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Green Paradoxes: How Much Should We Worry?
Ian Lange
I-SEE
About me• University of Washington (Seattle)
– PhD in Economics– Internships with Fisheries Service around salmon
conservation
• U.S. Environmental Protection Agency (Washington, D.C.)– Economist for National Center for Environmental
Economics; Climate Change Division; Office of Solid Waste
• University of Stirling– Director, MSc in Energy Management
Green Paradox (GP)
• Brought into academic and policy discussions by Sinn (2008)
• Fossil fuel suppliers incentive to extract resources is altered by environmental policy– If policy is expected to reduce future profits, the
supplier will want to extract sooner– Like pistons in an engine, when one is
depressed, others pops up
Concerns
• The concern is that an environmental policy would emissions increase (over status quo) in the short term and environmental problems may be exacerbated– Especially w.r.t to carbon dioxide emissions
but also a concern with other pollutants
Goal of Presentation
• Define GP and discuss scenarios where it may occur
• Discuss empirical tests of GP
• Discuss factors which may limit a GP in practice and how enlightened policy may take these into account
Theory of Resource Extraction
• Goes back to Harold Hotelling’s seminal work in 1931– Owners of fossil fuel stocks arbitrage between
expected price increase over time and return on financial assets to maximize profits
– If price will increase slower than expected, extract more now and invest in the financial asset
Types of Policies for GP
• Mathematically, a GP could occur under four types of environmental policy (van der Werf & di Maria, 2011)– Increasing pollution prices– Lag in implementing policy– Policy leakages– Increased subsidy for fossil fuel replacement
technology
Demand Side
• The GP discussion assumes that the demand for the fossil fuel is allowed to expand as prices change
• However, many fossil fuel using industries are limited in how much and how quickly they can respond to price changes
Limiting Factors
• Some examples include:– Economies of Scale in Production– Concurrent Regulations– Structure of the Industry– Procurement Strategies– Sensitivity of Demand to Price– Planning Consent/Permit to Operate– Firm risk aversion w.r.t. new policies
Test of GP• The U.S. Acid Rain Program is used as a
case study for an analysis of policy announcements on non-renewable resources
• Hypotheses tested– Decrease in price– Increased use of coal – Substitution for high sulfur coal over low sulfur
coal
Case Study
• Acid Rain Program of the 1990 Clean Air Act– National cap on SO2 emissions
– Tradable permits to pollute – Phase I 1995-1999: mandatory for 263 dirtiest,
previously unregulated boilers
• Announced in November 1990, implemented in January 1995 for a subset of plants who are the treatment group
Previous Regulation
• US Clean Air Act (CAA) of 1970 & 1977– New boilers subject to binding federal
emissions or technology standards
• These plants have an emissions standard at the same rate as the allocation of permits in Phase II (2000-)
• Subsets of this group act as a control group for our treatment
Test
• How did Phase I plants act in 1991-1994 relative to Phase II plants?
• Phase II plants are the proxy for how Phase I plants would have acted if the Acid Rain Program were not announced
Results
• Some evidence of a green paradox– Prices did seem to fall
• However, no increased use or increase in sulfur content– Except for plants which rely heavily on the spot
market
• Some factors which limit GP tested for– Procurement method and concurrent regulations
seem to be associated with limiting GP
Limiting Factors
• The one test of GP that is available does not find much support
• What factors could be limiting the increased use of fossil fuels on the – Supply side– Demand side
Supply side limiting factor
• Economies of scale in production
• Coal– Surface mining requires large capital
investment that is only worthwhile if operating continuously
– U.S., Australia are biggest surface mining countries
Economies of Scale
• Petroleum – Offshore oil extraction is similar– Riglund et al (2008) show only North America
region can increase rig activity when petroleum prices change
– North America has mainly onshore wells and more flexible subsurface regulations
Demand Limiting Factors• Concurrent regulation
– All fossil fuels emit multiple pollutants, with each one being independently regulated
– Coal• Particulates, Carbon Dioxide, Nitrogen Oxides,
Sulfur Dioxide
– Petroleum• Carbon Dioxide, Volatile Organic Compounds,
Nitorgen Oxides
Concurrent Regulation
• Examples Include– Low Emission Zones in EU– Ambient Air Quality Standards in U.S.
– CO2 Road Tax
– Nitrogen Oxides/Sulfur Dioxide Tradable permit schemes
Structure of Industry• Electricity
– Supply curve is a step-function with each step denoted by different technology thus limiting opportunities to increase production
– Coal is unlikely to displace nuclear or renewables in the merit order due to differences in costs of operating and ability to turn off and on
Structure of Industry
• Petroleum/Gasoline– Refining process can be a bottleneck to
increase gasoline consumption
U.S. Refiner Utilization from EIA
Procurement Strategies
• Many energy firms procure their fossil fuel under relatively long-term forward contract– Coal market averages around 2-3 years in
Europe and 5-7 in US
• Restricts how much an energy firm can alter consumption
Sensitivity of Demand to Price
• Most uses of fossil fuels have low price sensitivity– Electricity (Reiss and White, 2005)– Heat (Davis, 2011)– Vehicle Miles Travelled (Spiller and Stephens,
2012)
• Thus a lower price does not lead to a large increase in use in the short run
Planning/permit to Operate
• Increased use of resource may be limited by inability to site new plants or requirement to disclose compliance plans
• The GP is likely to occur when reduced price of fossil fuels leads to investment in new plants
Risk Aversion
• Firms often limit their actions based on concern for public/regulators reaction– Borenstein et al. (2012) show that regulated
natural gas firms systematically limit their gas trades to ensure less regulatory oversight
– Rose (1997) show that power plants operated with a ‘self-sufficient’ strategy w.r.t Acid Rain Program
Enlightened Policy • May include support for renewables and
electric/hybrid vehicles as this meshes with structure of industry and concurrent regulation limiting factors
• May limit new leases due to the scale economies in the coal and oil industry– GP-related extraction is likely to occur in new
mines/wells
What can this case tell us about climate policy?
• Policy in this analysis concerns acid rain, its outcome can provide information on climate policy– Majority of emissions for both policies from
non-renewable resource– Similar abatement options for both policies
(switching to low-sulfur/carbon coals) – Electric power sector a large percentage of
total emissions for both pollutants– Tradable permits the instrument used/likely to
be used in both cases
Treatment vs Control
• The treatment group is Phase I plants
• The control group varies but generally Phase II plants in states that have a Phase I plant is used– Plants subject to 1977 CAAA (known as
NSPS-Da) are required to have a scrubber thus would have no/little need to respond to Acid Rain Program
Data
• Federal Energy Regulatory Commission Form 423: Monthly Cost and Quality of Fuels for Electric Power Plants– All coal-fired plants bigger than 50 MW– Sample: 1986-1994
• Other data taken from – FERC Form 767– Federal Reserve Economic Data– Energy Information Administration Annual
Energy Review
Heat Statistics
Sulfur Content Statistics
