Economists are from Mars, Electric Cars are from Venus

I work at UC Davis, a University with at least two (that I know about) centers devoted to research “aimed at developing a sustainable market for plug-in vehicles.” I run into a lot of researchers and environmental advocates who are completely dedicated to the mission of accelerating the deployment of electric vehicles. They view electrifying a large share of the transportation fleet as one key piece of the climate policy puzzle.

I am also an economist.   The research coming out of the economics community has pretty consistently demonstrated that electric vehicles currently have marginal (at best) environmental benefits. I run into a lot of economists who are perplexed at the hostility these findings have generated from pockets of the environmental community.

I have followed and pondered these clashes for some time now, in part for the entertainment value, but also because of what this conflict reveals about how the different disciplines think about climate policy.

As the Paris climate summit concludes, the spotlight has been on goals such as limiting warming to 2 or even 1.5 degrees Celsius, and how the agreed-to actions fall short of the necessary steps to achieve them.  There has been much less focus on where targets like 2 degrees Celsius come from, and what the costs of achieving them would be.   A lot of the policies being discussed for meeting goals like an 80% reduction in carbon emissions carry price tags well in excess of the EPA’s official “social cost of carbon,” one measure of the environmental damages caused by CO2 emissions.   It is quite likely that these different perspectives, about how to frame the climate change problem, will define the sides of the next generation of climate policy debate (if and when we get past the current opposition based upon a rejection of climate science).

Screenshot 2015-12-13 16.03.50

Optimal EV Subsidies by County (from Mansur, et al.)

To be clear, the research on EVs is not (for most places) claiming that electric cars yield no environmental benefit. The point of papers like Mansur, et. al, and Archsmith, Kendall, and Rapson  is that these benefits are for the moment dwarfed by the size of public and private funds directed at EVs. Some have criticized aspects of the study methodologies (for example a lack of full life cycle analysis), but later work has largely addressed those complaints and not changed the conclusion that the benefits of EVs are substantially below the level of public subsidy they currently enjoy. Not only that, but Severin Borenstein and Lucas Davis point out that EV tax credits are about the most regressive of green energy subsidies currently available.

Another common, and more thought provoking, reaction I’ve seen is the view that the current environmental benefits of EVs are almost irrelevant. The grid will have to be substantially less carbon intensive in the future, and therefore it will be. The question is, what if it’s not? It seems likely that California will have a very low carbon power sector in 15 years, but I’m not so sure about the trajectory elsewhere. This argument also raises the question of sequencing. Why are we putting so much public money into EVs before the grid is cleaned up and not after?

This kind of argument comes up a lot when discussing some of the more controversial (i.e., expensive) policies directed at CO2 emissions mitigation.   Economists will write papers pointing to programs with an implied cost per ton of CO2 reductions in the range of hundreds of dollars per ton. One reaction to such findings is to point out that we need to do this expensive stuff and the cheap stuff or else we just aren’t going to have enough emissions reductions.   Since we need to do all of it, it’s no great tragedy to do the expensive stuff now.

It seems to me that this view represents what was once captured in the “wedges” concept and is now articulated as a carbon budget. Environmental economists call it a quantity mechanism or target. The underlying implication is that we have to do all the policies necessary to reach the mitigation target, or we are completely screwed. So we need to identify the ways (wedges) that reduce emissions and get them done, no matter what the costs may be.

Screenshot 2015-12-13 17.02.10

A CO2 Abatement Plan for California, circa 2011, from Williams, et al.

According to this viewpoint we shouldn’t quibble over whether program X costs $100 or $200 a ton if we’re going to have to do it all to get the abatement numbers to add up.   Sure, it may be ideal to do the cheap stuff (clean up the power sector) first and then do the expensive stuff (roll out EVs), but we’re going to have to do it all anyway.

At the risk of oversimplification, many environmental economists think of the problem in a different way. Each policy that reduces emissions has a cost, and those reductions create an incremental benefit. The question is then “are the benefits greater than the costs”?   From this framing of the problem, a statement like “we have to stick to the carbon budget X, no matter what the costs” doesn’t make sense. Any statement that ignores the costs doesn’t make sense.

