Conference on Transportation, Economics, Energy, and the Environment October 30 2015

2 TE3 Summary University of Michigan Energy Institute

CONFERENCE ORGANIZERS

John DeCicco, Research Professor, University of Michigan Energy Institute

Ryan Kellogg, Associate Professor, University of Michigan Economics Department

Thomas Lyon, Associate Director for Social Science and Policy, University of Michigan Energy Institute

EVENT ORGANIZER: Susan Fancy, Manager, Programs and Development, University of Michigan Energy Institute

R APPORTEUR: Shoaib Rahman, Erb Institute MBA/MS Program 2017

WEBSITE AND REPORT DESIGN:

David Barfield, Lonely Fox Studios

MARKETING AND COMMUNIC ATIONS:

Amy Mast, Communications Director, University of Michigan Energy Institute

Thank you for making TE3 possible.

Sponsors

Organizers

TE3 Summary University of Michigan Energy Institute 3

The TE3 — Transportation, Economics, Energy, and the Environment Conference — brings economic scholars together with government and industry practitioners to exchange ideas and strengthen collective knowledge for addressing transportation energy and environmental policy challenges.

What transportation energy and environmental policies will foster progress toward long-term climate protection goals given the volatility of energy markets and uncertainties in consumer behavior?

Relevant factors include technology cost and investment needs for vehicles, fuels and related infrastructure; changing demands for travel; social issues including changeable consumer behavior; new mobility services; car sharing; public transportation and other mode choice issues. The theme encompassed

tensions between current low fuel prices and tightening fuel economy and GHG emissions standards, as well as longer-term issues around aligning infrastructure, fuel, and vehicle design and consumer education for a sustainable future.

Sponsored by the University of Michigan Energy Institute and the Michigan Institute for Teaching and Research in Economics (MITRE), this year’s conference included three paper sessions on economic and policy research that addressed energy use in the transportation sector and its environmental implications. In addition to the 2015 paper sessions, a policy panel with representatives from industry, government and academia discussed how transportation policy can foster progress toward long-term fuel economy and emissions goals in the face of fuel price volatility and greenhouse gas emissions standards. The conference featured a selection of papers covering fuel economy and emissions, technology incentives, alternative fuels, consumer adoption and behavior, impact of vehicle scrappage programs, and infrastructure. 

What transportation energy and environmental policies will foster progress toward long-term climate protection goals given the volatility of energy markets and uncertainties in consumer behavior?

About TE3 2015

4

Transportation, Economics, Energy, and the EnvironmentSecond Annual ConferenceOctober 30, 2015Rapporteur’s Summary

University of Michigan Energy InstituteTE3 Summary

TE3 Summary University of Michigan Energy Institute 5

UMEI Director Mark Barteau welcomed the audience to the second annual Transportation, Economics Energy, and the Environment (TE3) conference, affirming the Energy Institute’s commitment to make this an ongoing signature event. The conference consisted of three sessions, each followed by a discussion, and concluded with a policy panel and discussion.

Fuel Economy and Emissions

The first session, moderated by John DeCicco, covered issues of vehicle fuel economy and emissions.

Shaun McRae’s “Step On It: Approaches to Improving Existing Vehicles’ Fuel Economy,” made use of extraordinarily detailed driving data provided by the UM Transportation Research Institute. A key finding is that higher gasoline prices do not change acceleration and speed behavior in cars, because drivers consider the time cost of driving just as much as the fuel cost. The key methods to improve fuel economy are by reducing variations in speed and by reducing acceleration events. Since human drivers haven’t been receptive

TE3 Summary University of Michigan Energy Institute6

to changing their driving behaviors, McRae believes that autonomous vehicles will improve fuel economy by smoothing driving behavior in ways that a human would not.

Erin Mansur’s “Measuring the Spatial Heterogeneity in Environmental Externalities from Driving: A Comparison of Gasoline and Electric Vehicles,” compared the environmental performance of gasoline vs. electric vehicles in every state in the United States. A surprising finding is that, in many states, gasoline vehicles should be subsidized instead of electric vehicles in order to reduce total emissions, especially in states with coal-heavy grids. The paper has stirred some controversy among environmentalists who argue that the paper isn’t future-looking, and doesn’t account for improving grid fuel mixes, nor does it do a full life-cycle analysis. Mansur counters that fuel use is the main driver of life-cycle impacts, and that the paper’s goal is to do an extremely careful job of assessing the environmental impacts that occur at present.

Discussants Jim Bushnell and William Chernicoff pointed out that whereas technologists often view vehicle electrification as a solution whose environment benefits will grow uniformly in the future, economists are more concerned with how actual electric vehicle performance varies by location. This difference of perspectives may explain why the Mansur et al paper is so controversial.

