Streetwise Professor

April 10, 2019

Trump’s Energy Infrastructure Executive Order: A Constructive Use of Federal Power, Consonant With the Purpose of the Constitution

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 7:31 pm

Trump just departed from Ellington Joint Reserve Base here in Houston, ending a quick trip to Texas which included a rally in Houston. The focus of Trump’s visit was the US energy sector (In Texas? Go figure!). As part of that, he announced and signed an executive order limiting the power of states to block or obstruct the construction of interstate oil and gas pipelines.

Overall, I’m not a fan of executive orders, as they tend to be used to override or circumvent normal Constitutional procedures and purposes. There is a strong argument, however, that this order is an exception.

The very genesis of the Constitution traces to commercial disputes between states under the Articles of Confederation. Contention between Virginia and Maryland over navigation of the Potomac and the Chesapeake resulted in the calling of the Annapolis Convention (formally The Meeting of Commissioners to Remedy Defects of the Federal Government) in 1786. Although the Convention itself was something of a damp squid, it did result in the calling of the Philadelphia Convention of 1787, which wrote the Constitution that continues to be the law of the land to this day, 232 years later.

Of course, one part of that document is the Commerce Clause (Article I, Section 8, Clause 3) which grants to the Federal government the power to regulate commerce between the states. This was not an accident, comrades. Preventing protectionism by the states against each other was one of the main reasons for creating a more powerful central government.

State governments always have the temptation and incentive to favor their own constituents at the expense of people in other states. Letting that impulse operate freely would result in a Balkanized country with myriad wasteful restrictions, taxes, tolls, and regulations that would sap wealth. (Consider pre-Revolutionary France, with its oppressive system of local tolls on the movement of goods.) Anticipating that, the Founders expressly sought to limit the protectionist powers of states.

In Gibbons v. Ogden (1824) the Marshall court forcefully exerted the Commerce Clause. Things have likely gone too far since: for example, the Commerce Clause’s delegation of authority over navigable waters to the US government has been pushed to the extreme by using it to impose Federal environmental regulation on an intermittent wet spot on your back 40.

But what Trump is ordering is clearly within the four corners of the Clause as originally conceived. Oil and gas are produced in some states, and consumed in others. Interstate movement is necessary to connect producers and consumers. Further, for myriad motives many states have attempted to obstruct that movement. That is not, and has not been since the formation of the Republic, their prerogative.

The case can be made that the Commerce Clause has proved a Trojan Horse that has facilitated an expansion of Federal power beyond that what the Founders envisioned. But what Trump is ordering is squarely within the intent of the Clause, as drafted and intended.

The dramatic growth in US energy production is being hampered by infrastructure constraints. For many, that is a feature, not a bug: the hostility towards fossil fuel energy in particular by many in the US, especially on the left, makes such infrastructure a schwerpunkt for environmentalists. Knock out the transit links between producers and consumers, and energy will be neither produced nor consumed. They often find it easier to focus their efforts on state and local governments because (a) they are often more biddable, and (b) since you only need to prevail in one or two to delay or derail altogether a pipeline moving across many, the odds of success are higher. (If there are N jurisdictions crossed by a pipeline, and the probability of getting a jurisdiction to block it is P, the probability that it will go through is (1-P)^N, which decreases with N.)

Yes, local communities do have concerns. The question is what is the appropriate remedy for them. A properly applied Takings Clause (with payment of true value for taken property) is one: it prevents subsidization through expropriation. Insofar as environmental issues are concerned, the question is whether ex ante restrictions (i.e., imposing high standards to permit construction) are better than ex post penalties for damage imposed (which provide an incentive for infrastructure operators to take precautions against damage).

Since infrastructure operators are well-capitalized, and unlikely to be judgment proof, and since there are armies of class action attorneys waiting in the wings salivating at the opportunity to sue for damages, ex post penalties are likely to be more efficient than ex ante restrictions, especially ex ante restrictions imposed by state and local governments who internalize the benefits they obtain for their constituents, but who do not internalize the costs that they impose on producers upstream or consumers downstream.

