Reducing Oil Use in Transportation

The public’s interest in reducing oil consumption has ebbed and flowed for decades, first prompted by the supply shocks of the 1970s and persisting today because of concerns about the buildup of greenhouse gases (GHGs) in the atmosphere and the cost of securing the world’s oil supplies. Today, the consumption of gasoline, diesel fuel, and other petroleum products in the transportation sector accounts for more than 70% of national oil demand. Yet when policies are pursued to reduce transportation’s petroleum use, the focus is almost exclusively on regulating the energy and emissions performance of cars and trucks. Motivating consumers to care about fuel economy and reduce energy-intensive vehicle use is often talked about but seldom acted on, because it is considered simply too difficult or disruptive.

An unprecedented regulatory effort is under way to boost the fuel efficiency of the nation’s cars and trucks, potentially doubling their fuel economy in terms of miles per gallon (mpg) within two decades. Without comparable increases in the price of gasoline and diesel fuel, mandated improvements in vehicle fuel economy will significantly lower the fuel “price” of driving, perhaps by as much as 50%. It is reasonable to ask whether this effective price decline will further erode consumer interest in purchasing vehicles with even higher fuel economy, and perhaps even to drive their vehicles farther and more often as vehicle operating costs decline.

These risks may be worth taking for the aggregate savings in fuel promised by the early mandated increases in fuel economy, but their repercussions warrant consideration. Vehicle use is sure to go up over time, if for no other reason than increased population and economic growth, and will require increasing investments in the already heavily used road system. In the present budget environment, it is likely that this will entail new ways of funding highway construction. Currently, road and other projects are paid for with revenues generated by taxes on fuel consumption. But these revenues have been declining and will continue to do so because of fast-rising fuel economy. Whether “cheaper” driving will cause even more driving is debatable, but it will certainly do little to encourage interest in alternative modes and may reinforce the pattern of dispersed and decentralized metropolitan development that is so dependent on the automobile.

Because automobiles account for two-thirds of transportation’s oil demand, they must be a target of any meaningful energy policy. But targeting them is much more easily said than done. Automobiles are tightly woven into the fabric of everyday life. The nation’s fleet of nearly 250 million cars and light trucks accounts for 85% of all miles traveled; the average household uses its vehicles to cover more than 20,000 miles per year.

Cars and light trucks dominate local travel. Although commuting to and from work is often considered the principal use, in actuality fewer than one in five trips made by private automobiles is for commuting. More than three-quarters of trips are made for shopping, running errands, and chauffeuring family members. Shopping trips alone account for more person-trips by automobile than the journey to and from work. For longer-distance travel, the car is also dominant, accounting for 95% of person-miles on trips up to 500 miles, and more than 60% of person-miles on trips between 500 and 750 miles. Not until distances from origin to destination exceed 750 miles do airlines account for a higher share of total person-miles of travel.

There are many reasons for the automobile’s supremacy. Not only do cars offer utility in providing door-to-door transportation service, but they also confer schedule flexibility, can carry multiple people and their cargo at little extra cost, and can be used for local travel when arriving at the final destination. The automobile offers the traveler privacy, protection from inclement weather, and a place to temporarily hold and secure belongings. With an automobile, travelers can make multiple stops en route, combining trips to and from work with shopping and other errands. No other mode of transportation comes close to offering such flexibility combined with the ability to cover large areas.

In nearly the same manner as automobiles dominate personal travel, trucks dominate freight movement. For hauling goods locally and over medium distances, trucks are the only practical option. They also provide door-to-door service, which saves on the labor-intensive transfer of cargo from one mode to another. Whereas many bulk and low-value commodities are still moved domestically by rail and water, these modes are used mainly for longer-distance line-haul and container movements. For shipping distances of less than 500 miles, trucks remain dominant for nearly all kinds of cargo. For shipping high-value goods, the reliability and security of trucking are critical attributes irrespective of shipping distance. Moreover, all modes of freight transportation, whether air, rail, or water, rely on trucks for picking up and delivering shipments to their final destinations. Consequently, trucks account for 80% of the petroleum used for freight transportation, representing about 20% of transportation’s total petroleum demand.

