Economics – Page 124 – a sibilant intake of breath

Hydroelectricity and bare winter mountaintops

Hydroelectricity is a crucial energy source for Canada: providing 59% of the national electricity supply (and 97% in Quebec), as well as energy for things like the Kitimat Aluminium Smelter. As such, there is good reason to be concerned about changes in mountain glaciers and snowpack arising from climate change. Ideally, you want snow and ice to accumulate in the mountains during the winter. That somewhat reduces the flow of water into reservoirs, which helps prevent the need to release large quantities because the dam is at capacity. Then, during the spring and summer, you want the ice to melt, helping to keep the water level in the reservoir relatively steady and allowing the continuous production of energy without threatening riverflow-dependent wildlife or downstream water usage.

Climate change is upsetting this dynamic in several ways. Warmer winters involve less snowfall, overwhelming dams during the wet season and failing to build up frozen reserves. Hot summers increase evaporation from reservoirs and water usage by industry and individuals. Some scientific evidence also suggests that climate change is exacerbating both the intensity of rainy and dry periods: further worsening the stability of water levels and the ability of dams to produce baseload energy reliably.

Mike Demuth, a glaciologist working for Natural Resources Canada, predicts the disappearance of all small to mid-sized glaciers in the Rockies within the next 50 to 100 years. The Athabasca and 29 other glaciers feed the Columbia River, which in turn provides 60% of the electricity used in the western United States (generated by the Grand Coulee Dam, Chief Joseph Dam, and others). The low cost of energy in the area has even led companies like Google to locate their server farms in the region. Not only is the loss of our mountain cryosphere likely to cause domestic problems, it is highly likely to eventually provoke a pretty serious international conflict.

Ethanol politics

This Robert Rapier article on the politics of biofuels makes some well-worn points (about how ethanol probably takes more energy to produce than it contains, how it drives harmful land use changes, etc), it also contains some interesting new arguments. The best bit might be the politically motivated change of heart ‘straight talking’ US presidential candidate John McCain has experienced:

2003:

“Ethanol is a product that would not exist if Congress didn’t create an artificial market for it. No one would be willing to buy it. Yet thanks to agricultural subsidies and ethanol producer subsidies, it is now a very big business – tens of billions of dollars that have enriched a handful of corporate interests – primarily one big corporation, ADM. Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality.”

2006

“I support ethanol and I think it is a vital, a vital alternative energy source not only because of our dependency on foreign oil but its greenhouse gas reduction effects.”

The article also makes some good points about the different political situations in the various states considering ethanol as an option. China is increasingly wary on the basis of concerns about land and food. It has now put a halt to new corn ethanol projects. The EU is also concerned about the unintended consequences of ethanol. The fact that they mostly import it, rather than growing it domestically, arguably gives them greater political freedom to investigate claims about ethanol and make decisions about how good an option it really is. Political leaders in the United States and Canada may face too many entrenched farm interests to make a similarly objective judgment.

Will technology save us?

All sensible commentators acknowledge that asking people to make big voluntary sacrifices to fight climate change is a strategy unlikely to succeed. People will fight to keep the benefits they have acquired, as well as their capacity to acquire yet more in the future. They will turf out or overthrow leaders who demand heavy sacrifices from them – especially if people in other places are not making the same ones.

If we accept that contention, we are left with a number of possible outcomes:

Painless technological triumph: technological advances allow us to stabilize greenhouse gas concentrations without big sacrifices in current or future standard of living.
Disaster provoked changed priorities: a big and undeniably climate related cataclysm convinces people to buckle down for the sake of their own safety.
Inaction with fairly benign climate change: people do little or nothing, and it turns out that climate change is not as harmful as predicted.
Unmitigated disaster: people do nothing or act too late and slowly, causing global disaster.

Intermediate outcomes are clearly also possible. The differences between several of these have to do with unknown facts about the climate system. Will it throw up a few big and undeniable disasters before a slippery slope is reached? What is the actual sensitivity of the climate to greenhouse gas concentration increases, once feedback and adaptive effects are included?

