The Wind Lobby’s Policy Two-Step

On Tuesday, June 20, 2017, the American Wind Energy Association (AWEA) announced the publication of a report touting wind as both a cost-effective and a reliable source of energy for the electricity grid. The report—which was supported with AWEA funding and written by the Analysis Group—presents energy-source diversity on the grid as a necessary good and wind’s emergence as a product of market forces. IER’s initial response can be found here and today we will follow up with an addendum from IER’s chief economist, Dr. Robert Murphy. Murphy’s commentary can be read below:

The Analysis Group report illustrates the familiar two-step in current energy policy debates. On the one hand, it is considered critical to keep in place measures such as state-based Renewable Portfolio Standards (RPS) and federal measures such as the Production Tax Credit (PTC) and the so-called Clean Power Plan (CPP). On the other hand, when critics object to the distortions that these measures cause, the defenders rush to claim that these policies have very little impact on the energy sector, because the major changes are all driven by market fundamentals. So which is it? If most of the changes really are driven by the market, then the interventionists shouldn’t defend RPS, PTC, CPP, and so on with such vigor.

To reiterate, this contradiction is evident in the Analysis Group report. Ostensibly the report seems to knock down the objections to interventions that promote wind and solar power, by claiming that the major changes in the electricity generation sector are caused by fundamentals, rather than government policies:

[T]he evidence shows that electricity markets have undergone a fundamental shift, one that is dominated by fundamental forces of electricity market supply, demand, and pricing that took shape with the shale gas boom and the economic downturn in the 2008-2009 period, but that also includes the rapid growth of renewables as costs declined and performance improved. (Analysis Group, p. 23)

We don’t need to argue about this conclusion. Let’s assume for the sake of argument that the Analysis Group is right.

In that case, the strong advocates for RPS, PTC, CPP, and other energy-sector interventions are wrong for thinking their favorite measures are actually that important. They should join forces with IER, where we have been saying all along that we don’t favor one energy source versus another. Rather, our point has always been that a neutral tax and regulatory environment—where policymakers and officials do not penalize or reward particular technologies—is most conducive to consumer well-being.

Besides making economic sense, the de-politicization of energy markets would reduce conflict. For example, the Analysis Group authors are somewhat cynical about certain players in the debate, when they write that objections about grid reliability sometimes “reflect a first line of defense by opponents of the changes underway in the industry” (p. 2). But this claim only makes sense in the context of political interventions. If we had a relatively free market in energy, any industry group who saw their market share decreasing would have no one to complain to, except their customers. The only reason we are even talking about “offense” and “first line of defense” in this context, is that certain groups are advocating policy measures where the government will intervene to help some energy sources and hurt others. No wonder the debate has become politicized.

As an additional point, we should clarify the Analysis Group’s contention regarding consumers and diversification. On page 2 they write: “The ongoing diversification of generation supply…has lowered wholesale electricity costs in most parts of the U.S. and has contributed to recent declines in consumers’ overall cost of living.”

No doubt, the supporters of the PTC and other renewables mandates would take this as evidence that their policies help consumers.

However, it’s not the diversification of energy sources per se that causes electricity prices to drop. It depends on the cause of the diversification. For example, the fracking boom did indeed cause the price of natural gas to fall, which led to a shift away from coal-fired and into gas-fired power plants. This is a market phenomenon which clearly benefits consumers; falling costs of production ultimately lead to lower retail prices in a competitive market.

But if a change in the energy mix results not from market forces but instead from political mandates, then this raises energy prices for consumers (other things equal). And finally, to the extent that tax credits lower wholesale (and hence retail) prices, note that this outcome is still less advantageous than if a general tax cut were given to the energy sector as a whole (rather than singling out specific producers).

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The Philosophic Roots of the Paris Agreement Part IV: Conservationism

Previous posts in this series have linked the philosophical roots of the global climate-change movement to the doctrines of Deep Ecology (optimal, fragile, sacrosanct nature) and Malthusianism (the people problem). A third sister intellectual/activist movement is conservationism, or less-is-more as a physical (versus economic) imperative.[1]

Nonuse or less use for its own sake is different and beyond self-interested, voluntary conservation, or market-based efficiency, wherein cost-minimization/profit-maximization by the economic actor reduces usage. In personal situations, it generally is an affordability decision to not buy; in business settings, it is paring inputs (reducing cost) for a desired, given output.

Unlike natural conservation, conservationism is thus about personal sacrifice (going without) and government intervention to reduce energy production or usage.

Market-based Conservation (Efficiency)

Less-is-more conservationism can be contrasted with more-from-less/less-to-more conservation. The history of the energy industry is replete with examples of increasing energy efficiency without the heavy hand of government.

“Today the [wellhead petroleum] conservation movement is led by sober business men and is based on the cold calculations of the engineers,” wrote resource economist Erich Zimmermann in 1933. “Conservation, no longer viewed as a political issue, has become a business proposition” (Zimmerman, p. 784).

Turning to electricity, the natural evolution of business efficiency can be appreciated in terms of how much coal is  required to generate a kilowatt hour of electricity. At Samuel Insull’s Commonwealth Edison Company in Chicago, for example, new power plants required the following pounds of coal to produce one kilowatt hour of electricity: 1888 (12 pounds), 1894 (6 pounds), 1903 (2.5 pounds), 1921 (1.8 pounds), and 1924 (1.5 pounds) (Bradley 2011, 483). That progress has continued. Approximately a pound of coal now is required per kWh in electric generation, and this efficiency can be expected to increase in the next decades.

