Perverse outcomes of water subsidies

I’m intruding on David Zetland’s turf, but in this 2012 Guardian article from 2012 Roger Cowe makes some compelling arguments about why agricultural water subsidies lead to perverse outcomes, do not help the poor, and waste a precious, scarce resource. Water is the only industry in which regulation more perversely stifles self-organizing processes for managing scarcity than electricity. His conclusion is apt:

Like most other perverse subsidies, the goal of improving access to water is not at issue. The perversity arises because making water cheap, especially to crop farmers, leads to excessive use and unintended, environmentally harmful consequences. And the poor, who are often the main targets of subsidies, typically don’t benefit. Irrigation benefits landowners rather than their tenant farmers. And surprisingly, consumption subsidies do few favours for poorer families.

No population bomb

From the op-ed pages of the New York Times, Erle C. Ellis explains, “Overpopulation Is Not the Problem“:

MANY scientists believe that by transforming the earth’s natural landscapes, we are undermining the very life support systems that sustain us. Like bacteria in a petri dish, our exploding numbers are reaching the limits of a finite planet, with dire consequences. Disaster looms as humans exceed the earth’s natural carrying capacity. Clearly, this could not be sustainable.

This is nonsense. Even today, I hear some of my scientific colleagues repeat these and similar claims — often unchallenged. And once, I too believed them. Yet these claims demonstrate a profound misunderstanding of the ecology of human systems. The conditions that sustain humanity are not natural and never have been. Since prehistory, human populations have used technologies and engineered ecosystems to sustain populations well beyond the capabilities of unaltered “natural” ecosystems.

All in all it seems a little better grounded than Paul Ehrlich’s approach in 1968, flatly declaring, “The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon….” Unfortunately for Professor Ehrlich, hundreds of millions of people did not starve to death in the 1970s. His neo-Malthusian pessimism was popular in the Carter administration, but even Carter’s policies at the end tilted a bit more toward markets and optimism and away from bureaucracy and pessimism.

Will domestic health and tourism concerns lead China to curb pollution?

Take these two facts and consider them together: (1) China’s air quality has been notoriously poor for the past three decades or so; and (2) according to the BP statistical Review of World Energy, China’s energy use and coal use relative to other countries indicates that any greenhouse-gas-reducing policies by other countries are likely to be ineffective if China’s trajectory remains the same.

Looking at those facts, and looking at all of the political distortions of economic signals in China (from state-owned industry to activist monetary policy), it’s hard not to despair if you, like me, would like to see the alignment of economic and environmental incentives to contribute to real, substantive, long-term economic-environmental sustainability.

Walter Russell Mead points to two dimensions of China’s poor environmental quality that may lead to some policy changes: domestic health care costs are high, in part due to the health effects of the poor air quality, and it’s also reducing tourism.

Air pollution contributed to the deaths of an estimated 1.2 million people in China in 2010, and it costs the country nearly six percentof its annual GDP in health care costs, material damages, and premature deaths. Beijing’s air quality is “crazy bad“, and the country’s toxic smog is driving China’s urbanites out of its megacities. Small wonder, then, that air pollution is having a devastating effect on China’s tourism industry.

These factors have led China to start looking a policies to improve their environmental quality, as described in the Economist last week. Among other things, the increasing “NIMBY”ism reported in the Economist shows the extent to which environmental quality is a normal good — when average incomes rise and living standards rise, people consume more quantity of normal goods, and these increasingly better-off residents of China want more environmental quality. That is a positive harbinger.

Bruce Yandle on bootleggers & Baptists

Bruce Yandle’s “bootleggers & Baptists” model of political coalition formation is one of the most useful models in the political economy of regulation (and one that both Mike and I employ frequently, as seen by our many posts using the model).

Here’s a great new Learn Liberty video featuring Bruce himself describing how coalitions of seemingly-unlikely interests can form to enact particular regulations. He describes the original formulation, and then applies it to environmental regulation.

