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The case for fuel efficiency standards

August 18th, 2014

Thanks to Joe Hockey’s masterful salesmanship, the idea of restoring indexation of fuel exercise, let alone imposing a carbon price, is dead for the foreseeable future. This is one case where, despite my economistic prejudice in favor of price-based measures, I think regulation is the way to go. Australia is one of the few developed countries that does not impose fuel efficiency standards on motor vehicles. Now that the Obama Administration has greatly tightened US standards, we are set to have the most petrol-guzzling car fleet in the entire world.

The Climate Change Authority, of which I’m a board member, recently looked into the issue and concluded that, over the lifetime of a vehicle, fuel efficiency standards matching those of the US would save motorists thousands of dollars. Unfortunately, it’s difficult to factor this saving into the initial sale price, given that it may not be reflected in resale values. Still, this would be one of the easiest and cheapest ways of reducing CO2 emissions.

In the long run, given the demonstrated feasibility of electric vehicles, it should be possible to decarbonize most motor transport at a very modest cost. Once the infrastructure was set up properly, this would also solve a large part of the timing problem created by the fact that peak solar supply is in the middle of the day, when household demand is low, but when millions of cars are parked, and could be recharged.

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  1. Collin Street
    August 18th, 2014 at 20:11 | #1

    Now that the Obama Administration has greatly tightened US standards, we are set to have the most petrol-guzzling car fleet in the entire world.

    How wise of Mr Hockey to destroy our car industry to save us from its environmental impact.

  2. Watkin Tench
    August 18th, 2014 at 21:58 | #2

    the idea of restoring indexation of fuel exercise

    should be:

    the idea of restoring indexation of fuel excise

    Otherwise I’m in agreement.

  3. NathanA
    August 18th, 2014 at 22:04 | #3

    We only just got rid of a scheme that gave people tax benefits to drive round and round in circles. There’s more than just fuel efficiency standards, car registration costs should be based on carbon emissions and the newer the car, the more you should pay. I would be interested to see a comparison between taxes based on registration charges and fuel prices to see which of these measures are more effective in reducing carbon dioxide emissions.

  4. August 18th, 2014 at 22:37 | #4

    I agree. Yes it makes the initial cost of a car higher, which is tough, but in the long run it saves money. And it reduces emissions. Do it.

  5. Colin
    August 18th, 2014 at 22:55 | #5

    The fuel excise isn’t just about reducing fuel use, it’s also about reducing driving, which gobbles an excessive amount of urban space, and has multiple negative externalities; danger, pollution, obesity, social dislocation etc.

  6. James Wimberley
    August 19th, 2014 at 00:38 | #6

    @Watkin Tench
    Linguists call this a cupertino, a typo generated by an officious spellchecker program.

  7. James Wimberley
    August 19th, 2014 at 00:48 | #7

    JQ: “In the long run, given the demonstrated feasibility of electric vehicles, it should be possible to decarbonize most motor transport at a very modest cost.”

    That is only true if you assume, no doubt correctly, that Australia will be a free rider on the efforts by other jurisdictions (California, France, Japan, China, Norway ..) to get evs and especially ev batteries quickly down the learning curve to prices where subsidies become unnecessary. The experience of wind and solar suggests that the total one-off costs of this are quite high. In solar, basically Germany has paid; in onshore wind, the USA, Germany, and Denmark; in offshore wind, the UK is paying now. Australia was pulling its weight on geothermal and CSP but this will no doubt stop.

  8. yuri
    August 19th, 2014 at 02:01 | #8

    Anyone here put their money into Shai Agassi’s local disaster Better Place? Even Evan Thornley couldn’t make the brilliant idea of swappable batteries work, in Australia or world wide. There’s some really interesting micro-economics as well as busiess school case studies to be done on this one.

  9. Terry
    August 19th, 2014 at 06:31 | #9

    Labor will do a deal with the government to enable the indexation of fuel excise to pass through the Senate. Now that they have the real prospect of returning to office in two years time, all that tax revenue fro a decision of the previous government is too attractive to pass up.

    Also, they would upstage the Greens among urban progressives in seats like Grayndler and Melbourne in terms of environmental credentials, thereby putting more pressure on Christine Milne’s leadership. I would not underestimate the degree to which Labor wants Milne out, and someone who they can work with heading the Greens (not Hanson-Young).

  10. Fran Barlow
    August 19th, 2014 at 07:40 | #10

    @james

    A colleague of Hubby’s sent her students off to the art gallery with a worksheet, which in part asked the students to describe the work of ‘crested omen’. This perplexed everyone until it became clear that the crested omen stood for ‘creative women’ in the world of autocorrect.
    ;-)

  11. Fran Barlow
    August 19th, 2014 at 07:43 | #11

    @Terry

    I very much doubt they will be doing that. They’d be helping out Hockey (and us) big time. In the current context, there’s no sympathy within our party for that measure at all.

