Hi, my name is Sean and I’m fallible
The challenges of reconciling science and policy
This is a post that I’m virtually certain will be misinterpreted. But it’s an important enough issue that I’m going to bet that my writing skills are sufficient to provide clarity to a rather muddy issue.
First off, though, a disclaimer: Science is good. Policy informed by science is good. Leadership informed by science is good. The alternative to all of the above is bad. Nothing I am about to say is to be taken as support for creationism, global warming denial, diminution of White House science advisers or the re-excommunication of Galileo.
However, there is a conflict that lies between the fuzziness that is innate to scientific inquiry and the precision that is required for policy — and more broadly, leadership. We see this conflict whenever global warming deniers trot out scientists who disagree with mainstream theories and we are forced to explain to the deniers that while the nature of scientific inquiry invites debate, the presence of a debate per se does not imply anything about the preponderance of evidence. As Joe Romm has pointed out, Einstein’s revisions to the laws of motion did not prove that Issac Newton was an insufferable quack. It just meant that science is innately fallible and subject to revision. Or as Keynes famously said, “When the facts change, I change my mind. What do you do?”
So far, I don’t think I’ve said anything novel or controversial. But here’s the catch: The same logic that compels us to acknowledge that science is fallible and evolves must also compel us to acknowledge that policy based on science might be wrong. This is not to suggest that a 1-percent doubt ought to stand in the way of policy based on 99 percent certainty, but rather to recognize that good policy must retain sufficient flexibility to “change its mind.”
The source of the conflict
Science, at core, is nothing more than a way to search for the truth. Karl Popper distinguished science from philosophy by noting that science is falsifiable. Religion, astrology, and Heidegger may or may not lead us to the truth. But per Popper’s definition, they are not scientific, since they cannot be falsified.
This makes for a situation where the most honest scientists are those who most critically examine their most deeply held beliefs. If one believes the theory of anthropogenic global warming to be true, try to prove it false. Try to prove that the globe is not warming, or that this warming is not caused by CO2 concentrations, or that human-made releases of CO2 do not account for the preponderance of the recent variation in CO2 concentrations. Try to disprove the theory not because you want to prove the theory false, but rather because the most robust way to test the theory is to try to knock it down. Astrologers can look at any personality type and conclude that it is a “typical Virgo.” Scientists by contrast ask for a robust, testable definition of one’s Virgo-ness and then look for exceptions to disprove the theory.
But now look at how this gets transformed into policy. Or indeed, to leadership of any type, since in a democracy, policy only proceeds by virtue of individual’s demonstrating sufficient leadership to sway opinion. While it may be scientifically valid to admit the fallibility of one’s theories, it’s a pretty lousy way to get people to follow you. “We hold these truths to be self-evident” inspires. “We believe the following is consistent with the current views on human nature but we reserve the right to change course, subject to the latest behavioral research” does not.
This is no less true in the halls of Congress than it is in corporate offices, baseball diamonds, or war zones. In all cases, effective leadership demands the appearance of certainty. Indeed, one of the hardest things about being a CEO in my experience is the internal conflict that comes from the necessity of this lie. If I know that our ability to make payroll next month depends upon us all rallying to close a deal this week, it behooves me to rally the team — and not to share my private concerns about the likelihood of that deal closing. More positively, leadership requires the ability to make decisions and be bound by the consequences of those decisions, even in the absence of sufficient information to make a fully-informed decision. And again, there is little to be gained by making those decisions with caveats about one’s inability to predict the future.
Any leaders who are truly honest with themselves face the same challenge. As such, scientifically-informed leadership must be nimble enough to shift gears when their fallibility is inevitably revealed — and honest enough to know that it will be revealed more often than we’d like.
Where policy and business deviate
In the chaos of a market, this fallibility is revealed on a daily basis in aggregate, even while it is denied specifically. Sony may have internally convinced themselves that beta was better than VHS. Bear Stearns may have internally concluded that their sub-prime exposure was limited. Calpine may have internally convinced themselves that the price of natural gas could never reach $13/MMBtu. In all cases, they were wrong — and the market revealed their fallibility, causing them to lose billions of dollars in waves of Schumpeterian “creative destruction.” And markets moved on.
