CAFE standards Archives - An Economic View of the Environment

Expanding the Electric Vehicle Market

In my series of podcasts, I’ve had the opportunity to engage in conversations with remarkable people who have worked at the intersection of economics, energy, and environment, with backgrounds and experiences in multiple sectors, including academia, government, the private sector, and NGOs. My most recent podcast guest was no exception, because I was joined by Elaine Buckberg, my colleague at the Harvard Kennedy School, where she is a Senior Fellow in the Salata Institute for Climate and Sustainability, and previously served as Chief Economist at General Motors, and before that worked at a number of economic consulting firms and investment banks, as well as the U.S. Department of the Treasury and the International Monetary Fund.

So, I was eager to feature an episode with Elaine in my monthly podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” The podcast is produced by the Harvard Environmental Economics Program. I hope you will listen to our conversation here.

Elaine Buckberg draws on her experience in macro, micro, and financial economics, both domestic and international, and much of her current work at Harvard focuses on the economics of electric vehicles (EVs) and policies intended to encourage their development and adoption.

In our conversation, she remarks that despite progress in the growth of the U.S. EV market over the past decade, there remain a couple of significant obstacles.

“Number one is [the] availability of public charging. Everyone, even if they can install home charging, want to believe that if they buy an EV, they can do a road trip, and it won’t be a challenging or frustrating experience. So, having highway charging that works, that’s widespread, and that’s reliable is huge for adoption. And that comes through in JD Power surveys of vehicle buyers too, for the top five reasons why people just bought [or] don’t buy an EV in recent quarters are all about charging. The other barrier is about price differentials … People have a limited willingness to pay more for an EV,” she says.

Of course, the Trump administration is taking steps through its “One Big Beautiful Bill Act,” Buckberg notes, to roll back subsidies for domestic EV purchases and impose a $250 per/year fee on EVs to compensate for lost gas taxes. I will add that the OBBBA also functionally eliminates any effect of CAFE standards for motor vehicle fuel efficiency (which go back 50 years to a law signed by President Gerald Ford) by eliminating the penalty for non-compliance.

However, Elaine says that most automakers understand that changing market dynamics on their own will compel them to embrace green technologies.

“[They] overwhelmingly believe that EVs are the future and are ambitious about getting into the market and want to be early winners in the EV market but also need to achieve profitability along the way in order to satisfy investors and be able to make those very substantial investments in their EV program,” she explains. “There [are] some differences among automakers. Automakers that are heavily in Europe or in China have to shift over their portfolios faster. I think GM and Ford are very ambitious. The Europeans are very ambitious. Hyundai and Kia [are] doing very well with EV models in the U.S. market.”

Looking over the longer term, Buckberg states that as EV battery ranges and charging capacities expand, this will further drive the advancement of the EV market – both in the U.S. and abroad.

“I’m a really big believer in the technological progress that the amount of research that’s happening on batteries – public and private – around the globe will really continue to drive down battery costs and get us to that point where buying an EV is actually cheaper than buying an internal combustion engine (ICE) vehicle even on the upfront costs, and that will be very compelling to people,” she states.

“I also think that some of the other challenges around charging and speed of charging are improving with continued rollout of chargers as well as improvements in the batteries that enable them to take in faster charges. You may have seen that there were a couple of breakthroughs from BYD and CATL, two Chinese companies, where they’re saying you could charge a vehicle in five minutes on new chargers they are developing that could provide more than a thousand kilowatts per hour and vehicles that could take them in at that speed.”

At the other end of the spectrum, Buckberg sounds an alarm for U.S. automakers who drag their feet on their EV programs.

“This is the future of auto, and if we want the U.S. to continue to compete in auto, if you want us to have jobs in auto and be a producer, we can’t fall further behind the rest of the world. Even without the emissions requirement, from a pure jobs and industry requirement, you want domestic production. This is the future of the auto industry, and if we don’t make them domestically, if we don’t promote sales, we will fall further behind in efficiency in learning, and we may not have a domestic auto industry in the future,” she warns.

