Europe wood. Wood you?

Michael Giberson

From The Economist, “Wood, The fuel of the future“:

WHICH source of renewable energy is most important to the European Union? Solar power, perhaps? (Europe has three-quarters of the world’s total installed capacity of solar photovoltaic energy.) Or wind? (Germany trebled its wind-power capacity in the past decade.) The answer is neither. By far the largest so-called renewable fuel used in Europe is wood.

In its various forms, from sticks to pellets to sawdust, wood (or to use its fashionable name, biomass) accounts for about half of Europe’s renewable-energy consumption. In some countries, such as Poland and Finland, wood meets more than 80% of renewable-energy demand. Even in Germany, home of the Energiewende (energy transformation) which has poured huge subsidies into wind and solar power, 38% of non-fossil fuel consumption comes from the stuff. After years in which European governments have boasted about their high-tech, low-carbon energy revolution, the main beneficiary seems to be the favoured fuel of pre-industrial societies.

Also note, “because wood can be used in coal-fired power stations that might otherwise have been shut down under new environmental standards, it is extremely popular with power companies.”

And:

But if subsidising biomass energy were an efficient way to cut carbon emissions, perhaps this collateral damage might be written off as an unfortunate consequence of a policy that was beneficial overall. So is it efficient? No.

Wood produces carbon twice over: once in the power station, once in the supply chain. The process of making pellets out of wood involves grinding it up, turning it into a dough and putting it under pressure. That, plus the shipping, requires energy and produces carbon: 200kg of CO2 for the amount of wood needed to provide 1MWh of electricity.

This decreases the amount of carbon saved by switching to wood, thus increasing the price of the savings. Given the subsidy of £45 per MWh, says Mr Vetter, it costs £225 to save one tonne of CO2 by switching from gas to wood. And that assumes the rest of the process (in the power station) is carbon neutral. It probably isn’t.

And there’s more, so read the whole thing, but you get the idea. A real case study in unintended consequences.

Europe is burning more American coal

Michael Giberson

Natural gas production is booming in the United States. The resulting low natural gas prices are helping the fuel displace other energy sources, most particularly the use of coal to produce electric power. As U.S. demand for coal falls, so has its price and as a result international coal buyers are increasingly turning to U.S. suppliers. One big buyer: Europe.

Ironies abound in this Washington Post report on growing European use of coal. The EU has elaborate and costly greenhouse gas regulations while the U.S. has failed to implement any systematic federal greenhouse gas policies. European nations like Germany, Spain, and Denmark are frequently cited as models for their support of renewable energy. And, with these policies in place, greenhouse gas emissions are falling in the United States and Europe is burning more coal. Apparently good intentions are not enough. The Wall Street Journal had a similar report yesterday: “U.S. Coal Finds Warm Embrace Overseas.”

One more point: All that “good news” about reductions in U.S. greenhouse gas emissions is mitigated a bit by tracing through the economic logic. We’ve displaced some coal consumption by increased gas consumption, but much of that coal is simply being burned in Europe or China or elsewhere. U.S. coal production has been relatively flat for two decades, but U.S. coal exports have doubled since the 2006. (See EIA data here.) So we’re cutting emissions, but there will be essentially no climate change pay-off from the cuts. This same consequence would have arisen had the U.S. shifted from coal to natural gas because of carbon taxes or an effective U.S. cap-and-trade scheme (except in that scenario we pay more for energy rather than less. Technological improvements rule!).

Mark Thoma on price gouging

Michael Giberson

At Fiscal Times, economist Mark Thoma discusses price gouging and fairness and capitalism. I hoped Thoma had provided the thoughtful defense of price gouging restrictions that John Carney was looking for. Thoma didn’t really–he had a weightier topic in mind and price gouging was just a lever he used to pry open the issue. But he covers enough on price gouging to be worth taking a look at.

