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

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193 To support the development of future transportation energy scenarios for this study, the preceding appendix con- sidered past trends and future prospects for several broad socio-economic factors strongly linked to both energy use and travel demand—namely population, the economy, and land use. At the same time, future policy choices relating to energy, climate, and transportation funding may likewise exert significant influence on future energy and transporta- tion outcomes. This appendix discusses current policy chal- lenges along with potential policy responses being considered or debated at the federal level and in many states across the country. The material serves as background information for the federal policy elements of the future scenarios developed in Chapter 5, and it also offers an introduction to some of the strategies that states might find helpful in preparing for and responding to an uncertain energy future. Note that there is some overlap between energy and trans- portation funding policies, most notably with respect to fuel taxes. Given the critical importance of fuel-tax revenue to state DOTs, however, it is helpful to discuss the two policy areas separately. The first section in this appendix thus focuses on ongoing policy debates relating to energy and climate change, while the second examines transportation funding and investment challenges and policy options. The final sec- tion considers the potential implications for policy options discussed throughout the chapter on the future transporta- tion energy scenarios developed for the study. H.1 Energy and Climate Policies Energy and climate policies can be motivated by several objectives, such as reducing the cost of energy, improving energy security (reducing the amount of energy that must be imported from volatile and potentially hostile nations around the world), and reducing GHG emissions produced through the combustion of fossil fuels to mitigate climate change (Burger et al. 2009). High and volatile gasoline prices over the past several years have led to broadly shared concerns regarding the cost of energy. At the same time, ongoing con- flicts and strife in the Middle East—the source of much of the world’s petroleum—have translated into increased inter- est in policies to promote greater energy independence. (Note that some commentators choose to distinguish between the amount of energy that the United States imports as a whole, including from neighbors such as Canada and Mexico, and the amount that it imports from potentially hostile regimes in the Middle East and elsewhere, with the latter being viewed as most critical from the perspective of energy security.) In contrast, policies aimed primarily at reducing green- house gas emissions—for example, by taxing carbon—remain much more controversial within the United States, particu- larly in the context of a still weakened economy. What is clear, however, is that any policies intended to achieve significant reductions in GHG emissions will need to encompass the transportation sector, which accounts for about 27% of all U.S. emissions (EPA 2011). Certain policy options can be helpful in addressing energy cost, energy security, and climate mitigation simultaneously. For instance, policies aimed at increasing vehicle fuel econ- omy will reduce the amount that consumers must spend on fuel per mile of travel and decrease aggregate fuel consump- tion for the nation as a whole, in turn reducing oil imports and greenhouse gas emissions from the transportation sector. Other policies, however, involve trade-offs. Boosting domestic oil production, for example, may reduce energy costs and pro- mote greater energy independence, but possibly at the cost of greater GHG emissions. (Any increase in supply should in theory reduce price and in turn stimulate greater consump- tion of oil, though other countries may choose to moderate their petroleum production in response to U.S. production levels.) Levying higher fuel taxes or introducing carbon taxes, in contrast, would reduce demand—thus decreasing oil imports and GHG emissions—but would also increase the end-user cost that consumers pay for gasoline and diesel. A p p e n d i x H Energy, Climate, and Transportation Funding Policies

194 Policies involving such trade-offs are almost invariably controversial. In this section are surveyed available policies—including some that have already been widely implemented and others that have only been discussed—for promoting the goals of reducing energy cost, promoting energy independence, or reducing GHG emissions. These can be broadly divided between policies that seek to expand domestic energy sources (supply-side policies) and policies that seek to reduce demand through greater fuel economy or by promoting the develop- ment and adoption of alternative fuels and vehicles (demand- side policies). Within the latter category, the discussion further distinguishes between regulatory approaches, sub- sidies, and pricing (taxation) policies. After discussing the range of potential policies, the section closes with commen- tary on current debates and the potential directions in which energy and climate policy could evolve in future decades. H.1.1 Policies to Boost Domestic Energy Production Policies in this category may focus on increasing the domes- tic production of petroleum and natural gas from both con- ventional and emerging sources such as bitumen or oil sands, shale oil (also known as tight oil), shale gas, coal-to-liquid fuel, and gas-to-liquid fuel (for further discussion see Chapter 3 and Appendix A). One potential strategy would be to remove current restrictions on areas open to energy development. For example, oil producers are not currently allowed to drill in the coastal waters off of many states, or on certain protected public lands such as the Alaskan National Wildlife Refuge. Likewise, the government could relax certain environmental and safety- related permitting requirements that act to constrain the pace of domestic petroleum and natural gas development. The gov- ernment could also provide further tax incentives for explora- tion and development, as well as continue to subsidize ongoing research into unconventional fossil-based energy sources. Active policy intervention to boost U.S. production of fossil fuels may in fact prove unnecessary. U.S. and North American production of both petroleum and natural gas have surged in recent years based on the development of improved tech- nologies for enhancing recovery from existing wells and exploiting tight oil and shale gas resources. Recent projec- tions by the IEA suggest that the United States could become the largest global oil producer by 2020 and—due in part to more-stringent fuel economy standards—a net oil exporter by 2030 (IEA 2012). To the extent that domestic fossil-fuel production, and in turn world production, is increased, it should have some effect on lowering fuel prices. Yet the benefits may be limited by the fact that oil is traded on the world market and world demand is expected to increase dramatically with the continued growth of China, India, and other emerging nations. At the same time, other major oil producers around the world may choose to lower production rates in response to changes in U.S. supply in order to maintain higher prices. If global demand outpaces global supply, oil prices could still rise. Further, as illustrated most recently by the Deepwater Horizon spill in the Gulf of Mexico, there are significant environmental risks associated with drilling and transporting petroleum and other fossil fuels. Finally, if increased U.S. production succeeds in helping to lower world prices, it should also translate to greater overall demand, problematic from the perspective of reducing GHG emissions to mitigate climate change. H.1.2 Reducing Petroleum Use and GHG Emissions Through Regulatory Mandates Regulatory mandates govern the quantity and qualities of goods or harmful wastes produced by individual firms or an industry as a whole. Current federal mandates to reduce the demand for petroleum include CAFE standards, which have recently been harmonized with GHG emissions standards, along with RFSs; analogous mandates have also been devel- oped at the state level. CAFE and GHG emissions standards. CAFE standards, in essence, require that the fleet of vehicles sold by auto manu- facturers each year achieves specified average fuel economy standards. Firms that fail to meet the standards are subject to significant fines based on (a) the amount by which their fleet falls short of the specified fuel economy goal, and (b) the num- ber of vehicles that they sell for the year. In the past, CAFE stan- dards were separate for passenger cars and light-duty trucks, with the former being more stringent; more recent standards also factor in the vehicle’s size (wheel-base footprint) in deter- mining the applicable fuel economy target. The EPA has traditionally been charged with measuring the fuel economy for different vehicle models, while NHTSA administers the overall program. With the most recent CAFE rulemakings—issued for model years 2012 to 2016 in April of 2010 and for model years 2017 to 2025 in August of 2012 (EPA 2012c)—federal fuel economy standards have been integrated or harmonized with GHG emissions standards determined by the EPA under authority of the Clean Air Act (CAA) along with the state of California, which holds a waiver to set its own emissions standards under the CAA. CAFE standards were first adopted in the United States in 1975 as part of the Energy Policy and Conservation Act (EPCA). The Middle East oil embargo of 1973–1974 caused a major economic shock in the United States, highlighting the relative inefficiency of many American cars. At the time, the fuel economy of new cars had experienced a steady decline, from 14.8 mpg in model year 1967 to 12.9 mpg in 1974. Some