And this is not to say that the Federal government is inevitably predisposed to efficient outcomes. Look no further than the previous administration, which largely embraced the environmentalist hostility to domestic energy development, and which as a consequence used its powers to thwart some important infrastructure developments (e.g., Keystone, which would have proven especially valuable in light of the loss of heavy crude production in Venezuela and to a lesser degree Mexico). So Federal power can be exercised for good or ill when it comes to energy infrastructure. Trump’s order is an example of it being exercised for the good of energy consumers and producers.

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March 11, 2019

Another Data Point on the Renewables Fairy Tale

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 7:39 pm

A coda to yesterday’s post. The EIA announced that in 2018 60 percent of new US electricity generating capacity was fueled by natural gas. This outstripped wind by a factor of almost 3, and solar by a factor of almost 5.

But those ratios understate matters, given that capacity factors for natural gas are about double those for renewables. Thus, in terms of actual real generation, natural gas added about four times as much effective capacity in 2018 as renewables. Not to mention that combined cycle plants are available pretty much on demand, rain or shine, day or night. Unlike the wind and the sun.

This despite the continued subsidization of renewables.

So tell me again how renewables will permit the fossil fuel-free electrification of the economy. I like fairy tales.

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Meet the New CEO of Tesla: Emily Litella

Filed under: Climate Change,Energy,Tesla — cpirrong @ 7:17 pm

So, remember that stuff about closing all sales outlets, selling exclusively on-line, and cutting prices? Tesla’s new CEO has an announcement:

So what’s “very different”? Here’s what the company says officially:

Over the past two weeks we have been closely evaluating every single Tesla retail location, and we have decided to keep significantly more stores open than previously announced as we continue to evaluate them over the course of several months.

So what you are saying then is prior to making the announcement that you were closing all retail locations you HADN’T evaluated every single location. Got it!

The company also reversed field on the price cuts.

To quote Casey Stengel: Can anybody play this game?

I mean really. A major, and arguably unprecedented in the industry, change in selling strategy and a major change in pricing policy are things that are not to be entered into lightly. Presumably they were the result of serious and sober consideration by serious and sober people. Right?

Serious and sober. Elon. Heh. Sometimes I crack myself up.

The initial decision was insanity. And the reversal validates that judgment. But too late to overcome the obvious implication of the initial decision: that the company is in dire straits. Further, the utterly botched process of pushing the panic button and then trying to un-push it answers Casey’s question quite definitively: No!

That is, the initial decision betrayed desperation. The decision plus the reversal betray the utter incompetence of the company’s management, and hence its incapacity to deal with its daunting challenges. And given that Tesla is a micromanaged company, that incompetence has a name: Elon.

I called Emily Litella the new CEO of Tesla in jest. But come to think of it, she could almost certainly do a better job. As could Rosanne Rosannadanna as head of investor relations and corporate affairs.

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March 10, 2019

Died of a Theory: Green Edition

Filed under: Climate Change,Economics,Energy,Politics — cpirrong @ 6:19 pm

Natural gas has a lot going for it, especially as a fuel for electricity generation and home heating. It is low-carbon, as compared to coal and petroleum. It is also clean burning, producing less particulates than competitor fuels. It does not require extensive (and polluting) refining, like oil. It is increasingly abundant, and hence becoming cheaper, due to technological innovations like fracking. Liquefaction makes intercontinental trade feasible, breaking the previous barrier between production and consumption regions, and allowing more people to realize the benefits of gas. What’s not to like?

Short answer, according to environmentalists: it is a fossil fuel, and therefore it must die.

It is bad enough that there are concerted efforts underway to replace it with renewables for the generation of electricity. There is also a push to eliminate it as a home heating fuel, and replacing it with . . . electricity, generated by yet more renewables. That is, simultaneously to replace NG in electricity generation with renewables, and to increase the demand for electricity . . . to be produced with even more renewables. (Not to mention the desire to eliminate the internal combustion engine, and rely on electric automobiles and trucks.) All without any apparent thought to whether renewables actually scale (putting aside that they are already more costly than conventional fuels at their current scale).

