Reason Foundation - Policy Areas > Energy

Why Poor Countries Won't Curb Emissions

shikha.dalmia@reason.org (Shikha Dalmia) — Wed, 15 Jul 2009 00:00:00 EDT

Forbes

If I were an environmental activist, I would be despairing right around now about ever getting meaningful action on global warming. Over the last eight years, eco-warriors had managed to convince themselves that the main obstacle to their grand designs to recalibrate the Earth's thermostat was a stupid and callow U.S. president unwilling to lead the rest of the world.

But with Barack Obama in office they no longer have that problem. In fact, they have a charismatic and savvy spokesman who combines a deep commitment to their cause with considerable powers of persuasion. Yet his call to action at last week's G-8 summit in Italy yielded little more than polite applause, and that only when he issued a mea culpa. "I know that in the past, the United States has sometimes fallen short of meeting our responsibilities," he said amid cheers. "So let me be clear: Those days are over."

What did this brave self-flagellation yield? To be sure, he got the attendees to collectively declare that they would never ever let the Earth's temperature rise two degrees centigrade from pre-industrial levels. This is supposedly a prelude to the real horse-trading over emissions cuts that will begin in a Copenhagen, Denmark, meeting this December.

But the depressing thing for climate warriors was that Obama could not get developing countries, without whose cooperation there is simply no way to avert climate change, to accept—even just in theory—the idea of binding emissions cuts. India's prime minister took the occasion to position his country as a major victim of a problem not of its making. "What we are witnessing today is the consequence [of] over two centuries of industrial activity and high-consumption lifestyles in the developed world," he lectured. "They have to bear this historical responsibility." And even before the summit began, China declared the West had "no right" to ask it to limit its economic growth.

Rather than engage with the issues, eco-pundits are grasping for all kinds of fanciful pseudo-scientific theories to explain why Obama's sweet-talking ways are leaving the rest of the world cold. New York Times columnist Nicholas Kristof, for instance, recently blamed the lack of progress on the faulty circuitry evolution has wired into the human brain. According to Kristof, evolution has programmed us to be alert to immediate threats, such as snakes, or enemies with clubs, but not for vastly greater but less imminent dangers that require forethought. If this sounds like a warmed-over, 21st-century version of the Calvinistic crooked-timber view of human nature, that's because it is.

Not to be outdone, Kristof's Nobel Prize-winning colleague at the Times, Paul Krugman, pulled out the folk story about the frog and the boiling pot in his latest column to explain our collective torpor over climate change. Just as the proverbial frog wasn't able to feel the gradually rising temperature before he boiled to death, so too, in Krugman's telling, human beings are not equipped to comprehend the dangers of an overheating planet before they fry to death.

But this psychologizing only exposes the inability of climate activists to take seriously the rational case for inaction. In fact, there is a perfectly good reason developing countries are unwilling to act on climate change: What they are being asked to do is more awful than climate change's implications--even if one accepts all the alarmist predictions.

Consider what would be necessary to slash global greenhouse-gas emissions just 50% below 2000 levels by 2050—a far less aggressive goal than what the enviros say is necessary to avert climate catastrophe. According to U.S. Chamber of Commerce calculations, even if the West reduced its emissions by 80% below 2000 levels, developing countries would still have to return their emissions to 2000 levels to meet the 50% target. However, Indians currently consume roughly 15 times less energy per capita than Americans—and Chinese consume seven times less. Asking them, along with the rest of the developing world, to go back to 2000 emission levels with a 2050 population would mean putting them on a very drastic energy diet.

The human toll of this is unfathomable: It would require these countries to abandon plans to ever conquer poverty, of course. But beyond that it would require a major scaling back of living standards under which their middle classes—for whom three square meals, cars and air-conditioning are only now beginning to come within reach—would have to go back to subsistence living, and the hundreds of millions who are at subsistence would have to accept starvation.

In short, the choice for developing countries is between mass death due to the consequences of an overheated planet sometime in the distant future, and mass suicide due to imposed instant starvation right now. Is it any surprise that they are reluctant to jump on the global-warming bandwagon?

The Waxman-Markey climate change bill that just passed the U.S. House of Representatives wants to force developing countries to accept this fate by resorting to the old and tired method of protectionism. Should this monstrosity become law, starting in 2020 the United States will impose carbon tariffs on goods from any country that does not accept binding reductions. But this is a path to mutually assured economic destruction—not to combating climate change.

For starters, by 2020, when these tariffs go into effect, India and China—with GDPs projected to grow anywhere from 6% to 10% annually—will have much bigger economies with huge domestic markets that they are increasingly opening to each other. Thus they might well be better off forgoing access to the U.S. market than accepting crippling restrictions on their growth.

Also, by then they will have more economic clout on the world stage to enforce their own ideas of who ought to take moral responsibility for climate change. The West's case for restricting Indian and Chinese exports rests on the claim that these countries' total emissions will exceed those from the West within the next few decades. (China's emissions are already at par with those of the U.S., the biggest emitter).

But these countries have, and will continue to have, far lower emissions on a per-capita basis, given that China's are now around one-fifth those of the United States and India's one-twentieth. Thus they would have an equally valid case for imposing countervailing restrictions on American exports based on per-capita emissions. The West might well be the bigger loser in this economic warfare if it is barred from accessing new, growing markets.

Obama obviously understands this—which is why he has condemned the House's turn down the protectionist path. So what should climate warriors do? Right now the only certain way to save lives is by calling off this misguided war on climate change. If and when climate change promises to claim more casualties than poverty and starvation, the world will begin heeding their calls. If, however, these climate-change casualties don't materialize, there would have been no need to act in the first place. Either way, the world has far more immediate and scarier problems than climate change to address right now.

Shikha Dalmia is a senior analyst at Reason Foundation and a columnist for Forbes, where this article originally appeared.

Will the Climate Change Bill Cost Just a Postage Stamp?

shikha.dalmia@reason.org (Shikha Dalmia) — Mon, 29 Jun 2009 10:12:00 EDT

The advocates of the climate change monstrosity that just passed the House - and is now headed to the Senate -- allege that the bill won't break the bank of Americans. To back their claims they point to a Congressional Budget Office study that estimated that in 2020 the bill's cost works out to about $175 a year for an average household. This translates into an extra postage stamp every day, the bill's author, Edward Markey (D-Mass), has been crowing. (My colleague, Anthony Randazoo, blogged the state-by-state breakdown of this estimate here.)

The CBO is a non-partisan entity that is held in high regard so its analysis has to be taken seriously. But Markey's sound-bite - that is being repeated ad nauseam by global warming alarmists - ignores this VERY important caveat: The $175 figure is based on the year 2020 - a year that the CBO itself acknowledges is not representative of the true costs of the program. Why? Because that year the government will still be handing a bulk of the carbon credits for free to power plants, utilities and other big emitters. Energy consumers won't feel the true pinch till about 2035 when these free allowances are phased out and the program starts forcing utilities etc. to buy about 70% of their credits. That's 16 years from now when President Obama (and Congressional backers of the bill) will be safely out of office, making millions of dollars giving speeches, and, in his spare time, basking in the sun room of his taxpayer-subsidized solar powered home.

Be that as it may, here is what CBO really says on page 3 of its report:

"This analysis focuses on the effect of the legislation in the year 2020, a point at which the cap would have been in effect for eight years (giving the economy time to adjust) and at which point the allocation of allowances would be representative of the situation prior to the phase-down of free allowances. The incidence of gains and losses would be considerably different once the free allocation of allowances has mostly ended. (Emphasis added)."

The true impact of the bill is a subject of fierce debate with: the Heritage Foundation estimating that it will cost a household about $4,300 annually; an MIT study putting this number at $3,100; and a previous CBO study of a similar bill at $1,600.

My own hunch?

The actual costs are likely unknowable because it is impossible to quantify opportunity costs of what could have! should have! would have! been had the resources being expended to appease the climate avatars been deployed in more productive segments of the economy.

The only thing certain is that they will be much higher than what meets the naked eye.

U.C. Berkeley: Trains are Not So Environmentally Friendly

adrian.moore@reason.org (Adrian Moore) — Mon, 29 Jun 2009 04:52:00 EDT

A study from U.C. Berkeley researchers looks at the whole panoply of environmental impacts of various modes of transport, including raw materials extraction, manufacturing, construction, operation, maintenance, fuels and much more.

We present results of a comprehensive life-cycle energy, greenhouse gas emissions, and selected criteria air pollutant emissions inventory for automobiles, buses, trains, and airplanes in the US, including vehicles, infrastructure, fuel production, and supply chains. We find that total life-cycle energy inputs and greenhouse gas emissions contribute an additional 63% for onroad, 155% for rail, and 31% for air systems over vehicle tailpipe operation. Inventorying criteria air pollutants shows that vehicle non-operational components often dominate total emissions. Life-cycle criteria air pollutant emissions are between 1.1 and 800 times larger than vehicle operation. Ranges in passenger occupancy can easily change the relative performance of modes.

In other words, how many people a vehicle carries matters crucially to the environmental outcome. Most urban rail transit systems don't carry enough people to be greener than cars. Diesel buses running empty are horrible, but when full they are pretty darn green.

Hat tip to Knowledge Problem, which pointed me to a nice summary at Next100.

