Chart of the Day: World Resources by Country

The World Bank's PSD blog passes on this neat chart showing world resources by country. It's a bit easy to jump to conclusions without appreciating the underlying detail, though.
Another interesting observation is that Brazil has almost 20 percent of the world's water resources (roughly on par with Saudi Arabia's share of oil reserves). Perhaps another reason to study Portuguese?
I imagine most of Brazil's water resources are in the Amazon basin and the Pantanal, though, where they're not currently being used for agriculture (responsible for ~70% of human water use, and probably more in ag powerhouse Brazil) and couldn't be without major environmental damage.

Geothermal (or at least public handouts) attract big players

I haven't been too optimistic on geothermal power on this blog (here, here, here), but here at least is some marginally good news from the U.S. government's recent round of grants.
... what really caught our eye was how many big companies were looking for ways to participate. Oilfield service giants Baker Hughes and Schlumberger were given about $5 million each to develop drill bits, motors and other tools that can churn through rock at 300 degrees Celsius.

General Electric was awarded four grants for a combined $10.9 million to design various tools, fluids and pump parts to be used in different stages of turning hot water into electricity. Honeywell and Johnson Controls also got checks from Washington D.C.
I tend to believe that these types of large corporations are pretty hard-headed about how they spend money, making this a good sign. The realist in me points out that these are tiny amounts of money - easily small enough to be justified on PR grounds alone - and keep in mind these are grants, so no financial obligation (although there may be some associated R&D investment spend comitments)... so not worth reading too much into.

Aid vs. remittances

From Roving Bandit, who also gave us migration vs. microfinance, comes this equally striking chart:

That's right - private remittances outweigh the total of international development aid for a given year.

Is this related to resources? Well, it might be in the sense that the income-generating activities for migrants in developed countries might be less resource-intensive and environmentally unfriendly than in developing countries (I am thinking slash-and-burn agriculture, etc.). I’m not sure, though, and would be interested in any existing analysis of this.

"The Forest for the Trees"

I just read “The Forest for the Trees” by William Powers and it is a good 101 on forest carbon. In a nutshell, saving forests isn’t currently integrated into market decision-making, but it could be through an appropriately designed carbon market. Here's a sample (it could clearly use more paragraph breaks - I will try to highlight to break it up).
The good news stemming from [the Coase] theorem is that it makes preventing deforestation a viable — and relatively affordable — complement to time and cost-intensive traditional climate change approaches, which seek to reduce emissions from economic activity, such as manufacturing. Tropical forests are currently being destroyed for very little profit. One hectare of rainforest cleared for ranchland crops or palm oil plantations yields as little as $25 or as much as $3,000, respectively. The latter is certainly a good sum, yet requires significant investment of materials, agriculture, and production to reap the rewards; but even the former can be a windfall amount for a poor Amazonian peasant, enough to feed a family for a month. On global markets, however, this resource is monumentally underpriced. On the European cap-and-trade carbon market (the European Trading System, or ETS), the right to emit one ton of carbon dioxide trades today at more than $20. With each hectare of intact rainforest storing around 500 tons of carbon dioxide, that means each hectare has a value of $10,000 as carbon dioxide storage unit, far more than the value of even the most productive tea or soy plantation. As a recent World Bank report put it, “farmers are destroying a $10,000 asset to create one worth $200.” To the peasant farmer or multinational agribusiness, of course, that makes perfect sense, because that $10,000 is still purely theoretical. It can’t put food on the table or deliver dividends to shareholders. The bad news, then, is that these markets—though fundamentally connected by the very fact that climate change is a global problem—remain unlinked.
I also liked this idea – seems like a happy medium on the challenging issue of how many offsets should be allowed:
Since 20 percent of global warming comes from deforestation, under an avoided deforestation system a maximum of 20 percent of any polluter’s emissions reductions toward an overall cap may come from paying to safeguard forest carbon.

Commodity share of retail food prices

Michael Roberts lays out some back-of-the-envelope math to back up the common (and true) assertion that “ Raw commodities make up a tiny share of retail food prices” in developed countries:
The numbers in the quote came from my own back-of-the-envelope calculations. There are about 6 lbs. of corn used to produce each lb. of beef. Corn sells for about $3.70/bushel. A bushel is 56 lbs. So I figured the value of corn in a pound of beef was about 40 cents, or 10 cents in a quarter pound hamburger. If corn when up to $37.00, a lot of people in poor countries would starve to death. But the price of a burger would go up just 90 cents.
Also, empirically, retail prices tend vary less than wholesale prices in absolute terms. In other words, I was being conservative--a pound of beef would probably go up a lot less than 90 cents.
On the topic of commodity prices, Michael also cites a recent paper on whether futures prices are effective predictors of commodity prices; the conclusion seems to be they they outperform a random walk, but that isn't necessarily significant in the statistical sense.

Green jobs: 1 - 1 = 0

Tim Haab of Environmental Economics puts a little theoretical framework around green jobs, runs the inductive argument starting with full employment, and concludes that:
To simplify this whole discussion, the simple math of green jobs is this: 1-1=0.

One more green tech fund

From Dealbook:
The race to cash in on the environmental technology wave just got a little more crowded on Monday with the founding of the New World Capital Group, a private equity firm focused on investing in companies in the nascent “green tech” sector.

Led by Carter Bales, an industry heavyweight who founded the environmental practice at McKinsey in the 1980s, and assisted by four partners including Bradley Abelow, former head of operations at Goldman Sachs and later chief of staff to Gov. Jon S. Corzine of New Jersey, New World is hoping to fill what they believe is a huge funding gap in the green industry by providing growth capital to more established, middle-market companies.

Mr. Bales estimates that there is only $3 billion in private equity capital pledged to help green-focused companies — those in the fields of clean energy, energy efficiency, environmental services, waste management, water, and sustainable and biodegradable materials. That represents just 1 percent of an industry that Mr. Bales believes is worth around $300 billion, growing at a rate of 8 to 10 percent a year.
My impression is the opposite – namely that there is much more money chasing good opportunities in the green tech sector than there are opportunities that offer attractive risk-adjusted returns. Sure, there will still be new home runs, but the sector is so hot that it’s been picked over several times by both financial investors and strategic players (e.g. the big oil companies), so I don’t know how much value can be created by looking for as yet undiscovered diamonds in the rough, unless you believe you are so much better at it than anyone else.

But then again I'm an advisor, so what would I know about taking principal risk?

Cap-and-trade’s impact on refining

From Environmental Capital:
Energy and climate legislation in Congress will create plenty of winners and losers, but one group in particular looks to get battered: U.S. refiners.

That’s the finding of a new report by energy consultants Wood Mackenzie, which says that cap-and-trade legislation will cost U.S. refiners about $100 billion a year by 2015 and put them at a competitive disadvantage to refiners in Europe. (The refining industry’s already warned about pain from climate legislation.)
There are still plenty of uncertainties about how climate legislation would affect the refining industry. Wood Mac’s analysis, for instance, is of the House version of climate legislation; the Senate version has even tougher rules for refiners right now.

It’s also not clear if refiners would be able to pass on the cost of carbon legislation to consumers. If they do, it would add 45 cents to the price of a gallon of gas, Wood Mac says.

But refiners may not be able to pass on the additional costs because of the threat of a flood of cheap gasoline imports from Europe. Current legislation leaves a loophole in which imported gasoline wouldn’t be subject to the same restrictions.

