Green Business: The Case of the Nissan Leaf

Filed Under (Environmental Policy) by Dan Karney on Oct 4, 2010

Water drips ominously from an icicle…

A glacier menacingly cleaves into the sea…

A lonely polar bear floats on a solitary iceberg…

Soft but eerily urgent music plays in the background…

No, this is not a trailer for the sequel to Al Gore’s “An Inconvenient Truth”, but the beginning of a television commercial for the Nissan Leaf (seen here).  Eventually, the camera focuses on a man and his new Leaf, where the polar bear – whom the viewers follow throughout the advertisement – hugs the man.  The announcer proclaims, “The 100% electric Nissan Leaf.  Innovation for the planet.  Innovation for all.”

Indeed, the Nissan Leaf is scheduled to be the first mass produced all-electric, plug-in vehicle sold in the United States starting in December 2010.  With an MRSP of $32,780, the Leaf is relatively expensive for its size, performance characteristics, and Nissan brand.  Federal tax credits for electric vehicles offset some of the high cost, but buyers will still pay a premium for the Leaf.  In exchange for the purchase price premium, the Leaf offers a reduction in the fuel cost per mile driven.  And, yes, the Leaf does burn “fuel” in the form of electricity purchased from the grid.

Another reason for the Leaf’s price premium comes from its green credentials.  Clearly, Nissan’s “polar bear” advertisement is meant to play-up the car’s greenness.  However, the electricity used to charge the Leaf creates pollution too, so the true green credentials of the Leaf takes some analysis.  Since the commercial implies that the Leaf reduced greenhouse gases, I limit my analysis of “greenness” to carbon dioxide (CO2) emissions.

To begin, I calculate the CO2(kg)/mile of a new conventional passenger car.  According to government agencies, the average new passenger car gets 31 miles/gallon and each gallon of gasoline combusted emits 8.86 CO2(kg).  Doing the division yields 0.295 CO2(kg)/mile.

Next, calculating the CO2(kg)/mile for the Leaf is a bit trickier and requires some assumptions.  First, I assume that coal-fired power plants meet all the MARGINAL demand for electricity due to charging the Leaf.  This is approximately true in all regions of the country during off-peak hours.  Second, I assume a heat rate of 10,500 for coal plants.  Third, I take Nissan’s word that the Leaf has a 100 range from a full 24kwh battery charge.  (Critics point out that the effective range of the Leaf might be quite less under certain weather and driving conditions.)

Using these assumptions, along with the CO2 emission factor of coal combustion, I find that the Leaf gets 0.238 CO2(kg)/mile.  This represents a 20% improvement over a conventional new car.  Thus, the Leaf is not an “emission free” vehicle, but potentially provides modest gains in the rate of CO2 emissions per mile driven.

However, the Leaf may not reduce total CO2 emissions for (at least) two reasons.  First, the cheaper per mile operating cost of the Leaf could lead to more driving, and thus more emissions.  This phenomenon is often referred to as the “rebound effect”.  Second, due to the limited range of the Leaf (only 100 miles), a second car might be purchased to fulfill the transportation needs of some consumers.  That is, the introduction of electric cars could increase the total number of cars, all else equal, and recall that all cars are manufactured from emission intensive inputs like steel, aluminum, and plastics.

In the end, Nissan is a profit-maximizing firm responsible to its shareholders.  Running their “polar bear” commercial to boost sales must be seen by the company as a way to increase profits, regardless if the Leaf is really green or not.

Another Problem Caused by Deforestation

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Apr 12, 2010


Payments for Forest Conservation

Filed Under (Environmental Policy) by Kathy Baylis on Mar 1, 2010

I spent a good chunk of last week working with US and Mexican colleagues, looking at data from a forest conservation program in Mexico. This “Payment for Environmental Services” (PES) program is in the highly threatened area where Monarch butterflies stay over winter. The program pays producers and communities not to log their forestland, as a means to halt the rapid deforestation that has threatened the area for years. While in many cases, PES programs have been placed in regions with little initial threat of logging, this region is at the opposite end of the spectrum. The program operates in an area with a very high threat of logging, and the real worry is that the most tempting lands left are those with the relatively pristine, dense forests – the ones in the core of the Monarch butterfly area.

