Gasoline is Good for Global Warming

Today the price of oil just set a new all-time high of over $104, something that may come as news to a President that doesn’t know the price of gasoline [1]. But that’s not what’s most interesting about the news on energy. What’s interesting is the recent data that gasoline consumption in the United States is down slightly, and what that tells us about carbon taxes and climate change.

The issue isn’t whether global warming is real or not, or even whether it’s mostly (or just partly) a man-made phenomenon. The issue is what to do about it. And in the midst of the hoopla around super delegates and related matters of import, it merits to be reminded of some of the key issues that the next President will face.

For the sake of argument let’s assume global warming is all about CO2 emissions. CO2 is not a pollutant in the sense that it’s something we can get rid of. In fact if we got rid of CO2 in the atmosphere, most of life as we know it would die. CO2 plays a role in a broad number of natural processes, not just ecosystems. Changing the level of CO2 – up or down – impacts a number of these, weather being one of them.

What that means is that there is no “right” level of CO2. There is no historical “in the absence of Man” level. In particular, there is no notion of zero.

Which means a cap-and-trade system makes little sense, which is why most economists favor carbon tax. They are both effective in reducing emissions – “effective” in the strict economic sense, namely, that under certain assumptions it minimizes the costs in adopting new manufacturing techniques etc, as needed, to cut the aggregate emissions to some very small number. The principal difference is that cap-and-trade focuses on the target level, whereas carbon tax focuses on setting the external cost.

The challenge with CO2 that is in question is that large amounts of it affect the weather, which in turn affects a number of facets of life on Earth. Rise in ocean levels, changes in rainfall patterns, possibly more flooding, likely more hurricanes, some species will either adapt or become extinct, changing agricultural conditions, and so forth. There are also some good effects – a reduction in cold-related deaths, increased water supplies in large parts of Asia, etc. But on balance, it appears to be a net negative.

That negative carries an associated economic cost. The cost of improving infrastructure, adapting farming, building or improving levees, providing disaster aid, etc. And this is where it gets really interesting. The costs are huge – in the billions – but the emission base is large as well. Hence the logic of a carbon tax – calculate the aggregate cost and divide it by total emissions. Predictably, human intuition is weak when a large number is divided by another large number. That’s where this thing called “math” comes in.

Global emissions of CO2 are on the order of 30 billion tons per year. The current best estimate of the likely annual cost of these emissions is on the order of $60 billion – or $2 per ton. But there is a great deal of uncertainty with that number, which is as you would expect from an extraordinarily complex economic calculation. The various studies conclude different numbers with wide zones of confidence.

The principal meta study to date (a study that looked at all the major studies done and tried to form a balanced view of them) concluded that the cost per ton was very likely on the order of several dollars per ton, or less, but to be 80% sure you needed to assume a $20 price tag, and to be 95% sure you need to consider a $60 price tag. (The study also concluded that there was a distinct possibility that the net value was negative, in other words, that the net effect of higher CO2 levels was an economic good.)

Some global warming critics will argue that we should go with a “likely” number of something around $2 until there’s serious evidence that the cost is higher. They have a point, but for my purposes today – talking about cars – I can assume a statistically safer position. Let’s go with the 80% number: thus the aggregate external negative effects of CO2 emissions is at most $20 per ton, or on the order of $600 billion, globally, per year. (To put that number in perspective, that is approximately equivalent to paying for a new Katrina each month.)

So that would be the “carbon tax” we should put in place (globally), and the proceeds should be spent on offsetting the damage (globally).

Now, CO2 emissions per gallon of gasoline is about 20 pounds per gallon. So at $20 per ton, that’s 20 cents per gallon. (See where I’m going?) Prices of gasoline the past ten years have gone from around $1 per gallon to upwards $4. This three dollar increase in price is over a magnitude (!) above our upper limit of the external cost.

The recent statistics on gasoline usage in the United States indicates that it’s only now that consumption has started leveling off – 2007 petroleum consumption was up only 0.2% over 2006, and recently actually declined. Certainly a general slowdown in the economy affects consumption, but one can’t help conclude that consumers tolerated a quadrupling of gasoline prices before noticeably altering their behavior.

