Damage Analogues and (Soon to be) Hurricane Isaac

The image above comes from the ICAT Damage Estimator, a nifty online tool that allows you to compare (soon to be) Hurricane Isaac with historical analogues, including an estimate of what damage those analogues would have caused if they were to hit with this year's level of coastal development.The damage estimates are based on an update to the normalization methodology that we published in 2008. After what could have been much worse in Haiti, Isaac is now turning towards the Gulf of Mexico.

The image above shows all storms that have passed within 75 miles of Isaac's most recent NHC position and where they eventually made landfall. Most went to the west of Florida as Issac is predicted to track. The median historical damage from this set of analogue storms is $1.6 billion, with an incredibly wide range. Currently the NHC projects Issac to make landfall along the Gulf coast as a category 2 storm. There are 5 historical analogues in the set above with normalized damage ranging $1 billion (Georges, 1998) to $4.4 billion (Gustav, 2008). Category 3 and 4 storms have resulted in much higher damage. I'll update these numbers as Issac gets closer to the Gulf Coast.

You can play around with the ICAT Damage Estimator here.

Summer is Over

Summer is over, the term starts next week. More fun here this fall.

Thanks for reading!

The Myth of College Costs Increasing Faster than Inflation

There is a common misunderstanding out there which makes it difficult for state universities to explain to the public the dramatic effect of state government budget cuts.

The public sees the price of an education reflected in the tuition, the amount that students or their families pay to attend the university. But the price of an education does not reflect the cost of an education. The reason for this is that state governments subsidize in-state students to attend their public universities. Thus, the total cost of an education is reflected in the tuition plus the state subsidy.

The state subsidy is typically hidden and out of sight, meaning that people assume that the tuition (and increases in it) are a reflection of the increasing costs of an education. In a situation where state support is diminishing, tuition must be increased to compensate or costs must be cut or both.

Let me illustrate these dynamics with the case of the University of Colorado, where I am a professor.

• In 2001-2002 in-state tuition was $2,614 and the state provided a $7,063 subsidy per student, for a total of $9,677, or after factoring in inflation, $12,289 in 2011 dollars.
• In 2011-2012 in-state tuition was $7,672 and the state provided a $2,839 subsidy per student, for a total of $10,511.

So over the 10 years the price of tuition went up by 293% -- inflation only increased 27%. This is a big increase, and certainly increases the burden on those who pay the tuition. However, over that same period the inflation-adjusted cost of delivering that education went down by 14%. How can this be? The simple answer is that the state has cut its subsidy per student by 60% (closer to 70% after inflation), transferring a large portion of the costs of an education from the state to the student. In Colorado at least, state university education is being privatized.

From this perspective, the University of Colorado should be applauded for its efforts to keep costs down over the past decade. This is a message that university administrators should advertise far more widely.

A US Ethanol Waiver and the Price of Corn

UPDATE: At The Washington Post Brad Plumer does a fantastic job explaining the Purdue/FF paper discussed in this post.

Today's FT says this in an editorial:

Passed by Congress in 2005, the Renewable Fuel Standard mandates fuel refiners to blend rising volumes of ethanol and other biofuels. For American farmers, the RFS has been spectacularly effective. Ethanol is expected to consume about 40 per cent of this year’s US corn crop...

In the short term, the Environmental Protection Agency has the ability to issue a waiver to the RFS if implementing it would “severely harm” the economy or the environment. The present conditions amply meet that requirement.

The biofuels industry argues, rightly, that the effect of waiving the RFS might not be immediate or dramatic. Refiners will still need large volumes of ethanol to meet fuel quality standards, so production would not dry up overnight.

RFS requirements can also be met using the tradeable credits known as Renewable Identification Numbers, issued when ethanol is produced. Because there is a substantial backlog of those credits, refiners can use them to meet their obligations rather than demanding physical ethanol, again blunting the effect of an RFS waiver.

Ethanol producers also point out that if output does fall, it will cut the supply of distillers’ grains, the protein-rich byproduct used as animal feed, so increasing demand for other crops such as soya.

Nevertheless, suspending the RFS would probably help ease corn prices – next year more than this. It would also send a signal that the US is not prepared to crucify mankind upon a cross of corn.

But what effect on corn prices might be expected from a waiver of the RFS? Academics at Purdue University affiliated with the US Farm Foundation have tried to answer this in a paper just out (here in PDF).

