By Jason Krupp*
As a researcher at a public policy think tank with a strong focus on economics, it is sometimes easy to take prices, and the influence they have on behaviour and innovation, for granted. Two recent incidents highlighted how powerful this mechanism can be.
The first happened at a dinner party, where the conversation had strayed to the taboos of religion and politics. Well, anthropomorphic climate change, but it could be argued that the topic fits into either or both categories, depending on who you talk to.
The focus of the conversation was not on whether humans are warming the planet, but rather what needs to be done about it. The loudest voices at the table argued that governments must heavily invest in renewable energy like wind turbines and ban the use of fossil fuels such as oil and coal in order to decarbonise the economy.
Pointing out that you cannot build a wind turbine without coal was quickly tutted away, but it remains a point of fact.
Robert Wilson, a student completing a PhD in mathematical ecology, expounds on the point here. In brief, he quotes US Geological Survey figures that state it takes 103 tonnes of stainless steel, 402 tonnes of concrete, seven tonnes of fibreglass and 20 tonnes of cast iron to produce a single megawatt of wind capacity.
Some of this could be produced by greener methods than are currently employed, such as using recycled metal instead of coking coal to turn iron into steel. But these production techniques are only viable at the margin, and would require several decades of investment before green steel could be produced in significant quantities. Other parts of a wind turbine cannot be produced without fossil fuels, such as the fibreglass blades. In addition, the concrete used to make the base that a turbine stands on is produced in giant kilns that rely on coal or natural gas for heat.
Even if there were viable alternatives, Wilson notes that fossil fuels are used at every single point in the production process, and there are no viable substitutes. For example, the trucks and giant diggers that extract iron ore from mines are fuelled by diesel. Similarly, the ships that transport the ore to the smelters run on crude oil, and are huge steel creations in their own right.
Although Wilson has made some assumptions and taken some necessary shortcuts to build his argument, his conclusion that you cannot build wind turbines in large quantities without fossil fuels is sound. A ban on fossil fuel is self-defeating if your goal is to encourage energy production from renewable sources.
Constraining carbon emissions by prices is a much smarter way to achieve the same outcome, either through cap-and-trade or an outright carbon tax. Those firms that want to avoid this constraint will look for ways around it, such as through innovation.
This is already happening in the wind turbine space, with manufacturers steadily scaling back on the amount of materials required to produce a megawatt of power. Wind and solar desperately need these kinds of advances to lift their efficiency. A recent paper analysed how much energy goes into making a power source versus how much it puts out, and found that nuclear, hydro, coal, and natural gas are more effective than photovoltaics and wind power by an order of magnitude.
Importantly, prices do not shut down potential innovation that a ban would otherwise stifle. If fossil fuel use were forbidden why would anyone continue to invest in developing carbon capture schemes or storage technologies?
The second recent incident that underscored the power of prices, or the potential thereof, was a recent story about a US biotech firm called Pembient. The San Francisco-based firm has developed a method of manufacturing rhinoceros horns that not only look like the real thing, but are genetically identical too.
The aim is to flood illegal wildlife markets in Asian with these bio-horns, thereby collapsing prices and wiping out any profits poachers may hope to make from killing these animals in the wild. If it works, prices could end up saving the remaining rhino species from extinction where an international ban, armed park rangers and tough criminal sentences have so far failed.
Even if Pembient’s aim were not as noble as described, but simply to make a profit (rhino horn allegedly sells for US$65,000 a kilogram), prices are likely to fall further as other suppliers enter the market. And provided the costs of production are lower than what it costs to illegally harvest a horn from an animal, poaching will also decline.
The point of these two examples is to hopefully introduce an alternative remedy to the popular problems that are discussed at dinner tables. All too often the go-to response is “the government needs to ban X, or ban Y”. It would be a welcome change to hear someone who is not an economist say “why not let prices do the work?”
There may be cases where a ban is justified, such as where you cannot put a price constraint on a behaviour that society wants to prevent. Or because it may take too long for prices to take effect, and the harm needs a remedy now. However, the use of bans should be saved as a last resort, and even then sparingly and with extreme caution for fear of unintended consequences.
We know prices work because we see them in action every day. The upshot in trusting in prices and the market is that it could lead to a world where more electricity is produced from renewable resources and rhinos thrive in the wild, and that sounds like a fine place to live.
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*Jason Krupp is a research fellow at the New Zealand Initiative. This is this week's NZ Initiative weekly column for interest.co.nz.
