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Transitions to Alternative Transportation Technologies: A Focus on Hydrogen (2008)

Chapter: 8 Actions to Promote Hydrogen Vehicles

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Suggested Citation:"8 Actions to Promote Hydrogen Vehicles." National Research Council. 2008. Transitions to Alternative Transportation Technologies: A Focus on Hydrogen. Washington, DC: The National Academies Press. doi: 10.17226/12222.
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Suggested Citation:"8 Actions to Promote Hydrogen Vehicles." National Research Council. 2008. Transitions to Alternative Transportation Technologies: A Focus on Hydrogen. Washington, DC: The National Academies Press. doi: 10.17226/12222.
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Suggested Citation:"8 Actions to Promote Hydrogen Vehicles." National Research Council. 2008. Transitions to Alternative Transportation Technologies: A Focus on Hydrogen. Washington, DC: The National Academies Press. doi: 10.17226/12222.
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Suggested Citation:"8 Actions to Promote Hydrogen Vehicles." National Research Council. 2008. Transitions to Alternative Transportation Technologies: A Focus on Hydrogen. Washington, DC: The National Academies Press. doi: 10.17226/12222.
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Suggested Citation:"8 Actions to Promote Hydrogen Vehicles." National Research Council. 2008. Transitions to Alternative Transportation Technologies: A Focus on Hydrogen. Washington, DC: The National Academies Press. doi: 10.17226/12222.
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8 Actions to Promote Hydrogen Vehicles As discussed in Chapters 1 and 2, the key motivations for to about 5-18 cents per gallon of gasoline. This fuel price this report, and for the interest in hydrogen-powered vehi- increase would raise the (discounted) life-cycle costs of cles, are that increasing imports of petroleum leave the nation operating new gasoline vehicles by roughly $200-$700, vulnerable to disruptions and high costs in the transportation which is a small fraction of the difference in life-cycle costs sector, and that emissions of carbon dioxide (CO2) from between hydrogen and gasoline vehicles in the early years vehicles may have to be curtailed to avoid serious climate of the alternative hydrogen pathway scenarios in Chapter 6. change. This report assesses the resource needs to acceler- Even if a long-term commitment to an aggressive greenhouse ate a transition to hydrogen fuel cell vehicles (HFCVs) by gas cap-and-trade system, radically higher fuel taxes, or 2020 and the resulting impacts on reductions in U.S. oil use more stringent fuel economy standards were credible, these and CO2 emissions. However, such a transition to HFCVs is alone may not be sufficient to spur a transition to HFCVs. unlikely to happen by itself. As discussed in Chapters 6 and For example, auto companies may be reluctant to incur large 7, too many changes have to occur in manufacturing and upfront costs in alternative vehicle development if some of fuel supply, with prospects for profit too remote for private the benefit spills over to rival firms that might be able to enterprise to make investments at the rate necessary to meet imitate new technologies or use them to further their own national objectives. Therefore a significant federal role will research and development (R&D) programs. be essential. As requested in the statement of task, this chap- While the committee concluded that a portfolio approach ter examines policy needs and options required to deploy to R&D is necessary to ensure that a sufficient number of the “maximum practicable” number of HFCVs discussed in options are available to reduce U.S. oil consumption and earlier chapters. carbon dioxide emissions, policies to implement specific options will have to be tailored to the technology or out- come desired. For example, improved fuel economy of GENERAL POLICY APPROACHES conventional vehicles may be achieved by raising corporate Policies can be targeted directly at HFCVs (push) or average fuel economy (CAFE) standards, as recently enacted aimed more broadly at creating an environment that favors by Congress, and greater use of biofuels can be encouraged them (pull). The committee concluded that although broad with economic incentives such as those currently in place for measures that allow flexibility for the market to find the best ethanol. The committee believes, however, that the current options are usually the best approach, this will not be ade- barriers to deploying large numbers of fuel cell vehicles are quate to implement HFCVs. General measures to reduce oil too great for existing policies to produce rapid growth in use and greenhouse gases, such as energy taxes, CO2 taxes, HFCV deployment. Thus, if the U.S. government wants to and greenhouse gas cap-and-trade systems, have a vital role have 2 million HFCVs operating by 2020, it must employ tar- to play in encouraging a broad array of options for reducing geted policies designed to push HFCVs into the marketplace. emissions and oil use across the economy. However, they Examples of such policy options are discussed below. will do little on their own to encourage commercialization of transformative technologies, such as hydrogen, for the POLICIES SPECIFIC TO HYDROGEN FUEL CELL foreseeable future. VEHICLES For example, current bills in Congress would impose an effective price of around $5 to $20 per ton of CO2 emissions, If policy makers decide that the technology is sufficiently which—given the carbon content of gasoline—is equivalent developed to warrant promoting long-run penetration of 103

