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Diversification in the driveway: mean-variance optimization for greenhouse gas emissions reduction from the next generation of vehicles

Author

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  • Oliver Gao, H.
  • Stasko, Timon H.

Abstract

Modern portfolio theory is applied to the problem of selecting which vehicle technologies and fuels to use in the next generation of vehicles. Selecting vehicles with the lowest lifetime cost is complicated by the fact that future prices are uncertain, just as selecting securities for an investment portfolio is complicated by the fact that future returns are uncertain. A quadratic program is developed based on modern portfolio theory, with the objective of minimizing the expected lifetime cost of the "vehicle portfolio". Constraints limit greenhouse gas emissions, as well as the variance of the cost. A case study is performed for light-duty passenger vehicles in the United States, drawing emissions and usage data from the US Environmental Protection Agency's MOVES and Department of Energy's GREET models, among other sources. Four vehicle technologies are considered: conventional gasoline, conventional diesel, grid-independent (non-plug-in) gasoline-electric hybrid, and flex fuel using E85. Results indicate that much of the uncertainty surrounding cost stems from fuel price fluctuations, and that fuel efficient vehicles can lower cost variance. Hybrids exhibit the lowest cost variances of the technologies considered, making them an arguably financially conservative choice.

Suggested Citation

  • Oliver Gao, H. & Stasko, Timon H., 2009. "Diversification in the driveway: mean-variance optimization for greenhouse gas emissions reduction from the next generation of vehicles," Energy Policy, Elsevier, vol. 37(12), pages 5019-5027, December.
  • Handle: RePEc:eee:enepol:v:37:y:2009:i:12:p:5019-5027
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    2. Urs Springer, 2003. "Can the Risks of the Kyoto Mechanisms be Reduced Through Portfolio Diversification? Evidence from the Swedish AIJ Program," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(4), pages 501-513, August.
    3. Shimon Awerbuch, 2006. "Portfolio-Based Electricity Generation Planning: Policy Implications For Renewables And Energy Security," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 11(3), pages 693-710, May.
    4. J. F. P. Bridges & M. Stewart & M. T. King & K. van Gool, 2002. "Adapting portfolio theory for the evaluation of multiple investments in health with a multiplicative extension for treatment synergies," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 3(1), pages 47-53, March.
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    Citations

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    Cited by:

    1. Stasko, Timon H. & Oliver Gao, H., 2012. "Developing green fleet management strategies: Repair/retrofit/replacement decisions under environmental regulation," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(8), pages 1216-1226.
    2. Mustapa, Siti Indati & Bekhet, Hussain Ali, 2016. "Analysis of CO2 emissions reduction in the Malaysian transportation sector: An optimisation approach," Energy Policy, Elsevier, vol. 89(C), pages 171-183.

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