Virginia's Gas Tax: Ending A "Dinosaur Tax"

I don't know if the Speaker of Virginia's House of Delegates intended a double entendre when he referred to the state gasoline tax that Governor Bob McDonnell (R) just proposed eliminating as a "dinosaur tax".  He was certainly correct that this tax is rapidly becoming outmoded as its capacity to keep pace with necessary infrastructure investment fades with every EV, hybrid, or other efficient car that's sold.   In the Governor's remarks, he referred to the gas tax as a "stagnant revenue source." In a low-tax state like the Commonwealth, shifting the tax burden for transportation away from fuel taxes and toward registration fees and a higher general sales tax represents an innovative, though also controversial answer to a challenge that has concerned me for some time. 

The scope of the underlying problem should be uncontroversial: Like most states, Virginia's $0.175 per gallon gasoline tax is a holdover from an era in which fuel sales grew in tandem with road use, and both expanded steadily year after year.  I can personally vouch for Northern Virginia's traffic congestion, cited in this morning's Washington Post story on this issue. As in most states, Virginia's gasoline sales have been flat to declining since the recession that began in 2008, while the value of the fixed fuel tax has been further eroded by inflation.  These trends seem likely to continue for years, with recent new-car fuel economy improving sharply. The gas tax simply can't cover the cost of repairing and extending Virginia's highways without a large increase now, followed by periodic increases as future fuel sales fall. 

A key aspect of Governor McDonnell's proposal that appeals to me is that it doesn't rely on high-tech monitoring or low-tech inspections of actual miles driven, like many of the other solutions I've examined.  Instead of trying to fix the fuel-tied tax, he would eliminate it entirely and shift revenue generation to a combination of higher annual fees, especially for alternative fuel vehicles that currently pay little or no road tax, and an increase in the Commonwealth's 5% sales tax to 5.8%.  0.5% of the current sales tax is already dedicated to transportation.  The proposed shift exchanges one regressive tax for another, in a manner that recognizes that all Virginians stand to benefit from improved transportation networks, whether they personally use them or not. 

The current Virginia gas tax costs an average motorist around $100 per year, based on 12,000 miles of annual driving.  The rise in the sales tax would generate comparable revenue from $12,000 of annual spending subject to the sales tax.  That likely equates to little or no tax increase for low-income drivers, and an increase of up to a few hundred dollars a year for the better-off, while still leaving Virginia's sales tax slightly lower than those in Maryland and the District of Columbia. Motorists would continue to pay the federal gasoline tax, currently set at $0.184/gal.

I can envision various objections to the Governor's proposal, including concerns that cutting the gas tax might increase gasoline demand--and emissions--and reduce the incentives for higher fuel efficiency.  That seems unlikely in the current context for at least two reasons.  First, eliminating the Virginia gas tax involves a reduction in pump prices of less than 5% of last year's average price in the region, and more importantly represents less than a quarter of the total range of gas-price volatility we experienced in 2012. Moreover, fuel economy improvements are already mandated under the new federal Corporate Average Fuel Economy regulations that will increase fleet-average miles per gallon to 54.5 mpg by 2025.  Cars will continue to become more efficient, no matter what gasoline costs.

It will be interesting to watch how this proposal fares in Richmond.  The Governor's party may control the House of Delegates and effectively the Senate, by virtue of a tie-breaking Lieutenant Governor, but 2013 is an election year, and Mr. McDonnell is barred by term limits from seeking reelection. I wish him luck with this idea, even though its enactment would probably result in a small net tax increase for my household. I'm sure other states will be watching, too.

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How Green Is My Electric Vehicle?

One of the biggest challenges in assessing the environmental benefits of electric vehicles is that electricity is generated in so many different ways, with differing costs and consequences, and that patterns of generation vary by region, season, and time of day. As a result, categorical claims that EVs are always greener than the hybrids against which they compete most directly, or even compared to efficient non-hybrid compact gasoline or diesel-powered cars, must be suspect. The Union of Concerned Scientists (UCS) has just issued a report that takes some of the mystery out of such comparisons, including a helpful map showing likely greenhouse gas emissions associated with EV use expressed in terms of equivalent miles per gallon from a gasoline vehicle. The takeaway is that as of now, the emissions advantage of purchasing an EV depends heavily on where you live, with equivalent emissions from average grid power in many parts of the country about on a par with those from a small car like the Chevrolet Cruze, and not even as good as from a Prius-type non-plug-in hybrid.

This apparent paradox becomes clearer when you examine the cities map that the New York Times distilled from the report, reflecting the local basis of electricity generation. An EV operated in L.A. or San Francisco would unambiguously beat a Prius on emissions, while an EV in my neighborhood in Northern Virginia would have only a slight edge, and one in Denver would yield emissions comparable to an ordinary car getting 33 mpg, unless the owner was scrupulous about recharging only when greener power was available. That's because despite the declining share of coal-fired power in our national generation mix, there are still many regions and locales where coal dominates the grid, and the GHG emissions from coal-fired generation are considerably higher than from natural gas or low-emission nuclear and renewables.

Any report such as this must incorporate a number of assumptions, and from my fairly quick perusal of the details they seem generally well-identified here. The UCS's emission-equivalent miles per gallon calculation is based on a Nissan Leaf getting 3 miles per kilowatt-hour (kWh.) Grid emissions are calculated using a model of average hourly emissions over the course of the year. It didn't appear that these hourly-averaged figures were weighted for seasonal variations in driving patterns, but that's probably more nuance than is necessary at this level of scrutiny.

The report also includes information about recharging costs in different locations under different rate plans. Prospective EV buyers would benefit from taking the time to understand what these issues mean in their specific locations before investing in one. From my perspective, the report should also provide serious food for thought for policy makers concerning the wisdom of a single federal tax credit for EV purchasers in the US. As hard as that policy is to justify in the best of locations, based on the equivalent cost per ton of CO2 avoided, it looks positively senseless in locations where coal is still king. And while the report makes the point that the generation mix in many regions will become cleaner over time as utilities respond to renewable portfolio standards and other policies, buying an EV in a high-emissions region and counting on that factor to improve the car's environmental benefits during its lifetime seems like a risky bet, particularly in economic terms.

