Bad Incentives For Green Choices

Sure, I’d like to see a tax on gasoline that reflects its greenhouse gases emissions.  If we can’t or won’t do that, then maybe subsidies for electric vehicles can imperfectly address some of the same goals.  If not that, how about free EV charging?  Free parking? Higher speed limits for EVs? Discount air travel for EV owners?  Complimentary massages?

By the time you got to the last couple ideas, you probably said “well that’s ridiculous.”  At least I hope so.  But where do you draw the “ridiculous” line?

The near-unanimous view of economists is that the best way to deal with pollution externalities is by pricing them, generally through a pollution tax or cap and trade program.  Yet, policy makers still prefer to reward “good” behavior rather than impose costs on bad behavior.  Economists grumble, but policy makers respond that we mustn’t let the perfect be the enemy of good steps in the right direction.  There’s something to that, but a number of recent debates illustrate how these substitutes for pricing pollution can go off the rails, often doing much less good or even overall harm.[1]

Even if a reward is narrowly targeted — such as a subsidy for using or generating energy that is truly zero-GHG —  it still doesn’t give consumers incentives that match the underlying problem.  When we subsidize cleaner electricity, we may get the relative price of green versus brown electricity right, but we get the relative price of electricity versus everything else in the economy wrong.

The fundamental problem is not that green energy has positive spillovers — running your A/C on solar power doesn’t make others better off — but that brown energy has negative spillovers.  Thus, when we subsidize green instead of taxing brown, we end up making electricity too cheap overall.[2]    Green electricity subsidies also fail to account for how much GHG emissions they actually prevent.  Is that wind turbine crowding out coal-fired generation, a gas-fired plant, or another wind turbine?  The answer determines the value of the green power, but is not reflected in today’s subsidies.

While renewable electricity standards and subsidies are the big gorillas of green behavior rewards, there is a plethora of smaller reward systems that create further problems.  They offer some indirect benefit that creates a new set of distortionary incentives.  A perfect example was in the news earlier this year when Los Angeles International Airport (LAX) cancelled its free parking for electric vehicles — which began in the 1990s when EVs were as rare as $4 gas  — because the program had become “too successful.”

The advantage of electric vehicles is that they put out less pollution (yes, even counting the electricity generation process), but only when they are moving.  Why would anyone think that subsidizing EV parking at LAX gives the appropriate incentive to buy and drive an EV?  In fact, it lowers the overall cost of travelling by air, which is itself a GHG-intensive activity.  Complimentary massages for EV owners would probably make more sense.

ElecVehicles

But this reward turned out to have many other flaws.  Free parking was especially attractive to people going on long trips, who left their EVs sitting for weeks at charging stations, blocking other EVs from getting a charge and actually reducing the effectiveness of the free charging reward that LAX also offers.  On March 1, LAX discontinued the free parking, but continued to offer free charging (at least when you can find a charging station available).  The change was deplored by some EV advocates who instead wanted LAX to offer still more EV-dedicated spots with charging stations.  For every subsidy there is a beneficiary who believes it is now their God-given right, whether free parking for EVs or free polluting for old cars and power plants. (This post is already too long, so I’ll have to defer comments on HOV lane access for EVs, another indirect subsidy.)

A number of recent stories about taxing hybrids and EVs have raised a similar issue.  In Massachusetts, New Jersey, North Carolina, Virginia, Washington, and many other states improved vehicle fuel economy is reducing gasoline sales, which is lowering gas tax revenues that are dedicated to road maintenance and improvement.   The owner of an EV or plug-in hybrid does about as much road damage per mile driven — and gets about the same value of using the road — as a similar-sized car with an internal combustion engine, but the electric car doesn’t pay those gas taxes.

Advocates of a tax on EVs say high-fuel-economy cars should pay their fair share for road use, but defenders of electrics say that we need strong incentives to recognize the environmental and other advantages of reducing gasoline consumption.  They’re both right.  Taxes for road use should reflect the cost imposed by the user — road damage, congestion, safety, and other externalities – regardless of the type of engine used.  But those should be coupled with charges that accurately reflect the environmental damage of each type of vehicle.  These are separate costs that need separate, and transparent, fees.

Exempting EVs from paying for road use is like giving them free parking at LAX, an indirect reward for good behavior that will be less equitable and efficient than taxing the negative externalities directly.  Using gas taxes to reflect road use may have once been the best we could do, but technology now allows easy pricing of vehicle miles traveled – such as a mileage component to the annual registration fee — as well as the vehicle’s impact on congestion.

I support gas taxes to address GHG emissions (that’s my generic-gray Prius with the “TAX GAS” license plate), but vehicles that put out little or no GHGs shouldn’t be exempted from covering all the other costs they impose.  There’s really no reason to think that exemption from road taxes creates the right level of incentives for reducing GHGs.

