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MIT Study: Widespread Acceptance of Alternative Fuel Vehicles Will Require Decades of Subsidies and Targeted Programs

2 June 2007

A study by MIT researchers concludes that marketing programs and subsidies will need to be in place for decades in order for the adoption and long-term market penetration of alternative fuel vehicles to become significant and self-sustaining.

Jeroen Struben and John Sterman of MIT’s Sloan School are developing a behavioral, dynamic model to explore the possible transition from internal combustion engine (ICE) vehicles to alternative fuel vehicles (AFV) such as hybrids, plug-in hybrids, natural gas vehicles, flex-fuel vehicles and hydrogen fuel cell vehicles.

Results show that there is a tipping point in the diffusion of AFVs: successful adoption of alternative vehicles requires policies, such as subsidies for alternative vehicles and fueling infrastructure, that persist long enough to push the AFV installed base over a critical threshold. Efforts falling short of the tipping point will not lead to sustained adoption. We show that the time required to achieve self-sustaining adoption is long—on the order of several decades—primarily due to the long life of vehicles.

Current alternative fuel vehicle technologies face a number of significant challenges that the gasoline internal combustion engine did not when it emerged in the market more than a century ago in competition with steam and electric vehicles.

The current enormous size of the automobile industry and support infrastructure creates a wide range of powerful positive feedback processes, including vehicle improvements and cost reductions driven by scale economies; R&D; and improving vehicle performance, sometimes through the spillover of innovations developed for alternative fuel vehicles to the dominant ICE platform.

More subtly, the current low functionality and high cost of alternatives, and low gasoline taxes, are endogenous consequences of the dominance of the internal combustion engine and the petroleum industry, transport networks, settlement patterns, technologies, and institutions with which it has co-evolved. The success of internal combustion suppresses the emergence of alternatives, maintaining the dominance of ICE.

These feedbacks mean, as we argue here, that achieving self-sustaining adoption would be difficult even if AFV performance equaled that of ICE today. The challenge facing policymakers seeking to promote a transition to sustainable alternative vehicles is how to overcome the barriers created by these feedbacks.

The researchers suggest that the potential for self-sustaining adoption of AFVs may be greater in developing markets such as China and India where the installed base of ICE vehicles is smaller and growth is faster. Growth in the total vehicle market speeds adoption of AFVs.

The mature markets of US, Europe and Japan, however, face greater challenges, especially given the long life of vehicles. Policies aimed at removing older ICE vehicles from the market therefore could have high leverage, the authors suggest. A sustained increase in the price of oil might stimulate sufficient adoption of AFVs to push past the tipping point, they note.

The long time required for the AFV market to develop in the simulations, however, suggests that a successful transition to AFVs will likely require policies that raise the real price of gasoline to levels that reflect its fully internalized cost, thus providing the persistent incentive favoring AFVs needed to reach the tipping point.

This research was supported by the Project on Innovation in Markets and Organizations at the MIT Sloan School of Management, the National Renewable Energy Laboratory and Shell Hydrogen.

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June 2, 2007 in Electric (Battery), Fuels, Hybrids, Hydrogen, Policy | Permalink | Comments (39) | TrackBack (0)

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Academic Egghead study-If we declared war on gasoline, the time frame would shorten.

Of course, no unsubsidized technology can compete with the massive $5 to $15 per gallon subsidies we've given to petroleum fuels (not to mention the blood of our fallen soldiers):

http://www.icta.org/doc/Real%20Price%20of%20Gasoline.pdf

When these government subsidies are removed, people will have to pay the true costs for their consumption. This will happen when governments find the political will to force non-renewable energy consumers to stop stealing from the public trust.

Faced with "true pricing," people will snap up non-ICE vehicles faster than they can be manufactured.

Whatever.

If the government would just get OUT OF MY WAY, I would have an alternative fuel vehicle *today*. I would import a diesel defender 90 from Great Brittan and run it on bio-diesel and gladly stop sending my money to hostile foreign governments. But my betters in DC think that the vehicle is too unsafe, and my betters at the california clean air board don't like diesels unless they are gargantuan hummers or trucks that get 15 mpg.

Surprise, surprise: academics dependent on government spending think that more government spending is required.

Cheers,
prat

BlackSun:

That is a very outdated document that is more political polemic than a discussion of facts. Should we pay the cost of travel delays in our gasoline prices? The fact that they can only roughly estimate those costs within a full ten dollars per gallon is telling. Why can't they give any firm numbers?

About the only thing I can agree with is removing the direct subsidies and tax breaks to the oil industry. The rest is just politics.

