Banana Republic

As Paul Krugman points out in a post this week, whether or not you are enjoying the current slump in oil prices depends pretty much on where you live, and it's a lesson Austin Knudsen really ought take to heart.

Krugman is a smart guy, but let's face it, this is not rocket science. For most of the world – the part that doesn’t produce and sell the stuff - cheaper oil means lower fuel costs for families and businesses. Wages go farther, profits grow, and it’s all good.*

On the other hand, for the producers – these days we think of Russia, the Bakken, the Tar Sands, OPEC and so forth – declining prices can hurt pretty badly, with just how badly depending on how dependent the economy is on oil production. Krugman offers as a case in point Texas, back in the mid-1980s. At that point about 5% of Texas’s total economic output was attributable to oil production. Then, as now, the economy was recovering from what at the time was the worst recession on record since the Great Depression. Then, as now, the national unemployment rate, while still high, was drifting steadily downward. And then, but even more so than now, there was a sudden, sharp decline in oil prices; in the first six months of 1986, the West Texas Intermediate spot price fell by 58%, from $26 to $11 per barrel.**

The result, for Texas, was very, very bad. Here’s Krugman’s chart, which shows that in 1986, as the US economy was recovering, the unemployment rate in Texas rocketed up, going from well below to well above the national average, where it stayed for several years.

You might think about all this when you read this Missoulian report on the Republican agenda for the 2015 legislative session. According to Austin Knudsen, who Republicans in the House have tapped for Speaker, more resource extraction is at the top of his party’s wish list, apparently because it will create “long-term new wealth.”

This is pretty standard stuff. Republicans, and a few of my fellow Democrats as well, have been saying for years that Montana is a “natural resource state” and that we can secure our economic future by digging up the ground and cutting down trees. But think about it: is placing all our eggs in the one basket of natural resource extraction really all that smart? Should we really, like Texas in 1986, rely for our prosperity on the notorious vagaries of international oil markets?  Should we really invest heavily in digging up and exporting more coal when our biggest potential customer apparently intends to import less of it? Should we blithely assume the world is going to keep on burning the fossil fuels we’re selling, consequences be damned? Does anyone really believe that in a world economy driven by incomprehensibly rapid change in technology and scientific knowledge, sustainable “long-term new wealth” is going to be found in natural resource extraction?

Speaker Knutsen comes from the oil patch, so his sympathies, and those of his party for the well-being of the oil companies that bankroll it, are easily understood. They make Montana sound like a 19^th. century colonial economy, the kind controlled by foreign corporations and local elites with the sole purpose of sending oil or copper or coffee or something off to a hungry imperial power. But come on: If we really care about Montana’s future, can’t we come up with a better vision for it than as a latter day banana republic?

*Well, mostly good. If people respond to lower fuel prices by burning more of the stuff, then we have a problem. Fortunately, in the short run at any rate, that tends not to happen; the demand for oil, as economists like to say, is inelastic.

** For a very useful site for tracking historic crude oil prices, click here.

Bring It!

Sen. Roger Webb popped up in the Missoulian this week, trotting out the usual litany of Republican shibboleths about the EPA’s Clean Power Plan. He says the plan, which will reduce carbon emissions from electrical generation by about 15 percent between now and 2030, is going to cost us an arm and a leg.* It’s going to devastate Montana’s economy. It’s going to drive the price of electricity through the roof.  It’s going to have no significant effect on emissions. It’s…well, you know the drill.  And as you also know if you’ve read my previous posts responding to Steve Daines, Rick Hill, Glenn Opel, Arnold Olsen and Keith Regier, and Bob Lake on this point, there’s not much new here, and it’s probably not worth plowing old ground to show, once again, how wrong headed it all is.

But Webb, who is in line to chair the Montana Senate Energy Committee, does say something that sticks out like a sore thumb. It's this: “Climate change is certainly a problem that we must tackle, but the solution to this problem must be at a cost we can afford… Republicans would prefer to...solve climate change… by focusing on making coal-fired electricity generation even cleaner than it is today”.

For most of us, the idea that “climate change is certainly a problem we must tackle” is hardly a revelation, but for a Montana Republican to acknowledge that fact is almost unheard of. Webb says something here that Daines and Hill and all those other guys just haven’t been able to bring themselves to say. As far as I can see, that’s progress.

But let’s take it up a notch.

If Webb is really serious about wanting cost effective measures to arrest climate change, he should stop attacking the Clean Power Plan and get down to business. Because the plan itself is designed to allow states to figure out how they want to reduce emissions. It doesn’t mandate solar, or wind, or end-use efficiency, or clean coal technology, or nuclear. It says that states can meet emissions reductions targets however they want, using any mix of strategies they chose, working in compacts with other states if that’s to their advantage, and employing cap and trade systems or carbon taxes if they think that will work.

In short, the plan gives states the flexibility to identify and implement the least costly strategy for reducing emissions, and that is what Webb says he wants. If Republicans really believe that the cheapest way to reduce emissions is to make “coal fired electricity generation even cleaner than it is today,” here’s their chance to prove it.

