Hard Cash and Climate change

Tim Worstall gets us past that pesky NYT paywall to link approvingly to a John Tierney column arguing that the way to encourage energy conservation in the US is not to fiddle with standards but to raise prices. Broadly speaking I agree. At a minimum, getting prices right is a necessary condition for an adjustment to sustainable levels of energy use. Nevertheless, the rate of adjustment and the smoothness with which adjustment takes place can be greatly enhanced by the adoption of consistent pro-conservation policies, or retarded by the adoption of inconsistent and incoherent policies.

This is as good a time as any to restate the point that, given a gradual adjustment, very large reductions in energy use and CO2 emissions can be achieved at very modest cost. Rather than argue from welfare economics this time, I’ve looked at the kind of adjustments that would be needed to cut CO2 emissions from motor vehicle use (one of the least responsive) and argued that price increases would bring this about over time, without significant pain.

Nicholas Gruen has some related thoughts

With the price of gasoline in the US passing $3/gallon and most of the remaining sceptics now conceding the reality of human-caused climate change, it seems like a good idea to re-examine some fundamental assumptions in the debate over climate change. Rather than focus on the short-run arguments about the Kyoto protocol, it seems more useful to focus on the question of whether anything can really be done to stop climate change.

A common estimate is that to stabilise the global climate, we would need to reduce emissions of carbon dioxide by 60 per cent, and proposals to achieve this by 2050 have been put forward. Assuming only a limited role for alternative energy sources, it seems reasonably to look at a 50 per cent reduction in primary energy use.

It’s a widely-held view that the kinds of changes required to stabilise the global climate must imply a fairly radical reduction in our material standard of living. This view is shared by radical environmentalists, who see such a reduction as a good thing, and by opponents of such changes most of whom, at least in developed countries are on the free-market right.

The fact that radical environmentalists view the modern economy as critically dependent on unsustainable patterns of energy use is not surprising. On the other hand, supporters of the free-market generally praise the flexibility of dynamism. Currently, energy use accounts for about 6 per cent of GDP. The suggestion that reducing this proportion to, say, 3 per cent, is beyond our capacity seems to represent a very pessimistic view of our economic potential.

There’s a standard economic technique for giving a rough estimate of the economic cost of such a shift. Begin with the assumption that in the long run, the demand for energy is sufficiently flexible that a 10 per cent increase in costs will eventually produce a 10 per cent reduction is usage, relative to the underlying trend. Although energy use responds slowly to price changes in the short run this is a fairly conservative estimate of price responsiveness over periods of a decade or more.

Given this assumption, halving energy use would require a 100 per cent increase in prices (by coincidence this is about the change that’s been seen in US gasoline prices in the last few years). A standard economic calculation suggests that the reduction in economic welfare associated with such a tax would be somewhere between 50 and 100 per cent of the revenue raised, or between 1.5 per cent and 3 per cent of GDP. That’s about one year’s worth of economic growth. Remember that this estimate is not for the modest first steps required under Kyoto, but for a reduction in emissions on the scale required to stabilise climate.

Is such a broad-brush estimate reasonable? One way to check is to look in detail at the kinds of changes that would be needed to achieve such a reduction in the most sensitive single category of energy use, that of private motor vehicles.

Consider changes over twenty years, a period long enough for the vehicle fleet to turn over, and for people and firm to make adjustments to home and work locations, commuting and shopping patterns, and so on.

First, a significant reduction could be achieved simply by improvements in the technical efficiency of fuel use. The motor vehicle industry, although technologically mature, still exhibits steady improvements in the efficiency of engines and other aspects of vehicle design. When fuel prices are low, much of the effort is allocated to improving performance.

When fuel prices are high, and policy is oriented towards reducing energy use, innovations that improve fuel economy are favoured. Over 20 years, and with support from publicly funded research, it seems reasonable to anticipate a 20 per cent improvement in fuel economy, for all types of vehicles, relative to the ‘business as usual’ trend.

Second, some shift towards alternative fuels could be anticipated. While radical alternatives such as ethanol and hydrogen and alternatives to internal combustion such as electric cars have so far proved disappointing, an increase in the effective cost of petrol would encourage greater use of existing alternatives such as LPG and diesel, which are more efficient in terms of carbon emission.

Yet further improvements could be achieved with measures to reduce traffic congestion, including purely technical innovations such as more sophisticated management of traffic lights and market innovations such as congestion charges.

Next, the mix of vehicles in the fleet would change over time. The gain from this source can be illustrated by a simplified example. Suppose that half of fleet uses 10l/100km, and half uses 5l/100km, yielding an average of 7.5l/100km. If the proportions changed to 25:75, the average would fall to 6.25,and fuel use would fall by 15 per cent. Most of this change would arise as a result of consumer responses to changing prices. However, existing policies that favour the use of large, inefficient vehicles (such as the special treatment of SUVs in US fuel economy regulations) should be scrapped, and replaced by policies pointing in the opposite direction.