The biggest caveat I'd offer about the report concerns its emphasis on comparing EVs to non-hybrid compact cars, both on costs and emissions. That just doesn't seem realistic, given the array of choices and types of consumers in the market. While the number of consumers willing to consider an electric vehicle is increasing, the "take rate"--the number who actually convert their interest into a purchase decision, remains minuscule, resulting in sales of just 0.3% of all US cars sold in March. Meanwhile hybrids have benefited from rising gas prices to hit 3.4% of sales. It's also worth recalling that the fuel, emissions and dollar savings from improved fuel economy decline with each additional increment. Hybrids already capture the most valuable savings over conventional cars, while the incremental fuel savings from stepping up from a hybrid to an EV are roughly comparable to what hybrids achieve, but require additional battery capacity and electricity, neither of which is free. That makes hybrids the technology for EVs to beat. As helpful as the information provided in the UCS report should be for consumers, the ultimate decision to buy an EV seems driven more by values than value, at least until EV costs fall significantly.

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D.C. Auto Show Focused on Efficiency

Last week I attended the media preview of the Washington Auto Show. With its dual focus on cars and energy policy, this is always a high point of the winter for me, even if this year's display lacked a draw of the magnitude of the pre-production Chevrolet Volt I drove at the 2010 show. Instead, I was pleased to find that the emphasis on fuel economy and technology in carmaker presentations was matched by a broad array of efficient and attractive new products. They still don't quite constitute the new car fleet needed for the 54 mile-per-gallon target the federal government requires them to meet by 2025, but in my opinion they're off to a very good start.

No one listening to the presentations I sat through last Thursday could have missed the shift in focus from previous years. Performance and drivability were still mentioned prominently, but in most cases the innovations allowing those attributes to be delivered along with improved fuel economy, instead of at its expense, received top billing. I heard about Ford's nine models that achieve at least 40 mpg, including the new C-MAX Energi plug-in hybrid that received Green Car Journal's Vision Award for 2012. GM touted a number of efficient new models, including the upcoming Chevrolet Spark subcompact, which will later be available as a full EV. In some respects I found the 2013 Malibu Eco with "e-Assist" even more impressive: With the new Malibu and this year's Buick LaCrosse, GM is building family-sized gasoline-powered sedans that achieve 36 or 37 mpg on the highway. And thanks to Fiat's MultiAir technology, Chrysler had its new 40 mpg Dodge Dart on display.

I was particularly interested in the VW press conference, where they debuted the 45 mpg 2013 Jetta turbo hybrid. The head of VW's US division introduced the car as part of his company's Think Blue sustainability drive, which with this latest model encompasses hybrids, clean diesels, efficient non-hybrid gasoline engines, and soon EVs. With all this technology to talk about, including the new, larger Passat sedan--where's the wagon?--built in VW's new Chattanooga, TN plant and sporting a diesel engine delivering 43 highway mpg (31 city), the biggest surprise was the amount of time he devoted to VW's partnership with Bikes Belong, a cycling safety group aimed at getting people out of their cars. That certainly reflects a bigger-picture view of vehicle sustainability.

My visit to the car show also included a meeting with Lars Ullrich, marketing director of Bosch Diesel Systems North America, and Jeff Breneman of the US Coalition for Advanced Diesel Cars. They updated me on the progress that diesels have been making in the US market, particularly in light of the greater cost-consciousness of consumers, post-recession. In the last five years, the willingness of consumers to consider diesels has nearly tripled to around one-third, while diesel sales passed the 100,000 mark for 2011--still less than 1%, but about where hybrids were just a few years ago. Clean diesel models are expected to double by 2014. Models with announced future diesel versions include the Chevrolet Cruze, Jeep Cherokee, Dodge Dakota, and a Mazda crossover. Will diesels ever reach the level of popularity here that they've attained in Europe, where half of all new cars are diesel-powered? They must wage an uphill battle against fuel economy regulations that are anything but fuel-neutral, legacy perceptions formed by the dirty diesels of 20 years ago, and federal and state fuel taxes that still assume that all diesel fuel is used by heavy-duty trucks that wear out our highways. That's a shame, because this is a terrific technology that could be every bit as attractive to many consumers as more expensive hybrids.

Another noteworthy item I gleaned from the manufacturers' presentations was that several of them are forecasting a return to annual US car sales of 16 million within a couple years. That would be good for the industry and employment, but it's crucial for shifting the fuel economy of the entire light-duty vehicle fleet. One of the unnoticed consequences of the low car sales of the last several years is that the US fleet has been aging faster, notwithstanding the small blip from the Cash-for-Clunkers program of 2009. The difference between sales of 16 million a yar versus 12 million is an average turnover of 15 years, instead of more than 20, and faster turnover should translate to quicker improvements in average mpg.

For years we heard that the biggest obstacle to improving the fuel economy of the US car fleet was the auto industry, which only wanted to sell us big SUVs that carried higher profit margins. That excuse was always overly simplistic, and it has been relegated to the ash heap by a new generation of cars and light trucks featuring innovations delivering steadily improving efficiency, even in mainstream sedans and SUVs. Getting the entire fleet to 54 mpg won't be easy, but if what I saw at the D.C. auto show is any indication, the attainment of that goal now depends at least as much on sales mix as on the availability of efficient models. Within a few years, virtually every segment of the market will include hybrid, diesel and EV options that will put a big dent in both fuel bills and emissions, albeit at the expense of higher sticker prices. That means that future fleet mpg will likely be determined mainly by the decisions of consumers, rather than carmakers.

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Carmageddon, Hybrid Cars and Diamond Lanes

The looming "Carmageddon" in Los Angeles made the front page of today's Wall St. Journal, as residents there brace for the two-plus day closure of ten miles of the famed San Diego Freeway (I-405) this weekend. The disruption is apparently required to allow for some demolition necessary for the construction of new high-occupancy vehicle (HOV) lanes on the 405. As locals assess their alternate routes--there are many--they might also want to spend some time thinking about who will be allowed to drive in those new HOV lanes. California recently decided to deny ordinary (non-plug-in) hybrid cars that privilege, in preference to plug-ins and other alternatively fueled vehicles. The new policy and the one it replaces both reflect muddled thinking, but I would argue that abandoning hybrids at this juncture is a mistake, at least if saving gas is still a priority in the Golden State.