The first option is certainly the one most popular among politicians. Virtually everyone likes technology and progress: it creates jobs and economic growth while increasing the welfare of those already alive. What big technologies are people hoping might make the difference?

Renewables: sound in theory and partially demonstrated in practice. New transmission capacity and incremental improvements in efficiency required. Potentially high land use.
Biofuels: politically popular but increasingly scientifically discredited. There may be hope for cellulosic fuels.
Nuclear fission: works in practice, with big non-climatic risks.
Nuclear fusion: promising in theory, but nobody has made it work.
More efficient machines: highly likely to occur, unlikely to be sufficient, may not cut total energy use.
Carbon capture and storage: theoretically viable, undemonstrated in practice. May divert attention from technologies with longer-term potential.
Geoengineering: desperate last ditch option, unlikely to work as predicted.

The question of whether climate change can be tackled without a substantial reduction in standard of living remains open. So does the question of whether climate change mitigation can be compatible with the elevation of billions in the developing world to a higher level of affluence. Given the above-stated unwillingness of anyone to undergo avoidable sacrifice, we should be hoping that technology does a lot better than expected, or some potent force changes the balance of risks and opportunities in the perception of most people.

Yet more biofuel doubts

The buzz on all the energy and environment blogs today is a new article in Science raising further doubts about the green credentials of biofuels. Searchinger et al. report that:

Using a worldwide agricultural model to estimate emissions from land use change, we found that corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years. Biofuels from switchgrass, if grown on U.S. corn lands, increase emissions by 50%.

The major contribution made by this study is a quantitative estimate of how land use change in response to biofuel production affects total greenhouse gas emissions. If the displacement of alternative land uses for corn ethanol produces net carbon emission increases, you can bet your life that clearing tropical rainforest to make palm oil is markedly worse.

Atwood bike tool

The other week, I bit the bullet and ordered one of Peter Atwood‘s excellent handmade tools. In anticipation of the summer, I ordered his bike tool. It’s about three inches long and made from Crucible‘s CPM3V cutlery steel, with a bead blasted finish. It includes 4mm and 5mm hex bits and a 15mm axle wrench, as well as a prybar. I have long admired Atwood’s work as quite beautiful but, prior to seeing the bike tool, never saw something well suited enough to something I do to justify the expense.

The appeal of the tool lies largely in the mode of manufacture. Virtually everything I have ever owned has been mass produced: clothes, electronics, furniture, tools, etc. Having something that was individually forged by a human being is fairly rare. All the logic of economics resists a production process wherein a single being completes everything from design through manufacturing to product testing, and yet it is strangely satisfying to possess something that arose from such an effort. It is that knowledge, and the value derived from it, that justifies paying a relatively high price for such an object.

All in all, this is one more reason I can’t wait for the roads to clear, allowing me to bring my bike up from the basement.

Peak coal

The common account of ‘peak oil‘ is straightforward enough. Oil is a non-renewable resource; as such, every barrel taken from the ground means one less for the future. The depletion of current reserves is temporarily offset by the discovery of new reserves and the development of better technology to extract more oil from the reserves we know about. A higher price for oil stimulates both exploration and technological development, creating a negative feedback loop that, to some extent, moderates scarcity and long-run prices. Given the finite nature of oil, it is a logical necessity that extraction will eventually exceed new discoveries and technological improvement, provided we continue to extract oil. The controversial question is when this will occur. Some people argue it already has, others that it will not take place for decades. You have to be a real optimist to think we can continue to expand or maintain present levels of oil extraction for a century.

In the conventional story, the next fossil fuel in line is coal. This is bad for a lot of reasons, including the damaging nature of coal mining and the high pollution and greenhouse gas emissions associated with burning coal. At least, the conventional wisdom says, coal is plentiful. The American Energy Information Administration estimates that 905 billion tonnes exist in recoverable reserves: enough to satisfy the present level of usage for 164 years. The World Energy Council estimates reserves at a somewhat more modest 847 billion tonnes. Combining the idea of peak oil with the reality of dirty coal has led many environmentalists to fear a world where cheap oil runs out and people switch to coal, with disastrous climatic consequences.

