Tag Archives: greenhouse gases

Citigroup climate risk study part 2 – stranded assets

3 Replies

The CitiGPS study makes a unique contribution to the climate change risk literature: reducing GHG emissions will lead to stranded investment assets. These assets include both fossil fuel holdings and the equipment that uses those fuels. Protecting those investments is at the heart of much of the resistance to addressing climate change risk.  Removing political barriers is probably the single greatest difficultly in moving to implement policies to mitigate this risk; many policy proposals are at the ready so there’s no lack there. Given the apparent urgency of acting, perhaps it’s time to ask the question whether these asset owners should be compensated by those who will benefit directly, i.e., the rest of us? 

What’s behind the reluctance of political actors to propose this type of solution is the belief in the underlying premise of benefit-cost analysis. Economists have unfortunately perpetuated a misconception on the public that so long as total societal benefits exceed costs, a policy is justified even if those suffering those costs are not compensated for their losses. The basis of this is the Kaldor-Hicks efficiency criterion. In contrast, market transactions are presumed to only occur if both parties gain through Pareto efficiency--one party fully compensates the other one for the transaction. Public policy now casts aside this compensation requirement. Unfortunately this leads to significant redistribution impacts that are too often left unexamined. And of course, the losers resist these policies, with a ferocity that is accentuated by both loss aversion (where potential losses are felt more strongly than gains) and that these losses are usually concentrated among a smaller group of individuals than the spread of the benefits.

Too often public agencies are running over these interests to push for societal benefits without compensating the losers. A recent example that I was involved with was the adoption by the California Air Resources Board of the in-use off-road diesel engine regulations. CARB mandated the premature scrappage of construction equipment that had been purchased to comply with previous regulatory mandates from CARB and the US EPA. CARB claimed societal air quality benefits of $13 billion at the cost of $3 billion to the construction industry. Yet CARB never proposed to pay the owners of the equipment for their lost investments. GHG regulation is proceeding down the same path.

If the benefits truly justify adopting a policy, and GHG reductions certainly appear to meet that criterion, then society should be willing to compensate those who made investments under the previous policy environment that endorsed those investments. Certainly there’s questions about whether those investors truly had property rights in the resources they used, but that issue should be addressed directly, not as an implicit assumption that no such property rights ever existed. (This question about property rights has been raised in regulating California’s water use.) Too often policy proponents conflate a goal of an improved environment with goals to redistribute wealth. By jumping over the property rights question, wealth also can be redistributed implicitly. Societal equity issues are important, but they shouldn’t be achieved through backdoor measures that make all of us worse off. Requiring politicians and bureaucrats to consider the actual cost of their policy proposals will make us all better off, and maybe even remove obstacles to a better environment.

Legal Planet: California Supreme Court to review San Diego SB 375 climate change ruling

Leave a reply

I blogged earlier on the implications of this case. The UCLA/Boalt Law Schools blog Legal Planet has more on this review.

Focus on uncertainty and risk in climate change

Leave a reply

Unfortunately Alex Epstein, a blogger at Forbes, takes the wrong perspective–an underlying premise that we need absolute certainty that climate change is occurring before we should act. (And equally unfortunately, environmentalist argue that catastrophic climate change is occurring with absolute certainty to defend policy initiatives.)

The correct perspective is to ask “what are the relative risks and consequences posed by potential climate change?” Can we say with absolute certainty that GCC is not and will not occur? No, we have strong evidence that warming has occurred (although the rate can be disputed) and that various local climates have measurably changed (e.g., glaciers receding). As an analogy, would anyone argue that we shouldn’t take measures to reduce forest fire risks to communities even if fires aren’t burning nearby? We know that such fires are a strong risk, and we ask what actions are sufficient to reduce the risks while still achieving other objectives. We should be asking the same questions regarding responses to potential climate change.

Steve Moss and I wrote about this perspective in 1999 in Chapter 2 of this report. (Note that we did not coauthor the other chapters. Chapter 3 about the economic consequences of using carbon taxes to replace other tax revenues in particular is simply wrong.) Economists have evolved methodologies beyond the simple approach we presented there, such as robust decision making (RDM), real options analysis and “fat-tailed” uncertainty benefit-cost analysis. We face a great deal of uncertainty in many dimensions. We need to conduct more complete analyses that assess the potential costs and benefits under uncertainty–i.e., measure the risk of relative actions and non actions.

Simply having a battle over which scientists are correct is fruitless and distracts us from the real question at hand. Let’s agree that a large plurality of scientists have posed a plausible case for human-induced climate change, even if there are doubts about the potential magnitude and consequences. Then we can move on to what are the range of potential consequences and the justification for various responses.

SANDAG, Executive Orders and California Policies

1 Reply

In a rather earthshaking ruling, California’s Fourth District Court of Appeals ruled that the San Diego Association of Governments (SANDAG) must comply with the Governor Schwarzenegger’s Executive Order S-3-05 to “by 2050, reduce GHG emissions to 80 percent below 1990 levels.” SANDAG had completed its 2050 Regional Transportation Plan using AB 32 as its primary compliance hurdle. AB 32 “requires California to reduce its GHG emissions to 1990 levels by 2020.” SB 375 required that metropolitan planning organizations (MPOs) such as SANDAG develop sustainable community strategies (SCS) that reduce GHG emissions by an amount allocated by the California Air Resources Board to each MPO.  SANDAG’s RTP is its SCS.

