Climate Math: Adaptation, Not Mitigation

“[The Paris climate accord] is a fraud really, a fake. It’s just bull— for them to say: ‘We’ll have a 2C warming target’ … is just worthless words…. As long as fossil fuels appear to be the cheapest fuels out there, they will be continued to be burned.” (James Hansen: 2015)

“We need to stop trying to balance the increasingly parsimonious carbon emissions budgets entailed by a two-degree target on the backs of the global poor. There is no moral justification for denying those populations the benefits of fossil-fuel-driven development.” (Ted Nordhaus: Foreign Affairs, 2018)

Ted Nordhaus of Environmental Progress has widened the civil war within the climate mainstream on grounds of social justice. “The Two-Degree Delusion,” subtitled The Dangers of an Unrealistic Climate Change Target, just published in Foreign Affairs, exposes the daunting climate math of carbon-dioxide mitigation strategy. In place of too late, politically unrealistic, all-pain no-gain CO2 rationing, Nordhaus urges a shift to a wealth-based, market-driven adaptation as climate policy.

Nordhaus argument can be reduced to three major points:

  • Global CO2 emissions are rising, confirming that there has not been a “step change” from fossil-fuel reliance (“what progress the world has made to cut global emissions has been, under even the most generous assumptions, incremental”).
  • International efforts to jawbone and ration CO2 emissions—symbolic, nonbinding, and largely inconsequential—have made the 40-year-old goal of keeping man-made global warming to under two degrees Celsius “no longer obtainable.”
  • The “arbitrary” target to limit global warming to two degrees Celsius, which would require “emissions … to fall precipitously,” would leave “the world ill prepared to mitigate or manage the consequences.”

His conclusion?

There is no moral justification for denying those populations the benefits of fossil-fuel-driven development. Lower-emissions levels associated with curtailed development will not provide any meaningful amelioration of climate extremes for many decades to come, whereas the benefits that come with development will make those populations substantially more resilient to climate extremes right now.

Nordhaus works within the mainstream of climate modeling. The incremental effects of postulated CO2-driven climate change are both uncertain and small. (“It is not until modelers project into the twenty-second century that large differences begin to emerge,” he notes.) Alleged “tipping points” for worse-case climate events, he adds, are plagued by “enormous uncertainties.” Relatedly, “the precautionary principle holds equally well at one degree of warming, a threshold that we have already surpassed; one and a half degrees, which we will soon surpass; or, for that matter, three degrees.”

Energy Realism

Nordhaus ties energy realism to climate realism. Today’s low-carbon technologies are costly, inefficient, and a burden for consumers and taxpayers, he notes. The proffered saviors of grid-level wind and solar fall short, for “the value of intermittent sources … declines precipitously as their share of electricity production rises.”

Nuclear, while better, has disappointed: “Outside of China and a few other Asian economies, few nations have been able to build large nuclear plants cost-effectively in recent decades.”

A new generation of low-carbon energy technologies are necessary, but “all are decades away from viable application.” And the fact remains that “almost 30 years after the UN established the two-degree threshold, over 80 percent of the world’s energy still comes from fossil fuels, a share that has remained largely unchanged since the early 1990s.”

Adapt, Don’t Mitigate

Wealth is health—and the means for environmental betterment. This insight from free-market environmentalism is prominent in Nordhaus’s call for a paradigm shift in climate policy. “A natural disaster of the same magnitude will generally bring dramatically greater suffering in a poor country than in a rich one,” he notes, meaning that “the faster those nations develop, the more resilient they will be to climate change.”

“Development in most parts of the world,” he posits, “still entails burning more fossil fuels—in most cases, a lot more.”

Most climate advocates have accepted that some form of adaptation will be a necessity for human societies over the course of this century. But many refuse to acknowledge that much of that adjustment will need to be powered by fossil fuels. Hard infrastructure—modern housing, transportation networks, and the like—is what makes people resilient to climate and other natural disasters.

More, Better Reasons Too

Nordhaus’s adaptation-for-mitigation strategy, or free-market self-help in place of energy statism, is intellectually stronger that his article lets on. He works from the shaky premise of high-sensitivity warming from the enhanced greenhouse effect (he refers to “a planet that is almost certainly going to be much hotter even if the world cuts emissions rapidly”).

Yet sensitivity estimates have been coming down in the mainstream literature. And “fat tail” extreme warming scenarios are being discounted if not ruled out with recent research. A new base case for serious consideration is global lukewarming, as opposed to the (aging) standard IPCC temperature range, which both mitigates the alleged problem and reduces the effect of mitigation itself.

Nordhaus should also acknowledge (if not champion) the benefits of CO2 fertilization and moderate warmth to upend the “social cost of carbon” to justify government mitigation of greenhouse gases.

