Economist's View

"Trade Growth, Global Production, and Environmental Degradation"

One more from Vox EU: Does trade growth harm the environment?:

Trade growth, global production, and environmental degradation, by Judith M. Dean and Mary E. Lovely, Vox EU: The sheer scale of China's recent trade growth and its environmental degradation are unprecedented.[1] In current dollars, the value of China’s exports plus imports rose from $280.9 billion in 1995 to $1422.1 billion in 2005 – a growth of over 400%. Meanwhile, there are almost daily media reports of Chinese rivers and lakes poisoned by pollution and algal bloom, water tables dropping too low to meet basic needs, farmlands tainted by industrial pollution and fertilisers, and cities choking on smog. While major improvements have been made in pollution regulation since the mid-1990s (OECD, 2005), and some progress has been made in achieving cleaner water and air, China’s own State Environmental Protection Agency (SEPA) recently stated that, “[r]elative shortage of resources, a fragile ecological environment and insufficient environmental capacity are becoming critical problems hindering China’s development” (SEPA, 2006). Thus, it is no surprise that China's experience has fuelled the popular view that trade growth is harmful to the environment.

Why is trade seen as detrimental to the environment? There is solid theoretical reasoning behind this popular view. Copeland and Taylor (1994) develop an elegant theoretical model in which low income countries have lenient environmental standards compared to industrial countries and, hence, a comparative advantage in pollution-intensive goods. They show how trade liberalisation may shift the composition of the country’s output toward its area of comparative advantage, increasing production of “dirty goods.” Moreover, to the extent that trade promotes income growth and raises the scale of production, it raises the use of all inputs, including environmental resources.

While these arguments are compelling, there are other factors at work in newly liberalised countries, as Copeland and Taylor (2004) note. Weak environmental standards may not necessarily give poorer countries a comparative advantage in dirty goods. The use of the environment is only one of many “inputs” into production. Comparative advantage is affected by the costs of other inputs as well, such as capital equipment, skilled labour, unskilled labour, etc., and these costs differ across industries in ways that complicate simple calculations based on environmental compliance costs. Importantly, higher incomes generate pressure for more stringent environmental regulations, implying that as liberalisation leads to higher incomes, incentives for firms to pursue cleaner techniques also rise.[2]

Menendez: "Thank God" Economists Don't Make Public Policy

Sen. Bob Menendez (D-NJ) is a coauthor with Clinton on the gas tax bill:

To me, the claims being made about this proposal are the same as saying tax cuts pay for themselves. Even if it has popular appeal, even if it wins votes and elections, economists are in wide agreement in saying that the proposal is misleading as stated by the campaign, and generally a bad idea. When literally all the experts around you are telling you that what you are saying is misleading (at best), yet you declare you are going to say it anyway, that’s no better than the Laffer curve stuff. Sure, it’s not much money, but what if this were attacking Iran instead and she declared she was just going to do it anyway? That’s a bigger deal, and refusing to listen to experts - dismissing them as out of touch and elitist - tells us something important.

I have refused, for the most part, to get into Dem vs. Dem issues, and I’ve focused on McCain, but the statement she made irked me. Economics has been undermined enough, and part of it has come from people at think tanks and elsewhere who aren't economists, but pretend to be, promoting ideas like tax cuts are self-financing in op-eds, TV appearances, the NRO, and elsewhere. It has confused people, the media turns it into a he said-she said issue rather than denouncing the falsehoods and misleading statements, and people are left confused and wondering if economists know what they are talking about. When Republicans do this, it ticks me off. Economics has been undermined enough by clowns pretending to be economists, and I won’t help our side undermine the profession even further.

If they want to do public policy without talking to economists, good luck with that. I'm tired of being told I don't understand how average Americans feel. The point here is that this is a lousy way to help people. It's not that we don't care, or don't understand, it's that we do care and understand all to well and we'd like to see policies put into place that actually have a chance to help people. Promising things that aren't likely to happen - telling people they will get relief when it will likely be a pittance (the $70 figure they cite is not supported by the underlying economics) - simply leads to disappointment and disenchantment with politicians. All we are asking is that promises have a chance to be realized. Let's help the people who need help, but let's do it in a way that is effective rather than in a way that plays off their difficulties and fears, but does not really address their needs.

"I'm not Going to Put my Lot in with Economists"

Greg Mankiw:

The Legacy of Bailouts, by Greg Mankiw: Alan Blinder makes the case for more regulation of financial institutions. The key passage:

It will, for example, substantially reduce the profitability of investment houses and, therefore, reduce their scale. But that’s the price you pay for access to a publicly financed safety net.

That is why some economists cringe when Wall Street firms are bailed out. Beyond the obvious equity issues about risking taxpayer money to help rich guys, there is the problem of efficiency. If you start bailing the firms out when they lose, you have to regulate the gambles they take. You can no longer count on the creditors to limit the firms' leverage, as the creditors are counting on Uncle Sam if things go wrong. But the more regulated these firms are, the lower their productivity will be.

The bottom line: The Bear Stearns bailout may have saved the economy from an episode of financial contagion in the short run, but in the long run it will likely leave us with a more regulated and less vibrant financial system.

I disagree. Lack of effective regulation opened the door for this crisis, and if the Fed had not intervened, there was a strong possibility that the financial system would have had a severe meltdown. Maybe not, but the chance was there and it wasn't a chance most people were willing to take.

Suppose we do nothing and there was a meltdown as feared. One need only look back at the aftermath of the Great Depression to see what happens to regulation after such an event - there was a strong regulatory response. Given the choice between a bailout and the level of regulation that comes along with it, and a crash and the much larger amount of regulation that would follow, it's hard to see why choosing the path that, in a probabilistic sense, gives a smaller likelihood of a major crash and a smaller regulatory response would be objectionable. Financial markets screwed up and they know it - that was quite evident this week at the Milken Institute Global Conference - and they accept that more regulation is needed. The choice isn't between no regulation and some regulation, there will be a regulatory response and the question is how large and effective it will be.

The chance that there would be a financial meltdown had the Fed remained passive instead of intervening is why the statement below from Hillary doesn't make a lot of sense. The equivalence she draws between the financial market bailout and lifting the gas tax is false. The Fed intervened to prevent a financial meltdown, and that helped all of us. There were costs, but the benefits - avoiding a large crash - were far larger.

There is no such necessity for a gas tax, the system won't crash and burn if we do not lift gas taxes for the summer, and the calculation is different. With the financial bailout, we had little choice but to accept some costs in order to prevent far larger costs associated with a meltdown. But given that intervention was needed, the policy that was implemented did not have obvious problems, every economist on the planet did not jump up and say there's a better way to do this! Some did, but the objection was to intervening in financial markets at all. Most agreed this was the best way to proceed if they accepted that that intervention was needed, though there were a few voices advocating variations on the policy. With the gas tax, it is just the opposite - there are no economists I know of that support the policy, not one. Even if they support the idea behind it, giving relief to lower income households, they do not support this particular means of addressing the problem:

Clinton Pushes Back on Gas Tax ‘Pushback’, by Matt Phillips:  Hillary Clinton’s sit-down with George Stephanopoulos on ABC’s “This Week,” quickly delved into her plan to suspend the federal gas tax during the peak summer driving season.

Stephanopoulos ... played a clip of Sen. Barack Obama criticizing the plan. Obama quoted New York Times columnist and Princeton economist Paul Krugman’s assessment that the idea is “pointless and disappointing,” and asked the New York senator to name “a credible economist who supports the suspension.”...

