Finally, a real world example of how benefit-cost analysis should be used in practice. Alberta takes the revenues that represent a portion of the society wide benefits and distributes those to the losers from the policy change. Economists have almost always ignored the problem of how to compensate losers in changes in social policy, and of course those who keep losing increasingly oppose any more policies. Instead of dreaming up ways to invest carbon market revenues in whiz bang solutions, we first need to focus on who’s being left behind so they are not resentful, and become a key political impediment to doing the right thing.
I follow Matthew Kahn’s, USC economics chair, blog posts. He expresses a libertarian view. He also writes about climate adaptation. He makes an important point that civilization is not static and we will be able to adapt the human ecology to a range of climate change. But his latest post on how climate change might affect marathon performances raised an important issue for me.
Kahn fails to acknowledge that adaptation to small, incremental climate change is not the concern. It’s the large, catastrophic changes with unknown (and unknowable) probability–deep uncertainty–that is of concern–collapsing ice sheets or ecosystems. He is not addressing the problem of what happens if the climate passes a tipping point. These types of articles and blog posts produced by Kahn and his colleagues trivialize the real risks and consequences, as though we’re just trying to adapt to a change in the weather while ignoring the potential systemic changes.
Wine Country wildfires may have been caused by PG&E electrical lines.
PG&E proposed to the California Public Utilities Commission in an ex parte meeting with a Commissioner that ratepayers rather than shareholders should bear the liability costs from the Wine Country fires. This is part of a larger pattern where the investor-owned utilities have pushed off procurement and management risks onto ratepayers. Yet, the IOUs continue to ask for investor returns that reflect much higher shareholder risks at 14% pre-tax.
If ratepayers are not getting the single most important benefit from investor-owned utilities–that is risk insurance–then it may be time to consider cutting our the middleman–the shareholder–and just go with public ownership. In the end, it looks like there will be no real differences in costs and risks, and we are no longer unduly enriching the wealthy who hold shares in the utilities.
The Vogtle nuclear power plant cost is projected to balloon to more than $12,000 per megawatt. In a study we did for the California Energy Commission in 2009, even at $4,000 per megawatt, nuclear power was uneconomic. This explains why nuclear power is not taken seriously as a solution to reducing greenhouse gas emissions.
Source: Vogtle nuke cost could top $25B as decision time looms | Utility Dive
Bjorn Lomborg, a Danish political scientist who has pushed for focusing spending on other pressing world needs over reducing climate change risk, has criticized the extension of California’s cap and trade program in the LA Times. I found two serious flaws in Lomborg’s analysis that undermine his conclusions.
The study that Lomberg cites about the electricity market impacts has not been reproduced since such extensive “contract reshuffling” can’t occur in the Western Electricity Coordinating Council (WECC) region or in the CAISO market. That’s just a simplistic modeling exercise not tied to reality. The fact is that thousands of megawatts of coal plants are retiring across the WECC at least in part in response to the cap & trade and renewables portfolio standards (RPS) adopted by California.
And then Lomberg writes “A smarter approach to climate policy — and one befitting California’s role as one of the most innovative states in the country — would be to focus on making green energy cheaper. ” Has Lomberg noticed that new solar and wind installations are now cheaper than new fossil-fueled plants? Contracts are being signed for less than 5 cents per kilowatt-hour–PG&E’s average cost for existing generation is close to 9 cents.
It’s as though Lomberg hasn’t updated his understanding of the energy industry since 2009 when the Copenhagen climate accord was signed.
I believe that California’s passage of the extended cap and trade program was a generally good compromise. Most importantly, it decoupled the cap and trade market from separate legislation to regulate local emission impacts. As I wrote earlier, earlier proposals failed on this aspect.
Here’s the two best analyses I’ve seen so far, one legal and the other economic (by a former Michigan classmate), of the legislation.
I follow Matthew Kahn, now at USC, post on June 30 about the how the “Lucas Critique” undermines a recent study forecasting how counties across the U.S. might be affected differentially by climate change. Quoting the New Palgrave Economic Dictionary, “The ‘Lucas critique’ is a criticism of econometric policy evaluation procedures that fail to recognize that optimal decision rules of economic agents vary systematically with changes in policy.” In other words, individuals within the economy are able to anticipate changing events, including government decisions, and can mitigate the impacts of those events when compared to continuing with the status quo. Kahn puts great faith in the Chicago School premise that individuals can readily adapt to all conditions without government or collective decisions.
However, Kahn ignores two important points. First, he misses the distributional focus of the study, and instead focuses on the overall efficiency gains from the net changes. That’s not the point of the study. We can see on example that land can’t be moved from one county to another, so landowners can’t adapt in anticipation of climate change without significant investment to protect their land. Homeowners will lose value in their homes, and others will find their asset value stranded. Sure, the overall economy will adapt and certain counties may gain enough to offset those losses, but residents within the net loss counties will be worse off. Economics for too long has focused solely on net gains without parsing the impacts and considering how to manage better outcomes for the losers. (I see this failure as one aspect of dissatisfaction driving Trump voters–which brings me to my second point.)
And second, if the Lucas Critique was truly valid, coal miners in Appalachia would have long abandoned their towns as they saw the decline of coal, and the need to satisfy West Virginia coal miners would not be driving national policy today. Instead, we see that people are myopic and these changes are likely to have significant consequences.