A Carbon Tax Would Be Fine, If Only …

01 Friday Mar 2019

Posted by pnuetz in Environment, Global Warming, Taxes

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A.C. Pigou, Carbon Dividend, Carbon Tax, Climate Change, Economic Development, External Cost, Fossil fuels, Green New Deal, IPCC, John Cochrane, Michael Shellenberger, Pigouvian Tax, Quillette, Renewable energy, Revenue Neutrality, Robert P. Murphy, Social Cost of Carbon, Warren Meyer, William D. Nordhaus

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.

The Renewable Energy Jobs Hoax

30 Tuesday May 2017

Posted by pnuetz in Renewable Energy, Subsidies, Uncategorized

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Fossil fuels, Government Subsidies, infrastructure, James Taylor, Job Creation, Jobs Objective, Marginal cost, Mark Zuckerberg, Renewable energy, Renewable Energy Subsidies, Tariffs, Tim Worstall

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 Wind, The Sun, and a Load of Subsidies

17 Thursday Mar 2016

Posted by pnuetz in Environment, Renewable Energy, Subsidies

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Abandoned Wind Turbines, Baseline Capacity, Cronyism, Decarbonization, Energiewende, Federal Energy Regulatory Commission, Intermittency, Investor Intel, John Peterson, Peaking Capacity, Power Storage, Renewable energy, Rooftop Solar, Seeker Blog, Solar Reimbursement Rates

Renewable energy sources are not economically viable without subsidies, and they can impose some ugly external costs. Taxpayer subsidies for renewables like solar and wind projects are rationalized on the grounds that adoption will reduce carbon emissions and bring declining costs, ultimately saving resources by virtue of “free inputs”: the sun and the wind. But the cost of carbon emissions is highly uncertain, even speculative, and subsidies usually manage to get wasteful projects off the ground that are all too often run by political cronies. Despite the free variable inputs, these projects entail substantial resource costs that are conveniently overlooked by supporters. No wonder so many renewable outputs cannot be sustained without a continuing flow of aid.

What happens when the subsidies reach their sunset? There are thousands of abandoned wind turbines littering the U.S. (and a number of abandoned solar farms, too). There are several thousand turbines at one abandoned wind farm north of Los Angeles and another east of the Bay Area. There are many more in Hawaii, Iowa, Maine, Texas and other states. Attorneys often warn landowners that lease agreements with wind developers are risky. There are a number of ways that crony wind developers impose “external costs” on landowners. Eventual disposal is a risk, as the developers might just be inclined to take the subsidies and run.

Again, wind’s big advantages, aside from the subsidies, are that wind itself is free and produces no carbon, but other resources needed to make use of wind energy are not renewable, and producing those inputs produces CO2. To build and install the windmills requires materials (including steel and scarce rare-earth materials used in the electronic components), machinery, and of course labor and land costs. There is also a substantial investment in connecting windmills to the power grid. Ultimate disposal is a certainty, and it is not cheap. Then there is a controversial cost in terms of slaughtered avian life. Increasingly, wind turbines are thought to create health issues for people living nearby.

Solar power has the same advantages as wind in terms of a free input and no direct carbon output. In addition, the cost of solar panels has declined precipitously. Rooftop solar installations have allowed consumers to sell power back to electric utilities at certain times. In fact, without those “reimbursements” on top of the subsidies, installed on-site solar power would not be economically viable for many households and businesses. Reimbursement rates are therefore a huge controversy. Solar advocates have insisted that consumers should be reimbursed at the retail price of electricity. That is difficult to square with the fact that utilities could produce that power themselves for much less. It is especially difficult to square with the fact that the excess solar generation is often mismatched with the timing of power demand.

This brings us to the achilles heel of wind and solar power: wind and sunshine are intermittent, and not just on a daily basis, but over weeks, whole seasons and even years. This risk can be diversified geographically, but only to an extent, and effective power storage options do not presently exist and will not exist for some time, even with massive subsidies. Intermittent energy production requires the availability of other reliable power sources that are costly to turn on and off as needs dictate. It requires other “peaking” capacity to fill the “valleys” in wind and solar output, and baseline capacity is needed to provide for the less variable components of demand. Baseline capacity relies on nuclear power (which many solar advocates abhor) and carbon-emitting fossil fuels. Peaking capacity is typically provided by oil and natural gas generators. Hydro-electric power can be used as baseline or dialed back as needed, but hydro capacity is generally limited.

