Saturday, 1 December 2012

Developing an Interest in Wind

No one could have guessed that the wind mill would have taken us as far as it has in global energy production. The wind energy industry is attractive to environmentalists and those interested in energy security alike because of its potential to bring countries closer to independence from fossil fuels. N. Hashmi, N. E. Malik, and I. Yousuf explain in an article that wind energy substitutes the harmful emissions generating energy from fossil fuels. Moreover, not having to cool and transport fuel eliminates countless risks and costs, such as the possibilities of spills or the wastage amounting from water cooling systems. The European Wind Energy Association published a paper where it further compares the costs of fuel and the benefits of wind as a substitute. The EWEA explains that the price volatility of electricity is linked to fuel price risks because many power generators use oil, gas, or coal. Imagine a shop owner who already has a significant debt burden and suffers an unexpected price increase in energy costs due to electricity’s price volatility; if he can’t service his loans, he could lose his business, due to the inability to forecast a price hike. Substituting oil and gas energy with even a 10% increase in renewables can save on balance $150 billion in global losses. This is based on the simple principle of diversifying your energy portfolio to spread risk.

Moreover, an indigenous source of energy that takes advantage of natural resources in a nondestructive manner is extremely important for developing countries. The Hydrocarbon Institute of Pakistan states that there is approximately 15,903 MW of total power generation capacity in Pakistan, with 65% of that power originating from fossil fuels. Irfan Mirza, Sana Ahmed, and M. Shahid Khlil argue that with increasing energy demands and reliance on imported fossil fuels, the competitive power generation capabilities coming from the wind energy sector make renewables very attractive. The Alternative Energy Development Board was introduced to oversee the development of renewables and has set a goal for wind energy to take up 5% of total power generation. This ambitious goal makes sense when considering the vast flat costal terrain within Pakistan, which, when mapped for wind speeds by both the Pakistan Meteorological Department and the National Renewable Energy Laboratories, promises more than 50,000 MW of energy. Of course this statistic is symbolic since energy technology is not that efficient to capitalize on all possible wind energy, but it is certainly representative of the importance of having wind energy in Pakistan’s product mix. As a less developed countries that faces pressures form the international arena to adopt cleaner and more expensive production technologies, it makes sense for Pakistan to look to this untapped market.

But why hasn’t Pakistan capitalized on wind energy? Mirza et al. argue that the issue lies in the lack of infrastructure and competitiveness. They explain that the fossil fuel industries are so heavily subsidized, while wind technology requires relatively higher investment, in both financial terms and human capital. In fact, most of the manufactured goods for wind energy production are imported from abroad at higher costs relative to domestic technology, and there is little technical expertise at home. Moreover, there are high risks associated with wind energy since there is no long term data on wind speeds. Even the data available has failed to meet international standards on proper monitoring techniques, leaving many investors unsure. The combination of high risk and high financial barriers make a socially beneficial market disappear.

In order to address these imperfections in the market and facilitate investment, the government needs to implement effective policies and demonstrate confidence. Mirza et al. argue that risks need to be addressed through continued monitoring of wind speeds, as well as guaranteeing companies that they would receive a certain benchmark amount of revenue, independent of  lower-than-expected wind speeds. Parvez Akhter explains in his paper that such long term energy policies and production targets signal confidence necessary for attracting investment. Moreover, the government needs to stimulate indigenous development of technology in order to eliminate the barriers of financial costs and technical ignorance associated with the current stymied growth. And finally, the government can provide unrestrictive loans and create an incentivizing tax structure for energy companies to easily enter the market.

Seeing the stimulating role that the government can play in encouraging market potential is motivating; as complicated as a government structure may be, focusing on a single policy bundle can leave a dramatic impact. However, these are also the moments that criticism towards the government doesn’t come in the form of an anti-interventionist critique, but, rather, as a critique of corruption and incoordination, especially in countries such as Pakistan. When there is little confidence in government guarantees or the development of effective policies, then many of the benefits of public economics disappear. Perhaps all we need are a few politicians and specific government departments blindly concentrating on wind energy policy, while ignoring the counteracting forces of corruption and incompetence around them, then maybe they may just beat the depressing lack of awareness and momentum for developing renewable energy markets.

Price Distortion in Energy Policy

A lot of economic policy deals with issues relating to efficiency and equity. How can the government facilitate desirable resource allocation along with an equitable distribution of wealth? So in the case of taxes, we impose a progressive tax rate, as opposed to a flat tax, because, when comparing wealth to price levels, those who are better off can give a greater portion of their wealth, compared to those who would can’t pay and actually do the opposite of paying taxes when they instead receive from the government. Of course, the details of this philosophy are subject to a debate on the highly technical levels of the tax code, but the general point is clear.

