Category Archives: Environmental policy

GMO bans and labeling laws

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Lynne Kiesling

Tyler Cowen and I have several things in common — wry senses of humor, economist sensibilities, and a strong love of interesting and well-prepared food. Those last two traits at least show up in Tyler’s post yesterday about proposals in California to label foods to indicate whether or not they contain GMOs. Tyler summarizes what for me is the material point: despite hundreds of studies over decades, no scientific evidence exists to support the argument that GMOs present a health hazard. None.

Arguments to ban or label GMOs are usually based on, as Tyler says, the “standards of evidence being applied here are extremely weak”. Having read Gary Taubes recently, and having read some sports nutrition research over the past few years, I think that’s right. Nutrition science research does not have a sufficiently high standard of proof for their hypotheses; nor does it use a combination of random trials and statistical techniques that would enable researchers to draw more than basic correlations.

Tyler’s post is worth your time in its entirety; I think he’s right that rather than expending effort on GMO legislation, California’s food activists should instead focus on antibiotics and treatment of animals, the improvement of which would have substantial and scientifically demonstrated benefits for human and animal health and for the environment.

The food-focused GMO argument, though, does not address explicitly the claimed environmental risks, such as this list from the Union of Concerned Scientists:

As discussed in the 1996 UCS-authored report, The Ecological Risks of Engineered Crops, genetically modified crops pose six kinds of potential risks.19 First, the engineered crops themselves could become weeds, a broad term that covers plants with undesirable effects.20Second, the crops might serve as conduits through which new genes move to wild plants, which could then become weeds. Third, crops engineered to produce viruses could facilitate the creation of new, more virulent or more widely spread viruses. Fourth, plants engineered to express potentially toxic substances could present risks to other organisms like birds or deer. Fifth, crops may initiate a perturbation that may have effects that ripple through an ecosystem in ways that are difficult to predict. Finally, the crops might threaten centers of crop diversity.

Although few problems of the sorts listed above would be expected to surface within the three-to-four-year time frame that the new crops have been in widespread use, the good news is that there have been no serious environmental impacts—certainly no catastrophes—associated with the use of engineered crops in the United States.

Of course, that does not mean that one can conclude that there have been no environmental effects. There may have been modest or subtle changes in animal or plant populations that are simply not dramatic enough or obviously enough connected to engineered crops to attract attention. Other than for insect resistance, there is no systematic monitoring underway in the United States to detect adverse effects of genetically modified crops.21 So much may be going on that we are simply not aware of.

To their credit, this excerpt shows the UCS doing what Tyler is encouraging food writers to do — acknowledge the science as it currently stands. In general, so far we have no evidence for harms 1, 2 or 3, although the UCS expresses continuing concern about harms 4, 5 and 6 to animals and ecosystems. Continued research on these effects makes a lot of sense.

Often lost in this debate are the benefits of GMOs, both to health and the environment: vitamin and mineral supplementation, drought resistance, reduced use of pesticides. Look, for example, at the recent Hunan trial of the revised Golden Rice formulation that now has enough Vitamin A to reduce the incidence of blindness in young children arising from Vitamin A deficiency.

The Hunan trial, conducted in 2008, was meant to determine whether a small bowl a day of genetically modified rice (called Golden because of its yellow colour) could effectively deliver enough Vitamin A to make a difference. Vitamin A deficiency is a scourge of the world’s poor (Vitamin A is contained in fruits and vegetables such as carrots, sweet potatoes and spinach). According to the World Health Organization, Vitamin A deficiency affects about a third of the world’s children under 5. It claims the lives of more than a million people a year, including hundreds of thousands of children. As many as half a million children go blind every year because they don’t get enough Vitamin A.

And yet, environmental groups like Greenpeace protest Golden Rice:

Greenpeace is campaigning vigorously to block Golden Rice trials throughout Southeast Asia. And it has lots of allies, including luminaries such as Naomi Klein and groups such as the Canadian Biotechnology Action Network, whose mission is “collaborative campaigning for food sovereignty and environmental justice.” These groups insist that what the poor really need is utopian political solutions. “Food insecurity is brought about by lack of enough land, by decreasing rice production and decreasing incomes,” says one Golden Rice opponent. “Only through a genuine land reform which ensures farmers’ access to sufficient rice and other food sources will farmers start to become healthy again.”