Thus, two modes of transportation, cars and trucks, are by far the main consumers of petroleum, accounting for more than 85% of transportation’s total. The next largest transportation user is the domestic airline industry, which uses not quite 10%. All other transportation modes combined, including passenger and freight railroads, public transit, and domestic waterways, account for the remaining 5% of transportation petroleum use. The relatively small amount of fuel used by these modes stems not so much from their energy-efficiency characteristics as from their limited usage. On a passenger-mile basis, for instance, intercity passenger rail (mainly Amtrak) is more energy-efficient by about 25 to 35% than its chief competitors, automobiles and airplanes. But passenger railroads serve only about 500 stations nationwide and account for less than 1% of total passenger miles. And their growth potential is limited because there are relatively few passenger-dense travel corridors of 100 to 500 miles, which are the most suitable markets for regular and higher-speed intercity rail.

Likewise, even though public transit is crucial to the functioning of many metropolitan areas, it accounts for fewer than 3% of all person-trips nationally and less than 1% of total passenger miles. Moreover, fixed-route transit bus operations, which make up most transit service, tend to be fuel-inefficient because these vehicles often run with few riders for a good portion of the day. When filled to near capacity, buses are very efficient. The average transit bus, however, carries fewer than 10 passengers per mile driven, despite being able to accommodate 40. As a result, the average transit bus uses about 25% more energy per passenger mile than the average passenger car.

The dominance of cars and trucks for transportation is often attributed to the fact that most of the country’s social and economic activity now takes place in metropolitan areas that are decentralized and spread out. These spatial patterns are poorly suited to providing the high passenger volumes needed to support fixed-route transit and have made center-city rail stations far less convenient than they once were. Public investments in highways during the past half-century, and particularly the building of the interstate system, are often credited with spurring the suburbanization of the country’s metropolitan areas. Because cities have been spreading out for centuries, this cause-and-effect relationship is often debated. The reality, however, is that the highway system is in place and durable. The dispersed built infrastructure that it serves is extensive and seemingly desired by Americans. Although it may be possible to change this au-tomotive-oriented landscape at the margins, reshaping it fundamentally will take many decades.

Energy policy implications

The scale and scope of U.S. dependence on motor vehicles explain why certain policies to curb transportation’s energy use have proven to be so sustainable and why others can only be described as anathema to policymakers. By far the most significant of the former is the Corporate Average Fuel Economy (CAFE) program, which requires automakers to sell vehicles achieving certain mpg averages. Because it accepts the dominance of the automobile, this longstanding program has been described as an attempt to “civilize” it.

Federal legislation calls for the CAFE standard to reach 35 mpg for cars and light trucks combined by 2020, from current separate levels of 30.2 mpg for cars and 24.1 mpg for light trucks. New federal GHG performance standards are expected to cause the 35 mpg threshold to be reached four years sooner (because most automotive GHG emissions derive from gasoline use), and federal regulators are in the process of planning more aggressive GHG performance standards that will boost the average mpg by more than 4% per year to nearly 55 by 2025. And for the first time, fuel efficiency standards are being put in place for medium- and heavy-duty trucks.

A doubling of automotive fuel economy levels in less than 20 years has no precedent. Whether these regulatory ambitions can be achieved at a reasonable cost and with cars and light trucks that have performance, styling, reliability, and size attributes that are acceptable to consumers remain to be seen. If not, the public may demand changes in the program to slow the rate of increase. It is not a coincidence that for all of the 1990s through much of the 2000s, CAFE standards remained essentially unchanged while the real price of gasoline continued to fall. Although carmakers had the means to increase fuel economy, consumers expressed little interest in it, nor did they demand it from their elected officials making energy policy.

In this regard, it bears noting that as vehicles become more fuel-efficient, each incremental gain in mpg will save less fuel than the last increment. For example, boosting fuel economy from 20 to 30 mpg will save more than 165 gallons of gasoline per year if a vehicle is driven 10,000 miles. Adding another 10 mpg to a car already obtaining 30 mpg will save only 83 gallons per year. From the standpoint of the owner, investing in increasingly more efficient vehicles provides a smaller and smaller fuel-saving return. If the vehicle cost or performance sacrifice to achieve each increment of mpg is greater than the last, the net return becomes even smaller.

There is also a longstanding debate about how sensitive drivers are to the aforementioned fuel price of driving. If fuel operating costs go down, motorists can be expected to do at least some additional driving. The direction of this relationship is indisputable and often is referred to as the “rebound” effect, because any added driving will counter some of the expected fuel savings from improved fuel economy. At issue is the size of the rebound effect. As incomes go up, however, the value of time becomes a critical factor in decisions about whether to drive more or less. In fact, there is evidence that this income effect is causing fuel costs to have less effect on miles driven than they once did. Estimates of the rebound effect vary, but most suggest that every 10% reduction in the real fuel cost of driving will cause vehicle miles of travel (VMT) to increase 1 to 3% over the longer term as drivers adjust their behaviors, for instance, by moving even farther away from their workplaces and other destinations.

