Tag Archives: Fossil fuels

Texas Cold Snap Scarcity: Don’t Blame Markets!

18 Thursday Mar 2021

Posted by in Electric Power, Price Mechanism, Renewable Energy, Shortage

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People say the darnedest things about markets, even people who seem to think markets are good, as I do. For example, when is a market “too efficient”? In the real world we tend to see markets that lack perfect efficiency for a variety of reasons: natural frictions, imperfect information, taxes, subsidies, regulations, and too few sellers or buyers. In such cases, we know that market prices don’t properly reflect the true scarcity of a good, as they would under the competitive ideal. Nevertheless, we are usually best-off allowing market forces to approximate true conditions in guiding the allocation of resources. But what does it mean when someone asserts that a market is “too efficient”.

Not long ago I posted about the failure of Texas utility planners to maintain surge capacity. Instead, they plowed resources into renewable energy, which is intermittent and unable to provide for reliable baseline power loads. That spelled disaster when temperatures plunged in February. Wind and solar output plunged while demand spiked. Even gas- and coal-fired power generation hit a pause due to a lack of adequate winterization of generators. The result was blackouts and a huge jump in wholesale power prices, which are typically passed on to customers. The price to some consumers rose to the ceiling of $9/kwh for a time, compared to an average winter rate of 12c/kwh. A bill in the Texas Senate would reverse those charges retroactively.

I cross-linked my post on a few platforms, and a friendly commenter opined that the jump in prices occurred because “markets were too efficient”. For a moment I’ll set aside the fact that what we have here is a monopoly grid operator: “market efficiency” is not a real possibility, despite elements of competition at the retail level. There is, however, a price mechanism in play at the wholesale level and for retail customers on variable rate plans. Prices are supposed to respond to scarcity, and there is no question that power became scarce during the Texas cold snap. Higher prices are both an incentive to curtail consumption and to increase production or attract product from elsewhere. So, rather than saying the “market was too efficient”, the commenter should have said “power was too scarce”! Well duh…

If anything, the episode underscores how un-market-like were the conditions created by the Texas grid operator, the ironically-named Electric Reliability Council of Texas (ERCOT): it allowed massive resources to be diverted to unreliable power sources; it skimped on winterization; it failed to arrange interconnection agreements with power grids outside of Texas; and it charged customers on fixed-rate plans too little to provide for adequate surge capacity, while giving them no incentive to conserve under a stress scenario. ERCOT can be said to have created a situation in which power supply was highly inelastic, which means that a normal market force was short-circuited at a time when it was most needed.

ERCOT‘s mismanagement of power resources is partly a result of incentives created by the federal government. The installation of wind and solar power generation came with huge federal subsidies, which distort the cost of the energy they produce. Thus, not only were incentives in place to invest in unreliable power sources, but ERCOT forced electricity produced by fossil fuels to compete at unrealistically low prices. This predatory pricing forced several power producers into bankruptcy, compromising the state’s baseline and surge capacity.

There are plenty of distortions plaguing the “market” for electric power in Texas, all of which worsened the consequences of the cold snap. This was far from a case of “market efficiency”, as the comment on my original post asserted.

The very idea that markets and the price mechanism are “ruthlessly efficient” is a concession to those who say high prices are always “unfair” in times of crises and shortages. We hear about “price-gougers”, and the media and politicians are almost always willing to join in this narrative. Higher prices help to ease shortages, and they do so far more quickly and effectively than governments or charities can provide emergency supplies (unless, of course, a monopoly grid operator leaves the state more vulnerable to stress conditions than necessary). Conversely, price ceilings only serve to exacerbate shortages and the suffering they cause. So let’s not blame markets, which are never “too efficient”; sometimes the things we trade are just too scarce, and sometimes they are made more scarce by inept planners.

Renewables and Preempted Prosperity

10 Wednesday Jul 2019

Posted by in Central Planning, Renewable Energy

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Coerced conversion to renewable energy sources will degrade human living conditions. That’s certainly true relative to a voluntary conversion actuated by purely private incentives. It’s likely to be true even in an absolute sense, depending on the speed and severity of the forced transition. A coerced conversion will mean lower real incomes during the transition (one recent estimate: $42,000 total loss per U.S. household to transition by 2030), and the losses will continue after the transition, with little redeeming improvement in environmental conditions or risk.

The Reality

There are several underpinnings for the assertions above. One is that the sensitivity of global temperatures to carbon forcings is relatively low. We know all too well that the climate models relied upon by warming alarmists have drastically over-estimated the extent of warming to date. The models are excessively sensitive to carbon emissions and promote an unwarranted urgency to DO SOMETHING… with other people’s money. There is also the question of whether moderate warming is really a bad thing given that it is likely to mean fewer cold-weather fatalities, increased agricultural productivity, and significant reforestation.

Another underpinning is that the real economics of renewable energy are vastly inferior to fossil fuels and will remain so for some time to come. Proponents of renewables tend to quote efficiencies under optimal operating conditions, free of pesky details like the cost of installing a vast support infrastructure and environmental costs of producing components. Solar and wind energy are tremendously inefficient in terms of land use. One estimate is that meeting a 100% renewable energy target in the U.S. today would require acreage equivalent to the state of California. And of course rare earth minerals must be mined for wind turbines and solar panels, and fossil fuels are needed to produce materials like the steel used to build them.

