The Duck has Landed

May has arrived and days are getting longer and warmer. This is good news for baseball fans, barbecue enthusiasts, and grid operators concerned about integrating unprecedented levels of solar energy onto the California grid.

baseball2

Source: Solar panels at Busch Baseball Stadium

Plugging lots of solar into the power system creates challenges, particularly on days when electricity demand is relatively low and renewable generation is high. Here in California, this happens in March and April when solar intensity is up (relative to the winter months), but air conditioning demand has yet to kick in.

Back in 2013, some California energy analysts with an eye for aesthetics were looking at how projected increases in renewable energy generation might affect power system operations. They plotted actual and projected hourly net load profiles (i.e. electricity demand minus renewable generation) over the years 2012 to 2020, focusing on late March when integration concerns loom large. The result was remarkably duck-like.

duck_CAISO

The California ISO “duck chart” made a big splash for a number of reasons. For one, a graph that looks like a duck makes an otherwise dry, technical issue more fun to talk about.  Conversations about renewable integration become more engaging when sprinkled with fowl word plays.

Perhaps more importantly, the graph highlights two related integration challenges. First, the long duck neck represents the steep evening ramp when the sun sets just as Californians are coming home and turning on their lights and appliances. Accommodating this ramp requires maintaining a fleet of relatively expensive generation resources with high levels of flexibility. Second, the duck’s growing belly highlights the near-term potential for “over-generation”. As solar penetration increases, net load starts to bump up against the minimum generation levels of other grid-connected generators, such as the state’s remaining nuclear power plant. At some point, system operators have to start curtailing solar to balance the grid.

How’s the duck shaping up?

The CAISO duck chart predicts that we should see increasingly duck-like net load profiles in March and April. So I’ve been keeping an eye on the great data that CAISO makes readily accessible. This year, the duck showed up. The graph below plots average net load profiles for late March/early April since 2013 (I averaged across seven days around March 31 to smooth out the variation that comes with random weather, week days versus weekends, etc.).

duck_graph.fwNote: All data taken from CAISO website. Graph summarizes hourly data, March28-April 3, 2013-2016.

In the 2016 duck season, we saw mid-day net loads at or around predicted levels. Increased solar penetration on both sides of the meter (utility scale and distributed)  has been driving net loads down when the sun is up. Fortunately,  the ramp from 5 – 8 pm has not been quite as steep as projected because electricity demand in the evening hours has  been lower than projected. Perhaps this is due to unanticipated demand-side energy efficiency improvements. I could not easily find hourly curtailment data. The data I could find on plant outages indicate that March 2016 saw the highest forced solar plants outages on record, but these outages could  be due to factors other than curtailment.

My after-the-fact duck chart suggests that renewables integration challenges are showing up more or less on schedule (although ramping requirements are somewhat less than projected). So far, these challenges are quite manageable without major changes to grid operations. But the duck of the future – especially given California’s new target of 50% renewables by 2030 –  will present a more formidable challenge.

Renewables integration strengthens the case for regional coordination

California is not alone in creating and confronting unprecedented renewable integration complications. Take Hawaii, for example, where a 100% renewables target makes California’s 50% look timid. Our colleagues at University of Hawai’i, Michael Roberts and Mathias Fripp, have been thinking hard about how Hawaii can pull this off at least cost. The charts below illustrate a hypothetical 100% day in Oahu in April (no more duck when all load is served by renewable energy!):

fripp

Source: Fripp (2016)

The broken line in the right graph represents the “traditional”, business as usual demand profile. To hit the 100% target, wind and solar generation increases to nearly double current levels of the traditional peak.  Differences between the timing of renewable energy production and traditional demand are reconciled primarily by EV charging and other demand-side response  programs (although batteries and pumped storage also play a role).

When you’re an island in the middle of the ocean, you’re pretty much on your own when it comes to tackling these grid integration challenges. Thus, Hawaii is preparing to demonstrate how significant renewable energy integration can be achieved with demand response, grid management, and storage. In contrast, California has more options to leverage.

Although California fancies itself a different world, it is physically connected to (but not perfectly integrated with)  a larger western power system.   From an economic perspective, expansion of the energy imbalance market and improved coordination of the western grid looks like an obvious and important piece of California’s renewable integration puzzle.  A regionally coordinated western grid would integrate mandated renewables across a larger area, thus reducing the likelihood of over-generation. Coordination across balancing areas should also provide increased flexibility.

In the past, economists have documented the efficiency gains of improved regional coordination and bemoaned the inefficiencies of the balkanization that persists.  Looming renewable integration challenges could provide the needed additional impetus for grid integration.  To be sure, there are some important details that need to be better understood. But if done right, a fully coordinated regional grid could help clip the duck’s wings.

 

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Is Distributed Generation the Answer to Regulatory Dysfunction?

One delightful aspect of teaching an MBA course in energy and environmental markets is getting together with my former students as they pursue careers in the industries I study.  I learn so much about the latest trends and ideas in these markets, and they frequently challenge the way I have been seeing the world.

This happened recently when I had coffee with a former student whom I will refer to as “Pat”.  Pat has worked for a successful alternative energy company and done well, but s/he is ready to think about new paths.  Like many cleantech mavens, Pat is excited about distributed generation (DG), particularly with improving storage technologies.  Pat explained to me a potential business model s/he has been exploring with rooftop solar photovoltaic (PV) panels and on-site storage.

As I’ve written in a previous blog, I’m skeptical that rooftop solar is the most cost effective way to utilize the fabulous breakthroughs in PV technology.  I proceeded to lay out my argument, addressing each of the claims for distributed generation, even though I know Pat is a regular reader of the Energy Institute blog and had surely heard my views before.

But Pat was a star student and continues to be one of the most insightful people I know in the business.  So I was not surprised, but still unsettled, when Pat put on the table an argument for DG that I hadn’t heard before, or maybe Pat just presented it much more clearly so that I finally actually got it.

DysfunctionalUtilities1Here’s my dramatic (if you are an energy geek) re-creation of what Pat said: “Yes, Severin, in theory grid scale generation and delivery of renewable electricity generation is probably more cost-effective.  And, yes, there are some fixed cost of distribution systems that utilities are recovering through volumetric charges, which drives up the retail price and gives an inefficient incentive to install DG.  And, yes, California’s extreme increasing-block residential price schedules mean many households are paying more than 30 cents per kWh for much of their consumption, way above cost.”

