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Economic Currents

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Hawaii's Proposed 400MW Wind Energy Project Explained

How will the proposed 400 MW Wind Energy Project contribute to the State’s Renewable Energy goals?

Hawaii has one of the most stringent Renewable Portfolio Standard (RPS)* policies in the country as well as the highest electricity rates due to dependence on oil for electricity generation (Coffman et al., 2012). As such, renewable energy technologies like wind tend to be more cost-effective in Hawaii than elsewhere in the U.S.

After the signing of the Memorandum of Understanding between the State of Hawaii and the U.S. Department of Energy, the Hawaii Clean Energy Initiative, Hawaii increased its’ RPS law to achieve 40% of electricity sales based on renewable energy sources by the year 2030. It specifies that:

  1.      1) 10% of net electricity sales be based on renewable energy sources by the end of 2010,
  2.      2) 15% by 2015,
  3.      3) 25% percent by 2020, and
  4.      4) 40% by 2030.
  5.  

Renewable fuel/energy types include solar, wind, ocean, geothermal, biomass-based, landfill gas, hydroelectric, CHP/cogeneration, hydrogen, anaerobic digestion, and waste. In the year 2015, energy efficiency ceases to count as a “renewable” energy type and will instead be governed by an Energy Efficiency Portfolio Standard (EEPS).

Using a model of Hawaii’s electric sector, we find that the proposed 400MW wind project will meet about 10% of the State’s energy needs in the year 2030. Figure 1 shows Hawaii’s possible energy mix from 2010 to 2030. The figure represents a scenario where:

  1.      1) the least-cost mix of electricity generation is selected assuming that the 400MW
  2.           wind project is built in the year 2020,
  3.      2) fuel prices (oil, coal and bio-oil) follow the Energy Information Administration’s (EIA)           reference trend, and
  4.      3) the RPS law is met.
  5.  

 

It is important to note that the RPS does not govern the use of the other 60% of fossil fuels (which remains oil-dominated)** nor does it distinguish between types of renewable energy (see Coffman, Griffin and Bernstein, 2012). For example, biofuels are counted similarly to solar photovoltaic or wind energy, even though their net energy content and greenhouse gas emissions impacts are quite different. The proposed wind project largely serves to limit the amount of imported biofuel used to meet the RPS.***

 

Does the proposed 400 MW Wind Energy Project make economic sense?

Using both the model of Hawaii’s electric sector and one of Hawaii’s overall economy, we find that moving forward with the proposed 400 MW wind project has net benefits to Hawaii’s economy because of a positive terms of trade effect. Fundamentally, wind energy serves as a “hedge” against potentially rising and volatile fuel prices, including biofuel prices. Biofuel prices are highly linked to oil due to their high level of substitutability. Even when fossil fuel and biofuel prices are expected to be low (according to the EIA’s Annual Energy Outlook 2012), the proposed wind project retains its net macroeconomic benefits, albeit quite small. We find that the project has a net positive impact of $589 million (in $2007 Gross State Product) over the 20-year model time horizon, translating to an impact of $2.80 per year to households.

Although the economic impacts are relatively small (never over half a percent increase in Gross State Product on an annual basis) they are clearly positive through the model time horizon.

 

Will the proposed 400 MW Wind Energy Project reduce Hawaii’s GHG emissions?

The proposed project serves to reduce Hawaii’s net GHG emissions by about 10 million metric tons of CO2 over a 20-year time horizon. This is a roughly 4% reduction in electric-sector emissions.

 

-- Makena Coffman

 

 

Coffman, M. and Bernstein, P. (2012). “An Integrated Top-Down and Bottom-Up Analysis of Wind Energy.” Prepared for AUBER 2012, Honolulu, HI.

Coffman, M., Griffin, J., and Bernstein, P. (2012). “An Assessment of Greenhouse Gas Emissions-Weighted Clean Energy Standards,” Energy Policy, 45: 122-132.

