Recently in Environmental policy Category

From the Houston Chronicle:

A majority of Texans would be willing to pay $4 more on their monthly electric bills to create a network of power lines from wind farms, according to a recent poll.

The survey, commissioned by a group of wind generation companies, is being released in advance of state utility regulators' debate over how much new transmission to require for wind-generated electricity. The Public Utility Commission is considering several plans, at costs ranging from about $3 billion to $6 billion.

The commission staff estimates the plans could cost average household electric consumers $2.50 to $5 extra a month.

... When asked about a new charge of $4 each month for power line construction to carry electricity from wind farms, 55 percent said they would favor paying the new fee and 42 percent said they would be opposed, with 4 percent unsure.

... The PUC is expected to decide the level of transmission by mid-August.

It isn't clear from the article whether the $2.50 to $5 extra a month is simply the estimate of the added transmission costs, or whether it is an estimate of the net effect considering any lower power costs that would offset a higher transmission payment.

Maybe one of our intrepid readers can point us to the PUCT study answering this question.

Michael Giberson

• T. Boone Pickens, the oil and gas billionaire now making a splash in wind energy, has released the "Pickens Plan" for reforming the U.S. energy landscape. In brief, use a lot more wind power to displace natural gas used in electric power generation, and use the natural gas to displace gasoline in transportation uses.

  
  Geoff Styles provides an assessment and commentary on the plan, concluding it is "an idea that merits further analysis and consideration." The USA Today also reports on the Pickens Plan. Pickens has an op-ed in the Wall Street Journal: My Plan to Escape the Grip of Foreign Oil.

• The Utility Wind Integration Group has said, "Hydropower has long been viewed as a perfect fit for wind generation," because the ready controllability of hydro overcomes some of the most obvious drawbacks of wind generation. But "perfect fit" is not the same as saying "no brainer." It still takes effort to get the two energy sources to work together, and you need functioning contingency plans for rare events.

  
  Last week operators at the Bonneville Power Administration had to cut hydro generation drastically in response to an unexpected surge in power, forcing dam operators to spill more water than expected and potentially threatening migrating salmon.

Apparently part of the problem was that the wind power operators didn't answer calls from the BPA, or didn't understand instructions to cut back on output. It was the first time the BPA has called wind power operators with such requests.
• In the Dallas Morning News, Elizabeth Souder reports on the current status of wind power in Texas: "Lawyers representing nearly everyone in the power industry have been airing these concerns to the PUC [of Texas] during the past couple of years as commissioners consider wind transmission." The story suggests that the Texas approach may be the model for integrating wind power elsewhere in the country, perhaps justifying the heavy investment in sorting out the issues in Texas first.

Michael Giberson

The Global Subsidies Institute takes note of a report on the consumer (and taxpayer) costs of ethanol-blended fuel in Missouri:

A report from a Missouri-based research organization debunks the claim that Missourians are saving money through a state law requiring that retail gasoline contain a minimum of 10% ethanol. The report is in reaction to an assertion by the Missouri Corn Merchandising Association (MCMA), alleging that Missourians will save more than US$ 285 million through the E-10 mandate in 2008, and nearly US$ 2 billion over the following decade.

The MCMA arrived at these numbers by taking the price difference between pure-grade gasoline and E-10 blended fuel, and multiplying it by Missouri's projected annual consumption.

However, the report by the Show Me Institute reveals two fundamental flaws with this calculation. One is that it fails to take into account the fact that E-10 blended fuel is cheaper because ethanol producers receive tax credits and other subsidies.

"Government officials cannot simply take tax dollars from the public, give those tax dollars to ethanol blenders, and then have ethanol supporters tell the public that ethanol is saving them money with cheaper fuel as though the subsidy never existed," write the report's authors, Justin P. Hauke and David Stokes.

The MCMA also does not take into account that E-10 blended fuel is about 2.5% less efficient than pure-grade gasoline, meaning that Missourians will be filling their tanks more often.

When both of these factors are taken into account, the ethanol blending mandates are shown to be costing Missourians about US$ 118 million per year.

The report, "The Economic Impact of the Missouri E-10 Ethanol Mandate", is available from the Missouri-based Show Me Institute.

(HT to Robert Rapier, R-Squared Energy Blog)

Michael Giberson

On July 4, The Guardian newspaper reported:

Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.

The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body.

The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil.

Senior development sources believe the report, completed in April, has not been published to avoid embarrassing President George Bush.

"It would put the World Bank in a political hot-spot with the White House," said one yesterday....

[The report] argues that production of biofuels has distorted food markets in three main ways. First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel. Second, farmers have been encouraged to set land aside for biofuel production. Third, it has sparked financial speculation in grains, driving prices up higher.

Other reviews of the food crisis looked at it over a much longer period, or have not linked these three factors, and so arrived at smaller estimates of the impact from biofuels. But the report author, Don Mitchell, is a senior economist at the Bank and has done a detailed, month-by-month analysis of the surge in food prices, which allows much closer examination of the link between biofuels and food supply.

The report points out biofuels derived from sugarcane, which Brazil specializes in, have not had such a dramatic impact.

Also July 4, the Marketplace radio news program ran a brief piece with the reporter.

(HT to Tom Philpott at Gristmill.)

UPDATE: As AWench points out in the comments, and as the WSJ Environmental Capital reports, the report in The Guardian was a little off target. The report wasn't secret or suppressed, just a working paper making the rounds, still being polished by the author.

Lynne Kiesling

Did the Reason article from the Kiesling/Bailey/Smith carbon policy panel that I linked to earlier this week just whet your appetite? Then this Reason Roundtable on Climate Change is for you!

