California Gas-Fired Power Plant Files for Bankruptcy

The La Paloma natural gas plant in California filed for bankruptcy last December because it was not getting enough operating time to cover its costs due to solar and other renewable energy receiving preference. The plant, which serves as back-up to the state’s renewable generating technologies, was also denied a reliability charge by the state that would have allowed it to continue to operate. The owners project an annual loss of $39 million without a reliability contract or other support. In its bankruptcy filing, the plant owners listed assets between $100 million and $500 million and liabilities of $500 million to $1 billion.[i]  La Paloma is a 1200-megawatt merchant plant located 110 miles northwest of Los Angeles and is able to serve both the San Francisco and Los Angeles markets.[ii]

The La Paloma Power Plant

La Paloma, an independent power plant constructed in 2003, was built by private developers at a cost of about $500 million and is the state’s eleventh largest plant. Its capital cost is completely paid and, even though it is 14 years into its operating life, its lifespan could last another 30 or 40 years. Unlike regulated utilities, it does not have retail customers and is dependent on contracts from utility companies. It gets its natural gas from a pipeline located nearby.

Between 2014 and 2016, La Paloma’s operating level dropped from about 78 percent of capacity to just 50 percent.

 

What is ironic is that the agency that operates the state’s power grid would rather have a new generating plant built, charging consumers for it rather than allow this merchant plant to operate. As IER’s study shows, operating an existing natural gas power plant is about half the cost of operating a new natural gas power plant.[iii]

La Paloma’s troubles began last year due to low market power prices, the lack of a guaranteed contract for its electricity and a new annual review by the grid operator of local electricity demand in ten state energy regions, including Los Angeles. The review was conducted with the premise that each region should be energy self-sufficient, supplied with electricity primarily from natural gas plants within the region to more reliably respond to sudden drops in electricity supply from solar, wind and other renewable sources. La Paloma fell outside the boundaries of all ten regions. The regional boundaries have been used to justify construction of seven new natural gas projects in Southern California to provide reliable power when renewable energy is not producing.

The California Independent System Operator wants a new power plant, the Puente power plant in Ventura County, to be constructed at a cost of about $250 million, which would be paid for by electricity customers. The Puente power project in Ventura County is being developed by Southern California Edison and will be built and owned by NRG Energy Inc. Edison customers would pay for the plant’s construction, regardless of how much the plant produces.

California regulators continue to approve more plants and increase electricity rates, even though California consumers are using less power. The building of new power plants and transmission lines is costing Californians $40 billion a year for electricity, $6.8 billion more than nine years ago, which is a reason why the state’s residential electricity prices are about 50 percent higher than the national average.

Conclusion

La Paloma is not the only power plant in California facing closure due to its policy promoting renewable energy. Pacific Gas and Electric’s Diablo Canyon plant is in a similar situation despite its solid operating experience. The result of California’s poorly designed energy policy is higher prices for its constituency, but that seems to be of little concern to state leaders.


[i] Los Angeles Times, A Central Valley power plant may close as the state pushes new building at customers’ expense, June 10, 2017, http://www.latimes.com/business/la-fi-la-paloma-capacity-20170609-story.html

[ii] Kallanish Energy, California gas power plant La Paloma files for Chapter 11, December 12, 2016, http://www.kallanishenergy.com/2016/12/12/california-gas-power-plant-la-paloma-files-chapter-11/

[iii] Institute for Energy Research, The Levelized Cost of Electricity from Existing Generation Resources, July 2016, https://www.instituteforenergyresearch.org/wp-content/uploads/2016/07/IER_LCOE_2016-2.pdf

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Will Solar Power Be at Fault for the Next Environmental Crisis?

Solar panel waste will become a major issue in the coming decades as old solar panels reach the ends of their useful lifespans and require disposal. Last November, Japan’s Environment Ministry issued a warning that the amount of solar panel waste Japan produces each year is likely to increase from 10,000 to 800,000 tons by 2040, and the country has no plan for safely disposing of it.[i] China has more solar power plants than any other country, operating roughly twice as many solar panels as the United States and also has no plan for the disposal of the old panels. In China, there could be 20 million metric tons of solar panel waste, or 2,000 times the weight of the Eiffel Tower, by 2050.[ii] California, another world leader in deploying solar panels, likewise has no plan for disposal, despite its boasts of environmental consciousness. Only Europe requires solar panel manufacturers to collect and dispose of solar waste at the end of their useful lives.[iii]

Environmental Issues with Solar Panels

Solar panels are manufactured using hazardous materials, such as sulfuric acid and phosphine gas, which make them difficult to recycle. They cannot be stored in landfills without protections against contamination. They contain toxic metals like lead, which can damage the nervous system, as well as chromium and cadmium, known carcinogens that can leak out of existing e-waste dumps into drinking water supplies.

A study published last December determined that the net impact of using solar panels actually temporarily increases carbon dioxide emissions, because of the amount of energy needed in the construction process. But, because newer solar panels have a smaller adverse environmental impact than older models and as their time of operation increases to mitigate the construction effects, some scientists believe the solar industry could develop a net positive environmental impact by 2018.[iv]

According to federal data, however, building solar panels significantly increases emissions of nitrogen trifluoride (NF3), which is 17,200 times more potent than carbon dioxide as a greenhouse gas over a 100-year time period.[v] NF3 emissions increased by 1,057 percent over the last 25 years. In comparison, U.S. carbon dioxide emissions only increased by about 5 percent during that time period.

