Strategic Issues Facing Transportation, Volume 5: Preparing State Transportation Agencies for an Uncertain Energy Future (2014)

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1 This summary outlines the results of NCHRP Project 20-83(04), “Effects of Changing Transportation Energy Supplies and Alternative Fuel Sources on Transportation.” The study is part of a series of reports funded by the American Association of State Highway and Trans- portation Officials (AASHTO) to examine strategic issues facing the transportation industry and inform long-range planning efforts by state departments of transportation (DOTs). As specified in the initial call for proposals, the objectives of this research were “(1) to deter- mine how the mandate, role, funding, and operations of DOTs will likely be affected by future changes in long-term energy supply and demand and (2) to identify strategies and actions that can be used by the DOTs to plan and prepare for these effects.” Perhaps most obviously, with the traditional reliance of state DOTs on federal and state motor-fuel taxes to fund high- way construction and maintenance activities, any significant shift in transportation energy use could adversely affect DOT revenue. Yet changes in fuel sources, prices, and usage patterns could also positively or negatively affect many other issues of concern to state DOTs, such as the cost of construction inputs, aggregate travel demand, choice among modes for passenger travel and good movement, local air quality, and greenhouse gas emissions. S.1 Study Approach and Scope The research team, led by the RAND Corporation with assistance from Cambridge Sys- tematics and the Institute of Transportation Studies at the University of California, Davis, pursued an approach to the study consisting of three main steps: developing a broad range of plausible future transportation energy scenarios in the 2040 to 2060 time frame; exam- ining how the future scenarios might adversely affect state DOTs given their current and evolving roles, mandates, funding, and operations; and employing the principles of robust decision making (RDM), a method for effective long-term policy analysis in the context of an uncertain future, to evaluate and identify promising strategies for states and state DOTs to respond to the potential impacts. Most traditional planning approaches seek to identify one or more futures viewed as highly likely and then develop a set of strategies tailored for the envisioned futures, potentially leading to inferior results should the future evolve in an unexpected direction. In contrast, RDM con- siders a much broader array of potential future outcomes and then facilitates the development of plans that should perform at least reasonably well regardless of how the future unfolds. This robust quality of RDM planning is enabled in part through the use of adaptive strategies that can be triggered or modified as new information about the future becomes available. Two additional notes on the scope of the study are merited. First, potential changes in fuels and vehicle propulsion technologies are not the only uncertainty confronting transportation policy makers. Many other factors—such as the rise of social networking and improved S u m m a r y

2telecommunications, changing attitudes toward transportation among younger generations, and the potential advent of autonomous vehicles in future years—could also affect future travel choices in profound ways. These are beyond the main scope of this study, however, and thus are considered only in passing. As an additional note, solutions to some of the energy-related challenges likely to confront state DOTs, such as reduced fuel-tax revenue, do not fall within the authority of a typical DOT. For this reason, with concurrence from the project panel, the study considered strategies that might require state legislation, a governor’s executive order, or collab- oration with peer agencies along with strategies that DOTs could pursue on their own initiative. S.2 Evolving State DOT Roles, Mandates, Funding, and Operations As a backdrop for the results and analysis that follow, it is first helpful to review current and evolving roles, mandates, funding, and operations for state DOTs. While the structure and responsibilities of a DOT can vary considerably from one state to the next, it is still possible to distill several generally applicable characteristics and trends. State DOTs have traditionally focused much of their efforts on planning, constructing, and maintaining high- ways and other state roads, devoting considerable attention to such concerns as engineering standards, state of repair, and safe operations. Much of the funding for roads has derived from user fees such as federal and state fuel taxes and vehicle sales taxes and registration fees. Like other aspects of society, though, state DOTs continue to evolve. Three emerging trends have proven especially important in recent decades. First, while highway travel remains a central concern for DOTs, many have also taken on greater roles in planning, funding, or oversight for other modes of travel such as transit, rail, aviation, and marine transport. Sec- ond, state DOTs are increasingly asked to address a broader range of policy objectives in their planning efforts. Areas of emphasis vary by state but may include economic development, equity, local air quality, greenhouse gas emissions, quality of life, and heightened attention to traffic safety. Third, following the initial boom in Interstate highway construction, federal and most state fuel-tax rates—typically levied on a cents-per-gallon basis—have not been increased enough to keep pace with inflation and improved fuel economy. With available revenue lagging the rapid growth in vehicle travel, many DOTs have found it necessary to focus much more attention on transportation demand management and operational effi- ciency as an alternative to significant additional capacity expansion. S.3 Future Transportation Energy Scenarios The future transportation energy scenarios developed for the project are intended to reflect a range of plausible outcomes relating to energy and travel that could pose challenges for DOTs given their roles, mandates, funding, and operations. As indicated in Table S.1, key elements of the scenarios can be clustered into three categories. Energy Futures Travel Futures Federal Policy Futures Price of oil Vehicle fuel economy Mix of transportation fuels Vehicle cost Energy cost of travel Passenger vehicle travel Trucking Transit demand Climate and energy policy Transportation funding policy Table S.1. Elements of the future transportation energy scenarios.