I routinely commuted on that stretch of the 405 between the Santa Monica Freeway (I-10) and the Ventura Freeway (US-101) when I lived on the West Side and worked in Mid-Wilshire and later in the San Fernando Valley. I carpooled for part of that time but for most of it, like most other Angelenos, I drove alone. I would have found the option of going solo in the HOV lanes a very appealing way to avoid the frequent stop-and-go traffic, and that's why offering that right to hybrid cars has been a useful non-cash incentive to boost their sales. State officials apparently concluded that normal hybrids are now commonplace, so the incentive should be shifted to the even more efficient cars now becoming available. They have emissions data on their side, because California's electricity mix is dominated by hydropower, nuclear and efficient gas turbines, plus a growing contribution of non-hydro renewables, though it also includes some imported coal-fired power from the Four Corners region. A plug-in should indeed emit less CO2 (directly and indirectly) than a Prius-type hybrid under those conditions.

What I think the state's regulators have missed, however, is that simpler hybrids, which currently enjoy no other incentives, still look like an equally effective way to save gasoline. That's particularly true if most buyers of plug-in cars are choosing them in preference to non-plug-in hybrids, rather than instead of gas-guzzling conventional cars. It comes down to the simple, but often counter-intuitive math of fuel economy the way we calculate it in the US, yielding diminishing gallon savings for increasing miles per gallon (see chart below.) Consider a 50 mpg hybrid that replaces a 25 mpg conventional car. Driven 12,000 miles per year, this choice saves 240 gallons per year. Trading in that hybrid for a plug-in like a Nissan Leaf only saves an additional 240 gallons per year, while a Chevy Volt would save somewhat less than that, unless it were never filled up.



Moreover, plug-ins didn't lack for incentives already. In addition to the federal tax credit of up to $7,500 per car, California offers its own rebate of up to $5,000 for qualifying plug-ins, which also receive discounted rates for electricity. Then there's the money the state is investing in recharging infrastructure. Whether or not the aggregate level of incentives is justified on grounds of economics, environmental and energy security benefits, throwing the HOV benefit on top of them seems like an unnecessary gilding of the lily. The 85,000 hybrids that were given the sticker allowing HOV access for solo drivers still represent a tiny fraction of the state's 39 million registered motor vehicles, and offering 40,000 new stickers for EVs won't make a noticeable dent in California's emissions, or its 40 million gallon-per-day gasoline consumption.

I don't know whether this weekend's Carmageddon will live up to its name, or like L.A.'s 1984 Summer Olympics result in lighter-than-normal traffic because motorists had enough notice to allow them to plan ahead. Yet it does seem that continuing to offer HOV access for non-plug-in hybrids would provide a meaningful incentive for a class of gas-saving vehicles that still represents only around 3% of US car sales, at no cash cost to the state. And if the state is truly concerned that a growing hybrid population could choke the HOV lanes and make them less useful for everyone, an even better option would be to auction the stickers, with only buyers of hybrids, plug-ins and other alternative fuel cars eligible to bid. The proceeds might be sufficient to relieve the state's battered budget of a large portion of the cost of the cash subsidies they're already paying on plug-in cars.

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Grading Cars on the Curve

By now you may have seen some prototypes of the new-car fuel economy stickers on which the EPA is seeking public comment. The versions that prominently display letter grades for overall fuel economy performance are certainly eye-catching, rising above the potentially confusing mix of numbers and graphics in the body of the sticker. Yet although the current stickers are clearly inadequate to illuminate the choices and consequences associated with buying vehicles powered by an increasingly diverse array of fuels, devising a similarly simple summary page may be beyond the skills of even the cleverest engineers and graphic designers. And in the hyper-connected world in which we now live, the necessity of presenting all this information in one place deserves at least as much thought as the proposed new stickers themselves.


I don't envy the EPA its assigned task of coming up with a useful replacement for the venerable fuel economy stickers that adorn the windows of all new cars at every dealership in America. It should be obvious that the current stickers, displaying city, highway and assumed average fuel economy--a subject for discussion in itself--along with estimated annual fuel expenditures, are not up to the task of informing consumers faced with a choice of vehicles running on gasoline, diesel, natural gas, ethanol, electricity, or a mix of several of these. Whether you consider it necessary to attempt to do so probably depends as much on your personal philosophy as on the inherent complexity of the situation, so for the purposes of this posting, I will accept it as a given and focus on evaluating the range of sticker options furnished by the EPA.

Start with the prototype shown above, for a plug-in hybrid car (PHEV) capable of running on both gasoline and electricity. A larger image of this sticker is available on page 4 of the PDF file on EPA's site. The two features that stand out in this design are the letter grade, which compares the fuel economy of the stickered vehicle to all others on a scale running from A+ to D (further conveyed in a green to amber color range) and the estimated 5-year fuel cost savings compared to the average new car. I've seen comments elsewhere suggesting that the graded comparison should be based only on comparable vehicles, rather than all cars, and there's some merit to that. There might be a few folks out there looking to replace a Chevy Suburban with a Nissan Leaf, but I'll bet they're in the minority. At the same time, the goal of the program is to reduce fuel consumption and emissions, and people are generally smart enough to figure out that if the vehicles that meet their needs only range from B- to a D, the B- choice will probably cost less to run and be better for the environment.

Of course that raises questions about whether the letter-grade system dumbs-down the whole process and diverts attention from details that actually matter a great deal, including the assumptions underlying the system, many of which are displayed in the fine print. One of the biggest of those is that only emissions from the tailpipe count. That sounds like a technicality, but when the result is that vehicles powered directly by electricity are guaranteed to get most of the A's in the class, it has serious consequences. For example, it would skew the comparison between an only-moderately efficient PHEV and an extremely efficient conventional hybrid (non-plug-in.) The latter might produce fewer lifecycle GHG emissions than a plug-in running on the electricity mix of the applicable regional grid, but because its emissions mainly come out of the tailpipe, it would be at a disadvantage. This kind of comparison is only one aspect of the emerging transportation energy market for which any static, national-level representation such as a sticker plastered on a car window seems likely to be wrong more than right.

