Financing the Highway Trust Fund: The Case for Higher Fuel Taxes

In this series of blog posts, RFF researchers take a look at the current state of the nation’s transportation infrastructure and evaluate various policies for financing the Highway Trust Fund. See the first and second posts in the series. 

From our first two blogs we saw that expenditures on roads and bridges from the Federal Highway Trust Fund (HTF) have increased over time, and the need for greater expenditures is expected to continue. Revenues into the Fund have not kept pace and will fall further behind unless Congress acts. In this blog, we discuss the advantages of a commonly discussed solution: raising the gasoline tax.

Since its inception in 1956, the HTF has been funded primarily through a federal tax on gasoline and diesel fuels. The revenue earned through the tax depends on two factors: the tax rate and the number of gallons sold. The taxes on gasoline and diesel have remained at 18.3 and 24.4 cents per gallon, respectively, since 1993. In real terms, an equivalent gasoline tax today would be 64% higher, or 30 cents per gallon.

As for the amount of fuel sold, Figure 1 shows national gasoline and diesel sales from 1983 to 2014. Since 2007, sales have fallen due to negative VMT growth from high fuel prices and the recession, and the fuel economy of new vehicles started to improve with tightening CAFE standards beginning in 2005. Going forward, a new round of CAFE standards require fuel economy of light duty vehicles to improve by close to 50% by 2025.

Diesel fuels sales, representing 38% of fuel revenues to the HTF, also fell beginning in 2007. While these sales have not dropped as drastically as gasoline, new fuel efficiency regulations on heavy-duty trucks will likely cut diesel tax revenues further in the coming years.

The government policies of raising fuel economy and funding the HTF through fuel taxes work against one another. Raising money for the HTF with a constant fuel tax requires constant or rising fuel sales over time, yet CAFE standards aim to reduce fuel consumption to promote energy security and protect the environment. As it stands now, these policies cannot both succeed.

Figure 1. US Daily Gasoline and Diesel Refiner Sales Volumes

Figure 1. US Daily Gasoline and Diesel Refiner Sales Volumes

So, should the gasoline and diesel fuel taxes be raised? Higher gasoline prices could make both more effective. More revenue would come into the HTF, and higher gasoline prices would make vehicles with higher fuel economy more appealing to consumers, thereby lowering the cost to auto manufacturers of meeting the CAFE standards.

And, there are other reasons why fuel taxes should be higher than they currently are. Automobile use leads to adverse effects on others, referred to by economists as “externalities.” These externalities include climate effects from greenhouse gas (GHG) emissions, local air pollution, congestion, road damage, and traffic accidents. If drivers are not forced to account for these externalities as part of the price of driving, they will not make efficient decisions about how much to drive, and when and where to drive.

Recent estimates of the appropriate tax on gasoline—accounting for these externalities and assuming no other policy is in effect—are around $1.20 per gallon (Parry and Small, 2012). This is well above the current tax rate on gasoline, about $.40 per gallon including federal and average state taxes. This high rate, however, may not be necessary. CBO has suggested that raising federal fuel taxes by ten to fifteen cents per gallon will address the revenue shortfall, as long as it is indexed for inflation. Read More

Resources Magazine: A View of the Environmental Policy Landscape from Outside the Beltway: An Interview with Paul Portney

In 2005, former RFF president and senior fellow Paul Portney ended his 33-year stint at RFF and headed west to become the dean of the Eller College of Management at the University of Arizona. In a recent interview I conducted for Resources magazine, he discussed how this move changed his perspective on environmental policymaking and the challenges posed by inequality, climate change, and water availability. An excerpt of that conversation follows; read the interview in its entirety at http://www.rff.org/Publications/Resources/Pages/189-QA.aspx.

Q: Once you moved to Arizona, how did your view of the landscape of environmental policy writ large in America expand beyond a Washington perspective?

A: Going out West gives you a different perspective on things. People don’t live and breathe what happens in Section 502b, Subsection c of an environmental regulation. They have bigger things on their plate: “How am I going to make a living, grow my business, and keep my house at a time when the economy is cratering?” After all, when I started as dean, the economy was just beginning to melt down.

There also is a bigger appreciation in the West for land use issues than environmental regulatory policy issues. Arizona, in particular, is a big agricultural state. It’s also a big mining state. So when I talked to people or read the papers there, they were more concerned with whether the Rosemont Copper Mine would get permitted than with power plant regulation or water pollution controls.

