GFEI report suggests $2T savings from fuel economy improvements in ICE vehicles through 2025 can help fund long-term transition to plug-ins
Fuel economy improvements from conventional internal combustion engine cars can save an estimated $2 trillion in fuel costs through 2025—and more in years after—according to a new working paper published by the Global Fuel Economy Initiative (GFEI) prepared by Dr. Lew Fulton, Co-Director, NextSTEPS Program at the Institute of Transportation Studies, University of California at Davis.
The GFEI, a partnership of international agencies and top energy policy experts, suggests that these cost savings could in part be used to help offset the costs of developing a global market for electric vehicles over this time frame, since the savings are estimated to be at least four times bigger than these costs.
Increasingly efficient conventional combustion-engine vehicles will be key in moving towards a low carbon future, according to the GFEI. Plug-in electric vehicles are promising and sales have started, but it will take time to reach very large volumes, and will likely require strong incentives over the coming decade to reach a fully competitive point.
Meanwhile, significant gains in vehicle fuel economy over the coming decades are possible and very much needed globally in order to address pressing issues of climate change, energy security and sustainable mobility. The global vehicle fleet is predicted to double by 2050 with 80% of that growth in the developing world. Far better fuel economy from cost-effective conventional technologies can keep fuel demand steady and save close to half the CO2 emissions from cars by this date.
According to the GFEI paper, improvements to conventional vehicles, including but not limited to hybridization, could achieve a 50% reduction in fuel use per kilometer for new cars by 2030, in line with GFEI targets. However after 2030, strong growth in PEVs and other very low‐carbon fuel vehicles will be needed to continue to decarbonize LDVs and reduce oil use out to 2050 and beyond.
Achieving a 50% improvement in new car fuel economy around the world in the 2025-2030 time frame would cost an estimated $3 trillion for new technologies, but would save $5 trillion from fuel savings for net savings of $2 trillion globally in that time frame, with much more in years after.
After 2030, plug-in electric vehicles along with other technologies such as fuel cells may become dominant and eventually provide more CO2 savings at a lower net cost than fuel economy improvements to conventional vehicles. But to get there they will need to be subsidized, perhaps for another decade.
The paper estimates PEVs to have a total incremental cost close to $500 billion between 2015‐2025. While this would be paid back by fuel savings, Fulton assues that to sell the cars, the full $500 billion would need to be offered as incentives to prospective buyers.
For a PEV subsidy of $500 billion from 2015‐2025, this would require an average tax (or fee) of $500 per vehicle for all vehicles sold (projecting sales of 1 billion vehicles)—slightly higher if PEVs are not charged a fee.
Such a tax or a fee across all new car sales would provide enough to create a $10,000 per vehicle subsidy for the estimated 50 million PEVs that would be sold over this time frame. Over the same time frame, drivers of conventional cars will save about $2 trillion net from fuel economy improvements, or roughly $2,000 per vehicle. Thus a $500 tax would still allow consumers to keep 3⁄4 of fuel economy-related savings.
In other words, Fulton argues, the cost of subsidizing PEVs through 2025 would be one-quarter of the savings from fuel economy improvement.
In essence, a small share of the savings from fuel economy improvement could be used to fund the transition to PEVs. This does assume that no subsidy would be needed for PEVs after 2025—and in fact it would be important that the subsidy phase down over time in line with reductions in the incremental cost of PEVs. The $500 per car assumed here represents an average over the time period, that might be higher for some years then start to decline.
There are a number of other concerns with such a scenario. One is that consumers won’t directly see the fuel economy savings—all such savings are relative to a future that doesn’t happen—the “contrapositive” case. Although consumers will spend far less on their combined vehicle and plus fuel purchase costs, they won’t ever experience the higher net costs that would have occurred under a no-fuel-economy-improvement case. Thus they may not realize how much they are saving; but they will very likely notice the direct vehicle tax they are paying in the above scenario. This suggests that a mechanism, such as a publicity campaign, may be needed to raise awareness.
Alternatively, a feebate type approach, with subsidies given to PEVs and other low-carbon, fuel efficient vehicles and a tax on higher fuel-consuming cars (and a still higher tax on extreme “gas guzzlers”) that averages $500 per taxed car to pay for the PEV subsidies would certainly be possible. A feebate design would also make the fuel savings more explicit and essentially provide this benefit up front, in the form of a rebate. Such a system will not only help people understand the combined economics better but provide a very clear price incentive for fuel economy and for PEVs, and may be more publicly acceptable (even popular, as feebates already have proven to be in some countries).—GFEI working paper
An alternative to a feebate that could raise similar revenue is raising fuel taxes by around $0.07 per liter ($0.26/gallon US), according to the paper.
We know that a 50% improvement in vehicle fuel economy worldwide is both technically achievable and cost effective. What we’ve now shown is that the financial benefits of this move could be staggering. With smart policies such as a feebate scheme, the financial benefits could be leveraged, and it would provide the answer to an electric vehicles market that currently does not have such a positive outlook. If the question is ‘how do we move to a low carbon future for vehicles?’, this could be the answer.—Lew Fulton
The Global Fuel Economy Initiative exists to promote debate and discussion around the issue of vehicle fuel economy. The GFEI is a partnership of the UN Environment Programme (UNEP), International Energy Agency (IEA), International Transport Forum (ITF), the FIA Foundation, the International Council on Clean Transportation (ICCT) and the Institute of Transportation Studies at the University of California, Davis.
Lew Fulton (2013) How vehicle fuel economy improvements can save $2 trillion and help fund a long-term transition to plug-in vehicles