The G8 solves climate change once and for all

Puny-tive damages

In one of it’s less talked recent decisions, the Supreme Court dramatically reduced the ammout of punitive damages Exxon was forced to pay for allowing one of its tankers to spill 11 million gallons of crude oil into the Prince William Sound in Alaska in 1989. Writing for the majority, Justice Souter appeared to substantially limit the use of punitive damages, apparently capping them at the level of awarded compensatory damages. As an economist and someone who’s worked in litigation consulting, I’m inherently weary of our ability to effectively set numerical limits on future damages. While Souter didn’t actually set a dollar cap, capping a ratio seems equally as arbitrary to me. Moreover, in this instance, I’m afraid that the shortcomings of applying such a ratio will be particularly burdensome on the environment.

One of the main functions of punitive damages is to deter entities from taking similar actions in the future.* Compensatory damages, on the other hand, are awarded to place a clamaint in the position he would have been in had the wrongful act not taken place. In this decision, SCOTUS effectively says that the latter can never legally exceed the former. (At least in maritime cases. It’s not really clear to me how broadly this rule will apply). Yet I find Souter’s justification of this ratio deficient for two reasons. First, he never discusses the theoretical relationship between the two types of damages. Second, he sets his cap based on historical ratios, ignoring the endogeniety of risky behaviour with respect to the limit of potential punishment.

In a world where transaction costs were zero, all transactions were legal, and Ricardian intergenerational concerns prevailed, punitive damages would be unnecessary. An intelligent judge could fully and perfectly compensate all affected parties, and society would be indifferent as to whether or not a similar act occurred again. We wouldn’t worry about deterrence, and market forces would prevail.

The real world is, of course, much messier: Transaction costs abound, contracts are imperfect, society outlaws certain acts (like the sale of organs or children), and intergenerational compensation is complicated. On top of all that, our judicial system is a blunt instrument. Court costs and rules of merit/ standing serve to exclude most small or tangential claims. For all these reasons, it seems reasonable that society would seek some additional penalty, beyond just compensation of affected parties, in order to deter acts where the harm extends beyond the parties involved. We recognize that our legal system can’t perfectly compensate all effective parties, but still try to protect fringe claimants by deterring actions that will adversely affect them.

Pegging punitive damages to compensatory damages will dramatically limit our ability to protect potential fringe claimants and bias risky behaviour towards areas that we already do a poor job of valuing. Up until now, assuming the probability of being successfully prosecuted is 1, a firm considering a risky act (in this case, hiring an alcoholic to captain its oil tanker) had to respect the fact that a judge and jury could subsequently tack on punitive damages to the point where the total costs outweigh the benefits. Now however, they would only be deterred up to the point where the value of the risky act is less than 2X prospective compensatory damages. As I just described above, actual awarded compensatory damages become a smaller and smaller component of total damages as the harm done becomes more opaque or spread out over a larger group of individuals. We can surely think of lots of heinous acts where the harm is far away and difficult to directly quantify (although Souter apparently can’t), but right off the bat this seems to obviously describe environmental disasters such as Valdez.

Ok, quickly, on endogeniety and legal rules of thumb. Souter cites a host of statistics on past damages ratios in developing his proposed 1:1 limit. He writes that the majority of these cases were probably decided justly and therefore suggests we just impose this mean amount on the population as a whole in order to curb unfair outliers. However, this assumes that the distribution of acted upon risky endeavors will remain unchanged after the cap is enacted. What he fails to consider is the effect that the threat of unlimited punitive damages had a on preempting particularly harmful acts during the time period he’s studying. Previously, firms were concerned solely with the total damages amount, and the threat of massive punitive damages probably deterred a lot of risky environmental behavior. Now, however, disipated harm looks comparatively cheap, and therefore firms are going to purchase more of it, shifting the very ratio Souter is treating as fixed.

This is something I argue about with Johnny Walker, my Borkish** budding corporate lawyer roommate, all the time. He wants to cap medical malpractice damages, but refuses to acknowledge that this would encourage the most risky behaviour at the tails of the damages distribution. I have a feeling he’ll have something to say about this post. Most likely that I don’t understand the law at all.

* There are other possible legal justifications for awarding punitive damages aside from determent. Souter has a nice overview of the history of punitive damages beginning on p. 17 of the decision.

** Ok he’s not really Borkish at all, just pro tort reform. Speaking of Mr. Bork, for anyone else who thinks they’re for capping torts, I refer you to the single best editorial the New York Times has ever written. Irony isn’t even the word.

Ban the bottle?

