19 April 2010

Carbon Dioxide at $800 per Ton in Boulder

[UPDATE: Will Toor, Boulder County Commissioner, helpfully responded to my invitation to respond to this post. He writes by email, reproduced with permission:
This program was designed with cost effectiveness as a primary consideration, so the prescriptive path focuses on cheap, easy upgrades (such as duct sealing, air sealing, insulation upgrades in accessible cavities) . The city went out and conducted 6 case studies of actual rental units in Boulder and hired contractors to do the work, and measured pre and post energy costs. In every case the improvements were better than cost neutral from day 1 - meaning that if you financed the improvements with a 15 year loan at 6%, the decrease in monthly utility bills was larger than the loan payment. In the case studies, most of the buildings would achieve about a 20% reduction in GHG emissions. And, since most of the improvements have a lifetime that of 30 years, eventually the savings will be even larger. So the real cost per ton is negative. Not positive.

Even if you ignored that, and pretended that energy is free so only capital costs matter, you would need to divide that capital cost by the cumulative emissions reductions over the 30 year lifetime of the improvements. So you would arrive at something more like $25/ton.

I looked at the case studies that he refers to (available here) and the amortized costs per tonne of CO2 over 30 years in the cases is $20 to $60. I have some serious methodological questions about the assumptions used in such a calculus, but Will explains that looking at amortized costs doesn't even matter:
. . . in the real world almost every landlord will finance this, and will be making annual payments. So you can ignore the future, and just take their annual payment and subtract the annual energy savings, and divide by the annual emissions reductions, to get a cost per ton. The data from the case study suggests the cost will be negative. If the landlord association claims were correct (they are claiming, with no study to back up the claim, that it will cost twice as much as the city claims) it will be a small positive number.
If it is indeed the case that the program saves money from day 1, which I have no reason to doubt, I do question the emphasis on greenhouse gas reductions, which seems to be a side benefit to a program than can be justified on economics alone, rather than a primary goal which depends upon a range of questionable assumptions to arrive at a reasonable number.

Will has convinced me that he cost per ton may not be $800, but I'm not buying $25 per ton. But if the program is a net economic winner than this debate is irrelevant, however the characterization of the program as focused on carbon dioxide rather than costs might be rethought.

Thanks to Will for adding this valuable context.]


Last week I highlighted a program in NSW, Australia which was paying $1,000 per tonne to reduce carbon dioxide emissions. Today its Boulder's turn to be in the spotlight for unjustifiably expensive carbon policies. An article in the Boulder Daily Camera today discusses a new program focused on regulating energy efficiency improvements for the purpose of reducing carbon dioxide:

On Thursday, the Boulder Planning Board will take up "SmartRegs," a proposed point-based system designed to get rental properties -- which make up about half of the city's housing stock -- to reduce their carbon footprint.

Under the program, landlords would be required to make improvements that could include installing energy-efficient appliances, sealing ducts or better insulating.

The city's overall goal is to reduce greenhouse-gas emissions coming from homes by 94,000 metric tons of carbon dioxide by 2012. The SmartRegs program, it's estimated, could make up about 45,000 tons of that goal. . .

The costs for making energy upgrades would vary widely based on the age and overall condition of rental properties. The city of Boulder recently completed testing on seven homes and found that reaching the 100-point threshold cost between $675 and $3,243 each.

The total estimated investment to upgrade all rental properties in the city is $17.7 million. But opponents of the measure, including the Boulder Area Rental Housing Association, say the total cost to property owners could top $35 million.

How much does the program cost per ton of carbon dioxide?

Assuming that the program actually leads to a reduction of 45,000 tons (a dubious assumption, as the goal is most likely "reductions" against a counterfactual baseline), and that the costs will be between the $17.7 and $35 million suggested by proponents and opponents, respectively, of the program then the costs per ton work out to be between about $400 and $800 per ton.

