-1-

FROM CAFE TO FUEL CELLS ADDRESSING AUTOMOBILE EXTERNALITIES

by Jon D Harford

January 2004

ABSTRACT

This essay attempts to summarize and relate academic institutional and governmental

writings to a variety of regulatory technological and externality issues associated with light duty

passenger vehicles from 1970 onward Discussed are the fuel economy and externalities of

vehicles powered by the gasoline and diesel internal combustion engines hybrid power systems

and fuel cells within the context of various actual and potential policies Consideration is given

to the effects of the Corporate Average Fuel Economy standards taxes and subsidies related to

automobiles and governmental research funding Externalities considered include those related

to conventional pollution carbon (greenhouse gas) emissions traffic congestion and traffic

accidents

-2-

FROM CAFE TO FUEL CELLS ADDRESSING GASOLINE EXTERNALITIES

by Jon D Harford

January 2004 Draft

I INTRODUCTION

For 2002 US energy consumption was 97 quadrillion Btus (quads) with over 83 billion

of that in the form of fossil fuels This is substantially up from 1975 when total energy

consumption was 72 quads with over 65 quads coming from fossil fuels The apparent absolute

and relative growth in non-fossil energy consumption comes far more from increased production

and consumption of electricity from nuclear power plants than it does from any increase in the

use of renewable energy Since population grew from 2155 million to 2884 million between the

same two years per capita consumption of energy remained almost constant Since per capita

real income rose by over 70 in that time period the ratio of energy used to real GDP has fallen

substantially In many ways these trends are favorable However the fact that total consumption

of fossil fuels has increased over a period in which various regulations and incentives have been

in place to reduce (particularly fossil) energy use and much energy saving technological change

has occurred could be seen as discouraging from the viewpoint of those concerned about the

negative environmental effects of energy use and energy security issues

The pattern with regard to energy use associated with the automobile has been similar to

that for energy as a whole Improving fuel economy has been more than offset by rising number

of vehicle miles traveled (VMT) For all light duty vehicles which includes passenger cars and

light trucks the total consumption of gasoline has gone from 934 billion gallons in 1975 to

-3-

1266 billion gallons in 2001 During the same time period US petroleum production has

declined absolutely so that the percentage of oil used that is imported is now much higher than it

was in 1975 and well over half of the total used To the degree that dependency upon imported

oil is of national concern the reason for the concern has not diminished This is perhaps

particularly true since the Middle East the location of much of the worldrsquos oil reserves has not

shown any trend toward greater tranquility

Against this backdrop this paper considers some of the important technological and

regulatory trends that have affected the automobile historically and considers the prospects for

the future Throughout the paper we consider how various regulations and technologies relate to

and affect the level of automobile-related externalities After a basic discussion of automobile

technologies and rationales for government intervention we consider automobile fuel economy

and externalities within the context of the Corporate Average Fuel Economy standards in

existence since the late 1970s and the alternative of greater gasoline taxes In further sections

we consider the technology and economics of the diesel engine the hybrid vehicle and the fuel

cell in relationship to the externality issues raised earlier The paper contains little original

analysis but tries to connect and summarize different sources and approaches The broadness

and complexity of the subject and the limitations of the author means that this paper leaves out

many details and may at times make statements that should be qualified more than is done

Discussed in the next section is a brief history and description of automobile technologies

II TECHNOLOGIES THE INTERNAL COMBUSTION ENGINE HYBRID VEHICLES

AND THE FUEL CELL

-4-

The four-cycle internal combustion engine (ICE) was invented in the late 1860s by

Nikolaus Otto The ICE used in the automobile has always been a source of pollution emitting

unburned hydrocarbons (HC) nitrogen oxides (NOx) and carbon monoxide (CO) It is also

responsible for significant noise and particularly in more modern times it has caused traffic

congestion These externality problems have been addressed to varying degrees with the

pollution problem getting serious regulatory attention starting in the 1960s

In more recent times the fact that burning gasoline creates additional carbon dioxide in

the atmosphere had become an additional externality issue due to its causal connection with

global warming Furthermore the energy crises of the 1970s and the continuing insecurity and

potential monopoly power associated with the importation of large amounts of oil has become a

national issue Both of these problems have generated demands for improvement in the fuel

economy of vehicles as reflected in the implementation of Corporate Average Fuel Economy

(CAFE) standards starting with model year 1978 and a call for the general lowering of the ratio

of energy use to GDP

Because of the general concerns about pollution there have been regulations in 1990s

particularly in California aimed toward creating vehicles with low or zero pollution In practice

this meant an attempt to develop battery electric vehicles (BEV) which was subsidized by

government research dollars It became clear that the effort to create viable BEVrsquos by early in

the twenty-first century had fallen short the effort has largely been halted as of 2001 However

research did yield improvement in such battery characteristics as durability and energy and

power density This improvement embodied in such new types of batteries as the nickel metal

hydride (NiMH) made the concept of a hybrid electric vehicle (HEV)close to economic viability

-5-

in the relatively near term An HEV has a combination of batteries and a smaller internal

combustion engine to provide power at various points in the driving cycle An example is the

Toyota Prius which appeared first in the US in the year 2000 and earlier in Japan Such a

vehicle gets significantly improved gas mileage particularly in urban driving Hybrid vehicles

are a technology that offers some fraction of the hoped-for benefits of the fuel cell vehicle while

facing much smaller economic and technological hurdles

The fuel cell was invented in the late 1830s by William Grove decades earlier

than the internal combustion engine The fuel cell is a device which essentially reverses the

process of electrolysis whereby electric current is used to break up water into the constituents of

hydrogen and oxygen The fuel cell combines the hydrogen and oxygen in a process that

generates an electric current In a way a fuel cell is analogous to a battery in which the chemical

reactants are continually replenished Since hydrogen does not naturally occur uncombined with

other atoms the hydrogen to be used in a fuel cell must first be extracted from some chemical

containing hydrogen atoms As others have said hydrogen is not an energy source but an energy

carrier or store of energy

More recent research into the use of fuel cells has been stimulated by their use in the

space program starting in the 1960s Improvements in the fuel cell have indicated to some that

sufficient further improvements may be possible so as to make them a commercial power

conversion system There are a number of types of fuel cells but the one most suitable for

automobiles is the proton exchange membrane (PEM) type which operates at relatively low

temperatures and uses platinum as a catalyst While research is ongoing a PEM fuel cell of a

size to power an automobile has a cost far in excess of what would be required of a product to

-6-

compete in the market Beyond this the physical properties of hydrogen particularly its low

density of energy per unit volume present a number of potentially costly technical problems

Some believe that the ldquonewrdquo technology of fuel cells will replace the internal combustion

engine and reduce or eliminate many of externalities associated with the internal combustion

engine The optimistic scenario reflects a belief that research will overcome the various technical

problems associated with PEM fuel cells and dramatically lower the cost to a level consistent

with market viability The widespread use of fuel cells in transportation and elsewhere

sometimes referred to as the ldquohydrogen economyrdquo is often associated with a move toward

renewable energy However the facts to be discussed indicate no strong connection between the

two

III UNCERTAINTIES IN TECHNOLOGICAL PREDICTION AND RATIONALES FOR

RESEARCH SUBSIDIES

The history of prognostication and efforts to force improvements in the cleanliness and

mileage of cars is mixed at best The attempt to develop a BEV is one example of an approach

that has for the immediate future been abandoned In the preface to the 1992 NRC report

Automotive Fuel Economy (p viii) it is indicated that various observers in the late 1970s

predicted that new passenger cars in 1990 would have a fuel economy of 32 to 40 miles per

gallon when in fact they had 278 miles per gallon In the same paragraph they note that at

various times gas turbines diesels and rotary engines were all incorrectly predicted to become

important in automobiles Despite failures of prognostication ICE vehicles have improved over

time Todayrsquos cars get significantly better mileage than the vehicles of 1975 although in recent

-7-

years much of the improvement in the light duty vehicles has been channeled into better

performance safety and comfort

The NRC (2003pp31-50) discuss many engine transmission and design innovations

that already exist or could be introduced within the next 15 years (from their writing) which

could increase the fuel economy of the conventional ICE vehicle Thus to become economically

viable fuel cell technology has compete with the improved cost and performance of the internal

combustion engine or its hybrid variation on that date some years in the future when it will be

marketed on a larger scale That one must reckon with an improving conventional cost standard

is illustrated by the historical example discussed by McVeigh et al (1999) The authors

discuss the fact that the cost reduction in the production of electricity from coal and natural gas

as well as the more effective use of existing nuclear power plants meant that the improving

technology for generating electricity from wind and solar was less successful than forecast

regarding its market penetration although it was reasonably successful in meeting its projected

cost goals

Subsidizing research is justified by efficiency considerations if there are public goods or

positive externalities that will be generated by that research Basic research is justifiably funded

because it provides the fundamental knowledge on which our understanding of the world is based

and therefore provides a broad base for more specific technological change Research aimed at

producing new technology that can be marketed by a company is most often encouraged by the

patent system which gives exclusive rights to new inventions for 20 years The fuel cell research

associated with the space program fell within this general form of justification in that the space

program provided the public good of knowledge and perhaps the some related public good

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-2-

FROM CAFE TO FUEL CELLS ADDRESSING GASOLINE EXTERNALITIES

by Jon D Harford

January 2004 Draft

I INTRODUCTION

For 2002 US energy consumption was 97 quadrillion Btus (quads) with over 83 billion

of that in the form of fossil fuels This is substantially up from 1975 when total energy

consumption was 72 quads with over 65 quads coming from fossil fuels The apparent absolute

and relative growth in non-fossil energy consumption comes far more from increased production

and consumption of electricity from nuclear power plants than it does from any increase in the

use of renewable energy Since population grew from 2155 million to 2884 million between the

same two years per capita consumption of energy remained almost constant Since per capita

real income rose by over 70 in that time period the ratio of energy used to real GDP has fallen

substantially In many ways these trends are favorable However the fact that total consumption

of fossil fuels has increased over a period in which various regulations and incentives have been

in place to reduce (particularly fossil) energy use and much energy saving technological change

has occurred could be seen as discouraging from the viewpoint of those concerned about the

negative environmental effects of energy use and energy security issues

The pattern with regard to energy use associated with the automobile has been similar to

that for energy as a whole Improving fuel economy has been more than offset by rising number

of vehicle miles traveled (VMT) For all light duty vehicles which includes passenger cars and

light trucks the total consumption of gasoline has gone from 934 billion gallons in 1975 to

-3-

1266 billion gallons in 2001 During the same time period US petroleum production has

declined absolutely so that the percentage of oil used that is imported is now much higher than it

was in 1975 and well over half of the total used To the degree that dependency upon imported

oil is of national concern the reason for the concern has not diminished This is perhaps

particularly true since the Middle East the location of much of the worldrsquos oil reserves has not

shown any trend toward greater tranquility

Against this backdrop this paper considers some of the important technological and

regulatory trends that have affected the automobile historically and considers the prospects for

the future Throughout the paper we consider how various regulations and technologies relate to

and affect the level of automobile-related externalities After a basic discussion of automobile

technologies and rationales for government intervention we consider automobile fuel economy

and externalities within the context of the Corporate Average Fuel Economy standards in

existence since the late 1970s and the alternative of greater gasoline taxes In further sections

we consider the technology and economics of the diesel engine the hybrid vehicle and the fuel

cell in relationship to the externality issues raised earlier The paper contains little original

analysis but tries to connect and summarize different sources and approaches The broadness

and complexity of the subject and the limitations of the author means that this paper leaves out

many details and may at times make statements that should be qualified more than is done

Discussed in the next section is a brief history and description of automobile technologies

II TECHNOLOGIES THE INTERNAL COMBUSTION ENGINE HYBRID VEHICLES

AND THE FUEL CELL

-4-

The four-cycle internal combustion engine (ICE) was invented in the late 1860s by

Nikolaus Otto The ICE used in the automobile has always been a source of pollution emitting

unburned hydrocarbons (HC) nitrogen oxides (NOx) and carbon monoxide (CO) It is also

responsible for significant noise and particularly in more modern times it has caused traffic

congestion These externality problems have been addressed to varying degrees with the

pollution problem getting serious regulatory attention starting in the 1960s

In more recent times the fact that burning gasoline creates additional carbon dioxide in

the atmosphere had become an additional externality issue due to its causal connection with

global warming Furthermore the energy crises of the 1970s and the continuing insecurity and

potential monopoly power associated with the importation of large amounts of oil has become a

national issue Both of these problems have generated demands for improvement in the fuel

economy of vehicles as reflected in the implementation of Corporate Average Fuel Economy

(CAFE) standards starting with model year 1978 and a call for the general lowering of the ratio

of energy use to GDP

Because of the general concerns about pollution there have been regulations in 1990s

particularly in California aimed toward creating vehicles with low or zero pollution In practice

this meant an attempt to develop battery electric vehicles (BEV) which was subsidized by

government research dollars It became clear that the effort to create viable BEVrsquos by early in

the twenty-first century had fallen short the effort has largely been halted as of 2001 However

research did yield improvement in such battery characteristics as durability and energy and

power density This improvement embodied in such new types of batteries as the nickel metal

hydride (NiMH) made the concept of a hybrid electric vehicle (HEV)close to economic viability

-5-

in the relatively near term An HEV has a combination of batteries and a smaller internal

combustion engine to provide power at various points in the driving cycle An example is the

Toyota Prius which appeared first in the US in the year 2000 and earlier in Japan Such a

vehicle gets significantly improved gas mileage particularly in urban driving Hybrid vehicles

are a technology that offers some fraction of the hoped-for benefits of the fuel cell vehicle while

facing much smaller economic and technological hurdles

The fuel cell was invented in the late 1830s by William Grove decades earlier

than the internal combustion engine The fuel cell is a device which essentially reverses the

process of electrolysis whereby electric current is used to break up water into the constituents of

hydrogen and oxygen The fuel cell combines the hydrogen and oxygen in a process that

generates an electric current In a way a fuel cell is analogous to a battery in which the chemical

reactants are continually replenished Since hydrogen does not naturally occur uncombined with

other atoms the hydrogen to be used in a fuel cell must first be extracted from some chemical

containing hydrogen atoms As others have said hydrogen is not an energy source but an energy

carrier or store of energy

More recent research into the use of fuel cells has been stimulated by their use in the

space program starting in the 1960s Improvements in the fuel cell have indicated to some that

sufficient further improvements may be possible so as to make them a commercial power

conversion system There are a number of types of fuel cells but the one most suitable for

automobiles is the proton exchange membrane (PEM) type which operates at relatively low

temperatures and uses platinum as a catalyst While research is ongoing a PEM fuel cell of a

size to power an automobile has a cost far in excess of what would be required of a product to

-6-

compete in the market Beyond this the physical properties of hydrogen particularly its low

density of energy per unit volume present a number of potentially costly technical problems

Some believe that the ldquonewrdquo technology of fuel cells will replace the internal combustion

engine and reduce or eliminate many of externalities associated with the internal combustion

engine The optimistic scenario reflects a belief that research will overcome the various technical

problems associated with PEM fuel cells and dramatically lower the cost to a level consistent

with market viability The widespread use of fuel cells in transportation and elsewhere

sometimes referred to as the ldquohydrogen economyrdquo is often associated with a move toward

renewable energy However the facts to be discussed indicate no strong connection between the

two

III UNCERTAINTIES IN TECHNOLOGICAL PREDICTION AND RATIONALES FOR

RESEARCH SUBSIDIES

The history of prognostication and efforts to force improvements in the cleanliness and

mileage of cars is mixed at best The attempt to develop a BEV is one example of an approach

that has for the immediate future been abandoned In the preface to the 1992 NRC report

Automotive Fuel Economy (p viii) it is indicated that various observers in the late 1970s

predicted that new passenger cars in 1990 would have a fuel economy of 32 to 40 miles per

gallon when in fact they had 278 miles per gallon In the same paragraph they note that at

various times gas turbines diesels and rotary engines were all incorrectly predicted to become

important in automobiles Despite failures of prognostication ICE vehicles have improved over

time Todayrsquos cars get significantly better mileage than the vehicles of 1975 although in recent