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

She argued that the policy, if designed properly, could be effective. ... “But let’s step back for a minute George. You know, it’s really odd to me that arguing to give relief to the vast majority of Americans creates this incredible pushback,” she said, “When the federal government, through the Fed and the Treasury gave $30 billion in a bailout to Bear Stearns I didn’t hear anybody jump up and say, ‘That’s not going according to the market, that’s rewarding irresponsible behavior.’ We’ve got to get out of this mindset, where somehow, elite opinion is always on the side of doing things that really disadvantage the vast majority of Americans.”

First, people did complain about the bailout - see above for one, and many of the complaints hit directly on her main point, that "I didn’t hear anybody jump up and say, ‘That’s not going according to the market, that’s rewarding irresponsible behavior’." If she didn't hear that, or if none of her economic advisors did, then they aren't listening. That message was loud and clear.

The "if designed properly" part is strange too. Is she saying that as it stands, it's not a good idea, but she's pushing it anyway? Or is she saying that, as she has designed it, it is a good idea? Either way, it's bunk. She also says, "it’s really odd to me that arguing to give relief to the vast majority of Americans creates this incredible pushback." It's not giving relief that is causing the pushback, there are ways to give relief that don't give up on our environmental goals and have better efficiency properties, e.g. a lump-sum rebate to lower income households. The pushback is about the form of the policy, not the idea behind it.

I'll have to vote soon - Hillary or Obama - and mail in my ballot (we vote by mail here). I've had a bit of trouble deciding, but this will help.

Update: See also Brad Delong, Robert Reich, Richard Green, Ezra Klein, Ryan Avent, and Kevin Drum.

"What to Do About Gas Prices?"

Jonah Gelbach emails that he has signed on to post periodically at Economists for Obama:

What to Do About Gas Prices?, by Jonah Gelbach: As an economist, as a person who worries about climate change, and as someone who believes the Democratic Party's electoral success is very important, if only to spare us more of the damage that the GOP has done over the last quarter-century of its hammer lock on federal policy, I find political discussion of gas taxes to be extremely frustrating to watch.

Democratic politicians regularly use high gas prices as a club with which to beat Republicans. I understand that politicians use the issues they think will work. And the nexus between oil company profits and GOP officials whose policies have been awful for most people in the bottom four quintiles of the income distribution (and probably plenty in the top one) has got to be pretty tough for Democratic candidates and officials to resist.

But the fact of the matter is that gas prices should be high. They should be high for the very simple and now very obvious reason that the pressure on the world's climate needs to be reduced. Our country's foolish policy of keeping gas prices low while providing implicit (and sometimes explicit) subsidies to the vehicles that get the worst mileage should have ended many years ago. Demand-side pressure on gas prices is finally pushing gas prices into the range they should have been for many years.

But that last paragraph tells only part of the story. One effect of the low-gas price policies we've pursued for so long is that it's induced many people to buy very fuel-inefficient cars and trucks. These are the people who are getting nailed hardest in the wallets by today's high gas prices, and I don't blame them for being upset. If you drive a vehicle that gets 18 miles per gallon for 12,000 miles a year, then you use about 670 gallons of gas a year. Even a $1.00 per gallon increase in the price of gas over a period of one year alone therefore translates into more than the stimulus tax rebate that a single person with sufficient income will receive over the next month. A married couple each of whom drives such a car 12,000 miles a year will receive a smaller rebate than the one-year cost of a $1 per gallon gas price hike.

By any reasonable standard, the increase in gas prices translates into real money for a huge number of people in this country, especially under current economic conditions.

But since the reason this is true is that American consumers have been induced to buy inefficient gas guzzlers, with serious environmental consequences, policies that would reduce the price of gas should be the last thing we consider. (On this score, the gas tax holiday that Sens. McCain and Clinton have proposed at least has the virtue that it would likely do very little, leading to at most a very small change in the price of gas; McCain's proposal would add to the deficit by increasing windfall profits of oil companies, while Clinton at least has proposed a new windfall profits tax to undo her proposal's provision of windfall profits.)

So what to do?

"Reinventing Energy"

Jeffrey Sachs summarizes some of the ways we can respond to higher energy prices:

Reinventing energy, by Jeffrey D. Sachs, Project Syndicate: The world economy is being battered by sharply higher energy prices. ... No quick fix exists... Higher prices reflect basic conditions of supply and demand. The world economy – especially China, India and elsewhere in Asia – has been growing rapidly, leading to a steep increase in global demand for energy... Yet global supplies of oil, natural gas and coal can’t keep up easily...

In order for developing countries to continue enjoying rapid economic growth and for rich nations to avoid a slump, it is necessary to develop new energy technologies. Three objectives should be targeted: low-cost alternatives to fossil fuels, greater energy efficiency, and reducing carbon dioxide emissions.

"Why the U.S. Policy for Climate Change is Flawed"

Is there any evidence that the Bush administration's preferred method for combating global warming -  companies voluntarily reducing their carbon footprint - can succeed in reducing greenhouse gases? According to these results, "the federal government’s reliance on voluntary measures to reduce greenhouse gas emissions will likely prove unsuccessful":

Why the U.S. policy for climate change is flawed, by Karin S. Thorburn, Vox EU: Climate change may prove to be the most severe environmental challenge of this century. Yet, the United States, one of the world’s largest producers of greenhouse gases, has refused to ratify the Kyoto Protocol mandating a reduction of greenhouse gas emissions. Rather than national regulation of greenhouse gas emissions, the Bush administration relies on voluntary measures to combat global warming. The success of U.S. climate change policy therefore ultimately depends on how profitable it is for companies to voluntarily reduce their carbon footprint. In other words, in order to be widely adopted, investments required to reduce greenhouse gas emissions must increase shareholder wealth and thus have a positive net present value.

Porter and van der Linde (1995) and Reinhardt (1999) argue that environmentally responsible investments can improve corporate financial performance. They propose that pollution-reducing investments create “green goodwill,” which differentiates the firm’s products and increases its market share. Such investments may also reduce production costs and the risk of future environmental liabilities, as well as give the firm a competitive advantage if subsequent regulatory actions force industry rivals to follow. In addition, Heinkel, Kraus and Zechner (2001) suggest that if investors refuse to hold the stock of polluting firms, the cost of capital may rise to the point where it is optimal for some firms to undertake environmentally responsible investments.

How Should We Respond to Uncertainty about Climate Change?

Paul Klemperer asks, what if the climate change skeptics are right that there are more uncertainties about the potential for problems than we have been led to believe?:

If climate sceptics are right, it is time to worry, by Paul Klemperer, Vox EU: Al Gore says the science on global warming is clear and there is a major problem. Vaclav Klaus, Czech president, contends that climate change forecasts are speculative and unreliable. Whose claims are scarier?

Of course, Mr Klaus exaggerates (he is a politician) but if he is partly right, we should be more concerned, not less. Consider an analogy. If, like many of my neighbours in Oxford, you fear that new building is exacerbating flooding, how would you feel if models that predicted bad news were discredited?

It depends. If the original models were biased, your best guess of the height of future floods is now lower. But if the models merely underestimated the uncertainty, the range of plausible outcomes is now greater, so flood defences would need to be higher for us to feel safe.

Likewise, if our understanding of climate systems is flawed, our best guess about the dangers we face may be less pessimistic, but extreme outcomes are more likely.

Should We Mimic Denmark's Energy Policy?

Is it possible to reduce greenhouse gas emissions, but still have a "remarkably strong economic record and without relying on nuclear power"?:

On Carbon, Tax and Don’t Spend, by Monica Prasad, Commentary, NY Times: Everyone seems to be talking about a carbon tax. ... The idea is that polluters should pay for the environmental damage they cause. Slap a tax on carbon, the theory goes, and you will get fewer carbon emissions, more revenue for government and energy independence, all at the same time. No wonder people from both sides of the political divide have come out in support of it.

