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Holiday from Sanity

May 3rd, 2008

I was pretty much stunned into silence by the proposal for a gasoline tax holiday put forward by John McCain and Hillary Clinton (not that it matters but I’m not clear which of them came up with it first – can anyone set me straight on this). I won’t bother repeating all the reasons why this is a terrible idea ( when Tom Friedman has your number, I’d say your number is up).

Just a couple of observations. First, I find it hard to see how anyone serious can support either McCain or Clinton after this.

Second, the fact that the proposal has lasted this long suggests to me that the chance of any serious US action on global warming after the election is not that great. Without the US, we won’t get anything from China and India either, so that means we’re setting course for disaster. Perhaps if Obama wins, he’ll be able to turn this around, but this episode has me very depressed.

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  1. conrad
    May 3rd, 2008 at 07:31 | #1

    “First, I find it hard to see how anyone serious can support either McCain or Clinton after this”

    I don’t suppose anyone is really after the serious vote — its not often the case that it is. I imagine its the very important internal issues that matter, like stopping gay people getting married, stopping too many Mexicans crossing the border, and being the only country that gets to threaten others with obliteration etc. .

  2. gerard
    May 3rd, 2008 at 07:49 | #2

    Obama is being killed by the TV newsmedia. What’s a policy proposal of vital significance compared to a ranting ex-pastor?

  3. Ian Gould
    May 3rd, 2008 at 07:57 | #3

    John, both Clinton ans McCain are smart enough that we can hope the tax holiday idea is just cynical pandering and will be abandoned if either of them are elected.

    I’m sure by next summer the situation will have changed so drastically the tax holiday needs to be abandoned. I doubt the oil price will have fallen so I’m guessing they go with the deteriorating US budget position as the excuse.

  4. John Mashey
    May 3rd, 2008 at 07:58 | #4

    1) McCain said it first (~April 15, i.e., US Federal Income Tax day), followed by Clinton (April 28).

    2) House Speaker Nancy Pelosi says …No….

    So, it’s not going to happen.
    In general, McCain & Clinton are getting whacked in the press.

    Google: mccain clinton gas tax

    It will make you feel a little better.

  5. May 3rd, 2008 at 08:48 | #5

    I wouldn’t read too much into this in terms of Obama’s virtues. I think it was the dynamics of the race (Clinton grabbed it because she needed a populist slam on him to come from behind, and so he set himself against it to draw a contrast) as much as being sharp about the merits of the issue that made him the good guy on this one. His record so far seems to indicate he’s neither more nor less serious about action on climate change than the average Democrat, a level of seriousness best described as “too little too late.”

  6. Steve Hamilton
    May 3rd, 2008 at 09:29 | #6

    OK – a couple of things;

    a.) They only pay 18c of tax per gallon of petrol? So something like 5c per litre???

    and

    b.) If they only pay 5c per litre in tax why on Earth do they need a holiday from it???

    My message to the Americans: if you’re planning on taking your “gas tax holiday” in Australia, think again; you’ll pay at least 8 times as much tax here per litre.

    And people wonder why Americans drive such large vehicles?

    Cheers

  7. Anthony
    May 3rd, 2008 at 10:56 | #7

    Gees, you would think if they wanted to reduce petrol tax they’d just cut it by a small amount for the entire year.

  8. wilful
    May 3rd, 2008 at 11:02 | #8

    Anecdotally I’ve heard it said that Australians are as as a generalisation far more economically literate than other countries (eg the US voting populace). Does anyone have an opinion on this?

  9. Joe
    May 3rd, 2008 at 11:40 | #9

    One of the “Economists for Obama” has a comment What to Do About Gas Prices?. I liked it until I got to the bit about how the American taxpayer should subsidise the motorist even more. (The comment is noted in Mark Thoma’s blog http://economistsview.typepad.com)

  10. John Mashey
    May 3rd, 2008 at 13:38 | #10

    re: #9 Joe
    You might want to reread that, as it is trying to do some plausible things:

    a) Give people a clear signal, but try not to hit them with too big a shock at once. One can argue whether that’s a good idea or not, but it is certainly a common approach. There are many changes of installed base in infrastructure or vehicle fleets that just take time.

    b) In a way that (could be, if desired) revenue-neutral, change the policy to encourage individuals to act differently. People do this now: CA has all sorts of rules like this to encourage efficient energy use, which causes CA to use muych less electricity/capita than most US states, even with spending 20% of it to pump water around.

    Draw a graph with horizontal = gallons (G), and vertical = total tax paid now (T1) and later (T2), via rates R1 and R2, and with vehicle rebate V.

    Now:
    T1 = R1 * G , i.e., a line from (0,0) going up and right.
    later:
    T2 = R2 * G – V, i.e., a steeper line from (0, -V), which crosses:
    T2 – T1 = (R2 – R1) * G – V = 0

    If R2 increases over time, the line gets steeper, encouraging people to either buy more efficient vehicles or drive less. One would expect R2 and V to change over time, and different places might pick them for different policies.

  11. rog
    May 3rd, 2008 at 14:20 | #11

    It’s hard to see how a solar energy will impact on fuel consumption – the US has mandated vehicle fuel efficiency and it is surprising just how efficient their new cars are; Japanese vehicles are more fuel efficient than the European yet fuel in Japan is much cheaper.