From Conservation to Conservationism

The (Malthusian) fear of mineral energy depletion inspired conservationism, an “ism” predicated on the belief that less energy consumption is good per se. Such a policy was rejected in the 19th century by the father of energy economics, W. S. Jevons. He feared that freezing coal usage meant that “Britain should be stationary and lasting as she was, rather than of growing and world-wide influence as she is” (Bradley, 2009, p. 242).

A century later, amid America’s (regulation-created) energy crisis, when the mainstream view was that we were running out of oil and natural gas, neo-Malthusians saw salvation on the demand side.

Wholesale shortages of petroleum products that threatened the same at retail (to trigger gasoline lines) inspired the first congressional hearing on energy conservation. This March 1973 event (seven months before the Arab Embargo) attracted the first wave of energy conservationists and environmentalists from organizations such as the Environmental Defense Fund, Friends of the Earth, and the Sierra Club (Bradley, 2009, pp. 243–44).

An energy intelligentsia got busy promoting conservationism as a cure for the energy crisis. The Ford Foundation’s A Time to Choose: America’s Energy Future (1974) reached three major conclusions (Bradley, 2009, p. 244):

  • the energy crisis is real and long-lived;
  • “conservation is as important as supply”; and
  • the U.S. needs an integrated national energy policy.

Energy conservation in the Ford report, headed by S. David Freeman, went well beyond self-interested economic conservation—economizing by eliminating waste in response to higher prices. The report proposed ending energy demand growth by creating a federal-level Energy Policy Council. Assisted by a Citizens’ Advisory Board, the council would set conservation goals for the nation, for each region, and for each industry sector. A first step was to set “a uniform system of accounting for energy” for industry to follow. Government energy planning was born—and not to go away even when oil and gas shortages turned to surplus in the next decade (Bradley, 2009, p. 245).

Amory Lovins (Romantic Conservationism)

In 1976, the 29-year-old energy representative of the UK environmental group, Friends of the Earth, wrote an essay that impacted the energy policy world. “Energy Strategy: The Road Not Taken?”, the most reprinted piece in the history of Foreign Affairs, coined the term soft energy paths to differentiate energy conservation and decentralized renewable technology from the “hard” path of central-station power plants fueled by oil, gas, coal, or uranium.

Lovins was soon testifying before the US Congress and advising President Carter on the proposition that the least-cost energy option was not to produce energy, but to save it. In 1977, Lovins presented his case in romantic, something-for-everyone terms to a congressional subcommittee (Bradley, 2009, p. 251):

A final feature of the soft energy path that I wish to commend to this committee as politicians is that it helps to avoid conflict between constituencies by offering advantages to all of them; jobs for the unemployed, capital for businesspeople, environmental protection for conservationists, increased national security for the military, opportunities for small business to innovate and for big business to recycle itself, savings for consumers, world order and equity for globalists, energy independence for isolationists, exciting technologies for the secular, a rebirth of spiritual values for the religious, radical reforms for the young, traditional virtues for the old, civil rights for liberals and states’ rights for conservatives.

To critics, however, Lovins was “selling a dream without presenting the bill” (quoted in Bradley, 2009, p. 250).

Daniel Yergin: Fooled by Shortages

The esteemed energy historian Daniel Yergin went Malthusian during the energy crisis, believing that oil and gas reserves were fixed and rapidly depleting. Costs and prices could only rise, in his view, since demand had overtaken supply.

In their 1979 book, Energy Future: Report of the Energy Project at the Harvard Business School, Yergin and Robert Stobaugh concluded that “the government must be the champion of conservation and solar” (Stobaugh and Yergin, p. 229). One major policy goal was to reduce energy usage between 30 and 40 percent with only “modest adjustments in the way people live” (Yergin, p. 136) This was not a free market program or outcome.

Hayek on Conservationism

In The Constitution of Liberty (1960), economist F. A. Hayek evaluated “the necessity of central direction of the conservation of natural resources” (p. 370), a view that was “particularly strong in the United States, where the ‘conservation movement’ has to a great extent been the source of the agitation for economic planning and has contributed much to the indigenous ideology of the radical economic reformers” (pp. 367–68). The US debate was about keeping more oil and gas in the ground via state wellhead-conservation regulation to better the future.

While not denying that economic error could produce real waste in the “consumption of irreplaceable resources” (p. 369), Hayek cautioned that government was unlikely to have the knowledge of future conditions of price and scarcity that would enable it to impose the “right” solution.

“Any natural resource represents just one item of our total endowment of exhaustible resources, and our problem is not to preserve this stock in any particular form, but always to maintain it in a form that will make the most desirable contribution to total income,” he wrote (p. 374).

Hayek also noticed a circularity problem in the conservationist argument: postponed consumption was still supply lost for the future. Quoting fellow economist Anthony Scott, Hayek noted the irony that “the conservationist who urges us ‘to make greater provision for the future’ is in fact urging a lesser provision for posterity” (p. 374). In other words, production had to be avoided indefinitely, not merely postponed, or it was not supply-side conservation. Yet this would create perpetual non-usage in the present—an impossibility.

Conclusion

Conservationism, substituting a physical standard for a consumer-driven one, is market conservation gone too far. An individual or business can overinvest in conservation just as it can underinvest in the same. Personal preferences and net-present-value economics, not engineering, dictate energy usage in a free society.

The hidden premise of conservationism—the unsustainability of carbon-based energies—is in full intellectual debate. Depletion, pollution, energy security, climate change—these issues, one by one, have been exaggerated by anti-fossil-fuel activists, a story told in many other posts at this website.

Natural consumer decisions about energy are not a “market failure” requiring government subsidies and mandates. No wise government planner or bureaucracy can know the “optimal” level of energy consumption, and any government involvement must be evaluated against public-sector failures.

The case for government conservationism has not been made. Energy policy predicated on market conservation is merited on consumer, producer, taxpayer, and civil grounds.


