New York Times economics columnist and blogger, Prof. Paul Krugman, has written a very informative article entitled “Building a Green Economy,” for the Times Magazine that is a must read.

In typical Krugman-esque fashion the Nobel Laureate whips through the various issues regarding the subject in rational sequence and clear to understand prose.  His article accurately frames the arguments and lays out the probable choices we all must make.   Along the way he offers explanations for questions that many of his readers probably didn’t know they had.

As for explanations, here’s one regarding the often used phrase  “negative externality.”  It comes under the sub-heading “Environmental econ 101.”

“Now, efficiency isn’t everything. In particular, there is no reason to assume that free markets will deliver an outcome that we consider fair or just. So the case for market efficiency says nothing about whether we should have, say, some form of guaranteed health insurance, aid to the poor and so forth. But the logic of basic economics says that we should try to achieve social goals through “aftermarket” interventions. That is, we should let markets do their job, making efficient use of the nation’s resources, then utilize taxes and transfers to help those whom the market passes by.

But what if a deal between consenting adults imposes costs on people who are not part of the exchange? What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window. So what should we do? Environmental economics is all about answering that question.”

Krugman does a good job of describing the differences between cap and trade policies and direct taxes on carbon usage.  He even has a couple paragraphs explaining Arthur Cecil Pigou’s arguments for taxing economic behaviour that generate negative externalities on others–called Pigovian taxes.

Under the subheading “Climate of Doubt,” Krugman directly confronts global warming critics who dismiss the value of various models used by advocates.

“… if you look at the evidence the right way ­— taking averages over periods long enough to smooth out the fluctuations — the upward trend is unmistakable: each successive decade since the 1970s has been warmer than the one before.

Second, climate models predicted this well in advance, even getting the magnitude of the temperature rise roughly right. While it’s relatively easy to cook up an analysis that matches known data, it is much harder to create a model that accurately forecasts the future. So the fact that climate modelers more than 20 years ago successfully predicted the subsequent global warming gives them enormous credibility.”

As for the costs of various schemes, Krugman doesn’t shy away from specifics.

 ”Just as there is a rough consensus among climate modelers about the likely trajectory of temperatures if we do not act to cut the emissions of greenhouse gases, there is a rough consensus among economic modelers about the costs of action. That general opinion may be summed up as follows: Restricting emissions would slow economic growth — but not by much. The Congressional Budget Office, relying on a survey of models, has concluded that Waxman-Markey “would reduce the projected average annual rate of growth of gross domestic product between 2010 and 2050 by 0.03 to 0.09 percentage points.” That is, it would trim average annual growth to 2.31 percent, at worst, from 2.4 percent. Over all, the Budget Office concludes, strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise.”

And Krugman never hesitates to point out inconsistencies in logic–or worse.

“What you hear from conservative opponents of a climate-change policy, however, is that any attempt to limit emissions would be economically devastating. The Heritage Foundation, for one, responded to Budget Office estimates on Waxman-Markey with a broadside titled, “C.B.O. Grossly Underestimates Costs of Cap and Trade.” The real effects, the foundation said, would be ruinous for families and job creation.

This reaction — this extreme pessimism about the economy’s ability to live with cap and trade — is very much at odds with typical conservative rhetoric. After all, modern conservatives express a deep, almost mystical confidence in the effectiveness of market incentives — Ronald Reagan liked to talk about the “magic of the marketplace.” They believe that the capitalist system can deal with all kinds of limitations, that technology, say, can easily overcome any constraints on growth posed by limited reserves of oil or other natural resources. And yet now they submit that this same private sector is utterly incapable of coping with a limit on overall emissions, even though such a cap would, from the private sector’s point of view, operate very much like a limited supply of a resource, like land. Why don’t they believe that the dynamism of capitalism will spur it to find ways to make do in a world of reduced carbon emissions? Why do they think the marketplace loses its magic as soon as market incentives are invoked in favor of conservation? 