Congress Is Hiding Cap-and-Trade Energy Price Increases

rbailey@reason.com (Ronald Bailey) — Wed, 10 Jun 2009 22:18:00 EDT

Last month, leading Congressional climateer, Rep. Henry Waxman (D-Calif.), chair of the House Energy and Commerce Committee, pushed out a sweeping 1000-page bill that aims to dramatically reshape how Americans will use energy in the 21st century. At the heart of the American Clean Energy and Security (ACES) Act is a cap-and-trade proposal for limiting the emissions of carbon dioxide by American industry and consumers. Carbon dioxide, produced by burning fossil fuels and chopping down forests, is building up in the atmosphere where it is thought be the chief cause of man-made global warming.

The ACES Act would establish an artificial carbon market by setting a limit on the amount of greenhouse gases that can be emitted each year. Beginning in 2012, a national cap—or total maximum CO2 emissions—would be set and then ratcheted downward annually. Under ACES, the U.S. would emit 17 percent less carbon dioxide in 2020 than it did in 2005, eventually falling to 83 percent less than emitted in 2005 by 2050.

Electric and gas utilities, cement plants, steel foundries, and other companies would be required to have one emissions permit for every ton of CO2 discharged from their smoke stacks. Under a cap-and-trade scheme, emissions permits can be allocated and/or auctioned up to the set cap. Once allocated, the market allows companies emitting less than their quota to sell their excess permits to emitters needing to buy extra to meet their cap. This process sets a price on each ton of carbon dioxide.

The central fact of the cap-and-trade proposal is that it will increase the price of energy. If energy prices don't go up, the goal of getting energy producers, manufacturers, and consumers to shift away from carbon generating fuels (coal, oil, and natural gas) toward low-carbon sources of energy (nuclear, solar, wind, conservation) will not be achieved.

Whatever else they are, the folks in Congress are not stupid when comes to protecting their electoral viability. They are painfully aware of the fact that, while Americans express support for regulations to reduce greenhouse gases, 77 percent in a recent ABC News/Washington Post poll declared themselves either "very concerned" or "concerned" that "federal regulation of greenhouse gases could substantially raise the price of things you have to pay for."

So in an attempt to ward off voter displeasure over higher energy prices brought about by Congressionally-mandated carbon rationing, the denizens on Capitol Hill have tacked on a number of Rube Goldbergesque policy obfuscations designed the mask the price increases. These include subsidies and tax breaks for retrofitting buildings to use less energy, setting energy conservation appliance standards, subsidies for higher mileage automobiles, and imposing a renewable fuel standard on utility companies, among many other things.

The chief technique that Congress is using to hide the mandated price increase in electricity and natural gas from voters is giving away free emissions permits to local electricity and gas distribution companies. In the ACES bill, some 30 percent of emissions permits are allocated free to local distribution companies who are supposed to sell the permits and then pass along the money to consumers as a lump sum rebate to offset their higher utility bills. Why a lump sum?

As Harvard University environmental economist Robert Stavins explains in his article on "The Wonderful Politics of Cap-and-Trade," the hope is that such rebates will compensate "consumers for increases in electricity prices, but without reducing incentives for energy conservation." Even if they are getting a rebate, higher monthly electric bills will still likely annoy voters. But let's assume that this scheme actually works as intended and blunts household displeasure about paying more for electricity and natural gas.

There's one big problem: The proposal merely shifts the price paid by consumers for energy from local utilities to other products and services. For example, Resources for the Future economists Rich Sweeney and Dallas Burtraw calculate that auctioning all of the carbon emissions permits would result in a price of $20.91 per metric ton. However, allocating 30 percent of the carbon dioxide emissions permits free to local utilities as proposed under the ACES bill would mean lower electricity prices, and lower prices would mean more consumption. The result is that there would 24 percent fewer emissions reductions in the electricity sector than would have been the case had all permits been auctioned.

The higher emissions in the electricity sector make it harder for other sectors of the economy—automobiles, construction, steel, cement, food processing, retail, agriculture—to stay below the national cap on carbon dioxide emissions. And this pushes up the demand for the remaining permits, which boosts their prices. Sweeney and Burtraw calculate that the requirement for increased emissions reductions in other sectors under a national cap would raise the allowance price to $26.90 per metric ton. The result, according to Sweeney and Burtraw, is that "this raises the costs of goods and services from these sectors."

So this plan to allocate "free" permits could well end up costing consumers even more than they "save" on their household electricity and natural gas bills. Fearing the electoral consequences of honesty, Congress is trying to hide the fact that they are increasing energy prices by distracting the American people with a torrent of rebates, subsidies, and tax incentives, along with plenty of happy talk about renewable energy and creating "green jobs." The result is that Congress has devised a complicated and inefficient scheme where distributing a "free" commodity actually makes products and services more expensive than it would otherwise have to be. That's truly "wonderful politics"!

Ronald Bailey is Reason magazine's science correspondent. This column first appeared at Reason.com.

Wind energy: Blowin' in the wind, or just blowin'?

sam.staley@reason.org (Samuel Staley) — Sun, 30 Nov 2008 06:05:57 EST

For those hoping wind energy is going to be the next great innovation for saving us from climate change, the Energy Tribune has a sobering report on the effects of wind energy programs in Europe:

Independent reports have consistently revealed an industry plagued by high construction and maintenance costs, highly volatile reliability and a voracious appetite for taxpayer subsidies. Such is the economic strain on taxpayer funds being poured into wind power by Europe's early pioneers -- Denmark, Germany and Spain – that all have recently been forced to scale back their investments.

And the U.K.? It's an "ideal case study" for political and economic reasons. Nonetheless,

Ofgem, which regulates the U.K.'s electricity and gas markets, has already expressed its concern at the burgeoning tab being picked up by the British taxpayer which, they claim, is "grossly distorting the market" while hiding the real cost of wind power. In the past year alone, prices for electricity and natural gas in the U.K. have risen twice as fast as the European Union average according to figures released in November by the Organization for Economic Cooperation and Development. While 15 percent energy price rises were experienced across the E.U., in the U.K. gas and electricity prices rose by a staggering 29.7 percent. Ofgem believes wind subsidy has been a prime factor and questions the logic when, for all the public investment, wind produces a mere 1.3 percent of the U.K.'s energy needs.

This is just a snippet of the criticism for wind.

Good day for free market in energy ballot initiatives

anthony.randazzo@reason.org (Anthony Randazzo) — Tue, 04 Nov 2008 12:23:12 EST

In the midst of the climate change debate is the issue of how much personal liberty or free market practice or fiscal responsibility can be sacrificed in order to make America a more green energy friendly nation. Hopefully the answer is: none. But when self-proclaimed conservatives such as Thomas Friedman fantasize over the U.S. becoming "China for a day" so the federal government can handout-sweeping mandates for energy efficiency to save the planet, then liberty has a problem. So every little win counts. There were several ballot initiatives yesterday on energy and climate change, liberty won most, but lost one: California Proposition 7: Win for free markets California voted down this measure that would have required publicly-owned utilities to produce 50 percent of their power from renewable energy resources by 2025. This was a win for free markets because it allows the market to adjust more naturally to price signals from consumers. Utilities do however, still have to produce 20 percent of their power via renewable energy by 2020 according to a previously pass provision. Missouri Proposition C: Loss for free markets The "Missouri Clean Energy Initiative" was approved bv voters and will require the state's three large investor-owned utilities to have at least 15 percent of their power come from renewable sources by 2021, and of that 2 percent must be from solar power. This similar measure to California will force the market to adapt to government mandates instead of consumer demand, but what is worse is that it caps utilities fee increases at one percent per year, meaning the utilities may not be able to recoup their increased costs. This will set an artificially low price that does not reflect true market value and could skew how firms use energy. It might also cause a significant price spike in 2022. California Proposition 10: Win for free markets This initiative would have issued a $5 billion bond, requiring the state to borrow still more money in the face of its budget and debt issues, to finance clean-energy initiatives. Most of that money would have been used to provide "incentives" for people buying hybrids (and other "alternative-fuel vehicles") or wanting to research renewable energy. This would have put the state deeper in debt in order to artificially reduce the price of a luxury good in tough economic times. A win for free markets and the California budget. Colorado Amendment 58: Win for free markets Colorado residents rejected raising taxes on gas and oil companies, and using that money to fund education programs. This will hopefully serve as a sign to the federal government when considering a windfall tax on the oil industry. Florida Amendment 3: Win for free markets Florida voters approved a measure that allows residents to add renewable energy devices to their homes without it raising the taxable value of the homestead. This is a good way for the government to encourage more efficient energy consumption and renewable energy sources: but offering tax breaks. Note, this is not a tax credit (the government giving money), but its stopping the tax code from creating perverse incentives to energy usage.