There has been much discussion in free market circles about market-based solutions to global warming that minimize the threat that big government poses to property rights. But less attention has been paid to the threat that greenhouse gas emitters themselves might pose to private property. This is the issue that Jonathan Adler, Professor of Law and Director of the Center for Business Law & Regulation at the Case Western Reserve University School of Law and Indur Goklany, author of The Improving State of the World: Why We're Living Longer, Healthier, More Comfortable Lives on a Cleaner Planet discuss in this edition of Reason Roundtable in two radical and provocative essays.

I like Shikha Dalmia's introductory essay, particularly where she says

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. These rights enhance human welfare by allowing individual choice and experimentation and creating an incentive for individual entrepreneurship and economic growth. But more: they are both the base of - and bulwark for - all other rights. They have normative value quite apart from their utilitarian value.

Jonathan Adler's essay focuses on thinking about climate policy from a property rights perspective, and I think he's broadly correct throughout. But his discussion leaves a gaping hole: there are substantial transaction costs associated with a property rights approach, given existing institutions. Some policy change is required to reduce the transaction costs that currently reduce the capacity of the global network to achieve private ordering. Bringing either tort claims or nuisance claims in this highly diffuse and distributed situation would be prohibitively costly. So how do we use his insights to help us design a set of institutions that enable private climate ordering to occur?

I encourage you to read all three essays.

Michael Giberson

Rich Sweeney, at Common Tragedies, raises the question "Is dynamic pricing green?"

Riffing off of Lynne's article in Smart Grid News and a complementary post here on Knowledge Problem, Rich acknowledges that dynamic pricing for retail power can encourage load shifting away from peaks and may even reduce consumption overall. But, he suggests, even if dynamic pricing reduces consumption a little it may not reduce overall emissions from power generation.

The reason, he says, it that much peak load generation is natural gas fueled, while baseload generation tends to be mostly coal fueled. All the load shifting that dynamic pricing encourages will move consumption away from gas and toward coal. Given that coal generation tends to produce much higher levels of pollutants than gas, load shifting can increase emissions.

As a general matter, I think Sweeney is right, but a more precise answer could be had looking at the question on a region-by-region level.

• Some areas have more baseload hydro, for example, or nukes, in which case the shift from peak to off-peak could reduce emissions even absent any net conservation.
• In some cases -- fewer and fewer with oil prices the way they are -- peak generators run on fuel oil, and some small generators run on diesel. Coal typically produces higher emissions than fuel-oil powered generators, but the contrast isn't as great as with gas.
• In the longer run, reducing peak consumption helps delay investment in new generating plants and transmission lines, thereby helping to avoid the environmental costs associated with that investment.

The real lesson here is that there is a difference between economizing on the consumption of electricity and economizing on the use of environmental resources. Putting a real price on retail electricity will bring about more efficient use of electric power, but if you want more economical use of environmental resources -- such as, for example, clean air -- then we need to put a real price on it, too.

Lynne Kiesling

Here's an online edited version of the transcript, and a link to the video of a discussion panel that Ron Bailey, Fred Smith, and I did at a Reason in DC event in October 2007. It was a very lively conversation!

The transcript is in the July 2008 print edition of Reason.

Lynne Kiesling

There are a couple of very interesting recent solar developments that have substantial economic implications. First, the blue sky stuff: courtesy of Slashdot, a team of researchers in the Netherlands have demonstrated avalanche effects in semiconductors that can be used in solar cells (here's the original article). Avalanche effects mean that instead of having a 1:1 relationship between a photon and an electron, in which 1 photon releases 1 electron, it's physically possible in these nano-scale semiconducting materials to have 2:1 or even 3:1 -- 2 or 3 electrons released per photon in the material. This means twofold or threefold increase in the possible energy intensity of the solar cell material. These nanocrystals are even inexpensive to manufacture. How cool is that?

What are the economic implications of this new material and new knowledge? The low energy intensity of solar cells has been a factor in making solar a less cost-effective means of generating electricity than fossil fuels, which are extremely energy intensive. This avalanche effect can mean smaller, more energy intensive solar cells, which changes the cost structure for solar. I think it will certainly shift the long-run average cost curve downward, which creates an opportunity for solar retailers to reduce prices. A lower solar retail price shifts the price ratio between solar power and all other electricity power sources. For example, the price ratio between solar-generated and coal-generated electricity would shift such that at the margin, consumers would substitute out of coal-powered electricity and into solar-powered electricity. If I were better at generating the isoquant and indifference curve graphs electronically, I'd show it here graphically ... but the logic is straightforward.

In brief, innovations like this one increase the margin on which solar can compete with fossil fuels.

Another solar development that's amenable to economic analysis is described in this Financial Times article from Monday.

The solar power business is bracing itself for a collapse in prices that could lead to a shake-out in one of the most promising areas of the renewable energy sector.

However, a price slump could hasten the take-up of the technology which would help boost the overall volume of future activity, even as margins fall, industry analysts and officials add.

Expectations of falling prices have been partly sparked by a surge in the level of manufacturing capacity for solar panels. This is likely to lead to demand outstripping supply for the first time in years.

Another factor driving prices is uncertainty over the degree of government subsidies in some key markets for the technology.

Interesting, interesting, interesting. Over the past decade the demand for solar cells has shifted out, leading to increased prices and to supply pressure on inputs like silicon (which is also an input into a lot of other products, so it's a very competitive global market). Now we are starting to see the supply response, with more solar manufacturing capacity coming online and the use of other materials, as entrepreneurs wanting to enter the market innovate around input supply constraints and costs. This market entry is shifting out the supply curve, and from the sounds of the FT article, the magnitude of the supply shift is large relative to current demand. Consequently, they anticipate a fall in solar cell prices due to the large supply shift. Even if the demand curve stays the same, this supply shift means that retail prices of solar cells would fall, leading to increased adoption of solar technology. More realistically, demand is likely to continue shifting out, which may mitigate some of the price reduction.

