Economics – Page 124 – a sibilant intake of breath

FutureGen and the cost of CCS

The American Department of Energy (DOE) has announced that it is cancelling funding for the $1.8 billion FutureGen project: a demonstration ‘clean coal‘ power plant to be built in Illinois. The reason cited for the change of position is “ballooning costs.” This makes it pretty unlikely the 275 megawatt plant will be built. Previously, the utilities involved would have been paying less than the cost of an ordinary coal plant, with the DOE paying the rest. Now, they would be paying more than three times as much for a carbon capture ready plant that would not, from the outset, actually capture any carbon.

This raises some serious questions about carbon capture and storage (CCS). A lot of climate plans depend on it, including those as diverse as George Monbiot’s and that of the Government of Alberta. The big question is whether this is evidence that all CCS is ruinously expensive, or simply evidence that this particular project was badly planned.

Some environmentalists are cheering this development, which might make sense if it’s just an example of a big taxpayer handout to industry being averted. Others, however, seem keen to see CCS undermined completely. It is true that it is an untested technology; only four installations in the world use anything like it. It is also true that it could perpetuate fossil fuel usage and slow the development of renewables. At the same time, it must be recognized that building renewables isn’t a purpose in its own right. It is a means to low-carbon and reliable energy. If that can be achieved through a combination of coal and CCS, we should probably be happy – especially given the strong likelihood that many coal rich countries (the United States, China, etc) are likely to burn as much of the stuff as they can get out of the ground for the foreseable future, with potentially ruinous climatic effects.

[Update: 12 June 2009] It seems that the Obama administration has decided to revive the project.

Australia’s geothermal potential

For a country using 83% coal to power an economy that produces 25.9 tonnes of carbon dioxide equivalent per person, Australia’s Innamincka desert could prove a blessing. This is not because of the sunshine hitting it, but because of the way geothermal energy has suffused the granite under it.

Initial tests have found that the granite is at approximately 250˚C, meaning that each cubic kilometre can yield as much energy as 40 million barrels of oil. If it proves viable to use this heat to boil water and drive turbines, the share of Australian power derived from renewables could increase considerably. According to Emeritus Professor John Veevers of Macquarie University’s Department of Earth and Planetary Sciences, the rocks could “supply, without emissions, the baseload electrical power at current levels of all consumers in Australia for 70 years.”

Naturally, it is not sufficient to just have hot stones within a drillable distance. It will have to be economical to construct the power generation equipment. There will be a need for water to use as a heat carrier. Finally, it will be necessary to build transmission capacity to link new facilities with Australian cities.

In a sense, a geological formation like this is like the oil sands in reverse. Both exist in large countries with economies that depend to a considerable degree on primary commodities. Likewise, both exist in states with shockingly high per-capita greenhouse gas emissions. There are questions about commercial viability and water usage of both projects, but the broader issue with Innamincka is how many megatonnes of carbon dioxide can be kept out of the atmosphere, rather than how much will be produced through a bituminous bonanza.

Commodities are a relatively poor investment

For a collection of reasons, the world is experiencing a commodity boom. Oil is hovering around $100 a barrel, while gold and platinum are setting new records. That said, it is still questionable whether commodities are a good long-term investment. While they boom sometimes, there will also be times when a glut or changes in demand cause prices to plummet.

Looking at the trends from 1985 to present, you can see a sharp divergence in asset performance between different classes of investment. The average dollar invested in global real estate in 1985 would be about $7.50 today. An investment in stocks would have yielded about $6.50, while bond growth would have left you with about $4. Investing in a basket containing all traded commodities would have yielded a return of about $2.60, while investing in just oil would have yielded less than $2.00 (oil having seen sustained growth in price only since 1998 or 1999).

None of this is to say you can’t make a fortune trading commodities. It just suggests that if you want to put money away for a few decades, not think about it much, and live well off it later, investing in equities is the way to go. Given the costs of management versus the extra returns, it is probably best to invest in index tracking funds, but that’s an issue to comment on another time.

Hurricanes, insurance, and the Everglades

After being endorsed by Charlie Crist – the governor of Florida – John McCain said something rather unintelligent today:

We’ve got to provide home insurance for every person who lives in the path of a hurricane. We are going to have to work together to save the Everglades and other great environmental treasures of this state.

