James Galbraith gets to the heart of the dilemma facing climate change economics:
The market's real failure is that it allows for no signal from the future to the present, either from the conditions that will exist 30 years hence or from the people who will be alive and working then. The question becomes: Can we really create a market in which those far-off voices are effectively heard?
He ponders the solution offered by mainstream economists, mainly carbon taxes and cap-and-trade systems, noting that they all rely on markets and competition. Then he directly questions whether that's the way to go:
"Planning" is a word that too many in this debate are trying to avoid, fearful, perhaps, of its Soviet overtones. But the reality of climate change is that central planning is essential, and on a grand scale. It would start with tens of billions of dollars in research to determine what is feasible, what is socially tolerable, and at what cost. A National Institute for Climate Engineering would be a good start. Departments of climate engineering at major universities would follow. Presidential candidates should take the lead by proposing a cabinet department of climate planning.
What then? Which new technologies would get taken up and how quickly? Part of the answer is public investment, big-time -- in cities and the ways they use power, in transportation and the energy used for it. Mandatory changeovers in technology would follow. Fuel efficiency, building efficiency, urban density, transportation modes, and requirements for renewable energy must all be part of the mix. Cities from Austin to New York, and states--notably California--are already leading the way. But the laggards -- Texas emits more carbon dioxide than California and New York state combined--will determine whether carbon emissions are sufficiently reduced.
So the real test will be whether national decisions are made and enforced. Mandates force the pace of technical change, lower unit costs, and help businesses with their own plans for technical transitions. Plans provide clarity and reduce risk, an essential step in making things happen. Of course, planning can be authoritarian, and planners make mistakes. Much of what goes into a national plan, especially at first, may be wasted. But so what? Waste and inefficiency are part of human endeavor, and markets do not protect against them.
What counts is not whether every single decision is wise. What counts is the possibility that we might prevent catastrophe and at the same time keep people employed and life tolerable, decades and centuries hence. What counts is not the economy we have, but a new economy that we, and future generations, can live with.
I'm not sure I'm ready to sign up, but I thought I'd pass it along since you so rarely see a noted economist directly questioning the assumption that markets can tackle this problem. Discuss.
Ask Umbra on buying carbon offsets
If REDD can’t save this….
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Jon Rynn Posted 1:51 pm
11 Aug 2007
For instance, I took my kids to "Arctic Tales", a heartbreaking (but cute) story of polar bears and walruses struggling in a warming arctic environment. At the end of the movie, they have kids telling people to change their lightbulbs! Agghhhh! At this point, I'm starting to think that this is not helping people make baby steps, it's patronizing. When people see, as in "Inconvenient Truth", that there are huge, plantary, epochal problems, and you don't throw huge, epochal solutions at them, as radical as they might sound, then you're screwing with their brains.
So I've been thinking that really the logical way to go is to discuss -- dare I mention it? "central planning", and now here comes Galbraith and brings up the terrifying phrase. The really enervating thing about this is that some authors have called for a "World War II" type effort to solve global warming -- during World War II the US had more central planning than the USSR! We don't need to plan 90% of the economy to transform the society -- but one trillion a year would certainly help, to build networks of solar/wind energy systems, networks of light rail/high-speed rail systems, put local/organic/intensive farmbelts around cities, rebuild the cities -- this would all require planning, not just at the federal level but mostly at the local levels.
Anyway, er, yes Dave, thanks for the post!
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Gar Lipow Posted 3:06 pm
11 Aug 2007
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noolympics Posted 6:34 pm
11 Aug 2007
Moreover, carbon dioxide is not only a consumption problem but also a production problem. Consumers will create carbon dioxide by driving cars and by using more electricity. Producers will create carbon dioxide by using low quality fuel and inefficient power generating facilities. Different countries have different consumers' needs. Different countries have different energy policies and standards for production.
Something like Kyoto is necessary for controlling carbon dioxide emission globally. But the current Kyoto is junk; a much improved version is needed.
The "per capita" carbon emission proposal by the Chinese Communist Party make no sense because consumers' "demand" for carbon emission in China is just relatively very low. A "GDP" based carbon emission takes account of both consumers' demand and producers' demand for carbon emission and is, therefore, a more accurate measure. The new version should take account of each country's GDP growth allowing developing countries to emit more carbon dioxide over time.
Without a new Kyoto, domestic carbon dioxide emission control is meaningless. The reason, as I have mentioned long ago, is that capital is almost perfectly mobile. Without an international agreement and without imposing control on development countries, producers in developed countries will only shift their production to developing countries. Since developing countries are less energy efficient, such a shit will only increase carbon emission with no real gain, except for an increase in labor productivity in these countries.
Unfortunately, for developing countries, capital investment is both a blessing and a curse. In addition to having more carbon dioxide, there will also be more sulfur dioxide, nitrogen dioxide, ozone, and carbon monoxide that tend to affect mainly the local environment. In term of air pollution and carbon emission, such capital movement is certainly not Pareto optimal because all consumers in the world will lose whereas producers do not really care.
freehk.org | chinasick.blogspot.com | noolympics.blogspot.com
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Delay And Deny Posted 3:40 am
12 Aug 2007
So the real test will be whether national decisions are made and enforced. Mandates force the pace of technical change, lower unit costs, and help businesses with their own plans for technical transitions. Plans provide clarity and reduce risk, an essential step in making things happen. Of course, planning can be authoritarian, and planners make mistakes.
