Topic: Energy and Environment

The Good Side of Bad News in Europe

What does the Greco-Euro currency/debt crisis mean for the U.S. economy?

Nearly everyone except the uniquely wise economist John Cochrane assumes very bad “contagion” effects –on U.S. banks, exports and particularly U.S. manufacturing.

This echoes identical anxieties while the world went through a far more dramatic Asian currency crisis after  July 1997,  and a Russian debt crisis the following May.

The most widely ignored effect of that crisis, however, was to depress foreign demand for oil, and thus slash oil prices to U.S. buyers from $25 a barrel in early 1997 to $11 by the end of 1998.

Oil is a major input into the manufacturing process (e.g., chemicals and plastics), and a major cost of distribution (trucks, trains and airplanes).  It is also a major determinant of the cost of all energy sources used in making other goods such as aluminum and paper.   When marginal costs go down, it becomes profitable to expand production.

At the height of the Asian/Russian crises, the table below shows that U.S. manufacturing output  rose by more than 10 percent. It’s an ill wind that doesn’t blow somebody some good.

Looking at the same phenomenon from the other side, every recession but one (1960) was preceded by a big increase in the price of oil. For oil importers like the U.S., cheaper oil is definitely better.

During the last big foreign currency/debt crisis, the real growth of U.S. Gross Domestic Purchases (the home-grown portion of GDP) jumped by 4.7% in 1997 and 5.5% in 1998.  Yet the Fed cut interest rates three times in October and November of 1998 because of what was happening in other countries.

The table  show what happened to the price of oil and to U.S. manufacturing from June 1997 to December 1998. The middle column is the price of a barrel of West Texas crude, and the column to the right is the U.S. industrial production index for the manufacturing sector.

1997-06    19.17    87.80
1997-07    19.63    88.12
1997-08    19.93    89.69
1997-09    19.79    90.45
1997-10    21.26    90.98
1997-11    20.17    92.05
1997-12    18.32    92.52
1998-01    16.71    93.36
1998-02    16.06    93.31
1998-03    15.02    93.13
1998-04    15.44    93.68
1998-05    14.86    94.25
1998-06    13.66    93.53
1998-07    14.08    92.96
1998-08    13.36    95.40
1998-09    14.95    95.11
1998-10    14.39    95.96
1998-11    12.85    96.08
1998-12    11.28    96.63

In recent weeks, as the debt and currency problems in Euroland hit the front page, the price of crude oil fell by about 20 percent.

Once again, as in 1997-98, everyone may be watching the wrong ball in the wrong court.

Krugman and Oil Spills, cont’d

Last week Paul Krugman seized on the Gulf oil spill as another occasion to bash libertarians in general and the great Milton Friedman in particular. On Friday David skewered the Times columnist over his odd rhetorical ploy of treating politicians’ failure to follow Friedman’s principles as a refutation of those principles. Now economist Alex Tabarrok at Marginal Revolution reports that Krugman also completely misunderstands the current set of laws governing oil spill liability:

The Oil Pollution Act of 1990 (OPA), which is the law that caps liability for economic damages at $75 million, does not override state law or common law remedies in tort (click on the link and search for common law or see here). Thus, Milton Friedman’s preferred remedy for corporate negligence, tort law, continues to operate and there is no doubt that BP’s potential liability under common law alone would be in the billions of dollars.

…The point of the OPA was not to limit tort law but to supplement it.

Tort law, as traditionally understood, could only be used to recover damages to people and property rather than force firms to pay cleanup costs per se. Thus, in the OPA as I read it – and take the details with a grain of salt since I’m not a lawyer–there is no limit on cleanup costs. Moreover, the OPA makes the offender strictly liable for cleanup costs which means that if these costs are proven the offender must pay them regardless (there are a few defenses, such as an act of war, but they are unlikely to apply). The offender is also strictly liable for up to $75 million in economic damages above and beyond cleanup costs. Thus the $75 million is simply a cap on the strictly liable damages, the damages that if proven BP has to pay regardless. But there is no limit, even under the OPA, on economic damages in the event that BP failed to follow regulations or is otherwise shown to be negligent (same as under common law).

The link Krugman supplies, and perhaps the source of his error, was this Talking Points Memo item baldly describing “the maximum liability for oil companies after a spill” as “a paltry $75 million.” Even the most passing acquaintance with the aftermath of real-world oil spills should have been enough for Krugman and TPM author Zachary Roth to realize that liability for assessments to this one federal rainy-day fund is but one component, perhaps but a minor one, of liability for overall spill damage. And even as regards this one specialized federal fund, Krugman and Roth got it wrong, as a glance at the May 1 edition of Krugman’s own paper would have revealed:

When a rich and well-insured company like BP is responsible for the spill, the government will seek reimbursement of what it spends on cleanup from the company and its insurers.