Clearly, conservatives abandon all faith in the ability of markets to cope with climate-change policy because they don’t want government intervention. Their stated pessimism about the cost of climate policy is essentially a political ploy rather than a reasoned economic judgment. The giveaway is the strong tendency of conservative opponents of cap and trade to argue in bad faith. That Heritage Foundation broadside accuses the Congressional Budget Office of making elementary logical errors, but if you actually read the office’s report, it’s clear that the foundation is willfully misreading it. Conservative politicians have been even more shameless. The National Republican Congressional Committee, for example, issued multiple press releases specifically citing a study from M.I.T. as the basis for a claim that cap and trade would cost $3,100 per household, despite repeated attempts by the study’s authors to get out the word that the actual number was only about a quarter as much.”

Krugman recommends being skeptical of sanguine assessments of the “consequences of climate change.” 

“The last time the earth experienced warming at anything like the pace we now expect was during the Paleocene-Eocene Thermal Maximum, about 55 million years ago, when temperatures rose by about 11 degrees Fahrenheit over the course of around 20,000 years (which is a much slower rate than the current pace of warming). That increase was associated with mass extinctions, which, to put it mildly, probably would not be good for living standards.”

So for what scenarios should we prepare?  Which are most likely?  There are many scenarios that are being considered in almost all aspects of this subject.  Here Krugman cuts through all that clutter.

“You might think that this uncertainty weakens the case for action, but it actually strengthens it. As Harvard’s Martin Weitzman has argued in several influential papers, if there is a significant chance of utter catastrophe, that chance — rather than what is most likely to happen — should dominate cost-benefit calculations. And utter catastrophe does look like a realistic possibility, even if it is not the most likely outcome.

Weitzman argues — and I agree — that this risk of catastrophe, rather than the details of cost-benefit calculations, makes the most powerful case for strong climate policy. Current projections of global warming in the absence of action are just too close to the kinds of numbers associated with doomsday scenarios. It would be irresponsible — it’s tempting to say criminally irresponsible — not to step back from what could all too easily turn out to be the edge of a cliff.”

This sounds very much like the concept put forward by “Black Swan” author Nassim Taleb.  One cannot predict when a major earthquake will hit, Taleb points out, but one can know (and thus prepare for) the consequences of a major earthquake. 

Krugman’s article covers other important considerations, among them how to get the rest of the world to go along, particularly developing economies that use a lot of coal, like China.   He writes about the likely costs of imposed by global warming.   And of course he writes about the politics of it all.

All in all a very helpfull article about a very important challenge we’re all about to face in a serious way–even if we do nothing at all.

You can get anything that you want, at Alice’s Internet.  (Apologies to Arlo Guthrie’s song entitled Alice’s Restaurant).

Consider the fossil fuel industries’ efforts to build a “straw man” argument that more jobs will be lost than created by clean energy.  If you’re an anti-clean energy person, the internet will give you studies that argue clean energy is bad, dirty energy is good.

The most recent efforts along these lines comes in the form of a Spanish study here, cited by a right wing outfit called the Western Business Roundtable, described here.

The fossil fuel industries are making a concerted effort to point out the obvious: The more we use clean energy, the fewer fossil fuel jobs there will be.  One set of new jobs will replace the other.  The fossil fuel industry points out that, particularly in these times of economic distress, it may be that in the beginning we’ll lose more fossil fuel jobs than we’ll gain in clean energy jobs, and this can make the Great Recession worse for some folks.

There are a number of problems with these arguments.  For one, none of them establish any direct causal relationship with this substitution effect during a Great Recession.  It may be the recession itself created many of these job losses, and any green jobs created kept a bad situation from being worse.   In the long run as fossil fuel energy declines, the jobs are obviously lost.  But that’s the long run, where it may turn out to be that clean energy jobs will match or exceed those lost from fossil fuel industries.

The arguments don’t address the main policy reasons for clean energy in the first place.  The entire idea is to install a sustainable, clean energy system before we’re hit by fossil fuel energy shortages.  Right now such a system is in its infancy and, of course, it will be more expensive to install and use.  As economies of scale are reached the new system will become cheaper, and as clean energy innovations come on line because of the increasing use of clean energy, the price will decrease even more.  In contrast to this positive clean energy cycle, the old, finite fossil fuels present a negative cycle where fossil fuels will always increase in price, no doubt dramatically as recessed global economies begin to recover.