Yep, I think that was what the USSR had in 1950.
Just more evidence that Gore and the IPCC are more interested power, taxation and dominance rather than "saving the world".
John Bailo
Supratext:
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justlou Posted 4:23 am
12 Aug 2007
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Jon Rynn Posted 4:25 am
12 Aug 2007
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sunflower Posted 5:28 am
12 Aug 2007
Nonetheless, just to stir the pot -- USSR covertly funded ($30,000) to promote solar energy 1983. That primed the pump and red blooded Americans ponied up another $400,000. Seed government direction and capital can be leveraged into enthusiasm for growth. It is not a bad idea. It does not need to be visible.
I was recently told by my Russian friend that nothing is as it seems.
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noolympics Posted 5:51 am
12 Aug 2007
Big corporations (monopolies and colluding oligopolies) who can control supply and price.
American Medical Association who can control the number of medical doctors and hence the pricing in the medical industry.
Drug companies who want to keep their patents forever so they make more monopoly rent.
Japanese whale killers who want to kill as many whales as they wish.
.
.
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Who want to have no control on carbon emission?
Big corporations engaging in heavy industries and heavy energy consuming industries.
Evil developing countries who only care about their GDP figures.
What kind of control?
Either quotas or taxes (domestic tax + tariff). The latter is obviously preferred to the former. How much should be charged? Depending on a well "PLANNED" acceptable level of global carbon emission!
Every legislation enacted by any civilized society is a result of some "PLAN"! Without any "PLAN" the society will be chaotic.
Can there be a market for "crime"? Do we need to have some "PLAN" to reduce the crime rate? Or we let the free market determine its level? Yeah, a 15 year-old doesn't have any plan and ends up as a criminal! The unfortunate laissez-faire equilibrium of the "crime market" leads to a Maffia society!
How about a free market for corruption?
freehk.org | chinasick.blogspot.com | noolympics.blogspot.com
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Delay And Deny Posted 7:50 am
12 Aug 2007
And this folks, is exactly what it's all about: control of human beings.
Al Gore and the rest of his eco-Fascists want control. And to get power, they will not seek election -- nope, Gore tried that twice and failed (1992, 2000)...so, he has to create a big bad bogeyman and then force us into giving power to the IPCC and himself.
Why? Everyday we find new cracks in the idea that CO2 or human activities has anything to do with Global Heating? And no one has yet to disprove that anything about increased warming is not beneficial. In fact, everything about warming since 1880 has helped the human race grow and prosper.
The "markets" have responded brilliantly...by taking the extra energy of the sun that nature is sending us and created a civilization dedicated to human freedom and wealth.
John Bailo
Supratext:
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ids Posted 10:40 am
12 Aug 2007
Planning should start with rolling black-outs (with certain exemptions)now, across the nation, done with great civic pride, to get people to think, maybe, about power, even. Food in a refrigerator is good for two hours without electricity, and people can survive without TV.
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trock Posted 12:23 pm
12 Aug 2007
To argue that we are better for the warming, maybe. But what we are doing is putting into the climate a sledge hammer where before the atmosphere had only a hammer. The earth has had climates massively worse than todays; hopefully we won't be bringing a climate beast on.
No to a "planning event" like the US had for World War II. Many reasons.
But it is an example of an economy that changed, some forcefully, some voluntarily, to an economy in the United States stronger than before the war.
We have an enormous potential to change our economy for the better. We have a 13 trillion dollar economy with 4 trillion dollars in federal, state, and local taxes. Out of those 4 trillion in taxes, almost none of it is in carbon/fossil fuel taxes. The only carbon taxes go mostly for roads, which is mainly so we drive more.
Some would argue that if we have carbon taxes, that'll destoy the economy, people will go jobless, dogs and cats having sex, well ok not that. But with 4 trillion in taxes and people still have things, do things, enjoy things. Lets change some of those taxes from the things we tax now to carbon taxes.
Rebate the first 1000 dollars of property taxes on every families home, owned or rented, and make it up with carbon taxes.
Rebate every employer 1000 dollars of property taxes for every employee they have.
Rebate the first 500 dollars the employee and 500 $ the employer pays in Social Security Taxes and tax carbon fuels instead.
Rebate every states sales tax the same amount that a new federal fossil fuel/carbon sales tax takes in. what is taxed in Maine is rebated to Maine, Texas in Texas, etc. In my state we pay a sales tax on a new car and a used car. Let's only tax the carbon fuel. maybe the manufacturer can make a more fuel efficient car if it could charge what the sales tax would have been.
People would be worse off by paying carbon taxes. But they would be better off not paying as much in property taxes. They would be better off in not paying as much in SSI taxes. They would be better off by not paying as much in Sales taxes.
Now we tax at 4 trillion a year. or, said another way, 4000 billion a year. Let's tax trade; 500 billion in taxes in our economy. Reduce what we pay in taxes now from 4000 billion to 3500 billion and increase carbon taxes from zero to 500 billion.
