Is an economist allowed to oppose the XL pipeline?

It feels at times as if opposing the XL pipeline requires one to give up their keys to the Energy Institute executive washroom. Chris Knittel has argued that stopping XL would yield  little to no reductions in emissions. Severin Borenstein sees the issues much like I do, but concludes that trying to combat climate change by blocking the pipeline doesn’t seem like a winning strategy. Even Meredith Fowlie appears non-comital - and she hangs out with Yaks!.  The arguments many economists (and others) have made include the following.

  • Even the large reserves of the oil-sands region are small potatoes in the global carbon budget.
  • Oil-sands production has grown cleaner and more efficient, so that emissions from new production may not be much worse than that from conventional oil production.
  • Oil is pretty fungible, so if we don’t buy it someone else will.
  • Oil is pretty fungible, so if we don’t buy from Canada, we’ll buy from Venezuela, and their oil is worse.

Each of these points are valid in at least a narrow sense, but also convey the true nature of the challenge facing us in trying to reduce greenhouse gas emissions.  Climate change is a global problem and GHG emissions are a global “public bad.”  Many of our efforts to combat GHG emissions locally are undermined by spillovers that ensue as the global economy adjusts to shifts in preferences (say against carbon intensive fuels) in one location. We see this problem all the time. California may decide it doesn’t want to buy from coal plants anymore, but that won’t matter if consumers in other states are still willing to. California may not want to consume conventional corn-ethanol, but other parts of the country don’t share that view so we just consume the clean stuff while they take the rest.

Much of the problem stems from the relationship between CO2 emissions and the consumption of fossil fuels, which are an exhaustible resource. With exhaustible resources, some – maybe a lot –  of the market price reflects the scarcity value of the fuel. Policies targeted at locally reducing the demand for fossil fuels (energy efficiency, renewable energy, biofuels) may shift demand in one place, but also lower prices of this scarce resource in other places. The resulting expansion of consumption elsewhere can greatly undermine the effectiveness of the demand-reducing policies.

What the XL pipeline debate encapsulates is both the appeal and distastefulness of tackling this problem by trying to limit the supply of fossil fuels, rather than the demand. Policies taken to reduce supply can be more effective in avoiding the spillover trap. No one gets to burn the fuel if it stays in the ground.  What matters is whether reducing this supply leads to more output from some other source of supply – or if the other sources would be used up regardless.

Technically a rejection of the pipeline would not explicitly prevent the oil sands from being developed. It may even have no effect if an alternative pipeline is built, although that seems somewhat less likely now. It could, by limiting access to higher value markets, reduce the value of production there to a degree that investors no longer find it worth the effort (or money) to try.

Many, including myself, have come to think of the climate mitigation problem as one of truncating the global supply curve for fossil fuels at some point where the atmosphere can still recover from the amount that has been (or will be) combusted. Under this view, we may have to write off most if not all the oil in fields that are currently under production. The point would be to prevent, or at least slow down, the development of new sources. Looked at this way, it doesn’t necessarily matter if we would import from Venezuela if we don’t build the XL pipeline if the Venezuela would develop those fields regardless of what happens with XL. This argument is only relevant if the heavy oil in Venezuela gets developed only because we reject the pipeline. The fact that oil-sands oil may be just as “clean” as other oil is also less important. The key issue is whether it has the bad luck to be located in a place where it could plausibly be stuck for a long while.  It may not be a lot in the global context, but I can’t shake the feeling that we’ve got to start somewhere.

This supply-side view of the problem does lead to some interesting ideas, like a nature-conservancy type approach to retiring or preventing fossil fuel development. I’m not sure how serious the pay-us-to-ban-drilling proposal in Ecuador ever really was (it would have worked out to about $3/ton of CO2, counting the forests), but
the concept of this kind of mechanism that holds some real promise.