So Krugman’s post not only strained to take a cheap shot at libertarians, but also thoroughly botched a factual background that it would have been easy enough for him to have looked up. Other that that, it was fine.

Big Global Warming Case Hinges on Weird Procedural Technicality

Nearly two weeks ago, I blogged about some strange procedural developments in the big global warming case coming out of the Gulf Coast, Comer v. Murphy Oil USA.  On the eve of final briefing deadlines before the en banc Fifth Circuit, an eighth judge of that court recused from the case (we don’t know the reason, but the previous seven recusals were presumably due to stock ownership) and so the court was faced with an unprecedented situation: losing an en banc quorum after previously having had enough of one to vacate the panel decision and grant en banc rehearing in the first place.  We were all set to file our brief when the Clerk of the Fifth Circuit issued an order notifying the parties of the lost quorum and canceling the scheduled hearing — and nothing more.  Out of an abundance of caution, we decided to go ahead with filing late last week.

Again, here’s the situation: Mississippi homeowners sued 34 energy companies and utilities operating in the Gulf Coast for damage sustained to their property during Hurricane Katrina. The homeowners alleged that the defendants had emitted greenhouse gases, which increased the concentration of greenhouse gases in the atmosphere, which contributed to global warming, which accelerated the melting of glaciers, which raised the global sea level, which increased the frequency and severity of hurricanes, which caused the destructive force of Hurricane Katrina. The district court concluded that it lacked the authority to resolve the public debate over global warming and dismissed the case. A Fifth Circuit panel reversed this dismissal, holding that the homeowners have standing to raise some of their claims and that those claims are appropriate for resolution by the federal courts. The Fifth Circuit then granted rehearing en banc.

Cato filed an amicus brief on the energy companies’ behalf, arguing that homeowners lack standing to bring their suit and that the case raises a nonjusticiable political question. Our brief asserts that the homeowners’ claim does not provide a clear causal connection between the harm suffered and any particular conduct by the energy companies, and that the money damages the homeowners requested would not remedy the environmental harm alleged. More importantly, we maintain that political questions such as those surrounding climate change must be resolved by Congress, not the federal courts. Put simply, the Constitution prohibits federal courts from resolving highly technical social and economic policy debates. Permitting plaintiffs to achieve “regulation by litigation” would not only contradict settled Supreme Court precedent, but would betray the separation of powers principles embodied in the Constitution.

The Clerk has since directed the parties to brief the procedural issues surrounding the apparent lost quorum, which letter-briefs came in this week (as a mere amicus, we did not file on this).  I’ll spare you the technical details, but there are three possible ways in which the Fifth Circuit could now rule: 1) the court actually does have a quorum and thus oral argument is resecheduled; 2) the panel decision is reinstated (with an ensuing cert petition appealing that decision to the Supreme Court); and 3) the district court is affirmed without opinion (the same result as when an appellate court vote is tied).  Stay tuned — this is a truly weird denouement to a hugely important case.

Krugman and Libertarianism and Political Power

Paul Krugman has a post today titled “Why Libertarianism Doesn’t Work, Part N.” Maybe parts A-M were compelling, but it seems like there’s a big flaw in his logic today. Here’s the entire item:

Thinking about BP and the Gulf: in this old interview, Milton Friedman says that there’s no need for product safety regulation, because corporations know that if they do harm they’ll be sued.

Interviewer: So tort law takes care of a lot of this ..

Friedman: Absolutely, absolutely.

Meanwhile, in the real world:

In the wake of last month’s catastrophic Gulf Coast oil spill, Sen. Lisa Murkowski blocked a bill that would have raised the maximum liability for oil companies after a spill from a paltry $75 million to $10 billion. The Republican lawmaker said the bill, introduced by Sen. Robert Menendez (D-NJ), would have unfairly hurt smaller oil companies by raising the costs of oil production. The legislation is “not where we need to be right now” she said.

And don’t say that we just need better politicians. If libertarianism requires incorruptible politicians to work, it’s not serious.

Well, he’s got a point. Politicians do interfere in the tort system — by placing caps on liability, by stripping defendants of traditional legal defenses, and in other ways. As my colleague Aaron Powell notes, the problem here is that politicians have power that libertarians wouldn’t grant them. And:

Second, and more troubling for Krugman, is his admission that all politicians are corruptible. If that’s true (and it almost certainly is), then what does it say about Krugman’s constant calls for granting those same corruptible folks more power over our lives? Surely if Murkowski is corrupt enough to protect BP from tort damages, she’s corrupt enough to rig safety regulations in BP’s favor.

