Point three on our list is energy dependence. This can and must be addressed on multiple levels and from multiple angles. Much of this is related to one particular type of so-called market failure, a situation in which markets do not provide optimal results. Even staunch believers in markets (like the writers of this blog) know these exist. The type in question here are called externalities. These are costs of doing something that are not paid by the person doing it. Pollution is the prime example. It is much cheaper for a factory to dump its waste into a nearby river than to pay to dispose of it properly. This does not mean that dumping waste in the river has no cost. On the contrary, the costs are extreme. The pollution may kill fish and poison water supplies downstream, killing people and making them sick. When the overall cost of dumping waste into a river is seen, one notices that the costs to everyone in total of properly disposing of the waste are actually very small by comparison. If the factory owner had to pay the costs in both situations, he or she would choose to properly dispose of the waste, as it is much cheaper.
In the above situation, the best method is probably regulation. Dumping is forbidden, the river is tested for pollution, anyone caught dumping waste is punished with severe fines or jail time. This works well when there are only a few polluters who are easy to monitor. In the absence of any regulation, non-polluting companies would go out of business because they would have to spend more to dispose of their waste, putting them an a disadvantage. This is the reason regulation in necessary. Calls for "morality" are pointless: without government help (e.g. via regulation or externality charges), the "moral" business owners are put out of business. Competition then selects the "immoral" ones for survival. This, by the way, is the same reason politicians lie: the ones who tell is like it is are never elected. Voters don't want to hear the truth, they vote for liars and then are shocked when lied to. My point is: analyze incentives. Do politicians have an incentive to lie? Do businesses have the incentive to cheat and pollute? If the answer is yes, you can rest assured that all these things are happening. Furthermore, you should think about how to change the incentives. Regulation and enforcement are often the answer for industry, a free press is the best solution for government (and certainly also helps for industry).
But why are we talking about pollution when we should be discussing energy dependence? Well, the two are linked. Much of the imported oil used in the US goes to transportation. Driving a car has a number of negative externalities, among them: pollution, noise, congestion, and increased danger of accidents. All of these things become worse the more people are driving on a given road. Charging for these externalities would increase efficiency (this is also discussed in Harford's book). Charging for congestion in areas where it is a problem would increase the costs to the drivers directly, who might then decide that public transport, biking, carpooling, etc. would be a better option. The money collected could be used to improve roads, rails, and public transit. This would reduce travel times to work for those willing to pay the congestion fees, it would reduce transit times for deliveries, etc. This, along with charges for other externalities like CO2, a fee for SUV drivers, whose large cars endanger other drivers, etc., would also reduce fuel consumption. An increased carbon price (via auctioned cap and trade credits, not given away, as currently planned) would encourage industries to cut carbon in whatever way is sensible for them, or to buy additional credits if that makes no sense for them. This allows each individual to decide what makes the most sense for her, and ensures that those who cause problems also pay for them. This would reduce oil imports and promote energy independence. Not only that, it would reduce waste from cars in traffic jams, cut delivery times, and generally increase efficiency in congested cities. It would also serve to increase the commercial viability of public transit (even if it is not subsidized, which would still make sense).
Why should we subsidize mass transit? Because we already subsidize private transit. Who pays for the roads everyone uses? Taxpayers! Yes, some of this comes from fuel and automobile taxes, meaning the people who use the roads pay for them, but much of it also comes from general taxes. This is a form of subsidy for car drivers.
Who pays for the rails and train cars? In most cases, only those who use them. This is obviously an unfair disadvantage.
All of this would make America a more efficient place, not to mention making driving there less frustrating. However, it would alsp admittedly make driving more expensive in previously congested areas. This sounds unfair for the poor, right? Yet another reason the funds should flow into improving public transit. Don't forget that no one is forced to use the roads as long as there is an alternative. If public transit gets better as a result, people who decide they cannot afford to drive to work will have much better alternative ways to get there.
OK, this is all well and good, but what does it have to do with energy dependency? Obviously this would serve to reduce fuel consumption or at least slow its growth. But we sense intuitively that this cannot be enough. After all, the US imports more than half its oil.
