Pragmatic problem-solvers have seen the enemy (and it is me)

From Realitybase ("And stay out of my damn yard!"):

Now I remember why I started this blog: To push back against public policy ideologies that are flatly contradicted by real world facts and/or which proponents will not quantify, test against alternatives, or accept accountability for results. Hence the subtitle to this blog: "The trouble with people is not that they don't know but that they know so much that ain't so."   So far, I haven't changed the world—or the proprietors of Environmental Economics.  Here's a good example of what pragmatic, problem-solvers are up against.

Yesterday, Environmental Economics posted The case for cap-and-trade (or a carbon tax) in 2009. I posted the following comment, starting by quoting the only reference in the post to policies not involving attempts to achieve policy goals by manipulating price signals.

 

"[F]orcing electric utilities and other entities that buy energy to purchase a mix of energy without appropriate price signals is not a good idea."

Why not? We've done a lot of this in the last 35 years or so, including the requirement that utilities buy electricity from co-generation projects at "avoided cost." The amazing achievements of the Clean Air Act and State analogs all resulted from command and control regulations with nary a price signal. Surely, you're not proposing to replace tried and true methods with an untested method without at least a comparative discussion. Or are you?

 

One of the proprietors, John Whitehead, responded this morning.

 

Roger,

   

The forced demand will increase the price of renewable energy. The decreased demand for dirty nonrenewable energy will decrease its price. The prices are moving in the opposite direction of where they need to go to provide the appropriate signals to energy consumers about the full social costs of the energy sources. Consumers will want to buy less green energy and more dirty energy. I don't know how all that would play out since it is not exactly textbook theory but there are some definite inefficiencies in that scenario.

 

 

And a sarcastic answer to your question: Yes, i'm suggesting we have no discussion. I'm that sort of dick.

 

 

And that's why we started a blog (with open comments). To limit discussion!

 

"To limit discussion." And yet in the sidebar is this invitation, which I now assume is meant only to offer talking points to those who already agree with their ideology, not to engage skeptics. [pointing to our "Answer Desk" link]...

On the substance of Whitehead's response (in which he quotes himself in italics) I continue to find it astonishing that educated people will propose big changes in government policy affecting us all while admitting they "don't know how all that would play out" and that there are some "definite inefficiencies" in their proposals.

Roger misreads the post and, I think, doesn't understand sarcasm. The definite inefficiencies are due to the RPS which might drive the price of renewable energy up and nonrenewable energy down -- exactly the opposite directions that we wish them to go.

In response to the original comment [and, folks, sorry that I don't have time to respond in depth to every comment in a timely manner ... I'm not a paid blogger]: command and control regulations have been shown to be less cost-effective than economic incentive-based policies such as taxes and cap-and-trade. This is why most economists prefer using incentives instead of standards.

More from Realitybase:

My public policy proposal (and yours) should be tested in a process that completely and accurately describes the problem to be addressed, considers all possible solutions (especially those that have been tested in the real world), identifies all significant costs, benefits, and collateral effects, and commits to quantified predictions for which we should be held accountable. But you may disagree with that.

Cap-and-trade has been tested in the real world (e.g., see the EPA's Acid Rain Program). The research has been conducted ... and recently summarize here: Review of Environmental Economics and Policy, Winter 2009.

Note to readers: I rarely, if ever, say anything that has not been in the literature. I'm not that creative. Yet, I'm too lazy to provide references to the literature in my posts.

Comments

[odograph]

Roger misreads the post and, I think, doesn't understand sarcasm. The definite inefficiencies are due to the RPS which might drive the price of renewable energy up and nonrenewable energy down -- exactly the opposite directions that we wish them to go.

Is there any CO2 abatement program that will not have this effect, outside the territory of enforcement? A Renewable Portfolio Standards in California might encourage coal-burning in Nevada (a couple of ways), but then a Cap and Trade limited to California would have the same effect.

[John Whitehead]

Odo,

A national policy will increase the price of nonrenewable energy.

[odograph]

Right, and lower the price of gasoline in Mexico.

[John Whitehead]

Odo,

Are you suggesting that cross-border gasoline arbitrage will be a problem?

[odograph]

I think we all know that non-global CO2 programs are less about changing global emissions and more about political strategy for achieving global programs.

A US program that got everyone on bicycles, and everyone in China into a new car, would not be terribly effective.

[Roger Chittum]

John:

I will review the linked report on the acid rain program. Thank you.

Meanwhile, here and here are links to staff reports to the South Coast Air Quality Management District board about the RECLAIM cap and trade system for SOx and NOx. That system broke down in late 2000 and had to be rescued by suspending participation by the largest sources. The largest sources were required to submit and, after approval, to implement emissions reductions projects. They did so, implementing projects that were essentially the same as were required by the command and control regime that RECLAIM replaced, and then were let back into the system. Here is EPA’s report. It does not say cap and trade cannot work (damning it with faint praise) but says making it work requires constant and perceptive attention and interventions by regulators.

In early 2008, before the current economic slowdown began in earnest, it appeared RECLAIM was approaching another crisis, and staff was directed to develop contingency plans. I attended one of the workshops last summer to observe. The Board was concerned that emissions credits were becoming less available, especially the valuable “infinite year” credits and was concerned that credits seem to be largely owned by “speculators.” In the room there was an evident coalition among members of the regulated community and the Board staff against the traders, who seemed quite disappointed that contingency plans were being discussed to prevent them from realizing profits as great as they apparently envisioned.

