Environmental Economics

Wither coal (despite all attempts to the contrary)? What's next?

In our Env-Econ 101 series (to the left), we have a lengthy two part explanation (Part 1, Part 2) of the Hotelling rule for depletable natural resources which is basically summarized as:

For a non-renewable, exhaustible resource with completely known stock, no discoveries possible, no alternatives, no recycling, private ownership and constant costs of extraction, the price of the resource will increase at the interest rate over time.

The important corollary to the Hotelling rule regarding transition to alternative fuel sources is:

As the price of the depletable resource rises and/or the price of the alternative resource decreases, incentives are created to switch between the resources.  Once the price of the depletable resources rises far enough, the incentive to continue with extraction diminishes and investments in alternative resources increase.  

On Monday, the Guardian (liberal hacks!) illustrated these results in a succinct attack on Trumpian coal policy titled "The war on coal is over.  Coal lost."  While the article itself is a less than veiled attack on President Trump's environmental policies (I will leave it to others to decide whether such attacks are warranted or not--hint:  they're warranted on economic grounds), a graphic in the article gives a nice illustration of the outcomes of Hotelling's rule:

In the U.S., electricity generation by coal has been surpassed by natural gas for two reasons: 1) Coal has become more expensive in an absolute sense (at least partially due to regulations), and 2) Natural gas has become much cheaper relative to coal (at least partially due to increased use of new extraction technologies like fracking).  Also of note from a Hotelling perspective is the upturn in electricity generation from renewable sources (the yellow-line, at least I think it's yellow, don't trust me on colors, I'm color-blind). 

The Guardian expects the trend to continue:

This trend will continue. As old coal plants continue to retire and be replaced by cheaper renewables and natural gas, their share of the US electricity supply will continue to plummet, and coal will become a fossil fuel in every sense of the word. That’s why American companies continue to invest in cheap, clean renewable energy.

I expect the trend to continue too.  Although my level of certainty changes daily depending on which Twitter policy announcement is to be believed on any given day.  

But if the trend continues, the hard work begins.  Economists are notoriously bad at looking at distributional issues.  But as the mix of energy sources changes, the distributional impacts are likely to be significant on regions dependent on outdated technologies and old energy sources.  The Guardian article puts it this way.

The shift away from coal poses a challenge for regions in which the local economy depends on the fossil fuel, but the transition is inevitable.

Ohio State Professors Mike Betz (Consumer Sciences) and Mark Partridge (Ag, Env, and Development Economics) recently summarized the problem similarly:

Communities that have historically relied on coal production, especially in Appalachia, have been suffering major economic and employment losses for decades. Today far fewer miners are needed to produce the coal that we consume, and alternative energy sources like natural gas, solar and wind have chipped away at coal’s cost advantage. Job losses in coal-reliant regions will only intensify as mining becomes more efficient and the nation takes steps to reduce greenhouse gas emissions.

So what then should these communities do?  Betz and Partridge argue there are two options (in my words) 1) Prop up coal dependent communities by subsidizing the coal industry.  However, as Betz and Partridge lay out, such a strategy is likely to result in investments in labor-reducing, efficiency enhancing technologies, and ultimately reduce the labor-force in these regions.  Seems counter-productive to me. 

Option 2) is to invest in 'people and place.'  Here's how Betz and Partridge make the case:

To spur economic development in lagging regions, it is helpful to consider what types of communities are likely to prosper in the future. Today we can predict that successful communities in 2040 or 2050 are likely be entrepreneurial and have well-educated workforces and high-quality schools.

Educated, highly skilled workers can live anywhere. To attract them, lagging regions need to offer a high quality of life and a clean environment. The Trump administration is moving in the opposite direction by weakening environmental regulation of the coal industry, which will make it harder for coal country to prosper in the long run.

We have found that entrepreneurship and creativity are key factors for promoting economic development in lagging areas of Appalachia. To foster them, aid programs should focus on improving quality of life and attracting new, highly skilled residents. One way to do so is by investing in natural resource amenities, such as abandoned mine cleanup. However, Trump’s budget request eliminates grants to Appalachian communities for economic development in conjunction with abandoned mine land cleanup.