 

* Renewable Portfolio Standards are a mandate placed on electric utilities that require a specified percentage of electricity sales be met through renewable sources of electricity by a certain year.

**The model represents all current laws and financial incentives for commercially available technologies. For example, the solar photovoltaic federal and state tax credits are accounted for to the extent that they are currently written into law. The exception, however, is coal. Although there is no law explicitly prohibiting the growth of coal use in Hawaii, we exclude more coal in this scenario because the Hawaiian Electric Company has publicly stated its commitment to limiting future use of coal. The full paper shows a wider array of scenarios.

***We assume that biofuels are imported because of the least-cost framework. It is certainly possible that locally produced biofuels are used to meet the RPS, but at a price premium.


Q & A: Economics of Local Food

Posted October 4, 2012 | Categories: Q&A
1. You are hosting a special forum on Hawaii's economy this month. What are some of the topics are being covered?

On October 29, we are holding the first UHERO Forum on Hawaii's economy. There will be a forecast presentation covering the US and China by the Chief Economist of FedX, sessions on investing in clean technology, Hawaii energy policy sponsored by Hawaii Energy Policy Forum, and prospects for Hawaii Agriculture sponsored by Ulupono.

2. Tell us about the session on Agriculture.

That session his organized by PingSun Leung, a researcher at CTAHR. The research will address how Hawaii farms compare to their mainland competitors. One of the primary findings of research by Arita, Naomasa and Leung (2012) is that Hawaii farms lag significantly behind mainland farms in terms of efficiency and profitability. Our farms are 15-20% less productive than mainland farms.

3. Does the research explain why Hawaii farms fall short of the productivity of mainland farms?

Research by Arita, Hemachandra and Leung (2012) points to two main factors:

a) Lack of economies of scale. Research shows that agriculture efficiency and profitability is strongly increasing in farm size. In both Hawaii and the U.S. mainland, small producers are significantly less productive than larger producers. With the average Hawaii farm 2-3 times smaller than the average U.S. mainland farm, the widespread lack of economies of scale in Hawaii explains much of the relative underperformance in profitability and efficiency. In fact, after controlling for farm size, they find that Hawaii’s farm efficiency and profitability are more on par with U.S. mainland farms. Smaller farm size may explain why Hawaii farms are significantly less capital intensive (despite facing higher labor costs).

b) High labor costs. Hawaii’s labor costs are significantly higher than the U.S. mainland. Arita et. al. estimated that the effective wages of a Hawaii agriculture laborer may be up to 50% higher than what is paid to a U.S. agriculture laborer. In Hawaii, labor costs accounts for more than 1/3 of total input costs and is by far the most expensive input costs for Hawaii’s farms, including land.

4. So with these impediments, how can Hawaii’s farms remain economically viable?

Hawaii farms generally cannot compete in terms of efficiency and productivity. Compared to mainland producers, they are too small and face significantly higher labor costs. Due to high barriers of land expansion and lack of access to lower wage migrant workers, these problems will likely only get worse over time. Research by Arita, Hemachandra, and Leung (2012) that will be presented at the Forum confirms that mainland import competition is negatively affecting Hawaii’s local farm production, and the problem is likely to get worse over time.

One potential silver lining is the growing interest in consumption of ‘local foods’. Hawaii’s farms may be able to remain economically viable by differentiating their products and cultivating ‘local-food’ marketing.

Arita, S., E. Naomasa, P.S. Leung. 2012. “Comparison of Cost Structure and Economic Performance of Hawaiʻi and U.S. Mainland Farms.” Economic Issues, EI-21.

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Q & A: Pacific Beat— U.S. and Europe Central Banks Announce Major Policy Changes

Posted September 20, 2012 | Categories: Q&A, Blog
1. Both the U.S. Federal Reserve and the European Central Bank made big
policy commitments last week. What did the Fed do?

