How Hawaii can Win the Oil EndGame
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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
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
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
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
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 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 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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