Conclusion

Kudos to Ted Nordhaus for a well-reasoned scholarly article in a mainstream journal that will be hard for the entrenched climate intelligentsia to ignore. His is an intellectual moment of note for critics of global climate governance—a mistaken, futile, and socially unjust crusade.

As the climate math becomes more and more daunting, or just plain politically impossible, expect the adaption-not-mitigation argument to only grow in stature.

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A Gas Tax Hike Is the Wrong Way to Fund Highways

Various reports suggest that policymakers—including President Trump himself—are considering raising the federal gas tax, by as much as 25 cents per gallon. Supporters argue that a hike is necessary to replenish the Highway Trust Fund, and—for those concerned about climate change—some also argue that a higher gas tax is needed to encourage drivers to switch to electric vehicles or mass transit.

These arguments are incorrect, even on their own terms. A gas tax is in principle a very blunt instrument for funding highway usage. And in terms of the political optics, imposing a huge new regressive tax on drivers would justify the critics of the recent income tax reform plan, who claimed that Republicans wanted to help the rich at the expense of the poor.

Ironically, if President Trump would just stick to his privately led infrastructure plan, then all of these problems would go away. The nation could get investment into those roads and bridges that genuinely need attention, while market prices would guide decisions and reduce traffic congestion. Road construction would be paid by users, the same way we pay for hotel construction. Smoother traffic flows would relieve stress and also cut way back on carbon dioxide emissions. As usual, the way to solve the problems in infrastructure is through less government intervention, not more.

Gas Tax, a Blunt Instrument

For some reason, people have adopted the notion that a gas tax directly attaches a fee to a driver’s “highway usage.” But that’s not true at all. Some people drive on highways very often, while other drivers remain on local roads. Yet the federal gasoline tax hits them equally.

Furthermore, when we’re trying to allocate the costs of highway construction fairly, the real issue is the wear and tear associated with a vehicle, not how many gallons of gasoline it burns. For example, an electric car causes a comparable amount of damage to a highway as a similarly-sized vehicle using conventional fuel, but the federal gas tax would implicitly charge only the latter driver for his usage.

In short, there is only a very tenuous link between the purchase of gasoline, and highway “usage.” Taxing gas to fund highways is like taxing forks to fund agriculture.

Tax Cuts for the Rich, Tax Hikes for the Poor?

There were many good arguments in favor of cutting the corporate income tax. Contrary to the claims of the critics, the recent tax legislation was not merely a “tax cut for the rich,” but instead should be expected to benefit workers and capitalists alike.

However, it would be even harder for Republicans to defend this stance, if shortly after cutting the corporate tax rate, they then more than double the federal gas tax. Regardless of the theoretical merits of such moves, it would certainly seem to the average voter that the Republicans weren’t really supporters of “lower taxes” after all.

Privatization Is the Answer

Ironically, the best solution to these political difficulties is contained in President Trump’s own infrastructure proposal—to rely on privatization, transferring roads and bridges back to investors who can rely on market signals to guide them in serving customers.

Privately-owned roads and bridges would have tolls set by supply and demand, just like prices are set in any other market. Infrastructure in need of repair or expansion would get it, whereas wasteful boondoggles would be minimized with private money on the line. People who rarely used highways wouldn’t be forced to pay for them, the way they are now with the federal gas tax.

Furthermore, for those worried about climate change, market pricing of tolls would greatly reduce traffic congestion. The smooth flow of vehicles during “rush hour” would eliminate unnecessary carbon dioxide emissions.

Conclusion

Using the federal gas tax to fund highways and other infrastructure is at best a very blunt instrument, and at worst an invitation to wasteful spending. Furthermore, it would be very bad optics for Republicans to support a regressive tax hike right after approving a large corporate income tax cut. The way to repair the nation’s infrastructure without burdening taxpayers is to rely on the market.

 

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AEO 2018 Forecasts a Fossil Future and Nearly Flat Carbon Dioxide Emissions

The Energy Information Administration’s (EIA) Annual Energy Outlook (AEO) 2018 projects that fossil fuels will supply 78 percent of the nation’s energy in 2050, only slightly down from 81 percent today. Further, carbon dioxide emissions in the agency’s forecast grow only slightly in the ensuing 34 years—by just 1.8 percent between 2016 and 2050, despite the economy almost doubling over the 34 year forecast.

The mix of fuels is projected to change with natural gas and non-hydroelectric renewables garnering a larger share than today. Natural gas consumption grows the most on an absolute basis, and non-hydroelectric renewable energy grows the most on a percentage basis. However, non-hydroelectric renewable energy makes only slight in-roads in this 34 year period increasing from an 8 percent share in 2016 to a 13 percent share in 2050. Reflecting President Trump’s energy dominance policy, the United States becomes a net energy exporter by 2022.

