2



# PAYING THE FREIGHT:

THE CONSUMER BENEFITS OF INCREASING

THE FUEL ECONOMY OF MEDIUM AND

HEAVY DUTY TRUCKS

Dr. Mark Cooper
Director of Research, CFA

With contributions from Jack Gillis Director of Public Affairs, CFA and author, The Car Book

February, 2014CONTENTS

I. INTRODUCTION 1

Purpose Overview of Findings: Commercial Transportation Fuel Costs are Large, Growing and Have a Direct Impact on Households

II

. CONSUMERS PAY THE FU EL COSTS FOR AMERICA ’S TRUCKING 4

AND DELIVERY INDUSTR Y

Current Household Expenditures for Medium and Heavy Duty Truck Fuel Future Household Expenditure Trends Commercial Fuel Costs Are Passed Through to Households

Econometric Models Demonstrate the Pass

- Through Nature of Transportation Fuel Costs

III. POTENTIAL FUEL AND COST SAVINGS FOR MEDIUM AND 10

HEAVY DUTY TRUCKS

Light Duty Technology Experience as Context for Medium and Heavy Duty Standards Medium and Heavy Duty Truck Technology Curves Consumer Benefits of Reducing Transportation Fuel Costs Indirect Benefits of Reducing Transportation Fuel Costs

The Costs of Implementing Standards

IV. A CHIEVING FUEL COST SAVINGS WI TH EFFICIENCY STANDA RDS 18

Externalities Lead to Underinvestment in Fuel Saving Technologies Market Obstacles , Barriers and Imperfections Inhibiting Investment

Performance Standards as a Policy Tool to Overcome Obstacles to Investment

Conclusion

LIST OF EXHIBITS

II

- 1: Annual Cost of Transportation Energy Costs per Household by Vehicle Type 4

II

- 2: Motor Vehicle Fuel Economy 1949

- 2011 5

II

- 3: Trends in Fuel Economy and Consumption Mileage by Vehicle 6 Type Expected MPG

II

- 4: Gross Domestic Product by Sectors 7

II

- 5: Sector Multipliers for the California Economy 9

III

- 1: Predicted Light Duty Fuel Efficiency Costs and Resulting Increases 10 in Fuel Economy

III

- 2: Technology Cost and Fuel Savings 11

III

- 3: The Cost of Fuel Efficiency Technology and its Payback in Fuel Savings 12

III

- 4: Break

- Even analysis for Class 8 Trucks 13

III

- 5: Diesel Prices i n the Long Term 14III

- 6: Tractor Trailers: Reduction in Consumption & Break Even Fuel Costs 15

III

- 7: Ratio of Estimated Cost to Ac tual Cost by Source 17

IV

- 1: Performance Standard and Market Barriers to Efficiency in the 21 Medium and Heavy Duty Truck Sector

IV

- 2: Interaction of Supply and Demand Side Factors in a Recursive Loop 231 I. INTRODUCTION

P URPOSE

Over the past decade public opinion polling by the Consumer Federation of America and other consumer groups has revea led strong and widespread support f or energy efficiency standards for consumer durables including automobiles and households appliances. 1 Because gasoline and electricity bill s are such a large household expense

– in 2010, households spent about $ 2,130 on gasoline and $1400 on electricity 2

— it is not surprising that polls consistently elicit these responses. Consumers feel the pain at the pump and when they pay their utility bills.

Economic analysis has shown that ther e is a sound basis for this consumer support of energy efficiency stan dards. 3 Although energy saving technologies require an investment, when they lower energy bills by much more than the cost of the technology

, the result i s substantial net savings

to consumers.

While direct household expenditures on personal energy are significant, they are only part of the nation’s expenditures on energy. E nergy consumption in the commercial and industrial sectors exceeds the energy consumed in the residential sector. 4 Ultimately, consumer s pay th e costs of

commercial and industrial transportation energy consumption in the price of the goods and services they buy.

Although the consumer impact of commercial and industrial energy costs will vary across goods

, services and markets, this report shows that these indirect expenditures on energy are substantial and have a significant impact on U.S. households. One of the largest contributors to

commercial energy consumption is America’s medium and heavy duty trucks. R educing the energy consumption of these truck fleets will have a positiv e impact on household expenditures.

T h is paper examines the costs of energy used by medium and heavy duty trucks

, t he potential for energy savings in this transportation sector

, and the positive impact increased fuel efficiency will have on America’s h ouseholds

. When fuel prices rise

, so do es the cost of consumer goods due to the cost of transporting those goods

. Convers e ly, because of competition, a reduction in transportation costs will result in lower cost of goods for consumers. Moreover, the fact that a significant component of the trucking industry is also seeking ways to reduce the enormous impact

of fuel expenditures on their costs reinforces the recognition

. 5

1 Mark Cooper, 2013, Energy Efficiency P e rformance Standards: The Cornerstone of Consumer

- Friendly Energy Policy, Consumer Federation of America, presents an extensive bibliography of survey analysis by the Consumer Federation of America and other consumer groups.

2 Here we use 2010 estimates because the data for analyzing medium and heavy duty truck fuel expenditure s used in this paper, is available through 2010. The most recent figures for consumer expenditures (mid

- 2011 through mid

- 2012) are $2600 for gasoline and $1400 for electricity.

3 Cooper, 2013.

4 Household gasoline consumption accounts for about half of tr ansportation fuels. Households account for about one

third of electricity consumption and one

- sixth of natural gas consumption.

5 Consumer Federation of America (Gillis) interviews with UPS, Navistar, Peterbilt, ATA.2

O VERVIEW OF F INDINGS : C OMMERC I AL T RANSPORTATION 6 F UEL C OSTS ARE L ARGE , G ROWING AND H AVE A D IRECT I MPACT ON H OUSEHOLDS

Because the money household s spend for fuel used to deliver consumer goods and services

is substantial , reducing fuel usage would benefit Americans . CFA has concluded that :

 In 2010, medium and heavy duty truck fuel costs amount ed to more than $11 00 per

household . U nless policies are adopted to change underlying trends , this amount is expected to grow considerably during the next two decades.

 Implementing fuel saving technologies could lower medium a nd heavy duty truck fuel consumption by almost 50% and yield a net savings to consumers (after the cost

of th e technologies are recovered) over $250 per year.

 As fuel prices rise and transportation services increase , the potential household savings would r ise to over $400 per year by 2035.

 Because the transportation sector is very competitive, the cost savings in fuel will be passed through to consumers.

Reducing commercial transportation fuel cost s will benefit the economy for the following reasons :

 As the central transportation service in our economy , t rucking accounts for nearly

90% of the total value of freight transport, two thirds of the fuel used and slightly

less than half of the total ton miles. 7 Reducing fuel expenses will reduce the cost of transportation and thereby increase the demand for transportation service s , which

will have a significant positive multiplier effect on the economy

.

 In spite of the fact that lower fuel costs increase demand for transportation services,

the net effect wi ll be overall cost savings because the increase in efficiency is much larger than the increase in the demand for services

.

 As pass

- through transportation fuel costs for consumer s decline, disposable income

will increase, further stimulating economic growth and activity.

Reducing commercial transportation fuel costs will provide significant social benefits in the following ways :

 The environmental impact of medium and heavy duty trucks is significant and growing. Reducing their use of fuel will provide a major contribution to reducing pollution and greenhouse gas emissions

.

 The potential for cutting commercial transportation fuel usage in half will significantly reduce our dependence on foreign o il thereby improving America’s

energy s ecurity.

6 In this paper we are using the ter m “commercial transportation” to include transportation costs related to medium and heavy duty trucks. We are excluding other types of commercial transportation (i.e., air, rail, public transportation, etc.).

