The meaning of rain

I got back to Addis last night, and it rained today, for the first time since I got to Ethiopia. Apparently it rained all weekend. Owen Barder explains the (unfortunate) significance for local farmers:

Over the weekend we were trekking in the north of Ethiopia. The fields were full of wheat and barley, looking (to my inexpert eye) about 3 weeks from harvest (see the picture, right, taken on 29th November). The farmers all said they were looking forward to a good harvest this year.

Then last night, we woke up to torrential rain. I gather it was raining in Addis Ababa too. It doesn’t normally rain at this time of year in Ethiopia. If this continues for another day or two, the crop will be ruined.

The rain today is an unwelcome reminder of how precarious is the livelihoods of millions of people who are dependent on rain coming at the right time (and not at the wrong time). It can turn a good harvest into a bad one, or into no harvest at all. Affected families may be forced to sell their meagre assets, pushing not only them but their children into another generation of chronic poverty.

Our thoughts today are with the millions of farmers of Ethiopia and their families.

Puts complaining about a rainy weekend in an entirely new perspective...

The power and persistence of democracy

FP has a list of the Top 100 Global Thinkers for 2009, which is interesting through. I enjoyed this description of #58 and one of my favorite economists, Amartya Sen:

Sen is that rarest of hybrids -- "the only recent or living economist who takes philosophy seriously," in the words of Martha Nussbaum (No. 93). Taking his cue from such diverse figures as Karl Marx and Adam Smith (whom he hails as an underappreciated moral philosopher), Sen earned a Nobel Prize in economics in 1998 for his groundbreaking insight: Food scarcity doesn't kill people; bad governments do. Central to his thinking is the concept of "capabilities" -- the idea that it is not just the distribution of resources in a society that matters, but the ability of its members to make informed choices about the use of those resources and to punish leaders who fail them. [emphasis mine]

Sen's emphasis on the power of democracy is interesting when juxtaposed with the career-establishing claim of #65, Francis Fukuyama, that the spread of liberal democracy is inevitable:

The foreign-policy world can be pretty cleanly split into two groups: those who passionately agree with "The End of History," and those who passionately disagree. Fukuyama's seminal work came out 20 years ago, but its central conclusion -- that liberal democracy will supplant other political ideologies as the dominant paradigm of the 21st century [emphasis mine] -- remains the crucial issue of the day. With Moscow and Beijing flexing their global muscles and the recession driving Western democracies inward, Fukuyama's thesis might seem in doubt, but he's still making the case. "I am still fairly confident that democratic systems are the only viable ones," he told Newsweek. This year, Fukuyama joined in debates about the future of Iran -- arguing, against conventional wisdom, that it may be possible for the Islamic Republic to "evolve towards a genuine rule-of-law democracy," even while allowing for continued strong clerical influence.

It's hard to win the debate over whether democracy will prevail (I suspect it will remain a debate for decades). One con argument that I enjoyed was made by #66 Robert Kagan in The Return of History and the End of Dreams, which basically opposes Fukuyama’s thesis (a point not captured by FP, which only notes that he “calls for the creation of a "league of democracies" to promote political liberalization and human rights globally”).

Personally, I'm skeptical of seemingly fatalistic or starry-eyed arguments that democracy will prevail, and I'm also skeptical of the dogmatic faith that liberal democracy is the only effective way to govern, particularly from an economic perspective (see: China).

Expensive apples

Greg Mankiw passes along an interesting agricultural anecdote (which doubles as an economics parable):

Economics textbooks, including Chapter 14 of my favorite one, explain how firms shut down production when the price of output falls below average variable cost. Here is an example:

NY apple growers leaving more fruit on trees

New York's apple orchards are being carpeted with red as unpicked apples drop to the ground.

With the best of the crop off to market, growers say this year it's cheaper to leave leftovers on the trees than to pick and sell them for juice....

One reason is an abundant crop, not only in New York but in neighboring Pennsylvania and nearby Michigan, which has produced more second-tier fruit than juice and applesauce makers need and driven down market prices.

When labor and transportation costs are factored in, selling anything but the cream of the crop for the supermarket can become a losing proposition.

"In some cases it's not worth the bother of picking them off the tree," said Peter Gregg, spokesman for the New York Apple Association.

The difference in prices is the biggest one-year swing some have ever seen. Last year, growers hurt by severe hailstorms were getting an above-average 12-18 cents per pound for processing apples, those sold for sauce and slices. The price is about 5-8 cents this year.

So not only are New York apples bad for the earth's climate, the economics don't always work even without internalizing the negative environmental externalities!

Energy games

David Mackay points to the Energy Game, an interesting-looking simulation designed to educate people about the trade-offs inherent in energy policy decisions. As I note in his comments, Chevron created a (VERY simplistic) online simulation, Energyville, along seemingly similar lines.

I would be curious to understand the Energy Game's level of realism and complexity. But most importantly, as Mackay says, these educational efforts are to be applauded.