We will never get to a pricing system that exactly reflects all the negative and positive externalities that our actions create.  But that shouldn’t be used as an excuse to adopt indirect — and opaque — subsidies without a careful analysis of how well they address the basic market failure, and what other perverse incentives they create.


[1] And this doesn’t even include the additional concern that pollution taxes can raise revenues that allow reductions in other distorting taxes – such as on wages — while subsidies often increase the need for those other distorting taxes.

[2] This is mitigated to some extent when we pay for the subsidies through increased electricity prices (though very imperfectly it turns out), but the U.S. relies heavily on green energy subsidies from the federal government, paid for through income taxes and other revenue sources that do not impact the price of electricity.  For more discussion of green power subsidies, see my recent paper on renewable electricity generation.

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15 Responses to Bad Incentives For Green Choices

  1. Jim says:

    This is an article hard to disagree with. Many of the incentives are really just a way to avoid taxing the source. People hate taxes so legislators use incentives instead. (I remember at one time retailers could not charge a customer for using credit cards. So instead, they gave a discount for cash payers.) A carbon tax would be tremendously efficient. Think of the bureaucracies that would be eliminated! Solar and Wind would have to compete based on economics. Oh my. Energy efficiency would be promoted naturally. If such a tax is too burdensome for certain segments of the economy, then provide them some assistance as they transition to the new regime. Economics can work if you give it a chance.

  2. Severin,
    Instead of all of this, you need to get a hydrogen fuel car in 3-4 years (your Prius will last
    that long — mine has over 110,000 miles and no problems (including the battery). But we
    (ALL OF US) need to be certain that the initial round of refueling stations for the H2 fuel cell
    cars electrolyze their hydrogen from renewable energy sources — and NOT the natural gas
    that is piped and shipped in, as is being pushed now. If not, then the stranded costs to for the natural gas will last decades, when meanwhile Hydrogen refueling will be available for everyone
    in their homes, building and local stores. It mitigates climate change and is SAFE, GREEN and CREATES jobs !!!!
    GET IT.
    I hope so. See you at CAL soon.
    Woody

  3. “The owner of an EV or plug-in hybrid does about as much road damage per mile driven — and gets about the same value of using the road — as a similar-sized car with an internal combustion engine, but the electric car doesn’t pay those gas taxes.”

    That’s true, but in both cases it’s effectively zero. Road damage is approximately proportional to the fourth power of axel weight, so it’s basically all caused by heavy trucks and buses.

    Of course, escaping the gas tax is still an implicit EV subsidy regardless.

  4. Jonathan Jacobs says:

    Why defer comments on HOV access for EVs? Using airport parking as a reward may have unintended consequences but doesn’t detract from the value of airport parking. Using HOV access detracts from the value of HOV access and contributes to defeating the purpose of HOV lanes which is to reduce congestion and get cars off the highway. Perhaps a better reward would be free parking in HOV lanes?

  5. Jim Dodenhoff says:

    Greetings Dr. Borenstein,

    Good and provocative stuff, as always. Green incentives and green subsidies have the interesting characteristic of quickly becoming perceived as entitlements and disproportionately influence buying decisions—in my view.

    Curious about the materiality of the type of distortions for green you mention as compared with the distortions currently in place in our federal tax code for resource extraction in petroleum, timber, and other industries (Sometimes included in the category of corporate welfare).

    Should we be spending our time ridding the fed tax code of these distortions or getting green “transformational” incentives/subsidies right, or both?

    thx!

    jim d

  6. Another nice post – thanks.

  7. Azmat Malik says:

    Very important. See the cover story in latest issue of IEEE Spectrum (also available online)
    On a mile-kg-driven basis (ie total energy consumed vs. efficiency etc) indeed electric transportation is more efficient. BUT when you figure in the environmental effects of the battery and other materials extraction and disposal at end-of-life the situation is not so clear.

    Consistent with tracking our every move, the DMV’s should issue every car a built-in fasttrak-like gps that keeps track of miles driven, and the charge is billed to a credit card, or paid for (in advance) at pay points, or the car just stops after a warning of impending road-tax deposit. This is equivalent to converting to an all-toll-road system for those who dont want to be tracked by the government.

    We could give each new all-electric car an ‘x’-year (say 5 year) road-tax waiver, after which the fasttrak kicks in. Similar to the carpool lane permitting for hybrids and EVs.

    Auto insurance companies collect the miles driven estimate data every renewal, perhaps they could collect and remit to the states a corresponding road-use premium for all cars.

    I am waiting for built in massage car seats; they should be just around the corner. These could be tax deductible.

    • Paula Rockwell says:

      You wouldn’t need to track the car; you could just check the odometer on a given date each year and weigh the vehicle to determine road use and abuse (approximately.) Maybe you could get a panel of experts to determine the cost to the environment, balancing the toxicity of batteries with the inevitable doom of global warming. That way, maybe someone would develop less toxic batteries, or less carbon intensive fuels. Of course the real world doesn’t quite work that way.