The IHT reports that “A majority of about 250 mayors at the U.S. Conference of Mayors meeting in Miami voted to phase out regular use of bottled water for its employees and functions.” My first reaction was that this is a great idea. In the United States, bottled water is a frivolous luxury, as we have regulations in place which ensure that tap water is fit to drink (in most places, it actually tastes pretty good too). Thus, it seems pretty wasteful for local government to spend its citizens tax dollars on bottled water. Moreover, in areas where the tap water isn’t all that great, this program could be coupled with a renewed push for improved drinking water quality, using the money saved on purchasing water and disposing of the bottles to update water infrastructure.

But as I began writing this post I realized that my initial enthusiasm for the story was based on a shaky presumption. I’d assumed that municipal employees first decide what beverage to drink, then chose a vehicle of consumption (ie- they first decide that they want water, and then decide if they want tap or bottled). If this were the case, the mayors’ plan might well indeed save a lot of money and reduce waste. But what if tastes are more nuanced? Assuming that other beverages are still going to be offered besides water, banning bottled water might just induce people to drink more soda. Imagine you’re at a city function. It’s crowded and hot, and there’s a long buffet style line. At the end of the line is a separate table with an assortment of canned/ bottled beverages, including bottled water. If the hosts suddenly swapped out the bottled water for pitchers of tap, but left all of the other options, I think it’s pretty clear that substitution would occur across beverages as well as across vehicles. Now I have no idea what the actual decline in bottled beverage consumption would be, but I’m pretty confident it’s not equivalent to current municipal bottle water consumption, as the mayors would have you believe.

Finally, some useful thoughts on flood damage

I’ve been pretty frustrated with the media’s coverage of the recent wave of flooding in the midwest. There’s been plenty of empathy (which is nice) but far too little substance. Specifically, while it may sound coarse, we need to start asking tough questions about how damage from future floods can be contained and how the public burden of this damage can be mitigated. Carolyn Kousky, who will be joining RFF in the fall, has a great article on just that in today’s St. Louis Post Dispatch:

Costs and risks are escalating

By Carolyn Kousky

06/30/2008

St. Louis Post Dispatch
If it seems to you that there has been more damage from environmental catastrophes recently - from hurricanes to wildfires to the current flooding - you’re right. Direct costs from natural disasters (adjusted for inflation) have been increasing in this country for the last several decades.

Of all natural disasters, though, floods account for more lives lost and more property damage than any other. In the St. Louis region, the risks of flooding have been increasing, and they may get worse.

One reason is that as more land is developed, more soil is covered with pavement and buildings, leaving less ground to absorb rain water. Instead, it runs off into creeks and rivers, increasing flood heights. Also, as researchers in the region have shown, flood stages on the Missouri and Mississippi Rivers are higher than they have been in the past because of physical alterations to the river, such as channelization and the construction of engineering works, including levees. Finally, it is possible that climate change, too, will increase flood events in the Midwest.

Given the increasing risk, we must look seriously at how we respond to flood hazards.

Right now, most property owners and mortgage lenders get their information on flood risk from the maps produced by the National Flood Insurance Program of the Federal Emergency Management Agency. But these maps may undererstimate true flood risks because they are not updated often enough to incorporate changes in land use, new information or new methodologies for measuring risk. A map modernization process is underway, which will provide more accurate information on risks to communities.

In the St. Louis region, maps for counties on the Illinois side of the Mississippi River already are in the process of being updated. Preliminary versions, as expected, show much more land designated at the highest risk level and, thus, requiring the purchase of federal flood insurance. Adding to the risk are assessments by the U.S. Army Corps of Engineers that five levees on the east side of the Mississippi River have deteriorated and no longer meet the protection standards to which they were built.

Many people assume that levees are structurally sound, well-maintained and will provide protection in the event of a flood. This assumption encourages extensive development behind levees: the so-called “levee effect.”

But as we know all too well from Chesterfield Valley flooding in 1993, New Orleans in 2005 and Gulfport, Ill., just last week, levees fail - even when they are certified to protect against a flood.

In the Metro East, FEMA’s new flood maps and the downgrading of the levees would add a substantial financial burden to homeowners and businesses in East St. Louis. To avoid that problem, Illinois counties in the Metro East are planning to ask voters to approve a sales tax increase to pay for upgrading the levees, which would negate the flood insurance requirement.

A different approach has been proposed by Howard Kunreuther, co-director of the Risk Management and Decision Processes Center at the University of Pennsylvania’s Wharton School of Business. He suggests offering vouchers to low-income families that cannot afford to purchase flood insurance. They also could receive grants to cover some costs of floodproofing and other activities that would lower insurance premiums. This would be preferable to reducing premiums or doing away with the flood insurance requirement, which not only masks the true risks but also increases the burden on taxpayers when flood damage does occur.