The defects of wind and solar as power sources, especially for reliable baseload power, are manifest. They are diffuse and intermittent. Not a good combination where demand is geographically concentrated, and highly regular. Someday battery storage might mitigate this problem, but that day is a long, long way away Throw in the complexity of the electricity grid, i.e., the need for supply to match demand exactly at all times, and intermittency becomes eve more of a nightmare.

Further, the factors that drive electricity demand (temperature extremes) are often negatively correlated with renewables production. Supply negatively correlated with demand–Not a good thing! Using electricity for home heating will only exacerbate this problem: the wind often does not blow when it is extremely cold, which is when you might want to have the heat in your home working.

Renewables do not scale well–diminishing returns are inherent to renewables production. The footprint of wind and solar operations is huge, and increasing output by X percent requires more than X percent more land because developers locate facilities in the most favorable places first, and can only expand into progressively less windy/sunny locations. Moreover, pesky physical laws, like the First Law of Thermodynamics, lead to decreasing returns to scale. Downwind expansion is less efficient because existing upwind operations reduce the available energy in the wind. Renewables sprawl is not yet a thing, but if some people’s wishes come true, it will be.

Where the wind blows and sun shines does not match where power demand is. So substituting renewables for conventional or nuclear generation requires more transmission–which, perversely, environmentalists can be counted on to oppose.

It is not an accident, then, that the greater the reliance on renewables, the higher the cost of electricity. The diminishing returns inherent in renewables production mean that green dreams to reduce conventionally-fueled electricity supply while increasing electricity demand (not just in home heating, but in transportation) will make it even more expensive still (as these push us further up a likely very steep average cost curve).

Renewables have only penetrated to the extent that they have due to extensive subsidization. Which just means that the costs get shoved elsewhere.

It is perversely ironic that many of those who push the green agenda also claim to be deeply concerned about the poor–and yeah, I’m looking at you AOC, and the rest of the Green New Deal advocates. With friends like you, the poor don’t need enemies. They consume a far higher fraction of their income in the form of energy (both directly, and indirectly through goods like food) than the better-thans who claim to be their champions, and hence will suffer disproportionately from higher energy costs. And the poorer the person, the more they will suffer. This is not complicated.

When you get down to it, not only is the watermelon crowd completely unhinged from basic physical and economic reality, it is profoundly anti-human. Achieving their utopia requires that there be fewer humans, and that those humans whom they deign to let live be much poorer.

I wouldn’t mind so much if they did they put their beliefs that there are too many humans consuming too much stuff into action by offing themselves. Be a good example! Take one for the team! But no. They’d much rather volunteer you–or more accurately, the poorest among us–for death and poverty.

I’ve used the Jefferson Davis quote about his suggested epitaph for the Confederacy–“Died of a Theory”–on many occasions. It is sickly fitting in this context too, but worse in a way. Because it won’t be those pushing the theory who perish literally or politically (as was the case with States Rights fanatics 1860-1865). It will be those whom they claim to be helping.

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March 6, 2019

Fists of Fury Fly Over Tesla’s Price Cuts

Filed under: Climate Change,Economics,Energy,Tesla — cpirrong @ 8:29 pm

According to this Seeking Alpha post, Chinese buyers are furious at the Tesla price cuts. The WSJ concurs.

And with good reason. In my post yesterday, I wrote that Tesla cut prices by 6 percent–which was another of the company’s half-truths. Or maybe fifth-truths, because for the pricier models the price cuts are on the order of 30 percent. The Model 3 Performance version price cut is 8 percent in China, and the pricier the car, the bigger the percentage discount. So no wonder buyers are furious. They look like suckers because if they’d waited, they would have saved as much as $50K.