Regardless, the waste disposal issues regarding solar panels are enormous. According to an analysis by Environmental Progress, solar panels create about 300 times more toxic waste per unit of electricity generated than nuclear power plants. For example, if solar and nuclear produce the same amount of electricity over the next 25 years that nuclear produced in 2016, and the wastes are stacked on football fields, the nuclear waste would reach 52 meters (the height of the Leaning Tower of Pisa), while the solar waste would reach 16 kilometers (the height of two Mt. Everests).

Further, while nuclear units can easily operate 50 or 60 years, solar panels have relatively short operational lifespans (20 to 30 years), so their disposal will become a problem in the next few decades. While nuclear waste is contained in heavy drums and regularly monitored, very little has been done to deal with solar waste. Solar waste outside of Europe tends to end up in a large stream of electronic waste.

 

A report determined that it would take 19 years to recycle all of the solar waste that Japan is expected to produce by 2020. By 2034, the annual waste production will be 70 to 80 times larger than that of 2020. (See graph below.) The projected annual peak of 810,000 tons of solar waste in Japan is equivalent to 40.5 million panels. To dispose of that amount of solar waste in a year would mean getting rid of over 110,000 panels per day.[vi]

 

Conclusion

Solar photovoltaic energy is not as environmentally conscious as many think it is. Besides being an intermittent source of energy and more expensive than traditional technologies[vii], it has serious waste disposal issues that few countries are tackling. The hazardous materials used in their construction are not easy to recycle and can contaminate drinking water if solely discarded with other electronic waste.


[i] Environmental Progress, Are We Headed For a Solar Waste Crisis?, June 21, 2017, http://www.environmentalprogress.org/big-news/2017/6/21/are-we-headed-for-a-solar-waste-crisis

[ii] Daily Caller, Old Solar Panels Causing An Environmental Crisis In China, August 1, 2017, http://dailycaller.com/2017/08/01/old-solar-panels-causing-an-environmental-crisis-in-china/

[iii] Solar Waste/ European WEEE Directive, http://www.solarwaste.eu/faq/

[iv] Daily Caller, Solar Power Actually Made Global Warming Worse, Says New Study, December 7, 2017, http://dailycaller.com/2016/12/07/solar-power-actually-made-global-warming-worse-says-new-study/

[v] Daily Caller, Solar Panels Increased Emissions Of A Gas 17,200 Times More Potent Than CO2, March 1, 2017, http://dailycaller.com/2017/03/01/solar-panels-increased-emissions-of-a-gas-17200-times-more-potent-than-co2/

[vi] Nikkei Asian Review, Japan tries to chip away at mountain of disused solar panels, November 8, 2016, https://asia.nikkei.com/Tech-Science/Tech/Japan-tries-to-chip-away-at-mountain-of-disused-solar-panels?page=1

[vii] Institute for Energy Research, The Levelized Cost of Electricity from Existing Generation Resources, July 2016, https://www.instituteforenergyresearch.org/wp-content/uploads/2016/07/IER_LCOE_2016-2.pdf

 

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Climate Optimism, Energy Realism for the Next Generation

I recently addressed a group of highly motivated high school students about environmental and energy issues relating to climate change. The event, Local to Global Politics: Climate Change, was hosted by the World Affairs Council of Houston.

Knowing that climate activists abounded at the two-and-a-half day affair, I pitched an optimistic view of free markets and a cautionary one about intellectual elites identifying problems for the government to solve.

I began my talk with a warning: my view was different—with a number of takeaways that they might not have heard, much less appreciated, before. I added that my perspective was now the very one emanating from Washington, DC, and the Environmental Protection Agency. How things change!

My first slide was a quotation from William Happer, Professor of Physics, Princeton University: “I believe that the increase of CO2 is not a cause for alarm and will be good for mankind.”

Happer is focused on the carbon dioxide fertilization effect. Hardly controversial, a New York Times piece earlier this year, “A Global Greening,” explained how plant growth has dramatically increased from CO2-induced photosynthesis. A young tree just planted, I told the students, would grow noticeably faster today than if it had been planted a century or two ago, largely as a byproduct of fossil fuel usage since that time.

What about the enhanced greenhouse effect of higher CO2 atmospheric concentrations acting as a blanket, blocking some of the incoming sun radiation from escaping back into space? I argued that this blanket is more like a bed sheet than a down comforter. The global lukewarming school disputes the catastrophic warming predicted by some climate models.

Climate scientists such as Judith Curry have documented how climate models have overpredicted actual warming, a gap that continues to widen. In fact, the warming “pause” since the late 1990s is actively debated in the peer-reviewed literature.

Climate economics has a role in the debate, I also explained to students. Nature is not taken as optimal; economists see benefits, not only costs, from the human influence on climate. A moderate increase in warming and precipitation (they go together) are positive; higher sea level is not. But recorded sea level increases have been modest, and recent predictions have been for slower increases.

Overall, I painted a very different picture from that expounded in Al Gore’s An Inconvenient Truth (2006) and in An Inconvenient Sequel: Speaking Truth to Power (2017).

Turning to energy policy, I defended fossil fuels compared to government-enabled wind power, (on-grid) solar power, and ethanol. Fossil fuels are energy dense and have built-in storage; they are thus affordable and reliable (non-intermittent) compared to renewables.

Carbon-based energies are the sun’s work over the ages—a stock—compared to the very dilute flow from the sun and wind. This explains why so much infrastructure (steel, concrete, etc.) is required to turn free energy inputs into usable energy (electricity).

