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Peak Oil (again)

The Economist has a piece on it:   Feeling peaky

FT Alphaville discusses it:  Peak oil goes mainstream (again)

From 2005, when oil was US$60/barrel, James Hamilton wrote:  How to talk to an economist about peak oil

In a related point, I’ve also put together two charts looking at the number of miles driven in America.  The first gives a rolling 12-month total of the number of miles driven per capita in America, while the second looks at deviations from previous peaks in the same.  Both are from 1971 onwards.  A few things to note:

  • The current dip started well before the recession (peak was in June 2005); it’s been going for 79 months so far.
  • The current level was last seen in February 1999.
  • The current level (January 2012) is 6.34% below the most recent peak; the low point in the current dip was at 6.45% below (November 2011).
  • The dip at the end of the ’70s and start of the ’80s (i.e. the second oil crisis and the Volker recession) reached 4.99% below the previous peak after 21 months and was back above that peak after 54 months.

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Two awesome links

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Cars as mobile battery packs for hire

The Economist’s Babbage (i.e. their Science and Technology section) has a great article on the possibility of electric cars being used as battery packs for the power grid at large.  Here’s the idea:

At present, in order to meet sudden surges in demand, power companies have to bring additional generators online at a moment’s notice, a procedure that is both expensive and inefficient. If there were enough electric vehicles around, though, a fair number would be bound to be plugged in and recharging at any given time. Why not rig this idle fleet so that, when demand for electricity spikes, they stop drawing current from the grid and instead start pumping it back?

Apparently it’s all called vehicle-to-grid (V2G).  That (wikipedia) link has some great extra detail over the Economist piece.  If you want more again, here is the research site of the University of Delaware on it.  If you want more again (again), I’ve included links to the UK study by Ricardo and National Grid referenced in the Economist piece below.

After reading about the idea of V2G, a friend of mine asked a perfectly sensible question:

If having batteries connected up to the grid is a good thing for coping with spikes in demand, then why wouldn’t the power companies have dedicated batteries installed for this purpose?

I presume that power companies don’t install massive battery packs to obviate demand spikes because the cost of doing so exceeds the cost they currently incur to deal with them: having X% of their gross capacity sitting idle for most of the time.

In particular, the energy density of batteries isn’t great, and batteries do have a fairly low limit on the number of charge-discharge cycles they can go through.

Interestingly, another part of the cost associated with battery packs will be in the form of risk and uncertainty [*], which are exemplified by precisely this idea.  If a power company were to purchase and install massive battery packs at the site of the generator only to see a tipping-point-style adoption of electric vehicles that, when plugged in, serve as batteries for hire situated at the site of consumption (i.e. can offer up power without transmission loss), they would have to book a huge loss against the batteries they just installed.

Technological innovation and adoption is disruptive and frequently cumulative, meaning that any market power created by it is likely to be short-lived, which in turn creates a short-run focus for companies that work in that space.  For an infrastructure supplier more used to thinking about projects in terms of decades, that creates a strong status quo bias:  by not acting now, they retain the option to act tomorrow once the new technologies settle down.

Anyway, I’m a huge fan of this idea.  For a start, I’ve long been a huge fan of massively distributed power generation.  Every household having an ability to sell juice back to the grid is just one example of this, but I think it should be something we could aim to scale both up and down.  Imagine a world where anything with a battery could be used to transport and sell power back to the grid.  My pie-in-the-sky dream is that I could partially pay for a coffee at my local cafe by letting them use some of my mobile phone’s juice for 0.00001% of their power needs for the day.

More realistically, the other big benefit of this sort of thing is that because the grid becomes better able to cope with demand spikes without being supplied by the uber generators, the benefit to the power company of maintaining that surplus capacity starts to fall.  As a result, the balance would swing further towards renewable energy being economically (and not just environmentally) appealing.

