A Preliminary Analysis of the LAO Analysis of cap-and-trade funding of High Speed Rail

Burning the Midnight Oil for Living Energy Independence

This blog  has been used over the past year primarily as a central cross link point to access Midnight Oil blog posts at various community blog sites, with the Sunday Train series outnumbering all other series over the past year by a substantial margin.

The Sunday Train will run tomorrow as scheduled. This post is to publish a more formal analysis of the California Legislative Analyst's Office (LAO) risk assessment of investment in the California High Speed Rail project. Regular readers of the Sunday Train will know that I see the project as moving in the right direction with the most recent revision of the CHSRA Business Plan. However, the California LAO has taken a different view, and so starting a few weeks back I took a careful look at their analysis of the use of cap and trade funding in particular. This analysis is the result of that look at their work.
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A Preliminary Analysis of the LAO Analysis of cap-and-trade funding of High Speed Rail

The LAO has made much of the risk that the HSR might not attract further Federal funding in previous reports. The purpose of this section on cap-and-trade funding appears to be to defend that earlier conclusion against the proposal to partially fund the HSR from cap-and-trade revenues. The LAO raises three points (p. 8) with respect to use of AB32 Cap and Trade funding for the High Speed Rail project. These are:

• ·        Would Not Help Achieve AB 32’s Primary Goal.
• ·        High-Speed Rail Would Initially Increase GHG Emissions for Many Years
• ·        Other GHG Reduction Strategies Likely to Be More Cost Effective.

These points shall be considered in reverse order.

The third claim is:

Other GHG Reduction Strategies Likely to Be More Cost Effective. As we discussed in our recent brief on cap-and-trade, in allocating auction revenues we recommend that the Legislature prioritize GHG mitigation programs that have the greatest potential return on investment in terms of emission reductions per dollar invested. Considering the cost of a high-speed rail system relative to other GHG reduction strategies (such as green building codes and energy efficiency standards), a thorough cost-benefit analysis of all possible strategies is likely to reveal that the state has a number of other more cost-effective options. In other words, rather than allocate billions of dollars in cap-and-trade auctions revenues for the construction of a new transportation system that would not reduce GHG emissions for many years, the state could make targeted investments in programs that are actually designed to reduce GHG emissions and would do so at a much faster rate and at a significantly lower cost.

In comparing projects that are designed to reduce Greenhouse Gas Emissions to projects that have reduction in GHG as one of several program benefits, GHG reduction funds must cover the entire cost of projects aimed soly at GHG reduction, but may share the cost of projects that meet multiple goals.

The sole means that the LAO supports to allow cap and trade funding to share the cost of an investment is by purchasing CO2 emissions reductions credits at market determined rates. The return on emissions credits is both variable and uncertain, so this implies that long term infrastructure investment that results in reduced CO2 emissions must treat CO2 emissions reductions credits as an uncertain source of funding. If sufficient funding is obtained from other sources to complete sufficient infrastructure to begin operations, then at that time CO2 emissions reduction earnings may be treated as a windfall gain.

The LAO argues that there is substantial funding uncertainty regarding completion of the entire San Francisco to Los Angeles / Anaheim High Speed Rail corridor, and that because of that uncertainty, construction should not begin. And then they propose restricting the use of cap and trade funds in a way that maximizes the uncertainty of long term infrastructure investments that include CO2 emissions reductions as one of multiple benefits.

Evidently, a system of funding that prevents cap and trade funding from being used to complete a system that will result in reduced CO2 reductions is interfering with the development of systems that are carbon neutral and low emissions, while favoring a policy of continued development of existing high emissions systems, which implies hoping that carbon offset programs will both fully offset the additional emissions of the status quo systems and additionally offset our current emissions while using those systems.

The fundamental flaw in the analysis is that the LAO is performing a risk analysis of a system that represents a substantial departure from the status quo, yet neglecting to consider the status quo risks of reliance on combustion of petroleum products in our current intercity passenger transport system. These risks include the risk of crude oil price shocks, interruption of access to imported crude oil, and the CO2 emissions impacts of reliance on the current system.

It should be noted that this set of risks apply across a wide range of scenarios of potential future economic growth. That is, if crude oil prices remain low, and access to imported crude oil is uninterrupted, one likely consequence is strong economic growth. Continued dependence on petroleum combustion for intercity transport then implies that CO2 emissions impacts are higher. If there is a relatively fixed available portfolio of inexpensive CO2 offset projects, this implies that CO2 must be offset at an increasing cost.

