Monday, May 14, 2012

A pro-fossil industrial policy?


Two items of news caught my eye today. The first is that Republicans in Congress are trying to stop the U.S. military from using biofuels:
In its report on next year’s Pentagon budget, the House Armed Services Committee banned the Defense Department from making or buying an alternative fuel that costs more than a “traditional fossil fuel.”...if the measure becomes law, it would make it all-but-impossible for the Pentagon to buy the renewable fuels. It would likely scuttle one of the top priorities of Navy Secretary Ray Mabus. And it might very well suffocate the gasping biofuel industry, which was looking to the Pentagon to help it survive.
Now, this sounds like a fairly straightforward narrative: cost-conscious Republicans versus free-spending Democrats who want to push a "green" agenda and protect favored industries. But a moment's thought will reveal that it's not so simple. The "cost" of a fuel source is not entirely reflected in its spot price. Here are purely economic reasons why the military might want to buy some biofuel:

1. Research and development. If the cost of biofuel can be brought below the cost of fossil fuels, not just the U.S. military but the entire human race will massively benefit. However, energy technology must be embodied in actual economic activity - it probably takes a lot of large-scale investment and trial-and-error to advance the state of the technology. Therefore, what looks like expensive biofuel might actually be cheap to a very patient monopsonist. Already, the cost of algae-based biofuel purchased by the U.S. Navy has fallen by a factor of 16 in two years!

2. Idiosyncratic risk. The U.S. Military faces different risks than other fuel buyers. For one thing, the military's budget changes very slowly, so spikes and dips in the price of fuel can interrupt military operations. This provides an incentive for the military to diversify its fuel sources. Also, a successful operation by an enemy military power to temporaily block the international flow of fossil fuels during a war would be annoying for a business, but devastating for our military.

In fact, the Secretary of the Navy made basically these arguments:

Mabus and his allies countered that...Of course relatively small batches of a new fuel are going to be expensive — just like the original, 5GB iPod cost $400 and held fewer songs than today’s $129 model, which holds 8 GB. That’s the nature of research and development. With development time and big enough purchases, the costs of biofuels will come down; already, the price has dropped in half since 2009... 
What’s more, Mabus added, there’s a value in a more stable, domestic supply of fuel; every time the price of oil goes up by a dollar per barrel, it costs the Navy $31 million. “We simply buy too much fossil fuels from places that are either actually or potentially volatile, from places that may or may not have our best interests at heart,” he said... 
None of those arguments managed to sway House Republicans[.] (emphasis mine)
So do Republicans just have a weak grasp of some of the more subtle points of economics? Or do they have some vested interest in blocking the adoption of non-fossil energy sources?

The other news story that caught my eye may provide some insight into that question. It's about a new campaign by conservative think tanks to block the adoption of solar and wind power:

A number of rightwing organisations, including Americans for Prosperity, which is funded by the billionaire Koch brothers, are attacking Obama for his support for solar and wind power. The American Legislative Exchange Council (Alec), which also has financial links to the Kochs, has drafted bills to overturn state laws promoting wind energy. 
Now a confidential strategy memo seen by the Guardian advises using "subversion" to build a national movement of wind farm protesters... 
It suggests setting up "dummy businesses" to buy anti-wind billboards, and creating a "counter-intelligence branch" to track the wind energy industry. It also calls for spending $750,000 to create an organisation with paid staff and tax-exempt status dedicated to building public opposition to state and federal government policies encouraging the wind energy industry... 
ATI [the think tank coordinating the campaign] is part of a loose coalition of ultra-conservative thinktanks and networks united by their efforts to discredit climate science and their close connections to the oil and gas industry, including the Koch family. Those groups include the Heartland Institute, the John Locke Foundation, and Americans for Prosperity, the organising arm of the Tea Party movement.
Is this a case of the oil industry working to fight industrial policies that bias markets against their products? Or is it a case of the oil industry working to create/perpetuate industrial policies that bias markets in favor of their products? The answer to this question depends on whether the "right" prices for fossil fuels and non-fossil fuels are represented by their spot prices.

