Belfer Center Study Concludes Reducing Car and Truck GHG Emissions Will Require Substantially Higher Fuel Prices; Income Tax Credits for Advanced Alt Fuel Vehicles Are “Essentially Ineffective” at Reducing Sector Emissions
|CO2 emissions from transportation sector by scenario in the study. The dashed blue line is 2005 emissions; the scale on the right shows the percent of 2005 level. Source: Morrow et al. Click to enlarge.|
A new study from the Harvard Kennedy School’s Belfer Center for Science and International Affairs finds that reducing greenhouse gas emissions from transportation will be a much bigger challenge than many assume, and will require substantially higher fuel prices combined with more stringent regulations.
The study—Analysis of Policies to Reduce Oil Consumption and Greenhouse-Gas Emissions from the US Transportation Sector—finds that reducing CO2 emissions from the transportation sector 14% below 2005 levels by 2020 may require fuel prices above $8/gallon by 2020. It also finds that, while relying on subsidies for electric or hybrid vehicles is politically attractive, it is an extremely expensive and ineffective way to significantly reduce greenhouse gas emissions in the near term.
Economy-wide CO2 prices of $30-60/t CO2 are too weak on their own to motivate significant reductions in CO2 emissions from transportation. The key to obtaining significant reductions in transportation-related GHG emissions is to increase the cost of driving. The economy-wide CO2 prices applied increase the cost of driving only marginally with respect to the business-as-usual case. Direct transportation (fuel) taxes generate the greatest reductions in CO2 emission from transportation, achieving CO2 emissions at 86% of 2005 levels by about 2025. The gasoline prices that achieve these reductions are in the range of $7-9/gal, however, which is considerably higher than the American public has been historically willing to tolerate. Strong income tax credits for the purchase of new diesel, hybrid, and plug-in hybrid vehicles are very expensive and essentially ineffective at reducing GHG emissions from transportation.—Morrow et al.
The study examined the impact of five scenarios:
An economy-wide cap and trade program along the lines outlined in the American Clean Energy and Security Act;
A strong gasoline and diesel tax;
Continuing to increase the passenger car fuel efficiency standards between 2020 and 2030;
Aggressive performance-based tax credits for alternative motor vehicles; and
Adoption of all of the preceding policies.
The authors used the 2009 version of the Energy Information Administration’s (EIA) National Energy Modeling System (NEMS), an energy-economic equilibrium model of US energy markets, to estimate the impacts of these scenarios both in terms of carbon mitigation and economic costs.
Four main results stood out, according to the authors:
All the policy scenarios modeled fail to meet the Obama administration’s goal of reducing total US 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, the results suggest that large purchases of offsets will be required. The authors did not include sector-specific programs in sectors other than transportation are not included in our analysis; these may help meet the reduction goal, they said.
The largest reductions in GHG emissions from transportation are obtained by increasing the cost of driving with fuel taxes, resulting in lower emissions in 2030 than in 2010. 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 US 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.
Purchase tax credits are an expensive way to reduce oil consumption and GHG emissions from transportation. The authors found 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.
The macroeconomic impacts of reducing GHG emissions are small, even with 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, the authors wrote, that aggressive climate change policy need not bring the economy to a halt.
“Surprising results” occur under the performance-based tax credits and the combined policy case, the researchers noted. Although performance-based tax credits resulted in a reduction in emissions relative to the AEO 2009 base case, they caused CO2 emissions to rise higher than they would be if there was only an economy-wide CO2 tax, they found.
There are several reasons for this counter-intuitive result. First, as discussed earlier there is an unintended interaction between the tax credits and the CAFE standards that decreases the efficiency of conventional vehicles. Since conventional vehicles still occupy the majority of the market, this has significant consequences for GHG emissions. Second, the tax credits give a significant boost to diesel vehicles. Diesels gain significant market share under the credits and increase driving, because they are more efficient. We believe this analysis underestimates the impact of these credits because NEMS does not account for the black carbon from diesel soot that has a medium-to-large global warming potential.—Morrow et al.
The combined policy case has noticeably higher CO2 emissions than the case with only transportation taxes, they found. Again, the authors noted, alternative motor vehicle income tax credits actually impede fuel economy improvements in conventional gasoline vehicles, diluting the power of the transportation taxes to reduce CO2 emissions with lower VMT (vehicle miles traveled).
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.—Morrow et al.
The paper is written by current and former affiliates of the Energy Technology Innovation Policy research group at Harvard Kennedy School’s Belfer Center: W. Ross Morrow, assistant professor, Iowa State University; Kelly Sims Gallagher, associate professor of energy and environmental policy at Tufts University and a senior associate at the Belfer Center; Gustavo Collantes, senior energy policy advisor to the State of Washington; and Henry Lee, director of the Belfer Center’s Environment and Natural Resources Program.
Morrow, W. Ross, Kelly Sims Gallagher, Gustavo Collantes, Henry Lee. “Analysis of Policies to Reduce Oil Consumption and Greenhouse-Gas Emissions from the US Transportation Sector.” Paper, Belfer Center for Science and International Affairs, Harvard Kennedy School, February 2010.