The Car and Truck Fleet and Leasing Management Magazine

Congress Shifts from Mandates to Incentivesto Spur Energy Independence

October 2005, by Kipp Coddington and Paul Smith

The recently enacted federal energy legislation promises to change the rules of the road for commercial and public sector fleets. Perhaps the most important aspect fo the legislation is what it lacks. In sharp contrast to the energy reform measures of a decade ago, the new law does not include any nbew requirement dictating the type of vehicle a commercial ground fleet acquires or the type of fuel it uses. "This is good news for commercial fleets," according to Steve Bloom, senior vice president of Enterprise Fleet Services who serves as environmental affairs vice president of the American Automotive Leasin Association (AALA). "The Best part of this new federal law is that regulators understood that incentives, as opposed to mandates, are a much better way to effectively motivate business to move toward clean air incentives." Are Fleet Mandates Over?
Is the issue of fleet mandates closed? Not entirely. The law does require a U.S. Department of Energy (DOE) study of the effectiveness of the Energy Policy Act (EPAct) of 1992’s oft-criticized fleet mandate programs and calls upon the DOE to make recommendations for future legislation. Likewise, the bill requires DOE to issue a study on the potential of biodiesel and hythane to become “major, sustainable, alternative fuels.” This study must address potential markets and strategies to enhance the commercial deployment of such fuels. “It is important that fleets remain vigilant and participate in these studies or risk seeing mandates reappear,” cautioned Bloom. The law is also silent about the rights of states to issue fleet mandates, a topic that the U.S. Supreme Court addressed last year in Engine Manufacturers Association vs. South Coast Air Quality Management District (541 U.S. 246; 124 S. Ct. 1756), so the remaining issues left open by the U.S. Supreme Court are left to be resolved in the courts. The law does relax the current EPAct acquisition requirements that apply to state government and fuel provider fleets. Those fleets will now have the option to waive out of the existing vehicle acquisition requirements if the covered fleet operator can show an equivalent reduction in petroleum by some other means. Of concern to many environmental activists is the absence in the new law of any increase in vehicle fleet-wide fuel economy, or CAFE, standards. Because this issue remains open, fleet fuel usage will remain under scrutiny on a variety of fronts, including the alleged contribution of vehicle emissions of carbon dioxide to climate change. Tax Incentives for Alternative-Fuel Vehicles
Fleet operators can look forward to a host of new tax incentives related to vehicle acquisitions under the new law. Of the total $11 billion in incentives provided by the energy bill, $1.2 billion is earmarked for alternative vehicles and fuels, including those for: 1. A variety of types of clean vehicles. 2. Producers of ethanol and biodiesel. 3. Alternative-fuel refueling stations, as follows: Fuel-cell vehicles:
The new tax incentive for fuel-cell vehicles is determined by a base credit amount that depends upon weight class of the vehicle and, in the case of automobiles or light trucks, an additional credit amount that depends upon rated fuel economy. Base credit amounts are:
  • $8,000 (vehicles below 8,500 lbs. GVWR).
  • $10,000 (for vehicles 8,500 to 14,000 lbs. GVWR).
  • $20,000 (for vehicles 14,000 to 26,000 lbs. GVWR).
  • $40,000 (for vehicles 26,000 lbs. GVWR). The additional credit based upon fuel economy varies from $1,000 to $4,000 as fuel economy ratably increases from 150 to 300 percent of base (MY 2002) fuel economy. {+PAGEBREAK+} Alternative motor vehicles:
    The new tax incentive for alternative motor vehicles is based upon 50 percent of incremental cost, plus an additional 30 percent based upon emission standards, but no more than between $4,000 and $32,000 depending upon vehicle weight. Alternative fuels include natural gas, LNG, LPG, hydrogen, and any liquid fuel that is at least 85 percent methanol. Maximum allowable incremental costs as a function of vehicle weight are:
  • $5,000 (for vehicles below 8,500 lbs. GVWR).
  • $10,000 (for vehicles 8,500 to 14,000 lbs. GVWR).
  • $25,000 (for vehicles 14,000 to 26,000 lbs. GVWR).
