America's Changing Energy Landscape 23

ResourcesResources for the Future No. 181 • 2012

The Return of an Can a Stew of Power Is a Carbon Tax OldMichaelHigh-Speed and PorterBattle-Tested Rail at RFF: GenerationIThencentives Future for ofRegulations a theTheDoes Only Next Speculation Good Battle: FriendLookingPassions for the ClearStrongerNatural the Gas SafetyAir? Vehicles Culture ClimateContainingDrive Oil FuturePolicy? Prices? Major “Win-Win” Solution Oil Spills The Clean Air Act New EPA Rules to Reduce Pollutants The Reasons Why 72421 3029 443834 Resources Resources for the Future 1616 P St. NW Washington, DC 20036–1400 202.328.5000 • www.rff.org

Resources is available to individuals and institutions at no cost. To subscribe, email [email protected] or call 202.328.5006.

Officers Phil Sharp, President Edward F. Hand, Vice President for Finance & Administration Lea Harvey, Vice President for Development and Corporate Secretary Molly K. Macauley, Vice President for Research

Board of Directors W. Bowman Cutter, Chair John M. Deutch and Frank E. Loy, Vice Chairs Lawrence H. Linden, Treasurer

Board Members Vicky A. Bailey, Anthony Bernhardt, Trudy Ann Cameron, Red Cavaney, Preston Chiaro, Mohamed T. El-Ashry, Linda J. Fisher, C. Boyden Gray, Deborah S. Hechinger, Peter R. Kagan, Sally Katzen, Rubén Kraiem, Richard G. Newell, Richard L. Schmalensee, Robert N. Stavins, Lisa A. Stewart, Joseph Stiglitz, Mark R. Tercek

Chair Emeriti Darius W. Gaskins, Jr., and Robert E. Grady

Resources Pete Nelson, Director of Communications Sarah Aldy, Editor Adrienne Foerster, Managing Editor Ellen A. Walter, Graphic Designer and Production Associate Shannon Wulf, Public Affairs Manager

Published since 1959, Resources (issn 0048-7376) contains news of research and policy analysis regarding environmental, energy, and natural resource issues. The views offered are those of the contributors and should not be attributed to Resources for the Future, its directors, or its officers. ©2012 Resources for the Future. All rights reserved. No part of this publication may be reproduced by any means, either electronic or mechanical, without permission from the publisher. Contact Pete Nelson at [email protected].

Printed with soy-based inks on 50% recycled (and recyclable) paper containing 25% postconsumer fiber, processed chlorine free, in an FSC-certified plant. Cover Photo © Ed Darack/Science Faction/Corbis Contents No. 181 • 2012 departments

03 Contributors

05 Welcome

08 Infographic Answering Questions about a Carbon 17 Tax: How New Natural Gas Supplies Impact the Electricity Sector features 10 Goings On Highlights of RFF’s Recent Contributions 17 Blue Carbon: A Potentially to Shaping Environmental Policy Winning Climate Strategy Protecting coastal mangrove forests from 12 Policy Commentary development can cost-effectively achieve

The Carbon Footprint of Wood for CO2 emissions reductions on par with taking Bioenergy millions of cars off the roads, according to Roger Sedjo a recent study by experts at RFF and the University of California, Davis. 15 Q & A Managing Water through Innovative Collaboration 19 Managing the Risks of Shale An Interview with Lynn Scarlett Gas: The Latest Results from RFF’s Initiative 45 Inside RFF RFF is helping policymakers, experts, and the public better understand the complex 48 Support RFF process of shale gas development as it unfolds across the country. Kristin Hayes

21 High-Speed Rail Passions California is planning the construction of a high-speed rail link between San Fran- cisco and Los Angeles, but transforming the Northeast Amtrak Corridor into the first US test case for high-speed rail may be a 12 smarter option. Joel Darmstadter

1 Contents No. 181 • 2012 features cont.

23 US Energy Policy: A Changing Landscape As Congress gears up to overhaul the tax code, it’s time to take stock of the develop- 34 ments reshaping today’s energy markets and assess whether federal mandates and incentives are cost-effectively achieving the intended results. Phil Sharp

29 Will Natural Gas Vehicles Be in 40 Our Future? High costs, reduced cargo space, and range issues are likely to make switching to natural 34 Does Speculation Drive Oil gas a tough sell for passenger vehicles, while Prices? prospects are brighter for heavy-duty trucks. Research on the forces behind the 2004– Alan J. Krupnick 2008 dramatic spike in oil price challenges the common perception that excessive speculation in the futures market is to blame. James L. Smith

40 Clean Air Regulations and the Electricity Sector Two historic air pollution regulations will not 23 have nearly the dramatic repercussions that some predict—research suggests that only a few coal generators will be forced to retire and retail electricity prices will increase only slightly. Karen Palmer, Dallas Burtraw, Anthony Paul, Blair Beasley, and Matt Woerman

2 Contributors

In This Issue

Blair Beasley is a research assistant at RFF.

RFF Darius Gaskins Senior Fellow Dallas Burtraw is one of the nation’s foremost experts on environmental regulation in the electricity sector. For two decades, he has worked on creating a more efficient and politically rational method for controlling air pollution. He also studies electricity restructuring, competition, Burtraw and economic deregulation.

In his four decades at RFF, Joel Darmstadter has conducted research centered on energy resources and policy. His recent work addresses issues of energy security, renewable and uncon- ventional fuels, and climate change. He has served on numerous National Research Council bodies and has contributed to their studies. He also was part of a team that evaluated the perfor- Darmstadter mance of the US Department of Energy’s National Institute for Global Environmental Change.

Kristin Hayes is the manager of RFF’s Center for Energy Econom- ics and Policy. She worked with researchers at RFF and the National Policy Institute to write and produce Toward a New National Energy Policy: Assessing the Options. Krupnick Alan J. Krupnick is director of Resources for the Future’s Center for Energy Economics and Policy, as well as a senior fellow at RFF. His research focuses on analyzing environmental and energy issues, in particular, the benefits, costs, and design of pollution and energy policies, both in the United States and in developing countries.

Research Director and Senior Fellow Karen Palmer has been a researcher at RFF for more than 20 years. She specializes in the Palmer economics of environmental and public utility regulation, particularly on issues at the intersection of air quality regulation and the electricity sector.

3 Anthony Paul is a center fellow at RFF's Center for Climate and Electricity Policy. His research interests include allowance alloca- tion under cap-and-trade programs for air pollution reductions, energy efficiency on the demand side of electricity markets, and electricity market regulatory structures. Contributors

Paul Roger Sedjo is a senior fellow and the director of RFF’s Forest Economics and Policy Program. His research interests include climate change and biodiversity, long-term sustainability of forests, industrial forestry and demand, timber supply modeling, international forestry, global forest trade, forest biotechnology, and land use change.

Phil Sharp is president of Resources for the Future. His career in Sedjo public service includes 10 terms as a member of the US House of Representatives from Indiana. Sharp also held a lengthy tenure on the faculty of the John F. Kennedy School of Government and the Institute of Politics at Harvard University. He was appointed to the National Academy of Sciences Committee on America’s Climate Choices.

Gilbert F. White Fellow James L. Smith holds the Cary M. Maguire Sharp Chair in Oil and Gas Management at Southern Methodist University. Since receiving his PhD in economics from Harvard University in 1977, Smith has specialized in energy studies and published extensively on OPEC, energy markets, real options, auction theory, and the oil and gas business.

Matt Woerman is a research associate at RFF.

Smith

4 Welcome

Challenges at the Intersection of Scarcity, Growth, and Risk

Sixty years ago, concern Although resource sufficiency had been that limited natural the prime concern in RFF’s early years, the resources could impede impact of resource consumption on our the progress of the air, water, land, and health became a major United States and the focus for the country and for RFF in the years rest of the “free world” that followed. For many observers, these led to the birth of RFF. issues appear even more compelling today: President Truman’s globally we face major challenges if we are to Commission on Materials sustain economic growth without seriously, Policy had recommended creation of such a even irretrievably, fouling our global nest. research organization, and the Ford Founda- Rapid population and economic growth tion for 25 years became our sole funder. in many parts of the world portend greater The focus of much of the work in the pressures on our resource base and greater early years of RFF is perhaps best summed risks of environmental degradation. Indeed, up by the title of the classic RFF book by we are confronting new patterns of risk. Howard Barnett and Chandler Morse, 1963's Previously, negative impacts of economic Scarcity and Growth. The authors concluded development were geographically limited, that, in the near and medium term, but today our collective activities are resource constraints wouldn’t hamper changing the chemistry of the grand economic growth. commons—our atmosphere and our

Rapid population and economic growth in many parts of the world portend greater pressures on our resource base and greater risks of environmental degradation.

This finding has been revisited frequently oceans. And part of our economic success and has again emerged in serious public has been tied to technologies that can discussion. This year marks the 40th produce huge benefits and potentially anniversary of The Limits to Growth, a huge disasters—witness deepwater controversial study that warned of an drilling in the Gulf and nuclear power impending and dramatic economic crash generation at Fukushima. Further, the due to the collapse of the natural resource march of technology—whether it be in base that sustains global economies. biotechnology, nanotechnology, or the In contrast, a second RFF investigation recent techniques to extract previously in the late 1970s, “Scarcity and Growth inaccessible hydrocarbons—offers Reconsidered,” essentially reaffirmed the tremendous promise accompanied by conclusions of its namesake. new risks.

5 Over the years, RFF scholars have brought RFF’s 2012–2013 First Wednesday Seminar new perspectives and approaches from a Series will look ahead to the future of variety of academic disciplines to natural environmental and natural resource policy. Welcome resource and environmental issues. Often, This series will provide an opportunity our scholars have looked through the lens of to engage firsthand with experts on economics. Indeed, RFF contributed mightily issues that lie at the intersection of to the creation of the discipline’s subdivision economic growth, resource scarcity, and of resource and environmental economics. environmental risk. For the last 60 years, RFF scholars have If you can’t make it to an event, you sharpened the intellectual tools of analysis can join us online. As part of this yearlong and creatively designed policy options to dialogue, RFF is featuring online discussions meet our environmental challenges, helping on its blog, Common Resources. RFF experts us find an environmentally sound path to and special guest contributors will host a economic growth. variety of conversations that examine these Our theme for our 60th anniversary is issues in depth. Share your thoughts at Resources 2020, a yearlong exploration www.common-resources.org. of how economic inquiry can address Within RFF, we must strive to manage emerging and future challenges at the effectively our own resources—financial intersection of scarcity, growth, and risk. as well as intellectual. We appreciate your Special events are planned throughout support and welcome your suggestions on the year, including a distinguished how RFF can use its research and public lecture series featuring Nobel Laureates platform to contribute to more effective in Economics Joseph Stiglitz, Kenneth management of the challenges posed by Arrow, and Thomas Schelling. Similarly, growth, scarcity, and environmental risk.

