Solyndra-gate

Filed Under (Environmental Policy) by Dan Karney on Sep 18, 2011

All good political scandals require the suffix “gate” and Solyndra-gate is no exception.  In this particular scandal, the Obama Administration provided a $535 million loan guarantee to Solyndra, a California-based company developing advanced solar-panel technology.  The loan went bad as Solyndra filed for Chapter 11 bankruptcy earlier this month.  Loans go bad all time, but in this case some allege that the Administration knew that Solyndra had a faulty business plan, but provided the loan guarantee anyway to benefit a prominent campaign donor that had heavily invested in Solyndra.  Compounding these allegations, the Administration repeatedly pointed to Solyndra as an example of job creation by green businesses, making the optics of the situation awkward.

Ignoring the potential improprieties of the situation, ideological opponents of the Obama Administration pounced on Solyndra-gate as another example of big government meddling in the private sector.  However, data suggests that loan guarantees for green energy, and wider energy sector in general, might in fact be good government policy.  To illustrate these ideas, I am borrowing two points from a blog posting titled “Five myths about the Solyndra collapse” and posted on Ezra Klein’s Washington Post site Wonkblog.

  • First, “Solyndra proves that energy-loan guarantees are a flop. Not exactly. The Energy Department’s loan-guarantee program, enacted in 2005 with bipartisan support, has backed nearly $38 billion in loans for 40 projects around the country. Solyndra represents just 1.3 percent of that portfolio — and, as yet, it’s the only loan that has soured. Other solar beneficiaries, such as SunPower and First Solar, are still going strong.”
  • Second, “The government should leave energy R&D to the private sector. Actually, there’s reason to think the private market is drastically under-investing in new energy technology. As a new report from the American Energy Innovation Council lays out, the utility sector spends just 0.1 percent of its revenues on R&D — the average for U.S. industries is 3.5 percent.”

Both points have merit: government loan guarantees do necessarily doom a company, and basic research in public goods is underprovided by the private sector.  However, a Wall Street Journal article suggests that the loan guarantee was in fact Solyndra’s undoing due to saddling the company with high fixed costs (link).  Furthermore, loan guarantee programs have a cost to the Treasury, and it is not clear that such programs return the highest benefit for their cost either in terms of job growth or long-run tax revenue compared to other ways of stimulating energy R&D.

Environmental Assets: Natural Capital Project

Filed Under (Environmental Policy) by Dan Karney on Aug 12, 2011

Some people like the outdoors because they like to go camping, while others like to bird watch or simply enjoy a nice sunset.

However, nature also provides many other benefits called “eco-system services”.  Examples of such services include bees pollinating plants and marshland buffering flood waters.  These benefits have clear economic value, and thus the environment can be viewed as an asset from which society derives a return.  Some initial estimates put the total value of worldwide eco-system services in the billions of dollars per year.  Environmental degradation damages or destroys the eco-system services and lowers nature’s value as an asset.

This past week I had the pleasure of hearing a presentation by the University of Minnesota’s Steve Polasky, a leading environmental economist, where he discussed an initiative call the Natural Capital Project (NCP).  The NCP combines the efforts of Stanford University’s Woods Institute for the Environment, University of Minnesota’s Institute on the Environment, The Nature Conservancy, and the World Wildlife Fund.  It is the NCP’s goal to “develop tools for quantifying the values of natural capital in clear, credible, and practical ways.”

Importantly, the NCP is an interdisciplinary group that combines the efforts of economists and ecologists.  The ecologists are critical in understanding the mechanisms for how eco-systems operate and the economists provide many quantitative tools to the overall analysis.  All parties work together to insure that when “promising a return (of societal benefits) on investments in nature, the scientific community [delivers] knowledge and tools to quantify and forecast this return.”  To this end, the NCP created the InVEST (Integrated Valuation of Ecosystem Services and Trade-offs) tool to allow “decision-makers to quantify the importance of natural capital, to assess the trade-offs associated with alternative choices, and to integrate conservation and human development.”