The Energy Efficiency Gap in Vehicles

The second session, moderated by Mark Barteau, explored whether there is an efficiency gap in vehicle purchases, that is, whether consumers fail to buy all the fuel efficiency that would be economically worthwhile.

Gloria Helfand’s “Searching for Hidden Costs: A Technology-Based Approach to the Energy

Efficiency Gap in Light Duty Vehicles,” made use of content analyses of automotive reviews of fuel efficiency technologies from major auto magazines. All technologies had majority positive reviews, but some technologies did affect the quality of operational characteristics. For example, for drivers, continuously variable transmissions decreased perceived acceleration in cars. The paper also found that well-implemented technology was more likely to reduce negative evaluations than it was to improve positive evaluations. Overall, the paper finds little evidence of hidden costs from fuel-saving technologies.

In contrast, Jeremy West’s paper, “Vehicle Miles (Not) Travelled: Why Fuel Economy Improvements Don’t Increase Household Driving,” argued that fuel efficiency reduces drivability. West analyzed the Cash for Clunkers

Discussants Jim Bushnell and William Chernicoff pointed out that whereas technologists often view vehicle electrification as a solution whose environmental benefits will grow uniformly in the future, economists are more concerned with how actual electric vehicle performance varies by location. This difference of perspectives may explain why the Mansur et al paper is so controversial.

TE3 Summary University of Michigan Energy Institute 7

program, which subsidized vehicle owners who traded in an inefficient car (<18 mpg) for an efficient one (>22mpg). Although one would expect that fuel efficient cars are driven more because their operating costs are lower (the so-called “rebound effect”), West found that program participants did not increase vehicle miles traveled (VMT) in their new cars. He took this as evidence that the new vehicles were not as pleasant to drive, which he attributed to their design for fuel efficiency.

Discussants Catherine Hausman and John German pointed out that whether a review is positive or negative isn’t sufficient when analyzing user reviews. One must also consider the intensity of the review’s expressed preferences. Another point of discussion was that although a lack of increase in VMT can be attributed to drivers enjoying their cars less, it may also be attributable to other factors, such as Cash for Clunkers participants being more frugal than non-participants. Additionally, current CAFE standards scale with vehicle size, and hence efficiency gains must come from technology, not simply through switching to smaller cars. Thus, it is not appropriate to assume a vehicle is less fun to drive just because it’s more efficient.

Fresh Insights into the VW Scandal

During lunch, John German of the International Council on Clean Transportation, who had an instrumental role in uncovering the Volkswagen diesel scandal, gave a talk entitled “Real World Emissions,” in which he provided context surrounding the diesel scandal, as well as the sociopolitical factors that may have set the stage for it. He pointed out the weak enforcement of emissions standards in Europe compared to the United States. While policies and regulations on emissions are passed at the European level, the enforcement of standards is done at the country level, with most automakers opting to get tested in the country with the laxest enforcement standards, Spain. Prior studies showed that emissions in Europe under normal driving conditions are over 7 times higher than the amounts allowed by European standards, and this is a result of lax enforcement. The Volkswagen study in the US was inspired by this discrepancy.

Perspectives on the Oil Industry

The third session, moderated by Ryan Kellogg, examined the oil market, including the reasons for recent oil price drops and the performance of the refining sector.

Christiane Baumeister’s “Understanding the Decline in the Price of Oil Since June 2014,” modeled oil price movements and found that the model could predict over half of the decline in oil price. She attributed the remaining half of the decline in oil price to economic shocks that occurred after June 2014, such as the

unexpected reduction in demand for oil storage in July 2014, as well as the unexpected slowdown in the global economy in December 2014.

Rich Sweeney’s “Environmental Regulation, Imperfect Competition and Market Spillovers: The Impact of the 1990 Clean Air Act Amendments on the US Oil Refining Industry,” found that on average gasoline production costs increased by 7 cents per gallon, and diesel production costs increased by 3 cents per gallon, after the 1990 Clean Air Act was passed. He argues that this has resulted in a consumer welfare loss (ignoring environmental gains) of $3.7 billion per year, which is only partially offset by a $1.5 billion per year gain in unregulated markets as refiners shifted gasoline supplies into the latter and away from heavily polluted (and regulated) markets. His main point was that these types of effects on consumers should be taken into account when passing laws such as the 1990 Clean Air Act in order to accurately account for the cost of environmental regulation.

Discussants Anas Alhajji and Howard Gruenspecht pointed out that there remains disagreement over the competitiveness of the world oil market. They also discussed OPEC strategies for forcing US shale oil producers out of the market.