 

 

Nope, I can't think of a worse [economic] idea

Alan Krupnick:

Can there possibly be a worse idea than to have the federal government give every ton of eastern coal burned a $15 subsidy—as was proposed by West Virginia Governor Jim Justice. To put this in perspective, the current price of coal from West Virginia ranges from $45 to $52 per ton, so this subsidy is very large relative to the price. Or, using the US Bureau of Labor Statistics’ estimate of coal jobs in the East (here defined as Appalachia) of 38,000, $4.5 billion translates to about $120,000 per miner per year.

The ostensible reason for the subsidy is to improve national security. ... If anything, coal should be taxed for its environmental damages relative to other electricity fuels to internalize its many negative externalities into its price—from mountain top removal and acid mine drainage to carbon dioxide and sulfur dioxide emissions when burned. A better plan for the $4.5 billion a year would be to support new efforts to build an enduring, modern economy in eastern coal country along with bolstering health care and job assistance programs.

via www.rff.org

I deleted the argument against subsidizing eastern coal as a national security issue. I understand why those at RFF need to act like they are taking it seriously but I don't, do I?

 

The China vs U.S. Coal Debate: Who is cleaner?

The Center for American Progress says China is kicking the U.S. a$$ in the great coal race:

The result is a report — authored by Melanie Hart, Luke Bassett, and Blaine Johnson — that offers the clearest picture yet of the big picture on coal in China. And a closer look, it turns out, utterly destroys the conservative argument. Far from sitting back and coasting while the US acts, China is waging an aggressive, multi-front campaign to clean up coal before eventually phasing it out — reducing emissions from existing plants, mothballing older plants, and raising standards for new plants. Unlike the US, it is on track to exceed its Paris carbon reduction commitments.

In short, while the US dithers along in a cosmically stupid dispute over whether science is real, China is tackling climate change with all guns blazing. The US, not China, is the laggard in this relationship.

...and the conclusion is stark:

The conservative argument that the US risks acting alone on climate change is the inverse of the truth. China is acting far more intentionally and aggressively than the US — investing more, building more, testing and experimenting more. If the US remains on its current path, by 2030 China will be the uncontested technological and economic leader on climate change.

And of course climate investments are only a small part of China’s sweeping plan to remake the global economy. Meanwhile, the US looks more and more like another powerful empire that got too bloated and stupid to see the future coming.

Eighty-percent of environmental economists surveyed think cutting EPA regulations will not benefit the U.S. economy

Apologies to those of you who have missed me the last few weeks (hi mom!) as I have recovered from taking care of some lingering neck issues from my years of head banging to 80's hair bands.  I'm back on my feet (computer) and ready to go (from the confines of my family room).

Anyway, I know John posted about our article that (finally) came out in the Review of Environmental Economics and Policy, describing the set of issues upon which a sample of AERE members appear to have consensus, and those for which they don't.  Here are a few highlights from the survey in light of President Trump's budget, keeping in mind that the survey was conducted before the thought of a Trump presidency was even a twinkle in the eye, and some of my thoughts on the results.

• 96% of respondents feel that unregulated markets do not provide public goods in optimal quantities.

Thought: I contend that many people who advocate for free markets fail to recognize the important distinction between 'free' markets and 'unregulated' markets.  From most economists' perspectives, a truly 'free' market is a market in which all of the costs and benefits associated with production and consumption (current and expected future) are fully encumbered by actors in that market today.

Too technical?  

Ok, try this:

'Free' markets have no unintended consequences.  

Still too technical?  

OK, how about one more:

'Free' markets have no spillovers.

I could go one, but hopefully you get the point.  If there are benefits or costs that come from making or consuming something, and those benefits or costs can't or aren't captured in the market from which they originate, the market is failing to do it's job.  That's why we call it a market failure.

An externality occurs when a cost or benefit from making or consuming something ends up costing or benefiting someone else, and that someone else has no choice in the matter.  For example, the health effects of air pollution from coal-fired electricity production in Ohio on the good people of Boston (I assume there are at least some good people in Boston), or the effects of second-hand smoke on those stuck in an airplane with a smoker, or the spill-overs from improved workforce productivity and social benefits of decreased crime from increased education.  