At a first guess, I suspect that this also means that it is against the interests of existing power station owners for this sort of thing to come about, which ends up as another argument in favour of making sure that power generators and power distributors are separate companies.  The distributor has a strong economic incentive to have a mobile supply that, on average, moves to where the demand is located (or better yet, moves to where the demand is going to be); the monolithic generator does not.

Back in December 2007 (i.e. when the financial crisis had started but not reached it’s Oh-God-We’re-All-Going-To-Die phase), Doctors Willett Kempton and Nathaniel Pearre reckoned a V2G car could produce an income of $4,000 a year for the owner (including an annual fee paid to them by the grid, about which I am highly sceptical).  The Economist quite rightly points out that V2G, like so many things in life, would experience decreasing marginal value, but apparently it wouldn’t fall so far as to make it meaningless:

Of course, as the supply of electric vehicles increases, the value of each to the power company will fall. But even when such vehicles are commonplace, V2G should still be worthwhile from the car-owner’s point of view, according to a study carried out in Britain by Ricardo, an engineering firm, and National Grid, an electricity distributor. The report suggests that owners of electric vehicles in Britain could count on it to be worth as much as £600 ($970) a year in 2020, when an electric fleet 2m strong could provide 6% of the country’s grid-balancing capacity.

If you’re interested in the study by Ricardo and National Grid, the press release is here.  That page also has a link to the actual report, but they want you to give them personal information before you get it.  Thankfully, the magic of Google allows me to offer up a direct link to a PDF of the report.

The ever-sensible Economist also raises the upfront cost of capital installation by the distributor as something to keep in mind:

There is, it must be admitted, the issue of the additional cost of the equipment to manage all this electrical too-ing and fro-ing, not least the installation of charging points that can support current flows in both directions. But if the decision to make such points bi-directional were made now, when little of the infrastructure needed to sustain a fleet of electric vehicles has yet been built, the additional cost would not be great.

I can’t remember a damn thing from the “Electrical Engineering” part of my undergraduate degree [**], but despite the report from National Grid, I’m fairly sure that there would still be significant technical challenges (by which I mean real engineering problems) to overcome before rolling out a power grid with multitudes of mobile micro-suppliers, not to mention the logistical difficulties of tying your house, your car and your mobile phone battery to the same account and keeping track of how much they each give or take from any location, anywhere.

If I were a government wanting to directly subsidise targeted research to combat climate change I’d be calling in the deans of Electrical Engineering departments and heads of power distribution companies for a coffee and a chat.  I’d casually mention some numbers that would make make them salivate a little and then I’d talk about open access and the extent to which patents are ideal in stimulating innovation. [***]

[*] By which I mean known unknowns and unknown unknowns respectively.

[**] Heck, I can’t remember a damn thing from the “Electronic Engineering” or the “Computing Engineering” parts, either.

[***] But that’s a topic for another post.

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The future of civil society (I hope)

In the Netherlands:

Potholes, stray garbage, broken street lamps? Citizens of Eindhoven can now report local issues by iPhone, using the BuitenBeter app that was launched today. After spotting something that needs to be fixed, residents can use the app to take a picture, select an appropriate category and send their complaint directly through to the city council. A combination of GPS and maps lets users pinpoint the exact location of the problem, providing city workers with all the information they need to identify and resolve the problem.

The application covers a wide range of familiar nuisances, from broken sidewalks to loitering youth (who will hopefully respond favourably to having their picture taken by concerned citizens). Compared with lodging a complaint by phone or in writing, BuitenBeter creates a nearly frictionless experience and will no doubt prompt a wider group of people to become active reporters of issues that need the city’s attention.

Besides giving people an easy way to send through detailed reports, city officials also believe the concept will create shorter lines of communication, and will facilitate quicker feedback from local government to citizens. Developed by mobile solutions provider Yucat, the BuitenBeter app will soon be available for Android and Windows Mobile phones, too. Eindhoven has signed on for a twelve-month trial, and Yucat hopes to roll out the system to other cities in the near future.

This is brilliant.  More!

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Whither baseload demand?