The new stickers also introduce several new concepts to motorists, including the MPGe, or mile per gallon equivalent--a worthy evolution of mpg. This provides a handy way to compare the energy content of different fuels, including electricity, to the standard energy content of a gallon of petroleum gasoline, approximately 115,000 BTUs. The problem is that in the case of electricity, the stated conversion rate of 33.7 kWh per gallon-equivalent ("eGallons in the stickers' parlance) grossly understates the energy required to produce most of the kWhs on the grid. It's only accurate for the 31% of our national electricity mix attributable to nuclear, hydro or other renewables. In the case of electricity from natural gas turbines, it can understate the fuel requirement by much more than half--and thus overstate electricity-based fuel efficiency by more than double. In other words, an accurate comparison of the equivalent fuel economy of an electric vehicle requires more information about the source of electricity for each consumer than any sticker could conceivably collect. I'd prefer to see a more conservative conversion rate for electricity, such as 14.4 kWh/gallon (based on a typical gas turbine heat rate), but at a minimum the CO2 grams per mile figure on all such stickers should be asterisked along the lines of, "Your emissions will vary depending on your local electricity source."

Another new concept incorporated in the sticker for PHEVs is the notion of "Blended Electric + Gas" fuel economy. Unfortunately, while it provides a basis of comparison among similar vehicles, its accuracy is limited to the precise combination of electric and non-electric miles that went into the EPA's calculation, accentuated by the kWh/eGallon problem described above. Drive mostly electric miles and just a few on gasoline, and you'll get a result like what I saw when I drove the Chevrolet Volt last winter. I much prefer the alternative sticker shown on page 12 of the PDF, in which consumers are given the fuel economy on gas only and electricity only and allowed to work out the likely result for their specific circumstances. I also like the range graphic on this PHEV sticker and the electric vehicle sticker on page 11, allowing an easy comparison between those two vehicle types.

Yet while the EPA is clearly working hard to provide consumers with more information about the performance of vehicles that can use combinations of electricity and liquid fuels, I find it inexplicable that their proposed sticker (page 15) for flexible fuel vehicles (FFVs) would display the fuel economy only for gasoline, rather than for both gasoline and E85 ethanol, since the latter tends to be a quarter to a third less, based on the EPA's own results for actual FFVs.

The last issue I want to raise relates to the assumptions underlying the annual fuel costs and savings shown on all the stickers. When the first stickers were introduced in the 1970s, there was no easy way to convey to consumers up-to-date information on current and expected future fuel prices. That's certainly no longer true, and posting cost estimates relying on the assumption that we all pay the same price for gasoline and electricity and will do so for the life of a car makes little sense. Why not omit this information and replace it with a link to an interactive website that, with the input of just a zip code, could determine local fuel and electricity prices and calculate future savings based on those and the latest forecasts from the Department of Energy?

While I commend the EPA for its effort to make alternative fuel vehicle characteristics more understandable and for making these proposed stickers public now, I believe the agency is attempting to over-simplify a truly complex set of parameters and relationships, at the risk of inadvertently misleading a significant number of purchasers. Consumers would get more reliable value from stickers that provided them with just a few clear metrics, plus access to the information needed to work out how the vehicles among which they are choosing would be likely to perform in their circumstances of where and how they drive. And unless the basis of the letter grades can be expanded to include lifecycle emissions, rather than just those from the tailpipe, they should be jettisoned as fundamentally flawed. It will be very interesting to see what emerges from the next 60 days of public comment, and I encourage my readers to put in their two-cents worth.

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The Energy Transition Is Already Underway

Lately I've been struck by the number of new groups and proposals calling for America to begin the transition to cleaner energy. We even heard this call from the Oval Office several weeks ago. Yet while there's clearly much more to be done to wean ourselves from our reliance on oil and other high-carbon fuels, I'm baffled by the suggestion that this process didn't actually begin long ago--not just in the last year and a half--with policies and R&D initiatives put in place by at least the previous two administrations. Perhaps it's fashionable to ignore our progress to date, because acknowledging it serves as a reminder that the process will require decades to complete, and that the end-point might not resemble the one we imagined when we began.

Let's start by recognizing that a massive energy transition is already well under way on many fronts, including the development of advanced biofuels, nearly-mature wind power, highly fuel-efficient vehicles, electric vehicles, solar power that's not just a science fair project, and a range of other technologies and policies for reducing oil consumption and greenhouse gas emissions. These didn't just appear spontaneously; most required literally decades of effort to get to this point. So if we're already headed down this path, rather than arguing about starting out should we rather be asking how much we can do now to accelerate this shift?

Take fuel economy, which seems simple, because we all understand miles per gallon, or think we do. But how many people realize that the incremental fuel savings from higher mpg shrink as mpg increases? The chart below shows the annual fuel consumption for a car driving 12,000 miles per year, about the national average, versus fuel economy in mpg. The improvement in Corporate Average Fuel Economy of new cars between 1978 and 2008, from about 20 mpg to 27 mpg, has already saved a very substantial 160 gal/yr per car, while the increase to 34 mpg by 2016, the new CAFE target, will save another 90 gal/yr. However, advancing from there to 44 mpg, roughly equivalent to the 2012 EU target of 130 grams of CO2 per kilometer, would save only an extra 80 gal/yr. That's no reason not to move ahead with more efficient cars, but we must recognize that we've already captured the steep part of a curve that is now flattening out, as the cost/benefit of each successively-harder increment diminishes, unless they burn no oil at all. That's where biofuels and EVs come in.
The Renewable Fuels Standard established by Congress in 2007 calls for a quantity of advanced and cellulosic biofuels by 2022 that exceeds what we currently get from corn ethanol. The problem is that at this point, after many years of hard work developing these technologies, there is not a single commercial-scale cellulosic biofuel facility design that has been built, tested and certified for profitable replication on the scale required, despite a special production tax credit of $1.01/gal. Nor do I conclude that's for lack of the government, private investors and big companies like ExxonMobil, Chevron, Shell, and BP throwing plenty of R&D dollars at the challenge. Within a few years we might be at the point at which billions of extra dollars for advanced biofuels would result in hundreds of such facilities actually being built, but then plenty of experts thought we would already be at that point by now, including the EPA, which had to ratchet back its cellulosic ethanol quota for this year from a level equal to the annual output of one corn ethanol plant to the quantity that a corn ethanol plant produces every three weeks or so.