It is important to note that most homeowners who live in floodplans fail to purchase flood insurance - even when they’re in high-risk areas and even when the insurance is mandatory for homeowners with mortgages from a federally regulated lender. First, homeowners with loans from unregulated lenders don’t have to buy insurance. Second, it turns out that many regulated lenders fail to follow up to make sure flood insurance is maintained over the life of the loan.

Meanwhile, investment in floodplains in the region has been booming. A 2005 study found that of all the states affected by the 1993 flood, the St. Louis region has been the leader in floodplain development, with half of it occurring on floodplains that were under water in 1993.

The best way to reduce damage from floods is to keep people out of harm’s way. Some municipalities - such as Napa, Calif., and Reno, Nev. - have restored wetlands in their floodplains. This keeps people and property out of the riskiest areas and increases flood protection because wetlands act like a sponge in storing floodwaters. The restored wetlands in these cities also have increased property values and provided recreational opportunities.

Maybe we should take a lesson from the Dutch, the masters of engineering works to hold back floodwaters. They have adopted a “Room for the River” policy and are returning some land along rivers to open space. It grew out of a realization that climate change could mean even more flood water - water that needs somewhere to go that that is not into homes and businesses.

It is time for the St. Louis region to realize that it needs to make way for the Missouri and Mississippi rivers, instead of trying to force the rivers to make way for us.

Carolyn Kousky, a graduate of John Burroughs School in St. Louis County, just completed work on her Ph.D. in public policy at Harvard University, where her focus was natural disaster policy. In September, she will become a fellow at Resources for the Future, a non-profit, non-partisan research institute in Washington, D.C.

Sure, cap and dividend. But let’s not get crazy

Writing on Grist yesterday, cap and dividend ringleader Peter Barnes proposes a “revenue neutral” program. However, what he appears to suggest is a 100% dividend of permits, which would be far from revenue neutral for the government. That’s because after we put a price on carbon, government expenditures go up and tax revenues go down. Terry Dinan of the CBO has looked at this extensively. Here’s an excerpt from a 2003 CBO study on the burden of cap and trade,

However, recent research has demonstrated that a significant share of that revenue might be needed to offset increases in government spending and declines in tax revenues caused by the program.

Using auction revenue to offset those effects could be viewed as compensating the government, but failing to do so would require the government to raise taxes if it wanted to keep its net revenues at their baseline levels (while holding spending constant). A tax increase could boost the cost of the cap-and-trade program.

A carbon trading program would affect government outlays and tax receipts in several ways. First, it would cause the government (like other consumers) to pay higher prices for carbon-intensive goods. Second, because the payments of some government programs, such as Social Security, are indexed to changes in the overall price level, higher prices could result in greater spending on those payments. Third, a cap-and-trade program for carbon emissions would lead to a decline in economic activity and a corresponding decrease in tax collections.

Researchers estimate that together, those effects could account for more than 30 percent of the total value of allowances.

Thus, at a very minimum, a revenue neutral program would involve the government taking a 20-30% haircut. Not sure if Barnes intends these dividend to be taxable, but even that would only get us part of the way there.

As for investing in R&D and transport, I find Barnes’ comments more reasonable but equally as unhelpful. He says,

“To be sure, we’ll need public money to fight climate change. But some of that money can come from shifting current expenditures, and if we need more, we can raise and allocate it later.”

Well then. Since you put it like that.

So the main point of this post is to say now that we’re in the red zone on climate policy, let’s not lose sight of little things like the national debt and government services.

How sausage gets made

This chart is amazing.

Source.

Roundtable discussion of upcoming Lieberman-Warner debate

Those interested in the politics of the climate policy bill are advised to point their browsers to E&ETV at 11 am EDT today. Via ClimateWire:

As the Senate prepares to take up the Senate emissions bill this week, many key provisions are expected to spark heated debate. During today’s exclusive E&ETV/ELI Special Event, NRDC’s David Doniger, Senate EPW Committee’s Andrew Wheeler, Pew’s Manik Roy, and Bracewell & Giuliani’s Scott Segal give their perspectives on the upcoming floor debate. The panelists address prospects for the bill, likely amendments, key floor fights and potential ramifications of the Senate’s debate over the bill.

Link to the coverage is here.

Update (12:08 pm EDT): “Today’s E&ETV/ELI special event will air early this afternoon. We apologize for any inconvenience.”