John Quiggin has a post in which he argues that, if baseload demand exists in any meaningful sense, it is much lower than current offpeak demand.  I want to paraphrase and expand on what he said.

There is no such thing as a “natural” or baseload level of demand.  There is a demand curve that plots quantity demanded as a function of price (or if you’re trained as an economist, the other way around).  There is a 3rd dimension of “time of day” (or more strictly, time of week, if I can say that): the curve of quantity-versus-price shifts in and out over the day.  The entire thing then shifts out slowly over time as population and the economy increase.

At most, we might say that there is a region of the demand curve for the offpeak period that is highly inelastic with respect to price.  Quiggin is arguing that that region would only be for quite small amounts of power, distinctly less than we currently see in offpeak load figures.

The reason lies in the economics of our current electricity supply through coal-fired power stations. (Side note:  I’m not 100% certain of these points – if anyone can confirm or deny them, I’d be glad to hear from you):

  • There is some range in the thermal output of a single furnace (it’s not simply all or nothing), but real variation comes from switching entire furnaces off and on.
  • The cost of moving within the output range of a given furnace is essentially just the fuel cost; the concurrent manpower required and the maintenance needs accrued are unchanged.
  • There are economies of scale in concurrent manpower when increasing the number of furnaces.  Moving from one furnace to two does increase the staff requirement, but it does not double it.
  • There are significant one-time costs associated with starting (and possibly also with shutting down) a furnace, largely due to accruing future maintenance costs.  This means that once you start a furnace, you want to keep it running as long as possible so as to amortise that cost over the greatest amount of output.

The upshot of these points (and all of them point in the same direction) is that a cost-minimising coal-fired power station is one with many furnaces that are shut down as rarely as possible.  In other words, they ideally want to supply a large and constant amount of power to the grid.

But the demand curve at 3pm is a lot further out than at 3am.  The coal powered stations can handle this a little bit by scheduling all non-emergency maintenance overnight, but ultimately, they face a conundrum:  the demand simply doesn’t exist — at any price — to meet their cost-minimising supply in the dead of night.  So they compromise by shutting down some furnaces (which raises the average cost of the remaining power generated) and lowering the offpeak price by half (which lowers the average revenue they receive for that power) in order to raise the quantity demanded.

Quiggin is contesting that the increase in quantity demanded during offpeak is significant compared to the “true baseload” demand, the quantity that would be demanded at 3am at just about any price.

In contrast, solar power, in particular, would have supply shifting in and out over the day along with demand.

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Carbon tariffs

Well, well.  It would appear that Nicolas Sarkozy is threatening China with “carbon tariffs.”  It comes as no surprise that:

His idea already has supporters in the European Commission, particularly among officials charged with defending the interests of European industry.

In other words, the criticism of China is not really based on a perceived risk to the global environment, but that by acting first and China not following, the EU feels that European industry suffers unfairly.  It’s difficult to see how this would be legal under WTO rules.

The stated justification for the threatened action was:

“We cannot have one response from Europe and one from Asia, one from the north and one from the south,” he said. “China can and must play its full part.”

…

“I will defend the principle of a carbon compensation mechanism at the EU’s borders with regard to countries that don’t put in place rules for reducing greenhouse gas emissions,” Mr Sarkozy said.

This might be morally defensible if (and I really have to stress that ‘if’) the EU were to hand the Chinese government every cent they took in tariffs from Chinese exporters, thus allowing Europe to claim that they really were acting on behalf of the planet and not just their domestic industry.

However, we still have the very large problem of sovereignty.  Why should the EU get to dictate policy to China and to impose it arbitrarily if China doesn’t comply?  Even if China were to agree that (a) climate change is real and (b) humankind can and ought to do something about it, it does not follow that China and the EU would agree on an acceptable cost to impose on polluters, not least because China is still a developing country.

The point is that for every tonne of CO2-equivalent emitted in the EU, Europe gets more goods for consumption, but for every tonne emitted in China, we get more goods for consumption and another couple of people lifted out of poverty.