  12. Stephen L
    May 3rd, 2008 at 15:43 | #12

    The problem is not that either Clinton or McCain will do this – as noted above they won’t. The problem is that if you keep telling people the answer is to cut fuel taxes you’re going the opposite way from getting them ready to pay more.

    I’d been starting to think “maybe Obama is unelectable and its time to start hoping for Clinton” but this just seals it. On the most important issue facing the planet she’s no better than McCain, better to go with Obama and at least have the remote hope of something better.

  13. Peter Wood
    May 3rd, 2008 at 15:46 | #13

    Re #9: The proposal in ‘Economists View’ would encourage the use of more efficient vehicles, but the problem with it as it stands is that the ‘Gas Price Rebate’ would create a perverse incentive to own a car.

  14. May 3rd, 2008 at 18:29 | #14

    ProfQ, you really should start reading the Peak Oil blogs, where this is old news.

    It should be noted that:

    a) Americans actually pay around 20c/L, whereas Australians pay 38c/L plus GST, compared with the UK where they pay $1.27 AUD per litre. So we are relatively lightly taxed.

    b) John Howard gave Australians a fuel tax holiday in 2001 when he froze the fuel tax excise at 38c/L. That 38c was probably around 50% of the retail price in 2001, whereas today its around 25% of the retail price.

  15. John Mashey
    May 3rd, 2008 at 18:33 | #15

    re: #13
    It really depends on the *actual* numbers, i.e., the devil hangs out in the details, as usual.

    Remember, itencourages lowering

    mileage driven / MPG

    so driving less helps, too.

    On still has to pay for:
    a) The car
    b) Insurance
    c) Maintenance
    d) Parking (maybe)
    e) Gas!

    As noted in an earlier thread, free parking is already a serious perverse incentive.

    The typical structuring of insurance is also – some have proposed bundling insurance with gas, so that if you drive more you pay more, and the cost is visible every time you fill up.

    This is probably neutral for things like City Car Share, which is not a bad solution for urban dwellers who really only need a car every once in a while.

    One would surely want to choose the numbers to *not* incent someone who doesn’t have a car to go out and get one.

    Of course, as Peak Oil really hits, gas taxes will matter less, as the automobile fleet better have turned BEV and PHEV anyway, or a lot of cars will be “stranded assets.” Some places in the US already won’t take SUVs as tradeins, period, although some dealers have managed to do deals with Russia to send them there.

  16. May 3rd, 2008 at 19:10 | #16

    On still has to pay for:
    a) The car
    b) Insurance
    c) Maintenance
    d) Parking (maybe)
    e) Gas!

    Feebates on a) b) and d) would help consumers make the right choice.

  17. swio
    May 3rd, 2008 at 22:15 | #17

    I wouldn’t worry about it too much. Its a desperate move by a relatively desperate candidate that will almost certainly do her more harm than good. This will come back to bite Clinton as it is burns up her credibility. As for McCain, well, a solid to connection to reality has not been a requirement for Republican presidential candidates for almost 30 years.

    The Americans will cut carbon emmissions. As soon as international carbon markets start getting big Wall St will figure out it can make a fortune from carbon emmissions and it won’t matter what the politicians or the public thinks. If there are billions of dollars to be made then Washington lobbyists can quickly get the US Congress to do just about anything. Of course that means that they will the design the emissions trading scheme so that the money goes to the people who own the government rather than to the government itself but that is a problem for the American people. It will no doubt be a scheme that has people outside the US shaking their heads in disbelief, but they will have one. There is no way that US business interests will miss the chance to do what essentially amounts to privatising taxation.

  18. Terry
    May 3rd, 2008 at 23:47 | #18

    I’m in the US at present and can provide some background on this.

    It was John McCain’s idea first. One of the problems, which was raised by Obama, is that the Federal gas tax in the US is linked to spending on highways. As a result, the $10bn foregone to tax revenue would be $10bn less spent on roads.

    When Hilary Clinton adopted the Summer gas tax holiday idea, she said that it would be paid for by a windfall profits tax on oil companies.

    At any rate, no-one can do anything about it for this summer, so Hilary is basically angling for the white conservative pick-up truck/SUV owning vote in North Carolina and (especially) Indiana – primaries happening on Tuesday. At best, according to Obama’s team, it would save US motorists 30c a day on gas, or $25 over the summer.

    Opinion polling in CNN suggests that 89% of people think its a political stunt and a bad idea. One Democrat super-delegate nominated it as his reason for switching sides from Clinton to Obama.

    On the credibility issue in the campaign, John McCain actually comes out pretty well at present. Well and truly at the bottom on the credibility scale is Hilary Clinton, and that is unlikely to change as the Democrat race gets more dirty and desperate.

  19. Donald Oats
    May 4th, 2008 at 00:24 | #19

    I suspect it is an idea that will quietly fade away…it has done its bit to interest a few punters.