The first huge problem with this is the transfer of wealth that is being proposed here. People who live on the coast in hurricane territory have every expectation of getting hit by hurricanes again and again. Having the taxes of people sensible enough to live elsewhere used to subsidize insurance for those in the risky area is quite unfair. It is also rather imprudent, as it encourages the continued occupation of hurricane-prone areas, with all the implications for death and property destruction that implies.

I could see some justification for a one-off relocation fee for people living in hurricane areas – especially if weather patterns have changed and made a previously safe area dangerous. I cannot see the logic behind using taxes to encourage people to live in dangerous areas, at a time when extreme weather seems to be getting ever-more-potent.

As for saving the Everglades, it is not at all clear that the people living nearby are helping them. The oil companies are most certainly not doing so. Indeed, the canals cut through the Everglades to allow ships passage to the oil rigs in the Gulf of Mexico may well have exacerbated the storm surges that breached the levees in New Orleans.

Improving energy efficiency through very smart metering

With existing technology, it is entirely possible to build houses that allow their owners to be dramatically more energy aware. For instance, it would be relatively easy to build electrical sockets connected to a house network. It could then be possible to see graphically or numerically how much power is being drawn by each socket. It would also be easy to isolate the energy use of major appliances – furnaces, dish washers, refrigerators – thus allowing people to make more intelligent choices about the use and possible replacement of such devices. In an extreme case, you could have a constantly updating spreadsheet identifying every use of power, the level being drawn, the cost associated, and historical patterns of usage.

Being able to manage electrical usage through a web interface could also be very helpful. People could transfer some of their use of power to low-demand times of the day. They could also lower the temperature in houses and have it rise in time to be comfortable by the time they got home. Such controls would also be very useful to people who have some sort of home generating capacity, such as an array of solar panels. A web interface could provide real-time information on the level of energy being produced and the quantity stored.

While all of these things are entirely possible, there do seem to be two big barriers to implementation. The first is in convincing people to install such systems in new houses or while retrofitting houses. The second is to make the systems intuitive enough that non-technical people can use them pretty well. The first of those obstacles would be partially overcome through building codes and carbon pricing. The second is mostly a matter of designing good interfaces. Perhaps an Apple iHome is in order.

European expansion and energy policy

The European Union is in the midst of a big internal fight about how to divide climate change mitigation obligations between members. The poorer states that joined recently say they should have easier targets so their economies will be able to grow more rapidly. States that have already made big investments in renewable technology think they should be called upon to improve by a lesser margin. France wants credit for its determined use of nuclear power. In many ways, the arguments are global disagreements writ small – an excellent illustration of which is Poland.

Poland has by far the biggest coal reserves in the EU – about fourteen billion tonnes worth. Germany is in second place with about six billion. The German GDP per capita is also US$39,650 at market exchange rates, compared to US$10,858 for Poland. Thankfully, the European Union has much more robust mechanisms for dealing with these distributional questions than exist in the world at large. There are European courts and European laws; there are also funds for regional development. Perhaps equally important is the recognition that interaction between EU states will be relatively intense for the indefinite future. This creates a stronger incentive to come to an acceptable settlement.

As such, the EU is an interesting test case for broader ideas. Given the lack of global institutions with similar strength, it is far from certain whether EU approaches could be applied worldwide. What does seem fair to say is that if Europe – with its relative wealth and strong institutions – cannot devise a system of burden-sharing for climate change mitigation, it will probably prove impossibly difficult on a global scale.

Google’s commitment to renewables

Google.org – the philanthropic arm of the internet search giant – is seeking to use the cognitive and financial resources of its parent to improve the world. Google has promised to eventually fund the organization using 1% of its equity, profit, and employee time. The real question is whether they will prove able to leverage their particular advantages and achieve outcomes of real significance. There is much reason to hope that they will.

From an environmental perspective, the awkwardly named “RE<C” initiative is the most exciting. The goal is to “develop electricity from renewable energy sources that is cheaper than electricity produced from coal… producing one gigawatt of renewable energy capacity – enough to power a city the size of San Francisco – in years, not decades.” This is certainly an ambitious undertaking. One reason for that is because the true price of coal is not being paid: all the environmental pollution associated with coal mining and burning is being left off the balance sheet, at least in America. If Google can produce renewable technologies that outperform coal economically even in the absence of carbon pricing, it will start to look feasible to begin dismantling the global fossil fuel economy.