Bibliography

Bradley, Robert. Capitalism at Work: Business, Government, and Energy. Salem, MA: M & M Scrivener Press, 2009.

Bradley, Robert. Edison to Enron: Energy Markets and Political Strategies. Hoboken, NJ: John Wiley & Sons and Scrivener Publishing, 2011.

Hayek, F. A. The Constitution of Liberty. Chicago, IL: University of Chicago Press, 1960.

Lovins, Amory. “Energy Strategy: The Road Not Taken?” Foreign Affairs 55 (1): 65–96 (October 1976).

Stobaugh, Robert, and Yergin, Daniel. “Conclusion: Towards a Balanced Energy Program.” In Energy Future: Report of the Energy Project at the Harvard Business School, edited by Stobaugh and Yergin, 216–33. New York: Random House, 1979.

Yergin, Daniel. “Conservation: The Key Energy Source.” In Energy Future: Report of the Energy Project at the Harvard Business School, edited by Stobaugh and Yergin, 136–82. New York: Random House, 1979.

Zimmermann, Erich. World Resources and Industries. New York: Harper & Brothers, 1933.

[1] Conservationism as a political-economy term was introduced in Bradley (2009), including pp. 187, 218, 242, and Bradley (2011), including pp. 226-27, 509. A fourth intellectual/activist strand, small-is-beautiful (E. F. Schumacher), will be next in this Paris series.

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New York’s Bet on Silevo’s Solar Technology Fails to Deliver

New York’s deal with Silevo Inc. is a sham and illustrates the problems that arise when politicians use taxpayer money to attract and reward favored industries. Silevo, which was acquired by Solar City, is a photovoltaic cell and module technology company that developed the proprietary Triex solar modules. New York’s deal with Silevo was to establish a manufacturing facility to produce 1 gigawatt worth (10,000 solar panels a day) of its Triex module technology with the potential of adding an additional 5 gigawatts of capacity in a later phase.

The agreement granted Silevo the use of a 1,000,000-square-foot factory in Buffalo, occupying 88 acres, with a lease that runs for 10 years and a 10-year renewal right. The rent is $1 or $2 per year. New York promised to spend $750 million on the factory and purchasing manufacturing equipment.[i]

In return, Silevo agreed to employ at least 1,460 people in “high tech jobs” at the factory, with 900 of those hires to be made within two years after completion of the factory; to retain the 1,460 high tech workers for at least five years; and to employ an additional 2,000 people over the first five years to support downstream solar panel sales and installation activities within New York. In addition to those jobs, Silevo agreed to help attract and retain an additional 1,440 “support jobs” in New York, for a total of 4,900 jobs. It also agreed to spend approximately $5 billion in capital expenses, operating expenses, and other costs over a 10 year period after full production began.

After the initial agreement made in 2014, modifications were made with Solar City, who acquired Silevo in June 2014, which watered down the agreement. The 1,460 high tech jobs turned into just 1,460 jobs with no “high tech” requirement. Instead of Solar City being required to hire 900 of those employees during the first two years after factory completion, only 500 were required. Further, the wording regarding the 2,000 hires, “to support downstream solar panels sales and installation activities within New York” was removed. Also, 7 delays were made to the factory completion date originally set for December 15, 2015 and finally set for March 31, 2017.

At this point, 3 years after the original agreement, none of the achievements promised in 2014 has occurred: no solar cells have been produced at the factory, there are no Buffalo jobs and the Silevo solar cell technology, Triex, has been abandoned by Solar City. Solar City has pushed back the target date for full production at the Buffalo factory from the first quarter of 2017 to later in the year.[ii] (The plant is expected to open this summer, with full production expected by the end of the year.[iii])

In fact, Tesla, who acquired Solar City, has partnered with Panasonic to build solar cells and modules in Buffalo, New York, implying that Solar City’s Silevo endeavor is a failure.[iv] According to Tesla’s blog post, the factory will produce Panasonic’s “high-efficiency PV cells and modules” and Panasonic will invest over $256 million in the Buffalo factory.[v]

Conclusion

New York’s decision to spend $750 million in taxpayer funds for a highly automated factory creating just 500 manufacturing jobs equates to a gigantic $1.5 million subsidy per manufacturing job.[vi] New York politicians made the risky investment despite competition from China’s solar panel industry and rapid changes being underway in the domestic market.


[i] Seeking Alpha, Tesla: SolarCity’s Buffalo Deal Has Lots Of Crooked Bends In The River, June 12, 2017, https://seekingalpha.com/article/4080844-tesla-solarcitys-buffalo-deal-lots-crooked-bends-river?auth_param=1cqlaa:1cjtlcp:e54fc92607a58c8a898a1ebf4de907d6&dr=1

[ii] MIT Technology Review, SolarCity’s Gigafactory. https://www.technologyreview.com/s/600770/10-breakthrough-technologies-2016-solarcitys-gigafactory/

[iii] WIVB, SolarCity to open south Buffalo plant ‘soon after’ June, May 4, 2017, http://wivb.com/2017/05/04/solarcity-to-open-south-buffalo-plant-soon-after-june/

[iv] The Motley Fool, Is SolarCity’s Buffalo Solar Plant a Failure? Tesla Thinks So, October 17, 2017, https://www.fool.com/investing/2016/10/17/is-solarcitys-buffalo-solar-plant-a-failure-tesla.aspx

[v] Ars Technica, Panasonic will spend $256 million on Tesla solar panel factory in Buffalo, NY, December, 27, 2016, https://arstechnica.com/business/2016/12/panasonic-will-spend-256-million-on-tesla-solar-panel-factory-in-buffalo-ny/

[vi] Daily Energy Insider, Success of Buffalo Billion-backed SolarCity factory remains elusive, March 24, 2017, https://dailyenergyinsider.com/featured/3905-success-buffalo-billion-backed-solarcity-factory-remains-elusive/

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The Wind Lobby’s Preemptive Strike on the Perry Grid Study

In an April 14 memo circulated through the Department of Energy, Secretary Rick Perry ordered a 60-day DOE study of the electric grid examining “the extent to which continued regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of baseload power plants.” In this era of overwrought political outrage, even an innocuous, consumer-focused initiative such as this grid study can become the focus of a partisan furor. And indeed this study has.

