Diversification in the Driveway: Mean-Variance Optimization for Greenhouse Gas Emissions Reduction From the Next Generation of Vehicles

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 U.S. 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.
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