 

Political economy and dealer franchise laws

Tesla Motors is doing more than shaking up the automobile industry by producing an exciting high-end electric vehicle and establishing a network of battery-swapping stations. Tesla wants to sell directly to consumers, bypassing established dealer franchising that dominates the industry. But such dealer franchising has not been a mere transaction-cost-driven Coasian outcome — it’s undergirded by state laws that require manufacturers to sell their automobiles through independent dealers (Francine Lafontaine and Fiona Scott Morton, Journal of Economic Perspectives Summer 2010 (pdf) provides a useful overview of the history of such laws).

Existing dealers object to Tesla’s direct-to-market approach, and are using the dealer franchise laws to stop Tesla from doing so in states like Virginia; see also this Reason post on legislative events in New York. Note that Virginia law prohibits manufacturers from owning dealerships, outlawing vertical integration in the name of promoting competition, which means that a potential competitor can’t use vertical integration as a competitive strategy (yeah, that’ll promote competition …). Think about that restriction, and apply it to another innovative company: Apple. Dealer franchise laws in electronics would prohibit Apple (and Samsung, etc.) from operating its own stores. How would such a law affect competition in electronics? The answer is not clear, which is the point; vertical integration is not inherently anti-competitive at the retail level. In many ways, these laws are a relic, a holdover from a century ago when the economics of vertical integration was not well understood and vertically integrated firms with market power were per se suspect.

Dan Crane has a really nice post at Truth on the Market about the state dealer franchise laws that examines all of the arguments in favor of state dealer franchise laws. After countering them all and finding them wanting, Crane concludes that

Since the arguments for dealer laws are so weak, I’m left with the firm impression that this is just special interest rent-seeking of the worst kind.  It’s a real shame that Tesla—seemingly one of the most innovative, successful, and environmentally correct American industrial firms of the last decade—is going to have to spend tens of millions of dollars and may eventually have to cut shady political deals for the right to sell its own products.

This raises an interesting political economy situation. When innovative and environmentally correct meets the crony corporatism of existing legislation, is the entrenched incumbent dealer industry sufficiently politically powerful to succeed in retaining their enabling legislation that raises their new rival’s costs?

 

Mike Munger in Cato Unbound on recycling

Lynne Kiesling

As is his wont, Mike Munger speaks vast amounts of sense in this month’s Cato Unbound, focusing on the political economy of recycling. I’ve never seen a better articulation of the various energy and economic tradeoffs associated with recycling than Mike’s presented here.

For example, Mike does a great job of pointing out the reasons why municipalities underprice landfill dumping — to reduce incentives for the illegal dumping and burning that it’s costly to monitor and enforce — and how that incentive may at the margin create reasons for recycling, even though lots of recycling uses more energy to process waste and create a not-very-valuable “resource”. He concludes by arguing for a nuanced view of recycling as a matter of policy:

Neither the simplistic “if it’s recyclable, it should be recycled!” view nor the “let unfettered markets handle it!” perspectives are defensible.  For sound economic reasons, advanced nations underprice landfill space, often by substantial margins.  If you think that doesn’t matter, just take a look around at all the ad hoc dumps, burning, and trash in developing nations.

The problem with underpricing landfill space is that we throw away many commodities and old packaging that could be disposed of more cheaply in some other manner.  It is at this point that the price system would be of value, but it’s because people are insulated from actual prices that we have the problem in the first place.

As a “second-best” solution, since we are denied the first-best price solution, we try to divert commodities out of the waste stream using moral suasion, appealing to public spirit rather than to the self-interest of the citizen.  But this requires that we elevate the value of the landfill space somehow in the minds of those we are trying to reach.  Unfortunately, without prices to guide us there is no limit on the value placed on landfill space, and we begin to make a fetish of garbage.  In extreme cases, citizens and public officials may even begin to try to divert garbage that should, on economic grounds, actually be disposed of in the landfill.  And when the relative scarcity of commodities changes because of the dynamics of modern economies, it may be very difficult to explain adjustments to those citizens who are persuaded that “Recycling is always cheaper, no matter how much it costs.”

Mike applies property rights logic to argue that a better approach would be to assign packaging disposal liability to the manufacturers of products, to align their incentives to reduce packaging and/or make it easier to reuse or more biodegradable.