3 To develop plausible futures for the scenario elements listed in the table, the team first reviewed the literature on future prospects for petroleum-fueled vehicles along with alter- natives such as natural gas, biofuels, electricity, and hydrogen. The team also examined past trends and future projections for other factors likely to influence travel demand and mode choice in the coming decades, including population growth, economic growth, and land use. Finally, the team reviewed ongoing challenges and policy debates relating to energy, climate, and transportation funding. Findings from the literature were supplemented with insights from a series of interviews with experts from across these disciplines. Drawing on this research, the team established plausible future outcomes for each of the energy, travel, and federal policy elements listed in the table. While there is a degree of correlation among certain elements of the scenarios—for example, higher vehicle fuel economy will generally lead to lower energy cost of travel—the team opted to present the scenarios in disaggregate fashion. This provided greater flexibility for assessing how certain scenario elements, either alone or in combination with other elements, might affect state DOTs. Future energy scenarios. Future oil prices are uncertain, with plausible futures for the 2050 time frame ranging from $70 to $230 or more per barrel (2011 dollars). With recent advances in drilling and extraction technologies to access petroleum from conventional and unconventional sources, however, the lower end of this range appears more likely. More-stringent federal corporate average fuel economy (CAFE) standards have now been specified through 2025, suggesting that vehicle fuel economy should at least double by 2050 and could even quadruple. With greater access to petroleum, mandates for major gains in fuel economy in the coming years, and mature industries for fuel distribution and auto motive engineering, parts supply, and maintenance, many of the experts interviewed expected petroleum to remain dominant for decades to come. Technical innovation is dif- ficult to predict, though, so the team also considered futures in which one or more of the competing fuels—natural gas, biofuels, electricity, or hydrogen—emerges to claim a significant share of the market by 2050. Success for any of these alternatives would almost certainly require significant technology advances along with major investments in distribu- tion and refueling infrastructure. Vehicles appear likely to be more expensive in future years. For conventionally fueled vehicles, the advanced technology required to meet more-stringent CAFE standards is expected to add a couple thousand dollars to the price of a vehicle; for alternatives such as hydrogen or electric, the additional premium could approach $10,000. On the other hand, the energy cost of travel could be much lower in 2050. The study entertains the possibility that oil prices could increase more rapidly than vehicle fuel economy, which would actually lead to a slight rise in per-mile energy costs. If the price of oil stabilizes or declines while vehicles achieve higher fuel economy, however, or if alternatives such as hydrogen, natural gas, or electricity achieve market success, per-mile fuel costs could easily decline to a half or even a third of what they are today. Future travel scenarios. Expected growth in the U.S. economy and population appear likely to spur continued growth in automobile and truck travel, with the possibility that auto travel could increase by as much as 80% and truck travel could rise by as much as 200% by 2050. At the opposite end of the spectrum, the study also considers the possibility that auto and truck travel could remain flat or even decline modestly, though this possibility would be most plausible in specific states resulting from potential population declines. Transit presently accounts for around 2% of passenger travel for the nation as a whole, and there is little reason to assume that it would shrink to less than this share. The report also considers the possibility that transit mode share could rise to as much as 10% on average; though not unprecedented in historic terms, this would likely require major policy intervention along with other factors motivating greater use of non-automotive travel options.

