Category: Policy

Cap & trade is dead. Long live cap & trade?

Democrats have pulled the plug on a sweeping energy bill this year. There is no heir apparent. This is not cause for panic. In climate, as in education, there are no emergencies.

However, the underlying reasons may be cause for panic. It seems that voters are unwilling to accept any policy that will significantly raise the price of emissions. Given that price is a predominant information carrier in our economy, other polices are unlikely to work efficiently, absent a price signal. That leaves us in a bit of a pickle. What to do?

If you don’t want to buck public opinion, advise the people to invest in (then pray for) a technological miracle. Ask yourself, “Do I feel lucky?” It might even work.

Alternatively, you might conclude that the public hasn’t quite grasped the nature of the problem – that wait and see is not a good policy in systems with long delays. But then you’d be accused of scientism, for the equivalent of challenging the efficient market hypothesis or the notion that the customer is always right. That’s rather puzzling, given that there’s direct evidence that people don’t intuitively appreciate the dynamics of accumulation, and that snowstorms in the East cause half of Americans to question the reality of climate change.

The anti-scientism, pro-technology crowd takes opposition to meaningful mitigation policy as a sure sign that the public is on to something. The wisdom of crowds is powerful when there’s diverse information and rapid feedback, as in price discovery through a market. But it has a pretty disastrous history in the runup to bubbles and other catastrophes, as we’ve recently seen. Surely there are some legitimate worries about current climate proposals (I’ve expressed a number here), but it doesn’t follow that pricing emissions is a bad decision.

So, what’s a modeler to do? Opening up political debates is a good idea, though not quite in the way that I think proponents intend. We already have plenty of political debates. The problem is that they tend to lack ready access to scientific or other information that can be agreed upon or at least presented in a way that permits testing of hypotheses against data or evaluation of decisions against contingencies. That means that questions of values and distribution of benefits (which politics is rightfully about) get mixed up with muddled thinking about science, economics, and social system dynamics.

The solution typically proposed is to open up science and models to more public scrutiny. That’s a good idea for a variety of reasons, but by itself it’s a losing proposition for scientists- they get all the criticism, and the public process doesn’t assimilate much of their insights. What’s needed is a fair exchange, where everyone shows their hands. Scientists make their stuff accessible, and in return participants in policy debates actually use it, and additionally submit to formalization of their arguments to facilitate shared understanding and testing.

Coming back to cap & trade, I don’t see that the major political players are willing to do that. Following a successful round of multi-stakeholder workshops that brought a systems perspective to conversations about climate policy, funded by the petro industry in California, we spent a fair amount of time marketing the idea of a model-assisted deliberation process targeted at shared design of federal climate policy. Lobbyists at some of the big stakeholders told us very forthrightly that they were unwilling to engage in any process with an outcome that they couldn’t predict and control.

In an environment where everyone’s happy with their own entrenched position, their isn’t much hope for a good solution to emerge. The only solution I see is to make an end run around the big players, and go straight to the public with better information, in order to expand the set of things they’ll accept. I hope there’s time for that to work.

Policy Resistance – Immigration & Prohibition

Complex systems find many ways of resisting or evading pressures, resulting in policy failure, backlashes, whack-a-mole games and other unintended consequences. Some great examples just wandered by my desk:

Via Economist’s View:

Immigration reform has a long history of unintended consequences: More than two decades of increased enforcement since the passage of the Immigration Reform and Control Act of 1986 has done little to reduce the number of illegal immigrants. In fact, it seems to have increased their numbers. …

Princeton University sociologist Douglas Massey pointed out … that measures to secure the border seemed to produce almost the opposite of what was intended. … With increasing border enforcement, workers who used to shuttle between jobs in California or Texas and home in Zacatecas or Michoacán simply began to stay put and sent for their families, becoming permanent, if sometimes reluctant, residents. According to Massey, post-IRCA border enforcement may have increased the size of the permanent Mexican population in the United States by a factor of nearly four.

