Streetwise Professor

June 27, 2013

Cost-Benefit Confusion

Filed under: Uncategorized — The Professor @ 2:41 pm

Obama gave a big speech on the environment, and specifically climate change and CO2.  The left swooned. The right raged.


Not that I like the content of the speech (if you can call what he said “content”)-more on this in a bit.  It’s just that presidential speeches tend to be long on promises and calls to action, and very short on follow through.  That’s doubly or triply true of Obama speeches.  Look at all his speeches on gun control, and how little that came from them.  Like nothing.  This is a little different, because he can actually direct the EPA to do some things, and nothing in the speech was dependent on legislative approval (which is revealing in itself). Moreover, even the EPA process will be long and drawn out, and its outcome uncertain.  Obama was equivocal on Keystone XL, basically setting out a set of criteria that he will use to evaluate it.  These criteria are so elastic that it is possible to use them to justify rejection or approval, and indeed, both sides said they were encouraged by Obama’s remarks.

Righties should actually like the speech.  The fact that Obama feels obliged to pander to his base should make them happy.  Hedge fund billionaire Thomas Steyer had made Keystone a litmus test for continued proggy support for Obama.  If he has to spend time, effort, and political capital to appease the Steyers of the world, righties should be pleased.

Insofar as the content, such as it is, goes, a couple of things jumped out.

The first is the condescending characterization of the state of the science on global warming.  The snide references to the “Flat Earth Society” and the like.  And silliness like this:

Here at home, 2012 was the warmest year in our history. Midwest farms were parched by the worst drought since the Dust Bowl, and then drenched by the wettest spring on record. Western wildfires scorched an area larger than the state of Maryland. Just last week, a heat wave in Alaska shot temperatures into the 90s.

And we know that the costs of these events can be measured in lost lives and lost livelihoods, lost homes, lost businesses, hundreds of billions of dollars in emergency services and disaster relief. In fact, those who are already feeling the effects of climate change don’t have time to deny it — they’re busy dealing with it. Firefighters are braving longer wildfire seasons, and states and federal governments have to figure out how to budget for that. I had to sit on a meeting with the Department of Interior and Agriculture and some of the rest of my team just to figure out how we’re going to pay for more and more expensive fire seasons.

Farmers see crops wilted one year, washed away the next; and the higher food prices get passed on to you, the American consumer.

Yeah.  Like that’s never happened before.

And the mention of higher food prices is a nice segue to the next problem: the confusion over costs and benefits.

I am convinced this is the fight America can, and will, lead in the 21st century. And I’m convinced this is a fight that America must lead. But it will require all of us to do our part. We’ll need scientists to design new fuels, and we’ll need farmers to grow new fuels. We’ll need engineers to devise new technologies, and we’ll need businesses to make and sell those technologies. We’ll need workers to operate assembly lines that hum with high-tech, zero-carbon components, but we’ll also need builders to hammer into place the foundations for a new clean energy era.

Obama touts these things as benefits of policies that encourage development of renewable fuels, when in fact they are the costs.  Scientists could spend their time and brains working on producing other things that could be of even greater value.  Farmers could grow crops to feed people, instead of growing them to feed an insanely inefficient renewable fuels industry that brings dubious environmental benefits (and may actually be environmentally destructive, all things considered).  And which also brings higher food prices, which hit poor people both in the US and abroad with particular force: the Arab Spring owes not a little to discontent over rising food prices.  If Obama is so concerned about higher food prices, as his one remarks suggests, he would take seriously the implications of his support of renewables for food prices.  A serious man would make an argument that acknowledged the true costs of what he advocates.  And a serious man would not tout costs as benefits.  But we’re talking Obama here.

In fairness to Obama, he is by no means alone in his inability to tell costs from benefits.  It is a failing of politicians of all stripes and parties.  It is this confused thinking that results in government programs producing waste rather than results.  In the un-economical minds of politicians, spending, jobs, etc., are ends in themselves, and are counted as benefits, when they are in fact the costs of implementing the policy.

Insofar as the specifics of the policies Obama advocates are considered, a few quick words.  Assuming that the EPA does implement restrictions on CO2 output, this will be a boon for natural gas consumption and production in the US, and a hit to coal.  The main domestic impact will be that it would reduce LNG exports, and reduce the profitability of the firms in that business.  It will encourage export of coal, to both Europe and China, which will reduce the environmental benefits of the reduction of coal consumption in the US.  Not one for one, but considerably.  The impact on gas markets overseas will be mixed.  Less US LNG exports will keep gas prices higher, but the substitution of cheap coal for expensive gas will mitigate that impact.  Probably close to a push for European electricity consumers, and for sellers of gas in Europe (notably Gazprom).

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