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On Rethinking the Role of Carbon Prices in Climate Change Policy

Hi Robert,

Great questions/prodding as always.

"So, it feels as if there is a strong element of false advertising here. I agree that alternative proposals will not achieve 450 ppm, however your case would be much more persuasive if you cut the public relations language, and just stated things more soberly."

By "get the climate job done" I mean achieve climate stabilization short of civilization-destabilizing impacts. I think my proposal can do that. I'm pretty confident actually. But there's more than enough moving parts in the human-climate system to make it foolish for anyone to pronounce a guaranteed end-point. Direction of travel is far more important, and that's what this is all about. So I'm sorry if using "get the climate job done" in a conversational tone doesn't pass muster with you. I don't think it's misleading at all however. Only if you think "getting the job done" is implictly linked to some oft-stated and never guaranteed specific target or timetable (80% by 2050 of 450 ppm or whatnot). I'd say those who promise such outcomes are the ones engaged in the false advertising, not me.

On energy consumption, its fine to say it would be great to reduce per capita energy consumption, but clearly that is not a cost-less activity. There is condirable debate whether or not truly "below-cost" or net-positive-cost efficiency opportunities await -- the so-called "efficiency gap" is much debated, see this recent paper for example. Those that do exist will trigger rebound effects, eroding a substantial share of the climate benefits as well (see my article in Ensia here). Plenty of efficiency and conservation can indeed be  captured at a net economic cost as well. But how are you going to force that? Anything that comes with an economic cost necessarily means a reduction in welfare. You can say "there's no evidence we are better off" in the US versus other nations with lower per capita energy consumption. But revealed economic preference would indicate millions of economic actors believe they are better off. So any effort to force them to behave otherwise surely meets plenty of political economy constraints as well. My point isn't that reducing energy use is a bad idea in the developed world. It is. Even you frugal Brits can cut back I'm sure. But it's no magic bullet and certainly not exempt from the kinds of political economy constraints this post is all about.

Finally, you ask a very good question, "do you have any evidence that the prospects for technological change are greater than those of political change?" I'd say my case is pretty strong here. Technological change has already dropped the cost of solar PV by a factor of 100! They've dropped by 75% in the last four years or so, and most analysts believe solar costs can be further reduced by at least a factor of 2. Cost curves for other energy technologies are not quite as drammatic, but plenty strong as well. It is pretty hard to imagine the political tolerance for higher energy prices to increase by a factor of even 2-4, let alone 100. 

BTW, Matthew Stepp and I made many similar arguments a year and a half ago in a 5-part series on the Future of Global Climate Policy. Part 3 specifically talks about the ability to move the political window versus the technological window, and why we put more stock in the latter than the former (not to discount the former entirely). Parts 1 and 2 are also brutally honest about the fact that we're not promising 450ppm or 2 degrees C or anything like that. No false advertising here.

Jesse

July 29, 2013    View Comment    

On Rethinking the Role of Carbon Prices in Climate Change Policy

"Kids who want to study economics or political science excluded."

Ouch! ;)

Thanks for the interesting perspective.

July 29, 2013    View Comment    

On Rethinking the Role of Carbon Prices in Climate Change Policy

Dear Robert,

First off, what do I mean by "innovation?" I mean an improvement in the price or performance of a good or service or introduction of a new and improved good or service. In the context of energy, that means an improvement (price or performance) in the provision of energy services or a new way to provide energy services that offers superior price or performance. That clear?

RE the "obvious flaw" in my proposal, I don't think you've really read this fully. I'm not even close to advocating just throwing "innovation at it" let alone an "innovation-first" strategy here. What I propose is making fossil energy as expensive as is politically feasible via a carbon tax, and then making good use of the revenues to (1) subsidize remaining abatement opportunities that are more expensive than the carbon price signal alone allows for, (2) to structure most (all hopefully) of those investments to actually drive down the real cost of those abatement opportunities over time, so as to conserve limited resources/maximize long-run abatement subject to political economy constraints, and (3) devote some portion of revenues to addressing substantial innovation-related market failures to ensure we continue to drive improvements in the price and performance of abatement opportunties, further maximizing abatement. That's a plan to specifically address the fact that fossil fuels may remain quite cheap, even over the long term.

