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|Federal Highway Administration > Publications > Public Roads > Vol. 71 · No. 6 > Higher Gas Efficiency Equals Lower Fuel Revenues|
Publication Number: FHWA-HRT-09-001
Higher Gas Efficiency Equals Lower Fuel Revenues
by Ron Hagquist
A Texas study shows that drastically higher motor fuel taxes—or something else—will be needed soon to compensate for revenue losses from increasing vehicle fuel efficiency.
It would be difficult to miss all the recent articles surrounding the current status of the Federal Highway Trust Fund. A main source of financial support for the transportation community, the fund is based on an old model of high gas consumption. Today, automobiles are more efficient, and consumers are cutting back.
But fuel tax rates have not been adjusted to meet growing needs for highway investment. The last increase in Federal fuel taxes was in 1993. Since then, highway construction costs have risen substantially. Recent spikes in fuel prices have reduced travel and hence fuel tax revenues, and voters have been reluctant to increase fuel tax rates.
Inflation in both construction and maintenance also have contributed to the highway revenue needs gap. At a time when fuel costs are continuing to increase, consumer demand is decreasing, and the institutional environment is staying the same, a long-term solution could take a while. Where does that leave the transportation community?
State departments of transportation (DOTs) are beginning to implement innovative financing strategies such as tolling and public-private partnerships (PPPs), but the bulk of their funding still comes from motor fuel taxes. Using even conservative estimates for market acceptance of technological improvements, such as hybrid and plug-in electric vehicles, the prognosis indicates a dramatic increase in motor fleet efficiency (cars and trucks) in the United States over the coming quarter century.
For State DOTs, which rely on motor fuel taxes for most of their funding, the years ahead pose a major financial challenge as motor vehicles become increasingly fuel efficient, motorists purchase less fuel, and fuel tax revenues decline. The Federal and State governments need to plan for this significant change when estimating future funds from the motor fuels tax.
As a basis for long-range strategic planning and policy evaluation, the Texas Department of Transportation (TxDOT) recently engaged a transportation consulting firm to produce a long-term forecast of the fuel efficiency of motor vehicles in the State. The study found that the fuel tax might have to be increased nearly eightfold to meet the expected mobility needs and to compensate for much wider use of more fuel-efficient motor vehicles. These findings indicate that policymakers need to start looking at expanded use of innovative financing and technological solutions such as a vehicle miles traveled (VMT) tax as alternatives to fuel taxes for transportation-related funding.
Fuel Efficiency on the Rise
In his 2007 State of the Union speech, President George W. Bush laid out a comprehensive plan to improve U.S. energy security by reducing the Nation's gasoline consumption by 20 percent over the next 10 years. Increasing Corporate Average Fuel Economy (CAFE) standards for the new car fleet is a primary means of meeting that goal.
The 2007 CAFE standard for the fuel efficiency of new vehicles is 11.7 kilometers per liter, km/l (27.5 miles per gallon, mi/gal) for cars and 9.4 km/l (22.2 mi/gal) for light trucks. Some commercial hybrid vehicles already on the road attain double those figures.
The second generation of hybrids (plug-in vehicles), coming to market around 2010, will have a fuel efficiency of 42.5 km/l (100.0 mi/gal). The third generation will be lighter and even more fuel-efficient. Already, a Volkswagen prototype car made of high-strength carbon composite material attains 101.6 km/l (239.0 mi/gal).
A perfect storm of political, technological, and market factors are converging to drive this change. Politically, financial incentives (subsidies such as tax credits) for purchasing hybrid vehicles have been used. In addition, more ambitious CAFE standards might become a reality.
Technological and market factors, and actions by automakers and buyers, could outpace government action. According to a 2007 survey of motor industry experts by technology-futures forecasting firm TechCast, the consensus is that 2012 is the most likely year for hybrids to attain 30 percent of the U.S. new car market. By 2025, the hybrid market share could be as high as 75 percent, the firm says.
In addition, automakers are introducing other fuel-saving technologies, such as state-of-the-art transmissions. The benefits generally are additive. As more new technologies are incorporated into a vehicle, the fuel efficiency increases. Motivated by fuel prices, auto manufacturers could replace standard spark-ignition engines with diesel engines in light trucks, increasing fuel economy by 30 percent.
