Two on energy subsidies

The WSJ has two good and related opeds on energy and transport subsidies recently, Randall O'Toole on Last Stop on the Light-Rail Gravy Train and Lee Ohanian and  Ted Temzelides write on energy and transport subsidies

O'Toole:

Last month, Nashville Mayor Megan Berry announced a $5.2 billion proposal that involves building 26 miles of light rail and digging an expensive tunnel under the city’s downtown. Voters will be asked in May to approve a half-cent sales tax increase plus additions to hotel, car rental and business excise taxes to pay for the project.

Just in time for self-driving Ubers to arrive.

I love trains. But we have to admit practicalities. One transportation economist summed all there is to know about transit with "Bus Good. Train Bad." (With a few exceptions, such as Manhattan.)  And light rail, worse. Trains are expensive, and once built, immobile. If people want to go somewhere else, tough. Rolling stock lasts around 50 years, meaning they bake in technical obsolescence. Trains carry far fewer people per lane-mile than busses. And a fleet of self-driving Ubers linked by computer will be able to use bus lanes.

Actually, even buses are more and more questionable. As I wait for the interminable lights on El Camino to cross to Stanford (on bicycle), I have taken to counting passengers on the well-subsidized bus line. The modal number is zero.

As Randy has pointed out elsewhere, the main beneficiaries of light rail are suburban largely white commuters with a nostalgia thing for trains. The main people paying for it are inner city minorities who don't get bus service anymore.

To pay for new light-rail lines that opened in 2012 and 2016, Los Angeles cut bus service. The city lost nearly four bus riders for every additional rail rider.

Congestion got you down? Real time tolling, adjusted minute by minute, will either cure traffic congestion forever, or will bail out indebted local governments with massive revenues, or both. Or, let people live somewhere near where they work!

Lee and Ted consider the transition from horse to auto and truck,

‘In 50 years, every street in London will be buried under 9 feet of manure.” With this 1894 prediction, the London Times warned that the era’s primary source of transportation energy—the horse—would soon create an environmental crisis. ...

The enormous demand for a cleaner and more efficient source of energy led to remarkable innovations in the internal combustion engine. By 1920 horses in cities had been almost entirely replaced by affordable autos and trucks...

And to be honest, horse manure replaced by auto exhaust -- but as bad as auto exhaust is, it's a lot better than horse manure.

Suppose governments in the 1890s, desperate to replace the horse, had jumped on the first available alternative, the steam engine. Heavy subsidies would have produced more steam engines and more research on steam technology. This would only have waylaid the development of the far superior internal combustion engine. 

Source: Obtainium works. 

(Actually, the government did subsidize railroads a good deal, and perhaps by doing so did stall the development of the truck.)

More than horse manure, I love the image of an alternate reality steampunk America...At left a cool  steampunk RV. (Image source)

Which brings us back, I'm afraid to the main force behind rail subsidies, which Randall has pointed out before: Nostalgia. Nostalgia for what seems like a simpler age. I understand that too. I love trains. But that doesn't make them practical, especially at billions of dollars per mile.

If we're doing nostalgia, how about doing it full time -- high speed stagecoach lines? Bring back the horse! It's all renewable!'

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Duet Redux

Another duet of headlines with an interesting lesson, both from the Wall Street Journal:

Solar power death wish

Suniva Inc., a bankrupt solar-panel maker, and German-owned SolarWorld Americas have petitioned the U.S. International Trade Commission (ITC) to impose tariffs on foreign-made crystalline silicon photovoltaic cells. 

Solar cells in the U.S. sell for around 27 cents a watt. The petitioners want to add a new duty of 40 cents a watt. They also want a floor price for imported panels of 78 cents a watt versus the market price of 37 cents. 

they’re resorting to Section 201 of the Trade Act of 1974 because they don’t need to show they are victims of dumping or foreign government subsidies. They only need to show that imports have harmed them

California Democrats Target Tesla

The United Automobile Workers are struggling for a presence in Tesla’s Fremont plant, and organized labor has called in a political favor. 

Since 2010 California has offered a $2,500 rebate to encourage consumers to buy electric vehicles. But last week, at unions’ behest, Democrats introduced an amendment to cap-and-trade spending legislation that would require participating manufacturers to get a sign-off from the state labor secretary verifying that they are “fair and responsible in their treatment of workers.” 

