Oil and Gas in the Capitals

	Vol. 231 No. 5
DR. ROGER BEZDEK, CONTRIBUTING EDITOR, WASHINGTON

Implications of US fuel economy regulations for trucks

In April, the US National Academies of Science (NAS) published a landmark report on fuel economy standards for trucks. This study could have profound long-term implications. Its results are already being used by the US Department of Transportation (DOT) to develop congressionally mandated fuel economy regulations for trucks, which will be issued in draft later this year. This is the first time the US, or any nation, has developed such standards for trucks—as opposed to automobiles—and US regulations will profoundly impact oil demand and oil industry structure in the US, the EU, Japan, China and elsewhere, as well as the trucking, shipping, vehicle manufacturing, transportation and logistics industries. In the US, trucks consume a large and increasing share of transportation liquid fuel requirements—more the 25%—and this will increase to about 30% within two decades.

These developments must also be viewed in light of the Environmental Protection Agency’s December 2009 finding that greenhouse gas (GHG) emissions endanger public health and the environment within the meaning of the Clean Air Act, a decision that compels the EPA to consider establishing first-ever GHG emission standards for new motor vehicles, including trucks.

I served on the NAS committee that prepared the report, and below I summarize the findings, implications and possible unforeseen consequences that may ensue from truck fuel economy regulation.

The mandate and the challenge. The Energy Independence and Security Act of 2007 required DOT, for the first time in history, to establish fuel economy standards for medium- and heavy-duty vehicles (MHDVs). The NAS study, called Technologies and Approaches to Reducing the Fuel Consumption of Medium- and Heavy-Duty Vehicles, was conducted to assist DOT in developing these standards.

While the US has regulated the fuel economy of automobiles and light trucks since the 1970s with corporate average fuel economy (CAFE) regulations, the regulation of MHDVs is much more complex and difficult. For example, CAFE addresses only two classes of vehicles: automobiles and light trucks. MHDVs consist of 18 or more classes of vehicles with vastly different sizes, weights, duty cycles, costs, lifetimes, turnover, etc. These include delivery vans, box trucks, garbage trucks, buses, utility trucks, dump trucks, flatbeds, refrigerated trucks and long-haul trucks, Fig. 1. Fuel efficiency regulations for one class of vehicles, such as long-haul trucks, may be inappropriate for other classes of vehicles. However, establishing different regulations for each class of trucks may not be technically feasible.

Fig. 1. Typical truck vehicle and weight classes.

Furthermore, the CAFE point of regulation is straightforward: automobile manufacturers, such as GM, Toyota and Ford. MDHVs, on the other hand, are produced in literally hundreds of unique configurations by many large and small original equipment manufacturers.

CAFE uses miles per gallon, but this measure is not appropriate for trucks. For example, a partially loaded tractor trailer would consume less fuel per mile than a fully loaded truck, but this would not be an accurate measure of the fuel efficiency of moving goods. The appropriate MDHV measure is the more esoteric fuel consumption normalized by payload, using the calculation of gal/ton-mile (load-specific fuel consumption).

The rationale for CAFE is that passenger vehicles are relatively insensitive to fuel prices and thus require regulation to increase fuel economy. However, MHDVs are commercial vehicles, fuel is a major expense, and the trucking industry is extremely sensitive to fuel prices. Thus, the rationale for MHDV fuel efficiency regulations is questionable.

Nevertheless, the congressional mandate is not to determine if MDHV fuel economy regulation is necessary but, rather, to determine how such regulations should be developed.

Findings. We evaluated a wide range of fuel-saving technologies. Some, such as aerodynamic features, automated manual transmissions and single low-rolling-resistance tires, are already available, and some are in development, while others are in the research stage. Current technologies increase vehicle costs, and purchasers must balance these costs against anticipated fuel savings. Most technologies under development will also increase vehicle costs, often substantially. Thus, many technologies, despite substantial fuel savings, will not be adopted unless driven by regulation or by higher fuel prices.

The major enabling technologies include hybridization, advanced diesel engines and aerodynamics, and the application of these can be grouped into packages and applied to different types of MHDVs, Fig. 2. The resulting fuel consumption reduction for each vehicle type will depend on the vehicle application and duty cycle. A relevant measure of cost is the break-even fuel price, which represents the fuel price that would make the present discounted value of the fuel savings equal to the total costs of the technology package applied to the vehicle class.