A 6 percent price cut by an ostensibly demand constrained growth company is bad enough. 8-30 percent price cuts is Armageddon time.

As I noted in yesterday’s post, this is a sign of a truly desperate company. Or maybe a completely delusional one. Because anyone in their right mind would know that price cuts–especially of this magnitude, and especially on what should be the most profitable vehicles–vaporize customer goodwill. Especially the goodwill of the type of customers who are vital to making the company profitable by buying the high margin vehicles.

You only do that if you are so desperate for cash today that you say f-the-future, it will have to take care of itself: if I don’t get cash today, I won’t have to worry about the future.

But they’re not done with incinerating their credibility faster than a flaming Model S that lost a wheel and hit a tree! The company also cut prices on its “Autopilot” function–and won’t refund those who pre-ordered and pre-paid. And oh, it just said that what it had previously said about self-driving capability was, what’s that old phrase?–no longer operative.


But hey. Why listen to me? Elon’s got some really, really cool stuff coming . Trust him! What could go wrong?

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March 4, 2019

The New Green Trojan Horse

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 7:16 pm

My daughter alerted me to this interview of Rhiana Gunn-Wright, “one of the architects of the Green New Deal.” It’s annoying–I swear I would have gone completely mental had she said “right?” one more time–but educational. Not because you will learn anything about the way the world works, but you will learn the way the minds of the Green New Dealers work.

The interview is hosted by ex-Obamaite Jason Bordoff, now of Columbia University’s Center on Global Energy Policy. Given Bordoff’s current gig, he was obviously interested in the GND’s implications for energy. After all, the supposed raison d’etre of the GND is that our current energy system, dependent on fossil fuels as it is, is causing us to hurtle towards catastrophic warming.

But whenever Bordoff asked a question about energy, or climate policy, Gunn-Wright couldn’t even feign interest. Her responses were in the vein of “whatever”, and then she launched into impassioned monologues about what really interested her–a laundry list of progressive dreams from health care to child care to labor policy.

What’s clear from Gunn-Wright’s performance is that “climate change” is merely a Trojan Horse for a hard-core leftist agenda. The plan is to use climate alarmism to stampede voters into electing hard-left politicians who, once ensconced in power, will implement what good (I use that term ironically) socialists have been drooling to implement for decades–since before the original New Deal.

Meaning that if you think the GND as presented by the likes of AOC and Sen. Ed Malarky–excuse me, Markey–would be ruinously expensive–you ain’t seen nothing yet!

Speaking of AOC, thinking of her reminded me of Mark Twain: “First, suppose you are an idiot; now suppose you are a member of Congress. But I repeat myself.” I think even Twain would be gobsmacked by the stupidity of Ocasio-Cortez. It’s beyond disturbing that such a moron promoting such a malign program is taken seriously, and has indeed bamboozled virtually every Democratic presidential candidate into endorsing her program.

But maybe that’s the good news. I think that it is highly likely that as enthusiastically as the coastal elites have embraced GND, it will prove toxic at the ballot box. Trump’s full-throated attacks on socialism certainly indicate that he believes so. And he has an innate sense for these things, as the very fact that he is president demonstrates.

One last thing. If you think I was scathing about the GND, I had nothing on Richard Epstein. He about jumps out of your computer in this podcast from a few weeks back. Worth a listen–especially as an antidote to the leftist bromides of Rhiana Gunn-Wright. Right?

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February 20, 2019

Is Ivan Glasenberg Playing B’rer Rabbit?

Filed under: Climate Change,Economics,Energy,Regulation — cpirrong @ 7:31 pm

In the folk tale about B’rer Rabbit and the Tar Baby, the trapped trickster bunny is at the mercy of B’rer Fox. The Fox debates ways to dispose of the Rabbit–hanging, drowning, burning–and the Rabbit pleads to do any of those things–just don’t throw him into the briar patch. Falling for the reverse psychology, B’rer Fox hurls B’rer Rabbit into the supposedly dreaded briars, after which B’rer Rabbit says: “Born and bred in the briar patch. Born and bred!”

