Redistributed as a Service of the National Library for the Environment*
|
Redistributed as a Service of the National Library for the Environment* |
|
|
Alternative Transportation Fuels: Oil Import, Highway Tax, and Implementation IssuesCarl E Behrens Updated August 30, 1996 IB93009 SUMMARYWith world oil prices low and expected to stay that way for some time, the outlook for the United States is for continuing increases in demand for petroleum products and decreases in crude oil production. This will lead to an inexorable enlargement of imports -- from 1992's 8.9 million barrels per day (bpd) to perhaps as high as 15.9 million bpd by 2010 (65% to 80% dependency). Over the past 7 years, Congress has enacted three major pieces of legislation designed to, among other objectives, foster the development, introduction, and diffusion of alternative nonpetroleum fuels into the transportation sector and thereby to reduce oil imports while at the same time creating domestic jobs, improving urban air quality, and staying even with, if not reducing, emissions of greenhouse gases. The Alternative Motor Fuels Act of 1988 created a program of modest financial support for research, development, and demonstration (RD&D) on both vehicles and fuels, plus fuel economy credits for carmakers Corporate Average Fuel Economy (CAFE). The Clean Air Act Amendments of 1990 create two new thrusts: (1) oxygen in gasoline in carbon monoxide and ozone nonattainment areas, and (2) clean cars in California and in fleets in the two dozen or so worst ozone nonattainment areas. As technologies evolve, there is as good a chance that reformulated gasolines will meet the clean car standards as that alter-native fuel vehicles will. By 2010, up to 500,000 barrels per day of gasoline could be replaced by oxygenates under this program. The Energy Policy Act of 1992 proposes a national target of 30% penetration of nonpetroleum fuels in the light-duty vehicle market by 2010 and requires that, in sequence, the Federal Government, alternative fuel providers, State and local governments, and private fleets buy alternative fuel vehicles in percentages increasing over time. The Act also creates tax incentives for vehicle buyers and for alternative fuel service station operators. By 2010, it is estimated that up to 450,000 barrels per day of gasoline could be displaced by alternative fuels. The combined impact would be a replacement of perhaps 11% of potential gasoline demand at that time, compared to the 30% goal in the Energy Policy Act. The 103rd Congress adopted a tax of 4.3 cents per liquid gallon on all transportation fuels, except for compressed natural gas (CNG) as a vehicle fuel, which was taxed at a rate equivalent to that on the Btu content of propane, which calculated out to be 48.54 cents for 1000 cubic feet of gas. This tax disadvantages all the alternative fuels relative to gasoline, with methanol being hit the hardest. The issue is: How big a contribution to reducing oil imports will alternative transportation fuels make under current law, should additional policies be adopted to ensure that they reach the 30% goal, or should the goal be reduced or delayed. CONTENTSSUMMARY MOST RECENT DEVELOPMENTSIn the 103rd Congress, a deficit reduction tax of 4.3 cents per gallon (48.54 cents per 1000 cubic feet for natural gas) was added to all transportation fuels. Given that the tax on alternative fuels has worsened the economics of all the alternative fuels compared with gasoline and diesel fuel, and given that the tax as applied, equal in volume terms, is unequal in terms of energy content, there is some interest in revisiting this tax. In the 104th Congress, the House Ways and Means Committee originally proposed in its reconciliation package that the incentive for ethanol use in highway fuel be reduced from 54 cents per gallon to 51 cents per gallon, that it be available only to the extent that the claimant claimed the credit during 1993-1996, and that it be limited to a blender tax credit rather than a highway tax waiver. This proposal has been withdrawn, but the idea is still active. The Committee has also considered the pros and cons of tax equalization between alternative fuels and gasoline, including the issue of whether compressed natural gas (CNG) should retain its favored position and whether liquefied natural gas (LNG) should be taxed at the energy equivalent rate or at the CNG favored rate. This initiative has also not survived, but the concept, too, is still active. The Department of Energy (DOE) is issuing regulations and initiating other programs to implement the alternative fuels provisions of the Energy Policy Act of 1992 (EPACT). An early critical component of the DOE effort, originally scheduled for release in March 1995, will be its estimate of the ability of the programs it is authorized to carry out to meet the EPACT goal of 30% replacement of gasoline by 2010. This report is now expected to be available by mid-1996. Meanwhile, the 104th Congress, as part of its deficit-reduction program, is reducing funding levels for the parts of DOE's activities that include implementation of EPACT. Cuts are being made primarily on funds designated to cover the incremental costs of alternative fuel vehicles purchased for the Federal fleet. A major debate on the relative merits of alternative fuels vs. other programs in the same category is underway in both Congress and the Department. BACKGROUND AND ANALYSISOil provides about 40% of all U.S. energy. Imports of crude oil and petroleum products (about 8 million barrels per day, bpd) supply about 46% of U.S. oil consumption of about 17.7 million bpd. Some 