But it’s also the case that had I moved to California from Washington, my experience would have been different because California is much more engaged in environmental regulation—more so than even Washington now. In Arizona, they still have that frontier mentality. “The least government we can have is the best” is the sentiment of many in Arizona. I recently retired and moved to California, and I really went from one extreme to the other.

Q: You mentioned the economic meltdown, and it strikes me that one of the conversations we’ve had over the last year or so at RFF concerns the issue of economic inequality and the fact that people are reluctant to reach into their pockets and pay for public goods when they are struggling to make ends meet. At the same time, many of the environmental solutions that might make sense on the economist’s blackboard can have regressive consequences. How do you see this intersection between inequality and the need to safeguard the environment today and for future generations?

A: I think one of the real challenges that the environmental advocacy community faces is that if inequality persists or gets worse, it’s going to be hard to maintain the same kind of public support for environmental protection measures as was the case, say, between 1970 and 2000.

For people who care about continuing to protect the environment, we have to find a way to ease the burden on not just those in the bottom income bracket but increasingly even those at the lower middle part of the spectrum. Over the last 15 years, income per capita for those in the middle has stagnated or even decreased a little bit.

I’m on the board of a small, publicly traded electric utility in Missouri, and we are finishing up two major investments: putting a new air quality control system on a coal plant and replacing coal units and a couple of inefficient gas units with a combined cycle unit at another plant. Together, those two investments will cost the company $300 million and may increase electricity rates—I don’t know—10 percent, let’s say. That’s in a relatively poor part of the country. I think people are going to be more sensitive to this kind of thing in the future and are going to be asking, “Well, what’s this going to cost?” Their support will be partially conditional on that cost.

Q: That becomes an ethical problem and also a political problem. The idea that if you tax an environmental “bad” people will use less of it has come into wide acceptance. But so often the response from policymakers is “You know, I love market-based approaches. Now if you can just do it without increasing the prices voters face, we have a deal.”

A: I think that’s true, and I think that’s why when you hear discussions about, say, a carbon tax, the conversation usually goes “Okay, great; we’re going to tax carbon. What taxes are we going to reduce?”

A carbon tax would have to be revenue neutral in able to make it politically palatable—certainly to almost all Republicans and maybe to some Democrats, too. If you want a carbon tax, for every dollar in carbon tax revenue that you expect to raise, you’re going to have to reduce other taxes—whether on labor or capital or corporate income—by just as much. So it’s definitely a challenge. My concern is if you look at the prospects for the US budget in the years ahead, we’re going to need some revenue “positivity,” not just neutrality.

Read the rest of the interview at http://www.rff.org/Publications/Resources/Pages/189-QA.aspx

RFF ON THE ISSUES: EPA’s report on fracking and drinking water; Wood emissions

In this edition:

  • Issues with EPA’s new report on fracking and drinking water
  • Commentary on the environmental impacts of wood bioenergy

EPA’s Report on Fracking and Drinking Water

Last week, the US Environmental Protection Agency (EPA) released a draft study finding “that hydraulic fracturing has no major impact on drinking water.” RFF’s Alan Krupnick and Katrina McLaughlin write that although the report does make important advances in knowledge, it falls short of its claim to advance “the scientific basis for decisions by federal, state, tribal, and local officials, industry, and the public on how best to protect drinking water resources now and in the future.” They explain that the report doesn’t reach that very high bar because it lacks a systematic set of analyses with robust results that really narrows the range of uncertainty. Read More

The EPA’s Draft Report on Fracking and Drinking Water

The EPA today released an executive summary (ES) of its long-awaited study of the impact of fracking on drinking water. While the report is still a draft external review, its release is being carefully watched by those on all sides of the debate. The major finding now circulating – that the EPA did not find “widespread, systemic impacts on drinking water resources in the United States” but did find “specific instances where one or more mechanisms led to impacts on drinking water resources” – has something for both critics and supporters of fracking. The most important line of the ES by our reckoning, however, is the last one:

“Finally, and most importantly, this assessment advances the scientific basis for decisions by federal, state, tribal, and local officials, industry, and the public, on how best to protect drinking water resources now and in the future.”