  12. Fran Barlow
    August 19th, 2014 at 07:52 | #12

    And of course professor it’s also the case that those plugged in vehicles, plus the reserve batteries for swapping, if we went that way, could be used to manage the late afternoon peak in summer even better, since much of this capacity remains in place until twilight.

    Indeed, when they get home, if they plug in there they can continue to supply power to the grid well into the evening — perhaps to the time when demand drops off. Then they can recharge over night on off-peak capacity, or if they are parking in shopping centres or station carparks or at work with grid connections they can recharge the next day.

  13. Ikonoclast
    August 19th, 2014 at 08:39 | #13

    Would anyone like to predict the date that electric vehicles will outnumber internal combustion engine vehicles on the public roads? Putting one’s mind to that prediction might suggest how far we have to go on this one. And this leaves aside the ultimate feasibility. Are there limits like lithium supply (for one example)?

    I think this needed changeover is happening far too slowly. It’s also a dilemma that this change is mandatory to save the biosphere and yet other natural limits must sooner or later limit the new renewable economy. In addition, Fossil Capital still owns all our governments and public policy. It will take petroleum scarcity (or all hydrocarbon liquids scarcity ) to drive the change. The question is when will this scarcity bite? Apparently, the costs of oil exploration are mounting exponentially due to the need to prospect in difficult places like deep sea. All the easily accessed oil has already been discovered and has been or is being extracted. Yet, current oil prices are not reflecting the new high capital costs of oil exploration. A price of $150 to $200 a barrel would probably be needed for that.

    Will petrol become a luxury good? How do we change over the truck transport, heavy machinery and farm machinery fleets which mostly run on diesel? The admitted economistic thinkers amongst us seem to think that price mechanisms can solve everything. It’s as if the laws of the natural world and thus the limitations imposed by physics, biology and ecology don’t apply. The magical price mechanism apparently will solve everything. (<- Sarcasm Alert.)

    It seems to me that change is too slow and being opposed by Fossil Capital. Stronger dirigist action is needed. However, I rate the chances of that occurring as very low unless we change our economic system away from monopoly capital and control of our societies and economies by the oligarchs. I also rate the chances of that occurring as very low, at least until a catastrophic crisis breaks forcing change. This current system is generating the crisis. We can't avert or (partially) survive the crisis without totally changing our system.

  14. Hermit
    August 19th, 2014 at 08:40 | #14

    The future sounds great. Poor people need not apply.

  15. Terry
    August 19th, 2014 at 09:44 | #15

    @Fran Greens won’t run against Labor on the fuel excise issue. Wrong issue and wrong constituency for them. PUP would, but they may face different issues, such as the Chinese investors who want to know about their $12m.

    The issue is a bit like the GST, which everyone was against until after it was introduced.

  16. John Quiggin
    August 19th, 2014 at 10:21 | #16

    Because poor people don’t drive? Is Hermit a pseudonym for Hockey?

  17. ZM
    August 19th, 2014 at 11:17 | #17

    Rejigging urban areas so distances to schools and employment are shorter, more social transport, and more cycling and walking are better options.

    Has any body in the world put out a plan for decarbonised transport in a state/nation so you can see what it might look like physically?

    Beyond Zero Emissions are working on one for Victoria but have said its really difficult. So far they have just published a high speed rail plan – I think this is for interstate travel to replace airplanes which cannot be decarbonised.

  18. Fran Barlow
    August 19th, 2014 at 11:49 | #18

    @ZM

    Rejigging urban areas so distances to schools and employment are shorter, more social transport, and more cycling and walking are better options.

    These are good options and an important part of the solution. Reducing the number of vehicle miles (total and per capita) is good, even if large parts of the fleet are EV. That cuts road trauma as well, adds to productivity and well-being, cuts insurance costs etc.

    I like the idea of making suburbs much more self contained, with a minimum of motor vehicle entry and exit points so that they could not be driven through with practical advantage.

    Adjacent suburbs could be connected through shared greenspaces with walking and cycle ways while the suburbs themselves would be serviced by light/heavy rail and local buses.

    The idea would be to have pretty much all the basic services supplied in each major group of suburbs. Those commuting with motor vehicles would be more or less compelled to take the major connecting routes and exit at the appropriate point. Local roads would all be at low speed — 40 or 50km/h. Individual precincts would again be largely self-contained as far as vehicle access was concerned, with perhaps electronic gates for residents and emergency services and a single adjacent entry and exit point for everyone else.