Farm bill

I’ve been surprised by the lack of attention that the U.S. farm bill has received in the corners of the blogosphere I frequent. The current food crisis is getting lots of attention, but the farm bill… not so much. I’ve refrained from commenting largely because of how shamefully little I know about U.S. farm policy.

I suspect that some of the current silence among bloggers is a result of similar ignorance, but a larger portion represents a combination of shame and despair. Nearly every policy wonk of any political persuasion agrees U.S. agricultural policy is a disaster — conservatives hate it (or should) for the massive governement handouts, while liberals decry (or should) who the handouts go to and the environmental damages they cause. But at the same time the political interests entrenched behind leaving policy ‘as is’ mean that substantive reform is a non-starter. Hence the shame and despair.

Now that the bill has passed (over the President’s veto) I thought I’d point you to the best post I’ve seen so far on the bill’s problems: Greg Mankiw quotes an insider at the White House on some of the bill’s most distasteful provisions. Do read the whole thing, but here’s a couple candidates for worst part of the policy:

Too much spending: The bill increases spending by almost $20 billion over the next ten years, at a time when net farm income is at an all-time high. …

New sugar program: The bill would make the government buy sugar for 2X the world price, store it, then resell it at about an 80% loss to the taxpayer. Sugar sells for about 11¢/lb on the world market. The US government would have to buy sugar for about 22¢/lb, store it, and then auction off the excess to ethanol plants. …

Using food aid $ inefficiently: Under current law, US food assistance for hungry people around the world must be spent purchasing US crops. The President proposed to allow up to 25 percent of US global food assistance to be spent purchasing food from local farmers (in the country where the people are starving). This allows US dollars to be spent purchasing food, rather than paying transportation costs.

Meanwhile, the WaPost editorial page highlights another real loser from the bill:

…the bill could authorize up to $16 billion more in crop subsidies than previously projected…

The culprit is a new program called Average Crop Revenue Election, or ACRE for short. ACRE gives farmers an alternative to direct payments, which come regardless of how much money they make, and other subsidies. Starting in 2009, farmers can choose to trade in some of their traditional subsidies in return for a government promise to make up 90 percent of the difference between what they actually made from farming and their usual income. …

[ACRE] pegs the subsidies to current, record-high prices for grain, meaning farmers would get paid if prices fall back to their historical and, for farmers, perfectly profitable norms. A program that started out as a streamlined insurance policy against extraordinary hardship has mutated into a possible guarantee of extraordinary prosperity. [emphasis added]

As the editorial makes clear, the policy change could have actually been a welcome reform, by providing a way to transition from direct subsidies to a more insurance-based model where farmers got paid in bad years. The problem is that by using record-high grain prices as the baseline for ‘usual income’, the program is insuring that farmers make bank. On the other hand, there’s always the chance that this won’t cost the government as much as we think:

The farm bill’s defenders insist that a budgetary disaster will not come to pass, because grain prices will not come down much during the five years the bill will be in effect.

Ah, what a relief! The government won’t have to pay for this program because the world’s urban poor are going to continue to be choked by food prices for the next five years. Glad we got that cleared up.

If readers are aware of other good analyses of the farm bill I’d be thankful for a pointer. Here’s Tim Haab recently on the effects of U.S. farm subsidies.

The real impact of gas prices

From the Washington Post:

In Kokomo, Ind., last week, Kathy Spier said the rising cost of gas is to blame for the 50 percent drop-off in sales at her three exotic lingerie stores. “They don’t have extra money to spend on frivolous things,” she said.

Tim Kaine gets it

Meaning that he understands that driving imposes external costs on society. Gov. Tim Kaine (D-VA) is calling for a hike in gas taxes to cover a transportation/infrastructure budget shortfall. Not a perfect incentive structure — I’d prefer real-time road usage charges — but it’s not a perfect world. At any rate it’s a gutsy call to make, though there is a one-term limit on VA governors, so what’s at stake is his approval rating and the party’s image in state government. I mean, we’re living in a high oil price world, on the cusp of summer driving season, and close to (if not already in) a recession. Kaine is providing a breath of fresh air in the context of the recent gas tax pandering by Clinton and McCain.

Energy subsidies in the U.S.

Have I mentioned recently how absolutely amazing the Energy Information Administration (EIA) is? As much as researchers frequently run into problems getting exactly the data they need to do the analysis they want, it’s pretty remarkable to live in a time and place where such incredibly detailed information about energy in the U.S. is available at your fingertips.

