CRA International,Inc. · NASDAQ:CRAI
CRA International,Inc — TRB 90th Annual Meeting Session 376 (January 2011)
25 slides from CRA International,Inc's conference presentation, Jan 24, 2011
Slide 1: HDV Technology Diffusion: Economic Trade-offs, Market Acceptance, and Policy Implications
HDV Technology Diffusion: Economic Trade-offs, Market Acceptance, and Policy Implications TRB 90th Annual Meeting Session 376 Reducing Energy Use and Emissions from the Freight Sector: Technical and Operational Advancements Related to Heavy-Duty Vehicles Harry Foster January 24, 2011
Slide 2: Overview
Overview • Acceptance of new HDV technologies: Who decides? • Vintage-dated regulation and fleet turnover • Acceptance of new technologies: the “energy paradox” • Future customer acceptance of more fuel-efficient MD/HD trucks and engines • Policy implications and conclusions 1
Slide 3: Market acceptance: Who decides what is produced and purchased?
Market acceptance: Who decides what is produced and purchased? • Producer sovereignty: Producers/regulators • Consumer sovereignty: Customers 2
Slide 4: Producer sovereignty
Producer sovereignty “Any customer can have a car painted any color that he wants so long as it is black.” – Henry Ford “Build it and they will come.” – Field of Dreams 3
Slide 5: Consumer sovereignty
Consumer sovereignty “The number of people who will not go to a show they do not want to see is unlimited.” – Oscar Hammerstein II 4
Slide 6: Absolute producer sovereignty requires an absence of competitive alternatives
Absolute producer sovereignty requires an absence of competitive alternatives • Once in effect, fuel efficiency standards will constrain competition among manufacturers of new trucks and heavy duty engines • Standards will not eliminate competition from pre-existing stock of vehicles or pull-ahead s
Slide 7: Vintage-differentiated regulation
Vintage-differentiated regulation • More stringent standards are applied only to newly purchased or installed equipment, while existing equipment is “grandfathered” • Potential buyers substitute old assets for new and turnover of older, more polluting assets is slowed – Delayed retirement – Pull-ahe
Slide 8: 2007 HD engine emissions standards induced pull-ahead truck sales
2007 HD engine emissions standards induced pull-ahead truck sales U.S. Sales of Class 8 Trucks 1999-2010 Units 300,000 250,000 200,000 150,000 100,000 50,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (Est.) Will regulation of MD/HD truck fuel efficiency do the same? 7
Slide 9: Technology adoption and the "energy paradox"
Technology adoption and the “energy paradox” • Agencies: Technology to improve fuel efficiency should generally pay for itself quickly Estimated payback periods for proposed MY 2018 standards (7% real discount rate) Truck type Months Heavy-duty pickups and vans 58 Vocational trucks 9 Tractors 8 • “E
Slide 10: What underlies the energy paradox for MD/HD trucks?
What underlies the energy paradox for MD/HD trucks? • Agencies advance arguments classified into five “hypotheses” – Imperfect information in new truck markets – Imperfect information in truck resale markets – Split incentives – Uncertainty about future fuel cost savings – Adjustment and transaction
Slide 11: What underlies the energy paradox for MD/HD trucks? (categories)
What underlies the energy paradox for MD/HD trucks? • Potential explanations can also be placed into four broad categories – Systematic undervaluation of future cost savings – Market failures – Market frictions – Unmonetized economic costs 10
Slide 12: Do purchasers of energy-consuming goods undervalue future energy savings?
Do purchasers of energy-consuming goods undervalue future energy savings? • Mixed evidence to support this view with respect to household purchases of consumer durables (autos, appliances) • Less persuasive as an explanation for choices made by profit- maximizing firms – NRC Study: “Larger fleets wi
Slide 13: Market failure: Information externalities
Market failure: Information externalities • Early adopters that develop real-world experience base bear costs and risks – First movers at a disadvantage; late adopters can “free ride” on knowledge gained – Marketplace incentives to develop and to share real world experience are inadequate • Can be p
Slide 14: Market frictions: Split incentives
Market frictions: Split incentives • Separate parties pay for fuel and equipment – This division of responsibilities may make good economic sense – Split may create inadequate incentives to invest in future fuel savings • Factors in owner/driver relationships mitigate effects of split incentives – F
Slide 15: Additional economic costs of adoption
Additional economic costs of adoption • Adjustment and transaction costs – Driver (and mechanic) training – “Look and feel” adjustments – Other transition costs • Risk aversion and uncertainty about future operating cost savings – Fuel consumption – Price of fuel – Maintenance expenses • Differing u
Slide 16: Cited hypotheses cannot explain claimed extent of shortfalls
Cited hypotheses cannot explain claimed extent of shortfalls • Payback period of eight or nine months is too short for resale market to matter • Expected benefits to initial owner large enough to overcome split incentives, adjustment costs, and realistic uncertainties about future cost savings • Nee
Slide 17: Performance trade-offs
Performance trade-offs • Proposed standards are designed to allow high-level measures of utility (power, torque, load capacity) to remain unchanged • Trade-offs of other dimensions of utility and performance are not precluded • Regulations may tilt trade-offs in directions that the marketplace has s
Slide 18: Example: Low rolling resistance tires for vocational trucks
Example: Low rolling resistance tires for vocational trucks • Buyers place a higher value on tire traction and durability than on fuel economy performance – Agencies: “The drive cycles typical for [vocational] applications often lead truck buyers to value tire traction and durability more heavily th
Slide 19: Uncertain reliability
Uncertain reliability • Previous work highlights the importance of uncertainty about reliability in purchase decisions – NRC study – Greene, German, and Delucchi (2009) paper on LDV fuel economy • Reliability likely to be larger concern for HD/MD truck buyers than for LDV buyers – Reliability costs
Slide 20: Fuel efficiency standards and fleet turnover: EPA/NHTSA perspective
Fuel efficiency standards and fleet turnover: EPA/NHTSA perspective “Build it and they will come” • Vocational vehicles – Technology costs will likely be modest – Small price increases will not affect turnover • Class 7 and Class 8 tractors – Price increases will be more significant for tractors tha
Slide 21: A contrary view: customer preferences will slow adoption
A contrary view: customer preferences will slow adoption of engines and trucks meeting the proposed standards “The number of potential truck buyers who will not purchase trucks and engines they do not want is greater than zero.” • None of the factors impeding customer acceptance will disappear spont
Slide 22: Policy responses
Policy responses • Address market failures – Create and disseminate reliable information on in-use performance – Subsidize early information creation through early adoption credits • Economic costs cannot be eliminated, but some can be mitigated – Governments cannot make costs disappear – Offsetting
Slide 23: Conclusions
Conclusions • Regulators cannot assume that truck buyers will passively accept regulation-compliant engines and vehicles • Need to identify and better understand the sources of buyer resistance – Address those elements that can be mitigated by policy interventions • Acknowledge that delayed turnover
Slide 24: Harry Foster, Charles River Associates
Harry Foster Charles River Associates 200 Clarendon Street Boston, MA 02116 +1-617-425-3045 hfoster@crai.com 23
Slide 25: Conclusions based on independent research and publicly available material
The conclusions set forth herein are based on independent research and publicly available material. The views expressed herein are the views and opinions of the author and do not reflect or represent the views of Charles River Associates or any of the organizations with which the author is affiliate
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