News and Outreach: Christopher Knittel

A new study indicates that solving the problem of wind and solar’s intermittency has thus far required the use of more fossil fuels, including the installation of several “fast-ramping” natural gas plants. Center for Energy and Environment Policy Research (CEEPR) Director Christopher Knittel comments.

Photo: Big Bend Power Station and Manatee Viewing Center Parking Lot - Solar vs Coal & Natural Gas.  Source: Walter)

In recent years, proponents of clean energy have taken heart in the falling prices of solar and wind power, hoping they will drive an energy revolution. But a new study co-authored by an MIT professor suggests otherwise.

Peter Dizikes | MIT News Office

The politics of climate change are often depicted as a simple battle, between environmentalists and particular industries, over government policy. That’s not wrong, but it’s only a rough sketch of the matter. Now a paper co-authored by MIT economist Christopher Knittel fills in some important details of the picture, revealing an essential mechanism that underlies the politics of the climate battle.

Specifically, as Knittel and his colleagues demonstrate, at least one climate policy enacted by Congress — on transportation fuels — contains a crucial asymmetry: It imposes modest costs on most people, but yields significant benefits for a smaller group. Thus, most people are politically indifferent to the legislation, even though it hurts them marginally, but a few fight hard to maintain it. The same principle may also apply to other types of climate legislation.

In 2005, Congress introduced the Renewable Fuel Standard (RFS), which mandates a minimum level of ethanol that must be used in gasoline every year, as a way of reducing greenhouse gas emissions. Ethanol can indeed reduce emissions, but as Knittel and other economists have argued, it is not the most efficient way of doing so: He estimates that mandating ethanol use is at least 2.5 times as costly, per ton of greenhouse gas reduction, as a cap-and-trade (CAT) policy, which would price the carbon emitted by all transportation fuels.

But corn-based ethanol production has strong political support in the Midwest, where much of the corn industry is based. In the new paper, Knittel and his colleagues quantify that effect in unique detail. They model what U.S. fuel consumption would likely look like through 2022 under both RFS and CAT scenarios, among others. Compared with a cap-and-trade system, the average American would lose $34 annually due to the RFS policy. But 5 percent of U.S. counties would gain more than $1,250 per capita, and one county gains $6,000 per capita.

Thus, most people are indifferent to the shortcomings of the RFS policy, but those who care tend to support it vigorously.

“Because of the skew in the distribution, you have the typical voter who doesn’t find it in their interest to fight against the inefficient policy, but the big winners are really going to fight for the inefficient policy,” says Knittel, adding: “If the typical voter is losing $30 a year, that’s not enough for me to write to my congressman. Whereas if you have someone on the upper end who is going to gain $6,000 — that’s enough for me to write my congressman.”

The political economy of energy

As the study shows, some folks do more than write to their representatives. Knittel and his colleagues found that members of the House of Representatives in districts that gain greatly from the RFS policy received an average of $33,000 more from organizations that opposed one particular piece of legislation — the 2009 Waxman-Markey bill, which would have created a CAT system, and likely would have reduced ethanol use. That bill passed in the House in July 2009, but was never taken up by the U.S. Senate.   

That difference in campaign contributions holds up strongly even when the researchers controlled for factors such as ideology, state, and overall emissions. That is, other things being equal, representatives of the specific areas benefitting most from RFS were given far more in donations from opponents of the Waxman-Markey bill than other congressmen. Representatives were also 39 percentage points more likely to oppose Waxman-Markey, other things being equal, if they were in districts that benefit strongly from the RFS policy.

“It’s a very robust finding,” Knittel says. “One interpretation is that these people or corporations who were donating money have a model very similar to ours, and are able to predict winners and losers under different policies. This is a very sophisticated group.”

On one level, the results confirmed something that was broadly understood: Areas with corn-based economies support ethanol. On another level, the study reveals the deep asymmetry that structures the politics of the issue: on one side, widespread indifference; on the other, narrow but deep support.

“It wasn’t until we got the results that we were able to think through the political economy of it,” Knittel says.

Tax the externality

The paper, “Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies,” is forthcoming in the Review of Economics and Statistics.  