-7-

years much of the improvement in the light duty vehicles has been channeled into better

performance safety and comfort

The NRC (2003pp31-50) discuss many engine transmission and design innovations

that already exist or could be introduced within the next 15 years (from their writing) which

could increase the fuel economy of the conventional ICE vehicle Thus to become economically

viable fuel cell technology has compete with the improved cost and performance of the internal

combustion engine or its hybrid variation on that date some years in the future when it will be

marketed on a larger scale That one must reckon with an improving conventional cost standard

is illustrated by the historical example discussed by McVeigh et al (1999) The authors

discuss the fact that the cost reduction in the production of electricity from coal and natural gas

as well as the more effective use of existing nuclear power plants meant that the improving

technology for generating electricity from wind and solar was less successful than forecast

regarding its market penetration although it was reasonably successful in meeting its projected

cost goals

Subsidizing research is justified by efficiency considerations if there are public goods or

positive externalities that will be generated by that research Basic research is justifiably funded

because it provides the fundamental knowledge on which our understanding of the world is based

and therefore provides a broad base for more specific technological change Research aimed at

producing new technology that can be marketed by a company is most often encouraged by the

patent system which gives exclusive rights to new inventions for 20 years The fuel cell research

associated with the space program fell within this general form of justification in that the space

program provided the public good of knowledge and perhaps the some related public good

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-3-

1266 billion gallons in 2001 During the same time period US petroleum production has

declined absolutely so that the percentage of oil used that is imported is now much higher than it

was in 1975 and well over half of the total used To the degree that dependency upon imported

oil is of national concern the reason for the concern has not diminished This is perhaps

particularly true since the Middle East the location of much of the worldrsquos oil reserves has not

shown any trend toward greater tranquility

Against this backdrop this paper considers some of the important technological and

regulatory trends that have affected the automobile historically and considers the prospects for

the future Throughout the paper we consider how various regulations and technologies relate to

and affect the level of automobile-related externalities After a basic discussion of automobile

technologies and rationales for government intervention we consider automobile fuel economy

and externalities within the context of the Corporate Average Fuel Economy standards in

existence since the late 1970s and the alternative of greater gasoline taxes In further sections

we consider the technology and economics of the diesel engine the hybrid vehicle and the fuel

cell in relationship to the externality issues raised earlier The paper contains little original

analysis but tries to connect and summarize different sources and approaches The broadness

and complexity of the subject and the limitations of the author means that this paper leaves out

many details and may at times make statements that should be qualified more than is done

Discussed in the next section is a brief history and description of automobile technologies

II TECHNOLOGIES THE INTERNAL COMBUSTION ENGINE HYBRID VEHICLES

AND THE FUEL CELL

-4-

The four-cycle internal combustion engine (ICE) was invented in the late 1860s by

Nikolaus Otto The ICE used in the automobile has always been a source of pollution emitting

unburned hydrocarbons (HC) nitrogen oxides (NOx) and carbon monoxide (CO) It is also

responsible for significant noise and particularly in more modern times it has caused traffic

congestion These externality problems have been addressed to varying degrees with the

pollution problem getting serious regulatory attention starting in the 1960s

In more recent times the fact that burning gasoline creates additional carbon dioxide in

the atmosphere had become an additional externality issue due to its causal connection with

global warming Furthermore the energy crises of the 1970s and the continuing insecurity and

potential monopoly power associated with the importation of large amounts of oil has become a

national issue Both of these problems have generated demands for improvement in the fuel

economy of vehicles as reflected in the implementation of Corporate Average Fuel Economy

(CAFE) standards starting with model year 1978 and a call for the general lowering of the ratio

of energy use to GDP

Because of the general concerns about pollution there have been regulations in 1990s

particularly in California aimed toward creating vehicles with low or zero pollution In practice

this meant an attempt to develop battery electric vehicles (BEV) which was subsidized by

government research dollars It became clear that the effort to create viable BEVrsquos by early in

the twenty-first century had fallen short the effort has largely been halted as of 2001 However

research did yield improvement in such battery characteristics as durability and energy and

power density This improvement embodied in such new types of batteries as the nickel metal

hydride (NiMH) made the concept of a hybrid electric vehicle (HEV)close to economic viability

-5-

in the relatively near term An HEV has a combination of batteries and a smaller internal

combustion engine to provide power at various points in the driving cycle An example is the

Toyota Prius which appeared first in the US in the year 2000 and earlier in Japan Such a

vehicle gets significantly improved gas mileage particularly in urban driving Hybrid vehicles

are a technology that offers some fraction of the hoped-for benefits of the fuel cell vehicle while

facing much smaller economic and technological hurdles

The fuel cell was invented in the late 1830s by William Grove decades earlier

than the internal combustion engine The fuel cell is a device which essentially reverses the

process of electrolysis whereby electric current is used to break up water into the constituents of

hydrogen and oxygen The fuel cell combines the hydrogen and oxygen in a process that

generates an electric current In a way a fuel cell is analogous to a battery in which the chemical

reactants are continually replenished Since hydrogen does not naturally occur uncombined with

other atoms the hydrogen to be used in a fuel cell must first be extracted from some chemical

containing hydrogen atoms As others have said hydrogen is not an energy source but an energy

carrier or store of energy

More recent research into the use of fuel cells has been stimulated by their use in the

space program starting in the 1960s Improvements in the fuel cell have indicated to some that

sufficient further improvements may be possible so as to make them a commercial power

conversion system There are a number of types of fuel cells but the one most suitable for

automobiles is the proton exchange membrane (PEM) type which operates at relatively low

temperatures and uses platinum as a catalyst While research is ongoing a PEM fuel cell of a

size to power an automobile has a cost far in excess of what would be required of a product to

-6-

compete in the market Beyond this the physical properties of hydrogen particularly its low

density of energy per unit volume present a number of potentially costly technical problems

Some believe that the ldquonewrdquo technology of fuel cells will replace the internal combustion

engine and reduce or eliminate many of externalities associated with the internal combustion

engine The optimistic scenario reflects a belief that research will overcome the various technical

problems associated with PEM fuel cells and dramatically lower the cost to a level consistent

with market viability The widespread use of fuel cells in transportation and elsewhere

sometimes referred to as the ldquohydrogen economyrdquo is often associated with a move toward

renewable energy However the facts to be discussed indicate no strong connection between the

two

III UNCERTAINTIES IN TECHNOLOGICAL PREDICTION AND RATIONALES FOR

RESEARCH SUBSIDIES

The history of prognostication and efforts to force improvements in the cleanliness and

mileage of cars is mixed at best The attempt to develop a BEV is one example of an approach

that has for the immediate future been abandoned In the preface to the 1992 NRC report

Automotive Fuel Economy (p viii) it is indicated that various observers in the late 1970s

predicted that new passenger cars in 1990 would have a fuel economy of 32 to 40 miles per

gallon when in fact they had 278 miles per gallon In the same paragraph they note that at

various times gas turbines diesels and rotary engines were all incorrectly predicted to become

important in automobiles Despite failures of prognostication ICE vehicles have improved over

time Todayrsquos cars get significantly better mileage than the vehicles of 1975 although in recent

-7-

years much of the improvement in the light duty vehicles has been channeled into better

performance safety and comfort

The NRC (2003pp31-50) discuss many engine transmission and design innovations

that already exist or could be introduced within the next 15 years (from their writing) which

could increase the fuel economy of the conventional ICE vehicle Thus to become economically

viable fuel cell technology has compete with the improved cost and performance of the internal

combustion engine or its hybrid variation on that date some years in the future when it will be

marketed on a larger scale That one must reckon with an improving conventional cost standard

is illustrated by the historical example discussed by McVeigh et al (1999) The authors

discuss the fact that the cost reduction in the production of electricity from coal and natural gas

as well as the more effective use of existing nuclear power plants meant that the improving

technology for generating electricity from wind and solar was less successful than forecast

regarding its market penetration although it was reasonably successful in meeting its projected

cost goals

Subsidizing research is justified by efficiency considerations if there are public goods or

positive externalities that will be generated by that research Basic research is justifiably funded

because it provides the fundamental knowledge on which our understanding of the world is based

and therefore provides a broad base for more specific technological change Research aimed at

producing new technology that can be marketed by a company is most often encouraged by the

patent system which gives exclusive rights to new inventions for 20 years The fuel cell research

associated with the space program fell within this general form of justification in that the space

program provided the public good of knowledge and perhaps the some related public good

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-4-

The four-cycle internal combustion engine (ICE) was invented in the late 1860s by

Nikolaus Otto The ICE used in the automobile has always been a source of pollution emitting

unburned hydrocarbons (HC) nitrogen oxides (NOx) and carbon monoxide (CO) It is also

responsible for significant noise and particularly in more modern times it has caused traffic

congestion These externality problems have been addressed to varying degrees with the

pollution problem getting serious regulatory attention starting in the 1960s

In more recent times the fact that burning gasoline creates additional carbon dioxide in

the atmosphere had become an additional externality issue due to its causal connection with

global warming Furthermore the energy crises of the 1970s and the continuing insecurity and

potential monopoly power associated with the importation of large amounts of oil has become a

national issue Both of these problems have generated demands for improvement in the fuel

economy of vehicles as reflected in the implementation of Corporate Average Fuel Economy

(CAFE) standards starting with model year 1978 and a call for the general lowering of the ratio

of energy use to GDP

Because of the general concerns about pollution there have been regulations in 1990s

particularly in California aimed toward creating vehicles with low or zero pollution In practice

this meant an attempt to develop battery electric vehicles (BEV) which was subsidized by

government research dollars It became clear that the effort to create viable BEVrsquos by early in

the twenty-first century had fallen short the effort has largely been halted as of 2001 However

research did yield improvement in such battery characteristics as durability and energy and

power density This improvement embodied in such new types of batteries as the nickel metal

hydride (NiMH) made the concept of a hybrid electric vehicle (HEV)close to economic viability

-5-

in the relatively near term An HEV has a combination of batteries and a smaller internal

combustion engine to provide power at various points in the driving cycle An example is the

Toyota Prius which appeared first in the US in the year 2000 and earlier in Japan Such a

vehicle gets significantly improved gas mileage particularly in urban driving Hybrid vehicles

are a technology that offers some fraction of the hoped-for benefits of the fuel cell vehicle while

facing much smaller economic and technological hurdles

The fuel cell was invented in the late 1830s by William Grove decades earlier

than the internal combustion engine The fuel cell is a device which essentially reverses the

process of electrolysis whereby electric current is used to break up water into the constituents of

hydrogen and oxygen The fuel cell combines the hydrogen and oxygen in a process that

generates an electric current In a way a fuel cell is analogous to a battery in which the chemical

reactants are continually replenished Since hydrogen does not naturally occur uncombined with

other atoms the hydrogen to be used in a fuel cell must first be extracted from some chemical

containing hydrogen atoms As others have said hydrogen is not an energy source but an energy

carrier or store of energy

More recent research into the use of fuel cells has been stimulated by their use in the

space program starting in the 1960s Improvements in the fuel cell have indicated to some that

sufficient further improvements may be possible so as to make them a commercial power

conversion system There are a number of types of fuel cells but the one most suitable for

automobiles is the proton exchange membrane (PEM) type which operates at relatively low

temperatures and uses platinum as a catalyst While research is ongoing a PEM fuel cell of a

size to power an automobile has a cost far in excess of what would be required of a product to

-6-

compete in the market Beyond this the physical properties of hydrogen particularly its low

density of energy per unit volume present a number of potentially costly technical problems

Some believe that the ldquonewrdquo technology of fuel cells will replace the internal combustion

engine and reduce or eliminate many of externalities associated with the internal combustion

engine The optimistic scenario reflects a belief that research will overcome the various technical

problems associated with PEM fuel cells and dramatically lower the cost to a level consistent

with market viability The widespread use of fuel cells in transportation and elsewhere

sometimes referred to as the ldquohydrogen economyrdquo is often associated with a move toward

renewable energy However the facts to be discussed indicate no strong connection between the

two

III UNCERTAINTIES IN TECHNOLOGICAL PREDICTION AND RATIONALES FOR

RESEARCH SUBSIDIES

The history of prognostication and efforts to force improvements in the cleanliness and

mileage of cars is mixed at best The attempt to develop a BEV is one example of an approach

that has for the immediate future been abandoned In the preface to the 1992 NRC report

Automotive Fuel Economy (p viii) it is indicated that various observers in the late 1970s

predicted that new passenger cars in 1990 would have a fuel economy of 32 to 40 miles per

gallon when in fact they had 278 miles per gallon In the same paragraph they note that at

various times gas turbines diesels and rotary engines were all incorrectly predicted to become

important in automobiles Despite failures of prognostication ICE vehicles have improved over

time Todayrsquos cars get significantly better mileage than the vehicles of 1975 although in recent

-7-

years much of the improvement in the light duty vehicles has been channeled into better

performance safety and comfort

The NRC (2003pp31-50) discuss many engine transmission and design innovations

that already exist or could be introduced within the next 15 years (from their writing) which

could increase the fuel economy of the conventional ICE vehicle Thus to become economically

viable fuel cell technology has compete with the improved cost and performance of the internal

combustion engine or its hybrid variation on that date some years in the future when it will be

marketed on a larger scale That one must reckon with an improving conventional cost standard

is illustrated by the historical example discussed by McVeigh et al (1999) The authors

discuss the fact that the cost reduction in the production of electricity from coal and natural gas

as well as the more effective use of existing nuclear power plants meant that the improving

technology for generating electricity from wind and solar was less successful than forecast

regarding its market penetration although it was reasonably successful in meeting its projected

cost goals

Subsidizing research is justified by efficiency considerations if there are public goods or

positive externalities that will be generated by that research Basic research is justifiably funded

because it provides the fundamental knowledge on which our understanding of the world is based

and therefore provides a broad base for more specific technological change Research aimed at

producing new technology that can be marketed by a company is most often encouraged by the

patent system which gives exclusive rights to new inventions for 20 years The fuel cell research

associated with the space program fell within this general form of justification in that the space

program provided the public good of knowledge and perhaps the some related public good

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-5-

in the relatively near term An HEV has a combination of batteries and a smaller internal

combustion engine to provide power at various points in the driving cycle An example is the

Toyota Prius which appeared first in the US in the year 2000 and earlier in Japan Such a

vehicle gets significantly improved gas mileage particularly in urban driving Hybrid vehicles

are a technology that offers some fraction of the hoped-for benefits of the fuel cell vehicle while

facing much smaller economic and technological hurdles

The fuel cell was invented in the late 1830s by William Grove decades earlier

than the internal combustion engine The fuel cell is a device which essentially reverses the

process of electrolysis whereby electric current is used to break up water into the constituents of

hydrogen and oxygen The fuel cell combines the hydrogen and oxygen in a process that

generates an electric current In a way a fuel cell is analogous to a battery in which the chemical

reactants are continually replenished Since hydrogen does not naturally occur uncombined with

other atoms the hydrogen to be used in a fuel cell must first be extracted from some chemical

containing hydrogen atoms As others have said hydrogen is not an energy source but an energy

carrier or store of energy

More recent research into the use of fuel cells has been stimulated by their use in the

space program starting in the 1960s Improvements in the fuel cell have indicated to some that

sufficient further improvements may be possible so as to make them a commercial power

conversion system There are a number of types of fuel cells but the one most suitable for

automobiles is the proton exchange membrane (PEM) type which operates at relatively low

temperatures and uses platinum as a catalyst While research is ongoing a PEM fuel cell of a

size to power an automobile has a cost far in excess of what would be required of a product to

-6-

compete in the market Beyond this the physical properties of hydrogen particularly its low

density of energy per unit volume present a number of potentially costly technical problems

Some believe that the ldquonewrdquo technology of fuel cells will replace the internal combustion

engine and reduce or eliminate many of externalities associated with the internal combustion

engine The optimistic scenario reflects a belief that research will overcome the various technical

problems associated with PEM fuel cells and dramatically lower the cost to a level consistent

with market viability The widespread use of fuel cells in transportation and elsewhere

sometimes referred to as the ldquohydrogen economyrdquo is often associated with a move toward

renewable energy However the facts to be discussed indicate no strong connection between the

two

III UNCERTAINTIES IN TECHNOLOGICAL PREDICTION AND RATIONALES FOR

RESEARCH SUBSIDIES

The history of prognostication and efforts to force improvements in the cleanliness and

mileage of cars is mixed at best The attempt to develop a BEV is one example of an approach

that has for the immediate future been abandoned In the preface to the 1992 NRC report