You charge that I ignore the role of conservation or efficiency in reducing energy use and thus contributing to both abatement and increasing WTP by reducing household carbon footprint. That's half fair. Efficiency is certainly one of the abatement opportunities this policy suite aims to unlock. Although as we all know, there are a host of other non-price related market failures to address to fully unlock efficiency opportunities. But you are absolutely correct that where cost effective, reducing energy consumption could help improve WTP for climate policy. I could have (should have) made that a clearer part of my case. Thanks for the addition. It is also fair to say that while efficiency is part of the package of abatement I have in mind, my language is biased towards the supply side. 

Finally, RE "getting the climate job done," this is indeed deliberately vague. I personally don't see any climate policy strategy, real or proposed, that looks like a realistic strategy to get to 450ppm at this point in time. If we hadn't blown the last 20 years on policies that failed to recognize and plan for the fundamental political economy constraints on climate policy design, perhaps we would still have a shot. But probably not any more. 

I can't actually predict or promise a specific outcome as far as concentrations of CO2 or temperature stabilization. No one really can. Policy makers have no direct control over those factors. What they cna try to influence is the decarbonization rate of the economy (changes in CO2/GDP). That was Roger Pielke's point in the letter to the FT editors that sparked this exchange. 

What I can tell you is that a policy suite that is designed around the multiple constraints on climate policy design, not just around economic efficiency, will succeed at accelerating decarbonization much faster than those that do not. And I can certainly say that if political economy constraints are binding, preventing the carbon price from reaching the social cost of carbon, then making good use of revenues is absolutely essential to maximizing the rate of decarbonization. 

I don't see this as wishful thinking. I see it as our best hope. Do you have another alternative in mind?

Cheers,

Jesse

p.s. I know I promised you a longer direct exchange on this topic a while back. I hope we can return to that soon. My apologies for getting sucked up in this and other work. 

July 29, 2013    View Comment    

On Energy Facts: Map of U.S. Electricity Consumption in 1921

I was actually hoping to find just that data as well, but came up empty handed yesterday. If anyone has state GDP data for this era please drop a link in the comments and I'll update the ranking table with that data as well.

July 26, 2013    View Comment    

On Energy Facts: Map of U.S. Electricity Consumption in 1921

Thanks for the insightful comment Sean.

July 26, 2013    View Comment    

On Energy Facts: Map of U.S. Electricity Consumption in 1921

My theory for the divergence between population rank and electricity consumption rank for most states also revolves around fuel availability. Those in the west with much higher electricity rankings (e.g. Washington) were blessed with plenty of hydropower (and coal; I'm not sure how early western coal resources were exploited in the inland west, but Seattle Washington was a major coal port in those days I believe) while those in the Appalachian region certainly had plenty of coal resources.

July 26, 2013    View Comment    

On Electricity Prices Soar Past $200 per Megawatt-hour as Heat Wave Hits Eastern United States

Hi Nathan,

What you're pointing to the is the very high utility of electricity consumption. But that doesn't mean that there will be no demand response to dynamic/real-time price signals. For example, if you had a home energy management system (an "energy box") that automatically managed your major electricity loads in response to price signals and your stated preferences, you might be ok, for example, with ticking up the AC thermostat setting a degree or two when prices spike, or you might program the system to heat water for a shower in the AM hours, and switch off during the day, or you might tell it to shut off all of your DC-based plug loads which are constantly draining power for the AC-DC converters attached when not in use, etc. Small actions across hundreds of thousands of users can make a real difference on the peak demand days.

