State Policies for a $4/Gallon World

With gas prices now topping $4 per gallon and rising concern over global warming, the public policies that accommodated and often subsidized wasteful driving habits in the past need to change.

In the U.S., transportation accounts for one-third of carbon dioxide emissions, most of which comes from vehicle tailpipes.  What is needed are policies to increase the fuel efficiency of cars on the road, create incentives for drivers to drive less, invest in the transit infrastructure to create alternatives to driving, and create smart growth development patterns to make it easier for people to live closer to work and commute less.  Some of these policies can have short-term effects, but given that it took decades to get our nation to our present dependence on cheap gas, policymakers, as this Dispatch will highlight, will need to embrace long-term changes to solve these problems.




Clean Car Standards

One thing is true today: the technology to create more fuel efficient cars already exits; what is missing is the political will and forethought.  Now that it is becoming increasingly clear that energy-efficient policies are also economically sound ones, it has become harder and harder to excuse such inaction.

At the same time that domestic automakers are losing market shares to foreign cars that are more fuel efficient, a recent study found that improved vehicle mileage performance would generate more revenue for automakers.  One study found that a target of a minimum 35 miles per gallon by 2020 would create as many as 170,800 jobs per year and save consumers nearly $25 billion on gasoline.  Moreover, the Union of Concerned Scientists found that a standard of 39 miles per gallon could be achieved by 2020 and that 35 miles per gallon could be met by 2018, which would result in even more environmental and economic savings.

In 2002, California passed the first law to cut global warming pollution from automobile tailpipes. The standards called for a 23 percent reduction in heat-trapping emissions from new cars by 2012 and a 30 percent cut in heat-trapping emissions from new cars by 2016.  The regulations, or "clean car standards" are designed to reduce emissions from three key greenhouse gases: carbon dioxide, methane, and nitrous oxide.  The only hitch is that California needs a waiver from weaker federal regulations that otherwise preempt tougher standards in the states; once the waiver has been granted, other states can adopt California's standards.  18 states have already adopted or announced plans to adopt the California's clean car standards.

The clean car standard faced severe opposition from automakers, who filed several lawsuits against the state to overturn the standard.  The courts have consistently struck down the automakers suits and sided with California's right to implement regulations to protect its citizens. 

A larger problem is the EPA.  Previously, the EPA has given California over 50 waivers under the Clean Air Act.  However, against overwhelming evidence in favor of the regulation and even after sitting on the request for over two years, the EPA rejected California's request.  Currently, 12 states and 11 non-profit organizations have filed suit to require the EPA to comply with a previous Supreme Court ruling that allows the regulation of global warming pollution.  

More states joining in passing "clean cars" legislation will only increase the political pressure on the EPA and the courts to allow tighter fuel efficiency standards to be implemented.

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Raising the Gas Tax

Along with raising fuel efficiency, one of the most direct ways to create incentives to buy more fuel efficient cars and fund alternative transit infrastructure is to raise the gas tax.  With families feeling strained by rising gasoline prices, raising the gas tax as a solution seems counterintuitive, but there are ways to ease the burden of such a gas tax on working families while addressing some of the $1.6 trillion needed to fix the infrastructure throughout our states.  With $4 per gallon gasoline, Americans are already paying a massive "tax" in the form of payments to overseas oil producers, who are using that money to build their own infrastructure at the expense of the U.S. economy.  An increased gas tax can encourage more fuel efficiency and keep the U.S. economy competitive with foreign oil countries.  

Raising the Gas Tax: One cause of the present crisis is that gas taxes were allowed to decline over the last few decades, encouraging Americans to buy gas-guzzling cars in the first place:

  • The federal gas tax at 18.4 cents-per-gallon has not been raised since 1993.  Adjusted for inflation, the federal gas tax is half of what it was in the 1960s.  
  • Although twenty-eight states raised their gas taxes between 1992 and 2003, only three raised it enough to keep pace with inflation.  In inflation-adjusted terms, the average state gas tax rate declined by 14 percent.
  • Other nations around the world pay far higher taxes on gas, helping them to fund infrastructure, encourage the purchase of more fuel-efficient vehicles, and strengthen their energy independence.  Europeans routinely pay $3 to $4 per gallon in gas taxes (see graph), so even a significant increase in the gas tax in the US would still leave US motorists paying far less than other developed nations -- and we would have additional funds to repair infrastructure.