Automotive Fuel Economy (p viii) it is indicated that various observers in the late 1970s

predicted that new passenger cars in 1990 would have a fuel economy of 32 to 40 miles per

gallon when in fact they had 278 miles per gallon In the same paragraph they note that at

various times gas turbines diesels and rotary engines were all incorrectly predicted to become

important in automobiles Despite failures of prognostication ICE vehicles have improved over

time Todayrsquos cars get significantly better mileage than the vehicles of 1975 although in recent

-7-

years much of the improvement in the light duty vehicles has been channeled into better

performance safety and comfort

The NRC (2003pp31-50) discuss many engine transmission and design innovations

that already exist or could be introduced within the next 15 years (from their writing) which

could increase the fuel economy of the conventional ICE vehicle Thus to become economically

viable fuel cell technology has compete with the improved cost and performance of the internal

combustion engine or its hybrid variation on that date some years in the future when it will be

marketed on a larger scale That one must reckon with an improving conventional cost standard

is illustrated by the historical example discussed by McVeigh et al (1999) The authors

discuss the fact that the cost reduction in the production of electricity from coal and natural gas

as well as the more effective use of existing nuclear power plants meant that the improving

technology for generating electricity from wind and solar was less successful than forecast

regarding its market penetration although it was reasonably successful in meeting its projected

cost goals

Subsidizing research is justified by efficiency considerations if there are public goods or

positive externalities that will be generated by that research Basic research is justifiably funded

because it provides the fundamental knowledge on which our understanding of the world is based

and therefore provides a broad base for more specific technological change Research aimed at

producing new technology that can be marketed by a company is most often encouraged by the

patent system which gives exclusive rights to new inventions for 20 years The fuel cell research

associated with the space program fell within this general form of justification in that the space

program provided the public good of knowledge and perhaps the some related public good

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-6-

compete in the market Beyond this the physical properties of hydrogen particularly its low

density of energy per unit volume present a number of potentially costly technical problems

Some believe that the ldquonewrdquo technology of fuel cells will replace the internal combustion

engine and reduce or eliminate many of externalities associated with the internal combustion

engine The optimistic scenario reflects a belief that research will overcome the various technical

problems associated with PEM fuel cells and dramatically lower the cost to a level consistent

with market viability The widespread use of fuel cells in transportation and elsewhere

sometimes referred to as the ldquohydrogen economyrdquo is often associated with a move toward

renewable energy However the facts to be discussed indicate no strong connection between the

two

III UNCERTAINTIES IN TECHNOLOGICAL PREDICTION AND RATIONALES FOR

RESEARCH SUBSIDIES

The history of prognostication and efforts to force improvements in the cleanliness and

mileage of cars is mixed at best The attempt to develop a BEV is one example of an approach

that has for the immediate future been abandoned In the preface to the 1992 NRC report

Automotive Fuel Economy (p viii) it is indicated that various observers in the late 1970s

predicted that new passenger cars in 1990 would have a fuel economy of 32 to 40 miles per

gallon when in fact they had 278 miles per gallon In the same paragraph they note that at

various times gas turbines diesels and rotary engines were all incorrectly predicted to become

important in automobiles Despite failures of prognostication ICE vehicles have improved over

time Todayrsquos cars get significantly better mileage than the vehicles of 1975 although in recent

-7-

years much of the improvement in the light duty vehicles has been channeled into better

performance safety and comfort

The NRC (2003pp31-50) discuss many engine transmission and design innovations

that already exist or could be introduced within the next 15 years (from their writing) which

could increase the fuel economy of the conventional ICE vehicle Thus to become economically

viable fuel cell technology has compete with the improved cost and performance of the internal

combustion engine or its hybrid variation on that date some years in the future when it will be

marketed on a larger scale That one must reckon with an improving conventional cost standard

is illustrated by the historical example discussed by McVeigh et al (1999) The authors

discuss the fact that the cost reduction in the production of electricity from coal and natural gas

as well as the more effective use of existing nuclear power plants meant that the improving

technology for generating electricity from wind and solar was less successful than forecast

regarding its market penetration although it was reasonably successful in meeting its projected

cost goals

Subsidizing research is justified by efficiency considerations if there are public goods or

positive externalities that will be generated by that research Basic research is justifiably funded

because it provides the fundamental knowledge on which our understanding of the world is based

and therefore provides a broad base for more specific technological change Research aimed at

producing new technology that can be marketed by a company is most often encouraged by the

patent system which gives exclusive rights to new inventions for 20 years The fuel cell research

associated with the space program fell within this general form of justification in that the space

program provided the public good of knowledge and perhaps the some related public good

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-7-

years much of the improvement in the light duty vehicles has been channeled into better

performance safety and comfort

The NRC (2003pp31-50) discuss many engine transmission and design innovations

that already exist or could be introduced within the next 15 years (from their writing) which

could increase the fuel economy of the conventional ICE vehicle Thus to become economically

viable fuel cell technology has compete with the improved cost and performance of the internal

combustion engine or its hybrid variation on that date some years in the future when it will be

marketed on a larger scale That one must reckon with an improving conventional cost standard

is illustrated by the historical example discussed by McVeigh et al (1999) The authors

discuss the fact that the cost reduction in the production of electricity from coal and natural gas

as well as the more effective use of existing nuclear power plants meant that the improving

technology for generating electricity from wind and solar was less successful than forecast

regarding its market penetration although it was reasonably successful in meeting its projected

cost goals

Subsidizing research is justified by efficiency considerations if there are public goods or

positive externalities that will be generated by that research Basic research is justifiably funded

because it provides the fundamental knowledge on which our understanding of the world is based

and therefore provides a broad base for more specific technological change Research aimed at

producing new technology that can be marketed by a company is most often encouraged by the

patent system which gives exclusive rights to new inventions for 20 years The fuel cell research

associated with the space program fell within this general form of justification in that the space

program provided the public good of knowledge and perhaps the some related public good

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-8-

benefits associated with national defense

An economic argument for additional governmental incentives (beyond the patent

system) for research to make fuel cells commercially viable is that the fuel cell will provide a

method of providing power for automobiles that will have fewer externalities than the internal

combustion engine Private incentives for research into technologies that reduce negative

externalities associated with the automobile have more justification to the degree that the

externalities of the current system of transportation are unpriced and are anticipated to remain

unpriced

Major externalities associated with the automobile are related to conventional air

pollutants carbon dioxide as a greenhouse gas and congestion In fact reduction of

conventional pollutants is not emphasized by most authors as a major justification for moving to

fuel cells One main source of benefits from fuel cell powered vehicles according to emphasis

given in the recent NRC study (National Research Council 2004) is the ostensible reduction in

greenhouse gases The physical size of the greenhouse effect from any given time path of fossil

fuel use has substantial uncertainty and the uncertainty in the net measure of damages is

relatively larger given the additional uncertainties in how effective and costly different

adjustment actions might be

Another externality from the US perspective is due to a rising supply curve of oil to the

world and the fact that the US consumes around a quarter of the worldrsquos current production A

reduced demand for oil by the US could reduce the price of such oil and thereby provided a gain

to US citizens While better gasoline fuel economy via CAFEacute standards or gasoline taxes might

provide a US benefit associated with reduced gasoline prices a move to fuel cell powered

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-9-

vehicles would only provide a similar type of US benefit if the hydrogen were derived from

imported fossil fuels In other words research into technologies that eliminate all use of fossil

fuels means that there is no obvious benefit to the US from whatever reduction in fossil fuel

prices might result

IV HISTORIC FUEL ECONOMY CAFEacute AND THE SIZES OF EXTERNALITIES

Fuel economy became a public policy issue in the 1970s with the advent of the energy

crises brought on by the actions of OPEC and related world events The average fuel economy of

light duty vehicles in model year 1975 was 131 miles per gallon Because of the pressure of

rising oil prices and Corporate Average Fuel Economy standards set by the federal government

the average fuel economy rose to 221 for the 1987 model year However as of model year 2004

the average fuel economy of light duty vehicles was 208 (These numbers have been adjusted

downward for realistic driving conditions and do not reflect the values used to determine

compliance) (See Table I below from EPA OTAQ April 2004 pii) The CAFEacute standards

have had to be met separately by each manufacturer as well as separately for cars and light

trucks For passenger cars they have to be met separately for imported and domestically

produced vehicles The recent decline in fuel economy has been the result of the relatively

constant CAFEacute standards combined with an increasing fraction of vehicles sold that are classified

as light trucks As of model year 2004 light trucks have a CAFEacute standard of 207 while

passenger cars have a CAFEacute standard of 275 These standards have remained basically the same

since the early 1990s However the share of new light duty vehicles classified as light trucks

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-10-

(which includes sport utility vehicles) has increased from 28 in 1987 to 48 in 2004 leading to

the decline in the average fuel economy of new light duty vehicles Perhaps because of these

trends the light truck CAFEacute standard is being increased to 210 mpg for MY 2005 216 for MY

2006 and 222 for MY 20071

Despite the recent decline in new vehicle average fuel economy there has been

substantial technological improvement in light duty vehicles since 1987 that could have

potentially been used to increase fuel economy As seen in the Table below from model year

1987 to model year 2004 there has been a 26 increase in the average weight of vehicles and a

76 increase in horsepower Specifically ldquoEPA estimates that had the new 2004 light-duty

vehicle fleet has the same distribution of performance and the same distribution of weight as in

1987 it could have achieved 20 percent higher fuel economyrdquo EPA April 2004 p v) Given

this technological improvement and the constancy of the CAFEacute standards over many years one

is tempted to conclude that the CAFEacute standards have become less binding than in the early

1980s An argument in the opposite direction would note that real oil prices since the mid-

1980s have up until recently been well below the levels seen in 1980 and that would tend to

make high mileage cars relatively less desirable Also rising affluence and the accompanying

increased demand for cars that are larger and have better performance would tend to make the

standards more constraining

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-11-

The recent National Research Council study (NRC 2003) examined the history of

rationale for and possible alternatives to the CAFEacute standards (The study will hereafter be

referred to as the CAFEacute report) The authors formally offered limiting conventional air pollution

greenhouse gases such as carbon dioxide and a reduction in import oil prices as rationales The

light duty vehicle fleet is responsible for roughly 16 of the greenhouse gas emissions of the US

and the US is responsible for roughly 14 of the worldrsquos greenhouse gas emissions The CAFEacute

report adopts an estimate of the external cost of carbon emissions of $50 per tonne which

translates to $012 external cost per gallon of gasoline This number is far higher than Nordhaus

and Yangrsquos (1996) estimate which would put the number in comparable 2000 dollars at

something under $10 per tonne carbon although others have argued for numbers as high as $100

per tonne The CAFEacute reportrsquos number for the carbon externality presumably reflect a global

perspective This is suggested by the fact that the $10 offered as a rough update to Nordhaus and

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-12-

Yangrsquos estimate of a global external cost of $619 in ldquo1990 dollarsrdquo in the year 2000 The

ldquononcooperativerdquo solution to their model which means each nation would use a carbon tax that

would maximize its net benefits would have the US charge a carbon tax of $065 a tonne in

ldquo1990 dollarsrdquo in the year 2000 about one tenth the level indicated when the US considers the

global externality

As of 2001 the US imports about 60 of the oil it consumes (StatAb No 896) and it

consumes roughly 14 of world production (AnnEnerg Rev 2002 Table 111 and Stat Ab)

Given a rising supply curve of oil greater consumption by the US or any other country causes the

price of oil to be higher The CAFEacute report (p87) uses a point estimate of the supply price

externality at $5bbl which translates to a value of $012 per gallon Clearly countries

exporting oil would lose from a US engineered reduction in gasoline demand while other

consuming nations would gain Another $002 of externality was added due to pollutants from

the supply chain of gasoline resulting in a $026 per gallon externality

The CAFEacute report offered no estimate of the size of the externality from the emissions of

conventional pollution in automobile exhaust From the viewpoint of improving fuel economy

this can be justified by the fact that conventional pollution per mile driven is already tightly

constrained by other regulations although fuel economy standards may affect the cost of meeting

pollution standards The conventional pollutants emitted by automobiles are hydrocarbons (HC)

carbon monoxide (CO) and nitrogen oxides (NOx) the first and last being the main cause of

ozone pollution in the troposphere In 1975 the federal standards for those three pollutants (in

order) were 15 15 and 31 grams per mile while under the new Tier 1 standards in effect for

recent model years the analogous standards are 25 34 and 04 grams per mile(NRC 2003

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-13-

p21) Tougher Tier 2 standards begin effect in 2004 While vehicle miles traveled by light duty

vehicles have roughly doubled from 1975 to 2001 (Stat Abstract 2003 Table 1095) and the

scale of industry has increased total air pollutant emissions are on average significantly lower

since 1975 (EPA Air Quality Trends2004) Thus the size of the negative externalities from

conventional pollutants are presumably lower per mile now than in 1975

Other authors have used estimates of the damages from conventional pollutants in their

studies along with estimates of other forms of damages associated with the automobile In at

least two cases the numbers used indicate that the relative damage from conventional pollutants

was not small compared with the carbon externality The numbers used by Lave and MacLean

(2002Table2) in their study of the Prius indicate that holding miles constant the damage from

carbon emissions was slightly smaller in size than the damage caused by conventional pollutants

Levinson and Gillen (1998Table 9) in their extensive study of virtually all the costs associated

with the highway automobile use use numbers that place the carbon externality at less than 5

of the overall damage from air pollution An important reason for the relative unimportance of

conventional pollutants in both of these studies is that each one uses a number for the damages

per ton from carbon emissions that is in line with the Nordhaus and Chang (1996) estimate

In fact CAFEacute standards may look better from an economic perspective if the externalities

from conventional pollutants are small This is because higher CAFEacute standards tend to increase

total miles driven and therefore emissions from automobiles via the ldquoreboundrdquo effect caused by

the reduction in the marginal cost of miles traveled Various authors Kleit (2004) Portney etal

(2003) and Congressional Budget Office (2002) refer to estimates that each 10 increase in fuel

economy caused by CAFEacute will tend to increase the miles driven by 2 Such an increase in

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-14-

miles driven increases direct vehicle emissions more or less proportionately although there is an

offset in that pollution emissions associated with the production and distribution of gasoline are

reduced According to CBO (2002 p26) there is a modest net decrease in HC and NOx with a

net increase in CO

Assuming the $50 per ton damage of carbon used in the CAFEacute report the net external

cost associated with changes in conventional pollutants may be relatively small but both carbon

and conventional pollutant externalities appear to be smaller than the external costs per mile

associated with congestion an issue ignored in that report Schrank and Lomax(2004 p1) offer

the estimate of approximately $63 billion as the cost of congestion in 2002 for 85 urban areas in

the US2 At 12 cents per gallon carbon externality multiplied by the roughly 130 billion gallons

of gasoline consumed by the light duty vehicle fleet in recent years one would get only $156

billion total carbon externality Assuming that most of the congestion is borne by those traveling

in the light duty fleet the congestion problem is larger than global warming Of course an

improvement in fuel economy would lead to increased driving spread out among times and

locations only part of which would be congested Accounting for these factors Parry and Small

(2001) make a ldquobestrdquo estimate of the marginal external congestion cost of 35 cents per mile

But increased travel would also potentially cause increased number of accidents Some accident

costs are internalized but others are not Parry and Small (2001) put the external accident costs

at 3 cents per mile Portney et al (2003p211) perform a ldquoback-of-the-enveloperdquo calculation

using these numbers and others to conclude that ldquothe rebound effect results in added congestion

and accident cost externalities of 195 cents for each gallon of mandated fuel economy

improvementrdquo Thus starting from the NRC (2003) numbers and subtracting the offsetting

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-15-

external costs of the rebound effect would put the net external benefit of tightening CAFEacute down

to 65 cents per gallon saved

V GASOLINE TAXES AND EXTERNALITIES

While tradable rights would improve the efficiency of the CAFEacute standards such

standards are less efficient in inducing reduction in fuel use than gasoline taxes as noted by the

