Category Archive for: Environment [Return to Main]

Wednesday, October 07, 2015

'The Papal Encyclical and Climate Change Policy'

Robert Stavins:

The Papal Encyclical and Climate Change Policy: ...I’m inspired by a marvelous essay by Yale professor William Nordhaus, “The Pope & the Market,”... However, my thoughts are completely independent from his...
With that preamble out of the way, here are the reactions of one environmental economist, yours truly, to Laudato Si’...
The Pope is to be commended for taking global climate change seriously, and for drawing more world attention to the issue. There is much about the encyclical that is commendable, but where it drifts into matters of public policy, I fear that it is – unfortunately – not helpful.
The long encyclical ignores the causes of global climate change: it is an externality, an unintended negative consequence of otherwise meritorious activity by producers producing the goods and services people want, and consumers using those goods and services. ... There may well be ethical dimensions of the problem, but it is much more than a simple consequence of some immoral actions by corrupt capitalists.
The document also ignores the global commons nature of the problem, which is why international cooperation is necessary. If the causes of the problem are not recognized, it is very difficult – or impossible – to come up with truly meaningful and feasible policy solutions.
So, yes, the problem is indeed caused by a failure of markets, as the Pope might say, or – in the language of economics – a “market failure”. But that is precisely why sound economic analysis of the problem is important and can be very helpful. Such analysis points the way to working through the market for solutions...
Should Carbon Markets be Condemned?
In surprisingly specific and unambiguous language, the encyclical rejects outright “carbon credits” as part of a solution to the problem. It says they “could give rise to a new form of speculation and would not help to reduce the overall emission of polluting gases”. The encyclical asserts that such an approach would help “support the super-consumption of certain countries and sectors”.
That misleading and fundamentally misguided rhetoric is straight out of the playbook of the ALBA countries, the small set of socialist Latin American countries that are opposed to the world economic order, fearful of free markets, and have been utterly dismissive and uncooperative in the international climate negotiations. Those countries have been strongly opposed to any market-based approaches to climate change...
By incorporating the anti-market rhetoric of the ALBA countries, the encyclical [is] emphasizing a perspective that is not progressive and enlightened, and would – I fear – ultimately work against meaningful climate policy at the international, regional, national, and sub-national levels.
That is why I said that although there is much about the encyclical that is commendable, where it drifts into matters of public policy it is – unfortunately – not helpful.

Monday, October 05, 2015

Paul Krugman: Enemies of the Sun

Why are Republicans hostile to initiatives that promote wind and solar energy?:

Enemies of the Sun, by Paul Krugman, Commentary, NY Times: Does anyone remember the Cheney energy task force? Early in the George W. Bush administration, Vice President Dick Cheney released a report that was widely derided as a document written by and for Big Energy — because it was...
But here’s the thing: by the standards of today’s Republican Party, the Cheney report was enlightened, even left-leaning. One whole chapter was devoted to conservation, another to renewable energy. By contrast, recent speeches by Jeb Bush and Marco Rubio — still the most likely Republican presidential nominees — barely address either topic. When it comes to energy policy, the G.O.P. has become fossilized. That is, it’s fossil fuels, and only fossil fuels, all the way.
And that’s a remarkable development, because ... we’re ... living in an era of spectacular progress in wind and solar energy. Why has the right become so hostile to technologies that look more and more like the wave of the future? ...
Part of the answer is surely that promotion of renewable energy is linked in many people’s minds with attempts to limit climate change — and ... the association with climate science evokes visceral hostility on the right.
Beyond that,... follow the money. We used to say that the G.O.P. was the party of Big Energy, but these days it would be more accurate to say that it’s the party of Old Energy. In the 2014 election cycle the oil and gas industry gave 87 percent of its political contributions to Republicans; for coal mining the figure was 96, that’s right, 96 percent. Meanwhile, alternative energy went 56 percent for Democrats.
And Old Energy is engaged in a systematic effort to blacken the image of renewable energy, one that closely resembles the way it has supported “experts” willing to help create a cloud of doubt about climate science. An example: Earlier this year Newsweek published an op-ed article purporting to show that the true cost of wind power was much higher than it seems. But ... the article contained major factual errors, and its author had failed to disclose that he was the Charles W. Koch professor at Utah State, and a fellow of a Koch- and ExxonMobil-backed think tank. ...
While politicians on the right may talk about encouraging innovation and promoting an energy revolution, they’re actually defenders of the energy status quo, part of a movement trying to block anything that might disrupt the reign of fossil fuels.

Sunday, September 20, 2015

'The Pope & the Market'

William D. Nordhaus reviews Pope Francis’s encyclical on the environment and capitalism (Laudato Si’: On Care for Our Common Home, an encyclical letter by Pope Francis, Vatican Press, 184 pp., available at

The Pope & the Market, NYRB: Pope Francis’s encyclical on the environment and capitalism, Laudato Si’, is an eloquent description of the natural world and its relationship to human societies.1 ... Most commentaries have focused on the pope’s endorsement of climate science, but my focus here is primarily on the social sciences, particularly economics.

My major point is that the encyclical overlooks the central part that markets, particularly market-based environmental policies such as carbon pricing, must play if countries are to make substantial progress in slowing global warming. ...

Unfortunately, Laudato Si’ does not recognize the fact that environmental problems are caused by market distortions rather than by markets per se. This is seen in the condemnation of “carbon credits”... Many commentators have interpreted this passage as a condemnation of cap-and-trade... Whatever the specific target, this part of the encyclical is clearly a critique of market-based environmental approaches. ...

Cap-and-trade has in fact been successfully used, for example to phase out lead from gasoline, to limit sulfur dioxide emissions in the United States by more than half, and to limit carbon dioxide emissions both in the European Union and more recently in major Chinese municipalities. The alternative to cap-and-trade is carbon taxation, which raises carbon prices by taxing carbon emissions. Such a tax is simpler and avoids any of the potential corruption, market volatility, and distributional issues that might arise with cap-and-trade systems.

Given the successes of cap-and-trade and other market mechanisms to improve the environment, it is unfortunate that they are the target of Pope Francis’s criticism. ... He does indeed acknowledge the soundness of the science and the reality of global warming. It is unfortunate that he does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause.

[I left out quite a bit. All of his points, and much more, are fully explained in the review.]

Friday, September 18, 2015

Republicans and Climate Change

I often forget to post the link to my MoneyWatch pieces:

Republicans and Climate Change: What should we do about climate change? When Jake Tapper asked that question at the Republican debate Wednesday night, the candidates were united in their view that the economic costs of fighting climate change are much larger than the potential benefits.
Florida Senator Marco Rubio, for example, said "Every proposal they (Democrats) put forward will make it harder to do business in America. Harder to create jobs in America." New Jersey Governor Chris Christie had similar sentiments. "We shouldn't be destroying our economy in order to chase some wild left-wing idea that somehow us by ourselves is going to fix the climate," he said. And Wisconsin Governor Scott Walker responded with: "We're going to put people -- manufacturing jobs -- this administration is going to put them at risk."
The skepticism among those on the political right about the benefits of addressing climate change could be at least partly based on the apparent pause in global warming from 1998-2013. But according to work from a group of researchers at Stanford University, that "hiatus" is a statistical artifact. The climb in temperatures hasn't paused at all.
Given that, and the voluminous scientific evidence indicating that global warming is a substantial threat, it's important to understand the extent to which climate change will affect the economy. Will the loss to GDP be large (so that the benefits of abatement are also large)? Will the impacts be equally distributed across geographic regions? Is it possible that some regions will actually benefit from global warming? ...

Thursday, September 17, 2015

''Global Warming 'Hiatus' Never Happened''

About that supposed pause in global warming:

Global warming 'hiatus' never happened, Stanford scientists say: An apparent lull in the recent rate of global warming that has been widely accepted as fact is actually an artifact arising from faulty statistical methods, Stanford scientists say. ...The finding calls into question the idea that global warming "stalled" or "paused" during the period between 1998 and 2013. ...
Using a novel statistical framework that was developed specifically for studying geophysical processes such as global temperature fluctuations, Rajaratnam and his team of Stanford collaborators have shown that the hiatus never happened.
"Our results clearly show that, in terms of the statistics of the long-term global temperature data, there never was a hiatus, a pause or a slowdown in global warming," said Noah Diffenbaugh, a climate scientist in the School of Earth, Energy & Environmental Sciences, and a co-author of the study.
Faulty ocean buoys
The Stanford group's findings are the latest in a growing series of papers to cast doubt on the existence of a hiatus. ...
The Stanford scientists say their findings should go a long way toward restoring confidence in the basic science and climate computer models that form the foundation for climate change predictions.
"Global warming is like other noisy systems that fluctuate wildly but still follow a trend," Diffenbaugh said. "Think of the U.S. stock market: There have been bull markets and bear markets, but overall it has grown a lot over the past century. What is clear from analyzing the long-term data in a rigorous statistical framework is that, even though climate varies from year-to-year and decade-to-decade, global temperature has increased in the long term, and the recent period does not stand out as being abnormal."

[I omitted the detailed discussion of the research.]

Thursday, September 03, 2015


Carlos Garriga, Finn Kydland, and Roman Sustek, say (based upon their work "The Costs of Interest Rate Liftoff for Homeowners":

If the purpose of the liftoff is to “normalize” nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincingly signs of inflation taking off.

Friday, August 21, 2015

'The Water Market Will Never be a Free Market'

John Whitehead responds to those who say the solution to water problems is to "allow free markets to operate":

...The water market will never be a "free market" in the true sense of the word. A plea to the water authority (i.e., government) to price water more rationally is a plea for policy reform ... towards a better use of incentives. Free markets only exist when there is no government regulation of buyers and sellers, no taxes, no subsidies and no nothing. An efficient free market for water is a difficult thing to pull off since it is a common-pool resource. It is easier for the pizza market to operate efficiently since pizza is a private good. 
I don't think adaption to climate change can be accomplished efficiently by government taking a hands off approach. You can't privatize much of the natural environment. ...

Sunday, August 09, 2015

'Analyzing Environmental Benefits from Driving Electric Vehicles'

On the environmental benefits of electric cars:

Analyzing environmental benefits from driving electric vehicles, by Stephen P. Holland, Erin T. Mansur, Nicholas Z. Muller, and Andrew J. Yates, Vox EU: After remaining relatively quiet for more than a century, the market for electric vehicles is undergoing a remarkable worldwide renaissance. This is most apparent in Norway, where the market share of electric vehicles has exceeded 15% of sales every month this year. Market shares are much smaller outside Norway, but nevertheless they are increasing year over year in places like England, France, and the US.

Sales and benefits of electric cars

At least part of the reason for this increase are subsidies and tax incentives that governments in each of these countries provide for the purchase of electric vehicles. Li et al. (2015) attribute approximately 50% of electric vehicle sales in the US to the $7,500 subsidy provided by the Federal Qualified Plug-in Electric Drive Motor Vehicle Credit.

There are a variety of motivations put forth to justify these subsidies. The overarching idea is that electric vehicles create public benefits relative to gasoline vehicles. And, because individual consumers may not consider these benefits when deciding what vehicle to purchase, electric cars should be subsidized to encourage adoption.

We can roughly classify these benefits into four categories: environmental, reduced oil consumption, innovation, and network benefits.

  • Environmental benefits stem from the difference between pollution generated by the manufacture and use of gasoline and electric vehicles.
  • Oil consumption benefits occur because electric vehicle use does not entail the risk of oil supply interruptions nor military expenditures to reduce this risk.
  • Innovation benefits may not be fully captured by innovating companies and thus may justify subsidizing the electric car market.
  • Network benefits occur when subsidizing electric vehicles today leads to incentives to develop charging infrastructure, which in turn increases adoption in the future, when presumably the electricity grid will be cleaner.