Which means that the consumer easily values gasoline well above any reasonable estimate of the external cost.

Which means we should go ahead and put a federal 20 cent tax on gasoline, and pool that money with the countries that are also willing to tax their carbon emissions at the same level (and put in place carbon tariffs against countries outside this group to avoid unfair trade), and put in place an agency that invests this money globally to offset these damages. And then we’re done.

Basically, car usage would be paying for reconstruction around the world, including providing for an infusion of aid to developing countries, offsetting damage from global warming. This is why gasoline powered cars are good for global warming. They provide the needed tax base.

Ah, you might say, this can’t be right. We should go to bio fuels. Or hybrids. Or electric cars. And more public transport. We have to get off “foreign oil”.

This is where the debate gets even messier. I’ve already proved the point that gasoline cars are good for global warming, given what we now know about aggregate consumer pricing sensitivity. But that doesn’t in and of itself prove that there aren’t even better solutions, just that properly taxed gasoline-powered cars are a good solution.

Some of these comments are also quite sensible. Hybrids are indeed a net good – they are a smart way to increase the energy efficiency of traditional cars. So by all means, let’s encourage the transition to hybrids, especially hybrid diesel. Public transportation should obviously be expanded – in particular high-speed trains that can offset commercial aviation.

But electric cars don’t make sense no matter how you do the math. First let’s look at CO2 emissions. The current mix of electric power consumption in the US corresponds to 1.3 lb of CO2 per kWh, and at 0.3 kWh/mi an electric vehicle emits about 0.4 lbs/mi. That’s the same emission as a 50 mpg gasoline powered hybrid. In other words, if you buy a plug-in electric vehicle today, you’re not doing much to reduce greenhouse gases.

What if the emissions associated with power consumption could be reduced? What about solar power and other renewable energy sources? They’re expensive. Residential solar power only makes sense given a combination of artificially low interest rate, high tax subsidy, and artificially high electricity prices. If the current energy industry was allowed to do it’s thing, we’d have residential power at under 10 cents per kWh. Solar power is about four times that. That would be a 30 cents per kWh additional cost, which for an electric vehicle would translate to 9 cents per mile – compared to the carbon cost of gasoline of 0.4 cents per mile.

And of course the energy requirements for switching to electric are enormous. If you do the math, you would need to double the total electricity production in the US. The only option for that is nuclear. Personally, I’m all for it – there’s enough uranium in sea water to last us for thousands of years. Currently nuclear is about 20% of electricity production, so we would need to quintuple that. The political will isn’t there. So it won’t happen.

But even if it did, it wouldn’t matter. The aggregate external carbon costs from a gasoline engine over it’s entire lifetime is around $1000. So any engine changes that increase the price of the car by more than that doesn’t change the equation. And batteries are much more expensive than that, more on the order of $10,000 over the lifetime of the car. In other words, even if you could get zero-emission free electricity for your electric car, it still would not make sense.

What about bio fuels? Well it turns out we don’t know much about their net effects on CO2 emissions – some recent studies show they are a net loss. Sure, they remove our “dependence on foreign oil”, and they get you votes in agrarian districts, but they don’t do much to reduce carbon emissions. They simply either require too much energy to produce to have much effect, or too much acreage to be economical. And they have some nasty side-effects, like dramatically raising the price of food in the world, to the detriment of developing countries, many of whom are net food importers.

What about “foreign oil”? Sure, you can make the argument that it’s of strategic value to reduce revenue to countries that we have various levels of disagreements with. But that is a different discussion. It has little to do with helping the environment or supporting developing countries in building their infrastructure.

So there you have it. US consumers are clearly willing and able to pay a lot more for gasoline than we expected. Which means gasoline can easily carry the cost of the external damage done by CO2 emissions. Which means the gasoline-powered car will be our savior – it can easily pay for any global investments needed to deal with global warming.

[1] Yeah I’m being bloggish. The prez actually reacted to the $4 claim, which had circulated in the press but was based on a local chapter AAA spokesperson comment in Florida. The official AAA comment was that they expected $3.75 gasoline.

