Monthly Archives: December 2010

The long and the short of energy efficiency

David Owen asks a provocative question in the current New YorkerIf our machines use less energy, will we just use them more? He more or less says yes. The real answer comes in two parts.

For now—over days, weeks, months, and even years—energy efficiency will decrease energy use and emissions. Screw a compact fluorescent light (CFL) bulb into a socket that used to hold an incandescent and your energy use will go down. Chances are you won't leave the lights on four times as long just because light now costs a quarter.

Over time—years, decades, centuries, and millennia—more energy efficient lights and appliances will indeed mean that more people use more of them. CFLs make light more affordable. That doesn't matter to the typical U.S. household, where few light sockets remain unused because of energy costs. But globally—and over time—it does make a difference.

The Jevons Paradox

William Stanley JevonsOwen goes back to 1865 and William Stanley Jevons who at 28 came up with what has later been called the "Jevons Paradox":

It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.

Jevons is right, of course. We have seen dramatic increases in energy efficiency over centuries while energy use has gone up by orders of magnitude.

Does that mean we shouldn't increase energy efficiency? Of course not. We just need to be clear about what we are getting in exchange.

Energy over the millennia

Sperm WhaleBy the mid-1800s, the latest and greatest in lighting technology was spermaceti, a fat from the head of sperm whales. It cost around $1,500 a barrel in today's dollars and its price was only going to go up as whales became ever scarcer. Since then, we have seen gas lights come and go and by now electric lights cost less than a thousandth as much as the equivalent in lighting power back then.

That's not a recent phenomenon. Bill Nordhaus went back to 500,000 BC. Lighting cost a million times [PDF] as much then as it does today. Needless to say, we are using much more of it now.

Another word for this phenomenon is “technological progress.” That’s really what’s behind the whale oil story, and we want more of it. There is still plenty of energy poverty [PDF] in the world. We clearly want affordable, clean energy for as many people as possible.

Of course, misguided “progress” has also led us to a planet on the brink of breakage. We need to limit greenhouse gas emissions—and do so sooner rather than later.

Will energy efficiency save the climate?

Should we look to energy efficiency as a way to do some of that? Absolutely. Energy efficiency is cheap, quick, clean, and often underutilized.

McKinsey has looked for zero-cost energy efficiency opportunities in the United States and has found possible savings of above 20 percent of total demand in 2020.  Those savings, could go a long way toward meeting commonly discussed climate policy goals.

But won’t those energy savings just mean that we are using more energy eventually? History has shown it to be true after all.

In the short run—over days, weeks, months, and even years—the Jevons Paradox manifests itself in a well-documented “rebound effect” of around 10 percent. On average, you would indeed leave your CFL on for a bit longer than you would an incandescent. We lose a tenth of energy savings to increased use. (Owen cites the 10 percent figure but then goes on to overstate some of the implications dramatically.)

That leaves 90 percent in true savings and points to the clear win-win potential of energy efficiency measures.

Not by energy efficiency alone

In the long run—over years, decades, centuries, and millennia—cleaner and cheaper energy also means more people will be using more of it.

Does that mean energy efficiency is bad? Of course not. Energy inefficiency is another term for waste. And we clearly want less of that. But the problems our planet faces are too large to address through waste reduction (“reduce, reuse, recycle”) alone.

To get emissions down in the long run, there’s no escaping the (gasp) inconvenient truth that we must limit pollution directly—ideally though a declining cap on total emissions.

A cap on emissions—and the ensuing price on carbon pollution and race to invent cleaner energy sources—is the only mechanism we know that can break the link between emissions and energy use.  It limits the former and makes clean energy cheaper relative to fossil fuels.

Posted in Markets 101, Technology | 3 Responses

"The rule of consensus doesn't mean unanimity"

Cancun closed with a bang, not least because Mexican Foreign Secretary and Cancun talks chief Patricia Espinosa declared that, "The rule of consensus doesn't mean unanimity."

Patricia EspinosaThat sentence alone should occupy legal scholars for years to come. Most economists would only applaud. Getting 190-odd countries to agree on anything is extremely difficult. Unanimous consent is almost always out.

If the Espinosa consensus stands, it will certainly insert some new vigor into the UN climate talks. It proved to be crucial to breaking the logjam in Cancun, which would otherwise have been held up by Bolivia as the lone dissenter. (Bolivia is now appealing Espinosa's decision.)