But a carbon tax isn’t a new idea. Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries — in the case of Norway, emissions have actually increased by 43 percent per capita. ...

The one country in which carbon taxes have led to a large decrease in emissions is Denmark, whose per capita carbon dioxide emissions were nearly 15 percent lower in 2005 than in 1990. And Denmark accomplished this while posting a remarkably strong economic record and without relying on nuclear power.

What did Denmark do right? There are many elements to its success, but taken together, the insight they provide is that if reducing emissions is the goal, then a carbon tax is a tax you want to impose but never collect.

This is a hard lesson to learn. The very thought of new tax revenue has a way of changing the priorities of the most hard-headed politicians... But if we want lower emissions, the goal of a carbon tax is to prompt producers to change their behavior, not to allow them to continue polluting while handing over cash to the government.

How do you get them to change? First, you prevent policy makers from turning the tax into a cash cow. Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. ...

Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation. Danish firms are pushed away from carbon and pulled into environmental innovation, and the country’s economy isn’t put at a competitive disadvantage. So this is lesson No. 1 from Denmark.

The second lesson is that the carbon tax worked ... because it was easy for Danish firms to switch to cleaner fuels. Danish policy makers made huge investments in renewable energy and subsidized environmental innovation. ...[T]he tax gave companies a reason to leave coal and the investments in renewable energy gave them an easy way to do so... The key was providing easy substitutes. ...

[A] carbon tax has been promoted almost as a panacea — just pop in the economic incentives and watch them work their magic. But unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution.

An increase in gasoline taxes ... would likewise be the wrong policy for the United States. Higher gas taxes would raise revenue but do little to curb pollution.

Instead, if we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources, cleaner-burning fuel, carbon-capture technologies and other environmental innovations.

I thought cap and trade - which is economically equivalent to a carbon tax if implemented correctly - was what "Everyone seems to be talking about," but I'll go with the premise. Also, I don't know much about how energy usage statistics have changed over time for these countries, or why, so I'll have to take the information given on faith (anybody disagree?).

Here's a graph I constructed awhile back to show the effects of a proposal to impose a carbon tax, then return every dime to the public. The economic consequences of these revenue neutral proposals are covered in most microeconomics principles classes, and people such as Robert Frank have made somewhat more formal proposals along these lines (and Marty Feldstein has a scheme he says "actually raises the income of a majority of households" and prevents policy makers from turning the tax into a cash cow, one of the concerns above). So the lesson that "a carbon tax is a tax you want to impose but never collect," is not such a "hard lesson to learn," it's a fairly common exercise (though economists would use different terminology to describe it).

There is no doubt that we should find out where and why under-investment in energy saving technology is occurring and fix the problem as soon as possible, and that can be accomplished in a variety of ways, a dedicated carbon tax is not the only possibility. But if we do impose a carbon tax, a priority for me would be to make sure that the households most vulnerable economically to an increase in energy prices are given the help they need, and it's fairly easy to construct proposals that they have this characteristic. If anything is left over after lower income households are compensated it can be earmarked for other purposes, one possibility is to support policies that help to get the proposal through the political process and do some good at the same time, but the main thing is to get the tax (or the equivalent cap and trade policy, or something that is effective) in place so we can begin to make headway on the global warming problem.

Blowing in the Wind

What do you think of wind power?:

Move Over, Oil, There’s Money in Texas Wind, by Clifford Krauss, NY Times: ...Texas, once the oil capital of North America, is rapidly turning into the capital of wind power. After breakneck growth the last three years, Texas has reached the point that more than 3 percent of its electricity ... comes from wind turbines.

Texans are even turning tapped-out oil fields into wind farms, and no less an oilman than Boone Pickens is getting into alternative energy.

“I have the same feelings about wind,” Mr. Pickens said in an interview, “as I had about the best oil field I ever found.” He is planning to build the biggest wind farm in the world, a $10 billion behemoth that could power a small city by itself.

Wind turbines were once a marginal form of electrical generation. But amid rising concern about greenhouse gases from coal-burning power plants, wind power is booming. Installed wind capacity in the United States grew 45 percent last year... It already supplies about 1 percent of American electricity, powering the equivalent of 4.5 million homes. Environmental advocates contend it could eventually hit 20 percent, as has already happened in Denmark. Energy consultants say that 5 to 7 percent is a more realistic goal in this country. ...

Despite the attraction of wind as a nearly pollution-free power source, it does have limitations. Though the gap is closing, electricity from wind remains costlier than that generated from fossil fuels. Moreover, wind power is intermittent and unpredictable, and the hottest days, when electricity is needed most, are usually not windy.

The turbines are getting bigger and their blades can kill birds and bats. Aesthetic and wildlife issues have led to opposition emerging around the country, particularly in coastal areas like Cape Cod. Some opposition in Texas has cropped up as well, including lawsuits to halt wind farms that were thought to be eyesores or harmful to wetlands.

But the opposition has been limited, and has done little to slow the rapid growth of wind power in Texas. ...

The quaint windmills of old have been replaced by turbines that stand as high as 20-story buildings, with blades longer than a football field and each capable of generating electricity for small communities. Powerful turbines are able to capture power even when the wind is relatively weak, and they help to lower the cost per kilowatt hour. ...

A short-term threat to the growth of wind power is the looming expiration of federal clean-energy tax credits, which Congress has allowed to lapse several times over the years. Advocates have called for extending those credits...

A longer-term problem is potential bottlenecks in getting wind power from the places best equipped to produce it to the populous areas that need electricity. The part of the United States with the highest wind potential is a corridor stretching north from Texas through the middle of the country, including sparsely populated states like Montana and the Dakotas. Power is needed most in the dense cities of the coasts, but building new transmission lines over such long distances is certain to be expensive and controversial.

“We need a national vision for transmission like we have with the national highway system,” said Robert Gramlich, policy director for the American Wind Energy Association. “We have to get over the hump of having a patchwork of electric utility fiefdoms.” ...

Sachs: We Need Global Cooperation to Promote Clean Energy Technology

Jeff Sachs says that if we leave development of technology to combat global warming to the private sector, we won't get the technology we need fast enough, if at all. What's needed is a cooperative global effort to encourage companies to pursue technological development:

Using technology to address poverty and the environment, by Jeffrey D. Sachs, Commentary, Project-Syndicate: ...We are used to thinking about global cooperation in fields such as monetary policy, disease control, or nuclear weapons proliferation. We are less accustomed to thinking of global cooperation to promote new technologies, such as clean energy, a malaria vaccine, or drought-resistant crops to help poor African farmers. By and large, we regard new technologies as something to be developed by businesses for the marketplace, not as opportunities for global problem solving.

Yet, given the enormous global pressures that we face, including vastly unequal incomes and massive environmental damage, we must find new technological solutions to our problems. ... Current reliance on coal, natural gas, and petroleum, without regard for carbon-dioxide emissions, is now simply too dangerous...

The National Academy of Engineering identified some possible answers. We can harness safe nuclear energy, lower the cost of solar power, or capture and safely store the carbon dioxide produced from burning fossil fuels. Yet the technologies are not yet ready, and we can't simply wait for the market to deliver them, because they require complex changes in public policy to ensure that they are safe, reliable, and acceptable to the broad public. Moreover, there are no market incentives in place to induce private businesses to invest adequately in developing them.

Consider carbon capture and sequestration. The idea is that power plants and other large fossil-fuel users should capture the carbon dioxide and pump it into permanent underground storage sites, such as old oil fields. This will cost, say, $30 per ton of carbon dioxide that is stored, so businesses will need an incentive to do it. ... Likewise, new regulations will be needed to ensure compliance with safety procedures, and to assure public support. All of this will take time, costly investments, and lots of collaboration between scientists and engineers in universities, government laboratories, and private businesses.

