Posts in Transportation

If there’s one fact to explain our modern energy system, it’s this: America is awash in cheap and plentiful natural gas. Thanks to advancements in hydraulic fracturing and horizontal drilling, natural gas production has risen sharply in the United States, increasing 35 percent since 2005. This boom is causing U.S. utilities to use more natural gas instead of coal to supply the nation’s electricity.

But America’s natural gas revolution is affecting more than the domestic market. It’s also fueling the debate over coal exports. As natural gas displaces coal in the United States, energy companies are looking to export more coal oversees – much of it headed to China and other Asian markets. Doing so requires the approval and construction of several new coal export terminals on the Pacific coast.

Environmental groups, for the most part, have opposed U.S. coal exports over concerns about their effect on climate change. Last week, Oregon officials rejected a permit to construct a terminal that would export 8.8 million tons of coal each year – mostly over local environmental concerns. Several larger terminals, however, still await approval.

How would these additional U.S. coal exports impact climate change? It’s not so simple, says Frank Wolak, a 2014 PERC Lone Mountain Fellow. Wolak is a professor of economics at Stanford University, where he is also the director of the Program on Energy and Sustainable Development. He has published extensively on competition and regulation in energy and environmental markets. We asked Prof. Wolak about coal exports during his research fellowship at PERC this summer. Some of his answers may surprise you.

Q: Over the past several years, U.S. natural gas prices have plummeted, causing electric utilities to shift to using more natural gas-fired generators instead of coal. What has the U.S. natural gas revolution meant for the rest of the world?

A: Because there are no liquefied natural gas (LNG) export facilities currently operating in the United States, this natural gas is trapped in the United States until at least one of the export facilities currently under construction begins operation. As a result, current prices of natural gas in Europe are 2 to 3 times higher than those in the United States, and LNG prices in Asia are 3 to 4 times U.S. prices. However, the shale gas revolution and resulting decline in domestic natural gas prices has led to a significant decline of coal use in the U.S. electricity sector, which has led to a decline in domestic coal prices. These lower coal prices have contributed to increased U.S. coal exports to Europe and Asia.

Q: You have argued that U.S. coal exports to China and other countries will actually reduce greenhouse gas emissions globally. Why is that?

A: I have argued that expanding western U.S. port capacity to allow a significant increase in exports of Powder River Basin coal to Asia will likely lead to reduced global greenhouse gas emissions. This argument relies on the fact that China has virtually no natural gas-fired electricity generation units and a limited amount of nuclear, hydroelectric, and wind generation units. However, China currently obtains more than 80 percent of its electricity from coal-fired generation units. During each of the past ten years, China built more than the installed generation capacity of California—approximately 60 gigawatts—in new coal-fired power plants. These generation facilities have a useful life of more than 30 years, so China’s demand for coal is unlikely to decline in the foreseeable future.

Although there is plenty of coal available in Indonesia, Australia, and South Africa to meet China’s and the rest of Asia’s imported coal needs, increasing western U.S. port capacity can allow a significant amount of Powder River Basin coal to be sold in Asia. The increase in U.S. coal demand caused by these exports will increase domestic coal prices and further increase the relative price of producing electricity from coal relative to natural gas in the United States. Consequently, increased coal exports to Asia will yield no net change in greenhouse gas emissions from China and other Asian countries. Instead, they will yield a reduction in U.S. greenhouse gas emissions because of the shift from coal to natural gas-fired generation brought about by the higher U.S. coal prices caused by the substantially higher coal exports to Asia.

Q: Some say that blocking coal exports would keep U.S. coal reserves underground and therefore reduce global carbon emissions. Is that not the case?

A: The total amount of coal consumed globally is a major driver of global greenhouse gas emissions. Over the past decade, coal has been the world’s fastest growing fossil fuel and virtually all of this growth has occurred in developing countries. There is plenty of coal available outside of the United States to meet this rapidly growing global demand. Blocking U.S. coal exports is therefore unlikely to have a noticeable impact on global coal consumption, only the total employment in the U.S. coal sector and port sector.

Q: Others argue that blocking coal exports will encourage China to look for cleaner energy sources or adopt energy efficiency measures. 

A: China already has the most wind generation capacity of any country in the world and the most energy-efficient fleet of coal-fired generation units in the world, largely because the vast majority of these units have been built in the past ten years. It is unrealistic to expect China to abandon its massive investments in coal-fired generation capacity over the past decade, particularly given that there is plenty of coal available to meet its needs for the foreseeable future.

Q: What prevents China and other countries like Australia and Indonesia from switching to natural gas, as the U.S. has done?