Utopian indeed. And in the quest for that collectivist utopia, Greenpeace and their collaborators condemn millions of children to blindness, disease, famine, and early death. How’s that for not weighing the benefits when you emphasize the risks?

Can we finally get the ethanol mandate monkey off of our backs?

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Lynne Kiesling

This summer, corn prices are high. Drought, extreme weather, and other factors combine to increase corn prices, and one of those factors is the federal ethanol mandate/renewable fuels requirement implemented over 20 years ago (as an oxygenate requirement) and extended in 2005. Roger Pielke Jr. points to a Purdue research paper that suggests that a waiver or partial removal of the renewable fuel standard could reduce corn prices by 20% or more. Posting at the Washington Post, Brad Plumer also discusses the issue, and the Purdue paper:

Currently, the EPA’s Renewable Fuel Standard requires refiners to blend a certain amount of ethanol in with their gasoline. In 2013, this will require about 13.8 billion gallons of ethanol. Since corn ethanol is the most viable form of ethanol in the United States at the moment, this creates a hefty—and fairly inflexible—market for corn. And that causes corn prices to rise higher than they otherwise would.

What would happen if the EPA relaxed this mandate? As the Purdue authors note, a lot depends on how quickly refiners and blenders could switch away from ethanol. That’s not as technically easy as it sounds—these refiners have already made preparations for blending ethanol. What’s more, under the EPA program, the producers of ethanol can carry over credits from year to year, giving them some flexibility to deal with shortages. That complicates matters further.

The study analyzes several different scenarios, varying by type of policy change and timing; as Plumer summarizes it:

In the first option, the EPA doesn’t alter its ethanol program at all. Corn prices remain elevated next year — staying around $8.57 per bushel. Under the second option, the EPA doesn’t alter its program at all, but ethanol producers use as many of their existing credits (RINS) as possible to deal with the shortage. Corn prices drop about 7 percent. In the third case, the EPA allows a little more flexibility in its rules, say, by partially relaxing the mandate or by allowing U.S. refiners to use imported sugarcane ethanol. Prices drop by about 13 percent.

Under the fourth option there, the EPA allows a fairly big relaxation of the ethanol rule next year. (A waiver this year is unlikely.) Refiners are required to use 25 percent less ethanol. And ethanol producers can carry over their credits from previous years. In that case, corn prices could drop more than 20 percent, to $6.56 per bushel. That’s about where corn prices would have been if we only had a “weak drought” this year. In other words, by relaxing the ethanol rule, the EPA could essentially turn a “strong drought” into a “weak drought” as far as prices are concerned.

Both posts are worth reading in their entirety. And from the electricity perspective, Ken Silverstein at EnergyBiz summarizes the arguments for waiving or eliminating the renewable fuels standard, and surveys the role that natural gas vehicles, hybrids, and electric vehicles can play in reducing the demand for gasoline.

This year’s drought has been painful and costly, but if in the process it leads to the demise of ethanol subsidies, boutique fuels, and the renewable fuels standard, that’s what I call a silver lining.

Obsolete boutique fuels and failure to arbitrage

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Lynne Kiesling

Andy Morriss (Univ. of Alabama Law School) and Don Boudreaux (George Mason University) have an excellent op-ed in today’s Wall Street Journal, A Coca-Cola Solution to High Gas Prices. The punch line: environmental fuel formulation regulations balkanize wholesale fuel markets and make prices more volatile as a consequence.

This is not a new phenomenon; indeed, in the mid-2000s the boutique fuel problem was the focus of a lot of attention, as well as a lot of my posts here at KP. But it’s a problem that has persisted as the regulations have persisted, despite the fact that modern pollution control technology makes fuel formulation regulations obsolete. As Jonathan Adler notes in remarking on Andy’s and Don’s op-ed,

While most of the fuel standards were adopted in the name of the environmental protection, many are actually the result of special interest pleading. Producers of various products, ethanol in particular, sought fuel content mandates or performance requirements that would benefit their particular product. (I detailed part of this history in “Clean Fuels, Dirty Air,” in Environmental Politics: Public Costs, Private Rewards (Greve & Smith eds. 1992).) Worse, some of the content requirements are irrelevant for new cars due to modern pollution control equipment. Federally imposed boutique fuel requirements have outlived whatever usefulness they ever had.