4Federal policy scenarios. Current federal energy and climate policies can be viewed as an ad-hoc mix of subsidies and regulations aimed at the not entirely compatible goals of maintaining low energy costs, increasing energy security, and reducing greenhouse gas emis- sions. The scenarios for this study include one future in which the current mix of federal policies is maintained in the coming decades; one in which greater emphasis shifts to the goal of reducing energy costs, leading in turn to expanded federal support for increased domestic fossil-fuel production; and one in which the goal of climate mitigation emerges as paramount, resulting in stronger policies—such as carbon pricing—to reduce the use of petroleum, coal, and other high-carbon fuels. Shifting to transportation funding, failure to increase federal fuel taxes to keep pace with inflation and fuel economy gains over the past two decades has led to growing shortfalls in the federal Highway Trust Fund. The report considers one possible future in which federal fuel taxes continue to stagnate, leading to increasing devolution of funding responsibility to state and local governments; one in which federal fuel taxes are increased or indexed to provide more stable federal transportation funding; and one in which the federal govern- ment transitions from fuel taxes to support for direct user charges—some combination of facility tolls, mileage fees, weight-distance truck tolls, and congestion tolls—to raise revenue and promote greater system efficiency. S.4 Potential Impacts on State DOTs After developing the future transportation energy scenarios, the team conducted a series of interviews with groups of knowledgeable senior DOT staff from 10 states to solicit insights on how any of the various futures might affect DOTs in the coming decades. Based on the comments received during the interviews along with additional supporting research, the team distilled seven potential impacts of concern. Declining fuel-tax revenue. More-stringent CAFE standards threaten to undermine the revenue from federal and state fuel taxes, which in combination provide a significant share of highway funding. Assuming continued reliance on some mix of petroleum and liquid biofuels, this problem could be addressed by increasing or indexing fuel taxes to keep pace with inflation and improved fuel economy. Should natural gas, electricity, or hydrogen—any of which might potentially allow for home refueling—achieve market success, then the cur- rent system of fuel taxes may no longer suffice. Higher construction costs. In addition to its role as a fuel, petroleum also serves as a key input for road construction activities and materials, such as the production of asphalt. Any significant increase in the price of oil could therefore translate into much higher costs for road construction and maintenance. Increasing traffic congestion. Should aggregate auto and truck travel continue to rise due to growth in population and the economy along with a potential reduction in the energy cost of travel, traffic congestion could worsen considerably, with negative implications for both quality of life and the efficiency and reliability of goods movement. The effects would be most pronounced in states with large metropolitan areas and major trade corridors, whereas more rural states could be largely unaffected. Increasing crashes and fatalities. Increased auto and truck travel could also result in more total crashes and fatalities, which tend to scale with vehicle travel. Yet this impact is highly uncertain; recent federal and state initiatives have already improved safety out- comes, and the possible emergence of autonomous vehicles—though beyond the scope of this report—could lead to dramatic safety improvements in future years. Difficulty meeting air quality standards. Greater challenges in meeting air quality stan- dards could also arise in some futures. Contributing factors might include a continued

5 reliance on petroleum, a shift to certain alternative fuels such as coal-generated electricity, growth in passenger and truck travel, and the possible further tightening of air quality stan- dards by the U.S. Environmental Protection Agency. Increasing pressure to mitigate greenhouse gas (GHG) emissions. While public opinion on climate change is currently polarized, any increase in extreme weather events could plau- sibly galvanize public opinion on the utility of concerted policy intervention. If total auto and truck travel continue to grow, if the transportation sector continues to rely on petroleum or other relatively carbon-intensive alternative fuels, and if the federal government has not enacted a national framework to address climate change, then state DOTs might be called upon to play an increasing role in reducing GHG emissions from the transportation sector. Greater demand for alternative travel modes. Higher demand for transit and other non- automotive travel options might occur in association with higher vehicle costs or energy costs for travel. Alternatively, significant growth in auto and truck travel could lead to wors- ening congestion, in turn creating a demand for alternative modes as a means to avoid sitting in traffic. Many, of course, view increased demand for transit, walking, and biking as a posi- tive outcome; from the perspective of most DOTs, with their traditional focus on highways, the main challenge would lie in determining an appropriate and effective role in helping to plan and fund significant expansion for alternative modes to serve this evolving demand. S.5 Developing Robust Long-Range Plans to Address Impacts After identifying potential impacts of concern to state DOTs, the next step was to evaluate strategies that states might find helpful in addressing the impacts. Each strategy, as defined in this study, includes multiple policy options with generally similar goals and approaches that a state might pursue. For example, the congestion pricing strategy encompasses the more specific policy options of high-occupancy/toll (HOT) lanes, express lanes, priced facil- ities, and cordon congestion tolls. In total, the team examined 23 