A: Currently, China has no significant domestic natural gas supplies. Australia relies primarily on coal-fired generation units, in spite of having significant natural gas reserves, because it also has extremely inexpensive-to-extract brown and black coal reserves.

Asian countries are willing to pay oil-indexed prices for Australia’s natural gas, so very little is currently used to produce electricity. A similar situation exists in Indonesia, which also exports natural gas and coal. This state of affairs could change as these countries attempt to exploit their shale gas reserves.

The U.S. Energy Information Administration estimates that China has even larger shale gas reserves than the United States. Consequently, China could potentially become a major producer and consumer of natural gas if it is able to exploit these reserves.

Q: If China has such large shale gas reserves, what are the prospects for a future natural gas revolution in China – or anywhere else?

A: How fast China will develop its shale gas reserves is anyone’s guess. There are a number of reasons to believe that it will be a slow process. First, shale gas exploration requires significant volumes of water, which is in short supply in China. Second, the property rights regime in China is not as conducive to landowner support of shale gas exploration as they are in the United States. Finally, the geology of China’s shale gas reserves is significantly different from that in the United States.

However, it’s worth noting that Chinese firms are significant partners in a number of U.S. shale gas plays. In addition, virtually all major U.S. oil and gas firms are currently involved in partnerships to develop China’s shale gas reserves.

Q: Where does renewable energy fit into all of this?

A: Wind and solar generation units produce approximately 5 percent of U.S. electricity consumption. In contrast, coal, natural gas, and nuclear generation units produce more than 80 percent of U.S. electricity consumption. At current U.S. coal and natural gas prices, wind and solar technologies cannot compete with natural gas and coal-fired generation units on a levelized cost basis (lifetime average cost per kilowatt-hour) without government support, and it is unclear whether state and federal governments will continue to provide financial support for renewables at current levels. Consequently, it is reasonable to expect that the U.S. electricity sector will continue to depend primarily on fossil fuel generation units.

Editor's Note: Frank Wolak's answers are based on a forthcoming paper with coauthor Michael Miller.

Related articles from PERC:

Gary Libecap, “Three Cheers for Fracking,” Defining Ideas, March 5, 2014

Daniel Benjamin, “The Fracking Revolution,” PERC Reports, February 7, 2013

Shawn Regan and Fred Thomas, “Coal Export Restrictions Harm Tribe and Montana,” Billings Gazette, November 6, 2013

Terry Anderson and Carson Bruno, “Property Rights Save the Environment,” Defining Ideas, May 20, 2014

Ronald Coase, who won the Nobel Prize in Economics for his study of transaction costs and how they influence everything from the size of private companies to society’s rules of legal liability, died in September at the age of 102. The outpouring of remembrances by scholars and students is testament to Coase’s enormous contributions to the fields of law and economics.

But Coase’s insights transcended academia by explaining, usually with refreshing simplicity, the complex machinations of the real world—an exceptional case in which few economists find much pleasure.

As Matt Ridley notes, Coase reminded us that economics is the study of how people actually behave, not how they should behave. Nonetheless, Coase’s teachings did influence private actions and public policy. Rare is the economist whose work doesn’t part rest on the shoulders of the Coase giant.

His proposal for auctioning off rights to the electromagnetic spectrum beat out the resource-wasting approach of government licensing. His theory of the firm influenced organizational structures. And his inquiry into social costs reshaped how policy makers, judges, and property owners think about resource conflicts.

Yesterday’s Bozeman Daily Chronicle featured an example of Coase’s practical relevance. A farm owner near the Bozeman airport filed suit claiming a change in flight plans interfered with her enjoyment of the property, upset her cows, and caused her emotional distress.

In a pre-Coasean world, we might conclude that, because the social costs of the airport’s operations exceeded the private costs, the airport has created something that academic economists used to call an “externality” that must be corrected by government intervention such as a tax, regulation, or court decree.

But Coase showed us that this thinking is destined to crash. Whether the airspace should be used for planes, or kept open for farmers and their cows, depends on the relative values of the two conflicting uses. And he stressed that the ability of the two parties to negotiate a mutually beneficial agreement heavily depended on myriad factors that can often prevent the best solution.

He suggested that government intervention is only necessary when the costs of negotiating are so high that the two parties cannot agree to use the resource efficiently, and he persuaded us that courts are quite good at mimicking the outcomes that costless markets would create; the common law is a powerful social invention.

In this case, the farmer and the airport were able to reach an agreement. As part of a settlement agreement ending the litigation, the airport will buy the land outright from the farmer and the nuisance and resource conflict vanishes.  The airport director explained said the purchase will protect the land from development “that is not compatible with the airport.”