Cervus, go read the whole report. You'll see why there is a wide range. It depends on what you are counting:

"The report divides the external costs of gasoline usage into five primary areas: (1) Tax Subsidization of the Oil Industry; (2) Government Program Subsidies; (3) Protection Costs Involved in Oil Shipment and Motor Vehicle Services; (4) Environmental, Health, and Social Costs of Gasoline Usage; and (5) Other Important Externalities of Motor Vehicle Use. Together, these external costs total $558.7 billion to $1.69 trillion per year, which, when added to the retail price of gasoline, results in a per gallon price of $5.60 to $15.14."

I think that's pretty clear and far from a polemic. (We should really be more concerned about its truth value, not whether or not it's a polemic.) The only reason I'd agree the document is outdated is because it was written in 1998 when the price of oil was $10/barrel. Now, we have to factor in not only the current market price of oil, but also the huge boondoggle of the Iraq war. So it's actually far worse than the report states.

Another passage is very instructive in this regard, and the authors of the MIT study should have addressed it rather than acting as if oil and the ICE were some sort of unsubsidized baseline case relative to AFVs:

"When the price of gasoline is so drastically underestimated in the minds of drivers, it becomes difficult if not impossible to convince them to change their driving habits, accept alternative fuel vehicles, or consider progressive residential and urban development strategies."

BlackSun:

When the costs discussed must be politically imposed, it becomes an inherently political document. They don't even consider the economic benefits that the automobile has given us in the past century--and whether those benefits outweigh the costs. It is therefore an entirely one-sided document and should be read with that bias in mind.

I agree with this. Out of more than 100 million vehicles out there, maybe 10 million will be "AFVs" as defined, in the next 10 years. We see the sale of Toyota hybrids going up and they have said that they will make a hybrid in all their models.

But then they show ads for the huge Tundra king cab hauling a semi trailer up over a cliff and talking very macho. They will go where people will buy. If that is huge powerful pickups and SUVs, they will be there.

I went through the MIT document.

Lots of correct modeling and math that, IMO, proves the bumble bee can't fly and planes can't sink battleships.

I think they over estimate the inertia of consumers to try the new. And mistake how buyers make decisions today. And how rapidly technology can evolve and facilities can be changed.

They refer repeatedly to what factors allowed the ICE to replace the horse and defeat the rival steam and electric cars of one hundred years ago. And how it happened over 2-3 decades.

They might examine VCR v. DVD. CD v. IPod. Cell phone v. phone booth.

Does the report consider a peak oil event?

"They don't even consider the economic benefits that the automobile has given us in the past century--and whether those benefits outweigh the costs."

So let's do a real cost-benefit analysis. Subsidies prevent people from actually weighing the two accurately. That's all I'm saying. Until people realize the extent of the subsidies, they are really only looking at benefits, while ignoring the bulk of the cost. This is why AFV's are such a hard sell to a general public who doesn't understand the full equation.

That is a very outdated document that is more political polemic than a discussion of facts.
Oh Really!!! Here's a document, January 2007, from the Conservative, National Defense Council Foundation. They say the the hidden cost of gasoline is $8.35/gal. That's $8.35 above what you're paying at the pump. The Hidden Cost of Oil: an Update

Spins this Cervus.

DS:

By and large, they use rather different measures as to what constitutes an externality. I don't see any mention of of social and environmental costs. Mostly they talk about job losses, investment losses. The only shared item is the defense expenditures. In other words, due to politics we can't even agree on what actually constitutes an externality. Therein is a big problem.

This group would support vastly expanded oil exploration in US territory and expanded domestic production. Something I doubt you'd agree to.

This group would support vastly expanded oil exploration in US territory and expanded domestic production. Something I doubt you'd agree to.

Non sequitur.

Aba:

My point is that political views influence what is considered an externality. The solutions to fixing them this group would seek are likely very different from what DS would consider a good idea.

This MPG increase the government is going to force on the auto makers will tie up more of their capital in trying to improve and produce an internal combustion engine. The automakers should be making capital investments in producing AFV (hydrogen, electric, ethanol, plugins) to reduce oil imports. The government needs to lead this effort with mandates and subsidies. AFV will consequently improve MPG

Subsidized fuel? Get real! Here in the U.S. and my state of California, fuel taxes are used to subsidize various socialist welfare schemes. If all of the fuel and user taxes/fees paid by motorists were put back into the highway system, we'd be driving on gold plated highways. The biggest profiteers in the oil business (just like the gambling, tobacco and liquor businesses) are the U.S. state and federal governments.

People in a free market economy will quit using petroleum fuels when it is uneconomical to do so. Corrupting the system with subsidies and price controls is a recipe for disaster. Didn't you dimwits learn anything from Dick Nixon's failed attempt at price controls?

