Asymptosis

An old friend dropped by recently and we had a few beers on the back deck. He runs his family’s commercial real-estate business; they own and operate half a dozen or so pretty large properties (and just bought another) — a mall, office buildings, mixed use.

I was really curious to talk to him about why commercial property owners don’t invest more in energy efficiency. By all accounts there’s great ROI in doing so — serious low-hanging fruit.

Why do commercial property owners leave five-dollar bills lying on the sidewalk?*

At least, it sure looks like there are five-dollar bills lying around. Here from a McKinsey report (PDF; see page 15) showing how much it costs to save (not buy/pay for) a million BTUs of energy, by instead investing in energy efficiency:

Sorry, it’s hard to see without going to the PDF. But short story: there are quadrillions of BTUs in efficiency savings available for less than $2 per million BTUs.

Now look at the cost of buying a million BTUs instead, to heat your building or power your plant (2011 figures, Energy Information Administration):

Coal: $2.39/MMBTU
Petroleum: $12.48
Natural Gas: $4.72

This is the cost to a utility company buying these fuels. The meter cost of the electricity produced (after line losses, administration, profits, etc.) — the cost for building owners — will of course be somewhat higher.

So it sure seems like there’s money to be picked up. Why don’t building owners do it? The short answer my friend and I came to? Triple-net leases — the ubiquitous standard in the commercial real-estate industry.

In these leases tenants pay per-square-foot rent, plus their pro-rata share (by square feet) of the building’s 1) taxes, 2) insurance, and 3) repairs, maintenance, and energy expenses. (Many NNN leases don’t include pro-rata energy costs, but tenants are separately metered and either pay directly or through the landlord. There are lots of variations, but landlords rarely pay all energy costs.)

Notice what is not included: the cost of improvements — for instance improvements to increase energy efficiency. So the owner gets all the costs, right up front. And the benefits go mostly or completely to the tenants, in the form of lower energy bills.

“But hey,” I asked my friend, “don’t lower energy costs for tenants mean you can charge more rent? Doesn’t it all come out in the wash?”

“Welllllhh,” he said… Most tenants are on long leases. “We just signed a ten-year lease with the anchor tenant for our mall.” My friend won’t see any dollar benefit from those energy savings for a long time, as leases turn over and are renegotiated. And it’s not at all clear how much benefit he’ll get, because tenants tend to fixate on the square-footage rental rate, which would go up. 

Imagine you’re a leasing agent for the building, trying to rent some space. You’re competing with other buildings that haven’t done the energy upgrade, so their rent/square foot is lower. You’re stuck saying “yeah yeah yeah yeah but you’ll spend less on energy!” This, if you even get the chance: Prospective tentants scanning the listings might never even call you because your rent is so high.

A building owner considering a big spend for energy efficiency really has to think thrice: would I rather have a million dollars, cash in hand, or the likely but uncertain prospect of higher profits somewhere (perhaps way) down the road? It’s easy to understand why they make the choices they do.

And all of this is true even though there’s money lying on the ground waiting to be picked up.

It’s a classic coordination problem — people acting in their own best-guess best interests, with ridiculously inefficient results — that is caused or at least greatly exacerbated by the institutional convention of triple-net leases. (The reasons the convention arose are yet another subject, about passing off risk and retaining returns.)

Obviously triple-net is not the sole villain in this very big picture. From the McKinsey report:

Got central planning?

* For those who don’t know the old joke: Two economists walking along, they see a five-dollar bill lying on the sidewalk. One of them gestures for the other to pick it up. “I’m not picking that up,” says the other. “If it were there somebody would have picked it up already!”

Cross-posted at Angry Bear.

No, this is not about lead-footed Starsky and Hutch-style car chases by law enforcement.

Rather, it’s about damned convincing evidence that unleaded gasoline (introduced in the U.S. in the 70s) is largely responsible for the huge decline in crime rates since the early 90s. (Update: it continues.) Even more convincing than (but not precluding) Levitt’s Roe v Wade hypothesis.

Short story: we spent fifty years quite literally poisoning the minds of our children — especially inner-city and low-income children. The damage is permanent.

Researcher Rick Nevin is getting some well-deserved press (Washington Post, Wall Street Journal) for his cross-country analyses of lead exposure and crime. (Worth noting: he first published this research in 1999.)

Here’s a picture; you can eyeball the correlations yourself. The researchers, naturally, analyze the correlations more systematically.

