Prepared for: Dr. J. Doucet BUEC 562. Prepared by: Damian Zapisocky

Transcription

1 SHOULD THE CANADIAN GOVERNMENT PROVIDE INCENTIVES TO CONSUMERS TO PURCHASE ALTERNATIVE POWERED VEHICLES IN ORDER TO HELP REDUCE EMISSIONS AND ATTAIN THEIR KYOTO COMMITMENTS? Prepared for: Dr. J. Doucet BUEC 562 Prepared by: Damian Zapisocky Date: June 27 th, 2005

2 Executive Summary In December 1997, Canada and more than 160 other countries met in Kyoto, Japan, and agreed to targets to reduce GHG emissions. Canada was a proud signatory to the Kyoto Protocol, trying to address the worldwide problem of global warming. Canada ratified the Kyoto Protocol in December 2002 when parliament voted in support of ratification of the protocol. Canada s commitment under the agreement was to cut greenhouse emission by 6% from 1990 levels, thus capping greenhouse gas emissions at 572 megatonnes a year by At current emission levels, the emissions reduction required is approximately 270 megatonnes. The federal government has come forward with a number of emissions reduction plans, the most recent being the first phase of Project Green, Moving forward on Climate Change: A Plan for Honouring our Kyoto Commitment, introduced in April One of the items of this plan relates to reducing 5.3 megatonnes of emissions through the automobile industry. The government has an opportunity to provide incentives to consumers in order to help reach their targeted commitment under Kyoto, and to help correct for market failures. The Canadian government acknowledges that they have a role to play to help correct for market failures, and address the two main reasons why governments could consider providing an incentive program to ensure positive economic and environmental outcomes. Currently, the Government of Canada does not provide rebates or incentives on the purchase of hybrid vehicles. 1

3 Hybrid electric vehicles (HEVs) are a recent advance in commercially available transportation technology. HEV s combine a gasoline powered internal combustion engine with an electric motor, which enables HEVs to be more environmentally friendly due to lower fuel consumption and cleaner emissions than conventional vehicles. By combining gasoline with electrical power, HEV s are able to operate approximately two times more efficiently than conventional vehicles. The annual fuel savings from purchasing the hybrid style of vehicle ranges from $253 to $575. However, given that the purchase price of these hybrid vehicles ranges from $5,540 to $12,690 more than their counterparts, the number of years of fuel savings to breakeven on the purchase price is staggering. From both the consumer s viewpoint, and the government s perspective, providing an incentive to purchase hybrid vehicles is not an option whose benefits outweigh its costs. From the consumer s perspective, an incentive greater than $3,000 would need to be offered to provide an inducement to buy a hybrid vehicle. From the government s perspective, the annual emissions reduction that would be seen by the conversion to a hybrid vehicle would be approximately one tonne per vehicle. This same one tonne in abatement would likely cost in the range of $15 to $30 should there be an international market for trading emissions credits. Thus, any incentive over an above the $15 to $30 range per year would be better spent on other activities by the government. 2

4 Table of Contents Page 1...Executive Summary Page 3...Table of Contents Page 4...Canada s Commitment to the Kyoto Protocol Page 6. Potential for the Canadian Government to Provide Incentives Page Hybrid Technologies Page 11 Fuel Usage and Emissions Comparisons Page 14 Cost / Benefit analysis Page 18...Recommendation and Conclusion Page 19.References Works Cited 3

