Assessing and Mitigating Future Impacts to the Federal Highway Trust Fund Such as Alternative Fuel Consumption (2008)

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Assessing and Mitigating Future Impacts to the Federal Highway Trust Fund Such as Alternative Fuel Consumption NCHRP Project 19-05 CHAPTER 1 INTRODUCTION AND RESEARCH APPROACH PROJECT STATEMENT 19-05, FY 2003 The Federal Highway Trust Fund provides funding for transportation improvements, including 100 percent of Federal funding for highway improvements and about 60 to 70 percent of Federal funding for transit improvements. The major funding source for the Highway Trust Fund is the Federal tax on motor fuels. In FY 2000, Federal taxes on motor fuels provided about $24.5 billion in revenue out of the total $30.3 billion deposited into the Highway Trust Fund. There are a number of initiatives that could affect future Highway Trust Fund revenue. These include: • Restoring the lost revenues from the Federal subsidy for the use of gasohol in the place of petroleum-based motor fuels (5.3 cents per gallon). • Redirecting the 2.5 cents of the tax on gasohol that is currently deposited into the Federal General Fund to the Highway Trust Fund. • Examining the legal prohibition in some states against using methyl tertiary butyl ether (MTBE) as an additive to petroleum motor fuels – MTBE is an additive to petroleum motor fuels used to meet Clean Air Act standards; MTBE is taxed as petroleum-based motor fuels. The only current alternative to MTBE is gasohol, which includes a Federal subsidy as noted in the previous bullet. • Studying hybrid vehicles that use a combination of electric and traditional motor fuel propulsion systems that are now in production, with a significant number of vehicle models planned in the near term. These vehicles can average in excess of 50 miles per gallon, which will reduce the consumption of petroleum-based motor fuels. While not in mass production, these vehicles are beginning to appear on the nations’ highways and could grow to become a significant portion of the market in the future. Usage of alternative fuels for transportation, including gasohol, is generally encouraged, and current tax mechanisms and other subsidies provide incentives for use. The Highway Trust Fund, however, is dependent upon use of petroleum-based motor fuels. In 1999, 14.3 billion gallons of gasohol were consumed out of a total of 162.9 billion gallons of all types of motor fuels. The “diversion” from the subsidy and the lower tax rates on gasohol, was about $1.0 billion in Cambridge Systematics, Inc. 3

Assessing and Mitigating Future Impacts to the Federal Highway Trust Fund Such as Alternative Fuel Consumption NCHRP Project 19-05 2000. For each increment of 1.0 billion gallons in the consumption of gasohol, the Highway Trust Fund will forego $78 million in revenue. The Federal Highway Administration (FHWA) has reported the actual consumption in comparison to the U.S. Treasury forecast in Federal FY 2001 was 28 percent more than the forecast for gasohol and nine percent less than the fore- cast for petroleum-based motor fuels. This was a contributing factor in the reported drop of the collections in the Highway Trust Fund by more than 10 percent for Federal FY 2001 in compari- son to 2000. The impact of alternative fuels has thus already created a major threat to the pri- mary funding source for transportation improvements by the Federal government under the current revenue structure. The objectives of this research project are to: • Define the impact of the use of alternative fuels and other products that resulted in the reduced consumption of petroleum-based motor fuels; • Assess the extent of increased use of alternative fuels and the reasons for the increased use where present; • Identify and apply procedures to forecast use of alternative fuels in FY 2002 through FY 2009 and beyond; and • Prepare a report presenting findings and recommendations for agency staff. Recent data reflect that increased use of alternative fuels is occurring much faster than forecasted in previous years. This increase has created a significant negative impact on revenue levels deposited in the Federal Highway Trust Fund. This results in the reduction of funds available for transportation improvements in Federal FY 2003 and in years beyond. It also sets a new lower baseline for Highway Trust Fund revenue estimates just one year prior to begin- ning the debate on the reauthorization of TEA-21. It is essential that options be researched and prepared in a timely manner to be debated as part of the reauthorization of TEA-21 in 2003 to help ensure a solid level of funding is provided for transportation improvements in relation- ship to the use of the transportation system. RESEARCH APPROACH Research for this study was divided into five tasks: 1. Assemble current information on the factors influencing motor fuel tax revenues. 2. Identify and analyze factors influencing increased use of alternative fuels and other factors impacting revenues. 3. Forecast future use of alternative fuels and fuel consumption impacts of other factors. 4 Cambridge Systematics, Inc.