New research

We focus here on the first category – environmental benefits – as they are prominently cited by proponents of electric vehicles. However, researchers have found evidence questioning this assertion. Michalek et al. (2011) present a lifecycle analysis of environmental benefits. They consider environmental impacts associated with vehicle operation (burning gasoline or generating electricity) and other considerations such as manufacturing the vehicle and the battery, as well as processing gasoline and fuels for electricity generation. They find that an electric vehicle generates approximately $1100 greater environmental harm than a gasoline vehicle.1

In a recent paper (Holland et al. 2015), we study how the environmental benefit of vehicle operation varies from place to place in the US. We combine an econometric model of emissions from the electricity sector with a sophisticated model of damages from pollution to calculate the environmental benefit at the county level, as shown below in Figure 1.

Figure 1. County-level environmental benefit

Holland fig1 7 aug

  • The benefit is large and positive in many places in the west because the western electricity grid is relatively clean – primarily a mix of hydro, nuclear, and natural gas.
  • The benefit is large and negative in many places in the east because the eastern electricity grid primarily relies more heavily on coal and natural gas.
There are a few exceptions in the east, e.g. places like Atlanta in which the large population implies severe damages from gasoline cars so that electric cars have a small positive environmental benefit in spite of the dirty grid. Aggregating to the level of the state, the environmental benefits imply an electric vehicle purchase subsidy ranging from $3,000 in California to -$4,500 in North Dakota. On average, the implied subsidy from operating an electric vehicle is -$750. Although this analysis does not incorporate life-cycle benefits, the large differences in benefits across places suggest that whether or not an electric vehicle generates environmental benefits is critically dependent on local conditions.
  • Our second finding is that electric vehicles export pollution across state borders to a much greater extent that gasoline vehicles.
Figure 2a shows the increase in particulate matter pollution associated with driving a fleet of gasoline vehicles in Fulton County Georgia. Most of the pollution is concentrated on the few counties in the immediate proximity. Figure 2b shows the increase in particulate matter pollution associated with driving a fleet of electric vehicles that are charged in Fulton County. The resulting pollution is distributed throughout the entire east coast and in fact most of it occurs outside the state of Georgia. A similar story occurs throughout the country. We determine that over 90% of damages from non-greenhouse gas emissions from driving an electric car in one state are exported to other states. In contrast, the figure is only 18% for gasoline vehicles. In the majority of states, driving an electric car makes that state’s air cleaner, but leads to increases in pollution in other states to such a degree that the overall environmental benefit from vehicle operation is negative.

Figure 2a. Increase in PM2.5 from driving gasoline cars in Fulton County

Holland fig2a 7 aug

Figure 2b. Increase in PM2.5 from charging electric cars in SERC region

Holland fig2b 7 aug

So should electric vehicles be subsidized for environmental reasons? The results in Michalek et al. (2011) and in our recent work suggest that it is difficult to justify a large uniform subsidy based on environmental benefits alone. In some states the subsidy should indeed be large and positive, but in others it should be large and negative. Of course, this conclusion may need to be revisited in the future as the electricity grid becomes cleaner.
Michalek, J, M Chester, P Jaramillo, C Samaras, C Shiau, and L Lave (2011), “Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits”, Proceedings of the National Academy of Sciences, 108: 16554-16558.
Li, S, L Tong, J Xing, and Y Zhou (2015), “The market for electric vehicles: Indirect network effects and policy impacts”, working paper, Cornell University.
Holland, S, E Mansur, N Muller, and A Yates (2015) “Environmental benefits of electric vehicles?”, NBER working paper w21291.
1 See Table S-25. The life-cycle environmental costs of an electric vehicle (BEV240) are $4,668. The lifecycle environmental costs of a gasoline vehicle (CV, excluding the oil premium of $1,284) are $3,517.

Monday, August 03, 2015

'Are All Tax Increases a Bad Thing?'

I have time for one more... This is John Whitehead at Environmental Economics:

Are all tax increases a bad thing?: Not necessarily. And yet, Greg Mankiw:

As long-time readers of this blog know, I have long advocated greater use of Pigovian taxes, such as taxes on carbon emissions. Such taxes can correct incentives by aligning private and social costs, and the revenue from such taxes can be used to reduce other, distortionary taxes.

Skeptics of Pigovian taxes on the right sometimes argue that such taxes are good in principle but in practice the left will co-opt them and, rather than using the revenue to reduce other taxes, will use it to fund ever larger government.

Sadly, that point of view is getting some support in Washington state.  The headline above from The Seattle Times reads 'Green' alliance opposes petition to tax carbon.  Why the opposition?  Because the ballot measure is revenue-neutral. Some environmentalists want to use the revenue from the proposed carbon tax to increase spending instead.

I believe that a carbon tax could someday win bipartisan support.  But before it does so, those on the left will need to convince those on the right that the tax would be a tax shift, not a tax increase.  The carbon tax needs to be evaluated on its own merits and should not be a stalking horse for a broader, big-government agenda.

The standard textbook treatment of a Pigouvian tax is agnostic on what happens to the revenue. It could be used efficiently to finance other projects..., reduce distortionary taxes or reduce government debt...

Mankiw's last paragraph strays far from the economics and is one-sided in its condemnation of those on the political left. A bipartison paragraph would read more like this:

I believe that a carbon tax could someday win bipartisan support.  But before it does so, those on the left will need to convince those on the right that the tax would be a tax shift, not a tax increase.  And those on the right will need to convince those on the left that the tax is not trojan horse for a tax cut for the rich. The carbon tax needs to be evaluated on its own merits. and should not be a stalking horse for a broader, big-government agenda.

The carbon tax needs to be evaluated on its own merits. Period. ...

I know of no empirical evidence to suggest that there is only one efficient use for Pigouvian tax revenue. 

Friday, July 24, 2015

'Raise the Gas Tax Already'

James Surowiecki:

Raise the Gas Tax Already: Senate Majority Leader Mitch McConnell is a conservative Republican. Senator Barbara Boxer is a liberal Democrat. So the fact that they’ve worked together to come up with a plan to fund highway spending for the next three years might seem like a good thing, a rare moment of bipartisanship in a Congress riven by ideological hostility. And, in fact, you could see the thousand-page bill they’ve produced as, in the words of the Times, “real progress,” except for one thing: their complicated, jury-rigged plan is only necessary because of the continued refusal by Congress to embrace the obvious, economically sensible solution to highway funding, namely raising the gas tax. ...
The fundamental problem, of course, is that raising taxes, no matter how economically sensible those taxes might be, is anathema to a huge swath of the Republican Party. ... Opposition to higher income taxes has some theoretical justification: higher marginal rates discourage people from working more and investing. ... But no such argument exists against the gas tax: all it does, in essence, is ask drivers to pay for the roads they use. It’s not even fair to say that keeping this tax at its current level is a check on big government, since most federal highway spending now goes toward rebuilding and repairing roads—maintenance that even conservatives recognize we must do.
Highway revenue has to be raised somehow. Congress should show some political spine, discard the Rube Goldberg funding schemes, and stop treating all taxes as bad ones.

As noted in the article, there are also, of course, environmental benefits from an increase in gas taxes.

Friday, June 05, 2015

No Slow Down in Global Warming


NOAA Study Confirms Global Warming Speed-Up Is Imminent

Wednesday, May 06, 2015

'The GOP’s War on Science Gets Worse'

Elizabeth Kolbert at the New Yorker:

The G.O.P.’s War on Science Gets Worse: During last fall’s midterm election campaign, “I’m not a scientist” became a standard Republican answer to questions about climate change. ... Now, it seems, they are trying to go one better. They are trying to prevent even scientists from being scientists.
Last week, the House Science, Space, and Technology Committee, headed by Texas Republican Lamar Smith, approved a bill that would slash at least three hundred million dollars from NASA’s earth-science budget. “Earth science, of course, includes climate science,” Representative Eddie Bernice Johnson, a Texas Democrat who is also on the committee, noted. ... Defunding NASA’s earth-science program takes willed ignorance one giant leap further. It means that not only will climate studies be ignored; some potentially useful data won’t even be collected. ...
The vote on the NASA bill came just a week after the same House committee approved major funding cuts to the National Science Foundation’s geosciences program, as well as cuts to Department of Energy programs that support research into new energy sources. ...
“It’s hard to believe that in order to serve an ideological agenda, the majority is willing to slash the science that helps us have a better understanding of our home planet,” Representative Johnson wrote. Hard to believe, but, unfortunately, true.

Thursday, April 16, 2015

Al Gore: Cheap Coal is a Lie

This is from Al Gore and David Blood (it is relatively long, so you may want to "read the whole thing"). Comments?:

Cheap coal is a lie – stand up to the industry’s cynical fightback: It is becoming increasingly difficult to avoid the reality that the days of coal ... are numbered. In a world where carbon emissions will increasingly have to be constrained, coal, as the dirtiest of the fossil fuels, is the energy asset most vulnerable ... to seeing its market value collapse well ahead of its previously anticipated useful life. ...
But as the coal industry fights for survival, it has ... embarked on a global campaign to promote coal as the solution to energy poverty. This disingenuous claim is predicated on the notion that coal is the cheapest way of providing electricity to the one-fifth of the world’s population lacking access to an electricity grid.
This ... is extremely misleading. If ever implemented, it would actually significantly worsen the condition of the 1.3 billion people mired in energy poverty.
Most developing countries face serious challenges that are already being exacerbated by climate change-related extreme weather events. They are being battered by stronger storms, more destructive floods, deeper and longer droughts and disruptive switches in the seasonal timing of rain. ... Food security and water supplies are being compromised, natural resources stressed, and critical infrastructure crippled.
Access to affordable and reliable energy is, of course, essential for sustainable development, poverty reduction, improved access to education and healthcare, and the promotion of public safety and stable government. We should not waver in our commitment to remedy energy poverty...
But the relative merits of different energy options must be considered over the long term with an emphasis on three factors: financial cost, reliability, and impact on society and the environment. And when viewed through this lens, renewable energy – particularly solar photovoltaic energy, or PV – far outranks coal as the best future energy choice for developing nations. ...

Friday, March 27, 2015

How Idealism Can Fight Climate Change

Robert Shiller:

How Idealism, Expressed in Concrete Steps, Can Fight Climate Change: Idealism combined with an intriguing application of economic theory may accomplish what international conferences have not: solve the seemingly intractable problem of global warming.
Despite periodic flurries of optimism, diplomacy has been largely disappointing. ... From an economic standpoint, international efforts until now have foundered on a fundamental “free rider problem.” ... Why not just take a “free ride” and let others do the hard work? ...
But there are other ways to look at this... In a new book, “Climate Shock: The Economic Consequences of a Hotter Planet” (Princeton 2015), Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist, question that assumption. In a proposal that they call the “Copenhagen Theory of Change,” they say that we should be asking people to volunteer to save our climate by taking many small, individual actions. ...
The world is a diverse and complicated place, however. In order to combat global warming, social movements aren’t enough. We also need a concrete framework on a global scale.
In his presidential address before the American Economic Association in Boston in January, William D. Nordhaus of Yale proposed what he calls “climate clubs”..., a group of countries that agree to create incentives for people to reduce carbon emissions, while also erecting tariff barriers on imports from countries that are not members of the club. ...
To actually solve the extremely challenging problem of climate change, we may want to rely on both theories...

