Tag Archives: Obama

The End of Cheap Coal

One of the reasons why the push for Cap and Trade was a good idea was it would not only internalize the cost of carbon emissions, but it would also raise the price of energy created from coal.   With higher prices for kilowatt per hour from coal energy, cleaner energy sources would become competitive.  Currently, cleaner energy sources can barely compete with coal, with exceptions of course.  But if legislation wasn’t going to push up the price of burning coal, then in the long-term, rising international demand would.  That time is now.

In 2009, China has ceased to export coal and has now began to import it.  According to the financial times, in 1993 the same happened to oil.  China’s oil imports exceeded what was being imported and the consequence was a climb in the average oil price, all too well known thanks to oil spiking at $150 a barrel in 2008.  China had been using more oil than it could produce in order to fuel its large amount of economic growth, and oil wasn’t the only commodity.

China isn’t the only player.  India as well as the emerging markets have offered its heavy share of the demand, tipping trade balances toward imports and helping to drive up commodity prices for oil and building materials.   The same is expected for coal.

This is good news for America, which contains the largest coal reserves in the world.  This is also good news for the coal industry, as it will be able to profit from an uptick in prices.

This is not so good for the coal power industry, especially in America.  While the coal industry will benefit in developing nations who have already increased the capacity to burn coal for energy and produce steel from coke, the developed world already faces pressures for pursuing greener technologies instead of burning coal.  And the coal power industry should be scared: the only thing keeping them from not succumbing to the powers of green energy is price, which is now soon to change.  With coal prices higher translating into higher per kilowatt hour energy costs that begin to be on par with greener technologies, the coal power industry will have a tough fight.

Green technologies already have the leg up of being green and renewable.  Obama’s recent moves to push for nuclear energy, which would already be competitive given Obama’s plan, and the ARRA’s subsidizing of renewable resources like wind and solar significantly put the government against the coal power industry.

The government’s backing of renewable energy certainly distorts what the market wants when providing energy, but a needed distortion nonetheless.  The only hope for the coal industry is to level the playing field by either removing green energy subsidies (not likely) or becoming green it self.  The industry’s only hope is going for clean coal. And now, it doesn’t have the luxury of waiting anymore.

Before one says that clean coal isn’t viable, I disagree.  It is possible, given recent developments in innvoation.  I blogged recently about Thomas Friedman’s catch about clean coal:

If you combine CO2 with seawater, or any kind of briny water, you produce CaCO3, calcium carbonate. That is not only the stuff of corals. It is also the same white, pasty goop that appears on your shower head from hard (calcium-rich) water. At its demonstration plant near Santa Cruz, Calif., Calera has developed a process that takes CO2 emissions from a coal- or gas-fired power plant and sprays seawater into it and naturally converts most of the CO2 into calcium carbonate, which is then spray-dried into cement or shaped into little pellets that can be used as concrete aggregates for building walls or highways — instead of letting the CO2 emissions go into the atmosphere and produce climate change.

If this can scale, it would eliminate the need for expensive carbon-sequestration facilities planned to be built alongside coal-fired power plants — and it might actually make the heretofore specious notion of “clean coal” a possibility.

With coal prices expected to rise, you can bet this will scale. With clean coal on the horizon, subsidizing greener technologies won’t be needed anymore or vice versa, coal won’t be dirty anymore. Either way, whether a Cap and Trade bill , favorable legislation towards green technologies or the sheer power of the market was going to force it, switching towards less CO2 intensive energy was inevitable. Now, about those mountain tops…

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Indecision on climate bill dampening economic recovery?

So says Obama. From Real Time Economics:

Senior Obama administration officials say the nation’s economic recovery could stall if Congress doesn’t pass a climate bill this year.

The officials warn that investors are so uncertain about the future cost of emitting greenhouse gases that they are sitting on capital rather than pouring it into “clean” technology, new power plants or energy-intensive manufacturing.