At first glance, one might think the program looks like a great success. The land inside the program area is much more heavily forested than the land outside, so a quick comparison of average forest cover argues that the program is working. At a second glance, the program looks like an abject failure. Comparing deforestation rates, we see more logging inside the core region than outside, so clearly the payments aren’t working. The real problem of course is twofold: first, the core land was selected to be in the program because it was more forested. Second, as other lands are deforested, the core zone becomes increasingly attractive to loggers, and it becomes harder and harder to keep the illegal loggers out.

These PES programs, where villagers are paid for providing an environmental service, are notoriously hard to evaluate. First is the problem that many such programs are put in places where people would likely have never cut down the forest in the first place. So the program may be only paying people for doing something they would have already done anyway (“additionality”). To determine the true opportunity cost of preserving this land – i.e. to determine whether these communities would have kept their forests intact without the payment – it’s helpful to have a control group to compare them to. But finding true control groups is tricky. For example, in places where there is a lot of logging pressure, by taking some land out of production, other neighboring land becomes more valuable, and therefore subject to higher logging pressure (“spillover effect”).
If this second effect is in place, just comparing the land use of those receiving the payment to those who are not will give a biased result. Since the program is driving increased logging into the control group, it’s going to look like the program is working amazingly well, even though overall deforestation hasn’t changed.

After trying to explain the pressure for logging using physical characteristics of the land and transportation cost, I found that when one looks at the map of deforestation, deforestation follows community boundaries amazingly well. So, for all that one would expect the high-value forest to get cut first, or land close to roads to be particularly at risk, deforestation, at least in part, seems to come down to community governance. Some communities have not only ceased logging, they are patrolling their forest to keep their trees safe. Other communities are not being so diligent. In some cases the illegal logging is spilling over from neighboring logged regions. In other cases, the community itself is split, and the faction that didn’t agree with the decision to participate in the conservation program just went ahead and logged anyway. We also observe some communities who refused to take the money even though they were formally losing the right to log. Rumors are that leaders in these communities did not want to give up the opaque payments they receive from the forestry companies in exchange for the very transparent payments they would receive from the conservation fund. Besides, illegal logging is rarely prosecuted, so losing the right to log was not apparently as great a threat as one might hope.

Why do we care? One reason we might is that a number of countries are looking at imposing these PES programs to pay for carbon sequestration (often referred to as “reducing emissions from deforestation in developing countries, or REDD).   The point is that when we consider any form of payment for environmental service, we need to consider the community institutions needed for such a program to be successful. Now, the situation in this conservation program in Mexico is complicated by the fact that land is often managed communally, but even if one is relying on a group or institution to organize private property owners, one could see similar problems. Second, much land in developing countries, particularly land that might be the target of a carbon-based reforestation program, is owned collectively. If all we are interested in is preserving carbon, we may just want to target well governed communities, to ensure that PES actually produce what was purchased. If we want to deliver development goals, we may need for some thought to go into designing PES programs that not only pay communities, but also help them establish the institutional structure needed to deliver the services purchased.

Europe vs. America (Travelogue vs. Travelblog?)

Filed Under (Environmental Policy) by Don Fullerton on Feb 22, 2010

This week, I’ve been travelling in Paris, to make a presentation at an OECD meeting on “encouraging low-carbon vehicle technologies”.  Now I’ve moved on to Barcelona, and in a few days fly to Istanbul.  I’ve been sightseeing “old Europe”, with very narrow city streets that are really just alleys at best, where walkers share the space with intermittent bicycles and mopeds.  The occasional delivery van is the only four wheeled vehicle that must venture down some of these alleys, just to reach the shops where they have to deliver their goods.

