University of Copenhagen: Large, economic wheels must be turned to make way for green cars

Which economic levers do the politicians have to pull to move people from fossil driven cars to electrified cars? That is the main question for the GREENCAR research team at the Department of Economics. There are several pitfalls – some ‘green’ solutions even turn out to be carbon black.

In a series of portraits, we go behind the diverse climate-related research that takes place at the Faculty of Social Sciences’ five departments and many research environments.

The article about the researchers behind the GREENCAR project is the third in the series.

Converting Denmark’s car fleet to zero-emission vehicles will take decades and require major tax reforms. The research project GREENCAR aims to provide the necessary quantitative tools so that politicians can make more informed choices while transitioning the car fleet.

Professor Mogens Fosgerau is leading the project, which has been granted DKK 11.8 million by the Danish Independent Research Foundation.

“Basically, we need to create a calculator that can predict the implications of policies in the car market,” says Mogens Fosgerau and continues:

“Ultimately, we have to calculate how much money one or another tax reform can provide. How many cars end up on the roads, how much CO2 they emit and what this means for air pollution.”

The GREENCAR project is very much about analyzing the consequences of human behavior – and the need to change behavior for the sake of the climate is a key agenda in 2022. However, Mogens Fosgerau believes that the green transition is often reduced to a question of how each individual can make an effort and become a better person. He sees no effect of the moral climate debate.

“I do not know of any major societal transformations in the environmental field or any other area of our society, where large-scale behavioral changes have been successfully implemented without using the major economic policy levers,” points out Mogens Fosgerau.

By economic levers he means reforms of taxes and duties. Carrot and stick.

“This also applies to a large domain such as cars, which is responsible for a considerable share of emissions. Here we have key economic policy levers in use: registration tax, fuel tax and annual ownership taxes – and then we have EU regulation on which cars may be sold at all,” mentions Mogens Fosgerau.

The true color of hybrid cars
Today, the models used by ministries to predict the effect of legislative changes in the automotive field are far from the cutting edge. History is also full of examples that it does not always go as intended when politicians pull policy levers to change the Danes’ car purchases.

Mogens Fosgerau was a member of the electric car commission, whose recommendations ended up accelerating the hybrid car sales at a crazy pace due to the introduction of low taxes. Hybrid cars have since often turned out to be even blacker than petrol and diesel cars, because they primarily run on fossil fuels and at the same time are equipped with a battery that has been costly to produce in terms of climate footprint.

“With 20/20 hindsight, it’s easy to see, but we did not know two years ago what we know now. Now, several data sources point to hybrid cars being charged much less than they need in order to be green. In fact, hybrid cars can have a negative climate effect, partly because people often prefer larger, cheaper hybrid cars to smaller, more expensive petrol cars,” says Mogens Fosgerau.

The explosion in the number of hybrid cars was the starting signal for the GREENCAR project.

“How do we avoid unintended effects when pulling the big, policy levers? A step along the way would be to get better at predicting the consequences of changes in car taxes. But no matter how good our model is, we can expect to adjust car taxes a few extra times before 2030,” predicts Mogens Fosgerau.

His colleague Anders Munk-Nielsen, who is part of the GREENCAR research team, also remembers failed regulations of the car sector.

“We have seen a single-minded focus on kilometers per liter, which favored diesel cars. They poured onto the roads as the taxes were lowered. But after a few years, it became evident that diesel cars’ emissions of NOx particles can result in cancer, and then the diesel car market was completely murdered by the politicians,” he says.

Facts about GREENCAR
In December 2021, the Danish Independent Research Foundation granted DKK 11.8 million for the GREENCAR project, which will contribute to the green transition of the large, complex car market.

The research team consists of Mogens Fosgerau, Bertel Schjerning, Anders Munk-Nielsen, Nikolaj Nielsen and Maria Juul Hansen.

Specifically, they must develop economic models that predict how the zero-emission car can take over at the politically decided pace, and what consequences different measures will have for climate as well as congestion, safety and air pollution.

It’s not just about climate
Unlike many other areas of society where there is widespread agreement on which policies to use, there is no consensus across national borders when it comes to the regulation of cars.

