[Economic Report of the President (2007)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 6

The Transportation Sector:
Energy and Infrastructure Use

Energy is a $1 trillion industry representing 8 percent of the U.S.
economy. The two biggest consumers of energy from fossil and
renewable fuels are electric power and transportation. While
electricity can be generated from diverse sources--coal, nuclear
fission, natural gas, water, petroleum, and increasingly, wind
and sun--98 percent of transportation, whether by plane, train,
ship or automobile, is currently powered by petroleum. The
transportation sector alone accounts for two-thirds of the
petroleum consumed in the United States. Thus, key to understanding
the transportation sector is understanding the petroleum market,
and the ways in which consumers and firms in the transportation
sector respond to changes in world oil prices.
The lack of substitutes for oil means that in the short run, oil
consumption in transportation is particularly unresponsive to price
changes. This makes the economy vulnerable to sudden increases in
oil prices. Perhaps more importantly, the world's reliance on oil
creates an external cost in terms of national security.
In addition to petroleum, the transportation sector relies on
infrastructure. The United States has close to 4 million miles of
roads, bridges, and highways to support a wide variety of economic
and social activity. Over time, however, demands on this
infrastructure have outstripped its capacity. While the miles of
urban roadways built have increased by nearly 60 percent since
1980, vehicle miles traveled on urban roadways increased by double
that amount. The primary reason for this shortfall is that a
well-functioning market that puts a price on roadway use is
largely nonexistent. As a result, traffic in most metropolitan
areas has become increasingly congested, costing both time and
fuel. In 2003 alone, Americans were delayed about 3.7 billion
hours and used 2.3 billion extra gallons of fuel (47 hours and 29
gallons per rush-hour commuter) in stop-and-go traffic. Like the
costs exacted by oil use on national security and the environment,
the full costs of congestion are not taken into account by
individuals when they drive: each driver usually decides when and
where to drive based on his or her own private needs and ignores
the costs imposed on others.

This chapter discusses several developments in the use of energy
and infrastructure for transportation, and reviews strategies that
have been used to reduce oil use and better manage the existing
infrastructure. Key points in this chapter are:

 Recent increases in the price of oil and the
external costs of oil have led to renewed interest by markets
and governments in the development of new alternatives. Government
can play a role in ensuring that external costs are taken into
account by markets, but ultimately markets are best suited to decide
how to respond.
  Cars and light trucks are the largest users of
petroleum. As a result, the fuel economy of the vehicles purchased
and the number of miles that they are driven have a large effect on
oil consumption.
 Congestion is a growing problem in American urban
areas. Cities and states have shown a growing interest in and
capacity for setting prices for road use during peak periods to
reduce the full economic costs of congestion.

Fuel Markets and the Transportation Sector

Over the past 15 years, petroleum use in the industrial, utility,
and building sectors has been relatively flat, while petroleum use
by the transportation sector has grown by 27 percent. This trend is
expected to continue. While new, more energy-efficient technology
has reduced the energy needs of most sectors, gains in vehicle
engine efficiency have been more than offset by a shift to heavier,
more powerful cars and light trucks, and increases in driving.
Cars and light trucks accounted for 92 percent of U.S. roadway
travel in 2006 and account for 62 percent of petroleum devoted
to transport. Department of Energy projections suggest that these
modes of transportation will continue to be important, and that
light truck usage will show significant growth in the years to come
(see Chart 6-1). Heavy trucks consume almost 17 percent of the
petroleum used for transport. Air, rail, marine, and off-road
vehicles currently account for the remaining 21 percent. Air travel
is one of the fastest growing modes of transportation. Energy
consumption for air travel is projected to increase nearly 46
percent by 2030, or about 620,000 more barrels of oil per day.




Responding to Changes in the Price of Oil
In well-functioning markets, the price of a good or service
reflects all of the associated costs and benefits--for example, the
costs incurred in extracting, transporting, and refining the oil,
or the benefits from using gasoline to drive. The market then uses
price to achieve the most efficient level of production and
consumption. Transportation has largely reacted to changes in
energy markets in this way.
High demand for oil, due in part to rapid economic growth in China
and India, has helped push oil prices to record levels. The real
average monthly price of oil to the refiner was $26 between 1986 and
2004 (see Chart 6-2, in 2006 U.S. dollars). In 2004, the price to
the refiner began to climb, approaching $70 per barrel in 2006
(other oil price measures were higher). For the transportation
sector, this is a significant increase in the cost of one of its
primary inputs. Normally, as the price of a good rises, consumers
reduce how much they use. However, it typically takes years before
the transportation sector's consumption of oil is substantially
reduced, in part due to the lack of easily available substitutes.
Eventually, though, consumers do react to high prices. For instance,
hybrid vehicle sales have tripled since 2004, while light truck
sales have fallen by 16 percent.





