Newswise — Consumers who think the cost of gas is high now haven't seen anything yet, says Dr. Peter Tsigaris of Thompson Rivers University in Kamloops, BC, Canada.
The public-finance economist argues that supply-side economics is only a part of an overall equation that could, and should, see gas prices rise even further.
"Sooner, rather than later, society is going to have to factor in the cost of carbon dioxide (CO2) damage to our environment, particularly in the form of global warming. While we can't really set a price on endangered species and threatened ecosystems, we are going to have to pay to mitigate effects like storm damage, rising sea levels and the like," he says.
In the face of these costs, it makes sense to use public money to make low-emission technologies a viable alternative, he argues.
"Governments need to make adopting alternative technologies worth it to both the consumer and the producer. One way is by raising, not reducing, fuel taxes."
The internal combustion/global warming dilemma has been a long time in the making.
For some reason (Tsigaris can't quite figure why), internal combustion cars were deemed "fittest" back at the turn of the last century in an industrial-Darwinism scenario that continues to influence society and the choices it makes.
What he calls an "historical accident" put society on the internal-combustion super-highway. In the early 1900s, internal combustion, steam and electric technologies used to power automobiles were competing just about equal in the North American market. In fact, electric and steam vehicles were ahead of internal combustion technology at one point in time.
"Imagine what our world would be like if electric cars had won," dreams Tsigaris. "Imagine what one hundred years of fine-tuning and innovation on electric cars would have produced by now."
Technologically, we've come a long way in the past century or so, with cleaner and more efficient electric-gasoline hybrid technology now available, but this alternative still occupies a small share of the overall market, not enough to offset emission increases due to ever-expanding automobile use.
The internal combustion engine needs to be replaced, says Tsigaris, but there's no big push to get production out of internal-combustion vehicles and into alternative cleaner automobiles.
There's a reason for this, he says.
It's 'lock-in,' a term used when an outmoded or even harmful technology continues to be used simply because it is very costly for the market to break the pattern.
"The problem is that the first users of a clean technology bear an excessively high share of the costs. Thus, most consumers rationally choose to purchase the cheaper dirty technology," he explains.
And how does this 'lock-in' come about? Once a particular technology takes off, "network and price effects" form around it. Consumers benefit from the service and support network developed to support internal combustion, which in turn depends on the number of users of this technology. Also, a larger number of users results in lower manufacturing unit costs, which translates to lower prices for traditional cars as compared to the alternatives.
It's a catch-22 situation. People won't embrace the new technology until industry creates a consumer comfort zone; as one blogger on a hybrid car site put it, "'Hybrids will never catch on until the day when you can walk in to the mall, check out the vehicle, and say, "I'll take the blue one.'" At the same time, industry hesitates to retool and start wholesale production of alternative vehicles until it sees a strong consumer demand.
"This scenario can shift, but for that to happen, government may have to get involved," says Tsigaris. North Americans may not like government dictating to the free market, but in cases where human or environmental health is severely compromised, the public has tolerated it in the past, as when governments have banned lead in paints and gasoline, CFCs and DDT, among other products.
But a government ban on the production of gas-powered cars? Tsigaris admits a ban on gas power isn't very likely, at least not in the near future. But there are other measures government could take to combat gas-guzzler lock-in, he says, but all the solutions are going to cost us.
Even though it's likely to be very unpopular, an effective way for government to drive consumer choice would be a significant rise in petroleum fuel taxes.
Tsigaris cautions that "A fuel tax alone, particularly one that is set to cover only the additional external costs related to environmental damage due to greenhouse gas emissions, will not be successful in counteracting "lock-in." Even with such a fuel tax, the net private benefits a consumer gets from the current technology would still outweigh those of a cleaner alternative. To get consumers to voluntarily switch, the tax would have to be much higher."
At the same time, government should put increased fuel-tax revenues toward subsidizing cleaner alternative technologies," says Tsigaris.
"Internal combustion is supported by a complete network of services for convenient refuelling, maintenance and repair. Similarly, a strong network of alternative fuelling, maintenance and repair stations is needed to build consumer confidence and incite industry to start major production of alternative vehicles," he explains.
To get this rolling, government could mandate a percentage of zero-emission vehicles to be sold; it could also provide subsidies to consumers who buy the vehicles and help entrepreneurs make the leap by subsidizing costs related to setting up alternative-fuel stations. Yet another part of a potential solution, already pursued by various governments to some degree, is purchase of low-emission public transportation vehicles.
These measures would all help create an all-important infrastructure base for alternatives, and some governments are already making some progress.
California is apparently pushing to get 200 hydrogen filling stations built within the next five years, stretching from Vancouver, British Columbia, all the way down to Baja, California, and China, the world's largest consumer of oil after the United States, will likely see the introduction of hybrid cars by 2008 in a bid to thwart a potential energy shortage that could stall the country's exponential economic growth.
"Countries like China and India are well-poised to go for new technologies," says Tsigaris. In these markets the combustion-engine-powered technology, although in a growth phase, has a much smaller installed base to make consumers locked-in to this particular technology. "However, time could be running out there, too."
"We're panicking now because we didn't take initiatives in the '70s," he says. "The earlier you set taxes on combustion technologies, the lower taxes could be, since the earlier the revenue is generated, the more revenue is available by a certain point in time to subsidize the new technology. Once the new technology has an installed base, the subsidy can be removed. "We could have raised fuel taxes back in the '70s, and put that revenue into developing alternatives. Now we have to catch up, and that's going to cost us."
--Dr. Peter Tsigaris is an Assistant Professor of Economics at Thompson Rivers University specializing in taxation and public policy, working with Dr. Eftichios Sartzetakis, Associate Professor in the Department of Accounting and Finance at the University of Macedonia specializing in environmental economics.
They presented their paper, "Environmental Externalities in the Presence of Network Effects: Adoption of Low Emission Technologies in the Automobile Market" at the 14th annual European Environmental and Resource Economists conference in Bremen, Germany, this past June, and will be presenting their research findings again at the National Business Economics Association conference to be held in March, 2006. Their paper was published last fall in the Journal of Regulatory Economics 28:3, 309-326, 2005.
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