New RFF Publications
A regular listing of the newest RFF discussion papers, issue briefs, and reports.
- What the Experts Say about the Environmental Risks of Shale Gas Development | Alan J. Krupnick, Hal Gordon, and Sheila M. Olmstead | RFF Report
- Paying for State Parks: Evaluating Alternative Approaches for the 21st Century | Margaret A. Walls | RFF Report
RFF on the Issues
Results from RFF’s Survey of Shale Gas Experts
In a recent letter, Senator Wyden (D-OR) called for balanced regulations on hydraulic fracturing that protect public health and the environment, especially in terms of air and water quality.
Potential risks to surface water and air quality are also highlighted as priorities in a new report by experts in RFF’s Center for Energy Economics and Policy. A key finding in the report is a high degree of consensus among experts from government agencies, industry, academia, and nongovernmental organizations about the specific environmental risks to mitigate. Read more about the survey and experts here.
Parsing the State of the Union
President Obama’s remarks on climate change on Tuesday were a mix of specificity and vagueness. It seems no two climate wonks interpret his State of the Union the same, leading to more questions than answers.
The President linked specific trends—including high temperatures over the past 15 years and increased frequencies and intensities of heat waves, droughts, wildfires and floods—to climate change, marking a change from his previous speeches that reflects his increasing willingness to emphasize climate dangers without masking his message in energy independence or job creation. This must please climate advocates.
Mr. Obama was vague when it came to climate policy. True, he did propose specific energy policies—like the Energy Trust—but did not clarify his strategy to regulate carbon. Here is what he said:
“I urge this Congress to pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago. But if Congress won’t act soon to protect future generations, I will. I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.”
The confusion mostly lies in what “executive action” means. Does it mean the much anticipated EPA standards for existing power plants? If yes, this is a threat that wonks are well aware of; During the Waxman-Markey debates the message to opponents was: “pass a bill that prices carbon or the EPA will regulate it.” If you thought this threat was already explicit, you might think that repeating it buys the EPA more time to issue regulations. If you think that threat was not yet explicit until Tuesday night, then Mr. Obama’s speech formalized it and outlined a game plan that you might huddle around.
But, what if “executive action” means something other than EPA regulations? There is a list of potential executive actions, but many (if not all of them) do not seem to hold the emissions reduction potential and political power that the EPA regulations do. This is the approach that at least one wonk thinks the administration is taking: small steps for now with no (or very little) effort toward the more important EPA regulations. For the President to actually expect any of these other executive actions to inspire a carbon pricing bill requires making a mountain out of a molehill.
You might see Mr. Obama’s reference to the McCain-Lieberman cap and trade bill as more a nod to general climate bipartisanship than explicit support of market based mechanisms. An alternative read on this reference is that Mr. Obama mentioned markets to leave the door open for carbon pricing to enter into tax reform discussions.
Proponents of this approach face a steep climb up the President’s agenda, competing with immigration and gun control for his political capital. But if policymakers do get to this point they will face a difficult question. A likely prerequisite for a majority vote would be an exemption from the EPA regulations that have been held over opponents’ heads; the difficult question facing proponents of climate legislation is: what kind of carbon pricing bill is worth trading away EPA regulations?
Shale Gas Priorities? I’d Like to Use a Lifeline.
Yesterday, we released a survey of 215 shale gas development experts that found a surprising amount of agreement between experts from academia, industry, government, and environmental NGOs on what potential environmental risks due to hydraulic fracturing for natural gas are of most pressing need for attention. Why, though, is a survey of experts a useful exercise in this policy context, and, furthermore, how do you go about sampling experts?
The shale gas boom has seemingly dropped out of the sky into the laps of policy makers and the public who until very recently had little idea what hydraulic fracturing was, and certainly did not know how to feel about its potential costs and benefits. So, what should we do? Some states have decided there is not enough yet known and instituted moratoriums on certain practices or indeed on all shale gas development, but far more have decided the known (or unkown) risks can be managed and are likely to be overwhelmed by the rewards. Who should these regulators turn to when they are in the hot seat?
In his 2005 book, The Wisdom of Crowds, James Surowiecki noted that another group in the hot seat, contestants on the hit game show Who Wants to Be a Millionaire were far more successful when they polled the audience (91% correct answer) than when they phoned a friend who they thought would be an expert (65% correct). But what if you could do both? Polling a large group of experts could give you the benefit of crowds and the benefit of expertise.
