Corporate Average Fuel Economy (CAFÉ) Standards Anticipated Impacts on Future Revenues

Corporate Average Fuel Economy (CAFÉ) Standards History First enacted by US Congress in 1975 to improve the economy of cars and light vans after the 1973 Arab Oil Embargo. Based on a weighted average of a manufacturer’s current model year passenger cars or light trucks with a Gross Vehicle Weight under 8,500 pounds. If the manufacturer exceeds the standard, a penalty is assessed. First enacted by US Congress in 1975 to improve the economy of cars and light vans after the 1973 Arab Oil Embargo. Based on a weighted average of a manufacturer’s current model year passenger cars or light trucks with a Gross Vehicle Weight under 8,500 pounds. If the manufacturer exceeds the standard, a penalty is assessed. $5.50 0.1 mpg under the standard X Manufacturer’s Total Production for the US Domestic Fleet $5.50 0.1 mpg under the standard X Manufacturer’s Total Production for the US Domestic Fleet

CAFÉ Standards National Highway Traffic Safety Administration (NHTSA) regulates the CAFÉ standards US Environmental Protection Agency measures vehicle fuel efficiency. US Congress specifies that CAFÉ standards must be set at the “maximum feasible level” with consideration for: Technological feasibility Economic practicality Effect of other standards on fuel economy Need of the nation to conserve fuel NHTSA must issue new standards eighteen (18) months in advance of model year production. National Highway Traffic Safety Administration (NHTSA) regulates the CAFÉ standards US Environmental Protection Agency measures vehicle fuel efficiency. US Congress specifies that CAFÉ standards must be set at the “maximum feasible level” with consideration for: Technological feasibility Economic practicality Effect of other standards on fuel economy Need of the nation to conserve fuel NHTSA must issue new standards eighteen (18) months in advance of model year production.

Proposed CAFÉ Standards The new standards are presented not simply as passenger vehicles and light duty trucks. Standards are now expressed in terms of the vehicle’s footprint (Wheel Base X Average Track Width) For passenger vehicles the two categories are: 41 square feet or smaller (Honda Fit) 55 square feet or bigger (Mercedes-Benz S-Class) For light trucks the two categories are: 41 square feet or smaller (Nissan Juke) 75 square feet or bigger (Ford F-150) The new standards are presented not simply as passenger vehicles and light duty trucks. Standards are now expressed in terms of the vehicle’s footprint (Wheel Base X Average Track Width) For passenger vehicles the two categories are: 41 square feet or smaller (Honda Fit) 55 square feet or bigger (Mercedes-Benz S-Class) For light trucks the two categories are: 41 square feet or smaller (Nissan Juke) 75 square feet or bigger (Ford F-150)

Proposed CAFÉ Standards for Larger Passenger Vehicles Model Year Passenger Car Standard 1978 18.0 mpg 1980 20.0 mpg 1985 27.5 mpg 1990 2000 2010 2011 2012 * 28.0 mpg 2016* 31.0 mpg 2020* 36.0 mpg 2025* 46.0 mpg * Indicates new ‘footprint’ standard. You can see from this table which highlights larger passenger vehicles, from 1978 – 1985 there were increases in the Corporate Average Fuel Economy Standards. From 1985 to 2011 the standard was not increased. In 2012, the standard will change to a ‘footprint’ based formula as I mentioned in a previous slide. As proposed, the new standard for both passenger and light duty trucks shows a drastic increase in fleet fuel efficiency.

Factors Influencing Driving Habits Distance to Destination Presence of Passengers Personal Value of Time Comfort Cargo/Freight Needs Interim Stops / Destinations Roadway Congestion Safety Cost of Fuel Cost of Vehicle We have attempted to quantify the impacts of the proposed standard on the annual vehicle miles traveled in Arkansas, the volume of fuel consumed, and the subsequent impact to the state Motor Fuel Tax revenues. There are several factors related to personal driving habits. Driving habits include both the manner in which a person drives but also the choice of vehicle, both of which are directly linked to fuel efficiency. This is a brief list of some factors that could impact the fuel consumption of drivers. Distance to Destination Presence of Passengers Personal Value of Time Comfort Cargo/Freight Needs Interim Stops / Destinations Roadway Congestion Safety Cost of Fuel Cost of Vehicle