“But,” Pat continued with growing enthusiasm, “California’s investor-owned utilities currently charge average residential rates in the 21 to 24 cent range –more than 50% above national average–and the utilities themselves are forecasting those numbers will rise in the coming years.  [Actually those are average rates among customers who aren’t on the low-income tariff.  More on that below. –SB]  I don’t know if rates are so high because of utility incompetence, a dysfunctional regulatory process, or some other reason, but it’s not my job to figure it out.  In any other industry, if a company’s prices are too high we rely on pressure from competition to reign them in.  Why should electricity be any different?”

Pat concluded with, “Severin, ever since I took your class many years ago you’ve been saying that California has high electricity rates in part to pay for the mistakes of the past.  But those ‘mistakes’ keep happening and keep driving up our rates.  At some point, aren’t those ongoing mistakes just part of a broken regulatory process? DG is the competition that will either force repairs in the process or will replace it.”

DysfunctionalUtilities2Pat’s argument isn’t entirely general; there are plenty of states — and even some municipal utilities in California — with rates that rooftop solar can’t touch.  And, there’s not much evidence nationally or internationally that competition introduced by deregulating retail electricity markets has significantly lowered rates.   Plus, it’s worth remembering that most residential customers don’t have a single-family home with a south-facing roof and no shading to put solar panels on, so most of us have to get all our electricity from the grid.

Nonetheless, Pat raises an important point.  Before proponents of high fixed charges and special fees for solar customers get too far down that road, they need to confront the fact that average residential electricity rates in California (and New York, and some other locations where DG is gaining the most traction) are out of line with the rest of the country.

I’ve been asking around about the high, and rising, average residential rates in California, and been surprised at the lack of clarity for the reasons. This seems like a central question of rooftop solar policy (as opposed to rooftop solar politics).  If the rates really reflect high costs of providing electricity, Pat and other DG supporters have a more compelling case that they are providing efficient competition.  On the other hand, if they are driven by other regulatory or legislative policy objectives, then we have to recognize that funding them in this way may encourage inefficient DG installation.

Put differently, is DG the answer to regulatory dysfunction, or is it just regulatory arbitrage? By regulatory arbitrage, I mean taking advantage of the structure of pricing or other utility obligations by pursuing strategies that reap private rewards through cost shifts to other ratepayers.

The simplest cause of regulatory arbitrage is the fact that electricity prices are well above the marginal cost of delivering a kilowatt-hour to the customer in California and many other states. In California, this is in part because of the regulator’s longtime resistance to fixed monthly charges, and in part because of the increasing-block price structure that leaves many customers today paying over 30 cents for their incremental kilowatt-hour.

In addition, the many programs that policymakers have decided to finance through electricity charges also invite regulatory arbitrage. For instance, significant parts of electricity bills in California and many other states pay for energy efficiency programs, early investments in renewable technologies, and — especially large in California — reduced electricity rates for low-income customers. Among the three large investor-owned utilities in California about 30% of all residential customers are on low-income rates.  And, of course, for more than a decade, part of electricity rates in California have paid to subsidize rooftop solar, both directly through the California Solar Initiative (from 2007 to 2013) and indirectly through net metering policies.

If all of these programs were eliminated, would average residential rates among California’s IOUs still be well above national average?   Of course, there are other factors that a cost analysis has to account for, such as the mix of generation, the density of residential consumers and the average consumption per customer.

I think that answering this question is critical to making good energy policy in California.  But after asking a number of regulators, utilities and other policy analysts in the state, I have not turned up any studies that put together all the numbers one needs.

That wouldn’t be the complete answer to Pat’s argument. It has to be paired with a credible analysis of the value and costs DG brings to the grid. But next time I see Pat, I’m hoping to have a better response than “good question. I should write a blog about that.”

 

I’m still tweeting energy news and research articles @BorensteinS

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Cartels Work Unless They Don’t

unicornI spend a lot of time describing unicorns in my undergraduate classroom. And by unicorns, I mean perfectly competitive markets and their features. If you’re a little rusty on this stuff, it goes like this: no single consumer or firm can affect the market price. This requires perfect information, no externalities, free entry and exit, blah, blah, blah.

Most markets are not perfectly competitive. For example – there can be huge returns for firms to try and raise prices above competitive levels. There are several ways to do this, but one of the most popular is to collude with your frenemies in a so-called cartel. Cartels can restrict output, which reduces total supply and leads to higher market prices. Consumers suffer, cartels (and most other producers) make out like bandits!

When everyone in the cartel sticks to the plan, this can work beautifully. So beautifully that in the US we have antitrust laws that prevent firms from colluding and setting prices artificially high (If you are in need of an excellent and entertaining summer read, read this). But on the international stage, one of the most well-known cartels is OPEC. These oil producing nations get together and set production targets that serve their interests (usually higher prices). In order for OPEC to function, its members need to stick to the agreed targets. A problem arises when the members of a cartel cannot agree to targets and do what is optimal for the individual countries, not the whole of OPEC.

And this is what appears to be happening in Qatar right now. Sixteen oil producing nations (essentially the OPEC nations and Russia) who jointly produce a significant share (yet less than 50%) of global output are engaged in talks about restricting output in order to prop up prices. Observers are suggesting that no meaningful restrictions will emerge from the talks. The markets agree with this. Oil prices fell on Friday and early morning trading in Asia raised fears of a significant drop in oil prices when major markets in the Western Hemisphere open, which is exactly what happened.

What does this mean for the average US consumer? If you are planning a road trip in your RV, which gets a glorious 3 mpg, to the national parks this summer, you should rejoice. The failure of oil producers to collude will lead to lower prices during driving season.

What does this mean for the atmosphere? Despite massive and unprecedented policy efforts to reduce emissions from transportation fuels, this lack of collusion leads to even lower prices and more miles driven. People in the market for a new car are already buying less fuel efficient cars than they would have if prices were high, which is bad news for the environment.

What I am saying may sound crazy on the surface; but if you are the global environment, successful collusion here might be a good thing! In unregulated markets with externalities, prices are too low and production/emissions are too high. Collusions will drive up prices and drive down consumption, which is a net gain for society.