104 TRANSITIONS TO ALTERNATIVE TRANSPORTATION TECHNOLOGIES—A focus on hydrogen hydrogen vehicles into the in-use vehicle fleet, this com- downside risk of pushing HFCVs (or any other specific mittee believes that technology-push incentives that are technologies) before they are really ready or if they turn out carefully targeted, substantial, durable, coordinated, and not to be the best option, which could be extremely expen- progressively phased out over time will be required. sive and disruptive. The committee concluded that HFCV technology, while promising, is still in the R&D phase and • Targeted incentives, such as federal tax credits or is not yet ready for a decision to initiate commercialization. subsidies for hydrogen vehicle purchase, or minimum sales That decision may come in a few years, and, as shown in share quotas imposed on manufacturers, would be needed to Figure 7.1, expenditures would start to increase rapidly in kick-start the market for hydrogen vehicles, given that these 2015. Thereafter, the technology must be reassessed every vehicles cannot become commercially viable until extensive few years during the transition, and policies readjusted, if learning-by-doing has occurred through sequential vehicle progress on reducing costs and improving performance dif- development, and the vehicles go into the mass production fers from expectations. In keeping with the requirement that needed to achieve scale economies. policies be durable, however, any potential readjustment • Substantial incentives would be required, given that must not appear to threaten the long-term investments that life-cycle costs for hydrogen vehicles are currently so much must be made by industry. Policies must be carefully crafted higher than those for comparable gasoline vehicles. Further- to be both believable and realistic. more, without large incentives, consumers may be reluctant to switch to a new, untested vehicle they are not familiar with, PROS AND CONS OF SUBSIDIES AND QUOTAS while producers competing in global markets may be reluc- tant to undertake major and risky investments in transitional Although government support for basic and applied R&D technologies. and fuel distribution infrastructure is necessary, the heart • Durable incentives, lasting 15-20 years or more, would of any program to ultimately promote substantial hydrogen be critical for altering private sector expectations about the vehicle penetration must be the incentives for auto manufac- long-run payoffs to investments with high up-front costs. turers to develop and mass-produce hydrogen vehicles. The • Coordination of incentives would also be important; two most direct ways to achieve this include a pricing-based for example, even if there is a substantial subsidy for hydro- strategy, where the market price of hydrogen vehicles is gen vehicle sales, auto manufacturers may still not invest initially heavily subsidized by the government, and a quan- in the technology if incentives for required infrastructure tity-based approach involving a progressively more stringent investment, or continued basic R&D, are perceived as inad- sales share requirement for hydrogen vehicles imposed on equate. This is a chicken-and-egg problem: vehicle manu- auto manufacturers. This section discusses the pros and cons facturers will not produce the vehicles without knowing that of the price- and quantity-based approaches. A final sec- the hydrogen supply will be there, while hydrogen producers tion comments very briefly on broader, technology-neutral will not supply the fuel without knowing that the demand for approaches to reducing oil use and CO2 emissions. it will be there. • Finally, any subsidies should be progressively phased Price-based Approach (Subsidies) out over time as long-term penetration targets are approached; this limits funding requirements from the government and A price-based approach involves adoption of a schedule encourages firms to act more quickly to obtain larger subsi- of government subsidies, such as the one sketched in Figure dies offered in the earlier years of the program. 8.1 (which corresponds to the Hydrogen Success scenario in Chapter 6) based on a specified difference in price between The committee also emphasizes that a decision to aggres- fuel cell vehicles and conventional vehicles. From a policy sively push hydrogen must be based on an assessment of the maker’s perspective, a major drawback of the price-based relative risks and benefits of HFCVs, as well as competing approach is that the future vehicle penetration rates under a technologies. On the one hand, the sooner a hydrogen pro- fixed, declining schedule for hydrogen vehicle subsidies are gram is initiated, the greater is the likelihood of achieving very uncertain, because they will vary with future market large reductions in gasoline consumption and the greater developments. For example, vehicle penetration might be the likelihood that rapidly industrializing countries might rapid and substantial if hydrogen vehicle technology evolves transition to hydrogen vehicles before getting locked into quickly, but if not, and/or if consumers and firms are espe- conventional gasoline. On the other hand, there is the cially reluctant to embrace hydrogen vehicles, penetration rates might be minimal. Put another way, we simply cannot Moreover, if any transition to hydrogen vehicles is to greatly reduce know in advance what subsidy schedule is required to meet a CO2 emissions over the longer haul, plants supplying the hydrogen must particular future target for hydrogen vehicle penetration. incorporate low-carbon technologies such as renewable hydrogen or fossil hydrogen with carbon capture and storage technologies. There is enormous potential for future growth in vehicle ownership in than 10 per thousand in both of these countries compared to more than 700 countries such as China and India. Vehicle ownership rates are currently less per thousand in the United States.