Unfortunately, a supply-side view of mitigation also clearly highlights the conflict between so-called energy security goals,  economic benefits, and climate policy. A couple years ago, Erin Mansur and I wrote out a model of where in the supply chain countries should target their reduction policies.  Its a bunch of math behind a couple basic ideas, one of which is that if your country exports a lot more CO2 than it consumes (yes I’m talking to you, Australia) then it is more effective to put the CO2 charge upstream – in this case on fossil fuel production.  This raises some difficult or – dare I say – inconvenient truths. California is currently on the leading edge of US climate policy, as its AB 32 goals could reduce CO2 emissions by about 75 mm tons in 2020, and maybe 200 mm tons over the next 7 years, relative to business as usual. There is also a lot of excitement about the economic potential of the Monterrey shale formation yielding up to 15.4 billion barrels of oil, or about 6 billion tons of CO2. Put these together for a moment. The carbon content of the oil contained in those reserves is about 30 times the amount that will be “saved” under AB 32.

Wealthy countries and jurisdictions have focused on reducing their consumption of fossil fuels because, for the most part, they consume more than they import.  It’s also easier to sell those policies as helping consumers save money.  The fact that producers lose money is a lot easier to swallow if those producers live somewhere else.   If we really want to be consistent though, opposing the XL pipeline means feeling very uncomfortable about binging on the Monterrey Shale. If we are capping the CO2 from the oil we are bringing into California, we need to apply the same policy to the oil that would be shipped out.

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10 Responses to Is an economist allowed to oppose the XL pipeline?

  1. David E. Bruderly PE says:

    Shiek Yamani, Saudi Oil Minister in the 70′s said [sic] “The Stone Age did not end because the world ran out of stones … and the Oil Age will not end because the world runs out of oil.” Total focus on supply side economics will never solve our oil addiction. Government policy needs to focus on stimulating consumer demand for low-carbon, non-petroleum motor fuels (aka natural gas and electricity) and motivating manufacturers to mass produce and mass market the vehicles (Dedicated and bi-fuel NGVs and Plug-in Hybrids) that can use these fuels. These motor fuels are already much cheaper than oily fuels, but to win consumer acceptance non-petroleum motor fuels also must be readily available and vehicles must be both affordable and of comparable utility. Deployment of NGVs and P-HEVs will save consumers money today while stimulating economic growth and creating good jobs. Is is very likely that advanced battery technology and hydrogen fuel cells will make the transition to zero-emission electric vehicles competitive within ten years. But if not, NGVs and EVs will stil be functional, affordable and much cleaner.

  2. Carl Pope says:

    Dear Professor Bushnell,

    I am delighted that as an economist you are willing to dig into the realities behind the macro-economic models. But I (a non-economist, but one who can play one on TV at least so I have the basic concepts) have reached a somewhat different set of conclusions about the interplay between supply side and demand side decarbonization strategies and the role of pricing.

    My starting point is that the elasticity of demand for energy services is very low. Raising the price of those services doesn’t do much to effectively lower the demand — until you start collapsing the whole economy. The most spectacular example is a graph of airline travel demand vs the price of jet fuel — they go up and down together, because both are driven by aggregate global economic demand. Quadrupling the price of jet fuel from 2004 to 2013 has not served to reduce total airline passenger miles. (It may have increased the incentive for airlines to buy more fuel efficient planes — but has not caused airlines to shift from hub and spoke systems to far more fuel efficient direct routings.)

    Second observation, is that when there is competition among fuel sources in a given market for a given energy service, price signals behave as economists assume — very efficiently. The emergence of cheap gas in the US caused a lot of coal plants to be idled for a while but when the price climbed back from $2.50-$3.75, a lot of that coal demand came back. But where there is no side by side fuel competition, as in Japanese LNG imports or global jet fuel price signals are extremely weak.

    Finally, in remote fuel markets, given the inelasticity of most energy services demand because of the lack of competition, there is enormous rent-taking because increased demand requires the production of ever and often rapidly more expensive marginal BTU’s. This is true in Indian coal markets, where increased demand required Australian or Indonesia imports and the Indonesians figured out how to capture rent by cancelling concessions (ala the Gulf in the 1960′s.) This tripled the price of coal, and doubled the cost of coal fired electrons. It is spectacularly true in global oil markets where the need for the last 5 mbd of oil shifts the marginal barrel from being a $70 barrel of Angolan crude to being a $100 barrel of tar sands oil.