The libertarian system of markets and property rights is impeded when politicians interfere in it. But Krugman’s ideal system is that politicians should decide all questions — monetary policy, health care policy, product safety, environmental tradeoffs, you name it. Whose system is more likely to produce corrupt politicians, and more likely to fail because of them?

Kerry and Lieberman Unveil Their Climate Bill: Such a Deal!

I see that my colleague Sallie James has already blogged on the inherent protectionism in the Senate’s long-awaited cap-and-tax bill.  A summary was leaked last night by The Hill.

Well, we now have the real “discussion draft” of  “The American Power Act” [APA], sponsored by John Kerry (D-NH) and Joe Lieberman (I-CT).  Lindsay Graham (R-SC) used to be on the earlier drafts, but excused himself to have a temper tantrum.

So, while Sallie talked about the trade aspects of the bill, I’d like to blather about the mechanics, costs, and climate effects. If you don’t want to read the excruciating details, stop here and note that it mandates the impossible, will not produce any meaningful reduction of planetary warming, and it will subsidize just about every form of power that is too inefficient to compete today.

APA reduces emissions to the same levels that were in the Waxman-Markey bill passed by the House last June 26.  Remember that one – snuck through on a Friday evening, just so no one would notice?  Well, people did, and it, not health care, started the angry townhall meetings last summer.  No accident, either, that Obama’s approval ratings immediately tanked.

Just like Waxman-Markey, APA will allow the average American the carbon dioxide emissions of the average citizen back in 1867, a mere 39 years from today.  Just like Waxman-Markey, the sponsors have absolutely no idea how to accomplish this.  Instead they wave magic wands for noncompetitive technologies like “Carbon Capture and Sequestration” (“CCS”, aka “clean coal”), solar energy and windmills, and ethanol (“renewable energy”), among many others.

Just like Waxman-Markey, no one knows the (enormous) cost.  How do you put a price on something that doesn’t exist?  We simply don’t know how to reduce emissions by 83%.  Consequently, APA is yet another scheme to make carbon-based energy so expensive that you won’t use it.

This will be popular!  At $4.00 a gallon, Americans reduced their consumption of gasoline by a whopping 4%.  Go figure out how high it has to get to drop by 83%.

Oh, I know. Plug-in hybrid cars will replace gasoline powered ones. Did I mention that the government-produced Chevrolet Volt is, at first, only going to be sold to governments and where it is warm because even the Obama Administration fears that the car will not be very popular where most of us live.  Did I mention that the electric power that charges the battery most likely comes from the combustion of a carbon-based fuel? Getting to that 83% requires getting rid of carbon emissions from power production.  Period.  In 39 years. Got a replacement handy?

Don’t trot out natural gas.  It burns to carbon dioxide and water, just like coal.  True, it’s about 55% of the carbon dioxide that comes from coal per unit energy, but we’ll also use a lot more more electricity over the next forty years.  In other words, switching to natural gas will keep adding emissions to the atmosphere.

Anyway, just for fun, I plugged the APA emissions reduction schedule into the Model for the Assessment of Greenhouse-gas Induced Climate Change (MAGICC – I am not making this up), which is what the United Nations uses to estimate the climatic effects of various greenhouse-gas scenarios.

I’ve included two charts with three scenarios. One is for 2050 and the other for 2100.  They assume that the “sensitivity” of temperature to a doubling of atmospheric carbon dioxide is 2.5°C, a number that many scientists think is too high, given the pokey greenhouse-effect warming of the planet that has occurred as we have effectively gone half way to a doubling already. The charts show prospective warming given by MAGICC.

The first scenario is “business-as-usual”, the perhaps too-optimistic way of saying a nation without APA.  The second assumes that only the US does APA, and the third assumes that each and every nation that has “obligations” under the UN’s Kyoto Protocol on global warming does the same.

As you can plainly see,  APA does nothing, even if all the Kyoto-signatories meet its impossible mandates.  The amount of warming “saved” by 2100 is 7% of the total for Business-as-Usual, or two-tenths of a degree Celsius. That amount will be barely detectable above the year-to-year normal fluctuations.  Put another way, if we believe in MAGICC, APA – if adopted by us, Europe, Canada, and the rest of the Kyotos – will reduce the prospective temperature in 2100 to what it would be in 2093.

That’s a big if.  Of course, we could go it alone. In that case, the temperature reduction would in fact be too small to measure reliably.

I’m hoping these numbers surface in the “debate” over APA.

So there you have it, the new American Power Act, a bill that doesn’t know how to achieve its mandates, has a completely unknown but astronomical cost, and doesn’t do a darned thing about global warming.  Such a deal!