Update: Commenter Damon has a neat app which shows graphically how energy demand compares to renewable energy supply. It's easy to think of ways the display could be expanded beyond the current binary renewable/non-renewable distinction (e.g. cost, GHG emissions reduction, etc.), but it looks like the guts are there in the model...

CFC reduction: a success story

Also via Tim Haab at Environmental Economics:

CFC reductions are often hailed as an environmental policy success story. The reason CFC reduction policies have been so successful is Congress taxed the bejesus out of CFCs.

The Clean Air Act (Title VI) established caps on most CFC's as agreed upon under the Montreal Protocol, with a complete phase out occurring around the year 2000. The tax on CFC's was $1.37 a pound in 1990 and 1991, about twice the then current product price. Recycled CFC's were exempted from the tax.

The tax was raised in 1990 and again in 1992. The tax raised to $3.10 per pound in 1995 and to $4.90 per pound in 1996, raising the price six fold.

The lesson: economic incentives change behavior.

I find the subsequent news item about taxing overgrown lawns in Jupiter, Florida entertaining, but not very relevant. And unfortunately the "tax the bejesus" strategy isn't as viable for massive emittants (is that a word) like CO2, NOx and methane.

Copenhagen in a sentence

Via Tim Haab at Environmental Economics:

Technologies to cut back carbon dioxide emissions from factories and vehicles that feed the global economy add costs to fuel, food and more, an option that appeals neither to industrial nations struggling with the global economic meltdown or developing nations trying to ramp up economic growth.

Map of the day: Access to markets in Ethiopia

From Roving Bandit, these striking graphs show how close a given point in Ethiopia is to international and domestic demand centers, respectively, in terms of travel time. If you're a farmer, living in a green area means your end markets are very far away, and transport will eat up a big chunk of the end price of whatever you're producing.

Transport times like this give you large import/export parity price wedges like this:

... which obviously leads to a lot of price volatility, which is bad for producers and consumers alike.

(the latter graph is a favorite of mine from the World Development Report 2008 on agriculture and development.)

Dairy productivity

In Israel, we have 100,000 cows that produce the same amount of milk as the 4 million cows in Ethiopia. I’m urging them to work together to increase yields.

That's Israeli PM Shimon Peres, via Owen Barder. As I note in Owen's comments, there are more than 40 million cows in Ethiopia, so perhaps he is just comparing those dedicated to dairy; in any case the difference is striking. Breeding stock, animal health, availability of feed, technology and management practices all likely contribute to some extent.

Peres' broader point is also interesting - he thinks Russia could engage more constructively abroad by selling water rather than weapons.

Turning Oil Into Salt (6): Batteries are the crux

Anyone plugging PHEVs has to address the issue of vehicle cost, and the authors own up to the fact that the battery is currently the critical bottleneck. They cite Ford that a lithium ion battery for a PHEV costs $8,000-15,000 (~$1,000 kWh), a number which needs to come down to ~$300/kWh for PHEVs to be cost-competitive.

One very interesting fact I did not know before was that the most costly element of a lithium ion battery is not the lithium or rare earth metals that get so much press, but rather “hair thin sheets of plastic called separators.” It turns out Exxon has the world’s best separator technology, and the authors hope a prize can inspire others to match it. I wish they had broken out in one place the cost of a battery by its different components, since without that it’s tough to infer more.

All the same, the question of raw material availability looms. The authors cite the well-known predominance of Bolivia’s lithium reserves and China’s rare earth metals reserves and point out known reserves elsewhere in the world. They also cite recycling and extending battery life as mitigating strategies for the West. But while they squarely name this challenge and address it head-on, I come away unconvinced that an electric car revolution wouldn’t be trading strategic energy dependency on one commodity (oil) for dependency on a host of others.

Ultimately, the authors also have the right, open attitude toward technology and avoid the “picking winners” trap:

As the backdrop of all of the above activities, it is important to remain open-minded about other battery chemistries and realize that advanced battery technology is only at the beginning of its upward trajectory. While significant progress is made toward mass production of advanced LiIon batteries, it would be imprudent for the government to crown one battery chemistry “the winner,” particularly in light of its questionable track record of picking R&D winners. With all their potential, the race is not over.

Yet despite that attitude and the optimism it engenders, in the end they do not illuminate a line of sight to the day that PHEVs will be cost-competitive with normal cars. And without that, their OFS story is basically a biofuels (or other hydrocarbon-to-liquids fuels) story... and is that really that revolutionary?

Turning Oil Into Salt (5): Alcohol as fuel

Given the low incremental cost of making vehicles flex-fuel, the key barrier to the liquid fuels half of the Open Fuel Standard aspiration is sourcing the non-oil-based fuel itself. The authors focus on two in particular, methanol and ethanol.

Their section on methanol is OK, but I still have questions around the feedstock. The throwaway line on biomass that “The raw material is plentiful, and most of the biomass products are currently discarded” is facile and unhelpful, as anyone familiar with the economics of biomass-to-power will know (the upshot is, not many plants are being built in the U.S. because the feedstock isn’t free and thus the economics aren’t great). Coal-to-liquids and gas-to-liquids technology is indeed fairly mature, but the current cost is not great and the GHG emissions (particularly for CTL) are terrible. And while the U.S. has abundant coal, their argument on gas sourcing is inconsistent, as I mentioned before.

