Home > Economics - General, Environment > Increasing fuel efficiency: standards vs prices

Increasing fuel efficiency: standards vs prices

January 19th, 2016

As I mentioned in a previous post, I’ll be talking to the Victorian Transport Economic Forum on decarbonizing transport on Wednesday, 10 February 2016 from 5pm at the Public Transport Victoria Corporate Centre, 750 Collins Street, Docklands. I thought I’d start with the policy issue implying the smallest change in existing transport patterns, increasing the fuel efficiency of petrol-engined vehicles. The primary choice here is between relying on a carbon price and imposing fuel efficiency standards. For those who want the shorter version, I think we need both but standards are probably going to be more important.

I’ll look first at the carbon price. We need some basic data: a barrel of oil is associated with something over 300 kg of CO2 emissions, while a litre of petrol generates about 2.3 kg of emissions. So, a carbon price of $US100/tonne would translate a bit over $US30/barrel or 23 cents/liter – about a dollar per US gallon (at current exchange rates for Australia, that’s around 35c/litre, maybe a bit more after accounting for retail markups, GST and so on). Those numbers can be halved for a price of $50/tonne.

Given the fluctuations we see regularly, it’s hard to imagine a carbon price of $50/tonne having much impact on patterns of supply and demand. but $50 looks to me to be at the upper end of realistic possibility (in particular, it’s enough to make new coal-fired electricity generation uneconomic almost everywhere).

A price of $100/tonne would be more serious: under current market conditions, the tax-inclusive price would be $60/tonne, twice as much as the price received by producers. That seems significant in terms of the long term impact on supply, since there are lots of producers with long-run costs in the range between $30 and $60. On the other hand, when we look at the demand effects of the increased price of petrol, the effect seems likely to be modest, falling mostly on cash-constrained low income households who would be forced to drive less.

The big problem, it seems to me, is that the decisions on the composition of the car fleet are made by new car buyers who are likely to be relatively insensitive to the cost of fuel. Fleet buyers presumably pay attention to anticipated fuel use over the expected time of ownership, commonly about three years, but probably don’t worry too much about the effects after that, which are reflected, if at all, in resale values. Private new car buyers seem likely to be more concerned with purchase prices than with operating costs, and (speculation alert!) to be more likely than motorists in general to favour performance over fuel economy.

So, it seems to me that fuel economy standards are probably the most effective way to go. The analysis undertaken by the Climate Change Authority (of which I’m a board member) shows that fuel efficiency standards would reduce the lifetime cost of buying and operating cars, the main cost being a reduction in subjective aspects of performance. For low-income buyers of second hand cars, that looks like a pretty good deal. If the trade-off is making life a bit harder for motor enthusiasts, that seems like a reasonable price to pay for this small step to saving the planet.

Political considerations mostly reinforce this conclusion. Taxing gasoline is impossible in the US, but Obama has managed to push through very ambitious fuel economy standards, the first of which are now taking effect. In Australia, the perceived need to protect domestically produced Falcons and Kingswoods prevented any action on fuel efficiency for a long time, but the Abbott. For good or ill, the Abbott-Hockey government solved that problem: in a couple of years all cars will be imported. While the motor trader lobby is still opposed to any action, it’s not as if they have anything substantial to fear – people will still buy their cars even if the choice is titled away from gas-guzzlers and towards more economical ways of getting from A to B.

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  1. NathanA
    January 19th, 2016 at 12:21 | #1

    I think this is missing an important tool for Governments, registration charges. Look at the UK example, the price signal isn’t just in the fuel costs but the annual registration costs for vehicles.

    https://www.gov.uk/vehicle-tax-rate-tables/rates-for-cars-registered-on-or-after-1-march-2001

    Basically, your registration fees are dependent on vehicle emissions. It is a different price signal than fuel because you get hit with a big charge that makes you think about your choices. I see that it’s been considered somewhat superficially in the report, but I think that’s a mistake. The references show that these fees make a difference, so why aren’t they one of the measures that are implemented?