Just three days after Perry ordered the DOE study, American Wind Energy Association (AWEA) CEO Tom Kiernan issued a memo of his own laying out an explicit plan to delegitimize the project. The memo—obtained by the Daily Caller News Foundation, posted on the open-publishing website Scribd, and subsequently deleted—catalogued a series of actions AWEA would pursue to undermine DOE’s as-of-yet unpublished study.

As Kiernan wrote on April 17:

In response, AWEA has initiated the following steps…

-Refine message, including a statement for today’s media calls and interviews (attached at bottom with details and sources), which makes these points:

  • Diverse grid is more reliable: We have more fuel diversity than ever with wind’s recent additions, which has enhanced reliability and resilience (per recent studies by largest grid operator PJM, NERC, and others)
  • It’s the market: Low gas prices (sustained by a winter that was 5 degrees warmer than average and record expansion of natural gas pipeline capacity) are behind coal and nuclear’s market challenges.
  • Jobs: Wind already has more jobs than coal mining and is adding jobs fast, and these are long-term good jobs with benefits in rural and Rust Belt America.

-Discuss with contacts at DOE

-Find out who will do study at DOE and brief them on our analysis. (We have seen these arguments before and so have data/rebuttals etc. largely prepared, but are updating)

-Secure meeting with FERC to share AWEA analysis (as FERC may be involved in DOE analysis, would be involved in carrying out any potential proposed regulatory reforms, and FERC has its own proceedings going on related to subsidies and wholesale markets)

-Pull existing research together into tightly written blog article

-Consider our own counter study, whether by AWEA or commissioned from third party

-Prepare to debunk others’ statements or studies, for example by the Institute for Energy Research, Northbridge (which did Exelon study), et al

Today, AWEA followed through on its commitment, releasing the proposed third-party study, titled Electricity Markets, Reliability and the Evolving U.S. Power System, in conjunction with Analysis Group under the authorship of Paul Hibbard, Susan Tierney, and Katherine Franklin.

Unsurprisingly, the Analysis Group study obscures the role government policy has played at both a federal and state level in propping up wind generation at the expense of other energy sources.

Market forces are helping to change the mix of resources as the report indicates, but so are onerous regulations such as the Obama Administration’s Mercury and Air Toxics Standard (MATS) which has forced many coal-fired power plants to retire. In 2014, the Energy Information Administration (EIA) noted that 9.5 percent of the coal generating capacity would retire rather than comply with MATS, and that another 20.4 percent of the capacity would either retire or need to add expensive retrofits to comply. EIA’s Annual Energy Outlook 2014 indicated that 60 gigawatts of coal-fired capacity would be retired by 2020 and 90 percent of those would retire by 2016, which was the first year of enforcement for MATS.

Burdensome regulations, state renewable portfolio standards requiring specified amounts of renewable power to be generated, and generous federal subsidies paved the way for wind and solar power to be constructed. The production tax credit (PTC), for example, is so lucrative that wind operators sometimes accept a negative price during periods of low demand in order to wipe out the competition from coal and nuclear plants. According to the Congressional Research Service, the PTC is the largest 2016 to 2020 energy-related tax expenditure to the Treasury at $25.7 billion.

Despite natural gas prices to electric utilities declining by 24 percent between 2005 and 2016 and coal prices declining by 11 percent in the last 5 years , average retail electricity prices in the United States have risen by 26 percent and average residential electricity prices have risen by 33 percent between 2005 and 2016. This increase is largely the result of the cost of new capacity that is being added as coal-fired power plants are being prematurely retired and as retrofits are added to meet regulations such as MATS.

As the Analysis Group report notes, in 2016, wind generation represented 5.6 percent of the U.S. generation market. Germany, by contrast, gets over 10 percent of its electricity from wind generation. But this has led to grid destabilization and prompted reform of renewable energy laws. Now, in fact, the German government is planning to limit the expansion of wind capacity in the northern part of the country to avoid overburdening the grid.

Thankfully, the Trump Administration has reset our course in the United States by putting the brakes on the Clean Power Plan and the Paris Agreement. As the North American Electric Reliability Corporation’s 2016 grid reliability report notes:

The CPP is expected to promote large-scale changes to the resource mix that could have reliability implications for planning reserve margins, system voltage support, frequency response, and other issues that would need to be addressed.

AWEA and the Analysis Group study authors both understate the role policy has played in their preferred energy source’s ascent and overstate the resiliency value that that source adds to the grid. In reality, wind generation has reached its current level of market penetration only through the aid of costly government tax incentives, garnered by groups like AWEA, that ultimately serve to diminish baseload capacity and reduce our grid’s reliability.

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Clarifying Paris, Part 1

The popular narrative in the major media and coming from most public intellectuals is that President Trump’s withdrawal from the Paris Climate Agreement represents a flat denial of basic science that threatens the survival of humanity itself. Furthermore—so the popular critique goes—Trump’s official reasons for withdrawal make no sense, since the Agreement was non-binding and therefore didn’t constrain US policy in any way.