Moreover, this kind of technology will be useful only if it is widely used, notably in China and India. This raises another challenge of technological innovation: We will need to support the transfer of proven technologies to poorer countries. ... Thus, technological developments should involve a collaborative international effort from the start.

All of this will require a new global approach to problem solving. We will need to embrace global goals and then establish scientific, engineering, and political processes to support their achievement. We will need to give new budgetary incentives to promote demonstration projects, and to support technology transfer. And we will have to engage major companies in a new way, giving them ample incentives and market rewards for success, without allowing them to hold a monopoly on successful technologies...

I believe that this new kind of global public-private partnership on technology development will be a major objective of international policy making in the coming years. ...

Rich countries should fund these efforts heavily, and they should be carried out in collaboration with poor countries and the private sector. ... This will be an exciting time to be a scientist or engineer facing the challenges of sustainable development.

Global cooperation would be good, but I'd settle for my own government doing more to encourage technological development in this area.

"Climate Control is Not a Morality Play"

Jeff Sachs says we need to cut our fossil-fuel based emissions by one third:

Change after Bali, by Jeffrey D. Sachs, Commentary, Scientific American: Last December’s agreement in Bali to launch a two-year negotiation on climate change was good news, a rare example of international cooperation... Cynics might note that the only accomplishment was an agreement to talk some more, and their cynicism may yet be confirmed. Nevertheless, the growing understanding that serious climate-control measures are feasible at modest cost is welcome.

The arithmetic is becoming clearer. If the rich nations continue to grow in income and the poor ones systematically narrow the income gap with successful development, by 2050 the global economy might increase sixfold and global energy use roughly fourfold. ...

Roughly speaking, ... to arrive at 440 ppm [CO2] by midcentury—a plausibly achievable “safe” level in terms of its likely climate change consequences but only 60 ppm more than the current one—cumulative emissions should be kept to roughly ... 21 billion tons a year on average until 2050. This goal can be achieved by ending deforestation (on a net basis) and by cutting our current fossil-fuel-based emissions by one third.

So here is the challenge. Can the world economy use four times more primary energy while lowering emissions by one third?

A promising core strategy seems to be the following: Electricity needs to be made virtually emission-free, through the mass mobilization of solar and nuclear power and the capture and sequestration of carbon dioxide from coal-burning power plants. With a clean power grid, most of the other emissions can also be controlled. ...

The Bali negotiations will succeed if the world keeps its eye on supporting the speedy adoption of low-emissions technologies. Issues of blame, allocation of costs, and choice of control mechanisms are less important than rapid technological development and deployment, backed by a control mechanism chosen by each country.

If the less polluting technologies pan out at low cost, as seems possible, the rich countries will be able to afford to clean up their own energy systems while also bearing part of the costs to enable the poor to make the needed conversions. Climate control is not a morality play. It is mainly a practical and solvable technological challenge, which, if met correctly, can be combined with the needs and aspirations for a growing global economy.

It's only a small part of the article, but the turnaround on attitudes toward nuclear energy from a few decades ago still surprises me when I see it. Instead of being viewed as a potential environmental disaster, nuclear power is now hailed as part of the solution to our environmental problems. So I'm curious, how do you feel about nuclear power? It's probably a result of all that conditioning decades ago, but I'm still wary.

"I Have to Disagree with Mark Thoma"

Disagreement:

Carbon Taxes, by Kevin Drum: ....Carbon taxes are clearly a more efficient way of reducing greenhouse gases than a growing hodgepodge of environmental regulations, so it would make sense to quit adding regulations to the pile and instead enact a carbon tax, right? But we don't. Mark Thoma is puzzled:

Despite the economic superiority of taxes over mandates in terms of the efficiency properties, there is substantial public support for mandates such as CAFE standards over taxes, and mandates continue to garner enough votes in the legislature to pass and be signed into law.

Why might that be? In thinking about efficiency as the primary reason for promoting one policy over the other, I think we might be missing something important: equity. More choice is best most of the time, but when it's a matter of being constrained, of not being able to do something you want or need to do, people want that constraint on behavior to be shared equally — especially when it involves something as essential to daily life as energy.

....I don't think policies that allow certain segment of the population to "buy out" of the constraint will find much popular support. If the poor are passed by roaring, gas guzzling, sports cars on the freeway as they drive their gas saving, small hybrid, they won't feel that is fair.

Hmmm. There's probably something to this, but I wonder if the initial assumption is really correct? According to the boffins at the Carbon Tax Center, a couple of recent polls suggest otherwise: A Field poll in November showed 72% of Californians in favor of a carbon tax (though, amusingly, "this declines to 53% if the tax were to result in Californians' paying higher prices for goods and services") and a BBC poll found 74% of Americans in favor of taxing coal and oil as long as the revenues are earmarked for energy research. So Americans may actually be pretty open to the idea of a broad-based carbon tax.

Republican politicians, of course, are a whole different story. Greg Mankiw can yell "Pigou Club" until he's blue in the face, but as a Republican himself he knows perfectly well that it won't do any good because Grover Norquist and the Wall Street Journal editorial page will cheerfully eviscerate any Republican who dares to raise any tax of any kind, regardless of how efficient it is, what it's funding, or whether it's revenue neutral. So while transforming public opinion is always important, in this case a salutary drubbing at the polls for the GOP is probably more likely to move us in the direction of a sensible carbon policy. It certainly can't hurt, anyway.

And:

Taxes, Mandates and Rebates, by Peter Dorman: I have to disagree with Mark Thoma regarding the equity advantage of mandates (like CAFE standards) over taxes on carbons and other bads. I think he misses two points: equity can be credibly built into the tax, and mandates and taxes (or permits) are not mutually exclusive.

For simplicity, let’s assume that the policy on the table is a carbon tax, overlooking the advantages (in this case) of a tradeable permit system. Requiring 100% auction of permits would be equivalent to a tax under full certainty, but in an uncertain world—the one I woke up in this morning—a permit system would nail down the atmospheric impacts at the expense of price volatility, while taxes would do the opposite. But we will ignore this for now and talk only of taxes.

My first point is that a tax system could be introduced with the stipulation that all (or a very, very high percentage of) proceeds be rebated to citizens on a per capita basis. As Boyce and Riddle show, this would be highly progressive, benefitting a solid majority of us on a net basis (even after subtracting higher prices from rebate income). Yes, the rich could still whiz by on the freeway in their supersized guzzlers, but ordinary folks could take comfort in their ability to buy more of the non-carbon-emitting stuff. They might even think, as the behemoth roars by, “That’s another dollar in my pocket.”

Thoma worries that low income people might worry that a future administration and congress might tinker with the rebate formula. Maybe, but it’s our job to nudge perceptions as close as possible to reality. Consider Social Security: we have seen multiple attempts in recent years to eviscerate the program, but they have been turned back every time, for a simple reason: most of us benefit from SS and would lose out if it were privatized. The same goes for a rebate plan. If it is written in as a basic entitlement, once the rebates start rolling the program will be virtually impregnable.

Second, I am sensing an emerging competition between tax (or permit) advocates and those pushing higher standards. There is no reason for this to happen, and each should stand or fall on its own merits. For instance, students of energy efficiency, like Gar Lipow, tell us that there is lots of low-hanging fruit—big improvements in efficiency at no net cost or even producing a net benefit. The purpose of a standard would be to circumvent information gaps, coordination failures and the like. A tax doesn’t change any of this; on the contrary, by enlarging the pool of innovations that can ultimately pay for themselves, a tax can justify an even more stringent efficiency standard. On the reverse side, a well-designed efficiency standard can help the public better cope with the demands of a tax. True, a bad standard can be an efficiency-loser, but we don’t want this beast with or without a tax.