From a great article on Wayne Wheeler, The Man Who Turned Off the Taps, in Smithsonian:

But for all his political might, Wheeler could not do what he and all the other Prohibitionists had set out to do: they could not purge alcoholic beverages from American life. Drinking did decline at first, but a combination of legal loopholes, personal tastes and political expediency conspired against a dry regime.

As declarative as the 18th Amendment was—forbidding “the manufacture, sale, or transportation of intoxicating liquors”—the Volstead Act allowed exceptions. You were allowed to keep (and drink) liquor you had in your possession as of January 16, 1920; this enabled the Yale Club in New York, for instance, to stockpile a supply large enough to last the full 14 years that Prohibition was in force. Farmers and others were allowed to “preserve” their fruit through fermentation, which placed hard cider in cupboards across the countryside and homemade wine in urban basements. “Medicinal liquor” was still allowed, enriching physicians (who generally charged by the prescription) and pharmacists (who sold such “medicinal” brands as Old Grand-Dad and Johnnie Walker). A religious exception created a boom in sacramental wines, leading one California vintner to sell communion wine—legally—in 14 different varieties, including port, sherry, tokay and cabernet sauvignon.

By the mid-’20s, those with a taste for alcohol had no trouble finding it, especially in the cities of the East and West coasts and along the Canadian border. At one point the New York police commissioner estimated there were 32,000 illegal establishments selling liquor in his city. In Detroit, a newsman said, “It was absolutely impossible to get a drink…unless you walked at least ten feet and told the busy bartender what you wanted in a voice loud enough for him to hear you above the uproar.” Washington’s best-known bootlegger, George L. Cassiday (known to most people as “the man in the green hat”), insisted that “a majority of both houses” of Congress bought from him, and few thought he was bragging.

Worst of all, the nation’s vast thirst gave rise to a new phenomenon—organized crime, in the form of transnational syndicates that controlled everything from manufacture to pricing to distribution. A corrupt and underfunded Prohibition Bureau couldn’t begin to stop the spread of the syndicates, which considered the politicians who kept Prohibition in place their greatest allies. Not only did Prohibition create their market, it enhanced their profit margins: from all the billions of gallons of liquor that changed hands illegally during Prohibition, the bootleggers did not pay, nor did the government collect, a single penny of tax.

The prohibition article also poses an interesting puzzle. If prohibition was more or less quickly and broadly unpopular, how did it get passed by such landslide margins in the first place? I can’t believe that ignorance of the possible outcome was universal, so there must have been some powerful positive feedback behind the initial passage of the policy. Perhaps it was a tipping point effect: once a vote becomes sufficiently lopsided, fewer and fewer politicians want to be on the losing side of a landslide vote, so they join the herd. A modern analogy might be the post-9/11 authorization of the Iraq war.

Will the real emissions target please stand up?

cop15_8_1_650

The post-Copenhagen climate negotiations seem to be diverging, at least on the question of targets. Brackets, denoting disagreement, have if anything proliferated in the draft texts. The latest from Bonn:

AD HOC WORKING GROUP ON LONG-TERM COOPERATIVE ACTION UNDER THE CONVENTION

Eleventh session Bonn, 2–6 August 2010

Item 3 of the provisional agenda Preparation of an outcome to be presented to the Conference of the Parties for adoption at its sixteenth session to enable full, effective and sustained implementation of the Convention through long-term cooperative action now, up to and beyond 2012

Text to facilitate negotiations among Parties

…

4. Parties should collectively reduce global emissions by [50][85][95] per cent from 1990 levels by 2050 and should ensure that global emissions continue to decline thereafter. Developed country Parties as a group should reduce their greenhouse gas emissions by [[75-85][at least 80-95][more than 95] per cent from 1990 levels by 2050] [more than 100 per cent from 1990 levels by 2040].

…

18. These commitments are made with a view to reducing the aggregate greenhouse gas emissions of developed country Parties by [at least] [25–40] [in the order of 30] [40] [45] [50] [X* per cent from [1990] [or 2005] levels by [2017][2020] [and by [at least] [YY] per cent by 2050 from the [1990] [ZZ] level].

Hat tip: Travis Franck.