It is far better, I opined, to build power plants near the population centers and avoid energy sprawl from land-intensive wind farms that must be sited far away from where people live. (Think of the $7 billion CREZ system built to transmit wind energy from the wilds of West Texas and the Texas Panhandle to San Antonio, Dallas, and other major population centers.)

My last slide made a case that fossil fuels were environmentally superior to renewables for these reasons. I shared a quotation. “The greenest fuels are the ones that contain the most energy,” stated Peter Huber in Hard Green: Saving the Environment from the Environmentalists. “The greenest possible strategy is to mine and to bury, to fly and to tunnel, to search high and low, where the life mostly isn’t, and so to leave the edge, the space in the middle, living and green.”

At the end of my talk, a student raised his hand. He was a climate activist and asked what he should do in light of my postulations.

My answer? Study both sides of the issue. Good intentions are not enough. Decide if the climate issue, on one side or the other, or another issue completely, is worth devoting your personal energy and resources to.

The EPA will soon convene a red team–blue team debate on climate science and its implications for climate policy. This same debate deserves to be held in every classroom and public forum across the country. Let the debate continue with assumptions, theory, and data—not ad hominem arguments—leading the way.

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Will Consumers Forfeit Traditional Vehicles for Electrics?

Globally, the number of electric vehicles on the road in 2016 was 2 million, according to the International Energy Agency (IEA). China, Europe and the United States 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—and more than twice the volume sold in the United States—due to its lucrative subsidies and large population. 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. Electric vehicles still made up only 0.2 percent of passenger light-duty vehicles on the roads of the world 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.[i]

 

Source:https://upload.wikimedia.org/wikipedia/commons/b/be/Top_PEV_global_markets_stock_Dec_2016.png

European countries are calling for a ban on the sale of combustion-engine vehicles—Norway by 2025 and France and Britain by 2040. However, while these countries have touted the bans, they have not yet legislated them. Unless the majority of their consumers prefer electric vehicles in the future, it is unlikely that they will implement these laws because subsidizing them is expensive. For electric vehicles to claim that much market share, they need to at least match the driving range of combustion vehicles, and their refueling time needs to be greatly reduced to nearly mimic the time it takes to refuel a combustion-engine vehicle. Further, a huge increase in electric vehicles would require many thousands of new charging stations, an upgrade in generating capacity, improved batteries and new sources of government income to replace lucrative fuel taxes that European governments receive from purchases of gasoline and diesel.

Bans on Combustion-Engine Vehicles

Norway, which has the highest penetration of electric cars in the world, has a target of only allowing sales of 100 percent electric or plug-in hybrid cars by 2025. About 40 percent of all cars sold in Norway last year were electric or hybrid vehicles due to its substantive package of incentives, which includes exemptions or reductions in taxes, no charges on toll roads or ferries, free municipal parking and access to bus lanes.[ii] Norway’s vast hydroelectric power system provides the majority of electricity for charging its electric vehicles.

Because France gets most of its electricity from nuclear power, it sees a ban in 2040 on gasoline and diesel vehicles as a way for the country to meet its commitments to the Paris accord.[iii] Britain’s new clean air strategy has sales of new gasoline and diesel cars and vans ending by 2040 and is making 255 million pounds ($332 million) available for local governments to take short-term actions like retrofitting buses.[iv]

Besides Norway, France and the UK, Austria, China, Denmark, Germany, Ireland, Japan, the Netherlands, Portugal, Korea and Spain have targets for electric car sales and some are considering banning gasoline and diesel vehicles.[v] The Netherlands has a motion to ban diesel and gasoline cars by 2025.[vi] India is considering no longer selling gasoline or diesel cars by 2030.[vii]

Auto Manufacturers Are Supporting the Electric Vehicle Market

Auto manufacturers are taking the electric vehicle market seriously. Volvo has announced plans to go all electric. The company’s long-term plan is to transition to three fully electric cars between 2019 and 2021, although sales of older pre-2019 gasoline vehicles could extend out to 2025. Volvo, which is owned by China’s Geely, plans to sell 1 million electric or hybrid cars globally by 2025. It is the only major automaker other than Tesla to make the 100 percent commitment to electric vehicles.[viii]

Toyota has a goal for all of its vehicles to be zero emission by 2050 and has favored electric vehicles for short-distance commuting.[ix] The company is in the production engineering stage of building a solid-state battery that will improve on the weight and range of the lithium-ion battery and possibly on the charging time.

Because it takes 4 to 5 years to design and develop a new car, many automakers began planning for electric vehicles in 2014 to debut by 2019, upping the model availability by almost a factor of three in the five-year period. By 2022, 143 models of electric vehicles are expected to compete with combustion-engine vehicles.[x] (See the chart below.)

 

Companies Upping Their Electric Vehicle Forecast

The IEA more than doubled its forecast for electric vehicles, increasing it to 58 million in 2030 from 23 million.[xi]

Oil producing companies have also increased their electric vehicle forecasts. Exxon Mobil expects electric vehicles to reach about 100 million in 2040 from a previous forecast of about 65 million. BP expects 100 million electric vehicles on the road by 2035—a 40 percent increase compared with a year ago.

The Organization of Petroleum Exporting Countries (OPEC) increased its forecast for sales of plug-in electric vehicles by more than a factor of five. OPEC raised its electric vehicle forecast to 266 million in 2040 from 46 million in last year’s forecast. (See graph below.) Electric vehicles are expected to account for 12 percent of the market within 23 years in OPEC’s new projection, compared to 2 percent in the prior year’s forecast. OPEC expects half the number of diesel vehicles in this year’s forecast, compared to last year’s forecast.