In a series of posts here at IER, I will document just how nonsensical this popular narrative is. As we will see, the Paris Climate Agreement was not integral to “saving the planet,” even if we rely solely on the conventional computer forecasts of climate change and its impacts as codified by the UN’s IPCC reports. Moreover, even if it were true that aggressive government action were needed to avert catastrophe, then the Paris Agreement wasn’t the solution—as even its fans admit.

In sum, whether one is relaxed or terrified at the prospect of climate change, US participation with the Paris Agreement is a red herring. It was a largely symbolic ritual, with the only guaranteed tangible result being hundreds of billions of dollars being transferred among governments.

Paris Agreement: The Basics

The “Paris Agreement” or “Paris climate accord” is an international arrangement adopted in December 2015 under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC). Its overarching purpose is, “Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels…”

To this end, each participating country submitted an Intended Nationally Determined Contribution (INDC), which is a non-binding pledge on how that country would do its part to achieve the global goal. To repeat, the INDCs were non-binding, in the sense that there are no penalties for noncompliance.

In addition to the grand goal and the INDCs that (ostensibly) should represent the components necessary to achieve it, the Paris Agreement also included a mechanism by which the richer nations would transfer $100 billion annually, from 2020 through 2025, to the developing countries, in order to help them afford the transition to lower emissions as well as to adapt to the damages of climate change.

For its part, the Obama Administration committed to “achieve an economy-wide target of reducing its greenhouse gas emissions by 26-28 per cent below its 2005 level in 2025 and to make best efforts to reduce its emissions by 28%.”

In this context, President Trump announced on June 1 that the US was withdrawing from the Paris Agreement, arguing that it sapped American sovereignty while hamstringing the US economy. Predictably, commentators across the board were aghast at the “science denial” and failure to understand the workings of the Agreement that were allegedly behind Trump’s decision. (Try here and here for examples, but dozens more could be cited.)

Why It’s the Paris “Agreement,” Not the Paris “Treaty”

In the first place, let’s be clear on why it’s the Paris Agreement and not the Paris Treaty or the Paris Protocol. The reason is that the advocates of coordinated government intervention in the name of fighting climate change learned their lesson from the Kyoto Protocol (not to mention the failure of domestic cap-and-trade legislation): it was going to be very difficult to get the US Congress to agree on stringent emission limits.

Keep this in mind when critics browbeat Trump for reneging on “American promises” or “US obligations”; the Paris Agreement was deliberately designed to avoid the US Senate having a say. I like the way Jeff Tucker at FEE put the matter:

…President Obama came home from the Paris meetings to the acclaim of all the right people. He alone had made the responsible choice on behalf of the entire country: every business, every worker, every consumer, every single person living within these borders who uses some measure of this thing we call energy….

The exuberant spokespeople talked about how “the United States” had “agreed” to “curb its emissions” and “fund” the building of fossil-free sectors all over the world. It was strange because the “United States” had not in fact agreed to anything: not a single voter, worker, owner, or citizen. Not even the House or Senate were involved. This was entirely an elite undertaking to manage property they did not own and lives that were not theirs to control.

And so we see the flimsiness of the claim that President Trump’s decision is a petty, personal impulse that rejects the authority of the United States or international law. Since the pro-Paris crowd put all their eggs in the basket of the Obama Administration, they shouldn’t be shocked when the next Administration reverses the decision.

Climate Change Doesn’t Require “US Leadership”

There are several problems with the claim that US participation in the Paris Agreement is necessary for “leadership.” First of all, as the critics themselves admit, the Agreement had no penalties for noncompliance. So even on their own terms, technically Trump could’ve simply ignored the “intentions” announced by the Obama Administration, and European statesmen would have had nothing they could do. So in what sense would this have been more mature and diplomatic than Trump’s decision, which was to straightforwardly announce that he thought his predecessor had erred?

We see here the fundamental inconsistency in the descriptions put forth by the pro-Paris crowd: On the one hand, they argued that it was a historic agreement, one of the crowning achievements of the Obama Administration (and other governments), which was a vital part of humanity’s response to climate change.

Yet on the other hand, when President Trump says the costs outweigh the benefits for the US, the critics argue that the Paris Agreement was just a non-binding pledge and so there’s no point to pulling out; no big whoop. How can one possibly reconcile these two views?

These analogies are never perfect, but let’s try this one: Imagine a wife agrees that she and her husband will go on a vacation with their friends, and she verbally commits to splitting the cost of the beach house rental. Then the wife tells her husband what she did, and he says, “No way, that’s too expensive for us right now, I’ll call and cancel.” But the wife objects and says, “I didn’t actually sign a contract with them. Let’s still go on the trip, and when they ask us to pay our share of the bill, we’ll point out they can’t force us to, legally.” In this analogy, clearly the wife’s strategy is duplicitous; it is better for the husband to outright cancel the trip, even if the other couple has started making plans and will be really upset at the flip-flop. If the husband and wife have no intention of following through on her verbal pledge, better to let everybody know that upfront than to go on the vacation and have their friends guilt trip them the entire time.

Beyond all of this, the other wrinkle in this “it’s non-binding” pro-Paris argument is that US environmental groups could have cited the Obama Administration’s commitment while suing to stop energy projects. So even if it is true that other governments can’t take punitive action against the US for failing to live up to the INDC, it still might have constrained domestic energy development if the Trump Administration formally stays in the Paris Agreement.

Yet there are other problems with the claim that the US needs to exercise “leadership.” For example, we see some critics warning that by getting out of the emission-limiting race, the US would lose out on the growing field of renewables technology. Well, if the critics actually believe that, then we have no reason to suppose that China, Germany, and other “clean energy” pioneers will alter course just because of Trump’s decision.

