Archive for March, 2014

Incentivize the good and punish the bad. A pretty normal concept that we see used in just about every aspect of life. In the economy, this tool could also be used to improve the way we function as society. A feebate could be one of these tools, and we will explore it through being incorporated with vehicles and transportation.

So what is a feebate? For our purposes, it is a system that would provide a rebate for the purchase of a fuel economy car, and a fee for the purchase of a poor fuel performance car. The idea would be that by utilizing this tool, we could shift the demand of vehicles away from the poor MPG cars to more efficient vehicles. By doing this, we would see a shift in the manufacturing of vehicles as well, and over time the cars we drove would be much more fuel efficient.

In terms of a policy that steps in the try to adjust demand and supply, it is pretty reasonable. I have discussed the pigovian tax for gasoline, which I think is a reasonable policy if implemented slowly over time, but a feebate has some benefits to it over a tax. It does not tax the poor more so than others, which a pigovian tax essentially does. In fact, it can provide a rebate to those that choose to purchase more efficient cars. It also is not a regulation that prevents certain vehicles from existing. If someone wants a Hummer they can still get it, and just pay some additional cost for it.

It can act as a tool to adjust the price signal in the market to increase the incentives for efficient cars. I do want to mention that is not a clear and easy thing to artificially adjust market price signals, but I tend to think that this system would be effective and fairly efficient. France has implemented the system and have seen market shares for efficient vehicles just about double, while the very poor fuel performing fell by even more. The French example also points out a potential issue, in that if rebates are much more predominant than the fee, then we can see a deficit in the program. So the policy needs to be designed with care so that we can facilitate that happening.

Now of course when thinking about this tool, there would have to be a regulation that determines what the efficient rate would be. Also, we would want to think about how often we would need to change the rate. This would be because if the efficient rate was set to 40 MPG, then what would happen as the average car approached that level. Would we want to ratchet up the efficient rate to incentivize the increase in efficiency? While I don’t think it would be perfectly smooth as a policy, I do think it would help to generate large scale manufacturing of efficient cars and in time, we would see some impressive changes in fuel economy which would make a huge difference in our government spending for oil and oil related security. Think about what price would make you think hard about purchasing a efficient car and let me know. Of course, any system would be tiered according to the fee or rebate for different levels of fuel economy. So I’d be interested in your thoughts.

Unstable Oil

Posted: March 29, 2014 in Uncategorized

Oil and security is often discussed in political arenas, typically with some controversy. I have often heard statements of opposition to the notion that security is a valid reason to cur our consumption of oil, and in this post I want to explore some of the facts that we have and look at what the implications could mean.

The United States has consistently spent resources to facilitate some form of structure throughout the Middle East. I am not going to get into whether this is for purely altruistic reasons or whether it is because of our oil greed, both of which are false at the tail ends but are most likely both included in thought processes. What I do want to assert is that if oil was no longer the fuel of the world, I think the costs associated with this would be much less for a number of reasons. An example of this spending would be the the amount spent to intervene in the Persian Gulf during the 1990s. A valuable way to look at this is that if the price of oil we imported from the Gulf would have included the costs of intervening with forces during that time, the price of oil per barrel would have been $77 higher, which is almost 3 times the cost of what we were paying. That is a huge change in price, and I think it is pretty logical to believe that at least some significant portion of all intervention in the region has to do with oil. When we add up the costs that are associated with military in the Gulf along with the oil dependence (not counting the actual cost of oil) it is 1.5 trillion dollars per year. That is a pretty high bill.

An important idea to consider is that much of the power the Gulf countries have is because of oil. Again, I am not asserting all Gulf economic profit is bad, because I don’t believe that. However, it is a large contributor to their power and therefore the cause of instability. Former CIA director, R. James Woolsey, has been on record saying that our spending on oil has funded both sides of the war. That is a depressing thought, but has real implications and should provide some real thought into why cutting oil dependence is so important.

More than that even is the potential threat that exists due to the importance that oil has on economic performance. Is it that far-fetched to think that a terrorist strike could take place on key supplies of world oil? I don’t think so. There have been attacks on important structures, and all it takes is success of one of them to cripple the global economy. For instance the Pentagon ran a study that concluded with saying a small group of people could cut-off roughly three quarters of the eastern US oil supply, in just one night without having to leave Louisiana.

Cutting dependence on oil is a long term goal. But in the short term, and we have improved, we should reduce the dependence on unstable oil as much as possible. It would be great if we could be a self-providing oil nation but even just relying on safer markets would provide some benefits immediately. Canada has been significant with that, as they have provided a significant amount of our imported oil. This is good, and we should continue to try to move in that direction. Comment if you have any insight into the topic and follow me on Twitter @devinxcombs.

Wind Energy Rant

Posted: March 27, 2014 in Uncategorized

This rant is specific to wind energy. We are not focusing on the entire wind energy market, but really just want to take issue with two of the common complaints we are hearing about wind energy. I often hear two ridiculous “barriers” which are 1) the NIMBY and 2) the birds.

