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Valuing demand destruction … critical to understanding value of clean energy action

October 28th, 2009 · 7 Comments

There are many things being lost in the discussion of the cost-benefit equation when it comes to mitigating global warming.

When doing cost-benefit analyses, organizations like the Congressional Budget Office (CBO) and Environmental Protection Agency (EPA) are constrained to consider just one quadrant of what could be considered (in simplified form) the four-quadrant cost-benefit analysis structure:

  1. Cost of action
  2. Benefit of action
  3. Cost of inaction
  4. Benefit of inaction

Writ large, these governmental institutions focus solely on seeking an accounting of the first quadrant, in narrowly defined economic terms. Thus, for example, that reducing fossil fuel pollution will reduce the negative health impacts on the American public is not part of the analysis of climate and clean-energy legislation. (Note that the National Academy of sciences just released a study showing, in 2005 terms, that these health impacts cost the economy at least $120 billion per year.)

In essence, these “externalities” are priced into analyses.  Everything that does not get monetized essentially does get monetized, just at $0.  Thus, what are some of the things that are monetized with a $0 value in the economic analysis of climate legislation?

    Americans’ health

  • Value of beach front property
  • Agricultural productivity
  • Biodiversity
  • New Orleans and other American ports potentially threatened by rising seas and stronger storms
  • And, so on …

Others have identified this problem and provided roadmaps (warning, pdf) for changing the instructions so that analysis captures the real value (and cost) of action (or inaction).

There are other gap arenas in the analysis. If there is a some form of carbon pricing (whether via a Cap & Trade or some form of Carbon Fee (inappropriately called a “carbon tax”), then  “energy prices” in terms of unit costs will go up. This, of course, is a misrepresentation because the real question is the cost of energy services, not the unit price of energy.  With serious focus on efficiency, an element of both the Markey-Waxman bill that passed the House and the Kerry-Boxer bill under consideration in the Senate, total energy costs will fall.  (This is without even considering conservation driven by awareness and, yes, unit costs of energy.)

When analysis focuses on total energy costs for households, for example, this is finding that average households throughout most of the United States would see lower total energy costs due to improved building codes, more efficient appliances,  reduced tax burdens as their local/state government utility bills fall, etc …

This, however, fails to address a more complicated, but potentially more significant, element of the equation.

The impact of reduced demand (due to efficiency and conservation) is not being modeled or seriously discussed (as it wasn’t amid the announcement of new automotive fuel efficiency standards).

If the US drops its demand for oil by 5 million barrels / day (25% or about 6% of global demand) by 2020 (no matter what other countries do), how much lower will oil prices be due to that reduced demand against supply? If it were as low as $5 barrel? That would be savings to US economy of $75 million day if usage (at 15 million barrels / day) and over $27 billion per year. (And, that would be $27 billion of dollars staying the US rather than sent overseas to buy imported oil.) If that demand destruction reduces prices by $10? By $20 barrel?

In other words, the increased “taxes” (or, better term, carbon FEES) could very well be offset by the reduced commodity prices due to reduced demand. This is quite difficult to model with any great confidence and there is the serious question of ‘proving a negative’ (’oil prices would be lower if the US had only continued to strengthen the CAFE standards rather than standing still for 20 years’ — boy, almost certainly true, quite difficult to “prove” to support policy-making). While difficult to “prove” in a model, there is more substance and confidence that can be ascribed to this than screams of job loss (coming from people who helped facilitate the export of US heavy industry to China over the past decade or so …)

A note: We should put aside those who come to the table with explicit agendas, blatantly skewing data to support their perspectives. Notably, this seems to be occur principally with opponents to action. Studies from such groups as NAM/ACCF, Charles River Associates, and the Black  Chamber of Commerce (see here)  simply do not stand up to even cursory examination for statistical flaws and biased inputs into their modeling. (Quite simply, providing textbook examples of GIGO analysis: Garbage-In, Garbage Out.)

