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Analysis of Corporate Average Fuel Economy (CAFE) Standards for Light Trucks and Increased Alternative Fuel Use |
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Macroeconomic Impacts S. 804 Table 9 summarizes projected macroeconomic activity in three cases: the AEO2002 Revised Reference and two of the S. 804 cases, focusing on the impacts in 2010, 2015 and 2020. As can be seen, the macroeconomic impacts are relatively small. There are three major effects that influence the economy at the aggregate level. First, with stricter CAFE standards there is an increase in the average price of light duty trucks. The higher vehicle cost to the consumer has an adverse effect on the family budget. As a consequence, aggregate personal consumption expenditures are lower relative to the reference case. With higher prices, sales of light trucks for investment purposes are also lower and thus the initial impact on real investment is also negative. Second, with greater fuel efficiency and a decline in aggregate expenditures, there is a reduction in energy use in the economy due to a decline in oil demand. This decline in energy use reduces imports of oil, and domestic production also declines slightly. Third, as a result of a decrease in energy demand, energy prices decline relative to the reference case. This relative decline in energy prices sets into motion deflationary forces that stimulate aggregate demand over time, for all goods and services in the economy, including energy. As described earlier, the incremental cost of light duty trucks for the two S. 804 Cases is shown in Figure 29. By 2010, the incremental cost for light trucks is $601 (expressed in 2000 dollars) in the S. 804 Case and $1,013 in the S. 804 Advanced Date Case. The S. 804 Advanced Date Case reduces the cumulative fines imposed on manufacturers for not achieving the standard under S. 804, but the price increase of the now available technology is higher. However, in the Advanced Date Case, the incremental cost levels off beyond 2010 and by 2020 is $1,116. While the S. 804 Case has initially lower incremental costs in 2010, these costs rise relatively more than the Advanced Date Case and by 2020 the incremental cost of a new light truck is $1,294. The effect of this incremental cost of new light trucks is reflected in decreased sales of light duty vehicles, including cars and trucks. The analysis assesses the change in light vehicle sales in the aggregate, but cannot assess shifts between cars and light trucks. Some economists believe that some consumers will purchase large cars rather than light trucks with reduced horsepower and weight. However, for this assessment, the projected changes in vehicle sales due to increased vehicle prices reported in this study are assumed to affect light trucks only. Sales of light duty trucks are lower, relative to the reference, in every year of the forecast. Of the two CAFE cases, the decrement in sales is greater under the S. 804 Advanced Date Case early in the forecast period, given the faster rise in incremental costs in this Case (Figure 30). In 2010 sales decline by 363 thousand vehicles in the S. 804 Advanced Date Case, relative to a reference projection for light duty vehicles of 17.3 million vehicles. By contrast, the S. 804 Case is projected to have a reduction of sales of 247 thousand units. However, by 2015 and 2020, the reduction in vehicle sales is slightly larger in the S. 804 Case. This is because the incremental cost of trucks continues to rise in the S. 804 Case while the S. 804 Advanced Case shows the incremental cost rising more slowly and then leveling off. By 2020, light truck sales are forecast to decline by 453 thousand vehicles in the S. 804 Case as compared to 450 thousand in the S. 804 Advanced Date Case. Over the 2003 to 2020 time period, sales of light duty trucks are 5.2 and 5.4 million units lower under the S. 804 and S. 804 Advanced Date Cases respectively, compared to the reference case. From a macroeconomic perspective, declining real consumption and investment expenditures dominate the early part of the forecast period and introduce cyclical behavior in the economy, resulting in small output and employment losses through 2010. In 2010, real GDP is forecast to be 0.14 percent lower in the S. 804 Case relative to the reference and the S. 804 Advanced Date Case is 0.22 percent lower. Accompanying this, non-agricultural employment declines by 214 thousand and 325 thousands jobs, respectively under the two Cases. This represents a percentage reduction in employment of between 0.15 percent and 0.22 percent of total non-agricultural employment in the economy. Further into the forecast period, the impacts on the economy are moderated as the incremental cost of light trucks in both cases begins to level off, and with the decline in the world oil price relative to reference levels. Investment, the most volatile component of GDP, initially declines in response to the decline in aggregate demand early in the forecast. With the economy reaching its peak GDP loss between 2010 and 2015, investment activity rebounds strongly in anticipation of increasing aggregate demand. The level of investment activity by 2020 is actually greater than in the reference forecast, making up some of the lost capital stock precipitated