Again, the main idea is that nature is a capital asset that delivers a flow of benefits.  The value of the asset comes from the present and future returns.  The Natural Capital Projects is one effort to help value nature so society knows how much it can gain (lose) from environmental conservation (degradation).  With this knowledge, informed decisions on a benefit-cost basis can be made regarding how society’s chooses to protect or destroy its existing eco-system services.

Weather vs. Climate

Filed Under (Environmental Policy) by Dan Karney on Jul 22, 2011

A strong heat-wave has gripped much of the Midwestern United States for the past week with heat-index readings well over 100 degrees (F).  Twenty-two deaths have been attributed so far to the extreme temperatures (source).  Inevitably, I hear the comment, “That’s global warming for you!” Conversely, during a bad winter storm I hear the opposite comment, “See, told you global warming was a hoax!”

I have written many times on the blog about climate change either explicitly (“America’s Knowledge of Climate Change”) or implicitly (“Green Business: The Case of the Nissan Leaf”).  However, the recent hot weather prompted me to address two issues.

First, “global warming” is different than “climate change”.  The U.S. Environmental Protection Agency defines “global warming” as “average increase in temperatures near the Earth’s surface” while maintaining that “[g]lobal warming can be considered part of climate change along with changes in precipitation, sea level, etc.” (source).  That is, climate change means many different and varying outcomes across the globe.

Second, weather is different than climate.  A heat-wave during one summer is a weather event (albeit an unpleasant one).  Other rare weather events have occurred this year, for instance the recent dust-storm or Haboob that hit Phoenix, AZ (source).  To highlight the distinction between weather and climate, Figure 1 plots the annual global temperature deviation from the long-term trend with the total deviation range approximately 1 degree Celsius (C).

Figure 1: Annual Global Temperature Deviation from Long-term Annual Average (1901-2000) for the years 1880-2010




 

 

 

 

 

(Source: Nation Oceanographic and Atmospheric Administration [link])

This figure is a recreation of a Nation Oceanographic and Atmospheric Administration (NOAA) figure from climate.gov meant to show an increase trend in global temperatures, with the largest positive deviations in recent years.  There are many different objects to using such a graph in climate change science, but that is not the issue here.  Rather, I am using the figure to show that while extreme weather might happen in one part of the world at any given time, the average global weather – a.k.a. climate – has remained within a fairly narrow band of temperatures.

Debates about climate change and environmental policy are important, but do not let weather cloud one’s judgment!

Nixon goes to China: Republicans & Environmental Policy

Filed Under (Environmental Policy) by Dan Karney on Jun 17, 2011

On Monday Republicans held the first important primary debate on the road to determining their 2012 Presidential candidate.  During the debate one of the candidates, Michelle Bachmann, called for the elimination of the Environmental Protection Agency (EPA) [source].  Another candidate at the debate, former Speaker-of-the-House Newt Gingrich, also endorses eliminating the EPA [source].  While many within the Republican party likely hold a similar view about the EPA, it is important to remember that Republicans have played an important role in the history of U.S. environmental regulation.

Nixon goes to China.  In 1972, President Nixon visited China in an effort to normalize diplomatic relations with the Communist country.  Afterwards, politicians commented that Nixon’s staunch anti-Communist record made the trip politically possible since Nixon could not be portrayed as “soft” on Communism.  At the time Senate Democratic Leader Mike Mansfield said, “Only a Republican, perhaps only a Nixon, could have made this break and gotten away with it.”

Similarly, many of the transformative environmental regulations in the last half-century were signed into law by Republican presidents:

  • Nixon 1970: Formed the Environmental Protection Agency and passed significant additions to the Clean Air Act (CAA).  The new provision to the CAA included establishing National Ambient Air Quality Standards (NAAQS).
  • Ford 1974: Signed the Safe Drinking Water Act (SWDA), the main federal law regulating standards drinking water.
  • Bush 1990: Proposed and signed the Clean Air Act Amendments (CAAA) of 1990.  The CAAA established a cap-and-trade program to regulate sulfur dioxide in order to eliminate acid rain.

