Topic: Energy and Environment

John McCain’s SimCity Energy Plan

For those of you not in the cultural “know,” Sim-City is a long-standing series of computer games which asks the player to essentially play the role of a Stalinist super-planner. What to build, where to build, and how people are to relate to all those buildings in your custom-designed city is up to you, the all-knowing, all-powerful uber-planner.

It’s all good fun in the privacy of your own home (I guess), but is this the sort of game we want the next President to play? I’m going to go out on a limb and say no. John McCain, however, seems to disagree.

Consider, for instance, John McCain’s call earlier this week for the United States to build 45 new nuclear power plants by 2030 and another 55 sometime after that. The first question that comes to mind is, why 45? Did the McCain brain trust engage in some high level economic computer modeling to discover that the optimum number of new nuclear power plants is not 42, 47, or some other number … but the nice, round number of 45? I’m going to guess that they did not. I’m going to surrender to my cynical alter-ego and posit that, if one were to ask the question, “Sen. McCain, how exactly did you come to the determination that the economically optimal number of new nuclear power plants is 45 new facilities over the next 22 years?” the answer you would get would likely be totally incomprehensible.

There are two ways we can go on energy policy. We can leave the decisions about what to build and when to build to market actors (disciplined as they are by hard costs and incentivized as they are by the pursuit of profit), or we can leave that task to political uber-planners who are not disciplined by either but are disciplined by campaign contributions, polling data, and periodic popularity contests. Call me a crazy ideologue, but I suspect that the economy would prove more efficient with the former rather than the latter approach.

Note: The reason we hear politicians like John McCain talk so much about the need for the federal government to promote nuclear power is because investors in the private sector take one look at the economics and run screaming for the hills. Investment banks tell utilities who want to borrow money to build these things that not one red cent will be coming their way unless and until the federal taxpayer guarrantees that the entire loan will be repaid in case of default. If nuclear power were such a good economic bet, those taxpayer guarantees would not be necessary.

Hydrogen Car Hooey

One of my pricier trade newsletters, Greenwire, reports today that Honda is manufacturing a “zero emission” vehicle. Their source? A story in today’s New York Times which spills a great deal of ink on the environmental promise of these sorts of vehicles. Well, nonsense. The hydrogen has to come from somewhere, and the emissions associated with producing that hydrogen are far from zero. In fact, hydrogen-powered vehicles are, on balance, even dirtier than conventional internal combustion engines.

Next time you see Jamie Lee Curtis tooling around in one of these things, tell her to buy some carbon credits. A lot of them.

Much Ado about Offshore Drilling

The lead story in today’s papers and the buzz on the political talk shows is about President Bush’s request to Congress that they suspend the federal ban on oil drilling off the U.S. Atlantic and Pacific coasts.

Already, drilling proponents and environmentalist opponents are gearing up for battle, and the presidential candidates are sounding off on the idea. None of their comments, so far, offer anything useful for public policy.

For people who want good policy, here are some points to consider:

  • Part of the reason for the high current price of oil (and gasoline) is that supply is “inelastic” – that is, it’s hard for producers to increase production even when prices are high and there is significant economic incentive to do so. A significant increase in production capacity would reduce oil and gas prices significantly — assuming the current condition of high inelasticity continues until the new oil is brought to market.
  • It will take a long time for that new oil to reach the market. It often takes as much as a decade or more for a new oil field to be brought online.
  • No one knows how much oil lies offshore and whether that oil is economically worthwhile to extract, as there hasn’t been any extensive studies of those areas in decades.
  • Concerns about the environmental impact of drilling are legitimate, as are concerns that the United States may be forgoing the use of a valuable resource by not drilling in these areas.

Good public policy would examine the risks and costs underlying both of these concerns, and then make a decision (or perhaps a compromise) about drilling. However, this issue will not be decided in such a rational way. The debate will be dominated by two ideological camps — the “drill at any cost” crowd and the “don’t drill at any cost” crowd” — and their ideological priors and political power will preempt any good policy discussion.

Unfortunately, that’s how we roll here in Washington, D.C.

Sustainable Architecture - A (Real Life) Straw Man?

