Streetwise Professor

July 6, 2013

The Road to Hell, Enviro Edition

Filed under: Climate Change,Economics,Politics,Regulation — The Professor @ 7:29 pm

The road to hell is paved with good intentions.  A couple of examples from environmentalist attempts to mitigate climate change.

The first relates to ethanol.  In its infinite wisdom, in 2010 Congress mandated the use of renewable fuels with lower CO2 content than corn ethanol to meet the renewable fuel standard it created in 2005.  Sugar ethanol from Brazil fits the bill.  But given the blend wall and other limits on ethanol usage, this created an excess of corn ethanol in the US, and created an incentive to export excess corn ethanol from the US to Brazil, and import sugar ethanol from Brazil.

The problem being, of course that all the fuel burned to ship ethanol from the US to Brazil, and from Brazil to the US, pours CO2 into the atmosphere.  And the net result: more CO2 emissions than would have occurred absent the mandate to meet the renewable fuel standards with low CO2 producing fuels:

As a result, since the start of 2011, the United States and Brazil have shipped over 1 billion gallons of ethanol back and forth – more than 500 million gallons each way. The emissions generated by the shipping have worsened the carbon footprint of both fuels.

Thomson Reuters Foundation found that this overseas trade has produced more than 312,000 tonnes of carbon dioxide (CO2) since the start of 2011, based on an industry method used to calculate greenhouse gas emissions from shipping. This equals a ratio of one tonne of CO2 emitted for every 10 tonnes of ethanol transported between the two countries.

Not to mention its just wasteful and stupid to expend real resources-fuel, labor, capital-to swap ethanol between hemispheres.

Not to mention that corn-based ethanol is a monstrosity.

The second example: electric cars.  Yes: No noxious fumes or CO2 come out of the (nonexistent tailpipe) of an electric vehicle.  But if you take into account emissions over the lifetime of the vehicle-including the CO2 emitted to generate the electricity that charges the batteries of electric cars-and the other environmental impacts of their construction-including battery disposal and the environmental costs of mining rare earth metals, etc.-it’s likely that electric cars have as bad or worse environmental effects as fossil-fuel powered ones.

Government policies have substantially encouraged the use of renewable fuels, and the development of electric cars, for the purpose of improving the environment.  But the actual effects of these policies often fall far short of the intended effects, and quite frequently  have the exact opposite effect, or unintended consequences that are more costly than the intended environmental benefits.

This illustrates several points.  First, policies frequently create perverse incentives that induce market participants to undertake actions contrary to the intent of the policy: this is what is going on in the ethanol trade.  Second, we live in a second best world.  The theory of the second best implies that when there are multiple “market failures” (i.e., multiple unpriced harms), mitigating one of them (e.g., reducing CO2 emissions) is not necessarily a good thing, because it can exacerbate the other market failures.  That’s the lesson in the case of electric vehicles.

It’s my sense that these problems are most likely to occur when legislators and regulators attempt to dictate technologies, rather than affect incentives through taxes on harms (e.g., CO2 taxes).   That seems to be particularly true of the first problem.  It’s less clear that’s true of the second problem.  For instance, a monomaniacal focus on CO2, whether implemented through taxes or cap and trade or dictating technology, tends to have substantial perverse effects because there are other unpriced harms and benefits.  The encouragement of wind power, for example, results in environmental damage in the form of massive bird kills and abandoned wind turbines.

Economics is sometimes called the dismal science, originally because of the Malthusian connection.  But the name has stuck long after economists have left Malthus far behind.  And for good reason.  We’re killjoys, with a habit of pointing out that things people do with the best of intentions often fail to realize those goals, or worse, are actually counterproductive.

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April 25, 2013

The Euros Wanted to Make A CO2 Market in the Worst Way, and They Succeeded!

Filed under: Climate Change,Economics,Exchanges,Politics,Regulation — The Professor @ 4:34 pm

There’s lots of angst in Euroland over the plunging price of European Union CO2 Allowances.  Trading activity has crashed along with prices. And the Eurocrats are casting about ways to “fix” the “problem.”  And Eurocrats being Eurocrats, their mooted fixes are interventionist monstrosities that make a mockery of the idea of a “market” for CO2.

The reason for the price decline is blindingly obvious.  The European economy is sputtering, and lower industrial activity translates into lower output of CO2, and hence lower demand for emissions allowances.

In other words, the Europeans wanted to reduce CO2 emissions, and they got their wish.  Just not the way they intended: a bad economy accomplished their mission for them.   If they’re so intent on reducing CO2, you’d think they’d be happy.