In contrast, several significant Democrat-only environmental regulations failed to become law including the Clinton administration’s inability to get the Kyoto Protocol ratified and the Obama’s administrations dead-end on carbon regulations.

Obviously, democracies require consensus for political action, but only Nixon can go to China!  That is, according to history, it will likely require leadership from Republicans to forge important and lasting environmental policies in the United States.

The Ethanol Mandate and Technological Innovation

Filed Under (Environmental Policy) by Dan Karney on May 20, 2011

Recently, I had the opportunity to visit Iowa State University’s new, multi-million dollar BioCentury Research Farm (BCRF) that is the “first-in-the-nation integrated research and demonstration farm devoted to biomass production and processing”.  While the BCRF has many different on-going projects sponsored by a variety of research grants and corporate funding, I am going to focus on technological innovation regarding biofuels and specifically cellulosic ethanol (aka “advanced biofuel”).

The Energy Independence and Security Act of 2007 introduced an expanded Renewable Fuel Standard (RFS) that mandates the blending of ethanol into transportation fuels.  The mandate requires a total of 36 billion gallons of ethanol blended by 2022, where 16 billion gallons comes from cellulosic ethanol (link).  However, the United States currently produces limited amounts of cellulosic ethanol due to its high cost of production, yet the mandate has spurred investments by industry in the form of research at the BCRF in order to lower costs and increase output.

Cellulosic ethanol is a biofuel – that can be used similarly to gasoline – made from the non-edible parts of plants.  The United States is a world-leader in the production of corn, so particular focus has been on cellulosic ethanol derived from “corn stover” that includes the stalks, leafs, husks, and cobs left-over from the harvest of the corn kernels.  A key step in that process is the efficient collection of the corn stover.

Traditionally, corn stover has been collected in a multi-pass system, where the corn is harvested on the initial pass(es) and the stover later.  The multi-pass system leads to high ash (i.e. dirt) content in the stover.  With prototypes from industry, the BCRF is conducting demonstration tests of a new harvesting system called the “single-pass” that collects and bales the corn stover while kernels are harvested simultaneously.  While the single-pass system is not yet perfected and has some disadvantages, the major innovation comes from significantly decreased ash content levels in the stover.  The purer stover can then be processed into ethanol at reduced cost and greater scale.

The point here is that the ethanol mandate led to technological innovation.  Although, academic economists often talk about innovation, it seems a rare occasion that one actually gets to see technological development.  I do not know if single-pass harvesting will become viable or the industry standard, but I do know from talking to the researchers at the BCRF that they are learning form their experiments driven by the profit-motives of self-interested companies to lower costs and increase production.  As an economist, a sight to behold!

Policy Riders, the Federal Budget, and Environmental Policy

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Dan Karney on Apr 12, 2011

The federal government averted a shutdown late on Friday night when the Democrats and Republicans agreed to a budget deal to fund the Federal government through the remainder of the 2011 fiscal year.  The 11th-hour deal displayed brinksmanship on both sides of the political aisle as negotiators struggled over provisions known as “policy riders” attached to the underlying budget bill.  While the most notable policy rider in the recent debate pertained to the elimination of Title X federal funding for Planned Parenthood and other similar organizations, the budget negotiations included many other provisions regarding environmental policy.  Indeed, the original continuing resolution budget passed by the Republican controlled House of Representative contains over 20 provisions to eliminate funding for environmental protection programs of which the majority are administered by the Environmental Protection Agency (EPA).  Examples include:

  • Prohibiting funding for the Wetlands Reserve Program
  • Prohibiting funding for the Conservation Steward Program
  • Prohibition of EPA funding for enforcement of total maximum [pollution] loads in the Chesapeake Bay watershed
  • Prohibition of funding for EPA efforts to regulate greenhouse gases.

