Testimony

Before the Committee on Finance,

U.S. Senate

United States General Accounting Office

GAO

For Release on Delivery

Expected at 10:00 a.m. Tuesday,

July 10, 2001 ALTERNATIVE MOTOR

FUELS AND VEHICLES

Impact on the

Transportation Sector

Statement of Jim Wells, Director, Natural Resources and

Environment

GAO-01-957T
Page 1 GAO-01-957T Alternative Motor Fuels and Vehicles

Mr. Chairman and Members of the Committee:

We are pleased to be here to discuss alternative motor fuels and vehicles

and related tax incentives. As you know, the transportation sector

accounts for the bulk of the petroleum consumption in our nation,

currently representing about two thirds of total petroleum use and roughly

a quarter of our total energy consumption. Each day, vehicles in the

United States consume about 10 million barrels of petroleum fuels,

primarily gasoline and diesel. According to projections made by the

Energy Information Administration (EIA), this figure will rise to about

15 million barrels per day by 2010, much of which will be met by importing

oil. This trend has long been a source of national concern.

Partly to address this concern, a number of measures have been taken

over the past 25 years either to reduce petroleum consumption or to

increase fuel diversity in the transportation sector, including tax

incentives, mandates for alternative fuel vehicles, and laws to promote

automobile fuel efficiency.1

 In 1992, Congress passed the Energy Policy

Act (EPACT) which, among other things, sought to replace at least 10

percent of the projected petroleum fuels consumed by Light Duty Vehicles

in 2000 and 30 percent in 2010 with alternative fuels—such as ethanol,

methanol, liquefied petroleum gas, compressed natural gas, liquefied

natural gas, and electricity. To achieve these goals, Congress has

established federal tax deductions and credits aimed at encouraging the

purchase of alternative fuel vehicles and use of alternative fuels. Federal

agencies, state governments, and private consumers have purchased an

increasing number of alternative fuel vehicles. Despite these efforts,

alternative fuel use in the transportation sector remains very small.

Recently, GAO has issued several reports examining, among other things,

federal programs to promote alternative fuel vehicles and alternative fuel

use in the transportation sector.2

 My testimony today, which is based on

 1

 Some of the other steps that have been taken to reduce petroleum consumption in the

transportation sector include encouraging the use of mass transit and high-occupancy

vehicles (e.g., carpooling).

2 Tax Incentives for Petroleum and Ethanol Fuels (GAO/RCED-00-301R, Sept. 25, 2000),

Energy Policy Act of 1992: Limited Progress in Acquiring Alternative Vehicles and

Reaching Fuel Goals (GAO/RCED-00-59, Feb. 11, 2000), Energy Policy Act: Including

Propane as an Alternative Motor Fuel Will Have Little Impact on Propane Market

(GAO/RCED-98-260, Sept. 24, 1998), Tax Policy: Effects of the Alcohol Tax Incentives

(GAO/GGD-97-41, Mar. 6, 1997).
Page 2 GAO-01-957T Alternative Motor Fuels and Vehicles

these reports, specifically discusses the extent of alternative fuel vehicle

acquisition and fuel use, some of the barriers inhibiting greater use of

alternative fuels and vehicles, and the federal tax incentives used to

promote the use of alternative motor fuels and vehicles.

Limited progress has been made in increasing the numbers of alternative

fuel vehicles in the national vehicle fleet and the use of alternative fuels,

relative to conventional fuel vehicles and gasoline and diesel. For

example, according to EIA’s estimates, alternative fuel vehicles accounted

for about 1 million or 0.4 percent of all vehicles in the United States in

1999. EIA also estimates that alternative fuels accounted for the equivalent

of about 354 million gallons of gasoline or about 0.2 percent of total

vehicle fuels consumption in 2000. When alternative fuels that are used as

oxygenates in gasoline, such as ethanol and MTBE are added, the total

increases to about 4.5 billion gallons or less than 3 percent of the total

motor fuels consumption—about 162 billion gasoline-equivalent gallons—

in 2000. As shown in figure 1 below, the consumption of alternative fuels

has increased in absolute magnitude since the early 1990s, but its relative

share in total motor fuel consumption has remained very small.

Purchases of

Alternative Fuel

Vehicles and the Use

of Alternative Motor

Fuels Remain Limited
Page 3 GAO-01-957T Alternative Motor Fuels and Vehicles

Figure 1: Trends in Motor Vehicle Consumption of Petroleum and Alternative Fuels

Note 1: Alternative fuels include ethanol and MTBE used as oxygenates in gasoline.

Note 2: Year 2001 data are forecasts.
Page 4 GAO-01-957T Alternative Motor Fuels and Vehicles

A number of barriers have impeded the American public’s acquisition of

alternative fuel vehicles and use of alternative motor fuels. The most

critical of these are:

• The relatively low price of oil—Even today’s gasoline prices are not high

enough to induce many people to give up their conventional gasoline and

diesel automobiles in favor of alternative fuel vehicles and fuels. For

example, in an analysis performed last year for GAO, EIA estimated that

doubling the price for crude oil (then $20/barrel) would not significantly

increase the market share for alternative fuel vehicles. Moreover, an entire

refueling infrastructure and auto-manufacturing system dedicated to this

fuel has been established. This system has become so developed and

entrenched over time that even if the price of gasoline rose above the price

of an alternative fuel, many consumers would be reluctant to switch to

alternative fuel vehicles and alternative fuels.