But no, of course, they’re not.  They were hoping that economic activity would be robust, and that the resulting demand for allowances would keep the price high, thereby making powering this activity by fossil fuels more expensive.  This, in turn, would lead to greater reliance on no-carbon renewables like wind and solar.  In this version of Euro Disneyland, where wishes come true, windmills and solar panels would be powering a thriving economy: they would have their low carbon cake, and their economic growth ice cream too.

But no such luck. The sluggish economies, and the resulting low price of CO2, have delivered a body blow to the economics of renewables.

And that’s where much of the angst is coming from.  If it was all about reduced CO2 output, it shouldn’t really matter how you get there.  But of course investors in wind, solar, etc., want to support those investments, and the cratering of the CO2 price is very bad news for them.

So the angst is about protecting investments in renewables.

How are they going to go about this?  There have been proposals to delay the issuance of some new allowances for a couple of years to support the price, but these were shot down in the European parliament.  That delay-”backloading”-was considered by many to be prelude to canceling them altogether.

Such interventions make a mockery of the idea of a carbon market.  The man-made “supply” of allowances is subject to change at political whim, and becomes contingent on price, and how that price affects political constituencies.  This adds a huge element of risk to trading in this market.  It also adds a huge element of risk to any investment that depends on the price of CO2.  This can include not just wind and solar, but conventional power plants, and any other investment (e.g., refining or chemical manufacturing) that emits CO2.  And once the EU allows the economic interests of industries to drive supply decisions so as to affect price, all these affected parties have an incentive to influence the process.  That consumes real resources, and given the unpredictable and shifting nature of political equilibria, adds to the uncertainty over future supply.

In other words, these man-made carbon markets are not time consistent.  Unless the EU can commit not to change supply in the future, the “market” will largely involve speculation on future policy, with a huge degree of feedback.  Speculations about policy will affect prices, and prices will affect policy, which will affect prices, and on and on.  (Example: the price of CO2 allowances fell by 50 percent when the Euro Parliament rejected backloading.)

Which is wickedly ironic, given Euro attitudes about speculation.

That’s no way to make a market.  And come to think about it, any “market” that is a completely political construction is almost a contradiction in terms.  It can be at best a simulacrum of a market, at most a form of “market socialism”, but not the idealized market socialism of years past, but a market socialism buffeted by special interest politics and political economy considerations.

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April 16, 2013

On Renewables and Rutabagas

Filed under: Climate Change,Economics,Energy,Politics,Regulation — The Professor @ 7:05 pm

My most recent contributions to the WSJ energy experts have been posted.

What is the most promising renewable? (This is the don’t-sweat-too-much-for-a-fat-girl piece.)

What should governments do to encourage conservation?

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April 7, 2013

Take Care of Our Fine Feathered Friends: Wind Blows (and Ethanol Does Too), or Wind (and Ethanol) are Bat Sh*t Crazy

Filed under: Climate Change,Economics,Politics,Regulation — The Professor @ 4:25 pm

FWIW, I am one of the “experts” on the WSJ’s new “The Experts: Energy” feature.  The first installment was a week ago.  The next one, about renewables, runs next Monday-tax day! Yay!

The question was: “What is the most promising renewable?”  My first instinct was to respond with the punch line from the very non-PC joke Ty Cobb told to a journalist who interviewed him late in life: “I feel like the country boy whose Mama told him to say something nice to his prom date, and he told her: ‘you don’t sweat too much for a fat girl.’” But I resisted the temptation to say that on the WSJ: here, not so much resistance.  But you’ll just have to wait a week to see what I said.  Snarky, but not quite so snarky as that.

It wouldn’t be quite so hard to answer the question: “What is your least favorite renewable?”  Here, we have to have separate categories for electricity generation and motor fuel.

With respect to electricity, the runaway winner is wind.  Economically: a turkey.  Environmentally: it kills turkeys.  Well, maybe not turkeys, but it does slaughter countless winged creatures.  Not that enviros will tell you that.  Rather, they are willing participants in a conspiracy of silence to cover-up the avian and chiropterian holocaust.

First, the economics.  Really.  I don’t have to go find these things.  They find me.

I could go on and on, but let me just point you to Germany.  Germany has made a huge bet on wind.  Huge.  And it is becoming a huge economic albatross (speaking of birds) around Merkel’s neck.  Two articles this weekend point that out, both from sources that are usually pretty enviro-friendly.

