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Natural Gas Vehicles: A State and Federal Policy Primer

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The significant and sustained lower relative cost of natural gas compared to petroleum-based fuels provides a strong incentive for fleets and individuals to shift to natural gas vehicles (NGVs). But those who seek to make such a switch face two significant obstacles: the higher up-front cost of NGVs and the lack of a comprehensive fueling infrastructure for either compressed natural gas (CNG) or liquefied natural gas (LNG).

Both the federal government and many state governments provide subsidies, tax incentives and loan programs to address these two obstacles. These public policies promote the use of NGVs (and other alternative fuel vehicles) by defraying their higher up-front costs and also support build-out of more natural gas fueling stations. Other policies provide incentives to use alternative fuel vehicles, such as the ability to use high-occupancy vehicle (HOV) lanes regardless of the number of passengers in a vehicle.

 

 

Most of the natural-gas-specific policies the U.S. has in place promote the use of natural gas. But one federal excise tax policy is currently disadvantageous to LNG, and this measure has attracted many calls for reform among various NGV stakeholders.

The federal excise tax on both LNG and diesel is currently 24.3 cents per gallon, but because it takes 1.7 gallons of LNG to produce the same amount of energy that a gallon of diesel produces, LNG is effectively taxed at a rate 70% higher than that of diesel. Both gasoline and CNG are also taxed according to energy output, leaving LNG as the odd fuel out.

Taxing the fuels on an energy content basis rather than on a volume basis would create a level playing field for LNG, and U.S. Rep. Mac Thornberry of Texas recently introduced the LNG Excise Tax Equalization Act of 2013 (H.R.2202) to achieve that goal. Thornberry believes that this reform would promote expanded private-sector investment in LNG infrastructure and production. U.S. Sen. Michael Bennet of Colorado has introduced a companion bill, S.1103, into the Senate.

These measures have been referred to their respective committees for consideration, but no further action has been taken yet.

Overall, the federal government currently has 27 policies in place that promote natural gas as a transportation fuel, covering a range of areas, including infrastructure development, HOV lane use, aftermarket conversions, public transportation and technological development.

Also, all U.S. states currently have at least one policy in place to promote CNG and/or LNG. A number of states are particularly strong natural gas supporters, including California (with 27 policies in place), Virginia (16) and Indiana (18). States that produce natural gas also tend to promote its use: Texas (15), Oklahoma (14), Colorado (11) and Utah ( 10).

The U.S. Department of Energy's Alternative Fuel Data Center website provides summaries of existing federal and state policies, available here.

Federal and state governments can also advance the use of NGVs via the fleet procurement policies they enact. For instance, President Obama issued a memorandum in May 2011 directing all federal agencies to purchase or lease only alternative fuel passenger vehicles and light-duty trucks by 2015. This policy required no congressional action to be implemented and took immediate effect upon announcement.

Mandating the use of alternative fuel vehicles for federal fleets was expected to have the direct effect of stimulating demand for such vehicles and, by creating economies of scale, reducing the up-front costs of such vehicles, thus increasing their attractiveness to a wider market.

Further, in the case of NGVs, placing more of them on the road was also intended to increase utilization of existing natural gas infrastructure and promote demand for additional fueling stations.

The policy was also expected to have indirect effects, as drivers of these vehicles will increase their familiarity with these vehicles and, in the case of NGVs, become aware of their far lower fueling cost compared to petroleum-fueled vehicles.

States have followed the federal lead in developing their own NGV procurement policies. The governors of Colorado, Wyoming, Pennsylvania and Oklahoma announced a memorandum of understanding (MOU) in November 2011 to work together to convert their state vehicle fleets to natural gas. The MOU called for a joint, multi-state request for proposals for purchasing NGVs for state fleets and committed each state to purchase a specific number of NGVs.

State fleets standing alone are not large enough convince OEMs that the vehicle needs of individual states represent a viable, stable, long-term market upon which to base product-launch decisions. By developing a common proposal for NGV purchases and pooling their resources, the states hope to encourage OEMs to offer a wider range of NGVs. More than 20 states are now committed to following this NGV sourcing approach.

Another key policy measure that helps promote the deployment of NGVs are the long-standing U.S. Corporate Average Fuel Economy (CAFE) standards, which were first implemented in 1975.

In August 2012, the Obama administration and 13 OEMs announced new standards for automobiles and light-duty trucks, helping to level the playing field between natural gas and other alternative fuels for these categories of vehicles. The standards, which initially cover model years 2017 to 2025, are ambitious ones, setting an average fuel economy standard of 54.5 miles per gallon by 2025 - double the 27.3 mpg average for model-year 2011.

The CAFE standards include tax incentives for certain types of alternative fuel vehicles, and an incentive multiplier to encourage the adoption of certain fuel types. The highest multiplier, 2.0, applies to electric vehicles; NGVs and hybrids enjoy a multiplier of 1.6 - a significant improvement on the previous standard.

Also, in 2011, the Obama administration was the first to announce the intention to launch emissions standards for heavy-duty vehicles. These standards will soon be codified in a proposed rule, which will be finalized sometime in 2015.

Joshua Bull is sector head of FC Gas Intelligence, a unit of FC Business Intelligence Ltd. This article is an excerpt from a recent comprehensive offering, FC Gas Intelligence's "Natural Gas Vehicle Market Whitepaper USA, 2013-2014." Bull can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. .

 

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