Honolulu

1
Legislative Briefing
The Transportation Efficiency Prize
Honolulu January 20, 2005
2
How Hawaii can Win the Oil EndGame

• The United States can get completely off oil and
  revitalize its economyled by business for profit
• States are the laboratories of change that will
  bring this about
• Hawaii is well positioned to be among the leaders

3
Winning the Game restoring competitiveness and
eliminating oil dependence

• National competitiveness and national security at
  risk
• Why should we care?
• Japan, EU, China will eat Detroits jobs for
  lunch
• Energy insecurity, price volatility, and climate
  concerns, perhaps depletion
• Save net 70 billion/yr by 2025, create 1 million
  net jobs
• How do we win?
• Reduce congestion through mass transportation and
  smart planning
• Efficient end-use can save half the oil at 12 a
  barrel
• Biofuels substitute for another fourth
• Longer term the hydrogen transition fueled by
  saved gas

4
Existing technologies can save 26 of oil use
cheaply (6/bbl), and State of the Art
technologies could save 52 of 2025 oil for only
12/bbl
Oil Saved by Full Deployment in 2025 (Million
Barrels/Day)
Conventional Wisdom (Avg. CSE 6/bbl)
State of the Art (Avg. CSE 12/bbl)
EIA 2025 Crude Oil Price
Cost of Saved Energy (2000 /bbl RAC on the
short-run margin)
25 of 2025 Baseline Use
50 of 2025 Baseline Use
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Given the barriers to efficiency, what is the
role of state government?

• Four Major Market Failures
• Most customers have very high implicit discount
  rates when buying energy efficiency
• Most equipment/vehicle makers and their
  customers, even sophisticated ones, lack good
  information on alternatives, especially in
  end-use efficiency
• Oil is priced below its societal cost
• Externalities include military/security,
  environmental, net subsidies, and
  diplomatic/geopolitical
• The Creative Destruction Problem
  Organizational and cultural and institutional
  obstacles make it difficult for large companies
  to adopt disruptive innovations

Government can accelerate market adoption
by Stimulating Demand Setting an
Example Providing better information
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To get real security, Hawaii needs to back out
the entire barrel of crude oil
Hawaii Fuel Use Model
Total Petroleum Usage in 2003 (MM Barrels)
13.2 10.7 15.5 7.2 0.6 0.3 0.1 0.9
Crude Oil Imports
Refined Products

• 48.6 MM barrels
• 22 US
• 78 Foreign

Other ProductsImports (000s barrels)
7.9 MM barrels - 40 US - 60Foreign
48.5
Sources DBEDT (2004), EIA
7
Hawaiis has a unique situation passenger
vehicles represent 80 of the fleet and 50 of
new cars are rental vehicles
Vehicle Fleet State of Hawaii (2003)

• Total Cars Registered (000s) 1,045
• Passenger 828
• Light Trucks 115
• Heavy Trucks 60
• Trailers 26
• Motorcycles 11
• Miles Driven (MM miles) 9,058 (1)
• Average fleet efficiency (mpg) 20.8 (2)
• Motor Fuel Equiv. Consumption (MM gallons)
  434

New Cars
Scrappage (3)
Passenger 35,927 Trucks 9,127
Vehicles 65,000
Rental Cars
Passenger 37,525 Trucks 349
Notes (1) Miles driving based on average 9.058
miles driven per year by vehicle assumes all
vehicles except trailers and vehicles subject to
scrappage Source 2000 Hawaii Strategy Plan,
DBEDT (2) Based on overall fleet except for
trailers in the State of Hawaii in 2000. Source
2000 Hawaii Strategy Plan, DBEDT (3) Scrappage
based on US national scrappage rate of 75.3 of
new registered vehicles
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The energy cost burden to the state will
increase Hawaii will consume 510 MM gallons/y
of motor fuel by 2024 (17 increase)
Hawaii Estimated Consumption of Motor Fuel Base
Case If Light Vehicles Reach Equivalent
Penetration Rates as National Average
Hawaii Cumulative Fuel Consumption through 2023
9,507 MM gallons
Commercial Fleet
Light Duty Trucks
Annual Consumption of Gasoline Equivalent (MM
Gallons)
Fleet Fuel Efficiency 2004 20.8 mpg Fleet Fuel
Efficiency 2024 26.0 mpg
Passenger Vehicles

• Assumes scrappage rate of 75.40 of new
  registered vehicle. Source NADA.org
• Assumes growth of vehicle fleet of 1 per year
• Based on expected distribution of 79 passenger
  vehicles, 17 light trucks and 4
  commercial/heavy vehicles. Source HI Strategy
  Report 2000
• Assumes 92.6 of vehicles powered by motor
  gasoline, and remainder powered by diesel and
  LPG, Source Hi Strategy Report 2000
• Assumes average miles driven per vehicle of 9.058
  miles/year. Source HI Strategy Report 2000

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Why Drive? Mass transportation and smart growth
reduce demand for vehicle travel

