the visible hand

it is the theory which decides what can be observed – einstein

Running in Circles Over Carbon

Posted by ecoshift on June 8, 2008

Our attention continues to be drawn to recent failures in unregulated financial markets that resulted in the ongoing collapse of the housing bubble — and the continuing evaporation of equity in financial institutions and family balance sheets.

Deflation of the housing bubble makes it clear: unregulated markets for mortgage backed securities resulted in a gross misallocation of resources into housing development. This highly inefficient use of investment capital delivered an oversupply of housing that will take years to work off. In some cases entire suburban developments will likely remain devoid of human habitation — ghostly reminders of market excesses. But, the housing market will correct. Hopefully housing prices come into line with median incomes and average americans will once again be able to purchase a home without devoting 60% of the monthly income to their mortgage payment in order to provide unjustified leveraged returns to hedge fund investors.

The article below points out another, more important, failure of competitive markets to efficiently allocate resources to critical societal needs.

This market failure contributes to positive feedback loops in global warming that will not self-correct. The cost of this misallocation of resources may well be incalculable. We know what we are doing and we know what needs to be done: the technology exists to reduce our emissions. If the investment requires a risk, then we need to take that risk. If we need to tax an industry to equitably spread the risk, level the playing field and provide appropriate incentives to those willing to make the first investment, then so be it.

As excellent as competitive markets are for developing ever more fascinating and improved tech widgets, there’s no excuse for this kind of competitive market failure. There are times when markets need guidance. This is one of them:

The Nation – Running in Circles Over Carbon – NYTimes.com
By MATTHEW L. WALD

WASHINGTON— Cutting carbon dioxide emissions is a fine idea, and a lot of companies would be proud to do it. But they would prefer to be second, if not third or fourth.

This is not a good way to get started in fighting global warming.

As efforts to pass a global warming bill collapsed in the Senate last week, companies that burn coal to make electricity were looking for a way to build a plant that would capture its emissions. There is a will and a way — several ways, in fact — to do just that.

Capturing carbon from these plants may become a lot more important soon. Emissions from coal-fired power plants already account for about 27 percent of American greenhouse emissions, but as prices for other fuels rise, along with power demand, utilities will burn more coal. And if cars someday run on batteries, a trend that $4-a-gallon gasoline will accelerate, then the utilities will burn even more fuel to generate the electricity to recharge those batteries.

This could be good news, because controlling emissions from a few hundred power plants is easier than controlling them from tens of millions of house chimneys, or hundreds of millions of tailpipes. And in the laboratory, at least, there are three very promising systems for capturing carbon dioxide before pumping it underground.

But supplying electricity is not like most other businesses. Unlike the companies that make microchips, clothing for teenagers or snack foods, the companies that make electricity can see no advantage in going first. This is true for the traditionally regulated utilities that can charge everything to a captive class of customers (if regulators approve), and it is also true for the “merchant generators,” who build power plants and sell their output on the open market.

“No one wants to go into the new world,” said Armond Cohen, executive director of the Clean Air Task Force, a nonprofit group that favors stringent controls on power plant emissions. “We have very few takers because of the price premium.”

By price premium, Mr. Cohen meant not only the costs of going first, with the high probability of mistakes that others can learn from, but the costs of the new technology itself. The problem is, the premium is of unknown size, which makes everyone in the industry especially wary.

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