The first is from Bloomberg:

With consumer power bills increasing and Merkel facing elections in September, Germany’s energy policy is rising on the political agenda. The cost of developing wind farms in the North Sea has surged following construction glitches and delays in linking turbines to the grid.

“The entire energy switch has derailed,” Marc Nettelbeck, an analyst at DZ Bank AG, said this week by phone from Frankfurt. “The difficulties connecting offshore wind farms to the power grid reduces their profitability and renders the original investment calculations of utilities invalid.”

Merkel has sought to spur development of wind farms at sea — where gusts are typically strong enough to keep turbines generating around the clock — because most renewable sources can’t provide constant, or baseload, power like nuclear plants.

The connection setbacks are “problematic for baseload power capacity and can lead to the failure or delay of the energy switch,” Nettelbeck said.

Spending Reduction

EON, the country’s biggest utility, said last month it will lower clean-energy investments to less than 1 billion euros in 2015 from 1.79 billion euros last year. RWE will cut annual renewables spending in half to about 500 million euros in the next two years.

Read the whole thing.  It gets worse.

The second is from the FT:

The EU’s biggest economy has long been a champion of renewable power, a haven investors could depend on.

This made it a green leader well before it decided to phase out nuclear power after the 2011 Fukushima disaster in Japan, and drive its renewable generation up even further.

Though it is not very sunny nor even that windy, Germany now accounts for nearly half of Europe’s solar power capacity and 30 per cent of its wind power.

Renewable power – mostly wind, solar and biomass – made up a formidable 22 per cent of Germany’s electricity generation last year.

But, with the levy added to German power bills to help pay for this growth nearly doubling to €0.053 per kWh – and an election looming in September – environment minister Peter Altmaier has unveiled plans to freeze renewable subsidies for two years. He has also said future rises would be limited to 2.5 per cent a year after that.

Other proposals to reduce costs include a requirement for renewable generators to sell their electricity to buyers under long- term power purchasing agreements – a far less attractive option than the current system of selling power to the grid and getting paid a set tariff.

These new measures are supposed to take effect from August, but face so much political opposition that nothing may happen before the election.

Still, the consequences have been swift. One big municipal utility with substantial renewable investments, Munich’s Stadtwerke München, has already suspended new clean power projects.

Germany touts that it has made 1.4 billion euros on exporting surplus power (mainly from wind).  It doesn’t tout the fact that it spent 14 billion euros subsidizing wind production.  (H/T Tim Worstall.)

Wind is a diffuse energy source.  Wind production is greatest at night, and smallest when it’s hot.  Meaning that it is there when you don’t need it and isn’t when you do.  Load tends not to be located in windy places, meaning that it requires a substantial investment in transmission.  And wouldn’t you know (a) this is expensive, and (b) people don’t like transmission lines.  Wind is also intermittent, and requires backup traditional generation (fossil fuel or nuclear).

Other than that, it’s great.

But it’s so environmentally friendly, right? Aren’t these small prices to pay?

Why don’t you go ask your fine feathered friends that question?

Wind turbines A/K/A bird cuisinarts, bat blenders.

Master Resource and Watts Up With That? provide chapter and verse about the number of flying creatures killed every year by wind turbines.  The numbers are in the 10s of millions in the US alone, not to mention Europe. Each turbine kills several hundred birds per year.  In some locations, bats are major contributors to the body count.

In contrast: it is estimated that the Exxon Valdez spill killed less than 700,000 birds.

So surely, the enviros are shrieking in their opposition to wind, right? Right?

Hardly.  And as the links above demonstrate, the Federal government is actually complicit in efforts to cover up the bird and bat body counts.  Indeed, the Feds actually give licenses to kill.

To recapitulate.  Wind is economically inane and environmentally dubious.  Other than that, I see no problems whatsoever.

Now ethanol.  Another historically enviro-leaning source, The Economist, takes it apart.  Like wind, it is neither economically efficient nor environmentally friendly:

Moreover, ethanol burned in an engine produces more than twice as much ozone as the equivalent amount of petrol. Ground-level ozone is a big cause of smog. And, while good at boosting a fuel’s octane rating, ethanol packs only two-thirds the energy per gallon of petrol. As a result, motorists get fewer miles per gallon using fuel blended with ethanol than with undiluted petrol. So, even if blended fuel is cheaper per gallon than petrol (thanks to ethanol’s subsidies), the overall cost of using it tends to be higher

Not to mention (which the Economist does) that ethanol mandates are screwing up the gasoline market, and inflating the price of motor fuel in the US.