The administration has for months been moving away from advocating climate legislation primarily as an environmental issue and toward a jobs-creation argument. But the comments are a marked shift to a stronger rhetoric: fears of prolonging the recession. The White House says spurring “clean,” or low-greenhouse-gas-emitting energy, can help lay the foundation for the 21st-century U.S. economy.

“Right now there’s a lot of money on the sidelines,” said Energy Secretary Steven Chu. “Capital on hold means investments not being made, investments not being made means jobs not being created,” he said at an Export-Import Bank conference last week.

Companies that could capitalize on a carbon-constrained economy, such as General Electric Co., Alstom SA, Areva, Babcock & Wilcox, a unit of McDermott International, Siemens AG, Chesapeake Energy Corp. and First Solar Inc., say policy clarity will focus investment. So do emitting businesses that will need to adapt, such as American Electric Power Co. and BP PLC.

Ambiguity, however, breeds risk, which begets financiers’ reluctance.

It is an interesting argument. Financial decisions makers will always delay their decisions until some certainty can be had.  But, I don’t think indecision is hampering recovery. I think it is only limiting the potential for growth in clean energy. Nothing should change the outlook for conventional energy because climate change legislation’s aim is to not reduce the amount of conventional energy but reduce carbon. Financial decision makers regarding conventional energy should be much savvier when facing this uncertainty because the room for change is available post investment.  Unless congress is going to enact climate legislation that will completely cripple the conventional energy industry, (it won’t) carbon will be priced should be priced where alternative energy will become competitive.  There is no metric for pricing carbon at it’s value. (Pigovian tax)  Politics determines it.  Cap and trade is the best mechanism for private investment to determine the actual cost of carbon.

What the issue here is, investors wishing to take advantage of more growth in clean energy are waiting on congress to make clean energy more competitive.  So, while indecision is not hampering recovery, it certainly is hampering growth.  And given this comment:

“People need to realize this is a global market for our capital,” GE’s Walsh said. “Our money is going to go where we see long-term certainty … and if Europe has a better framework, that’s where our money’s going to go,” he said.

I would have to say that a climate bill is not an issue of environmentalism anymore. Its about helping new industries compete with a global mindset that may have more forward thinking politicians than America does. So maybe I should retract my comment: Indecision with climate change legislation isn’t hampering our recovery; its hampering our competitiveness with the rest of the world in clean energy.

Senate passes jobs bill

So the Senate just voted on the jobs bill and it is now going to Obama.  I predict with a 99.87% certainty that Obama will pass it, only so that he can push it aside to get political points while getting to bigger business for the next session of congress.  Here is what the bill will offer: (bullet points added, from NYT)

  • …businesses that hire workers who have been jobless for at least 60 days will be exempt from paying the 6.2 percent payroll tax on those employees’ earnings until the end of the year. If those workers stay on for a full year, businesses will also get a $1,000 tax credit. (The employee’s pay would still be subject to the usual personal income taxes.) The business tax breaks would add up to about $15 billion in all.
  • It also provides an extra $20 billion for road and bridge construction and extends the federal highway program through year-end.

And that’s it. $30 billion in corporate tax breaks is soon to follow, which is probably being pushed by Dems in order to compliment the oddly restrictive, albeit mildly effective hiring incentive.

But where is the investment tax credit Obama said he would like to see when he gave his State of the Union address? This bill won’t do much for employment as much as we hope.  Construction spending is only expected to ease some of the pain for construction workers on federal contracts.  Of course I can’t quantify what this will do. (I will look out for it) I know that at this turning point in the economy, with productivity up and a lot of pent up need for hiring, an investment tax credit would definitely stimulate demand.  Weak demand is the reason that’s keeping employment from taking off.