The U.S. Federal Reserve launched a program known in the media as “QE3”. The 
program involves Fed purchase of long-term bonds and is designed to bring down
 long-term interest rates. The program announced last week is the Fed’s third round
of purchasing long-term bonds, thus the name “QE3”.

QE1/2/3 represent big changes in the way that the Federal Reserve usually 
operates, as the Fed typically focuses on reducing or short-term interest rates. 
However, short-term interest rates have been close to zero now for 4 years, so the 
Federal Reserve is focusing instead on reducing long-term interest rates.

Studies of the effects of QE1 and QE2 show that they have been effective in reducing
 long-term interest rates. And lower long-term rates reduce the cost to firms of
investing in new plants and equipment and reduce the cost to consumers of buying
 homes. This should lead to more firm and consumer spending and economics
 growth.

 

2. But not all economists and politicians have been enthusiastic about QE3 …

The Republican presidential candidate, Mitt Romney, compared the QE3 program to
a “sugar high” and repeated his desire to replace the Fed’s chair, Ben Bernanke.

Some politicians and economists have questioned whether a third round of bond
 buying will be effective in lowering long-term rates, while others are worried that 
the monetary stimulus will reignite inflation.

Others, including myself, tend to believe that QE3 is needed given the lingering high
unemployment in the United States but is likely to generate only modest increases 
in economic growth.

 

3. What did the European Central Bank announce?

Mario Draghi, the President of the European Central Bank, announced late last week
 that the Bank would buy bonds of several struggling European countries—Spain,
Portugal, and Italy. The Bank’s very ambitious goal is to put a cap on the interest 
rates paid by these governments on their debt and to ensure that all three countries 
remain in the euro zone.

Since Mr. Draghi’s announcement, global stock markets have rallied and bond
 markets have calmed considerably.

The Bank’s bond-buying program is, however, conditional on governments 
requesting the Bank to buy its bonds and on those governments showing progress 
in implementing new rounds of fiscal and regulatory reforms.

 

4. So will this new program of the European Central Bank work?

It’s a big bold commitment that is exactly what is needed. This is a policy that the
 Bank should have implemented much earlier in the euro crisis. Mr. Draghi
 deserves much credit for the strong leadership that he has exhibited in getting all 
major European leaders to support the Bank’s new commitments.

But here’s where we stand now in both the U.S. and Europe: Both the U.S. and
 European monetary authorities have made big ambitious policy commitments.
 Now it’s up to European parliaments and the U.S. Congress to follow through with
 critical reforms to financial markets and banks, labor markets, regulations affecting
 businesses, and overall fiscal policy. Monetary policy alone is just not powerful
 enough to ignite strong growth needed to bring Europe and the United States
 surging back to full employment.

---Sumner Lacroix

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Q & A: Generous Tax Credit Leads to Lower Revenue Forecast

Posted September 7, 2012 | Categories: Q&A
1. The State Council on Revenues met yesterday and lowered its projection for general fund tax revenues. Whats up with that? I thought the tourism boom was also generating tax revenue growth.

It is true that the boom in tourism spending and arrivals have contributed to a surge in tax revenues. Transient accommodations tax revenue grew by almost 30% in 2011 and is up 10% though July of 2012. And General Excise tax revenue is up 8% though July.

2. So why is the council lowering its forecast?

The Council actually raised its economic forecast a bit. But overall, we lowered the tax revenues forecast because of new estimates of the tax credits claimed for solar photovoltaic installations. Those estimates show a more than doubling of tax credits in the past two years, increasing to $170M in the current FY. And the Council adopted an estimate for next FY of $230 M in credits.

3. OK, what about the US jobs report?

The employment situation in August was not good. The US economy created 96,000 jobs in August, well below the consensus forecast of 125,000. So far this year, the economy has added 1.21 million private sector jobs and at this rate would add fewer than the 1.8 million private sector jobs created in all of 2011. As has a been the case for the past 2 years, the government sector shed workers despite growth in private sector jobs. State and Local government jobs have declined by 61,000 since the start of the year, and federal government jobs have fallen by 32,000.