The building blocks for a global deal are still elusive. Cancun punted on some of the most important issues. Some other crucial ones like Avoiding Deforestation (REDD+) and the basic building blocks for a Green Climate Fund saw some real progress.

Head over to EDF's Climate Talks blog for a rundown of the most important issues.

In the end Michael Levi has it exactly right:

The Cancun agreement should be applauded not because it solves everything, but because it chooses not to.

It focuses on what the UN does well, and avoids the rest.

That, and the Espinosa consensus—if it withstands Bolivia's appeal—may well be the most important legacies of Cancun.

Posted in International, Politics | Leave a comment

There They Go Again, Part Two: Mercury

Sometimes cap and trade isn't the best solution. Call me a purist, but I want my kid's amniotic fluid to be toxin-free. In the case of mercury, direct regulation is the best way to go.

It also shows that carbon can have some good uses after all. Activated Carbon Injection can reduce mercury pollution from power plants by 90 percent. It's clean(er), readily available, already deployed large scale, and affordable. Now it's up to EPA to set the proper rules.

Steve Cochran tells the full story. Second in a series.

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First steps for the California carbon trading market

Whoever said cap and trade is dead hasn’t been paying attention to the news in California.

Recently, the first trade of a greenhouse gas emissions permit in the Golden State took place, signaling the beginning of what experts project to be a robust carbon market—and the largest in the U.S. given the absence of a nation-wide policy (note that the Regional Greenhouse Gas Initiative (RGGI), the first mandatory market-based effort in the U.S. with 10 participating Northeastern states, applies to utilities, while California’s program will also apply to industry and in later years, transportation).  The trade takes place hot on the heels of the defeat of Proposition 23 in the November elections.

Although the compliance market won’t launch until 2012, Barclays Bank and NRG Energy completed the first allowance trade:  a forward contract which guarantees the delivery of allowances valid for use in the California market at the start of the program at a locked-in price (around $11-$11.50 according to Point Carbon).  By helping provide certainty about the future, these types of trades allow firms to make smart business planning decisions, such as which energy technologies to invest in.  Experts at Barclays as well as at San Francisco-based CantorCO2 expect that other early trades are soon to follow, as firms look for ways to reduce risk and start transitioning to a clean energy economy.

Ensuring the integrity of the carbon market…

State regulators have been able to provide sufficient certainty about how the market will be structured and the timeline for regulatory action to allow for this early launch of the California market.  However, it will be important to nail down sooner rather than later the nitty-gritty specifics of how the market will be regulated in order to ensure that trading occurs in an efficient and transparent way (note that the California Air Resources Board (CARB) is currently accepting comments on a detailed rule proposal).

The financial crisis we just lived through should provide ample incentive for us to make sure to get the rules right and for ensuring tough enforcement and strong oversight — for example, by requiring all carbon trading to be done on registered exchanges, rather than over the counter.  On that point, it’s worth noting that the recently passed Dodd-Frank Financial Reform legislation requires the Commodities Futures Trading Commission (CFTC) to lead an interagency study on how best to regulate the carbon market.  (Carl Royal’s 2009 testimony from the House Energy & Commerce Committee hearing on the American Clean Energy and Security Act and our own fact sheet provide some more arguments).

The path forward for CA

California's cap-and-trade program will cover the power and industrial sectors starting in 2012 and the transportation sector (including cars and fuels) beginning in 2015.  Time and time again, California and other regional initiatives, like RGGI, continue to lead the nation on sensible energy and climate policy (and stay tuned for developments in the Western Climate Initiative (WCI) as well as New Mexico).  Time for Washington to catch up.

Posted in California, Cap and Trade Watch, Markets 101 | Leave a comment

How environmental economics saved Christmas

Art Carden has a great piece on the Grinch saving Christmas,

using Pigouvian taxes and the bargaining business.

But it reminds us again that even Coase missed the mark,

when it comes to things outside of Whoville's small arc.

So to Art's welcome take on a Yuletide tradition,

We humbly append a climate-change addition:

Since Whoville Whos’ chanting affects only the Grinch,

Bargaining is the solution that works in a pinch.

Climate's a problem that affects the whole planet,

Coasian bargaining is much too small to span it.

A price on carbon is the better path,

all we need now is the political math.

Failing that, to be sure, we have the EPA,

not a first-best choice, still it may win the day.