The legislation, which passed Friday, is a direct shot at Tesla. The Clean Vehicle Rebate Project has amounted to a $82.5 million subsidy for the company

Both moves ought to pose a liberal conundrum. If you want carbon reduction, you want cheap solar cells, so that more people will buy them. The planet does not care where the solar cells are produced. If you want electric cars, you want cheap electric cars so that more people will buy them.

But those who falsely sold green energy as a job producer, a boon to the economy; not a costly alternative to fossil fuels, a cost that must be borne to save the planet, now face this conundrum.

The deeper lesson here is the corrosive nature of subsidies and protection. Once the government starts subsidizing solar cells and electric cars, there is a quite natural force demanding access to the subsidies. Why should the owners of the Tesla company get largesse from the taxpayers, and not their workers too?

Solar cells are just the latest embodiment of the infant industry fallacy -- that protection from competition will allow an industry to grow and become competitive.  Instead, they become infantile industries, expert and getting protections and subsidies not producing cheap solar cells.

The infrastructure paradox is similar. We need infrastructure. Yet federal contracting requirements, requirements for union workers and union wages, and everything else attracted to federal money being handed out, drive costs up to astronomical levels.

For energy, this is an abject lesson in the wisdom of a simple carbon (and methane) tax in place of all the subsidies and winner-and-loser-picking our government does. (Let's not fight about whether to do it. The point is if we want to restrict fossil fuels and subsidize a move to non-carbon energy, this is how to do it.) Subsidies and protection invite demands for subsidies and protection, not clean energy.

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In the name of Science

"Climate Feedback" has produced a "scientific review" of my WSJ oped with David Henderson on (Oped ungated full text here, see also associated blog post.)

In the blog post, I wrote,

"If it is not clear enough, nothing in this piece takes a stand on climate science, either affirming or denying current climate forecasts. I will be interested to see how quickly we are painted as unscientific climate-deniers."

Now we know the answer. 

To recap, the oped said nothing about climate science, nothing about climate computer model forecasts, and did not even question the integrated model forecasts of economic damage. We did not deny either climate change nor did we argue against CO2 mitigation policies in principle. For argument's sake we granted a rather extreme forecast (level of GDP reduced by 10% forever) of economic costs. We did not even question the highly questionable cost-benefit analyses of policies subject to cost benefit analysis. We mostly complained about the lack of any cost benefit analysis, and the quantitative nonsense of many claims.

So, it's curious that there could be any "scientific" review of a purely economic article in the first place. How do they do it? 

Aaron Bernstein, Associate Director of the Center for Health and the Global Environment, Boston Children’s Hospital, Harvard: writes 

"Although many claims in this op-ed don’t mesh with reality, [no example stated] the most concerning delusion presented is that the health costs of climate change are both known and manageable. Legitimate economic analyses have put the costs of climate change at 2100 to GDP at several percent to more than 20%[1], with the variability largely due to different discount rates." 

We did not say known. We cited estimates, which have standard errors. We cited 10% of the level of GDP, forever. The response cites the discounted cost of all future GDP loss, in terms of one year's  GDP. Our number is much larger. 10% of GDP forever has a discounted value of 10%/(interest rate - growth rate). If interest rate - growth rate is one percentage point, then 10% of GDP forever is worth 10 times annual GDP, 1000% a lot more than 20%. If we took his number, total discounted costs only 20%, then climate change would truly be trivial. Even if he were answering our 10% with 20%, a factor of two is couch change in this business. OK, two tenths of a percentage point of growth.

(The quote is only about losses up to 2100, so you don't get the full r-g effect, but you see the point -- apples to oranges. The lesson is don't divide a present value by one year's flow. The discounted costs are an even larger fraction of a minute's GDP.)  

Bernstein  continues: 

"Even these higher damage estimates may fail to capture the full costs of extreme events over time, as Martin Weitzman’s work has shown. But there’s another, and more difficult, rub. What if we don’t understand the full consequences of greenhouse gas emissions? "

and continues with a standard list of things that might go wrong. We had written, 

"... some advocate that we buy some “insurance.” Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. "

and addressed the issue. 