Edit (3/7) I just found some good data to kill any arguments of “you save on maintenance”. Consumer Reports

4 Comments

  1. Awilky

    5 Reasons to Buy an Electric Car
    1. Zero Air Pollution
    ZAP stands for Zero Air Pollution. We believe electricity is the fuel of the future. With electricity to power our transportation, our world can tap into renewable resources like hydroelectric, solar, wind, or geothermal power; resources that lessen our environmental footprint. Furthermore, studies show that millions of electric vehicles can recharge at night using existing surplus electrical generation; a vast, virtually untapped resource.
    2. Save Gas
    Gasoline is a precious natural resource and vital to the world economy. ZAP vehicles use no gasoline and require no oil changes. Using less fossil fuel can help relieve our current energy shortages while ensuring that future generations can rely on the same inexpensive, useful, petroleum products that we all take for granted.
    3. Save Money
    Gas keeps getting more expensive. Imagine all the money you can save by ZAPPING to work every day, rather than driving your gas vehicle. The typical electric car costs a penny per mile versus ten cents per mile with gas. Electric bikes and scooters are even less expensive. Plus, electric motors have fewer moving parts, meaning fewer trips to the mechanic. If you live close to work, you can save thousands of dollars per year by replacing your car with a ZAP bicycle.
    4. Save Time
    Traffic congestion and parking shortages eat away at our busy days, but a ZAP vehicle can help you save time, especially in busy urban areas. ZAP bikes and scooters slice through traffic jams and finding a place to park your ZAP neighborhood car is a snap.
    5. Help the Economy
    Today, the majority of USA’s foreign trade deficit is attributed to imported oil. Using a ZAP vehicle will reduce our reliance on foreign oil. Furthermore, by investing in advanced transportation technologies, the USA can take the technological lead in offering energy efficient products that emerging economies around the world can use to build their own transportation infrastructures.

    For more information on buying an Electric Car go to: http://www.zapworld.com
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    [PSM] Hello Awilky and thank you for posting. Your company looks like it makes some nifty vehicles. But your arguments don’t hold up:

    Reason 1 is incorrect, it assumes a revamping of our electricity production. Given today’s mix, electric cars emit about as much CO2 as normal cars.

    Reason 2 confuses “energy shortage” with petroleum usage. There is no “energy shortage” per se; what is a challenge is cheap and low-CO2 emission energy sources (and the only reason that that is a challenge is because there is little political support for nuclear power). The US has coal deposits to last at least 500 years at current levels of usage. And there are other, vast deposits; Canada’s oil sands alone may hold upwards 2 trillion barrels of oil, which is twice the total amount of oil that mankind has consumed to date.

    Reason 3 I think is bogus, no offense. I see flavors of this claim on lots of advocacy sites. But when I crunch the numbers it’s just not true. The capital cost of the batteries far outweigh any savings on operational use. If reason 3 was true, why aren’t consumers flocking to electric cars? Consider your own ZAP-X Electric. It has a list price of $60,000. That’s tens of thousands of dollars above comparable internal combustion cars. The external costs of CO2 for a traditional car is at most $2000 over the lifetime of the car.

    Reason 4 has nothing to do with electric but with size of car.

    Reason 5 is a policy argument, not a reason to buy an electric car. Plus, since I’m anal, I have to point out that it is not strictly true: the US trade deficit in 2007 was $711.6 billion of which petroleum was $331.2 billion. And about the “foreign oil” bit. This carries the overture of us paying for rogue regimes in Iran, Russia, Venezuela, etc. But the reality is that it’s a global market. The US can become contained to North American oil production quite easily, we don’t need electrical cars to do that. Improve the average mpg from the current 25 to, say, 35, reduce the amount of petroleum used for non-transport purposes, decrease our driving habits somewhat, and increase imports from Canada, and we’re done. All of these changes are already under way. In fact, already less than 10% of our oil comes from OPEC countries.