Government policy, by contrast, has no such built-in correction. We made a bet in the 1980s that it was a good idea to give weapons to Iraq, and we’re still cleaning up the resulting mess. We made a bet in the 1950s that nuclear power would be “too cheap to meter” and still throw billions of dollars a year in subsidies at the industry to try to make it so. We decided in 1776 that we needed a well-regulated militia and 250 years later use this to allow private citizens to own armor-piercing bullets.
This isn’t because our political leaders are bad people, but simply because — absent the check of a market economy — there is no easy way to undo those decisions that proved to be less-than-omniscient. But decisions are made by mortals. And mortals are fallible. And any decision we make today based on today’s understanding of The Truth will therefore eventually turn out to be less than perfect.
This is why Lieberman-Warner is so problematic. Not because it seeks to reduce greenhouse-gas emissions (based on the current scientific consensus with respect to AGW), but because it presumes knowledge of the optimal way to address greenhouse-gas emissions over the next 42 years. It’s also why the Clean Air Act is bad for the environment. Not because it wasn’t important to lower criteria pollutants, but because it’s so damned hard to fix it so that it stops mandating increased CO2 emissions.
And those of us with an environmental policy bent are well advised to keep our own hubris in check as we think about the optimal approaches to address the environmental problems of our time. Be scientifically informed. Don’t wait for 100 percent scientific consensus to make a decision, because it never comes. But acknowledge that our best decision today may not be the best decision in the long term. Be flexible. Don’t write policies that are so heavily proscribed that they are unable to adapt as The Truth is more fully revealed.
Note: This first appeared on Grist.
Very well written as we need to focus policy on what we know today about greenhouse gas emissions and also have enough flexibility to modify in coming years; especially a CO2 cap and trade regime as well as keeping in mind that Kyoto expires in 2012.
Very interesting discussion on building political consensus around scientific solutions. Your argument that CHP is held back by regulatory issues and not technical ones looks persuasive. I also like the way you lay out why output based regulation would lead to a natural carbon market confined to those players who can actually solve the problem. While your proposed GHG rules would likely favour CHP projects, there is a built in mechanism to drive capital to other even better project projects should you be fallible.
The question is: given the strong scientific evidence and sensible market approach behind your analysis, why is there so little media coverage about the problems with electricity regulation, the clean air act and output based GHG regulation? It seems to me that the green movement should have picked up on your line of analysis. They would be able to push for economically net positive action that improves air quality and reduces carbon dioxide. Or if environmentalists have issues with your analysis, who are the other natural political allies?
David,
Thank you for the kind words. As to why it’s so hard to change the debate, I can only say that goes the heart of the issue. The hardest thing for anyone to change is their own mythology. This is as true for media and environmentalists as it is for policy makers and business leaders. (Personal admission: I “rode a lot of pine” on my high school soccer team, but remained convinced up until I got to college that I had skills my coach never saw. At which point I realize that my own mythology needed changing as well.)
With respect to your questions, the mythology that needs to be confronted in the media are those which assume GHG reduction will be economically painful, and which assume that our current economic model is optimum. Both conflate to a convenient (but false) assumption that the secret to our future is Sexy New Technology. The fact that you can actually profitably reduce GHG emissions with old, proven technologies conflicts with the conventional wisdom… but that doesn’t make it any less true.
Meanwhile, on the environmental side, there is a mythology that the Clean Air Act is good for the environment, ergo any change to same must be bad for the environment. The somewhat more subtle truth is that the CAA was directionally good, but structurally flawed. (And to be sure, there are quite a bit of understandable reluctance within the environmental community to even open up the CAA to debate, given the scope of shenanigans that could then be injected into the ensuing political process.)
But at core, it goes back to this issue of mythologies, and fallibility. Markets are like collegiate soccer programs: they force us to confront the flaws in our own mythologies, whether we want to or not. Regulation and media shorthand tend to resist those self-corrective forces and - as many an investor knows - there is great money to be made when the truth is in conflict with conventional wisdom. And man, is it ever.
Sean
I’ve since read your dad’s post “Uniting the clean energy army” and I’ve understood a little better the challenge of changing the system. At least we’re only fighting human laws and not thermodynamics.