“Norway has almost no hybrids because their incentives for electric cars were so strong: the electric cars got free parking, were allowed to drive in bus lanes and were exempt from taxes. That was not the case with hybrids, so it is more of a niche segment relative to electrics in Norway, whereas sales of hybrid cars have exploded in Denmark,” says Anders Munk-Nielsen.

When Mogens Fosgerau and Anders Munk-Nielsen analyze the car sector, their focus is not solely on climate effects.

“When you regulate transport, it is also about air pollution and safety – and it is about being able to get to work and on vacation, to have a life. If we closed all roads, then we would have removed the climate problem but also lots of other things that we would be sad to lose,” points out Mogens Fosgerau and elaborates:

“Our formula is about mapping the effect on climate and all the other goals we care about. The politicians must choose how to balance the tradeoffs between these often conflicting goals. We cannot say what the best policy is – we just want to make sure that politicians make informed policy decisions. “

We know all the cars that drive on Danish roads. We know when they have been to safety tests. We know how far they have driven and who owns them. We know the make and model – how far they drive per liter, how many airbags are installed. We know an awful lot!

Mogens Fosgerau
The electric car is a supplement
The GREENCAR researchers’ primary tool is a huge amount of data.

“We know all cars that drive on Danish roads. We know when they have been to safety tests. We know how far they have driven and who owns them. We know the make and model – how far they drive per liter, and how many airbags are installed. We know an awful lot! You can definitely talk about big data here,” explains Mogens Fosgerau.

To keep track of all this information and predict how the car market will react to various policy initiatives, the Department of Economics has some very advanced modeling tools that can grind the large quantities of data.

“The car market is huge. There are around 1,000 variants to choose from every year if you need to buy a new car. There are also used cars, and if they last for 20 years, then we have 20,000 different types of cars to choose from,” says Mogens Fosgerau and is supplemented by Anders Munk-Nielsen:

“If the price of car variant no. 859 rises, how much does the probability that you buy one of the other models increase? And if you lower the tax on no. 899, but not on all the others, how does this affect purchases? It is a profound mathematical challenge to make models that can keep track of it,” he says.

Anders Munk-Nielsen has also examined Norwegian data and found a clear tendency for electric cars to typically supplement the family’s fossil car rather than replace it.

“Households that own a fossil car are more likely to own an electric car than households in general. A typical consumption pattern is that the electric car is for daily short trips, while the petrol car can be used for the family holiday trip,” he explains.

However, that consumption pattern is not set in stone – it can adapt in response to policies.

“If you have a huge gas guzzler and an electric car, what happens if you increase the tax on fossil fuels? Then you might alter the family’s consumption pattern,” says Anders Munk-Nielsen.

Hard apples to pick
The car sector is just one area of ​​many that must be remodeled if the political climate goals are to be achieved. However, the green transition on the roads is very expensive in Europe compared to other continents.

Politicians should not spend time discussing whether the hybrid car is green or not, or how big the effect would be on government finances if you reduced the tax on a specific car. We must agree on the numbers and on the cost of each policy. Then we can start discussing whether each policy is worth its cost.

Anders Munk-Nielsen
“In European countries, it is much more expensive to save CO2 in the car sector than to buy and destroy CO2 quotas,” mentions Anders Munk-Nielsen.

How Danes should reduce their climate footprint is up for the politicians to decide.

“But they should not spend time discussing whether the hybrid car is green or not, or how big the effect would be on government finances if you reduced the tax on a specific car. We must agree on the numbers and on the cost of each policy. Then we can start discussing whether each policy is worth its cost,” says Anders Munk-Nielsen.

Regardless of how politicians choose to make use of the GREENCAR team’s calculator, the funds from the Danish Independent Research Foundation will create important insights regarding the use of advanced models that process enormous amounts of data. It will provide a much stronger foundation for future analyzes of the complex car market.

“These models are pioneering work. The beauty of the project is that we can work on the absolute research frontier in terms of technique and mathematics. It is rocket science that can deliver on a large societal scale,” concludes Mogens Fosgerau.

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