This is crazy. The city recognizes that imposing an economic burden on landlords and tenants might not be the best idea, so they are already floating ideas to step back from the program, which invariably would drive down the emissions reductions a good deal, perhaps making the cost-per-ton even higher:

To minimize the financial shock to landlords, the city is proposing that the requirements be phased in over time.

Options being considered include requiring all rental properties to meet the 100 points when they renew their rental licenses -- which would bring all of the estimated 19,600 rental properties into compliance by 2014 -- or having smaller steps toward meeting the efficiencies over many years, which could stretch full compliance into 2018.

Affordable housing units that don't qualify for government assistance could be given up to 12 years to phase in the upgrades.

City staffers are recommending a "hardship provision" that would extend the deadlines for owners who can demonstrate an inability to pay for the upgrades. Those landlords might be allowed to purchase carbon offsets to buy them more time to meet the requirements.

Ah yes, carbon offsets. Faced with a choice of taking symbolic action at up to $800 a ton or taking symbolic action at around $20 per ton, what do you think will happen?

Boulder is showing leadership in climate policy. Too bad that leadership is showing the inanity of climate policies focused on regulating energy use for purposes of reducing carbon footprints. There are better ways.

29 comments:

Craig said...

From the picture it is possibly 'Le Mythe de Sisyphe.' Boulder can do whatever symbolic measures it wants while C02 concentrations will remain immune to the effort. Sisyphus will will continue his picturesque displays so long as the money holds out. Linking Boulder's efforts to arresting climate change is not leadership, but conscience cleansing from flagellation of the governed. Where is the evidence linking such efforts to climate modification even if they are adopted on a worldwide scale?

Michele Mottini said...

I would assume that once you did the improvements the energy savings - and so carbon emission reduction - will continue for many years - so it is not $800 per ton, it is much less than that. Or am I missing something?

0tim0 said...

Not sure if I did my math right, but at that rate, you are talking about an $8 per gallon CO2 tax on gas. That's just not practical in any sense.

I could see a $1 tax being, maybe, workable in the short term. (It may decrease demand enough that the price of oil itself will drop to compensate somewhat). But more than that seems impossible in the current (political) climate.

--t

W.E. Heasley said...

The Boulder Planning Board’s mission statement must be: “Find the most expensive and most complicated solution that actually does not solve the problem”.

Apparently the private property rights of thousands of landlords in Boulder is less important than the Boulder Planning Board’s anointed/intelligentsia view of “the way things ought to be”.

It might be worth the time for the Boulder Planning Board to understand government intervention from a different point of view by reading Daniel B. Klein’s essay The People’s Romance: Why People Love Government (as Much as They Do). Link here:

http://www.independent.org/publications/tir/article.asp?a=536

jae said...

LOL. It probably won't have any significant impact on CO2 and may even increase it, since higher rents will force more people to live out of town and drive further to work. Renters are very mobile. The socialists need to go back to the drawing board.

Len Ornstein said...

Roger:

Along the line of Michele's question:

Is the "94,000 metric tons" or your "45,00 tons" "by 2012", per year, or total?

If per year, amortized over the life of the investments, the proposal isn't too different than your "symbolic action at around $20 per ton" ;-)

Roger Pielke, Jr. said...

-6-Len

These are the costs through 2012, as the article says. There is no discounting of the dollars.

If you'd like to amortize into the distant future, the costs are zero ;-)

W.E. Heasley said...

Roger Pielke, Jr. said...

“If you'd like to amortize into the distant future, the costs are zero ;-) “

Its Math Quest! Or did you merely cut-and-past from a Congressional Budget Office report? :-)

EliRabett said...

Charming. You make a wild claim based on a fundamental mistake and now you are trying to niggle. Since you have started a dialog with the Boulder folk, how about actually seeing it through.

Roger Pielke, Jr. said...

-9-Eli

Nope no mistake. If the goal is to meet a 2012 target, as stated in the Camera article, the numbers are exactly as I've presented them.