Here's part II: we expect electric cars to start arriving in the coming decades. If this does happen, America will probably need more electrical generation capacity, or a huge increase in the efficiency with which our current supplies are used. Either way, one huge part of this solution is a better power transmission network, capable of transport power around the country from where it is abundant to where it is not with little loss of energy. Could the private sector take care of this? It would be nice, but the answer is no. Here's why: there are 50 states, all with different regulations and processes for building new transmission lines. This bureaucratic red tape insures that federal assistance, oversight, and legislative harmonization are needed to give the project and chance of working. The second reason is that there are a number of regional providers. Who should pay for the network? True, they could form a consortium to build it together, but all of them would have an incentive to cut corners and free ride. Fights would ensue as soon as a project started to cost more than it was supposed to. The project is best managed centrally by an authority that has the power to change laws as necessary to move things forward. That means the federal government. Sorry.
How would this network help? Different parts of the country, across 4 time zones in the Lower 48 alone have different energy needs at different times and seasons. If power plants are not interconnected, each has to have enough capacity to cover an area's maximum energy needs. If they are connected, power can be re-routed to where its needed.
This all would be useful as things are, but it gets really beneficial if more renewables are used. Solar power could be generated very efficiently in the American Southwest. In fact, the majority of the land in Arizona is owned by the state government and could be leased for sold for energy production. With a good direct-current transmission network, this energy could then be shipped around the country. At the same time, the Midwest is a great place for windfarms. This energy, too, could be sent to where it is needed. Chances are, most of the time that it's cloudy in the Southwest or quiet in the Midwest, generation in another place can make up for the loss. Otherwise, natural gas or even coal plants (less polluting because they are only used as backup) could be used to make up the difference. All this is only possible with a transmission network. (See link to Scientific American article on the subject).
All these things combined would reduce our dependency on foreign energy sources, cut CO2 emissions, and even make America a more economically-efficient place. How about off-shore drilling? I'm concerned about the environment, but I'm even more concerned about dependency. Maybe it's time to take a closer look at drilling on US territory...
Showing posts with label cap-and-trade. Show all posts
Showing posts with label cap-and-trade. Show all posts
Monday, January 25, 2010
Sunday, June 14, 2009
The Green Economic Revolution: Will it Destroy Our Economy?
By Charles Kirchofer, April 4th, 2009
Barack Obama and other world leaders have been talking a lot about a sort of green industrial revolution. The hope is that this will create new, high tech jobs, reduce the US and other western countries' dependence on foreign oil and energy supplies, and, of course, help the environment by curbing greenhouse gas emissions, along with other environmental benefits. These benefits, it is hoped, will outweigh the costs. Sure, some jobs will be destroyed by higher energy prices and/or taxes, but these will be replaced by a plethora of jobs in green energy and in other areas that benefit from the technology developed in the green energy sector. The reductions in greenhouse gas emissions will benefit the world by saving it money on things like building dikes and levees and transporting water to newly dried out regions, not to mention the benefits received by the world's poorest, who will all too often be unlikely to implement such measures to protect themselves from climate change. The benefits to security and political stability are clear: the US will enjoy greater security and independence, fights over oil will be less likely and will open the door to fair negotiations on peace in the Middle East, or so it is hoped.
But will all that is hoped for really happen? I think this depends more on the way the plans are enacted than on whether they are enacted. There are good ways and bad ways to do just about everything. Unfortunately, from what I've heard so far, Congress is looking to do it the bad way, although there is hope that a more pragmatic Obama may lead them to better decisions.
Cap and trade: Why it's a good idea
An externality is something a company produces that it cannot charge for (or is not charged for). They can be positive or negative. For example, an externality of Coca-Cola advertising for its products is that some people might to be enticed to buy cola in general, but not necessarily Coke. In this way, Coke's advertising provides a service for all cola producers that they don't have to pay for - a positive externality. Pollution is a perfect example of a negative externality. Companies (and people) produce it, and the cost is spread around to everyone. Negative externalities are examples of market failures, areas where the market does not provide the best result for everyone. In these situations, government must step in. No one would argue that the government should let companies dump toxic chemicals into our water supplies, etc. All right, but the way government steps in is perhaps more important than whether it does.