(For a complete list of policy riders in the original budget bill click here.)

Initially, I was concerned when thinking about these policy debates during budgetary discussions, but as Ezra Klein of the Washington Post observes, “To call some of the provisions in this deal ‘budgetary’ and others ‘policy riders’ is a distinction without a difference.  The budget is policy and policy is the budget.”  Indeed the budget does have to pass both Congressional chambers and be signed by the President, just like any other bill that becomes law.

However, I would like to address three issues with yearly budgets as policy vehicles.  First, the appropriations committee that writes the budget is not a policy committee.  For example, the Energy and Commerce Committee has jurisdiction regarding environmental legislation in the House of Representatives.  The policy committees hear testimony by expert witnesses regarding proposed legislation and (hopefully) weigh the costs and benefits of potential policy.  Meanwhile, the budget just allocates funds.  Second, some government programs require long-term investment horizons, but they are either explicitly or implicitly subject to yearly budgetary risk by politicians that may not receive the future political benefits while incurring up-front costs.  Third, one-time budget changes may have irreversible effects.  For instance, if funding is cut for a program that protects endangered species and a species goes extinct, then regardless of future funding to protect endangered species that particular species will always be extinct.

Finally, if news reports can be trusted, then we will have many “budget as policy” debates in the near future as rhetoric begins to heat-up over raising the debt ceiling and the 2012 fiscal year budget.

NOAA’s Climategate Exoneration

Filed Under (Environmental Policy) by Dan Karney on Mar 4, 2011

Do you recall the “Climategate” controversy from late 2009?  If not, here is a quick refresher: on or about November 17, 2009, a computer hacker stole emails from the Climate Research Unit (CRU) at East Anglia University, and posted a selection of the emails on the internet in an attempt to discredit the climate change research done by CRU.  Using these out-of-context emails, allegations of data manipulation and scientific fraud were leveled at CRU researchers along with their colleagues at other institutions.  This episode became known as Climategate and resulted in a media frenzy.  (Please see a previous CBPP blog post on this topic, click here.)

In response to the Climategate scandal, Congress held hearings because National Oceanic and Atmospheric Administration (NOAA) employees were named correspondents in the leaked emails.  Following these hearings, Sen. James Inhofe (OK-R) sent a letter to the Inspector General (IG) of U.S. Department of Commerce requesting an investigation of NOAA’s handling of the CRU email leak and to determine the integrity of NOAA’s Global Historic Climatology Network-Monthly dataset (GHCN-M).

(Note: Sen. Inhofe famously said on the Senate floor that global warming is the “greatest hoax ever perpetrated on the American people.”)

The Inspector General issued his report two weeks ago (report) and it exonerates NOAA.  The report clearly states, “In our review of the CRU emails, we did not find any evidence that NOAA inappropriately manipulated data comprising the GHCN-M dataset or failed to adhere to appropriate peer review procedures.”  Furthermore, other investigations conducted in the United Kingdom have already cleared British scientists at the CRU (source).

However, the IG’s report does criticize NOAA for not replying quickly or thoroughly enough to Freedom of Information Act (FOIA) requests, as it must do because it receives federal funds.  The report recommends that NOAA should consider “an overall assessment of the sufficiency of its FOIA process.”  This is an important point because this potential lack of transparency, even if the underlying research process is sound, can lead to undo skepticism of the science.  With the environmental and economic implications of climate change being so large, a “just trust me” approach by scientists will not work.  The IG report already demonstrates that NOAA’s science adheres to best-practice procedures, so clearly telling the public their methodologies could reduce some of the confusion regarding the data of climate change science.

The President vs. Big Oil

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Dan Karney on Feb 4, 2011

In last week’s State of the Union (SOTU) Address, President Obama was less than crystal clear about the future of America’s energy policy (see the previous CBPP post “The State of the Union may be strong…”).  However, the President did seem determined to pick a fight with Big Oil by declaring, “We need to get behind [clean energy] innovation.  And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies… So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.” (Read the full SOTU Address here.)