Another interesting fact in this article: where is a lot of this new manufacturing capacity coming online? China.

Think about the economics of the interaction of these two developments. Taken together, they imply a potentially dramatic decrease in solar power manufacturing costs and retail prices. It will be fascinating to see how this market continues to develop.

Michael Giberson

Tom Igoe, a physical-computing researcher at New York University, said the Prius mpg display is one of the best examples of technology "where green meets information systems."

"For a long time," he said, "we have known that people will change their habits if they are exposed to feedback in real time."

From "For Hybrid Drivers, Every Trip Is a Race for Fuel Efficiency" in the Washington Post. The article notes that real time energy use tools are available for the home as well.

Interesting article. I wonder whether some of the hypermilers described in the article -- when they took longer routes to avoid going up steep hills -- were actually always saving energy. But on the whole, we'd all be better off with more direct feedback on our energy consumption decisions.

Lynne Kiesling

Google's blog has a post describing their new investment in BrightSource Energy and linking to lots of background information on their renewable investments. BrightSource does large-scale solar.

This is part of Google's RE < C initiative, through which they channel their investments with an objective of making renewable energy cheaper than coal-fueled energy. Their FAQ gets at the question of why Google would be doing this:

This initiative is not just about creating clean, affordable electricity for Google - though we are keenly interested in making our business as environmentally sustainable as possible. If successful, this effort would likely provide a path to replacing a substantial portion of the world's electricity needs with renewable energy sources. We want to do our part, but that won't be enough alone to thwart climate change; we need a worldwide green electricity revolution to do that.

OK, fine. But what's the return to Google? They clearly don't see it as a short-run bottom-line reduction in their own energy costs. So what's motivating it? Brand capital and reputation capital? I have my ideas, but I would like to hear yours.

Lynne Kiesling

The WSJ Environmental Capital blog has been doing a great job of keeping up with the wind power industry in the U.S. lately. Today's post about Iberdrola's planned investment in wind power in the U.S. is a good summary, with links to some of their other recent posts on the subject.

How to read this? For starters, it's another sign the U.S. wind power market is going great guns regardless of what Congress does for clean-energy tax credits. As we noted last week, the Department of Energy figures wind power could provide 20% of U.S. electricity by 2030--with or without subsidies. And T. Boone Pickens put the first $2 billion down on his $10 billion bet on the world's biggest wind farm in Texas last week, without waiting for the tax credits to be renewed.

One interesting aspect of Iberdrola's investment plans is how the New York Public Service Commission's concerns about electricity prices may influence some of their investment decisions:

But the New York Public Service Commission, the five-person body that has to give the final green light, is leery. It's worried Iberdrola's deal could harm consumers by raising power prices; it argues the deal would give Iberdrola a virtual monopoly, since the Spanish utility could control both generation and transmission of electricity. So, the New York commission is proposing that the world's biggest wind-farm operator divest some of its wind farms to win regulatory approval.

The post then goes on to note that those who are interested in environmental policy are upset about the NYPSC's objections, because their highest priority is increasing renewable energy capacity to meet New York's goal of having 25% of their power generated from renewable sources by 2013. I think increasingly we will see the tension between the regulatory objective of low electricity prices and the regulatory objective of reduced fossil fuel generation that is evident in this example.

Michael Giberson

While Lynne was visiting Maryland in search of the perfect yarn score, I was in New Orleans for the Jazz and Heritage festival. I'll share a photo or two once I have a chance to sort through them myself. In the meantime, I'll share this article from the Monday morning Times-Picayune, which reveals how hare-brained schemes from economists of 30 or 40 years ago are now being used to manage over-fishing of red snapper in the Gulf of Mexico.

As part of a new plan to manage harvest of the popular but ailing red snapper, [Walter] Heathcock and [Kirk] Fitzgerald are among the Gulf's pioneers in a privatization of fish in the sea.

Unlike the past, where snapper fishers competed for the catch in brief, 10-day-long fishing seasons each month, Gulf commercial snapper fishers now are assigned individual, personalized quotas they can fish at any time throughout the year. Every pound they catch is monitored and tallied by the federal government, and fishers can buy, sell or lease their rights to the fish like stock brokers.

The tradable quota system works much better than the earlier limited fishing seasons:

In the past, regulators managed commercial fishers by saying when and how they could fish. The idea was that those limitations would translate into fewer fish harvested.

But unintended consequences soon followed. Allowing snapper to be caught the first few days of each month meant that every licensed boat was sent scrambling after the same fish. The "derbies" became costly, as fishers braved high seas and stormy weather to pursue the signature bright-red Gulf fish.

"You were basically forced to fish," said Wayne Werner, a snapper fisher from Galliano. "There were a lot of days in the derby when we shouldn't have been out there. Personally, it was a nightmare. Biologically, it was a nightmare."

The new approach of dividing the catch among individuals puts emphasis on personal responsibility.

A Times-Picayune video explains a bit more about fishing under the system:

Meanwhile, from about 350 miles to the west, the Houston Chronicle reports that recreational fishers in Texas are not so happy about how the new system limits their take of red snapper.

"Nobody in the Gulf of Mexico is happy. I'm not happy. You're not happy," [Roy] Crabtree, regional administrator for the National Marine Fisheries Service's southeast region, said to a crowd of about 100 aggravated anglers during a meeting Friday evening at the University of Houston-Clear Lake.