But the chief renewable bugaboo is that the power generated by wind and solar is intermittent. Our ability to store power is still extremely limited, so almost all surplus energy production is lost. Therefore, intermittency necessitates redundant generating capacity, which imposes huge costs. When the winds are calm and the sun isn’t shining, traditional power sources are needed to meet demand. That redundant capacity must be maintained and kept on-line, as these facilities are even costlier to power up from a dead start.

LA Hucksterism

These issues are typified by the unrealistic expectations of Los Angeles’ plan to replace 7% of the city’s power consumption with renewables. The cost predicted by LA regulators is slightly less than 2 cents per kilowatt hour for solar and even less for battery power, which are unrealistically low. For one thing, those are probably operating costs that do not account for capital requirements. The plan promises to provide power 16 hours a day at best, but it’s not clear that the 7% estimate of the renewable share takes that into account or whether the real figure should be 4.2% of LA’s power needs. The project will require 2,600 acres for solar panels, and if it’s like other solar plant installations, the stated capacity is based on the few hours of the day when the sun’s rays are roughly perpendicular to the panels. So it’s likely that the real cost of the power will be many times the estimates, though taxpayers will subsidize 30% or more of the total. And then there is the negative impact on birds and other wildlife.

The Question of Intent

Michael Schellenberger goes so far as to say that a degraded standard of living is precisely what many fierce renewable advocates have long intended. Modern comforts are simply not compatible with 100% renewable energy any time soon, or perhaps ever given the investment involved, but a target of 100% was not really intended to be compatible with modern comforts. In fact, the renewable proposition was often intermingled with celebration of a more austere, agrarian lifestyle. Schellenberger discusses the case of Martin Heidegger, an early anti-technologist who said in 1954 that modern technology “puts to nature the unreasonable demand that it supply energy....” Of course, Heidegger was not talking about the use of solar panels. Others, like Murray Bookchin, were ultimately quite explicit about the “promise” of renewables to dial-back industrial society in favor of an agrarian ideal. And here’s a quote from a new book by John Barry, Professor of “Green Political Economy” (!) at Queen’s University Belfast:

“The first question which serves as the starting point of this chapter is to ask if the objective of economic growth is now ecologically unsustainable, socially divisive and has in many countries passed the point when it is adding to human wellbeing?”

If that’s the question, the answer is no! The quote is courtesy of David Middleton. Green Professor Barry has one thing right, however: growing anything will be tough after crowding erstwhile farm and forest land with solar panels and wind turbines. But at least someone “green” is willing to admit some economic realities, something many alarmists and politicians are loath to do.

Welfare Loss

Involuntary actions always involve a welfare loss, as “subjects” must sacrifice the additional value they’d otherwise derive from their own choices. So it is that coerced adoption of renewables implies a starker outcome than zero economic growth. Objective measurement of all welfare costs is difficult, but we know that the adoption of renewables implies measurable up-front and ongoing economic losses. Matt Ridley notes that the impact of those losses falls hardest on the poor, whose energy needs absorb a large fraction of income. This, along with fundamental impracticality and high costs, accounts for the populist backlash against radical efforts to promote renewables in some European states. The politics of forced adoption of renewables is increasingly grim, but attempts to sell a centrally-planned energy sector based on renewables continue.

Ridley is rightly skeptical of carbon doomsday scenarios, but the pressure to curb carbon emissions will remain potent. He advocates a different form of intervention: essentially a carbon tax on producers with proceeds dedicated to new, competing sequestration or carbon capture technologies. Still coercive, the tax itself requires an estimate of the “economic cost of carbon”, which is of tremendously uncertain magnitude. The tax, of course, has the potential to do real harm to the economy. On the other hand, Ridley is correct in asserting that the effort to fund competing carbon-capture projects would leverage powerful market forces and perhaps hasten breakthroughs.

Mandated Misery

The attempt to force a complete conversion to renewable energy sources is meeting increasing political challenges as its cost is revealed more clearly by experience. Alarmists have long recognized the danger of economic damage, however. Thus, they try to convince us that economic growth and our current standards of living aren’t as good as we think they are, and they continue to exaggerate claims about the promise of renewable technologies. One day, some of these technologies will be sufficiently advanced that they will be economically viable without taxpayer subsidies. The conversion to renewables should be postponed until that day, when users can justify the switch in terms of costs and benefits, and do so voluntarily without interference by government planners.

April 22: Happy Human Achievement Day!

21 Sunday Apr 2019

Posted by in Free markets, Free Trade, Human Welfare, Uncategorized

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By way of celebrating human ingenuity, I’ll be driving 600 miles on Monday in a beautiful sedan powered by high-octane fuel. I’ll be clothed in incredibly comfortable fibers and have access to a great variety of listening amusements via satellite. The celebration will continue when I arrive home. I’ll enjoy the comfort of climate-control, electric power, modern plumbing, a refrigerator and pantry full of agricultural bounty, delicious wine, and even more incredible access to entertainment and intellectual pursuits. But it’s not just the goods and technology I’ll celebrate. I’ll also raise a glass to the fabulous, free-market institutions that have made all this possible, effectively allowing us to trade with specialized producers all around the world at low cost, and at prices that signal the true scarcities of resources… ill-considered tariffs aside.