Each of these is an example of a cost or benefit that is generated by activity in a market, but spills over to people outside the market.  The result is that, in these cases, unregulated markets tend to underproduce good things and overproduce bad things (too much pollution, too much second-hand smoke, too little education).  

Why then don't the people in the markets, through generosity, just do the right thing?  

Unfortunately market forces are powerful.  If a good-hearted electricity producer in Ohio decided to voluntarily absorb the costs of pollution, the Ohio electricity-producer's costs of production will go up.  The producer then has the choice of trying to charge higher prices to those buying electricity, or settle for lower profits.  If they choose to raise prices, they are now at a competitive disadvantage to the less-good-hearted producers. Most consumers don't really know (or care?) where they get their electricity, so they are going to choose to buy from the cheapest seller, which now causes a big dilemma for the good-hearted producer: raising prices is off the table, so I either settle for lower profits or I abandon my morals and pollute.

Stakeholders are going to be less than pleased with lower profits, to the point that voluntarily lowering profits is not a long-term sustainable business strategy.  So ruling that out, the good-hearted producer has to either pollute or shut down.

Sorry, that was a long way to go to make the point that this is NOT a 'free' market.  It is an 'unregulated market.' And in the case of an externality, an unregulated market will overproduce bad things and underproduce good things (in the case of education, do you consider the positive benefits you provide to society when you decide how much education to get?  Or do you just consider your personal benefits?).

That is why, 96% of AERE members who responded to our survey think that unregulated markets fail to provide optimal quantities of public goods (an extreme form of externalities).  And it is also why:

Eighty-percent of environmental economists surveyed think cutting EPA regulations will not benefit the U.S. economy

Environmental economists are not market-killers.  In fact, most are advocates for truly free markets: markets that fully capture all benefits and cost of production and consumption through market-based regulations.  Afterall,

Eighty-six percent of respondents agree that emissions taxes or marketable emissions permits are a more economically efficient approach to pollution control than emissions standards.

Sensible market-based regulations make sense.  

 

"With Energy Prices Down, Western States See Recession-Like Cuts"

Hmm, it seems like there could be a way for the universities to avoid the boom-bust cycle of energy:

Nationwide, things are looking up — or at least stable — for institutions dependent on state funding, which is up for the fourth year in a row. But at some universities, morale is looking more like it did in the midst of recession-era spending cuts.

Thanks to a boom in energy production several years ago, states such as Alaska, North Dakota, and Wyoming were among the leaders in post-recession higher-education spending, according to the Center on Budget and Policy Priorities. Now, with energy prices down, looking at the mood on some of those campuses is like looking into a time machine for the rest of the nation, where many states have turned the money faucet back on for higher education. ...

More than 900 jobs have been eliminated from the University of Alaska system in two years, according to state figures. At the University of Wyoming, where Professor Scott R. Shaw said it’s "the darkest mood in years and perhaps since the Great Depression," the number of job cuts exceeded 300 and could surpass 400. And in North Dakota, where the development of the Bakken Shale helped establish the state as one of the most financially stable in the nation, 500 jobs were eliminated along with 6.5 percent of state support in the last budget.

But as those states scramble to balance budgets, many university leaders are pushing programs they believe could help lift their states out of the boom-and-bust cycles synonymous with energy economies. In some cases, states are holding onto nine-figure campus projects despite hemorrhaging money, programs, and positions. ...

State support to the University of Alaska system dropped from $375 million to $325 million in two years, Mr. Johnsen said, and the loss of over 900 university jobs is significant in a state with a labor force of about 360,000 people.

The numbers don’t tell the full story, Mr. Jeffries said. Speaking about the Anchorage campus, he said the recent cuts have damaged morale and cited a faculty survey that found that 41 percent of respondents were actively seeking work elsewhere.

via www.chronicle.com

I don't think the answer is capital infrastructure and academic programs. If you have a boom-bust economy, it seems to make sense to save money in the boom years and spend those savings down in the bust years. But, politicians (and academics and households) don't always think like that. 