It is probably fair to say that meeting this goal would be a more significant contribution to human welfare than everything Google has done so far. Here’s hoping all those brains and dollars come together brilliantly. Of course, as much as we might hope for such a technological rescue, it’s not something to bet on. Even in the absence of breakthrough technologies in renewables, the path to a low-carbon future is pretty well marked out: carbon pricing, regulation in demand inelastic sectors, energy conservation, and massive deployment of existing low-carbon technology.

But why drives on that ship so fast / Without or wave or wind?

A company called SkySails is hoping to reduce fuel usage by large shipping vessels by supplementing their fossil fuel engines with wind power. They estimate that a kite of 160 square metres could, when tethered to a ship, reduce fuel usage by 20%. The company has a video explaining the idea.

It would be very interesting to know (a) what proportion of a time such a system could be used during real-world shipping and (b) how long it would take to pay back the total cost of the system through lower fuel bills.

Fishing should never be subsidized

The economic case for government subsidies can be made in one of two ways. The first is the argument based on externalities: the idea being that one person’s behaviour creates benefits for others, but that those others do not compensate the actor. An example might be a landowner who refrains from cutting down trees uphill from rivers. All river users benefit from the flood control and lack of silt. In this case, it might make sense for the government to pay the landowner to save the trees – in providing the subsidy, the government encourages a more socially optimal behaviour. This justification doesn’t work for fisheries. Fisheries are a common property resource and, as such, tend towards over-exploitation. Having fishers catch more does not provide anyone else with benefits; indeed, it harms the ability of everyone else to use marine resources. Subsidizing fishing pushes fishers to continue catching fish even beyond the point where it would normally be unprofitable, leading to further depletion.

The second argument for subsidies is the ‘infant industries’ argument. The idea here is that it can take a while for a new business to reach the level of existing businesses in the field. A brand new textile industry in an African state may not initially be able to produce goods at a cost and level of quality competitive with existing industries in Asia. In such cases, you can justify a temporary program of subsidy, intended to get the industry running. Once again, this doesn’t apply to fisheries. If anything, there is too much fishing capacity in the states that subsidize heavily (North America, Europe, and Japan). Excess fishing capacity is being exported into developing states, depleting the resources there.

The one form of subsidy that can be justified in relation to the fishing industry is subsidized training to get out of it. We can recognize that fishers are having an increasingly difficult time making a living, while also recognizing that subsidizing their fuel or equipment will just batter fish stocks further. The solution is to help people to transition into other industries where they can sustain themselves without depleting pools of resources common to everyone. It is always hard for politicians to say that an industry should be smaller, or should not exist at all, but, in the case of fisheries, that is probably the only position that makes economic and ecological sense.

A partial defence of carbon offsets

Everybody compares carbon offsets with the indulgences of the medieval Catholic Church. Indeed, a good number of people seem to treat the comparison as the decisive point against them. Offsets allow one person to ‘sin’ by flying or driving a big car, then pay for it by having someone else reduce emissions by a similar amount. While there is certainly potential for abuse, the real issue here is about the intuitive sense of fairness people possess.

Obviously, if someone buys an offset that produces no real reduction in emissions, they have been bilked and the climate has suffered. There are plenty of cases of dubious offsets, including all those based around planting trees. Furthermore, it is necessary not only for the sale of the offset to lead to reduced emissions: it must lead to a reduction of emissions equivalent to the face value of the offset and, crucially, these must consist entirely of reductions that would not otherwise occur. The perfect offset is something like this: (a) a farm releases large amounts of methane, a powerful greenhouse gas (b) in the normal run of things, the farm would have no incentive to stop doing so (c) the sale of offsets changes the economics of the situation, making it most economically efficient to capture the methane, perhaps using it to generate electricity (d) this produces a quantity of real and verifiable reductions that can be sold at the marginal cost of capturing the methane.

In this situation, the argument of ineffectiveness does not apply. What we are left with is the offence against fairness – allowing one person to ‘take more than their share.’ While there is intuitive force behind this position, I don’t think it is very convincing. While it would be better to both moderate one’s consumption and help others to do so, it does seem less objectionable to emit and purchase credible offsets than to emit and simply ignore the consequences of your actions. The critical difference between offsets and indulgences is that offsets (when used properly) actually have a mitigating effect on total greenhouse gas emissions; indulgences never did anything at all, except raise money for those selling them and the ire of those opposed.