Introduction

Sen. Frank Murkowski, the Ranking Minority Member of the Senate Committee on Energy and Natural Resources requested an analysis of selected portions of Senate Bill 1766 (S. 1766, the Energy Policy Act of 2002), House Resolution 4 (the Securing America’s Future Energy Act of 2001) and Senate Bill 517 (S. 517, the Energy Policy Act of 2002).^1,2,3 In response, the Energy Information Administration (EIA) has prepared a series of analyses showing the impacts of each of the selected provisions of the bills on energy supply, demand, and prices, macroeconomic variables where feasible, import dependence, and emissions. The analysis provided is based on the Annual Energy Outlook 2002⁴ (AEO2002) midterm forecasts of energy supply, demand and prices through 2020.

Because of the rapid delivery requested by Sen. Murkowski, each requested component of the Senate and House bills was analyzed separately, that is, without analyzing the interactions among the various provisions. Because of the approach taken:

• The combined impact of the individual policies cannot be determined by simply adding the individual policy impacts together. For example, a provision establishing a renewable portfolio standard (RPS) for electricity production, and one that establishes a bio-diesel program for transportation fuels, each increases the use of biomass. The simultaneous enactment of the two provisions would be likely to increase biomass costs because of the competition for land and other needed resources. The estimated fossil energy displaced will therefore be lower than the sum of the two individual policy impacts because of the higher resource costs. Stated another way, the impacts of multiple simultaneous policies are non-linear.
• Some policies will interact to increase the overall response while others may interact to mitigate the impacts of each other. For example, when two separate policies increase demand and, consequently, production of an advanced technology, the reductions in manufacturing costs expected from increased production are likely to be accelerated, making the technology even more attractive in later years. The total adoption of the advanced technology in this case could be greater than the sum of the parts.

In addition, the following should also be noted:

• At of the time of the initial request, Section 801 of S. 1766 had been designated as a placeholder for increased fuel economy provisions; therefore, it was originally requested that this study examine, the impacts of the CAFE standards proposed in Senate Bill 804 (S. 804, the Automobile Fuel Economy Act of 2001). It has since been requested that Section 801 of S. 517 also be analyzed.
• Increasing fuel economy standards results in consumer benefits realized through increased fuel savings. Although this is a positive aspect, significant reductions in vehicle horsepower and weight are generally associated with aggressive increases in CAFE standards. Given current consumer preference for these attributes, significantly increasing CAFE could have the unintended effect of reducing new vehicle sales or shifting new vehicle sales to larger size classes.
• Embodied in this analysis is the assumption that manufacturers will opt to produce more expensive, lighter weight vehicles to meet the proposed CAFE standards as opposed to paying the less expensive fine for non-compliance. For the most aggressive standards examined in this study, if no additional fuel economy improvements were achieved relative to the reference case, the CAFE fines for non-compliance would approximate $590 per vehicle for like trucks and $500 per vehicle for cars. Although the fine is only slightly lower than the estimated increase in cost for cars due to improved fuel economy, for light trucks, the fine for no fuel economy improvement would represent about 60 percent of the cost of improving fuel economy.
• This study does not consider increases in diesel or hybrid market penetration, beyond those estimated in the reference case, as an option to meet the proposed CAFE standards. This is due to uncertainties regarding emissions compliance for diesels and consumer acceptance for either of the technologies. Technologies requiring mild hybridization are addressed in this study. Mild hybridization typically refers to the incorporation of a 42-volt electrical system on a vehicle. The 42-volt electric system increases electrical power thus allowing the use of electrically powered systems such as electric power steering, electric brakes, and electromechanical value actuation.

EIA’s projections are not statements of what will happen but what might happen, given known technologies, current technology and demographic trends, and current laws and regulations. Thus, the AEO2002 provides a policy-neutral Reference Case that can be used to analyze energy policy initiatives, as has been done for each of these studies. EIA does not propose, advocate or speculate on future legislative or regulatory changes. Laws and regulations are assumed to remain as currently enacted or in force in the Reference Case; however, the impacts of emerging regulatory changes, when clearly defined, are reflected.

