International Oil Efficiency vs Gas Prices

US Fleet Fuel Economy

EPA Fuel Economy Report

Chevy Volt Financial Math

It Can't Possibly Be That Easy

Over the weekend, I read Paul Krugman's big essay on climate economics, Building a Green Economy.  In it, he makes the following claim:

Just as there is a rough consensus among climate modelers about the likely trajectory of temperatures if we do not act to cut the emissions of greenhouse gases, there is a rough consensus among economic modelers about the costs of action. That general opinion may be summed up as follows: Restricting emissions would slow economic growth — but not by much. The Congressional Budget Office, relying on a survey of models, has concluded that Waxman-Markey “would reduce the projected average annual rate of growth of gross domestic product between 2010 and 2050 by 0.03 to 0.09 percentage points.” That is, it would trim average annual growth to 2.31 percent, at worst, from 2.4 percent. Over all, the Budget Office concludes, strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise.

And what about the world economy? In general, modelers tend to find that climate-change policies would lower global output by a somewhat smaller percentage than the comparable figures for the United States. The main reason is that emerging economies like China currently use energy fairly inefficiently, partly as a result of national policies that have kept the prices of fossil fuels very low, and could thus achieve large energy savings at a modest cost. One recent review of the available estimates put the costs of a very strong climate policy — substantially more aggressive than contemplated in current legislative proposals — at between 1 and 3 percent of gross world product.

Such figures typically come from a model that combines all sorts of engineering and marketplace estimates. These will include, for instance, engineers’ best calculations of how much it costs to generate electricity in various ways, from coal, gas and nuclear and solar power at given resource prices. Then estimates will be made, based on historical experience, of how much consumers would cut back their electricity consumption if its price rises. The same process is followed for other kinds of energy, like motor fuel. And the model assumes that everyone makes the best choice given the economic environment — that power generators choose the least expensive means of producing electricity, while consumers conserve energy as long as the money saved by buying less electricity exceeds the cost of using less power in the form either of other spending or loss of convenience. After all this analysis, it’s possible to predict how producers and consumers of energy will react to policies that put a price on emissions and how much those reactions will end up costing the economy as a whole.

There are, of course, a number of ways this kind of modeling could be wrong. Many of the underlying estimates are necessarily somewhat speculative; nobody really knows, for instance, what solar power will cost once it finally becomes a large-scale proposition. There is also reason to doubt the assumption that people actually make the right choices: many studies have found that consumers fail to take measures to conserve energy, like improving insulation, even when they could save money by doing so.

But while it’s unlikely that these models get everything right, it’s a good bet that they overstate rather than understate the economic costs of climate-change action. That is what the experience from the cap-and-trade program for acid rain suggests: costs came in well below initial predictions. And in general, what the models do not and cannot take into account is creativity; surely, faced with an economy in which there are big monetary payoffs for reducing greenhouse-gas emissions, the private sector will come up with ways to limit emissions that are not yet in any model.

Now, it's important to note that the goal of the Waxman Markey bill is to reduce US carbon emissions by 83% by 2050 (from 2005 levels, so even more than that from 2010 levels). So essentially, the CBO is saying, and Krugman is endorsing, that this level of emissions reduction will have so small an effect on economic growth that it's going to be indistinguishable from noise. I don't dispute that environmental economists think this, but I find it to be a completely facially implausible conclusion. I want to lay out two arguments for why these economists cannot possibly be right. The first is a common-sense argument about what actually has to happen at the level of the lives of individual citizens to bring about such a large reduction in carbon emissions. The second argument is based on looking at what was required to cause significant changes in energy efficiency in past episodes.

35.5mpg by 2016

News today:

WASHINGTON — The federal government issued final rules establishing the first greenhouse gas emissions standards for automobiles and light trucks on Thursday, ending a 30-year battle between regulators and automakers.

The U.S. issued new rules that sets emissions and mileage standards for automobiles and light trucks. The new rules, jointly written by the Transportation Department and the Environmental Protection Agency, set emissions and mileage standards that will translate to a fleet average of 35.5 miles a gallon by 2016, nearly a 40 percent improvement over today’s fuel economy.

Awesome! This is the single most important and practical step that the US can take to dealing with tight oil supplies.

League Table of Most Oil-Efficient Economies

At least for those countries that BP had oil consumption data for.

A few surprises here. Bangladesh would not usually be thought of as best positioned to do well in an era of oil scarcity! And look at the famously dense and bike-friendly Netherlands down there below the United States. Perhaps no surprise that the bottom of the rankings are dominated by oil exporting nations.

Driving is Extremely Inelastic

US economic output (GDP in chained 2005 dollars) per vehicle mile traveled 1960-2008 (left scale), together with annual average oil prices adjusted for inflation to 2008 dollars (right scale). Source: FHWA for VMT data, BEA for GDP, and BP for oil prices.

US Competitiveness in a Tight Oil Era

Value of goods and services produced per barrel of oil in various countries, 1980-2008. Comparisons are done at purchasing power parity, and corrected for inflation to 2005 dollars. Sources: IMF World Economic Outlook for GDP data, BEA table 1.1.4 for deflator, and BP for oil consumption data.

US Economic Recovery in the Era of Inelastic Oil

Ok, suppose you'd never heard of peak oil.

Or you didn't believe in it.

What could you conclude from the recent history of price and global oil supply?