EclectEcon

The Tragic Folly of "Earth Hour": "Its vain symbolism reveals exactly what is wrong with today's feel-good environmentalism."

Bjørn Lomborg is one of the most realistic environmentalists I've ever read. He goes beyond alleged benefits and looks at costs and feedback effects, and he pays attention to the impacts of changed/distorted incentives. In a recent piece in Slate, he takes on the folly of Earth Hour, scheduled for March 23rd.

[T]he reality is that Earth Hour teaches all the wrong lessens, and it actually increases CO₂ emissions. Its vain symbolism reveals exactly what is wrong with today’s feel-good environmentalism.

... Hypothetically, switching off the lights for an hour would cut CO₂ emissions from power plants around the world. But, even if everyone in the entire world cut all residential lighting, and this translated entirely into CO₂ reduction, it would be the equivalent of China pausing its CO₂ emissions for less than four minutes. In fact, Earth Hour will cause emissions to increase.

As the United Kingdom’s National Grid operators have found, a small decline in electricity consumption does not translate into less energy being pumped into the grid, and therefore will not reduce emissions. Moreover, during Earth Hour, any significant drop in electricity demand will entail a reduction in CO₂ emissions during the hour, but it will be offset by the surge from firing up coal or gas stations to restore electricity supplies afterward.

And the cozy candles that many participants will light, which seem so natural and environmentally friendly, are still fossil fuels—and almost 100 times less efficient than incandescent light bulbs. Using one candle for each switched-off bulb cancels out even the theoretical CO₂ reduction; using two candles means that you emit more CO₂.[emphasis added].

... To green the world’s energy, we should abandon the old-fashioned policy of subsidizing unreliable solar and wind—a policy that has failed for 20 years, and that will fail for the next 22. Instead, we should focus on inventing new, more efficient green technologies to outcompete fossil fuels.

If we really want a sustainable future for all of humanity and our planet, we shouldn’t plunge ourselves back into darkness. Tackling climate change by turning off the lights and eating dinner by candlelight smacks of the “let them eat cake” approach to the world’s problems that appeals only to well-electrified, comfortable elites.

Related articles

The Use of Fossil Fuels and the GREENING of the Planet

Global Warming: It is NOT Settled Science

The Use of Fossil Fuels and the GREENING of the Planet

 In this 18-minute video, Matt Ridley explains why and how the use of fossil fuels is contributing to the greening of the planet:

From Reason magazine (h/t JB):

Over the past three decades, our planet has gotten greener!

Even stranger, the greening of the planet in recent decades appears to be happening because of, not despite, our reliance on fossil fuels. While environmentalists often talk about how bad stuff like CO2 causes bad things to happen like global warming, it turns out that the plants aren't complaining.

Related articles

Global Warming: It is NOT Settled Science

A must watch - Greening the Planet - Dr. Matt Ridley

Matt Ridley: Burning fossil fuels is greening the planet

Matt Ridley on How Fossil Fuels are Greening the Planet

Molokai, Part 4 (of 11); More hiking in the hills

As I said before, I absolutely love windswept openness. And the west end of Molokai has LOTS of it.

The short, scrubby trees you see in the above two photos are kiawe. More about them later.

The dirt on most Hawaiian islands is red, presumably from the iron in the magma and lava (though I'm not sure). We all remember the red mud we encountered many years ago when our family climbed Olomana on Oahu, and it is abundant here, too. The dust is red, too, and it gets on everything, including inside the condo and on the roadside guardrails.

There were a number of imports to the islands that didn't work out very well. The Japanese emperor donated some small deer. These have thrived on Molokai, but during dry periods they go down into the condo complex, looking for edible vegetation. 

Another import was the mongoose. Reportedly Mongeese (?) were brought to the islands to hunt the rats, but that didn't work out very well because they are active at different times of the night and day. But the mongoose holes can be serious and dangerous.

A third import, and one that is really horrid now, was the kiawe tree. I'm told it was originally imported to be raised as a source of firewood. And that might have been successful in the days when wood was the only source of carbon fuel. But the trees have spread and have nasty thorns. Several times I had thorns from downed twigs or branches stick into my shoes or sandals (fortunately, they didn't go through, but they certainly do go through flip-flops). Nevertheless, kiawe are beautiful, gnarly trees.

 

Related articles

Molokai, Part I (of 11?)

Molokai, Part 2 (of 11)

Molokai, Part 3 (of 11); Hiking in the hills

Prices and Sustainability

I recently received a call for papers from The International Journal of Sustainability Economics. I am, to say the least, skeptical about the economics that appears in such a journal. 

At the beginning of 21^st century the sustainability concept was mainly a basis for developing policies consistent with a continued use of resources into the future without causing environmental crisis. But the situation has evolved, and the global economic crisis in 2009 was the ultimate consequence of short-term economic thinking. We need a new form of economic development, addressing the needs of the present without undermining the needs of the future. The International Journal of Sustainable Economy (IJSE)addresses sustainability issues within economic theory and analysis.