Similarly, Andy and Don point out that

By the 1920s and early 1930s, oil companies were engaged in a vigorous “octane war” to improve quality and reduce price. This competition helped transform 100-octane fuel from a chemical that sold for $25 per gallon in the early 1930s to a mass-produced commodity selling for about 25 cents per gallon a decade later. That improvement helped win the Battle of Britain by giving the Royal Air Force a performance edge over the Luftwaffe. By 1944, Standard of Indiana alone could refine 1.15 million gallons of 100-octane aviation gasoline per day, a production rate surpassing that of the entire industry before the war.

After the war, prices continued to fall as competition drove producers to improve their fuels and expand their pipeline networks. With the gasoline market becoming national, refiners gained the scale to innovate in ways that further boosted quality and cut prices. …

From the 1920s to the 1950s, competitive markets successfully drove improvements in transportation fuels while reducing prices. We need to unleash those forces again. A good place to start is by undoing the anticompetitive regulations that keep our fuel markets small and fragmented—and making the sale of gasoline once more like selling Coca-Cola.

This is a really important point. In a very important sense, fuel performance and emissions reduction objectives are aligned — the better the fuel at delivering performance and the better the engine and the exhaust system at minimizing fuel waste, the lower the emissions per mile driven and per gallon of fuel. That also lowers the overall cost of driving, which gets us back to the Jevons effect discussion of yesterday and before.

See also David Henderson’s comments on the topic at Econlog. He accurately connects the regulation-induced price volatility to a failure to arbitrage across markets, which would happen naturally if not outlawed.

More on rebound, backlash, and the Jevons effect

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Lynne Kiesling

Back in July and also a couple of other times over the past two years, Mike has written here about the Jevons effect — when an increase in energy efficiency reduces the per-unit cost to the consumer of doing the energy-consuming action, moving her down along her energy demand curve and increasing her quantity consumed. This fascinating and nuanced issue, like so many things in energy policy, is a real phenomenon, but a very dynamic one. How big is the Jevons effect; how much of a rebound will there be from a given increase in energy efficiency? Paraphrasing Jevons’ neoclassical successor Alfred Marshall, answering that question starts from a comparative statics-partial equilibrium analysis, but ceteris is never paribus, so the model you use is likely to be wrong, and you’ll have a hard time capturing the actual dynamics accurately because the underlying system you are trying to model is not just complicated, but also complex (i.e., non-linear and non-deterministic).

The size of the rebound depends, among other things, on the price elasticity of demand for the energy (typically thought to be pretty inelastic), but the demand for energy is always a derived demand, so it depends on the demand for the goods and services into which the energy is an input. So, say, if I’m going to drive 10 miles a week no matter how much I spend per week on gasoline, an increase in energy efficiency will not have a rebound effect from my behavior because it’s not going to change. To complicate matters further, though, my demand for those goods and services is a function of both substitutes and complements, and is a function also of the context in which I am making my consumption choices. So at the margin the reduction in the per-mile cost of driving may, at the margin, induce me to drive slightly more because then I can group my errands more efficiently, weighed against the other alternative ways that I might be able to achieve what I want to achieve (in the case of transportation, alternatives like bus, train, bike, walking, scooter, etc.). Those preferences are sure to be quite heterogeneous across a diverse population, as are time preferences and discount rates, which can also change in a highly distributed way as people change their behavior based on their expectations of future environmental harm from current energy consumption. Plus, ceteris is never paribus in the sense that other technological and energy efficiency changes are likely to be occurring simultaneously with the one you are trying to isolate, which will confound the analysis.

But I digress (sorry). Like Mike, I’ve been thinking about the Jevons effect and have read Jevons, although I have not yet read The Myth of Resource Efficiency: The Jevons Paradox yet. A couple of weeks ago I also discussed the new Gayer and Viscusi paper from Mercatus on the consumer irrationality hypothesis and whether energy efficiency regulations actually do benefit consumers. Mike and I aren’t the only ones; Ken Green at AEI also took note of some Jevons effect work (referencing the Breakthrough Institute work that Mike mentioned in his most recent post on this) and the Gayer and Viscusi work on consumer irrationality, thinking of those two issues as pervasive fallacies in energy policy.