Which means that the government’s environmental plans could end up undermining another administration goal—energy security—by increasing the share of imported fuels.
True (and others - such as Geoff Styles, repeatedly - have noticed) but this would be fairly easily fixed by a border tax on imported gasoline, no?

(Hmm, I have pretty vocally opposed "border adjustments" before – is this position inconsistent? I'm afraid it might be...)

More on green jobs

In addition to me, Tyler Cowen, and Bastiat, here are a few other credible voices weighing in on green jobs.

Environmental Economics:
“We’ve reached another milestone as we move to a clean energy future,” Mrs. Boxer said in a statement, “creating millions of jobs and protecting our children from dangerous pollution.”
Cap-and-trade won't create millions of jobs in the way that a naive reader might perceive that statement. Jobs will be created in certain industries and we'll be able to point a finger at those and count them up. Jobs will also be lost elsewhere as a result of regulation and these will be more difficult to point out and count up. The net effect will be minor noise in the symphony of cyclical, structural and frictional job market. In other words, don't expect the unemployment rate to fall as a result of cap-and-trade.
When legislation like the Kerry-Boxer climate bill, which includes many provisions that would make energy more expensive for consumers and businesses, is marketed as a jobs bill it merits a skeptical reception. Stimulating jobs in the 6-10% of the economy devoted to energy seems unlikely to compensate for the loss of jobs that would ensue throughout the broader economy, if climate legislation caused energy costs to soar. That may, however, be a necessary evil, and the question we should really be asking is not how many green jobs such legislation will create, but whether on balance its provisions are truly justified in order to address climate change--even if they resulted in a net loss of employment, as I strongly suspect they would. Unless the answer is an unequivocal yes, we could be setting our long-term energy policy on the basis of a metric that is only a minor contributor to either energy costs or total economic activity, for reasons that seem unlikely to stand the test of time.

P.S. Did not intend to back-handedly praise my "credibility" by association...


This was too good not to re-post in full (the sincerest form of flattery):
I was sitting in church this past Sunday morning listening to the annual stewardship sermon "... and money is not just a medium of exchange..." and I'm thinking "... amen preacher, it's also a unit of account and a store of value."

Food aid by text message

Speaking of food aid, here’s a great story:
We've reached a very strange point in human history when it is assumed that people who don't have access to food will have working cell phones:

In a test project targeting 1,000 Iraqi refugee families, the United Nations agency will send a 22-dollar (15-euro) voucher every two months by SMS to each family, who will be provided with a special SIM card.

The beneficiary can then exchange the electronic voucher for rice, wheat flour, lentils, chickpeas, oil, canned fish, cheese and eggs at selected shops.

Addressing concerns about mobile phone ownership among the refugee population, WFP spokeswoman Emilia Casella said all the 130,000 Iraqi refugees currently receiving food aid from the agency in Syria have mobile phones.

Update: The Roving Bandit approves.

More to life than blogging

Greg Mankiw gives some very legitimate reasons why he won’t be blogging any more than he already does.
Sorry to disappoint, but more frequent blogging is not in my future. I have a full life: classes to teach, students to advise, articles to write, textbooks to revise, kids to raise, and a wife who still enjoys spending time with me (within limits).

I will continue use this site to pass along links for articles of interest, weigh in when I have something to get off my chest, and flog my favorite textbook. But I am too busy with other things to produce the voluminous output of some of my more energetic colleagues in the blogosphere.
Disappointing for those of us who very much enjoy access to his thoughts, but completely understandable.

Update: Chris Blattman gives some good reasons why he will continue his excellent blog - great news for the rest of us!!

Another oil book

Green Inc. interviews Peter Maass, author of Crude World, in two parts. Nicholas Shaxson’s Poisoned Wells, which I review here, seems to have beaten Crude World to the market, as it’s not clear Maass’ book is that different (except that Maass takes on a broader scope, both outside of Africa and in speculating about Peak Oil).

I’m not particularly compelled by the interview, but if anyone reads the book and finds differently, let me know.

Is green technology like vaccine technology?

India's former intransigence on GHG emissions has unfortunately quickly reasserted itself after a brief hiatus.
Then just yesterday, India’s prime minister ratcheted up the rhetoric again, reiterating the need for developed countries to provide developing countries with the wherewithal to clean up their economies—essentially for free. From the FT:
“Climate friendly and environmentally sound technologies should be viewed as global public good,” [Prime Minister Manmohan] Singh told the United Nations-sponsored Delhi High Level Conference on Climate Change: Technology Development and Transfer. “Such an approach has been adopted successfully in the case of pharmaceutical technologies for the benefit of HIV/Aids victims in developing countries. The moral case of a similar approach for protecting our planet and its life support systems is equally compelling.”
Chinese officials quickly echoed the call, saying that access to advanced technologies was “crucial” to the outcome of the Copenhagen climate summit. That repeated call for unfettered access to clean technology is the one thing that unsettles big companies (such as General Electric, Siemens, and the like) which are otherwise thrilled about the business prospects of a world dedicated to rebuilding its entire energy infrastructure.
The comparison of green technology to pharmaceutical technology is a brilliant one for developing countries – if I were them I'd ride it for all it’s worth.

Obama’s speech conspicuously omits "cap-and-trade"

Obama has been fairly silent on climate change, much to the chagrin of those who decry his rhetoric gap. He gave a big speech at MIT today which excited Joe Romm, but as Environmental Capital points out, the focus on renewable energy to the complete exclusion of cap-and-trade or broader climate legislation is very concerning to those of us who believe that a comprehensive market-based system to limit emissions is an important – nay, indispensable – step toward stemming global warming. As I commented on Climate Progress:
Isn’t it a bit concerning that Obama’s speech seems to focus completely on renewable energy, to the exclusion of broader climate legislation and market-based mitigation strategies? Cap and trade wasn’t mentioned at all, and the word “climate” only appears once (whereas “energy” is all over the place). If he is indeed trying to stump for the cap-and-trade system which is the centerpiece of Congress’s current climate legislation, he’s doing it in an extremely roundabout way...

Enough (hunger)

I’m currently reading Enough: Why the World's Poorest Starve in an Age of Plenty, based on a trusted recommendation, and am finding it surprisingly substantive for a book written by two WSJ journalists. I’m about halfway through and will post more when I’m done, but two quick thoughts for now.

First, I had not appreciated at all the bizarre distortions created by the U.S. food aid system (aid is required to come from U.S. farms) and the “Iron Triangle” of farmers, shippers and charities which upholds is. The resistance to spending just 25% of food aid budget on locally produced food (which would be much more cost-effective) is astounding (it was quashed in Congress four years running from 2005-2008).

Second, everyone (Bono, Tony Blair, the authors, etc.) fixates on hunger in Africa specifically, but there are more undernourished people in South Asia than in Africa, and Africa has less than 30% of the billion undernourished people in the world. The lion’s share are in Asia (despite the Green Revolution!). So it’s good to keep that in perspective.

Update: Right, so apparently I posted on the latter less than two weeks ago, in response to an NYT article on the same topic.

Is taxing debt a good idea?

Paul Volcker thinks so; I don’t know, but it’s an interesting idea that would be a sea change in U.S. corporate finance. Here’s a great WSJ chart on how the U.S. has one of the highest corporate tax rates in the developing world, but collects a relatively small share of revenue.