Phil Sharp, President [email protected]

6 Resources Digital Edition for the iPad™

RFF goes mobile with Resources magazine— also available on the iPhone™ & Android.

 Gain unlimited access to cutting-edge economic analysis

 Discover RFF experts online

 Explore special digital features on environmental and natural resource issues

Get a Resources digital subscription for just $.99 per year and access the latest research, analysis, and insight on the the environment and the economy—all at your fingertips.

Download the app today | www.rff.org/resourcesapp Powered by Resources for the Future Answering Questions about a Carbon Tax Infographic How New Natural Gas Supplies Impact the Electricity Sector

The US electricity sector—which produces 40 percent of total carbon dioxide emissions in the country—could raise significant revenues through a carbon tax. However, these revenues are uncertain and depend on the level of the tax and conditions such as natural gas prices, which have changed significantly in the past few years.

How much would consumers pay for electricity in 2020 as a result of a $25-per-ton tax on carbon? A carbon tax would result in electricity price increases nationwide, but the increases would be distributed differently across the states, as shown below. Some regions that have low electricity prices currently (such as the Midwest and Southeast) would have the largest increases in prices, in part because of their heavy reliance on coal. Nonetheless, these regions would continue to be among those with the lowest prices in the nation (in blue).

Northwest Pacic $63/MWh increase: $6–11/MWh New England $141/MWh increase: $6–11/MWh

Long Island, New York $171/MWh increase: $6–11/MWh Southern California $136/MWh increase: $5–6/MWh

Kansas and Missouri

$82/MWh Kentucky and Tennessee increase: $16–21/MWh $85/MWh increase: $16–21/MWh

8 Infographic

How could this affect electricity generation in 2020? Under the low gas price assumptions of 2011-era projections, natural gas plays a bigger role in electricity generation than under 2009-era projections. In both cases, that role grows with the addition of a carbon tax.

2009 PROJECTIONS (TWh)

Steam Baseline 2,101 coal With a $25 tax 1,731 on carbon

Natural Baseline 572 gas With a $25 tax 695 on carbon

2011 PROJECTIONS (TWh)

Steam Baseline 1,832 coal With a $25 tax 1,195 on carbon

Natural Baseline 836 gas

With a $25 tax 1,186 on carbon

How much revenue could be raised in 2020? Changing forecasts for natural gas prices and other factors in 2020 influence the range of uncertainty over carbon tax revenue from the electricity sector. Between the 2009 and 2011 projections natural gas, prices have dropped by 35 percent—contributing to a $9 billion drop in expected revenues under a $25 carbon tax.

2009 PROJECTIONS 2011 PROJECTIONS Revenue raised: Revenue raised: $52 billion $43 billion

Natural gas price: $6.84/million Btu Natural gas price: $4.47/million Btu

Source: Palmer, Karen, Anthony Paul, and Matt Woerman. 2012. The Variability of Potential Revenue from a Tax on Carbon. Issue brief 12-03. Washington, DC: Resources for the Future.

FURTHER READING Center for Climate and Electricity Policy. 2012. Considering a Carbon Tax: Frequently Asked Questions. Last modified June 2012. http://www.rff.org/centers/climate_and_electricity_policy/Pages/Carbon_Tax_FAQs.aspx.

9 Highlights of RFF’s Recent

Goings On Contributions to Shaping Environmental Policy

Oil Prices and Speculation May 2 At this RFF First Wednesday Seminar, moderated by RFF Gilbert F. White Fellow James L. Smith, panelists discussed the influx of speculators that may have driven the price of oil to unprecedented heights in 2008. www.rff.org/speculation

Building Partnerships Convening Thought Leaders Ocean Protection Ecosystem Services Policy April 8 May 8 James Boyd, RFF senior fellow and co-director RFF’s Center for the Management of of the Center for the Management of Ecologi- Ecological Wealth co-hosted an inaugu- cal Wealth, presented on interdisciplinary ral policy forum in collaboration with the ecological science and decisionmaking at the National Ecosystem Services Partnership. California Ocean Protection Council’s Joint The forum aimed to promote shared learn- Science Advisory Team Meeting, “Knowledge ing across federal agencies and to further an to Action: Theory to Practice.” understanding of how ecosystem services approaches can be integrated into federal Alternative Fuels and Vehicles planning, spending, and program practices. April 15 RFF Post-Doctoral Researcher Beia Spiller Carbon Tax presented at a symposium on regulations May 16 and incentives for alternative fuels and RFF hosted the second Carbon Tax Expert vehicles at the MIT Energy Institute. Engagement Meeting, presenting findings from new work on carbon tax revenue reli- Marcellus Shale Development ability by RFF Center Fellow Anthony Paul, April 18 RFF Senior Fellow Carolyn Fischer, and US RFF Fellow Sheila Olmstead spoke at a panel International Trade Commission Economist discussion, “Marcellus Shale Development: Alan Fox. Communities, People, Health, Economics,” sponsored by the Environmental Initiative, the P.C. Rossin College of Engineering and Applied Science, the Cluster for Sustainable

Development, and Lehigh University. © Ellen A. Walter

10 Goings On

Long-Term Environmental Threats Natural Gas April 27 June 27 Johns Hopkins University’s Systems Institute Alan Krupnick, RFF senior fellow and direc- and Environment, Energy, Sustainability, tor of the Center for Energy Economics and and Health Institute hosted a lecture by Policy, presented on natural gas as a trans- RFF Vice President for Research Molly portation fuel at a conference hosted by Macauley titled “Forever Ours: Technology, the Bipartisan Policy Center, “Understanding Economics, and Institutions for Managing the New Energy Landscape: Technological Long-Lived Environmental Problems.” Change and Global Market Integration.”

Energy and Government Water Quality and Shale Gas May 21 July 12 At the Wilson Center’s panel discussion on RFF Fellow Yusuke Kuwayama presented Congress and the Global Energy Crunch, on the water quality impacts of shale gas RFF President Phil Sharp discussed the development at The Nature Conservancy’s uncertainty of predictions about future "Reducing Energy’s Impacts to Water and energy supplies. Biodiversity" conference.

Flood Insurance Engaging Congress May 21 Tropical Forest Management RFF Fellow Carolyn Kousky explained the April 16 National Flood Insurance Program as part of Lynn Scarlett, RFF visiting scholar and C-SPAN’s “Your Money” series. co-director of the Center for the Manage- ment of Ecological Wealth, spoke at The Energy Policy Lacey Act and Tropical Forest Protection June 13 Briefing on Capitol Hill. Ray Kopp, RFF senior fellow and director of the Center for Climate and Electricity Policy, Clean Energy Standards discussed the feasibility of pricing carbon May 17 as part of a panel presentation, “Out of the RFF Research Director and Senior Fellow Box Thinking: New Approaches to National Karen Palmer testified at the US Senate Energy Policy,” hosted by Environmental Committee on Energy and Natural Resources Entrepreneurs, the Natural Resources hearing on The Clean Energy Standard Act Defense Council, and RFF. of 2012. She discussed the expected effects of the proposed policy on electricity prices Energy and Environmental Economics and carbon dioxide emissions. June 25 RFF Darius Gaskins Senior Fellow Dallas Energy Policy and Tax Reform Burtraw gave a keynote address at the June 12 5th Atlantic Workshop on Energy and RFF President Phil Sharp testified at the US Environmental Economics hosted by Senate Committee on Finance hearing on Tax Fundación Barrié, Economics for Energy, Reform: Impact on US Energy Policy, provid- and the research group “rede” at the ing a history of national energy policies and University of Vigo in Spain. an overview of the US energy market.

11 The Carbon Footprint of Wood for Bioenergy Commentary Biomass energy is expected to play a major to crop production. This argument has role in the substitution of renewable ener- been used particularly for biofuel produc- gy sources for fossil fuels over the next tion with respect to corn, corn prices, and several decades. The US Energy Informa- ethanol. tion Administration forecasts that biomass A dispute has since ensued over the will increase to 15 percent of US energy carbon neutrality of biomass energy and the production by 2035, up from 8 percent in nature of regulations that may be applied. 2009. And although wood, grasses, plants, Should biomass energy, particularly trees, and other biogenic materials do release which have a long regeneration period, be carbon when combusted, the general view treated like a fossil fuel, the carbon emis- has been that they are carbon neutral: sions of which are viewed as irreversible the subsequent plant regrowth simply and are regulated as such? Or, does the fact recaptures the carbon emitted earlier. But that biomass is renewable and hence, when recently, this view has been challenged on regenerated, offsets its own emissions imply two counts. First, a study released by the a different treatment for biomass emissions Manomet Center for Conservation Sciences as suggested by the Intergovernmental in 2010 argues that the use of wood for Panel on Climate Change (IPCC)? bioenergy will result in a decrease in the forest stock and in an associated net reduc- A Two-Way Street tion in sequestered carbon—meaning that In reality, neither argument captures the the carbon in the forest will be transferred dynamic nature of markets for renew- to the atmosphere, at least for a period able resources. The use of bioenergy is a of time. A second argument, advanced by two-way street, affecting supply as well as Princeton University scholar Tim Search- demand. Given an expectation of a signifi- inger and colleagues in a 2009 Science cant increase in the use of biogenic energy,

The general view that biomass energy is carbon neutral has been challenged on two counts.

article, is that the use of biogenic material it is clear that bioenergy harvests from for bioenergy will lead to changes in land forests will reduce stored forest carbon and use associated with the release of large release carbon into the atmosphere. It is volumes of greenhouse gases. This occurs, also clear, though, that an anticipation of the argument goes, because bioenergy higher levels of future demand for wood use will raise demand, leading to increases biomass will encourage increased invest- in crop prices and providing incentives ments in forests for biomass energy—think

for natural land systems to be converted forest expansions, new plantings, and © Ashley Cooper/Corbis