Not surprisingly, for a lot of consumer products this is already happening without regulation or legal precedent, brought into being in the market through reputation mechanisms. Companies as diverse as Apple and Amazon have been changing their packaging (minimizing it consistent with cushioning, replacing plastics with cardboard or with plant-derived plastics) in response to consumer preferences and perceptions. Wine shippers have moved from styrofoam to molded cardboard to hold bottles in boxes. And those are just the examples I have off the top of my head.

The richness and depth of Mike’s analysis is superb, and not to be missed. I look forward to the rest of the contributions over the month.

More on the purported environmental benefit of cutting down trees

Lynne Kiesling

As a follow-up to my previous post about cutting down trees for biofuels, here’s some interesting news about the unintended consequences and perverse incentives embedded in regulations to promote the use of biomass as fuel: a BBC investigation reveals trees cut from swamp forests in the US being used to fuel electricity generation in Britain.

Critics say subsidising wood burning wastes money, does nothing to tackle climate change in the short term, and is wrecking some of the finest forests in the US.

I have tracked the controversial trade from the swamp forests of North Carolina to the towering chimneys of the UK’s biggest power station, Drax in Yorkshire, which is converting half its boilers from coal to wood.

The implications are complicated and disputed, but it is clear that EU leaders did not have burning American wood in mind when they mandated that 20% of Europe’s energy should come from “renewable” sources.

But that’s what’s happening, induced by billions of pounds worth of subsidies in Britain. 

Cutting down trees for biofuels?

Lynne Kiesling

Cutting down trees to generate biofuels to substitute for fossil fuels can’t make sense in terms of carbon accounting, can it? I never thought so, but apparently some people have contended that it does. This Project Syndicate essay from Bjorn Lomborg addresses the question, and I think it’s worthy of consideration not just because I think his argument is persuasive (which may reflect the quality of the argument or my confirmation bias, take your pick), but also because he provides several links to published papers that suggest that such strategies may actually increase GHG concentrations.

His point is more important and more subtle, though. What happens when deliberate cultivation of biomass crops changes the land use and moves agricultural production to other plots of land?

But the biggest problem is that biomass production simply pushes other agricultural production elsewhere. Studies are just beginning to estimate the impact. In Denmark, a group of researchers estimated by how much various energy crops would reduce CO2 emissions. For example, burning a hectare of harvested willow on a field previously used for barley (the typical marginal crop in Denmark) prevents 30 tons of CO2 annually when replacing coal. This is the amount that proud green-energy producers will showcase when switching to biomass.

But burning the willow releases 22 tons of CO2. Of course, all of that CO2 was soaked up from the atmosphere the year before; but, had we just left the barley where it was, it, too, would have soaked up quite a bit, lowering the reduction relative to coal to 20 tons. And, in a market system, almost all of the barley production simply moves to a previously unfarmed area. Clearing the existing biomass there emits an extra 16 tons of CO2 per year on average (and this is likely an underestimate).

So, instead of saving 30 tons, we save four tons at most. And this is the best-case scenario. Of the 12 production modes analyzed, two would reduce annual CO2 emissions by only two tons, while the other ten actually increase total emissions – up to 14 tons per year.

Rather than displace agricultural production (with all of the attendant distortions in other markets that would arise), I tend to think about doing research in and exploring technologies for biomass waste recycling. Things like anaerobic digesters to process dairy waste and use it to generate electricity. In that case you are generating two benefits — electricity for consumption and waste management — so the combined value of those two benefits may make a more costly technology economical. Here are some suggestive numbers about that net benefit from Wisconsin, although I caution putting too much credence in them.

How cool WAS that? Not that cool, it turns out.

Michael Giberson

While digging through the KP archives looking for another old story, I can across a 10-year old post titled “How cool is this?

(Let me warn you now that there isn’t much more to this 2013 post other than to observe that not every cool-sounding technology in 2002 turned out to work. You already know that; you can stop reading now. -MG)

What seemed pretty cool at the time was a new bladeless turbine that the inventor said would drastically reduce costs in a number of applications. The Hydrogen Renewable Energy Enterprise, LLC in Hawaii was reportedly very excited about the possibilities and signed up to be the exclusive seller of the technology.

