Wednesday, August 08, 2007

The Cost of Driving

The other day I suggested that perhaps vehicle miles per gallon might not be the best measure on which to base energy and environmental policy, particularly as new transportation fuels come into the mix, including biofuels and electricity. While the European model based on grams of CO2 emissions per kilometer traveled has much to recommend it, it omits the economic element necessary for at least the energy side of policy. The more I reflect on this, the more I conclude that consumers will need more information, rather than just different information, in order to make decisions that support the policy directions set by Congress and the White House. That means adding not just emissions data, but also a common economic denominator that will help them to sort out the competing claims of different technologies. Fuel cost per mile has much to recommend it, in this regard.

Consider the table below, comparing several different vehicle and fuel options. The prices shown are for the week of 7/23/07, to align with a comparable E-85 price. The electricity price is the most recent national average consumer price from the DOE's Electric Power Monthly.

Although this data represents only a snapshot in time, it reveals several key challenges standing in the way of broad consumer acceptance of alternative fuels. Among other things, it shows that with the typical fuel economy penalty associated with E-85 in a flexible fuel vehicle capable of running on either gasoline or ethanol, the latter may be uneconomical outside the corn belt, where E-85 prices are often 20-30 cents below the national average. Diesel looks more attractive than ethanol, at least on this metric, particularly in biodiesel blends, provided they are priced closed to petroleum diesel.

The chart also shows that the total energy cost of a plug-in hybrid car is likely to be little below that for a conventional hybrid, calling into question the return available on the significant up-front premium that plug-ins are expected to require. If that premium is low, as some advocates of plug-ins expect, then this isn't a big problem. But if it approaches or exceeds the amount of the plug-in tax credit included in the House Energy Bill, which starts at $4,000 per vehicle and goes up based on battery capacity, then this looks like a very poor investment, ignoring the climate externalities that haven't been included in current fuel prices.

That's another reason to proceed with monetizing those externalities as soon as possible, whether via cap & trade or a carbon tax. Until they can be reduced to cents per mile and factored into this kind of chart, the comparisons above are truly apples and oranges, at least in terms of the associated climate impact. As it is, the presence or absence of taxes in current fuel prices distorts consumer decisions, and as I've noted before, the mechanism for collecting road taxes must be addressed before large portions of the vehicle fleet are using untaxed electricity or tax-shielded ethanol.

As alternative fuel vehicles, broadly defined, become more prevalent, it's going to get harder for consumers to make sensible choices among them without consistent data. This applies equally at the national policy level, where we are trying to nudge vehicles in the direction of lower emissions and energy consumption with the blunt tool of a CAFE standard relying on an obsolete measure of miles per gallon. Ultimately, a useful vehicle efficiency metric ought to reflect our priorities among oil security, energy security and climate change. Choosing the right metric might provide a golden opportunity to clarify those priorities, at last.

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