This message was driven home Tuesday by an article in a Communist party newspaper that said 95 per cent of carbon dioxide emissions from the era of the Industrial Revolution through the 1950s came from today’s developed countries.  Rich nations’ per capita emissions of greenhouse gases are also far above those in the developing world, the overseas edition of the People’s Daily newspaper said.

Now, if the world can agree on some sort of framework for reducing greenhouse gas emissions that also includes some restrictions on China and India, it seems sensible enough to me to allow carbon tariffs as punitive action against non-compliant states, but that’s pretty much the only way I’d support it.

I suppose that you might argue that if one country refused to ratify some treaty and other countries judged that by failing to do so, that country was placing other countries in peril, then taking action against them – in this case, imposing carbon tariffs – might be justified under “self defence.”  It’d be a tough sell, since the danger would not be imminent, but you might try it.  The problem then would be that if the stand-alone country were one of the UN security council’s permanent members, they could veto any attempt at multilateral action.

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Pigovian taxes or rolling-auction-cap-and-trade?

Update:  I’ve received some criticisms of this proposal elsewhere and I hope to do up a version 2.0 in the near future.

For the purposes of this post, I shall assume that climate change is real, is undesirable and, if not wholly anthropogenic in its causes, is still able to be mitigated by a decrease in emissions of greenhouse gases. The question is how best to achieve that goal. Generally speaking, there are two broad approaches to the problem: emission trading (cap-and-trade) or taxation.

The largest cap-and-trade scheme in the world is the European Union Emission Trading Scheme (EU ETS). You can read more about it at Defra or Wikipedia. Benefits of the EU scheme are:

  • It offers a “market-based” solution while still allowing control over total emission levels, which is arguably necessary to combat climate change because, in this respect, the earth is a closed system.
  • It rewards innovative companies that reduce their emissions (by allowing them to sell their excess permits).

However, it suffers from several problems:

  • The allocation breakdown between countries is negotiated politically rather than on the basis of need or economic efficiency.
  • The allocation breakdown within countries is decided by the government, which makes it susceptible to political vagaries.
  • Incumbent firms do not incur a cost for the bulk of their emissions, but only for those in excess of their allotment.
  • Because allotments are decided for several years at a time, the system raises a barrier to entry in the affected industries and so stifles innovation. This is because new entrants (who don’t receive any allotment) will have to pay for all of their permits in full. Worse still, they have to buy them from the incumbents!
  • In the lead-up to allocations being made, it is optimal for both firms and governments to exaggerate – or worse, actually increase – their emission levels in an attempt to capture a higher share of the total permits and thus extract rents from others.
  • It would be extremely cumbersome and invasive to spread the idea of emission permits down to the level of the individual consumer for pollution that is created by acts of consumption (e.g. burning gasoline by driving your car) rather than acts of production (e.g. burning coal to produce electricity).
  • The government’s sole incentive to enforce the system is environmental altruism, which may at times take a back seat to political expediency.

As an alternative, various people advocate Pigovian taxes on greenhouse gas emissions (particularly Greg Mankiw and his Pigou Club, which boasts some pretty big names). I first want to acknowledge some of the key benefits that taxes offer in this regard:

  • The infrastructure for taxation and tax auditing is already well established.
  • Taxation can readily be applied to all sources of pollution, both in production and consumption.
  • The revenue can be used to offset taxes that are distortionary.
  • The government would have two incentives for enforcing the system – environmental altruism and protection of a revenue stream – making it more likely to be done thoroughly.

Next, the downsides to using taxes to reduce greenhouse gas emissions:

  • As a general rule, the government is in no position to decide which industries are best able to innovate to reduce their emissions, but this is exactly what the government would in effect be doing when it decided tax rates on a product-by-product basis. Tax rates of X% on gasoline, Y% on aviation fuel and Z% on coal-fired electricity production include an implicit government bias in which industries ought to change.
  • Because the price elasticities are not known, it is impossible to know the optimal level(s) of taxation.
  • Even if the optimal tax level were known, all taxes are subject to political compromise, not just when introduced but on an on-going basis in much the same way that the allocation of permits is under the EU system.

