Markets are great – but the true costs of our fuel choices are not reflected in the price

There an argument that is often repeated, and sounds pretty logical when you first hear it: we should let consumers pick which fuel technologies win, thus letting the market do its work. President Obama's recent announcement on a Clean Fleet Partnership promoted a flurry of stories and editorials arguing this exact point.

In the auto industry, the reasoning continues: set the fuel economy targets, encourage the auto makers to compete and let innovation be the factor that separates the winners from the losers. The problem is that this over-simplistic view assumes that markets correctly price the total cost of each fuel that consumers might choose. Unfortunately, markets don't.

In today's world of transportation fuel choices, we're seeing a growing proliferation of alternatives, with each of those choices having consumer economics and societal economics that are dramatically different. Our markets and present transportation policies just aren't sophisticated enough to price in the direct and negative indirect costs of each of these choices.

Let's take corn ethanol. Certainly, second-generation biofuels have great potential as automotive fuels. But they've been "just around the corner" for years now and may stay that way for a long time. When I lived in Brazil running Ford's South American operations, I was a strong advocate for the sugar cane-derived ethanol that was used in the flex-fuel cars that have become pretty much standard in that country. But ethanol derived from corn is drastically inferior to sugar cane ethanol – and its overall carbon efficiency is neutral at best and negative at worst. It can take more energy to produce a gallon of corn ethanol than the energy you get back from it. Continue reading...

[Image: ToastyKen – C.C. License 2.0]

So how do we treat corn ethanol? We subsidize it to the tune of $5.8 billion each year. So why don't we use the more efficient Brazilian sugar cane ethanol? Because there's an import tariff of 45 cents per gallon. This means we have "free trade" in fossil fuels from the Middle East or Venezuela, but heavy protection to avoid imported ethanol from more efficient producers.

Gasoline, too, has heavy market distorting subsidies of $3.6 billion each year which mean that prices paid by consumers don't fully reflect the cost of obtaining it. More efficient diesel engines are all the rage in Europe – driven mostly by diesel fuel prices that are significantly lower than gasoline prices in many countries through generous tax breaks originally intended to support farmers, but which now are available to all diesel users. Modern diesels certainly are incredibly efficient, fun to drive and much cleaner and quieter than many people remember, but the air quality issues from particulate matter (PM) are estimated to cause between 22,000 and 52,000 deaths per year in the United States and 200,000 deaths per year in Europe. In the UK's air pollution hotspots, the most vulnerable people's lives are cut short by up to nine years, with 70 percent of that pollution coming from transport.

So, when I pull up my car at the pump (or power outlet), am I really meant to take all of this into account as an individual consumer and make my choice? Impossible. We need a thoughtful energy policy that's developed not according to the power of the lobby group, but guided by scientists and policy makers that can help markets reflect the true cost – both to consumers and to society – of the fuel choices we make. Markets can then do their work to help stimulate innovation and competition and consumer choice will help pick the winners. First and foremost, we need legislators brave enough to understand the facts and get it done.

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Richard Canny is the former CEO of Norwegian electric vehicle developer Think. He joined Think in August 2008 and was CEO of Think Global and Think North America from October 2008 to October 2010, and was Vice Chairman of Think North America until January 2011. Prior to joining THINK, he accumulated a wealth of automotive experience to from a 25-year career at Ford Motor Company where he held key leadership roles in all the world's major automotive manufacturing regions.

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