7 Committee to Assess Fuel Economy for Medium and Heavy Duty Vehicles, Technologies and Approaches to Reducing the Fuel Consumption of Medium

- and Heavy

- Duty Vehicles, National Research Council, 2010, Figure 1

- 5, Table 2

- 1.3

Performance standards are an effective approach to achieving savings in transportation fuel costs , as shown by :

 Overcoming the m arket ba rriers and imperfections in the trucking sector that have prevented many economic opportunities to save energy from being implemented.

 In 2011 , the trucking sector had a fuel economy standard applied for the first time

. This was almost 40 years after fuel economy standards were implemented for cars and small trucks (light duty vehicles). While not due to take effect until 2014, this standard has stimulated significant progress and will produce significant savings

. 8

More aggressive standards in the future will yield even greater savings.

In this report: Section II will explain how we derive the cost of fuel consumption by medium and heavy duty trucks that is borne by households.

Section III will identify the magnitude and cost of the reduction in fuel consumption that can be achieved in the medium and heavy duty truck sector.

Section IV will examine why the medium and heavy duty truck sector has failed to incorporate technologies that would lower fuel consumption on their own and why performance

standar ds are an effective policy to address this significant economic issue

.

8 Class 8 trucks are expected to experience a 20% increase in fuel efficiency

.4

I I. CONSUMERS PAY THE FUEL COSTS F OR AMERICA’S TRUCKIN G AND

DELIVERY INDUSTRY

C URRENT H OUSEHOLD E XPENDITURES FOR M EDIUM AND H EAVY D UTY T RUCK F UEL

To estimate the potential consumer sav ings from improvements in the fuel economy of medium and heavy duty trucks, we first estimate d the fuel used by the three main vehicle categories : households, commercial and medium and heavy duty. We undertake this analysis because different organizations that analyze energy use slightly different categorizations of e nergy use by types of

vehicles and b ecause light duty vehicles, which make up the vast majority of households vehicles, are already covered by standards. We want to be careful not to double c ount energy consumption or potential energy savings in our estimate of indirect household expenditures on medium and heavy duty transportation fuel.

Exhibit II

- 1 shows transportation f uel consumption divided into three categories: household light duty vehicles, commercial light duty vehicles, and medium and heavy duty trucks.

We use three data sources to build our estimate, the Annual Energy Outlook of the Energy

Information Administration , the Bureau of Labor’s Consumer Expenditur e Survey , and the data gathered by the U.S. Department of Transportation ’s Bureau of Transportation Statistics , which estimates fuel usage by types of vehicles.

E XHIBIT II

- 1: A

NNUAL C OST OF T RANSPORTATION E NERGY C OSTS PER H OUSEHOLD BY

V EHICLE T YPE (2010 )

How Vehicle Types are Characteriz ed Consumption Fuel Annual Cost

Billion Gallon s Type Cost Total Per

Billion Household

EIA/BLS BTS EIA/BLS BTS

Household Gasoline Light Duty Short Axle 91 88 Gasoline $2.835 $254 $2,150

Commercial Light Duty Light Duty Long Axle 36 36 Gasoline $2.835 $102 $ 865

Medium & Heavy Duty 2Axle

- Six Wheel 43 45 Diesel $2.993 $132 $1,116

& Combination

Source: Consumptions: Bureau of Labor Statistics (BLS)

, Consumer Expenditure Survey 2010, Energy

Information Administration (EIA)

, Annual Energy Outlook, 2013, Appendix A ; Department of Transportation (DOT)

, Bureau of Traffic Statistics (BTS) Data Base, Ta bles 4

- 11 to 4

- 14. Price: Energy Information Administration, Petroleum Database; Households, Bureau of the Census, Statistical Abstract of the United
States: 2012, Table 59, 118 million households.

Notes: Annual total is based on the average of the EIA and BTS consumption multiplied by the average price. Per household is calculated by dividing the annual total by 118 million households.

The EIA identifies the amount of energy consumed by automobiles and light duty vehicles, medium duty vehicles and hea vy duty trucks. The EIA data does not separate out household and commercial use of light duty vehicles , so we used the Consumer Expenditure Survey f rom the Bureau of

Labor Statistics to estimate the gasoline consumed by h ouseholds. We subtracted this fro m the total for light duty vehicles , as r eported in the Annual Energy Outlook

, to determine the amount of energy consumed by light duty vehicles that is not consumed by households. We call this commercial light duty. As shown in Exhibit II

- 1, this approa ch provides an estimate that is consistent with the Department of Transportation data, which categorizes vehicles by axle length and the number of5

tires. The consistency of this data provides us with a substantial level of confidence in the amount of medium and heavy duty truck fuel we use for our calculations.

We then divide d the total dollar amount by the total number of households to arrive at the expenditure per households

. Using 118 million households, Exhibit II

- 1 shows the resu lting household energy cost s attributed to each transportation sector. 9 Direct household expenditures on gasoline were about $2,15 0 in 2010. We estimate that indirect household expenditures on fuels consumed by medium and heavy duty trucks was just over $1,100. In other words, for every one

dollar households spent directly on personal transportation fuel, they spent about 50 cents on medium and heavy duty truck transportation fuel.

F UTURE H OUSEHOLD E XPENDITURE T RENDS

As large as current household spend ing is on transportation fuel used by medium and heavy duty trucks

, it will become ev en more stunning in the future. Going forward, the new CAFE requirements for light duty vehicles will lower the household impact of fuel costs associated with

consumer an d commercial light duty vehicles. On the other hand, without some controls, the $1,100 that households pay for medium and heavy duty truck fuel will only increase. Exhibit II

- 2 shows that historically, the fuel economy of heavy

- duty trucks has not incre ased. The burden on households of these indirect expenditures, relative to direct fuel expenditures will grow.

E XHIBIT II

- 2 : M OTOR V EHICLE F UEL E CONOMY 1949

- 2011 (M ILES PER G ALLON )

Light duty Fuel Economy

Standards

Source: U.S. Energy Information Administration, Monthly E nergy Review, December 2012, page 17.

The most recen t Annual Energy O utlook from the EIA

, incorporat ing the new fuel economy standard for light duty vehicles

, projects a substantial decline in fuel consumption by those vehicle s
, as a result of increasing fuel economy standards, as shown in the top graph of Exhibit II

- 3

. As shown in the bottom graph of Exhibit II

- 3

, fuel consumption of light duty vehicles (and therefore household gasoline) is projected to decline because the increase in fuel economy is larger than the expected increase in miles driven

. 10

.

Without long

- term standards for freight trucks, fuel consumption of medium and heavy duty

trucks is project ed to increase because fuel economy improvements will not keep up with increasing demand for freight services. Within 25 years, taking the price difference between gasoline and

9 The Bureau of Labor Statistics, Consumer Expenditure Survey for 2010, uses a slightly higher figure for consumer units (121 million) and arrives at a slightly lower figure for expenditure on gasoline and motor oil ($2132). To maintain consistency acr oss the categories, we use the estimates in Exhibit II

- 1.

10 Population growth will increase vehicles on the road and overall miles driven.6

0 2 4 6 8 10

2010 2015 2020 2025 2030 2035 Trillion BTU Personal and Freight Consumption of Fuel

Personal Freight Freight

- Price Adjusted 0 10 20 30 40 50

2010 2015 2020 2025 2030 2035 MPG 

### Projected MPG by Vehicle Type

Light Duty diesel into effect, direct and indirect household expenditures on transportat ion energy are projected to be almost equal. Moreover, rising diesel prices relative to gasoline prices will push freight fuel costs higher.

E XHIBIT II

- 3 : T RENDS IN F UEL E CONOMY AND C ONSUMPTION M ILEAGE BY V EHICLE T YPE

E XPECTED MPG

Source: Energy Information Administration, Annual Energy Outlook, 2013.

