How Hawaii can Win the Oil EndGame

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How Hawaii can Win the Oil EndGame
How Hawaii can Win the Oil EndGame

              The United States
               can get completely
               off oil and revitalize
               its economy—led by
               business for profit

              States are the
               laboratories of
               change that will
               bring this about

              Hawaii is well
               positioned to be
               among the leaders

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing             1
How Hawaii can Win the Oil EndGame
Winning the Game: restoring competitiveness and
        eliminating oil dependence
         National competitiveness and national security at risk

         Why should we care?
            – Japan, EU, China will eat Detroit’s jobs for lunch
            – Energy insecurity, price volatility, and climate concerns, perhaps depletion
            – Save net $70 billion/yr by 2025, create 1 million net jobs

         How do we win?
            – Reduce congestion through mass transportation and smart planning
            – Efficient end-use can save half the oil at $12 a barrel
            – Biofuels substitute for another fourth
            – Longer term: the hydrogen transition fueled by saved gas

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                              2
How Hawaii can Win the Oil EndGame
Existing technologies can save 26% of oil use cheaply ($6/
                        bbl), and State of the Art technologies could save 52% of
                        2025 oil for only $12/bbl

                                                              Oil Saved by Full Deployment in 2025 (Million Barrels/Day)

                                                $50
                                                                                        Conventional Wisdom (Avg.
                                                                                        CSE = $6/bbl)
     (2000 $/bbl RAC on the short-run margin)

                                                                                                                              State of the Art
                                                $30
                                                                                                                              (Avg. CSE = $12/bbl)
                                                           EIA 2025 Crude Oil
                                                           Price
              Cost of Saved Energy

                                                $10

                                                       0                        5                   10                      15
                                                -$10
                                                                                     25% of 2025                     50% of 2025
                                                                                     Baseline Use                    Baseline Use
                                                -$30

                                                -$50

                                                -$70

                               ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                               3
How Hawaii can Win the Oil EndGame
Given the barriers to efficiency, what is the role of state
        government?

                            Four Major Market Failures

              Most customers have very high implicit
               discount rates when buying energy efficiency

              Most equipment/vehicle makers and their           Government can
               customers, even sophisticated ones, lack          accelerate market
               good information on alternatives, especially in   adoption by:
               end-use efficiency
                                                                 Stimulating Demand
              Oil is priced below its societal cost
                                                                 Setting an Example
                – Externalities include military/security,
                  environmental, net subsidies, and              Providing better
                  diplomatic/geopolitical                        information
              The “Creative Destruction Problem”:
               Organizational and cultural and institutional
               obstacles make it difficult for large companies
               to adopt disruptive innovations

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                       4
How Hawaii can Win the Oil EndGame
To get real security, Hawaii needs to back out the entire
        barrel of crude oil
                                                         Hawaii Fuel Use Model
                                                                                        Total Petroleum Usage in 2003
                                                                                                 (MM Barrels)

                                                                      Residual Fuel
                                                                                                    13.2

                                                                      Motor Gasoline
                                                                                                    10.7

                                                                         Jet Fuel
                                                                                                    15.5

                                      Crude Oil
                                       Imports                        Distillate Fuel                7.2
                                                     Refined
                                                     Products
                                  48.6 MM barrels                          LPG                       0.6
                                  – 22% US
                                  – 78% Foreign
                                                                         Asphalt*                    0.3
                                   Other Products
                                       Imports
                                    (000s barrels)                                                   0.1
                                                                       Lubricants*
                                  7.9 MM barrels
                                  - 40% US                                                           0.9
                                  - 60%Foreign                            Other

                                                                                                     48.5
        Sources: DBEDT (2004), *EIA

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                         5
Hawaii’s has a unique situation: passenger vehicles
        represent 80% of the fleet and 50% of new cars are rental
        vehicles

                                                         Vehicle Fleet – State of Hawaii (2003)