I read the commentary on grist (Carbon policy dilemma, David Roberts and carbon policy 5) and you’re on your own fighting for output based standards. Until recently, I was also in the carbon tax or cap and dividend camp because I was against the wealth transfer created in giving away pollution rights and didn’t want the government picking winners. I only learned recently about output standards. I think the problem is that environmentalists don’t know about the low hanging fruit in the electrical and industrial sector. If we could just get some carrots in there, we could get very quick and profitable investment that would reduce GHG. (some) Environmentalists “know” that the way to stop GHG is to raise prices and get people to change their consumer behavior. If Joe Public got a “dividend” (paid by carbon tax or allocations), he could afford or choose to make those life style changes. Eventually when electricity costs and industrial costs are passed to consumers, they will make rational consumer choices and eventually companies with low CO2 technologies will win out. The problem with this approach is it initially prefers GHG reduction strategies that are available to Joe Public (solar on roof, buying a hybrid, installing better windows and insulation, etc…) when the low hanging fruit is in industry and power generation. It might eventually get us to the goal, but will take a lot of time and money in the process. Then once we get to that optimal mix, we’ll have a policy where companies transfer wealth to citizens for no reason (or we will have a mix that’s optimal for a society with that wealth transfer distortion). Do I have this right? If output based standards are to hard to sell and we end up with cap and dividend, is it just an expensive and long way to get to the same place or is it flawed in a deeper sense? One problem I see is that once half of GHG’s have been removed, the revenue collected and thus dividend payments will go down while the tax will be going up. I’m not sure it will be such an easy sell then.
After reading the commentary on output standards, a few questions came to mind. Sorry I’m late to the discussion, but I’m guessing you’re not checking you carbon policy 5 post anymore.
1) How are the standards between CO2/MWhr and CO2/MMBtu linked? Coal used for thermal energy (universally over 50%) is by definition more useful than coal for electricity (almost always under 45%). If the link is not done properly, there will be a massive wealth shift from the electricity sector to the thermal sector that doesn’t really accomplish anything. They’d be getting paid for being in an industry where you get more useful energy per unit of fuel. Would you keep the electrical and thermal markets separate and adjust the rates annually with the attempt of keeping the spot price for a credit in the same ballpark? Or is there a way to link the markets? We can’t have a fixed ratio, because that assumes we won’t learn how to heat or generate electricity better than we did in the past. If the link is not done properly, there will be an obvious arbitrage play in CHP where in the book keeping, you could give yourself thermal or electrical credits based on which market had a higher spot price for credits.
2) What happens to installed hydro? It is a sizable portion of the energy mix, and their output is pretty much constant. (no new rivers to dam, they’ll run as many gallons through the generators as they can). Paying their operators wouldn’t change anything. The natural follow-up is nuclear. Installed plants will get a huge windfall profit under this system. They’re already running at 90% capacity factor. Do we only allow new nuclear to get credits? I have no issue with installed wind, solar geothermal or other carbon free technology because they’re so small. In general, I agree with you that additionality is a bad test to get an optimal distribution of capital. However, for installed nuclear and hydro (about 30% of the US market?), I don’t see how giving them the right to sell credits gets to the goal of low GHG energy.
3) I like your idea for carbon tax in home heating and transportation. A “dividend” might be applicable here to get people to invest in more efficient cars and insulation. But I could also imagine that public infrastructure such as public transit and subsidized train system might be efficient. What are your thoughts? I guess we could also just have high CAFE standards, building code regulations and appliance standards, and home retrofit programs.
David,
In the interests of brevity, let me try to answer in a few separate chunks. First, re: your question as to the politics of GHG policies generally (your first paragraph). At core, any GHG policy will ultimately be evaluated on two questions: (1) how much did it reduce GHG emissions, and (2) at what cost? Big numbers in response to the first question are good. Big numbers in response to the second question are bad. Getting those mechanics right can ultimately be boiled down to several, simpler questions:
1) Do all tons of GHG pollution have the same price? If yes, we will optimally allocate capital through the economy and reduce as quickly as possible. If no, we will create artificial arbitrage opportunities, fabricated by the regulatory scheme with no relation to actual GHG reduction.
2) Does the policy encourage investments to reduce GHG emissions? Changing our energy infrastructure is a massively capital-intensive endeavor. As such, we better have incentives in place to deploy capital.