To save the world's Whovilles, we need a solution

that in the end puts a firm limit on carbon pollution.

Cap and trade is the most certain way

to give every Who joy on this and future Christmas Days.

Posted in Cap and Trade, Politics | Leave a comment

One person's cost, another's opportunity

Transitioning into a new, low-carbon energy future costs money. No doubt about it. Yet the flip-side of cost is opportunity.

Pew just released a new study on Global Clean Power: A $2.3 Trillion Opportunity. Is this just a smart attempt at rebranding the inevitable, or is there more behind this?

Costs now, savings later

Cash flow graphFirst, a quick qualifier on costs. Yes, investing in low-carbon technology costs money upfront. It's also true, though, that many investments in clean technology reap savings later.

The up-front capital expenditures for wind, solar, nuclear, and other low-carbon technologies are large. But operating costs are much cheaper than using fossils fuels (and I'm not even including the costs of climate change from carbon emissions, which have long been socialized).

CapEx OpEx tableThat still doesn't make the transition a freebie, but it makes it much cheaper over time. McKinsey has run the numbers. Global net incremental capital expenditures for a clean energy future are significantly lower than upfront capital investments, once we consider operational cost savings.

These operational cost savings could, in fact, be called "opportunities." But that's not what the Pew report has in mind. It refers to the actual costs.

Cost = Opportunity ?

Higher costs imply more money changing hands. So costs do, in fact, equal opportunities in a very real sense for anyone on the receiving end of the transaction.

If you decide which career to pursue, you may well want to opt for renewables instead of, say, petroleum engineering. Your chance of landing a job is much greater. The former will add many more jobs in the foreseeable future. And once you are in a particular industry, you want as much money to come your way as possible. (Of course, a scarcity of petroleum engineers would imply a salary premium for the few who do opt to study a 19th century technology.)

That is different from society's and especially the government's perspective, where cost minimization is de rigueur. That's also what makes market incentives—a cap on carbon emissions—so crucial: it unleashes private investment dollars without government spending.

Investment + Recession = Opportunity

But even the social picture changes completely once we find ourselves in a situation we are in right now.

In a recession, with lots of spare capacity and industry literally sitting on $1 trillion in idle cash, creating incentives for more spending is exactly what we want to do as a society.

Investing in renewable energy, of course, has the added benefit that it also comes with an enormous social benefit—by decreasing the now socialized costs of carbon emissions. That's one cost we definitely want to avoid.

Posted in Politics, Technology | 1 Response

No jobs in economic modeling

Co-authored with Nat Keohane.

Last week Nat Keohane and I tried to shed some light on the inner workings of economic models when it comes to jobs. Among other more specific statements around climate policy, we also said that,

many macroeconomic models don’t actually attempt to model jobs. In fact, they generally assume full employment no matter what happens, which doesn’t leave any room for estimating increases or decreases in jobs as a result of specific policies.

We should have been clearer here. If you think of employment as "total units of labor employed, given equilibrium wages and household labor-supply decisions," then yes macroeconomic models do model employment—just as they model the equilibrium values of other inputs and outputs in the economy.

That's just not how you or I think about jobs, and that has some major implications.

Economic modeling versus the real world

Computable general equilibrium models of the economy literally assume full employment in the sense that everyone who wants to work works.

When we think about unemployment in the real world, it is due to the fact that people actually lose their jobs. More technically, there are market frictions that keep wages high in recessions. As a result, demand for workers goes down.

Not so in the world of general equilibrium economic models. There, wages rise and fall with the fate of the economy. In a recession, wages fall and people simply choose to work less. The technical term is the household "labor-leisure tradeoff." People work less because they supply less labor to the economy.

Most people, of course, would argue that when wages fall you have to work more to make up the gap.  That intuition can't be true in an economic equilibrium, which is what the models are trying to capture; hence the discrepancy between models and the real world.

Not all models are created equal

So how then do economic modelers estimate employment impacts?

First, not all models are of the "general equilibrium" type that have the full-employment assumption built into them.  For example, the Department of Energy’s Energy Information Administration relies on a macroeconomic model called National Energy Modeling System (NEMS), which has a different structure.  Partly as a result, the NEMS model does produce employment estimates.

