Comments David Mack has made

ids

If you just divide the capital cost by the capacity, you get around $4700/kW of capital costs, about $1000/kW higher than coal plant Sean says is already very expensive in his initial post. This may not increase rates more than 2% because the cost of this small facility may be averaged with other cheaper plants. The point is that new coal plants, let alone clean coal, are not cheap. On Another rate increase in the name of cheap coal posted 10 months, 2 weeks ago 27 Responses

Sean

I feel your frustration. You and your dad have been at it for so many years. Keep up the good fight. The more profitable Recycled Energy is, the more competition you will have and the more investment in cogen. Maybe if wall street realizes it can make money on this, and even more with deregulation, it will get on board. On The electric sector's price inversion posted 1 year, 3 months ago 5 Responses

Sean- I wasn't as clear as I thought

I was trying to make a point that your version of OBS treats electricity differently than other commodities such as steel, gasoline... I made up a hypothetical OBS that only alloted credits for CO2/MMBtu. I tried to explain that this hypothetical policy would incentivize efficient boilers but would be agnostic to how the heat is transformed into energy. There would be a wealth transfer from those using inefficient coal boilers to high efficiency natural gas boilers, accelerating the deployment of the latter. Efficiency in the heat to electricity process would only be incentivized by the resulting increase (or decrease) in the price of heat. There would be no wealth transfer to those who efficiently make electricity and no accelerated deployment of capital. Clearly, this hypothetical policy wouldn't accomplish our goals, and that is why electricity is added to OBS with a CO2/MWhr standard.

I created this lengthy example to draw the parallel with how the production of commodities are treated. Your proposed OBS is agnostic to how heat is used to refine aluminum, steel, oil... just as my straw man OBS is agnostic to how heat is transformed to electricity. The result of your proposed OBS is that there will be a wealth transfer that will accelerate deployment of efficient boilers in commodity production. Deployment of efficient processes will only be incentivized by the resulting changes in price for heat and electricity.

The question I was getting at is why should the electricity and boiler sectors be allocated extra capital as opposed to investment in improving industrial processes. To get an efficient policy outcome, all reductions in GHG's must be treated as equally as possible.

I've since realized there are a few features about electricity that make it deserve its special place in GHG policy.

1. Electricity is completely fungible. As long as the grid is working properly, I can't tell where my electricity is coming from. A unit of heat is the same, which make standards like CO2/MWhr very simple. Steel has different alloys, different grain sizes that make CO2/ton steel much more complicated. I've come to understand why an OBS that accounted for different commodities would over-complicate things.

2. GHG from the elecricity sector is 4x bigger than those from petrochemicals which is number 2. A GHG policy that puts a special focus on electricity is targeting the right sector.

3. You've shown that the electricity sector is incredibly inefficient because of monopoly regulation. The lowest hanging fruit are there.

4. Electricity can be made in numerous ways not involving fossil fuels such as hydro, wind, solar, something new... Since the electricity sector is so important, we want to incentivize all paths making clean electricity equally. These different paths don't really exist in commodity refining. They all need heat typically comes from fossil fuels.

5. Your point that CO2 is best regulated at the point of release.

However, I've come to agree that attempts to incentivize other reductions through OBS would over-complicate it. Once the lowest hanging fruit are picked (points 2&3 are no longer true), it might be time to come up with new policies. Until then, OBS is the cheapest path to GHG reductions.

Is this a good assessment? I also apologize for quibbling over a minor point.    On New white paper provides more details on output-based standards posted 1 year, 4 months ago 8 Responses

A few more thoughts

I forgot about the lifecycle footprint of commodities. The simplest example is fossil fuel production. A facility that efficiently uses heat to transform shale into gasoline should not get more credit than a producer that inefficiently refines conventional oil. A comprehensive carbon policy would have to find a way to look at the entire footprint of fossil fuels (and other commodities) from well/mine to finished product.

I don't really understand who owns transmission capacity. I'm guessing its the regulated utilities. Is there a way to incentivize improvements in the grid to remove line losses? I wonder how this could be linked to the carbon markets. I'm guessing that at some point, transmission investments will be competitive with other investments. Would the entire electricity model have to be changed or could this be achieved with the utility owned grid model?On New white paper provides more details on output-based standards posted 1 year, 4 months ago 8 Responses

Sean

Thanks for the heads up.

I've been thinking about a few ways to get output based standards to get larger economy wide coverage and give equal cost/benefits for polluters/reducers during the next 42 years.  

1. Assuming total delivered energy remains constant,  the standards have to be tightened by 2.38 percent each year to get a 70 percent reduction in CO2 by 2050. This 2.38 will be adjusted based on actual energy use. I am certain that it will be cheaper to reduce either CO2 per useful thermal energy unit or electricity (not sure which one, but I'm sure it won't be equal). While not explicitly stated in the article, I'd suggest suggest taking this into account when re-averaging the output based standard on a annual basis.