A small further saving, say 5 per cent, could be achieved through discretionary decisions on which vehicle to use for a given trip. Given high fuel prices, a household with a small car and a 4WD might be more inclined to use the small car when dropping the kids off at school, for example.

A similar small change, say a 5 per cent reduction in fuel use, could be achieved through improved driving habits. These include stricter adherence to speed limits on open roads, and avoiding excessive acceleration and braking in urban areas.

So far, we’ve considered changes which involve no change at all in travel patterns (with the exception of congestion pricing, which would actually improve things), and only marginal adjustments in lifestyle. The biggest single change, in the fleet mix, would do little more than restore the mix prevailing in, say, 1980. Yet taken together, these changes would be sufficient to reduce energy use by between 30 and 40 per cent and CO2 emissions by an even larger amount.

Now consider some changes in travel patterns. The most important single variable is the distance travelled by each person. To get an idea of feasible magnitudes let’s consider a 20 per cent reduction in distance travelled. For commuting, the biggest single use of time, this could be achieved if people chose to live a little closer to work, to rearrange schedules to allow a four-day week, or to telecommute one day each week. Similar savings could be made on shopping and leisure travel with only modest costs.

The fuel cost of travel also depends on the extent to which people share cars. The average occupancy of cars has declined steadily reaching about 1.1 persons per vehicle for commuting trips in the US in 2000, and about 1.5 persons per vehicle for all trips. A partial reversal of this trend, raising occupancy to 1.65 persons would reduce fuel use by 10 per cent for a given number of person-km travelled.

Finally, there’s public transport and alternatives to cars like bicycles and walking. Doubling the share of these would reduce the number of vehicle trips by around 10 per cent, though the reduction in fuel use would be smaller since mostly short trips would be avoided.

Adding all of these modest changes together would yield a reduction in fuel use of more than 50 per cent Some of these changes would be imperceptible, others would require marginal adjustments over a couple of decades. Taken all together, they would be barely noticeable relative to the changes in lifestyle that most people experience over such a period.

You might think that adding together a whole lot of small changes in the same direction is stacking the deck in some sense. But this is the way markets work. An increase in the effective cost of some commodity generates adjustments on many different margins, all in the direction of economising on that commodity.

It is also the way coherent public policy works. If a goal of reducing energy use or CO2 emissions is properly embedded in public policy, it will be reflected in modest shifts in many different dimensions of policy, producing a significant aggregate impact.

The combination of price responsiveness and public policy can be seen working together in the reduction in tobacco use over the forty-odd years since the link between smoking and cancer was first officially recognised in the US in the Surgeon-General’s report of 1964. At the time, the proportion of men who smoked was 52 per cent and smoking among women was rising rapidly as older social taboos lost their effect. In 2000 the proportion who smoked was down to 25 per cent for men, and 20 per cent for women and was declining for both groups.

Admittedly, the health risks of smoking are borne mainly by the smoker, so the link between giving up and receiving benefits is direct and personal. Against this, nicotine is possibly the most addictive drug known to humanity. Giving up smoking requires an effort far greater than the modest changes discussed above.

The reduction in smoking was achieved by a combination of higher taxes, aggressive public information campaigns and public policies that gradually limited smoking in various public places, but without any radical changes or any element of compulsion comparable to Prohibition of alcohol or of the many drugs that are currently illegal.

What is true for driving and smoking is even more so for other forms of energy use, particularly in business and industry. Given a consistent upward trend in prices and a coherent set of public policies, massive reductions in energy use would follow as surely as night follows day.

32 thoughts on “Hard Cash and Climate change

  1. Ian – Connecting remote power users is exactly the wrong thing to do. The ideal way to reduce emissions is to de-centralise power not connect remote places with inefficient transmission lines. How about building large solar thermal plants instead. Esperance in Western Australia is an example of how to do remote power properly.
    If you read it note the AUSTRALIAN DESIGNED power controls used. Jobs and export markets for Australians. How hard would it be, with encouragment, for Westwind to start ramping up to build large wind turbines. Australia’s CSIRO also makes the best absorbant coating for solar thermal tubes.

    Also nuclear power is neither easy or cheap. I sort of agree with the IGCC however it is only a stopgap. Not only should solar thermal hot water systems be mandatory but solar PV grid-tie installations.

    We need to mandate energy efficiency. There should be nothing on sale in Australia less then 5 stars. Increased use of domestic air conditioners is making huge demands on power generation. Incentives can be given to increase the efficiency of both domestic and business air-cons.

    With Australia’s massive potential for solar and wind there should be no need for nuclear power. Contrary to fossil fuel proponents charges solar power is not needed at night. Peak demand is often 60% more than off-peak demand.