                                            Total Cars Registered (000s):                                  1,045
                                              – Passenger:                                                     828
                    New Cars                  – Light Trucks:                                                  115
                                              – Heavy Trucks:                                                   60
             Passenger: 35,927                – Trailers:                                                       26              Scrappage (3)
             Trucks:     9,127
                                              – Motorcycles:                                                    11
                                                                                                                              Vehicles: 65,000
                                            Miles Driven (MM miles):                                     9,058 (1)
                   Rental Cars
                                            Average fleet efficiency (mpg)                                20.8 (2)
             Passenger: 37,525
                                            Motor Fuel Equiv. Consumption (MM gallons):                       434
             Trucks:      349

        Notes:
        (1) Miles driving based on average 9.058 miles driven per year by vehicle – assumes all vehicles except trailers and vehicles subject to scrappage
            Source: 2000 Hawaii Strategy Plan, DBEDT
        (2) Based on overall fleet except for trailers in the State of Hawaii in 2000. Source: 2000 Hawaii Strategy Plan, DBEDT
        (3) Scrappage based on US national scrappage rate of 75.3% of new registered vehicles

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                                        6
The energy cost burden to the state will increase: Hawaii will
          consume 510 MM gallons/y of motor fuel by 2024 (17%
          increase)
                                                           Hawaii Estimated Consumption of Motor Fuel
                                      Base Case – If Light Vehicles Reach Equivalent Penetration Rates as National Average

                                                            600         Hawaii Cumulative Fuel Consumption through 2023: 9,507 MM gallons

                                                                                                                                                        Commercial Fleet
                Annual Consumption of Gasoline Equivalent

                                                            500

                                                                                                                                                        Light Duty Trucks
                                                            400
                             (MM Gallons)

                                                            300

                                                                                                                                                        Passenger Vehicles
                                                            200                                               Fleet Fuel Efficiency 2004: 20.8 mpg
                                                                                                              Fleet Fuel Efficiency 2024: 26.0 mpg

                                                            100

                                                              0
                                                              2003   2005    2007     2009     2011    2013     2015       2017       2019       2021

  (1) Assumes scrappage rate of 75.40% of new registered vehicle. Source: NADA.org
  (2) Assumes growth of vehicle fleet of 1% per year
  (3) Based on expected distribution of 79% passenger vehicles, 17% light trucks and 4% commercial/heavy vehicles. Source: HI Strategy Report 2000
  (4) Assumes 92.6% of vehicles powered by motor gasoline, and remainder powered by diesel and LPG, Source: Hi Strategy Report 2000
  (5) Assumes average miles driven per vehicle of 9.058 miles/year. Source: HI Strategy Report 2000

          ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                                                             7
Why Drive? Mass transportation and smart growth reduce
        demand for vehicle travel
        Congestion is imposing high costs to our society and our
         positioning in the tourism market

        Mass transit alternatives are cheaper than building more roads
         and are well known, but must be funded
            – Light rail on Oahu
            – Bus service on neighbor islands

        Tax increases should equitably support transit improvement in
         all counties

        Smart growth and planning to provide employee housing close
         to work, solving both the transportation and the housing crisis

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                            8
Three options to stimulate demand for more efficient
        vehicles
                                                                                          Policy Impact to Gasoline & Diesel Consumption
                                                              600
               Annual Consumption of Gasoline Equivalent

                                                                                                                                                                        Baseline
                                                              500

                                                                                                                                                                                                Feebate Only
                                                              400
                            (MM Gallons)

                                                              300                                                                                                                                         $1000 Tax Rebate
                                                                                                        Feebate + Acc. Scrappage
                                                              200

                                                              100

                                                                 0
                                                               03

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                                                                                                                                                             Motor Fuel Savings
                                                                                                                             Motor Fuel Consumption                                           Fleet Efficiency
                                                                                                                                                                 2004-2023
                                                                                                                             (2004-2023) MM Gallons                                                (mpg)
                                                                                                                                                                MM Gallons
                                                           Baseline                                                                        9,507                                                     26
                                                           Feebate                                                                         7,656                        1,851                        35
                                                           Feebate & Scrappage                                                             6,329
                                                                                                                                           8,699                        3,178                        40
                                                           $1000 Tax Credit                                                                7,647                        1,860                        37