Based on what’s presented in the ES, there’s no doubt that the EPA report will be helpful in adding to our understanding of the vulnerabilities of drinking water resources to fracking. The EPA has done this through an extensive literature review and systematic identification of potential mechanisms by which contamination could occur, and examination of cases in which contamination did in fact occur. However, the difference between understanding vulnerabilities and risk pathways and the “scientific basis for decisions,” while seemingly semantic, is large. The difference is a question of degree of uncertainty – do we have enough information to really advance the scientific basis, or are we still in the world of anecdotes? To the extent that data limitations force us to rely only on anecdotes, there is a way to go before decisionmaking can be improved.

 

 

Resources Magazine: Pits versus Tanks: Comparing Storage Methods for Fluids Used in Fracking

The extraction of shale gas using hydraulic fracturing (fracking) requires the use
 and storage of large amounts of freshwater, fracking fluids and flowback, and “produced water”—a highly salinized combination of water and chemicals that exists in shale formations and is forced
out of the ground as a by-product of gas extraction. Except for the freshwater, these fluids can contain heavy metals, radioactive substances, and other contaminants that are highly damaging if released into the environment. For this reason, the fluids are typically stored in lined, open pits in the ground or in sealed tanks.

A 2013 RFF survey of experts identified the storage of fracking wastewater in pits—and its potential to leak into surrounding rivers and streams—as a priority environmental risk that is not being addressed adequately by industry or government. Some have argued that storage tanks are a better choice than pits because they provide a “closed system” and can greatly reduce the possibilities of spills. New research by RFF’s Yusuke Kuwayama, Alan Krupnick, Skyler Roeshot, and Jan Mares examines whether this assertion is true. In a new infographic published in Resources magazine, they compare the two methods and suggest that tanks are not necessarily a fail-safe alternative.

Kuwayama and colleagues extracted data from the online spill database of the State of New Mexico Oil Conservation Division to catalog the reported volume of fluids used in fracking and other oil and gas production activities that was spilled and not recovered from pits and tanks, from 2000 to 2014. In Figure 1, they show that although most pit and tank spills lost less than 1,000 gallons, both storage methods have resulted in some larger-scale spills (6,000 to 10,000 gallons). Furthermore, the figure omits
a handful of even larger spills, including
six spills from pits that were larger than 100,000 gallons. Notably, spills from pits occurred twice as often as spills from tanks, while also losing over 10 times as much fluid over the study period—1,569,973 gallons versus 156,534 gallons. But the researchers caution that what is spilled matters, too.

Pits versus Tanks: Comparing Storage Methods for Fluids Used in

An examination of the data on the types of fluids spilled showed differences between the spills from pits and tanks (Figure 2). Reporting on tank spills included fluids such as acid, gelled brine, and unspecified chemicals. Pit spills showed higher frequencies and volumes of produced water, drilling mud, and brine water, and less frequency (but significantly more volume) of crude oil. The differences in types and volumes of fluids spilled suggest that a one-size-fits-all approach to regulation is unlikely to be cost-effective.

Pits versus Tanks: Comparing Storage Methods for Fluids Used in

 

 

The researchers also looked at the causes of the spills. Tanks seemed to be more vulnerable to lightning strikes, vandalism, and fire, which were not reported as spill causes for pits. Information on the causes
of spills could be valuable for policymakers in deciding whether pit and tank storage regulations should be adjusted. It also may help natural gas producers understand what voluntary actions they could take to reduce the occurrence of these spills.

Finally, the researchers note that New Mexico’s system is a good example of the transparency that is needed for stakeholders and the public to better understand the potential environmental impacts of fracking. However, more research is needed to fully understand the health and environmental impacts of related spills and the cost-effectiveness of implementing spill safeguards.

New Issue of Resources Magazine: On the Frontiers of Climate Policy

Resources 189; 2015For more than 60 years, experts at RFF have been analyzing the economic impacts of environmental policies. This year, in particular, we are engaged on the frontiers of several important climate-related policy decisions at the regional, national, and international levels.

One conversation under way is focused on the significant commercial developments in the US Arctic, from fishing and shipping to oil and gas exploration. Scientists find there are observable consequences of global warming in the region, so new development—particularly of oil and gas—brings both opportunities and challenges. In the new issue of Resources, articles by former deputy secretary of the Interior David J. Hayes and Carol Lloyd of the National Petroleum Council explore how we balance this development with protection of the Arctic’s pristine environmental assets, while ensuring that local communities reap the benefits.

