Alternative Motor Fuels and Vehicles: Impact on the		 
Transportation Sector (10-JUL-01, GAO-01-957T). 		 
								 
The transportation sector accounts for the bulk of the petroleum 
consumption in the U.S., currently representing about two thirds 
of total petroleum use and roughly a quarter of the nation's	 
total energy consumption. 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. This testimony	 
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. 
So far, based on GAO's studies and the Energy Information	 
Administration'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	 
fundamental economic obstacles such as the relatively low price  
of oil, insufficient availability of alternative fuel refueling  
infrastructure, and the relatively high cost of certain 	 
alternative fuel vehicles. As GAO reported in its 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 some	 
time--at least until the number of vehicles reaches the level	 
necessary to support an economically sustainable infrastructure. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-957T					        
    ACCNO:   A01371						        
  TITLE:     Alternative Motor Fuels and Vehicles: Impact on the      
             Transportation Sector                                            
     DATE:   07/10/2001 
  SUBJECT:   Fuel taxes 					 
	     Gasoline						 
	     Motor vehicles					 
	     Petroleum products 				 
	     Alternative energy sources 			 
	     Energy costs					 
	     Tax credit 					 
	     Energy consumption 				 

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GAO-01-957T
     
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)

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