RFF on the Issues: Extreme flooding; Shale gas liability; Climate crash
Extreme Flooding
Cities across the Midwest are preparing for even more floods, following torrential rains and tornados that have already caused significant damage. Some in the area have noted that such flooding has “become more the rule than the exception,” with rainfall increasing in both quantity and intensity.
With increased flooding comes increased claims to the National Flood Insurance Program—and it seems that extreme events and damage are becoming “even more extreme,” according to RFF’s Roger Cooke, Carolyn Kousky, and colleague Erwann Michel-Kerjan of the Wharton Risk Management and Decision Processes Center. They note that “yearly losses can be hopelessly volatile and, as such, historical averages are not good predictors of future losses” and suggest that “we may need to rethink our risk management strategies.”
Shale Gas Liability
A Texas family was recently awarded $2.9 million in a lawsuit against Aruba Petroleum, in “one of the first successful US lawsuits alleging that toxic air emissions from oil and gas production have sickened people living nearby.” One of Aruba’s arguments in the case was that the family could not prove that the emissions were coming from Aruba wells.
RFF’s Nathan Richardson argues that liability rules should be revised for shale gas development issues to not only protect the public, but to help specify when companies are responsible and “whether they could be sued.” In new research by Richardson and RFF Visiting Scholar Sheila Olmstead of the University of Texas at Austin, the authors write that while most discussions of shale risk mitigation focus on regulatory measures, the existing legal liability system “could be adapted to address many of the potential risks of shale development.”
Climate Crash
In a New York Times op-ed, former Secretary of the Treasury Henry Paulson, Jr. paralleled the current issues with climate change to the 2008 financial market crash: “We’re staring down a climate bubble that poses enormous risks to both our environment and economy. The warning signs are clear and growing more urgent as the risks go unchecked.” (He also discussed this topic at RFF previously.) Paulson is not the only one taking this approach. In a special lecture at RFF earlier this year, Nobel Laureate Robert Engle explained how financial models can be used to evaluate environmental risk, noting: “I think the fact that environmental stocks, on average, are viewed as underperforming stocks is kind of an important observation because that means people are willing to pay more for them . . . they’re hedging this environmental long-run risk.”
Managing the Risks of Shale Gas Development Using Innovative Legal and Regulatory Approaches
At the heart of the US shale gas boom is a tense relationship between the desire for its economic benefits and the fear of its environmental costs. Regulatory measures and industry best practices can be adjusted to ease this tension, but the potential for incorporating innovative tools into new measures has been relatively understudied. Both regulation and litigation are already important components of shale gas risk mitigation, but understanding how these two systems can be improved requires an analysis of how they currently work together.
While state regulation receives the most attention in public discussions about shale gas risk mitigation, liability is probably the more important driver of risk-reducing behavior by operators. According to economist Steven Shavell, the decision to use regulation and liability to account for environmental risks should be based on the presence of information asymmetry, the ability of those at fault to pay, the ability of those at fault to avoid being sued, and the cost of the chosen action. Shavell noted that a mix of liability and regulation is often used in real-world settings, and that society generally gets the regulation–liability decision right.
We believe that this is true in the context of shale gas as well. While the presence of well-informed operators points toward a liability system, a potential lack of victim access to private information would require more regulation-based strategies. Calculating which is more cost-effective is difficult, because liability may be cost-effective for small scale events but less useful for dispersed harms that require complicated class-action lawsuits. Ultimately, the idea that there is a loose “division of labor” between the use of liability and regulation appears to hold true for shale gas development, though that’s not to say that switching between these policies won’t be beneficial in some existing situations.
Quick Thoughts on UARG v. EPA
SCOTUS released its decision in UARG v. EPA today, with the majority opinion authored by Justice Scalia. The issue in the case was whether EPA appropriately subjected stationary sources to new source review obligations for their GHG emissions. Here are some quick thoughts. If you’re unfamiliar with the case or with EPA’s regulatory agenda for greenhouse gases, this may be a little tough to follow. If you need more background, take a look at this post on the cert grant and the lower court’s decision or the good coverage at Legal Planet. 1) The court reviewed three related parts of EPA’s carbon policy. After 2007′s Massachusetts decision and its subsequent move to regulate GHG emissions from vehicles, EPA:
a. Required new & modified large stationary emitters (power plants and factories) undergoing new source review (aka PSD permitting – the difference is immaterial here) due to their emissions of conventional pollutants to implement best available control technology (BACT) for GHGs.
b. Required GHG emitters to go through PSD permitting based on GHG emissions alone, even if they would not have to do so for other pollutantsc.
c. Limited the group in b) to large emitters over 100k tons CO2e/year despite the statute’s requirement of 250 tons/year (this is the “Tailoring Rule”).