12 Commentary

improved, faster-growing seedlings. To sis would not capture these anticipatory the extent that these investments need market adjustments. Indeed, an increasing be undertaken in anticipation of future demand for biomass for energy creates demand not yet realized, forest expan- a self-generating incentive for markets sion will precede harvests, and carbon will to invest in its production. For wood, this be newly captured, thereby preceding its means that higher biomass prices also future release. The expansion of forests and create incentives for increased investment harvests is additional to what would have in forests and therefore increasing capacity been the “business-as-usual forest.” for carbon sequestration. Most commercial forests in the United The entire sector of commercial forestry, States are managed, and increasing which must wait 20 to 50 years before a percentages involve investments in tree tree is ready to be harvested, is predicated planting. Forest management allows for on making investments today in anticipa- increased forest intensity, as with the tion of future, as-yet-unrealized demand. denser planting of tree seedlings and more Over the last 40 years, for example, almost frequent pre-commercial thinnings. These 50 million acres of commercial forest have thinnings, which traditionally have not been been planted in the United States, and undertaken or have simply been turned to forest stocks rose even as harvests experi- waste, become economically important if enced their peak levels. Commercial forests, they have value as biomass. Hence, market which provide the vast majority of indus- incentives will promote investments to trial wood produced in the United States, increase forest stocks as part of traditional involve investments based on a tree’s commercial forestry as well as through expected future market value, as inves- biofuel-dedicated forest plantings, often tors anticipate future wood markets. These in anticipation of their use. A static analy- forests are managed largely on a sustainable

13 basis and respond to market forces. Higher the tree growing experience of the late 20th biomass prices can be expected to result in century illustrated: that when responding to reductions in forest carbon through larger an anticipated substantial increase in future harvests and also to offset increases in demand, the forest stock will rise as fast as forest carbon emissions as forest managers or faster than harvest draw-downs. Again, Commentary invest in biomass for the future to substi- this result reflects the response of managers

Higher biomass prices can be expected to result in reductions in forest carbon through larger harvests and also to offset increases in forest carbon emissions as forest managers invest in biomass for the future.

tute for fossil fuels, through a combination to increase the area (and intensity) of forest of forestland expansion and increased forest production, thereby offsetting the carbon management. released in the harvest for feedstock for bioenergy production. This finding demon- A Dynamic Approach strates that wood bioenergy production can Forest dynamic modeling studies have be carbon neutral in a host of situations, and shown that earlier static analysis fails to particularly when demand is anticipated to incorporate supply responses as well as increase substantially into the future, as is demand changes into their carbon neutral- the current case in the United States. ity analysis. Thus, static analysis ignores —Roger Sedjo the self-regulating feature of markets for renewable resources and commercial forests This article was originally published as part of RFF’s Policy Commentary Series. To learn more and read other commen- and the associated carbon sequestration taries by RFF experts and thought leaders examining natural adjustments. In one study, Xiaohui Tian and resource, energy, transportation, and land policy debates, visit I examine how an increase in the demand www.rff.org/policycommentary. for wood as bioenergy affects investments in forestry and the volumes of carbon in the forest stock. Our dynamic model shows Further Reading Daigneault, A., B. Sohngen, and R.A. Sedjo. 2012. An Economic under what conditions that stock might Approach to Assess the Forest Carbon Implications of increase or decline. Another paper—a Biomass Energy. Environmental Science & Technology dynamic approach of the entire multi-stand 46(11): 5664–71. commercial, multiple-forest system by Adam Manomet Center for Conservation Sciences. 2010. Biomass Sustainability and Carbon Policy Study. NCI-2010-03. Daigneault and colleagues—captures the Manomet, MA: Manomet Center for Conservation Sciences. interconnectedness of the forest system Searchinger, T., S.P. Hamburg, J. Melillo, and W. Chameides. both spatially and over time. Decisions 2009. Fixing a Critical Climate Accounting Error. Science 326 (5952): 527–28. on a site are not independent of activities Sedjo, R.A., and X. Tian. 2012. An Investigation of the Effects on other sites as market signals provide of Wood Bioenergy on Forest Carbon Stocks. Journal of coordinating information. This analytical Environmental Protection 3(9): 989–1000. approach demonstrates conceptually what

14 Q&A

Managing Water through Innovative Collaboration

An Interview with Lynn Scarlett

Former deputy secre- longer local problems of a single stream. tary of the US Depart- They are interconnected problems that ment of the Interior cross jurisdictional boundaries and involve Lynn Scarlett, who the public sector, private sector, and many currently serves as an different participants. They demand a differ- RFF visiting scholar and ent kind of thinking about how to manage co-director of RFF’s water issues and challenges. Center for the Manage- ment of Ecological RESOURCES: How do we address some Wealth, sat down with of these challenges? Do you believe that Resources to discuss high-level institutional overhauls are the emerging watershed governance models for answer? multi-jurisdictional water systems. SCARLETT: On the one hand, large insti- RESOURCES: Lynn, can you talk a little bit tutions are important. The law for the about some of the water challenges we're Colorado River dates back 100 years and facing in the United States and how that sets the stage for seven states to work translates into governance challenges? together with the secretary of the interior to manage that system. But many of the SCARLETT: We've always had water chal- challenges we face with water vary in their lenges. There's an old saying in the West scope and scale. that whiskey's for drinking, and water's for That means we need different institu- war. But these challenges are accelerating tional structures. Many of them are what I and expanding. For example, think of the call “organically emergent”—that is, start- Gulf of Mexico, where we have big hypoxia ing from the ground up and fitted to the problems. Contaminants come down circumstance. For example, addressing the through the Mississippi River watershed challenges of hypoxia along the Gulf Coast system and are offloaded into the Gulf, is very different from addressing storm essentially creating a dead zone. water issues in a city or large metropolitan Or think about the Colorado River and the area. We need different institutional struc- challenges of figuring out how to make sure tures and network governance—networks that water stretches to meet the agricultural of public and private entities sharing and community needs of that area. These authority and working together to address are problems of big systems. They're no these challenges.

15 Q&A RESOURCES: Can you give a few examples a network governance model that is shared of successful network governance? governance. There’s also the Klamath River basin. SCARLETT: I always like to say that conser- California has been very much a participant vation and resource management is a in discussions over Klamath. A decade or journey, not a destination. One is never at so ago, drought brought major challenges. a final point. But let me give you a couple There was an opinion to require withholding examples. The Platte River system that runs of some of the water from the agricultural

We need different institutional structures and network governance—networks of public and private entities sharing authority and working together.

across three states (Colorado, Wyoming, sector. A huge conflict surfaced. However, and Nebraska) has endangered species out of that came an agreement among problems. There's a lot of agricultural use of 50-plus participants to conserve some land water, power production that utilizes water, that could store water, but also to reexam- and the potential introduction of new crops ine the dams in the area to improve fish for biofuel and other forms of energy. passage. It's a prelude to what could be a The Fish and Wildlife Service, pursuant network governance model. But, again, the to requirements under the Endangered proof of the pudding is in the tasting. We're Species Act, began working in the area with not there yet. the three states and the local entities to try to address endangered species problems. Read the full interview at www.rff.org/ScarlettQ&A, or listen to the podcast at http://itunes.apple.com/us/podcast/ There was a lot of tension, as you can imag- resources-for-future-podcast/id305068222. ine. Everybody wants to hold tight to their water. But what the Fish and Wildlife Service did, rather than just simply put itself in charge, was to work with those communities to develop a network governance model. They have formed a sepa- rate entity that serves as the convener and provides a neutral space for these three states, local entities, and the private sector to come together and work to allocate the water to meet species' needs, agricultural needs, and so forth. So it's © Ellen A. Walter

16 Blue

CA Potentiallyarbon Winning Climate Strategy

As global leaders struggle to cut greenhouse Juha Siikamäki, James Sanchirico, and Sunny gas emissions, a cost-effective way to reduce Jardine estimate that protecting mangrove

the amount of carbon dioxide (CO2) released forests from development can reduce CO2 into the atmosphere may lie in preventing emissions at a cost of $4–$10 per ton, the loss of mangrove forests found on the while the current market prices for carbon coastlines of most tropical nations. offsets are on the order of $10–$20. By Mangroves, which are among the most protecting these ecosystems from develop- unique and rapidly disappearing natural ment or destruction, global leaders could environments in the world, store enormous achieve a reduction in greenhouse gas amounts of carbon, especially in the earth emissions on par with taking millions of cars below their roots, possibly equal in total to off the roads. This suggests that in many

roughly 2.5 times annual global CO2 emis- places mangroves are worth saving for their sions. Between 1990 and 2005, mangrove carbon storage potential alone. loss occurred at a rate of about 0.7 percent One upshot of protecting mangroves per year. When these coastal habitats for the purpose of offsetting emissions is are disturbed by changes in land use, the preservation of habitats and biodiversity. so-called blue carbon locked away in the A conservation strategy based solely on bodies of the plants or in the soil is gradu- carbon would not automatically target areas

ally exposed to air and released as CO2 into most valuable for biodiversity. However, a the atmosphere. biodiversity-focused strategy would only In a new study released by RFF and the modestly raise the costs of a blue carbon University of California, Davis, co-authors program.

17 "We find that protecting mangroves can ment and institutional environments will be be competitive with other approaches unable to join the carbon market. Remov- for reducing global greenhouse gas emis- ing countries that score in the bottom half sions," said Siikamäki, a fellow and associ- of the World Bank’s index on governance ate research director at RFF. "The bonus is effectiveness reduces the potential blue that in doing so, we can preserve important carbon offset supply by three-quarters. habitats critical to coastal fisheries, rich Today, there is no formal system for in biodiversity, and home to hundreds of including blue carbon ecosystems in global species of plants and animals, many of them or regional emissions trading programs. endangered." The economics of preserving blue carbon A promising vehicle for valuing and habitats suggest it would be worthwhile preserving blue carbon may be bilat- to focus on establishing a place for blue eral deforestation agreements. Developed carbon in such programs. countries looking to cut their emissions Language included in the American could choose to finance those reductions by Power Act of 2010 paved the way for preserving mangroves in developing coun- including marine ecosystems in carbon- tries rather than adopting high-cost domes- offset programs that would eventually have tic mitigation actions, such as retrofitting been part of a cap-and-trade program had factories, adopting regulations on automo- the bill become law. Although it did not biles, and otherwise reducing fossil fuel use. pass, including such provisions increases The two countries would define the types the likelihood that blue carbon could be of projects that are eligible to be counted as part of US offset programs with developing offsets as well as the rules for determining countries in the future. the quality of those offsets. Further Reading One serious challenge to realizing the Siikamäki, Juha, James N. Sanchirico, and Sunny L. Jardine, 2012. potential for blue carbon may lie in limits Global Economic Potential for Reducing Carbon Dioxide to governance capacity. It is plausible that Emissions from Mangrove Loss. Proceedings of the National Academy of Sciences Early Edition, July 30. http://www.pnas.

governments with problematic manage- © George H.H. Huey/Corbis org/content/early/2012/07/25/1200519109.short.