Backing up his promise, on Monday the Obama administration asked Congress to eliminate $36.5 billion over 10 years in subsidies for oil and gas companies starting on October 1st, according to Reuters (source).  At issue are industry-specific tax breaks on drilling and extraction costs.  The administration estimates that the $36.5 billion subsidy represents only 1% of expected industry revenues over the coming decade.

In response, the American Petroleum Institute (API), the oil and gas industry’s main lobbying body, declared, “If the president were serious about job creation, he would be working with us to develop American oil and gas by American workers for American consumers.”  And went on to add, “The federal government by no stretch of the imagination subsidizes the oil industry. The oil industry subsidizes the federal government at a rate of $95 million a day.”

I am going to address two issues, one specific and the other general, regarding the Big Oil subsidy debate.

First, the claim the oil and gas industry is not subsidized by the federal government seems factually incorrect.  A 2005 Congressional Budget Office study (here), found the effective tax rate on capital income from petroleum and natural-gas structures to be 9.2%, the lowest rate among all the asset types studied.  The oil industry claims that since it pays $95 million a day in taxes and royalties to the federal government that it is not being subsidized; however, the relative tax rates that determine which industry is being favored by the tax code and thus subsidized.  Here, a relatively low tax rate on capital in oil industry encourages capital investment because the rate of return on capital to be profitable in the oil industry is lower than other sectors due to the lower tax rate.  The over-investment in the oil industry leads to more oil production, and likely total profits, than would be the case if all industries were taxed at the same rate.

Second, a subsidy can come in many forms.  For example, a payment can occur per unit of output, such as the Production Tax Credit (PTC) for renewable energy that provides a 2.1-cent per kilowatt-hour subsidy for electricity generated by generate wind, solar, geothermal, and “closed-loop” bioenergy (source).  Alternatively, paying a lower tax rate relative to other industries is also a type of subsidy as in the case of the oil industry (see above).  However, both types of subsidies affect the federal budget in similar, yet mirrored ways, where the former essentially pays out money, while the later forgoes revenue.  In the end, the fiscal deficit depends on the difference in spending and revenue, so either type of subsidy (payments or forgone taxes) impacts the deficit.

Hayek on Environmental Regulation

Filed Under (Environmental Policy) by Dan Karney on Jan 7, 2011

Shortly after Glenn Beck featured Friedrich Hayek’s 1944 book titled “The Road to Serfdom” on his TV program it went to #1 among all books sold on Amazon.com (link), quite an impressive feat for a work published over a half-century ago.   Modern scholars of “The Road to Serfdom” hail it as a “war cry against central planning.”

(For those readers unfamiliar with Hayek, he won the 1974 Nobel Prize in Economics for his technical work on the Austrian theory of the business cycle and his social commentaries are often associated with libertarianism.)

Despite this reputation, “The Road to Serfdom” has an interesting passage regarding environmental policy.

“Nor can certain harmful effects of deforestation, or of some methods of farming, or of the smoke and noise of factories, be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation.  In such instances we must find some substitute for the regulation by the price mechanism.  But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created, does not prove that we should suppress competition where it can be made to function.”  (Hayek, 1944)

While I am not the first to discuss this passage (link), I do find it quite remarkable and thus will comment on each of its sentences in turn.

1)      “Nor can certain harmful effects of deforestation… be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation.” Hayek clear identifies pollution to be a negative externality; that is, pollution harms those not directly involved the economic transaction that creates pollution and thus is “external” to the market.  [Interestingly, the final phrase about “agreed compensation” has the flavor of the Coase Theorem even though “The Road to Serfdom” significantly predates Coase’s “The Problem of Social Cost” (1960).]

2)      “In such instances we must find some substitute for the regulation by the price mechanism.”  Hayek clearly states that negative externalities are market failures and thus cannot be handled by the market alone.