California's new "Green" public-private partnership

anthony.randazzo@reason.org (Anthony Randazzo) — Sun, 26 Oct 2008 08:54:57 EDT

California has established a new public-private partnership to provide renewable solar energy to the state's universities. The partnership is between the energy firm SunEdison and California State University will serve as a test for future PPP opportunities:

Last week Gov. Arnold Schwarzenegger announced the state has partnered with SunEdison to provide affordable solar power at 15 California State University (CSU) campuses and the CSU executive office. This innovative public-private partnership will protect the environment by providing a zero-emission eight megawatt (MW) solar photovoltaic power system to the California state university campuses. As state government's contract manager, the Department of General Services (DGS) negotiated the alternative financing method known as a power-purchase agreement for CSU. The agreement allows CSU to buy renewable power at or below current retail rates while avoiding the cost of installing the system. Under this agreement, SunEdison will finance, build and operate the solar panels for 20 years. The State of California-SunEdison solar purchase agreement arranged by DGS should yield a total of approximately 20 MW of new renewable energy for the state. "California is going green and we are doing it first and we are doing it fast," Gov. Schwarzenegger said last Tuesday. "With the partnership being announced today between California and SunEdison, we are seeing more tangible results and more follow through in reducing our state's carbon footprint. This partnership is a good deal for the state, the planet and our economy – all at no cost to taxpayers." The eight MW of energy produced by the solar panels are expected to deliver approximately 12 million kilowatt hours of clean renewable energy in the first year of operation. This amount of solar generated electricity represents five percent of the entire CSU system's yearly energy consumption. Over the life of the contract, the partnership will offset approximately 9,485 metric tons of carbon dioxide, which is the equivalent of removing 48,937 cars from the road. New SunEdison solar panels will be installed on rooftops, atop parking canopies and in ground-mounted arrays at the following locations: CA Maritime Academy, Vallejo; CSU Bakersfield; CSU Channel Islands; CSU Chico; CSU Fullerton; CSU Humboldt; CSU Los Angeles; CSU Monterey Bay; CSU Pomona (Cal Poly); CSU Sacramento; CSU San Bernardino; CSU San Bernardino (Palm Desert): CSU San Francisco; CSU San Marcos; CSU Stanislaus; and, the CSU Office of the Chancellor, Long Beach. "California's continued economic, environmental and social prosperity depends on sustainable energy and technology," said CSU Chancellor Charles B. Reed. "As the nation's largest university system, the CSU welcomes this opportunity to lead the way." "California leaders have turned the vision of renewable energy for the state into results. SunEdison is proud to be part of this important public-private partnership and to help make solar a meaningful part of California's energy portfolio," noted David Buzby, chief executive officer of SunEdison. In addition to the eight MW of solar power generation announced Tuesday, further development is under way by DGS and other state departments, including the Department of Corrections and Rehabilitation and the Department of Mental Health, to generate approximately seven MW of solar power at five state prison sites and three state mental hospitals. Since 2006, 4.2 MW of solar power have already been deployed at eight other state facilities through similar power purchase agreements. DGS also recently launched an online database identifying where solar panels, fuel cells, wind turbines and other green energy technologies are generating renewable power at state office buildings, prisons, hospitals and college campuses which can be found at www.RenewableEnergy.dgs.ca.gov. California's push to fight global warming and increase renewable energy will also boost our economy. According to an economic study released yesterday by the University of California at Berkeley and Next 10, California's policies will create as many as 403,000 jobs in the next 12 years and household incomes will increase by $48 billion.

Read the article from Lake County News here.

Politics - Not Economics - Is Hampering Nuclear Energy

info@reason.org (William Tucker) — Tue, 21 Oct 2008 00:00:00 EDT

"Nuclear has gone from too cheap to meter to too expensive to matter," exults anti-nuclear guru Amory Lovins. "It is so hopelessly uneconomic that one doesn't need to debate whether it's clean or safe." Given that there hasn't been a new reactor built from the ground up in the United States for 30 years, who would disagree?

In the Energy Policy Act of 2005, Congress offered a 1.8-cent per kilowatt-hour production tax credit to the first 6,000 megawatts of new nuclear construction. Also added was "regulatory insurance" designed to protect new projects if they become ensnared in the licensing morass that stretched construction times out to 15 years in the 1980s. Yet, despite all this government prompting, investors do not seem very confident about undertaking the risks.

The day after presidential candidate John McCain announced his determination to build 45 new reactors by 2030, Admiral Frank "Skip" Bowman, director of the Atomic Energy Institute, wrote an op-ed in the New York Post begging for money:

Our nation will need something similar to the Clean Energy Bank concept being considered by some in Congress. This would be a government corporation providing loan guarantees and other forms of financial support to ensure capital for deploying clean-electricity technology.

All this would suggest that nuclear power is a failed enterprise, surviving off government subsides. There is only one trend that runs counter to this. In 2006, when the Northeast was experiencing a winter run-up in natural gas prices, Connecticut Attorney General Richard Blumenthal wrote the following manifesto for the Hartford Courant:

[W]e need a windfall profits tax aimed at generators who have reaped outlandish and undeserved profits through irrational market rules. In 2006, the nuclear Millstone II and III generators in Waterford will have profits of $274 million and $419 million respectively, while the coal-fired Bridgeport Harbor plant will enjoy profits of $113 million . . . The generators using low-cost coal and nuclear fuel reap these same high prices and enjoy ever-ballooning profit margins.

So how is it that nuclear can be too expensive to matter and at the same time making so such money that it merits a windfall profits tax? To understand this mystery, you have to recognize the hurdles nuclear power faces.

The idea that nuclear is inherently uneconomical is incorrect. Most of the nation's 104 nuclear reactors are now making profits in the range of $1 million a day. One reason is that nuclear plants are immune to the price increases that bedevil fossil fuels. Even when uranium underwent a speculative boom in 2008, with prices rising from $16 to $135 a pound before dropping back to $60, reactors were only marginally affected. "Uranium costs represent only about 10 percent of the costs of nuclear electricity as opposed to 77 percent with coal and 95 percent for natural gas," Jim Slider, director of planning and analysis at the Nuclear Energy Institute, notes.

What's more, operating and safety snags that long dogged the industry have been overcome so that the nation's entire nuclear fleet now operates at a capacity factor of 90 percent - a figure undreamed of a decade ago. Fossil fuel plants, by contrast, operate at a capacity factor of 60 percent and windmills and solar collectors are lucky to produce at 30 percent. The superior efficiencies of nuclear compared to both conventional and alternative fuels are the result of a re-organization within the industry in 1997 when "merchant" companies started buying up reactors from utilities. Entergy, Exelon, Progress Energy, Florida Power and Light and several others became specialists in operating reactors, raising their performance to unprecedented heights. In the old days, for instance, refueling could take two months and employees often regarded it as a vacation. Now, special teams tour the country performing refueling in three weeks, choreographing them years in advance. These merchant companies are now making so much money that they want to build new nuclear plants - which is why there are nine applications before the Nuclear Regulatory Commission (NRC) with two dozen more waiting in the wings.

Indeed, no one disputes that nuclear offers big cost advantages and returns over conventional fuels in the long run due to their low operation and maintenance costs. The problem is getting over the initial investment hump, given Wall Street's reluctance to invest in nuclear. A new reactor costs between $5 and $7 billion, probably the biggest private undertaking in the world. As Thomas Friedman puts it in his new book, Hot, Flat and Crowded:

To build a new nuclear plant costs a minimum of $7 billion today, and would take probably eight years from conception to completion. Most CEOs have about eight years in office, and there are not a lot of utility CEOs who would bet $7 billion - which might be more than half the company's market cap - on one nuclear project. [Friedman, pg. 264.]

Nevertheless, a 2003 MIT study, "The Future of Nuclear Power," found that while nuclear electricity sold for 6.7 cents per kilowatt-hour (kWe-hr) compared to 4.2 cents for coal and 3.8 cents for natural gas, a $50-per-ton tax on carbon emissions would push coal and gas prices to 5.4 cents and 6.1 cents respectively while leaving nuclear unaffected. Both coal and gas prices have since increased by 25 percent. A 2006 study by the French government found that nuclear and gas now cost exactly the same - 4.6 cents (Euro) per kWe-hr - without a carbon tax.

The problem then is much less economics than politics. Both Wall Street and the utilities fear that, as soon as the first proposal comes out of the box, environmental and opposition groups will gang-tackle it, exploiting the public's fear about safety and nuclear "waste." Once again completion times will extend 10 years and beyond and costs will rise to $15 billion. In fact opposition groups are already challenging new proposals even before they reach the NRC licensing stage. "We're still in a situation where pretty much everybody wants to be second," notes Roger W. Gale, a former Energy Department official and now a utility consultant.

This is unfortunate because, as far as "nuclear waste" is concerned, the problem could readily be solved by reprocessing. Almost 100 percent of the material in a spent nuclear fuel rod can be recycled for additional fuel or industrial and medical isotopes. The problem is that America banned nuclear reprocessing in the 1970s under the illusion that it would somehow prevent nuclear weapons from proliferating around the world. Several countries have since built nuclear weaponry and it had nothing to do with plutonium from American reactors.

The French now have complete nuclear reprocessing and get one-third of their reactor fuel from spent rods. Other isotopes are extracted for commercial sale. The remaining "waste" is all stored beneath the floor of a single room in La Hague - 25 years worth of producing 75 percent of France's electricity.

The fate of the Yucca Mountain Nuclear Repository - which has been entirely funded by the industry through taxes on every kilo watt of energy generated over the last 20 years - is evidence of the power of opponents to derail nuclear. Thanks to them, the government has been hampered in completing the site on schedule and it will likely never become operational because of environmental opposition. Indeed, Exelon Corporation, which owns the largest fleet of reactors in the country, won a $300 million settlement from the Department of Energy for its failure on Yucca.