Quick note on GDP rise

It’s a bit late, but I want to comment on it considering it is relatively good news above the surface. For those who didn’t see, the advanced release for GDP in 4th quarter clocked growth at around 5.7%. (here) Considering that this is an advanced release, it will most likely get revised downward later to a more conservative estimate. Why so high? Inventories, mostly, and it is expected that such a growth rate can’t be maintained. ( IHS Global Insight sees growth in 2010 to be around 2.5% – 3.0%)

Beneath the surface there is a nugget of optimism that I want to point out, and that Obama should pay attention to, since timing is critical.  From the BEA release:

Real nonresidential fixed investment increased 2.9 percent in the fourth quarter, in contrast to a decrease of 5.9 percent in the third. Nonresidential structures decreased 15.4 percent, compared with a decrease of 18.4 percent. Equipment and software increased 13.3 percent, compared with an increase of
1.5 percent. Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9 percent.

If you haven’t read previously, I pointed out Greg Mankiw’s belief that an investment tax credit is a great way to spur growth in the economy. I made my case here on Mankiw’s point. Already businesses are seeing that it is profitable in some sectors, notably software, to decide to invest.  As you can see it has spurred tremendous growth for output, which means that demand can only follow.  This in turn will create jobs.  Obama has already indicated an attempt in his State of the Union speech (here) to try and pass a job bill to include an investment tax credit.  Smart move. However, Obama continues to supplant the focus on small businesses when he should be focusing on all sizes.  I am sure not many populists will even notice in order to gain steam against it, because after all, it helps everyone, not just small businesses.   But Obama needs to act quickly if he is going to want to keep growth like this for 2010.  Let’s hope, for something like this at least, that politics don’t get in the way again.

A Case for the Investment Tax Credit

Obama has recently sparked debate about a proposal to spark job creation.  He wants the proposal to include incentives for small businesses to hire more workers, spend more money for infrastructure projects and offer rebates for homeowners who update their homes with energy efficient durable goods and weatherization renovations — that has come to be known as “cash for caulkers.”  The debate around the blog world has included some interesting ideas, including the “cash for caulkers” idea itself and a cut in the minimum wage, which has spurred tremendous uproar in the blogging community for and against it.

One proposal that has caught my eye is the Investment Tax Credit. (ITC) Mankiw has made several good points about the ITC that is well worth looking at.  First, a temporary ITC could help act as a similar mechanism to create negative real interest rates, much like what inflation could do, even though quantitative easing is now out of the question given Bernanke’s recent remarks. Second, like cash-for-clunkers, it would help stimulate AD in the short-run and move AS rightward in the long-run, but broadly so as to not favor a specific industry. And lastly, tax credits usually are a good idea if you want more of something.  Considering how low investment growth is, it would only make sense to target tax credits on something like investment.  If businesses focus on investing, it will help stimulate demand for capital goods, increasing the need for more labor to supply it.

If opponents want to say that this may just stimulate demand for investment in foreign capital goods, I would say that most investment worthy capital goods would be created here in the U.S.  Less value added products that usually come from abroad, if do happen to be purchased, still doesn’t mean that the products wouldn’t go toward future productivity and lower unit costs.  For what its worth, the economics out rightly support the ITC.

To drive the point further, Obama should really listen to what small businesses actually want.  Yes, America wants jobs, but small businesses are not going to hire unless they get what they want first.  While the blogosphere argues over lowering labor costs with the minimum wage, small businesses are asking for something different.   From Peter Crabb:

The latest reading of the National Federation of Independent Business (NFIB) Index of Small Business Optimism was down, but business owners don’t see a lack of bank loans as a problem.Twenty-nine percent of all respondents to the NFIB survey reported they have met their borrowing needs. Nine percent reported problems obtaining financing, which is one point lower than the previous period.

Why are small businesses not desperately seeking more financing? Because they have little reason to invest in their companies. In the survey, only 16 percent said they are making capital-expenditure plans for the next few months. Only 8 percent said the current period is a good time to expand facilities, and only 3 percent think the economy will improve.

Small businesses are not concerned about getting loans for making investment into their companies. In fact, among their chief concerns are:

[From the NFIB report] …we find that when asked to identify the most important problem small-business owners face at this time, poor sales are cited most frequently, high taxes second and government requirements third.