5 Canada s Commitment to the Kyoto Protocol In December 1997, Canada and more than 160 other countries met in Kyoto, Japan, and agreed to targets to reduce GHG emissions. Canada was a proud signatory to the Kyoto Protocol, trying to address the worldwide problem of global warming. The accord originally sought to reduce carbon dioxide emissions by up to 20 per cent. Canada ratified the Kyoto Protocol in December 2002 when parliament voted in support of ratification of the protocol. Canada s commitment under the agreement was to cut greenhouse emission by 6% from 1990 levels, thus capping greenhouse gas emissions at 572 megatonnes a year by At current emission levels, the emissions reduction required is approximately 270 megatonnes. Furthermore, participants to the accord were to show demonstrated progress and commitment to the accord by 2008 in the form of actions to reduce emissions, thus Canada must begin to execute a plan by that time. Limiting CO 2 emissions can be achieved through one of three options: reduced energy use, greater energy efficiency, or substitution of energy sources with lower carbon content. Russia was the final signatory required to achieve the Kyoto criteria of ratification by 55 industrialized nations accounting for at least 55% of global greenhouse gas emissions in Russia accounted for approximately 17% of the 1990 emissions, thus without their ratification, the treaty was unlikely to pass and become law. Russia ratified the agreement in November 2004, and with their ratification, Kyoto came into law and became legally binding at midnight New York time on February 16 th, From the outset, Canada did not have a comprehensive plan that would enable the reduction of greenhouse gas emissions to the required levels. In spite of that, there was a 4

6 commitment by the government that they would help directly bear the cost of compliance, some of which was expected to be through purchasing emission credits from other countries that had achieved their targets. The government had also committed that companies would not be impacted by more than $15 per tonne: During the first commitment period, Canadian companies will be able to meet their emission reduction responsibilities at a price no greater than $15 a tonne 1. Given the fact the federal government ratified Kyoto; they are obligated to meet their commitment of reducing greenhouse gas emissions to 570 megatonnes per year. The federal government has come forward with a number of emissions reduction plans, the most recent being the first phase of Project Green, Moving forward on Climate Change: A Plan for Honouring our Kyoto Commitment, introduced in April The Plan provides for Government of Canada investments in the order of $10 billion between now and 2012 to fully realize the anticipated reductions of about 270 megatonnes 2. One of the items of this plan relates to reducing 5.3 megatonnes of emissions through the automobile industry as defined as follows 3 : The reductions in greenhouse gases from the automotive sector will be achieved through a Memorandum of Understanding between the Government of Canada and the Canadian automotive industry. That agreement, to reduce the emissions of greenhouse gases produced by light duty motor vehicles operating in Canada, sets out commitments by the auto sector to achieve emissions reductions through the deployment of more fuel-efficient and less greenhouse gas intensive technologies and vehicles. Examples include improved fuel efficiency, advanced emission and diesel technologies, and alternative fuel and hybrid vehicles. Rigorous monitoring and reporting requirements will be put in place to ensure targets are reached. The Government of Canada remains ready with legislative and regulatory action as needed 3. 5

7 Potential for the Canadian Government to Provide Incentives The government has an opportunity to provide incentives to consumers in order to help reach their targeted commitment under Kyoto, and to help correct for market failures. The Canadian government acknowledges that they have a role to play to help correct for market failures, and address the two main reasons why governments could consider providing an incentive program, taken from a statement on their own website: The case for government intervention in pursuit of environmental goals is founded in large measure on the need and opportunity to correct market failures. Where market failures exist, well-designed government intervention can foster a more rational use of resources and enhance both environmental and economic outcomes 4. As well, to help correct for market failures, the government could act to minimize or mitigate the consequences of those failures. A market failure exists in the fact that the average car owner is having an impact on the environment with each additional kilometer driven, however isn t required to pay for the negative consequences of that impact in terms of the C0 2 emissions from their vehicles. This is in contradiction to the Polluter- Pays Principle in which the polluter should bear the costs of their actions that contribute to environmental degradation through market prices. The Polluter-Pays Principle would help ensure the rational use of resources, and help minimize negative externalities in the form of pollution. The market failure that exists is that the price of fuel does not include costs for the environmental damage caused by the use of the fuel and the release of emissions from vehicles as a result. Furthermore, there isn t a cost associated with this same type of damage incorporated into vehicles; hereby vehicles that pollute more are more expensive as a result. Instead, the opposite is true. In the case of lesser polluting vehicles such as the 6