C OMMERCIAL F UEL C OSTS A RE P ASSED T HROUGH TO H OUSEHOLDS

While we ha ve calculated the size of fuel expenditures on a per household basis

, we must ask, “ do households actually pay these costs? ” We believe the answer is clearly “ Yes. ” These costs are just like any other commercial costs in the economy. When a farmer pays for fertilizer or the delivery driver gets his paycheck, the se are business cost s that are recovered in the pr ice of the

related goods and service s. The same is true with fuel costs. In fact, the Mid

- Atlantic Freight7 0% 2% 4% 6% 8% 10% 12% 14% 

### Chart Title Coalition confirms the pass through of transportation costs in a recent report on how t ransportation and logistics consume a significant portion of household budgets. According to the report,

“ t he freight logistics system costs nearly $4,500 per person, which is spent moving and warehousing goods. This $4,500 factors into the cost of every product we buy. Anything that industry or government can do to make the logistics system more efficient will return benefits in terms of lower cost and greater global competitiveness

. ” 11

While t his estimate of the size of the expenditure on freight logistics includes all transportation modes and all cost s , such as the cost of equipment, maintenance an d salaries paid in the sector, the observation on the importance of transportation costs to the economy applies to all the components of transportation costs , including fuel costs

. In fact, as discussed below, it app lies with greater force to fuel costs since such a large share of the resource to produce transportation fuels is imported.

While t he recognition that transportation costs are paid by consumers is obvious, the concept is reinforced by two observations : First, although transportation costs are a small part of the total economy ( just under 3% )

, they are as large

, or larger

, than several other sectors, including agriculture, mining, utilit ies and construction (see Exhibit II

- 4 ).

E XHIBIT II

- 4 : G ROSS D OMEST IC P RODUCT BY S ECTOR S

Source: GDP by Industry , http://en.wikipedia.org/wiki/Economy_of_the_United_States

Second, fuel costs are the single largest component of transportation costs, representing over

one

- third of the total cost

. Fuel costs are slightly larger than drive r pay and three times as large as the cost of owning and insuring the truck. 12 As transportation costs are passed through to

consumers , fuel is the largest component of that pass

- through

.

11 Mid

- America Freight Coalition “The Economic Importance of Freight,” p. 2.

12 NRC, 2010, Table 6.18

E CONOMETRIC M ODELS D EMONSTRATE THE P ASS

- T HROUGH N ATURE OF T RANSPORTATION

F UEL C OSTS

Th e economic reality of the flow through to consumers of transportation fuel costs is reflected in the way econometric models describe the growth of the economy. Such models are built on input/output t ables, and transportation costs are a significant input in the models. In building these models, the pass

- through of transportation costs is assumed, since transportation plays a fundamental role in the overall cost of production.

In building these model s, the pass

- through of transportation costs is assumed, since transportation plays a fundamental role in economic activity as a factor of production.

Transportation is an economic factor of production of goods and services, implying that relatively small c hanges can have substantial impacts on costs, locations and performance...

Transport also contributes to economic development through job creation and its derived economic activities. Accordingly, a large number of direct (freighters, managers, shippers) and indirect (insurance, finance, packaging, handling, travel agencies, transit operators) employment are associated with transport. Producers and consumers make economic decisions on products, markets, costs, location, prices which are themselves based on transport services, their availability, costs and
capacity. 13

The importance of transportation in these economic models is reflected in the high multiplier it is given in the models. I n order to build a model of the economy, analysts study the places where a sector purchases inputs and sells output. Typically, t h e more places that are touched by a sector, the larger its multiplier. Because most economic models are built on the flow of goods and services through the economy, they depend on the geographic scope and nature of activity within the economy being modele d. T ransportation is generally seen as a central input to measuring broader economic activity.

To further reinforce the impact of transportation costs on consumer pocketbooks, Exhibit

II

- 5 presents the sector multipliers for the state of California. Tra nsportation has the 20 th largest multiplier, in a study of 60 California sectors. Not only is the transportation cost multiplier above

average , but it is substantially larger than the multipliers on related to the petroleum production

.

13 Transportation and Economic Development Authors: Dr. Jean

- Paul Rodriguez and Dr. Theo Notteboom, http://people.hofstra.edu/geotrans/eng/ch7en/conc7en/ch7c1en.html

, A regional analysis reinforces this observation, Oregon, Transportation, Plan Update, Transportation and the Economy Manufacturing is dependent on transportation to receive raw materials and to deliver its products. Manufacturing is usually a highly competitive

ac tivity. Unless an area has other low cost attributes, high transportation costs will cause manufacturers to leave or

avoid that area9 0 0.5 1 1.5 2 2.5 3

Transport Oil extraction Petrol Mfct. Median Multipliers

Industry E XHIBIT II

- 5 : S ECTOR M ULTIPLIERS FOR THE C ALIFORNIA E CONOMY

Source: California Economic Strategy Panel, Using Multipliers to Measure Economic Impacts, 2009, Table 1

In modeling the impact of higher fuel economy with these econometric models, it is important to understand the relative size of two different impacts. On the one hand, as the cost of transportation declines, demand for transportation increases because dem and for goods and services that use transportation increases. However, the fuel savings from greater efficiency are much larger than the increase in consumption due to increases in demand for other goods and services. The net effect is to reduce expendit ure on fuel as a percent of total output. In fact, the reduction in energy consumption may be so large that the absolute level of consumptions is lowered. This has a positive effect on the economy. We consume less petroleum products and more of other go ods and services. Because those other goods and services have bigger multipliers, the economy e x pands.

Thus recognizing the pass through to consumers of expenditures on fuel for medium and heavy duty trucks is important for both energy policy and econo mic policy.10 0 20 40 60 80 100 120 140 160

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Miles per Gallon

Additional Cost

MIT

- 2008 NAS

- 2010 NHTSA

- 2011 III. POTENTIAL FUEL AND COST SAVINGS FOR MEDIUM AND HEAVY DUTY

TRUCKS

L IGHT D UTY T ECHNOLOGY E XPERIENCE A S C ONTEXT FOR M EDIUM AND H EAVY D UTY

S TANDARDS

In 2002, after the first gasoline price spike of the 21 st century, the National Academy of Science undertook an analysis of the technical potential to increase the fuel economy of light duty

vehicles. 14 It concluded that there was substantial opportunity to reduce fuel economy at relatively

low cost s

. They dete rmined that the value of the fuel savings was larger than the cost of the technology needed to reduce fuel use. As shown in Exhibit I II

- 1, other well

- respected research

reached similar conclusions over the co urse of the decade.

E XHIBIT III

- 1: P REDICTED L IGHT D UTY F UEL E FFICIENCY C OSTS AND R ESULTING

I NCREASES IN F UEL E CONOMY

Sources: NAS

- 2010, National Research Council of the National Academy of Science, America’s Energy Future (Washington, D.C.: 2009), Tables 4.3, 4.4; MIT, 2008; Laboratory of Energy and the Environment, On the Road in 2035: Reducing Transportation’s Petroleum Consumption and GHG Emissions Cambridge: July, 2008), Tables 7 and 8; EPA

- NHTSA

- 2010, Environmental Protection Agency Department of Transportation In the Matter of Notice of Upcoming Joint Rulemaking to Establish 2017 and Later Model Year Light Duty

Vehicle GHG Emissions and CAFE Standards , Docket ID No. EPA

- HQ

- OAR

- 0799 Docket ID No. NHTSA

2010

- 0131, T able 2.

Although there were differences in the estimates, a clear consensus emerged showing a significant amount of economic benefit in developing new fuel saving technologies. This universal conclusion was a key reason why the doubling of the fuel econom y standards for light duty vehicles (CAFE) was adopted in 2012. It was particularly significant that this standard was fully supported by diverse segments of the market including: car companies, unions, consumer groups, and

environmentalists.