It does appear that to reduce emissions by 80% by 2050, we will have to almost completely decarbonize the power sector and largely, if not completely, take the carbon out of transportation. That’s just arithmetic. How does one square that with research that implies such policies currently cost several hundred dollars a ton?

In particular, how do we reconcile this with the EPA’s estimates of the social cost of carbon that are in the range of $40/ton?  In their paper on the lifecycle carbon impacts of EVs and conventional cars, Archsmith, Kendell, and Rapson, using $38/ton as a cost of carbon, estimate the lifetime damages of the gasoline powered, but pretty efficient, Nissan Versa to be $3200. In other words, replacing a fuel efficient passenger car with a vehicle with NO lifecycle emissions would produce benefits of $3200. That puts $10,000 in EV tax credits in perspective.

Many proponents of those policies no doubt believe that the benefits of abatement (or costs of carbon emissions) are indeed many hundreds of dollars per ton. Or they could believe that costs of many of these programs are either cheaper right now than economists claim, or will become cheaper over the next decades.  Some justify the current resources directed at EVs as first steps necessary to gain the advantages of learning-by-doing and network effects.  Others make the point that the average social cost of carbon masks the great disparity in the distributional impacts of those costs.   Perhaps climate policy should be trying to limit the maximum damages felt by anyone, instead of targeting averages. How do residents of the Marshall Islands feel about the US EPA’s social cost of carbon?

All these are legitimate viewpoints. However, there is also the fact that the quantity targets we are picking, like limiting warming to 2 degree Celsius increase and/or reducing emissions by 80% by 2050, are somewhat arbitrary targets themselves. It’s hard to claim that the benefits of abatement are minuscule if we fall slightly short of that target and suddenly become huge if we make it.   This encapsulates the economists’ framing of the climate problem as a “cost-based” one.   Under this viewpoint we should keep pushing on abatement as much as we can, and see if the costs turn out to be less than the benefits. If not, we adjust our targets in response to what we learn about abatement costs (in addition to climate impacts).

This motivates so much of the economics research focus on the costs and effectiveness of existing and proposed regulations. That community doesn’t view it as sweating the small stuff. Under this framing of the issue, maybe having a fleet of super fuel efficient hybrids makes more sense, even if it results in higher carbon from passenger vehicles than a fleet of pure EVs might.

Or maybe EVs do turn out to be the best option. The two sides will have to recognize where the other is coming from, or the next round of climate policy debates may be as frustrating as this one.

 

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28 Responses to Economists are from Mars, Electric Cars are from Venus

  1. Pingback: Economists are from Mars, Electric Cars are from Venus - Berkeley-Haas Insights

  2. The idea of deriving an “optimal path” based on benefit cost analysis for costs and benefits decades hence is, shall we say charitably, optimistic. There are lots of good reasons to think that benefit-cost analysis shouldn’t be used for the climate problem writ large, though doing a narrower “cost effectiveness analysis to meet a given target is a worthy goal of economic analysis. I explore these issues here: Koomey, Jonathan. 2013. “Moving Beyond Benefit-Cost Analysis of Climate Change.” Environmental Research Letters. vol. 8, no. 041005. December 2. [http://iopscience.iop.org/1748-9326/8/4/041005/]

    Also see the discussion of path dependence (especially in the electricity sector) here: Williams, James H., Andrew DeBenedictis, Rebecca Ghanadan, Amber Mahone, Jack Moore, William R. Morrow, Snuller Price, and Margaret S. Torn. 2012. “The Technology Path to Deep Greenhouse Gas Emissions Cuts by 2050: The Pivotal Role of Electricity.” Science. vol. 335, no. 6064. January 6, 2012. pp. 53-59. [http://www.sciencemag.org/content/335/6064/53.abstract]

    And see: Williams, James H., Benjamin Haley, Fredrich Kahrl, Jack Moore, Andrew D. Jones, Margaret S. Torn, and Haewon McJeon. 2014. Pathways to deep decarbonization in the United States. San Francisco, CA: The Deep Decarbonization Pathways Project of the Sustainable Development Solutions Network and the Institute for Sustainable Development and International Relations. [http://unsdsn.org/what-we-do/deep-decarbonization-pathways/]

  3. Leslie says:

    I think the discussion should be framed in terms of lags: we should be pushing for (some number of) EVs now if we believe that the delays in implementation are significantly longer than those needed to clean the grid, due, say, to a need to simultaneous develop both vehicles and a network of charging stations.

