June 27 (Bloomberg) -- Armenia is not generally known as a world leader, but it holds at least one record: Seventy-five percent of its cars and trucks run on natural gas.
In the U.S., in contrast, the share is well under 0.1 percent -- even though natural-gas prices have plummeted here over the past few years. Given the problems associated with U.S. dependence on oil, more use of natural gas for transportation could carry big benefits.
One of the most important of these would be macroeconomic. Switching to natural-gas vehicles would reduce our vulnerability to oil-price shocks, as Christopher Knittel, a professor of energy economics at the Massachusetts Institute of Technology, argues in a new paper for the Hamilton Project. That benefit alone could amount to between $850 (for sedans) and $18,500 (for heavy-duty trucks) for each vehicle converted.
More natural-gas cars and trucks could also, if managed well, reduce greenhouse-gas emissions and other pollutants (more on that below). The bottom line is that the U.S. would be much better off with a wider choice of transportation fuels.
Converting to natural-gas vehicles requires several changes but, as Floyd Norris of the New York Times has recently pointed out, the most elemental involves filling stations. There are fewer than 2,000 natural-gas stations across the country -- a fraction of the 120,000 that offer gasoline. This makes people and companies reluctant to shift to the new vehicles. At the same time, the dearth of natural-gas vehicles on the road makes fuel companies reluctant to build the stations they need.
A measure recently considered in Congress, the New Alternative Transportation to Give Americans Solutions Act, is aimed at this chicken-and-egg problem. It would, among other things, provide a 50 percent tax credit, up to a maximum of $100,000, for installing natural-gas filling stations and also encourage people and companies to buy more natural-gas vehicles.
The Natgas Act is a rare piece of legislation these days -- it would not only address an important problem but do so sensibly, with bipartisan backing. (It is languishing in Congress partly because other industries that benefit from low natural-gas prices oppose it; they don’t want transportation competing for the resource.) Still, given the potential benefits for energy policy and the economy, the Natgas Act should be even more ambitious.
To provide a forceful incentive to create the needed filling stations, the federal government could provide an 80 percent tax credit, up to a maximum of $250,000, for additions to existing stations and $2 million for new stand-alone facilities, for the first 20,000 natural-gas stations built over the next three years. This would be the Natgas Act on steroids.
It would make sense for many of the new facilities to be along national highways, to service long-haul trucks. (United Parcel Service Inc. is already trying to provide fueling for natural-gas trucks in the Los Angeles-Las Vegas corridor.)
Assuming that half of the eligible 20,000 stations were add-ons to existing facilities and half were new ones, the maximum cost to the government over the next three years would be $22.5 billion, or about $7 billion a year. Twenty percent cost sharing for station builders would be high enough to force them to optimize locations and not build stations that have little or no economic value, yet still low enough to encourage construction.
In exchange for that $7 billion a year or less, we would get a network of stations sufficient to make natural-gas vehicles a feasible alternative, while also putting more people back to work. It would be an economic stimulus today that would build a macroeconomic hedge for tomorrow.
If that seems too ambitious -- we often seem to be living in an era of meekness in public policy -- Knittel has other good suggestions. He would, for one, encourage home fueling by requiring natural-gas distribution companies to sell to individual customers for their cars at low rates. And he would allow those companies to include in their regulated rate bases the cost of building new filling stations.
What about the environmental benefits of switching to natural-gas vehicles? Such cars and trucks emit perhaps 25 percent less greenhouse gases than petroleum vehicles do. That comparison, however, has to do only with the vehicles’ operation -- and not how the fuel is obtained in the first place.
As Fred Krupp of the Environmental Defense Fund has underscored, methane leakage from gas production may be large enough that its net impact on the climate is negative for many years. Methane, the principal component of natural gas, is an extraordinarily powerful greenhouse gas. It dissipates faster than carbon dioxide, however, so the climate effects depend on the time horizon.
A recent article in the Proceedings of the National Academy of Sciences concluded that, given current leakage rates of methane in the production of natural gas, vehicles that run on the fuel “are not a viable mitigation strategy for climate change.” It estimated that converting from gasoline to natural-gas vehicles would adversely affect the climate for at least 80 years, and switching from heavy-duty diesel vehicles would exacerbate greenhouse-gas effects for 300 years.
Methane leakage would have to be reduced to 1 percent to 1.6 percent to make natural-gas conversions beneficial for the climate over the next few decades, the same study found. Estimates of current leakage are debated, but they are very likely much larger than the break-even rates. The Environmental Protection Agency recently announced regulations that will indirectly lead to lower methane emissions from shale gas production. It is worth exploring more efficient approaches (potentially even a permit-trading system) to reduce methane leakage as natural gas is produced and transported.
With a bold incentive for more natural-gas filling stations, we could put more people to work today and might one day even catch up to Armenia on natural-gas vehicles. And with more effort to plug methane leaks, we could be confident about helping the climate along the way.
(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)
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