That article has several errors and is misleading in others aspects. First, California’s electricity rates are high because of the renewable contracts signed nearly a decade ago when renewables were just evolving and much higher cost. California’s investment was part of the reason that solar and wind costs are now lower than existing coals plants (new study shows 75% of coal plants are uneconomic) and competitive with natural gas. Batteries that increase renewable operations have almost become cost effective. It also claims that reliability has “gone down” when in fact we still have a large reserve margin. The California Independent System Operator in fact found a 23% reserve margin when the target is only 17%. We also have the ability to install batteries quickly to solve that issue. PG&E is installing over 500 MW of batteries right now to replace a large natural gas plant.
For the rest of the U.S., consumers will benefit from these lower costs today. Californians have paid too much for their power to date, due to mismanagement by PG&E and the other utilities, but elsewhere will be able to avoid these foibles.
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.
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 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.
It’s not environmental regulation now that is leading to the demise of the coal industry–it’s the cheaper cost of alternatives. Rather than “bring back coal mining jobs,” we should focus on how we retrain and relocate those displaced workers. And we need to look for new industries that may thrive in “coal country.”