ACTIONS TO PROMOTE HYDROGEN VEHICLES 105 200 might be more appealing to policy makers because it achieves a given hydrogen penetration target with far more certainty. 180 Here, manufacturers must sell hydrogen vehicles through Annual per-vehicle subsidy, $1000 160 their own vehicle pricing strategies, regardless of market conditions and competition from other types of vehicles. 140 The quota might be accompanied by a subsidy to manufac- 120 turers to assist them in getting through the very expensive transition, but the driving force would still be the quota. As 100 suggested by the two figures, either approach can achieve 80 the same results. The main drawback of this approach is that there is no limit on the costs of the policy, which could be 60 especially burdensome if technological advance is slower 40 than for competitor vehicles and hydrogen vehicles remain relatively costly to produce. In contrast, a (fixed) subsidy 20 under the price-based approach is more flexible because it 0 provides a natural mechanism for capping program costs, 2010 2015 2020 2025 as manufacturers are free to scale back any plans for new vehicle production if future market conditions do not favor Year hydrogen vehicles. Imposing a uniform, minimum sales Figure8-1.eps FIGURE 8.1  Illustrative example of a price-based policy approach, share quota across different manufacturers can also be indicating the per-vehicle subsidy from government for each fuel problematic if it is relatively easy for some firms to meet the cell vehicle sold in a particular year for the Hydrogen Success quota (for example, firms that are further ahead on the learn- (Case 1) scenario. ing curve) and relatively costly for others. Again, this is not an issue under the subsidy policy since low-cost hydrogen vehicle producers will take more advantage of the subsidy by selling more vehicles, while high-cost producers will sell One way to reduce the uncertainty over future penetration fewer vehicles and forgo the subsidy. However, the problem rates is to use a discretionary policy whereby subsidy levels or tax credits are adjusted upward or downward, according to whether future penetration rates turn out to be below or above target levels. In other words, the policy is adjusted to try and 0.5 keep the net-of-subsidy life-cycle costs of hydrogen vehicles below (perhaps well below) those for comparable gasoline 0.45 vehicles in any given year. However, this can be problematic in several respects. In particular, it may make more sense 0.4 to adjust the penetration targets—for example, make them 0.35 less ambitious, or possibly even abandon them altogether, if Sales share hydrogen technology evolves at a rate slower than that for 0.3 others, such as biofuels or electric vehicles. It also creates an uncertain environment for investment decisions if firms do 0.25 not know when, or by how much, future subsidies might be 0.2 revised, and it may even have perverse effects if firms antici- pate that their progress on vehicle development may cause 0.15 future subsidies to be cut. A possible compromise might be 0.1 to allow some very limited flexibility, for example, a midterm review of progress with a once-and-for-all correction in the 0.05 subsidy schedule, based on criteria clearly specified in the initial legislation. 0 2010 2015 2020 2025 2030 2035 Quantity-based Approach (Quotas) Year In contrast to the price-based approach, a quantity-based FIGURE 8.2   Illustrative example of a quantity-based policy ap- approach would impose a rigid sales share quota, such as proach, indicating the required fraction (quota) of all new vehicles illustrated in Figure 8.2 (which also corresponds to the sold in a particular year that must be fuel cell vehicles for the Figure8-2.eps Hydrogen Success (Case 1) scenario. Hydrogen Success scenario in Chapter 6). This approach