"Science" and "scientific" review is supposed to include the ability to read and basic quantification. 

David Easterling, Chief of the Scientific Services Division, NOAA's National Climatic Data Center writes:

"This is a very simplistic, almost naive op-ed on climate change impacts." ...

It wasn't an oped on climate change impacts. It was an oped on cost-benefit analysis of policies to address climate change impacts, and never questioned any climate change impacts. 

"The idea that Miami is going to build a dike like Rotterdam is almost laughable. Of course climate change is not the only risk to society, but it is the biggest environmental risk. And most large buildings (e.g. Empire State Building) are not rebuilt every 50 years, only smaller, more expendable ones are."

Just why is building dikes, or other adaptations laughable? Miami is 7 feet above sea level, Rotterdam about the same below sea level, and 7 is greater than most estimates of sea level rise. Rotterdam did it. Climate change is the biggest environmental risk? More than nuclear war, chemical pollution, the crap in the water that most people in the world drink, malaria, loss of habitat, poaching, all put together? A citation or two comparing climate change to the others would be nice. And the total value of smaller more expendable buildings is far larger than the total value of Empire State buildings. 

Easterling falls neatly into our trap. We accused the politicized climate policy community for leaving quantitative, cost-benefit policy analysis behind and he... leaves quantitative cost benefit policy analysis behind.  

Frank Vöhringer, Dr. rer. pol, Scientist, Ecole Polytechnique Fédérale de Lausanne (EPFL), 

"The article plays down impacts of climate change that most studies consider to be highly important: e.g. the death toll of heat waves, hazards to coastlines, costs and friction of migration and other adaptation.... economic studies suggest that the risks of climate change are important, especially in certain economic segments (e.g. agriculture, health) and for low income countries with low capacity for adaptation. The article fails to mention that hazards and distributive issues of climate change increase all the other risks that the authors itemize, “nuclear explosions, a world war, global pandemics, crop failures and civil chaos”, even if it is not yet clear to what extent."

Verena Schoepf, Research Associate, The University of Western Australia, 

"The authors seem unaware of many consequences of climate change, particularly related to the ocean. The increase in ocean acidity and temperature, due to uptake of atmospheric CO2, will have tremendous consequences for many marine organisms and thus ultimately humans via sea level rise, impacts on weather and climate, food security, etc."

Wolfgang Cramer, Professor, Directeur de Recherche, Mediterranean Institute for Biodiversity and Ecology (IMBE) continues in the same vein.  

This is all simply untrue. We didn't "play down" any costs, and certainly not "economic studies," which we fully acknowledge. We do take for granted all the scientific, computer modeling and economic model estimates (though there is plenty to argue with there, but that's for another day). Nothing in the oped questions any of this. And "fails to mention" has to respect our limits: the WSJ gives us 900 words. We can't mention everything. 

Moreover, we acknowledge and consider

"Yes, the costs are not evenly spread. Some places will do better and some will do worse...."

We acknowledge and consider that

"Migration is costly. But much of the world’s population moved from farms to cities in the 20th century...."  

Not bad for 900 words.

Wolfgang Cramer, Professor, Directeur de Recherche, Mediterranean Institute for Biodiversity and Ecology (IMBE) continues, but I'm running out of steam. You get the idea.

Bottom line

Our main charge for the climate-policy community was, 

"Scientific, quantifiable or even vaguely plausible cause-and-effect thinking are missing from much advocacy for policies to reduce carbon emissions. "

climatefeedback.org has nicely illustrated exactly such flights from scientific, quantifiable, or even vaguely plausible cause and effect thinking. Notice not one counterexample in my quotes or the whole post. Along with a striking inability to read, and a fascinating will to put words in people's mouths that aren't there.

Let me offer a little "scientific review" of this "scientific review." N=5 is a small data sample. There is this little concept called "selection bias." Offering highly interested people a chance to blast an oped is not a "scientific review."

Blogging, opedding, publishing your political opinions is what democracy and free speech are all about. Just don't call it "science." 