  2. Troy Prideaux
    January 19th, 2016 at 12:53 | #2

    There’s already a provision in the luxury car tax scheme for fuel efficient cars which appears to be working well for company purchased vehicles. Maybe something similar can be introduced for all vehicles? Manufacturers have taken massive steps recently for petrol fuel efficiency. I was looking at the Mazda CX5 last year and was amazed at how much more efficient it was compared to my old CX7 and what’s more, can now use regular low octane fuel.

  3. Ikonoclast
    January 19th, 2016 at 15:27 | #3

    @Troy Prideaux

    How much credence can we give to manufacturing fuel efficiency claims? They could be lying through their teeth via rigged software/firmware like VW was. Dash displays can be rigged too along with electronic odometers. Every make and model would have to be sample tested multiple times at random, off the import ship and off the road by an independent government testing agency. VW, Toyota (airbags, accelerators) and others have demonstrated time and again that zero trust in large auto companies is the correct level of trust.

  4. Jim Birch
    January 19th, 2016 at 16:00 | #4

    It’s pretty easy to road test cars emissions so we don’t have rely on manufacturers claims.

    Prior to cars with computers and sensors it wasn’t possible for the car to detect it was being tested in a lab so there wasn’t a potential for cheating. What those canny VW engineers did was quite smart and could have won a science prize or something if it hadn’t been an illegal and unconscionable scam.

  5. hc
    January 19th, 2016 at 16:32 | #5

    I calculated a $25/tonne CO2-cum-pollution tax as about 7 cents/litre so close to your figure. This is vastly dominated by the fuel excise which does not have a clear rationale. So pretty good signals being sent out here already. Do you really want more? Maybe if you anticipate big adjustment costs if taxes are ramped up and you want car producers to get active.

  6. January 19th, 2016 at 22:15 | #6

    A carbon price won’t be much chop in this case. We’ll pay $1.50 a litre without modifying our driving much, which is $0.35 more than at the moment. According to hc, that would be a carbon tax of $125 per tonne. So efficiency standards are the way to go.

    Efficiency standards are also good because they force us to make good decisions. A price saving of $2000 might make us choose an inefficient car, even though we can do the calculations that show we will be worse off in the long term. We are better off if that short term temptation is not there.

  7. hc
    January 19th, 2016 at 22:35 | #7

    The fuel excise is 38 cents per litre. If this was treated as a carbon tax it would correspond to a hefty social cost of carbon of around $137 per tonne. Again, the question is why worry about efficiency standards? There might be reasons, as I say*, but you have to dig a bit since current price signals are strong.

    * To the above you might add Ramsey reasons for taxing a good (petrol) in inelastic demand or less plausibly congestion charges levied independent of where cars. These could create a case for a hefty excise independent of carbon pricing.

  8. James Wimberley
    January 19th, 2016 at 22:59 | #8

    Even if you had a carbon tax (magic pony alert) reflecting a fair price for CO2 emissions, you haven’t imposed anything for the health costs specifically associated with ICEVs. So you should either have an additional fuel tax or additional emissions standards.

  9. James Wimberley
    January 20th, 2016 at 00:47 | #9

    I’m not entirely convinced by the argument about performance bias among new car purchasers. Sure, there are young male buyers fuelled by testosterone, and older male ones fuelled by its waning. But many car purchases are responses to changes in life circumstances, particularly starting and increasing a family, and retirement. Women and practicality play a large part in these decisions, and the modal car is not a drag racer. Conclusion: there is probably a performance bias effect, but since there are countervailing forces, evidence is needed on its scale.

    The theory is I admit borne out by Tesla’s success. Musk’s plan has been to start with a fairly expensive sports car with high performance, and then work down to the mass market after gaining economies of scale. Tesla puts a lot of effort into the irrational test of “speed off the lights”.

  10. Troy Prideaux
    January 20th, 2016 at 08:07 | #10

    Ikonoclast :
    How much credence can we give to manufacturing fuel efficiency claims? They could be lying through their teeth via rigged software/firmware like VW was. Dash displays can be rigged too along with electronic odometers. Every make and model would have to be sample tested multiple times at random, off the import ship and off the road by an independent government testing agency. VW, Toyota (airbags, accelerators) and others have demonstrated time and again that zero trust in large auto companies is the correct level of trust.