    So long-term, blocking Keystone (which I favor) doesn’t appear to do anything to demand — except to shift in elsewhere. But it does delay investment, because new tar sands projects are not profitable without access to larger markets. And if during the period of time investment is delayed lower carbon substitutes for oil in the transportation sector are deployed so that demand (and the price of the marginal barrel) drop below $90, then those tar sands projects are never developed because in a shrunken oil market — say below 85 mbd, so not that shrunken — global demand can be met from cheaper reserves.

    Eventually the climate needs that we phase out even $60 oil — the HSBC/Carbon Tracker analysis suggested that there is enough $50 oil to fill the carbon budget for a 2 degree world — but clearly we are likely to get rid of $100 oil before we lock-down $80 oil. So from my perspective supply side campaigns buy time, but it is demand side campaigns that must eventually deliver the goods.

    Sincerely yours,

    Carl Pope

  3. The opportunities for cognitive dissonance, inconsistency, and outright hypocrisy riddle the effort to reduce CO2. Does that mean we should throw up our hands? No.

    Our way of life is predicated on fossil fuels. One cannot even use the internet to leave a comment without opening oneself to charges of hypocrisy. As long as we allow ourselves to be tied in knots by the cynical manipulation of our own scruples by those who advocate inaction, whether explicitly or implicitly, we are lost.

    One should not be forced to apologize for having been born into the world that exists. One should not have to choose between energy puritanism and energy profligacy. There’s a wide spectrum of reasonable actions in between these two poles.

    The symbolic value of rejecting KXL cannot be overstated. It’s not a matter of pragmatism. It’s not a matter of supply versus demand. It’s a matter of creating a collective consciousness of the problem, which will snowball (I hope) into the collective realization that we can’t perpetuate the status quo.

    The climate problem has thousands of facets, components, and interconnections. They will not be undone and reversed with a single philosophically and morally consistent ideology. A 200-year-old tangle is hard to untangle in 10 or 20. Every opportunity to pluck at the losse ends must be taken.

    If KXL is allowed to go forward, it adds tremendous weight to the inertia otherwise known as stranded investment. Better to prevent the investment in the first place, and drive it somewhere else. Maybe it won’t be directly to renewables or to conservation. But that it won’t be to this project is profoundly significant. There is a big difference between facilitating this project and not facilitating it. The situation is not fungible. Not going forward will create its own dynamic and potentially a new path forward.

  4. Jack Ellis says:

    I come at this from a different perspective. We’re hoping we can slow the observed rise in global temperatures by eventually phasing out fossil fuels and replacing them with something else. However we’ve failed to carefully think through e economic, social and environmental consequences of the possible alternatives other than to rule out nuclear energy (at least in the US). Maybe Mark Jacobson’s thesis that we can use only wind, water and sun is feasible, and maybe it’s much harder to put into practice than it is to think about in the abstract.

  5. Paul Brady says:

    The pipeline has now passed all reviews, and I expect Obama will OK it before the 2014 elections! However, maybe the pipeline is not needed! Rail is turning out to be a faster way of sending oil south as far as the Gulf, although a little more expensive. And Obama cannot stop the export of Canadian oil or refined products from the Gulf! In an earlier life I was a geophysicist and engineer with Schlumberger in Saudi, India and Libya where our team discovered oil. Now I am a retired UC Davis Physics Professor and investor. I believe the oil sands are a good long-term investment as the supply is large. However the economics may, in fact will, eventually render oil uneconomic.

    It is interesting that the famous IPCC Panel has a new “fifth assessment” report which backs off
    the alarmist nature of earlier reports. The failure of their climate models to predict the very slow or non-existent temperature rise of the past 15 years when 50% more CO2 has been emitted, and atmospheric CO2 has risen to new levels [400 ppm] has stunned them. The predicted warming over the next 50-70 years will have benefits which will outweigh the harm! Most warming will occur in cold, dry areas and at night, and will extend the range of farming farther north [as has been happening] and the extra CO2 will improve crop yields and, along with increased rainfall from the warmer oceans, the greening of the earth. [Winter deaths, which far exceed those in summer heat, will be reduced.]

