Honolulu January 20, 2005

1. ROCKY MOUNTAIN INSTITUTE Legislative Briefing The Transportation Efficiency Prize Honolulu January 20, 2005

2. How Hawaii can Win the Oil EndGame • The United States can get completely off oil and revitalize its economy—led by business for profit • States are the laboratories of change that will bring this about • Hawaii is well positioned to be among the leaders Hawaii Energy Commitee Briefing

3. Winning the Game: restoring competitiveness and eliminating oil dependence • National competitiveness and national security at risk • Why should we care? • Japan, EU, China will eat Detroit’s jobs for lunch • Energy insecurity, price volatility, and climate concerns, perhaps depletion • Save net $70 billion/yr by 2025, create 1 million net jobs • How do we win? • Reduce congestion through mass transportation and smart planning • Efficient end-use can save half the oil at $12 a barrel • Biofuels substitute for another fourth • Longer term: the hydrogen transition fueled by saved gas Hawaii Energy Commitee Briefing

4. Existing technologies can save 26% of oil use cheaply ($6/bbl), and State of the Art technologies could save 52% of 2025 oil for only $12/bbl Oil Saved by Full Deployment in 2025 (Million Barrels/Day) Conventional Wisdom (Avg. CSE = $6/bbl) State of the Art (Avg. CSE = $12/bbl) EIA 2025 Crude Oil Price Cost of Saved Energy (2000 $/bbl RAC on the short-run margin) 25% of 2025 Baseline Use 50% of 2025 Baseline Use Hawaii Energy Commitee Briefing

5. Four Major Market Failures Most customers have very high implicit discount rates when buying energy efficiency Most equipment/vehicle makers and their customers, even sophisticated ones, lack good information on alternatives, especially in end-use efficiency Oil is priced below its societal cost Externalities include military/security, environmental, net subsidies, and diplomatic/geopolitical The “Creative Destruction Problem”: Organizational and cultural and institutional obstacles make it difficult for large companies to adopt disruptive innovations Given the barriers to efficiency, what is the role of state government? Government can accelerate market adoption by: Stimulating Demand Setting an Example Providing better information Hawaii Energy Commitee Briefing

6. Residual Fuel Motor Gasoline Jet Fuel Distillate Fuel LPG Asphalt* Lubricants* Other To get real security, Hawaii needs to back out the entire barrel of crude oil Hawaii Fuel Use Model Total Petroleum Usage in 2003 (MM Barrels) 13.2 10.7 15.5 7.2 0.6 0.3 0.1 0.9 Crude Oil Imports Refined Products • 48.6 MM barrels • 22% US • 78% Foreign Other ProductsImports (000s barrels) 7.9 MM barrels - 40% US - 60%Foreign 48.5 Sources: DBEDT (2004), *EIA Hawaii Energy Commitee Briefing

7. Hawaii’s has a unique situation: passenger vehicles represent 80% of the fleet and 50% of new cars are rental vehicles Vehicle Fleet – State of Hawaii (2003) • Total Cars Registered (000s): 1,045 • Passenger: 828 • Light Trucks: 115 • Heavy Trucks: 60 • Trailers: 26 • Motorcycles: 11 • Miles Driven (MM miles): 9,058 (1) • Average fleet efficiency (mpg) 20.8 (2) • Motor Fuel Equiv. Consumption (MM gallons): 434 New Cars Scrappage (3) Passenger: 35,927 Trucks: 9,127 Vehicles: 65,000 Rental Cars Passenger: 37,525 Trucks: 349 Notes: (1) Miles driving based on average 9.058 miles driven per year by vehicle – assumes all vehicles except trailers and vehicles subject to scrappage Source: 2000 Hawaii Strategy Plan, DBEDT (2) Based on overall fleet except for trailers in the State of Hawaii in 2000. Source: 2000 Hawaii Strategy Plan, DBEDT (3) Scrappage based on US national scrappage rate of 75.3% of new registered vehicles Hawaii Energy Commitee Briefing