• Congestion is imposing high costs to our society
  and our positioning in the tourism market
• Mass transit alternatives are cheaper than
  building more roads and are well known, but must
  be funded
• Light rail on Oahu
• Bus service on neighbor islands
• Tax increases should equitably support transit
  improvement in all counties
• Smart growth and planning to provide employee
  housing close to work, solving both the
  transportation and the housing crisis

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Three options to stimulate demand for more
efficient vehicles
Policy Impact to Gasoline Diesel Consumption
Baseline
Feebate Only
Annual Consumption of Gasoline Equivalent (MM
Gallons)
1000 Tax Rebate
Feebate Acc. Scrappage
Motor Fuel Consumption (2004-2023) MM Gallons
Motor Fuel Savings 2004-2023 MM Gallons
Fleet Efficiency (mpg)
26
9,507
7,656
1,851
35
6,329
3,178
40
8,699
7,647
1,860
37
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Our finding is that feebates plus scrappage are
cost effective policy measures, so long as each
sunset once the goals are achieved
Note Assumes 5 discount rate, 1 inflation
rate for motor fuel gasoline Assumes scrappage
program of 500 per car, and tax credits of
1,000 per HEV
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Policy goals criteria

• Reduce Hawaiis oil dependency
• Align new-car purchasers incentives with the
  true cost to society

Policy Goals

• Simple to understand and implement
• Cost effective
• Inexpensive to administer
• Revenue-neutral
• Automatic sunset
• Progressive or at least not regressive

PoliticallyViable
Some Suggested Criteria
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Transportation Efficiency Policy Options
High Impact
TOUGH CHOICES
CLEAR WINNERS
Feebates
CO2 Emissions Standards
Mass Transit
HEV/AFV Tax Credits
Scrappage
Cost Implementation
LOW HANGING FRUIT
Easy Cheap
Hard/ Expensive
AVOID
State Procurement
Increases Gasoline Taxes
Tire Labeling
HOV /Parking Preferences
Public Information Campaigns
Low Impact
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Traditional policy options

• Provide alternative means for mobility
• Critical need to reduce congestion
• Cheaper than adding more roads

Mass Transportation

• LEV/HEV Fleet Percentage Quotas
• Enacted to meet emissions standards
• Hawaii scale unlikely to sway manufacturers

Quotas

• Increase gasoline taxes
• Reduces consumption
• Marginally effective when prices are already high
  and politically unpopular

Pricing

• Mandate HI government fleet new purchases
• Mandate minimum efficiency for new purchases
• Demonstrates leadership

Procurement Scale
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Measures to improve existing fleet efficiency

• Standardize Tire Rolling resistance and noise
  labeling
• 20 reduction in rolling resistance creates 5
  fuel savings in cars, and 4-12 fuel savings in
  heavy trucks
• Prices are similar for low or high Crr tires

Tire Rolling Resistance

• Public Information Campaign
• Incremental cost is 10-15, 5 savings possible
• Mandating viscosity impractical

Low Viscosity Oils

• Public Information Campaign
• Proper inflation reduces fuel use 2, 30 of
  tires not inflated

Proper Tire Inflation
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Innovative policy options

• Stimulates demand for new vehicles
• Revenue and Size neutral
• Requires exemption for federal preemption

Feebates
Scrappage

• Pay to take least efficient cars off the road
• Accelerates capital stock turnover

• Provide Tax Credits for Efficient Vehicles
• Make dependent on engine technology, sunset after
  10 penetration rate

Subsidies or Tax Credits

• Implement pay-as-you-drive (PAYD) or
  pay-at-the-pump (PATP) auto-insurance
• Creates marginal decrease in driving
• Both have welfare benefits from linking cost of
  insurance more closely to VMT
• PATP induces switching to more efficient vehicles
  due to taxation aspect giving larger reduction

Higher Prices via Insurance
Focus
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Summary of State Actions
Incentive/Regulation
How it Works
States Using It
Feebate

• Revenue neutral rebate for more efficient
  vehicles paid for by fee on less efficient
  vehicles

• DC, MD

Tax Credit or Rebate for High Efficiency Vehicles

• Tax credit or rebate for the purchase of a high
  efficiency vehicle
• Tax credit or rebate for the conversion of a
  vehicle to operate on AF

• AZ, CA, CO, CT, DC, GA, IL, KS, KT, LA, MD, ME,
  MT, NC, NJ, NM, NY, OK, OR, PA, RI, UT, WI, WV

Tax Credit or Rebate for Alternative Fuels or AF
Production

• Tax credit or rebate for biofuels, CNG, LPG

• AR, CT, DE, HI, ND, KS, MN, MS, ND, RI, SD, TX,
  VA, WA

Tax Credit, Rebates or Grants for AFV Refueling
Station

• Tax credits, rebates or grants for AF refueling
  stations

• CO, CT, HI, IN, KS, LA, ME, NJ, NY, OK, OR, RI

Government Purchase of Efficient or AFVs

• Funds or mandates to purchase AFVs or efficient
  vehicles in state, country or school fleet