CO2 production is a perfect example. It costs everyone, but the costs are not immediate and are not felt by its producers. There are two ways to make the costs more immediate: a carbon tax and a cap-and-trade system. Though it is more complicated, I prefer a cap-and-trade system because it encourages carbon emitters to either reduce or balance their emissions, both of which can be beneficial. With a carbon tax, this flexibility does not exist. The great thing about the balancing is that companies would then have an incentive, for instance, to buy up plots of rainforest and protect them. This is a double-edged sword of adding value to rainforests and natural lands (which are valuable, but their monetary value is generally underpriced) and increasing the immediate costs of releasing carbon. The flexibility would also allow companies to decide themselves the best way to invest money: buy more carbon credits, reduce carbon emission by increasing efficiency or changing energy supplies, or acquiring more credits through the purchase and maintenance of natural areas, which would allow them to "grow" their own carbon credits. In the future, some companies might exist only on the basis of "producing" carbon credits through conservation. The number of credits in the system would be reduced each year in such a way that the price of carbon rises at a somewhat faster rate than inflation, but not so fast that it kills industry.
Cap and trade: Difficulties
Cap and trade is not without its political difficulties. Aside from cost concerns (which can be continually adjusted, by the way), senators from states that rely heavily on coal and other carbon-intensive industries don't like the idea. Cap and trade would hurt their states more than others. This is where the inefficient politics of earmarks comes in. It might be necessary to divert some of the proceeds from the cap-and-trade system back to the very states that pay most in the form of subsidies. This is perhaps not such a bad idea as long as the subsidies aren't flowing back into the very industries that are paying most. That would obviously be pointless. Instead, the money should be used to help states adapt. Besides, it is still unlikely that the demand for coal is just going to disappear - the carbon credits should not be so extreme. They should encourage a sustainable shift to greener methods. After all, we can't move away from coal if we have nowhere to move to. Coal will be made more expensive, but consumers will still pay for it until other possibilities arise. But those subsidies might help to make the shift for workers in those states affected easier.
This would still be OK. It is my feeling, however, that that should be the end of the subsidies. Once the market failure of negative carbon emission externalities is removed by the cap-and-trade plan, private investment will be able to provide the green solutions we need (after all, "necessity is the mother of invention"). I simply do not believe the government is good at picking the winning technologies. I also think private funds, not public ones, should be risked on the project. Big investments in infrastructure (like direct current transmission wires), due to their massive scope and scale, are an exception, as such a project can only succeed with government assistance. This doesn't mean that the government shouldn't help green technologies in other ways, for example by creating legislation conducive to the types of development needed (making it easier to get permits for windfarms and to use government land for them, for example). This way, the private sector can be steered to produce the technologies we desire, but will be encouraged to find the most efficient and cost effective technologies. This is something that happens less often when politicians, wedded to specific ideas and special interests, get involved. When a politician hears about something and turns it into a pet project, he or she is much less likely to abandon that project when it becomes apparent that it is destined to fail. CEOs are less sentimental.
Although Barack Obama might agree with the above plan (although he also plans to spend a lot more on subsidies than I would like), Congress looks set to mire the entire project in earmarks and subsidies that would drive up the cost of curbing emissions dramatically. In the end, such acts could end up getting repealed as their costs are seen. That would give green ideas in general a bad name, and that would be a real shame.
Oh yeah, and it's also time to divert agricultural subsidies into this project. They are not needed and they are hurting the poorest in developing countries. Agricultural subsidies currently cost more than a solar "Grand Plan" would cost. They are politically popular, but hurt many and are a total waste of money and a misallocation of resources. Get rid of them!
Barack Obama and other world leaders have been talking a lot about a sort of green industrial revolution. The hope is that this will create new, high tech jobs, reduce the US and other western countries' dependence on foreign oil and energy supplies, and, of course, help the environment by curbing greenhouse gas emissions, along with other environmental benefits. These benefits, it is hoped, will outweigh the costs. Sure, some jobs will be destroyed by higher energy prices and/or taxes, but these will be replaced by a plethora of jobs in green energy and in other areas that benefit from the technology developed in the green energy sector. The reductions in greenhouse gas emissions will benefit the world by saving it money on things like building dikes and levees and transporting water to newly dried out regions, not to mention the benefits received by the world's poorest, who will all too often be unlikely to implement such measures to protect themselves from climate change. The benefits to security and political stability are clear: the US will enjoy greater security and independence, fights over oil will be less likely and will open the door to fair negotiations on peace in the Middle East, or so it is hoped.
But will all that is hoped for really happen? I think this depends more on the way the plans are enacted than on whether they are enacted. There are good ways and bad ways to do just about everything. Unfortunately, from what I've heard so far, Congress is looking to do it the bad way, although there is hope that a more pragmatic Obama may lead them to better decisions.
