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Posts from — July 2010

Milton Friedman on Mineral Resource Theory (remembering a giant of social thought)

Editor note: Milton Friedman would be 98 this Saturday July 31. (He died on November 16, 2006.) This exchange with Robert Bradley–when Dr. Friedman was 91 years old–is testament to the mental powers of one of the greatest social thinkers of modern time.

Friedman had not met Bradley but was in the habit of actively communicating with scholars until his final illness.

I had heard that the great economist and social thinker Milton Friedman (1912–2006) was a prolific communicator with those who posed worthy questions to him. So when I got interested in mineral resource theory, which would culminate with my 2007 essay, Resourceship: An Austrian Theory of Mineral Resources, I asked Dr. Friedman in August 2003 about his views on the late Julian Simon (1932–98), specifically whether Simon’s work on resources, and his conception of the ultimate resource, merited a Nobel Prize in economics.

The discussion continued from there as I tried to flesh out his views of whether “depletable” minerals such as oil were somehow different from “nondepletable” resources. I believe Friedman agreed with Simon that there is no difference from a social science/business perspective. But Friedman disagreed with Simon’s assessment of the contribution of Harold Hotelling, who mathematically proved that the cost and thus price of a fixed resource in a world of perfect knowledge was ‘good’ economics. Read on…. [Read more →]

July 30, 2010   24 Comments

New Mexico: Raising Rates for Bad Energy in a Poor State

New Mexico has enjoyed some of the lowest energy prices in the country—which is good as it is a poor state. However, the major supplier of electricity to the state, PNM, has just asked for a 21.2% rate increase on top of the 24% they’ve received over the last few years. Welcome to the new world of government-forced renewable energy–and one reason why Senator Harry Reid (D-Nev.) recently said he didn’t have the votes for a federal renewable portfolio standard (RPS).

The anticipated rate shock gets worse for New Mexicans: a nearly 50% rate hike in five years. While PNM claims New Mexico still has some of the lowest rates in the country, the citizens are not taking the preventable increase lying down. David King, chairman of the New Mexico Public Regulation Commission (PRC), for example, calls the rate increase a “hot potato” saying that he’s received “a flood of calls from ratepayers.”

Public Outcry

During the month of July, PNM has been holding Public Forums through out their service area regarding their Integrated Resource Plan (IRP). The flyer promoting the event invited the “public” to join in on the discussion on topics such as “To what degree are consumers willing to pay more for a different combination of power sources?” The news about the proposed rate increase came out at the same time as the forums were scheduled. While PNM had a set program they’d planned to deliver, the attendees had little interest in the PNM’s dog-and-pony show. [Read more →]

July 29, 2010   11 Comments

Why Cap-and-Trade Is Politically Failing: Cost, Cost, Cost (The Chamberlin study and his response to Michael Levi, Council on Foreign Relations)

[Editor note: The summary and analysis below is reprinted with the permission of the Institute for Energy Research. The sections past the summary are authored by Dr. Andrew Chamberlin. Cap-and-trade remains alive unless the U.S. Senate fails to pass legislation to go to conference with HR 2454, The American Clean Energy and Security Act of 2009.)

To better understand the broad consequences of the proposed Kerry-Lieberman American Power Act on the U.S. economy, the Institute for Energy Research commissioned Chamberlain Economics, L.L.C to perform an economic and distributional analysis of cap-and-trade portion of the proposal.

The report examines the impacts that the American Power Act would have on the U.S. economy, the method by which emission allowances are distributed to corporations and the distributional cost of the bill on households by income, age group, region and family type.