I’m not sure I get how this math works, though:
Headed by former Federal Reserve Chairman Paul Volcker, the bipartisan presidential tax-policy panel also is examining the way multinational corporations pay taxes. The group is considering whether to replace the current system, which taxes global income, with one that taxes only profits generated in the U.S. Such a move could provide more revenue for the Treasury by simplifying a system that has provided multinationals multiple ways to navigate transborder tax rules to minimize payments to the government.

Such changes could raise tens of billions of dollars in tax revenue.
Via Felix Salmon.

Intellectual arbitrage

Chris Blattman reflects on how few economists knew Elinor Ostrom, the recent Nobel laureate, before her award, and he sees major arbitrage opportunities:
There are vast amounts of relevant knowledge in related fields, seldom exploited. The economists have been pouring into the economics and psychology gap, but the economics-politics gap is just starting to close. Politics and behavioral psychology is still wide open territory.

Even within the disciplines there are gains from exchange. Just the other day I listened to a group of grad students suggest that political theory (i.e. philosophy) wasn’t answering questions relevant to other fields of politics. Sounds like a research frontier to me. Why, for instance, has political science left the human rights and humanitarian debates to ex-journalists?
This resonates with me, and I think this probably holds in the resources world (both in academia and in the private sector). I don’t have a tremendous amount of experience interacting with academics specializing in natural resources, but my sense is some lack the groundedness of having spent years working on the ground in the private sector (and obviously many actors in natural resources industries are not up to date with the latest academic thinking). And these opportunities hold between private sectors as well - Lord knows a deeper knowledge of the complexities of oil refining economics and markets would be of great use to many people working in biofuels, for example (I'm sure there are many others).

Trying to develop that type of broader perspective is one of the reasons I started and continue to enjoy this blog, and I highly recommend blogging to anyone else who is interested in the same thing!!

The hidden cost of energy

Many people have been linking to the new study claiming that America’s current energy sources cost $120 bn per year excluding the effects of climate change (largely health costs from other forms of pollution). Environmental Capital’s Keith Johnson puts it in a way that caught my attention:
Looked at another way, coal’s hidden pricetag adds up to 3.2 cents per kilowatt hour. Compare that to the 2 cents-per-kilowatt hour that wind power gets from the government — that’s less a subsidy than a partial attempt to level the playing field.
Wow – I would not have guessed that the costs reach the scale of cents per every KWh produced, which is quite hefty. If these numbers are robust – and no doubt there will be ample debate over that – then that is yet another argument that the benefits of climate change legislation far outweigh the costs.

Many views on fuel subsidies

There are a lot of possible angles on fossil fuel subsidies. It's easy to draw a chart like this that makes them seem way out of proportion with renewable fuel subsidies in the U.S.:

But there are also other ways to cut the data, like in proportion to total energy consumption, which give the opposite picture - according to, fossil fuels receive 71% of subsidies while providing 86% of U.S. energy in 2007 (94% if nuclear is excluded). Oil and gas taxes also far outweigh subsidies, so counting only the subsidies provides a distorted picture.

Geoff Styles argues that the "level playing field" argument is misleading, because of the strange economics of oil and other subsidies for renewables. He calculates the gasoline subsidy on a per volume basis and compares with that corn ethanol; ethanol subsidies are higher, unsurprisingly, but this alone isn't a generalizable argument, because corn ethanol subsidies don't have much support from greenies either.

Enough about the U.S., how about developing countries? According to The Economist, they spend an order of magnitude more than developed countries on fuel subsidies ($310 bn vs. $20 bn):

Ultimately, I find The Economist quite sensible on this issue - they applaud the recent G20 resolution to phase out fossil fuel subsidies (although being appropriately skeptical of the vague "medium-term" timeline) because ultimately, subsidized fuel consumption is both bad for energy efficiency and not particularly effective as an investment in poverty alleviation. And if developing countries eliminate their subsidies, the paying field levels, weakening at least one of the arguments against doing the same here in the U.S.

The underrated efficiency of cap-and-trade

I have a lot of respect for Geoff Styles, who is always very thoughtful in his writing on energy and related issues, but I disagree with him here (I'll reproduce my comment):
Hi Geoff,

I don’t think the current state of economic research on cap-and-trade (both theoretical and empirical) would support your statement that, “The problems with this thinking lie in the enormous distortions and unnecessary economic hardship those uneven allocations will create over the next 20-plus years and the opportunity cost of the emissions reductions that could have been achieved more quickly and cheaply.” See for example Robert Stavins here:
It is exceptionally important to keep in mind what is probably the key attribute of cap-and-trade systems: the allocation of allowances – whether the allowances are auctioned or given out freely, and how they are freely allocated – has no impact on the equilibrium distribution of allowances (after trading), and therefore no impact on the allocation of emissions (or emissions abatement), the total magnitude of emissions, or the aggregate social costs...

Generally speaking, the choice between auctioning and freely allocating allowances does not influence firms’ production and emission reduction decisions. Firms face the same emissions cost regardless of the allocation method. When using an allowance, whether it was received for free or purchased, a firm loses the opportunity to sell that allowance, and thereby recognizes this “opportunity cost” in deciding whether to use the allowance. Consequently, the allocation choice will not influence a cap’s overall costs.
I agree there’s a lot of room to argue that the W-M allocation of permits is unfair, and some shareholders will benefit while others will suffer. But the attractive efficiency properties of the cap-and-trade mechanism (as opposed to a carbon tax, incidentally) mean that the aggregate social outcome is likely to be fairly efficient, rather than “enormously distorted” as you worry.

Update 1: bartman on merchant power generation:

If you read the text of Waxman-Markey, you will find that in one key way it invalidates Stavins' statement that you cited.

The key feature is the dynamic allocation of permits to merchant coal plants. Since their annual allocation is based upon their previous year's production, then a merchant coal plant has a greater incentive to use the permits than to trade them, because trading them means that they get a lower allocation the following year. The end result is that, ceteris paribus, there will be more coal burned than in a world with static allocation or full auctioning.

We've had a lot of debate at work whether this is a feature or a bug.

Good point that the dynamic allocations for merchant power generation may not uphold optimal efficiency. As you say, TBD whether the dynamic allocations are a feature or a bug. But these are only 5% of total allocated permits, so even in the worst case this won’t drastically compromise the efficiency of the overall outcome (and 95+% efficiency would be a pretty good outcome of the political sausage-making process).

Update 2: Geoff responds:
I'd go further than Bartman and suggest that while Stavins might be right about the "equilibrium distribution after trading", such systems rarely attain equilibrium in the real world. Dr. Stavins has an impressive bio, but I don't see any real-world commodity trading experience in there.

The fundamental problem is that for the first 15-18 years of cap & trade, the highest emitting sector will receive the lion's share of free allowances and have the least incentive either to alter operations or to invest in more efficient hardware. That's compounded by W-M's structural requirement that the utilities pass on the benefits to their customers; without that, they'd have more incentive to reduce their own emissions and sell their free allowances to the poor refiners who already operate at 90% effeciency and have little scope for reducing emissions further. The result of that structural flaw will be higher emissions from the electricity sector than under full auctioning or even-handed allocation, while refiners will be unable to cut enough to compensate for that and will merely have to pay up, perhaps at the penalty level, with the resulting increase in their costs driving up fuel costs for consumers and putting marginal US refiners out of business, leading to higher imports of refined products than otherwise. None of those outcomes looks good for energy security, and they won't do very much for the global climate, either.

Re “such systems rarely attain equilibrium in the real world”, the empirical research I’m aware of shows that cap-and-trade systems have often reached efficient equilibria in the past (e.g. the SO2 allowance trading system) – see this paper for more detail, and please let me know if you’re aware of other evidence contradicting this.

