Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Biden’s Green Agenda (update), changing the way regulations are made (for the worse), inflation (again), and Australia’s solar rooftops. To sign up for the Capital Note, follow this link.
Biden’s Greenery — Hypocrites, Regulations, Lawyers, and (in time) Less Meat on Your Plate
Say what you will about President Biden, but it does seem that he was serious about the idea that climate policy should infect every level of government, although I am not sure that he used the i-word.
That is clear both from some early decisions (such as rejoining the Paris agreement, withdrawing necessary approvals for the Keystone XL pipeline, and suspending new federal oil and gas leases and drilling permits on public lands) and, of course, some early appointments too, perhaps, most notably that of John Kerry as climate czar (with, in due course presumably, James Taylor in tow as climate troubadour), an appointment that, for all the economic misery that it may entail, will at least be the opportunity for some snark. This, after all, is the Kerry who is so worried about the climate “crisis” that a few years back he bought waterfront property on Martha’s Vineyard, which is, the last time I looked, an island in one of those rising oceans. And, of course, this is the Kerry who, in 2019, flew to accept an environmental award in Iceland by private jet, a moment of peak obliviousness, until that peak was reduced to a molehill by his response to a journalist who asked him if this was quite the thing to do.
White House climate czar John Kerry traveled to Iceland by private jet in 2019 to accept an environmental award and defended his transportation choice to a reporter at the time by calling it, “the only choice for somebody like me.”
Czar Kerry, of course, is in good company. Here’s the Daily Mail with a report (from 2020) on the traveling habits of another royal climate warrior, Prince Charles:
Prince Charles flew 16,000 miles in just 11 days using three private jets and one helicopter before proudly posing with Greta Thunberg in Davos. . . . After an impassioned speech on climate on Wednesday, he took a fourth private jet from Switzerland to Israel.
Those who argue that there is a climate “crisis” (full, and unsurprising, disclosure, I am not one: I am a lukewarmer) might be more convincing if their behavior reflected their claims.
The pity is that there is a way to reconcile, at least partly, the demands of climate warriors with the approach of those who take a rather more measured view of what our planet’s climate risks really might turn out to be. Rather than spend large amounts of money subsidizing technologies that can be rather less effective (and rather more pricey) than advertised (yes, wind turbines, I’m looking at you), it would be better to increase the support given to research alternative or improved energy technologies (by the time they would be ready they would be likely to be far less expensive to install than many of today’s efforts). Meanwhile (this is a point that I have made before, but will keep on making) spend the big bucks on job-intensive infrastructural projects, such as strengthening the defenses of low-lying coastal cities or burying electric cables, that are likely to be only a bad hurricane or, in the case of the underground cabling a severe storm or two away, from paying for themselves whatever the climate may have in store for us. Such a solution should be acceptable to many of those who remain unconvinced that the climate is in quite the state of crisis that is so frequently claimed. Equally, I assume that the saner climate warriors must recognize that adaptation will also have to be a part of their plan too. And meanwhile, yes, look again at nuclear energy. Just don’t build the plants in earthquake zones.
Sadly, I do not think that that is the approach that is going to be taken. The rhetoric has been bleak enough, but changes in the way that the cost-benefit analysis of a new regulation is now going to be calculated (please see Around the Web below) would seem to confirm fears that what lies ahead is a culture of restriction and denial. This may satisfy both the controlling and hairshirt tendencies of many climate warriors, but it will almost certainly not have the impact on the climate that the advocates of such policies claim to believe, either directly, or, through setting a moral example to (checks notes) Beijing, indirectly. It is also hard to see how an economy hobbled by a growing body of poorly assessed (again, please see Around the Web, below) environmental regulation is going to create the right environment for the level of growth that will be necessary to fund the climate mitigation efforts that the climate warriors want to see. Debt, as we will discover soon enough, is not an infinite resource. Nor, for that matter, are taxes.
And just wait until the lawyers get going. With the U.S. rejoining the Paris agreement a case from France is worth noting.