For this and much more, please listen to my complete podcast conversation with Elaine Buckberg, the 68th episode over the past five years of the Environmental Insights series, with future episodes scheduled to drop each month. You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program. Previous episodes have featured conversations with:

Gina McCarthy, former Administrator of the U.S. Environmental Protection Agency
Nick Stern of the London School of Economics discussing his career, British politics, and efforts to combat climate change
Andrei Marcu, founder and executive director of the European Roundtable on Climate Change and Sustainable Transition
Paul Watkinson, Chair of the Subsidiary Body for Scientific and Technological Advice (SBSTA) within the United Nations Framework Convention on Climate Change
Jos Delbeke, professor at the European University Institute in Florence and at the KU Leuven in Belgium, and formerly Director-General of the European Commission’s DG Climate Action
David Keith, professor at Harvard and a leading authority on geoengineering
Joe Aldy, professor of the practice of public policy at Harvard Kennedy School, with considerable experience working on climate change policy issues in the U.S. government
Scott Barrett, professor of natural resource economics at Columbia University, and an authority on infectious disease policy
Rebecca Henderson, John and Natty McArthur University Professor at Harvard University, and founding co-director of the Business and Environment Initiative at Harvard Business School.
Sue Biniaz, who was the lead climate lawyer and a lead climate negotiator for the United States from 1989 until early 2017.
Richard Schmalensee, the Howard W. Johnson Professor of Management, and Professor of Economics Emeritus at the Massachusetts Institute of Technology.
Kelley Kizier, Associate Vice President for International Climate at the Environmental Defense Fund.
David Hone, Chief Climate Change Adviser, Shell International.
Vicky Bailey, 30 years of experience in corporate and government positions in the energy sector.
David Victor, professor of international relations at the University of California, San Diego.
Lisa Friedman, reporter on the climate desk at the The New York Times.
Coral Davenport, who covers energy and environmental policy for The New York Times from Washington.
Spencer Dale, BP Group Chief Economist.
Richard Revesz, professor at the NYU School of Law.
Daniel Esty, Hillhouse Professor of Environment and Law at Yale University.
William Hogan, Raymond Plank Research Professor of Global Energy Policy at Harvard.
Jody Freeman, Archibald Cox Professor of Law at Harvard Law School.
John Graham, Dean Emeritus, Paul O’Neill School of Public and Environmental Affairs, Indiana University.
Gernot Wagner, Clinical Associate Professor at New York University.
John Holdren, Research Professor, Harvard Kennedy School.
Larry Goulder, Shuzo Nishihara Professor of Environmental and Resource Economics, Stanford University.
Suzi Kerr, Chief Economist, Environmental Defense Fund.
Sheila Olmstead, Professor of Public Affairs, LBJ School of Public Affairs, University of Texas, Austin.
Robert Pindyck, Bank of Tokyo-Mitsubishi Professor of Economics and Finance, MIT Sloan School of Management.
Gilbert Metcalf, Professor of Economics, Tufts University.
Navroz Dubash, Professor, Centre for Policy Research, New Delhi.
Paul Joskow, Elizabeth and James Killian Professor of Economics emeritus, MIT.
Maureen Cropper, Distinguished University Professor, University of Maryland.
Orley Ashenfelter, the Joseph Douglas Green 1895 Professor of Economics, Princeton University.
Jonathan Wiener, the William and Thomas Perkins Professor of Law, Duke Law School.
Lori Bennear, the Juli Plant Grainger Associate Professor of Energy Economics and Policy, Nicholas School of the Environment, Duke University.
Daniel Yergin, founder of Cambridge Energy Research Associates, and now Vice Chair of S&P Global.
Jeffrey Holmstead, who leads the Environmental Strategies Group at Bracewell in Washington, DC.
Daniel Jacob, Vasco McCoy Family Professor of Atmospheric Chemistry & Environmental Engineering at Harvard.
Michael Greenstone, Milton Friedman Distinguished Service Professor of Economics, University of Chicago.
Billy Pizer, Vice President for Research & Policy Engagement, Resources for the Future.
Daniel Bodansky, Regents’ Professor, Sandra Day O’Connor College of Law, Arizona State University.
Catherine Wolfram, Cora Jane Flood Professor of Business Administration, Haas School of Business, University of California, Berkeley, currently on leave at the Harvard Kennedy School.
James Stock, Harold Hitchings Burbank Professor of Political Economy, Harvard University.
Mary Nichols, long-time leader in California, U.S., and international climate change policy.
Geoffrey Heal, Donald Waite III Professor of Social Enterprise, Columbia Business School.
Kathleen Segerson, Board of Trustees Distinguished Professor of Economics, University of Connecticut.
Meredith Fowlie, Professor of Agricultural and Resource Economics, U.C. Berkeley.
Karen Palmer, Senior Fellow, Resources for the Future.
Severin Borenstein, Professor of the Graduate School, Haas School of Business, University of California, Berkeley.
Michael Toffel, Senator John Heinz Professor of Environmental Management and Professor of Business Administration, Harvard Business School.
Emma Rothschild, Jeremy and Jane Knowles Professor of History, Harvard University.
Nathaniel Keohane, President, C2ES.
Amy Harder, Executive Editor, Cypher News.
Richard Zeckhauser, Frank Ramsey Professor of Political Economy, Harvard Kennedy School.
Kimberly (Kim) Clausing, School of Law, University of California at Los Angeles
Hunt Allcott, Professor of Global Environmental Policy, Stanford Doerr School of Sustainability.
Meghan O’Sullivan, Jeane Kirkpatrick Professor of the Practice of International Affairs at Harvard Kennedy School.
Robert Lawrence, Albert Williams Professor of International Trade and Investment, Harvard Kennedy School.
Charles Taylor, Assistant Professor of Public Policy, Harvard Kennedy School.
Wolfram Schlenker, Ray Goldberg Professor of the Global Food System, Harvard Kennedy School.
Karen Fisher-Vanden, Professor of Environmental & Resource Economics, Pennsylvania State University
Max Bearak, climate and energy reporter, New York Times
Vijay Vaitheeswaran, global energy and climate innovation editor, The Economist
Joseph Aldy, Teresa & John Heinz Professor of the Practice of Environmental Policy, Harvard Kennedy School
Nicholas Burns, Roy and Barbara Goodman Family Professor of the Practice of Diplomacy and International Relations, Harvard Kennedy School