The prospect for EVs looks more immediate--though still on a relatively small scale--with GM and Nissan launching flagship models later this year. However, as I noted in a recent webinar, every million EVs running entirely on electricity would save 31,000 barrels per day of gasoline, or about 0.3% of our current usage, and that's assuming they would replace cars getting today's average mpg, rather than Prius-type non-plug-in hybrids, as seems likelier to me. It's going to take a whale of a lot of EVs to make a real difference, and it's not yet obvious that offering more than the current $7,500 in consumer tax credits to buy them, or handing out more than the billions that have already been given to car companies--including some that have never built a mass-produced car--is going to put a lot more of these vehicles on the road in the next few years than would happen under existing policies that are still playing out.

However attractive energy visions such as the President's might be, even to me, there are practical limits to additional activism at a point when so many wheels have already been set in motion. I do understand that the nation is riveted by the oil spill, and that transforming this interest into support for a broader energy agenda could be a once-in-a-generation opportunity. At the same time, I worry about an approach that relies on expanding already-unsustainable financial incentives for clean energy deployment at a time when the deficit has taken on the aspect of a black hole threatening to devour our future, energy and otherwise. To see the energy transition really take off, we must reach the point at which the alternatives are unambiguously better/faster/cheaper than oil, or can at least match its cost and convenience in its primary transportation energy uses, and are not merely better for the environment--as important as that is. We're not there yet, but we've clearly already begun the journey.

Energy Outlook will be on holiday the rest of this week and through the July 4th weekend.

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Paying the Bill for Electric Vehicles

Perhaps it's merely a sign of the times, when a billion is the new million and firms in many industries have found it easier to get capital from the government than from bankers, bondholders and shareholders, but the price tag implicit in the recommendations of a new cross-industry group formed to promote electric vehicles is startling even in this context. Although I couldn't find the total anywhere in the lengthy report from the Electrification Coalition, the Washington Post tallied the combined cost of their proposals at $124 billion in new government incentives, over and above the billions already being spent under the stimulus bill and other programs to support the R&D, manufacturing, and infrastructure for plug-in electric cars, and to subsidize consumer purchases of them. The frustrating part of this is that I'm in general agreement that electric vehicles probably represent the long-term future of cars. However, I don't believe anyone can know this with sufficient certainty, any more than they knew a few years ago that fuel cell cars were the answer, or in the late 1990s that diesel hybrids were the answer. The report also raises basic questions about how new industries should be built, and at whose expense.

Without dissecting the entire document, the justification for its recommendations appears to hinge on a few key arguments concerning our current use of oil, which the Coalition is hardly alone in regarding as excessive. Although they go a bit overboard focusing on the $900 billion Americans spent on petroleum products last year--roughly half of which represented the value of domestic production, refining margins, and federal, state and local taxes collected on product sales, all of which are part of GDP and thus a plus, not a minus for the economy--they eventually get around to mentioning last year's oil import tab of $388 billion. (That figure is currently running at around $250 billion per year, based on the September refiner acquisition price applied to our average monthly net imports, but it is still a lot of money.) Yet as attention-focusing as that sum is, vehicle electrification is hardly the only way to go about reducing it, and from what I can tell it is almost certainly not the most cost-effective means of doing so.

Aside from the diesel options I discussed the other day, there are a variety of strategies available to improve fuel economy significantly without merely shifting our transportation energy consumption from one category (oil) to another (electricity generated from a mix anchored by coal.) Our approach to reducing oil consumption must also take into account the diminishing returns to increasing fuel economy. Doubling the average car's fuel economy from 25 mpg to 50 mpg saves twice as much gasoline as going from 50 mpg to 100 mpg--and it still saves more than achieving the fancifully hyperbolic mpgs we've seen quoted for various plug-ins and EVs that ignore the energy required to generate grid electricity. The avoided fuel cost effectively sets a ceiling on the financial rewards available from the notional fuel economy of grid-based vehicles. Because fuel savings can't justify today's high up-front cost of battery-powered cars, the Coalition proposes consumer tax credits for plug-in hybrids or EVs that could top $10,000, compared to the current $7,500 maximum. By comparison, for ten grand you could fuel a Prius for 100,000 miles at $5/gallon, or a pair of them at current gas prices.

Nor do I find the suggestion of providing federal tax credits to cover 75% of the cost of EV-recharging infrastructure (50% in later phases) appealing, other than as a gift to the member companies of the Coalition that paid for this study. Infrastructure is an expensive investment, and I'm quite familiar from my experience of the EV-1 rollout with its importance in breaking the chicken-and-egg market dynamic associated with battery cars. However, I don't see sufficient justification for taxpayers to pick up this much of the tab--and risk--for infrastructure for which the demand will be so small and uncertain for years to come.

Even measured against the scale of the bailouts of GM, Chrysler, and the big banks, $124 billion is a huge price tag to impose on taxpayers who have just begun to wake up to the likely consequences of the enormous debts that our deficits are piling up. While vehicle electrification might reduce our trade deficit in oil, it's not obvious that it won't replace it with offsetting deficits in cars, batteries and the scarce strategic materials they require. Nor does it seem equitable to ask average taxpayers to furnish other, perhaps higher-quintile taxpayers with EV tax credits so generous that they would exceed the depreciated value of the average car on the road.

I'm not opposed to electrification or the companies behind this initiative. In fact, I wish them well and look forward to someday having the choice of buying an attractive and affordable electric car. What I do oppose is another massive handout to another chosen industry on the basis of a highly uncertain scenario of future market development, bypassing all of the competitive pressures that should shape such a revolutionary change along the way. The first few million grid-powered EVs would have a negligible impact on the nation's energy consumption, emissions, and oil imports, yet even their advocates suggest they will cost a bloody fortune to put on the road. As you read the Coalition's analysis and their proposals for who should foot the bill for all this, I encourage you to consider who stands to benefit the most from it in the next ten years. Taxpayers should insist that the early adopters and the companies that will garner most of the value of these developments pay their own way, as was the case for personal computers, cellphones, and most other successful new technologies of the last several decades.

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The Way We Drive Now

My posting of October 29th examined two of the ways we risk under-counting the greenhouse gas emissions (GHGs) from favored energy technologies such as biofuels and electric vehicles, with potentially serious consequences. Well, it turns out that the same joint proposal by the EPA and Department of Transportation establishing new fuel economy and vehicle emissions rules incorporates another, subtler distortion that could be even more significant over the next few years than treating electric vehicles (EVs) as if their external power sources emitted no GHGs. Consider the many ways in which personal transportation in the US has changed since the mid-1970s--longer commutes, heavier traffic, and new vehicle technologies--and then ask how it could possibly make sense to embed a vehicle-use statistic set by a 1970s' law at the heart of the new Corporate Average Fuel Economy system. Yet that is precisely what these new rules would do.