"I can understand your frustrations," he said to the group who had come, mostly, to voice their exasperation with increasingly tighter federal regulations on recreational red snapper harvest. "But I need real solutions that are consistent with the science and that will stand up in court."

The meeting, arranged and attended by Congressman Nick Lampson, D-Stafford, was meant as a way for Texas anglers to hear the reasoning behind recent moves to further tighten the already choked recreational snapper regulations in federally controlled Gulf waters and to question the point man for the federal agency responsible for managing the snapper fishery.

It was a grim 2 1/2 -hour session. And at its conclusion, it was obvious that the controversy surrounding the red snapper fishery is not going to fade any time soon.

Lynne Kiesling

I handed out the Washington Post story on biofuels that Mike posted on Wednesday in one of my classes, and it was very timely, as they were presenting case studies of proposed biofuels investments. The one thing I went out of my way to point out to them was an appalling, shocking example of flimsy and incorrect economic logic:

Don Endres, the chief executive of VeraSun and owner of 20 percent of its shares, grew up on a farm in Watertown, S.D., where his father and grandfather raised corn. His brothers are still farmers.

Endres says ethanol plants aren't to blame for high corn or food prices. He notes that the corn used to make ethanol isn't the kind that people eat anyway.

AAARGH! Does he fail to understand the principle of substitutability? Let me say this slowly and clearly: different crops compete for the use of scarce land. Ethanol plants, and the subsidies that make it more attractive to build them, increase the demand for a type of corn. That makes it more profitable for farmers to plant that corn, and to do so they reduce their plantings of soy and corn for food (for both humans and livestock). That reduction in supply, in combination with global economic growth that increases food demand, raises prices.

Thus Mr. Endres is entirely incorrect. Ethanol plants do contribute to high food prices, despite their use of non-food corn.

And he's not alone in making this fallacious argument. I'm sitting here listening to NPR's Morning Edition, which just did a story about this question (I'll post the link when it's available), and one of the contributors to the story was Iowa Senator Charles Grassley (who is himself a farmer). Not only did he make the same incorrect argument as Mr. Endres, he even went one further and bit into a kernel of the corn used for ethanol, to show how inedible it is!

Politics really is just theater, isn't it? Sadly, my taste in theater tends toward Shakespeare and Tom Stoppard, not toward self-aggrandizing gimmicks.

Here's my question: are folks like Mr. Endres and Senator Grassley really that economically illiterate, really that stupid? Or are they hoping that everyone else is that economically illiterate, and that they can use this fallacious argument for their own political expediency? In either case, I find it shocking.

Lynne Kiesling

I'm taking a little time this morning to catch up on the reading I've missed over the past month, while I've been focused elsewhere. One worthwhile observation, with which I agree, comes from Virginia Postrel's note about carbon policy positions of Presidential candidates, among other things:

It's infuriating how all three presidential candidates prattle on about the need to fight global warming while also complaining about the high price of gasoline. ... The last thing you'd want to do is reduce gas taxes during the summer, as John McCain has proposed. That would just encourage people to burn more gas on extra vacation trips--as any straight talker would admit.

Michael Giberson

In an op-ed in the Washington Post, Lester Brown and Jonathan Lewis seem overly generous in their interpretation of the motivations for the now-obvious-failure of ethanol policy in the United States:

Food-to-fuel mandates were created for the right reasons. The hope of using American-grown crops to fuel our cars seemed like a win-win-win scenario: Our farmers would enjoy the benefit of crop-price stability. Our national security would be enhanced by having a new domestic energy source. Our environment would be protected by a cleaner fuel. But the likelihood of these outcomes was never seriously tested, and new evidence has shown that the justifications for these mandates were inaccurate.

I must have missed the analysis indicating that ethanol was intended to create crop price stability. I thought the hope was always that the policy would push food prices up. Isn't that how increases in demand work?

Also, the national security argument for ethanol always struck me as false. We import most of our oil from Canada and Mexico, and with oil a fungible product in an international market, it is hard to see just how some other nation might wield oil-withholding as an offensive threat.

Possibly the move to increased ethanol could have lead to environmental improvements, but biofuel mandates are a bad way to implement policy even if it were true that they produced benefits. As a practical matter, the environmental arguments for ethanol have always been mostly a smokescreen. Ethanol policies were never popular in Iowa because of their potential for improving air quality in Los Angeles or New York City. "Food-to-fuel mandates" always smelled like political pork to me, so I guess I've never had a generous opinion of the motives of its political supporters.

(In fact, there is some danger that all ethanol technologies will be unfairly tainted by an association with current failed policies mostly intended to drive up corn prices. Supporters of non-corn-based alternatives for making ethanol may want to distance themselves from the pork-barrel politicking of the agribusiness lobby.)

Of course, Brown and Lewis are promoting a change in policy, for which the support of politicians is needed. I suppose, purely as a rhetorical device, it is useful to not describe the targets of your appeal as a bunch of .... Well, it is probably useful not to finish that sentence.

The Brown and Lewis editorial does bother me in parts. Does most of the energy used to make ethanol actually come from coal? I would have guessed oil for fuel and natural gas for fertilizer. Also, like many people (myself included), Brown and Lewis are eager to blame world-wide high food prices on ethanol policy, but most of the analysis I've seen in the newspapers is thin. The argument makes a lot of sense, but there are other obvious factors (high fuel costs, increasing world demand for meat consumption, increasing world demand for food generally), so it would be nice to see a careful sorting out of the contributing factors.