18 Managing the Risks of Shale Gas The Latest Results from RFF’s Initiative

RFF has unveiled two tools to help policymakers, experts, and the public better understand the complex process of shale gas development as it unfolds across the country. Kristin Hayes reports.

here’s no hotter topic in US energy »» a survey of the public in several states policy today than natural gas: how to understand public perception of risks; Tmuch technically recoverable gas is in »» statistically based analyses of surface the country, how risky it is to get that gas water impacts in the Pennsylvania portion out of the ground, and—once unearthed, of the Marcellus play; and processed, and piped—how its price will »» an assessment of current state and trend (and affect the US energy mix) in the federal shale gas regulations and nonregula- future. Experts in RFF’s Center for Energy tory initiatives. Economics and Policy (CEEP) are making a Combined, the results and findings from significant contribution to the risk part of each of these components will help the these conversations with a major research team identify the highest-priority risks and initiative—Managing the Risks of Shale develop recommendations for how best to Gas: Identifying a Path toward Responsible reduce them, whether through regulatory Development. The project, scheduled for reform or voluntary industry action. completion in December 2012, includes several key components: Risk Matrix for Shale Gas »» a survey of experts to identify what Development they think are the priority risks involved in One of the first tools released by the CEEP the shale gas development process; team was a catalog of plausible environ-

19 mental risks associated with the develop- patterns nationwide, available at www.rff. ment of shale gas—an important starting org/shalemaps. place for understanding the ways that The states vary widely in their approaches shale gas development could possibly to shale gas development, with some impact environmental and human well- regulating with very specific standards, being. Developed at RFF with input from others being based more on performance, geologists, hydrologists, economists, risk and others using a case-by-case permit- assessors, and representatives from both ting process. Even for those using specific industry and environmental groups, the standards, there is wide heterogeneity. This tool—called the Risk Matrix for Shale Gas diversity is the subject of an RFF report that Development—is available online at www. is expected in fall 2012. In the report, the rff.org/shalematrix. RFF team will delve into the differences The risk matrix highlights 264 impact illustrated on the maps, examining whether pathways linking activities associated with they can generally be attributed to variance shale gas exploration and development to in the risk factors among the states (differ- possible effects on the environment and ences in geology or population density, for communities. This set of pathways forms example), or whether they simply arise from the core of RFF’s surveys of experts and the institutional factors. public. The team noted some important caveats when developing the maps. First, enforce- A Review of Shale Gas Regulations ment matters: two states with similar laws by State or regulations on the books may regulate A second online tool demonstrates the very differently in practice. results of CEEP’s survey of state regulations Second, understanding permitting is for shale gas exploration and production. important: the permits required for siting, RFF’s Nathan Richardson, Madeline Gottlieb, drilling, fracking, and operating a well may and Alan Krupnick examined regulations actually impose conditions that are tighter and surveyed regulators in the 31 states than any regulation, but it can be hard to with current or near-future shale gas devel- find out what these conditions are and opment to identify how 20 or so important whether they’re uniformly applied. This is an regulatory elements are applied in each area for future research at CEEP. state. Although river basin commissions RFF’s shale gas maps illustrate one of the and localities also play important roles, at fundamental truths about shale gas devel- the moment, states are taking the lead on opment in the United States: it is a compli- setting guidelines for shale gas develop- cated, varying process that is unfolding at ment. The debate continues over how much a pace that is challenging to keep up with. the federal government should get involved. The team at RFF will continue to delve into The results of this survey are presented these issues in the context of this project in a series of maps that show regulatory and beyond.

20 High-Speed Rail passions

In a post from RFF’s new blog, Common Resources, Joel Darmstadter questions some “surreal” proposals for American high-speed rail.

espite differences of opinion on a look at a measure just enacted by the various societal–environmental California state legislature. The law commits Ddilemmas, worsening urban conges- the state to the planned construction (and tion is a near-universal American complaint, completion by 2027) of an HSR link between often reaching despair. The situation isn’t San Francisco and Los Angeles. The line is limited to city centers and the urban fringe. to be built in stages, with an initial segment Inter-urban transportation faces bottle- routed through a relatively sparsely popu- necks on highways, which lag badly in lated Central Valley agricultural area rather maintenance and capacity. Where flying is than along the coastal urban agglomeration. an available option, delays and crowding at That economically questionable provision numerous of the nation’s airports add their may be why the state senate’s approval of own dollop of misery. the initiative was extremely narrow. Enter the renewed appeal of high-speed Will California’s experiment set an enlight- rail (HSR). After all, what American tourists ened course for the rest of the country? have savored while traveling at 200 miles Maybe, but there are good reasons to be per hour in Japan, France, or Spain shouldn’t skeptical. prove impossible to replicate in the United Such a major innovation—one that spells States. In that context, it’s worth taking a marked break with the established way

21 of doing things—had best be carried out cally least-defensible HSR projects currently under circumstances with enough prospect being contemplated at the behest of Sena- of success to serve as a kind of role model tor Harry Reid and other Nevadans. The for a broader national HSR constituency. plan—and it is utterly surreal—to construct The California plans don’t fit that bill. a line from Victorville, California to Las Vegas In contrast, transforming the Northeast would force Angeleno visitors to the Strip to Amtrak Corridor (DC to Boston) into the first drive 80 miles in their cars before trans- such US test case seems to me much closer ferring to rail for the remaining 200 or so to an ideal start-up decision when judged miles. That project, favored by the Obama by several significant metrics: population administration, is in line for a $5 billion loan density, proven ridership, overburdened from the federal government. airports, and existing trackage right-of-way In the San Francisco–Los Angeles case, a (albeit without, as yet, a dedicated high- $3 billion federal payment supplements an speed rail configuration). approximately similar state amount, allow- An economic comparison of the California ing a start on the initial 130-mile segment vs. Northeast cases, in terms of underly- of the project. ing economics and demographics, was And a recent update of Amtrak plans for a the topic of a New York Times blog post prospective Northeast Corridor high-speed early this year by Rick Geddes, an associate rail line concludes that “federal funding is a professor of policy analysis and manage- crucial component and necessary to deliver ment at Cornell. Geddes’s observations are major [Northeast Corridor] improvements.” instructive: “A project should move forward At the end of the day, it has to be said if the revenue from all sources is sufficient that strengthened analysis will help sharpen to cover operating costs while making a the comparative merits of different regions’ contribution to its capital costs, including aspirations for HSR service. But it is also paying off debt and providing investors with the case that the prospects for long-term an adequate return on their investment.” success, in California or elsewhere in the The proposed California line, as presently country, are higher if the first national envisaged, fails to meet that test. For now, experiment comes where conditions are the Northeast Corridor, Geddes argues, best. That appears, in my judgment, to point should be our priority “if America wants to the Northeast. true high-speed rail.” Of course, what holds in accounting terms This article originally appeared on Common Resources, a new blog that features the highlights of RFF’s research, along with needn’t hold in political terms. And the new, policy-relevant insights and debates. To read more, visit recognition that HSR confers social benefits www.common-resources.org. not easily captured in a private market and financing environment means intense Further reading constituency-jockeying for determination Amtrak. 2012. A Vision for High-Speed Rail in the Northeast of who contributes what. One thing is clear: Corridor. beyond the state financing burden, the need Geddes, Rick. 2012. The Right Idea in the Wrong Place. Room for Debate, January 27. http://www.nytimes.com/ for a federal role seems inescapable. roomfordebate/2012/01/26/does-california-need-high- But, at times, also politically nebulous. speed-rail/californias-high-speed-rail-is-the-right-idea-in- Take one of the most bizarre and economi- the-wrong-place.

22 USA Changing Energy Landscape Policy: In testimony before the Senate Finance Committee and adapted here, Phil Sharp describes unexpected developments in our energy markets.

The energy sector is undergoing a profound opportunities for both economic growth transformation, both in the United States and “greener” production, along with a and globally. Technological advances, new set of risks. And as these opportuni- new discoveries of fossil fuel reserves, ties and challenges emerge, they should be and changed economic and demographic addressed with a serious dose of humility. projections have prompted a dramatic Our understanding of the energy picture reshaping of our view of the energy future. has changed over the past 10 years, and What does this mean for energy policy there’s no reason to expect our current in the United States? Or, perhaps more worldview to be any more durable than accurately, what does this mean for the our prior ones. Additionally, energy markets many layers of different, often overlapping, are vast, influenced by many factors, and, and sometimes contradictory policies that for most fuels, global in nature—making constitute “energy policy”? them very difficult for government policy to

23 Our Changing Energy Picture In the last decade, we have witnessed dramatic changes in America’s energy makeup: »» A raft of new technologies has entered the marketplace in virtually every sector of production, distribution, and use. »» Dramatic new supplies of natural gas from shale formations are being produced. »» Our dependence on foreign oil has declined significantly as a result of added oil production, improved vehicle efficiency, and a major increase in ethanol use. The expectation is for imports to continue declining. »» Carbon dioxide emissions are in decline not only as a result of the economic slowdown but also because of heightened efficiency and a change in our fuel mix, especially in the electric sector. The expectation is that our emissions growth ahead will be modest. and to improve efficiency. These changes were driven by several We have witnessed major price swings factors: major price increases in oil and several times over the last four decades natural gas, entrepreneurial activism, and each time have seen major changes decades of private and public energy in consumer, investor, and government research, and government policies. behavior. Invariably, arguments arise over The price of natural gas spiked at the how the government might be able to

Carbon dioxide emissions are in decline not only as a result of the economic slowdown but also because of heightened efficiency and a change in our fuel mix, especially in the electric sector.

beginning of the decade, and oil followed prevent the big swings up—or even down. a few years later. As with past price rises, Given the size of these markets, govern- consumers and investors find ways to ment policy is very unlikely to prevent such produce more and use less of the higher- volatility; certainly, our previous experience cost fuel, and governments respond with with oil and natural gas price controls was

new efforts to advance alternatives to oil not a good one. History suggests we should © Owaki/Kulla/Corbis

24 ing solar, wind, auto efficiency, advanced vehicles, digitization of the electric grid, and advanced nuclear reactor designs. Alongside this research, state and federal governments have instituted a variety of policies that promote market adoption of more efficient technologies and practices as well as renewable and alternative fuels—from the Production Tax Credit, initially adopted in 1992, to various state renewable portfolio standards in the electric sector.