The EIA’s latest feat is this new report on federal energy subsides. I’m pretty sure I’ll be revisiting this report frequently, but on first glance two things stood out.

1. What the heck is “refined coal”? Based on a cursory reading it sounds like coal used to produce synthetic fuels. It is getting a huge portion of federal energy subsidies (check out table ES1): around $2.4 billion of the $16.6 billion total. Part of my confusion though is that the EIA analysis classifies most of this subsidy under electricity generation (so is it a synfuel or coal?) and this makes refined coal the biggest subsidy recipient on a dollar-per-megawatthour ($/MWH) basis (see table ES5): it receives $29.81/MWH, versus $23.37/MWH for wind, $1.59/MWH for nuclear, and $0.44/MWH for (regular) coal. (These are the only electricity generating technologies which receive more than a $0.3B in federal support.)

2. Besides refined coal, who’s the other enormous hog at the trough? Three guesses, and the first two don’t count. That’s right, ethanol/biofuels chewed through $3.2 billion in 2007. The metric used to report subsidy payments here is dollars per million BTUs (table ES6), and ethanol is more than double the nearest competitor at $5.72/mBTU. It’s a little tricky comparing this subsidy level to the subsidies for electricity, since electricity is a more valuable form of energy than heat, but a simple back of the envelope calculation using standard conversion factors suggests that this is in the ballpark (slightly lower) than the dollar-per-output subsidies for wind I listed above.

So, to summarize, just with those two items, one-third of federal energy subsidies are going 1) to the most polluting fuel used today and 2) to a form of liquid food that is driving up world prices and at best is saving us a tiny bit of greenhouse gas emissions. Awesome.

Categorical statement of the day

Not that I disagree, Tim:

The inevitability of spring. Flowers bloom. Thunderstorms roll. I sneeze. Gas prices rise. And politicians think they should do something about it.

“House Republican leaders on Tuesday challenged Speaker Nancy Pelosi (D-Calif.) to release a plan to lower gas prices that they say Democrats touted when they were in the minority.”

Instead of rewriting past posts, I’m going to just cut and paste my post from May 17 of last year below(one of my better, if I do say so myself). That post draws on the same ideas from a post in April/May 2006. Noticing a pattern? While the legislative proposals are different, the analysis is the same. All politicians are idiots.

This on the heels of John McCain’s gas tax holiday plan? To quote Charlie Brown, “AAAAARRRRRRGH!”

Update:  From Tim’s post, I think this is a superbly clear explanation of gas prices:

High gas prices might be uncomfortable while we search for viable long-term solutions, but they’re more comfortable than the alternative:  no gas and no solutions.

Fun with statistics: the regressivity of gasoline taxes

Yesterday on Grist, Joseph Romm responded to a reader who argued that he should care more about incidence when talking about gas taxes. His response was a litany of citations suggesting that gas taxes were not in fact regressive, partially because the poor don’t own cars/ drive as much. Romm’s supporting evidence is pretty compelling. He cites a recent study by Don Fullerton (who used to be at RFF) which finds that a gas tax would only be regressive across the top half of the income distribution (BTW, Fullerton’s paper is one of the best I’ve seen on the public finance options for curbing vehicle emissions if you’re interested in that issue). Yet despite all of the evidence Romm put forth, I was still skeptical of his claim. I’m working on an incidence paper myself right now, and do see regressivity in the data. It just depends on how you define it. Below is a table with gas expenditure by income quintile from the 2007 BLS Consumer Expenditure Survey (which, btw, is the same source Fullerton uses):

Notice how different the story looks depending on whether you put income or consumption in the denominator. Both measures have their faults, and, in the policy world, people tend to flip back and forth between them depending what point is being made. Ideally economists would like to put lifetime income in the denominator, assuming that people incorporate their future welfare/ wealth into their current decision making (ie college student go into debt with the expectation that they’ll make much more money later on). For a more detailed discussion on defining incidence see this working paper by Gilbert Metcalf.

For those who don’t have time to check out the Fullerton paper, I’d also just like to point out something about the table Romm presented in his post.

However, he omitted the third column. To be fair, his point was about average effects across all people. Yet one can imagine how the second statistic might be relevant to policymakers. While poorer people are less likely to own cars/ drive, the ones that do are likely to be significantly impacted by an increase in the price of gasoline. If a household making under $20,000 a year does own a car, it’s probably because they live in an area where there aren’t any other options for getting to school, work, etc. This means that their demand response in the face of a price increase would probably be negligible, and a gas tax would simply crowd out other consumption. Thus you could imagine framing incidence in terms of rural vs. urban households, as well as simply rich vs. poor.

