Doing A Cost/Benefit Analysis

Most business people put great faith in cost/benefit analysis. When honestly done, these are a value. The problem is most people don’t know, or can’t know, when they are honestly done. Worse yet, the creator of the study might not be trying to mislead you.

The rule becomes – there is no such thing as an honest or complete cost/benefit analysis. All have certain facts and assumptions. All of them have reasoning applied to the facts and assumptions. None of them have a full complement of facts and there is no idea how good the assumptions are.

How good will your reasoning be if the facts are incomplete, or predictive rather than observed?

Let’s take an easy one

The question is, “Do Electric Vehicles (EVs) reduce CO2?”

  • If Yes, at what cost?
  • If No, why not?

EVs reduce CO2

The positives

EVs are electric and produce no CO2, while gasoline powered vehicles produce about 2.3 Kg per liter burned. (Roughly 5 pounds per liter or about 20 pounds per American Gallon) If you drive 20,000 miles per year at an average consumption rate of 20 miles per gallon combined, you will contribute roughly 10 tons to the problem. More,if you drive only in the city because your mileage will be worse.

There are 284 million cars in the United States. We get over 2 billion tons pretty easily. Big benefit to electric.

Other benefits include fun (especially a high end Tesla) and social virtue signalling.

The cost

For now, EVs cost much more. As they are presented in greater quantity they will get less expensive, so the cost to get this benefit is a gradually diminishing one. In the interim the government is subsidizing the difference so price should not influence the consumer decision about how quickly the vehicles are replaced.

Other costs include:

  1. The price of  a high voltage charger at home or the 40 minute wait to charge if you cannot provide one.
  2. How much does the electricity cost per mile compared to the price of gasoline per mile.
  3. The low resale value once the batteries deteriorate. A battery pack is expensive — $10,000 in some cases. A 10-year old EV with a spent battery is likely a parts car.
  4. The majority of them today are not particularly efficient for normal household use. In Norway, many families have both a gas powered vehicle and an EV. The gas powered one picks up children and groceries and goes to the lumber store. The EV is for cruising. The average use is about 5,000 km per year. I suppose the batteries will last longer.
  5. I don’t know about insurance, but if I were buying one I would ask the question.
  6. Maintenance and repairs may be better or worse depending on factors like how many vehicles there of the one you have. When GM was building 5 million 350 cubic inch engines each year, everyone had parts and enough knowledge to fix one.  If you have to wait three days for a part, that is a cost.

EVs don’t reduce CO2

The point is the EV is the energy consumer and the comparison to a gas powered vehicle needs another step. Where does the electricity to charge it come from? If you are in Ontario where 95% or so of the electricity comes from nuclear, hydro-electric, wind turbines, and solar, the CO2 cost per kilowatt produced is quite low. If the electricity comes from burning coal, the CO2 cost per mile is higher than for a gas powered vehicle.

In terms of CO2, the cost to manufacture batteries and the cost to mine the specialized materials needed substantially exceeds the cost to build gas tanks.

The cost to dispose of batteries is a factor. I don’t know how you would do at the scale people are talking about, but I think there is a CO2 cost there too.

The conclusion

Every business and some individuals know about the idea of “TCO” – Total cost of ownership. That cost could be money, like when two similar cars have different costs to insure or repair or lose trade in value quickly. There is a similar idea with CO2 costs. Which produces more?

Total Cost of Ownership for CO2 is a more realistic comparison than a single dimension variable like CO2 produced per mile.

It’s not only CO2 where the analysis is useful.

There are similar cost benefit defects in things like the value of shutdown to change the incidence of Covid-19, and in global warming in general. Many solutions are ideologically driven. Some by impatience, so the people can be seen to be doing something. Not very sound reasoning.

Scott Adams has  a thought —  The Law of Slow Moving Disasters. The solution is in the future and the smart money is on the idea, “We’ll find a way.”

Governments are not the right leader on slow moving disasters. Their inclinations, even actions,  support their personal needs, are antithetical to patience and “We’ll find a way.”

Acting in haste generally requires two solutions — the one that looks good from a narrow viewing point in the beginning, and the one that eventually works.

Slow moving disasters require evolutionary answers. As more experience and knowledge comes along, small changes happen. Over time the answer comes clear and by then is largely implemented.

The takeaway

Slow moving disasters are processes. Using event-like answers cannot work except as a an experiment in the direction you want to go. If there is no positive evolutionary advantage to the step proposed, it had better be an inexpensive step.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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