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What is the key question to ask when shopping for CO2 reductions?
The first rule of subsidies: comparison shop
Subsidizing is like shopping, so there is no excuse for the mess Congress has made of energy subsidies. When wind is subsidized, that is like buying a reduction in fossil usage. When ethanol is subsidized that is also like buying a reduction in fossil fuel usage. It's like buying the same thing in two different stores.
What is unusual about shopping with subsidies is that the more you offer to pay (the higher the subsidy) the more they will sell you. Suppose one store will sell one ton of fossil reduction for $10, but charge you $50 per ton for more. Suppose a second store will sell five tons of reduction for $20 per ton, but charge $100 per ton for more. If you need six tons of reduction where should you shop? Obviously you should buy one ton for $10 at the first store, and buy the rest for $20/ton at the second store. This is not rocket science.
Another way to shop would be to set price limit of $20 per ton and then buy as much as you can at each store. This is how to level the subsidy playing field. There is no use paying $50 per ton at one store when you can by the same thing for $20 per ton at the other store. It just wastes money. This is completely ignored by present government policies.
Comparison shopping rule for subsidies: Offer the same subsidy rate per ton of carbon reduction to every alternative fuel.
This this rule will level the playing field. It is also a market-based approach to subsidies, even though subsidies themselves are not ideal. It is market based because investors will look for the cheapest way to gain the subsidy. If ethanol is cheaper, they will make ethanol. If wind is cheaper they will make electricity with wind. In this way the market--not the regulator--will decide which is the better alternative energy source.
How unequal are current subsidies?
Start with the biggest one, ethanol. Every gallon of ethanol gets a 51¢ subsidy. So you might think that's 51¢ to save a gallon of gasoline. Not so. Ethanol has only 2/3 the energy of gasoline, and a study of EPA mileage ratings for cars using E85, shows that, just as expected, they get only 2/3 as far driving on pure ethanol. If a car gets 30 mpg on gasoline, it would get 20 mpg on pure ethanol. That means the subsidy is 76¢ per gallon of gasoline saved. But there's an even bigger problem.
Making ethanol uses fossil fuel. What if it took as much fossil energy to make ethanol as there was energy in the ethanol. Then a gallon of gasoline could be used to make 1.5 gallons of ethanol, which would replace 1 gallon of gasoline. In this case making a gallon of ethanol would save no fossil fuel at all. This is called a zero energy ballance. Some say ethanol has a negative energy balance; it uses up more fossil fuel than it saves. The more we make the more we increase energy dependence and global warming. But the best unbiased estimates are not this pessimistic.
The best estimates say that making four gallons of ethanol uses up energy equal to three gallons of ethanol. The energy ballance for ethanol is 1/4. Making four gallons of ethanol saves the energy in one gallon of ethanol. This means the subsidy per gas-gallon of fossil energy saved is four times greater than just calculated. That's $3.04 of federal subsidy to save one gallon of gasoline. And this does not count the subsidy for growing the corn! That brings us to about $4.00 of subsidy per gallon saved.
So to save a gallon of gasoline with corn ethanol, first buy 1.5 gallons of ethanol at the pump and use it instead of one gallon of gasoline. That will cost about $3.00. Then pay $4.00 in taxes so the governement can subsidize the corperate farmers and ethanol makers. Achieving energy indepence with corn ethanol really would wreck the economy.
Next consider the subsidy for more efficient standard (non-hybrid) cars. This is much easier to figure out. It's $0.00 per gallon saved. There is no such subsidy. But what if there were?
The National Academy of Sciences issued a report in 2002 on the CAFE standards. It estimated the cost of fuel savings for small medium and large efficiency improvements. The cost of savings was respectively $1.31, $2.11, and $2.65 per gallon. This estimate is based on cost estimates from the study plus two assumptions. First, it assumes cars and light trucks are driven only 12,000 miles per year and last only 10 years. Second, it weights future savings of gasoline 12% less each year. This means in the 10th year, a savings of 100 gallons is counted as saving only 30 gallons. These are conservative assumptions.
Because of inflation the cost of saving a gallon with the small improvement would now be about $1.50. That means if gas, over the next ten years cost $2.25/gallon, more money would be saved than the cost of the efficiency improvement. The net cost would be negative.
In other words, a fuel efficiency subsidy paid to car makers for small efficiency improvements would have a negative net cost to society of roughly –$0.75 per gallon saved. This compares favorably with ethanol which costs about +$4.00 per gallon of gas saved.
Small efficiency changes would, on average, save about 15% of the gasoline used by cars and light trucks. That's 21 billion gallons of gasoline per year. Source By contrast, corn supplies about 3 billion gallons of ethanol which saves the fossil energy equivalent of 0.5 billion gallons of gasoline.
The bottom line on ethanol vs. auto efficiency subsidies
Congress has gone shopping for fossil fuel reductions and has bought corn ethanol reductions at a cost of about $4.00/gallon saved, while passing up auto-efficiency reductions at a cost of about minus $0.75/gallon saved. In doing so it has saved 0.5 billion gallons/year and passed up a savings of 21 billions gallons per year.
Answer: The key question for subsidies is "How many subsidy dollars does it cost for one ton of CO2 reduction?"
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Can we take the standards out of efficiency standards and still make them work?
In my years at "the Lab" working on appliance efficiency standards for the Department of Energy, our focus was on coming up with an efficiency number for each appliance. Side-by-side refrigerators with through-the-door ice makers and 14 cubic feet of volume would have to have at least efficiency E starting in future year F. There were a lot of these efficiency-cutoff numbers to come up with, and all were controversial.