Without a ready-made expert studio audience, or even a way to randomly sample the population of experts, RFF had to create our own population by searching news stories, academic literature, government hearings, conference participant lists, and recommendations of an expert about who else to contact, as well as identifying every organization, firm, and governmental body that has a prominent role in the public discussion. This gave us a pool of over 1000 experts. After eliminating those who disclaimed expert status, and extra people from organizations that elected to give a single response, just over 700 remained. Of these, 30% (215 experts) took part in our lengthy survey. Remarkably, the response rate was nearly identical across the four groups of experts (industry, environmental NGO, academic, and government experts), so we are confident that non-response bias from an institutional perspective is not a problem.
The report details how our responses came from experts representing or affiliated with nearly every big firm, headline environmental NGO, state government, federal department, and university that has played a prominent role in shale gas development. We choose to group the experts by organization (NGOs, industry, government, and academia) because that was clearly the characteristic that mattered most—organization was a strong predictor of how many high priorities experts had, their views on boomtowns, whether government or industry should take the lead on addressing risks, and just how severe the risks of certain accidents are. As long as group was controlled for, years of experience in oil and gas or in shale development itself as well as specific expertise or education had little to no explanatory value.
This suggests that regulators and the public, when hearing from a specific expert, should ask “who do you work for?” just as often as they ask “what do you know?” when trying to build their own panel of diverse advice.
This makes it even more surprising, however, that we found so much consensus between the four groups of experts on 12-15 specific risk pathways that are in need of more government or industry attention. For a regulator unable to assemble her own TV studio full of shale gas experts, these risks are the ones she should keep most in mind. For more on that, see our summary report.
Econ 101. The Fray Market
Markets are not perfectly competitive and they are not free. Even if they were perfectly competitive, they would not be free. In his iconic Economics textbook, Paul Samuelson says there are no perfect competitors “except possibly the millions of farmers who individually produce a negligible fraction of the total crop.” But even those farmers are not free to go out at night and burn their neighbors’ crops down. There are rules.
Everyone agrees on the need for rules of lawful behavior. The policy discussion is about what behavior should be lawful and what should not. On this we do not have agreement. “Free market” generally means freedom to do what the individual or group invoking it wants. For Mitt Romney, it meant freedom to emit carbon but not to set up banks in garages.
“As president, Mitt Romney will eliminate the regulations promulgated in pursuit of the Obama administration’s costly and ineffective anti-carbon agenda.”
“You can’t have a free market work if you don’t have regulation. As a businessperson … I needed them there. You couldn’t have people opening up banks in their — in their garage and making loans.”
While what people call free varies, the symbolism they are invoking does not – free means good. Fossil fuels freely discharging carbon is good – taking account of their accumulating long-term harm would reduce the rewarding near-term benefits of extraction and use which the market offers. “Let the market deliver” will carry the day until the costs become too obviously big to disregard, at which point free-market talk will be abandoned as the purely rhetorical flourish it is. Alas, too obviously big can be phenomenally big. See for example too-big-to-fail systemically important financial institutions, which gave us the great recession and are now bigger and riskier than they were at the outset. Whether fossil fuel industries can fend off unwanted rules to the same extent as Wall Street has remains to be seen. What is clear is that both finance and energy are capable of producing history-making events of a scale sufficient to blow free-market rhetoric off the map.
Of course well-functioning markets are good at what they do. Here is Samuelson again, speaking about (pre-Sandy) New York City.
“How is it that 12 million people are able to sleep easily at night, without living in mortal terror of a breakdown in the elaborate economic processes upon which the city’s existence depends? For all this is undertaken without coercion or centralized direction by any conscious body!”
But market goodness comes from competition and pricing that are made as perfect as possible, not as free – i.e. lawless – as possible. Shorthand use of “free market” as a standard of goodness is cant by some, carelessness by others. A more accurate term would be “free-fire market” or “fray market,” – the victor-gets-the-spoils economy unraveling at the seams and edges. Free market has long been a successful battle cry for a small group of winners. For everyone else in the market, freedom’s not just another word. It’s two words.*
*Think Janis Joplin and homophones.
