Coal is too Cheap

 

Two weeks ago on this blog, Max drew our attention to the fact that gas is too darn cheap. To underscore this point, he noted that  the average American is purchasing gasoline at half of its true social cost. Well, by that measure, coal is even cheaper!  The average coal plant is paying around a quarter of the estimated social cost of coal (more on this below).

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Coal delivery (source)

The economist’s prescription for this coal-is-too-cheap problem is simple and elegant: raise coal prices to reflect the true cost of extracting and burning coal. But it’s proving extremely difficult to fill this prescription in practice.  Last week’s SCOTUS decision reminds us just how hard it’s going to be to implement domestic policies that significantly reduce coal consumption.

First, some good news

Last year, the U.S. passed a milestone. As of July 2015, domestic electricity generators have been burning more natural gas than coal. This is kind of a big deal, given that coal has been the leading source of electricity generation in the US for as long as anyone can remember.

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EIA Data released earlier this month show coal’s share of annual electricity generation in 2015 hit  record lows (this is jumping the gun a bit, official December numbers not released yet. 2015 estimated using December 2014 as a proxy for December 2015).

Tweets from Donald Trump might lead you to believe that the decline of domestic coal is the result of Obama’s personal  “war on coal”.  Economists looking closely at the historic decline in coal-fired electricity generation paint a different picture.

In a recent working paper, Harrison Fell and Dan Kaffine argue that the two most important drivers have been the dramatic decrease in natural gas prices (largely due to the supply shock that is the shale gas boom) and the policy-induced increase in renewable energy supply. These two factors working together have pushed coal plants closer to the margin- and to some extent out of the market entirely.

Joseph Cullen and Erin Mansur look at how the drop in natural gas prices – and the associated increase in the coal price:gas price ratio-  has affected CO2 emissions in the power sector. The graph below maps out the historical relationship they estimate between power sector emissions and natural gas prices, holding other factors (such as renewable energy capacity and coal prices) constant.

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The graph shows that a decrease in the natural gas spot price from $12/mmbtu to $2/mmbtu, roughly what we saw over the period 2008-present, is associated with more than a  ten percent drop in domestic power sector CO2 emissions.

Coal consumption has dropped – but not far enough

While we’ve seen a significant increase in relative coal prices since 2008, actual coal prices have been – and continue to be-  astonishingly low.

The delivered coal price averaged $2.23/MMBtu in 2015. A study commissioned by the National Academy pegs damages unrelated to climate change at approximately $0.03/kWh (or more than $3.00 per mmbtu assuming average heat rates) . Using current Social Cost of Carbon estimates,  greenhouse gas related damages work out to about $3.60/mmbtu (this assumes $38/ metric ton and 210.2 lbs CO2/mmbtu) . Taking these numbers at face value, the market price for coal amounts to approximately a quarter of the social cost.

At this point, the economist has to re-enforce the point that an across-the-board, across-the-globe tax that properly internalizes the health and environmental damages caused by fossil fuels would constitute an efficient policy response to the coal-is-too-cheap problem.

But the pragmatist has to point out that the theoretically preferred approach seems far out of reach when you consider the current state of affairs (recall that the much celebrated climate agreement coming out of Paris features voluntary actions with no enforcement provisions). So we are left to find the best possible policy within a politically constrained set of options – or do nothing.

Coal is too cheap– What are we going to do about it?

The Clean Power Plan(CPP) sits at the core of the Obama administration’s efforts to do something in the sector that matters most– electricity.   Last week, the Supreme Court made a surprising and disheartening decision to put a stay on the implementation of the plan. Proponents of the rule – including Obama himself-  are determined to see the rule through to implementation. But at the very least, this is a frustrating bump on the road to a domestic climate change policy that would significantly  reduce coal-fired electricity generation in the US.

Given the uncertainty and upheaval surrounding the CPP,  now seems like a good time to consider other (possibly complimentary)  policy alternatives that are gaining momentum.

The U.S. government owns approximately one third of total domestic coal reserves.  For some time, there have been calls to modernize the outdated Federal coal program to ensure taxpayers get paid a fair market price. More recently, environmental economists and other stakeholders have argued that reforms should go further to account for the environmental costs of coal.

Last month, the Obama administration announced that it was suspending new coal leasing on federal lands until a thorough review of how to overhaul the program to better reflect environmental costs can be conducted .

On the face of it, imposing a tax that reflects the social cost of coal at the point of extraction has clear appeal.  Charging the full social cost would mean that federal coal will only be extracted if the coal will generate benefits in excess of these costs. Revenues could be used to fund investments in climate change mitigation and to help coal-dependent communities transition.

But there are complications. The big one, of course, is that the Federal Government controls a relatively small share of global coal reserves. A significant increase in the cost of federal coal would likely lead to substitution of other sources. If taxing federal coal simply shifts production to other coal mines outside the reach of the BLM,  leaving federal coal in the ground will have limited impact on coal consumption or associated emissions. This report provides a more detailed look at these (and other) challenges.

Eliminating inefficient federal coal program subsidies is a clear-cut no-brainer. Economic arguments for taxing the carbon in federal coal are more nuanced.  That said, a reform of the federal coal program that takes into account the substitution of un-taxed sources for taxed sources, in addition to other real-world complications (such as interactions between overlapping policies), would be a step in the right direction.  Policies that raise domestic coal prices would reduce coal-related emissions, and lay some foundations for the more comprehensive, across-the-board climate change policies that the economist in me still dreams of.

 

 

 

 

 

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Is “Community Choice” Electric Supply a Solution or a Problem?

Big news! If you live in California, Massachusetts, New York, Illinois, or a few other states you may soon have the opportunity to ditch your local investor-owned utility and buy your electricity from a competing retailer.  And in a few locations in those states, you recently got that option.

Wait. Is that really new? “Retail choice” for electricity has existed in Texas, Pennsylvania, and Connecticut and a number of other states (as well as England, Australia, New Zealand, and other countries) for more than a decade.

CCAs1What’s new is that increasingly it’s not private for-profit companies providing consumers retail alternatives to the utility, but local governments or coalitions of governments.  These entities, known as Community Choice Aggregators (CCAs), are usually set up with environmental and other social goals in mind, such as getting a larger share of power from renewable (and sometimes local) sources, or reducing or eliminating purchases from coal-fired generation or nuclear plants.

And that’s why some people refer to CCAs as “politically correct retail choice.” (One of Jim Bushnell‘s many insightful and humorous comments.)

But snarky labels aside, what do CCAs do? Are they a good idea? And what risks might they bring?

First, retail choice, whether with a for-profit firm or a CCA, does not mean you are ditching your local utility.  The utility still owns and manages the distribution lines that carry electricity to your house.  And in most cases the utility is still in charge of metering each customer’s usage and sending them a bill.  That’s because on each kilowatt-hour you use, you still have to pay the utility’s distribution charge and, in many cases, fees for transmission and for public interest programs like energy efficiency investment and assistance for low-income customers.

