The International Conference on Climate Change - Part III

Your humble correspondent was in Washington last week to cover the most recent (Third) International Conference on Climate Change, which was organized by the Heartland Institute.

This is the second in what will be a series of reports on the event; you can find Part I here, and Part II here.

As foreshadowed on Wednesday, in this part we’ll look at economic issues – with comments from Rep. James Sensenbrenner (R-WI), David Tuerck of the Beacon Hill Institute, and Prof. Gabriel Calzada of King Juan Carlos University in Spain.

More below the fold….

Rep. James Sensenbrenner (R-WI) had just recently returned from China – where he was the lone Republican in the delegation that was led there by Speaker Pelosi during the Memorial Day break. As has been widely reported, Speaker Pelosi made the visit almost entirely about “climate change” issues, and Rep. Sensenbrenner took advantage of the opportunity to ask a few questions of top Chinese officials.

He point-blank asked the Premier and other high officials if they were going to participate in whatever “process” comes out of the big Copenhagen meeting (the successor to Kyoto) in December; he was told by everyone of whom he asked that question that: No, China would not be signing on to any agreements in Copenhagen – they instead plan to set up their own standards and do things their own way. Whatever “mechanisms” come out of Copenhagen, it is clear that China, India, and many other countries simply will be opting not to participate.

Rep. Sensenbrenner’s main fear vis-a-vis the official United States participation in the Copenhagen discussions is that we will sign agreements merely for the sake of signing.

Given these political realities, Rep. Sensenbrenner has concluded that the cap-and-trade plans now being discussed in Congress will be disastrous – since they amount to unilateral economic disarmament.

Rep. Sensenbrenner is from Wisconsin, and a clear political fault line is emerging in the swirl of all of these “cap-and-trade” discussions. The industrial Midwest is home to a disproportionate share of America’s manufacturing employment, and it relies very heavily for base-energy on coal. This region of the country is in the crosshairs of all the “green” efforts that are emerging from Washington.

David Tuerck of the Beacon Hill Institute made a few macro-economic remarks regarding the cap-and-trade proposals.

He first noted that the notion of “green jobs” involves not ab initio creation of jobs – but rather represents a diversion of jobs from one field to another (at best); we’ll come back to this problem below.

The present incarnation of the Waxman-Markey cap-and-trade proposal uses 2005 carbon dioxide emissions as a base; the goal is to mandate regular decreases from this level over time. The reductions are at first rather modest – with a goal of a 3% reduction (from 2005 levels) by 2012. However, after that, the reductions become increasingly draconian – exceeding an 80% reduction by 2050. Exactly what technologies will allow this to be achieved is something that remains unspoken.

The overall economic consequences of this proposal also remain unspoken. By his analysis, the total world cost of the Waxman-Markey cap-and-trade proposal comes out to something like $20 trillion. He also concludes that these proposals (in reality) amount to an enormous-and-growing de facto carbon tax – and that this tax will amount to $714 per emitted ton of carbon dioxide by 2050.

One of the real highlights of this event (and which I leave as the final section of Part III) was the chance to hear the thoughts of Prof. Gabriel Calzada of King Juan Carlos University in Spain.

Prof. Calzada, you might recall, recently led a study of what went on with Spain’s big “green energy drive” (a model frequently held up to us as one to emulate) over the past decade or so; I mentioned this study a couple weeks back in my big essay “Rhapsody in Green,” and to begin I can simply reprise what I wrote there:

The results have been – to say the least – not only disappointing, but very negative. The salient economic highlights are findings that: 1) For every four “green” jobs created, nine other jobs were destroyed; 2) Among those “green” jobs, only 1 in 10 was a real, full-time job. None of this is a surprise; “alternative energy” requires overly-massive use of scarce resources – resources that can only be taken away from better and more productive activities.

The complete report is only 51 pages long, and it begins with a very good executive summary; you can download it here (link goes to a .pdf file).

However, in his Washington remarks, Prof. Calzada discussed matters that went far beyond just the economics and failed-outcomes of the Spanish green energy effort. This is a remarkable and frightening story – a story that we ignore at our own peril.

It’s now easy to forget that until the mid-1970s, Spain was a poor and authoritarian backwater corner of Europe; the steady rise of the Spanish economy – under an open political system – has been a very remarkable story.

However, in 2001, a new commitment was made in Spain – based on a desire to allow the steady economic growth to continue, while somehow at the same time something would allow carbon dioxide emissions to reverse their long-term co-traveling trend and decrease. The same reasoning that was bruited there back-then is what we are now hearing domestically – that the efforts required to effect the reduction of carbon dioxide emissions would create unspecified magic new technologies and large numbers of “green jobs” that would boost the economy. It should have been obvious from the get-go that what was really starting was a rationing system – as resources had to be redirected to less-productive activities and rationed into the required/desired slots.

As is always the case with “alternative” energies, the mother’s-milk was a firehose-torrent of government subsidies. In the Spanish case, according to Prof. Calzada, subsidies for wind power battened a cost-to-create gap that amounted to being de facto 90% above the market price – while the subsidies for solar power amounted to being 575% above the market price. To further the use of this “green electricity,” the Spanish government provided both guaranteed minimum pricing, and a requirement that all generated “green electricity” must be purchased by the utility firms for at least the floor price.

One problem with this sort of thing – and one that “policy-makers” remain all-too-oblivious to (or which they just conveniently ignore) is that when you open a sluice-gate, water will flow where it wants to flow (rather than just where you want it to flow). (In a more apt analogy for certain parts of what follows, it was not kept in mind that if you keep a dirty kitchen…. you will be swarmed with roaches.)