And then in this morning’s Wall Street Journal, Robert Michaels takes on the rebound effect in a short opinion piece, The Hidden Flaw of ‘Energy Efficiency’. In this piece, which draws on his recently-released Instituted for Energy Research study, The Rebound Dilemma, Michaels analyzes the direct and the indirect effects of energy efficiency mandates:

Higher efficiency reduces the cost of cooling. A family that once had only a single air-conditioned bedroom may now choose to install a central unit, and one that suffered in the heat may purchase its first one. Direct rebounds like these, however, are only the start of the story.

Technology that improves energy efficiency and reduces its cost means people can consume more goods and services that use energy—home electronics, appliances and the like. And of course, businesses will use additional energy making them.

One reason why I think research and debates are important on complex effects like the Jevons effect is that too often, energy efficiency mandates are naively offered up as a cost-effective way to reduce energy use, and therefore to reduce greenhouse gas emissions. We’re fooling ourselves (or, as Ken notes in his post, suffused with fatal conceit) if we think that such effects and relationships are going to be so straightforward and yield the desired outcomes predictably and reliably.

In the context of Mike’s earlier posts, I think Bob’s conclusion fits right in:

Rebound gives critics of regulation both philosophical and practical rationales for their views: Some object to efficiency standards on libertarian grounds and rebound research now tells us that many standards will fall short of their initial promise. But for the Breakthrough Institute in Berkeley, Calif., which gives primacy to climate change, rebound increases the urgency of introducing large-scale governmental management of both markets and technologies.

The growing body of research on rebounds means that both the left and the right must rethink their stances on energy policy. Some efficiency regulations may be worth their costs, but the existence of rebound means that the nation can no longer accept legislation to improve efficiency without further thought.

To that I would add another recommended reading: Richard Epstein’s Simple Rules for a Complex World.

An Invisible Hook Q&A, and other items of interest

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Michael Giberson

At the Freakonomics blog, a Q&A with Peter Leeson about his book The Invisible Hook. Here is the first exchange:

Q.The Invisible Hook is more than just a clever title. How is it different from Adam Smith‘s invisible hand?

A. In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively.

The Q&A provides an excellent short introduction to the book. The book itself is highly recommended (my MBA class will be reading a portion of it).

Also at Freakonomics, “The birth of the ‘Chicken Offset’.” If you’d like a little more philosophical provocation with your fried chicken, consider Will Wilkinson’s “Feathers Flying: Conscientious consumption and culture war” at The Economist.

Elsewhere around the web:

Gayer & Viscusi: Energy efficiency regulations, the environment, and consumer sovereignty

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Lynne Kiesling

Ted Gayer of the Brookings Institution and Kip Viscusi of Vanderbilt University have a new Mercatus working paper that is a careful and thoughtful critique of the rationale, the methodology, and the outcomes of federal energy efficiency regulations. Using standard Pigouvian externality theory, most environmental regulations are based on the “market failure” rationale that individual actions create unaccounted-for and uncompensated costs. Gayer and Viscusi begin their argument with the claim that such a rationale for regulation is indeed valid, to the extent that such costs exist. It also matters whether or not those costs are relevant at the margin — would imposing a tax for a cost or a subsidy for a benefit change the individual’s actions in ways that would account for the externality? If not, then it’s an irrelevant externality.

In the case of a relevant externality, we use benefit-cost analysis (BCA) to evaluate policy proposals that are intended to move from the existing outcome toward a more efficient outcome by changing individual incentives and choices. Gayer and Viscusi provide a clear, succinct summary of BCA’s analytical framework. Much of their subsequent argument hinges on something important that they point out early in the paper: while it’s possible that individuals don’t fully take into account the effects of their actions on others, we still assume that the individual is in the best position to evaluate the likely net benefits they will obtain across a range of alternatives. I’ve phrased this statement of rationality quite generally — it doesn’t require full information, nor does it require perfect foresight. All of the rationality that is required to support the consumer sovereignty at the core of BCA is that the individual is better positioned than any other person or set of persons to perform that evaluation.

Here’s where the Gayer and Viscusi analysis is very useful, because from here they open up a critique of how regulatory agencies use the consumer irrationality interpretations of behavioral economics as a further rationale for regulation. This is common practice, and one that I find analytically unacceptable. Moreover, I think it’s common practice in energy policy analysis to conflate the “market failure” argument and the “consumer irrationality” argument; for example, several years ago I attended a talk in which the author took the empirical finding that consumers have high discount rates for vehicle fuel savings (typically they value three years worth but not beyond), and he labeled that fact as a “market failure”! To this day I wish I had challenged him on that false conflation.