When high oil prices are sustained, as has been the case recently,
the market shows renewed interest in investing in new technologies
for developing alternatives to oil and improving vehicle fuel
economy. Such research and development investments tend to recede
when oil prices fall. During the period of high oil prices in the
late 1970s and early 1980s, the private sector invested billions
of dollars in energy research and development before the price of
oil declined. A recent study finds that private investment in
alternative fuel technologies again has increased in response to
higher oil prices, doubling between 2004 and 2006, constituting 10
percent of the total investment in energy. Because of the
transportation sector's delayed response to oil prices, these
increases are likely to continue for some time.
The lack of alternatives to oil also means that sudden major oil
supply changes--such as when oil production in an entire region is
unexpectedly shut down--can lead to large and sudden price increases
in the months following the shock. Since oil trades in a global
market, the impact on the economy from such shocks does not depend
on how much we import, only on how much we consume, and our
consumption has been growing. The market has adapted to this
threat by investing in more energy-efficient modes of production,
investing in alternative energy sources, and increasing holdings of
private oil inventories.


External Costs of Oil Use

Prices determine which goods and services are produced in the
marketplace. In the absence of government policy (such as taxes
or regulations), the price of a good or service accounts for all
private costs incurred by those who have produced or purchased the
product. In the case of oil, this includes everyone from the oil
company that extracts the oil, to the shipper, refiner, retailer,
and driver who fuels her car. In the case of oil, the price reflects
most of the costs, but there are some costs to society that remain
unaccounted for.
Eighty-one percent of the world's remaining proven petroleum
reserves are currently controlled by members of the Organization
of Petroleum Exporting Countries (OPEC) (including Iran and
Venezuela) and Russia, and nearly all of these reserves are
controlled by national oil firms. Since oil trades in a world
market, oil consumption anywhere in the world affects the price
of oil for Americans. The importance of oil to the world economy
gives the major oil-producing countries disproportionate diplomatic
leverage in world affairs. Oil resources can also fuel corruption
in developing countries. Air pollutants and carbon dioxide from
burning gasoline also contribute to concerns about air quality,
human health, and climate.
The purchase of a gallon of gasoline imposes these national
security and environmental costs on everyone, not just on the
buyer and seller. Though State and Federal gasoline and diesel
fuel taxes and regulations help account for these other costs,
many studies suggest that the total external costs of oil may be
higher. Carefully crafted government policy may be a useful way
to account for these additional costs. However, this objective
should be balanced against additional inefficiencies that
government involvement introduces into the market. Once policies
are in place that ensure that individuals account for the full
costs of the goods and services they consume--e.g., national
security and environmental concerns--competitive markets are the most
efficient means to determine how goods are produced, as well as
which goods are produced in the future.


Transportation Fuel Supply

Motor gasoline and diesel fuel will continue to be the main
sources of power for cars and trucks in the near future. In 2006,
motor gasoline accounted for 74 percent of fuel used in highway
vehicles, and diesel accounted for 24 percent (alternative fuels
made up the remainder). Diesel cars and light trucks are uncommon
in the United States--only 2 percent of new cars and light trucks
sold use diesel engines; the majority of diesel fuel is used by
commercial vehicles.


Ethanol, an alternative fuel, is currently used as an additive
in gasoline to increase octane and help gasoline burn more
completely, reducing emissions of carbon monoxide and other
pollutants. In many states and metropolitan areas, gasoline sold
at the pump contains between 2 and 10 percent ethanol, depending
on State requirements. Using such alternatives to oil can reduce
the environmental costs of transportation as well as the national
security consequences of oil use. To further encourage alternative
fuel use, a provision in the Energy Policy Act of 2005 (EPAct 2005)
known as the Renewable Fuel Standard requires a certain quantity of
renewable fuel to be used by gasoline producers each year. In 2006,
producers were obligated to use 4 billion gallons per year; this
obligation will gradually increase to 7.5 billion gallons in 2012
(Americans consumed about 140 billion gallons of motor gasoline in
2006). One of the strengths of this policy is that it does not
choose which renewable fuel to promote, but allows the standard to
be met with any renewable fuel that accomplishes the goal of
reducing oil use. However, it does not extend to oil alternatives
beyond renewable fuels, such as electric cars or hydrogen fuel
cells. The Renewable Fuel Standard also allows imports to satisfy
the standard, allowing U.S. consumers to take advantage of cheaper
production of renewable fuels in other countries, although this is
impeded by an import tariff on such fuels.
A more significant regulatory change has been applied to diesel
fuel. Starting in 2006, diesel fuel sold in the United States is
required to have a sulfur content of no more than 15 parts per
million (ppm), down from 500 ppm in the previous standard. This
reduction results in the most stringent diesel fuel standard in the
world and enables U.S. consumers to purchase vehicles with engines
that meet clean air requirements using clean diesel fuel. Diesel
engines are between 20 and 25 percent more fuel efficient than
comparable gasoline engines (even accounting for the fact that a
gallon of diesel contains more energy than a gallon of gasoline).
EPAct 2005 also grants tax credits to buyers of diesel cars that
meet stringent emission standards.