 

Source: https://www.bloomberg.com/news/articles/2017-07-14/big-oil-just-woke-up-to-the-threat-of-rising-electric-car-demand

Bloomberg New Energy Finance expects electric cars to outsell gasoline and diesel models by 2040 based on a projected rapid decline in the cost of lithium-ion battery units. It expects 530 million plug-in cars on the road by 2040—about a third of the total number of cars worldwide. It also expects those cars to reduce oil demand by 8 million barrels by 2040. According to the agency, the world’s top automakers have a combined plan to sell 6 million electric vehicles a year by 2025, increasing to 8 million in 2030.

Consumers Will Decide the Fate of Electric Vehicles

Despite what these forecasters project, consumers will determine the future market for electric vehicles. If consumers find that electric vehicles are too costly, that they need recharging too frequently or that they are inconvenient due to a dearth of charging stations, they may decide that gasoline and diesel vehicles are a better buy. Electric vehicles still have range limitations, which can be more restrictive than manufacturers’ estimates. Because recharging stations are still too few to be available when needed, drivers must plan their trips around charging opportunities. Due to these factors, no more than 10 percent of consumers who consider purchasing an electric vehicle actually buy one.[xii]

If these forecasts are generally in the ballpark, there are still the long-term issues of whether the charging infrastructure will keep up with the number of vehicles and whether electric grids will be able to handle the additional demand. Further, if the mix of technologies in the generating sector does not change to zero emission technologies in concert with the growth in electric vehicles, the change will be for naught because the electricity that fuels the vehicles will be generated from technologies that emit carbon dioxide.

Conclusion

Consumers must be convinced that the combustion era is ending and electric is taking over for the bans on combustion vehicles to be effective. Otherwise, habits are unlikely to change. While financial incentives can help bring electric-vehicle prices closer to those of traditional vehicles, they are not enough for consumers to forfeit their traditional vehicles, given the limited driving range and lengthy charging time of electric vehicles.


[i] 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

[ii] Norwegian EV Policy, http://elbil.no/english/norwegian-ev-policy/

[iii] Guardian, France to ban sales of diesel and gas vehicles by 2040, July 6, 2017, https://www.theguardian.com/business/2017/jul/06/france-ban-petrol-diesel-cars-2040-emmanuel-macron-volvo

[iv] New York Times, Britain to Ban New Diesel and Gas Cars by 2040, July 26, 2017, https://www.nytimes.com/2017/07/26/world/europe/uk-diesel-petrol-emissions.html

[v] CNN Money, These countries want to ditch gas and diesel cars, July 26, 2017, http://money.cnn.com/2017/07/26/autos/countries-that-are-banning-gas-cars-for-electric/index.html

[vi] Netherlands moots electric car future with petrol and diesel ban by 2025, April 18, 2016, https://www.theguardian.com/technology/2016/apr/18/netherlands-parliament-electric-car-petrol-diesel-ban-by-2025

[vii] Times of India, India aiming for all-electric car fleet by 2030, petrol and diesel to be tanked, April 30, 2017, http://timesofindia.indiatimes.com/auto/miscellaneous/india-aiming-for-all-electric-car-fleet-by-2030-petrol-and-diesel-to-be-tanked/articleshow/58441171.cms India aiming for all-electric car fleet by 2030, petrol and diesel to be tankedIndia aiming for all-electric car fleet by 2030, petrol and diesel to be tankedIndia aiming for all-electric car fleet by 2030, petrol and diesel to be tanked

[viii] Seeking Alpha, Volvo draws notice with all-in EV commitment, July 5, 2017, https://seekingalpha.com/news/3277029-volvo-draws-notice-ev-commitment?dr=1#email_link

[ix] Reuters, Toyota takes stake in Mazda, links up for $1.6 billion U.S. plant, August 4, 2017, https://www.reuters.com/article/us-toyota-mazda-idUSKBN1AK0RF

[x] Seeking Alpha, Tesla Competition Watch: 143 Electric Car Models In The Market By 2022, July 10, 2017, https://seekingalpha.com/article/4086652-tesla-competition-watch-143-electric-car-models-market-2022?auth_param=1cqlaa:1cm76t4:c95930f8eeda23d72a967493e2ec001a&dr=1

[xi] Bloomberg, Big Oil Just Woke Up to Threat of Rising Electric Car Demand, July 14, 2017, https://www.bloomberg.com/news/articles/2017-07-14/big-oil-just-woke-up-to-the-threat-of-rising-electric-car-demand

[xii] National Post, Leonid Bershidsky: Killing fossil-fuel engines is easy. Make an electric car people actually want to drive, July 31, 2017, http://nationalpost.com/opinion/leonid-bershidsky-killing-fossil-fuel-engines-is-easy-make-an-electric-car-people-actually-want-to-drive/wcm/61958d66-fff8-4028-a11d-438114e7dfb9

 

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Actually, Plenty of Intellectuals Oppose a Carbon Tax

As is his wont, Nobel laureate Paul Krugman recently chided Bret Stephens, who had been lamenting the intellectual downfall of American conservatism. Krugman agreed with Stephens that today’s right-wing personalities are no substitute for the late Bill Buckley, but Krugman argued that there really never was a “golden age” of conservatism. These guys have always been morally bankrupt and low-brow thinkers, in Krugman’s book. He went on to list four key policy areas in which conservatives, according to Krugman, have either fumbled the ball or have been awful all along. One area in which Krugman thinks conservatives have regressed is environmental policy. “The use of markets and price incentives to fight pollution,” Krugman wrote, “was, initially, a conservative idea condemned by some on the left. But liberals eventually took it on board — while cap-and-trade became a dirty word on the right.”