Impacts of An Increase in CAFÉ Standards Slight increase in vehicle miles traveled Slight decrease in the gallons of gasoline consumed Commensurate decrease in motor fuel revenues related to gasoline consumption at the State and National level Increased costs to society in the form of additional crashes, fatalities, injuries, and property damage Because of the many factors that influence driving habits, it is difficult to formulate anticipated impacts to the State of Arkansas and the Department. Preliminary estimates indicate there may be a slight increase in the vehicle miles traveled. This will be accompanied by a decrease in gasoline consumption and the revenues associated with gasoline consumption. Other possible impacts to the driving public have been identified at the national level. A National Research Council report found that standards implemented in the 1970s and 1980s “probably resulted in an additional 1,300 to 2,600 traffic fatalities in 1993.” There have been numerous studies that correlate the relative safety of the vehicle with the vehicle weight.

This graph displays both the historic Vehicle Miles Traveled on all public roadways in Arkansas as well as the project growth in VMT to 2025. Vehicle Miles Traveled account for both the average distance of daily travel as well as long-distance travelers on Arkansas roadways. Likewise, any growth in population at either the state or national level is reflected in VMT figures. Research regarding the impact of fuel efficiency on driving habits indicates that for each 10% improvement in fuel efficiency, there is an average increase in travel distance of 1-2%. This 1-2% increase in VMT is reflected on the chart with the projected 2025 VMT expected to be slightly higher if there are increased fleet fuel efficiency standards than if the standards remain constant. The higher 2025 VMT figure is 43.2 billion annual miles of vehicle travel.

This slide shows the anticipated consumption of motor fuels in Arkansas both without and with the proposed increased fleet fuel efficiency standards. Both gasoline and diesel consumption are displayed here. There is an assumption that diesel consumption will maintain its historic growth pattern with the continuation of national freight movement. The entire impact of improved fuel efficiency is attributed to gasoline-powered vehicles. To arrive at the estimated value for 2025 consumption, the VMT was calculated as shown in the previous slide. At this point, the incremental increase in fuel efficiency was applied to the VMT figure to arrive at a new gasoline consumption figure. It is estimated the 2025 consumption of gasoline will be roughly 640,000 gallons (or 24%) lower than status quo under the increased fuel efficiency scenario. It should be noted this is a WORST CASE scenario in that it uses the assumption that ALL gasoline powered vehicles will operate with increased fuel efficiency.

Nearly 70% of the motor fuels revenue can be attributed to gasoline consumption. There is a commensurate reduction in anticipated motor fuels revenues under this. Again, this is a WORST CASE scenario assuming all gasoline-powered vehicles will operate with increased fuel efficiency.

Strategies to Offset the Fiscal Impacts of Increased CAFÉ Standards Advocate revenue option other than Motor Fuel- based tax Increase Motor Fuel taxes Reduce expenditures Cost Savings Reduce System Miles Accept lower pavement conditions as the norm Allow more severe congestion along major corridors Advocate revenue option other than Motor Fuel-based tax Increase Motor Fuel taxes Reduce expenditures Cost Savings Reduce System Miles Accept lower pavement conditions as the norm Allow more severe congestion along major corridors

Anticipated Implementation Schedule Originally expected the proposed 2017-2025 standards to be officially released September 30, 2011. Indication from the US DOT and US EPA that a proposal is expected no sooner than November 2011. Delays are reportedly linked to preparing detailed of the official proposal to ensure it covers issues likely to be voiced during the comment period. The administration is expected to remain on track to issue final guidance by July 2012. Originally expected the proposed 2017-2025 standards to be officially released September 30, 2011. Indication from the US DOT and US EPA that a proposal is expected no sooner than November 2011. Delays are reportedly linked to preparing detailed of the official proposal to ensure it covers issues likely to be voiced during the comment period. The administration is expected to remain on track to issue final guidance by July 2012.

Shrinking Highway Dollar

Shrinking Highway Dollar

Shrinking Highway Dollar

Thank you again for inviting me to speak to your group today Thank you again for inviting me to speak to your group today. Any questions? If you have any questions please contact us through our website or by e-mail at: www.arkansashighways.com or info@arkansashighways.com ACE-P:P&R:10/3/2011 20