Sidling away from climate debate

While results from Cancun seem to warrant cautious optimism, it seems fewer and fewer actors want to tackle climate head-on in the U.S.:

After two years of fairly disappointing outcomes at the U.N. climate summits in Copenhagen and Cancun, and after watching hopes for cap-and-trade or other measures to regulate carbon fizzle in the U.S. Congress, a growing slice of those favoring investment in clean-energy are working hard to ditch the association with "climate," which now seems to many a losing political issue. As the Breakthrough Institute's Ted Nordhaus put it, "We need to free energy from the polarizing climate debate."

This seems like an obvious step, in retrospect, and potentially a very positive and effective one. After all, climate is only one form of environmental pressure humankind is exerting upon the planet, and there are many other (inter-related) challenges to tackle (water, waste, agricultural sustainability, etc.). And hey, if it worked in Kansas...

Ethanol subsidies live another year

NOOOOO!!! Despite promising earlier signs, the ethanol tax credit renewal managed to sneak into the tax bill, so it's been extended into 2011 at least. Very disappointing, even though Geoff Styles thinks the subsidy won't last past next year.

Ethanol quote of the day

Historically our government has helped a product compete in one of three ways: subsidize it, protect it from competition, or require its use. We understand that ethanol may be the only product receiving all three forms of support from the U.S. government at this time.

That's 17 senators from both parties, via the WSJ and Environmental Economics.

Even reduced second-gen ethanol targets too high

Speaking of ethanol, despite all of the whinging about the reduction in second-generation ethanol target from 250 million gallons to only 6 million, producers will by their own admission struggle to supply half of that.

As cellulosic refineries across the country are stuck in start-up phase, the U.S. presently has the capacity to refine only "a few million gallons" of that type of ethanol annually, said Matt Hartwig, spokesman for the Renewable Fuel Association industry group.

Not surprising - the "valley of death" between demonstration and commercial scale has not been successfully bridged by anyone to date. The industry complains a lot about lack of sufficient capital, but it seems like more of a chicken and egg problem.

Bipartisan support to end ethanol subsidies?

In today's political climate in the U.S., it's rare to find bipartisan support for anything, let alone an eminently sensible idea like ending subsidies for ethanol. (Not to be confused with cutting the cellulosic ethanol RFS requirement for 2011 by 97%, which is unfortunate but necessary given that we haven't actually figured out yet how to produce cellulosic ethanol economically at scale.) It will be interesting to see how the 42 ethanol state senators push back against this one, but it does seem that the shifting balance toward fiscal conservatism makes it both more likely that subsidies could expire and more difficult for them to be re-established once the do, as NRDC's Nathanael Greene points out in the NY Times article.

I'm not close enough to corn futures markets to know to what extent the expectation of lapsing subsidies is baked in, but I'll be very curious to see how world grain prices react if subsidies are allowed to expire. The discontinuity may give us a crude sort of counterfactual to help answer the persistent question of how much biofuels drive up food prices.

Via Michael Roberts, who's also cheering.

Another cut in crop forecasts

U.S. crop production forecasts were slashed again this week:

The agriculture department on Tuesday cut estimates of US corn yields for a third successive month, forecast record soyabean exports to China and warned of the slimmest cotton stocks since 1925.

“The combined production shortfalls and dramatic potential stock drawdowns mean a much tighter supply picture than just a few months ago,” the agency said in a separate grains report.

Benchmark Chicago corn futures soared above $6 a bushel for the first time since August 2008, before ending lower.

I'm looking breathlessly to Michael Roberts for the more granular data analysis he promised; this year could well be a preview of agriculture in a warmer world of the future.

In other unfortunate news, most of the $20 billion of food aid that was pledged last year has failed to materialize, and the probability of inspiring U.S. leadership on the issue has fallen substantially after the recent mid-term elections.

Precipitation and political determinism

Or, as Tyler Cowen puts it, a rainfall theory of democracy:

Why have some countries remained obstinately authoritarian despite repeated waves of democratization while others have exhibited uninterrupted democracy? This paper explores the emergence and persistence of authoritarianism and democracy. We argue that settled agriculture requires moderate levels of precipitation, and that settled agriculture eventually gave birth to the fundamental institutions that under-gird today’s stable democracies.

... and now brace yourself for the awesome use of econometrics...

An instrumental variables approach demonstrates that while low levels of rainfall cause persistent autocracy and high levels of rainfall strongly favor it as well, moderate rainfall supports stable democracy. This econometric strategy also shows that rainfall works through the institutions of the modern territorial state borne from settled agriculture, institutions that are proxied for by low levels of contemporary tribalism.

Sad news: SO2 is dead

Tim Haab reports from the Heartland that the teetering SO2 cap and trade market is "Elvis dead."