Not only would we help Global Warming, but fossil fuel exhaustion by, hopefully, using less carbon fuel. Our buildings and land will be here 50, 100, 200, even 500, and our land a million years from now. our fossil fuel will be long gone.
We are tax stupid. We don't respect or value enough, those things that are permanent or near permanent when we tax them. And we don't respect or value enough those things that are polluting and depleatable when we don't tax them.
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Jason D Scorse Posted 3:57 pm
12 Aug 2007
I teach environmental economics and blog at http://www.voicesofreason.info.
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trock Posted 9:02 pm
12 Aug 2007
From what I've read, 85 percent of the research dollars that the federal government has spent has been for fossil fuels or nuclear (since 1974.) 15 percent for renewables. I like to say non depleatables instead of renewables.
Nondepeatables energy research should increase to at least 10 billion a year. I think it's around 500 million a year right now. give or take 300 million.
Before world war II, in the 1930's, the United States just didn't and couldn't get enough people to agree to even spend money for military reseach into better planes, bombs, bullets and guns. Had they in the 1930's reseached more into these things they would have been better when they were needed.
what are we waiting for. The research will be done. Let's start now in the 2000's to spend 10 billion on research instead of into the 2040's.
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odograph Posted 11:20 pm
12 Aug 2007
And why Buddhist monks seldom run for congress?
Come on John, congress-critters are about control (one way or another). You need blinkers to think that only one kind of control is bad, or that only one kind is "in play."
And of course, you have to pretend that control is always bad.
(As an easy example of a blind-spot, how many "free marketers" are ready to repeal the headlight law on cars? It's control man! The Government through its state violence wants me to light my car!")
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odograph Posted 11:36 pm
12 Aug 2007
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Jon Rynn Posted 12:56 am
13 Aug 2007
But the bigger problem I see with carbon taxes is this -- if things go according to plan and carbon use goes down, revenues for the government go down. Has anyone thought of this? Now, I can see a time when Right-wingers/libertarian types might look at this and think, "Hey! What a great idea those enviros have to destroy government! Let's take that one up!"
Mongo qualifier: I am not accusing anyone of being Right-wing, although if you are that's ok too, I offer this observation about carbon taxes in order to spur constructive debate and head scratching. Thank you.
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Sean Casten Posted 1:13 am
13 Aug 2007
At core, Jason Scorse has it right. Gov't historically does a really crummy job of picking winners, and yet that is precisely what mandates do. Witness the vitriol around the biofuels debate if you think this is likely to lead to favorable outcomes.
Galbraith's mistakes come in a couple flavors:
He appears to implicitly assume that current markets optimally deploy capital, ergo any shift must impose cost. This "full employment" fallacy is awfully attractive to economists because if you take it away, their discipline (at least with respect to forecasting) has no mathematical basis. But it doesn't make it true. See here for details.
Surprisingly for an economist, he seems to resist pricing externalities. We did it for SOx and NOx and it worked quite well, not only getting emissions down, but doing it at a much lower price than anyone forecast at the start of the tradeable permits markets. (In large part because the forecasts made the full-employment mistake in item 1.) Why shouldn't it work for carbon?
He confuses total emissions with emissions per unit of useful stuff. Texas has a lot of emissions because Texas has a lot of industry... which produces stuff that gets used in other, low total emissions states as well. But on many metrics, Texas is actually pretty good (for example, their power grid is much more gas intensive than other industrial states that are coal-heavy). Thus, a market-based carbon control system could, for some products give Texans a competitive advantage in the global marketplace. This highlights a key problem with mandates - and with the earlier posts on Soviet philosophies. Say what you will about Marxism, but at core, it always put intellectuals in control. Galbraith the academic would likely be called upon to pick winners should a mandate system evolve. And based on his read of the market, I would expect him to do about as good a job as any Soviet politburo. Not because he's dumb - but simply because the collective wisdom of the market - if we let competition work - always trumps the collective wisdom of a handful of smart dudes. Which an economist, of all people, ought to know.
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odograph Posted 1:18 am
13 Aug 2007
It really boggles my mind how everybody forgets the debt. Fiscal responsibility is just gone from American culture. We run up debt in our private lives, and our congress-critters argue about how to run up debt on our (or our proverbial grandchildren's) behalf.
(Aside from debt service, and the need to reduce debt, there are proposals to reduce Social Security or other taxes in proportion to carbon taxes ... but that smacks, as I say, of unreality.)
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odograph Posted 1:23 am
13 Aug 2007
The Prius credits are a case in point. We are weak, so we do not tax hummers. Instead we run up more debt to credit hybrids.
Who pays for that?
It's the same deal with ethanol subsidies. We don't have the guts for a gas tax (reducing consumption) so we write checks to corn growers.
Who pays for that?
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Jon Rynn Posted 1:36 am
13 Aug 2007
In fact, it's so much better if CEOs who are dictators of their huge hierarchies of capital and employees get to pick the new technologies instead of democratically elected governments! Now I see! After all, in their wisdom, they told us that global warming doesn't exist and oil will last forever. Well, I guess there's nothing to worry about! Because the only alternative is Soviet communism!
