Discussion Paper Calls for Modification of Alternative Motor Fuels Act to Better Support Energy and Environmental Goals
|Collantes proposes a logic sequence to assess whether to keep, eliminate, or revise the AMFA provisions. Click to enlarge.|
The two decade-old Alternative Motor Fuels Act—the statute that currently provides automakers with incentives under the CAFE program to manufacture Flex Fuel Vehicles—needs to be overhauled or scrapped to better account for issues related to the consumer acceptance of biofuel-capable vehicles and to the geographical correlation between biofuel supply and vehicle deployment; and to enhance energy security and reduce greenhouse gas emissions in the transportation sector, according to a new discussion paper out of Harvard University.
The paper, Biofuels and the Corporate Average Fuel Economy Program: The Statute, Policy Issues, and Alternatives, was written by Gustavo Collantes at the Energy Technology Innovation Policy research group, Belfer Center for Science and International Affairs, Harvard Kennedy School of Government.
The Corporate Average Fuel Economy (CAFE) program has served as the US’ principal policy mechanism for the reduction of oil consumption in the transportation sector since 1975. Other policy strategies, including demand reduction, fuel switching and vehicle technology mandates, have either had limited success or suffered from limited commitment.
In 1988, Congress passed the Alternative Motor Fuel Act (AMFA) with the intent of encouraging the development and widespread use of methanol, ethanol, and natural gas as transportation fuels by consumers and the production of vehicles powered by those alternative fuels.
(The underlying motivation, Collantes points out, even then was to enhance long-term national energy security through reductions in oil importation and, even if secondarily, to reduce emissions of heat-trapping gases from motor vehicles.)
Specifically, Congress, through AMFA, endeavored to induce manufacturers to deploy vehicles capable of operating on alternative fuels by providing for special treatment of such vehicles under the CAFE program....Reflecting Congress’s awareness of the lower per-gallon mileage that alternative fuels generally yield relative to gasoline, Section 32905 establishes that, for the purpose of measuring fuel economy, one gallon of alternative fuel is equivalent of 0.15 gallons of petroleum fuel. Thus, the Administrator of the Environmental Protection Agency (EPA) is to estimate the fuel economy of a vehicle running on alternative fuel by dividing the actual miles per gallon by 0.15. This way, not only would CAFE not hinder the commercialization of alternative-fuel vehicles, but also deploying such vehicles would help manufacturers meet their CAFE requirements.
The Energy Independence and Security Act 2007 (EISA) with its new CAFE program effectively extended the applicability of the AMFA provisions. Under the AMFA provisions of EISA 2007, a given manufacturer can use alternative fuel-capable vehicles to increase its average fuel economy for a particular model year up to a maximum of 1.2 miles per gallon for each of model years 1993 through 2014. The fuel economy credits will be phased out gradually starting in 2015 and ending in 2019.
While noting that AMFA has been relatively successful in inducing manufacturers into deploying flex-fuel vehicles, Collantes also points out that the original expectation of Congress was that once a reasonable supply of such alternative fuel vehicles developed, a demand for alternative fuels would ensue.
The latter effect was observed to a very limited extent. Therefore, all in all, the AMFA amendments cannot be considered a success. More importantly, as it will be discussed in this section, they cannot be expected to be any more successful than they have so far been, if they maintain their current structure.
Though well-intentioned and pioneering, AMFA took a unidimensional approach to solve a multidimensional problem. AMFA could have been more successful had the chicken-and-egg problem actually been the main obstacle to the market diffusion of alternative fuels. The main obstacles have been, however:
The relatively low value proposition that flex-fuel vehicles running on ethanol blends could offer to consumers, vis-à-vis the mainstream vehicle-fuel system;
The lack of a policy mechanism to internalize the external costs of gasoline relative to alternative fuels.
...Starting from an incomplete understanding of the relevant mechanisms of technology innovation, AMFA provided incentives for the vehicle manufacturer, but ignored the consumer and the fuel provider.
Collantes suggests that policies to effectively address transportation energy problems ought to be systemic—more effective solutions can be expected if the fuel and vehicle sides of the equation are not only considered separately but also in coordination. Among the potential approaches he suggests are schemes that relate the fuel-economy credits granted to flex-fuel vehicles to the proportion of fuel dispensing stations that offer high ethanol blends in the state.
Ultimately, however, he says that the AMFA provisions should be revised to reduce the incentives for automakers to use them merely as a mechanism to meet their average fuel economy requirements.
Disabling the compensating mechanism altogether would leave automakers with little incentive to keep producing flex-fuel vehicles. Leiby and Rubin (2000) estimate that, without fuel-economy incentives, production of FFV would decline by about 50%. At the same time, leaving the mechanism intact does not correct for the perverse effect of inducing lower average fuel economy.
Possible ways out of this dilemma include:
Prescribing a minimum gasoline fuel economy level for every flex-fuel vehicle model;
Requiring that flex-fuel vehicles be more optimized to operate on the alternative fuel, so as to close the gap in per-gallon mileage when the vehicle runs on gasoline and on a high ethanol blend;
Granting AMFA fuel economy credits proportionally to the accessibility of the corresponding alternative fuel in the regions where the vehicles are sold;
Complementing AMFA with a set of incentive mechanisms that send the right signals to industry. Collantes suggests a demand-based incentive scheme (DBIS) in which credits are calculated on an estimate of demand for E85, rather than on the supply of vehicles. Under such an accounting, automakers would be rewarded as FFV owners do most of their driving on E85. Conversely, automakers would be rewarded less than under the current incentive scheme as FFV owners do most of their driving on gasoline.
Under such a scheme, Collantes says, manufacturers would have incentives to induce consumer demand for E85 by improving vehicle performance on E85, deploying more flex-fuel vehicles in areas with more established refueling infrastructure, educating consumers on the benefits of using E85, and other strategies.
Deployment decisions would be based on their expectations on actual E85 demand, rather than as a mere strategy to meet their CAFE requirements.
Looking forward, it may be useful to think of the AMFA provisions in the context of the CAFE program as a whole. With the current political drive to address the problem of global climate change, there is a temptation to use CAFE as a climate policy tool. Meanwhile, federal standards on vehicle emissions of carbon dioxide are pending after a Supreme Court ruling in April, 2007. Given the obvious overlap between a fuel-economy program and a CO2-emission program, it is entirely conceivable for CAFE to be replaced with a CO2-oriented program. Such approach could provide incentives for biofuels more naturally than AMFA currently does.
Collantes, Gustavo. (2008) Biofuels and the Corporate Average Fuel Economy Program: The Statute, Policy Issues, and Alternatives. Cambridge, Mass.: Energy Technology Innovation Policy research group, Belfer Center for Science and International Affairs