3) Does it put the point of regulation at the point in the economy where regulated actors have options? This is a subtle point, best explained rather flippantly. Suppose I want to put a stop to people getting hit on the head with bats. Do you put the fiscal penalty for head-batting on those who own bats, or those who have heads? A silly question to be sure, but one with an obvious answer. Similarly on the GHG side, it is critical to make sure that we put the regulation in the right place. This is a test that Lieberman-Warner horribly failed (for example, by placing regulation on gas importers. What else are you going to do if you import gas?)
When you add these up, the problems with cap & dividend become rather obvious - and the benefits of output-based standards also quite clear. The latter passes all three test. The former potentially passes the third (to the degree that the “fee” from the cap is imposed on those who burn fossil fuel, but that is a structural consideration that could still be screwed up.) But cap & dividend fails the first two tests. Tons of reduction are not clearly monetized, even though tons of pollution have a clear penalty. This creates a stick, but no carrot to those who might seek to deploy the capital that we desperately need to get the emissions down. Which means that we get financial pain, but no obvious way to solve.
David,
Per your question about linkages:
It’s actually quite straightforward in an output based standard. Let’s look at the electric side first: If I know how much fuel, and of what type a power plant burned in a given year (readily available from fuel bills) and I know how many MWh were generated (readily available from generator meters), it is a simple matter to calculate the tons/MWh. If no thermal energy is produced, that is the end of the calculation.
But if thermal energy is produced, it is simply a repeat of the above. If I have a boiler/furnace/etc., I again have fuel bills that I can measure. If I have a CHP plant, there is no incremental fuel use, but I have useful thermal energy. What then gets a bit tricky (but is easily solvable) is that thermal-generation plants rarely have very good meters. Consider your own home: you probably have good records of how much gas or oil you bought in a given year, but poor records of how many Btus of useful energy you delivered into your house. This is a problem of bad metering though - it’s certainly soluble. The idea of an output based standard to address this is that it intentionally sets a very low assumed efficiency of thermal conversion (say, 60%, as compared to a typical 75 - 80% for a modern boiler/furnace). The rule would then stipulate that if a thermal producer wants to claim a higher efficiency, they have to install meters and obtain an independent verification of the efficiency. This alone would work wonders on GHG emissions, simply by keeping score. But in the meantime, it ensures that to the extent that the input:output conversion is flawed, it is flawed in a conservative direction.
Now let’s look at how the OPS works. Currently, the US averages about 0.6 tons of GHG per MWh of power production and 0.3 tons of GHG per MMBtu of useful thermal energy production. Anyone who produces electric or thermal energy is given an allowance up to this level. If you’re over, you would have to demonstrate that you purchased allowances from those who are under. If you’re under, you have something to sell. (Clearly, the whole system needs to be audited, but this is easy enough to do & oversee.)
For a CHP plant, the heat recovered effectively provides an additional 0.2 tons of allowance per MMBtu recovered. Ergo, efficiency can be used as a pollution control device - as can shifts to low/zero carbon fuels or end-of-pipe controls. But the key is that the market allocates resources to optimally deploy that capital, rather than only deploying capital towards regulation-picked winners. Make sense?
David,
Re: your second question about hydro, I think this is a larger question about how to handle existing resources. The truth is that there are multiple ways to skin that cat.
In theory, one can certainly make the case that these rules should only apply to new generation sources, rather than provide windfall profits to assets that are already built. The trouble with that approach though is algebraic, since if you ignore existing assets, you also implicitly end up providing windfall profits to existing dirty assets, in the sense that if you don’t provide credits for the existing hydro/nuke fleet, you are also by definition not imposing penalties on the existing coal fleet.
As a practical matter, I think this implies that the optimal approach is simply to apply the structure to all existing and new generation assets. Yes, it creates added profits to the hydro/nuke stuff. But it also provides an added profit to gas (at least relative to coal), which - depending on carbon pricing - ends up changing the dispatch order on the grid to lower the overall carbon mix. That on balance strikes me as a good thing from a GHG perspective. One might object to paying windfall profits to existing nuke and hydro plants on economic or radioactivity grounds, but it does make sense from a GHG policy perspective. And since we’re talking about GHG policy, it strikes me as the right thing to do.
David,
Re: your final question about residential heating and transportation.