Now nuclear utilities have pioneered "dry cask storage," an on-site system that is good for at least 100 years. Because of nuclear's great "energy density" - the energy generated from a given volume, mass or collection area - the waste generated by nuclear is vanishingly small. Three years worth of spent rods from a 1000-MW reactor can be stored in a cask four times the size of a telephone booth. But Greenpeace and the Nader organizations - who remain beguiled by the idea that an industrial economy can be run on so-called "renewable" energy - exploit NIMBY (Not in My Backyard) fears to oppose nuclear plants housing on-site disposal. This has injected uncertainty and made nuclear power too risky to justify the high up-front investment.

Some free market advocates bring up the Price Anderson Act that caps the liability of the industry in case of accidents to question its viability. They maintain that if the industry had to buy full insurance, it would make nuclear power uneconomical compared to other fuels. But the fact of the matter is that caps on liability are in no way unique to nuclear. The coal mining industry also benefited from liability caps against black lung disease. Major hydroelectric dams around the country carry no liability insurance because they are all federally or municipally owned and exempted by sovereign immunity. If anything, the nuclear industry carries far more insurance than any other industry. Under Price-Anderson, every reactor in the country can be assessed $100 million for an accident by another reactor. That puts total coverage for any accident at $10 billion. As the industry says: "We are all hostages to each other." That's despite the fact that coal kills 30,000 people a year according to Environmental Protection Agency estimates, whereas Chernobyl - a bizarre foul-up that will never happen again - claimed only 60 lives directly attributable to the disaster.

The current problem with nuclear is not its underlying economics but the current political climate in the U.S. that is hostile to nuclear and doesn't offer a level playing field. Coal is familiar and politically entrenched and so people don't question the danger it poses. Solar and renewables are showered with subsidies and mandates because they have won popular favor even though they are very low density energy sources.

The real solution then to making nuclear energy economically feasible may lie in changing the popular perception of nuclear as forbidding and dangerous. People should consider nuclear as natural as the ground beneath their feet (hence I have titled my forthcoming book Terrestrial Energy). The slow breakdown of uranium atoms is what heats the core of the earth to temperatures hotter than the surface of the sun. When we build a nuclear reactor, we are only reproducing this process in an isolated environment. Yet it is so powerful that its environmental impact is 2 million times smaller than fossil fuels or the various forms of renewable energy. If powering the world with virtually no environmental impact can't be made economical, what can be?

William Tucker is an award-winning journalist whose book, Terrestrial Energy: How Nuclear Power Will Lead the Green Revolution and End America's Long Energy Odyssey, has just been published by Bartleby Press.

Going Nuclear - But Not for Energy Independence

shikha.dalmia@reason.org (Shikha Dalmia) — Tue, 21 Oct 2008 00:00:00 EDT

Nuclear energy is receiving renewed attention this election season, thanks to the battle-cry of energy independence that both presidential candidates have raised. Our contributors to this edition of the Reason Roundtable consider whether nuclear energy is the right answer - but let me begin by pointing out why energy independence is the wrong cause.

Every president since Richard Nixon has muttered direly about the need to make America "energy independent." But this old and tired saw has assumed new importance now because both Barack Obama and John McCain are offering it as the weapon of choice to vanquish all the alleged threats we currently confront - terrorism, recession and, not to forget, global warming.

In the last debate, both candidates pledged to end America's reliance on Middle Eastern and Venezuelan oil within 10 years (Canadian oil supposedly is OK) - a nonsensical goal since oil is a fungible commodity with a single global market. Both candidates also claim that replacing oil with alternative fuels will create "millions of jobs" and, once again, put America on the road to riches. "We can't keep on borrowing from the Chinese and sending money to Saudi Arabia (to pay for oil)," Sen. Obama thunders on the stump (a formulation more admirable for its pithy syntax than grasp of economics.)

But the fact of the matter is that energy independence is neither feasible nor desirable. Indeed, when Nixon originally took up this crusade in the wake of the oil embargo, America imported a third of its oil. Now it imports 60 percent. Why? Because imported oil is cheaper than indigenous oil. Trying to fight this reality won't create jobs or restore America's economy, it'll do the opposite.

Third World countries in Latin America and Asia learned this lesson the hard way when, in their zeal for economic self-sufficiency, they embraced a something called the import-substitution approach half a century ago. The idea was to discourage imports of key industrial products such as factory equipment and machinery through trade barriers and encourage their domestic production through massive subsidies. The upshot, however, was neither self-sufficiency nor prosperity. Rather, import-substitution raised production costs, making Third World goods uncompetitive in the global markets and prohibitively expensive at home, consigning these countries to decades and decades of economic stagnation that has not yet been fully reversed. Delinking America from global energy markets will wreak similar economic havoc.

But will energy independence make America more secure by depriving terrorist nations of petro dollars? Not really. Indeed, insofar as America, the single biggest oil consumer, spurns Middle Eastern oil, it will only make it that much cheaper - and therefore more attractive than the alternatives - for everyone else, including India, China and other energy-hungry emerging markets. The result might well be a new geo-political alignment with countries dependent on Middle Eastern oil in one camp - and "energy-independent" America in the other. This is not a recipe for defunding terrorism. Rather, it is a way of giving Middle Eastern countries even less of a stake in our well being and making them less interested in helping our struggle against terrorism.

Energy independence therefore offers no rationale for building 45 new reactors in America by 2030 as John McCain wants. That, however, doesn't mean that there is no case for nuclear power - or, for that matter, other alternatives to oil. Oil prices are inherently volatile, making it hard for businesses and manufacturers to reliably plan ahead. What's more, a diversified fuel supply that is not too dependent on any one source would increase economic security. And to the extent that such fuels supplement existing oil supplies, they would bring down overall energy costs and boost economic growth.

In an economy unencumbered by barriers to entry or distorted by other government policies, the market of course would be constantly searching for the most viable alternatives. But that is far from the case in America where a complicated web of government subsidies, taxes and trade barriers has severely crimped some fuels while artificially boosting others. So the question before the current Reason Roundtable is whether nuclear energy would be economically viable if it were neither helped nor hindered by government policies. Can the industry offer energy consumers sufficient value to stand on its own without shaking down taxpayers or receiving immunity from liability for future hazards?

Nuclear, to be sure, has many advantages over other alternatives currently on the table: It is plentiful, clean, and, in the long run, cheaper than other fuel sources. What's more, unlike wind and solar, it is capable of generating a steady supply of energy without disruptions due to the weather. Yet nuclear's share of the American energy market has effectively remained stagnant at about 19% for the last many decades. France, by contrast, gets about 80% of its energy from nuclear.

Is this because of an overly cumbersome regulatory process and political opposition to nuclear plants? Or are potential investors daunted by the prospect of nuclear's heavy upfront capital costs?

William Tucker, an award-winning journalist and author of, Terrestrial Energy: How Nuclear Power Will Lead the Green Revolution and End America's Long Energy Odyssey, believes that nuclear's challenges in America are not economic - they are political. Existing nuclear power plants are raking in $1 million a day, he points out, something that has, ironically enough, triggered calls for a windfall profit tax on these plants. Yet few new nuclear plants are being built in America right now. "Both Wall Street and the utilities fear that, as soon as the first proposal comes out of the box, environmental and opposition groups will gang-tackle it, exploiting the public's fear about safety and nuclear 'waste,'" he explains.

Jerry Taylor, a senior fellow at the CATO Institute, however, disagrees. He points out that the high upfront cost of building safe and reliable plants have raised both the opportunity and risk costs of nuclear, making it unattractive for potential investors. Only in countries where government has stepped in has nuclear flourished. "Those who favor nuclear power should adopt a policy of tough love," he counsels. "Getting this industry off the government dole would finally force it to innovate or die - at least in the United States."

Nuclear Energy: Risky Business

info@reason.org (Jerry Taylor) — Tue, 21 Oct 2008 00:00:00 EDT

Nuclear energy is to the Right what solar energy is to the Left: Religious devotion in practice, a wonderful technology in theory, but an economic white elephant in fact (some crossovers on both sides notwithstanding). When the day comes that the electricity from solar or nuclear power plants is worth more than the costs associated with generating it, I will be as happy as the next Greenpeace member (in the case of the former) or MIT graduate (in the case of the latter) to support either technology. But that day is not on the horizon and government policies can't accelerate the economic clock.

Many free market advocates support nuclear because it costs less to generate nuclear power than it does to generate electricity from any other source (save, perhaps, hydroelectric power), thanks to nuclear's low operation and maintenance costs. However, someone has to first pay for - and build - these plants and the rub is that nuclear has very high, upfront construction costs ranging from $6-9 billion. By contrast, gas plants cost only a few hundred million dollars to build and coal a couple of billion depending upon the capacity and type of plant.

This raises the opportunity and risk costs of nuclear, making it unattractive to investors. Capital-intensive power facilities take longer to build, which means that investors have to defer returns for longer than if they had invested elsewhere. What's more, electricity markets have a very peculiar pricing mechanism that makers it harder for nuclear to maximize returns compared to gas-powered or other plants. In essence, there are two electricity markets: a market for base-load power (electricity sold 24-hours a day) and a market for peak power (electricity sold as needed during peak demand periods like hot summer days). Much of the demand for new power - and thus much of the profit available to investors today - is found in the peak market. But nuclear power plant construction costs are so high that it would take a very, very long time for nuclear facilities to pay for themselves if they only operated during high demand periods. Hence, nuclear power plants are only profitable in base-load markets. Gas-fired power plants, on the other hand, can be profitable in either market because not only are their upfront costs low but it is much easier to turn them off or on unlike nuclear.