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  2. Scott P

    Peter,

    I like your analysis methods, but I wonder about the validity of the Consumer Reports article to the debate. Limiting the study to cars only 5 years old is artificial, in that most of the major maintenance costs are incurred after that point. I drive 2 vehicles, one is 10 years old and the other is almost 30 years old. Maintenance and fuel are the big cost components at this stage in their lives. Even so, fuel is priced low enough, and I drive few enough miles, that it’s hard to justify spending any real money to replace the cars (one gets 10 mpg and is driven less than 7000 miles a year, and the other gets 25 mpg and is driven about 16000 miles per year). Even at $4.00 per gallon, it doesn’t make sense to go out and buy a new car, just for the fuel savings. The capital costs are just too great to justify the expense. Absent a tax policy change (taxing carbon emissions, most people will likely continue to drive their current cars until they wear out.

    Scott P

    [PSM] Scott, thanks for dropping by and commenting. Yes indeed, it would be nice with more data, and especially for the second 5-year period – e.g. to know what happens the first 10 years of ownership.

    However, that said, consumers are unlikely to pay much attention to cost of ownership issues that are beyond a 5-year horizon. It’s not practical to argue to a consumer that a product might be expensive but it will pay for itself in, say, 15 years. And that’s not irrational – for the typical consumer, the uncertainty of that payback is too high and their cost of capital is too high.

    Your own experience with two old cars is very much to the point. At any given time, on the margin, you cannot rationally motivate buying a new car.
    Which brings us to the externality. The best economic data suggests that the damage done by CO2 is less than 20 cents per gallon. And your choice of not buying new cars would not materially change by gasoline costing $4 rather that $4.20.

    Ergo, it makes little sense to force people – through incentives or taxes – to make capital equipment investments that are of equivalent irrationality. Better to simply tax the gasoline, and use the proceeds to make investments or economic compensation elsewhere.

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  3. I have to say, I can see several flaws in your analysis.

    You assume that dollars and global warming are completely fungible on a direct linear basis. Although that may be true up to a point, and for certain aspects of the problem, that relationship is going to break down at some point if you push it far enough.

    Your whole analysis seems to be built around the assumption that a tax structure can be established to siphon dollars away from gasoline users (notionally in the USA) and direct them to global warming mitigation programs (notionally in Bangladesh). That is a socio-political fantasy. It’s so far from anything that could be enacted into law, it’s laughable.

    It was particularly eye-opening when you dismissed a large-scale expansion of nuclear power as being politically infeasible — after championing a scheme far, far less likely to ever be accepted by our society. Americans can understand building something in America that will be useful to Americans. They can’t understand the government taking their money and sending it to Bangladesh to combat a hypothetical future problem.

    You also assume that electric cars must be far more expensive than gasoline-powered cars. That is true today, but has no bearing whatsoever on the potential cost of electric cars when they are mass-produced. There is no readily apparent reason why electric cars should be more expensive to make than gas cars, and it’s entirely possible that they may end up being cheaper.

    Even if electric cars remained more expensive, that would only be relevant to global warming if your proposed tax-and-mitigate program were operating (wildly improbable) and if the dollar value of mitigation remained linear (highly questionable).

    You also assume that clean energy will continue to be more expensive than carbon-emitting energy sources (primarily coal). I have strong reasons to question that assumption. Not only is the cost of solar energy being driven down, but a study from MIT showed that enhanced geothermal energy has huge potential and would be quite inexpensive to develop. Not only that, but the late Dr. Bussard’s “Polywell” fusion reactor project is still under development and, if successful, could drastically undercut every other form of power generation.

    Despite all that, the worst problem I see in your analysis is underscored right near the end, in your “foreign oil” paragraph.

    The huge crisis facing our civilization globally right now is Peak Oil. It’s no exaggeration to say this will be a subject with billions of lives hanging in the balance. Yet, you’ve wasted a whole document doing an in-depth (but flawed) analysis of a problem that may not even be a real problem. Then at the end you dismiss Peak Oil, with a wave of your hand, as merely a topic you aren’t interested in talking about right now.

    [PSM] Hm, you make some good points. In particular about me being inconsistent in on the one side dismissing nuclear power as a political fantasy and on the other hand supposing that a global tax structure would be feasible. I’ll need to ponder this a bit.

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