As shown in Exhibit III

- 1, as the 2025 CAFE standards were being considered, the consensus was that the fuel economy of cars could approach 60 miles per gallon at costs in the range
of $2,000 to $3,000. The standard was set at 54.5 miles per gallon. Given that the av erage fuel

14 Transportation Research Board, National Research Council, 2002, Effectiveness and Impact of Corporate Average Fuel

Econom y
, National Academy of Sciences

.11

0% 10% 20% 30% 40% 50% 60%

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000

NESCCAF GO

- 60 UCS NRC ACEEE economy at the time was about 27 miles per gallon, this represented more than a doubling of the fuel economy of new vehicles. When the fuel economy doubles, fuel consumption is cut in half. Given the amount of money being spent on gasoline, su ch a large reduction in gasoline costs would quickly pay for itself and yield large net benefits over the life of the vehicle. T h is result will be equally true in the medium and heavy duty truck sector.

M EDIUM AND H EAVY D UTY T RUCK T ECHNOLOGY C URVES

The medium and heavy duty truck sector is a much more complex product space than light duty vehicles. Nevertheless

, while there are different types of vehicles, equipment configurations, and use patterns, a similar consensus has emerged with respect to medium and heavy duty trucks

— expenditures on fuel efficient technology will be more than offset by savings in fuel costs

. Exhibit

III

- 2 presents fuel savings in terms of percentage reduction (rather than gallons) for tractor trailers

. Tractor trailers

, defined as Class 8 trucks, are the most significant category of medium and heavy duty trucks, accounting for 60

- 75 percent 15 of the fuel consumption f or this class of vehicles

.

E XHIBIT III

- 2: T ECHNOLOGY C OST AND F UEL S AVINGS

Sources: Northeast States Center for a Clear Air Future, International Council on Clean Transportation and
Southwest Research Institute, Reducing Heavy Duty Long Haul Combination Truck Fuel Consumption and

CO 2 Emissions, October 2009; Don Air, Delivering J obs: The Economic Costs and Benefits of Improving the Fuel Economy of Heavy

- Duty Vehicles, Union of Concerned Scientists, May 2010; Committee to Assess Fuel Economy for Medium and Heavy Duty Vehicles, Technologies and Approaches to Reducing the Fuel

Consum ption of Medium

- and Heavy

- Duty Vehicles, National Research Council, 2010; Go 60 MPG, Delivering the Goods: Saving Oil and Cutting Pollution from Heavy Duty Trucks. A. Siddiq Khan and Therese Langer, 2011, Heavy Duty Vehicle Fuel Efficiency and Greenhouse Gas Emissions: The 2014

- 2019 Standards and a Pathway to the Next Phase, American Council for an Ener gy Efficient Economy, December

.

As Exhibit III

- 2 shows

, various studies predict that significant percentages of fuel reduction (10

- 20%) can be made with technology investments of $10,000

- $20,000. In addition, s ubstantial percentages of reduction (40

- 50%) can be made with investments of $40,000

- $50,000. 16 This high

15 NRC, 2010, Table 2

- 1.

16 It is important to note that a 50% fuel consumption decrease is equal to a 100% increase in fuel economy. In other words, when the fuel economy doubles, the fuel consumption is cut in half.12

reduction in fuel consumption is for Class 8 trucks

, and other categories may not present equally rich fuel saving potential, but the potential is substantial in all classes of trucks. 17

Compared to the figures for light duty vehicles, the cost of adding efficiency technologies to heavy duty trucks may app ear large. However, heavy duty trucks are driven many more miles and

cost between $100,000

- $150,000

. Given the much larger number of miles driven per year in heavy duty trucks and the much lower mileage per gallon , as well as the higher cost of diesel, t he average annual expenditure on f

uel for heavy duty trucks is almost ten times the expenditure for light duty

vehicles. 18

To demonstrate the economics of fuel cost savings, the EPA estimates that to achieve the 20% improvement in Class 8 vehicles by 201 8, it could involve a technology cost of $6215. 19 While this is a substantial amount of money, it would improve the MPG of a typical truck from today’s 6.5 average MPG, to 7.8 MPG. Using typical miles per year and a conservative 4 year period, the

investm ent of $6215 will save over $43,000 after paying for the technology. For a truck operator, that provides a payback period of just over six months. This example is included in Exhibit III

- 2. This is a significant reduction in fuel consumption at a very l ow cost. While requirements for the next phase of fuel efficiency standards are likely to be more expensive, as this paper shows, the resulting benefits will be much greater. The bottom line: even with significant technology costs,

because these vehicles consume such large quantities of fuel, the paybacks will be significant and rapid.

Exhibit III

- 3: T HE C OST OF F UEL E FFICIENCY T ECHNOLOGY AND ITS P AYBACK IN F UEL

S AVINGS

Benefits of 2014

-

2018 Standard MPG Miles

Traveled

Per Year Cost

of Fuel Years of

Owner

ship 4 Year

Cost of

Fuel 4 Year

Fuel

Savings Fuel

Saving

Less Cost Fuel

Savings

per

Year Months

for

Payback

Average Truck

Efficiency 6.5 120,000 $3.88 4 $286,523

$62 15

technology cost

to get 20%

improvement 7.8 120,000 $3.88 4 $238,769 $47,754 $43,534 $11,938 6.25

17 Fo r example, t h e American Council for an Energy Efficient Economy estimates potential fuel savings from two

p hases of technology improvement at between 30% and 46% for heavy duty pickup and vans and Class 8 trucks respectively, http://aceee.org/files/pdf/fact

- sheet/hd

- oil

- reduction.pdf ;. There are many opportunities to reduce fuel consumption that have been studied recently. See for example, Ben Sharpe and Nigel Clark, Trailer technolo gies for increased heavy

- duty vehicle efficiency, Technical, market, and policy considerations, International Council on Clean Transportation, June 2013; Donald W. Stanton, Systematic Development of Highly Efficient and Clean Engines to Meet Future Commer cial Vehicle Greenhouse Gas Regulations, Safe International, 2013

- 01

- 2421, September 2013; TA Engineering, DOE SuperTruck Program Benefits Analysis, December 20, 2012. It should also be noted that the cost analyses are being updated and, reflecting the fin dings in Cooper, 2013, the actual costs are likely to be lower than early estimates.

18 Energy Information Administration, Monthly Energy Review for fuel consumption, of 4, 26 gallons per heavy duty truck of 4126 gallon and 460 gallons per light duty vehi cle in 2011. Diesel was over 7% more expensive tha n gasoline.

19 Fed. Register Vol.76, No. 179, page 5712713 0 0.5 1 1.5 2 2.5

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 Break

- even $/gallon

Technology Cost NRC

NESCAFF

GO

- 60

UCS

Log. (NESCAFF)

Log. (UCS) With estimates of the technology costs and fuel savings, the National Research Council report on medium and heavy duty trucks simplifies the cost benefit analysis by focusing on the cost side and not making assumptions about fuel prices (See Exhibit III

- 3 ). Instead of engaging in the uncertain and sometimes contentious exercise of projecti ng fuel costs over long periods, the

National Research Council estimates the price per gallon that would be necessary to break even on

an investment that incorporates technologies to reduce fuel consumption in medium and heavy duty

trucks

. NRC includes a discount rate, represent ing the time value of money, set at 7% to compare the estimated costs of saved fuel to projections for the future cost of fuel. 20

As shown in Exhibit III

- 4 , the NRC estimated that fuel prices would have to be just $1.09 per gallon f

or a very large investment in new technology to earn a 7% real rate of return. As actual fuel prices are currently over three times this amount and expected to rise over time, the payout from these technologies would far exceed their cost.

