Posts from — October 2009

Editor Note: Robert Murphy’s peer-reviewed article in The Independent Review, “Rolling the DICE: William Nordhaus’ Dubious Case for a Carbon Tax”, is available online [.pdf].

When I first began working for the Institute for Energy Research, my preliminary research indicated that William Nordhaus (now a co-author of Paul Samuelson’s famous economics textbook) was a great representative of the mainstream case for a Pigovian carbon tax. I have gone on to study his case, presented in articles and a book, in great detail. What I have found is an eager willingness to spot “market failure” coupled with a naive faith in government “solutions.” The full article deals with these big picture issues, but this post will dwell on the narrow technical results–using Nordhaus’s own numbers–that should give average economists pause when it comes to the typical recommendation of a carbon tax to “internalize the externality” of greenhouse gas emissions.

Most Damages Come From Ill-Specified “Catastrophic” Outcomes. In Nordhaus’s DICE model [Dynamic Integrated Model of Climate and the Economy], he relies on a simplified model of the global climate system and economy, calibrated to the latest numbers put out by the IPCC and other groups. The model can then simulate the climate damage impacts of a marginal ton of emissions on human welfare, allowing Nordhaus to derive the “optimal carbon tax.”

When I delved into the numbers behind Nordhaus’s damage function–which related a given increase in global temperatures to a percentage loss of global GDP–I was quite surprised. The DICE model (at least as of the time I wrote the paper) assumed that a warming of 2.5C would yield a loss of 1.5% of global GDP, averaged across various sectors. For example, the agricultural sector (worldwide) would contribute to a 0.13% reduction in global GDP, the toll on coastal regions would yield another 0.32% of GDP in damages, and so forth.

The single biggest contributor, however, was a 1.02% GDP loss attributed to a “catastrophic impact.” (See Table 2 on page 209 of my paper, hyperlinked above.) So to repeat, Nordhaus’s optimal carbon tax was based on a damage function that said 2.5C of warming would yield 1.50% GDP losses, and 1.02% was due to a “catastrophic impact.”

Now this in itself is a bit disturbing, since the lion’s share of Nordaus’s recommended tax is coming from the nebulous “catastrophic impact” category. In other words, it would be one thing if careful, sectoral studies assessed the likely impact from various amounts of warming, and then Nordhaus rounded up the final number because of the “kicker” of ill-defined catastrophic impacts. But that’s not what happened–fully 68% of Nordhaus’s damage function (calibrated at the 2.5C warming level) results from this one category of impacts. [Read more →]

Last month, an article in The Economist tried to make the case that global warming is or ought to be an urgent concern for developing countries. My letter protesting the speculative and unsubstantiated claims of the piece was prominently published in the current issue. Although the editors of The Economist changed my title, dropped the references, and made it somewhat briefer, the printed version is quite faithful to the spirit of the original, which is available here.

For the public record, my full version is provided below.

A badly developed climate backgrounder

SIR — The Economist’s article, A bad climate for development (September 17), which also serves as a backgrounder for an online debate on climate change, is not only selective in the information it presents, it is riddled with speculation and unsubstantiated claims.

For example, its chart 3 presents portions of two of three panels in figure 2.1 of the World Development Report 2010.  But the panel that it chooses not to display shows that deaths from all climate related disasters have actually declined at least since 1981–85 despite (a) an enormous increase in the population at risk, namely, the world’s population, and (b) the fact that older data has a greater tendency to underestimate the number and casualties of extreme weather events. The original source of the data (Center for Research on the Epidemiology of Disasters, CRED) states that the increase in the data until 1995 “is explained partly by better reporting of disasters in general, partly due to active data collection efforts by CRED and partly due to real increases in certain types of disasters.”[1] They also state that they are unable to say whether the latter increases are due to climate change. [Read more →]

Editor’s note:  This article is the second of two on shale gas production.  The first dealt with the U.S. situation; this one looks at the potential impacts of shale gas production in Europe and China.

Natural gas production in Europe, currently just over 11 Tcf, has been falling rapidly over the past decade.   About three fourths of Europe’s gas is produced in just three countries: the UK, Norway and the Netherlands.  Production peaked in 2003 at 13.5 tcf.