    No way they could get away with that. Faulty odometers would show up quickly as would faulty fuel usage claims. People would compare efficiencies to work or country trip or wherever they’ve travelled regularly in the past against their previous car’s usage and mileage and would smell a rat if the claims were bogus. Motoring journalists would likely be scrutinizing these claims closely when doing their comparisons and reports.

  11. Ikonoclast
    January 20th, 2016 at 08:39 | #11

    @Troy Prideaux

    Good points. I should have thought that through. Such cheating should be more easily detected than the VW pollution boondoggle. At the same time, let us think it right through.

    1. Odometer readings are easily tested as you assert. Simply drive a route of known distance and check the odometer. Indeed, your GPS can give you distance readings for any journey.

    2. However, assessing volumes of petrol used is trickier for the average driver. You “fill” your tank. What precisely is full? After how many shudders of the stop-flow device do you stop trying to fill? Do internal splashes affect when the stop-flow device activates? Then you journey, return to a service station and read your GPS for distance. Then you refill (to precisely the same level? Is the day the same temperature?) Finally, how accurate are the dispensing pumps? Do they deliver accurately and consistently in every service station across the land? Can THEY be trusted? I don’t know the answers to these questions but there must be same margin of error in these procedures.

    3. Motoring writers and government testers could conceivably empty a car’s tank and then fill it from known accurate containers of 20 litres each (say) and then test drive until they run out of petrol. That would be more accurate I guess.

    You might have heard “Never trust an elf!” (Lord of the Rings)
    I say, “Never trust a corporation!”

  12. pablo
    January 20th, 2016 at 08:56 | #12

    @NathanA
    Moreover Nathan, London applies a diesel engine surcharge/tax much to the consternation of all those SUV and sloan-ranger folk.

  13. Jim Birch
    January 20th, 2016 at 13:17 | #13

    The medical evidence is now pretty solidly against the sort of fine “particulates” (aka particles) produced by diesel engines.

  14. Jordan from Croatia
    January 21st, 2016 at 05:24 | #14

    Well i was thinking more along the lines; you need standards in order to provide diversity/ fuel eficiency to buyers and then price effect to incentivize buyers of new cars to notice the fuel efficiency. Both are needed, standards and prices to be effective, one on each end.

  15. Jim Birch
    January 21st, 2016 at 11:27 | #15

    How about selectively placing GPS logging device in vehicles with undesirable characteristics charging them for road usage? This could be used to produce a mad rush to low emissions, high fuel efficiency, electric power, preferred colour schemes, or whatever.

  16. derrida derider
    January 21st, 2016 at 12:22 | #16

    Harry has a point. Petrol use imposes social costs (eg congestion, having to be nice to the Saudis, smog, peak oil, whatever) above and beyond carbon emissions, so we have reasons above and beyond carbon emissions for wanting to limit it. So why use a carbon price as your Pigovian tax rather than direct fuel tax? You’re not quite comparing like with like here.

  17. TerjeP
    January 21st, 2016 at 12:38 | #17

    We already have a tax on fuel that more than pays for roads. Call the excess a carbon tax and we’re done. Although it probably needs to be a lowered a little to be consistent with other instances of carbon pricing.

  18. Ivor
    January 21st, 2016 at 14:25 | #18

    @TerjeP

    What is logic here?

    Why didn’t you cite the fuel tax revenue and compare it to roads expendtures?

  19. hc
    January 21st, 2016 at 20:07 | #19

    The fuel excise is not hypothecated to road construction or maintenance. The amount of revenue collected by the excise does exceed expenditure on construction and maintenance of roads.

  20. January 22nd, 2016 at 14:03 | #20

    There are about 634 grams of carbon in a liter of petrol, depending on blend and oil used to make it, so it will produce about 2.3 kilograms of carbon dioxide when burned. However, a carbon price should also include carbon released in refining the petrol and transporting it. Going by memory, I think that adds about 13% to the CO2 output but I’m not sure that’s actually correct. Any carbon price should apply to these emissions as well and bump up its cents per liter. Of course, it is certainly possible for a carbon price to not include these emissions, but it should.