As background (and to oversimplify), the principal parts of the Paris agreement that are legally binding — so far as international law is ever binding — concern a country’s obligation to target emission reductions and then report on its progress. There are no sanctions for failing to meet that target, at least internationally, but, what about domestically?
The Daily Telegraph reports:
A French court has found the state guilty of inaction in fighting climate change in a landmark ruling that environmentalists have dubbed “the case of the century”…In what is seen as “the first major climate trial in France”, judges at the administrative court in Paris ruled on Wednesday that the state had displayed “culpable failure” by not meeting its climate goals. The case is part of a lawsuit launched two years ago by four NGOs, including Greenpeace France and Oxfam France, following an online petition that gathered 2.3 million signatures – the largest in French history, according to the organisers . . .
[The] plaintiffs’ aim was to “compel the State to take all necessary measures to reduce greenhouse gas emissions” to meet the 1.5 degrees Celsius target set by the Paris Agreement, a 2016 pact signed by almost all the world’s countries seeking to limit global warming. France has committed to reducing emissions by 40 per cent by 2030 compared to 1990 levels and to reach carbon neutrality by 2050.
The court ordered the state to pay a symbolic €1 to the NGOs behind the lawsuit for “moral prejudice” due to “culpable failure to respect its commitments in the fight against climate change” . . .
Greenhouse gas emissions in France fell by 0.9 per cent in 2019 whereas the annual fall to meet France’s climate goals should have been 1.5 per cent and 3.2 per cent starting 2025.
Clémentine Baldon, lawyer for the Fondation Nicolas Hulot, a Green NGO and plaintiff, called the ruling “revolutionary” in more ways than one as it recognised “the responsibility of the state” in the climate crisis and that its inaction was henceforth “illegal”.
Also, for the first time the administrative judge recognised that the state was partially responsible for the “ecological prejudice” caused by the harmful build-up of greenhouse gasses in the atmosphere as it had failed to bring those emissions down. However, the court rejected a request for financial compensation as the NGOs had not demonstrated that the ecological prejudice was irreversible in nature…Judges now have a further two months to decide whether to order the Macron administration to take extra measures to honour its commitments. In a separate but similar case in November, France’s top administrative court gave the government a three-month deadline to show it was taking action on global warming . . .
In December 2019, Dutch high court judges found their government had not done enough to protect its citizens from the dangerous effects of climate change, which can “threaten their lives and wellbeing”. To live up to its obligations, the government needs to ensure that CO2 emissions are at least 25 per cent below 1990 levels by the end of 2020, the court said in a final verdict, upholding a 2015 decision by a lower court.
In the UK last January, the Court of Appeal ruled that Chris Grayling, then transport secretary, acted unlawfully by failing to consider the UK’s climate change commitments under the Paris Agreement when he gave the green light for a third runway at Heathrow Airport in 2018. The ruling was, however, overturned by the Supreme Court in December.
Now imagine what will happen in the U.S., this most litigious of societies, with activists and lawyers using the Paris agreement to force the pace of change through the courts rather than the legislatures (quite possibly with the tacit — or even explicit — support of the Biden administration), and, for that matter, using the agreement as an excuse to raise legal challenges to industrial projects of which they disapprove. That is not a recipe either for growth or for democratic accountability.
Oh yes, I couldn’t help noting one rather quaint argument that the French government put forward in its defense:
“A substantial part of this pollution comes from industrial and agricultural activities,” but also from “individual choices and decisions which it is not always possible to influence,” it claimed.
That said, last year, the Daily Telegraph also reported:
[Macron] backed a series of proposals from an environmental citizens’ panel on Monday, including that the French should cut their cheese and meat consumption by 20 per cent.
Meanwhile, in the U.K., prime minister Boris Johnson, the underwhelming leader of the underwhelming Conservatives, a grim and incompetent party of coercive liberals trading under a name that they should give to someone else is, according to the Daily Mail, mulling this:
Families are facing a tax on their lifestyles as Boris Johnson ponders new carbon taxes and charges for Britain that would see higher prices on meat and cheese at the supermarket and on gas for their hobs and boilers at home . . .