195 gas guzzlers attained only 6 or 8 mpg. This shift had been driven at least in part by the availability of relatively inexpen- sive gasoline during the 1960s and early 1970s. CAFE stan- dards offered a strategy to reverse this trend by requiring the production of cars with greater fuel economy levels, in turn reducing the nation’s need to rely on foreign, and potentially volatile, sources of oil. In the intervening decades, energy independence has remained a key motivation underlying CAFE standards. In more recent years, given that GHG emis- sions vary in proportion to fuel consumption, stricter CAFE standards have also been viewed as a potentially powerful tool to help mitigate the threat of climate change. This additional objective of climate mitigation is now formalized with the harmonization of CAFE standards with EPA and California GHG emissions standards. In the initial legislation, standards for passenger vehicles were set at 18 mpg by 1978, 20 mpg by 1980, and 27.5 mpg by 1985, with the goal of doubling overall fuel economy within 10 years. For much of the subsequent period, while standards were increased modestly on a few occasions, most efforts to increase fuel economy standards were blocked in Congress. Thus CAFE standards remained relatively static throughout the late 1980s, 1990s, and early 2000s. Over this same period, there was a significant rise in the market share for light-duty trucks (i.e., pickup trucks, sport utility vehicles, and minivans), which have been subject to lower CAFE stan- dards than passenger vehicles. With the failure to further increase CAFE standards combined with a dramatic shift in vehicle purchase preferences, the average fuel economy of light-duty vehicles on the road increased only modestly over the past several decades, as shown in Figure H.1. In just the past few years, however, with increasing oil prices and greater concerns about climate change, CAFE standards have been revised with much more demanding goals. Light- duty truck standards were amended in 2006, although the 9th Circuit Court of Appeals overturned the rules as not being sufficiently strict and directed NHTSA to implement further revisions. In December 2007, Congress passed the Energy Independence and Security Act (EISA) of 2007, calling for ratable increases in fuel economy from 2011 through 2020, culminating in an average of 35 mpg for all passenger cars and light-duty trucks by 2020. In May 2009, President Obama proposed a new national fuel economy program adopting uniform federal standards to regulate both fuel economy and GHG emissions while preserving the legal authorities of NHTSA, the EPA, and California (which had separately been pursuing a waiver under the CAA to set its own GHG emission standards). The resulting rules, issued by NHTSA and the EPA in April 2010, specify an average fuel economy of 35.5 mpg (39 mpg for passenger cars and 30 mpg for light-duty trucks) Source: ORNL (2012, Figure 4.1, Tables 4.20 and 4.21, and author computations based on data from Tables 1.15, 2.11, and 3.7). Note that the dip in estimated average fuel economy for the existing light-duty fleet following 2007 is an artifact of changes in the way that the FHWA estimates annual vehicle miles of travel, as documented by ORNL (2012, Table 3.7). 0 6 12 18 24 30 0% 20% 40% 60% 80% 100% 1980 1985 1990 1995 2000 2005 2010 Fuel Econom y in M iles per Gallon Pe rc en t o f N ew L ig ht -D ut y Ve hi cl e Sa le s Market Share for Light Duty Trucks CAFE Standards for Passenger Cars CAFE Standards for Light Duty Trucks Average Fuel Economy for New Light-Duty Vehicles Average Fuel Economy for Exis‰ng Light-Duty Fleet Figure H.1. CAFE standards and light-duty fleet fuel economy, 1980–2010.

196 Another concern is that CAFE standards have not been as effective as possible in reducing the nation’s petroleum use, in part because the standards remained largely static between 1985 and the middle of the first decade of the 2000s. Finally, some have examined the question of whether fuel economy might be improved more cost-effectively through other pol- icy options such as increased fuel taxes (e.g., CBO 2003). Renewable fuel standards. As an additional means of reduc- ing oil consumption and GHG emissions, the United States has adopted a national renewable fuel standard for ethanol and biodiesel. The first such standard, RFS1, was established under the Energy Policy Act of 2005 and called for at least 7.5 billion gallons of biofuels to be used each year in the United States by 2011. A revised and more demanding set of standards, RFS2, was developed in compliance with EISA. Finalized in Febru- ary 2010, RFS2 defines four categories of renewable fuels: cel- lulosic biofuel, biomass-based diesel, advanced biofuels, and other renewable fuel. Fuels from each category must meet different standards for GHG reductions to qualify—cellulosic biofuels, for instance, must demonstrate a 60% reduction over the petroleum baseline—and there are separate volumetric tar- gets for each category (EPA 2013a). In aggregate, RFS2 calls for biofuel use in the United States to increase from 11.1 billion gallons in 2009 to 36.0 billion gallons in 2022. The method for enforcing RFS2 is complicated, involving the use of unique renewable identification numbers (RINs) attached to each gallon of qualifying biofuel produced in or imported into the country. RINs are transferred with inter- mediate fuel purchase transactions, and ultimately retail fuel blenders are required to accumulate a certain number of RINs—in essence, biofuel credits—in proportion to the total volume of fuel that they sell (referred to as their renewable volume obligation, or RVO). If blenders accumulate more RINs than they need in a given year, they can trade their extra credits to other blenders who have fallen short of their goals. Alternatively, blenders can hold on to the extra credits to use against the following year’s requirements. If the renewable fuel mandate increases the overall cost of producing fuel—that is, if the price of biofuels exceeds the price of petroleum— blenders are expected to pass most of the additional costs along to consumers (Schnepf and Yacobucci 2010). Related to the concept of renewable fuel standards is the prospect of implementing low-carbon fuel standards. Yeh and Sperling (2010) provide further discussion of this idea. H.1.3 Reducing Petroleum Use and GHG Emissions Through Subsidies Along with core investment in research and development, the U.S. government also encourages the production and adoption of advanced vehicle technologies and alternative fuels through subsidies provided to producers and consumers. by 2016, accelerating the pace of improvement stemming from the 2007 EISA bill. Next, in July of 2011, the Obama adminis- tration announced an agreement with California and 13 large automakers to increase average fuel economy to 54.5 mpg by 2025, with the final rulemaking issued in August of 2012. The feasibility of this target is supported by a series of studies of advanced vehicle and powertrain technologies (e.g., Kasseris and Heywood 2007; Burke and Zhao 2010; NRC 2010; Burke, Zhao, and Miller 2011; Cheah and Heywood 2011), which indicate that it should be possible to achieve 60 mpg in mid- size cars at reasonable cost. President Obama’s proposal in May of 2009 also directed NHTSA and the EPA to develop the Heavy-Duty National Pro- gram, which would for the first time specify fuel economy stan- dards for combination tractors (the semi-trucks that typically pull trailers), heavy-duty pickup trucks and vans, and voca- tional vehicles (buses, refuse trucks, utility trucks, etc.). The proposed rulemaking for this program was issued by NHTSA and the EPA in November 2010 and finalized in September of 2011 (EPA 2012b). Under the standards, which take effect in 2014 and escalate through 2018, combination tractors will be required to achieve a 20% reduction in fuel consumption and greenhouse gas emissions, heavy-duty pickup trucks and vans will be required to achieve a 15% reduction, and vocational vehicles will be required to achieve a 10% reduction. Many studies have examined the effects of CAFE standards as well as the prospects for instituting more-stringent future standards (e.g., Greene 1997, GAO 2000, NRC 2002, CBO 2003). Most agree that the program has been successful in reducing aggregate U.S. oil consumption. The NRC study, for example, found that CAFE standards were responsible for reducing oil use by about 2.8 million barrels per day as of the early 2000s (NRC 2002). On the other hand, CAFE standards have been subject to considerable critique as well. Perhaps the most signifi- cant concern is that CAFE standards led auto manufactur- ers to produce smaller vehicles, which in turn created greater safety risks for motorists. Along these lines, the NRC study estimated, though not with full panel consensus, that CAFE standards contributed to an additional 1,300 to 2,600 traffic deaths in 1993 (NRC 2002). Based on safety concerns, and as mandated by the 2007 EISA, the most recent CAFE stan- dards differentiate not only between passenger cars and light- duty trucks, but also between cars or trucks of different sizes as measured by vehicle footprint. The effect of linking fuel economy targets to vehicle footprint is that it motivates auto- makers to achieve the standards by making lighter and more efficient vehicles rather than by making smaller vehicles. The logic for this shift, as demonstrated in a recent analysis by Kahane (2012), is that safety outcomes in traffic collisions correlate with vehicle size—smaller vehicles are less safe, other factors held constant—rather than with vehicle weight.