    On a slight tangent, I’ve never really thought much of fuel excise, since it links the government’s revenue to something that has a cost which is largely outside of the system (pollution, health effects, global warming, etc). IMO its presence is problematic because while it may be in the public interest for government to discourage our consumption of fuel (for example), it leaves the government with the problem of how to make up the revenue *and* still get re-elected. Simply jacking up the excise would reduce demand for the short while until the next election :-)

  20. pablo
    May 4th, 2008 at 00:29 | #20

    Obama should go on the front foot with this absurdity by pointing out what a Washington insider stunt it really is and that he will end it. He can rightly assume that most of the voting public will quietly agree with him that it makes no economic sense and that the tax foregone if adopted is money not spent on roads. The collapse of the twin cities bridge over the Mississippi at St Paul last year is all he needs to point to for confirmation. I hope he wins big.

  21. John Mashey
    May 4th, 2008 at 02:25 | #21

    re: #16 carbonsink
    Yes, thanks for the URL.

    There are more, of course:
    a) Toll roads.

    b)High occupancy-vehicle lanes exist in a wide profusion of types, although everybody bans inflatable dummies. It is certain that around here, the handling of HOV lanes impelled many purchases of hybrids, i.e., sometimes non-financial incentives are more effective.

    c) Parking – variable pricing – some cities are very interested in that, and for what it’s worth, parking is actually a big revenue source for some cities. (~$120M/year for San Francisco for metered spots, ~500M/year for NYC.)

  22. Terry
    May 4th, 2008 at 07:37 | #22

    Pablo, I can say that Barack Obama has gone on the front foot in saying that the gas tax holiday is a stunt and a sham. We’ll know on Tuesday whether this approach gets traction in North Carolina and Indiana.
    What people in Australia probably need to be aware of is that Hilary Clinton has abandoned any pretence of being a political progressive. She has turned hard right and is basically seeking to attract Republican voters to her campaign against Obama. If she ultimately gets the Democratic nomination, it is hard to work out how grassroots Democrats would find much enthusiasm for someone who is increasingly running to the right of John McCain.

  23. gordon
    May 4th, 2008 at 11:34 | #23

    There is little point in raising the price of petrol as an emissions-control measure unless there is a more carbon-efficient and affordable alternative available to consumers. The idea of rebating some tax to lower-income consumers implicitly abandons the prospect of using a price signal to reduce their emissions, and is a desperate expedient forced on marketeers by the absence of alternatives.

    Commenter Bakho has a nice roundup of how significant improvements in carbon efficiency in the US are the result of regulation, not prices, here at Angry Bear.

  24. jquiggin
    May 4th, 2008 at 17:11 | #24

    Gordon, on your second para, it’s hard to see how it could be otherwise given that prices were falling until recently, assisted by ludicrously low tax rates. When prices were rising from the early 70s to the mid-80s energy efficiency improved drastically.

    It’s also incorrect that rebating tax to low-income households abandons the price signal, unless the rebate is directly related to consumption.

  25. gordon
    May 4th, 2008 at 17:54 | #25

    Prof. Quiggin, isn’t that the whole meaning of a rebate – that the extra cost of, say, petrol arising from a tax or emissions trading scheme is rebated to low-income housholds? And the extra cost incurred depends on consumption.

    From the early 70s to the mid-80s in the US regulations were also being imposed and the economy was becoming more service-based. To estimate the extent to which higher prices led to increased carbon efficiency it’s necessary to eliminate these effects. I don’t know whether anybody has done such a complicated estimate.

  26. John Mashey
    May 4th, 2008 at 17:59 | #26

    1) Efficiency regulations are great, and Bakho mentions many US ones for appliances, for example.

    Where did those improvements come from? Nany contributed, but it’s hard to think of any one person who did more than Arthur Rosenfeld of the Lawrence Berkeley Laboratory.

    In his 1999 autobiography, starting at page 13 of the PDF (labeled p45 in the journal, the section “Going after Appliances”.

    2) Efficiency rules for cars can raise mileage, but given that one has some car 9and fleets don’t turn over that fast), tax mechanisms can at least encourage less driving, without simply forbidding people to have cars, not politically easy.

    Refrigerators:
    1975: US government required energy labels
    1977: CA sets standards, tightened in 1980,1987
    1990,1993,2001: Federal standards.

    LBNL was where high-frequency ballasts were developed for CFLs.

    People may know CA is suing the EPA to let us set stricter auto CO2 emissions rules (well, lower CO2). We’re also suing the DOE to raise minimum efficiencies for electrical transformers. CA sues the US often, especially lately. Sigh.

    3) In any case, “low-income households” is not very precise. Car ownership is heavily correlated with income, and realistically, given Peak Oil [and more expensive water in some places, and more expensive fertilizer, and higher petroleum costs for farmers and food transport], lower-income (say lowest quintile) are going to get mostly priced out of owning cars.

    UK example (see second figure) shows a profile of ownership, with 41% of lowest quintile having car(s). I’d guess car ownership rates to be higher in US, Australia, or Canada, but I expect that the general idea is the same. As costs of necessities rise, the fraction of car owners in the lower quintiles will surely drop.

    The definition of the proposed rebate was explicitly not related to consumption.

  27. gordon
    May 4th, 2008 at 20:33 | #27

    John Mashey: “lower-income (say lowest quintile) are going to get mostly priced out of owning cars”. What do you say to somebody who uses his/her car to get to work, the children to school & other places and who has no more carbon-efficient alternative? Do you perhaps predict death by apoplexy as he watches his richer neighbour swish by in the latest 4-wheel-drive?