65% of oil consumption (about 11 million bpd) goes to products used in the transportation sector (gasoline, diesel fuel, jet fuel); the sector is about 95% dependent on oil products. In 1994, gasoline consumption was about 7.6 million bpd (117 billion gallons), about two-thirds of the total sectoral fuel consumption. Of the 7.6 million bpd of gasoline consumption, two-thirds, or about 5 million barrels per day, were burned by automobiles (most of the rest was consumed by light trucks). About 21 billion gallons (1.4 million bpd) of diesel fuel for highway use was consumed, and about 23 billion gallons (1.5 million bpd) of jet fuel was used. Gasoline consumption is just about equal to crude oil imports today (7.6 million bpd vs. 7.0 million bpd). Although it is not physically the case that oil imports go directly to auto and truck travel (about 65% of the oil going into a refinery comes out as gasoline and diesel fuel), from an overall material balance perspective, just about every barrel of oil imported can be thought of as going directly into gasoline for automobile and truck driving. Consumption of petroleum products is expected to continue to rise in the future. Oil use is growing in the transportation sector despite the 15-year record of improving automobile fuel economy. After a decade of nongrowth, it is growing again in the other two major consuming areas, industry and residential/commercial. Chart 1 shows the expected future increase in oil import dependence. The projections to 2010 represent the reference case in the Annual Energy Outlook 1996 (AEO) laid out by the Energy Information Administration. They include expected increases in world oil price to about $24 per barrel (1993 dollars) in 2010 up from today's range of about $16 per barrel). Should world oil prices not rise that high, and other things remain equal, domestic production would be lower, consumption higher, and the import gap larger. Annual Energy Outlook 1996, although it projects a 2010 world oil price about $1 lower than did AEO 95, projects the same oil import dependence of 61% in 2010. Improved energy efficiency, including vehicle fuel efficiency, makes up for the higher level of economic activity, indicating that, at least for this small change in projected world oil price, other things do not remain equal. Chart 1. Oil Import Gap To Keep Growing Evolution of Congressional Policy Since 1973 and the Arab oil embargo, Congress has addressed the issue of oil use in motor vehicles six times in a major way. The first was in response to the Arab oil embargo of 1973 and led primarily to a reorganization of Federal agencies to focus public policy attention on the issue. The second was as part of President Ford's energy policy package in 1975, and led to fuel economy standards for automobiles and light trucks (CAFE standards, .see Issue Brief 90122). This regulatory program has, along with higher gasoline and diesel fuel prices at the time, been credited with accelerating the U.S. move to more efficient cars in the late 1970s and early 1980s and with retarding a return to gas guzzlers when gasoline prices fell in the mid-1980s. On the other hand, some of the hoped-for reductions in gasoline consumption did not occur, as large numbers of people switched to vans and light trucks as large autos disappeared from dealer showroom floors. The third came during the Iran-Iraq war of 1978-9 and led to (1) an excise tax credit for alcohols derived from biomass (primarily ethanol from corn) added to gasoline to make gasohol (10% ethanol in gasoline), and (2) the Synthetic Fuels Corporation (SFC) and its proposed major construction program for making transportation fuels (among other energy products) from coal, oil shale, and other domestic raw materials. The fuels and vehicle engines would not change, but the sources of the fuels would. The ethanol tax incentive has led to use of about one billion gallons of ethanol in gasoline (somewhat less than 1% of gasoline sales). The SFC initiative collapsed in the mid-1980s when the bottom fell out of world oil prices and the costs of synfuels plants became viewed as unacceptably high in the face of the prospect of continued low oil prices. The fourth was the Alternative Motor Fuels Act of 1988 (AMFA, P.L. 100-494). This initiative was in many ways the manifestation of a continuing but low-key congressional concern over rising oil imports in a world of low oil prices and uneconomic synthetic fuels. AMFA started from the premise that making gasoline and diesel fuel from coal, oil shale, and the like would remain uneconomic but perhaps changing both the fuel and the vehicle engine could be made economic through research, development, and demonstration (RD&D). The fuels of primary interest were methanol, ethanol, and natural gas. The program was one of modest financial support for RD&D on both alternative fuel vehicles (AFVs) and alternative fuels, plus fuel economy credits to carmakers for each AFV they produce (beneficial to the carmakers should they have difficulty in meeting their Corporate Average Fuel Economy [CAFE] targets but limited to a total effect of 1.2 miles per gallon), coupled with extensive studies of technological potential and infrastructure needs. By 1990, AMFA was working, but the scale of action was so small as to make no measurable dent in the oil import dependence trend line. The fifth was the Clean Air Act Amendments of 1990 (CAAA, P.L. 101-549). The CAAA include two thrusts affecting nonpetroleum content of transportation fuels: (1) a requirement for oxygen in gasoline (at least 2.7% oxygen in the four winter months for 39 carbon monoxide