Not in my backyard. Really? That is why we don’t want to develop a clean energy market that has experienced significant growth, and is beginning to see some reductions in cost. Cost and effectiveness are good concerns, “having to see a wind turbine out of my window” is terrible. How about the pollution in the air in your backyard? Before I go any further, I want to ¬†point out that there are many different and valid questions for wind energy and that NIMBY is not only a wind energy association, and they do provide good points in other aspects. Now back to the why this is ridiculous. So the defense this can be related to property rights and the value of property both quantitatively and qualitatively. I am not talking about wind farms that are within danger of a home, I can understand that. I am talking about the wind farms that are within sight but out of any physically potential danger. If you are reading this and you romanticize NIMBY please comment and let me know your thoughts. I find it to be a very poor reason to object to wind energy.

The birds. So there is controversy about wind turbines and birds because according to a study by Fish and Wildlife Service about half a million birds are killed each year by turbines. The backlash is that there is a push to limit wind farm growth and to make companies pay fines for these birds dying which of course makes it even more difficult to develop the wind energy market. Do we really want to inhibit wind energy because birds are flying into them? I am not saying it doesn’t matter, but come on. Wind energy is trying to help combat global environmental disasters and we want to sacrifice that for birds. Which by the way, a lot of birds will die if global warming truly does continue like much of science predicts it could. Birds die on power-lines all the time but we still use those. Again, hopefully we figure out a way to help prevent these birds from dying, but don’t let it be something that keeps us from developing wind energy.

There are valid concerns about wind energy and other renewable sources, but these are not some of them. There is nothing wrong with having the view that certain technologies or policies are poor solutions, but I hope that in general as a society we reserve that for some of the more significant problems. If you disagree comment and let me know why.

Price is perhaps the most powerful mechanism in any market based economy. I am not going to spend much time talking about the detailed role of price, but in general we need to understand why it is so important. Price acts as THE signal in the market of relative scarcity given supply and demand. What this means is that a stand-alone price will find the appropriate level to hover around in the market, while having fluctuations in response to changes in the variables. Prices can change for many reasons, but just having this basic understanding of the role of price, we can talk about why fuel subsidies can be a problem.

 

I am going to focus this post on oil subsidies and why we should really think hard about changing what we do. In 2011 the IMF put out a study that 480 Billion dollars were spent on petroleum based subsidies. Now, without getting into the fact that we spend that much money on oil subsidy, that can play a big role in the way that price is supposed to relate the current environment in the market. Remember, price should tell us what is going on.

So for example, if we are running out of oil then we should see that price is going up (decrease in supply), provided that demand in not decreasing at an offsetting amount, and its not. Demand is actually increasing significantly. So we should expect gas prices to increase. Okay, now you might be saying that well they are increasing so what are you talking about. The subsidies we as tax payers are paying for, artificially lower the price we see. Which means that the true signal is not being sent to the market. Why is this so crucial? If the true price was represented in the market then we could respond appropriately to finding alternatives. So as we began to experience a situation in which the price tells us that for one reason or another, gasoline is becoming a problem. This would then provide the incentive for the most powerful tool we have, innovation, to step into the market and look for the solutions.

Maybe you say well we are trying. Okay, yeah we have tried but not to the full capacity that would ensue if the true price was provided. Additionally, we would have vastly different requirements for what is an acceptable alternative, and those alternatives would have more competitiveness in the market without having to provide them with billions of subsidies. This means if we removed subsidies to artificially keep the price down we would not only improve the signals in the market but also reduce the need to subsidize clean and alternative fuels. I think that is a win-win. Comment if you agree or disagree and find me on Twitter @devinxcombs

Pigovian Gasoline

Posted: March 18, 2014 in Uncategorized

Earlier we explored the idea of a pigovian tax and how it can help to compensate for the externalities of some output in the market. In this post I want to look at how this could be used in the form of a gas tax and some of the externalities that could be accounted for.

So obviously this would mean that we are trying to increase the price of gasoline at the pump by increasing the tax on that gas. We currently have a very small tax (in the US) relative to most of the world. For our purposes here, I am not proposing any specific rate and the way in which we would transition the implementation, but rather just look at the potential impacts that the increase could have. Our assumption is that with the increase in price, we would have a decrease in the amount of driving vehicles, and/or see a transition in the type of vehicles manufactured and purchased.

Environmental benefits. In either case, whether we drove less total miles or bought more fuel efficient cars, the environment would see fewer emissions of carbon dioxide, at least from vehicles. We would most likely see this happen due to different reasons, predominantly from the ones I mentioned earlier, that we would have some people drive less and some people would buy more efficient cars and a combination of the two.

We most likely see some regulatory benefits as well. Increasing the gas tax is fairly simple and would not take much in the form of bureacratic control. I think it plausible to think that CAFE regulation could become obsolete and so we could save the government spending for that administrative cost. The tax would provide some revenue and decrease total administrative cost of government regulation. This change in “available” spending could be shifted to more pertinent aspect of our federal budget.