The RGGI budget raid and cap & trade credibility

I haven’t been watching the Regional Greenhouse Gas Initiative very closely, but some questions from a colleague prompted me to do a little sniffing around. I happened to run across this item:

Warnings realized in RGGI budget raid

The Business and Industry Association of New Hampshire was not surprised that the Legislature on Wednesday took $3.1 million in Regional Greenhouse Gas Initiative funds to help balance the state budget.

“We warned everybody two years ago that this is a big pot of money that is ripe for the plucking, and that’s exactly what happened,” said David Juvet, the organization’s vice president.

Indeed, the raid happened without any real debate at all. In fact, the only other RGGI-related proposal – backed by Republicans – was to take even more money from the fund.

… New York state lawmakers grabbed $90 million in RGGI funds last December. Shortly afterwards, New Jersey followed suit taking $65 million in the last budget year. And “the governor left the door wide open for next year. They are taking it all,” said Matt Elliott of Environment New Jersey. …

This is a problem because it confirms the talking point of “cap & tax” opponents, that emissions revenue streams will be commandeered for government largesse. There is a simple solution, I think, which is to redistribute the proceeds transparently, so that it’s obvious that a raid on revenues is a raid on pocketbooks. The BC carbon tax did that initially, though it’s apparently falling off the wagon.

The Law of Attraction

No, not that silly one.

Controlling Growth by Controlling Attractiveness

In Woodstock, Vermont, everyone’s mad about a highway. In other places the issue is a sewer system or a school. The real issue, of course, is growth. According to Jay Forrester’s Attractiveness Principle (Forrester is a professor of systems analysis at MIT) there’s only one way to control growth — control attractiveness.

…

In a free society if any place is unusually attractive, folks will — no surprise — be attracted there. The most mobile people (the young, the rich, the educated) will get there first. The place will grow until its attractiveness has been reduced by crowded highways, or unemployment, or scarce housing, or pollution, or just plain visual blight. (The most mobile people have moved on by then). When the place is no more attractive than anywhere else, then and only then will it stop growing. What else can stop it?

…

The attractiveness of a place is a complex combination of climate, economy, amenities, scenery. No one can define attractiveness exactly, but people make up their minds about it every day by deciding to move from Hartford or Boston or Westchester County to Vermont (that’s the direction they’re moving at the moment). Millions of human judgements weigh Vermont’s clean air against Boston’s job market and Manhattan’s cost of living. The very different mixes of attractiveness and unattractiveness in those places may seem incommensurable, but people make their comparisons, and eventually attractiveness evens out everywhere.

…

The normal instinct of public officials, including those of Woodstock, is to fix problems and make their community perfect. The more perfect they make it, the more new people show up. What Woodstock needs to do, Forrester would say, is decide what kinds of imperfection it’s willing to live with.

A crowded, unsafe highway? If that’s unacceptable, then choose something else. Super-restrictive zoning, perhaps, or an absolute limit on new curb cuts, or higher property taxes (I know, they’re already too high, but not high enough to stop people from moving in). Bad schools. Bad air. No jobs. Developments so ugly you might as well live in New Jersey. Some sort of whopping surcharge on those developers. Either Woodstock chooses its form of unattractiveness, or the growth process itself chooses.

It takes awhile to absorb the implications of the Attractiveness Principle, because it turns conventional thinking upside down (Forrester is good at doing that). Its implications are not good news for the sort of people who live in Woodstock. The Principle says you can’t live in a privileged bubble of attractiveness, unless you are perpetually young, rich, educated, and on the move at the head of the attractiveness wave. It says that growth is your problem wherever it occurs. It says the only way to be sure of living in an attractive place is to be committed to the attractiveness of every place.

From the Donella Meadows Archive

Enabling an R&D addiction

I actually mean that in a good way. A society addicted to learning and innovation would be pretty cool.

However, it’s not all about money. Quoting the OSTP Science of Science Policy Roadmap,

Investment in science and technology, however, is only one of the policy instruments available to science policy makers; others include fostering the role of competiton and openness in the promotion of discovery, the construction of intellectual property systems, tax policy, and investment in a STEM workforce. However, the probable impact of these various policies and interventions is largely unknown. This lack of knowledge can lead to serious and unintended consequences.

