The Global Issues of Fuel Dependency and Climate Control - Essay Example

? Discussion: Should cars be more efficient? and Number Introduction The global sales volume of new passenger cars reached 58.7 million units in 2010 an increase of 11.4% over 2009, and is expected to increase by 3% in 2011 (Volkswagen, 2011). Further, the estimated number of cars in operation worldwide is expected to reach 1.25 billion by the end of 2015 (TMR, 2011). The sheer numbers suggest that the debate on making cars more efficient has significant impact for all stakeholders – manufacturers, consumers, governments, – global fossil fuel dependence, and climate control. The case for making the cars more efficient finds its roots in two of the larger global issues – modern world’s dependence on depleting fossil fuels, and the impact of emissions on global climate. The proponents of making cars more efficient stress on the impact of cars on these two factors, and the opponents base their opinion on the huge investments needed to do so, and behavioral aspect of technology improvements. While both arguments seem to be strong, in the larger interest of sustainable development, the case for making the cars more efficient definitely seems to have an edge, on the face of it. This paper evaluates the two sides of the argument - whether (or not) cars must be made more efficient. Arguments “For” making cars more efficient The proponents for making cars more efficient base their arguments on three main pillars – decreasing dependence on fossil fuels, reducing greenhouse gas (GHG) emissions and helping climate control, and savings for the consumer and the government. Below each of these pillars are discussed in detail. Decreasing dependence on fossil fuels: The global oil reserves stand at 1.33 trillion barrels and the current global consumption rate is 84 million barrels per day (Rogers, 2010). Accordingly, the current oil reserves are expected to last no more than 44 years. This clearly means that we need to work today to ensure that our dependence on oil can be gradually faded away. Amongst the uses to which oil is put, Gasoline accounts for nearly 45% of all oil use – and this is mainly for transportation purpose. According to McKinsey (2007), the road transport sector is the largest oil consuming sector globally and consumes nearly 32 million barrels of oil per day. Within the road transport sector, light vehicles (cars) were responsible for 10 million barrels of oil use per day. Another output from the McKinney study was to compare the oil demand due to different fuel efficiency of cars in Europe and US. Generally, cars sold in Europe are more fuel efficient than those in the US as the US customers prefer larger vehicles. It was found that the lower fuel economy of cars in the US was responsible for 37% extra demand for oil in the US. This means that if the cars in US were to be as fuel efficient as those in Europe, the demand for oil in the US could go down by 37%. Further, the study estimates that without improvements in fuel efficiency, this gap is expected to increase to 42% by the end of 2020. Therefore, the onus of reducing the global dependence on oil is largely on transportation sector and specifically on cars - it is a natural obligation for the transportation sector to reduce the consumption of oil. Therefore, cars must be made more fuel efficient so that we can reduce our dependence on these depleting resources and make them last longer than they would at current rate. Reducing GHG emissions and climate control: Estimates suggest that the transport sector is responsible for 27.3% of global energy demand. Table 1 shows the details of energy demand per sector. Although it is below other sectors by pure numbers, the reality is however slightly different. In the other sectors, power transmission losses (which are due to production constraints) get added due to which their weight appears to be more. Therefore, from a pure demand perspective, the transport sector is a significant silo for global energy demand. Table 1. World energy use by sector 2000 2008 2000 2008 in TWH (Terra Watt Hours) in % Residential and service 30 555 35 319 37.3% 36.0% Industry 21 733 27 273 26.5% 27.8% Transport 22 563 26 742 27.5% 27.3% Non-energy use 7 119 8 688 8.7% 8.9% Total 81 970 98 022 100% 100% Source: IEA 2010 According to McKinsey (2007), the road transport sector was responsible for 4,600 million tons of CO2 emissions in 2003 (19.5% of global CO2 emissions), and at the current rate, it is expected to increase by 2.2% every year. At this rate, by 2020, the road transport sector would be responsible for 6,200 million tons of CO2 emissions. Within the road transport segment, the fuel demand from light vehicles (cars) is 57% of the total although this number varies widely from one country to another. Thus, at current estimates, by 2020, cars would be responsible for 57% of 6,200 million tons = 3,534 million tons of CO2 released. These numbers clearly show that focusing on making more efficient cars is a must if we are serious about global warming and climate change issues. Savings for the consumer and governments: Another important argument for the case of making cars more efficient is the economic effect of more efficient cars. It is a well known fact that as the price of oil increases, the demand for it decreases. Therefore, there is definitely some, if not high, price sensitivity of the consumers to oil. An improvement in efficiency of cars means consumers would need to spend less to drive the same distance. This saving not only has a positive effect for individual customers for the entire world economy. Savings made on fuel cost can be spent for other items therefore increasing global demand of other goods. An average household in the UK spends ?28.8 per week on personal transport (The Guardian, 2008). This is equal to nearly ?1500 per year. The magnitude of cost saving due to improved efficiency of cars could be immense when we consider the entire population in UK. This is not specific to UK alone. Similar observations are made for other countries too. From the government’s perspective, most of oil reserves are in a handful of countries which export oil and earn money. Other countries spend money to import this oil. An increase in the efficiency of cars means positive growth for both types of countries – importers and exporters. For importers, it means lower trade deficits and for exporters it means their key export item can last longer. For governments that save money on the import of oil, they can spend this money elsewhere public welfare projects. In the US for example, according to IAGS (2011), over the past thirty years, the oil imports have cost the US $7 trillion leading to a trade deficit with oil producing countries of $1.7 trillion. According to National Defense Council foundation, the cost of US dependence on oil is $304.9 billion per year. Further, the Department of Energy estimates that every $1 billion of trade deficit cost the US 27,000 jobs! Even a decrease of 1% in demand for oil then means a trade deficit lower by $3 billion which is equivalent to 81,000 jobs in the US. These numbers are of extreme significance especially in current times when the unemployment rate in the US is close to 9%. By making cars more efficient, the potential for savings for both households and governments is immense. These savings would only mean more jobs, and more growth in the economy. Other reasons: There are several other arguments that build the case for making cars more efficient. These include: a) Improving the efficiency of cars does not necessarily have to mean huge investments for automobile manufacturers without any incentive. Governments can provide tax incentives for these companies to invest in the research and development of efficiency of cars. b) Consumers would be ready to pay a nominally higher amount for the improved efficiency – although the auto makers should not expect the price difference to be significantly high. c) Overall transport efficiency can be improved not just by making new cars that are more efficient. Several other measures can be taken to improve the overall fuel efficiency of cars globally. Governments could introduce mandatory norms for retrofitting old cars with some devices that improve the fuel efficiency. Further, global norms could be introduced that disallow usage of cars older than a set limit (15 years for example). Arguments “Against” making cars more efficient Those against making cars more efficient base their opinion of three key arguments. These are – the cost of making the cars more efficient for manufacturers and governments, an increase in efficiency would increase the usage of cars thereby annulling the effect for better efficiency (rebound effect), such moves make the market less competitive, and more efficient cars would decrease road safety. Below are the details of each of these arguments. Cost of improving efficiency: There is no doubt that the investments needed to improve the fuel efficiency of cars are huge. Further, the cost of having more fuel efficient cars is not just limited to the research and development cost of getting a new technology but there is also cost for changing the production norms and changing suppliers who can provide this technology. In the end, these costs must be borne by someone – manufacturers, governments, and consumers. Due to the high cost, no stakeholder would want to bear all the cost. From the customer point of view, an increase in efficiency of 10% would mean a saving of $ 2,500 over the lifetime of a vehicle as shown in the calculations below. Number of kilometers run by the vehicle over lifetime: 200,000 Normal fuel efficiency of cars: 30 miles per gallon 10% improved fuel efficiency: 33 miles per gallon Difference in amount of fuel used over lifetime: 606 liters Total cost of 606 liters @ $4 per gallon = $ 2,424 So, an average customer would save about $2,500 by using a car that is 10% more fuel efficient. Simple economics suggests that this is the maximum premium that the customer would be ready to pay for such a vehicle over a non-efficient one. This difference is however, not sufficient to cover the billions that companies would need to spend to have the technology that would allow 10% fuel