The most honest answer is that I’m not an expert in those fields, and we really ought to defer to those who are.
That said, that’s a bit of a cop-out on my part, so I’ll simply pass along advice I’ve gotten from friends in those spaces. In power generation and industrial/commercial thermal generation sectors, the annual costs are dominated by fuel expense. But in transportation and residential heating, the annual costs are dominated by capital recovery. (Look at how much per year you spend on car payments as compared to gasoline and you’ll see what I mean.) The reason why is because in these two sectors, you are dealing with capital equipment that doesn’t get used very often. Cars spend most of their time parked (while power plants spend most of their time burning fuel to generate power). Residential heating systems hardly do anything during the summer months. But in both cases, you still have to pay down their capital and maintenance costs.
So far, so factual.
What I’m told by friends in those sectors is that because of this dichotomy, a surcharge on fuel is a much more significant stimulus in the power and “big” thermal sectors than it is in transportation and small thermal. As such, a price on carbon (essentially, a fuel tax) provides much less incentive in those spaces. By contrast, regulation placed on the capital equipment in the form of CAFE standards, or appliance efficiency standards are much more effective.
Logically, this makes sense to me, and one could contemplate some bit of algebra to equate these standards to the carbon price as set in the other spaces. But - as I said at the start - this gets out of my personal area of expertise. Do you have any good ideas?
Thank you for the detailed responses. I read the paper your dad co-wrote (Energy efficiency, sustainability and economic growth, good thing the university has a subscription) that gave me a better background on the problems with carbon taxes (cap and dividend), where it explained that an increasing cost of useful energy will be a drag on the economy. When you frame the discussion about responding to those three questions, it helps understanding that output based standards are better. However, it is not initially obvious. By placing a tax on carbon content of fossil fuels (as they are extracted domestically or imported), it seems all CO2 is treated equally. It’s tempting to argue that as the dividend stimulus works its way through the economy, there will be capital investments. On the third point, some would argue that the market will eventually funnel the money to the actor who can best reduce GHG. A couple months ago, I would have believed or even defended these myths. You’re absolutely right that the output based standard answers these 3 questions more effectively than a tax. In addition, by designing the regulation to specifically reduce CO2 per useful unit of work, we may in fact lower the cost of delivered energy while reducing CO2. Using this type of regulation, we don’t have to trade the economy with the environment. That was another myth I believed, I was just hoping to minimize the damage. Thanks for presenting me an out.
I’m asking you to speculate about the future. You’re quite sure that under this policy (and complete deregulation and amendment to CAA), society can exploit the low efficiency of the power generation sector. Once this is accomplished, how confident are you that society can continue to reduce the cost of delivered energy while reducing CO2? Right now, the environment and the economy don’t have to be in opposition. Will this always be true?
Regarding my 3 more specific questions about the carbon policy, your answers make sense.
1) I hadn’t thought enough about output standards when I posted yesterday. Initially, the average power standard is .6 CO2/MWhr and .3CO2/MMBtu. I thought it was strange that a technology that produced CO2 free power would get .6 credits per MWhr and a similar free heat technology would only get .3 credits per MMBtu delivered. However this is not a problem because this new technology would replace the fleet (or the worst element of the fleet), which would presently make a bigger contribution to GHG reduction if this free technology were on the power side. Reaveraging every year will catch the distortions. I still think there will be an arbitrage opportunity for CHP, where you can rig the books such that the electricity is free or that the heat is free, or some combination, to maximize your credits. But I don’t see anything wrong with this. As long as CHP has advantages over other technologies, it should get the maximum benefit.
I was also trying to imagine how a carbon credits would get priced. By definition, at the beginning of every year, there will be an equal number of credits and number that need to be purchased. Any capital investment, or rise in capacity factor by a “good” facility will create an oversupply of credits. There are many variables including marginal profit per unit energy, cost of capital investments, ability to pass through cost increases, changes in fuel prices due to changes in supply and demand, long term “strip” prices, etc… I know the market will decide, but I was wondering if anybody has ever played the “what if” game and written it down. I’m imagining it being pretty chaotic at first, which will lead to a rapid decrease in GHG’s, but it might be quite a shock to the economy. Also how will the uncertain nature of the reaveraged standard each year affect business decisions? Do you imagine the spot price of credits to be stable?