It’s not going to be easy: earlier this year Count on Coal Montana was telling us that carbon capture and storage at power plants is going to be very, very expensive. Now, apparently, it’s the source of our salvation. I guess we’ll just have to see. But whatever they do, Republicans should just bring it. They should stop this incessant whining about the Clean Power Plan and start using it to prove, if that's possible, that they can actually do something about the climate crisis.

* The Clean Power Plan is usually described as reducing emissions from the electrical generating sector by 30 percent between 2005 and 2030. But since half that reduction has already been achieved (for reasons other than the plan itself), we have about a 15 percent reduction to deal with going forward.

Montana's Get-Out-of-Jail-Free Card

When the EPA laid out its plan for reducing carbon emissions from electrical generating plants last June, Montana got something of a get-out-of-jail-free card.

The  EPA’s Clean Power Plan calls on every state to reduce its carbon emissions rate –the amount of carbon it dumps in the atmosphere per megawatt hour of electricity it produces - with some states reducing rates quite a bit and others, like Montana, very little.  Specifically, the EPA wants us to reduce our rate by just 21%, which is less than what’s expected from all but a handful of states, as you can see from the map.* And as the Montana Department of Environmental quality reported in a white paper last month, we can achieve this rate reduction without reducing actual emissions very much at all; Montana’s coal fired power plants can continue to operate much as they have in the past and burn about the same amount of coal.

The DEQ white paper left many of the people who worry a lot about climate change (I’m one of them) mystified and a little disillusioned. How could a plan that was supposed to reduce US emissions by 30%** possibly leave coal unscathed? Why didn’t the EPA expect Montana to do more? And even if the EPA doesn’t think so, shouldn’t we do more anyway? Shouldn’t DEQ design some implementation scenarios that would make that happen?

The answer to the first question is pretty simple: What happens to coal is going to depend mainly on the implementation plans of the states that burn it, rather than the states that dig it out of the ground. Montana does some of both, of course, but a big part of Montana’s coal is sold to other states, and how they decide to control their emissions will determine how much coal they’ll want to buy in the future. There are a lot of unknowns here, but since total US power sector emissions need to decline by about 15% between now and 2030 to meet the EPA goal, it seems safe to conclude that the market for coal – including Montana’s - will contract slowly, but hardly disappear.

Why the EPA expects so little from Montana is a more complicated matter. To determine how much a state could reasonably be expected to reduce its emission rate, the EPA calculated how much the state could take advantage of four different “building blocks,” or strategies, to come up with a best system of emissions reductions (BSER in the jargon). These building blocks – which included more production of renewable energy, greater efficiency both in burning coal and in using electricity, and shifting generation to less polluting natural gas plants – were all ones that the EPA deemed both technically feasible and available at reasonable cost. So the EPA’s goal for Montana – the 21% reduction in our emissions rate – reflects what the agency thinks it’s actually possible for us to do at reasonable cost. And the reason that we are able to do relatively little is that we’re lacking one of the building blocks – the shifting of electrical generation to cleaner natural gas plants – for the simple reason that we have no natural gas plants to shift to.

There is then a method to the EPA’s madness in assigning the wide range of emission rate reductions you see on the map, and it’s this: if you required all states to reduce their emissions equally, some states, among them Montana, would be forced to resort to strategies, such as sequestration, that are believed to be costly and not very reliable. And making some states pay a lot for emissions reductions, while other states could do the job for much less, doesn’t make economic sense.

But bear in mind that the EPA is not requiring that states use only the four building blocks it has identified. On the contrary: a state can employ almost any strategy it wants to hit its emissions reduction target; those possible alternative strategies are what DEQ is running up the flag pole in its white paper. EPA appears to recognize that a top-down, one-size-fits-all BSER, making use of only the four building blocks, will often not be a good match for a particular state, either because it has available some effective, low cost way of reducing emissions that’s not one of the building blocks, or because it is willing to follow a higher cost strategy in order to protect some special interest.  Protecting the coal industry by relying on sequestration would be an example.

DEQ gave us five possible scenarios that would get us to Clean Power Plan compliance, as well as a planning model that lets folks come up with more scenarios of their own. Going forward, there are going to be people who will want us to reject the Clean Power Plan in any way, shape or form, out of hand. The rest of us have to take advantage of the flexibility we have been accorded to come up with a compliance plan that is low cost, equitable and allows us to make a meaningful contribution to reducing emissions and arresting climate change.

* I clipped this map from NERA Economic Consulting’s report, PotentialEnergy Impacts of the EPA Proposed Clean Power Plan.

** This is the EPA’s estimate of the reduction in emissions from the electric power sector that will occur between 2005 and 2030 if the plan is implemented. But because emissions have fallen about 15% since 2005, we are already half way to the EPA’s 2030 goal; the regulations are designed to get us the rest of the way.