Finally, standard models of climate change and projections of emissions show that the US is going to be a minor player going forward. For example, consider this scenario which I explained in a previous IER post:

 

China has already surpassed the United States in CO2 emissions, and that disparity will only increase as the populous country continues to catch up in economic development.

Conclusion

The popular narrative concerning the Paris Agreement makes no sense. As Trump’s critics themselves point out, the agreement had no penalties, so his decision (on their own terms) didn’t do anything except honestly state what would happen. The Agreement was specifically designed to avoid input from the representatives of the American people in the form of Congress.

Furthermore, for those critics[1] who argue that cutting back on emissions will help individual countries by boosting their renewables sectors, they shouldn’t worry about other countries pulling out of the Agreement. By these critics’ own arguments, the countries staying inside the Agreement will benefit all the more so from the alleged myopia of the US. So if instead, we see that the US pulling out leads to a domino effect, then these particular critics must have been wrong, and Trump was right when he claimed that participating in the Paris Agreement would hurt the US economy.

Finally, standard projections of emissions scenarios show that the US is going to be subordinate to China and India going forward. The US doesn’t need to “exercise leadership” when it comes to global climate agreements, except insofar as American taxpayers are expected to foot the bill.


[1] In the main text I write “for those critics” because not all proponents of the Paris Agreement are being inconsistent in this way. For example, many of them would agree that the emission pledges make individual countries poorer, but think that if all countries follow through, then they will all be better off (because of mitigated climate change). That is a separate argument that I will address in Part 2 of this series. In the main text, I am dealing with people who inconsistently claim that we need US leadership in this arena, and that the US economy would actually have been helped by the stimulus to “green energy” from mandated emission cuts.

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Green Technologies Cannot Survive in the Marketplace without Subsidies

Green technologies (e.g., wind, solar and electric vehicles) cannot compete in the marketplace without subsidies or favorable government policies.

In Nevada, for example, when the government modified its policy to pay customers less for excess power produced by rooftop solar systems, solar installers left the state for others providing more favorable net metering policies. With its solar installations down, Nevada’s legislature recently passed a net metering bill, which the Governor is expected to sign, that brings back net metering at a slightly discounted rate.

The reason the state removed net metering was that solar rooftop customers received free transmission access, forcing non-rooftop solar customers to pay for the transmission services of the solar customers. Net metering is a regressive policy because most rooftop solar customers are higher income households. Nevada’s electric utility company, NV Energy, indicated that restoring net metering under an earlier version of the revised policy would be expensive—over $63 million each year, or about $1.3 billion over two decades.[i]

Besides net metering, many states have renewable portfolio standards that require a certain percentage of their generation to come from renewable energy by a specified date. These state incentives—along with federal government subsidies such as the production tax credit for wind, the investment tax credit for solar and the tax credit for purchasing electric vehicles—provide lasting incentives that are pushing green technologies into the U.S. marketplace. These technologies would not have grown to today’s levels without these incentives. It is important to realize that the incentives are costing consumers and taxpayers more than the alternatives would.

Nevada Reinstates Net Metering

Nevada’s new bill (AB 405), if signed, will allow rooftop solar customers to be reimbursed for excess generation beginning at 95 percent of the retail electricity rate. Over time, the customers’ compensation would decline to a floor of 75 percent of the retail rate. If signed by the Governor, the bill would create four tiers, where credit rates decrease in 7 percent increments for every 80 megawatts of rooftop solar. Since 80 megawatts of solar panels can be deployed in each tier, it is expected to take years to reach the 75 percent floor. In Nevada’s largest solar installation year the state deployed around 100 megawatts of rooftop solar.

AB 405 allows net-metered customers to lock in their rate for at least 20 years, which is another feature of many renewable energy incentives. The bill contains several consumer protections such as a requirement that solar companies offer a 10-year warranty and provide transparent information so that consumers can calculate their savings. The legislation also ensures that net metering will continue even if Nevada decides to deregulate the state’s electricity market. And, the bill mandates that residential solar and energy storage customers cannot be treated as a separate rate class, eliminating the option of instituting higher fees.

If Governor Brian Sandoval signs the bill, the net metering compensation changes would take effect immediately, and the consumer protection measures would take effect this fall.

Federal Renewable Subsidies

The federal Production Tax Credit (PTC) for wind provides a tax credit for wind units during their first ten years of operation. It has expired and extended 10 times and is now set to expire at the end of 2019. This year, the subsidy is 20 percent less than its level last year of 2.3 cents per kilowatt-hour. In 2018, it will be 40 percent less, and in 2019, 60 percent less.[ii] The credit is so lucrative that wind operators can, and sometimes do, accept a negative price during periods of low demand in order to wipe out the competition. According to a Congressional Research Service study, the PTC is the largest 2016 to 2020 energy-related tax expenditure cost to the Treasury at $25.7 billion.[iii]

The Investment Tax Credit (ITC) for solar provides a federal tax deduction of 30 percent from the cost of installing a solar energy system. The credit applies to both residential and commercial systems. The 30 percent ITC was originally established by the Energy Policy Act of 2005 and was set to expire at the end of 2007. Like the PTC, Congress has extended its expiration date several times and it now sunsets in 2021 for residential customers with reduced tax credits. From 2016 through 2019, the tax credit remains at 30 percent of the cost of the system. In 2020, the deduction is reduced to 26 percent and in 2021, the deduction is 22 percent of the cost of the system. In 2022 and thereafter, only owners of new commercial solar energy systems can receive a credit, which is 10 percent of the cost of the system.[iv]

Source: https://www.energysage.com/solar/cost-benefit/solar-investment-tax-credit/

