Today the price of oil just set a new all-time high of over $104, something that may come as news to a President that doesn’t know the price of gasoline [1]. But that’s not what’s most interesting about the news on energy. What’s interesting is the recent data that gasoline consumption in the United States is down slightly, and what that tells us about carbon taxes and climate change.
The issue isn’t whether global warming is real or not, or even whether it’s mostly (or just partly) a man-made phenomenon. The issue is what to do about it. And in the midst of the hoopla around super delegates and related matters of import, it merits to be reminded of some of the key issues that the next President will face.
For the sake of argument let’s assume global warming is all about CO2 emissions. CO2 is not a pollutant in the sense that it’s something we can get rid of. In fact if we got rid of CO2 in the atmosphere, most of life as we know it would die. CO2 plays a role in a broad number of natural processes, not just ecosystems. Changing the level of CO2 - up or down - impacts a number of these, weather being one of them.
What that means is that there is no “right” level of CO2. There is no historical “in the absence of Man” level. In particular, there is no notion of zero.
Which means a cap-and-trade system makes little sense, which is why most economists favor carbon tax. They are both effective in reducing emissions - “effective” in the strict economic sense, namely, that under certain assumptions it minimizes the costs in adopting new manufacturing techniques etc, as needed, to cut the aggregate emissions to some very small number. The principal difference is that cap-and-trade focuses on the target level, whereas carbon tax focuses on setting the external cost.
The challenge with CO2 that is in question is that large amounts of it affect the weather, which in turn affects a number of facets of life on Earth. Rise in ocean levels, changes in rainfall patterns, possibly more flooding, likely more hurricanes, some species will either adapt or become extinct, changing agricultural conditions, and so forth. There are also some good effects - a reduction in cold-related deaths, increased water supplies in large parts of Asia, etc. But on balance, it appears to be a net negative.
That negative carries an associated economic cost. The cost of improving infrastructure, adapting farming, building or improving levees, providing disaster aid, etc. And this is where it gets really interesting. The costs are huge - in the billions - but the emission base is large as well. Hence the logic of a carbon tax - calculate the aggregate cost and divide it by total emissions. Predictably, human intuition is weak when a large number is divided by another large number. That’s where this thing called “math” comes in.
Global emissions of CO2 are on the order of 30 billion tons per year. The current best estimate of the likely annual cost of these emissions is on the order of $60 billion - or $2 per ton. But there is a great deal of uncertainty with that number, which is as you would expect from an extraordinarily complex economic calculation. The various studies conclude different numbers with wide zones of confidence.
The principal meta study to date (a study that looked at all the major studies done and tried to form a balanced view of them) concluded that the cost per ton was very likely on the order of several dollars per ton, or less, but to be 80% sure you needed to assume a $20 price tag, and to be 95% sure you need to consider a $60 price tag. (The study also concluded that there was a distinct possibility that the net value was negative, in other words, that the net effect of higher CO2 levels was an economic good.)
Some global warming critics will argue that we should go with a “likely” number of something around $2 until there’s serious evidence that the cost is higher. They have a point, but for my purposes today - talking about cars - I can assume a statistically safer position. Let’s go with the 80% number: thus the aggregate external negative effects of CO2 emissions is at most $20 per ton, or on the order of $600 billion, globally, per year. (To put that number in perspective, that is approximately equivalent to paying for a new Katrina each month.)
So that would be the “carbon tax” we should put in place (globally), and the proceeds should be spent on offsetting the damage (globally).
Now, CO2 emissions per gallon of gasoline is about 20 pounds per gallon. So at $20 per ton, that’s 20 cents per gallon. (See where I’m going?) Prices of gasoline the past ten years have gone from around $1 per gallon to upwards $4. This three dollar increase in price is over a magnitude (!) above our upper limit of the external cost.
The recent statistics on gasoline usage in the United States indicates that it’s only now that consumption has started leveling off - 2007 petroleum consumption was up only 0.2% over 2006, and recently actually declined. Certainly a general slowdown in the economy affects consumption, but one can’t help conclude that consumers tolerated a quadrupling of gasoline prices before noticeably altering their behavior.
Which means that the consumer easily values gasoline well above any reasonable estimate of the external cost.
Which means we should go ahead and put a federal 20 cent tax on gasoline, and pool that money with the countries that are also willing to tax their carbon emissions at the same level (and put in place carbon tariffs against countries outside this group to avoid unfair trade), and put in place an agency that invests this money globally to offset these damages. And then we’re done.