E XHIBIT III

- 4 : B REAK

- E VEN ANALYSIS FOR C LASS 8 T RUCK S

Sources: Northeast States Center for a Clear Air Future, International Council on Clean Transportation and
Southwest Research Institute, Reducing Heavy Duty Long Haul Combination Truck Fuel Consumption and

CO 2 Emissions, October 2009; Don Air, Delivering Jobs: The Economic Costs and Benefits of Improving the Fuel Economy of Heavy

- Duty Vehicles, Union of Concerned Scientists, May 2010; Committee to Assess Fuel Economy for Medium and Heavy Duty Vehicles, Tech nologies and Approaches to Reducing the Fuel Consumption of Medium

- and Heavy

- Duty Vehicles, National Research Council, 2010; Go 60 MPG, Delivering the Goods: Saving Oil and Cutting Pollution from Heavy Duty Trucks. A. Sid ddiq Khan and Therese Langer, 2011

, Heavy Duty Vehicle Fuel Efficiency and Greenhouse Gas Emissions: The 2014

- 2019 Standards and a Pathway to the Next Phase, American Council for an Energy Efficient Economy, December

, 2011

.

In Exhibit III

- 4 , we have also converted the results of several other recent studies to this

break

- even approach. While there are some differences among these studies, there is a clear consensus that large investments in increasing the fuel economy of medium and heavy duty trucks are very attractive. All but one of t he analyses show that investments in technology to improve fuel economy would earn more than the 7% discount rate at diesel prices of $2 and substantially more at

20 The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows... takes into account not just the time value of money, but also the risk or uncertainty of
future cash flows; inv estopedia.com/terms/d/ discountrate .asp14

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00

2010 2015 2020 2025 2030 2035 Per Gallon (2011$) higher gas prices. Assuming a ten year truck life, the Peterbilt example yields a cost per g allon saved
of $1.30

EIA’s projected fuel prices over the next quarter century will average close to $4.00 per gallon over the next quarter century, as shown in Exhibit III

- 5 . With average diesel prices projected to be well above $4 per gallon over the next 25 years, the investment in energy saving technology would yield a very attractive return.

E XHIBIT III

- 5 : D IESEL P RICES I N THE L ONG T ERM

Source: Energy Information Administration, Annual Energy Outlook, 2013.

Exhibit III

- 6 shows the size of potential fuel savings compared to technology costs

. It suggests that a goal of cutting tractor trailer fuel consumption in half is economic al in the long run.

In order to cut fuel consumption in half, one must double the fuel economy of the vehicle. This is exactly the target that was adopted for light duty vehicles in the 2025 CAFE rule. For example, if you reduce consumption by 50% the break even cost of fuel is $1.50, which means that as long as fuel is more than $1.50, the cost of technology wi ll be a money saver.

C ONSUMER B ENEFITS OF R EDUCING T RANSPORTATION F UEL C OSTS

A long

- term goal of cutting freight fuel consumption in half would substantially benefit consumer pocketbooks. With the cost of including technologies less than $2/gallon and the price of diesel at $4 gallon, approximately half of the savings in fuel costs ends up in the consumer’s pocket as a net savings. 21

Since net pocketbook benefits (above and beyond the discount rate) would be one

- half of the reduction in fuel consumptio n, which was one half of the baseline consumptions, net pocketbook benefits would be one

- quarter of the baseline consumption. With a long term target of doubling fuel economy of medium and heavy duty trucks (i.e. cutting fuel consumption in half), the

poc ketbook savings would be very large. Given that we have estimated the baseline consumption at slightly over $1100 dollars, the net pocketbook savings would be $275 per year per household. With

21 E ven after the interest rate is deducted and put in the bank, given that a 7% interest (discount) rate has been earned.15 0% 10% 20% 30% 40% 50% 60%

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 % Reduction

Break

- even Fuel Price a baseline of 118 million households, the net pocketbook savin gs would total over $32 billion per

year.

E XHIBIT III

- 6 : T RACTOR T RAILER S : R EDUCTION IN C ONSUMPTION & B REAK E VEN F UEL

C OSTS

S ources: Northeast States Center for a Clear Air Future, International Council on Clean Transportation and

Southwest Rese arch Institute, Reducing Heavy Duty Long Haul Combination Truck Fuel Consumption and

CO 2 Emissions, October 2009; Don Air, Delivering Jobs: The Economic Costs and Benefits of Improving the Fuel Economy of Heavy

- Duty Vehicles, Union of Concerned Scientists, May 2010; Committee to Assess Fuel Economy for Medium and Heavy Duty Vehicles, Technologies and Approaches to Reducing the Fuel Consumption of Medium

- and Heavy

- Duty Vehicles, National Research Council, 2010; Go 60 MPG,

Deliv ering the Goods: Saving Oil and Cutting Pollution from Heavy Duty Trucks. A. Siddiq Khan and Therese Langer, 2011, Heavy Duty Vehicle Fuel Efficiency and Greenhouse Gas Emissions: The 2014

- 2019 Standards and a Pathway to the Next Phase, American Council fo r an Energy Efficient Economy, December.

Viewing the process from the other end, with freight fuel consumption per household projected to rise about 10 percent 22 and diesel fuel prices projected to rise almost 50% 23 in real terms, by 2035

, the total pot en tial savings could rise to $44 0 per year per household, and total over $5 0 billion per year economy

- wide. The actual savings achieved will depend on the timing of the fuel economy increases , the cost of the technology and the rate of increase in diesel pr ices. The economics are sufficiently positive to suggest that policy should endeavor to achieve the largest improvement in fuel economy as quickly as the industry can implement it.

I NDIRECT B ENEFITS OF R EDUCING T RANSPORTATION F UEL C OSTS

After the oil pr ice shocks of the 1970s, econometric modeling focused on understanding

how economic growth was impacted by increases and decreases in energy costs and how those changes affected economic activity. 24 These are the same models ( discussed previously ) that can be

22 EIA, Annual Energy Outlook, Table A

- 7, projects a 30% increase in freight ton miles by 2030, which is partially offset by the growth in the population.

23 EIA, Annual Energy Outlook, Table A

- 3.

24 James Hamilton Oil Prices

, Exhaustible Resources and Economic Growth, Center for Energy and Environmental Economics, February 2012; EPA analysis of the Transportation Sector: Greenhouse Gas and Oil Reduction Scenarios, February 10, 2010.16

used to explain how medium and heavy duty fuel costs are passed through to consumers. E nergy

costs are linked to overall economic activity for two main reasons :

First, the investment in consumption reducing technologies increases employment and economic output in the sector that produces the new technology. T his effect can be seen in the previous Exhibit II

- 3 . The multipliers i n oil sector activity are much lower than most other activities. Shifting resources out of oil

- related activities into other activities creates more economic growth. The impact is particularly large when imports are replaced because financial resources that go abroad to pay for imports go to nations with which the balance of trade is negative, resulting in a

drain ing of r esources. It is also large whe n the re are energy savings in the transportation sector because of its central role as a factor of production in many sectors . Since energy accounts for such a large part of the transportation costs, the cost of transportation will be lowered significantly and demand for transportation services will increase disproportionately, triggering a larger multiplier for

this sector.

S econd, the resulting net savings for consumers gives them more discretionary income, which stimulates economic activity in other sectors

. This effect flows from the fact that by lowering household expenditures broadly, consumers have mo re disposable inco me to spend

. 25 Since the goods and services purchased tend to have higher multipliers than the multipliers in the sector where consumption of services has been reduced (petroleum), the effect is magnified.

Given the role that transportation costs play in America’s economic structure

, as well as the multiplier effects, it is no surprise that improvements in the fuel economy of medium and heavy duty trucks will have a large, positive effect on the economy. Due to the pass through nature of transportation f

uel costs, these savings are a major reason why households will experience lower

costs of goods

. Applying an econometric model to the base case identified in Exhibit III

- 1

, the

Union of Concerned Scientists projects : 26

 100 billion gallons of fuel savings with

 net direct cost savings of $24 billion and

 indirect economic benefits of a $10 billion increase in gross domestic product and 124,000 jobs.