Re “the highest emitting sector will receive the lion's share of free allowances and have the least incentive either to alter operations or to invest in more efficient hardware”, Stavins’ key point is free allowances alone don’t alter operating incentives (in this sense they’re similar to sunk costs). If the allowances market is clearing at $20/ton CO2e, any company (utility, refinery, whatever) with available abatement opportunities at a cost of $15/ton can make money by implementing that project. If it’s a utility with allocated allowances, the benefit will come from selling a credit for $20, whereas the benefit to a refinery without allocated allowances is avoiding the purchase of credit for $20, but the incentives are the same. The case for abatement opportunities at a cost above the market-clearing price is similar – implementing these projects doesn’t make economic sense, whether or not the company was allocated allowances.

So an initial overallocation to utilities will not in and of itself result in high inefficiency. The tricky part is that utilities don’t capture the full benefits of cost-effective abatement, since as you rightly point out these must be passed on in part to consumers. If I remember correctly, states and municipalities have some latitude to regulate the credit pass-through locally, so there is some flexibility to mandate investment in energy efficiency at the local level. I agree that this makes the overall efficiency properties messier. But if utilities capture even a part of the benefits of their own investments, efficiency investments below the market-clearing cost of carbon will still be profitable, and it seems overall efficiency will still be pretty good.

Update 3: The dialogue continues:
I'm sorry, but those arguments would have been much more persuasive had we not been treated to such a massive display of behavioral inefficiencies in markets. Nor am I terribly reassured that SO2 markets might have reached equilibrium, since at scale the GHG markets seem likely to look a lot more like energy commodity markets, which manifestly are rarely in equilibrium, except by sheer coincidence. In that light, it matters very much how those free allowances are allocated. I don't mean to imply that any economic analysis of the situation is irrelevant, but rather that it must be tempered with the fruits of real-world experience.
I'd like to add a thought to my response above. Without invoking the whole sub-prime, CDO/CDS debacle, a much more relevant example comes from the California electricity crisis. Contrary to conventional wisdom that lays all the blame on certain bad actors, the underlying problem--which created the loopholes through which traders drove Mack trucks--was poor market design. From my long experience in real markets, a situation that so massively skews the initial allocation looks like another recipe for inefficiency, distortion and exploitation; i.e., it constitutes poor market design. Good market design requires listening not just to the lobbyists, regulators, economists, and NGOs, but also to folks who have run or participated in actual markets.

I totally agree that good market design is critical, and I appreciate that you're skeptical of markets reaching relative equilibrium based on recent events and your real-world experience (which is totally fair).

I don't understand the mechanism by which you believe initial allowance allocations (a.k.a. unconditional free money) will affect the decisions made by actors like utilities. Are you arguing that they'll behave irrationally, or do you think allowance allocations in some way affect the actual economic incentives they face?
There are many issues and uncertainties here, and it's important to note that behavior that might seem irrational to you could seem perfectly rational in the context of these players. For example:

A. At the foreseeable price of allowances in the early phases of cap & trade the foregone opportunity cost of selling allowances (the benefit of which passes to customers, anyway) is unlikely to be sufficient to compensate utilities for not running their fleets of billion-dollar assets. I.e., for the largest group of allowance recipients, it may be more rational for them to consume the allowances they receive and pass on their notional value to customers than to under-run and sell them to refiners.

B. The impact of the large share of allowances allocated to non-commercial recipients is hard to predict. Will they sit on their allowances until they need revenue, sell them cheaply to middlemen to get funds up front, strike long-term deals with refiners, or choose to retire them in an effort to accelerate reductions? Some of these outcomes could impede market liquidity and leave refiners exposed to penalties or higher costs than anticipated.
In situation A), whether the utility was originally allocated allowances doesn't change their rational action. If the benefit of running their legacy assets exceeds the market price of the necessary allowances (as you describe), a rational utility would run those legacy assets no matter what, buying allowances on the market if necessary.

B) is a valid point, but I'm not sure the danger of strange market behavior would be lessened by giving those allowances to refiners with sophisticated trading operations instead.

Update 4: And... the dénouement:
Your background on your blog indicates you're a strategy consultant. Are you telling me that all of your clients have treated an opportunity cost exactly the same as a cash cost? I'm highly skeptical, because in my own experience businesses treat the two very differently. Anyone else want to weight in on that one?
Businesses don't always treat cash costs and opportunity costs the same in practice, but I would categorize this as irrational behavior (or making bad business decisions, if you prefer).

For example, imagine your exact scenario A), except in the world where the utility wasn't allocated allowances. Running legacy assets would still be the right business decision (and not doing so would be a bad decision). Whether the utility should run its legacy assets depends on the allowance market price, but not the utility's initial allocation of allowances.

My point is not that utilities won't behave irrationally, but rather that A) is not an example of rational commercial incentives leading to inefficient outcomes.

Thank you, by the way, for the spirited but respectful tone of this discussion.
Spirited but respectful is what we aim for. Thanks.

The military: Convinced climate skeptics

The fact that a bunch of retired generals and admirals would put together a report highlighting the need to deal with climate change for the sake of national security makes a statement. These retired military leaders aren't pushovers and can't be considered liberal environmentalists. "We're not an easy sell, if you will, on anything," he said. "So the fact that we came together to talk about climate change and the threat, it's real."
That’s Chris Clayton on the climate change and national security panel at the World Food Prize. So what does the top brass think we should do?
"So it's real, let's get over it, and let's look for the opportunities that can be created by dealing with this set of challenges," McGinn said. "It isn't bad. It's not like we have to give up something."
McGinn said the U.S. has to "break this paradigm that the only way to get economic growth and have high quality of life is through fossil fuels."
I’ll take them on my side.

The green jobs argument, circa 1845

From Bastiat’s candlemakers’ petition against the sun, which I mentioned here but is too good not to excerpt on its own:
First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.
Hap tip to the inimitable Tyler Cowen.

The danger of the "green jobs" argument

“Green jobs” is, for better or worse, becoming the rallying cry and focal point of the fight over climate change legislation in Congress. I’ve generally had reservations over this approach because:
  1. The point of the climate bill is climate, not jobs, and it is hard to do both at the same time
  2. I worry that the green jobs argument is being oversold
  3. If the case that the bill will create jobs is shown to be flawed, it tremendously weakens the public argument for the bill (even though it loses none of its urgency)
Given that preamble... Tyler Cowen links to a study on the cost of green jobs in Spain. Here are some choice quotes from the study:
Spain’s experience cited by President Obama as a model reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created.
The study calculates that since 2000 Spain spent €571,138 to create each “green job”, including subsidies of more than €1 million per wind industry job.
And here is Tyler’s commentary:
To be sure, there are very real benefits from limiting climate change. But if it takes more jobs to produce "green energy," that is a net cost to the economy, not a benefit... We're dealing now with something beyond the Keynesian short run and so those extra jobs are a drain of resources from elsewhere. If you wish, sub out the word "energy" and sub in the word "agriculture" and then reevaluate the sentence from the vantage point of 1900. Would it truly create net jobs -- much less good jobs -- to trash tractors and industrial fertilizer? The ideal situation would be a technology where very few jobs were required to create and distribute the nation's energy supply.
The idea that directed government spending is important to private sector job creation in the long term flies in the face of most capitalist ideology and economic theory. It is, in effect, economic populism with socialist implications (and with all due respect to socialism, I don't think that's what most American voters would aim for if the argument were laid out transparently). But the green jobs meme is so attractive politically, given the state of the economy, that it’s lured lawmakers like a Siren... and I worry how things will turn out once the economic evidence is examined in the light of day.