2) The court (5-4) rejected policy b) on the grounds that it contradicted the plain meaning of the statute. This is interesting because EPA had claimed that a plain reading required it to include all GHG emitters in PSD, despite the fact that doing so would be really expensive and burdensome. The court’s reading of the statute is reasonable, but it has some problems in light of court’s traditional deference to agencies on questions of statutory interpretation (see #8 below). Read More
Energy Efficiency in 111(d): Evaluating Energy Savings for Carbon Reduction
EPA’s Clean Power Plan uses expanded energy efficiency programs as a component of states’ emissions rate targets. States that choose to use energy efficiency for compliance need to develop and provide EPA with a plan for evaluating energy savings that result from the policy. In the technical support document for state plans, EPA describes the state of the art with respect to Evaluation, Measurement & Verification (EM&V) of energy efficiency programs and suggests a number of approaches that states might adopt.
EPA’s discussion of EM&V focuses on traditional engineering-based methods. These calculations are sometimes (but not always) adjusted to reflect the fact that some of the consumers who participate in an efficiency program may have made the investments anyway. When they are made, adjustments are based on surveys that ask customers whether they would have invested without the program, a method of questionable reliability. The engineering approaches also may fail to account for the interactions between efficiency enhancements related to one end use and energy consumption for another end use. (For example, replacing incandescent lights with cooler compact fluorescent lights or LED lamps could increase demand for energy for heating in the winter and reduce demand for energy for cooling in the summer.) They also fail to account for the so-called rebound effect, an increase in usage that may occur when efficiency improves. And the engineering approach is not well suited to policies that work through behavioral “nudges,” information provision, and other non-technology based approaches.
An alternative approach to evaluating energy savings would be to use actual customer-level energy consumption data, comparing energy consumption before and after a policy takes place for those affected and a control group., This approach eliminates the need for a separate net to gross calculation and it automatically accounts for impacts of the efficiency policy across different energy end uses. And the approach can be used for nudges, information provision, and similar policies. This econometrics approach is often used in the scholarly economics literature, but typically has not found its way into mainstream energy efficiency EM&V.
This Week in the RFF Library Blog
Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.
Lord Stern’s New Paper on Carbon Pricing
[Abstract] ‘To slow or not to slow’ (Nordhaus, 1991) was the first economic appraisal of greenhouse gas emissions abatement and founded a large literature on a topic of great, worldwide importance. In this paper we offer our assessment of the original article and trace its legacy, in particular Nordhaus’ later series of ‘DICE’ models. From this work many have drawn the conclusion that an efficient global emissions abatement policy comprises modest and modestly increasing controls. On the contrary, we use DICE itself to provide an initial illustration that, if the analysis is extended to take more strongly into account three essential elements of the climate problem – the endogeneity of growth, the convexity of damages, and climate risk – optimal policy comprises strong controls. To focus on these features and facilitate comparison with Nordhaus’ work, all of the analysis is conducted with a high pure-time discount rate, notwithstanding its problematic ethical foundations… — via London School of Economics
Comparative Life Cycle Assessment of 2.0 MW Wind Turbines
Wind turbines produce energy with virtually no emissions, however, there are environmental impacts associated with their manufacture, installation, and end of life. The work presented examines life cycle environmental impacts of two 2.0 MW wind turbines. Manufacturing, transport, installation, maintenance, and end of life have been considered for both models and are compared using the ReCiPe 2008 impact assessment method. In addition, energy payback analysis was conducted based on the cumulative energy demand and the energy produced by the wind turbines over 20 years. Life cycle assessment revealed that environmental impacts are concentrated in the manufacturing stage, which accounts for 78% of impacts. The energy payback period for the two turbine models are found to be 5.2 and 6.4 months, respectively. Based on the assumptions made, the results of this study can be used to conduct an environmental analysis of a representative wind park to be located in the US Pacific Northwest… — via International Journal of Sustainable Manufacturing
What are the Benefits and Costs of EPA’s Proposed CO2 Regulation?
This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.
On June 2nd, the Obama Administration’s Environmental Protection Agency (EPA)released its long-awaited proposed regulation to reduce carbon dioxide (CO2) emissions from existing sources in the electricity-generating sector. The regulatory (rule) proposal calls for cutting CO2 emissions from the power sector by 30 percent below 2005 levels by 2030. This is potentially significant, because electricity generation is responsible for about 38 percent of U.S. CO2 emissions (about 32 percent of U.S. greenhouse gas (GHG) emissions).