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                                                                                                      9
Our finding is that feebates plus scrappage are cost effective
        policy measures, so long as each sunset once the goals are
        achieved

                                                           Policy Impact                            Benefit                       Costs

                                                 Cum.                        # New          HI                Gasoline
                                                Gallons      # of Add’l     Vehicles    Taxpayer     CO2        Tax      Scrappage   Incentive
                                                Saved         Vehicles     Receiving    Savings    Reduced    Forgone      Costs       Costs
                                                 (MM)        Scrapped      Incentives     ($MM)     (Mtons)    ($MM)       ($MM)       ($MM)
       Accelerate HEV adoption up to 10%
       penetration using feebates as              1,851           –           28,609     2,081       14.9       262          –            0
       incentive
       Accelerate HEV adoption up to 10%
       penetration using feebates and
       accelerate scrappage to 95% of             3,178        342,697        77,860     4,093       25.6       518         106           0
       new cars (30% increase over
       current rates)

       Accelerate HEV adoption up to 10%
       penetration using a $1000 tax              1,860           –           36,887     2,057       15.0       258          –            32
       rebate as incentive

         Note:
         Assumes 5% discount rate, 1% inflation rate for motor fuel gasoline
         Assumes scrappage program of $500 per car, and tax credits of $1,000 per HEV

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                                  10
Policy goals & criteria

                                    Reduce Hawaii’s oil dependency
                    Policy Goals
                                    Align new-car purchaser’s incentives
                                     with the true cost to society

                                    Simple to understand and implement

                                    Cost effective

                                    Inexpensive to administer
                Some Suggested                                                Politically
                   Criteria                                                    Viable
                                    Revenue-neutral

                                    Automatic sunset

                                    Progressive or at least not regressive

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                             11
Transportation Efficiency Policy Options
                                  TOUGH CHOICES                   High Impact                         CLEAR WINNERS
                              CO2
                            Emissions                                                 Feebates
                            Standards

                                              HEV/AFV                  Mass Transit
                                             Tax Credits

                                                           Scrappage

      Cost &
  Implementation                                                                           LOW HANGING FRUIT
                       Hard/              AVOID                                                                              Easy &
                     Expensive                                                           State                               Cheap
                                                                                      Procurement
                              Increases
                               Gasoline
                                Taxes                                                                              Tire Labeling
                                                                                                    HOV /Parking
                                                                                                    Preferences
                                                                                                                      Public
                                                                                                                   Information
                                                                                                                    Campaigns

                                                                  Low Impact

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                       12
Traditional policy options

                                             Provide alternative means for mobility
                      Mass Transportation     – Critical need to reduce congestion
                                              – Cheaper than adding more roads

                                             LEV/HEV Fleet Percentage Quotas
                                  Quotas      – Enacted to meet emissions standards
                                              – Hawaii scale unlikely to sway manufacturers

                                             Increase gasoline taxes
                                              – Reduces consumption
                                  Pricing
                                              – Marginally effective when prices are already high
                                                and politically unpopular

                                             Mandate HI government fleet new purchases
                       Procurement Scale      – Mandate minimum efficiency for new purchases
                                              – Demonstrates leadership

                                                       Focus Here

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                     13
Measures to improve existing fleet efficiency

                                                Standardize Tire Rolling resistance and noise
                                                 labeling
                            Tire Rolling         – 20% reduction in rolling resistance creates 5%
                            Resistance             fuel savings in cars, and 4-12% fuel savings in
                                                   heavy trucks
                                                 – Prices are similar for low or high Crr tires

                                                Public Information Campaign
                        Low Viscosity Oils       – Incremental cost is 10-15%, 5% savings possible
                                                 – Mandating viscosity impractical

                                                Public Information Campaign
                       Proper Tire Inflation     – Proper inflation reduces fuel use 2%, 30% of tires
                                                   not inflated

                                                           Focus Here

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                         14
Innovative policy options
                                              Stimulates demand for new vehicles
                                               – Revenue and Size neutral
                                  Feebates
                                               – Requires exemption for federal preemption