The paper’s co-authors are Knittel; Stephen P. Holland of the University of North Carolina at Greensboro; Jonathan E. Hughes of the University of Colorado; and Nathan C. Parker of the Institute of Transportation Studies at the University of California at Davis.

To conduct the study, the researchers used modeling by Parker that estimates where ethanol production will be located in coming years, as well as projecting the overall costs of various potential transportation fuel policies, were they to be implemented. The work also drew extensively on methods the other co-authors have used in evaluating both the potential impact of biofuels as a gasoline replacement and the relationship between policy options and politics.

On the general question of picking the optimal emissions–reduction policy, Knittel says, “The efficient policy is to tax the externality.” That is, to tax the additional cost or problem imposed on people — in this case, greenhouse gas emissions. That forces consumers to account for the costs of their own decisions, such as buying fuel-efficient vehicles.

Other scholars in the field regard the paper as a significant contribution to the study of energy politics. Mark Jacobsen, an associate professor of economics at the University of California at San Diego who has read the paper, says the “voting and donations models are both quite convincing.”

Jacobsen adds: “A very important contribution of this paper is in pointing out that we need to be alert to distribution [of energy resources] across states, making sure that it does not stand in the way of otherwise good policy.”

Knittel suggests the same kind of political asymmetry is probably at work in other aspects of climate politics. When it comes to coal-burning power plants, most people are only marginally affected by policy changes — but people living in coal-mining areas are deeply affected, and so have a much larger impact on the policy debate.

“We hope this paper sparks a literature that can do the same thing for other fuels,” Knittel says.

“Sound climate policy makes for good politics.” In a nutshell, that was the message conveyed by a high-ranking delegation of government, civil society and business representatives from British Columbia, who discussed experiences with their province’s carbon tax at an Earth Day Colloquium organized on April 13, 2015 by the MIT Energy Initiative (MITEI) and the MIT Center for Energy and Environmental Policy (CEEPR). More than 200 participants convened in the Walker Memorial’s spacious Morss Hall to hear first-hand how British Columbia was able to introduce a carbon price, and what effects it has had on the local economy and the environment. Comments by MIT faculty and a local State Senator underscored the economic merits of carbon pricing and its prospects as a policy option for Massachusetts.

MIT Chancellor Cynthia Barnhart opened the event with a brief welcome address, handing over to Parliamentary Secretary for Energy Literacy and the Environment of British Columbia, Mike Bernier. In his keynote address, Bernier described the history, design and early impacts of his province’s carbon tax, which he praised for shifting costs from desirable to undesirable activities, namely from employment and investment to pollution. Because the tax is revenue-neutral, he explained, it has helped limit carbon emissions and fuel use while reducing individual and corporate income taxes, effectively boosting the British Columbian economy. “What we’ve been doing in British Columbia has not gone unnoticed”, Bernier noted, pointing to growing interest in his province’s experience with carbon pricing from the United States and elsewhere.

Moderating the event, MITEI Director Robert Armstrong introduced the remaining panelists and invited each to address a series of detailed questions about the British Columbian experience. Merran Smith, Director of Clean Energy Canada, began by reflecting on the political context at the time the carbon tax was introduced in 2008. Widespread public demand for climate action, coupled with bold leadership from the province’s then-Premier Gordon Campbell, were among the factors Smith credited with successful passage of the necessary legislation.

Susanna Laaksonen-Craig, Head of the Climate Action Secretariat in the British Columbia Ministry of Environment, provided further detail on the technical design and implementation of the carbon tax. In her remarks, she reminded the audience that the tax had been lauded as a “textbook example of a carbon tax” by former MIT professor and statesman George P. Shultz.

Speaking on behalf of the private sector, Ross Beaty, Founder and Chairman of the Pan American Silver Corporation and Executive Chairman of Alterra Power Corporation, conceded that companies usually oppose new taxes. Still, so Beaty, corporate leaders increasingly acknowledge the need for climate action, and British Columbia’s local economy, in particular, has seen far-reaching impacts from climate change. Enlightened companies were thus ready to embrace political leadership when the carbon tax was introduced, quickly seeking ways to innovate and reduce compliance costs under the stable policy framework it offered.