This analysis suggests that indirect economic benefits are about two

- fifths the size of the

direct fuel cost savings, which adds substantially to the total net benefit and improves the cost benefit ratio substantially.

T HE C OSTS OF I MPLEMENTING S TANDARDS

Another important consideration in estimating the net benefits of performance standards

relates to how the es timate of the costs to meet the standard are calculated. The analysis often presented in regulatory proceedings is typically static and based on current costs. On the other hand, a thoughtful, well

- designed performance standard will be dynamic and facili tate multiple responses to standard compliance rather than mandate specific technologies. If companies are given

25 Chapter 5: Regional Input

- Output Multipliers, http://www.rri.wvu.edu/WebBook/Schaffer/chap05.html

, “The striking thing about the contrast of th ese two effects is the importance of the household in a regional economy. (The same relative pattern occurs in all regional models which I have encountered.)

26 Don Air, Delivering Jobs: The Economic Costs and Benefits of Improving the Fuel Economy of Hea vy

- Duty Vehicles, Union of Concerned Scientists, May 2010.17 0 1 2 3 4 5 6 7 8 9 10 11 12 13

Small '82 Medium '82 Large '82 Small '90 Medium '90 Large '90 Small '82 Large '82 1982 1995 1990 1975 LEV I TLEV ULEV I 1996 T I Phase 2 RVP RFG - 1 RFG - 1 Diesel Diesel

Room AC Central AC Refrig Washer Café Fuel Controls Ratio of Estimated to Actual Regulators

Industry broad flexibility to meet standards, they will determine the most cost beneficial approach and they will learn how to lower the cost of adopti ng new technologies

. History has shown in virtually every other standard compliance effort, the initial cost estimates always prove to have been too high, as

shown in Exhibit III

- 7

. T here is clear and consistent evidence across a wide range of standards that the actual costs of implementing standards were consistently well below their original projections.

E XHIBIT III

- 7 : R

ATIO OF E STIMATED C OST TO A CTUAL C OST BY S OURCE

Sources: Winston Harrington, Richard Morgenstern and Peter Nelson, “On the Accuracy of Regulatory Cost
Estimates,” Journal of Policy Analysis and Management 19(2) 2000, How Accurate are Regulatory Costs

Estimates?

, Resources for the Future, March 5, 2010; Winston Harrington, Grading Estimates of the Benefits and Costs of Federal Regulation: A Review of Reviews , Resources for the Future, 2006; Roland Hwang and
Matt Peak, Innovation and Regulation in the Automobile Sector: Lessons Learned and Implications for

California’s CO2 Standard , Natural Resources Defense Council, April 2006; Larry Dale, et Al., “Retrospective Evaluation of Appliance Price Trends,” Energy Policy 37, 2009.

Exhibit III

- 7 , shows the systematic overestimation by regulators of the cost of ef ficiency improving regulations in consumer durables. The cost for household appliance regulations was overestimated by over 100 percent and the costs for automobile fuel standards were overestimated by about 50 percent. The estimates of the cost from ind ustry were even farther off the mark, running three times higher for auto technologies. 27 Broader studies of the cost of environmental regulation find a similar phenomenon, with overestimates of cost outnumbering underestimates by

almost five to one with industry numbers being a “serious overestimate.” 28

While the very high estimates of compliance costs offered by, for example, the auto manufacturers can be readily dismissed as self

- interested political efforts to avoid regulation, they

can also be seen a s a worst case scenario in which the manufacturers take the most irrational approach to compliance under an assumption that there is no possibility of technological progress or strategic response.

27 Roland Hwang and Matt Peak, Innovation and Regulation in the Automobile Sector: Lessons Learned and Implications for California’s CO 2 Standard, Natural Resources Defense Council, April 2006;

28 Wi nston Harrington, Richard Morgenstern and Peter Nelson, 2000, “On the Accuracy of Regulatory Cost Estimates,” Journal of Policy Analysis and Management 19(2) , 2010, How Accurate Are Regulatory Costs Estimates? Resources for the Future, March 5; Winston Harrington, 2006, Grading Estimates of the Benefits and Costs of Federal Regulation: A Review of
Reviews, Resources for the Future, 2006.18

IV. A CHIEVING FUEL COST SAVINGS WI TH EFFICIENCY STANDA RDS

With such large poten tial economic gains available, two important question arise :

 Why don’t market forces drive these technologies into the vehicles?

 What policies can be implemented to achieve the economic gai ns?

This section offers answer s to these questions based on the reviews of the medium and heavy duty truck sector by several major research institutions

. The evidence they provide is clear :

 The medium/heavy duty truck market is far from perfect , with significant obstacles, barriers and imperfections that inhibit investment in energy saving technologies.

 Performance standards are a very effective tool for overcoming these obstacles.

We examined the s e question s at l ength in our comments supporting the r ecently adopted light duty vehicle efficiency standard 29 and in a recent paper on performance standards. 30 The performance standards paper identified over three dozen market barriers, imperfections and other

causes of market failure in the residential appli ances and buildings, light dusty vehicles and industri a l sectors. It did not include the medium/heavy duty truck sectors. Here we add the important findings from the medium/heavy duty truck sector to our earlier analysis.

E XTERNALITIES L EAD TO U NDERINV ESTM ENT IN F UEL S AVING T ECHNOLOGIES

Externalities as the source of market failure are well grounded in traditional economic analysis. The se analyses if benefits and costs reviewed in the previous section recognize that externalities play a key part in dri ving policies to spur investment in energy saving technologies, but they focus on other obstacles to investment. Externalities are factors that are not directly included in typical cost

- benefit analysis of business investment decisions. In the case of in vesting in fuel efficient technologies, the failure to consider externalities leads to the undervaluation of improving energy efficiency from the societal point of view and a resulting underinvestment in efficiency because these benefits do not factor into typical and immediate business decisions. Because these considerations never enter into business calculations, they are considered market failures. They are

distinct from cases where businesses do make the calculations, but arrive at the r esults that fail to invest in cost beneficial technologies for any of a variety of reasons

. Different authors apply

different labels to the various types of obstacles that inhibit i nvestment but the underlying obstacles

are similar. 31

For example, there are negative externalities that result from fuel consumption, these do not enter into the typical business cost/benefit calculations, as happens when tail pipe emissions create

env ironmental and health problems. An externality that is unique to transportation fuel is the national security implications of dependence on oil imports. While externalities are generally not

29 Cooper, Mark, 2011a, Comments of Consumer Federation of America and Consu mer Groups, Proposed Rule 2017 and Later Model
Year, Docket Nos. Light

- Duty Ve hicle Greenhouse Gas Emissions, EPA

- HQ

- OAR

- 2010

- 0799; FRL

- 9495

- 2 and Corporat e Average Fuel Economy Standards, NHTSA

– 2010

– 0131, February 13 , 2012

. 30 Cooper, Performance Standard s

. 31 Cooper, Performance Standards, reviews the different approaches in the appliance, building, light duty and climate change

literatures. Sanne Aarnink, Jasper Faber, Eelco den Boer, Market Barriers to Increased Efficiency in the European

On

- road Freig ht Sector, Delft, October 2012 , introduce these distinctions for the medium/heavy duty truck sector.19

factored into business decision making, from a societal perspec tive they can, and should, be an important factor in standard development.

While these negative externalities that are reduced by high fuel economy receive the most
attention, o ur focus in the prior secti o n was on positive economic externalities

. Invest ment in energy efficiency creates benefits for the broad public for which the firm making the investment cannot charge. As a result, the indirect macroeconomic effects of energy efficiency do not enter into typical cost/benefit decisions about investing i n energy efficient technologies. While transportation companies capture some of the benefits in increased demand for their services, each

company captures, at best, only a small part of the broader economic stimulus that reducing fuel consumption would ca use. Therefore, such a benefit would be absent in each company’s typical cost benefit analysis of fuel saving technology. This category of externalities has expanded recently well beyond the public goods aspect that was identified in traditional economic analysis to include information and learning, network effects and innovation process.