Tyler also links to Bastiat's candlemakers' petition against the sun, which is both quite funny and quite apropos.

Why farmers oppose climate change legislation

Michael Roberts explains why bad for yields does not mean bad for farmers' profits.
So, in response to Grist and the position by the American Farm Bureau on climate change, one may wonder: Why would farmers oppose the climate bill if they have so much to lose from potential global warming?

There is a simple answer: a big hit to crop yields does not imply a big hit to farmers' profits. In fact, if the rest of the world is unable to make up for U.S. losses, a big hit to yields is probably a very good thing for farmers profits. At least for the corn-soybean guys in the Midwest.

You see, the demand curve for basic grains is very steep. We've estimated an elasticity of about 0.05 (also see this paper). So if yields worldwide get cut by 50%, and no additional supply comes online to replace that loss, prices will go up 1000%, and farmers revenues will go up 500%. Farmers' profits will go up by a lot more than 500%.

So, while climate change is looking bad for buyers of basic grains, like North Carolina hog farmers and the urban poor in developing nations, those who grow basic grains will do very well. The incentives are very clear: opposing climate change legislation is good for corn growers' pocketbooks.

Image/Publicity stunt of the day

The Maldives holds an underwater cabinet meeting to raise awareness of the danger climate change and rising seas pose to the low-lying island nation.

The rest of the post says, in essence, that the world has implicitly decided to let the Maldives drown, and publicity stunts aside, the nation hasn't been terribly effective in promoting its cause.

Heat and ag yield, cont.

Michael Roberts' great paper with Wolfram Schlenker on the effect of detrimental increased heat on crop yields (which I first excitedly blogged here) is getting a lot of (well-deserved) attention.

First, Ezra Klein cites the work in the Washington Post, and, despite a few minor inaccuracies by Klein, Michael is deservedly proud of having cracked into the mainstream media.

Second, the paper was noticed as far away as Brazil, whence came a letter to the editor challenging that Brazil (being warmer and high-yielding) refutes the Schlenker/Roberts conclusion, or at least casts into doubt its generalizability. But their quick-and-dirty analysis seems to corroborate their original findings:
First, they cherry picked the state and the year from Brazil. Mato Grasso is the highest yielding state in Brazil and 2008 was a remarkably good year for them, due to unusually good weather. Other states in Brazil have average yields that are about half those of Mato Grasso.

Second, Mato Grasso yields were higher than average yields in the U.S. as a whole, but not higher than the best yielding states in the U.S.

Third, if we narrow our comparison by looking a particular state—Illinois, the number two yielding soybean state in the U.S.—and also look more closely at the data, Mato Grasso doesn’t look much warmer. In fact, the southern half of Illinois, which has average yields comparable to those in Mato Grasso, also has comparable exposure to extreme heat. (Northern Illinois is cooler and higher yielding than both Mato Grasso and Illinois). This can be seen from careful inspection of the maps below (click the figure for more detail). It turns out that there aren’t any soybeans grown in the hottest part of Mato Grasso. It’s not clear whether the commenters took into account the locations in Mato Grasso where soybeans are actually grown.
Look for more back-and-forth discussion on this interesting area, and the Schlenker/Roberts contribution in particular.

Moving to feedburner

In the latest step of my slow and unsteady journey toward professionalizing this blog, I've moved my feeds to Feedburner. To those readers who subscribed to the old Blogger feeds, I'd be much obliged if you could take two seconds to subscribe to the new Feedburner feeds by clicking here for posts (and here for comments if you wish). This will allow me to collect aggregated stats on my readership (never individual - your privacy is protected) and direct People and Resources accordingly. Thanks!!

Diseconomies of scale in government

Robin Hanson highlights an interesting study that hints with a fact-based analysis that governmental bodies get markedly less efficient as they get bigger:
Differences across public bodies are correlated with institutional characteristics rather than geography or size. Semi-autonomous bodies (universities and health authorities) pay the lowest prices. Compared to these, the average town government pays 13% more. The difference increases further for regional governments (21%), social security institutions (22%), while the average ministry tops the list with 40% higher prices...
This was in Italy, and incidentally, over 80% of the gap was found (not sure how) to stem from inefficiency, rather than corruption.

This is another bullet for those who argue that big state-run companies (e.g. NOCs) can never be as efficient as their private sector counterparts (but they had a lot of bullets already).

”Reductionist science” and development

I like two things in particular about Chris Blattman’s response to Aid Watch’s diatribe against Millenium Villages.

First, he does a great job of concisely synthesizing the opposing philosophies on development (Sachs vs. Easterly, if you will):
We wouldn’t be testing the fundamental premises: the theory of the big push; that high levels of aid simultaneously attacking many sectors and bottlenecks are needed to spur development; that there are positive interactions and externalities from multiple interventions.

The alternative hypothesis is that development is a gradual process, that marginal returns to aid may be high at low levels, and that we can also have a big impact with smaller, sector-specific interventions.
Second, he nails the flaw in the simplistic critique that MVs prove nothing because they’re not subject to rigorous evaluation (e.g. randomized impact evaluations):
To test the big push and all these externalities, we’d need to measure marginal returns to many single interventions as well as these interventions in combination (to get at the externalities). I’m not sure the sample size exists that could do it.
This reminds me of Michael Pollan’s critique of “reductionist science” in nutrition in his books – single development treatments (or nutrients) can be tested in isolation, but what if they have complex interactions with one another? The combinatorial explosion of trials you’d need to rigorously test all of these interactions renders the traditional scientific method helpless to mortals.

This, in turn, reminds me of business. Good businesspeople have no illusions that they’ll ever have rigorous certainty that they are making the right decision; but they have to make those decisions anyway.

How to apply this to development, I’m not sure (after all, “who decides who decides?”), but the reductionist science analogy was a new thought that I was excited to share.

The blogosphere as learning mechanism

I’m just reprinting this Tyler Cowen post in full - even the title is good enough to repeat:
Refuting this post helps confirm it

Chess players who train with computers are much stronger for it. They test their intuitions and receive rapid feedback as to what works, simply by running their program. People who learn economics through the blogosphere also receive feedback, especially if they sample dialogue across a number of blogs of differing perspectives. The feedback comes from which arguments other people found convincing. Do the points you wanted to hold firm on, or cede, correspond to the evolution of the dialogue? This feedback is not as accurate as Rybka but it's an ongoing test of your fluid intelligence and your ability to revise your opinion.

Not many outsiders understand what a powerful learning mechanism the blogosphere has set in place.
I could not agree more, which is why I love the blogosphere and blogging. I also think it will be particularly interesting to see how academia's relationship with the blogosphere evolves - to what extent this powerful learning mechanism is recognized in the mainstream, and incorporated into teaching beyond pioneers like MR and Chris Blattman (two of the first blogs I ever read).

Can alternative energy replace fossil fuels?