  8. Ben Schlesinger says:

    Bravo, Severin! As a Tesla S owner, I’m more than willing to pay my share for road maintenance, and support special EV fees to that effect – they’re nothing compared to what I save by not buying gasoline, ever. As to EV charging bays at airports (and train stations too, here in the Northeast), I don’t use them any more – indeed, I feel this is like parking in a handicapped space – the technology my car employs makes local EV charging unnecessary, whereas a Leaf driver (also a pioneer in my view) might not make it back home without this facility. I do use the J1772 EV chargers when driving out of town far from Tesla’s still nascent supercharger highway, however, see http://breakingenergy.com/2013/06/19/life-on-the-electric-vehicle-highway-part-1-up-to-new-england/. The real test for EVs will come when oil prices finally buckle under pressure from rising OPEC spare capacity caused by burgeoning North American oil production and weak demand. Then, we’ll be back on the 40 year high-low-high-low cycle of fuel prices that has helped to crush automotive efficiency (gas at $1.50 per gallon?) – so we’ll surely need to keep some of our ‘imperfect’ incentives around for a long time, especially California’s globe-leading vehicle economy standards.

  9. art2science says:

    A great column.
    But the situation may be much worse. EVs may not be environmentally superior AT ALL. See http://spectrum.ieee.org/energy/renewables/unclean-at-any-speed

    I foresee a repeat of the biofuels from corn fiasco, where by the time environmentalists woke up to the net negative effect of corn–> ethanol, large subsidies were already built into taxes and other places. Those subsidies have proved impossible to dislodge because they created “vested interests.”

    Here’s an excerpt from the IEEE article. Very discouraging. And once again, the mainstream press + environmentalists will loudly ignore the message.

    The National Academies’ assessment didn’t ignore those difficult-to-measure realities. It drew together the effects of vehicle construction, fuel extraction, refining, emissions, and other factors. In a gut punch to electric-car advocates, it concluded that the vehicles’ lifetime health and environmental damages (excluding long-term climatic effects) are actually greater than those of gasoline-powered cars. Indeed, the study found that an electric car is likely worse than a car fueled exclusively by gasoline derived from Canadian tar sands!

    As for greenhouse-gas emissions and their influence on future climate, the researchers didn’t ignore those either. The investigators, like many others who have probed this issue, found that electric vehicles generally produce fewer of these emissions than their gasoline- or diesel-fueled counterparts—but only marginally so when full life-cycle effects are accounted for. The lifetime difference in greenhouse-gas emissions between vehicles powered by batteries and those powered by low-sulfur diesel, for example, was hardly discernible.

  10. Brian Steel says:

    From the owner of a geriatric-gray Prius with the “EFFCNCY” license plate: “Well said, Severin. Some critical concepts/issues very cogently presented.”

  11. CG Dong says:

    I guess the problem is still that it is difficult to draw the “ridiculous” line and whether we need smaller actions like these stated in the article. When we consider these small incentives/actions, the logic of “big problems — small actions” is helpful for us to understand why they exist. In economics, when there are big market failure problems, big actions such as tax and CAT are obviously the best options. However, what can small bodies like an airport do when facing big problems? Purely nothing and unnecessary? I don’t think so. It is exactly because the problem is so prevalent that everybody wants to contribute in his/her own way. Maybe their policies/approaches are not perfect, but when they see a potential problem of it, they will react to that. This is a practical, gradual and ‘imperfect’ approach, but a worthwhile one. Most of these small actions just cannot be perfect in economics sense, since they are partial and cannot consider the full impact they have on the economy. But they are voices from various small parties, who can then converge and add up to the momentum, before we have a once-for-all best policy.

  12. John Proctor says:

    Subsidies are insidious, I have done some work in Saudi Arabia. Their electricity is highly subsidized. Their water (desalinated) is highly subsidized. The citizens of that country have no reason to buy an efficient air conditioner or to turn it off. I don’t see any way out for them. To change that situation might cause a revolution.

  13. Why the worry about making electricity too cheap, setting aside the pollution from fossil generation and the risks from nuclear? I suggest taking a long view on this. A 100% renewable electricity system, which we must get to over the next few decades to prevent climate catastrophe, will have a marginal production cost of zero most of the time, because you need a large reserve to cover peak loads and outages. So we will have to pay for electricity almost entirely by capacity charges. Nobody will worry about the marginal kwh. Under plenty – and economists might remember that plenty is desirable if you can have it, even if it makes them redundant – the problem of misallocation disappears. A temporary misallocation en route to early plenty isn’t that important.

  14. Naor says:

    Are there any recent studies (within the past few months) on the impact (or lack thereof) of renewable standards and subsidies on the continuing decline in prices (according to the EIA, 35% drop in the levelized cost of solar in the last two years)?

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