  19. Fran Barlow
    August 19th, 2014 at 11:51 | #19

    @Terry

    We won’t have to run against them. The ALP won’t do it. If they did though, we would run against them on it, on equity grounds, unless they could show that all of the extra burden on the poor was fully compensated in other services.

  20. Ikonoclast
    August 19th, 2014 at 12:40 | #20

    Going on topic, yes I agree we need fuel efficiency standards. We also need much more but I have banged on about all the details before. I will sum up below.

    I think the optimists are greatly under-estimating the difficulty of the changes we need to make especially given the urgent timeframe. We need to decarbonise the entire world economy within 25 years. Then after that we have to make the economy and the environment (excluding atmosphere) a carbon sink again and get back to pre-industrial CO2e levels. Nothing short of a global “war effort” level of action will achieve this. If we don’t do this we aren’t serious and a climate catastrophe is almost inevitable.

    I must admit I feel that online blogging about this achieves nothing. People are just endlessly arguing in circles (me included) without anyone changing their preconceived views. The few who argue from science rather than magic-pudding economics get howled down. Meanwhile MSM and capitalist propaganda pushes the endless growth myth and 99% of people believe it. I didn’t want to end up feeling this bitter but I am starting to believe humanity deserves what’s coming.

  21. August 19th, 2014 at 13:14 | #21

    @Ikonoclast

    Good point. What does it take to change someone’s mind? I like reading stuff that tells me things I didn’t know, or gives me a point of view I hadn’t considered. It may not change my mind, but it can’t hurt.

  22. Ben
    August 19th, 2014 at 13:54 | #22

    @Ikonoclast
    Heather Ridout asked on Q&A last night why we keep going around in circles on climate science when both major parties hold the same emissions reduction target and policies to (apparently) meet the target. I think the simple answer is that the Coalition party room is packed full of deniers. They keep going around on the science because half of them still don’t get it. Direct Action is just a placeholder — the policy you have when you don’t want one.

  23. Collin Street
    August 19th, 2014 at 14:08 | #23

    John Brookes :
    @Ikonoclast
    Good point. What does it take to change someone’s mind? I like reading stuff that tells me things I didn’t know, or gives me a point of view I hadn’t considered. It may not change my mind, but it can’t hurt.

    A person’s opinion arises from their subconscious. You can’t change your own mind — I find that I’m still distressingly prejudiced against kiwi scientists — what makes you think you can control what someone else thinks?

  24. derrida derider
    August 19th, 2014 at 14:27 | #24

    Call me a blinkered economist, but I still can’t see where the economic advantage of fuel efficiency standards is compared to pricing fuel properly. The best case for mandatory standards is political but very antidemocratic – the costs are harder to calculate and the thoughtless can be fooled into thinking someone else is paying them.

    Fuel consumption is, after all, a very good proxy for carbon emissions given the chemistry of hydrocarbons. And the typical advantages of a price mechanism over mandates are evident here in spades. Especially, once a manufacturer meets the standards they’ll have little interest in looking for further efficiencies (the reason non-tradeable emissions quotas are a lousy idea). While a price mechanism means they keep looking, including at electric cars.

    If you want real life evidence on this just compare the fuel efficency of a typical European and US car.

  25. John Quiggin
    August 19th, 2014 at 17:24 | #25

    @derrida derider

    The obvious disadvantage of pricing is the distributional impact. In principle, it shouldn’t be hard to address this, but the Australian debate is too toxic to permit sensible discussion, and Hockey has made it more so.

  26. August 19th, 2014 at 22:44 | #26

    @Collin Street

    And yet you can change people’s minds. Great leaders get others to follow them and change their views. Changed circumstances lead to changed minds (think of Pauline Hansen after she went to prison). Right now, Russians are having their opinions formed by Putin. Just how our collective views are formed seems a terribly important subject to me.

  27. derrida derider
    August 20th, 2014 at 16:11 | #27

    @John Quiggin
    But if fuel efficiency standards bite, won’t the higher cost of cars have an adverse distributional impact too? This surely comes under my bit about the political advantages of “costs are harder to calculate and the thoughtless can be fooled into thinking someone else is paying them”.

    In fact to the extent that the cost of such standards for new cars encourages the cash-strapped to hold onto their old gas guzzlers longer and to drive them more kms, it is another way in which such standards are a less effective way of managing fuel consumption.

  28. John Quiggin
    August 20th, 2014 at 17:05 | #28

    @derrida derider

    As noted in the OP, the higher purchase costs are more than offset by lower costs of ownership. This will be particularly beneficial in the second-hand market, which undervalues fuel-efficiency.

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