by Amory Lovins and Jon Creyts, via Rocky Mountain Institute

Would you build a buy-and-hold financial portfolio from only junk bonds and no Treasuries by considering only price, not also risk? Not for long. Yet those who say cheap natural gas is killing alternatives—solar, wind, nuclear—make the same error. In truth, they’re doing the math wrong: The gas isn’t really that cheap.

“Cheap gas” reflects only the bare spot price of the commodity without adding the value of its price volatility. Yet such competitors as efficiency and renewables have no fuel and hence no fuel-price volatility: Once built, they’re as financially riskless as Treasuries. Of course, much gas is sold not at spot but on long-term contract, especially to its biggest user—electricity generators. But for other players, it’s vital not to become the patsy in the poker game: basic financial economics says asset comparisons must value and equalize risk.

One way is to compare fuel-free competing technologies with constant-price gas. A broker will take the price-volatility risk for a fee based on the market’s risk valuation, discoverable from the “straddle”—the sum of the prices of simultaneously sold put and call options. A year ago, when the cheap-gas mania was taking hold, gas-price volatility five years out was worth more than recent spot gas prices. Even today, with lower price and volatility (whose value automatically falls with price), gas’s price volatility alone, over a time horizon appropriate for comparison with durable assets, is worth roughly what gas now sells for. Omitting price volatility thus understates gas’s true cost (excluding its fixed delivery costs) by about twofold—a very material error.

A leading promoter of shale-gas fracking, asked about this at a recent financial conference, replied, “Trust me!” Gas, he claimed, would remain very cheap for a very long time. So how much gas would he contract to sell for a constant $2–3 per thousand cubic feet for 20–30 years, backed by solid assets unlinked to hydrocarbon prices? Probably none.

Actually, you can buy gas today for delivery at least a decade hence. Sure enough, it costs 2–3 times more, or about $6. So why doesn’t a fracking promoter lock in huge profits by shorting gas futures? Because shale gas (unless sweetened by valuable liquid byproducts) has lately sold at below its cash production cost. The reasons include frenetic drilling (driven by use-it-or-lose-it leases and the need to book big reserves to raise cash), pricey oil spurring plays in oily shales, and filled storage due to a mild winter. Those low 2012 natural gas prices will probably prove as transient as the even lower real prices of 1995–2000.

The gas industry’s inherent short-term price volatility is due to weather, storage, trade, and other factors. The April 2012 low gas price rose 31% by the end of May and doubled for delivery two years hence. Uncertainties increase further out because economies are complex and unpredic-table. The fracking revolution didn’t repeal basic economics: to get $6–8 gas, just assume $3–4 gas, use it accordingly, and watch supply and demand reequilibrate at higher prices.

In fact, traders’ confounded attempts to forecast supply and demand dynamics for natural gas have helped accentuate this volatility. The track record of official price forecasts is abysmal (see Figure below), and private forecasts weren’t much better. Three times in the past 15 years, huge investments—such as $100-odd billion worth of mistimed combined-cycle gas turbine generators bought in the late ’90s—were painfully stranded or misdirected when gas price forecasts shifted abruptly.

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Americans for Prosperity, a national political organization that claims to uphold libertarian values, is showing its true intentions: Protect government support of fossil fuel interests.

Founded and partly funded by the oil billionaire Koch Brothers, AFP has become a leading organizer of the Tea Party. The organization has thrown millions of dollars behind national ads attacking clean energy that fact checkers have called “ultimately ridiculous.” (Even more ridiculous, AFP recently bussed in protesters to picket a small event where kids were flying kites on the beach in support of wind power).

Given AFP’s ties to the oil industry and its blatant disdain for renewable energy, its latest campaign to end a key tax credit for wind shouldn’t come as a surprise to anyone who follows the group. But what’s truly remarkable about AFP’s latest effort to kill wind tax credits is the mind-bending contradiction between its stance on renewable energy tax policy and fossil fuel tax policy.

Here’s an excerpt from a letter on the wind tax credit sent to members of Congress by AFP and a large group of other conservative organizations yesterday:

This special provision continues the deplorable practice of using the tax code to favor certain groups over others. Whenever the government protects a particular industry, as it has with wind energy production, the industry tends to remain dependent on it.

It is time to end special tax provisions that distort the energy market and increase energy prices. We urge you to let the wasteful wind PTC expire as planned at the end of the year.

So an organization trying to limit government spending and create a “free market” would surely support doing the same thing for the tens of billions of dollars in special tax incentives for the fossil fuel industry, right? Not a chance.

Here’s AFP’s official stance on tax policy for fossil fuel companies:

AFP opposes using the tax code to attack oil and natural gas producers that are simply using the same tax deductions that are broadly available to everyone else, just because these energy producers are politically unpopular.

Using the same tax deductions as everyone else? Not exactly. Yes, oil and gas companies take advantage of many of the same tax provisions offered to other industries. But as Seth Hanlon, Director of Fiscal Reform at the Center for American Progress recently pointed out, there many that apply specifically to fossil fuel producers:

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While most of the political world was glued to the Democratic convention Thursday night, Congressman Steve King (R-IA) debated Democratic challenger Christie Vilsack on local radio station WHO 1040.

