conservation and reduce the federal deficit. However, the funds from that levy were redirected back to the Highway Trust Fund in 1997.

To be used extensively, alternative fuels, together with the vehicles that they power, would have to be at least price competitive with petroleum-based fuels and conventional vehicles. For compressed natural gas and hydrogen, the alternative fuels would have to be made available with complementary vehicle and refueling infrastructure. To undertake the large investments necessary for the development and widespread availability of any alternative fuels, the fuel producers and distributors will have to be convinced that there eventually will be a profitable market for those fuels, including assurance that they will not be undercut by low-cost petroleum. The price of petroleum-based fuels would have to be relatively high and stable for investors to be confident in the profitability of alternatives. One policy that has promise for creating price stability in the oil market is a tax on petroleum that moves inversely with petroleum price and is levied only when petroleum prices fall below a target level, as discussed in Chapter 6. This tax approach ensures the price stability necessary to provide better signals to investors to invest more in efficiency or in alternative energy sources.

FINDING. Taxes on petroleum-based fuels can create a price signal against petroleum demand, offset the “rebound effect” induced by increasingly efficient vehicles, and help assure innovators, producers, and distributors that there is a profitable market for improved efficiency in energy use and for alternative fuels. The range of possible tax policies includes a fixed tax rate per barrel on petroleum that is a surtax on current taxes, or a tax that moves inversely with the oil price when the price falls below a target level, thereby stabilizing prices so that they are at or above the target. Fuel subsidies or quantity mandates are more difficult than taxes to use effectively. Subsidies require government funding, and sometimes complex decisions about who is eligible for the subsidies. Until alternative fuels become cost competitive with petroleum-based fuels, quantity mandates for alternative fuels would require fuel producers to cross-subsidize their money-losing alternative fuels from their profitable petroleum-based fuels. Creating and then maintaining the conditions necessary for successful cross-subsidization would be difficult, politically and otherwise, for the government. Yet without adopting one or more of these policy approaches, the lure of eventual profitability necessary to induce investment is absent, and so the investment is unlikely to occur.

POLICY OPTION. High and stable oil prices would be helpful in transitioning away from oil use in LDVs and meeting the 80 percent reduction goal by 2050. If fluctuations in oil prices and often low oil prices persist, it may be necessary to impose a tax on domestic use of petroleum-based fuels or set a price floor target for petroleum-based fuels.

Taxing petroleum or implementing a price floor to prevent the decline of petroleum price beyond a certain level would discourage its use and contribute to reducing VMT and increasing the use of fuel-efficient internal combustion engine vehicles (ICEVs) if petroleum-based fuel remained the dominant fuel. (See Box 7.1 and see Section 6.3.5, “A Price Floor Target for Motor Fuels,” in Chapter 6). A reduction in petroleum use also would reduce the social cost of oil consumption. (See Box 5.5, “Social Costs of Oil Dependence,” in Chapter 5.)

FINDING. The Renewable Fuel Standard contributed to reducing petroleum use by LDVs. As a result of the failure of cellulosic biofuels to achieve commercial viability and the ability of the EPA to waive the requirement, the volume of cellulosic biofuels mandated by the RFS has repeatedly been reduced. The RFS could become more effective if the EPA’s authority to reduce the mandated requirement either is eliminated so as to maintain a guaranteed market for any cellulosic biofuels produced or linked to a requirement to fund RD&D for progress toward the improved viability of cellulosic biofuels.

POLICY OPTION. The committee supports continuation of the Renewable Fuel Standard because it has been modestly effective in displacing petroleum. The committee suggests periodic review of the RFS by Congress to assess whether the mandated volumes should be increased and whether other alternative fuels should be included in the mandate to encourage the use of alternative fuels and reduce the share of petroleum-based fuels in use for LDVs. The committee also supports further research and analysis for refinement of the means of assessing how fuels qualify as renewable.


Policies that reduce the overall energy demand of LDVs through improving vehicle efficiency and lowering travel demand contribute to a reduction in GHG emissions. In addition, reducing GHG emissions requires policies that limit the net GHG emissions associated with the fuels used by LDVs. In considering fuel-related policies, it is crucial to distinguish between the fuels themselves—that is, the end-use energy carriers used directly by vehicles—and the primary energy resources (such as fossil fuels) and associated energy sector systems that supply end-use fuels. GHG emissions from fuel use can be limited through three basic approaches:

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