An article in the January issue of New Scientist challenges this orthodoxy. The article argues that official reserves have fallen over the last 20 years to an extent far greater than usage, suggesting that the estimates were over-generous. It asserts further that the ratio of official reserves to annual coal extraction worsened by 1/3 between 2000 and 2005. This is attributed primarily to increased demand in the developing world.

The article predicts that the combination of higher rates of usage and smaller than stated reserves may cause oil to “peak as early as 2025 and then fall into terminal decline.” If this is true, it massively changes the logic of coal power and carbon capture and storage. The only reason anybody wants to use coal is because they perceive it to be a relatively inexpensive and amply provisioned fossil fuel that can be obtained from stable and friendly countries. If coal plants being built today with a fifty year lifespan are going to face sharply increased feedstock prices in a few decades, their economic competitiveness compared to renewable energy may be non-existent. This is especially true of plants with carbon capture and storage (CCS) technology, since they require about 20 to 40% more fuel per unit of electricity, in order to power the separation and sequestration equipment.

One article does not make for a compelling case, especially given the poor overall record people have had of predicting energy trends and prices across decades. The article acknowledges the scepticism surrounding the idea of peak coal:

The idea of an imminent coal peak is very new and has so far made little impact on mainstream coal geology or economics, and it could be wrong. Most academics and officials reject the idea out of hand. Yet in doing so they tend to fall back on the traditional argument that higher coal prices will transform resources into reserves – something that is clearly not happening this time.

Regardless of whether this particular analysis proves to be accurate or not, it does a service in questioning an important assumption behind a fair bit of energy policy planning. The idea of peak coal has a complex relationship with climate change. On one hand, it might reduce the incentive to develop CCS, making whatever coal is burned more climatically harmful. On the other hand, awareness that coal reserves are more limited than assumed might prompt more investment in renewable energy, the only option that is sustainable in the long term.

Even if world coal reserves are significantly smaller than the official estimates above, there is a good chance that burning all that is available will have extremely adverse climatic consequences. We know the approximate level of emissions that would maintain stable atmospheric concentrations of greenhouse gasses and we know that we are way above it. What we don’t know is the shape of the damage curve associated with increased concentrations, increased radiative forcing, and further increased mean temperatures. Even if there aren’t sharp transitions within the next 150 ppm or so, it is inevitable that extensive further use of coal will push us further into unknown and potentially dangerous territory.

Bans, taxes, or nothing

A former chairman of Shell has argued that the European Union should ban cars that get fewer than 35 miles per gallon. The basic idea is that there is no reason for cars to be less efficient than that and the new ones that do more poorly are intolerable luxury items. Forcing all cars to meet the standard is presented as a way of making the rich “do their share” when it comes to climate change.

Similar arguments exist about lightbulbs. Should governments ban incandescent bulbs, impose extra taxes on them, or do nothing? The last option won’t help with climate change mitigation. The middle option risks dividing the world between an upper class nicely lit in flattering yellow hues and an underclass rendered corpselike by flickering green compact fluorescent bulbs. Banning the bulbs outright could prevent their use in the few situations in which they are genuinely highly valuable, as evidenced by the willingness of their owners to cut emissions in other areas in order to not have to give them up.

The ideal solution is sustainable, tradeable carbon allowances. Everyone on earth gets about 750kg a year, and are free to trade it between them. Yes, the poor will sell to the rich, but they will do so voluntarily because the money is worth more to them than their emissions are. This certainly isn’t perfect (people may sell under duress or still lack sufficient means for a decent life), but it’s better than the ‘grab what you can’ approach that dominates presently. Of course, this allowance approach is hopelessly unrealistic. The emissions of people in the rich world are so far above what’s sustainable, they would never sign on to a system that required them to cut back as far as is appropriate.