    I re-read the piece by J.Gelbach on Economist’s View. You are right, the rebate is just a fixed sum of money based on average National US mileages and petrol consumption per car. Provision of such a rebate does, however, remove any price signal from any driver whose actual mileage and miles-per-gallon outcomes (ie. expenditure on petrol) are close to the National averages. If his/her expenditure on petrol is higher, he/she will be penalised and if expenditure is lower, the rebate will actually be an incentive to drive more.

    That means unless the freqency curve of petrol expenditure is very skewed, for every person who gets a price signal to reduce driving, somebody else will get a price signal to increase it. Net result: zero.

    So though my original argument was based on a misunderstanding of the rebate, Gelbach’s actual proposal looks as though it’s not capable of giving an effective price signal either.

  28. observa
    May 4th, 2008 at 23:19 | #28

    Greg Mankiw has a number of posts on the proposed gas tax holiday, the players and general response to it, but also points to the NYT article that analyses the current US market reponse to rising petrol prices, gas tax holiday promises or no-

    ‘About one in five vehicles sold in the U.S. in April was a compact or subcompact car, while sales of pickups and S.U.V.’s fell sharply’

  29. John Mashey
    May 5th, 2008 at 04:20 | #29

    re: #27 Gordon

    I don’t understand your juxtaposition of:
    a) Worry about lower-income folks who are car-dependent.
    b) Dislike a policy explicitly geared to give a little cushion to such people.

    1) At least in UK, a majority of lowest-quintile folks already do not have cars. In 20003, in israel, see Figure 2, car ownership by decile is:
    1 20%
    2 32%
    3 35%
    4 45%
    I.e., in the lowest 40% of the population, only 33% have cars.

    2) “What do you say…”
    What I say to them is driven by Peak Oil & Gas. While there are always jiggles, the easiest way to say this is:

    The world’s yearly oil production is at or very near the maximum we’ll ever see, and in the next decade (or two, at best), oil production will drop, no matter how high the demand. Look at the predictions inside 95% confidence intervals (red dashed lines) for a good source.

    a) I spent a lot of time with petroleum geologists in the 1990s, worldwide, including Dhahran (Aramco, Saudi Arabia).

    b A good friend, we’ve known for decades is an ex-chair of Shell, whose interview is worth reading. Another friend is an ex-Vice-Chairman of Chevron, we spent half an hour discussing this at dinner a few weeks ago, and he says the same thing.

    If you want to read books on this, I recommend David Strahan’s “The Last Oil Shock”, Kenneth Deffeyes’ “Beyond Oil – The View from Hubbert’s Peak”, and Matt Simmons’ “Twilight in the Desert”. Strahan’s book is an especially good place to start.

    So, if somebody tells me “I’m dependent on a car, but I can barely afford the gas right now”, I’d have to tell them a cruel truth:

    - gas is *never* going to get substantially cheaper and stay there for any length of time.
    - you’ve been living in the first half of the Petroleum Age, with cheap oil, and increasing supply trends for a century.
    - that’s over, right now,and for oil, it’s downhill from here.

    SO, I’d tell them:
    - do everything you can (in the short term) to reduce your use of fuel. Keep your tires pumped, drive at lower speeds, etc.
    - if you can use public transport, do so as much a you can, and agitate for better transport.
    - if you’re going to buy another car, think *really hard* about your choice.
    - if you can, restructure (where you live, where you work) to be less impacted by gas prices.
    - I’m sorry, but if you are lower-income, over time increasing gas costs are going to price you out of heavy car usage. (In CA, “drive until you qualify” has been a motto for a long time, and some people commute 2 hours each way. That’s going to disappear.)
    - I’m sorry, but if you own an SUV no one will take on a tradein, and you bought a house far from anything (in CA, called “drive until you qualify”) you own “stranded assets”, and life is going to get very tough.
    - Maybe, sometime when electric vehicles & PHEVs become widespread, you may be able to eventually afford one, but not for a while, and in any case, they will change workable geographical patterns.

    What would you tell them: “Don’t worry, life will be business-as-usual, and if gas gets expensive, we’ll subsidize it for everybody? (This is, after all, what Saudi Arabia, Iran, Venezuela do.)

    3) The original proposal was revenue-neutral, but I think you might want to investigate price signals more. Suppose an average driver(in US) uses 600 gallons of gas year, @ $4/gallon (soon).

    Suppose:
    a) Increase tax by $1, give $600 to each owner, $5 gas.
    b) Increase tax by $2, give $1200 to each owner, $6 gas.
    c) Increase tax by $6, give $2400 to each owner, $10 gas.

    Your belief seems to be that there’s no price signal difference among those. The last I heard, money was fungible, and I suspect people receiving a $2400 check might prefer other uses. I’m no economist, but I suspect that’s a serious price signal … well, it seems to work in Europe, but maybe Oz and US are different.

  30. Father Mercy
    May 5th, 2008 at 08:22 | #30

    How sad to note that petrol sniffing is now rampant in the USA with political hopefuls enthusiastically embracing it. Don’t they know that long term sniffing can cause a person to lose the ability to think clearly?