It seems that their chief concern is with demand. Small-businesses don’t necessarily care about making investments right now as they need revenues to catch up first. However, whether or not small business are enticed by an ITC, larger businesses would be. I am sure many companies would be willing to take advantage of it. And the downside? No one takes advantage of it and the treasury account stays the same.

Some more cases for the ITC can be found here and here.

Tire tariff costs U.S. $1.35 billion in lost savings

Tire prices are rising and some analysts are pointing fingers at the Obama administrations 35% tire tariff on Chinese imports.  I had previously vocalized why this was a bad idea: that although the current impact would be small, it could lead to a trade war with China.  Of course with any tariff, there will be a dead weight loss, resulting in a decline of consumer surplus.  So, how have consumers been affected by this? Explicit costs include: (From the AP article)

Under the government’s new tariff, which went into effect in September, a set of Chinese tires that would have cost $280 now cost nearly $100 more.

As well as implicit costs:

Jennifer Stockburger, a tire test engineer for Consumer Reports, says six of the top ten all-season tires recently tested by the magazine were made in China by major manufacturers.

More importantly, the price increases for domestic tires is expected to end up offsetting the tariffs.  Some of the price increases have been caused by an upcoming rise in demand due to an economic recovery and maintenance needs as well as increasing material costs for production.

Lets do a cost-benefit analysis.  17% of the tire market is made up of Chinese tires.  Tire sales for 2008 was around $27 billion, which means that about $4.6 billion is Chinese tires. With an average price of $280 for Chinese tires pre-tariff, the total quantity of Chinese tires sold would amount to 16.4 million.  With a $100 price increase, assuming that domestic tire price increases offset the tariff increase, U.S. consumers are expected to lose out on a net savings of over $1.6 billion.  And that of course does not take into account the implicit cost of quality loss.

The tariff was expected to stop the loss of employment in the U.S. tire industry.  By assuming there would be a benefit of saving 5,000 jobs in the tire industry, even at the median U.S.  income, that only amounts to a very large estimate of over $250 million of saved income.

Therefore, Obama’s tire tariff cost the U.S. over $1.35 billion dollars.  Lets not to mention the sour trade relations he has made with China, and considering how his current trip there went; he has made it even worse.    I hope his political support from the unions was worth it when he goes for re-election in 2012.  It is quite an expensive campaign contribution.

On Dairy Farm Subsidies

Obama just signed a bill of $350 million in emergency subsidies to help dairy farmers get through falling milk prices.  A good op-ed from Edward Lotterman on why it isn’t that simple.  Something to ponder:

Costs are complex, including fixed costs, which do not change with different levels of production, and variable costs that do. Moreover, both fixed and variable costs vary from one region of the country to another. Blanket assertions about what it “costs to produce” milk or corn or anything else may be true for some producers but false for others.

Government programs intended to cover such asserted “costs of production” for farmers as a whole invariably are well above the costs of production for many operators. They ramp up output in response to government-originated profits, thus increasing supply. This drives down market prices, and even more government help is demanded.

Across crop and livestock products, there is a long history of government programs that ratcheted up profits for lower-cost producers and, over the long run, helped drive high-cost producers out of business.

In a way, it seems that no matter what distortion is presented, the market reverts back to equilibrium. The only difference here is that farmers reap large profits from the government when otherwise the economic profits wouldn’t be present. The $350 million the treasury hands over will, in the long run, yield the same outcome.

Is the dairy lobby that strong? Why doesn’t the government take into consideration that a) milk isn’t necessarily a nutritional necessity as much as maybe corn would be (that’s arguable) or b) factor in the unneeded environmental waste caused by over production?

UPDATE (10/27): So dairy farms are effectively handling the oversupply of milk.  In a sad, but necessary, move for the industry, co-ops have ordered that dairy cows be killed in order to bring the milk price up.  So far it has been effective.  If dairy farmers are effectively handling the downturn, then why did we give dairy farmers $350 million?