And definitely not to mention (which the Economist does not, at least in this article), that the subsidy- and mandate-driven demand for ethanol has increased the demand for corn, thereby increasing corn prices, and food prices generally.  The biggest victims of this?  The poor, notably in developing countries, who spend a very large fraction of their income on food.

Wind and ethanol are monstrosities.  Moreover, governments-through subsidies and mandates-are the Frankensteins who created these monsters.  (At least the original Dr. Frankenstein created only one monster.)

To the extent that fossil fuels create externalities, it is best to provide incentives to reduce their consumption, and to encourage the production of substitutes, through taxes (taking into account the heavy tax burden that fossil fuel consumption already incurs).  Then let market participants determine the most efficient way to mitigate these externalities.  Instead, for decades governments have attempted to pick winners, and constructed an elaborate system of subsidies and mandates that have been driven by politics and politicking, and which have led to the massive stimulation of the worst of the non-fossil fuel technologies: wind and (corn-based) ethanol. In so doing, they have picked total losers.

What’s more, the subsidization of inefficient technologies, actually suppresses the incentive to develop more efficient technologies (where efficiency includes the environmental costs).   This unseen impact is arguably as devastating as the seen effects-and those are bad indeed.

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February 18, 2013

Chasing Green Unicorns: That’s Reality-Based?

Filed under: Climate Change,Economics,Energy,Politics — The Professor @ 8:04 pm

Obama and his acolytes flatter themselves as sophisticates, reality-based devotees of science.  They look to Europe for inspiration.  If only they would actually pay attention to the reality of Europe, as opposed to their fantasy vision.

Obama brought his supporters to paroxysms of joy-near orgasms, in fact-with his call in the SOTU speech for action on “climate change.”  Action that he said he would take if Congress does not-the Constitution be damned.

Would that he actually look to what his Euroheroes are actually doing  Which is to realize that their alternative energy initiatives have proved to be very expensive unicorn hunts.  Both Germany and Spain have realized that alt-energy is outrageously expensive and inadequate to achieve any meaningful impact on climate:

More than a decade ago, Germany and Spain created similar laws to aggressively promote the adoption of renewable energy. The two countries were again marching in step on Thursday—this time to fix a web of subsidies and compensations they created for green energy that had the unintended effect of driving up household electricity bills.

. . . .

Fearing a voter backlash from anger over the lopsided financing of green energy, Ms. Merkel’s government on Thursday proposed putting a cap on the green-energy surcharge until the end of 2014 and then restricting any rise in the surcharge after that to no more than 2.5% a year. The government also plans to tighten exemptions, which would force more companies to pay, and achieve a cut in green subsidies of €1.8 billion ($2.42 billion). The plan is a quick fix pending comprehensive reform after the election, government officials said.

. . . .

The Spanish parliament took a similar step on Thursday, passing a law that aims to curb rising household electricity costs by cutting aid to the renewable-energy industry.

Renewable-energy producers “are going to receive less revenue, but these measures are better for consumers” said Energy Minister José Manuel Soria.

In other words, Germany and Spain are retreating posthaste from their former grandiose commitments to green energy.

But despite this rather flagrant example of the economic bankruptcy of subsidies for renewables, Obama is intent on playing the David Farragut of greendoggles: Damn the reality! Full speed ahead!

It’s bad enough that Obama ignores what is going on in Euroland.  He should have plenty of examples closer to hand.  Like Solyndra. (Do you really need links?  Seriously?)  Like Tesla (ditto). Compact Power. LG Chem: read it and weep.  You’d  get more satisfaction out of taking $175mm in $100 bills and setting them alight.

But we are likely to be subjected to yet more of these monstrosities, because there is nothing that the reality-based community likes to do more than deny reality.  Especially when it stares them in the face.

Not only are we almost certain to chase green unicorns, we may well deny ourselves of very real energy sources.  This weekend saw protests against the Keystone XL pipeline, and I would say that the odds are better than even that he delays or kills it: the cabal of enviros and Warren Buffett will be pretty hard for Obama to oppose.  (The calculations of my earlier post imply that Keystone XL-which will last for decades-will pay for itself in less than 600 days-and that’s conservative because a good fraction of the $20mm/day in surplus generated by Cushing-Gulf pipelines is attributable to the oil that Keystone XL could transport.)  In contrast we’ll be paying for greendoggles for many multiples of 600 days.

It is quite instructive to view the contrast between the European’s concession to reality, and Obama’s denial thereof.  Just when the Euros are beginning to concede that green unicorns may not exist, Obama is hell bent on chasing them.