nonattainment areas; at least 2.0% oxygen in "clean" gasoline (reformulated gasoline, or RFG) in the nine worst ozone nonattainment areas year-round), and (2) a requirement for "clean cars" in California and in fleets in the two dozen or so worst ozone nonattainment areas. When the CAAA was passed, the prevailing perception held that performance standards for future "clean cars" were being set so stringently that only "inherently clean" alternative fuels could meet them. A transition from gasoline and diesel fuel to the alternatives would occur as a response to urban air pollution control needs rather than to oil import dependence, which was not on the political table as such at the time. The ink from President Bush's pen was hardly dry when it began to become clear that gasoline and diesel fuel, through extensive reformulation, coupled with some vehicle hardware changes, would probably be able to meet the new standards and be as economic or more economic than the alternative fuels and associated vehicle changes. The sixth major initiative was the National Energy Policy Act of 1992 (EPACT, P.L. 102-486). The Bush Administration, responding to a new wave of concern over rising oil imports and the prospect of uninterrupted future increases (magnified by the Iraqi takeover of Kuwait), proposed in its National Energy Strategy in early 1991 a new round of energy policy initiatives. These included a strong regulatory program requiring alternative fuel vehicles in centrally fueled fleets in every major U.S. metropolitan area, plus an expansion of AMFA's existing vehicle and fuel demonstrations and infrastructure development programs. During debate on EPACT, Congress added a national target for displacement of 30% of the petroleum content of fuels for light-duty motor vehicles (about 2 million bpd if defined as gasoline consumed by automobiles) by 2010 with nonpetroleum derived replacement fuels, at least half of which would hopefully come from domestic resources. As passed, this Act includes not only natural gas, methanol, and ethanol, but also propane, electricity, hydrogen, and other nonpetroleum fuels which may be developed in the future. It requires that Federal fleets and fleets of providers of alternative fuels move rapidly toward alternative fuel vehicles, followed within a few years by State vehicle fleets and private fleets. It also includes tax incentives for purchasers of AFVs and for installation of alternative fuel service stations. Oil Backout Through Changes in Gasoline Composition Gasoline composition has always been subject to change, as refinery product slates and motor vehicle engine technologies have evolved. Nonetheless, the past 20 years have been a particularly active period, driven primarily by the Environmental Protection Agency (EPA). EPA's first critical gasoline decision was in 1973 to set interim auto emission standards which required availability of unleaded gasoline. Taking the lead out meant replacing the octane historically provided by the lead. The refining industry did this through a number of process and composition changes. Two major ones were to increase the content of aromatics (carbon compounds with the carbons strung together in rings) and to increase the content of light paraffins such as butanes and pentanes. All of these ingredients come from the oil barrel through processing in refineries. Aromatics, it turns out, increase tailpipe emissions of ozone precursors and toxic air pollutants such as benzene. Butanes and pentanes increase the volatility of the gasoline, thus increasing evaporative emissions of ozone precursors and benzene. EPA, in a series of rulemakings in the 1980s and early 1990s, has imposed increasingly stringent volatility limits on gasoline to counteract the impacts of rising levels of butanes. The refining industry, in response to EPA's lead phasedown and volatility rulemakings and to impending aromatics constraints from both EPA and California Air Resources Board (CARB), has been turning toward methyl tertiary butyl ether (MTBE) as an octane source and as a way to include butane in the gasoline without increasing the volatility. MTBE, about one-third methanol and two-thirds isobutylene, is currently well over 90% domestically produced. Methanol, currently made from natural gas (100% nonpetroleum by definition, 90% domestic with 99% of the imports coming from Canada), is 100% nonpetroleum and about 80% domestic (80% of the imported methanol comes from Canada). Isobutylene is currently made about 60% from natural gas and 40% as a petroleum refinery by-product. Before the Clean Air Act Amendments of 1990, MTBE was being added to gasoline in volumes approaching one billion gallons per year, at oxygen concentrations of 0.5% to 1.5%, depending on the refiner and the geographic market area. Meanwhile, driven by the economic advantage provided by the Energy Tax Act of 1978 as amended, biomass-derived ethanol was being used as a gasoline extender to make gasohol, 10% ethanol in gasoline. Ethanol is completely domestic and nonpetroleum, although some oil products are consumed in its production cycle (mostly fuel for tractors and for transportation from field to processing plant). As gasoline price increases, as it did in the late 1970s and early 1980s, ethanol becomes more profitable when priced for use as an extender; as gasoline price decreases, as it did in the late 1980s, it becomes less attractive and less is produced. Ethanol consumption was high in the early 1980s, dropping off in the late 1980s. It has been coming back in the early 1990s as gasoline price stabilized and as six CO nonattainment cities (Denver, Las Vegas, Phoenix, Tucson, El Paso, and Albuquerque) put into place winter oxygenate requirements. In 1992, about 1 billion gallons of ethanol were added to gasoline. Except for the six CO cities, gasohol, because of the tax subsidy, was an economic product, one whose impact on emissions was not a governing factor, either pro or con, but one otherwise subject to normal market forces of price competition and product performance. The Oxygenated Gasoline Program The CAAA, with its requirements for oxygenated gasoline for wintertime CO emission reductions, built on a trend already ongoing. The 39 CO nonattainment areas mandated by the Act to require oxygenated gasoline consume some 2.8 billion gallons of gasoline per month (about 29% of national demand). Mandated oxygenate demand is about 330,000 bpd (MTBE equivalent) during the four winter months. This totals about 1.8 billion gallons of MTBE equivalent. On the basis of oxygen content (about 35% for ethanol, 17.2% for MTBE), ethanol after subsidy is considerably less expensive than MTBE. There is enough ethanol capacity to provide about 40% of this oxygenate; ethanol is unlikely to capture more than about 30% of the potential market (about 300 million gallons), mostly because of the economics of distribution, which vary widely from area to area. MTBE consumption is expected to be about 1.2 billion gallons per year. The Reformulated Gasoline Program As indicated above, the RFG program requires that nine metropolitan areas with the highest incidence of ozone violations (Los Angeles, San Diego, Houston, Chicago, Milwaukee, Baltimore, Philadelphia, New York, and Hartford) sell only reformulated gasoline, starting January 1, 1995. The RFG must have at least 2.0% oxygen, contain no more than 1% benzene, and contain no heavy metals. It must meet three performance specifications: from a baseline of standard vehicles using a standard gasoline, ozone-forming hydrocarbon emissions must, during the high ozone season, be at least 15% less; toxic air pollutant emissions (benzene, butadiene, formaldehyde, acetaldehyde, and polycyclic organic matter [POM]) must be at least 15% less; and NOX emissions cannot be more than the baseline. Starting in 2000, emissions of hydrocarbons and toxics must be 25% less. The nine cities involved in RFG, when the 1995 mandate began, added a demand for oxygenate for about 17 billion gallons of gasoline per year (about 15%. of total demand). If this were all provided by MTBE, the additional MTBE volume would be about 2 billion gallons. Other ozone nonattainment areas can opt in to the RFG program. A number have done so. If all who could were to opt in, some 65% of all the gasoline in the country would be affected. The major unresolved issues affecting gasoline displacement are the extent of opt-ins (RFG could make up anywhere from 17 to 70 billion gallons per year) and the role of ethanol (ethanol displaces less gasoline per unit of oxygen than ethers do). Although EPA has ruled that 30% of the oxygen in RFG must be derived from renewable resources, the rule has been rejected by the U.S. Court of Appeals for the District of Columbia. The role of ethanol will thus be determined by its economics, which include a highway tax waiver worth 54 cents per gallon of ethanol used in gasoline. Impact of Oxygenates on Non-Petroleum content of Gasoline In 1992, one billion gallons of ethanol and two billion gallons of MTBE were blended into gasoline. As a first approximation, the replacement equals about 2.7% by volume (2.1% of energy content) of all gasoline and just under 4% by volume (3% relative to energy content) of the gasoline consumed by automobiles. In addition to the loss of energy content in the gasoline, some petroleum products are consumed in making the ethanol, and some petroleum-derived isobutylene is used in the MTBE, so the net displacement of petroleum is less. Assuming that about 10% of the ethanol energy content represents oil consumption in its production and that 40% of the butylene, which is two thirds of the MTBE, is also petroleum-derived, the net petroleum displacement would be 1.7 billion gallons, 1.6% of gasoline, and 2.4% of gasoline consumed by automobiles. In 1995, RFG in the nine mandated ozone nonattainment areas will add about 1.4 billion gallons of MTBE and 300 million gallons of ethanol. If all the areas eligible to opt in to the RFG program had done so, the 65% of all the gasoline in the country involved would consume 5 to 6 billion gallons of MTBE and 1 to 2 billion gallons of ethanol. From 5 to 7% of total gasoline (7 to 10% of auto fuel) would be displaced. However, not all the areas that could opt in did so for 1995. The areas that did (most of the Northeast, plus several areas in Kentucky and Wisconsin) represented a gasoline consumption just about equal to that in the mandate areas, so that annual RFG demand was expected to be about 35 billion gallons (about 2.3 million barrels per day). As the first RFG season (1995) approached, 28 counties in Pennsylvania, nine areas in New York, and two areas in Maine opted out, primarily because of the price increases expected to occur for gasoline because of the RFG requirements. RFG consumption for the year was about 30 billion gallons, or 2.6% of total gasoline demand. In the first quarter of 1995, complaints, primarily in New Jersey and Wisconsin, arose about negative health effects and negative impact on auto fuel economy and performance allegedly caused by the presence of the oxygenates (primarily MTBE). In March, the governor of Wisconsin took the three counties between Milwaukee and the Illinois border out of the