As in the case of the military, state governments deciding which energy source to buy face a problem that is not a simple static cost minimization problem. Here are some additional considerations a local government should consider:

1. Long-term investments. Our existing energy infrastructure is oriented toward fossil fuels. If non-fossil fuel spot prices will eventually fall below fossil fuel spot prices, it makes sense to start building the new infrastructure well in advance of that time. A private company is (mostly) not responsible for building new infrastructure. A government is. Therefore a government may have an incentive to switch to non-fossil fuels before it would make sense for a company to do so.

2. Environmental costs. I think that the environmental costs of fossil fuel use are much lower than members of the Pigou Club think. This is not because global warming isn't real (it is!), or because it isn't dangerous (it is!), but because fossil fuels are pretty fungible, meaning they can be sold on world markets; if the U.S. burns less, China will simply burn what we don't burn (this is not always true, especially in the case of coal). But there are some carbon costs all the same.

Also, there is the research aspect, again.

In addition, this campaign by conservative think-tanks seeks to raise costs for the wind industry by using local government to block wind farm construction. That has nothing to do with halting industrial policy, and everything to do with using government regulation to overrule the logic of the market.

It seems to me overwhelmingly reasonable to assume that the U.S. fossil fuel industry, led by oil barons like the Koch brothers, would try to push for government policies that favor their industry at the expense of potential future competitors, irrespective of actual market logic. It also seems obvious to me that the U.S. fossil fuel industry is a key backer of the Republican party and a key backer of conservative think tanks and opinion-making organizations. Are these two facts sufficient to prove that the conservative campaign against alternative energy runs counter to economic efficiency? No. It may still be true that government adoption of non-fossil energy sources is a misguided, ideological initiative. But as non-fossil energy costs fall and fall, that position will become harder and harder to defend.

Update: Fred Kaplan backs me up in this excellent article at Slate.

21 comments:

  1. Are you saying for "2. Environmental costs" that there are actually fewer environmental costs, or that they're in a sense unavoidable because China will offset what we do? Because it seems to me that if China burns that carbon the environmental costs will be just as big, it will just be a different country inflicting the negative externality.

    Perhaps a case for a coal embargo on China.

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    1. Both. It's the same thing. When calculating an environmental cost, I ask "If I burn this barrel of oil, how much will the environment be worse off? If China will burn anything I don't burn, then the answer is "none", because one way or another the oil is getting burned.

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    2. And yes, coal is a bit of a different story, since the U.S. has a big chunk of world reserves, and since transport costs are relatively high.

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    3. Larry Headlund6:31 PM

      China imports a small fraction of its consumption (~1.5%) and is a net coal exporter at about the same level.

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    4. Actually, China has been a net coal importer since 2009.

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    5. Anonymous7:34 PM

      The Aussies are mining coal as fast as they can, but they still import so much other stuff to support their growing population that they are going to have real balance of payment crunches before 'ere to long.

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    6. MaxUtility7:55 PM

      Your point about "someone else will burn it" has some truth in the short term. But it's the large scale, long term that is the real issue here. Every day we delay developing and deploying alternatives has some real lost opportunity cost I think. If you believe in GCC, you have to believe that as some point everyone will really push hard to shift out of fossil fuels and those who have laid the groundwork will have a real advantage. A lot of the issues with climate change and energy are really about "buying" insurance against an unpredictable future, not about shaving a couple pennies off a KWh of power.

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    7. Larry Headlund8:22 PM

      My numbers for China imports and production were out of date (2006).

      Even so, after a record year in 2010 imports declined in 2011 to about 10% of production.
      Imports: 150M
      Exports: 1.5M
      Production 1120M

      I wouldn't be planning on putting the squeeze on.

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  2. We tend to assume this is some sort of rational profit-maximizing agenda - Koch is blocking alternatives to keep up demand for their products (though I am not sure how deeply they are involved in oil).

    But I wonder if it isn't a deeper ideological agenda. Development of renewables tends to be associated with energy conservation and acceptance of the science of greenhouse warming. Conservatives have set rejection of global warming as a marker of political affilitation, so windmills and biofuels become a symbol of liberal infiltration.

    This also may tie into the 1970s oil crisis vs the 1980s, where conservatives rejected conservation as un-American and argued for building up a military that could bomb the tar out of anyone not willing to give us their oil.

