BHI’s response to TP’s Climate Progress blogger Michael Conathan’s critique of NJ wind farm study

-- This post was written by Paul Bachman, Director of Research, Beacon Hill Institute, August 19, 2011.


On TP's Climate Progress blog, Michael Conathan, claims that Beacon Hill Institute's recent cost-benefit analyses of offshore wind energy in New Jersey are slanted. Conathan alleges that the BHI study "misses the mark on both sides of the ledger by dramatically overstating the costs and underestimating the economic benefits of offshore wind."

It is actually Mr. Conathan that "misses the mark" in his critique of the BHI study. Mr. Conathan makes baseless claims, reports only partial data and relies on irrelevant studies with no economic value or relevance to offshore wind power in New Jersey. We address his individual critiques below.

Mr. Conathan: "The study dramatically underestimates the economic savings realized from the environmental benefits by assuming a static price for the valuation of reduction of greenhouse gasses - which will inevitably rise over time. "

BHI response: Mr. Conathan bases his claim on speculative assumptions about the future regulations of greenhouse gas emissions and other variables. He assumes that the U.S. government will impose a cap-and-trade system, a carbon tax, or a restrictive E.P.A. regulatory regime. This action by the federal government would raise the cost of greenhouse emissions and in turn the price of coal and other fossil fuels, while at the same time raising the benefits of wind power. However, these greenhouse gas regulations are not even a remote possibility in the current political and economic environment.

Let us take a look at the recent history of CO2 prices over time. The IntercontinentalExchange INC. which runs the Chicago Climate Exchange and Chicago Climate Futures Exchange has decided to shut both down due to a lack of legislative interest. "The U.S. has not enacted carbon cap-and-trade legislation and changes to the EPA acid rain program have reduced trading activity," ICE said in its notice. "Accordingly, volumes are down substantially and the exchange is operating at a loss." It appears that IntercontinentalExchange INC. does not share Mr. Conathan's view that the price of greenhouse gas emissions will inevitably rise over time.

The exchange also lists prices for New Jersey RGGI futures contracts. On June 30, 2011 the price was $2.02 per metric ton for November 2016 delivery and on May 30, 2011 the price was $1.93 per metric ton. In our study we used a real price of $2.04 in 2011 dollars. Therefore, our price is well within the range of futures prices listed at that time. Moreover, if we inflate our current price using a 3.5% annual rate, our $2.04 2001 real price translates into a nominal price of $2.78 in 2020 and $3.92 in 2030. We, in fact, do account for his inevitable price increase over time.

Mr. Conathan: By BHI applies an absurdly high discount rate of 10 percent to the benefits when most economic studies use rates of 3-5 percent. The discount rate mistake alone could lead to underestimating the benefits of offshore wind by as much as 50 percent.

BHI Response: First, Mr. Conathan makes the mistake of comparing our 10 percent nominal discount rate with 3-5 percent real, or inflation-adjusted, discount rates. Using the same 3.5 percent inflation rate assumption as in the previous example would translate our nominal rate into a real discount rate 6.5 percent, not far off from his 3-5 percent range. If we use the recent annual CPI increase of 4.2%, our real discount rate becomes would be 5.8%. Moreover, the White house Office of Management and Budget recommend using this discount rate.

While Mr. Conathan rails against us for applying such as high discount rate to the benefits, he is silent about the fact that we apply the same discount rate to the costs of the project. Thus, if we are underestimating the benefits of the project by 50 percent, which we do not, then we would be underestimating the costs also.

Mr. Conathan: BHI also artificially inflates the costs of the project compared to fossil fuel generation by failing to account for the reality that as costs go up, people will reduce their consumption thereby partially offsetting the price increase.

BHI Response: Mr. Conathan is describing what is commonly known as a "rebound effect." It is often used to describe the consumers' behavior after the installation of energy efficiency equipment. For example, as consumers witness their winter heating bill drop after making energy efficiency changes, they respond by turning up the thermostat to a more comfortable temperature, and thus negate some of gains of the efficiency gains. However, Mr. Conathan thinks that there is a free lunch to reducing electricity consumption and fails to recognize the two factors in the wind power case. First, consumers incur a cost to reduce the amount of electricity they would have consumed in the absence of the higher price. Either consumers lose the benefit they derive from that electricity consumed, for example less time on one's IPad, or consumers make an energy efficiency investments to reduce their electricity consumption, which also has a cost of lost opportunity to spend the money elsewhere. Thus, our estimates of the price effects include these costs of the rebound effect and do not need to be adjusted.