Basically, car usage would be paying for reconstruction around the world, including providing for an infusion of aid to developing countries, offsetting damage from global warming. This is why gasoline powered cars are good for global warming. They provide the needed tax base.
Ah, you might say, this can’t be right. We should go to bio fuels. Or hybrids. Or electric cars. And more public transport. We have to get off “foreign oil”.
This is where the debate gets even messier. I’ve already proved the point that gasoline cars are good for global warming, given what we now know about aggregate consumer pricing sensitivity. But that doesn’t in and of itself prove that there aren’t even better solutions, just that properly taxed gasoline-powered cars are a good solution.
Some of these comments are also quite sensible. Hybrids are indeed a net good - they are a smart way to increase the energy efficiency of traditional cars. So by all means, let’s encourage the transition to hybrids, especially hybrid diesel. Public transportation should obviously be expanded - in particular high-speed trains that can offset commercial aviation.
But electric cars don’t make sense no matter how you do the math. First let’s look at CO2 emissions. The current mix of electric power consumption in the US corresponds to 1.3 lb of CO2 per kWh, and at 0.3 kWh/mi an electric vehicle emits about 0.4 lbs/mi. That’s the same emission as a 50 mpg gasoline powered hybrid. In other words, if you buy a plug-in electric vehicle today, you’re not doing much to reduce greenhouse gases.
What if the emissions associated with power consumption could be reduced? What about solar power and other renewable energy sources? They’re expensive. Residential solar power only makes sense given a combination of artificially low interest rate, high tax subsidy, and artificially high electricity prices. If the current energy industry was allowed to do it’s thing, we’d have residential power at under 10 cents per kWh. Solar power is about four times that. That would be a 30 cents per kWh additional cost, which for an electric vehicle would translate to 9 cents per mile - compared to the carbon cost of gasoline of 0.4 cents per mile.
And of course the energy requirements for switching to electric are enormous. If you do the math, you would need to double the total electricity production in the US. The only option for that is nuclear. Personally, I’m all for it - there’s enough uranium in sea water to last us for thousands of years. Currently nuclear is about 20% of electricity production, so we would need to quintuple that. The political will isn’t there. So it won’t happen.
But even if it did, it wouldn’t matter. The aggregate external carbon costs from a gasoline engine over it’s entire lifetime is around $1000. So any engine changes that increase the price of the car by more than that doesn’t change the equation. And batteries are much more expensive than that, more on the order of $10,000 over the lifetime of the car. In other words, even if you could get zero-emission free electricity for your electric car, it still would not make sense.
What about bio fuels? Well it turns out we don’t know much about their net effects on CO2 emissions - some recent studies show they are a net loss. Sure, they remove our “dependence on foreign oil”, and they get you votes in agrarian districts, but they don’t do much to reduce carbon emissions. They simply either require too much energy to produce to have much effect, or too much acreage to be economical. And they have some nasty side-effects, like dramatically raising the price of food in the world, to the detriment of developing countries, many of whom are net food importers.
What about “foreign oil”? Sure, you can make the argument that it’s of strategic value to reduce revenue to countries that we have various levels of disagreements with. But that is a different discussion. It has little to do with helping the environment or supporting developing countries in building their infrastructure.
So there you have it. US consumers are clearly willing and able to pay a lot more for gasoline than we expected. Which means gasoline can easily carry the cost of the external damage done by CO2 emissions. Which means the gasoline-powered car will be our savior - it can easily pay for any global investments needed to deal with global warming.
[1] Yeah I’m being bloggish. The prez actually reacted to the $4 claim, which had circulated in the press but was based on a local chapter AAA spokesperson comment in Florida. The official AAA comment was that they expected $3.75 gasoline.
Edit (3/7) I just found some good data to kill any arguments of “you save on maintenance”. Consumer Reports did a study of total cost of ownership over 5 years for 300 models of cars. Capital cost, and costs related to it, completely dominate: depreciation, sales tax, insurance, and interest together is 75% (!). Fuel (even at $3) is just 21%, and maintenance & repair is 4%. So there is minimal room to increase the cost of a normal car - you can only go one third above cost of the car, after that it doesn’t matter if fuel and maintenance is zero bucks.
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Posted by Peter S Magnusson
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