The Unexpected Forecasting market and technological developments is a very uncertain business: many defy views that were widely held at A plant in West Burlington, Iowa, produces corn ethanol, a the beginning of the decade. The dramatic fuel that is increasingly replacing oil from foreign sources. rise in natural gas and oil prices, the development of shale gas, the marketing of hybrid vehicles, the reduction in oil imports, the decline in carbon emissions, and the stop pretending we have solved the volatil- licensing of a new nuclear plant are but a ity problem or believing there is a simple few examples. solution if the government would just adopt In many respects, these developments it. Unexpected swings in basic energy prices of the last decade are very positive, but are here to stay. the picture is also marred by the terrible Another factor is entrepreneurial risk- explosions at the Macondo Well in the Gulf taking. Incentivized by high prices and of Mexico and at the nuclear reactors in government policy, some entrepreneurs Fukushima. These were painful remind- defied the conventional wisdom about ers that the scale of our energy operations what is possible. This was particularly the entails major risks. And with respect to case with respect to shale gas develop- global warming, neither our government ment. For years, the common perception nor much of the international community was that the gas trapped in shale could has yet found a strong path forward. not be economically extracted, and it was Perhaps the most significant develop- not until smaller companies took on the ment of the last decade is the new natural risky, ultimately profitable investments that gas supply. Already it is generating major the major companies began pursuing this economic benefits for the nation. At the resource. Such risk-taking also has been same time, it generates a number of important in the development of wind, uncertainties and challenges. Industry and solar, and other renewables as well as effi- government must work through a number ciency technologies of issues—water pollution and scarcity, air Also contributing to the changing energy pollution, and methane leakage—to assure picture are decades of private and public responsible development. This is a widely research on a host of technologies, includ- held conviction, articulated by the secretary

25 of energy’s task force led by John Deutch liquids. (who serves on RFF’s Board of Directors) The new gas supply is creating significant and by the National Petroleum Council’s adjustments in planning and investment study, Prudent Development. Meanwhile, for virtually all other major fuel sources. the public discussion has been exceedingly The near-term impact of lower natural gas stormy, making it difficult for many citizens prices has been to change the way electric to sort out the real risks from unfounded utilities are using their current generating fears. capacity—using more gas and less coal. In How fast this major new resource will the longer run, the supply picture is chang- develop is not altogether clear, nor is what ing the calculations used by utility compa- kind of price volatility to expect, given the nies and state regulators to assess new limited experience with developing and facilities and the various trade-offs among marketing this resource. Already we see coal, nuclear, renewables, and natural gas. shrinkage in shale gas production as the With respect to greenhouse gases, there excess supply has driven down gas prices is dispute over how much methane leakage and drillers have focused on more lucrative occurs in the course of current development tight oil wells and gas wells with associated activities and to what extent this can be

A pump jack extracts oil from shale that was drilled using hydraulic fracturing in the Southern Texas Eagle Ford Shale Formation.

26 The near-term impact of lower natural gas prices has been to change the way electric utilities are using their current generating capacity—using more gas and less coal. In the longer run, the supply picture is changing the calculations used to assess new facilities.

mitigated. The larger question is of natural cal research, market adoption of various gas's impact in replacing other fuels in our fuels, and our approach to climate change. energy mix. To the extent, for example, that The challenges of attempting a tax- it replaces coal in our electric generation, it code overhaul of a magnitude as great as is clearly beneficial with regard to carbon or greater than last achieved in 1986 are dioxide emissions, so long as methane considerable: How to address the critical leakage is minimized. To the extent that it need to get America’s fiscal house in order? replaces nuclear or renewable sources, it is How to reshape the code to better support likely to increase the carbon intensity of our economic growth in a highly competitive energy mix—though it also has the potential world? How to address the conflicting views to work well with renewables in manag- over what is fair? ing the problem of intermittency with wind Many reformers advocate simplification, and solar and enhancing the use of those elimination of most of the deductions or sources. RFF experts are examining some tax preferences, and rate reductions. On of the major issues associated with natural paper this may add up, but in practice it gas in a multi-year initiative, Managing the is considerably more difficult. To achieve Risks of Shale Gas: Identifying a Pathway significant reform that focuses on economic toward Responsible Development (see page progress and efficiency, Congress may want 19 of this issue for the latest results of this to consider some version of a carbon tax project). with revenues dedicated to cutting other taxes that impede economic growth. The Possibility of Significant Tax A carbon tax has several features that Reform make it an attractive option from an Congress has adopted a host of recent economic perspective and, from a political energy policies to grapple with some of point of view, a potential avenue to enable these issues, most notably the so-called the transformation of the tax code: comprehensive energy bills in 2005 and »» It is a policy that fits well with market 2007 and the stimulus package of 2009. economics. Not since the 1970s has there been as much »» It could generate revenue that, if recy- effort by the US government to reshape cled into the economy by cutting so-called our energy markets as in this last decade. distortionary taxes, has the potential for And now Congress is gearing up for a major contributing to economic growth rather © Shuli Hallak/Corbis overhaul of the tax code, which potentially than being a depressant. can affect the advancement of technologi- »» It has many design options that make it ➜

27 possible to address a variety of the concerns Further Reading expressed about carbon policy, such as the Krupnick, Alan, Ian Parry, Margaret Walls, Tony Knowles, and Kristin Hayes. 2010. Toward a New National Energy Policy: impact on trade-sensitive industries. Assessing the Options. Washington, DC: Resources for the »» It could begin modestly and rise over Future, National Energy Policy Institute. http://www.rff.org/ time, permitting adjustment. Documents/RFF-Rpt-NEPI%20Tech%20Manual_Final.pdf. National Petroleum Council. 2011. Prudent Development: »» It could reduce the need for more Realizing the Potential of North America’s Abundant Natural extensive subsidies and regulations to Gas and Oil Resources. Washington, DC: National Petroleum address the climate problem. Council. Palmer, Karen, Anthony Paul, and Matt Woerman. 2012. The If this option is to be seriously consid- Variability of Potential Revenue from a Tax on Carbon. Issue ered, there is a need for greater analysis, brief 12-03. Washington, DC: Resources for the Future. more consideration of design options, and http://www.rff.org/RFF/Documents/RFF-IB-12-03.pdf. extensive vetting with various sectors of the Parry, Ian, and Dick Heine. Reforming US Energy Policy to Better Address Market Failures. Unpublished manuscript. economy. RFF and others are engaged in this work.

28 Will Natural Gas Vehicles Be in Our Future?

Alan J. Krupnick examines the bid for natural gas to become a fuel of choice for America’s vehicle fleet.

Natural gas holds the promise of reducing natural gas (CNG) with gasoline and hybrid carbon emissions and dependence on oil. electric models, and heavy-duty trucks But until recently, it was an also-ran in the running on liquefied natural gas (LNG) sweepstakes for transforming fuel costs and with their diesel counterparts. High costs, transportation in the United States. The new reduced cargo space, and range issues— abundance of domestically available shale along with stiff competition from other gas and continuingly high gasoline and alternative fuels—are likely to make switch- diesel prices could change that. Will these ing to natural gas a tough sell for passenger developments be enough to extend the vehicles. Tractor trailer semi-trucks running reach of natural gas vehicles beyond buses, on LNG can be a good deal for reducing oil garbage trucks, and delivery trucks? use, conventional pollutant emissions, and To answer this question, I compared costs, but significant uncertainty surrounds

29 Natural Gas Vehicles at a Glance Natural gas vehicles have been a part of global vehicle fleets for decades, with an esti- mated 11 million on the road worldwide. With just 110,000 of these, the United States ranks 12th globally in number of gas-fueled vehicles—considerably behind Argentina, Brazil, Italy, India, and others. Between 1999 and 2009, US domestic consumption of natural gas in the transportation sector tripled, but infrastructure is lacking. There are 840 compressed natural gas and 39 liquefied natural gas fueling stations in the United States (compared with 4,000 diesel truck stops).

Sources: Bryce 2011; Natural & Bio Gas Vehicle Association 2011.

Passenger Vehicles: Comparing gasoline alternative. But fuel tanks for the Options compressed natural gas are large and The light-duty vehicle market currently has heavy, decreasing cargo space by a dramat- one natural gas entrant: the Civic Natural ic 50 percent compared with the gasoline Gas (formerly the GX) by Honda. Chrysler, version. Also, its range is lowered to only Ford, and Hong Kong–based Hybrid Kinetic 218 miles, compared with 383 miles for the Motors are also gearing up to produce comparable gasoline vehicle and 504 miles passenger vehicles that run, at least in part, for the hybrid. on natural gas. Assuming a seven-year period of annu- Some of the issues hindering penetration alization, an interest rate of 6 percent, a of natural gas–fueled passenger vehicles gasoline cost of $4 per gallon, and a natural

While a hybrid is more expensive than its gasoline- fueled counterpart by almost $400 per year, the natural gas Civic is $721 more expensive per year. become clear using Honda’s website to gas price of $3 per thousand cubic feet, compare its 2011 Civic GX with comparably the natural gas Civic is still more expensive. equipped conventional and hybrid Civics. While a hybrid is more expensive than its Without a subsidy, the natural gas Civic gasoline-fueled counterpart by almost $400 costs $26,240—modestly more expensive per year, the natural gas Civic is $721 more than the $24,700 hybrid but substantially expensive per year when the annualized more expensive than the $19,905 gasoline cost of a home-fueling unit is included. version. Its maintenance and repair costs Things look even worse for the natural gas– are also considerably more expensive. fueled car with a higher interest rate and The fuel economy for the natural gas the current gasoline price of around $3.50 Civic is about the same as that of the per gallon.

30 Of course, subsidies lower costs considerably. The Energy Tax Policy of 2005 offered a $4,000 subsidy for the purchase cost. While it expired in 2010, new bills call for reinstating it, and in April 2011, Congress passed HR 1380, an act that provides a $2,000 subsidy for home charging stations and the annual cost of the loan. After these adjustments, amortized costs are about $100 less than a gasoline vehicle. But the key question is whether a subsidy is justified independently of other types of vehicles and, then, in relation to other types of vehicles.