The story goes something like this: The SO2 market was designed as if SO2 was a uniformly mixed pollutant. This made trading easier. One ton of SO2 in Ohio could be traded for one ton in Illinois. But, the impacts of each of those tons is different. Those states who absorbed a disproportionate impact from SO2 trading sued the EPA. Congress issued the Clear Air Interstate Rules limiting interstate trades of SO2. SO2 prices crashed. EPA lost the lawsuit: Must scrap the SO2 market and start over. SO2 market dies quietly.

Leaving us without a textbook example of market-based environmental policy... and that is the least of it.

It's all about messaging

Speaking of farmers and climate change, Chris Clayton highlights has an interesting story from a climate-skeptical Kansas town that's nevertheless reduced its energy use by 5% from baseline (which is a lot).

You don't make a case to do something in Kansas by saying Al Gore backs it, but you can reshape the message and get the same result.

Climate and Energy Project looked at what it would take to get Kansans to overcome their skepticism about climate change.

So the (Climate and Energy) project ran an experiment to see if by focusing on thrift, patriotism, spiritual conviction and economic prosperity, it could rally residents of six Kansas towns to take meaningful steps to conserve energy and consider renewable fuels.

The most resonant themes were thrift (i.e. efficiency), reducing dependency on foreign oil, green jobs and "creation care":

The obligation of Christians to act as stewards of the world that God gave them, even creating a sermon bank with talking points they could download.

This is probably even much more effective than arguing that rising temperatures from climate change will hammer yields.

Heat and crop yields in 2010

This may be premature, but I'm very tempted to award a gold star for clairvoyance to Michael Roberts, whose research on the effect of heat on crop yields I've blogged here and here. Here he is on August 12:

[Current temperatures] are still rising fast. If this keeps up for a few more days I'd say yields will get hammered.

(to give credit where credit is due, the market may have seen the same thing)

Anyway, fast forward to last week, the October forecasts for wheat, corn and soy are all well below the September forecasts (although USDA puts a bizarrely positive spin on it). As Michael's chart below shows, the September forecast is almost always very good, and revisions are generally upward, not downward, so something funny happened this year, and late heat seems to be a very strong hypothesis.
Michael is investigating the more detailed data and I hope will post any findings as they arise. As I mentioned before, if it was the heat, it will be very valuable to prove and communicate this to stakeholders in agriculture, some of whom have taken very skeptical views toward climate change and its impact on them specifically.

Nile water politics

This NYT article nicely captures the latest on Nile water politics. In sum:

• The current treaty guaranteeing 80% of the flow to Egypt and Sudan is a legacy of British colonialism


• Egypt views any reduction of flow to itself and its 80 million people as an existential threat, and rejects any such proposals out of hand


• Five of the seven upstream countries have signed a new Nile accord which requires a simple majority to approve projects, while Egypt insists on retaining veto rights over any project in any country


• Egypt believes it has the World Bank in its pocket on dam approvals, but worries that agricultural projects will not only soak up more water but also bring Arab and Chinese investors with their own clout into the fight


• Experts believe there is large water efficiency upside both upstream and downstream

It's hard not to be sympathetic to the seven countries who are still holding the short end of the stick imperialism handed them; on the other hand, in Egypt it's, if not life and death, a matter of the utmost political importance. Ethiopia's prime minister is right that it's not a zero-sum game, given the efficiency upside, but as in so many other parts of the world, at a market price of free, not enough stakeholders will be incentivized to capture it.

Peak (or finite) helium

Via MR, are helium party-balloons the next commodity to spike? Apparently helium, which cannot be made synthetically or chemically, is subject to a serious market pricing distortion:

The US government established a national helium reserve in 1925, and today a billion cubic metres of the gas are stored in a facility near Amarillo, Texas. In 1996 Congress passed an act requiring that this strategic reserve, which represents half the Earth's helium stocks, be sold off by 2015. As a result, helium is far too cheap and is not treated as a precious resource.

Nobel prizewinner Robert Richardson thinks the government should

Get out of the business and let the free market prevail. The consequence will be a rise in prices. Unfortunately party balloons will be $100 each rather than $3 but we'll have to live with that. We will have to live with those prices eventually anyway.

I would love to understand the political reasons why this happened - the economic illogic is patently apparent, and I can't imagine it does much for national security either.

Market believes heat hurts crop yields

The market believes what Michael Roberts' popular paper showed about crop yields - higher temperatures really hurt.

Corn futures rose the most in almost two weeks and soybeans gained on speculation that the recent Midwest heat wave will mean smaller production than the record crops predicted today by the government.

August has gotten off to the second-warmest start since 1960, T-Storm Weather LLC said today in a report. Another forecaster, Commodity Weather Group LLC, said about 25 percent of the U.S. soybean-growing area won’t get enough rain for proper plant development over the next two weeks, and that the dryness could harm a third of the Midwest should rain miss sections of Illinois this weekend, as expected.

