Alternative Fuels and Advanced Technologies
To date, changes in petroleum usage have been driven primarily by the increasing price of oil and by regulatory concerns. The greatest potential for large reductions in gasoline consumption stems from new technologies that could transform how transportation is powered. Over 1 million advanced technology cars and light trucks were sold in the United States in 2006. About two-fifths of these were flex-fuel vehicles that can use conventional gasoline or an alternative fuel called E85, which is approximately 85 percent ethanol and 15 percent gasoline. U.S. consumers also purchased 256,000 hybrid vehicles in 2006. Hybrid vehicles use an electric motor in conjunction with a gasoline engine to increase fuel economy.
Use of advanced technology vehicles in the United States is projected to grow over time. The Department of Energy projects that over 3 million advanced technology vehicles will be sold in 2015 and that by 2030 they will make up more than 25 percent of all light-duty vehicles sold. Of these advanced technology vehicles, 71 percent are expected to be either gasoline–electric hybrids or vehicles that can be powered by ethanol and other plant-based fuels. Though alternative fuels currently power only a small fraction of our transportation needs, private-sector investments combined with government policies are expected to fundamentally change the energy landscape.
Ongoing research explores a wide variety of vehicle fuel technologies such as electricity, hydrogen fuel cells, and biofuels. Significant technological barriers exist that prevent the development of these as commercially viable alternatives. For instance, the wide-scale deployment of hydrogen fuel cells— devices that combine hydrogen with oxygen in the atmosphere to yield electricity—will depend on reductions in expense and weight as well as on the development of clean, cost-effective sources of hydrogen.
Private markets tend to underinvest in innovation of all kinds because inventors only capture a fraction of the benefits from discovery. Underinvestment is particularly likely for basic scientific research where the application to the marketplace may not be evident at early stages. Underinvestment is also likely when the results of research mainly reduce the external costs of consumption (such as national security and environmental costs associated with oil) instead of directly benefiting consumers. In response, the President’s Advanced Energy Initiative proposed an increase in annual funding for alternative energy research of 22 percent for fiscal year 2007, adding to the $10 billion of government spending devoted to such research since 2001.
Several studies find that Federal research and development (R&D) investment in energy has yielded sizeable societal benefits, not only in economic terms, but also in terms of knowledge creation and pollution reduction. Still, the government's ability to predict which technologies will best meet a given goal is questionable, so the most effective government policies allow the market to choose the path of innovation.