In honor of mankind’s great achievements, I bring you additional testimony from Don Boudreaux, who provides some juicy tidbits to mark our progress. Here is more from Marion Tupy at humanprogess.org. And one more link is from Paul Driessen, who last Thanksgiving wrote of the the many developments since 1800 that have drastically improved human well being, including the ability to exploit fossil fuels that are extremely clean-burning and efficient relative to primitive energy sources.

What riches we enjoy today! Contrary to the claims of doomsayers, busybodies, and self-appointed enforcers of an austere existence, our prospects for continued improvement in human standards of living are excellent. The long arc of technological progress has made the effective abundance of resources greater and more sustainable than ever. As the many charts in Tupy’s article demonstrate, long-term trends in real incomes, poverty, literacy, longevity and the incidence of disease are quite favorable. We owe all that to the spread of human ingenuity, freedom, and voluntary exchange. That’s truly progressive!

A Carbon Tax Would Be Fine, If Only …

01 Friday Mar 2019

Posted by in Environment, Global Warming, Taxes

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I’ve opposed carbon taxes on several grounds, but I admit that it might well be less costly as a substitute for the present mess that is U.S. climate policy. Today, we incur enormous costs from a morass of energy regulations and mandates, prohibitions on development of zero-carbon nuclear power, and subsidies to politically-connected industrialists investing in corn ethanol, electric cars, and land- and wildlife-devouring wind and solar farms. (For more on these costly and ineffective efforts, see Michael Shellenberger’s “Why Renewables Can’t Save the Planet” in Quillette.) Incidentally, the so-called Green New Deal calls for a complete conversion to renewables in unrealistically short order, but with very little emphasis on a carbon tax.

The Carbon Tax

Many economists support the carbon tax precisely because it’s viewed as an attractive substitute for many other costly policies. Some support using revenue from the tax to pay a flat rebate or “carbon dividend” to everyone each year (essentially a universal basic income). Others have pitched the tax as a revenue-neutral replacement for other taxes that are damaging to economic growth, such as payroll taxes or taxes on capital. Economic growth would improve under the carbon tax, or so the story goes, because the carbon tax is a tax on a “bad”, as opposed to taxes on “good” factors of production. I view these ideas as politically naive. If we ever get the tax, we’ll be lucky to get much regulatory relief in the bargain, and the revenue is not likely to be offset by reductions in other taxes.

But let’s look a little closer at the concept of the carbon tax, and I beg my climate-skeptic friends to stick with me for a few moments and keep a straight face. The tax is a way to attach an explicit price to the use of fuels that create carbon emissions. The emissions are said to inflict social or external costs on other parties, costs which are otherwise ignored by consumers and businesses in their many decisions involving energy use. The carbon tax is a so-called Pigouvian tax: a way to “internalize the externality” by making fossil fuels more expensive to burn. The tax itself involves no prohibitions on behavior of any kind. Certain behaviors are taxed to encourage more “desirable” behavior.

Setting the Tax

But what is the appropriate level of the tax? At what level will it approximate the true “social cost of carbon”? Any departure from that cost would be sub-optimal. Robert P. Murphy contrasts William D. Nordhaus’ optimal carbon tax with more radical levels, which Nordhaus believes would be needed to meet the goals of the United Nation’s Intergovernmental Panel on Climate Change (IPCC). Nordhaus won the 2018 Nobel Prize in economics for his work on climate change. Whatever one might think of the real risks of climate change, Nordhaus’ clearly recognizes the economic downsides to mitigating against those risks.

Nordhaus has estimated that the social cost of carbon will be $44/ton in 2025 (about $0.39 per gallon of gas). He claims that a carbon tax at that level would limit increases in global temperature to 3.5º Celsius by 2100. He purports to show that the costs of a $44 carbon tax in terms of reduced economic output would be balanced by the gains from limiting climate warming. Less warming would require a higher tax with fewer incremental rewards, and even more incremental lost output. The costs of the tax would then outweigh benefits. For perspective, according to Nordhaus, a stricter limit of 2.5º C implies a carbon tax equivalent to $2.50 per gallon of gas. The IPCC, however, prescribes an even more radical limit of 1.5º C. That would inflict a huge cost on humanity far outweighing the potential benefits of less warming.

A Carbon Tax, If…

Many economists have come down in favor of a carbon tax under certain qualifications: revenue-neutrality, a “carbon dividend”, or as a pre-condition to deregulation of carbon sources and de-subsidization of alternatives. John Cochrane discusses a carbon tax in the context of the “Economists’ Statement on Carbon Dividends” (Cochrane’s more recent thoughts are here):

“It’s short, sweet, and signed by, as far as I can tell, every living CEA chair, every living Fed Chair, both Democrat and Republican, and most of the living Nobel Prize winners. … It offers four principles 1. A carbon tax, initially $40 per ton. 2. The carbon tax substitutes for regulations and subsidies and (my words) the vast crony-capitalist green boondoggle swamp, which is chewing up money and not saving carbon. 3. Border adjustment like VAT have [sic] 4. ‘All the revenue should be returned directly to U.S. citizens through equal lump-sum rebates.'”

Rather than a carbon dividend, Warren Meyer proposes that a carbon tax be accompanied by a reduction in the payroll tax, an elimination of all subsidies, mandates, and prohibitions, development of more nuclear power-generating capacity, and contributions to a cleanup of Chinese and Asian coal-power generation. That’s a lot of stuff, and I think it exceeds Meyer’s normal realism with respect to policy issues.