CCAs3Retail choice means that your CCA or for-profit retailer replaces the utility in contracting to purchase electricity on your behalf.  The hope is that competition will have the same effect in electricity procurement as in most other markets: better prices and a wider variety of products. Of course, we have learned that electricity is not always like other markets.

For example, the electricity itself is not differentiated once it is on the transmission grid. You are not getting electricity from any particular source. Once it is injected into the grid, it all gets “mixed together” and what you get is your helping from that soup (OK engineers, you can stop wincing now). Still, if your retail provider is out there on your behalf signing contracts to put more renewable electricity generation onto the grid, that is likely to help change the mix and make the soup greener.

For instance, if your utility has a goal of getting 20% of its electricity from renewable sources, and you want your consumption to be associated with 100% renewables purchases, then a retail choice provider that contracts 100% for renewables may be the solution. Interestingly, among the for-profit retail choice providers few tout high rates of renewable generation. But among CCAs, the vast majority do.

Yet, while offering much higher renewable shares than the IOUs, CCAs are also charging prices that are generally very close to those of the incumbent IOU they compete with, sometimes even a bit lower. How can they do that?

I’ve been at a number of public discussions of CCAs and watched as this question led to raised voices and red faces.

CCAs2 

Making the case for CCAs

CCA advocates generally rest their case on two arguments: renewables are cheaper than you think and utilities are less public spirited than they claim.

First, supporters argue that renewables are much less expensive than they used to be and can compete head-to-head with conventional generation.   There is no doubt that renewables costs have dropped drastically in the last decade.  With the very favorable federal tax credits and depreciation rules they receive, wind and grid-scale solar power may cost about the same as gas for a new plant built today.

Second, the CCA advocates argue that utilities have all the wrong incentives and don’t procure power cost-effectively. In particular, utilities like to build their own power plants so they can earn a rate of return on their investment.   And when they do buy power from merchant generators they get to pass those costs along, so they are not out there searching for the best possible deal.

There is clearly some truth to this argument. One need not look far to find examples of utilities that have not been as cost-conscious as they should, even with the oversight of regulators.  Of course, it is also not hard to find examples of local governments spending money unwisely.

But CCA advocates can point out that at least governments are supposed to be acting in the interest of consumers, while the fiduciary responsibility of an IOU is to its shareholders. Furthermore, advocates argue, CCAs don’t replace the monopoly utility retailer with a monopoly CCA retailer. Rather, the CCA has to compete with the utility.

 

But are CCAs really looking for a fair fight?

The incumbent utilities and other skeptics respond that the competitiveness of renewables-heavy CCAs is mostly smoke and mirrors.  They point first to the historical obligation of the utility to procure electricity every year, not just at a time when renewables costs happen to have dropped. In many cases, regulators required utilities to purchase renewables under long-term contracts that are much more expensive than current renewables prices.

This is clearly true, but it’s not a reason that CCAs shouldn’t be allowed to compete. It’s just a reason that customers leaving the utility for a CCA need to pay their fair share of the costs of past contracts. Most CCA advocates agree that some sort of “exit fee” is justified. The fight comes down to what a “fair share” is and how high that exit fee should be. A lot of accounting hocus-pocus can be introduced on both sides.

While the accounting can be complicated, the fundamental concept isn’t. A CCA should succeed or fail based on its ability going forward to procure power from the sources its customers prefer at a cost that is competitive.  Whatever regulatory mandates, managerial mistakes, or incompetence occurred in the past, customers switching to a CCA should not be allowed to shift their share of costs from past decisions onto other ratepayers.

If the exit fee is set too low, it’s easy for a CCA to offer “competitive” rates that are just a cost shift.  But it is also easy for the utility to squash efficient competition if it gets to charge the CCA’s customers an excessive exit fee.  Getting the exit fee right is central to making sure that retail choice provides fair and efficient competition.

CCAs4

Who Gets To Be the Default Provider?

Utilities also complain about a particular advantage that CCAs usually get, default status.  Most CCAs that have been established have been allowed to tell customers in the community that they are joining the CCA unless they explicitly opt out. That turns out to be a big advantage, because most customers pay little or no attention to the issue.  Utilities say that is unfair, and they are right. But the opposite is unfair as well.

In fact, from the deregulation of long-distance telephone service in the 1980s, to the introduction of electricity retail choice in the 1990s, to CCAs today, the choice of default provider has tilted the competitive landscape during the transition. No one has come up with a great solution that doesn’t unfairly advantage the incumbent monopolist or arbitrarily assign customers to a seller they have never dealt with before. CCAs argue that they are different, because they are affiliated with the local government that is supposed to be acting in the interests of residents.

 

Recreating Flawed Deregulation?

Nearly two decades of retail choice experience with for-profit companies has made clear a problem when customers have too much flexibility to jump back and forth between a utility and a competing retail provider. During California’s disastrous deregulation, when wholesale prices skyrocketed in 2000-2001, many retail providers folded and sent their customers back to the utility.

In that case, the utilities were obligated to take the customers back, but it was clear that customer option created an incentive for some retailers to bet on risky procurement strategies.  They (and their customers) knew that if the strategy failed the customers could just return to the utility rates.  But that meant the utility would then have to buy more power when it was especially costly, driving up the rates for all.

This problem has been solved in other deregulated electricity markets by making rules that customers who switch will not automatically be able to switch back to the utility’s standard rate.  In some markets, the “provider of last resort” utility just has to sell them power at a rate that reflects wholesale electricity prices, even if those prices are sky high.

Applying this scenario to utilities and CCAs, one could argue that without clear rules customers from either side might later want to switch opportunistically, creating the same sort of free riding problem we saw during the California crisis. There might, however, be one important difference of perception. Without clarity about switching rules, CCA customers seem more likely to expect they have a free option to switch back to the utility than the other way around.

CCAs5

Do These Contracts Make Me Look Green?

Finally, as I blogged about last month, merely buying unbundled Renewable Energy Certificates doesn’t necessarily mean that the electricity provider’s purchase is increasing the total amount of renewable energy on the grid, or decreasing greenhouse gases.

There are generally strict rules about what utilities, CCAs and any other retailer can count towards a Renewable Portfolio Standard, the minimum renewable share that many states mandate. But beyond a state’s RPS, there are often few restrictions on what a retailer can claim counts as providing renewable power.  So, regardless of the retailer, green energy claims deserve close scrutiny.

 

So Is Community Choice Aggregation a Problem or a Solution?

