On Tesla and Tariffs

Much to the chagrin of Econists the White House has imposed tariffs on steel and aluminum imports into the US. The tariffs are set at 25% and 10% on the two metals respectively. The relationship between trade and environment is fascinating and complex and above all hard to generalize. But here I just want to explore what it means for pollution from transportation. It is not obvious the these are connected right? But they are.

I will dispense with the environmental implications one can draw from Econ101 as to how this raises domestic price of these commodities and lowers the world price (as we are a large consumer) and it's attendant effects for consumption and pollution. Since steel and aluminum are very energy intensive, if this action does lead to a net reduction in global consumption and if it shifts production to countries with cleaner electricity mix, it could be an "unintended" benefit for the environment. But those are BIG IFS. For if you relax Econ101 assumptions and bring in exemptions to imports from specific countries which could mean we are just shuffling things around, game theory and  general equilibrium effects, it gets complicated very quickly. Economics of trade and the environment is, however, not my trade.

But what I do know is steel and aluminum have an important role in automakers achieving the stringent fuel economy standards put forth by Pres. Obama. Needless to mention, this is a regulation that the current administration is proposing abandoning. In any case, according to the US Department of Energy,  "A 10% reduction in vehicle weight can result in a 6%-8% fuel economy improvement. Replacing cast iron and traditional steel components with lightweight materials such as high-strength steel, magnesium (Mg) alloys, aluminum (Al) alloys, carbon fiber, and polymer composites can directly reduce the weight of a vehicle's body and chassis by up to 50 percent and therefore reduce a vehicle's fuel consumption."

At the same, it appears that aluminum-based materials are two to three times costlier per kilogram relative to steel. So whereas the pricey Tesla S relied more heavily on aluminum, the Tesla 3 which is a intended as a mass market car has a greater proportion of Steel. This means the Tesla 3 will be heavier for a given range  and will have to pay a greater fuel economy penalty.

In fact, the tariffs might be giving ammunition to auto makers to lobby harder for weaken the fuel economy targets. After this yet another depressing assessment, let me try to cheer you up with a couple of sunnier possibilities. One, steel makers have not been sitting idle hoping for political developments to regain market share in the auto industry. They have developed  advanced high-strength steel (AHSS), which according to the steel industry is cheaper and has lower life cycle emissions relative to aluminum. This coupled with improvements in power train technology and lighter batteries there might not be much penalty from reverting to steel. Last but not least, the tariffs on aluminum are set lower relative to steel.

If you accept that intentional harm is a given, then the fact there isn't additional unintentional harm is good news.

A bright spot in the US tariffs of solar imports

Today's hottest news relating to the environmental is the imposition of tariffs on imports of solar panels (along with washing machines) by the Trump administration. Ironically it coincides with World Economic Forum summit in Davos.

Per Econ 101 trade barriers cannot be good overall. While I do buy that, if we are to take anything away from the developments of late 2016 it is that thinking in overall terms is practically useless. What matters is who stands to gain (or lose) or are can be seen as gaining (losing). Domestic solar panel industry benefits while domestic solar panel consumers, retailers and installers lose. Government revenues increase due to tariffs and decrease due to reduced sales. The size of each is an empirical question. However, if the affected countries retaliate, there will be loses in the broader economy and this is what economists mean it cannot be good overall.

But let me talk about something I really know little bit better. Climate change is a global problem and while the world could use all the solar we can, in the near to medium term which is the time frame for this policy, it matters where it is installed. On the margin Solar is displacing natural gas in the US market and not coal. If the US is large enough a market, and it is, this should dampen global demand for solar which would lower global solar prices. This will boost demand from  developing countries.  If this can help delay or cancel investments in coal then both the global and local environmental benefits could be larger. So our president's policy might end up helping the poor countries he wants to limit migration from. Of course, you don't need have come this far to keep your chin up as there are reports out there that say this policy will not affect the global solar industry as much as it seems. Now what would be the point of saying this right up front.

You cannot take this to the bank

After spending three weeks in India and exposing my son to  pollution in the name of being sustainable (i.e, not Ubering or Ola-ing every where), I am all the more looking forward to the rapid diffusion of electric cars in our cities. So far I have read reports  that cite automakers, oil companies, transportation industry, consumers, investors, and ofcourse, policy makers. However, one group is conspicuous by it's absence from this list, Bankers. There was a time before 2008 when the phrase you can take it to the bank was worth the ink on which it was written but not anymore.

Apropos this criticism is the picture below from a Bloomberg report citing a Bank of America analysis about the future of oil demand.












I am not going to go into issue of peak oil demand for it is not a question of if but when, and I for one feel the when is not as near as it is made out to be but that is another topic. I refer to my earlier post on Peak Oil here.

Here, I really take issue with how two different phenomena -- share of EV sales and global oil demand over the three decades -- are juxtaposed in a misleading way and misinterpreted as an optimistic future when the actual story it tells is a depressing one for the environment! Notice that the primary y-axis (one on the left) runs from 0 through 100% while the secondary y- axis (one the right) runs from 96 to 106 million barrels per day. In other words, the right axis runs from 0 to 8%, which is the decline in oil consumption from it's peak in the late 2020's. What's more, oil demand is unchanged at 0% from 2016 through 2050. Just think about EV's rise to a 100% of car sales in 30 years time and oil consumption has not dropped one bit. This chart is not one you can take to the bank. For the sake of our own future let us hope that this projection is wrong.

May be I am being too harsh as this post is about bank analysts, a subset within those large institutions who perhaps are more guilty than the rest of their ilk for all that is wrong with them.  Unfortunately, one might find such misleading graphics in academic and scholarly journals as well, which was the point of my 2016 paper on "Peak Cropland". I argue, albeit using correlations only, that global crop acreage is set to keep growing.