Economics – Page 120 – a sibilant intake of breath

GHG-intensive industries and regulation

As mentioned in a recent Charlemagne column, certain industries produce so much carbon dioxide that it can be more in their interests to relocate than to face an effective national carbon pricing policy. At least, that is what they commonly argue. Examples of such industries include fertilizer, chemicals, steel, aluminium, and cement. Frequently, they have threatened to relocate if they are required to pay carbon taxes or buy permits for their emissions. While there is some reason to doubt how valid the threats are – it would be very expensive to relocate production facilities and personnel just to escape a new carbon regulatory regime – there is good reason to think about how various forms of regulation would affect such firms.

One mechanism through which such threats might be countered is by reaching agreements among major producers in as many states as possible. A Dutch chemical company will be more willing to accept carbon regulation if it knows that its American and Japanese competitors face similar requirements. This is an approach that worked well in dealing with ozone-depleting CFCs and could work similarly well in GHG-intensive industries that (a) involve a relatively small number of firms (b) located in countries with strong regulatory capacity (c) which have some political willingness to take action on climate change.

One feature many of these industries share is that a high proportion of their emissions are what are called ‘process’ emissions. This means that the greenhouse gasses are released not as a side-effect of energy production, but as a side-effect of the production of whatever it is the industry makes. As discussed before, cement has high process emissions and limited prospects for carbon capture. The situation is similar for at least some of the processes employed in the other listed industries.

One slightly counterintuitive aspect of ‘intensity-based’ cap-and-trade systems (in which firms are obliged to reduce the quantity of emissions they produce per unit of output, rather than in absolute terms) is that they are absolutely brutal for firms with predominantly process related emissions. If a cement company actually cannot do anything to reduce GHG emissions per tonne of cement, the only option under an intensity-based system is to buy 100% of its obligations from firms that have done better than their target or close down. Under a cap-and-trade system with 100% auctioning, or a carbon tax regime, such firms would basically be encouraged to contract while the economy finds less GHG intensive alternatives to what it produces. While that is a very politically difficult thing to call for, it must be remembered that all the years of unregulated emissions were, in effect, an undeserved gift from the general public in this and future generations to those firms. Discontinuing such unearned benefits is a necessary part of curbing climate change.

If we are serious about dealing with climate change, it needs to be acknowledged that not all industries are likely to find technological fixes during an acceptable timeframe. Some will simply need to shut down or be sharply scaled back. Looking across the past 100 years, it is clear that the fates of whole industries have risen and fallen in response to societal forces. The impetus for them to do so now is enormously greater, as nothing less than the future habitability of the planet is potentially at stake.

Trouble with aquaculture

Recently, Manitoba banned new hog farms in a wide swathe of the province due to environmental concerns. Now, British Columbia has suspended the issuing of new licenses for salmon farms. The ecological impact of these facilities has been mentioned here before.

Generally, the idea that open-pen aquaculture makes ecological sense for carnivorous species like salmon is fallacious. All it does is displace pressure from fishing activity from wild salmon themselves to the kind of fish they eat. Inevitably, an unconstrained fishery will destroy those stocks as well. Meanwhile, the salmon farms leach lice, excrement, and antibiotics into the waters around them.

Carbon trading, windfalls, and consumers

This background note on carbon trading from the Sightline Institute does a good job of explaining the relevance of different modes of permit allocation to consumers. That sounds terribly dull, I’m sure, but it’s simple and important. The basic idea of carbon trading is that you set some level of allowable emissions for a facility, firm, sector, or economy. Say you want to reduce total national emissions by 2% over the next year. You multiply current national emissions by 0.98 and create permits for that quantity of emissions. What you do next is very important. You can either auction these credits to the highest bidder, requiring firms that produce greenhouse gasses to purchase them, or you give some or all of them away for free to such firms.

The critical point here is that these credits are money. Auctioning them does two things: it requires polluters to pay for their emissions and it raises funds. These can be invested in research, used to subsidize low-carbon technologies, or just used to fund general tax cuts. When these credits are given away for free, they give firms the option of either continuing to pollute for free or selling the right to pollute to someone else.

The point made in this document is that consumers end up bearing the cost from either approach. This is because unless firms are tightly regulated or in competition with other firms that don’t face emissions restrictions, they will both profit from any permits they are allocated for free and pass along the cost of permits to consumers. The analogy used in this document is a good one:

Try buying World Series tickets from a scalper. Would he charge you any less if he found the tickets on the ground? Of course he wouldn’t. Like energy, the street price of World Series tickets is based on supply and demand. The supply and demand for tickets is the same no matter how much the scalper paid for them, and so the price he charges you will also be the same no matter how he got them.