None of this is to say that one way is best. And I definitely support a gas tax, although I think we should be smart about implementing it. I just thought I’d point out that on this issue, like just about every other issue in DC, different people can use the same data to make different points.

Support for SPR site dries up over river concerns

I’m posting, which these days means a story about the SPR must have come out. From Reuters:

The Department of Energy is boosting the reserve to 1 billion barrels, as Congress mandated, by adding Richton and expanding two existing sites. Richton was chosen because it is less vulnerable to hurricanes but close to a major pipeline system and the Gulf of Mexico for easy oil deliveries.

But many locals are horrified the government may drain 50 million gallons of water a day from the Pascagoula River for five years to dissolve the salt in the caverns. The resulting brine is to be carried away in a pipeline — which the Energy Department admits will probably leak many times — and dumped into the Gulf of Mexico not far from the state’s coastline.

Yep, we do actually need somewhere to put all that controversial SPR oil. Is it really surprising that leaching salt out of a cavern large enough to hold 160 million barrels of crude oil might have an adverse environmental impact? Not really, as was pointed out in the Canadian context about two months ago:

The report proposes a series of salt caverns in Lambdon County, Ontario, to cover that province’s allocation, but immediately notes that their excavation could be an environmental concern.

It’s also a bit disconcerting that the DOE is so freely admitting that the brine will likely “leak many times” (four dozen leaks in 5 years is the estimate) on its way to the Gulf. One wonders if this is the full extent of the potential damage, given that they’re so willing to concede the point. The brine issue is exacerbated by its extreme salinity (10 times that of the Gulf) and the nature of surrounding wetlands:

With some remote wetlands, leaks won’t likely be found for days and then the damage will be done. “Somebody is going to be out fishing and they’ll start seeing dead fish,” said Shepard.

With the net benefits of an expanded SPR so uncertain, decisions like this only add to the cost side of the balance.
H/T: Oil Drum

Pork barrel term of the day

Comitological hypothecation.

Hypothecation is eurospeak for earmarking. Not sure if comitological is a word, but this is supposed to mean that it takes place in a governmental committee.

If we ever get around to capping or taxing carbon, there’s gonna be a whole lotta comitological hypothecation goin on in Congress.

H/T Dallas.

GAO blasts DOE on SPR*

As the fill of the SPR is debated by Congress and the DOE, the GAO threw its hat in the ring. The Office’s report is critical of the cost-effectiveness of fill protocol. It makes three very reasonable suggestions:

1. Include some heavy crude in the SPR.

This is a complete no-brainer as far as I’m concerned. According to the report, around half of disruption-vulnerable U.S. refineries are incompatible with the light and medium crude currently held in the SPR. Running the wrong type of crude would result in about a 5% reduction in U.S. refining throughput, a significant loss during a supply disruption. Five percent is pretty bad, and certainly blunts the impact of any SPR release, but that’s for total refinery throughput. One refiner cited in the study claims that using exclusively SPR oil in its heavy crude unit would result in 11 percent less gasoline and 35 percent less diesel. To be fair, refineries are probably not going to be relying entirely on SPR crude, but you get the point.

There’s also the little matter that heavy crude costs about 10% less than light. So current policy has us buying more expensive crude oil that is only efficiently compatible with about 55% of likely affected U.S. refineries. Gold star for the GAO.

2. Use dollar-cost averaging to determine a purchase path instead of a constant quantity path.

The government has basically set a quantity and, as Sen. Dorgan is learning, is largely intractable regardless of market conditions. This means that even as prices soar above that magical $100 mark, the DOE is stubbornly purchasing the same monthly quantity as before. By using dollar-cost averaging, DOE basically gives itself a monthly SPR allowance. Thus, like a normal consumer, the DOE buys more oil when it’s cheap, and less when it’s expensive. This sounds good, but markets are tricky, and the oil market is quite volatile. So I quote the GAO:

We also ran simulations to estimate potential future cost savings from using a dollar-cost-averaging approach over 5 years and found that DOE could save money regardless of the price of oil as long as there is price volatility, and that the savings would be generally greater if oil prices were more volatile.

100 points to the GAO.

3. Purchase oil on the market instead of through royalty-in-kind arrangements.

First, this adds an unnecessary level of red tape to the SPR fill process. Since not all oil from RIK arrangements goes to the SPR, there is clearly already bureaucracy in place to sell RIK crude. But maybe selling off RIK crude and using the revenues to purchase the same amount of oil on the world market sounds inefficient and circuitous.