My own view is that carefully implemented CCAs may benefit a community without dumping costs onto other utility ratepayers.   Benefits are more likely if either (a) the community wants a much greener power mix than the utility will provide, and the community is sophisticated about the prices and greenness of the power it buys, or (b) the utility is doing a poor job of procuring electricity cost-effectively and the community can do better.   Of course, if either situation exists, why should retail electricity competition be limited to local governments?

Regulated investor-owned utilities are flawed organizations that operate under a distorted set of incentives. But local governments are also flawed organizations subject to their own set of distortions, a fact that is often less appreciated by the local government leaders who are promoting the CCA.  If your community is considering a CCA, you need to think about which organizational structure is most likely to have the sophistication and the incentives to serve you best.

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

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Gas is too cheap

Readers of this blog are likely aware that oil is really cheap right now. While in July 2008, the U.S. benchmark price peaked at just above $140 a barrel, its price dipped to below $27 in mid-January.

gasprices

The internet is on fire telling us that oil is now cheaper than the barrel (it actually doesn’t) come(s) in, the equivalent volume of Perrier sparkling water or Coca Cola. But there is a much more frightening comparison. The national average price for gasoline is $1.80 this week, with a minimum of $1.29 in Tulsa, Oklahoma. The external costs for a gallon of gasoline, as estimated in a now classic paper, are approximately $2 per gallon. This means that the average American is currently purchasing gasoline at half of its true social cost.

Now, higher oil price won’t fix the external costs of course and we have argued ad nauseum for a carbon tax on this blog to fix one of the market failures. Michael Anderson and I have a nice paper suggesting that one would need to charge a gas tax somewhere significantly north of $2 to make drivers internalize all of the external costs you spew on your fellow citizens faces while hurling your Dodge Hellcat down I-80 at rush hour.

But low gas prices have all kinds of negative effects for a society that does not properly tax gas. People drive more and hence cause more congestion. People purchase less fuel efficient cars, since they think gas prices will always stay where they are any given day, which is rational. (What is not, is that folks buy more convertibles on sunny days.) So we drive our bigger cars more on a road network that is falling apart. Bridges and highways are in terrible condition, as has been documented widely.

The smartest energy economist I know and Energy Institute colleague, Severin Borenstein, has suggested a perceived outrageous solution to this problem a while back. A price floor for gasoline. Stop the presses! A neoclassical economist suggests a price floor. My version of the idea goes like this. If the price of oil drops below a certain price, say $70 per barrel, gas prices get frozen at the average local historical price for $70 oil. Yes, we would keep gas prices artificially high. This would discourage consumers from driving more and maintain disincentives to purchase really fuel inefficient cars.

But what to do with the profits? Give it to refiners? Oil companies. No. The idea is for the regulator to capture this windfall and use it to put our highway system back together or improve public transportation systems. You are shaking your head. Well, the Chinese are not. In the first week of January, the National Development and Reform Commission (which is China’s economic planning agency) announced that price of Diesel and Gasoline would not be lowered as long as the price of oil is below $40.

This is a big deal. China had 279 million registered cars in 2015. In the US this number is 257.9 million. Due to regulatory controls, the market for gasoline is less complex in China than the fragmented US market. So how one would calculate the exact floor by region would be subject to lengthy regulatory processes. Still, the basic economics are right. While I agree that the tightened CAFE standards will improve fuel efficiency, they will not generate revenues that will prevent our then smaller and lighter cars from falling in to giant size potholes. Let’s get on it.

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New CAFE Standards: The Good, the Bad and the Ugly

New vehicles sold in the United States have long been subject to a set of fuel economy regulations known as the Corporate Average Fuel Economy (CAFE) standards. CAFE has been tightened several times during the program’s 40-year history, but no previous change was as significant as the new program rules which took effect starting in 2012. Four years into the new CAFE rules there has been surprisingly little discussion or analysis. This is about to change, however, as both proponents and critics of the policy begin gearing up for the US EPA’s required midterm review that will determine what form the program takes through 2025. The review formally kicks off in June 2016 when the EPA will release its Draft Technical Assessment Report for public comment.

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Economists have long complained that fuel economy standards are an inefficient way to reduce gasoline consumption. In a University of Chicago survey, 93% of economists said they would prefer a gasoline tax over fuel economy standards. I know I would. That said, there are some interesting features of the new CAFE standards. From an economic perspective the design features of the new rules can be divided into three categories: (i) the good, (ii) the bad, and (iii) the ugly.

 

The Good

The new CAFE rules allow for trading. This is a good thing. As with any cap-and-trade program, the “cap” is a good start, but it is the “trade” that can substantially lower compliance costs.

How does it work? Each year, the standard is assessed for each manufacturer. If a manufacturer is above the minimum fuel-economy standard, then it has a surplus and receives credits. If instead a manufacturer is below the standard, then it has a deficit and must buy credits.

Under the new CAFE rules these credits can be traded across manufacturers. This trading improves efficiency by equalizing the marginal cost of improving fuel economy across manufacturers. Opportunities for improvements in fuel economy vary widely across manufacturers. For some manufacturers there is low-hanging fruit, e.g. they already have relative expertise in producing and marketing fuel-efficient vehicles, whereas for other manufacturers it can be much harder. Under trading, investments are made where there is the biggest bang-for-the-buck, achieving the targeted aggregate level of fuel economy at lowest total cost.

The new rules have particularly important implications for companies like Toyota and Honda who tend to already sell relatively fuel-efficient vehicles. Under the old CAFE rules, Toyota and Honda were usually well below the standard, so for them, it was as if the CAFE standards did not exist. There was no penalty, but also no incentive to make further improvements in fuel economy. (In fact, these manufacturers had an incentive to make larger vehicles to pull market share away from other manufacturers who were constrained by CAFE.) Fast-forward to the new CAFE rules. Now any improvement in fuel economy generates CAFE credits, and thus profit. All manufacturers now have an incentive to improve fuel economy, including those who are perennially well-above the standard.

Under the new rules manufacturers can also bank and borrow credits across years. This is good too. It means that manufacturers can smooth over year-to-year fluctuations in demand driven by macroeconomic shocks, changes in gasoline prices, and other factors. The banking and borrowing also provides stability for the permit market, helping to avoid permit price spikes and crashes, and mitigating concerns about market power in permit markets.

 

The Bad

Unfortunately, the new CAFE rules also introduce a feature which makes little sense from an economic perspective. As has always been the case with CAFE standards, automakers are required to meet a minimum sales-weighted average fuel economy for their vehicle fleets. Unlike in previous years, however, with the new rules this target now depends on the footprint of vehicles in the fleet.

footprint

How does it work?  Each vehicle sold has a different emissions target based on its footprint. Larger vehicles have larger targets.