Source: EIA

In EIA’s forecast, natural gas increases its share from to 29 percent in 2016 to 33 percent in 2050, while petroleum’s share declines from 37 percent in 2016 to 33 percent in 2050, and coal’s share declines from 15 percent in 2016 to 12 percent in 2050.

EIA projects that the economy will grow at 2.0 percent per year in its reference case; that energy consumption will grow at 0.4 percent per year; and that carbon dioxide emissions will grow at 0.1 percent per year between 2017 and 2050.

Source: EIA

The United States has been a net energy importer since 1953, but that changes in the early 2020s as the United States decreases its imports and increases its exports. Most U.S. trade historically and in the projection period is in crude oil and petroleum products. The United States imports mostly crude oil and exports mostly petroleum products such as gasoline and diesel. Except for the period between 2029 and 2045, the United States remains a net importer of petroleum and other liquids in EIA’s forecast.

In natural gas trade, the United States remains a net exporter with pipeline shipments to Mexico and Canada and liquefied natural gas (LNG) shipments to further destinations. The United States continues to be a net exporter of coal, but its export growth is not expected to increase significantly due to competition from suppliers closer to major international markets.

Source: EIA

Oil and Gas Sector

Natural gas production accounts for nearly 39 percent of U.S. energy production by 2050 in EIA’s reference case. Production from shale gas and tight oil plays as a share of total U.S. natural gas production is projected to continue to grow because of the large size of the associated resources, which extends over more than 500,000 square miles. To satisfy the growing demand for natural gas, production expands into more expensive-to-produce areas, putting upward pressure on production costs and prices.

Natural gas production is expected to grow 6 percent per year from 2017 to 2020–greater than the 4 percent per year average growth rate from 2005 to 2015. However, after 2020, it slows to less than 1 percent per year for the remainder of the projection. Natural gas growth in the near term is due to growing demand from large capital-intensive chemical projects and from the development of liquefaction export terminals in an environment of low natural gas prices.

Offshore natural gas production in the United States is expected to be almost flat over the projection period as production from new discoveries generally offsets declines in legacy fields. Production of coalbed methane gas is expected to decline through 2050 because of unfavorable economic conditions for producing that resource.

Source: EIA

U.S. crude oil production in 2018 is projected to surpass the 9.6 million barrels per day record set in 1970 and is expected to plateau between 11.5 million barrels per day and 11.9 million barrels per day as tight oil development moves into less productive areas and as well productivity declines. Lower 48 onshore tight oil development continues to be the main driver of total U.S. crude oil production, accounting for about 65 percent of cumulative domestic production in the reference case between 2017 and 2050. Continued technological advancements and improvements in industry practices are expected to lower costs and to increase the volume of oil and natural gas recovery per well.

Previously announced deep-water discoveries in the Gulf of Mexico lead to increases in Lower 48 states offshore production through 2021. Offshore production then declines through 2035 and remains flat through 2050 as new discoveries offset declines in legacy fields

The continued development of tight oil and shale gas resources supports growth in natural gas plant liquids production, which reaches 5.0 million barrels per day in 2023 in the reference case—almost a 35 percent increase from its 2017 level. Natural gas plant liquids production nearly doubles between 2017 and 2050, supported by an increase in global petrochemical industry demand.

Electricity Sector

This year’s AEO does not include the Clean Power Plan in its reference case as President Trump and EPA Administrator Pruitt plan to dismantle it. In the near term, fuel prices determine the share of natural gas-fired and coal-fired generation. But, in the longer term, the relatively low cost of coal moderates the decline in coal-fired generation. Growth in renewable generation in the near term is due mainly to federal tax credits, but is also influenced by state renewable portfolio standards.

The primary drivers for new capacity in the reference case are the retirements of older, less-efficient fossil fuel units, the near-term availability of renewable energy tax credits, and the assumed continued decline in the capital cost of renewables, especially solar photovoltaic. Low natural gas prices and favorable costs for renewable energy result in natural gas and renewables as the primary sources of new generation capacity.

Between 2011 and 2016, net coal capacity decreased by nearly 60 gigawatts, mostly as a result of compliance with the EPA’s Mercury and Air Toxics Standards. In EIA’s projection, coal-fired generating capacity decreases by an additional 65 gigawatts between 2017 and 2030 as a result of low cost natural gas and increasing renewable generation and then levels off near 190 gigawatts through 2050.

EIA projects substantial nuclear power retirements as the industry continues to have problems competing in competitive power markets. EIA expects nuclear electric generating capacity to decline from 99 gigawatts in 2017 to 79 gigawatts in 2050 (a 20 percent decline)—with no new plant additions beyond 2020.