Unfortunately, equity comes into conflict with efficiency quite often, especially in the case of energy policy. Take the case of Pakistan’s energy subsidies; to give context, Elizabeth Mills explains how the shortfall in Pakistan’s energy supply is a result of failed budgetary and infrastructure related policy, along with mounting energy demand. Projections claim that domestic oil and gas supplies will be exhausted by 2030, meaning that without sufficient funding, Pakistan will increase the frequency of its scheduled power outages to sustain energy supply. Power outages have damaged the textile business and fuel shortages have deteriorated the transportation industry.

With the presence of energy subsidies, Pakistan’s government allows price distortions to deteriorate fuel supplies. So while subsidies for consumers visiting the super market may be good, governments usually protect those farther up the production line, such as farmers using gas for tractors.  In an efficient market, when fuel supplies run short, prices rise to meet the shrinking supply, which leads to a decrease in demand from farmers, thus rationing the amount fuel used. This price mechanism breeds innovation, forcing people to adapt to the pressures of their constraints, thus either developing more efficient production methods for the limited supply of resources or simply adjusting consumption behavior. Contrary to this, unsustainable subsidies breed dependence, provide disincentives to innovate, and have negative transmission effects throughout the economy.

A fair compromise between efficiency and equity may be to target subsidies to end users as opposed to the farmers who receive these subsidies earlier on. Thus, while farmers are subject to the higher prices of fuel and adjust their behavior accordingly, low-income consumers don’t carry the burden of higher food prices. But what about low-income farmers who would face high costs as a result of the government withdrawing subsidies? Vijay Paul Sharma argues that targeting subsidies for these farmers alone would be equitable while maintaining efficiency because the impact of the marginal subsidies would be small, mitigating issues regarding wastage and price distortions.

It’s important to demystify the vagueness of what we mean by policy. While this my pose is a simple analysis of how the government can intervene to affect price distortions, legislators need to expand their scope of policy instruments beyond the few relationships that I’ve discussed. The debate consists of a whole package of reforms that are meant to harmonize with each other, meticulously calculating the effects of these reforms on government expenditure, fuel supplies, productivity, competitiveness, and various markets that aren’t directly related to the industry affected by the reforms. Without this consideration, politicians can promise beyond their means and not realize the detrimental impacts that their actions may have. For example, since energy companies in Pakistan were waiting for subsidies from the government (which they never received because of failed foresight) they ran up a debt to no avail, to the point that they were unable to gain enough funding for the necessary fuel supplies to generate an efficient amount of electricity, which added insult to injury to their poor quality infrastructure. Poor decision making was multiplied when the government decided to contract new rental power plants that would go online relatively quickly to meet increased energy demand. Unfortunately, auditors found that the management of these companies under-produced by ludicrous margins, the difference between 2800 MW of promised energy capacity and the reality of only 800 MW. Suppose now if those funds were used instead to fund the power generators that we mentioned earlier. By releasing these companies from their debt burden, companies could produce fuel to its full efficient capacity, capitalizing on profits and sustaining them to grow while meeting energy demand. More importantly, this expansion of the power-generation sector of the energy industry would signal the industry’s vitality, attracting investment in other areas and helping it grow as a whole.

But it’s not that simple, once again. Money is liquid, especially in government, and when we say that government revenues that went in one direction could have been better served somewhere else, we say so with a level of ignorance to procedure and bureaucracy. And while I present economic policy as a means to efficiency and equity within a society, I understand that this moral narrative falls in the face of an alternative realistic theory, one that believes policy makers, or at least executives, have an incentive to shirk unless held by the constraints of various vested interests. Fortunately, these vested interests are powerful enough to deliver results, which are mutually beneficial, such as when a politician wants to publicize an effective four years of an administration to promote a reelection. Whether these short term constraints can effectively deliver long term solutions, however, is hard to tell. 

