India’s Ambitious Target For Only Electric Cars By 2030 – Stern V Nordhaus All Over Again – Forbes

Posted: Sunday, April 30, 2017

The power minister, Piyush Goyal, has suggested that India has a target that only electric cars should be operating by 2030 in the country. Which is an interesting little illustration of the difference between the Lord Stern and William Nordhaus approaches to the same problem. Should we be trying to work with the capital and technological cycle or not? The Nordhaus answer is yes, we should, it will be a lot cheaper that way.

Note that my point here is not about climate change itself nor the desirability of doing something about it. This is purely about the economics of how we organise what we’re going to do once we’ve decided to do something. And in one sense India is wrong by the standards of both approaches, in another right by one and wrong by the other. One report says:

Would you believe, if we told you that by 2030, you won’t see even a single petrol or diesel car running on the Indian roads? Well, that’s the vision planned for the country by Piyush Goyal, Minister of State with Independent Charge for Power, Coal, New and Renewable Energy.

No, not really, that’s not what the suggestion is:

“We are going to introduce electric vehicles in a very big way. We are going to make electric vehicles self- sufficient like UJALA. The idea is that by 2030, not a single petrol or diesel car should be sold in the country,” Power minister Piyush Goyal said while addressing the CII Annual Session 2017.

That is what the suggestion is and it’s a neat way of illustrating the difference between the Stern and Nordhaus proposals. Both say that the solution is a carbon tax (no, again, let’s not debate this, it’s the next economic point I want to consider). But how do we organise that tax? Stern says make it at the social cost of carbon now and keep it there. Nordhaus says start much lower today and then promise to raise it much higher into the future. Nordhaus is correct here by the way.

For we’ve already invested in a certain amount of infrastructure. Here the example is cars that already exist. They have some future lifetime and if we junk them before we would have done otherwise that’s a cost to us. The same is true of power stations, buildings and so on. We do indeed need to change future behaviour but it is the next generation of whatever that we want to be non-emitting, not what we’ve already got built which is usable.

Imposing the tax now to make people junk extant working items is more expensive than imposing a tax which makes people change what they buy next time, while using up the current machinery over its economic life. That is, we want to work with the capital and replacement cycle, not abort it. And thus Nordhaus is right. We still end up where we want to be, with a non-emitting society, but we’ve used up the economic value of the current structure, not destroyed it, in the process.

And thus the not so subtle difference between the two car proposals. Insisting upon only electric on the roads by 2030 would be expensive. Because it would mean that a patrol car sold in, say 2028, would only have 2 years of life before being junked. Insisting upon only electric cars being sold from new after 2030 means that we still get that use of the sunk cost of the current fleet over its normal working life. Up into, say, 2040 or 2045. It’s simply cheaper to get to the same end goal this way.

Of course, by both standards, both Stern and Nordhaus, the decision to insist upon electric is wrong. The entire point of taxation as the insistence is to leave open any technological solution that is non-emitting. From previous work I know an alarmingly large amount about fuel cells for example, and I most certainly wouldn’t want to bet on their not being a potential solution. Thus near all the economic work about what to do next insists that, again it will be cheaper, if we simply tax the emissions out of existence and just wait and see what the market comes up with as the solution rather than trying to pick technologies through the fog of uncertainty.

But then that’s why economists like the market system in the first place. We just don’t know–so, better to set the ground rules and see what happens rather than trying to plan what people should be doing.

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