They explain their quantitative analysis as follows:

A range of possible impacts depends on the price of oil, the price of corn, the magnitude of the drought, the economics of switching away from ethanol, and technical flexibility of refiners and blenders. First, assuming limited flexibility on the part of refiners and blenders in the near term, the impact of a waiver would be very small or nil. If refiners and blenders cannot or choose not to change their current practice of using 10% ethanol blends, then a waiver does not matter. Technical and market constraints would override the waiver.

However, refiners and blenders may have some degree of flexibility in production. This is certainly true the longer the time horizon, so the question is to what extent it is true in the confines of one year. There is not a complete answer to that question, but many of the factors that will determine it are described above.

The next question: What would be the impact of a partial waiver under the assumption that refiners and blenders do have some flexibility in reducing ethanol use and substituting other octane and oxygen additives for ethanol to meet final product specifications? For this paper, estimates were done using a partial equilibrium model developed and used for previous ethanol policy work [5-9]. The model was updated, tuned according to recent observations, and modified for this work on drought impacts. The analysis was done for several levels of partial waiver or use of available RINs in 2013. As indicated above, it is unlikely any waiver will be issued for 2012.

The model for this analysis includes expectations before the drought with a full 13.8 BG RFS for 2013. Then it assumes the drought with three alternative ethanol blending levels: 11.8 BG, 10.4 BG, and 7.75 BG. For this analysis, it does not matter whether the reduced blending levels result because of the use of RINs or a partial waiver. However, the 11.8 BG level could be seen as no waiver and the use of 2 BG of RINs. (Use of some RINs in 2012 and surplus 2013 RINs carried forward to 2014 could limit the 2013 usage to around 2 BG.) The case of 10.4 BG represents 75% of the 13.8 BG RFS and could result through any combination of waiver, use of prior RINs, or use of sugarcane ethanol. The drought may reduce corn production 25% from pre-drought expectations, so EPA might consider a case that could reduce corn ethanol use through some combination of RINs and waiver by that same fraction. Finally, the case of 7.75 BG represents a waiver of 3.45 BG (25% of RFS) plus use of all the estimated available 2.6 BG of RINs, estimated to be the maximum possible ethanol reduction level if economic and technical hurdles could be overcome.

In the graph that appears at the top of this post, I have summarized the data in the last paragraph above (and as shown in the paper's Table 2) for the case of "stronger drought."

The analysis indicates that a partial waiver coupled with use of RINS credits could have a significant impact on corn prices (a reduction of >20%). However, a reduction in corn prices due to such policy action means a cascading series of impacts in the agricultural economic system (and beyond), starting with corn farmers themselves, as as the FT notes, with downstream effects on animal feed and corn substitutes.

Policy makers are fully aware that in the political process acts of commission are sanctioned more severely than acts of omission. Thus, the chances that the US will issue a waiver of any sort in 2012 appear unlikely, though I wouldn't be surprised to see a managed use of RINs and other technical instruments. The Purdue/FF analysis is thus an academic exercise in the short term, but an interesting one nonetheless, and perhaps relevant to efforts to tinker with the RFS down the road.

Why Levelized Tuition is Inevitable

From the California State University system comes this remarkable news:

The California State University system is embroiled in a controversy over plans to admit higher-paying out-of-state and international students to its undergraduate and graduate programs next spring while barring California residents because of state funding cuts.

The issue has become so heated that department leaders on some campuses are saying that rather than turn away Californians, they will not accept any students into their programs.

State budget cuts combined with differential tuition for in-state and out-of-state students is leading universities to act in the direction of their economic interests. The Cal State decision to ban in-state students may be a highly visible publicity gambit, but it does show the consequences of the current incentive structure.

A Cal State spokesman explains:

“We need to make appropriate enrollment cuts and that, unfortunately, has to be California residents,” Cal State spokesman Mike Uhlenkamp said to the Times. “If a campus has a program with the capacity to bring in students who are not subsidized and who are paying for the entirety of instruction, they could … bring in additional revenue that could go to benefit state residents.”

Cal State provides more evidence that the days of in-state tuition appear numbered.

H/T MattL in the comments.