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

Delighted and Depressed

I’m pleased to announce that my blog website – An Economic View of the Environment – has been thoroughly cleaned and purged of the malware that had plagued it since the website was attacked in January. That’s the source of my being delighted.

It’s probably not necessary to state that the source of my “depression” is the ongoing attack by President Trump and his administration on sensible public policy – in the environmental and energy realm, as well as so many others. In nearly every case, the administration’s combination of incompetence and malevolence has been breathtaking.

Goodbye to the Malware Attack

As for the malware attack on my blog website, which occurred shortly after I had written and posted two blog essays that were harshly critical of Presidential candidate and then President-Elect Trump, quite a few of you wrote to me suggesting that the timing was not a coincidence and that the attack was probably from supporters of the administration (if not from people in the administration). I do not believe that was the case, although I honestly don’t know. Rather, I believe it was simply an attack intended to drive traffic to particular websites. I’m hoping that the outside firm we hired to clean the site may be able to give us the answer. Stay tuned for that.

Back to Business

Much has transpired since I announced the hiatus in my blog posts (An Explanation and Apology, February 5, 2017) and even more has transpired since I last wrote a regular essay here before the presidential inauguration (Trying to Remain Positive, January 3, 2017). It would take more time than you or I have — for you to read and for me to write – about all that’s transpired in this policy realm since Inauguration Day, including:

the bizarre “Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs” (January 30, 2017), with its childish, made-for-TV decision that for each new regulation promulgated, two regulations must be repealed;

the worrisome decision by the President to cancel the motor-vehicle fuel efficiency (Corporate Average Fuel Economy, or CAFE) standards set by the Obama administration for 2023-2025 (March 15, 2017); and

the President’s misleading and misguided attempt to bring back an earlier era of the coal industry by decimating the Obama administration’s key climate change policies with the misnamed “Presidential Executive Order on Promoting Energy Independence and Economic Growth” (March 28, 2017).

Saving Us Time

Happily, I can save you time for reading – and myself for writing – by referring you to two new audio recordings:

NPR “On Point” Program re Trump Decision to Revisit Obama’s Motor Vehicle Fuel Efficiency (CAFE) Standards, where Jane Clayson interviewed me on March 16^th, the day after President Trump announced in Detroit, Michigan, his intention to revisit the Obama Administration decision of January, 2017, to finalize CAFE standards at a fleet average of 54.5 miles per gallon for the year 2025.

New Yorker Podcast on Trump’s Executive Order to Rollback Climate Policies, in which Dorothy Wickenden, the Executive Editor of The New Yorker, interviewed me on March 30^th, with the focus on President Trump’s Executive Order of March 28^th, in which he launched his rollback of climate policies from the Obama administration.

Speaking of saving time, if you have time for only one of these, I suggest the second one, which is both briefer (about 17 minutes) and more comprehensive.

The Path Ahead

With my blog website having been purged of its contamination and with my feeling that I’ve more or less caught up, I will return to my usual approach with a brief essay in my next posting at this blog. In the meantime, thanks for your tolerance of the recent hiatus and your interest in what transpires here.

Crude Oil Prices, Climate Change, and Global Welfare

A few weeks ago, I participated in a panel session titled, “The Remarkable Transformation of the Energy Sector: Does it Also Transform Our World.” The motivating question was: “Is the dramatic decline in oil prices a complete gift to the West because of the enormous funds being saved, or is it an unintended Trojan horse because development of renewable energy as well as new fossil-fuel sources will decline in the West, posing longer new challenges?”

The other members of the panel – from private industry – had vastly more expertise (and relevant insights) on fossil-fuel markets, but here’s what I had to say. This is hardly at the sweet spot of my professional competence, so I welcome your comments and corrections! In general, how would you answer that question?