Judging by your comment on the Australia thread, I can see that your knowledge of economics is not so sharp ;-)

W.E. Heasley said...

Its Eli’s normative economics vs. Pielke’s positive economics. Vegas odds are Pielke 7 to 1.

Roger Pielke, Jr. said...

-11- W.E. Heasley

Only 7-1? I am insulted! ;-)

W.E. Heasley said...

Not to worry. You appear 89% on InTrade.

Frontiers of Faith and Science said...

Obsessing on CO2 is counter productive.

Tom Fiddaman said...

The cost "may not be $800" is the closest you can come to an admission that it's a serious error to calculate costs as (2012 reduction)/(investment cost), ignoring the fact that the investment produces reductions in other years as well? Come on! Just check your units: (tons/year)/($) <> ($/ton)

The provenance of the 45,000 figure is not evident from the Camera article, but if you read Boulder's assessments, linked at http://www.bouldercolorado.gov/index.php?option=com_content&view=article&id=1058&Itemid=396 , it's clear that the number has to be a flow (tons/year).

Also, from those documents, it's evident that "the goal is most likely "reductions" against a counterfactual baseline" is actually rather unlikely, since the city target is an absolute value.

jae said...

Will Toor writes:

"In every case the improvements were better than cost neutral from day 1 - meaning that if you financed the improvements with a 15 year loan at 6%, the decrease in monthly utility bills was larger than the loan payment. In the case studies, most of the buildings would achieve about a 20% reduction in GHG emissions. And, since most of the improvements have a lifetime that of 30 years, eventually the savings will be even larger. So the real cost per ton is negative. Not positive."

Yes, but. Generally the renter pays for the energy, not the landlord. So the landlord is saddled with the bill, and the renter gets the gravy? No, that won't happen, even in gracious Boulder. The landlord will raise the rent, making his place less competitive to places outside Boulder. That could cause more CO2 from automobiles. The socialistic City Fathers ought to stay out of this stuff and leave it to market forces.

W.E. Heasley said...

jae said...


“Yes, but. Generally the renter pays for the energy, not the landlord. So the landlord is saddled with the bill, and the renter gets the gravy? No, that won't happen, even in gracious Boulder. The landlord will raise the rent, making his place less competitive to places outside Boulder. That could cause more CO2 from automobiles. The socialistic City Fathers ought to stay out of this stuff and leave it to market forces.”

Jae you are exactly right. The increased input costs of the rental unit will be passed by the landlord onto the consumer. The consumer is mobile and so is capital. The consumer will seek alternate rental outside Boulder. Capital will also seek to build future rental units outside Boulder to escape current and future burdensome regulations and requirements.

Allowing free market forces to solve the situation would require Boulder City Planning to actually believe in free markets. Or as Milton Friedman once said: “A major source of objection to a free economy is precisely that it ... gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.”

Neven said...

jae, I can see that you looked really hard to find another point of criticism, but you overlooked something:

"The landlord will raise the rent, making his place less competitive to places outside Boulder."

Isn't this compensated by the fact that the renter has lower utility bills? :-O

I also did some research on the Boulder, CO website and found this:

"Rent and Expense Impacts
While the research on the rental premium for energy efficient apartments is thin, there is
potential that residential rental revenue may benefit in the form of increased rents or decreased vacancies. In theory, if a rental tenant realizes increased disposable income through lower utility bills, this income could translate to increased rent. This is particularly true if average utility savings are published in the lease or provided in other forms of legal documentation. In addition, if the property owner makes investments above those required by the SmartRegs or those made by competing properties, this may place the property at a competitive advantage to others in the City, potentially increasing occupancy."

Shall I just give you the bank information of the House of Saud so you can send your money directly or don't you want your wonderful corporate/political leaders to miss out on their commission? That would be so altruistic of you!

W.E. Heasley said...

