Vehicles for Change? Prospects for Alternative Fuels in the Near Term

Harper + Obama

At the Scholoss Elmau meeting, Stephen Harper and Barack Obama pledged to decarbonize their economies by the end of the century.

In June, Group of Seven leaders, including United States President Barack Obama and Canadian Prime Minister Stephen Harper, pledged at their Scholoss Elmau meeting to “de-carbonize” their economies by the end of the century. To do so, many have suggested focusing on the transportation sector, which according to the International Energy Agency has already been declining as an area of total energy consumption, and thus represents a tempting target for further improvements. Furthermore, as a practical matter, the cost of replacing a vehicle is lower and more widely distributed across the economy than the replacement costs associated with new industrial or power generation equipment.

But will a shift away from the petroleum fuels that dominate the current transportation system be part of the path to de-carbonization? Will motorists, auto assemblers, and regulators embrace alternative fuels? Perhaps, but not in the near term. The reasons for this include the carbon content of existing alternative fuels such as compressed natural gas (CNG), the fact that consumers have been slow to invest in vehicles that utilize alternative fuels without available refueling infrastructure, and the combined effect of lower oil prices and increasingly efficient internal-combustion engines.

Alternative Fuels, but Few Carbon Alternatives

The drive to de-carbonize has been largely fueled by concerns about the effects that carbon emissions may be having on global atmospheric temperatures. While other tailpipe airborne pollutants such as mercury and sulfur have attracted the attention of regulations, carbon dioxide reduction has been identified as a principal target for reduction by some climate scientists.

As an initial goal, the reduction of carbon dioxide emissions has led auto manufacturers to increase the use of plastics, aluminum and other lighter materials in vehicle chassis – something traditionally composed almost exclusively of steel. Additionally, fuels with lower emissions such as natural gas have attracted increased attention, particularly for fleet use. The fortunes of arguably the most environmentally friendly option, electric engines, have not, however, generated comparable interest. While electric engines offer the theoretical prospect of zero emissions, the use of fossil fuels (oil, natural gas and coal) for electricity generation has prevented electric vehicles from emerging as a truly clean technology. And although renewables are growing in importance, in the near term, it is unlikely that they will supplant fossil fuels as the dominant fuel for power generation.

For their part, biofuels offer certain advantages since they can be generated from renewable plant matter. These are largely alcohols that burn hot – and by extension, cleanly – and some, such as ethanol and methanol, can also be used as gasoline additives to reduce engine knock. Yet agriculture has climate effects of its own, and the cultivation of biofuels can distort the availability of food and other commodities. This has not, however, stopped the United States from providing over $20 billion in subsidies1 to support ethanol, and the country has gone further than other G-7 countries in its bio-ethanol mandates by requiring all gasoline to contain 10 per cent ethanol content. Nonetheless, stubbornly high ethanol refinement costs, limited demand, and politically contentious subsidies likely precludes a significant expansion of the biofuels market in the near term.

“The drive to decarbonize has been fueled by the concerns about the effects of carbon emissions.”

“The drive to decarbonize has been fueled by the concerns about the effects of carbon emissions.”

Wary Consumers Hold Back

For alternative fuels to contribute to de-carbonization, consumers will at some point have to purchase new vehicles. However, in the United States and Canada, the light duty consumer vehicle fleet is replaced every 10 to 20 years through attrition and new purchases. This alone probably makes a sudden shift to alternative fuels untenable in the near term.

In addition, market research has identified “range anxiety” as a key barrier to wider adoption of alternative fuel vehicles. While the United States’ nearly 153,000 gas stations2 ensures that drivers of conventionally powered vehicles are able to refuel practically anywhere, no such guarantee is available to drivers of alternative fuel vehicles.

Other fuel options, such as hydrogen fuel cells, require new infrastructure. While CNG has been a popular option for fleets of vehicles – most notably city busses and commercial trucks – it is best suited for drivers that can return to a central refueling point each day: something which excludes the vast majority of vehicle owners.

These difficulties have led some to conclude that hybrids, which offer the efficiency of electric motors and the familiarity and reliability of gasoline power, might be the best option for consumers. Yet in a 2010 study3, JD Power estimated that the total market for hybrid electric vehicles was saturated – everyone in North America willing and able to purchase a hybrid at current prices had done so. This in turn suggests that the future of the hybrid market will largely hinge on the uncertain ability of carmakers to drive the price of hybrids down to a level comparable to their gasoline-powered counterparts.

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Low Oil Prices Undercut the Case for Alternative Fuel

Alternative fuels face a formidable challenge in the market from petroleum, which continues to power around 95 per cent of the American vehicle fleet.4 Demand for vehicle fuel tends to be inelastic in the short term, because vehicle owners have required trips: to the store, to work, or to take the kids to soccer practice. Over time, alternatives can be found, but when prices at the pump spike upward, consumption only slowly decreases in response. When oil prices drop, however, fuel consumption rises more quickly as discretionary travel – a summer vacation drive or a trip to visit grandparents – becomes affordable.

G7This phenomenon is crucial to the competitiveness of alternative fuels, as the growth of global oil supplies – itself precipitated by a boom in oil production in the United States and reduced demand in Asia – has lowered prices and further reduced the incentive for businesses and consumers to switch to alternative fuels. When coupled with steady improvements to the already considerably efficient internal combustion engine, the price collapse has only further entrenched the role of gasoline in the transportation sector.

G-7 leaders will likely continue to pursue vehicle emissions reductions through regulation, and perhaps even carbon taxes that will raise the cost of vehicle fuels. To force a transition from the internal combustion engine, governments may eventually abandon strategies for marginal energy efficiency gains in the transportation sector and mandate the adoption of a promising vehicle fuel alternative – just as governments did when they banned lead and mandated sulfur reductions in gasoline – or by at least requiring a partial shift as the United States government did with its biofuel mandates.

Low oil prices undercut the case for alternative fuels.

Low oil prices undercut the case for alternative fuels.

However, given the lack of truly carbon-free alternatives for vehicle fuel, the reluctance of consumers to take a chance on a fuel without adequate infrastructure to support it, and current low oil prices it should come as no surprise that in this latest G-7 pronouncement, the leaders have set a deadline well after most of them will have died.

Christopher Sands and Jesse N. Barnett collaborated on a research study of future vehicle fuels technologies at the Hudson Institute. Sands is also Senior Research Professor at the Johns Hopkins University School of Advanced International Studies (SAIS) where Barnett studies energy, resources and environment.

  1. Robert Pear. “After Three Decades, Tax Credit for Ethanol Expires” New York Times January 1, 2012. Accessed July 15, 2015; Available at: http://www.nytimes.com/2012/01/02/business/energy-environment/after-three-decades-federal-tax-credit-for-ethanol-expires.html?_r=0
  2. American Petroleum Institute. “Service Station Facts” Oil and Gas Overview 2015. Accessed July 15, 2015; Available at: http://www.api.org/oil-and-natural-gas-overview/consumer-information/service-station-faqs
  3. JD Power and Associates. “Drive Green 2020: More Hope than Reality?” (New York: McGraw-Hill) 2010.
  4. “Alternatives to Transportation Fuels 2011” (Washington: U.S. Energy InformationAdministration.) April 2013. Accessed July 15, 2015; Available at: http://www.eia.gov/tools/faqs/faq.cfm?id=93&t=4