California Cap-and-Trade Drives Up Gas Prices... By About 3 Cents... Maybe...

California's cap-and-trade program now covers gasoline, and—surprise!—it looks like the doomsayers were wrong.

State Republican lawmakers (and even some Democrats) recently tried to delay or exempt gas from the cap-and-trade program, arguing that California residents can't afford more expensive fuel, but they couldn't have picked a worse time for the fight: the update to the law took effect on January 1st, after a six-month period in which national prices took a 50 percent nose dive. This chart sums up the new tax's impact nicely:

Fear the tail

Since the new year, prices have gone up by about 3 cents. Ahhh!!! This compares favorably to apocalyptic predictions from the California Driver's Alliance, which claimed that prices would increase from 16 to 76 cents a gallon. Actual experts have estimated that the cap-and-trade program will increase gas costs by about $0.10 per gallon in the long run, and it's still very early, so we'll see.

As an admitted amateur in the field of gas price prediction (though with a much better record than several former presidential nominees), I'm not going to pull a Reason and pretend that three days is enough time to fully adjust to this new reality. At the very least, though, it's reasonable to assume that the carbon tax is responsible for the small bump over the past few days.

...Right?

Well, I got a little curious and looked at the same chart for some other states, it turns out that California's not the only state with a slight bump since the new year. Here are a few other states (and D.C.) with similar increases:

Oklahoma gas prices.

Washington State gas prices.

New York gas prices.

Washington, D.C gas prices.

There were also many states whose gas prices continued to slide since the 1st of the month, and even more where prices held steady, so none of this is to say that the cap-and-trade program won't result in persistently higher prices, even if the impact is slight. Maybe it just means we shouldn't jump to conclusions too quickly. Gasoline is still essential for many, many Americans, and if oil companies want to pass along the increased cost to consumers there's very little to stop them—that is, until more viable alternatives to driving are available. 

It's also important to remember that, while driving remains non-negotiable for millions of Californians today, the proceeds of the cap-and-trade program are primarily dedicated to funding projects that reduce the need for car dependence and decrease carbon emissions in the process. More than half of revenues—which are expected to reach at least $3 billion annually—will be spent on clean, energy-efficient transportation and sustainable, affordable housing. Over time, the fortunes of far fewer residents will be tethered to the price of gas; by then, hopefully, I can start sharing charts about improving environmental quality rather than a three-cent bump in gas prices.

The Reason Foundation's Broken Logic, Summed Up in Two Sentences

Real-life American humans waiting to ride a high-speed rail train (!!!).

This is from a year ago, but I just came across it while doing some other research and it was too perfect to pass up. Here's Baruch Feigenbaum from the Reason Foundation arguing why high-speed rail could never work in the U.S. These sentences are literally back to back in the same paragraph:

A U.S. high-speed rail line would need ridership of 6 million to 9 million people per year to break even. The high-speed Acela service, despite operating in the busy Northeast Corridor, averages only 3.4 million passengers per year.

With Acela capturing barely half the "minimum" break-even ridership, one might imagine after reading Feigenbaum's article that the rail service has been a catastrophic failure. Clearly, we shouldn't waste our money on any more high-speed rail boondoggles. A quick look at actual facts, however, shows that Acela is doing quite well: despite its trains, which can only travel a maximum of 150 mph; its decrepit tracks, which don't allow the trains to travel anywhere near its max speed for most of its length; and the fact that it has to share many miles of those tracks with freight, Acela is killing it.

Here's Amtrak's most recently monthly report, which shows Acela has generated over $240 million in operating profit – literally more than half of its revenues – since the beginning of the fiscal year:

Taken from the June 2014 Amtrak Monthly Performance Report, page C-1

But you won't find Reason acknowledging uncomfortable facts like these. Unfortunately, this kind of poorly-researched, easily refutable analysis permeates the Reason's baldly politically-motivated work. For another example, you can look to Reason's roundly-criticized "report" from a few years ago, in which two of their writers declared the LA Metro Expo (light rail) Line a failure literally days after it opened. A year later, the Expo Line hit its 2020 ridership projections seven years ahead of schedule. It's almost as though they don't respect their readers enough to expect them to do any of their own research!

If I were running a Metro or any other transportation authority I'd be treating Reason's jabs and low-blows as a badge of honor. And if their previous reports are any indication, California's impending high-speed rail service is in for a bright, prosperous future.