The study’s key findings of the American Power Act follow:

  •   U.S. employment would be reduced by roughly 522,000 in 2015, rising to over 5.1 million jobs by 2050.
  • Households would face a gross annual burden of $125.9 billion per year or $1,042 per household, with costs disproportionately borne by low-income households.
  • On a net basis, the top income quintile will benefit financially, redistributing to these households roughly $12.3 billion per year from the bottom 80 percent of earners.
  • Households over age 75 bear the largest burden at 2.3 percent of income, followed by households aged 65-74 and under age 25 at 2.1 percent. By contrast, the nation’s highest-earning households between age 45 and 54 years would bear the smallest percentage burden of just 1.5 percent.
  • Contrary to the legislation’s stated goal of reducing price volatility by excluding petroleum refiners from quarterly auctions, the Kerry-Lieberman bill is likely to significantly increase allowance price volatility from quarter to quarter, compared to an ordinary auction in which all covered industries bid for allowances.

The authors also explored two specific propositions: the first, the potential for shareholders, and not consumers, to benefit from the distribution of free emission allowances; and, second, the expected consequences of the bill’s creation of a separate pool of allowances for petroleum refiners, thus adding to the price volatility of those allowances.  Both conclusions are contrary to Kerry and Lieberman’s stated intent of the legislation. [Read more →]

July 28, 2010   3 Comments

Muir Russell Findings No Solace for U.S. EPA

[Update 07/29/10: The EPA has announced its decision to deny all the petitions asking it to reconsider its Endangerment Finding, claiming that it could find no evidence in the Climategate emails indicating that climate change science could not be trusted. Read on to see if you think this decision is justified.]

While the U. S. Environmental Protection Agency would surely love to use the findings of the Independent Climate Change Email Inquiry (aka the Muir Russell report) to brush aside the many challenges mounted, in response to the Climategate email scandal, to the EPA’s finding that greenhouse gases endanger the public’s health and welfare (a finding which enables the EPA to regulate greenhouse gas emissions), they’ll find little in the Muir Russell report to help in their defense.

Well, I should qualify that. They’ll find little scientifically to help their defense. Politics is another matter.

Since the EPA has largely based its Endangerment Finding on an appeal to authority—the primary authority being the IPCC—rather than its own investigations, the Muir Russell report plays right into the EPA’s hands when concluding (emphasis in original):

[W]e do not find that their [influential scientists from the Climate Research Unit of the U.K.’s University of East Anglia] behaviour has prejudiced the balance of advice given to policy makers. In particular, we did not find any evidence of behaviour that might undermine the conclusions of the IPCC assessments.

At face value, it seems as if the EPA could take this as the only proof needed to dismiss all of the post-Climategate calls for it to reconsider it pre-Climategate Endangerment Finding.

But, as with just about everything else about the EPA’s Endangerment Finding, such action would be a gross oversimplification, a side-step around the deeper complexities, and an incomplete address of the issues raised against it. [Read more →]

July 27, 2010   7 Comments

Muir Russell Climategate Findings: Superficial, Uncompelling

Reactions to the findings of the last of the investigations into the “meaning” of the contents of the Climategate emails—the so-called Muir Russell report—are still trickling in. And truly, there have been few surprises.

The Muir Russell panel—hired by the University of East Anglia (UEA)—concluded (some add, predictably) that the scientists from for the Climate Research Unit (CRU, which is part of the UEA) had not really done anything wrong aside from not being particularly cooperative with folks that they didn’t like.

The CRU scientists and their close colleagues who were caught up in the Climategate affair claim vindication (see RealClimate), alarmists love it (see ClimateProgress, Newsweek), those in the middle were a bit displeased (see The Atlantic, New Scientist) or wishy-washy (see DotEarth), and those feel that the Climategate emails revealed glaring problems with how climate change research is being conducted and brought to the public were crying “whitewash” (see Wall Street Journal, Watts Up with That).

It makes me wonder why Muir Russell bothered in the first place.

