Tuesday, December 30, 2008

Environmentalism and Keynesianism

After yesterday's posting, the thought crossed my mind: what exactly do I mean when I speak of environmentalists. I looked up the word in Merriam-Webster's, and the word environmentalist is defined as "one concerned about environmental quality especially of the human environment with respect to the control of pollution", and the word environmentalism is defined as "a theory that views environment rather than heredity as the important factor in the development and especially the cultural and intellectual development of an individual or group". Oxford dictionary's definition for the word environmentalist is "a person who considers that environment has the primary influence on the development of a person or group". Needless to say, the word environment does not only mean nature in this context. However, for the sake of argument and simplicity, let's take it's meaning as referring to nature, alone.

It's become fashionable to say that we're all Keynesians now, and that claim is mostly true, except for Germany's finance minister, Peer Steinbrück (and a few others). In a similar way, we could also say that we're all environmentalists now (except for Bjorn Lomborg and a few others). Environmentalism is no longer an emotional issue, it's an intellectual issue (to most). What I mean by this is not only that we've understood that preserving the environment has mostly a lower net cost than abusing and destroying it. We've also realized that the environment has more than mere economic value, and those values, such as its aesthetic value, doesn't render the issue emotional. To some people, of course, it still is emotional. Some would like to stop the development of wind parks, because they cause a few bird kills per year. In a similar way, there are guys like Bjorn Lomborg who completely neglect the facts of climate change. However, most people are willing to accept the results of several studies (by McKinsey, IPCC, and IEA) that tell us that stabilizing CO2 concentration to 450 PPM has a net cost near to zero. In that respect, we're all environmentalists now: We're all concerned about environmental quality, and we're all beginning to understand that, in the future, environmental issues will probably have a much larger influence on our development than we previously thought.

Monday, December 29, 2008

Snow Angels near Lapland

I'm in (update: near) Lapland skiing with my family. Yesterday, I made snow angels after the sauna - naked. FYI.

Today, I read that the Bush administration might not extend the Endangered Species Act protection to arctic seals living in oil and gas rich Chukchi and Beufort seas. This, of course, is just to speed up off-shore drilling in these areas. Now, does off-shore drilling make sense in these areas relative to the environmental risks? It depends what you compare it with. Environmentally, it probably makes more sense than making ethanol from corn in the U.S. or making oil from Canadian tar sands or shale. In a similar way, it probably makes less sense than using clean power generation to charge electric cars during the night when there's no other load in the network. Personally, I think we're wise to deplete all conventional oil and gas resources first, because it's certain that every conventional oil barrel will off-set one barrel of sheer stupidity - whether it's corn ethanol or liquified coal. These are the issues environmentalists should concentrate on instead of off-shore drilling.

Tuesday, December 23, 2008

Gas OPEC

Energy ministers from twelve gas exporting countries flew to Moscow today to continue talks about creating a "gas OPEC" (ft.com). It's interesting to see what comes out of it, but a gas OPEC will certainly never effectively set volumes, as OPEC does, or prices since gas markets are much more rigid and based on bilateral contracts between the seller and the buyer. John Stern wrote a good article almost two years ago in which he analyzes the meaning of a gas OPEC to Europe's gas markets.

Sunday, December 21, 2008

ENTSO-E and EU's Energy Market Integration

On Friday, a new EU body was established to help coordinate the development of pan-European electric transmission network (Commission's press release). The responsibilities of the European Network of Transmission System Operators for Electricity (ENTSO-E) will include the coordination of EU's future cross-border transmission investments, analysis of resource adequacy of both generation and transmission, and development of market and technical codes. ENTSO-E's work will be of consultative nature, and ACER (Agency for Cooperation of Energy Regulators) will maintain the market regulator's mandate at the EU level. The establishment of ENTSO-E will thus have no impact until ACER is established and has full power to enforce new game rules that apply to all national regulators. Furthermore, it may be misleading to use the term "full power" since ACER may never really have such a mandate. EU's institutional framework prohibits the delegation of discretionary powers to bodies outside the Community framework. ACER is bound to have a very specific mandate that is not seen as discretionary decision making, per se. In reality, as Martin Godfried pointed out, the Agency will be quite dependent on the cooperation of national regulators to play along. Those regulators must be politically independent and dedicated to the integration of EU's electricity markets.