Why High-Speed Rail Isn't Less Cost-Effective Than Other Transit Investments (Part Two)

Last week UCLA published a working paper arguing that urban transportation projects were more cost-effective at reducing greenhouse gas emissions than high-speed rail (HSR). I posted a critique of that paper, focusing first on the benefits side of the ledger, showing that the authors had overstated the user savings of light rail, bus, and bicycle infrastructure projects while HSR's savings may have been undersold. This week, I'm going to look at costs.

I want to start this out by noting that the study's authors, Juan Matute and Mikhail Chester, Ph.D, seem to be focused on making a case for using the state's cap-and-trade revenues for what they view as worthy investments. That's fine, and there should be a debate about how those funds are spent, but the premises of that debate should be accurate. I don't think this working paper meets that requirement in its current form.

LA's Orange Line bus rapid transit and bicycle path, and Gold Line light rail services are all great projects, and we absolutely should invest in more bicycle paths, light rail, bus rapid transit, and pedestrian facilities. The error in the UCLA report is in the belief that these projects are in competition with HSR, which shouldn't be the case.

Now, onto the numbers.

CAPITAL AND OPERATING COSTS

The California High Speed Rail Authority's 2014 Draft Business Plan says the project should cost $54.9 billion in 2013 dollars to build up to Phase 1, which gets us from San Francisco to Los Angeles. If this estimate sounds low, it's because reports on the rail line often use year-of-expenditure numbers, but we're going to use 2013 dollars for capital, revenue, and costs to keep things simple and consistent. (The UCLA authors use this same 2014 draft business plan for their report, by the way.) The following table shows the projects estimated capital cost; the relevant number can be found in the last row of the "Cumulative Capital Cost (Billions 2013$) column:

Projected capital costs.

According to the UCLA study, $54 billion is the total high-speed rail project cost. That's wrong. The authors make the erroneous assumption that HSR will operate at a zero-profit level, apparently using an obscure table from page 55 of the 2014 business plan that shows a net operating cash flow of $165 million. For whatever reason, they seem to have interpreted this number as the total profit of the project for its entire lifecycle. I suspect it actually represents a single year's profit in an early year of the initial operating segment's active service, but it doesn't actually matter because we have much more detailed figures in this very same business plan.

First let's look at operating/maintenance costs and lifecycle costs. Here are the tables that summarize those costs:

Projected operating and maintenance costs.

Projected lifecycle costs.

There are low, medium, and high ridership scenarios, which effect these costs: more riders means higher operations, maintenance, and lifecycle costs (as well as higher revenues, which we'll get to). They only provided the annual O&M costs at five-year intervals, so I summed them up by averaging the costs at adjacent 5-year periods, then multiplying that average cost by 5 for every column except for 2060, which is the final year of the project's lifecycle. Here's an example:

O&M costs under the high ridership scenario are projected to be $403 million in 2025 and $920 million in 2030. Averaging those numbers gives us an annual cost of $661.5 million, for a total of $3.3075 billion over five years from 2025 to 2029. This isn't perfect but it's a close approximation, and revenues are summed in the same way so any error should be canceled out on the revenue side.

Lifecycle costs mostly consist of rolling stock replacement, so costs don't vary too much whether the trains are used frequently or not. They just get old after a while.

Here's a table I made of total operations, maintenance, and lifecycle costs through 2060:

 Scenario O&M Lifecycle Total costs 
 High ridership $34,394 $7,656 $42,050 
 Medium ridership $30,550 $7,029 $37,579 
 Low ridership $27,448 $6,376 $33,824 

REVENUES

Now, if the UCLA authors' assumption is correct, revenues should come out to about the same as costs. That's not the case, as you'll see below.

First, here's another table from the business plan. This one is projected farebox revenues under the three ridership scenarios:

Projected revenues.

This is just farebox revenue, i.e., the revenues from ticket sales. It doesn't include any ancillary income, such as advertising or food and beverage sales. According to the business plan, ancillary income can add anywhere between 2 and 30 percent to revenues above ticket sales. I'm going to assume that ancillary income adds 10 percent to revenues—with opportunities for transit-oriented development and the potential for high-profit services targeted at business travelers, I think this is fairly conservative. 