Beer, Circuses and How Not to Fill a Tuition Hole

Colorado State University in Fort Collins is proposing to build a new stadium for its football team (visualized above). One of the central arguments for building the stadium is to increase out-of-state applications, the quality of the student body and raise more tuition revenue. A close look shows that the numbers just don't add up.

Frequent readers here will be aware of the dwindling support of university education by the State of Colorado. This leaves a situation where state institutions must figure out a way to fill a gap left by the reduced state support. How this is done is not complicated, as I wrote last year about my institution, the University of Colorado:

In round numbers, the state provides about $3,000 per student.  If the state allows the university to charge about $8,000 per student in tuition, and the cost of running the university requires a break-even tuition of about $14,000, then you can see that the result is a loss of $3,000 per in-state student.  That adds up fast -- it is a  $60 million shortfall.

How does the university make up the difference?  Answer: Out-of-state students!  In 2010 the proportion of out-of-state students at CU was larger than at any time since 1975 (data, it was 34.5% in fall, 2010 and state law allows it to go to as much as 45%).  From 2005 to 2010 the number of CU in-state undergraduates shrunk by 1% while the number from out-of-state increased by 17%.

An interesting twist on this argument comes from Colorado State University, up the road in Fort Collins where my father was on the faculty for about 25 years. At CSU the administration is seeking to dramatically upgrade its athletic program.

Writing in The Denver Post, Terry Frei explains:

[CSU President Tony] Frank has overseen a massive overhaul in the Rams' athletic department. He was dissatisfied with the department's direction, and also increasingly determined to use sports to help raise the university's national profile. The move comes at a time when national league realignment has significantly weakened CSU's conference, the Mountain West, making the highest priority — football prominence — even more of a challenge.

In the wake of a Stadium Advisory Committee's report last week that the controversial project is feasible, Frank said he will announce by early October his recommendation to the school's board about whether CSU should move forward with construction of a 42,000-seat, on-campus stadium. The new facility would replace the 32,500-seat, off-campus Hughes Stadium as the Rams' game-day home starting with the 2015 season.

Estimated cost: $246 million for the core project, planned for the south side of the campus. The SAC, headed by athletic director Jack Graham and school vice president Amy Parsons, said it had "roughly estimated" another $51 million in costs if previously cited features were included, including an alumni center, parking facilities and other buildings.

The stadium is only the tip of the iceberg:

Now Graham is hopeful of not only witnessing the Rams' move into a new stadium, but eventually a buildup of the athletic department budget — from the $23.5 million 2011-12 budget he inherited, to a planned $28.45 million in 2012-13, and to around $55 million a year at some point.

"The rest of this campus knows what excellence looks like," Graham said in his office at the Fum McGraw Athletic Center. "You go to our veterinary school, our agriculture school, our college of business. They don't settle for mediocrity. That is not what the culture's been like in our athletic department the last 10 years. ... I did not come here to babysit mediocrity. We're going to drive athletics to a level of excellence that reflects the standards of the rest of the university."

Frank outlines a vision for athletics in a speech here. One notable feature of the justifications being offered for the new stadium is tuition costs and out-of-state students:

Frank can rattle off stunning numbers about the increases in tuition at public universities over the past few decades, a result of both inflation and a precipitous percentage drop in state support, which traditionally subsidized much of the costs for in-state students. "Over that period, we've essentially been privatizing American public higher education," he said.

If the trend continues, Frank said, state support could completely dry up in the next 20 years. He views his mission as positioning CSU — which has an enrollment of about 27,000 — to withstand that. One move, of course, would be to continue with major tuition hikes, but he speculates that it would require a doubling of in-state tuition to make up for the lost state money. He also scoffs at trying to make up the money through volume, such as increasing enrollment to 63,000. "That doesn't work for CSU; that doesn't work for this community," he said.

A more palatable alternative, he said, is to draw more students paying out-of-state tuition. And higher-profile sports teams, he believes, would draw more national attention to CSU, including from potential nonresident students. "Adding 4,000 nonresident students is $80 million," he said.

That's where the on-campus stadium comes into play, with the country seeing — and the fans attending the games getting — a better feel for the campus itself than if games continue to play be played at Hughes Stadium, which opened in 1968 along the foothills to the west of campus. Frank said a realistic goal could be to add 2,000 to 3,000 in-state students, while pursuing even harder additional out-of-state students.