On his popular blog, economist Tyler Cowen pushed back against Krugman, with the apparent intent of defending conservatives’ intellectual honor. But rather than herald the sophistication of conservative critiques against cap-and-trade and carbon taxes, Cowen countered Krugman by dismissing the notion that conservatives oppose those measures. Oddly, Cowen argues that “[c]onservative intellectuals never have turned against the idea of a carbon tax, as evidenced by Greg Mankiw’s leadership of the Pigou Club.” But here, Cowen is simply mistaken. Plenty of conservative (and libertarian) intellectuals have indeed publicly come out against carbon taxes, and some of these are academics with more training in environmental economics than Greg Mankiw.

In the rest of this post I’ll highlight some examples, and argue that Krugman is right when he says that over time, the conservative movement has crystallized its opposition to carbon taxes. Where I differ from Krugman is in my defense of this opposition as being not just consistent with conservative (and libertarian) principles but also eminently reasonable according to the peer-reviewed economic analysis, if you delve into the literature dealing with realistic complications.

Krugman vs. Mankiw on Conservatives and the Environment

Here is the full passage in which Krugman discussed the conservative movement’s alleged descent into hackery when it comes to environmental issues:

On [the] environment, a similar turn took place a bit later. The use of markets and price incentives to fight pollution was, initially, a conservative idea condemned by some on the left. But liberals eventually took it on board — while cap-and-trade became a dirty word on the right. Crude slogans–Government bad!—plus subservience to corporate interests trumped analysis.

To reiterate, Tyler Cowen thought Krugman was being unfair in the above characterization. Cowen responded:

I believe [Krugman’s description] is pretty far from the reality, here are a few points:

1. Conservative intellectuals never have turned against the idea of a carbon tax, as evidenced by Greg Mankiw’s leadership of the Pigou Club. Cap-and-trade is somewhat less popular, but that is probably the correct point of view, given the time consistency problems with governments that increase the supply of permits, as has happened in Europe.

2. Water economics is a big part of environmental economics.  “Raise the price” and “define property rights better” remain central ideas in that field, commanding a lot of attention.  David Zetlandis one recent exemplar of these ideas…

7. Applying property rights analysis to animal herds, animal ownership, and the tragedy of the commons remains a significant conservative idea.  You will note throughout I don’t like calling these “conservative” ideas, they are simply good ideas or bad ideas. [Bold added.]

Interpreted literally, Cowen is clearly mistaken when he argues that the existence of the Pigou Club (a group that advocates higher gasoline taxes and other mechanisms to correct what they perceive as “negative externalities” in the framework developed by A.C. Pigou) means that Krugman is wrong about conservative intellectuals. Surely Krugman wasn’t claiming that every last conservative on Earth is adamantly opposed to a carbon tax. Rather, Krugman was arguing that he had notice the conservative movement in general had crystallized its opposition, coming to view the carbon tax as another example of “big government.”

And on this, I agree with Krugman. After all, a carbon tax (or its kissing cousin, cap-and-trade) was a fairly wonkish idea that took a while to grow in popularity enough for the rank and file conservative to even take note of. But when they did, conservatives’ instincts kicked in: Since when do conservatives sign on to massive new taxes, because PhDs are telling them scary things about computer simulations in the year 2100?

To repeat, my description above is the kind of “low-brow knee jerk hostility” to carbon taxes that Krugman is mocking. I disagree with Krugman on this point; I think the conservatives’ gut instincts are eminently sensible. But in the rest of the post, I’ll explain why I disagree with Cowen as well: There are many economists and other intellectuals who are fully versed in the literature, and oppose a carbon tax for very sophisticated reasons. It is actually economists like Greg Mankiw who (to my knowledge) have not responded to challenges coming from “right wing” economists on these matters. It is Mankiw who is offering a very simplistic analysis.

Conservative and/or Libertarian Intellectuals Against a Carbon Tax

At the risk of narcissism, let it begin with myself: I have a 2009 peer-reviewed critique of William Nordhaus’ case for a carbon tax. My critique was certainly not, “Government bad!” à la Krugman. The interested reader can peruse my article, where I walked through the assumptions and methods Nordhaus used in his DICE model to generate his policy conclusions. Maybe I’m right and maybe I’m wrong, but I certainly did more than write, “Me no like taxes.”

More recently, I am the co-author (along with climate scientists Pat Michaels and Chip Knappenberger) of a comprehensive critique of carbon taxes for the Cato Institute. We cover the latest climate science literature, and we review the historical examples of a carbon tax (to show that they do not live up to the promises of advocates). We also explain the tremendous importance of the “tax interaction effect,” something that many casual supporters of a carbon tax do not understand. (See my explanation here.)

There is also the panel of experts we assembled for an IER event on carbon taxes back in the summer of 2013. First I outlined some surprising facts about “the social cost of carbon.” Second, Ross McKitrick explained why the “double dividend” was so elusive in practice and that the “optimal” carbon tax could be roughly $0. Third up was Ken Green, who explained why he had initially supported a carbon tax but then changed his mind. Finally David Kreutzer explained the results of some of the modeling his group had done for the Heritage Foundation, and why he opposed a carbon tax.