My Opposition

Again, I oppose the adoption of a carbon tax for several reasons, despite my sympathy for the logic of Pigouvian taxation of externalities. At the risk of repeating myself, here I elaborate on my reasons for opposition:

Government Guesswork: First, Nordhaus’ estimates notwithstanding, we do not and cannot know the climate/economic tradeoffs with any precision. We can barely measure global climate, and the history of what measures we have are short and heavily manipulated. Models purporting to show the relationship between carbon forcing and global climate climate change are notoriously unreliable. So even if we can agree on the goal (1.5º, 2.5º, 3.5º), and we won’t, the government will get the tradeoffs wrong. I took the following from a comment on Cochrane’s blog, a quote from A.C. Pigou himself:

“It is not sufficient to contrast the imperfect adjustments of unfettered enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any State authority will attain, or even wholeheartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interest. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.”

Political Hazards: Second, we won’t get the hoped-for political horse trade made explicit in the “Economists’ Statement …” discussed above. As a political matter, the setting of the carbon tax rate will almost assuredly get us a rate that’s too high. Experiences with carbon taxes in Australia, British Columbia, and France have been terrible thus far, sowing widespread dissatisfaction with the resultant escalation of energy prices.

Economic Growth: Neither is it a foregone conclusion that a revenue-neutral carbon tax will stimulate economic growth, and it might actually reduce output. As Robert P. Murphy explains in another post, the outcome depends on the structure of taxes prior to the change. The substitution of the carbon tax will increase output only if it replaces taxes on a factor of production (labor or capital) that is overtaxed prior to the change. That undermines a key selling point: that the carbon tax would necessarily produce a “double dividend”: a reduction in carbon emissions and higher economic growth. Nevertheless, I’d allow that revenue neutrality combined with elimination of carbon regulation and “green” subsidies would be a good bet from an economic growth perspective.

Overstated Risks: Finally, I oppose carbon taxes because I’m unconvinced that the risk and danger of global warming are as great as even Nordhaus would have it. In other words, the external costs of carbon don’t amount to much. Our recorded temperature history is extremely short and is therefore not a reliable guide to the long-term nature of the systemic relationships at issue. Even worse, temperature records are manipulated to exaggerate the trend in temperatures (also see here, here and here). There is no evidence of an uptrend in severe weather events, and the dangers of sea level rise associated with increasing carbon concentrations also have been greatly exaggerated. Really, at some point one must take notice of the number of alarming predictions and doomsday headlines from the past that have not been borne out even remotely. Furthermore, higher carbon concentrations and even warming itself would be of some benefit to humanity. In addition to a greener environment, the benefits include more rapid economic growth, improved agricultural yields, and a reduction in the salient danger of cold-weather deaths.

Economic Development: The use of fossil fuels has helped to enable strong growth in incomes in developed economies. It has also given us energy alternatives such as nuclear power as well as research into other alternatives, albeit with very mixed success thus far. And while a carbon tax would create an additional incentive to develop such alternatives, a U.S. tax would not accomplish much if any global temperature reduction. Such a tax would have to be applied on a global scale. Talk about a political long-shot! Increasing the price of carbon emissions also has enormous downsides for the less developed world. These fragile economies would benefit greatly from development of fossil fuel energy, enabling reductions in poverty and the income growth necessary to someday join in the prosperity of the developed economies. This, along with liberalization of markets, is the affordable way to bring economic success to these countries, which in turn will enable them to consider the energy alternatives that might come to fruition by that time. Fighting the war on fossil fuels in the underdeveloped world is nothing if not cruel.

 

Electric Cars: EPA Serves Up Green Kool-Aid To Pair With Subsidies

03 Tuesday Oct 2017

Posted by in Environment, Subsidies, Technology

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Electric cars don’t save much energy over gas-burners if at all, at least for now. Warren Meyer’s recent Coyote Blog post on this topic is aptly titled “Why Is It So Hard To Get Even Smart People To Think Clearly On Electric Vehicle Efficiency“. Meyer begins by quoting the following tweet from Google smarty Eric Schmidt, which typifies the general level of public awareness regarding the supposed energy savings from electric cars produced by Tesla and many others:

“Electric motors are the unsung hero of clean energy – the latest are 97% efficient, vs. 45% for internal combustion.“

Meyer emphasizes these major points:

  1. the efficiency with which source fuels are converted to physical work via electric and gas-burning cars is more comparable than Schmidt’s tweet suggests;
  2. differences in energy density weigh heavily in favor of fuel-burning vehicles.
  3. the so-called miles-per-gallon equivalent (MPGe) calculated by the U.S. Environmental Protection Agency (EPA) is a sham.

First, Schmidt’s tweet is accurate only if the discussion is confined to simple conversion of energy to physical work performed by the respective engines. The tweet ignores energy losses that occur prior to that conversion: electricity must be generated with far less than 100% efficiency, mainly by burning coal and natural gas. In an earlier Forbes article, Meyer compares this situation to a distorted comparison of two refrigerator installers:

“In both cases the customer lives in a fourth floor walkup. The first installer finds the refrigerator has been left on the street. He has to … haul the appliance up four flights of stairs. After that, relatively speaking, the installation is a breeze. The second installer finds his refrigerator has thoughtfully been delivered right to the customer’s door on the fourth floor. He quickly brings the unit inside and completes the installation. So who is a better installer?“

The fact is that both gas-burning and electric vehicles rely heavily on fossil fuels. And, in addition to losses in the generation process, there are other losses of energy attributable to electric cars: transmission of power involves a significant energy loss, as does charging batteries and storage itself. Meyer considers only the extra losses from production and transmission of electricity in the following comparison:

“We take 97% times 90% transmission efficiency times 50% electricity production efficiency equals 43.6%.  This is actually less than his 45% figure.  By his own numbers, the electric motor is worse….“

Meyer qualifies this comparison, as some of his assumptions are of the “best outcome” variety, but contrary to Schmidt’s assertion, gasoline and electric engines are reasonably comparable in terms of energy efficiency.