Well, unfortunately, the way the bid evaluation process works is not equivalent for market purchases versus RIK exchanges. Straight market purchases are considered conditional on general market trends, as well as the prices of SPR-suitable crude grades relative to other grades. In contrast, the RIK oil is exchanged for other oil for the SPR. The evaluation process focuses on whether DOE will receive oil of at least the same value as the RIK oil it is giving up. Thus, it ignores market trends and is vulnerable to exchanging at questionable times. The GAO report gives an example in which simultaneous bidding processes resulted in opposite outcomes: the cash process rejected Light Louisiana Sweet (LLS) at $67/bbl, whereas the exchange process bought LLS at a similar price. As you might have just concluded yourself, the cash process is also considerably more transparent. A for the GAO.

This report is quite readable, and well worth a look. But at first glance, it certainly seems that if the SPR fill process is to go on, the DOE and Interior would do well to implement the GAO’s suggestions. They would save money, improve the SPR’s effectiveness in the event of a disruption, and increase transparency.

Note: for great analysis of the fill/no fill debate, check out this post at Energy Outlook. Also read the post’s comments for some discussion of dollar-cost averaging by people who actually seem to know something about investment.

* I kind of wanted to see if I could write a title in which over 50% of the letters are in acronyms. Yes I could.

Is state climate policy “inappropriate”?

Yesterday Congressmen John Dingell, Chairman of the Committee on Energy and Commerce, and Rick Boucher, Chairman of the Subcommittee on Energy and Air Quality, released a White Paper on “the appropriate roles of different levels of government” in legislating climate change controls. Most of the stuff in here is old news. However, the congressmen did manage to take one previous conventional wisdom, turn it on its head, and effectively man-slap states like California that aim to push the national envelope on climate change.

One of the most problematic aspects of pollution in general, and carbon emissions in particular, is that there’s not much room for “personal virtue” (to quote the Vice President). What I mean buy this is that what really matters is the total stock of CO2 in the atmosphere, regardless of where it comes from. If I cut my carbon footprint in half, but Evan doubles his, I essentially sacrificed for naught (or perhaps, for Evan). However, climate policy is most likely going to take the form of some sort of national carbon cap, which all involved parties will be aware of, and will be stringent enough, one presumes, to be binding. Now lets say California goes ahead and imposes an additional cap on its own emissions, above and beyond the national target. National carbon emissions will remain unchanged. However, the burden that the rest of the country feels is a lot lighter as a result of CA’s environmental piety. Californians’ presumably get some sort of utility from doing this, and everyone is in theory better off. In this context, maybe the Penguin was right after all.

Enter Messrs Dingell and Boucher. Invoking interstate commerce and static job figures, they seem to be arguing that any additional climate policy on the part of the states might be “inappropriate”. The argument is that CA’s policy will affect jobs in Michigan, even though Michigan workers didn’t get to vote on the law. Given the authors’ positions, this could be a signal that they’re going to recommend that a national climate policy completely subsume state policies. Now I’m no expert on federalism, nor have I really analyzed the impacts of additive state climate policies. I’m sure both of those issues will will be discussed at length in the coming months. Actually I think I’ll leave it at that for now. Thoughts?

let’s get rid of used cars?

Regular CT commenter and friend Tmoney often sends me interesting links and ideas. Today he sent me a policy idea in response to this article from the LA Times and thought I’d share it with y’all. I’m running out the door now but will think about this some more and post my thoughts in the comments later. I encourage you to do the same.

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here’s an interesting policy idea.

used cars tend to be big, gas chuggers, less safe than new cars (all else equal), and with lower quality combustion (leading to more nox, pm, etc). additionally, the market for used cars gives the marginal car buyer an alternative to newer, safer, cleaner, and more efficient new cars. finally, used cars don’t create manufacturing jobs.

is there a role for government intervention here? policy makers want cleaner air, manufacturing jobs, less oil consumption, and auto accidents with fewer injuries. replacing older cars with newer ones tend to acchieve these goals. why not offer some sort of incentive to owners of older cars to have them destroyed instead of being used. I wonder what the combined public benefits of scrapping an older car are relative to continuing to drive it.

in practice, how would this work? lets say Bob owns an older suv. it has a trade-in value of say, $2k. instead of getting $2k from the dealer for it (and having the dealer subsequently re-sell it in the US or mexico), why not have the government buy it and scrap it? the costs to the government are $2k (or so). the benefits are the market value of the scrap steel + the environmental benefits + the public health benefits (higher quality emissions, less emissions, and safer vehicles leading to lower costs). given that its not easy to capture the last 2 pieces (financially), you’d need a way to pay for this. gas taxes come to mind, as well has vehicle registration fees. with the $2k, bob buys a newer car that is hopefully safer and more efficient. society consumes less oil, emissions go down, and bob is less likely to be seriously injured in a car accident.