by the early loss in aggregate demand. In the long run, the economy is expected to recover and move back toward the reference growth path. By 2020, real GDP is still 0.07 percent below the reference in the S. 804 Case, but the path is beginning to return to the reference. The S. 804 Advanced Date Case is more cyclical, in part because of the initial larger, then subsequent smaller incremental cost path relative to the S. 804 Case. Also, when the economy is adversely affected earlier, such as in the S. 804 Advanced Date Case, there is a strong tendency of the economy to attempt to return to its natural long-run growth path. This results in a strong rebound, in response to the strong decline early in the forecast period. The net effects on the trade balance are influenced by opposing sets of pressures – those which affect the oil import bill directly and those that influence other traded goods and services. The initial reduction in gasoline demand results in a reduction in imported oil. This lower demand for gasoline leads to a slight decline in the world price of oil, which stimulates the demand for energy and reduces domestic production slightly. On balance, energy demand is expected to be lower and the oil import bill reduced. However, with a reduction in oil imports and aggregate demand, there is pressure on U.S. export commodities due to the resultant foreign exchange rate depreciation, which may offset the reduction in the oil import bill. As a result of these opposing tendencies, it is difficult to predict the direction of the trade balance. The results indicate that the trade balance generally deteriorates. S. 517 Since the S. 517 Case applies to both cars and light trucks, the price of each is expected to increase. Figure 31 shows the incremental cost for cars, light trucks and the average for all light-duty vehicles. Moreover, the profile of the price path is different from the two S. 804 Cases discussed above. The incremental costs in the S. 517 Case commence later, but rise steadily through the forecast. In 2010, the incremental cost for light-duty vehicles in the S. 517 Case is about even with the overall incremental cost of light-duty vehicles in the S. 804 Case, at $368 and $361 respectively, but below the $505 incremental cost in the S. 804 Advanced Date Case. However, by 2015 the average incremental cost of light duty vehicles is higher than both of the S. 804 cases, and this trend continues through 2020. In 2020, the incremental cost of light-duty vehicles is $756 in the S. 517 Case, as compared to $630 for the S. 804 Case and $542 for the S. 804 with Advanced Date Case. This different cost profile has an impact on the size and duration of the economic impacts associated with the S. 517 Case. Figure 32 shows the effect on light duty vehicle sales for both cars and light trucks. In the aggregate, light duty vehicle sales decline at a slower rate early in the reference forecast. By 2010 sales are down relative to the forecast by 231 thousand vehicles, about the same as in the S. 804 Case. However, by 2015, with the incremental cost of light duty vehicles above both of the S. 804 cases, new vehicle sales decline by 604 thousand and by 2020 are also lower than the reference case by 604 thousand vehicles. The impact on the economy is small through 2010 (Table 10). By 2010, real GDP is projected to be 0.14 percent lower than the reference, almost the same impact as under the S. 804 Case. However, with the steady increase in the incremental cost of new light duty vehicles from 2010 through 2020, the economy continues to worsen and by 2015 is 0.30 percent lower than the reference. The economy begins to rebound past 2015, but by 2020 is still 0.15 percent lower. By 2015, the peak loss in non-agricultural employment is 453 thousand jobs, 0.30 percent of the total non-agricultural employment in the economy. By 2020, with the economy beginning to recover, non-agricultural employment is still down by 293 thousands jobs (0.19 percent). Present Value of Impacts Table 11 provides the sum of the discounted changes (billions of dollars discounted at 7 percent) in real GDP and personal consumption expenditures over the entire 18-year forecast period for the S. 804 Case, the S. 804 Advanced Date Case, and the S. 517 Case. These can be viewed as summary measures of the net effects on the macroeconomy. To provide perspective about the magnitude of losses, these discounted values are also expressed as percentages of the total discounted sum of values of real GDP and consumption over the same period. These percentages imply that the losses in real GDP and personal consumption expenditures are small. Alternative Fuels Provisions Table 12 summarizes the alternative fuels legislation examined in this report. S. 176615 The alternative fuel provisions of S. 1766 have two main purposes: increase the use of alternative fuels in Federal fleets and fund a large demonstration program aimed at using alternative, fuel cell, and ultra-low sulfur diesel school buses. Section 811. Increased use of alternative fuels by Federal fleets The section amends the Energy Policy and Conservation Act (EPCA) to require that dual-fueled vehicles be operated such that by September 30, 2003, at least 50 percent of total fuel used in such vehicles will be from alternative fuels.16 The percentage will increase