Life is a Highway

by John Eichberger (Fuels Institute) ... Fuels Institute recently published “The Impact of Transportation-related Environmental Initiatives” which provides an objective assessment of 37 global efforts and a deep dive into 14 of the most prominent initiatives affecting transportation. As we embark upon a dedicated path to reducing carbon emissions, this report can serve as a foundation for evaluating which options, or combinations of options, might be the most effective.

Evaluating the Map for Possible Routes

The battle against carbon emissions can take many different forms, some more effective than others, some less expensive than others. The chart below plots 14 different initiatives analyzed in our report based upon their relative effectiveness and cost compared to one another. This comparison forms the basis of our report and provides a quick snapshot of how these initiatives rank. For those specifically related to carbon, I typically focus on the following: Carbon pricing, transportation climate initiative (TCI), biofuels and vehicle electrification. For this column, I am not going to discussed vehicle electrification – we cover that extensively in many other formats. So, let’s focus on the first three which all occupy the middle of the chart and deliver moderate benefits at a moderate price.

A Global Route: Carbon Pricing

These initiatives have significant momentum globally, with 20% of global greenhouse gas (GHG) emissions subject to some sort of carbon fee in 2020. A carbon fee imposes a monetary cost on businesses that emit carbon into the environment. The concept assumes such a fee will encourage businesses to adopt measures to reduce their emissions and lower their compliance costs. The fees today range from $0.08 per metric ton of CO2 in Poland to $132 per ton in Sweden. In Europe, the average tax rate imposed in about $40 per ton. In 2018, 42% of global revenues generated from carbon fees ($44 billion) were used to support other environmental projects, thus enhancing the potential benefit of these fees beyond encouraging businesses to reduce their own emissions.

Our report took at look at the potential impact of a carbon fee in the United States and used a $40 per ton value as a baseline for analysis.

In 2008, when average national retail prices (for gasoline) surpassed $4.00 per gallon, there was anecdotal evidence of consumers changing behavior – combining trips, carpooling, seeking more efficient vehicles. There may be a price point at which consumers will change behavior. However, that price point is a moving target.

That said, there are implications associated with this data indicate that should be considered carefully. It seems for a carbon fee to be effective with regards to the transportation sector, the revenues must be invested in other carbon mitigation efforts. Unfortunately, an evaluation of legislation introduced in Congress to establish a carbon fee does not often include such investments. Of seven U.S. bills introduced, the intended investment of revenues in other environmental efforts is almost non-existent. The legislators, however, did recognize that an increase in energy costs would disproportionately affect lower income consumers and included several subsidies to mitigate the negative impact on these communities. But they do not double down on carbon mitigation by leveraging carbon fee revenues for other environmental efforts.

A Regional Route: Transportation Climate Initiative

The Transportation Climate Initiative (TCI) is regional program still under development among twelve states in the northeast region of the United States and is designed to reduce carbon emissions from transportation by 20% - 25%. It is presented as a cap and investment program in which fuel suppliers must acquire allowances, provided by the regulator, to cover the emissions associated with regulated fuels, such as gasoline and diesel. These allowances are estimated to generate up to $7 billion per year by 2032 and potentially increase fuel prices by up to $0.27 per gallon.

A Route through the Heartland: Biofuels

One way to effectively reduce carbon emissions from the transportation sector is to incorporate renewable fuels into the product mix. According to the California Air Resources Board (CARB), ethanol and biomass-based diesel have a significantly lower carbon intensity (CI) than gasoline.

Our recent study looked at the federal Renewable Fuel Standard (RFS) and the California Low Carbon Fuel Standard (LCFS) program to evaluate the effectiveness and cost of biofuels programs. From the analysis, the LCFS seems to have more successfully achieved its stated objectives, which sets targets for reducing the CI of fuel. And to date, the cost of the program has been relatively low. However, the target CI reduction through 2020 was to be 7.5% lower than that measured in 2010. By 2030, the reduction target is 20% below 2010, a much more aggressive objective. By 2025, it is estimated that the program will have avoided a cumulative $8 billion in avoided GHG emissions and saved consumers up to $7 billion in fuel consumption. On the other hand, by 2025 it is estimated LCFS will cost $6 - $10 billion per year in compliance, which could equate to up to $0.70 per gallon.

There are efforts in other parts of the country to establish programs similar to the one in CA, including an effort among states in the Midwest and among some northeastern states. There are also discussions about doing something at the federal level, especially as we near the end of the statutory volumetric provisions of the RFS. The costs and benefits of such programs need to be carefully balanced if similar programs should be contemplated for the nation as a whole.

Meanwhile, the RFS was established with specific volumetric targets for qualified renewable fuels. As everyone familiar with the program knows, the Environmental Protection Agency (EPA) has waived the volumetric requirements for advanced biofuels due to a lack of production and availability. These fuels have a much greater impact on reducing GHG than do traditional biofuels (as demonstrated in the graphic above) and their lack of inclusion in the market has limited the overall GHG effectiveness of the program. It is estimated that the RFS has delivered less than a 5% reduction in GHG emissions due to the limited availability of these fuels. READ MORE