The case of Ross McKitrick is particularly instructive. McKitrick is the author of a graduate-level text on the economics of environmental issues. He has written extensively on the interaction of a new carbon tax with existing taxes and regulations, and indeed in July came out with a new working paper. Here is the abstract:

This paper makes two contributions to the economics of pollution policy. First, many studies have looked at the effects of emission taxes in the absence of regulations and vice versa, but the implications for optimal tax design when one is layered on top of the other have been ignored, even though the practice is commonly observed. I develop a model of multiple polluting sectors capable of providing a tractable characterization of this case. Second, numerical modeling has shown that tax interactions can yield a positive damage threshold below which any emission tax is welfare-reducing even if marginal damages are positive, but this has largely been ignored in both the theoretical and policy literatures. I show that a positive damage threshold occurs when the policy is not revenue-raising and/or the rest of the tax system is not optimized, but can also occur in a second-best context with optimal taxes and full revenue-recycling, a result not previously shown. Introducing a pollution tax when one firm is already subject to an emissions constraint yields a positive damage threshold that goes up, the more the regulation distorts the income tax base. Hence, under more general conditions than have previously been realized, pollution taxes are not guaranteed to raise welfare even when marginal damages are positive and revenues are fully recycled. [Bold added.]

Say what you will about McKitrick’s paper, but he’s not burying his head in the sand and ignoring the science.

For another example, David R. Henderson is an excellent economist (whose political views would best be described as libertarian, not conservative) who teaches a course on energy economics. He is by no means a “science denier,” but thinks that even if manmade climate change is occurring, it doesn’t necessarily follow that governments need to “do something” about it. (In the WSJ article that I’ve linked, Henderson is joined by John H. Cochrane, another excellent economist but about whom I do not know his background in the economics of climate change.)

Finally, consider Oren Cass, a Senior Fellow at the Manhattan Institute. He has researched and written extensively on the economics of climate change. He is opposed to a carbon tax not out of knee-jerk opposition to taxation per se (indeed I personally probably disagree with Cass’ philosophy on the proper role of the federal government), and not because he refuses to read up on the science. No, Cass uses “the consensus science” to show that the standard arguments for aggressive government action in this sphere have not been justified.

Specifically, Cass calls the proposals for a U.S. carbon tax a “shell game” because its proponents tout one alleged virtue of a carbon tax, only to undo that virtue when patching up one its flaws raised by the critics. (For example: “The same revenues are rhetorically spent to achieve multiple ends, even as the different promises made to each constituency would be rejected by the others.”)

Conclusion

Paul Krugman is right that conservatives over the years have crystallized their opposition to a carbon tax, and that this position fits “naturally” with the rest of their views. However, Krugman is wrong for arguing that this somehow proves conservatives are ignoring the facts.

At the same time, Tyler Cowen missteps when he tries to rescue conservative honor by arguing that the intellectuals are on board with a carbon tax. No, not all of them. And as I’ve shown in this article, there are several prominent, expert economists (with political persuasions that are conservative and/or libertarian) who reject carbon taxes after conducting much deeper analyses than Greg Mankiw and others who think a Pigovian tax is the no-brainer solution to an alleged negative externality.

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Book Review: “Keeping the Lights On at America’s Nuclear Power Plants”

For decades, misplaced fears of nuclear energy convinced environmentalists and lawmakers to shutter America’s nuclear power plants. However, a new book seeks to set the record straight on nuclear and usher in a brighter future for the vilified industry.

Written by Jeremy Carl and David Fedor, two energy scholars at Stanford University, Keeping the Lights On at America’s Nuclear Power Plants argues that nuclear power has enormous potential to provide America safe and reliable electricity while lowering costs for consumers. Unfortunately, government policy has increased the average cost of nuclear-generated electricity by 29 percent since 2002, from $28 per megawatt hour to $36, by imposing ever expanding regulatory burdens on nuclear power plants.

“These costs are driven by the implementation of $3 billion in Nuclear Regulatory Commissioned-mandated antiterrorism capitol expenditure and additional security staffing… and license extension investments,” the authors said.

License extensions are especially burdensome because anti-nuclear advocates exploit the opportunity to hobble power plants with extra costs or deny their extension requests all together. The Pilgrim Nuclear Power Station in Massachusetts, for example, faced fierce litigation from advocacy groups over safety and environmental concerns before it received approval to extend its license. But after six years of expensive delays, the plant was forced to close.

Nuclear plants are also being hobbled by generous subsidies for wind and solar. The Wind Production Tax Credit pays wind companies $23 for every megawatt hour they produce. Industry experts observe these corporate welfare dollars make up roughly half of wind generators’ revenues and allow them to undercut their nuclear competitors by selling electricity at artificially low prices.

The combined effect of renewable subsidies and heavy-handed regulations has caused nuclear power plants to close their doors across the country. A recent report from the Energy Information Administration (EIA) projects that 25 percent of America’s current fleet of nuclear reactors will close by 2050. And nuclear’s share of America’s electricity market will decline from 20 percent to just 11 percent.

In order to reverse this extraordinary decline, Carl and Fedor propose streamlining the federal government’s expensive licensing and testing process. The current Nuclear Regulatory Commission (NRC) regime imposes enormous regulatory burdens on building and upgrading nuclear reactors. According to a study in Energy Policy, the construction costs of building new nuclear power plants has increased nearly 1,600 percent since the 1960’s, from $650 per kilowatt to $11,000. The authors conclude, “Licensing, regulatory delays, or back-fit requirements are a significant contributor to the rising [construction cost] trend.”