    I also wonder to what extent spillovers from other types of R&D could be different for EVs and other environmentally-friendly technologies, potentially changing the relative cost-benefit ranking.

  4. Pingback: Economists are from Mars, Electric Cars are from Venus | Renewable Electron

  5. mcubedecon says:

    Relying on the EPA’s “social cost of carbon” ignores Weitzman’s work on the importance of avoiding a catastrophic outcome. Too often as economists we use “averages” or “expected” values when that frame isn’t appropriate. That may be the case here.

    There’s also the issue of co-evolution. Adopting EVs works in tandem in adding renewables at the same time, and those EVs also may provide storage services the 95% of the time that they’re parked. In that case, you have to look at the entire interactive portfolio when the resources aren’t separable.

  6. JM Dickenson says:

    Language like “saving the planet” (President Obama used the phrase the other day when discussion climate change), and the conceptualization of the problem such language reflects, makes consideration of costs difficult or impossible for many: any cost is justified if the survival of the planet hangs in the balance.

    • Paul Brady says:

      Paris acknowledged that we are very unlikely to reach the climate-crisis temperature of 2.0 C [3.6 F]. The global Temperature has been increasing 0.12 C per decade for the last 5 decades. Presently, we are at 0.85 C above preindustrial temperatures. So it takes 100 years more to reach 2.0 C. But we do not have enough oil and gas to provide the CO2 emissions to take us that far. [Coal is being replaced by gas which produces 60% less CO2.] So Paris wants to move the goal posts to 1.5 C! This value has been surpassed in Canada, Russia, etc., and the milder winters, billions saved in energy and gained in crop lands and productivity are much appreciated there!

  7. Mark Trexler says:

    Can you clarify Figure 2 and the meaning of the “optimal” EV subsidy (and the fact it’s negative in most of the U.S.)?

  8. Tam Hunt says:

    James, the first study you cited is demonstrably bunk, I have described in detail here: http://www.greentechmedia.com/articles/read/Do-Electric-Vehicles-Lead-to-Environmental-Benefits.

  9. Tam Hunt says:

    So the “hostility” from the environmental community may be based on the fact that a lot of the economic research is just really bad research, so bad in the case of the Holland et al study that it seems that it must have some agenda behind it. For example, the Holland study itself includes a sensitivity analysis for less greenhouse gas-intensive power sources for EVs, but buries those results deep in the study. Since those less greenhouse gas-intensive power sources are obviously occurring in more and more states over time, this sensitivity study should have been the primary result highlighted in the abstract and elsewhere. And yet it’s not mentioned in the abstract or key conclusions. So when there is that kind of apparently willful obfuscation of key results, it starts to look fishy.

  10. Pingback: Revue des blogs – mardi 15 décembre 2015 | Veille énergie climat

  11. I think there may be some interesting correlations to be considered. All the people I know of who have purchased or built (techie geeks) electric cars have done this simultaneously with PV installations. Installing PV alone has a considerable activation barrier and for many the small use of electricity doesn’t warrant the purchase or lease of a home PV system (including my family, with a $14 / month electrical bill). However, by piggybacking the PV installation on transitioning to electric transportation, the consumer is making a big step toward carbon free living. In this sense, we’re not comparing greening the grid to electrifying transportation, because they are one and the same.

    • Other considerations are the secondary societal response. People see and talk about electric car purchases and why they might be important and what this all means. People don’t see the greening of the grid. I think that the economic analysis done piece by piece misses a much larger force – what happens when society’s will changes? It could be huge.

    • Additionally, the isolated economic analysis may miss a very important effect of visibility and education. People see electric cars and talk about electric car purchases and what it means. Greening of the grid is largely invisible. In fact, discussions of electric car purchases may stimulate motivation to make the grid greener. These effects may be difficult to include in your analysis, but they are huge. When I was on sabbatical at Berkeley, it didn’t seem likely that we would be closing down coal fired electrical plants at the rate we’ve been doing, and that our national carbon footprint would be shrinking (if only a little) every year. I think a large portion of this is public awareness and the pride associated with doing our best. In short, the economic analysis alone seems narrow to me.