106 TRANSITIONS TO ALTERNATIVE TRANSPORTATION TECHNOLOGIES—A focus on hydrogen under the quantity-based approach could be addressed by a technology, which, as we know from past experience, might allowing firms to trade credits for hydrogen vehicle sales significantly distort the market. Some of these policies are among themselves so high-cost manufacturers can opt to be sector specific, whereas others are economy-wide; some are below the standard by purchasing credits from other firms price based and others are quantity based; some are based that exceed the standard. on performance standards. The quantity-based (quota) approach may also face far For example, fuel economy or vehicle greenhouse gas more resistance from auto manufacturers, because they (or standards that increase steadily in stringency over time their customers) must bear the losses from selling hydrogen ensure that emerging efficiency technologies are applied to vehicles while their life-cycle costs are still above those for fuel economy improvements instead of acceleration enhance- comparable gasoline vehicles; in contrast, under the subsidy ments. Such improvements would help to enable any of the approach these losses are ultimately borne by the general major long-term alternatives for powering vehicles in the taxpayer. future without favoring one technology (e.g., hydrogen) over any other (e.g., biofuels). Vehicle performance standards could include a requirement that some number of vehicles Combined Approaches be zero or near-zero emitting, which would favor biofuels, The differences between price- and quantity-based batteries, or hydrogen vehicles over conventional gasoline approaches illustrates a fundamental tension between meet- vehicles, but leave it to the market to determine the most ing a future penetration target for hydrogen vehicles with viable option. Such a requirement could be pegged, for more certainty, and keeping down the possible costs of the example, to the hydrogen vehicle penetration rates achieved program. A further option is to combine elements of the by HFCV-specific policies described above; this would two approaches in a hybrid policy. For example, a relatively guarantee that these vehicles were low-emitting, but not modest quota on hydrogen vehicles could be combined with necessarily hydrogen fuel cell vehicles. subsidy inducements to go beyond the quota, which produc- Another policy option is to raise gasoline taxes. Increas- ers will take advantage of if future market developments ing per-mile costs of driving would discourage unnecessary favor hydrogen vehicles. Alternatively, a fairly stringent trips and promote fuel economy and alternative fuel vehicles, sales share quota could be mandated, but combined with a including hydrogen. Thus, emissions and oil use could be “safety valve” that allows manufacturers to pay a penalty in reduced throughout the transportation sector. However, lieu of meeting the standard, which they will take advantage there has been considerable opposition to higher fuel taxes of if future market developments are more favorable to other in the past. technologies than to hydrogen. Market-based greenhouse gas control instruments— namely, cap-and-trade or CO2 taxes—are also being imple- mented or under consideration both here and abroad. If these Phased Hydrogen-specific Approach instruments are applied economy-wide, they can effectively One way to reconcile the contradiction between wanting exploit all low-cost emission reduction opportunities. How- to move ahead rapidly but lacking sufficient confidence that ever, for reasons already discussed, these policies most hydrogen is the “right choice” would be a phased approach; likely would not provide sufficient pricing incentives by the decision to scale up the policy to a national level would be themselves to speed the adoption of major transformational contingent on the success of “lighthouse” pilots, as discussed technologies, such as fuel cell vehicles. If carbon emission in Chapter 6. In this regard, a government procurement allowances are allocated through an auction, cap-and-trade approach, where state and municipal government vehicle and tax proposals under consideration in the United States fleets transition to HFCVs, might play a useful role in help- could generate $50 billion to $100 billion or more worth of ing with early development of the market. Such an approach annual allowances or government revenue. Many of these would provide a way to avoid rapidly escalating costs if the legislative proposals set aside allowances or government rev- technology did not advance as expected, but it would also enue to fund technology programs or incentives, providing introduce uncertainty in private sector planning. a potential stable funding source for the types of technology programs discussed earlier. BROAD POLICIES TO REDUCE OIL USE AND GREENHOUSE GAS EMISSIONS CONCLUSIONS Whether or not policy makers choose to push HFCVs CONCLUSION: Sustained, substantial, and aggressive aggressively, there are a variety of broader (technology- energy security and environmental policy interventions neutral) options to reduce greenhouse gas emissions and oil will be needed to ensure marketplace success for oil-sav- use that have been implemented, or are under consideration, ing and greenhouse-gas-reducing technologies, including at both federal and state levels in the United States, and in hydrogen fuel cell vehicles. other countries. These broader polices do not attempt to pick