Every time I read things on sustainability, I am struck by how rarely people mention using prices to promote sustainability. 

If people are so convinced that we are going to run out of x, y, or z, I encourage them to buy up access rights and options to mine/harvest/whatever x, y, or z. If they are right, they'll serve two functions:

• They'll drive up current prices and induce others to use less x, y, or z, and
• They'll make a fortune for their progeny.

But nope. Most people who write about sustainability have all sorts of plans for how to interfere with the price system, plans for telling others what to do, and plans for imposing their own forecasts on others who don't share them.

I wish people who are concerned about sustainability would do more speculating and less preaching. I wish they would do more to encourage the use of prices and less to interfere with those very speculators who are doing so much to make sure we have resources for the future.

Energy Policy Conference: a worthwhile afternoon session

After things got off to such a questionable beginning, I was quite pleased as the day wore on.

First, the Saskatchewan Minister of Energy said (as a minor part of an otherwise forgetable speech) that people in the West might accept the proposition that carbon taxes are a good idea, but one thing they will not tolerate is having the Canadian federal gubmnt impose carbon taxes on the western provinces and then redistribute the funds to the eastern provinces [shades of the old National Energy Programme, as I said earlier]. I don't know how the provinces will stop the feds, but I can see constitutional challenges on the horizon....

The primary afternoon session that I attended included Jeremy de Beers [law, University of Ottawa] who knows a LOT about biofuel production and trade. He and I had a great talk after his session, during which he said that if gubmnts would set a carbon tax then all the other rent-seeking nonsense would be unnecessary [my words, not his]. Another of the panelists in the session was Stever Dorey from Charles River Associates (based in Trono). He was very astute in his discussion of energy policy and noted that regulations create incentives for mischief-makers to create more mischief [a reference to rent-seeking in the guise of being in the public interest]. 

As I say in the title of this posting, it was a worthwhile session, seeing that there were presenters here who recognize the importance of prices, incentives, public choice mechanisms, and the private sector. 

But the concluding session was a bit of a bust, again, with general, vague statements that seemed more like something from  "planners" than should be taken seriously.

Energy Policy Conference: An Unholy Alliance?

As I listen to the speakers and look through the programme for today's conference (available here), I see that every person on the programme is paid by taxpayers, directly or indirectly. There are professors of policy, representatives of consulting firms with gubmnt contracts, bureaucrats, and politicians. It would be a much better-balanced programme if there were representatives from, say, C.D. Howe or The Fraser Institute, here as well. As it is everyone who has spoken is really into planning, which, of course, concerns me considerably. Examples:

• People talk about developing technologies rather than providing a fertile atmosphere for the private sector to do these things 
• People talk about energy sustainability but never mention the role of the price system.

Where is Hayek when we need him (and I simply cannot pinch hit for him given my own inabilities). Someone needs to quote Hayek on the importance of markets to provide incentives and especially information.

Update: Hayek said it so well in 1945. Please, please read this.

Opening Session: We Don't Need No Steenking Energy Policy

The opening panel is introduced with the question "Where is Energy Policy?" I simply cannot fathom what that means, so we're off to a good start! And of course problems like gasoline line-ups (in the US! not Canada!) etc. are used as examples that we don't have an energy policy, when in fact they are the result of energy policy. The word "crisis" has already emerged. 

Damn. Too bad I didn't think to set up an "Energy Policy Cliche" Bingo game.

The next cliche: Let's get people talking about these crucial issues. 

Why does it matter that Saskatchewan is an energy exporter? My guess is that it matters to people in Ontario who think they have some sort of claim to Saskatchewan's energy.... shades of Canada's National Energy Programme in the 1970s.

Surprise, surprise: the provincial deputy minister of energy says it energy policy should be a provincial policy. 

"Energy policy is too important to be left to economic ideology..." Says a CEO of a firm that depends on gubmnt contracts. Surprise!

 I can't keep blogging this on such a detailed basis. More later.

We Don't Need No Steenking Energy Policy

I'm attending an all-day conference called "Taking Charge: Towards an Integratred Energy Policy for Saskatchewan." My priors are that "energy policy" means several things:

• Politicians and bureaucrats make investments with taxpayer funds, thus trying to pick winners. They aren't risking their own money (albeit they are to some extent risking their reputations), and so they have a tendency to take on other issues as well
• Energy policy too frequently devolves into "crony capitalism". Individuals and firms, with specific agendas or specific products and services to sell, use an abundance of scarce resources to try to convince bureaucrats to "invest" in their products. One glaring example: bio-fuels, nominally justified by the argument that they reduce carbon dioxide output when, in fact, they increase carbon dioxide output AND they amount to little more than a convoluted way to increase the demand for the output from farmers (much to the distress of poor people around the world facing rising food prices).
• I'm in awe of the hubris and arrogance when "planners" think they can plan better than private investors in the marketplace. E.g., in the opening remarks, we're told that energy is the most important policy issue facing us today. Hmph.

My observations and comments will follow as the day progresses.

