Tuesday, December 30, 2008
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
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
Sunday, December 21, 2008
Friday, December 19, 2008
Tuesday, December 16, 2008
Monday, December 15, 2008
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
"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?
Thursday, December 11, 2008
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?
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
“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
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
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
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
Wednesday, December 3, 2008
"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
- 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
- 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