program. Despite threats to do so, no other governors took such action. Future demand for RFG remains uncertain. The higher cost of RFG, about five cents per gallon in most areas, may cause some jurisdictions seeking reductions in emissions of ozone precursors to opt for low volatility gasoline instead of RFG. Continuing concerns over health and engine impacts might cause more areas that have opted in to opt back out. Penetration of Alternative Fuels Currently, there are about 300,000 propane-fueled vehicles on the road in the United States, almost all as a result of economics; propane has been cheap enough to compensate for the conversion costs within a couple of years. There are about 30,000 natural gas vehicles, mostly part of government and gas utility fleets. Methanol has been the fuel of choice in high-speed racing cars, but has been slow to penetrate further. Otherwise, up until 2 or 3 years ago, except in California, vehicles run on alternative fuels have been the province of aficionados. In California, there has been a strong program of support for demonstration programs and planning for implementation, mostly for methanol until recently. Under AMFA, the Federal Government began purchasing AFVs for its own fleets in 1991 (about 65 vehicles) and is expanding purchases. It had about 3300 at the end of 1992 and a plan to acquire about 5500 in 1993. Supported by DOE, about 100 medium- and heavy-duty trucks are being tested under commercial use conditions. DOE and the Federal Transit Administration have supported purchase of about 430 transit buses (240 CNG, 170 methanol, 14 ethanol, and 7 LNG (Final Report of the Interagency Commission on Alternative Motor Fuels, Department of Energy, September 1992). On April 21, 1993, President Clinton signed a new Executive Order implementing the Federal fleet purchase program under EPACT and setting a goal of 50% more vehicles than required. By the end of 1994, there were about 17,000 AFVs in the Federal fleet. California has several thousand methanol flexible fuel vehicles (FFVs); Texas and Oklahoma have been moving rapidly in the past 2 years but are just now beginning to acquire vehicles -- mostly natural gas and propane fueled. A number of gas utilities have converted portions of their fleets, and electric utilities are beginning to move now that the energy act, with its tax credits for EVs, has passed. However, as governmental pressure on fleet owners has increased, so also has resistance. In Texas, the legislature has softened its AFV mandate by defining both RFG and clean diesel fuel as alternative fuels . DOE has an ongoing process for estimating the numbers of alternative fuel vehicles and the oil to be displaced from the alternative fuel provisions of EPACT. Its current estimate shows that, if it does not implement the private fleet provision of the Act, some 661,000 AFVs would be on the road in 2010, displacing 24,000 bpd of gasoline. Should it implement the private fleet provisions, there would be about 2.4 million AFVs on the road in 2010, displacing some 120,000 bpd of gasoline. Annual Energy Outlook 1995 estimates, including the impacts of many new State requirements in addition to the Federal mandates, that AFVs will displace 465,000 barrels of gasoline per day in 2010. Methanol would represent about 10%, ethanol 10X, natural gas 30%, propane 24%, and electric and hybrid electric vehicles 26%. AFVs would comprise about 9% of new vehicle sales in 2010. CRS views these estimates, particularly the EV ones, as optimistic. The State mandates for zero emission vehicles are aggressive, and the mandated penetration rates may be delayed when the costs are recognized. The Energy Information Administration has published the first two of what is programmed to become an annual series of reports ("Alternatives to Traditional Transportation Fuels") on the numbers and types of AFVs and their locations, the amounts and types of alternative fuels consumed, and the resulting greenhouse gas emissions. The estimates are also inputs to EIA's Annual Energy Outlook reports. These initial reports furnish preliminary estimates; subsequent reports will become more comprehensive and will rely increasingly on primary information sources. Now that the national policy direction and relevant environmental and tax constraints and incentives have been defined statutorily, it remains for the regulatory rules to be written and administrative actions taken, and for the State and local governments and the private sectors to respond. Regulations will affect the rate and extent of penetration of alternative fuels. DOE has issued a rule covering State and fuel provider fleets, and a program of marketable credits (61 FR 10621, March 14, 1996) and a proposed rule covering State and local incentive programs (60 FR 15020, March 21, 1995). However, in addition to activities in response to existing legislation, other factors will also affect the rate and extent of penetration of alternative fuels. Changes in world oil price, tax rates on the various fuels, changes in CAFE standards, and State government regulations and incentives are the most important. Of these, only world oil prices are not under the control of Federal or State governments. Meanwhile, the private sector is responding rapidly. The natural gas and electric utilities, and the methanol and propane suppliers are all installing refueling facilities in selected major metropolitan areas, mostly serious, severe, and extreme ozone non-attainment areas. There are now about 1,000 CNG refueling stations around the country, mostly in the most severe ozone nonattainment cities. Electric utilities