With the lush subsidies and the guaranteed minimum prices, providers of “green” energy quickly discovered that they could make returns on their “investments” (sic?) of 12% – 20%. This of course is the sort of year-over-year return that can only be matched by the likes of Bernie Madoff – which should have been a warning sign about the underlying basis of the whole game.

Thus, it was not a surprise that this “return” caused a stampede into the sector, leading to a “green bubble” economy (or, to be more precise, a “renewable energy bubble”).

Beyond the subsidy-driven mania of the artificially-high returns, even more dangerous and sinister things began to happen.

It doesn’t take much business acumen to note that if you have a guaranteed return of 12% – 20% while interest rates are much lower than those levels, someone has set up a perfect type of arbitrage situation for you to exploit. So, not surprisingly, there was a tremendous rush to borrow as much money as possible – since it was guaranteed that one could, as it were, buy low and sell high. Thus, many (if not most) of the newly-minted (pun intended) “green” energy companies became very, very highly leveraged (that’s finance-speak for “they got themselves into a great deal of debt”) because the rules of the game made it a no-brainer – as long as the bubble didn’t burst.

To make matters worse, by Spanish federal law one had to receive a Spanish government license to produce “green” electricity – mainly because a license was required to be allowed into the part of the game in which produced-power had to be purchased by the utilities. This was the keeping of the dirty kitchen that led to (surprise!) an influx of roaches. With the guaranteed easy returns, there was a stampede for licenses – which led to both a long “line” for licenses and a need for a considerable wait for the issuance of those licenses. This quickly led to a “corruption bubble” as various players tried to get themselves jumped-forward in the line (to be able to get into the money-generating game more quickly), and/or to be allowed into the game when the gate-opening was in doubt.

As a final complication, it was obvious that the “green electricity” that was produced by wind and solar projects was (as noted above) much, much more expensive than electricity produced by various plain-old, plain-old methods – and the utilities were obligated to buy all of the “green” electricity produced at a very high mandated floor price. With all of this “green electricity generation” coming from a blizzard of independent “green” power generators, this put the conventional utilities de facto into the role of middlemen – between the generators and the end-customers.

The normal thing to do in this situation would be the standard (and necessary) practice of passing those inflated costs on to the end-customers. However, the Spanish politicians who had been pushing this whole scheme didn’t want end-user electric rates to rise – since this would make the cost of the “green drive” clear to both individual and industrial users, and would likely touch off a revolt against the whole scheme. So the Spanish government issued IOUs to the utilities, promising to pay them the difference between the price that they needed to charge and the price that they were mandated to charge…. 15 years down the road.

So the utilities found themselves eating enormous losses because they were being forced to buy high and sell low…. and all that they had to show for it was an accumulating pile of IOUs from the Spanish government. It was the mid-2000s, so what did you do? Well, you took all those IOUs to some investment bankers and asked them to “securitize the debt” – in other words, convert that debt into debt instruments that could be marketed, so that (rather than sit there on dead-weight debt) you can generate some cash flow off of that debt. Like many (most?) such debt instruments created during that period (e.g., sub-prime mortgages), there was really no viable cash flow into that debt instrument – and these debt instruments became another pile of “toxic assets” that had had assumed-worth but which eventually found their true worth of basically zero.

This was ultimately a train-wreck waiting to happen, but there was one last problem that kept the whole circus going for just a little longer. As noted above, a key structural problem was that nine of every ten jobs in the “green energy sector” were non-permanent jobs; basically, most of the jobs created were directly related to “installation” (of windmills, solar panels, etc.) – and these jobs could only exist as long as there was continuing growth in the primary installation of such items (the jobs would simply disappear when market-saturation and a steady-state were reached).

So rather than try to carefully diffuse the bubble and bring things carefully back down to earth, the Spanish government was more fearful of the concurrent consequences of massive job losses as “installation employment” wound down. This caused a further growth in subsidies in order to keep installation – and the associated jobs – going.

Taken together, this whole story is one of a pyramid scheme that produced a giant bubble – one that took on a life of its own, to the point that no one had the fortitude to try to wind down (what they had themselves created) in a minimally-damaging fashion.

Instead, pushed by its own weight and by the global economic downturn, the Spanish “green energy bubble” has burst – and rather badly. There have been massive job losses in the green energy sector, as all of those “installation” jobs have now vanished. The underlying collateral damage – hidden by the bubble during its good years – has also been quite high; according to Prof. Calzada’s analysis (as noted above), because of the long-term misallocation of resources, for every four “green” jobs (most of them temporary) created, nine other jobs (most of them real and permanent) were either directly destroyed or simply never came into being. The collateral damage caused by the implosion of the “toxic assets” has also been high. And as a final addition of insult to injury, the lack of investment in good, low-cost energy availability has led to an outflow of employment (particularly in manufacturing) from Spain.

As a consequence of this fiasco, today Spain’s unemployment rate sits just a bit below 18%.

Why the “Spanish model” is still held up (in some quarters) as a model escapes me – on both practical and moral grounds.

As I noted earlier, Prof. Calzada’s presence and remarks were such a highlight that I want to stop there – and let him have the limelight for Part III.

In Part IV, we’ll discuss the thoughts of University of Alabama/Huntsville climatologist Prof. Roy Spencer, some comments from Rep. Dana Rohrbacher (R-CA), and (a RedState exclusive!) cover a few items from my interview and conversation with Steve Milloy – founder of junkscience.com and the author of the recently-issued book, “Green Hell.”