Second, you sometimes see even general equilibrium models being used to derive numbers on jobs.  In those cases, however, the jobs impacts are computed after the fact: the modelers take the estimated effects on output and then back out employment impacts using rather arbitrary rules of thumb that assume a high degree of friction in labor markets even over long periods of time, often decades.  This is problematic, to say the least, because it goes directly against the grain of the underlying models used to produce those results.

The Peterson Institute study mentioned in our last post, which uses the NEMS model, is in the first camp.  It is also among the first to take a more realistic look at the jobs impacts of climate policy given the current recession.  Not surprisingly, it comes up with a very different answer on the jobs question.

Posted in Cap and Trade, Politics | 1 Response

There they go again, again

Steve Cochran, head of EDF's climate and air program, debunks economic scare tactics used against the highly successful acid rain program in the Clean Air Act Amendments of 1990. First in a series:

There they go again. Economic meltdown. Higher consumer costs. Massive job losses. These are among the predictions of doom surrounding EPA's current and forthcoming round of clean air protections. If they sound familiar, they should. Time and again, from the enactment of the Clean Air Act in 1970 to today, prophets of doom have predicted that disastrous consequences would flow from cleaning the air we all breathe. And time and again, those dire predictions have been wrong. The Clean Air Act has protected American health and our environment for decades while our economy has grown. It is a legislative success story that continues today.

This series will examine what the naysayers have said about Clean Air Act protections and how those wild predictions compare to the statute's actual record of protecting Americans from toxic air pollution and its devastating effects on human health and the environment. We start with the acid rain program in the Clean Air Act Amendments of 1990.

Read the full post on EDF's Climate411 blog.

Posted in Cap and Trade, Politics | 1 Response

Jobs, jobs, jobs

Co-authored with Nat Keohane.

Marc Gunther lists ten reasons why "Cancun can’t." We won't go into his other nine points here, but number three on the list hit home:

Environmentalists have been disingenuous about the climate issue. They’ve argued that regulation of carbon dioxide will create green jobs and grow the economy. Typical is this graphic from Environmental Defense. (“Get a step-by-step picture of how a carbon cap will spark new jobs, lift the economy and clean the air.”) Uh, no. Most economists agree that dealing with global warming will entail short term costs. (See Eric Pooley’s excellent analysis at Slate.)

Talking about jobs is one of the most difficult things to do well in the arena of climate policy. The jobs issue is highly politically charged—and for good reason, given the state of the economy. But it struck us as unfair for Marc to use EDF as his bête noire.

To begin with, the graphic that Marc links to doesn’t make the claim he ascribes to it. We weren’t saying that climate policy was a free lunch. What we were pointing out was that doing something about climate can also create good jobs in some unexpected places. More on that in a minute.

We have bent over backwards to be as balanced and rigorous as possible in our assessment of the economics of climate change.

This turns out to be perfectly illustrated by Eric Pooley’s analysis—the same one Marc links to.

Eric's indeed excellent analysis makes two points:

First, there is a broad consensus that the cost of climate inaction would greatly exceed the cost of climate action.

That's the main, often-forgotten point because it seems so obvious: "it's cheaper to act than not to act."

We should really stop here and reflect on that for a second. Many—if not most—economists do, in fact, agree on that statement and have for a while.

But that's not our point here, either. Read More »

Posted in 1000 words, Cap and Trade, International, Politics | 6 Responses

Not green or brown, just good economics

Lord Stern famously calls global warming "the biggest market failure the world has ever seen." It would only be natural for any introductory economics textbook to prepare budding economists to address this problem.

You would think.

Yoram Bauman, otherwise known as the Stand-up Economist, put together a sobering report: Grading economics textbooks on climate change.

Only four of sixteen books received As.

The others are either out of date, outright wrong, or worse.

It's frustrating that even the best texts seem to banish the biggest market failure into sidebars or special chapters toward the end. Sadly that's the typical treatment of environmental issues in introductory economics classes: "First, let's discuss all the reasons why the economy is doing just fine. Then, if there's time at the end, we'll cover some exceptions to those rules."

Krugman and Wells's text appears to be the only one that integrates climate considerations into a key chapter, one on "long-run economic growth." That's not entirely surprising, given Paul Krugman's other writings on the topic, but it's good to know it starts with the introductory text. It would be even better if other texts followed that lead.

(More takes: Mankiw and Env-Econ)

Posted in Climate science, Markets 101 | Leave a comment