13 October 2010

The Old Paradigm is Hard to Shake

At his blog at CFR, Michael Levi raises some conventional arguments against the importance of direct government investments in energy R&D, in favor of making fossil fuels more expensive:
Here’s the thing: the Internet delivers benefits to every person who uses it. Radar is a boon for the military. Microchips help businesses operate more efficiently. Modern aviation is great for travelers everywhere. Biotechnology improves the health of those who exploit its fruits. Government support hasn’t made airplanes cheaper than cars, high-end drugs less expensive than Tylenol, or microchips a better deal than the abacus. (Well, maybe not the last — I haven’t checked abacus prices recently.) What it’s done is help make them affordable. And once government investment in innovation makes initial commercial adoption feasible, market forces (i.e. individual demand) take these technologies the rest of the way.

But clean energy? Not so much. I get zero benefit by choosing to buy energy produced by a wind farm. (It actually costs me more.) My utility doesn’t get any either, unless its regulator lets it pass on the cost, which it won’t absent government policy. There are big social benefits to clean energy, most prominently through reductions in both greenhouse gas and particulate emissions. But neither individuals nor companies have any significant reason to shift to clean energy, even if innovation closes the cost gap considerably. (There may be small exceptions for things like rooftop solar PV in limited areas, but these don’t upend the general point.) For the foreseeable future, government will still need to cover the remaining gap, either through subsidies for clean energy or by making dirty energy more expensive.
Michael seems stuck in the old paradigm.  He seems to think that clean energy offers no benefits to individuals or companies, only social benefits as uncaptured externalities.  It might seem that way to people who live in a world of plentiful, cheap energy.  But from a broader perspective, the idea that individuals and companies have no stake in making fossil fuel alternatives cheaper is just wrong.

The reason that India has put a surcharge on coal and using the proceeds to invest in clean energy, why Germany is taxing nuclear fuel rods to invest in clean energy and China is investing massive amounts in clean energy has nothing to do with unpriced externalities.  Rather, these countries see direct benefits to their citizens to driving down the costs of clean energy.  I can give him more than 2 billion examples of people who would benefit from cheaper, more secure, and more readily available energy.  And the companies that help to provide those lower-priced technologies and infrastructure are going to see some pretty large benefits as well.  China appears to have figured this out. India too.

Here is the comment that I left at his blog:
Michael-

Here are four counterpoints to your argument.

First, the goal of making clean energy cheaper is not so much for it to displace existing fossil energy, but to become increasingly preferred as new infrastructure in the future.  As Ken Caldeira and colleagues recently argued in Science, it is future infrastructure that matters most.

Second, while it is true that you don't much care about clean energy, there are 1.5 billion people who lack access to electricity world wide, and a big reason for that is that energy presently costs too much.  These folks have a big stake in making clean energy cheaper.

Third, a related point is that by making fossil fuels more expensive you would be making energy access to those 1.5 billion more distant.  There is an iron law of climate policy that says that while people will accept some price for environmental objectives, that willingness only goes so far.  The key to putting a price on carbon is through the availability of cheaper clean alternatives.

Finally, there is evidence that several countries are already investing in clean energy based on pricing fossil fuels, most notably India.  They are doing this not out of environmental concerns but to secure more energy at a low cost for the future.  Energy demand is going to increase dramatically in coming decades, and someone is going to provide the technology and infrastructure.  The US can be part of that economy or not, and investments in clean energy are a good way to make that more likely.

19 comments:

  1. Roger -

    Happy to engage on this. I, like you, support government investment in innovation. (Keep an eye out for an article on precisely this issue in the November/December issue of Foreign Affairs.) But I think you've missed my much narrower point, which concerned whether market demand is enough to take over where government investment leaves off, ultimately delivering a solution to climate change. There may be a case to be made that market demand among those without energy access will help bring down costs far enough to make clean energy cheaper than fossil fuels for those who already have energy access, hence solving the problem. But I'm skeptical. Demand from those without access to energy isn't going to bring down the cost of centralized generation. Moreover, the breakeven point with fossil fuels comes at a way higher price for those without energy access -- it's quite possible to make clean energy cheaper than fossil fuels for the bottom billion while still leaving them more expensive for everyone else. That would be a tremendous accomplishment, and one I think we should be doing much more to bring about, but it wouldn't solve the climate problem.

