In arguing for efficiency mandates, Joe Romm notes the failings of carbon pricing as a solution to climate change:
That means a price of $400 a metric ton of carbon (whether achieved through a tax or a cap & trade system) would increase the price of gasoline a mere $1 a gallon. How much efficiency would that drive? Not bloody much!
Joe Romm more recently comments on the future of the electric car:
If hybrids drop in price and gasoline resumes its peak-oil driven upward trend, then by, say 2015, it would simply not make sense to bother producing a non-hybrid version of any vehicle.
This analysis doesn't quite compute. Carbon pricing doesn't matter, but oil's upward climb (another form of carbon price) is about to drive conventional cars out of existence? Granted, the supply-driven swings in oil price are far larger than anything we expect from carbon pricing in the near term, but there still seems to be something missing from the analysis.
The main problem is the confusion between demand for driving with demand for internal combustion engines. Gasoline prices rise and fall by dramatic amounts, but miles driven only seem to climb (until they don't). Europeans pay enormous gasoline taxes, and still they won't quit their cars. This point is often taken too far, but people really do seem to like to drive.
Well, of course they do: Personal mobility is an incredible convenience and an economic necessity. People want it a lot, and even in lean times they'll give up a many other things before they give up their driving.
Now consider spark plugs.
Would anyone really miss spark plugs? Or consider spark plugs' complementary good: gasoline. The piece missing (or at least inconsistently treated) in Romm's analysis is the arrival of a new form of personal mobility -- the hybrid electric -- that is about as good and almost as cheap as the internal combustion engine. Without hybrids, carbon pricing is fairly hopeless as a lever on gasoline consumption. With hybrids, pricing starts to matter a lot.
Of course, carbon pricing didn't create hybrid electric cars. Neither did efficiency mandates. Carbon pricing won't do a very good job curbing demand for driving. Neither will efficiency mandates. But both carbon pricing and efficiency mandates absolutely can help to create a market for electric cars. Moreover, carbon pricing helps to create a market for renewable energy to power those electric cars. Efficiency mandates don't. Carbon pricing also makes meat more expensive and causes companies to move factories across oceans, both things efficiency mandates aren't so good at.
To be clear, Romm isn't opposed to carbon pricing. Rather, he appears to be opposed to the faintly ludicrous strawman notion that "we aren't going to meet a 450 ppm target by just raising carbon prices alone," a position advocated by roughly no one. Likewise, I'm all in favor of efficiency standards, which offer much faster emissions reductions than carbon pricing alone, in spite of my leeriness of the government's execrable track record on this sort of thing.
Nevertheless, the notion that transportation emissions won't yield to carbon pricing is not nearly so well supported by the evidence as Romm suggests. The recent surge in the price of oil coupled with coming technological advances suggest carbon price sensitivity is higher than many suppose.
Perhaps more importantly, a questionable premise underlies both Romm's original analysis and similar criticism of cap-and-trade from less knowledgeable sources. That premise, in brief, is that we need Solution X to beat climate change; Solution X is only viable if carbon prices become really high, therefore carbon pricing is bound to fail.
For the Wall Street Journal, Solution X is clean coal. For Romm, it's electric cars. Both may be worthy technologies (although my money is on electric cars), but if carbon pricing can't wave them into being tomorrow, the problem may simply be that they're not quite ready yet. Reality matters. If the technology exists, carbon pricing will favor it. If it doesn't exist yet, carbon pricing will favor cheaper forms of emissions reductions. That's how the system is supposed to work.
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Comments
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Sean Casten Posted 4:37 am
27 Oct 2008
Making the qualitative observation that rising oil costs have changed consumer behavior for automobiles does not imply that CO2 prices would do the same.
A bit of math may illustrate:
A barrel of oil contains about 114 kg of carbon. So if you assume complete combustion to CO2, that's 44/12 x 114 = 418 kg of CO2. Call it 0.42 tonnes/bbl.
In the last 5 years, we've seen massive increases in oil prices, going from $20/bbl to $147/bbl at peak - and note that it wasn't until we got near the upper end of that range that we saw demand start to shift away from SUVs. To pick a round number then, let's assume that behavioral changes in oil need something like a $100/bbl price signal. That works out to $100/0.42 = $238/tonne of CO2 - well in excess of where anyone thinks a CO2 price will finally settle down. (Note that Kyoto-compliant markets are trading at about 10% of this number.)
The problem here isn't that people are stupid, but simply that the dominant cost of a car is the purchase price rather than the operating price - while the dominant sources of CO2 emissions are in assets that run more or less continuously (power plants, boilers, etc.) and are therefore have cost structures that are dominated by fuel costs. Analytically, it is hard to see how this doesn't lead to a situation in which the clearing price for CO2 is always going to be substantially lower than the price needed to significantly change consumer behavior in the automotive sector. (Note, after all, that even the recent fall off in big truck sales is hardly having the kind of world-changing impact on CO2 emissions that we probably both agree is necessary in the transportation sector... suggesting that we'd actually need a carbon price well over this $235 value to effect change.)