Mr. Conathan: "Furthermore, the study estimates the cost of natural gas and coal based on historical prices rather than based on forecasts of future market conditions. While natural gas prices are difficult to predict, experts believe coal prices will rise in the future."

BHI Response: Here again Mr. Conathan believes that his and other "expert" assumption of future prices and regulatory regimes are more valid than ours. Only time will tell who is more accurate. However, what we do know is that forecasting future regulations, supply, demand, costs, prices and other variables is extremely difficult and uncertain, and that includes coal prices. This is why we conduct a sensitivity analysis to test the robustness of our assumptions and provide a range of estimates.

Mr. Conathan: "The BHI study entirely fails to account for the jobs that would be created by the wind farm. Meanwhile, according to a 2009 report by the European Wind Energy Association, the wind energy sector in Europe created more than 60,000 jobs from 2004-2008."

BHI Response: Mr. Conathan is wrong again. We report net jobs, which includes 2,400 jobs created in the construction, manufacturing and related industries. These jobs created are simply swamped by the jobs lost in the other sectors that suffer from the higher electricity costs.

Mr. Conathan cites a report from the European Wind Energy Association, hardy an unbiased source. The purpose of the report is to boast the positive employment effects of the industry. However, as an economic study, it makes nonsensical assertions and fails to look at the economy-wide effects of wind energy that is more expensive and less reliable than conventional energy. Manufacturing and other energy intensive industries facing higher costs can move production to lower cost locations or simply shut down.

For example, the study states that the "additional employment effect of including the higher cost (and higher employment per MW installed) of offshore capacity is estimated at 2,800 jobs…" The report associates higher costs and higher employment requirements with offshore wind with economic benefits. The report associates higher costs and less efficient energy sources with more employment in the wind energy industry. Using this logic, the wind power should not be placed just off the New Jersey coast, but rather in the middle of the ocean because it would create many more jobs to construct and maintain the turbines and transmission lines that are much further away from the energy consumer. This is the same logic that would insist that a canal should be dug with picks and shovels instead of machines.

The report, and Mr. Conathan, fail to note that Denmark has the highest concentration of wind power in Europe and the highest electricity rates in Europe. Moreover, Denmark sells its wind power to Germany during the overnight hours at a very low rate, when the wind is blowing most consistently, and buys conventional electricity back from Germany during the daytime at a much higher rate, when their electricity demand is highest.

Mr. Conathan: Furthermore, the study assigns zero value to increased energy independence and vastly underestimates the reductions in greenhouse gas emissions that New Jersey's targeted 1,100 MW of offshore wind energy would produce.

BHI Response: Mr. Conathan displays his ignorance of the composition of the New Jersey electricity market. As we explain in the report New Jersey gets the vast majority of its electricity supply from domestic sources of coal, natural gas and nuclear power. Oil only provides between 0.5 percent and 1.5 percent of state electricity, and fluctuates depending on oil prices. Moreover, because it is unpredictable and unreliable, wind power cannot provide any of the marginal electricity supply. In other words, wind power operators are at the mercy of the current wind conditions and they cannot control their output to meet changes in electricity demand at any given moment in the day. Therefore, wind power must supply the base load on the grid, which means it would displace domestically supplied coal and natural gas and would have no effect on electricity supplied by oil. Therefore, no foreign oil would be displaced by the wind power.

Contrary to Mr. Conathan's statement that we underestimate the reductions in greenhouse gas emissions the wind power project would produce; the emissions effect is likely negligible for two reasons. First, coal represents 68% of the New Jersey's marginal supply of electricity, so that when the wind suddenly stops blowing at any given moment, coal plants must be cycled up to supply the power lost from the wind plant. The opposite happens when the wind begins to blow again.

Nevertheless, the coal plants cannot be shut down completely when the wind power is operating. That is to say coal power plants are similar to an automobile idling. They are still burning coal and sending some electricity to the grid, but not at an efficient level. When the wind stops blowing the cola plant operator hits the gas petal, if you will, to keep the current electricity supply balanced with the current demand and prevent brownouts and blackouts. While the coal plants are idling, so to speak, they are running at less-than-peak efficiency and produce more greenhouse gas emissions than if they were running at peak efficiency while online. This shifting back and forth between idling coal plant and intermittent wind turbine reduces the emission benefit from wind power.

In addition, the construction of a 1,000 MW wind plant takes much more raw materials, such as steel concrete, aluminum, plastics, transmission wires and land, or in this case water, than a conventional power plant. The production of all these materials also produces greenhouse gas emissions and when we accounted for these greenhouse gas emissions, the wind advantage erodes even further.

