Focus On: Eric W. Orts

The Potential Long-run Impact of California’s Cap-and-trade Plan

California’s first auction of greenhouse gas pollution credits is a landmark effort to combat emissions, says Wharton legal studies and business ethics professor Eric W. Orts. The auctions will be held quarterly and are aimed at reducing California’s greenhouse gas emissions by 30% — to 1990 levels — by 2020. The state expects to cut emissions to 80% below 1990 levels by 2050.

“This is a serious program with potentially large long-term implications,” notes Orts, who is also director of Wharton’s Initiative for Global Environmental Leadership. “It is the next biggest experiment in this area behind the European Union’s program.”

Wednesday’s auction by the California Air Resources Board is the culmination of efforts that began in 2006 to put in place a cap-and-trade mechanism to reduce emissions. Under this plan, the state sets a cap on total emissions and enables polluters to meet individual targets through a market to trade in pollution credits. The effort has overcome numerous legal challenges from businesses over the years, including a last-minute lawsuit from the California Chamber of Commerce to stop the auction. Opponents say the auctions are unfair to large businesses and a threat to jobs.

Major industrial facilities — including cement plants, steel mills and refineries — filed bids at the auction, according to a Los Angeles Times report. Results of the auction will be announced Monday. Polluting entities will initially receive 90% of their credits for free to help the businesses meet the costs of compliance. The auctions enable the firms to buy the rights for every additional metric ton of emissions at a floor price of $10 each.

The Golden State’s experience with the program could have “long-run influence,” although it may not prompt other states or countries to follow its path, says Orts. Several U.S. states have mechanisms to tackle emissions. They include the Regional Greenhouse Gas Initiative (RGGI) in the Northeast, involving nine states. By 2018, the RGGI aims to cut carbon dioxide emissions by 10% in the power sector through auctions of “emissions allowances.”

California’s auction may bring some pressure on the Northeast program “and perhaps arguments for a convergence of the two over time will occur,” Orts notes. But the main outcomes he envisions include increased pressure to create a federal climate change program to preempt state programs, and potential changes in business attitudes toward federal regulation.

To sufficiently incentivize businesses to curb emissions, much more than the California experiment will be needed, it appears. “Businesses need to get off the sidelines and engage proactively with government to address climate change in a rational, pragmatic, and efficient manner,” says Orts. “Piecemeal approaches are likely to be worse for business in the long run.”

Orts worries that the risks of climate change may not provide sufficient political incentive for legislative action. Environmental legislation has traditionally required a clear “disaster” or “crisis,” but climate change doesn’t have “easily identifiable disasters,” he notes. He points to fires caused by pollutants in Ohio’s Cuyahoga River in the late 1960s, and the Niagara Falls Love Canal scandal in the 1970s, in which toxic pollutants caused birth defects, nervous disorders and cancers. The Cuyahoga scare led to the creation of the federal Environmental Protection Agency in 1970 and the Clean Water Act in 1972, in addition to other such measures.

However, climate change analysis can help predict long-term increases in temperature or the potential for even larger and more frequent storms, according to Orts. “The very severe weather experienced in the U.S. in the past year just might provide sufficient political incentive and motivation to do something positive legislatively,” he says. He would like to see the federal government move toward adopting a “climate tax” or “climate charge” to address emissions control. A climate tax would provide flexible funding for measures related to both mitigation (e.g., investment in long-term alternative energy technology) and adaptation (e.g., the construction of sea walls to protect New York City and other vulnerable coastal cities), he notes. “Perhaps the time is right for compromise on this issue. Hurricane Sandy has perhaps provided a sufficient object lesson in the kinds of risks that ‘doing nothing’ will have for our long-term future.”

The budget deficit and need for revenue may also provide an opportunity “to move the ball forward” in emissions control, Orts suggests. California, for example, is expected to raise about $1 billion through its cap-and-trade auctions in the first year.

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Is Solar Grid Parity Nearly Here?

Solar energy could become price competitive with fossil-fuel energy sources in some U.S. cities within a couple of years, notes the website Energy Self-Reliant States. The first to hit the mark will be San Diego in 2013, followed by New York City in 2015. By 2018, several additional California cities are projected to join the ranks.

The Institute for Local Self-Reliance (ILSR), which developed the website, has created an interactive map showing by year which metropolitan areas would reach “solar grid parity,” meaning the costs for locally generated solar energy would equal the cost of grid electricity — traditional, remotely generated electricity delivered via transmission lines. “In just seven years, one in six Americans living in major metropolitan areas could lower their electricity bill by installing solar – without any incentives,” according to John F. Farrell, a senior researcher at the ILSR. Below is a static version of the map, showing the U.S. cities where solar energy will reach grid parity by 2027 and be able to serve 156 million people.

You can try the interactive version here.

