Gas pain needed to meet emission targets, Harvard study says

By Marlo Lewis, Open Market.org

A new Harvard University study (Analysis of Policies to Reduce Oil Consumption and Greenhouse-Gas Emissions from the U.S. Transportation Sector) offers a sobering assessment of what it will take to meet the emission reduction targets proposed by President Obama and the Waxman-Markey cap-and-trade bill.

Saruman’s rebuke to Gandalf — “You have elected the way of pain!” – nicely captures the key policy implication of this study (although the researchers, of course, do not put it that way).

Congressional proponents of cap-and-trade policies typically favor cost-control measures (price collars, safety values, offsets) designed to keep emission permit prices from exceeding $30/ton of CO2 in 2010 and $60/t of CO2 in 2030. Although an economy-wide permit price of $30-$60/t CO2 would significantly reduce GHG emissions from the electric power sector, it would have only a “marginal impact” on transport-sector emissions, which account for about one-third of all U.S. GHG emissions.

As a consequence, by 2020, total annual GHG emissions under Waxman-Markey would be only 7% below 2005 levels — far short of both the Waxman-Markey target (15.4% below 2005 levels) and President Obama’s somewhat less aggressive target (14% below 2005 levels).

To reduce transportation GHG emissions 14% below 2005 levels by 2025 would require gasoline prices “in the range of $7-9/gal,” the researchers estimate. They acknowledge that such prices are ”considerably higher than the American public has been historically willing to tolerate.” Yep, $7-9 a gallon would set a new record for pain at the pump!

By itself, the $30-$60/t CO2 carbon price would increase motor fuel prices by “only” $0.24-0.46/gallon. Not enough pain! To make driving hurt enough to save the planet (okay, hurt enough to produce undetectable effects on global temperatures), policymakers would also have to adopt a $0.50/gal motor fuel tax in 2010 that increases 10% a year until it reaches $3.36/gal in 2030. Even then, it won’t hurt enough unless crude oil prices increase to $124/barrel (in real dollars) by 2030. Crude oil prices as high as $198/barrel would work even better, the researchers opine.

Exactly how would “the way of pain”  produce these transport-sector emission reductions? Some of the reductions would come from consumers buying higher mpg vehicles, and some from technological innovation spurred by market demand for such vehicles. Most of it however, comes from people driving less — i.e., pain avoidance behavior!

A by-the-numbers explanation: In the base case (no carbon price, no new transportation taxes), vehicle-miles traveled (VMT) is projected to grow 39% by 2030. The economy-wide carbon price would reduce VMT by only 1% compared to the base case, and maybe not even that much due to the “rebound effect” of fuel-economy regulation (when the average vehicle gets more miles to the gallon, the average motorist travels more miles). But, add a generous serving of pain at the pump, and Voila – instead of growing 39%, VMT grows 25%. We’re saved!   

A few other tidbits from the Harvard study: 

  • Economy-wide CO2 prices must be more than twice as high (250%) as oil price increases to result in the same increase in the price of gasoline. For example, a $50/barrel increase in the price of oil is comparable to a CO2 price of $130/t.
  • Tax credits for advanced vehicles (diesels, hybrids), ranging from $3000 to $8000 per vehicle, require excessive government expenditures ($22-38 billion per year, on a par with the 2008 U.S. auto bailout).
  • Such subsidies are also counter-productive, because they blunt automakers’ incentive to increase the fuel economy of conventional vehicles, which occupy a larger share of the market.
  • If Congress is unwilling to elect the way of pain (impose transportation taxes and steeper CO2 prices), covered entities will increasingly purchase offsets rather than reduce emissions to comply with the Waxman-Markey cap. Specifically, they will purchase an estimated 730-860 tons of CO2-equivalent offsets in 2020 and more than 2 billion tons in 2027 — breaching the proposed statutory limit.
  • A $30-$60/t CO2 carbon price combined with $7-$9/gallon gasoline would reduce GDP only 1% in 2030. However, this conclusion depends on the assumption that Congress adopts a textbook perfect revenue-neutral carbon tax, in which all emission permits are auctioned, and all revenues are retured to taxpayers. 
  • The actual GDP losses would be higher: ”Given the politics surrounding the debate in Washington, D.C., revenue neutrality is likely to be an elusive goal and thus our analysis may understate the economic impacts, since only a small number of the permits are likely to be auctioned.”

The Harvard study makes even more obvious what should no longer be controversial. Congress has not yet adopted tough controls on GHG emissions not because a “well-funded denial machine” is “confusing the public,” but because Members of Congress seek above all else to get re-elected, and inflicting pain on voters is not a smart way to win their support!

See post here.

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