This sovereignty/irrationality point is a crucial core of the normative arguments and justifications for legitimate policies and regulations, and it’s an argument that isn’t well-made often enough. Gayer’s and Viscusi’s contribution here is important. They note that

If BCA abandoned the presumption of consumer sovereignty and replaced it with another  assumption about the systematic behavior of consumers, it would lead to the normative implication that the analyst or policymaker decides what is best for each consumer. Given the informational and analytical challenges of finding behavioral failings among heterogeneous individuals, this is a tall order for any analyst or policymaker, especially given that they are also prone to information and behavioral failings. A principal theme of Viscusi’s book, Rational Risk Policy, is that government regulators often institutionalize individual irrationality because policymakers are human and because the pressures exerted by their constituencies push policies in directions away from rational norms. (pp. 7-8)

Here Gayer and Viscusi argue in the spirit of robust political economy — humans have cognitive limitations both in their individual decision-making and in the institutions they design and the political/policymaking roles they perform. Their analysis in this paper presents an argument, and provides supporting evidence, that individual sovereignty should remain our analytical standard in the BCA methodology that regulatory agencies implement to evaluate policies. As they state, this standard implies that

A shift away from the principle of consumer sovereignty will also lead to regulations focused more on correcting self harm than on internalizing environmental harm. For example, it would place greater weight on regulations that ban energy-inefficient products than on regulations that raise the price of pollution. … Therefore, the burden of proof for any BCA conducted as part of a review of regulatory proposals should be placed heavily on justifying any presumption of a deviation from consumer sovereignty. The agency preparing the BCA needs to demonstrate a systematic deviation from consumer rationality rather than just presuming that the regulator is better equipped to make decisions that protect individuals from themselves. (pp. 8-9)

They then evaluate four specific applications of energy efficiency policies designed to close the “energy efficiency gap” — the high discount rate implicit in the tradeoff facing consumers between near-term capital costs of energy-efficient devices and longer-term energy savings (as in the example I alluded to earlier). In evaluating energy efficiency regulations for vehicles (CAFE standards), room air conditioners, clothes dryers, and incandescent light bulbs, they examine both the academic literature and agency analyses to see whether the regulations internalize environmental harm or correct self-harm, to use their language.

Their analysis of agency (and, by implication, national lab) studies shows a recurring pattern of emphasis on engineering analyses that compress the treatment of consumer benefits into energy-efficiency-focused dimensions and ignore other aspects of consumer preferences. For example, in performing vehicle analyses, regulatory studies will incorporate data on the transportation function of the vehicle, fuel costs, and the energy efficiency of the vehicle. Omitted from the analyses are variables like comfort, number of seats, volume of cargo capacity, mortality statistics and safety ratings, maintenance ratings and costs, and performance variables such as acceleration. Omitting these variables from the analysis implies that the agency’s policymakers do not believe that such variables should factor in to consumer technology choices, and that energy efficiency is the most important variable. Gayer and Viscusi argue that agencies should make that argument based on evidence of external costs and market failure, and not based on arguments that policymakers know better than individuals what choices are most in their self interest.

My summary does not do their argument justice; the entire paper is well worth your time. Mercatus has also generated some policy briefs to accompany this longer paper: this four-page policy brief that summarizes the analysis, and this graphic that illustrates their estimate of the effects of energy efficiency regulations. If the purported objective of energy efficiency regulations is reducing environmental harm, this analysis suggests failure.

 

I would add another arrow to their analytical quiver. Taking as given the cognitive limitations of humans and the evidence we see from behavioral economics, which institutional framework is more likely to lead to more efficient error correction? If their analysis is correct and most of the outcomes of energy efficiency regulation are “protection from self-harm” and not reduction in environmental harm, what’s the most effective means of enabling individuals to correct those errors? Imposition of choice-restricting regulations is less likely to do so than either market processes or, in the cases where the “self-harm” results from incomplete information, regulations that focus instead on providing clear information and comparisons of the effects of different alternatives.

 

Losing the race to sound conclusions on the Production Tax Credit

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Michael Giberson

When I worked on public policy issues in Washington, DC, I used to read the National Journal. It tended a bit toward Washington-establishment thinking, but at least it gave evidence of thinking. Now much farther from the daily fray, I only occasionally come across the National Journal, and usually just the so-called Energy Experts Blog. I’m less impressed with the National Journal than I used to be.