I know amory lovins has proposed this before, but I wonder if there’s something politically feasible and economically rational that would work.

thoughts?

-tmoney

“The cost of Lieberman-Warner just got a lot cheaper”

That was my boss’s summary of breaking news that a federal appeals court struck down a Bush administration policy exempting power plants from certain environmental regulations. Here’s the AP story:

EPA’s relaxed emissions rule struck down

By MATT APUZZO, Associated Press Writer 26 minutes ago

A federal appeals court struck down a Bush administration policy exempting power plants from certain environmental regulations. The court said the policy was unlawful.

The U.S. Court of Appeals for the District of Columbia Circuit negated a rule known as cap-and-trade. That policy allows power plants that fail to meet emission targets to buy credits from plants that did, rather than having to install their own mercury emissions controls. The rule was to go into effect in 2010.

The court struck down the cap-and-trade policy and the Environmental Protection Administration’s plan to exempt coal- and oil-fired power plants from regulations requiring strict emissions control technology to block emissions.

New Jersey and many other states challenged the policy in federal court. The agency defended the rule, saying it represented the nation’s first attempt to control such emissions and would reduce mercury emissions by 70 percent.

The three-judge panel agreed with the states that the EPA did not have the authority to exempt the power plants. The court unanimously ruled that EPA’s arguments were “not persuasive.”

Mercury is a powerful neurotoxin that accumulates in fish and poses the greatest risk of nerve and brain damage to pregnant women, women of childbearing age and young children. Emissions of mercury total about 48 tons a year, most of it in the form of air pollution that winds up in waterways.

The states argued that the cap-and-trade system would endanger children near some power plants that pollute but which also use credits to do it legally.

“This means the EPA is going to have to go back and do a real job of regulating all the toxics coming out of these plants,” said attorney James S. Pew, who argued on behalf of several environmental organizations that filed documents in the case.

The EPA had no immediate comment.

Joining New Jersey in the lawsuit were: California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Mexico, New York, Pennsylvania, Rhode Island, Vermont and Wisconsin.

The joys of public finance - FutureGen edition

Just when it seemed that both parties were hopping on the public clean energy promotion bandwagon, the FutureGen project reminds us just how bad the government is at doing this sort of thing. The Bush-sponsored clean coal project once described by Andrew Revkin as being in “perpetual creep mode” now appears to have completely halted. Whereas the initial plan (and working assumption for the past 4 years) was that the government would pick up almost 75% of the pilot CCS plant’s costs, the DOE announced yesterday that it was “restructuring” its approach, which is government speak for backing out.

Just last month the FutureGen Alliance announced its selection of Mattoon, IL as the site of the the pilot plant. This was the culmination of an enormous amount of planning, research, and negotiation. The DOE’s explanation for it’s decision back out is twofold. First, it says that cost projections for the site were ballooning out of control (shocking). However, Durbin and the industry alliance answered this complaint by offering to to pay 50% of any further cost overruns upfront, and use revenue from the facility to pay back the DOE’s 50% later. Then the DOE announced that it was more than just the cost overruns. Unlike the original plans, which called for the sponsorship of an entire clean coal plant, the government feels that it should only really support the CCS component of the power plant, not the whole thing. This will allow the DOE to take all its eggs out of the Mattoon basket, and sponsor multiple CCS pilots at the same time.

So what the hell happened here? Well it depends on your perspective:

DOE: “This restructured approach allows DOE to maximize the role of private sector innovation, provide a ceiling on federal contributions, and accelerate the Administration’s goal of increasing the use of clean energy technologies to help meet the steadily growing demand for energy while also mitigating greenhouse gas emissions. “

FutureGen Alliance: “We wuz robbed. Everyone’s teaming up to kill coal in America.”

Dick Durbin: “When the city of Mattoon, Illinois, was chosen over possible locations in Texas, the secretary of Energy set out to kill FutureGen.”

Texas: Werd.

Optimist’s View: The government made a rational decision to spend its money more wisely and to diversify its risks.

Cynic’s view: How do you promote CCS without spending government money? Tell a group of investors that you’ll match any money they’ve spent 3 to 1, and then pull out when the project is too far along to simply abandon.

Regardless of which story you buy, the story continues to be “Too much future, too little gen.”

Thanks to Shalini for the pointer and background info.