NRC (2003) Kleit (2004) Portney etal (2003) and CBO (2002) An increase in tax on

gasoline would not only offer an incentive to make new cars with greater miles per gallon such a

tax would given incentives for individuals to drive all cars less and maintain them more with an

eye toward reducing fuel use Instead of a rebound effect the incentive of a gasoline tax would

work toward reducing automobile fuel consumption in a cost-effective manner across all ways of

doing so There would be a reduction in emissions of conventional pollutants and carbon from

fewer vehicle miles traveled along with any gains that might occur from cars that got more miles

per gallon Insofar as cars would be driven less traffic congestion might will be reduced thereby

addressing another externality of the automobile A tax on gasoline use which is more or less

directly related to the two main externalities considered by the CAFE study would also be more

neutral toward attributes such as the size and weight of vehicles and make the categories of light

truck and passenger car of no consequence with regard to the effort that a manufacturer should

make to improve fuel economy As it is now all passenger cars are measured against the same

average fuel economy goal regardless of how large they are or how many passengers the vehicle

might hold Of course broad based taxes (or their equivalent) on carbon emissions and other

pollutants would tend to be even more efficient barring some offsetting distortions

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-16-

An important consideration is that these external costs exist in a world in which there is

substantial taxation generally and specific taxation aimed at gasoline consumption The CAFEacute

report notes that at the time of their writing there was an average combined level federal and state

taxes on gasoline of around $038 per gallon The social gain from better fuel economy would

not include the savings in tax payments since they are a transfer of resources to the government

Indeed Michael Boskin while head of the Council of Economic Advisers made a statement

quoted in NRC (1992 p25footnote 17) to the effect that while economists believe in

internalizing externalities the taxes on gasoline were already sufficiently high to offset any such

externalities

The Boskin statement was made before the publication of some important and relevant

analyses of environmental taxation in a world of existing taxes used for financing government

services The analysis of Bovenberg and Mooij (1994) and Fullerton (1997) indicate that the

correct differential level of environmental taxation depends upon the details of the utility

function and existing patterns and levels of taxation The theoretical arguments suggest that the

rate of taxation on the good causing the externality should be higher than the rate of taxation on

clean goods but not as much higher as the marginal external cost The facts that income used to

buy autos and gasoline is taxed sales of automobiles are often subject to sales taxes and

automobiles users pay gasoline taxes that generally exceed the usual sales taxes by a good

margin would seem to suggest that the efficient level of additional taxation per gallon would not

be a large fraction of any external cost However the automobile makes special demands upon

public funds to build and maintain roads and highways largely out of the fuel taxes so it may be

that one should limit how one counts fuel taxes against the external costs

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-17-

Of course the US has far lower taxes on gasoline than European countries and Japan

As of 2002 the retail price of gasoline in Germany France Italy and Great Britain was more

than twice that of the US at existing exchange rates Japanrsquos retail price was almost twice that of

the US and both Mexico and Canadarsquos retail prices were higher than the USrsquo (Annual Energy

Review 2003 Table 11-8) Parry (2001) analyzed Great Britainrsquos level of fuel taxation

apparently the highest in the world and concluded that it was excessively high even considering

generous estimate of environmental externalities and revenue needs

Parry and Small (2002) offer an impressive attempt to derive a theoretically consistent

estimates of the second best gasoline tax for the US and the UK They account for the external

costs associated with carbon emissions conventional pollutants traffic congestion and the

external portion of accident costs Their model includes a governmental budget constraint in

which funds are raised by a general tax on labor plus a tax on gasoline to raise a fixed amount of

revenue The tax on gasoline affects both vehicle miles traveled and the amount of gasoline

consumed per mile Except for the carbon emissions the other externalities depend mainly on

vehicle miles traveled Therefore only a portion the impact of a fuel tax works to reduce these

other externalities For the US their optimal second best gasoline tax was $101 (in 2000 $)

compared to an actual US average gasoline tax of 40 cents Only 26 cents of the tax was

described as the ldquoRamsey taxrdquo justified based upon revenue raising considerations alone

The marginal external cost for the US adjusted for the limitations of the fuel tax in

addressing several of the externalities was estimated by Parry and Small at 83 cents However

this figure was reduced to 74 cents to account for excess burdens implied by the tax on labor Of

the marginal external cost estimate of 83 cents only 6 cents was attributable to carbon emissions

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-18-

based upon a $25ton C damage figure while an (adjusted) value of 18 cents was for

conventional pollution 32 cents for congestion and 27 cents for the external portion of accident

costs The ldquoadjustmentrdquo accounts for the fact that part of the response to the fuel tax is to

increase miles per gallon which does nothing to reduce the externalities associated with vehicle

miles traveled No ldquoenergy securityrdquo or supply externality was included in the calculation

While there are many uncertainties and simplifications in such a model the results are

sufficiently strong as to create a presumption that higher gasoline taxes would be welfare

improving

Estimates of the price elasticity of demand for gasoline vary but most put it in the

inelastic range Kleit (2004) used a value of 49 for the elasticity over a five year period while

Parry and Small (2002) assumed a value of 55 Assuming a perfectly elastic supply of gasoline

this would imply that an extra 60 cent per gallon tax might raise the price of gasoline from

around $180 to $240 At the indicated elasticity this would reduce consumption by about 15

A larger long run impact would result if fuel taxes induced faster innovation to improve fuel

economy over time However even with CAFEacute pushing fuel economy higher US gasoline

consumption has grown from 934 billion gallons in 1975 to 1266 gallons in 2001 an increase of

around 35

VI DIESEL POWERED VEHICLES

In the United States less than 3 of new light vehicles as of 2002 were powered by diesel

engines while in Europe approximately 40 of new vehicles are diesel While diesel fuel has

roughly the same per gallon cost as gasoline in the US diesel fuel is cheaper than gasoline in

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-19-

Europe due to favorable tax treatment Regulations on emissions from diesels are also relatively

more lenient in Europe than the US (Monahan and Friedman (2004 Table 1)

Diesel engines while tending to emit more particulate matter and nitrogen oxides than

gasoline powered vehicles have some advantage over gasoline powered vehicles with regard to

reduced petroleum use and reduced emissions of carbon According to Monahan and Friedman

(2004p11) ldquoTaking both upstream and downstream emissions into account each gallon of

gasoline combusted results in about 24 pounds of heat-trapping gasesmdasha 17 increase

However a gallon of diesel fuel contains more energy and a diesel engine is more efficient in

converting chemical into mechanical energy Thus Monahan and Friedman conclude ldquoThe

diesel car would release 15 percent less heat-trapping gas emissions over its lifetime than its

gasoline counterpartrdquo (p11) This assumes no increase in miles driven because of the lower cost

of fuel per mile

The greater fuel economy of diesel engines measured in miles per gallon overstates the

potential reduction in petroleum use because 25 percent more oil is needed to produce a gallon of

diesel(Monahan and Friedman 2004pp2) Since the cost per gallon of fuel is roughly the

same and the diesel vehicle can achieve a 37 percent improvement in fuel economy there is a

considerable saving in fuel costs On balance for the same miles driven there appears to be

roughly a 9 percent reduction in oil use (Monahan and Friedman p11) Some or all of the fuel

cost would be offset by the higher cost of a diesel engine required because the need for a

sturdier engine to withstand higher compression ratios

With regard to conventional pollution and its regulation the increases in particles and

nitrogen oxides implied by the use of diesels instead of ICEs or the costliness of keeping these

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-20-

emissions to level that would be close to ICEs is likely to be sufficient to discourage their

widespread use in automobiles in the US There are also indications that Europe is starting to

question its favorable tax treatment of diesel fuel Nevertheless Monahan and Friedman

(2004p34) express concern that the US CAFEacute standards favor diesel vehicles because only

miles per gallon of fuel used are considered and not miles per gallon of petroleum Because of

the greater petroleum used per gallon of fuel with diesel the substitution of a diesel vehicles with

better miles per gallon than the gasoline vehicles they replace could potentially increase the total

demand for petroleum and the amount of greenhouse gases

VII HYBRID ELECTRIC VEHICLES

California has been in the forefront of tightening auto emission regulations It instituted

emission regulations before the US government and has generally had tighter standards than the

federal since the 1960s More recently the California Air Resources Board (CARB) initiated a

mandate which required manufacturers to build and sell an increasing proportion of zero-

emission (ZEV) vehicles In practice this meant battery electric vehicles (BEVs) Despite some

research spending by the federal government and considerable work by manufacturers no vehicle

having acceptable cost range and performance characteristics was developed Honda and GM

have both stopped producing the BEVs they had developed

While the advances in battery technology were insufficient to create a viable BEV they

were substantial enough in order to create hybrid electric vehicles that were not too far from

economic viability While there can be variations in the degree of ldquohybridizationrdquo a hybrid

electric vehicle is basically one having a gasoline engine and system of batteries that can run an

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-21-

electric motor The advantages of a hybrid mainly relate to the fact that it can get more miles per

gallon of fuel and thereby emit less greenhouse gases and potentially less pollution of other types

The gain in fuel economy stems from several sources 1 Energy normally lost in braking can be

partly recovered by using the electric motor as a generator to recharge the batteries This is

referred to as regenerative braking 2 The size of the primary engine can be reduced thereby

using less fuel 3 The internal combustion engine operates at a more constant load which leads

to a better ratio of gasoline energy burned to mechanical energy produced 4 The presence of a

large battery system allows the gasoline engine to be shut off when the vehicle is stationary

Advantages 1 2 and 4 are particularly useful for improving fuel economy in the urban

driving and mileage for hybrids tends to be nearly as good in urban driving as on the highway

In fact the Toyota Prius of 2003 officially gets 52 miles per gallon in the city and ldquoonlyrdquo 45

miles per gallon on the highway The Prius accounted for 47 of the hybrid vehicle registrations

in 2003 It is an interesting issue how such substitution of a hybrid car for a conventional one

would effect congestion costs On the one hand they lower the cost of urban driving and

therefore total miles traveled in congested areas would tend to increase thereby creating more

congestion On the other hand one of the costs of congestion is gasoline wasted with idling and

frequent stops This cost would be particularly reduced by hybrids However the net effect

would seem to be clearly in the direction of making the time cost of urban travel higher

Hybrid vehicles first appeared in the model year 2000 Californiarsquos regulation gave some

encouragement in that hybrid vehicles could qualify as ultra-low emission vehicles (ULEV)

could to some extent count against the ZEV goal (Jefferson and Barnard 2002 p11)

Furthermore Californiarsquos Low Emission Vehicle II standards passed in 1998 have been adopted

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-22-

by Maine Massachusetts New York and Vermont This set of states accounts for more than

one-fifth of all new car sales (Monahan and Friedman 2004p29)

Beyond this regulatory encouragement of hybrids the federal government has offered a

deduction from adjusted gross income on the federal tax form of $2000 for the all hybrid model

years through 2005 (recently extended by the ldquoWorking Families Tax Relief Act of 2004) with

deductions allowed at $500 rate in 2006 and with no deduction scheduled for 2007 and beyond

ltwwwfueleconomygovfegtax_afvshtmlgt Some states including Colorado and New York

have added tax breaks at the state level for the purchase of new hybrid vehicles These

incentives have been sufficient to lead to the registration of a total of 43435 hybrid vehicles in

the US in calendar year 2003 up from 34521 in 2002 Not surprisingly more than 14 of the

registered hybrids are in California

(ltwwwtheautochannelcomnews20040422191012htmlgt) There are presumably many more

hybrid vehicles that have been sold in the high gasoline tax countries of Europe and

Japan(ZEV)

A basic benefit-cost analysis of a particular hybrid vehicle has been performed by Lave

and MacLean (2002) They compared the 2001 model year ldquoperformancerdquo Prius to a Corolla LE

They calculated that the Prius has a sticker price $3495 greater than the Corolla They estimated

the fuel economy of the performance Prius as 437 mpg while the Corolla had 348 mpg and

assumed that the lifetime miles of each vehicle was 155000 (250000 km) spread out evenly over

14 years The Prius saved around 908 gallons over the life of the vehicle Using a 6 discount

rate for valuing gasoline savings and assuming other things such as maintenance costs they

estimate that one would need a gasoline price (or social cost) of $510 to justify the choice of a

-23-

Prius At a zero discount rate the relevant gasoline price was $342 At the levels of external

costs and gasoline price assumed in his study the Prius could not come close to justifying itself

privately or from the viewpoint of social net benefits

It is interesting to attempt a quick and dirty update for the 2005 model year with

specifications from the Toyota web site ltwwwtoyotacomgt The MSRP of the Toyota Prius is

listed as $21415 while the Corolla LE with automatic transmission is listed as $16230 leading

a $5185 difference The combined urbanhighway mpg for the Corolla is around 331 while the

comparable figure is 55 mpg for the Prius The savings in gasoline over the same lifetime

assumed above is 1868 gallons3 The break-even gasoline price at a zero discount rate

(heroically) assuming all other things the same is $278 or $369 at a 6 percent discount rate

Thus since Lave and MacLeanrsquos study there seems to have been an improvement in the relative

net cost of purchasing the hybrid Prius This is particularly true in that gasoline prices have risen

significantly above the$150 per gallon they assumed Starting from the relatively high supply

cost of gasoline in the summer of 2004 Parry and Smallrsquos second best optimal tax of something

over $1 per gallon would seem to put the retail cost of gasoline fairly close to the level where

even someone not making an environmental fashion statement might consider choosing a hybrid

vehicle4 This is particularly true if the large majority of the driving to be done was in an urban

setting

From the private perspective there is also the federal tax deduction for the purchase of a

ldquoclean carrdquo to consider The deduction from adjusted gross income of $2000 which does not

require itemization is worth different amounts to different taxpayers depending upon the

individual marginal tax rate Furthermore there are a few states which offer additional tax

-24-

breaks for purchasing a hybrid For the sake of argument let us assume that the federal tax break

reduces the net cost of buying a Prius by $700 This reduces the difference in purchase costs to

$4485 and makes the zero discount rate break-even price of gasoline approximately $240 rather

than the $278 calculated above In many places in Europe the retail price of gasoline exceeds

even the larger figure and private incentives assuming the same price differential for the

vehicles could make the Prius the superior choice for those with low discount rates

The above comparisons are made ignoring any differences in maintenance costs and

performance While the 2005 Prius is closer in desirable attributes to the Corolla than it was

when first introduced it is still slightly inferior in acceleration and cannot be used for towing

However its listed measurements give it a very small edge in some dimensions of interior space

Additionally the Prius should save some trips to the gas station Given the relative mileage and

size of gas tanks (119 gallons for the Prius versus 132 for the Corolla) it seems that one would

have to fill up the Prius tank only 23 as often If the driver filled the tank when it was 14 full

and drove the lifetime distance assumed one would fill up the Corolla over 470 times Using the

Prius might save over 150 fill-up operations and the remaining ones would presumably take a

little less time due to the smaller tank Even at the modest cost in labor and travel cost of about

$3 per fill-up this saving could amount to $400 to $500 in (undiscounted) savings over the life

of the car

Another minor consideration in favor of the Prius is that the use of regenerative braking

should reduce wear on the brakes However this is likely to be more than offset by the fact that

regenerative breaking requires systems which themselves will likely be a source of expensive

maintenance The most expensive additional maintenance associated with the Prius is the

-25-

potential replacement of the Nickel-Metal-Hydride batteries which have a power capacity of 21

kW and an overall voltage of 2015 While they are superior in most quality dimensions to lead

batteries it is estimated that currently they would cost $3000 to replace although that cost may

decline with time and greater production volume Toyota as well as Ford and GM warrants

their hybrid systems for 8 years or 100000 miles somewhat less than the lifetime of a traditional

ICE vehicle (Jensen111404)

The future of oil and gasoline prices is uncertain but ultimately one would expect that

prices would tend to trend upward unless there are major breakthrough in alternative energy If

this is the case then the hybrid vehicle is likely to take new car market share from conventional

ICE vehicles Within a scenario of rising prices it can even be rational to buy a hybrid when the

current price alone would not justify its purchase over a conventional car Another consideration

favorable to the future of hybrids is that presumably it has not yet reaped the potentially

substantial cost savings associated with learning by doing and economies of scale that comes

with greater cumulative production and rates of production

Environmental trends may also favor increasing use of hybrids over time Even with

models with relatively optimistic views of global warming the optimal carbon tax rises in real

terms over time A recent exposition of the Regional Integrated model of Climate and Economy