Like most people, I revere "science." Its dispassionate quest for the truth has brought us unimagined prosperity. But, dear climate policy "scientists," be careful,  if you are going to invoke the imprimatur of "science" you had darn well better be right. If you end up saying "never mind," as the food establishment has done with the 1970s advice to eat margarine and sugar instead of animal fats, the public prestige of science, and all the good for policy it has brought, will come crashing down. You will be treated no more seriously than economists. And that will be a great tragedy. The fact that you are using such unscientific method in your policy analysis is an early warning sign.

I wrote to the climatefeedback editor, requesting that they post a link to this response on their "review." It will be an interesting test of what ethics remain part of "science" to see if they do that, or answer my email.

Update: climatefeedback answers, in the true spirit of dispassionate transparency that "science" demands:

Hello John,
Thank you for reaching out. We could agree to add a link in our review acknowledging
 your reply; we only require that The Wall Street Journal adds a link to our review from your article.
Thank you,
Emmanuel Vincent

I replied with a guffaw. Grumpy enjoys good snark as much as the next person. I invited them to post a comment at WSJ, which at least WSJ allows and climatefeedback does not ("feedback" does not even include comments), and allow me to post a comment at their site.

I also pointed out that the Wall Street Journal oped page is explicitly an opinion page, while they pretend to be a page of "scientific review." In the old days "science" publications were not opinion, and operated by greater standards of transparency and openness. (Though, not only through comments and letters, even the WSJ opinion page would publish a response such as mine. Editors have contacted me in the past with several inquiries about my articles.)

Not allowing a criticized author a link to a response, forget about posting the response itself, is way out of the bounds of "scientific" ethics. Proof again that the name of "science" is taken in vain here. 

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On climate change 2

Now that 30 days have passed I can post the full Wall Street Journal climate change oped with David Henderson. The previous post has more commentary. A pdf is here.

By David R. Henderson and  John H. Cochrane
July 30, 2017 4:24 p.m. ET

Climate change is often misunderstood as a package deal: If global warming is “real,” both sides of the debate seem to assume, the climate lobby’s policy agenda follows inexorably.

It does not. Climate policy advocates need to do a much better job of quantitatively analyzing economic costs and the actual, rather than symbolic, benefits of their policies. Skeptics would also do well to focus more attention on economic and policy analysis.

To arrive at a wise policy response, we first need to consider how much economic damage climate change will do. Current models struggle to come up with economic costs commensurate with apocalyptic political rhetoric. Typical costs are well below 10% of gross domestic product in the year 2100 and beyond.

That’s a lot of money—but it’s a lot of years, too. Even 10% less GDP in 100 years corresponds to 0.1 percentage point less annual GDP growth. Climate change therefore does not justify policies that cost more than 0.1 percentage point of growth. If the goal is 10% more GDP in 100 years, pro-growth tax, regulatory and entitlement reforms would be far more effective.


Yes, the costs are not evenly spread. Some places will do better and some will do worse. The American South might be a worse place to grow wheat; Southern Canada might be a better one. In a century, Miami might find itself in approximately the same situation as the Dutch city of Rotterdam today.

But spread over a century, the costs of moving and adapting are not as imposing as they seem. Rotterdam’s dikes are expensive, but not prohibitively so. Most buildings are rebuilt about every 50 years. If we simply stopped building in flood-prone areas and started building on higher ground, even the costs of moving cities would be bearable. Migration is costly. But much of the world’s population moved from farms to cities in the 20th century. Allowing people to move to better climates in the 21st will be equally possible. Such investments in climate adaptation are small compared with the investments we will regularly make in houses, businesses, infrastructure and education.

And economics is the central question—unlike with other environmental problems such as chemical pollution. Carbon dioxide hurts nobody’s health. It’s good for plants. Climate change need not endanger anyone. If it did—and you do hear such claims—then living in hot Arizona rather than cool Maine, or living with Louisiana’s frequent floods, would be considered a health catastrophe today.

Global warming is not the only risk our society faces. Even if science tells us that climate change is real and man-made, it does not tell us, as President Obama asserted, that climate change is the greatest threat to humanity. Really? Greater than nuclear explosions, a world war, global pandemics, crop failures and civil chaos?

No. Healthy societies do not fall apart over slow, widely predicted, relatively small economic adjustments of the sort painted by climate analysis. Societies do fall apart from war, disease or chaos. Climate policy must compete with other long-term threats for always-scarce resources.