Alternative Fuels and Advanced Technologies

To date, changes in petroleum usage have been driven primarily by
the increasing price of oil and by regulatory concerns. The greatest
potential for large reductions in gasoline consumption stems from
new technologies that could transform how transportation is powered.
Over 1 million advanced technology cars and light trucks were sold
in the United States in 2006. About two-fifths of these were flex-fuel vehicles that can use conventional
gasoline or an alternative fuel called E85, which is approximately 85
percent ethanol and 15 percent gasoline. U.S. consumers also purchased
256,000 hybrid vehicles in 2006. Hybrid vehicles use an electric
motor in conjunction with a gasoline engine to increase fuel economy.
Use of advanced technology vehicles in the United States is
projected to grow over time (see Chart 6-3). The Department of Energy
projects that over 3 million advanced technology vehicles will be
sold in 2015 and that by 2030 they will make up more than 25 percent
of all light-duty vehicles sold. Of these advanced technology
vehicles, 71 percent are expected to be either gasoline-electric
hybrids or vehicles that can be powered by ethanol and other
plant-based fuels. Though alternative fuels currently power only a
small fraction of our transportation needs, private-sector
investments combined with government policies are expected to
fundamentally change the energy landscape.




Ongoing research explores a wide variety of vehicle fuel
technologies such as electricity, hydrogen fuel cells, and biofuels.
Significant technological barriers exist that prevent the
development of these as commercially viable alternatives. For
instance, the wide-scale deployment of hydrogen fuel cells-devices
that combine hydrogen with oxygen in the atmosphere to yield
electricity-will depend on reductions in expense and weight as well
as on the development of clean, cost-effective sources of hydrogen.
Private markets tend to underinvest in innovation of all kinds
because inventors only capture a fraction of the benefits from
discovery. Underinvestment is particularly likely for basic
scientific research where the application to the marketplace may
not be evident at early stages. Underinvestment is also likely
when the results of research mainly reduce the external costs of
consumption (such as national security and environmental costs
associated with oil) instead of directly benefiting consumers. In
response, the President's Advanced Energy Initiative proposed an
increase in annual funding for alternative energy research of 22
percent for fiscal year 2007, adding to the $10 billion of
government spending devoted to such research since 2001.
Several studies find that Federal research and development (R&D)
investment in energy has yielded sizeable societal benefits, not
only in economic terms, but also in terms of knowledge creation and
pollution reduction. Still, the government's ability to predict
which technologies will best meet a given goal is questionable,
so the most effective government policies allow the market to choose
the path of innovation.


Demand for Transportation Fuel

The United States is a vehicle-dependent society. More than 9 out
of 10 American households own at least one vehicle, and most
households own two. In 2004, vehicles in the United States traveled
close to 3 trillion miles, up more than 20 percent from 1995.
Commuting and other business-related activities account for about
35 percent of vehicle miles traveled (see Chart 6-4). Americans also
use their cars and trucks to go shopping (15 percent of miles
driven), attend to personal and family business such as medical
appointments and dropping children off at school (25 percent of
miles driven), and for social and recreational activities, including
vacations (22 percent of miles driven).




In spite of widespread vehicle use, the proportion of the American
household budget spent on transport fuel is small (less than 4
percent). That said, Chart 6-4 shows that a significant share of
vehicle miles traveled are related to nonwork activities, indicating
that households may have some flexibility to quickly adjust when
the costs of travel are high. In response to higher prices, drivers
make two adjustments: they drive less and they purchase more
fuel-efficient vehicles. Several studies have found that these two
effects combined imply that a 10 percent increase in the price of
gasoline will result in about a 4 percent decrease in gasoline
consumption in the long run. Compared to other commodities,
households' gasoline consumption may take several years to respond
to price changes.
State and local initiatives that encourage use of mass transit and
carpooling focus on encouraging people to drive less. In New York
City, the most densely populated of all cities in the United States,
mass transit accounts for 45 percent of all commutes into the
central city. New York, however, is unique. Many U.S. cities, such
as Phoenix and Los Angeles, are spread
out over a large area, making it difficult to design mass transit
corridors that effectively meet the commuting needs of travelers.
Public transportation also has difficulty competing with the
flexibility and convenience of car travel in these types of cities.
In the entire United States, 5 percent of commuters rely on public
transportation.
One way many urban areas try to encourage carpooling is through
the designation of high-occupancy vehicle (HOV) lanes. This method
rewards carpooling by allowing vehicles with two or more passengers
to travel in lanes not open to vehicles with only one person in
them. In this way, HOV drivers can reduce travel time when roads
are congested. Unfortunately, HOV lanes are often underutilized
and the popularity of carpooling is not increasing. In 2000, 90
percent of American commuters drove to work each day, but of these
drivers only about 13 percent carpooled, down from almost 20 percent
in 1980. This trend makes it unlikely that initiatives focused on
carpooling will make large strides in reducing vehicle fuel use.