On the national level, some of our scholars are focused on EPA’s Clean Power Plan—the first policy that will significantly reduce emissions from the existing fleet of power plants across the United States. Many of the most important policy choices will be made by state governments, which will decide how to meet the federally set goals. Most of the technology and policy options available as compliance mechanisms are not new to the states or the electric utilities. A number of these options are outlined in this issue by RFF’s Karen Palmer and Anthony Paul, who have been working extensively with various stakeholders.

Finally, RFF is engaged in the coming international climate negotiations to be held in Paris at the end of the year. A key question is how to compare nations’ pledges and efforts to ensure a fair and measurable outcome. RFF Visiting Fellow Joe Aldy of Harvard and University Fellow Billy Pizer of Duke have been tackling this question and, in this issue, suggest a series of metrics to guide a comparative analysis of the national action plans.

The international community has its 
eyes set, in particular, on the United States, where the record on climate policy over the past decade has not been considered aggressive or adequate. Indeed, critics of US policy are asking whether there is political support in the United States to back up our government’s pledges. In my view, political support is growing, as seen in public opinion polls, state actions, and changing public discussion. But the proof is in the pudding.

RFF is not in the business of advocacy or lobbying, but we have done—and will continue to do—extensive analysis of the policy options for addressing climate change.

In this issue:

Infographic

Pits versus Tanks: Comparing Storage Methods for Fluids Used in Fracking

Commentary

Getting Past the “Yuck Factor”: Recycled Water in Florida and Other States
Yusuke Kuwuyama and Hannah Kammen

Q&A

A View of the Environmental Policy Landscape from Outside the Beltway
An Interview with Paul Portney

Features

Should We Price Carbon from Federal Coal?
Alan Krupnick, Nathan Richardson, Joel Darmstadter, and Katrina McLaughlin

The Road to Paris and Beyond: Comparing Emissions Mitigation Efforts
Joseph E. Aldy and William A. Pizer

America’s Awakening as an Arctic Nation
David J. Hayes

The Promise of US Arctic Oil and Gas Potential
Carol Lloyd

Complying with EPA’s Clean Power Plan: Policy Options for States
Karen Palmer and Anthony Paul

Falling Oil Prices: Implications in the United States
Stephen P.A. Brown

To view all articles from this issue of Resources, visit our website.

RFF ON THE ISSUES: North American energy and climate policy; Park funding legislation stalls

In this edition:

  • Insight into opportunities for North American energy and climate partnerships
  • A roundup of RFF research on assessing and funding US parks

North American Energy and Climate Policy                

Energy ministers from the United States, Canada, and Mexico have established a working group designed to “enhance cooperation and integrate more climate change–related policies” into their energy dialogues. Group members have said that they will focus on “aligning regulations to control emissions from the oil and gas sector,” as well as improving grid efficiency and clean energy technologies. Read More

How Bad is the Nation’s Transportation Infrastructure, and What are Future Spending Needs?

In last week’s blog post, we described the current dilemma in funding the Federal Highway Trust Fund (HTF). Congress just passed another in a long series of short-term extensions for surface transportation funding, but a long-term solution is what is needed. In this entry, we provide additional context for the problem by giving an overview of the current state of roads and bridges in the United States. We then review estimates of how much funding is projected to be needed in the future.

There is no consensus for assessing the quality and performance of the nation’s roads or bridges, but there are a number of measures that can provide benchmarks. The general picture, contrary to popular opinion, is that the quality of both roads and bridges has been improving nationwide over the last 25 years, but a good deal of infrastructure remains in fair or poor condition. In addition, there is a great deal of heterogeneity across states in the quality of roads and bridges. Finally, roadway congestion has become a significant problem in many urban areas, but congestion levels have fallen recently in many cities.

Figure 1. Bridge Conditions by County

Figure 1. Bridge Conditions by County

Bridges. Federal Highway Administration (FHWA) data shows that the number of bridges listed as structurally deficient has halved since 1992, with roughly 9,000 bridges removed from the structural deficiency list since 2010. Despite these marked improvements, there remains a significant backlog of improvement projects nationwide – a quarter of bridges remain rated as either structurally deficient or functionally obsolete, and many are over 50 years old. Former Transportation Secretary Ray LaHood explained, “[structurally deficient bridges] need to be really either replaced or repaired in a very dramatic way … I don’t want to say they’re unsafe, but they’re dangerous.” Overall, ARBTA reports that more than $115 billion in bridge work awaits funding. Read More

Crude Oil Prices, Climate Change, and Global Welfare

This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.