Of course, there will be no domestic tax revenues that can be redistributed – all the revenues will go to a bunch of oil rich countries. This means no dollars to be redistributed, invested in the development and deployment of more renewable energy in the countries where the majority of consumption takes place. So in a perfect world, where I am the king of carbon, I would like not cartels, but a carbon tax. But, since I am missing this title I am going to stick to Severin’s proposal for a gas price floor domestically. Yes. It’s time for higher gas prices.

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Automakers Complain, but CAFE Loopholes Make Standards Easier to Meet

With gasoline prices averaging $2 per gallon, Americans are flocking to gas-guzzling vehicles. Last year was the biggest year ever for the U.S. auto industry with 17.5 million total vehicle sales nationwide. Trucks, SUVs, and crossovers led the charge with a 13% increase compared to 2014.

trucks

The one problem with selling all these gas guzzlers is that it makes it harder to meet fuel economy standards. U.S. Corporate Average Fuel Economy (CAFE) standards have been around for a long time, but the new “super-size” version introduced in 2012 mandates a steep climb in fuel economy each year until 2025.

Back in 2012 when the Obama Administration announced the new standards, gasoline prices were $4 per gallon and Americans were buying smaller, more fuel-efficient vehicles.  Sales were increasing rapidly for the Chevrolet Volt, Tesla Model S, and other electric vehicles, and there was great optimism about reducing the carbon-intensity of the U.S. transportation sector.

Fast forward to 2016, and the automakers can’t believe they ever agreed to this. The new CAFE rules are scheduled to be reviewed this summer, and automakers are pushing back hard, seeking adjustments that would weaken the standards to reflect this new reality of cheap gasoline.

In pleading their case, one of the automakers’ favorite approaches is to try to shift the focus to consumers.  “One of the areas that needs to be addressed is consumer demand,” recently argued Gloria Bergquist, spokeswoman from the Alliance of Automobile Manufacturers, “Automakers can build models that are extremely fuel-efficient, but they can’t control sales.”

But, of course, automakers can control sales. In the short-run, automakers can adjust prices. And in the long-run, automakers can design new fuel-efficient vehicles that Americans want to buy. Nobody expected this to happen by itself. The whole rationale behind CAFE is that there are externalities associated with gasoline consumption. If we thought consumers were going to perfectly internalize these externalities, then we wouldn’t need CAFE in the first place.

What Ms. Bergquist probably meant to say instead is that $2 gasoline makes it harder to get consumers to switch. This is certainly true. Cheap gasoline provides huge benefits to U.S. consumers, but it also leads drivers to prefer larger, more powerful vehicles.

Fortunately for the automakers – though not for the environment – there is a built-in mechanism that relaxes the standard when consumers choose larger vehicles. The new standards are “footprint” based so that the fuel economy target for each vehicle depends on its overall size.  Larger vehicles have less stringent targets.

footprint

The standards are also more generous for trucks than cars. Most of the best-selling vehicles are “trucks” from a CAFE perspective including, of course, pickup trucks, but also SUVs, crossovers, and minivans. And as Americans switch from “cars” to “trucks” this makes it easier for automakers to comply with CAFE.

The real but more subtle challenge for manufacturers is that cheap gasoline makes consumers prefer more powerful engines (for a given footprint) and makes them less willing to buy EVs and hybrids. The automakers can adjust their prices to sell lower horsepower engines and more EV’s and hybrids, but this reduces profits.

There is one more loophole, however, to help soften blow. And it is a big one. My colleague Jim Sallee and former student Soren Anderson worked on this topic several years ago (here), but until I looked at it again, I had no idea how large this loophole was, nor had I known that the loophole would last so long after being initially introduced in 1993.

I’m talking about flex-fuel vehicles. Over two million flex-fuel vehicles are sold each year in the United States. These vehicles can run on E85 (a blend of 85% ethanol and 15% gasoline), but in practice, most end up running on gasoline and many sales of flex-fuel vehicles occur in parts of the country where there is limited E85 availability.

gascap

Under CAFE, however, these vehicles have a near-magical property. They are assumed to be operated 50% using E85 and 50% with gasoline — a very optimistic assumption. But even more optimistic, each gallon of E85 is assumed to have the carbon content of only 0.15 gallons of gasoline. This is, the ethanol component of E85 is assumed to be zero carbon. It is notoriously difficult to quantify the lifetime carbon impacts of biofuels but most studies find that, at best, ethanol is only marginally less carbon-intensive than gasoline. As a result of these overly generous assumptions, flex-fuel vehicles like the GMC Terrain end up being treated by CAFE as if they were extremely fuel-efficient.

terrain

Not surprisingly, manufacturers have been producing flex-fuel vehicles like crazy.  There are today more than 100 different models of flex-fuel vehicles for sale in the United States (who knew?).  And while you used to always see a “flex fuel” sticker on the back, many flex-fuel vehicles today aren’t even identified. You might be driving one and not even know it.

Thankfully, the flex-fuel loophole ended with model year 2015. These credits were so lucrative, however, that many manufacturers are now sitting on large stores of surplus credits. Under CAFE rules these credits can be “banked” until 2021, ensuring that the legacy of this loophole will live on, allowing manufacturers to produce lower-MPG vehicles for years to come.

flex

So let’s not feel too sorry for the automakers. Yes, the CAFE screws are beginning to tighten, but the automakers’ situation is not nearly as dire as they would have us believe.

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Why Does the Media Ignore Grid-Scale Solar?

Last month, I went to a talk by someone I surprisingly hadn’t heard of before. Yosef Abramowitz is an entrepreneur whose company, Gigawatt Global, just constructed and commissioned the largest solar power plant in East Africa. The 8.5 MW solar PV plant is 60 kilometers east of Kigali, Rwanda. It came online in February 2015 in record time – just one year after the power purchase agreement was finalized – and at its $24 million budget.

Gigawatt Global's Rwanda Project

Gigawatt Global’s Rwanda Project

Yosef is a fascinating, driven entrepreneur. But, through my usual perusing of the energy trade press, I hadn’t come across him. I had heard vague references to a solar plant in East Africa from conversations, but quick Internet searches hadn’t turned anything up.

I just did a slightly more systematic search and confirmed that Abramowitz’s story hasn’t been widely covered.

For example, if I search on “Rwanda solar” on Greentech Media – my go-to site for industry news – I turn up three stories about off-grid solar. One focuses on Ignite Power and two on Off-Grid Electric (here and here). Greentech Media (GTM to insiders) has only an oblique mention of Gigawatt Global’s project with a link to a story in the Guardian.