Renewable generation is projected to increase 139 percent by 2050, led by wind and solar generation, which account for 94 percent of the total growth in the reference case. The extended federal tax credits account for much of the accelerated growth in these renewables in the near term. Solar photovoltaic growth continues throughout the projection period due to continued assumed decreases in solar PV costs.

Support Growth in Energy Storage.

Source: EIA

Between 2020 and 2050, utility-scale wind capacity is projected to grow by 20 gigawatts and utility scale solar photovoltaic capacity is projected to grow by 127 gigawatts. Between 2018 and 2021, 80 gigawatts of new wind and solar photovoltaic capacity are added due to assumed declining capital costs and the availability of federal tax credits.

In AEO 2018, EIA represents two distinct solar photovoltaic technologies to account for the cost and value trade-offs between fixed-tilt and tracking-solar technologies. EIA also represented energy storage on the electric grid with four-hour batteries in AEO 2018 to model electric grid operations, including the integration of wind and solar generation.

Over the forecast period, utility-scale storage is expected to grow by 34 gigawatts. In the near term, policies such as storage mandates in California and market participation rules in the PJM electricity market support growth in storage systems to stabilize grid operations, improve utilization of existing generators, and integrate intermittent technologies such as wind and solar into the grid. In the longer term, wind and solar growth are projected to support economic opportunities for storage systems and enable renewable generation produced during the hours with high wind or solar output to supply electricity at times of peak electricity demand.

Conclusion

EIA sees fossil fuels as dominating the U.S. energy sector through 2050, despite significant penetration of wind and solar power for electric generation. EIA’s forecast retires 85 gigawatts of coal and nuclear capacity and replaces them with natural gas, wind and solar capacity spurred by low natural gas prices, federal tax credits for wind and solar, and state renewable portfolio standards, with solar PV increasing the most.

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Cold Winters Are Testing the Limits of the Grid

This article was originally printed at The Hill on Monday, January 29.

The arctic air that has frozen the northeastern U.S. over the first weeks of 2018 has prompted New Englanders to crank up the heat and New England’s utility companies to scramble for fuel.

This season’s above-average heating and electricity demand has tested grid reliability at a time when the topic has had particular political salienceMost reporting on the matter has lauded the resilience the grid has shown, but a fuel-security analysis performed by the group that oversees New England’s power system delivers a pessimistic chill. ISO New England’s analysis reveals that in winters to come fuel insecurity will plague the region.

Insecurity despite abundance

What makes ISO New England’s report so tragic is that the United States is now a veritable world energy superpower. Ten years ago, concerns about energy prices and fuel security were a standard element of the national zeitgeist. But a decade removed from the oil price peak of $147 per barrel in July 2008, our national concern over resource depletion has been rendered moot. Spurred by the high prices of the mid-2000s, American companies embarked upon nothing less than a domestic energy renaissance. Since 2005, oil production in the United States has increased by 50 percent, oil exports have seen a tenfold increase, and oil imports have fallen by a quarter.

More critically for electricity, however, have been the gains made on the concomitant natural gas front. Natural gas production has soared over the past decade by 50 percent and in late 2017 the United States became a net-natural gas exporter — meaning that America now sells more to foreign countries than it buys from them.

Given the positive developments that have left markets awash with energy resources, one would expect American utility companies would be well-positioned to meet the needs of their customers. Instead we are now being warned by ISO New England that in future winters utilities will be unable to meet demand during bouts of frigid weather. The group’s projections in almost every future scenario forecast the implementation of rolling blackouts — the sequential disconnection of blocks of customers from power — to protect the grid from outright disaster.

Though the resources are close at hand, a combination of laws and regulations has made New England dependent upon natural gas, yet unable to access all that it needs. While the presence of natural gas in New England’s electricity fuel mix has grown from 18 percent in 2000 to 45 percent in 2017 to an anticipated 56 percent in 2025, New England’s ability to receive natural gas has not kept pace.

Pipeline paucity

On Jan. 23, ISO New England CEO Gordon van Welie testified before the Senate Energy and Natural Resources Committee that, “when it gets cold the region does not have sufficient gas infrastructure to meet demand for both home heating and power generation.” It is a theme van Welie has conveyed since at least 2013. The pipeline constraints to which he points have at times caused New England to have the most expensive spot natural gas prices in the world — including this January.

At the barricade preventing the transport of gas from the abundant reservoirs of Pennsylvania and West Virginia to New England is the state government of New York. Cursed by geographic happenstance, New England needs New York’s consent to receive gas from the Marcellus Shale. But New York politicians and regulators headed by Gov. Andrew Cuomo refuse to grant it whenever possible. In addition to a hydraulic fracturing ban, New York politicians have put the brakes on pipeline projects through their permitting power, blocking the Constitution and Northern Access pipelines outright.

