I ran across an interesting calculation in a presentation recently that I think serves as a good example of how careful we have to be about energy and environmental analyses and what conclusions we draw from them.
The number is in the presentation “Peak Oil”, by Paul Wallace, which was made at the event Peak Oil and Future Challenges: A Panel Discussion. (See that link for the Wallace presentation and others, all in PowerPoint format.)
One slide 9, Wallace shows a bar graph depicting the cost per tonne of avoided CO2 for various technologies, and he includes “Hybrids” at $250/tonne. Now, for anyone who follows such discussions, $250/tonne is several times higher than the CO2 prices that are bandied about. Could hybrids really perform that poorly according to this metric?
With one questioning eyebrow raised, I powered up my calculator and browser and ran my own set of numbers.
First, I picked a pair of car models. Since there is no non-hybrid Prius, I avoided it and used the Honda Civic EX and the Civic Hybrid. These cars are very similar in equipment, identical in size, and from the same manufacturer, so they present about as perfect an apples-to-hybrid apples comparison as one could hope for.
The 2008 Civic EX with automatic transmission costs $19,510 and gets a combined 29 MPG. The 2008 Civic Hybrid costs $22,600 and gets a combined 42 MPG.
Assuming the same number of miles driven, 12,000, and the same ownership period for the initial owner, 4 years, even if you assume that the hybrid has no greater resale value (which I’ll come back to in a minute), the cost per tonne of avoided CO2 is conspicuously high–depending on which factors you include.
The Civic uses 413 gallons of gasoline/year, compared to 285 gallons/year for the hybrid variant. That’s a savings of 128 gallons, or 2,560 pounds of CO2 per year, or 10,240 pounds, about 4.6 tonnes, over four years. At an initial price premium of $3,090 for the hybrid, that’s a “raw” savings of $671/tonne of CO2 avoided. Talk about a number that will raise some eyebrows.
But wait–during those four years, the driver is not just using less gasoline, but paying for less gasoline, which reduces that initial cost premium for the hybrid. Assume that gasoline in the US will average $4/gallon[1] between now and 2012, and suddenly the price premium shrinks dramatically–our hypothetical driver will buy 512 fewer gallons of gasoline over four years, for a savings of $2,048, dropping the premium to $1,042, for a price per tonne of CO2 avoided of $226, which is very close to Wallace’s number for a “back of the Internet” calculation.
I mentioned the assumption about trade-in value, which deserves more attention. If you assume that we’re headed for much higher oil and gasoline prices in the next few years, then I think you can assume that the resale value of a Civic EX (or any car of comparable size, efficiency, quality, etc.) will hold up pretty well.[2] The resale value of a Civic Hybrid (or comparable vehicle) should do even better, meaning it will further erode that hybrid price premium. With gasoline prices in the $5/gallon range in 2012[3], someone in 2012 choosing between a used Civic EX and a used Civic Hybrid, each four years old, would be looking at a fuel cost savings of at least $2,560 over the ensuing four years by buying the hybrid, assuming no further increase in the price of gasoline in the 2012-2016 time frame. If we allocate that $2,560 roughly equally between the resale value the initial owner of the hybrid gets at trade-in time and what the second owner pays for the car in 2012, then our first owner is actually receiving a premium for avoiding CO2, to the tune of about $51/tonne. (($1,042 - $1,280) / 4.6 = -$51)
My point here isn’t to disagree with Wallace’s number, but simply to point out via this example that we’re living in a time when shifting energy and environmental costs are putting major portions of the world and national economies in motion, in ways none of us has seen before. Therefore, the more real world factors we can (with reasonable accuracy) include in our numbers, not only the more accurate our conclusions, but the more surprising results we can find.
[1] Yes, I know, predicting the price of gasoline over a period of years is fraught with peril. But for the sake of calculation I need to plug in a number. Right now, I think $4/gallon will turn out to be slightly on the low side for the period May 2008 to May 2012. My gut instinct is that it will be more like $4.50 to $4.75, but I let it go at $4 to avoid the distraction of people saying I was cooking the books.
[2] The price of such cars probably won’t hold up much longer than 2012, though, as they’ll pretty quickly be seen as gas guzzlers compared to EV’s and PHEV’s. I expect this fact to be completely ignored by virtually all consumers, similar to the way many people buying SUV’s today probably aren’t thinking about where gasoline is headed in the next three or four years.
[3] Yes, another wild-eyed assumption. Again, I think this could be slightly low if we’re headed for a world oil production peak in 2011 or 2012.
This post is a market test, of sorts. I’ve long considered doing semi-regular posts focused on this kind of analysis. The goal of such a feature on the site would be to help answer specific questions about the economic decisions we all have to make, as well as help the energy geek wannabes out there gain some skill and confidence in their own calculator work.
So, tell me what you think, suggest new topics or a new approach for future “By the numbers” installments, or tell me it’s a dumb idea and where I can stick my calculator.
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May 15th, 2008 at 12:03 pm
Yes, but A civic LX has an MSRP of $17,760. Granted it has less equipment, but it it has power locks, power windows, and AC and will save you an additional $1,750 over the hybrid civic for a grand total of $4,840 in savings. Or you could buy a smaller less expensive car like the honda fit or toyota yaris and save even more, but that is a different point.