 

Peak Oil? More Like Peak Oil Distortions

For over five years I have been questioning the scare-writings of those who subscribe to "peak oil" hypotheses. Surely as world oil supplies dwindle, the supply curve will shift to the left and prices will be bid upward. The higher prices will reduce the quantity demanded. And surely, in anticipation of such price increases, people will step up exploration activities and and speculators will hold oil off the market now in anticipation of earning higher profits in the future. For example, see this for my earlier writing on the subject; also this. 

In today's NYTimes, Michael Lynch develops these same themes. It seems people continually need to be reminded about the importance of incentives, expectations, speculation, and the basics of supply and demand. Lynch writes,

 While peak-oil advocates have in the past ridiculed optimistic industry expectations, the evidence continues to confound them. Over recent decades, the consensus estimates of the amount of recoverable oil on the planet have roughly doubled. And recovery rates — the percentage of those reserves that we are technologically able to collect — have grown from 10 percent a century ago, to 25 percent a half-century ago, to an estimated 35 percent now. In some areas, like the North Sea, the figure is above 60 percent.

There are several other reasons to remain calm about Saudi reserves. Officials there have discovered approximately 70 major oil fields that they have left untapped over concerns that increased Saudi production would cause global oil prices to collapse.

He quite sensibly adds,

None of this is to say that importing Saudi oil — or any oil — is desirable in and of itself. Oil remains a political commodity, and price fluctuations can create economic havoc, so the more good choices we have for meeting our energy needs, the better. But we should not let a false panic over disappearing oil reserves lead to rushed government investments in “technologies of the future” that, all too often, end up only wasting taxpayer money.

Wager offer to Brad DeLong

It appears that Don Boudreaux and Brad DeLong are negotiating/feuding over the terms of a Julian Simon-Paul Ehrlich type bet about the future prices of commodities [See this]. From what I've read of their exchange, it appears that Boudreaux offered a bet to DeLong with the following terms:

let’s make a bet very much like the famous bet that Julian Simon and Paul Ehrlich made in September 1980.

Because of inflation, I propose that the wager be larger than the Simon-Ehrlich amount.  How about $2,500?  And I offer to you terms similar to those that Julian offered to Ehrlich.  Like Ehrlich, you can choose whichever bundle of five or more raw materials you like, and choose which (professionally respected) means to be employed for adjusting nominal prices for inflation.

The bet will be for a duration of at least ten years, but no longer than 15 years.  (You choose.)

DeLong countered with this offer of a bet:

... that the real price of West Texas Intermediate crude oil would be higher than $20 per barrel in 2031.

When Boudreaux responded that he was on the way to a funeral and would respond completely in a day or so, DeLong posted that Boudreaux had declined to accept the bet. [for which he has since apologized]

I think DeLong's counteroffer is ridiculous; why not make a Simon-Ehrlich type bet about future prices relative to current prices? But if Delong doesn't think his counteroffer is ridiculous, he can take me up on this one:

Brad DeLong, if the price of West Texas Intermediate crude oil is less than $100,000/barrel (US $) on Jan 1, 2025, you owe me $100 Cdn. If the price is greater than $100,000/barrel (US $) on Jan 1, 2025, I owe you $100 US. 

Since I'm old, I'll even make the outcome of the bet an obigation for my estate, if you wish.

 

The Chevy Bastiat

A very telling suggestion for renaming the Chevy Volt. The Coyote Blog points out that not only will the Volt Bastiat be expensive, it won't save much on fuel costs and it won't reduce the carbon footprint much [h/t Kip].

I am thinking about renaming the Chevy Volt the Chevy Bastiat.  Because the entire vehicle concept is based on the hope that people will ignore the unseen.  Specifically, those pushing the vehicle are hoping that buyers will just assume the electricity for the vehicle is free (after all it is not separately metered) and that the CO2 footprint is zero (despite the fact that in states like Michigan, an electric car is essentially powered by coal combustion.

For more on Frederic Bastiat, see this.

Update: a colleague writes, "I guess its more symbolism - almost like wearing a religious symbol.. The Chevy Hairshirt?" 

More on "No Pressure", the Eco-Fascist Video

I posted the video yesterday, with comments by Ross McKitrick, one of the calmest, most level-headed researchers about climate and the environment that I know of. As one might readily imagine, others  are less reserved with their comments, but some of the better ones are summarized here by Ed Driscoll. Many of the comments reproduced there are witty, others are insightful. And there are several additional examples of tasteless videos produced by various organizations.

Also, Chris Essex, a co-author (with McKitrick) of Taken by Storm, points out in an e-mail message that the very scheme of  the 10:10 video is nonsense:

Aside from the passive-aggressive blood letting, 10% [reduction of carbon use] per year over ten years would take you down to about a third. All of the suggestions that were warmly received in these skits have not the slightest hope of doing this. Turning out the lights and sitting in the dark won't even do it. This is completely empty even for people who are game for the numbers. So we must conclude that this it not about numbers. It's about whether you are with the mindset. Believe or else. 

