Category: Policy

Electric Car Wisdumb

The current McKinsey Quarterly feature’s Andy Grove’s editorial, An electric plan for energy resilience. An excerpt:

We believe the United States should consider accelerating this movement by creating an industry of after-market retrofitters. What problems’”technical and economic’”would need to be solved in order to do that? With the help of a team of second-year graduate students in our Bass seminar at the Stanford Business School, we examined this question in the context of a proposed pilot program, whose aim would be to retrofit one million vehicles in three years. We felt that such a project would represent what in game theory is referred to as the ‘minimum winning game’: a significant step toward a long-term strategic objective (see sidebar, ‘Inside Andy’s real-world seminar’).

We estimate the price tag of such a pilot project to be around $10 billion, owing to the present high cost of batteries, which are around $10,000 each. One might expect such costs to drop as volume increases, but because this program is accelerated by design, we have to assume that batteries will remain expensive. Assuming an average gas price of $3 per gallon, the payback period to the owner of a retrofitted vehicle is at least ten years, not a strong economic incentive. But the benefits of this program’”testing and validating a key approach to energy resilience’”accrue to the well-being of the United States at large. As the general population is the predominant beneficiary, economic assistance flowing from everyone to vehicle owners, in the form of tax incentives, is justified.

There are different approaches to retrofitting vehicles. We favor GM’s Volt design, in which the car is directly driven by an electric motor. The vehicle’s existing gasoline engine is replaced by a smaller one, whose sole purpose is to generate electricity and recharge the battery. To simplify the retrofitting task, we would limit the scope of the program to six to ten Chevrolet, Ford, and Dodge models, selected on the basis of two criteria: low fuel efficiency and large numbers of vehicles on the road. Most of these vehicles would be SUVs, pick-ups, and vans.

There’s some wisdom in this proposal, particularly in the recognition that achieving an alt fuel vehicle transformation takes more than a few inventions; it requires changes in infrastructure, marketing, and a variety of other domains, each with bugs to be worked out:

Others wondered why we should bother retrofitting a million cars if that would deal only with a fraction of a percent of the existing cars. That’s one way to look at it. Another, which was the view our students took, is that it is important to strive to do enough conversions that we can encounter all the unknown unknowns, which in my experience characterize every new product or technology as it gets scaled into volume. Should it be 5 million? Should it only be 500,000? We picked a million as a number that is big enough to stress retrofitting capability, battery production capability, manufacturing issues and marketing issues. We described our aim as the ‘minimum winning game’ that would give us a platform from which we could scale further.

However, the retrofit idea strikes me as fundamentally flawed. Targeting low efficiency SUVs, pick-ups, and vans puts batteries exactly where they’d be least effective. If most such vehicles weren’t overweight, un-aerodynamic, saddled with lossy AWD, and bloated with power-hungry accessories, they’d already get decent fuel economy. Adding batteries to them is going to result in some combination of high cost, short range, and poor performance. That sounds like a sure way to poison the public perception of plug in electric vehicles.

RMI has been arguing for years that a coordinated set of chassis innovations could make powertrains with high cost-per-watt, like fuel cells, attractive. It’s no accident that that the only really successful hybrid vehicle (the Prius, responsible for over half of 2007 and 2008 hybrid sales) was designed from scratch. It gets its breakthrough mileage/performance combination from much more than a battery and motor. Lightweight materials, aerodynamics, low rolling resistance tires, and other innovations are also key.

I think Grove and his students are falling for a common fantasy: that technology will step up and allow us to drive exactly as we now do, fossil-free. I personally doubt that will happen. Arnold will probably be one of only a few to ever drive a hydrogen Hummer. The rest of us will have to recognize that if alt fuel vehicles are to accomplish anything really meaningful from an energy standpoint, they’ll be different, as will our land use, commuting, and travel habits.

With that in mind, we should be focusing on creating the new stuff, not fixing the old. That might mean the Chevy Volt, but it might also mean rail or telecommuting. Rather than setting up programs to achieve narrow goals, I’d rather see broad, credible signals (e.g., prices at the pump reflecting environmental and security values) guide the evolution of the new from the bottom up.

Four Legs and a Tail

An effective climate policy needs prices, technology, institutional rules, and preferences.