Mr. Conathan: This report isn't BHI's first foray into the admittedly complex world of offshore wind. A 2003 report from BHI on Cape Wind's proposal to build America's first offshore wind farm used similarly deceptive tactics, suggesting the project could cost the region $64 million to $134 million in tourism dollars. These findings were included despite polls that showed less than 3 percent of potential tourists would change their plans if the farm were built and despite ample studies of actual tourists' behavior in areas proximate to actual wind farms in Europe.

BHI Response: Mr. Conathan must not have read BHI's report on Cape Wind carefully. BHI did, in fact, conduct a statistical survey of tourists that were on the very Cape Cod beaches where the Cape Wind turbines would be visible. The fieldwork for these two surveys was done under contract with, and under the supervision of, David Paleologos, President, DAPA Research, Inc., an experienced pollster and professor at Suffolk University. The attitudes of European tourists on European beaches, cited by Mr. Conathan, are irrelevant to the Cape Wind project.

Mr. Conathan also fails to cite the recent contract between Cape Wind and the utility National Grid that priced its electricity at 19.4 cents per kilowatt hour in 2016, escalating 3.5% per year for 20 years. This is almost double the current electricity rates for Massachusetts.

Offshore wind power is more expensive, unpredictable, less reliable and less efficient than conventional energy sources. These features make wind power costly to electricity consumers, especially businesses in energy intensive industries. This is why wind power was abandoned as a source of reliable electricity at the dawn of the industrial revolution. These inconvenient economic truths force advocates like Mr. Conathan to resort to "deceptive tactics," half- truths and baseless accusations.

BHI on Green Jobs

Green Jobs a Cost, Not Benefit, to the National Economy

Academic Study Finds Critical Economic Flaws and Assumptions in Previous Reports

BOSTON, MA – Recent studies forecasting the potential economic benefits of government green job programs are critically flawed and erroneously promote these jobs as a benefit, according to a report released today by The Beacon Hill Institute (BHI) at Suffolk University.

The economic analysis reviewed the primary claims of three of the most influential green jobs studies and found serious economic flaws in each.

“Contrary to the claims made in these studies, we found that the green job initiatives reviewed in each actually causes greater harm than good to the American economy and will cause growth to slow,” reported Paul Bachman, Director of Research at the Beacon Hill Institute, one of the report’s authors.

The studies reviewed by BHI include:

* The United Nations Environment Programme, International Labor Organization, International Trade Union Confederation’s Green Jobs Initiative, “Green Jobs: Towards Sustainable Work in a Low-Carbon World.”

* The Center for American Progress, “Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy.”

* The U.S. Conference of Mayors, “U.S. Metro Economics: Current and Potential Green Jobs in the U.S. Economy” prepared by Global Insight.

The authors of the BHI critique identified a fundamental error in each of these studies, specifically "counting the creation of a green job as a benefit and rationale for its proposed program in and of itself.”

The BHI study also stresses that “Jobs -- green or otherwise -- are not benefits but are instead costs. If the green job is a net benefit it has to be because the value the job produces for consumers is greater than the cost of performing the job. This argument is never made in any of these three green jobs studies.”

The executive director of the Beacon Hill Institute and co-author, David G. Tuerck, went further, noting that “these studies are based on arbitrary assumptions and use faulty methodologies to create an unreliable forecast for the future of green jobs.

“It appears these numbers are based more on wishful thinking than the appropriate economic models, and that must be taken into consideration when the government is trying to turn the economy around based on political studies and the wrong numbers,” Tuerck said.

According to BHI, the results of the study also show estimates on how a state-based cap and trade policy will negatively impact both job growth and wages. One specific critique involves job creation in the state of Indiana, where previous reports did not take increased energy costs from a “cap and trade” system into consideration when looking at job creation. In that case, BHI developed a computable general equilibrium (CGE) model and found that contrary to previous studies, Indiana would lose more than 18,000 jobs in 2009, up to nearly 29,000 job losses in 2011, and that real disposable income would be cut by nearly $1 billion in 2009 and close to $1.5 billion in 2011.

The authors concluded by noting that further economic analysis is needed before governments move forward on green job initiatives. “All three green jobs studies we reviewed are riddled with economic errors, incorrect methods, and dubious assumptions. Economic policy should not be based on such faulty analysis. Serious economic studies of costs and benefits are desperately needed before the adoption of any green jobs proposal.”

For more information and the full study, please visit www.beaconhill.org.

