ISSUES

The dual-fuel Vehicle Incentive Program
of the Alternative Motor Fuels Act of 1988

A Success Story That Needs to be Kept Going

• In 1988, Congress passed the Alternative Motor Fuels Act (AMFA) to encourage the sale of vehicles that can use alternative fuels including ethanol. The dual-fuel vehicle incentives created by AMFA and the alternative fuel fleet vehicle purchase requirements of the Energy Policy Act (EPACT) of 1992 have been successful to date in putting more than three million dual-fuel vehicles on the road.
• Since the existing fuel delivery infrastructure can be used to provide E85, a major presence of E85 dual-fuel vehicles in the market allows a rapid conversion of that portion of the transportation fleet from petroleum-based fuel to alternative fuels. This capability can help minimize the impact of disruptions in petroleum supply. In this regard, providing incentives for automakers to produce dual-fuel vehicles can be compared to purchasing insurance against the risk of a disruption in petroleum supply. The larger the number of dual-fuel vehicles, the more valuable the insurance policy.
• The dual-fuel vehicle incentives (i.e., credits that can be used by automakers for compliance in the Corporate Average Fuel Economy (CAFE) program) have provided an encouragement for automakers to produce these vehicles even though there is a nominal increase in vehicle costs associated with E85/gasoline dual-fuel capability. In the price-competitive vehicle market, it is unlikely that the current production level of dual-fuel vehicles would be sustained if the incentives were removed, reduced from their current level or made less certain by including conditions for their availability.
• Some have suggested restructuring of the dual-fuel credits program to make it dependent on E85 fuel usage. This would have the perverse consequence of reducing the quantity of dual-fuel vehicles in the fleet while placing the burden of increasing E85 fuel availability and usage on automakers, which they clearly do not control. This would also be directly opposite of the original intent of AMFA to not condition these credits on alternative fuel usage.
• Now that the "chicken and egg" problem is being successfully addressed with dual-fuel vehicle incentives, the focus can be shifted to increasing the amount of E85 alternative fuel use. Several methods are available to create market demand and increase E85 use, including economic incentives and better enforcement of EPACT requirements. While E85 use has increased ten-fold in the past five years, new retail incentives being considered in the Senate should help increase market demand. Curtailing the incentives to produce dual-fuel vehicles would certainly undermine efforts to expand fuel usage.
• The proposition that dual-fuel credits jeopardize the nation's ability to deal with supply disruptions by reducing the stringency of CAFE standards is erroneous for two important reasons. First, the CAFE program only affects the level of fuel consumption over a period of decades, as higher fuel economy vehicles replace the existing fleet. It cannot achieve significant reductions during an oil supply disruption. On the other hand, dual-fuel CAFE credits that encourage the production and sale of dual-fuel vehicles can achieve substantial reductions in oil consumption in the nearer term, by increasing the number of vehicles on the road that can switch to alternative fuels during an oil supply disruption.
• During the last session of Congress, both Houses passed bills (H.R. 4 and S. 517) that would have extended the CAFE incentive to produce E85 dual-fuel vehicles. This is a strong indication of Congressional belief that extending the dual-fuel vehicle incentives is good public policy.