U.S. Emissions Trends: Optimism, Pessimism, and One Big Decision
This week, the World Resources Institute released a report addressing U.S. progress on reducing GHG emissions to date, and the prospects for further progress without new legislation putting a price on carbon. The tone of the report is cautionary – it claims that ambitious “go-getter” policies are required to achieve the President’s Copenhagen target of 17% reductions in U.S. emissions by 2020 and that, therefore, the U.S. is “not currently on track to meet its 2020 reduction pledge”. This appears to contrast with our recent research on the same question – as we wrote here last fall, we find that “the country is on course to achieve reductions of 16.3 percent”.
In fact, WRI’s results are really not so different from ours. Part of the question is how to count emissions reductions from policies already in place or “in the works,” like stricter fuel economy standards for cars and trucks, and those arising from underlying economic trends. Here, there is almost no difference between our analysis and WRI’s.
The difference is their pessimism about the remaining 40% of reductions that has to occur by 2020 and, specifically, their views on Clean Air Act existing source performance standards for power plants. Our point is to say the runner is “on pace” at the 14th mile in a marathon but still has a way to go. What happens ultimately will depend on the existing source standards – and while both we and WRI’s team have been studying options for these standards for some time, nobody (at least outside of EPA) yet knows how strict they will actually be, or when they will be in place.
The second issue is WRI’s focus on all GHGs and not just combustion emissions. The president’s pledge was widely interpreted to be combustion fuels, but to be sure other gases are relevant. A third issue is WRI’s strong feeling there needs to be a price on carbon (we would not disagree) and this influences how they present their results. Finally, WRI is really focused beyond 2020 in this study, looking out to 2035.
But most importantly they do not think the existing source rules for power plants will be sufficiently stringent and may not be timely. That is a judgment call, neither right nor wrong. We believe that the decision on how to regulate existing sources (which is now on the President’s desk) is the most significant climate-related policy decision a president has ever faced. In different ways, the RFF and WRI analysis emphasize that status.
An Economic View of Sen. Murkowski’s Blueprint
Today, Senator Lisa Murkowski (R-AK) released her long-anticipated energy policy “blueprint.” Murkowski is a relatively centrist Republican and has historically made energy policy a priority. This makes her one of the most important votes in Congress on energy, and the blueprint is therefore worth a close look—it is an important indicator of what is possible in this Congress. The whole thing is worth skimming, but if you don’t have time, Brad Plumer’s overview is a good summary. Here’s our quick views on a few issues where we find grounds to differ with the blueprint.
Energy Prices and Externalities
If the blueprint has a single philosophy, it’s that “energy is good” (its first line) and that policy should make it cheaper. This means expanding fossil fuel production at every opportunity (including ANWR), government spending on R&D on both fossil and renewable technologies, and eschewing taxes to internalize negative externalities. Reducing energy intensity (energy use per unit of GDP) is OK, but policies solely aimed at reducing total energy use are misguided.
While the comprehensiveness of the blueprint is laudable, it unfortunately rules out the most economically promising method for implementing such an ambitious strategy. It accepts in principle that energy choices create differential environmental externalities, but rejects the best policies to deal with this—putting a price on them. It says that “[e]conomics also indicates that sizeable tax increases on fossil fuel producers are ill‐advised, as higher taxes on a good or service will result in less of it—not more.” But this is a straw man. Energy taxes come in two basic forms: general production taxes, and Pigouvian taxes aimed at externalities, neither of which are intended to increase production. General taxes are intended to raise revenue—Alaska has among the highest such taxes in the country, though Sen. Murkowski has supported efforts to cut them.
Moreover, for Pigouvian taxes (like a carbon tax), decreasing production and increasing prices of relatively dirty energy is precisely the point, not a negative side effect. That increase gives both producers and consumers incentives to switch to cleaner energy, driving investment without government spending on R&D or other subsidies. That investment should—contrary to what the blueprint says—bring down clean energy prices over time.
More fundamentally, the singular focus on energy prices ignores the real costs of energy choices. While a modest carbon tax would drive up some energy prices, maybe permanently, it would improve the national welfare, including not only the economy but also public and environmental health. Those benefits are real and quantifiable, but aren’t reflected in energy prices—unless they are priced in with a tax or other policy.