197 economy of the purchased vehicles was 24.8 mpg, representing a prospective fuel savings of 36%. Yet analysis by several econo- mists indicated that as a means of reducing GHG emissions, the program was very expensive, costing about $400 to $500 per ton of CO2 equivalent emissions (Knittel 2009). Ethanol subsidies. For a period of three decades, the United States subsidized the production of corn-based ethanol to blend into gasoline. The most recent subsidy, a tax credit of 45 cents per gallon, expired at the end of 2011. Owing in part to the nation’s renewable fuel standard, however, business pros- pects for ethanol producers remain strong. In October 2010, the EPA increased the maximum amount of ethanol that can be blended into gasoline from 10% to 15% for use in cars of model year 2001 and later. This was an important ruling for the ethanol industry because it significantly increased the potential size of their market. There are also about nine million flex-fuel vehicles in the United States that can use E85 (blends of up to 85% ethanol), but most use much lower blends given the lim- ited availability of E85 and—perhaps even more importantly— the cost and inconvenience of reduced vehicle range stemming from the lower energy content of ethanol versus gasoline. With more modest blends of 10% or 15%, however, governmental subsidization has clearly played an important role in boosting the production and consumption of ethanol. H.1.4 Reducing Petroleum Use and GHG Emissions Through Taxes and Fees The third demand-side policy approach, often referred to as “pricing,” is to apply taxes or fees that are structured to encourage consumers to adopt conventional vehicles with higher fuel economy or to shift to alternate-fuel vehicles. Although subsidies can also be viewed as a form of pricing incentives, the focus here is on the use of taxes or fees that penalize certain vehicle and fuel choices—a potentially effec- tive but also more controversial policy approach. Feebate programs. Although direct vehicle subsidies, as described previously, appear to be successful in stimulating more rapid adoption, they are also quite costly to maintain over the long run. In a period of growing fiscal austerity, it is unclear that federal or state governments will have sufficient resources to offer pure rebates on an ongoing basis. Another option that might be considered, then, is a feebate program, under which consumers who purchase vehicles with lower fuel economy must pay a fee, and consumers who purchase more fuel-economical models or alternative-fuel vehicles receive a rebate. The fees paid by the former group offset the rebates provided to the latter, allowing the program to be revenue neutral to the government. While the feebate concept has been studied thoroughly, there is limited experience with actual application (Bunch and Greene 2010, German and Meszler 2010). Only France and Tax credits for electric vehicles and plug-in hybrids. The federal government, along with some states, currently offers subsidies (rebates in the form of tax credits) for the purchase of electric or plug-in hybrid vehicles. The subsidies are intended to help early adopters defray the higher initial cost of such vehicles in comparison to conventional internal combustion engine technology. The federal tax credits were authorized in the Energy Improvement and Extension Act of 2008 and the American Clean Energy and Security Act of 2009. The subsi- dies are directed toward battery electric (such as the Nissan Leaf) and plug-in hybrid (such as the Chevy Volt) vehicles, which draw energy from a traction battery that stores at least 5 kWh of electricity and uses an off-board source of energy to recharge the battery. The tax credit for such vehicles is $2,500 plus $417 for each kWh of storage over 5 kWh up to a maxi- mum of $7,500, and credit is only available on models from a given manufacturer until that manufacturer has sold 200,000 qualifying vehicles. The federal government is also subsidiz- ing, through the end of 2013, up to 30% of the cost of install- ing home-based alternative-fueling infrastructure (capped at $1,000) and larger public refueling installations (capped at $30,000); this program encompasses electric charging infra- structure along with other alternative fuels such as natural gas, propane, and ethanol (EERE 2013). Previously the federal government offered tax credits of up to $3,400 for hybrid vehicles like the Toyota Prius, but those tax credits expired in December of 2010. Many perceive that such subsidies helped the initial adoption rate for hybrid vehicles, and it is possible that subsidies will have a similar effect on initial sales for early electric and plug-in hybrids such as the Volt and the Leaf. Some states have provided additional subsidies for advanced vehicle purchases. Among the more generous examples, California offers a $5,000 purchase rebate for bat- tery electrics and $3,000 for plug-in hybrid vehicles, Oregon offers up to $5,000 for plug-in hybrid vehicles, and New Jersey offers up to $4,000 for battery electric vehicles. Many other states offer smaller rebates. Car Allowance Rebate System (cash for clunkers program). The 2009 cash for clunkers program, which offered rebates to consumers who traded in an older vehicle with lower fuel economy for a new vehicle with higher fuel economy, provides another recent example of federal subsidies for the purchase of cleaner vehicles. The program was part of the economic stim- ulus package and sought to support struggling auto makers while simultaneously encouraging sales of more fuel-efficient models. Depending on the difference in fuel economy between the vehicle purchased and the vehicle traded in, the subsidy varied between $2,500 and $4,500. The program lasted several months and was well received, with the allocated funding of $3 billion being spent rapidly. The average fuel economy of the trade-in vehicles in was 15.8 mpg, while the average fuel

198 Parry 2007). However, note that, as Greene, German, and Delucchi (2008) argue, consumers do not always act in an economically rational manner, potentially undermining the case made by economists for pricing. The idea behind pricing carbon dioxide and other GHGs (often described as carbon pricing, carbon fees, or carbon taxes) is that the incentives embodied in pricing can motivate emission reductions at lower overall societal cost given the flexibility in how the emissions can be reduced. Two policies involving carbon pricing have been considered to date: carbon fees and carbon cap and trade. Carbon fees involve a direct tax on the emission of GHGs into the atmosphere in order to create a strong financial incentive for reducing emissions. Such fees could in theory be imposed when fuels are extracted from the earth, when they are imported, when they are processed, or when they are consumed. From an economic perspective, the level of the fee would ideally approximate the damages caused by the emis- sions, although in practice this is extremely difficult to quantify. An important effect of carbon fees would be to level the playing field such that cleaner fuels (i.e., fuels that produce less GHGs) or conservation technologies could better compete in the mar- ketplace. From the perspective of mitigating climate change, one of the main drawbacks of carbon fees is that the approach does not provide for a specific limit on overall emissions. In contrast, a cap-and-trade policy would not impose direct costs on the carbon content of fuels; rather, it would place a limit (the cap) on overall GHG emissions. Allowances would then be distributed, either for free or via auction, that grant the holder rights to emit a certain amount of GHGs. For example, an allowance might entitle a company to emit 1 ton of CO2 or to sell fuel that, once combusted, would result in 1 ton of CO2 emissions. Companies would then be free to buy and sell allowances as needed. If it were expensive for one company to reduce its GHG emissions, that company could purchase allowances from another company that could reduce its emissions at lower cost. It is this ability to trade permits, in the view of economists, that promotes greater overall economic efficiency. As years pass, the number of per- mits would be gradually reduced, resulting in corresponding overall reductions in GHG emissions. The CAA employed cap-and-trade policy to reduce emis- sions that contributed to acid rain. Title IV of the act set a goal of reducing SOx emissions from power plants by 10 mil- lion tons per year below 1980 levels. Phase I began in 1995, and data show that emissions were reduced by roughly 40%. Phase II began in 2000 and further constrained emissions from over 2,000 power plants (EPA 2012a). In 2005, the EPA implemented the Clean Air Interstate Rule to reduce SOx and NOx from power plants whose emissions drift from one state to another. This rule also relies on a cap-and-trade system to reduce these emissions by 70% (EPA 2013b). Canada have implemented feebate programs, while Ireland, Germany, and the United States have in certain cases applied fees to vehicles with lower fuel economy without offering the corresponding rebates for vehicles with higher fuel economy. Taxes on gasoline and diesel. Increasing current motor-fuel excise taxes on gasoline and diesel would provide an incentive for motorists to reduce total travel or to purchase vehicles with greater fuel economy or alternative-fuel vehicles. The federal government currently levies an 18.4 cents-per-gallon tax for gasoline and a 24.4 cents-per-gallon tax for diesel. States also collect excise fuel taxes and in some cases charge additional sales taxes on the purchase price of gasoline and diesel. According to recent calculations by API, the average motorist paid a total of 48.8 cents per gallon in federal and state taxes on gasoline as of January 2013, and a total of 54.4 cents per gallon on diesel (API 2013). The majority of this tax burden is based on federal and state excise taxes as opposed to sales taxes. Because excise taxes are levied on a cents-per-gallon basis, the revenue—measured in real dollars per mile of travel—declines over time with infla- tion and fuel economy improvements. Over the past several decades, however, despite the fact that the United States has the lowest fuel taxes of any industrial country, elected officials have grown increasingly reluctant to take on the unpopular task of instituting fuel-tax increases to offset inflation and fuel economy gains. For example, federal fuel taxes were last raised in 1993, and many states have likewise not increased fuel taxes for many years. As a result, fuel-tax revenue, adjusted for inflation and fuel economy, has fallen precipitously. Fischer, Harrington, and Parry (2007), for example, estimate that real fuel-tax revenue per mile of travel has declined by about 40% since 1960. With reduced real rates, fuel taxes are no longer as effective at influencing traveler behavior or at raising necessary highway revenue. If the purchase price of gasoline and diesel were raised by instituting substantial motor-fuel excise tax increases, con- sumers would be likely to invest in more fuel-efficient con- ventional vehicles or alternative-fuel vehicles and change their travel behavior to reduce their consumption of oil. Because a fuel-tax increase would represent a permanent increase in the retail cost of fuel, it would tend to induce greater efforts at conservation than similarly sized transitory price increases generated by oil market fluctuations. It would also create greater opportunities for the emergence of cost-competitive alternative-fuel vehicle options; that is, such options would then be competing against reliably more expensive gas and diesel. The next section discusses fuel taxes at greater length in the context of highway revenue sources. Pricing greenhouse gas emissions. From a theoretical perspective, many economists view pricing policies as a more efficient means for reducing GHG emissions than regulatory mandates such as CAFE standards (Fischer, Harrington, and

