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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen 8 Actions to Promote Hydrogen Vehicles As discussed in Chapters 1 and 2, the key motivations for this report, and for the interest in hydrogen-powered vehicles, are that increasing imports of petroleum leave the nation vulnerable to disruptions and high costs in the transportation sector, and that emissions of carbon dioxide (CO2) from vehicles may have to be curtailed to avoid serious climate change. This report assesses the resource needs to accelerate a transition to hydrogen fuel cell vehicles (HFCVs) by 2020 and the resulting impacts on reductions in U.S. oil use and CO2 emissions. However, such a transition to HFCVs is unlikely to happen by itself. As discussed in Chapters 6 and 7, too many changes have to occur in manufacturing and fuel supply, with prospects for profit too remote for private enterprise to make investments at the rate necessary to meet national objectives. Therefore a significant federal role will be essential. As requested in the statement of task, this chapter examines policy needs and options required to deploy the “maximum practicable” number of HFCVs discussed in earlier chapters. GENERAL POLICY APPROACHES Policies can be targeted directly at HFCVs (push) or aimed more broadly at creating an environment that favors them (pull). The committee concluded that although broad measures that allow flexibility for the market to find the best options are usually the best approach, this will not be adequate to implement HFCVs. General measures to reduce oil use and greenhouse gases, such as energy taxes, CO2 taxes, and greenhouse gas cap-and-trade systems, have a vital role to play in encouraging a broad array of options for reducing emissions and oil use across the economy. However, they will do little on their own to encourage commercialization of transformative technologies, such as hydrogen, for the foreseeable future. For example, current bills in Congress would impose an effective price of around $5 to $20 per ton of CO2 emissions, which—given the carbon content of gasoline—is equivalent to about 5-18 cents per gallon of gasoline. This fuel price increase would raise the (discounted) life-cycle costs of operating new gasoline vehicles by roughly $200-$700, which is a small fraction of the difference in life-cycle costs between hydrogen and gasoline vehicles in the early years of the alternative hydrogen pathway scenarios in Chapter 6. Even if a long-term commitment to an aggressive greenhouse gas cap-and-trade system, radically higher fuel taxes, or more stringent fuel economy standards were credible, these alone may not be sufficient to spur a transition to HFCVs. For example, auto companies may be reluctant to incur large upfront costs in alternative vehicle development if some of the benefit spills over to rival firms that might be able to imitate new technologies or use them to further their own research and development (R&D) programs. While the committee concluded that a portfolio approach to R&D is necessary to ensure that a sufficient number of options are available to reduce U.S. oil consumption and carbon dioxide emissions, policies to implement specific options will have to be tailored to the technology or outcome desired. For example, improved fuel economy of conventional vehicles may be achieved by raising corporate average fuel economy (CAFE) standards, as recently enacted by Congress, and greater use of biofuels can be encouraged with economic incentives such as those currently in place for ethanol. The committee believes, however, that the current barriers to deploying large numbers of fuel cell vehicles are too great for existing policies to produce rapid growth in HFCV deployment. Thus, if the U.S. government wants to have 2 million HFCVs operating by 2020, it must employ targeted policies designed to push HFCVs into the marketplace. Examples of such policy options are discussed below. POLICIES SPECIFIC TO HYDROGEN FUEL CELL VEHICLES If policy makers decide that the technology is sufficiently developed to warrant promoting long-run penetration of
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen hydrogen vehicles into the in-use vehicle fleet, this committee believes that technology-push incentives that are carefully targeted, substantial, durable, coordinated, and progressively phased out over time will be required.1 Targeted incentives, such as federal tax credits or subsidies for hydrogen vehicle purchase, or minimum sales share quotas imposed on manufacturers, would be needed to kick-start the market for hydrogen vehicles, given that these vehicles cannot become commercially viable until extensive learning-by-doing has occurred through sequential vehicle development, and the vehicles go into the mass production needed to achieve scale economies. Substantial incentives would be required, given that life-cycle costs for hydrogen vehicles are currently so much higher than those for comparable gasoline vehicles. Furthermore, without large incentives, consumers may be reluctant to switch to a new, untested vehicle they are not familiar with, while producers competing