Nuclear's high up-front costs don't just mean delayed profits, it also makes nuclear a more risky investment, especially since 20 states have scrapped policies that used to allow investors to charge rates that would guarantee their money back. This means that investors in new nuclear power plants are making a multi-billion dollar bet on disciplined construction schedules, accurate cost estimates, and the future economic health of the region. Bet wrong on any of the above and the company may well go bankrupt. Bet wrong on a gas-fired power plant, on the other hand, and corporate life will go on because there is less to lose given that the construction costs associated with gas-fired power plants are a small fraction of those associated with nuclear plants.

One metric that reflects this difference is the "levelized" cost -- the price that must be received by owners to cover fixed and variable costs while returning profits to investors. This cost is substantially higher for nuclear than coal-fired electricity. Tufts economist Gilbert Metcalf, for instance, has calculated that, under current law, the levelized cost of nuclear power in the United States is 4.31¢ per kilowatt hour (kWh). Coal-fired electricity, on the other hand, cost 3.53¢ per kWh and "clean" coal cost 3.55¢.

But even these nuclear estimates are almost certainly too low. That's because Metcalf uses an "overnight cost" (construction costs minus financing costs) figure of $2,014 per installed kilowatt (kW) which is much too low. The Energy Information Administration (EIA) puts this cost at $2,475 per kW at present - although even this figure is suspicious because it relies on a world-wide average for nuclear power plant construction - including the grossly unreliable estimates from state-managed economies. The Standard & Poor's overnight cost estimate of $4,000 is likely the most reliable because it is based on nuclear plant construction costs in economies where labor and material costs are very similar to those found in the United States. Industry analyst Jim Harding, who uses overnight cost figures similar to Standard & Poor's, puts the levelized costs for new nuclear power generation at 12-15c per kWh right now.

Investors are also wary of nuclear plants because of the construction delays and cost over-runs that have historically plagued the industry. For instance, the Areva/Siemens nuclear power plant being built for TVO in Finland - the first nuclear power plant to be built in a relatively free energy market in decades - once scheduled to be operational within 54 months, is now two years behind schedule and 60% over budget. Nor have these construction delays had anything to do with regulatory obstruction or organized public opposition.

If nuclear power plants are so uneconomical, how then to explain the blizzard of permit applications for the construction and operation of new nuclear power plants that the Nuclear Regulatory Commission has received? Easy: These applications cost little and oblige utilities to do nothing. Industry analysts maintain that federal approvals will not translate into actual plants without a federal promise to private equity markets that, in case of default by power plants, the taxpayer will make good on the full sum of all bad nuclear loans.

Nuclear supporters often counter that construction costs would be a lot lower if regulators didn't impose insanely demanding safety standards, byzantine and time-consuming permitting processes, or endless public hearings, any one of which could result in the plant being stopped in its tracks. Investors would also be more likely to invest, we're told, if there were a high-level waste repository in place or more political support for nuclear power.

I would love to tell that story. I do, after all, work at the Cato Institute, and blaming government for economic problems is what keeps me in business. But what stops me is the fact that those complaints are not echoed by the nuclear power industry itself.

On the contrary, the industry in the early 1990s asked for - and got - exactly the sort of safety regulations, permit review process, and public comment regime now in place. Both public and political support for nuclear power is running so high than even a majority of Democrats in Congress are happy to not just tolerate nuclear power, but lavish even more subsidies upon it. And while Yucca Mountain may not be open now or ever, everyone seems reasonably content with the current on-site waste storage regime.

Indeed, if government were the reason why investors were saying "no" to their loan applications, I would expect that industry officials would be the first to say so. But they do not.

There's another good reason why the industry is not protesting government intervention these days -- the industry would not exist without it. Take away the 1.8¢ per kWh production tax credit available to the first 6,000 megawatts of new nuclear generation built prior to 2021, for instance, and Metcalf calculates that the levelized cost of new nuclear power plants jumps by 30 percent. Replace accelerated depreciation tax rules with regular depreciation rules and costs jump another 9 percent. Even zero taxation on nuclear power would increase costs by 6 percent because right now nuclear power enjoys a negative effective tax rate. Indeed, this jump by itself would make nuclear much more expensive than conventional coal, "clean" coal, and natural gas. Finally, repealing the $18 billion in federal loan guarantees recently promised the industry and eliminating regulations that relieve nuclear plant owners of the responsibility to pay third-parties to accept the risks associated with waste disposal would dampen market interest in nuclear power even further.

But the final nail in the coffin for the industry would be if the federal cap on the liability that nuclear power plant owners face in case of accidents (the Price-Anderson Act) were to be lifted.

Given all of this, how do France, India, China and Russia build cost-effective nuclear power plants? They don't. Government officials in those countries, not private investors, decide what is built. Either these governments build expensive plants and shove them down the market's throat - or they build shoddy plants and hope for the best.

Conservatives project nuclear power as the solution to greenhouse gas emissions. But they should resist that argument. If we slapped a carbon tax on the economy to "internalize" the costs associated with greenhouse gas emissions - the ideal way to address emissions if we find such policies necessary - then the "right" carbon tax would likely be about $2 per ton of emissions according to a survey of the academic literature by climate economist Richard Tol. That's not enough to make nuclear energy competitive against coal or natural gas according to calculations performed by the Electric Power Research Institute. In any case, if nuclear offers a cost-effective way to reduce greenhouse gas emissions, it should have to prove it by competing against alternatives in some future carbon-constrained market.

There's nothing new about today's rhetoric about the supposed "nuclear renaissance." Back in 1954, GE maintained: "In five years - certainly within 10 - a number of them (nuclear plants) will be operating at about the same cost as those using coal. They will be privately financed, built without government subsidy." Now, 54 years later, the talk of "renaissance" is back - as are promises about the imminent economic competitiveness of nuclear.

Those who favor nuclear power should adopt a policy of tough love. Getting this industry off the government dole would finally force it to innovate or die - at least in the United States. Welfare, after all, breeds sloth in both individual and corporate recipients. The Left's distrust of nuclear power is not a sufficient rationale for the Right's embrace of the same.

Jerry Taylor is a senior fellow at the Cato Institute in Washington, DC.

Reason Roundtable: Nuclear Power and Energy Independence

mike.alissi@reason.org (Mike Alissi) — Mon, 20 Oct 2008 04:33:14 EDT

Reason Foundation's latest roundtable feature examines the economic viability of nuclear power, with commentary by William Tucker, Jerry Taylor, and Shikha Dalmia. Read it here. Please feel free to join the debate in the comments section below. Going Nuclear - But Not for Energy Independence The case for nuclear ought to depend on its market, not political, viability By Shikha Dalmia Politics - Not Economics - Is Hampering Nuclear Energy People should consider nuclear as natural as the ground beneath their feet By William Tucker Nuclear Energy: Risky Business Those who favor nuclear power should adopt a policy of tough love By Jerry Taylor

Analysis of California's Propositions 7 and 10: Renewable Energy Mandates and Handouts

skaidra@reason.org (Skaidra Smith-Heisters) — Wed, 01 Oct 2008 00:00:00 EDT

Introduction

California has just set out on a highly ambitious mission, a decades-long effort to reduce greenhouse gas emissions to the equivalent of 1990 levels by 2020, and 80 percent below 1990 levels by 2050. Two propositions on the California General Election ballot for November 4 exemplify the kind of bold thinking that makes the state an environmental and economic leader: Proposition 7, which would raise state standards for renewable energy procurement, and Proposition 10, which would authorize bonds to finance a variety of alternative energy research and development. Unfortunately, the two propositions fail to transcend the legislative shortsightedness that has burdened California with high budget deficits and poor economic performance in recent years.

Proposition 7 would require unprecedented and costly alternative energy acquisitions that far exceed the alternative energy goals set by Governor Schwarzenegger, state legislators, state energy agencies and expert advisors to the California Air Resources Board for the purpose of reducing greenhouse gas emissions. The goal set by Proposition 7 probably can’t be met, which will mean penalties on utilities that will be passed on to customers as rate increases. Worse, it would mean diverting state revenues and household budgets away from more cost-effective greenhouse gas emission reduction strategies. Tough economic times mandate that we are allowed to use the most cost effective means to reduce greenhouse gases.

Proposition 10 is likewise badly flawed. It gives subsidies to people who already buy clean energy cars or solar or wind, and of course lots of grants to some special interest companies that are pushing for this plan. It would not effectively increase the use of alternative energy. Worse, among other provisions, it would give out rebates (at an eventual taxpayer expense of more than $1 billion) to buyers of the Honda GX CNG, a natural-gas-powered car that emits more greenhouse gases than the more popular and more easily fueled Toyota Prius. The $10,000 rebate to Honda natural gas car buyers comes as no surprise, as this proposition is bankrolled by T. Boone Pickens, founder of Clean Energy Fuels Corporation, a company that makes natural gas refueling stations. Pickens has already secured at least $107 million in public grants for its private projects and would almost certainly line up more contracts with the money provided in Proposition 10.