(RICE) shows the optimal carbon tax more than tripling between 2005 and 2055 although the

2055 carbon tax is still less than the $50 tonne carbon number used by NRC in its study of the

CAFEacute standards (Nordhaus and Boyer 2000 p133) Lastly it is the nature of the fuel economy

that the improvement from 15 mpg to 30 mpg saves absolutely more gasoline for a given distance

traveled than the improvement from 30 mpg to 60 mpg would save Given some within-vehicle

-26-

economies of scale in hybrid systems this suggests that making large vehicles into hybrids has

more potential for being economically justifiable

In fact a larger number of hybrid models and models in larger sizes are slated to be on

the market in the next few years A hybrid version of the Honda Accord goes on sale in

December 2004 while Ford will be making a hybrid version of its Escape more available in

2005 According to JD Power as reported in the Plain Dealer by 2010 there will be about 35

hybrid models including about 15 from domestic automakers (Jensen Nov 14 2004Plain

Dealer G6) One estimate is that Americans will be buying about 400000 hybrids by 2008

However that number is on the order of only 5 of the vehicles expected to be sold in that year

VIII FUEL CELL VEHICLES

In George W Bushrsquos January 2003 State of the Union address he announced a proposed

$12 billion in research funding to develop the technology for fuel cell powered automobiles

The fuel cell powered vehicle would presumably be cleaner and more ldquoenergy efficientrdquo and it

had become clear that previous efforts to produce a ldquozero-emission vehiclerdquo in the form of a

battery electric vehicle were not destined to succeed anytime soon The type of fuel cell suitable

for automobiles is the Proton Exchange Membrane (PEM) which have been used by the Gemini

and Apollo missions as well as the space shuttle Such fuel cells operate at a relatively low

temperature compared to other fuel cells around 150 degrees Fahrenheit which gives them a

quicker start-up time than ones requiring higher temperatures PEM fuel cells are extremely

expensive because of among other reasons the significant amount of platinum needed to act as a

catalyst in the reaction of hydrogen and oxygen By the early 1990s researchers had succeeded

-27-

in reducing the amount of platinum needed in a fuel cell by nearly a factor of ten (Romm

2004Ch1) This encouraging factor also played a role in the newer interest in fuel cells

However authors such as Borgwardt (2001) suggests that the required platinum for large

numbers of FCVs would imply unrealistically large and rapid increases in production although

Spiegel (2004) argues that such is not likely to be the case

It is difficult to find a precise estimate of the recent or current cost of a PEM fuel cell that

would power a typical automobile The appropriate range of required power is apparently from

50 kW to 80 kW based upon some prototype cars listed in the Department of Energyrsquos Fuel Cell

Vehicle World Survey 2003 However it is clear that currently a PEM fuel cell is nowhere near

commercial viability Romm (2004p20) states ldquoIn 2003 fuel cell vehicles cost $1 million each

or morerdquo A recent NRC report states ldquoIn spite of substantial RampD spending by DOE and

industry costs are still a factor of 10 to 20 times too expensive these fuel cells are short of

required durability and their energy efficiency is still too low for light-duty-vehicle

applicationsrdquo (NRC 2004 p4) The Fuel Cell Report to Congress (2003 p39) indicates that

implementation of current fuel cell technology on the scale of 500000 units would result in an

unit cost of $195-325 kW The current cost of internal combustion engine power plants is put at

$25-35 The estimated cost of the fuel cell required for commercial viability is put somewhere in

the neighborhood of $50 per kW In any case the NRC (2004p29) develops an ldquooptimisticrdquo

scenario for fuel cell powered vehicles whereby they ldquocould reach 1 percent of US sales by

2015 and then increase by 1 percentage point per year until 2024 and by 5 percentage points per

year thereafter until they dominate the marketrdquo By 2020 the projected total number of fuel cell

vehicles would be 4 million or less

-28-

Fuel cells have not been proven to have the durability of an ICE which is around 5000

hours of operation Furthermore PEM fuel cells are particularly sensitive to pollutants The

platinum catalyst is susceptible to poisoning by CO a possible contaminant in hydrogen obtained

from fossil fuels Sulfur compounds can cause permanent damage to the catalyst

Currently hydrogen derived from fossil fuels would be cheaper than hydrogen derived

from renewable energy The cheapest source of hydrogen would be from steam reforming

methane (SMR) process whereby water and the main constituent of natural gas would be

combined to produce hydrogen and carbon dioxide Of course this is an energy using process

and so one ends up with less usable energy than one starts with However fuel cell vehicles

could get 24 times as many miles per unit of energy than current gasoline ICErsquos so that a net

gain in energy efficiency can be obtained (NRC2004p26) In any case one estimate of the cost

of producing and distributing hydrogen using SMR is at $4 to $5 per kilogram of hydrogen

(Romm2004p74) although NRC (2004 Table 4-1) estimates the current production cost

(alone) of natural gas in a very large scale plant of $103 without carbon capture plus $096 in

dispensing and (pipeline) distribution costs for a total of $199 per kilogram of hydrogen

However with shipment of liquid hydrogen by rail or truck a likely requirement for a transition

period the overall current cost is put at $242 A convenient fact is that a kilogram of hydrogen

contains about the same energy as a gallon of gasoline If the higher cost figure for both and

production and delivery of hydrogen is used and the relative fuel efficiency numbers are roughly

correct one would project that the fuel cost per mile with a fuel cell would be roughly the same

as that of a gasoline vehicle at a price per gallon of slightly under $2 In the NRC report (which

uses 2003 $) the current cost per gallon of gasoline is taken as $112 which is net of gasoline

-29-

taxes and reflects a price before the significant rise in 2004

One of the ostensible benefits of fuel cells is the reduction in the emissions of greenhouse

gases particularly carbon dioxide Production of hydrogen with natural gas (largely methane)

could generate substantial carbon emissions While methane is the virtually the least carbon

intensive of the fossil fuels its carbon intensity per unit of energy is roughly 75 of gasoline In

addition natural gas can be considered a substitute for coal in the generation of electricity in

which capacity it could potentially reduce carbon emissions by a greater amount than if it

substituted indirectly for gasoline Romm (2004p153) indicates that due to a combination of

less carbon per unit of energy and a higher energy efficiency with gas plants a combined cycle

natural gas plant can generate a megawatt-hour of electricity with the release of about 810

pounds of CO2 while even relatively newer coal plants may release more than 2200 pounds of

CO26

The production of hydrogen starting from fossil fuels is consistent with a substantial

reduction of carbon emissions only if the carbon is captured or sequestered in some way The

usual method envisaged is to pump carbon dioxide into underground areas from which it would

not leak at a significant rate Such pumping of carbon dioxide has been done in a limited way to

add pressure to recover more oil but the scale of such operations would have to be vastly larger

to accommodate a wide scale operation of carbon sequestration There would be issues of the

costliness of transporting large amounts of carbon dioxide to sites with sufficient capacity to

handle the huge volumes implied by a hydrogen economy run on fossil fuels While there are

presumably many uncertainties associated with a large scale effort to sequester carbon dioxide

the NRC (2004Table 4-1) estimates of the current added cost for natural gas are only around an

-30-

extra 19 cents per kilogram of hydrogen This is a sum that represents only about 10 of the

estimated cost of ldquoretailrdquo hydrogen without carbon sequestration7

Hydrogen from fossil fuels can be produced in large scale plants and shipped by truck or

pipeline to filling stations it could be produced at filling stations or it could be produced within

the vehicle The last might be considered uneconomical on its face given even minimal

economies of scale in the production of hydrogen However there are a couple of factors which

led some experts to consider it First there is the chicken-and-egg problem of infrastructure to

provide hydrogen versus vehicles to use hydrogen Currently the US has a network of about

180000 retail fuel stations serving more than 200 million vehicles (NRC2004p29) A switch

to hydrogen as a vehicle fuel would imply a massive new infrastructure for distribution under

centralized production which raises important issues of stranded costs and two transitionally

inefficient fueling networks With the use of on-vehicle reformers advantage would be taken of

the existing network of natural gas pipelines until the density of fuel cell vehicles reached a level

to justify larger scale production and distribution of hydrogen In fact there has even been some

consideration of using gasoline ldquoreformersrdquo in vehicles for the same reason However as of

2003 vehicle manufacturers have recently largely abandoned this approach as costing too much

and shifted efforts toward direct hydrogen use (NRC 2004 p27)

The second problem of having hydrogen produced outside of the car involves the

difficulties of transporting and storing hydrogen While hydrogen has a large amount of energy

per kilogram it naturally has a very low amount of energy per unit volume Even when under

high pressure its energy density is lower than that of gasoline An illustrative quote from Romm

(204p96) is that ldquoA 5000 psi tank which until recently was considered at the upper limits for

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-25-

potential replacement of the Nickel-Metal-Hydride batteries which have a power capacity of 21

kW and an overall voltage of 2015 While they are superior in most quality dimensions to lead

batteries it is estimated that currently they would cost $3000 to replace although that cost may

decline with time and greater production volume Toyota as well as Ford and GM warrants

their hybrid systems for 8 years or 100000 miles somewhat less than the lifetime of a traditional

ICE vehicle (Jensen111404)

The future of oil and gasoline prices is uncertain but ultimately one would expect that

prices would tend to trend upward unless there are major breakthrough in alternative energy If

this is the case then the hybrid vehicle is likely to take new car market share from conventional

ICE vehicles Within a scenario of rising prices it can even be rational to buy a hybrid when the

current price alone would not justify its purchase over a conventional car Another consideration

favorable to the future of hybrids is that presumably it has not yet reaped the potentially

substantial cost savings associated with learning by doing and economies of scale that comes

with greater cumulative production and rates of production

Environmental trends may also favor increasing use of hybrids over time Even with

models with relatively optimistic views of global warming the optimal carbon tax rises in real

terms over time A recent exposition of the Regional Integrated model of Climate and Economy

(RICE) shows the optimal carbon tax more than tripling between 2005 and 2055 although the

2055 carbon tax is still less than the $50 tonne carbon number used by NRC in its study of the

CAFEacute standards (Nordhaus and Boyer 2000 p133) Lastly it is the nature of the fuel economy

that the improvement from 15 mpg to 30 mpg saves absolutely more gasoline for a given distance

traveled than the improvement from 30 mpg to 60 mpg would save Given some within-vehicle

-26-

economies of scale in hybrid systems this suggests that making large vehicles into hybrids has

more potential for being economically justifiable

In fact a larger number of hybrid models and models in larger sizes are slated to be on

the market in the next few years A hybrid version of the Honda Accord goes on sale in

December 2004 while Ford will be making a hybrid version of its Escape more available in

2005 According to JD Power as reported in the Plain Dealer by 2010 there will be about 35

hybrid models including about 15 from domestic automakers (Jensen Nov 14 2004Plain

Dealer G6) One estimate is that Americans will be buying about 400000 hybrids by 2008

However that number is on the order of only 5 of the vehicles expected to be sold in that year

VIII FUEL CELL VEHICLES

In George W Bushrsquos January 2003 State of the Union address he announced a proposed

$12 billion in research funding to develop the technology for fuel cell powered automobiles

The fuel cell powered vehicle would presumably be cleaner and more ldquoenergy efficientrdquo and it

had become clear that previous efforts to produce a ldquozero-emission vehiclerdquo in the form of a

battery electric vehicle were not destined to succeed anytime soon The type of fuel cell suitable

for automobiles is the Proton Exchange Membrane (PEM) which have been used by the Gemini

and Apollo missions as well as the space shuttle Such fuel cells operate at a relatively low

temperature compared to other fuel cells around 150 degrees Fahrenheit which gives them a

quicker start-up time than ones requiring higher temperatures PEM fuel cells are extremely

expensive because of among other reasons the significant amount of platinum needed to act as a

catalyst in the reaction of hydrogen and oxygen By the early 1990s researchers had succeeded

-27-

in reducing the amount of platinum needed in a fuel cell by nearly a factor of ten (Romm

2004Ch1) This encouraging factor also played a role in the newer interest in fuel cells

However authors such as Borgwardt (2001) suggests that the required platinum for large

numbers of FCVs would imply unrealistically large and rapid increases in production although

Spiegel (2004) argues that such is not likely to be the case

It is difficult to find a precise estimate of the recent or current cost of a PEM fuel cell that

would power a typical automobile The appropriate range of required power is apparently from

50 kW to 80 kW based upon some prototype cars listed in the Department of Energyrsquos Fuel Cell

Vehicle World Survey 2003 However it is clear that currently a PEM fuel cell is nowhere near

commercial viability Romm (2004p20) states ldquoIn 2003 fuel cell vehicles cost $1 million each

or morerdquo A recent NRC report states ldquoIn spite of substantial RampD spending by DOE and

industry costs are still a factor of 10 to 20 times too expensive these fuel cells are short of

required durability and their energy efficiency is still too low for light-duty-vehicle

applicationsrdquo (NRC 2004 p4) The Fuel Cell Report to Congress (2003 p39) indicates that

implementation of current fuel cell technology on the scale of 500000 units would result in an

unit cost of $195-325 kW The current cost of internal combustion engine power plants is put at

$25-35 The estimated cost of the fuel cell required for commercial viability is put somewhere in

the neighborhood of $50 per kW In any case the NRC (2004p29) develops an ldquooptimisticrdquo

scenario for fuel cell powered vehicles whereby they ldquocould reach 1 percent of US sales by

2015 and then increase by 1 percentage point per year until 2024 and by 5 percentage points per

year thereafter until they dominate the marketrdquo By 2020 the projected total number of fuel cell

vehicles would be 4 million or less

-28-

Fuel cells have not been proven to have the durability of an ICE which is around 5000

hours of operation Furthermore PEM fuel cells are particularly sensitive to pollutants The

platinum catalyst is susceptible to poisoning by CO a possible contaminant in hydrogen obtained

from fossil fuels Sulfur compounds can cause permanent damage to the catalyst

Currently hydrogen derived from fossil fuels would be cheaper than hydrogen derived

from renewable energy The cheapest source of hydrogen would be from steam reforming

methane (SMR) process whereby water and the main constituent of natural gas would be

combined to produce hydrogen and carbon dioxide Of course this is an energy using process

and so one ends up with less usable energy than one starts with However fuel cell vehicles

could get 24 times as many miles per unit of energy than current gasoline ICErsquos so that a net

gain in energy efficiency can be obtained (NRC2004p26) In any case one estimate of the cost

of producing and distributing hydrogen using SMR is at $4 to $5 per kilogram of hydrogen

(Romm2004p74) although NRC (2004 Table 4-1) estimates the current production cost

(alone) of natural gas in a very large scale plant of $103 without carbon capture plus $096 in

dispensing and (pipeline) distribution costs for a total of $199 per kilogram of hydrogen

However with shipment of liquid hydrogen by rail or truck a likely requirement for a transition

period the overall current cost is put at $242 A convenient fact is that a kilogram of hydrogen

contains about the same energy as a gallon of gasoline If the higher cost figure for both and

production and delivery of hydrogen is used and the relative fuel efficiency numbers are roughly

correct one would project that the fuel cost per mile with a fuel cell would be roughly the same

as that of a gasoline vehicle at a price per gallon of slightly under $2 In the NRC report (which

uses 2003 $) the current cost per gallon of gasoline is taken as $112 which is net of gasoline

-29-

taxes and reflects a price before the significant rise in 2004

One of the ostensible benefits of fuel cells is the reduction in the emissions of greenhouse

gases particularly carbon dioxide Production of hydrogen with natural gas (largely methane)

could generate substantial carbon emissions While methane is the virtually the least carbon

intensive of the fossil fuels its carbon intensity per unit of energy is roughly 75 of gasoline In

addition natural gas can be considered a substitute for coal in the generation of electricity in

which capacity it could potentially reduce carbon emissions by a greater amount than if it

substituted indirectly for gasoline Romm (2004p153) indicates that due to a combination of

less carbon per unit of energy and a higher energy efficiency with gas plants a combined cycle

natural gas plant can generate a megawatt-hour of electricity with the release of about 810

pounds of CO2 while even relatively newer coal plants may release more than 2200 pounds of