My scrutiny of the draft "Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards" rulemaking was an outgrowth of a recent conversation with Jeff Breneman, Executive Director of the US Coalition for Advanced Diesel Cars. In addition to promoting to an American audience the benefits of the improved engine technologies that have enabled diesel passenger cars to capture over half of the new-car market in Europe, this group advocates an approach to emissions reduction and improved energy security that emphasizes outcomes, rather than "flavor of the month" pathways. That resonates with themes I've been expounding since I began this blog nearly seven years ago.

According to Mr. Breneman, achieving a level playing field for advanced vehicle types such as diesels, hybrids, plug-in hybrids and pure EVs depends on establishing metrics for judging them that reflect "real-world driving." In the case of the draft EPA/NHTSA rules, that means updating their assumption that the average American drives 55% in city traffic and 45% on the highway. That ratio was set by the Energy Policy and Conservation Act of 1975, when there were 100 million fewer cars on our roads, each driving on average about 2,000 fewer miles per year, and the only alternative fuel vehicle I was aware of burned propane. According to the EPA's own data from 2006, current average driving patterns exhibit a roughly 43% city, 57% highway split, even though its 2010 vehicle sticker program is still based on the old 55/45 ratio.

This divergence between current and historical driving patterns has become more significant as the array of available vehicle choices has broadened to encompass technologies such as hybrids that perform best in city driving, but offer little highway benefit, and others such as diesels that are at their best in sustained driving above 45 miles per hour (highway driving by definition in the EPA's split.) For example, the 2010 VW Jetta Diesel is rated at 30 mpg city/42 mpg highway, compared to 41/36 for the Ford Fusion Hybrid.

The two agencies involved indicate they intend to assess carmakers' fleets using the old split until at least 2017. That means that during this crucial transition to stricter fuel economy standards these rules will motivate manufacturers to invest more in vehicle technologies that perform best under the old assumptions--despite the resulting misalignment with how consumers really drive now--in order to meet their tougher corporate targets. The difference gives hybrids an extra edge vs. diesel, over and above any disparity in purchaser tax credits. It would likely limit the choices available to consumers, given the high costs of developing additional models with drastically different powertrains.

Prolonged reliance on the outdated 55/45 split could affect actual GHG emissions, as well. A study by the Energy Information Agency earlier this year indicated that the lifecycle emissions of diesel vehicles are typically 15% less than for comparable gasoline-powered vehicles. When fueled with blends containing 20% biodiesel they emit levels of CO2 per mile similar to gasoline hybrids or plug-in hybrids recharged using grid-average power in much of the US. That's a surprising result for a technology option that generally costs somewhat less than hybridization and many thousands of dollars less per car than a plug-in with its expensive batteries.

I don't know whether US consumers would ever warm up to diesels to the extent that Europeans have. But given their attractive fuel economy and emissions benefits, they shouldn't be impeded from trying, merely because of an accounting ratio that was set when I was driving my first car. Nor do I buy the argument that diesels are a dead end, compared to electric vehicles. Interpolating from the EIA data cited above, diesel cars running on advanced biofuel derived from sources that don't compete with food crops or result in deforestation appear no less sustainable than a plug-in hybrid backed by California's low-emission power grid. When the time comes for me to buy my next car, I hope to see a wider array of clean diesel options, including some from GM and Ford, which make wonderful diesel cars in Europe.

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Plug and Pay

Yesterday's photo-op at an Indiana RV factory for the purpose of announcing more federal assistance for the electric vehicle industry came just a few days after Nissan debuted its Leaf electric car, which might become the first mass-market EV in the world. Cars powered by batteries alone or a combination of batteries and conventional engines look like one of the most promising long-term solutions to the dual problems of energy security and climate change. But precisely because of their potential to have such a large impact, it's vital that the economic arrangements for their energy consumption are put on the right basis from the start. Among other things, that means avoiding the temptation to provide free public recharging for them. If we get this wrong, we risk negating much of the energy and greenhouse gas benefit these cars offer. We could also inadvertently deter the substantial private investment in recharging infrastructure that would be needed to make EVs fully competitive with cars running on liquid fuels.

Against the backdrop of $2.4 billion in new subsidies for EV and battery manufacturers and federal electric vehicle tax credits ranging up to $7,500 per car, my concerns about collecting for the electricity actually used by the first few mass-production EVs might seem disproportionate or even eccentric. After all, how much juice can a few battery cars use, compared to our factories, office buildings, and billions of home appliances? Initially, very little and eventually still less than you might imagine. If every vehicle-mile traveled in the US were driven in an EV averaging 3 miles per kilowatt-hour (kWh), US electricity consumption would only increase by about 27%. The impact on emissions is much harder to assess, however, since it depends heavily on which generating technologies deliver the power used by EVs, and that in turn depends to a large degree on the time of day when they are recharged. Charge up at 3 AM, and you might be getting zero-emission wind power that would otherwise go to waste. Charge up at 3 PM, and you are almost certainly going to be drawing on a gas turbine somewhere--probably a fairly inefficient "peaking" unit--or a coal power plant. To put that in perspective, let's look at the emissions from two comparable cars, under both scenarios.

For our baseline, consider a Prius-type hybrid that gets all of its energy from the fuel that goes into its tank. At 50 mpg, its emissions from gasoline amount to roughly 40 lb. of CO2 per 100 miles. For an EV getting 4 miles per kWh and recharged with wind power, they would be essentially zero. However, the same car recharging during mid-peak or peak electricity demand would trigger power plant emissions between 35 lb. ("peaker" turbine @ 12,000 BTU/kWh on natural gas) and 53 lb. (average US coal plant) for every 100 miles. In other words, while the hidden emissions from an EV would in the worst case still be lower than those of the average car in America today (around 80 lb. CO2/100 mi.), they could be substantially higher than from an ordinary hybrid that never plugs in. So if we want EVs to repay the substantial national investment we're making in them by reducing our fossil fuel consumption and greenhouse gas emissions, we will want them to recharge as little as possible during daylight hours, particularly in the late afternoon, at least until wind, solar and geothermal power account for a much higher share of our annual electricity generation than the 1.6% they contributed last year.