I’m continuously irked by calls for R&D to save us from climate change. Yes, we need it very badly, but it’s no panacea. Without other signals, like a price on carbon, technology isn’t going to do a lot. It’s a one-legged dog. True, we might get lucky with some magic bullet, but I’m not willing to count on that. An effective climate policy needs four legs:

  1. Prices
  2. Technology (the landscape of possibilities on which we make decisions)
  3. Institutional rules and procedures
  4. Preferences, operating within social networks

Continue reading “Four Legs and a Tail”

News Flash: There Is No "Environmental Certainty"

The principal benefit cited for cap & trade is “environmental certainty,” meaning that “a cap-and-trade system, coupled with adequate enforcement, assures that environmental goals actually would be achieved by a certain date.” Environmental certainty is a bit of a misnomer. I think of environmental certainty as ensuring a reasonable chance of avoiding serious climate impacts. What people mean when they’re talking about cap & trade is really “emissions certainty.” Unfortunately, emissions certainty doesn’t provide climate certainty:

Emissions trajectories yielding 2C temperature change

Even if we could determine a “safe” level of interference in the climate system, the sensitivity of global mean temperature to increasing atmospheric CO2 is known perhaps only to a factor of three or less. Here we show how a factor of three uncertainty in climate sensitivity introduces even greater uncertainty in allowable increases in atmospheric CO2 CO2 emissions. (Caldeira, Jain & Hoffert, Science)

The uncertainty about climate sensitivity (not to mention carbon cycle feedbacks and other tipping point phenomena) makes the emissions trajectory we need highly uncertain. That trajectory is also subject to other big uncertainties – technology, growth convergence, peak oil, etc. Together, those features make it silly to expend a lot of effort on detailed plans for 2050. We don’t need a ballistic trajectory; we need a guidance system. I’d like to see us agree to a price on GHGs everywhere now, along with a decision rule for adapting that price over time until we’re on a downward emissions trajectory. Then move on to the other legs of the stool: ensuring equitable opportunities for development, changing lifestyle, tackling institutional barriers to change, and investing in technology.

Unfortunately, cap & trade seems ill-suited to adaptive control. Emissions commitments and allowance allocations are set in multi-year intervals, announced in advance, with long lead times for design. Financial markets and industry players want that certainty, but the delay limits responsiveness. Decision makers don’t set the commitment by strictly environmental standards; they also ask themselves what allocation will result in an “acceptable” price. They’re risk averse, so they choose an allocation that’s very likely to lead to an acceptable price. That means that, more often than not, the system will be overallocated. On balance, their conservatism is probably a good thing; otherwise the whole system could unravel from a negative public reaction to volatile prices. Ironically, safety valves – one policy that could make cap & trade more robust, and thus enable better mean performance – are often opposed because they reduce emissions certainty.

Cap & Trade – How Soon?

I’m a strong advocate for a price on carbon, but I have serious reservations about cap & trade. I’m thrilled that climate policy is finally getting off the dime, but I wish enthusiasm were focused on a carbon tax instead. Consider this:

Jurisdiction Instrument Started Operational Status
EU Cap & Trade 2003 2005 Phase 1 overallocated & underpriced; still wrangling over loopholes for subsequent phases
British Columbia Tax Feb 2008 July 2008 Too low to do much yet, but working
Sweden Tax 1991 1991 Running, at $150/TonCO2; emissions down
RGGI Cap & Trade 2003 2008 Overallocated
Norway Tax 1990 1991 Works; not enough to lower emissions substantially
California Cap & Trade (part of AB32) 2007 Earliest 2012 Punted
WCI Cap & Trade 2007 Earliest 2012 Draft design

The pattern that stands out to me is timing – cap & trade systems are slow to get out of the gate compared to carbon taxes. They entail huge design challenges, which often restrict sectoral coverage. Price uncertainty makes it difficult to work out the implications of allowance allocation (unless you go to pure auction, in which case you lose the benefit of transitional grandfathering as a mechanism to buy carbon-intensive industry participation). I think we’ll be lucky to see an operational cap & trade system in the US, with meaningful prices and broad coverage, by the end of the first Obama administration.

Next Generation Climate Policy Models

Today I’m presenting a talk at an ECF workshop, Towards the next generation of climate policy models. The workshop’s in Berlin, but I’m staying in Montana, so my carbon footprint is minimal for this one (just wait until next month …). My slides are here: Towards Next Generation Climate Policy Models.

I created a set of links to supporting materials on del.icio.us.

Update Workshop materials are now on a web site here.

California Punting on Cap & Trade

Bloomberg reports that California’s cap and trade program may still be some way off:

[CARB chair] Nichols told venture capitalists and clean-energy executives last week in Mountain View, California, that she was “thinking of punting,” saying the specifics of the emissions-trading program may not be ready for 1-2 more years.

“I think the cap-and-trade system needs to be thought through and I don’t think that has been done yet,” said Jerry Hill, a member of the Air Resources Board. “It would be a good idea to take our time to be sure what we do create is successful.”