Tuesday, March 24, 2015

'The Real Cost of Coal'

David Hayes and James Stock:

The Real Cost of Coal, NY Times: Congress long ago established a basic principle governing the extraction of coal from public lands by private companies: American taxpayers should be paid fair value for it. They own the coal, after all.... Studies by the Government Accountability Office, the Interior Department’s inspector general and nonprofit research groups have all concluded that taxpayers are being shortchanged.
This is no small matter. In 2013, approximately 40 percent of all domestic coal came from federal lands. ... Headwaters Economics estimates that various reforms to the royalty valuation system would have generated $900 million to $5.6 billion more overall between 2008 and 2012.
This failure by the government to collect fair value for taxpayer coal is made more troubling by the climate-change implications of burning this fossil fuel. ... The price for taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions. ...
Industry is sure to oppose this, even though coal is the planet’s most carbon-intensive energy source. Others will argue that an across-the-board carbon tax is a more efficient way to account for climate impacts. With no near-term prospects for such legislation, however, the Interior Department should set a royalty that provides fair value to taxpayers by addressing the climate costs of burning coal. ...

Monday, March 23, 2015

'When Reasonable Policy Discussions Become Unreasonable Personal Attacks'

I don't think Robert Stavins is happy about a story challenging his credibility and reputation:

When Reasonable Policy Discussions Become Unreasonable Personal Attacks: Recently I was reminded of the controversy that erupted late in 2014 about remarks made by the distinguished health economist, Jonathan Gruber... Professor Gruber, one of the country’s leading experts on health policy, had played an important role in the construction of the Obama administration’s Patient Protection and Affordable Care Act, subsequently derided by its political opponents as “Obamacare.”
A brief but intense political controversy and media feeding-frenzy erupted when videos surfaced in which Professor Gruber – largely in a series of academic seminars and conferences – explained how the Act was crafted and marketed in ways that would make it easier to develop political support. For example, he noted that insurance companies were taxed instead of patients, fundamentally the same thing economically, but vastly more palatable politically. He went on to note that this was possible because of “the lack of economic understanding of the American voter.” His key point was that the program’s “lack of transparency is a huge political advantage.” Is that a controversial or even unique observation?
A Truism of Political Economy
Any economist who has worked on the development or analysis of public policy – in areas ranging from health care policy to environmental policy to financial regulation – recognizes the truth of the key insight Gruber was communicating to his audiences. It is inevitably in the interests of the advocates of a policy to make the policy’s benefits transparent and to make its costs vague, even unobservable; just as it is in the interests of the opponents of a policy to make that policy’s benefits obscure and its costs as clear as the light of day.
The specific construction of hundreds of public policies are explained by this truism. ...
So, the central lesson Professor Gruber was offering is hardly controversial... He doesn’t need me to defend him, but he was unfairly demonized, simply because people disagreed with him politically regarding the merits of the public policy he had helped develop and support.
Unfortunately, I was reminded of this recently when I found myself subject to attempted demonization, because someone did not agree with a policy I supported. What happened to me is trivial compared with what Professor Gruber has gone through, but it prompts me to write about it today. ...
A young and – I’m sure – well-intentioned climate activist and journalist, writing in the Huffington Post, implied that my assessment in the New York Times of the Washington political debates regarding Keystone XL and my support for Harvard’s divestment policy, are because “Stavins has done consulting work for Chevron, Exelon, Duke Energy and the Western States Petroleum Association.”
The author of the Huffington Post piece selected those three companies and one trade association from a list of 92 “Outside Activities” that I voluntarily provide as a means of public disclosure. The author chose not to note that the vast majority of my outside engagements are with universities, think tanks, environmental advocacy NGOs, foundations, the U.S. Environmental Protection Agency, other federal agencies and departments, international organizations, and environment ministries around the world (not to mention a set of Major League Baseball teams, but that’s another story altogether). ...
It is nothing less than absurd – and, frankly, quite insulting – for someone to suggest that my views on divestment and my New York Times quote on the politics of Keystone XL are somehow due to my having worked with an oil company, a trade association, and two electric utilities. This was an unfortunate move to question my credibility and damage my reputation in a misguided attempt to demonize me, rather than engage in reasonable discussion and debate. Unfortunately, most of those who have read the activist/journalist’s original commentary and have possibly repeated his claims to others will not see the response you have just read.
This is surely nothing compared with what Professor Gruber has gone through, but it has certainly increased my empathy for him, as well as my admiration.

Wednesday, March 04, 2015

'Rep. Paul Ryan is Getting the Economics Wrong on Cap and Trade and a Revenue Neutral Carbon Tax'

Paul Ryan says "I do not like cap and trade because I think the costs far outweigh the benefits." John Whitehead (who provides the Ryan quotes) responds:

Rep. Paul Ryan is getting the economics wrong on cap and trade and a revenue neutral carbon tax: Way wrong...
The costs of cap and trade do not outweigh the benefits. It might be the case that the costs of a climate policy, any climate policy, outweigh the benefits. But cap and trade is a policy instrument, not something for which you conduct a benefit-cost analysis. The economics says that if the government decided to undertake climate policy, cap and trade would be one of the most cost-effective ways of doing it.

Ryan also says (when asked about a revenue-neutral carbon tax), "I don’t like that either. I think these tax-and-spend ideas are the wrong way to go. They hurt economic growth. They’re very regressive. They hurt people who rely on disposable income solely — the poor. And they make our manufacturing industry much less competitive. So why don’t we get faster economic growth, more upward mobility, help increase people’s take-home pay, and finance research to innovate ourselves to come up with better technology. This is Madison, Wisconsin. We’re good at researching stuff. So why don’t we just research."

John Whitehead once again:

And that brings us to the revenue-neutral carbon tax (another cost-effective way of undertaking climate policy). The idea behind this is to tax a bad thing (pollution, carbon) and reduce taxes on a good thing (work effort). Revenue neutral means that the additional tax revenue from the carbon tax would be completely offset by the reduction in tax revenue from lower income taxes. The income tax reduction could be designed such that any regressivity of a carbon tax could be avoided. 
Tax and spend policies are usually thought of as an increase in taxes (carbon and income) where the additional revenue is used to pay for a government policy. But, a revenue neutral carbon tax would not raise any additional revenue. I really don't see how a revenue neutral carbon tax could be classified as a tax and spend idea. ...
The only conclusion that I can reach is that Rep. Ryan doesn't understand climate economics very well.

Wednesday, February 25, 2015

'The Cost of Delaying Action to Stem Climate Change'

Jason Furman, Ron Shadbegian, and Jim Stock:

The cost of delaying action to stem climate change: A meta-analysis, Vox EU: Summary The cost of delaying climate action has been studied extensively. This column discusses new findings based on a meta-analysis of published model runs. A one-decade delay in addressing climate change would lead to about a 40% increase in the net present value cost of addressing climate change. If anything, the methodology used in this analysis could understate the cost of delay. Uncertainty and the possibility of tipping points provide a motivation for more action as a form of insurance against worse outcomes.

Thursday, February 19, 2015

'Should the US Switch to a Declining Discount Rate?'

Tim Taylor:

Should the US Switch to a Declining Discount Rate?: Imagine that that you can save 100 lives by enacting one of two regulatory policies. The policies have the same cost, which must be paid right now. However, one of the regulatory policies saves the 100 lives in the present, while the other saves 100 lives 50 years from now. In this hypothetical example, the two policies are equal in their costs. Are the policies equal in their benefits, because both policies save 100 lives? Or does saving 100 lives in the present have a different value--a greater value--than saving 100 lives in the future?

This question involves what economists call the "discount rate," which expresses how much future benefits should be "discounted" compared to present benefits of the same size. If your answer to the hypothetical question is that saving the 100 lives 50 years from now has the same value as saving 100 lives right now, you are applying a discount rate of 0%--that is, benefits in the future are not discounted relative to benefits in the present. If your answer is that saving 100 lives now is a greater benefit than saving 100 lives 50 years from now, you are applying a positive discount rate.

Almost all economists argue that a positive discount rate is appropriate. At an intuitive level, having a benefit happen sooner is worth something. Also, there is a level of certainty in saving 100 lives right now, while saving 100 lives in 50 years has some degree of uncertainty as to whether that will happen. In addition, say that the hypothetical example would cost $1 billion in the present. If you invested that money in a safe financial that pays 3% per year, then after 50 years of compound interest it would add up to $4.38 billion--which makes the cost-benefit tradeoff 50 years from now look less attractive. A discount rate of zero would mean that we treat all costs and benefits as equivalent, no matter whether they occur in the present, the near-future, the middle-future, or the unimaginably distant future. Thus, the near-certainty of a large asteroid hitting the earth in the next few million years would be treated as of equal concern to if we could see the asteroid coming and the event was 10 years away--because the future isn't discounted.

But what should the discount rate be? And should the discount rate be a constant value over time, or a declining value over time? Consider what's at stake here. A higher discount rate means that we have more of an orientation to the present, and in particular will treat future benefits as much less important. A lower discount rate means that while we still have an orientation to the present, we are giving greater weight to what happens in the future. For public policy issues that involve spending resources now for a benefit that would occur (at least partly) in the distant future, like some of the risks of climate change, or the chance of an asteroid hitting the earth, it turns out that the choice of discount rate is extremely important.

An all-star list of environmental and welfare economists tackle this issue in "Should Governments Use a Declining Discount Rate in Project Analysis?" which appeared in the Summer 2014 issue of the Review of Environmental Economics and Policy (8:2, pp. 145–163). The list of authors is Kenneth J. Arrow, Maureen L. Croppery, Christian Gollierz, Ben Groom, Geoffrey M. Heal , Richard G. Newell, William D. Nordhaus, Robert S. Pindyck, William A. Pizer, Paul R. Portney, Thomas Sterner, Richard S. J. Tol , and Martin L. Weitzman. Here's how the authors describe the curent US policy with regard to discount rates:

In the United States, however, the Office of Management and Budget (OMB) recommends that project costs and benefits be discounted at a constant exponential rate (which, other things equal, assigns a lower weight to future benefits and costs than a declining rate), although a lower constant rate may be used for projects that affect future generations. ... For intragenerational projects, the OMB (2003) recommends that benefit-cost analyses be performed using a discount rate of 7 percent, representing the pretax real return on private investments, and also a discount rate of 3 percent, representing the “social rate of time preference.

Two points are worth noticing here. First, the U.S. policy has a fixed discount rate over time. Second, the difference between a 7% rate and a 3% discount rate over a long period of time like a century is enormous. Consider a policy that has a benefit of $100 billion that occurs 100 years in the future. At a discount rate of 7%, it is worth spending $115 million or less in the present to achieve that benefit. (Sometimes it's useful to think of this calculation in reverse: If you invested $115 million at a 7% annual interest rate, you would have approximately $100 billion at the end of a century.) At an annual discount rate of 3% of annual rate it would be worth spending up to $5.2 billion in the present to achieve that benefit. Thus, one of the differences between those who would spend many billions of dollars in the present to reduce the risks of climate change in the decades and centuries ahead, and those who would spend only millions of dollars, can be traced to different discount rates.

But what about other countries? The authors write (citations omitted):

In evaluating public projects, France and the United Kingdom use discount rate schedules in which the discount rate applied today to benefits and costs occurring in the future declines over time. That is, the rate used today to discount benefits from year 200 to year 100 is lower than the rate used to discount benefits in year 100 to the present.

