Petroleum-based conventional fuels dominate the transportation sector due to simple economics. Per unit of energy, few fuels can rival gasoline and diesel in terms of total cost of ownership to the consumer. While some fuels, such as natural gas and electricity, offer lower fuel costs and/or higher vehicle efficiencies than conventional fuels, the fuel price differentials may not be sufficient to offset the higher initial costs of the vehicles, especially if petroleum prices are low. Even when total costs of ownership are similar or slightly lower for alternative fuels than conventional fuels, differences in attributes, such as vehicle range, fueling time, cargo space, vehicle availability, and fuel availability, and consumer loss aversion suggest that more substantial differences in costs are required before consumers are willing to adopt the alternatives.

In order for the transportation sector to achieve greater energy sustainability, the traditional economic paradigm for the vehicle purchase decision must expand to incorporate the true benefits of alternatives to conventional fuels, namely the societal benefits of increased energy security, lower criteria pollutant emissions, and lower greenhouse gas emissions. These benefits are not purely economic and yet are crucial to the future of transportation. To capture these benefits in the economic scheme, the societal costs of transportation fuels to the U.S. have been monetized according to measurable impacts. For energy security, the costs are tied to decreased economic output, loss of national gross product, economic strain and volatility, oil supply shocks and price spikes, supply disruption, and import costs. For criteria pollutant and greenhouse gas emissions, the costs are tied to human health impacts, property damage, loss of agricultural productivity, and destruction of terrestrial and aquatic ecosystems. These societal costs then applied to the use of specific fuels in two representative market segments, representing distinct applications, duty cycles, fuel consumption, and vehicle lifetime. Incorporating the monetized societal costs of transportation fuels in the total costs of ownership enables a fair comparison that reflects the benefits of alternatives to conventional fuels. As a result, these societal costs provide a justifiable framework for a real discussion on incentives and the direction of energy policy, beyond the mere objective of low fuel prices that has pervaded policy discussions to date.

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