My take on whether RECLAIM “works” is that it’s like the financial system, which has recently melted down. Both are very likely to experience crises requiring major government interventions. One can say these systems are self-correcting and "work" only if one ignores the fact that periodic government bailouts are an indispensible part of the systems; it’s bailouts, not markets, that get them through crises.

To that I would add that press reports (one discussed here) indicate that the carbon trading system in Europe is not working—CO2 emissions are still rising. Other press reports (sorry no link) say many CO2-reducing projects outside Europe (but which qualify to meet obligations in Europe) are bogus.

I’m persuadable, but at the moment cap and trade looks to me like a faith-based program that is unlikely to realize its theoretical advantages in the real world.

[Bob Murphy]

John,

I can't believe it, but I'm siding with Odo over you (on this narrow dispute). You seem to be arguing that the RPS standard would actually lead to a greater amount of dirty power being produced. That seems wrong to me. If energy prices on average go up (and they must), then consumers must buy less total energy. And if the % of renewable energy goes up (which the law dictates), then that means total dirty power produced goes down.

To clarify, I totally get the standard economic argument in favor of price mechanisms versus command and control, and I love those types of arguments. But it seems like you're saying, "Not only would the RPS cause unnecessary costs to achieve a given environmental objective, but it might not even help the environment."

So if that IS what you're saying, can you spell out a concrete example? If you're right, that's a great argument I want to add to my toolkit. :)

[odograph]

A lot are like this Bob, when you drill down. A funny point was when they said they'd go get Mark Thoma to school me, and then whoops when he agrees with me he goes away.

[John Whitehead]

Bob and Odo,

I'm saying that an RPS is likely to push prices in the wrong direction, and this could lead to some weird unintended consequences, NOT that it might increase the amount of dirty energy being used.

A general principle is that if you get the prices right then negative externalities will be internalized efficiently.

[John Whitehead]

Weird "world revolves around Odo" comment:

A funny point was when they said they'd go get Mark Thoma to school me, and then whoops when he agrees with me he goes away.

Mark has blogged here before and I asked him to share his thoughts. I never thought for a minute that I was asking for another opinion to "school you."

Mark is more pessimistic about this recession than I am. There are economists on both sides with is the nature of macroeconomics. I thought another opinion would be healthy and I might learn something.

Heaven forbid!

[John Whitehead]

Roger,

Here is more on the acid rain program:

http://www.env-econ.net/2005/10/benefits_and_co.html

I don't know anything about the California experience, but am trying to follow RGGI. The EU CO2 market got messed up with too many permits.

[odograph]

John, I caught an awful lot of poop for things Thoma later said.

[John Whitehead]

Odo,

Huh?

[Bob Murphy]

John,

To reiterate, I totally get the "use prices not commands" argument. :)

But can you elaborate a little on your point about prices moving in the wrong direction?

Let's say the government tells electricity providers that they need to buy 50% of their power from Gore-approved sources. So right away, the demand for wind-turbine-generated electricity goes up, and the demand for coal-fired power plant output drops.

So you're right, this leads to a wholesale price differential. But I don't see what the next step in your analysis is. It seems you are saying, "And that's bad, because the lower price for coal-fired electricity will lead people to prefer that to wind turbine electricity."

That's true, but the stupid RPS doesn't give utilities the option of shopping for the best price. That's the whole point, the government is forcing them to buy the higher-priced (or otherwise disadvantageous) Gore-approved electricity.

Maybe if we switched to smoking it would help. You say, "I think we should slap a surtax of $2 per pack because of secondhand smoke."

Joe Romm says, "That's for wusses. Let's behead people who are caught buying cigarettes!"

Then would you say, "No, because that would crush the demand for cigarettes, leading to a fall in their price, which is the opposite of what we want..." ?

I apologize if I'm being dense here, but I really don't get your argument. Can you spell it out a little more?

[John Whitehead]

Bob,

But I don't see what the next step in your analysis is.

There is no next step. The prices are all wrong, they are sending the wrong signals and the standard keeps demand constant.

The problem might be the contrast with a tax. With a tax on dirty energy the price rises and government gets revenue. With decreased demand caused by a RPS, consumers of dirty energy enjoy additional consumer surplus (the revenue that would be generated by the tax). There may be no efficiency implications but the distributional consequences are different.

As Joe Romm et al. would say: "The lack of depth of Whitehead's analysis surprises me."

[David Zetland]

Yo -- PLEASE define your acronyms. RPS? "Renewable Energy Portfolio Standard"? (Not REPS?) I prefer Rock-Paper-Scissors...

More: http://en.wikipedia.org/wiki/RPS

You guys need to drink a few beers and have a pillow fight...

[Brandon Cole]

I agree that an RPS could create the wrong price signal.

Though, correct me if I am wrong. But that is only true if the supply of renewable energy isn't there to meet the demand mandated by the RPS. If there is a surplus of renewable energy above the mandated demand, then price will stay low. While also letting the RPS continue to ensure that demand is rising. The RPS also mandates that demand be taken away from nonrenewable. Though it doesn't necessarily mandate they go above and beyond the standard to obtain renewable. So there may be some back flopping towards dirtier energy.

I think this actual could work well in the begging of a cap and trade program just to ensure that demand is driven upward. But care is going to have to be taken to make sure the prices stay below nonrenewable.

Another problem with RPS is it simply gives a percentage for Utilities to meet with renewable. It is actually encouraging them to switch, they are simply doing just enough to meet the standard.