Some contend, however, that power losses in electricity transmission are much larger than the 10% Meyer assumes (see the comments on his post). Battery charging involves a loss of perhaps 20%. And a replacement for a Tesla battery, post 8-year warranty, is $8,000 – $12,000, an additional storage “cost” that is virtually non-existent for gas-powered vehicles. Beyond a certain point in its life, that cost will have an impact on a Tesla’s resale value. Moreover, some contend that the production of electric vehicles is more energy-intensive, putting them in an energy efficiency hole right from the get-go.

Meyer then takes up the notion of storage density as an explanation for why early experiments with electric cars were essentially abandoned:

“15 gallons of gasoline weighs 90 pounds and takes up 2 cubic feet. This will carry a 40 mpg car 600 miles. The Tesla Model S 85kwh battery pack weighs 1200 pounds and will carry the car 265 miles (from this article the cells themselves occupy about 4 cubic feet if packed perfectly but in this video the whole pack looks much larger). We can see that even with what Musk claims is twice the energy density of other batteries, the Tesla gets  0.22 miles per pound of fuel/battery while the regular car can get 6.7. More than an order of magnitude, that is simply an enormous difference…“

Meyer notes in the Forbes article that the EPA calculates its MPG conversion factor for electric vehicles by dividing BTU’s in a gallon of gas by the BTUs in a kilowatt hour: 33.7 KwH per gallon. Thus, the EPA multiplies an electric car’s miles per KwH by 33.7 to arrive at the so-called MPG equivalent: MPGe. But as we’ve seen above, the conversion factor ignores the generation and transmission of electricity required at the front end, and the associated energy losses that occur before a single KwH is released by a Tesla battery.

Despite what we hear from the EPA, Tesla, and other interests today, electric cars have not really overcome these disadvantages, at least not yet. The EPA’s MPGe estimates are vastly inflated. Perhaps if they were accurate, these vehicles would not have to rely so heavily on taxpayer subsidies to be competitive. By extension, the presumed environmental benefits of electric cars are nonexistent at this stage of development. I’m certain that Eric Schmidt and many other smart people are capable of understanding these nuances, but they might be too busy tripping over their politics to bother.

The Renewable Energy Jobs Hoax

30 Tuesday May 2017

Posted by in Renewable Energy, Subsidies, Uncategorized

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James Taylor at Forbes reveals the dishonest math behind the claim that renewable energy generates more jobs than “conventional energy”, i.e., fossil fuels. It’s a simple trick, as Taylor explains:

“… renewable energy advocates create the broadest possible definition of workers ‘supported’ by the solar power industry, falsely claim that the solar power industry ’employed’ all these workers, and then compare that to the narrowest possible definition of just a single segment of workers ‘directly’ employed in the ‘extraction’ component of the much larger natural gas industry.“

Taylor notes that, “In reality, renewable energy isn’t even in the same universe of job creation as conventional energy.” He goes on to cite the report on which these claims are based and picks it apart. The renewable energy job assertions are obviously self-intereseted, as rent seeking lobbyists know that the political class is dominated by easy marks for renewable energy wonder-stories.

Of course Taylor is correct that the claims about renewable energy jobs are false in the aggregate sense. However, it might or might not be true in the marginal sense, and that’s clearly the sense in which the claim is intended to be taken, despite the fact that the data used is not marginal in nature. If true, it’s not a selling point for renewable energy subsidies because “more jobs” represents a greater marginal cost.

And that brings us to an even more critical issue missed by Taylor: public policy should not be based on the objective of direct job creation. Jobs are a cost, not a benefit. We value the finished goods, not the inputs required to produce them. If you don’t quite get that, imagine two bids for the construction of new kitchen in your home. Same plans, same completion date, similarly brilliant customer reviews of the competing contractors. Without knowing the actual bids, if one contractor tells you it’s a three-man job and the other says it’s a four-man job, you’ll be pretty certain which bid you’ll want to accept.

Ah, but you say, that’s not a fair comparison, because I’m paying for it. Yes you are, just as taxpayers (and more generally society) must pay for the subsidies that lobbyists wheedle out of politicians. Or you say, Ah, but we want more renewable jobs because we want renewable energy, ’cause it’s just right. Maybe, maybe not, but if that’s so, then the idea that the cost is higher because more jobs are required per unit of energy is not a good rationale.