in global markets may be reluctant to undertake major and risky investments in transitional technologies. Durable incentives, lasting 15-20 years or more, would be critical for altering private sector expectations about the long-run payoffs to investments with high up-front costs. Coordination of incentives would also be important; for example, even if there is a substantial subsidy for hydrogen vehicle sales, auto manufacturers may still not invest in the technology if incentives for required infrastructure investment, or continued basic R&D, are perceived as inadequate. This is a chicken-and-egg problem: vehicle manufacturers will not produce the vehicles without knowing that the hydrogen supply will be there, while hydrogen producers will not supply the fuel without knowing that the demand for it will be there. Finally, any subsidies should be progressively phased out over time as long-term penetration targets are approached; this limits funding requirements from the government and encourages firms to act more quickly to obtain larger subsidies offered in the earlier years of the program. The committee also emphasizes that a decision to aggressively push hydrogen must be based on an assessment of the relative risks and benefits of HFCVs, as well as competing technologies. On the one hand, the sooner a hydrogen program is initiated, the greater is the likelihood of achieving large reductions in gasoline consumption and the greater the likelihood that rapidly industrializing countries might transition to hydrogen vehicles before getting locked into conventional gasoline.2 On the other hand, there is the downside risk of pushing HFCVs (or any other specific technologies) before they are really ready or if they turn out not to be the best option, which could be extremely expensive and disruptive. The committee concluded that HFCV technology, while promising, is still in the R&D phase and is not yet ready for a decision to initiate commercialization. That decision may come in a few years, and, as shown in Figure 7.1, expenditures would start to increase rapidly in 2015. Thereafter, the technology must be reassessed every few years during the transition, and policies readjusted, if progress on reducing costs and improving performance differs from expectations. In keeping with the requirement that policies be durable, however, any potential readjustment must not appear to threaten the long-term investments that must be made by industry. Policies must be carefully crafted to be both believable and realistic. PROS AND CONS OF SUBSIDIES AND QUOTAS Although government support for basic and applied R&D and fuel distribution infrastructure is necessary, the heart of any program to ultimately promote substantial hydrogen vehicle penetration must be the incentives for auto manufacturers to develop and mass-produce hydrogen vehicles. The two most direct ways to achieve this include a pricing-based strategy, where the market price of hydrogen vehicles is initially heavily subsidized by the government, and a quantity-based approach involving a progressively more stringent sales share requirement for hydrogen vehicles imposed on auto manufacturers. This section discusses the pros and cons of the price- and quantity-based approaches. A final section comments very briefly on broader, technology-neutral approaches to reducing oil use and CO2 emissions. Price-based Approach (Subsidies) A price-based approach involves adoption of a schedule of government subsidies, such as the one sketched in Figure 8.1 (which corresponds to the Hydrogen Success scenario in Chapter 6) based on a specified difference in price between fuel cell vehicles and conventional vehicles. From a policy maker’s perspective, a major drawback of the price-based approach is that the future vehicle penetration rates under a fixed, declining schedule for hydrogen vehicle subsidies are very uncertain, because they will vary with future market developments. For example, vehicle penetration might be rapid and substantial if hydrogen vehicle technology evolves quickly, but if not, and/or if consumers and firms are especially reluctant to embrace hydrogen vehicles, penetration rates might be minimal. Put another way, we simply cannot know in advance what subsidy schedule is required to meet a particular future target for hydrogen vehicle penetration. 1 Moreover, if any transition to hydrogen vehicles is to greatly reduce CO2 emissions over the longer haul, plants supplying the hydrogen must incorporate low-carbon technologies such as renewable hydrogen or fossil hydrogen with carbon capture and storage technologies. 2 There is enormous potential for future growth in vehicle ownership in countries such as China and India. Vehicle ownership rates are currently less than 10 per thousand in both of these countries compared to more than 700 per thousand in the United States.