Posted by: bmeverett | January 26, 2010

Turning over a new leaf


Later this year, Nissan will introduce the Leaf – an all-electric car. Get it? Leaf? Green? Carlos Ghosn, Nissan’s CEO, says that the Leaf is about “preserving the planet.” Is there anybody left in this world who really believes that a profit-making corporation invests for purely altruistic, environmental motives? Maybe not, but Nissan isn’t taking a huge risk to bring an innovative, environmentally friendly vehicle to market?

As always in the world of corporate greenwash, the reality is ugly. Let’s go back to Econ 101. In a market economy, investors take risks with their own money. They place a bet that what they produce is worth more than it costs. If they succeed, they can keep the difference as profit. If they don’t succeed, their investors and bankers have to eat the loss. If I choose not to invest in their venture, their loss is not my problem. That simple mechanism is what makes the US a wealthy country.

Is that what Nissan is doing? Taking a gamble with their shareholders’ money? In a word, no. They talked the US Department of Energy into giving them a $1.6 billion loan to build a 200,000 vehicle-per-year production facility in Smyrna, Tennessee. The US Government essentially borrows that money from China at about 5% per year, requiring interest payments of $100 million annually or $500 per vehicle produced. Who pays that? You do.

That’s not the worst of it. The US Government also offers consumers a $7,500 per year tax credit to buy an electric car or a plug-in hybrid. You also pay for that. Where will you be able to plug in your new Leaf? About 11,000 charging stations are to be built in strategic markets for the Leaf by Electric Transportation Engineering Corp (eTec) at a cost of $100 million. Who pays for that? You do, via a grant from the US Department of Energy.

If the Leaf is a rousing success, Nissan gets to keep the profits. If it falls flat on its face, you have to pick up the tab.

Why exactly is the US Government doing this? Well, if you ask the Department of Energy, I’m sure they will patiently explain that this “seed money” will help to develop a new technology that will help us fight climate change and free us from dependence on imported oil. Are electric cars a good answer to these problems? Well, let’s have a look at the economics before the federal government starts distorting them. We don’t really know what the Nissan will cost to produce, but we can make an educated guess. The Leaf is roughly the size of a Toyota Corolla. With a 24 kilowatt-hour (kWh) lithium-ion battery costing about $600 per kWh, the battery itself would cost about $14,000. Let’s say the whole electric drive system costs $15,000, so a Leaf would cost that much more than a conventional gasoline Corolla. If your car loan is for 10 years at 6.5% interest, the Leaf will cost you an additional $2,100 per year in car payments.

How much do you save in fuel? Well, if you drive 15,000 miles per year, a Corolla at 30 miles per gallon would require 500 gallons of gasoline at about $2.75 per gallon for an annual fuel cost of $1,375. The Leaf would use about 0.3 kWh of electricity per mile, requiring 4,500 kWh per year at an average price of 11.5¢ per kWh or a total of $517.50 in fuel costs per year. In other words, for $2,100 more in car payments, you save $800 a year in fuel. Few if any people would buy this car without the massive government subsidy, which will reduce the owner’s cost by just over $1,000 a year. Even this subsidy may not make the car economical, but some people will buy any cool new gadget and some people will want to “go green.” For the average American on a budget, however, this car is a non-starter.

How about greenhouse gas emissions? Nissan trumpets the leaf as a “zero emission” vehicle. Really? The car itself would emit no gases, but fuel has to be burned to generate the electricity that charges the car’s battery. Let’s make a favorable assumption that all additional power required for electric cars is produced by natural gas. (Nuclear would be better, but we won’t be able to build more than a handful of nuclear plants over the next 20 years.) Providing 4,500 kWh of power to a residence would require on average 40 million British Thermal Units (Btus) of natural gas emitting just over 2 metric tons of CO2 annually. Since the vehicle costs $1,300 more per year ($2,100 in car payments less $800 in fuel savings), our carbon dioxide savings cost $650 per metric ton. Is that price high or low? Well, just for comparison, the Senate version of the “Cap and Trade” bill seeks a maximum price for carbon emissions of $28 a ton. From that standpoint, the Leaf looks like a loser.

How about solar or wind power to generate electricity? These technologies emit no carbon dioxide, but they are prohibitively expensive. For example, if you installed solar panels on your roof, the electricity to fuel your Leaf would cost roughly $2,000 annually, much more than the gasoline to fuel a conventional car.
The Leaf makes sense only if you believe that actually building electric cars will make them cheaper. Maybe, but unlikely. Doubling or even tripling production of Mercedes would not put them within the grasp of the average consumer. Nissan has a sweet deal from the US taxpayer, and if the Leaf turns sour on them, they are much more likely to run to Washington for more assistance than to spend a lot of money improving the cars. We are indeed turning over a new leaf in the US automotive industry. The car manufacturers and the government will get together and decide what’s good for you. This should be as popular as Obamacare.

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Responses

  1. This article should become a required readings for all attending your class – it’s a great summary (above all) of the lectures on electricity, alt. fuels, etc. Hope all is well. JH

  2. I’m so glad that I came across your excellent analysis of the way things are in the greenie-car arena. The costs of supporting this stuff (by all of us) has to be considered, and you really figured it out and put it out there very well.

    One thing that’s missing, though, is all the costs we pay in maintaining the status quo… Each gallon of gas has its own share of hidden costs, too. As a nation, the US spends about $2,500,000 a year on gasoline for cars, but for every two or three bucks for gas that we “Shell” out at the pump, there’s ten or so that get squeezed out of us in other less noticeable ways.

    http://www.iags.org/costofoil.html

    • I’m not sure I agree with the argument about ll the hidden costs of gasoline. There are of course issues like pollution that need to be addressed. It’s my view, however, that these costs are relatively small compared to the social and economic value of mobility.


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