  31. jquiggin
    May 5th, 2008 at 19:55 | #31

    Gordon at #27. The fact that the payments cancel out for an average driver doesn’t affect the price signal at all. The average driver can still save the amount of the tax by driving less, and must pay the amount of the tax if they drive more. This is why the concept of marginal cost is so powerful.

  32. observa
    May 6th, 2008 at 00:46 | #32

    An associated side issue with the rising cost of fuel and ameliorating its impact on low income earners may well be to tradeoff some immediate road safety for the occupants for their longer term environmental wellbeing. We may need to cut the weight of cars ruthlessly with a bare bones car. Accessories like aircons, heaters, cigarette lighters, radio/music players could easily be sacrificed but airbags, ABS, EBS, seat belts and the stricter child seat requirements might have to go too in the medium term. Before you have kittens about the latter suggestion, let me explain. Now MrsO drives a 4 door auto (Continuously Variable Transmission) Mitsubishi Colt rated at a miserly 5.6L/100km. That’s 0.2L/100km better rated than the manual, because the CVT does a better job of matching engine power to load than any driver can manually. Now this car is really a small clone of a people mover like the Toyota Tarago and can easily carry 5 adults, albeit boot space is limited. One snag if its mum and dad in the front and 3 kids under 7 in the back, because the kids all need child seats and or baby capsules, which many small cars would struggle to accommodate. I know because that’s exactly the nephew and his family’s problem. We may have to relax our attitudes to child restraints here, perhaps dropping the town speed limit to say 40km/hr for their safety as well as economy. Their luggage like pushers, prams, etc could also go on a roof rack. A small petrol/electric stepthru or scooter might have to be the second get to work vehicle for them too. No reason why we can’t emulate many of our Asian neighbours in this regard, if we’re really serious about emissions.

  33. observa
    May 6th, 2008 at 00:57 | #33

    Actually the front wheel drive Colt could carry 6 adults (probably not Big Loser contestants) if the front buckets became a bench seat, as the auto change is a column shift and there’s no prop shaft tunnel problems like RWDs have.

  34. John Mashey
    May 6th, 2008 at 01:46 | #34

    re: 32, 33 observa
    Although it’s still not quite what I’d wish for,take a look at the Toyota 1/X concept car. It’s still a parallel hybrid, i.e., includes a mechanical drivetrain, but sooner or later, we get to serial hybrids, with electric drive only, i.e., like diesel-electric trains.

    Then there 2-seaters of the SMART-car ilk, of which I’ve seen electric versions around. I wanted to test one in Palo Alto, but there were too many people ahead of me.

    But indeed, in many cases, a second vehicle can be something yet smaller.

  35. Ian Gould
    May 6th, 2008 at 08:42 | #35

    It’s obviously not for everybody but electric bikes seem to be catching on all over the world.

    The attraction in the US seems, in part, to be that they’re cheap enough that you can buy one for the weekday commute and still keep your car for the week-ends.

    New York: http://wcbstv.com/seenon/e.zee.bikes.2.713917.html

    Austin, Texas:

    http://www.keyetv.com/content/news/topnews/story.aspx?content_id=404a0265-78e3-4789-bdcc-60dddf5a901e

    China:

    http://www.evworld.com/news.cfm?newsid=18091&url=http://www.bike-eu.com/news/2817/shanghai-show-sets-e-bikes-in-spotlights.html

  36. observa
    May 6th, 2008 at 10:06 | #36

    John, it’s axiomatic that Toyota’s 1/X concept car is the same shape as the Colt and Tarago. Essentially a high roofed, wedged box on wheels. The FWD or east-west motor configuration allows a short bonnet and it needs to be a wedge for wind resistance. They’ve also learned to lift the roof height to sit you more upright like a dining chair. Consequently a 6’4″ bloke like me can easily be accommodated, with a minor tradeoff in wind resistance (that wedge shape plus the fact most driving is urban and wind resistance at urban speeds is negligible) Once you’ve broken the air resistance you may as well have a square backed hatchback for greater rear storage capacity too. Recall again the lack of prop shaft tunnel for extra passenger foot comfort and the FWD, high roofed, wedged box is it for the future now. Not so sure about that glass roof for Oz though.

  37. gordon
    May 6th, 2008 at 12:33 | #37

    Oh, dear, we are all at cross-purposes with the price signal business. Let’s abandon econospeak for a moment and just think about the population of travellers and about emissions. If the aim is to reduce total travel-related emissions from this population, raising the price of petrol may have some effect, but at the cost of reduced well-being because there are no available, affordable and carbon-efficient alternatives for many (most?) of these people. A Prius is too expensive for many, public transport is not always available or useful (you can’t carry the weekly shopping home on the bus if you are shopping for more than 1 or 2 people at the most), and many destinations are quite distant, especially for outer-suburban or rural people, so that simply reducing travel isn’t always an option.