John Whitehead of Environmental Economics answers in 138 words:
It all depends on how the definition of “effective” is applied in this context. According to, effective means “adequate to accomplish a purpose.” If the purpose of alternative energy, such as wind and solar, is to provide a substitute for nonrenewable energy, such as oil and coal, then it can be effective. The problem facing proponents of alternative energy is that it is more costly to produce. If oil and coal were priced appropriately, incorporating all of the external costs of production and consumption such as air pollution and long-term climate change, then alternative energy would appear more competitive. However, potential supplies of wind and solar don’t appear to be large enough to completely replace oil and coal in the foreseeable future. If that is the purpose, then no, alternative energy can not effectively replace fossil fuels.
Since I post a lot on climate change, I am going to claim this as my post on climate change for Blog Action Day 2009 - see here for a complete listing of my thoughts.

Perennializing crops

An academic recently forwarded me this hypothetical "50-year farm bill." It claims that perennializing crops will provide substantial benefits, and we should therefore devote substantial research attention to developing perennial versions of crops like wheat and corn.
"Perennialization of the 70 percent of cropland now growing grains has potential to extend the productive life of our soils from the current tens or hundreds of years to thousands or tens of thousands. New perennial crops, like their wild relatives, seem certain to be more resilient to climate change. Without a doubt, they will increase sequestration of carbon. They will reduce the land runoff that is creating coastal dead zones and affecting fisheries, as well as saving and maintaining the quality of scarce surface and ground water. U.S. food security will improve.

Social stability and ecological sustainability resulting from secure food supplies will buy time as we are forced to confront the intersecting issues of climate, population, water and biodiversity."
I don't really understand why perennial crops carry these benefits - does anyone else have familiarity with this particular issue? FYI, here's what Wikipedia has to say:
"Although most of humanity is fed by seeds from annual grain crops, perennial crops provide numerous benefits. Perennial plants often have deep, extensive root systems which can hold soil to prevent erosion, capture dissolved nitrogen before it can contaminate ground and surface water, outcompete weeds (reducing the need for herbicides), and help to mitigate global warming by carbon sequestration. These potential benefits of perennials have resulted in new attempts to increase the seed yield of perennial species, which could result in the creation of new perennial grain crops."

Gates on agricultural productivity

I'll quote at length from Bill Gates, speaking at the World Food Prize symposium, on agriculture and the importance of smallholder agricultural productivity:
The world can make huge strides in reducing hunger and poverty by helping the world's poorest farmers become more productive, Microsoft Inc. co-founder Bill Gates said Thursday.

Gates, co-chairman of the Bill & Melinda Gates Foundation, spoke at the World Food Prize symposium, where he said more needs to be done to help small-holder farmers in Africa increase production and get their crops to market.
"Helping the poorest small-holder farmers grow more crops and get them to market is the world's single most powerful lever for reducing hunger and poverty," Gates said during his speech in Des Moines.

He said the global effort to help small farmers is being threatened by a divide between those who want to increase productivity and those who promote sustainability.
"It's a false choice," he said. "It blocks important advances. It breeds hostility among people who need to work together. And it makes it hard to launch a comprehensive program to help poor farmers.

"We certainly need both productivity and sustainability and there is no reason we can't have both," he said.

Gates said the environment can benefit from increased productivity. "When productivity is too low, people start farming on grazing land, cutting down forests, using any new acreage they can," he said. "When productivity is high, people can farm on less land."

"If we can make small-holder farming more productive and more profitable, we can have a massive impact on hunger and nutrition and poverty," Gates said.
This excites me on multiple levels. It signals and publicizes a shift toward a more holistic view of agriculture, which is a great thing. It signals that the Gates Foundation is shifting its considerable weight toward this more holistic view, and where Gates goes, others often follow. And finally, I personally will soon begin some work in the area of smallholder agricultural productivity, and it’s of course exciting and gratifying to see and as intelligent and influential a figure as Bill Gates attesting to its importance.

Carbon tariff table-turning

Speaking of carbon tariffs:
One reason for skepticism is that I’m actually skeptical that a properly implemented set of worldwide carbon border adjustments would actually achieve its intended purpose of boosting American manufacturing... The EU, Canada, and Japan are in the aggregate much more significant trade partners than China/Mexico/Brazil. And the case for them charging us carbon tariffs seems about as good as the case for us charging the Chinese.
Yet another reason the “border tax” aspect of the Kerry-Graham compromise is a terrible idea.

From Matt Yglesias, via MR.

The regulatory revolving door

Much has been made of its contribution to the financial crisis, but the regulatory revolving door is alive and well in the resources sector as well:
Prosecutors are investigating whether Norton was discussing future employment with Shell before she stepped down as Interior secretary in March 2006, when she was in charge of a process that resulted in Shell winning three lucrative leases to research and develop oil shale projects on federal land in Colorado.

Nine months after resigning, Norton accepted a job in a Shell division that includes its oil shale efforts.
I'm not terribly interested in whether Norton acted improperly or not here; the bigger issue is that for all the incentive problems this revolving door creates, the alternative - an environmental regulator staffed with mediocre talent and completely lacking in any industry expertise - could be even worse. Simon Johnson, among others, has written extensively on regulatory capture in finance, but I haven't seen nearly the same degree of coverage in natural resources. I wonder if we will, given that many people have nothing to gain and a lot to lose by opening their mouths, and use of natural resources does not entail the same type of systemic risk that the financial system does (at least, not on the time-scale appreciated by politicians and voters).

Thumbs up on cooperation, thumbs down on substance

The Kerry-Graham NYT op ed on climate policy is a welcome sign of collaboration across the aisle, but its substance is mixed. The five main points are:
  1. "We agree that climate change is real and threatens our economy and national security." [good!]

  2. "While we invest in renewable energy sources like wind and solar, we must also take advantage of nuclear power, our single largest contributor of emissions-free power." [fine]

  3. "Climate change legislation is an opportunity to get serious about breaking our dependence on foreign oil." [i.e. we need clean coal and offshore drilling]

  4. "We cannot sacrifice another job to competitors overseas." [i.e. we need carbon tariffs]

  5. "We will develop a mechanism to protect businesses — and ultimately consumers — from increases in energy prices." [good]
As a friend points out, clean coal is nice, but it won't do much to displace oil imports, since the vast majority of oil is used for transportation fuel, whereas coal is entirely used for power. (NB: this could change if CNG or coal-to-liquids ever took off in the U.S., but the former is still a Pickens pipe dream for now, and the technology for the latter has bad economics even without carbon pricing, which would make it completely untenable).

But the worst point is clearly the nearly naked defense of climate-inspired trade protectionism. Kerry-Graham claim that such tariffs will incentivize other countries to adopt environmentally friendly policies; this is the best possible outcome, but sparking a global trade war is another one, and it’s not clear to me why the latter is any less likely.

The cash-for-clunkers halo

Morgan Downey looks at the numbers and concludes that:
While the benefit to taxpayers may not be immediately significant, the cash for clunkers program appears to have had a halo effect on efficient vehicle sales in the US. This efficiency will strengthen the US economy against future oil price shocks and if the trend continues it is a welcome unintended benefit of the clunkers program.
Why might that be? Not sure, but here are some ideas:
The month after the clunker program ended, consumers continued to purchase more cars and small vehicles rather than larger light trucks and SUVs. Perhaps vehicle dealers realized that efficiency is the new best selling point - particularly as US consumers are in an increased saving mode following the severe recession? Maybe it took the surge in efficient vehicle sales during the clunkers program for this realization to become widespread?
This is nice news, particularly since from an environmental perspective the program was quite cost-ineffective.

Economics Nobel and the Environment

Ms. Ostrom "challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized," the Nobel judges said. "Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, [Ms.] Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes."
Via Environmental Economics, which posts multiple times on the significance of this year's Nobel Prize selection for, well, environmental economics.