OK, guys, we're not talking about a centrally planned economy here with a dictatorship deciding on production. Even the Soviets figured out that you can't plan an entire economy. But what Sean and Ron Steenblik have shown, it seems to me, is that certain special interests have gotten hold of government, and enforced their way of doing things -- coal plants far away from use, biofuel subsidies, etc. First of all, this is classic conservative argumentation -- brake government and then tell people it doesn't work. The Air America radio host Thom Hartmann talks about this all the time (he has podcasting too if you're interested).
We're not talking about James Galbraith sitting at a desk making decisions. We're -- I'm -- talking about a very public discussion about what kind of society do we want? do we want sprawl forever? If we don't, we have to start doing things, like building trains and changing land use policy. Do we want renewable energy, specifially solar/wind and maybe geothermal, or do we want biofuels, or whatever else? If the market decides this, renewables will lose, and so will the biosphere. These are all large issue discussions, big choices -- coal or solar?, and then, if the society, acting through democratically elected officials -- as imperfect as they are -- decide we would rather go toward solar, then we engage in a huge, messy, challenging debate about how to do it.
If we were still in an economy that was truly competitive and made up of small firms, it would be one thing. But we're not. That's why James Galbraith's father, John Kenneth Galbraith, coined the term "countervailing power", because something has to stand up to large corporations, or else they will do what they claim their shareholders want -- maximize returns, which in 2007 means frying the planet. I'm not being ideological here, I'm trying to be realistic.
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odograph Posted 1:59 am
13 Aug 2007
It's easy to present a polarized view based on one type of failure.
It's harder to make a nuanced and pragmatic argument, that both markets and central planning fail at times, and that they should both be used in careful measure.
(Put another way, I don't think it is pragmatic to "specialize" in one sort of criticism.)
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GRLCowan Posted 2:33 am
13 Aug 2007
I have thought of it, and concluded that it would cause everyone on a public payroll who had influence over anything that could encourage or discourage thrift in carbon-burning -- thrift meaning either conservation or substitution -- to do everything he deniably could to discourage it.
That, and present government carbon revenues, are how I explain present government behaviour. I would expect, e.g., carbon revenues supposedly earmarked for alternative energy R&D to be intentionally wasted.
There's a shortcut: ask yourself what an oil company would do if it had the same power.
--- G. R. L. Cowan, former hydrogen fan
Oxygen expands around boron fire, car goes
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odograph Posted 2:46 am
13 Aug 2007
Whatever the level of the target, a revenue could be extracted from that target. Indeed, it must be, as a deterrent against re-expansion of GHG emissions.
(A badly designed cap and trade would 'give away' emissions rights in perpetuity, but in is improper generalization to damn everything for that corner case. As an example, a simple carbon tax would generate carbon as long as there were carbon emissions. That will be a couple generations at least.)
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Jon Rynn Posted 3:12 am
13 Aug 2007
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odograph Posted 3:24 am
13 Aug 2007
I mean, look at the futures that people imagined and the fears people managed in the 1950's. Were they preparing for the problems of today? Perhaps in part ... but only in part.
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Sean Casten Posted 3:24 am
13 Aug 2007
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naturescene Posted 3:55 am
13 Aug 2007
This argument should be all but dead and buried, and we should be focusing on which pricing mechanism to use. Note, a tax or a cap-and-trade are pricing mechanisms, not markets.
The Carbon Share program is the truest "market" policy approach to carbon reductions - more so than a carbon tax, more so than any of the other cap-and-trade proposals. It's a shame that it is not getting any attention.
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naturescene Posted 4:17 am
13 Aug 2007
Grist readers and contributors should take the time to understand it if they don't already.
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GRLCowan Posted 4:23 am
13 Aug 2007
... insert your own technical succession example where the old did not have to support, and the new therefore did not have to defund, a large number of public cheque-cashers.
Casten is right to suggest redistribution that does not leave the carbon money where it can sustain any population, even larger than today's, of public carbon revenue-vores . Odograph and Rynn seem to be having difficulty imagining how anyone could possibly not want to burn carbon. Surely the revenue would be very reliable, surely.
--- G. R. L. Cowan, former hydrogen fan
Oxygen expands around boron fire, car goes
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David Roberts Posted 4:48 am
13 Aug 2007
grist.org
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Jon Rynn Posted 4:53 am
13 Aug 2007
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odograph Posted 4:59 am
13 Aug 2007
You are, by listing past inventions, engaging in retrospective narrative. That is quite different from successfully creating future narrative.
Will we have neat things? I think so. Can you or I list them? I think not.
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odograph Posted 5:02 am
13 Aug 2007
But the truth is people talked about them just like people talked about hydrogen cars just a few years ago ... full of hope and promise and vision of a better world.
Now, which future tech will replace (or at least reduce our need for) oil? If we are good students of history we'll say that some things will be invented, but we won't know what or how good they are until we get there.
We don't want to get caught out as flying car proponents.