They argue that after taking issues into account like uncertainty about the future, and the fact that the path of benefits recognized in the future will tend to follow a correlated pattern (rather than being random from year to year), a declining discount rate makes sense. You can check the articles for some ways in which such a rate could be estimated from data, but in practice, the decision of what rate to use may be guided by such studies, while ultimately being chosen by a regulator. They conclude:

We have argued that theory provides compelling arguments for using a declining certainty equivalent discount rate. ... Clearly, policymakers should use careful judgment in estimating a DDR [declining discount rate] schedule, whichever approach is used. Moreover, as emphasized earlier, the DDR schedule should be updated as time passes and more data become available. Establishing a procedure for estimating a DDR for project analysis would be an improvement over the OMB’s current practice of recommending fixed discount rates that are rarely updated.

Tuesday, January 13, 2015

'Estimated Social Cost of Climate Change Not Accurate'

Climagte change may be more costly than we thought:

Estimated social cost of climate change not accurate, Stanford scientists say: The economic damage caused by a ton of carbon dioxide emissions - often referred to as the "social cost" of carbon - could actually be six times higher than the value that the United States now uses to guide current energy regulations, and possibly future mitigation policies, Stanford scientists say.
A recent U.S. government study concluded, based on the results of three widely used economic impact models, that an additional ton of carbon dioxide emitted in 2015 would cause $37 worth of economic damages. These damages are expected to take various forms, including decreased agricultural yields, harm to human health and lower worker productivity, all related to climate change.
But according to a new study, published online this week in the journal Nature Climate Change, the actual cost could be much higher. "We estimate that the social cost of carbon is not $37 per ton, as previously estimated, but $220 per ton," ...

See also: New economic model may radically boost the social cost of carbon - Ars Technica.

Monday, January 12, 2015

Paul Krugman: For the Love of Carbon

What's the real reason Republicans are pushing for the Keystone XL pipeline?:

For the Love of Carbon, Commentary, NY Times: It should come as no surprise that the very first move of the new Republican Senate is an attempt to push President Obama into approving the Keystone XL pipeline... After all,... the oil and gas industry — which gave 87 percent of its 2014 campaign contributions to the G.O.P. — expects to be rewarded for its support.
But why is this environmentally troubling project an urgent priority in a time of plunging world oil prices? Well, the party line, from people like Mitch McConnell, the new Senate majority leader, is that it’s all about jobs. ...
Let’s back up for a minute and discuss economic principles. For more than seven years ... the United States economy has suffered from inadequate demand. ... In such an environment, anything that increases spending creates jobs. ...
From the beginning, however, Republican leaders have held ... that we should slash public spending... And they’ve gotten their way... The evidence overwhelmingly indicates that this kind of fiscal austerity in a depressed economy is destructive...
Needless to say, the guilty parties here will never admit that they were wrong. But if you look at their behavior closely, you see clear signs that they don’t really believe in their own doctrine.
Consider, for example, the case of military spending. When it comes to possible cuts in defense contracts, politicians ... suddenly begin talking about all the jobs that will be destroyed. ... This is the phenomenon former Representative Barney Frank dubbed “weaponized Keynesianism.”
And the argument being made for Keystone XL is very similar; call it “carbonized Keynesianism.” ... But government spending on roads, bridges and schools would do the same thing. ... If Mr. McConnell and company really believe that we need more spending to create jobs, why not support a push to upgrade America’s crumbling infrastructure?
So what should be done about Keystone XL? If you believe that it would be environmentally damaging — which I do — then you should be against it, and you should ignore the claims about job creation. The numbers being thrown around are tiny compared with the country’s overall work force. And in any case, the jobs argument for the pipeline is basically a sick joke coming from people who have done all they can to destroy American jobs — and are now employing the very arguments they used to ridicule government job programs to justify a big giveaway to their friends in the fossil fuel industry.

Sunday, January 04, 2015

'Let This be the Year When We Put a Proper Price on Carbon'

Larry Summers:

Let this be the year when we put a proper price on carbon: The case for carbon taxes has long been compelling. With the recent steep fall in oil prices and associated declines in other energy prices it is overwhelming. There is room for debate about the size of the tax and about how the proceeds should be deployed. But there should be no doubt that starting from the current zero tax rate on carbon, increased taxation would be desirable.
The core of the case for taxation is the recognition that those who use carbon-based fuels or products do not bear all the costs of their actions. ...
Progressives who are concerned about climate change should rally to a carbon tax as the most important step for mobilising against it. Conservatives who believe in the power of markets should favour carbon taxes on market principles. .... Now is the time.

Sunday, December 14, 2014

'Assessing the Outcome of the Lima Climate Talks'

Robert Stavins:

Assessing the Outcome of the Lima Climate Talks: In the early morning hours of Sunday, December 14th, the Twentieth Conference of the Parties (COP-20) of the United Nations Framework Convention on Climate Change (UNFCCC) concluded in Lima, Peru with an agreement among 195 countries, the “Lima Accord,” which represents both a classic compromise between the rich and poor countries, and a significant breakthrough after twenty years of difficult climate negotiations. ...
The Lima Accord
By establishing a new structure in which all countries will state (over the next six months) their contributions to emissions mitigation, this latest climate accord is important, because it moves the process in a productive direction in which all nations will contribute to the reduction of greenhouse gas emissions. ... The ... Lima Accord constitutes a significant departure from the past two decades of international climate policy, which ... have featured coverage of only a small subset of countries, namely the so-called Annex I countries (more or less the industrialized nations, as of twenty years ago).
The expanded geographic scope of the Lima Accord ... represents the best promise in many years of a future international climate agreement that is truly meaningful. ...
The Key Roles Played by China and the United States
Throughout the time I was in Lima, it was clear that the joint announcement on November 12th of national targets by China and the United States (under the future Paris agreement) provided necessary encouragement to negotiations that were continuously threatened by the usual developed-developing world political divide. ...
As I predicted in my previous essay at this blog,... the Lima Accord will surely disappoint some environmental activists. Indeed, there have already been pronouncements of failure of the Lima/Paris talks from some green groups, primarily because the talks have not and will not lead to an immediate decrease in emissions and will not prevent atmospheric temperatures from rising by more than 2 degrees Celsius (3.6 degrees Fahrenheit), which has become an accepted, but essentially unachievable political goal.
As I said in my previous essay, these well-intentioned advocates mistakenly focus on the short-term change in emissions among participating countries..., when it is the long-term change in global emissions that matters.
They ignore the geographic scope of participation, and do not recognize that — given the stock nature of the problem — what is most important is long-term action. Each agreement is no more than one step to be followed by others. And most important now for ultimate success later is a sound foundation, which is what the Lima Accord provides. ...
The Bottom Line
Although it is fair to say that the Lima text was watered down in the last 30 hours (largely as a result of effective opposition by developing countries), the fact remains that a new way forward has been established in which all countries participate and which therefore holds promise of meaningful global action to address the threat of climate change.
So, despite all the acrimony among parties and the 30-hour delay in completing the talks, the negotiations in Lima these past two weeks may turn out to be among the most valuable steps in two decades of international climate negotiations.

Friday, November 28, 2014

Paul Krugman: Pollution and Politics

Why and when did Republicans become anti-environmentalists?:

Pollution and Politics, by Paul Krugman, Commentary, NY Times: Earlier this week, the Environmental Protection Agency announced proposed regulations to curb emissions of ozone, which causes smog, not to mention asthma, heart disease and premature death. And you know what happened: Republicans went on the attack, claiming that the new rules would impose enormous costs.
There’s no reason to take these complaints seriously... Polluters and their political friends have a track record of crying wolf. ... Again and again, the actual costs have been far lower than they predicted. In fact, almost always below the E.P.A.’s predictions.
So it’s the same old story. But why, exactly, does it always play this way? ... When and why did the Republican Party become the party of pollution?
For it wasn’t always thus. The Clean Air Act of 1970 ... was signed into law by Richard Nixon. (I’ve heard veterans of the E.P.A. describe the Nixon years as a golden age.) A major amendment of the law, which among other things made possible the cap-and-trade system that limits acid rain, was signed in 1990 by former President George H.W. Bush.
But that was then. Today’s Republican Party is putting a conspiracy theorist who views climate science as a “gigantic hoax” in charge of the Senate’s environment committee. And this isn’t an isolated case. ...
So what explains this anti-environmental shift?
You might be tempted simply to blame money in politics... But this doesn’t explain why money from the most environmentally damaging industries, which used to flow to both parties, now goes overwhelmingly in one direction. ...
One answer could be ideology... My guess, however, is that ideology is only part of the story — or, more accurately, it’s a symptom of the underlying cause...: rising inequality. ... Any policy that benefits lower- and middle-income Americans at the expense of the elite — like health reform, which guarantees insurance to all and pays for that guarantee in part with taxes on higher incomes — will face bitter Republican opposition.
And environmental protection is, in part, a class issue,... ownership of, say, stock in coal companies is concentrated in a few, wealthy hands. ...
In the case of the new ozone plan, the E.P.A.’s analysis suggests that, for the average American, the benefits would be more than twice the costs. But that doesn’t necessarily matter to the nonaverage American driving one party’s priorities. On ozone, as with almost everything these days, it’s all about inequality.

Friday, November 14, 2014

Paul Krugman: China, Coal, Climate

Are we finally getting somewhere in the battle against climate change?:

China, Coal, Climate, by Paul Krugman, Commentary, NY Times: It’s easy to be cynical about summit meetings. Often they’re just photo ops, and the photos from the latest Asia-Pacific Economic Cooperation meeting, which had world leaders looking remarkably like the cast of “Star Trek,” were especially cringe-worthy. At best — almost always — they’re just occasions to formally announce agreements already worked out by lower-level officials.
Once in a while, however, something really important emerges. And this is one of those times: The agreement between China and the United States on carbon emissions is, in fact, a big deal.
To understand why, you first have to understand the defense in depth that fossil-fuel interests and their loyal servants — nowadays including the entire Republican Party — have erected against any action to save the planet.
The first line of defense is denial: there is no climate change; it’s a hoax concocted by a cabal including thousands of scientists around the world. ... Indeed, some elected officials have done all they can to pursue witch hunts against climate scientists.
Still, as a political matter, attacking scientists has limited effectiveness. It ... sounds like a crazy conspiracy theory, because it is.
The second line of defense involves economic scare tactics: any attempt to limit emissions will destroy jobs and end growth. ... Like claims of a vast conspiracy of scientists, however, the economic disaster argument has limited traction beyond the right-wing base. ...
Which brings us to the last line of defense, claims that America can’t do anything about global warming, because other countries, China in particular, will just keep on spewing out greenhouse gases. ... But ... China has declared its intention to limit carbon emissions. ...
But consider the situation. America is not exactly the most reliable negotiating partner on these issues, with climate denialists controlling Congress ...
But the principle that has just been established is a very important one. Until now, those of us who argued that China could be induced to join an international climate agreement were speculating. Now we have the Chinese saying that they are, indeed, willing to deal — and the opponents of action have to claim that they don’t mean what they say.
Needless to say, I don’t expect the usual suspects to concede that a major part of the anti-environmentalist argument has just collapsed. But it has. This was a good week for the planet.