2) While I’d be tempted to exclude old stock nuclear and hydro, it is clearly better than grandfathering coal.
3) This is also the first time where I’ve seen why changes in efficiency (capital investment) of consumer items are typically not economic. Thanks for pointing out that the “capacity factor” of most appliances, cars, insulation and heating systems is so low that it often isn’t worth making a change, while the low hanging fruit is in industry and power generation. I don’t have any great ideas on how to solve problems at this level, but this piece of knowledge is key in understanding why gasoline and energy demand is so inelastic. This also helps frame the debate on how solve the problem (maybe even ignore it for the most part until major work is done on low hanging fruit). At least there will be a reference price in the regulated market to understand at what point regulating the consumer side will be economic. As a side note with respect to car use, because the capacity factor is so low, hybrids (capital investment to increase efficiency) are not economic. However, Americans have started preferring smaller cars, reducing “capacity” which is economic.
David,
At some point, one clearly reaches thermodynamic limits. If we were converting 100% of our fossil fuel into useful energy, we couldn’t go any further. In the near term though, we’re not even close, hovering at <20%, and less than half of what other industrialized countries like Denmark have been able to achieve. So while one cannot infinitely increase energy efficiency, we can still go a long way towards profitably lowering greenhouse gas emissions before we hit any practical limits.
David,
Re: comment number 11, one can imagine a lot of ways that you could build in stability. If I have a project in a world with output based standards that is a net seller of credits, I’d do a bilateral deal with some one who is a net buyer (think of the local coal plant). Over time, we both bear risks that the average will move, which means that I might not have as many to sell as I have today and they might have more to buy than they have today. Conceptually, that ought to lead to a situation where we both come up with some reasonable view of the future and then sign a long-term contract for X% of the credits I have to sell, with X% < 100%. In the first year, I have a bit more than X% available, so I sell those on the spot. And the coal plant has a few more to buy, so they buy on spot. But the net result is that as an investor in a low-GHG technology, I can still negotiate a long-term strip that has a bit of “upside” in the early years.
Re: the “what if” game, that’s what economists are for. Most of their forecasts are bunkum, but that doesn’t stop them from making them!
I’m well aware that you can’t get more than 100% efficiency out of fossil fuels and getting close to 100% is highly unlikely. I’m wondering if by the time we transition away from fossil energy, do you think a clean technology will exist so we can continue the long term trend of lower cost delivered energy. Maybe you don’t like making forecasts 20 years out. I’m just asking for an educated guess from someone who knows more about energy than I do. I’m an engineering student and I know that my predictions are usually bunkum too (the difference is economist’s predictions get so much more air time). Its still fun making them!
I definitely think that having spots and strips will bring some stability to the market. Would you support some sort of cap where the government would supply credits at say 50$ each for the first few years, just to make sure an unintended catastrophe doesn’t happen? This shouldn’t be necessary because whenever investment happens a surplus of credits are created, but just in case.
David,
I don’t mean to dodge the question, but it’s damn hard to answer without knowing something about population growth in the interim. Traditional renewable prices are certainly coming down, although (given their intermittency, which imposes capacity factor contraints on them as well), they have to fall lower than conventional generation to break even. (In other words, a solar panel can only achieve ~ 20% annual capacity factor, which means that it needs to cost 1/5th of the alternative before it is economically advantageous.) Clearly, they have a long way to go, although it’s not as far as you might think once you take into account the subsidies and externalities associated with fossil fuels. Do I think they can get there eventually? Yes. Can I guess on when the point is that they can serve all our load? I have no idea.
One note though is that I’m not sure a full transition away from fossil energy is ever possible. We can certainly use much less, but there’s no getting around the fact that we need carbon, and fossil fuels may have a role in it’s provision. Even if we got all our power and fuel from renewables, we still need carbon for products and fertilizers. Consider: you can’t make a solar panel without silicon and steel. And you can’t make either of those without carbon. Similarly, the only baseload renewable is biomass, and so if we really go to an all-renewable grid, it’s hard to see that happening without a significant increase in the amount of acreage dedicated to energy crops. That inevitably is going to take fertilzer, which requires carbon. Can some of that carbon come from biomass? Of course - but that’s not without it’s consequences either, and we may well conclude that even in a fully-responsible, carbon constrained future, we are still dependent on coal, gas and oil (albeit to a much lower degree than we are today). This is the point I was making about practical efficiency limits. We may well be able to get to a world where we get >1 unit of useful energy out for every unit of fossil input (because of renewables, etc.) But I’m not convinced we can get to a world with 0 fossil input absent massive sacrifices in our standard of living.