“The crops are going downhill rapidly in parts of the Midwest and South,” said Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis. “Our farmers are already preparing for corn yields that may fall 5 percent to as much as 10 percent from earlier field samples.”

Looking for the silver lining, might this influence the farm lobby's stance on climate change?

Via Michael at Greed, Green and Grains.


Update: I'm struggling a bit to square this with USDA predictions of record U.S. corn production... I wonder if those forecasts were based on outdated inputs (like, perhaps, "earlier field samples").

The fragile credibility of cap-and-trade markets

This isn't fresh news, but it's a powerful illustration of how sensitive cap-and-trade systems are to loss of political credibility. The SOx cap-and-trade market was a long-standing success story and talisman for those who sought to establish a similar, broader system for GHG emissions to curb climate change.

2005:

The current problems in the acid-rain market stem from 2005, when the EPA, with the backing of many utilities and environmental groups, announced major new reductions in smog-forming and soot-producing emissions, and expanded the reach of the cap-and-trade system in more than two dozen, mostly Eastern, states.

2008:

In response to lawsuits filed by a handful of utilities and North Carolina, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had overstepped its authority...

In response to the ruling, prices for the pollution allowances plunged to $130 a ton. Utilities held off on projects to clean up their plants.

2010:

Last week, the EPA issued new rules to comply with the court's decision. The new program will limit the use of the market and instead require most of the emission reductions to come from changes at the plants themselves. And millions of allowances that utilities now hold can't be used under the new program, which will issue its own allowances.

And unsurprisingly, prices have now fallen to essentially zero. A powerful cautionary tale.

The other oil spill

The Deepwater Horizon spill has continued to worsen - the latest estimates of leak volume have doubled (again), BP's reputation is plummeting (as is its market value), the Obama administration appears largely powerless and increasingly blamed, and U.S. consumers and taxpayers appear to be the major losers in the long term. But as the Guardian pointed out, Nigeria's agony dwarfs the Gulf oil spill - and it has been going on for decades.

One report, compiled by WWF UK, the World Conservation Union and representatives from the Nigerian federal government and the Nigerian Conservation Foundation, calculated in 2006 that up to 1.5m tons of oil – 50 times the pollution unleashed in the Exxon Valdez tanker disaster in Alaska – has been spilled in the delta over the past half century. Last year Amnesty calculated that the equivalent of at least 9m barrels of oil was spilled and accused the oil companies of a human rights outrage.

That is a wide range of estimates - at 7 barrels per ton, Amnesty's estimate for last year is almost equivalent to the other estimate for the past century. But even if we take the former estimate, it would take the Deepwater Horizon well almost a year flowing at the new estimated 30,000 bbl/day rate to equal the amount of oil leaked into the Niger Delta over time - and look at the horrific environmental and economic consequences after only a month.

The problem with Nigeria, of course, is the security challenges atop the technical ones.

Last month Shell admitted to spilling 14,000 tonnes of oil in 2009. The majority, said the company, was lost through two incidents – one in which the company claims that thieves damaged a wellhead at its Odidi field and another where militants bombed the Trans Escravos pipeline.

I don't have any answers - it is such a complicated situation that it is hard to know the best way to intervene, even if the political will could be summoned. But maybe one tiny silver lining of the Gulf disaster is that Americans will now appreciate more vividly the consequences that Nigeria has faced for so long - I know I do.

Amusing sentences

Biodiesel and soybean industry leaders are urging the U.S. Senate to pass the American Jobs and Closing Tax Loopholes Act, which retroactively extends the biodiesel tax incentive through Dec. 31, 2010.

From Biofuels Business.

Krugman on environmental economics

Long but excellent article by Paul Krugman on Environmental Economics 101 and the economics of climate change. I also recommend Michael Roberts' addendum and heartily second his emphasis on argiculture, forests and land use which Krugman under-addresses.

One thing I found interesting was Krugman's favorable take on both the legitimacy and the feasibility of carbon tariffs:

To the objection that such a policy would be protectionist, a violation of the principles of free trade, one reply is, So? Keeping world markets open is important, but avoiding planetary catastrophe is a lot more important. In any case, however, you can argue that carbon tariffs are well within the rules of normal trade relations. As long as the tariff imposed on the carbon content of imports is comparable to the cost of domestic carbon licenses, the effect is to charge your own consumers a price that reflects the carbon emitted in what they buy, no matter where it is produced. That should be legal under international-trading rules. In fact, even the World Trade Organization, which is charged with policing trade policies, has published a study suggesting that carbon tariffs would pass muster. [emphasis mine]

These aren't pushover arguments, but my gut reaction is that even if the WTO sanctions this type of action, the reaction from countries like China wouldn't be pretty.