Consumption, on the other hand, continues to rise.  Gas use in Europe stood at 20.5 tcf in 2008 and is likely to increase further as coal-fired power plants retire or are phased out of service for environmental reasons.  Most of Europe’s imported gas comes from Russia (about 80%), with the remainder mostly as LNG.

Conventional natural gas production is likely to continue its decline since the major source of gas production, the North Sea, seems set on a declining trajectory.

A Scramble for Supplies Seems to Be in Order

With the continent increasingly dependent on the state of Russian-Ukrainian relations, and with Russia’s sales prices pegged directly to oil, Europe’s energy future promises to be even more costly than its past.  Recent efforts at diversifying supplies – LNG, Nabucco, pipelines from Libya and Algeria – have proved only partially successful and retain the oil-linked price structure of Russian gas supplies.

Gas from Shale, Ours and Theirs, May Rescue Europe

U.S. shale gas production has already roiled the world of natural gas.  By providing plentiful supplies to the US shale gas production has promoted heavy discounting of natural gas in the U.S. relative to oil. [Read more →]

Last weekend, Sens. John Kerry (D-MA) and Lindsey Graham (R-SC) co-authored an op-ed in the New York Times titled, “Yes We Can (Pass Climate Change Legislation).”

Kerry and Graham want to pass a Senate companion bill to H.R. 2454, the American Clean Energy and Security Act (ACES), also known as Waxman-Markey, for its chief sponsors, Reps. Henry Waxman (D-CA) and Ed Markey (D-MA). Waxman-Markey narrowly passed in the House by a vote of 219 to 212. Only eight Republicans — under 5% of those voting – supported the bill.

Republican Opportunity

The overtly partisan character of Waxman-Markey is one of the reasons some observers conclude that Congress will not pass a cap-and-trade bill this year. Cap-and-trade “works” by raising consumer energy prices, and Democrats are loathe to increase household utility bills and pain at the pump unless they can snooker Republicans into giving them bipartisan cover.

Republicans can pry Blue Dogs apart from their more “progressive” brethren and protect the economy from Kyotoism by simply refusing to jump on the cap-and-trade bandwagon.

Republicans, however, are continually tempted to “Me-Too” it, because breaking a legislative stalemate can win ephemeral plaudits from Democrat colleagues and the liberal media.

Case in Point #1: When President George H.W. Bush accepted the Rostenkowski plan to balance the budget by raising taxes, his stock soared in Washington, D.C. But by agreeing to raise taxes, Mr. “Read-my-lips: No New Taxes!” betrayed the people who elected him and pushed the economy into a recession. That sealed his fate as a one-term president.

Case in Point #2: Republican Sen. John McCain of Arizona made a national name for himself, first, by co-sponsoring the McCain-Feingold campaign finance “reform” law, and, later, by co-sponsoring the McCain-Lieberman cap-and-trade bill.

These actions — especially McCain-Feingold, which would have revived the power of major broadcasting corporations and newspapers to act as information gatekeepers during federal elections — made McCain the establishment media’s favorite Republican in Congress. But these high-profile acts of Me-Tooism did not win McCain the White House. Many voters wondered: Why elect an imitation Democrat when we can have the real thing? [Read more →]

Editor’s note: This article is the first of two posts on shale gas production and concerns the U.S. situation. The second will look at the potential impacts of shale gas production in Europe and China. While some have interpreted shale gas in terms of coal displacement in power generation, this new competition has profound (negative) implications for the viability of politically favored renewables in power generation.

Shale gas formations have been known for many years. But only in the 1990s did an understanding of hydraulic fracturing technology make production of gas from such formations feasible technically. And it was not until the middle of this decade, with U.S. domestic gas prices consistently above $10/mmbtu, that shale moved from an interesting future resource to a major current reserve.

The U.S. Department of Energy now estimates that recoverable shale gas resources in the U.S. total more than 550 tcf, with conversion of resources to reserves occurring at a rate of more than 1 tcf/year, above production. The production of shale gas and the increasingly economic production processes have reversed the historic decline of U.S. gas reserves, which stood at 293 tcf in 1968 and fell to 164 tcf in 1998. Dry gas reserve estimates for the U.S. as of December 31, 2007, stood at 237 tcf. Production has moved in a similar fashion (with a small lag), peaking in 1973 at 21.7 tcf, then falling to a plateau of about 17–19 tcf throughout the next three decades, until shale changed the domestic U.S. gas supply picture.