The NRC’s licensing regime is even more burdensome for newer and more advanced nuclear reactors. The authors note that the lack of regulatory certainty in the NRC’s byzantine approval process hinders investment in next generation nuclear technologies.

“The engineering and design of a new nuclear reactor can easily incur $500 million to $1 billion in costs and a decade of time, not including the licensing process. This makes streamlining of licensing and testing all the more important in reducing investment risks,” the authors said.

Heavy-handed regulations are especially unnecessary when you consider that the latest nuclear reactors in development are far less risky than the NRC’s safety mandates. The NRC requires that every nuclear power plant have less than 1 in 10,000 chance that an accident would damage its reactor or fuel, a metric known as Core Damage Frequency (CDF).

But next generation reactor are far safer than these federal requirements. For instance, advanced light water reactors (ADWR) that Mitsubishi Motors develops are 33 times safer than the CDF standard. Westinghouse’s new ADWR is 588 times safer. And NuScale Power’s small modular reactor design is 10,000 times safer than the NRC’s requirements.

Yet despite these technological breakthroughs in the nuclear industry, NRC’s licensing process continues to impede entrepreneurs from bringing these innovations to market. Nuclear power plant developers on average wait 20 years before the NRC grants them permission to build. The newest nuclear reactor, the Watt Barr Station, waited 43 years before it were permitted to open.

In order to accelerate the development of new nuclear technologies, the authors call for shifting the NRC’s license process towards a “test-then-license” system. Under this approach, the NRC would grant companies step-by-step approval as they wade through the process, similar to how the Food and Drug Administration certifies medications. These changes would make it easier for companies to navigate the NRC’s requirements and provide greater certainty for investment in nuclear power.

Keeping the Lights On At America’s Nuclear Power Plants  is a timely reminder that America can and should reassert nuclear power as a key pillar of our electric grid. Unless lawmakers and the public at large recognize that nuclear plays a vital role providing baseload energy to power our homes, offices, and factories, regulatory barriers will continue to shutter nuclear plants and make energy less accessible and more expensive for everyone.

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Whitehouse-Schatz Carbon Tax Proposal Ignores Realities of Political Process

Last week, at an event at the American Enterprise Institute, Senators Sheldon Whitehouse (D-RI) and Brian Schatz (D-HI) unveiled the American Opportunity Carbon Fee Act—a carbon tax that places a $49 per ton fee on carbon emissions. According to Whitehouse and Schatz, the tax would be implemented at the point of extraction or importation of fossil fuels and would steadily increase over time. Taxing carbon emissions at the point of extraction would mean that the tax would be placed at the earliest point in the supply chain—during the mining or drilling process used to recover fossils fuels.

The plan’s advocates claim the bill will be revenue neutral, as revenues will be used to offset a reduction in the corporate tax rate and to offer workers an annual inflation-adjusted $550 refundable tax credit to offset payroll taxes. The bill also plans to use the carbon tax revenue to deliver $10 billion annually in grants to states to help low-income and rural households and to help workers transition to new industries. In addition to carbon tax credits, the plan also proposes a border adjustment tax to adjust prices of imports and exports so that they also reflect the cost of carbon emissions.

Advocates of the carbon tax argue that it is the preferable way to internalize the costs of carbon emissions because it allows market actors to achieve a given amount of emissions reductions at the lowest cost to them. The carbon tax rate is calculated based on a figure known as the social cost of carbon (SCC), which attempts to approximate the cost of carbon emissions. As IER noted in a formal comment on the issue, the social cost of carbon is a misleading figure and should not serve as a basis for public policy.[1]

In addition to the problems surrounding the social cost of carbon, there are also concerns about the effect a carbon tax would have on the American economy and the effectiveness a carbon tax would have on actually reducing global temperatures in a meaningful way. Given the degree of focus others have devoted to these areas of debate, I want to focus instead on how the political process is likely to shape a carbon tax bill.

A Brief Introduction to Public Choice

Conventional wisdom holds that actors in the political sphere are motivated to make decisions based on what they think will promote the “public good.” Although this may be one factor in an individual’s political decision-making process, assuming that the “public good” is the primary motivation behind political decision-making does very little to describe the actual behavior of voters, politicians, and bureaucrats. This assumption allows people who routinely push for government intervention in the economy to pay little attention to the effect the political process will have on their policy proposals.

It is a mistake to view actors in the public sector as magnanimous public servants guided primarily by their desire to promote the public good. When a person moves from the private sector to the public sector, there is no magical stripping of their self-interest; they continue to seek what is best for them, except now under a different set of incentives and institutions guiding their behavior. This insight—often referred to as behavioral symmetry—means that it is reasonable to apply the rational actor model of economic theory to the political process. In other words, just as we believe that self-interest is the primary thing that influences decision-making by individuals in a market setting, the same holds true for people in political life. This realistic view of political behavior is called public choice theory, which can be best summarized as the application of economic theory and modeling to the analysis of political behavior.

It’s clear that most advocates of a carbon tax would prefer not to apply public choice analysis to their proposals because doing so exposes the carbon tax to further scrutiny. By using this realistic approach to examining political behavior, it is clear that the political process is likely to distort a carbon tax plan in ways that should concern anyone interested in building a freer and fairer economy.

Government Will Seek to Maximize Revenue

Because a tax represents a source of revenue for government, Congress is likely to set a carbon tax rate that collects more revenue than one that simply reflects the uninternalized costs of carbon emissions.