Here’s more, consumption of lead in gasoline in the USA, in thousands of metric tons (click for source):

See also the work of Jessica Wolpaw Reyes, who claims that half the decline in crime resulted from less lead in the environment (hence in little kids’ heads).

Robert Waldmann (hat tip!) at Angry Bear is looking at the latest data from the UK, where they went unleaded thirteen years later, so the effects should be showing up now. They seem to be:

the total number of violent crimes was basically identical in 2004/5 2005/6 and 2006/7 then declined about 17% by 2009/10. The predicted peak of 2007 corresponds about as precisely to the data as is conceivable.

From the WaPo article:

Chicago’s Robert Taylor Homes, for example, were built over the Dan Ryan Expressway, with 150,000 cars going by each day. Eighteen years after the project opened in 1962, one study found that its residents were 22 times more likely to be murderers than people living elsewhere in Chicago.

Nevin’s finding implies a double tragedy for America’s inner cities: Thousands of children in these neighborhoods were poisoned by lead in the first three quarters of the last century. Large numbers of them then became the targets, in the last quarter, of Giuliani-style law enforcement policies.

We’re seeing it in spades: the history of tetraethyl lead (read it and weep) is a tragic textbook case of market/profit interests eviscerating the commons and making us all (including the rich) far worse off, in the name of “the invisible hand” making us all better off.

That ebil gubmint man with his heavy-handed regulations impinging on honest businesspeople (who are just trying to make a buck, for everyone’s benefit) sure did have a pernicious effect, huh?

I’ve long lauded Jim Manzi for his cogent and convincing arguments against carbon taxes. He’s the antithesis of the “1998 was really hot! Look: it’s cooler now!” school of head-in-in-the-sand self-delusionists. Rather, he takes the 2007 IPCC report as the best available consensus scientific knowledge we have, and uses it to think through a clear-eyed, long-term cost-benefit analysis of carbon taxes/cap-and-trade. Anyone interested in this subject should read this article (and note that it’s published in the regular “In-House Critics” column of the  decidedly lefty New Republic, which speaks volumes about which side of this debate is willing to tolerate and consider — and yes, publish — strongly argued dissenting views).

When I consider arguments in favor of climate legislation, Manzi’s thinking is what I measure those arguments against. Here’s his argument in small (my emphasis for easy skimming):

• “the cost of policies designed to limit the rise in atmospheric carbon dioxide to 450 parts per million (ppm) average a little over 6 percent of global GDP by 2100 (with a very wide range of estimates). That is, we would start paying a cost today that would rise to about 6 percent of world output by 2100 in order to only partially avoid a problem that would have expected costs of about 3 percent of world output sometime later than 2100.”

• “hedging your bets and keeping your options open is almost always the right strategy. Money and technology are our raw materials for options. … the loss of economic and technological development that would be required to eliminate all theorized climate change risk (or all risk from genetic technologies or, for that matter, all risk from killer asteroids) would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk.”

Yes, he addresses the uncertainty/risk/probability issues of global warming — notably those from Harvard’s Martin Weitzman.

It’s a compelling argument: given the risk scenario painted by the IPCC in 2007 — and its uncertainty — our best response is to promote economic and technological growth and development, so we have the resources to address problems in the future, when we have a clearer picture of what the problems are.

But the counterarguments are also very strong. If Manzi incorporated them into his thinking, I think he would come to very different conclusions. Respondents at The New Republic have offered several of them; I will steal from them unabashedly, and add a few of my own.

• The 2007 IPCC report is getting long in the tooth — it’s based on the best research from four to six years ago. Recent research is (almost uniformly) far more alarming. Two examples: 1. “The area of summer sea ice remaining during 2007-2009 was about 40% less than the average projection from the 2007 IPCC Fourth Assessment Report.” 2. One report posits a circa 5% chance that large portions of the planet will be rendered uninhabitable — including the eastern U.S..

• The 2007 report specifically did not make projections for sea-level rise. The modeling of ice-sheet behavior was considered too difficult at the time. The economic costs from rising seas could dwarf all others combined. A cost-benefit analysis that doesn’t include those costs doesn’t tell us much.

A 6%-of-GDP insurance policy against those eventualities starts to sound more reasonable. But even the 6% estimate has serious problems.