Neven said:

‘jae, I can see that you looked really hard to find another point of criticism, but you overlooked something:

"The landlord will raise the rent, making his place less competitive to places outside Boulder."


I also did some research on the Boulder, CO website and found this:

"Rent and Expense Impacts
While the research on the rental premium for energy efficient apartments is thin, there is
potential that residential rental revenue may benefit in the form of increased rents or decreased vacancies. In theory, if a rental tenant realizes increased disposable income through lower utility bills, this income could translate to increased rent. This is particularly true if average utility savings are published in the lease or provided in other forms of legal documentation. In addition, if the property owner makes investments above those required by the SmartRegs or those made by competing properties, this may place the property at a competitive advantage to others in the City, potentially increasing occupancy." ‘

Maybe, maybe not.

Average consumption of a utility, with a rental unit having energy efficiency E, with utility price X, will be different than average consumption of a utility, with a rental unit having energy efficiency E1, with price X. In other words, a renter keeping his thermostat at 68 in the winter and 72 in the summer may find it more comfortable to set the thermostat at 72 in the winter and 68 in the summer as his/her average utility bill remains unchanged at price PX. That total utility consumption increases but total average cost remains unchanged. Hence in some cases, some subsection of tenants, the efficiency creates an incentive for the utility user to use average historical cost to set utility usage rather than seek utility savings.

Then you have the argument that a landlord passes on price X to the tenant and the tenant saves exactly X in utility fees. However the tenant’s price X for the utility is not static. Any future price rise in utility costs then cause the tenant to suffer a loss as his/her savings on utilities are no longer in equilibrium with the rental cost increase. Hence the argument that the landlord’s rental increase is equal to the tenant’s utility savings is a snap shot/static argument. This static argument then has a bearing on the assertion that certain energy efficient rental units being more attractive to consumers. Would the consumer pay a higher rent when utility prices increase and the rent increase cost is not in equilibrium with utility savings?

You can also make the argument that the force of government is causing a private property owner to modify his/her behavior. That the cost to comply with Boulder’s Planning Board creates higher rents which are in fact a creation of a “behavioral price”. That certain individuals want to shape behavior through price. Please do remember when you use price to shape behavior, human capital and capital are mobile and will migrate away from a behavioral price and seek a market for the same good or service that has a non-behavioral price.

Finally, rental prices will rise do to the additional costs of the landlord. More than likely the rental cost will be a sticky price and will not retreat after the costs are recovered, over time, through higher rents charged by the landlord.

Then Neven finishes by saying:

“Shall I just give you the bank information of the House of Saud so you can send your money directly or don't you want your wonderful corporate/political leaders to miss out on their commission? That would be so altruistic of you!”

That’s an old and worn out debating point attempting to say Jae’s argument is worthless hence it must be discarded. A debating point based on discard the worthless point and adopt my view. Jae’s point has not been empirically disproved. Neven has not proven his point empirically. Yet discard Jae and adopt Neven. Gezzzzz!

Roger Pielke, Jr. said...

-15-Tom Fiddaman

Sorry for the delayed response, been offline ...

Boulder's goals for carbon emissions only go through 2012, how then do you define "emissions reductions" post-2012 in the absence of a policy goal?

Neven said...

W.E. Heasley, you have a way with (a lot of) words!

W.E. Heasley said...

You got a point Neven. :-)

Maybe the Boulder Planning Board will make me install “brevity”. Then I’ll pass the cost of brevity onto readers through spelling in a dyslexic fashion. Readers will have less to read saving time but their misspelling rate and headache rate will be on the increase.

Marlowe Johnson said...

assuming anyone actually reads these blogs to learn something :) Garnaut has a good discussion of principal agent problems (e.g. landlord-tenant mismatch of incentives)

Contrary to what you might think jae, the market is neither free nor perfect. Thus the occasional need for creative government intervention...

W.E. Heasley said...