• Insufficient availability of alternative fuel refueling infrastructure—

Likewise, the limited number of refueling stations for alternative fuels,

compared with gasoline and diesel stations, has been a major impediment

to using alternative motor fuels and vehicles. For example, in 1999, there

were only about 6,000 refueling stations for alternative fuels in the United

States, compared with over 180,000 conventional fuel refueling stations.

The federal and state officials that administer vehicle fleets told us last

year that the lack of adequate refueling infrastructure represents the

biggest impediment to using alternative fuel vehicles. A chicken- and-egg

situation prevails here. Because of the insufficient number of alternative

fuel vehicles in the nation’s vehicle fleet, owners of gasoline refueling

stations are reluctant to provide refueling facilities for them. Adding to this

reluctance, the high cost of providing some alternative fuels at existing

refueling gasoline stations reduces station owners’ willingness to provide

the facilities. For example, the costs to build facilities that provide

compressed natural gas cost about $300,000—significantly more than the

cost of refueling stations for gasoline, ethanol, or methanol. At the same

time, the scarcity of alternative fuel refueling stations makes it less

convenient to acquire alternative fuels, which in turn deters the general

public from buying the vehicles that use them.

• The relatively higher cost of certain alternative fuel vehicles—According

to most stakeholders we contacted last year, on average, alternative fuel

vehicles cost more than conventional vehicles which reduces the incentive

for their purchase, although these costs vary by type of vehicle. For

example, a vehicle that runs on compressed natural gas generally costs

from $3,000 to $5,000 more than the conventional version of the same

Fundamental

Economic

Impediments Hinder

the Acquisition and

Use of Alternative

Fuel Vehicles and

Alternative Motor

Fuels
Page 5 GAO-01-957T Alternative Motor Fuels and Vehicles

vehicle. In addition, last year, we reported that the price of an electricpowered vehicle generally ranges from the low $30,000s to the mid-

$40,000s, according to the Electric Vehicle Association of the Americas.

Because of the high purchase price, most of the estimated 3,500 electric

vehicles in operation were identified as having been leased. The costs of

alternative fuel vehicles are often higher than vehicles that run on

conventional fuels because consumer demand for them is not great

enough to achieve economies of scale in their production.

To promote increased use of alternative fuels and vehicles in the

transportation sector, Congress has supported and enacted certain tax

incentives, including federal tax exemptions, credits and deductions.

Based on U.S. Treasury Department’s estimates, since the late 1970s, these

tax incentives have resulted in forgone tax revenues of about $13 billion

for alcohol fuels and about $600 million for clean-burning fuels and

electric vehicles, in year-2001 dollars.3

 These amounts comprise only a

small share of the total transportation tax incentives over the years (much

of which has been devoted to conventional fuels) but, as figure 2 shows,

they have risen fairly steadily over time.

 3

 Qualifying clean burning fuels include natural gas, liquefied natural gas, liquefied

petroleum gas, hydrogen, or other fuels composed 85 percent of methanol, ethanol, any

other alcohol, ether, or any combination of these.

Tax Incentives

Promote the

Acquisition and Use

of Alternative Fuel

Vehicles and

Alternative Motor

Fuels
Page 6 GAO-01-957T Alternative Motor Fuels and Vehicles

Figure 2: Trends in Tax Revenue Forgone Through Tax Incentives for Alternative Fuels

Note: Revenues are in 2001 dollars.

In conclusion, so far, based on our studies and EIA’s statistics, alternative

fuels and vehicles have not made much of a dent in the conventional fuel

and vehicle dominance of the U.S. vehicle fleet, primarily because of the

fundamental economic obstacles just discussed. As we reported in our

February 2000 report, any significant increase in the use of alternative

motor fuels and vehicles by the general public will depend on two main

factors: (1) a dramatic and sustained increase in the price of gasoline and

(2) very large incentives, far above the current levels, to reduce the cost of

using alternative fuels and vehicles. Depending on what happens to

conventional fuel prices, these incentives would likely need to be

maintained for sometime—at least until the number of vehicles reaches

the level necessary to support an economically sustainable infrastructure.

Mr. Chairman, this concludes my prepared remarks. We would be pleased

to answer any questions you or any other member of the Committee may

have.
Page 7 GAO-01-957T Alternative Motor Fuels and Vehicles

For further information, please contact Jim Wells at (202) 512-3841.

Individuals making key contributions to this testimony include

Godwin Agbara, Anne Stevens, and Daren Sweeney.

Contact and

Acknowledgments

(360115)
The first copy of each GAO report is free. Additional copies of reports are

$2 each. A check or money order should be made out to the

Superintendent of Documents. VISA and MasterCard credit cards are also

accepted.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St., NW (corner of 4th and G Sts. NW)

Washington, DC 20013

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and testimony. To

receive facsimile copies of the daily list or any list from the past 30 days,

please call (202) 512-6000 using a touchtone phone. A recorded menu will

provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an

e-mail message with “info” in the body to:

Info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• E-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

Ordering Information

To Report Fraud,

Waste, and Abuse in

Federal Programs