• Manzi assumes that carbon taxes will add to, not replace, other taxes. Economists agree that consumption taxes and “Pigovian” taxes — taxing negative externalities — are more economically efficient (they result in greater economic growth and prosperity) than many of our current taxes, like those on income, corporate profits, etc. A carbon tax is a Pigovian consumption tax. If our tax base shifts in that direction, the result is more economic efficiency, yielding the very result — faster growth and development — that Manzi champions.

• He assumes the need for a global taxing regime, ignoring the benefits to the U.S. of a unilaterally imposed carbon tax. The long-term savings in national defense and security from reduced fossil-fuel consumption are darned hard to predict, but even most righties will acknowledge that we wouldn’t have invaded Iraq if there was no oil over there. That war will cost us trillions, all told — somewhere north of 25% of U.S. GDP for a year. And that’s before even considering the fuel that it poured on the fire of global jihad. That was one damned expensive insurance policy to ensure future oil supplies.

• He ignores the threat that global warming poses to U.S. national security, as detailed by those left-wing nut jobs at the Pentagon in their Quadrennial Defense Review for 2010 (PDF): “climate change could have significant geopolitical impacts around the world, contributing to poverty, environmental degradation, and the further weakening of fragile governments. Climate change will contribute to food and water scarcity, will increase the spread of disease, and may spur or exacerbate mass migration.While climate change alone does not cause conflict, it may act as an accelerant of instability or conflict, placing a burden to respond on civilian institutions and militaries around the world.”

• He ignores the truly horrific, potentially even apocalyptic human impact of global warming, and a “mere” 3% decline in GDP, especially outside the developed world. (Quite resoundingly demonstrating Jonathan Haidt’s findings about libertarians’ lack of compassion.) As Nate Silver has pointed out (H/T Bradford Plumer) we could eliminate 43% of the world’s people and only reduce world GDP by 5%.

As I said, I greatly admire Jim Manzi’s thinking. But I have to say that his failure to include these points in that thinking gives the strong impression of confirmation bias.

I got curious about this. Here’s what WikiPedia says:

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^a One tonne of crude oil is roughly equal to 308 US gallons, or 7.33 barrels.

——————-

News reports say the current Gulf of Mexico well is leaking 200,000 gallons a day, which comes to 650 tons. Do that for a month and it’s about 20,000 tons.

And did I just miss it, or was there essentially no mainstream coverage of the Gulf War oil spill?

The Exxon Valdez spilled about 37,000 tons.

I’m wondering: how much was spilled during the Battle of the Atlantic in WWII?

More sex, more people. More people, more global warming. Pretty simple.

If people would just stop having sex, we could solve the global warming problem! (Envision: Just-Say-No types happily twirling their fingers in their cheeks.)

Right. But my tongue-in-cheek wise-guyism is spurred by something quite real: reducing unprotected sex worldwide could be the most cost-effective method to reduce global warming.

A new study (full PDF here) says that providing contraception worldwide to reduce the 40% of pregnancies that are unintended (UN figure) would reduce carbon emissions at a cost of $7 a ton. Compare that to:

Wind power: $24

Solar: $51

Coal-plant carbon capture: $57-83

Plug-in hybrids: $92

The only methods that compete, according to this study, are geothermal, switchgrass, and sugar cane, all of which would be deucedly difficult to ramp up to the massive global levels that are needed. (The study proposal envisages a reduction of “34 gigatonnes of CO2 between now and 2050 – equivalent to nearly six times the annual emissions of the US and almost 60 times the UK’s annual total.”) I’d be curious to know where algae co-firing for electricy production would land.

I noticed one flaw in the study–it doesn’t seem to account for the people who would live (longer) because of the reduction in STD deaths resulting from increased condom usage. (This may be trivial in the carbon calcs–I can’t say–though obviously it’s profound for global well-being.)

Here’s hoping that the Bjorn Lomborgs of this world are paying attention.

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It’s now clear that the McCain/Palin shout-outs for more domestic drilling were not, in fact, tawdry and childish pitches to get votes from jingoistic know-nothings. They were, in fact, calls for an energy policy that would lead this country into a future of responsibility, prosperity, and well-being.

The free market is speaking…

Here's the best description I've seen of McCain's plan for American "energy independence":

The image was produced by these guys, with data from the Energy Information Administration. 

HT to Gristmill and Mark Thoma.

Some years ago, in one of the few instances where the NYT actually published one of my letters, I ranted about how we should institute a heavy tax on low-efficiency vehicles.