8. The energy cost burden to the state will increase: Hawaii will consume 510 MM gallons/y of motor fuel by 2024 (17% increase) Hawaii Estimated Consumption of Motor Fuel Base Case – If Light Vehicles Reach Equivalent Penetration Rates as National Average Hawaii Cumulative Fuel Consumption through 2023: 9,507 MM gallons Commercial Fleet Light Duty Trucks Annual Consumption of Gasoline Equivalent (MM Gallons) Fleet Fuel Efficiency 2004: 20.8 mpg Fleet Fuel Efficiency 2024: 26.0 mpg Passenger Vehicles • Assumes scrappage rate of 75.40% of new registered vehicle. Source: NADA.org • Assumes growth of vehicle fleet of 1% per year • Based on expected distribution of 79% passenger vehicles, 17% light trucks and 4% commercial/heavy vehicles. Source: HI Strategy Report 2000 • Assumes 92.6% of vehicles powered by motor gasoline, and remainder powered by diesel and LPG, Source: Hi Strategy Report 2000 • Assumes average miles driven per vehicle of 9.058 miles/year. Source: HI Strategy Report 2000 Hawaii Energy Commitee Briefing

9. Why Drive? Mass transportation and smart growth reduce demand for vehicle travel • Congestion is imposing high costs to our society and our positioning in the tourism market • Mass transit alternatives are cheaper than building more roads and are well known, but must be funded • Light rail on Oahu • Bus service on neighbor islands • Tax increases should equitably support transit improvement in all counties • Smart growth and planning to provide employee housing close to work, solving both the transportation and the housing crisis Hawaii Energy Commitee Briefing

10. Baseline Feebate Feebate & Scrappage $1000 Tax Credit Three options to stimulate demand for more efficient vehicles Policy Impact to Gasoline & Diesel Consumption Baseline Feebate Only Annual Consumption of Gasoline Equivalent (MM Gallons) $1000 Tax Rebate Feebate + Acc. Scrappage Motor Fuel Consumption (2004-2023) MM Gallons Motor Fuel Savings 2004-2023 MM Gallons Fleet Efficiency (mpg) 26 9,507 7,656 1,851 35 6,329 3,178 40 8,699 7,647 1,860 37 Hawaii Energy Commitee Briefing

11. Policy Impact Benefit Costs Cum. Gallons Saved (MM) # of Add’l Vehicles Scrapped # New Vehicles Receiving Incentives HI Taxpayer Savings ($MM) CO2 Reduced (Mtons) Gasoline Tax Forgone ($MM) Scrappage Costs ($MM) Incentive Costs ($MM) Accelerate HEV adoption up to 10% penetration using feebates as incentive 1,851 – 28,609 2,081 14.9 262 – 0 Accelerate HEV adoption up to 10% penetration using feebates and accelerate scrappage to 95% of new cars (30% increase over current rates) 3,178 342,697 77,860 4,093 25.6 518 106 0 Accelerate HEV adoption up to 10% penetration using a $1000 tax rebate as incentive 1,860 – 36,887 2,057 15.0 258 – 32 Our finding is that feebates plus scrappage are cost effective policy measures, so long as each sunset once the goals are achieved Note: Assumes 5% discount rate, 1% inflation rate for motor fuel gasoline Assumes scrappage program of $500 per car, and tax credits of $1,000 per HEV Hawaii Energy Commitee Briefing

12. Policy goals & criteria • Reduce Hawaii’s oil dependency • Align new-car purchaser’s incentives with the true cost to society Policy Goals • Simple to understand and implement • Cost effective • Inexpensive to administer • Revenue-neutral • Automatic sunset • Progressive or at least not regressive PoliticallyViable Some Suggested Criteria Hawaii Energy Commitee Briefing

13. Transportation Efficiency Policy Options High Impact TOUGH CHOICES CLEAR WINNERS Feebates CO2 Emissions Standards Mass Transit HEV/AFV Tax Credits Scrappage Cost & Implementation LOW HANGING FRUIT Hard/ Expensive Easy & Cheap AVOID State Procurement Increases Gasoline Taxes Tire Labeling HOV /Parking Preferences Public Information Campaigns Low Impact Hawaii Energy Commitee Briefing