Christopher Knittel, the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management and Director of the MIT Center for Energy and Environmental Policy Research, commented on the carbon tax from an economist’s point of view. Despite almost universal agreement among economists on the merits of carbon pricing, he noted that few jurisdictions have decided to implement this policy option. On the contrary, the United States has recently seen a resurgence of rigid performance standards, which not only tend to impose higher cost than the externalities they avoid, but also have unintended consequence such as rebound effects. By contrast, he argued, a carbon price has positive spillover effects, such as revenue generation to reduce other taxes.

Drawing the discussion to a more local context, Massachusetts State Senator Michael Barrett of the 3rd Middlesex District answered questions on his own bill aimed at introducing a fee on carbon-based fuels in Massachusetts. All the revenue, he explained, would return to taxpayers by way of rebates, distributed in such a way that low-income households pay less for pollution than high-income households. Because of its revenue neutrality, moreover, the fee – so Barrett – does not fit the legal definition of a tax, allowing state officials who have pledged to oppose new taxes to support his bill.

An engaged discussion with the audience ensued, reflecting interest in carbon taxation as a policy option for Massachusetts and the U.S., and leading to detailed questions to the panel about policy design, impacts and ways to avoid hardship for different segments of society. Secretary Bernier’s parting advice to Senator Barrett and the largely Massachusetts-based audience was to “take the politics out of carbon pricing.” But once introduced, he added, it will limit pollution without harming the economy.

A video of the full event can be viewed here.

Francesca McCaffrey | MIT Energy Initiative

Leaders from the energy industry, government, and the scientific community will gather to discuss the world’s most pressing energy challenges at the annual MIT Energy Club Conference, to be held February 27-28 on the MIT campus. Developed and organized entirely by MIT students, the conference is this year celebrating its 10th anniversary. 

Christopher Knittel, MIT’s William Barton Rogers Professor of Energy and a Professor of Applied Economics at the Sloan School, gave MITEI a preview of the panel he’ll be moderating on the opening day of the upcoming MIT Energy Conference.  Called “Unconventional resources: successes and challenges,” Knittel will be focusing on the future of shale gas development in the U.S. and globally.  

Here, Knittel shares some brief advance insight about the future of shale gas development.

Q: Does Shale Gas really provide the largest share of US Natural Gas Production?

Knittel:  According to the EIA, 40% of US natural gas production, in 2012, came from shale resources. Over 60% of our natural gas comes from shale basins and what is known as tight reservoirs, which typically uses the same drilling techniques as shale natural gas.

Q: Why has shale gas experienced such a boom in the US?

Knittel: The short answer is that there has been a tremendous amount of technological progress in the ability to extract natural gas (and oil) trapped in shale and tight formations. Geologists have known for years that hydrocarbons were trapped in shale basins, but not until the development of horizontal drilling, along with hydraulic fracturing techniques have energy companies been able to economically recover these hydrocarbons. 

Q: In a recent MIT News interview, you discussed how a central tenet of the EPA’s forthcoming Clean Power Plan involves shifting states from coal to natural gas. What role do you see federal regulation playing in the future of shale gas in the US?

Knittel: There are a number of important roles for federal regulation. First, if left alone the market will not lead to enough shifting away from coal to natural gas. This is because a number of "externalities"—social costs associated with burning fossil fuels that are unpaid by consumers and firms in these markets—that exist in fossil fuel markets. This is the role that policy makers must take in these markets. Ideally, we would have a set of pollution taxes, not just a carbon tax, but also taxes on particulate matter, mercury, etc. Because these types of policies tend to be politically infeasible, politics drive us to policies like the Clean Power Plan. 

Q: Will the advent of shale gas have an impact on the development of alternative energy sources?

Knittel: Anything that lowers the prices of fossil fuels will slow down the development of alternative energy sources. This is true not just for natural gas, but also for oil. Lower natural gas prices make solar and wind technologies more expensive on a relative basis. Similarly, the drop in oil prices will make it more difficult for alternative fuel vehicles to compete in the market place. In the more long term, these lower fossil fuel prices will reduce R&D into these alternative technologies. 

Q: What are some of the key political and environmental issues that shale gas producers face?