Addendum: The rabid moralists impose a death fatwah on the non-believers.

  .

Energy Conservation: People Respond to Incentives

What Paul Heyne refers to as "The Law of Demand" says that as prices rise, ceteris paribus, people will in general want to buy less of the product. It is true for energy as well as every other product. 

So if additional energy conservation is somehow "a good thing", then a great way to reach that goal is force energy prices up. In fact, that is what has been done in Copenhagen:

How, then, has Denmark been so successful in managing its carbon emissions? The answer lies not with the source of power, but with the price of power. At 30 cents per kilowatt hour, electricity costs anywhere from three to five times what the average North American would pay. And, not surprisingly, Danish households consume a fraction of the power that we do....

The other reason commonly cited for Denmark’s success at carbon management is cars—or, more precisely, the lack thereof. Nearly everyone in Copenhagen seems to be riding a bicycle. At first I thought this was testament to the environmental consciousness of the populace, or at a minimum, to a commitment to physical fitness. Then I checked out what it costs to buy a car....

Depending on how many horses are under the hood, Danish car buyers pay a tax ranging anywhere from 100 to 180 per cent of the sticker price of the vehicle. In other words, when you purchase a car in Copenhagen, you can pay almost as much as if you were buying three cars in North America. At that tax rate, I’d be riding a bike too.

What I learned from my trip to Copenhagen is that you don’t have to be a world leader in green energy technology to cap your carbon emissions. Just charge 30 cents per kilowatt hour for power, and slap a 180 per cent surcharge on vehicle prices. Consumers will do all the rest.

That piece is by Jeff Rubin and appeared in The Globe and Mail. It's a great example of how to use prices to conserve scarce resources, assuming there is a good reason to conserve them. 

 

 

I Know of a MUCH Better Use for Tim Horton Cups

Friend and co-author JH sent me this link a few months ago, describing how some laboratory scientists have been able to convert used Tim Horton cups into an ethanol fuel.

Sparling and Levin collect the raw materials for their research by setting up bins outside campus Tim Hortons outlets. The cups are brought back to the lab, where they are put through a paper shredder and eventually converted into a mulch resembling pink cotton candy. That increases the surface area that the bacteria can latch onto in order to start munching, speeding up the process.

The mulch is loaded into a bioreactor, where the environment, including the temperature and pH, is controlled to make the bacteria comfortable and help them process the mulch efficiently. Then the bacteria are added, and they go to work.

I wonder how much traditional energy must be used to produce ethanol this way. I'd guess it would be lots.

 As JH implied when he sent me the link, there is probably a much more interesting use for used Tim Horton cups. See this.

 

Astounding Conspicuous Consumption from a Major Re-Distributionist

Al Gore buys his FOURTH mansion?? From the National Post (relying on the LATimes):

 The Los Angeles Times reported recently:  

Former Vice President Al Gore and his wife, Tipper, have added a Montecito-area property to their real estate holdings, reports the Montecito Journal.

The couple spent $8,875,000 on an ocean-view villa on 1.5 acres with a swimming pool, spa and fountains, a real estate source familiar with the deal confirms. The Italian-style house has six fireplaces, five bedrooms and nine bathrooms. 

This makes four mega-homes for the Gores, who have made vast amounts of money urging people to reduce the amount of energy they consume. It's safe to say approximately everyone in the world (give or take a plutocrat) has fewer mega-homes and uses less energy than the Gores.

I'm astounded that this guy hasn't been embarrassed by all this extravagance. 

Gubmnt, Markets, and Ethanol

Phil Miller says it so well:

 If you have a product and say you need tax credits and mandates to stay afloat, I ask this rhetorical question: there are almost 6.7 billion people in this world and you can't convince a tiny percentage of them to invest in your company or to buy your product?

US Biofuel Policy: "We need to set realistic targets...instead of just throwing taxpayer money out the window."

Smittie, a frequent commenter here at EclectEcon, came across this item last week and sent it on to me, noting that it says things pretty similar to what I have been arguing for several years on this blog. I note that its authors are primarily civil engineers, not economists, but it looks as if their economic intuitions are pretty decent. Some excerpts:

The United States needs to fundamentally rethink its policy of promoting ethanol to diversify its energy sources and increase energy security...

The paper, "Fundamentals of a Sustainable U.S. Biofuels Policy," questions the economic, environmental and logistical basis for the billions of dollars in federal subsidies and protectionist tariffs that go to domestic ethanol producers every year. "We need to set realistic targets for ethanol in the United States instead of just throwing taxpayer money out the window," said Amy Myers Jaffe, one of the report's authors.

...[T]he report notes that in 2008 "the U.S. government spent $4 billion in biofuels subsidies to replace roughly 2 percent of the U.S. gasoline supply. The average cost to the taxpayer of those 'substituted' barrels of gasoline was roughly $82 a barrel, or $1.95 per gallon on top of the retail gasoline price (i.e., what consumers pay at the pump)." The report questions whether mandated volumes for biofuels can be met and whether biofuels are improving the environment or energy security.