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naturescene Posted 5:15 am
13 Aug 2007
markets and market-based policies don't lead to pre-defined specific solutions; rather, they create the atmosphere in which innovation, creative destruction, and the entrepreneurial drive excel.
Whereas Galbraith, and others I presume, are completely sure that an overhaul in transportation infrastructure is necessary, I wouldn't jump on that yet. It may be sufficient (it may not), but necessary? With all the carbon reduction possibilities out there right now, how do we decide which ones are necessary? I have my own concerns about the wisdom of more investment in public transit, but I'll leave that aside for now.
It's an interesting question, so I'll give it a little thought experiment:
First, why do we not already have more public (or mass) transportation? Answer: it is relatively expensive compared to other means.
Why is it more expensive? Well, one reason is that public transportation is historically a government granted monopoly - thus there are no incentives to reduce costs. Competition is needed in the public transportation market. Policies that promote competitive contracting of services would be one step.
Another step would be to shift the focus away from just rail. Buses are less expensive to invest in, and more versatile - yet the majority of public transit funds go to rail. Alternatives like buses offer a bigger bang for the buck.
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Sean Casten Posted 5:15 am
13 Aug 2007
Many states have found ways to shift highways into the public sector. Close to my home, the Australian bank Macquarie bought the Indiana toll road from the state, took it private and runs it. So it does strike me as possible that big, massive, public infrastructure projects can be built and maintained by the private sector. However, one cannot do this for rails so long as we subsidize the interstate system so heavily. Amtrak's frequent requests for Congressional bailout do have a grain of truth to them when Amtrak must charge it's passengers a rate that covers all their operating costs, but tolls/gas tax only pay a fraction of the costs of building & maintaining the interstate. So while we could think of ways to make public rail attractive for the private sector, I have a hard time seeing a way to do that without first removing the subsidies to the competition.
On the other hand, there is a legitimate case to be made that some industries are natural monopolies. (With electricity distribution and federal highways being the two most oft-cited examples). Logic holds that since one doesn't benefit from duplication of systems, these systems are bound to be run by one, single entity who has the natural monopoly on service. And to the extent that this is true, it is likely to be better served to be managed by the gov't than the private sector.
To the extent that item (2) offsets (1), maybe mandates are the best way to go. But this is only true to the extent that one can't come up with a way to provide a vehicle within which competitive markets can work. And on this front, there are a lot of possible ideas. We did build a national railroad way back when by granting rights of way to those who built the railroad, and did a pretty good job of getting cross country quickly. Alternatively, some of the most thoughtful ideas I've seen on the electric grid suggest shifting the utilities back into the public realm, but opening wide competition on both ends (e.g., the public manages the grid, but the private sector decides how and where to best deploy generation).
But even still, this is a narrow issue. Because even if we were to conclude that light rail is best served through gov't mandate, it is quite a stretch to therefore conclude that all approaches to carbon reduction are best met through gov't mandate.
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Jason D Scorse Posted 5:47 am
13 Aug 2007
I teach environmental economics and blog at http://www.voicesofreason.info.
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Sean Casten Posted 6:01 am
13 Aug 2007
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Jon Rynn Posted 6:07 am
13 Aug 2007
The only possible reason to keep a natural monopoly in private hands is that there would be an incentive to keep costs down. But even according to mainstream economic theory, there is also an incentive to raise prices at the expense of the consumer, and certainly innovation would not thrive in a monopoly sector that way it would in a competetive one. That has to be contrasted with the gains for the public from having some control over the governments that directly control the natural monopolies.
The problem is that much of infrastructure is at least in certain parts, monopolistic. Even the transportation system, which has been privatized way beyond reason, in my opinion -- in other words, based on cars -- has to have monopolization of roads, bridges, etc. Having the grid run by the government sounds logical to me too, and maybe you can explain why having private generation makes sense, because I can't see how one could choose between generating firms -- but if you can, great! To continue through infrastructure, water is almost totally government controlled, and communications is another interesting topic, especially munipicipal wifi, but I won't get into that here.
NatureScene, you seem to be a little more ideological, you haven't answered how to treat a natural monopoly. Not everything can be competitive. Many more things can be local, although still a monopoly, such as transit systems and energy grids or even generation. I suppose you could say that people could choose by living in a particular region, in that case.
Which brings us to NYC, which many people do want to live in, partly because of the density/mass transit (for a good debate on rail, etc., see "The Potential of Electrified Urban Rail and/or Electric Vehicles" at TheOilDrum.com). So Jason, the question is, can government move people back into cities, since they did so much to move them out of cities by building suburban infrastructure while letting the cities rot, guaranteeing mortgages in suburbs and not cities, etc? Wouldn't it be nice if the government could give it a push, maybe with some government built dense housing/retail in strategic locations? This is a real problem, because cap-and-trade, carbon taxes and the rest of it does not address this issue, unless you somehow give credits for building dense/mixed use buildings -- which I suppose could be part of the mix.
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Jason D Scorse Posted 6:11 am
13 Aug 2007
On a related note, I wonder how much driving would have to cost to get people to live in much different ways. Nominal gas prices have tripled in less than a decade and barely anything has changed. Americans love cars and are probably willing to pay quite a good deal to live away from dense cities and drive hours to work. I don't get it, but it persists.