Yesterday mining behemoth Glencore announced that it would cap coal output at 150 million tons per year, claiming that the cap was an acknowledgement of the threat of global warming. Various activists claimed vindication and victory.

Might I offer a more cynical explanation? Getting thrown into the output limitation briar patch is exactly what B’rer Glasenberg wants. A firm exercises market power by limiting output to raise price: global warming gives Glencore an elite-blessed excuse to limit output, i.e., exercise market power. It will be especially beneficial for Glencore if other coal producers are stampeded into cutting output too.

Indeed, you know how this will play out. The activists will now descend on the other producers, holding up Glencore as a shining progressive example. Some, perhaps most, and maybe even all, will capitulate, further increasing prices.

And Glencore/B’rer Glasenberg will laugh all the way to the bank.

As an aside, this is an interesting illustration of the theory of the second best. In a world without any distortions, an exercise of market power is a bad thing–it reduces welfare. But in a world with other distortions, an exercise of market power can enhance efficiency.

If due to an externality, coal output in a competitive industry is too large, the exercise of market power mitigates the effect of the externality.

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February 13, 2019

Brave Green World

Filed under: Climate Change,Economics,Politics,Regulation — cpirrong @ 11:21 am

I was considering not commenting on the Green New Deal, given the largely negative–and often incredulous and scathing–response that its release evoked. Including from mainstream Democratic politicians, notably Nancy Pelosi. But most of the cast of thousands currently seeking the Democratic presidential nomination have embraced it to some degree or another, and the criticism has spurred a counterattack from many media precincts. The plan will therefore not be consigned immediately to oblivion, so I will weigh in.

In a nutshell (emphasis on the “nut”), the proposal aims at making the US “carbon neutral” in a mere decade by eliminating the internal combustion engine, retrofitting every existing building in the US, largely eliminating air travel and replacing it with high speed rail, and reducing, er, flatulence from cows by sharply reducing our consumption of meat. No biggie, right?

I find it somewhat ironic that hard on the heels of the announcement of the basics of the GND, the hard left governor of California, Gavin Newsome, said it was necessary to “get real” and recognize that the state’s high speed rail project was a disaster, and to eliminate most of the route.

But “getting real” is not on the GND agenda.

If implemented, the GND would effectively destroy a vast amount of the existing US capital stock, or require its replacement with less productive capital. This will make Americans poorer, in terms of consumption of goods and services.

The proponents of the GND commit the fundamental economic fallacy of arguing that this destruction of productive resources will bolster the economy because of all the jobs that will be created to build a fossil-fuel free power system, electric autos, massive rail systems, etc. The reality (sorry, but I can’t help dealing in reality) is that jobs are a cost, as is the decline in consumption required to make massive investments in new capital to replace existing capital.

The point of producing–including through the use of labor which entails the cost of foregone leisure–is to consume. The GND will unambiguously reduce consumption of goods and services, and make us poorer. GND is crypto-Keynesianism at its worst.

Then there is the detail of paying for this. Here advocates of GND invoke MMT–Magical Monetary Theory. Sorry, MMT actually stands for “Modern Monetary Theory” but my description is far more accurate. MMT is free lunch economics writ large, mistakes accounting identities for economic substance, and commits errors that would be embarrassing for someone in their first session of Econ 101 at one of your more backward community colleges.

The Magical Monetary Theorists argue that an endeavor as massive as the GND can be paid for by printing money.

Really. Don’t believe me? Consider this (rather conclusory) tweet by a major MMT advocate, Stephanie Kelton:

Q: Can we afford a #
? A: Yes. The federal government can afford to buy whatever is for sale in its own currency.

What follows (as is usually the case with MMT arguments) is a verbal discussion of a game of financial Three Card Monte.

Read that again: ” The federal government can afford to buy whatever is for sale in its own currency.” But at what price, dear? At what price? Venezuela has been operating on this principle, and is on pace to achieve record inflation of more than a million percent per year.