The full study is here, and it includes considerable use of fundamental economics. The monograph is lengthy and seems to consider nearly every issue that has ever been raised on the topic. It should be a go-to study for anyone interested in the details of biofuel production and effects.

But as regular readers of EclectEcon know, I see no reason for gubmnts to set targets for biofuel production. I truly doubt that bureaucrats or even very smart scholars, not risking their own money, can make better decisions in this area than can private investors.

If the gubmnt wants to dissuade people from using petroleum-based fuels for various reasons, my argument has long been that legislators should raise the taxes on those fuels. The result will be that individuals and firms will make efficient decisions, on their own, as to when and whether it is reasonable to switch to hybrid fuels or biofuels. Otherwise, as this study points out so well, the externality arguments simply are not strong enough to carry the day.

$20 Oil by December??

Former US gubmnt advisor Philip Verleger says that falling demand and near capacity storage will force oil prices down, possibly as low as $20/bbl by December. It's hard to believe that forecast when oil prices are hovering around $70/bbl as I write this. Here is his argument:

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger.... “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating."

Of course not everyone agrees with Verleger. From the same source:

Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg. Crude for December delivery traded at $65.61 today [July 16th] in New York. Prices have rebounded on expectations of a demand recovery, led by China and other developing economies, and concern expansionary monetary policy would stoke inflation and weaken the dollar.

At the other end of the spectrum from Verleger, Goldman Sachs Group Inc. predicted in a report yesterday oil will rally to $85 a barrel by the end of the year, and recommended that clients buy futures contracts for delivery in December 2011.

Natural Gas Prices:Supply, Demand, and Cobwebs

Natural Gas prices have been all over the place for the past couple of years, ranging from just over $2 per million British Thermal Units (MMBtus) to over $13/MMBtu. Peter Hall effectively uses supply and demand to explain the wild swings:

So far, a classic case of elementary economics: tight supplies boost prices, high prices boost investment, increased production brings prices back to equilibrium. But are today’s sagging prices actually in equilibrium? Not exactly. Unfortunately for the industry, increased supply coincided with the largest economic contraction in six decades. As such, demand for gas has swooned by 5% to date this year, on a 13% drop in industrial demand. For the moment, prices are abnormally low.

Prices are expected to remain subdued while the world economy works through the current period of weakness. In response to soaring inventories, gas producers have scaled back activity, but are expected to ramp up again as the recovery takes hold. As we march through 2010, prices are expected to climb back to the US $5-6/MMBtu level, enough to kick-start production again.

The bottom line? Surging supply and stifled demand have pummelled natural gas prices. Consumers will enjoy the brief hiatus, but producers can look forward to more normal pricing in 2010.

In the above explanation, Peter Hall is assuming that decision-makers have somewhat myopic expectations (or what are typically referred to as adaptive expectations). In the first paragraph, he assumes that investors expect prices to remain high and hence overinvest; there is no anticipation on the part of the investors that other people will be expanding capacity as well and that prices will fall. I.e., there is a systematic error in the expectations. Rational expectations are out the window.

And then, again, when the price is low, investor-producers do not invest on the basis that they expect the price to rise to $5-$6/MMbtu. Instead, they wait to see if the price actually does rise that far.

These cycles remind me of the old myopic-theory of agricultural prices for the corn-hog cycle and that was (and perhaps still is) taught as the cobweb theory. [note: this Wikipaedia explanation is very good]

I tend to like adaptive expectations models, given my own inability to formulate rational expectations in many instances. And this is probably a fairly good example of that application.

Addendum: James Hamilton has an equation here that captures this adaptive expectations model with a simple lag structure. For those who are interested, note the alternating signs on the lagged variables, which seem consistent with a cobweb model.

Update: it is really clear that these clowns do not understand the cobweb (adaptive expectations) model. Contrary to their assertion, it involves continued overshooting.

Serious Questions about Wind Turbines

A recent C.D.Howe Institute release, authored by Michael Trebilcock, raises serious questions about the efficacy and efficiency of wind turbines. His five major objections are:

1. Industrial Wind Turbines Have Minimal Impact on Carbon Emissions
2. Industrial Wind Turbines Are Uneconomic
3. Industrial Wind Turbines Cause Insufficiently Researched Health Effects
4. Industrial Wind Turbines Have Adverse Effects on Adjacent Property Values
5. The Decision-making Process is Undemocratic and Will Undermine Efficient Regulation

Trebilcock raises important questrions in his explanations, but I especially like his conclusion, in which he emphasizes how bad politicians are at picking winners:

Good Politics, Bad Policy
In debates over climate change, and in particular subsidies to renewable energy, there are two kinds of green. First there are some environmental greens who view the problem as so urgent that all measures that may have some impact on greenhouse gas emissions should be undertaken immediately, whatever their cost or their impact on the economy and employment.16 Then there are the fiscal greens, who being cool to carbon taxes and cap-and-trade systems that make polluters pay, favour massive public subsidies to themselves for renewable energy projects, whatever their relative impact on greenhouse gas emissions. These two groups are motivated by different kinds of green. The only point of convergence between them is their support for massive subsidies to renewable energy (such as wind turbines). This unholy alliance of these two kinds of greens (doomsdayers and rent seekers) – a classic Baptist-Bootlegger coalition, harking back to the Prohibition era – makes for very effective, if opportunistic, politics (as reflected in the Ontario government’s Green Energy Act), just as it makes for lousy public policy: politicians attempt to pick winners at our expense in a rapidly-moving technological landscape, instead of creating a socially efficient set of incentives to which we can all respond. (emphasis added)

Incentives and Adjustments:Subsidies and Black Liquor

The US, in its misguided attempt to encourage more use of bio-mass for fuel, has provided a (probably unintended) subsidy for the pulp and paper mills that use their "black liquor" (what is left after the pulp is extracted) for fuel. Here is just one article on the subject (h/t to Emirates Economist).

The issue  centres on black liquor, a biofuel byproduct of the papermaking process. At kraft pulp mills, wood is boiled in caustic chemicals, causing the pulp to separate from the various combustible chemicals in the wood. What is left after the pulp is removed is black liquor, which is refined and burned as a biofuel energy source in most kraft pulp mills.

While pulp mills have been burning black liquor for decades, American paper companies have begun receiving large tax rebates from the U.S. government, which Canadian papermakers complain puts them at a distinct disadvantage.

Here are some of the bizarre and not-so-bizarre effects of the policy:

• In order to qualify for the subsidy, firms in the US must burn a blend of petroleum-based fuels and bio-mass based fuels. So while the pulp mills had been merrily using purely bio-mass based fuel for decades, they now blend it with diesel fuel to qualify for the subsidy, thus increasing the demand for diesel fuel.
• The subsidy amounts to a cost reduction of nearly 25% of average costs for US firms. Understandably, this subsidy has Canadian pulp mills hurting and upset.

We tend to teach our students that if another country wants to subsidize production of something, then we should let them, gladly. It's as if they're giving us stuff cheaper than we can produce it ourselves AND they allow us to free up our scarce resources to produce something else.

It's a nice theory, assuming that capital, resources, and labour are all completely fungible and freely mobile. Then, sure, the capital and labour being used in Canadian pulp mills can just find alternative uses in Canada, and we'll all be better off in Canada if the US wants to subsidize pulp production, right?

How likely is it that the capital of a pulp mill will find an alternative use? How long will it take labour, located where the pulp mills are, to find new jobs? And what kind of jobs will these be?

We cannot teach trade theory and policy using two-by-two-by-two models (two inputs, two outputs, two countries) and expect them to make sense to real people in the real world who understand that adjustment is painful and has costs.

These adjustment costs are dealt with, to some minor extent, in Canada with various transitional adjustment programmes as well as our higher social safety net than exists in the US. But at the same time, this type of subsidy in the US (which I suspect policy makers did not anticipate) must be fought via NAFTA and the WTO. I don't know that much progress can be made in these fights, but at the same time, it makes little sense for Canada to offer countervailing subsidies.

Man, this bio-mass energy kick sure created some weird and awful distortions.

Gasoline Prices are NOT Proportional to Oil Prices

Several weeks ago, a friend asked me why, when oil prices had fallen to a third of what they were a year ago, gasoline prices had fallen by less than half of what they were then. And the other day, I heard some talking-head mediot* ask,

"So tell me this: if oil has fallen from $140/barrel to $50, why have gasoline prices only fallen from $1.29/litre to $.79/litre? Huh?"

Here is a graph of a few of the observed data points to which they were referring:

[Update: several people were confused by the original graph, so here is a better-labeled one. It is a scatter plot of the price of gasoline versus the price of oil at three different points in time:]

Applying the famous "Palmer Eyeball Algorithm" to these data and completely ignoring the lack of degrees of freedom, it appears that gasoline in Ontario is roughly priced at about $.55  x [1+  (price of oil)/100]. In other words, about 55 cents of the price of a litre of gasoline is due to other costs that do not vary with the price of oil. These costs include, of course, taxes, but they also include the bulk of labour and capital costs as well. These costs cannot be altered much as the price of oil changes, and hence their influence on the price gasoline cannot change much when oil prices change.

It is nearly a linear relationship, but because of the comparatively fixed costs, the relationship is not proportional.

Finally, did you ever notice that the people who complain when gasoline prices don't fall in proportion to a fall in oil prices do not express gratitude when prices rise less than proportionally with oil prices?

*mediot: a contraction of the words "media" and "idiot".

Calling All Truckers!

Remember how truckers and trucking firms wept and wailed about how the gasoline tax had to be cut to help them survive back when gasoline was over $1.30 per litre in Canada and about $4/gallon in the US?

Maybe now that gasoline prices are the lowest they have been for the past four or five years, these same firms will support an increase in the gasoline tax?