  12. mcubedecon says:

    Tam, you’re correct to point out that the Holland et al study doesn’t do a look-forward, instead relying on a static assumption about grid characteristics. On the other hand, your response on GTM ignores the regional differences in the grid. You can’t use national averages to calculate the differences in GHG emissions by state. While you’re correct that the grid is changing, it may or may not be changing sufficiently quickly to keep up with new EVs. And whether EVs are universally paired with solar panels is anecdotal and perhaps speculative. The lack of realistic projections about future electricity resources unfortunately is a common trait of academic studies. Perhaps its a lack of either resources or industry experience. But how Holland et al frame the question is useful. Of particular note is that the Northeast is a particularly location for EVs. I’m not familiar with the rate of renewable installation there compared to the rest of the U.S., but it certainly has the least promising set of resource characteristics. Shouldn’t we be considering that as we role out electrification strategies.

    Which brings me a related topic that I’ll blog about separately. Instead of the traditional building up of a supply portfolio as Jim does here (and I criticized the ARB staff for failing to do in 2008), we probably should be analyzing more in depth the joint coevolution of technologies, and as Jonathan Koomey pointed out, the path dependence of technology choices.

    • Tam Hunt says:

      You’re right that it’s a common problem in econ studies but it highlights how much bad science masquerades as good science. Science is fundamentally about the study of change so if studies don’t even consider in their primary focus the role of changing trajectories in the underlying trends that they’re actually studying they are simply missing the point. As I highlighted in my response to the Holland study, it’s very easy to learn that the energy trajectories in the US are undergoing fundamental changes and rapidly, so any study of a snapshot in time five years ago is irrelevant to the present let alone policy that is oriented toward the future 5, 10 or 20 years out.

  13. Stephen Noctor says:

    James, the study you cite: “electric vehicles currently have marginal (at best) environmental benefits” is both outdated and (at best) questionable. I’m sure you must be aware of more recent studies showing that 1) cradle to grave EVs produce far less pollution than gas powered cars; and 2) that unlike emissions from a gas car that never change once the car comes into service, emissions from EVs improve year to year. See: http://www.ucsusa.org/clean-vehicles/electric-vehicles/life-cycle-ev-emissions#.VnBR0TYV70c

  14. Matt says:

    In relation to the magnitude of the problem this discussion is sadly academic.

    It would take taxing the hell out of carbon emissions (J. Hansen, carbon fee and dividend). This will get many people to stop driving or to car pool. We don’t need EVs as much as we need a lot less driving. Heavy penalization of FF is only going to have a chance. Everything else is an exercise in bureaucracy and fantasy.

    When you consider how indebted people and governments are, how many people really have enough money to afford an EV at twice the price of a petrol car? Doesn’t this fact alone prove the solution is less driving, not technological substitution that perpetuates unsustainable behaviour?

    How can a brutally inefficient arrangement of cities, roads and populations that was made possible and conceivable only by cheap oil continue to operate the same way on much less energy dense renewable energies? It won’t and nor should it. People seem to want perfect substitution without making any personal sacrifice. This is imbecilic and just denying the real scale of the problem.

    If everyone who is concerned promoted the progressive carbon tax, there might be a small hope in hell. The rest is just rearranging the deck chairs.

  15. Shuwei says:

    What’s the motivation to provide subsidy for EVs. Seems it is due to the technology deadlock (chicken-and-eggs), other than EVs being clean. No?

  16. Matt says:

    Has it occurred to anyone else why it is we keep wanting and trying to perpetuate the very systems, technologies and habits that set us on the course of self annihilation?

  17. The learning-by-doing piece seems really crucial to me: the point of subsidizing electric cars nation-wide, even though the grid is dirty in some places, is exactly to make electric cars cheap in the future. So if you want dialog to improve economics, go and build a model of the costs of electric cars that uses past industrial experience to see which components and systems are most likely to improve with experience and at what rate. I presume there’d be some cross-over point where subsidies *should* reflect the properties of the local grid (or equivalently, where a carbon price alone would be a good-enough incentive to drive replacement of gasoline cars with electric cars), once the electric cars had become cheap enough and volume large enough, because at that point the market in those states with clean grids would be big enough that subsidies in dirty electrical markets wouldn’t add substantially to the rate of learning-by-doing improvements.