Wednesday, November 12, 2014

The Climate Breakthrough in Beijing

Jeff Sachs seems to be pleased:

The climate breakthrough in Beijing gives the world a fighting chance: Today’s US-China joint announcement on climate change and energy is the most important advance on the climate change agenda in many years. ... What they’ve said gives the world a fighting chance – and no doubt the last one – for climate safety. ...
An announcement is just an announcement, of course. .. The US and China have yet to put their cards on the table on how they intend to achieve deep decarbonization. ...
Not surprisingly, the incoming Republican Senate majority leader Mitch McConnell piped up immediately that he and his colleagues would oppose the deal. No doubt they will try. Yet my guess is that Mr McConnell and his buddies are soon going to learn a lesson in real democracy.
While the fossil fuel lobby may have helped finance the Republican victories last week, the US public cares about its own survival and the world that their children will soon inherit. ... The Koch brothers may have bought some 44,000 paid ads this fall to help put favoured coal and oil candidates over the top, but they did not buy the souls of the American people, who by a large majority will be gratified today by the announcements from Beijing. ...

I'm not so sure that Republican opposition can be overcome so easily.

Saturday, November 08, 2014

'How Severe Has The Zero Lower Bound Constraint Been?'

Eric Swanson:

How severe has the zero lower bound constraint been?: Summary In December 2008, the Fed lowered the federal funds rate to essentially zero and has kept it there since then. This column argues that, contrary to traditional macroeconomic thinking, monetary policy has not been severely constrained by the zero bound until mid-2011. The results imply that the Fed could have done more to ease monetary policy between 2009 and 2011. These findings could also help explain why the fiscal stimulus package adopted in 2009 did not bring the expected success.

Monday, October 27, 2014

'Climate Change: Lessons for our Future from the Distant Past'

David Hendry at Vox EU:

Climate change: Lessons for our future from the distant past, by David F. Hendry: Summary Climate change has been the main driver of mass extinctions over the last 500 million years. This column argues that current evidence provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent.

His conclusions:

Economic analysis offers many insights – externalities need to be either priced or regulated, and climate change is the largest ever worldwide externality. All approaches are affected by the possibility of abrupt changes and the resulting unknown uncertainty when distributions shift, making action more urgent to avoid possible future shifts. Adaptation is not meaningful if food, water, and land resources become inadequate. Conversely, mitigation steps need not be costly, and could stimulate innovation. International negotiations are more likely to succeed if the largest players act first in their own counties or groups – also creating opportunities for their societies as new technologies develop.
Planet Earth will survive whatever humanity is doing – the crucial issue is the effect of climate change on its present inhabitants. It is a risky strategy to do nothing if there are potentially huge costs when the costs of initial actions are small. The obvious time to start is now, and the obvious actions are the many low-cost implementations that mitigate greenhouse gases (see Stern 2008 for a list) – just in case.

[See also "U.N. Climate Change Draft Sees Risks of Irreversible Damage - Scientific American".]

Sunday, September 21, 2014

'Climate Realities'

Robert Stavins:

Climate Realities: ...It is true that, in theory, we can avoid the worst consequences of climate change with an intensive global effort over the next several decades. But given real-world economic and, in particular, political realities, that seems unlikely..., let’s look at the sobering reality.
The world is now on track to more than double current greenhouse gas concentrations in the atmosphere by the end of the century. This would push up average global temperatures by three to eight degrees Celsius and could mean the disappearance of glaciers, droughts in the mid-to-low latitudes, decreased crop productivity, increased sea levels and flooding, vanishing islands and coastal wetlands, greater storm frequency and intensity, the risk of species extinction and a significant spread of infectious disease.
The United Nations has set a goal of keeping global temperatures from rising by no more than two degrees Celsius above preindustrial levels. ... Meeting this goal would require a worldwide reduction in greenhouse gas emissions of 40 to 70 percent by midcentury, according to the Intergovernmental Panel on Climate Change. That’s an immense challenge. ...
Of course, the political climate in the United States presents its own challenges. It will require immense effort — and profound good fortune — to find political openings that can resolve the debilitating partisan divide on climate change. But if destructive politics have been at the heart of the problem, the best hope may be that creative politics and leadership can help provide a solution.

He also talks about the cost of climate change (saying it will be large), as do Peter Dorman  (in response to Paul Krugman) and John Quiggin. See also Scientists Report Global Rise in Greenhouse Gas Emissions.

Friday, September 19, 2014

Paul Krugman: Errors and Emissions

Don't pay any attention to "the prophets of climate despair":

Errors and Emissions, by Paul Krugman, Commentary, NY Times: This just in: Saving the planet would be cheap; it might even be free. But will anyone believe the good news?
I’ve just been reading two new reports on the economics of fighting climate change: a big study by a blue-ribbon international group, the New Climate Economy Project, and a working paper from the International Monetary Fund. Both claim that strong measures to limit carbon emissions would have hardly any negative effect on economic growth, and might actually lead to faster growth. This may sound too good to be true, but it isn’t. These are serious, careful analyses. ...
Enter the prophets of climate despair, who wave away all this analysis and declare that the only way to limit carbon emissions is to bring an end to economic growth.
You mostly hear this from people on the right, who normally say that free-market economies are endlessly flexible and creative. But when you propose putting a price on carbon, suddenly they insist that industry will be completely incapable of adapting to changed incentives. Why, it’s almost as if they’re looking for excuses to avoid confronting climate change, and, in particular, to avoid anything that hurts fossil-fuel interests, no matter how beneficial to everyone else.
But climate despair produces some odd bedfellows: Koch-fueled insistence that emission limits would kill economic growth is echoed by some who see this as an argument not against climate action, but against growth. ... To be fair, anti-growth environmentalism is a marginal position even on the left, but it’s widespread enough to call out nonetheless.
And you sometimes see hard scientists making arguments along the same lines, largely (I think) because they don’t understand what economic growth means. They think of it as a crude, physical thing, a matter simply of producing more stuff, and don’t take into account the many choices — about what to consume, about which technologies to use — that go into producing a dollar’s worth of G.D.P.
So here’s what you need to know: Climate despair is all wrong. The idea that economic growth and climate action are incompatible may sound hardheaded and realistic, but it’s actually a fuzzy-minded misconception. If we ever get past the special interests and ideology that have blocked action to save the planet, we’ll find that it’s cheaper and easier than almost anyone imagines.

Saturday, September 06, 2014

'The Wall Street Journal Parade of Climate Lies'

Jeff Sachs is unhappy with the editorial page of the WSJ:

The Wall Street Journal Parade of Climate Lies: That Rupert Murdoch governs over a criminal media empire has been made clear enough in the UK courts in recent years. That the Wall Street Journal op-ed pages, the latest victim of Murdoch's lawless greed, are little more than naked propaganda is perhaps less appreciated. The Journal runs one absurd op-ed after another purporting to unmask climate change science, but only succeeds in unmasking the crudeness and ignorance of Murdoch's henchmen. Yesterday's (September 5) op-ed by Matt Ridley is a case in point.
Ridley's "smoking gun" is a paper last week in Science Magazine by two scientists Xianyao Chen and Ka-Kit Tung, which Ridley somehow believes refutes all previous climate science. Ridley quotes a sentence fragment from the press release suggesting that roughly half of the global warming in the last three decades of the past century (1970-2000) was due to global warming and half to a natural Atlantic Ocean cycle. He then states that "the man-made warming of the past 20 years has been so feeble that a shifting current in one ocean was enough to wipe it out altogether," and "That to put the icing on the case of good news, Xianyao Chen and Ka-Kit Tung think the Atlantic Ocean may continue to prevent any warming for the next two decades."
The Wall Street Journal editors don't give a hoot about the nonsense they publish if it serves their cause of fighting measures to limit human-induced climate change. If they had simply gone online to read the actual paper, they would have found that the paper's conclusions are the very opposite of Ridley's. ...

Tuesday, August 26, 2014

'Property Rights and Saving the Rhino'

Tim Taylor:

Property Rights and Saving the Rhino: South Africa is the home for 75% of the world's population of black rhinos and  96% of the world's population of white rhinos. There must be some lessons for conservationists behind those statistics. Michael 't Sas-Rolfes tells the story in "Saving African Rhinos: A Market Success Story," written as a case study for the Property and Environment Research Center (PERC).

The story isn't just about markets. In 1900, the white rhinoceros had been hunted almost to extinction, with about 20 remaining in a single game preserve in South Africa. The population slowly recovered a bit, and by the middle of the 20th century, there were enough to start relocating breeding groups of white rhinos to other national parks in South Africa, as well as private game ranches. In 1968, the first legal hunt of a white rhino was authorized.

But by the 1980s, Sas-Rolfes reports, a strange disjunction had emerged. In 1982, the Natal Parks Board had a list price for a white rhino of about 1,000 South African rands, but the average price paid by a hunter for a rhino trophy that year was 6,000 rands. Private game preserves were quick to take advantage of the arbitrage opportunity. The Natal Parks Board soon began auctioning its rhinos. In 1989, it was selling rhinos for 49,000 rand, but the average price to a hunter for a rhino trophy had risen to 92,000 rand. There were obvious questions about whether this system of raising and hunting rhinos was a useful tool from a broader environmental perspective.

But property rights and markets enter the story in a different way in 1991.
Before 1991, all wildlife in South Africa was treated by law as res nullius or un-owned property. To reap the benefits of ownership from a wild animal, it had to be killed, captured, or domesticated. This created an incentive to harvest, not protect, valuable wild species—meaning that even if a game rancher paid for a rhino, the rancher could not claim compensation if the rhino left his property or was killed by a poacher. . . . Recognizing the problems associated with the res nullius maxim, the commission drafted a new piece of legislation: the Theft of Game Act of 1991. This policy allowed for private ownership of any wild animal that could be identified according to certain criteria such as a brand or ear tag. The combined effect of market pricing through auctions and the creation of stronger property rights over rhinos changed the incentives of private ranchers. It now made sense to breed rhinos rather than shoot them as soon as they were received.
For a sense of how much difference these issues of property rights and incentives can make to conservation, consider the difference in populations between black and white rhinos. Sas-Rolfes explains: "Figure 2 shows trends in white rhino numbers from 1960 until 2007. Contrast those
numbers with the black rhino, which mostly lived in African countries with weak or absent wildlife market institutions such as Kenya, Tanzania, and Zambia. In 1960, about 100,000 black rhinos roamed across Africa, but by the early 1990s poachers had reduced their numbers to less than 2,500. . . . Unprotected wild rhino populations are rare to non-existent in modern Africa. The only surviving African rhinos remain either in countries with strong wildlife market institutions (such as South Africa and Namibia) or in intensively protected zones."
A strong demand for rhino horn remains, and especially since about 2008, rhinos across Africa face a risk of illegal poachers. Here's a figure from the conservation group Save the Rhino showing the level of rhino poaching in South Africa:
Along with the existing choices of "intensively protected zones"--which implies costly and not-very-corruptible protectors--and allowing for private game preserves, the other option is to seek to undercut the black market for rhino horn with a legal market. Other more controversial options discussed at the Save the Rhinos website include de-horning rhinos, to make them less attractive to poachers, and perhaps even allowing legal sale of these rhino horns, to undercut the prices paid to poacher. Rhino horns are made of keratin, similar to the substance in fingernails and hair, and the horn could be removed every year or two. There are strong arguments on both sides of allowing legal sale of rhino horn: perhaps rather than undercutting the illegal market, it might also make it easier for poachers to sell their illegally obtained rhino horn. In the end, given that South Africa is now the home to most of the world's rhinos, I suspect that South Africa will end up making the decision about whether to proceed with these options.

Those interested in how property rights might be one of the tools for helping to protect endangered species might also want to check this post on "Saving Jaguars and Elephants with Property Rights and Incentives" (December 19, 2011).  

Tuesday, August 19, 2014

The Agent-Based Method

Rajiv Sethi:

The Agent-Based Method: It's nice to see some attention being paid to agent-based computational models on economics blogs, but Chris House has managed to misrepresent the methodology so completely that his post is likely to do more harm than good. 