New England, for its part, is not much better. In the summer of 2017 the Massachusetts Supreme Judicial Court nixed a pipeline cost-sharing proposal that would have helped to reduce stress on the grid during a harsh winter like New England is experiencing now. The hostility to pipelines is so pervasive in the northeast that ISO New England takes that bleak view that “no new incremental gas infrastructure will be built to serve power generation.”

The Jones Act 

With state governments blocking new pipeline construction to bring in affordable shale gas, New England buys liquefied natural gas (LNG) transported by sea.

Since the United States is now an LNG exporter, New England would seem to have a reliable option. But domestic shipping of LNG is made impossible by the obtuse Merchant Marine Act of 1920 — commonly called the Jones Act. The Jones Act mandates that only American-built, -owned, -crewed and -flagged vessels can participate in maritime shipping between domestic ports.

The alleged purpose of the Jones Act is to improve national defense. While that may have made sense to lawmakers with the specter of German U-boats fresh in their memories, the Jones Act’s only effect today is that it drives up prices for consumers and protects a special interest group.

The Congressional Research Service has found that the Jones Act results in American vessels operating at twice the cost of comparable foreign ships. There are no Jones Act-compliant LNG ships at this time and New England therefore contracts with importers from around the Atlantic. While Trinidad and Tobago is the largest supplier, this month the Everett LNG import terminal is due to receive Russian gas produced by Yamal LNG, a facility subject to U.S. financial sanctions.

The cold truth

In 2013, van Welie sounded the alarm, informing the Senate that New England was becoming more reliant on natural gas for power generation without investing in natural gas supply infrastructure. Sadly, ISO New England’s message has gone unheeded and insidious laws and regulations continue to harm the region. The result is that despite unprecedented domestic energy production, New Englanders will soon find themselves out in the cold.

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Oil and Energy Security Another Fallen “Market Failure”

Rising Oil Prices Give U.S. An Edge in Global Energy,” a front-page headline in the New York Times read last week. And with that, another “market failure” argument against the consumer-driven U.S. petroleum industry bit the dust, joining the “peak oil” argument for government intervention in order to usher in a post-hydrocarbon age.

Actually, the “peak oil” and “energy security” arguments are different sides of the same coin. The doubling of domestic oil production in the last decade to ten million barrels per day has resulted in a two-thirds-plus decline in US net oil imports (to 19 percent).

Some salient quotations from the Times’s piece follow:

  • “This is a 180-degree turn for the United States and the impacts are being felt around the world,” said Daniel Yergin, the economic historian and author of The Prize: The Epic Quest for Oil, Money and Power. “This not only contributes to U.S. energy security but also contributes to world energy security by bringing new supplies to the world.”

 

  • The United States and its allies now have a supply cushion at a time when political turmoil in Venezuela, Libya and Nigeria is threatening to interrupt flows to markets.

 

  • Only a few years ago, such threats — along with a recent pipeline failure in the North Sea and storms in the Gulf of Mexico — would have sent the price of crude soaring. Instead, the rise has been muted, and gasoline at the pump remains below $2.60 a gallon across most of the United States.

 

  • It is a striking contrast to the 1970s, when Arab oil boycotts forced motorists to line up for blocks to fill their tanks and the economy went into a tailspin. Even more recently, during the presidency of George W. Bush, domestic oil output was declining so rapidly that the country set a course to replace oil with biofuels like ethanol.

 

  • Technological advances … [have transformed] unlikely places like North Dakota and New Mexico into world class petroleum hubs. Pipelines are being built across Texas to serve ports where oil can be pumped onto tankers headed for China, India and other markets.

In its recent editorial, “Drilled, Baby, Drilled,” the Wall Street Journal poked fun at the words of then-presidential candidate Barack Obama, who in 2008 called a pro-drilling strategy “a gimmick…not a strategy.”

The Journal then went on to credit the U.S. institutional framework for the unanticipated boom: “These drillers could move fast because they had the support of private capital and could lease private land,” the editorial board stated. “The frackers were also largely regulated by the states, which meant even the Obama Administration couldn’t stop them.”

Beware of Intellectual Planners

The lesson of the U.S. oil renaissance is to trust markets and not an intellectual elite advocating a government to coerce consumers and producers.

Consider the uber-confidence of Peak Oil planner Kenneth Deffeyes, a geologist and Princeton professor. “Planning for increased energy conservation and designing alternative energy sources should begin now to make good use of the few years before the crisis actually happens,” he wrote in his 2001 book, Hubbert’s Peak: The Impending World Oil Shortage.

