Kōtuitui
New Zealand Journal of Social Sciences Online
Cars, carbon, and Kyoto: evaluating an emission charge and other
policy instruments as incentives for a transition to hybrid cars in New
Zealand
B. B. Gleisner
S. A. Weaver
Environmental Studies, Institute of Geography
School of Earth Sciences
Victoria University of Wellington
PO Box 600
Wellington, New Zealand
Abstract Transition to hybrid petrol/electric
vehicles (HEVs) is one means among many of reducing carbon emissions
pursuant to the New Zealand emissions reduction targets under the Kyoto
Protocol. The potential financial incentive value of an emissions
charge was evaluated by comparing purchase and running costs of an HEV
with an equivalent petrol-fuelled car. Had a carbon tax of $15/tonne CO2
operated in January 2006, the net fuel efficiency saving on the basis
of the emissions charge and the inbuilt fuel efficiency of the HEV
amounted to $655.50 annually for an HEV. When compared with a $7000
purchase price differential in favour of petrol-fuelled vehicles, it
can be concluded the proposed carbon tax would not have provided a
sufficient incentive to bring about any significant change in the
distribution of HEVs across the market. Shifting the norm to a higher
proportion of fuel-efficient cars will therefore require other
incentives and/or policy mechanisms. We explore alternative policy
options for bringing about such a shift, including the option of a
tradable vehicle emission permit system.
Keywords carbon tax; hybrid cars; vehicle emissions;
fuel efficiency; climate change; policy; emission trading systems; New
Zealand
INTRODUCTION
By signing and ratifying the Kyoto Protocol, the New Zealand
Government committed the country to reducing its greenhouse gas (GHG)
emissions back to 1990 levels or to take responsibility for any
emissions above this level (MFE 1999; Schriermeier 2003). Of industrial
GHGs, carbon dioxide (CO2) contributes by far the most to
global warming (Gerlagh et al. 2004). The transport sector emits
approximately 45% of New Zealand’s CO2 emissions (EECA
n.d.; MOT 2002b), with light-duty petrol vehicles contributing the
largest proportion (NIWA 2004; NZCCO 2004a). The Ministry of Transport
(MOT) argues that the key to reducing road transport GHG emissions is
improved energy efficiency (MOT 2002a,b). A carbon tax (or “emission
charge”) is one method of providing an economic incentive for consumers
to reduce emissions and shift to more fuel-efficient cars (NZCCO
2004b). In April 2007, the Government was set to introduce a charge of
$15/tonne of CO2; however, it subsequently decided against
this following its 2005 review of climate change policy (Parker 2005).
Other policy instruments exist, and have been successfully used
overseas, such as subsidising the purchase of hybrid vehicles (O’Dwyer
2004), setting strict vehicle emission standards, and charging larger
quantity emitters higher road taxes (Duff 2003). Incentives to purchase
energy efficient vehicles could also be achieved through a cap and
trade system, similar to the one operating for energy-intensive
industries within the EU.
While hydrogen fuel cells are a potential future option for
vehicles (Demirdöven & Deutch 2004), they are still decades
away from wide-scale production. Hybrid electric vehicles (HEVs), on
the other hand, are currently on the market, and compared with pure
petrol counterparts are more fuel efficient (McNally 2003; Miller
2004), and produce significantly less CO2 emissions (Inman
et al. 2003). Initial sales of hybrids have been slow, with only 100
sold in the first 8 months in New Zealand (New Zealand Herald
2004). The potential for growth is, however, large, with a total of
200 000 Toyota HEVs sold worldwide since 1997 (EECA n.d.). HEV
sales globally are predicted to grow to 100 million a year by 2020
(Moore 2003). In 2004, there was a 3 month waiting list for a 2004
Toyota Prius hybrid in parts of the United States and up to
6 months in Japan and Europe (Kachadourian 2004; Schoenberger
2004). Major car manufacturers are planning another 18 hybrid models
over the 3 three years (Taylor 2004), including entries in the popular
truck and sport-utility vehicle sectors (Buss 2001; Phelan 2004).
Toyota plans to use gasoline-electric hybrid engines in all vehicles by
2012 (Lippert 2002).
EMISSION CHARGE
An emission charge is one way of boosting the cost competitiveness
of fuel-efficient technologies over less efficient counterparts, as
well as sending an important signal to high carbon emission sectors
concerning investment strategy. Had the Government continued support
for the emission charge, it would have applied to each tonne of CO2
emitted (DPMC 2001b), and it was widely accepted that any cost borne by
suppliers in meeting their obligation would probably be passed on to
consumers in product prices (DPMC 2001a). The degree to which the
emission charge would have raised petrol prices is therefore a
straightforward calculation, as fossil fuels make very good proxies for
emissions from combustion (DPMC 2001b). With a charge of $15/tonne of CO2,
petrol prices would have increased by 3 cents per litre (DPMC 2002,
2003).
