Electric carmaker Tesla just announced its first profitable quarter. I also learned it was able to add $40.5 million to its bottom line for selling pollution credits to other auto makers.
States like California have a zero emission requirement for a proportion of the cars sold by each automaker. Too small to have the emission mandate, Tesla sells its credits to other auto manufacturers. The pollution credits are earned (or owed) with each car sale.
Both accomplishments started me thinking about tradeoffs. Electric cars are environmentally friendly because they do not spew carbon emissions. They might be less friendly, though, than most of us expect.
Here is the story:
The environmental impact of an electric car starts sooner and ends later than its road life. One academic study concluded that, “The supply chains involved in the production of electric powertrains and traction batteries add significantly to the environmental impacts of vehicle production.” It added that vehicle parts disposal and material add to cost. But, researchers also said that some vehicles can be so environmentally beneficial that they offset the costs.
How then to assess a firm’s environmental ledger? With Tesla, we can place a federal loan, the state carbon credits, manufacturing and disposal on the liability side. Its benefits focus on road use.
Our bottom line: Looking at environmental friendliness, we might not see the hidden tradeoffs.
Sources and Resources: The name Tesla and its image belie a more complicated story. Supported by government subsidies and benefiting from carbon credits, Tesla is a perfect example of the complexities of assessing environmental impact. The academic article on “cradle to grave” considerations, a WSJ article and a Timothy Taylor discussion are, respectively, here, here, and here. As a result, this and this article about Tesla were only a part of the environmental story.
Sometimes green incentives can have unintended consequences.
Our story begins in an airport. About to board a flight, an environmentally concerned individual purchases “carbon offsets.” Yes, that flight will pollute the air but the offset could be used to fund a project that reduces emissions. The offset purchase is the incentive. It encourages others to pollute less if the payment is more than the reduction costs. Yes?
Unfortunately, firms that produce air conditioning coolants figured out how to use payments for polluting less to pollute more. Located in countries ranging from India to Mexico, plants producing gases used in air conditioning and refrigeration started making more coolant than they otherwise would have produced. Then, by capturing and destroying harmful waste gases, they could get thousands of “waste gas credits” from the United Nations. Selling the credits made them millions of dollars. Meanwhile the buyer of the credits could now legally pollute. The result? Some of the producers are overproducing the coolant to get huge waste gas credit revenue.
Another air conditioning story that we looked at recently also had unintended consequences. Hoping to reduce pollution, Mexico subsidized low emission air conditioner and refrigerator purchases. Because they were so cheap, though and because electricity was also inexpensive, people ran them longer than the inefficient units they had previously used. The result? More emissions.
But the last chapter of our story has a happy ending. Its unlikely title is the Environmental Kuznets Curve. Connecting more affluence in poor nations to pollution, the curve reflects data showing that as people become richer, first their country pollutes more and then it pollutes less. Why? More affluent households have greater political power. More affluent countries have the resources to lower pollution. The turn around point seems to be average annual income of $11,000 in 2007 dollars.
In a second happy ending, the European Union has announced that it will prohibit coolant producers from purchasing waste gas credits for manipulated emission reductions. I am concerned, though, that people will outmaneuver whatever solution regulators figure out as a replacement.
This academic paper and this paper tell more about Kuznets Curves. My facts about coolant producers are based on this excellent NY Times article. I also recommend 2 Teaching Company lectures from economist Robert Whaples about pollution.
Posted by: adminEcon
Tags: carbon credits, CO2, environment, environmental Kuznets curves, global warming, HFC-23, incentive, India, industrial gases, marginal analysis, pollution, United Nations