3)      “But the fact that we have to resort to the substitution of direct regulation by authority…[emphasis added]”  Even the great warrior against social planning says that the government should have a regulatory role when it comes to environmental policy.  Given Hayek’s free market inclinations, it seems plausible that he would advocate for Pigouvian-style environmental taxes and tradable permit systems over pure command-and-control regulation, but either way that statement is profound.

Addendum: The American Economic Association (AEA) is currently holding its annual meeting in Denver, CO where thousands of economists gather to exchange research ideas and give paper presentations.  At last year’s AEA meeting in Atlanta, GA some economists decided to have a little fun with economic theory and created a rap video about the intellectual differences between Keynes and Hayek.  That’s right, a rap video (see here).



A New Vision for Electric Cars

Filed Under (Environmental Policy) by Dan Karney on Dec 10, 2010

In a previous CBPP blog post (here), I criticize Nissan’s advertizing campaign surrounding the release of the all-electric Leaf, due to the overselling of environmental benefits from the new car.  However, it turns out that Nissan’s Renault division is working with a new company named Better Place (BPL) to revolutionize the electric car business.  The key to BPL’s revolution is rethinking the economics of batteries in the context of electric vehicles.

I first became aware of Better Place during an interview on the Charlie Rose Show (here) with Shia Agassi, the CEO and founder of BPL.  The new insight of Mr. Agassi is that the battery of an electric car needs to be treated more like gasoline for standard vehicles.  That is, the battery is a consumable commodity distinct and separate from the vehicle.  Existing business models for selling electric cars require the buyer to purchase the car and the battery in a single unit, leading to high sticker prices for electric cars.  In contrast, when someone buys a regular vehicle, they are not required also to buy a lifetime supply of gasoline from the dealership!

In addition, when currently purchasing an electric vehicle, one is stuck with the same battery until it fails or the car is scrapped.  During that time battery technology evolves.  Mr. Agassi claims in his interview that electric vehicle batteries double in quality every two years, where the quality is a mixture of the amount of power a single battery charge can hold, how many times it can be recharged, and how fast it recharges.  Thus, if one owns an electric car with fixed battery technology, by the end of that car’s life the new batteries will be many multiples better.

Better Life leverages the technological innovation of batteries in their business model.  Instead of the batteries being bundled with the vehicle, individuals buy their specialized electric vehicle from Renault and then rent battery power from BPL.  To be clear, BPL does not sell or manufacture cars; rather, BPL owns batteries and operates a service business to provide power to customers.  In this way, BPL acts like any gasoline station, where individuals can stop and refill, literally.  The Renault car is designed with a quick swap battery pack and BPL servicing stations can replace a depleted battery with a freshly charged battery in less than one minute.  Alternatively, these electric cars can be charged at home or special parking lots.  These options give the owner flexibility in operating their vehicle by providing multiple ways to get power and the opportunity to driving beyond the range of a single battery charge.

Since BPL owns the batteries and they are easily swappable, old battery technology can be replaced at a rapid rate, bring down the cost per mile of driving an electric car dramatically over the course of its lifetime.  BPL monetizes these cost savings and uses the revenue for two purposes: profits and rebates.  First, in order for electric cars to be viable in the long-run, they need to operate under a sustainable business model, so profits are necessary.  Second, BPL rebates part of the purchase cost of the specialized electric vehicles back to consumers, lowering the initial electric car price BELOW that of similarly equipped conventional cars.  This is the same principle used by cell phone operators when they provide free or reduced price phones to new customers.

Whether Better Life’s business model works and attracts a large share of the market is going to be tested soon.  Beginning in 2012, BPL will rollout a full system in Israel complete with 55 battery swapping stations, so that one can drive across the entire country without stopping for hours to plug-in and recharge.  Time will tell if rethinking the economics of batteries holds the key to all-electric vehicles, I know I will be watching closely!