8 hybrid vehicles currently being offered, the actual cost of the hybrid technology makes the vehicle relatively more expensive, thus creating a disincentive in the market for consumers to purchase a vehicle that is more environmentally friendly, thus creating the market failure. There are several different options available to governments as policy instruments to help effect environmental change including: regulation, environmental taxes, and tax incentives. These have been identified by the Canadian government through the following chart: Source: The government already regulates pollution, by imposing emission standards on new vehicles. To a limiting degree, there are already environmental taxes in the price of fuel; revenues from fuel taxes are spent according to the government s annual budget, which includes environmental spending. To date, the Canadian government has not provided any tax incentives on the purchase of hybrid vehicles, however, the 2005 budget 7

9 noted the need to study incentives for purchasing fuel efficient vehicles with incentives included in the 2006 budget. From an economics standpoint, a tax incentive directly impacts government revenue, as the revenue is foregone in the form of the incentive amount. The measure of whether a proposed tax measure is fair relates to the distribution of the burden of the tax and of the benefit of the tax incentive. As such, a tax incentive imposes a cost on all taxpayers to the extent that all taxpayers must fund government spending, and foregone revenues entail either higher taxes, or reductions in other types of spending. It is important to understand what the effects of a tax incentive will be and what alternative proposals may exist that should be evaluated in order to earn the greatest overall return, where the return can be measured as C0 2 reductions, financial impact, etc. The projected fiscal cost needs to be assessed against what environmental benefits will be achieved, and whether those benefits can be achieved at a lower cost through other options. For example, measures may be ranked by how many tonnes of greenhouse gas emissions reductions they produce per dollar of foregone tax revenue. Such comparisons may be carried out across tax and non-tax measures to help identify the most cost-effective environmental policy measures 4. Currently, the Government of Canada does not provide rebates or incentives on the purchase of hybrid vehicles. In 1999, they studied different options to improve vehicle fuel efficiency, including rebates on the purchase of hybrid vehicles. The result of their study was that: A fuel efficiency improvement target for all new light-duty vehicles was considered as the more promising and cost-effective way of reducing greenhouse gas emissions within the Kyoto Protocol time-frame ( ). The Government of Canada believes that establishing an 8

10 overall fuel efficiency target -- leaving the choice of vehicles and technologies to the marketplace -- will lead to the most economic solutions for manufacturers and consumers alike 5. Only the Ministry of Finance of Ontario and British Colombia are offering residents of these provinces a $1000 rebate on the purchase of qualified hybrid vehicles 5. Hybrid Technologies Hybrid electric vehicles (HEVs) are a recent advance in commercially available transportation technology. HEV s combine a gasoline powered internal combustion engine with an electric motor, which enables HEVs to be more environmentally friendly due to lower fuel consumption and cleaner emissions than conventional vehicles. By combining gasoline with electrical power, HEV s are able to operate approximately two times more efficiently than conventional vehicles 6. HEV s advantages include 6 : reducing smog-forming pollutants reducing resource consumption and our dependency on fossil fuel competitive pricing exceptional gas mileage similar or better performance compared to conventional vehicles similar safety and comforts features compared to conventional vehicles HEVs differ from Battery Electric Vehicles (BEVs) in that BEVs only use batteries as a fuel source, whereas the HEVs use both an electric motor and gasoline engine. BEVs are currently in limited distribution due to short driving ranges of one to three hundred kilometers, and extended recharging times of up to eight hours or longer. HEVs offer the extended driving range and rapid refuelling of conventional vehicles, together with many of the energy and environmental benefits of electric vehicles 7. Compared to BEVs, none of the commercially available HEVs on the market need to be plugged in, because the motors use regenerative braking, coasting or the 9