Their section on ethanol is way off, and the worst part of the entire book. They correctly rail against ethanol tariffs, but become apologists for ethanol subsidies, calculating the absurd claim that $6 billion in ethanol subsidies reduced the world price of oil in 2008 by enough to save the U.S. alone $60 billion on fuel imports (“ten times the subsidy”). They misleadingly quote the energy requirements of gasoline vs ethanol:

The amount of fossil fuel in mega joules needed to make one mega joule of gasoline is 1.19 versus 0.77 for corn ethanol and 0.10 for cellulosic ethanol.

(That 1.19 includes the mega joule of energy from combusting the gasoline, which is why the wording is misleading.)

Even more flawed, though, is their thinking on the “food vs. fuels myth”:

How could that drastic increase in the price of food commodities from fish to rice possibly be attributed to ethanol? Nobody was growing corn in rice paddies or making biofuels out of fish.

Yikes. Agricultural commodities are largely fungible, like oil, from both the supply and demand sides. Increased corn cultivation reduces the land available to grow other cereals like wheat, and higher prices affect the prices of substitutes like rice as consumers shift their consumption patterns in response. Farmed fish are often fed corn, as are industrially-raised cattle, pigs and poultry, which are meat substitutes for fish. Ethanol is certainly not responsible for all of the rise in food prices, but the most credible estimates link it to ~30% of the rise in grain prices (more for corn and less for wheat and rice.

This lack of understanding infects their analysis of CO2 emissions from indirect land use change and deforestation. Yes, Brazilian sugarcane is not grown near the Amazon, but it displaces commercial soy and corn farming, which in turn displaces lower-value farming and ranching activities and pushes them further into the Amazon. Throughout the world, increasing food production in response to higher prices often means extension onto marginal land (which in turn is often forest). Yes, this effect is hard to measure precisely, but that does not mean it doesn’t exist.

Finally, like many others, they take a rich-world-centric view of food price increases (“farm commodity prices have almost no effect on the retail consumers”). Yes in America, but in poorer countries where food purchases account for >50% of income and raw commodities make up >65% of end food prices, that is not the case – food price rises have a huge negative impact on nourishment, nutrition and overall welfare, which is not something to be casually ignored.

Turning Oil Into Salt (4): Selective thinking on fungibility

The authors recognize that:

Oil is a globally traded, fungible commodity, so stifling U.S. purchases from the Persian Gulf and buying from other regions like Africa would just mean that someone else would buy more from the Persian Gulf with no impact on price and availability, certainly not on oil’s status as a strategic commodity.

This is one of their multiple (and good) arguments against the “Cheney plan” of diversifying America’s oil imports to non-OPEC countries.

Unfortunately, they don’t extend this level of understanding to their analysis of agriculture and biofuels:

How could that drastic increase in the price of food commodities from fish to rice possibly be attributed to ethanol? Nobody was growing corn in rice paddies or making biofuels out of fish.

Yikes. Agricultural commodities are largely fungible from both the supply and demand sides. Increased corn cultivation reduces the land available to grow other cereals like wheat, and higher prices affect the prices of substitutes like rice as consumers shift their consumption patterns in response. Farmed fish are often fed corn, as are industrially-raised cattle, pigs and poultry, which are meat substitutes for fish. Ethanol is certainly not responsible for all of the rise in food prices, but the most credible estimates link it to ~30% of the rise in grain prices (more for corn and less for wheat and rice).

Not only are the crops themselves fungible commodities, some of the resources required for production are fungible and, like oil, fundamentally scarce (think arable land and water). Like diversifying away from Middle Eastern oil, diversifying into biofuels is no free lunch.

Turning Oil Into Salt (3): Intellectual consistency

The authors more than once deride other points of view as lacking intellectual consistency. Sadly, I cannot give them high marks for intellectual consistency themselves. While there is much to like in both their thesis and how they defend it, there are numerous examples where they take both sides of an approach in different parts of the book to suit their persuasive goals.

(I differentiate this from couching arguments in politically/emotionally charged terms, such as referring to Obama bowing to King Abdullah as a “symbolic act of self-denigration.” This is also rampant, and I find it quite irritating for a book aspiring to be a clear-headed policy brief, but I don’t feel dissecting this is worth much further effort.)

One major inconsistency is their selective thinking on fungibility – to them oil is fungible, but corn and other agricultural commodities (and the resources used to grow them) are not.

Second, they dismiss some energy sources up front, only to subtly return to them later. They reject the Pickens Plan to build wind power and run vehicles on displaced natural gas since, despite currently producing 98% of its natural gas consumption, the U.S. only has 3% of world gas reserves and a reserve-to-production ratio of less than 10 years. And yet, in plugging methanol two chapters later, they cite natural gas as one likely feedstock (specifically the 5 tcf of natural gas that is flared each year, especially in Nigeria).

