduce GHG emissions from motor vehicles. These state efforts, coupled with growing concerns over higher oil prices and energy security, have been factors in prompting changes at the federal level. Recent federal legislation mandates a 30 percent increase in fuel economy stan- dards by 2020, as well as the eventual establishment of fuel economy standards for medium- and heavy-duty trucks. Federal legislation also calls on fuel suppliers to increase the volume of renewable fuels used by cars and light trucks. The Obama administration has since developed GHG performance standards for new cars and light trucks to complement the higher fuel economy standards and is working on similar standards for trucks.

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100 Policy Options for Reducing Energy Use and Greenhouse Gas Emissions from U.S. Transportation It has been demonstrated that fuel economy and renewable fuel regulations can be implemented, but policies aimed at raising the price of energy and setting prices on GHG emissions have received compara- tively little support from policy makers. The CAA is emerging as a central means by which the federal government can influence energy use and emissions in the transportation sector and elsewhere. Meanwhile, many policy actions to reduce GHG emissions have emerged at the state and local levels. Because many important policy levers reside outside the federal government, these jurisdictions may serve as important test beds for energy and emissions policy. References abbreviation NRC National Research Council Crandall, R. W., H. K. Gruenspecht, T. E. Keeler, and L. B. Lave. 1986. Regulating the Automobile. Brookings Institution, Washington, D.C. Lutsey, N., and D. Sperling. 2008. America’s Bottom-Up Climate Change Mitigation Policy. Energy Policy, Vol. 36, pp. 673–685. NRC. 2010. Technologies and Approaches to Reducing the Fuel Consumption of Medium- and Heavy-Duty Vehicles. National Academies Press, Washington, D.C.