Still, even if the rebound effect is minimal, demographic-induced growth in VMT will counter some of the fuel-saving impact of efficiency standards. During the last three decades of the 20th century, VMT increased an average of 2 to 3% per year, as the number of households grew dramatically and Baby Boomers and women entered the workforce in droves. No one expects such rapid growth to resume anytime soon, because the demographics of the country have changed. VMT are expected to increase about half as fast during the next two decades, on the order of about 1.5% per year. Even this smaller rate of growth, however, would mean that more than a quarter of the fuel saved from an aggressive 4% annual increase in vehicle standards will be countered by the upward trend in driving.

Difficult policy choices ahead

Given the political durability of the approach, it is difficult to argue against relying on vehicle efficiency standards as a practical and effective means of curtailing transportation’s petroleum use and GHG emissions. It is important to keep in mind, however, that there is no track record of these standards being increased year after year at a fast pace.

The “civilizing” policy of mandated higher fuel economy has thus far proven to be acceptable to consumers when it does not lead to significant sacrifices in the affordability, utility, and performance of vehicles. Maintaining this balance goes a long way toward explaining why CAFE has remained central to federal energy policy for more than 30 years, while at the same time having a history of long periods of little or no change being made in the mpg standards. Based on this history, it is reasonable to question whether too much stock is being put in a policy approach that focuses on requiring the supply of efficient vehicles and not enough on policies to promote their demand.

Apart from whether the mandated mpg and GHG improvements will be sustainable in the absence of a financially motivated consumer, one must ask whether the reductions in energy use and GHG emissions from this policy will be enough. The answer depends on how deep the cuts need to be. If the concern is to control GHG buildup, then the answer is probably no. Scientific analyses and models indicate a need to stabilize atmospheric concentrations of GHGs by the middle of this century, leading to estimates that worldwide GHG emissions will need to be reduced by up to 80% by mid-century. Although it is not possible to ascribe a share of the reductions that must come from U.S. transportation, simply tempering growth in this sector’s emissions will make it necessary to achieve much larger cuts in other energy-using sectors.

The unavoidable reality is that in order to achieve deep reductions in petroleum use and GHG emissions within four decades, growth in driving will need to be slowed even more, or low-carbon energy sources will need to be broadly adopted even sooner. Despite the new GHG performance standards for automobiles, low-carbon fuels are not likely to have significant effects for some time. There are good reasons why petroleum accounts for more than 95% of transportation’s energy consumption. Not only are gasoline, diesel, and other petroleum-based fuels relatively inexpensive to buy, they are dense in energy, as is required for vehicles having limited space to store energy. Many opportunities remain to increase the efficiency of gasoline- and diesel-powered vehicles. It will be hard for any alternative energy sources to compete against the combination of efficiency gains in vehicles powered by internal combustion engines in an environment of cheap gasoline. Although encouraging the development and use of low-carbon energy sources makes sense, it may not pay substantial dividends for several decades.

Yet on the scale of difficulty, significantly curbing growth in VMT does not seem any more promising than greatly reducing the carbon content of transportation’s energy. For years, governments have subsidized public transit, in part to provide a means of mobility to those who do not have access to cars and to alleviate traffic congestion by offering more transportation choices during peak travel periods. The effectiveness of these investments for saving energy has long been debated. As a practical matter, even tripling transit ridership levels across the country would produce only a small dip in national VMT. And motivating more people to use these and other travel alternatives in an automotive-friendly environment will require much more than simply providing the transportation service or infrastructure. Its supply will need to be accompanied by a demand for its use.