Panel: Strict Mileage Standards in an Era of Low Gasoline Prices

The conference concluded with a policy discussion, moderated by Tom Lyon, with Alberto Ayala of the

8 TE3 Summary University of Michigan Energy Institute

California Air Resources Board, Bill Charmley of the US Environmental Protection Agency, Reuben Sarkar of the US Department of Energy, John Viera of Ford Motor Company, and Wolfgang Warnecke of Royal Dutch Shell. The main topics of discussion were the future of diesel, the future of CAFE standards, connected and autonomous vehicles, and carbon-based fuel pricing.

When discussing the future of diesel, the panel highlighted the health risks of air pollution and how ongoing concerns over this environmental problem will impact the future of diesel vehicles. Surprisingly, the EU has made standards for NOx emissions nominally even more lax than before, although they will now be measured in use, rather than through automakers’ own laboratory testing alone. The panel discussed the question of on-road versus laboratory testing for enforcing vehicle emissions regulations. The consensus was that laboratory testing is still necessary, and that the regulatory certification process is not broken. The Volkswagen scandal presents a valuable lesson from which regulators must learn, however. Additionally, panelists believe that diesel isn’t going away, and that “clean diesel” will be a part of any plan to reduce CO2

emissions. John Viera of Ford mentioned that he expects diesel to continue to be the fuel of choice for heavy duty applications such as trucks in the future. The panel agreed that appropriate policy toward diesel depends importantly on the type of vehicle in which it is being used.

Following the discussion of diesel, the panel discussed the conflict between low gasoline prices and increasingly stringent CAFE standards, as well as the future evolution of these standards. While the panelists did not reach a consensus on how the standards will evolve, they did agree that the switch to footprint-based vehicle emission standards has had a positive impact on the ability of automakers to design and sell cars without regulatory complications. John Viera added that in order for automakers to be able to sell cars, it is important that there be just one national emissions standard, and not a patchwork across different states with its attendant higher costs. Reuben Sarkar said that any revision to the standards will be based on the level and rate of technological progress in vehicle emissions since the last iteration of the standards. Although the panel recognized that future review of CAFE standards will be contentious, no one felt that a major retrenchment is likely. Instead, mileage standards are likely to continue to tighten as concerns about climate change intensify. Connected and autonomous vehicles were mentioned by an audience member as one technology that has significant potential to disrupt the current paradigm of vehicle emission standards. An audience member also mentioned carbon-based fuel pricing as a method to discourage unsustainable increases in gasoline use; the panel generally agreed that the political hurdles to implement such a plan would be significant, though it is possible such a plan could be passed in the future.

Although the panel recognized that future review of CAFE standards will be contentious, no one felt that a major retrenchment is likely. Instead, mileage standards are likely to continue to tighten as concerns about climate change intensify.

TE3 Summary University of Michigan Energy Institute 9

Authors and SpeakersAnas Alhajji, NGP Energy Capital Management

Alberto Ayala, Deputy Executive Officer, California Air Resources Board

Mark Barteau, Director, University of Michigan Energy Institute

Christiane Baumeister, Assistant Professor, Department of Economics, University of Notre Dame

Jim Bushnell, Associate Professor, Department of Economics, University of California-Davis

Bill Charmley, Director, Assessment and Standards Division, Office of Transportation and Air Quality, U.S. Environmental Protection Agency William Chernicoff, Manager, Energy and Environmental Research, Toyota

John DeCicco, Research Professor, University of Michigan Energy Institute

John German, Senior Fellow, International Council on Clean Transportation

Howard Gruenspecht, Energy Information Administration

Catherine Hausman, Assistant Professor, Ford School of Public Policy, University of Michigan

Gloria Helfand, U.S. Environmental Protection Agency

Stephen P. Holland, Associate Professor, Department of Economics, University of North Carolina at Greensboro

Ryan Kellogg, Associate Professor, University of Michigan Economics Department

Ashley Langer, Assistant Professor of Economics, University of Arizona

Thomas Lyon, Associate Director for Social Science and Policy, University of Michigan Energy Institute

Erin T. Mansur, Revers Professor of Business Administration, Tuck School of Business, Dartmouth

Shaun McRae, Assistant Professor of Economics, University of Michigan

Reuben Sarkar, Deputy Assistant Secretary for Transportation, Office of Energy Efficiency and Renewable Energy, U.S. Department of Energy Rich Sweeney, Pre-Doctoral Fellow, Harvard Environmental Economics Program

John Viera, Global Director of Sustainability, Ford Motor Company

Wolfgang Warnecke, Chief Scientist for Mobility, Royal Dutch Shell

Jeremy West, Massachusetts Institute of Technology, Department of Economics

The full agenda of the 2015 Te3 Conference is viewable here (downloadable pdf available): http://te3conference.com/program/

The papers and presentations presented at 2015 TE3 Conference are downloadable here: http://te3conference.com/archives/

2015 conference photos are viewable here: http://te3conference.com/2015-photos/

ONLINEenergy.umich.edu

Designed By Temply 13