Rather than write myself the rebuttal to these “studies,” I’ll quote from an article here.

“The problem with their entire line of reasoning here is that they are caught in short-term thinking as opposed to long-term thinking. In the short term, coal may well be the best alternative. But in the long term, given the alarming studies that show that man-made global warming is a major problem, we can’t afford not to switch to a carbon neutral economy. So, the solution here is clear — combine antipoverty problems with efforts to become carbon neutral. That would mean supporting the Employee Free Choice Act, universal healthcare, more money for education, as well as other programs that are designed to lift people out of poverty and into the middle class. These are difficulties that can be worked around, not excuses to ignore the long-term threat to our planet.

The report suggests that some of the jobs lost would be from those in conventional utility industries as a result of a loss of competitiveness. But that is not an excuse to ignore the threat to our planet any more than the horse and buggy industry had a right to complain about the rise of the auto industry at the start of the 20th century. When progress is made in science and technology, some jobs are lost — that is a fact of life. When Copernicus discovered that the Sun was the center of the Solar System, that did the Geocentric earth theorists out of jobs over the next 150 years or so. And all of the church bannings and inquisitions could not put the genie back in the bottle again. What we can’t do is refuse to push for more technological progress just because it might make the coal  industry obsolete. What we can do is to help communities that are economically dependent on coal to get back on their feet and help them find other career paths so that we can minimize the displacement as much as possible.

Now, nobody is suggesting that we should close down all the coal mines in this country tomorrow. But what we have to recognize is that resources like coal are finite resources that are not going to be here forever. That is why, as President Zapatero stated when campaigning for President in 2004, we have to diversify our energy resources. That way, when we do run out of coal, we don’t have the kind of panic that set in when gas prices went to $4 per gallon here. There is a big difference between solar and wind and coal — solar and wind are infinite resources; coal is not. Nuclear is better than coal, but there is only a finite amount of space to store left-over waste. And it is getting increasingly less likely that coal can expand, seeing that more and more places are getting used up and there will be more and more NIMBY opposition to any new so-called “clean” coal plants being built.

And the study, which appeals to guilt by bringing up poverty, fails to take into consideration the benefits that would happen when renewable energy is brought into the equation. Utilities are required to purchase renewable energy. Therefore, if we put solar plants or wind farms in every community in this country, then utilities would purchase any left-over electricity. Cities could own these solar and wind utilities and charge customers like they currently do water and sewer and gas, meaning that there would be a much bigger tax base to work with. That way, local authorities would have a lot more money to do public works projects and thus attract new residents and jobs, growing the tax base.

The study then suggests that renewable energy is subject to boom and bust. But the more one reads their analysis, the more it is clear that the problems with Spain’s boom and bust cycles have nothing to do with renewable energy in and of itself, but with the boom and bust mentality that was part of the Bush years. In other words, if the US government creates a sound financial basis for renewable growth that is not based on out of control debt and which rewards people who live within their means, then we can avoid the problems of boom and bust that have plagued previous efforts.

The study then pans previous studies because of what it claims is anecdotal information. But in fact, there have already been studies which contradict the claims of the Western Business Roundtable. For instance, a study by the Union of Concerned Scientists finds that if we are to go to a 25% alternative energy plan by 2025, then we would create a net 200,000 new jobs as well as 200,000 new jobs total. Jeff Deyette explained the reason for the job creation to the New York Times:

The reason, Mr. Deyette said, is that more expenditures go into manufacturing, equipment, installation and maintenance for renewable energy systems than they do for fossil fuels. “Obviously, the mining sector has become incredibly mechanized in recent years,” he said.

When asked about the flip side of this scenario — that renewable energy could be viewed as inefficient because it required more labor per unit of energy than fossil fuels — he said, “Jobs for dollars is essentially the trade-off there.”

So, we can see right away why the UCS study is superior to the Spanish study — it took into account such things as manufacturing, equipment, installation, and maintenance, while the Spanish study did not.