Landing In Pakistan

The weather in Pakistan is beautiful. It reminds me of spring, but I’ve been told multiple times that my overconfidence can get me sick. “The cold here chills you to your bones, you never expect it." Of course, I’m not here to enjoy the spring like weather, although that, coupled with the opportunity to develop relationships with my countless long lost relatives, is enough to bring me to the subcontinent. The reason for my visit to spend the next six weeks of my winter break interning at an energy project finance law firm, RIAA, and researching on the energy industry at FC College. While the details of my internships are unclear since I haven't started yet, I know that Pakistan is one of the best places to learn about energy related issues since it suffers from them itself. The first thing that I noticed when arriving was the long lines for CNG vehicles outside gas stations. The lines extended almost thirty cars down, apparently a common site during the winter season, due to low fuel supply. Other anomalies include load shedding, a term used for the daily scheduled power outages which save the quickly depleting supplies for fuel, and a lack of modern domestic heating system, which leave much to be desired when using the bathroom. While I understand that I shouldn’t hold such high expectations on the energy industry’s development in Pakistan, I find it frustrating to realize that all of this happens in the face of huge military expenditures and a rich abundance of undeveloped natural resources. With all of this potential, most of what I’ll be exposed to through client cases at RIAA and research at FC will give me insight into what pioneering an impossible industry looks like. In reality, we can’t label the private sector’s progress with any less commending words, particularly because, in Pakistan, such progress is beating the tide of an impossible and uncoordinated governing body. Here's hoping to sharing and expanding on whatever I learn during my time in Lahore.

Thursday, 22 November 2012

Energy, Agriculture, and Sustainability in India

Beyond a relationship between the environment and energy, there’s a similarly enlightening relationship specifically between energy and agricultural resources, tying back to our earlier discussion regarding agricultural degradation. This relationship can appear complimentary, such as when we use crops to produce biodiesel, or in conflict, such as when energy demands push farmers to adjust their behavior.

Observing the first example, I refer you to a paper presented by Deepak Rajagopal on the production of Jatropha Curcas, a crop used for biofuel in India’s “wastelands”.  Jatropha is a non-edible oil seed crop that is inefficiently farmed, holding not much use outside of biodiesel production. This production ignores the plight of the poor families who reside near the wastelands, for whom the wastelands are not wastelands at all (they receive 25% of their income through its food, fuel, and fodder).  If anything these wastelands should be afforested with climate appropriate crops as opposed to the Jatropha, which can deteriorate the soil further. Rajagopal explains that complimenting this by planting crops such as Sweet Sorghum and Castor, which also hold high oil content and shorter cultivation periods, allows farmers to practice crop rotation between afforesting crops in order to maintain ecological stability.

This forces us to confront major issues surrounding energy security. I find it troubling to realize that under the stress of trying to shift towards energy independence, countries would begin to support destructive environmental practices that don’t make sense in the face of alternatives that both benefit the environment and provide for rising energy demands. This lack of consideration can be pinned to both the inefficiency in government policy (once the government legitimizes Jatropha through legislation, it is difficult to reverse policy) and the labeling of community property resources as “wastelands” (why would an institution go through the pain of reversal for a dead zone).

Other considerations that come to mind include the play between rising food prices and energy independence. While there are benefits to biodiesel production from falling energy costs and higher employment among farmers, food prices are bound to rise as demand for farmland and crops increases with the introduction of energy companies. Interestingly, as demand for food rises and more actors decide to enter the business as farmers, we might notice a rise in quantity of food supplied. This implies that we need more resources to produce that food, which increases demand for water extraction and the energy required to extract that water. Thus, we notice that the reduced energy costs are actually offset later on.

We can observe this trend closely in places like West Bengal, where shifts in energy prices affects the behavior of farmers. Aditi Mukherji explains that when the government feared that its groundwater resource was depleting quickly, probably because of a rise in demand for food products, farmers were hit with high tariffs on electricity and extraction regulation. We find that in doing so, farmers extract less water, use less energy, and create less product. But this points out the dilemma of maintaining the livelihood of those in underdeveloped and impoverished regions while limiting the deterioration of the environment. It seems that policy makers face significant challenges in implementing legislation to address the issues outlined in my last post regarding resource deterioration. Perhaps these are the tough pills that we’ll need to swallow in the coming years, to undo the destructive practice we’ve become so dependent on. The only problem is that I see pay cuts like this unfair, imposed on the poorer farmers who are subject to government tariffs and regulation and, unable to lobby against them. Moreover, these pay cuts are a wildly disproportionate percent of farmers' incomes, compared to the low percentage hits that large companies take for destructive environmental practices. What we are left with is a watered down version of the dilemma that I mentioned earlier: are there sustainable farming practices that can meet the needs of poor families while still maintaining ecological stability?

Tuesday, 20 November 2012

Food for thought for when food runs out

I take some of the responsibility away from myself when I say that I’m merely giving you interesting talking points, not objective world views that you should share with me. I can distance myself from having to make larger statements about serious issues such as climate change, which I hate doing; the very concept of fear mongering ignores legitimate concerns and imposes passion-fed ideas on others.