In comparing the agent-based method to the more standard dynamic stochastic general equilibrium (DSGE) approach, House begins as follows:

Probably the most important distinguishing feature is that, in an ABM, the interactions are governed by rules of behavior that the modeler simply encodes directly into the system individuals who populate the environment.

So far so good, although I would not have used the qualifier "simply", since encoded rules can be highly complex. For instance, an ABM that seeks to describe the trading process in an asset market may have multiple participant types (liquidity, information, and high-frequency traders for instance) and some of these may be using extremely sophisticated strategies.

How does this approach compare with DSGE models? House argues that the key difference lies in assumptions about rationality and self-interest:

People who write down DSGE models don’t do that. Instead, they make assumptions on what people want. They also place assumptions on the constraints people face. Based on the combination of goals and constraints, the behavior is derived. The reason that economists set up their theories this way – by making assumptions about goals and then drawing conclusions about behavior – is that they are following in the central tradition of all of economics, namely that allocations and decisions and choices are guided by self-interest. This goes all the way back to Adam Smith and it’s the organizing philosophy of all economics. Decisions and actions in such an environment are all made with an eye towards achieving some goal or some objective. For consumers this is typically utility maximization – a purely subjective assessment of well-being.  For firms, the objective is typically profit maximization. This is exactly where rationality enters into economics. Rationality means that the “agents” that inhabit an economic system make choices based on their own preferences.

This, to say the least, is grossly misleading. The rules encoded in an ABM could easily specify what individuals want and then proceed from there. For instance, we could start from the premise that our high-frequency traders want to maximize profits. They can only do this by submitting orders of various types, the consequences of which will depend on the orders placed by others. Each agent can have a highly sophisticated strategy that maps historical data, including the current order book, into new orders. The strategy can be sensitive to beliefs about the stream of income that will be derived from ownership of the asset over a given horizon, and may also be sensitive to beliefs about the strategies in use by others. Agents can be as sophisticated and forward-looking in their pursuit of self-interest in an ABM as you care to make them; they can even be set up to make choices based on solutions to dynamic programming problems, provided that these are based on private beliefs about the future that change endogenously over time. 

What you cannot have in an ABM is the assumption that, from the outset, individual plans are mutually consistent. That is, you cannot simply assume that the economy is tracing out an equilibrium path. The agent-based approach is at heart a model of disequilibrium dynamics, in which the mutual consistency of plans, if it arises at all, has to do so endogenously through a clearly specified adjustment process. This is the key difference between the ABM and DSGE approaches, and it's right there in the acronym of the latter.

A typical (though not universal) feature of agent-based models is an evolutionary process, that allows successful strategies to proliferate over time at the expense of less successful ones. Since success itself is frequency dependent---the payoffs to a strategy depend on the prevailing distribution of strategies in the population---we have strong feedback between behavior and environment. Returning to the example of trading, an arbitrage-based strategy may be highly profitable when rare but much less so when prevalent. This rich feedback between environment and behavior, with the distribution of strategies determining the environment faced by each, and the payoffs to each strategy determining changes in their composition, is a fundamental feature of agent-based models. In failing to understand this, House makes claims that are close to being the opposite of the truth: 

Ironically, eliminating rational behavior also eliminates an important source of feedback – namely the feedback from the environment to behavior.  This type of two-way feedback is prevalent in economics and it’s why equilibria of economic models are often the solutions to fixed-point mappings. Agents make choices based on the features of the economy.  The features of the economy in turn depend on the choices of the agents. This gives us a circularity which needs to be resolved in standard models. This circularity is cut in the ABMs however since the choice functions do not depend on the environment. This is somewhat ironic since many of the critics of economics stress such feedback loops as important mechanisms.

It is absolutely true that dynamics in agent-based models do not require the computation of fixed points, but this is a strength rather than a weakness, and has nothing to do with the absence of feedback effects. These effects arise dynamically in calendar time, not through some mystical process by which coordination is instantaneously achieved and continuously maintained. 

It's worth thinking about how the learning literature in macroeconomics, dating back to Marcet and Sargent and substantially advanced by Evans and Honkapohja fits into this schema. Such learning models drop the assumption that beliefs continuously satisfy mutual consistency, and therefore take a small step towards the ABM approach. But it really is a small step, since a great deal of coordination continues to be assumed. For instance, in the canonical learning model, there is a parameter about which learning occurs, and the system is self-referential in that beliefs about the parameter determine its realized value. This allows for the possibility that individuals may hold incorrect beliefs, but limits quite severely---and more importantly, exogenously---the structure of such errors. This is done for understandable reasons of tractability, and allows for analytical solutions and convergence results to be obtained. But there is way too much coordination in beliefs across individuals assumed for this to be considered part of the ABM family.

The title of House's post asks (in response to an earlier piece by Mark Buchanan) whether agent-based models really are the future of the discipline. I have argued previously that they are enormously promising, but face one major methodological obstacle that needs to be overcome. This is the problem of quality control: unlike papers in empirical fields (where causal identification is paramount) or in theory (where robustness is key) there is no set of criteria, widely agreed upon, that can allow a referee to determine whether a given set of simulation results provides a deep and generalizable insight into the workings of the economy. One of the most celebrated agent-based models in economics---the Schelling segregation model---is also among the very earliest. Effective and acclaimed recent exemplars are in short supply, though there is certainly research effort at the highest levels pointed in this direction. The claim that such models can displace the equilibrium approach entirely is much too grandiose, but they should be able to find ample space alongside more orthodox approaches in time. 


The example of interacting trading strategies in this post wasn't pulled out of thin air; market ecology has been a recurrent theme on this blog. In ongoing work with Yeon-Koo Che and Jinwoo Kim, I am exploring the interaction of trading strategies in asset markets, with the goal of addressing some questions about the impact on volatility and welfare of high-frequency trading. We have found the agent-based approach very useful in thinking about these questions, and I'll present some preliminary results at a session on the methodology at the Rethinking Economics conference in New York next month. The event is free and open to the public but seating is limited and registration required. 

Monday, August 11, 2014

'How Much is our Distant Future Worth?'

Cecchetti & Schoenholtz

How much is our distant future worth?: ...One new report estimates that – on the current path – perhaps $500 billion of U.S. coastal properties will be below sea level by 2100. ... We have plenty of other longer-run worries, too; like surviving a future asteroid hit (an event like the Tunguska blast of 1908 – perhaps 1,000 times more powerful than the Hiroshima bomb – probably occurs every 1,200 years) or managing radioactive waste (which can be toxic for tens of thousands or even millions of years).
How much should we care about such big threats that are potentially far off in time? How much ought we spend now to avoid a $1 worth of damage hundreds of years in the future? ... [explains how long-term discount rates are calculated] ...
Economists have tried several (more sophisticated) ways to measure very long-term discount rates... One well-known report, which applied a relatively low discount rate of 1.4%, called for rapid, large reductions in carbon emissions to limit future losses associated with climate change. A different analysis based on a relatively high 4.3% discount rate called for a carbon tax only about one-tenth the level implied by the low-discount rate analysis. Why? The low discount rate puts a great deal more weight on losses that are predicted to occur hundreds of years in the future.
Of course, it’s not just about discount rates. It’s about the scale of future losses, too. If policy actions today can prevent a calamity that threatens life on earth, then most people (including us) might judge the appropriate discount rate to be quite low because we would not weight the value of future lives any lower than their own. And there’s at least one powerful reason to suspect that ... today’s governments don’t weight those future lives sufficiently: our distant descendants don’t vote.

Saturday, August 02, 2014

'Shattering Myths to Help the Climate'

Robert Frank:

Shattering Myths to Help the Climate, by Robert Frank: Each new climate-change study seems more pessimistic than the last. This May and June, for example, were the hottest ones on record for the planet. Storms and droughts occur with increasing frequency. Glaciers are rapidly retreating, portending rising seas that could eventually displace hundreds of millions of people.
Effective countermeasures now could actually ward off many of these threats at relatively modest cost. Yet despite a robust scientific consensus that greenhouse gas emissions are at the root of the problem, legislation to curb them has gone nowhere in Congress. In response, President Obama has proposed stricter regulations on electric utilities, which some scientists warn may be too little, too late.
Why aren’t we demanding more forceful action? One reason may be the frequent incantation of a motley collection of myths, each one rooted in bad economics...

Friday, July 25, 2014

'Ignoring Climate Change Could Sink the U.S. Economy'

Robert Rubin:

How ignoring climate change could sink the U.S. economy, by Robert E. Rubin: ...When it comes to the economy, much of the debate about climate change ... is framed as a trade-off between environmental protection and economic prosperity. Many people argue that moving away from fossil fuels and reducing carbon emissions will impede economic growth, hurt business and hamper job creation.
But from an economic perspective, that’s precisely the wrong way to look at it. The real question should be: What is the cost of inaction? In my view — and in the view of a growing group of business people, economists, and other financial and market experts — the cost of inaction over the long term is far greater than the cost of action.
I recently participated in a bipartisan effort to measure the economic risks of unchecked climate change in the United States. We commissioned an independent analysis, led by a highly respected group of economists and climate scientists, and our inaugural report, “Risky Business,” was released in June. The report’s conclusions demonstrated the ... U.S. economy faces enormous risks from unmitigated climate change. ...
We do not face a choice between protecting our environment or protecting our economy. We face a choice between protecting our economy by protecting our environment — or allowing environmental havoc to create economic havoc. ...

Tuesday, June 24, 2014

'Bipartisan Report Tallies High Toll on Economy From Global Warming'

Republicans in Congress will ignore this bipartisan report and continue to block action on climate change. This "toxic mix of ideology and anti-intellectualism" is endangering our future:

Bipartisan Report Tallies High Toll on Economy From Global Warming, by Justin Gillis, NY Times: More than a million homes and businesses along the nation’s coasts could flood repeatedly before ultimately being destroyed. Entire states in the Southeast and the Corn Belt may lose much of their agriculture as farming shifts northward in a warming world. Heat and humidity will probably grow so intense that spending time outside will become physically dangerous, throwing industries like construction and tourism into turmoil.
That is a picture of what may happen to the United States economy in a world of unchecked global warming, according to a major new report released Tuesday by a coalition of senior political and economic figures from the left, right and center, including three Treasury secretaries stretching back to the Nixon administration.
At a time when the issue of climate change has divided the American political landscape, pitting Republicans against Democrats and even fellow party members against one another, the unusual bipartisan alliance of political veterans said that the country — and business leaders in particular — must wake up to the enormous scale of the economic risk. ...

Monday, June 23, 2014

How Much Do We Care About Future Generations?

At MoneyWatch:

How much do we care about future generations?, by Mark Thoma: Former U.S. Treasure Secretary Henry Paulson's recent warning that "We're staring down a climate bubble that poses enormous risks to both our environment and economy" and his call for a carbon tax brings up an important question. How do we assess the benefits to future generations from taking action on climate change now, especially benefits that may be decades or even centuries away?
To answer this question, it's necessary to consider what's known as the "discount rate" on such policies. ...