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen FIGURE 8.1 Illustrative example of a price-based policy approach, indicating the per-vehicle subsidy from government for each fuel cell vehicle sold in a particular year for the Hydrogen Success (Case 1) scenario. One way to reduce the uncertainty over future penetration rates is to use a discretionary policy whereby subsidy levels or tax credits are adjusted upward or downward, according to whether future penetration rates turn out to be below or above target levels. In other words, the policy is adjusted to try and keep the net-of-subsidy life-cycle costs of hydrogen vehicles below (perhaps well below) those for comparable gasoline vehicles in any given year. However, this can be problematic in several respects. In particular, it may make more sense to adjust the penetration targets—for example, make them less ambitious, or possibly even abandon them altogether, if hydrogen technology evolves at a rate slower than that for others, such as biofuels or electric vehicles. It also creates an uncertain environment for investment decisions if firms do not know when, or by how much, future subsidies might be revised, and it may even have perverse effects if firms anticipate that their progress on vehicle development may cause future subsidies to be cut. A possible compromise might be to allow some very limited flexibility, for example, a midterm review of progress with a once-and-for-all correction in the subsidy schedule, based on criteria clearly specified in the initial legislation. Quantity-based Approach (Quotas) In contrast to the price-based approach, a quantity-based approach would impose a rigid sales share quota, such as illustrated in Figure 8.2 (which also corresponds to the Hydrogen Success scenario in Chapter 6). This approach might be more appealing to policy makers because it achieves a given hydrogen penetration target with far more certainty. Here, manufacturers must sell hydrogen vehicles through their own vehicle pricing strategies, regardless of market conditions and competition from other types of vehicles. The quota might be accompanied by a subsidy to manufacturers to assist them in getting through the very expensive transition, but the driving force would still be the quota. As suggested by the two figures, either approach can achieve the same results. The main drawback of this approach is that there is no limit on the costs of the policy, which could be especially burdensome if technological advance is slower than for competitor vehicles and hydrogen vehicles remain relatively costly to produce. In contrast, a (fixed) subsidy under the price-based approach is more flexible because it provides a natural mechanism for capping program costs, as manufacturers are free to scale back any plans for new vehicle production if future market conditions do not favor hydrogen vehicles. Imposing a uniform, minimum sales share quota across different manufacturers can also be problematic if it is relatively easy for some firms to meet the quota (for example, firms that are further ahead on the learning curve) and relatively costly for others. Again, this is not an issue under the subsidy policy since low-cost hydrogen vehicle producers will take more advantage of the subsidy by selling more vehicles, while high-cost producers will sell fewer vehicles and forgo the subsidy. However, the problem FIGURE 8.2 Illustrative example of a quantity-based policy approach, indicating the required fraction (quota) of all new vehicles sold in a particular year that must be fuel cell vehicles for the Hydrogen Success (Case 1) scenario.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen under the quantity-based approach could be addressed by allowing firms to trade credits for hydrogen vehicle sales among themselves so high-cost manufacturers can opt to be below the standard by purchasing credits from other firms that exceed the standard. The quantity-based (quota) approach may also face far more resistance from auto manufacturers, because they (or their customers) must bear the losses from selling hydrogen vehicles while their life-cycle costs are still above those for comparable gasoline vehicles; in contrast, under the subsidy approach these losses are ultimately borne by the general taxpayer. Combined Approaches The differences between price- and quantity-based approaches illustrates a fundamental tension between meeting a future penetration target for hydrogen vehicles with more certainty, and keeping down the possible costs of the program. A further option is to combine elements of the two approaches in a hybrid policy. For example, a relatively modest quota on hydrogen vehicles could be combined with subsidy inducements to go beyond the quota, which producers will take advantage of if future market developments favor hydrogen vehicles. Alternatively, a fairly stringent sales share quota could be mandated, but combined with a “safety valve” that allows manufacturers to pay a penalty in lieu of meeting the standard, which they will take advantage of if future market developments are more favorable to other technologies than to hydrogen. Phased Hydrogen-specific Approach One way to reconcile the contradiction between wanting to move ahead rapidly but lacking sufficient confidence that hydrogen is the “right choice” would be a phased approach; the decision to scale up the policy to a national level would be contingent on the success of “lighthouse” pilots, as discussed in Chapter 