It’s often the case that public policy aimed at “creating jobs” is not accompanied by higher output, lower prices, or even… more jobs! For example, tariffs on foreign goods give an advantage to American producers, but at the cost of job losses in import industries and higher domestic prices that harm consumers more broadly, and thereby reduce jobs. When certain industries or firms are subsidized by the government, the taxpayer is harmed directly, not to mention suppliers of alternatives. This is true at the local and national levels: politicians love to talk about job creation when they offer incentives for new facilities or relocations to their jurisdictions, but these subsidies may put other local firms at a competitive disadvantage and leave taxpayers holding the bag for public services supplied to the recipient firm. When government undertakes large taxpayer-funded infrastructure projects, which might or might not boost productivity, the taxes are damaging and the projects are often poorly planned and lack effective cost controls. Jobs are not a reason to support such projects.

Similar points have been discussed in the past here on Sacred Cow Chips, with links to articles emphasizing the distinction between direct jobs created and economic welfare like this one. “Jobs” should never be a policy objective in and of itself. As Tim Worstall explains in a brief review of Mark Zuckerberg’s recent commencement address at Harvard, jobs simply are not the point! Policy must have a better rationale than the high cost of the labor input!

The Taxing Logic of Carbon Cost Guesswork

11 Saturday Mar 2017

Posted by in Environment, Taxes, Uncategorized

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An article by three prominent economists* in the New York Times this week summarized the Climate Leadership Council’s Conservative Case for Climate Action“. The “four pillars” of this climate plan include (1) a revenue-neutral tax on carbon emissions, which are used to fund… (2) quarterly “carbon dividend” payments to all Americans; (3) border tax adjustments to account for carbon emissions and carbon taxes abroad; (4) eliminating all other regulations on emissions of carbon. The “Case” is thus a shift from traditional environmental regulation to a policy based on tax incentives, then wrapped around a redistributive universal income mechanism.

I’ll dispense with the latter “feature” by referencing my recent post on the universal basic income: bad idea! The economists advocate for the carbon dividend sincerely, but also perhaps as a political inducement to the left and confused centrists.

The Limits of Our Knowledge

The most interesting aspect of the “Case” is how it demonstrates uncertainty around the wisdom of carbon restrictions of any kind: traditional regulations, market-oriented trading, or tax incentives. Those all involve assumptions about the extent to which carbon emissions should be restricted, and it’s not clear that any one form of restriction is more ham-handed than another. Traditional regulation may restrict output in various ways. For example, standards on fuel efficiency are an indirect way of restricting output. A carbon market, with private trading in assigned “rights” to emit carbon, is more economically efficient in the sense that a tradeoff is involved for any decision having carbon implications at the margin. However, the establishment of a carbon market ultimately means that a limit must be imposed on the total quantity of rights available for trading.

A carbon tax imputes a cost of carbon emissions to society. It also imposes tradeoffs, so it is similar to carbon trading in being more economically efficient than traditional regulation. A producer can attempt to adjust a production process such that it emits less carbon, and the incidence of the tax falls partly on final consumers, who adjust the carbon intensity of their behavior accordingly. For our purposes here, a tax is more illuminating in the sense that we can assess inputs to the cost imputation. Even a cursory examination shows that the cost estimate can vary widely given reasonable differences in the inputs. So, in a sense, a tax helps to reveal the weakness of the case against carbon and the carbon-based rationale for allowing a coercive environmental authority to sclerose the arteries of the market system.

The three economists propose an initial tax of $40 per metric ton of emitted carbon. The basis for that figure is the so-called “social cost of carbon” (SCC), a theoretical construct that is not readily measured. Economists have long subscribed to the theory of social costs, or negative externalities, and to the legitimacy of government action to force cost causers to internalize social costs via corrective taxation. However, the wisdom of allowing the state to intrude upon markets in this way depends on our ability to actually measure specific external costs.

Fatuous Forecasts

The SCC is based on the presumed long-run costs of an incremental ton of carbon in the environment. I do not use the word “presumed” lightly. The $40 estimate subsumes a variety of speculative assumptions about the climate’s response to carbon emissions, the future economic impact of that response, and the rate at which society should be willing to trade those future costs against present costs. The figure only counts costs, without considering the huge potential benefits of warming, should it actually occur.

Ronald Bailey at Reason illustrates the many controversies surrounding the calculation of the SCC. He notes the tremendous uncertainty surrounding an Obama Administration estimate of $36 a ton in 2007 dollars. It used an outdated climate sensitivity figure much higher than more recent estimates, which would bring the calculated SCC down to just $16.

A discount rate of 3% was applied to projected future carbon costs to produce an SCC in present value terms. The idea is that today’s “collective” would be indifferent between paying this cost today and suffering the burden of future costs inflicted by carbon emissions. This presumes that 3% is the expected return society can earn for the future by investing resources today. Unfortunately, the SCC is tremendously sensitive to the discount rate. Together with the more realistic estimate of climate sensitivity, a discount rate of 7% (the Office of Management and Budget’s regulatory guidance) would actually make the SCC negative!

Another U.S. regulatory standard, according to Bailey, is that calculations of social cost are confined to costs borne domestically. However, the SCC attempts to encompass global costs, inflating the estimate by a factor of 4 to 14 times. The justification for the global calculation is apparent righteousness in owning up to the costs we cause as a nation, and also for the example it sets for other countries in crafting their own carbon policies. Unfortunately, it also magnifies the great uncertainties inherent in this messy calculation.