And in his next book, Beyond Oil: The View from Hubbert’s Peak (2005):

[Global oil decline] is upon us…. Business as usual is not an option…. Whether we like it or not, there will be major rearrangements in the world economy. It would be more orderly if we were to generate a blueprint for a society constrained by the availability of resources. Then we need a non-catastrophic pathway that takes us from here to that blueprint.

Planning? Blueprint? Professor Deffeyes has government in mind—using the superior knowledge that he, but not self-interested market participants, possesses.

Harvard University energy specialists had a similar view about government intervention to correct the alleged market failure. Oil prices were too low, according to Harry Broadman and William Hogan of Harvard’s Energy & Environmental Policy Center. In 1986, they calculated the negative externality (“oil-import premium”) to be between $10–$11 per barrel, implying a “socially optimal” oil tariff of the same amount. Why? To protect us from ourselves!

The authors stated in their study that “any argument for a U.S. oil tariff must bear a heavy burden of proof.” Yet the technical analysis behind their policy recommendation assumed perfect knowledge of both the problem and the solution, as well as a perfect (costless) implementation of the (governmental) solution.

Real-world market entrepreneurship, and real-world government, anyone?

Freedom’s Spark

Compare Deffeyes and Broadman/Hogan to the simple prediction of Julian Simon, whose ultimate-resource theory has proven consistent with real-world developments. In his bookThe Ultimate Resource 2 (1996), Simon explained, “Discoveries, like resources, may well be infinite: the more we discover, the more we are able to discover.” And: “It’s reasonable to expect the supply of energy to continue becoming more available and less scarce, forever.”

Elsewhere, I summarized Simon’s theory of cascading human ingenuity as follows:

Innovation does not appear to be a depleting resource but an expanding, open-ended one. Instead of encountering diminishing returns, new advances appear to be expanding the horizon of new possibilities.

But far from a given, the institutional framework of freedom must be present. The last word belongs to Julian Simon:

The extent to which the political-social-economic system provides personal freedom from government coercion is a crucial element in the economics of resources and population…The key elements of such a framework are economic liberty, respect for property, and fair and sensible rules of the market that are enforced equally for all.

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Paul Krugman Should Love President Trump’s Infrastructure Plan

America’s most famous Keynesian, economist Paul Krugman, predictably used his New York Times column to excoriate President Trump’s State of the Union infrastructure proposal. Yet ironically, Krugman’s own positions on the economy and climate change should lead him to applaud Trump’s ideas. This is just another episode where Krugman displays his partisanship, rather than fidelity to his ostensible goals for the public.

Right off the bat, Krugman is in an awkward position, because back when he thought Hillary Clinton was going to be the next president, Krugman stressed the need for more infrastructure spending. For example, in a column from August 2016 titled, “Time to Borrow” (!), Krugman wrote:

The campaign still has three ugly months to go, but the odds — 83 percent odds, according to the New York Times’s model — are that it will end with the election of a sane, sensible president. So what should she do to boost America’s economy, which is doing better than most of the world but is still falling far short of where it should be?

There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.

How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing. [Bold added.]

Well, it turns out that the NYT’s model gave Krugman a false sense of security, since his “sane, sensible” choice didn’t end up winning. After Trump’s surprise election, Krugman—being Krugman—suddenly flipped in his economic analysis. After the August 2016 column we just cited—titled “Time to Borrow,” remember—Krugman then wrote a column in early January 2017 titled, “Deficits Matter Again.” (Of course they do—a Republican was in the White House again!) And, if Krugman flipped on the wisdom of government deficits, he also now must be a massive opponent of Trump’s proposed infrastructure plan.

How Can Krugman Oppose a Giant Infrastructure Plan?

So how does the Nobel laureate pull this particular rabbit out of the hat? Here’s Krugman’s case, from the recent column following Trump’s State of the Union address:

[W]hile we desperately need new investment in public capital, Trump’s proposal – Trumpfrastructure? – isn’t remotely serious. At best, it would be a trivial sum of money pretending to be something big. At worst, it would amount to an orgy of crony capitalism, privatizing public assets while generating little new investment.

So, what’s being sold here? Trump gave a big number, $1.5 trillion. But a leaked draft of the plan says that it will involve only $200 billion of federal money. The rest is supposed to be induced spending from private investors. That’s quite a trick. How does it work?

The answer is, basically, that it doesn’t. Private investors won’t spend on public infrastructure unless guaranteed a return. This only works if they’re given ownership, and the ability to collect future revenue from the public.

…[E]ven where it does work — say, on toll roads and bridges — that private investment doesn’t come free; it’s in return for the ability to collect fees from the public, which is just taxation in another form. And there’s no evidence that doing public investment this way saves any money. On the contrary, it usually ends up costing taxpayers more than just having the government build the thing.