When I searched on “Rwanda solar” at the Wall Street Journal I was told, “Sorry, no results found.” The New York Times has two hits since Gigawatt Global’s installation came online, but one describes solar dryers and pumps for farmers and the other discusses solar lamps. No mention of Gigawatt Global.

Studying by a solar lamp

Studying by a solar lamp

In general, my read of the energy press is that it’s disproportionately focused on the off-grid sector in the developing world. Why aren’t projects like Gigawatt Global’s getting more coverage?

Here are some possible explanations:

  1. It’s only 8.5 MW. True, this is a pretty small plant relative to other grid-scale solar projects. For example, South Africa has a 175 MW plant, and the US has 17 grid-scale solar PV plants over 100 MW.

But, I don’t think that explanation works for two reasons:

  • Gigawatt Global is delivering orders of magnitude more solar power compared to the off-grid solar companies. For example, Ignite Power, which netted an entire article from GTM, provided 1,000 households with solar systems in 2015. I could not find any discussion of how big these systems are, but they’re described as powering, “some lights, a radio and a television, and cell phones.” Generously, let’s assume this is a 100W system. This means that Ignite has installed .1 MW, less than 1/50th of Gigawatt Global.

Powerhive, a company that installs solar mini-grid systems in rural Kenya, and has been in three GTM articles in the past three months, currently has installations in four villages amounting to 80 kW. That’s 1/100th the size of Gigawatt Global, and Powerhive has been around for several years.

These comparisons are based on capacity, not energy. I’m guessing that central stations deliver more energy per watt, since they don’t rely on individuals keeping the panels in good repair or putting them out when the sun is shining. A former Berkeley PhD student has found that some solar home systems aren’t outside in the middle of the day because farmers don’t want them stolen while they’re in the fields.

Sure, these companies are projected to grow, but Gigawatt Global should as well.

  • 8.5 MW is a huge plant for Rwanda. Total installed generating capacity in Rwanda was less than 150MW in 2015, and Gigawatt Global’s installation increased it by more than five percent. This is like increasing the US’s solar capacity by a factor of 13.
  1. soh_rwanda_5It’s in Rwanda. This might explain why the Wall Street Journal isn’t covering the sector in general, but the other outlets reported on the off-grid sectors there.
  1. It’s not a Silicon Valley company. Abramowitz is Israeli and his company is based in the Netherlands. It may simply be easier for reporters to bump into people who work at local companies, so this might explain a US-centric focus. If this is true, grid-scale solar in Sub-Saharan Africa will get more attention as US-based companies expand in the region.
  1. It’s grid-scale solar, not distributed. I think this is the most likely answer, but it’s useful to reflect on why this preference might exist. I can think of two reasons:
  • It’s more exciting to report on a new kind of electricity system.

I could have asked the question why Kenya’s proposed Lamu coal power plant, which is poised to nearly double the country’s existing generating capacity, hasn’t been covered. But, fossil fuel plants have been built for decades, and, if we’re serious about addressing climate change, we can’t continue building them in the same way.

thumb.php

But, the leap from a fossil fuel driven grid to off-grid solar may be too far.

Projections suggest that only 10 percent of the growth in residential electricity consumption in Sub-Saharan Africa over the coming decades will be driven by off-grid consumers. The majority of new demand will come from existing users in grid-connected areas as well as migration to these areas and grid extensions. If we bring in commercial and industrial, this share goes up considerably.

  • The poor, rural consumers targeted by off-grid solutions are seen as more deserving than the beneficiaries of the grid.

This is misleading for several reasons, which I’ve written about before (here, here and here). For one, we are likely wrong if we think that the only way to use electricity to help the people who currently don’t have it in their homes is by putting a solar panel on their roof. The rural poor need a lot of things, like good jobs, good health care and good education for their kids. Electricity is an important input into many of these things and doesn’t necessarily have to be at someone’s home to provide those benefits. As I argue here, things like solar lanterns and solar home systems don’t currently provide even the services households seem to want, let alone support a robust commercial and industrial sector.

There are certainly examples of the press covering the benefits of the grid. For example, The Economist had a recent piece that was largely about grid electricity. But, the coverage is disproportionately of the off-grid sector.

I’m not against solar home systems or solar lanterns. My concern is that those technologies are getting a disproportionate share of the media coverage relative to the potential benefits they can provide. If policymakers follow the media’s lead and emphasize off-grid solutions, we’re overlooking much higher impact on-grid solutions. And, if the ambitious entrepreneurs and funding follow the media, we’re ignoring the most important part of the picture.

To my mind, this is a huge omission. I hope we see more coverage of companies working on grid-scale solutions in the months to come.

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Canada’s Got a Good Thing Going

It’s tax season and this makes many Americans pretty grumpy. According to a recent poll/parody, 27% of those surveyed indicate they would rather get an IRS tattoo than pay their taxes.

tattoo

Source

Given the deep-seated ire that taxation can inspire in U.S. taxpayers, it’s not altogether surprising that calls for an economy-wide carbon tax do not find broad support.

Things are different in my native land, Oh Canada, where tax is not a four-letter word. Public support for judicious taxation and public spending are, in my mind, among the shared values that define the Canadian identity (up there with health care, hockey, and Neil Young).  Recent surveys suggest Canadian support for taxation extends to carbon.  According to this comparative study, a majority of Canadians support a carbon tax. Responding to the same survey, less than a quarter of Americans share this view.

Given this cultural bent, it’s not surprising that the highest carbon price in North America is found in Canada.  In 2008, the Canadian province of British Columbia implemented an economy-wide, revenue-neutral carbon tax.  A tax of $30/ton of CO2e  (or approximately $23 USD) applies to all fossil fuels consumed in the province. Carbon tax revenues, which account for approximately 6 percent of provincial tax revenues, offset other taxes (e.g., income and corporate taxes) or are directly transferred to households.

bctax  Sources of British Columbia Tax Revenue : Source

This carbon tax has won international acclaim and support at home. Last year, even the Business Council of British Columbia recommended keeping the BC carbon tax in place. A recent poll shows six in 10 support their home-grown BC carbon tax.

