Category Archives: energy and the environment

I Wish They Had Just Divested

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The Swarthmore College Board of Managers writes,

Following extensive preparation, analysis, and robust discussion and debate by managers on both sides of the issue, the Board of Managers of Swarthmore College reached consensus not to divest from fossil fuels. . .

The Board is fully committed to addressing the threat of climate change, however. To affirm our commitment, the College will intensify its sustainable practices as an institution. Our efforts will cut across all aspects of College operations including new construction, energy consumption, water usage, and recycling, and also the curriculum and investment practices. We will build upon important environmental efforts that have long been underway and expand upon them.

The email notifying alumni of this decision reads, in part,

The managers of Swarthmore College agree that climate change is the most pressing issue of our time and that Swarthmore College can — and must — play a leadership role in helping to curb the seemingly insatiable appetite for fossil fuel.

I think that a good rule of thumb is that if the board of managers of a college insists that something belongs in the curriculum, it doesn’t.

Why California is Losing Sustainability

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Joel Kotkin writes,

Desalinization, widely used in the even more arid Middle East, notably Israel, has been blocked by environmental interests but could tap a virtually unlimited supply of the wet stuff, and lies close to the state’s most densely populated areas. Essentially the state could build enough desalinization facilities, and the energy plants to run them, for less money than Brown wants to spend on his high-speed choo-choo to nowhere.

Pointer from Don Boudreaux, who recommends the entire essay.

My one criticism is that it not an essay written to convince people to change their minds. To me, the most interesting challenge is to find a way to explain to environmentalists that markets are a subtle, sophisticated calculation mechanism for sustainability. (Incidentally, I am not certain that desalinization is quite at the point where it meets the market test.) Of course, markets can and do come up with imperfect answers. But people who claim to have better answers often do not.

Robert Solow on Sustainability

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A commenter points to a talk from 1991, in which Solow says,

Once you take the point of view that I have been urging on you in thinking about sustainability as a matter of distributional equity between the present and the future, you can see that it becomes a problem about saving and investment. It becomes a problem about the choice between current consumption and providing for the future.

The reader recommended the article for this quip:

It is very hard to be against sustainability. In fact, the less you know about it, the better it sounds.

I recommend the entire article to readers of this blog and indeed to any student of economics. In fact, I would like to hit every graduate school economics professor over the head with it and say, “This is what you should be aiming to enable your students to do when they get their Ph.Ds.”

Solow deals with the concept of sustainability not with a formal model but with a philosophical examination. It is this ability to think like a philosopher that was lost when MIT transformed economics. Ironically, Solow aided and abetted the transformation.

Solow was my dissertation adviser. Although we have grown apart ideologically, my macro memoir explains how I was drawn to him in the late 1970s:

Unlike many of my fellow students, I am not inspired by Dornbusch and Fischer. I do not see the benefit of writing down equations to solve long-term optimization problems as a way of understanding macroeconomics. To me, too much economic relevance is being sacrificed to the altars of mathematical rigor and rational-expectations dogma. That assessment puts me hopelessly out of step with where academic macroeconomics is headed. It binds me to Solow.

The Economics of Sustainability

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George Leef writes,

The sustainability movement isn’t interested in the kind of analysis that scholars bring to controversies. It wants zealots, such as the “eco-reps” now employed on many campuses to push the agenda. Recycling, for instance, is always advanced as an imperative for saving the planet. There are trade-off questions about recycling that have caused many people to conclude that its costs often exceed its benefits, but students are not encouraged to think about them.

It strikes me that introductory economics teachers need to include some thoughts on sustainability. Here are mine:

1. The most reliable indication of sustainability is the ability to make a profit at unsubsidized market prices.

2. When people disagree with the market’s judgment, there is a good chance that they are focusing on a cost they can see and ignoring a cost that they cannot see. For example, someone who argues that “eating local” is sustainable probably sees the cost of transporting food but does not see the cost of allocating land and water to inferior uses. Before modern transportation, refrigeration, and food preservatives, more of us “ate local.” Consequently, we wasted land near cities on farms, and that land now is used to house people or has been returned to wilderness.

3. If in order to get people to recycle you need to use subsidies or regulations, then that is a sign that recycling does not save resources and instead wastes them.

4. Remember that one of the laws of science is that in chemical reactions matter is neither created nor destroyed. There is a sense in which production of goods and services does not “use up” physical resources. Instead, it changes the form of matter from something that is relatively useless to something that is relatively useful.

5. The great industries of the world came about because entrepreneurs were able to take abundant, seemingly useless resources and make them valuable. Before internal combustion engines, oil was just annoying gunk. Before computers, silicon was just the main constituent in sand.

6. In a free-market economy, price signals tell consumers and entrepreneurs what can be wasted and what must be conserved. If property rights are clear and market prices are free to move, then there is no need to fear running out of any valuable resource.

7. Public policy is subject to public choice problems, including the bootleggers and baptists problem. I believe that the consensus now is that using corn to fuel cars is not sustainable. If a free market had experimented with using corn to fuel cars, the experiment would have failed and that would be the end of it. However, because there is now a substantial lobby for the ethanol mandate, government policy to enforce the use of corn to fuel cars remains in place indefinitely.

Properly taught, freshman economics has a lot of useful things to say about sustainability.

News Reports Throw Caution to the Wind

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Many news reports about a new Department of Energy report echo the Boston Globe.

Wind power will be cheaper than electricity generated by natural gas within a decade, even without a federal tax incentive, according to a US Energy Department analysis.