to at least 75 percent of total fuel used in dual fueled vehicles by September 30, 2005. Under current regulations, dual fueled or flexible fuel vehicles qualify as alternative fuel vehicles (AFVs) even if they consume only gasoline. This provision would require such vehicles to actually use alternative fuels for 75 percent of their consumption by 2005. This section also amends EPCA to include as a “dedicated vehicle” three-wheeled enclosed electric vehicles with a vehicle identification number. The impact of Section 811 would be similar to the requirements in Executive Order 13149 (April 21, 2000) to use "alternative fuels to meet a majority of the fuel requirements” of AFVs. In effect, Section 811's main provisions would place into law the requirements included in existing Executive Orders. Consequently, little, if any, additional impact on future transportation energy relative to the Reference Case is expected. Estimated alternative fuel consumption by Federal agencies was 5.8 million gallons in 1999, which was 1.7 percent of total U.S. alternative fuel consumption of 339.3 million gallons (Table 13). At the same time, Federal agencies accounted for about 276 million gallons of gasoline consumption, which amounts to 0.2 percent of total U.S. gasoline consumption. Overall, alternative fuels make up about 0.3 percent of the combined total of alternative fuels plus gasoline. The type of fuel consumed by dual fuel vehicles in the Federal fleet must be estimated because specific data are not available. Table 14 separates the Federal AFV fleet into two categories, Dedicated and Non-Dedicated. Dedicated AFVs use only alternative fuel; Non-Dedicated AFVs may use an alternative fuel as well as non-alternative fuel. Most of the Non-Dedicated AFVs use compressed natural gas (CNG) or liquefied petroleum gas (LPG) as the alternative fuel. The Flexible Fuel AFVs in Table 11 consist of those Non-Dedicated AFVs that use either E85 or M85. These Flexible Fuel AFVs probably consume very little of the alternative fuel, relying almost entirely on gasoline for fuel. Federal agencies’ inventory of AFVs was about 24 thousand in 1999 (Table 10), with flexible fuel vehicles accounting for almost 40 percent of the alternative fuel vehicles in the Federal fleet. As an upper bound estimate, assume that all flexible fuel vehicles in 1999 consumed only gasoline. If these vehicles consumed the average gallons of gasoline per car,17 5.1 million gallons of gasoline would be consumed. If it were required that 75 percent of fuel used in flexible fuel vehicles be alternative fuels, the Federal fleet alternative fuel consumption would be increased by 3.8 million gallons, with a corresponding decrease in gasoline consumption. With these assumptions, the flexible fuel requirement would have reduced 1999 Federal fleet petroleum consumption by 1.4 percent. Since the alternative fuel consumed contains 15 percent gasoline, carbon emissions would be reduced by 1.2 percent. Section 812. Exception to HOV passenger requirements for alternative
fuel vehicles Section 814. Green school bus pilot program Authorized funding for this program is shared with the funding for the fuel cell bus program described in Section 815. This means that over the 2003-2006 period, at least $235 million and as much as $260 million is authorized for the green school bus pilot program. It has been estimated that 30 States have no pre-1977 school buses.19 For most others, the percentage of pre-1977 school buses is 1 to 2 percent. A major exception is California’s school bus fleet, which is estimated to have 9 percent pre-1977 buses (2,180 vehicles). In light of the small number of affected buses, the overall impact of reducing the use of pre-1977 buses would be minimal, although perhaps significant for some State fleets. While there is some uncertainty about the number of school buses in service the Transportation Energy Data Book, an authoritative source, reports there were approximately 592 thousand school buses in service in 1999 (Table 15),29 that consumed 76 trillion Btu (608 million gallons gasoline-equivalent) of transportation fuel. However, since the number of pre-1991 diesel-power buses in the school bus fleet is not known, no further evaluation of the impact of this provision can be done. Section 815. Fuel cell bus development and demonstration program Because it is difficult to relate levels of funding for research, development, or demonstration programs directly to specific improvements in the characteristics, benefits, and availability of energy technologies, the overall impact of this proposal cannot be assessed. In general increased research, development, and demonstration would be expected to lead to advances, but it is impossible to determine which programs would or would not be successful or how successful they might be. Section 816. Appropriations for 814 and 815