Facing this reality, some advocate that we buy some “insurance.” Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. But the same argument applies to any possible risk. If you buy overpriced insurance against every potential danger, you soon run out of money. You can sensibly insure only when the premium is in line with the risk—which brings us back where we started, to the need for quantifying probabilities, costs, benefits and alternatives. And uncertainty goes both ways. Nobody forecast fracking, or that it would make the U.S. the world’s carbon-reduction leader. Strategic waiting is a rational response to a slow-moving uncertain peril with fast-changing technology.

Global warming is not even the obvious top environmental threat. Dirty water, dirty air and insect-borne diseases are a far greater problem today for most people world-wide. Habitat loss and human predation are a far greater problem for most animals. Elephants won’t make it to see a warmer climate. Ask them how they would prefer to spend $1 trillion—subsidizing high-speed trains or a human-free park the size of Montana.

Then, we need to know what effect proposed policies have and at what cost. Scientific, quantifiable or even vaguely plausible cause-and-effect thinking are missing from much advocacy for policies to reduce carbon emissions. The Intergovernmental Panel on Climate Change’s “scientific” recommendations, for example, include “reduced gender inequality & marginalization in other forms,” “provisioning of adequate housing,” “cash transfers” and “awareness raising & integrating into education.” Even if some of these are worthy goals, they are not scientifically valid, cost-benefit-tested policies to cool the planet.

Climate policy advocates’ apocalyptic vision demands serious analysis, and mushy thinking undermines their case. If carbon emissions pose the greatest threat to humanity, it follows that the costs of nuclear power—waste disposal and the occasional meltdown—might be bearable. It follows that the costs of genetically modified foods and modern pesticides, which can feed us with less land and lower carbon emissions, might be bearable. It follows that if the future of civilization is really at stake, adaptation or geo-engineering should not be unmentionable. And it follows that symbolic, ineffective, political grab-bag policies should be intolerable.

Update: 

A good recent summary of the calculations of economic damage of climate change in an NBER working paper:


2.  A Survey of Global Impacts of Climate Change: Replication,
Survey Methods, and a Statistical Analysis
by William D. Nordhaus, Andrew Moffat  -  #23646 (EEE PE)

Abstract:

....the estimated impact is-2.04 (± 2.21) % of income at 3 °C warming and -8.06 (± 2.43) % of income at 6 °C warming.  We also considered the likelihood of thresholds or sharp convexities in the damage function and found no evidence from the damage estimates of a sharp discontinuity or high convexity.

http://papers.nber.org/papers/w23646

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Carbon compromise?

In a remarkable and clear oped "A Conservative Answer to Climate Change" James Baker and George Shultz lay out the case for a carbon tax in place of the complex, cronyist and ineffective regulatory approach to controlling carbon emissions.

A plea to commenters. Don't fall in to the trap of arguing whether climate change is real or whether carbon (and methane) contribute to it. That's 5% of the debate. The real debate is how much economic damage does climate change actually do. Science might tell us that the temperature will warm 2 degrees in a century, with a band of uncertainty. But the band of uncertainty of the economic, social and political consequences of 2 degrees is much bigger. Moreover, the band of relative uncertainty is bigger still. Does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us -- above nuclear war, pandemic, state failure, and so on?

And most of all, given that our governments are going to do something about climate change, how can we do something much more efficient, and (plea to environmentalists) much more effective? That's the question worth debating.

Both sides have fallen in to the trap of arguing about climate change itself, as if it follows inexorably that our governments must respond to "yes" with the current system of controls and interventions. The range of economic and environmental effects from the "how" question are much, much larger than the range of the effects of the "is climate change real" question.

So, Baker and Shultz lay out in gorgeous clarity the kind of compromise we all hope our governments can still occasionally achieve: Given that we're going to do something, trade a carbon tax for the removal of intrusive regulation. You get more economy and less carbon.

The oped refers to a report from the Climate Leadership Council, which is here and worth reading. The Niskanen Center has also been championing the case, and reaching out to environmental groups.

There is a natural bargain, if our political system can get around its current habit of take-no-prisoners maximalism.


