Common Tragedies

Thoughts on Environmental Economics

Outsourcing electricity

Posted by Daniel Hall on September 20, 2007

One concern about climate change policy is that regulations here in the U.S. will just drive some industries to pack up and move to Chindia countries without restrictions. Since greenhouse gases are a global externality, this outcome — referred to as “leakage” — would wipe out the environmental benefits of regulation.

This is clearly a much larger concern for some industries than others. You can move your aluminum smelter overseas and ship your product back; good luck shipping electricity across the Pacific.

This doesn’t mean that electric generation can’t go to Mexico:

Texas and Mexico are tying their electricity grids together to allow commercial power trade, but it’s not obvious which way the juice might flow. …

Supplying demand on either side of the Rio Grande could present a business opportunity for power generation companies. But there are a couple of niggling issues that could disrupt the whole idea: environmental worries and federal jurisdiction.

As many Texans become more sensitive to environmental issues, the concept of importing electricity from a country that isn’t bound to U.S. environmental rules might rankle. …

[N]ortheast Mexico currently has excess power generation capacity, after building some natural gas plants along the border. So it’s possible that some power traders would like to import electricity to Texas. But the situation might not last.

Texas’ deregulated wholesale market attracts billions in power plant investment for every type of fuel. Some of that power could be sold across the border.

Mexico remains a regulated utility monopoly, and building a plant involves heavy dealings with unions, said George Baker, research director for Houston consultancy

As the article makes clear, there much more than just environmental regulations that goes into deciding where to site a plant. But this will be an interesting story to keep an eye on as debates about U.S. climate policy move forward.

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