All of which obscures the economic essence. Investment today requires people to reduce consumption of goods and services. They only do so in anticipation of consuming more in the future–the “more” is the interest/return on capital from the investment. In private capital markets, the interest rate/return on capital adjusts so that the additional consumption people demand to fund investment is just paid for by the additional production flowing from the assets invested in.

In GND, as noted above, the massive investment will not result in a greater flow of goods and services in the future that will make people willingly reduce their consumption today. Indeed, future consumption in goods and services will decline. The private rate of return will be negative.

And indeed, GND implicitly acknowledges this. Its entire rationale is to reduce carbon emissions, under the theory that these are a “bad.” That is, the payoff from the massive investment (the sacrifice of private consumption) is a lower level of bad carbon emissions.

But to the extent that the reduction of this particular bad is a good, it is a public good. Everyone benefits from a decline in this putative pollutant, regardless of their contribution in paying for the reduction. Meaning that it cannot be financed voluntarily via private capital market transactions, but must be compelled, and paid for through massive taxation.

Printing money only changes the form and/or the timing of the taxation. Inflation is a tax. Moreover, if you borrow/print to pay for investment today, the investment cost not covered by the inflation tax must be paid for by higher taxes in the future. Like the old oil filter commercial: you can pay me now, or you can pay me later. But you must pay.

This is not hard. But reality is not magical.

Furthermore, given that it will be the most massive government program in history, it will entail all of the rent seeking and waste inherent in such programs.

I should also note that it will entail massive redistribution, most notably from rural, exurban, and suburban areas to urban ones as it will dramatically raise the costs of transportation and mobility which are borne disproportionately by those living outside cities. If a few Euro cents/liter fuel tax in France sparked massive protest in non-metropolitan France, just think of what would be in store in the far more sprawling US in response to taxes orders of magnitude larger than those imposed by Manny Macron.

These costs could be justified if the cost of carbon is sufficiently high, in which case the social rate of return could be substantially higher than the private rate of return, and the cost of capital. But even if one believes the most alarmist estimates of the cost of carbon, the adoption of GND by the US would have a modest–and arguably trivial–impact on emissions and temperatures, given the level and growth of emissions elsewhere, especially in China and India. Thus, the social rate of return is almost certainly far below the cost of capital.

The advocates of GND argue that the US needs a grandiose mission. The analogies that they draw are to NASA’s moon landings, or–get this–World War II and the defeat of the Nazis.

But neither Apollo nor even WWII envisioned the radical transformation of society–which is an explicit goal of GND. Apollo was a focused, and by comparison with GND, a relatively moderate expenditure financed in the ordinary course of government business and intended primarily as a campaign in the Cold War, undertaken at a time when the Johnson administration waged another Cold War campaign–Vietnam–with the specific objective of minimizing disruption to US society and the economy. World War II definitely altered every aspect of American life, but these disruptions were also viewed as temporary sacrifices necessary to win the war, to be reversed at its conclusion. Which happened in the event: the US demobilized rapidly, and most wartime expedients (e.g., rationing, the massive employment of women in manufacturing) were scrapped precipitously at its conclusion. As happened in WWI as well: Harding’s 1920 campaign slogan was “return to normalcy” after the extraordinary measures adopted during the war. But GND proposes to be the new normalcy, deliberately destroying the old normalcy.

The original New Deal as implemented was also not intended to be as transformative as its latter day green version (though the more Bolshi elements of the Roosevelt administration did harbor such ambitions).

What are the politics here? This is being pushed by the urban progressive left, epitomized by Alexandria Ocasio-Cortez, D-Brooklyn. (Sorry, Tatyana!) The ubiquitous AOC is the face and voice of the movement, though frankly I doubt it would get the same attention if her face looked like, say, Debbie Wasserman-Schultz, and I wonder whether her Munchkin voice will eventually grate on even her fellow travelers, not to mention the rest of us.