Regulators, politicians and environmentalists all like efficiency cutoffs because they guaranteed results. If the government mandates that appliance B must have at least efficiency E, those with lower efficiency will definitely go away. Since government regulations are often full of loopholes, a clear-cut standard of this type provides some welcome reassurance.
There are three problems with this approach. First, it is genuinely difficult to figure out how fast to raise these cutoffs. How much better could they make the appliance at what cost? Second, this difficulty provides ample opportunity for manufacturers to cause confusion, slow the process, and weaken the standards. Also, it allows government bureaucrats to hide behind small ambiguities when they yield to pressure from manufacturers. Finally, hard cutoffs are risky and a bit wrong in principle. See sidebar
CAFE as an alternative to rigid standards
Automobile efficiency standard, call Corporate Average Fuel Economy (CAFE) standards, partly get around this problem of rigidity. There are not separate standards for small two-door cars and small four-door cars, and cars with automatic transmissions. There is just one standard that the manufacturer must meet on average. If one car does not meet the standard another can make up for it by doing better than the standard. Moreover, car makers are not forced to meet the standard and some never do. If they don't meet it, they must simply pay a fine. In spite of this flexibility, all large US car companies have met the standard almost every year. Only luxury European imports choose to pay the fine (and that money goes to energy efficiency research).
CAFE standard show that the rigidity of appliance standards is unnecessary. Unfortunately they still require agreement on a type of cutoff value and the value is always controversial. In 2007 the required average fuel economy is 22.5(??) mpg. Should it have been 22.6? Who can say. Again there is ambiguity and again small changes in the cutoff matter, but because of CAFE's inherent flexibility they matter a bit less.
A flexible but strong CAFE standard
The CAFE standard is not as rigid as it is described to be. It is often said that average fuel efficiency "must" be above 22.5 mpg. But the law includes no such "must." It is entirely legal to have an average efficiency of 22.4, but then a payment must be made to the Department of Transportation. The rigidity of CAFE is not caused by having a cutoff value, but by the magnitude of the fine. If the fine were $1 per car for the first mpg below the cutoff and $2 for the second and so on, the standard would be soft and weak. The real key to designing a flexible but strong CAFE standard is the fine, or as an economist my view it, the price to be paid for making low mileage cars.
To summarize, the key to flexibility is to shift focus from quantity cutoffs to a financial incentive. This is the essence of moving from command and control regulation to market-oriented regulation. Here is one way to do it.
For a given appliance (or type of car), at the end of the year, find the average efficiency of all the appliances sold by the entire group of corporations under the regultion, as well as the average for each corperation (as in CAFE).
Basic Automatic Standards
Step 1 If a corporation has a higher average efficiency than the overall average by X, then it is paid $C×X for each appliance it sold. If its average was lower by X, then it must pay $C×X for each appliance it sold.
Step 2 Refund all the money to the corporations in proportion to the number of appliances they sold.
This is a revenue-neutral design, just as was discussed in the previous chapter and, just as shown there, it will have the same impact as if the government kept the money. But this way there is no harm to the industry as a whole. There are many variations on this design, which could, for example, be used to protect local industries. But for now it is enough to understand the benefits of this basic Automatic Standards design.
Advantages of Basic Automatic Standards
CAFE standards need an efficiency cutoff and a penalty. A Basic Automatic Standard needs only a penalty, and that can be set more objectively. For example, if a change from 20 to 21 mpg saves $400 over the life of a car, then that could be used as the reward/penalty rate. Or, a more cautious approach could use $200. There is still room for disagrement, but once it is set there is no need to keep revising it. This standard will keep working year after year because it is self adjusting.
In fact the Basic Automatic Standard is a form of competition. Any company that beats the average wins in proportion to how far ahead it is. The losers pay the winners. This puts pressure on companies to raise there average efficiency as long as they can do so more cheaply than, in this case, $400 per mpg. They will increase efficiency only while efficiency is still reasonably inexpensive. If the can save the consumer $400 in gas costs, by spending $400 on the improved efficiency, they will.
Unlike the CAFE standard, all charges are refunded to the industry. That is why it is not necessary to worry about the efficiency target or cutoff. We have stated that payments are made to those above the industry average. But what if we had said "above the industry average plus 3 mpg." That would seem stricter. But a little mathematics would show that nothing has changed. There are more penalties and bigger penalties, but that means more money is collected so more is returned. As it turns out, every appliance company ends up with exactly the same amount of money.
Another benefit of the Basic Automatic Standard is that it is consistent and predictable. Any improvement of 1 mpg will earn the same reward (or avoid the same amount of penalty) year after year, no matter what average efficiency a coporation attains.
With CAFE standards, if a consumer chooses to buy an extra efficient car that simply allows the car company to sell one more extra inefficient car and still meet the standard. Smart consumers realize this and loose their motivation to voluntarily contribute to CO2 reductions. Not so with the Basic Automatic Standard. The incentive to raise the efficiency of every single cars stays at $400 per mpg if that is the inefficiency charge, no matter what the individual consumer does.
But the main benefit, for appliance standards, is still that there is no efficiency cutoff to fight over year after year.
Answer: We can take the efficiency standard--the cutoff--out of appliance standards and make them work even better if we replace the cutoff value with a reward/charge that applies to every appliance no matter what its efficiency.
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http://zfacts.com/p/981.html | 01/18/12 07:27 GMT
Modified: Sun, 30 Mar 2008 23:16:13 GMT
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