Of course, the scalper would much rather get his tickets for free – and that’s precisely the point. Polluters are financially much better off if permits are given away instead of auctioned, but the cost of cutting emissions and the resulting effect on energy prices will be the same no matter how the permits are delivered.

As such, the superiority of an auction system is further reinforced. Not only does it implement the Polluter Pays principle, but it also provides a mechanism through which governments can compensate consumers for the manipulative behaviour of firms.

Carbon capture in Saskatchewan

A $1.4 billion carbon capture (CCS) equipped coal plant is on the drawing board in Saskatchewan. The projected output is 100 megawatts (MW). That works out to a price of $14,000 a kilowatt, compared with about $2000 and $4600 per kilowatt for wind turbines (according to Agriculture and Rural Development Alberta). Of course, unlike the coal plant, the wind turbines wouldn’t require fuel after being installed.

Unless the cost of CCS falls dramatically, it is never going to be able to ride in, horse at a gallop and sword drawn, to rescue the coal sector. The cancelled FutureGen project in the United States was one demonstration of this. Until there is at least one unsubsidized commercial facility out there that is producing electricity from coal and sequestering emmisions – all for less than the price of ‘expensive’ renewable technologies like wind and solar – a fair bit of skepticism about the technology is justified.

Earth Hour, and why it is a bad idea

The news today is full of talk about Earth Hour. Frankly, I think the idea is stupid. Telling people to turn out the lights for one hour one day has a trivial impact. Furthermore, it has nothing to do with approaches that actually would. Shutting down the lights in a brief symbolic gesture does nothing to change the energy basis of our society. Replacing one ordinary light bulb with a compact fluorescent one would have a bigger impact in the long term, and would at least suggest an understanding that brief voluntary abstinence from energy use is no solution whatsoever. Earth Hour is akin to choosing to fast for one hour and hoping that it will send a strong message to the factory farming industry.

Earth Hour reinforces many of the fallacies people believe about climate change, such as:

It will mostly be solved through consumer choices
Voluntary efforts are enough
It’s the visible changes that really matter

As discussed at length here in the past, it is very likely that none of these things are true. Climate change will only be dealt with when the energy basis of society has changed enough that the most greedy and selfish people are nonetheless leading low-carbon lives. That requires massive infrastructure change over the course of decades – the progressive replacement of high carbon options with low carbon and finally zero carbon ones. Earth Hour is, at best, a distraction from this process.

[Update: 25 March 2009] Judging by the Google searches, another ‘Earth Hour’ is coming up. I still think the exercise is a pointless one. Moving to a sustainable society isn’t about reducing energy use for one hour, it’s about reforming the energy basis of society. Tokenistic environmental gestures do no good, and help to convince people that the real changes we need are trivially easy.

[Update: 24 March 2011] Looking back over it, what I have written about Earth Hour before is a bit harsh. Yes, I think the basic idea of turning out the lights for an hour is a weak one. At the same time, environmental groups presumable use Earth Hour as an opportunity to communicate with the public. It might have less value as a symbolic action, and more as a simple advertising opportunity, in terms of direct communication with the public and media exposure.

Brief survey: the value of humanity

You versus the lot:

What proportion of your income would you be willing to give up to stop yourself from dying instantly in 1 year’s time?
If you were certain to die in one year’s time, what proportion of your income would you be willing to give up to prevent all of humanity from becoming extinct at that precise moment?
What proportion of your income would you be willing to give up to stop yourself from dying instantly in 10 years’ time?
What proportion of your income would you be willing to give up to prevent humanity from becoming extinct in 10 years?

The long-term perspective

What proportion of your income would you be willing to give up to prevent humanity from becoming extinct in 100 years?
What proportion of your income would you be willing to give up to prevent humanity from becoming extinct in 1000 years?

Delaying versus preventing

What proportion of your income would you be willing to give up to delay human extinction by 100 years, assuming it will otherwise occur in 100 years? That is to say, what would you pay to extend the length of the human species’ existence by 100 years?
What proportion of your income would you be willing to give up to delay human extinction by 100 years, assuming it will otherwise occur in 1000 years?
What proportion of your income would you be willing to give up to delay human extinction by 1000 years, assuming it will otherwise occur in 1000 years?

The relevance of the questions

Do you feel strongly about all of these possibilities, about some but not others, or about none at all?

Green energy ‘war’

A new blog written by a former California energy commissioner chooses to discuss the fight against climate change as a ‘war.’ At one level, this reflects the silly American tendency to discuss non-military problems using military language: the War on Drugs, the War on Poverty, etc. At another, the choice reflects the serious disjoint between what most people have publicly accepted about climate change and what the problem really involves.