Paul Krugman: The Big Green Test

Are Republicans willing to settle for second best solutions to climate change?:

The Big Green Test, by Paul Krugman, Commentary, NY Times: On Sunday Henry Paulson, the former Treasury secretary and a lifelong Republican, had an Op-Ed article about climate policy... In the article, he declared that man-made climate change is “the challenge of our time,” and called for a national tax on carbon emissions... Considering the prevalence of climate denial within today’s G.O.P., and the absolute opposition to any kind of tax increase, this was a brave stand to take.
But not nearly brave enough. Emissions taxes are the Economics 101 solution to pollution problems... But that isn’t going to happen in the foreseeable future. ... Yet there are a number of second-best things ... that we’re either doing already or might do soon. ... Let me give some examples of what I’m talking about.
First, consider rules like fuel efficiency standards, or “net metering” mandates requiring that utilities buy back the electricity generated by homeowners’ solar panels. Any economics student can tell you that such rules are inefficient compared with the clean incentives provided by an emissions tax. But we don’t have an emissions tax, and fuel efficiency rules and net metering reduce greenhouse gas emissions. So a question for conservative environmentalists: Do you support the continuation of such mandates, or are you with the business groups (spearheaded by the Koch brothers) campaigning to eliminate them and impose fees on home solar installations?
Second, consider government support for clean energy via subsidies and loan guarantees. ... Are you O.K. with things like loan guarantees for solar plants, even though we know that some loans will go bad, Solyndra-style?
Finally, what about the Environmental Protection Agency’s proposal that it use its regulatory authority to impose large reductions in emissions from power plants? ... Are you willing to support this partial approach? ...
In policy terms, climate action — if it happens at all — will probably look like health reform. That is, it will be an awkward compromise dictated in part by the need to appease special interests... It will be the subject of intense partisanship, relying overwhelmingly on support from just one party, and will be the subject of constant, hysterical attacks. And it will, if we’re lucky, nonetheless do the job.
Did I mention that health reform is clearly working, despite its flaws?
The question for Mr. Paulson and those of similar views is whether they’re willing to go along with that kind of imperfection. If they are, welcome aboard.

Monday, June 09, 2014

Shrinking Arctic Ice

When will we acknowledge what is happening, and do something about it?:

Shrinking Arctic Ice Prompts Drastic Change in National Geographic Atlas, by Christine Dell'Amore: The shrinking of the Arctic ice sheet in the upcoming 10th edition of the National Geographic Atlas of the World is one of the most striking changes in the publication's history, geographers say. ...
Ice loss is accelerated in the Arctic because of a phenomenon known as the feedback loop: Thin ice is less reflective than thick ice, allowing more sunlight to be absorbed by the ocean, which in turn weakens the ice and warms the ocean even more, NASA says.
Because thinner ice is flatter, it allows melt ponds to accumulate on the surface, reducing the reflectiveness of the ice and absorbing more heat....
"You hear reports all the time in the media about this," Valdés said. "Until you have a hard-copy map in your hand, the message doesn't really hit home." ...

Paul Krugman: Interests, Ideology And Climate

The "real obstacle" to action on climate change:

Interests, Ideology And Climate, by Paul Krugman, Commentary, NY Times: There are three things we know about man-made global warming. First, the consequences will be terrible if we don’t take quick action to limit carbon emissions. Second, in pure economic terms the required action shouldn’t be hard to take: emission controls, done right, would probably slow economic growth, but not by much. Third, the politics of action are nonetheless very difficult.
But why is it so hard to act? Is it the power of vested interests?
I’ve been looking into that issue and have come to the somewhat surprising conclusion that it’s not mainly about the vested interests. ... What makes rational action on climate so hard is something else — a toxic mix of ideology and anti-intellectualism.
Before I get to that, however, an aside on the economics.
I’ve noted in earlier columns that every even halfway serious study of the economic impact of carbon reductions ... finds at most modest costs. ...
But wouldn’t protecting the environment nonetheless impose costs on some sectors and regions? Yes, it would — but not as much as you think. ... So why is the opposition to climate policy so intense?
Well, think about global warming from the point of view of someone who grew up taking Ayn Rand seriously, believing that the untrammeled pursuit of self-interest is always good and that government is always the problem, never the solution. Along come some scientists declaring that unrestricted pursuit of self-interest will destroy the world, and that government intervention is the only answer..., this is a direct challenge to the libertarian worldview.
And the natural reaction is denial — angry denial. Read or watch any extended debate over climate policy and you’ll be struck by the venom, the sheer rage, of the denialists.
The fact that climate concerns rest on scientific consensus makes things even worse..., right-wingers never liked or trusted scientists in the first place.
So the real obstacle, as we try to confront global warming, is economic ideology reinforced by hostility to science. In some ways this makes the task easier: we do not, in fact, have to force people to accept large monetary losses. But we do have to overcome pride and willful ignorance, which is hard indeed.

Friday, June 06, 2014

Why are Conservatives Attacking its Market-Based Climate Options?

Following up on the post below this one, this is Robert Stavins:

EPA’s Proposed Greenhouse Gas Regulation: Why are Conservatives Attacking its Market-Based Options?, by Robert Stavins: This week, the Obama Administration’s Environmental Protection Agency (EPA) released its long-awaited proposed regulation to reduce carbon dioxide (CO2) emissions from existing sources in the electricity-generating sector. The regulatory (rule) proposal calls for cutting CO2 emissions from the power sector by 30 percent below 2005 levels by 2030. ...
Much of the response this week has not been surprising..., but what should be surprising is the fact that conservative attacks on EPA’s proposed rule have focused, indeed fixated, on one of the options that is given to the states for implementation, namely the use of market-based instruments, that is, cap-and-trade systems. Given the demonization of cap-and-trade as “cap-and-tax” over the past few years by conservatives, why do I say that this fixation should be surprising?
The Irony of Conservatives Targeting Cap-and-Trade
Not so long ago, cap-and-trade mechanisms for environmental protection were popular in Congress. Now, such mechanisms are denigrated. What happened? Professor Richard Schmalensee (MIT) and I recently told the sordid tale of how conservatives in Congress who once supported cap and trade had come to lambast climate change legislation as “cap-and-tax.” Ironically, in doing this, conservatives have chosen to demonize their own market-based creation. ...
It may be that some conservatives in Congress opposed climate policies because of disagreement about the threat of climate change or the costs of the policies, but instead of debating those risks and costs, they chose to launch an ultimately successful campaign to demonize and thereby tarnish cap-and-trade as an instrument of public policy, rendering it “collateral damage” in the wider climate policy battle.
Today that “scorched-earth” approach may have come back to haunt conservatives. Have they now boxed themselves into a corner, unable to support the power of the marketplace to reduce their own states’ compliance costs under the new EPA CO2 regulation? I hope not, but only time will tell.

[The original post is much, much longer and detailed.]

Paul Krugman: The Climate Domino

On the administration's new climate rules:

The Climate Domino, by Paul Krugman, Commentary, NY Times: Maybe it’s me, but the predictable right-wing cries of outrage over the Environmental Protection Agency’s proposed rules on carbon seem oddly muted and unfocused. ... Where are the eye-catching fake horror stories?
For what it’s worth, however, the attacks on the new rules mainly involve the three C’s: conspiracy, cost and China. That is, right-wingers claim ... it’s all a hoax promulgated by thousands of scientists around the world; that taking action to limit greenhouse gas emissions would devastate the economy; and that, anyway, U.S. policy can’t accomplish anything because China will just go on spewing stuff into the atmosphere.
I don’t want to say much about the conspiracy theorizing, except to point out that any attempt to make sense of current American politics must take into account this particular indicator of the Republican Party’s descent into madness. There is, however, a lot to say about both the cost and China issues.
On cost: It’s reasonable to argue that new rules aimed at limiting emissions would have some negative effect on G.D.P.... Claims that the effects will be devastating are, however,... just wrong ... as I explained last week...
But what about the international aspect? At this point, the United States accounts for only 17 percent of the world’s carbon dioxide emissions, while China accounts for 27 percent — and China’s share is rising fast. So ... America, acting alone, can’t save the planet. We need international cooperation.
That, however, is precisely why we need the new policy. America can’t expect other countries to take strong action against emissions while refusing to do anything itself... And it’s fairly certain that action in the U.S. would lead to corresponding action in Europe and Japan.
That leaves China... China is enormously dependent on access to advanced-country markets ... and it knows that it would put this access at risk if it refused to play any role in protecting the planet.
More specifically, if and when wealthy countries take serious action to limit greenhouse gas emissions, they’re very likely to start imposing “carbon tariffs”... So China would find itself with strong incentives to start limiting emissions.
The new carbon policy, then, is supposed to be the beginning, not the end, a domino that, once pushed over, should start a chain reaction that leads, finally, to global steps to limit climate change. Do we know that it will work? Of course not. But it’s vital that we try.

Thursday, June 05, 2014

Energy Choices

Paul Krugman:

Energy Choices, by Paul Krugman: Nate Silver got a lot of grief when he chose Roger Pielke Jr., of all people, to write about environment for the new 538. Pielke is regarded among climate scientists as a concern troll – someone who pretends to be open-minded, but is actually committed to undermining the case for emissions limits any way he can. But is this fair?
Well, I’m happy to report that Pielke has a letter in today’s Financial Times about the economics of emissions caps – something I know a fair bit about – that abundantly confirms his bad reputation. Better still, the letter offers a teachable moment, a chance to explain why claims that we can’t limit emissions without destroying economic growth are nonsense. ...

Friday, May 30, 2014

Paul Krugman: Cutting Back on Carbon

The cost of taking action to reduce the threat from global warming isn't as large as you might be led to believe:

Cutting Back on Carbon, by Paul Krugman, Commentary, NY Times: Next week the Environmental Protection Agency is expected to announce new rules designed to limit global warming. Although we don’t know the details yet, anti-environmental groups are already predicting vast costs and economic doom. Don’t believe them. Everything we know suggests that we can achieve large reductions in greenhouse gas emissions at little cost to the economy.
Just ask the United States Chamber of Commerce.
O.K., that’s not the message the Chamber of Commerce was trying to deliver in the report it put out Wednesday. It clearly meant to convey the impression that the E.P.A.’s new rules would wreak havoc. But if you focus on the report’s content rather than its rhetoric, you discover that ... the numbers are remarkably small.
Specifically, the report considers a carbon-reduction program that’s probably considerably more ambitious than we’re actually going to see, and it concludes that between now and 2030 the program would cost $50.2 billion in constant dollars per year. That’s supposed to sound like a big deal. ... These days, it’s just not a lot of money.
Remember, we have a $17 trillion economy..., and it’s going to grow over time. So what the Chamber of Commerce is actually saying is that we can take dramatic steps on climate ... while reducing our incomes by only one-fifth of 1 percent. That’s cheap! ...
And ... this is based on anti-environmentalists’ own numbers. The real costs would almost surely be smaller...
You might ask why the Chamber of Commerce is so fiercely opposed to action against global warming, if the cost of action is so small. The answer, of course, is that the chamber is serving special interests, notably the coal industry ... and also ... the ever more powerful anti-science sentiments of the Republican Party.
Finally, let me take on the anti-environmentalists’ last line of defense — the claim that whatever we do won’t matter, because other countries, China in particular, will just keep on burning ever more coal. This gets things exactly wrong. Yes, we need an international agreement... But U.S. unwillingness to act has been the biggest obstacle to such an agreement. ...
Now, we haven’t yet seen the details of the new climate action proposal... We can be reasonably sure, however, that the economic costs of the proposal will be small, because that’s what the research — even research paid for by anti-environmentalists... — tells us. Saving the planet would be remarkably cheap.