Senate Climate Bill Trade FAIL

The Kerry-Lieberman-Graham (is he still part of these efforts?) climate bill summary has been leaked. I’m sure my colleague Pat Michaels will weigh in on its contents soon, but in the meantime I thought I would comment on the trade-related aspects of the bill, or at least the summary that is now in the public domain.

As Scott Lincicome points out, the drafters have gone to great pains to emphasize that this bill is, like, totally about saving the environment.  (Which, by the way, is a bit of a turnaround). I’ve blogged before about why advocates of “border adjustment measures” need to be careful about the justification they offer.  In short, the World Trade Organization does not look too kindly upon disguised protectionism, and any legal challengers would probably use things like, say, press releases touting the (traditional) protective benefits of carbon tariffs as evidence of U.S. wrongdoing. The House bill fell short in that regard, with lots of talk about equalizing costs etc, and apparently the sponsors of the Senate bill have learned from warnings from trade experts. Not completely, though. Here’s Scott on their efforts to be more careful, and why they fall short:

The bill’s short summary (available here) also follows [a] new “green” road-map…:

In order to protect the environmental goals of the bill, we phase in a WTO-consistent border adjustment mechanism. In the event that no global agreement on climate change is reached, the bill requires imports from countries that have not taken action to limit emissions to pay a comparable amount at the border to avoid carbon leakage and ensure we are able to achieve our environmental objectives.

You couldn’t shoehorn more “environmental” references into this summary if you tried.  Only one small problem: this strictly “environmental” summary falls clearly under the main heading “Expanding America’s Manufacturing Base,” and the long summary of Sections 775-777 above comes under the main heading “Subtitle A - Protecting American Manufacturing Jobs and Preventing Carbon Leakage.”  So did the Senate drafters really just take all that time purging all of the scary “competitiveness” language from their new bill’s carbon tariffs provisions, only to keep them under a legislative subtitle that expressly denotes provisions dealing with domestic industrial competitiveness?

Scott’s right, but I found the heading in the bill’s long summary even more blatant: Title IV, under which the international provisions are explained, is called “Job Protection and Growth”. Call me overly cautious, but I don’t think having the phrase “job protection” as the first words in the title on border measures is a good way to hide your intent from the WTO or, for that matter, your increasingly-fractious trade partners.

Of Butterflies, Tsunamis, and Draconian Recusal Standards

Last October, I blogged about Comer v. Murphy Oil USA, a lawsuit in Mississippi alleging that the defendant oil, coal, utility, and chemical companies emit carbon dioxide, which causes global warming, which exacerbated Hurricane Katrina, which damaged the plaintiffs’ property.  Mass tort litigation specialist Russell Jackson called the case “the litigator’s equivalent to the game ‘Six Degrees of Kevin Bacon.’”  In a brief that Cato was due to file this week, I framed the operative question as, “When a butterfly flaps its wings, can it be sued for the damage any subsequent tsunami causes?”

The plaintiffs asserted a variety of theories under Mississippi common law, but the main issue at this stage was whether the plaintiffs had standing, or whether they could demonstrate that their injuries were “fairly traceable” to the defendants’ actions.  The federal district court dismissed the case but a dream panel (for the plaintiffs) of the Fifth Circuit Court of Appeals held that the plaintiffs could indeed proceed with claims regarding public and private nuisance, trespass, and negligence. 

In my blog post, I predicted that the Fifth Circuit would take up the case en banc (meaning before all the judges on the court, in this case 17) and reverse the panel.  And this was all set to happen – even though eight judges recused themselves, presumably because they owned shares of defendant companies – with en banc argument slated for May 24.  I was planning to head down to New Orleans for it, in part because the judge I clerked for, E. Grady Jolly, was going to preside over the hearing (the only two more senior active judges being recused).

But a funny thing happened on the way to legal sanity.  On Friday, not half an hour after I had finished editing Cato’s brief, the court clerk issued a notice informing the parties that one more judge had recused and, therefore, the en banc court lacked a quorum.  As of this writing, I still don’t know who this judge is and what circumstances had changed since the granting of the en banc rehearing to cause the recusal.  And indeed, by all accounts the Fifth Circuit is still figuring out what to do in this unusual (and, as far as I know, unprecedented) situation where a court loses a quorum it initially had – having already vacated the panel decision.

In short, the court could decide that the vacatur stands and either remand to a (now-confused) district court or rehear the case in a new random panel assignment.  More likely, however, the court will now reinstate the terrible, horrible, no good, very bad panel decision – and we’ll tweak our brief to make into one that supports the defendants’ inevitable cert petition.

All in all, an illustration of the absurdity both of litigating climate change politics in the courts and of forcing judges (including Supreme Court justices) to withdraw from cases for owning a few hundred dollars’ worth of stock.  If that’s all it takes to corrupt federal judges, we have bigger problems than trial lawyers run amok!