When rebates go bad


There’s a long-standing argument over the extent to which rebound effects eat up the gains of energy-conserving technologies, and whether energy conservation programs are efficient. I don’t generally side with the hardline economists who argue that conservation programs fail a cost benefit test, because I think there really are some $20 bills scattered about, waiting to be harvested by an intelligent mix of information and incentives. At the same time, some rebate and credit programs look pretty fishy to me.

On the plus side, I just bought a new refrigerator, using Montana’s $100 stimulus credit. There’s no rebound, because I have to hand over the old one for recycling. There is some rebound potential in general, because I could have used the $100 to upgrade to a larger model. Energy Star segments the market, so a big side-by-side fridge can pass while consuming more energy than a little top-freezer. That’s just stupid. Fortunately, most people have space constraints, so the short run price elasticity of fridge size is low.

On the minus side, consider tax credits for hybrid vehicles. For a super-efficient Prius or Insight, I can sort of see the point. But a $2600 credit for a Toyota Highlander getting 26mpg? What a joke! Mercifully that foolishness has been phased out. But there’s plenty more where that came from.

Consider this Bad Boy:


The Zero-Emission Agricultural Utility Terrain Vehicle (Agricultural UTV) Rebate Program will credit $1950 in the hope of fostering greener farms. But this firm knows who it’s really marketing to:


Is there really good control over the use of the $, or is public funding just mechanizing outdoor activities where people ought to use the original low-emissions vehicle, their feet? When will I get a rebate for my horse?


Like spreadsheets, open-loop models are popular but flawed tools. An open loop model is essentially a scenario-specification tool. It translates user input into outcomes, without any intervening dynamics. These are common in public discourse. An example turned up in the very first link when I googled “regional growth forecast”:

The growth forecast is completed in two stages. During the first stage SANDAG staff produces a forecast for the entire San Diego region, called the regionwide forecast. This regionwide forecast does not include any land use constraints, but simply projects growth based on existing demographic and economic trends such as fertility rates, mortality rates, domestic migration, international migration, and economic prosperity.

In other words, there’s unidirectional causality from inputs  to outputs, ignoring the possible effects of the outputs (like prosperity) on the inputs (like migration). Sometimes such scenarios are useful as a starting point for thinking about a problem. However, with no estimate of the likelihood of realization of such a scenario, no understanding of the feedback that would determine the outcome, and no guidance about policy levers that could be used to shape the future, such forecasts won’t get you very far (but they might get you pretty deep – in trouble).

The key question for any policy, is “how do you get there from here?” Models can help answer such questions. In California, one key part of the low-carbon fuel standard (LCFS) analysis was VISION-CA. I wondered what was in it, so I took it apart to see. The short answer is that it’s an open-loop model that demonstrates a physically-feasible path to compliance, but leaves the user wondering what combination of vehicle and fuel prices and other incentives would actually get consumers and producers to take that path.

First, it’s laudable that the model is publicly available for critique, and includes macros that permit replication of key results. That puts it ahead of most analyses right away. Unfortunately, it’s a spreadsheet, which makes it tough to know what’s going on inside.

I translated some of the model core to Vensim for clarity. Here’s the structure:


Bringing the structure into the light reveals that it’s basically a causal tree – from vehicle sales, fuel efficiency, fuel shares, and fuel intensity to emissions. There is one pair of minor feedback loops, concerning the aging of the fleet and vehicle losses. So, this is a vehicle accounting tool that can tell you the consequences of a particular pattern of new vehicle and fuel sales. That’s already a lot of useful information. In particular, it enforces some reality on scenarios, because it imposes the fleet turnover constraint, which imposes a delay in implementation from the time it takes for the vehicle capital stock to adjust. No overnight miracles allowed.

What it doesn’t tell you is whether a particular measure, like an LCFS, can achieve the desired fleet and fuel trajectory with plausible prices and other conditions. It also can’t help you to decide whether an LCFS, emissions tax, or performance mandate is the better policy. That’s because there’s no consumer choice linking vehicle and fuel cost and performance, consumer knowledge, supplier portfolios, and technology to fuel and vehicle sales. Since equilibrium analysis suggests that there could be problems for the LCFS, and disequilibrium generally makes things harder rather than easier, those omissions are problematic.