In addition, green collar jobs in Germany expanded from 160,000 to 240,000 in the last three years and could reach 400,000 by 2020. Also, the total number of green collar jobs around the world is forecast to be 40 million by the year 2020. That is several times the number of jobs that are available now. This means that if you are laid off from work, it might be a good idea to consider pursuing a career in green collar jobs, since it is an industry that is growing, unlike many career fields these days.

Next, the Western Business Roundtable-championed study claims that Spain has only created 50,000 jobs through their renewable program. However, a UNEP study says the figure is 188,000. There is a significant difference between the Spanish study and the UNEP study; the latter takes into account jobs indirectly created as the result of Spain’s investment in green collar jobs. The UNEP study breaks down the job creation; they say that 89,000 jobs have been directly created and 99,000 jobs have been indirectly created by the Spanish government’s investment in renewables. The Spainsh study does not take into account jobs indirectly created as the result of their investment in green jobs; however, it does take into account jobs which they say are indirectly lost as a result of Spain’s investment in the green economy. Thus, they are stacking the deck in favor of their side. Finally, even if we take their job losses at face value and accept their figures, Spain’s investment in renewables has still resulted in a net gain of 80,000 jobs.

But the Western Business Roundtable study continues by oozing “concern” over what they call “capital destruction:”

Public investment in renewable energy has job creation as one of its explicit goals, which, given the current economic crisis, suggests an intention of seeding a future recovery with “green job” subsidies. The problem with this plan is that the resources used to create “green jobs” must be obtained from elsewhere in the economy. Therefore, this type of policy tends to create not just a crowding-out effect but also a net destruction of capital insofar as the investment necessary must be subsidized to a great extent and this is carried out by absorbing or destroying capital from the rest of the economy.

The money spent by the government cannot, once committed to “green jobs”, be consumed or invested by private parties and therefore the jobs that would depend on such consumption and investment will disappear or not be created. Investment in green jobs will only prove convenient if the expense by the public sector is more efficient at generating wealth than the private sector. This would only be possible if public investment were able to be self-financing without having to resort to subsidies, i.e., without needing to absorb wealth generated by the rest of the economy in order to support a production that cannot be justified through the incurred incomes and costs. We have calculated that the total public subsidy in Spain, both spent and committed, totals 28,671 million Euros (€28.7 billion or appx. $37 billion USD), and sustains 50,200 jobs.

The study hammers on the guilt trips here, trying to appeal to guilt. This is an attempt to generate some sort of buyer’s remorse over what might have been. But one could use these sorts of appeals to guilt to pan any kind of government spending; therefore, these appeals are pointless. Secondly of all, it is simply not true that money spent on these projects would no longer generate wealth; the fact of the matter is that workers would spend the money that they got and thus generate wealth that way.

Then, they get into the math. They take the amount of money invested in renewables (around 28 billion euros) and divide it for each worker (50,000) and come up with a subsidy of around 571,000 euros per worker. By way of comparison, they estimate, based on average capital per worker, is 259,000 euros. Therefore, they estimate that for every green collar job that they create, they lose 2.2 workers. But all that is dependent on the accuracy of the 50,000 worker figure. And the problem, as noted above, is that study does not take into account jobs indirectly created by green collar jobs; the UNEP study does and comes up with a much higher figure of 188,000 jobs. So, plugging the much more accurate UNEP figures yields a much different figure — the average capital per worker is 152,805 euros per worker, which means that for every two jobs lost through this program, three are created. And that means that their calculations about worker productivity are similarly off.

The authors of the Spanish study then go on to pronounce judgment on themselves:

This case is similar to the one that French economist Frédéric Bastiat denounced in his famous “Petition by the candle-makers,” in which he ridicules the intentions of protectionist entrepreneurs by comparing them to candle-makers clamoring for the state to crowd-out the sun, which was competing with them unfairly when providing light. In their opinion, if the sun was barred from providing light, numerous jobs would be created in the candle manufacturing industry. Obviously, this is not so: precisely by not being able to profit from the sun’s light we would be wasting scarce resources in the production of candles instead of producing other goods and services that would increase our wealth.