199 rate, it takes 88.5 gallons to produce a metric ton of emissions. To estimate how a tax on greenhouse gas emissions could affect the per-mile cost of driving a gasoline-powered vehicle, then, one simply calculates the cost of emissions (in $/metric ton per CO2 equivalent) divided by 88.5 gallons divided by the vehicle’s fuel economy measured in miles per gallon. In Table H.1, this calculation is provided for a vehicle that averages 27 miles per gallon (corresponding roughly to CAFE standards for passenger vehicles over much of the past 25 years) and for a vehicle that averages 54.5 miles per gallon (corresponding to the target average vehicle fuel economy in 2025 under the recent CAFE revisions). To put the cost of emissions in context, the table also estimates the per-mile cost of gas to fuel the car as well as the per-mile cost of federal and state fuel taxes. These latter calculations assume a pur- chase price of $4 per gallon, including $3.50 for the fuel itself and another 50 cents in federal and state taxes [close to the average tax burden reported by API (2013)]. As shown in Table H.1, any change in the marginal cost of driving that would result from pricing GHG emissions could prove to be quite modest. For both the $10 and $20 per-ton scenarios, the incremental cost of GHGs would remain sub- stantially lower than the cost associated with fuel taxes or fuel itself. Still, even a small increase in the cost of driving would provide some incentive for travelers to purchase vehicles with higher fuel economy or to switch to lower-carbon alternative fuels. H.1.5 Future Energy and Climate Policy Directions U.S. climate and energy policy over the past several decades could be described as conflicted, a reflection of the seemingly inevitable competition among stakeholder interests seeking to influence policy choices based on their own goals. On one hand, for example, the federal government provides con- siderable research and development funding to support the emergence of cleaner energy and fuel sources and technolo- gies, in turn reducing dependence on foreign oil and mitigat- ing climate change. On the other hand, the United States also continues to subsidize oil exploration and the development of unconventional fossil fuels such as oil sands, shale oil, and In recent U.S. debates, cap-and-trade policy has been favored over carbon fees due to the perceived successes of cap- and-trade policies for acid rain. Additionally, unlike carbon fees, for which the resulting emissions reductions would be difficult to predict, a cap-and-trade system offers greater cer- tainty in actual emissions reductions. In 2009 the U.S. House of Representatives passed H.R. 2454, American Clean Energy and Security Act of 2009. This bill would have used cap and trade to reduce greenhouse gas emissions as part of an overall attempt to create clean jobs, promote energy independence, and reduce global warming. The bill was not passed by the Senate, however, and therefore did not become law (Govtrack, undated). Absent more aggressive federal action, the state of California has now implemented its own multi-sector carbon cap-and-trade program (CARB 2013), while the Eastern Sea- board’s Regional Greenhouse Gas Initiative has established a cap-and-trade program for electric power. Other multi-state efforts to explore and develop cap-and-trade programs are the Western Climate Initiative and the Midwestern Greenhouse Gas Reduction Accord (UCS 2012). Either form of carbon pricing—carbon taxes or cap and trade—would ultimately increase the cost of emitting GHGs based on the combustion of fossil fuels. From the perspective of motorists, the effect would be to increase the cost, in cents per mile, of driving. The magnitude of the effect would depend on (a) the cost of greenhouse gases (typically expressed as $/metric ton of CO2 equivalent) based on either the tax or the market price for trading emissions permits, (b) the amount of GHG emissions created by producing, transporting, and consuming each unit of the fuel (i.e., well-to-wheels emis- sions), and (c) the vehicle’s fuel economy. An electric vehicle running entirely on renewably generated power, for example, would face no additional cost, while a conventional vehicle with poor fuel economy would face higher costs. Even with today’s conventional vehicles, however, the over- all effect of pricing greenhouse gas emissions on the cost of driving is expected to be rather modest. To illustrate, Table H.1 computes how carbon pricing, under several cost-per-ton sce- narios, could affect the marginal cost of driving a conventional gasoline-powered vehicle. Per EPA (2010) estimates, the calcu- lations assume that each gallon of gas produces 11,294 grams of CO2-equivalent emissions on a well-to-wheels basis. At this Marginal Cost in Cents/Mile Miles per Gallon Gasoline at $3.50/gallon Gas Taxes at $0.50/gallon GHGs at $10/ton CO2 Equivalent GHGs at $20/ton CO2 Equivalent GHGs at $100/ton CO2 Equivalent 27 12.96 1.85 0.42 0.84 4.18 54.5 6.42 0.92 0.21 0.41 2.07 Table H.1. Effect of carbon pricing on cost of driving with gasoline.