The new Canadian Prime Minister is hoping to leverage this important carbon tax foothold. During election season, many swooned over Justin Trudeau’s legendary perfect hair. His hair is perfect. But what made my heart skip a beat was his election promise to pursue a national carbon price that would apply across the country.

Earlier this month, Trudeau convened a ministers’ meeting to accelerate action on this important promise. But alas, even in my tax-tolerant Canada, a nation-wide carbon price is meeting with formidable resistance.  Although all parties at the meeting ultimately signed on to endorse “some form” of carbon pricing, this compromise language hinges on a very loose interpretation of carbon pricing.

ministers

First Ministers Meeting in Vancouver, B.C., Thursday, March. 3, 2016.  SOURCE

Perhaps the most creative interpretation comes from Saskatchewan Premier Brad Wall. Pointing to the CCS project in his province that captures carbon dioxide from a coal-fired power plant and sells it to oil companies for use in extracting crude, he maintains that this could fall under the umbrella of carbon pricing, very broadly defined.  Others point to government regulations mandating renewable energy and clean technology development, noting that these programs put a hidden price on carbon, paid for by industry, taxpayers, and electricity consumers.

We have seen similar debates play out here in the U.S. where renewable energy mandates, tax incentives, and clean technology programs are the preferred policy response. Across the U.S., a patchwork of these prescriptive policies have been implemented. The good news is that many of these programs are delivering real emissions reductions.  The bad news is that many of these emissions reductions come at higher-than-necessary cost.

Pursuing a GHG emissions reduction target without a carbon price amounts to tackling climate change with one (invisible) hand tied behind your back.  Mandating levels of investment in specific technologies or mitigation options – versus using a strong carbon price signal to coordinate actions taken by households and firms –  can significantly increase the cost of meeting emissions reduction targets.  Here in California, we see significant differences in marginal abatement costs across disconnected climate change policies and programs. This tells us that we could be achieving the same carbon emissions reductions at less cost if we relied more heavily on harmonized market-based mechanisms.

Another key cost consideration for any Canadians preparing to jump the carbon tax ship is that a carbon tax or cap-and-trade program– unlike mandates, subsidies, or  tax breaks – generate government revenues.  These revenues can be used to finance reductions in the marginal rates of existing distortionary taxes (see British Columbia for proof of concept). Alternatively, tax revenues can be used to fund other climate policy initiatives (such as investments in clean technology development) that can expand future opportunities for climate change mitigation while meeting other social objectives.

The upshot is not that carbon pricing is the silver bullet. Multiple market failures and distortions contribute to the global climate change problem.  Complimentary measures such as clean technology subsidies and mandates have a role to play in moving the climate change mitigation ball forward. But carbon pricing is the essential catalyst for coordinating today’s most cost-effective abatement and supporting tomorrow’s most promising abatement options.

Canada has a good thing going in British Columbia. Some other Canadian provinces are preparing to follow suit. With global enthusiasm for action on climate change picking up post-Paris, the value of demonstrating well-designed climate change policy is high. Here’s to hoping that Canada’s good thing keeps on going.

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Driving Taxes for the 21st Century

Both Max and Lucas have recently written on this blog about the need to price gasoline appropriately. I agree with them…mostly.  I mean, how could I disagree with them? I’m the one driving the gray Prius with the license plate “TAX GAS”.  But, as I and the others who have advocated for higher gas (and diesel) taxes have recognized all along, it is an imperfect way to price the externalities of driving.  And it is likely to get worse.

IMG_0067

A good idea, but not the whole solution

For more than a decade, the students in my MBA course on Energy and Environmental Markets have listed the externalities from driving and then discussed how well taxing gasoline prices those externalities. The list usually looks something like this:

  1. Greenhouse gas emissions
  2. NOx, particulates, and other local pollution emissions
  3. Energy security
  4. Congestion
  5. Accidents

The students generally get the emissions externalities right away, and the energy security externality pretty quickly. Congestion externalities — my decision to get on the freeway slows down all the other cars on the road — sometimes takes a bit longer.  Accident externalities — my decision to drive increases the chances that another car will hit or be hit by me — are almost always the last to be pointed out.  Most students are surprised to learn that congestion and accidents are the largest externalities from driving.

LosAngelesTraffic405freeway

Slowing down other cars is often the largest negative externality from driving (limitstogrowth.org)

Then we get to the livelier part of the discussion: is taxing gas an effective way to have drivers internalize the externalities that they create?

Before I discuss the answers, let’s recognize that no public policy perfectly targets the problem it is meant to address. Every tax break is utilized by someone it was not intended to benefit and goes unnoticed by someone whose behavior it would have changed in exactly the hoped-for way.  Subsidizing the purchase of an energy efficient refrigerator sometimes causes a household to go from having one refrigerator to two, keeping the old one running in the garage or basement.  Fuel economy standards get people to buy more efficient cars, but don’t encourage them to drive any less.

Still, even if perfection is unreachable, we need to understand the policy imperfections and work to improve them.

The discussion of gas taxes and greenhouse gas emissions is always very satisfying, because it turns out that the correlation between burning gasoline and emitting GHGs is nearly perfect. Every gallon results in about 20 pounds of CO2 emissions.  So, if you want to put a price on GHGs, taxing gasoline is pretty much the same thing when it comes to emissions from gasoline-powered cars.  One smiley face for gas taxes. 

ORNL_vehicle_exhaust

Much of the problem comes from a small number of old smokies (Oak Ridge National Laboratory)

But the students also start to see red flags as they apply that logic to the other categories. The high correlation with GHG emissions evaporates when it comes to NOx and other local pollutants. These emissions, which contribute to ozone and other health-damaging pollutants, have a very low correlation with the amount of gasoline the car uses. Old cars are massive polluters compared to new cars, due to great technology improvement in pollution control systems. And even within the same year and model, there is huge variation in the quantity of these emissions, as our MIT colleague Chris Knittel has shown in work with Ryan Sandler. Taxing gasoline is not an effective way to go after the small share of cars that put out most of the local pollution.  A frowny face for gas taxes.

Energy security is always a bit hard to explain, but it generally means some combination of greater risk to our economy when we import a lot of oil, and greater security risk when oil sales enrich the autocratic leaders of oil exporting countries.  As US oil production rises and world prices fall, it’s less clear that this is a big externality, but it is clearly still highly correlated with the amount of gasoline one uses.  Another smiley face, though probably a less important one.