I don't think most people are talking about fixed pricing. The federals subsidies for oil are what stands out as the biggest item in the report to me. I don't think there's many people that will say that it's right to subsidize oil companies.

I agree with the person that mentioned ipods and other new technologies. If the price and convenience are there any technology will be nearly instantly adopted by the people.

I filed it with the:Computers in the home will never catch on study.

Here in the U.S. and my state of California, fuel taxes are used to subsidize various socialist welfare schemes. If all of the fuel and user taxes/fees paid by motorists were put back into the highway system, we'd be driving on gold plated highways. The biggest profiteers in the oil business (just like the gambling, tobacco and liquor businesses) are the U.S. state and federal governments.

That's perhaps the most delusional comment I've seen in 6 months.

Many of the commenters here seem to prefer fiddling while Rome burns, and perhaps, while they are fiddling, they don't even notice the house that is burning down around them. For the young amongst you, good luck trying to bear the world you will be living in around 2050.

Can't we move beyond arguments about socialism and capitalism to confront and solve the issue which will doom both systems? We need to reduce our carbon emissions by at least 80%. Insert solution here. Hint. The free market will not get us there.

Someone please send this link to MIT team.
http://www.greencarcongress.com/2007/06/toyota_more_tha.html#more

Hybrids are selling like hotcakes and dont need any subsidies.

This team must have taken bribes from Oil company.

Maybe society pays a large number of dollars per gallon of fossil-derived motor fuel, on top of what motorists pay.

Such non-payment of the whole shot is a bad idea, but there's a flip side.

All the fuel-subsidy money that can be freed up with each billion gallons a government can persuade its subjects to substitute or conserve, that government is free to spend on other things. Secure jobs for cousins and brothers-in-law; beautiful young secretaries. Downtown apartments for beautiful young secretaries.

Now you know why they're so aggressive in speed limit enforcement and why cities and towns are laid out in such car-disdaining ways. Now you know why government support of alternative fuel R&D is so results-oriented.

tom:

If you truly want us to go "beyond politics" then you'll have to let go of your view that the free market will have no role in this. If we're going to do anything meaningful this means working with people you don't like. We're spending way too much time sniping at each other around here lately. It's hard to be productive in that kind of environment.

If you truly want us to go "beyond politics" then you'll have to let go of your view that the free market will have no role in this.

He didn't say it would have "no role" in this. He said "it will not get us there", meaning, in and of itself it is insufficient. This is obvious and borne out by ample years of experience.

Reading the MIT study, I found two fatally flawed assumptions:

1) On page 15, equation 9, the authors use a linear value of 1 to denote a constant desirability and acceptance of the ICE platform. This completely ignores what rising demand and finite supply will do to petroleum prices, or the reality of any new carbon-tax regime.

2) On page 31, the authors presume that any petro-gasoline price increases are simply spikes. The study is mostly couched in marketing terms. They make no allowances for practical effects and responses to any changes to the status quo. They theorize ICE consumer acceptance will be unaffected by drastic price rises (due to burgeoning demand and flat production worldwide, which looks to be the beginning of the global oil peak).

"For example, the petroleum and energy markets are prone to large price fluctuations caused by lags in the adjustment of demand and supply to price (Sterman 2000, Ford 1999). The high real oil prices of 1973-1984 led to large improvements in vehicle efficiency. Similarly, the rise in real oil prices beginning in 2005 might stimulate AFV adoption enough to push the industry past the tipping point so that diffusion becomes self-sustaining even after real oil prices fall back."

Making these kinds of assumptions given the geopolitical situation, the fact that the U.S. now imports 2/3 of its oil and a growing percentage of finished gasoline, and the tight worldwide markets seems the height of ignorance. They have ignored the elephant in the room. If this was simply a marketing study, I'd say they were correct. But "consumer choice" is going to be trumped very soon by necessity.

The authors also acknowledge on page 2 that the slow adoption of AFV's is directly related to subsidized gasoline:

Certainly the high cost and low functionality of alternative fuel vehicles (AFVs) compared to ICE limits their market potential today because gasoline is priced below the level that would reflect its environmental and other negative externalities, particularly in the US. More subtly, the current low functionality and high cost of alternatives, and low gasoline taxes, are endogenous consequences of the dominance of the internal combustion engine and the petroleum industry, transport networks, settlement patterns, technologies, and institutions with which it has coevolved. The success of internal combustion suppresses the emergence of alternatives, maintaining the dominance of ICE.

We are simply reaching a time when our government's capacity to continue these subsidies is going to evaporate in the face of rising deficits,stiff foreign competition for energy resources, and global adoption of climate protection measures. In this sense, the free market simply being allowed to operate without subsidy will solve the problem.

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