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My Mini Cooper has a footprint of 39 square feet so in 2012 would have received an emissions target of 244 grams of carbon dioxide per mile. Actual emissions are 296 grams per mile, significantly above the emissions target. Even though my car is one of the smallest on the road weighing only 2,500 pounds and with a paltry 115 horsepower, it is less fuel-efficient than its footprint-based target. Thus if BMW wants to sell more Mini Coopers, it also needs to sell more of some other vehicle that is below its target and/or BMW needs to buy permits from some other manufacturer.

This a bit surprising isn’t it?  Mini Coopers can and probably should be made more fuel-efficient, but at the same time with a respectable 31 MPG (36 highway) most people don’t typically think of them as enemy #1 when it comes to climate change. Herein lies the main problem with footprint-based targets. For a given vehicle footprint, the standards encourage automakers to make their vehicles as fuel-efficient as possible. But the new standards create no incentive for consumers to switch to smaller vehicles. In fact, the footprint-based targets may actually incentivize manufacturers to increase the average footprint of their fleet. This may make sense from a political point-of-view because domestic manufacturers produce large numbers of SUVs and pickups, but it doesn’t make sense from the perspective of reducing GHGs. Jim Sallee and Koichiro Ito have a paper exploring the economic costs from this type of “attribute-based” regulation.

Another problem with the new CAFE rules is that they give preferential treatment to trucks. In one way or another, preferential treatment for trucks has long been a feature of CAFE (more here). The CAFE rules encourage manufacturers to sell more trucks and fewer cars, as well as to relabel vehicles as trucks. Remember the PT Cruiser? Back in the early 2000s, Chrysler was making big profits on its Dodge Ram pickups, and desperately wanted to sell more, but was running up against CAFE. Ingeniously, Chrysler responded by introducing the PT Cruiser which looked like a car but was built on a “truck” platform, thus raising Chrysler’s average MPG for trucks. This meant Chrysler could sell more low-MPG pickups. This distortion continues under the new CAFE rules because of the higher emissions targets for trucks.

ptcruiser 

The Ugly

Worst of all, CAFE continues to suffer from a couple of more fundamental problems which greatly reduce its effectiveness. These problems existed under the old CAFE standards and they continue to exist under the new CAFE rules. These are problems inherent in any policy aimed at trying to reduce GHGs through fuel economy standards for new vehicles.

First, fuel economy standards do not encourage people to drive less. To efficiently reduce gasoline consumption you need people to buy more fuel-efficient cars and to drive less. You have to have both working together. Second, CAFE only applies to new cars. Mark Jacobsen and Arthur van Benthem have shown that fuel economy standards cause old fuel-inefficient vehicles to stay on the road longer. Why scrap your 1996 Ford Bronco if there is nothing similar available in the new car market?  A gasoline tax gets all of these margins right – both vehicle purchase and driving decisions – and both new and used vehicles.

Economists have estimated that per gallon of gasoline saved, the old CAFE standards cost 3 to 6 times as much as a gasoline tax. See here and here. As we approach the midterm review there is going to be a flood of new research and it is going to be interesting to see comparable estimates for the new standards. With both good and bad changes in program design it is not clear yet whether, on net, CAFE has become more or less cost-effective. For sure, however, the program is going to continue to be a very expensive way to reduce gasoline consumption compared to increasing the gas tax.

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“Real” Electricity Still Comes from the Grid

A recent article in the New York Times describes how a solar home provider will, “help some of the 1.2 billion people in the world who don’t have electricity to leapfrog the coal-dependent grid straight to renewable energy sources.” Does that mean someone didn’t read my previous attempt to stamp out the phrase “leapfrogging” in the context of distributed solar energy for households in the developing world?!? Alas!

One of the reasons I object to the phrase leapfrogging is that, at least given current technologies, home solar systems do not provide anywhere close to the same level of service as electricity from the grid. By contrast, a mobile phone, the oft-cited analogy in the leapfrogging discussions, has at least one notable advantage over a landline – it’s mobile.

Preferred to the grid?

Preferred to the grid?

Together with my co-authors Ken Lee and Ted Miguel, I just released a working paper that provides direct evidence that home solar users have not leapfrogged the grid.

We surveyed over 2,500 rural households in Western Kenya, some of whom had grid connections, some of whom had home solar systems and some of whom were un-electrified. (I’m also not nuts about the term “un-electrified” in this context as it suggests that electrification is a binary outcome and a home solar system “electrifies” a household, but please bear with me.)

Households in the “home solar” category had either a solar lantern or a small solar home system. They had paid on average $55 for the solar lanterns and $235 for solar home systems – a lot of money to households whose average annual incomes are likely less than $1,000. Many of them probably have the M-KOPA system, as it’s the most popular in Kenya. It currently costs over $200 and provides an 8-watt panel, two LED bulbs, an LED flashlight, a rechargeable radio and mobile charging adapters.

Here’s what we found:

  1. People want high wattage appliances, such as irons. We asked households to list all of the electrical appliances they own. We then asked them to name the appliance that they would ideally purchase next (that they did not currently own). The chart below shows the most desired appliances among the three groups in our study: “grid connected”, “home solar” and “un-electrified”.Desired

For both the home solar and the un-electrified households, televisions and radios are the most coveted appliances. These do not have to be high wattage, although even a pretty efficient small television at 15 watts is asking too much from the typical 8-watt home solar system in Kenya. Irons, which are the third most desired appliance among home solar households and the fourth most desired appliance among un-electrified households, are very high wattage – typically 1,000 to 1,500 watts.

We also asked the households about their general standard of living, and the home solar users appear richer and better educated than un-electrified households. These higher living standards, however, do not translate into meaningful differences in appliance ownership.

  1. The set of appliances owned by home solar households is much more similar to un-electrified households than the households with grid connections. The set of appliances that home solar and un-electrified households most desire is exactly the same as the set of appliances most likely to be owned by households with grid connections – televisions, radios, mobile phones, and – you guessed it – irons. The grid accommodates high wattage appliances like irons because it has a large capacity and because not everyone uses an iron at the same time, so households can share the infrastructure. So, it looks like both home solar and un-electrified households aspire to the energy consumption of a grid-connected household.Owned
  1. Home solar owners still use almost as much kerosene as un-electrified households. We asked households how much kerosene they had purchased in the past month. Kerosene is primarily used for lighting in our sample — almost none of the households report cooking with kerosene. So, we would expect to see a substantial drop in kerosene consumption for a household enjoying electric lighting.

On average, un-electrified households had spent $3.90 while home solar had spent $3.41. Perhaps the home solar owners are still buying kerosene to light additional rooms or to compensate for days when they cannot charge their solar systems. A greater share of home solar customers reported spending nothing on kerosene — almost 25% compared to 3% of un-electrified households, though this implies that three-quarters of the home solar owners are still relying on kerosene.