Revenues with and without this additional income can be found below:

 Scenario Farebox revenue Ancillary income Total revenue 
 High ridership $74,060 $7,406 $81,466 
 Medium ridership $57,886 $5,789 $63,675 
 Low ridership $43,633 $4,363 $47,996 

SUMMING UP

We've got a lot of numbers at this point, so lets put them all together. Here's capital, operating, maintenance, and lifecycle costs, plus revenue, all in the same table:

 Ridership Capital O&M / Lifecycle Revenue Net cost 
 High ridership ($54,900) ($42,050) $81,466 ($15,484) 
 Medium ridership ($54,900) ($37,579) $63,675 ($28,804) 
 Low ridership ($54,900) ($33,824) $47,996 ($40,727) 

o rather than a $54.9 billion total project cost, as the authors assert, the actual cost according to the CA HSR Business Plan projects that costs will range from $15 to $41 billion through 2060. That's still a huge amount of money, but consider the fact that this is a 520-mile mega-project, and that it's very likely that a portion of this project will be funded with federal assistance (not in the next few years, but this is a long-term project and politics shift rapidly) and/or private partnerships. Accounting for federal and private funding sources, it's entirely possible that the project could net a profit for the state of California in the long term, as well as boosting the regional economy and reducing greenhouse gas emissions statewide.

A study prepared by Parsons Brinckerhoff (and commissioned by the California High Speed Rail Authority) estimates that 4,200 new lane-miles of highway, 115 new airport gates, and 4 runways would need to be constructed to match the capacity of HSR, all at a cost of over $130 billion. This is bogus, frankly, since I don't think anyone believes we're ever going to construct an extra six lanes of freeway between LA and SF. It's quite clear that the vast majority of that highway capacity would never be built in the absence of HSR, though some of the airport expansion remains a distinct possibility. 

Despite this transparent attempt to justify the cost of high-speed rail, I think reasonable people can agree that some expansion of airports and highways will be necessary over the next 45 years to accommodate additional trips of 200-500 miles—unless we build high-speed rail. Is it so hard to imagine that the cost of highway and airport expansions wouldn't reach into the tens of billions over that time period? I, for one, would rather spend that on an emissions-free, displacement-lite transportation mode.

A vision of LA's Union Station in 2050, from Bustler.

Last, we should consider the timeline under consideration here: 2025-2060. Implicit in this study period is the assumption that once the ball drops and 2060 begins, the whole process starts anew. New rails, new trains, new legal bills, new tunneling, new acquisition costs, new everything. Did New York cave in all its subway tunnels after 35 years of operation and start from scratch? It's silly to take such a short-range view on such a monumental project.

There will certainly be significant replacement costs as infrastructure ages into disrepair, but consider the fact that right-of-way acquisition is expected to cost $12 billion, more than a fifth of HSR's total capital cost. That's something you only pay for once. Stations also won't have to be re-constructed, just renovated over time, which is probably accounted for in operations and maintenance anyway. Even track construction, which accounts for nearly half of the total project cost, will be cheaper the second time around. If tracks don't need to be fully replaced after 35 years of use, the costs will be even lower.

Assuming even the medium ridership scenario, if we extend the timeline of high-speed rail service into the year 2100 we easily achieve profits on operations and capital. And that's exactly the perspective we should be taking on this project—it's a long-term investment in California's future, not a short-term economic recovery effort. This is transportation for the long haul (ho ho!), and over the long haul it can be a money-maker that actually helps the state fund other important infrastructure projects, including urban transportation like light rail, bus service, and bicycle and pedestrian improvements. 

I don't think profitability should be the primary goal of HSR, but when you take into account the opportunities for federal and private funding, reduced highway and airport expansion costs, and a longer operations horizon, California high-speed rail has potential to make a lot of money for the state. That's something that urban transportation projects can't say, but that shouldn't be an argument against those forms of investment. Instead, it should be viewed as an argument for high-speed rail—the sooner it begins operation, the sooner it can start creating a funding stream for our state's various other infrastructure needs.

Why High-Speed Rail Isn't Less Cost-Effective Than Other Transit Investments (Part One)

UCLA's Institute of Transportation Studies released a working paper report* two days ago, which makes the claim that local transit and active transportation upgrades are a more cost-effective way to reduce greenhouse gas emissions (GHGs) than California's planned high-speed rail (HSR) line from Los Angeles to San Francisco. And if their numbers are to be trusted, those local projects are way more cost-effective: when all is said and done, they calculate that HSR will cost approximately $361 per metric tonne of GHG reduction — 30 times more than a tonne sells for in California's cap-and-trade market — while Los Angeles' Orange Line Bicycle Path will actually save the state over $3,600 for every metric tonne of GHG reduction that they achieve. The Orange Line Busway and Gold Line light rail services both fall somewhere in between, but look much better than high-speed rail by this metric.