Assessing and Mitigating Future Impacts to the Federal Highway Trust Fund Such as Alternative Fuel Consumption NCHRP Project 19-05 4. Develop recommendations. 5. Prepare draft and final reports. Task 1 – Assemble Current Needed Information Current sources of information on alternative fuels and fuel efficiency and other threats or potential developments were surveyed and assessed with regard to the potential revenue impacts. The research team updated their sources of currently available information through a literature search and through contacts with other experts in the field of alternative fuels and factors impacting revenues. Team member Energy and Environmental Analysis, Inc. (EEA) led this task based upon their involvement in the very latest research sponsored by the Department of Energy (DOE) and the automotive industry on alternative fuels and other factors impacting on future fuel efficiency. The state of knowledge was summarized by EEA with regard to the current usage of alternative fuels and important legislation and market forces that are under- way, emerging, or being considered. An initial memo covering these items and Task 2 was cir- culated in October 2002, and the substantive findings of that memo are summarized in Chapter 2 of this report. Task 2 – Identify and Analyze Factors Influencing Increased Use of Alternative Fuels and Other Factors Impacting Revenues Research published by DOE documents the factors influencing the use of alternative fuels as mainly regulatory and economic. Use of alternative fuels and subsequent revenues from alternative fuels may be impacted through subsidy policies and/or or voluntary or mandated implementation of fuel economy technology. To identify and analyze factors influencing increased use of alternative fuels and other factors impacting revenues, both regulatory and economic forces were considered, and expertise was applied on forecasting and estimating the probabilities of the possible outcomes. EEA supplied the expertise required to estimate the probabilities of particular possible futures in terms of fuel efficiency and fuel types. EEA based these probabilities on research performed for the National Academy of Sciences (NAS) on its recent fuel economy study, and on their recent support to the U.S. Department of Transportation (DOT) on its congressionally mandated review of Corporate Average Fuel Economy (CAFÉ). EEA utilized its detailed knowledge of alternative fuel vehicle characteristics in terms of their price, fuel economy, and attributes in determining the likely probabilities of outcomes in the near term and through 2020. The potential factors qualitatively analyzed included a number of alternative fuels, the primary factors influencing fuel economy, and potential legislative, regu- latory, and market factors. The team utilized its previous work on the analysis of revenue alternatives to organize the information necessary to transform the estimated impacts into quantitative forecasts of fuel consumption and forecasts of Federal revenues. The team evaluated the use of the FHWA and DOE models for potential use in Task 3. DOE models were determined to be significantly more sophisticated and up-to-date. After the review of the models in this task, the research team determined that DOE models would be used to quantify the fuel usage forecasts of potential scenarios. Project resources were reallocated to allow EEA to utilize the range of DOE models that were determined to be most useful. Cambridge Systematics, Inc. 5

Assessing and Mitigating Future Impacts to the Federal Highway Trust Fund Such as Alternative Fuel Consumption NCHRP Project 19-05 Task 3 – Forecast Future Use of Alternative Fuels and Fuel Consumption Impacts of Other Factors The team utilized the available DOE model systems to evaluate the scenarios as described qualitatively in the first two tasks, and identify them as medium to high probability. The focus was on evaluating the parameters that will matter the most to the estimates of reve- nues as a result of alternative fuel use and of overall motor fuel consumption. Fuel consump- tion forecasts for light and heavy-duty vehicles utilized the models or procedures developed for the DOE, the auto industry, and DOT CAFÉ analyses. Potential changes were evaluated and are included in an overall forecast for 2010 and 2020 for alternative fuels, alternative fueled vehicles, and fuel efficiencies. The forecasts iden- tify the probabilities of outcomes, rather than presenting simply a single mean or best estimate forecast. There is considerable uncertainty over the potential factors, including not only the future legislative background and state of technologies, but also over the more mundane determinants of markets such as the prices of petroleum fuels and of alternative fuels. These uncertainties were ranked and forecast quantitatively accordingly. Task 4 – Develop Recommendations In this task, the team identified draft recommendations to deal with the potential impacts of alternative fuels use and subsequent impacts on revenues. Fortunately, those potential impacts with the greatest adverse consequences for revenue streams are longer-term due to the nature of the vehicle system, in which fleets turn over very slowly. Thus, changes in fuel efficiencies or fuel types that have impacts on revenues are cumulative over time rather than immediate. The findings, elaborated upon below, also indicate that the most serious potential threats to revenues are very low probability in the next decade, such as from wide- spread use of fuel types (fuel cells, natural gas, and pure electric) that are outside of the current revenue collection system. Task 5 – Prepare Draft and Final Report For this task, the draft final report was prepared, the reviewed by the panel, and the final report was published based on panel feedback. 6 Cambridge Systematics, Inc.