It is all very quaint, and picturesque.  Anybody who really needs to get somewhere just rides the metro.  Perhaps the dense grid of subway stops is not surprising in a city the size of Paris, but Barcelona has a similar number of stops on many routes, all around the city.  The population is about 3 million.  I don’t think that any city of 3 million in the United States has dug so many subway lines for convenient public transportation.

The narrow streets and convenient subways reflect the culture and history of the place.  Given the topic of my presentation, however, I have to wonder if it reflects the current policies in place.   Has the high tax on gasoline (“petrol”) encouraged these citizens to buy mopeds instead of cars, and to vote more funding for public transportation?  Or has the number of mopeds and subways induced the people to vote for high taxes on petrol?

I don’t know, and it would be very difficult to sort out the direction of causation.  But I do know that “old” Europe is a long way ahead of the U.S. in terms of low carbon footprint.  We in the U.S. see congested highways as an indication that we need to spend more money on highways!  That kind of reaction will never get any of us out of our cars and into public transportation.  For that we need infrastructure, which requires exactly the wording I used above: “culture and history”.  It cannot be built overnight.  The existing trajectory for building of highway infrastructure will put us on the path to future emissions, which sow the seeds of future global warming.

I’m easily as patriotic as the next American.  Last night I cheered when Bode Miller won the gold metal in the men’s “super combined event” at the Vancouver Olympics.  But I really have to wonder if the rest of the world is right that the United States has already caused more than its share of what will be a huge global warming problem, and we’re just not doing enough about it.  It’s not much warmer yet, but CO2 concentrations have already increased enough to guarantee another 5 degrees warmer climate.  If we don’t change our culture of driving, our way of life could be history.

Those with More Income Do Not Hold More Wealth

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 15, 2010

Energy is an integral input to nearly all aspects of our economy.  Energy policies, especially policies aimed at curbing greenhouse gas emissions associated with energy consumption, thus have sizable effects on nearly all participants in our economy.  The distribution of these effects across participants is an important consideration of policy design.

The incidence of the costs of energy or climate policy manifests itself in at least two major ways.  First, policy affects the “uses side” of income, through product prices.  A carbon tax may disproportionately increase the price of gasoline and electricity, two goods that represent a higher share of expenditure for poorer households.  The uses side incidence is then regressive.  Second, policy affects the “sources side” of income, through factor prices.  A carbon tax may be more burdensome to capital-intensive industries and disproportionately reduce the return to capital.  If so, and if capital provides a higher share of income for richer households, then the sources side incidence may be progressive.

In a new working paper, however, Garth Heutel and I find that the sources side burden is regressive – just like the uses side.  The reason is that high income households do not get more of their income from capital than from labor.  The holding of wealth is not the same as the flow of income. 

The data for capital income indicate one major problem with using annual income to categorize families from rich to poor: the group with the lowest annual income has the highest fraction of income from capital.  This group includes a lot of retired individuals who have no labor income and are living off their retirement savings.  These individuals may not really be “poor” on a lifetime basis.  In other words, we would like to classify households by the stock of lifetime wealth, but instead we are classifying them by a flow of annual income.  If individuals smooth consumption over their lifetime, then total annual consumption might be a good proxy for lifetime income (or at least, a better proxy than annual income). 

So we also categorized all households in the Consumer Expenditure Survey by total annual expenditures (as a proxy for permanent income).  Still, however, the group with the highest annual expenditure has a higher ratio of labor income to capital income than does the group with the lowest annual expenditure.

Thus, the sources-side burden is also regressive.  The carbon tax applies to the energy-intensive sector, which uses relatively more capital than labor in production.  Thus it reduces the demand for capital, and it reduces the return to capital relative to the wage rate.  This places less burden on those with more labor income – the high income group.

The same occurs for annual consumption deciles instead of annual income deciles.  Both the uses-side and sources-side incidences are regressive.  When defined by annual consumption groups, however, the uses-side incidence is more regressive than when defined by annual income, and the sources-side incidence is less regressive than when defined by annual income.

This topic could use more research.  But this research so far is one indication that a cap-and-trade system or carbon tax might hurt low-income groups in two ways, instead of just one!