14. Focus Here Traditional policy options • Provide alternative means for mobility • Critical need to reduce congestion • Cheaper than adding more roads Mass Transportation • LEV/HEV Fleet Percentage Quotas • Enacted to meet emissions standards • Hawaii scale unlikely to sway manufacturers Quotas • Increase gasoline taxes • Reduces consumption • Marginally effective when prices are already high and politically unpopular Pricing • Mandate HI government fleet new purchases • Mandate minimum efficiency for new purchases • Demonstrates leadership Procurement Scale Hawaii Energy Commitee Briefing

15. Focus Here Measures to improve existing fleet efficiency • Standardize Tire Rolling resistance and noise labeling • 20% reduction in rolling resistance creates 5% fuel savings in cars, and 4-12% fuel savings in heavy trucks • Prices are similar for low or high Crr tires Tire Rolling Resistance • Public Information Campaign • Incremental cost is 10-15%, 5% savings possible • Mandating viscosity impractical Low Viscosity Oils Proper Tire Inflation • Public Information Campaign • Proper inflation reduces fuel use 2%, 30% of tires not inflated Hawaii Energy Commitee Briefing

16. Innovative policy options • Stimulates demand for new vehicles • Revenue and Size neutral • Requires exemption for federal preemption Feebates Scrappage • Pay to take least efficient cars off the road • Accelerates capital stock turnover Subsidies or Tax Credits • Provide Tax Credits for Efficient Vehicles • Make dependent on engine technology, sunset after 10% penetration rate • Implement pay-as-you-drive (PAYD) or pay-at-the-pump (PATP) auto-insurance • Creates marginal decrease in driving • Both have welfare benefits from linking cost of insurance more closely to VMT • PATP induces switching to more efficient vehicles due to taxation aspect – giving larger reduction Higher Prices via Insurance Focus Hawaii Energy Commitee Briefing

17. Summary of State Actions Incentive/Regulation How it Works States Using It Feebate • Revenue neutral rebate for more efficient vehicles paid for by fee on less efficient vehicles • DC*, MD** Tax Credit or Rebate for High Efficiency Vehicles • Tax credit or rebate for the purchase of a high efficiency vehicle • Tax credit or rebate for the conversion of a vehicle to operate on AF • AZ, CA, CO, CT, DC, GA, IL, KS, KT, LA, MD, ME, MT, NC, NJ, NM, NY, OK, OR, PA, RI, UT, WI, WV Tax Credit or Rebate for Alternative Fuels or AF Production • Tax credit or rebate for biofuels, CNG, LPG • AR, CT, DE, HI, ND, KS, MN, MS, ND, RI, SD, TX, VA, WA Tax Credit, Rebates or Grants for AFV Refueling Station • Tax credits, rebates or grants for AF refueling stations • CO, CT, HI, IN, KS, LA, ME, NJ, NY, OK, OR, RI Government Purchase of Efficient or AFVs • Funds or mandates to purchase AFVs or efficient vehicles in state, country or school fleet • AZ, CA, CO, DC, DE, FL, GA, IA, IL, IN, KS, MA, MD, ME, MI, MN, MO, MT, NC, NM, NJ, NV, NY, OK, OR, RI, SC, TX, UT, VT, WA, WI, WV Emissions Standards • Quota based LEV or LEV standards on cars sold to alleviate air pollution • CA, NY Hawaii Energy Commitee Briefing

18. Blueprint for Action: What the Legislature can do • Pick Up the Low Hanging Fruit • AFV/HEV access to HOV lanes, special parking access • Mandate state procurement of efficient vehicles • Run state fleet on biofuel blends B20 or W85 (when available) • Fund mass transit alternatives • Leverage actions of larger states • Alliance with other states seeking exemption from preemption on feebates or mirror alternative legislative remedies that are not preempted • Adopt labeling program for tires (under development in CA) • Provide near term tax incentives for HEVs and AFVs • Provide $1,000 state tax credit from 2006-2009 • Sunset after penetration reaches 10% or feebates are allowed Hawaii Energy Commitee Briefing