Continue reading “Fuzzy VISION”

Cash for Clunkers Illusion

The proposed cash-for-clunkers program strikes me as yet another marginally effective policy that coulda been a contenda. In the aggregate, getting rid of clunkers doesn’t do much good, because fleet fuel economy has not improved in the last decade (at least current proposals don’t target age). Only transaction costs prevent wholesale shuffling of vehicles to yield advantageous trades that don’t improve total fleet efficiency. Clunkers that are cheap enough to scrap for a tax credit likely have low utilization; if they’re replaced by a new vehicle with high utilization, that doesn’t help. It might be a good stimulus for automakers, but you can’t get to a low-carbon future by subsidizing new carbon-consuming capital. The credits proposed in House and Senate versions appear to suffer from MPG illusion:

Clunker credits & differences

Clunker credit vs. fuel savings

How many climate and energy policies that don’t work do we really need?

Drinking too much CAFE?

The NHTSA and EPA have announced upgraded vehicle efficiency and emissions standards. The CAFE standard will go up to 35.5 mpg by 2016, and a 250 gCO2/mile emissions limit will be phased in by the same time. My bottom line: I strongly favor efficient, low-emissions vehicles, but I think command and control legislation is a lousy way to get them. The approach works, but there’s a lot of collateral damage and inefficiency, and opponents of climate and energy policy are given lots to complain about. I’m happy about the new standard, but I look forward to the day when it’s not needed, because other signals are working properly.

First, as background, here’s the new CAFE standard in perspective:

CAFE standard and performance & light truck share

Source: NHTSA Update: I’ve corrected the data, which inadvertently showed light trucks rather than the total fleet. Notice two things: first, the total fleet corporate average fuel economy (CAFE) and standard has been declining, due to the penetration of light trucks (including SUVs). Second, if the 2016 standard of 35.5 mpg is to be met, given car and truck standards of 39 and 30 mpg, the share of light trucks will have to fall below 40%, though extrapolation of the historic trend would carry it nearer to 70%. It’s not clear how the allocation of footprint, credit trading and other features of CAFE will cause this to occur.

Like other portfolio standards, CAFE creates an internal tax and subsidy system within regulated entities. To meet its portfolio requirement, a manufacturer has to (internally) subsidize high-mpg vehicles and tax low-mpg vehicles. This hidden tax structure is problematic in several ways. There’s no guarantee that it yields an implicit price of carbon or energy that’s consistent across manufacturers, or consistent with fuel taxes and the price of emissions under a cap & trade system. Subsidizing the high-mpg vehicles is a bad idea: they’re more efficient, but they aren’t zero-emissions, and they still contribute to congestion and other side effects of driving – why would we want more of that? It’s even possible, if high-mpg drivers are price elastic  (think kids) and low-mpg drivers are less so (think luxury SUV buyers, that the standard increases the total fleet and thus offsets some of its intended fuel savings.

The basic incentive problem with portfolio standards is compounded by the division of CAFE into domestic and imported, car and light truck stovepipes. Separate, non-fungible standards for cars and trucks create a bizarre allocation of property rights – in effect, light truck buyers are endowed with more property rights to consume or emit, irrespective of the fact that GHGs and other externalities do the same harm regardless of who’s responsible. Recently, a new footprint methodology effectively generalized the car/truck distinction to an allocation based on vehicle footprint. This makes about as much sense as subsidizing bullets for felons. It sounds like the stovepipe issue will be relaxed a bit with the new regulations, because credits will become tradable, but just wait until GM truck buyers figure out that they’re paying a tax that goes to subsidize Honda Fits. Still, there’s no clear reason why the ratio of car:truck standards should be 39:30, or why the car standard should go up 30% while the truck standard goes up 15%.