Unemployment and the Environment?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 9, 2010

I would never ever want to be a macroeconomist charged with making economic predictions.  In fact, I’m sorry that anybody makes macroeconomic predictions, because they can’t always be right, and the fact that they turn out wrong gives all economists a bad name!   Yet I particularly like it when some non-economist friend of mine asks  “Do you think the economy is going to improve, or worsen?”  That just gives me a chance to respond, “YES!  That is, yes, I think the economy will improve or worsen.”

So I’m particularly reluctant to write any blog about the poor state of the macro-economy, what should be done about it, and when we are likely to see any turnaround.   But today’s article in the Washington Post is about macroeconomics and environmental policy!  It is called “Obama laments job losses, announces tax credits for clean energy”.   How are those connected to each other?   Only through rhetoric.

Basically, all of the points are valid, as presented by the article and even by the Obama Administration spokespersons.   The economy is bad, and we don’t know when it will improve.  We don’t even know what is the effect of last year’s stimulus bill, because we’ll never know what would have happened without the stimulus bill!  And it’s also true that we might need more stimulus.  And it is furthermore true (even if unrelated) that it might be a good idea to spend more money on green investments, to aid the transition away from burning fossil fuels that worsen global warming, and towards energy efficiency and alternative sources of energy such as solar power.

More specifically, the Washington Post article says:

“The unemployment rate was unchanged at 10 percent, the Labor Department said. Forecasters had expected zero net change in the number of jobs on U.S. payrolls, and some had had expected job growth to return. Those expectations were dashed by a report that — while not without bright spots — suggested that the long slog toward an improved labor market continued in December.”

That paragraph seems unrelated to the prior one:

“As part of an effort to ‘close the clean-energy gap,’ he announced the awarding of $2.3 billion in tax credits to American manufacturers of technologies such as wind turbines, solar panels and cutting-edge batteries. The credits — destined for 180 projects in 40 states — will generate 17,000 jobs and help leverage $5 billion in private-sector investment that would create tens of thousands of additional jobs, while doubling the amount of renewable power over the next three years, Obama said.  …  Since there are far more qualified applicants for the credits than the federal funding will cover, he said, he is calling for investment of an additional $5 billion in the program.”

Yet the Administration might as well link the two, at least to appear to be doing something, and to make headway on another important agenda item.  Just as stated by Obama’s Chief of Staff, Rahm Emanuel, “You never want a serious crisis to go to waste — and what I mean by that is an opportunity to do things that you think you could not do before”.  You can even listen to it on You-Tube, if you click here!

Speaking of “unrelated”, I have another link to suggest.  If you are interested in hearing about progress in Copenhagen toward international agreements on climate change, in the style of Dr. Seuss, click here!

Eye on the Prize

Filed Under (Environmental Policy) by Don Fullerton on Dec 15, 2009

Recently, somebody hacked into servers at the Climate Research Unit at East Anglia University, and they posted stolen emails on the internet.  From these emails, climate change skeptics claim to have proof that anthropogenic (i.e. man-made) climate change is not occurring.  With the climate summit in Copenhagen underway, some say that this  “climategate” scandal could derail the process.  Instead, I believe this situation allows us a moment to remember the facts regarding climate change.

To be clear, however, I am not writing to judge the contents of those emails sent between a small set of researchers using one method of analysis.

First, the Earth always has had a natural greenhouse effect that depends on CO2 and other “greenhouse gases”.  Without this natural process, the Earth would be unable to trap solar radiation and warm the surface.  Fortunately, so far, the Earth has had a stable carbon cycle that regulates the concentration of greenhouse gases in the atmosphere.  In contrast to Earth, Venus has a runaway greenhouse effect due to its lack of carbon cycle, resulting in a mean planet temperature of 461 degrees Celsius.

Second, the CO2 concentration in the Earth’s atmosphere is increasing.  Over the last 150 years, CO2 concentrations have risen from 280 to nearly 380 parts per million (ppm), and the concentrations are still increasing.  While the exact concentration is an empirical matter, the trend is clear.