Another big question has to do with induced technological change. Automakers will howl to the moon if you demand that they make 35mpg cars across the board. Sputtering, they will swear that it is impossible and even trying will bankrupt them. Actually forced to do so, however, it is probable they would squeak over the line. The question is whether such a policy would have benefits that outweigh the associated costs – including the perceived loss of liberty on the part of car makers and car owners.

How then do policymakers reconcile the possible with the fair, the risks associated with climate change and the reality of other social and equitable issues? The idea of forcing manufacturers of luxury cars to turn out models that get 50mpg does have appeal, but it is probably a mistake to conflate the fighting of climate change with the desire to reduce the profligacy of the wealthy. Excessive emissions are the behaviour properly targeted by climate policies: not pompous displays of extravagance. Mandated standards do have a role to play in situations where elasticity of demand is weak and there are possibilities for structural change. Those, in combination with carbon pricing, do have the capacity to help us move to a low-carbon economy. The devil of that transition, as ever, is in the details.

Some figures on the economics of corn ethanol

Trustworthy numbers on some climate-related things are virtually impossible to find. Key examples are nuclear power and biofuels.

All the more reason, then, to be thankful that some numbers have been crunched over at R^2. Conclusions:

The corn for one gallon of ethanol costs about US$1.30.
Energy for processing costs another $0.33
Enzymes, yeast, and chemicals are $0.14
Labour and other expenses are $0.23
Capital depreciation costs are estimated at $0.40

He thus concludes that corn ethanol costs about $2.00 per gallon, not including return on investment. This is also after you subtract the revenue from selling the distiller’s dried grains with solubles (DDGS) grown with the corn but not used for ethanol production. Due to the lower energy density of ethanol, this is equivalent to gasoline for $3 a gallon.

While I certainly wouldn’t bet the farm on the accuracy of those figures, I think there is reason to put more stock in them than in estimates from journalists (who lack expertise) or governments (who often have conflicts of interest). Of course, the issue of whether corn ethanol is cheap or expensive doesn’t bear upon some other vital questions: Does it actually reduce fossil fuel usage? Does it produce fewer greenhouse gas emissions on a lifecycle basis? Does making it raise food prices and starve the poor?

Taskforce calls for $2 billion for CCS

In March 2007, the Canadian federal government and the Government of Alberta formed a task force to investigate carbon capture and storage (CCS) as a climate mitigation technology. Now, the report of that task force has been released: Canada’s Fossil Energy Future: The Way Forward on Carbon Capture and Storage. The report for $2 billion to be spent by federal and provincial governments in order to get five CCS facilities online by 2015. These five facilities would collectively sequester 5 Mt of CO2 per year. This is equivalent to about 0.6% of Canadian emissions.

Supporters of the plan argue that initial governmental support is essential for learning how to scale up the technology, making much larger (and presumably unsubsidized) reductions possible in the future. The report projects that as many as 600 megatonnes (Mt) of CO2 could be sequestered by 2050: a figure equivalent to about 85% of current Canadian emissions. Sequestration at this kind of scale is a key element of the climate plan recently announced by the Government of Alberta.

The announcement raises both practical and ethical questions. The first centre around the overall expense of the plan, the second around who is paying it. The report acknowledges that building CCS into facilities increases the cost substantially:

The financial gap associated with most commercial-scale CCS projects (ones with one megatonne or more of CO2 emission reductions per year) is on the order of hundreds of millions of dollars.

Businesses will only do this when either (a) the cost of emitting carbon justifies mitigation efforts of this expense or (b) they can convince someone else to foot the bill. The idea that federal and provincial governments should spend $2 billion to help the oil sector continue behaving as usual can be seen as objectionable. It certainly contradicts the Polluter Pays Principle. If carbon capture and storage is to rescue certain industries from the climate change externalities they are creating, it will have to be possible for them to pay for it themselves and remain profitable; otherwise, either public finances or the global environment will need to suffer to sustain their profits.

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.