Friday, December 19, 2008

Rumor: Obama to nominate John Holdren as his science advisor

Yesterday, Science magazine speculated that President Elect Obama might nominate the Harvard Professor as his science advisor tomorrow. His appointment would be a very clear signal of Obama's aims to respond aggressively to climate change. Joseph Romm speaks more about Prof. Holdren here.

Tuesday, December 16, 2008

The Return of Depression Economics

There are many great minds talking about The Return of Depression Economics over at TPM Café, including Paul himself. If you're at all interested in economics or the economy in general, you don't want to miss this one.

Monday, December 15, 2008

Energy Options For Transportation

Mark Z. Jacobson of Stanford University recently published an interesting article about the merits of various alternative energy sources for transportation. The study omits the costs of different technological solutions and the current real world applications of some of the solutions. Rather, the study takes a look at eleven categories or criteria, including resource abundance, CO2 emissions, and several other factors. The paper is ingenious in showing the relative merits of energy options for transportation, where car batteries could be charged off-peak, but what's a little disturbing is the paper's seeming attempt to extend the findings to apply to baseload power for the grid. After going through the study, especially one odd assumption sticks out.

Jacobson's "opportunity cost emissions due to delays" takes into account the 10 y (update: 8-14 y) longer planning and construction time of nuclear power relative to wind power, and hence nuclear power gets an additional 59-106 g Co2/kWh. I suppose this range is based on some current portfolios of power generation that's needed to grind power while the plant is being plant and built. However in a similar way, there are current and real "opportunity cost emissions due to operation" of wind and solar power that the study doesn't take into account. There are currently several gas and coal plants around the world that are ramped up and down to fill in the intermittency gap of those energy sources. If there Jacobson assumes an ideal zero emission world with interconnected wind parks, energy storage technologies, and intermittency mitigating portfolios of clean power, he should for the sake of symmetry, assume the same world for nuclear power. After all, it takes much more than 2-5 years to plan, permit and build those prerequisites.

To be fair, academic papers have the prerogative of omitting some factors of reality in order to give us even some new insights. Jacobson's paper certainly accomplishes that mission. The transportation sector should indeed be based more on renewable energy sources driving efficient electric motors instead of ineffcient biofuels driving inefficient internal combustion engines.

Saturday, December 13, 2008

No Price For CO2 Until 2020 in Europe?

Yet again, European heavy polluters had a major victory in EU's climate talks in Brussels yesterday. According to the BBC:

"The original plan was for them to start buying all their pollution allowances from 2013. Currently many of these CO2 allowances are allocated for free, with varying national allocations in the 27-nation EU. Under the revised package, exceptions will be made for plants which were only partly or not at all linked up to the main EU power network in 2007 and for plants in poorer EU states still heavily dependent on fossil fuel. They will buy 30% of their CO2 allowances in 2013, and the 100% figure for buying allowances at auction will not be reached until 2020. Exceptions - called "derogations" - will also apply to industrial sectors identified as being at risk of "carbon leakage". That is, industries which EU data suggest could relocate jobs or plant to non-EU countries which pollute more. The Commission now faces a huge job in identifying those "carbon leakage" risks - and there will be pressure from industry lobbies who hope to get derogations."