Don’t get me wrong. I’m not opposed to solar lanterns or solar home systems. For some households, they provide a real improvement over kerosene lighting. Most solar solutions seem to be priced to give households slight savings compared to buying kerosene. And, to the extent households are using less kerosene, they’re exposed to less indoor air pollution and lower risks of fire or burns. But, they are best described as steps up the energy ladder, rather than leapfrogging.

The Center for Global Development describes recent research that makes a similar point. They found that nearly 90% of households in Tanzania who already had “access to electricity outside of the national grid, such as solar power” still wanted a connection to the national grid. They also link to an article that describes villagers with a solar microgrid in India who still want “real” electricity, by which they mean grid.

Certainly, grid connections provide very different levels of service, depending on the reliability levels. We did not see this in our data, but it’s conceivable that households would have both a home solar system and a grid connection – using the home solar system for basic lighting and cell-phone charging when the grid was unavailable. Fortunately, the World Bank is starting to collect data that will elicit more information on the different level of services that households experience.

Our paper also provides perspective on the potential environmental benefits of home solar. If we’re thinking of home solar as an alternative to a grid connection, it’s important to know how the grid electricity is generated. Over 60 percent of the existing generation in Kenya and other parts of sub-Saharan Africa comes from hydro, geothermal and other non-fossil-fuel sources.

So, pushing households to home solar in Sub-Saharan Africa may not save nearly as much fossil fuel as some proponents would have you believe. But, just because Sub-Saharan African grids are green now, though, does not mean they will continue to be. If all the new generation is expected to come from coal, home solar could have large benefits by offsetting this marginal generation.

We looked at countries’ plans for growing their grids and saw that most countries are projecting they’ll get an even higher fraction of their generation from non-fossil sources over the next 10-20 years (see Figure 2B in the paper).

Think of it this way. As countries in Sub-Saharan Africa develop, they will need more and more electricity to power manufacturing facilities, high rise office buildings, subway systems and all the (mostly urban) residential customers who are already connected to the grid. To meet environmental goals, we need to figure out a way to supply that power with as few emissions as possible. But as long as we’re trying to de-carbonize the grid, providing rural households with home solar systems doesn’t provide many environmental benefits and may even distract from attempts to, for instance, build grid-scale solar.

So, let’s stop talking about leapfrogging and help more people get access to “real” electricity.

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Double Counting Virtue

If you’ve installed solar at your home and are now basking in the I’m-saving-the-planet warm glow, you may be in for a splash of ice water.  There’s a good chance someone else has purchased your halo and is wearing it right now.

You see, in practically every state, rooftop PV is recognized as green with Renewable Energy Certificates (RECs) that correspond to the amount of electricity they produce.  But if you are leasing the panels or buying the electricity they produce under a power purchase agreement, then the third-party owner (TPO) of the system gets the RECs.   Most TPOs are selling those RECs to another electricity vendor or customer, who can match them up with power from a “brown” source and magically turn those brown electrons green.

Certificate image              A Renewable Energy Certificate (Source: EnergyBrokerNetwork.com)

Here’s how it works: Joe’s Solar puts a 5 kilowatt system on your roof and sells you the electricity under a power purchase agreement. Because Joe owns the panels, he gets credit — in the form of RECs —  for the 7000 kilowatt-hours (kWh) of renewable electricity it produces each year.  Meanwhile, Bob’s all-fossil utility wants to “green up” so it buys the RECs from Joe to match with its coal or gas-fired generation.  Then Bob can claim that 7000 kWh of its power is renewable.

Before discussing why that might be a problem, let’s first remember why such renewable energy accounting systems exist, and can be a good idea.  Let’s say a state has a 20% renewable electricity standard for utilities. Utility A is in an area with few opportunities for renewable generation, but utility B has lots of wind and sunshine, and can cost-effectively generate more renewable power than it needs to meet the standard.  Utility B can build extra renewable energy sources in its area and sell the extra certificates to utility A.  In that way, utility A is helping to finance new green generation in area B. RECs are the currency that allows the overall goal to be met at lower cost.

REC_Diagram_3Degrees            A nice graphic of how RECs work from 3degrees (a company that brokers RECs)

Let’s say utility B generates 28% of its power from renewables, but sells the RECs from the extra 8% to utility A.  No problem with that.  But most people would be concerned if utility B still claimed it was 28% green powered, while utility A also counted those RECs it bought towards its own renewables goal.  That’s essentially the problem that is cropping up with some rooftop solar.

About 70% of new rooftop solar systems are now owned by third parties, and nearly all of the RECs associated with such systems are retained by the TPO.  (The solar homeowner is notified in the fine print of their contract, which s/he probably never reads.)  The TPO companies typically sell those RECs either to a company with a well-publicized goal of being “carbon neutral” or to a “community choice aggregator” that wants to claim a high percentage of green energy for its customers.

One might see this as a creative way to make both the solar homeowner and the RECs buyer feel good about saving the planet.  But the Federal Trade Commission and the Vermont Attorney General are killjoys when it comes to such double counting of virtue.  If the certificates are stripped off and sold to some other entity as “unbundled RECs” (that is, sold separately from the electricity), the FTC says (see §260.15) it is deceptive for the TPO to advertise or tell solar buyers they are getting “clean,”  “renewable,” or maybe even “solar” electricity with their lease or power purchase agreement.

Example 5: A toy manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is ‘‘100% solar-powered.’’ The manufacturer, however, sells renewable energy certificates based on the renewable attributes of all the power it generates. Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling renewable energy certificates, transferred the right to characterize that electricity as renewable. The manufacturer’s claim is therefore deceptive

From the Federal Trade Commission’s guidance on marketing renewable power

Just to be clear, there is nothing wrong with installing solar panels in one location while credit is claimed by someone in another location, as long as everyone understands that is happening.  But I suspect many PV homeowners wouldn’t be too happy if they knew their systems were being used by some fossil-powered company to claim it had gone green.

The problem is exacerbated in California, because none of the large utilities here are allowed to buy more than a tiny number of RECs from rooftops solar installations to meet their renewables goals. Due to high electricity prices, lots of sunshine, and generous compensation for rooftop solar generation, we still have about 45% of the nation’s new rooftop PV — mostly under leases or power purchase agreements — which are creating a glut of unbundled RECs that sell for practically nothing. That means that the RECs aren’t doing much to incentivize new rooftop solar systems, but the REC buyers still get to claim their electricity is green. That’s all legal, as long as all parties to the transaction, including the homeowner, are consenting (and fully informed) adults.

The lesson here is that if you choose to go solar, find out what will happen to the RECs.  If they are sold to someone else, you still get to use the electricity, but you have to give back the halo.