On the other hand, a coming decade of repeated severe oil price shocks and oil supply interruptions directly implies forced reduction in petroleum consumption due to household and business travel budget constraints, and so implies substantially less risk of rapid growth in CO2 emissions from the intercity passenger transport system. However, it also likely implies a substantially lower economic growth rate, and under this scenario, the economic benefit of having an oil-independent common carrier intercity transport corridor is substantially greater than is represented by California HSR Authority Cost/Benefit modeling.

If these status quo risks are taken seriously, then there is a substantial risk in not proceeding with an available petroleum-independent common carrier intercity transport corridor. Given this status quo risk, the policy that the LAO is arguing for, of only funding CO2 emissions reductions from long term infrastructure after the fact, is amplifying those risks.

Addressing these neglected status quo risks brings attention to the neglected alternative policy. Under this policy, a reasonable cost is established for up-front investment in infrastructure in support of CO2 neutral and low emissions systems to replace existing high emissions systems. The CO2 emissions reductions associated with the new system is estimated, and that determines the maximum amount of capital support that may be provided by either grants or revenue bonding from the cap and trade fund.

The risks associated with this approach are that the cost will be at times higher than a cost than the current cost of emissions reductions over the coming decades, and that the project will not achieve the expected levels of CO2 emissions. However, the risks of not proceeding with this approach is that the projects in question are not able to go ahead for lack of funding, so California remains more dependent on petroleum combustion for intercity transport than is necessary and as a result suffers, under one set of scenarios, substantially greater reductions in economic activity than if the infrastructure had been made available or, under another set of scenarios, substantially higher CO2 emissions due to a failure of CO2 reductions policy to cope with the consequences of strong economic growth.

In line with its neglect of status quo risks, the LAO also restricts its consideration to direct GHG emissions benefits of the HSR line and ignores opportunity benefits associated with the availability of the HSR corridor. First, unlike the auto and air intercity transport systems, the HSR intercity transport system does not require explicit or hidden operating subsidies, so diversion of travel to HSR will free up resources for providing operating subsidies for low emissions and carbon neutral local transport. Second, an intercity train station offers an effective anchor for dense, multi-use development, even in areas that are presently car-dependent. Third, because rail pays a much smaller time penalty than airplanes for adding a stop, intercity rail is a superior intercity transport complement to sustainable local transport technologies that are competitive with gasoline fueled automobiles for local transport in smaller urban centers, but cannot compete with gasoline fueled automobiles for intercity trips.

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The second claim is:

High-Speed Rail Would Initially Increase GHG Emissions for Many Years. As mentioned above, in order to be a valid use of cap-and-trade revenues, programs will need to reduce GHG emissions. While the HSRA has not conducted an analysis to determine the impact that the high-speed rail system will have on GHG emissions in the state, an independent study found that—if the high-speed rail system met its ridership targets and renewable electricity commitments—construction and operation of the system would emit more GHG emissions than it would reduce for approximately the first 30 years. While high-speed rail could reduce GHG emissions in the very long run, given the previously mentioned legal constraints, the fact that it would initially be a net emitter of GHG emissions could raise legal risks.

The LAO does not cite their source, but it appears to be the Chester and Horvath (2010) study which appeared to reach this conclusion, while including infrastructure construction, maintenance and operation emission costs and vehicle manufacture emission costs on both sides. However, this was based on a miscalculated figure of 170 kilowatt hours per vehicle kilometer traveled (kWh/VKT) from the California HSR Authority program EIR. A cross check with a source such as the CCAP & CNT (2006, pp. A1-A3) study of High Speed Rail and CO2 emissions in the US, would have shown power consumption in the range of 20-30 kWh/VKT. While the actual figure for the California system is expected to be an average of 46kWh/VKT for the double-length trains and operations at 220mph rather than 180mph, a figure of 170kWh/VKT should have been recognized as implausible.

The source of the miscalculation here is the California HSR Authority EIR itself. The German peer review of the California HSR Corridor Evaluation performed a detailed analysis of specific energy consumption based on a 240mph version of the German “ICE” HSR equipment, arriving at 74.2kWh/VMT, or 46 kWh/VKT. In the preparation of the EIR, the contractor for the CHSR Authority performed an incorrect conversion, which resulted in the value that Chester and Horvath (2010) used.

The LAO must clarify whether they are basing a substantial point in their analysis of the suitability of using cap and trade funds for a portion of High Speed Rail capital funding on the original Chester and Horvath figures, which were based on overestimating vehicle energy consumption nearly fourfold. Examination of the results of other studies point to the miscalculation embedded in Chester and Horvath (2010) as the source of their conclusion.

Further, the California HSR Authority has committed to sourcing renewable power for its operations. While there are unlikely to be contracting terms that guarantee that 100% of the power comes from incremental new capacity, the availability of a single guaranteed institutional buyer for carbon neutral power will encourage the more rapid development of carbon neutral power sources, so that the effective GHG emissions per kilowatt-hour for the California HSR system will be lower than the current grid norm assumed by Chester and Horvath (2010), so that their figures will still overstate the GHG emissions of the California HSR system, even corrected to take into account the miscalculation of HSR Vehicle power consumption.