The conclusion, however, is good:

[I]t is impossible to avoid the conclusion that food-to-fuel mandates have failed. Congress took a big chance on biofuels that, unfortunately, has not worked out. Now, in the spirit of progress, let us learn the appropriate lessons from this setback, and let us act quickly to mitigate the damage and set upon a new course that holds greater promise for meeting the challenges ahead.

(HT to Tim Haab at Environmental Economics)

Lynne Kiesling

We've been talking about the interaction of biofuels subsidies and food markets here at KP for at least the past year. The interaction is reaching a crescendo, as seen in the increased media coverage of the increased food prices, riots in poor communities, and impending increased hunger and starvation. See, for example, the lead in this week's Economist. Their recommendation: stop the policy distortions.

In general, governments ought to liberalise markets, not intervene in them further. Food is riddled with state intervention at every turn, from subsidies to millers for cheap bread to bribes for farmers to leave land fallow. The upshot of such quotas, subsidies and controls is to dump all the imbalances that in another business might be smoothed out through small adjustments onto the one unregulated part of the food chain: the international market.

For decades, this produced low world prices and disincentives to poor farmers. Now, the opposite is happening. As a result of yet another government distortion--this time subsidies to biofuels in the rich world--prices have gone through the roof. Governments have further exaggerated the problem by imposing export quotas and trade restrictions, raising prices again. In the past, the main argument for liberalising farming was that it would raise food prices and boost returns to farmers. Now that prices have massively overshot, the argument stands for the opposite reason: liberalisation would reduce prices, while leaving farmers with a decent living.

There is an occasional exception to the rule that governments should keep out of agriculture. They can provide basic technology: executing capital-intensive irrigation projects too large for poor individual farmers to undertake, or paying for basic science that helps produce higher-yielding seeds. But be careful. Too often--as in Europe, where superstitious distrust of genetic modification is slowing take-up of the technology--governments hinder rather than help such advances. Since the way to feed the world is not to bring more land under cultivation, but to increase yields, science is crucial.

Michael Giberson

Tom Weber said that neither word in the phrase "congestion pricing" is too upbeat, and strung together "the combination evokes thoughts of opening one's wallet while suffering a sinus headache." He suggests that the unappealing phrase may have had something to do with the failure of Mayor Michael Bloomberg's congestion pricing plan for New York City.

Zubin Jelveh, at Odd Numbers, collects some alternatives from branding experts and others, including "EZ-Zone," "FreeFlow," and "StreetSmart." But Jelveh notes that most congestion pricing plans in place around the world don't seem to need an appealing brand name to succeed: in London the phrase used is "Congestion Charge," and in Singapore their program is "Electronic Road Pricing."

On the other hand, Jelveh notes that Milan has styled their plan as "EcoPass."

Beginning in January this year, to enter the central district of Milan with an automobile required purchase of a pass, with the fee tied to the emissions level of the car. One early report suggests the plan is working to improve air quality in the city. (Of course, improving air quality is easy -- economists would want to know how much it is costing to achieve the improvements.) I was unable to locate a more current report in English.

RELATED: In 2006, Lynne posted on Road Congestion Pricing in Stockholm. Last October, I argued that, "Economists do not understand the opposition to congestion pricing."

Michael Giberson

The Washington Post reports on their hometown industry - lobbying Congress - in a report on efforts by the wind and solar power industry to have tax credits renewed.

Some of the quotes have me wondering whether John Whitehead has had any success with his "lost green jobs challenge." Here, for example, is the closing quote from a lobbyist for the American Wind Energy Association (AWEA):

"In the absence of an extension by Memorial Day, we're looking at 116,000 jobs at risk -- 76,000 in wind and 40,000 in solar -- and $19 billion in clean energy investment. ... We have a lot of friends in the House, and we need to make them understand that time is imperative."

For those pursuing Whitehead's challenge, the Post article helpfully points out the wind industry has had its production tax credits lapse three times: 1999, 2001 and 2003. AWEA said that "new installed wind capacity declined 93, 73 and 77 percent, respectively."

Michael Giberson

At the Becker-Posner Blog, the authors tackle rising food prices and the latest Neo-Malthusians concerns that the world is reaching the limits of the earth to produce food. Curiously, both cite the thoroughly flogged old Neo-Malthusian book, Paul Ehrlich's The Population Bomb, but no current examples.

Gary Becker writes to claim the Neo-Malthusians are wrong, again, and besides, the current high prices, "has nothing to do with population growth, and is only a little related to the rapid expansion in world incomes in recent years." Instead, he said:

Rather, the boom in petroleum prices and subsidies to ethanol and other biofuels are the most important forces explaining the recent increase in food prices. Both the sharp run up in oil prices, and the continuing subsides to ethanol production in the United States, and to a lesser extent Europe, induced an increasing diversion of corn from feed and human consumption to the production of biofuels. The main goal of the diversion has been to produce more ethanol as a substitute for gasoline. During the past year, one quarter of American corn production, and 11 percent of global production, was devoted to biofuels, and the US contributes a lot to the world corn market.

The huge increase in petroleum prices also pushed up the cost of producing foods, and hence food prices, since energy is an important input in the production of fertilizers and agricultural chemicals.

Richard Posner asserts that Malthus's analysis is sound, given his assumptions, but his frightening forecast -- and that of the Neos -- failed to result because of technological and social progress.

Posner also links higher food prices to biofuels and economic growth in China and India. The supply response to that increased demand for food has been constrained by the high cost of fuel. We may be seeing the beginnings of an "attenuated Malthusian response", Posner said, in countries where food riots lead to increasing subsidies for urban consumers and export restrictions on domestically-produced food, which limit rural income and dampen the domestic supply response.