Similarly, they demolish the argument for hydrogen cars based on the energy intensity of producing elemental hydrogen, but later propose a plan to produce methanol from CO2. It sounds win-win, but aside from the energy intensity of splitting CO2 into CO and oxygen, the process then requires… you guessed it… the resulting CO to be reacted with… hydrogen.

Finally, while they generally acknowledge the importance of economics, this emphasis is not consistent through (for example, when extolling the vast photosynthetic potential and CO2-consuming benefits of algae, a more fair-handed author would have felt compelled to at least mention that algae is nowhere near cost-competitive at commercial scale).

Turning Oil Into Salt (2): Fuel choice via the Open Fuel Standard

The heart Turning Oil Into Salt’s thesis is the idea fuel choice via the Open Fuel Standard (OFS). This basically means turning car engines into flexible platforms that can use a wide variety of energy sources, incentivizing competition and reducing the strategic predominance of oil. One attraction is that it avoids the picking winners syndrome/game that seldom ends well.

One major pillar is flex-fuel vehicles, a la Brazil. I didn’t realize it cost only $100/car, for corrosion-resistant fuel line and a different fuel sensor, to make a car flex-fuel, and if this is true I think the argument for flex-fuel vehicles is strong (although of course consumers will be the ultimate arbiters). The authors’ other push is for flex-fuel vehicles to be certified for a wide range of alcohols (e.g. methanol, their favorite case study), which certainly makes sense if it is similarly inexpensive (is it?).

The other pillar is electric vehicles – unsurprisingly – but more specifically plug-in hybrid electric vehicles (PHEVs), to overcome the issue of limited range which plagues pure EVs. This is also not a new idea, but for me it gains new life in the context of a broader push for an Open Fuel Standard.

Flex-fuel PHEVs could get 500 mpgg (miles per gallons of gasoline, as the authors say) – note that this is not a measure of energy efficiency, but rather of lessening strategic dependence on oil. That said, it is also easy to see this resulting in higher systemic efficiency (using braking energy and charging on off-peak hours) and lower GHG emissions (if electricity generation is clean and if biofuels are environmentally friendly).

The other tiny obstacle, of course, is making flex-fuel PHEVs economical. More on this here.

Turning Oil Into Salt (1): Things I liked

First off, there were a number of things I liked about Turning Oil Into Salt. The overall thesis - the emphasis on fuel choice as the path to energy independence, and the Open Fuel Standard as the primary mechanism – was compelling, and while I will tear into some of their arguments shortly, I think the overall case holds together pretty well.

They also addressed all of the major issues. Every time I thought “Hmm, what about Issue X” (e.g. methanol feedstock, price of electric cars, sourcing lithium, etc.), they addressed it a chapter or two later. Not always to my satisfaction, but each issue was at least addressed in a whole-hearted way, so kudos for that.

Despite a fair amount of political rhetoric, they side-stepped some of the tempting memes like demonizing Big Oil:

This is probably the point where cynics would suggest that Exxon’s interest in critical components of car batteries stems from its desire to perpetuate oil’s monopoly in the transportation sector, that they will sit on the patent, drive up the battery price and keep us addicted to oil forever. The evidence for such conspiratorial thinking is flimsy. Oil companies have shown growing interest in technologies that can displace oil. [followed by several examples]

They also recognize resource interdependencies that are often overlooked in public dialogue:

For example, environmentalists who still lament the killing of the electric car and who promote the so-called “green economy” should realize that the road to electric cars, efficient light bulbs, and both wind and solar energy production passes through the mine and entails easing some of our mining laws and opening new areas for exploration and discovery. To put it plainly: one cannot go green and tout energy independence while reflexively opposing any mining activity and lobbying for the designation of millions of acres where essential minerals can be found as wilderness.

Finally, the analogy with salt is surprisingly good. Not only did I not appreciate beforehand the strategic importance of salt (as the only method of food preservation), which the authors convincingly make a case for, I particularly enjoyed how it was brought full circle at the end with the anecdote of how Napoleon (desirous of more logistical flexibility for his armies) incentivized the invention of modern food canning by offering a 12,000 franc prize in 1800. The authors suggest a similar prize for whoever can devise a thin-film plastic separator for electric batteries as good as Exxon’s, and it sounds like a great idea to me.

Turning Oil Into Salt: Irritating, but productively provocative

A knowledgeable friend recommended Turning Oil Into Salt (by Gal Luft and Anne Korin) to me about a month ago, and on a recent trans-oceanic flight I had the time to read it. At a slim 124 pages, it’s a quick read. And while I was often frustrated by the style of their argument, and sometimes by the substance as well, there were a lot of good ideas and I think reading it would be time well spent for anyone interested in energy.

In order to organize my thoughts, as well as make them more bite-sized and readable for readers, I’ll write on each of the following as a separate post.

1. Things I liked


2. Fuel choice via the Open Fuel Standard


3. Intellectual consistency


4. Selective thinking on fungibility


5. Alcohol as fuel


6. Batteries are the crux

P.S. It appears my flight was long enough not only to read the book, but also to attempt a massive multi-part review. I'll be curious to read this once I'm removed from the haze of travel.