Knittel: In the US - Any drilling activity has environmental risks. Hydraulic fracturing is no different. In addition, the added step of pumping millions of gallons of water down into the well creates a new set of environmental risks. Furthermore, natural gas leaks, known as fugitive emissions, are a much more potent greenhouse gas compared to carbon dioxide. It is important for the Federal EPA and state-level EPA to assure that best business practices are used in drilling for natural gas and that these practices, as well as fugitive emissions, are adequately monitored. 

Q: Do you expect shale gas to truly be a “bridge” fuel, used only as a temporary solution while renewable energy technologies improve, or do you think that shale gas will hold a lasting spot in our energy ecosystem?

Knittel: This will depend on policy. Policy makers must create a set of incentives that will move markets away from natural gas and into renewable technologies. Absent these, natural gas may push coal out of the market and remain the main fuel source in electricity markets. 

Professor Knittel will continue the discussion on shale gas development with panelists Paul Sheng, Director at McKinsey & Co, Jan Erik Johansson, Principal Consultant at TCS, and Helen Currie, Senior Economist at ConocoPhillips, on Friday, February 27 at 2pm. Afternoon lectures on Friday will be held at the Marriott.

To attend Professor Knittel’s panel, or to view the rest of the conference agenda and reserve your ticket, visit the MIT Energy Club Conference website by clicking here.

By Peter Dizikes, MIT News Office

With cap-and-trade legislation on greenhouse-gas emissions having stalled in Congress in 2010, the Obama administration has taken a different approach to climate policy: It has used the mandate of the Environmental Protection Agency (EPA) to propose a policy limiting power-plant emissions, since electricity consumption produces about 40 percent of U.S. greenhouse gases. (The administration also announced a bilateral agreement with China this week, which sets overall emissions-reductions targets.)

The EPA’s initial proposal is now under public review, before the agency issues a final rule in 2015. Christopher Knittel, the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management, is one of 13 economists who co-authored an article about the policy in the journal Science this week. While the plan offers potential benefits, the economists assert, some of its details might limit the policy’s effectiveness. MIT News talked with Knittel about the issue.

Q. How is the EPA’s policy for power plants intended to work?

A. The Clean Power Plan calls for different emissions reductions depending on the state. This state-specific formula has four “buckets:” efficiency increases at the power plant; shifting from coal to natural gas; increases in generation from low-carbon renewables such as wind; and increases in energy efficiency within the state. So they applied these four things and asked what changes were “adequately demonstrated” to generate state-specific required reductions.

Q. The Science piece emphasizes that the EPA’s plan uses a ratio-based means of limiting emissions: the amount of greenhouse gases divided by the amount of electricity consumed. So a state could add renewable energy, lower its ratio, but not reduce total emissions. What are the advantages and disadvantages of doing this?

A. The targets are an emissions rate: tons of CO₂ [emitted] per megawatt-hour of electricity generation. Then it’s really up to the states to determine how they’re going to achieve the reductions in this rate. So one strategy is to increase total electricity generated. This compliance strategy, unfortunately, is what makes rate-based regulation economically inefficient.

The states also have the option to convert that rate-based ratio target into what the EPA is calling a mass-based target, total tons of greenhouse-gas emissions. This would effectively imply the state is going to adopt a cap-and-trade program to reach its requirements.

In current work, we — scholars Jim Bushnell, Stephen Holland, Jonathan Hughes, and I — are investigating the incentives states have to adopt to convert their rate-based mandate into a mass-based mandate. Unfortunately, we are finding that states rarely want to [use a mass-based target], which is a pity, because the mass-based regulation is the most efficient regulation, from an economist’s perspective. Holland, Hughes, and I have done work in the transportation sector that shows that when you do things on a rate base, as opposed to a mass base, it is at least three times more expensive, and more costly to society — often more than five times more costly.

Q. Why did the EPA approach it this way?

A. I can only speculate as to why the EPA chose to define the regulation as a rate instead of total greenhouse gas emissions. Regulating a rate is often cheaper from the firm’s perspective, even though it is economically inefficient. Why the EPA chose to define things at the state level is more clear: The Clean Air Act … is written in such a way to leave it up to the states.

But if everyone’s doing their own rate- or mass-based standard, then you don’t take advantage of potentially a large efficiency benefit from trading compliance across states. That is, it might be cheaper for one state to increase its reductions, allowing another state to abate less.