WSJ: Cap and Trade Fiction

WALL STREET JOURNAL skewers Waxman-Markey and the CBO.

... Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

BHI's work on cap-and-trade can be found here.

Cap and trade will cost you!

RON BAILEY: Energy Price Deceit: Congress tries to hide its cap-and-trade energy price increases.

The central fact of the cap-and-trade proposal is that it will increase the price of energy. If energy prices don't go up, the goal of getting energy producers, manufacturers, and consumers to shift away from carbon generating fuels (coal, oil, and natural gas) toward low-carbon sources of energy (nuclear, solar, wind, conservation) will not be achieved.

Whatever else they are, the folks in Congress are not stupid when comes to protecting their electoral viability. They are painfully aware of the fact that, while Americans express support for regulations to reduce greenhouse gases, 77 percent in a recent ABC News/Washington Post poll declared themselves either "very concerned" or "concerned" that "federal regulation of greenhouse gases could substantially raise the price of things you have to pay for."

So in an attempt to ward off voter displeasure over higher energy prices brought about by Congressionally-mandated carbon rationing, the denizens on Capitol Hill have tacked on a number of Rube Goldbergesque policy obfuscations designed the mask the price increases. These include subsidies and tax breaks for retrofitting buildings to use less energy, setting energy conservation appliance standards, subsidies for higher mileage automobiles, and imposing a renewable fuel standard on utility companies, among many other things.

The chief technique that Congress is using to hide the mandated price increase in electricity and natural gas from voters is giving away free emissions permits to local electricity and gas distribution companies. In the ACES bill, some 30 percent of emissions permits are allocated free to local distribution companies who are supposed to sell the permits and then pass along the money to consumers as a lump sum rebate to offset their higher utility bills. Why a lump sum?

As Harvard University environmental economist Robert Stavins explains in his article on "The Wonderful Politics of Cap-and-Trade," the hope is that such rebates will compensate "consumers for increases in electricity prices, but without reducing incentives for energy conservation." Even if they are getting a rebate, higher monthly electric bills will still likely annoy voters. But let's assume that this scheme actually works as intended and blunts household displeasure about paying more for electricity and natural gas.

There's one big problem: The proposal merely shifts the price paid by consumers for energy from local utilities to other products and services. For example, Resources for the Future economists Rich Sweeney and Dallas Burtraw calculate that auctioning all of the carbon emissions permits would result in a price of $20.91 per metric ton. However, allocating 30 percent of the carbon dioxide emissions permits free to local utilities as proposed under the ACES bill would mean lower electricity prices, and lower prices would mean more consumption. The result is that there would 24 percent fewer emissions reductions in the electricity sector than would have been the case had all permits been auctioned.

More on climate change mitigation here.

"The largest corporate welfare program in the history of the U.S."

The coming Cap-and-Trade debacle.

The Supreme Court's decision last year that the Environmental Protection Agency (EPA) has the authority to regulate carbon dioxide under the Clean Air Act and the EPA's ruling in March that carbon dioxide threatens the public's health and welfare, have put considerable pressure on Congress to act. Naturally, when the federal government puts hundreds of billions of dollars in play, it attracts a lot of rent-seekers. "The special interests that seek to derail, blunt, or tailor any new climate policy to their narrow agendas have already gathered in staggering numbers," declared The Climate Change Lobby, a study conducted by Center for Public Integrity. In 2008, more than 770 companies and interest groups spent an estimated $90 million funding 2,340 climate change lobbyists in Washington, DC.

The prospects of carbon rationing and permanently higher fuel prices are going to produce far-reaching changes in the ways companies do business and hit consumers hard in their pocketbooks. In March 2008, House Energy and Air Quality Subcommittee member Rep. Mike Doyle (D-Penn.) told the Capitol Hill newspaper Roll Call, "You are either at the table or on the menu." Mixing his metaphors, Doyle added, "This train is leaving the station." Now it's largely a question of whom it's going to run over.

The House hikes the ante on climate change bill.

No one ever sold short the ambitions of individual Congressmen. They see opportunities in every crisis. The first draft of the climate change bill casts caution to the wind (excuse the pun).

The cap-and-trade portions of the draft bill are incredibly ambitious, covering 85 percent of the economy's carbon pollution—from electric utilities to oil companies to large industrial sources, leaving out only smaller entities. The legislation would aim to cut U.S. greenhouse-gas emissions 3 percent below 2005 levels by 2012, 20 percent by 2020, and 83 percent by 2050. That's slightly more stringent than what Obama has proposed, though not quite as steep as what the IPCC has called for to avoid drastic climate impacts.