To the Editor:

Gregg Easterbrook’s proposal for a 50-cent-a-gallon increase in the federal gasoline tax (”The 50-Cent-a-Gallon Solution,” Op-Ed, May 25) is absolutely on the mark. Except that it ignores reality.

No politician would dare to propose it, and the American people wouldn’t swallow it. And despite all its benefits, there is good reason for even liberals to oppose it — as Mr. Easterbrook acknowledges, it’s nonprogressive.

Unlike income taxes (which Mr. Easterbrook proposes reducing to offset the gas tax), a gas tax would shift the tax burden to lower-income taxpayers who can ill afford it.

A better alternative: impose large taxes on the sale of low-efficiency vehicles.

Americans with excess piles of cash would be free to buy Humvees and Cadillac Escalades, but they’d have to pitch in, say, $5,000 to offset the costs of their selfishness, including pollution-related illnesses, global warming and, perhaps the most expensive of all, threats to our national security from energy dependence.

We could call it the National Security Tax.

What I didn’t realize at the time, and only discovered the other day in my web travels, is that we already have a gas-guzzler tax. Have since 1978. A hefty one. Here it is:

The problem is—this just sounded too good to be true, right?—the Gas-Guzzler Tax doesn’t tax gas-guzzlers—trucks, vans, and SUVs. And it explicitly excludes cars over 6,000 pounds. (Is it just a coincidence that the BMW Z5’s “curb weight,” according to the company, is 6,008 pounds?) And the top limit—22.5 miles per gallon, is ridiculously low.

A list of those few 2008 vehicles subject to the tax is here (PDF). About two hundred models, total. They’re all high-performance cars. I count ten American cars (five Chryslers, five GMs), and one (one!) Japanese car (Nissan’s M45X). The rest are exotic and semi-exotic European imports. Meaning that pretty much all the cars that Americans actually buy are excluded.

So while  our representatives have been muddling around with an unwieldy, anemic, and contortionally market-distorting set of CAFE standards, the perfect market-based tool for reducing oil dependency is one tweak away from being actually useful.

Just change the rules so the Gas Guzzler Tax applies to all (non-commercial?) vehicles, and call it good. For good measure, raise the top MPG limit.

Did our representatives even consider this? I can’t find any press reports suggesting they did.

Now I feel like I hardly need to detail the long list of positives associated with such a tax. (Those who oppose taxes on principle, save your stamp; I’ve heard it. We need to tax something to finance the government.)

• It causes vehicles to be priced more accurately, by putting a price tag on the many very real “externalities” that all Americans pay for, but that aren’t included in a vehicle’s cost of goods. (Things like B1 bombers, Homeland Security Departments, lung-related deaths, corn subsidies, possible global environmental pandemonium, such like that.)

• It’s much more progressive than a gas tax, because people who can afford it will be the ones who pay it.

• It harnesses the power of the market to promote many valuable economic and social goals. (National security, reduced pollution and greenhouse gases, better public health, reducing oil dependence and the resulting need for unsavory alliances, etc.)

• It leaves people the freedom to choose low-efficiency vehicles. They just have to pay the full cost.

• It’s easy to administer, because it’s paid by the manufacturer. (Who passes it on as part of the sales price.)

• Since the consumer ultimately pays it—and makes the decision whether the more-accurately-priced car is worth the money—it has all the advantages that consumption-taxers will be delighted to detail for you.

• It uses the market to send the message to automakers—make fuel-efficient cars available—that they’ll actually listen to.

• It provides revenues for the government. (I know, some wackos think that’s always a bad thing. I hope they enjoy their cave dwellings.)

Update, 2-18-08: Several people on other sites have pointed out something I only included in a tiny parenthetical: people who need low-efficiency vehicles for their work. They shouldn’t be penalized, it’s argued. I agree–as long as they truly do need it–for reasons of both fairness (they’re not just leeching off the public subsidation of negative externalities) and economics (big taxes on small business probably hurt everyone more than other taxes).

But consider: small-business owners get to write off vehicle purchases. The numbers for a purely fictional but probably representative situation:

Car cost: $30K
Tax: $5K
Tax bracket: 20%

They get to write off the whole truck, including the tax, so they save $7K. Their gas-guzzler tax is cut by $1,000—20%.

It’s not a huge difference, but it does ameliorate the impact on these folks some. And it does maintain the incentive to go with smaller, more efficient vehicle. (Which incentive is needed by tradespeople as much as by others…) I’ve tried to think of another method that doesn’t require yet more paperwork, haven’t thought of one.