Lack of Evidence

This guest essay on the Watts Up With That? web site by Paul Driessen and Roger Bezdek takes a less gracious view of the SCC than Bailey, if that is possible. As they note, in addition to climate sensitivity, the SCC must come to grips with the challenge of measuring the economic damage caused by each degree of warming. This includes factors far into the future that simply cannot be projected with any confidence. We are expected to place faith in distant cost estimates of heat-related deaths, widespread crop failures, severe storm damage, coastal flooding, and many other calamities that are little more than scare stories. For example, the widely reported connection between atmospheric carbon concentration and severe weather is demonstrably false, as are reports that Pacific islands have been swallowed by the sea due to global warming.

Ignoring the Benefits

The SCC makes no allowance for the real benefits of burning fossil fuels, which have been a powerful engine of economic growth and still hold the potential to lift the underdeveloped world out of poverty and environmental  distress. The benefits of carbon also include fewer cold-related deaths, higher agricultural output, and a greener environment. It isn’t surprising that these benefits are ignored in the SCC calculation, as any recognition of that promise would undermine the narrative that fossil fuels are unambiguously evil. Indeed, an effort to calculate only the net costs of carbon emissions would likely expose the entire exercise as a sham.

The “four pillars” of the Climate Leadership Council‘s case for climate action rest upon an incredibly flimsy foundation. Like anthropomorphic climate change itself, appropriate measurement of a social cost of carbon is an unsettled issue. Its magnitude is far too uncertain to use as a tool of public policy: as either a tax or a rationale for carbon regulation of any kind. And let’s face it, taxation and regulation are coercive acts that better be undertaken with respect for the distortions they create. In this case, it’s not even clear that carbon emissions should be treated as an external cost in many applications, as opposed to an external benefit. So much for the corrective wisdom of authorities. The government is not well-equipped to centrally plan the economy, let alone the environment.

  • The three economists are Martin Feldstein, Ted Halstead and Greg Mankiw.

Carbon Farce Meets Negative Forcings

22 Saturday Aug 2015

Posted by in Global Warming, Technology

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NanoMan copy

A new technology is being refined that could reverse years of carbon forcings, given sufficiently wide application, and do so at a profit. That profit should not require the kind of costly subsidies that are now routinely paid to green crony capitalists. Instead, the profit should derive from real market demand for a valuable material. The MIT Technology Review covers the technology under “… How To Suck Carbon From The Air, Make Stuff From It“. It makes possible a form of carbon capture that produces carbon nanotubes, a promising material already in use but having much wider potential. From the second link above:

“Carbon nanotubes are a great example of how useful materials are being developed. This material is said to be one hundred times stronger than steel because of its ‘molecular perfection’ as explained in the paper ‘Year 2050: Cities in the Age of Nanotechnology’ by Peter Yeadon. In addition, because carbon atoms can bond with other matter; such material can be an ‘insulator, semi-conductor or conductor of electricity’”.

Carbon nanotubes have remarkable properties that will revolutionize fabrics and allow buildings to have incredible strength, “transient features” such as variable transparency, and shape shifting. The new technology is said to be more efficient than existing methods of producing carbon nanotubes, and probably much cheaper.

The first link above quotes the developers on the technology’s massive potential for carbon capture:

“They calculate that given an area less than 10 percent of the size of the Sahara Desert, the method could remove enough carbon dioxide to make global atmospheric levels return to preindustrial levels within 10 years, even if we keep emitting the greenhouse gas at a high rate during that period.“

That area is twice the size of California, but a much more modest deployment would certainly reduce the political pressure to decrease carbon emissions. The extent would depend upon the demand for nanotubes, which is expected to grow dramatically in the presence of declining costs. Perhaps we’ll want more carbon emissions if nanotube materials come into widespread use. That would be a welcome development in the developing world, where fossil fuels hold the potential to lift millions out of poverty, as they have for advanced countries in the past. However, such a change would require elites to acknowledge and yield to the supremacy of markets over politics.

A technology capable of such significant carbon capture obviously constitutes a negative carbon “forcer”. Therefore, another implication is that climate models with a heavy emphasis on carbon forcings may be rendered moot. Those models have persistently generated over-predictions of global temperatures, so a deemphasis is already long overdue.

Another hat tip to my buddy John Crawford, who recently has fed me some great information. John should accept my invitation to guest-blog on SCC sometime soon, or start his own blog!

Human Achievement, Comfort and Joy

28 Saturday Mar 2015

Posted by in Human Welfare

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sisyphus-when-you-ve-got-a-minute

2015’s Human Achievement Hour (HAH) starts at 8:30 p.m. on Saturday, March 28. That’s tomorrow night! It starts at 8:30  p.m. in every time zone, so it’s a rolling celebration. But you can celebrate human achievement for a full 24 hours, starting Saturday at about 2:30 a.m. Central Daylight Time, when it will be 8:30 p.m. Saturday in Tonga, just over the international date line. It’s coming up soon! This will be my third year of celebrating HAH. To mark the occasion I just might start celebrating with the Tongans. Here is the Facebook event page for HAH. The Competitive Enterprise Institute is the sponsor of HAH. Here is the first part of their description, followed by their suggestion for how to celebrate.