Since I hadn’t noticed bladeless turbines taking over the world, I wondered what became of the technology. Unfortunately, other than a bunch of press release inspired news reports from about 10 years ago, not a lot of information is findable online about Hawaii-based The Hydrogen Renewable Energy Enterprise, LLC.

Utah-based International Automated Systems, Inc. (IAUS), developer of the bladeless turbine technology appears to be still around. In addition to the bladeless turbine, the company has developed products including a automated self-checkout retail system and a fingerprint identification system. The newest technology seems to be a solar energy thermal system which can be used with the bladeless turbine. The company website lauds its solar technology as “Years Ahead of Schedule” and costing less than “the World Government’s goal for solar power cost per kilowatt by the year 2020.”

In June 2009 Renewable Energy Development Corporation contracted with Needles, California to supply the town with solar power based on the IAUS technology. In an interview published in November of 2009, REDCO owner Ryan Davies touted the IAUS technology, saying, “All of our engineering reports and research data indicate that this technology will be significantly more efficient than PV. We’re quite excited about it.” A year later REDCO was pleading with Needles to boost the $128 per MW price in the contract after REDCO “discovered … fatal flaws in the technology they were going to use. Those flaws included cost and efficiency issues.” In 2012 REDCO filed for bankruptcy.

Neldon Johnson, President and CEO of IAUS, is quoted as saying he thinks the technology would have worked, had Davies and REDCO attracted enough investment. Maybe, but IAUS has apparently attracted a detractor online who has collected information about the company: See http://www.iausenergy.com, particularly the page http://iausenergy.com/NewsHistory/index.html, and don’t miss the website’s collection of photos from the IAUS solar pilot plant west of Delta, UT.

That’s about it. No real surprises.

 

Some natural gas posts worth reading

Lynne Kiesling

Last week the EPA released a report on the extent of methane release during shale gas drilling; the results indicate that methane release is substantially smaller than previously thought. According to an article in Fuel Fix summarizing the report,

The scope of the EPA’s revision was vast. In a mid-April report on greenhouse emissions, the agency now says that tighter pollution controls instituted by the industry resulted in an average annual decrease of 41.6 million metric tons of methane emissions from 1990 through 2010, or more than 850 million metric tons overall. That’s about a 20 percent reduction from previous estimates. The agency converts the methane emissions into their equivalent in carbon dioxide, following standard scientific practice.

The EPA revisions came even though natural gas production has grown by nearly 40 percent since 1990. The industry has boomed in recent years, thanks to a stunning expansion of drilling in previously untapped areas because of the use of hydraulic fracturing, or fracking, which injects sand, water and chemicals to break apart rock and free the gas inside.

Experts on both sides of the debate say the leaks can be controlled by fixes such as better gaskets, maintenance and monitoring. Such fixes are also thought to be cost-effective, since the industry ends up with more product to sell.

This excerpt reflects my thinking on the leaks — since methane is the product they are extracting to sell and the cost of managing leaks is relatively low (but not zero), the firm has a self-disciplining incentive to reduce leaks (although not eliminate them, since the cost is not zero).

In a post on the EPA report, Walter Russell Mead remarks that

Companies are developing more sophisticated leak detection systems, and unlike many other environmental problems (like, say, power plants’ greenhouse gas emissions), there is a market incentive to prevent these leaks without any sort of green interventionist policy. Every unit of methane released into the atmosphere during drilling is lost profit.

But that’s not stopping misguided greens like Bill McKibben from bemoaning the news. McKibben took this opportunity to stress the need to transition away from fossil-fuels altogether, rather than appreciating the fact that we’re extracting one of the cleanest fossil-fuels more efficiently and with much less environmental impact than ever before. McKibben’s blinders are firmly in place; we’re unlikely to see a revision to a post of his earlier this month in which he suggested that methane leakage might make natural gas worse for the environment than coal.

I’ve never found McKibben’s arguments compelling, and now I realize why: his advocacy for dramatic, fast changes does not reflect how real people in real-world, complex decisions make changes in their behavior. McKibben fails to think at the margin. He does not acknowledge that the long transition to cleaner fuels is already in process. Long transitions are typical in technological change; think about how long it took to transition from water power to steam power — 60 years! McKibben’s argument for sudden, dramatic change does not reflect economic thinking.