With possibly a major part of allowances given for free, I wonder how the EU will meet its new target of cutting emissions by 20 % below 1990 levels by 2020, which falls far short of the emissions cuts called for by the IPCC (25-40 % by 2020). The only good news is that the target of increasing renewable energy's share of the pie is set to 20 % by 2020. It may not be a dramatic factor in mitigating climate change, but we'll have to wait until next November to see what Obama's administration will bring to the global mix. The conference in Poznan ended today without any promise of breakthroughs to come, although Elisabeth Rosenthal from The NYT seems to think otherwise. For example, she calls the adaptation fund for developing countries, which according to the BBC currently means about $ 80 million per annum in funding for developing countries, a ground-breaking element. I call that a slap in the face (for developing countries). On the other hand, a slap in the face is always better than a kick in the balls. Right?

The Multiplier Effect of Infrastructure Spending Meets Rationing

Bob Hall and Susan Woodward recently argued that infrastructure spending has no multiplier effect (i.e. has a multiplier of one), based on military spending's effect on GDP during WW2. Paul Krugman suggests that perhaps the fact that rationing regulated the amount of goods people could obtain had an effect, as well. Good thinking, Batman.

Thursday, December 11, 2008

Some things are still relative

An article in the New York Times has the title "Money and Lobbyists Hurt European Efforts to Curb Gases". However true it might be that industrial lobbyists have watered down the European emissions trading scheme, their U.S. colleagues were so successful that a mandatory ET scheme never got off the ground in the first place. So what's the big news?

I believe the news is that in order for us to respond to climate change, a major change needs to happen either in the relative strength of lobbying coalitions that have a stake in the matter or lobbying must be banned altogether (which is not going to happen). I bet you would get a pretty good idea of where the U.S. energy policy might go in the next four years, if you pulled out the data for sources of campaign funding and lobbying expenditure by various industries. Anyone?

Change in U.S. Energy Administration

Change is now everywhere. According to the Washington Post, Mr. Obama is going to appoint the 1997 Nobel Laureate in physics, Steven Chu, as the new head of DOE. He'll also place Carol M. Browner, the head of EPA during the Clinton administration, to a new White House post overseeing energy, environmental, and climate policies. These are great news to anyone, who believes we should decarbonize our current energy infrastructure. That includes yours truly.

I'm not going to repeat everything that has already been said about Steven Chu (here, here, here, and here) or about Carol M. Browner (here, and here). To get a first hand view of their views, you can watch them speak about important topics (not about their appointments, though) here (Steven Chu) and here (Carol Browner).

I just want to say one thing. Although this is good news, and it makes us hopeful of what's to come, the responsibilities of both Chu and Browner will be quite limited. Unfortunately, the U.S. energy policy will still remain a democratic and political process, making it slow, painful, and quite possibly, not so radical.

Wednesday, December 10, 2008

Clean Energy New Deal

Yes, even the IEA is talking about the New Deal. This came out on Monday, but it went past my radar:

“The current volatility in global energy markets and the broader economic slowdown must not push us off-track from our efforts to address climate change. We must put in place the framework that will guide investment during the recovery and we must start the green infrastructure that will enable the sustainable economy going forward. We think there is an enormous opportunity to develop a ‘Clean Energy New Deal’ to achieve energy security, economic and environmental goals,” Mr. Tanaka stated. “By adopting new energy efficiency measures, constructing green energy infrastructure and taking steps to integrate cleaner energy into the power grids, governments can lock in sustainable technologies and reduce CO2 emissions by almost 40% relative to the projected baseline emissions for 2030.” According to the IEA publication World Energy Outlook 2008 (WEO), greening the energy system requires additional investment of USD 3.6 trillion in power plants and USD 5.7 trillion in energy efficiency over the period 2010-2030. These additional investments correspond to 0.6% of GDP per year, but bring fuel cost savings to consumers of the order of USD 6 trillion.

Sadly, that's the biggest news out of Poznan so far.