 

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

 

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Billing Tweaks Don’t Make Net Metering Good Policy

Just before Christmas, an administrative law judge at the California Public Utilities Commission put a shiny package with a big bow under the tree for distributed solar PV companies, and gave the state’s regulated utilities a lump of coal. That ALJ’s proposed decision, which will next go to the CPUC commissioners, rejected the utilities’ attempts to end net energy metering (NEM) for new residential solar customers.  Around the same time, the Nevada Public Utilities Commission came to the opposite conclusion.

The immense challenge we face from climate change, and the limited resources the political landscape is willing to allocate to it, means it is critical to design energy policy that gets the greatest long-term greenhouse gas reduction bang for the buck.  In previous blogs, I’ve argued that net metering is an inefficient and opaque way to support the growth of low-greenhouse gas technologies (see here, here, and here), and should be replaced with more direct and transparent subsidies.

MinimumBillsFig1Rather than rehash that argument, however, I thought I would start the new year discussing two rate structures that are being proposed as alternatives to repealing NEM: minimum bills (mostly proposed by rooftop solar supporters) and demand charges (mostly proposed by those on the opposite side).

 

Minimum Bills

Here’s the simple math: a minimum bill is identical to a  fixed charge plus giving every customer a set quantity of free electricity.

For instance, let’s say that electricity costs $0.10 per kilowatt-hour (kWh) and there is a minimum bill of $8 per month.  This is identical to a fixed charge of $8 per month and each customer receiving the first 80 kWh for free each month. Either way, it will make no difference to the bill of anyone who consumes more than 80 kWh. Either way, any customer consuming less than 80 kWh per month will face an increased bill and an incremental cost of zero for consuming one more kWh of electricity.  The same math holds whether retail rates are constant or tiered (though there is an extra step to calculating the number of free kilowatt hours if it goes beyond the first tier).  A minimum bill yields exactly the same bill for every single customer every single month as the equivalent fixed charge and free quantity of electricity.

MinimumBillsFig2If the minimum bill is set at a low level, such as $10 per month, then nearly all customers will exceed the minimum level and it will make no difference to either customer bills or utility finances. If the minimum bill is set at a higher level, such as $50 per month, then it will raise the bills of a significant number of low-use customers. And it will also give those customers an incentive to consume more, because until they hit $50, their incremental cost of consuming one more kWh is zero. If you are already a small user who is nonetheless forced to pay $50 every month, why bother turning off the lights when you go out this evening?

Then why in the world are some environmental groups among the proponents of minimum bills?  Perhaps because they will effectively maintain the status quo of recovering all revenues through volumetric charges. No one is seriously talking about a minimum bill of $50. Both NRDC and some solar companies have endorsed $10.  The Regulatory Assistance Project is also advocating very low minimum bills, proclaiming that their virtue is that almost no customers would be affected.

That would be just fine if volumetric charges reflected the social marginal cost of a kWh, that is, the utility’s marginal cost plus all emissions externalities from greenhouse gases, NOx, SO2, and particulates.    But in California, and many other states with high electricity rates, the prices exceed any realistic estimate of a kWh’s social marginal cost, as I wrote about a year ago.

Maintaining a high volumetric electricity price is not a worthy goal if that price greatly exceeds the full cost to society. It not only prevents customers from getting as much value from electricity as they can, it also discourages efficient switching from other energy sources, such as natural gas for heating and gasoline for transportation.  I recognize that fixed charges are no panacea either, creating a difficult trade-off between efficiency and equity/distributional concerns.

In any case, rather than hiding behind a minimum bill, regulators should just admit that they are making no changes and continuing to put all costs into the volumetric price of electricity.  A minimum bill either does nothing or takes rate design in the wrong direction.

 

Demand Charges

A demand charge is a fee based on the customer’s highest usage in any one hour (or shorter timeframe) during the billing period, regardless of whether that individual customer peak occurred when the system was stressed or during a time with plenty of spare capacity.  With the technology of the mid-20th century, it was extremely expensive to meter usage in every hour, so a simpler device was used, which captured peak consumption, but not the time at which it occurred.

Back then, a demand charge may have been the best available approximation to a customer’s usage during system peak periods, but it was never a very good approximation as the customer’s peak may not be coincident with the system peak.  Furthermore, the customer’s single highest consumption hour during each billing period is not the only, and may not even be the primary, determinant of the customer’s overall contribution to the need for generation or transmission capacity.

In any case, the value of such approximations has been mostly eliminated with smart meters that record usage in hourly or shorter intervals.  Smart meters permit time-varying price schedules that can easily be designed to more effectively capture the time-varying costs that a customer imposes on the system, including their contribution to the need for generation, transmission, and distribution capacity.

Interestingly, some utilities and others are proposing a fee based on the customer’s usage during system peaks and calling it a “demand charge.” That gets a lot closer to Critical Peak Pricing, a form of time-varying pricing, though the details of such “demand charges” still make them a poor alternative. They tend to focus on one or two hours of highest system demand within the billing period, regardless of whether that demand level actually stresses supply capability.  In one year, the hottest day in June may be a real scorcher and may occur when some major generation is off-line, while in another year June might be mild and have plenty of available capacity every day.

Sure, such a nouveau demand charge may be a small step in the right direction towards time-varying pricing, but it requires all the same infrastructure as pricing alternatives that are much bigger steps and are likely to seem much less risky to customers, because they are not driven entirely by just one or two hours.

An additional explanation for demand charges is that they capture the customer-specific fixed cost of providing a certain level of service capacity to the customer’s site. Such capacity, however, is established by making up-front and largely sunk investments in the local distribution network and the final connection to the customer.  These may constitute substantial fixed costs, but those costs are determined by the attributes of the connection, not by the customer’s peak usage after the connection is established. A monthly fixed charge based on the customer’s service capacity would more appropriately capture these costs.

The use of demand charges has also created a large market of consultants advising customers on how to reduce their peak demand (see here, here, and here for examples).  Those strategies that may yield little benefit to the utility or society.  Customers faced with demand charges place high private value on reducing their very highest hour of usage even if there are other hours in which usage is nearly as high, and even if none of those hours are coincident with system peak times.

At their very best, demand charges capture some customer-specific fixed costs and may very imperfectly reflect the time-varying costs of the customer’s consumption.  But customer-specific fixed charges that reflect service levels and time-varying pricing accomplish these goals much more effectively, so why would one use demand charges?

 

So What Should We Be Doing About Net Energy Metering?

The reality is that a customer who consumes 300 kWh in a month is imposing very different costs on the system than a customer who consumes 1500 kWh over some hours and also injects 1200 kWh into the grid during other hours. NEM treats them the same. That may have been a convenient benign fiction back when solar PV barely existed.  But today it is a costly distortion that has the potential to create huge economic inefficiencies and unfairly shift billions of dollars in costs among customers.

