Is profit driven affordable housing possible?

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Last week at the Better Boulder Happy Hour (B2H2) we tried to talk about affordable housing.  The little nook at the Walnut Brewery was so packed that it was hard to even have a face-to-face conversation with folks, let alone do any kind of presentation that didn’t sound like an attempt at crowd control.  Which is good I guess… but not exactly what we’d planned.  I think a good chunk of the attendance was due to all the buzz generated by last Tuesday’s City Council meeting, and the talk of a citywide development moratorium.  Anyway, it was a learning experience.  We want these events to be informative, but also to get people talking to each other, and have it be more fun and social and network-building than a brown bag seminar or lecture that’s mostly going to appeal to the Usual Suspects, who are already engaged.  We need to get more “normal” people to show up and engage on these issues.

In any case, Betsey Martens, director of Boulder Housing Partners (the city’s housing authority) got up and said a few words to the assembled crowd.  She made a point which is in retrospect obvious, but that got me thinking anyway.  The costs of creating additional housing in Boulder (or anywhere, really) can be divided up into three categories:

  1. Hard development costs — the cost of actually building the housing.
  2. Soft development costs — e.g. the financing and permitting costs, carrying costs associated with regulatory delay, organizational overhead, etc.
  3. The cost of land.

She pointed out that you can do all the work you want to reduce hard and soft development costs — using standardized designs, prefabricated buildings, streamlined permitting for affordable housing — but ultimately those optimizations just nibble around the edges of affordability.  The real driver of housing costs in a desirable place is the cost of the land, which is pretty irreducible.  If you’ve got a funding stream (as we do here from our inclusionary housing policy), then you can buy up a bunch of land and create housing on it, but there’s still an opportunity cost to be had for using the land inefficiently — the same money might have created more affordable housing.

The obvious way to attack this problem is to spread the fixed land cost across more dwelling units.  You may not be able to reduce the price of the land, but you can share it with more people, decreasing per unit costs, and increasing density.  Naysayers are quick to point out that all the density in Manhattan and Tokyo has not made them cheap.  A common response is that they’re cheaper than they would have been if they hadn’t been more densely developed, but I’m not sure this is really the right answer (even if it’s true).

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Utilities Decoupling to Cover Their… Assets

Last month, Xcel Energy subsidiary Public Service Company of Colorado (PSCo) filed a rate case at the Colorado Public Utilities Commission (Docket: 14AL-0660E).  A lot of the case — the part that’s gotten most of the press — is about PSCo recovering the costs of retiring and retrofitting coal plants as agreed to under the Clean Air Clean Jobs Act (CACJA) of 2010.  However, there’s a piece of the case that could have much wider implications.  Way down deep in the last piece of direct testimony, PSCo witness Scott B. Brockett:

…provides support and recommendations regarding the initiation of a decoupling mechanism for residential and small commercial customers.

This recommendation has captivated all of us here at CEA because it could open the door to Xcel adopting a radically different business model, and becoming much more of an energy services utility (PDF), fit for the 21st century.

To explain why, we’re going to have to delve a ways into the weeds of the energy wonkosphere.

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Humans as Curators in Troubled Times

We had some of that golden evening light tonight just after house meeting.  The kind that makes you think maybe an apocalypse is just over the horizon.  That the mountains are on fire.  That the gods are angry.  This Saturday I went for a long bike ride up to the Peak to Peak highway with Amy from Picklebric.  At the Sunshine Saddle she pointed out the cheat grass — an invasive species that she works on.  Studying disturbed ecosystems, and how to assemble new approximations of the originals from the parts at hand.  You can’t get rid of the invasives, but maybe you can influence which ones thrive.  Just beyond the divide above us, the mountains covered with red trees, a forest being transformed in a lifetime.  500 years from now will they be the Aspen mountains?  Tim applied for a job at the Nature Conservancy as a landscape ecologist in a similar vein — understanding and managing wild and semi-wild lands for their own sake.  Like the Colorado river pulse.  All this made me think of the ecopoesis that Kim Stanley Robinson portrayed in his Mars books, especially Green Mars.  Humans as gardeners of the no longer quite wild.  From here on out, it’s all gardening. Mandatory gardening.  It’s just what kind of garden do we want?  What will grow in this climate?

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Facing the Risk in Fossil Fueled Electricity

I recently wrote about how our risk tolerance/aversion powerfully affects our estimation of the social cost of carbon, but obviously that’s not the only place that risk shows up in our energy systems.  Fossil fuel based electricity is also exposed to a much more prosaic kind of risk: the possibility that fuel prices will increase over time.