In other words, to spend $16 billion/year wisely, you have to get a number of moving parts coordinated, including:

  1. Prices & tax policy. If prices of natural resources, national security, clean air, health, etc. don’t reflect their true values to society, innovation policy will be pushing against the tide. Innovations will be DOA in the marketplace. The need for markets for products is matched by the need for markets for innovators:
  2. Workforce management. Just throwing money at a problem can create big dislocations in researcher demographics. Put it all into academic research, and you create a big glut of graduates who have no viable career path in science. Put it all into higher education, and your pipeline of talent will be starved by poor science preparation at lower levels. Put it all into labs and industry, and it’ll turn into pay raises for a finite pool of workers. Balance is needed.
  3. Intellectual property law. This needs to reflect the right mix of incentives for private investment and recognition that creations are only possible to the extent that we stand on the shoulders of giants and live in a society with rule of law. Currently I suspect that law has swung too far toward eternal protection that actually hinders innovation.

At the end of the day, #1 is most important. Regardless of the productivity of the science enterprise, someone will probably figure out how to make graphene cables or an aspen tree that bears tomatoes. The key question, then, is how society puts those things to use, to solve its problems and improve welfare. That requires a delicate balancing act, between preserving diversity and individual freedom to explore new ways of doing things, and preventing externalities from harming everyone else.

R&D – crack for techno-optimists

I like R&D. Heck, I basically do R&D. But the common argument, that people won’t do anything hard to mitigate emissions or reduce energy use, so we need lots of R&D to find solutions, strikes me as delusional.

The latest example to cross my desk (via the NYT) is the new American Energy Innovation Council’s recommendations,

Create an independent national energy strategy board.
Invest $16 billion per year in clean energy innovation.
Create Centers of Excellence with strong domain expertise.
Fund ARPA-E at $1 billion per year.
Establish and fund a New Energy Challenge Program to build large-scale pilot projects.

Let’s look at the meat of this – $16 billion per year in energy innovation funding. Historic funding looks like this:

R&D funding

Total public energy R&D, compiled from Gallagher, K.S., Sagar, A, Segal, D, de Sa, P, and John P. Holdren, “DOE Budget Authority for Energy Research, Development, and Demonstration Database,” Energy Technology Innovation Project, John F. Kennedy School of Government, Harvard University, 2007. I have a longer series somewhere, but no time to dig it up. Basically, spending was negligible (or not separately accounted for) before WWII, and ramped up rapidly after 1973.

The data above reflects public R&D; when you consider private spending, the jump to $16 billion represents maybe a factor of 3 or 4 increase. What does that do for you?

Consider a typical model of technical progress, the two-factor learning curve:

cost = (cumulative R&D)^A*(cumulative experience)^B

The A factor represents improvement from deliberate R&D, while the B factor reflects improvement from production experience like construction and installation of wind turbines. A and B are often expressed as learning rates, the multiple on cost that occurs per doubling of the relevant cumulative input. In other words, A,B = ln(learning rate)/ln(2). Typical learning rates reported are .6 to .95, or cost reductions of 40% to 5% per doubling, corresponding with A/B values of -.7 to -.15, respectively. Most learning rate estimates are on the high end (smaller reductions per doubling), particularly when the two-factor function is used (as opposed to just one component).

Let’s simplify so that

cost = (cumulative R&D)^A

and use an aggressive R&D learning rate (.7), for A=-0.5. In steady state, with R&D growing at the growth rate of the economy (call it g), cost falls at the rate A*g (because the integral of exponentially growing spending grows at the same rate, and exp(g*t)^A = exp(A*g*t)).

That’s insight number one: a change in R&D allocation has no effect on the steady-state rate of progress in cost. Obviously one could formulate alternative models of technology where that is not true, but compelling argument for this sort of relationship is that the per capita growth rate of GDP has been steady for over 250 years. A technology model with a stronger steady-state spending->cost relationship would grow super-exponentially.