Keeping an eye on the bottom line, once we get a new congress and a new president in 2009, a national climate change program will be on the table. We are likely to get a carbon cap: a permit system that limits carbon emissions, with the cap going down on a yearly basis. We have to stay very focused to avoid fine print that will weaken the effect of the program or steer the huge amount of money involved into the pockets of the upper class. But we should also use the opportunity to look for regulations that target bottlenecks and irrationalities in the market: better energy efficiency in transportation, land use, the built environment.

Why either/or?

One more:

Environmental Mandates Versus Carbon Taxes, by Josh Patashnik: Via Kevin Drum, Mark Thoma has an interesting post asking the question: If it's universally acknowledged that carbon taxes are a better means of fighting global warming than clunky mandates like CAFE standards, why is it that mandates seem to have far more political viability? Mark thinks it might have to do with concerns about equity:

I don't think policies that allow certain segment of the population to "buy out" of the constraint will find much popular support. If the poor are passed by roaring, gas guzzling, sports cars on the freeway as they drive their gas saving, small hybrid, they won't feel that is fair, not unless our transportation infrastructure changes dramatically. ... A mandate, done properly, may have poor economic properties, but I think people support them because at least there's a chance that a mandate will force the luxury cars to abide by the same mpg restrictions as the lower price cars driven by the typical household.

There could be something to this, although it seems like a bad idea to use climate-change policy as a vehicle for redistribution. But I think the real explanation is simpler: politicians are loath to vote for a carbon tax because it's easier for their opponents to blame them when people are forced to make lifestyle changes. (Which also explains why a cap-and-trade system is more attractive to politicians than a carbon tax.) What frightens the average voter isn't the thought that fat cats might still be able to drive around in Hummers--it's the thought that they might have to give up their own beloved vehicles for more fuel-efficient models. Now, of course, things like CAFE mandates have the practical effect of forcing them to do this. But most folks aren't quite that rational: because the effect is further removed from the vote in Congress, it's all but impossible to pin the blame on the political system--so representatives feel like they can cast a vote for the environment without forcing voters to confront trade-offs. So we wind up with policies that everyone agrees are inferior to the alternative of a carbon tax.

The blame, I'd suggest, lies primarily with opponents of a carbon tax. Presumably, the ideal outcome for carbon-tax opponents would be to have neither a carbon tax nor environmental mandates. But that isn't an option: it's clear that there's enough political support for global-warming mitigation--it just happens that the political support is for the (relatively) economically inefficient kind of global-warming mitigation. If they genuinely cared about implementing a sound climate-change policy, carbon-tax opponents at this point would relent, since the alternative is a set of policies--environmental mandates--that they claim to like even less. But, as Kevin notes, a lot of carbon-tax opponents are more concerned with pushing broader ideological agendas.

Pigouvian Taxes and Equity

In the debate over global warming and what to do about it, we often hear arguments such as:

In particular, we could go to Greg Mankiw, founder of the Pigou Club. He would no doubt argue that the proper way to handle the negative externalities ... would be to tax them. Then, there's no need to stamp out industry... Rather, we simply give the market an incentive to reduce the bad effects.. The idea is that larger social goals are perfectly compatible with the preservation of individual choice...

But yet, despite the economic superiority of taxes over mandates in terms of the efficiency properties, there is substantial public support for mandates such as CAFE standards over taxes, and mandates continue to garner enough votes in the legislature to pass and be signed into law.

Why might that be? In thinking about efficiency as the primary reason for promoting one policy over the other, I think we might be missing something important: equity. More choice is best most of the time, but when it's a matter of being constrained, of not being able to do something you want or need to do, people want that constraint on behavior to be shared equally - especially when it involves something as essential to daily life as energy. If we impose an energy tax (carbon tax), the wealthy will pay more for their fuel, but the jets will still fly. We know that if the price of gas goes up a dollar or two due to a carbon tax, many people at the upper end of the income distribution will hardly notice, they won't be constrained in the same way the average or poor household will be. They can still drive their cars, heat their pools and houses, and so on. Their savings might not accumulate quite as fast, but to what extent are they really paying the same cost as a poor person?

Progressive carbon taxes anyone?

That might work, but even with a progressive carbon tax many people toward the upper end of the income distribution would not be very constrained in what they can do. With CAFE standards at least there's a chance that the cost of the policy action will be shared more equally. I realize that people have found a way to evade the CAFE standards (e.g. classify an SUV as a truck and make trucks subject to different standards), and evasion is always a problem, but that's largely a matter of will and closing loopholes. With mandates, at least the perception that we are trying to distribute the costs more equally is there.

I don't think policies that allow certain segment of the population to "buy out" of the constraint will find much popular support. If the poor are passed by roaring, gas guzzling, sports cars on the freeway as they drive their gas saving, small hybrid, they won't feel that is fair, not unless our transportation infrastructure changes dramatically. We can promise that with a carbon tax the proceeds will be redistributed to the poor so they are left harmless, but credibility over the long-run is a problem (what if the next administration cuts the government transfers to the poor?), people won't necessarily believe it will be fair to them individually, and there remains the problem of certain groups buying their way around the constraint and the public perception that comes along with that.

Maybe I'm wrong about this, but I do think we should spend more time thinking about the equity of these proposals and how fairly the (utility) cost is distributed across the population. A mandate, done properly, may have poor economic properties, but I think people support them because at least there's a chance that a mandate will force the luxury cars to abide by the same mpg restrictions as the lower price cars driven by the typical household. If we are going to go the carbon tax route, touting the efficiency properties won't be enough, I think we will need to find a way to convince people that everyone will share the costs (approximately) equally before it will find popular support.

"Climate Policy with a Global Refunding System"

This is an interesting proposal to combat greenhouse gases and climate change through a "Global Refunding System," at least at a theoretical level. But is it practical?:

Climate Policy with a Global Refunding System, by Hans Gersbach, Vox EU: Cumulated carbon dioxide emitted by the burning of fossil fuels is leading to warmer surface temperatures that are likely to have a significant and adverse impact on the functioning of ecosystems and the well-being of future generations. As greenhouse gases tend to disperse uniformly around the globe, emissions reduction is a global public good, and international coordination is crucial. It is, however, difficult to achieve. The Kyoto Protocol promises only modest progress in slowing global warming. Various other approaches to international coordination have been suggested (see Aldy, Barrett, and Stavins (2003) and Nordhaus (2006)).

I propose an alternative international framework called the Global Refunding Scheme (referred to hereafter as GRS) that would enable countries to determine their climate policy at a national level while simultaneously creating powerful incentives for abatement by means of global refunding, which would work as follows:

The Difference Between US and UK Economists

Angus Deaton uses the Stern report to highlight the "enormous gulf" he sees between US and UK economists on questions of public policy:

On transatlantic vices, or Stern in America, by Angus Deaton, RES Letter from America: The Stern report on climate change (henceforth Stern) has sparked enormous debate in Britain and in much of the rest of the world, but has had a much smaller impact in the US. ...

The Bush administration’s hostility to discussion of climate issues is certainly part of the story. The White House wields a formidable publicity machine that deeply affects both the choice of current topics and the tone in which they are debated. But both houses of Congress are controlled by Democrats, not Republicans, and the Democrats have not highlighted climate change as an issue over which to attack the administration. The ... comparative lack of attention to Stern in the US remains something of a mystery. Perhaps the American public, like most American economists, think that Stern is wrong.

Constructing a discount rate
There is an enormous gulf between the American and British economics professions in the way that they analyze the central questions of public economics. Climate change raises issues of modelling, of cost-benefit analysis, and of ethics, all of which are typically treated differently by economists on each side of the ocean. These differences are of long standing and in part reflect the political structures of the two countries. But I also believe that recent developments in macroeconomics have also been important.