Fig. 2. Comparison of new potential fuel-saving technologies (available 2015–2020) for seven vehicle types: tractor trailer (TT), Class 3-6 box (Box), Class 3-6 bucket (Bucket), Class 8 refuse (Refuse), transit bus (Bus), motor coach (Coach) and Class 2b pickup/van (2b).

Table 1 illustrates the differences in economic viability of the technology options for the indicated vehicle classes. However, it is important to note that these breakeven prices are calculated assuming that all the technologies are applied as a package; individual fuel-saving technologies applied in a given vehicle class may face much lower or much higher breakeven values than indicated. Technology costs and benefits vary significantly: Some are economically viable at current fuel prices, while others require much higher prices or high valuations of environmental and security externalities to justify their use.

Unintended consequences. By design, regulations change economic costs and alter consumer behavior; however, they often also result in indirect effects and unintended consequences that subvert the purpose of the regulation. These are important, and NAS identified a number of these. For example, consumer buying in anticipation of new regulations and retention of older vehicles can slow the rate of fleet turnover and the rate at which standards affect fuel consumption. Furthermore, if regulations lower the cost of shipping, they will increase ton-miles shipped due to the “rebound effect,” and fuel savings from the regulations will be overestimated.

Also, standards that differentially affect the capital and operating costs of individual vehicle classes can cause purchase of vehicles that are not optimized; the complexity of truck use and the variability of duty cycles increase the probability of this occurring.

In addition, some fuel efficiency technologies add weight and push vehicles over federal threshold weights, thereby triggering new operational conditions and affecting vehicle purchase decisions. Some technologies will reduce cargo capacity for trucks that are currently “weighed-out” and will therefore force additional trucks on the road.

Finally, some regulations may be counterproductive. Thus, speed limit reductions for trucks may increase fuel efficiency for individual vehicles, but, in some cases, timely delivery will require more vehicle trips to deliver the same volume. This will increase traffic congestion and will also reduce drivers’ incomes (since drivers are usually paid by the mile), and thus induce them to drive more.

Alternative approaches. NAS noted that there may be more efficient, less costly approaches than standards for reducing truck fuel consumption, such as driver training, adjustment of size and weight restrictions, market-based instruments, incentives for mode shifting, and intelligent vehicle and highway systems. We found that several approaches—particularly driver training and longer combination vehicles—offer potential fuel savings that rival those from standards.

Most importantly, NAS determined that fuel taxes offer a transparent and efficient method for reducing truck fuel consumption and have clear economic and efficiency advantages over regulations:

• A tax affects the incentives associated with all elements in the freight transportation system and provides incentives for technology adoption and operational efficiencies (e.g., reduced idling, improved driver education).

• A tax affects the utilization of existing vehicles, while standards affect only new vehicles and are implemented slowly as the vehicle fleet turns over.

• A fuel tax, by raising the cost of shipping, will reduce miles driven, thereby reducing congestion, accidents and other driving-related externalities.

• Increased fuel taxes would augment the US Highway Trust Fund, permitting development of improved transportation options.

• A tax minimizes the information needed by regulators, provides incentives for private firms, and relies on the knowledge and incentives manufacturers and shippers have to reduce costs.

• The trucking industry is competitive, and given tax-induced higher fuel prices, firms will optimize their operations to realize the greatest fuel savings.

• Setting standards is difficult and complex, so a fuel standard has higher probability than a tax for counterproductive consequences.

• A tax clearly indicates the additional costs being imposed on the trucking sector to accomplish societal aims, whereas standards obscure the costs.

Thus, although NAS recognizes the political difficulty with increasing fuel taxes, it strongly recommended that Congress consider fuel taxes as an alternative to mandating fuel efficiency standards for trucks.

Nevertheless, fuel taxes are the third rail of American politics and, given the huge increases in fuel taxes that would be required, the probability of Congress enacting such taxes is close to zero. Thus, standards will be issued, and they will reduce truck fuel consumption by many billions of barrels of oil over the next several decades. But the costs in terms of inefficiency, bureaucracy and unintended consequences will be hundreds of billions of dollars higher than necessary, and the trucking industry and all US consumers will pay the price. WO