are gearing up to build public recharging facilities for electric vehicles in 10 cities by 1998. In a notable commitment, Metallgesellschaft Refining and Marketing announced in mid-June 1993 that it would install methanol pumps at 2,500 independent retail service stations, the largest commitment yet by a single company. The parent company is experiencing severe economic times, so this commitment has been revoked. Vehicle manufacturers are cautious, waiting for signals from the 104th Congress and DOE's rulemakings, among other factors, before making major production commitments. For model year 1996, Chrysler is offering seven CNG-fueled vans and pickup trucks. Ford is offering two vans, two pickup trucks, a station wagon, and the Crown Victoria sedan in CNG-fueled versions, plus the Taurus as an FFV for either methanol or ethanol, a propane-fueled truck, and a Ranger sport vehicle "glider" (delivered without engine, transmission, or fuel delivery system) to be upfitted by others to all-electric drive. General Motors is not offering any AFVs in model year 1996. Ongoing Executive Branch Alternative Fuel Issues How DOE, EPA, and the Treasury Department write a number of regulations and take administrative actions required under recent legislation will help to shape the future alternative fuels market and the rate and extent of AFV penetration. For example, EPA must complete its rulemakings on RFG, on emission standards for AFVs, on emissions credits and trading for AFVs, and on future requirements for certification of fuels and fuel additives. EPA must also accept or reject State Implementation Plan incentives and regulations for alternative fuels and AFVs; it must respond to State requests to opt in to or out of RFG or California's gasoline and vehicle programs. These will affect the relative economics of gasoline and alternative fuels -- particularly but not exclusively in ozone nonattainment areas. President Clinton has accelerated by Executive Order the Federal fleet alternative fuel vehicle program mandated in EPACT. However, the 104th Congress is reducing funding for AFV purchases. The full extent of the reduction -- and the resultant impact on numbers of AFVs purchased -- is not yet clear. The President created a task force of specialists in the fuels, vehicles, infrastructure needs, and multi-group coordination areas, to develop recommendations on how to structure the Federal fleet purchase program to stimulate penetration of alternative fuel vehicles and alternative fuels beyond EPACT's mandated target group and into the vehicle fleet at large. The DOE Clean Cities Initiative, in which Federal, State, and private fleets work together to create viable numbers of AFVs and associated refueling infrastructure, is the direct result of the task force's deliberations. The Clean Cities Program now operates in about three dozen cities. DOE must guide the acquisition of and operating data obtained from AFVs in the Federal fleet; develop major information and education programs for fuels, vehicles, and infrastructure; establish a low-interest loan program for small businesses to buy AFVs; and, perhaps most important in the long run, determine the technical and economic feasibility of reaching the Energy Policy Act target of 30% penetration of alternative fuels by 2010 and, via rulemaking, decide whether or not to change the target, the timetable, or both. Alternative Fuel Issues in the 104th Congress The high cost of alternative fuel/vehicle systems compared to gasoline/vehicle systems is seen by most analysts as the largest barrier to increased use of alternative fuels. The low relative prices of gasoline and gasoline-fueled cars result in part from the economic benefits of the massive scale of production and distribution, much of the investment in which has already been written off, an advantage unavailable to other fuels using new capital investment and trying to penetrate the market at low volumes in the beginning. Two major coalitions of environmental groups have proposed significant increases in gasoline taxes to reduce urban air pollution, congestion, and emissions of greenhouse gases. If gasoline were taxed at higher levels, for any reason, and alternative fuels were not, as is the policy in Canada, the Netherlands, Italy, and other countries, then alternative fuels and the vehicles to use them could become more attractive. Arguably inconsistent road taxes at the Federal level are viewed by some as a significant problem, because some fuels end up benefited while others are disadvantaged. Compressed natural gas, for example, had no road tax (paid to the Highway Trust Fund) at the federal level. As a result of the 103rd Congress's actions (see below for details), it currently has a tax of about 30% that on gasoline and the other alternative fuels on a volume basis. Liquefied natural gas, on the other hand, is taxed at the gasoline rate per gallon, about 50% more on an energy equivalent basis. Methanol paid full energy equivalency with gasoline, and now pays about 30% more than on an energy equivalent basis. Propane paid and still pays the same price per gallon but about 35% more on an energy equivalency basis. Ethanol had and still has a 5.4 cent per gallon of gasohol tax benefit (54 cents per gallon of ethanol). And electricity for highway use carries no road tax. Inconsistent and at times counterproductive taxation at the State level is also seen as a major problem by those seeking to maximize AF market penetration. Tax rates vary from none at all (natural gas in Wyoming, for example) to 49 cents for methanol per gasoline-equivalent gallon in Connecticut. Probably