This situation has prompted another California rarity: virtually every major environmental group in California opposes Proposition 7, and Proposition 10 has earned criticism from the state’s top energy experts.

California's Proposition 7 Is Flawed

skaidra@reason.org (Skaidra Smith-Heisters) — Thu, 18 Sep 2008 00:00:00 EDT

Television ads about Proposition 7 have been airing for weeks in California. The ads are part of a ballot battle that pits Arizona billionaire Peter Sperling and campaign spokesman Jim Gonzalez against a coalition which includes the state's Democratic and Republican parties, big utilities, alternative energy providers, California Labor Federation, California Taxpayers' Association, California League of Conservation Voters and California Chamber of Commerce.

Proposition 7 would change California's renewables portfolio standard (RPS), a set of state mandates for electricity procurement from geothermal, biomass, small hydro, wind, solar and other state-approved alternative energy sources. California's first RPS was enacted in 2002, when 11 percent of the state's electricity came from renewable sources. The 2002 RPS mandated that 20 percent of the state's electricity be renewable electricity by 2017. In 2006, the state's actual renewable energy share was unchanged at 11 percent, but legislators upped the ante and called for an accelerated RPS anyway-20 percent by 2010.

Today, the state's renewable electricity share still hovers around 11 percent, yet government energy experts remain confident that the state will eventually meet the 20 percent goal-if not in the next 16 months, then soon enough. They've even begun workshops to explore what will be needed to meet Gov. Arnold Schwarzenegger's longer-term goal of 33 percent renewable electricity by 2020.

Without even a preliminary analysis completed, Proposition 7 would arbitrarily mandate an increase in renewable electricity share of 40 percent by 2020 and 50 percent by 2025.

Anyone with a bad idea and a billion dollars can buy their way onto the California ballot. What remains to be seen is whether the combined opposition of California's major lobbies is enough to convince voters to oppose a proposition that nearly two-thirds of them supported in preliminary polling.

Voters have many reasons to oppose Proposition 7. The RPS targets are imprudent and regrettably out of sync with the considerable effort already underway to devise a coherent greenhouse gas reduction strategy for the state. Further, the poorly-worded initiative may inadvertently drive small and mid-size renewable energy projects out of the state market. But the biggest problem with Proposition 7 is that it requires Californians to buy renewable energy no matter how expensive it is-a scenario that promises to damage both ratepayers and the environment.

Proposition 7 softens the criteria for determining the state's reference price for electricity, allows utilities to charge 10 percent over that reference price to accommodate the higher price of renewable energy generation, and locks utility companies into 20-year contracts with generators. That means Californians could be bound to very expensive utility contracts even as far more cost-competitive renewable energy sources, energy-saving technologies, and other greenhouse-gas-cutting opportunities become available. To top it off, the proposition specifies that the new laws it creates could only be changed by a two-thirds vote of both houses of the legislature or another ballot initiative, so it would be hard to fix the problems that Proposition 7 would create in the future.

Proponents of the measure get one thing right: they say it won't raise taxes. But since it will expand state government, create redundant responsibilities among state agencies, and increase local government costs, it will certainly result in greater government spending. Their claim that the measure won't increase electricity rates by more than 3 percent is simply false; the Legislative Analyst's Office has determined that "the measure includes no specific provisions to implement or enforce this declaration."

The solar thermal generation favored by the proposition's authors is still two-to-four-times more expensive than electricity from natural gas (20 to 40 cents per kWh as compared to 9 cents for natural gas), and it will take billions of dollars in new transmission infrastructure to bring these alternative energy sources into the California grid.

Greenhouse gas reduction policies will backfire if they significantly raise the cost of living and doing business in California. Bad policies like Proposition 7 can easily increase near-term greenhouse gas emissions more than no policy at all. The effort to clean up California's power supply is better served by maintaining the state's flexibility to buy from the best sources at the right time and the right price.

Arab crisis: plunging oil costs

anthony.randazzo@reason.org (Anthony Randazzo) — Wed, 10 Sep 2008 07:53:04 EDT

The OPEC oil cartel met Wednesday to discuss their most recent crisis: plunging oil prices. Never mind that one year ago oil was $20 less than it is right now, two months ago it was soaring, and many nations are concerned about their rapid loss of profits. In a move to try and stop the hemorrhaging, they've cut back production by 500,000 barrels per day. The theory is simple: less supply with sustained demand will raise the price. Initially the idea was working Wednesday morning as oil rose to over $104 per barrel. The price fluctuated before dropped down to $101 early Thursday morning. The actual role supply and demand play into the price of oil is unclear, as much of it seems to be driven on speculator comfort. Lately there has been positive news out of Iraq, an agreement between Europe and Russia over Georgia (again), and a general sense of calm not to mention a growing (though slowly) U.S. economy that has yet to hit recession. Saudi Arabia has expressed concern that too highly priced oil will shift demand for fuel elsewhere. The high cost of gasoline has spurred on the hunt for alternative energy in American and promoted oil drilling in the Western hemisphere. Both initiatives set an ominous horizon for Arab nations dependent on American money. Economists understand that supply and demand determine price in a normal market. However, if the decreased production of oil does not raise the price then we must consider two possibilities: either demand is decreasing with decreased outputs, or speculation has a much heavier guiding role in the price of oil than many economists would like to admit. Considering that the reduced price a the pump is unlikely to scare drivers away and thereby decreasing demand, I think we'll find a much clearer demonstration of oil speculation realities in the coming weeks.

The Myth of $10 per gallon gas

sam.staley@reason.org (Samuel Staley) — Tue, 02 Sep 2008 09:25:18 EDT

Thankfully, the hysteria over sky-high fuel prices is moderating, thanks in no small part to the moderation of fuel price inflation as retail gas prices fall to under $4 per gallon in most places. Nevertheless, this hasn't kept some forecaster from claiming we will see $10 gas prices ($200 per barrel) by the end of the decade. I doubt this will happen. We may well see $5 per gallon gas by 2010, but this would represent relatively modest increases over the next two years compared to what we have experienced over the last two. We'll adjust. The real kicker will be the BRIC countries--Brazil, Russia, India and China. The unsettling of energy markets in Russia and former satellites creates uncertainty that could trigger upward pressure on prices if it continues for several months. But the real issue will be whether India and China continue their rapid growth. On their current trajectory, their demand for oil will outstrip their supply, even if China begins tapping into its known reserves in western regions of the continent. More importantly, world oil supply is not longer replacing oil at a rate sufficient to keep pace with demand. (Yes, we've hit "peak oil" in this respect.) Still, I doubt we will see bumps much above $5 per gallon in the US because of the following: 1. I don't see congress upping the fuel tax to the point we would add more than a $1 to the overall price, and keeping us well below European gas prices (and fuel taxes); 2. Our economy is in a much stronger position to adopt new technologies, so the upward pressure on prices will be muted significantly within the next decade if retail gas prices continue to approach (or exceed) $5 per gallon. 3. US households will adjust to keep travel expenditures within about 10-12 percent of their overall budget. Over the past 12 months, they've accomplished this by simply not driving (hence falling VMT): longer term households will adjust their routines and adopt new technologies to reduce the budgetary impact 4. 4-5 years is long enough for new supplies to be brought on line at higher retail prices to mute the worst effects of high retail prices in the US. 5. Uncertainty in the current retail price will be reduced by an increasingly visible commitment to alternative technologies to substitute for oil, most importantly nuclear. While these technologies will not be on-line for 15-20 years, the investment commitment will quell a lot of uncertainty. Of course, all this crystal ball gazing goes up in smoke if Russia (or Iran or Iraq or Venezuela or North Korea or.....) uses the Bomb.

A Carbon-Free Electricity System in 10 Years

sam.staley@reason.org (Samuel Staley) — Tue, 22 Jul 2008 00:00:00 EDT

Former Vice President Al Gore just called on America to ditch electricity that is generated by fossil fuels over the next 10 years and shift to a carbon-free system using renewable energy sources. Anyone taking the Nobel Prize-winner seriously recognizes that achieving this goal would inevitably entail giving the government control of vast swaths of the private economy.

Mr. Gore's goal is to eliminate man-made greenhouse gases. That means moving the economy away from natural gas, oil, and coal and toward solar, water, wind and geothermal.

"Ending our reliance on carbon-based fuels," Gore said, holds "the answer" to overcoming three challenges: our stagnating economy, global warming, and "dependence" on foreign oil.

Shifting to renewable sources would reduce our reliance on oil, cut carbon dioxide emissions and, according to Gore, create high-wage jobs in a new environmentally-friendly industry.

It's a nice armchair theory. But what would it take to achieve it in the real world?

Start with restructuring the entire economy, piece by piece.

Currently, 70 percent of our electricity is produced by fossil fuels, according to the U.S. Energy Information Administration. Another 21 percent comes from nuclear power. Just 9 percent of our energy currently comes from renewable sources.

But, there's a twist. Two-thirds of that renewable power comes from water, which is limited and geographically constrained to places with rushing rivers and dams such as the Rocky Mountains and other Western states. Less than 1 percent of all of our electricity currently comes from wind and geothermal. Solar power is barely a blip.