God help us.

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February 11, 2013

Greendoggles, or Wind Blows (except when you need it)

Filed under: Climate Change,Commodities,Economics,Energy,Politics,Regulation — The Professor @ 1:00 pm

Sunshine: The New Subprime.

Spain can no longer afford greendoggles:

The Spanish government’s latest bid to cut its growing debts to the country’s energy sector is expected to slash profits at renewable energy companies as Madrid continues to grapple with a €28bn deficit built up through years of subsidies.

Spain’s most recent reform to the energy sector will force renewable energy operators to choose between a fixed price or market price for their power – and remove a previous subsidy – while renewables subsidies will also be delinked from consumer price inflation and instead aligned with Spain’s core inflation measure.

Shares in Acciona, Spain’s second largest wind power operator, have tumbled almost 20 per cent, with Abengoa, Spain’s largest solar thermal power plant developer, also falling sharply since the changes were announced at the end of last week.

This story about the travails of the Utility Formerly Known as TXU doesn’t mention renewables-notably wind-but it should:

Energy Future Holdings Corp., the struggling Texas power company involved in a record leveraged buyout, could end up splitting as it faces significant choke points on debt and seeks counsel from Wall Street restructuring advisers.

The former TXU Corp. has been getting advice from big-name law firms and investment banks ahead of May, when it must start making cash payments on certain debt. In addition, the company faces nearly $4 billion in debt maturing in October 2014. The Dallas-based company was purchased by the private-equity firms and others in 2007 for $32 billion plus about $13 billion of debt.

After a series of complicated transactions over the past several years that rearranged its finances, the company now appears poised to start contemplating a major debt restructuring, be it through a bankruptcy filing or another means, according to a person close to the situation.

The article rightly notes that the collapse in natural gas prices has cratered generating margins (spark and dark spreads, and especially the later).  This is the main reason for EFH’s problems, but not the only reason.  The large increase in wind generation-which benefits quite nicely from  federal subsidies-has put downward pressure on power prices in Texas, and has led to negative prices for power with some regularity.  This is particularly important because Texas operates an energy-only market, with no capacity market, meaning that capital costs must be recouped from energy prices.  With wind subsidy-supressed prices, traditional generation has a hard time paying for itself.  As PUC Commissioner Donna Nelson said:

Federal incentives for renewable energy… have distorted the competitive wholesale market in ERCOT. Wind has been supported by a federal production tax credit that provides $22 per MWh of energy generated by a wind resource. With this substantial incentive, wind resources can actually bid negative prices into the market and still make a profit.

We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed…. The market distortions caused by renewable energy incentives are one of the primary causes I believe of our current resource adequacy issue… [T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.

The impact is greatest in the western part of the state, but wind weighs on prices throughout the state.  Except when it’s hot, because that’s when the wind doesn’t blow-but the power is particularly needed.  And wind also imposes substantial reliability challenges, requiring backup generation resources-which find it difficult to recoup costs due to prices that are often artificially low due to the wind subsidy.

The subsidies completely distort price signals, which in turn distort investment incentives and raise the serious risk of shortages of reliable generation resources that can operate hot or cold, rain or shine.

Other than all that stuff, wind is great.

But regulators are hell-bent on tipping the scales in favor of wind:

It’s no secret why FERC is likely to rule against the homeowners in Iowa and Minnesota. The Obama Administration’s green vision is to make wind and solar an ever-larger share of U.S. electricity production, regardless of costs. Think high-speed rail for the electric power network. The only way to make that happen without a political backlash is to spread the costs far and wide.

Wind and solar power are too expensive to compete with natural gas, coal, nuclear and hydropower without government help. The wind lobby already won an extension of its $12 billion production tax credit as part of the recent tax increase. More than half the states also have renewable energy standards forcing residents to purchase wind power. And now the greens want another subsidy for transmission lines.

Because wind makes such economic sense.  The fact that subsidies (and, in some places, the indoctrination of children) are required to support wind development tells you just how much economic sense it makes.  It is a greendoggle of the first order, and one that you might want to think about when the lights or AC go out, especially in Texas on a hot summer’s day.

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January 23, 2013

The Pain is the Gain?