Monday, December 8, 2008

Architectures for Agreement

I just read David Victor's chapter in Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World (thanks Furhana), and although the book's been out for over a year now, I wanted to share some of my observations. If you haven't heard of David Victor; he's one of the world's best experts on energy policy and he's written extensively on climate change policies, as well. He is a die-hard realist when it comes to politics, and that makes his writing a bit disturbing - it sometimes seems as if he's so pragmatic that he waters down the Post-Kyoto Treaty when he should leave that to the politicians. Perhaps, he's just ahead of the game after all the game theory he's done at MIT's Poli-Sci department.

In the chapter, David Victor attacks four key elements of the Kyoto Protocol: universal participation, binding targets and timetables for emissions, integrated international emissions trading, and compensation to developing countries. He's right about universal participation. We should focus on getting the top polluters (G8 + 5?) on board first, instead of trying to get everyone to comply. Rome wasn't built in a day, and neither were the EU or the GATT.

In dismissing binding targets and timetables, Victor's reasoning breaks down a bit. He takes the North Sea and Baltic sea regimes as examples of successes in setting nonbinding commitments for reducing emissions. While the cooperation in the case of the North Sea may have been more successful, the Baltic Sea remains one of the most polluted seas in the world, and the pollution's only been getting worse. Leaving that aside, it's easy to agree with Victor that the commitments should not be set in outputs (emissions), but rather in inputs (policies), because the outputs are outside the direct and near-term control of the government. However, I'm yet to be convinced why nonbinding terms would be more effective than binding ones. I just need a practical example of potentially effective nonbinding commitments to mitigate GHGs. I doubt that a nonbinding carbon tax would be very effective, but of course I could be wrong. I realize that countries have different capabilities and interests, but I'm still inclined to think that a global fund to collect carbon tax revenues might be able to address this issue. At the same time, it could bring more accountability, and make the monitoring of commitments easier and less costly.

It's guys like David Victor that the best possible design of the Post-Kyoto treaty and thus our future depends upon. He certainly has the most pragmatic ideas.

Sunday, December 7, 2008

Stimulus: Update

The Washington Post ran a front-page article today about Obama's coming spending program to jump-start the economy. Governors claim they have $ 136 billion worth of public infrastructure projects "ready to go". It's hard to say what "ready to go" really means, but the proposal is bound to have a "use-it-or-lose-it" rule to encourage the speeding up of projects. I hope they put several other rules and strings to the package, as well, to avoid the wasting of money on projects that have low social returns.

Meanwhile, it seems as if the car industry is going to get money from the government, after all, to avoid filing for bankruptcy. I fully support a large scale fiscal stimulus for the economy, but I think it's the government's responsibility to spend money on goods that they believe ARE likely to be in demand, not on goods nobody clearly wants. Filing for Chapter 11 would've forced the car makers to reorganize their businesses and focus on models where they could still be competitive at (large pick-ups?). Yesterday, another article in The Washington Post stated the following:

"The sums being discussed by lawmakers and the White House fall well short of the automakers' request. Democratic aides said they are talking about providing $15 billion to $17 billion, which would be expected to see GM and Chrysler through the end of March, when president-elect Barack Obama would be in position to take over long-term plans for returning the industry to profitability. "

Come again. Say, who's going to restore the industry's profitability? I doubt that's Mr. Obama's job, and I think he'd agree with me.

Friday, December 5, 2008

Stimulus: How Much, Where, and When?

Everybody's looking into the U.S. right now to see, if they can still jump start their economy before taking a nose dive into a much deeper recession and everybody else with them. There are now three related questions: how big of a stimulus package is sufficient (can it be too big?), to what sectors should it be directed, and in what time frame can we expect it to have an effect on the economy?

How much is sufficient? Sufficient for what? To fill the gap in declining private spending? Well, if the U.S. GDP is bound to drop by 7-9 %, we're probably in the one trillion range over the next two years. (Update: If you take into account the Keynesian multiplier, a stimulus of $ 600-700 billion could make up the gap.) But can the stimulus package be too large, and lead to massive inflation? According to guys like Paul Krugman, the Fed should be able to fight it off simply by raising rates. I've heard some opposing views, but they don't seem very credible considering the seriousness of the situation. Inflation is the last thing we need to worry about now. We don't want to see deflation similar to The Great Depression.