Another benefit, which may be more of an indirect benefit as the assumption would be that pigovian taxes would be used more often, would be a potential for economic growth due to lower income taxes. The idea would be that we could reduce income taxes if we increased the utilization of these consumption taxes. This idea can be debated, but it is certainly a valid concept that deserves thought. Check out this link for some input about the income v. consumption tax idea.

This is not an exhaustive list of possible impacts from a pigovian gas tax, but I think it provides a good initial understanding of how to think of it. We could also take this to look at some of the unintended consequences of this system, which will be for another post. To finish, take a look at the picture and think about that questions. What was your initial association to the question? Did you have more than one? I think it is a great image to generate some real thought into the issue. If after thinking about that question you have some valuable insight, post a comment about it. I’d be interested to see the input.

Rant

Posted: March 14, 2014 in Uncategorized

I think too often the debate over the incorporation of clean energy sources and technology hovers around the idea of global warming. While that argument certainly has its place, I get so tired of hearing conversation coming back to it every time we discuss trying to develop alternate fuel markets. So this post is a bit of a rant, but I think it is worth ranting about.

Global warming, even amongst scientists, can be argued. Fine. The role of human activity on the climate can be argued. Fine. I don’t see why the “controversy” in this means we should be static in our development of energy. I am not a climatologist and do not want to try to speak as one, and so I will leave the scientific debate to those folks. But we can still think of the issue from a risk management and logical perspective.

We know that fossil fuels have harmful emissions, and that these emissions lead to negative externalities, even if global warming is not one of them. We also know that renewable sources are sustainable, and we can become much more energy independent through a larger availability of these sources. We have been aware for decades the role that oil plays in the volatility of international relations, and I think for that reason alone it would be beneficial to evolve our power supply and move away. As I have said, it is a process and so as a initial goal why not aim to be neutral in our oil consumption, or even a net exporter?

We have seen some significant increases in many aspects of our energy usage, from cleaner sources to independent production to efficiency. Renewable energy does not have to be linked to global warming. I want that to be the take away from this post. When we base the reasoning of developing clean energy around global warming, we are automatically losing people due to political sentiment. Renewable energy development has so many benefits, that only looking at it through an often politicized scope, in which we tend to center around global warming, is ridiculous. Developing our renewable sources will continue to clean our living environment, increase the potential supply of fuel (huge benefits in the long run), reduce dependence on foreign volatile markets, etc, and all while developing another industry with potential for billions of dollars and hundreds of thousands of jobs.

I want you to think about all the reasons you have heard that renewable energy is not needed or is a bad idea. How many of those ideas had merit? Or how many were more political? I am not saying there is no reason to question renewable energy, because there are many barriers to developing this industry. The point is that we should be focused on how to develop an industry that will be beneficial if we can develop it, rather than whether or not we should develop it. Of course we should, but we need to figure out the best way to do it.

Pigou and Coase Part 1

Posted: March 12, 2014 in Uncategorized

We explored the externality issues of climate and environmental concerns, and how they are an important factor in the need for clean energy systems. To expand off that idea, I want to take a small look into two topics of economic theory that can be applied to this topic. Ronald Coase and Arthur Pigou are two important figures in the development of economic theory and each has an interesting approach to externality concerns, and both ideas have been implemented in various forms, including energy markets.

 

We will start with Pigou and his idea, known as a pigouvian tax, as a solution to externality issues. You may also know of this by the term “sin tax” and is the idea that we place taxes on a market product that has negative externalities connected to it. If we apply this concept to the energy market and greenhouse gas emissions, this idea would assert that we place an emissions fee that would cover the damage done by the emissions. By applying this fee, we would reset the market price to one that now accounts for the externality. In this case, the externality is negative and so because the price is higher, it helps to decrease the incentive to produce these emissions.

Coase argued a different view of this problem. His theorem asserts that actors will solve the issue in the market as long as 1) property rights are well defined and 2) the transaction costs area low enough to allow for the actors to find an efficient outcome. This theory implies that private markets may act more efficiently than government regulation by allowing market forces to take the leading role and have the actors negotiate and find some level of marginal benefit. If the two conditions are not met, applying this theorem would not be practical as market forces would have a much more difficult time find an efficient outcome. If the costs of bargaining are low and the property rights (in this case the right to emissions) are defined, then the market can facilitate an efficient outcome to this problem. An example of this system playing out is the idea of Cap-and-Trade where the “right to pollute” can be traded amongst firms.

Of course, there is the “cap” side which sets the max on total emissions, and this is not the idea of Coase. Perhaps we should just think of Coase playing out in a similar way to the carbon credits and thereby creating a market for them. But, the cap leads us to the regulatory possibility that we can use as a potential solution. I am not going to speak much on this, some in part because it is fairly straight forward and also because I do not believe regulation is an optimal strategy for us to rely on. This post is our introduction to what I think are the two more valid approaches to dealing with externalities, at least at this point. We will explore them further, but until then, follow me on Twitter @devinxcombs.