“Solutions” for wildlife conservation, cont.

To pirates, add military standoffs in disputed territory:

It seems the very adorable Asiatic black bears of Kashmir are one group that is pleased by all the conflict there. Authorities estimate that their population has gone from 800 in 1990 to 3,000 now. They (and other endangered species in the area, presumably) are benefiting it seems from lingering fear of violence, which stops poachers and hunters, as well as the dearth of hunting rifles after the Indian authorities confiscated them as an attempt to quell the separatist revolt that started twenty years ago.

Unfortunately, it doesn’t seem like this particular “solution” generalizes (not to mention the terrible human costs):

It looks like conflict itself is terrible for wildlife, and happens disproportionately in biodiversity hotspots. One study found that 80 percent of the armed conflicts between 1950-2000 took place in these areas important to maintaining plant and animal diversity. Detrimental effects on population and habitat, such as those suffered by the DRC's gorilla population are well known.

The bright side, looking at the Kashmir bear evidence and the Korean DMZ, seems to be that when conflict pauses, the animals benefit as well as the humans.

Malthus on food speculation

The man who refuses to send his corn to market when it is at twenty pounds a load, because he thinks that in two months time it will be at thirty, if he be right in his judgment, and succeed in his speculation, is a positive and decided benefactor to the state; because he keeps his supply in that period when the state is much more in want of it; and if he and some others did not keep it back in that manner, instead of its being thirty in two months, it would be forty or fifty.

If he be wrong in his speculation, he loses perhaps very considerably himself, and the state suffers little; because, had he brought his corn to market at twenty pounds, the price would have fallen sooner, and the event showed that there was corn enough in the country to allow of it: but the slight evil the state suffers in this case it almost wholly compensated by the glut in the market, when the corn is brought out, which makes the price fall below what it would have been otherwise.

I think Malthus is wrong that any price volatility caused by speculation is benign, but otherwise this is an admirable defense of the beneficial role that much-maligned (today and throughout history) speculation can play in food markets.

The quote comes from Cormac Ó Gráda's excellent book Famine, which I am reading and enjoying, and specifically from his outstanding chapter on the famous Bengal famine of 1943-44.

Eventual Nobel Prize winner in economics Amartya Sen made his name with his 1981 work which made the case that the famine was caused primarily by lacking "entitlements" (e.g., many were too poor to purchase food at escalated prices), rather than by what Ó Gráda terms a "Food Availability Deficit" (FAD). In other words, the famine was an issue entirely of distribution, rather than sufficiency. And moreover, Sen blames the entitlement issues (i.e. high food prices) primarily on speculation, which I hadn't previously realized.

Ó Gráda marshals quantitative and qualitative arguments to make the case that there was in fact a significant Food Availability Deficit in Bengal, despite the strenuous efforts of the governing British to mask this. Such deficits themselves cause price rises, which lead to entitlement issues, but after reading Ó Gráda I'm convinced that, as he says, "the heavy focus of the literature on hoarding is misplaced."

Tragedy of the commons solved by pirates

Who needs Nobel Prize-winning political economist Elinor Ostrom when you can solve the tragedy of the commons with pirates?

The increasing levels of piracy off the coast of Somalia have caused an unexpected spin-off, raising the levels of fish in the sea.

Fisherman in Kenya have reported bumper catches of shark and shellfish because commercial fishing boats from China and Japan have been scared away.

Now the fishermen are able to catch up to £200 worth of fish per day in an area where the average daily earnings are less than £5.

The massive factory trawlers which used to drain their fish stocks have been scared away and that means there is a huge bounty for local fishermen as well as helping to restore the health of the marine eco-system.

Hat tip to Aid Thoughts (one of the new Africa/aid-related blogs I've added to my RSS reader, given my new whereabouts and the ubiquity of aid here).

GHG emissions of livestock

A new report claims that livestock are directly or indirectly responsible for 51% of all anthropogenic greenhouse gas emissions. But it is wrong, or, put more colorfully:

I read about 2 pages into the report and then gave up, because its conclusions appear to be hopelessly addled.

I'll guesstimate that the right number must be in the 10-20% range - agriculture and deforestation (which is mostly driven by agriculture, directly or indirectly) combine for about a third of human GHG emissions, and livestock is a significant part of that, the largest components being methane emissions from cows and emissions associated with crop production destined for animal feed.

Livestock is a complicated issue - while its negative environmental impacts are myriad (see the FAO's "Livestock's Long Shadow" report for a detailed assessment), it also plays important economical and social roles, particularly in poor countries with highly rural populations and agricultural economies (like, for example, Ethiopia, where I am now). As this report illustrates, for many smallholder farmers, livestock can provide nutritious food (meat and milk), steady cash income (selling milk or eggs), labor (transport and traction), fertilizer and fuel (manure), while also serving as a store of value and a hedge against inflation. And this does not even include livestock's significant social and cultural roles.