If you’re free Friday morning, you might want to hop on over to the Russell Senate Office Building to learn about the amazing, inexplicable, short-sighted market bias against straw-bale buildings and the need for the feds to do something about it. The Environmental & Energy Study Institute, the sponsor of this event,

Invites you to learn how the ‘new but old’ method of straw-bale construction can help address some of our most serious national policy challenges, such as record energy prices and unemployment, inadequate supply of affordable housing, the threat of climate change, and pressing needs in transportation and infrastructure funding. The modern building industry places heavy demands on the energy and transportation sectors. Straw is a locally-sourced, widely available, and renewable resource that builders, architects, engineers, and home owners are turning into affordable, safe, durable, and energy-efficient buildings in many climates. The following presenters will discuss the benefits of using this American invention, the regulatory barriers and institutional biases against straw-bale construction, and the role of the federal government in resolving these issues.

And that parable about the three little pigs? A PR smear spun by “Big Brick” no doubt.

Compensating for Climate Change

Reason Roundtable has a discussion on whether developed countries should compensate developing countries for any damages from climate change. The following is from the introduction to the discussion:

Should companies or countries that have contributed to global warming be required to compensate individuals directly impacted by climate change? Is global warming a threat to private property? The latest Reason Roundtable examines these questions from a couple of perspectives.

Reason Foundation’s Shikha Dalmia says libertarians “cannot treat the earth’s thermostat as an enemy of freedom. Indeed, regardless of whether climate change eventually turns out to be real or not, the libertarian goal ought to be to ensure the protection and advancement of freedom — and all its attendant institutions: free markets, limited government and property rights.”

Jonathan Adler, professor of law at Case Western Reserve University School of Law, writes, “The whole point of protecting property rights is to ensure that property owners control exercise of their own rights. If a property owner wishes to accept another’s waste in return for compensation, that should be her choice. If not, then her right to refuse ought to be protected. Individual property rights should not be put up for a community vote or sacrificed as part of some utilitarian calculus. Libertarians readily accept this principle when government planners violate property rights in the name of economic development (think of the Supreme Court’s landmark eminent domain decision, Kelo v. New London). Yet they seem to abandon their commitment to property rights when it comes to global warming…. Given the potential impact of climate change on property rights, we ought to at least start thinking about policy measures that compensate affected parties without themselves posing a risk to individual liberty.”

Indur M. Goklany, author of the book The Improving State of the World: Why We’re Living Longer, Healthier, More Comfortable Lives on a Cleaner Planet, writes, “Not only is there no proven harm that can be specifically attributed to the warming, but, more importantly, even if there were such harm, a proper respect for property rights might preclude compensation…. If only some countries had contributed to global warming and benefited from causing it while others had neither contributed nor benefited from it, there might have been an argument for compensation from one to the other. But that’s far from the case. That every country is both a contributor and a beneficiary not only makes it infinitely more difficult to calculate who owes whom how much, it also vitiates anyone’s moral standing for compensation — a normative commitment to property rights notwithstanding.”

The Roundtable essays can be found in the following:

Global Warming: Keeping Property Rights at the Forefront
Looking for solutions that would least empower the government — and least threaten property rights
By Shikha Dalmia

Climate Change As If Property Rights Mattered
Individuals should be compensated by those whose actions create environmental problems that produce provable damages to their property
By Jonathan H. Adler

Climate Change: No Harm, No Claim
All countries have engaged in greenhouse-gas generating activities
By Indur Goklany

Is Climate Change the World’s Most Important Problem? Part 3

In Part 1 of this series we saw that even if one gives credence to the oft-repeated but flawed estimates from the World Health Organization of the present-day contribution of climate change to global mortality, other factors contribute many times more to the global death toll. For example, hunger’s contribution is over twenty times larger, unsafe water’s is ten times greater, and malaria’s is six times larger. With respect to ecological factors, habitat conversion continues to be the single largest demonstrated threat to species and biodiversity. Thus climate change is not the most important problem facing today’s population. 

In Part 2 we saw that even if we assume that the world follows the IPCC’s warmest (A1FI) scenario that the UK’s Hadley Center projects will increase average global temperature by 4°C between 1990 and 2085, climate change will at most contribute about 10% of the cumulative death toll from hunger, malaria and flooding into the foreseeable future. It would simultaneously reduce the net population at risk of water stress. 