Building a new coal or gas plant is a wager that fuel will continue to be available at a reasonable price over the lifetime of the plant, a lifetime measured in decades.  Unfortunately, nobody has a particularly good record with long term energy system predictions so this is a fairly risky bet, unless you can get somebody to sign a long term fuel contract with a known price.  That doesn’t really get rid of the risk, it just shifts it onto your fuel supplier.  They take on the risk that they won’t make as much money as they could have, if they’d been able to sell the fuel at (higher) market rates.  If the consumer is worried about rising prices, and the producer is worried about falling prices, then sometimes this can be a mutually beneficial arrangement.  This is called “hedging”.

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Geology and Markets, not EPA, Waging War on Coal

With the release of the Environmental Protection Agency’s proposed rules limiting carbon pollution from the nation’s electricity sector, you’ve no doubt been hearing a lot of industry outrage about “Obama’s War on Coal.”

Don’t believe it.

Despite the passionate rhetoric from both sides of the climate divide, the proposed rules are very moderate — almost remedial.  The rules grade the states on a curve, giving each a tailored emissions target meant to be attainable without undue hardship.  For states that have already taken action to curb greenhouse gasses, and have more reductions in the works, they will be easy to meet.  California, Oregon, Washington, and Colorado, are all several steps ahead of the proposed federal requirements — former Colorado Governor Bill Ritter told Colorado Public Radio that he expects the state to meet the proposed federal emissions target for 2030 in 2020, a decade ahead of schedule.  This isn’t to say that Colorado has particularly clean power — our state has the 10th most carbon intensive electricity in the country, with about 63% of it coming from coal — but we’ve at least started the work of transitioning.

Furthermore, many heavily coal dependent states that have so far chosen to ignore the imperatives of climate change (e.g. Wyoming, West Virginia, Kentucky) must only attain single-digit percentage reductions, and would be permitted to remain largely coal dependent all the way up to 2030.  Roger Pielke Jr. and others have pointed out that in isolation, the new rules would be expected to reduce the amount of coal we burn by only about 15%, relative to 2012 by 2020.  By 2030, we might see an 18% reduction in coal use compared to 2012.  Especially when you compare these numbers to the 25% reduction in coal use that took place between 2005 and 2012, and the far more aggressive climate goals that even Republicans were advocating for just two presidential elections ago, it becomes hard to paint the regulations as extreme.  Instead, they look more like a binding codification of plans that already exist on the ground, and a gentle kick in the pants for regulatory laggards to get on board with at least a very basic level of emissions mitigation.

So, in isolation, there’s a limited amount to get either excited or angry about here.  Thankfully, the EPA’s rules will not be operating in isolation!

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The Myth of Price

Our society’s prevailing economic zeitgeist assumes that everything has a price, and that both costs and prices can be objectively calculated, or at least agreed upon by parties involved in the transaction.  There are some big problems with this proposition.

Externalized costs are involuntary transactions — those on the receiving end of the externalities have not agreed to the deal.  Putting a price on carbon can theoretically remedy this failure in the context of climate change.  In practice it’s much more complicated, because our energy markets are not particularly efficient (as we pointed out in our Colorado carbon fee proposal, and as the ACEEE has documented well), and because there are many subsidies (some explicit, others structural) that confound the integration of externalized costs into our energy prices.

The global pricing of energy and climate externalities is obviously a huge challenge that we need to address, and despite our ongoing failure to reduce emissions, there’s been a pretty robust discussion about externalities.  As our understanding of climate change and its potentially catastrophic economic consequences have matured, our estimates of these costs have been revised, usually upwards.  We acknowledge the fact that these costs exist, even if we’re politically unwilling to do much about them.

Unfortunately — and surprisingly to most people — it turns out that understanding how the climate is going to change and what the economic impacts of those changes will be is not enough information to calculate the social cost of carbon. Continue reading The Myth of Price

Alone in the Wilderness

I’ve been thinking a lot about risk tolerance and discount rates lately, and how they profoundly shape our perception of the economic costs associated with minimizing climate change.  Basically… if you’re willing to vary your preference for the present over the future or the level of uncertainty you’re willing to accept, then you can make mitigation cost whatever you want.  All else being equal, low discount rates and low risk tolerance make taking action cheap, while high discount rates and high risk tolerance make it expensive.

Unfortunately, we live in a society with high discount rates and high risk tolerance.  Or at least, that’s what you’d infer from our collective behavior.  It’s also what you’d gather from a lot of the rhetoric around climate action, and our obsession with trying to make it “economically efficient”, to the point of maybe not doing it at all.  Our risk tolerances and discount rates aren’t really objectively measurable.  They are fluid, and context sensitive.  The same person in different situations will not behave consistently.  Different people in the same situation may come to different conclusions.  How we deal with uncertainty and the value of the future is a personal as well as cultural decision.

For some reason, I find myself with a low pure time preference, and an aversion to many kinds of risk.  This is part of why I find our unwillingness to act on climate infuriating, and why I’m working on climate policy.  I got to wondering, how did I end up this way?  Why isn’t it more common?

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