While this priced-based instrument provides a financial incentive
to consume less petrol in theory, if used in the absence of other
complementary instruments, it has several potential flaws. Firstly, the
relationship between the charge level and emission reduction is
non-linear: if the initial charge was set too low to achieve emissions
reduction targets, simply doubling the charge will not automatically
double the emissions reduced (DPMC 2001b). The demand for petrol is
also relatively inelastic, therefore the marginal increase in petrol
price from an emission charge of $15/tonne of CO2 is
unlikely to have a major impact on the quantity demanded (DPMC 2001b;
MED 2001). This uncertainty and inelasticity in the shape of the demand
curve for petrol make price-based instruments, such as emission
charges, particularly inept at ensuring an emission target is reached,
particularly when the price difference is so small (Hall & Walton
1996). They do, however, provide some incentive to reduce
emissions, and to test the scale of this incentive, we compared
purchase price and running costs of an HEV with an equivalent
petrol-fuelled vehicle (a Toyota Prius and a Toyota Camry) (Table 1).
As can be seen from Table 1, an HEV owner can anticipate an
annual fuel efficiency saving of approximately $640–1080 over a
petrol-fuelled equivalent vehicle on the basis of a 50:50 urban-rural
driving split (depending on the price of petrol). If the emission
charge were added to the running costs, an HEV owner can expect an extra
annual saving of only $14.25, irrespective of petrol price.
While this static analysis provides a simple illustration of the lack
of incentives for fuel efficiency, it is important to consider how the
relative costs change with time.
Using figures from point 2 in Table 1, a discount rate of 5%,
and assuming the 25% growth in petrol prices witnessed over the last 5
years continues, the net present cost in the next 10 years of the Prius
is $51 844.31, compared to $51 519.96 for the Camry. The
Prius is therefore only $324 more expensive, assuming maintenance costs
are identical. When the emission charge is factored in, this figure
becomes $214—a mere $110 additional savings over a decade!1 While this dynamic analysis illustrates how
increasing petrol prices in the short to medium term do in fact cancel
out the difference in purchase price, even if the Camry depreciates
fast enough so as after the 10 years they are worth the same, the extra
financial incentive provided by the charge is again shown to be
insignificant.
While it is unrealistic to expect consumers to undertake such
complex calculations, this dynamic analysis has also failed to factor
in non-financial incentives which do influence demand. However, despite
rising petrol prices, when comparing the slow demand for HEVs to the
continued growth in SUV sales (ANZ 2003; Allen 2005), it appears the
benefits of fulfilling a moral (environmental) goal do not outweigh the
benefits associated with “perceived safety, styling, carrying capacity
and prestige, [which] appear to have played a part in driving [SUV]
sales growth” (ANZ 2003: 1).
EMISSION STANDARDS, REGISTRATION TAXES, AND SUBSIDIES
The Intergovernmental Panel on Climate Change (IPCC) recommends that
“national responses to climate change can be more effective if deployed
as a portfolio of policy instruments” (Davidson et al. 2001: 12)—a
sentiment that is repeated in other studies (see Perkins 1998; Greening
2004). While some economists argue that economic incentives rather than
regulatory instruments are more efficient at reducing pollution (Hall
& Walton 1996), we have seen that regulation is a valuable tool
when the market fails to protect certain values. This does not set up
an either/or situation but instead invites us to explore an integrated
combination of market and regulatory measures to meet our national
climate change mitigation targets.
In most European countries, transport accounts for approximately
25% of all CO2 emissions (Oil and Gas Journal 1998), which
led the European Union (EU) to “outline a plan to halve the growth in
emissions of CO2 from the transport sector, with road
traffic being the main target” (O’Toole 2001: 97). The EU proposes that
one of the best means of achieving this reduction (in addition to the
current high taxes on fuel), is through setting strict standards on the
CO2 emissions of cars (Oil and Gas Journal 1998; O’Toole
2001; de Saint-Seine 2004)—a goal also proposed by many Asian countries
(de Saint-Seine 2004). The United States has operated similar standards
for many years, including tailpipe emission testing (Public Utilities
Fortnightly 1995), which has achieved remarkable success in reducing
air pollution and creating incentives for new technologies (O’Toole
2001; Bishop et al. 2003).