the fastest way to promote the widespread use of alternative fuels would be to promote the methanol FFV for individual, nonfleet car buyers. The major constraint on methanol FFVs is economic; EPA has certified them, and the automakers are ready to produce them if the market says it wants them. But the market probably will not want them so long as the vehicles and fuels have no price advantage. The Energy Policy Act, through its less-expansive treatment of dual-fueled vehicles compared to dedicated AFVs, disadvantages methanol relative to the other alternative fuels. Methanol fuel, taxed at the Federal level at a rate about 25% higher than gasoline in terms of energy content, does not have the advantage provided to compressed natural gas, taxed only at the deficit reduction rate imposed by the 103rd Congress, and is significantly disadvantaged in all those States taxing on a per-gallon basis (most of them). Further, methanol has become, since mid-1994, a commodity in short supply. The price tripled and, although it has come back down, the price spike has caused fleet owner interest in it, already minimal, to almost completely disappear. Natural gas, despite being taxed only at the deficit reduction rate, and electricity, despite not being subject to Federal road taxes, continue to have economic problems. For natural gas, the critical cost components are fuel tanks on the vehicle and compression costs at the retail service station. For EVs, the critical cost components are vehicle and battery costs. For both gas and electricity, technological improvements are also needed: for gas in the pass-through of unburned fuel and in fuel storage on board (the recent failures of CNG tanks on General Motors' pickup trucks are the manifestation of this technological need); for EVs, in energy storage (batteries) and delivery to the wheels, in particular. In the absence of major improvements in these technological areas, both natural gas and electricity will probably remain niche fuels. Since from an overall market viewpoint, the existing statutory and regulatory rubric constitutes a modest introductory program for alternative fuels, and since the oil import gap is expected to continue to grow, a new round of proposals either to intensify or to soften the push behind alternative fuels and AFVs is possible. The most basic issue that might be addressed by the 104th Congress is whether the pressure toward substitution of alternative fuels for gasoline and diesel should be continued as a component of national energy and environmental policy. Response to EPACT, CAAA, and the other related statutes has been significant in that demonstration programs have sprung up in most major cities, involving vehicle makers, fuel producers, and fleet owners, with Federal and State programmatic and funding support. The primary hurdles of vehicle and fuel cost, infrastructure development, and user education are being addressed but are still in their early stages. Like many other programs, DOE's Alternative Fueled Vehicles was cut in FY1996, and faces further cuts this year. FY1996 funding was $29 million, compared to $44 million the previous year. The FY1997 request was $25.3 million, and the House-passed version (H.R. 3662) reduced that to $24.1 million. Assuming that the policy goals remain in place, fuel tax policy is currently operating against alternative fuels other than electricity and compressed natural gas, as previously described. Options that have surfaced in earlier Congresses include equalizing fuel taxes for all fuels -- alternative and conventional, equalizing among the alternatives at a level lower than those for gasoline and diesel, and temporarily removing the fuel tax completely for the alternatives. The House Ways and Means Committee held hearings July 11-13, 1995, on a number of tax issues, among which was tax equity for alternative fuels. Legislation to give LNG the same exemption from federal taxes that CNG has been proposed by a six-member task force chaired by Representative Barton. Similar legislation has been introduced by Representative Thornberry (H.R. 2812). The initiative gained some sympathy from Chairman Archer of the Ways and Means Committee, but he also cited some problems with it. In a letter to the six task force members March 13, 1996, Representative Archer pointed out that LNG would fuel mostly heavy, long-distance trucks, whose use of the federal highway system without paying taxes into the Highway Trust Fund could cause complaints from the public. He also noted that giving relief to LNG would probably stimulate the propane market and other natural gas fuels to ask for a similar exemption, which would further threaten Highway Trust funding. Gasoline/Diesel Fuel Displaced and Oil Imports Reduced In 1995 By Blending with Gasoline. As mentioned, in 1992 an estimated 3 billion gallons of gasoline were displaced by one billion gallons of ethanol and two billion gallons of MTBE. The petroleum content of these 3 billion gallons was about 600 million gallons and the energy content was about three-fourths that of gasoline, so the net displacement was about 1.7 billion gallons, about 1.6% of gasoline consumption. EIA estimated in 1992 that, in 1995, oxygenate consumption would increase to 3.9 billion gallons of MTBE, 1.3 billion gallons of ethanol, and about 250 million gallons of other ethers (primarily TAME and ETBE). Net displacement of gasoline would be about 4%. EIA reported in early 1996 that oxygenate consumption in gasoline in 1995 was 4.1 billion gallons, of which 3 billion were MTBE, 900 million were ethanol, and 200 million were other ethers. The