43 Comments
Interesting, particularly around the omission - developing carbon sinks, stopping global deforestation, planting more forests. Putting a price on carbon has been clearly shown to NOT work, but rather just puts more money into polliticians pockets, while they endlessly debate but essentially do nothing that stops the corporations profit from unethical practices. Perhaps nationalising the major oil companies that produce the raw product (from the ground) and then using their profits to fund the development of alternative technologies might get some results?
Problem with Nationalising such an asset is that instead of putting money into politicians (and by that I take it you also mean government employees (see recent news on salaries at the MBIE)) ; instead of putting money in their pockets, you're just putting the whole asset, gift wrapped, in their pockets. So instead they do power plays and make minor profits and stuff their pockets with management and other fees instead. That's the problem with socialism, is that invariably the same crooks end up running things. the ideals are good but keeping control on track for it's targets is always an issue.
And as long as local population is poor, they will struggle to chance that situation.
Is nationalising an asset only a socialist tool? I wasn't trying to espouse a particular ideology, rather identify that none of the popular tools being used and even promoted by the greenies will be effective. There appears to be very little Governmental support for the necessay R&D to develop alternative sources of energy to fossil fuels, or to reverse past legislative changes that meant forests no longer had to be replanted when harvested. I suggest the ideology of the Government is less relevant than, as you mentioned, the greed of the people involved at the cost of the tax payers and consumers. As usual it seems to be manouverings by the powerful and privileged to protect their position, rather than deliver real benefit and change.
I am a huge fan of pricing signals. I am less a fan of deliberately misleading articles supporting a particular business agenda. The article tries to dismiss solar and wind power on the basis that if they were the only power source you would need massive storage to manage for when they are not available. We already have such massive storage. it is called hydro power plants. No sensible person would not have a balance of power production sources. Wind and solar can be very useful elements of that mix.
With respect Stephen, you have more chance of getting a pig to fly than a major hydro dam off the ground. Most of NZ's hydro assets were built by the government without fully recovering the cost of capital, and in an era where there were no rules. So even if you wanted to build a dam and could make the ROC stack up, the regulatory costs would doom it to a slow and painful death thanks to the RMA. Go look up Project Hayes, Meridian's failed attempt to set up a wind farm on the South Island. That had minimal land use. A dam has massive land use, and tends to be a net carbon emitter because of all the rotting organic matter. That said, I chose wind and solar because many people believe these technologies are the way to decarbonise the economy. Well, as per above, clearly there are problems.
Jason, the flow through the turbines on existing hydro plants can be managed within reason to supply power when solar, wind and other renewables cannot supply power. So any increase in power demand in NZ can likely be supplied without massive investment in storage. What storage that will be invested in will likely be in things like car batteries that will have storage for their own reasons. They won't run without storage. All of these technologies are operating on largely unsubsidised price signals now. Given your linked paper deliberately did not split out the carbon cost of producing the core elements of solar and wind from the storage that is not required in NZ, then I am deeply sceptical of its motivations. A sense check suggests solar panels take relatively little carbon to produce and then produce electricity for 20+ years. That Nimbys do not like wind or solar but like distant coal plants is a different matter that should have a carbon price tax to eventually sort.
Existing hydro as the battery, combined with solar and wind are the way forward. Distributed storage will become important soon.
As for price signals. Pffft. Look at the price signals around fossil, which give no indication supply is finite. And Jason - please read the book 'Cod'. Total disaster in that industry.
Jeez no wonder the world is in such a dire position, when this opinion piece is representative example of the quality of thinking, which is produced by an institution which the author proclaims has a strong focus on economics in public policy.
Actually the Green Party has for a long time has advocated employing "market-based" mechanisms to address climate change,.
"The Government talks a lot about economic transformation, well this transformation needs to be an environmental economic transformation," Dr Norman says.
Dr Williams identifies that economic instruments such as taxes, levies, charges, tradable permits, deposit schemes, subsidies, and credits, are effective policy tools for changing consumer and business behaviour.
"The mechanisms can be used in other areas of our economy to ensure that we move towards becoming more sustainable. We need to use market mechanisms in order to direct economic activities away from things that destroy the environment towards things that protect the environment.
- See more at: https://home.greens.org.nz/press-releases/lets-use-market-mechanisms-mo…
in my view they are entirely an exercise in futility because by its very nature, capitalism demands expansion in order to continue functioning. Its a fundamental reality. Investors in capitalism demand a compounded rate of return on their capital and for it to be paid, the economy must grow.