Both Becker and Posner trace poor policies to the political clout of urban consumers in developing countries and rural agricultural interests in among developed countries, and neither shows much cause for optimism.

Michael Giberson

In a post at Common Tragedies, Erica Meyers reports the release of an addendum from the RGGI auction design team that responds to certain of the comments filed in response to their earlier report. As she reports, "One of the more interesting findings is that 'clock auctions' may be more susceptible to explicit efforts to collude than sealed-bid formats."

In my post on the initial RGGI auction design report, I concluded that while it presented "a thorough examination of the market design problem and a well-thought out justification for their final design proposal," it nonetheless failed to address one critical issue. The report recommended quarterly auctions which each offered two "vintages" of the RGGI carbon emissions allowances, and the auction design proposal failed to account for the substitutability between the two vintages. (Follow the link for more detailed discussions.)

The substitutability could be readily addressed using an ascending price clock auction. Peter Cramton, who highlighted the substitutability issue in comments submitted to RGGI, urged use of the ascending price clock. In my post, I endorsed that recommendation, saying, "Simultaneous ascending clocks [are] becoming the industry standard for these sorts of market situations. ... There is little doubt that such a design would do the job."

So I was fascinated to learn that I could be wrong. In the addendum, the auction design group address three issues:

1. the choice of auction design (clock versus sealed bid) and how this affects the efficiency of the auction and the ability of parties to collude,
2. variations on design for clock auctions, and
3. auctions that combine different vintages of allowances.

Among their findings: "In laboratory auctions with communication among participants, successful collusion is more effective in clock auctions than in discriminatory and uniform price auctions." They elaborate on this finding in the addendum and cite some related work. Erica provides good coverage of this topic in her post, "The Potential For Collusion in Ascending Price Auctions."

Because of the potential collusion issues, the auction designers suggest sticking with the sealed-bid auction design, but they do propose two changes in response to the comments filed. From their summary:

The New England and New York ISO proposal that allowance owners be able to offer allowances for sale in the RGGI auction has definite advantages. We have different suggestions about how this might be implemented. The uncertainty of supply that results can help reduce the potential of collusion.

Since RGGI allowances are bankable, a bid for a later vintage could be treated as a request to purchase either a later vintage or an earlier vintage, whichever is less expensive. Interpreting bids in this manner prevents a price inversion in which the uniform price for the later vintage is higher than the price for the earlier vintage, although theory suggests this price inversion is inefficient and would not occur in the secondary market. This addendum describes a simple procedure for combined vintage auctions that implements this idea.

This last point largely addresses the substitutability issue while keeping the simplicity of the sealed-bid market design.

Overall, the addendum suggests useful tweaks to the RGGI auction design.

(NOTE: In addition to the post cited above, I commented on RGGI auction design topics in "RGGI auction design comments available online," and "RGGI picks uniform-price sealed-bid auction design." Erica Meyers' previous post on the RGGI auction design: "Combined Vintage Auctions For RGGI.")

Michael Giberson

An article in the Houston Chronicle reports that the high price of corn is putting the squeeze on the cattle feedlot business:

[John] Van Pelt, the manager of a cattle feedlot in this town 50 miles south of Amarillo, is now paying $215 a ton for cattle feed -- double what he spent just three years ago. With 20,000 cattle in his yard, that works out to about $25,000 per day, just in feed, and what could become several million dollars in added costs this year.

Van Pelt blames a surge in U.S. ethanol production for a near tripling in the price of corn, the main ingredient in cattle feed, and for cutting into profits across Texas' massive cattle feeding industry.

... Cattle feeders won a victory last fall when the state Legislature killed a key incentive that had helped attract ethanol and biodiesel plants to Texas, a provision the feeders said gave preferential treatment to biofuels.

But U.S. ethanol production continues to rise amid growing demand for the fuel and as new plants come online, including several in Texas. The situation is likely to keep pressure on corn prices for both ethanol producers and cattle feeders.

The article includes a quote from an ethanol industry representative who makes the reasonable claim that not all of the blame for higher food prices can be placed at the ethanol industry's feet. Rising demand for food from growing economies around the world have also put upward pressure on food prices.

...The matter has drawn attention from the top of state government.

"Finding that balance is what this is all about," Gov. Rick Perry said last summer in Houston. "We don't want to be put in the place of having to decide whether we are going to feed cattle or fuel vehicles."

Not to mention, of course, the possibility of feeding people. Given that curious omission, I'm sure we can say we don't want the government "to be put in the place of having to decide" between alternative uses of valuable resources.

ELSEWHERE, Time magazine connects the dots: "An explosion in demand for farm-grown fuels has raised global crop prices to record highs, which is spurring a dramatic expansion of Brazilian agriculture, which is invading the Amazon at an increasingly alarming rate."

Michael Giberson

In a post titled "The $100 Billion Windfall: Why Utilities Love Cap-and-Trade", Environment Capital notes the release of a new study by Point Carbon, financed by the WWF, which sought to estimate the "potential and scale of windfall profits in the power sector in selected countries (UK, Germany, Spain, Italy and Poland) during the second phase of the EU Emissions Trading Scheme (ETS), which runs from 2008 to 2012." Point Carbon provides an estimate of between 23 and 71 billion Euros, depending on assumptions.

We should be clear here. It isn't the cap-and-trade that utilities love, its the multi-billion Euro windfall.

(NOTE: Rich Sweeney at Common Tragedies also comments on the Point Carbon study and Environmental Capital post.

Michael Giberson

Maria Cantwell (D-Wash.), co-sponsor of the proposed Clean Energy Tax Stimulus Act, says if Congress and the President don't act fast to enact the bill, as much as $20 billion in investment will be delayed or canceled and and more than 100,000 jobs lost.

