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Are LNG tax incentives enough to wean trucking industry off diesel fuel?

By John D. Schulz, Contributing Editor
June 20, 2013

Washington is pushing a tax break that might make liquefied natural gas (LNG) economically competitive with diesel fuel, although a skeptical trucking industry is still taking a wait-and-see approach on the clean, domestically produced fuel.
 
Two Congressmen—Reps. Mac Thornberry, R-Texas, and John Larson, D-Conn.—recently introduced a bill that would equalize disparity between the tax the federal government levies on diesel fuel and on liquefied natural gas. Called the LNG Excise Tax Equalization Act of 2013, it provides what Thornberry called “a fair, market-centered solution” to fix the tax disparity between diesel and LNG.
 
“I think this change will encourage more private-sector investment in LNG infrastructure and production, and that will be a real positive effect on our economy,” Thornberry said in a statement.
 
Now, a gallon of LNG is taxed at the same rate as diesel—24.3 cents a gallon at the federal level. But because it takes 1.7 gallons of LNG to produce the same amount of energy as a gallon of diesel, the effective tax on LNG is much higher than on diesel.
 
The American Trucking Associations estimates that in order to buy a quantity of LNG with the same energy equivalent as diesel, LNG buyers pay a levy of about 41 cents—or nearly 70 percent more in tax. The bipartisan House bill would effectively reduce the LNG tax to 24.3 cents—same as diesel.
 
Compressed natural gas (CNG) is already taxed that way but at the energy equivalent for gasoline. Because of that equality, CNG already is in widespread use by municipal vehicles, such as buses and trash trucks, but not by long-haul truckers.
 
A lack of a reliable national distribution infrastructure and limited number of engines currently in production that can use LNG are often cited by trucking fleets for their reluctance to convert away from diesel—even with current fuel prices stuck stubbornly near $4 a gallon.
 
Trucking executives say that while they are studying LNG for possible use in long-haul vehicles, there are significant hurdles before the industry converts away from diesel.
 
“Incentives will bring the days of LNG closer for us, but they are not here yet,” said Steve O’Kane, president of A. Duie Pyle, the nation’s 20th-largest LTL carrier.  “We are sitting on the sidelines due to the initial investment in the equipment, the difficulty in establishing our own fueling locations, and some of the requirements for maintenance facilities.”
 
Trucking fleets already are coping with rapid cost increases in the typical Class 8 truck—which has risen to about $125,000 from $80,000 just five or six years ago. A truck equipped to run on LNG costs even more initially—and faces some higher maintenance costs over its lifetime, according to preliminary reports on their use.
 
“We prefer to perform our own maintenance and fueling, and right now both are prohibitive for us to accomplish,” Pyle’s O’Kane said.
 
CNG proponents, such as billionaire T. Boone Pickens, do have some arguments. They claim it’s cheaper and more reliable than diesel, burns cleaner and offers slightly better mileage. But mostly they are selling it on cost.
 
As Pickens said recently, “We have so much natural gas, we are going to see $5 diesel before we’ll see $3 natural gas.
 
Today, the typical Class 8 truck burns approximately 25,000 gallons of fuel annually, getting 5.9 miles per gallon. Switching to compressed natural gas could save up to $20,000 per truck per year, according to Banks. CNG currently costs about $1.90 per gallon, about half the cost of diesel. This year the trucking industry is on pace to spend about $155 billion on diesel and gasoline.
 
LNG must be cooled to about minus 260 degrees Fahrenheit and carried in insulated tanks aboard trucks. Con-Way Inc. President and CEO Doug Stotlar has compared it to “hauling around a giant Thermos bottle on top of your trucks” to avoid loss through evaporation. But LNG allows carriers to carry much more fuel in less space. But it must be chilled to minus-260 degrees Fahrenheit so tanks have to be highly insulated.
 
By comparison, CNG is not chilled and has more limited range, perhaps 300-400 mile range, compared to up to 600 miles in range for LNG. Another possibility is run dual-fuel engines that run on both diesel and natural gas, but they could cost as much as $140,000 per truck.
 
For local fleets, it’s perhaps an easier choice. Waste Management, the nation’s garbage hauler, already is buying trucks that will run on cheaper natural gas and says 80 percent of its new trucks over the next 10 years will run on natural gas. By 2017, it will run more trucks on natural gas than diesel.
 
If LNG and diesel taxes are equalized, LNG supporters said the change will help facilitate the shift away from diesel.
 
“Companies are already beginning to make the switch towards natural-gas vehicles, and this bill will knock down a significant barrier preventing companies from further harnessing this domestic energy source,” Rep. Larson said in a statement. “By leveling the playing field for LNG trucks, we are taking an easy step towards utilizing clean, affordable and American energy.”

About the Author

image
John D. Schulz
Contributing Editor

John D. Schulz has been a transportation journalist for more than 20 years, specializing in the trucking industry. He is known to own the fattest Rolodex in the business, and is on a first-name basis with scores of top-level trucking executives who are able to give shippers their latest insights on the industry on a regular basis. This wise Washington owl has performed and produced at some of the highest levels of journalism in his 40-year career, mostly as a Washington newsman.


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