Economix: John Mitchell analyzes energy regulations

{safe_alt_text}Oregon has joined with California, Washington, Arizona, Utah, New Mexico, British Columbia and Manitoba in a long-term effort to reduce greenhouse gas emissions to 15% below 2005 levels by 2020.


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{safe_alt_text} BY JOHN MITCHELL

Oregon has joined with California, Washington, Arizona, Utah, New Mexico, British Columbia and Manitoba in a long-term effort to reduce greenhouse gas emissions to 15% below 2005 levels by 2020. Interest in greenhouse gases and global climate change has grown with additional warming evidence, celebrity involvement and graphic pictures of melting glaciers. The anxiety has merged with concerns about energy security, looming Iowa caucuses and the perils of dependence on oil supplies, large portions of which happen to be under lands occupied by governments that can charitably be described as unfriendly.

To economists, the emission of greenhouse gases is an externality — an action by one unit that imposes uncompensated costs or benefits on others. Externalities can be positive or negative. If you keep up your house, your neighbor benefits with a nice view and perhaps a higher selling price. If you discharge waste into a river, people downstream may be negatively impacted. Greenhouse gas emissions impact climate change and may harm future generations. The exact impact of the human contribution is uncertain, but policies are being formed to reduce the emissions and presumably the impact on future generations. This assumes that the developing world goes along. Much of the recent focus on greenhouse gas emissions has been on power generation and transportation.

The 2007 Oregon Legislature enacted a renewable portfolio standard for electricity that requires 25% of the electric load to come from new renewable energy sources by 2025, renewable being defined as wind, wave, solar, tidal, geothermal, biomass, new hydro or efficiency upgrades to existing modes. Firms can meet the standard by building or buying the power or making payments to be used for conservation.

The legislation primarily impacts Portland General Electric, Pacific Power and Eugene Water & Electric Board, one of the state’s consumer-owned utilities. The Energy Information Administration (EIA) stated in September that 4.7% of Oregon’s net electricity generation was from renewables other than hydro, and 65% was hydroelectric. (EIA also said Oregonians’ electricity costs are about 75% of the national average.) The magnitude of this policy change is dramatic, particularly when one starts from a system dominated by a renewable base.

House Bill 2210 set biofuel requirements for both diesel- and gasoline-powered vehicles. After production of biodiesel from sources in Oregon, Washington, Idaho and Montana reaches 5 million gallons annualized, a 2% biodiesel requirement goes into effect. When production in Oregon reaches 15 million gallons, a 5% requirement is imposed. For gasoline, a 10% ethanol requirement goes into effect when production of ethanol in the state reaches 40 million gallons. The EIA says that in Oregon, motor gasoline use in 2005 was 1.54 billion gallons — yes, billion. We are going to need more ethanol.

Lots of young males (and maybe some females) like to throw rocks in ponds to watch the ripples. The analogy seems appropriate as we start down the path to reduce emissions and dependence on fossil fuels. We are in one sense internalizing the externalities — bearing the costs of our actions. Portfolio requirements, cap and trade systems and carbon taxes are ways to increase the relative price of energy by including some of the external costs. Carbon taxes are explicit (visible), while cap and trade systems, increased mileage standards and portfolio requirements are more indirect but move us in the same direction.

The ripples are just starting. The surge in agricultural prices in 2007 is in part due to the diversion of farmland into corn production. The drive to biofuels has linked food production and energy in a new way.

While eating an ear of corn recently, I could not help thinking that it could go in my truck. A 10% ethanol requirement means 45 pounds of corn for a 25-gallon fill-up. In this corner of the world, we are accustomed to cheap electricity. At the margin, our capacity increases will be like that of the rest of the nation as regions seek renewable sources.

Slogans and sound bites are fun, and politicians can fashion goals for people long after their own terms end. Changed relative prices will change behavior. Internalizing the externalities will mean doing things differently ­— from transportation choices, both mode and vehicle, to dwelling types and location. If we are serious, we will be looking at windmills, buoys and solar, all of which have different characteristics for ramping up production to meet peak loads.

The rocks have been thrown and the ripples are starting. It promises to be very exciting as we see the generally underestimated flexibility of the U.S. economy on display.

John Mitchell is a contributing columnist for Oregon Business magazine and former chief economist for US Bancorp.

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