While such standards do not provide any direct financial incentive
to reduce emissions (apart from fines), within Europe an alternative economic
instrument, also linked to emission ratings, has been operating since
1993. Austria, Sweden, Denmark, Germany, and Switzerland have all
introduced a vehicle registration tax, which increases as fuel economy
decreases (Duff 2003). Results are compelling with a 16–73% increase in
more fuel-efficient Class 1 and 2 vehicles in Sweden, and a 50%
reduction in the number of high-emission vehicles in Germany (Duff
2003). If we include a similar type of tax within our previous dynamic
comparative model, and a 5% discount rate, charging Camry owners $100
more a year for registration instead of taxing petrol reverses the cost
differential in favour of the Prius owner, who now faces $448 less
costs over the period. Although these types of registration fees have
been introduced in the United States, they have had less effect as they
were not combined with high taxes on fuel (Duff 2003) and fines are
often too small to act as a disincentive (Dasgupta et al. 1998).
Within some states, such as New York, subsidising the purchase of
HEVs has been both supported by the public (Perkins 1998) and found to
be relatively successful at shifting demand (Octane Week 2002). If high
enough to reduce the disparity between purchase prices, subsidies
provide a simple mechanism to increase the financial incentive of
buying an HEV. Returning to our comparative dynamic analysis, if a
$7000 subsidy was given to Prius buyers, the cost differential over 10
years is $6676 in favour of the Prius. Subsidies do, however,
result in a large fiscal burden, and in Finland they have had little
impact on overall emissions (O’Dwyer 2004). To reduce the fiscal
burden, an interest-free grant of $7000 (similar to those currently
being offered for the purchase of home solar water heating units) could
be offered, and paid back over the 10 year period. In this case, the
cost differential is $1270, also in favour of Prius purchasers.
While emission standards, registration taxes, subsidies, and grants
provide an economic incentive to purchase more efficient vehicles,
unlike an emission charge, they do not provide an economic incentive to
drive less, and therefore (as with the emission charge) do not
guarantee any emission target is met.
EMISSION TRADING SYSTEM
A “cap and trade” pollution permit system provides both a higher
level of confidence in meeting an emission target, and following
initial distribution of a quota of permits by the governing authority,
allows for the market to efficiently allocate the permits to those
individual emitters with the least costs of abatement. While
transportation emissions have not yet been included in cap and trade
systems, in 2005 the EU started an emission trading system (ETS) for
energy-intensive industries (Allen & White 2005). Each
“installation” is allocated a certain quota each year relative to their
country’s national target, and these permits are tradable with other
installations (EPA 2005).
Installations will be required to have their annual emissions
verified, and must surrender at the end of each year the number of
permits equal to the total emissions from that installation during the
preceding calendar year (DEFRA 2005). Failure to surrender emission
permits results in high fines, and paying these fines does not remove
the obligation to retire the missing permits (Allen & White 2005).
Prices for permits have approximately tripled since the market’s
January 2005 opening (B&E 2006), thereby providing an increasing
incentive to reduce emissions. While it has operated for less than a
year, it is seen as a great step towards reducing emission and meeting
Kyoto targets, and member states are currently debating whether to
expand EU ETS to additional sectors of the economy such as
transportation (Allen & White 2005). With technology such as HEVs
available, and numerous alternative modes of low emitting
transportation, capping and trading private vehicle emissions is
certainly a practical and cost-effective mechanism in reducing New
Zealand’s emission footprint.
TRADABLE VEHICLE EMISSION SYSTEM
Shifting the fuel supply and fuel efficiency in a domestic private
motor vehicle fleet is one part of the climate change mitigation
equation. HEVs are a practical component of this solution. But this
practicability needs to make economic sense to both consumers and the
Government. This is where a cost comparison between a petrol and a
hybrid vehicle combines with opportunities for public policy
instruments to meet socially determined strategic targets for climate
change mitigation.
If the New Zealand Government seeks to meet its Kyoto targets in
the motor vehicle sector, it is important that it finds a way to
support a transition to more fuel-efficient vehicles that are already
on the market. This clearly needs to happen by means of an integration
of policy instruments and market options. From a review of the cost
competitiveness of HEVs in comparison with standard petrol vehicles,
and in light of the experience internationally, we recommend the
introduction of a Tradable Vehicle Emission (TVE) system where:
- every registered vehicle must have displayed on the registration
sticker their emission rating—either in a rural (open road) or urban
class depending on registration address. The emission rating is
standard for each vehicle/engine;
- Government sets an annual target tonnage of CO2 emissions
for private motor vehicles (e.g., 2007 = 150% of 1990 levels from the
sector; 2008 = 140%; 2009 = 130% etc.);
- the number of these vehicles on the road in the coming year is
calculated, and the target tonnage is divided by this figure to give
each vehicle’s annual CO2 emission quota (AEQ);
- AEQ are sold (at a nominal fee) to vehicle owners in the form of
annual emission permits (AEP) (1 AEP worth × kg of CO2).