The Economics of LNG-Fueled Heavy-Duty Trucks Natural gas is more likely to fuel large trucks, particularly tractor trailers, and fleet vehicles, including buses. In addition to the cost and range issues, it would be costly to build the infrastructure to service passenger vehicles throughout the nation’s extensive road system. But tractor trailers travel mostly by interstate highways, where natural gas refueling stations could be concentrated. Indeed, changes in the way truckers drive— few are willing to routinely travel across the country—are leading to development of an interconnected hub-and-spoke system, where interstate trucking hubs are a one- or even half-day destination for truckers to unload their cargo and then pick up a new load on the way home. Because manufacturers have had only limited experience with natural gas engines, it is difficult to accurately estimate their future costs. Current estimates suggest natural gas trucks have very high up-front costs—around $70,000 more than comparable diesel trucks. Maintenance costs for natural gas trucks are also difficult to calculate: they have been found to be as much as 29 percent greater than their diesel © moodboard/Corbis

31 counterparts at one facility, and 6 percent at another, but these estimates are dated. Yet natural gas historically has cost less than diesel as a fuel, and currently is much cheaper at a gasoline equivalent of $2.50 per gallon. As a result, natural gas trucks can still make economic sense under plausible, albeit optimistic, scenarios—by providing payback periods that might be acceptable to truck buyers, for example. Payback refers to the amount of time it takes to repay the up-front investment cost through future energy savings, and it is commonly believed that industry looks for a period of two to three years or even less before it makes investments. To get there for an investment cost difference of $70,000 and fuel economy of 5.1 miles per gallon

Compared to diesel fuel’s lifecycle carbon emissions, those of LNG are smaller. But if the natural gas itself is not burned, it becomes a greenhouse gas 25 times more powerful than carbon dioxide over a 100-year period in the atmosphere. equivalent, one needs fuel price differentials of infrastructure for refueling. Those who in the $1.50-per-gallon equivalent range, would build the infrastructure want to see rates of interest used to evaluate multi-year many vehicles needing the fuel, but those fuel savings benefits of 10 percent or less, who would buy the vehicles want to see the and vehicle miles traveled around 125,000 infrastructure in place first. For natural gas, per year. it has been huge enough to have kept the According to the US Department of Trans- general public out of the market. Between portation, about one-third of the heavy-duty the compressors for the gas and the cooling fleet drives this distance. For trucks that travel units for the LNG, not to mention fuel stor- less than 90,000 miles per year, payback peri- age and refueling, only fleet vehicles fueled ods increase by about a year. This suggests at centralized facilities could make a go of it. that the high-mileage part of the trucking All this has been changing with the fleet is the best target for marketing. plunging price of natural gas. Companies with large holdings of natural gas wells and Solving the Chicken-or-Egg Problem high production goals, like Chesapeake The biggest stumbling block to the intro- Energy, have been looking for outlets for

duction of a new fuel is generally the lack selling their gas, and even to create new © David Goldman/AP/Corbis

32 from conventional gas wells or from shale gas wells are smaller. But if the natural gas itself—methane—is not burned, it becomes a greenhouse gas 25 times more powerful than carbon dioxide over a 100-year period in the atmosphere. Calculating just how methane emissions compare with their carbon dioxide counterparts is tricky, though. Because methane lasts for far less time in the atmosphere, some researchers use a much higher factor in converting methane to its carbon dioxide equivalent. In addition, the amount of methane that escapes—is “fugitive,” in industry parlance—from gas wells is uncertain. According to the latest studies, putting together the short lifetime of methane and a high estimate for fugitive methane emissions can result in lifecycle emissions for LNG vehicles exceeding those of diesel. Until this issue is settled, the environmental benefits of natural gas vehicles markets, with the increase in demand rais- are uncertain. ing prices and increasing profits. Accord- ingly, some companies have been making Further Reading Brown, Steven P.A., Alan J. Krupnick, and Margaret A. Walls. plans to invest in infrastructure. Chesapeake 2009. Natural Gas: A Bridge to a Low-Carbon Future? Issue Energy’s plans are the most impressive: brief 09-11. Washington, DC: Resources for the Future. they are building 150 LNG/CNG stations on Bryce, Robert. 2011. Energy Policy & the Environment Report: interstates across the country, using Pilot J Ten Reasons Why Natural Gas Will Fuel the Future. New York: Manhattan Institute for Policy Research. http://www. truck filling station land. Other companies manhattan-institute.org/html/eper_08.htm. are partnering to build and operate LNG Chandler, Kevin, Kevin Walkowitcz, and Nigel Clark. 2002. “corridors” between some major cities to United Parcel Service (UPS) CNG Truck Fleet: Final Results. Research report NREL/BR-540-31227. Golden, CO: US. support heavy-duty truck traffic. Thus, this Department of Energy, National Renewables Laboratory. segment of the market could experience Krupnick, Alan J. 2011. Will Natural Gas Vehicles Be in Our significant growth. Future? Issue brief 11-06. Washington, DC: Resources for the Future. Krupnick, Alan J., Ian W.H. Parry, Margaret A. Walls, Kristin The Last Hurdle: Uncertain Hayes, and Anthony C. Knowles. 2010. Toward a New Environmental Benefits National Energy Policy: Assessing the Options. Washington, With costs and infrastructure in their favor, DC: Resources for the Future. Natural & Bio Gas Vehicle Association Europe. 2011. LNG trucks face one more hurdle—their Worldwide NGV Statistics. http://www.ngvaeurope.eu/ carbon footprint. Compared to diesel fuel’s worldwide-ngv-statistics. lifecycle carbon emissions, those of LNG

33 Does Speculation Drive Oil Prices?

The populist view is that financial trading is responsible for the oil price spike of 2004–2008. But as James L. Smith explains, ongoing research points elsewhere.

The price of crude oil seems erratic. It the root causes of oil’s tremendous price swings up, then down, in endless and volatility. Economists have identified a seemingly inexplicable cycles. The breath- number of factors, including the relative taking ascent from $34 to $145 per barrel rigidity of supply and demand for oil, as well between January 2004 and July 2008, as the magnitude and frequency of unex- followed by a sharp retreat all the way pected shocks that periodically disrupt the back to $34 by January 2009, is a dramatic market. Any disruption, whether to demand example of what has become a familiar or supply, requires extraordinarily large pattern. The economic significance of these price adjustments to persuade producers price swings is underscored by the fact and consumers to adjust their behavior that crude oil comprises the single largest as required to restore equilibrium to the component of global trade, far outranking market. As a rule of thumb, a 1 percent the combined value of clothing, food, and disruption to the supply of oil creates a automobiles. corresponding 10 percent jump in the price. Nearly all nations are vitally affected Libya provides a real-word example: Libyan by the price of crude oil—as consumers, output comprises roughly 2 percent of total producers, or both—and are interested in world production of crude oil, and global

34 prices jumped roughly 20 percent when tupled between 2004 and 2008. Although Libyan shipments were blocked by revolu- the number of contracts held by commer- tion last year. cial traders—producers and consumers of Alongside these fundamental reasons for oil who use futures contracts to hedge their the volatility of oil prices, there are persis- natural exposure to price risk—also grew, tent concerns that excessive speculation the increase was less and their market share and financial trading in the futures market declined from 67 percent to 50 percent have played a role. These concerns emerged between those years. Since the financial as the flow of “managed money”—finan- influx was accompanied by a steep ascent cial investments placed by hedge funds, in oil prices, it is natural to ask whether this pension plans, commodity index funds, and represents coincidence or causality. the like—into the commodity markets esca- lated in recent years. This so-called “finan- Common Wisdom cialization” of the futures markets (crude and Its Shortcomings oil included) has been well documented. The populist view is quite simple: whenever For example, the total number of crude oil a large influx of new money comes into a

35 and when that money leaves, the price expires. This is the mechanism by which must fall. As a general economic proposi- futures traders take their gains and losses, tion, this view occupies hallowed ground, known in the industry as “financial settle- capturing the spirit of Milton Friedman’s ment.” No hedge fund wants to receive a quantity theory of money, which sees cargo of crude oil delivered to its door, but inflation as the end result when a grow- this can only be avoided if the hedge fund ing supply of money chases a fixed supply sells back all of its contracts before they

An influx of money into the futures market does not, per se, move the price of oil. Only a change in expectations regarding market conditions can do that. of goods. Applications of this principle to expire. Every futures contract purchased certain individual commodities may be by an investor is subsequently sold back appropriate. For example, recent record- by that same investor, and this fact is breaking prices of the best vintages of fine known and anticipated by all investors Bordeaux wine can safely be attributed to in the market. Thus, for each and every the new and large influx of Chinese demand contract, buying pressure equals selling chasing what is an absolutely fixed supply pressure—which ultimately equals no pres- of the product. But attempts to extend the sure. Futures trades neither add nor remove logic of the quantity theory to the operation oil from the physical supply chain, where of futures markets fail badly. the spot price of oil is determined. Thus, The first failing arises because the quan- an influx of money into the futures market tity of futures contracts, unlike the supply does not, per se, move the price of oil. Only of Bordeaux, is not fixed, but expands or a change in expectations regarding market contracts to equilibrate the market. When a conditions can do that. hedge fund manager expresses a desire to This leads us to consider the alternative purchase oil futures at $100 per barrel, his hypothesis of contagion, a channel by which demand can be supplied simply by creat- financial traders may conceivably impact ing a contract de novo and selling it to him. the price. If heightened trading by financial And if he wants another, it can be created investors alters the expectations of commer- and sold as well. The seller would only do cial traders, then any resulting adjustments so, of course, if he expected oil to sell in to production, inventories, or consumption the future for less than $100 per barrel, but could move prices to a new level. Was this regardless of prevailing price expectations, behind the recent price spikes? futures contracts always can be created to accommodate demand. (If only that were What Research Tells Us true of fine Bordeaux.) Economists tend to believe that prices The second failing is to assume that an reflect expectations, and when expecta- influx of money necessarily creates buying tions change, prices follow. It is an empirical pressure. In fact, each contract initially question whether the actions of financial purchased by an investor will be resold traders had such an impact on expectations by that same investor before the contract and prices during the 2008 oil price spike.

