Smell the Infrastructure: Climate Price Signals and Picking Winners

Over this morning's coffee I watched some of a youtube'd speech by regulatory economics legend Paul Joskow, in which he addresses energy solutions to climate change.

The remarks wholeheartedly support a carbon price—in Joskow’s words, “letting the rat smell the cheese:” creating incentives to broadly temper energy production and consumption decisions.

In turn, Joskow warns against strictly prescribed government solutions to climate change, noting our national humiliations in coal gasification, nuclear waste disposal, cold fusion, etc.

The comments were made just a couple years ago, but a carbon price is probably no longer on the US political table: HRC’s platform, for example, makes no mention of it. The pursuit of a lid on carbon has gone upstream—as Obama’s Clean Power Plan narrowly targets big power generation—and more fundamentally to the individual states, including our own New York.

At first blush, New York would appear to be a strong adherent to Joskow’s “smell the cheese” approach. In particular, Cuomo’s signature utility policy, REV, attempts to break delivered electricity down into its component price signals (their “LMP+D+E” formulation), whose price of carbon (E) builds on the state’s Pataki-era entry into a milder multistate carbon market (RGGI).

In a different light, however, we are very much indebted to well-picked winners.

New York has the lowest per capita energy-related CO2 emissions of any state. While some of this is certainly due to the past decade’s investment in energy efficiency, it is more certainly due to big government choices, aided massively by geography.

Take New York City: built on a series of islands before the advent of the automobile, the original megacity is doubtless conducive to superefficient population density; but without our world-leading public transit infrastructure, we would be using many more cars to get around.

This same is true, to an even greater extent, in our energy supply.

Some 50% of our in-state generation (71 of 142 terawatt-hours) is green, driven by just a handful of nuclear and hydroelectric plants. Our hydro—the vast majority at 2 plants, Niagara and St. Lawrence—was envisioned by Governors Theodore Roosevelt and Al Smith over a century ago; operationalized by Governor Franklin D in 1931; and took more than 20 years to build (by Robert Moses, under Governor Dewey) in the 1950s. Our nuclear was no market accident either: just 4 plants (3 on Lake Ontario, plus the much-maligned Indian Point) were imagined and winner-picked during the Rockefeller Administration in the 1960s.

Behind the rhetoric, there is winner-picking going on in Cuomo’s REV as well.

The NY-SUN program, for example, sets explicit targets for rooftop PV installation, largely agnostic to the relative cost and benefit of these sources (as compared to say efficiency or utility-scale land-based wind). Despite costing significantly more than other resources, the Administration has carefully developed a case for Offshore Wind. Along these lines, look out for aggressive electrochemical battery incentives / procurement targets at the end of this year.

Perhaps most strikingly, the Cuomo Administration has opted to directly subsidize those Rockefeller-era nuclear plants: a reasonable short-term fix that does not solve the problem of replacing them when the increasingly uneconomic majority of the nukes reach end-of-life (around 2030).

New York has certainly made big mistakes in picking big winners, to wit the doomed Shoreham nuclear plant on Long Island, which forced LILCo’s reverse-privatization (to LIPA) under Cuomo I. Whether Cuomo II’s picks will bear fruit of course remains an open question, too.

I’d guess that price signals, if well-implemented (i.e. not gamed by insiders—a big if!), are the better option, in that we are not so beholden to a handful of big bets. Joskow is certainly thinking of the brilliant performance of price signals in handling acid rain in the 90s (nor am I sure he’d disagree with me here?).

But in general, New York State owes most of its climate assets to winner-picking. In the current political environment—and despite REV's rhetoric—it is worth remembering the historical merits of big bets on infrastructure projects.