The U.S. job market continues to change

And there is not much anyone can do about it:

Roughly 163,000 oil jobs were lost nationally from the 2014 peak, or about 30 percent of the total, while oil prices plummeted, at one point by as much as 70 percent. The job losses just in Texas, the most productive oil-producing state, totaled 98,000.

Several thousand workers have come back to work in recent months as the price of oil has begun to rise again, but energy experts say that between a third and a half of the workers who lost their jobs are not returning. Many have migrated to construction or even jobs in renewable energy, like wind power. ...

Indeed, computers now direct drill bits that were once directed manually. The wireless technology taking hold across the oil patch allows a handful of geoscientists and engineers to monitor the drilling and completion of multiple wells at a time — onshore or miles out to sea — and supervise immediate fixes when something goes wrong, all without leaving their desks. It is a world where rigs walk on their own legs and sensors on wells alert headquarters to a leak or loss of pressure, reducing the need for a technician to check.

And despite all the lost workers, United States oil production is galloping upward, to nine million barrels a day from 8.6 million in September. Nationwide, with a bit more than one-third as many rigs operating as in 2014, production is not even down 10 percent from record levels.

Some of the best wells here in the Permian Basin that three years ago required an oil price of over $60 a barrel for an operator to break even now need about $35, well below the current price of about $53.

Much of the technology has been developed by the aviation and automotive industries, along with deepwater oil exploration, over more than a decade. But companies drilling on land were slow to adapt until oil prices crashed and companies needed to get efficient quickly or go out of business.

Getting rid of environmental regulations in the energy sector will have several effects. Environmental quality will get worse. Energy sector profits will rise and energy jobs will increase. But the small increase in energy jobs will not be able to compensate for the lost jobs that arise due to technological improvement.  

Wind farms: "In the end, the economics trump Trump"

I should add a question mark to the end of that post title. From the NY Times: 

Last fall, five turbines in the waters of Rhode Island — the country’s first offshore farm — began delivering power to the grid. European energy developers like Statoil and Dong Energy are making big investments to bring projects to American waters. Last year in Massachusetts, Gov. Charlie Baker, a Republican, signed into law a mandate that is pushing development forward.

And in New York, after years of stymied progress, the Long Island Power Authority has reached an agreement with Deepwater Wind, which built the Rhode Island turbine array, to drop a much larger farm — 15 turbines capable of running 50,000 average homes — into the ocean about 35 miles from Montauk. If approved by the utility board on Wednesday, the $1 billion installation could become the first of several in a 256-square-mile parcel, with room for as many as 200 turbines, that Deepwater is leasing from the federal government. ...

These projects could also become an important test case in establishing just how far states can go to to pursue their clean energy agendas under the Trump administration. Before putting steel in the water, the project would need federal approvals and policies that are in doubt amid Washington’s changing of the guard.

Wind power has finally become viable for a number of delicately interlaced reasons. It has taken favorable state policies and technological and economic advances to spur the current level of activity, as well as interest among developers and investors, including foreign oil and gas companies that see offshore wind as an important part of their corporate strategies. In Europe, where the offshore wind industry is far ahead of the United States’, costs have plummeted to roughly half of what they were five years ago, said Thomas Brostrom, who runs United States operations for Dong Energy, the Danish oil and gas giant and a leading offshore wind developer.

As the industry has grown, manufacturers have been able to take advantage of economies of scale and cut their prices. At the same time, turbines have grown ever larger, allowing them to capture and produce more energy on the same site. ...

Statoil, the Norwegian fossil-fuel giant, has been aiming to get into the offshore business in the United States for years, and proposed in 2011 to build a farm off the Maine coast using floating platforms it had designed. The company withdrew the project two years later amid uncertainty over changing state policies, eventually deciding to build off the Scottish coast.

Now it is back, having won a 33-round auction to secure a 79,000-acre site south of Jones Beach on Long Island. Statoil beat out several other bidders, including the state’s energy agency, Dong and a subsidiary of Iberdrola, a leading energy company based in Spain. Statoil pledged $42.5 million for the lease, which still awaits final signoffs, far more than the $16 million generated by all earlier offshore wind auctions combined. ...