Models are simplified representations of reality because reality is complex. Projections are highly dependent on the data, methodologies, model structure and assumptions used to develop them. Because many of the events that shape energy markets are random and cannot be anticipated (including severe weather, technological breakthroughs, and geo-political disruptions), energy market projections are subject to uncertainty. Further, future developments in technologies, demographics, and resources cannot be foreseen with any degree of certainty. These uncertainties are addressed through analysis of alternative cases in the AEO2002.

National Energy Modeling System

The projections and quantitative analysis for this report were prepared using the Transportation Demand Module (TRAN) of the National Energy Modeling System (NEMS). NEMS is a computer-based, energy-economic model of the U.S. energy system for the mid-term forecast horizon, through 2020. NEMS projects production, imports, conversion, consumption, and prices of energy, subject to assumptions about macroeconomic and financial factors, world energy markets, resource availability and costs, behavioral and technological choice criteria, cost and performance characteristics of energy technologies, and demographics. Using econometric, heuristic, and linear programming techniques, NEMS consists of 13 submodules that represent the demand (residential, commercial, industrial, and transportation sectors), supply (coal, renewables, oil and natural gas supply, natural gas transmission and distribution, and international oil), and conversion (refinery and electricity sectors) of energy, together with a macroeconomic module that links energy prices to economic activity. An integrating module controls the flow of information among the submodules, from which it receives the supply, price, and quantity demanded for each fuel until convergence is achieved.⁵

Domestic energy markets are modeled by representing the economic decision-making involved in the production, conversion, and consumption of energy products. For most sectors, NEMS includes explicit representation of energy technologies and their characteristics. In each sector of NEMS, economic agents—for example, representative households in the residential demand sector and producers in the industrial sector— are assumed to evaluate the cost and performance of various energy-consuming technologies when making their investment and utilization decisions. The costs of making capital and operating changes to comply with laws and regulations governing power plant and other emissions are included in the decision making process.

Provisions Addressed in this Study

This study addresses the provisions of H.R. 4, S. 804, and S. 517 that pertain to light vehicle fuel economy in the transportation sector. An additional case that represents a 5 percent increase in fuel economy in 2005, followed by a 10 percent increase in 2010 is also examined. There are three main sections. The first provides a summary comparing the impacts of the CAFE cases to a revised AEO2002 Reference Case. A detailed analysis of each case is presented in the second section where the estimated effects of the fuel economy provisions are presented. A qualitative discussion is provided in the last section for the alternative fuels provisions included in S. 1766 and H.R. 4.

Summary of CAFE provisions

This analysis provides a comparison of the energy, carbon and economic impacts of five proposed CAFE standards to a specific baseline. The five CAFE cases include:

1) H.R. 4 Section 201, specifying that light truck⁶ (8,500 pounds or less gross vehicle weight) CAFE standards are to increase to a level that would provide a cumulative 5 billion gallon reduction in gasoline use between 2004 and 2010;

2) A Sensitivity Case, specifying that new light vehicle (including cars) fuel economy increases 5 percent in 2005 and 10 percent in 2010, relative to the current standards;

3) S. 804, specifying that light truck (10,000 pounds or less gross vehicle weight) fuel economy standards increase to 22.5 miles per gallon (mpg) in model years 2003 through 2004, 25 mpg in model years 2005 through 2007, and 27.5 mpg for model years 2008 and beyond;

4) An S. 804 Sensitivity Case in which the introduction dates for advanced conventional technologies are moved forward 3 to 4 years and are analyzed for potential fuel economy gains relative the CAFE standards defined S. 804; and

5) S. 517, specifying that the combined average fuel economy of new light vehicles increase to 35 mpg by 2013. For cars, the standard increases from 27.5 mpg to 38.3 mpg and for light trucks (10,000 pounds or less gross vehicle weight), the standard increases from 20.7 mpg to 32 mpg.

