Streetwise Professor

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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  1. So lunatics in Brooklyn who’ve never seen a bad economic idea they didn’t enthusiastically endorse will pay more for their electricity? Time to practice my Gallic shrug, methinks.

    Comment by Tim Newman — January 23, 2019 @ 2:49 pm

  2. @Tim–Brooklyn I couldn’t give a sh*t about. It’s the people upstate who get shafted by the lunatics. Not that different than France, really, where the metropolitan elites routinely shaft provincial France. The French elites are now getting their comeuppance courtesy of les gilets jaunes. Perhaps something like this will happen to New York’s metropolitan elites (and wannabe elites, who are particularly dense on the ground in Brooklyn, and are also annoying AF). Maybe it will happen when upstaters start seeing their utility bills jacked up, or get laid off because higher power costs make their employer unprofitable.

    Comment by cpirrong — January 23, 2019 @ 7:25 pm

  3. Social cost of carbon?

    A key benefit of higher carbon in the atmosphere (a trace gas, by the way at about 0.04%, so not exactly abundant) is greater greening (faster plant growth). World greening has increased by 11%, I think without checking, as a result of higher C02 concentrations in the atmosphere.

    Against any “cost” (IMHO very questionable assumptions about how CO2 is driving global warming, but heck, even if it is) you have to measure “benefits”. This will assuredly put the SC of carbon down below $40. The one-sided analysis of carbon’s (supposed) warming effects and the globe destroying impact of the world warming by 1.5 degrees plus. Another fallacy, by the way since there is no such thing as a global temperature. There are local temperatures and averaging across geography is nonsensical. But hey, it is being done.

    Before I am flamed for my sceptical views, ask yourself one thing: Why do growers inject CO2 into their greenhouses?

    Comment by Peter — January 24, 2019 @ 9:40 am

  4. @Peter–I agree with all of that. Didn’t want to get into the weeds on the broader climate change debate. To me the bigger point is even if you assume a social cost of carbon exists, the redistributive effects of regulation intended to reduce emissions swamp efficiency effects.

    Comment by cpirrong — January 24, 2019 @ 5:46 pm

  5. Anthony Watts on his WUWT blog has an essay today on the collapse of the all-renewables electricity grid in South Australia and Victoria, during a heat wave:

    Too much demand during the hottest hours, apparently.

    A special irony is that they also apparently just demolished their last functioning coal power plant.

    New York has an object example of what they can expect from Gov. Cuomo’s deep wisdom. If renewables collapse and the very predictable excess deaths result, Mr. Cuomo should be charged with negligent homicide.

    I’ve gone deep into the weeds of so-called consensus climate science, by the way. The whole thing battens on incompetence. It’s the worst case standards-betraying group-think, ever, in science.

    Comment by Pat Frank — January 25, 2019 @ 9:05 pm

  6. my personal case for why the gilets jaunes: got my electricity bill today, 470 euros for elec use (5000 kWh), plus 167 euros for “contribution to public service” (to subsidise renewable energy), and on top of that a vat of 20% (tax on a tax!), so total bill of 789 euros! i dont know how the price per kWh compares to New York, but the nearly 70% tax makes it damn hard to beat.
    ps, thanks as always for great analysis, Im a big fan of your blog.

    Comment by a Paris reader — January 26, 2019 @ 4:29 pm

  7. @Peter: The excellent YouTube channel “Veritasium” has a hypothesis that the increased plant growth comes at a cost of lower nutrition value (excluding carbs) per unit mass, so that’s not nearly as cut and dried (no pun intended) as it first appears.

    Also, they’re not worrying about global average temperature, but global average temperature change, which seems to me to be a perfectly reasonable thing to track.

    @Pat: I’m on board with the whole man made climate change thing, but I was significantly helped on my way there by the potential of a better trade balance and, as the author of the Dilbert cartoons put it: “so that the middle East can go from being a strategic interest of the USA to being a bunch of strangers arguing about sand and magic” (though he was talking about fusion power). And it frustrates me to see the Australian example used to bash renewables: There is nothing wrong with the renewables themselves. Australia’s problem is in their grid management – as witnessed by how a single Tesla battery facility stabilised that grid until this recent overload (while earning a stack of money in energy arbitrage). They could have kept that coal plant on standby instead of demolishing it, this isn’t the fault of renewables… it’s a failure to provision adequately for the demand…

    Comment by Hiberno Frog — January 27, 2019 @ 2:08 am

  8. I’ve seen time and again the absolute horrific mistakes, and just plain incompetence in the MMGW group to ability to conduct global calorimitry. Direct calorimitry is hard enough to quantify, when all the sources and sinks are well known. We’ve seen this when an expert debunks the latest fad in perpetual motion, or ‘cold’ fusion. Extending the measurement errors all the way out to the entire globe, makes any of the predictions complete fantasy. And this is always, and constantly abetted by political pressure, and funding pressure to advance a position that is most likely to garner a grant(our host knows this far better than I as an adjunct teacher).