By now the students see where this is going, despite the fact that I have told them of my license plate at the beginning. Congestion is also likely to be poorly correlated with the amount of gasoline a car burns. Some people drive on crowded freeways at rush hour, while others drive on uncongested roads or at off-peak times. I’m not aware of any good studies on the variation in congestion externalities across drivers, though someone at Waze/Google should be able to tell us a lot on the subject. That one almost certainly gets a big frowny face.

Accidents are more complicated because some of this externality is internalized through your insurance rates. But work that Max has done with Michael Anderson points out that insurance does a poor job of internalizing the accident-risk externality, because of low insurance requirements and limited cases of liability.  Max and Michael find that a gas tax does a pretty good job of representing the fact that heavier cars are more likely to hurt other people, but it still doesn’t capture the variation in where and when people drive, or much of the variation in how carefully they drive.  Hard to know for sure, but gas taxes probably aren’t great.

Perhaps the most interesting part of this debate is not how well taxing gas captures externalities today, but how that will change in the next decade or two. Gas taxes will almost certainly remain an excellent way to price greenhouse gas emissions and, to the extent they are relevant, energy security externalities.

Technology, however, is increasingly giving us much better ways to address the other externalities, though not without their own issues. Onboard computers will be able to inexpensively monitor tailpipe emissions so we can know exactly how much pollution a car has put out in the last year (though tampering with the equipment may still be a problem – see the VW debacle).  GPS will be able to report to that computer how many of the miles were driven on roads that Google was coloring yellow or red at the time and, with some sophisticated algorithms, even calculate how many delay minutes you imposed on the drivers around you.

LAtrafficmap

GPS could easily tell your onboard computer when you’ve been driving on congested roads (LA freeways at 7:13am today)

At the cost of a modicum (OK, a whole lot) of privacy, we could price pollution and congestion externalities to an extent that perhaps only an economist could love.  The difficult conversations we have been hearing lately about the trade-off between privacy and social responsibility will come to vehicle transportation.

And the possibilities for pricing accident-risk externalities are even more exciting/disturbing.  That onboard computer will know how close you came to hitting the other car or tree or pedestrian, as well as every time you accelerated too quickly or braked too hard.

By now, you may be thinking, “wait, when onboard computers are monitoring that much information, they will also be driving the car.”  Maybe so.  But given the blowback I’ve heard from drivers who seem to think that the right to drive old polluters is also protected by the Second Amendment, I don’t think see everyone giving up their vehicular autonomy any time soon.

And sometime in the next decade we will have to face up to the fact that electric or hydrogen or biofuel powered vehicles have the same congestion and accident effects as the ones powered by hydrocarbons.  As they become a larger share of the fleet, gas taxes will become even less effective for these major externalities, though still a fine way to capture GHG emissions.

In 20 years, if vanity license plates aren’t obsolete, I will have to get a new one: MEASURE AND TAX ALL DRIVING EXTERNALITIES.  Hmmmm. That may have to go on my LED bumper sticker.

ADDENDUM: As commentors have pointed out, wear and tear on roads is also an externality, because we don’t pay for the damage our vehicles do to the roads.  That is clearly correct.  There seems to be some disagreement about how much road damage increases with weight (though it is recognized to be more than proportional), and about how much damage occurs due to weather apart from vehicle use.

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Our Newest Energy Consumer

We recently added a new member to our family. Since I have a tendency to look at the world through an energy lens, I’ve being wondering, what is the likely energy and climate change impact of our family expanding the global population by one? And more broadly, what is the current thinking about how global population trends will affect greenhouse gas emissions?

Within our household the impact is apparent. We’ve been running the heater more than usual to make sure the baby isn’t cold at night. We’re doing more laundry, thus using more natural gas and electricity. We’re also consuming more—diapers and baby toys. In other words, we’re directly and indirectly, through our consumption of goods and services, using more electricity, oil and gas. The little squirt is racking up a significant greenhouse gas deficit already!

Now let’s assume our child is going to be an average American. How much greenhouse gas emissions does the average American account for? Yikes! According to World Bank statistics, carbon dioxide emissions per capita in the US were 17.0 metric tons per capita in 2011. That’s over 3 times the world average!

World Bank Group. 2016. Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0669-8. License: Creative Commons Attribution CC BY 3.0 IGO

World Bank Group. 2016. Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0669-8. License: Creative Commons Attribution CC BY 3.0 IGO

Ah, but our daughter is not an average American, she’s a Californian. According to the US Energy Information Administration’s (EIA’s) latest state-level analysis California per capita greenhouse gas emissions are 45% below the national average. If she had been born in Texas, where I grew up, the statistics would suggest her contribution would have been 45% above the national average.

Is it appropriate to look to averages like these to determine the environmental impact of expanding the population?

Dr. Paul Ehrlich thought so in the late 1960s, when his book The Population Bomb popularized the idea that population growth will cause widespread environmental damage. His analysis proposed multiplying the population by the per capita environmental impact to predict the total negative environmental damages.

The Population Bomb

If you take this analysis at face value, policymakers wanting to address climate change should not only promote policies that reduce the amount of greenhouse gas generated by energy, but also push policies that reduce population and economic activity. That sort of narrow logic, however, ignores all the other ways in which growing populations and economies improve human welfare, and has, fortunately, fallen out of favor. (For an excellent history of the debate between Paul Ehrlich and his critics check out Paul Sabin’s 2014 book The Bet.)

In the early 1990’s, an update of this analysis by Dr. John P. Holdren, President Obama’s current Director of the White House Office of Science and Technology Policy, used a similar, simple model to conclude that, globally, population growth from 1850 to 1990 was responsible for 52% of energy growth, with the remainder being attributed to a growth in per capita energy use.

More recently several studies (for example, here and here) have taken a fresh look at relationships between greenhouse gas emissions and population. The papers try to model relationships between population growth, economic growth, aging, urbanization and other demographic factors.

As far as I can tell, unraveling what’s causing what among all these factors is extremely difficult. In some cases these papers imply causal relationships, but I’m skeptical that we really understand these interactions yet. I hope to see more vigorous research in this subject area because I believe that policymakers addressing climate change should try to understand demographic trends.

Two types of trends deserve special attention. First, policymakers should consider overall projections of population growth by region to help set energy priorities. Second, policymakers should look beyond the headline numbers and consider how the age profiles of populations are changing in different ways in different regions.