Improving Fuel Economy

Evidence shows that drivers switch to more fuel-efficient vehicles
in response to higher gasoline prices. One study finds that higher
gasoline prices accelerate the retirement of older, less
fuel-efficient vehicles, and shift new purchases toward more
fuel-efficient vehicles. Government policies have also been used to
influence vehicle fuel economy. The Corporate Average Fuel Economy
(CAFE) standard, passed in 1975, mandates a minimum mile per gallon
(mpg) requirement for each manufacturer's fleet of new cars and a
minimum requirement for each manufacturer's fleet of new light
trucks. If a given vehicle is less fuel efficient than the
requirement, the manufacturer must offset it by producing a vehicle
that is more fuel efficient, so that the average fuel economy for
all cars (or for all trucks) the manufacturer sells is above the
required miles per gallon level. One rationale used to justify
increasing the stringency of the CAFE standard is to further induce
improvements in the fuel economy of vehicles sold to consumers,
reducing the demand for transport fuel and the external costs
associated with oil use.
It is important to note that while improvements in fuel economy
translate into gasoline savings, it is not a one-to-one
relationship. Higher CAFE standards encourage increased driving.
Since higher fuel economy vehicles can go the same distance using
less gasoline, the cost of driving a mile is reduced. As the
per-mile cost of driving declines, the quantity of miles driven by
individuals tends to increase. This ``rebound effect'' reduces
potential fuel savings from improvements in fuel economy by 10 to
30 percent. Recent estimates suggest that as incomes grow, driving
decisions will depend less on the cost of driving, and therefore,
the rebound effect is expected to shrink in the future.


In 1978, CAFE mandated 18 mpg for cars and 17.2 mpg for light
trucks. The CAFE standard became increasingly stringent until 1990,
after which it remained virtually unchanged. It only recently
became more stringent for light trucks. Currently, the CAFE standards
are 27.5 mpg for cars and 22.2 mpg for light trucks (including
SUVs). The Federal government has increased the CAFE standard for
light trucks through two separate regulations, raising it in
increments each year beginning in 2005. By 2011, new light trucks
will meet a 24 mpg standard, reflecting a 16-percent increase. Also
by 2011, the largest SUVs--those weighing between 8,500 and 10,000
pounds-will be subject to the CAFE standard for the first time. The
Department of Transportation based the new standard for light trucks
on vehicle footprint, a measure of size, in line with a recommendation
by a National Academy of Sciences panel as a way to mitigate safety
concerns. The footprint-based CAFE standard for light trucks is also
an improvement over its previous configuration because it ensures
that all manufacturers make fuel economy improvements instead of
only those producing a wide mix of vehicles. The Department of
Transportation is seeking similar authority to reexamine CAFE for
new passenger cars (see Box 6-1).
The fuel economy of new vehicles rapidly increased over the first
8 years of CAFE. In part, this was a market response to the dramatic
increase in gasoline prices between 1973 and 1981. By the late
1980s, however, overall fuel economy had stagnated. While the fuel
economy of cars has continued to slowly increase over time and has
been above the CAFE standard since 1986, consumers have bought an
increasing number of SUVs and light trucks whose fuel economy has
remained close to the mandated level of the light truck standard.
Half of all vehicles sold in 2005 were light trucks, including
SUVs, compared to 20 percent when CAFE was first put in place.
This shift in consumer preferences is a rational response to more
than a decade of low real gasoline prices, rising household
incomes, and incentives created by CAFE requirements. Manufacturers
also responded to changing consumer preferences and CAFE
requirements. For instance, while station wagons and minivans
have similar fuel economies, the former are counted as cars, and
the latter are counted as light trucks. In the late 1980s, many
manufacturers took advantage of the difference in the stringency
of CAFE standards across cars and light trucks to phase out the
station wagon--a relatively fuel-inefficient car--and replace it
with the minivan--a relatively fuel-efficient light truck. This
shift improved the individual fuel economy of both the car and
light truck fleets but did little to change overall fuel economy.
While the CAFE standard has contributed to improved fuel economy
since its inception, understanding its precise impacts and its
interaction with gasoline prices is a matter of some debate. A
recent National Academy of Sciences study also finds that CAFE may
have led manufacturers to produce smaller and lighter cars, posing
a risk to safety.


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Box 6-1:The President's New Energy Initiatives