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  2. Hi Michael-

    Thanks for responding ...

    I don't think that it makes any sense to talk about solving the climate problem -- if that means a comprehensive path to 450 (or whatever) ppm stabilization. No one knows how to do this.

    What we should be talking about is how to take the first steps to accelerate decarbonization of the economy toward a rate consistent with such a path. Staying on such a path over many decades is what would be required.

    One thing I am pretty sure of, the ability to increase the price of dirty energy will be a function of the ability to make clean energy cheaper.

    I argue in my book explicitly that market demand will almost certainly not be enough (citing arguments about the so-called "green paradox") ... but that circumstance can only be dealt with, again, if there are low cost technologies of energy supply (and usage) readily available at scale.

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  3. To artificially increase the cost of one product in order to artificially lower the cost of another product does not a sustainable policy make.

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  4. "Radar is a boon for the military. "

    Talk about old paradigms: How about commercial aviation, water navigation, life-saving storm warnings, and microwave ovens? The latter, by the way, is a net energy saving over the older electric ovens.

    I bring this up because it supports Roger's excellent point that "we didn't tax to telegraph to get the telephone." None of us know -- today -- what the technology of 2020 will be except that it will be different than we imagine.

    It liekly far more fruitful (not to mention more morally attractive) to incentivize better technology and energy producing techniques than the condemn the Third World to a life of misery to 'solve' a future problem we do not fully understand.

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  5. I find both quotes in this post (i.e. Michael Levi's and Roger's) making sense, and I don't see that they are necessarily contradicting.

    At least in this quote, I don't see Michael argumeing "against the importance of direct government investments in energy R&D", and his comment here seems to say the opposite.

    From the PoV of a Western consumer or Western power company, the short term benefits are low or nil, as Michael sais. For poor people without access to plentiful energy, and for politicians and power compnaies with a long term focus (a rare trait), there is a benefit, as Roger argues.

    The antagonistic talk about old paradigm and such is not helpful IMO.

    Bart

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  6. taxing nuclear fuel rods is a tax on a very clean small dense energy source. subsidy of wind and solar collection notions is a subsidy of ugly land use changes.

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  7. Roger Pielke, Jr. is advocating a silver bullet approach to decarbonization (more clean energy R&D). This approach probably won't work alone without other policies. Michael Levi, while acknowledging that supporting clean energy R&D is very important for future decarbonization, simply also advocates for pricing GHG emissions as well. Not everywhere, and specifically not for countries where energy consumption per capita is below an impoverished threshold. That last is important, because it directly addresses (and defangs) the one argument that many (including Pielke, Jr.) fall back on. That argument is: pricing carbon condemns the world's poor to unaffordable energy. That argument is a red herring as I demonstrated in a comment to one of Pielke's posts: providing energy to the world's poor would not significantly slow decarbonization (http://rogerpielkejr.blogspot.com/2010/09/access-to-energy-poverty-alleviation.html#comments). Pricing carbon in the world's advanced economies would support decarbonization, is not in conflict with supporting clean energy R&D, and does not need to be implemented via cap and trade to be effective. In fact, as the EU experiment effectively shows, cap and trade can be gamed in a way that does not lead to decarbonization. And as I write in the comments here (http://thebreakthrough.org/blog/2010/10/the_technologyfirst_climate_fi.shtml),I think the Iron Law formulation Pielke Jr. uses to characterize the tradeoff between the economy and decarbonization is flawed.

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  8. -7-Sam

    First off, you are welcome to be as critical of my views as you'd like, but I would ask that you accurately represent them. You have not.