The CPUC needs to dig into the studies and take a stand on the real value that distributed generation brings to the grid.  And to be transparent about any additional subsidies based on learning or other technology development arguments.  Then the Commission needs to craft a tariff that accurately accounts for these values. Continuing NEM is just politically ducking the hard questions. If California is going to be a leader in alternative energy and combating climate change it has to be willing to make serious and defensible policy choices.

 

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

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Don’t Be a Grinch When It Comes to Holiday Lights

led lights

We bought them more than a decade ago. Several sets of Christmas lights. Every year we decorate the tree listening to Willie Nelson’s Pretty Paper, the greatest Christmas album of all time. We have two boxes, adding up to a whopping 800-count of little white incandescent bulbs. They put out a beautiful warm yellow light and have survived 10+ seasons of use and storage.

grinch

 

But they must use a horrendous amount of electricity, right? Are these lights ancient history, like the bulb in Catherine Wolfram’s basement? Should I be a Grinch and put these out to pasture? Is it time to replace these lights with LEDs?

 

I still have the original boxes, but they don’t say anything about electricity consumption. No problem. This is why everyone needs a “Kill-A-Watt” at home. I plugged the first set of lights into the Kill-A-Watt and, bam!, 51.5 watts.

killawatt

This is for 200 lights so the full set of 800 lights (36 feet) draws 206 watts. This is a lot of electricity. But we only have these lights plugged in about 50 hours per year. Just a couple of hours each evening for about three weeks. By January we are usually pretty sick of Willie Nelson (sorry Willie!) and we pack everything up and put it away.

So 200 watts multiplied by 50 hours yields 10 kilowatt hours annually. We are on Pacific Gas & Electric’s “Time-of-Use” rate and most months in the third-tier so we face a price of about $.30 per kilowatt hour. Thus our annual expenditure for Christmas lights is $3.00. Wait. Only $3.00? Yep. The lights are electricity-intensive, but on for so few total hours each year that it probably wouldn’t make sense to replace them with LEDs.

But what about externalities?   How much carbon dioxide are we emitting? PG&E customers emit 0.391 pounds of carbon dioxide per kilowatt hour, so my 10 kilowatt hours lead to about 4 pounds of carbon dioxide emissions. Valued at $36 per ton, this is only about 7 cents per year. Even if you assume a social cost of carbon of $200 per ton, the damages are only 39 cents per year. In fact, the $.30 per kilowatt price is already higher than social marginal cost unless you think the social cost of carbon is stratospherically high. And keep in mind that those new LED lights would require resources too, for manufacturing, packaging, and shipping.

Economics tells us that we live in a world of finite resources, so investments must be made where they yield the greatest return. With energy this means the big ticket items: car, furnace, home insulation, perhaps refrigerator — but not holiday lights that are used only a few hours each year. Unless your house looks like these homes below or you leave your lights on until St. Patrick’s Day, then it probably does not make sense replacing your lights with LEDs either to save yourself money or to save the planet.

xmas lights1xmas lights2xmas lights3

So go forth and enjoy your holiday lights! Crank up the Frosty the Snowman and enjoy this holiday season with your family and friends. We will be back next year recharged and ready to engage once again on the world’s most pressing energy challenges. Happy holidays from the Energy Institute!

The blog will be on vacation next week but will return on January 4.

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Economists are from Mars, Electric Cars are from Venus

I work at UC Davis, a University with at least two (that I know about) centers devoted to research “aimed at developing a sustainable market for plug-in vehicles.” I run into a lot of researchers and environmental advocates who are completely dedicated to the mission of accelerating the deployment of electric vehicles. They view electrifying a large share of the transportation fleet as one key piece of the climate policy puzzle.

I am also an economist.   The research coming out of the economics community has pretty consistently demonstrated that electric vehicles currently have marginal (at best) environmental benefits. I run into a lot of economists who are perplexed at the hostility these findings have generated from pockets of the environmental community.

I have followed and pondered these clashes for some time now, in part for the entertainment value, but also because of what this conflict reveals about how the different disciplines think about climate policy.

As the Paris climate summit concludes, the spotlight has been on goals such as limiting warming to 2 or even 1.5 degrees Celsius, and how the agreed-to actions fall short of the necessary steps to achieve them.  There has been much less focus on where targets like 2 degrees Celsius come from, and what the costs of achieving them would be.   A lot of the policies being discussed for meeting goals like an 80% reduction in carbon emissions carry price tags well in excess of the EPA’s official “social cost of carbon,” one measure of the environmental damages caused by CO2 emissions.   It is quite likely that these different perspectives, about how to frame the climate change problem, will define the sides of the next generation of climate policy debate (if and when we get past the current opposition based upon a rejection of climate science).

Screenshot 2015-12-13 16.03.50

Optimal EV Subsidies by County (from Mansur, et al.)

To be clear, the research on EVs is not (for most places) claiming that electric cars yield no environmental benefit. The point of papers like Mansur, et. al, and Archsmith, Kendall, and Rapson  is that these benefits are for the moment dwarfed by the size of public and private funds directed at EVs. Some have criticized aspects of the study methodologies (for example a lack of full life cycle analysis), but later work has largely addressed those complaints and not changed the conclusion that the benefits of EVs are substantially below the level of public subsidy they currently enjoy. Not only that, but Severin Borenstein and Lucas Davis point out that EV tax credits are about the most regressive of green energy subsidies currently available.

Another common, and more thought provoking, reaction I’ve seen is the view that the current environmental benefits of EVs are almost irrelevant. The grid will have to be substantially less carbon intensive in the future, and therefore it will be. The question is, what if it’s not? It seems likely that California will have a very low carbon power sector in 15 years, but I’m not so sure about the trajectory elsewhere. This argument also raises the question of sequencing. Why are we putting so much public money into EVs before the grid is cleaned up and not after?

This kind of argument comes up a lot when discussing some of the more controversial (i.e., expensive) policies directed at CO2 emissions mitigation.   Economists will write papers pointing to programs with an implied cost per ton of CO2 reductions in the range of hundreds of dollars per ton. One reaction to such findings is to point out that we need to do this expensive stuff and the cheap stuff or else we just aren’t going to have enough emissions reductions.   Since we need to do all of it, it’s no great tragedy to do the expensive stuff now.

It seems to me that this view represents what was once captured in the “wedges” concept and is now articulated as a carbon budget. Environmental economists call it a quantity mechanism or target. The underlying implication is that we have to do all the policies necessary to reach the mitigation target, or we are completely screwed. So we need to identify the ways (wedges) that reduce emissions and get them done, no matter what the costs may be.

Screenshot 2015-12-13 17.02.10

A CO2 Abatement Plan for California, circa 2011, from Williams, et al.

According to this viewpoint we shouldn’t quibble over whether program X costs $100 or $200 a ton if we’re going to have to do it all to get the abatement numbers to add up.   Sure, it may be ideal to do the cheap stuff (clean up the power sector) first and then do the expensive stuff (roll out EVs), but we’re going to have to do it all anyway.