Insight number two is what the multiple in spending (call it M) does get you: a shift in the steady-state growth trajectory to a new, lower-cost path, by M^A. So, for our aggressive parameter, a multiple of 4 as proposed reduces steady-state costs by a factor of about 2. That’s good, but not good enough to make solar compatible with baseload coal electric power soon.

Given historic cumulative public R&D, 3%/year baseline growth in spending, a 0.8 learning rate (a little less aggressive), a quadrupling of R&D spending today produces cost improvements like this:

R&D future 4x

Those are helpful, but not radical. In addition, even if R&D produces something more miraculous than it has historically, there are still big nontechnical lock-in humps to overcome (infrastructure, habits, …). Overcoming those humps is a matter of deployment more than research. The Energy Innovation Council is definitely enthusiastic about deployment, but without internalizing the externalities associated with energy production and use, how is that going to work? You’d either need someone to pick winners and implement them with a mishmash of credits and subsidies, or you’d have to hope for/wait for cleantech solutions to exceed the performance of conventional alternatives.

The latter approach is the “stone age didn’t end because we ran out of stones” argument. It says that cleantech (iron) will only beat conventional (stone) when it’s unequivocally better, not just for the environment, but also convenience, cost, etc. What does that say about the prospects for CCS, which is inherently (thermodynamically) inferior to combustion without capture? The reality is that cleantech is already better, if you account for the social costs associated with energy. If people aren’t willing to internalize those social costs, so be it, but let’s not pretend we’re sure that there’s a magic technical bullet that will yield a good outcome in spite of the resulting perverse incentives.

Gallagher, K.S., Sagar, A, Segal, D, de Sa, P, and John P. Holdren, “DOE Budget Authority for Energy Research, Development, and Demonstration Database,” Energy Technology Innovation Project, John F. Kennedy School of Government, Harvard University, 2007.

Greenwash labeling

I like green labeling, but I’m not convinced that, by itself,  it’s theoretically a viable way to get the economy to a good environmental endpoint. In practice, it’s probably even worse. Consider Energy Star. It’s supposed to be “helping us all save money and protect the environment through energy efficient products and practices.” The reality is that it gives low-quality information a veneer of authenticity, misleading consumers. I have no doubt that it has some benefits, especially through technology forcing, but it’s soooo much less than it could be.

The fundamental signal Energy Star sends is flawed. Because it categorizes appliances by size and type, a hog gets a star as long as it’s also big and of less-efficient design (like a side-by-side refrigerator/freezer). Here’s the size-energy relationship of the federal energy performance standard (which Energy Star fridges must exceed by 20%):

standard

Notice that the standard for a 20 cubic foot fridge is anywhere from 470 to 660 kWh/year.

Continue reading “Greenwash labeling”

When rebates go bad

rebate

There’s a long-standing argument over the extent to which rebound effects eat up the gains of energy-conserving technologies, and whether energy conservation programs are efficient. I don’t generally side with the hardline economists who argue that conservation programs fail a cost benefit test, because I think there really are some $20 bills scattered about, waiting to be harvested by an intelligent mix of information and incentives. At the same time, some rebate and credit programs look pretty fishy to me.

On the plus side, I just bought a new refrigerator, using Montana’s $100 stimulus credit. There’s no rebound, because I have to hand over the old one for recycling. There is some rebound potential in general, because I could have used the $100 to upgrade to a larger model. Energy Star segments the market, so a big side-by-side fridge can pass while consuming more energy than a little top-freezer. That’s just stupid. Fortunately, most people have space constraints, so the short run price elasticity of fridge size is low.

On the minus side, consider tax credits for hybrid vehicles. For a super-efficient Prius or Insight, I can sort of see the point. But a $2600 credit for a Toyota Highlander getting 26mpg? What a joke! Mercifully that foolishness has been phased out. But there’s plenty more where that came from.

Consider this Bad Boy:

credit

The Zero-Emission Agricultural Utility Terrain Vehicle (Agricultural UTV) Rebate Program will credit $1950 in the hope of fostering greener farms. But this firm knows who it’s really marketing to:

turkey

Is there really good control over the use of the $, or is public funding just mechanizing outdoor activities where people ought to use the original low-emissions vehicle, their feet? When will I get a rebate for my horse?