With long gas lines and other shortages putting people on edge in the wake of Hurricane Sandy, the usual post-disaster debate over the economics and ethics of price-gouging is underway…

Thoma explains the usual economist’s views: extraordinary prices can motivate extraordinary supply efforts and help allocate goods efficiently, though he omits the demand side rationing benefits usually part of this explanation. Then, allowing the efficiency gains, Thoma wonders why merchants usually don’t raise prices a lot, and why we have laws against efficient responses.

Most of the explanations economists have come up with rely upon the idea of fairness. After a natural disaster, people consider food, water, even goods like gasoline a necessity, and despite attempts by economists to explain that allowing prices to rise is best, they are sensitive to two types of inequities.

First, after a disaster supplies are short, shopping around may be next to impossible, and consumers do not appreciate producers exploiting short-term monopoly power. That’s especially true when they can’t see any obvious way for the higher prices to induce more supply in a reasonable time-frame due to the post-disaster conditions. If consumers feel they are being taken advantage of at a time when they already have enough problems due to the disaster, they might decide to shop elsewhere and this could hurt future sales to the extent that firms will forego price increases.

Second, people do not consider it fair when only the wealthy can get the things they need to ease their troubles. If people have to go without because of an act of god, then everyone should share in the pain. The wealthy should not be able to corner the available supplies of goods and services that are in high demand because of the disaster.

The essay then takes this fairness issue, suggests its importance beyond emergency conditions, and concludes that the endurance of capitalism depends on institutional changes that return us to a less uneven distribution of income. Okay, maybe, but I’ll stick to commenting only on the two price gouging points.

First, it surely seems true that “consumers do not appreciate producers exploiting short-term monopoly power,” the classic citation on this issue being Kahneman, Knetsch, and Thaler, “Fairness as a constraint on profit-seeking,” American Economic Review, 1986. (KKR) Merchants, understanding this aspect of consumer behavior, often fail to raise prices to market clearing levels and shortages and queues are common results.

Of course the thoughtful economic commentator has a response: Not every consumer reacts in this same way. After all, even in the two Canadian cities that KKR surveyed by telephone for the classic article, not everyone thought it unfair of a hardware store to raise the price of snow shovels the morning after a snowstorm. And social welfare would be improved if people were more willing to allow merchants to adjust prices freely after storms.

Second, “people do not consider it fair when only the wealthy can get the things they need … everyone should share in the pain.” The idea that freely adjusting prices will mean “only the wealthy can get the things they need” is obviously rhetorical excess. The U.S. economy is mostly a place where most prices freely move almost all of the time, and yet non-wealthy people get many of the things they need every day.

Even after natural disasters, an amazing number of non-wealthy people manage to survive. Neither Maryland nor Delaware have price gouging laws, did anyone notice the wealthy snapping up all of the gasoline, canned tuna, and bottled water in those states?

And by the way, it turns out that letting prices adjust helps achieve the result that more people share in the pain. Laws prohibiting price gouging tend to keep the pain localized to just where the natural disaster struck. If the price of gasoline in northern New Jersey had shot up by one or two dollars a gallon for a few days, gasoline trucks and rail cars around the middle Atlantic states and the Northeast would have been diverted to the area. Supplies would have flowed into stations in the affected areas that had power, consumers would have eased up on their hoarding and lines would have dwindled. And, and this is the “share the pain” result that Thoma (and Michael Sandel) find important, gasoline prices around the region would have risen in response to the supply shifts.