These individual cases are referred to as H.R. 4 Case, Sensitivity Case, S. 804 Case, S. 804 Advanced Date Case, and S. 517 Case in the body of this report, respectively. The S. 804 and S. 517 proposals also include an important provision that expands the definition and coverage of CAFE standards from light trucks with a gross vehicle weight (GVW) of 8,500 lbs or less to 10,000 lbs or less. The definition brings in the heavy light truck fleet, which has much poorer fuel efficiency than light trucks under the previous standards and definition.

Two additional cases are discussed as well, the 2002 Technology Case⁷ and the AEO2002 Revised Reference Case. These cases are compared with the CAFE cases. The 2002 Technology Case provides an outlook that assumes no new technology is adopted over the projection period. The AEO2002 Revised Reference Case was developed specifically for this report and updates the AEO2002 Reference Case with new data for advanced conventional vehicle technologies. The report provides a detailed discussion of the proposed CAFE cases compared against the AEO2002 Revised Reference Case. All graphical comparisons include projections from the 2002 Technology Case, so that the reader can measure the impacts relative to a vehicle with today’s technology as well as the a vehicle with the improvements projected in the Revised Reference Case.

The detailed projections for the AEO2002 Revised Reference Case and CAFE cases are shown in Table 1. The following is a summary of the findings of this report:

