NOVEMBER 2007: ECONOMIX
Ripples in the energy pond
BY JOHN
MITCHELL
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Oregon has joined with California, Washington, Arizona,
Utah, New Mexico, British Columbia and Manitoba in a long-term
effort to reduce greenhouse gas emissions to 15% below 2005
levels by 2020. Interest in greenhouse gases and global climate
change has grown with additional warming evidence, celebrity
involvement and graphic pictures of melting glaciers. The
anxiety has merged with concerns about energy security, looming
Iowa caucuses and the perils of dependence on oil supplies,
large portions of which happen to be under lands occupied by
governments that can charitably be described as unfriendly.
To economists, the emission of greenhouse gases is an
externality — an action by one unit that imposes
uncompensated costs or benefits on others. Externalities can be
positive or negative. If you keep up your house, your neighbor
benefits with a nice view and perhaps a higher selling price.
If you discharge waste into a river, people downstream may be
negatively impacted. Greenhouse gas emissions impact climate
change and may harm future generations. The exact impact of the
human contribution is uncertain, but policies are being formed
to reduce the emissions and presumably the impact on future
generations. This assumes that the developing world goes along.
Much of the recent focus on greenhouse gas emissions has been
on power generation and transportation.
The 2007 Oregon Legislature enacted a renewable portfolio
standard for electricity that requires 25% of the electric load
to come from new renewable energy sources by 2025, renewable
being defined as wind, wave, solar, tidal, geothermal, biomass,
new hydro or efficiency upgrades to existing modes. Firms can
meet the standard by building or buying the power or making
payments to be used for conservation.
The legislation primarily impacts Portland General Electric,
Pacific Power and Eugene Water & Electric Board, one of the
state’s consumer-owned utilities. The Energy Information
Administration (EIA) stated in September that 4.7% of
Oregon’s net electricity generation was from renewables
other than hydro, and 65% was hydroelectric. (EIA also said
Oregonians’ electricity costs are about 75% of the
national average.) The magnitude of this policy change is
dramatic, particularly when one starts from a system dominated
by a renewable base.
House Bill 2210 set biofuel requirements for both diesel- and
gasoline-powered vehicles. After production of biodiesel from
sources in Oregon, Washington, Idaho and Montana reaches 5
million gallons annualized, a 2% biodiesel requirement goes
into effect. When production in Oregon reaches 15 million
gallons, a 5% requirement is imposed. For gasoline, a 10%
ethanol requirement goes into effect when production of ethanol
in the state reaches 40 million gallons. The EIA says that in
Oregon, motor gasoline use in 2005 was 1.54 billion gallons
— yes, billion. We are going to need more ethanol.
Lots of young males (and maybe some females) like to throw
rocks in ponds to watch the ripples. The analogy seems
appropriate as we start down the path to reduce emissions and
dependence on fossil fuels. We are in one sense internalizing
the externalities — bearing the costs of our actions.
Portfolio requirements, cap and trade systems and carbon taxes
are ways to increase the relative price of energy by including
some of the external costs. Carbon taxes are explicit
(visible), while cap and trade systems, increased mileage
standards and portfolio requirements are more indirect but move
us in the same direction.
The ripples are just starting. The surge in agricultural
prices in 2007 is in part due to the diversion of farmland into
corn production. The drive to biofuels has linked food
production and energy in a new way.
While eating an ear of corn recently, I could not help
thinking that it could go in my truck. A 10% ethanol
requirement means 45 pounds of corn for a 25-gallon fill-up. In
this corner of the world, we are accustomed to cheap
electricity. At the margin, our capacity increases will be like
that of the rest of the nation as regions seek renewable
sources.
Slogans and sound bites are fun, and politicians can fashion
goals for people long after their own terms end. Changed
relative prices will change behavior. Internalizing the
externalities will mean doing things differently —
from transportation choices, both mode and vehicle, to dwelling
types and location. If we are serious, we will be looking at
windmills, buoys and solar, all of which have different
characteristics for ramping up production to meet peak
loads.
The rocks have been thrown and the ripples are starting. It
promises to be very exciting as we see the generally
underestimated flexibility of the U.S. economy on display.
John Mitchell is a
contributing columnist for Oregon Business
magazine and former chief
economist for US Bancorp.
Have an opinion? E-mail feedback@oregonbusiness.com