The most ideal regulatory model is that everyone’s under one giant mass-based standard, one big cap-and-trade market. Even if every state’s doing its own cap-and-trade market, that’s unlikely to lead to the efficient outcome. It might be cheaper for California or Montana or Oregon to reduce their greenhouse-gas emissions, but as soon as they meet their standard, they’re going to stop.

Q. The Science article says that certifying efficiency-based gains is a crucial factor. Could you explain this?

A. Given how the regulation treats efficiency, it really puts in the forefront the importance of understanding the real-world reduction in energy consumption coming from efficiency investments. Let’s say I reduce electricity consumption by 100 megawatt-hours through increasing efficiency in buildings. Within the [EPA’s] policy, that reduction is treated as if I’m generating 100 megawatt-hours from a zero-carbon technology. So that increases the denominator in the ratio [of greenhouse gases produced to electricity consumed]. One concern, though, is that often the actual returns from energy-efficiency investments aren’t as large as the predicted returns. And that can be because of rebound [the phenomenon by which better energy efficiency allows people to consume more of it], which is a hot topic now, or other behavioral changes.

Behavioral changes can make those efficiency gains larger or smaller, so getting the right number is very important. I’ve heard stories of people who get all-new windows, and the old windows used to let in air, but now they think the house is stuffy, so they keep their windows cracked. We should be doing more field experiments, more randomized controlled trials, to measure the actual returns to energy efficiency.

Another related concern is that it might be left up to the states to tell the EPA what the reduction was from these energy-efficiency investments. And the state might not have any incentive at all to measure them correctly. So there has to be an increase in oversight, and it likely has to be federal oversight.

Q. While you clearly have concerns about the efficacy of the policy, isn’t this one measure among others, intended to lessen the magnitude of the climate crisis?

A. For many of us, the potential real benefit from the clean power rule is that it will change the dynamic in Paris in the [forthcoming international climate] negotiations. For a long time the U.S. could say it was doing some improvements in transportation, but they really weren’t doing anything in electricity, for climate change. My view is there are a lot of countries out there that aren’t going to do anything unless the U.S. does. This might bring some of those countries on board.

Peter Dizikes, MIT News Office

If you have stopped at a gas station recently, there is a good chance your auto has consumed fuel with ethanol blended into it. Yet the price of gasoline is not substantially affected by the volume of its ethanol content, according to a paper co-authored by an MIT economist. The study seeks to rebut the claim, broadly aired over the past couple of years, that widespread use of ethanol has reduced the wholesale cost of gasoline by $0.89 to $1.09 per gallon.

Whatever the benefits or drawbacks of ethanol, MIT’s Christopher Knittel says, price issues are not among them right now.

“The point of our paper is not to say that ethanol doesn’t have a place in the marketplace, but it’s more that the facts should drive this discussion,” says Knittel, the William Barton Rogers Professor of Energy and a professor of applied economics at the MIT Sloan School of Management.

The 10 percent solution?

The vast majority of ethanol sold in the United States is made from corn. It now constitutes 10 percent of U.S. gasoline, up from 3 percent in 2003.

It is another matter, however, whether that increase in ethanol content produces serious savings at the pump, as some claim. Knittel and his co-author, economist Aaron Smith of the University of California at Davis, contest such an assertion in their paper, which is forthcoming inThe Energy Journal, a peer-reviewed publication in the field.

The claim that ethanol lowers prices derives from a previous study on the issue, which Knittel and Smith believe is problematic. That prior work involves what energy economists call the “crack ratio,” which is effectively the price of gasoline divided by the price of oil.

The crack ratio is something energy analysts can use to understand the relative value of gasoline compared to oil: The higher the crack ratio, the more expensive gasoline is in relative terms. If ethanol were a notably cheap component of gasoline production, its increasing presence in the fuel mix might reveal itself in the form of a decreasing crack ratio.

So while gasoline is made primarily from oil, there are other elements that figure into the cost of refining gasoline. Thus if oil prices double, Knittel points out, gasoline prices do not necessarily double. But in general, when oil prices — as the denominator of this fraction — go up, the crack ratio itself falls.