200 investment policies in the United States over much of the past century. It then looks at more recent shifts in highway and transit funding over the past several decades. The overarch- ing story is that certain of these recent trends—most notably the steady shift from fuel taxes and other user fees to greater reliance on general sources of revenue—could make it dif- ficult to sustain adequate funding in the coming decades, in turn prompting decision makers to consider major reforms in transportation funding policy. The section concludes by examining ongoing revenue policy debates and exploring how potential shifts in funding mechanisms and investment choices could affect energy use and travel demand in the coming decades. H.2.1 Historical Themes in Transportation Revenue and Investment Roads and transit systems are typically planned and funded by the public sector based on revenue raised at federal, state, and local levels. Common funding sources are user fees (e.g., fuel taxes or transit fares) and various general revenue sources (e.g., property taxes and sales taxes). Looking back over much of the past century, several themes in surface transportation funding and investment can be discerned: strong adherence to the principle that users of the transportation system should pay for its construction and upkeep, a willingness to increase taxes and fees as needed to improve transportation systems, the hypothecation of transportation revenue, and the diversifi- cation of funding sources. Adoption of the user-pays/user-benefits principle. The evolution of highway funding policy in the United States has been guided by the principle that those who benefit from the road network should pay, in proportion to use, for build- ing and maintaining the system (Wachs 2003). In the early 1900s, as the adoption of cars and trucks began to accelerate, demand for new roads to serve these vehicles grew rapidly. With most households not yet owning vehicles, it was gener- ally viewed as fair to ask those who used the system to pay for its development and maintenance, as opposed to relying on general revenue sources (Brown et al. 1999). While tolls were one way to levy usage fees, broad applica- tion of tolling would have led to high administrative costs, congested traffic surrounding toll plazas, and the difficulty of preventing theft of toll-box revenue. Searching for a more efficient alternative to tolls, in 1919 the state of Oregon pio- neered the application of motor-fuel taxes to raise highway revenue. Fuel-tax collections, like tolls, would be paid by those who used the road network, and further would vary in rough proportion to the amount of travel. At the same time, collecting fuel taxes from a small number of fuel wholesalers would be much cheaper and easier to enforce than collecting tolls from individual drivers on different stretches of road. coal-to-liquid fuel that, while supporting the goal of energy independence, could severely undermine efforts to mitigate climate change. U.S. policy could also be characterized as being relatively moderate, in the following sense. Most federal energy and climate policies to date—for example, investment in research and development, CAFE standards, renewable fuel standards, and tax credits for ethanol production and electric vehicle purchases—have involved either subsidies or regulations on industry. In contrast, the federal government has generally eschewed the more controversial—though potentially more effective—approach of structuring taxes or fees with the aim of influencing consumer behavior, although certain states such as California have begun to move in this direction. The future trajectory of energy and climate policy in the United States thus rests on two key issues that remain very much unresolved, with strongly divergent views among different elements of the electorate. Relative prioritization of policy goals. With anticipated increases in U.S. oil and natural gas production, energy secu- rity concerns appear to be receding. What remains unresolved, however, is whether the nation’s policies should aim primarily at low energy costs or instead focus more strongly on climate change. Some policy options such as CAFE standards can simultaneously reduce the energy cost of travel and mitigate climate change. Many other policies, however, such as sup- port for petroleum production or the application of carbon pricing, involve trade-offs between the goals of reducing energy cost and climate mitigation. Should a greater degree of agreement regarding the relative prioritization of these goals emerge—perhaps in response to changing economic conditions or new information about climate change—it could set the stage for significant shifts in federal energy and climate policies. Application of pricing policies. This leads to the second question of whether the application of pricing to achieve energy and climate goals will achieve broader adoption among states or at the federal level. Carbon pricing, for instance, could support even more rapid progress toward energy inde- pendence and climate change mitigation, but to date this idea has proven too divisive to gain sufficient support for federal implementation. H.2 Transportation Funding and Investment Policy The discussion now turns to transportation funding and investment policy. Similar to energy and climate policy, choices about how to raise and spend transportation funds can exert a strong influence on both energy consumption and travel behavior. This section begins with an overview of principles and themes that have guided transportation revenue and

201 gradually broadened the set of revenue sources for funding surface transportation. In addition to excise taxes on gaso- line and diesel fuel, for example, the HTF receives funding from taxes on the sale of trucks, trailers, and truck tires, along with an annual heavy-vehicle use fee for trucks. States and local governments rely on an even more diverse set of rev- enue mechanisms (Cambridge Systematics et al. 2006). These include (a) direct user fees such as tolls, weight-distance truck tolls, container fees, and transit park-and-ride fees; (b) indirect user fees such as sales taxes on motor fuels, license and registration fees, vehicle personal property taxes, vehicle sales taxes, taxes on automotive parts and supplies, vehicle lease taxes, and rental car taxes or surcharges; (c) beneficiary taxes or fees such as property taxes, development impact fees, special assessment districts, and transit advertising, leases, and concessions; and (d) general revenue sources such as income taxes, sales taxes, general obligation bonds, and taxes on tobacco, alcohol, and gaming. H.2.2 Recent Trends in Highway Funding Historical reliance on federal and state fuel taxes hypoth- ecated for highway investment provided stable and sufficient funding to develop the Interstate system, an engineering feat that contributed enormously to the nation’s economic growth and prosperity. The past few decades, however, have been marked by several significant shifts in highway fund- ing. These include diminished emphasis on fuel-tax revenue, devolution of funding responsibility, and reduced reliance on user fees overall. Decline in motor-fuel tax revenue in relation to travel. The ability of excise motor-fuel taxes to raise sufficient rev- enue has been increasingly undermined, in recent years, by structural and political limitations. Most fuel taxes are levied on a cents-per-gallon basis and must be raised periodically to offset the effects of inflation and improved fuel economy. Beginning with the tax revolts of the late 1970s, however, voter sentiment has hardened against tax increases in any form, and elected officials have correspondingly grown less willing to take on the politically unpopular task of raising fuel taxes. Federal fuel taxes, for example, were last increased in 1993, and many other states have allowed their fuel taxes to stagnate as well. As of 2010, based on the most recent avail- able data from the FHWA, 19 states had not increased their excise fuel-tax rates for gasoline or diesel since the 1990s, while another six states had not raised their rates since the 1980s or earlier (OHPI 2011). Failure to increase per-gallon fuel taxes to offset inflation leads, over time, to the erosion of real revenue per gallon of fuel. Since they were last increased in 1993, federal excise fuel taxes have lost more than a third of their value due to inflation (NSTIFC 2009). The effects of inflation have been further These proved to be compelling advantages; the federal gov- ernment first levied fuel taxes in the 1930s, and by 1940 all of the states had followed Oregon’s lead (Brown et al. 1999). In the intervening decades, fuel taxes evolved to become the most significant source of highway revenue; in 2004, for example, federal and state motor-fuel excise taxes collectively generated roughly $68 billion, representing about 64% of all highway user fees and about 50% of all highway revenues (TRB 2006). The principle that transportation should be funded by those who directly benefit from the system has analogs in the fund- ing of local roads and transit systems. Many local governments, for example, have relied on property taxes to help pay for the local road network. Although property taxes are not related to direct use, the logic is that property owners benefit—through enhanced land values—from access provided by local roads. Local transit systems, in turn, have historically relied on user fees, in the form of transit fares, to help fund operations and capital improvements. Increasing taxes and fees as needed. Throughout much of the past century, federal and state fuel taxes, typically levied on a cents-per-gallon basis, were periodically raised to account for inflation and, in more recent decades, improved fuel econ- omy. Initially set at 1 cent per gallon in 1932, for example, the federal excise tax on gasoline has been increased nine times in the intervening years—most recently in 1993—and currently stands at 18.4 cents per gallon. Many states, in turn, have insti- tuted similar fuel-tax increases as needed or have indexed their fuel taxes to increase with inflation. Other revenue sources, such as registration fees and transit fares, have also been peri- odically increased. Still others, such as property and income taxes, increase automatically with inflation. Hypothecation of transportation revenue. To garner public support for levying and increasing fuel taxes to pay for roads, the federal government and most states have chosen to hypothecate (dedicate) fuel-tax revenue for transportation investments. In essence, this represents a pact between road users and the government that fuel taxes will be treated as a user fee; road users agreed to fund the road network through fuel taxes, and the government in turn agrees to invest the resulting revenue in construction and maintenance projects that benefit road users. With the Highway Revenue Act of 1956, Congress created the federal Highway Trust Fund account to serve as a repository for federal fuel-tax receipts, which are in turn allo- cated to states to fund the Interstate highway system and other federal-aid highways. Many states and local areas have likewise created dedicated accounts for allocating revenue from fuel taxes and other funding sources to investments in roads or transit systems, which is an arrangement that is relatively rare outside of the United States. Diversification of funding sources. To augment fuel taxes and transit fares, federal, state, and local governments have