Oh? It's not symmetrical?

Didn't think so...

Note: Both Becker and Posner think it would not be a good idea to raise the gasoline taxes right now, given that the US economy is in a recession. Becker, however, prefers a gas tax increase to a tightening of gasoline efficiency standards:

"Although neither higher gas taxes nor tougher fuel-efficiency standards are desirable at this time, higher taxes would be preferable to tougher standards."

And Posner supports a petroleum tax once it is clear we are emerging from the current depression.

Me? I prefer driving our minivan to driving our smaller car on my commutes, and gasoline is so cheap nowadays that I am seriously thinking of doing so on a regular basis.

"People respond to incentives..."

Conspicuous Consumption/Advertising

Back in the early 1990s, as Lithuania was emerging from socialist dominance by Russia, two colleagues and I visited there to present a series  of seminars on tax policy and on bankruptcy law.

While we were there it became apparent to me that the high-end restaurants were brightly lit -- lights on everywhere. Meanwhile, the offbeat dens and lower-scale establishments were often quite dark, with a few dim lights and possibly several candles to provide the lighting. It all seemed backwards from what we were used to in North America, where the fancy-schmancy places have dimmed lights, and the mom-and-pop eateries have bright lights.

As we talked about it, we realized that the high-end places were advertising their affluence and quality by using a lot of very expensive electricity to light their restaurants. The lower-end eateries simply could not afford to pay for the electricity to keep their places well-lit.

- - - - -

A couple of years ago, I ran across a similar phenomenon while visiting Chester, England, with our friend "The Chauffeur". We were there on an extremely hot day. As we looked for a place to sit, rest, and have a cool drink, I said,

"Let's make sure we go to a place with the doors closed -- it will be air-conditioned. They keep the doors closed to preserve the air-conditioning."

I was wrong. The first place we entered with closed doors had no air conditioning; they were trying to preserve what little cool air they had left from overnight, but it was still stiflingly hot. So we left and continued our search.

 As we walked past Piccolino, their windows were opened. I said,

"We don't want to go in here. They have the windows open, trying to cool the place off."

 Again, I was wrong: cool air was rushing out onto the sidewalk. It was great advertising, even though it was extremely expensive: we felt the cool air, knew they were air-conditioned, and stopped to go in.

It was a fascinating day in Chester (Piccolino is on the right in the above photo) -- lots of history and interesting sites, including some ongoing archeological digs (see photo below). And the food and service at Piccolino were excellent.

And we didn't even visit the outlet mall described in Le Deal.

Good News or Just Wishful Thinking?The Effect of Falling Oil Prices in Venezuela

The recent precipitous decline in oil prices (relative to their highs in July) will surely require Hugo Chavez to scale back his spending in (and out of!) Venezuela. But how serious will the effect be? From the WaPo,

The price of a barrel of oil has fallen from $147 in July to less than $70, and analysts say the drop is a blow to Chávez's free-spending administration, which depends on oil for 50 percent of government revenue and 95 percent of its export earnings. ...

Venezuela could be particularly exposed if the worldwide financial meltdown continues. That would slow economic growth, reduce the need for petroleum products and further drive down oil prices.

Venezuela exports about 1.4 million barrels daily to the United States, about 10 percent of U.S. oil imports. The dire predictions come as the inflation rate in Venezuela has surpassed 36 percent and the black market rate for dollars has shot well beyond the fixed government rate. ...

PFC Energy said in a report that oil must be at least $94 a barrel to ensure Venezuela's macroeconomic stability this year and generate enough money to pay for imports. ....

Nigeria needs the barrel to be at least $68 to cover its imports, while two Persian Gulf states -- Saudi Arabia and Iran -- need the price to remain above $55. ...

"Venezuelan fiscal profligacy and its huge off-budget populist programs has left it very little room for error," the PFC report said.

My prediction: if the price of oil stays under $75/barrel for long, look for even more price controls and other gubmnt restrictions in Venezuela. Further, the price controls, etc., will be enforced more strenuously (perhaps even more ferociously). And anticipating popular unrest, Chavez will tighten his reins on the police and military. Things will not be nice for the Venezuelan version of Joe, the plumber.

Maybe it will be good for most of us in the rest of the world if Chavez is eventually deposed, but the process will not be pretty, I fear.

More: The Emirates Economist has much more on the effect of declining oil prices on oil-producing economies.

Crude Oil Prices and Economic Policy

Now that crude oil prices are roughly half of what they were six months ago, I want everyone who favoured a windfall profits tax back then to pony up for a subsidy to the oil companies now.

Oh? It isn't symmetrical? Why not?

Oil Prices Down, Gasoline Prices Up

The Emirates Economist explains how hurricanes could cause both price movements. As refining capacity was either damaged or shut down, the supply of gasoline shrank, thus driving up the price of gasoline. At the same time, the reduction in refining capacity also led to a reduced demand for oil. He also offers other explanations.