Saturday, May 24, 2014

'Buying Insurance Against Climate Change'

Robert Shiller:

Buying Insurance Against Climate Change: The third National Climate Assessment report ... warns us about our hazardous future... We must face facts: There is a real risk of new kinds of climate-related disaster. ... We are taking major gambles with our environment... Expect surprises.
In March, a United Nations report identified with “high confidence” a number of risks that will be visited on different people unequally. ... In short, we need to worry about the potential for greater-than-expected disasters, especially those that concentrate their fury on specific places or circumstances ... we cannot now predict.
That’s why global warming needs to be addressed by the private institutions of risk management, such as insurance and securitization. They have deep experience in smoothing out disasters’ effects by sharing them among large numbers of people. The people or entities that are hit hardest are helped by those less badly damaged.
But these institutions need ways to deal with such grand-scale issues. Governments should recognize that by giving these businesses a profit incentive to prepare for these unevenly distributed disasters. ...

Friday, May 16, 2014

Paul Krugman: Points of No Return

Can anything reverse the growing hostility to science within the Republican Party?:

Points of No Return, by Paul Krugman, Commentary, NY Times: Recently two research teams, working independently and using different methods, reached an alarming conclusion: The West Antarctic ice sheet is doomed. ... Even if we took drastic action to limit global warming right now, this particular process of environmental change has reached a point of no return.
Meanwhile, Senator Marco Rubio of Florida — much of whose state is now fated to sink beneath the waves —... confidently declared the overwhelming scientific consensus on climate change false, although in a later interview he was unable to cite any sources for his skepticism.
So why would the senator make such a statement? The answer is that like that ice sheet, his party’s intellectual evolution (or maybe more accurately, its devolution) has reached a point of no return, in which allegiance to false doctrines has become a crucial badge of identity.
I’ve been thinking a lot lately about ... how support for a false dogma can become politically mandatory, and how overwhelming contrary evidence only makes such dogmas stronger and more extreme. ... To see how it works, consider a topic I know well: the recent history of inflation scares. ...
Inflation phobia has always been closely bound up with right-wing politics; to admit that this phobia was misguided would have meant conceding that one whole side of the political divide was fundamentally off base about how the economy works. So most of the inflationistas have responded to the failure of their prediction by becoming more, not less, extreme in their dogma...
The same kind of thing is clearly happening on the issue of global warming. ... As the evidence for a changing climate keeps accumulating, the Republican Party’s commitment to denial just gets stronger. ...
And truly crazy positions are becoming the norm. A decade ago, only the G.O.P.’s extremist fringe asserted that global warming was a hoax concocted by a vast global conspiracy of scientists (although even then that fringe included some powerful politicians). Today, such conspiracy theorizing is mainstream within the party, and rapidly becoming mandatory; witch hunts against scientists reporting evidence of warming have become standard operating procedure, and skepticism about climate science is turning into hostility toward science in general.
It’s hard to see what could reverse this growing hostility to inconvenient science. As I said, the process of intellectual devolution seems to have reached a point of no return. And that scares me more than the news about that ice sheet.

Monday, May 12, 2014

Paul Krugman: Crazy Climate Economics

Can you guess how conservatives will react if the EPA announces rules to combat climate change?:

Crazy Climate Economics, by Paul Krugman, Commentary, NY Times: Everywhere you look these days, you see Marxism on the rise. Well, O.K., maybe you don’t — but conservatives do. If you so much as mention income inequality, you’ll be denounced as the second coming of Joseph Stalin; Rick Santorum has declared that any use of the word “class” is “Marxism talk.” ...George Will says the only reason progressives favor trains is their goal of “diminishing Americans’ individualism in order to make them more amenable to collectivism.”
So it goes without saying that Obamacare, based on ideas originally developed at the Heritage Foundation, is a Marxist scheme... And just wait until the Environmental Protection Agency announces rules intended to slow the pace of climate change. ...
You can already get a taste of what’s coming in the ... recent Supreme Court ruling on power-plant pollution. ... Justice Scalia didn’t just dissent; he suggested that the E.P.A.’s proposed rule ... reflected the Marxist concept of “from each according to his ability.” ...
And you can just imagine what will happen when the E.P.A ... moves on to regulation of greenhouse gas emissions. ...
First, we’ll see any effort to limit pollution denounced as a tyrannical act. Pollution wasn’t always a deeply partisan issue... John McCain made ... cap-and-trade limits on greenhouse gases part of his presidential campaign. But when House Democrats actually passed a cap-and-trade bill in 2009, it was attacked as, you guessed it, Marxist. ...
Second, we’ll see claims that any effort to limit emissions will have ... “a devastating impact on our economy.” ... Now, the rules the E.P.A. is likely to impose won’t give the private sector as much flexibility as it would have had in dealing with an economywide carbon cap or emissions tax. But Republicans have only themselves to blame: Their scorched-earth opposition to any kind of climate policy has left executive action by the White House as the only route forward. ...
What about the argument that unilateral U.S. action won’t work...? ... U.S. action on climate is a necessary first step toward a broader international agreement, which will surely include sanctions on countries that don’t participate.
So the coming firestorm over new power-plant regulations won’t be a genuine debate... Instead, the airwaves will be filled with conspiracy theories and wild claims about costs, all of which should be ignored. Climate policy may finally be getting somewhere; let’s not let crazy climate economics get in the way.

Wednesday, May 07, 2014

Tax Miles?

Tim Haab at Environmental Economics:

Tax Miles? I still think I have a better idea...:

The California Legislature is looking at a voluntary program that would tax motorists for every mile they drive.

KCAL9’s Bobby Kaple reports that Sen. Mark DeSaulnier, D-Concord, introduced a bill to test out the vehicle miles traveled (VMT) tax because the state’s gas tax was no longer bringing in the revenue it used to due to people driving more fuel efficient vehicles. [via]

It's been almost exactly 7 years now (May 8, 2007) and people still aren't listening to me. 

Taxing miles creates perverse incentives for fuel efficiency. ...  In words, a mielage tax increases the tax per gallon the more fuel efficient the car.  Now granted, with higher mpg you use fewer gallons to drive an equivalent number of miles, and in the end, everyone driving 100 miles will pay the same tax.  And from a revenue perspective, that might be OK.  But there might be a way to kill fewer birds with one stone.

As I have written a number of times, a more straightforward proposal is to simply raise the gas tax.  Reaising the gas tax accomplishes a number of things 1) It raises revenue, 2) It discourages miles driven, and 3) It increases the incentive for higher fuel efficiency. ...

It's really simple.  Why worry about complicated milage programs?  The gas tax infrastructure is in place.  Raise the gas tax and meet multiple public policy and economic goals simultaneously.

Saturday, April 26, 2014

'Greening Economics: It is Time'

Another call for change in how economics is taught:

Greening Economics: It is time, by Carlo Carraro, Marianne Fay, Marzio Galeotti, Vox EU: ... It took the deepest economic and financial crisis since the Great Depression to provoke an open debate amongst macroeconomists as to whether the ‘economic model’ taught in economics programs is adequate. We do hope it will not take the full realization of the adverse consequences of climate change for the profession to come to its senses regarding environmental economics and the way natural capital is ignored in most macroeconomic work. How many superstorm Sandys will it take? By how much does the sea level have to rise? How many severe droughts and floods (and where) will it take before we come to the realization that ignoring natural capital and its many externalities is simply bad economics?
The difference between the financial and environmental crisis is that we actually do have a good body of work that incorporates natural capital in models of growth. The problem is that it has remained to a large extent the restricted domain of environmental economists. The vast majority of us were able to get degrees in economics without ever reading a single paper on environmental economics or encountering natural capital as an argument in the production functions we studied. We did hear about Pigouvian taxes of course – and so figured the problem had been solved…
Environmental economists have long modified growth models to account for the role of the environment, thus revisiting the conditions that ensure growth, whether sustainable or sustained. Classical references are three 1974 articles by Partha Dasgupta and Geoffrey Heal, by William Nordhaus, and by Robert Solow (though Solow could be hardly defined an environmental economist). More generally, existing work is summarized in the survey chapters by Tasos Xepapadeas and by William Brock and Scott Taylor, both published in 2005. A more recent example that compares ‘traditional’ (brown?) and ‘green’ models of growth is a 2011 World Bank working paper by Stephane Hallegatte, Geoffrey Heal, Marianne Fay, and David Treguer.
As a result, environmental economists tend not to talk about economic growth per se, but about sustainable economic growth. When macroeconomists refer to sustainable growth, however, they usually mean sustained growth. When growth economists study the role of externalities in the growth process they almost exclusively refer to technological and knowledge externalities, and generally ignore environmental ones, even though the latter are likely to become largely more relevant in the coming decades. Even social capital, a relative newcomer in economics, appears better integrated into the growth literature.
Why such disregard for an issue that epitomizes market failures from externalities, common property issues, and whose importance in both growth processes and human well-being is well documented? Sheer ignorance, likely – or a vague notion that innovation will come to the rescue. But why would markets generate the technology to solve a problem that combines both knowledge and environmental externalities?
The teaching of economics
Here is a plea then for an urgent change in the economics curriculum, at both introductory and advanced levels. Growth chapters in today’s macroeconomics textbooks make no reference to the environment – whether as an input into the production function or as a limiting factor affecting the productivity of human or physical capital. This is the case, for example, of David Romer’s textbook, in its fourth edition in 2011; of Jean-Pascal Benassy’s 2011 volume; or those of the Chicago School economists, such as Nancy Stokey, Robert Lucas and Edward Prescott’s (1989) and of Lars Ljungqvist and Thomas Sargent (third edition, 2012); or even that of Neo-keynesian economists such as Olivier Blanchard and Stanly Fischer (1989); or, finally, the very recent example of Michael Wickens (2012).
What is needed is not simply that more environmental economics be offered, but rather that the macroeconomics courses teach that natural capital is a key input into production processes, and that the environment – through massive mismanagement and a chronic failure to apply the basic principles of economics – has now become a serious macroeconomic problem, one that requires a profound and dramatic change in our model of growth. The development model of the industrial revolution (‘grow now and clean up later’) partly worked for a world of 1.5 million people; it simply won’t do for a global population approaching 9 billion.
If introducing the notion and role of the environment is necessary in macroeconomics teaching, it is a fortiori necessary when the student is presented with the theory and models of economic growth. There are a few economic growth textbooks written by well-known growth economists who are very active in that area. Going through the tables of contents, however, one is quickly disappointed. Neither the volume by Robert Barro and Xavier Sala-i-Martin (2003) nor the one by Daron Acemoglu (2008), for instance, consider explicitly the role of the environment in the process and in the perspectives of economic growth of a country. The same holds for the textbook by Olivier de la Grandville (2009), while Charles Jones and Dietrich Vollrath (2013) include a chapter on economic growth and natural resources, which is only a component of natural capital. Only the book by Philippe Aghion and Peter Howitt (2008) includes a chapter – the sixteenth – where the authors study ‘how new growth theories can integrate the environmental dimension, and in particular how endogenous innovation and directed technical change make it possible to reconcile the sustained growth objective with the constraints imposed by exhaustible resources or the need to maintain the environment’ (p.377).
It is remarkable that all textbooks on which undergraduate and graduate students learn the fundamental of economic growth invariably include a chapter on the role of human capital and of technological change, but always miss addressing the issue of the environment and natural capital.
As we believe that it is time to stop teaching that economic growth is uniquely measured by the growth of the production of all goods and services, we also firmly believe that the time has come to teach – from the first steps – that economic growth cannot abstract from the explicit consideration of the constraints and opportunities imposed by the environment and natural exhaustible resources. It is clear from many recent assessments (including the recently released IPCC Fifth Assessment Report) that environmental externalities, constraints on natural resources, and climate change – largely a macro problem – will constantly and deeply affect mankind’s future. The teaching of economics can no longer ignore it.