I found this particularly interesting:
One thing that I think is most interesting about Ostrum's work is that where common property regimes work well they are often enforced with very strong social sanctions and/or coercion. The notion that somehow in the absence of markets or government intervention we might get some sort of Kumbuya agreement- a favorite fantasy of some leftist critiques of markets- is not supported by the facts. Instead, complete social ostracization and even physical violence are often necessary in order to enforce common property rules. Bottom line: managing common resources is very hard no matter what institutions are in charge.
I often think of property rights and the rule of law (including safety from violence and intimidation) as an underappreciated prerequisite for well-functioning markets. (E.g. for libertarians who more or less advocate the abolition of government - who do you think will keep people from stealing your stuff? Maybe you with a gun, but that imposes enormous transaction costs that would greatly impeded the much-lauded efficiency of markets.) But this is almost a bizarre inversion - that it may be the very threat of violence (albeit controlled by strictly-observed social convention) which allows certain communities to manage their common resources in an effective way.

Greenland's oil, cont.

Via Felix Salmon, Greenland is "poised to achieve a geopolitical importance it hasn’t had since the invention of Risk."
Some estimates, including those of the U.S. Geological Survey, suggest Greenland’s coastal waters could hold anywhere from 16 billion to 47 billion barrels of oil, or 800,000 barrels for every man, woman, and child. That would mean a staggering leap in income for Greenlanders, who until two generations ago were mostly subsistence hunters and fishermen.
As the article notes (and I've noted before), not everyone is happy with this prospect. But it seems like both the hopers and the worriers will have to be a bit more patient:
The state oil company, Nunaoil, had one of the largest booths, with an eye-catching flame flaring out of an oil-burning lamp. I asked a company rep manning the booth where the oil was from. “Italy,” he laughed. “It’s olive oil from the grocery store. We haven’t found oil here yet.”

A guide for the perplexed

Published by the New Scientist, on the science of climate change. Pretty good as a quick myth-debunking reference.

"A new kind of President"

Via The Onion, "Obama to Enter Diplomatic Talks with Raging Wildfire."

Management consulting sucks: Jill Lepore edition

Chris Blattman, a former management consultant himself, links to this New Yorker article on the origins of management consulting. Consulting is an easy target, and I (in a self-interested and biased way) think it gets a bad rap - for example, I don't think the lack of intellectual rigor insinuated by Stewart's "two-handed regressions" anecdote is a fair characterization of the best work that we consultants do. But some of the author's jabs are quite fair, and her profile of a handful of historical figures is fascinating.

Here's the obligatory takedown of modern work culture (better than most):
Home and work, separated since the first stirrings of the Industrial Revolution, have been growing back together again: BlackBerry on the nightstand, toaster in the photocopy room. Efficiency was meant to lead to a shorter workday, but, in the final two decades of the twentieth century, the average American added a hundred and sixty-four hours of work in the course of a year; that’s a whole extra month’s time, but not, typically, a month’s worth of either happiness minutes or civic participation. Eating dinner standing up while nursing a baby, making a phone call to the office, and supervising a third grader’s homework is not, I don’t think, the hope of democracy.
... and the witty but biting conclusion:
Lillian Gilbreth died, of a stroke, in Scottsdale, Arizona, in 1972, at the age of ninety-three. She was cremated. The Times ran an obituary headed “Dr. Gilbreth, Engineer, Mother of Dozen.” She had always believed that the world needed “a new philosophy of work.” She never did manage to write it.

Not so fast

Looks like Exxon’s Jubilee bid isn’t a done deal yet, with talk of a counterbid from China’s CNOOC and discontent within the Ghanaian government and national oil company.
China National Offshore Oil Corp. is in advanced talks with the Ghana National Petroleum Corp. to make a rival bid challenging Exxon Mobil Corp.'s $4 billion offer for a stake in a giant oil discovery off of West Africa, said people familiar with the matter.

A GNPC-Cnooc bid, which one person said "will be competitive to what Exxon has offered," reflects both the Chinese government's desire to secure access to more of the world's oil and the Ghanaian government's to be a larger participant in the discovery, known as Jubilee.
News of the Exxon agreement infuriated the Ghanaian government and GNPC, which had been trying to negotiate to increase its 13.8% stake in the field. "I don't see the Exxon-Kosmos deal as done," said GNPC chief executive Thomas Manu said in an interview this weekend. The Ghanaian oil minister also expressed his unhappiness with not being notified that Kosmos had made a deal with Exxon and said he believed the country had the right to block the offer.
Kosmos thinks it can sell to anyone, but even with Ghana attempting to hold itself to a higher level of sophistication and investor friendliness, it would be unwise to count out the host government so soon. (That said, Blackstone and Warburg will probably still make out like bandits.)

This is also getting boringly repetitive, but China is really leaving no stone unturned in its quest to secure resources in Africa, Guinea being the latest target (or beneficiary, depending on how you view it and whose interests you're rooting for).

WDR on climate change and ag

Also from the World Development Report 2010, a great map of the predicted effects of climate change on agricultural yields:

A colleague of mine comments that while some of the increases in yield are obvious (Russia, Canada), others are less so (Kenya? Bangladesh?). Bangladesh will presumably be offset by declining agricultural area. The decreases are more profound as they include the eastern half of China, north India, Brazil and the Midwestern U.S., i.e., the breadbaskets.

Obviously these types of macro projections are only as good as the bottom-up science supporting them, but the latest research does not paint a promising picture.

CO2 footprint per capita

Nothing earth-shattering here, just a good chart putting numbers on something that we all understand conceptually. If anything I'm surprised that rich countries are less than an order of magnitude above the poorest.

From the World Development Report 2010, which focuses on development and climate change, and is worth a read (at least the executive summary).

Exxon forecasts vs. actual

This chart from Econbrowser shows how Exxon has repeatedly (well, at least twice since 2000) forecast 3% production growth and failed to deliver.

An interesting question is whether Exxon’s famed investment discipline holds in the case of their recent $4 billion acquisition in Ghana.
Alan von Altendorf thinks they can't make a good return unless they sell the oil for $100/barrel. Presumably the company is reckoning on more oil in the field than current estimates suggest. But even if von Altendorf's calculations are off by a factor of two, it still seems to signal a change in philosophy for a company that has historically been extremely careful with its investments in order to maintain its position as a very low-cost producer.
If I recall correctly, Exxon’s longtime breakeven hurdle was $22/bbl, so this would indeed signal a sizeable shift unless we are missing something. But then again, given that oil bottomed out around $35/bbl during the scariest recession the world has faced in a generation, so some change in worldview is certainly justified.

More bad press for jatropha

The bad news for jatropha continues:
In a report leaked to The East African newspaper last week, Envirocare, an environmental and human rights organization, highlighted the impact of the jatropha trade in Tanzania — including concerns over the displacement of farmers, water consumption, and the substitution of food crops for biofuels.
Jatropha producers are naturally not thrilled with the report’s findings:
Mr. Ruud Van Eck, the chief executive of Diligent Energy Systems, a Dutch jatropha developer working in Tanzania, is among business executives who have contested the findings on the water footprint of jatropha.

Mr. Van Eck also stated that for jatropha to be sustainable, it should not be grown in places with high rainfall, which can be used to grow food crops.
That jatropha is a water-hog is old news. Perhaps less-discussed is that, while part of jatropha’s appeal was that it can be grown on marginal land, it will compete with food crops for prime cropland too, if fuel prices are high enough.