The previous work evaluated time periods when oil prices rose, and the percentage of ethanol in gasoline also rose.

But Knittel and Smith assert that the increased proportion of ethanol in gasoline merely correlated with the declining crack ratio, and did not contribute to it in any causal sense. Instead, they think that changing oil prices drove the change in the crack ratio, and that when those prices are accounted for, the apparent effect of ethanol “simply goes away,” as Knittel says.

To further illustrate that the previous study was touting a correlation, not a causal relationship, Knittel and Smith conducted what are known in economics literature as “antitests” of that study’s model. By inserting unconnected dependent variables into the model, they found that the model also produced a strong correlation between ethanol content in gasoline and, for instance, U.S. employment figures — although the latter are clearly unrelated to the composition of gasoline.

The previous work also claimed that if ethanol production came to an immediate halt, gasoline prices would rise by 41 to 92 percent. But Knittel does not think that estimate would bear out in such a scenario.

“In the very short run, if ethanol vanished tomorrow, we would be scrambling to find fuel to cover that for a week, or less than a month,” Knittel says. “But certainly within a month, increases in imports would relax or reduce that price impact.”

Informing the debate

The differing assessments of ethanol’s impact have garnered notice among economists and energy policy analysts. Scott Irwin, an economist at the University of Illinois at Urbana-Champaign who has read the paper, calls it a “convincing and compelling” rebuttal to the idea that expanding ethanol content in gasoline drastically lowers prices.

“The paper dispensed once and for all with that conclusion,” Irwin says. Still, he adds, there remains an open debate about the marginal effects of ethanol content in gasoline, and more empirical work on the subject would be useful.

“A case can be made that it can be a positive few cents,” Irwin says, adding that “reasonable arguments can be made on either side of zero” regarding ethanol’s price impact. In either case, Irwin says, his view is that the effect is currently a small one.

Knittel has posted, on his MIT Sloan web page, a multipart exchange between himself and Dermot Hayes, an Iowa State University economist who is a co-author of the prior work. After an initial finding that ethanol reduced gasoline prices by $0.25 per gallon, Hayes and a co-author produced follow-up studies, examining about a decade after 2000, and arrived at the figures of $0.89 and $1.09 per gallon, which gained wider public traction. 

Knittel acknowledges that policy decisions about gasoline production are driven by a complex series of political factors, and says his study is not intended to directly convey any policy preferences on his part. Still, he suggests that even ethanol backers in policy debates have reason to keep examining its value.

“Making claims about the benefits of ethanol that are overblown is only going to set up policymakers for disappointment,” Knittel says.

By Chris Knittel and John Parsons

Professor Robert Pindyck has a new working paper (CEEPR-WP-13-XXX) that has attracted a good share of attention since it steps into the highly charged debate on the reliability of research related to climate change. But in this case, the focus is on what we learn from one class of economic model, the so-called integrated assessment models (IAM). These models have been used to arrive at a “social cost of carbon” (SCC). For example, in 2010 a U.S. Government Interagency Working Group recommended a $21/t CO2 as the social cost of carbon to be employed by US agencies in conducting cost-benefit analyses of proposed rules and regulations. This figure was recently updated to $33/t. Professor Pindyck’s paper calls attention to the wide, wide range of uncertainty surrounding key inputs to IAM models, and to the paucity of reliable empirical data for narrowing the reasonable range of input choices. The paper then suggests profitable directions for reorienting future research and analysis.
 
Reflecting the highly charged nature of the U.S. political debate on climate change, Professor Pindyck’s paper has been seized on by opponents of action. In particular, certain blogs have cited his paper in support of their campaign against any action. Here is one example—link.
 
Interestingly, Professor Pindyck is an advocate of action on climate change, such as leveling a carbon tax. So his own view of the implications of his research are quite different than that of those who oppose any action. This post at the blog of the Natural Resources Defense Council includes more extensive comments by Professor Pindyck on the debate—link.
 
An alternative approach is to think about Professor Pindyck’s review as a guide for future research on the costs of climate change which is better focused to address the important uncertainties in a way that can better contribute to public discussion and analysis. CEEPR researcher Dr. John Parsons emphasizes this point in his blog post about Pindyck’s paper—link.

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