Environmental groups that really care about carbon are starting to realize that the current system produces symbolism at great cost but will never produce the kind of carbon reductions they think are necessary. High speed trains and electric coal-powered cars may make you feel good, but they don't make a dent in carbon. They are also realizing that climate is swallowing up the world's attention for other pressing environmental problems. Endangered species need habitat, now, not 2 degrees cooler in a century. People are dying of dirty water and particulate pollution now. Yes, they'd prefer carbon tax and controls, since they don't trust the tax incentive alone. But given the choice, I've met serious environmentalists who would take the deal.

Alas, the sad fate of the Washington (state)  carbon tax is not encouraging. Maximalism won. Some large environmental organizations are going to have to realize, in the current era, this is their best deal. Perhaps staring in the face that waiting for a progressive uprising that takes back house, senate, presidency, state legislators, governors, and turns back to tide of global nationalist populism, allowing regulations of the scale that actually would cut back carbon --without using nuclear power -- will induce a little deal-making will. It also feels good to be part of the "resistance," but the climate keeps warming while you feel good.

Those on the other side, horrified at the waste, cronyism, and economic damage of our current controls would prefer nothing, and hence keep arguing about the science. But a straightforward carbon tax would be immensely less distorting than what they will get otherwise. This one will not go away. Removing energy regulation, even with Rick Perry in charge of DOE, will be a miserable mess against an entrenched and very politically effective opposition. If you can get them to accept the deal, it will go much more easily than trying to shove no carbon regulation down their throats.

Of course, the major problem in any deal is trust. The environmental side may not trust that carbon taxes will be high enough to abandon command and control. And the market side certainly does not trust that controls will be removed, or not reimposed -- especially given the large amount of money that green subsidy-seekers can get from them.

Minor quibbles: The oped and council report refer to steadily increasing carbon taxes. Ideally, in my view, a big advantage of the carbon tax is that it is easily adjustable -- much more adjustable than direct controls. Implement a carbon tax at say $40 a ton. Keep fighting about the science, and the level of the carbon tax. There is uncertainty about the science, face it. Once in place it's easier to raise if we learn carbon is a bigger problem than thought, and vice versa.

Also, I think it will be much easier to agree on the principle of a carbon tax if each side knows it can keep fighting about the rate than if they have to agree on the principal of carbon tax + deregulation and the rate, and the schedule of future rates. (Generally, I think things would go much better to debate the structure of the tax code separately from the rates.)

Not mentioned, of course, is that it is vital for a tax like this that the law forbid any of the special credits and deductions that people will instantly start asking for. "Family farmers can't pay the carbon tax on their diesel fuel....; low income americans need a break so they can drive to work...." The incentive to make every single tax redistributive is strong.

Second, what to do with the money? Greg Mankiw has, on other occasions, argued that the carbon tax revenue should offset other, more distorting taxes. It is a double-whammy -- most taxes, in order to raise revenue, reduce some desirable economic activity. A carbon tax, to raise revenue, reduces an undesirable economic activity. As a matter of economics, Greg is exactly right.

The Oped and council propose instead that the tax is rebated to Americans, so the tax is revenue-neutral. That is, I think, politically attractive. A $2,000 check to each taxpayer is a nice way to build a political consensus for keeping the carbon tax, much as using the tariff to fund civil war pensions kept a strong pro-tariff constituency in the late 1800s. In a previous post, I suggested carbon rights instead: Each American owns the rights to emit X tons of carbon, which he or she sells on an electronic marketplace. Or throws away, if they want to do their bit. That too gives people a stake in keeping the system going.

But we should be clear when as economists we are treading into political waters. Giving up on a optimal tax in order to produce political support for a project is the kind of tradeoff that we're not as good at as we are at figuring out optimal taxes in the first place, and figuring out compromises between current political groupings is really not our strong point. Perhaps it would be better to outline the possibilities -- rebate if you think it's politically necessary, use to eliminate other distorting taxes if you can -- and let politicians figure that one out.

Quibbles over.

I must add that Shultz is an inspiration. I hope that at 96 I can write opeds half this good. Heck, I wish I could do it now!

Update: A Conservative Case for Climate Action by Martin Feldstein, Ted Halstead, and N. Gregory Mankiw in the New York Times, describing the same plan, also excellent.

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