• For H.R. 4, it is estimated that in order to save 5 billion gallons of gasoline, the light truck CAFE standard would need to be increased to 21.5 mpg from the current standard of 20.7 mpg. The light truck fuel savings and subsequent increase in CAFE standards required in H.R. 4 are exceeded in the AEO2002 Revised Reference Case. Comparing the AEO2002 Revised Reference Case to the 2002 Technology Case, by 2010, light truck energy use is reduced 2.2 billion gallons annually and cumulative fuel savings exceed 8 billion gallons.
• For the Sensitivity Case, the proposed CAFE standards for cars and light trucks are met with little impact on vehicle prices or performance. The new CAFE standards require slight increases over the AEO2002 Revised Reference Case projected fuel economy of cars and light trucks. As a result, light truck incremental costs are $60 (in 2000 dollars) in 2010, but fall to zero by 2020. For cars, incremental costs are $40 in 2010 and $110 in 2020, compared to the AEO2002 Revised Reference Case. Light vehicle annual fuel use is reduced 1.6 billion gallons (1 percent) in 2010 and 5.5 billion gallons (3 percent) in 2020 compared to the AEO2002 Revised Reference Case. Carbon equivalent emissions are reduced 3.9 million metric tons (MMTCe) (1 percent) in 2010 and 13.0 MMTCe (3 percent) in 2020.
• For the S. 804 Case, the proposed CAFE standard is not met. Although light trucks less than 8,500 pounds GVW achieve the standard by 2014, those light trucks greater than 8,500 pounds GVW, achieve a fuel economy of only18.2 mpg, reducing overall light truck CAFE to 26.6 mpg. As a result, light truck manufacturers would pay almost $10 billion in CAFE fines over the projection period. Light truck costs increase $601 in 2010 and $1,294 in 2020 above the AEO2002 Revised Reference Case. Assuming consumers hold vehicles for four years on average and using an 8 percent discount rate, the net present value of the realized fuel savings is approximately $500, resulting in a net increase in cost to consumers. Slight sales increases are projected for midsize and large cars due to lower fuel prices, thus lowering average new car fuel economy relative to the Revised Reference Case. In 2010, fuel use is 6.4 billion gallons (4.2 percent) lower and 14.7 billion gallons (8.1 percent) lower in 2020, compared to the AEO2002 Revised Reference Case. The reduction in light vehicle fuel demand is projected to reduce net petroleum imports by 5 percent (830 thousand barrels per day) by 2020. The projected decrease in imported petroleum fuels results in a 1.7 percent decrease ($0.42 in 2000 dollars) in world oil prices by 2020. Carbon equivalent emissions from the transportation sector are reduced by 15 million metric tons in 2010 and 34.8 million metric tons in 2020. By 2020, this equates to an annual carbon reduction of 8.0 percent for light vehicles.
• The macroeconomic impacts of imposing stricter CAFE standards are relatively small. Declining real consumption and investment expenditures dominate the early part of the forecast period and introduce cyclical behavior in the economy. In 2010, real GDP is forecast to be 0.1 percent lower relative to the reference case and non-agricultural employment declines by 214 thousand jobs, 0.15 percent of total non-agricultural employment in the economy. Beyond 2015, the economy is expected to recover and move back toward the reference growth path. The sum of the discounted change in real GDP (billions of dollars discounted at 7 percent) is $134 billion between 2003 and 2020. This represents a loss of 0.11 percent of real GDP relative to the reference discounted sum of real GDP over this period.
• In the S. 804 Advanced Date Case light trucks less than 8,500 pounds meet the standard in all years except 2008 and 2009, but again the overall CAFE standard is not achieved due to the fuel economy of heavy light trucks. Although heavy light truck fuel economy increases from 14.2 mpg to 18.2 mpg over the projection period, including them in the CAFE estimation results in light trucks not meeting the standard. Because fuel economy improvements occur more rapidly in this case, CAFE fines are reduced $2.6 billion to $7.4 billion over the projection period, compared to the S. 804 Case. Light truck costs are $1,013 higher in 2010 and $1,116 higher in 2020, compared to the reference case. As in the S. 804 Case, the net present value of the realized fuel savings is approximately $500, resulting in a net increase in cost to consumers. By 2020, annual fuel savings exceed 15 billion gallons. The reduction in highway fuel demand is projected to reduce net petroleum imports by 5.2 percent (860 thousand barrels per day) by 2020 compared to the AEO2002 Revised Reference Case. The projected decrease in imported petroleum fuels results in a 1.9 percent decrease ($0.48 per barrel) in world oil prices by 2020. By 2020, carbon equivalent emissions are reduced 35.6 million metric tons, a decrease of 8.2 percent in light vehicle emissions and are similar to the S. 804 Case.
• For the S. 517 Case, the proposed minimum CAFE standards for 2013 are not met. For cars, the standards are met through 2009, after which fuel economy continues to increase to a peak of 35.9 mpg in 2018. Light trucks (trucks less than 10,000 pounds GVW) meet the proposed standards through 2007; fuel economy continues to climb to a peak of 26.5 mpg in 2018. In 2013, the combined fuel economy achieved by cars and light trucks is 30.2 mpg, 4.8 mpg less than the required minimum. By 2020, the combined average increases to 31.0 mpg. Vehicle manufacturers would pay a projected $40 billion in CAFE fines over the projection period. In addition, the projections show that compared to the AEO2002 Revised Reference Case the incremental cost of a new car would be $535 higher and light trucks would be $961 higher in 2020. Assuming consumers hold vehicles for four years and using an 8 percent discount rate, the net present value of the realized car fuel savings is approximately $390, resulting in a net increase in cost to consumers. For light trucks, the net present value of fuel savings is approximately $500, also resulting in a net increase in the cost to consumers. In 2010, light vehicle fuel use decreases 6.7 billion gallons (4.2 percent) and 22.4 billion gallons (11.8 percent) in 2020, compared to the reference case. The reduction in light vehicle fuel demand is projected to reduce net petroleum product imports by 7.7 percent (1.3 million barrels per day) by 2020. Carbon equivalent emissions from the transportation sector are reduced by 15.7 million metric tons in 2010 and 53.1 million metric tons in 2020. By 2020, this equates to an annual carbon reduction of 12.3 percent for light vehicles.
• The impact on the economy is small through 2010. 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 real GDP is 0.30 percent lower than the reference. The economy begins to rebound past 2015, but by 2020 real GDP is still 0.15 percent lower. The sum of the discounted change in real GDP (billions of dollars discounted at 7 percent) is $170 billion between 2003 and 2020. This represents a loss of 0.14 percent of real GDP relative to the reference discounted sum over this period. 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 thousand jobs (0.19 percent).