I find my reaction somewhere between the last two categories, which I guess would make me wishy-whitewashy. I don’t think Climategate revealed any great fractures in the general concept that human greenhouse gas emissions are leading to a warmer world, but it most definitely did confirm what I felt had been the case all along—that the Climategaters were not playing fair. And not playing fair has a lot more consequences than the Muir Russell panel cared to admit—this is where the “whitewash” comes in for me. [Read more →]

July 26, 2010   8 Comments

Regulatory Failure by the Numbers

Between the current financial mess and the debate over carbon dioxide emissions controls, there is a lot of talk about regulation these days.  We are told, for example, that the recession would have been prevented if proper regulations had been in place.  While it is true that (by definition) the “right” regulations would have prevented bad and ensured good, it is also true that had an omniscient, omnipotent, omnibenevolent dictator been in charge, the recession would have been avoided as well.  The problem, of course, is that God, being otherwise occupied, didn’t run for President during the last election.

Enacting the right regulations is somewhat simpler than electing an omni-everything being to run the world, but not much.  As evidence, consider the fact that it was a lot of the wrong regulations that got us into this mess in the first place.  Also consider the oft heard argument that financial regulators needed to “get out ahead of the innovators.”  Clearly, a job for the omniscient.  There is, after all, a reason why the Wright Brother’s flight at Kitty Hawk preceded the establishment of the Federal Aviation Administration.

Any time government regulators try to do much more than lay out the basic rules of the game, unintended consequences and moral hazards rear their ugly heads.  The following list of pitfalls, adapted from our book Energy: The Master Resource, is offered as a caution to regulatory enthusiasts.  [Read more →]

July 24, 2010   3 Comments

Northwest Windpower: Problems Aplenty

Sharp increases in windpower output on the Pacific Northwest electricity grid has lead to a number of problems. This has fallen into the lap of the Bonneville Power Administration (BPA), the Pacific Northwest federal power marketing authority that must integrate the large influx of wind energy into the electricity grid.

In 1998, the BPA’s wind generation was roughly 25 megawatts (MW). Today, it totals 2,780 MW and, with the Oregon Renewable Portfolio Standards passed in 2007, over 6,000 MW of wind power is expected to be on-line by 2013. Often overlooked are the impacts of increasing wind generation on the reliability and affordability of electricity that might very well outweigh any of the environmental benefits that are proclaimed to exist.

The negative aspects of wind are quite apparent. Obviously, wind is unpredictable and inconsistent, creating a significant problem for BPA and electric utilities. To prevent brownouts or overloads on the grid, BPA has to schedule energy production in advance and the ability to predict when and how hard the wind will blow is extremely limited (usually a two or three day window) and is often inaccurate.

Because wind power is so unpredictable, every MW must be backed up by an equal amount from reliable, reserve energy sources to replace the energy lost when the wind dies down. This means BPA must have a “balancing” reserve equal to or greater than the wind power capacity utilized at any given time. In the Pacific Northwest the backup source has traditionally been federally owned hydroelectric dams, which are shut on and off to respond to fluctuations in wind energy. [Read more →]

July 22, 2010   33 Comments

One Person’s Oil Addict is Another’s Intelligent Consumer

In the last few weeks, rhetoric about America’s oil addiction has resurfaced, years after being pushed by former President George W. Bush.  It is meant to explain the inability of Americans to become energy independent or at least to significantly reduce consumption.  The implication is that consumers are either foolish or brainwashed, and that the government is a slave to the oil industry’s lobby. 

I submit that this claim reveals an ideological bias, as well as a degree of energy illiteracy.  

Such illiteracy is not new and is often battled by economists.  For example, when I was at MIT, one class was taught by an engineer who believed that oil was underpriced because it cost less than mineral water.  I didn’t have the heart to tell him that this is a common misconception:  the prices of the two are completely unrelated.  

Now there is a new litmus test for energy illiteracy, namely the claim that America is ‘addicted to oil.’ Those stating this are either being less than honest (politicians and special interests) or have failed to comprehend either addiction or economics.  For example, why say Americans are addicted to oil, but not food, housing and clothing?  Or cement or steel?  It is easy to compare the traditional types of addiction with the reliance on these substances to see where oil falls on the spectrum.

What is ‘Addiction’? 