Supporters of acting to mitigate Global Warming and avert catastrophic climate change often take ‘conservative’ approaches, seeking to maintain credibility with what they know are understated estimates of the benefits of action.  For example, Mckinsey & Company has done some of the most cited work related to the costs and benefits of energy efficiency and other actions to reduce US emission levels.  They show that the US could move quite aggressively, with an aggregate cost of under $50 per CO2 to meet targets for emissions reductions. Their analysis, however, does not count the benefits of reduced health costs due to lowered pollution nor does it calculate systems of systems benefits (such as if a city’s buildings all have cool roofs, the benefits are not just for each building, but the reduced heat island impact reduces the cooling energy demands for all buildings).  And, perhaps surprisingly for a business consulting form, they do not calculate the productivity improvements that come from greening work spaces (nor the educational benefits from greening educational institutions.)

Turning from analytical / consulting organization like McKinsey  to explicitly advocacy groups  finds similarly constrained analysis.  Greenpeace’s Energy [R]Evolution work also does not monetize the benefits for averting climate change.

Thus, those opposing action on climate change are showing no hesitancy in putting out truthiness-laden misrepresentations of the implications of acting to mitigate catastrophic climate change while those advocating action are, near uniformly, understating the case for action.

Tags: Congress · Energy · Global Warming · analysis · cap and trade · carbon tax · climate change · climate legislation · environmental · government energy policy

7 responses so far ↓

  • 1 Zero Energy Homes // Oct 30, 2009 at 10:56 pm

    One area where the cost of action and the benefit of action make great balance is in Zero Energy Homes. In order to build a Zero Energy Home, it will cost a little more during construction, but when you consider what you will save in monthly energy bills, and how much more of a mortgage you could afford when you are paying zero energy bills, the upgrades will more than pay for themselves. Keep in mind this is considering today’s energy prices. Imagine what will happen when our energy prices continue going through the roof, you will find that building a zero energy home was the smartest decision you ever made.

    If you have some ambition to save some money and be your own builder, you could build your own Zero Energy Home for the same cost as buying a conventional home from a builder. Find out how easy it can be at http:www.GreenHomeCoach.com

  • 2 Inhofe and Republicans are Right: Analysis of Climate Bills is Flawed // Nov 3, 2009 at 12:03 pm

    [...] of action and, in essence, zero focus on the costs and (very limited) benefits of inaction.  The EPA (and CBO and others) does not, for example, calculate the benefits to the economy of reduced fue…. (Basic capitalist equation: supply vs demand. Reducing demand is, functionally, the same as [...]

  • 3 Cooking the Books along with Everything and Everyone Else – After Gutenberg // Nov 8, 2009 at 8:40 am

    [...] of action and, in essence, zero focus on the costs and (very limited) benefits of inaction. The EPA (and CBO and others) inadequately, for example, calculates the benefits to the economy of reduce…. (Basic capitalist equation: supply vs demand. Reducing demand is, functionally, the same as [...]

  • 4 The Power of No Regrets … a reprise … // Dec 11, 2009 at 9:08 am

    [...] reliance on fossil fuels that make absolutely sense before one even accounts for climate change. Mining and drilling for those negawatts and negagallons is the richest set of veins to tap into the United States … 20 years ago and today. And, [...]

  • 5 Climate Sanity and the necessity of Fully-Burdened Cost and Benefit Analysis // Aug 19, 2012 at 5:25 am

    [...] Valuing demand destruction … critical to understanding value of clean energy action [...]

  • 6 Pres. Obama’s Truck Efficiency is a W6+ solution: Win-Win-Win-Win-Win-Win+ // Feb 18, 2014 at 12:36 pm

    [...] basic economic principle: the law of supply and demand.  Reduced demand leads to lower prices.  Lowering US oil demand by 1 million barrels per day will, by definition, foster lower prices than what might have been the case with greater demand. If [...]

  • 7 The Power of No Regrets and Green, Clean Energy Jobs Deniers - CleanTechies // Apr 1, 2014 at 9:39 am

    [...] reliance on fossil fuels that make absolutely sense before one even accounts for climate change . Mining and drilling for those negawatts and negagallons is the richest set of veins to tap into the United States … 20 years ago and today. And, [...]

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