Recently they’ve posted a bundle of energy “experts” on the production tax credit. I mentioned the other day that one of the “experts” thought the PTC paid $2,200 per megawatt (actually it pays $22 per megawatt-hour). I just noticed another “expert” reporting that the PTC is set to expire at the end of 2013 (oops, off by 365 days). I guess we’re getting raw, unvarnished expertise on the Energy Experts Blog, nothing subjected to the indignities of editorial review.

But worse than these little slip ups is the general lack of depth to many of the arguments. For “Ms. 2013,” who works for the Pew Clean Energy Program, whether or not we continue the Production Tax Credit is apparently about being at the top of the world in building “clean energy.”

Really? This is your policy criteria? Whether we can wear the “#1 Clean Energy Nation” T-shirts and wave the big “We’re #1″ green energy foam fingers? I thought these kinds of public policy decisions should be informed by considerations of costs and benefits, not a bunch of cheesy cheerleading routines.

Quoted, so you can see what I’m talking about:

In 2011, for the first time in several years, the United States led the world by investing more than $48 billion in clean energy. The clean energy sector represents one of the fastest-growing industries globally, with investment increasing more than 600 percent between 2004 and 2011 (excluding research and development).

We’re in danger of losing our place at the top, however. To maintain our lead amid fierce international competition and to continue to attract private capital, there must be policy certainty. While other nations have national policies to encourage the adoption of clean energy, we rely on a patchwork of state policies and cyclical federal tax incentives, one of the most important of which is to end in a year.

The production tax credit (PTC) is an effective tool to keep electricity prices low and encourage the development of proven clean energy projects. While not large–about 2.2 cents per kilowatt hour–it gives American businesses the certainty they need to continue to invest, build, and deploy. But it’s set to expire at the end of 2013. Uncertainty about whether Congress will act to extend the PTC has already resulted in a sharp drop in investments in wind energy production, threatening the livelihoods of the more than 78,000 people nationwide who are in wind-supported jobs.

When Congress has allowed the PTC to expire in the past, wind installations declined by 73 to 93 percent.

“Wind-supported jobs”? Funny phrase, given the context. Apparently they are 73 to 93 percent tax-break supported jobs. The wind-supported jobs are the ones that would be left in the business after the tax break goes away.

The rebound effect: the ACEEE strikes back

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Michael Giberson

The significance of the “rebound effect”  remains a matter of some debate. (The rebound effect is the frequently observed tendency for energy efficiency improvements to increase consumer use of the now more efficient good or service).

Recently the Institute for Energy Research published Robert Michaels’s survey of rebound effects. In the study, Michaels concluded:

Properly accounting for the impact of rebounds is essential to obtaining an accurate picture of how the efficiency policy in question may impact consumption levels, and will also better inform the cost-savings estimates associated with decreasing consumption.  Improving the accuracy of cost-savings estimates will allow policymakers to better evaluate whether the benefits of energy efficiency programs outweigh the problems associated with limiting the choices available to consumers.

This would be a matter of mere technical interest among energy policy economists but for conservation advocates who have seized onto engineering efficiency regulation as a key public policy tool to promote resource conservation. One such group of conservation advocates, the American Council for an Energy Efficient Economy, has produced its own survey of the efficiency and rebound literature. In announcing the study, ACEEE said:

… we found that there are both direct and indirect rebound effects, but these tend to be modest. Direct rebound effects are generally 10% or less. Indirect rebound effects are less well understood but the best available estimate is somewhere around 11%. These two types of rebound can be combined to estimate total rebound of about 20%. We examined claims of “backfire” (100% rebound), but they do not stand up to scrutiny. Furthermore, direct rebound effects can potentially be reduced through improved approaches to inform consumers about their energy use in ways that might influence their behavior. And indirect rebound effects, which appear to be linked to the share of our economy that goes to energy, may decline as the energy intensity of our economy decreases.

Efficiency policy often gets treated as a “win win win” type of policy, which accounts for some of its popularity as a conservation tool. The public gets a reduction in any externalities associated with the production and consumption of the resource, more resources are left in the ground for future generations, and the consumers get more bang for their resource buck. Rebound effects cut into the first two effects, and whether consumers actually get more bang for their buck depends on the cost of the efficiency improvements and the degree to which consumers prefer to save some money now over more money later. The reason efficiency policy advocates want to push back against rebound is that recognizing even modest rebound effects can substantially tilt cost-benefit analysis against energy efficiency policies.