I teach environmental economics and blog at http://www.voicesofreason.info.
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Jason D Scorse Posted 6:13 am
13 Aug 2007
I teach environmental economics and blog at http://www.voicesofreason.info.
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Sean Casten Posted 6:36 am
13 Aug 2007
You hit a subject near and dear to my heart. Notwithstanding the way our electric grid runs ($650 BN industry, and counting), there are NO good reasons to put a monopoly in the private sectors hands. It is far too frequently espoused that businesses are more efficient than government, but there's actually no proof for that. What there is proof for is that competitive markets are more efficient than non-competitive markets. Government is not inefficient because of the people they choose to employ or the way they get elected - they are inefficient because they have no competition. (Indeed, if you've ever tried to sell something to a big company and navigated the resulting maze of paperwork, you quickly come to realize that even the bureaucratic molasses blamed on gov't is misplaced - that particular inefficiency is common to any sufficiently large organization.)
What electric utilities - and indeed, every for-profit industry that has ever been subject to government regulation has been able to do politically is to convince the public that they are more efficient solely by virtue of their profit incentive.
But let's read Adam Smith a bit more closely than that. He didn't say that profits engender the public good - he said that the competitive pursuit of profits engenders the public good. Take away the competitive pursuit bit, and the only thing that profits do is create a tax on the price that the consumer otherwise would have paid. The biggest proof of this is that the electric sector is now only 1/2 as efficient as it was in 1910, before we created for-profit monopolies. There is no other industry with such a dismal record of growth. (Another point of reference - non-profit electric coops consistently provide lower price power than their regulated brethren. This is not because they are the ideal, but because if you have to choose between a civil servant running the monopoly and a for-profit company running the monopoly, you're better with the former. Better still not to have the monopoly.)
This is subject for a longer post one day, but it is a hugely important point. One of the interesting things you find if you study the history of monopoly regulation is how many industries used to be regulated as for-profit monopolies - from bakers to innkeepers - and how all of them deployed the same arguments about the natural nature of their monopoly. In every case, society was better off when we exposed them to the discipline of competition.
(And before someone screams CALIFORNIA, please note that CA electric dereg didn't expose markets to competition - it just took away the regulatory check on the monopolist. In a deregulated industry, you still need antitrust oversight.)
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Sean Casten Posted 6:41 am
13 Aug 2007
The Galvin Institute has espoused (at least from podiums - not sure if they have white papers on this) some interesting ideas that suggest that the distribution utility ought to manage the operation of the grid, but not the metering or billing function. If you do this, they quickly become amenable to civil servantization, and then the generators - whereever they may be located - can enter into bilateral contracts with whoever needs their excess power. Use the grid to wheel the commodity if you need be, build your own wire if you don't - but in all cases, take away the utility's right to decide whether or not it wants to allow a competitor to use it's distribution network.
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Jon Rynn Posted 6:58 am
13 Aug 2007
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David Roberts Posted 6:59 am
13 Aug 2007
This point is vital to assessing the Bush administration's many efforts to "privatize" various government functions. The way it's sold is that privatizing a given function will make it run more efficiently, but in practice what happens is gets turned over to a single large corporation (or small set of politically connected corporations) via no-bid contracts. All competition is removed; what's added is the profit motive and a lack of accountability. The result is, predictably, disastrous.
As I see it, the grid should be a neutral playing field, maintained by a public agency, accessible to all private actors. Yes, let energy generators start competing; let net metering and demand reduction and all the rest be the subject of market competition. Things would improve -- chaotically, perhaps, but rapidly. (This is a variant of the "net neutrality" argument that's going on about the web.)
grist.org
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trock Posted 7:04 am
13 Aug 2007
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Sean Casten Posted 7:45 am
13 Aug 2007
Actually, the argument for competitive central generation is already pretty well established. Calpine built lots of gas fired central plants in response to the 1992 Energy Policy Act which (for the first time) made it possible for unregulated entities to buy fuel, convert it into power and sell the resulting output onto the grid through wholesale markets (ISOs, RTOs, etc.) In hindsight, Calpine didn't do a very good job of betting on which direction gas and electric prices were going to go, but the competitive central generation model remains fairly robust, at least in the restructured states. Central wind plays just as well into those markets, as would central solar if it becomes significant. Those markets are far from ideal, but they're getting better, as the bid-markets now occur with enough granularity to put differential values on power at different times of day/year and are starting to recognize that power generated close to the point of consumption is inherently worth more than power generated in rural North Dakota. Which isn't to say that the power in ND is bad, but it's not worth as much since it still needs all that T&D to get to market.
In candor, it bears noting that the viability of the central wind model at present relies to a significant degree on production tax credits for wind - which gets us back into gov'ts picking winners. But this doesn't change the fact that those central stations are not monopolistic. So long as customers are not forced to buy from you (as the ISOs/RTOs protect against), you aren't a monopoly.
So I don't really see that there is much political disagreement within the renewable community. Both ends of the wire benefit from more competitive markets. Where there is a difference is that the central wind stations are much more amenable to the central utility model where the utility owns the wires (and the wind plant needs the wires). This, to a significant degree explains why the uptake on wind by the monopoly utilities has been so much vaster than many other - often more cost effective, I might add - technologies.
