Asymmetrical Information - Megan McArdle

01.22.13

Would Putting a Price on Carbon Pave the Way for Electric Cars?

Pigovian taxes put a price on dangerous behavior. But they don't necessarily change it.

"But if we were pricing carbon fairly . . . "

That's the standard rejoinder to pieces like the one I just wrote, arguing that it's surprisingly difficult to make electric vehicles cost-competitive with the internal combustion engine.  Hydrocarbons are an amazingly energy-dense and affordable form of storage for the energy needed to propel a vehicle.  Four years ago, my friend Tom has did a couple of great pieces on the great frustration of technologists: why aren't batteries improving as fast as everything else?  I encourage you to read both pieces, but here are a couple of highlights.  From the first piece:  

The other thing to mention is that Drum’s concern over lithium is probably misplaced. Lithium’s great, and a ringer when it comes to batteries. A cell’s energy density is largely determined by the electrical potential between its anode and cathode — the bigger the gap between them, the better. And as you can see from this chart, electrode potentials don’t get much more negative than lithium.

But it’s got its problems, too. Lithium wasn’t incorporated into mass-market batteries for a long time because of its tendency to catch on fire when exposed to air or charged too quickly. And lithium batteries still tend to dramatically lose capacity about 18 months after they roll off the assembly line, mostly without regard to how hard they’ve been used. Both of those problems have and continue to be addressed by brilliant electrochemists, and the lithium polymer batteries we use today are fairly miraculous. But it would probably be a mistake to think that lithium technology will get dramatically better than it currently is.

And from the second:  

None of this has done much to improve the fundamental energy storage densities of the underlying chemistries. These have been known for a long time now, and nothing is going to change them — nor are there any more promising elements like lithium waiting to be tamed (well, none that aren’t radioactive, anyway). The glacial pace of improvement in battery technology really can’t be overemphasized. The lead-acid battery was developed in 1859, for pete’s sake. It’s really heavy relative to the energy it stores, can produce explosive fumes if overcharged, and sometimes requires the addition of distilled water. Yet it’s still the best battery technology we have for supplying the high current necessary to turn over an engine. A century and a half and we haven’t come up with anything better!

It may seem like batteries have improved dramatically — consider the lifespan of an iPod Nano versus a portable cassette player. But this is misleading. In fact it’s a byproduct of more energy-efficient technologies. Which isn’t to dismiss energy effiency! But electric motors are already extremely efficient. And when it comes to vehicles, we’re unfortunately dealing with hard physical limits related to how much energy it takes to move a car. So long as we’re committed to EVs being able to perform like and drive safely near gasoline-powered cars, we will find ourselves with less room for improvement than people would like to think.

I don’t mean to be a downer, but it’s difficult to overstate what a serious problem this is, or for how long it’s been one. Hydrocarbons are an unbelievably efficient way to store energy when compared to electrochemical cells, and I seriously doubt anything will change that. Hopefully I’ll be proven wrong. But smart people have been working on the battery problem for decades and decades, propelled by the lure of the financial bonanza that a breakthrough would represent. And while they’ve made impressive improvements, none come anywhere close to competing with gasoline’s energy density. We’re still an order of magnitude away.

There's some hope that Tom may be wrong--companies like Envia have announced amazing breakthroughs (though as with all startups, take with a grain of salt: amazing breakthrough products often turn out not to be so amazing when companies tried to take them up to industrial scale.)

But there are other problems as well, which people noted in response to my original post: batteries don't work as well in extreme climates (hard to start in the cold, and using the air conditioner runs the battery down really fast).   Charging and discharging the battery often degrades the capacity over time, so that even a low nominal cost-per-kilowatt-hour doesn't necessarily translate into a low cost-of-ownership when you consider the need to frequently replace the battery.  And faster charging also comes, as I understand it, at some cost in battery life/performance.  

To this environmentalists respond "It only looks expensive because we're subsidizing carbon."  By which they mean that if we charged people for the negative externalities of carbon emissions, gasoline-driven cars would be more expensive than electric.

I quite agree that we should price the negative externalities of carbon, preferably through a carbon or source-fuels tax.  But I'm not sure it therefore follows that pricing carbon will make electric vehicles economically viable.  As I noted, Israel, where Better Place launched their electronic vehicle program, had a gasoline price of nearly $10 a gallon last summer.  Just how high were we thinking that our carbon tax would be?

Taxes on behavior with significant negative externalities are called "Pigovian Taxes", and they have a long and storied intellectual history.  I myself am a big fan.  But many of the fans who say things like "Of course electric vehicles (or solar panels, or wind, or whatever the green flavor of the month may be) would be competitive if we made polluters pay the costs of their pollution" seem a bit confused about what a Pigovian tax does.

The way Pigovian taxes work is that you calculate the cost of the externality, and then slap a tax on the activity so that the market price approximates the total cost.  Then people choose whether to keep doing that activity, or do something else.  It is a perfectly acceptable outcome for people to decide that they enjoy polluting enough to pay the higher cost; in the case of electric vehicles, it may even be the likely one.  The purpose of a Pigovian Tax is not to achieve a given outcome, but rather, to make sure that the market prices contain all the relevant information about activities like polluting, which generate substantial negative externalities.  Once you've done that, you let market price discovery (aka "consumers") determine whether the activity is still worth doing.

Of course, calculating the costs is immensely fraught: the two sides do not, to put it mildly, agree on basic questions such as how much weight should be assigned to the desires of people who haven't even been born yet, or people who live in other countries.  They do not agree on whether we should gamble on getting richer and more technologically advanced later (making the issue moot), or how seriously we should consider alternatives to conservation such as geoengineering or migration.  And one's priors about the environment tends to dictate the assumptions one chooses about these things, so that radical environmentalists calculate very large taxes and conservatives, small to none. 

But at least they are agreed on a process that makes sense, however much the assumptions may vary.  What you do not do is work backwards from the cost of the lifestyle you would like people to adopt, to the "cost" you assign to the lifestyle they already have.  This sort of circular, agenda-driven reasoning isn't economics; it's aesthetics.  Which is perfectly fine, but then there's no need to blather about implicit subsidies and negative externalities as if you actually cared about the size of those things; just state that you think it is morally wrong to despoil the planet, and that you think we should tax people until they stop.

In other words, it's possible that if we properly priced carbon, electric vehicles would become viable.  But it's also possible that if we properly priced carbon, the internal combustion would remain the favored technology. To say otherwise, without calculations in hand, is to assume what you want to prove.