Why NYC’s Yellow cabs took so long to go green

Posted by: Adam Aston on May 24, 2007

For New York City’s fleet of iconic yellow cabs, gas guzzlers are out and gas-electric hybrids are in. The switchover of the city’s 13,000 fleet of taxis is expected to take four years, with new hybrid models replacing older vehicles (a mix of mostly Ford Crown Victoria sedans, along with some SUVs and minivans) as they are retired. Come 2012, when the switch is completed, the city expects to have “the largest, cleanest fleet of taxis on the planet.” The announcement doesn’t specify hybrids, but instead details emission and mileage standards — topping out at 30 mpg — that only hybrids can meet, for now at least. Some 375 hybrids already prowl city streets, as part of a trial program. This green fleet is made up mostly of Ford Escape Hybrids, but also includes Toyota Priuses and Highlander Hybrids plus a handful of Lexus 400h’s, with new hybrids to join the menagerie as they hit the market.

The shift is all good news for the ciy: hybrid taxis mean cleaner urban air, less gas consumption, and higher earnings for taxi drivers. So why didn’t this shift happen sooner? Consider the simple economic savings this move promises. For a driver who abandons an abysmally inefficient 10-mpg Crown Victoria and moves to a 30-mpg hybrid, daily savings in fuel costs could hit over $100, particularly with gas going for $3.50 or more at city stations. Those savings go straight to drivers’ pockets and lower the pressure to increase taxi fares down the road. Overall, the city estimates the plan will save 22 million gallons of gas -– and related emissions -– in the first year alone.

But by this logic, the Crown Victorias should have motored off to junk yards years ago, whether replaced by hybrids or not. A recent Consumer Reports analysis makes the point more starkly. Simply replacing today’s taxi fleet with more modern, efficient models — something like the similarly-sized Kia Rondo minivan which gets 14 mpg in similar conditions — could save some 22 million gallons of gas per year. Of course, why the switch didn’t happen faster has to do partly with safety regulations covering driver and passenger safety. Until recently, city rules locked taxi buyers into large and easily-fortified (often with bullet-proof driver partitions) vehicles, such as the Crown Victoria.

But a another dynamic was at play, one that has broader implications in the nation's push for greater energy efficiency. Call it the owner-user conflict. Here’s how it shows up in taxi fleets. Cab drivers are typically not taxi owners. Rather, most taxis are bought by fleet operators, who buy cars in large numbers for the lowest price possible, then lease them to drivers for half-day shifts. In this model, a taxi cab owner typically doesn't want to pay more for a hybrid since the day-to-day cost of fuel is born by the driver. Gas isn't the owner's problem, but the driver's.

This sort of disconnect can be found across the whole economy. Landlords have little reason to spend extra on energy-efficient appliances since tenants typically pay for electricity. On the flip side, tenants won't shell out for the same appliances since the payback on their investment is likely to take longer than their period of residency.

This mismatch affects the fast growing stock of new buildings too. Commercial developers, who tend to own and manage the structures they build, are making the switch to green features faster than are big tract home developers because the former find they can recover the cost of investments in energy-efficiency technologies. That’s the case at The Bank of America Tower in New York City, designed by Cook+Fox Architects and being built in cooperation with Durst Associates. Durst, which has built a handful of other green towers in Manhattan, reports that tenants are willing to pay above market rents for high-efficiency buildings because running costs – for electricity, air conditioning, water and so on – are so much lower than in conventional buildings, the savings pay off in the long run.

Consumers are notoriously bad at identifying long-run savings compared to short run costs. It’s the fluorescent light bulb problem writ large: compared to a $1 incandescent bulb, consumers are often loathe to pay $3 for a florescent today, even if it will save them $50 over the next five years.

No surprise then that big home developers report they are having trouble making a similar pitch, asking new home buyers to spend more upfront for long term savings. In part because they sell new homes as quickly as they are built, builders there’s less incentive to splurge on green technologies such as solar panels since consumers value luxury fixtures and low sales prices over other energy-saving features with long-term paybacks.

Here’s another example from the utility sector. The deregulation of retail markets, where consumers pay for the variable cost of electricity as demand ebbs and flows, is considered by many energy gurus to be good policy. The approach discourages power use when demand and prices are highest. But think about this from the perspective from a utility selling you power it buys from an independent power producer. If a utility can pass on the cost of their power, they have less incentive to hustle to find the lowest-cost wholesale supplier at any given moment, or the most efficient. So electricity customers can end up paying more than they should, and older less efficient plants may be more likely to be kept running.

Ditto in the world of planes, trains and trucks. In transportation operators routinely pass on “fuel surchages” to their customers. By insulating themselves from such a major cost, the owners of the vehicles that consume the fuel have less incentive to invest in the leanest running machines money can buy.

Back to the hybrids. Sure, taxi operators might have made the move to more efficient wheels on their own, in time, especially if gas prices stayed very high. Yet why not make the move sooner if the net results is a clear good? Even as fleet owners gripe about the higher price of hybrids, there’s been scant resistance to the announcement in New York. It goes to show, the market doesn't always work; some of the easiest efficiency gains can go unpicked because of a mismatch between who pays and who benefits. In these cases, smart political leadership can make all the difference. New York City's mandate speeds up the benefit of cleaner air and cheaper transport, for drivers, their passengers, and the city as a whole.

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BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.

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