Chester and Horvath (2010) also make the extraordinary assumption that a realistic low occupancy rate for HSR services is 10% occupancy of a sixteen car train with a 1,200 seat capacity. However, this train is comprised of two eight-car consists coupled together, and if there was an average 10% occupancy on such a service, operating costs could be cut nearly in half by only running an eight car train at 20% occupancy.

Indeed, even operating at an average 20% occupancy seems infeasible, given a requirement to operate without subsidy. Since a three hour corridor service is far more capable of tailoring its frequency to available transport demand than a six to twelve hour corridor service, 40% would be a quite conservative lower bound on occupancy.

In Chester and Horvath (2010b: fig S1), GHG emissions per Vehicle Kilometer travelled (VKT) appear to be about 55kg CO2e emissions per VKT, with about 45kg for operations, and so about 10kg for infrastructure. If their assumption of a low 10% occupancy of sixteen car trains is taken to be a 40% actual occupancy of eight car trains operating half the projected Vehicle Kilometers, the 10kg infrastructure emissions per 120 passengers remains the same, for 80-90g per passenger mile on the low assumption. However, at 46kWh/VKT rather than 170kWh/VKT, and at an actual 40% vehicle occupancy, that is more realistically 3kg CO2e/VKT than 45kg, so a further approximate 25g per passenger mile on the low assumption, for 105g to 115g CO2e/PKT.

Supporting 40% to 80% as a more reasonable range for HSR occupancy is Network Rail (2009):

In comparison, the following Table 2.12 summarises typical load factors for European high-speed rail services, which range from 42% to as high as 88%. The lower load factors of the German ICE services are notable compared to the French TGV and Spannish AVE. The primary reason for this is considered to be a degree of over-capacity provided by the ICE services (ATOC, 2009a) in order to compete more effectively with services from new low-cost airlines. On ICE lines, services are run closer to the capacity of the network than comparable TGV and Eurostar services. Load factors above 60% are achieved by TGV and Eurostar in most cases, which is achieved by running trains under the capacity of the infrastructure and pulling passengers to the train times (Network Rail, 2009). It is also notable that the medium-long distance high-speed rail services seem to achieve higher average load factors than the shorter distance services. This is presumably due to the increased competition with road at lower distances, where road transport can more effectively compete in terms of journey time.

If Chester and Horvath (2010) were to perform their analysis again and take into account that the energy consumption value is overstated nearly fourfold, with the knowledge that a sixteen car train is simply two eight car trains coupled together which can be operated individually if there is no demand for the additional seats, and taking into account the constraint on the train to operate at an occupancy that permits operating cost break-even or better, they would find that the “low” occupancy GHG emissions on a full life-cycle analysis are below their midpoint values for car, conventional rail, and air travel, and the GDG emissions at a mid-point occupancy value are below the emissions of car, conventional rail and air travel at 100% occupancy.

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References for this section:

 

Center for Clean Air Policy (CCAP) and Center for Neighborhood Technology (CNT). (2006). “High Speed Rail and Greenhouse Gas Emissions in the US”. http://www.cnt.org/repository/HighSpeedRailEmissions.pdf

Chester, Mikhail, and Arpad Horvath. (2010) “Life-cycle assessment of high-speed rail: the case of California.” Environmental Research Letters Vol.5 Issue 1. January 2010.

Chester, Mikhail, and Arpad Horvath. (2010b) “Supplementary Data for Life-cycle assessment of high-speed rail: the case of California.” Environmental Research Letters Vol.5 Issue 1. January 2010.

Network Rail (New Lines Programme). (2009) “Comparing environmental impact of conventional and high speed rail.” http://www.mendeley.com/research/comparing-environmental-impact-conventional-high-speed-rail/

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The first claim made is:

Would Not Help Achieve AB 32’s Primary Goal. The primary goal of AB 32 is to reduce California’s GHG emissions statewide to 1990 levels by 2020. Under the revised draft business plan, the IOS would not be completed until 2021 and Phase 1 Blended would not be completed until 2028. Thus, while the high-speed rail project could eventually help reduce GHG emissions somewhat in the very long run, given the project’s timeline, it would not help achieve AB 32’s primary goal of reducing GHG emissions by 2020. As a result, there could be serious legal concerns regarding this potential use of cap-and-trade revenues. It would be important for the Legislature to seek the advice of Legislative Counsel and consider any potential legal risks.