So less meat consumption might be better within developed countries, but on a global scale the questions are more nuanced and the right paths of action are less clear.

Explore all the nuclear fuel alternatives

Environmental Capital on the statement emerging from Obama's recent visit to Japan:

But one bit in particular seems interesting: “Strengthened partnership on nuclear energy including on advanced fuel cycle technologies…”

That pretty much boils down to figuring out the best—and most affordable way—to reprocess spent nuclear fuel. That’s something Japan and some European countries do; the U.S. nixed such plans during the Carter administration, though it’s perennially on the Energy Department’s back burner.

Given the many challenges posed by reprocessing nuclear fuel, one would hope that "advanced fuel cycle technologies" has a more broad and far-sighted connotation, including alternative reactor designs (e.g. here, here) and perhaps a more substantive R&D effort around the promising but under-developed thorium fuel cycle.

Parsing questions about GMOs

Parke Wilde at U.S. Food Policy helpfully parses the potential questions about genetically modified food:

But, exactly what question are we picking sides on?

Question A is:

Could there ever exist a GMO technology worth supporting?

Questions B1, B2, B3, and B4 are:

Are current oversight systems inadequate to protect against food safety failures and environmental harms? Do current GMO technologies promote increased chemical use? Have current GMO technologies been oversold prematurely? Does the current regime of intellectual property rights favor multinational corporations over farmers?

I have no answer to Question A right now. I'll find out the correct answer in a few years.

Here's where I am more confident: If you oppose GMOs, it benefits you to remain friendly with everybody who shares your answers on Question B, regardless of their answer to Question A.

I'll interpret from the wording of Question A that Parke is skeptical of GMOs. First, from a clarity of argument/logic perspective, it seems to me like a stretch that we could conclusively prove that GMOs are never worth pursuing within the next few years. Second, like Michael Specter, I tend to be more positive on at least giving GMOs strong consideration, simply because no one has convincingly demonstrated that future food demand of the entire world can be met relying solely on traditional (or "wholesome" organic) food production systems.

I wish promoters of organic agriculture would engage more substantively with the broader debate of how food production can satisfy both growing population and growing per capita consumption throughout the developing world, rather than the blindered rich-world-centric view that's implied by many of their arguments (e.g. the Michael Pollan/Vandana Shiva argument that "industrial agriculture makes food too cheap", as I've pointed out before).


Update: I've been meaning to post this Michael Roberts post but wasn't sure exactly what to say about it, so I'll awkwardly append it here and excerpt some quotes relevant to the above discussion:

I think higher food prices--the kind the poor will see much more than anyone reading this blog post--are one of the biggest risks from global warming. If you don't care about whether the poor eat or not, I think you will care about the civil conflict that would accompany their hunger. If GMOs solve the problem, great. But I'm kinda skeptical that they will...

... and...

For people in the United States these dramatic predictions are actually of little direct concern. Raw commodities make up such a tiny share of retail food prices we would hardly notice a 10-fold increase in corn prices. The price of a quarter-pound hamburger (produced from corn-fed beef) would probably go up by less than a dollar. It’s hard to believe we’d buy much less meat as a result. Indeed, demand growth today comes less from population growth and more from rising incomes and meat consumption in China. (Keep in mind that it takes five to 10 calories of staple grains to make one calorie of meat.)

But three billion people — nearly half the planet — live on $2.50 per day or less. The poor typically spend a third to half of their income on food, composed mainly of staple commodities. If food quantities go down and prices go up, it’s the world’s poor who consume less.

"Green jobs" preventing green energy?

Geoff Styles on the uproar over the proposed wind project in Texas involving Chinese investors...

The chief complaint about the project in question is that it might be eligible to take advantage of a key energy provision of the American Reinvestment and Recovery Act of 2009--this year's stimulus bill--that allows the developers of a qualifying renewable energy project to collect an up-front cash grant from the US Treasury equal to 30% of the cost of the project. In this case much of that money, along with the funds provided by the US and Chinese partners, would go to pay for wind turbines imported from China. As a result, most of the jobs this project would create would be in China, not the US. On the face of it, this looks like a colossal loophole that some high-profile legislators--who incidentally voted for the stimulus bill including this feature--are rushing to plug. However, this only looks like a nasty unintended consequence of a hastily-crafted law if you misunderstand the mechanics and purpose of the Treasury renewable energy grant program.

You guessed it, the program was passed to stimulate renewable energy projects in the wake of Lehman's collapse. Which it seems to be doing... unless the green jobs argument gets in the way.

Here's Geoff's conclusion, with which I whole-heartedly agree:

The wind industry has already developed a globalized supply chain, similar to many other industries, and no one should be stunned if wind turbines from China show up in Texas, any more than China should be surprised that its nuclear power plant construction projects are creating jobs in the US. Our assessment of the value of renewable energy sources such as wind power should hinge on their efficacy at providing reliable and cost-effective energy supplies and reducing greenhouse gas emissions, not on domestic jobs creation--even in a recession.