At the risk of oversimplification, many environmental economists think of the problem in a different way. Each policy that reduces emissions has a cost, and those reductions create an incremental benefit. The question is then “are the benefits greater than the costs”?   From this framing of the problem, a statement like “we have to stick to the carbon budget X, no matter what the costs” doesn’t make sense. Any statement that ignores the costs doesn’t make sense.

It does appear that to reduce emissions by 80% by 2050, we will have to almost completely decarbonize the power sector and largely, if not completely, take the carbon out of transportation. That’s just arithmetic. How does one square that with research that implies such policies currently cost several hundred dollars a ton?

In particular, how do we reconcile this with the EPA’s estimates of the social cost of carbon that are in the range of $40/ton?  In their paper on the lifecycle carbon impacts of EVs and conventional cars, Archsmith, Kendell, and Rapson, using $38/ton as a cost of carbon, estimate the lifetime damages of the gasoline powered, but pretty efficient, Nissan Versa to be $3200. In other words, replacing a fuel efficient passenger car with a vehicle with NO lifecycle emissions would produce benefits of $3200. That puts $10,000 in EV tax credits in perspective.

Many proponents of those policies no doubt believe that the benefits of abatement (or costs of carbon emissions) are indeed many hundreds of dollars per ton. Or they could believe that costs of many of these programs are either cheaper right now than economists claim, or will become cheaper over the next decades.  Some justify the current resources directed at EVs as first steps necessary to gain the advantages of learning-by-doing and network effects.  Others make the point that the average social cost of carbon masks the great disparity in the distributional impacts of those costs.   Perhaps climate policy should be trying to limit the maximum damages felt by anyone, instead of targeting averages. How do residents of the Marshall Islands feel about the US EPA’s social cost of carbon?

All these are legitimate viewpoints. However, there is also the fact that the quantity targets we are picking, like limiting warming to 2 degree Celsius increase and/or reducing emissions by 80% by 2050, are somewhat arbitrary targets themselves. It’s hard to claim that the benefits of abatement are minuscule if we fall slightly short of that target and suddenly become huge if we make it.   This encapsulates the economists’ framing of the climate problem as a “cost-based” one.   Under this viewpoint we should keep pushing on abatement as much as we can, and see if the costs turn out to be less than the benefits. If not, we adjust our targets in response to what we learn about abatement costs (in addition to climate impacts).

This motivates so much of the economics research focus on the costs and effectiveness of existing and proposed regulations. That community doesn’t view it as sweating the small stuff. Under this framing of the issue, maybe having a fleet of super fuel efficient hybrids makes more sense, even if it results in higher carbon from passenger vehicles than a fleet of pure EVs might.

Or maybe EVs do turn out to be the best option. The two sides will have to recognize where the other is coming from, or the next round of climate policy debates may be as frustrating as this one.

 

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Heat and Happiness

As we Californians snuggle up around our ethanol or natural gas powered fireplaces to survive the barbaric temperatures which are dipping into the 50s, 40,000 people are hanging out in Paris trying to hammer out a new climate accord. Well, a few hundred are doing that, and I am not sure what the others are doing. But anyway.

One of the reasons we think that we should take action about climate change is that the costs of doing something about the problem are lower than the stream of future damages if we fail to act. Figuring out what damages from climate change will be 100 or more years into the future is difficult. It requires pairing climate models with economic models that simulate a global economy far out into the future. These very long-range forecasts make many economists’ skin crawl. Could we have predicted today’s economy on the eve of World War I?

There are many good and many not so good papers which provide estimates of what future weather and climate will do to a variety of sectors like agriculture, energy, disease, conflict, etc. One of the hardest things to figure out, though, is how much human well-being will be lost from factors that are not traded in markets.

One of my favorite new papers on the topic is by my student, Patrick Baylis, who is entering the shark tank (also known as the job market for economists) in a few weeks. Patrick’s job market paper is available here. He cites observations going back hundreds of years, which point out that being hot makes people unhappy. While Max A. might be very grouchy on a hot day and his wife Lori G. might be able to subjectively scale how much more grouchy he is compared to a cold day, this is hardly a reliable measurement and there could be other factors that make Max grouchy on a hot day.

tweetvolume

Patrick notes that there is a giant database of expressions of human emotion, which he can download. It’s called Twitter. You should try it sometime. It turns out that this large social media site has an interface which allows you to download tweets, many of which are geocoded. Figure 1 shows the density of tweets across the US, which largely mimics the distribution of population. Patrick uses algorithms from computational linguistics to translate the occurrence of certain words into “happiness” scores. He also looks for the occurrence of emoticons and swear words. He matches those scores to temperatures and a number of other climate indicators and estimates the impacts of different temperatures on revealed happiness. Since he observes the same individual at many points in time, he can make sure that his results are not driven by the fact that happier people may simply be living in more pleasant areas. His findings are really interesting:

  1. An individual living a day with an average (not maximum!) temperature in the 80-90 degree range relative to a day in the 60-70 degree range experiences a drop in happiness similar to a drop in happiness from a Sunday to a Monday. I don’t know about you, but for me that is essentially going off an emotional cliff. The figure below shows this for one of his measures of happiness quite clearly.
    dat
  2. He doesn’t observe a similar drop in happiness on cold days. He shows convincing evidence that this is not a selection effect of who lives where. But this might be due to the fact that we can much better fight off cold than we can warmth.
  3. “It’s not the heat, it’s the humidity.” He shows that hot and humid days are much worse than days with just high temperatures, which is probably a finding that residents of Washington D.C. can verify.
  4. He shows that people adapt partially but not fully to hot climates. In other words, people in Texas are more heat tolerant than people in Minnesota, but they are still negatively affected when it gets hot out.
  5. He also shows suggestive evidence that on hot days the frequency of typographical errors skyrockets. This is further evidence that on hot days cognitive ability decreases, which has been shown elsewhere.

When graduate students go on the market, the advice given is often to nudge the boundary in a field, since this is how scientific progress is made. Patrick’s work is more than a nudge: it takes an understudied question in the literature, pulls from work in other disciplines to establish a new methodology to investigate that question, and uses that methodology to document the answer across multiple dimensions. But hey, I’m biased. I am his advisor and all my academic children are above average. At the end of the paper, Patrick implements a preliminary technique to estimate the cost of temperature change, and finds that a one degree increase in temperature has similar happiness implications to living to an area with $500 lower median income.

The real reason I think this paper is important is that almost everyone will be exposed to more extreme temperatures – across the globe. If Patrick’s results are valid for other countries as well, what we will see is no benefits from fewer cold days and only costs from hotter days. This might be the economics paper that has quantified the most broadly applicable non-monetary costs of climate change. And these are not in the models. Yet. Get to it modelers.

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