Similarly, U.S. consumption of transportation fuels is sufficiently large that a reduction in the quantity consumed has the effect of lowering the global (and therefore the national) price of crude oil. The public enjoys a large benefit, but the firms investing in efficiency receive only a small part of that total benefit because each individual firm receives a very small share of the total. This is called a consumptio n externality. 32

Ironically, these positive economic externalities can create concerns from the energy and environmental points of view. When consumers use their savings from lower fuel costs to buy more goods and services they are likely to indirectly inc rease their use of energy. However, the increase in consumption due to this dynamic, called the ‘rebound effect,’ is much smaller than the direct reduction in energy consumption, so the net effect is to reduce overall energy consumption. 33 From the point of view of consumer and macroeconomic analysis, “the rebound effect” represents a positive economic result for consumers. It means that consumer welfare is increasing. How consumers use their increased disposable income is of secondary importance to the fact that they have more income to spend on other goods and services. If the goal is to reduce energy consumption, one must subtract the rebound effect from the benefits column. But experience shows that the rebound effect erases only a fraction of the energy savings. 34

In all of the economic analyses of efficiency presented above, only direct economic costs and benefits were included. No value was placed on environmental or national security benefits ; however these are significant additional benefits. Even though we did not include externalities in the cost benefit calculation, we found that the benefits far exceeded the costs. EPA reached exactly the same conclusion. Since externalities cannot explain the failure of firms to invest in these

attracti ve technologies, EPA shifts it attention to the other factors that inhibit investment.

32 Consumer Federation of America, et al., 2012, Comments on the Proposed Rule 2017 and Later Model Year Light

Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards , Docket Nos. EPA

- HQ

OAR

- 2010

- 0799; FRL

- 9495

- 2, NHTSA

– 2010

– 0131, 2/13/12.

33 Barker, Terry, Paul Eakins and Tim Foxon, 2007, “The Macro

- economic Rebound Effect in the UK Economy,” Energy Policy, 35; Cambridge Centre for Climate Mitigation Research, 2006, The Macro

- economic Rebound Effect and the UK Economy, Cambridge Econometrics and P olicy Studies Institute, May 15; Goldstein, David, Sierra Martines and Robin Roy, Are there Rebound Effects from Energ y Efficiency? An Empirical Analysis, Internal Consistency and Solutions, Electric Policy.com. ; Nadel, Steven, 2012, The Rebound Effect: Large or Small, American Council For An Energy Efficient Economy , August. ; Bornstein, Severin, 2013

, A Microeconomic Fra mework for Evaluating Energy Efficiency Rebound and Some Implications, Energy Institute at HAAS, May.

34 Cooper, Performance Standards.20

M ARKET O BSTACLES , B ARRIERS AND I MPERFECTIONS I NHIBITING I NVESTMENT

Not surprisingly, given the strong evidence of many factors that inhibit efficiency in the

other sectors demonstrated in our earlier analysis , we find strong support for similar factors in the

mediu m and heavy duty truck sector. Exhibit IV

- 1 shows the results of the analysis of the obstacles to investment in efficiency in the medium /heavy duty truck sector prepared by four major independent institutions. It also identifies the major documents on which they rely. These studies support our findings in several important ways. In constructing this table we use the same criteria as

we applied in the analysis of Performance Standards

– including empirical studies or summaries of the empirical literature from the past ten years.

While some argue that there are no market barriers and imperfections to inhibit investment in energy savin g technologies in the medium and heavy duty truck sector, 35 the failure to make the previously cited investment in technologies, in spite of their clear benefits, indicates that there are significant inhibitors at work that have created an “efficiency gap.”

EPA identified six broad categories of factors that have been offered as explanations for the failure of the truck market to pursue investment opportunities in fuel saving technologies that appear to be cost effective

. The other major analyses identify these obstacles and several more, adding a great deal of detail. The findings from the medium/heavy duty truck sector reinforce several of the key aspects of our earlier analysis.

 The analysis involves commercial enterprises, which affirms the fact that economic motivation alone does not ensure optimum investment in efficiency.

 Many of the same factors are confirmed as important obstacles to energy saving investment on both the supply and the demand sides of the market.

 The supply and the demand sides in teract and reinforce each other in a vicious circle. Policies that can break the circle are extremely attractive.

 The diffusion of innovation unfolds as a process in which the early challenge is to provide reliable, verifiable information to trigger the diffusion process. Experience allows the sharing of information later in the process , which creates different challenges

.

The Environmental Protection Agency and the National Highway Traffic Safety Administration (EPA/NHTSA) examined the evidence th at these barriers affect the truck market

and summarized their conclusion as follows.

On the other hand, the short payback period required by buyers of new trucks is a symptom that suggests some combination of uncertainty about future cost savings, trans action costs, and imperfectly functioning market

. In addition, widespread uses of tractor

- trailer combinations introduces the possibility that owners of trailers have weaker incentives than truck owners to adopt

fuel

- saving technology for their trailers...

35 Mark Cooper, Performance Standards, examines the arguments in detail.21

Exhibit IV

- 1: Performance Standard and Market Barriers to Efficiency in the Medium and Heavy Duty Truck Sector

( Based on empirical analysis within the past 10 years)

Nature of the Barrier Effect on the Market Impact of the Standar d

Information Issues in the first sale market * Inadequate or unreliable information Better information more readily available Unavailable due to public good nature about fuel saving technologies Public provision of information Complexity due to geography, driving styles, uses * Cost of gathering Cost of “redundant” production of Information

Information Issues in the Secondary Market Resale valu e inadequately rewards Better information more readily available Compounded information problem fuel saving technology Complexity due to geography, driving styles, uses * Lack of incentive to invest in fuel economy Different uses may affect mileage in 1 st sale market

Split Incentives

* Owners emphasize different attributes Alters the incentives

Owner

- Operator * Information does not overcome Investment embedded in market

Owner

- Renter Coordination Problem Fosters coordination

Tractor

- Trailer

Contract structure*

Shrouded Attribute Bundles of attributes maximize other Increased emphasis on shrouded attribute Lack of availability in bundles* characteristics

-- durability, mainten ance Positional, “status” good costs

Market power Ability to choose operators, Investm ent embedded in market, lower risk dulls market signals

Uncertainty Savings are future, technology costs are Some market uncertainties removed Future savings, level and variance * current Investm ent embedded in market, lower risk Fuel price, performance, life, use, geography* Hidden costs * Risk aversion, Option value Reliability

Adjustment & Transaction Costs Slows innovation Experience with technology accelerates Conservative approach to change, need to learn Resistance to capital expenditure innovation & evaluate technology Resistance to increased cost Lev els the playing field for investment

Accelerated fleet turnover Training costs

Financial

* Crowds out investment in efficiency Levels the playing field for investment Limited Access to Capital * Short payback period due to under

- Investm ent embedded in market, lower risk Short payback, First Cost Bias * compensation of initial investment Time lag for retrofit*22

P RIMARY S OURCES :
Bold = EPA

- NHTSA, Greenhouse Gas Emissions Standards and Fuel Economy Standards for Medium and Heavy Duty Engines and Vehicles, Federal Register 76(179), September 15, 2011, pp. 57315

- 57319.

Italic = Committee to Asses Fuel Economy for Medium and Heavy Duty Vehicles, Techno logies and Approaches to Reducing the Fuel Consumption of Medium

- and Heavy

- Duty Vehicles, National
Research Council, 2010.

Underlined = M ike Roeth, et al., Barriers to the Increased Adoption of Fuel Efficiency Technologies in the

North American On

-- ‐ Road Freight Sector Report for the International Council for Clean Transportatio n March 2013.

* = Sanne Aarnink, Jasper Faber, Eelco den Boer, Market Barriers to Increased Efficiency in the European

On

- road Freight Sector, Delft, October 2012

.