202 In just the past few years, real revenue per VMT has rebounded somewhat due to both a decrease in VMT and a rapid increase in nominal revenue, but these outcomes may prove ephemeral. The recent decline in VMT reflects actual reductions in travel based on spiking fuel prices followed by the deep recession as well as a change in the way that the FHWA computes VMT (per notes provided with ORNL 2012, Table 3.7). Turning to the funding side of the equation, in 2008 and 2009, Congress transferred a total of $15 billion from the general fund to the HTF in order to keep it solvent. Then, begin- ning in 2009, under ARRA (also known as “the stimulus”), Congress directed tens of billions of additional dollars to transportation programs to help rejuvenate the economy. Given the current federal focus on debt reduction, the prospects for significant future injections of general revenue to shore up transportation programs seem limited. Assuming that total travel rebounds with the economy in the coming years, then, the measure of real revenue per VMT could decline again to the level of the middle of the first decade of this century—that is, a roughly 50% reduction from 1970. Devolution of funding responsibility. One effect of the failure to increase federal and state fuel taxes commensurate with inflation and fuel economy gains has been to shift a greater responsibility for transportation funding to local jurisdictions (Goldman and Wachs 2003). Over the past half century, since the inception of the Interstate highway system, both the federal and state shares of highway funding have gen- erally declined, while the local share has risen. Through the 1960s and early 1970s, at the height of the Interstate construc- tion era, federal and state governments provided about 80% compounded by gains in vehicle fuel economy, which reduce the amount of revenue collected per mile of vehicle travel. Between 1970 and 2010, for example, total travel on the nation’s roads increased by about 167%, while total fuel con- sumed by on-road vehicles increased by just 92% (ORNL 2012, Tables 1.15 and 3.7). Recent projections from EIA, which factor in more-stringent corporate average fuel econ- omy standards along with a modest shift to alternative fuels in the coming years, are that growth in VMT will outpace growth in gasoline and diesel consumption to an even greater extent in future decades (EIA 2013). The effects of inflation and improved fuel economy, along with the failure to increase fuel taxes to account for these fac- tors, have combined to reduce real fuel-tax revenue per mile of travel. Given the significant share of highway revenue gen- erated by federal and state fuel taxes, this has in turn under- mined total highway revenue, in real terms, in relation to total travel. Figure H.2 illustrates the growth, over the past four decades, in total nominal highway revenue (all sources of fed- eral, state, and local user fees along with general revenue and bond sale proceeds directed toward highway spending), the consumer price index (as a measure of inflation), VMT, real revenue (adjusted for growth in the CPI), and real revenue per mile of travel (adjusted for CPI and VMT). Between 1970 and 2010, as shown in the figure, while total nominal revenue has increased by nearly 900%, cumulative inflation as measured by the CPI has exceeded 450%, and total VMT has increased by almost 170%. Combining these factors together, real revenue per mile of travel declined by nearly 50% between 1970 and the middle of the first decade of the 2000s. Sources: Compiled by authors from OHPI (undated), BLS (2013), and ORNL (2012, Table 3.7). 100% 0% 100% 200% 300% 400% 500% 600% 700% 800% 900% 1000% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Cu m ul a ve G ro w th fr om 1 97 0 Nominal Highway Revenue Consumer Price Index VehicleMiles of Travel (VMT) Real Highway Revenue Real Highway Revenue / VMT Figure H.2. Growth in highway revenue, inflation, and VMT, 1970–2010.

203 early 1900s and were largely reliant on fare-box revenue to fund capital investments and operations. Following World War II, however, as automobile ownership accelerated and the relative attractiveness of transit deteriorated, privately provided transit services became less viable. Recognizing that transit still represented a valuable service for many res- idents, the public sector began to assume control of many local transit systems. Since that shift, though fare-box rev- enue has remained an important source of income, there has been significant growth in public subsidization of transit ser- vices by all levels of government. And in contrast to the high- way sector, growth in transit funding has exceeded growth in ridership—in other words, per-passenger subsidies have been rising. With fiscal challenges faced at all levels of government, it is not clear that this trend will continue indefinitely. Significant and increasing public subsidies. Between 1988 and 2010, based on data from APTA, the share of annual transit capital and operating expenses derived from user fees (transit fares) and other direct sources of agency revenue (such as advertising and concessions) has declined from about 33% to just under 26% (APTA 2012, Table 71). Remaining funds are provided, in roughly even shares, by federal, state, and local sub- sidies. As of the early 1980s, most federal subsidies flow through the Mass Transit Account within the HTF, which receives approximately 15% of HTF revenue. Growth in transit funding relative to ridership. In con- trast to the decline in real highway revenue relative to vehicle travel, transit funding has increased faster than ridership in recent decades. Based on data from APTA and BLS, transit rider- ship measured in passenger miles has increased by about 31% since 1996, while total transit capital and operating expendi- tures have increased, in real terms, by about 57% over the same period (APTA 2012, Tables 3 and 56; BLS 2013). At first blush this seems encouraging; transit funding has increased faster than ridership, suggesting that transit operators should not be facing financial difficulties. In fact, the data hint at two trou- bling trends. Closer examination of APTA data reveals that, since the mid-1990s, total annual transit expenditures in real terms (APTA 2012, Table 56, adjusted for inflation based on BLS 2013) have increased faster than transit capacity as mea- sured by vehicle revenue miles (APTA 2012, Table 9), which has in turn risen faster than ridership in passenger miles (APTA 2012, Table 3). In other words, the cost of providing each unit of transit capacity is increasing, in real terms, while the level of ridership supported by each unit of capacity is decreasing. With roughly three-quarters of all transit revenue now stem- ming from federal, state, or local subsidies, these numbers portend challenges in securing adequate transit revenue in the future. With intense ongoing debate over the federal debt, and with budgetary shortfalls already confronting many states and local areas, voters and elected officials may con- sider the allocation of increasingly scarce general revenues of all highway revenue, with local governments accounting for the remaining 20%. By the middle of the first decade of the 2000s, with the erosion in fuel-tax revenues and preceding the actions of Congress to shore up the HTF with transfers of general revenue, the share of highway funding provided at the federal and state levels had decreased to about 72%, while the local share had grown to 28% (computations based on data from OHPI, undated). Note, however, that the increasing share of local highway funding has not been sufficient to offset the overall decrease in total funding in relation to travel; as indicated previously, real highway revenue adjusted for total VMT has fallen considerably over the past four decades. Reduced reliance on user fees. Another effect of diminish- ing federal and state fuel taxes, given the significant share of total highway revenue for which they account, has been reduced overall reliance on user fees. Based on analysis of FHWA data, user fees accounted for more than 78% of all highway revenue in 1960, for about 60% in 1980, and for just under 50% in 2010 (OHPI 1997, 2012). This decline appears to reflect a reduction in the share of fuel-tax revenue at the federal and state levels combined with an increased share of general revenue stem- ming from state and local sources. Search for alternative revenue sources. As the erosion of real fuel-tax revenue in relation to VMT has accelerated, deci- sion makers and analysts have sought to identify alternative rev- enue mechanisms to replace or augment fuel taxes. Examples of discussions in this vein are those found in Whitty (2003), TRB (2006), Cambridge Systematics et al. (2006), NSTPRSC (2007), and NSTIFC (2009). Although the particulars vary from one study to the next, most of these analyses have identi- fied various forms of direct user fees—for example, facility- based tolls, mileage-based user fees, weight-distance truck tolls, and congestion tolls—as being among the more promising longer-term revenue mechanisms to pursue. One can charac- terize user fees as being equitable in the sense that they align the costs of paying for roads with the benefits received from use of the roads, and they also encourage more efficient use of the road network by creating a financial incentive for drivers to forgo their least-valued trips (Wachs 2003). A key drawback of direct user fees, however, is that they often face more challeng- ing public acceptance barriers in comparison to sales taxes, general obligation bonds, and other forms of general reve- nue. This explains, in part, why the recent trend in highway finance has been toward greater reliance on general revenue rather than on user fees. H.2.3 Recent Trends in Transit Funding As with roads and highways, current transit revenue mecha- nisms may face challenges in their ability to provide a sustain- able and expanding source of funding in the coming decades. Most transit services were privately provided during the

