Comments on Financing the Infrastructure to Support Alternative Fuel Vehicles

Comments on: Financing the Infrastructure to Support Alternative Fuel Vehicles How Much Investment is Needed and How Will It Be Funded? Ellen Hughes-Cromwick, Ford Motor Company and Joshua Cregger, Center for Automotive Research

2nd Annual Meeting GIC Global Society of Fellows Richmond, VA - April 9, 2013

Discussant: Santiago Pinto, Federal Reserve Bank of Richmond The views expressed here are those of the discussant and are not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

Summary of the Paper

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A necessary condition for the adoption of AFVs is the development of a substantial refueling network

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Expanding the availability of alternative fuels, however, requires large investments The paper

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1. Estimates the costs associated with the development of such infrastructure 2. Examines and describes financing alternatives employed around the world

General Comments I

1. Chicken and egg problem I

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Drivers will not find AFVs attractive without ready access to fuel, parts, and repair services Energy producers, automakers (and governments) will not invest in AFV technology and infrastructure without the prospect of a large market The installation of fueling infrastructure for alternative fuels will only be profitable for service station owners if demand, i.e. the number of vehicles using alternative fuels, considerably increases.

General Comments II

2. AFVs: network and adoption externalities I

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Utility derived from the consumption of these goods is affected by the number of users The reliance on joint-consumer expectations generates multiple equilibria (adoption vs. non- adoption, multiple standards) In the presence of adoption externalities, what should be the minimal number of users (the critical mass) needed for inducing all potential consumers to adopt the new product?

3. Network externalities associated with the existing fueling infrastructure for gasoline and diesel may deter consumers from switching to new, incompatible technologies (“excess inertia�)

General Comments III 4. Dethroning (internal combustion engines) ICE is difficult I

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Common explanations for the failure of these programs in the past: technologies are still immature and their costs too high High cost and low functionality of AFVs compared to ICE limits their market potential I I

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Relative prices favor ICE? Transport networks, settlement patterns, technologies, institutions have evolved around ICE

The success of ICE suppresses the emergence of alternatives, maintaining the dominance of ICE. The challenge facing policymakers seeking to promote a transition to sustainable alternative vehicles is how to overcome the barriers created by these feedbacks. Evolution of new technologies is likely to be strongly path dependent

General Comments IV

5. Analysts suggest diverse approaches to stimulate a sustained transition to AFVs. I

Some argue for incentives in the form of subsidies to consumers, automakers, or fuel providers to “prime the pump� and overcome the chicken-egg problem

6. But prior subsidy programs have often failed, or were not sustained long enough for AFV diffusion to become self-sustaining 7. Without a deep understanding of the dynamic implications of an intervention, policies intended to stimulate may actually hinder large scale adoption

General Comments V 8. History: The transition to the current ICE-dominated system in the late 19th century provides insights into the challenges of creating an alternative transportation system I

Originally, steam and electric vehicles. I

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Steam technology was mature, reliable and familiar. Water and coal were widely available. Electric vehicles proved attractive in cities as taxis: quiet, started immediately, did not smell. Battery performance was improving.

ICE was a late entrant (1885). Despite first-mover advantage, electric and steam vehicles were soon overtaken by ICE. In 1912 registered electric cars peaked at 30,000, while the ICE installed base was already 30 times greater. Why did electrics fail? I I

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Changes in preferences Many towns had bicycle shops and mechanics skilled with the mechanical linkages and chain drives used in early ICE vehicles Experience with batteries and electric motors was less widely distributed. Innovation spillovers (e.g., replacement of the cumbersome hand-crank with electric starting in 1911)

General Comments VI

9. From the consumer’s perspective: a wide range of alternative vehicle technologies, from hybrids to biodiesel to fuel cells, compete for dominance I

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The lack of standards increases uncertainty and inhibits investment Imperfect information Relative prices? Awareness and adoption must exceed the threshold to become self-sustaining, but consumers may be reluctant to choose a specific alternative

General Comments VII

10. Some research has focused on different aspects related to the demand and supply for AFVs

General Comments VIII

11. Impact of fuel availability on demand for AFVs I

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What impact does fuel availability actually have on car purchase decisions? How much are consumers willing to pay for a larger service station network? Would consumers really switch to vehicles running on alternative fuels if a fully developed network of service stations existed? Achtnicht, Buhler, and Hermeling (2012) “Impact of service station networks on purchase decisions of alternative-fuel vehicles” I

Show that fuel availability influences choices positively, but its marginal utility diminishes with supply. They also derive consumers’ marginal willingness to pay for an expanded service station network.

General Comments IX 12. Determinants of AFV adoption I

Diffusion of hybrid vehicles among consumers: Heutel (2009) “Learning, Externalities, and Hybrid Vehicle Adoption Garth� I

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Different makes and models of hybrids have varying qualities, and this means that consumers get different signals about hybrid quality from their exposure to different types of vehicles. Use data on new hybrid car purchases for 11 different models over seven years, identify the effect of the penetration rate, or total cumulative hybrid sales per capita, on new hybrid purchases Finding: the diffusion rate significantly affects new purchases, and the effect differs by hybrid model (higher diffusion rates of some models promoted new purchases of hybrid cars, but higher diffusion of other models gave a negative signal about hybrid quality and inhibited hybrid adoption)

General Comments X

13. It has frequently been asserted that consumers “undervalue� energy costs relative to purchase prices when they choose between different goods, perhaps because they are inattentive to or imperfectly informed about these costs, or they may have time inconsistent preferences I

Research work suggests different policies to address this issue

General Comments XI 14. Careful assessment of the kind of government policies that actually work I

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Beginning in 2005 in California, owners of hybrid vehicles achieving 45 mpg or better were able to apply for a special sticker that allowed them access to HOV lanes regardless of the number of occupants in the vehicle Goal: stimulate the demand for highly fuel-efficient vehicles, particularly of ultra-low-emission vehicles (ULEV). Finding: interaction between congestion and this policy dominates any intended environmental benefit. Hopes to offset these costs with congestion relief for mainline drivers are frustrated: highway capacity created by moving ULEVs into HOV lanes is immediately refilled (fundamental law of highway congestion)

General Comments XII

15. In Urban Economics, we face this kind of “chicken-and-egg� story I I

Downtown revitalization programs Combination of private and public initiatives

In Summary

1. Identify clearly the externalities involved I I I

What kind of externalities are involved? Infrastructure Environmental impact

2. Subsidize/tax the demand or the supply side? Command/control policies 3. Which level of government should be involved? I I

Trend towards the defederalization of the transport system Multi-jurisdictional spillovers?

Financing Alternatives

1. Focus on alternatives that narrows the gap between users and the cost 2. Infrastructure Development Bank I I

Commonly used in other countries Driven by political motives

Minor Comments

1. Estimations I I

Sensitivity analysis Consider different possible scenarios

2. Cost benefit analysis I

More efficient allocation of public funds

3. CFOR methodology?