No costs have been mooted by Whitehall [shorthand for the British bureaucracy], but recent studies by a team at Oxford University have calculated that surcharges of 40 per cent on beef, 25 per cent on oils, 20 per cent on milk, 15 per cent on lamb and 10 per cent on chicken would reduce emissions and reduce consumption in the way the PM wants.
It would, of course, be a pointlessly destructive exercise, but then that is one thing at which Johnson excels.
If you don’t think that sooner or later something like this will be on the American, uh, menu, then you are more of an optimist than I am. That’s not difficult, but still . . .
Around the Web
The Anti-Science Presidency
President Joe Biden has moved swiftly to rev up the regulatory state by weakening oversight and effectively ending a reality-based assessment of the costs and benefits of federal regulation.
It may have gone largely unnoticed amid a flurry of executive orders Biden has signed since taking office less than two weeks ago, but a January 20 memo from the White House to the “heads of executive departments and agencies” outlines a regulatory framework that will empower federal bureaucrats to count unquantifiable “benefits” when weighing the potential impact of new regulations.
Specifically, Biden instructed those officials to revamp their regulatory review processes to “promote public health and safety, economic growth, social welfare, racial justice, environmental stewardship, human dignity, equity, and the interests of future generations.” The memo also states that the new regime “serves as a tool to affirmatively promote regulations.”
Cowen links to a piece in Reason in which Eric Boehm looks in rather more detail at what these changes will mean, both in themselves, but also with regard to the expansion of the regulatory state.
Biden’s Expansion of the Regulatory State
Boehm examines what allowing bureaucrats to factor in “unqualifiable” benefits might mean:
If a bureaucrat can conceive of a way that new regulations could advance the goals of racial justice or environmental health, those political aims should be counted as benefits — even if they can’t, well, actually be counted.
That’s a recipe for more regulation, and for a less honest assessment of which rules might be worthwhile and which merely make the appropriate gestures to a political agenda . . .
During his first week in office, Biden also abolished a Trump-era rule that imposed some measure of accountability on the federal bureaucracy. In 2017, President Donald Trump’s Executive Order 13777 established regulatory reform officers and task forces at federal agencies. Their job was to ensure compliance with Trump’s other regulatory reforms — including the famous “one-in, two-out” order, which mandates that two regulations be removed for each new rule that was imposed . . .
According to Crews [Clyde Wayne Crews, a vice president at the Competitive Enterprise Institute], who has been tracking the size and power of the federal regulatory state for decades, the Trump administration actually revoked about 3.2 regulations for every new one approved.
Biden wasted no time in scrapping those Trump-era changes, not just removing the “one-in, two-out” policy but also gutting the extra layers of accountability that the administration imposed on the regulatory approval process.
If Biden was serious about modernizing regulatory review in a fair way, that oversight could provide important insight. Removing it suggests that to Crews that Biden is preparing “a new architecture for never-ending, endless regulations.”
Quite how this will be reconciled with the sustained growth that the country needs if it is to emerge from the wreckage that the pandemic has left behind is beyond me.
Another contribution to the inflation debate.
Michael D. Bordo and Mickey D. Levy, writing in the Wall Street Journal:
A few episodes from history stand out as parallels. After World War II, concerns that aggregate demand would slump and the economy would shrink led the Treasury to pressure the Fed to maintain its artificially low interest-rate pegs. Contrary to expectations, a surge of pent up household savings and massive Fed liquidity resulted in strong economic growth, and inflation — up to 15% a year by 1948.
After the relatively flat 1950s, inflation returned in the mid-1960s and depressed economic performance for a decade and a half — an illustration of how money supply ebbs and flows. The Fed accommodated deficit spending for the Vietnam War expansion and Great Society, and President Lyndon B. Johnson pressured the central bank to keep interest rates low. The Fed spent the following years trying to curb the resulting inflation but was reluctant to hike rates out of fear of hurting employment, its true priority. The result was abysmal economic performance with high inflation and unemployment, the opposite of the outcomes predicted by the Phillips curve . . .