2. This plan does not account for the way heat is used in industrial production of steel, aluminum, glass, cement and others. Heat is an intermediate product and tonnes of these commodities are the final product. Your version of output based standards incentivizes industry to generate heat efficiently but then is agnostic to how well the heat is used to make the final product. For example, depending on the process used to make aluminum, different amounts of delivered heat are needed per tonne produced. In certain energy intensive industries (perhaps any commodity industry that produces more than .5% of US CO2 output), give them their own standard for CO2 per tonne of commodity. These markets could be linked to the other carbon markets. Of course, if they can recycle waste heat, they should be given credits for those units of delivered energy.

3. On a similar vein, output based standards do not account for "negawatts". When I heat/cool my home, my output is not delivered Btus, but a house in which I am comfortable. So it does not account for the efficiency of my house converting delivered units energy into my desired output. Under your plan, if the price of delivered energy goes up, there is a "stick" to build more efficient homes, but no "carrot". I imagine including residences into OBS would be a nightmare. Perhaps the building code for insulation could be adjusted based on the CO2/unit energy spot prices and average regional temperatures. I'm not sure how to pay for this. Perhaps an government auction element in the carbon markets to raise money for these "negawatts". Perhaps a tax on heating oil. The same type of ideas could be used for retrofits, but it is more expensive to renovate to a certain code than to build to that code in the first place. I'm not sure how to bring competition into the insulation market.

4. The same can be said for appliances and fuel efficiency. I'd suggest regulation such as CAFE standards for cars and appliances. One market possibility is that manufacturers who produce items that are less efficient than the standard would have to buy credits from manufacturers above the standard. With assumptions about average use of these devices, it would be possible to link the car and appliance market to the broader carbon markets. However, I'm not sure if this level of regulation to get larger economy wide coverage is worth it.

5. I agree that hydro and nuclear producers should  get an allocation of credits for the electricity produced in the long term. All energy options must be treated equally to get the desired result. However, in the first few years, output based standards represent a huge unexpected windfall to ~31% of US electricity producers. I don't see how this windfall profit reduces GHG's. Perhaps we can phase in the amount of credits already installed facilities get over 10 years.

Max

In most commodity markets, producers have predictable future production (farmers, miners etc...) and they have a choice to lock in the sale price. Industrial consumers have predictable supply needs and they might choose to lock in a purchase price. I admit that speculators will come in and make bets, not planning on ever using the commodity. In your version of cap and trade, there will be no sellers trying to stabilize future revenues. Only speculators who are betting on prices going down can sell long term supplies of credits. Something about this makes me uneasy, but it may be workable.

I have a hard time believing that price increase that 80% percent of families face will be less than what they receive in a tax rebate, with money left over. That sound too good to be true. Who then is paying for the credits?

I agree that government should be doing advanced R&D and perhaps even large scale proof of concept deployment. But I could also support this being paid for by other sources.

Your argument that OBS represents a distortionary subsidy to clean energy producers is an interesting one. My first response is that this subsidy is necessary to correct a power grid that was built without accounting for externalities.

Another thing that comes to mind is a paper co-authored by Sean's father that tries to show that the energy sector is different from other sectors of the economy. It says that economic growth is correlated to the price an economy pays for delivered energy. A price on carbon that does not allocate revenues to the energy sector would be a net tax on energy and could slow the economy. http://www.sciencedirect.com/science?_ob=ArticleURL&_ ...
I'm not an economist, but it seems plausible to me. On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

Ken

If I understand what you're saying, I think you're making an interesting point. I'll give an example of dealing with some pollutant

Environmental benefits:
80% reduction, 1000$ per ton
90% reduction, 1200$ per ton

Estimated costs:
80% reduction, 800$ per ton
90% reduction, 2000$ per ton

The reasonable thing to do is develop a plan to reduce by 80%.

Actual abatement costs (since they are usually cheaper than estimates):

80% reduction 300$ per ton
90% reduction 900$ per ton

With these new numbers, it now makes sense to change the environmental policy to demand a 90% reduction in pollutant. If I understand right, with the clean air act, since compliance costs were so low, the cap should have been tightened even more in response because there is now a net benefit to do so. Is this correct? If so, I still don't see why a well designed cap and trade could not meet these needs. Maybe you just don't trust politicians to steadily tighten the cap should abatement costs prove to be low? There is also political risk if the tax is set too low and not enough abatement occurs. Then you have to trust that politicians will raise the tax again. In the end, no matter what policy is implemented, the plan will have to be modified as we learn about the effects the policy has. On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

Max

Your comments make more sense now that I understand your preference for auctioning of credits. I have a few more comments and questions.

1. Under your system, I assume credits would be auctioned every year (or three months or something). Companies would estimate how many they need and buy that number. The secondary market is needed if a company's estimated number of credits needed is off. Since all credits must be purchased, the long term strips that Sean talks about to remove volatility would not work. It seems to me that you need to have a predictable allocation for you to sell a long term credit contract. The result is that your cap and trade system would not subsidize clean technologies such as wind, solar or CHP (it would not give them "free capital"). It would only promote clean technologies once energy prices go up due to the cost of credits working its way to the energy user. My guess is that companies would face more volatile carbon credit prices under your system than under output based standards because they have fewer financial instruments available to them to hedge against the volatile credit spot price.  