" Yes, nonsensical ideology. The root of the problem goes back to a point made in the mid-19th century by John Stuart Mill, one of the sharpest minds of all time, in an overview article on unresolved methodological aspects of economics. Mill viewed economics as a branch of logic and noted that the least error in the premises of any logical argument would infect with like error the whole superstructure built thereon. A seemingly small error is embedded in the premises of modern monetary economics. Paul Samuelson noted it very briefly in his Ph.D. thesis in 1942 and said it didn't matter. Today, this small error is destroying the world's monetary system.
Egill:
And what is this logical error?
Gunnar:
Joseph A. Schumpeter, who is one of the two greatest economists of the 20th century — the other is John Maynard Keynes — Schumpeter noted in 1935 that the source of interest and profit in the production process was unclear. That issue has never been satisfactorily resolved. Keynes had sought to clarify this in Treatise on Money in 1930. He then moved on to write his major work, General Theory published in 1936, in which he bypassed the issue because his principal concern was to argue for a new approach to getting the world economy out of the Great Depression and the point was not germane in that respect.
Paul Samuelson, the godfather of modern monetary thought, addressed the source of interest in the production process in a 1939 paper entitled "The Rate of Interest Under Ideal Conditions." He did not succeed in resolving the matter. Then, in his Ph.D. thesis at Harvard three years later, he said that interest and profit were the product of "something" and it didn't matter what we called it. And that is how a tiny logical error slipped into the foundations of modern economic analysis, without which what is happening now would not be happening. And thirty some years ago I realized that this was nonsense."
https://mises.org/library/end-mainstream-economics-interview-gunnar-t%C…
"But our mentality is currently centered on growth. Our economic systems rely on growth for investment, loans, and interest to make any sense. If we don’t deliberately put ourselves onto a steady state trajectory, we risk a complete and unchoreographed collapse of our economic institutions."
https://physics.ucsd.edu/do-the-math/2011/07/can-economic-growth-last/
Issue one.
"Pointing out that you cannot build a wind turbine without coal was quickly tutted away, but it remains a point of fact.
Robert Wilson, a student completing a PhD in mathematical ecology, expounds on the point here. In brief, he quotes US Geological Survey figures that state it takes 103 tonnes of stainless steel, 402 tonnes of concrete, seven tonnes of fibreglass and 20 tonnes of cast iron to produce a single megawatt of wind capacity."
While true, this example, rather relates to a matter of EROEI (Energy Return On Energy Invested), which is peripheral to most people, because organizations and individuals in our society make resource allocation decisions on the basis of monetary calculations, not with complex physics equations, which few people could be bothered or are capable of performing.
People lack the ability to determine the actual worth of the product and are in fact exploited by those who set retail prices for their goods, particularly through reference price strategies, such as when supermarkets set a price with a very generous markup, then discounting the prices in store sales, thereby luring people into believing they are getting a bargain and the stores reap a windfall when their sales volumes increase.
http://uwmktg301.blogspot.co.nz/2010/02/reference-pricing.html
In fact a growing body of economic literature demonstrates that the neoclassical supply/demand function is nothing but a fictional intellectual construction with little real world evidence to prove its existence.
"Clearly there can be momentary glitches in the working of the price mechanism; but I am not concerned with these correctable imperfections. Instead the issue is: when does the waywardness of prices, wage rates, and interest rates cease to be glitches in price mechanism and actually eliminate it altogether. Starting with prices, since the 1930s, it has been known that price stability dominate the industrial, wholesale, and retail areas of the American economy. The 40-50 studies in the past fifteen years by Alan Binder and others which cover developed countries around the world further support the existence of price stability. One basis for its existence is the administered cost-plus pricing mechanism (used by virtually all business enterprises to set the prices) which neutralizes the impact of changing sales on costs hence prices. So price stability and its underlying pricing mechanism are systemic features of developed economies such as the American economy resulting in a disjuncture between price and quantity."
http://neweconomicperspectives.org/2013/11/conventional-price-mechanism…
I was thinking of researching a safer/cleaner solution...
If carbon fuels were to run out quickly It would be interesting to compare if you would be better off with a fission reactor or a whole pile of wind and solar generators. Could you maintain either without cheap carbon?
Wind and solar are already competitive...witness their large scale installation across the world as fastest growing new forms of generation. Whats missing is pricing the carbon of fossil fuel generation ($50/ton minimum) which makes wind/ solar even more attractive. NZ has great storage for renwable energy, dams. Use the dams when renewables have low output.
