Autos in Econ 331b

Agenda

Wednesday: AutosSection: Misc and oil premium

Monday: Continue autos and rebound effect

Wednesday: Behavioral energy economicsPset 3 due

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Overview of energy system

3

Energy resources

(oil in ground,…)

Capital, labor, …

Energy fuels (gasoline,

electricity, …)

Capital, labor, …

Energy goods and services (passenger miles, warm house, hot coffee, …

Non-energy goods and services

Utility:U(c1, c1, …, cn)

Market boundary

External effects

4

Energy resources

(oil in ground,…)

Capital, labor, …

Energy fuels (gasoline,

electricity, …)

Capital, labor, …

Energy goods and services (passenger miles, warm house, hot coffee, …

Non-energy goods and services

Utility:U(c1, c1, …, cn); externalities(-)]

Production externalities: SO2, CO2, …

Consumption externalities:

congestion, smog, …

Market boundary

Pollution

MB, MC

Private MC

MB

Market Pollution 5

Pollution

MB, MC

Private MC

MB

Market PollutionEfficient Pollution

Social MC

6

Damages and taxes for gasoline use

7

0

50

100

150

200

250

Pretax Taxes Externalities

Cost

s (ce

nts p

er ga

llon)

Pollution, health

Global warming

What are current estimates for US?

8

Damages (cents/gallon, US light autos)

Conventional health 29GHG at $30/tCO2 32Total 61Gasoline taxes -46Net 15

Source: NAS, The Hidden Cost of Energy.

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Generic Strategies for Policies

A. Taxes on “bads” Carbon tax on CO2 emissions; taxes on ozone-depleting

chemics

B. Subsidies on “goods”1. Subsidies for private actions (usually tax credits, roll-in)

“Incentives” for vehicles, electricity, non-oil fuels, ethanol, …

2. Federal expendituresFederal energy R&D, renewable electric, advanced

nuclear

C. Regulations that are implicit taxes or redistribute private costs1. Efficiency standards

Vehicle (CAFE) standards, appliance standards

2. Misc. market regulationsFeed-in tariffs, mandate market shares for renewables (ethanol)

D. Innovational strategies (particularly important for long run)Key problem here is that there is a double-externality (pollution and knowledge).

Pollution

MB, MC

Private MC

MB

Efficient Pollution= Market

Social MC

Pollution regulation

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Regulation

Pollution

MB, MC

Private MC

MB

Efficient Pollution= Market

Social MC

Pigovian tax

Private MC+tax

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Taxes

Current approach in USAside from gasoline taxes, virtually no energy taxes.Instead, use regulation of new energy-using capitalRationale:

- to avoid taxation and fiscal impacts (political)- to induce innovation on energy technology (questionable economics)

Questions:- is it an efficient way to reduce energy consumption?- why do we override consumer/producer preferences (“lightbulb socialism”?)- rebound effect.

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DOE regulations on capital equipment

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Residential Products Commercial Equipment

Battery Chargers & External Power Supplies ASHRAE Products

Ceiling Fans & Ceiling Fan Light Kits Automatic Ice Makers

Central Air Conditioners & Heat Pumps Clothes Washers

Clothes Dryers Distribution Transformers

Clothes Washers Electric Motors

Cooking Products Furnaces & Boilers

Dehumidifiers High-Intensity Discharge Lamps

Direct Heating Equipment Metal Halide Lamp Fixtures

Dishwashers Packaged Terminal Air Conditioners & Heat Pumps

Furnace Fans Refrigerated Beverage Vending Machines

Furnaces and Boilers Refrigeration Equipment

Fluorescent & Incandescent Lamps Small Electric Motors

Fluorescent Lamp Ballasts Unitary Air Conditioners & Heat Pumps

Plumbing Products Walk-In Coolers and Walk-In Freezers

Pool Heaters Water Heaters

Refrigerators & Freezers

Room Air-conditioners

Small Duct, High Velocity Air Conditioners

Television Sets

Torchieres

Water Heaters

US Corporate Average Fuel Efficiency

• “Corporate Average Fuel Economy (CAFE) is the sales weighted average fuel economy, expressed in miles per gallon (mpg), of a manufacturer’s fleet of passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 lbs. or less, manufactured for sale in the United States, for any given model year.”

• “Congress specified that CAFE standards must be set at the maximum feasible level. Congress provided that the Department’s determinations of maximum feasible level be made in consideration of four factors: (1) technological feasibility; (2) economic practicability; (3) effect of other standards on fuel economy; and (4) need of the nation to conserve energy.

• Separates cars from “light trucks” (the growth the SUV culture)• Averaging across corporate fleet• Harmonic mean

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US standards

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Global standards

16

17

Gasoline (gpm)

gpm

K Excess cost of gasoline reduction

Simple economics of efficiency standards

0

0

1

1

2

2

Example of savings from higher mpg with diesel

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Jetta

SEL automatic 22,800.00 27.5 mpg

TDI Auto diesel auto 24,865.00 36.0 mpg

Cost of diesel 2,065.00

Cost of capital 15 % per year

Annual cost 309.75 $ per year

Annual gasoline at 12,000 miles per year

Gasoline 436 gal per year

Diesel 349 gal per year

Difference 87 gal per year

Cost per gallon 3.55 $ per gallon saved

Estimated cost of improvement, compact car

19Nat. Acad. Sci., Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,2002.

Jetta, 2011

Cost to reduce gasoline

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12,000 miles per year and 5% discount, 10% depreciation

Initial capital cost0 1000 2000 3000

Subcompact 2.27 2.78 naCompact 1.79 3.13 naMid-sized 1.92 3.57 3.57 Full-sized 1.56 3.13 4.17

Note: Calculated as [cost per year]/[gallons saved per year].

Important question raised by behavioral economics: Are consumers rational in their choices of gasoline mileage? We return to next week.

Critique of CAFE Standards

1. Ineffective because so far from target of policy (mpg rather than gasoline.

2. Ineffective because of “rebound effect” which arises when target wrong input (capital instead of fuel).

3. Ineffective because covers such a small fraction of market (automobiles in global carbon market).

4. Not cost-beneficial if already have energy taxes that cover the externality.

5. Blunt instrument that leads to SUV culture.

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