This is the first time that an EO has been held at legally binding on local agency actions. Governors have issued plenty of EOs before but they’ve been taken as providing policymaking and rulemaking guidance to the Governor’s appointees in various agencies. This decision raises the question whether those other EOs will now carry much more weight? And if governors issue conflicting EOs, which one is currently in force? What if an EO conflicts with state law passed by the Legislature?

On climate change, governors have issued seven such EOs. The Governor recently issued an EO calling for substantial water use reductions in the drought. Is the EO from 2008 still in force?  The Energy Action Plan EO from 2004 calls for several specific actions by state agencies, many of them undertaken but necessarily on the timeline specified. Should the 33% renewable portfolio standard (RPS) be implemented along the lines of state law or the EO? A bit of research could show many more of these types of examples.

SANDAG is appealing the decision the State Supreme Court. How various interests align will be interesting.

RFF: Seminar 12/3/14 on China’s cap & trade pilot programs

Leave a reply

I had not realized that China has been running 3 pilot cap & trade projects. Resources for the Future is hosting a seminar/webinar December 3 exploring China’s efforts:

http://www.rff.org/Events/Pages/Carbon-Cap-and-Trade-in-China.aspx

Understanding the Challenges of Modeling AB 32 Policy

1 Reply

A summary of the review of the AB 32 Scoping Plan we conducted in 2008 for EDF.

clotworthy's avatarEnvironmental & Energy Valuation News

The Aspen Environmental Group, M.Cubed for Environmental Defense / by Richard J. McCann
http://www.edf.org/documents/8902_AB32%20EconModeling%20M3%20final.pdf (full report)
http://www.edf.org/documents/8901_AB32%20AspenEnv%20Modeling%20PolicySum.pdf (summary)

[From press release] A new study released today concludes that state-of-the-science economic models, including those used for the California Air Resources Board’s economic analyses of California’s Global Warming Solutions Act (AB 32), are not capable of simulating the fundamental changes in California’s economy that AB 32 measures are likely to cause. While critics of ARB claim that costs might be underestimated, this new study shows that many benefits also are not represented by models and more modeling isn’t as useful as consideration of lessons from prior policies and economics literature.

The study is timely because CARB will vote on the Proposed Scoping Plan to implement the Global Warming Solutions Act of 2006 (AB 32) on December 11, less than a week away.

In the new study, Dr. McCann reveals that current techniques…

View original post 60 more words

Identifying the barriers to transportation fuel diversity

Leave a reply

Tim O’Connor of EDF writes about the benefits of transportation diversification at EDF’s California Dream 2.0. I think that fuel diversity is a useful objective, but achieving that will be difficult due to the network externalities inherent in transportation technologies. Gasoline and diesel vehicles became dominant because having single-fuel refueling networks is more cost effective for both vendors and customers, and reduce the search costs for drivers to find those stations. Think of how many fueling stations someone might have to pass to reach their particular energy source. Investing in a particular fuel requires a certain level of revenue. Note how many local gas stations have closed because they didn’t have enough sales.

For a more recent example, we can look at cell phone operating systems. Initially each manufacturer had their own system, but now virtually all phones are driven by two systems, Android and iOS, while Windows 8 keeps trying to make inroads.

We need to be very aware of the fueling network economics when pushing for new transportation energy sources. Investing in a system is as much a set of business decisions as a policy decision. One approach might be to focus on using particular fuels in a narrow set of sectors and discourage broad sector-wide use. Another might be to use a geographic focus and to set up means of interconnecting across those geographies.

Repost: Californians Can Handle the Truth About Gas Prices

1 Reply

Sev Borenstein writes about the two sides of the argument on whether transportation fuels should be rolled into the cap-and-trade program in January 2015.

I have an observation that that has only been alluded to indirectly in the debate. The main point of the legislators’ letter calling for a delay in implementation is that low income groups may be particularly hit. The counter argument that we need the inclusion of transportation fuels under the cap to incent innovation seems to pit the plight of the poor against the investment risk of wealthy entrepreneurs. We haven’t really done a good job of addressing affordability of the transformative policies that can change GHG emissions. The proposal to use carbon tax revenues to rebate to low income taxpayers has been floated at the national level, but of course that died with the rest of the national cap and trade proposal. A similar proposal was made to mitigate electricity price impacts.

Our state legislators are rightfully concerned about the impacts on those among us who have the least. Nevertheless, that problem is easily addresses with the tools and resources that are already available to the state. Those families and households who now qualify for the CARE and FERA electric and natural gas utilities rate discounts can be made eligible for an annual rebate equal to the average annual gasoline consumption multiplied by the amount of the GHG allowance cost embedded in the gasoline price. This rebate could be funded out of the state’s allowance revenue fund. For example, if the price is increased by 15 cents per gallon and the average automobile uses 650 gallons per year, an eligible household could receive $97.50 for each car.