Greentech VCs aren’t thrilled, but I think this is wise, and applaud CARB for recognizing the scale of the design task rather than launching a half-baked program. Still, delay is costly, and design complexity contributes to delay. California has a lot of balls in the air, with a hybrid design involving a dozen or so sectoral initiatives, a low-carbon fuel standard, and cap & trade. As I said a while ago,

My fear is that the analysis of GHG initiatives will ultimately prove overconstrained and underpowered, and that as a result implementation will ultimately crumble when called upon to make real changes (like California’s ambitious executive order targeting 2050 emissions 80% below 1990 levels). California’s electric power market restructuring debacle jumps to mind. I think underpowered analysis is partly a function of history. Other programs, like emissions markets for SOx, energy efficiency programs, and local regulation of criteria air pollutants have all worked OK in the past. However, these activities have all been marginal, in the sense that they affect only a small fraction of energy costs and a tinier fraction of GDP. Thus they had limited potential to create noticeable unwanted side effects that might lead to damaging economic ripple effects or the undoing of the policy. Given that, it was feasible to proceed by cautious experimentation. Greenhouse gas regulation, if it is to meet ambitious goals, will not be marginal; it will be pervasive and obvious. Analysis budgets of a few million dollars (much less in most regions) seem out of proportion with the multibillion $/year scale of the problem.

One result of the omission of a true top-down design process is that there has been no serious comparison of proposed emissions trading schemes with carbon taxes, though there are many strong substantive arguments in favor of the latter. In California, for example, the CPUC Interim Opinion on Greenhouse Gas Regulatory Strategies states, ‘We did not seriously consider the carbon tax option in the course of this proceeding, due to the fact that, if such a policy were implemented, it would most likely be imposed on the economy as a whole by ARB.’ It’s hard for CARB to consider a tax, because legislation does not authorize it. It’s hard for legislators to enable a tax, because a supermajority is required and it’s generally considered poor form to say the word ‘tax’ out loud. Thus, for better or for worse, a major option is foreclosed at the outset.

At the risk of repeating myself,

The BC tax demonstrates a huge advantage of a carbon tax over cap & trade: it can be implemented quickly. The tax was introduced in the Feb. 19 budget, and switched on July 1st. By contrast, the WCI and California cap & trade systems have been underway much longer, and still are no where near going live.

My preferred approach to GHG regulation would be, in a nutshell: (a) get a price on emissions ASAP, in as simple and stable a way as possible; if you can’t have a tax, design cap & trade to look like a tax (b) get other regions to harmonize (c) then do all that other stuff: removing institutional barriers to change, R&D, efficiency and renewable incentives, in roughly that order (c) dispense with portfolio standards and other mandates unless (a) through (c) aren’t doing the job.

State Emissions Commitments

For the Pangaea model, colleagues have been compiling a useful table of international emissions commitments. That will let us test whether, if fulfilled, those commitments move the needle on global atmospheric GHG concentrations and temperatures (currently they don’t).

I’ve been looking for the equivalent for US states, and found it at Pew Climate. It’s hard to get a mental picture of the emissions trajectory implied by the various commitments in the table, so I combined them with emissions data from EPA (fossil fuel CO2 only) to reconcile all the variations in base years and growth patterns.

The history of emissions from 1990 to 2005, plus future commitments, looks like this:

State emissions commitments, vs. 1990, CO2 basis

Note that some states have committed to “long term” reductions, without a specific date, which are shown above just beyond 2050. There’s a remarkable amount of variation in 1990-2005 trends, ranging from Arizona (up 55%) to Massachusetts (nearly flat).

Continue reading “State Emissions Commitments”

Is the BC Carbon Tax Fair?

That’s the title of a post today at The Progressive Economics Forum, introducing a new report from the Canadian Centre for Policy Alternatives.

The bottom line:

In this study, we model the distribution of BC’s carbon tax and recycling measures. Our results conirm that BC’s carbon tax, in and of itself, is regressive. However, the overall carbon tax and recycling framework is modestly progressive in 2008/09 ’” that is, low-income families get back more in credits, on average, than they pay in carbon taxes. If the low-income credit is not expanded, however, the regime will shift to become regressive by 2010/11. It is important for policy makers to rectify this situation in the 2009 and future budgets by minimally ensuring that the credit grows in line with the carbon tax.

A related problem:

A second concern with the carbon tax regime is that tax cuts undermine a progressive outcome at the top of the income scale. In 2008/09, personal and corporate income tax cuts lead to an average net gain for the top 20% of households that is larger in dollar terms than for the bottom 40%.

I plotted the results in the report’s tables to show some of these effects. In 2009, the lowest income groups (quintiles 1-3) come out a little ahead, but the 4th quintile faces a net loss, while the top income group is overcompensated by the corporate tax cut:

BC carbon tax incidence and rebate distribution

Continue reading “Is the BC Carbon Tax Fair?”