19. The $3 Billion Efficiency Prize and Real Security:Backing out: 8 Million barrels of crude oil saved (15% of crude imports) from efficiency alone Efficiency Impact Reference Consumption Million barrels Efficiency Savings by 2025 Million Barrels % Savings Residual Fuel 23% 13.2 (3.0) Motor Gasoline 28% 10.6 (3.1) Jet Fuel 5% 15.5 (0.7) Crude Oil Saved Refined Products Distillate Fuel >19% (1) 7.2 (1.2) LPG 0% 0.6 8 MM Barrels Asphalt 50% 0.3 (0.2) Lubricants 0% 0.1 Other 0% 0.9 Source:RMI Analysis, note: additional distillate would be importedExpectation is that renewables would save more residual fuel oil(1) Additional diesel savings possible from new truck designs 48.3 (8.2) Hawaii Energy Commitee Briefing

20. Why should you care enough to act? Hawaii Energy Commitee Briefing

21. Appendix Hawaii Energy Commitee Briefing

22. How feebates work How Feebates Result in a More Fuel-Efficient Fleet of Vehicles (1) Feebate Price Incentives Improved Fuel Economy of Vehicle Fleet Short-Run Change in Sales Mix Long-Run Change in Product Mix • Rebates reduce the price consumers pay for fuel-efficient vehicles • Fees increase the price consumers pay for inefficient vehicles • Available selection of vehicles (including the fuel economy of individual models) is unchanged, but price incentives encourage consumers to purchase the cheaper, more fuel-efficient vehicles • The selection of new vehicles being marketed changes: Manufacturers make vehicles that are more fuel efficient because the resulting increase in the feebates helps pay for additional fuel-economy technology Source: Davis, W.B., Levine, M.B., and Train, K.T., “Effects of Feebates on Vehicle Fuel Economy, Carbon Dioxide Emissions, and Consumer Surplus”, DOE, February 1995, p. 3, Fig. 1-1 Hawaii Energy Commitee Briefing

23. Feebate schedules examples: $1,500 discount paid for by $800 fee on new cars Example of Feebate Schedule (1) Source: Davis, W.B., Levine, M.B., and Train, K.T., “Effects of Feebates on Vehicle Fuel Economy, Carbon Dioxide Emissions, and Consumer Surplus”, DOE, February 1995, p. 5, Fig. 1-2 Hawaii Energy Commitee Briefing

24. Shredding scrapped tires into asphalt can halve asphalt use, double road’s life, and offset some of Hawaii gasoline tax lossAsphalt Rubber (AR) pavement is a winner versus traditional Asphalt (A) pavement AR repaving reduces cost substantially… • Use LESS asphalt per lane-mi: From ~180 to ~120 bbl… • Same lane-width & density, only ~1/2 as thick (from average of ~4” to ~2” pavement thickness) • … yet DOUBLE LIFE (from 7-10 to 15-20 yrs), and… • … LOWER costs: • Up-front cost down ~35% from $70k to $45k/lane-mi • Life-cycle cost advantage even better For Hawaii, 2025 (1) • Annual saving in resurfacing from $17M to $21M (49%-61% vs. today) • This would offset 10% of gasoline tax revenue shortfall from efficiency gains … and could have significant effect by 2025: • US today: 300 M total scrapped tires per year • 96M/yr currently not used — would satisfy ~40% of current re-pavement demand • 65% of re-pavement by 2025 assuming fixed supply proportion • Lowers national paving costs by $11 billion ($53BN to $42BN/yr) (1) Assumes approx 2/3 of 3R (Restoration, Rehabilitation, and Resurfacing) budget for Hawaii is used for resurfacing. Source: (1) RMI analysis / RMI US Asphalt Model (2) Jung, J-S., Kaloush, K E., and Way, G.B., "Life Cycle Cost Analysis: Conventional versus Asphalt Rubber Pavements", Arizona State University, August 2002. (3) http://wwwcf.fhwa.dot.gov/ohim/hs99/hm51r.htm, assuming 50% of HI 3R state funds go towards re-paving existing and new roads; from figures Tables SF12AP1 through SF12AP6. (4) “US Scrap Tire Markets 2001”, Rubber Manufacturer Association, December 2002 Hawaii Energy Commitee Briefing