    • Yes, correctly characterizing learning by doing is the key issue, in my view. The conventional economic models exclude learning by doing because it results in path dependence and multiple equilibria for a single starting point. But learning by doing is pervasive in modern technological societies, but economic modelers have by and large ignored this problem. That needs to change.
      For a book length treatment of the “inside critique” of the big economic models, see DeCanio, Stephen J. 2003. Economic Models of Climate Change: A Critique. Basingstoke, UK: Palgrave-Macmillan. [http://amzn.to/1wvkvDu]
      For two “outside” critiques see Ackerman et al. and Rosen and Guenther:
      Ackerman, Frank , Stephen J. DeCanio, Richard B. Howarth, and Kristen Sheeran. 2009. “Limitations of Integrated Assessment Models of Climate Change.” Climatic Change. vol. 95, no. 3-4. August. pp. 297-315. [http://link.springer.com/article/10.1007%2Fs10584-009-9570-x]
      Rosen, Richard A., and Edeltraud Guenther. 2015. “The economics of mitigating climate change: What can we know?” Technological Forecasting and Social Change. vol. 91, no. 0. 2//. pp. 93-106. [http://www.sciencedirect.com/science/article/pii/S0040162514000468]

  18. sethzuckerman says:

    When you look toward deep decarbonization of the economy, electric-drive vehicles are the clear choice, whether powered by batteries or fuel cells. (See for instance this study for California: https://ethree.com/public_projects/energy_principals_study.php) But getting there requires proving (and improving) the technology, which requires some people to step up and be early adopters.

    Because the technology is new and doesn’t yet provide comparable range to a hydrocarbon car, the subsidy is a way of de-risking the early adopters’ choice of an EV.

    Even apart from the doubts raised by other commenters regarding the studies substantiating this tally of the current costs and benefits, this post imagines the cost-benefit analysis statically, which is the wrong way to analyze the incentives to test out and ramp up a promising technology.

  19. James Adcock says:

    EV advocates point to at least four advantages to EVs, not just one: 1) the reduced CO2 generated, as mentioned, 2) reduced local air pollution (smog, etc.) leading to reduced injuries, including from asthma in children — the reason the Cal has supported EVs for many decades 3) reduced dependence on foreign oil, including the costs multi-trillion-dollar wars in the middle east. 4) reduced noise pollution.

    Going back to the first point — CO2 emissions — it is *conservative* economists like Nordhaus who put the carbon price in the $35 range. And this is “economic” damages, NOT environmental damages. Even the conservative economists will be the first to admit that they do have not any idea how to cost out the actual environmental damages, and have thus, falsely, set these environmental damage costs to zero. The falsity of Nordhaus’ analysis can also be seen by the fact that he doesn’t even support his own analysis, repeated warning against the dangers of spending too much to protect against climate change, while at the same time even his own analysis would show that actually society is spending too little — not too much! So the gentleman by his own words belies even his own analysis — if he believed in his own analysis he should be recommending that society spend more, not less!

    Another example of these “conservative” economic estimates is the so-called Meta-analysis by Tol, where Tol averages a number of estimates made by Tol over a number of years, to supposedly come up with a “scientific average” of the CO2 estimates!

    Recent publications by real climate scientists in real peer review climate journals, correcting the work of these conservative economists, find CO2 prices in the much higher $100 to $400+ / ton range. In which case, Wind, Solar, and EVs become “no brainers” and Coal is properly recognized to be a global pariah.

    http://www.nature.com/nclimate/journal/v4/n4/full/nclimate2135.html

    • mcubedecon says:

      Fortunately, the study authors are not “climate scientists” but rather economists, which gives credibility to their work published in Nature. Unfortunately, too many climate scientists haven’t recognized where their expertise ends.

  20. Pingback: EV Incentives: Economists vs Economists (& Climate Hawks) | CleanTechnica

  21. Pingback: EV Incentives: Economists vs Economists (& Climate Hawks) | Enjeux énergies et environnement

  22. Pingback: A real game changer in EVs? | Economics Outside the Cube

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