As mentioned in prior posts on rebound effects, the Breakthrough Institute and the Rocky Mountain Institute have dueled on the issue as well.

The fraying of support for wind power’s PTC subsidy

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Michael Giberson

The coalition in support of  wind power’s Production Tax Credit has always had a bit of a “Baptists and Bootleggers” flavor: environmentalists making a clean and green argument in favor of wind power and the multinational wind power development corporations funding the political muscle needed to get things done. The coalition has proven durable even as wind power took a few environmental hits, but now the business side of the coalition is beginning to fray. The Production Tax Credit will expire at the end of 2012 unless Congress acts to extend it.

One example: The Chicago Tribune reports that Exelon Corp., a large electric power company that owns a significant amount of wind power and a member of the American Wind Energy Association, is opposing efforts to renew the tax credit (reg. required).

“The (production tax credit) has been in place since 1992, I believe,” Exelon Chief Executive Christopher Crane said in a conference call with investors and analysts Wednesday. “And I think that’s enough time to jump-start an industry, 20 years.”

The economic logic behind Exelon’s position is clear: ”with nearly half of its profits coming from its nuclear fleet and low-cost wind power cutting into its margins, Exelon is in Washington leading a fight to kill a tax credit the wind industry says is crucial to its survival.” Note that “low cost wind power” is referring to the low marginal cost of production, not the total cost per MWh of energy produced. Most of Exelon’s generating assets are in markets with energy prices driven toward the marginal cost of production, and additional wind power in these markets tends to push average prices down.

It isn’t just the nuclear fleet that sees its profitability pushed down, either. Wind on wind competition is also becoming an issue. If additional wind power comes online near existing wind power, it naturally produces more output at the same time that existing wind power plants produce more output. The profit-suppressing effect of new wind is thereby intensified for existing wind assets.

Wind power project owners contemplating PTC extension have to weigh the benefits from anticipated new projects against the price suppressing consequences for their existing wind power and other generation assets. It is a cost-benefit weighing that is increasingly turning against continued support for the PTC among owners of wind power assets. Of course, on the other hand, manufacturers of wind power turbines and towers, and those developers who build but don’t own wind power projects benefit only from the construction of new projects. Wind power coalition dynamics should see these players taking a bigger and bigger role over time.

The Chicago Tribune article contains more good stuff. They found someone willing to claim that wind power needs the subsidy because it is “on the cusp of seeing real price declines,” and “In three to five years wind energy will be cost competitive … without the subsidy.” The claimant doesn’t explain why we shouldn’t just wait three to five years and build wind power when it is actually competitive.

(Research efforts do seem to be making progress in improving wind power productivity. That progress justifies maybe a few million dollars for continued research, not a few billion dollars to build more not-quite-cost-competitive wind power projects now.)

Other Production Tax Credit news and commentary:

 

Minnesota Supreme Court rules pesticide drift is not a trespass, but might be a nuisance

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Michael Giberson

The Minnesota Supreme Court ruled today that pesticide drifting across property lines onto an organic farmer’s crop does not constitute a trespass under state law. The court dismissed the trespass claim as well as accompanying claims asserting nuisance and negligence under laws that govern organic farming. The organic farming laws regulate what a producer can apply to his own crop, but not what may drift onto the crop from elsewhere. However, the court ruled that additional nuisance and negligence claims not grounded in the organic farming laws could advance, and that portion of the suit was remanded to a lower court for further action. The case is Johnson v. Paynesville Farmers Union Cooperative Oil Company.

The case has become somewhat noteworthy within the organic farming community as an effort in which a small organic family farmer is battling against big, conventional agriculture. (Example.)

We’ve been following it more for its potential as an example of Coasian-style clarification of property rights, which done well can promote efficient resolution of such conflicts. The case might, eventually, bring clarity to the property rights held by neighboring farmers with respect to unwanted pesticide drift in Minnesota. Whether it does bring clarity will depend on what the lower court now does with the Minnesota Supreme Court’s ruling.

NOTES: We have discussed the case here before, Lynne with Coase, legal liability, and pesticide drift) and me with A Coasian look at pesticide and genetic drift). Additional background information available at those links. You can view the supreme court hearing in the case, from February 2012, at this link.