CO26

The production of hydrogen starting from fossil fuels is consistent with a substantial

reduction of carbon emissions only if the carbon is captured or sequestered in some way The

usual method envisaged is to pump carbon dioxide into underground areas from which it would

not leak at a significant rate Such pumping of carbon dioxide has been done in a limited way to

add pressure to recover more oil but the scale of such operations would have to be vastly larger

to accommodate a wide scale operation of carbon sequestration There would be issues of the

costliness of transporting large amounts of carbon dioxide to sites with sufficient capacity to

handle the huge volumes implied by a hydrogen economy run on fossil fuels While there are

presumably many uncertainties associated with a large scale effort to sequester carbon dioxide

the NRC (2004Table 4-1) estimates of the current added cost for natural gas are only around an

-30-

extra 19 cents per kilogram of hydrogen This is a sum that represents only about 10 of the

estimated cost of ldquoretailrdquo hydrogen without carbon sequestration7

Hydrogen from fossil fuels can be produced in large scale plants and shipped by truck or

pipeline to filling stations it could be produced at filling stations or it could be produced within

the vehicle The last might be considered uneconomical on its face given even minimal

economies of scale in the production of hydrogen However there are a couple of factors which

led some experts to consider it First there is the chicken-and-egg problem of infrastructure to

provide hydrogen versus vehicles to use hydrogen Currently the US has a network of about

180000 retail fuel stations serving more than 200 million vehicles (NRC2004p29) A switch

to hydrogen as a vehicle fuel would imply a massive new infrastructure for distribution under

centralized production which raises important issues of stranded costs and two transitionally

inefficient fueling networks With the use of on-vehicle reformers advantage would be taken of

the existing network of natural gas pipelines until the density of fuel cell vehicles reached a level

to justify larger scale production and distribution of hydrogen In fact there has even been some

consideration of using gasoline ldquoreformersrdquo in vehicles for the same reason However as of

2003 vehicle manufacturers have recently largely abandoned this approach as costing too much

and shifted efforts toward direct hydrogen use (NRC 2004 p27)

The second problem of having hydrogen produced outside of the car involves the

difficulties of transporting and storing hydrogen While hydrogen has a large amount of energy

per kilogram it naturally has a very low amount of energy per unit volume Even when under

high pressure its energy density is lower than that of gasoline An illustrative quote from Romm

(204p96) is that ldquoA 5000 psi tank which until recently was considered at the upper limits for

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-26-

economies of scale in hybrid systems this suggests that making large vehicles into hybrids has

more potential for being economically justifiable

In fact a larger number of hybrid models and models in larger sizes are slated to be on

the market in the next few years A hybrid version of the Honda Accord goes on sale in

December 2004 while Ford will be making a hybrid version of its Escape more available in

2005 According to JD Power as reported in the Plain Dealer by 2010 there will be about 35

hybrid models including about 15 from domestic automakers (Jensen Nov 14 2004Plain

Dealer G6) One estimate is that Americans will be buying about 400000 hybrids by 2008

However that number is on the order of only 5 of the vehicles expected to be sold in that year

VIII FUEL CELL VEHICLES

In George W Bushrsquos January 2003 State of the Union address he announced a proposed

$12 billion in research funding to develop the technology for fuel cell powered automobiles

The fuel cell powered vehicle would presumably be cleaner and more ldquoenergy efficientrdquo and it

had become clear that previous efforts to produce a ldquozero-emission vehiclerdquo in the form of a

battery electric vehicle were not destined to succeed anytime soon The type of fuel cell suitable

for automobiles is the Proton Exchange Membrane (PEM) which have been used by the Gemini

and Apollo missions as well as the space shuttle Such fuel cells operate at a relatively low

temperature compared to other fuel cells around 150 degrees Fahrenheit which gives them a

quicker start-up time than ones requiring higher temperatures PEM fuel cells are extremely

expensive because of among other reasons the significant amount of platinum needed to act as a

catalyst in the reaction of hydrogen and oxygen By the early 1990s researchers had succeeded

-27-

in reducing the amount of platinum needed in a fuel cell by nearly a factor of ten (Romm

2004Ch1) This encouraging factor also played a role in the newer interest in fuel cells

However authors such as Borgwardt (2001) suggests that the required platinum for large

numbers of FCVs would imply unrealistically large and rapid increases in production although

Spiegel (2004) argues that such is not likely to be the case

It is difficult to find a precise estimate of the recent or current cost of a PEM fuel cell that

would power a typical automobile The appropriate range of required power is apparently from

50 kW to 80 kW based upon some prototype cars listed in the Department of Energyrsquos Fuel Cell

Vehicle World Survey 2003 However it is clear that currently a PEM fuel cell is nowhere near

commercial viability Romm (2004p20) states ldquoIn 2003 fuel cell vehicles cost $1 million each

or morerdquo A recent NRC report states ldquoIn spite of substantial RampD spending by DOE and

industry costs are still a factor of 10 to 20 times too expensive these fuel cells are short of

required durability and their energy efficiency is still too low for light-duty-vehicle

applicationsrdquo (NRC 2004 p4) The Fuel Cell Report to Congress (2003 p39) indicates that

implementation of current fuel cell technology on the scale of 500000 units would result in an

unit cost of $195-325 kW The current cost of internal combustion engine power plants is put at

$25-35 The estimated cost of the fuel cell required for commercial viability is put somewhere in

the neighborhood of $50 per kW In any case the NRC (2004p29) develops an ldquooptimisticrdquo

scenario for fuel cell powered vehicles whereby they ldquocould reach 1 percent of US sales by

2015 and then increase by 1 percentage point per year until 2024 and by 5 percentage points per

year thereafter until they dominate the marketrdquo By 2020 the projected total number of fuel cell

vehicles would be 4 million or less

-28-

Fuel cells have not been proven to have the durability of an ICE which is around 5000

hours of operation Furthermore PEM fuel cells are particularly sensitive to pollutants The

platinum catalyst is susceptible to poisoning by CO a possible contaminant in hydrogen obtained

from fossil fuels Sulfur compounds can cause permanent damage to the catalyst

Currently hydrogen derived from fossil fuels would be cheaper than hydrogen derived

from renewable energy The cheapest source of hydrogen would be from steam reforming

methane (SMR) process whereby water and the main constituent of natural gas would be

combined to produce hydrogen and carbon dioxide Of course this is an energy using process

and so one ends up with less usable energy than one starts with However fuel cell vehicles

could get 24 times as many miles per unit of energy than current gasoline ICErsquos so that a net

gain in energy efficiency can be obtained (NRC2004p26) In any case one estimate of the cost

of producing and distributing hydrogen using SMR is at $4 to $5 per kilogram of hydrogen

(Romm2004p74) although NRC (2004 Table 4-1) estimates the current production cost

(alone) of natural gas in a very large scale plant of $103 without carbon capture plus $096 in

dispensing and (pipeline) distribution costs for a total of $199 per kilogram of hydrogen

However with shipment of liquid hydrogen by rail or truck a likely requirement for a transition

period the overall current cost is put at $242 A convenient fact is that a kilogram of hydrogen

contains about the same energy as a gallon of gasoline If the higher cost figure for both and

production and delivery of hydrogen is used and the relative fuel efficiency numbers are roughly

correct one would project that the fuel cost per mile with a fuel cell would be roughly the same

as that of a gasoline vehicle at a price per gallon of slightly under $2 In the NRC report (which

uses 2003 $) the current cost per gallon of gasoline is taken as $112 which is net of gasoline

-29-

taxes and reflects a price before the significant rise in 2004

One of the ostensible benefits of fuel cells is the reduction in the emissions of greenhouse

gases particularly carbon dioxide Production of hydrogen with natural gas (largely methane)

could generate substantial carbon emissions While methane is the virtually the least carbon

intensive of the fossil fuels its carbon intensity per unit of energy is roughly 75 of gasoline In

addition natural gas can be considered a substitute for coal in the generation of electricity in

which capacity it could potentially reduce carbon emissions by a greater amount than if it

substituted indirectly for gasoline Romm (2004p153) indicates that due to a combination of

less carbon per unit of energy and a higher energy efficiency with gas plants a combined cycle

natural gas plant can generate a megawatt-hour of electricity with the release of about 810

pounds of CO2 while even relatively newer coal plants may release more than 2200 pounds of

CO26

The production of hydrogen starting from fossil fuels is consistent with a substantial

reduction of carbon emissions only if the carbon is captured or sequestered in some way The

usual method envisaged is to pump carbon dioxide into underground areas from which it would

not leak at a significant rate Such pumping of carbon dioxide has been done in a limited way to

add pressure to recover more oil but the scale of such operations would have to be vastly larger

to accommodate a wide scale operation of carbon sequestration There would be issues of the

costliness of transporting large amounts of carbon dioxide to sites with sufficient capacity to

handle the huge volumes implied by a hydrogen economy run on fossil fuels While there are

presumably many uncertainties associated with a large scale effort to sequester carbon dioxide

the NRC (2004Table 4-1) estimates of the current added cost for natural gas are only around an

-30-

extra 19 cents per kilogram of hydrogen This is a sum that represents only about 10 of the

estimated cost of ldquoretailrdquo hydrogen without carbon sequestration7

Hydrogen from fossil fuels can be produced in large scale plants and shipped by truck or

pipeline to filling stations it could be produced at filling stations or it could be produced within

the vehicle The last might be considered uneconomical on its face given even minimal

economies of scale in the production of hydrogen However there are a couple of factors which

led some experts to consider it First there is the chicken-and-egg problem of infrastructure to

provide hydrogen versus vehicles to use hydrogen Currently the US has a network of about

180000 retail fuel stations serving more than 200 million vehicles (NRC2004p29) A switch

to hydrogen as a vehicle fuel would imply a massive new infrastructure for distribution under

centralized production which raises important issues of stranded costs and two transitionally

inefficient fueling networks With the use of on-vehicle reformers advantage would be taken of

the existing network of natural gas pipelines until the density of fuel cell vehicles reached a level

to justify larger scale production and distribution of hydrogen In fact there has even been some

consideration of using gasoline ldquoreformersrdquo in vehicles for the same reason However as of

2003 vehicle manufacturers have recently largely abandoned this approach as costing too much

and shifted efforts toward direct hydrogen use (NRC 2004 p27)

The second problem of having hydrogen produced outside of the car involves the

difficulties of transporting and storing hydrogen While hydrogen has a large amount of energy

per kilogram it naturally has a very low amount of energy per unit volume Even when under

high pressure its energy density is lower than that of gasoline An illustrative quote from Romm

(204p96) is that ldquoA 5000 psi tank which until recently was considered at the upper limits for

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-27-

in reducing the amount of platinum needed in a fuel cell by nearly a factor of ten (Romm

2004Ch1) This encouraging factor also played a role in the newer interest in fuel cells

However authors such as Borgwardt (2001) suggests that the required platinum for large

numbers of FCVs would imply unrealistically large and rapid increases in production although

Spiegel (2004) argues that such is not likely to be the case

It is difficult to find a precise estimate of the recent or current cost of a PEM fuel cell that

would power a typical automobile The appropriate range of required power is apparently from

50 kW to 80 kW based upon some prototype cars listed in the Department of Energyrsquos Fuel Cell

Vehicle World Survey 2003 However it is clear that currently a PEM fuel cell is nowhere near

commercial viability Romm (2004p20) states ldquoIn 2003 fuel cell vehicles cost $1 million each

or morerdquo A recent NRC report states ldquoIn spite of substantial RampD spending by DOE and

industry costs are still a factor of 10 to 20 times too expensive these fuel cells are short of

required durability and their energy efficiency is still too low for light-duty-vehicle

applicationsrdquo (NRC 2004 p4) The Fuel Cell Report to Congress (2003 p39) indicates that

implementation of current fuel cell technology on the scale of 500000 units would result in an

unit cost of $195-325 kW The current cost of internal combustion engine power plants is put at

$25-35 The estimated cost of the fuel cell required for commercial viability is put somewhere in

the neighborhood of $50 per kW In any case the NRC (2004p29) develops an ldquooptimisticrdquo

scenario for fuel cell powered vehicles whereby they ldquocould reach 1 percent of US sales by

2015 and then increase by 1 percentage point per year until 2024 and by 5 percentage points per

year thereafter until they dominate the marketrdquo By 2020 the projected total number of fuel cell

vehicles would be 4 million or less

-28-

Fuel cells have not been proven to have the durability of an ICE which is around 5000

hours of operation Furthermore PEM fuel cells are particularly sensitive to pollutants The

platinum catalyst is susceptible to poisoning by CO a possible contaminant in hydrogen obtained

from fossil fuels Sulfur compounds can cause permanent damage to the catalyst

Currently hydrogen derived from fossil fuels would be cheaper than hydrogen derived

from renewable energy The cheapest source of hydrogen would be from steam reforming

methane (SMR) process whereby water and the main constituent of natural gas would be

combined to produce hydrogen and carbon dioxide Of course this is an energy using process

and so one ends up with less usable energy than one starts with However fuel cell vehicles

could get 24 times as many miles per unit of energy than current gasoline ICErsquos so that a net

gain in energy efficiency can be obtained (NRC2004p26) In any case one estimate of the cost

of producing and distributing hydrogen using SMR is at $4 to $5 per kilogram of hydrogen

(Romm2004p74) although NRC (2004 Table 4-1) estimates the current production cost

(alone) of natural gas in a very large scale plant of $103 without carbon capture plus $096 in

dispensing and (pipeline) distribution costs for a total of $199 per kilogram of hydrogen

However with shipment of liquid hydrogen by rail or truck a likely requirement for a transition

period the overall current cost is put at $242 A convenient fact is that a kilogram of hydrogen

contains about the same energy as a gallon of gasoline If the higher cost figure for both and

production and delivery of hydrogen is used and the relative fuel efficiency numbers are roughly

correct one would project that the fuel cost per mile with a fuel cell would be roughly the same

as that of a gasoline vehicle at a price per gallon of slightly under $2 In the NRC report (which

uses 2003 $) the current cost per gallon of gasoline is taken as $112 which is net of gasoline

-29-

taxes and reflects a price before the significant rise in 2004

One of the ostensible benefits of fuel cells is the reduction in the emissions of greenhouse

gases particularly carbon dioxide Production of hydrogen with natural gas (largely methane)

could generate substantial carbon emissions While methane is the virtually the least carbon

intensive of the fossil fuels its carbon intensity per unit of energy is roughly 75 of gasoline In

addition natural gas can be considered a substitute for coal in the generation of electricity in

which capacity it could potentially reduce carbon emissions by a greater amount than if it

substituted indirectly for gasoline Romm (2004p153) indicates that due to a combination of

less carbon per unit of energy and a higher energy efficiency with gas plants a combined cycle

natural gas plant can generate a megawatt-hour of electricity with the release of about 810

pounds of CO2 while even relatively newer coal plants may release more than 2200 pounds of

CO26

The production of hydrogen starting from fossil fuels is consistent with a substantial

reduction of carbon emissions only if the carbon is captured or sequestered in some way The

usual method envisaged is to pump carbon dioxide into underground areas from which it would

not leak at a significant rate Such pumping of carbon dioxide has been done in a limited way to

add pressure to recover more oil but the scale of such operations would have to be vastly larger

to accommodate a wide scale operation of carbon sequestration There would be issues of the

costliness of transporting large amounts of carbon dioxide to sites with sufficient capacity to

handle the huge volumes implied by a hydrogen economy run on fossil fuels While there are

presumably many uncertainties associated with a large scale effort to sequester carbon dioxide

the NRC (2004Table 4-1) estimates of the current added cost for natural gas are only around an

-30-

extra 19 cents per kilogram of hydrogen This is a sum that represents only about 10 of the

estimated cost of ldquoretailrdquo hydrogen without carbon sequestration7

Hydrogen from fossil fuels can be produced in large scale plants and shipped by truck or

pipeline to filling stations it could be produced at filling stations or it could be produced within

the vehicle The last might be considered uneconomical on its face given even minimal

economies of scale in the production of hydrogen However there are a couple of factors which

led some experts to consider it First there is the chicken-and-egg problem of infrastructure to

provide hydrogen versus vehicles to use hydrogen Currently the US has a network of about