The Journal of Economic Literature has just published two exceptionally fine reviews of Stern by William Nordhaus of Yale and Martin Weitzman of Harvard. They focus, as have many other commentators, on the central role of discounting, and particularly on the claim that is it is Stern’s low discount rates that drive his recommendations for large, prompt, and painful action. With the Stern discount rates, the avoidance of future harm, even very far in the future, is worth a substantial sacrifice of consumption now. ... Stern constructs his discount rate from first principles, assuming a rate of time preference that is close to zero; indeed, apart from the possibility of planetary extinction, it is zero. ... According to much of the American discussion, Stern’s discount rates cannot be correct because market rates of return are much higher. Or in a related version of the same argument, the Stern configuration of discount rate and time preference cannot be right because we do not observe the rates of national saving that such rates would support, a point that has been made by several others, including Kenneth Arrow, perhaps the doyen of American public economics, who says that he was long ago persuaded on this issue by Tjalling Koopmans.

What do we owe to future generations?
Both Nordhaus and Weitzman express their discomfort with Stern’s taking an explicit ethical position on what the current generation owes to those yet unborn, on the grounds that Stern has no right to impose an ethical position on others. Both Arrow and Weitzman believe that a zero rate of pure time preference, while defensible in theory, is typically only so defended by British economists and philosophers, a comment that is clearly not meant to be taken as any recognition of the superiority of British thinking. The paternalism of any such ethical judgment is certainly a concern, and it seems right to want a more democratic discussion and determination of the ethics of climate policy. But a judgment needs to be made on some basis, and Arrow, Weitzman, and Nordhaus argue that we can find at least some of the relevant evidence in markets, revealed by, as Weitzman writes, ‘the preferences for present over future utility that people seem to exhibit in their everyday savings and investment behaviour.’ ... So Stern’s choices about the ethical parameters are wrong because market rates are higher than those with which he works. An even clearer statement is made by the mostly American (and all non-British) economists (Tom Schelling, Bob Fogel, Douglass North, Vernon Smith, Nancy Stokey, Jagdish Bhagwati, Justin Lin, and Bruno Frey) who signed on to the ‘Copenhagen Consensus’ statement that climate change was not worth addressing relative to the world’s other problems. At the interest rates commonly prevailing in the bond market — and the group used a rate of 5 percent ...— climate change is not a serious problem.

If zero discounting (with perhaps a touch of paternalism) is the British vice, the refusal to consider ethical questions explicitly but to leave them to the market is surely the American vice. How do the preferences of unborn generations get expressed in the bond market? Do we really want to discriminate across people by their date of birth? And do we really think that saving rates, whether by individuals or governments, are the results of optimal intertemporal planning by individuals, even over their own lives, let alone over those of their unknown descendents who will live as far in the future as King George III and George Washington lived in the past? Are we really entirely comfortable with the essentially arbitrary functional form assumptions that allow us to link risk aversion, intertemporal preferences, and the treatment of rich people versus poor people? The difficulties of matching market behaviour to any coherent normative model have only multiplied in recent years, as indeed is recognized by Weitzman. Whatever it is that is generating market behaviour, it is not the outcome of an infinitely lived and infinitely far-sighted representative agent whose market and moral behaviours are perfectly aligned, and who we can use as some sort of infallible guide to our own decisions and policies. The optimal savings and growth models that used to be taught in development courses as tools of central planning, along with careful explanations of why their solutions cannot not be decentralized by the market —remember the transversality conditions? — are now routinely taught in macroeconomics courses as descriptively accurate accounts of the economy. According to some stories, the government does better, correcting our collective missteps, but is it really possible to seriously imagine that an administration that dismissed global warming without economic analysis is nevertheless making optimal provision for future generations? Zero pure time preference, if it is a vice, is surely a minor one. Relying on markets to teach us ethics is very much worse.

Update: Dani Rodrik comments on the article.

Clean Coal?

President Bush, in the State of the Union Address:

To build a future of energy security, we must trust in the creative genius of American researchers and entrepreneurs and empower them to pioneer a new generation of clean energy technology. Our security, our prosperity, and our environment all require reducing our dependence on oil. ... Let us fund new technologies that can generate coal power while capturing carbon emissions. ... Let us create a new international clean technology fund, which will help developing nations like India and China make greater use of clean energy sources. ... The United States is committed to strengthening our energy security and confronting global climate change. And the best way to meet these goals is for America to continue leading the way toward the development of cleaner and more energy-efficient technology. To keep America competitive into the future, we must trust in the skill of our scientists and engineers and empower them to pursue the breakthroughs of tomorrow.

SciAm Observations follows up:

Clean Coal Turns to Cinders, by Steven Ashley, SciAm Observations: For those journalists who have been monitoring “clean coal” technology over the last few years, it was no surprise to hear that the U.S. Department of Energy has canceled its so-called FutureGen plant, which was to burn coal to produce electricity and then sock away the resulting climate change-causing carbon dioxide emissions underground. ...

"The Costs of a Different World"

What will it take to meet the challenge posed by climate change? This research concludes that "massive changes are required":

What a different world. Costs and policy for a low carbon society, by Valentina Bosetti, Carlo Carraro, Emanuele Massetti, and Massimo Tavoni, Vox EU: No longer confined to the roundtables of politicians and scientists, the debate on climate change has become a mounting wave that doesn’t seem to be losing momentum. Both policy and research communities have focused on the need to stabilise atmospheric CO2 concentrations at about 550 ppm (parts per million, all greenhouse gases included). This is generally considered a very ambitious, hardly feasible target with drastic implications for our economies and lifestyles.

Given projected world population dynamics, this objective requires reducing per capita emissions in the second half of this century from about 2 tonnes carbon equivalent (tC) to about 0.3 tC per year. In other words, the world will have to cut emissions to the per capita average of India today – quite a significant reduction for most industrialised countries (US average per capita emissions are about 5tC) and for countries that aim at similar lifestyle standards. For example, 0.3 tC is the amount of greenhouse gases emitted by an individual flying – one way – from the EU to the US East coast!

Clearly, a world with 0.3 tC per capita per year will be a different world. What are the optimal strategies and the related economic costs of achieving this ambitious, but seemingly inevitable, target?

Paul Krugman: Dealing With the Dragon

Paul Krugman says we’re having the wrong discussion about foreign policy:

Dealing With the Dragon, by Paul Krugman, Commentary, NY Times: ...Almost all the foreign policy talk in this presidential campaign has been motivated, one way or another, by 9/11 and the war in Iraq. Yet it’s a very good bet that the biggest foreign policy issues for the next president will involve the Far East rather than the Middle East. In particular, the crucial questions are likely to involve the consequences of China’s economic growth.

Turn to any of several major concerns now facing America, and in each case it’s startling how large a role China plays.

Start with the soaring price of oil. Unlike the oil crises that followed the Yom Kippur War and the overthrow of the shah of Iran, this crisis wasn’t caused by events in the Middle East that disrupted world oil supply. Instead, it had its roots in Asia.

It’s true that the global supply of oil has been growing sluggishly... But the reason oil supply hasn’t been able to keep up with demand is surging oil consumption in newly industrializing economies — above all, in China. ... China has been responsible for about a third of the growth in world oil consumption. As a result, oil at $100 a barrel is, in large part, a made-in-China phenomenon.

Speaking of made in China, that brings us to a second issue. There’s growing concern in this country about the effects of globalization on wages, largely because imports ... from low-wage countries have surged, doubling as a share of G.D.P. since 1993. And more than half of that rise reflects ... industrial imports from China...