Filed under: Climate Change,Economics,Politics,Regulation — The Professor @ 11:36 am

It is bizarre to observe Obama’s burning desire to reproduce the European welfare state in the US (on full display in his inaugural address) at the same time that model is collapsing before our eyes.  But another element of Obama’s address reveals that his disconnect between a desire to reproduce European policies at the same time as those policies are lapsing into farce is not limited to the welfare state alone. On Monday, Obama pledged a renewed commitment to combating “climate change.”  (When has climate been static, by the way?)  Ironically, on Monday, the FT ran an article describing the near collapse of the EU’s emission trading (cap-and-trade) market:

Carbon prices have fallen to a record low of less than €5 a tonne, pushing the European Union’s eight-year-old emissions trading system into a crisis.

Benchmark EU carbon prices yesterday dropped to a session low of €4.79 a tonne – down nearly 20 per cent over the past week – after Germany’s failure on Friday to sell carbon permits triggered a crisis of confidence.

As the article notes, this follows hard on the collapse of the UN’s Clean Development Mechanism.  Kyoto is dead.  The regional/state markets in the US (REGGI and California) are wheezing, at best.

So why not a new Big Push (cue Douglas Haig) on climate change?  What could possibly go wrong?

Better yet, why bother with the pesky legislative branch when pursuing this endeavor in the face of a truly global record of failure?  After all, Congress might be subject to feedback, and we can’t have that.  Thus, according to Bloomberg, Obama plans to pursue his Quixotic venture (almost literally so, given the prominence of windmills in alternative energy efforts) via executive order and regulation, rather than legislation.  Again: what could possibly go wrong, putting what is arguably the worst, most dangerous government regulator, the EPA in charge of this?

Not to mention that these initiatives at the level of individual nations, or even large multinational blocks, will be costly, and have virtually no impact on global temperatures.  All pain, no gain.  It is utterly insane for California to attempt unilaterally to control emissions: it is only slightly less insane for the US to do so.  But that’s the way Obama wants to go, despite the collapse of similar initiatives around the world.

But maybe that just reflects the fact that these endeavors are driven more by a religious and ideological belief than a commitment to tackle an issue an a practical way that wrestles with empirical and political realities, and weighs costs and benefits.  For people so driven, ostentatious sacrifice and adherence to ritual are valued in their own right, not for their practical consequences.  Incurring a cost signals the depth of commitment, and that’s what matters.  The pain is the gain.  For them, that is.  For the rest of us who are not wedded to such beliefs, not so much.

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January 6, 2013

Woulda, Coulda, Shoulda

Filed under: Climate Change,Politics — The Professor @ 4:02 pm

Back in the mid-to-late-1990s, when I first started reading about global warming (which has since be relabeled to the more, umm, flexible “climate change”), one thing that struck me is that estimations of temperature trends were statistically daft.  The temperature data appeared integrated, that is, non-stationary.  (The data are I(0) I(1) technically.) This means that temperatures are characterized by “stochastic trends.”  So estimating some sort of time trend, and projecting it into the future, is statistically nonsensical.  The trends estimated in that way jump around randomly.

It surprised me that it didn’t seem that this had been recognized in mainstream climate science.  I searched around a little, and found a Russian scientist (a hydrologist, I believe, but I can’t put my hands on his name or his book) who had written about this.  (In a way, not surprising, because hydrological time series present interesting integration issues, including fractional integration.) We corresponded a few times, but the language barrier was a problem.  And it seemed like he was a voice in the wilderness anyways.  He wasn’t a climate scientist, and his book was obscure and badly translated.

Thinking about an integrated time series like temperature, and the theory that CO2 drives temperature, immediately brought to mind the question of whether temperature and CO2 are co-integrated.  Cointegration would suggest some causal connection between these variables: a lack of cointegration would suggest no causal connection.  Absent cointegration, the correlation between temperature and CO2 would  be a case of “spurious regression.”  Spurious regression occurs when two unrelated, but highly autocorrelated time series are regressed on one another.  One way of thinking about spurious correlation is: are you going to believe your lyin’ eyes? The answer is no: just because two (integrated) time series seem to move together does NOT mean that there is any causal connection between them. Basically it means that the association between CO2 and temperature, which seems so compelling to the naked eye, is statistical garbage.

But I never pursued the idea, because, well, I had lots of other fish to fry and climate science was/is not my comparative advantage.  Fortunately, years later-far too long, IMO-somebody has taken up the issue. Using more sophisticated techniques than I would have considered using, the authors of this paper demonstrate that temperature and anthropogenic variables (e.g., CO2) are not polynomially cointegrated.  At most, they find that shocks to CO2 have a temporary impact on temperature.

This is a major problem for global warming absolutists, who see a mechanical connection between CO2 output and temperature.