                                              Pay to take least efficient cars off the road
                             Scrappage
                                               – Accelerates capital stock turnover

                                              Provide Tax Credits for Efficient Vehicles
                            Subsidies or
                            Tax Credits        – Make dependent on engine technology, sunset after
                                                 10% penetration rate

                                              Implement pay-as-you-drive (PAYD) or pay-at-the-
                                               pump (PATP) auto-insurance
                                               – Creates marginal decrease in driving
                        Higher Prices via
                           Insurance           – Both have welfare benefits from linking cost of
                                                 insurance more closely to VMT
                                     Focus
                                               – PATP induces switching to more efficient vehicles due
                                                 to taxation aspect – giving larger reduction

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                          15
Summary of State Actions

              Incentive/Regulation                         How it Works                                  States Using It
          Feebate                     Revenue neutral rebate for more efficient vehicles paid     DC*, MD**
                                       for by fee on less efficient vehicles

          Tax Credit or Rebate for    Tax credit or rebate for the purchase of a high             AZ, CA, CO, CT, DC, GA, IL,
          High Efficiency Vehicles     efficiency vehicle                                           KS, KT, LA, MD, ME, MT,
                                      Tax credit or rebate for the conversion of a vehicle to      NC, NJ, NM, NY, OK, OR,
                                       operate on AF                                                PA, RI, UT, WI, WV
          Tax Credit or Rebate for    Tax credit or rebate for biofuels, CNG, LPG                 AR, CT, DE, HI, ND, KS,
          Alternative Fuels or AF                                                                   MN, MS, ND, RI, SD, TX,
          Production                                                                                VA, WA

          Tax Credit, Rebates or      Tax credits, rebates or grants for AF refueling stations    CO, CT, HI, IN, KS, LA, ME,
          Grants for AFV Refueling                                                                  NJ, NY, OK, OR, RI
          Station

          Government Purchase of      Funds or mandates to purchase AFVs or efficient             AZ, CA, CO, DC, DE, FL,
          Efficient or AFVs            vehicles in state, country or school fleet                   GA, IA, IL, IN, KS, MA, MD,
                                                                                                    ME, MI, MN, MO, MT, NC,
                                                                                                    NM, NJ, NV, NY, OK, OR,
                                                                                                    RI, SC, TX, UT, VT, WA, WI,
                                                                                                    WV

          Emissions Standards         Quota based LEV or LEV standards on cars sold to            CA, NY
                                       alleviate air pollution

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                   16
Blueprint for Action: What the Legislature can do
        Pick Up the Low Hanging Fruit
            – AFV/HEV access to HOV lanes, special parking access
            – Mandate state procurement of efficient vehicles
            – Run state fleet on biofuel blends B20 or W85 (when available)

        Fund mass transit alternatives

        Leverage actions of larger states
            – Alliance with other states seeking exemption from preemption on feebates
              or mirror alternative legislative remedies that are not preempted
            – Adopt labeling program for tires (under development in CA)

        Provide near term tax incentives for HEVs and AFVs
            – Provide $1,000 state tax credit from 2006-2009
            – Sunset after penetration reaches 10% or feebates are allowed

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                          17
The $3 Billion Efficiency Prize and Real Security:
        Backing out: 8 Million barrels of crude oil saved
        (15% of crude imports) from efficiency alone
                                                                       Efficiency Impact                  Reference           Efficiency
                                                                                                 %       Consumption       Savings by 2025
                                                                                               Savings   Million barrels    Million Barrels
                                                                                  Residual
                                                                                    Fuel        23%           13.2              (3.0)

                                                                                   Motor
                                                                                  Gasoline      28%           10.6              (3.1)

                                                                                   Jet Fuel      5%           15.5              (0.7)

                                       Crude Oil                                  Distillate
                                        Saved                                       Fuel       >19%           7.2               (1.2)
                                                                                                 (1)
                                                           Refined
                                                           Products
                                                                                     LPG         0%           0.6
                                8 MM Barrels
                                                                                   Asphalt      50%           0.3               (0.2)

                                                                                  Lubricants     0%           0.1

                                                                                    Other        0%           0.9
  Source:RMI Analysis, note: additional distillate would be imported
  Expectation is that renewables would save more residual fuel oil                                            48.3              (8.2)
  (1) Additional diesel savings possible from new truck designs

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                               18
Why should you care enough to act?