If forced to choose between them, I would personally favour Pigovian taxes over an EU-style cap-and-trade system.

But before Professor Mankiw adds me to his club, I want to stress that if given true freedom to choose, I wouldn’t go with either of them. I would choose what I (rather cumbersomely) call a rolling-auction-cap-and-trade system. Here’s how I imagine it working:

  1. An independent government agency would perform the following roles:
    1. Decide on the total number of permits to be allocated to the economy as a whole.
    2. Auction permits on a rolling basis (say, monthly) on the open market.
    3. Declare the market average amount of greenhouse gases emitted by products used in acts of consumption.
    4. Enforcement, with random audits and the ability to impose (effectively) infinite penalties.
  2. Permits would be freely tradable between private agents.
  3. Any firm that pollutes in the act of production must possess permits for the greenhouse gases that it emits.
  4. Any firm that that produces a product which will cause pollution in the act of consumption (e.g. gasoline) must possess permits for the market average amount of greenhouse gases that will be emitted.
  5. Full reporting of points 3 and 4 would be required under Generally Accepted Accounting Practices (GAAP) and must be certified by an independent auditor.

So far as I can tell, this system essentially offers all the benefits of both the EU ETS and Pigovian taxes without any of the downsides of either. It effectively places a cap-and-trade system on the entire economy (consumption and production) without forcing a burden on individual consumers to purchase and keep track of their permits. It minimises government interference and with it, the chance that the system might be picked apart by well meaning but short sighted politicians in the years to come. It offers up revenue which helps encourage the government to maintain the system and allows them to offset distortionary taxes. It does not create incentives for agents to exaggerate or alter their behaviour to “game” the system. It does not try to second-guess the market in terms of where innovation might most easily occur, nor does it impose any barriers to entry or innovation. Innovative firms benefit two-fold, by lowering their costs and – by passing at least some of those savings on to their customers – increasing their market share.

I’d welcome any comments or criticism.

p.s. I have previously wondered whether the revenue raised ought to go to the Central Bank (rather than the government) so that they could then reissue the revenue raised into the money supply. I believed back then and at least suspect now (the intuition is the same, but I’m more cautious now) that this would be the ultimate sterilised environmental policy. The money supply would remain unchanged and since the money would never go near the government, there would be no change to the government’s macroeconomic position or impact on the economy. Without attempting a model to “prove” it, I think the general equilibrium result would be a redistribution from firms and individuals that were above-average polluters to those that were below-average polluters, with the market deciding who and how much at both ends of the transfer.

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Carbon taxes vs. Carbon credits

I don’t know for sure, but I think that I disagree with an explicit carbon tax. Why should the government be any good at deciding which industries have the best chance of improving their energy efficiency (which they are doing when they set the tax rate on a product-by-product basis)?

I suspect it would be better to go for carbon-credit trading system. Have a (declining) aggregate quota of completely tradable carbon credits, issuing them by open-market auctions on a rolling basis throughout the year. To be economically neutral (that is, non-distortionary), the issuer of carbon credits would need to government-independent (although operating within boundaries set by the government) and either work closely with the central bank or be a new branch of the central bank itself.

This last point would be necessary because if the proceeds from auctioning the credits were not going to be treated as government revenue (and in order to avoid being distortionary, that would need to be the case), any money paid for the credits would need to be recycled back into the economy by the central bank. This would ultimately have the equivalent effect of raising interest rates on carbon-intensive parts of the economy and lowering interest rates for the carbon-free sections while keeping the aggregate rate (and thus, in theory, the overall effect on GDP) unchanged.

In practice, I suspect that we would see some increased volatility in market interest rates and inflation pressures, with both settling down over a few years.

I could be entirely wrong on all this, though. It’s just the result of 20 minutes of thought. I’d welcome any corrections.