May 15th, 2008 at 1:20 pm
Sure, but I was trying to isolate the hybrid drive train as the only difference between the vehicles, or at least get as close to that ideal as possible.
If you want to compare the Civic Hybrid with a Fit or Yaris, you can easily adjust the calculations to take into account differences in purchase price and MPG, but putting a dollar value on the utility (in the technical, microeconomic sense) of having a slightly more substantial car with more features, is a lot tougher.
May 15th, 2008 at 1:45 pm
I agree with your approach to doing the analysis - you have to compare apple to hybrid apple here. People ask me how much extra did I spend to get a hybrid. Since I have a Prius it’s really hard to say because there is no direct comparision that is non-hybrid. Having said that, as it was pointed out somewhere recently (treegugger.com maybe?), people shouldn’t feel that they should go with the more energy efficient product only if it will pay itself off. The example that was given was how long does it take someone to pay back the alloy wheel upgrade on their new car? Nobody asks that question or how long to pay back for the larger engine or the Porsche. Why should we have to justify paying a little extra for getting a clean, fuel efficient car. I’ll be honest, part of my decision to get the Prius was to reduce CO2 but part was also to have a vehicle that would do better in a post peak oil world.
BTW, I like these types of analyses you do.
Thanks
Paul
May 15th, 2008 at 2:07 pm
stoner: That’s exactly the point I keep trying to impress on people. Microeconomic theory talks about people “maximizing the utility derived from their expenditures”, where “utility” basically means whatever the individual consumer values.
For example, when I bought my Scion, I got the medium blue, mostly because I got lucky–it was my first color choice and that’s what the dealer had in their one and only one xA on the lot. (They were selling like water in the desert in June of 2006. Two different people saw the car on the lot and tried to buy it while they were writing up my paperwork.) If I had a choice of a color I didn’t like, white and blue, but the blue one was $50 more, I would have paid it. It would have returned absolutely nothing in terms of efficiency or higher resale value, but I know that I would derive utility from enjoying the car more for the years I’ll be driving it.
I think this is why it can be so hard to get people to change and pay more attention to vehicle efficiency over a short time frame. They’ve grown used to having the luxury of placing a high value on things like cup holders and sound systems and who knows what–they’ve altered their utility functions over a period of (possibly many) years, in microeconomic terms. For those consumers to value efficiency higher they literally have to rewire how they value car features, i.e. they have to reformulate their utility function.
This happens at different rates for different people, depending on their income level, their needs, their personal history, and who knows what else. In one way, this phased change to a new model is a good thing. If everyone woke up tomorrow with the same view of energy and environmental issues, there would be market chaos as we all tried to do the same thing. Still, I wish people would change quicker than they are, which would only benefit them and everyone else.
May 15th, 2008 at 2:08 pm
I see what you are saying Lou. I just wish that auto companies would offer smaller, more spartan hybrid vehicles. I might buy a hybrid Honda Fit for about $18,000.
But, I have vowed that my next car will use no gasoline. I will wait for the all electric vehicles that Mitsubishi and Nissan will be selling in the U.S. in 2011. They’ll be small, have a range or about 100 miles, and cost around $20,000.
May 15th, 2008 at 8:25 pm
What are they doing to your cars to achieve such low mpg? UK Honda Civic 1.8 petrol has 44.1 mpg on combined urban cycle (36.7 US mpg). Admittedly this is on a manual, but still…
I note the price is also about half the UK list price too, which might have something to do with it.
May 16th, 2008 at 8:44 am
chad: I’m with you 100%. When I bought my Scion xA in 2006, I told my wife that my plan was to keep it until about 2012 and replace it with an EV. Of course, my car might be hard to sell, since it will be a gas guzzler by 2012 standards. (I’m only half kidding about that last part.)
May 18th, 2008 at 7:45 pm
Lou: I also like this kind of analysis but it has its dangers. See the Hummer vs Prius nonsense put out by CNW Marketing. I have been responding similar to stoner for a couple of years now when asked if the premium I paid for my Prius will ever be recovered. I always retort with ” what’s the payback on your iforce or hemi V8″. In my view a large percentage of people will never change unless they can figure out how to make it their own idea. I have several people I work with who are upside down in their big boxes but I tell them to start saving their money for a more FE auto and to do what they can to get better mileage in what they have. Slow down, air up tires, and stop jack rabbiting to the next light. There is nothing else to do really. On another note I live in the Dallas area and here it almost better to be called a child molester than a tree hugger (yes, still). A lot of people here want to blame the oil companies and “speculators” gouging us for current fuel prices and all will be well if we can just stop that and make the OPEC sell us their oil at the price we want to pay for it. But that won’t stop me from continuing to speak up about peak oil and a slowing supply curve with a rising demand curve plotted against it.
May 25th, 2008 at 10:09 pm
Very helpful analysis. I hope you continue to write articles along this line.
May 25th, 2008 at 10:45 pm
Thanks. I’m definitely planning to do more “By the numbers” installments at irregular intervals, meaning whenever I think of a good topic and have the time to dig up the relevant numbers to punch into Mr. Calculator.