    It’s not that the globe isn’t warming at some rate function, I’m sure it is. The questions to be asked now is how much created by man(some), is it bad or good(mix?), and what are we to do about it? From my limited experience, we are at or near the end of the last interstadial glaciation period of warming. Maybe the predicted cool-down is being delayed due to all the carbon burning, it seems likely. If that is the case, the next question is the warming trend bad, or good? I’m no botanist, but it seems to me again that those regions of the globe which fared the best in the last glaciation were those locations which stayed warm enough year round to produce fauna(equatorial tropics), and support animal life, including humans. Maybe equatorial locations of the globe will be less fecund, but imagine central and northern Asia and America flourishing from Mokba all the way to the Bearing sea. Or in N America from Fargo to Baffin bay.

    Sure, it would be a hassle to travel all the way to the arctic for a ski trip, but on balance, maybe the growth season in Saskatchewan will be longer than about 3 months. Who’s for a Feb crop of strawberries in Winnipeg! Of course, this would be bad news for Cairo, and Addis Abbaba, etc. How much produce contribution comes out of equatorial climates now? I don’t recall getting mangos from N Brazil, or Kenya…

    Comment by doc — January 27, 2019 @ 9:48 am

  9. C., and why, pray, you don’t give a shit for Brooklyn? It’s forth biggest city in US (if it was a city), and not all of us are lefty lunatics. We are trapped.

    Comment by Tatyana — January 28, 2019 @ 7:02 pm

  10. C., and why, pray, you don’t give a shit about Brooklyn? By population size, it’s a fourth biggest city in US (if it was a city), and not all of us here are lefty lunatics. We are just trapped. From Wiki: Manhattan’s median annual household income is $66,739, while Brooklyn’s is a mere $44,850. Still think we are “elites” here?

    Comment by Tatyana — January 28, 2019 @ 7:06 pm

  11. Interesting. A few points.

    One, AOC doesn’t seem to think cost should be an object; it is a concern of only us old folks but it is her generations’ WW-II. Good luck with that New York.

    Two, $40/metric tonne is nothing approaching the cost that will be required to get to a 90% reduction in GHG emissions. Probably add a zero to that. The reality is it will be unaffordable to continue many of the uses we have for our current power & energy consumption (A/C & central heat come to mind, transportation will be the last to go).

    Third, Cuomo seems to be going along with the environmentalists and working on freezing Yankees in the dark with plans to ban new Natural Gas power generation. Also pulling the Title V permit on the combined cycle gas power plant that was just ready to start up.

    Finally, I have to point out that historically power was not sold at one real-time market clearing price, but on a cost of service basis where each source received a return based upon net investment. So it is far more redistributionist to put carbon taxes on any sort of generation, which will drive up power prices more significantly than any other power source. The whole commodity auction market approach to power pricing has very severe negative implications as the grid is driven to renewables. Texas has only done well due to low natural gas prices and the high degree of subsidization of wind. We’ve only gotten to 20% (up from zero); but we have probably made a shift comparable to California (maybe more given the large percent or power that CA gets from out of state).

    Comment by JavelinaTex — January 29, 2019 @ 12:29 pm

  12. @Tatyana-Hyperbole! My snark at Brooklyn was motivated primarily by the fact that voters there (and elsewhere in NYC) are large responsible for such inane policies. Brooklyn also evokes (with some justice, I think you’ll admit) mental images of particularly annoying leftist hipsters. Yes, I am aware that it is not inhabited 100 pct by left lunatics–and that you are one of the sane–and that many Brooklynites are hurt as badly as upstaters. So apologies for painting with too broad a brush.

    Comment by cpirrong — January 29, 2019 @ 7:57 pm

  13. @Hiberno Frog. It is impossible to de-link the renewables push in SA with the demolition of the coal plant. These were the flip sides of the same ideological coin. The same thing is going on in Germany right now. And as a general matter, SA is just one data point among several that shows that extensive reliance on renewables leads to higher power costs.

    Comment by cpirrong — January 29, 2019 @ 8:03 pm

  14. Craig: it WAS the Russians!

    Comment by Tatyana — January 29, 2019 @ 10:20 pm

  15. Also: see map

    That tiny spec of red on the west shore? That was me.

    Comment by Tatyana — January 29, 2019 @ 10:25 pm

  16. @Tatyana–From tiny acorns might oaks grow! You are part of an elite group!

    Comment by cpirrong — January 31, 2019 @ 12:36 pm

  17. @Tatyana–Beachhead in enemy territory.

    Did they also vote illegally in Pennsylvania, Michigan, and Wisconsin? 😉

    Comment by cpirrong — January 31, 2019 @ 12:37 pm

  18. Hiberno Frog – I can demonstrate, and have demonstrated, that no one, not even the IPCC, knows what they’re talking about concerning CO2 and the climate. Never have I encountered such a group of scientific incompetents as the consensus so-called climate scientists.

    I’ve published a paper about that:

    Wind and solar will never provide reliable power because of the intermittency problem. Trying to solve that problem using battery storage is a fool’s errand. Wind and solar could not power the manufacture of their own replacements.

    Comment by Pat Frank — January 31, 2019 @ 7:04 pm

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