But the main political effect here is to cause deep fissures in the Democratic party. Mainstream elements are in a state of near panic, which they are attempting to conceal, with little success.

And this will redound to the benefit of Donald Trump. Opposition insanity is the greatest gift an incumbent can receive. And methinks this is a gift that will keep on giving, through November 2020.

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January 22, 2019

Regulating Carbon Emissions: Efficiency vs. Redistribution

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 8:01 pm

Bloomberg reports that New York state’s plan to eliminate its few remaining coal power plants has caused power prices for delivery in 2020, 2021, and 2022 to increase. Eyeballing the chart, the impact of the proposed regulation is on the order of $7/MWh, or about 25 percent of the 2019 price.

Coal represents a dwindling fraction of New York’s generation. The EIA reports 0 electricity from coal in October, 2018. As of 2014, the last full year for which I could find data on the EIA website, coal accounted for 4.6 million MWh, out of a total of 137 MWh of generation.

The efficiency impact of this depends on (a) the estimated social cost of carbon, (b) the kind of generation that will replace the shuttered coal plants, and (c) the non-energy costs that this replacement generation creates.

If you believe that the cost of carbon is $40/ton, if coal is replaced by zero emissions generation, the move is efficiency enhancing. A coal plant with a heat rate of a little more than 10 implies a carbon cost per MWh of $40. This is well above the price increase of around $7.

If coal is replaced by natural gas, with a carbon cost of about $20/MWh, the call is closer, but still comfortably in favor of eliminating coal.

Lower social costs of carbon of course affect the math. The other thing to keep in mind, though, is that the price is for energy only. Changing the generation mix also affects the need for ancillary services to maintain grid stability. In particular, substituting diffuse and intermittent renewables for coal increases the non-energy costs of supplying electricity. These costs can be appreciable, though again it’s difficult to see them being so large as to overcome the approximate $160 million in carbon cost savings from eliminating coal, based on a $40/MWh CO2 cost, ~4 MWh of coal fired generation, and replacement of coal by zero carbon emissions generation sources.

What’s truly startling about the numbers, though, is the redistributive impact. Price is driven by marginal cost, and the price impact suggests that the cost of the marginal megawatt hour from coal replacement generation is about $7/MWh above that of the eliminated coal units. Note: that $7/MWh price increase benefits every single MWh generated by inframarginal units (e.g., combined cycle NG). Coal represents (as noted before) ~3 pct of NY generation, but the remaining 97 percent will see a big increase in margins.

This is a crude calculation, but roughly speaking the regulation will result in a transfer of about $1 billion/year from consumers to owners of generation (~140 million MWh x $7/MWh). The vast bulk of this $1 billion will be a quasi rent for inframarginal generating assets. (About $28 million–4 mm MWh/year x $7/MWh–will cover the cost of the more expensive generation that replaces coal plants.)

As is often the case with regulation, the wealth transfers swamp the efficiency effects (which total at most $130 million=~4 MM MWh x $33/MWh in social cost savings). (Since coal generation has probably dropped from the 4 million in 2014, and the price impact reflects the elimination of the remaining coal generation, the total efficiency effects now are probably substantially smaller than $130 million.)

Thus, although this regulation is sold as one benefitting the environment, I strongly suspect that the political coalition that has given it birth is strongly supported by incumbent generation operators selling into the New York market. That is, it smacks of the typical special interest regulation that benefits a small concentrated group at the expense of a large diffuse one (i.e., the consumers in New York), all dressed up in pretty green (environmental green camouflaging Benjamins green, as it were).

Yes, in this instance perhaps–depending on one’s assumptions about the cost of carbon and the incremental uplift costs created by the regulation–this bargain has produced an efficient outcome. But the redistributive nature of this regulation, and those like it, creates a great risk that such regulations will be introduced even when they are inefficient.