On June 18th, EPA published the proposed rule in the Federal Register, initiating a 120-day public comment period. In my previous essay at this blog, I wrote about the fundamentals and the politics of this proposed rule (EPA’s Proposed Greenhouse Gas Regulation: Why are Conservatives Attacking its Market-Based Options?). Today I take a look at the economics.
Cost-Effective, Perhaps – but Efficient?
The proposed rule grants freedom to implementing states to achieve their specified emissions-reduction targets in virtually any way they choose, including the use of market-based instruments (the White House has referenced cap-and-trade in this context, although somewhat obliquely as “market-based programs,” and state-level carbon taxes might also be acceptable – if any states were to include them in their plans to implement the regualtion). Also, the proposal allows for multistate proposals and for states and regions to establish linkages among their state and multi-state market-based instruments. Some questions remain regarding the temporal flexibility (banking and borrowing) that the proposed rule will allow, but it’s reasonable to conclude at this point that although EPA may not be guaranteeing cost-effectiveness, it is allowing for it, indeed facilitating it. AsDallas Burtraw of Resources for the Future has said, the proposed rule ought to be judged to be potentially cost-effective.
Cost-effectiveness (achieving a given target at the lowest possible aggregate cost) is one thing, but economists – and possibly some other policy wonks – may wonder if the proposal is likely to be efficient (maximizing the difference between benefits and costs). This is a much higher mountain to climb, and a particularly challenging one for a regional, national, or sub-national climate-change policy, given the global commons nature of the problem.
The Challenge of this Global Commons Problem
GHGs mix globally in the atmosphere, and so damages are spread around the world and are unaffected by the location of emissions. This means that any jurisdiction taking action – a region, a country, a state, or a city – will incur the direct costs of its actions, but the direct benefits (averted climate change) will be distributed globally. Hence, the direct climate benefits a jurisdiction reaps from its actions will inevitably be less than the costs it incurs, despite the fact that global climate benefits may be greater – possibly much greater – than global costs.
Energy Efficiency in 111(d): The Role of End-Use Efficiency in State Compliance Plans
In a prior blog post, I describe the contribution of energy efficiency to state emissions-reduction targets in EPA’s Clean Power Plan. As EPA has pointed out, including energy efficiency in states’ targets does not mean that states will necessarily choose to include energy efficiency programs in the compliance plans they submit to EPA. Many factors will no doubt play a role in a state’s decision on what to do about energy efficiency, but here are a few points to keep in mind.
First, it matters if a state chooses to convert its emissions rate target (tons CO2 per MWh of electricity generation) to a mass budget (tons CO2)—the proposal allows states to do so if they choose. Limiting emissions to a mass budget can be done in a variety of ways but economists have long advocated imposing a cap and allowing trading across sources of emissions under it, or imposing an emissions fee on covered sources calibrated to achieve a similar level of reductions—as at least one state is already considering and some in Congress have advocated.
Energy Efficiency under a Mass Target
If states use either of these policies to raise revenue and reduce other preexisting taxes (and there are many good reasons why a state might want to do that, as discussed in the RFF carbon tax FAQs) electricity prices could rise by as much as 10 percent in 2020, according to a recent RFF analysis. That increase in prices could lead to substantial changes in behavior and investment that improve energy efficiency. However, if a state selects a budget approach with emissions trading and then returns revenues to local electric distribution companies or to generators, the policy will have only modest impacts on electricity prices. This would provide little direct incentive for consumers to adopt more efficient appliances or equipment. This makes separate policies to encourage energy efficiency more attractive.
Resources Magazine: Blue Skies Ahead for China? An Interview with Mun Ho
Given China’s high-profile air pollution problem and dominant contribution to global carbon dioxide (CO2) emissions, many in the West are surprised to learn that China has spent more on addressing these problems than any other country. RFF Visiting Fellow Mun Ho recently sat down with Resources to discuss China’s efforts and the reasons the country is not keeping pace with rapidly rising emissions, drawing on lessons from his recently published book, Clearer Skies over China: Reconciling Air Quality, Climate, and Economic Goals, coedited with Chris Nielsen and available from MIT Press.
Resources: China’s record in addressing climate and air pollution includes a mix of successes and failures—but the big picture doesn’t seem to give a sense that tremendous progress is being made. What is China’s status on these issues?
Mun Ho: The headlines highlight the negative parts of the story and, at times, they present a misleading picture. Everybody knows about the very rapid rate of economic growth in China, which has hovered just below 10 percent for a long period of time. Those who read the newspapers know that the air pollution problem is very serious, and it is often attributed to the inability or unwillingness of the government to deal with this issue. But while indeed the air pollution problem is severe, the government has done quite a lot to improve air quality.