    The IPCC is not even sure how much warming is man-made. We have been in a warm era for ~12,000 years. The sea ice and glaciers continue to melt thus reflecting less solar radiation back, and allowing the sun to warm more of the earth! In 50-70 years fossil fuel use will very likely be uncompetitive and in decline. Slowly, the green earth will absorb the CO2 as we prepare for the next ice age!

    • David E. Bruderly PE says:

      Assumptions that warming “benefits will outweigh harm” are not only intellectually dishonest and morally bankrupt, they ignore long established and fundamental principles of economic philosophy. Economics is not just about computer models and manipulation of money to mazimize returns for investors; the practice and science of economics is founded on principles of governance and creation of policy that optimizes the human condition while protecting “the Commons” from exploitation by “the Mercantilists” (Adam Smith, 1776). Macroeconomic policy debate must be based on values and philosophical concepts, such as fairness, justice, integrity, honesty and respect for the rights of others.

      • Paul Brady says:

        “Assumptions that warming “benefits will outweigh harm” are not only intellectually dishonest and morally bankrupt, they ignore long established and fundamental principles of economic philosophy.”
        Why does Mr. Bruderly write such accusations without giving some justification and proof. My note was based on the information provided by the UN’s Intergovernmental Panel on Climate Change, the IPCC. Even this union of climate-crisis merchants with their vested interests has dialed back their extreme rhetoric and the expected temperature increases in their just-released draft report!

        Obviously, the IPCC cannot admit directly to the associated benefits of moderate warming. Their mission is to promote a climate crisis and garner more fame and fortune! However other climate experts and all sorts of data support the benefits of an increase of up to 2 degrees C. Possibly, most important, is the striking decrease in weather-related deaths in this past century from near 400,00 per year to about 30,000/yr. In this period temperatures increased about 0.8 C. [Cold spell death rates exceed warm/hot- spell rates by factors of 2-5, mainly because the effects of cardiovascular events last for several weeks following a cold spell.] The decline in such death rates is continuing and is expected to do so for decades because the new IPCC warming estimates are moderate – see below .

        Most warming is occurring in the colder dryer regions and has extended the range of productive agriculture farther north. The additional CO2 is improving crop yields and reducing the need for water, although the slightly warmer ocean surface is providing on average more rain. As noted by many observers the earth is greening. My brother and sister, living in different parts of Canada, tell me that winter weather has moderated considerably and heating costs have declined substantially. This and the milder climate have had substantial benefits to all.

        In 1990 the IPCC estimated that doubling atmospheric CO2 would lead to a rise of the Earth’s temperature of 9 degrees F [5 degrees C]. In its 2001 report this was changed to a little over 6 F, and in 2007, to near 5.4 F. Now in the present 5th assessment the estimate of likely warming is 2.4 F, in line with more moderate estimates from scientists who have been called “skeptics” or even “deniers” of the supposed climate “calamity”! Satellite measurements [deemed the most reliable] over the last 20+ years have shown little, if any, temperature rise although 50% more CO2 has been released into the atmosphere and CO2 has risen to a modern-era high of 400 ppm! The failure of all climate models’ predictions has stunned the IPCC, and made us realize that Mother Nature is still playing an important climate role! For example, in this past year arctic ice increased 60%, leaving many boats ice-bound! And the hurricane season has been very quiet!

        When the distinguished, Princeton Institute theoretical physicist, Freeman Dyson, was in residence here at UC Davis a few years ago he explained why the IPCC models were so inaccurate and limited. One important failing is their inaccurate description of the atmosphere-earth interactions. Another failing is their cloud-water-vapor equilibrium estimates.