Energy Independence
The blueprint sets out a goal of “full independence from OPEC oil imports by the year 2020.” The argument here is more subtle than the common but mistaken belief that the U.S. can become truly independent from foreign oil. No matter how large U.S. production gets, oil will be traded on a global market and the U.S. will be subject to price swings triggered by supply or demand shifts.
Instead the blueprint argues that the U.S. can produce enough oil (and substitutes) that the world price will fall substantially and that the U.S. will be less vulnerable to volatile price swings. Historically, any shift in North American production has been viewed by most analysts as far too small for this to be true. With tight oil and Canadian oil sands production booming, is this changing? We’re skeptical such changes in North America and others to come will be enough to seriously alter the world market, but this deserves more study.
Besides the amount of production, the cost of extracting U.S. oil is crucial. If it’s close to the (very low) cost of extracting OPEC oil, this price effect might be important. If, on the other hand, it’s close to the current marginal producer, it has much less value and confers much less power to the U.S. If it costs $100/barrel to extract U.S. oil, big new supplies reduce the risk of 2008-style price spikes. But they can’t bring oil prices back to 1990s levels.
As for ensuring us against price volatility, it is hard to imagine that OPEC would lose its ability to jack up prices through slashed production under any U.S. supply scenario. And, any price swings in the world market would be felt in the U.S. unless the U.S. can ramp up its production to counter OPEC cutbacks. This seems a stretch.
Further, the blueprint doesn’t want to see energy use reduced. This means continued exposure to world oil prices and market volatility, no matter what effects increased U.S. production has. Sustained lower world oil prices requires both increases in supply in non-OPEC countries and reductions in world demand—and that means, ultimately, reducing consumption, something the report barely considers.
“Clean” Energy
The blueprint makes another suggestion: redefining “clean” energy, currently a code word for renewables, to mean “less intensive in global life-cycle impacts on human health and the environment than its likeliest alternative.” In other words, natural gas or even coal could be considered “clean,” depending on what it is being compared to. Clean becomes a relative concept, not an absolute one. This is an important conceptual point. Energy choices, like all others, need to be compared to real-world alternatives. You may not particularly like natural gas or nuclear. But the real-world alternative is coal, not solar.
This rebranding is not necessary though: English already does a good job with comparatives. We humbly suggest “cleaner” be used to describe the relative relationship the blueprint highlights. This would avoid unproductive fights over terminology.
Another positive element of the blueprint from an economics perspective is its support (albeit heavily qualified) for wider U.S. natural gas exports. But we hope to have more on that in another post.
A few years ago RFF conducted a comprehensive analysis of a multitude of alternative strategies for reducing greenhouse gas emissions and promoting energy security. The most effective approaches by far involved pricing carbon along with efforts to reduce overall fuel consumption, two elements that unfortunately remain absent from this blueprint.
RFF on the Issues
Gasoline Tax
While many states continue to raise revenue for transportation infrastructure through gasoline taxes, Virginia Governor Bob McDonnell recently proposed eliminating the gas tax in his state and replacing it with an increased sales tax allocated to transportation.
RFF Thomas J. Klutznick Senior Fellow and Research Director Margaret Walls agrees that the gas tax will generate even less revenue in the future due to greater fuel efficiency, alternative fuel vehicles, and changes in driver habits. She also notes that a gas tax has other limits, such as not addressing congestion issues, and suggests “mov[ing] beyond the long-standing political stalemate over increasing the gas tax to think creatively about new policy choices and funding approaches.”