efficiency. So, the government must provide incentives to manufacturers to invest in research and development. From the government’s perspective, it would be better off in investing these subsidies/incentives on other projects that reduce the fuel consumption such as building better infrastructure that prevents traffic jams or that promotes public transport usage, which is bound to give much higher returns than simply increasing the efficiency of cars. Increase in efficiency means more usage of cars: Another argument for opposing improving the efficiency of cars is that as the cars would consume less fuel, people would be more willing to take their cars for weekends or even to work. Therefore the gain in lesser fuel used per mile of running the car would be offset by more miles run by the consumers. This paradox is also known as the “rebound effect” (Gavankar & Geyer, 2010). The US National Highway Traffic Safety Administration estimates a rebound effect of 15%, while others place the figure for rebound effect at close to 30% for cars (Bialik, 2009). A 30% rebound effect means that if the fuel efficiency of the car increases by 10%, the net gain in fuel efficiency would be only 7% because the rest would be lost due to more usage of cars. Therefore, the absolute gain from improving the efficiency of cars is much less. This indicates that efforts to reduce fuel usage must be diverted elsewhere. Makes the market less competitive: Among the car manufacturers around the world, some concentrate on making bigger cars which are less fuel efficient (German manufacturers like Mercedes for example) and others concentrate on smaller cars that are comparatively more fuel efficient (French car makers like Renault for example). Adopting a cross-industry standard for reducing fuel consumption would mean that the big car makers would suffer a lot more than the small car makers. This would make them less competitive and in the end the consumer would lose due to a sort of “monopoly” for the small car makers Road safety would be compromised: Generally, the fuel efficiency of a car depends on its weight, among other factors. However, heavy and sturdy cars are safer on road than lighter cars. If the manufacturers are forced to increase the fuel efficiency, they would make the vehicles lighter in weight. This would mean make the vehicles would become less safe on the road. Conclusion Both sides of the arguments for making (or not) the cars more fuel efficient are strong and have logical reasons to defend their positions. However, in the larger interest of sustainable development, I would agree with the proponents for making cars more efficient. My agreement with the proponents is based on the fact that most of the arguments against making cars more efficient seem to stem from a more capitalistic point of view rather than a holistic view of the global problems - while the proponents’ arguments seem to support a long-term view of tackling the global issues of fuel dependency and climate control, the opponents’ arguments seem to support a rather short-term view of capital costs, and market competitiveness. Further, some of the arguments of the opponents (market competitiveness, road safety, and rebound effect) are based on hypothesis and speculation rather than facts, while the arguments of the proponents are based on facts and figures that support the cause. Thus, I agree that the cars should be made more efficient – not only the new cars but also the existing fleets of cars. References Bialik, C. (2009, May 27). To Gauge Oil Savings, Economists Road Test the 'Rebound Effect' . Retrieved November 9, 2011, from The Wall Street Journal: http://online.wsj.com/article/SB124338431100556717.html Gavankar, S., & Geyer, R. (2010). The Rebound Effect: State of the Debate and Implications for Energy Efficiency Research. Institute of Energy Efficiency (UCSB). IAGS. (2011). How much are we paying for a gallon of gas? Retrieved November 8, 2011, from Institute for Analysis of Global Security: http://www.iags.org/costofoil.html IEA (International Energy Agency). Key World Energy Statistics 2010. pp24, 32-37. McKinsey. May 2007. Curbing Global Energy Demand Growth: The Energy Productivity Opportunity. McKinsey Global Institute, McKinsey & Company. Rogers, S. (2010, June 9). BP energy statistics: the world in oil consumption, reserves and energy production. Retrieved November 8, 2011, from The Guardian: http://www.guardian.co.uk/news/datablog/2010/jun/09/bp-energy-statistics-consumption-reserves-energy The Guardian. (2008, November 26). Rising transport costs dominate family expenditure. Retrieved November 9, 2011, from http://www.guardian.co.uk/money/2008/nov/26/family-finances-household-bills-consumer-affairs TMR. (2011). World car fleet expected to reach 1.25 billion by 2015. Retrieved November 8, 2011, from http://www.themotorreport.com.au/3461/world-car-fleet-expected-to-reach-125-billion-by-2015 Volkswagen. (2011). Global Automotive Industry Performs Better Than Expected. Retrieved November 8, 2011, from http://annualreport2010.volkswagenag.com/managementreport/businessdevelopment/globaldemand.html Read More