First, the overall projections. The United Nations Population Division develops a set of widely used population projections. A supplemental probabilistic analysis published in Science projects that global population will grow from 7.2 billion people in 2014 to between 9 billion and 13 billion in 2100, with a 95% probability.

The difference in projections between continents is especially remarkable. Asia, the most populous continent, could see a peaking population mid-century, but Africa is projected to triple or even quintuple in population. So, while today’s emissions per capita in Africa are lower than anywhere else in the world, the aggregate emissions from Africa could grow dramatically over the century, even more so if per capita emissions converge with higher income countries.

SOURCE: Gerland et al. (2014), "World population stabilization unlikely this century," Science 346(6206):234-237.

SOURCE: Gerland et al. (2014), “World population stabilization unlikely this century,” Science 346(6206):234-237.

One takeaway is that policies and technologies that are effective in Africa will have a tremendous impact over the course of the century. Catherine, for one, is exploring important issues related to energy use in Africa (here, here and here). Also, as Lucas explored last week, getting energy prices right is important, especially before countries’ get too far down the path of investing in inefficient automobiles and other capital stock.

Second, policymakers should consider how the characteristics of the global population are changing, and how these characteristics vary between countries. The World Bank tackled these trends in its latest Global Monitoring Report. The report describes how children have represented a shrinking share of the population since the late 1960s and working age adults’ share of the population peaked in 2012. Adults aged 65+, on the other hand, represent a growing share.

However, Africa diverges from the overall trend. Children and working age adults still represent a growing share of the population. Africa may eventually converge towards global aging trends, but it isn’t there yet.

In higher income countries with aging populations policymakers will need to pay more attention to 65+ energy consumers, and how they may differ from the average consumer. For example, income-tested subsidy programs that disregard overall wealth capture disproportionate numbers of older adults. Some of these programs encourage inefficient use of energy by setting lower prices for energy rather than transfers to pay for a certain basic level of energy use. Programs aimed at the poor should be better targeted to those they’re intended to help and also consider any negative impacts on the environment. Improving the energy efficiency of low-income senior housing programs could also be an important use of resources long term.

Also, energy use within sectors like healthcare could become more significant and is ripe for technological innovation that focuses on energy conservation. Policy and technology should turn attention to these kinds of problems and opportunities.

On the flip side, in lower income countries, especially those in Africa, policymakers should keep in mind that populations are younger and will remain that way for quite some time. Prioritizing access to the latest energy innovations for young people there will have long lasting effects. For example, energy efficiency within rapidly expanding mobile phone networks will be important.

Of course our new daughter will be hearing a lot about the importance of being a thoughtful energy user. We’ll also have to get her some carbon offsets for her first birthday to make her feel better.

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Getting Energy Prices Right

Last month Meredith wrote about coal being too cheap and Max wrote about gasoline being too cheap. But what is the right price for energy?

Nobody in recent years has done more to try to answer this question than Ian Parry, a University of Chicago trained economist now at the International Monetary Fund.  Over the last 20 years Parry has written dozens of articles on this topic, including influential work on gasoline taxes, pollution externalities, traffic congestion, and the double dividend.

ianparry

In his latest work, Parry has turned his attention in an ambitious new direction.  Together with a team of IMF researchers, Parry set out to quantify energy externalities for 156 countries.  The result is the aptly-named study, “Getting Energy Prices Right”.  The summary can be accessed for free here, or the entire report can be purchased for $28 here.  Following best practices for open science the team has also made all of the data from the project publicly-available here including all of the information on power plant locations, mortality rates, emissions factors and transport data.

These figures begin to give a sense of the scale of the project.  You want to know local pollution damages from coal in Bangladesh?  They have it. Traffic congestion damages from gasoline in Morocco?  Sure.  Vehicle accident externalities from diesel consumption in Sri Lanka?  Yep.  Previous studies had measured marginal damages for particular energy types and for particular individual countries, but this new work provides comprehensive estimates for the entire planet.

CoalCostsGasolineCosts

The results are fascinating.  Coal is indeed too cheap.  The bars in each figure indicate marginal external damages by externality type. Local pollutant damages from coal vary widely across countries because of differences in population exposure and other factors, but external costs exceed current tax levels everywhere.  Local pollutant impacts are also large enough so that, for most countries, carbon pricing would be welfare improving even if you ignore benefits that accrue to other countries. Meredith blogged about Parry’s related paper on these co-benefits here.

Gasoline and diesel also tend to be too cheap, but the story is more complicated.  Whereas coal and natural gas taxes are low around the world, many countries do have substantial fuels taxes. In fact, according to Parry’s estimates, Germany and the United Kingdom, for example, have taxes that exceed the marginal external damages from gasoline consumption. The United States has a much lower gasoline tax, well-below external damages. This is true even here in California, with our higher-than-average state gasoline tax.

But even more interesting are the countries like Egypt, Indonesia, and Nigeria that have gasoline subsidies rather than taxes. Despite increasing calls for reform, there are about two dozen countries that continue to provide subsidies for gasoline and diesel. In a new Energy Institute working paper available here, I use Parry’s estimates to quantify the external costs of global fuel subsidies. Cheap gasoline leads people to drive more, causing increased vehicle emissions as well as traffic congestion and accidents. Based on conservative assumptions about price elasticities, I find that global fuel subsidies cause $44 billion in external costs annually. This includes $8 billion from carbon dioxide emissions, $7 billion from local pollutants, $12 billion from traffic congestion, and $17 billion from accidents. To put this in some perspective, this $44 billion is about 1/3 the total size of the fuels market in countries that subsidize gasoline and diesel ($128 billion annually).

EX_Top_Ten

This figure shows annual external costs for the top ten countries. The list is dominated by OPEC members, mostly in the Middle East and Northern Africa. Cheap energy has long been a permanent fixture in many of these countries and is often viewed as part of sharing the resource wealth. This approach to redistributing resources is expensive, however. I find that it costs more than $1 in inefficiencies for each $1 that is transferred to consumers. This is very expensive, particularly when alternative approaches exist that could achieve the same distributional goals at much lower cost. Residents of Alaska, for example, receive an annual divided ($2,000 in 2015) derived from oil and gas revenues.