Yet, Gore is proposing that in just one decade we literally flip our electricity sector from fossil fuels to 100 percent renewable sources.

There are reasons that existing renewable technologies serve a tiny fraction of our overall electricity needs today. Cost is one. Distribution is another. And you simply cannot make Gore's shift, as much as it may sound like a good idea, in just 10 years without an unprecedented dislocation in the economy.

Gore recognizes that shifting to renewable sources for power generation would require massive upgrades to, and expansion of, the existing electricity transmission and distribution system - he calls this the Unified National Grid - so that customers can tap into these renewable sources.

While we clearly need electricity infrastructure upgrades, such as adding capacity and making the grid "smarter" technologically to enhance efficiency and reliability, Gore's call raises significant concerns.

Without advance knowledge of where the most economically efficient generation sources will be in the future (or even if those sources will require a grid), master planners will inevitably miscalculate where and how to build new capacity, at great cost to electricity customers or taxpayers.

Prudent caution, however, is not part of Gore's 10-year plan. We are "called upon to move quickly and boldly to shake off complacency," he told his audience, and "those who, for whatever reason, refuse to do their part must either be persuaded to join in the effort or asked to step aside." He left open the question of what would happen to those who refused to join the effort or step aside.

The message is clear. The federal government will have to choose which technologies should be adopted - and where, force private industry to adopt them, or, if necessary, create the government-run agencies to make it happen.

Factories will have to be retooled; workers retrained; research and development accelerated. Consumer concerns about cost, functionality, efficiency, or convenience will be irrelevant. This is the government, where customer service and satisfaction aren't top priorities.

Most people recognize that, at some point, the Unites States will have to wean itself from oil, natural gas, coal and other fossils fuels. But now is the time for the U.S. to embrace markets and private-sector innovation, not squelch them.

Ultimately, Gore's plan reveals itself as government planning and mandates disguised as national energy policy. Gore, of course, is right in one respect: technology will be the key to solving our future energy needs. But ultimately, technological advancements will be spurred by encouraging private innovation, not by creating an energy bureaucracy modeled after the IRS or U.S. Postal Service.

Gas prices and the family budget

sam.staley@reason.org (Samuel Staley) — Thu, 19 Jun 2008 08:01:03 EDT

Lots of articles are being published about how rising gas prices are resulting in "fundamental" shifts in travel behavior and decisions on where to live. One of the more recent articles (an AP story) can be found here. But consider this: The U.S. Bureau of the Census estimated that the average consumer household spends about 3.4% of its budget on gasoline and motor oil in 2005. The average price of a gallon of unleaded regulor gasoline at the pump was $2.29 in 2005. That price increased to about $3.44 by April 2008 according to the US Department of Energy, an increase of 54%. Thus, by 2008, the average consumer household was spending $3,000 on gas & motor oil, or 5.1% (assuming household spending also has not changed). This is hardly enough of a change to generate major shifts in consumer behavior, even though gas prices influence spending on the margin. The costs of moving would swamp any savings in travel for the vast majority of households, let alone the changes in the quality of life the move implies.

Roving Economic Nonesense

sam.staley@reason.org (Samuel Staley) — Thu, 19 Jun 2008 07:28:17 EDT

Former Bush advisor Karl Rove has an excellent article in the Wall Street Journal on the silly economic populism spouted by both presidential aspirants. Both McCain and Obama are chastizing Big Oil and US energy companies for not sinking even more money into risky and money losing alternative energy technologies.

Instead ask this: Why should we stop with oil companies? They make about 8.3 cents in gross profit per dollar of sales. Why doesn't Mr. Obama slap a windfall profits tax on sectors of the economy that have fatter margins? Electronics make 14.5 cents per dollar and computer equipment makers take in 13.7 cents per dollar, according to the Census Bureau. Microsoft's margin is 27.5 cents per dollar of sales. Call out Mr. Obama's Windfall Profits Police!

McCain is not spared by Mr. Rove either. He writes:

This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, "I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy." But oil and gas companies report that they have invested heavily in alternative energy. Out of the $46 billion spent researching alternative energy in North America from 2000 to 2005, $12 billion came from oil and gas companies, making the industry one of the nation's largest backers of wind and solar power, biofuels, lithium-ion batteries and fuel-cell technology.

All this bodes terribly poorly for private enterprise after this November's election.

The gas "crisis" blame game I: Corporations

sam.staley@reason.org (Samuel Staley) — Tue, 17 Jun 2008 06:36:03 EDT

Everyone seems to be searching for someone to blame for the so-called "gas crisis". So, I'm going to look at some of the culprits in a series of posts over the next week. Let's start with the most obvious: those evil, greedy, short sighted corporations that can't seem to get their act together. Their transgressions are so great, Congress wants to levy a windfall profits tax on them in order to do the "right thing"--have the government invest in appropriate alternative technologies (e.g. ethanol or wind). But, how short-sighted are the oil & gas companies? In truth, it's Congress that is short-sighted and opportunistic, not the oil companies. Oil companies have simply learned a few economic lessons--the hard way. The oil industry has experienced more ups and downs over the last 30 years than the world's longest roller coaster (which, btw, is the Beast at Kings Island in Ohio). Let's take a look at the price of gas. Here's the price of unleaded regular gas at key benchmark dates according to the Energy Information Administration at the US Dept of Energy: 1976: $0.61 1980: $1.24 1985: $1.20 1990: $1.16 1995: $1.15 2000: $1.51 2005: $2.29 2008: $3.44 (April) These are nominal dollars. Factoring in inflation, the real price of gasoline at the pump fell until the middle part of this decade. Note that the nominal value of gasoline also fell in the 1990s. Throughout this period, the spot price of crude oil remained steady, ranged from $13 to $20 per barrel. The spot price didn't increase to over $20 per barrel consistently until after September 1999. Even during this period, the price dipped below $20 during late 2001 and early 2002. Crude oil prices didn't jump to more than $30 per barrel until after March 2004. Why did prices tank? Because we were getting plenty of oil to meet our needs from the rest of the world--most notably Saudi Arabia and other Middle Eastern countires--and the BRIC countries (Brazil, Russia, India, and China) had not yet taken off. This is hardly a robust economic environment for the gas companies. The idea that companies should be investing in new capacity is simply unsupportable based on history and the data. We can see the industry's fortunes flag in domestic employment. I like to use Wyoming as a benchmark for the health of the domestic oil industry because this is a small state that depends on natural resources for a good chunk of its economy. Moreover, it reflects the change in the marginal value of extracting oil from more difficult sources. Here's Wyoming's record for employment in "oil & gas extraction" over the last few decades: 1975: 10,300 1981: 22,700 (peak) 1990: 8,900 2000: 9,400 2005: 3,800 2007: 4,300 Not surprisingly, employment tanked in the 1980s and 1990s, reflecting the declining fortunes (and prices) of the industry itself. Employment hasn't ticked up by much, but given the declines and uncertainties of the previous decades, it's not hard to figure out why. Only sustained increases in prices over several years would justify a substantial increase in capacity. Given that US oil companies control only 1.6% of the world's reserves and about 7% of world production, the real capacity to meet rising world demand is going to have to come from elsewhere. Thus, blaming the domestic US oil industry for not investing in reserves simply ignores the uncertainty and economic reality of the global energy market. Taxing their profits now also ignores the hard times of previous decades where oil companies were struggling to make money as crude oil prices languished and, and time, seemed to be in a free fall. To argue that the oil companies should have foreseen the spike in crude oil prices we've experienced over the past few years simply belies the hard, cold experience of the past several decades. Moreover, it's not at all clear that oil prices won't fall dramatically again, just as they did after the OPEC oil market interventions of the 1970s. Personally, I doubt they will fall to those levels. Moreover, innovation in the energy sector may have finally brought the costs of using alternative technologies far enough to create a broad-based market that will make the energy sector even more competitive. Toyota, afterall, sold its one millionth Prius this year, and production is approaching (if not exceeding) mass market levels. Honda has also launched a zero emissions plug in 4-door sedan, the FCX Clarity. So, times they are a changing, and the trends don't bode well for domestic oil companies over the long run.