Third, humans have been burning fossil fuels in large quantities since the industrial revolution.  Carbon dioxide is emitted by the burning of these fuels (coal, oil, wood, and natural gas).

Those three facts are not in dispute.

The only potential room for debate is the causal connections between human activities including those emissions, and the observed rise in CO2 concentrations.  Since climate scientists cannot perform an experiment to test the causal link, the conclusion that humans are causing climate change can never be proven in the same way as results in other branches of science.

However, many scientists using many different methods conclude that enough evidence exists to prove beyond a reasonable doubt that humans are causing climate change.   Moreover, this climate change is very dangerous and damaging.  It is predicted to disrupt agriculture around the world, change ecosystems in ways that endanger biodiversity, increase extreme weather events like hurricanes and droughts, and raise sea levels enough to cover several island nations, much of Florida, other U.S. coastal cities, and about half of the nation of Bangladesh.

Therefore, it is our responsibility to devise a reasonable strategy to limit the effects of climate change.  I don’t mean that the U.S. should or could do it all alone!  Perhaps a small step by the U.S. might encourage other nations to get on board.  The meeting in Copenhagen this month is another, hopefully productive, step in developing a global plan.

The situation in East Anglia should not distract from the facts.  We need to keep our eye on the prize.

Geoengineering: A Reasonable Solution to Climate Change?

Filed Under (Environmental Policy) by Don Fullerton on Nov 13, 2009

In SuperFreakonomics, the new book by Steven Levitt and Steven Dubner, the authors suggest geoengineering as a possible solution to climate change.  Their assertion has been so controversial that they devoted a long blog entry to its defense.  What is geoengineering, and how should economists think about it?

The National Academy of Sciences defines geoengineering as “options that would involve large-scale engineering of our environment in order to combat or counteract the effects of changes in atmospheric chemistry.”  The specific geoengineering that Levitt and Dubner analyze calls for injecting sulfate aerosols into the stratosphere.  The idea is that the aerosols form a shield to reflect sunlight, thus lowering global temperature.  A similar cooling effect occurs naturally after large volcanic eruptions.  Paul Crutzen, the Nobel Prize winning chemist, estimates that $25-50 billion could be enough to construct a sulfate aerosol shield to counteract a doubling in the current atmospheric concentration of greenhouse gases (see “Albedo Enhancement by Stratospheric Sulfur Injections: A Contribution to Resolve a Policy Dilemma”, Climate Change 77: 211-200).

The traditional solution to climate change calls for limiting greenhouse gas (GHG) emissions that cause global warming.  In a “meta-analysis” discussed in the Stern Review (p.242),  a 50% reduction in worldwide greenhouse gas emissions could cost 2% of world GDP or more.  Let’s see,  world GDP is about $70 trillion, so a 2% reduction in GDP costs $1.4 trillion.   While the comparison here is not exactly apples-to-apples, the point is that these mitigation cost estimates are significantly higher than geoengineering cost estimates ($25-50 billion).  Thus, it superficially appears that geoengineering is the “correct” economic solution to climate change.

However, geoengineering is an ex post solution, where society waits for the symptoms of climate change to become so severe that geoengineering is the only remedy to treat the symptoms.  In contrast, GHG mitigation tries to prevent the symptoms from ever occurring by trying to correct the root cause.

Many present the geoengineering solution as an insurance policy against the disaster of runaway climate change.   Shall we rely on the theory that temperatures can be reduced later, while we continue unlimited burning of carbon?  What if that insurance doesn’t work.  What if geoengineering doesn’t cool the planet as theorized?  What if the sulfates cause other environmental problems?  In addition, geoengineering cannot necessarily counteract the economic effects of severe climate change.  Imagine that society waits for “proof” of climate change, such as waiting for large sections of Arctic ice sheets to break off and raise sea level by a few feet.  At that point the economic damage is irreversible – regardless of the geoengineering temperature correction – with millions of people displaced from low-lying areas, billions (if not trillions) of physical capital submerged, and severe disruption to economic activity.  Then would GHG mitigation look like the bargain solution?