What Has the Shale Bonanza Meant for the U.S.?

Large-scale commercial production of natural gas from shales commenced only in the middle of this decade, becoming significant as a proportion of supply only in the last couple of years. In 2005, U.S. gas production stood at just over 18 tcf. In 2008, domestic production had risen to 20.6 tcf, reversing more than a decade of decline, and closing in on the 1973 peak production figure.

‘LNG to the rescue’: Conventional thinking in mid-decade was that only large-scale imports of liquefied natural gas (LNG) could meet the demands of the U.S. gas market. [Read more →]

“The use of wind power is as old as history.”

- Erich Zimmermann, World Resources and Industries (New York: Harper & Brothers, 1951), p. 62.

“The Federal Power Commission became interested in the Grandpa’s Knob [windpower] experiment during World War II, and commissioned Percy H. Thomas, a senior engineer of the commission, to investigate the potential of wind power production for the entire country. Thomas’ survey, Electric Power from the Wind, was published in March 1945.”

- Wilson Clark, Energy for Survival: The Alternative to Extinction (Garden City, NY: Anchor Books, 1974), p. 545.

Last week I posted on the long history of solar energy to make the point that this technology is not an infant industry. The fact that solar cannot compete against grid electricity (off grid is another matter) today is proof positive that there is an inherent disadvantage with the dilute, intermittent flow of sunlight in the thriving carbon-based energy era.

Windpower is another case of bad economics and bad quality. Wind is actually worse than solar because micro wind for off the grid is not a niche market. Ever seen a wind turbine in the middle of nowhere powering something? I haven’t. But I have seen solar panels in the middle of nowhere doing the work of electricity.

Old Stuff

My post, “Wind: Energy Past, Not Energy Future,” documented how 19th century economists unmasked wind as an inferior energy. Here is one example–see my post on W. S. Jevons (1865) for more.

The quotations below document how wind was a primary energy prior to the age of coal and how various developers have tried to commercialize wind without success. [Read more →]

Accusations of cherry-picking—that is, carefully choosing data to support a particular point—are constantly being hurled around by all sides of the climate change debate. Most recently, accusations of cherry-picking have been levied at analyses describing the recent behavior of global average temperature. Primarily, because claims about what the temperature record says run the gamut from accelerating warming to rapid cooling and everything in between—depending on who you ask and what point they are trying to make.

I am often asked as to what is the “right” answer is. What I can say for certain, is that the recent behavior of global temperatures demonstrates that global warming is occurring at a much slower rate than that projected by the ensemble of climate models, and that global warming is most definitely not accelerating.

Choice of Cherries

But as to questions concerning just how far beneath climate model predictions the rate of warming is, or for just how long the average temperature of the world has not warmed at all, the answers depend on several things, among them the dataset you want to use and the time period over which you examine—i.e., which cherries you wish to pick.

Figure 1 illustrates the various cherry varieties that you have to choose from. [Read more →]

[Editor: This MasterResource post from July is reprinted given the 'war on coal' strategy by environmental groups and certain activist strands of the upstream natural gas industry, led by Chesapeake Energy (Aubrey McClendon.]

Robert F. Kennedy Jr., president of Waterkeeper Alliance, posits in the Financial Times (July 19) that converting our fleet of coal-fired power plants to natural gas could be accomplished “practically overnight” and will have the effect of “jump-starting our economy….without the expense of building new power plants.” Thus did Kennedy express his new-found love of natural gas: It’s our “bridge fuel to the ‘new’ energy economy.” (Where have we heard that before–wasn’t that Enron’s tag line decade or two ago?)

Yet Kennedy’s proposal ignores the extremely high cost of fuel conversion (upwards of $100 million for a medium-size coal plant) and the added fuel cost to burn gas. He seriously mischaracterizes how an electricity market operates. And Joe Romm (Climate Progress) had added to the confusion by calling Kennedy’s proposal a “game changer.” For Romm plentiful gas means “damn easy and cheap” compliance with the Waxman-Markey climate bill (HR 2454).

Environmentalists looking to draft the natural gas industry in a forced conversion effort against coal do not know what the gas industry does: it is highly uneconomic and would overload the pipeline system that was not built with coal conversions in mind.