204 recently estimated that as much as 25% of HTF funds may be allocated to projects not directly related to highway and bridge capacity, maintenance, operations, and safety. Set- ting aside debates over the merits of such projects, Poole and Moore argue that the diversion of fuel-tax revenue for other modes has made it more difficult to secure the support of road user groups for increasing federal fuel taxes to keep pace with inflation and total vehicle travel. Disproportionate investment in transit relative to use. Total U.S. investment in highways greatly exceeds total invest- ment in transit. In 2010, for example, highway expenditures across all levels of government—inclusive of capital outlays, maintenance and traffic services, administration and research, safety and law enforcement, interest on debt, and bond retirements—totaled around $205 billion (OHPI 2012), while total transit investments in the same year were about $55.6 bil- lion (APTA 2012, Table 56). On the other hand, transit receives a disproportionately large amount of funding relative to its use. Table H.2, based on data from the 2009 National House- hold Travel Survey (see Santos et al. 2011), compares the mode share for private automobiles and transit in terms of person trips and person miles for total travel and commute travel. As shown, the ratio of personal vehicle travel to transit travel ranges from 25 to 1 to 59 to 1, depending on the metric one uses, while the ratio of highway investment to transit invest- ment is closer to 3.7 to 1. The disproportionate investment in transit relative to mode share stems from the fact that many decision makers view tran- sit as an attractive and politically viable strategy for addressing a spectrum of worthy social objectives. These include provid- ing mobility for those unable to drive, enhancing access to employment, enabling denser development and more livable communities, easing traffic congestion, reducing reliance on foreign oil, and limiting the emissions of harmful greenhouse gases and local air pollutants (Taylor 2010). However, the ability of transit to deliver on some of these aims depends on ridership levels, which to date remain weak in many cities. Declining emphasis on bus transit. Within the context of transit, a final trend worth noting is the diminishing share of investment devoted to bus service. Over the past two decades, according to APTA, the share of transit investment devoted from a broad range of potential public investments. Assess- ment of the relative costs and benefits of alternate investment choices could factor into this debate. H.2.4 Recent Trends in Highway and Transit Investment Examination of surface transportation investments over the past several decades reveals several important trends: insufficient overall investment, increased diversion of federal highway revenue to other uses, disproportionate investment in transit relative to use, and diminished investment in bus service relative to other modes of transit. Insufficient overall investment. Relatively recent esti- mates suggest that the gap between projected federal, state, and local revenue and the amount needed to maintain the nation’s transportation networks in their current conditions falls in the range of $57 billion to $118 billion per year, while the shortfall in funding needed to substantially improve the networks falls in the range of $113 billion to $185 billion per year (NSTIFC 2009). Absent new sources of funding, the pros- pects for meeting these needs are bleak. As noted previously, insufficient federal fuel-tax revenue led the Congress, in 2008 and 2009, to transfer a total $15 billion in general revenue to keep the HTF solvent; in the later stimulus bills, Congress pro- vided further infusions of general funds into the federal sur- face transportation program. At the state level, where budgets must be balanced each year, many transportation projects have simply been put on hold in the face of growing revenue shortfalls. Diversion of federal highway revenue. When the HTF was established in 1956 to fund the Interstate system, federal excise fuel taxes on gasoline and diesel were designated as the main source of HTF funding. (Additional truck-related fees were hypothecated to the HTF.) In the intervening decades, through a series of federal transportation bills, the share of HTF funds directed to non-highway uses—including transit, air quality mitigation, and bicycle and pedestrian improvements—has gradually grown. Based on analysis of a study by the GAO (2009) documenting HTF expenditures in fiscal years 2004 through 2008, Poole and Moore (2010) Mode Person Trips Person Miles Total Commute Total Commute Private vehicle 83.4% 91.4% 88.4% 94.5% Transit 1.9% 3.7% 1.5% 2.6% Private vehicle-to-transit ratio 44:1 25:1 59:1 36:1 Source: Santos et al. (2011, Tables 9 and 12). Table H.2. Mode share for personal vehicles and transit.

205 and do not promote economically efficient use of the system (Wachs 2003). Absent sufficient public funding, it is also possible that pri- vate industry (most likely through PPPs) could take a greater role in financing and operating transportation facilities in the United States. This could include developing and operating new private tollways or transit facilities, for example, or con- tracting with public agencies to operate existing systems. Level of funding. The decline in real highway funding rela- tive to vehicle travel has diminished the capacity of transpor- tation agencies to provide new infrastructure where needed and to maintain existing facilities. For transit systems, in contrast, increasing subsidies have outpaced growth in rider- ship. Still, the overall pattern in surface transportation can be described as one of increasing disinvestment (Cambridge Systematics et al. 2006), and the question is whether voters will continue to support this trajectory. On one hand, strong arguments can be made that the nation’s investment in a world-class transportation network in prior decades has been a key underpinning of its economic prosperity and that further investment will be critical in ensuring continued suc- cess in the future. On the other hand, constituencies favor- ing lower taxes and smaller government have gained greater political influence of late, reducing the likelihood of signifi- cant increases in the level of public investment for at least the near term. Over the longer term, it is difficult to predict whether leaders will continue to focus on austerity or instead ask the public to invest more in transportation with the aim of promoting continued economic growth. Funding mechanisms. The United States has traditionally relied heavily on user fees, such as fuel taxes, tolls, and transit fares, to fund transportation investments and operations. With the failure in recent decades to increase federal and state fuel taxes to keep pace with inflation and improved fuel economy, the proportion of transportation funds derived from general sources has increased. Yet recent technical innovations are now enabling the development of systems to meter travel and levy more-precise road-use fees based on some combination of vehicle attributes, distance, time, and location of travel (e.g., electronic tolling, mileage-based user fees, congestion tolls, and weight-distance truck tolls), and interest among elected offi- cials in these alternatives appears to be growing (Sorensen and Taylor 2006). Similarly for transit systems, the proliferation of electronic fare media now makes it possible to structure rates based on such factors as time and distance of travel, and this could in turn promote greater ridership as well as enhanced cost recovery (Wachs 1981, Cervero and Wachs 1982). Despite the potential benefits of more precise user fees— specifically, their ability to align costs with benefits and promote more efficient system use—and the availability of enabling technology, it remains uncertain whether decision makers will adopt such an approach or instead allow a continued shift to bus service has declined from about 50% to about 42% (APTA 2012, Table 57). The combined share of investment in commuter, heavy, and light rail has grown slightly during this period, while the share devoted to demand-responsive transit (also known as paratransit) has increased dramati- cally, expanding from 3% to 11%. The shifts in funding have been mirrored by shifts in ridership as well. Since 1992, the share of transit passenger miles served by bus has declined from about 51% to less than 39%. The combined share for rail transit modes has risen from 47% to about 55% over this same period, while the share for other transit modes has gained just a few percentage points (APTA 2012, Table 4). H.2.5 Future Funding and Investment Policy Options As noted previously, growing gaps between transportation investment needs and available revenue—owing in large part to the decline in real fuel-tax revenue in relation to total travel— have prompted discussion of a broad range of alternate policy directions for the future. This section briefly reviews some of the ideas and concepts under debate. Note that many of the strategies that states might choose for increasing revenue are discussed at greater length in Appendix I and summarized in Chapter 7. Federal, state, local, and private roles in funding trans- portation. Failure to increase federal and state fuel taxes to keep pace with inflation and improved fuel economy has led to an increased role for local governments in funding trans- portation investments. With the Interstate system now largely complete, some might argue that a shift toward greater local responsibility is appropriate. Under this line of reasoning, local officials are in a better position to judge what invest- ments will be most helpful, and residents will be more will- ing accept revenue measures when they know that the money will be invested in local improvements and that they can hold their officials responsible. Yet there are at least three significant drawbacks to increased reliance on local revenue sources. First, much of the Interstate system is reaching the end of its 50-year design life and will soon need to be completely rebuilt, a task of national impor- tance that is likely to be far more expensive than the initial construction (Regan and Brown 2011). Second, greater reli- ance on local resources has to date corresponded with reduc- tions in total revenue relative to total travel; that is, increases in local funding have been insufficient to offset overall reduc- tions in state and especially federal funding. Third, following recent trends, increased devolution of funding responsibility to local areas is likely to result in greater reliance on general revenue sources such as sales taxes. In comparison to fuel taxes and other forms of user fees, general revenue sources are less equitable (payments are not aligned with benefits received)