Causes

I start (and started) from the premise that the dramatic decline in crude oil prices that took place from August, 2014 ($96/barrel), to March, 2015 ($44/barrel), was due – on the one hand – to decreased demand, a function of slow economic growth in Asia, Europe, and elsewhere, endogenous, price-driven technological change leading to greater fuel efficiency, and policy-driven technological change that also has been leading to greater fuel efficiency, such as more stringent Corporate Average Fuel Economy (CAFE) standards in the United States; and – on the other hand – was due to increased supply, partly a function of the growth of unconventional (tight) U.S. oil production (a product of the combination of two technologies – horizontal drilling and hydraulic fracturing). And, in the presence of all of this, Saudi Arabia decided not to restrict its output to prop up prices.

[Before proceeding, I should note that since May of this year, crude oil prices have increased by about 30% from their March low, but as of May ($60/barrel) are still far below their August 2014 level.]

Consequences

When one examines virtually any significant price change from an economic perspective, there inevitably seems to be both good news and bad news. So with the fall in crude oil prices.

The Bad News

First of all, I assume that low crude oil prices are problematic for the economic and political stability of some of the oil-producing/exporting countries, including Saudi Arabia, Russia, Venezuela, and Nigeria. (For details, see Bordoff and Losz 2015, below.)

Second, it’s frequently been asserted that low oil prices are bad news for the development of alternative forms of energy, including renewable sources. Of course, in the United States, there isn’t much effect on electricity generation from renewable (wind and solar), because in the U.S. electricity sector, renewable supplies compete with coal and natural gas, not with fuel oil (but in other countries, which use more fuel oil for electricity generation than we do, there can be a disincentive for renewable dispatch – and hence development).

Third, there can be – indeed, has been – a major impact in the U.S. motor fuels sector, where the market for biofuels (mainly ethanol) is negatively affected by low conventional gasoline prices. However, these impacts must be somewhat muted by public policies, which directly or indirectly subsidize (or, in fact, require) the use of biofuels.

Fourth, low gasoline prices have resulted in decreased demand by consumers for motor vehicles with high fuel efficiency, and SUV and pickup truck sales have rebounded from previous lows. But these effects are also muted, to some degree, by public policies, including U.S. CAFE standards. Finally, low gasoline prices also have short-term effects in the form of more driving and fuel use by the existing fleet of motor vehicles, which is bad news in terms of emissions (and congestion).

Differences across Sectors

Before turning to the “good news” about low crude oil prices (and there surely is good news), it’s worthwhile noting that whether individual businesses find these low prices to be good or bad depends largely upon the economic sector in which they operate. For example, whereas commercial airlines are finally making profits, due to the low price of jet fuel (their most important variable operating cost), manufacturers of commercial aircraft will see lower demand for new planes if low jet fuel prices become the long-term norm. The primary factor driving the larger airlines to replace aircraft in their fleets is the lower operating costs due to the much greater fuel efficiency of new models.

And, of course, low oil prices are systematically bad news for oil producers, including the major U.S. companies.

The Good News

Finally, here is the upside of these significant changes in crude oil markets.

Low oil prices are unambiguously good for aggregate global welfare. This includes consumers in the United States, Europe, Japan, and South Korea. And, at least temporarily, OPEC seems to have lost its ability to set a price floor.

Low oil prices mean an increase in consumers’ disposable income, amounting to nearly $2,500 per U.S. household annually, according to Stephen Brown (see below). If we subtract the income losses to U.S. oil producers, the net gain per U.S. household amounts to a bit more than $800 per year, with gains accruing disproportionately to low-income households.

Turning to the environmental realm, there is also good news, or at least the possibility of good news. An opportunity for new, sensible energy and climate change policies has emerged with these low oil prices.

First, now is the time to reduce – or better yet, phase out – costly and inefficient fuel subsidies, which exist in many parts of the world, particularly in developing countries.

Second, with gasoline prices relatively low – and natural gas supplies holding down electricity prices, at least in the United States – there has never been a better time to introduce progressive climate policies in the form of carbon-pricing, whether via carbon taxes or through carbon cap-and-trade. Unfortunately, none of us should hold our breath waiting for that to happen.

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For further reading, I recommend:

Bordoff, Jason, and Akos Losz. “Oil Shock: Decoding the Causes and Consequences of the 2014 Oil Price Drop.” Horizons, Spring 2015, Issue No. 3, pp. 190-206.

Brown, Stephen P. A. “Falling Oil Prices: Implications in the United States.” Resources, Number 189. Washington: Resources for the Future, 2015, pp. 40-44.