4. So will job growth like this get President Obama reelected?

The slowdown in economic growth this year sure is working against him. Check out UHERO's blog post—It's the Economy, Stupid! (Or Is It?) One question is whether voters understand and agree with former President Clinton's point that President Obama inherited an economy that was in such horrendous shape, that it was impossible to repair all the damage in 4 years time. No President could have accomplished that.

5. Is there anything policymakers can do to increase economic growth?

Yes, and the odds of Federal Reserve action when they meet next week have definitely increased with this jobs report. Ben Bernanke set the stage for additional FED easing in his speech last week at Jackson Hole where he argued that QE has been effective and the potential costs of nontraditional monetary policy are manageable. And we have already seen some significant policy action this week on the part of the European Central Bank. The E.C.B. president, Mario Draghi announced that the bank will purchase sovereign bonds in unlimited quantities on secondary markets to support euro zone countries that have requested assistance and agreed to conditions set by the European Stability Mechanism. This was a pretty significant step in helping to calm bond markets and reduce the borrowing costs of Spain and Italy. 

---Carl Bonham

 

 

 

 

 

 

 

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Q & A: The Never-Ending Euro Crisis

Posted August 24, 2012 | Categories: Q&A
1. You are a professor at the university of Hawaii, but you are going to be in Paris for the next four months. How is that possible? 
I am teaching two courses in a study abroad program at the American Business School in Paris. I’m hoping to have a great time living in Paris and to learn a lot from my very diverse group of students who are mostly from France, Africa, and the United States.
One of the two courses that I’ll be teaching is called “Growth and Crisis in France’s Economy”. About half of the course focuses on how France got to where it is today—a rich country that continues to succeed in the global economy and that faces a big set of economic, political, and social challenges. The other half of the course focuses on the current crisis of the euro, the European currency, and various ways in which the euro crisis might be resolved or the euro currency area falls apart. 
 
2. Are people in Paris talking about the Euro or the economic crisis? 

 When I arrived in Paris about a week ago, it was really hot and most of the people that I encountered looked like they were really suffering from the heat. And when I asked them whether they had been talking with friends about the euro, several said that it was the summer, that they had been talking about the euro for two years, and that they were tired of talking about the euro crisis.

But this week, the mood has changed: the heat is gone, Paris is so much more pleasant, and French government leaders are coming back from their vacations in the south of France to confront, once again, the ongoing fiscal crises that Southern Europe governments—Portugal, Spain, Italy, and Greece, in particular—are facing. And as always the two main questions are: (1) How much aid will northern European countries ultimately decide to extend to southern European countries; (2) will the ECB and national governments work more closely together to resolve the crisis. Tonight the French President and the German Chancellor are meeting in Berlin to try to bridge their policy differences.

 

3. Are there any hints as to the direction that the euro crisis will take? 

If one is a pessimist, one would point to recent economic data that show many European countries heading into recession. Countries in recession usually face expanding fiscal deficits due to lower tax revenues and higher social welfare spending. And bigger fiscal deficits are not what bond market investors want to see. Countries could end up paying higher interest rates on their debt, thus worsening already heavy fiscal burdens from the high debts that southern European countries have already rung up.

If one is an optimist, one would hope that the leaders of both northern and southern European countries had good vacations and had each independently come to the realization that there are feasible ways to resolve the crisis as long as the European governments cooperated more closely. The faint but real signals of a more robust economic recovery in the United States may also be an encouraging sign for future European growth prospects.

 

4.  Is the Euro crisis going to continue for several more years?

Absolutely. Debt crises are never resolved very quickly. But if northern and southern European governments coordinated their fiscal and regulatory policies more closely with each other and with the monetary policies of the European Central Bank, it would not be surprising to see the European economy roar back to life once a credible policy commitment to both economic growth and fiscal health is made.

 

-- Sumner Lacroix

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