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.


  1. I got a Honda Insight that was cheap. Was actually cheaper than a comparable car let alone a comparable hybrid. The Prius is more expensive and yet seems to sell more vehicles than comparable hybrids with lower features. Seems that the kind of people who buy Prius's are also the greatest consumer who want premium.

  2. I considered the Insight too and for the prices I was being quoted, the Prius was a bit more cost-effective and also felt a sturdier vehicle. But I agree it is a viable alternative.