And it works the same way here as well — if the government had passed laws against autos on public roads around the turn of the 20th century, the horse and buggy industry would have survived and millions of jobs would have been saved. Not only is the creation of green collar jobs more efficient than the creation of average jobs, the long term future of our planet demands it as well.

And finally, even the authors of the study admit that the numbers of the Spainish experience can’t be directly translated into the American experience. That is why the UCS study is much more reliable than this one in determining the future of our energy policy, because it takes into account American jobs, not someone else’s situation. And the UCS study suggests that we would stand to gain much more than the Spanish would if we were to implement Obama’s plans for renewable energy here in this country.”

Back to Beezer.  Gearing up to make a massive transition in energy to sustainability will obviously cost a lot of money.  In the Great Recession, the downside is that money is tight.  Jobs in all industries are being lost, that is clear.  But the negative cycle presented by finite fossil fuel supplies, and their substantial exogenous costs in environmental degredation and health care, care nothing of economic cycles.

In short, it isn’t going to be easy.  Nothing as important as this challenge will ever be easy.  The quicker we get the job done, the faster we’ll be able to move forward with clean, reliable and sustainable energy.

Pay me now.  There is no later.

People need some way to compare different energy sources and energy return on investment (EROI) is one popular (although controversial and complicated in estimating) method.

EROI is commonly written as numbers comparing energy input to output.  For example, the numbers 1:1 would mean it took just as many energy inputs to get the identical output–for no net gain.

Here are some sample numbers for various energy sources:

• Oil: anywhere from 10-15:1
• Wind 19:1
• Coal 10:1
• Ethanol 1:1.2
• Hydro 11:1 or greater, sometimes much greater.
• Passive solar, from 5:1 to 10:1

EROI is a very, very rough tool to use, but so far no-one seems to have come up with anything better.  Part of the problem is assessing the negative impacts of any particular energy source.

Hydro can generate huge EROI’s but dams create large reservoirs of still water that have major negative impacts on the environment.  Nuclear EROIs are good, but their negatives are well understood, and quite frankly, more than a little scary.  McCain has called for a nuclear expansion program as part of his energy package and he cites the reliability and cleanliness of nuclear energy.  It is guaranteed that position will run into stiff opposition in Congress.  Nevertheless France, for example, gets something like 80% if its electricity from nukes.  Seven dollar gas might tilt that argument somewhat in McCain’s favor.

Passive solar is pretty good although its main benefit is not electricity production, but reduction in electricity use as residential, industrial and commercial buildings reduce their electric demands for heating, and lighting (negawatts).  Its impact would be huge, however, if a large number of buildings were to be retrofitted and all new construction included  passive solar systems.

Ethanol has lousy EROI, at 1:1.2  And such a low EROI certainly doesn’t justify the impact Ethanol production has had on food prices worldwide.  Research into breaking down cellulose in non-crop plants like switchgrass, instead of using corn or sugar cane, have not met with much success at improving that 1:1.2 number.  This is probably why neither McCain nor Obama have been positive about ethanol.  McCain has said he would eliminate all ethanol subsidies.

Other types of biomass fuels for transportation energy, such as for diesel, have better EROI’s of 3 or 4:1, so they could become part of the transition to all electric transportation.

One thing appears clear:  Renewables are definitely in the game at current oil prices.  As the fundamental supply/demand imbalances with fossil fuels continues and, as a result, prices for those fuels goes up the comparison with renewables will be even more favorable.

What if a barrel of oil contues to drop in price?  Kuwait has pegged their current national budget on oil prices in the mid-$80s, while Russia is expecting slightly more at $90.  Prices have ranged well above $100 recently and don’t show much sign of going below that figure.

If they do go below, however, it presents a conundrum for politicians here in the US and elsewhere because it could take the “gas” out of transitioning away from fossil fuel dependence.  It will take a very brave President, and Congress (brave Congress is an oxymoron, I believe) to impose a tax on fossil fuels in order to keep the transition from slowing.

In the end the diminishing availability, and increasing price, of fossil fuel energy will have its way.  We’ll either be off the stuff, or we will pay a very heavy price indeed.