Paying for the electricity to recharge plug-in electric vehicles involves major cultural and behavioral shifts. The price of gasoline is one of the most visible, ubiquitous and transparent prices in our society. You stand at the pump and see the dollars going into your tank. But when you recharge an EV at home, unless you have a separate electric meter, you're going to have to sift through a power bill with a welter of distribution, fuel and non-fuel supply charges plus various state and local taxes and fees to see what it actually cost. At the current national average rate of around $0.11/kWh, a typical driver might only see an extra $27 a month, a big savings compared to the typical gasoline bill even at the current $2.55/gal. The extra power cost could easily get lost in seasonal usage fluctuations and rate changes. The impact would likely be more noticeable for utility customers in places with sharply graduated rate structures or time-of-use rates. For many people, however, even if they don't charge up using someone else's electricity--their employer's, their town's, or the local Starbucks'--it could look nearly free.

That would have implications for companies that are building vehicle recharging infrastructure that would need to recoup their investment on a per-kWh basis or, like Better Place, charges per mile of usage in a manner similar to cellphone service contracts. Those investments won't happen and the companies involved will go out of business if consumers regard the electricity for their new plug-in vehicles as effectively free and resist paying as they now do for fuel.

How this will all turn out is anyone's guess at this point, and I emphasize "guess." Until there are at least hundreds of thousands of these vehicles on the road, in the hands of many ordinary consumers and not just unrepresentative deep-green or "gear-head" early adopters, we can only make assumptions about how they will really be used. Still, it seems safe to predict that recharging that was free or regarded as free would get used more, resulting in more trips, more miles traveled, and eventually more energy consumption and emissions.

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A Gasoline Floor Price for Hybrid Cars

The coverage of this year's Detroit Car Show has focused on hybrids and electric vehicles, with a number of high-profile launches, including the debut of the third generation Toyota Prius. However, as convinced as I am that electric-drive cars represent the future of the car industry and will make important contributions to reducing greenhouse gas emissions and oil imports, the collapse of oil prices has erected a substantial barrier to the rapid market penetration of these technologies. Nor can the answer be simply ratcheting up the nation's Corporate Average Fuel Economy (CAFE) standard, as the New York Times recently suggested. We need a practical way to bridge the gap between consumers' growing interest in electrified vehicles and the economic deterrent posed by the added cost of these complex systems. Rather than taxing fuel itself, as has been widely suggested, we should consider a new hybrid car tax credit based on the price of fuel.

Despite growing interest in hybrids, these vehicles accounted for only 2.4% of the 13.2 million light-duty vehicles sold in the US last year. Although its 2008 sales of around 160,000 units made the Prius the 15th most popular model in the US last year, it did not even make it into the top 20 for December, thanks to slumping gasoline prices and the credit crunch. For that matter, the December monthly figures showed trucks, including SUVs, outselling cars again at 53% vs. 47% of the market, essentially back to their average for 2007. For all of 2008 cars outsold trucks by 51% to 49%, though that included those summer months of $4 gas when you couldn't have given a big SUV away. Perhaps the most encouraging news in this data is that sales of "cross-over" SUVs declined much less than other light trucks to become the largest segment of that market. (Moving someone from a 15 mpg SUV to a 22 mpg crossover saves more gallons of gas than converting a Camry owner to a Prius driver.)

The lackluster hybrid sales at the end of the year shouldn't surprise anyone. Consider the Saturn VUE crossover SUV. The sticker for the hybrid version is $4,880 higher than the base model with the same 4-cylinder engine. Boosting fuel economy from an EPA-estimated combined 22 mpg to 28 mpg saves 117 gallons of gas per year, based on 12,000 miles of annual driving. Yet even if gas were still $4 per gallon, it would take 10.4 years of fuel savings to pay out the hybrid premium. With gas at $1.78/gal., that stretches to 23 years. If the savings at the pump aren't sufficient to justifying spending an extra $5k on the hybrid, a buyer must bet that the combination of higher resale value and lower maintenance costs would close the gap.

How could the government induce more consumers to buy hybrids, even when fuel costs are too low to justify the extra investment? One option is to raise the CAFE standard beyond the 35 mpg target that the industry must meet by 2020. That might force manufacturers to produce more hybrids, bringing their cost down, and sell fewer non-hybrids, which would tighten the market, reducing the effective premium from both ends. The Congress would like to impose that outcome, in any case, as a condition of financial assistance to Detroit. Unfortunately, such a command-and-control approach risks creating another disconnect between car companies and consumers, and the modest fines by which CAFE has been enforced may end up looking more attractive to Detroit than the distortions an unrealistic fuel economy standard could create in their already-strained sales channels.

Another solution would be a big increase in the gasoline tax, or a floor-price tax on gas, to boost pump prices to a level that would ensure high demand for very fuel-efficient cars. As I noted the other day, however, the gas tax looks like a much less effective way to reduce greenhouse gas emissions than a tax on carbon or emissions cap-and-trade that would create a similar disincentive for CO2. Nor does raising the gas tax during a major recession--even if a large portion of the revenue could be returned to taxpayers--look like smart economic policy, when the recent drop in fuel prices is among the few forms of relief actually reaching consumers and smaller businesses.

Perhaps the answer lies in inverting the proposition offered in those car ads we saw when gas prices were rising steadily--the ones that promised your first few years of fill-ups at some low fixed price. To make hybrids more attractive, we could replace the current, expiring hybrid tax credits with a new, fully-refundable tax credit--one that the government pays even if it exceeds your income tax liability for the year--that would create an effective gasoline floor price of $4, but only for the purchasers of hybrid cars. The amount of the credit would be set by the difference between $4 per gallon and the national average pump price for each year, applied to the EPA fuel economy rating of the hybrid purchased. This could easily be made technology-neutral by extending it to any car exceeding the actual new-vehicle CAFE for the previous year, which for the 2008 model year averaged 31.2 mpg for cars and 23.4 for trucks. Even with this modification, the bulk of the subsidy would still flow to the models that save the most fuel.

