Thursday, September 29, 2005

A better way to reduce pollution

The other day I wrote about the economics of buying a Prius to save gas.

I wanted to figure out how much it really costs to reduce pollution, if it is done in the most cost effective manner. I am certain that big companies know how to reduce pollution for the smallest possible price. Companies must buy pollution vouchers. A limited number are auctioned off every year, so the price of the vouchers must reflect industries best estimate of what it costs to reduce pollution. If they could do it cheaper, they would not pay that much for the vouchers, and if it cost more to reduce pollution, the auction price would be higher. There is a web site for people who feel guilty about their car emissions. They can pay for some of these vouchers, which reduces pollution from other sources equal to what their car generates. I believe that this reflects the most cost-effective way to reduce total pollution.

As I said in my blog, the Prius sells for $4,400 more than is economically justified. This premium can only be explained as buying the feel-good illusion that you are doing something good for the environment. But how much CO2 production are you preventing, and what is the cost per pound? The terrapass site says that a Prius produces about 6,000 pounds of CO2 a year, and an average car produces 12,000 pounds. The difference is 6,000 pounds per year. If you drive the car for 8 years, you have reduced emissions by 48,000 pounds. The cost per pound is about 9 cents.

But what if I took that $4,400 and bought vouchers? Currently a voucher for a metric ton of CO2 costs $1.91. Instead of 48,000 of CO2 reduction, I could buy vouchers for 1,754,756 pounds of CO2, at a much better price of 0.08 cents per pound. Instead of eliminating half the emissions of one car, I have eliminated the emissions of 11 full-sized SUVs.

However, I have an even better idea. Buy a Camry instead of a Prius. If you are concerned about the environment, buy one TerraPass. Then put the remaining $4,350 in a retirement account invested in an S&P500 index fund. Put your money to work for you in the greatest wealth-generating machine that ever existed. The benefits will last much longer than any car.

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