The federal tax credit for electric vehicles is based on battery size and can be as large as $7,500. It is given to the purchaser of the vehicle and to the manufacturer if it is a leased vehicle. The electric vehicle tax credits are phased out as sales volume increases. The expiration date differs by manufacturer and comes only after an auto manufacturer sells 200,000 qualified vehicles, which no manufacturer has achieved yet. The following table provides a list of tax credits for some popular models as of April 2017.[v]

 

Electric Vehicles Federal Tax Credit
BMW i3 $7,500
Chevrolet Bolt $7,500
Fiat 500e $7,500
Ford Focus Electric $7,500
Hyundai Ioniq Electric $7,500
Kia Soul EV $7,500
Mercedes-Benz B-Class EV $7,500
Nissan Leaf $7,500
Tesla Model S $7,500
Tesla Model X $7,500

 

Plug-In Hybrids Federal Tax Credit
Audi A3 e-tron $4,205
BMW i3 (with range extender) $7,500
BMW i8 $3,793
Chevrolet Volt $7,500
Chrysler Pacifica $7,500
Ford C-Max Energi $4,007
Ford Fusion Energi $4,007
Hyundai Sonata Plug-In Hybrid $4,919
Kia Optima Plug-In $4,919
Toyota Prius Prime $4,502
Volvo XC90 T8 $4,585

 

Source: https://www.edmunds.com/fuel-economy/the-ins-and-outs-of-electric-vehicle-tax-credits.html

Despite these lucrative tax credits and state renewable programs, the penetration of green technologies has been limited. Wind generates only 5.6 percent of our electricity, utility scale solar less than 1 percent. Rooftop solar systems provide another half of a percent based on estimates of the Energy Information Administration. And, despite former President Obama’s desire to have 1 million electric vehicles on the road in 2015, less than half that number was achieved. While sales of electric vehicles continue, through November 2016, only 542,000 electric vehicles were sold in the United States.[vi]

Globally, the number of electric vehicles on the road in 2016 was 2 million, according to the International Energy Agency (IEA). China, the United States and Europe make up the three main markets, totaling more than 90 percent of all electric vehicles sold. China alone accounted for over 40 percent of the electric vehicles sold in 2016. In Europe, Norway had the highest share of the electric vehicle market at 29 percent, followed by the Netherlands with 6.4 percent, and Sweden with 3.4 percent.[vii] In terms of the total market, however, electric vehicles made up only 0.2 percent of total passenger light-duty vehicles on the road in 2016. According to the IEA, in order to limit temperature increases to below 2°C by the end of the century, the number of electric cars will need to reach 600 million by 2040—a factor increase of 300.[viii]

Conclusion

There are many lucrative subsidies and government programs for green technologies—several of which have been highlighted above. These programs cost consumers and taxpayers more than the alternatives available to the market place and often are regressive policies, particularly in the case of rooftop solar systems and electric vehicles which are purchased by higher income consumers, who can afford them.


[i] Greentech Media, Nevada Legislature Passes Bill to Restore Net Metering for Rooftop Solar, June 5, 2017, https://www.greentechmedia.com/articles/read/nevada-bill-to-restore-net-metering-for-rooftop-solar-passes-in-the-senate?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+GreentechMedia+%28Greentech+Media%29

[ii] Department of Energy, Renewable Electricity Production Tax Credit, https://energy.gov/savings/renewable-electricity-production-tax-credit-ptc

[iii] Congressional Research Service, March 27, 2017, http://docs.house.gov/meetings/IF/IF03/20170329/105798/HHRG-115-IF03-20170329-SD002.pdf

[iv] Energy Sage, Investment Tax Credit for Solar Power, https://www.energysage.com/solar/cost-benefit/solar-investment-tax-credit/

[v] Edmunds, Electric Vehicle Tax Credits, March 29, 2017, https://www.edmunds.com/fuel-economy/the-ins-and-outs-of-electric-vehicle-tax-credits.html

[vi] Recode, There have now been over 540,000 electric vehicles sold in the U.S., December 21, 2017, https://www.recode.net/2016/12/21/14041112/electric-vehicles-report-2016

[vii] International Energy Agency, Electric vehicles have another record year, reaching 2 million cars in 2016, June 7, 2017, https://www.iea.org/newsroom/news/2017/june/electric-vehicles-have-another-record-year-reaching-2-million-cars-in-2016.html

[viii] Ibid.

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Roots of the Paris Agreement Part III: Ken Lay and Enron

“I am writing to urge you to attend the upcoming United Nations Conference on Environment and Development [‘Earth Summit’] scheduled for early June in Brazil and to support the concept of establishing a reasonable, non-binding, stabilization level of carbon dioxide and other greenhouse gas emissions.”

– Ken Lay [CEO, Enron Corp.] to George H.W. Bush, Letter of April 3, 1992.

“The United States fully intends to be the world’s preeminent leader in protecting the global environment. Environmental protection makes growth sustainable…. [This] recognition … by leaders from around the world is the central accomplishment of this important [United Nations] Rio Conference.”

– George H. W. Bush, “News Conference in Rio de Janeiro, June 13, 1992.

Connect these five dots: Enron … George H. W. Bush … Rio Earth Summit 1992 … Kyoto Protocol of 1997 … Paris Climate Agreement of 2015.

With more than a half-dozen profit centers aligned with carbon dioxide (CO2) regulation, Ken Lay was more than just active in promoting the global warming agenda. Enron was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business,” stated Greenpeace-ex Jeremy Leggett (p. 204).

With the Paris pullout just last week, President Trump’s American First policy could also be labeled an Enron Last policy.

Cronyism in Action

The Trump administration’s decision to exit Paris starkly reverses the U.S.-side climate activism that Enron (1986–2001) crucially pushed. When the issue first emerged in 1988, Ken Lay promoted government rationed (priced) CO2 emissions that would advantage natural gas at the expense of coal. (Gas emitted about half-as-much CO2 as did coal.)