Does it pay to be a global warming skeptic?

Among the skeptics Ron Bailey of Reason reports from the Heartland Institute's 2009 International Conference on Climate Change.

Czech President Vaclav Klaus was today's marquee speaker. He held nothing back, apparently:

Klaus also warned that powerful rent-seeking groups were riding the global warming alarmism bandwagon all the way to the bank. Rent-seeking occurs when individuals, firms, or organizations attempt to make money by manipulating the regulatory environment rather than by trade and production. Klaus cited firms and non-governmental groups that plan to profit from carbon rationing in the form of emissions permits trading and by deploying highly subsidized solar and wind energy projects.

Climate change may or may not be real; "fixing" it will be especially expensive.

Ecological Knowledge vs. Economic Knowledge

You may remember the name of Dr. John Holdren from an earlier post on this blog. Former summer fellow John Macek had written a letter to the editor in response to Holdren's claim that anyone who doesn't tow the line on global warming is "dangerous."

Now NYT columnist John Tierney is reporting that Obama has named Holdren as his science advisor. Tierney has more on Holdren's troubling past here.

It looks like John has more work to do.

Government is not an efficient entrepreneur

Barack Obama thinks that government can pick a winner and his industrial policy suggests that green jobs will help grow the U.S. economy.

At last month's DNC, Obama claimed that he will “invest $150 billion over the next decade in affordable, renewable sources of energy” creating “five million new jobs that pay well and can't ever be outsourced.”

Not so fast with those job numbers says John Stossel who takes on Obama's major premise that government directed "investment" to create Green Jobs is something that he should be proud of. Obama's claim misses the larger point: government is a lousy investor subject to the push and pull of politics.

1.) Stossel reminds us "Alaska Rep. Don Young claimed the infamous "bridge to nowhere" would create jobs." Digging a hole then filling it is also creates jobs, but people would not consider that a benefit.

As BHI research economist Ben Powell has noted numerous times, “Jobs themselves are not a benefit; if they were, workers would be paying their employers for the privilege of working, rather than vice versa! It is the value created by performing those jobs that is the benefit, while doing the job is the cost an individual must pay to obtain a benefit.”

2.) Stossel also questions the idea “that Obama knows how best to 'invest' the $150 billion.” I have always held a firm belief that entrepreneurs invest much better then any politician. The entrepreneur risks their own money, and therefore will suffer any costs of a poor investment, encouraging them to measure the risk very carefully. The government risks my, and your, money so the costs are merely passed onto taxpayers. McCain suffers from the same issue, saying he “will support projects to advance technologies that capture and store carbon emissions,” funded via federal revenue. He is careful to say he is for “support,” as he is against “subsidies." Six one way, half a dozen the other.

Green jobs are touted as a welcome byproduct of climate change legislation. In truth it is taking money out of the private sector and putting it into a government that take a cut. When an indepth look is taken and the hand waving and populist rhetoric has been pushed aside, current climate change strategies that consist of a mixing of heavy handed government regulation often fail to meet the basic criteria of cost-benefit analysis.

More of this line of critique can be found here at BHI:

The Faulty Economics of Colorado's Climate Change Action Plan: A Peer Review

The Economics of Climate Change Legislation in North Carolina

Peer Review: Minnesota Climate Mitigation Action Plan Cost-Benefit Analysis

Solution Lies in the Free Market System

On Monday, John P. Holdren criticized global warming skeptics for challenging the scientific "consensus" around global warming. He also accused skeptics of stalling the political process necessary to combat global warming:

The extent of unfounded skepticism about the disruption of global climate by human-produced greenhouse gases is not just regrettable, it is dangerous. It has delayed - and continues to delay - the development of the political consensus that will be needed if society is to embrace remedies commensurate with the challenge. The science of climate change is telling us that we need to get going. Those who still think this is all a mistake or a hoax need to think again.

The Boston Globe printed my response today.

SKEPTICS OF climate change not only doubt the "scientific consensus" behind global warming but the proposed mechanism to combat global warming.

Supporters of decisive action on climate change assume that the federal government must step in and solve the global warming crisis using a "cap and trade" or carbon tax program. Advocates of these programs do not realize that both these mechanisms will severely hamper economic growth, and neither plan will slow global warming.

The only way to slow global warming is to allow entrepreneurs to create more energy-efficient products and technologies. As the demand for these products grows, entrepreneurs will naturally react to market forces and direct their energies to producing more energy-efficient products at a cheaper cost. Government intervention is not the solution to this problem, the free market is.