In March, Benjamin Zycher of the American Enterprise Institute explained why this is the case in a report where he outlined the problems of a similarly structured carbon tax plan released by the Climate Leadership Council:

In short, the efficient tax rate is something approximating the marginal social cost of GHG (“carbon”), with perhaps some downward adjustment for the deadweight economic costs (“excess burden”) imposed by the tax system on the economy. That is not the same as the revenue-maximizing tax rate, and democratic political institutions can be predicted to opt for the latter under a broad range of assumptions.

“Revenue maximization” means the present value of the revenue stream over some time horizon, that is, at some discount rate. Accordingly, the tax rate that maximizes revenues over a short period is very likely to be higher than that maximizing revenues over the long run, due to the greater ability of market participants to find ways to avoid the tax given more time to do so, in particular when the tax rate is higher rather than lower. Because marginal members of the congressional majority are likely to be the incumbents in greatest danger of defeat in the next election, it is not difficult to predict that the political equilibrium for a carbon tax will be a rate maximizing revenues over a time period shorter rather than longer, precisely because for those marginal members of the majority the time horizon is the next election.

In other words, the incentive for government to collect more revenue through a carbon tax in the short-term will lead Congress to select a carbon tax rate that is above the uninternalized cost of carbon emissions. The result: an already costly policy that limits economic growth becomes even more expensive and destructive to our economy.

Tax Credits Will Go to the Politically Connected 

The American Opportunity Carbon Fee Act proposes to return the tax’s revenues to American workers through annual tax credits on payroll taxes. Here again, advocates of this carbon tax plan are overlooking the impact the political process will have on their legislation.

It’s clear that a carbon tax will have disproportionate effects on the fossil fuel industry and areas like Texas, Alaska, and West Virginia where that industry is a major component of the economy. Therefore, it’s naive to think that the revenue from a carbon tax will not be used in a way that favors these groups over the rest of the American people. A realistic examination of our political system demonstrates that special interests stand to gain more in exemptions and special privileges than the average taxpayer stands to lose through any given tax. When you combine that with the fact that businesses and special interest groups have the time and the resources to dedicate to lobbying for special treatment, it becomes clear that the revenues from a carbon tax won’t be distributed to the American public as evenly as the plan describes. The more likely scenario is that the revenue from a carbon tax will be directed toward groups who stand to lose the most if a carbon tax is adopted.

The Affordable Care Act is a perfect example of the process described above. The ACA required insurance companies to offer coverage to every applicant but also restricted insurers from charging premiums that accurately reflect the risk of the people they were insuring. The fact that premiums were forcibly set too low created an enormous financial strain on health insurance companies. However, because it was clear that the ACA would have a negative impact on health insurers, a complicated system of subsidies was offered to these companies to alleviate their financial struggles. As health insurance premiums skyrocketed for average Americans, big businesses were gifted billions of dollars to ease their pain.

It’s easy to see how a similar scenario will play out with a carbon tax. Businesses that are hurt most by a carbon tax will lobby for subsidies from government to offset the financial burden, and the revenue from the carbon tax will be directed disproportionately to them.

Border Carbon Adjustments

This plan also calls for a border adjustment tax on the carbon content of both imports and exports in order to protect American businesses and punish nations that have not imposed a carbon tax. What is actually being described here is a complicated system of price adjustments to imports and exports—one that no serious advocate of a liberal market economy should be willing to advocate.

Given the complexity of international trade and the fact that imports and exports often contain components from several different countries, a border adjustment is likely to significantly grow the size of government and its involvement in international trade. A border adjustment tax on carbon would require things like: tracking and calculating the carbon price of each component of a good based on its country of origin; adjusting prices for exchange rates; and adjusting these values based on the proportion of each component’s overall value of the good. It’s clear that this complicated system would require an aggressive expansion of government’s already over-involved role in trade, making it more difficult for goods to flow across borders.

Finally, like many other parts of the bill, carbon-based border adjustment taxes are also susceptible to influence by interest groups. The complexity of border-adjusted carbon pricing gives lobbyists and special interests more opportunities to exploit the system through loopholes, special rates, and exemptions—something we can reasonably expect the groups most affected by border adjustment taxes to lobby for.

The American Opportunity Carbon Fee Act Is Not a Market Solution

The most astonishing part of this proposal is that it is being touted as a market-based solution to carbon pricing. Yes—this proposal and its advocates are using language that might sound familiar to advocates of the free market, as prices are certainly an important element of the market process. However, it should be clear that this proposal calls on the political process to set the price of carbon—a process that is unlikely to end in the way carbon tax advocates describe. As such, the aspects of this bill that sound like a market-based solution are merely a veneer disguising what the American Opportunity Carbon Fee Act really is: a complex system of wealth transfers and border taxes that are likely to serve special interests at the expense of the American people.

 


[1] [T]he use of the SCC as an input into federal regulatory actions is totally inappropriate. The Administration is treating the SCC as if it is a scientifically valid, objective fact of the external world, akin to the charge on an electron or the boiling point of water at sea level. However, the SCC is no such thing, at least in our present state of understanding. Rather, the SCC is an arbitrary output from very speculative computer models. It can be adjusted up or down as the analyst wishes, simply by changing a few key parameter choices. Simply by adjusting the parameter and modeling choices in plausible ways, a knowledgeable economist can generate SCC estimates that are very high, very low, or even negative—meaning that carbon dioxide emissions actually shower “positive externalities” on humans beyond the direct benefits to the emitters, and therefore should (according to the Administration’s logic) receive federal subsidies.

 

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