JAGGED LITTLE PILL
Swallowing the gas consumption truth?

BACK SEAT DRIVING: MIT SLOAN SCHOOL OF MANAGEMENT MIT Sloan’s Christopher Knittel examines how to lower petroleum consumption (or why this man will never be able to run for office) With the price of gasoline hovering at $4 a gallon and a presidential election just around the corner, policymakers are busily debating the best ways to reduce petroleum consumption. But their inevitable proposals—providing more federal subsidies for hybrid and electric cars, forcing carmakers to increase the fuel economy of new vehicles, and raising the production of biofuels—are “mostly a waste of money,” according to a new paper by Christopher Knittel, an economist at MIT’s Sloan School of Management (“Reducing Petroleum Consumption from Transportation,” forthcoming in the Journal of Economic Perspectives). Compared with raising the federal gasoline tax, each of these measures are between three and five times more expensive. “The things we are doing now to lower petroleum consumption are very expensive both in terms of the technology they require and the social costs they incur,” says Knittel. “But because Americans don’t feel pain at the pump, those costs are hidden.” The U.S. consumed more petroleum-based liquid fuel per capita than any other high-income country: 30 percent more than Canada, the second-highest country, and 40 percent more than the third-highest country, Luxemburg. The transportation sector accounts for 70 percent of U.S. oil consumption and 30 percent of U.S. greenhouse gas emissions. “Reducing our petroleum consumption is a good goal—it’s better for the environment, it reduces the military expense of trying to assure stability in oil-producing regions, and it reduces the threat of recessions caused by oil price shocks—but the bottom line is: we’re going about it the wrong way.” Take, for instance, Corporate Average Fuel Economy standards (CAFE), which dictate the average number of miles per gallon for an automaker’s annual fleet. Besides the fact that these standards have barely budged in the last three decades, Knittel says that CAFE focuses on the wrong issue: fuel economy instead of total fuel consumption. It pushes consumers into more fuel-efficient cars without changing the price of fuel, leading to more miles traveled, and thus more pollution, more traffic, and more greenhouse gas emissions. Studies show that the social costs of CAFE are about three times more expensive than the equivalent gasoline tax. Tax credits that induce customers to buy hybrid or electric cars are another popular policy. But the big hurdle for widespread adoption of these vehicles is cost. Today, the battery alone for an all-electric sport-utility vehicle with a 200 mile range is estimated to cost between $53,000-$70,000. Biofuels, which are derived from corn, soybeans and sugar, are another alternative to gasoline that U.S. policymakers have embraced through subsidies and mandates. But production of two of the most popular biofuels—ethanol and methanol—lead to higher greenhouse gas emissions than gasoline, and both have lower energy content than gas, so a tank doesn’t last as long. “Gasoline is hugely underpriced in this country,” says Knittel, noting that the federal tax on gasoline has not been raised in 18 years, and is now a much smaller percentage of the total price of a gallon of gas. “A lot of policymakers don’t think that price matters for decisions like what vehicle to buy, where to live, and so on, but it does. If we compare fuel consumption and fuel prices across OECD high income countries - a comparison that I freely admit is not the perfect ‘experiment’ - for every 10 percent increase in fuel prices, fuel consumption falls by 18 percent. “The fact is: if we’re serious about reducing gas consumption, we’re putting resources in the wrong areas,” he adds. “Raising the gas tax is the most viable—albeit politically unpopular—way to lower our gas consumption. Economics 101 tells us that the most efficient way to reduce the consumption of a product is by raising its price. Relying on these other policies only hides their significantly higher costs.” For more information about the MIT Sloan School of Management, click here. For another opinion on the matter, go to Jagged Little Pill 2