Still looking for the crisis in the "Gas Crisis"

sam.staley@reason.org (Samuel Staley) — Sun, 15 Jun 2008 11:27:32 EDT

Okay, I'm getting a bit tired of the constant headlines on national newstands and on tv about the so-called gas crisis. There isn't a crisis. There is an imbalance between supply and demand, which is contributing to higher gas prices, but there is no way we can credibly claim that an increase of a $1 per gallon constitutes a crisis. I ran a few back of the envelope numbers just to illustrate the point. Our family, like most in the US, has 2 vehicles--a minivan (2003 Dodge Caravan) for hauling lacrosse, soccer, and vollyball players, as well as assorted skiing & snowboarding gear, and a 4 door sedan (2001 Toyota Prius). One gets lousy gas mileage, averaging 18 mpg, and the other does pretty darn good, averaging 47 mpg. (You can figure out which of the vehicles is more fuel efficient, if not family efficient.) So, what has the "crisis" of gas prices going from $3 to $4 meant in real terms? Let's assume that we put 15,000 miles on each vehicle, according to AAA estimates (even though we don't because one of us is a telecommuter and the other works part-time close to home). That means the Caravan burns through 833 gallons each year and the Prius burns through a miserly 319 gallons. At $3 per gallon, we would shell out $2,500 in gas for the van and just $957 for the Prius, for a total gas budget of $3,457 annually. Now, gas goes up to $4 per gallon. Our van is now gobbling up $833 more a year in our hard earned cash. Our Prius is now eating up another $319. That's not really chump change for a family getting by on a nonprofit salary, but it doesn't put us in the poor house either. We might have to rethink a vacation or two to bring spending in line with income. (Guess what? Las Vegas is reporting an economic slow down.) But that's not the really important point. The important and highly relevant point is that if we wouldn't have to give up any of our lifestyle or mobility if we simply switched out the van for the Prius. By getting rid of the van (or SUV or luxury car) and opting for a prius, our gas budget at $4 per gallon is just $2,554 per year (compared to $3,457 at $3 per gallon gas). In fact, even if gas prices are goosed to $5 per gallon, our two Prius family still would be shelling out less money than at $3 per gallon gas with the van and one Prius. So, what's all the fuss? Two reasons: 1) People don't like to change their lifestyles, even when its a minor change, and 2) we're slow to adjust our expectations. For some reason, most of us weren't following oil futures markets and really didn't think $4 per gallon (or $5 per gallon) gas prices were really that close (or inevitable). Of course, people are changing their behavior. Vehicle Miles Traveled (VMT) are down by 2.3 percent over the last year, and the SUV and truck marekts have tanked, threatening the profitability and long term viability of automotive giants like GM and Ford. As US consumers, we have both the technology and wealth necessary to make the adjustments we want to maintain our mobility and our lifestyle. Dashed expectations don't constitute a crisis. They simply require adjustments. And that's the normal stuff of life.

Macaroni cantaloupe knows the future

skaidra@reason.org (Skaidra Smith-Heisters) — Sun, 25 May 2008 10:49:39 EDT

Do a Google search for "37 million barrels" AND China, and you'll find at the beginning of the year Reuters reported: Chinese people use up to 3 billion plastic bags a day and the country has to refine 5 million tons (37 million barrels) of crude oil every year to make plastics used for packaging, according to a report on the Web site of China Trade News (www.chinatradenews.com.cn).
Fast-forward five months, and the same figure has been repeated more than a thousand times on websites ranging from environmental blogs to, this week, Scientific American:

The Chinese government is banning production and distribution of the thinnest plastic bags in a bid to curb the white pollution that is taking over the countryside...The move may save as much as 37 million barrels of oil currently used to produce the plastic totes, according to China Trade News.

Either I'm missing a browser plugin of some kind, or the China Trade News website is in Chinese. In any case, I haven't seen the original claim so it is a little hard to place in context, but I don't need to in order to know that the Chinese bag regulation will not--as Scientific American and legions of (less-reputable) sources claim--"save 37 million barrels of oil." First, that original 37-million-barrel figure referred to "plastics used for packaging," which might include packaging other than the plastic bags affected by the new rule. Second, the Chinese government has not announced plans to ban all bags, but only bags less than 0.025 mm thick. That means it would be illegal to produce the equivalent of a grocery or dry cleaning bag, but something as thick as a bread bag or boutique retail bag would still be legal as long as they have a price tag on them (the law prohibits complimentary plastic bags). Third, even if every single plastic product in the 37-million-barrel figure stopped being produced, the regulation only saves that amount if nothing replaces them. This little game of journalistic telephone shows that, yes, the plastic bag really does epitomize modern environmental debate. A similar distortion was recently uncovered in the figures used to describe plastic bag impacts on wildlife: The central claim of campaigners is that the bags kill more than 100,000 marine mammals and one million seabirds every year. However, this figure is based on a misinterpretation of a 1987 Canadian study in Newfoundland, which found that, between 1981 and 1984, more than 100,000 marine mammals, including birds, were killed by discarded nets. The Canadian study did not mention plastic bags. Fifteen years later in 2002, when the Australian Government commissioned a report into the effects of plastic bags, its authors misquoted the Newfoundland study, mistakenly attributing the deaths to "plastic bags."

The future is here: smart metering in CA

skaidra@reason.org (Skaidra Smith-Heisters) — Wed, 21 May 2008 18:19:16 EDT

Announcements of smart meter roll-outs across California abound recently. A new study of 300 homes and businesses in California's desert interior will take smart metering an extra step by helping consumers to use both electricity and water at off-peak hours: Coachella Valley Water District (CVWD) is partnering with the Association of California Water Agencies (ACWA) and Energy Consulting to conduct the study, which is funded predominately through a $400,000 grant from the California Energy Commission. Energy use associated with water is substantial. Statewide, energy directly associated with water deliveries accounts for eight percent of all energy consumption. Factor in the amount of energy needed for wastewater disposal, water heating and cooling, and the percentage jumps to a fifth of total energy consumption in California. The 18-month, time-of-use study will begin this month and continue through fall 2009. Where possible, homes and businesses with water meters featuring automated reading already installed will be utilized. As needed, additional "smart" meters will be installed to ensure that the study is sufficient in scope. These meters provide a reading that is entered into the database of a computer automatically. Data from the meters enable the customer to determine at exactly what time and how much water is consumed and, quite often, for what purpose.
Sempra Energy will begin their roll-out of smart meters this month, with plans to replace an estimated 1.4 million electric meters with smart meters by 2011 at a cost of $572 million. Southern California Edison will complete replacement of 5.3 million conventional meters under their SmartConnect initiative by 2012. Many Pacific Gas and Electric customers will see replacements this summer, with all 10.3 million meters in the PG&E service area replaced by 2011. Back in January there was a flap about whether or not state regulators would have the authority to make mandatory thermostat adjustments in the rare event of state electrical emergencies. At the time, Lynne Kiesling aptly weighed the concerns and opportunities for two-way communicating programmable utility meters over at Knowledge Problem. Some ratepayer advocates are still balking at the $200 to $450 per-meter costs of the upgrade, but that is nothing compared to the costs of employing troops of meter readers and service people, having a major commodity without any price signal at the point-of-purchase, and building additional peaker power plants. Worse, many of these critics make the rather unflattering assumption that consumers are too stupid to use smart meters. We'll see about that!

Speaking of biofuels. . .

adrian.moore@reason.org (Adrian Moore) — Fri, 09 May 2008 12:32:37 EDT

After my previous post about a serious academic paper on biofuels, I came across this amusing article about a fight in California over collecting fuel taxes from people who burn used cooking oil in their diesel cars. Alt fuels and alt vehicle technologies are accelerating rapidly. Which means fuel taxes are an increasingly unsustainable way to fund transportation infrastructure, a key reality my colleagues and I are wrestling with on the National Surface Transportation Infrastructure Finance Commission. What struck me about this article though, is the central point that CA's regulatory system cannot handle the very green innovations the system is supposedly set up to encourage. The stories of people who so desparately want to use greener biofules and just can't do so legally are jaw droppers. That lightweight Terry Tamminen says in the article "When you go through a period of change, there is always a clunkiness to the bureaucracy." That misses the mark by a mile. Regulatory systems are designed to find what is believed to be the one best way to solve a problem, and force that on everyone and expunge all else. Our crazy over-regulated energy system will continue to suppress innovations and thwart progress.

Speaking of biofuels. . .

adrian.moore@reason.org (Adrian Moore) — Fri, 09 May 2008 12:32:37 EDT

The tricky bits of biofuels

adrian.moore@reason.org (Adrian Moore) — Fri, 09 May 2008 12:21:35 EDT

Researchers at UC Berkeley took a close look at biofuels in a paper called Review of Environmental, Economic and Policy Aspects of Biofuels. It is notable because unlike sooooo many other things I have seen about biofuels, this paper looks at a broad range of strengths and weaknesses and effects of different biofuels. The main takeaways are a) each of them entail tradeoffs, and you have understand all of those tradeoffs to judge the merits of any biofuel, b) policy cannot treat all biofuels the same, but has to tackle them based on their individual characteristics if we want to maximize the good and minimize the bad. Here is the abstract of the paper. You can download it here.

The world is witnessing a sudden growth in production of biofuels, especially those suited for replacing oil like ethanol and biodiesel. This paper synthesizes what the environmental, economic, and policy literature predicts about the possible effects of these types of biofuels. Another motivation is to identify gaps in understanding and recommend areas for future work. The analysis finds three key conclusions. First, the current generation of biofuels, which is derived from food crops, is intensive in land, water, energy, and chemical inputs. Second, the environmental literature is dominated by a discussion of net carbon offset and net energy gain, while indicators relating to impact on human health, soil quality, biodiversity, water depletion, etc., have received much less attention. Third, there is a fast expanding economic and policy literature that analyzes the various effects of biofuels from both micro and macro perspectives, but there are several gaps. A bewildering array of policies - including energy, transportation, agricultural, trade, and environmental policies - is influencing the evolution of biofuels. But the policies and the level of subsidies do not reflect the marginal impact on welfare or the environment. In summary, all biofuels are not created equal. They exhibit considerable spatial and temporal heterogeneity in production. The impact of biofuels will also be heterogeneous, creating winners and losers. The findings of the paper suggest the importance of the role biomass plays in rural areas of developing countries. Furthermore, the use of biomass for producing fuel for cars can affect access to energy and fodder and not just access to food.