Update: The aforementioned report has caused waves in short order:
Reacting to mounting pressure from farmers and environmental groups citing concerns over food shortages, the Tanzanian government has reportedly suspended all biofuel investments in the country and halted land allocations for biofuel development.

“The government was asleep,” Esther Mfugale, the coordinator of biofuel production for Tanzania’s Ministry of Agriculture, Food Security and Cooperatives, was quoted as saying in an interview with The East African newspaper. “We have to stop and set out clear procedures for biofuel investments.”
This may hurt businesses and investors currently in biofuels in Tanzania, since setting up “clear procedures” could take a while, but of the country’s overall welfare this is probably a good thing.

The complexities of commercial agriculture

An interesting student essay on the often unrecognized complexity of modern commercial agriculture, made poignant by the circumstances. Here's a taste:
I will never forget the dexterous and visionary employees who taught me not just that wearing shorts while working on a farm is equivalent to modeling a Speedo at a consulting interview, but more importantly how complicated producing food is with advanced mechanized systems. Whether it be welding an auger for grain transfer, converting a piece of scrap metal into a rotating laptop computer harness for the cattle chute, or actually building a propane-powered irrigation pump, the competency of those with whom I worked was remarkable. I learned untold lessons and skills from colleagues, reminding me that a cattle pen could also be an educational setting.

But no business could be productive without a savvy leader. During my last few weeks in Nebraska I spent time alongside the manager I so esteemed. His ability to synthesize futures and cash market strategies, reconcile input and output data to avert risk, and heed both large issues and small in a multifaceted business was phenomenal. The organization was a machine in itself—protean, even despite its seasonality and daily routine.
Big Ag gets a lot of bad press, and the amount of skill it takes to do it well - and in the process feed the planet - deserves to be recognized.

CCS gets underway

There’s been a lot of hype, but now the Mountaineer power plant in West Virginia is actually operating CO2 capture and sequestration on a trial basis.
“During injection, the well behaved as expected,’’ said Melissa McHenry, a spokeswoman for American Electric Power.
It is too early to tell, of course, but hopefully this works!!

Oil find in Uganda

Western oil company Tullow strikes black gold in Uganda, and it looks like the government managed to strike a pretty good deal:
Reports of a deal between Tullow Oil and the Ugandan government suggest that for every ten barrels found by Tullow, the government gets eight. This would represent a huge windfall for the landlocked East African country, where annual gross domestic product is estimated at $14.53 billion.

If a suitable pipeline to the coast in Kenya or Tanzania can be built, the nation could could become a significant oil exporter.
Hopefully this turns out well, but there is reason to be cautious.

Malnutrition worse in India than Africa

“India is an economic powerhouse and a nutritional weakling.”
This is from this NYT article on malnutrition in India; it is no surprise that malnutrition is prevalent, but this statistic surprised me:
India is often compared — and often compares itself — with China, but the fact is that as China became an economic powerhouse it greatly reduced malnutrition. In an all-fronts effort, China cut child malnutrition by two-thirds between 1990 and 2002. Today only 7 percent of Chinese children under age 5 are underweight, whereas the figure for India is 43 percent. Even in sub-Saharan Africa, which most people assume to have the direst poverty statistics, the average child-malnutrition rate is 28 percent.
I would not have guessed 50% worse than the average of Sub-Saharan Africa.

Styles on ethanol

Geoff Styles writes as well-reasoned an appeal for lifting corn ethanol subsidies as I’ve seen in a while. The trouble is, the case to abolish these distortionary subsidies was never lacking for logical arguments; the real trouble is the 30 to 42 ethanol Senators, without whom it’s pretty much impossible for an enterprising president to accomplish anything in Congress.

There are 42 farm senators

I know I've wanted to refer to this before, and couldn't find it, so I'm posting it now (and expect to link back to it soon and often). The question is how many farm (or if you prefer, ethanol) Senators are there? One answer is here:
As former Sen. Bob Dole of Kansas once explained to Texas oil baron T. Boone Pickens, “There are 21 farm states, and that’s 42 senators. Those senators want ethanol.” And the influence of those senators — 15 states now have ethanol production capacity of at least 200 million gallons per year —will be hard to overcome.
So 42 farm senators, at least 30 of whom have a sizable incentive to support the continuation of "the ethanol juggernaut." That is a formidable force to overcome.

Balanced appraisal of oil sands impact?

The Oil Drum posted this report on the environmental impact of oil sands, published by the Pembina Institute. I found it interesting reading and it seemed passably fair-minded. I had a quick look on the interweb to find out Pembina's underlying biases, and it was hard to tell (apparently it is an independent institute founded in 1985) - does anyone know anything more?

Chart of the Day: Oil price uncertainty

Well-titled by the Roving Bandit as "The Challenge of Budgeting in Oil-Dependent Economies."

The first tech bubble? 1720

Robin Hanson passes on this well-reasoned argument that tech bubbles preceded dot-coms by several centuries:
Although 1720 is not generally viewed as a period of technological novelty, we argue in this paper that there were at least three critical innovations that took place in a very short span of time; two of which were financial innovations, the other was a major potential shift in the configuration of global trade. The first innovation was financial engineering at a national scale. The Mississippi Company and the South Sea Company issued equity shares in exchange for government debt; in effect converting the national debt into corporate stock. …

The second innovation was an incipient shift in global trade. Both of the companies were set up to exploit trade in the Americas. … The third innovation was also financial. The first publicly traded insurance corporations were chartered in Great Britain 1720, as a result of the Act. As such, they represented a new model of capital formation for maritime insurance firms – in a nation built on maritime trade.
These do seem like indisputably valuable innovations in the long-run (like, say, ATMs, as opposed to securitization).

(or has securitization just passed through its initial collapse, preceding a long and fruitful contribution to human economic activity?)

I would be interested to see similarly far-reaching historical analysis on commodity cycles. I have the impression that real commodity prices have fallen throughout human history, but I lack the facts to back it up.

Blackstone and Warburg win big with oil

Raw commodities are far from the ideal private equity play - heavy value exposure to volatile commodity prices and seemingly little competitive advantage in either deal flow or operations. But a brave few have tried, and in at least one case succeeded:
Warburg Pincus and Blackstone Capital Partners are set to make a four times return on their investment in West African oil company Kosmos after oil giant ExxonMobil agreed to acquire Kosmos’ stake in Ghana’s Jubilee oil field for $4bn, according to reports.
I checked the Warburg Pincus website and found that:
Warburg Pincus led the company’s initial $300 million equity financing in 2004, and also led a $500 million follow-on equity financing in 2008.
I then checked the news for when in 2008 (makes a big difference!), and it was in June, or basically when oil prices were well above $100/bbl and racing towards $150. So it's not as if Blackstone and Warburg simply bet on and nailed the commodity cycle - it seems their add-on investment came at the peak. It seems the bet was more on the management team and their track record, which is impressive. That said, I doubt we see too many more of these deals - with the recent levels of commodity volatility, most major PE firms are shying away from direct commodity price exposure and looking for more indirect ways to get exposure to the overall volume and price growth.

Debt as important as climate

That's the case Tom Friedman makes in the NYT. For human existence on the planet, perhaps not, but for the United States of America, absolutely. The seeming inability of American legislative and executive branches to behave in a fiscally responsible manner is a big source of frustration to me personally (for example, in the healthcare debate that I opted out of).