11 gasoline engine to recharge the batteries, which are the primary technical advantages of both HEVs and BEVs: The inherent bi-directionality of their energy/work loop. An EV power train can convert energy stores into vehicle motion, just like a conventional vehicle, and it can also reverse direction and convert vehicle motion (kinetic energy) back into energy stores through regenerative braking. In contrast, combustion engine vehicles cannot reverse the direction of the onboard energy flow and convert vehicle motion back into fuel. The significance of regeneration becomes apparent when one considers that approximately 60 percent of the total energy spent in urban driving goes to overcoming the effects of inertia, and theoretically, up to half of this energy can be reclaimed on deceleration 8. For most HEVs, both the engine and the motor are connected to the wheels by the same transmission. Hybrid vehicles combine the best features of the internal combustion engine, and the electric motor, resulting in a smaller engine. The electric motor is used primarily for low speed cruising or for providing power for quick acceleration and/or hill climbing. An energy management system controls the use of the motor and the engine, as well as when to store electricity in a battery pack for future use. When braking or coasting to a stop, the hybrid uses its electric motor as a generator to produce electricity, which is then stored in its battery pack. The main fuel source, gasoline, is stored in a conventional fuel tank and provides all the energy the hybrid vehicle needs. Unlike allelectric vehicles, hybrid vehicles do not need to be plugged into an external source of electricity given the regeneration through braking. The diagram on the following page illustrates the main components of a hybrid vehicle. 10

12 Source: The first commercially available hybrid vehicle on the market in Canada was the Honda Insight. Today, there are a myriad of vehicles on the market that now also include the Ford Escape Hybrid, a small SUV. The Ford Escape Hybrid was the first vehicle to combine SUV capability with the fuel economy and low environmental impact of a hybrid electric engine. Fuel consumption equals that of a gasoline-powered compact or sub-compact car, but you gain some of the benefits associated with a larger vehicle 9. Fuel Usage and Emissions Comparisons Fuel usage and emissions are affected by a number of items. The choice of transmission directly affects the cost of the vehicle and fuel consumption, as manual transmissions are generally more fuel-efficient than automatics. As well, the weight of four-wheel drive versions due to friction created by additional drive train parts causes an increase in fuel consumption, offsetting some of the benefits. Many other options also increase the vehicle s weight, also reducing overall fuel efficiency. Lastly, using air 11

13 conditioning in a vehicle can increase fuel consumption by more than 20 percent in city driving. As such, the combination of options can significantly impact fuel efficiency. For the purposes of this analysis, we will assume that both the hybrid and normal versions of each vehicle have the same options, thus preventing differences due to differing options. Normally consumers would have a list of standard options that they would want in a vehicle, thus the comparison between vehicles should only account for incremental differences based on the hybrid technologies, as the same options would likely be chosen in either vehicle. Given the HEV advantages previously discussed relating to regeneration of batteries through braking and coasting, HEVs use less gasoline than conventional vehicles do, thanks to their battery power and regenerative breaking. Fuel consumption can be reduced by 50 percent or more. That means their driving range is farther than that of regular gasoline vehicles 9. This assertion will be looked at in the cost / benefit analysis section, where the annual fuel savings will be compared, and assessed versus the purchase price of the vehicle. It is the annual cost savings in comparison to the purchase price that should be important to consumers who are making a purely economic decision; the relative percentage of fuel reduction is a statistic; it must be translated to dollars to determine whether it is significant in the purchase decision. HEVs do produce GHG emissions, but such emissions are far fewer than those from conventional gasoline vehicles. HEVs reduce GHG emissions from vehicle operation and decrease upstream emissions by about 28 percent compared with conventional gasoline vehicles 7. 12

14 The following chart was produced based a selection of vehicles chosen for this analysis, with information from a Government of Canada web service. Carbon dioxide (CO 2 ) emissions are measured in the chart in kilograms based on a vehicle's estimated annual fuel use and fuel type, and the annual cost savings due to fuel consumption can also be measured by taking the difference between the hybrid version and the normal version of the vehicle. This analysis will be done in the cost / benefit analysis section. The fuel usage calculations and emissions in this chart are based on 20,000km / year, with 55% city and 45% highway driving, and a $0.69/litre fuel cost. FORD ESCAPE X E4E FORD ESCAPE HYBRID X VE HONDA M X E5E ACCORD HONDA M X E5E ACCORD HYBRID HONDA CIVIC C X M HONDA CIVIC C X M HYBRID HONDA INSIGHT T X M TOYOTA M X E5E CAMRY TOYOTA PRIUS M X V Source: From the chart above, we can calculate what the annual difference in emissions is between the hybrid and normal version of each vehicle. These have been summarized in the table that follows. The emissions reductions noted on the table are discussed in the 13

