Saturday, November 12, 2011

Where is all your hot air coming from?

In my previous post I said I would rather pay a carbon tax than a buy a hybrid car if asked to choose between the two. Although it seems (and unfortunately so) unlikely we will have a carbon tax in the US in the immediate future, I wanted to calculate what kind of carbon tax I am personally looking at per month. So I proceeded to estimate my total carbon footprint, both - direct emissions I cause while I drive, commute, turn on stove etc  and indirect - embodied in  the electricity and water I use and also the goods and services I use. I found one  online calculator that seems easy to use and reasonably detailed to get an estimate one's carbon footprint.
I hope the tool takes into account the fact that some part of everything I buy in the US has originated half away around the globe and for goods like plastics, clothing, electronics etc. entirely so.

So go ahead and try the tool. See if you get a happy face or sorry face (you can get atleast one other type of face which I will reveal later). If you got a happy face, multiply your total emissions of CO2 per year by say $30, this a reasonable first approximation for the amount you can expect to pay if we had carbon fee of that amount or a policy such as that in the European Union. Do you still have a happy face? My bet is if you are bothering with reading my post or playing with tool, you will not be too worried (unless you are a friend or family member and were urged to visit my new blog and write nice comments).

While the tool was interesting, what I found cool was you can not only find out what actions you may take (these choices are generated and ranked based on where your hot air is coming from) and there are indeed several of these, but you can also get an estimate of what are the things you should be doing first i.e., the least cost actions you can undertake. There are several that  save you money right way and involve no additional expenditure. However, I bet they involve some cost in the form of lifestyle changes or seeking out information etc.. The usual ones such as buying more efficient products involve a positive payback period i.e., it takes a while to recoup the extra cost in the form of savings in operating cost.

Guess what, I was not advised to upgrade my car, leave alone upgrade to a hybrid car! So I decided to be a little mischievous and said I drive enough to go from Los Angeles to New York back once every month and also visit my parents in India (and of course my in-laws too) six times a year. This was enough to make the happy face on the summary page burst into tears. He suggested the first thing I do is to get a more efficient car!!!

Wednesday, November 9, 2011

Why hybrid cars are not yet green enough for some?

One year of living in Los Angeles, where a 10 mile drive can take 45 min to 1 hour, put paid to my resoluteness in holding on to my well functioning 16 year old manual transmission Corolla with only about 100,000 miles. After proudly proclaiming for several years that my next car would be a Prius, when the time came to put my money where my mouth was, it didn't seem so obvious a choice. Here's why.

1. I live and intend to live within walking distance or few miles to work. LA traffic has convinced me that I should venture out only rarely even on weekends. This means I am going to be a low mileage driver. Basic principles of finance tell you, the more intensively you utilize an investment, the more attractive it looks.    

2. In the coming years the near-monopoly of Prius is likely to be broken by a slew of alternatives - more hybrids, EVs, CNG etc. Moreover, gas mileage of all cars are going to get better thanks to Pres. Obama's revision of fuel economy standards for automobiles and higher oil prices.

3. A large amount of research suggests people place a substantial premium on appearing green relative to actually calculating their environmental impact. I for one don't care about merely appearing green. Guess how many people would have bought Prius that was identical in appearance to a Corolla or Civic?

So if the main reason I am willing to pay a  premium  for a greener car is for climate change, I am keen to know how much should I be valuing carbon at so as to justify the additional cost of a hybrid over a ten year life. Of course,  tail pipe emissions of non-carbon pollutants are also lower for hybrids but then these are already regulated and at the same battery production and disposal are not clean. So  lets assume the latter two wash, an obvious over simplification! We know very little about the what scaling up battery production will do to the environment. Nevertheless, I give the benefit of the doubt to the battery car.

For 6000 miles per year, 50% of driving in city traffic, a conservative 3.5% discount rate and 7.5% rate of increase in fuel price, $6000 in additional purchase cost, and $2000 in additional resale value after 10 years,  that I must value CO2 at $330 per tonne or higher to buy Prius instead of civic. This rises to $450 per tonne when compared to certified pre-owned Civic and $550 per tonne compared to a used civic from a private seller (ofcourse I accounted for higher maintenance cost for used cars)! Comparing the used-civic to a used-Prius did not throw any surprise either. The NPV of Prius is higher by a couple of thousands but this was not an important metric in my decision. The simple payback period, the time after which one recovers the additional upfront cost through  annual (non-discounted) savings in fuel costs, for a 2012 Prius exceeded 25 years relative to a 2012 civic!

Given the uncertainty in the various factors, I analyzed the sensitivity of the implied carbon cost to several factors - the amount I expect to drive, my expectations for the increase in fuel price, the interest I would earn on money saved by not purchasing Prius, the fact that gasoline is getting dirtier with the global transition to lower grade fossil fuels, resale value etc. Unless I doubled my annual mileage and drove most of my miles in city traffic, and/or placed a premium on appearing green, I could not convince myself to buy a Prius.  Even if I believe the damage from carbon justifies this cost, I see several lower hanging fruits one can pick before picking a hybrid or electric car.

After all the hype and hoopla and seemingly sophisticated calculations I seem to have come to the same conclusion as most people that it is worth waiting and watching while the earth is warming. I am indeed disappointed both with what my calculations revealed and that cleaner technologies are not being adopted in a big way. Charitable and voluntary action will not save the day! So bring on the carbon tax, a tax even an economist cannot oppose, or cap and trade or whatever one wants to call it but lets start paying for pollution. I am sure we will see much more and many more forms of civic engagement with the global cause.