strategies aimed at such objectives as raising revenue, reducing DOT costs, improving automobile and truck travel, improving transit and other alternative travel modes, and promoting energy efficiency or lower-carbon alternative fuels. Drawing on available evidence, the evaluation of each strat- egy considered expected effectiveness in mitigating the potential impacts listed previously; broader effects on the economy, environment and public health, and equity; barriers relat- ing to financial cost, public acceptance, technical risk, required legislation, or the need for institutional restructuring; required lead time for strategy implementation and results; and caveats regarding applicability in different state contexts (e.g., rural versus urban). Based on the strategy assessments and through qualitative application of RDM principles, the team then outlined a framework to assist state DOTs in developing robust long-term plans for addressing the potentially significant but also uncertain impacts associated with the range of plausible future transportation energy scenarios. Development of the frame- work included (a) categorizing strategies based on the appropriate time frame for action and the degree of risk associated with taking action, and (b) rating the relative merits of different strategies within each category. Time frame for action and degree of risk. In considering whether and when to pursue strategies aimed at a given objective, the application of RDM principles leads to four possible outcomes, as follows: • Robust strategies for near-term action. Impacts that appear likely across all futures can be addressed in the near term with little chance of regret. Given that federal and state fuel taxes are not generally indexed for fuel economy improvements, and with much more

6stringent CAFE standards scheduled through 2025, declining fuel-tax revenue can be viewed as highly probable, and any shift to alternative fuels would further erode fuel-tax receipts. While increased construction costs stemming from higher oil prices are less cer- tain, efforts to decrease DOT costs through increased efficiency should be beneficial as well. Thus, actions to stabilize or enhance revenue and to reduce DOT costs can be viewed as robust strategies for near-term action. • Deferred adaptive strategies to address uncertain impacts. One of the important concep- tual contributions of RDM is that the robustness of a plan can be enhanced by deferring strat- egies intended to address uncertain impacts until more information about how the future is unfolding becomes available. Specifically, RDM makes use of signposts—leading indicators about future trends—to trigger the initiation or adjustment of adaptive strategies. For this study, the impacts of increased traffic congestion, adverse safety outcomes, air quality chal- lenges, pressure to reduce greenhouse gas emissions, and greater demand for alternative travel modes only occur in some futures and are thus candidates for deferred adaptive strategies. • Near-term hedging strategies to address uncertain impacts. To safely defer action on a mitigation strategy until relevant signposts appear, the lead time required to implement the strategy and achieve intended effects must be less than the amount of advanced warning pro- vided by the signposts. For strategies requiring longer lead times, decision makers may wish to pursue near-term implementation to ensure that the benefits of the strategies are available if needed. Such hedging actions, however, carry the risk of wasted investment should the impacts fail to emerge. In considering whether to pursue hedging strategies, decision makers will therefore need to weigh the benefits of having implemented the strategies should they be needed against the costs of the strategies should they prove unnecessary. • Near-term shaping strategies to influence future transportation energy outcomes. The preceding discussion focuses on strategies to mitigate the potential impacts of alternate plausible energy futures. Rather than simply considering how to respond to whatever future emerges, some states may wish to proactively pursue actions intended to influence or shape future transportation energy outcomes with the goals of promoting energy secu- rity, reduced emissions, or more stable energy costs. Like hedging strategies, however, shap- ing strategies also carry a degree of risk. First, the actions of an individual state may exert comparatively little influence in the context of much broader global energy and technol- ogy trends. Second, if a state’s efforts do prove helpful in accelerating a transition away from petroleum, it will need to develop alternate funding mechanisms that much sooner (though this challenge may be preferable to the risk of severe climate change). Rating strategies to address specific objectives. For any of the potential mitigation or shaping objectives considered in the study, there are multiple strategies that could offer some degree of benefit. To assist states in selecting among the options, the team rated strategies in each category, taking into consideration their anticipated effectiveness in addressing the objective in question; their broader effects on economy, environment and public health, and equity; and barriers relating to financial cost, public acceptance, technical risk, required leg- islation, and possible need for institutional restructuring. Based on these factors, strategies for each objective were designated as most promising, optional high impact, or optional low impact. Strategies rated as most promising offer strong performance and present a generally favorable relationship between benefits and barriers. Strategies in the latter two groupings, in contrast, combine either high benefits with high barriers or low benefits with low barriers and are thus framed as optional. Summary of strategy timing, risk, and ratings. Table S.2 summarizes appropriate tim- ing, degree of risk, and strategy ratings for the various mitigation and shaping objectives included in the study. Strategies entailing higher degrees of risk—either hedging or shaping strategies—are shown in italicized text.