Gore’s 100% Dream … and Round Two

Late last year Al Gore, self-appointed father of the climate-change movement, astonished his most ardent acolytes with a plan to produce 100% of the nation’s electricity from renewable energy and carbon-free sources within 10 years. In making the announcement, Gore noted that “The quickest, cheapest, and best way to start using all this renewable energy is in the production of electricity. In fact, we can start right now using solar power, wind power, and geothermal power to make electricity for our homes and businesses.” As always, Gore carefully sidesteps the impact of his proposals to the consumer’s pocketbook and our country’s future economic well-being. [Read more →]

“Vice President [Al] Gore is wrong to call for the elimination of the internal combustion engine, and wrong again to call ‘absurd’ our current reliance on cars and trucks. Mobility is an essential and inseparable part of almost all that we value—from close-knit families to rewarding careers, quality educations, and fulfilling recreation. Mobility truly is what makes our autonomy possible. And cars, trucks, and the internal combustion engine are worth keeping because they make automobility itself increasingly sustainable.”

- Joseph Bast and Jay Lehr, “The Increasing Sustainability of Cars, Trucks, and the Internal Combustion Engine,” Heartland Institute Policy Study No. 95, June 2000, p. 54.

Part I of this two-part series described the primitive, messy, inefficient  prehistory of the mechanized transportation.  Today’s post provides quotations form different scholars that describe the great advances provided by carbon-based energy transportation.

Transportation Benefits

 “Not only was the motorcar considered cleaner, safer, more reliable, and more economical than the horse, but it promised to be vastly improved and lowered in price in the near future, whereas the expense and liabilities of the horse seemed unalterable. . . . [Moreover] the general adoption of the automobile by farmers promised to break down the isolation of rural life, lighten farm labor, and reduce significantly the cost of transporting farm products to market, thereby raising the farmers’ profits while lowering food prices paid by city consumers.”

- James Flink, The Automobile Age (Cambridge, MA: The MIT Press, 1993), pp. 138-39.

“Mass personal automobility appears to have a new lease on life. In contrast with the disappointing past, disillusioning present, and clouded future of mass transit in the United States, the renaissance in automotive technology is making cars safer, less polluting, and more energy efficient with every model year. Predictions of the imminent death of the automobile have given way to a new optimism. [A Massachusetts Institute for Technology] report comes to the particularly rosy conclusion that ‘the automobile’s future as the prime means of personal transport is quite secure because of the flexibility of the basic concept and robustness of automotive technology. . . . [T]here is no basis whatever for projecting that in the end auto technologists will fail to cope. Thus, the auto industry can continue to be one of the world’s foremost manufacturing activities far into the future, serving the need for personal transportation in developed and developing nations.’”

-James Flink, The Automobile Age (Cambridge, MA: The MIT Press, 1993), p. 404. [Read more →]

Should the U.S. join OPEC? After all,  the U.S., home of the never-ending calls for “energy independence,” is an oil exporter. A big one.

Through the first six months of 2009, America’s daily exports were averaging 1.9 million barrels per day.[i] At that level, U.S. oil exports are on a par with countries like Angola and Venezuela.[ii] Of course, the vast majority of those exports are refined products, not crude. And those exports are also largely a function of America’s position as the world’s largest oil importer, which means that OPEC membership is rather unlikely.

Nevertheless, the fact remains that the U.S. is an integral player in the oil market. And there has never been a bigger, more global, more integrated, more transparent market than the modern crude oil and oil products market. And America’s role as an oil exporter should put paid to the continuing calls from both the Right and the Left for the U.S. to secede from the world oil sector. Energy Information Administration data show that rather than seceding from the global oil market, the U.S. is playing a bigger role than ever before and that the U.S. refining sector is bolstering its role as a global player in manufactured goods.

In 1998, the U.S. was exporting about 945,000 barrels of oil and refined oil products per day. By 2008, the U.S. was exporting nearly twice that amount, some 1.8 million barrels per day.[iii] What about imports over that time period? Well, while imports rose, exports rose even faster. In 1998, U.S. crude oil and petroleum product imports averaged 10.7 million barrels per day. By 2008, that number had increased to 12.9 million barrels per day.[iv] Thus, while total U.S. imports increased by 2.2 million barrels per day, or about 20%, over that time period, the amount of U.S. exports of refined products doubled, to about 1.8 million barrels per day. [Read more →]