In answer to your question though, yes, markets can choose where their power comes from. Clearing prices on ISO markets allow people to pick all the time (and while you may or may not choose the "green purchase option" from your local utility, whoever you buy your electricity on is regularly choosing who to buy from - and therefore, at the margin, which plant to dispatch) in wholesale power markets.
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naturescene Posted 10:01 am
13 Aug 2007
Sean clarified the point I was trying to make. I didn't directly address natural monopolies for a few reasons. One is that I don't think public transportation (I prefer to call it mass transportation) is a strong natural monopoly, unless you're only considering rail. I implicitly accepted what Jason pointed out, that most US cities aren't designed for rail - but instead of moving the issue to one of dense development I opted to remain focused on transportation. If you're talking buses, I see no natural monopoly.
The other reason for steering clear of the natural monopoly issue is that the term 'monopoly' conjures up an assumption of anti-competitiveness. But, as others have already pointed out, the public sector can benefit from competition. Public-private partnerships in mass transportation is what I was referring to when I said that policies should encourage competitive contracting. Government may have a comparative advantage in planning and building infrastructure, but private firms tend to face better incentives for better manufacturing, operation, and maintenance. Partnerships that play on these comparative advantages can be developed through good market-based policies.
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Jon Rynn Posted 11:12 am
13 Aug 2007
And Sean -- thanks again, although I need a little primer on ISO's and RTOs, any links?
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Solshapiro Posted 2:57 pm
13 Aug 2007
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Delay And Deny Posted 3:29 pm
13 Aug 2007
<blockquoute>it is time to face it; and central planning can help.
Everything in late 20th century politics, economics and science has declared the opposite. We have no valid tools for predicting almost anything that is not already in a linear relationship to something.
That excludes almost everything of interest.
John Bailo
Supratext:
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Colin Wright Posted 5:58 pm
13 Aug 2007
But let's look at what Galbraith is saying. First, he's not against cap-and-trade. But he thinks it's not enough. More importantly he sees the energy markets being dominated by large corporations, like Exxon and TXU.
Can they be trusted to invest those profits correctly? No. A real climate solution must shrink some industries and grow others, and that means changing the distribution of profits. Exactly how is something we need to plan.
That is, large corporations will act in their own interests, by buying up the competition, for example -- just as the oil and tire companies bought out the streetcars in 50 American cities, forcing people into cars, and propagandizing them into desiring "quiet country life" (the new suburbs).
The utopian ideas of perfect markets exist only in people's heads. Stiglitz years ago demolished the idea that markets and the persuit of self-interest leads to economic efficiency. "Whenever information is imperfect ... (always)...the reason that the invisible hand seems invisible is that it is not there" (Making Globalization Work, p.xiv). Adam Smith, as valuable a thinker as he was, was writing in a time of corrupt merchantilism, before capitalism and powerful corporations existed.
Instead, the argument is not, Can markets solve GW? It is, How can governments use markets as one tool among many to further the public good? We cannot take the chance that ths time we will do better at regulating the corporations. With their massive resources they are always one step ahead of the law.
That's one reason why we need to persue parallel paths of government investment, in addition to cap-and-trade.
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Sean Casten Posted 11:25 pm
13 Aug 2007
The 1992 Energy Policy Act and FERC order 888 which followed shortly thereafter created "open access" to the transmission grid and gave the states the ability to begin deregulating wholesale markets. Some states restructured wholesale markets (e.g., TX), some did nothing (all of the SE and most of the NW) while others started, panicked and stopped (e.g., CA).
In those states that did restructure, there is some Independent System Operator (ISO) and/or Regional Transmission Operator (RTO) that coordinates the market. They are flawed beasts, as John Anderson of ELCON has pointed out quite eloquently here. But they do, for the first time provide a mechanism for participation in electricity markets by non-regulated parties. (Anderson's criticism, which I share is that the price set by those markets is still flawed - but there is at least access.)
For info on some of the other major ISOs, here are links to ISO-New England, the PJM Interconnection (Pennsylvania-New Jersey-Maryland) and the Midwest ISO.
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Sean Casten Posted 12:08 am
14 Aug 2007
You raise good points, but I think confuse the theory - and practice - of unfettered markets with the inefficiencies inherent in a democratic system.
The difference is important, but too often conflated. Being in favor of competitive markets is not synonymous with being in favor of corporate oligarchies. Indeed, to some degree, these motivations are opposed. A successful business in a competitive market place is one that outcompetes the competition. If it does so by offering a more valuable service for less price, we generally see that as a good thing. (Think iPod) If it does so by using it's competitive position to unfairly squash it's rivals, we generally see that as a bad thing (think Microsoft bundling Explorer with Windows, or Standard Oil dropping gasoline costs on competitive street corners until it owned the corner). And if it does so by buying out it's suboptimal competition, we can get a bit conflicted as to where economic efficiency ends and anticompetitive concentration begins.