36 Fortunately, empirical research has begun of contracts by hedge funds indeed causes to provide some answers. prices to rise, then such a pattern should be Most relevant to the question of plac- apparent in the historical data. But research- ing new restrictions on futures trading are ers have found that in fact, the opposite studies that focus directly on the impact pattern emerges. From 2000 to 2009, hedge of trades made by hedge funds and other funds and other financial traders seem to

From 2000 to 2009, hedge funds and other financial traders seem to have adjusted positions in response to price movements; their trades do not appear to have caused price movements.

financial investors. Using comprehensive have adjusted positions in response to price data from the Commodity Futures Trading movements; their trades do not appear to Commission (CFTC) that reflect individual have caused price movements. trading patterns in the NYMEX WTI crude oil The behavior of other commodities not futures contract, these studies investigate widely traded on futures markets provides whether price movements typically have corroborating evidence and suggests been preceded by changes in the trading that the 2008 oil price spike was prob- positions of hedge funds and other types ably due to the unprecedented increase in

37 emanated from India and China, rather than metric models) to model misspecification, the financialization of the futures market. left-out variables, and unaccounted shocks Studies by the International Energy Agency that have nothing to do with speculative and other researchers show that prices of trading. At best, this simple “not elsewhere non-traded commodities like manganese, classified” approach to price movements rice, cobalt, and coal all tended to rise and suggests that speculation could account, at fall in unison with oil between 2004 and most, for 25 percent of observed oil price 2009, without any prompting or prodding variations. by futures traders. The question has been subjected to more Other strands of current research bear on rigorous analysis in the form of struc- the question at hand, albeit from somewhat tural vector autoregressive (SVAR) models. different perspectives. For example, simple Roughly speaking, this approach attempts attempts to model and measure fluctua- to isolate and distinguish the several causes tions in the basic fundamental determi- of observed price movements and measure nants of oil prices leave about 25 percent their relative importance. It is based on the of total price movements unexplained. One hypothesis that different types of shocks interpretation is that the residual percent- leave distinctive fingerprints on the price of age might be due to speculation. Another oil. For example, demand shocks associated is that the unexplained portion of observed with unexpected changes in the global busi- price movements is due (as in many econo- ness cycle should cause global oil produc- © David Brabyn/Corbis

38 tion, global economic activity, and the price Regulatory Response of oil all to increase, whereas supply shocks Despite ongoing research, the question should cause the price of oil to increase of whether oil speculation caused the while global oil production and economic recent spike in oil prices appears settled to activity both fall. Shocks to the speculative some observers. New regulatory policies demand for oil should cause inventories are taking shape in the United States and to accumulate at the same time that oil elsewhere based on the assumption that prices rise. By searching through all these financial speculation and excessive futures related time series for the characteristic trading push oil prices away from funda-

Any summary of the peer-reviewed research produced so far would place the weight of evidence on the side that market fundamentals, not financial speculation, drive the price of oil. fingerprints, the SVAR technique apportions mental values. As part of the Dodd-Frank observed variation in oil prices to its various financial overhaul, for example, the Federal components. Reserve, Securities and Exchange Commis- The most straightforward application of sion, and CFTC are circulating reforms that the SVAR technique finds historical evidence will impose new costs on financial inves- that speculation moved oil prices on tors and limit their investment in futures numerous occasions—in 1979, 1986, 1990, contracts. Whether these policies will have and late 2002—which accords with other the intended effect remains to be seen— anecdotal evidence. It provides little support, the channel by which financial trading though, for the notion that the oil price might impact commodity prices is anything surge between 2004 and 2008 was due to but transparent. speculation. Rather, the analysis identifies a series of negative supply shocks and, more Further Reading Buyuksahin, Bahattin, and Jeffry H. Harris. 2011. Do Specula- significantly, a series of positive demand tors Drive Crude Oil Futures Prices? The Energy Journal shocks as causes of the price spike. 32(2): 167–202. Empirical research on the impact of Fattouh, Bassam, Lutz Kilian, and Lavan Mahadeva. 2012. The financial trading is subject to many limita- Role of Speculation in Oil Markets: What Have We Learned so Far? Working paper. http://www-personal.umich. tions, and while research remains ongoing, edu/~lkilian/milan030612.pdf. it seems prudent to keep an open mind. Yet Irwin, Scott H., and Dwight R. Sanders. 2012. Testing the any summary of the peer-reviewed research Masters Hypothesis in Commodity Futures Markets. Energy Economics 34: 256–69. produced so far would place the weight of Smith, James L. 2009. World Oil: Market or Mayhem? Journal of evidence on the side that market funda- Economic Perspectives 23(3): 145–164. mentals, not financial speculation, drive the Stoll, Hans R., and Robert E. Whaley. 2010. Commodity Index Investing and Commodity Futures Prices. Journal of Applied price of oil. Finance 20(1): 7–46.

40 Clean Air Regulations the Electri&city Will historic air Sector pollution regulations have dramatic effects By Karen Palmer, on electricity prices and Dallas Burtraw, the generation mix? Anthony Paul, Blair Beasley, No, but cheap natural gas and Matt Woerman and falling demand might.

Two decades of air pollution rulemaking in industries outside the electricity sector for culminated last year with two landmark decades. regulations aimed at controlling emissions The scope of the new rules is such that from the electricity sector. One of these, the segments of the electricity industry are Cross-State Air Pollution Rule, would have expressing significant concerns about the

controlled emissions of nitrogen oxides (NOx) cost of complying and the potential for the

and sulfur dioxide (SO2)—ingredients in smog, regulations to cause reliability problems. acid rain, and fine particulate pollution associ- Some fear that many coal-fired power ated largely with burning coal—in the eastern plants will opt to shut down instead of half of the country. On August 21 this regula- investing in expensive pollution controls, tion was overturned by the DC Circuit Court leading to electricity shortfalls. Others worry of Appeals. In its place remains the Clean Air the rules will cause short-term reliability Interstate Rule. Meanwhile, also in effect while problems if large numbers of power plants under court review are the Mercury and Air temporarily go offline to install new pollu- Toxics Standards. These set national emissions tion controls. And the apprehension that rates for acid gases and heavy metals, most electricity prices will skyrocket or utility notably mercury, which has been regulated profits will plummet has fueled industry

41 criticism of the new regulations. have profound impacts for the electricity These concerns are largely misplaced, industry and for expectations regarding the according to our analysis, using Haiku, RFF’s effects of environmental policy. sophisticated national electricity sector simulation model. The regulations do have Effects on the Power Sector a cost: they require power plants to invest The rules will lead to substantial new invest- in expensive technology upgrades. But even ment in pollution controls at existing coal- if both new rules were implemented, we fired facilities. By 2020 the two rules would find that by 2020, retail electricity prices lead to the introduction of new pollution increase by just 1 percent as a result of controls at about 220 gigawatts of coal-fired the two rules combined, and neither rule capacity, or roughly two-thirds of the exist- creates a substantial decrease in generating ing coal-fired fleet. We estimate that these capacity. investments come at an annual capital cost Dwarfing the effects of the regulations are of $6.6 billion (in 2009 dollars) if both regu- two long-term market trends: a drop in the lations are implemented, an increase of 39 growth rate of electricity demand and fall- percent over pollution control capital costs ing natural gas prices as new technologies in the baseline scenario. enable the economical extraction of gas The costs of compliance have led to from domestic shale reserves. These trends speculation that many coal-fired generators

The New Regulations The US Environmental Protection Agency (EPA) finalized its Cross-State Air Pollu- tion Rule on July 6, 2011. Under the rule, electricity generating units in 28 states in the eastern half of the country are required to significantly reduce air pollution that

crosses state lines, including SO2 and NOx emissions. The rule allows unlimited intra- state trading of pollution credits between power plants and limited interstate trading. The first phase of compliance would have begun in January 2012, with a second

phase of SO2 reductions scheduled to begin in 2014. On August 21, the US Court of Appeals for the DC Circuit overturned the rule, and an EPA decision about whether to appeal the decision is pending.

In late 2011, EPA also finalized its Mercury and Air Toxics Standards for power plants. The rule requires new and existing coal- and oil-fired units to reduce emissions of heavy metals—including mercury, arsenic, chromium, and nickel—and of acid gases, such as hydrogen chloride and hydrogen fluoride. The rule allows for power plants to use a range of technologies to meet the standards. Existing sources must comply within three years, but sources can obtain an additional year from state permitting authorities if needed to complete retrofits. As a result, most plants will have until 2016 to comply. Units that play an important reliability role also can apply for an administrative order to obtain an additional year to become compliant. The rule is being challenged in the courts. And in July 2012, EPA announced that it would reconsider portions of the rule addressing new power plants. The agency is not reconsider- ing the rule for existing sources.

42 will shut down in lieu of making pollution percent through 2035. While this division control investments, reducing the capacity suggests that consumers pay most of the of the power system. However, we find that costs, their share is actually less than one neither the mercury standards alone nor the would usually expect from environmental mercury standards plus the Cross-State Air regulation. Pollution Rule lead to substantial changes in The reason for this division is the complex existing capacity. The court’s rejection of the interplay among technology, allowance Cross-State Rule does not affect our results prices, and retail electricity prices faced by because the court left in place the Clean Air consumers. Because the regulations require Interstate Rule, which we also have in place power plants to invest in pollution control

as a backstop. We expect coal capacity to technologies, emissions of SO2 and NOx fall, fall by about 1.5 percent in 2020 under both lowering the demand for associated allow- policy scenarios. Natural gas capacity chang- ances and therefore their price. For example, es even less. Most striking, these reduc- the mercury rule completely eliminates the

tions are small compared with anticipated need to purchase SO2 allowances by the year changes in capacity stemming from recent 2020, representing a $7.3 billion cost savings. projections for lower natural gas prices and But because the allowances are given for reduced electricity demand growth. free to coal-fired power plants, they will not We estimate total annual costs in 2020 save the $7.3 billion. Instead, consumers for consumers and producers are $7.1 capture the lion’s share of the benefit from billion under the mercury scenario and $6.6 the reduction in allowance prices through billion under both regulations. An unusual its effect on retail prices for electricity. The aspect of the regulatory environment is opportunity cost of using allowances is part the distribution of costs between consum- of the variable cost of operating the plants, ers and producers. Whether the Mercury so as this cost falls when allowance prices and Air Toxics Standards are implemented fall, consumers face lower prices. independently or alongside the Cross-State On net, the electricity price reductions Air Pollution Rule, consumers pay for about from the savings in allowance costs almost 70 percent of the costs associated with the fully offset the price increases from expand-

43 a very slight increase in national average end-use energy-efficiency investments. prices under both scenarios compared with These trends have implications for present the baseline. In 2020, the national average and future electricity generator revenues and electricity price will rise by about 1 percent, profits. Our analysis shows that the changes from $88 per megawatt hour in the baseline between 2009 and 2011 in projections of to $89 in the scenario without the Cross- natural gas supply and electricity demand State Air Pollution Rule, with an even smaller have a much bigger effect on electricity pric- change when both regulations are in place. es, total generation, and generation mix than Producers, on the other hand, will experi- does the introduction of the Cross-State Air ence significant effects from the regulations Pollution Rule or the Mercury and Air Toxics in the form of reduced revenue due to the Standards. For electricity prices, these secular decline in allowance value. Overall, we find changes drive effects that are generally more producer profits at existing generation facili- than five times greater than the effects of ties fall in 2020 by $3 billion to $5 billion new regulation. That multiple is even bigger under the policy scenarios. when comparing the effects on electricity consumption and generation from coal. Market Trends Industry, policymakers, and the public will Whether one thinks these effects are want to distinguish these effects from those significant or not, they pale in the context of of environmental regulation when evaluating trends in fuel prices and electricity demand the consequences of regulation. that are already changing the power sector. The one outcome these regulations affect A key element is the game-changing nature more is emissions. Introducing the Cross- of newly accessible shale gas reserves. State Air Pollution Rule leads to a substan-