A number of states have embraced higher gas taxes in recent years.  Most recently, the Minnesota Legislature passed an increase in its gas tax to fund needed transportation improvements.. 

Easing the Economic Burden on Working Families:  Although fuel prices have been shown not to fall disproportionatley on working families more than upper income groups when measured over a lifetime, many nations offset gas tax increases by offering tax credits or lowering other taxes such as income taxes to compensate for those gas taxes.  Many European countries followed this path, including Germany where gas tax increases were introduced over a number of years to give consumers warning and time to upgrade their vehicles.

As we described in April, a number of groups, from the Brookings Institution to the Center for Budget and Policy Priorities (CBPP), propose ways to offset taxes on carbon fuels with tax credits in ways that protect working families, even as we encourage all consumers to choose more fuel efficient alternatives.

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Pay As You Drive Auto Insurance

Encouraging Americans to buy more fuel efficient cars is just the first step.  Ultimately, consumer behavior patterns need to change and the number of miles driven needs to be decreased.  Pay As You Drive (PAYD) insurance plans reward drivers for reducing the number of miles they drive, encouraging them to find alternative methods of travel or locating where they can drive less.

Instead of paying a lump-sum amount for insurance regardless of how many miles are driven, PAYD would charge insurance premiums based on the number of miles driven.  The result would be incentives for drivers to drive less and an easier entry into insurance for uninsured drivers who cannot afford set premiums.  PAYD is also more equitable because it shifts the costs of driving onto more high-risk drivers.

The benefits of PAYD are enormous.  According to a Brookings Institution estimate, a PAYD scheme would reduce miles traveled per driver by an average of 8 percent.  An 8 percent reduction in vehicle miles traveled would yield social benefits of $51.5 billion, largely through reduced congestion and accidents.  Carbon emissions would be reduced by roughly 126 million tons per year.  And, roughly two-thirds of households would have reduced premiums under PAYD, equal to approximately $270 per car per year.

States have been working with this idea for several years now.  In 2003, Oregon passed HB 2043, which encourages insurers to offer pay as you drive insurance by offering a tax credit.  The Oregon Environmental Council is looking for participating insurance companies.  The Texas Legislature passed HB 45 in 2001 to give insurance companies the authority to offer PAYD insurance policies.  Texas also just completed a 2-year pilot PAYD program with Progressive Insurance.  The initial results suggest that PAYD does reduce miles driven and that there was a high level of interest in the pilot program among Progressive customers.

Progressive Insurance is planning to expand their PAYD program and will offer a "MyRate" pay as you drive plans in six states.  Drivers on the plan would install a small wireless device in their cars that transmits not only how many miles traveled, but also how they are traveled in order to asses the true risk of every driver.  The device measures the car's speed every second, from which Progressive can determine acceleration and braking behavior.  States can take action to encourage the voluntary expansion of the program to more drivers.

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Build Mass Transit

Especially as we encourage Americans to drive less, we need to invest in mass transit infrastructure as an alternative.  As we described in February, the demand for mass transit is picking up across the country.  Over half of Americans polled said they would take mass transit if it were more easily accessible from their homes or where they work.  Two in three (65%) said the rising price of gasoline makes them more likely to consider using mass transit and 44% would be willing to pay higher taxes if they knew all the added taxes were being spent on improving or creating public transportation where they live.