It was Lay who spearheaded the formation of the business lobby group, the Business Council for a Sustainable Energy Future (1992), bringing natural gas interests to join environmental leaders. Today, the (renamed) Business Council for Sustainable Energy is run by a former Enron climate lobbyist, Lisa Jacobson.

The Rio Earth Summit’s Agenda 21 called for the international community to take a “more integrated approach to decision making… to facilitate the integrated consideration of social, economic and environmental issues” for sustainability. The next year, President Clinton created the President’s Council on Sustainable Development (PCSD) to “develop and recommend to the President a national sustainable development action strategy that will foster economic vitality.”

Ken Lay was one of three energy CEOs appointed to the 25-member PCSD. The rest of the group was Environmental Left, with administration officials and such pressure-group leaders such as Fred Krupp (Environmental Defense Fund) and John Adams (Natural Resources Defense Council). Lay would have Clinton’s ear, just as he had the elder President Bush’s.

Enron at Kyoto

Enron’s push for CO2 rationing only grew when the company entered the solar business in 1995 and the wind-power business two years later. It was Enron’s climate lobbyist who reported from Kyoto in late 1997 that the new agreement was “a victory for us” and “good for Enron stock!” Specifically, in the words of John Palmisano:

If implemented, this agreement will do more to promote Enron’s business than will almost any other regulatory initiative outside of restructuring of the energy and natural gas industries in Europe and the United States. The potential to add incremental gas sales, and additional demand for renewable technology is enormous. In addition, a carbon emissions trading system will be developed. While the trading system will be implemented by 2008, I am sure that reductions will begin to trade within 1–2 years. Finally, Enron has immediate business opportunities which derive directly from this agreement.

Moreover:

Through our involvement with the climate change initiatives, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF, NRDC, GermanWatch, the US Climate Action Network, the European Climate Action Network, Ozone Action, WRI, and Worldwatch. This position should be increasingly cultivated and capitalized on (monetized).

Where It Began: Earth Summit (1992)

The beginning of Kyoto (and Paris) emerged from the mid-1992 ‘Earth Summit” in Rio de Janeiro, where George H. W. Bush signed the Framework Convention on Climate Change Treaty. The Senate unanimously ratified the treaty, on the basis that the greenhouse-gas (GHG) reduction goals were voluntary, not mandatory.

In April 1992, a few months ahead of the scheduled Earth Summit in Rio de Janeiro, Enron’s chairman wrote a three-page, carefully orchestrated letter to George H. W. Bush. Lay’s letter makes a seemingly benign case for finding the middle ground and endorsing voluntary CO2 restrictions. But as classical liberals and many conservatives knew, this would be a beachhead for the climate/forced-energy-transformation issue, one that would surely grow and grow in predictable and unpredictable ways. (It did.)

Here are some key excepts from Lay’s letter (which was cc’d to two pro-Summit Bush advisors, Clayton Yeutter and C. Boyden Gray):

Dear Mr. President:

I am writing to urge you to attend the upcoming United Nations Conference on Environment and Development scheduled for early June in Brazil and to support the concept of establishing a reasonable, non-binding, stabilization level of carbon dioxide and other greenhouse gas emissions.

This stabilization level should serve as a useful public policy guide, not a policy mandate. Moreover, I believe a market-based policy approach is the most cost effective and environmentally beneficial method to achieve greenhouse gas stabilization.

The demagoguery on both sides of this issue has been extraordinarily fierce. Frankly, I do not believe the oceans will boil in a few years if we don’t address greenhouse gas emissions, but I also do not believe the U.S. will suffer from economic ruin if prudent steps are taken to reduce CO2 emissions in order to protect the global environment. In fact, if pursued through market-based policies, a reduction in greenhouse gases should result in a cleaner environment, cheaper electricity, and more American jobs.

Among other industries, I am convinced that America’s hard-pressed domestic natural gas industry would benefit substantially from a market-based approach to reducing CO2 emissions. Natural gas is our cleanest fossil fuel and through its increased use in electric power generation could play a major role in reducing CO2 emissions and delivering lower electricity prices to consumers….

In summary, I urge you to provide leadership on this important global environmental issue. Not only will many U.S. industries benefit from measures to reduce greenhouse gas emissions, including the natural gas industry, but with the appropriate market-based policies, the measures will result in a cleaner environment, cheaper electricity, more American jobs, and a reduced trade deficit.

Sincerely, Ken

Bush went and spoke. Although environmental pressure groups wanted more, the president gave the global-climate negotiations a beachhead. “The United States fully intends to be the world’s preeminent leader in protecting the global environment,” he stated. “Environmental protection makes growth sustainable [as recognized] … by leaders from around the world [at] … this important Rio Conference.”

Conclusion

While closely associated with both Bush administrations, Lay was ideologically closer to another political figure on the issue of climate change. Lay said: “In Earth in the Balance, Senator Al Gore stated: ‘Higher taxes on fossil fuels … is one of the logical first steps in changing our policies in a manner consistent with a more responsible approach to the environment.’ I agree” (Lay 2000).

The Paris climate agreement, indeed, has roots in Ken Lay and Enron Corp.

Biography

Bradley, Robert. Capitalism at Work: Business, Government, and Energy. Salem, MA: M & M Scrivener Press, 2009.

Bradley, Robert. Enron Ascending: The Forgotten Years, 1984–1996, forthcoming.

Lay, Ken. “Climate Change: Where Do We Go from Here.” Presentation to the American Bar Association, Section of Environment, Energy, and Resources, London, England, July 20, 2000 (copy in files).

Leggett, Jeremy. The Carbon War. London: Penguin Books, 1999.

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