The public consensus seems to be: climate change is happening and it will have some bad effects. Technology and consumer choices will probably deal with it. Hybrids and fluorescent lights for all! Some of the big issues missed in this viewpoint are:

Stabilizing greenhouse gas concentrations is a massive undertaking. It requires deep cuts (50-95%) in emissions from all countries, rich and poor alike.
Time is of the essence. Stabilizing at an atmospheric concentration likely to avoid catastrophic impacts probably requires global emissions to peak within the next ten years and fall dramatically within the next forty.
Once concentrations are stabilized, continued effort and restraint will be required to maintain that. Human emissions will need to be kept in balance with natural absorption of carbon dioxide forever.
Abrupt or runaway climate change could completely undermine the basis for the global economy. Potentially, it could even make the planet uninhabitable for human beings for thousands or millions of years.

Referring to the situation as a war does have some potential benefits. People expect sacrifice and the suspension of normal ways of operating during wartime. The lower quality of light from fluorescent bulbs seems less significant when the future of humanity is at stake; the same goes for bans on short-haul flights or inefficient cars. At the same time, there are huge problems with the war analogy. Wars end. While it is possible that we will eventually have such excellent zero-emission technology that the world’s coal reserves and tropical forests will not tempt us, that seems a distant prospect.

What this underscores is the degree to which climate change is a challenge of an altogether new and different type for humanity. It’s one that our previous ideas about collective action, the ethics of an individual in society, and the cooperation of sovereign entities need to grow to accommodate. While the seriousness and focus sometimes applied to warfare will surely be required, the metaphor probably ultimately distorts more than it clarifies.

Population and GDP

The Economics Focus in this week’s Economist makes some excellent points. Most importantly, it demonstrates the degree to which looking at national rates of GDP growth independently from national rates of population growth produces a misleading impression of what is really happening.

America and Australia usually have the kind of economies that people understand to be growing rapidly – a fact often attributed to their dynamism, lack of enthusiasm for income redistribution, etc. By contrast, Germany and Japan tend to be lamented as low-growth laggards. If you consider the changes in GDP per capita, Japan grew more quickly than either Australia or the United States between 2002 and 2007. Because of relatively high rates of population growth, the American economy needs to ‘run just to stand still.’ The problem is even more acute in places with still higher rates of population growth.

Arguably, this offers one more reason to cheer falling populations as a sign of national maturity. While an aging population does put strain on pay-as-you-go pension and health care systems, that is a one-time cost of adjustment. Once it has been borne, a diminishing population means fewer resource constraints, a higher level of physical and financial capital per person, and a increased factor price for labour, yielding improved economic returns for workers.

For both environmental and economic reasons, we may thus have good reason to hope for fewer members in each subsequent generation.

Israel’s electric vehicles

Shai Agassi has a bold plan to transform personal transportation in Israel: electric cars built by Renault and Nissan using lithium-ion batteries from NEC. The crucial difference between this plan and those simply intended to encourage customers to buy individual electric vehicles is that Agassi’s company plans to provide battery infrastructure, in the form of recharging outlets and battery swap stations. Each battery is initially expected to provide 124 miles (200 km) per charge, with recharging happening both at parking-meter type stations and at centres where depleted batteries can be swapped immediately for charged ones. The batteries are expected to last 1,500 charges, or 150,000 miles (240,000 km).

The pricing model is also interesting. While it is still evolving, it will probably take the form of a monthly fee based on expected mileage. The company selling the battery exchange plans will subsidize the purchase of the cars, to some extent, increasing the rate at which people switch over from gasoline vehicles. The Israeli government has pledged $200 million to help get the scheme running. Given the incentives for clean vehicles that the government has promised to maintain until at least 2015, company officials suggest that their electric cars will cost half as much to buy and operate as gasoline ones would.

Israel does have unique characteristics that arguably make this approach especially suitable. Foremost among those may be its small size. One of Agassi’s batteries would be sufficient to drive across it from east to west, with two or three being required to go from north to south. That said, if this model proves successful, one could certainly imagine it working in other relatively confined high-density areas, from Manhattan to Shanghai.

Car standards in China and North America

The Toronto Star has reported that: “No gasoline-powered car assembled in North America would meet China’s current fuel-efficiency standard.” Even the proposed tougher Californian standards – the ones about which there is a big fight with the Environmental Protection Agency – will not do so. In the United States, there is a proposal to require 35 mile per gallon (14.9 km/L) performance by 2020. Today, all Chinese cars are 36 mpg (15.3 km/L) or better. Canadian cars average 27 mpg (11.5 km/L), and don’t have to meet any minimum standard of that type.

That’s certainly something to consider the next time you hear that tougher standards will maul the auto industry. Judging by the relative performance of Japanese and American car companies, it might be fairer to say that continuing to pump out dinosaur vehicles is more likely to leads to its demise on this continent.