300 well-chosen words on food

At the NYT Room for Debate on "Can biotech cure world hunger?", this is Michael Roberts:

• I don't think biotech crops are evil and could be a big help, especially in developing nations. But I think we'd be naive to think these will solve all the world's food problems going forward. Maybe they will but they probably won't.


• Good development policy, whatever that may be, is surely good food policy. In many ways food is too cheap relative to income in rich countries and too expensive relative to income in poor countries. Both problems are solved if incomes are more equal. Figuring out good development policy is, err..., much harder...


• I think a meat tax makes a lot of sense. Taxing meat would help to keep staple grains cheap and plentiful, which would help the poorest food-importing countries and probably improve health outcomes in rich countries. Some economists would probably cry foul. They might claim lump-sum transfers of cash would be a better way to deal with the underlying distributional issue. The problem is effective transfers to especially poor countries are very difficult. (Consider why those countries are poor in the first place.) Also, given our semi-public health care systems in rich countries, there could be negative externalities from meat consumption.


• Stop ethanol subsidies. These look really silly.


• Then there is that other externality we might want to tax or cap (CO2).

Quote of the day: denialism

From Michael Specter on genetically modified food:

“Someone told me they didn't want to take a flu shot because they didn't want to put a foreign substance into their body," says Specter. "What do they think they do at dinner every night?"

Less catchy, but also:

But in Africa, where arable land is scarce, science offers the only hope of providing a solution to the growing problem of hunger. To suggest that organic vegetables, which cost far more than conventional produce, can feed billions of people in parts of the world without roads or proper irrigation may be a fantasy based on the finest intentions. But it is a cruel fantasy nonetheless.

Denialist arguments are often bolstered by accurate information taken wildly out of context, wielded selectively, and supported by fake experts who often don't seem fake at all. If vast factory farms inject hormones and antibiotics into animals, which is often true and always deplorable, then all industrial farming destroys the earth and all organic food helps sustain it.

Like Michael Roberts, I don't think GM crops are the entire or only solution to food production shortages and price spikes. But I do like Specter's emphasis that technology and nature are not always in tension with each other – something often simply assumed in public discussions.

Electric cars and rare earths

This is a bit hysterical.

If in fact the massive onset of electrical vehicles will lead to some sort of apocalypse, Colorado’s monster ~$42,000 tax break isn’t helping.

"Food miles" are stupid

This is not news, but I hadn't really appreciated it until digging into the impressive success story of Kenyan horticulture recently. Feeling threatened by Kenya's initial success, UK's organic trade organization proposed stigmatizing - or even outright banning - products flown in from far-off countries on the basis of greenhouse gas emissions.

This ignores, unfortunately, the emissions from many other phases of food production, e.g. heating greenhouses to grow tomatoes in the winter in northern Europe. Here are a few choice quotes from a good Guardian article on "How the myth of food miles hurts the planet":

But the idea that 'only local is good' has come under attack. For a start, food grown in areas where there is high use of fertilisers and tractors is likely to be anything but carbon-friendly, it is pointed out. At the same time the argument against food miles - which show how far a product has been shipped and therefore how much carbon has been emitted in its transport - has been savaged by experts. 'The concept of food miles is unhelpful and stupid. It doesn't inform about anything except the distance travelled,' Dr Adrian Williams, of the National Resources Management Centre at Cranfield University, told The Observer last week.

'Half the people who boycott air-freighted beans think they are doing some good for the environment. Then they go on a budget airline holiday to Prague the next weekend,' adds Bill Vorley, head of sustainable markets for the International Institute for Environment and Development. 'They are just making gestures.'

Stylized biofuels fact of the day

From a recent speech by BP Biofuels CEO Philip New (couldn't find a link):

The Brazilian government points out that 99.7% of the country’s
sugarcane plantations are as far from the Amazon as the Vatican is from the Kremlin.

And even better news is that the government plans to keep it that way.

Update: A reader asks, "The Amazon river or the edge of the Amazon rain forest?" It's not specified in the speech (found a link), but I believe he means the forest - the river wouldn't make much sense.

Commodity risk premia

Here's a discussion I had with Michael Roberts in the comments of this post at Greed, Green and Grains. The themes of risk premia for natural resources commodities and the implications for asset pricing and discount rates are pretty interesting for someone with a finance nerd inside them.

Teaser/spoiler: this will also be of interest to anyone interested in arguing that climate policy cost-benefit analysis should use a low discount rate, i.e. should value the future almost as highly as the present, rather than discounting it heavily.

[end of original post]

My dissertation, which I never published, argued that these negative risk premiums help to explain why natural resource prices haven't trended up over time. A negative adjustment for risk means Hotelling's interest rate is probably close to zero.

I'm a little less confident than I used to be about this story. But I still think there is some truth to it. I really need to dust off that paper...

R:

Not sure I understand your dissertation thesis - I thought that for Hotelling's theory the relevant interest rate (/risk premium) was that available in broader financial markets? I.e. even if a resource extractor can't get a positive risk premium from holding natural resources, they could by buying a bond...

Michael:

Yeah, I could have been way clearer in this post. Sorry, this was really more of a note to myself than a genuine effort to communicate an idea.