    1. "Roger Pielke, Jr. is advocating a silver bullet approach. . ."

    I say exactly the opposite in my new book (almost verbatim). there are no silver bullets.

    2. "pricing carbon condemns the world's poor to unaffordable energy"

    I am not against pricing carbon.

    I argue in my new book for a price on carbon.

    I also state that making energy cheaper enhances the chances for expanding access.

    3. "I think the Iron Law formulation Pielke Jr. uses to characterize the tradeoff between the economy and decarbonization is flawed"

    You have mischaracterized the Iron Law.

    Please point to one policy maker who advocates slowing economic growth as a way to reduce emissions?

    I suggest reading my book before attacking my arguments, that way, you are more likely to focus on the right things!

    Thanks!

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  9. "I say exactly the opposite in my new book (almost verbatim). there are no silver bullets."

    You say there are no silver bullets. But how much have you studied potential silver bullets?

    For example, if I told you that:

    1) Liquid fluoride thorium reactors,

    2) Rechargeable zinc-air batteries, and

    3) Graphene photovoltaics

    ...could reduce human emissions of CO2 by 80 percent or more, what literature would you point to that would indicate I was wrong?

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  10. -8- Roger,

    The subject of your post is an assertion that Michael Levi's idea about pricing carbon emissions is stuck in an old paradigm. I read his point instead as being advocacy for a policy that needs to be implemented alongside incentivizing clean energy R&D - pricing carbon emissions.

    To take your numbered points in order:

    1) While you claim there are no silver bullets, I only see one de-carbonization policy consistently advocated by on this blog: a small price on carbon to incentivize clean energy R&D.

    2) Unless I am mistaken, you have consistently argued that the price on carbon must be so small as to make an almost unmeasureable impact on a society's economic growth. I will define this as a 'small price on carbon' that has essentially no price signal to the market. I am advocating -also- for a more market-based approach that contains a price signal against the same carbon emissions. I believe that both approaches (small carbon tax for R&D and price-signal carbon tax) have merit, and are non-exclusive. These examples of the telegraph, telephone, and microwave oven are meaningless, since there were no external impacts of their uses that called for regulation. GHG emissions have significantly different negative characteristics than the product examples bandied about.

    3) In the comment on the post I linked to on the Breakthrough Institute website, I used their characterization of the Iron Law:

    "While media attention has tended to focus on the proximate obstacles to climate policy -- fearful politicians, corporate resistance, low public concern -- the heart of the problem, writes Pielke, Jr., is "the iron law of climate policy": no nation is going to sacrifice its economic growth for global warming. "

    Do you agree with their characterization of your formulation? If so, feel free to address the subject of my disagreement with your Iron Law formulation.

    You ask: "Please point to one policy maker who advocates slowing economic growth as a way to reduce emissions?"

    This does not make your formulation of the Iron Law correct, as you are inferring. Firstly, there are plenty of advocates of consumption reduction and a stabilization of economic activity (sustainability) in Western lifestyles for decarbonization. Secondly, if long-term benefits of slightly slowing growth now result in expanded growth later, or reduced contraction later, the 'Iron Law' has little application.

    I have the Climate Fix, I'll get to reading it, but your tactic of simply referencing the book as required reading before I can substantively comment on your blog positions is disingenuous. I can read and interpret the English words that you and others post on your blog. No scolding required!

    Thanks!

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  11. -10-Sam

    Thanks for the response. As far as the "scolding" -- when you misrepresent my views, I'll call them out. I expect you to do the same to me ;-) On to the substance ...

    1) The small price is a mechanism of fund raising to support a wide range of policies focused on accelerating innovation and expanding energy access. I like how Prins and Rayner said it, there is no silver bullet, but we do have silver buckshot. If you rad The Hartwell Paper and its antecedents you will find a wide range of proposed policies invoked (as well in TCF).

    2) I don't think that a high carbon price is possible. It is not going to happen anytime soon; it is not worth debating.