    We need to reduce electricity demand first. We can do this with a combination of carbon taxes increasing the cost of electricity and using the money to fund grants to replace inefficient electrical appliences.

    On the transport front we need to end the diesel fuel subsidy (2 billion per year) and give the money to renewable projects. We need to end novated leases paying less tax when you drive further. We need to exempt hybrids electric cars and electric cars from taxes and give incentives for their use. We need to encourage plug-in hybrid electric cars.

    On the supply side every house in Australia should generate some of it own power. One watt generated at home prevents one watt wasted getting to your home. Grid-tie solar PV plants are commercially available and should be encouraged with more than the current PV rebate. Wind power and solar thermal should be massively expanded with subsidies from the carbon taxes. With reduced demand there is no reason Australia could not be 50% or 60% renewable in 20 years. With this level of renewable power our gas reserves, assuming we stop selling it all to China, should last for hundreds of years and not produce too much CO2.

    All if this however needs Government vision and commitment. With our present government firmly set on the 1950s this will not happen. I have grave doubts that the Labor Liberal Party will do any better. With my own Green Party intent on fairies at the bottom of the garden don’t expect much here either.

  2. When we bought a (second hand) car a year ago it seemed pretty obvious to me that fuel prices were too low. Noone we called to enquire about their car knew what “mileage” they routinely got. We had researched the makes and models on sites like drive.com.au and had an idea of what the manufacturers thought it was, but wanted to know if the owners had achieved these figures. They literally had NO IDEA.

    We initially looked at Magnas, but their fuel economy stinks. Something like 12l/100km for the 3.5L versions around the city, and yet these are very popular cars. In the end we settled on a 1995 Mazda 626 (2.0L). We get about 8.5l/100km around town.

    Why isn’t there a requirement that the fuel economy of new cars be displayed at point of purchase? They do this in the US I believe.

    Why aren’t we encouraging diesel cars? They are much more efficient than equivalent petrol versions. I know they aren’t historically popular in Australia, but concessions on registration and perhaps stamp duties could help to change that.

  3. Why isn’t there a requirement that the fuel economy of new cars be displayed at point of purchase?

    Um, something like this?

    In his 1997 statement on Australia’s response to climate change, the Prime Minister called for a mandatory model-specific fuel consumption labelling scheme for all new vehicles sold in Australia. The development of such a scheme was a key element of the Environmental Strategy for the Motor Vehicle Industry as outlined in measure 5.10 of the National Greenhouse Strategy.

  4. It’s fairly easy to get fuel figures – most of the companies keep them on their websites. I thought it was mandatory to publish them (usually at the back of the glossy, in the small print). But I can’t say I’ve ever seen any of them actively display their fuel figures except VW and Peugeot, both of whom now market some very economical diesels that are good for 5l/100k or thereabouts. That’s a whole lot better than any of the local makers can offer.

    As for why diesel cars haven’t caught on in Oz – I’m told that until very recently, Australian diesel was too high in sulphur for some of the new diesel designs to operate reliably, they are very high-tech compared to the smoky monsters of yesteryear. And also Australians for the most part seem unaware of just how good some of the european and japanese diesels are. A friend of mine in northern Italy has a little diesel Fiat (at least I think its a fiat) which is an absolute rocket, good for 200kph on the autostrada (not that I’m advocating such irresponsible activity!)

    There is some interesting trials around about the efficiency of these machines – there was a long distance trial in the US recently where a diesel and a hybrid were compared, and the diesel was more fuel efficient, although the hybrids tend to have the edge in stop-start conditions. The downside of diesels seems to be fine particulate emissions. Nonetheless, if we are serious about significantly improving car fleet efficiency and the CO2 emissions from it, diesels certainly have something to offer, at least as a bridging technology. However, fleet turnover is so slow in this country that it would take a long time for changes to become significant. You also have the problem that only reasonably high income earners can quickly respond to fuel price signals and switch in the short term, those among us who are less well off haven’t got those sort of choices open to them. Alas, it was ever thus.

  5. SJ said:

    Um, something like this?

    Yeah .. something like that.

    Paint me purple and call me a gooseberry.

    Not sure what to do about the fleet turnover rate. This would be a problem I agree.

  6. The Oz car fleet currently turns over in about 20 years – hence my choice of this period in the post. That was about the lag between the switch to unleaded fuel vehicles in 1985 and the end of unleaded fuel sales fairly recently. Rising fuel prices would raise the scrappage rate for old fuel-inefficient vehicles.

  7. John,
    Interesting that you pick up that piece from me. I do have an ulterior motive, of course. I’m peripherally involved in the development of a certain type of fuel cell. 🙂
    I think it’s also worth noting that the country with the highest such fuel taxes (the UK as far as I know although it might be Norway but that would make the same point) has the lowest fuel to GDP ratio of the advanced deconomies. Changing prices via taxation does seem to work.

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