Those harmed include ordinary New Yorkers lighting their homes, and commercial and especially manufacturing firms (and their employees) who pay higher power costs. (Employees will pay in lost employment and lower wages, due to a decline in derived demand for labor driven by higher costs of other inputs.) In France, a seemingly small imposition on a similar group sparked widespread social unrest. It hasn’t happened in the US yet (or in places like Germany, where consumers and employers are paying steeply higher electricity costs due to anti-carbon regulations), but US states should be aware that such policies could trigger resistance here as well–especially if and when the hoi polloi realize that the biggest winner from these policies is not the environment, but companies that are pretty unpopular to begin with.

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November 18, 2018

File Under “Duh”

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 7:25 pm
The IEA points out the obvious:

Driving electric cars and scrapping your natural gas-fired boiler won’t make a dent in global carbon emissions, and may even increase pollution levels.

Higher electrification may lead to oil demand peaking by 2030, but any reduction in emissions from the likes of electric vehicles will be offset by the increased use of power plants to charge them, according to the International Energy Agency’s annual World Energy Outlook, which plots different scenarios of future energy use.

Substitution electrical motors for internal combustion engines involves a substitution of one fossil fuel for another?  Who knew?  WHY WASN’T I TOLD????

Further, especially when it comes to countries outside the EU, Canada, and the US, this will result in a substitution towards coal, electrification will involve a substitution of higher-CO2 intensive fuel (coal) for lower CO2-intensive fuel.

But, but, but . . . renewables! Right?

Of course, Bloomberg feels obliged to quote a green fantasist:

“Electrification is a necessary part of deep decarbonization because it is relatively easy to decarbonize the power sector,” said Lauri Myllyvirta, a senior analyst at Greenpeace’s air pollution unit. “But electrification only helps if the power sector moves rapidly towards zero emissions.”

Zero emissions power sector.  “Relatively easy to decarbonize.”  Apparently, Greenpeace does not require drug tests.  Or perhaps, they do, but if you test negative you’re fired.

What is the cost of zero emissions power sector? (Anything is “easy” if cost is no object.)  Even far smaller renewable penetration (Denmark, Germany, California) results in substantially higher electricity costs.  Costs which fall extremely regressively, especially if implemented no a global basis, but upper middle class types who populate Greenpeace and Green Parties etc. couldn’t be bothered thinking about that.

Furthermore, there is no proof that renewables scale, and indeed,  basic considerations and basic economics strongly suggest they will not and cannot.  Renewables are diffuse and intermittent, and as a result maintaining reliability is costly, and this cost increases at an increasing rate the larger the share of renewables in the generation mix.

But, but, but . . . . batteries!

Batteries have been the subject of intense research for decades, and costs are falling, but again there are serious doubts that they can scale sufficiently to make zero emissions power even remotely attainable.  Indeed, batteries perhaps can handle diurnal variations in renewable power production, but handling the massive seasonal fluctuations in power demand is another matter altogether.

Further, from a lifecycle perspective, it is by no means clear that electric vehicles reduce CO2 emissions.  What’s more, the monomaniacal focus on CO2 ignores the other environmental and economic consequences of renewables generation, including profligate use of land, blended birds, the pollution created by extraction of minerals used in batteries and motors, and the pollution caused by the disposal thereof.

These issues always bring to mind James Scott’s Seeing Like a State, which shows that “high modernist” projects envisioned by alleged elites invariably result in catastrophe because they inevitably impose simplistic, low-dimension measures on complex, high-dimension systems.  Unintended consequences usually strike with a vengeance, and even the intended consequences fail to materialize.

The massive re-engineering of society required to de-carbonize is in many ways the zenith of high modernism, and is destined to produce a nadir of consequences, even compared to some of the other disasters that Scott examines.

The IEA’s caution should be heeded.  But it will not be.  Those Who Know Better will plunge ahead, until it becomes clear that they in fact know very little about what they imagine to design.  Alas, they will not bear the costs of their conceit.  The Lesser Thans will, and the lesser you are, the greater the costs will be.


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