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing              19
Appendix

          ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing         20
How feebates work

                              How Feebates Result in a More Fuel-Efficient Fleet of Vehicles (1)

                                                                             Improved Fuel Economy of Vehicle Fleet
           Feebate Price Incentives
                                                            Short-Run Change in Sales Mix              Long-Run Change in Product Mix
         Rebates reduce the price                          Available selection of vehicles            The selection of new vehicles
          consumers pay for fuel-                            (including the fuel economy of              being marketed changes:
          efficient vehicles                                 individual models) is                       Manufacturers make vehicles
                                                             unchanged, but price incentives             that are more fuel efficient
         Fees increase the price                            encourage consumers to                      because the resulting increase
          consumers pay for inefficient                      purchase the cheaper, more                  in the feebates helps pay for
          vehicles                                           fuel-efficient vehicles                     additional fuel-economy
                                                                                                         technology

  Source: Davis, W.B., Levine, M.B., and Train, K.T., “Effects of Feebates on Vehicle Fuel Economy, Carbon Dioxide Emissions, and Consumer Surplus”,
  DOE, February 1995, p. 3, Fig. 1-1

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                                   21
Feebate schedules examples: $1,500 discount paid for by
        $800 fee on new cars
                                                      Example of Feebate Schedule (1)

  Source: Davis, W.B., Levine, M.B., and Train, K.T., “Effects of Feebates on Vehicle Fuel Economy, Carbon Dioxide Emissions, and Consumer Surplus”,
  DOE, February 1995, p. 5, Fig. 1-2

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                                   22
Shredding scrapped tires into asphalt can halve asphalt use,
        double road’s life, and offset some of Hawaii gasoline tax loss
        Asphalt Rubber (AR) pavement is a winner versus traditional Asphalt (A) pavement

                       AR repaving reduces cost substantially…

          Use LESS asphalt per lane-mi: From ~180 to ~120 bbl…
           – Same lane-width & density, only ~1/2 as thick (from average of
             ~4” to ~2” pavement thickness)
          … yet DOUBLE LIFE (from 7-10 to 15-20 yrs), and…
          … LOWER costs:                                                                                          For Hawaii, 2025 (1)
            – Up-front cost down ~35% from $70k to $45k/lane-mi
                                                                                                             Annual saving in resurfacing
            – Life-cycle cost advantage even better                                                           from $17M to $21M
                                                                                                              (49%-61% vs. today)
                     … and could have significant effect by 2025:
                                                                                                             This would offset 10% of
                                                                                                              gasoline tax revenue shortfall
          US today: 300 M total scrapped tires per year                                                      from efficiency gains
           – 96M/yr currently not used — would satisfy ~40% of current re-
             pavement demand
          65% of re-pavement by 2025 assuming fixed supply proportion

          Lowers national paving costs by $11 billion ($53BN to $42BN/yr)

 (1) Assumes approx 2/3 of 3R (Restoration, Rehabilitation, and Resurfacing) budget for Hawaii is used for resurfacing.
 Source: (1) RMI analysis / RMI US Asphalt Model (2) Jung, J-S., Kaloush, K E., and Way, G.B., "Life Cycle Cost Analysis: Conventional versus Asphalt
 Rubber Pavements", Arizona State University, August 2002. (3) http://wwwcf.fhwa.dot.gov/ohim/hs99/hm51r.htm, assuming 50% of HI 3R state funds go
 towards re-paving existing and new roads; from figures Tables SF12AP1 through SF12AP6. (4) “US Scrap Tire Markets 2001”, Rubber Manufacturer
 Association, December 2002

         ROCKY MOUNTAIN INSTITUTE
Hawaii Energy Commitee Briefing                                                                                                                    23
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