“Observing Human Achievement Hour is about paying tribute to the human innovations that have allowed people around the globe to live better, fuller lives, while also defending the basic human right to use energy to improve the quality of life of all people.” “In order to celebrate with CEI and friends worldwide, we invite you to enjoy the benefits of energy, capitalism, and human innovation by utilizing your favorite innovation or human advancement…“

Once again this year, I will illuminate every lightbulb in my home to pay homage to the wonder of widely distributed electricity and the tremendous benefits derived from our ability to harness the power of fossil fuels. In a review of Alex Epstein’s The Moral Case for Fossil Fuels, Ronald Bailey of Reason says:

“As humanity burned more fossil fuels and increased carbon dioxide in the atmosphere, human lives dramatically improved. ‘Weather, climate, and climate change matter—but not nearly as much as they used to, thanks to technology,’ Epstein writes. For example, the death rate from extreme weather events has dropped 98 percent since 1920. Indeed, the chief benefit of burning fossil fuels has been longer and healthier human lives. The central idea of Epstein’s book is that ‘more energy means more ability to improve our lives; less energy mean less ability—more helplessness, more suffering, and more death.’“

Matt Ridley adds his thoughts on the benefits of fossil fuels at The Rational Optimist blog. Both Ridley and Bailey are confident that humans will one day achieve such efficiencies in the production of energy from renewable sources as to be competitive with fossil fuels. That will be worth celebrating. We are not there yet, however, and we do ourselves no favor in attempting to restrict fossil fuel consumption in the meantime. In fact, the risks of anthropomorphic global warming are far less severe than climate activists insist. Moreover, a warmer climate would not be unambiguously bad for people.

It is no accident that HAH is scheduled to coincide with Earth Hour, a “celebration” that stands in stark contrast to HAH in its antipathy for free market institutions and its condemnation of humankind’s relatively recent success in adapting to our planet’s environment. But there is no doubt that our progress in reducing poverty has hinged on the complementary nature of human ingenuity and the free market, the latter being a fairly recent (on historical scales) and most powerful innovation for promoting voluntary human cooperation and enrichment. Here is a recent Ridley post in which he elaborates on reasons for continued optimism. A quote:

“For 200 years, pessimists have had all the headlines-even though optimists have far more often been right. There is immense vested interest in pessimism. No charity ever raised money by saying things are getting better. No journalist ever got the front page writing a story about how disaster was now less likely. Pressure groups and their customers in the media search even the most cheerful statistics for glimmers of doom. Don’t be browbeaten-dare to be an optimist!“

Let’s celebrate for the right reasons. The flourishing of human welfare in the face of a harsh natural environment is real achievement.

Live Long and Prosper With Fossil Fuels

12 Friday Dec 2014

Posted by in Uncategorized

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AltFuelReindeer

Do your friends have even a clue as to the massive cost of eliminating fossil fuels? What it would mean for their way of life? Perhaps they do, but it’s not polite to admit to such obvious truths in many circles. Alex Epstein cares enough to tell the world about the spectacular benefits and currently dismal alternatives to fossil fuels in his new book, The Moral Case For Fossil Fuels. His thesis and and a few of his arguments are reviewed in a pair of posts by Bryan Caplan, who really likes the book. According to Caplan:

“Epstein’s book has two key claims. His first claim is descriptive: Laymen and experts alike greatly underestimate the benefits of fossil fuels and greatly overestimate their costs… .

Epstein’s second key claim is normative: Human well-being is the one fundamentally morally valuable thing. Unspoiled nature is only great insofar as mankind enjoys it… .”

Both claims strike me as reasonable, though the first is true only as a generalization about modern energy mythology, punditry and statist philosophy. In fact, one might say that society acts as if it understands the benefits of fossil fuels very well, as evidenced by our emphasis on maintaining a high and/or growing standard of living supported by these energy sources. Yet the popular misconceptions are a reality, and we persist in choosing leaders who favor policies that handicap fossil fuels and human well-being.

Caplan offers some choice quotes from Epstein’s book. I repeat only three. The first is on the benefits of plentiful energy:

“Energy is what we need to build sturdy homes, to purify water, to produce huge amounts of fresh food, to generate heat and air-conditioning, to irrigate deserts, to dry malaria-infested swamps, to build hospitals, and to manufacture pharmaceuticals, among many other things. And those of us who enjoy exploring the rest of nature should never forget that energy is what enables us to explore to our heart’s content, which preindustrial people didn’t have the time, wealth, energy, or technology to do.”

The second quote might seem controversial to some, but it is unequivocally true:

“[W]hen we look at the data, a fascinating fact emerges: As we have used more fossil fuels, our resource situation, our environment situation, and our climate situation have been improving, too.”

The third quote is about the drawbacks of some prominent alternative energy sources:

“Traditionally in discussions of solar and wind there are two problems cited: the diluteness problem and the intermittency problem. The diluteness problem is that the sun and the wind don’t deliver concentrated energy, which means you need a lot of materials per unit of energy produced…

Such resource requirements are a big cost problem, to be sure, and would be one even if the sun shone all the time and the wind blew all the time. But it’s an even bigger problem that the sun and wind don’t work that way. That’s the real problem– the intermittency problem, or more colloquially, the unreliability problem. As we saw in the Gambian hospital, it is of life and death importance that energy be reliable.”

There is no doubt that technology will someday bring better and cleaner energy sources, but we are nowhere close. The flow of subsidies to weak alternatives destroys resources, and the subsidies themselves skew heavily toward the upper end of the wealth distribution. And of course, popular fears about nuclear energy have limited our ability to diversify. For the indefinite future, we would do well to embrace plentiful and cheap fossil fuels, especially to help reduce poverty and poor living conditions in the developing world.