And I am amazed that it’s taken so long for someone to have explored this rather obvious research path.  But given the results . . . maybe not.

Note that most of the references in the paper are to the econometric literature.  Time series econometricians have thought deeply about integrated time series for a long time.  It’s about time for climate scientists to do the same.  Actually, it’s well past time.  About 15 years, at least.

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November 25, 2012

Let’s Hope Not

Filed under: Climate Change,Economics,Energy,Politics,Regulation — The Professor @ 4:48 am

Apropos my visit to Germany: Bloomberg reproduced a piece from titled “Can the US Create Its Own German-Style Energy Revolution.”  It is a paean to Germany’s Energiewende. Indeed, it is the capstone to a 6 part series (available as an Amazon eBook!) plus a slide show that is one big slobbering wet kiss to Germany’s top-down policies designed at controlling how energy is produced and consumed.  And of course, German top-down social control policies have always worked out so well.

The piece is a classic in the genre.  It measures “progress” in alternative energy purely by outputs.  How many MWs generated by wind.  How many generated by solar.  The cost of these MWs as compared to alternatives is not even mentioned, except obliquely.  And that oblique reference illustrates the absurdity of the whole exercise, not that the author of the piece notices:

For Tunnicliff, who works in natural resource management, adopting native landscape was a logical choice in a desert climate. Bolted to his roof was another rational choice: a solar photovoltaic system that supplies most of his family’s electricity needs. He installed the system even though he estimates it will take 12 years to break even on the investment.

“That is the future of energy,” he said, pointing to the dark blue panels on his roof.

12 years to break even on solar.  In Phoenix.  If that’s the future, we’re screwed.

Interestingly-but not surprisingly-the piece fails to mention any of the problems with Energiewende, in particular the huge costs of implementing the policy-costs that are far larger than originally estimated, and which are causing unease even in the relatively docile German populace as electricity tariffs are skyrocketing.  It also fails to mention the degradation in electricity quality that results from a reliance on solar and wind, which are vulnerable to the vagaries of the weather.

But there is one paragraph in the piece that should be sufficient to convince any American that this is a crack-brained idea:

The absurdity of the U.S. impasse over energy reform was highlighted when the primary author of the Germany law, Hans-Josef Fell, told me what I already had heard from other German leaders—that he was inspired to write the act by what today seems like an unlikely source.

“Your President Jimmy Carter was the first politician to promote an industrial revolution with renewables,” Fell said when we met in his Berlin office in April. “I looked to the USA in the 1970s. There was wind power in California and solar power on the White House. I thought, ‘Oh, this is wonderful! Why can’t we have this in Germany?’”

Jimmy Carter thought it was a great idea.  That’s all you need to know.

We don’t need energy revolutions.  We need energy evolution that is driven by balancing costs and benefits.  Costs and benefits that are highly unpredictable, and which can change rapidly in short periods due to technological, economic, and political shocks.   Exactly the circumstances in which top-down, socially planned, command-and-control-type approaches are extraordinarily inefficient, and prone to creating economic havoc.

I think Germany will come to regret Energiewende when it moves beyond dreaming about the environmental benefits and actually has to pay to costs of achieving them.  So let’s hope that the US doesn’t smuggle in Jimmy Carter’s energy policies using Germany as a cutout.

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February 26, 2012

Energy Is Scarce: Stupidity Is Abundant

Filed under: Climate Change,Economics,Energy,Politics,Regulation — The Professor @ 9:13 pm

It is difficult to figure out which commodity induces more mass stupidity-gold or oil. Upon reflection, it seems that the stupidity is price dependent, and given the rise in gasoline prices the oil-related stupidity is taking the lead.

Glibfinder wrote a comment and friend R told me about a particularly distilled example of oil induced insanity-the Bill O’Reilly-Lou Dobbs discussion last Friday.  I am well familiar with O’Reilly’s cluelessness on energy.  Whenever prices are high, he asserts that oil companies can charge whatever they want for oil, and are overcharging: which always raises the question of why they would let prices fall to around $30/bbl (2008-2009) or $10/bbl (1998).

Being a glutton for punishment, I watched.  Or tried to, anyways.  I could take it for only about 3 minutes. O’Reilly spewed his usual story, this time with a bit of a new spin: Prices are “subjective” so companies can charge whatever they want.  Believe me: he wasn’t making a subtle, Austrian-economics based point.  Then he and Dobbs went on crude Mercantilist rants that would have been an embarrassment in 1775.