I'll try to give the intuition briefly.

Take oil, for example, say back 10-30 years ago. Prices generally bounced around due to news about supply or potential supply in the future. The really big price spikes came from oil embargoes, wars, etc. If prices go up, those who own the oil are very happy. But the rest of economy is not so happy. A reduction in oil supply is a real shift inward in the productive capacity of the aggregate economy.

Now asset pricing theory tells us that in equilibrium we should expect the risk premium to depend on the covariance with the aggregate economy. So, if oil prices go up when the aggregate economy goes down, going long on oil is like buying insurance for a bad economy. Insurance, like buying and holding oil, has a negative risk premium--it's an investment that loses money on average but you're willing to do it because it pays off most when you need it most.

Assets like stocks are the opposite, they pay most when the economy is booming and you need the money least.

Now Hotelling is just asset pricing for natural resources. It says prices should generally go up at the rate of interest. The thing is, for some basic commodities, the risk-adjusted rate is about zero. So prices don't go up in the long run.

Today demand shifts are driving oil prices, and that changes things. But I think the story still holds for precious metals and natural gas where supply uncertainty remains significant.

The same idea applies to climate change discounting. Investment in curbing global warming reduces the chance of a bad thing happening. It is an investment that pays off a lot of climate change is a really bad thing and an investment that pays nothing if climate change really isn't so bad. This means the risk premium is negative.

Somehow many of my colleagues (especially environmental economists) seem to forget or overlook this essential fact. Weitzman gets it. So do the macro/finance guys who care about climate change. So does John Quiggin. Rank and file environmental economists don't get it, and it really shows in the literature.

R:

Ah, I understand now - thanks for the longer explanation.

So what are the practical implications of the negative risk premium for investing in climate change prevention? (e.g., what mistakes would policy made based on the work of the "rank and file" be prone to?)

And does the asset pricing analogy really hold for climate change or other environmental public goods, where the "proceeds" of investment are shared broadly, rather than captured by the investor alone?

Michael:

Yes, I think all of this matters a lot for climate policy. A big part of the debate in economic circles pertains to the discount rates that should be used in weighing the benefits and costs of regulation.

If someone naively things the risk premium is positive, then the future--where all the benefits of climate change mitigation reside--gets discounted heavily. If we see it is actually a negative risk premium, then we discount the future much less.

Strangely, depending on one's assumptions, all of which may seem reasonable, one can get discount rates anywhere from slightly negative to 10% or more. And these different assumptions lead to cost/benefit calculations for curbing C02 that range from HUGE, like approaching 100% of GDP to basically nothing.

This ambiguity is not inspiring for economists...

R:

Nice - as an advocate of something being done about climate change sooner rather than later, I like this argument for why the financial discount rate should be low (for those who don't believe a lower "social" discount rate is appropriate).

Back to the original point, the more I think about it, the more I struggle to believe that natural resource commodities (even aside from oil) have a negative beta. Natural gas, iron ore, copper, phosphate fertilizer, most ag crops - pretty much you name it, it spiked in mid-2008 and fell dramatically when the world economy nose-dived. I'm sure someone has actually run the numbers before, but it seems anecdotally that demand is a big driver for all of them and they're only occasionally countercyclical.

Unfortunately that's as far as the conversation got (unfortunately because I think there is more to be done to hash this out completely) - but hopefully this is a good starting point for exploring these issues further in the future.

P.S. For anyone confused by the asset pricing jargon, here's Wikipedia on the Capital Asset Pricing Model (CAPM). The key idea relevant here is that diversification is valuable, so investors are willing to accept lower rates of return for assets whose returns are less correlated with the overall market (and this correlation is called beta).

What is Buffett betting on?

Everyone's talking about Warren Buffett's big $26 billion acquisition of Burlington Northern Santa Fe railroad, which the Wizard himself characterized thus:

“It’s an all-in wager on the economic future of the United States,” he said in a written statement. “I love these bets.”

Dig a bit deeper, and there are a few other angles. Green Sheet sees it as a bet on government infrastructure spending, especially on carbon-friendly railroad. Environmental Capital notes the same, but also uncovers a fascinating tidbit:

About half of Burlington Northern Santa Fe’s cargo is coal, from the huge coal fields around Wyoming, notes Reuters. Coal accounts for one-quarter of BNSF’s revenue. And coal accounts for about half of the electricity generated in the U.S. today.

That makes Mr. Buffett’s deal basically a massive bet on coal, argues Brad Plumer at The Vine.

Economic growth is good for energy and thus for coal... unless cap-and-trade or some other carbon price comes into effect, in which case coal will take a big hit. I would be very curious what Buffett thinks the net impact of a bill like Waxman-Markey would be on his newest and biggest acquisition.

In Africa, blogging output will suffer

I will be spending most of the next four months in Africa. Ethiopia, to be more specific. The frequency and quality of my internet access will fall dramatically, and my blogging output along with it, unfortunately. On the bright side, I will be doing some very interesting work and undoubtedly learning a ton.