Jim Roumasset, Professor of Economics, University of Hawaii
Waxman-Markey: The Devil is in the details
Ever wonder what's in all those 1500 pages (including the 300 page amendment added the day of the House vote)? That's a lot of details. Here are a few items warranting further economic input.
Subsidies and mandates
- Renewable electricity standard. 20% of electricity generation should come from renewable sources. This sounds potentially costly, but there's a loophole in the fine print. Up to 8% of the requirement can be satisfied by not actually producing with renewables but using energy-saving devices, possibly including those that have been previously installed.
- "Cash for Clunkers." The definition of clunkers is generous, and you can trade your "clunker" in for an SUV that gets 22mpg. How much money would be wasted paying for something that will happen anyway? To what extent would carbon savings be offset by producing new cars to replace perfectly serviceable ones?
- Smart grids. Which kind? There are municipal smart grids, home grids, wide-area synchronous grids, intragrids, intergrids, unified smart grids, super grids, SuperSmart grids and more. Some proponents believe that smart grids will be able to accommodate the heavy reliance on renewables implied by an 80% cap (to be effected by 2050). It doesn 't compute. The big problem with wind and solar power is storage. Large, integrated grids lower the demand for storage through diversification, but their ability to substitute for storage is limited. Surely smart grids will enhance the ability of utilities to effect demand conservation, but whether these gains will pay for the mandates and subsidies is an open question.
- Subsidies for plug-ins. Again a mixture of mandates and subsidies, both for expanded production of electric vehicles and state and utility obligations to build regional infrastructures to support plug-ins. Whether intentionally or not, this appears to be a buyout for the coal lobby.
- Building codes for energy efficiency. The whole point of market-based instruments is to effect the minimum-target achievement. Why do we still need command and control?
Allocation of allowances
- Thirty percent of the allowances would be allocated directly to local distribution companies, mandated to use them exclusively for the benefit of customers. We can't be sure that these mandates will be entirely effective; it's easy to imagine a public utility commission accepting a plea for an unnecessary price increase on the grounds that things could have been worse. On the other hand, if the allowances are indeed used to give customers relief through lump-sum rebates (as intended), customers may not correctly discern the effective jump between the intramarginal and marginal price and may react to the overall size of their bills instead.
- "Output-based updating allocations" are also potentially troublesome inasmuch as they blunt the incentives imparted by the carbon market price. These have also been proposed as a device to maintain international competitiveness and limit leakage but this appears to be a case of one instrument for multiple objectives. (See also http://theenergycollective.com/TheEnergyCollective/41734 ).
Would unilateral greenhouse mitigation by the U.S. lead to increased action by other countries? There are at least three reasons why the reverse might be true.
- In the simple theory of public goods, the increase in the public good by one player lowers the marginal benefit to another, thus lowering her incentive to cooperate.
- In general equilibrium, unilateral or multilateral action increases the carbon tax in the mitigation coalition but lowers it in other countries. If those non-signatories such as China have a comparative advantage in energy intensive production and use less energy-efficient technology, things can get worse instead of better. http://ideas.repec.org/a/eee/jeeman/v25y1993i2p162-176.html http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1340394
- There may also be a perverse anticipation effect. The more mitigation actions spread, the more the petro-chemical suppliers will increase production while they still can, much as the threat of nationalization. This exerts downward pressure on petro-chemical prices, incenting increased consumption. http://ideas.repec.org/a/eee/jetheo/v10y1975i1p42-53.html
- According to the CBO, the American Clean Energy and Security Act (ACES ) would cost the average household only $175 a year by 2020. But the CBO admittedly excludes the reductions in the GDP that would result from the cap and focuses on 2020, before the more serious reductions in permits and offsets kick in. The Heritage Foundation's more comprehensive estimate puts the cost at less than $2000 per family of four by 2020 but almost $7000 by 2035. Maybe they exaggerated. On the other hand, HF did not attempt to estimate the dynamic costs of lost innovation and specialization that inevitably result from market replacement where only market correction and coordination are warranted. So their estimate could be "conservative."
- Carbon price: The CBO says $28 in 2020, presumably in 2009 dollars. Other studies, including by the EPA, suggest that the offsets will make the price even less, possibly creating no emission reductions by 2020. After 2020 the price would increase markedly; how much, nobody knows. Carbon "scrubbing" from coal-fired utilities removes only about one-half of the carbon, reliable underground storage is likely to be expensive at the margin, and renewables have limited potential due to storage problems. On the other hand, new inventions (e.g. new methods of energy production, carbon sequestration, geothermal drilling, photovoltaic storage) may allow the target to be met at relatively low carbon prices. Price uncertainty of course implies cost uncertainty as well.
If the benefits (properly calculated to include environmental benefits) exceed the costs, you don't need mandates; there is a way to package the reform as a win-win. If the costs exceed the benefits, the project/policy-reform shrinks social welfare. Applying a multiplier would be double counting because the costs of employing unemployed factors should have already been incorporated in the shadow prices of those factors (Tresch, Public Finance: a Normative Theory, http://www.jstor.org/pss/2720229, http://www.jstor.org/pss/2720975 ). Why should the U.S. emulate the Spanish model for creating green jobs? According to "Study of the Effects on Employment of Public Aid to Renewable Energy Sources" [PDF] every green job has cost Spain 2.2 other jobs via misallocated capital (Tilting at Green Windmills). How much would green jobs cost in Waxman-Markey?
-- Jim Roumasset