Renewable energy activists speak of replacing traditional power sources with wind and solar power. It is difficult enough, however, for wind and solar to replace peaking capacity, let alone baseline capacity. Peak wind and solar power production is not well-aligned with peak power demand in many areas (see the second chart at this link). The extra resources required to provide redundant facilities are significant, with ratepayers picking up the tab.

Given the current state of technology, pushing renewable energy goals even further, to the replacement of baseline capacity, is misguided at best. Yet it has been tried, with unintended but easily foreseeable consequences. Germany’s Energiewende program seeks to “decarbonize” power production without nuclear power. The costs have been very high:

“The report gives enough detail that you can see why Germany’s nuclear ban leads to a shocking cost of avoidance of $300 [/mt CO2]. … J.P. Morgan modeled a balanced deep decarbonization strategy, which using 35% nuclear, costs only $84/mt CO2. Note that the $300 is a bare-bones estimate – none of the cost of the additional transmission infrastructure required by high-renewables is included in the analysis. Even so the baseline Energiewende plan will double already second-highest in Europe current costs from $108 to $203/MWhr.“

California officials apparently want to go in the same direction. John Peterson reinforces the difficulties of integrating renewable energy capacity into the power grid in a recent post at InvestorIntel:

“The disadvantages [of intermittent power sources] include:

Intermittent power sources must have conventional backup for frequent periods when the wind and sun aren’t feeling particularly cooperative;
Cannibalization of peaking plant revenue streams results in higher electric costs for all because interest, depreciation, overhead and other fixed operating expenses must be recovered from fewer units of production;
When utilities pay premium prices for renewables, that indirectly increases electricity prices for all; and
When Federal, State and local treasuries subsidize the construction and operation of intermittent power sources, they indirectly increase everyone’s tax burden.“

The U.S. Federal Energy Regulatory Commission (FERC) is currently investigating the risk of intermittent energy sources to the reliability of the power grid.

“Power demand is relatively predictable and conventional power plants, like nuclear plants and natural gas, can adjust output accordingly. Solar and wind power, however, cannot easily adjust output. Peak power demand also occurs in the evenings, when solar power is going offline. Adding green power which only provide power at intermittent and unpredictable times [and stopping or even retiring other capacity], makes the power grid more fragile.“

Given decreasing costs, solar energy is likely to play an increasing role in power production in the future; wind production to a lesser extent. Both will depend on advances in the technology of power storage. However, there are still tremendous diseconomies that make current, widespread adoption of both wind and solar power a “Renewable Irony“. Like other attempts to centrally plan economic activity, the intentions are well and good, but execution requires mandated behavior and artificial inducements that impose heavy costs on society. Renewables should not be forced on us prematurely. They will happen voluntarily and naturally if we let them, guided by market signals as technology matures and resource scarcities evolve.

Subsidized Waste: The Renewable Irony

12 Tuesday May 2015

Posted by pnuetz in Renewable Energy

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Charles Frank, Christopher Helman, Elon Musk, Energy Matters, Energy storage, Energy subsidies, Lobos Motl, Renewable energy, Tesla Powerwall battery, The Brookings Institution, The Economist, Viv Forbes, Wind and solar

The new Tesla “Powerwall” home battery is probably most noteworthy for the breathless hype it has generated. The $3,500 cost for the 10 kWh version is not cheap, and the installed price is probably closer to $7,000. The battery has a limited number of charge cycles, though Tesla has not fully disclosed all of the specifications. People of considerable expertise in this area (not me!) do not believe that Tesla’s new battery is the least bit innovative as an energy storage technology. See this post by Lobos Motl, or this one by Christopher Helman. This is not to say that Tesla has not made contributions to battery technology, only that this variation is not new, except for the marketing.