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. Check out this week’s highlights below:
Law and Order in the Oil and Gas Fields: A Review Of the Inspection and Enforcement Programs in Five Western States — 2012 Update
There are not enough government inspectors to ensure that increased oil and natural gas drilling operations on federal and state lands across the West are operating correctly, according to an analysis of inspection and enforcement records by a conservation group… — via Western Organization of Resource Councils
Aviation Report: Market Based Mechanisms to Curb Greenhouse Gas Emissions from International Aviation
A new report published today by WWF assesses the four market-based measures currently being considered [to curb greenhouse gases emitted by international aviation]: offsetting, offsetting with a revenue generating mechanism, a cap-and-trade scheme and a fuel levy with offsetting. — via World Wildlife Fund
Impact of the Smart Grid Investment Grant Program: 4 Papers
The Department of Energy’s Office of Electricity Delivery and Energy Reliability has released four reports on the impact of the Recovery Act-funded Smart Grid Investment Grant (SGIG) Program. Under the SGIG Program, investor-owned and municipal utilities, transmission operators, and electric co-ops across the U.S. are deploying a range of smart technologies and systems designed to increase the electric grid’s flexibility, reliability, efficiency, affordability, and resilience. — via US DOE, Office of Electricity Delivery and Energy Reliability
Managing Spent Nuclear Fuel Strategy Alternatives and Policy Implications
Increasing awareness of the need to reduce greenhouse gas emissions has renewed interest in nuclear power generation. At the same time, the longstanding logjam over how to manage spent nuclear fuel continues to hamper the expansion of nuclear power. If nuclear power is to be a sustainable option for the United States, methods for managing spent fuel that meet stringent safety and environmental standards must be implemented. — via Rand Corporation
Expedited Federal Authorization of Interstate Natural Gas Pipelines: Are Agencies Complying with EPAct? America’s Children and the Environment, Third Edition
The tudy, Expedited Federal Authorization of Interstate Natural Gas Pipelines: Are Agencies Complying with EPACT?, found that for interstate gas pipeline projects, the percentage of federal authorizations that were issued more than 90 days beyond FERC’s issuing an environmental impact statement or an environmental assessment rose from 7.69% before EPACT became law to 28.05% after its implementation. — via Interstate Natural Gas Association of America
For more from the RFF Library Blog, click here.
Responding to Natural Disasters—False Security or Damage Reduction?
Fire, floods, coastal storms, drought—the list of natural disasters that invoke billions in damage to communities and their economies is long and persistent. The tally of costs from Hurricane Sandy in the Northeast continues to mount, mirroring the multi-billion dollar price tags for other hurricane disasters. Yet, year after year, the US Army Corps of Engineers spends millions of dollars to replenish beaches, supporting the continued presence and expansion of coastal communities. And federal agencies spend between $1 billion and $2 billion annually on fire suppression and efforts to remove dangerous underbrush and trees from overly dense forests. Billions more are spent on flood protection. Should federal taxpayers continue to foot the bill for measures to protect communities in areas at high risks from natural disasters?
A recent National Public Radio story resurrects this long-standing debate, focusing on federal taxpayer costs to replenish beaches—year after year—as bulwarks against storm damage. Proponents of this spending point to the significant protections beach replenishment provides, and hundreds of millions of dollars in avoided storm damage. Critics say such spending just keeps people living in dangerous places, luring them into a sense of security and shielding them from the costs of their decisions. Similar arguments are made against the billions of dollars spent on fighting forest fires.
But this set of for-and-against choices overly simplifies the challenges—whether along coasts or in areas adjacent to forests and grasslands subject to wildland fire. Efforts such as beach replenishment and wildland fire suppression may contribute to perverse incentives to locate or remain in high-risk areas. Yet such measures can be cost-effective ways to reduce risks. This latter point is especially important, since many communities are already in these high-risk areas, and costs of relocation could be extremely high.
Thus, the nation and these communities often face the choice of doing nothing–and experiencing extremely high costs of damage, or actually taking actions to mitigate risks–such as, for example, beach nourishment, and, in areas near forests, thinning forests to reduce risks and engaging in fire suppression where communities are threatened. Some research suggests damages are much lower in communities that have protected coastal dunes or supported beach replenishment. For wildland fires, early fire suppression responses when fires erupt can significantly reduce the subsequent extent and consequences of fire.
But other considerations are also in play. Take wildland fire. For communities near forests, risks of catastrophic wildland fires are, themselves, partly a product of former federal decisions to put out every fire. These decisions failed to recognize that many of these areas require fire to sustain forest health. As a result, forests have become unnaturally dense with brush and closely spaced trees, causing dramatic changes in fire behavior and significantly increasing risks to adjacent communities. This context complicates the “who pays for what” question with respect to forest and fire management.
These sorts of complicating details accompany most cases where communities face risks of natural hazards. What is the extent of the risk? Has it changed over time? Why? What are the relative costs of doing nothing, mitigating risks (and using which measures), or relocating whole communities? Who pays the bill? Before rejecting ideas like beach replenishment or forest and fire management, these devilish details deserve careful consideration.
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