Induced innovation in agriculture

Two interesting things Michael Roberts learned at the recent NBER ag workshop:

1. On the political economy of agricultural subsidies: Bruce Babcock suggests that the reason we subsidize field crop farmers and do not subsidize vegetable crop or livestock farmers is that supply of field crops is inelastic, which gives these farmers (or the owners of the land on which these farmers farm) a stronger incentive to seek rents in the form of subsidies. This incentive doesn't exist for other kinds of agriculture because the relatively elastic supply will quickly dissipate potential rents. This view was new to me and makes a fair amount of sense.

2. The real crux going forward with regard to agricultural production, biofuels, demand growth coming from Asia, and what all this will mean for food prices going forward is the extent of induced innovation. In other words, will (or has) the prospect for higher commodity prices induced greater yield growth, perhaps through further development and adoption of genetically modified crops? And if so, to what extent? Economists tend to be technological optimists and I wouldn't call myself a pessimist. But I am skeptical about finding clear and compelling evidence of induced innovation--I think this is very hard to detect in the data.

On the question of induced innovation, I think we can disaggregate further into privately and publicly funded research. High crop prices will certainly induce private investment in agricultural research by polarizing companies like Monsanto as long as there is sufficient intellectual property protection for them to reap the financial rewards. There are promising signs that high food prices are also attracting attention back to publicly funded agricultural research, but this induction mechanism is less direct and perhaps more prone to breaking down.

I agree that induced innovation is probably very hard to prove empirically, and the lag between investment and sizable effect on yields is probably on the scale of decades.

WWID: Recognizing high dimensionality

In Chapter 6 of What Works in Development, Ricardo Hausmann makes, in commentator Ross Levine’s words, an “imaginative, provocative, and substantive” argument that much work on economic growth willfully ignores the complexity inherent in the classical development formula (“peace, easy taxes, and justice” in Adam Smith’s words, or trade openness, sound finances, and property rights, to paraphrase Larry Summers). Providing the right public inputs, particularly regulation, to enable a nation to develop new productive capabilities is a very “high dimensional” problem, which Hausmann compellingly illustrates with the myriad policy elements required to enable an efficient real estate market.

The necessary information to determine optimal policies is highly dispersed, Hausmann continues, and in such a context central planning is bound to fail. Unlike a product market, the market for public inputs lacks mechanisms to aggregate information (prices), incentivize action (profits), and allocate resources (capital markets). Hausmann then hypothesizes that in the United States, the open political architecture allows lobbyists may play a market-making role in the provision of public inputs. (Not without some rent-seeking, of course, but this is a necessary tension “in the absence of an omniscient and benevolent social planner.”)

How, then, to incorporate broad input into the provision of public inputs in developing countries? He doesn’t have all of the answers, and neither do commentators Nava Ashraf (who suggests looking to social enterprise for systems) and Levine (who uses the example of racism to argue that institutions themselves evolve in response to underlying incentives, and their change cannot be mandated independently of those incentives). But I find the question alone quite profound.

Very interesting stuff… I will have to let it marinate for a while, and hope to have further reflections at some point.

Speculation is not manipulation

In the fine tradition of Thomas Malthus, famous Stanford finance professor Darrell Duffie has penned an op ed entitled "In Defense of Financial Speculation: It is not the same thing as market manipulation." He has a sharp mind and makes the case well.

First, speculators perform valuable market functions by taking risk and disseminating information (remember Enron?).

Speculators earn a profit by absorbing risk that others don't want. Without speculators, investors would find it difficult to quickly hedge or sell their positions.

Speculators also provide us with information about the fundamental values of investments. When the fundamentals appear favorable, they buy. Otherwise, they sell. If their forecasts are correct, they profit. This causes prices to more accurately forecast an investment's value, spreading useful information. For example, the clearest evidence that Greece has a serious debt problem was the run-up of the price for buying CDS protection against the country's default.

Is this sort of speculation wrong? I have not heard why.

The distinction between "speculation" and "manipulation" is important.

Those who call for stamping out speculation may be confused between speculation and market manipulation. Manipulation occurs when investors "attack'' a financial market in order to profit by changing the value of an investment. Profitable speculation occurs when investors accurately forecast an investment's fundamental strength or weakness.

Manipulation is much harder to pull off than making a simple directional bet.

Market manipulation for profit is not easily done... Simply driving up the price, as speculators are alleged to have done in the oil market in 2008, is not enough. To make a profit, a manipulator needs to obtain monopolistic control of the supply. Given the size of the oil market, that seems implausible, absent a major and sustained conspiracy.

As long as speculators do not crash and destabilize financial markets with them, they are not where regulatory attention should lie.

It would be better for our economy to enforce anti-manipulation laws, and require that speculators have enough capital to cover their risks, than to attempt to squash speculation.

Worth keeping in mind the next time someone starts ranting about "reckless speculation."