Officials at the Bureau of Ocean Energy Management, which approved the Cape Wind site in 2010, have spent years clarifying rules and identifying marine parcels suitable for wind power development in an effort to balance several often-competing concerns. Those include the needs of marine life and of industry, along with those of coastal communities. They also include the demand for economic development and clean energy sources, from states concerned about both job losses and climate change. Since 2013, the agency has conducted six competitive auctions of long-term leases for parcels from New England to Virginia, and in the past week it announced a seventh, for North Carolina, scheduled to take place in March. ...

That momentum may be difficult to slow, even if new federal policies put a stop to the Bureau of Ocean Energy Management’s leasing activities for wind energy, its proponents say. The active leases alone, if developed, are enough to create an industry, they say. And the commitments of states like New York and Massachusetts, and experienced multinational developers, show that the struggle to harness Atlantic breezes is no longer the same as tilting at windmills.

“It is a sign of something that’s inevitable, which is the addition of offshore wind into the energy mix,” said Erik Gordon, a clinical assistant professor at the Ross School of Business at the University of Michigan. “It’s just going to be too appealing. In the end, the economics trump Trump.”

Famous last words?

 

Well, this throws a wrench in Hotelling's Rule*

Science is awesome:

Einstein once boldly claimed that the Laws of Thermodynamics were the only physical theory of the universe that will 'never be overthrown'.

That all changed late last month, when scientists from the Argonne National Laboratory at the University of Chicago found a loophole in the system - one that allows them to break the second law of thermodynamics.

The finding has huge implications for our understanding of the universe, not least because it presents us with a chance to one day create perpetual motion machines.

*Not really.  Back in 2013 I wrote about Hotelling's Rule in it's simplest form: 

For a non-renewable, exhaustible resource with completely known stock, no discoveries possible, no alternatives, no recycling, private ownership and constant costs of extraction, the price of the resource will increase at the interest rate over time.

If these scientists are right (and Einstein was wrong...idiot), then energy might be infinitely renewable...at least for a little while...

The ANL researchers claim that their loophole could bypass this long-held rule of the universe, allowing the accelerating march of entropy to go in the opposite direction.

This would only be on a small, local scale, and for short periods of time.

...and energy prices would fall to zero.

 

 

One thing [on-topic] that bothered me about the second debate

Hillary Clinton:

... you know that we are now for the first time ever energy-independent. We are not dependent upon the Middle East. But the Middle East still controls a lot of the prices. So the price of oil has been way down. And that has had a damaging effect on a lot of the oil companies, right?

via www.nytimes.com

If the Middle East controlled energy prices they would be high instead of low. High prices on a good with inelastic demand (consumption is not very sensitive to price changes) leads to higher profits. Energy prices are low because supply in the U.S. has increased. 

"Trump's energy plan overstates benefits of more drilling"

Excuse the politics but 't'is the season: 

Donald Trump has promised to roll back regulations and unleash an energy revolution in America — but economists have their doubts about the plan.

The Republican presidential candidate says he will boost America's economic output, create millions of new jobs, and put coal miners back to work. But the windfalls Trump touts originate from a report commissioned by a nonprofit with ties to the energy industry and whose findings rely on a forecasting model that often overstates the benefits of increased drilling, according to economists who have researched the U.S. shale oil and gas revolution. ...

While outlining his economic blueprint last month, Trump said that lifting restrictions on oil and gas would increase GDP by more than $127 billion, add about 500,000 jobs, and increase wages by $30 billion each year over over the next seven years. Those figures come from the Institute for Energy Research, a nonprofit that advocates for a free-market approach to energy. It typically casts fossil fuels as the most economic form of energy generation, promotes research that says green energy jobs are unsustainable, and claims there is an "enormous volume of sensationalized, simplistic and often plain wrong information" on climate change. ...

The IER study does not actually attribute the gains to a lifting of restrictions, as Trump indicated, but to opening all federal lands to oil, gas, and coal leasing. It is currently barred or temporarily blocked in some parts of the U.S. lower 48, the outer continental shelf, the Gulf of Mexico, and the Arctic National Wildlife Refuge. ...