I guess this is a useful discretionary note to jump into a set of papers that I found on how many ancient civilizations found themselves destroyed at the hands of supposedly man-made ecological change. Consistently, we notice that over production of agricultural resources have caused societies to collapse. For example, R. D. Hansen, who analyzed the archaeological exploration of Petan, Guatemonala, describes the geographic and cultural landscape of ancient settlements in the Mirador Basin through the technically charged reconstruction of past environmental conditions. Hansen attempts to explain the collapse of the once densely populated region, beginning his analysis by noticing that the inhabitants were living under relatively stable conditions until they suddenly faced dramatic changes in population levels. Hansen blames the society’s collapse on man-made environmental effects, specifically with regards to soil erosion, deforestation caused by destructive agricultural production, and the associated growth of the population (which dramatically shot up from over consumption).

We see a similar analysis of unsustainable growth in a paper by James A. Brander and M. Scott Taylor, explaining the “archeological and anthropological mystery” that is Easter Island, infamous for its massive human figure moai statues lining its coasts. Bradner et al. explain that the island was supposedly settled by a group of Polynesians around 400 A.D., under rich resource conditions. With such a generous endowment, the small colony could use wood for tools for various indigenous activities, allowing the society to sustain relatively high productivity levels. With high productivity, the society produces a surplus, which feeds population growth, allowing it to increase in wealth, and eventually support the artisan class that would create the very statues that the island is now famous for. However, unfortunate consequences associated with the growth, such as the islands complete deforestation, insufferable dietary adjustments, and conflict so severe that it brought about cannibalism, all led to the collapse of the society itself.

Interestingly, Brander et al. outline other examples of resource degradation, such as that of ancient Mesopotamia, from the Akkadian Empire, which lasted 200 years, experiencing major soil erosion because of agricultural over production, to the Ur Dynasty, which couldn’t even use irrigation to counteract erosion because it just further destroyed the soil. By 1200 A.D., Mesopotamia’s only inhabitable land was left to 5% of the original region.

One would argue that these civilizations were unable to adapt because they left their destructive practices unchecked, that their behavior (and the consequences of that behavior) were difficult to detect, and that they made things worse by using counter-productive solutions (in the case of Easter Island, the inhabitants proceeded to tip over their statues as a form of “religious revolution” with no avail). What’s more is that this discussion can’t possibly have a connection to today’s debate, where our conversation on climate change concentrates on ozone depletion, global warming, carbon emissions, etc. While my knowledge of climate issues doesn’t extend into modern agricultural resource degradation, I agree that these ancient examples aren’t directly relevant, but certainly shouldn’t be dismissed. I find the current energy crisis, growing frequency of natural disasters, and all the associated geopolitical tensions resembling what many of our ancestors faced. Fortunately, we also have tools ranging from scientific models to warn of our destructive behavior, to environmental policy, such as property rights or environmental taxation. Economics, which means “management of a household, administration” in Ancient Greek, has a huge role to play in managing these tools and finding ways to get actors to hold socially optimal behavior. Let me give you one last example of how this can come into play. Joseph Tainter writes in his book about the demise of the Chacoan people in the early 1000’s A.D. Tainter explains that in the tenth century the Chacoan population in the San Juan Basin of the US Southwest was a complex community, with various economic linkages across the Chaco Canyon, spreading risks across a network that pooled resources. While this network provided security from supply volatility, as the network expanded to include communities that provided no value added, the marginal returns from the pool of resources declined to a point that the network became unsustainable; it was a huge resource pool with no diversification that essentially grew so large that it offset its original benefit. While the Chacoan society used to manage supply shocks caused by natural disasters, Tainter argues that the overpopulation and inefficient handling of resources led to the society’s collapse in the face of a moderate drought.

I argue that we suffer a similar plague of undigested information and unorganized large networks.  This is apparent from the lack of engaged concern over issues regarding sustainability, apparent from the inability of risk analysts to predict huge crashes in the finance industry, apparent from the absence of dialogue between various academic departments that have made their literature inaccessible. It’s not that we are working with stone daggers and wooden spears that we can’t rationalize the world around us, but, rather, we simply aren’t liberating the resources that we have to do so.

Monday, 19 November 2012

Why I do what I do

I made this blog in order to explore a budding interest in the environment and energy, with a particular emphasis on economics and sustainability. Since beginning my term at Oxford, I’ve noticed that the most effective way of learning wasn’t by passively reading dense economic textbooks, but rather through writing about those dense concepts, breaking them down, and then processing the residuals. In economics, so much of what we deal with is theory, the building of models, the objectification of anything or anyone as marginal inputs in a larger system. While such a process can be very cold, leaving economists out of touch with the richer aspects of society, it does allow us to quantify the dynamics of destructive systems in order to predict behavior and learn how to adjust it for socially optimal results. I guess that’s the cost of representing Plato’s guardian class. I only kid, but I do hope that this blog provides you with a better sense of the economics behind relevant, pressing topics, if not a few interesting facts to throw around.