New transit projects are moving forward across the country-- and not just in traditional older cities.  For example:

  • Denver, Colorado has a 14-mile Light Rail Transit system with over 22,000 riders using the system on an average weekday.
  • North Carolina is moving forward on Charlotte's public transit system, CATS.  Bus lines will now not only run to and from the urban center, but will include a number of neighborhood connector routes, while its LYNX commuter rail system now runs along Charlotte's south corridor.
  • Northern Virginia is looking to implement a mass transit expansion that could include Bus Rapid Transit (BRT), which features extra-long carriers running in dedicated bus lanes.
  • In Minnesota, ISAIAH of Minneapolis, led a coalition to win $20 million for public transit expansions.

As US PIRG described in a recent report, there is good news in the renewed commitment to public transit, which was happening even before the recent skyrocketing gas tax increases:

Public transportation ridership reached 10.1 billion trips in 2006, a growth of 30 percent since 1995. This impressive rate outpaces the 12 percent growth of our population as well as the 24 percent growth in highway travel during this period... Motivated by worsening traffic congestion, high prices at the pump, a desire to cut global warming pollution, or just the pleasure of reading the newspaper on the way to work, Americans have proven ready to use transit when they have the option.

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Smart Growth

Ultimately, long-term reductions in gasoline use require remaking an urban and suburban landscape created in an era of cheap gas.  Decades of government policies have encouraged sprawling housing tracts in the suburbs and exurbs, encouraging businesses and families to move farther from urban centers.  In the post-war period, highway subsidies and low levels of funding for mass transit made surburban transit costs look lower than they actually were -- until congestion, gridlock and now higher gas prices trapped many suburbanites into costly commutes.  Zoning policies have also made the problem worse, particularly in inner-ring suburbs that actively block higher-density housing and therefore more affordable units closer to work and entertainment centers.

The irony is that many city dwellers have fled to exurban communities in search of cheaper housing, only to see those housing savings eaten up by commuting costs.  However, if states would stop artificially limiting the supply of housing near where people work and shop, and instead encourage affordable housing and smart growth development along existing transit corridors, most Americans would happily exchange their long exurban commutes for more a sustainable lifestyle with less driving demands.

The reality is that state and local regulations can shape housing markets in a considerable way to encourage more fuel-efficient lifestyles.  A short checklist would include:

  • Changing the traditional zoning structures to allow for denser, mixed-use zoning.  Commercial and residential use in the same area creates creates healthier communities by allowing residents to be closer to the services they use on a regular basis and creating walkable communities.
  • As we highlighted in a past Dispatch, inclusionary zoning increases the availability of affordable housing by requiring developers to make a percentage of housing units in new residential developments available to low and moderate income housing.
  • Transit Oriented Development (TOD) is another way to incorporate smart growth policies and create more affordable housing.  Transit oriented development creates towns and cities around public transportation stations.  Around a train station, for example, are a combination of residential, retail, and commercial buildings.  The cost of transportation is decreased.  Due to compact design, there is a greatly reduced incentive for sprawl and an increased incentive for compact design, resulting in more affordable housing.
  • Reviving old urban centers, such as downtowns, is a key to providing affordable housing and smart growth.  Maryland's smart growth policy supports existing communities and their revitalization.  In addition to providing the actual housing, smart growth and affordable housing advocates need to look at creating whole communities to nurture healthy and vibrant community development.

As urban and suburban centers become more affordable and more liveable, they will encourage more people to live where less driving is required and public transit is more accessible on a daily basis, each fueling significant savings on gas spending.

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The bad news is that the era of cheap gas is over.  The good news is that policies to cope with higher energy prices not only don't have to lead to a lower standard of living, but can also contribute to stopping climate change.   With smarter policies, we can encourage more fuel-efficient vehicles, less driving, more use of public transit, and smarter growth developments that require less driving.  States are already taking action on all these fronts -- state leaders only need to pull them all together into a plan for long-term action.  Many of the adjustments don't need to go into effect all at once, but long-term incentives will encourage changes in how state residents buy cars and choose where they live without imposing economic hardships on anyone.  If policies are designed with both economic equity and environmental sustainability in mind, these policies will be enormously popular with voters looking to escape the costly commutes in which many are now trapped.