        The IPCC asserts that it is 95% sure than man’s activities are responsible for at least 50% of the increased warming. Since about 1750 human activity has released nearly 565 gigatons of CO2. Doubling this – by around 2060 – is predicted to approach or possibly breach the 2 degree C limit where negative effects begin to dominate. However doubling CO2 faces important limitations. The Energy Watch Group – http://www.energywatchgroup.org – has done a careful analysis of global reserves of fossil fuels. They predict that oil production will peak in this decade and then decline to 1/4 its peak value in 50 years. Coal and natural gas production are estimated to peak in the next decade and have a similar decline. Since our green earth and oceans appear to absorb about 2/3 of emitted CO2, the greenhouse gas effect could eventually reverse from warming to cooling. Thus my comment concerning preparing for the next ice age!

  6. Kevin says:

    The oil industry is already moving around the XL holdup. They’re building rail capacity like crazy in Alberta, which is also proving to be a more flexible alternative to pipelines as its opening up other markets that a pipeline like Keystone would bypass. I recently saw an estimate of ~200 MBLD already in operations with another ~600 MBLD of takeaway capacity in development (http://www.rbnenergy.com/go-your-own-way-can-canadian-heavy-crude-by-rail-compete), which basically puts rail takeaway capacity equal to XL! Side note– guess which logistically stranded import-reliant region is a major importer of tar sands, and is looking to expand rail unload capacity? Yep, our beautifully “green” Golden State! (looking at you Valero and Tesoro…) Transcanada has also been developing pipeline plans to move tar sands oil to the refineries in eastern Canada. So the argument that preventing XL will slow tar sands development doesn’t seem to have been taught to the oil industry yet…

  7. Lorenzo Kristov says:

    Albert Einstein was purported to have said that you can’t solve a problem from within the mindset that created it. Applied to the above discussion, I’d say we can’t figure out how to put a stop to the impacts of fossil fuel extraction and consumption on our ecosystems from within the dominant economics paradigm. So let’s change the paradigm. I suggest we start by composting that terribly obfuscating term “externality” and replace it with something more revealing: subsidized cost of production or consumption. The language is important. “Externality” sounds like something given from above, as if it has some inevitable reality in its own right. Whereas “subsidized cost” indicates that some human decision was made to remove a cost from the entity that should bear it and transfer the cost to others – other humans and other species in this case. I’d go even further and argue that it is not appropriate for a firm to make profits that it distributes to shareholders if it can’t even pay the true costs of production of the stuff it sells. Admittedly it may be challenging with the current political framework to force fossil energy companies to pay their true costs of production, but I think there’s no excuse for continuing to perpetuate the externality fiction. The much deeper problem with the dominant economics paradigm is that it is very selective about what it places monetary values on, and then it values at zero those things that it does not place monetary values on. For Mr. Bushnell and others who have deep understanding of California’s electric restructuring adventures, I’d point to a useful analogy. California’s original zonal market ignored the laws of physics in order to create so called deep and liquid day ahead spot energy markets, whose outcomes then proved to be infeasible when the energy actually had to flow the next day. So the system of values inherent in the dominant economics paradigm ignores the physics, chemistry and biology of a finite earth, and as a result has now brought us to the point of infeasibility. So in response to the question that headlined Mr. Bushnell’s article, I’d say we all need to be thoughtful human beings first, before we call ourselves economists or any other profession, and if the dogma we were trained in prevents us from seeing solutions because it in fact brought us to this place, then let’s put aside the dogma. Let’s consider what it will be like living on the earth 20 or 40 years from now if we keep extracting, transporting and consuming fossil fuels at the same rate we are today. And think about all the costs of doing that – the water contamination from fracking, the ubiquitous oil spills, the mountaintops dumped into critical watersheds, the enormous expenditures and the military and civilian deaths resulting from military actions to control oil supplies, etc., etc. There are solutions to be found, but we have to decide which is more important, finding a way for humans to live sustainably on the earth, or saving dominant economics paradigm.

    • We have used the atmosphere as a free, limitless sump. We have entered into a tremendously back-loaded deal by not paying as we went to control the waste. Now the balloon payment is due.

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