At the Environmental Economics blog, John Whitehead says, "Show me empirical evidence":

My contention is that tax credits can increase employment in preferred sectors but this employment is taken from other sectors of the macroeconomic. Employment and unemployment is unaffected in the aggregate.

Are any of the dips caused by a lack of targeted environmental policy? I'll send a free "Drive Less! www.env-econ.net" bumper sticker to the first person who shows me empirical evidence that the U.S. loses jobs from expiration of renewable energy tax credits or some such policy using appropriate econometric methods and the 1946-2007 employment data....

His post includes monthly employment numbers from the U.S. Bureau of Labor Statistics since 1946.

Michael Giberson

On Monday night, Republicans in the Kansas House voted to apply a tax of $37 per ton of CO2 emitted from coal fired power plants for emissions in excess of 110 percent of the statewide average. Proceeds from the tax would be distributed to the large coal plants in the state with the lowest average carbon emissions.

The Salina Journal quoted Rep. Clay Aurand, R-Courtland, as saying, "This is like a giant race to be the cleanest."

Only, as written, the tax would apply to a single power plant in the state, one owned by the Kansas City Board of Public Utilities, and the money would flow to one or more of the competing coal-fired generators owned by Westar Energy, Kansas City Power Light and Sunflower Electric. Generators with much lower emission rates, which includes just about everything from gas-fueled generators to nuclear power to wind power, would neither be taxed or subsidized. Some members of the Kansas House saw the proposal as an attempt to punish opponents of proposed coal-fired power plants in western Kansas.

Not exactly the approach the members of the Pigou Club have in mind.

Apparently on Tuesday morning Kansas House Republicans reconsidered their enthusiasm for carbon taxing, and voted to eliminate the carbon tax proposal.

Pigovian taxes are great in theory, but even in theory sometimes quantity regulation is preferred. And, of course, in practice both price- and quantity-based regulation will be shaped by lobbyists and politicians, perhaps motivated by factors beyond pure economic efficiency. Economist-advocates should mind the gap between theory and practice; the Kansas coal carbon tax caper provides an illustrative example.

(HT the Carbon Tax Center blog.)

Lynne KIesling

Can someone please explain the logic of the argument in this Wired Autopia blog post to me?

EV advocates say the California Air Resources Board is trying to kill the electric car -- again.

Under a proposal pending before the Air Resources Board, state regulators would slash -- from 75,000 to as few as 27,500 -- the number of zero-emission vehicles automakers must build between 2012 and 2017. Under the changes, the big automakers could put fewer than 2,500 nonpolluting cars on the road in the next four years. That's only 300 more than Tesla Motors plans to produce in the next two.

Ummmm ... first of all, the whole reference to killing the electric car "again" is a reference to the fact that the technology was not scalable and commercializable the last time California passed an electric car mandate. Wishing didn't make it so then, and it still doesn't, despite all of the arguments about government policy being "technology forcing". High gasoline prices and increased environmental concerns at a distributed, decentralized level are much more effective at inducing resilient technological change than government mandates. Such mandates run much more of a risk of the unintended consequences of governments having the hubris to think that they can pick technology winners. They cannot. What if, for example, such mandates induce researchers to shift entirely into electric vehicles and out of plug-in-electric hybrids, and what if it turns out that the PHEV has a larger portfolio of benefits and is more consumer-friendly than the EV? Then the government has picked wrong, and we all bear the cost of the coercion.

Second, does it occur to any of these so-called EV supporters that with the electric car plans of Tesla and GM, such government policy is irrelevant? That last sentence of the quote -- that Tesla itself will be producing almost as many as are named in California's mandate -- belies the argument that more government forcing is needed.

I think the carrot is there, the lures are all around, and the commercial electric vehicle (and plug-in hybrid) is in the near future. How can changing a government target in a wishing-it-to-happen piece of legislation reverse that? Ridiculous.

Michael Giberson

Even in the Houston area, with an economy built on the oil industry, some consumers are looking for a little extra -- and sometimes a lot extra -- energy efficiency in their home purchases. Via the Houston Chronicle:

Local builders for years have touted the energy efficiency of their homes, such as better insulation and power-saving appliances, but some are taking it to a new level.

One company, for example, is creating an entire community where all the houses will have solar power. Another builder claims its new green homes will cut up to 50 percent in heating and cooling usage.

"Just about every other person I come across is wanting at least one of these green features," said real estate agent Stephanie Edwards-Musa, who specializes in green homes. "But it's still making its way here because we are still overcoming the misconception that it's too costly."

[...] But rising energy costs are fueling demand.

In a move to bring solar power to the masses, Houston developer Land Tejas plans to power its 2,700-home Discovery at Spring Trails community with the help of solar power.

The solar systems will offset about 15 percent of the electric usage in a 4,000-square-foot home that uses an average 3,000 kilowatts a month, said Craig Lobel, a planning consultant hired by Land Tejas.

Of course, just because you slap a solar panel on your roof doesn't make your home energy efficient. It may not even make much sense economically - perhaps a good shade tree strategically placed would provide more cooling than a solar-panel powered air conditioner.

But the houses are to be built to "Environments for Living" program standards, and each of them will get a General Electric designed dashboard to track water and power use, and measure solar power production. At least it looks like a pretty good set up, just judging from a newspaper story and a few pictures on the internet. At least if you are looking for a new home just north of Houston.

Lynne Kiesling

Have you seen the Galvin Electricity Initiative Sad Socket ad?