Simple but the NZ power market is not setup to maximise environmental benefit, the Government has Carbon emissions as low priority. NZ needs to wake up to the reality of climate change which is already making itself clear in NZ. The world is currently on course for catastophic change by 2100, temperature change of 3-6 degrees, 2m sea level rise, enormous drought and associated loss of life, habitat, economic loss etc etc. Post 2100 the globe will continue to warm due to the build up of green house gases
The scientific consensus is clear- climate change is happening now and we need far reaching and radical change now to have any hope of reducing temperature increase to 2 degrees...2 degrees is likely already unobtainable as human systems take so long to change.
Do some "independent" research on climate change and avoid the NZ initiative, Fox news and their ilk. Seriously Jason do you have a conscience...how much do you get paid by NZ initiative for your integrity?
Prove that climate change as in the theory is real !!
Over fishing was done mainly in the 1980"s when hundreds of squid boats trawled NZ waters. The political BS of the time was let the foreigner boats in to fish the heck out of NZ waters and claim over-fishing by locals so as to introduce quota that Government can sell to locals!!! Now don'tgetmegoing !!
The prices are doing a bit of work in the UK at the moment. Poor landed rent seekers.
"Amber Rudd says 250 proposed wind farms are now "unlikely to be built" following cuts to subsidies announced last week."
http://www.telegraph.co.uk/news/earth/energy/windpower/11692535/Ending-…
Funny how the price mechanism isn't allowed to work its magic in the case of your beloved oil and gas industries, eh Profile?
"While the falling oil price is good news for families across the country, it brings with it challenges for hundreds of thousands whose jobs depend on the North Sea," the Chancellor said.
"The fall in the oil price poses a pressing danger to the future of our North Sea industry – unless we take bold and immediate action."
Mr Osborne announced that the Government would also fund new seismic surveys to assess the potential in "under-explored areas" of the UK North Sea."
http://www.telegraph.co.uk/finance/budget/11474801/north-sea-oil-and-ga…
Yeah it is a shame big gov. puts it hand out on a whim. As usual should have been left well alone. Thank goodness for the independent frackers in the US showing big oil and big gov. how it's done.
"George Osborne, the chancellor, is under pressure from within his cabinet to back down on his unexpected plans to impose a £2bn windfall tax on North Sea oil and gas companies.
...Bruce accused Alexander of being "economically illiterate for coming up with a "populist move" that could kill off investment in the North Sea."
Looks like Bruce was right.
http://www.theguardian.com/politics/2011/mar/31/george-osborne-north-se…
I trust that you said, "Thank goodness for the independent frackers in the US showing big oil and big gov. how it's done." in jest, because the oil and gas industries receive massive subsidies from the U.S. taxpayer.
"Oil and gas companies enjoy savings of over $500 million each year from percentage depletion allowances in addition to other subsidies such as $6 billion in royalty free extraction from public land over the next 5 years according a report to the Government Accountability Office. Meanwhile, the societal, health and environmental costs of petroleum use are immeasurable. Estimates range from $500 billion to over $1 trillion dollars each year in added healthcare costs and environmental damage."
http://www.forbes.com/sites/peterjreilly/2011/10/19/scientist-calls-for…
Of course the drillers piss and whine like the dogs they are when their master and benefactor threatens to take their goodies away.
"If Washington removes oil companies’ ability to write off intangible drilling costs—expenses spent on building oil infrastructure—oil activity in the Bakken could go down by as much as 30%, Hamm said at the Forbes Reinventing America conference Thursday morning.
A 30% drop is a daunting figure, especially coming from the biggest fracker in North America. Hamm started his Harold Hamm Tank Truck Service in 1966 with one man and one truck. Over a half century, he has grown to become one of the biggest gas drillers in the country and is now worth an estimated $15.6 billion.
He was early to bet on the Bakken and predicted years ago that it would eventually produce 1 million barrels a day. Now that it is nearly at that level, he is saying it could reach 2 million barrels—but only if Washington doesn’t get in the way."
http://www.forbes.com/sites/danalexander/2014/03/27/billionaire-oilman-…
For wind this might be worth a read,
https://theconversation.com/how-much-does-wind-energy-cost-debunking-th…
I have not had a chance to yet.
LOL. Anarkist absolutely nailed Profile with that post. Absolutely nailed.
The fossil fuel industry received $500 Billion in subsidy in 2011 alone.
http://www.ewea.org/blog/2013/02/fossil-fuel-subsidies-are-public-enemy…
And that is before one adds the costs that their production is inflicting on society via induced climate change.
http://www.ceres.org/press/press-clips/the-scary-truth-about-how-much-c…
''In the United States, 2011 and 2012 were the two most extreme years on record for destructive weather events. A record 14 weather disasters occurred in 2011, sustaining more than $1 billion each in economic losses for a total of $60.6 billion. Last year brought 11 weather disasters that each cost $1 billion or more; while the total economic loss has not been determined, experts say the dollar figure is almost certain to exceed 2011’s. Meanwhile, the insurance industry estimates that its losses from 2012’s natural disasters will total $58 billion—more than double the average yearly losses of $27 billion from 2000 to 2011.''