Cap and trade: Why it's a good idea
An externality is something a company produces that it cannot charge for (or is not charged for). They can be positive or negative. For example, an externality of Coca-Cola advertising for its products is that some people might to be enticed to buy cola in general, but not necessarily Coke. In this way, Coke's advertising provides a service for all cola producers that they don't have to pay for - a positive externality. Pollution is a perfect example of a negative externality. Companies (and people) produce it, and the cost is spread around to everyone. Negative externalities are examples of market failures, areas where the market does not provide the best result for everyone. In these situations, government must step in. No one would argue that the government should let companies dump toxic chemicals into our water supplies, etc. All right, but the way government steps in is perhaps more important than whether it does.
CO2 production is a perfect example. It costs everyone, but the costs are not immediate and are not felt by its producers. There are two ways to make the costs more immediate: a carbon tax and a cap-and-trade system. Though it is more complicated, I prefer a cap-and-trade system because it encourages carbon emitters to either reduce or balance their emissions, both of which can be beneficial. With a carbon tax, this flexibility does not exist. The great thing about the balancing is that companies would then have an incentive, for instance, to buy up plots of rainforest and protect them. This is a double-edged sword of adding value to rainforests and natural lands (which are valuable, but their monetary value is generally underpriced) and increasing the immediate costs of releasing carbon. The flexibility would also allow companies to decide themselves the best way to invest money: buy more carbon credits, reduce carbon emission by increasing efficiency or changing energy supplies, or acquiring more credits through the purchase and maintenance of natural areas, which would allow them to "grow" their own carbon credits. In the future, some companies might exist only on the basis of "producing" carbon credits through conservation. The number of credits in the system would be reduced each year in such a way that the price of carbon rises at a somewhat faster rate than inflation, but not so fast that it kills industry.
Cap and trade: Difficulties
Cap and trade is not without its political difficulties. Aside from cost concerns (which can be continually adjusted, by the way), senators from states that rely heavily on coal and other carbon-intensive industries don't like the idea. Cap and trade would hurt their states more than others. This is where the inefficient politics of earmarks comes in. It might be necessary to divert some of the proceeds from the cap-and-trade system back to the very states that pay most in the form of subsidies. This is perhaps not such a bad idea as long as the subsidies aren't flowing back into the very industries that are paying most. That would obviously be pointless. Instead, the money should be used to help states adapt. Besides, it is still unlikely that the demand for coal is just going to disappear - the carbon credits should not be so extreme. They should encourage a sustainable shift to greener methods. After all, we can't move away from coal if we have nowhere to move to. Coal will be made more expensive, but consumers will still pay for it until other possibilities arise. But those subsidies might help to make the shift for workers in those states affected easier.
This would still be OK. It is my feeling, however, that that should be the end of the subsidies. Once the market failure of negative carbon emission externalities is removed by the cap-and-trade plan, private investment will be able to provide the green solutions we need (after all, "necessity is the mother of invention"). I simply do not believe the government is good at picking the winning technologies. I also think private funds, not public ones, should be risked on the project. Big investments in infrastructure (like direct current transmission wires), due to their massive scope and scale, are an exception, as such a project can only succeed with government assistance. This doesn't mean that the government shouldn't help green technologies in other ways, for example by creating legislation conducive to the types of development needed (making it easier to get permits for windfarms and to use government land for them, for example). This way, the private sector can be steered to produce the technologies we desire, but will be encouraged to find the most efficient and cost effective technologies. This is something that happens less often when politicians, wedded to specific ideas and special interests, get involved. When a politician hears about something and turns it into a pet project, he or she is much less likely to abandon that project when it becomes apparent that it is destined to fail. CEOs are less sentimental.
Although Barack Obama might agree with the above plan (although he also plans to spend a lot more on subsidies than I would like), Congress looks set to mire the entire project in earmarks and subsidies that would drive up the cost of curbing emissions dramatically. In the end, such acts could end up getting repealed as their costs are seen. That would give green ideas in general a bad name, and that would be a real shame.
Oh yeah, and it's also time to divert agricultural subsidies into this project. They are not needed and they are hurting the poorest in developing countries. Agricultural subsidies currently cost more than a solar "Grand Plan" would cost. They are politically popular, but hurt many and are a total waste of money and a misallocation of resources. Get rid of them!
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