Energy Policy, By the Numbers

Two great articles on energy policy.

1) One of the major points of resistance to carbon taxes or caps is that developing countries won't have similar quotas giving them a comparative advantage in the production of goods. However, some economists don't think that comparative advantage will be very large. The percentage of the cost of production that goes to energy is small for most goods, and only certain industries will be affected. From the Economist:

The authors of "Leveling the Carbon Playing Field", published recently by the Peterson Institute for International Economics, a think-tank based in Washington, DC, argue that the damage would be small. Most manufacturers (let alone service industries) do not use much energy, the main source of emissions, and so would not suffer big costs. Energy makes up less than 1% of the cost of making cars, furniture or computers. Even some energy-intensive industries, such as power generation, should not be much affected. Since they have no foreign competition, they could pass on extra costs to their customers.

Only a few industries -- metals, paper, chemicals, cement and the like -- are both global and profligate enough to be at risk. These accounted for just over 3% of America's output in 2005 and less than 2% of its jobs. Much the same is true in Europe: those industries, plus refining, account for less than 5% of output and an even smaller share of jobs, according to the interim report* of a group of academics studying the effects of Europe's carbon-trading scheme.

2) Publishing in Science, Larrick and Soll show that people systematically underestimate the benefits of improving gas mileage for cars at the low end of the efficiency spectrum -- when it is at this level of efficiency that even tiny increases have large effects. They explain thusly:

To illustrate these issues, consider the criticism that has been directed at adding hybrid engines to sport utility vehicles (SUVs). In a New York Times Op-Ed column, an automotive expert has said that hybrid cars are like "fat-free desserts"--they "can make people feel as if they're doing something good, even when they're doing nothing special at all." The writer questions the logic of granting tax incentives to buyers of "a hypothetical hybrid Dodge Durango that gets 14 miles per gallon instead of 12 thanks to its second, electric power source" but not to a "buyer of a conventional, gasoline-powered Honda Civic that gets 40 miles per gallon." The basic argument is correct: The environment would benefit most if all consumers purchased highly efficient cars that get 40 MPG, not 14, and incentives should be tied to achieving such efficiency. An implicit premise in the example, however, is that an improvement from 12 to 14 MPG is negligible. However, the 2 MPG improvement is actually a significant one in terms of reduction in gas consumption. The amount of gas used by a vehicle to drive 10,000 miles at different levels of MPG is shown in the graph above. A car that gets 12 MPG consumes 833 gallons to cover that distance (10,000/12); a car that gets 14 MPG consumes 714 gallons (10,000/14). The roughly 120-gallon reduction in fuel used is larger than the reduction achieved by replacing a car that gets 28 MPG with a car that gets 40 MPG over that distance. (Citations removed. Emphasis mine.)

People don't think of energy efficiency in terms of volumes of gas required to drive a certain distance (gallons per miles or GPM). Rather we think of distance from a certain volume (miles per gallon or MPG). If we thought of energy efficiency in terms of GPM we would close the psychological loophole that causes us to underestimate efficiency gains for relatively inefficient vehicles:

These studies have demonstrated a systematic misunderstanding of MPG as a measure of fuel efficiency. Relying on linear reasoning about MPG leads people to undervalue small improvements on inefficient vehicles. We believe this general misunderstanding of MPG has implications for both public policy and research on environmental decision-making (7-9). From a policy perspective, these results imply that the United States should express fuel efficiency as a ratio of volume of consumption to a unit of distance. Although MPG is useful for estimating the range of a car's gas tank, GPM allows consumers to understand exactly how much gas they are using on a given car trip or in a given year and, with additional information, how much carbon they are releasing. GPM also makes cost savings from reduced gas consumption easier to calculate. (Emphasis mine. Citations removed.)

Read the whole thing.

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