Whiner - did you actually read the article you linked? Let me help you - again. "“One of the main arguments to keep fossil fuel subsidies is that they protect the poor, but studies show that 80% of fossil fuel subsidies go to middle and high income households,” Birol said."
Note who the subsidies go to - it is not big oil companies (who oil make up a small proportion of oil production anyway). It is crackpot regimes like, for example, Venezuela - who have the world's largest oil reserves - bribing their voters with $12 billion/year in gasoline subsidies. Big government pumps the vast majority of the world's oil so in effect it is big government subsidising big government via inefficient hand-outs to their citizens.
It is a green fantasy that big oil gets $500B in subsidies.
Bill gets it - I wonder when the ecotards will cotton on. $94 Billion taken out of the pockets of Joe Worker to support wind and sun farm boondoggles and only $6 billion going into R&D - which could actually achieve something useful, and be of benefit to everyone, rather than a select few Big Green and other vested interests.
"...However, he argued that current technologies could only reduce global CO2 emissions at a “beyond astronomical” economic cost. “The only way you can get to the very positive scenario is by great innovation,” he said. “Innovation really does bend the curve.”
Mr Gates urged governments to switch more resources from subsidising renewable energy into basic research. At present, government subsidies amounted to more than $100bn with only $6bn a year being invested in renewable energy R&D, he said. “Most of the people you talk to would say that we should double or triple the amount of renewables R&D.”
Rejecting calls from environmental campaign groups for shareholders to dump holdings in oil and gas companies, on the grounds this will have little impact, he instead urged “high-risk” investment in new technologies.
He said renewables were far from capable in their current form of capturing projected growth in energy use by 2030. He cited solar power as an example: “Solar is only during the day, solar only works best in places where it's warm. We don’t have perfect grids. We don’t have storage.
“There’s no battery technology that’s even close to allowing us to take all of our energy from renewables and be able to use battery storage in order to deal not only with the 24-hour cycle but also with long periods of time where it’s cloudy and you don’t have sun or you don’t have wind.
“Power is about reliability. We need to get something that works reliably.”
http://www.ft.com/intl/cms/s/0/4f66ff5c-1a47-11e5-a130-2e7db721f996.htm…
The thing is resilience costs money, or in other words lost profit short term. The right wingers above think that like buying and selling shares when a nation does poorly they can sell and move elsewhere. This means they only think very short term and aim maximise THEIR profits today. In other words gut good businesses, sack people, reap windfall profits, load them up with debt and sell them as "going concern" to "mom and pop" investors.
The problem with that model is like the Roman empire once you have pillaged everything of the one time resources what you are left with isnt enough to support the lifestyle you think you are entitled to and repression, forced extraction and collapse is the result.
For Joe worker when oil gets so expensive that the company he works for cant afford to stay in business what then? I'll give you a clue....look up "let them eat cake"
I dont disagree on the substantial costs and "“Power is about reliability. We need to get something that works reliably." for a business as usual scenario. That is where both sides of this argument are wrong and equally deluded. Both sides think we can just carry on either using fossil fuels or switching to green, oopsie wrong, our life style has to change to meet the NET energy available.
This is how we lived up until about 1850 ~ 1920s and the world's population then? 1~2billion.
You are probably young enough to watch this correction unfold in its entirety, enjoy the view.
The debate here is reflective of all debates that swirl around climate change, and the use of energy. There is a general consensus of opinion that change needs to occur, and while this debate interstingly expands to include economics, the main focus is on energy consumption and the source of that energy. fundamentally though all are only focussing on one side of the equation the left;
Energy consumption = planetary ability to absorb byproducts with out adverse impacts on the environment.
It is clear that for the human race and the planet to survive, this equation must at least be in balance, or the right to have a surplus over the left. Equally clearly there is no identified technological solution offered to replace fossil fuels which is creating the primary imbalance, and no tolerance to reduce consumption, so until that occurs we must focus on the right hand side and develop our environment's ability to absorb the by products of our consumption. Simple? Hardly, but entirely necessary.
A side response to a comment above, i believe that people do care about where their power comes from like coal fired power stations v hydro, but you or I as individuals have little say in the matter, and only mass action will force pollies to change the way they do things, and that is neither easy nor quick, and if forced we can guarantee any pollie will make the out come very expensive!
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