• AZ, CA, CO, DC, DE, FL, GA, IA, IL, IN, KS, MA,
  MD, ME, MI, MN, MO, MT, NC, NM, NJ, NV, NY, OK,
  OR, RI, SC, TX, UT, VT, WA, WI, WV

Emissions Standards

• Quota based LEV or LEV standards on cars sold to
  alleviate air pollution

• CA, NY

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Blueprint for Action What the Legislature can do

• Pick Up the Low Hanging Fruit
• AFV/HEV access to HOV lanes, special parking
  access
• Mandate state procurement of efficient vehicles
• Run state fleet on biofuel blends B20 or W85
  (when available)
• Fund mass transit alternatives
• Leverage actions of larger states
• Alliance with other states seeking exemption from
  preemption on feebates or mirror alternative
  legislative remedies that are not preempted
• Adopt labeling program for tires (under
  development in CA)
• Provide near term tax incentives for HEVs and
  AFVs
• Provide 1,000 state tax credit from 2006-2009
• Sunset after penetration reaches 10 or feebates
  are allowed

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The 3 Billion Efficiency Prize and Real
SecurityBacking out 8 Million barrels of
crude oil saved (15 of crude imports) from
efficiency alone
Efficiency Impact
Reference Consumption Million barrels
Efficiency Savings by 2025 Million Barrels
Savings
Residual Fuel
23
13.2
(3.0)
Motor Gasoline
28
10.6
(3.1)
Jet Fuel
5
15.5
(0.7)
Crude Oil Saved
Refined Products
Distillate Fuel
gt19 (1)
7.2
(1.2)
LPG
0
0.6
8 MM Barrels
Asphalt
50
0.3
(0.2)
Lubricants
0
0.1
Other
0
0.9
SourceRMI Analysis, note additional distillate
would be importedExpectation is that renewables
would save more residual fuel oil(1) Additional
diesel savings possible from new truck designs
48.3
(8.2)
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Why should you care enough to act?
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Appendix
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How feebates work
How Feebates Result in a More Fuel-Efficient
Fleet of Vehicles (1)
Improved Fuel Economy of Vehicle Fleet
Feebate Price Incentives
Short-Run Change in Sales Mix
Long-Run Change in Product Mix

• Available selection of vehicles (including the
  fuel economy of individual models) is unchanged,
  but price incentives encourage consumers to
  purchase the cheaper, more fuel-efficient vehicles

• The selection of new vehicles being marketed
  changes Manufacturers make vehicles that are
  more fuel efficient because the resulting
  increase in the feebates helps pay for additional
  fuel-economy technology

• Rebates reduce the price consumers pay for
  fuel-efficient vehicles
• Fees increase the price consumers pay for
  inefficient vehicles

Source Davis, W.B., Levine, M.B., and Train,
K.T., Effects of Feebates on Vehicle Fuel
Economy, Carbon Dioxide Emissions, and Consumer
Surplus, DOE, February 1995, p. 3, Fig. 1-1
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Feebate schedules examples 1,500 discount paid
for by 800 fee on new cars
Example of Feebate Schedule (1)
Source Davis, W.B., Levine, M.B., and Train,
K.T., Effects of Feebates on Vehicle Fuel
Economy, Carbon Dioxide Emissions, and Consumer
Surplus, DOE, February 1995, p. 5, Fig. 1-2
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Shredding scrapped tires into asphalt can halve
asphalt use, double roads life, and offset some
of Hawaii gasoline tax loss Asphalt Rubber (AR)
pavement is a winner versus traditional Asphalt
(A) pavement
AR repaving reduces cost substantially

• Use LESS asphalt per lane-mi From 180 to 120
  bbl
• Same lane-width density, only 1/2 as thick
  (from average of 4 to 2 pavement thickness)
• yet DOUBLE LIFE (from 7-10 to 15-20 yrs), and
• LOWER costs
• Up-front cost down 35 from 70k to 45k/lane-mi
• Life-cycle cost advantage even better

For Hawaii, 2025 (1)

• Annual saving in resurfacing from 17M to 21M
  (49-61 vs. today)
• This would offset 10 of gasoline tax revenue
  shortfall from efficiency gains

and could have significant effect by 2025

• US today 300 M total scrapped tires per year
• 96M/yr currently not used would satisfy 40 of
  current re-pavement demand
• 65 of re-pavement by 2025 assuming fixed supply
  proportion
• Lowers national paving costs by 11 billion
  (53BN to 42BN/yr)

(1) Assumes approx 2/3 of 3R (Restoration,
Rehabilitation, and Resurfacing) budget for
Hawaii is used for resurfacing. Source (1) RMI
analysis / RMI US Asphalt Model (2) Jung, J-S.,
Kaloush, K E., and Way, G.B., "Life Cycle Cost
Analysis Conventional versus Asphalt Rubber
Pavements", Arizona State University, August
2002. (3) http//wwwcf.fhwa.dot.gov/ohim/hs99/hm5
1r.htm, assuming 50 of HI 3R state funds go
towards re-paving existing and new roads from
figures Tables SF12AP1 through SF12AP6. (4) US
Scrap Tire Markets 2001, Rubber Manufacturer
Association, December 2002