As to your second question, I generally don’t like the idea of the government providing credits, at least at the start because it presumes failure. It’s like going to play golf and agreeing beforehand that you’re going to give yourself 10 mulligans, even before you know whether you need them. Give them out, and you’ll use them. Better to start strict, and only later adjust if necessary, for reasons that have much more to do with human nature than carbon policy per se.
About the cap on carbon prices, I guess the myths about deregulation are still whispering to me. Its important that the free market people keep reminding us about the power of well designed markets.
Thank you for speculating on an energy future 20-40 years down the road. While getting the answer right is nearly impossible, I trust your prediction a whole lot more than the coal utilities and the economists. Carbon policy is based on a somewhat educated guesses of what a future energy grid would look like. If your guess is wrong, your models are wrong (one you complain about a lot is the ~100 $/tonne CO2 that is necessary to justify sequestration).
If you start with the assumption that a technology with similar cost per delivered unit energy as today will emerge, that also affects your policy. Concepts like this push us toward policy that rewards different metrics (ie. CO2/unit energy as opposed to $/tonne CO2). Do you think output based standards are enough to drive development in this unknown technology? Or does some R&D money need to be spread around? (this might be the myths whispering again).
Policy generally does best when it rewards goals rather than paths - and in that vein, targetted R&D rarely guesses technologies correctly (while rewards for anything that lowers CO2/unit of useful energy equally incentivizes everything that gets us closer to that goal.)
That said, there is clearly a role for government to play in long-term technological development. The private sector is good at commercializing technology, but in the modern financial environment not that great at blue-sky, long-term R&D. So government R&D has an important role to play, so long as it leaves commercialization and technology selection to the private sector, subject to the appropriate regulation to address externalities.
What types of technologies would you say are too advanced to be properly developed even by a well designed market that also prices carbon? Are you talking about fusion or more near term stuff like advanced PV cells and cellulosic ethanol?
Do you think money is better spent at universities and national labs, or can government get good value in research partnerships?
On another non related matter, I’ve read in your blogs that hydroelectric electricity is used for base load, because the marginal cost of generation is low. I’ve got an uncle who works in electricity sales for a mainly hydro utility. He says that since hydro can be turned on in 5 minutes, they usually use hydro as a peaker whenever the spot price of electricity gets high. So is hydro used as both?
David,
I’m really not in the R&D world and was speaking more generally about those technologies that are 10+ years away from commercialization that the private sector doesn’t have the financial appetite for nowadays. I also don’t have much expertise in universities, nat’l labs or partnerships.
Your comment about hydro surprises me, and I wonder if perhaps your uncle works with pumped hydro (e.g., water pumped up hill and night with cheap electricity and then run down during the day.) In those cases, you can certainly play the prices in the market. But for normal, run-of-river hydro (and even the massive hydro dams out west), you are to a significant degree dependent on the weather and how much water is upstream, since if it doesn’t go through the turbines, you are either flooding upstream areas or bypassing the turbines to throw value away. Yes, you can use reservoirs as “surge tanks” within reason to opportunistically play markets, and I’m sure some do, but for the most part, conventional hydro is a “price taker” in the parlance of the trade, producing it’s cheap power whenever it can and taking whatever the spot price is on the market at that time.
My uncle has since told me that they supply base load and peak load. I only remembered the peak load stories, because stories about profits during heat waves are more memorable. They mainly have storage type facilities and have the competing incentives of avoiding spilling water and generating energy during the most profitable times of the day/month They also have other restraints, such as fish conservation, irrigation, flood control, etc… Their fleet is built to meet maximum domestic load for winter heating (the thought of using electricity for home heating drives me crazy, until the day comes when the grid produces less GHG/unit useful energy than a high efficiency furnace). The consequence is that they have a large oversupply of capacity in the summer to power air conditioners, which they export at high price.