Effectiveness and Efficiency of Policies to Promote Alternative Fuel Vehicles

Alternative motor fuels have been advocated in the name of energy security, regional air quality, greenhouse gas emission reduction, and even economic savings. The Energy Policy Act of 1992 sets a goal of replacing 30 percent of conventional fuel use with alternative fuels by the year 2010. Earlier analysis using a single-period equilibrium model demonstrated the feasibility of EPACT’s replacement goals. This earlier analysis, however, assumed mature markets: large-scale vehicle production and the widespread availability of alternative fuels at retail stations. These conditions are not currently attained. To better assess what may be necessary to achieve mature, large scale, alternative fuel and vehicle markets, we use the Transitional Alternative Fuels and Vehicles (TAFV) Model. We simulate market outcomes for the use and cost of alternative fuels and vehicles over the time period of 1996 to 2010, considering possible transitional barriers related to infrastructural needs and production scale. Prices and choices for fuels and vehicles are endogenous. The model accounts for dynamic linkages between investments and vehicle and fuel production capacity, tracks vehicle stock evolution, and represents the effects of increasing scale and expanding retail fuel availability on the effective costs to consumers. Various policy alternatives are evaluated, including fleet vehicle purchase mandates, fuel subsidies, and tax incentives for low greenhouse gas emitting fuels. 1 1.0 INTRODUCTION Since the energy crisis of 1973 the United States has explicitly sought to moderate the consumption and importation of oil. Initially the concerns were energy conservation and energy security. While these concerns continue today, additional impetus comes from the environmental concerns of urban air pollutants and greenhouse gases. The transportation sector now represents about 27% of total domestic energy use (Davis, Table 2.4). Of the total amount of transportation energy used in the United States the demand is overwhelmingly met by petroleum, supplying 96.8% of total transportation energy in 1996. As Greene (1996) points out, the almost complete dependence of the transportation sector on petroleum persists today despite the market upheavals of the 1970's and early 1980's. In 1973 at the height of the Arab embargo, the U.S. transportation sector was 95.6% dependant on oil, about 1% less than today. There are three ways to reduce the amount of petroleum use by cars: reduce the amount of driving per year; increase the average fuel efficiency of the vehicle fleet; and, substitute alternative fuels for gasoline. The fuel substitution approach is advocated by Section 502(b) of the Energy Policy Act of 1992 (EPACT), and is the focus of this paper. EPACT provides incentives to introduce alternative fuel vehicles (AFVs) and requires that the U.S. Department of Energy (DOE) to estimate the technical and economic feasibility producing sufficient alternative and replacement fuels to replace, on an energy equivalent basis, at least 10 percent of gasoline use by the year 2000; and at least 30 percent by the year 2010 (EPACT, 502(a), 502(b)). Petroleum is displaced by the use of neat alternative fuels as well as through the use of reformulated and oxygenated gasolines which contain natural gas, hydrogen,