As a result - and I think this is Joe's point - a well-crafted CO2 price signal can affect many sectors of the economy, but is unlikely to affect transportation to any meaningful degree. As such, if GHG policy wants to create meaningful incentives to shift to lower-CO2 vehicles, it will almost certainly have to be coupled to some sort of mandate or incentive that affects the capital cost of the vehicle in lieu of (or in addition to) the impacts that GHG-prices have on the variable cost of vehicle ownership.
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Adam Stein Posted 5:18 am
27 Oct 2008
I'm not really making that argument at all. I understand that even a hefty carbon price has a fairly small relative impact for transportation. (I think the tendency to use short-run demand elasticities for gasoline as an indication that people don't respond to price changes paints a somewhat inaccurate picture, but let's assume that people will want to drive a lot no matter how expensive gas gets.)
But I don't think I'm the one mixing and matching. It doesn't make sense to say that a) carbon prices don't matter and b) hybrids will drive conventional cars out of existence in less than ten years if oil prices rise. (a) is a statement about people's demand for driving. (b) is a statement about what people will choose to drive. People tend to conflate these two things, but they are very different, and it does seem that the price of carbon matters.
Likewise, efficiency mandates aren't what has driven the rapid adoption of hybrid electrics to date. CAFE requirements are far, far below the performance of the most efficient cars on the market. And recently gains in fleet average efficiency in the U.S. have actually outpaced the CAFE requirements.
So, again, this notion that pricing is hopeless and efficiency mandates are the only thing that make a difference in people's consumption choices doesn't map very cleanly to reality.
In the end, Romm and I and everyone think that both carbon pricing and efficiency standards are important elements of holistic greenhouse gas abatement strategy. But this notion that carbon prices have to reach a certain level to work is, I think, somewhat misdirected -- and you yourself have had a bunch of smart stuff to say about how a low carbon price is a sign of a successful policy.
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Sean Casten Posted 6:34 am
27 Oct 2008
Ergo - and if you'll permit me to insert the qualfiers that I think Joe Romm and others have implied - I think it is reasonable to say that:
"carbon prices don't matter [within the range that they are likely to settle out] for transportation and hybrids will drive conventional cars out of existence in less than ten years if oil prices rise [within the range they could plausibly rise]"
for the simple reason that $235 > $20.
That said, I'm not sure I'm with you on the rest of your logic. Yes, oil prices have driven people's VMT down, but they've also driven up demands for hybrids. (Are you suggesting that the push for hybrids is independent of oil price?) Moreover, I'd argue that - at least in this country, where gasoline prices are comparatively low - vehicle-level mandates a la CAFE have been much more effective at changing consumer behavior than gasoline price signals. Yes, CAFE is annoyingly petrified, but the increase in fuel economy from Carter - the SUV boom is way more significant than the comparatively small shift to HEVs in recent months.
(That said, I think there is a long-play with HEVs based only on the creature comforts enabled by having more on-board electric sources to power heated seats, GPS and in-dashboard GameBoys. But that's another conversation...)
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Max8806 Posted 3:46 pm
27 Oct 2008
...This is not to say that I'm volunteering to be Joe Romm's strawman, I just get bugged when I see that "look at what $2.50 change in prices has done..." argument because it misses an important point. Gas is not $2 or $3 anymore, so additional price increases are a different story.
The second issue is less academic and I think more important, and I'm glad to see Adam Stein finally raise it. Its not the end product that carbon pricing needs to affect so much as the means of production. So I would add that just as consumers like driving, not sparkplugs, car companies don't like making sparkplugs or even cars, they like making money. If getting SUV's off their lots requires them to use gimmicks such as "we'll pay your gas for a year," (which I've seen) this is cutting into their bottom line and encouraging them to build more fuel efficient vehicles.
A better example is electricity. Consumers have a similarly inelastic demand for electricity, but a carbon price does not work only if consumers ramp down electricity consumption. Most of the reductions come from shifting the means of producing those kwhs towards cleaner methods.
A final point - its sometimes said that a carbon price wouldn't work because many producers can't pass along the price increases they incur. But to drive the theme home here, its not price increases that are important, its --cost-- increases. To the extent that cost increases cannot be passed through to encourage demand-side conservation, they are absorbed by producers and trim profits. This in turn drives capital away to cleaner methods of producing those goods which don't incur those cost increases.
-Max Epstein
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Max8806 Posted 3:50 pm
27 Oct 2008
-Max Epstein
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