A few weeks ago, I participated in a panel session titled, “The Remarkable Transformation of the Energy Sector: Does it Also Transform Our World.” The motivating question was: “Is the dramatic decline in oil prices a complete gift to the West because of the enormous funds being saved, or is it an unintended Trojan horse because development of renewable energy as well as new fossil-fuel sources will decline in the West, posing longer new challenges?”

The other members of the panel – from private industry – had vastly more expertise (and relevant insights) on fossil-fuel markets, but here’s what I had to say. This is hardly at the sweet spot of my professional competence, so I welcome your comments and corrections! In general, how would you answer that question?

Causes

I start (and started) from the premise that the dramatic decline in crude oil prices that took place from August, 2014 ($96/barrel), to March, 2015 ($44/barrel), was due – on the one hand – to decreased demand, a function of slow economic growth in Asia, Europe, and elsewhere, endogenous, price-driven technological change leading to greater fuel efficiency, and policy-driven technological change that also has been leading to greater fuel efficiency, such as more stringent Corporate Average Fuel Economy (CAFE) standards in the United States; and – on the other hand – was due to increased supply, partly a function of the growth of unconventional (tight) U.S. oil production (a product of the combination of two technologies – horizontal drilling and hydraulic fracturing).

Read More

This Is the Time for a Long-Term Solution to Highway Funding

In this series of blog posts, RFF researchers take a look at the current state of the Nation’s transportation infrastructure and evaluate various policies for financing the Highway Trust Fund.

Facing a May 31st deadline to extend surface transportation funding, Congress is opting for a two month extension, the 33rd short-term measures to shore up  the Highway Trust Fund in the last 6 years. The Fund faces insolvency at the end of this very short time frame, forcing a discussion about a much-needed long-term solution to the Fund’s continuing deficit.

The Fund was established in 1956 to launch the Interstate Highway System and finances roughly one quarter of all roadway spending nationwide, including highway and bridge expansion and maintenance. The major sources of revenue for the Fund are taxes on gasoline and diesel fuels. The per-gallon tax rates on these fuels, 18.4 cents for gasoline and 24.4 cents for diesel, have remained unchanged since 1993. In real terms, the value of these taxes has decreased by nearly 40% since that time.

Offsetting the effect of inflation on Highway Trust Fund revenue, gasoline consumption steadily rose from 1990 to 2007. Figure 1 shows that the Fund’s expenditures and revenues matched quite well during this period.  In 2008, however, the Great Recession marked declines in both economic activity and miles driven. Following the first decline in vehicle miles traveled in 20 years, gasoline sales and Highway Trust Fund revenues have remained low.

Yet, federal spending for roads and bridges continued its upward trajectory.  Over the past twenty years, Highway Trust Fund outlays have been growing at about 2.5% a year, roughly on pace with the growth rate in economic activity. The widening gap between expenditures and revenues, displayed in Figure 1, has increased the need for a long-term funding solution.

Figure 1. Highway Trust Fund Outlays and Revenues (current dollars)

highway fund chart 2

With no surface transportation funding bill since 2005 lasting longer than two years, Congress has continually propped up the Fund with transfers from federal funds — totaling $62 billion since 2008. Despite these infusions, the United States has dropped from eighth to sixteenth globally in road infrastructure quality during that time (World Economic Forum 2008, 2014).

Without Congressional fixes – whether short or long term – these troubling trends are likely to continue, even with a recovering economy. New Corporate Average Fuel Economy (CAFE) standards starting at the 2012 model year will gradually require much better fuel economy from all cars through the 2025 model year. With vehicles using less gasoline, the Fund will generate decreased revenue. Despite low oil prices and a rebounding economy, the Federal Highway Administration projects that it is unlikely that vehicle miles traveled will reach the high growth seen in the 1990s and early 2000s.

Given these trends, CBO sees shortfalls reaching $168 billion by 2025, with annual shortfalls over the next decade increasing from $13 to $22 billion. Without a departure from current policy, this deficit will need to be addressed by either continued General Fund transfers or significant cuts to federal surface transportation funding—an unattractive proposition given the poor state of our roads and bridges.

In the two months leading up to the July 31st deadline for Congressional action, we will continue the debate on how to address the Nation’s crumbling infrastructure and the Highway Trust Fund’s precarious financial situation. In next week’s blog post here on Common Resources, we will discuss the poor state of roads and bridges in the United States. After outlining the need for highway funding, we will discuss various funding mechanisms in subsequent posts.