Marlowe Johnson said...

“assuming anyone actually reads these blogs to learn something :) Garnaut has a good discussion of principal agent problems (e.g. landlord-tenant mismatch of incentives)


Ross Garnaut is really talking about Milton Friedman’s second category of spending. Here is the second category according to Friedman:

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.

Then comes this statement: “Contrary to what you might think jae, the market is neither free nor perfect. Thus the occasional need for creative government intervention…”. This statement is related to Daniel B. Klein’s encompassing coordination of sentiments, aka The Peoples Romance.

Lets take private property and encompassing coordination of sentiments and inspect this excerpt from Daniel B. Klein’s essay The People’s Romance:

“The essence of property rights lies in others’ duties not to interfere with one’s
property. When those duties weigh on us as genuine moral obligations, they are
authorized by interest—that is, by the property owner’s interest. If the collectivity’s
interest really does depend vitally on one’s (uncritical) participation, then the collectivity
may well erect an apparatus of control and promulgate norms of duty that
enjoy social recognition and acceptance—in other words, that make one its property .
The statist romantic manifesto is clearly set down by Hegel: “It is false to maintain
that the foundation of the state is something at the option of its members. It is nearer
the truth to say that it is absolutely necessary for every individual to be a citizen. The
great advance of the state in modern times is that nowadays all the citizens have one
and the same end, an absolute and permanent end” (1952, 242).

Whereas Hegel saw some mystical, organic foundation for political obligation,
modern-day social democrats see political consent or “social contract,” but the upshot is
the same. In their social-democratic tract The Cost of Rights, Stephen Holmes and Cass
R. Sunstein hold that all things are owned, fundamentally and ultimately, by the government.
“Private property [is] a creation of state action,” “laws [enable property holders]
to acquire and hold what is ‘theirs’” (1999, 66, 230). The quotation marks around
theirs tell us: the car that you park in your garage is really the property of the state; the
state just lets you think it is yours. Holmes and Sunstein presumably would say that your
own person is “yours” only in a diminished sense that calls for quotation marks. Any
decentralized exercise of property rights or contract is undertaken by the government’s
authorized delegation. Taxes are the fees you pay for having those things—your car, your
house, your own person—placed at your disposal. Throughout their book, we find indications
that their doctrines exist to serve TPR: “To focus on the cost of rights is to urge
that the collectivity define rights, and spend resources on rights, in a way that is broadly
defensible to a diverse public engaged in a common enterprise” (216).

TPR lives off coercion—which not only serves as a means of clamping down on
discoordination, but also gives context for the sentiment coordination to be achieved.
The government inculcates the notion of “The People” chiefly by coercion.”

Note: TPR is short hand for “The People’s Romance” which is encompassing coordination of sentiments.

Will Toor said...

I would like to respond to a few claims:

1) W. E. Heasley states: "Then you have the argument that a landlord passes on price X to the tenant and the tenant saves exactly X in utility fees. However the tenant’s price X for the utility is not static. Any future price rise in utility costs then cause the tenant to suffer a loss as his/her savings on utilities are no longer in equilibrium with the rental cost increase. Hence the argument that the landlord’s rental increase is equal to the tenant’s utility savings is a snap shot/static argument. This static argument then has a bearing on the assertion that certain energy efficient rental units being more attractive to consumers. Would the consumer pay a higher rent when utility prices increase and the rent increase cost is not in equilibrium with utility savings?
This reasoning is exactly backwards. As utility costs rise, the savings experienced by tenants will rise, not fall. In the absence of energy efficiency upgrades, the total price paid by tenants (rent + utility) will rise compared to the total price paid by tenants in a unit that has been upgraded (higher rent + lower utility bill).

2) Jae claims that this program could make Boulder rents less competitive, leading to greater in-commuting. The analysis that has been done suggests that total tenant costs will go down, not up (although the total magnitude is pretty small compared to average rents) so his argument is also exactly backwards. Lower total costs, plus more comfortable units, should make Boulder rentals a little bit more attractive.