As it happened, gasoline prices in New Jersey rose an average of about 10 cents a gallon statewide after the storm, but that wasn’t enough to motivate extraordinary responses. Notice in this chart that gasoline prices in Philadelphia (in Pennsylvania but just across the river from New Jersey) resemble prices in Pittsburgh (in Pennsylvania but 300 miles to the west), but usually Philadelphia prices share the same market twists and turns as nearby New Jersey. Whatever happened at the end of September had Philly sharing the pain with New Jerseyans. Superstorm Sandy, on the other hand, with anti-price gouging laws prominently on display courtesy of Gov. Chris Christie, saw no sharing of the pain across the river.

gasprices

The “sharing the pain” issue is examined in Montgomery, Baron, and Weisskopf, “Potential Effects of Proposed Price Gouging Legislation on the Cost and Severity of Gasoline Supply Interruptions,” Journal of Competition Law & Economics, 2007. They estimated that a federal price gouging law would have reduced the flow of goods into areas directly hit by Hurricanes Rita and Katrina and thereby left people there worse off, relatively speaking, and people elsewhere with more stuff.

Yes, maybe people would have their fairness-feelings hurt if prices rose in disaster-struck areas, but just maybe the efficiency gains (i.e., harm more effectively reduced in disaster-struck areas) are worth bruising a few feelings.

[Note: Edited for a few grammatical problems after initial post.-MG]

Anecdotal evidence on employment effects from stimulus spending

Michael Giberson

From Aguanomics:

I was talking to a friend, and he mentioned that he’d hired an extra guy under the stimulus program.

“Yeah, they are paying 80 percent of his wages and overhead. It’s a win-win for him and me…”

“…but then I fired another guy; he just cost too much compared to the new guy.”

Administration abandons airport landing slot auction

Michael Giberson

From the New York Times City Room, “U.S. Won’t Auction Airport Landing Slots“:

The United States Department of Transportation has canceled a plan to auction landing slots at New York City’s three airports, officials announced on Wednesday, bringing an end to a widely criticized effort by the Bush administration to use market incentives to reduce congestion and delays.

“We’re still serious about tackling aviation congestion in the New York region,” Transportation Secretary Ray LaHood said in Manhattan on Wednesday in remarks to the Association for a Better New York. “I’ll be talking with airline, airport and consumer stakeholders, as well as elected officials, over the summer about the best ways to move forward.” [Links in original.]

An auction would let prices help clear demand for landing slots, and would therefore reduce congestion into and out of the three New York airports that were targeted by the proposal. The administration, by avoiding auctions, chooses to continue to clear the market by making people wait instead. Since some of that waiting is done by people flying around in large jets, burning jet fuel and emitting stuff, there are environmental consequences to the administration’s status quo approach.

Just saying.

(HT to Sandy Ikeda)

“Congress didn’t intend to create SUVs”

Michael Giberson

From Two Billion Cars by Daniel Sperling and Deborah Gordon:

Ironically, it was the fuel economy standards adopted by Congress in 1975 that set the stage for the later surge of gas-guzzling SUVs and light trucks. As Congress was designing its fuel economy, safety, and emission standards, Detroit lobbied to exempt light trucks, which at the time were used mostly by businesses and farms for hauling goods and providing services. This loophole was written into law, with light trucks subject to less stringent requirements. They also were exempt from the large tax imposed on “gas guzzlers.” The light-truck loopholes were to be the industry’s savior for almost three decades. Chrysler recovered from its 1980 near-bankruptcy in part by taking advantage of those loopholes, producing the first modern minivan, a vehicle built on a truck platform but designed for family travel. Minivans became the new version of the station wagon, only “better” because they were cheaper to make and buy, thanks to the gentler energy, emissions, and safety regulations, and their exemption from the gas-guzzler tax.

Consumers flocked to these cheaper carlike trucks. The advent of the minivan was accompanied by a slow expansion of the pickup truck market and soon followed by a surge of SUVs in the 1990s. Chrysler was again the leader, building on its 1987 acquisition of American Motors Corporation and its Jeep vehicle line to pioneer the SUV market. Ford and GM followed. SUVs flourished.

I think this brief narrative puts too much emphasis on the role of Congress, and neglects the effects of rising incomes and changing gasoline prices on automobile industry developments over the “almost three decades” discussed. Nonetheless, the episode should serve as a warning to folks with grand policy ambitions about the weaknesses of piecemeal, ad hoc interventions into people’s lives.