So there you have it: Krugman thinks he’s reconciled his earlier calls for massive infrastructure spending, with his current opposition to Trump’s call for massive infrastructure spending. But even on his own terms, and in light of his other writings, Krugman’s case doesn’t hold up.

Why Krugman Ought to Applaud Trump’s Plan

On Krugman’s own description of it, Trump’s plan has private investors put up a bunch of their own money to do the lion’s share of infrastructure spending, in exchange for the revenues that flow to the projects over time from fees levied on the citizens who use the items (bridges, roads, etc.). In other words, the plan is economically equivalent to financing public works projects through privately financed deficits, except it cuts out the IRS middleman.

Krugman should be a huge fan of this approach. After all, Krugman tells us that sure, the economy seems to be doing OK in the first year under Trump, but that “when the next big shock comes…we’ll need an effective, coherent response from officials beyond the world of central banking.” This is because—Krugman claims—we are dangerously close to the “zero lower bound” world of the liquidity trap, so that the Fed can’t just cut interest rates when the next shock hits us.

In that context, then, Krugman should be ecstatic to learn that the Trump Administration had already gotten the wheels in motion for private investors to put up $1.3 trillion on the front end to build infrastructure, in exchange for revenues to be collected over the following decades. That is exactly the kind of plan to promote investment spending via deficit finance that Krugman thinks is necessary when the Fed is rendered impotent because interest rates hit 0%.

Better for the Environment, Too

I am not being facetious; my analysis above flows directly from Krugman’s writings in the years following the financial crisis. Back then—when it was Barack Obama rather than Donald Trump in the White House—Krugman even stressed the fact that it was foolish to worry about costs. Indeed, it was a virtue for the government to spend more money than “necessary” on things; worrying about cost-effectiveness was the last thing to do in the midst of a depression. So again, in that spirit, Krugman should be happy for Trump’s plan to go through, even if it works exactly as Krugman has described it in his latest column.

Finally, if we’re talking about roads and bridges, then even “price gouging” is great, from Krugman’s perspective. If a private owner sets tolls to maximize profit, then this will ensure a smooth flow of traffic. As economists have been arguing for decades, the familiar and agonizing traffic jams plaguing our major cities are not a force of nature—they are instead the predictable consequence of government setting prices below their market-clearing levels.

And so, even in the “worst case” scenario where private owners charge higher tolls than would occur on government-owned roads, this will reduce traffic congestion and cut back on vehicle emissions. Not only will it enhance economic efficiency (which is why free-market economists welcome it), but it will reduce the threat of catastrophic climate change, which Krugman claims to be very worried about.

In short, even if President Trump’s infrastructure proposal works out exactly as Paul Krugman has described it, Krugman should be applauding it. According to Krugman’s own stated views, Trump’s plan will be an insurance policy to maintain aggregate demand in the event of another shock to the economy. Furthermore, the more bridges and roads that are transferred into private hands, the less traffic congestion and carbon dioxide emissions.

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The Ever-Expanding Wing PTC

We’ve been hearing a lot lately about the economics of wind energy. In a recent earnings call, James Robo, CEO of NextEra Energy, predicted that within a decade the cost of wind generation would be more competitive “without incentives’ than conventional sources like coal and natural gas. NextEra is one of the largest generators of wind and solar electricity.

Tom Kiernan, CEO of the American Wind Energy Association (AWEA), the $18 million lobbying arm of the wind industry, stated in 2016 that “wind is now the cheapest source of new electric generating capacity” in many parts of the U.S. Kiernan is also fond of saying that the wind industry is getting out of the federal subsidy business altogether because of a provision in the PATH Act of 2015 that gradually phases down the industries main federal subsidy, known as the Production Tax Credit (PTC). In an interview defending the PTC from being modified in the recently passed tax reform law, Kiernan implied that the industry will no longer be receiving the federal subsidy because “we made a deal to drop our tax credit to zero over five years.” Tom is right, the subsidy phases down, but a closer look at the mechanics of the PTC shows that the wind industry will still be receiving billions in federal subsidies well beyond 2020.

Boosting a Nascent Industry

In 1992, Congress created the Production Tax Credit (PTC) which initially paid a 1.5-cent subsidy (indexed to inflation it is now 2.4-cents) for every kilowatt-hour of electricity produced by certain favored generation technologies. This subsidy, which has primarily gone to wind generators, lasts for 10 years. At the time of its creation, the PTC was meant to be temporary, but more than 25 years later it is still with us. While the original justification for the PTC was to boost a nascent industry, the PTC currently continues to subsidize a mature industry to the expected tune of nearly $24 billion from 2016-2020 according to the Joint Committee on Taxation. And that estimate will almost certainly be too low. Through legislation and IRS fiat, the PTC has been expanded and extended seemingly endlessly.