impact of this displacement on the sum of imports of crude oil and petroleum products is unclear but probably minimal. Changes in gasoline production of this volume can easily be accommodated by the way the refinery is operated, and there is a strong economic imperative to run the refinery at as high a percentage of capacity as the market for the overall product slate can absorb. The likely outcome of the desire to run the refinery at maximum capacity in the face of a decline in gasoline consumption of a few percent is to process the same amount of crude oil, produce commensurately more jet fuel, diesel fuel, or other petroleum fraction, and eventually import less of those commodities. Imports of petroleum products are currently declining, but the decline does not seem to be related to the winter oxygenate program. From Use of Alternative Fuels. Propane consumption in vehicles in 1995 was about 260 million gasoline equivalent gallons, up slightly from historical patterns. About 44 million gasoline equivalent gallons of natural gas were consumed, while consumption of all other alternative fuels, including electricity, was less than 10 million gallons. In 2010 By Blending with Gasoline. If the gasoline industry adds oxygenates to gasoline only in ozone nonattainment areas, if the oxygenate program in CO nonattainment areas remains as it is now, and if the use of gasohol in noncontrol areas maintains its current share of the market, ethanol use in 2010 could be 2.3-3.2 billion gallons and ether use (as MTBE) could reach 6.3-7.3 billion gallons. Total oxygenate volume could thus range from 8.5-10.5 billion gallons out of a total gasoline consumption of, say, 130 billion gallons, or 6.5% to 8%. Given the uncertainty of the assumptions, it does not seem helpful to try to correct for differences in energy content. From Use of Alternative Fuels. According to the current DOE estimate, EPACT will cause alternative fuel use to increase from 24,000 to 120,000 bpd (400 million to 1.8 billion gallons) or about 0.3% to 1.4% of estimated 2010 gasoline demand. State programs are just now beginning to take shape, making projections of the impacts very difficult. It is conceivable that they could collectively equal or perhaps be larger than the Federal program, provided that the States were willing to reduce their road taxes, equalize the road taxes on an energy basis, or provide other subsidies. The DOE estimate in Annual Energy Outlook 1996 shows alternative fuel vehicle sales in 2010 to be about 1.4 million, with alternative fuels displacing around 300,000 bpd of gasoline, or about 4% of estimated 2010 gasoline demand. This year's estimate for 2010 is about 35% lower than EIA's projection of a year earlier. Aggregate Effect. Displacement of gasoline in 2010 could range from 10.5% (6.5+4.0) to 12% (8 +4.0), more than half of which would come from changes in gasoline composition. These estimates are charted in Chart 2. For the purposes of the Appendix, MTBE consumption estimates have been discounted by 25% to account for the portion of the isobutylene derived from oil refining. Each alternative fuel vehicle has been assumed to displace 1000 gallons per year of gasoline; electric vehicles are assumed to displace 500 gallons each, half that of other AFVs because of their limited range and assumed overnight recharging. Chart 2. Non-Petroleum Transportation Fuels LEGISLATIONP.L. 104-6, H.R. 889 P.L. 104-19, H.R. 1944 H.R. 409 (Zimmer) H.R. 460 (Delay) H.R. 479 (DeLay) H.R. 1015 (Klecska) H.R. 1052 (Neumann) H.R. 1158 (Livingston) H.R. 1514 (Tauzin) H.R. 1977 (Livingston) H.R. 2812 (Thornberry) Taxes liquefied natural gas (LNG) at the same rate as compressed natural gas (CNG) when used as a motor fuel. Sets the tax for both at 4.3 cents per gasoline equivalent gallon instead of the current rate of about 5.8 cents per gasoline equivalent gallon. Introduced December 19, 1995; referred to Committee on Ways and Means. S. 219 (Nickles) S. 462 (Feingold) S. 477 (Kohl) S. 665 (Simon) CONGRESSIONAL HEARINGS REPORTS. AND DOCUMENTSU.S. Congress. House. Committee on Energy and Commerce. Subcommittee on Energy and Power. Hearing on Alternative Fuels. 104th Congress, 1st session. June 6, 1995. FOR ADDITIONAL READINGSingh, Margaret. "Estimates of Alternative Fuel Vehicle Use from Federal, State and Local Programs." Argonne National Laboratory. Draft. January 13, 1995. U.S. Department of Energy. Energy Information Administration. Alternatives to Traditional Transportation Fuels: An Overview. Report DOE/EIA-0585/0. June 1994. ---- Alternatives to Traditional Transportation Fuels: 1994. Report DOE/ELA-0585 (94)/1. February 1996. ---- Annual Energy Outlook 1996. Report DOE/ELA-0383 (96). January 1996. U.S. Library of Congress. Congressional Research Service. Alternative Fuels and Reformulated Gasoline, by David E. Gushee. Updated regularly. CRS Issue Brief 91008 --- Alternative Fuels for Automobiles: Are They Cleaner than Gasoline? by David E. Gushee. February 27, 1992. CRS Report 92-235 S ---- Disparate Impacts of Federal and State Highway Taxes on Alternative Motor Fuels, by David E. Gushee and Salvatore Lazzari. March 12, 1993. Revised December CRS Report 93-330 E ---- Impact of Highway Fuel Taxes on Alternative Fuel Vehicle Economics, by David E Gushee, March 16, 1994. CRS Report 94-247 ENR --- Heavy Duty Diesel Engines and Their Fuels: Can They Survive Clean Air Regulations? by David E. Gushee, September 11, 1995. CRS Report 95-961 ENR |
CRS Reports Home
|
||
 |
National Council for Science and the Environment 1725 K Street, Suite 212 - Washington, DC 20006 202-530-5810 - info@NCSEonline.org |
 |