O’Reilly, while denying he was a socialist, claimed that the government has a legitimate right to control oil prices because it is “our oil.”  I was waiting for him to channel Woody Guthrie, and break out singing “This oil is your oil, this oil is my oil.”

But O’Reilly and Dobbs are just talking (empty) heads. Barack Obama is president of the United States, but he is as idiotic about energy (and economics generally) as they are.  He’s just idiotic in a different way.

He has repeatedly ridiculed increased production of hydrocarbons, saying that it is impossible to drill our way out of dependence.  In Saturday’s radio address, he said that drilling isn’t a plan, “it’s a bumper sticker.”

Typical Obama false choices. Obama says we are already drilling.  The questions are, though, whether restrictions on drilling should be eased, whether more federal lands should be opened for exploration and production.  Obama, in his typical three card monte fashion, attempts to avoid answering those questions by suggesting that since drilling is not the entire solution, it is not worth discussing.

He then demonizes oil companies and their profits, playing on the class warfare theme.  Would he be willing to compare return on capital of oil companies to those of his biggest Silicon Valley donors?

Here’s a laugh:

I’ve directed my administration to look for every single area where we can make an impact and help consumers in the months ahead, from permitting to delivery bottlenecks to what’s going on in the oil markets.

Permitting? Delivery bottlenecks? Really? You mean like Keystone? Looked at the differences between Bakken prices and Cushing prices, or between Gulf prices and Cushing, lately? Plenty of evidence of a bottleneck, which Keystone II and other projects would alleviate.  The biggest bottleneck, arguably, in the world oil industry right now.  One that Obama could have alleviated-but consciously decided not to.  Now that’s chutzpah.

And speaking of bumper stickers, he drones on about a subject on many a bumper sticker plastered to Priuses and Volvos: renewable energy:

It’s time to end taxpayer giveaways to an industry that’s never been more profitable, and use that money to reduce our deficit and double-down on a clean energy industry that’s never been more promising. Because of the investments we’ve already made, the use of wind and solar energy in this country has nearly doubled – and thousands of Americans have jobs because of it.

Uhm, to the extent that the oil industry is profitable, it is because it provides a product that people are willing to pay more for than it costs to produce.  Looking past his risible claim that anything he proposes is to reduce deficits, he proposes to “double-down” on an industry that only survives because of subsidies, because it produces energy that is far less valuable than the cost of producing it. (Actually, “doubling down” is a very appropriate characterization, a phrase usually applied to desperate gamblers trying to dig themselves out of a deep, losing hole.)

Doubling of wind and solar-from nearly infinitesimal to twice infinitesimal.  BFD.  And at what cost?  Regarding jobs-Obama emphasizes the seen jobs supported by subsidies derived from distorting taxes, but what about the unseen lost jobs (and lost wealth) as resources are pushed into uneconomic uses?

Renewables are a colossal waste. Wind. Don’t make me laugh. There is a strong negative correlation between wind and temperature, meaning that wind doesn’t produce power when you need it, and produces power when you don’t-requiring the costly shutdown of conventional plants when the wind is blowing hard (costly, as indicated by negative prices for power). Its unreliability also requires the maintenance of backup thermal generators, and the fact that wind resources are often distant from loads necessitates additional investment in transmission.

Who couldn’t love it?

Insofar as solar is concerned, even the Germans, who went whole hog into dreams of replacing fossil fuels with the sun, have realized it is utter folly.   The Europeans generally, especially the Spaniards and the Germans, have realized that unicorn dreams will not keep the lights on.

But Obama refuses to heed the Ghost of Christmas Future, and insists on repeating the same follies.  One can excuse the Germans and the Spaniards for making the mistake in the first place.  It is inexcusable to repeat the mistake-and glory in it-with their example before his eyes.

Apparently the stupidity is the most renewable part of green energy.

Not to mention that wind or solar don’t address the most pressing energy problem-motor fuels-and the one that does-biofuels-is a disaster in its own special way (apologies to Tolstoy).

Obama also touts fuel economy standards, another fundamentally misguided policy, and one that has wreaked havoc with the US automobile industry for decades.

Milton Friedman said there is no problem government couldn’t make worse. Virtually everyone advancing government solutions to address high energy prices, from O’Reilly to Obama, seem hell bent on proving Friedman correct.

Update: Literally 3 clicks after modifying this post to add the dig at biofuels, via Climateer Investing I came across this post summarizing the views of a Nobel winning chemist: “The Nonsense of Biofuels.”  Hear, hear.

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