3) Roger asks "how then do you define "emissions reductions" post-2012 in the absence of a policy goal?". I don't understand this question. The energy and associated emissions reductions associated with physical improvements to a property are physical quantities, independent of emissions reduction goals or policies. The largest uncertainty about long-term emissions reductions associated with SmartRegs is probably what the future power mix will be. If Boulder is successful at significant reductions in carbon intensity of the electrical power supply, then the emissions reductions associated with lowered electricity use will be smaller in the out years.
-Will Toor

Roger Pielke, Jr. said...

-25-Will Toor

Thanks for dropping by, the quality of the conversation improves with you in it.

Here is a rephrase of my question .... how do you quantify the value of emissions reductions via public policy after 2012, when there is no formal goal in policy for achieving emissions reductions after 2012?

W.E. Heasley said...

Will Toor said...

“I would like to respond to a few claims:


This reasoning is exactly backwards. As utility costs rise, the savings experienced by tenants will rise, not fall. In the absence of energy efficiency upgrades, the total price paid by tenants (rent + utility) will rise compared to the total price paid by tenants in a unit that has been upgraded (higher rent + lower utility bill).”

Mr. Toor:

If rent is Y before the government efficiency intervention, and after intervention rent is Y+1. Current total cost equals Y + utility cost = P1. After intervention, total costs equals Y+1 + utility cost -1 = P2. In the example I outlined costs before intervention and after intervention were exactly the same (P1 = P2). That the increased cost of the landlord’s rent was exactly equivalent to the savings in utility costs. In other words, total cost remained the same merely the components of total cost changed.

My comparison was then stated as: “Any future price rise in utility costs then cause the tenant to suffer a loss as his/her savings on utilities are no longer in equilibrium with the rental cost increase. Hence the argument that the landlord’s rental increase is equal to the tenant’s utility savings is a snap shot/static argument.”

What I’m saying is scenario P2 is being advertised as a “cost savings” through energy efficiency. But P1 and P2 are equal. However, as utility prices rise, P2 rises as well. Did you experience “cost savings”? No.

I stated “Any future price rise in utility costs then cause the tenant to suffer a loss as his/her savings on utilities are no longer in equilibrium with the rental cost increase.” That is true. P2 clearly increased.

Your comparison stated above is between P1 and P2 when utility prices increase.

What I said was P1 and P2 is assumed to be equal, that the argument put forth was that the tenant gains a “cost savings”. No cost savings exist. As utility prices rise, a cost increase exists as P2 rises and the savings of {utility cost -1) is no longer equivalent to the rent increase {Y+1) passed onto the tenant.

You are exactly correct that P1 and P2 will vary with future utility cost increases. The cost increase of P1 would presumably increase faster than P2 given energy efficiency dynamics. However, neither tenant in P1 nor tenant in P2 received a “cost savings”. Both tenants experienced price increases.

Your comparison is the differences in “price increases” given utility price changes. My point is that no one is saving any money.

t said...

A quick perusal of the case studies show some problems. Electricity cost is pegged at $0.11/kWH and gas cost at $1.10 a therm. Last time I checked I was paying $0.07 cents a kWH and $0.33 a therm. Another problem is that the savings for insulation and air infiltration assumes the original HVAC costs and not the lower costs of the improvement of HVAC system. And then you have the giggle factor of requiring a clothes line to replace the dryer. A big cost not mentioned is the actual HERS rating process and certification. The mandatory HERS certification for my remodel set me back a few hundred dollars. This is a big percentage of the typical cost for the upgrades.

In any event if this is so wonderful why are we limiting to landlords. Why not require all homes in Boulder to adhere to these new standards? Is it because somehow an owner occupied house has higher property rights?

EliRabett said...

Landlords are licensed. Certificates of occupancy and all that.

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