Natural gas for transportation: Incentives in North America

The federal government currently offers only two incentives to promote the use of natural gas for transportation purposes, both of which are due to expire at year-end 2013.

Federal incentives
The federal government currently offers only two incentives to promote the use of natural gas for transportation purposes, both of which are due to expire at year-end 2013. Neither is slated for renewal. The first, a $0.50 federal excise tax rebate per LNG gallon or CNG gasoline gallon equivalent (GGE) is intended to redress the differential excise tax treatment between NG and diesel or gasoline.

The second, a $30,000 federal tax credit for fueling station construction is largely insignificant, since costs for constructing single stations often easily top $1 million.

- It’s possible, but unlikely, that the federal excise tax rebate would be resuscitated by legislation after the 2014 mid-term congressional elections; such an action this could be made partly retroactive.

- Given federal budgetary pressures, the federal government is unlikely to adopt any significant new alternative fuel incentives; in particular, measures that have a revenue impact (e.g., tax changes) are effectively frozen.

- Many states levy their own fuel excise taxes, and several have in 2013 moved to address NG-related tax issues at the state level; these measures coming into effect will mitigate some of the impact of the federal excise tax rebate’s expiration.

State incentives
Most states offer some form of incentives to use NG for transportation. These cover a wide range, including vehicle purchase rebates and tax credits (especially for purchase or conversion of HD trucks); preferential treatment for parking, access to high-occupancy lanes, or relaxed weight restrictions; and grants or loans to construct fueling stations.

- Incentives cover a broad geographic scope, from Alaska, which is providing incentives for LNG station construction; to California, which is a bellwether state promoting alternative fuels, driven largely by air quality concerns; to Florida, which in 2014 will begin to provide up to $25,000 rebates for HD conversion costs capped at $250,000 per applicant and has also suspended state excise tax for NG through end 2019; to Pennsylvania which promotes NG use for HD trucks via grants that cover up to 50% of NG conversion costs up to $25,000 per vehicle.

-Incentive schemes correlate with transportation corridors, including the Interstate Clean Transportation Corridor (linking major California cities, Salt Lake City, Las Vegas, and Reno), the Texas Clean Transportation Corridor, the Rocky Mountain Corridor (linking Colorado, Utah, and Wyoming), the Pennsylvania Clean Transportation Corridor, and the Interstate-75 Corridor (extending from Florida to Michigan).

- Some transportation corridors include major NG producing states, which are at the forefront of promoting NG use (as explained further below).

State NG production correlates with incentives
States with significant NG production generally promote NG use for transportation. 

- Thirty-two states currently produce NG, with Texas, Louisiana, Wyoming, Oklahoma, and Colorado the top five producers.

- States that produce NG promote its transportation use both because it contributes to state economic growth and creates jobs, and because most of these states earn significant fiscal benefits from ‘severance payments’— taxes on NG extraction.

-Thirty-five states impose taxes on gas and oil production, and only three states that produce NG—Maryland, New York, and Pennsylvania—lack a severance tax, according to an article authored by Casarah Brown in June 2013 for the Natural Conference of State Legislatures. Three states-- North Carolina, Idaho, and Wisconsin-- impose such taxes even though they currently don’t produce any oil or gas in-state.

- Large increase in a state’s NG production capacity could lead its leadership to enact further NG use incentives.

- The largest NG producers have generally adopted infrastructural incentives, implemented excise tax equalization or other tax credits, and promoted clean transportation corridors.

Effectiveness of Incentives
There’s clearly been a big upsurge in the number and types of NG incentives that states are adopting. Yet determining how these drive market growth is much more problematic, since many incentives have only been in place since 2010 or 2011. Lack of any significant long-term track records makes it difficult for states to decide which policy mix is most effective for promoting further NG use.

- 2013 saw a 43% increase in proposed NG incentive legislation, compared to 2012, according to NGVAmerica’s State Government Affairs Committee.

- There’s no clear consensus on whether vehicle incentives, or fueling station incentives, more effectively promote NG use.

- As indicated in table 2, many states are hedging their bets, and are promoting both vehicle and station incentives.

- 2013 saw a big increase in state adoption of excise tax changes for NG; 11 states implemented such plans, making this the single most popular 2013 NG state policy incentive adopted. These measures will mitigate the impact of expiration of the federal CNG/LG excise tax rebate plan at 2013 year-end in states that have adopted such measures.

- Data weaknesses make it difficult to track the effectiveness of incentives to promote NG vehicles in real-time, since there’s a significant lag in the release of information about NG vehicles on the road—government figures on the number of NG vehicles are currently only available as of 2011. States don’t collect information on alternative fuel vehicles, including NGVs, as part of their vehicle registration process; if such details were to be recorded by states, it would be far easier to track the number of alternative fuels vehicles on the roads, and the effectiveness of vehicle incentives.

- Data sources such as the Department of Energy’s (DoE) Alternative Fuels Data Center (AFDC) makes it easier to assess the impact of incentives on promoting infrastructural investment, since this website allows plotting of CNG and LNG station locations on state maps. Private websites have sprung up to track CNG and NG station locations, opening hours, prices, and payment options. This information can be correlated with information on infrastructural investments.

- Incentives are having some impact on promoting construction of fueling stations: Louisiana, for example, which adopted fueling station incentives in 2011, has seen an increase in the total number of CNG and LNG stations, from 13 in 2010, to 22 (planned and pending).

Washington is currently frozen in budgetary gridlock, making it virtually impossible to enact or extend any costly federal programs— regardless of how worthy the goal. States, particularly those that produce NG, have picked up the policy slack, and this trend can be expected to continue. The short track record for NG incentives makes it difficult to say which types of incentives are most effective. States will continue to experiment with a mix of vehicle and infrastructural measures, which will mingle direct grants, loans, and tax incentives.