Addictive substances typically cause changes in brain behavior, create a sense of euphoria but also reduce productive activity, making citizens less capable and/or less interested in being productive.  They serve primarily to stimulate pleasure and often distort mental processes, creating biochemical dependencies to the point where those consuming the substances sacrifice their careers, livelihoods, families and everything they hold dear to acquire it on a continual basis.  While there are many functioning addicts, there are also huge numbers whose lives have been ruined by their addictions.  (Just watch “Behind the Music” on VH1.) [Read more →]

July 21, 2010   9 Comments

BP Fools the “Socially Responsible” Investors (‘Green’ Enron did too)

“The BP incident highlights big differences in how socially responsible funds prioritize various causes. Some of these managers considered BP’s stance on climate change a strong positive. ‘BP was the first to break the logjam on climate change policy’ and had been a leader on alternative energy, says Mark Regier, director of stewardship investing for MMA Praxis.”

- Quoted in Eleanor Laise, “Oops: ‘Socially Responsible’ Funds Hold Big Stakes of BP,” Wall Street Journal, July 17–18, 2010.

The greenwashing strategy of BP and Enron has been the subject of three recent posts at MasterResource:

They Loved BP and Enron: Climate Alarmism as the Great Environmental Distraction (Part I: Worldwatch Institute quotations)

BP’s ‘Beyond Petroleum’: Climate Alarmism as the Great Environmental Distraction (Part II: Why the ‘greenwashing’?)

Harvard Business Review Article: BP as Environmental Role Model (Part III on global warming as the great environmental distraction)

Don’t believe that “Beyond Petroleum” BP fooled the politically correct after Enron and even all the way up to the Deepwater  Horizon explosion/Gulf spill of May 2010? Then consider the Wall Street Journal’s “Oops: ‘Socially Responsible’ Funds Hold Big Stakes of BP” (reprinted below as Appendix A). [Read more →]

July 20, 2010   3 Comments

Regional Greenhouse Gas Initiative (RGGI): A Cap-Tax-Spend Model to NOT Follow

“Bottom line, the program has raised electricity prices, created a slush fund for each of the member states, and has had virtually no impact on emissions or on global climate change.”

Against a backdrop of oil spewing into the Gulf of Mexico, the Obama administration stepped up its campaign to pass national climate change legislation. Senate Majority Leader Harry Reid, D-NV announced last week that he plans to bring a comprehensive energy and climate bill to the Senate floor by the end of the July. The bill, still to be written, is expected to include a cap on carbon emissions produced by the nation’s electricity providers.

But before the U.S. embraces such a program, Congress — and the public — would be wise to examine the early performance of the Regional Greenhouse Gas Initiative (RGGI), the nation’s first mandatory greenhouse gas cap and trade system.

Bottom line, the program has raised electricity prices, created a slush fund for each of the member states, and has had virtually no impact on emissions or on global climate change.

Background

The federal government has been debating national climate legislation since 1992. Over one-hundred heads of state attended the United Nations Conference on Environment and Development, where it was assumed that man-made global warming was a problem and deserved public-policy action.

The Kyoto Conference followed in 1997.  The conference resulted in the proposed Kyoto Protocol, a treaty to reduce greenhouse gas emissions (“GHG”) through either a cap-and-trade or a carbon tax programs in developed nations, and through carbon emission subsidies for underdeveloped nations.

The Protocol established the concepts of Joint Implementation (“JI“) and Clean Development Mechanism (“CDM”) as means to fund GHG reductions in the developing world. With Kyoto, “carbon finance” was born.

Major compromises in Kyoto included setting 1990 as the baseline to get Eastern European buy-in and exempting the underdeveloped world. The 1997 Byrd-Hagel Resolution, which passed the U.S. Senate by 95-0 ensured the U.S. would not sign onto Kyoto. It was the sense of the Senate, as cited in the resolution, that the protocol would “result in serious harm to the economy of the United States.”

RGGI in Action

Ten years later, in 2008, the Regional Greenhouse Gas Initiative (“RGGI”) was launched. [Read more →]

July 19, 2010   8 Comments