Gasoline Prices Skyrocket along Texas Coast;and this is a good thing

From the Houston Chronicle,

Wholesale gasoline prices hitting $5 on Gulf Coast

Fuel prices are "going absolutely ballistic" today as Hurricane Ike heads toward the "largest refinery cluster on the planet," says Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service.

Prices of spot or wholesale gasoline _ which is what refiners charge retailers _ ranges anywhere from $4.25 to $5 a gallon along the Gulf Coast. Some other markets also are up sharply, Kloza says.

That's up from about $3.30 a gallon yesterday, before forecasts had Ike making landfall near Freeport and threatening Southeast Texas _ with all its refineries _ with hurricane force winds.

When the demand increases suddenly and the short-term price elasticity of supply is very low, one expects precisely this result: rapidly rising prices

The good thing about this is that entrepreneurs in other regions, outside the Texas Gulf coast, will now have a big incentive to rush tankers to the area during the next twelve hours or so (well before Ike hits) to capture some of the potential gains: high prices serve as a signal for more scarce resources to move into an area. Without those higher prices, the transportation costs and added risks would not be covered, and less gasoline would be shipped into the areas.

Furthermore, the high prices will deter many folks from topping up "just in case" and limit the gasoline purchases to those who value the gasoline more (in the sense of being willing to give up more to acquire it). Here's hoping they don't put in price-gouging laws to thwart these efficiency effects of the rising prices.

Are Wind Turbines Just "Subsidy Farms"?

When I see wind turbines, knowing next-to-nothing about the economics of their operation, I quite inexplicably think, "Oh, that's a neat idea." I am certainly not distressed when I see them cluttering the horizon in some places.

But if the only thing that makes wind turbines economically viable is subsidies, I'm concerned. Why do gubmnt planners think they know better than markets what will happen with alternative energy prices? Why do private entrepreneurs need subsidies to install wind turbines if, indeed, they will be economically viable as oil and natural gas prices rise?

From EUReferendum,

Last night.... in front of 400 local residents, in a packed hall set out for 250, North Shropshire Planning and Development Committee, decided to go with local sentiment and refused the application [for wind turbine installation rights] by a clear majority of 13-3.

However, the developers, Dutch-owned Nuon ..., are planning to appeal and, from past experience, it is likely that the government appointed planning inspector will approve the scheme, citing the essential need to increase the amount of renewable energy. ...

But, with £43 million of subsidy at stake, it is easy to see why Nuon are so enthusiastic about wind. This is easy, secure money, gained from ripping off customers through the so-called Renewables Obligation Certificate (ROC) levy, without which wind power would be economically unviable.

And that, at the heart of it, is what windmills are all about – money. Government policy, with the backing of the EU, has turned these useless eyesores into giant money-making machines and the corporates are now digging deep into the trough to grab their shares of the booty.

Still there are enough stupid people out there – and an awful lot of politicians – who are naïve enough to believe otherwise. But, for once, democracy and common sense have prevailed. But, such is this land of ours that it will very soon be cast aside. The windmills must prevail – for no other reason than money talks.

Sound Criticisms of Ethanol Policies

Doug Auld, an economist at The University of Guelph and former colleague (both recently and many years ago), published a scathing attack on Ethanol policies with the C.D. Howe Institute.

Federal and provincial policies that promote the production and use of ethanol fuel to reduce greenhouse gas (GHG) emissions are misguided, according to a Commentary released today by the C.D. Howe Institute. The strategy should be recon-sidered, says the study, since the net environmental benefits of ethanol fuel are uncertain, and the costs to consumers and governments are high.

In The Ethanol Trap: Why Policies to Promote Ethanol as Fuel Need Rethinking, economist Douglas Auld of the University of Guelph notes that Canada has become a major booster of increased ethanol production. In addition to federal efforts, a number of provinces encourage ethanol production through similar capital and production subsidies.

Auld finds that:

• • There is no conclusive scientific evidence that ethanol reduces GHGs or energy use once the entire production cycle is taken into account.
• • Even assuming that the use of ethanol has a net positive impact on CO2 emissions, public funds contribute approximately $368 for each tonne of CO2 reduced, roughly seven times greater than the cost of alternative policy measures. Auld finds that cellulose-based ethanol blends and solid biofuels provide a more promising approach to reducing GHGs.
• • To the extent that ethanol policy is meant to act as a rural development tool, ethanol mandates and production subsidies provide benefits to some farmers while hurting others, with perhaps more being hurt financially than helped.
• • Increased domestic production of ethanol contributes to increases in food prices, both direct and indirectly, for Canadian and foreign consumers. Domestically, increased food prices cost consumers an estimated $400 million each year.

Auld concludes that the headlong thrust into corn ethanol as a GHG reduction policy cannot be justified once the significant price effects, economic costs, and consequences for income distribution in Canada and, indeed, globally are considered.

Most of the points made in his study have been made before, but they need to be made again (and again) even more forcefully. And one of his points that has received less attention is that current ethanol policies, by driving up the prices of grains, have hurt many cattle operations.