National Research Council CAFE Comparison

The National Research Council (NRC) recently published a report on the effectiveness of CAFE standards and estimates of potential car and light truck fuel economy improvements and the incremental vehicle costs associated with those improvements.⁸ The study did not allow for weight reduction as a means of increasing fuel economy and assumed vehicle weight would remain at today’s levels. Their analysis indicated that by 2015, average new car fuel economy could be increased to about 33.5 mpg at an incremental cost of $690. For the EIA S. 517 Case, the analysis indicated that cars could achieve 35.9 mpg at an incremental cost of $535. The higher fuel economy and lower incremental cost projections in the EIA S. 517 Case compared to the NRC study reflect the improvements gained when weight reduction is included as an option to increase fuel economy. In the EIA S. 517 Case, average car weight in 2020 is projected to be 364 pounds lighter than the average car in model year 2000, a decrease of 11.8 percent.

The NRC study estimates that average new light truck (less than 8,500 pounds gross vehicle weight) fuel economy could be increased to about 27.5 mpg at an incremental cost of $1,260 with no reduction in vehicle weight. The EIA S. 517 Case analysis shows that light truck (less than 8,500 pounds gross vehicle weight) fuel economy could increase to 27.6 mpg at an incremental cost of $961. This estimate includes a weight reduction of 321 pounds (7.5 percent) from a model year 2000 light truck, showing the improvements in cost reduction and fuel economy realized from vehicle weight reduction. It’s important to note that although our analysis agrees with the NRC study for cars and light trucks less than 8,500 pounds gross vehicle weight (GVW), increasing the CAFE weight limit to less than 10,000 pounds GVW limits the fuel economy improvement potential for light trucks.

Summary of Alternative Fuel Provisions

For the alternative fuel provisions in S. 1766, the following Sections have been reviewed: 811, 812, 814, 815, 816, and 819.⁹ There are two main purposes of these provisions of S. 1766: 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. The funding that would be authorized in these provisions totals $260 million.

The Federal fleet provisions basically codify the requirements of Executive Order 13149. However, the proposed legislation would require flexible fuel vehicles to eventually use only alternative fuels. The proposed legislation would also allow neighborhood electric vehicles to qualify as alternative fuel vehicles. Since the covered vehicles in the Federal fleet accounted for less than 0.2 percent of highway fuel use in 2000, it is likely that little if any measurable reduction in transportation petroleum consumption would result from these Federal fleet provisions. Another provision of S. 1766 would exempt alternative fuel vehicles from High Occupancy Vehicle (HOV) requirements. The impact of this provision cannot be estimated, as there is no data specific to petroleum consumption in HOV lanes, but the impact of this provision would be more likely to increase transportation petroleum consumption (due to increased congestion in HOV lanes).

For H. R. 4, the following Sections have been reviewed: 151, 205, 206, 2101-2105, 2131-2133.¹⁰ The funding that would be authorized in these provisions totals $515 million. There are three main purposes of these H.R. 4 provisions: increase the use of alternative fuels in Federal fleets, fund a large demonstration program aimed at using alternative, fuel cell, and ultra-low sulfur diesel school buses, and fund a program to provide grants to local governments to purchase alternative fuel vehicles and low-sulfur diesel vehicles.¹¹ Many of these provisions of H.R. 4 are similar to the S. 1766 provisions. For example, the school bus provisions are virtually identical to S. 1766 except that H.R. 4 would authorize an additional $40 million. However, the Federal fleet provision is more extreme than the corresponding S. 1766 provisions in that the Federal fleet would have to be entirely converted to alternative fuel vehicles by 2009. In terms of dollar authorization, the largest difference between the two bills is H.R. 4's Alternative Fuels Vehicle Acceleration Act of 2001. The latter provisions would provide grants to local governments to purchase alternative fuel vehicles, with a total budget authorization of $200 million.

While some provisions of these bills may have the effect of advancing technology development, there is likely to be little impact on total transportation fuel consumption.

Notes