ACTIONS TO PROMOTE HYDROGEN VEHICLES 107 CONCLUSION: Policies designed to accelerate the pen- (not a substitute for) broader measures to reduce greenhouse etration of HFCVs into the U.S. vehicle market will be gases and oil use. However, the committee believes that required to exploit the long-term potential of HFCVs. HFCV-push policies would have to be designed very care- The committee concluded that these policies must be fully if they are to be effective. Incentives must be substan- durable over the transition time frame but should be tial, durable, and coordinated with measures to encourage the structured so that they are tied to technology and market development of a hydrogen fuel distribution infrastructure progress, with any subsidies phased out over time. Such and continued basic research on vehicle design. Moreover, it policies are likely to deliver significant long-term reduc- is not entirely clear whether a price-based (subsidy) approach tions in U.S. oil demand, but additional policies limiting or a quantity-based (quota) approach to promoting vehicle greenhouse gas emissions will be required in order to also sales is preferable; both approaches have pros and cons. reduce CO2 emissions significantly. A mix of the two approaches, however, might afford the most effective policy to achieve the maximum practicable If policy makers decide to push the market penetration of deployment of fuel cell vehicles in the time frame examined HFCVs, these policies should be seen as a complement to in this study.

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Hydrogen fuel cell vehicles (HFCVs) could alleviate the nation's dependence on oil and reduce U.S. emissions of carbon dioxide, the major greenhouse gas. Industry-and government-sponsored research programs have made very impressive technical progress over the past several years, and several companies are currently introducing pre-commercial vehicles and hydrogen fueling stations in limited markets.

However, to achieve wide hydrogen vehicle penetration, further technological advances are required for commercial viability, and vehicle manufacturer and hydrogen supplier activities must be coordinated. In particular, costs must be reduced, new automotive manufacturing technologies commercialized, and adequate supplies of hydrogen produced and made available to motorists. These efforts will require considerable resources, especially federal and private sector funding.

This book estimates the resources that will be needed to bring HFCVs to the point of competitive self-sustainability in the marketplace. It also estimates the impact on oil consumption and carbon dioxide emissions as HFCVs become a large fraction of the light-duty vehicle fleet.

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