This outcome puts the disputed resource, the airspace, in the hands of the party who valued it most. It also avoids a regulation that would cost the airport more than it paid directly to the farmer. And it leads to lower ticket prices than would be possible under an inefficient regulatory solution.

So, the next time you fly in or out of Bozeman, Montana, remember Ronald Coase and his wisdom about markets as problem solvers and thank him for the discount.

For more on Coase's work, see "Q&A with Steve Medema on the Coase Theorem and Environmental Economics."

by Monica Lucas

A transportation technology is now on the radar claiming it could replace airplanes and cut reliance on fossil fuels. ET3, a company focused on making “evacuated tube travel” a reality, has implemented a 20-year timeline within which engineers believe infrastructure could exist to transport commuters from New York to Beijing in two hours.

According to ET3, evacuated tube travel will use electric motors to propel 6-passenger capsules inside of vacuum-sealed tubes that stretch thousands of miles—from New York to Los Angeles, from Washington D.C. to Beijing. Preliminary maps show the tubes stretching from Alaska to Russia, down through China and India and all the way through Europe to Great Britain. Set up like a highway system, it purports that a capsule will never be more than 15 minutes away from an exit.

Because the technology uses magnetic levitation in a vacuum, air and ground resistance will not slow the capsules down, and energy will not be needed to continue to propel them forward. Once the initial boost of energy is used, the motor does not need to continue to operate. ET3 claims that the motor may be able to recoup the lost energy when the capsule slows down. Since evacuated tube travel is so energy efficient, the majority of the cost comes from building the tube system. ET3 reports that the cost of the tubing is less than that of a four-lane highway and yet will have the carrying capacity of a 32-lane highway. The company claims that because the cost of building the tube system is low it will not require government support.

In the midst of all the talk about the technology, there are concerns regarding the use of eminent domain in attaining the land on which to build the tube system. Because it is land-based, thousands of miles of tubes would have to be placed in strategic areas across multiple continents and countless countries. The company states that it will offer landowners (both public and private) 5% of revenue generated from the land in exchange for a perpetual use right of way. The proposed lines, however, need to be placed over specific routes, making it likely that they will encounter problems gaining access to some property. This raises questions about how ET3 will be able to handle property rights issues as it moves forward.

Currently, talk of the technology is mostly speculative, as there has not yet been a proper test of the system. But if evacuated tube transport becomes a reality in the ways described by ET3, it is an innovation that has the potential to eliminate the need for other transportation means such as airplanes and railroads. It could dramatically increase the speed of transport and reduce energy use associated with transportation—all without government support.  In fact, the company considers bureaucracy to be the biggest obstacle to the success of the project.  

Now with the recent support of Elon Musk, the entrepreneur behind SpaceX, evacuate tube travel has credibility, as Musk has proven his ability to make meaningful progress towards new transportation technologies. Evacuated tube travel seems to be a realistic possibility for the future of long-distance travel and I look forward to its progress. 

Others have commented on President Obama’s decision to punt on the Keystone XL pipeline project.  Ordering additional review pushes the decision past the next election and enables the Administration to evade responsibility should the project ultimately fail.  As those who study environmental law know, delays of this sort are often enough to derail major projects for good — and that’s certainly the outcome some environmentalists anticipate.

The CFR’s Michael Levi suggests environmentalists are being short-sighted, as “the tactics and arguments that have won the day are ultimately as likely to retard clean energy development as they are to thwart dirty fuels.”

oil pipelines are hardly the only pieces of energy infrastructure that will require government approval in coming years. This is particularly true if the United States wants to build a new clean-energy economy.

The country has already seen strong opposition to offshore wind energy in Massachusetts, including from environmental activists and local landowners, on the grounds that it will ruin spectacular ocean views. Solar plants will need to be built in sunny deserts, but local opponents continue to insist that the landscape blight would be intolerable. New long distance transmission lines will have to cross multiple states in order to bring that power to the places that need it most. Once again, though, a patchwork of local concerns and inconsistent state regulation is already making the task exceedingly difficult. . . .

Energy experts often note that it would be impossible to recreate today’s energy infrastructure, given the intensity of opposition to pretty much any new development. The environmentalists’ victory against Keystone XL will only reinforce that judgment. But realizing their broader vision — a low-carbon economy that enhances the nation’s security and helps avoid dangerous climate change — will require defeating the same sort of local opposition that they have just embraced.

Originally posted at The Volokh Conspiracy.