6. In this regard, a government procurement approach, where state and municipal government vehicle fleets transition to HFCVs, might play a useful role in helping with early development of the market. Such an approach would provide a way to avoid rapidly escalating costs if the technology did not advance as expected, but it would also introduce uncertainty in private sector planning. BROAD POLICIES TO REDUCE OIL USE AND GREENHOUSE GAS EMISSIONS Whether or not policy makers choose to push HFCVs aggressively, there are a variety of broader (technology-neutral) options to reduce greenhouse gas emissions and oil use that have been implemented, or are under consideration, at both federal and state levels in the United States, and in other countries. These broader polices do not attempt to pick a technology, which, as we know from past experience, might significantly distort the market. Some of these policies are sector specific, whereas others are economy-wide; some are price based and others are quantity based; some are based on performance standards. For example, fuel economy or vehicle greenhouse gas standards that increase steadily in stringency over time ensure that emerging efficiency technologies are applied to fuel economy improvements instead of acceleration enhancements. Such improvements would help to enable any of the major long-term alternatives for powering vehicles in the future without favoring one technology (e.g., hydrogen) over any other (e.g., biofuels). Vehicle performance standards could include a requirement that some number of vehicles be zero or near-zero emitting, which would favor biofuels, batteries, or hydrogen vehicles over conventional gasoline vehicles, but leave it to the market to determine the most viable option. Such a requirement could be pegged, for example, to the hydrogen vehicle penetration rates achieved by HFCV-specific policies described above; this would guarantee that these vehicles were low-emitting, but not necessarily hydrogen fuel cell vehicles. Another policy option is to raise gasoline taxes. Increasing per-mile costs of driving would discourage unnecessary trips and promote fuel economy and alternative fuel vehicles, including hydrogen. Thus, emissions and oil use could be reduced throughout the transportation sector. However, there has been considerable opposition to higher fuel taxes in the past. Market-based greenhouse gas control instruments—namely, cap-and-trade or CO2 taxes—are also being implemented or under consideration both here and abroad. If these instruments are applied economy-wide, they can effectively exploit all low-cost emission reduction opportunities. However, for reasons already discussed, these policies most likely would not provide sufficient pricing incentives by themselves to speed the adoption of major transformational technologies, such as fuel cell vehicles. If carbon emission allowances are allocated through an auction, cap-and-trade and tax proposals under consideration in the United States could generate $50 billion to $100 billion or more worth of annual allowances or government revenue. Many of these legislative proposals set aside allowances or government revenue to fund technology programs or incentives, providing a potential stable funding source for the types of technology programs discussed earlier. CONCLUSIONS CONCLUSION: Sustained, substantial, and aggressive energy security and environmental policy interventions will be needed to ensure marketplace success for oil-saving and greenhouse-gas-reducing technologies, including hydrogen fuel cell vehicles.
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Transitions to Alternative Transportation Technologies — A Focus on Hydrogen CONCLUSION: Policies designed to accelerate the penetration of HFCVs into the U.S. vehicle market will be required to exploit the long-term potential of HFCVs. The committee concluded that these policies must be durable over the transition time frame but should be structured so that they are tied to technology and market progress, with any subsidies phased out over time. Such policies are likely to deliver significant long-term reductions in U.S. oil demand, but additional policies limiting greenhouse gas emissions will be required in order to also reduce CO2 emissions significantly. If policy makers decide to push the market penetration of HFCVs, these policies should be seen as a complement to (not a substitute for) broader measures to reduce greenhouse gases and oil use. However, the committee believes that HFCV-push policies would have to be designed very carefully if they are to be effective. Incentives must be substantial, durable, and coordinated with measures to encourage the development of a hydrogen fuel distribution infrastructure and continued basic research on vehicle design. Moreover, it is not entirely clear whether a price-based (subsidy) approach or a quantity-based (quota) approach to promoting vehicle sales is preferable; both approaches have pros and cons. A mix of the two approaches, however, might afford the most effective policy to achieve the maximum practicable deployment of fuel cell vehicles in the time frame examined in this study.