Recent technological innovations have tially larger reduction of SO2 emissions than enabled extraction of natural gas from shale do the changes in demand and natural gas formations that was formerly uneconomic prices. Similarly, introducing the Mercury and changed the economics of electricity and Air Toxics Standards leads to a substan- generation, favoring natural gas and disad- tial reduction in mercury emissions from vantaging coal. Lower prices for natural gas electricity producers. Emissions of mercury also tend to reduce wholesale electricity are expected to fall by almost 80 percent prices, thereby lowering the profitability of and emissions of SO2 are expected to fall by electricity supply for non-gas generators, 27 to 34 percent in 2020 under the differ- including coal generators. ent policies. These important reductions These effects have already begun to be come with apparently little disruption to realized; the US Energy Information Admin- the sector, especially in comparison with istration has noted a 16 percent increase in the disruptions associated with a changing daily consumption of natural gas by elec- world resulting from trends in fuel prices tricity generators in the summers between and electricity demand. 2008 and 2010, and in March 2012, coal’s share of total generation had fallen to Further Reading Burtraw, Dallas, Karen Palmer, Anthony Paul, Blair Beasley, and 34 percent compared with just under 50 Matt Woerman. 2012. Reliability in the Electricity Sector percent in 2009. Coincident with gas price under New Environmental Regulations. Discussion paper declines, electricity demand projections also 12-18. Washington, DC: Resources for the Future. have been falling as a dual consequence Burtraw, Dallas, Karen Palmer, Anthony Paul, and Matt Woer- man. 2012. Secular Trends, Environmental Regulation, and of the recession and expected increases in Electricity Markets. The Electricity Journal 25(6): 35–47.

44 Inside RFF

A Look at What’s Happening Inside RFF

The Spring 2012 issue of Daedalus, the RFF Fellow Yusuke Kuwayama won the Journal of the American Academy of Arts 2011 Outstanding Dissertation Award & Sciences, featured articles by several from the Department of Agricultural and RFF experts, including “The Alternative Consumer Economics at University of Illinois Energy Future: Challenges for Technological at Urbana-Champaign. Change,” coauthored by RFF Visiting Scholar Robert Fri; “Using the Market to Address RFF Resident Scholar Leonard Shabman’s Climate Change: Insights from Theory & article “Rhetoric and Reality of Water Quality Experience,” by RFF Nonresident Fellow Trading and the Potential for Market-like Joseph E. Aldy and Board Member Robert Reform” is a finalist for best paper published Stavins; and “National Prices to Promote in the Journal of the American Water Resourc- Renewable Energy,” by RFF Board Member es Association in 2011. Mohamed T. El-Ashry.

RFF named the following academic fellowships and special stipend awardees to conduct environmental and energy research during the coming year:

Gilbert F. White Postdoctoral Fellowship Paul Scott, a PhD student in econom- Per Fredriksson, professor of economics ics at Princeton University, is completing at the University of Louisville, will pursue his dissertation, in which he models crop empirical research on environmental choice decisions and applies those results to federalism. evaluate the effects of potential regulations of greenhouse gases from agriculture. Joseph L. Fisher Doctoral Dissertation Fellowships John V. Krutilla Research Stipend Peter Maniloff, a PhD student in envi- Timothy Fitzgerald, an assistant professor at ronmental science at Duke University, is Montana State University, will research the completing his dissertation on volatility energy and environmental trade-offs associ- and environmental policy, focusing on ated with hydraulic fracturing for natural gas. ethanol and oil price shocks, price contain- ment in greenhouse gas cap-and-trade, and Walter O. Spofford Memorial Internship environmental liability. Zifei Yang, who recently completed a master’s in public administration at Ameri- Nicole Ngo, a PhD student in sustainable can University, will work with RFF Fellow development at Columbia University, is Zhongmin Wang on research that compares completing her research on air pollution the development of shale gas and coal-bed and health in New York City and Nairobi. methane in the United States and China, and assesses implications for Chinese energy and environmental policy.

45 Unearthing RFF History Inside RFF

In the course of reviewing RFF’s volumi- recommenda- nous paper files during a major renovation tions led to the of our offices in Washington, DC, librarian creation of RFF, a Chris Clotworthy came across a remarkable “landmark.” Says Clotworthy, who is also piece of RFF history. Amid all the memos, the proprietor of the RFF Library Blog budgets, and agreements was a letter from (rfflibrary.wordpress.com), “One of the great President Harry S. Truman to William Paley, benefits of working at RFF for someone like commending the work of the President’s me is the incredible history of the place, Materials Policy Commission. In thanking which goes back 60 years and is filled with Paley, Truman called the report, whose important intellectual contributions.”

June 23rd, 1952

Dear Mr. Paley: Your Commission’s report is a landmark in its field. I do not believe there has ever been attempted before such a broad and far-sighted appraisal of the material needs and resources of the United States in relation to the needs and resources of the whole free world. Nor, in my judgment, has the conclusion ever been so forcefully stated and documented that international cooperation in resource development and international trade in raw materials is imperative to world peace and prosperity. Your report likewise makes clear exactly where and how we need to conserve and strengthen our natural resources here at home, and to maintain our dynamic progress in science and technology. The conviction you have expressed that this Nation, despite its serious materials problem, can continue to raise its living standards and strengthen its security in partnership with other freedom loving nations should be heartening to people everywhere. I have not yet had an opportunity to study in detail each of your specific recommendations but I am sure they merit careful consideration, not only by the Congress and the executive branch of the Federal Government, but by state governments, the general public and especially by farm, labor, industry and other private groups most closely related to the problem. It is my hope that your report will stimulate further study and discussion, both in and out of Government, of all aspects of this vital problem. I extend to your Commission and its staff my thanks and congratulations for the public service you have rendered. Your study, I feel sure, will be appreciated not only in our own country but by people of other nations with which the United States is cooperating toward the preservation of freedom and peace, and the enrichment of human life.

46 Inside RFF

Summer Interns

Every summer, interns come from around the world to work with the RFF research staff.

Standing, left to right: Will Rafey, Andrew Waxman, Reeaz Bassa, Jhon Valdez.

Seated, left to right: Jackie Willwerth, Zifei Yang, RFF President Phil Sharp, Paige Weber, Meg Walker.

Not pictured: Ron Chan, Kevin Collins, Laura Fielding, Han Kyul Yoo.

Celebrate RFF’s 60th Year with Resources 2020

RFF is celebrating its 60th anniversary with Resources 2020, a yearlong exploration of how economic inquiry can address future environmental and natural resource challenges. Special events are planned throughout the year, including a distinguished lecture series featuring Nobel Laureates in Economics.

Joseph E. Stiglitz, October 5 2001 Nobel Laureate in Economic Sciences University Professor, Columbia University

Kenneth J. Arrow, November 13 1972 Nobel Laureate in Economic Sciences Professor of Economics (Emeritus), Stanford University

Thomas C. Schelling, December 13 2005 Nobel Laureate in Economic Sciences Distinguished University Professor, University of Maryland

Each of the events is free and open to the public. For more information or to RSVP, visit www.rff.org/Resources2020.

47 Opportunities to Support RFF

In 1951, a presidential commission called for an independent organization to inform the nation’s natural resource planning. In 1952, RFF was created to do just that. Today, RFF

Support RFF enjoys a broad base of support from government, individuals, foundations, and corporations. Through this continuing support, RFF is able to help decisionmakers develop policies that work. RFF relies on those who have the vision to see the role rigorous, objective research plays in formulating sound public policies. Contributors to RFF receive a wide variety of benefits, including invitations to special events, targeted research reports, and briefings with RFF experts. For a complete listing of these benefits, visit www.rff.org/support.

There are many ways to contribute: Send your gift directly to RFF Resources for the Future Attn: Development Office 1616 P St. NW Washington, DC 20036

Donate online through the secure Network for Good website at www.networkforgood.org.

Participate in the Combined Federal Campaign and support RFF using CFC code 19241.

Provide matching gifts through your employer’s matching gift program. Your personnel office can provide you with the appropriate form to include with your donation. RFF’s Tax ID number is 53-0220900.

Give gifts of stocks, bonds, or mutual funds.

Consider planned gifts through bequests or deferred giving.

Contact Us Whether you’re interested in providing unrestricted support for RFF, giving to a specific program, or partnering in another way, the RFF Development Office can tailor opportunities to meet your needs. Please feel free to contact the appropriate individual listed below.

For individual giving, contact Barbara Bush at 202.328.5030 or [email protected].

For foundation and corporation support, contact Key Hill at 202.328.5042 or [email protected].

All other inquiries should be directed to Lea Harvey at 202.328.5016 or [email protected].

nonprofit org U.S. POSTAGE 1616 P St. NW PAID Washington, DC 20036-1400 PERMIT NO. 8 Hanover, NH return service requested

New from RFF Press

Water Diplomacy Carbon Capture and A Negotiated Approach to Sequestration Managing Complex Water M. Granger Morgan and Networks Sean T. McCoy Shafiqul Islam and This book identifies current law Lawrence E. Susskind and regulation that apply to geologic sequestration in the US, Water is the resource that will the regulatory needs to ensure determine the wealth, welfare, that geologic sequestration is and stability of many countries carried out safely and effectively, in the twenty-first century. This book offers a new approach and barriers that current law to managing water that will and regulation present to timely overcome the conflicts that emerge when the interactions deployment of CCS. The authors among natural, societal, and political forces are overlooked. operationalize their recommendations in legislative language, Solutions will only emerge if a negotiated or diplomatic which is of particular use to policymakers faced with the chal- approach—that blends science, policy, and politics—is used lenge of addressing climate change and energy. to manage water networks. The authors show how open “This volume carefully explains why old models won’t work, and constantly changing water networks can be managed and more important, how to do it right. It’s an essential start- successfully using collaborative adaptive techniques to build ing point for realizing the promise of this technology.” informed agreements among experts, users with conflicting interests, and governmental bodies. —Robert W. Fri, Senior Fellow Emeritus at RFF June 2012 June 2012 Paperback: 978-1-61726-103-9 Hardback: 978-1-61726-101-5 Hardback: 978-1-61726-102-2 www.routledge.com/9781617261015 www.routledge.com/9781617261039 To place an order, please visit www.routledge.com/rffpress or call 1-800-634-7064

RFF Press is an imprint of Routledge/Taylor & Francis, a global publisher of quality academic books, journals and online reference.