Tuesday, February 7, 2017

The Real Cost of a Gallon of Gasoline

A few months ago, my wife and I decided that it was time to purchase a newer car for our family. Our two vehicles were old—my pickup is a 1993 Toyota T-100, and the family minivan is a 2002 Toyota Sienna, both closing in on 200,000 miles—and maintenance costs on both have been increasing. I drove over to Jim Barkley Toyota and walked into the sales room, where I was cheerfully greeted by one of their sales associates. I told him that I was interested in a slightly used Prius, the ubiquitous hybrid vehicle Toyota has sold since 2000. “Oh sure, we have plenty of those here,” he replied, continuing that he “couldn’t keep a truck on the lot” with gas prices so low. As a consumer, this was great news for me, but as an environmentalist, this reality disturbed me. That got me to thinking: Is there really that predictable of a relationship between gasoline price and the number of trucks and SUVs sold?

The answer is yes. For the 13 years from 2003 through 2015, there is a very strong, negative linear relationship between gasoline price per gallon (inflation-adjusted) and percentage of vehicles solid in the U.S. that are trucks and SUVs. (The regression outlier is from 2009, during the recession.) Translated into everyday terms, this means that when the price of gasoline is low, we buy more vehicles that are larger and less fuel-efficient, and when the price of gasoline is high, we turn to smaller, more fuel-efficient cars.

I’m all for consumer choice, so if my neighbor needs or wants a larger vehicle, then so be it. (After all, I own two of them!) However, a big problem is that the price per gallon we pay at the pump is not nearly the real cost of that gallon of gasoline to you and me as individuals and to society in general, if all external costs are considered. In a peer-reviewed journal article published in 2015, Professor Drew Shindell of Duke University estimated the environmental damages per gallon of gasoline to be $3.80, the damages including the shared burden of global mean climate change and global health burdens from poor air quality. Paying $6.00 or more per gallon of gasoline would be a tough pill to swallow for Americans, who’ve become quite accustomed to buying relatively cheap gasoline, but we ultimately end up paying for these external costs in other ways, such as in higher medical costs and higher home insurance premiums.

What’s to be done? Placing a price on carbon would go a long way. Fossil fuels companies would pay a fee per ton of carbon extracted, and of course they would pass along these costs to us, the consumers. We would face a choice: Buy the larger, less fuel-efficient truck, or go for the smaller, fuel-efficient option, given that the price at the pump would be higher, because the price of the gallon of gasoline would be closer to the real cost of burning it. Undoubtedly, more of us would choose the more fuel-efficient models. The projected extra cost on a gallon of gasoline would be approximately $0.15 per gallon upon implementation, and increasing roughly $0.10 per gallon per year. At some point, many consumers would choose a more fuel-efficient vehicle.

It is important to note that, under a Carbon Fee and Dividend (CF&D) model, the carbon fee collected would be returned to households each month, so this approach is revenue-neutral from a government standpoint. The best news from both a societal and an environmental perspective is studies predict that, during the first 20 years alone, a comprehensive CF&D policy (one that includes all fossil fuels—coal, oil and natural gas—and other greenhouse gases) would lead to a 50% reduction of carbon emissions below 1990 levels; the addition of 2.8 million jobs, driven by the economic stimulus of the energy dividend; and the avoidance of 230,000 premature deaths due to reduction in air pollutants that often accompany carbon emissions.

All we need is the political will to make this happen, to the betterment of us all.

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