The President has announced several energy initiatives designed to
increase the country's energy security by reducing projected
gasoline consumption in the light-duty vehicle transportation sector
by 20 percent within a decade.
About three-fourths of this goal will be met by greatly increasing
and expanding the Renewable Fuel Standard. The new standard will
mandate that 15 percent of transportation fuels come from alternative
fuels. In 2006 about 3 percent of fuels used in light-duty vehicles
were not petroleum-based. Under the revised standard 35 billion
gallons will be alternative fuels in 2017. This initiative reflects
the belief that technological change is the key ingredient to
diversifying America's energy portfolio. Energy security will
increase as the dominance of oil use in the transportation sector
diminishes.
The standard will continue to allow refiners, importers and
blenders to use renewable fuels to meet the standard but will expand
to allow for current or future viable alternatives to petroleum to
compete. Expanding the alternatives that meet the standard makes it
easier for blenders and refiners to comply and affords the market
broad flexibility to find the most cost-effective
non-petroleum-based fuel options. In the event that production of
alternative fuels proves more costly than expected, the President
has built in two safety valves to protect consumers. First, the
Administrator of the Environmental Protection Agency, and the
Secretaries of the Department of Energy and the Department of
Agriculture will have the authority to waive or modify the
standard if refiners and blenders have difficulty finding
alternative fuels for purchase. Second, an automatic mechanism will
be in place to prevent the price of gasoline from rising above a
threshold due to this policy. These two provisions ensure a degree
of market stability as use of alternative fuels expands in the
marketplace. The 20 percent goal will also be met through increasing
the fuel efficiency of automobiles. This will occur through
reforming and modernizing CAFE standards for cars and further
increasing light truck and SUV standards. These changes are
predicted to reduce consumption of gasoline by an estimated 5
percent, based on the assumption that increases in the standard
of 4 percent each year starting in 2010 for cars and 2012 for light
trucks prove warranted. Three reforms are key to the President's
proposal of increased stringency of CAFE. First, paralleling recent
changes for light trucks, the law for cars should be changed to
allow the standard to be based on a vehicle attribute
(such as footprint) to address safety concerns. Second, CAFE for
both cars and light trucks should allow manufacturers the option of
increased flexibility in how they meet the standard, by allowing
them to trade  credits. Any manufacturer that increases fuel economy
by more than what is mandated could generate credits that other
manufacturers could purchase to reduce their costs of meeting the
standard. The benefit of trading credits is that it allows the same
overall goal of improved fuel economy to be met at a lower cost.
Third, the rate of increase of the CAFE standard as well as how fuel
economy improvements will be divided between cars and light trucks
should be at the discretion of the Secretary of Transportation, as
is currently done for light trucks. The Department of Transportation
will employ the regulatory process to determine these increases
based on sound science and an assessment that balances the costs and
benefits. The President has also proposed a new $175 million
initiative to give State and local governments the opportunity to
explore innovative ways--such as roadway pricing and increased use of
real-time traffic information--to reduce traffic congestion and save
fuel.
In addition to improving the nation's energy security profile,
these initiatives will also produce significant benefits by reducing
air toxics associated with petroleum-based fuel. They will also help
confront the challenge of climate change by potentially stopping the
projected growth of carbon dioxide emissions from this sector.
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Transportation Infrastructure and Management of
Existing Traffic Flow

In addition to its reliance on oil, the transportation sector also
relies heavily on the existing infrastructure of roads and highways.
Under the Intermodal Surface Transportation Efficiency Act of 1991,
the Federal government plays an important role as overseer of the
National Highway System to ensure that the highway system is
``economically efficient and environmentally sound, provides the
foundation for the Nation to compete in the global economy, and will
move people and goods in an energy-efficient manner.'' In
recent years, however, the road and highway infrastructure has not
kept pace with the number of miles driven in the United States.
When more people use a roadway than the capacity for which it is
built, traffic slows. Commercial trucking--the most common method
of moving freight across the United States--is increasingly reliant
on urban interstate highways, many of which are congested. Between
1982 and 2003 the share of roads in U.S. urban areas that are
congested rose from 34 percent to 59 percent. Changes in



commuting patterns have also spread congestion to more roads. The
traditional suburb-to-city commute has diminished in importance:
As of 2000, half of all commuters drove to jobs in the suburbs,
while only 20 percent drove to jobs in central cities.
Congestion is defined as the marked slowing of traffic as a roadway
reaches capacity. Congestion in the United States manifests itself
primarily as a bottle-neck on a roadway (see Chart 6-5). A
bottleneck is a hindrance to vehicle movement because it involves
delays at key intersections, backed-up traffic, or narrow or
obstructed sections of a roadway. Unexpected events such as
accidents or other traffic incidents also cause congestion on
crowded roadways. Together, they are responsible for 65 percent
of all congestion.




It is important to note that roadways are not congested at all
hours of the day. For instance, on one particular roadway in the
Seattle area, a trip that occurs prior to 6 a.m. or after
10 p.m. takes about 10 minutes (see Chart 6-6). That same trip
takes about 30 percent longer at 8 a.m. and almost twice as
long at 6 p.m. due to slowing traffic. This general trend appears
in many U.S. cities and suggests that it is the timing of vehicle
miles traveled more than their growth that is at the root of the
congestion problem.






One underlying reason why congestion exists on U.S. roadways is the
lack of a private market to price roadway use. Most roads in the
United States are provided by the government, are open to all, and
are free of charge. Economists generally believe that a good may
be better provided by the government when it is difficult for
private markets to charge for its use. Because one motorist's use
of a congested road reduces the road's value for other drivers and
drivers can be selectively prevented from entering the roadway
through the use of gates or technologies that monitor use, it is
increasingly appropriate to charge drivers for some roadway use
in the same way the private market charges for other goods and
services.
A driver decides which road to use based on private needs: for
instance, the shortest distance or fastest route between
destinations, or the closest, most accessible highway. The fact that
each driver decides on a route independently of other drivers is not
a problem when the number of drivers is well below the roadway's
capacity. However, when drivers have free access to roads, crowding
occurs at times of high demand, decreasing vehicle speed and flow.
Each additional driver slows down other drivers on the roadway,
causing them to lose time and to burn extra gasoline. However,
drivers typically do not consider the added costs they impose on
others. This is a ``get in line'' or ``queuing'' approach to allocating
road space. When there is a shortage of something


for instance, space on a ski lift, or attendants at the Department of
Motor Vehicles--those willing to get in line and wait eventually
receive what they want. This approach to road-use management is
inefficient because it allocates road space to those with the time
to wait in traffic, not necessarily to those who value its use most
highly.