180000 retail fuel stations serving more than 200 million vehicles (NRC2004p29) A switch

to hydrogen as a vehicle fuel would imply a massive new infrastructure for distribution under

centralized production which raises important issues of stranded costs and two transitionally

inefficient fueling networks With the use of on-vehicle reformers advantage would be taken of

the existing network of natural gas pipelines until the density of fuel cell vehicles reached a level

to justify larger scale production and distribution of hydrogen In fact there has even been some

consideration of using gasoline ldquoreformersrdquo in vehicles for the same reason However as of

2003 vehicle manufacturers have recently largely abandoned this approach as costing too much

and shifted efforts toward direct hydrogen use (NRC 2004 p27)

The second problem of having hydrogen produced outside of the car involves the

difficulties of transporting and storing hydrogen While hydrogen has a large amount of energy

per kilogram it naturally has a very low amount of energy per unit volume Even when under

high pressure its energy density is lower than that of gasoline An illustrative quote from Romm

(204p96) is that ldquoA 5000 psi tank which until recently was considered at the upper limits for

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-28-

Fuel cells have not been proven to have the durability of an ICE which is around 5000

hours of operation Furthermore PEM fuel cells are particularly sensitive to pollutants The

platinum catalyst is susceptible to poisoning by CO a possible contaminant in hydrogen obtained

from fossil fuels Sulfur compounds can cause permanent damage to the catalyst

Currently hydrogen derived from fossil fuels would be cheaper than hydrogen derived

from renewable energy The cheapest source of hydrogen would be from steam reforming

methane (SMR) process whereby water and the main constituent of natural gas would be

combined to produce hydrogen and carbon dioxide Of course this is an energy using process

and so one ends up with less usable energy than one starts with However fuel cell vehicles

could get 24 times as many miles per unit of energy than current gasoline ICErsquos so that a net

gain in energy efficiency can be obtained (NRC2004p26) In any case one estimate of the cost

of producing and distributing hydrogen using SMR is at $4 to $5 per kilogram of hydrogen

(Romm2004p74) although NRC (2004 Table 4-1) estimates the current production cost

(alone) of natural gas in a very large scale plant of $103 without carbon capture plus $096 in

dispensing and (pipeline) distribution costs for a total of $199 per kilogram of hydrogen

However with shipment of liquid hydrogen by rail or truck a likely requirement for a transition

period the overall current cost is put at $242 A convenient fact is that a kilogram of hydrogen

contains about the same energy as a gallon of gasoline If the higher cost figure for both and

production and delivery of hydrogen is used and the relative fuel efficiency numbers are roughly

correct one would project that the fuel cost per mile with a fuel cell would be roughly the same

as that of a gasoline vehicle at a price per gallon of slightly under $2 In the NRC report (which

uses 2003 $) the current cost per gallon of gasoline is taken as $112 which is net of gasoline

-29-

taxes and reflects a price before the significant rise in 2004

One of the ostensible benefits of fuel cells is the reduction in the emissions of greenhouse

gases particularly carbon dioxide Production of hydrogen with natural gas (largely methane)

could generate substantial carbon emissions While methane is the virtually the least carbon

intensive of the fossil fuels its carbon intensity per unit of energy is roughly 75 of gasoline In

addition natural gas can be considered a substitute for coal in the generation of electricity in

which capacity it could potentially reduce carbon emissions by a greater amount than if it

substituted indirectly for gasoline Romm (2004p153) indicates that due to a combination of

less carbon per unit of energy and a higher energy efficiency with gas plants a combined cycle

natural gas plant can generate a megawatt-hour of electricity with the release of about 810

pounds of CO2 while even relatively newer coal plants may release more than 2200 pounds of

CO26

The production of hydrogen starting from fossil fuels is consistent with a substantial

reduction of carbon emissions only if the carbon is captured or sequestered in some way The

usual method envisaged is to pump carbon dioxide into underground areas from which it would

not leak at a significant rate Such pumping of carbon dioxide has been done in a limited way to

add pressure to recover more oil but the scale of such operations would have to be vastly larger

to accommodate a wide scale operation of carbon sequestration There would be issues of the

costliness of transporting large amounts of carbon dioxide to sites with sufficient capacity to

handle the huge volumes implied by a hydrogen economy run on fossil fuels While there are

presumably many uncertainties associated with a large scale effort to sequester carbon dioxide

the NRC (2004Table 4-1) estimates of the current added cost for natural gas are only around an

-30-

extra 19 cents per kilogram of hydrogen This is a sum that represents only about 10 of the

estimated cost of ldquoretailrdquo hydrogen without carbon sequestration7

Hydrogen from fossil fuels can be produced in large scale plants and shipped by truck or

pipeline to filling stations it could be produced at filling stations or it could be produced within

the vehicle The last might be considered uneconomical on its face given even minimal

economies of scale in the production of hydrogen However there are a couple of factors which

led some experts to consider it First there is the chicken-and-egg problem of infrastructure to

provide hydrogen versus vehicles to use hydrogen Currently the US has a network of about

180000 retail fuel stations serving more than 200 million vehicles (NRC2004p29) A switch

to hydrogen as a vehicle fuel would imply a massive new infrastructure for distribution under

centralized production which raises important issues of stranded costs and two transitionally

inefficient fueling networks With the use of on-vehicle reformers advantage would be taken of

the existing network of natural gas pipelines until the density of fuel cell vehicles reached a level

to justify larger scale production and distribution of hydrogen In fact there has even been some

consideration of using gasoline ldquoreformersrdquo in vehicles for the same reason However as of

2003 vehicle manufacturers have recently largely abandoned this approach as costing too much

and shifted efforts toward direct hydrogen use (NRC 2004 p27)

The second problem of having hydrogen produced outside of the car involves the

difficulties of transporting and storing hydrogen While hydrogen has a large amount of energy

per kilogram it naturally has a very low amount of energy per unit volume Even when under

high pressure its energy density is lower than that of gasoline An illustrative quote from Romm

(204p96) is that ldquoA 5000 psi tank which until recently was considered at the upper limits for

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-29-

taxes and reflects a price before the significant rise in 2004

One of the ostensible benefits of fuel cells is the reduction in the emissions of greenhouse

gases particularly carbon dioxide Production of hydrogen with natural gas (largely methane)

could generate substantial carbon emissions While methane is the virtually the least carbon

intensive of the fossil fuels its carbon intensity per unit of energy is roughly 75 of gasoline In

addition natural gas can be considered a substitute for coal in the generation of electricity in

which capacity it could potentially reduce carbon emissions by a greater amount than if it

substituted indirectly for gasoline Romm (2004p153) indicates that due to a combination of

less carbon per unit of energy and a higher energy efficiency with gas plants a combined cycle

natural gas plant can generate a megawatt-hour of electricity with the release of about 810

pounds of CO2 while even relatively newer coal plants may release more than 2200 pounds of

CO26

The production of hydrogen starting from fossil fuels is consistent with a substantial

reduction of carbon emissions only if the carbon is captured or sequestered in some way The

usual method envisaged is to pump carbon dioxide into underground areas from which it would

not leak at a significant rate Such pumping of carbon dioxide has been done in a limited way to

add pressure to recover more oil but the scale of such operations would have to be vastly larger

to accommodate a wide scale operation of carbon sequestration There would be issues of the

costliness of transporting large amounts of carbon dioxide to sites with sufficient capacity to

handle the huge volumes implied by a hydrogen economy run on fossil fuels While there are

presumably many uncertainties associated with a large scale effort to sequester carbon dioxide

the NRC (2004Table 4-1) estimates of the current added cost for natural gas are only around an

-30-

extra 19 cents per kilogram of hydrogen This is a sum that represents only about 10 of the

estimated cost of ldquoretailrdquo hydrogen without carbon sequestration7

Hydrogen from fossil fuels can be produced in large scale plants and shipped by truck or

pipeline to filling stations it could be produced at filling stations or it could be produced within

the vehicle The last might be considered uneconomical on its face given even minimal

economies of scale in the production of hydrogen However there are a couple of factors which

led some experts to consider it First there is the chicken-and-egg problem of infrastructure to

provide hydrogen versus vehicles to use hydrogen Currently the US has a network of about

180000 retail fuel stations serving more than 200 million vehicles (NRC2004p29) A switch

to hydrogen as a vehicle fuel would imply a massive new infrastructure for distribution under

centralized production which raises important issues of stranded costs and two transitionally

inefficient fueling networks With the use of on-vehicle reformers advantage would be taken of

the existing network of natural gas pipelines until the density of fuel cell vehicles reached a level

to justify larger scale production and distribution of hydrogen In fact there has even been some

consideration of using gasoline ldquoreformersrdquo in vehicles for the same reason However as of

2003 vehicle manufacturers have recently largely abandoned this approach as costing too much

and shifted efforts toward direct hydrogen use (NRC 2004 p27)

The second problem of having hydrogen produced outside of the car involves the

difficulties of transporting and storing hydrogen While hydrogen has a large amount of energy

per kilogram it naturally has a very low amount of energy per unit volume Even when under

high pressure its energy density is lower than that of gasoline An illustrative quote from Romm

(204p96) is that ldquoA 5000 psi tank which until recently was considered at the upper limits for

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-30-

extra 19 cents per kilogram of hydrogen This is a sum that represents only about 10 of the

estimated cost of ldquoretailrdquo hydrogen without carbon sequestration7

Hydrogen from fossil fuels can be produced in large scale plants and shipped by truck or

pipeline to filling stations it could be produced at filling stations or it could be produced within

the vehicle The last might be considered uneconomical on its face given even minimal

economies of scale in the production of hydrogen However there are a couple of factors which

led some experts to consider it First there is the chicken-and-egg problem of infrastructure to

provide hydrogen versus vehicles to use hydrogen Currently the US has a network of about

180000 retail fuel stations serving more than 200 million vehicles (NRC2004p29) A switch

to hydrogen as a vehicle fuel would imply a massive new infrastructure for distribution under

centralized production which raises important issues of stranded costs and two transitionally

inefficient fueling networks With the use of on-vehicle reformers advantage would be taken of

the existing network of natural gas pipelines until the density of fuel cell vehicles reached a level

to justify larger scale production and distribution of hydrogen In fact there has even been some

consideration of using gasoline ldquoreformersrdquo in vehicles for the same reason However as of

2003 vehicle manufacturers have recently largely abandoned this approach as costing too much

and shifted efforts toward direct hydrogen use (NRC 2004 p27)

The second problem of having hydrogen produced outside of the car involves the

difficulties of transporting and storing hydrogen While hydrogen has a large amount of energy

per kilogram it naturally has a very low amount of energy per unit volume Even when under

high pressure its energy density is lower than that of gasoline An illustrative quote from Romm

(204p96) is that ldquoA 5000 psi tank which until recently was considered at the upper limits for

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-31-

storage of gaseous fuel could still take up more than ten times the volume of a gasoline tank

with the same energy contentrdquo (For comparison the atmosphere has a pressure of around 15

pounds per square inch (psi)) Even at twice the energy efficiency this would imply a tank nearly

five times as large for a fuel cell vehicle to provide the same range Hydrogen also tends to make

metals brittle and is the most leak-prone of gases because of the small size of its molecule It is

clear that a vessel that holds pressurized hydrogen would have to be heavier and more expensive

than the ordinary gasoline tank This issue carries over to the problem of transporting hydrogen

from centralized production facilities While large centralized facilities could take best

advantage of economies of scale the cost of transporting hydrogen would be greater per unit of

energy than for natural gas or gasoline However the distribution costs indicated by NRC do not

seem to be large enough to represent one of the more serious obstacles to the use of hydrogen 8

In the long run renewable forms of energy will presumably come to dominate Along

with the traditional hydroelectric electricity one would presumably also see a mixture of wind

solar geothermal and tidal sources of energy For the most part these sources of energy would

be most directly converted to electricity The most obvious way to use this energy to produce

hydrogen would be done through the process of electrolysis where electric current is used to

separate the hydrogen and oxygen in water Hydrogen could be generated at the site of the

electricity generation or the electricity could be transmitted to locations nearer the demand where

a smaller scale electrolysis plant would produce hydrogen While no estimate is offered for the

cost of large scale hydrolysis the NRC (2004 Table 4-1) estimate for the current cost of

hydrolysis is $658 kg of hydrogen a number that would make the overall fuel cost per mile

higher than recent gasoline fuel costs even assuming that a hydrogen fuel cell gets 24 times the

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-32-

miles per unit energy

Some writers who have analyzed the technological energy efficiency and greenhouse

issues associated with various technologies have concluded that the FCV is not the approach that

is most likely to prove technologically and economically viable in the long run First it is argued

that the electric vehicle (EV) or plug hybrid electric vehicle (PGEV) is closer to economic

viability than the FCV (A PGEV is a type of hybrid vehicle that can be plugged into an electrical

outlet to supplement its charge) Mazza and Hammerschlag (2004) cite evidence that there has

been considerable improvement in battery technology stemming from the research on electric

vehicles and argue that this improvement will continue due to the widespread use of more

powerful and advanced batteries in HEVrsquos It is further argued that the relative decline in cost

required to make a commercially successful product is lower for advanced batteries such as the

lithium ion type than it is for the fuel cell and associated hydrogen storage technologies An

additional factor favoring this view is that the transition to electric vehicles would seem to be less

costly in terms of infrastructure adjustments

An energy use analysis indicates that one gets less energy delivered to the wheels of a

vehicle for each unit one starts with when one uses electricity to generate hydrogen which is in

turn used to generate electricity in the vehicle with the use of a fuel cell To justify such a

process there must be some advantage to hydrogen over electricity as a form of energy that more

than compensates for the energy losses involved Apparently Mazza and Hammerschlag

(2004p22) do not think there are sufficient compensating factors and offer the statement ldquoThe

table [Table 3] makes clear that batteries are ahead of hydrogen on grounds of price safety

calendar life and gross material availability Even on the batteriesrsquo weaker points of cycle life

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-33-

recyclability and toxicity fuel cells do not show decidedly superior performancerdquo

Another factor to consider in determining how best to use renewable energy is the impact

on greenhouse emissions As indicated earlier replacing coal as a fuel for generating electricity

eliminates more carbon per unit of energy displaced than using renewable energy to generate

hydrogen to displace the use of gasoline If there were a carbon tax (and appropriate taxes for

any other relevant externalities) set at the appropriate external cost then the issue would simply

be to displace the fuel with the highest cost at the margin At some sufficiently high external cost

of carbon coal fired electrical generation as the most carbon intensive of energy production

would have to be the fuel that one would want renewable energy to displace rather than gasoline

IX CONCLUSION

To the extent that regulation of the automobile and research dollars to improve its

technology are meant to produce net benefits the externalities of the automobile play the central

role in determining the best policies Previous studies have made clear that the CAFEacute standards

are a poor way to increase the net benefits of our use of the automobile A gasoline tax would be

superior in its impacts on externalities by a wide margin More generally broad based taxes on

carbon emissions and other pollutants would be even better at getting the most pollution

reduction for the dollar assuming other distortions in the economy are not severe

The externalities addressed in the CAFEacute report are mainly the greenhouse effect from

carbon emissions and supply cost externality to US citizens These externalities were estimated

to be on the order of 26 cents a gallon less than existing taxes on gasoline of around 38 cents a

gallon Furthermore a higher CAFEacute standard would worsen congestion and accident

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-34-

externalities due to the rebound effect The Parry and Small(2002) estimate of the second best

optimal fuel tax of around $101 is based upon consideration of the effects of such a fuel tax on

carbon emissions congestion external accident costs and conventional pollution Even if one

does not add an additional amount of tax for a supply price externality this paper offers strong

support that increasing US fuel taxes would increase US welfare

Hybrid vehicles seem to have a future given their improved urban fuel economy and

something less than prohibitive increase in up-front vehicle cost This is particularly true if

gasoline taxes remain high in other countries of the world or increase in the US or if gasoline

prices approach new highs based upon supply considerations However the reduction in the

marginal cost of driving implied by hybrids could increase congestion in urban areas as measured

by the amount of delay per trip Given the HEVrsquos ability to shut down the engine while stopped

and to re-use some energy used in braking they may reduce the fuel cost of congestion Since

the time cost of congestion is substantially larger than the fuel cost the net change in congestion

cost from additional miles traveled because of the greater use of hybrids is likely to be positive