Clearly, climate change would, through the foreseeable future, be a bit-player with respect to human well-being

Here I’ll examine whether, notwithstanding that climate change is likely to be outranked by other factors when it comes to human well-being, whether it is likely to be the most important global ecological problem if not today, at least in the foreseeable future.  

As in Part 2, I’ll rely on estimates of the global impacts of climate change from the British-government sponsored “Fast Track Assessments” (FTAs).  

The following figure, which presents the FTA’s estimates of habitat converted to cropland as of 2100, shows that the amount of habitat lost to cropland may well be least under the richest-but-warmest scenario (A1FI), but higher under the cooler (B1 and B2) scenarios. Thus, under the warmest scenario, despite a population increase cropland could decline from 11.6% in the base year (1990) to less than half that (5.0%) in 2100: Climate change may well relieve today’s largest threat to species and biodiversity! 

One reason for this result is that higher atmospheric concentrations of CO2 might make agriculture more efficient, and this productivity increase would not have been vitiated as of 2100 by any detrimental impacts of higher temperatures.

The next figure shows that in 2085 non-climate-change related factors will dominate the global loss of coastal wetlands between 1990 and 2085.

[In this figure, SLR = sea level rise. Note that the losses due to SLR and “other causes” are not additive, because a parcel of wetland can only be lost once. For detailed sources, see here.]

Thus we see that neither on grounds of public health nor on ecological factors is climate change likely to be the most important problem facing the globe this century. 

So if you hear anyone make the claim that climate change is the most important environmental problem facing the globe now or whenever, ask to see the analysis that compares climate change with other problems. 

In future postings I’ll look at the policy implications of the results from the FTA in greater detail.

A Stagflation Sideshow: The Wall Street Journal’s Flawed Theory of Oil Prices

Yesterday’s Wall Street Journal editorial “The Stagflation Show” (June 9) has a graph showing the price of oil generally rising while the fed funds rate was falling (if you don’t look too closely at flat or falling oil prices from November through February).

The conclusion is that if the Fed had not cut interest rates since last September the oil price would not have go up. Perhaps so, but the most obvious reason for any link between Fed easing and oil prices is not mentioned at all. And the stated reason (a “dollar rout and commodity boom”) is at odds with the facts. The timing is way off.

The most obvious connection between oil prices and Fed policy is cyclical.

There have been nine big spikes in oil prices since the 1950s and every one of them was followed by a U.S./world recession within a year.

Every recession, in turn, was followed by a huge drop in the price of crude oil. West Texas crude fell by 44-71% in the wake of the last three recessions.

If the Fed had left the interest rates on bank reserves at 5 ¼% – the U.S. would very likely have led the world into a significant recession long before now. And a U.S./world recession would indeed have pushed the oil price down. But that is not what the Journal editorial page seems to be suggesting. Instead, they blame the Fed for a “dollar rout and commodity boom.”

The big spike in oil prices since early March happened when the dollar was not falling and also when prices of many non-energy commodity prices were falling. There has been no dollar rout and a no generalized commodity boom since February (when oil fell as low as $87 even as food prices soared).

The Fed’s trade-weighted index of the dollar’s value against 26 currencies was 95.77 in March and 95.83 in May. The narrower index of 7 major currencies was 70.32 in March and 70.75 in May.

From March 4 to June 3 The Economist index of 25 commodity prices – excluding oil –fell by 7.8% in dollars (from 271.9 to 250.6) but by only 5.7% in British pounds. The dollar price of wheat fell by 40%, cotton by 26%, and prices have also fallen sharply for livestock, lumber and most industrial metals. This is a “commodity boom”?

It is true that lower short-term interest rates have made it cheaper for producers and “speculators” to hold crude oil off the market (e.g., in tankers or in the ground) if they expect a higher price in the near future. But speculation in the futures market can’t keep prices in the cash (spot) market higher than the market will bear. And the world does not have an unlimited budget to pay more and more for petrochemicals and fuel. As firms cut back or shut down production in energy-intensive industries worldwide (U.S. airlines are just the most obvious example) the demand for oil can drop quickly.

Oil above $130 involves a massive transfer of income away from oil-importing countries, raising their cost of living and cost of production. That greatly increases the likelihood of a significant economic slowdown or contraction in most oil-importing countries, even India and China. And that, in turn, always causes the price of oil to collapse.