15 next section. One point through is significant: the hybrid versions of the vehicles have lower CO 2 emissions than the standard version of the same vehicle. In fact, these vehicles average 1, fewer kilograms of CO 2 emissions annually, or 1.4 tonnes. Annual Emissions C02 (kg) Make Year Hybrid Model / Normal Model Hybrid Normal Difference Ford 2006 Escape Hybrid / Escape XLS (1,481.0) Honda 2005 Accord Hybrid / Accord (1,174.0) Honda 2005 Civic Hybrid / Civic (909.0) Toyota 2005 Prius / Camry LE (2,059.0) Cost / Benefit analysis The costs and benefits of hybrid cars and their associated environmental impacts will be assessed through both the consumer and the government perspective, as each has competing interests, and the benefits may not accrued to each party in the same manner. Consumer Perspective The fuel consumption and emissions data from this summary chart are used as key components of the overall consumer cost benefit analysis that follows. Market prices for the vehicles were obtained from the manufacturer s website, while the fuel economy, annual fuel costs, and emissions were obtained from the preceding annual emissions chart based on information from the Government of Canada website. Price Annual Fuel Cost - $ Breakeven Make Year Hybrid Model / Normal Model Hybrid Normal Difference Hybrid Normal Difference Years Ford 2006 Escape Hybrid / Escape XLS 34,645 26,745 7, , Honda 2005 Accord Hybrid / Accord 36,990 24,300 12, , Honda 2005 Civic Hybrid / Civic 28,500 16,200 12, Toyota 2005 Prius / Camry LE 30,530 24,990 5, , From the table above, the annual fuel savings from purchasing the hybrid style of vehicle ranges from $253 to $575. Once again, these would be significant savings to the 14

16 average Canadian, if measured relative to the average person s annual income. However, given that the purchase price of these hybrid vehicles ranges from $5,540 to $12,690 more than their counterpart, the number of years of fuel savings to breakeven on the purchase price is staggering. The Toyota Prius breaks even in the fewest number of years, at 9.6 years. However, the Ford Escape Hybrid requires 19.1 years to breakeven, the Honda Accord Hybrid requires 38.7 years, and the Honda Civic requires Hybrid 48.6 years. Each of the Ford and Honda vehicle s breakeven points is well beyond the normal useful life of a vehicle, thus purely from an economic standpoint, consumers would be better off buying the non-hybrid version of the vehicle. What level of incentive could make this worthwhile to a consumer from a combination of economic and environmental benefits standpoints? For the average consumer, the environmental benefits are unlikely to be given a large weighting in any decision where the decision is mainly a financial one. Thus, for the purposes of this paper, the benefits associated with environmental benefits will be analyzed mainly from the government s point of view as reductions in CO 2 by the average consumer are not noticeable, and the effects on their local environment are unlikely to be seen directly. The following table summarizes the effect of an incentive on the breakeven number of years the consumer would have to keep the vehicle to before achieving any cost saving. Price Fuel Cost Breakeven Years based on Incentive Amount Make Year Hybrid Model / Normal Model Difference Difference $ 500 $1,000 $1,500 $2,000 $2,500 $3,000 Ford 2006 Escape Hybrid / Escape XLS 7900 (413.0) Honda 2005 Accord Hybrid / Accord (328.0) Honda 2005 Civic Hybrid / Civic (253.0) Toyota 2005 Prius / Camry LE 5540 (575.0)