    So to alleviate the pain, a rebate is proposed, eg. Galbach’s, calculated on the basis of average petrol expenditures. This may indeed alleviate the pain for some, but at the cost of vitiating the original objective viz. reducing emissions. We are talking about total emissions from the travelling population here, remember. Let’s look at people who have high petrol expenditures first. That means above average. Such people will not be fully compensated for increased petrol prices by the rebate. They will have an incentive to reduce petrol expenditure. Some of them will be able to do so but others, for reasons like those given above, won’t; they will just have to pay more. There will therefore be a net reduction in emissions from these people because of the sub-group of “reducers�. Now think about the people who have below-average petrol expenditure. They receive the same rebate as the others, but the rebate is actually higher than their expenditure on petrol. These people therefore have an incentive to increase their petrol expenditure. Some of them won’t; they’ll buy a plasma TV with it instead. But some of them will. There will therefore be a net increase in emissions from this group.

    The point I was trying to make in previous comments (#23 and #27) was that these two effects (reduced and increased expenditure on petrol) will roughly cancel out, leaving no net reduction in emissions from the travelling population. There will also be a cost to those who have higher than average petrol consumption and who are unable to switch to other modes of transport or reduce travel, thus reducing their welfare. Overall result: no reduction in emissions but reduced welfare for some.

  38. Peter Wood
    May 6th, 2008 at 13:08 | #38

    Gordon, if people with below-average petrol expenditure reduce their petrol usage more, the rebate will be the same, their petrol expenditure will be less and they will have more cash in their pocket. They will have just as much incentive to reduce their usage as the people with above average petrol expenditure. I believe that this is what John Quiggin meant when talking about marginal cost in post #31.

    In post #13 I criticised Gelbach’s proposal for creating a perverse incentive to own a car. There are various incentives and disincentives to own a car at present, but creating more of an incentive will lead to more emissions if other things remained the same. Because only a small amount of households in most developed countries do not own a car, so extending the rebate to all households will not reduce the total value of the rebate much.

  39. Joseph Clark
    May 6th, 2008 at 15:17 | #39

    Here’s a thought: A fair whack of US petrol taxes go to making/improving roads. People drive more on more/better roads. Given that petrol is fairly price inelastic increasing the tax will, in the long run, increase the amount of driving. Maybe.

  40. gordon
    May 6th, 2008 at 18:13 | #40

    Peter Wood: “If people with below-average petrol expenditure reduce their petrol usage more, the rebate will be the same, their petrol expenditure will be less and they will have more cash in their pocket�.

    I’m happy to believe that some of them would be really glad of the opportunity to buy something else with the combination of rebate and petrol savings (like my rather flippant plasma TV example), but it seems to me that some of them would just drive more, too. Are you saying that none of them would drive more?

  41. jquiggin
    May 6th, 2008 at 18:59 | #41

    #38 The implicit parameter values here are not plausible. Moreover, road improvements that reduce congestion will probably reduce not increase fuel use.

    #39 There’s an income effect, compared to the case with a tax and no rebate, but it will be tiny compared to the effect of the price incentive

  42. jquiggin
    May 6th, 2008 at 19:05 | #42

    “Let’s abandon econospeak for a moment and just think about the population of travellers and about emissions …”

    Gordon, what you are saying here is “let’s abandon economics in making judgements about the impact of economic policy, and substitute my own amateur attempts at reasoning on these topics”. It’s unsurprising that, from this starting point, you are getting things persistently wrong.

    There’s really not a lot of point in reading an economist’s blog if you are going to dispute basic economics from a starting point (as far as I can see) of complete ignorance. I’m happy to try and explain the issues, but I find it frustrating when commenters refuse to listen.

  43. gordon
    May 6th, 2008 at 20:10 | #43

    I don’t appreciate being told to leave my own comments threads, and I haven’t appreciated much from you lately, Gordon. Please either improve your attitude or find another blog to comment on. In the meantime, you’re on automoderation.

  44. John Mashey
    May 6th, 2008 at 23:57 | #44

    jquiggin:

    Are you familiar with the Dunning-Kruger Effect? It perhaps explains some comments here.

  45. observa
    May 7th, 2008 at 10:32 | #45

    Condolences John Q and I can see why you’re getting a wee bit depressed (she might win)
    http://blogs.abcnews.com/politicalradar/2008/05/im-not-going-to.html
    (from Greg Mankiw’s site)

  46. observa
    May 7th, 2008 at 10:41 | #46

    “Are you familiar with the Dunning-Kruger Effect?”
    I find it a fairly difficult concept to get my head around. Where does that leave me? ;)

  47. jquiggin
    May 7th, 2008 at 11:17 | #47

    John M, I think Socrates may have beaten them to this discovery, but it’s good to have empirical support.

  48. May 7th, 2008 at 11:40 | #48

    observa @ #32:

    The Colt is certainly an excellent choice, and importantly, an affordable choice. IMO, this is the car of the (near) future, not overpriced, overly complex hybrids. Ultra-efficient diesels such as the Hyundai i30 (that uses 20% less fuel than the Colt) will also become more popular as long as the price premium for diesel stays in the 10-20% range.

    John Mashey:

    I know you’re a fan of David Strahan. He has a cracker of a piece on the future of aviation on his website:
    How do you solve a problem like jet fuel?