Increasing wind energy to 35 percent of US electricity supplies by 2050 will cause national power prices to decline 2.2 percent and result in $400 billion in benefits related to reduced emissions of greenhouse gases. Wind energy provided 4.5 percent of US power supplies in 2013.

The report itself says,

The Study Scenario is a plausible outcome, representing what could come about through a variety of pathways, including aggressive wind cost reductions, high fossil fuel costs, federal or state policy support, high demand growth, or different combinations of these factors.

(emphasis in the original). If I am understanding this correctly, the authors took this 35 percent goal and conjured a scenario in which it might occur. Maybe we will have the “aggressive wind cost reductions, high fossil fuel costs” and so on, or maybe we will not.

I would add that I really object to a study that says that wind power will soon be cheap and ubiquitous. . .and that is why we need to make a long-term commitment to subsidize it. If wind power really does amount to 35 percent of total electricity generation, those subsidies will amount to real money. Moreover, if you really are confident that wind power is economical, then you would not be arguing for subsidies out into the indefinite future.

The Tesla Battery

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It got lots of media attention. The WaPo writes,

For the millions of consumers frustrated with their power companies thanks to frequent outages and poor customer service, the batteries could be a boon. In general, the choices for how people power their homes is relatively limited. Most have to rely exclusively on their local utility providers. Getting a generator can be expensive — some homeowners pay around $20,000 for back-up generators that run on natural gas. So Tesla is eyeing a market that might be ripe for innovation.

I would be happy to own a battery for that purpose. We looked into generators, and in order to meet safety codes they have to be situated so far from our home that they would not be within our property line.

More generally, if the batteries prove to be economical, they could really change the electric power industry. You can smooth out peak demand, make better use of solar and wind, etc.

Ignoring Hotelling, Ignoring Standard Macroeconomics

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Rabah Arezki and Olivier Blanchard write,

Futures markets suggest that oil prices will rebound but will remain below the level of recent years.

Pointer from Mark Thoma.

Futures markets are bound to tell you that oil prices will remain near current levels, with a tendency to rise. If not, there is an arbitrage opportunity. If futures prices were far below spot prices, then producers would pump lots of oil and holders of inventories would try to sell every drop as soon as possible, until current prices fell. If futures prices were far above spot prices, then producers would cap wells and holders of inventories would fill every storage tank to the brim, until current prices rose.

I find the Hotelling model of resource pricing persuasive. In that model, the futures price and the spot price do not contain independent information. The relationship between the two is governed by storage cost and the rate of interest.

Then there is this:

central banks’ forward guidance is crucial to anchor medium-term inflation expectations in the face of falling oil prices.

This statement confused me on many levels.

1. The drop in oil prices that is already behind us would not seem to cause a downward shift in medium-term inflation expectations. The quoted phrase seems to equate the future with the past and levels with rates of change.

2. Elsewhere in the article, the authors point out that for oil importing countries, a drop in oil prices will boost aggregate demand. Well, from a conventional macroeconomic standpoint, that is the end of the story. There is no reason at all for monetary authorities to think that all of a sudden they need to counter the deflationary impact of an increase in aggregate demand. That is an oxymoron.

Yes, Blame Oil Speculators

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James Pethokoukis writes,

If greedy speculators were to blame for the $7.50 per barrel (and 10.6%) increase in oil prices during the first half of this year that motivated your anti-speculation bill in early July, do oil speculators now get any of the credit for the $43.60 (and 41%) drop per barrel in oil prices during the last half of 2014?

1. Oil is a speculative asset. The price of oil today and the price expected for oil ten years from now are necessarily linked. See Hotelling pricing of natural resources.

If you believe that the oil price is going to be high ten years from now, then you try to leave more of it in the ground today, raising its price today. If you believe that the price is going to be low ten years from now, you try to sell it now, while you can still get a decent price. This drives the price down today.

2. Although I cannot find the post now, I recall James Hamilton suggesting that the oil market is subject to speculative overshooting and undershooting. More recently, he wrote,

It’s just a matter of how long it takes for the high-cost North American producers to cut back in response to current incentives. And when they do, the price has to go back up.

3. Why would someone expect oil prices to be low for the next several years? Perhaps low-cost energy supplies will emerge (note that fracking is not low-cost) rapidly. Perhaps world economic growth will be very slow for many years. However, it strikes me as at least plausbile that low-cost energy supplies will not emerge and that world economic growth will be decent, in which case I would expect the price of oil to rise. Most important, there is still the possibility that all the money-printing going on in the world will amount to something, and even if the supply-demand balance in energy markets stays where it is, the nominal price of oil will go up a lot. If I were a speculator now, I would be inclined to be long oil.

4. It is possible that what is going on is a cave-in on the part of speculators who had been betting that money-printing would cause a lot of inflation. One can interpret the decline in interest rates and the softness in commodity prices as reflecting speculators giving up on those positions.

5. As is often the case, in looking at financial markets I find myself feeling confused and out of synch.

Green Rent

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In today’s news:

The Department of Commerce slapped high tariffs on solar products from China and Taiwan yesterday in a decision intended to address dumping and unfair subsidization of imports to the United States. The final ruling marks another victory for petitioner SolarWorld Americas in a lengthy solar trade battle.

We also have trade barriers against Brazilian sugar, which otherwise might be used in biofuels. So, on the one hand, we subsidize our producers of green energy (which one can argue is a WTO violation). But we use trade policy to raise the cost of green energy to consumers. It’s almost as if the environmental concern is just a smoke-screen used by rent-seeking producers.