Wednesday, July 23, 2008

Update: It's more like $300B

Most Pickle readers will be unaware that I'm working at an economic consulting firm this summer, between years of my graduate degree. Accordingly, when one or two people at work caught a glimpse of my post from Friday, I got busted. Using the backs of better, more experienced envelopes, they insisted that my figure of $80B today to take a wrecking ball to all existing coal and gas generation assets on 1/1/2019 is way too low, for a couple of reasons: my initial cost per plant was too low, the useful life was too short, and, probably most importantly, I was using book value, when the real measure of what we taxpayers would owe to the owners should be market value - much higher. I'm hearing numbers between $250B and $600B. I still think the latter is too high - what is government good for if not paying people too little for stuff it says they have to do?

But it's also important to note, as I said in the original post, that this is only one of the costs of the Gore proposal. The cost to replace all that carbon-fueled generation is much higher, in the neighborhood of 1 to 3 trillion. But I wouldn't call that a cost of the plan, in the same way that we call the shuttering of all coal and gas plants a cost. In the former case, market participants would see a huge demand - for electricity - that can not be met once 70% of all existing generation is gone, and they would move to fill that void, with the expectation of earning a return on their investment. In the latter case, however, there is no return - it's taking things that are worth something, and turning them into piles of rubble, worth only the salvage value of the raw materials. That's like burning cash. Dollar-for-dollar, it's the far more economically powerful of those two classes of costs, and that's why, even though it's the small of the two, it's the one on which I chose to focus in my post.

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