Applying the standard to vehicles at the point of purchase, rather than as they are used (through fuel taxes or VMT tolls) fails to recognize that most of the negative side effects of a vehicle arise from its use, not from its existence. With fuel, emissions, and congestion charges, people could be free to make their own tradeoffs among efficiency, vehicle utilization, and capabilities like cargo capacity. Standards basically ignore diversity in usage patterns, and shoehorn everyone into the same mold. Remember that, while a driver-only Chevy Suburban is ridiculous, a full one moves people almost as efficiently as a full Prius, and 3x more efficiently than a driver-only Prius.

Once efficient vehicles are on the road, the rebound effect crops up. CAFE lowers the cost of driving, so in the absence of a fuel or emissions price signal, people will drive, consume, and emit more. Over the past three decades, miles traveled per vehicle and the total fleet size have dramatically increased. As a result, fuel consumption per vehicle has been essentially constant, in spite of efficiency improvements, and total fuel consumption is up. The increase in driving is likely due mostly to cheap fuel, sprawl, and increasing population and wealth, but efficiency mandates have probably contributed as well.

VMT, fuel, registrations

Source: DOT FHWA

In addition to incentive problems, there are lots of implementation issues in CAFE. Over the years, there’s been a lot of tinkering with the standard (like the footprint methodology) designed to restore flexibility you’d have automatically with a market-based mechanism or to achieve other policy goals. As a result, the rules have become rather opaque. CAFE measurements use EPA’s old fuel economy measurement methods, which were abandoned for window stickers a few years ago because they didn’t match reality. There are various loopholes, including one that permits vehicles to claim 4x mpg if they can consume alternate fuels, even if those fuels are not widely distributed (E85).

The critics of CAFE mostly don’t focus on the incentive and transparency problems above. Instead, they hammer on two ideas: that CAFE costs jobs, and forces us all to die in tiny boxes. Those make good sound bites, but neither argument is particularly strong. Seeking Alpha has a nice look at the economics. The safety issue is harder to wrap your arms around. Basically, the critics argue that, in a collision, weight is good. From the perspective of a single driver, that’s largely true, because the distribution of changes in momentum in a collision is strongly proportional to the relative mass of the objects involved. However, that’s an arms race, with no aggregate benefit: when everyone else drives a 4952 lb Dodge Ram 1500, you need a 6342 lb Ram 3500 to stay ahead. With safety as the only consideration, soon we’d all be driving locomotives and M1 tanks. The real social benefit of weight is that it’s correlated with size, which (all else equal) lowers the acceleration passengers face in a collision, but the size-weight correlation is intermediated by technology, which governs the strength of a passenger compartment and the aggressiveness of a vehicle chassis against other vehicles.

In that respect, CAFE’s car-light truck distinction and footprint methodology probably has been damaging, because it has encouraged the spread of heavy SUVs on ladder frames, as can be seen in the first figure. Those vehicles impose disproportionate risk on others:

Collision risk, decomposed to own and other effects

Source: Marc Ross UMich, Tom Wenzel LBNL, An Analysis of Traffic Deaths by Vehicle Type and Model, ACEE Report #T012, March 2002.

There are many ways to achieve safety without simply adding mass: good design, better materials, restraints, lower speeds, and less beer on Saturday night all help. If we had a vehicle energy and emissions policy that permitted broader tradeoffs, I’m sure we could arrive at a more efficient system with better aggregate safety than we have now.

In spite of its many problems, I’ll take CAFE – it’s better than nothing, and there’s certainly no technical obstacle to meeting the new standards (be prepared for lots of whining though). Alternatives will take a while to construct, so by wingwalker’s rule we should hang onto what we have for the moment. But rather than pushing the standards approach to its inevitable breakdown point, I think we should be pursuing other options: get a price on carbon, and any other externalities we care about (congestion tolls and pay-at-the-pump insurance are good examples). Then work on zoning, infrastructure, and other barriers to efficiency, mode shifting, and VMT reduction. With the fundamental price signals aligned with the goals, it should be easier to push things in the right direction.

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.