206 case. While such taxes will reduce the demand for oil, in turn putting downward pressure on the underlying price, the addi- tion of the taxes has the net effect of increasing prices for end users. The analysis here considers the end-user perspective. Following this logic, any policies to expand domestic oil production (e.g., the expansion of offshore drilling or further development of oil sands, shale oil, or coal to liquids) should reduce price. Policy choices that could reduce price through reductions in demand include CAFE standards, subsidies or feebate programs to encourage the purchase of alternative-fuel vehicles or conventional vehicles with higher fuel economy, renewable fuel subsidies or standards, reduced total investment in transportation (by limiting capacity for additional travel), increased funding for transit (by encouraging mode shift), and the application of tolls or MBUFs that raise the marginal cost of travel. Policies that could result in increasing demand, and in turn price, include boosting total transportation investment or shifting a greater share of funding to highways (either of which would increase capacity for additional travel and potentially stimulate greater economic growth, which in turn increases the demand for oil) and reducing the cost of travel by relying on general revenue sources, as opposed to user fees, to fund highways. Finally, the application of carbon taxes (or alterna- tively carbon cap and trade) or higher fuel taxes would reduce demand for oil and, in turn, the underlying price, but still result in higher prices for the end user. Vehicle fuel economy. More rapid adoption of vehicles with greater fuel economy can be promoted via regulation, as with CAFE standards, or through government incentives such as vehicle subsidies or feebate programs. Additionally, policies that would result in increasing the price of gasoline or diesel—notably carbon taxes or fuel taxes—create an incen- tive for consumers to adopt vehicles with higher fuel economy. Policies that would reduce the price of fuel to the end user, in contrast, would undermine efforts to encourage a transition to vehicles with greater fuel economy. These include expanded domestic oil production and a transition from fuel taxes to tolling, MBUFs, or general revenue sources, any of which would eliminate the current incentive for more fuel-efficient vehicles embodied in fuel taxes. Alternative fuels. Policies that result in either decreasing the purchase price of gasoline and diesel or speeding the adop- tion of conventional vehicles with higher fuel economy would make it harder to develop cost-competitive alternative-fuel models. These include expanded oil production, CAFE stan- dards, and transitioning from fuel taxes to tolling, MBUFs, or general revenue to fund highways. Policies that mandate or incentivize the production and consumption of alternative fuels or increase the cost of conventional fuels, in contrast, should support greater adoption of alternative-fuel technolo- gies. Renewable fuel standards, renewable fuel subsidies, car- bon pricing, and higher fuel taxes on gasoline and diesel fall into this category. Note that the effect of clean vehicle subsidies toward general sources of revenue to fund transportation. The recent success of numerous local transportation fund- ing initiatives across the country, many of which have relied on sales taxes and general obligation bonds (Goldman and Wachs 2003), suggests that the public views general revenue as an acceptable source for transportation funding; in contrast, innovative transportation funding mechanisms such as con- gestion tolls and mileage-based user fees remain controversial. Investment in roads versus transit. While the United States invests less in transit than it does in roads, transit systems still receive a disproportionate share of transportation funding in relation to the ratio between transit ridership and automotive travel. This can be explained, in part, by the fact that transit represents a relatively uncontroversial means for addressing numerous social and economic goals. Yet the ability of tran- sit to deliver on many of these goals depends on a high level of ridership, which has yet to be achieved in many U.S. cities and is even less common in suburban and rural areas. At the same time, the state of repair for roadways is rapidly deterio- rating in many states, leading some to argue that the share of road use fees (e.g., from federal fuel taxes) currently allocated to fund transit should be reduced or eliminated (Poole and Moore 2010). Looking forward, it is unclear—particularly if one assumes continued shortfalls in available transportation funding—whether the nation will continue to increase fund- ing for transit or instead shift a greater percentage of revenue to the road network. H.3 Potential Effects on Energy and Transportation This final section summarizes the anticipated direct and indirect effects of various energy, climate, and transportation funding and investment policies on core elements of the future scenarios developed in Chapter 5. The discussion focuses first on the impacts for fuels and vehicle technologies and then examines potential implications for broader trends in travel demand. H.3.1 Effects on Fuels and Vehicle Technologies Elements of the future scenarios related to fuels and vehicle technologies include the price of oil, conventional vehicle fuel economy, use of alternative fuels, vehicle cost, and the mar- ginal cost of driving. Price of oil. The price of oil is governed by the interaction of global trends in supply and demand. As such, U.S. policy choices are likely to have only a moderate effect on price. With that caveat in mind, policies intended to expand supply or reduce demand should still have some effect on decreasing the underlying price of oil, while policies that restrict supply or increase demand should have the reverse effect. Policies that tax the consumption of oil products represent a special

207 or by limiting capacity expansion—include carbon pricing, reducing overall transportation investment, devoting a greater percentage of transportation funds to support transit rather than roads, and relying to a greater extent on fuel taxes, tolls, or MBUFs to raise highway revenue. The effect of renewable fuel standards remains unclear and will ultimately depend on whether biofuels can be produced at lower cost than fossil fuels. Use of transit. As a general rule, the effects on transit use of the policy choices discussed in this appendix should be oppo- site to the effects on automotive travel; that is, policies that sup- port increased growth in automobility will tend to constrain growth in transit use, while policies that limit automotive growth will tend to promote greater use of transit. The main exceptions to this rule involve the overall level of investment in transportation capacity. Increased total investment (without regard to specific allocation among modes) may increase both automotive travel and transit demand, while reduced total investment may undermine growth in both modes. Freight trucking. The effects on trucking of the energy, climate, and transportation funding and investment policies considered in this appendix should be broadly similar to the effects on personal automotive travel. References API. 2013. Motor Fuel Taxes. Oil & Natural Gas Overview. http://www. api.org/statistics/fueltaxes/ (accessed March 22, 2013). APTA. 2012. Appendix A: Historical Tables. 2012 Public Transportation Fact Book. Washington, D.C. BLS. 2013. Consumer Price Index: All Urban Consumers—(CPI-U). ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt (accessed March 18, 2013). Brown, J., M. DiFrancia, M. C. Hill, P. Law, J. Olson, B. D. Taylor, M. Wachs, and A. Weinstein. 1999. The Future of California Highway Finance. California Policy Research Center, Berkeley. Bunch, D. 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The recent adoption of more-stringent CAFE standards, however, is expected to result in the application of advanced fuel-saving technologies that will increase the average price for new vehicles. Vehicle subsidies or feebate programs, in contrast, should reduce the purchase price (if not the production cost) of conventional vehicles with higher fuel economy or alternative-fuel vehicles. Marginal cost of driving. Policies that either decrease the cost of fuel or lead to improved fuel economy will in turn lower the marginal cost of driving. These include expanded oil production, CAFE standards, renewable fuel subsides, clean vehicle subsidies, feebate programs, and a shift from fuel taxes to general revenue sources for highway funding. In contrast, policies that would increase the cost of fuel, including carbon taxes and higher fuel taxes, should raise the marginal cost of travel. A transition from fuel taxes to tolls or MBUFs would also increase the marginal cost of travel over time as fleet fuel econ- omy improves. The effect of renewable fuel standards is unclear, ultimately depending on whether it proves possible to produce ethanol and biodiesel more cheaply than gasoline and diesel. H.3.2 Effects on Travel Demand Elements of the future scenarios related to travel demand include growth in personal vehicle travel, growth in transit ridership, and growth in truck travel. Passenger vehicle travel. Policies that reduce the cost of vehicles, reduce the marginal cost of driving (by either improv- ing fuel economy or reducing the purchase price of fuel), or increase available road capacity will tend to promote automo- bility. Options in this vein include efforts to expand fossil-fuel production, renewable fuel subsidies, clean vehicle subsidies, feebate programs, increasing total investment in transporta- tion capacity, investing a greater share of revenue in highways, and shifting to greater reliance on general revenue rather than user fees to fund highways. CAFE standards have a conflict- ing effect, increasing the cost of vehicles but also reducing the marginal cost of travel through improved fuel economy. How- ever, economic practicability is one of the criteria used to set CAFE standards (NHTSA, undated), and as a result they tend to be structured such that the savings through improved fuel economy will more than offset the vehicle purchase premium. As such, it is reasonable to expect that CAFE standards, on bal- ance, will also tend to promote greater automotive travel. In contrast, policies that would restrict the growth in auto- motive travel—either by increasing the marginal cost of driving

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