17 From the preceding table, only rebates on the Toyota Prius would enable a breakeven point of less than 10 years, the vehicle that already had a breakeven point of less than 10 years. With a $3,000 incentive, the breakeven point could be reduced to 4.4 years, which would likely be within a normal timeframe for which a consumer would keep their vehicle, and thus realize cost savings. However, for the other three hybrid models analyzed, the breakeven point even with a $3,000 incentive would still be beyond the normal timeframe for which a consumer keeps their vehicle. Therefore, it is unlikely that the average consumer would purchase a hybrid vehicle even with a $3,000 incentive if they were making their decision as an economic one. Government Perspective The preceding economic analysis on the breakeven number of years ignores the environmental benefits of the emissions reductions that can be achieved through the hybrid versions of the vehicles. Thus, the environmental benefits should be assessed to determine whether these are significant enough to warrant consideration of incentives by the Canadian government to help consumers to buy hybrid vehicles to enable CO 2 reductions and aid in the attainment of their Kyoto commitments. Given that the annual emissions reduction of the hybrid vehicles ranges from 909 kgs to 2,059 kgs over their counterparts, this would meet the government s goal of each person reducing their emissions by one tonne (1000kgs = 1 tonne) through the One Tonne Challenge. Although this would be significant if applied on a large scale countrywide, the actual cost of abatement is significantly higher than the $15 per tonne in emissions credits that the government felt they could purchase on the international market, should a market be setup. This is significantly higher due to the fact that if the government were to provide 16

18 an incentive to consumers equal to $15 per tonne of abatement, this would be insignificant to the overall purchase decision, given that the preceding analysis showed that even a $3,000 incentive on most vehicles would not likely be an inducement from a purely economic standpoint. Assuming that consumers were to keep their vehicles for 10 years, then a $150 incentive on the purchase of a hybrid vehicle would not likely be a factor in their decision from an economic standpoint. From the government s perspective, comparing $150 abatement costs to a $3,000 incentive that would achieve the same offsets required under Kyoto is a significant economic gap. Furthermore, although any emissions reduction alternatives merit consideration as part of attaining the Kyoto commitments, the local environment is not likely to see dramatic effects from the switch buy a few consumers to hybrid vehicles. Only large scale conversions would likely have any noticeable local environmental impact, and likely only where there are significant concentrations of vehicles, such as in Toronto and Vancouver where smog is a current issue that could be aided by fewer emissions. Otherwise, the local environmental effects are likely to be negligible, and likely not directly noticeable by normal consumers. Overall, in order to achieve the 5.3 megatonne CO 2 reduction that the government has planned through the automobile industry, a total of 3.79 million hybrid vehicles would have to be sold to accomplish this goal, assuming that the average annual emission reduction per vehicle was 1.4 tonnes, as was the case with the average of the four vehicles previously discussed. This is not to say that this was the government s plan on emissions reductions through the automobile industry, as they had other plans including 17

19 ensuring that the current non-hybrid vehicles being produced have fewer emissions than their predecessors. The government s plan also included items that consumers could do through the One Tonne Challenge such as idling their vehicles less, which would also reduce emissions. There are a number of other choices that could be made that would not entail the additional cost of conversion to hybrid vehicles, including seeking alternative fuels, an option which the government has been acting on for over a decade. Recommendation and Conclusion Thus, from both the consumer s viewpoint, and the government s perspective, providing an incentive to purchase hybrid vehicles is not an option whose benefits outweigh its costs. An incentive greater than $3,000 would need to be offered to induce consumers to buy a hybrid vehicle. From the government s perspective, the annual emissions reduction that would be seen by the conversion to hybrid vehicles would be approximately 1.4 tonnes per vehicle. This same one tonne in abatement would likely cost in the range of $15 to $30 should there be an international market for trading emissions credits. Thus, any incentive over an above the $15 to $30 range per year would be better spent on other activities, assuming that there were other alternatives that could be instituted or implemented with lower costs than of providing the level of incentives to consumers that would be required to induce them to buy a hybrid vehicle. Thus, the government should not offer incentives to consumers over and above a range of $150 to $300, assuming that consumers keep their vehicle for ten years. There are other alternatives for emission abatement which would require less of a financial burden to the government than providing incentives to purchase hybrid vehicles. 18

20 References Works Cited 1. Statement by Minister H. Dhaliwal, December 18, #!