Analysis of Policies to Reduce Oil Consumption and Greenhouse-Gas Emissions from the U.S. Transportation Sector

Summary

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As the U.S. debates an economy-wide CO2 cap-and-trade policy, the transportation sector remains a significant oil security and climate change concern. Even though the transportation sector consumes the majority of the U.S.'s imported oil and produces a third of total U.S. Greenhouse-Gas (GHG) emissions, economy-wide CO2 prices at their currently projected levels will have little impact on this sector. Faced with this reality, the United States has adopted programs such as aggressive new vehicle efficiency standards and the "Cash-for-Clunkers" car scrappage program. Other possible programs include higher gasoline taxes or fees and performance subsidies for low-carbon emitting vehicles, and feebates and incentives for smarter growth.

This study examines the impact of five scenarios. We first study an economy-wide cap and trade program along the lines outlined in the American Clean Energy and Security Act. Then we investigate what happens if, in addition to economy-wide CO2 prices, Congress also imposed one of several transportation-specific measures: a strong gasoline and diesel tax, continuing to increase the passenger car fuel efficiency standards between 2020 and 2030, and aggressive performance-based tax credits for alternative motor vehicles. In our final scenario, we assume that the United States adopts each of these policies. The 2009 version of the Energy Information Administration's (EIA) National Energy Modeling System (NEMS), an energy-economic equilibrium model of U.S. energy markets, is used to estimate the impacts of these scenarios-both in terms of carbon mitigation and economic costs.

Several results stand out.

First, all the policy scenarios modeled fail to meet the Obama administration's goal of reducing total U.S. GHG emissions 14% below 2005 levels by 2020. If there is a strict cap on emissions that must be met either with emissions reductions from covered sources or through purchases of offsets, our results imply that large purchases of offsets will be required. Sector-specific programs in sectors other than transportation are not included in our analysis and may help meet the Obama administration's goals.

Second, the largest reductions in GHG emissions from transportation are obtained by increasing the cost of driving with fuel taxes. While CO2 prices are equivalent to fuel taxes, CO2 prices at their projected levels are far too small to create a significant incentive to drive less. Fuel prices above $8/gallon may be needed to significantly reduce U.S. GHG emissions and oil imports. At such prices, CO2 emissions from the transportation sector alone are reduced to 14% below 2005 levels and net crude oil and petroleum product imports decrease by 5.7 million barrels per day, relative to 2008 levels. Efficiency policies such as performance standards and purchase tax credits, while politically palatable, do not address growth in Vehicle Miles Traveled (VMT), an important root cause of GHG emissions from transportation.

Third, purchase tax credits are an expensive way to reduce oil consumption and GHG emissions from transportation. We observe that artificially increasing the popularity of alternative motor vehicles through tax credits has the unintended effect of decreasing new conventional vehicle fuel economy as compared with implementing Corporate Average Fuel Economy (CAFE) standards without the credits. Furthermore, aggressively subsidizing alternative motor vehicle purchase is a very expensive proposition, costing the government roughly $22–37 billion per year. Reducing this figure through appropriations limits would limit the influence of the subsidy program.

Finally, the macroeconomic impacts of reducing GHG emissions are small, even with our relatively aggressive policy scenarios. Losses in annual Gross Domestic Product (GDP), relative to business-as-usual are less than 1%, and GDP is projected to grow at 2–4% per year through 2030 under all scenarios. Similar results hold for other macroeconomic indicators. This result clearly illustrates that aggressive climate change policy need not bring the economy to a halt.

All of our conclusions rely on the NEMS model that, like all models, has its flaws. We caution against embracing the absolute numbers resulting from our analysis. These results should, instead, serve as an indicator of the nature of impacts that would be observed in various transportation policy scenarios. The overarching conclusion of this report is that reducing GHG emissions and fuel consumption in the transportation sector will be an enormous challenge that requires stronger policy initiatives than are currently being discussed by policy makers.