If a roadway is priced--that is, if drivers have to pay a fee
to access a particular road--then congestion can be avoided by
adjusting the price up or down at different times of day to reflect
changes in demand for its use. Road space is allocated to drivers who
most highly value a reliable and unimpaired commute. This
arrangement encourages drivers to consider the tradeoff between the
price of using the road and the additional time and inconvenience
of using a nonpriced, alternate route, or driving at a noncongested
time. Drivers who place a high value on the predictability and
reduced time of commuting, for instance, a doctor who has been called
to the hospital for an emergency, have the option to pay for
access to noncongested roads. Drivers with more time flexibility,
for instance a person doing his or her grocery shopping, can avoid
the road and the fee. They can use alternative but more congested
roads, shift when they drive to nonpeak hours, or use mass transit
when it provides a cheaper alternative to driving. The average cost
to each driver falls because drivers have a choice in how they pay
for roadway use, in time or in money.


The Cost of Congestion

Over time, slowing traffic exacts heavy costs on drivers. On
average, congestion caused 47 hours of delay for U.S. commuters and
commercial truck drivers in 85 urban areas during peak hours in
2003. For America's 13 largest cities, this number is much higher:
61 hours. Extra fuel is consumed on congested roads because of the
effect that waiting in stop-and-go traffic has on fuel economy. In 2003, sitting in traffic wasted about 2.3 billion gallons of fuel, or
almost 1.4 percent of all fuel consumed by light-duty and commercial
vehicles that year. Waiting in traffic can also increase the
cumulative amount of pollution emitted from a vehicle's tailpipe,
which contributes to poor air quality and more greenhouse gas emissions.
Aggregating over the 85 most congested U.S. cities, the cost of
time wasted in traffic and extra fuel consumed by commuters and
commercial truck drivers due to congestion is estimated to have
exceeded $63 billion in 2003 (see Table 6-1). In Los Angeles, the
city with the worst congestion, the fuel and time cost of waiting
in traffic was calculated to be almost $1,600 per traveler in
2003. In Philadelphia, congestion is noticeably less than in Los
Angeles, but the estimated cost to travelers is still high: $641
per traveler per year. In addition, businesses that rely on regular
and on-time delivery of supplies have begun to maintain larger
inventories to safeguard against





unanticipated delays caused by congestion. A recent study conducted
by the Department of Transportation confirms that congestion has
resulted in higher transportation prices and less reliable pickup
and delivery times for freight.


Building More Roads

Expanding road capacity may be an important component of any
long-term strategy to accommodate traffic growth in urban areas.
However, there are a number of reasons why a construction-only
strategy to alleviate congestion is likely not the best solution.
First, increasing capacity can take years to complete and is
expensive--one study found that a lane costs between $1 million
and $8.5 million per mile to build. Second, new lanes are often
needed in densely populated areas, but these are often also the
areas where it is most difficult to find unoccupied space for
expansion, making new lanes politically controversial. Third, a
body of evidence suggests that the addition of a nonpriced lane
to an already congested roadway may do little to alleviate
congestion. This happens for two reasons: new roads generate
additional traffic as drivers take trips to destinations that
previously took too long to reach. And since traffic flow improves
initially, drivers who were previously using alternative, often
less congested routes now find the highway with the added lane
more attractive. Drivers continue to redistribute themselves
across the various routes until the costs of using the new route and
the costs of using the existing route are about equal. At this
point, no driver can be made better off by changing routes.
Ultimately, the reason why building more roads is insufficient is
because it does not address the underlying problem: roads are not
priced and are therefore subject to overuse.


Pricing Road Space

There is reason to believe that reductions in traffic congestion
would be relatively easy to attain. Small changes in the number of
cars using a particular roadway at a given time can result in
large improvements in the flow of traffic. For instance, the
addition of just a few school buses makes traffic flow noticeably
worse on the first day of school, while traffic flow is noticeably
better on some State holidays when only a small number of residents
stay home from work.
Congestion pricing dampens demand for roads during peak hours and
spreads usage over a longer time period. Differentiating the price
of a good by the time of day effectively allocates limited space
during periods of higher demand. This approach is used by many
providers of goods and services: movie theaters charge more in
the evening than they do midday; ski runs charge more during
weekends than they do on weekdays; airlines raise prices on tickets
during peak seasons; taxi cabs charge more during rush hour; and
railroads often charge lower prices for offpeak traveling.
In addition to improved allocation of road space, charging a fee
also provides urban planners with useful information about when and
where to invest in the expansion of existing road capacity.
Expansion should be focused on roads where drivers demonstrate a
willingness to pay that is higher than the costs of construction.
Revenues from roadway pricing may also prove a viable alternative
to taxes as a way to fund the building of new roads in urban areas.
As is the case in other markets, those who use the roadway would pay
for its maintenance and expansion.
In general, there are two ways to price road space to address
congestion: cordon pricing and roadway pricing. Cordon pricing
charges a toll to vehicles for access to a congested area regardless
of which roads in the area are used. It is typically in effect
during the work week and varies by time of day. Cordon pricing has
been implemented in a number of cities including London, Stockholm,
and Singapore. While cordon pricing has been considered for several
cities in the United States, it has not yet been implemented here.
It is likely to be less effective in cities that are less dense,
do not have adequate public transportation systems, and have
multiple areas of centralized economic activity (such as Phoenix
or Los Angeles).
Evidence suggests that cordon pricing fees have been effective in
reducing congestion where they have been tried. After the first year
that cordon pricing was imposed in London, for instance, congestion
fell by 30 percent, average vehicle speed increased by 20 percent,
and bus travel became more reliable (see Box 6-2). One important
mechanism for reducing congestion appears to be the ability to
substitute some form of public transportation for driving.