Section 819. Neighborhood electric vehicles Table 16 summarizes the potential energy impacts of the S. 1766 provisions. H.R. 421 Section 151. High Occupancy Vehicle Exception Section 205. Hybrid Vehicles and Alternative Vehicles This means that the total percentage AFVs would increase to 80 percent in 2004-2005 and to 85 percent thereafter. Current regulations do not include hybrid vehicles as AFVs for purposes of EPACT compliance. Section 205 would also amend EPACT to specify that hybrid vehicles would count as AFVs. While the impact of this provision cannot be evaluated quantitatively, it would increase the potential market for hybrid vehicles in the Federal fleet. Section 206. Federal Fleet Petroleum-Based Nonalternative Fuels Estimated alternative fuel consumption by Federal agencies was 5.8 million gallons in 1999, compared with estimated US total alternative fuel consumption of 339 million gallons (Table 9). In the same year, Federal fleets consumed 276 million gallons of petroleum for transportation use. If all Federal fleet petroleum consumption were converted to alternative fuels,22 then U.S. alternative fuel consumption in 1999 would have been 81 percent higher, amounting to 615 million gallons. This eventuality would have resulted in alternative fuels accounting for 0.5 percent of total U.S. gasoline and alternative fuel transportation fuels. The feasibility of achieving 100 percent alternative fuel use by 2009 is difficult to assess. However, at the end of FY1999, there were 554 thousand gasoline or diesel fueled vehicles in the Federal fleet.23 In the same fiscal year, 58 thousand gasoline or diesel-fueled vehicles were purchased.24 If the bulk of the purchases were to replace retired vehicles rather than to expand the fleet, the existing fleet of gasoline or diesel vehicles could be replaced in 10 years. Section 2101-2105. Alternative Fuel Vehicle Acceleration Act of 2001 State agencies’ fleets are estimated to have consumed 1.9 billion gallons of gasoline in 1999 (Table 9). During the same period, these fleets contained about 78 thousand alternative fuel vehicles (Table 10). However, of that total, only about 14 thousand were non-petroleum AFVs.25 If the entire $200 million was available to purchase alternative fuel vehicles that cost an average of $15 thousand each,26 13,333 alternative fuel vehicles could be added to State and local agencies’ fleets, almost doubling the number of non-petroleum AFVs. If these vehicles average the same gallons per year as the Federal fleet average (557 gallons per year), petroleum consumption would fall 7.4 million gallons or 0.4 percent of State and local agencies’ 1999 gasoline consumption. Section 2131-2133. Secondary Electric Vehicle Battery Use Funding to be authorized for the secondary electric vehicle battery program
is as follows: $1 million in 2002; Because it is difficult to relate levels of funding for research, development, or demonstration programs directly to specific improvements in the characteristics, benefits, and availability of energy technologies, the overall impact of this proposal cannot be accessed. Sections 2141-2144. Clean Green School Bus Act of 2001 The following summarizes the concordance between the two bills:
The proposed authorization for the Clean Green School Bus Act of 2001 for 2002 to 2006 is as follows:
Table 17 summarizes the potential energy impacts of the alternative fuels provisions of H.R. 4. Uncertainties The fuel economy projections presented in this report reflect a continuation of consumer purchase patterns by vehicle size class and type (car versus light truck). Because it is projected that significant changes will occur in vehicle weight, horsepower, and price to meet the CAFE standards examined in this report, it is likely that these changes will affect consumer purchase patterns. To compensate for lighter vehicles, consumers may decide, for safety reasons, to move to larger size classes. But increased vehicle costs may force consumers into smaller less expensive vehicles. In addition, significant sales shifts may occur between cars and light trucks. In the S. 517 Case, the projected reduction in car weight may influence more consumers to purchase light trucks. It is also likely that increasing the maximum gross vehicle weight rating of vehicles covered under CAFE to less than 10,000 pounds will serve to push the sales of these types of vehicles to the next largest size class where they would not be subject to fuel economy regulation. Although many light trucks are now used as passenger vehicles, performance attributes like towing and hauling capability have remained relatively consistent, while vehicle acceleration has increased significantly. Increasing the CAFE standards for light trucks will have significant impacts on both the cost and performance attributes of these vehicles. The availability of advanced technology will be critical to maintaining vehicle performance while also increasing vehicle fuel economy at an acceptable price. Depending upon the availability of technology and its effect on vehicle price and performance, light trucks meeting the new CAFE standards could be viewed as either superior or inferior products. If manufacturers opt to minimize price impacts and produce light trucks with significantly reduced performance to achieve the new CAFE standards, then consumers may view the product as inferior and opt to purchase a midsize or large car to meet their needs. If advanced technology becomes available and manufacturers produce light trucks that meet the new CAFE standard and maintain performance attributes with slightly higher vehicle costs, then consumers may view this product as superior, resulting in more consumers shifting their next vehicle purchase to light trucks.
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