Last, but most important, is the issue of climate change, which will eventually be recognized as the most crucial problem facing America and the world — maybe not today, and maybe not tomorrow, but soon, and for the rest of our lives.

China is already, by some estimates, the world’s largest emitter of greenhouse gases. And as with oil demand, China plays a disproportionate role in emissions growth. In fact, between 2000 and 2005 China accounted for more than half the increase in the world’s emissions of carbon dioxide.

What this means is that any attempt to mitigate global warming will be woefully inadequate unless it includes China. ...

So what does all this tell us about the presidential race?

On the Republican side, foreign policy talk is all bluster and braggadocio. To listen to the G.O.P. candidates, you’d think it was still February 2003, when the national discourse was dominated by people who thought that American military might was sufficient to shock and awe the rest of the world into doing our bidding.

Memo: China has 50 times the population of Iraq.

The Democrats in general make far more sense. But among at least some of Barack Obama’s supporters there seems to be a belief that if their candidate is elected, the world’s problems will melt away in the face of his multicultural charisma.

Memo: It won’t work on the Chinese.

The truth is that China is too big to be bullied, and the Chinese are too cynical to be charmed. But while they are our competitors in important respects, they’re not our enemies, and they can be dealt with.

A lot of Americans, when they think about the next president’s foreign-policy qualifications, seem to be looking for a hero — someone who will stand tall against terrorists, or transform the world with his optimism.

But what they should be looking for is something more prosaic — a good negotiator, someone who can bargain effectively with some very tough customers and get the deals we need on energy, currency policy and carbon credits.

"What’s Your Consumption Factor?"

Jared Diamond continues to worry about overshoot - using up resources faster than they can be replaced - and the eventual collapse of consumption, though he does see encouraging signs:

What’s Your Consumption Factor?, by Jared Diamond, Commentary, NY Times: ...The average rates at which people consume resources ... and produce wastes ... are about 32 times higher in North America, Western Europe, Japan and Australia than they are in the developing world. That factor of 32 has big consequences. ...

People in the third world are aware of this difference in per capita consumption, although most of them couldn’t specify that it’s by a factor of 32. When they believe their chances of catching up to be hopeless, they sometimes get frustrated and angry, and some become terrorists, or tolerate or support terrorists. ... There will be more terrorist attacks against us ... as long as that ... difference of 32 in consumption rates persists.

People who consume little want to enjoy the high-consumption lifestyle. Governments of developing countries make an increase in living standards a primary goal... And tens of millions of people in the developing world seek the first-world lifestyle on their own, by emigrating...

Among the developing countries that are seeking to increase per capita consumption rates at home, China stands out. It has the world’s fastest growing economy...

Per capita consumption rates in China are still about 11 times below ours, but let’s suppose they rise to our level. Let’s also make things easy by imagining that nothing else happens ... China’s catching up alone would roughly double world consumption rates. Oil consumption would increase by 106 percent, for instance, and world metal consumption by 94 percent.

If India as well as China were to catch up, world consumption rates would triple. If the whole developing world were suddenly to catch up, world rates would increase elevenfold. It would be as if the world population ballooned to 72 billion people (retaining present consumption rates).

Some optimists claim that we could support a world with nine billion people. But I haven’t met anyone crazy enough to claim that we could support 72 billion. Yet we often promise developing countries that if they will only adopt good policies — for example, institute honest government and a free-market economy — they, too, will be able to enjoy a first-world lifestyle. This promise is impossible, a cruel hoax: we are having difficulty supporting a first-world lifestyle even now for only one billion people.

We Americans may think of China’s growing consumption as a problem. But the Chinese are only reaching for the consumption rate we already have. To tell them not to try would be futile.

The only approach that China and other developing countries will accept is to aim to make consumption rates and living standards more equal around the world. But the world doesn’t have enough resources to allow for raising China’s consumption rates, let alone those of the rest of the world, to our levels. Does this mean we’re headed for disaster?

No, we could have a stable outcome in which all countries converge on consumption rates considerably below the current highest levels. Americans might object: there is no way we would sacrifice our living standards for the benefit of people in the rest of the world. Nevertheless, whether we get there willingly or not, we shall soon have lower consumption rates, because our present rates are unsustainable.

Real sacrifice wouldn’t be required, however, because living standards are not tightly coupled to consumption rates. Much American consumption is wasteful and contributes little or nothing to quality of life. For example, per capita oil consumption in Western Europe is about half of ours, yet Western Europe’s standard of living is higher by any reasonable criterion, including life expectancy, health, infant mortality, access to medical care, financial security after retirement, vacation time, quality of public schools and support for the arts. Ask yourself whether Americans’ wasteful use of gasoline contributes positively to any of those measures. ...

Just as it is certain that within most of our lifetimes we’ll be consuming less than we do now, it is also certain that per capita consumption rates in many developing countries will one day be more nearly equal to ours. These are desirable trends, not horrible prospects. ...

Fortunately, in the last year there have been encouraging signs. Australia held a recent election...; the new government immediately supported the Kyoto Protocol on cutting greenhouse gas emissions.

Also in the last year, concern about climate change has increased greatly in the United States. Even in China, vigorous arguments about environmental policy are taking place, and public protests recently halted construction of a huge chemical plant... Hence I am cautiously optimistic. The world has serious consumption problems, but we can solve them if we choose to do so.

Though he does end on an optimistic note, at least for him, I can't be as gloomy about the future. Somehow, we'll figure it out and keep moving forward. Won't we?

Have Polluting Industries Moved to Developing Countries?

Is the fall in air pollution since the 1970s because of improved abatement technology, or is it because we shifted dirty production to developing countries?:

What accounts for the clean-up of US manufacturing: technology or international trade?, by Arik Levinson, Vox EU: Antiglobalisation protesters display signs denouncing international trade's role in polluting the environment.[1] Pundits write Op-Ed pieces cautioning that increased trade has environmental costs.[2] And a majority of Americans agree that "freer trade puts the United States at a disadvantage because of our high ... environmental standards".[3]

Are they correct? Over the past thirty years, while the real value of US manufacturing output has increased by more than 70 percent, the total annual air pollution emitted by US manufacturers declined substantially, by 58 percent for the sum of four common air pollutants.[4]

One explanation for the clean-up of US manufacturing is that the protesters are correct, and that thanks to freer trade, the US now imports polluting goods it once produced domestically, and concentrates domestic manufacturing on goods less likely to incur environmental regulatory costs. Of course, there is an alternative explanation: thanks to improved technology (cleaner fuels, end-of-pipe abatement, process changes, etc.) US manufacturers may now be able to produce more output using less pollution. Which of these explanations, trade or technology, accounts for the dramatic clean-up of US manufacturing pollution?

EPA Denies California a Waiver

David Roberts of Grist with an analysis of the EPA's decision to deny California a waiver from federal fuel economy standards. California wants to implement its own greenhouse gas emissions standards that force a reduction in tailpipe emissions, but the request was denied:

Johnson's nuts, by David Roberts: As I mentioned below, today the U.S. EPA denied California's request for a waiver exempting it from federal fuel economy standards, allowing it to implement its own standards. EPA administrator Stephen Johnson announced the decision in a rushed press conference following President Bush's signing of the energy bill.

The announcement came with a veritable torrent of dishonest spin. Let me try to disentangle some of it.

Carbon Consumption Caps

Judith Chevalier argues that, in the absence of an international agreement to limit greenhouse gas emissions, a carbon consumption cap is "a more limited but still useful approach":

A Carbon Cap That Starts in Washington, by Judith Chevalier, Economic View, NY Times: The United Nations conference on climate change wrapped up in Bali ... without a firm commitment from the United States or China to reduce emissions of ... greenhouse gases. While a binding global agreement would be the best way to cut back on those emissions, a more limited but still useful approach is available, and it is wending its way through Congress.