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Box 6-2: Cordon Pricing Experiences in London and Stockholm

In London, drivers pay an 8-pound fee for daily access to a portion
of downtown between the hours of 7:00 a.m. and 6:30 p.m. on
weekdays. There are no toll booths around the perimeter of this
area. Instead, cameras record the license plates of vehicles and
check them against a list of prepaid vehicles. Drivers have a
variety of choices in how they pay: they can pay at designated
service stations, through the Internet, by text message or phone,
or by mail. Weekly and monthly charges also are available for
regular commuters. If drivers have not prepaid, they have until
midnight of the next day to do so. Anyone who drives within the
zone without paying during this time period is fined 100 pounds
through an automated system.
Stockholm also recently implemented cordon pricing, but it differs
from the London system in two ways. First, it charges vehicles via
a card mounted on the windshield that is read electronically by
roadside beacons when cars drive past them. Second, Stockholm uses a
variable pricing system, which means that the fee is higher during
rush hour periods.
A recent report on the London policy indicates that cordon pricing has
led to a 30 percent reduction in delay time for city commuters.
Initial reports from Stockholm's 6-month test period indicate that
there were decreases in traffic of about 22 percent due to cordon
pricing. Large reductions in London and Stockholm traffic were due
in part to increased use of bus transit. In spite of early criticism
from drivers and businesses within the central city, cordon pricing
has grown in popularity in London. In Stockholm, this has also been
the case: a majority of residents voted to retain cordon pricing
after the test period ended.
Roadway pricing aims to limit congestion on certain routes by
charging variable fees (tolls) to access a particular lane or road,
regardless of the final destination. Ideally, road tolls should be
responsive to the actual level of congestion at each moment. By
increasing the fee during periods of high demand and reducing it
during periods of low demand, the variable tolls reduce congestion
by encouraging offpeak driving and the use of alternative routes.
Variable tolls are rare in the United States. Most of the over 5,000
miles of toll roads in the United States have flat tolls designed
to generate revenue, rather than variable tolls to relieve
congestion. Where they do occur, they are typically limited to a
single road or freeway. On the congested bridges and tunnels
connecting New York and New Jersey, tolls are discounted by
20 percent ($1.00) during nonpeak hours. Results of a small survey
indicate that about 7 percent of drivers changed their behavior as a
result of these variable tolls. The most common changes were to
switch to mass transit, carpool, or to increase offpeak driving.
Recently, the Department of Transportation helped fund a small
pilot project in Seattle to examine how drivers would respond if
the entire road system in the city were subject to a variable
tolling system. Where and when participants drove was automatically
tracked and transmitted by a device installed in their car.
Participants received prepaid accounts between $600 and $3,000 to pay
the tolls. At the end of the pilot, they were allowed to keep whatever
they did not spend. Tolls ranged from 5 to 50 cents per mile and
varied by road and time of day. Preliminary results show that
nearly 80 percent of participants decreased the amount they drove or
changed when they drove. On average, participants took 5 percent
fewer trips by automobile and drove 2.5 percent fewer miles each
weekday due to tolls. Participants took 10 percent fewer trips and
drove 4 percent fewer miles during the morning commute.
Currently, there are about six U.S. highways that use
high-occupancy toll (HOT) lanes, many of which incorporate variable
pricing and were piloted using Federal funds. HOT lanes are
variations of the high-occupancy vehicle (HOV) lanes discussed
earlier in the chapter, but they have greater potential to reduce
congestion since they are less likely to be underutilized. Similar
to HOV lanes, they allow carpoolers to use the road for free or at
a discount but charge a toll to single occupancy drivers for access.
The toll frequently varies by time of day. Some tolls set variable
prices based on historical highway use and adjust rates monthly or
quarterly. Other tolls use real-time information on congestion
conditions to adjust tolls dynamically over the course of the
day. In locations where HOV lanes are underutilized, conversion to
HOT lanes is suggested as a way to increase use and to provide more
choice to drivers. For instance, in San Diego, conversion of HOV
lanes to HOT lanes on a portion of Interstate 15 increased usage by
64 percent over a 3-year period. Several studies confirm that there
are substantial gains in societal welfare from allowing solo drivers
to pay for access to existing HOV lanes. Others caution, however,
that when only one HOV lane is converted to a variable toll and
other lanes are free of charge, any temporary decrease in congestion
on the remaining free lanes may be offset by the redistribution of
traffic.
The use of real-time or historically based variable tolling on HOT
lanes may have a significant effect on traffic flow. For instance,
San Diego's variable toll uses real-time pricing, which changes
every 6 minutes to reflect the amount of traffic on the road.
Computerized electronic signs make information on the toll amount
and the speed and flow of traffic available to drivers before they
have to decide between the free and priced lanes. Results show that
travel times