Other sources:

Carbon War Room, Road Transport: Unlocking Fuel

-- ‐ Saving Technologies in Trucking and Fleets, 2012

. Lisa M. Ellram and Susan L. Golicic. Environmentally Sustainable Transport, Executive summary, 2011.

J asper Faber, et al., Technical support for European action to re ducing Greenhouse Gas Emissions from international maritime transport, CE Delft, 2009.

Goodyear Dunlop, Driving fleet fuel efficiency

– the road to 2020

, Diegem (Belgium), 2012

.
C orina Klessmann, et al. 2007, Making energy

- efficiency happen: from potential to realization. An assessment of policies and measures in G8 plus 5 countries, with recomme ndations for decision makers at

national and international level , Utrecht : Ecofys, 2007.

H eikki Liimatainen, e t al., “Energ y Efficiency Practices Among Road Freight Haulers,” Energy Policy, 2012

50.

Gunter Prockl, Henrik Sternberg and Jan Holmstrom, “ICT in Road Transport Operations: Analyzing Potential Effects on Individual Activity Level.” In Logistics and Supply Chain Management in A High North Perspective: The 23rd Annual NOFOMA Conference Proceedings June 9

- 10 , 2011.

Greater Than, Analysis of the European road freight market: Business models and driving forces influencing its carbon footprint Stockholm: Greater Than AB, 2011.

P atrik Thollander, J enny . Palm and P atrik, “ Categorizing barriers to energy efficiency: An interdisciplinary perspective, ” In: Energy Efficiency , Edited by Jenny Palm, S.L. : Sciyo, 2010

D avid Vernon and Alan Meier, “Identification And Quantification Of Principal

-- ‐ Agent Problem Affect Energy Efficiency Investments And Use Decisions In the Trucking Industry.” Energy Policy, 2012, 49.

Haifeng Wang, et al., Marginal Abatement Costs and Cost Effectiveness of Energy

- Efficiency Measures

, London : International Maritime Organization (IMO), 2010.23

[B]ecause individual results of new technologies vary, new truck purchasers may find it difficult to identify or verify the effects of fuel saving technologies. Those who are risk averse are likely to avoid new technologies out of a concern over the possibility of inadequate returns on the investment, or with other impacts....

Both baselines used project substantially less adoption than the agencies consider to be cost

effective. The agencies will continue to explore reasons for this slow adoption of cost

- effective technologies. 36

The report from the International Council on Clean Transportation summarized the supply

and demand side fac tors that inhibit innovation with a simple graph that depicts a recursive loop of
factors that reinforce one another, as shown in Exhibit IV

- 2.

E XHIBIT IV

- 2: I NTERACTION OF S UPPLY AND D EMAND S IDE F ACTORS IN A R ECURSIVE

L OOP I NHIBITING I NVESTMENT IN E FFICIENCY

Lack of Credible

Information

Slowed Technology Development and Deployment

S ource: M ike Roeth, et al., Barriers to the Increased Adoption of Fuel Efficiency Technologies in the North

American On

-- ‐ Road Freight Sector Report for the International Council for Clean Transportatio n March 2013, p. 5

Given the thorough review by EPA/ NHTSA, the NRC, and the International Council for Clean Transportation, as well as our own, suffice it to say that there is a significant energy efficiency

gap in the medium and heavy duty truck market and there is no reason to doubt the economic analysis of the potential benefits of closing that gap. In fact, the benefits have likely been underestimated, not only because the full value of externalities has not been included in the economic analyses , but also because the costs of implementing the standards have likely been

overestimated , as discussed above

.

P ERFORMANCE S TANDARDS AS A P OLICY T OOL TO O VERCOME O BSTACLES TO I NVESTMENT

These reviews of the literatu re on obstacles investment in efficiency in the medium/heavy duty truck sector also identify and discuss the ways that performance standards can improve the market performance. The regulatory analyses are required to consider alternatives. They do not

co nclude that the alternatives (like simple information programs) wi ll have no impact, but that the

36 EPA

- NHTSA, Greenhouse Gas Emissions Standards and Fuel Economy Standards for Medium and Heavy Duty Engines and Vehicles, Federal Register 76(179), September 15, 2011, p. 57319 Uncertain Payback Time Lack of Access To Capital

Insufficient Reliability Lack of Technology Availability24

alternatives do not address key obstacles effectively. As we showed in our Performance Standards paper, standards are attractive because they effectively add ress a wide range of obstacles. As show n
in Exhibit IV

- 1, in the medium/h eavy duty truck sector these beneficial effects include the following:

 Partially internalize the externalities

 Provides experience with the new technologies, lowering hidden costs.

 Creates the market by embedding the technology in products, thereby lowering marketplace and first mover risk

 Triggers learning and economies of scale that lower cost

 Generates and makes available reliable information in a standardized manner

 Fosters coope ration, as the efficiency attribute is giver higher visibility

We believe that one of the other major findings of our earlier analysis of fuel economy and performance standards applies in the medium/heavy duty truck sector as well. I n order to effectively achieve the large net benefits, performance standards must be well

- designed and carefully implemented. T he following characteristics, which were critical for the success in the adoption of fuel economy standards for automobiles and light duty trucks, can successfully guide the development of performance for medium and heavy duty trucks:

Long

- Term: Setting a progressively rising standard that targets a high long term goal over

the course of a decade or more will foster and support a long

- term perspective f or the truck manufacturers, transportation companies and public, by reducing the marketplace risk of inv esting in new technologies. The long

- term view gives the truck makers time to re

- orient their thinking, retool their plants and help re

- educate the trans portation industry. It also gives the industry buying and using these trucks time to adjust

.

Technology N eutral: Taking a technology neutral approach to a long term standard unleashes competition around the standard that ensures that the industry will ge t a wide range of choices at that lowest cost possible.

Product Neutral: The new attribute

- based approach to standards accommodate s buyer preferences; it does not try to supplant them. This levels the playing field between truck makers and

removes any pr essure to push inappropriate vehicles into the market

.

Responsive to industry needs: As was done in the light vehicle standards, establishing a long term performance standard recognizes the need to keep the standards in touch with reality.

The standard s can be set at a moderately aggressive level that is clearly beneficial and achievable. With thoughtful cost estimates

, consistent with the results of independent analyses of technology

costs , a long term performance standard will contribute to the signi ficant reduction of the most significant cost in the transportation industry.

Responsive to market needs: S etting standards that are market

- friendly fa cilitates compliance. The attribute

- based approach ensures that the standards do not require radical changes in the types or size of vehicles the industry needs ; so
, the full range of choice s will be available to the

market

. The setting of a coordinated nation al standard that l ays out a steady rate of increase over a long time period giv

ing the market and the industry certainty and time to adapt to change. These25

characteristics make standards pro

- competitive. Truck makers have strong incentives to compete

around the standard to achieve them in the least cost manner, while targeting the market segments they prefer to serve.

C ONCLUSION

This analysis has made the case for the consumer benefits (and resulting consumer support) for higher fuel economy standards for medium and heavy duty trucks. We have shown that the amount that the industry spends on truck fuel is substantial and those fuel costs are passed to consumers. We have also shown that technologies to reduce the energy consumption of medium and heavy duty trucks would cut fuel consumption dramatically over the next decade . The cost of the energy saving technologies will be more than be recouped in lower fuel costs. The net benefit

would ramp up to over $400 per year, per household, and add up to tal $50 billion dollars p er year. Moreover, macroeconomic benefits would add another $20 billion to the benefit column.

A number of barriers and imperfections in the medium and heavy duty truck market have inhibited investment in fuel saving technologies in the past and are lik ely to continue to do so. As such, fuel economy standards are an effective tool for overcoming those market barriers and imperfections and delivering the savings to the transportation industry, consumers, and the

economy

.