In addition, according to the U.S. Department of Energy, although hybrid vehicles accounted for just 2.2 percent of all new vehicle registrations for 2007, hybrid vehicle registrations rose 38 percent for a total of 350,289. Of the top 10 States for new hybrid vehicle registrations, California had by far the most, accounting for a quarter of all new hybrid vehicles, while the remaining top 9 States—Florida, Illinois, Massachusetts, New Jersey, New York, Pennsylvania, Texas, Virginia, and Washington—each had about 3 to 5 percent of new hybrid registrations. Although the State of Washington had only 3.7 percent of new hybrid registrations for 2007, it was second only to California on a per capita basis.
Hybrid vehicles have been sold in the United States since the Honda Insight went on the market in 1999. Total hybrid sales were about 350,000 in 2007, which is an increase of about 40 percent over total 2006 sales. Sales of hybrids also have increased at the national level from 1.4 to 2.6 percent. Diesels, however, experienced a slight decline in 2007, bringing their total sales figures closer to that of hybrid vehicles.
The Texas Study
In developing its long-range plans, TxDOT sought to account for these market trends in fuel efficiency. Using a scenario-based approach, the consultant's study, Accounting for Fuel Efficiency in Texas Fuel Tax Revenue Estimations, found that the average fleet mileage, currently 7.6 km/l (17.9 mi/gal), will likely increase to 24.7 km/l (58.0 mi/gal) by 2030—and quite possibly as high as 36.6 km/l (86.0 mi/gal).
In other terms, Texas's average total fleet (all cars and trucks on the road in the State) efficiency most likely will triple by 2030 and could increase nearly five times. This rate of increased efficiency greatly outstrips the expected growth in Texas's population, resulting in a large net decrease in fuel tax revenues.
The second part of the analysis used the consultant's efficiency projections to determine how much higher the State motor fuels tax would have to be to cover the estimated $86 billion gap in mobility needs expected to accrue in Texas by 2030—that is, the shortfall that was expected in fuel tax revenues before considering higher vehicle fuel efficiency. Using a set of fleet efficiency scenarios, the consultant determined that the tax, currently 20 cents per 3.8 liters (1.0 gallon), necessary to close the gap is between $1.33 and $1.79, most likely $1.51 per gallon. Thus, the State would need to increase the current tax by a factor of nearly eight to compensate for the greater fuel efficiency anticipated in Texas.
The Texas Scenarios
The next 25 years will look very different than the last 25 in terms of two critical factors affecting fuel consumption: the dawn of high fuel-efficiency technology and the dusk of cheap oil. Even a cursory assessment of these factors finds a wide range of possible outcomes. Since simple extrapolation of historical trends is not appropriate due to likely major changes in these fundamental factors, the consultant used a scenario approach to forecast fuel consumption in Texas. According to the study, the two parameters critical to the future of motor fleet fuel efficiency are technological progress and market acceptance.
The consultant combined scenarios of motor-industry market forecasts with scenarios of technological fuel-efficiency improvements. The consultant also estimated the associated probabilities for these individual scenarios, allowing calculation of the likelihoods of the final combined scenarios. Since wider adoption of hybrids is only one of the expected fleet changes that will increase fuel efficiency over the coming decades, the analysis factored in other changes, including greater use of diesel engines and technologies such as continuously variable transmissions and cylinder idling.
Low, medium, and high scenarios for both market and technology resulted in nine scenarios of fleet fuel efficiency, each with an estimated probability, in turn allowing determination of confidence intervals for future fuel efficiency.
The consultant's study found that the overall fleet fuel efficiency in Texas will likely range between 10.4 km/l (24.5 mi/gal) and 17.0 km/l (40.0 mi/gal) in 2020 (averaging out at 13.7 km/l, 32.2 mi/gal), and range between 13.0 km/l (30.5 mi/gal) and 36.8 km/l (86.5 mi/gal) in 2030 (averaging out at 24.7 km/l, 58.0 mi/gal).