I'm going to take a look at why this is completely wrong in two parts.

Today will be the (relatively) short post, regarding their misleading calculation of "Net User Costs" for high-speed rail and other transportation infrastructure.

Here's an adaptation of the table from their paper, which shows the costs of reducing greenhouse gas emissions. Notice that in the first column the full public cost is actually lowest for high-rail; only after they account for "Net User Costs" are factored in does HSR end up looking so bad.

Cost per metric tonne of GHG reduction:

Full Public Cost Full Public Cost Less Net User Costs
California High­-Speed Rail  $461 $361
Orange Line Busway $1,074 -$676
Gold Line Light Rail Transit $3,458 -$1,233
Orange Line Bicycle Path $1,061 -$3,670

So what are "Net User Costs"? They're the amount you save when you switch from one mode of travel to a cheaper mode. When I switch from driving to work to taking the Gold Line, I go from paying whatever it costs to operate my car to paying $1.50 for a one-way fare on LA's Metro system. When I switch from flying to taking high speed rail, my ticket cost drops from $97 to $81. It's in this conversion that UCLA's working paper so significantly misrepresents the private savings of local transit and bicycling relative to high-speed rail.

Acela high-speed rail.

There are a few problems here. The first is a bit abstract — it's actually the use of this metric in the first place. It completely ignores those that switch from driving to high-speed rail, because this is switching from a less expensive mode to a more expensive one. From the perspective of this paper, those diversions don't exist, or at best they're implicitly judged as mistakes. But people generally act pretty rationally, and someone that decides to trade in a car trip for a train trip is probably doing so for completely valid reasons. Maybe they don't want to deal with traffic, or they put a premium on their time, or they want to work during their trip. If the benefits of taking the train outweighed the costs, they'd either find another way to get there or they wouldn't make the trip at all. Reducing all decisions to the immediate monetary cost isn't very instructive, and the reality of millions of people choosing to use the Acela high-speed rail service in the Northeast, rather than driving, highlights that.

The second point is easier to understand, and probably more significant. Net user costs are an easy calculation for air to rail: the ticket cost of one minus the ticket cost of the other. Things get tricky when measuring the cost of switching from car to bike or bus, however. To calculate the savings, the report's authors need to know the cost of the new trip — easy: bikes are free and buses are $1.50 — and the cost of the car trip it replaced. The driving cost is found by multiplying the trip distance by the standard IRS mile rate, which is mostly used for deducting business-related transportation expenses. As of 2012, that rate was 55.5 cents per mile.

The reason this number is so inappropriate is that the mileage rate is "based on an annual study of the fixed and variable costs of operating an automobile," and the vast majority of people switching from their car to the train aren't getting rid of their cars (sadly), they're just using them less. Most of those "fixed and variable costs" — insurance and car payments in particular, as well as depreciation — are accruing no matter how much or how little you drive; most car owners that switch to transit or bicycling are only saving on gas, and perhaps parking in very dense areas. I wrote about this car ownership sunk cost bias last year. Though it's dependent on the driver, gas probably account for less than a quarter of most people's car expenses, so this study probably overstated the Net User Cost savings by a factor of 4, at least.

As a side note, since it's (falsely) assumed that no one is switching from driving to using HSR for their long-distance travel, the rail line doesn't benefit from this nifty accounting trick. That's convenient, since if driving actually did cost 55.5 cents per mile, it would cost $211 to drive from LA to SF — more than double a high-speed rail fare.

As someone who's been car-free for going on six years, I'm the last person to criticize someone trying to raise the profile of local transit and active transportation investments — I rely on them every day and frequently write about the need for more. Even though most people don't get rid of their cars when new transit services arrive, some do, and that's amazing. We should celebrate and encourage that. But at the same time, pitting different forms of clean, efficient transit against one another isn't productive, especially when those transit types serve entirely different purposes. I feel that this recent UCLA report understated the benefits of HSR while overselling the benefits of rail, bus, and bike infrastructure. In truth, they're both outstanding investments and perfect complements, and we should be striving to find ways to build more of each.

The second part to this critique will come soon, with a focus on the differences between high-speed rail and local transit infrastructure, and why they shouldn't be considered competitive with one another. 

*Streetsblog LA has a great summary of the report's findings.