In honor of Earth Day which was celebrated yesterday, I thought I would do a couple of posts this week regarding the economics of environmentalism and how they impact your personal finance.
Let me start by saying the I consider myself very much pro-environment. I am concerned, but not worried, about global warming and try to do my share to reduce emissions. With that in mind, I thought I would take a look at the economics of hybrid vehicles and find out if they make sense, both from an environmental perspective and from a personal finance perspective.
My research focused on the Honda Civic, since it offers both hybrid and regular versions that are easy to compare. I compared Civic's Hybrid version (50 MPG combined city / hwy) with two other Civic models, 4 door DX and 4 door EX (both 35 MPG combined city / hwy). According to Edmunds.com the Civic Hybrid has a 5 year true cost to own of $37,717, this compares to a true cost to own of $35,425 for the DX model and $38,018 for the EX model. These total costs of ownership include the cost of gasoline, repair, maintenance, depreciation and so forth. The conclusion according to Edmunds is that the Hybrid costs about $2300 more to own than the DX model over 5 years, but is about $300 cheaper to own than the EX model.
Of course, Edmunds is basing their estimates on many generalizations, including an average cost per gallon of gasoline, and an average number of miles driven per month. If you live in a state where the cost of gasoline is above average (such as California) or if you drive more than average, the calculation may not apply to you.
Let's for a minute accept these "averages" proposed by Edmunds. There is one important factor that Edmunds doesn't take into consideration: the environmental impact of vehicle emissions. Emissions have a real economic cost, however these costs are paid by society as a whole rather than by individual vehicle owners. Nevertheless, these costs should be taken into consideration.
According to the EPA, one gallon of gasoline produces about 8.8 kg (19.4 pounds) of CO2 when burned. So according to my calculations, a Civic Hybrid driven for 12,000 miles per year will produce approximately 905 kg (about 2,000 pounds) fewer CO2 emissions per year than a non-hybrid Civic. Wow! That's equal to a net reduction of about 5 tons of CO2 over a five year period.
Five tons of CO2 should be worth an extra $2,000 in total cost of ownership over five years. True? Not so fast. I continued my research by looking at the cost to off-set those carbon emissions by other means, and my research led me to the Carbon Fund. The Carbon Fund offers individuals a way to off-set their entire CO2 emissions, by investing in renewable energy projects. Now listen to this: according to that website, you can completely off-set the cost of driving a highly polluting SUV for a mere $49 per year! Off-setting the CO2 emissions of a regular Civic costs only $19.9 per year, or just under $100 over a 5 year period. This is a much cheaper solution than merely reducing your emissions by paying an extra $2,000 to own a hybrid.
There are many other organizations that offer Carbon off-setting projects. Here is a short list I came across.
Does that mean that you shouldn't drive a hybrid to save the environment? Hell, no. You should do anything within reason to reduce your carbon emissions. However, this does mean that driving a hybrid is probably NOT the most cost effective way to make an impact on the environment. As my regular readers know, I am a firm believer in the power of the markets, and the environment is no different. If you have a limited amount of resources, and you probably do, you should use them in the most cost-effective way to obtain the desired result. If you believe in the reality of carbon off-setting projects, those appear to be a better way to improve the environment than getting into that new hybrid Honda or Toyota. Might be less fun though.