About 30% of households are currently eligible for CARE or FERA. On a statewide basis, the program would cost about $650 million, which is comparable to the cost for CARE for a single utility like PG&E or Southern California Edison. Those legislators who are most concerned can coauthor legislation to put this program in place.

(BTW, I think the DOE fuel use calculator is outdated–on my many trips to LA I haven’t seen these types of fuel economy changes. My average MPG is pretty much the same no matter how much traffic there is on I-5.  But that’s just a fun fact aside…)

Making Community Solar Gardens Work

13 Replies

California has been quite successful at encouraging the development of (1) large utility-scale renewables through the renewables portfolio standard (RPS) and other measures and (2) small-scale, single structure solar generation through the California Solar Initiative (CSI) and measures such as net energy metering (NEM).  However, there have been numerous market and regulatory barriers to developing and deploying the “in-between” community-scale and neighborhood-scale renewables that hold substantial promise.

Community-scale and neighborhood-scale distributed generation (DG) includes some technologies that simply are not cost-effective at the small scale of a single house or business, but are not large enough to justify the transaction costs of participating in the larger wholesale electricity market.  These resources, such as “community solar gardens”, can meet the demands of many customers who cannot take advantage of adding renewables at their location and can also reduce investment in expensive new transmission projects. Examples of these types of projects are parking structure-scale solar photovoltaics, solar-thermal generation and space cooling, and biogas and biomass projects, some of which could provide district heating.  Technology costs are falling so rapidly that these mid-scale projects are becoming competitive with utility-scale resources when transmission cost savings are factored in. SB 43 (Wolk 2013) recognizes that the promise of mid-scale renewables has not been realized.

In response to SB 43, each of the large investor-owned utilities–PG&E, SCE and SDG&E–have filed proposed tariffs with names such as Enhanced Community Renewables Program or Share the Sun. I filed testimony in the PG&E and SCE cases on behalf of the Sierra Club addressing shortcomings in those programs that would inhibit development of community solar gardens. SDG&E’s proposal, while not perfect, better meets the law’s objectives. After the hearings, the CPUC postponed a proposed decision from the July 1 deadline to October.

SB 43’s requirement that the investor-owned utilities “provide support for enhanced community renewables programs” is a critical step forward for California’s distributed energy goals.  The CSI is the state’s premier distributed generation program.  In SB 43 the Legislature expressed its intent that the “green tariff shared renewables program seeks to build on the success of the California Solar Initiative by expanding access to all eligible renewable energy resources to all ratepayers who are currently unable to access the benefits of onsite generation.”  SB 43 advances the success of the CSI into the area of multifamily residential and multitenant commercial properties and introduces all types of renewable energy resources.  Customers who, for various reasons, cannot benefit from the current net metering programs, will be able to benefit through SB 43.

The Legislature clearly intends for this program to lead to a transformation in the energy market akin to the success for single customers of the CSI. This necessary market transformation extends to multifamily and commercial lease properties that are currently beyond the CSI and Self Generation Incentive Programs (SGIP). The Commission should ensure that utilities’ programs under SB 43 provides the market transformation that is necessary for this underserved segment.

State regulations calls for all new residential dwellings to consume zero-net energy (ZNE) by 2020, and all new commercial properties by 2030.  Fully implementing the market transformation identified in SB 43 is one of the obvious means to achieve this target.  The CSI option has already facilitated many examples of feasible ZNE single-family homes using renewables well ahead of the 2020 deadline.  There are several market barriers to integrating renewables in a similar manner on multifamily and commercial leased properties and on single-family that are not favorably located or that have other impediments.

A properly-designed community solar garden program should provide a critical work-around for the split-incentive problem that has plagued local renewable development in California.  The split-incentive problem arises from the fact that multi-tenant structures, both commercial and residential, may not be able to implement solar or other renewable resources due to the fact that lessees are not the owners of the shared space where renewables could be sited.  The problem of split-incentives between landlords and tenants has long been recognized, and has been the focus of energy efficiency programs.

As a corollary, the Commission should provide individual developers and property owners the opportunity to integrate energy efficiency and DG measures to achieve the best mix for meeting environmental and economic goals. Each project is unique so that a “one size fits all” approach that requires sale of all output into the wholesale market with buyback from customers who may have no connection with the project will only discourage enhanced development.

For distributed generation to expand in California there must be a cost-effective path for residential and commercial tenants, as well as not-well-situated buildings, to install solar and other renewables and share the costs among other customers. The focus to date has been on either utility-scale or single-building scale projects, but the most promise may be in mid-scale projects that can serve a community or a neighborhood cost-effectively through a combination of scale economies and avoided transmission and distribution investment.  But to achieve this objective requires changes from current utility practices.

An update: Here’s the link to the decision on this CPUC case issued in January. And here’s the link to scoping memo for the phase of this proceeding.

Repost: What’s the Worst That Could Happen?

1 Reply