One problem with using tax credits to encourage the purchase of hybrids as is currently

done is that the greater fuel economy implies smaller amounts of gasoline taxes collected as

well as smaller amounts of federal income tax If the desired level of highway construction and

maintenance stays roughly the same the replacement of conventional ICE vehicles with hybrids

could lead to pressure to increase the gasoline tax rates to maintain revenue to the federal and

state highway trust funds Such increases in gasoline taxes would then encourage a greater shift

toward more ldquofuel efficientrdquo vehicles such as hybrids From the analysis of Parry and Small

(2002) it is clear that the value of fuel taxes to combat externalities associated with conventional

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-35-

pollutants congestion and accidents is likely to be diminished if more of the behavioral response

goes into reducing gasoline use per mile rather than a reduction in vehicle miles traveled

Fuel cells using hydrogen are a technology that is going to have a significant impact on

the environment and the economy no sooner than two or three decades into the future The

reference to such a technology as the solution to major environmental and energy supply issues

could be seen as a distraction from currently doing things with far more predictable

environmental gains with quite possibly a better benefit to cost ratio The history of

prognostication with regard to the future technological winners does not encourage one to trust in

the enthusiasm of that technologyrsquos supporters not all of whom are disinterested Examples in

the automobile area have already been mentioned It seems possible that the enthusiasm of some

for the ldquohydrogen economyrdquo and FCVs will have a similar fate to the enthusiasm of some for

nuclear power in its early days It was asserted that it would eventually make electricity ldquotoo

cheap to meterrdquo In fact in the last forty years metering costs would seem to have dropped

relatively more than the cost of electricity from nuclear powered plants

Fuel cells have a long way to go to become economically superior to an ever improving

conventional and hybrid electric competitors Not only are the required declines in the cost of

the fuel cell very large the technology tends to require an enormously expensive and awkward

replacement of fueling infrastructure to accommodate a fuel that will much more difficult to

handle than the liquid fuels being replaced Given the long lead time involved with such a

project it is not clear that battery electric vehicles are not as good or better bet for research

dollars and planning It is also not clear that trying to develop hybrid electric vehicles that run

on (mainly) ethanol would not face smaller hurdles than the fuel cell-hydrogen scenario (The

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-36-

ethanol scenario is at least more directly consistent with moving to renewable energy) In any

case the size of the research investment in fuel cells at this point is quite modest compared to the

size of the part of the economy involved with building and fueling automobiles Given the long

lead time the nation and the world will have opportunities to make new resource allocation

decisions at many points in this stochastic dynamic programming optimization problem

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-37-

1The CAFEacute standards essentially calculate a higher than actual mileage number for vehicles

designed to run on alternative fuels which includes a fuel known as E85 E85 is 85 percent

ethanol However the large majority of the time the cars designed to operate on E85 run on

ordinary gasoline which prompted the NRC to call for elimination of the special treatment The

CAFEacute report states that the extra credit for multi-fuel vehicles ldquohas had if any a negative effect

on fuel economy greenhouse gas emissions and costrdquo(p3)

The CAFEacute standards are not always met The civil penalty per car for failing to meet the

CAFEacute standard was recently increased from $500 for each 1 tenth mile per gallon in excess of

the standard to $550 Most European manufacturers regularly pay some penalties Domestic

and Asian manufacturers never have This and other information was obtained from the National

Highway Traffic Safety Administration web site

ltwwwnhtsadotgovcarsrulescafeoverviewhtmgt

2 The total congestion cost number is based upon an estimated 35 billion hours of delay and 57

billion gallons of extra fuel consumed in 2002 Congestion got significantly worse in the period

from 1982 to 2002

3 Consumer Reports New Car Preview 2005 did their own testing of vehicles and found that

the Priusrsquo overall fuel economy was only 44 mpg while the Corollarsquos overall number was 29 (pp

155 149) However a calculation of the lifetime savings of gasoline with the Prius assuming

155270 miles traveled was roughly 1825 gallons only marginally lower than the number

obtained with the EPA mileage numbers

4 Parry and Smallrsquos $101 number was in 2000 year dollars and would have to be updated to

current values In any case not only is the number not terribly precise to begin with but it would

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-38-

presumably change over time Conventional emission standards on automobiles are getting

stricter which should lower the optimal fuel tax while congestion seems to be getting worse

which would tend to raise the optimal tax Clearly other things affecting the optimal value may

change as well

5 The gasoline engine is rated at 57 kW at 5000 rpm while the battery is rated at 21 kW The

net power of the 2005 Prius is listed as 82 kW (110 hp)

6 The quantity of 2200 pounds of carbon dioxide translates to around 600 pounds of carbon

which is 3 tons of carbon At the $50 per ton carbon externality assumed in the CAFEacute and

Hydrogen reports one gets a carbon externality of roughly 15 cents per kilowatt-hour This

externality would be reduced to around 06 cents per hour for electricity generation with a natural

gas plant using the carbon emission number in the text

7 Somewhat surprisingly the NRC estimates in Table 4-1 indicate that obtaining hydrogen from

processes starting with coal would be even cheaper than with natural gas currently and in the

future and with and without carbon capture It is surprising because natural gas is the currently

the most common starting point for producing the 9 million tons of hydrogen produced in the

US currently The majority of hydrogen currently produced is consumed at the place of

manufacture and the majority of the hydrogen is used as a feedstock to produce ammonia (NRC

2004p17)

8While liquified hydrogen would be more compact one estimate puts the energy cost of

liquefying hydrogen at 40 of the energy it contains In addition the required special cryogenic

fuel tanks would be expensive and add weight to the vehicle (Romm2004p94)

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-39-

References

Borgwardt RH 2001 ldquoPlatinum Fuel Cells and Future US Road Transportrdquo Transportation

Research (Part D 6) 199-207

Bovenberg A Lans and Ruud A De Mooij 1994 ldquoEnvironmental Levies and Distortionary

TaxationrdquoAmerican Economic Review Vol 84 No 4 1085-89

Congressional Budget Office November 2002 ldquoReducing Gasoline Consumption Three Policy

Optionsrdquo ltwwwcbogovgt

Department of Energy Energy Efficiency and Renewable Energy February 2004 Fuel Cell

Vehicle World Survey 2003 Breakthrough Technologies Institute Washington D C

Department of Energy Energy Efficiency and Renewable Energy Fuel Cell Technology

Challenges ltwwweereenergygovhydrogenandfuelcellsfuelcellsfc_challengeshtml

Department of Energy Fuel Cell Report to Congress ESECS EE-1973 February 2003

Energy Information Administration 2002 Annual Energy Review 2002 DOEEIA-0384

Washington DC

Environmental Protection Agency 2004 Air Quality Trends ltwwwepagovecgi-

binepaprintonlycgigt

Environmental Protection Agency Office of Transportation and Air Quality April 2004 Light-

Duty Automotive Technology and Fuel Economy Trends 1975 Through 2004 EPA420-

R-04-001

Fullerton Don 1997 ldquoEnvironmental Levies and Distortionary Taxation Commentrdquo

-40-

American Economic Review Vol 87 No 1 245-251

Hoffmann P Tomorrowrsquos Energy Hydrogen Fuel Cells and the Prospects for a Cleaner

Planet Cambridge Mass The MIT Press 2002

Heywood JB etal December 2003 The Performanceof Future ICE and Fuel Cell Powered

Vehicles and Their Potential Fleet Impact MIT LFEE 2003-004 RP

Jefferson CM and RH Barnard 2002 Hybrid Vehicle Propulsion Southhampton UK WIT

Press

Jensen Christopher Novermber 14 2004 ldquoGoing with the Greenrdquo Plain Dealer Business

Section G1G6

Jurgen R K(Ed) 2002 Electric and Hybrid -Electric Vehicles Society of Automotive

Engineers Inc Warrendale PA

Kleit Andrew N 2004 ldquoImpacts of Long-Range Increases in the Fuel Economy (CAFEacute)

Standardrdquo Economic Inquiry 422 pp 279-294

Lave LB and HL MacLean 2002 ldquoAn Environmental-Economic Evaluation of Hybrid-

Electric Vehicles Toyotarsquos Prius vs Its Conventional Internal Combustion Engine

Corollardquo Transportation Research (Part D 7) 155-162

Levinson David M and David Gillen 1998 ldquoThe Full Cost of InterCity of Highway

Transportationrdquo Transportation Research (Part D) Vol 3 No 4 207-223

Mazza P And R Hammerschlag 2004 Carrying the Energy Future Comparing Hydrogen and

Electricity for Transmission Storage and Transportation Institute for Lifecycle

Environmental Assessment June

-41-

McVeigh James etal June 1999 ldquoWinner Loser or Innocent Victim Has Renewable Energy

Performed As Expectedrdquo Discussion Paper 99-28 Resources for the Future

Washington DC

Monahan Patricia and David Friedman January 2004 The Diesel Dilemma Union of

Concerned Scientists

National Research Council 2003 Effectiveness and Impact of Corporate Average Fuel Economy

(CAFEacute) Standards National Academy Press Washington DC

National Research Council and National Academy of Engineering 2004 The Hydrogen

Economy Opportunities Barriers and RampD Needs The National Academies Press

Washington DC

Nordhaus William D and Joseph Boyer 2000 Warming the World Economics of Global

Warming The MIT Press Cambridge Mass

Nordhaus William D and Zili Yang 1996 ldquoA Regional Dynamic General-Equilibrium Model

of Alternative Climate-Change Strategiesrdquo The American Economic Review (Vol 86

No 4) 741-765

Ogden JM Williams RH and ED Larson 2001 Toward a Hydrogen-Based Transportation

System (Final Draft) Center for Energy and Environmental Studies Princeton

University May

Ogden JM 1999 Prospects for Building a Hydrogen Energy Infrastructure (Final Draft)

Center for Energy and Environmental Studies Princeton University June

Parry Ian W H 2001 ldquoAre Gasoline Taxes in Britain Too Highrdquo Issue Brief (Revised)

Resources for the Future Washington DC

-42-

Parry Ian WH and Kenneth A Small 2002 (rev 2004) ldquoDoes Britain or the United States

Have the Right Gasoline Taxrdquo Discussion Paper 02-12 Resources for the Future

Washington DC

Romm J J 2004 The Hype About Hydrogen Washington DC Island Press

Schrank David and Tim Lomax September 2004 The 2004 Urban Mobility Report Texas

Transportation Institute College Station Texas Texas AampM University System

Spiegel R J 2004 ldquoPlatinum and Fuel Cellsrdquo Transportation Research (Part D 9) pp 357-

371

Vyas AD et al (Argonne National Laboratory) Batteries for Electric Drive Vehicles

Evaluation of Future Characteristics and Costs through a Delphi Study Conference

Paper at SAE International Spring Fuels and Lubricants Meeting May 5-7 1997

Weiss MA etal Comparative Assessment of Fuel Cell Cars MIT LFEE 2003-001 RP

February 2003

Weiss MA etal On the Road in 2020 A Life-Cycle Analysis of New Automobile

Technologies MIT EL 00-003

• Page 1
• Page 2
• Page 3
• Page 4
• Page 5
• Page 6
• Page 7
• Page 8
• Page 9
• Page 10
• Page 11
• Page 12
• Page 13
• Page 14
• Page 15
• Page 16
• Page 17
• Page 18
• Page 19
• Page 20
• Page 21
• Page 22
• Page 23
• Page 24
• Page 25
• Page 26
• Page 27
• Page 28
• Page 29
• Page 30
• Page 31
• Page 32
• Page 33
• Page 34
• Page 35
• Page 36
• Page 37
• Page 38
• Page 39
• Page 40
• Page 41
• Page 42

-41-

McVeigh James etal June 1999 ldquoWinner Loser or Innocent Victim Has Renewable Energy

Performed As Expectedrdquo Discussion Paper 99-28 Resources for the Future

Washington DC

Monahan Patricia and David Friedman January 2004 The Diesel Dilemma Union of

Concerned Scientists

National Research Council 2003 Effectiveness and Impact of Corporate Average Fuel Economy

(CAFEacute) Standards National Academy Press Washington DC

National Research Council and National Academy of Engineering 2004 The Hydrogen

Economy Opportunities Barriers and RampD Needs The National Academies Press

Washington DC

Nordhaus William D and Joseph Boyer 2000 Warming the World Economics of Global

Warming The MIT Press Cambridge Mass

Nordhaus William D and Zili Yang 1996 ldquoA Regional Dynamic General-Equilibrium Model

of Alternative Climate-Change Strategiesrdquo The American Economic Review (Vol 86

No 4) 741-765

Ogden JM Williams RH and ED Larson 2001 Toward a Hydrogen-Based Transportation

System (Final Draft) Center for Energy and Environmental Studies Princeton

University May

Ogden JM 1999 Prospects for Building a Hydrogen Energy Infrastructure (Final Draft)

Center for Energy and Environmental Studies Princeton University June

Parry Ian W H 2001 ldquoAre Gasoline Taxes in Britain Too Highrdquo Issue Brief (Revised)

Resources for the Future Washington DC

-42-

Parry Ian WH and Kenneth A Small 2002 (rev 2004) ldquoDoes Britain or the United States

Have the Right Gasoline Taxrdquo Discussion Paper 02-12 Resources for the Future

Washington DC

Romm J J 2004 The Hype About Hydrogen Washington DC Island Press

Schrank David and Tim Lomax September 2004 The 2004 Urban Mobility Report Texas

Transportation Institute College Station Texas Texas AampM University System

Spiegel R J 2004 ldquoPlatinum and Fuel Cellsrdquo Transportation Research (Part D 9) pp 357-

371

Vyas AD et al (Argonne National Laboratory) Batteries for Electric Drive Vehicles

Evaluation of Future Characteristics and Costs through a Delphi Study Conference

Paper at SAE International Spring Fuels and Lubricants Meeting May 5-7 1997

Weiss MA etal Comparative Assessment of Fuel Cell Cars MIT LFEE 2003-001 RP

February 2003

Weiss MA etal On the Road in 2020 A Life-Cycle Analysis of New Automobile

Technologies MIT EL 00-003

• Page 1
• Page 2
• Page 3
• Page 4
• Page 5
• Page 6
• Page 7
• Page 8
• Page 9
• Page 10
• Page 11
• Page 12
• Page 13
• Page 14
• Page 15
• Page 16
• Page 17
• Page 18
• Page 19
• Page 20
• Page 21
• Page 22
• Page 23
• Page 24
• Page 25
• Page 26
• Page 27
• Page 28
• Page 29
• Page 30
• Page 31
• Page 32
• Page 33
• Page 34
• Page 35
• Page 36
• Page 37
• Page 38
• Page 39
• Page 40
• Page 41
• Page 42

-42-

Parry Ian WH and Kenneth A Small 2002 (rev 2004) ldquoDoes Britain or the United States

Have the Right Gasoline Taxrdquo Discussion Paper 02-12 Resources for the Future

Washington DC

Romm J J 2004 The Hype About Hydrogen Washington DC Island Press

Schrank David and Tim Lomax September 2004 The 2004 Urban Mobility Report Texas

Transportation Institute College Station Texas Texas AampM University System

Spiegel R J 2004 ldquoPlatinum and Fuel Cellsrdquo Transportation Research (Part D 9) pp 357-

371

Vyas AD et al (Argonne National Laboratory) Batteries for Electric Drive Vehicles

Evaluation of Future Characteristics and Costs through a Delphi Study Conference

Paper at SAE International Spring Fuels and Lubricants Meeting May 5-7 1997

Weiss MA etal Comparative Assessment of Fuel Cell Cars MIT LFEE 2003-001 RP

February 2003

Weiss MA etal On the Road in 2020 A Life-Cycle Analysis of New Automobile

Technologies MIT EL 00-003

• Page 1
• Page 2
• Page 3
• Page 4
• Page 5
• Page 6
• Page 7
• Page 8
• Page 9
• Page 10
• Page 11
• Page 12
• Page 13
• Page 14
• Page 15
• Page 16
• Page 17
• Page 18
• Page 19
• Page 20
• Page 21
• Page 22
• Page 23
• Page 24
• Page 25
• Page 26
• Page 27
• Page 28
• Page 29
• Page 30
• Page 31
• Page 32
• Page 33
• Page 34
• Page 35
• Page 36
• Page 37
• Page 38
• Page 39
• Page 40
• Page 41
• Page 42