The IER report uses a method of forecasting called the input-output model, which is frequently used by consultants and government agencies to make projections about the effects of economic activity.

But a number of economists say that model is not well-suited to predicting how more drilling will produce windfalls in other sectors, and academics are skeptical of the method because the results, or outputs, rely so heavily on the assumptions, or inputs.

Thomas Kinnaman, chair of the Economics Department at Bucknell University, who reviewed the IER report for CNBC ... said the technical assumptions used throughout the study are not "egregious," but he noted that the paper makes no attempt to weigh the environmental and social costs of opening federal lands against the benefits.

Joseph R. Mason, the author of the IER study and professor of banking at Louisiana State University, acknowledged that input-output models are not published in academic journals "because economics has moved on" from the method developed by Nobel Prize-winner Wassily Leontief nearly 100 years ago. But he said it is still a useful tool, and one that is widely utilized by the government.

Peter Maniloff, assistant professor of economics at the Colorado School of Mines, said the IER study is based on a questionable assumption.

"The IER report assumes that policy restrictions are the major factor holding back coal, oil, and gas production," but it has more to do with straightforward economics, he said. "Domestic oil drilling on available land has dropped by three-quarters since 2014 due to low prices."

U.S. drillers have slashed capital spending and laid off tens of thousands of workers to survive an oil price collapse brought on by massive oversupply. A chief contributor was surging U.S. production over the last decade as wildcatters harnessed the power of horizontal drilling and hydraulic fracturing, a method of releasing oil and gas from shale rock by pummeling it with water, minerals, and chemicals.

More drilling would delay re-balance and an ultimate price recovery, keeping the pressure on beaten-down American producers. Mason counters that oil prices are expected to eventually recover, and it makes sense to lease federal lands ahead of that rebound.

The IER report makes similar assumptions about coal production that discount the effects of regular economic factors, according to Maniloff. ...

But IER Director of Communications Chris Warren said one cannot ignore the effect of government forces on energy. Congressional research shows oil and gas production on federal lands has lagged output on state and private property, he noted. Indeed, oil and gas drillers often complain that it takes too long to get approval to drill on federal lands and too few auctions for leases have been held.

Further, the Environmental Protection Agency's Mercury and Air Toxics Standard and its carbon dioxide regulations have put pressure on coal miners, Warren said. The U.S. Energy Information Administration does ascribe part of the effect of coal-fired power plant retirements to the Mercury and Air Toxics Standards rules, but concurs with Maniloff that the chief culprit in reduced coal consumption is that it can't compete with cheap and abundant natural gas. ...

Of the hypothetical $127 billion in increased economic output that IER ties to scrapping restrictions, the group attributes more than half of the supposed gains, or $68 billion, to "spillover" effects into other industries. IER says, for example, that increased drilling in offshore fields "might lead to more automobile purchases that would increase economic activity in Michigan." Similarly, most of the 552,000 jobs hypothetically gained would not be directly related to the oil and gas sector. IER believes 75 percent of the employment gains would be in high-wage, high-skill employment like health care, education, professional fields and the arts.

Maniloff's research into the economic effects of increased drilling show a substantial boost in employment and wages in the boomtowns where drilling takes place, and finds that most statistically significant labor gains outside the energy industry are in the construction and retail sectors. ...

Mason, the IER study author, acknowledged to CNBC that he did not attempt to quantify the environmental costs of more drilling and mining, but he noted that he also left out a potential economic benefit: Oil, gas, and coal production inevitably leads to environmental damage, which requires the services of remediation companies.

"I know it's a perverse argument, but it is there," he said of the economic benefits that can come from environmental damage. "As economists, we're caught ... This is not about what should be, but about what is."

via www.cnbc.com

This article includes many of the things we try to say often:

• Economic impact studies shouldn't be conducted at the national level -- it ignores all of the substitutions that will make impacts smaller. 
• Don't count jobs created/lost by government policies -- unless you also count those jobs lost/created by the same government policies.
• The benefit-cost analysis of an environmental regulation should include environmental benefits -- i.e., people will die early and we ought to acknowledge that. 
• The broken window fallacy is a perverse argument -- don't be perverse.