These permits provide a permitted annual distance to drive, which is
calculated by multiplying the AEQ by their vehicle’s emission rating.
AEPs expire at the end of the calendar year if unused;
- AEPs (and portions thereof) can be freely bought or sold in a
vehicle emissions market (an online trading system);
- the next time the vehicle is registered it must surrender the
number of permits equal to the total emissions during the preceding
registration period (through a third party odometer check);
- without sufficient permits, fines must be paid, and the missing
permits purchased before the new allocation of quota given, and
registration permitted.
The Tradable Vehicle Emission system has the following benefits:
- with all vehicles displaying their emission rating, there will be
better informed consumers—particularly when making vehicle purchase
decisions;
- by capping the emissions, the instrument increases the likelihood
for a target to be met;
- the instrument is flexible to vehicles numbers on the road by
adjusting AEQ;
- with a market for permits (as in the EU), it will provide
economic incentive to drive less, and purchase more efficient vehicles;
- revenues generated from the sale of AEPs, and fines charged to
vehicles that do not hold sufficient permits at registration time, will
help finance the instrument.
Some potential challenges remain:
- there may need to be some adjustment for accommodating
differences between private/business and rural/urban vehicles, both in
terms of quotas and compliance methods;
- high administration/transaction costs. There are options to learn
from the EU ETS in ways to reduce these costs;
- if the annual quota of permits reached a value greater than the
cost of registration, a mechanism would be needed to prevent buying
vehicles (registrations) “for quota”. However, as the Camry in our
example emits approximately 2.5 tonnes of CO2 a year, the
price of carbon would have to be about $150/tonne (10× more than
EU ETS initial price) for the annual quota to be worth more than the
registration fees;
- equity issues with respect to people with disabilities etc. who
rely on private transport.
A tradable vehicle emission system is one means of helping to
reduce carbon emissions in the transport sector by providing an
opportunity to help fuel efficiency innovations (e.g., HEVs) become
mainstream, whilst at the same time, helping to foster driver behaviour
change. A cap and trade emission permit system would help to shift the
vehicle transport sector to meeting strategic targets for national
emission reduction. Such a system for motor vehicles may also provide a
model for achieving rapid, sector-by-sector transitions to
technological innovations as they become available in an on-going
cycle, which climate change mitigation will increasingly demand.
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1With a 10% discount rate and carbon
tax, the Prius is $1550 more costly and with a 2% figure, the Camry is
in fact $864 more expensive.
Table 1 Net annual financial incentive
for HEV over petrol-fuelled vehicle.
| Comparative cost (petrol vs HEV) |
|
Net HEV saving ($NZ) |
| Purchase price differential1 |
|
–7000.00 |
| Annual HEV fuel saving2 |
|
+641.25 |
| Annual maintenance differential3 |
|
0.00 |
| Annual HEV fuel saving with
emission charge4 |
|
+655.50 |
| and with changing petrol prices ($/litre) |
1.50
|
+726.75 |
|
1.75 |
+845.50 |
|
2.00 |
+964.25 |
|
2.25 |
+1083.00 |
(+) indicates net saving; (–) indicates net
cost in comparison with petrol-fuelled equivalent.
1Toyota NZ Ltd (2004a,c).
2Based on: (1) annual fuel saving
associated with 50% urban/rural driving—from average fuel efficiency
figures of 8.55 litres/100 km (Camry) and
4.75 litres/100 km (Prius)—derived from: Sharp 2002; Shain
2003; Toyota NZ Ltd. 2004b,e; Vogt 2004; Wilson 2004; (2) annual
distance driven each year: 12 500 km (Charlton & Baas
2002; LTSA 2002); and (3) $1.35 per litre (price of petrol in Dec
2005).
3Annual maintenance and on-road costs
(tyres, servicing, etc) are assumed to be the same for both vehicles,
as there is very little literature or studies into these comparative
costs.
4Based on a $15/tonne CO2
emission charge and a fuel rating of 3 kg/litre (Treasury 1997)
leading to a petrol price increase of 3c/litre. Calculated in the same
way as (2) above but replacing the $1.35 per litre price with $1.38 per
litre.
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