For example, if we calculated the credit on 10,000 miles of annual usage, a buyer of the new 37 mpg Ford Fusion Hybrid would receive a credit of $600 for 2009, if gasoline remained at last week's average of $1.78/gal for the entire year. Of course, that would be in addition to roughly $260 of actual fuel savings, compared to the 24 mpg non-hybrid Fusion. If gas prices averaged $3 in 2010, this taxpayer's credit would drop to $270, while fuel savings rose to $440. Once gas was back over $4, the tax credit would go to zero.

It sounds complicated, though in practice it would merely be a hedge contract on the price of fuel--in the opposite direction from the ones typically offered to heating oil customers--conferring the equivalent of a set of annual put options on gasoline at $4. It probably would not be any more difficult to implement than a floor-price tax for all gasoline sold, even if the latter were politically feasible or economically desirable. It would also have the benefit of a built-in phaseout, as overall fleet fuel economy increases and future gas prices rise.

Perhaps someone can think of a simpler way to reduce the uncertainty of hybrid car buyers about future fuel prices than by issuing federal gasoline floor price tax credits. What we can't do is merely to hope that gas prices will recover enough to make hybrids and other advanced technology vehicles attractive on their own merits, or to assume that consumers will remain so stunned by last summer's high gas prices that they will buy the most efficient cars possible, even if they don't promise a financial return. This discussion will turn distinctly non-theoretical as soon as the government considers another round of financial assistance for a Detroit that it insists must build as many hybrids as possible.

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Sales Mix and Fuel Economy

When Detroit's CEOs return to Washington, DC in early December for further Congressional hearings on a rescue package, the industry's prospects for meeting tougher fuel economy standards are likely exert significant influence on the granting of federal assistance. When I was writing last Monday's posting on "Detroit, Bailouts and Fuel Economy", the CAFE database of the National Highway Traffic Safety Administration, which administers the Corporate Average Fuel Economy standard, was undergoing maintenance. That meant I couldn't calculate the impact of this year's shift in the sales mix of the Big 3 on their fleet fuel economy. The numbers indicate that simply selling fewer SUVs and more of their existing car models, without any major changes in technology, is already yielding significant fuel savings. In addition, the figures for the leading Japanese brands indicate what might be possible for GM, Ford and Chrysler, simply by offering fewer V-8 and V-6 engines and selling more four-cylinder cars. That's a good thing, because the latest survey from R.L. Polk & Company suggests that hybrids will still make up less than 6% of US new car sales in 2012.

NHTSA tracks fuel economy for every automaker in three categories: domestic passenger cars, imported passenger cars, and light trucks. The latter includes most SUVs. These data, in combination with the year-to-date auto sales figures through October, facilitate some quick spreadsheet analysis revealing the key factors differentiating the fuel economy performance of the big US carmakers from their competitors, such as Toyota and Honda. For example, for the 2007 model year, the US companies averaged a combined 24.9 miles per gallon, while the US models of these two Japanese firms averaged 30.2 mpg. That gap is attributable to two components, neither of which comes as a surprise. The Japanese passenger cars averaged 5 mpg better than their US counterparts, helped considerably by their imported hybrid models. The passenger cars made in these firms' US factories averaged just under 3 mpg better than their US peers.

The other big influence comes from the relative sales mixes of these companies. Of the combined 2007 sales of GM, Ford and Chrysler, nearly 65% were "light trucks", comprised of SUVs and pick-up trucks. Such vehicles only made up 42% of the sales of Toyota and Honda. That's particularly significant for fuel economy, because the Big 3's light trucks turned in fuel economy ratings averaging 7 mpg lower than their passenger cars, while the light trucks of Toyota and Honda were 10 mpg worse than their cars.

With gas prices that surged past $4 per gallon this summer, 2008 has produced some modest but encouraging shifts in fuel economy. SUV sales are down much more than those of passenger cars, for both US and Japanese makes, while the cars and SUVs sold tended to be from the more economical models within their respective categories. This has improved the average fuel economy of the Big 3 by 0.4 mpg, year-to-date, with 75% of that improvement coming from the shift between passenger cars and light trucks, which fell to 63% of Detroit's mix. Toyota and Honda saw an even bigger fractional change in light trucks, with the drop to 38% of sales helping to boost their combined average by more than one full mile per gallon.

Why do these figures matter in the context of a bailout of Detroit? Last year the Congress passed, and President Bush signed, the Energy Independence and Security Act of 2007, which among its many provisions included an increase in the federally-mandated new-car fleet average to 35 mpg by 2020, including both passenger cars and light trucks. Given the emphasis during the recently-concluded election campaign on both energy independence and greenhouse gas emissions, Congress appears concerned that a bailout of Detroit should not be viewed as providing any leeway on fuel economy. So it's important to understand whether achieving 35 mpg would require a technological revolution that might be beyond the resources of the cash-strapped domestic industry. Encouragingly, the figures above suggest otherwise. If the Big 3 merely matched the 2008 passenger-car performance of the top Japanese brands (35.5 mpg) while reducing their light truck sales proportion to 25%--the level that prevailed in the US car fleet prior to 1990--they would be three-fourths of the way toward achieving their 2020 CAFE target.

As helpful as advanced-technology cars like the upcoming Chevrolet Volt would be for speeding up that transition, simply by shedding the least-efficient SUVs and offering peppy four-cylinder engines as the standard across most of their product lines, Detroit could deliver greatly-improved fuel economy, of the kind the Congress and new administration are seeking. Just as important, considering the priority that US consumers have placed on vehicle performance in the last decade, European-style turbo-diesels, better gasoline-engine technology, and hybridized drivetrains can deliver these gains at an mpg-vs-power trade-off that car buyers should find much more palatable than the one we were forced to accept in the early 1980s, the last time high oil prices focused US policy-makers on automotive fuel economy to this degree.

I don't want to make this change sound easier than it is likely to be. Reducing SUV sales by the necessary extent would require re-tooling on a massive scale, sending ripples through the North American auto supply chain that might be nearly as dramatic as the bankruptcy of one or more of the Big 3. Consumers are leading this shift today, and they must be willing--or encouraged by new policies--to stay the course. The fall of gasoline prices back below $2 per gallon, if it persists for more than the next few months, will work against that. If a rescue or restructuring is to succeed, it must result in a new mix of products that are globally competitive and not just more fuel-efficient, but also profitable to make and market. That argues against embedding expensive, unproven technology in millions of cars, until Detroit is strong enough to stand behind the warranties that will be crucial to selling them.

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