  • $40,000 (for vehicles above 26,000 lbs. GVWR). Hybrid vehicles:
    The new tax incentive for hybrids is the sum of two components: a fuel economy credit amount that varies from $400 to $2,400 with rated fuel economy (from 125 to 250 percent of base fuel economy), and a conservation credit that varies from $250 to $1,000 based on estimated lifetime fuel savings (from 1,200 to 3,000 gallons), with both components measured against 2002- MY baselines. A qualifying hybrid automobile or light truck must have maximum available power from the rechargeable energy storage system of at least 4 percent. In addition, the vehicle must meet or exceed certain EPA emissions standards. The credit is subject to a numerical cap, based upon the number of vehicles produced. Advanced lean-burn technology vehicles (diesel):
    The new tax incentive for lean-burn technology vehicles is the sum of two components: a fuel economy credit amount that varies from $400 to $2,400 with rated fuel economy, and a conservation credit based on estimated lifetime fuel savings that varies from $250 to $1,000, with both components measured against 2002-MY baselines. A qualifying advanced lean-burn technology vehicle must meet the same emission standards as those noted for hybrids. This credit, like the one for hybrids, is subject to a numerical cap based upon the number of vehicles produced. Electric vehicles:
    The energy bill repeals the existing phase-out of the credit for electric vehicles. The new credit amounts are based upon vehicle weight and are:
  • $4,000 (vehicles below 8,000 lbs. Amount increases to $6,000 if the vehicle has an estimated driving range of at least 100 miles on a single charge or is capable of a pay load capacity of at least 1,000 lbs.)
  • $10,000 (for vehicles between and 14,000 lbs. GVWR).
  • $20,000 (for vehicles between 14,000 and 26,000 lbs. GVWR).
  • $40,000 (for vehicles above 26,000 lbs. GVWR). In general, the credit is allowed to the vehicle owner, including the lessor of a vehicle subject to lease. Taxpayers may claim a 30 percent credit for the cost of installing clean-fuel vehicle refueling property to be used in a trade or business or installed at the principal residence of the taxpayer. Taxes on Some Alt-Fuels Modified
    In a last-minute deal that arose during completion of the tax title of the energy bill, the conferees agreed to modify the taxes on CNG, LNG, and several other alternative fuels and to include those changes in the conference report for the transportation bill, which President Bush also signed into law in early August. The provision would fully tax those fuels at the equivalent rate of gasoline (or diesel) and provide a temporary incentive for their sale. The incentive is a 50-cent-per-gallon credit to the seller. The incentive’s value to the purchaser will be dependent on how much of it gets passed through to consumers by the retailer. These changes take effect in 2007 and expire in 2009. The law also modifies daylight savings (DST) time such that DST now starts on the second Sunday of March and ends on the first Sunday in November. The change takes place in March 2007 but only after DOE performs a study on the economic and safety effects of the move. This change might benefit service and other fleets that have higher productivity in daylight hours. Finally, the so-called Barton Amendment, which would have extended Clean Air Act compliance dates for areas of the country that are unfairly impacted by upwind pollution, was dropped from the bill. State and local governments will remain under the gun to tighten emission requirements to meet the new eight-hour ozone standard, thus subjecting mobile sources such as fleets to continued scrutiny. Will the federal government change course from mandates to incentives? “Based on our prior experiences within the fleet management industry, we expect that positive reinforcement, as opposed to a directive, will motivate change,” said Bloom. “But now it is up to the market to see how effective the incentive will be in changing purchasing decisions. Even though it is still a little early to tell, we’ve seen that business leaders want to do the right thing without putting their business solvency at risk.” Paul Smith, AALA environmental counsel, and Kipp Coddington, Alston and Bird, are attorneys who have represented AALA for more than a decade on environmental and energy matters.
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