2. Your version of cap and trade seems very similar to a carbon tax. The difference is that instead of the government choosing a stable tax rate with uncertain amount of reductions, government mandates a level of reduction and lets the market set the value of the tax. I see that you have a wishlist of worthwhile projects to spend the auction revenue on. Why do you think government can come up with a more efficient allocation of this money compared to an output based system directing money to the most cost effective clean energy sources? I admit that it would be complicated to design output based regulations that compensate all forms of energy use fairly. However, if time is spent to design these rules optimally, we'll get an efficient result. No matter how much time the government takes to give away the carbon credit revenues, I doubt that they will choose anything near an economically efficient solution.

3. I read your example about how electricity rates are based on the bid of the highest price producer (presumably fossil fuel based). I could imagine that the electricity price would initially increase. (it would probably increase more when all credits are auctioned, and increase less when credits are allocated). With output based standards, clean energy providers would benefit by selling their product for more money AND from the subsidy they receive in the form of their credit allocation. The "free capital" clean energy producers are given is the beauty of output based standards. I imagine that investment in clean energy will occur a lot faster under output based standards, displacing inefficient fossil power that is now expensive. Once this occurs energy prices would increase at a slower rate (or maybe even decrease) than under an allocation. I see low energy prices being more advantageous than spending the auction money on corporate tax cuts or assistance to the lower and middle class.  

SPG

If you read more of Sean's posts, you'll see that he a CEO of a company that recycles waste heat. In typical fossil fuel power plant, 66% of the heat is thrown out through the smoke stacks. Sean's company places small power plants near industrial and other heat users where up the wasted heat can be used. Use of up to 90% of the heat from fossil fuels can be achieved. There are many variations on this idea. Currently, monopoly rules in the regulated power sector and unintended consequences of the clean air act stop his company from growing faster. He estimates that by just properly using the energy that is wasted in industrial sites, 200 GW (20% of the capacity of the American grid) could be added to the grid. If it weren't for the monopoly rules and clean air act, the 200 GW of capacity could be added profitably at no incremental increase of greenhouse gases. This could displace coal capacity. While your idea of ratepayer-producers having on site wind and PV cells may well turn out to be economic some day, there are even cheaper solutions that the general public should know about. On Costs for utilities rise faster than politically palatable rate changes can keep up posted 1 year, 4 months ago 28 Responses

Joebhed

I can understand where you're coming from. I too want a solution to global warming that minimizes economic cost. If the economic cost is low, the rate of greenhouse gas reduction will be faster. Until a few months ago, I'd never heard of output based standards. I supported carbon taxes because I think they are a cost effective stick. They treat all tonnes of pollution the same way. I assumed that with a efficient stick in place, the market would eventually adapt to a carbon constrained world at lowest cost. I too was skeptical that a better option existed.  

It will take a lot of investment to build a lower carbon world. I've accepted the argument that carbon taxes do not reward all sources of GHG reduction equally (at least in the short term). Without proper carrots, the investment required for the new low carbon world won't happen. The beauty of output based standards is that they distribute carrots in an economically efficient way too (which a tax doesn't do). They allocate money to the most effective technology to improve today's energy mix. I feel like I'm being a cheerleader, but I'd recommend you to go through Sean's blog posts on gristmill and his company website http://blog.recycled-energy.com/.On The goal of climate policy is not high GHG prices posted 1 year, 5 months ago 69 Responses

Joebhed

You use the CBO's study to support a carbon tax vs. Sean's output based standards. From the little I know about the CBO study, they seem to have only compared carbon tax and cap and trade and concluded carbon tax was most economically efficient of a small number of options. Had the CBO considered output based standards, their conclusions would probably be different. On The goal of climate policy is not high GHG prices posted 1 year, 5 months ago 69 Responses

Carbonless world endgame

I'm talking about 20 to 60 years in the future when CO2 emissions are down 40-80% from today's level. Let's assume we're in an ideal world where the output based regulation you propose goes through (as well as deregulation of the electricity market and amendments to the clean air act) and we're in a low carbon world where all energy technologies are competing on a level playing field. Centralized fossil fuel generation (without sequestration) has been removed from the energy mix because it by definition has a higher CO2/(MWhr or MMBtu) than CHP. So at this point, CHP is a high carbon energy source compared to whatever carbonless alternatives exist(nuclear, solar, wind or some future technology). I'm asking you to speculate what would happen to the deployed CHP assets. Off hand, I can think of carbon sequestration, burning biofuels or hydrogen (electrolyzed by a carbonless electricity). Or can you imagine a world where CHP combustion is not the most efficient way to generate process heat? It's a bit silly to think this far ahead, but if you can't imagine a world where CHP becomes obsolete, it's not only a bridge strategy, but an endgame strategy in a carbon free world. It would allow you to make the same arguments as the coal utilities about an end game strategy (sequestration in their case) but guarantee a lower cost. On Coal is no longer cheap -- so what comes next? posted 1 year, 5 months ago 43 Responses