7 Because revenue is the most immediate challenge confronting DOTs, it may be helpful to provide additional commentary on the first four strategies listed as most promising. Increas- ing fuel-tax rates—ideally indexing them to account for both inflation and fuel economy gains—is a promising near-term option that should work well as long as most vehicles rely on petroleum or liquid biofuels. If other alternative fuels gain significant market share, how- ever, then tolls or mileage-based user fees (MBUFs) would provide more stable revenue, allocating costs fairly and promoting more efficient use of the system. Increasing registra- tion fees would be an even simpler option for raising revenue from alternative-fuel vehicles, though it does not offer the same policy advantages as tolling or MBUFs. Finally, beneficiary fees levied on developers or property owners, who also benefit from transportation invest- ments, could further broaden the revenue base in an equitable manner. Objective Most Promising Optional High Impact Optional Low Impact Near-term strategies to address highly probable impacts Revenue and DOT costs Fuel taxes Tolling or MBUFs Registration fees Beneficiary fees DOT efficiency Land use Carbon pricing Congestion pricing Private capital Agency energy use Deferred adaptive strategies and near-term hedging strategies to address uncertain impacts Traffic congestion Congestion pricing Goods movement TDM Public transportation ITSs TSM&O Safety Traffic safety ITSs Goods movement TSM&O Air quality or greenhouse gas emissions Feebates Carbon pricing Goods movement TDM Land use Fuel mandates and programs Public transportation Fuel production and distribution Agency energy use Demand for alternative travel modes Public transportation TDM Land use Traffic safety Congestion pricing ITSs TSM&O Shaping strategies to influence future transportation energy outcomes Shaping future transportation energy outcomes Feebates Fuel taxes Land use Carbon pricing Fuel mandates and programs Public transportation Fuel production and distribution Agency energy use Note: Strategies entailing higher degrees of risk are shown in italicized text. ITSs = intelligent transportation systems, MBUFs = mileage-based user fees, TDM = transportation demand management, TSM&O = transportation system management and operations. Table S.2. Framework for strategies to address an uncertain energy future.

8S.6 Tailoring Strategic Plans for State Context States exhibit considerable variation in terms of such factors as size, population density, economic structure, travel patterns, and policy priorities. With that variation in mind, this report closes by suggesting various ways in which states, beginning with the framework outlined previously, can tailor plans to meet their own contextual needs. Opportunities for customizing plans to meet specific state needs include: • Choosing among strategies rated as most promising for any given objective based on con- textual characteristics such as the degree of urbanization, expected population growth, and presence of major goods-movement facilities or corridors. • Choosing whether to pursue optional high-impact and optional low-impact strategies based on policy priorities and ability to overcome associated barriers. • Determining the signposts that will be used to trigger deferred adaptive strategies. (The report suggests a number of possibilities, but states may vary in terms of what new infor- mation would be viewed as sufficient to precipitate action.) • Choosing to implement some adaptive strategies in the near term, rather than waiting for future signposts, to address problems that a state may already be facing. • Choosing whether to implement strategies with long lead times in the near term to hedge against certain plausible futures and the resulting impacts on state DOTs, recognizing the possibility that those futures may fail to emerge. • Choosing whether to pursue near-term shaping strategies intended to promote future transportation energy outcomes viewed as more desirable, recognizing that such efforts are not guaranteed to succeed.