    Also, you write, "These examples of the telegraph, telephone, and microwave oven are meaningless, since there were no external impacts of their uses that called for regulation." Sorry, but this is wrong. All three technologies are/were regulated.

    But if you don't like those, try CFCs and HCFCs, or medicine, or any of a million military-derived technologies.

    3. On the "iron law" -- what can I say? You are making a long detailed argument (at TBI) without having read what I've said about this. Rather than engage what you wrote about what I did not write, I will await a more informed discussion. There is no hurry, the iron law will still hold ;-)

    Meantime, let's start a list of policy makers who have called for or proposed "consumption reduction and a stabilization of economic activity (sustainability) in Western lifestyles for decarbonization." You go first, as I don't know of any!

    Thanks again!

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  12. Michael said,

    "Moreover, the breakeven point with fossil fuels comes at a way higher price for those without energy access"

    Actually, the opposite is true.

    A 'new' coal fired 1,000 megawatt electric plant currently sells in the US for around $4 billion dollars. For those in the vicinity of Gillette, Wyoming coal sells for $15 ton.

    The folks in Wyoming already own a coal fired plant that generates sufficient electricity. So even if we put a huge price on CO2 burning coal will be cheaper.

    Look at India and China. The price of coal is $100/ton. They don't have enough electric generating capacity, they are going to have to build a new something no matter what. So the calculation is 'does the additional interest on the capital investment in clean more then the cost of coal?'

    In China a nuclear plant can be built for about $2 billion. At $100/ton and 3 million tons of coal per year for a 1,000 megawatt coal plant the coal plant will require 300 million in coal per year. Even with an interest rate of 10% the interest on the new nuke plant is only $200 million per year. China is currently building nukes as fast as the Japanese can make the parts and the Canadians can guarantee the fuel supply.

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  13. -11- Roger,

    It is interesting to see your response on what you call the small price. I am curious about how do you define a price small enough that there is no economic impact, yet large enough to make a difference. Do you consider the German ecotax to be a small tax? It brings in EUR 18B annually, and has current rates of EUR 0.15/liter of gas ($0.81/gallon), EUR 0.02/kWh electricity ($0.03/kWh)? These levels would sure be considered big in the US - a 30% gas tax and a 20% to 50% electricity tax, bringing in $120B per year scaled for the US population! By my math, the gasoline tax is equivalent to $90/tonne-CO2, and the electricity tax (renewables exempted) is around $44/tonne-CO2. Is this a "high price on carbon" or not? Some policy-makers somewhere apparently got a carbon tax-and-refund passed, since 90% of the revenue reduces the equivalent of Social Security taxes!

    Regarding sustainability, check out:
    Sustainable Production Consumption Systems: Knowledge, Engagement and Practice
    By Lebel Louis, Sylvia Lorek, Rajesh Daniel

    It has sections on energy as well as material goods, and various authors discuss balances between healthy economic activity, consumption, and environmental damage. Volker Hauff, a former German minister, works on this subject tirelessly. He is a policy advocate and organizer of business interests, and more info can be found in this book: Eco-efficiency and beyond: towards the sustainable enterprise.

    There are no external effects on climate or human health on the use of a telegraph or telephone. As you point out, CFC's and SOx/NOx are much better analogies to practices with significant externalities, but each one has weaknesses in the analogy. In the CFC case, offending substances were phased out by banning them and penalizing manufacturers who did not comply. I doubt you would support that approach - I haven't heard you suggest it at any rate for GHGs. In the SOx/NOx case, we had regional cap-and-trade, useful because effects are local. This approach is not going to work with GHGs.

    I will read and take notes on TCF. I will make specific responses to how you characterize the Iron Law using your own words. Apparently you did not like how the article on TBI characterized it.

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  14. -13-Sam

    Thanks, just to reply to one point:

    "In the CFC case, offending substances were phased out by banning them and penalizing manufacturers who did not comply."

    The story is more complex, with innovation preceding regulation, rather than vice versa:

    http://dx.doi.org/10.1016/S0048-7333(97)00020-6

    Thanks!