To what sectors should it be directed? If I had an agenda, I might easily argue that the right way to spend it is by putting a large part in decarbonizing the energy infrastructure, but unfortunately there are some contenders, especially the financial and health care sectors, and of course general infrastructure. The money must be spent in a way that maximizes long-term returns. There's been talk about pouring $ 15 billion per year into "greening the economy" as part of the coming stimulus package. Recently, Senator Jeff Bingaman gave a talk at CSIS about the energy priorities of the new administration. To those of you who don't him, he's the chairman of the Committee on Energy and Natural Resources.

The time frame for seeing any impact of the stimulus package is another interesting issue. There are reasons to be believe that the package will come too late to have any effect for the coming year of 2009. Infrastructure projects take time to go from paper to shovel-ready, and projects ready to be built are relatively few, possibly only worth a few tens of billions of dollars. If the U.S. started losing half a million jobs per month, next year is not looking bright. Government expenditure in the financial sector will probably bring the quickest response in the short term.

Thursday, December 4, 2008

Casting for I am Legend: The Sequel

Looking at the depressed faces on the streets of Helsinki cracks me a bit. Some of them look exactly like the nocturnal zombies in the movie I am Legend. In fact, if I didn't know that the zombies in the movie were computer rendered, I would guess the cast came mostly from Finland. If they're making a sequel, they should definitely look into my country. Using Finns wouldn't even require make up.

Wednesday, December 3, 2008

Time for Universities to Reflect upon Their Finance Curriculums

I warned you when I started this blog that some of my postings would not deal with energy, but society in general. One phenomenon I've wanted to comment for a while now is the skill set of people working in finance, and how finance curriculums should be improved. Mark Thoma put it well in his blog today:

"All over the world, it has become fashionable for Universities and Colleges to offer Masters degree programs in quantitative finance or financial engineering (FE), a code word meaning the solution of the Black-Scholes option pricing differential equation in as many ways as possible. To do so, students are taught to use basic techniques in numerical analysis whenever the equation is either non-linear or does not lend itself to the standard analytical solution. As a precursor to this main task, the program usually includes a course in stochastic calculus during which Ito's celebrated lemma is discussed, proved and used."

My suggestion to improve finance curriculums includes courses in
1) critical thinking (i.e. philosophy: logic, political philosophy, ethics)
2) economics (both macro and micro, the key is to understand the balance sheet and dynamics of the economy, and the policy tools and their effectiveness)
3) public finance (yes, this is still economics, but the finance people don't know that)
3) international capital markets (ok, many programs already require this)
4) much more case studies (many about the current financial crisis)

I'm not going to suggest we should abandon the BS formula or portfolio theory. I just wouldn't want anyone to leave university with only these tools. In fact, I'd rather have them read just one book: The General Theory.



Tuesday, December 2, 2008

People, read about the economy!

It seems that people at Frost & Sullivan share my view of the impact of the economic crisis on wind development, at least for Europe. That's great - especially, if their view is based on hard facts, unlike mine. Talking about hard facts, I recently had a worrying discussion about the economy with a person, who should know much better what's happening around the world. Everyone should be following the economy closely now, and if you're wondering what the best sources for analysis are, here are couple:

Blogs:
- Our latest Nobel Lauriate, Paul R. Krugman (see also link to his columns): http://krugman.blogs.nytimes.com/
- Brad DeLong: http://delong.typepad.com/

Bloomberg (for the best podcasts On The Economy): http://www.bloomberg.com/tvradio/podcast/cat_economics.html

Books:
- John Maynard keynes (that's right, we're all Keynesian now): The General Theory of Employment, Interest and Money
- Paul Krugman: The Return of Depression Economics and the Crisis of 2008

Yes, I assume you read newspapers, but if that's not the case, start with FT.com