"Rather than simply come up with a point estimate of the revenue shortfall due to increased vehicle efficiency, the consultant came up with a range of plausible outcomes on two dimensions of uncertainty to give decisionmakers a look at the real future, which is always more complex than our expectations allow," says Peter Bishop, coordinator of the Future Studies program at the University of Houston.
The second part of the analysis consisted of determining the necessary tax increase that would be required to meet an $86 billion gap in mobility needs through 2030. This analysis goes to the issue of the feasibility of funding mobility needs in Texas entirely from increasing fuel taxes as opposed to tolling roads or using other forms of revenue generation. This computation involved adding to the fuel efficiency scenarios two additional low and high scenarios for annual traffic growth over the 25-year timeframe (1.7 percent and 3.2 percent, respectively).
The "average tax value" is the average annual Texas State tax that would have to be imposed over the entire 25 years to close the entire $86 billion gap over that period. The range of scenario results shows that the "expected value" (the probability-weighted average) is $1.51, with a 75 percent probability that the tax will have to be within a range of $1.33 to $1.79.
Trends and Solutions
Even in growth States such as Texas, the outlook for fuel tax revenues over the coming decades is for dramatic declines. Increases in fuel efficiency can easily exceed long-term growth in driving, resulting in lower fuel use and therefore lower tax revenues.
Many factors will continue to drive the popularity of hybrids and other fuel-saving technology: the rising price of oil, the push to reduce foreign imports of oil, and the desire to reduce greenhouse gas emissions and smog-causing pollutants from tailpipes. The common-denominator solution is reducing fuel use, and the technology is already doing just that.
The study findings—that a considerable increase in funding would be required to meet mobility needs over the next quarter century—argue forcefully for the need for policymakers to consider innovative and road user-based financing. "Future vehicle design and fuel efficiencies are going to profoundly change the financial landscape for highways," says Robert Harrison, deputy director of the Center for Transportation Research at The University of Texas at Austin.
Departments of transportation across the Nation face a similar situation: changing fuel efficiency, aging infrastructure, and the demand-dampening impact of higher fuel prices. In Texas and elsewhere, increasing mobility needs due to continuing population and economic growth add to the challenge.
In response, TxDOT established a high-level 2030 Committee composed of transportation officials, stakeholders, and researchers with the mission to direct a major assessment of the State's transportation needs through 2030. Two university transportation research organizations will complete the study in time for the convening of the Texas Legislature in January 2009.
That study, together with the revenue scenarios based on fuel efficiency, will provide elected officials with the most extensive and up-to-date information possible for considering policy options for addressing the funding gap.
For example, one long-term strategy might be to levy a fee on vehicle miles traveled rather than a per gallon fuel tax. Some new investment-raising strategies that several States are using or testing for building and maintaining the transportation system include tolling, pricing, bond issuance, and PPPs. In the financial arena, diversification is viewed as a prudent strategy to balance risk. Likewise, a mix of revenue sources to fund future surface transportation improvement programs also could benefit States. Industry experts agree that the financing issue is serious and complex. Most likely, the solution also will be complex.
For more information on revenue sources, see the 2007 report Revenue Sources to Fund Transportation Needs by the American Association of State Highway and Transportation Officials, available at www.transportation1.org/tif4report/intro.html.
Ron Hagquist is a senior researcher in the Research Office of the Government and Public Affairs Division of TxDOT. He holds a B.S. in chemical engineering and an M.B.A., and he did doctoral work in energy economics at The University of Texas at Austin.
Editor's note: On September 18, 2008, the U.S. Secretary of Transportation Mary E. Peters remarked on President George W. Bush's action regarding the Highway Trust Fund: "Following the President's signature of legislation to prevent a funding shortfall in the High-way Trust Fund, $8.017 billion of general funds has now been transferred to the Highway Account of the Highway Trust Fund. Yesterday, we paid all current State payment requests, and today, we will resume daily payments. While the Highway Account has been temporarily replenished, we should not delude ourselves into thinking the fundamental problems of transportation funding are somehow resolved. It is imperative that the debate begin now as to the most effective means to finance and improve highways and transit infrastructure in the United States. Clearly, the current tax and spend model is both unsustainable and unresponsive to the country's needs."
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