    John

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  3. Not sure about biofuels, but the us military currently has a real interest in non- fossil fuels . It has to hump petrol/gas whatever across Pakistan or central Asia to Afghanistan. Thatt's a vast cost, danger and logistical nightmare. Anything it can do to power generators etc some other way must be a benefit.

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  4. hmmm. i wonder why the pentagon wants to diversify its fuel sources. gee, it would kinda suck if one of those aircraft carriers ran out of jet fuel while we were attacking a country with, umm, a lot of oil and the price skyrocketed.

    Wind is awful. for about every 6 GW of wind, you get about 2 GW of unreliable intermittent generation and have to keep about 2 GW of gas-fired gen hot and ready to ramp in case the wind dies (TX had blackouts due to insufficient gas-fired backup power a few years back). You may as well just run a gas-fired plant. They've gotten bigger, but the generation technology has not changed much in 30 years either, just a big turbine on a stick. We've been subsidizing it for 30 years, at what point do we actually cut the cord on stuff that doesn't work?

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    1. "We've been subsidizing it for 30 years, at what point do we actually cut the cord on stuff that doesn't work?"

      I agree, we should cut subsidies on oil, NG and coal production.

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  5. Anonymous8:20 PM

    "Ethanol? Don't make me laugh. You get out less energy than you put in! It's like those robots in The Matrix trying to use humans as generators - stoopid."

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    1. dwb: Wind makes sense in certain locations. The fact that it's intermittent means it can't completely take over from gas, but it substantially decreases the rate at which you burn your gas (obviously). But you're right that wind is not a large-scale solution for our energy needs. Also the cost has stopped decreasing.

      Anon: Yup. If we're going to have viable biofuel, it's going to be from algae, which have a sunlight conversion efficiency orders of magnitude better than ethanol.

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    2. You know, I wonder if the ethanol industry doesn't have a hand in this as well - opposing a potential biofuel competitor.

      if 6GW wind requires 2GW gas to support it, then it still saves 4GW gas. But I would concede that a renewable energy plan will require some redundancy and backups - and most likely it will require long-distance distribution to balance the less consistant renewables.

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    3. More engineering understanding is required of those who comment on renewables. It is true that there is no silver bullet renewable solution, and we'll all cook (not global warm) ourselves in a couple of hundred years if we don't consider the thermodynamics of exponential economic growth. Short term, at least as far as being cooked, the problem with renewables is NOT the technology, it's the grid and Rule 888 which effectively runs the national grid to the benefit of individual privately owned power generators and limits the amount of renewables that can be utilized. The stupid self-serving regulations cause a gigawatt of power to endlessly circle Lake Erie. See http://somewhatlogically.com/?p=57 for more discussion and how the American Institute of Physics saw the whole deregulation mess coming.
      High voltage DC transmission makes possible ideal linkages between widely dispersed renewables and hydro, an area where China and Europe are making rapid progress because if you can gather renewables from sufficiently geographically dispersed areas, dispatch efficiency (matching power and loads) increases dramatically. Also, in the southwest, there is an almost perfect match between air conditioning loads and sunshine (duh!) For an example of something we might do about by making a link between Bonneville federal power and wind sites in the upper tier of states via electrifying the Burlington Northern right of way, check out 'America Back on Track, an Electrifying Idea' at http://somewhatlogically.com/?p=60

      Fat chance of getting current crop of conservatives to look at overall engineering requirements (no, its not rocket science) for a sane national energy policy. Modern politics is becoming total dogma, and engineering and science are basically heretical, always questioning current beliefs. We need a Roosevelt and a new REA (renewable energy agency) but if you thought the vested interest squeals over the original REA would be bad, just imagine today, when a national high voltage DC grid would bring about true competition.

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  6. Anonymous7:47 AM

    Another reason (or perhaps an addendum to your second point) why the military uses renewable energy is energy independence. For instance, the military wants to power their bases in Afghanistan with solar energy, so they are not dependent on fuel transports that are constantly under threat from the Taliban.

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  7. Here's my latest post on economics, "Labor Reallocation in a Depressed Economy".

    http://socialmacro.blogspot.com/2012/05/labor-reallocation-in-depressed-economy.html

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  8. Anonymous12:17 PM

    Noah

    The motto of the modern GOP: If it makes sense, I'm against it

    Great post

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    ReplyDelete