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  15. Wow,

    This is the post that drives me from your blog forever. Not because of simple disagreement. I find I disagree with most of what you post. Instead, it is the basis and method of your argumentation.

    To cite:
    1. "paradigm shifts" - (if I had a dollar for every "paradigm shift" I would be a wealthy man). Why not just say "I reckon X, because of stuff", it has as much intellectual rigour.

    2. The old "because people [in this case governments] are doing it it must be right".

    I have come to the conclusion that I will be dead and buried before I ever read a properly argued and well supported case for decarbonisation, or that fossil fuels are "dirty", or even some proper explanation of how "dirty" and "clean" are defined in your world.

    sio-nara.

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  16. -Roger-

    Thanks for the link. Unfortunately, it will cost more to buy the paper than TCF! ($35.95 vs $17.81)

    If you have time for one more short comment, what do you think of the size of the German ecotax? "It brings in EUR 18B annually, and has current rates of EUR 0.15/liter of gas ($0.81/gallon), EUR 0.02/kWh electricity ($0.03/kWh)?" For my understanding of your points, is this a "small carbon price" or not?

    Thanks!

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  17. -16-Sam

    Sorry. Try this:
    http://sciencepolicy.colorado.edu/admin/publication_files/resource-153-1997.11.pdf

    The German eco-tax that you describe is small in the context of Germany (it is, from memory, about 25% of the total petrol tax rate). In the US such a tax would be huge (200% of the present gas tax rate). Also, when Germnay implemented the eco-tax it lowered income taxes proportionately, in order to mute the consumer impact. The point was to align tax policy with public goals, not to inflict price pressure on citizens. This fact reinforces the notion of an "iron law" of climate policy.

    Thanks!

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  18. -17-Roger,

    Thanks for the response,I downloaded the CFC paper.

    And your response on the German tax is illustrative. If I understand your point, it is that sending a price signal with a carbon tax at this level (by my math, the gasoline tax is equivalent to $90/tonne-CO2, and the electricity tax is around $44/tonne-CO2) is a small tax if it refunds the bulk of collected revenues via reductions in other taxes. I believe that many carbon tax proposal are structured this was: tax-and-refund. The point is to tax the behavior that is undesired, AND raise some funding for R&D and implementation of clean energy. Most carbon tax proposals of which I am aware refund the bulk of the fees collected to taxpayers. The goal is not overall price pressure, but directed incentives that provide clear market signal.

    It sounds like when the bulk of a taxes' revenues are refunded, and in certain cases like the German ecotax, you consider that as a "small tax".

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  19. There are several problems with the idea of pouring more money into government-driven R&D. Sure, as Mike Levi pointed out, "the Internet delivers benefits to every person who uses it. Radar is a boon for the military. Microchips help businesses operate more efficiently. Modern aviation is great for travelers everywhere. Biotechnology improves the health of those who exploit its fruits. Government support hasn’t made airplanes cheaper than cars, high-end drugs less expensive than Tylenol, or microchips a better deal than the abacus."

    But this is meaningless taken out of contact, because what's missing is, well, what Frédéric Bastiat pointed out 160 years ago is what is unseen: What is SEEN in government R&D are its successes. What is NOT SEEN in government R&D is what the same capital would have produced in a free-market economy. Because government planners can not "outperform the market," we know that society, as a whole, would almost certainly have profited more had the money been invested privately.

    What is also not seen in government R&D are the projects that fail. And according to studies of Japan's MITI, for example, there were plenty of failures to accompany each success. (http://www.econlib.org/library/Enc/Japan.html,) Governments don't exactly publish reports that document all of their failed R&D efforts, preferring to point to those that worked.

    Here's a link to a book by that should be standard reading for those bandying about the idea of increasing government R&D.

    http://www.amazon.com/Economic-Laws-Scientific-Research/dp/0312173067/ref=ntt_at_ep_dpt_2

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