Also interesting is the large degree to which these external costs are driven by traffic congestion and accidents.These externalities are rarely mentioned in policy discussions about fuel subsidies but are quantitatively very important. Riyadh, Caracas, Tehran, and even Kuwait City, are well-known for severe traffic jams, so drivers are imposing a significant negative externality on other drivers in the form of reduced driving speeds. Moreover, a growing literature including Max’s work (here) shows that accident-related externalities are a major component of the external costs from driving.

caracas

Caracas

kuwait

Kuwait City

I’m a big believer in the idea that some number is better than no number. Quantifying the external costs from energy for 156 countries is an incredibly ambitious task that is impossible to get exactly right. Can the IMF numbers be refined and improved? Absolutely. But in striving to assign actual numbers to these externalities, Ian Parry and co-authors have taken a significant step forward. If policymakers are going to make informed decisions they need to be able to weigh the full social benefits and costs of different alternatives.

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No More Berning of Fossil Fuels

I am currently sitting in my yard enjoying the post El Nino 75 degree weather, while typing away on my locally made (…well invented at least) MacBook which was charged from the highly subsidized solar panels on my roof. I am still reeling from the large number of Oscar worthy performances during the recent presidential debates. For the energy sector a lot is at stake with this next election.

Of the GOP front runners, only Marco Rubio has an energy or climate plan on his website. A few choice nuggets are doing away with “Obama’s carbon mandates” (whatever that means), approving Keystone XL immediately, rewriting the offshore drilling plan and creating a National Regulatory Budget to Limit the Power of Unelected Regulators. There is no plan to address climate change, because that’s not a problem in the Rubio world. I can hear my great grandchildren crying into their organic pillows across the space time continuum. I don’t even want to speculate about Trump’s energy plan. Well, maybe he will put gold plated windmills made in U.S.A. on his wall to Mexico.

On the other side of the aisle, the two front runners have spelled out their energy and climate plans pretty well on their respective sites. Hillary Clinton’s plans are an aggressive acceleration of the agenda set during the Obama administration, and it focuses (perhaps wisely) on executive actions that are feasible without new acts of Congress. The two main goals listed are:

  • The United States will have more than 500,000,000 solar panels installed by the end of 2020.
  • The United States will produce enough renewable energy to power every home in America by 2026.

Goal one is ambitious and smartly stated in units that the voter can visualize (what is a MW anyway?). This is equivalent to putting solar panels on 25 million homes or a seven-fold increase of current levels. I assume that a significant share of these panels will not be on residential roofs but in PV plants, but this is not spelled out.

Goal two is broader than goal one, since it pulls in the other sources of renewable energy (wind, hydro, etc.). Promising to power “every home” implies covering residential consumption, which accounts for about a third of energy consumption. This would require a doubling of renewable energy sources over a decade. I’m mildly skeptical (professional hazard), but intrigued. The “how we get there” section lists a 60 billion dollar “Clean Energy Challenge.” The plan involves cutting red tape to get panels onto roofs faster, transmission infrastructure investments, a Solar X-Prize and …..drum roll…. tax incentives. I don’t want to be Debbie Downer here, but achieving this goal in four years is going to take net metering on steroids across large swaths of the country and tax credits that are significantly higher than the 30% you get now. If you spent all 60 billion dollars on subsidies (which I don’t believe is the plan) this would amount to roughly $3000 per new solar household. While that sounds like a lot, it is not. For a $21k install, you already currently get $7k in federal tax credits.

While there is no explicit mention of market based mechanisms to fight climate change, Hillary’s plan pushes for a continuation of the Clean Power Plan as proposed, which has some market mechanisms built in. Further, a carbon tax or national cap and trade is beyond the power of the executive and lacking a tidal change in Congress, is simply politically not feasible. There is also talk of more energy efficiency, reforming leasing of public lands, ending subsidies for oil and gas and cutting methane emissions.

Bernie Sanders’ agenda is significantly more aggressive. The stated goals make this liberal heart sing. Accelerating a just transition away from fossil fuels, investment in clean energy, revolutionizing the electric and transportation infrastructure, and taking a leadership position in the international fight against climate change. How to get there? Bernie plans to charge a revenue neutral carbon tax, repeal fossil fuel subsidies and invest massively in energy efficiency and clean energy. A candidate arguing for a REVENUE NEUTRAL CARBON TAX? Sign me up! And then I read on.

“Create a Clean-Energy Workforce of 10 million good-paying jobs by creating a 100% clean energy system. Transitioning toward a completely nuclear-free clean energy system for electricity, heating, and transportation is not only possible and affordable it will create millions of good jobs, clean up our air and water, and decrease our dependence on foreign oil.”

This sounds good. Real good. Much like free Krispy Kreme donuts that don’t make you fat good. Then there is a link where for each state you can see what this 100% clean energy system for your state will look like. I clicked on California. The future mix looks like this:

transWWS

This is 35% from Wind, ~55% from Solar and the remainder from a mix of sources. No nuclear, no gas, no coal. All clean. This plan will generate 315,982 forty-year jobs in construction, and 142,153 permanent operating jobs. Also, the private costs of this system are projected to be 9.7 cents per kwh, which is one cent lower than projected costs of the fossil energy. This plan will avoid 127.9 billion dollars in health damages. And the final conclusion is that because of customer-side solar and improving energy efficiency, total demand will go down by 44%. This is not fat free donuts. In my humble opinion achieving this goal is about as likely as me starting to work out today and looking like Ryan Gosling next week.

Why? California’s population is projected to grow by 28% by 2050. So in order to decrease demand by 44% over today, you will have to do that and add 11 million carbon free individuals. California is famous for its aggressive energy efficiency policies. They have contributed to keeping our per capita consumption relatively constant. But a decrease in demand of this magnitude is beyond what even the most optimistic energy efficiency advocates would consider reasonable.

I don’t even want to get started on these job creation figures. Severin has written about this. I realize that you have to promise jobs to get elected in some places, but these wildly exaggerated claims are simply not honest. And neither are the claims about the costs of renewables.

We need to craft an ambitious path forward towards this brave new energy system that will address climate change and local pollution externalities. Germany is trying the path of nuclear free renewables and it is turning out to be an expensive and not necessarily “coal reducing” one. Let’s study this case closely and learn from it. I realize that in order to get elected one has to make promises one can’t keep. But this economist dislikes it when as an adult he is promised Santa, when we know that Santa does not exist.

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