vary little on San Diego's variable toll lanes because free-flow
conditions are almost always maintained. In Orange County, the
tolls vary by hour and day of the week, but are based on
historical information. While they are adjusted several times each
year, the toll does not convey actual conditions to drivers,
only average conditions. Thus, unexpected events such as accidents
can cause major delays on the variable toll lanes and because drivers
do not have up-to-date information on road conditions, travel
time is less predictable.
Despite their potential benefits, toll lanes are sometimes
portrayed as ``Lexus Lanes.'' The contention is that tolled roadways
supply faster routes only to high-income drivers who can afford to
pay the tolls, while lower income drivers continue to be stuck in
traffic. One study finds that drivers with higher incomes tend to
use HOT lanes more often than lower income drivers, but that lower
income drivers rely on toll lanes when on-time arrival at their
destination is important. For instance, you can imagine a case
where a parent is running late, but needs to be at the daycare to
pick up his or her child by a certain time. If the parent is late,
and the daycare fines him or her $10, then paying a $4 toll to arrive
on time saves $6. A recent survey also finds that support for or
opposition to HOT lanes is unrelated to income. Another study finds
that lower income, bus commuters were some of the largest
beneficiaries of cordon pricing in London. Bus riders are exempt
from paying the cordon fee, but their commute times greatly
improved. Not surprisingly, the number of bus passengers during
morning hours increased.
Experts note that implementation of congestion pricing faces less
resistance where motorists are unaccustomed to free and unrestricted
roadway access. For instance, it may be more feasible to implement
congestion pricing on a new road than on an existing road.
Likewise, it may be easier to convert HOV lanes to HOT lanes. The
advent of new technologies that electronically charge the toll by
sensing a microchip placed on the windshield of the vehicle
eliminates the need for a driver to stop and physically pay the
toll. These are increasingly used to charge drivers tolls on
existing roadways, making congestion pricing systems easier and less
costly to implement.
Historically, one of the largest hurdles to variable price tolling
on roadways in the United States has been the Federal-aid highway
program, which has prohibited states from collecting tolls on
interstates or other roads that receive Federal funding. Federally
funded pilot projects that explored variable price tolling
brought the advantages of congestion pricing to the attention of
policymakers. Policymakers also began to explore the use of pricing
mechanisms to reduce congestion in other contexts, such as for
allocation of runway access at airports (see Box 6-3). A
transportation bill signed into law in 2005 (The Safe, Accountable,
Flexible, Efficient Transportation Equity Act: A Legacy for Users)
provides states with increased flexibility to use tolling to
manage congestion and finance infrastructure improvements, and
provides ways to participate in pilot demonstrations of variable tolling.
States such as Texas and Colorado have passed laws allowing the
formation of toll authorities at local levels that can then construct
and operate toll roads. States such as Washington, California, Florida,
and Minnesota have identified candidate freeways for variable tolling.

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Box 6-3: Airport Pricing to Decrease Congestion

Though traffic jams are easily observable manifestations of
congestion, flight delays and runway bottlenecks also waste time and
fuel. Landing fees at most U.S. airports are directly related to
the weight of the plane, even though lighter and heavier planes
tend to consume approximately the same runway time. This contributes
to airport congestion because it encourages smaller, lighter planes
(which can use smaller satellite airports) to overuse the airport,
displacing larger, heavier passenger planes and reducing the number
of passengers that an airport can serve at a time.
A short-lived experiment at Boston's Logan airport in 1988
demonstrates how a change in the landing fee structure can
effectively reduce airport congestion. Boston changed its runway use
fee from one based only on aircraft weight to one that combined a
non-weight-based fee and a smaller weight-based component. The fee
for a small single-engine plane increased from $25 to about $100,
while the fee for a large jumbo 747 jet decreased from $800 to less
than $500. By flattening the landing fee, Logan made it relatively
more costly to land small planes, decreasing their volume. This
allowed it to more easily accommodate the larger planes that carry
more passengers. The result was that Logan airport reduced delayed
landings from 30 percent to 14 percent in less than 4 months.
Despite a reduction in congestion, the new landing fee structure
abruptly ended when the program was deemed to be in violation of the
Federal Aviation Act.
The auctioning of runway access for planes may prove to be an even
more effective way to reduce congestion at airports. An auction
would award landing rights to the carrier that values the slot the
most. Such auctions have been successful in other contexts such as
to allocate radio waves while still accommodating smaller local and
public radio stations.
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Conclusion


The transportation industry relies overwhelmingly on petroleum for
fuel. In spite of its reliance, the market largely functions as it
should; while transportation is particularly unresponsive to
changes in oil prices in the short run due to the lack of readily
available substitutes, it does eventually respond. Also, the price
reflects the costs to the firm of producing the oil and the
benefits to drivers from consuming the oil. That said, the use of
oil by the transportation and other sectors generates costs to
national security and the environment that users typically do not
take into account. Likewise, the full costs of congestion are not
taken into account by individual users when they drive, since
roadway use is not priced by the market. Carefully crafted policies
could help address these costs but care should be taken as
government action itself imposes inefficiencies.