  21. January 22nd, 2016 at 14:19 | #21

    There is no need for improvements in fuel efficiency standards to cause drivers to take a hit to the performance of new vehicles. If a new car purchaser wants high performance, all they have to do is purchase an electric one. Because of the characteristics of electric motors, any electric car that is capable of doing 110 kilometers an hour on the highway will have high acceleration and good performance in town. The Tesla electric cars have demonstrated this to a ridiculous degree with the highest acceleration of any production model vehicle. And while they are expensive sports cars, within 18 months or perhaps 2 years with delays, Tesla will be selling a high performance electric car for rich bastards whose richness is of the more common sort. It will apparently cost around the average US new car price and will be called the Tesla 3. (It was going to be called the Tesla E but apparently someone already owned the letter E.)

  22. January 22nd, 2016 at 15:25 | #22

    With regard to a performance bias among customers, it definitely exists. Basically because people are stupid. And by stupid I don’t mean not intelligent, I mean that they don’t use the ability they have to think these things through because we are monkeys first and Spocks from the planet Vulcan 241st at best. The difference in travel times between a daihatsu (bless you) charade and a porshe are trivial. They might total to a minute or so over the course of a daily commute. So clearly improved performance is almost useless. Despite this, no one has ever made a car ad along the lines of, “You can tell it’s saving you money by its much lower than average acceleration.” While the bulk of car buyers should be opposed to improved performace because of its trivial utility and large increase in operating costs, in reality they clearly do care about it. So much so that when I went to buy a car I couldn’t even find one with performance low enough to suit me.

    The average horsepower of US new cars took a dip after the oil shocks of the 70s and introduction of fuel efficiency standards. But since 1980 the horsepower of new US cars has increased by over 80%. If horsepower and weight had stayed at 1980 levels US cars would now be about 50% more fuel efficient.

    This graph, which I presume is accurate, shows the huge increase in US car horsepower:

    http://cdn2.vox-cdn.com/assets/4706472/car-weight.png

  23. Ikonoclast
    January 22nd, 2016 at 15:44 | #23

    @Ronald Brak

    Good one Ronald! Well reasoned. The performance bias for high acceleration and top speed is ludicrous for commuter driving (and Australian highway driving for the matter). It might once have made sense in Germany for autobahn driving with unlimited speeds on outer lanes.

    When I was in Germany in 1991, I noted driving in Germany was far safer or at least felt far safer than driving in the UK. The main difference was with lorries (as the Poms call them). In the UK in 1991 lorries were permitted the maximum speed of the motorway and they would puch beyond that. It’s probably still the same today. So loadedlorries, semis and pantechnicons (another lovely Pommie word) would do (from memory) about 65 mph to 70 mph (about 110 kph to 120 kph. Driving a small car around the UK, as we were, one would have huge lorry right up one’s **** and pushing one to 120 kph.

    In Germany, all lorries etc were speed limited to 80 kph and to the very right lane (slow lane on the Continent) of the motorway or autobahn. Also the design of entries and exits was very good (exits always before entries to siphon off some traffic first), the entries had very long merge lanes and German drivers were impeccable at moving out one lane to allow you to merge. With a modest car, one never had to mix it with the high speed drivers in the outer speed lane. I was doing 100 kph in of the slower lanes. I am pretty sure a few cars in the very outer lane (quite a way out) went past at least at a road speed of 180 kph or 80 kph relative to me. I still felt far safer than in the UK.

    However, inter-city commuting at 180 kph plus in autos is not fuel efficient and would push emissions way up. There can be no argument for allowing that anywhere now.

  24. MartinK
    January 25th, 2016 at 17:30 | #24

    @Ronald Brak
    Hello Ronald, re “However, a carbon price should also include carbon released in refining the petrol and transporting it.”.
    That should just be factored into the price. Ie if you increase the tax from 13 to 15% then fuel prices should go up by 2% of base price plus the increased refining and transport costs. Alternatively shipping companies and refineries have the added incentive to increase efficiency or use renewables.

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