"The carrying capacity of this campus is somewhere between 35,000 and 40,000," he said. "You've got plenty of room for nonresident growth that maintains the character of the campus."

While there may be good arguments for the building of a new stadium in Fort Collins, the appeal to the tuition gaps smacks of an argument of convenience. Let's take a look at the numbers.

In his presentation of February 3, 2012, CSU athletic director Jack Graham explained that "increasing the flow of student applications is an objective of construction of an on campus stadium" (here in PDF). The relevant slide from Graham's presentation is shown above.

In that slide you see that Graham cites Pope and Pope (2008) to argue that "applications received will increase 2%-8%." Pope and Pope (2008) can be found here in PDF. Here is what they concluded from their analysis:

For basketball, the results suggest that being one of the 64 teams in the NCAA tournament yields approximately a 1% increase in applications the following year, making it to the “sweet sixteen” yields a 3% increase, the “final four” a 4-5% increase, and winning the tournament a 7-8% increase. The impact of the athletic lags, are as we expected. While there is an effect of winning on the current year’s applications, the largest effect comes in the first lag. By the third lag, the effect has usually diminished substantially. . .

For football, the results suggest that ending the season ranked in the top twenty in football yields approximately a 2.5% increase in applications the following year, ending in the top ten yields a 3% increase, and winning the football championship a 7-8% increase. The largest effect is on the current football sports variable along with a small effect on the first lag.

The numbers above are for all universities, public and private, and the study finds larger effects for private schools. CSU is public, but let's set that distinction aside, and place the numbers reported above into the context of actual admissions numbers for CSU.

In 2011 CSU received about 16,000 applications of which about 7,000 were out of state. A top-20 team would therefore boost out of state applicants by 175, a top-10 team by 210 applications and a National Championship by as much as 560 applicants. This boost would be for only one year, after which the effect would disappear. I think it is safe to say that CSU's football successes simply cannot drive large increases in out-of-state applications, even with a national championship every year.

There may indeed be good reasons to build a new stadium at CSU, but increasing student applications, improving the academic quality of the study body and filling the State budget tuition hole cannot be supported based on the evidence provided by CSU.

Magical Thinking in Germany

Back in 2009 I shared the following comments from Sigmar Gabriel, then German energy minister:

Germany’s environment minister Sigmar Gabriel (Social Democratic Party) is pushing for the construction of new coal-fired power plants in Germany. “We need eight to twelve new coal plants if we want to get out of nuclear energy,” Gabriel said on Friday at a meeting of the Mainz-Wiesbaden AG (KMW) in Mainz. With regard to the opponents of the planned coal-fired power in Mainz, the minister said: “Those who demonstrate against coal-fired power will get nuclear power plants instead.” Gabriel said, the decision about which power plants are built is the responsibility of companies and not politics. He added that new coal power plants would not increase carbon dioxide emissions.

First of all, old plants would be closed. In additon, the emissions trading scheme would limit the level of emissions. “You can build 100 coal-fired power plants and don’t have to have higher CO2 emissions,” said the environment minister.

Renewable energies would not be able to close the gap in energy supply that will arise due to the shutdown of nuclear power plants by 2020, said Gabriel. Even gas-fired power plants are not a real alternative because their power generation is expensive and thus not competitive for the energy supply of industrial production.

I had a bit of fun with the highlighted quote. 100 coal-fired plants and no higher CO2? Magic!

Yesterday, the current German environmental minister provides us with an updated and equally absurd quote:

German Environment Minister Peter Altmaier said Wednesday the country will need to build more coal- and gas-fired power plants in coming years to ensure energy supplies, even as Germany is pursuing one of the world's most ambitious climate protection strategies. . .

Renewable energies have been booming in Germany in recent years and the renewable electricity production has already exceeded 20% of overall production. But the government has repeatedly said that there needs to be adequate backup power generation capacity to ensure that consumers and, more crucially, industry can be supplied with energy around the clock.

He also said that new fossil-fueled power plants like the 2,200-megawatt facility that RWE built in western Germany are contributing to climate protection goals.

"If one builds a new state-of-the-art lignite power plant to replace several older and much less efficient plants, then I feel this should also be acknowledged as a contribution to our climate protection efforts," Mr. Altmaier said.

 A 2.2 gigawatt lignite power plant as a contribution to "climate protection"? Magic!