How can it pay for itself? The promise is not so much for back-up power during outages. Instead, it is an arbitrage play allowing consumers to store power during off-peak hours and avoid usage during peak-price hours. But the application (and hope) that has excited the media and well-meaning greens is efficient storage of power generated by intermittent, renewable sources. Tesla’s marketing effort certainly fostered such hopes; those with home solar panels may have Tesla sugar plums dancing in their heads.

Advocates of renewable energy can rightly claim that the costs of energy storage (and some forms of renewable power generation) have been declining. But there is still a mismatch between expectations and reality: the Tesla battery is not new technology, and it is not really cheap in terms cost per unit of energy stored and later delivered. The economic viability of intermittent sources of power obviously depends on the combined cost of storage, transmission and the power generated by a renewable source relative to other fuels, including the initial capital outlays. This is reviewed at the Energy Matters blog in “The High Cost of Renewables“, which is largely based on this paper from The Brookings Institution by Charles Frank.

It’s relevant to compare renewables such as wind and solar to nuclear energy and natural gas as replacements for “base-load” coal plants. Nuclear and gas power are often touted as viable, reduced or no-carbon solutions to providing for the energy needs. Two issues make renewables more costly than nuclear and gas in terms of installed cost per kilowatt, despite the huge up-front installation costs of nuclear. The first is the intermittency of wind and solar power generation. According to Frank’s calculations at the link above, this factor alone causes solar to be nearly four times as costly as nuclear energy, and wind to be more than 25% more costly. The second issue is that wind and solar installations have short useful lives relative to nuclear. This adds to the wind and solar cost disadvantages, but the practice of dividing costs by the number of years of useful life probably distorts the comparisons. The shorter-lived installations can be expected to involve lower costs at replacement, which should be averaged into a comparison with a longer-lived asset. Still, there is no question that renewables are more costly than gas and nuclear power.

Critics took Frank to task over certain assumptions following the publication of his paper. He offered rebuttals here, here and here in which he revised his calculations in ways that tested his critics’ assertions. Frank’s conclusions are the same:

“Taking all changes into account, my main conclusions are strengthened. Wind continues to rank number four and, by a large margin, solar number five. Gas combined cycle continues to rank number one by a large margin, although nuclear drops from two to three [behind hydroelectric power].”

This article in The Economist also emphasizes the problem of intermittency:

“… countries which have a lot of renewable generation must still pay to maintain traditional kinds of power stations ready to fire up when demand peaks. And energy from these stations also becomes more expensive because they may not run at full-blast.“

“Firing-up” a power station repeatedly consumes fuel at a greater than proportionate rate. If fossil fuels are involved, this process eats into the presumed benefits of using renewables. Of course, there are other factors that make large-scale renewable energy “farming” undesirable, such as massive land requirements and danger to birds and even marine life. Here is another piece offering a reality check on the true costs of wind power.

Certain forms of renewable energy and energy storage technologies will continue to advance and their costs will decline over time. However, solar and wind power are currently more costly than other alternatives. The benefits of these technologies to society are highly speculative, since models of carbon-forced climate change do a poor job of explaining the actual climate. In any case, climate change, should it occur, is not unambiguously costly. In the absence of more convincing evidence, the costs of renewable energy supplies should be fully internalized by rational actors (who may have personal preferences for renewables) in private, arms-length transactions. Unfortunately, to date, the growth in the share of renewable energy production in most countries has been abetted by government subsidies, so even the aforementioned private actors are collecting rents at the expense of the rest of society. The extra costs imposed on society represent a waste of resources.

In the absence of compelling evidence of pure public benefits, new technologies should be subject to true market tests, not forced upon the public by mandates or encouraged via artificial self-interest created by subsidies. In “Green Energy Policy: ‘Nothing That Works’“, Viv Forbes discusses the real goals of the extreme green lobby, quoting several environmental radicals. Here is the “money” quote:

“… Amory Lovins of the Rocky Mountains Institute, said: ‘It would be little short of disastrous for us to discover a source of clean, cheap, abundant energy, because of what we might do with it.’“

There are a few countries that have attempted to adopt aggressive policies of renewable energy mandates. Here is a discussion of the German “Green Energy Debacle”. Australia has had its share of problems as well. And here is a warning about the implications of green policy and the imposition of “energy poverty on poor countries“.