But the point is that a profit-seeking business by its nature constantly seeks to make it's industry less competitive, and not all paths to that goal are contrary to the public interest. But it does create a problem in a democratic system of government - or any other form, for that matter - in that there is never any lobby that argues for competitive markets. And in this degree, government oversight is critical to provide antitrust oversight and ensure that we always strive for the theoretical ideal of competitive markets. We may not get there, but we are always better heading in that direction than towards concentration. (As an aside, it is one of my great frustrations with the Republican party that they have shifted from a party of capital-B business to one of favoring specific businesses at the expense of the broader business community. The Dems are really no better, but unlike the Rs, they never claimed to be. There is truly no political bloc right now that consistently and eloquently argues for functioning markets - to all of our great detriment.)
It is tempting in this morass to argue that we ought to just throw up our hands and move in a more socialist direction with enlightened despots making all the hard choices. And if you go this way, you're in good intellectual company. Einstein felt pretty strongly in the 1920s that the magnitude of scientific challenges we faced at the time was far too large to be left to the private sector, and was rather enamored of the Soviet experiment at the time as a way to get that done. History has proved him quite wrong on that front, but the example is illustrative for what it says about the intellectual temptation to understate the potential for competitive (or even near-competitive) markets to deliver societal gains. It also makes it clear why socialism has always been popular amongst intellectuals who see the scale of societies problems with greater clarity, even while they so often understate the ability of markets to address.
So yes, the theory of fully competitive markets may always be just out of reach. But stepping in the other direction is disastrous. The role of gov't in this case ought to be to maximally encourage competitive markets whereever possible, and then step in only to address those externalities that remain. I don't doubt that some externalities will remain, but the reason why I have such a problem with Galbraith's idea here is that he seems to start by throwing up his hands. We haven't even tried to get competitive markets in carbon yet (and we massively subsidize the worst actors). Let's get markets in before stipulating what they can and can't do.
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Jon Rynn Posted 2:21 am
14 Aug 2007
But another problem which your work and Steenblik's work has highlighted for me is the problem that Mancur Olsen called "sclerosis", that is, some industries (or other groups) get their hooks into government and the general political economy, and it's hard to get them out -- e.g., the coal and utility industries. I'm not sure what this means exactly, and obviously it means taking them out in terms of ending regulations and subsidies that keep them going, but it may also mean something more, like somehow making it possible for "infant industries" like solar (or cogeneration) to thrive, but not worrying about trade as is the usual need for infant industry protection, but protect them from the giants that are in the domestic economy. Just a thought, for now.
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GRLCowan Posted 2:59 am
14 Aug 2007
Mr. Cowan, have you read that book? You are, by listing past inventions, engaging in retrospective narrative. That is quite different from successfully creating future narrative.
I haven't read the book. I've heard it mentioned enough times that I may have to see if the library has it.
I think trying to predict the future by positing that it will in some respects resemble the past has some history of effectiveness ... but what good is that, eh.
Will we have neat things? I think so. Can you or I list them? I think not...
Obviously not list them all. But if I have not listed one of them, it hasn't been for lack of trying.
Put another way, people who chart the future hate it when flying cars are brought up. That's not fair, right?
But the truth is people talked about them just like people talked about hydrogen cars just a few years ago ... full of hope and promise and vision of a better world.
It seems fair to me. Flying cars have problems that must have been the subject of FABNAQs at every such discussion.
--- G. R. L. Cowan, former hydrogen fan
How shall motoring gain nuclear cachet?
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Jonathan M Feldman Posted 8:25 am
14 Aug 2007
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness"
-- Declaration of Independence, July 4, 1776
There is a basic problem in the contemporary discussions of rights. A basic principle in democracy has been taken over by technocratic policy think, namely the concept of "emissions rights." This legal innovation has begun to concept the most basic ideas of American society namely the right to "life, liberty, and the pursuit of happiness." This idea of the right to life from the U.S. Declaration of Independence includes the right to maintain one's life which is being violated by polluters.
When polluters are given the "right to pollute" they are potentially violating the "right to life." Thus, emissions "rights" have are not exclusively a question of markets, but a question of politics as well. Citizens in Western Europe and increasingly the developing world recognize that the U.S. uses far more energy than its share of the world population and also disproportionately contributes to global warming and other environmental ills. Therefore, treating the right to emissions and market solutions as some kind of "internal" U.S. debate misses the larger problem which is whether the "right to pollute" that is traded within the U.S. violates the rights not only of U.S. citizens, but citizens elsewhere.
This does not mean that government is always more efficient or productive than markets. The Soviet case, however, pointed to the limits of a centralized state which we also have in the Pentagon as Jon Rynn and others have noted. Rather, independently of the efficiency of markets, if companies are more efficient or productive by violating my or your rights to life free from health reducing pollution, then efficiencies are irrelevant.
The increasingly technocratic education that some get in policy schools, economics departments, and engineering programs probably explains why some people can go on about "rights" and assume that it only refers to the "right" to pollute.
Note: Try re-reading or reading the Declaration of Independence.
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Biodiversivist Posted 8:59 am
14 Aug 2007
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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biofuelsimon Posted 9:26 pm
15 Aug 2007
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