The biggest example is the effort to reduce sulfur dioxide (SO2) emissions during the recent 11th Five-Year Plan covering 2006–2010. During this period, China aimed to reduce SO2 emissions by 20 percent and was quite successful by mandating flue gas desulfurization plans in electric power plants. That reduced emissions—and did so at a remarkably low cost.
Unfortunately, we since have seen Chinese pollution continue to increase because of rising electric power generation and industrial activity, such as cement production. So China has made great efforts to reduce emissions, but the level of industrial output keeps rising. The government is fighting an uphill battle.
China’s record on climate change is similar. There is no policy to reduce emissions of CO2 directly, but China has ambitious energy efficiency targets. Officials stated at the United Nations Framework Convention on Climate Change meeting in Copenhagen in 2009 that China plans to reduce the energy per unit of GDP by 40 percent over the next 20 years. The country is in line to achieve such a target but, again, with the economy growing in excess of 7 percent, China will continue to have rapidly rising carbon emissions. It overtook the United States many years ago and will continue to be the world’s largest emitter for many years to come.
Read the rest of the interview.
RFF on the Issues: Natural Gas in EPA’s Plan; Insuring Against Climate Change
Natural Gas in EPA’s Plan
Analysis that accompanied EPA’s Clean Power Plan predicts that “natural gas [will] edge out coal to become the most common fuel for power plants by 2030.” The EPA says that this could have significant environmental benefits because “natural gas emits about 40 percent less carbon than coal for the same amount of energy.”
There will be economic benefits as well, according to RFF researchers. In a recent blog post, RFF’s Alan Krupnick writes: “With the new plan, the demand for natural gas will increase even more. In the old days, this would have led to big increases in costs and prices to bring that gas to market. But the shale gas revolution has changed all that.” Research by Krupnick, RFF’s Stephen P.A. Brown, and Margaret Walls on the cost of a similar plan “shows that the natural gas revolution can shave a [a billion dollars] off of the plan’s cost.”
Insuring against Climate Change
Recently, a major insurance company dropped the lawsuits it filed against Chicago municipalities who it says are failing to prepare for climate change. The company argued that the cities and suburbs have been aware of the increasing impact of global warming on regional rainfall “since the 1970s” and that the lawsuits were intended to “encourage cities and counties to take preventative steps to reduce the risk of harm in the future.”
At a recent RFF seminar (video now available), experts questioned whether disaster events that are exacerbated by climate change and globalization are becoming increasingly uninsurable. RFF Fellow Carolyn Kousky noted that “insurability is a dynamic concept that changes over time,” requiring risk management tools that can accommodate levels of financial and scientific uncertainty to keep insurance profitable for its writers and affordable for its buyers. (Related: See “How Much Do Weather-Related Disasters Cost?” for Kousky’s examination of the costs and why they are increasing.)
Energy Efficiency in 111(d): Understanding Building Block #4
EPA’s recently released Clean Power Plan to regulate emissions of carbon dioxide (CO2) from existing power plants under the Clean Air Act includes four building blocks that are used to establish the target CO2 emissions rate for each state. Earlier blog posts by my RFF colleagues have described these different building blocks; my focus here is on building block four, based on energy efficiency potential.
The purpose of building block four is to find the electricity generation savings that states could achieve through energy efficiency programs and factor those potential savings into the emission rate target calculation as a non-emitting energy resource. The higher the energy savings potential, the tighter the state’s emissions rate obligation under the policy, all else equal.
These calculations are based on existing state policies: 24 states have adopted Energy Efficiency Resource Standards (EERS) that target a specific minimum ratio of efficiency program related energy savings to total electricity consumption. Twelve of those states have EERS policies that require or soon will require a 1.5 percent incremental reduction in total statewide electricity consumption each year, a target that EPA adopts in its proposal.
Here’s how it works: states currently achieving 1.5 percent annual energy savings are assigned that rate in 2017 and for all future years. States that have yet to attain that amount of savings are assumed to start at their 2012 annual incremental savings rate in 2017 and then the annual savings target is incremented by 0.2 percentage points per year until it reaches 1.5 percent where it remains going forward. In both cases new energy efficiency programs are expected to yield energy savings for multiple years and these cumulated savings are reflected over 2020-29. According to EPA’s calculations, total energy efficiency potential in 2029 (which determines the target in 2030) ranges from 9.3 percent of annual electricity sales in Louisiana and Virginia to just over 12 percent in Maine.
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