Skeptical as I am about much of what is being doing on the (sometimes only supposedly) green front, rooftop solar strikes me as a technology that (where the weather allows: Scotland, don’t try this at home) makes sense (and I will admit that my inner libertarian likes the autonomy that comes with it).
That said, reconciling a high take-up rate on rooftop solar does not come without problems for the preservation of the larger utilities that will (almost certainly) be necessary, something that has been seen, for example, in Germany.
But over to Australia with Nathaniel Bullard from Bloomberg Green:
Australia has hit a notable energy milestone: one in four homes now has rooftop solar panels, more than anywhere else in the world. It also has a notable energy problem: one in four homes now has rooftop solar panels.
Electricity networks require an instantaneous balance of supply and demand. Historically, at least, networks have provided this by adding supply as demand increased. The equation was inherently one-sided. Any asset capable of adding or reducing supply communicated directly with the market operator. There may have been dozens, even hundreds, of power plants in any given network, all interacting in concert to match supply and demand.
Rooftop solar and distributed energy storage changes that equation in a handful of chaos-inducing ways. First, solar on homes adds tens or hundreds of thousands of new (albeit tiny) power generators to the electricity network. Second, those systems turn consumers into producers, pushing electrons back onto the grid when supply exceeds their own personal demands. Third, the market operator has very limited communication with or control over those producers. The market doesn’t so much interact with rooftop solar (or batteries and electric vehicles) as it does react—by absorbing power when there’s excess generation and covering shortfalls when distributed generation falls away.
A market operator can handle that reaction-only relationship at low penetrations of solar, batteries, and electric vehicles. But Australia is now well past that. Its power market today is increasingly unable to do what it needs to in order to operate properly. “Rooftop solar has reached such a high penetration in Australia that it is untenable for networks to maintain a stable grid and power market with only limited input from power loads or battery owners,” says Will Edmonds, a Sydney-based analyst for BloombergNEF.
Harnessing these distributed energy resources may provide solutions to the very problems they create. As the Australian Energy Market Operator sees it, things will have to become two-sided. The first step in creating a two-sided market is aggregation of many small distributed generation and storage assets under the control of one entity. This aggregation, in essence, creates a virtual power plant, a single point of contact controlling a significant amount of capacity.
Virtual power plants are not new, and they exist in Australia and in many other power markets. In Australia’s case, virtual power plants are still limited in capability thanks to regulation. If operated by the owners of electricity networks, they can’t provide services to companies that sell electricity; if operated by retailers who sell electricity, they can’t provide services to the network owners.
This is why those in charge of Australia’s electricity system are so keen on creating two-sided markets, with the network owners and retailers being equally able to provide services wherever they’re needed most and to whomever will value them most. This aggregation will hopefully allow for much greater operational flexibility in the near term. Equally important, though, is that it will allow for greater understanding of the long-term implications of even more distributed power generation. The list of objectives for Australia’s first two-sided market, dubbed Project EDGE, includes determining different ways to consider the limits of networks, achieving a deeper understanding of the roles and responsibilities that market participants can play.
Crucially, the pilot should also “demonstrate how to facilitate standardized, scalable and competitive trade of local network services” — in other words, making sure people benefit from participating. Those benefits could take any number of forms, from payments for not generating electricity at times of peak supply to providing stored electrons from a battery when demand exceeds supply, or even delivering excess power for free when supply outruns demand.
Australia’s main energy regulator has it right, I think: markets indeed require standards if they are going to scale; they need scale if they are to be competitive; they need competition if they are to trade; and they need trade in order to provide services. If the trial is successful, it could prove two things. First, power users can play a vital role in stabilizing the decentralized grids of the future. Second, they can make money doing it, with all of the actual work done by the aggregator on the behalf of the user.
As more users sign up, the balance of power in the electricity market is gradually shifting away from large, dirty power plants. In their place are millions of properly rewarded buyers and sellers, plus a better-functioning electricity system.
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