King, who has called climate scientists “frauds” doing “the modern version of the rain dance, touted his support for wind power and other renewable fuels as a means of helping the local economies. That’s right, of course, but in the same thought King condemns government intervention into the marketplace — a direct contradiction with his support for providing government subsidies to clean energy:

The prosperity that we have enjoyed is a result of a lot of things; risk-taking capital, trying to get government out of the way, trying to reduce the intrusiveness of the federal government. And I don’t want to go back from that — I think our job is let people have their freedom, let them use their individual responsibilities to grow and strengthen families and life and marriage and free enterprise and farms and business and communities. And, by the way, the very best thing that has come along for small communities in Iowa, around 950 of them, has been renewable fuels, and I’m fortunate that I’ve been in the middle of that for a long, long time.

Listen:

King thinks there’s no tension here — he sees his support for a wind tax credit as a tax cut that’s consistent with a broader minimalist worldview about the role of government. However, targeted tax cuts are a form of government intervention into the market — the government is providing a certain industry a financial advantage to promote its growth. From an economic perspective, there’s no difference between a tax cut and a subsidy, as both involve taking money from the government and giving it to a targeted sector of the economy. King’s support for a wind tax credit suggests that government can, in fact, play in an important role in fuelling economic growth, especially in the renewable energy sector.

Indeed, King’s own Iowa is testament to that fact. As he says, renewable fuels are “the very best thing” for Iowans, creating thousands of jobs and attracting billions of investment dollars due in large part to state and federal support. It’s a shame, then, that Mitt Romney can’t recognize a point that’s pretty clear to his Republican allies on the ground.

by Mary Anne Hitt and Justin Guay, via the Sierra Club

While no new coal plants have broken ground here in the US since 2008, the US government is backing a huge, polluting new coal plant oversees. The U.S. Agency for International Development (USAID) and World Bank are pushing a heavily polluting, costly, and controversial new coal plant in Kosovo.

As if that weren’t bad enough, new documents obtained by the Sierra Club under the Freedom of Information Act reveal they are using inaccurate and unreliable data in order to ensure the plant is fast-tracked. They are cutting corners and recklessly endangering the health of Kosovar citizens and it’s time this controversial project was stopped.

According to the documents, the USAID contractor PA Government Services Inc. (now Tetra Tech Inc.) warned the agency that an existing plant — called Kosovo ‘B’ — had an emissions monitoring system that was deficient as early as 2010. The contractor warned unequivocally that “the Kosova B plant is not equipped with continuous emission monitoring apparatus…. It is strongly recommended that a complete continuous emission monitoring system be installed and emission data be collected annually.”

The documents express grave concerns about the accuracy of the intermittent emissions data that they were able to collect, calling it “questionable.” The data USAID was collecting was erratic and unreliable, featuring major discrepancies between units within the same year as well as within the same unit from one year to the next.

Even worse, the reported climate pollution vastly exceeded limits set by the European Union, sometimes by as much as 900%. This shows that building another highly polluting coal plant right next door would only make air quality worse, no matter how ‘clean’ it is promised to be.

Based on similar information obtained by the Sierra Club, a letter was sent in 2012 that again warned both USAID and the World Bank that:

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After being left out in the cold all year, global warming is making a reappearance on the campaign trail. President Obama, who campaigned aggressively in 2008 on the promise of fighting climate change, has barely mentioned the subject during this campaign, despite a summer of record heat and drought and news reports linking such extreme weather events to increases in greenhouse gases. [National Journal]

But on Thursday night, under the spotlight at the Democratic National Convention in Charlotte, just two months from the general election, Obama made his most high-profile mention of the controversial issue this year.

“And yes, my plan will continue to reduce the carbon pollution that is heating our planet—because climate change is not a hoax,” Obama said. “More droughts and floods and wildfires are not a joke. They’re a threat to our children’s future. And in this election, you can do something about it,” he said, to a sustained ovation.

Until now, Obama’s advisers calculated that in a campaign centered on the economy, a pledge to save the environment by cutting carbon pollution would fall flat—and create a target for Republican attacks. But Thursday’s remarks could signal a new willingness to address a crucial public-policy issue which both campaigns have until now avoided.

President Barack Obama’s effort to develop renewable power sources and persuade Congress to adopt a long-term energy policy will be priorities should he win a second term, his top climate and energy aide said. [Businessweek]

Scientists in the Arctic are warning that this summer’s record-breaking melt is part of an accelerating trend with profound implications. [BBC]

Preliminary lab results show two oil samples taken on the Louisiana coast are from BP’s 2010 Gulf spill, state officials said Thursday. [CNN]

Despite locally drenching rains from the remnants of Hurricane Isaac, the worst drought in more than 50 years is still firmly entrenched across much of the U.S. [Climate Central]

The Illinois Department of Natural Resources says drought is fueling an outbreak of a fatal deer disease in southern and central Illinois and surrounding states. [Sacramento Bee]

Meteorological and ecological shifts driven by climate change are creating a slow and often unpredictable bloom of novel public health challenges across the United States. [New York Times]