 

Also, it's worth noting that you may see higher rates under dynamic pricing during the peak demand hours, but also lower rates during the off hours. So your annual bill shouldn't be higher (in fact it should be lower). We all pay for those peak demand periods in our rates anyway, but we do so inefficiently, since energy demandf or which the utility derived from that demand is less than the marginal cost of supplying energy at the peak is still consumed, as we see average prices not marginal prices. So we incurr higher than necessary system losses, we have to build more peak power plants than we should need, etc. All that drives up our annual costs over the course of the year, and thus the average rates we pay in our flat tariffs. 

At this point, the residential demand response market is a tough nut to crack though, since the individual savings are relatively minor and the transaction costs can be prohibitive. That's why I dont think this happens for residential consumers until automation of loads and smart energy managements systems are available. That's a market many entrepreneurs are trying to crack open now though.

More immediately, the market for large commercial and industrial demand response programs are booming. Boston-based EnerNOC is making plenty of money on those markets during this record-setting week in New England, I can assure you.

July 19, 2013    View Comment    

On Electricity Prices Soar Past $200 per Megawatt-hour as Heat Wave Hits Eastern United States

Hi Christos,

Yes this is largely an issue with retail tariff design. Wholesale markets do fluctuate dynamically, as the post describes, reflecting the cost of supplying the marginal megawatt-hour at a given location on the grid (either by zone as in New England or specific point or "node" as in PJM). But whereas wholesale prices fluctuate to reflect marginal costs, retail prices generally do not. Most of us are on flat tariff rates, where each kilowatt-hour we consume costs us the same regardless of whether its in the dead of night or the heat of day.

Some utilities have tiered or time-of-day tariffs that help more closely reflect the difference between peak and off-peak consumption. Some even update these seasonally, as a peak day in the summer looks different (and costs differently) than a peak day in the winter or spring. But even those are fixed tariff rates for each tier, so they don't pass along a price signal when prices spike and reach levels like we were seeing yesterday afternoon (and will again today and likely tomorrow as well). Instead, utilities and system operators have to rely on "demand response" markets to try to send price signals to reduce demand at these times by paying people who voluntarily reduce their demand. Companies like EnerNOC have done an excellent job capitalizing on and building out this kind of business opportunity, and the PJM system operators in particular have done a great job integrating these kinds of demand response providers into the market for peak power and reserves. 

In the long run however, many economists argue we should be moving towards something reflective of real-time marginal costs of supplying power, so that consumers can truly respond to the real cost of electricity at that moment. This is known as "real-time pricing." Here's an NBER article from UC-Berkeley energy economist and TheEnergyCollective.com contributor Severin Borenstein on the topic.

Thanks for reading and for the great question. Cheers,

Jesse

July 18, 2013    View Comment    

On Department of Energy Launches New Clean Energy Manufacturing Initiative

Hi Cliff, 

I think you might not have the full story on where the shale gas extraction technologies came from. The government's role was quite a bit more material than you say -- not to diminish the role of private industry but to note that they worked in partnership with government on many of the key technologies. Hydraulic fracturing in other geologic formations initially developed in the 40s was not applicable to shale formations for example until additional work supported by the Eastern Gas Shales Project and other federal efforts helped pave the way for later innovations. See:

"Where the Shale Gas Revolution Came From" (Breakthrough Institute)

and

"Fracking Developed with Decades of Government Investment" (AP)

Cheers,

Jesse

June 28, 2013    View Comment    

On Pandora's Promise, Nuclear Energy Documentary, Asks: What Are You Wrong About?

No, not really a place for your comedy routine sadly ;)

In all seriousness, please try to engage all participants here in good faith and assume they are also operating in good faith. If you disagree, disagree on substance and with respect. Those are the rules of the road around here. Thanks!

Jesse Jenkins
Digital Community Strategist
TheEnergyCollective.com

June 26, 2013    View Comment    

On Pandora's Promise, Nuclear Energy Documentary, Asks: What Are You Wrong About?

Alex, please keep this conversation civil. 

June 26, 2013    View Comment