    …aviation is uniquely exposed to peak oil. Whereas ground transport could in theory be completely electrified and run on renewable power, for jet engines there is no alternative to energy dense liquid fuels. And while soaring crude prices are already hammering airline finances at $110 per barrel, analysts Goldman Sachs now forecast potential spikes of $150-$200…

    Aviation really is in a pickle. The days of the sub-$100 flight anywhere on the east coast are surely limited. There’s no realistic alternative to jet fuel and no alternative propulsion technology on the horizon (don’t get me started on hydrogen planes!). In fact, the best option at the moment seems to be going back to propellor — they’re more efficient, they run on a wider range of fuels, and they’re not that slow.

    High Gas Prices Aid Prop-Plane Comeback

  49. observa
    May 7th, 2008 at 15:10 | #49

    “Ultra-efficient diesels such as the Hyundai i30 (that uses 20% less fuel than the Colt)..”
    Hmmm.. Not so sure about that Carbonsink. You’re right about the 20% more fuel efficient for the i30 over the Colt if you’re comparing ADR81/01 figures for the manual versions (4.7L/100km vs 5.8) but the 1.5L petrol Colt at 5.6L/100km with CVT auto beats the 1.6L diesel turbo in auto attire at 6.0L/100km. Diesel is messy too if you’ve ever watched blowback at the pump. Then there’s the RRP difference of $16990 cf $23490 and the higher price of diesel. Hyundai will have to do better or go and talk to Mitsi’s engineers about CVT transmissions for mine. Mitsi have a lot of faith in their product with an overall 5yr/100000km total waranty and an added 10yr/160000 ‘power train’ (ie engine and transmission) warranty, the latter only for the original owner.

  50. observa
    May 7th, 2008 at 15:15 | #50

    I should have added both of them beat a Prius hands down though.

  51. John Mashey
    May 7th, 2008 at 16:19 | #51

    re: #48 carbonsink

    Yes, good article by David.

    Personal opinion: in the long term, it’s hard to see how aviation doesn’t shrink quite a bit, with whatever is left using biofuels from algae, jatropha, etc. The biggest hope would be algae with some bioengineering wizardry that algae people claim is coming, but which I cannot really evaluate yet. Algae is nontrivial, for sure. If people make it work (I have friends who are trying), then places with sun and desert can be big fuel producers.

    Consider that UK wants to do a major expansion of Heathrow, tearing down hundreds of houses at the North edge, to build Runway 3, hoping to be ready around 2020.

    The latest UK DfT document I could find, published 2004, says:

    “A2.12 Aviation fuel prices
    The price of oil is assumed to stabilise around its current value of $25 a barrel, although in the longer term it may decline. As fuel is approximately 10% of costs even a 50% change in the price of oil has a modest effect on air fares but nevertheless a significant one compared to other drivers.”

    Since this is an econ blog, people may want to look up definitions of “stranded assets”.

    I don’t know enough to know whether this particular airport expansion is a good investment or not. {After all, London has several airports. Maybe as air travel peaks, they’re better off centralizing at Heathrow and shutting the others, although the dynamics of cities with multiple big airports can be tricky.]

    I would suggest that *any* long-term investments in public infrastructure consider Peak Oil and Sea Level Rise effects in its lifetime.

    If you need petroleum to build something long-lived, do it soon, while oil is still cheap.

    At least Heathrow only need worry about one of those. I’d think twice about major long-term expansions of airports on coasts near sea-level. [In SF, we have two ... and I think you have one or two in Oz.] Maybe the approach is to use dikes until air traffic falls enough to not need the airport any more.

  52. May 7th, 2008 at 16:30 | #52

    Lets just say I’m a little dubious about any auto (CVT or not) beating a manual, I don’t care what the official fuel economy figures say.

    Lets do an apples-to-apples comparison. The Colt is available with both petrol and diesel engines in the UK. Here are the economy figures for same capacity engine with same transmission:
    1.5L 5spd man petrol: 45.6 mpg or 6.2L/100km
    1.5L 5spd man diesel: 58.9 mpg or 4.8L/100km

    Note that the diesel model is actually 500 pounds cheaper in the UK.

    Besides, what you or I think is irrelevant. In the most advanced car market in the world, where fuel prices are double what they are here and triple what they are in the US, the Majority Of European Cars Now Run On Diesel.

    The market has spoken.

  53. May 7th, 2008 at 16:31 | #53

    Lets just say I’m a little dubious about any auto (CVT or not) beating a manual, I don’t care what the official fuel economy figures say.

    Lets do an apples-to-apples comparison. The Colt is available with both petrol and diesel engines in the UK. Here are the economy figures for same capacity engine with same transmission:

    1.5L 5spd man petrol: 45.6 mpg or 6.2L/100km
    1.5L 5spd man diesel: 58.9 mpg or 4.8L/100km

    (I’d post links but PrQ’s blog won’t let me)

    Note that the diesel model is actually 500 pounds cheaper in the UK.

    Besides, what you or I think is irrelevant. In the most advanced car market in the world, where fuel prices are double what they are here and triple what they are in the US, the Majority Of European Cars Now Run On Diesel.

    The market has spoken.

  54. May 7th, 2008 at 16:36 | #54

    observa:

    The links showing Mitsubishi Colt economy figures in the UK are here:
    UK Mitsubishi Colt Models

    I compared the “1.5 CZ3 5dr” (petrol) with the “1.5 DI-D CZ2 5dr” (diesel).