As part of the overall carbon cycle, carbon dioxide persists in the atmosphere for about a century. The goal of AB32 is therefore to reduce California’s ongoing contribution to climate change going forward by reducing CO2 emissions in 2020 to 1990 levels. While a lawyer may analyze the legal position, from the perspective of ecological economics, California’s transport system and its dependence on petroleum combustion is one of the principle sources of the problem. In terms of the primary objective of AB32, it is a far better outcome to arrive at 2020 in a position to make further substantial progress on this important GHG source than to arrive in 2020 at 1990 emissions level, but with little immediate prospect of further improvement.

In the analysis here, the LAO also ignores the fact that the current funding request is required to begin construction of the Initial Construction Segment (ICS), and that the initial construction segment will be put to use once track and signaling is completed by the San Joaquin service connecting the Bay Area to the San Joaquin Valley and connecting through to the LA Basin via a connecting intercity bus service between LA Union Station and Bakersfield. The capacity to support this service was a federal requirement for funding the ICS, and neglecting this independent utility has been a feature of previous LAO analyses as well.

The substantial reduction in San Joaquin service trip times will increase the ridership on the service, and additional passengers at existing stops on an existing train has a negligible impact on energy consumption of the train. Operation on the HSR corridor will also be more energy efficient than operation on the mainline freight corridor presently used. So the transfer of the San Joaquin to the HSR ICS corridor will have its own modest carbon emissions impact, before any cap-and-trade funds are required. Chester and Horvath (2010) confirm that will conventional rail has lower life cycle carbon costs than cars at equivalent occupancy, whether cars at 5 passengers and rail at 100% occupancy or cars at 1 passenger and rail at 20% occupancy.

While the gain in GHG reductions from increasing the average occupancy of conventional Amtrak California services is modest, there is no need to fund this work from cap and trade funds. The LAO advice to repeatedly delay start of the ICS and hope that the Stimulus ARRA funds awarded to California on the basis of constructing the ICS in the Central Valley were Express HSR speeds are possibly risks not only losing these ARRA funds, but also losing the GHG emissions reductions from operations of the San Joaquin on the ICS.

Conclusions

The California HSR Authority has been directed to plan to build an Express HSR system, and much of the LAO report has focused upon the fact that a project of this magnitude is built in stages, and that the completion of the entire project is uncertain so long as the Federal Government has not committed to a funding mechanism for HSR that seems likely to fund the bulk of the California HSR system.

However, the LAO ignores the benefits of completion of portions of the proposed California HSR corridor even if completion of the entire Phase 1 is delayed. This is in line with the LAO neglect of the risks to the California economy of being dependent upon petroleum combustion for its intercity transport.

When considering alternative established, mature technologies, electric passenger trains are the most energy efficient mode of intercity transport per seat mile, and under current economic conditions, it is Express HSR that consistently generates operating surpluses when operated in transport markets at similar distances and size (though typically smaller than) the LA to SF transport market. Electric automobile transport is complementary with electric Express HSR transport, but unlike Express HSR, technology for all-electric operation on trips of 200 miles to 500 miles trips is not mature, proven technology. So the strategy of pursuing both potentially carbon-neutral intercity transport options is preferable to strategies of pursuing either one alone.

The focus of the use of CO2 cap-and-trade funds for the Express HSR system should be on providing insurance against dependency on petroleum fueled transport.  The proposed staging of the HSR construction is:

• The Initial Construction Segment (ICS) from Merced to Bakersfield;
• A construction segment from Bakersfield to Lancaster/Palmdale;
• A construction segment from Lancaster/Palmdale to the San Fernando Valley;
• A construction segment to connect from the San Joaquin Valley to San Jose;
• And completion of the “bookends” to the San Francisco Transbay Terminal and LA Union Station.

Under the business plan, the ICS is first used by the San Joaquin service, while Express HSR service will commence after construction is finished to the San Fernando Valley, to be extended further with each following phase.

It is feasible to provide a one-seat ride from the LA Basin to the Bay Area once the Bakersfield to Lancaster segment is complete, by electrifying the Lancaster to Merced segment and using one of several options to operate by a combination of electric and diesel power. This is not assured of operating at a surplus under current economic conditions, but is a useful contingency in the event of an urgent need to reduce petroleum consumption, whether because of oil supply shocks or because of increased urgency in addressing the problem of greenhouse gas emissions, or both, and under severe oil price shocks and supply interruptions, its financial viability would be assured.

Therefore, the most effective strategic use of CO2 cap-and-trade funds for the financing of the California HSR system, to guarantee the opportunity for an effective carbon-neutral intercity transport system, is to approve their use up to a total level appropriate for the projected CO2 emissions reductions, and to focus the spending on assuring the completion of the corridor from Merced through to Lancaster.