In the half-century since our electric power system was completed, little has been done to update it -- and it shows. We're relying on an obsolete electricity grid that is dangerously vulnerable, even to forces as predictable as thunderstorms and as tiny as squirrels. And blackouts and power interruptions cost public facilities, businesses and households at least $150 billion a year. Power plants generate as much pollution as they do electricity, and then two-thirds of this energy is lost before it ever reaches the end-user. Meanwhile, consumers are no more than passive participants without real choice. [emphasis added]

The technology already exists to address these unhappy circumstances, save you money, improve the quality of electricity service and give you control.

But regulatory policies stand in the way of progress.

The Galvin Initiative's website suggests five things you can do to help accelerate the transformation of the electric power network:

1. Use the power of the purse
2. Demand control -- by federal law, your utility is required to provide you with a time-of-use rate and an enabling meter. Call them and ask for it!
3. Call for policy change -- write your elected representatives
4. Use less power
5. Share your business story with the Galvin Initiative, to show how widespread and dispersed the inefficiency of the existing electric power network is

Lynne Kiesling

Mike's two recent posts about turning animal waste in to electric power and John Doerr's focus on methane recovery from animal waste prompt me to mention one of the innovative entrepreneurs in this space: RealEnergy. RealEnergy builds, installs, and manages distributed generation and combined heat and power (CHP) systems, and can do so within a local microgrid if the regulatory barriers to interconnection and to the construction of microgrid power lines across roads are removed.

Real Energy has done many projects ranging from urban installations in San Francisco to dairy farms. On dairy farms they turn animal waste into biogas, which is pretty much a methane conversion, as far as I understand it.

Michael Giberson

This could be one of the gee-whiz, how-cool-is-that posts about advancing technologies that we do here from time to time. The Arizona Republic has a story about how the new Phoenix Convention Center, which was finished in 2006, will begin to generate some of its own power courtesy of some gee-whiz technologies: peel-and-stick solar panels. The city is going to put up about 2/3rds of an acre's worth of the photovoltaic devices on the roof of one of the buildings.

So this could have been one of those gee-whiz, how-cool-is-that-posts, except that Scott Gustafson ran the numbers and posted the results on his Arizona Economics blog. Talk about raining on the city's solar power parade.

The short version: Capital cost - $850,000; estimated power production, 150,000 kwh annually; current retail power costs avoided, 10 cents per kwh.

So, Gustafson concludes, that's a 1.7% return on an $850,000 investment, ignoring maintenance costs and anything else.

The important thing, says Councilman Greg Stanton, is that the panels are a groundbreaking effort for Phoenix.

Well, city taxpayers may have other ideas about what "the important thing" is, but at least the city intends to carefully track exactly how much power the tiles actually generate. Maybe the Arizona Republic will follow up in a year or so, to see how the solar panels are paying off.

Michael Giberson

The Regional Greenhouse Gas Initiative (RGGI) announced today that the first allowance auction in the United States for a mandatory CO2 emissions reduction program will take place on September 10, 2008. A second auction will take place December 17, with quarterly auctions thereafter; the compliance period will begin January 1, 2009. The announcement indicated that the following companies had been tentatively selected via competitive procurement processes to work with RGGI on aspects of the program: World Energy Solutions, Inc., Perrin Quarles Associates, Inc., ICF International, and the Greenhouse Gas Management Institute.

RGGI separately announced the basic auction design features that the RGGI states have agreed upon. As my title disclosed, RGGI has chosen a single round, uniform-price, sealed-bid auction -- the design recommended by the RGGI's auction design experts. However, RGGI indicated that "flexibility will be retained to transition to a multiple-round, ascending-price auction format if necessary to address evolving market conditions," an alternative supported by Peter Cramton, among others, in comments on the RGGI auction design recommendations.

In November I wrote ("RGGI auction design flaw"):

Cramton, in his report on behalf of the New England and New York power markets, recommends a simultaneous ascending clock auction design. Worth reading if you are into these kinds of issues. Simultaneous ascending clocks pretty much are, as Cramton describes them, becoming the industry standard for these sorts of market situations... There is little doubt that such a design would do the job.

My sense of the RGGI situation is that their design issue could be remedied with a much less drastic accommodation. A linked sealed-bid auction would allow bids for the future vintage to specify the premium, if any, which they would pay to receive the current vintage product. Permits could be allocated using a surplus-maximization rule, with a uniform clearing prices for each of the products.

Actually, there is just enough vagueness in the description of the auction as a "single round, uniform-price, sealed-bid auction" to permit the linking of two simultaneous sealed-bid auctions such that the appropriate substitutions between two vintages is permitted. But I suspect they're playing it simple to start, and then they'll watch the "evolving market conditions."

The key substantive issue now is for them to know what to look for in the auctions, so they will recognize whether or not separate auctions are causing inefficient results. The most obvious indicator of a problem would be if an auction resulted in lower prices paid for the better good. (The auctions will offer both a current vintage permit and a future vintage permit, but because a current vintage permit can be used to satisfy future year compliance requirements -- but not the reverse -- the current permit is a strictly superior product.) With access to all bid data it would be possible to produce a more sophisticated analysis of the effects of the separate sealed bid auctions on market efficiency.

The RGGI announcement will likely add a little extra context to the discussions at Wednesday's half-day seminar at Resources for the Future, "Managing Costs in a US GHG Trading Program." If you can't make it over to RFF, the event will be webcast beginning at 8:30 AM.

More details from the RGGI design features announcement:

Auction Structure and Format: Allowances will be made available for sale on a quarterly basis in lot sizes of 1,000 allowances. The initial auction will offer allowances through a single-round, uniform-price, sealed-bid auction format. While the goal is to maintain a consistent auction format, flexibility will be retained to transition to a multiple-round, asc