  55. May 7th, 2008 at 16:40 | #55

    The price of oil is assumed to stabilise around its current value of $25 a barrel, although in the longer term it may decline

    That is frickin’ hilarious! No doubt a highly qualified economist, who is very dismissive of peak oil, came up with that forecast.

  56. Ian Gould
    May 7th, 2008 at 17:42 | #56

    There are a few minor things aviation can do – a surprisingly large percentage of aviation fuel is used taxiing around on the ground and running the electrical generation units for air-conditioning and power while on the ground.

    Battery-powered tractors could probably tow aircraft to reduce the amount of taxiing needed and the aircraft could probably be hooked into ground-based power grids somehow for at least much of the time they spend on the ground.

    I’ve also wondered if you might see civilian aircraft using some version of the catapults used for take-off assists for naval aircraft.

  57. May 7th, 2008 at 20:34 | #57

    Ian Gould #55:

    Sure those things will help at the margin, as will incremental improvements in efficiency, but with oil potentially doubling or tripling again in the next few years, aviation needs more than incremental gains.

    According to this propeller-driven typically consume a quarter to a third less fuel than equivalent jets. That’s a big gain, and there’s probably more to come if engineers focus on improving propellor plane efficiency.

    In addition, propellor planes fly lower and slower than jets emitting fewer GHGs (such as water vapour and NOx) into the upper atmosphere.

  58. observa
    May 8th, 2008 at 12:13 | #58

    “I compared the “1.5 CZ3 5drâ€? (petrol) with the “1.5 DI-D CZ2 5drâ€? (diesel).”

    Don’t know about UK Colts carbonsink, but I’m quoting Aus ADR fuel cosumption figures for Oz distributed cars as described under the specs for each car at the Redbook site. RRPs too. Redbook is the best, one stop, comprehensive car guide going around and as well you can check depreciation prices for various cars over the years as well, to see that owning a Prius doesn’t stack up against standard fuel misers. Well not unless you’re a cabbie maybe, or a greenie public servant getting the Govt to indulge you. Actually if you want to compare true running costs, the NRMA have a pretty comprehensive weekly running cost, data list for comparisons too.

  59. observa
    May 8th, 2008 at 13:37 | #59

    If you want to compare weekly running costs of vehicles (based on 15,000km/yr and new to 5 years old, whole of life averaging) go here and have a play http://www.mynrma.com.au/cps/rde/xchg/mynrma/hs.xsl/operating_costs_full.htm
    The cheapest is about $120/week for a bare bones 3door, manual, Hyundai Getz. Whack that up to 5 door auto with all the power and safety options and the Colt and Getz are inseparable at $139/wk, jumping to $199 for the base Prius, $233 for an LPG auto Falcon and a whopping $350 for a V8 auto Landcruiser. Take your pick with rising petrol prices, but remember those $4500, 5 year warranty, Prius replacement batteries and these costs are based on the first 5 years of ownership as being whole of life. That might affect your choice if you can only stretch the budget to a 5 year old second hand model.

    “Lets just say I’m a little dubious about any auto (CVT or not) beating a manual, I don’t care what the official fuel economy figures say.”
    I didn’t do the testing or supply the comparison figures, but it would largely be the ability for the CVT to allow the engine to run at its most efficient output revs all the time. Presumably that’s where the Prius gets a lot of its economy from too and when you consider the characteristics of diesel engines, a CVT may do better than for petrol. At any rate CVTs are growing in use, even in large cars and trucks now, so the technology must have grown quickly.

  60. observa
  61. observa
    May 8th, 2008 at 14:22 | #61

    Even uni students can build them carbonsink, providing they’ve been to the right lectures http://www.chemassociates.com/products/findett/Santotrac_USU_Mini_Baja.pdf

  62. May 8th, 2008 at 18:38 | #62

    I’m sure CVTs are wonderful and probably a lot better than conventional autos, but this is like the diesel vs hybrid argument, its not an either/or proposition. The best solution is not diesel –OR– hybrid, its a diesel-hybrid.

    Similarly, a diesel engine hooked up to a CVT is going to return better economy than a petrol CVT, because the diesel cycle is more efficient than the Otto cycle

    However, a diesel engine will be more efficient overall since it will have the ability to operate at higher compression ratios. If a petrol engine was to have the same compression ratio, then knocking (self-ignition) would occur and this would severely reduce the efficiency, whereas in a diesel engine, the self ignition is the desired behavior. … And the ideal Otto cycle formula stated above does not include throttling losses, which do not apply to diesel engines.

    This advantage in thermal efficiency is not something that’s going to change.

  63. observa
    May 8th, 2008 at 21:15 | #63

    Agree about the diesel hybrid tradeoff carbonsink and ultimately it may be small CVT, FWD, diesel, wedged boxes in a few years time. I’ll be ready to chop the Colt shopping trolley in about 3 years time as it’s one year old now and the missus racks up about 20,000km/yr. I find trading them at 80k with a years factory warranty left works out fairly well. Not so Aussie sixes because of the high fronr end depreciation so I drive the utes into the ground on LPG. Interesting though, how the push for economy has driven an old technology in CVT to the forefront. The Colt is like driving an electric job. Great with a column shift too like the good old days as you can slide across and get out the kerb side easily on a busy road.

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