The Never-Ending Temporary Tax Credit

The PTC has expired and been extended multiple times since 1992. The original PTC terminated in 1999. On 10 subsequent occasions, Congress has extended the PTC, though rarely without controversy. On five of those occasions, 1999, 2002, 2004, 2014 and 2015, the PTC actually expired and had to be retroactively extended. Upon many of these extensions, Congress made tweaks to the PTC. Most often, these tweaks have expanded the types of generation technologies that were eligible for the PTC. Other changes include modifying the years of eligibility and when a project begins to qualify for the subsidy. Through all the changes the wind industry remained the dominant recipient of PTC subsidies.

The IRS’s first Big Gift

In 2013, in passing one of its many extensions of the PTC, Congress introduced a major change in how projects became eligible for PTC subsidies with the American Taxpayer Relief Act (ATRA). Prior to this change, a wind facility need to be “placed-in-service” in a given year in order to be eligible for that year’s PTC. After ATRA, a facility need only “begin construction” within the PTC time period to be eligible. The opportunity to game the system from this change is obvious. It can be a long time after construction begins for a project to come online, but this provision allows the project to lock in eligibility even if the tax credit were to expire well before the project actually gets built.

ATRA did not define what conditions were required to meet this “begin construction” language. That job was left to the IRS. An IRS controlled by the Obama administration, keen on expanding subsidies for its favored technologies by any means necessary. The IRS obliged, issuing guidance in 2013 which allowed wind developers to meet the “begin construction” standard if they commenced “physical work of a significant nature” OR incurred at least 5% of the total cost of the facility. This 5% safe harbor was described nowhere in the ATRA, the IRS invented it. The IRS additionally instructed that either of these options would be automatically satisfied if the facility were placed into service with two calendar years of the deadline to begin construction. So at that point, if the PTC expired at the end of 2013, a developer had until the end of 2015 to get his project built to automatically qualify for PTC subsidies, which remember then pay out for 10 years. But even that wasn’t all. If a project did not meet the 2-year deadline, it still had the opportunity to argue to the IRS that it had made continuous construction or continuous efforts the advance the project, which could extend the window for eligibility even further.

So much, so generous. But the IRS wasn’t done yet. In 2014, the IRS issued additional guidance on what actions would meet the “physical work” standard. In this list of actions, which was non-exclusive, the IRS included such minimal standards as beginning excavation for the foundation, pouring concrete pads, or even just starting construction of onsite roads for moving materials. This 2014 guidance then conclusively stated that beginning work on any of the listed actions would be deemed to be physical work of a significant nature. The sum of all this is that with just the barest of activity, a wind developer could lock in his eligibility for the PTC, even if the project was years away from actually generating electricity.

The IRS Giveaway Gets Even Bigger

In 2015, Congress passed another extension of the full PTC for 2015 and 2016, and then included a stepped down phase out of the subsidies from 2017-2019, with each of those years qualifying for a reduced percentage of the PTC for 10 years. While that may seem like Congress intended to take a fiscally responsible action, the IRS had other ideas. In 2016, the IRS issued new guidance that expanded the previous 2-year safe harbor to four full calendar years. This means that a project that “began construction” by the end of 2016, under the extremely lax definition discussed above, would have until 2020 to automatically qualify for the full PTC subsidy.

And that four years was not all. The IRS included a loophole to extend the time frame even further by providing a long list of delays that that would be accepted to expand the eligibility window. This list includes: severe weather, delays in getting permits, and supply shortages, among many others. The 2016 guidance also describes extremely generous aggregation terms. This “aggregation rule” allows a huge facility with numerous turbines to fully qualify for subsidies even if only a handful of turbine sites had actually begun work. So for example a facility with a planned 100 individual turbines would qualify as beginning construction even if only a few foundations had been prepared.

This 2016 guidance was so lax, so generous the wind industry, that it seemed calculated to contradict the express intent of Congress to terminate the PTC, leaving developers with tactics to extend their subsidies well into the future.

Does It Ever Really End?

For many years Congress continued to extend PTC subsidies, though each time there was substantial debate about whether to continue subsidizing wind. In 2015, Congress finally decided that enough was enough and opted to phase out PTC subsidies. The IRS under the Obama administration, however, at every opportunity expanded and relaxed the already generous terms of the PTC. These actions have all been taken through unilateral guidance documents from the IRS, not through changes to the law or even through the public regulatory process. The result is that the PTC is even more expensive than intended and will last even longer that Congress ever contemplated, distorting energy markets for years to come and artificially harming competing generation sources like nuclear and coal. The cumulative effect of the IRS guidance is that despite the “phase out” in 2019, the federal government will still be paying PTC subsidies and distorting markets at least into the 2030’s.

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