The solar parity calculations are based on the following:

  • Solar energy costs are assumed to be $4.00 per watt installed.
  • The map uses a grid electricity price based on the average residential retail rate reported by PVWatts for the core city of the metropolitan area cited.
  • The map assumes solar-generation costs fall 7% per year and that grid electricity prices rise 2% per year over the period covered.

Solar will certainly be one important component of an array of energy sources in the future, says Eric W. Orts, Wharton professor of legal studies and business ethics. He agrees that solar energy is close to becoming competitive with coal-generated and other sources of fossil fuel energy in the United States. But the demand for energy is also rising rapidly worldwide, and that may simply make solar an additional, rather than a replacement, energy source. “Coal is still cheap in China, which is building a new coal plant every couple of weeks,” Orts notes.

Read more about the advance of solar energy in this recent Knowledge@Wharton Today article.

Additional related Knowledge@Wharton Articles:

Is China’s Solar Industry Heading for an Eclipse?

An NGO Champions Solar Energy in Egypt

Solar Power Incentives in France: Subsidization without ‘Planification’?

 

 

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Sun Rise Sunset – Solar Energy’s New Day

Solar energy’s contribution to total U.S. energy needs is gathering momentum thanks, in part, to continually falling costs for solar panels. But technical success also makes for a tough competitive environment that has claimed the lives of many solar companies – with more victims likely.

The falling costs recently caught the attention of Paul Krugman, the Nobel Prize-winning columnist at The New York Times. In a recent article, he wrote that solar panel costs have dropped so much that the energy they produce is now priced competitively with fossil fuels in many cases. “We are, or at least we should be, on the cusp of an energy transformation, driven by the rapidly falling cost of solar power.” Krugman also references a recent blog post at Scientific American, which noted “there’s now frequent talk of a ‘Moore’s law’ in solar energy.” (Moore’s law suggests that the amount of computing power that can be placed on an integrated circuit doubles every 18 months.) Inflation-adjusted prices for solar equipment generally are dropping about 7% annually, and solar panel prices fell by about half over the last two years, according to some estimates.

That positive long-term news is partially offset in the short run by shifts in the production landscape, where the rapid advances and lower costs achieved by some firms have outflanked many others. The result: “’Of the few hundred or so solar panel makers worldwide, just 20 to 40 are expected to remain standing in a few years time,’ said Mark Bachman, a renewables analyst at Avian Securities,” according to CNN Money online. The industry shakeout is being driven further by cuts in solar subsidies in some countries – notably in Europe – which face tough budget constraints.

More generally, projected rising energy demands in fast-growing regions such as Asia and Latin America  mean that the use of all forms of energy – fossil fuels and alternatives – will rise rapidly in the furute, notes Eric W. Orts, Wharton professor of legal studies and business ethics. “Solar will be a piece of that.” (Expect oil production also to ramp up over the next few years because, ironically, global warming has opened up vast new areas of the Arctic to oil production.)

One problem facing solar, wind and most other alternative energy sources is that the payoff — or breakeven — period for investments is long term. Venture capital and private equity investors tend to prefer the faster payouts potentially available in, say, social media, notes Orts, who also is director of Wharton’s Initiative for Global Environmental Leadership (IGEL).

Meanwhile, solar energy costs would be competitive today with fossil fuels if all of the external costs of the latter were counted, such as the effects on air and water quality, and ultimately on human health, Orts points out. Because those costs are not priced in, they amount to hidden subsidies, Krugman says. “Economics 101 tells us that an industry imposing large costs on third parties should be required to ‘internalize’ those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production.”

Alternative energy sources typically receive overt government subsidies of various kinds, something that has become a point of contention recently. The biggest controversy involves Solyndra, a solar energy equipment company which recently went bankrupt after receiving $500 million in U.S. subsidies. Solyndra was one of those solar companies that failed because technological successes in the industry swept past them, according to Krugman.

While those opposing subsidies point to Solyndra’s losses as a prime example of why the government should not be picking winners and losers, Orts points out that the U.S. may have to continue subsidies to counter strong competition from China, which most observers say heavily subsidizes its fast-growing solar energy industry. “Solyndra suggests subsidies are a bad thing, and there’s been a lot of focus on one case gone bad. But what about China?” Orts asks. “And if we do choose to fight back that way, challenging China for violating WTO (World Trade Organization) obligations in subsidizing the industry, how does that play into all of this?” Some U.S. solar panel makers have already filed an action against China with the U.S. Commerce Department over alleging subsidies.

The bottom line is that if solar energy is not yet totally competitive, it soon will be, Orts says. “It’s already a significant piece of the mix and will become more so.” Right here at Wharton, for example, there’s been talk of setting up a parking lot that will be wired to recharge electric car batteries via solar panels.

Given the fallout in the solar panel industry, in the short run, the bigger alternative investment opportunity in energy may be energy efficiency, according to Orts. A lot of times, such solutions – such as insulation and heating and air conditioning control – don’t get much attention. “But there have been many advances in new technologies and materials that save lots of money, and venture capital money has found it has a pretty good payoff.”

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