Economists have long argued that a financial motivation in the form of higher fuel prices through taxation (in the absence of market-driven fuel price increases) is the most certain way to motivate people to conserve fuel through a varied set of means. In addition to prompting consumer interest in the much more efficient vehicles mandated by regulation, sustained higher fuel prices will induce other fuel-saving behaviors by individuals and businesses over time. Motor carriers, for instance, will reduce travel speeds and truck idling, seek more direct routing, use their vehicle capacity more intensely, and partner with railroads to provide line-haul trailer and container movements. Individuals will be more inclined to combine vehicle trips, carpool, walk, bicycle, ride transit, and forego some low-value travel. Over the longer term, both businesses that ship goods and households will factor higher fuel costs into their decisions about which modes to use; when substitutes for transportation make sense, such as telecommuting and Internet shopping; and where to locate relative to workplaces, customers, suppliers, and other destinations. This multipronged response is what makes higher fuel prices so effective as a means of controlling transportation energy use in a timely and economically efficient manner.

To simply mention fuel taxes, however, is to invite weariness or skepticism at best. Although fuel taxes have long played a key role in financing the nation’s transportation infrastructure, in the United States they are not used for the explicit purpose of fuel conservation. The federal tax on motor fuel is 18.4 cents per gallon. The average state and local tax adds up to about 30 cents per gallon. Although state and local taxes sometimes change, the federal tax has not changed since 1993, when it was increased by 4.3 cents. Meanwhile, the inflation-adjusted value of the tax has declined by more than 20%. In 1993, federal taxes accounted for about 15% of the retail price of gasoline. Today they account for only 5%. As a practical matter, fuel taxes in the United States have a minor effect on fuel conservation and are increasingly becoming inadequate to pay for the basic upkeep of the transportation infrastructure.

One rationale for using fuel taxes to fund highways is that they are an indicator of system use. The more one drives, the more one contributes to the financing of the system. Historically, growth in VMT led to increased fuel use and more fuel tax revenues. The combination of increasing vehicle fuel economy and stable tax levies means that these highway revenues could decline even as user demands on the system continue to rise. And because of public and political resistance to raising taxes, other user fees, such as tolls and fees per mile driven, are being considered to supplement fuel taxes to generate revenue and in some cases to alleviate congestion. In 2007, a report by the congressionally created National Surface Transportation Infrastructure Policy and Revenue Study Commission concluded that revenues required to meet the nation’s highway infrastructure needs were equivalent to $0.60 to $1.00 per gallon of fuel consumed. To help close this gap in needs versus revenues, the commission recommended that the federal motor fuel tax be increased by $0.05 to $0.08 per gallon annually for 5 years and then adjusted regularly for inflation. Two years later, having observed no political interest in recommendations to boost fuel taxes, a second national commission urged the creation of a new transportation finance system that would use more targeted tolling and direct user fees.

Need for innovative policymaking

Fuel taxes should not be cast aside as being forever impractical. To be sure, other forms of road-user pricing, such as tolls and mileage charges, present many of the same implementation challenges. Drivers do not particularly favor paying tolls over fuel taxes, whereas mileage charges introduce concerns associated with their administration and the potential for government monitoring of private travel. In fact, because cars are becoming more fuel-efficient, the time may be right to reconsider the practicality of raising fuel taxes. As fuel economy improves, higher fuel taxes will not necessarily boost the fuel cost of driving but rather hold it steady. A 4% annual increase in fuel prices, for instance, would not increase the fuel cost of driving if fuel economy grows comparably. In return, the revenues to pay for transportation infrastructure would be preserved, and consumer interest in higher fuel economy would be maintained.

But to exploit this opportunity will require innovative policymaking that provides something tangible to drivers in return. As an example, it will require that consideration be given to ideas such as providing consumers and businesses with rebates of a significant portion of the total revenues generated by fuel taxes. The resulting higher fuel prices will prompt conservation, while the rebates will return money to consumers and the economy. The revenue from higher fuel taxes can also be promoted as a means to offset other taxes or to provide essential government services. And of course, a convincing case must be made that these revenues are needed to pay for the transportation infrastructure that Americans and the national economy require. Indeed, it is difficult to envision a scenario in which policymakers could ever generate public support for higher fuel taxes without offering a very compelling plan for use of the revenue.

The emphasis on vehicle efficiency standards to the exclusion of most other policies is an inherently practical policy choice and one that will probably pay for fuel-saving dividends during the next 20 years and longer if increases can be sustained. Whether this approach is strategically the right choice—one that is aligned with longer-term policy goals— warrants more careful consideration. Fuel taxation has long been the “third rail” of energy policy, and there is no reason to believe this will change dramatically in the near term. But the policy debate should not be allowed to continue along these lines. We argue that fuel economy standards and fuel taxation are in many respects complementary policies. Not only can they be combined, they will increasingly need to be combined for many practical and strategic reasons.