In its current version, the Lieberman-Warner Climate Security Act, as the bill is known, would cap American carbon consumption through a tradeable permit plan. ...

One goal of a tradeable permit system is to force consumer prices for goods to reflect the harm that the production of those goods causes the planet. For example, if a television were made using a high-emission process, the factory would have to buy many carbon permits, driving up the TV’s price. A television made in a low-emission factory would require fewer permits, lowering its relative price. Consumers, of course, would have an incentive to choose the TV from the low-emission factory, and all factories would have an incentive to lower emissions.

A problem would arise, however, if a producer needed to buy permits to make televisions in a country with a carbon cap, while no permits were required in a country without a cap. The television from the country without the cap would be cheaper, consumers would prefer it, and there would be no economic incentive to cut emissions. Environmentalists call this the “leakage problem”: just as a balloon squeezed at one end will bulge at the other, emissions caps applied in only some economies will lead to emissions surges in others.

A provision in the current version of the Climate Security Act links responsibility to carbon consumption, not production. ... The provision requires that importers of goods from countries without carbon caps obtain permits for the emissions resulting from the goods’ production. While this requirement could be used to protect American jobs from foreign competition, if handled equitably, it could provide an elegant solution to the leakage problem.

Kenneth Arrow: The Case for Cutting Emissions

Kenneth Arrow argues that cutting greenhouse gas emissions now makes economic sense "even if ... one heavily discounts uncertainty and the future." Thus, "there can be little serious argument about the importance of a policy aimed at avoiding major further increases in carbon dioxide emissions":

The case for cutting emissions, by Kenneth Arrow, Commentary, Project Syndicate: Last fall, the UK issued a major government report on global climate change directed by Sir Nicholas Stern, a top-flight economist. The Stern Review ... argues that huge future costs of global warming can be avoided by incurring relatively modest cost today.

Critics of the report don't think serious action to limit carbon dioxide emissions is justified, because there remains substantial uncertainty about the extent of the costs of global climate change, and because these costs will be incurred far in the future.

However, I believe that Stern's fundamental conclusion is justified: We are much better off reducing carbon dioxide emissions substantially than risking the consequences of failing to act, even if, unlike Stern, one heavily discounts uncertainty and the future. ...

Cost-benefit analysis is a principal tool for deciding whether altering it through mitigation policy is warranted. Two aspects of that calculation are critical. First, it has to be assumed that individuals prefer to avoid risk. ...

The second critical aspect is how one treats future outcomes relative to current ones -- an issue that has aroused much attention among philosophers as well as economists. At what rate should future impacts -- particularly losses of future consumption -- be discounted to the present?

The consumption discount rate should account for the possibility that, as consumption grows, the marginal unit of consumption may be considered to have less social value. This is analogous to the idea of diminishing marginal private utility of private consumption, and is relatively uncontroversial, although researchers disagree on its magnitude.

There is greater disagreement about how much to discount the future simply because it is the future, even if future generations are no better off than us. Whereas the Stern Review follows a tradition among British economists and many philosophers against discounting for pure futurity, most economists take pure time preference as obvious.

However, the case for intervention to keep carbon dioxide levels within bounds (say, aiming to stabilize them at about 550 ppm) is sufficiently strong to be insensitive to this dispute. Consider some numbers from the Stern Review concerning the future benefits of preventing greenhouse gas concentrations from exceeding 550 ppm, as well as the costs of accomplishing this. The ... benefit of mitigating greenhouse gas emissions can be represented as the increase in the annual growth rate from today to 2200 from 1.2 percent to 1.3 percent.

As for the cost of stabilization... Let's assume that costs to prevent additional accumulation of carbon dioxide (and equivalents) come to 1 percent of GNP every year forever, and, in accordance with a fair amount of empirical evidence, that the component of the discount rate attributable to the declining marginal utility of consumption is equal to twice the rate of growth of consumption.

A straightforward calculation shows that mitigation is better than business as usual -- that is, the present value of the benefits exceeds the present value of the costs -- for any social rate of time preference less than 8.5 percent. No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5 percent.

These calculations indicate that, even with higher discounting, the Stern Review estimates of future benefits and costs imply that mitigation makes economic sense. These calculations rely on the report's projected time profiles for benefits and its estimate of annual costs, about which there is much disagreement. Still, I believe there can be little serious argument about the importance of a policy aimed at avoiding major further increases in carbon dioxide emissions.

Reduce Fish Catch Now for Bigger Net Profits Later

This is going to come as a big surprise. According to new research, we've been over-harvesting our fisheries. However, the argument about over-harvesting in this case is relative to the profit maximizing level of harvest, not the more usual calculation based upon sustainability. That is, this research argues that "net" profits will be higher in the future if harvests are reduced in the short-run to allow the stock of fish to increase to a higher level:

Economists: Reduce fish catch now for bigger net profits later, EurekAlert: A new and compelling argument for reducing fish harvests – the profit motive – could persuade world fishers to endure the short-term pain of lower catches for the long-term gain of higher returns... according to authors of a ground-breaking study on fisheries over-exploitation.

They say their findings, published in the journal Science Dec. 7, will help overcome a key cause of over-fishing – industry opposition to lower catches – by demonstrating that when stocks are allowed to recover, profits take a sharp turn upward.

“It has always been assumed that maximizing fishing profits will lead to stock depletion and possibly even extinction of some commercial species,” says co-author Quentin Grafton... “But our results prove that the highest profits are made when fish numbers are allowed to rise beyond levels traditionally considered optimal. In other words, bigger stocks mean bigger bucks.”

The simple reason is “the stock effect”: when fish are more plentiful and thus easier to catch, fishers don’t have to spend as much on fuel and other costs to fill their nets – profits are higher. ...

“Conservation promotes both larger fish stocks and higher profits,” says Tom Kompas... “The debate is no longer whether it is economically advantageous to reduce current harvests – it is – but how fast stocks should be rebuilt.”

Four fisheries studied To establish the relationship between fish stocks and profitability, the authors modelled outputs for four different fish – big eye tuna and yellow fin tuna of the western and central Pacific, northern tiger prawn and orange roughy in Australia – plotting revenue and profit curves against fish biomass.

Previous calculations of profit-maximizing stock levels failed to account for the “stock effect” – when fish are more plentiful they are cheaper to harvest – and assumed that harvesting costs are independent of, or proportional to, the available fish stocks. ...

After testing their model on disparate fisheries – from the fast-growing prawn and tuna to the long-living and very slow-growing orange roughy – and using discount rates as high as 25% for the tuna and prawn fisheries and 10% for orange roughy, they established that the outcome was the same. Larger fish stocks increase profits.

Major implications for fisheries management Grafton said ... “This is quite a different argument from the current focus on sustainability. In this framework, we can say, ‘What you are doing now is costing you money but if you reduce the harvest now, it will pay off down the road.’ I think that in a lot of cases, that could be seen as an attractive proposition.”

The new framework could open the way for fishery-wide agreements under which transfers from future, higher profits would compensate fishers for the immediate costs of making the transition to lower harvests. The report’s authors emphasize that support for stock rebuilding by fishers is contingent on them having individual or community harvesting rights that ensure current fishers will be able to reap the benefits of lower initial harvests.

The idea is being taken up in Australia, the first country to change its harvest strategy to reflect the profit-maximizing stock calculation. Grafton, Kompas and Hilborn are convinced it won’t be the last. ...

Martin Wolf: We Need Fear without Loathing

Martin Wolf says that if the U.S. does not take the lead on climate change immediately and forcefully, "the cause, in all probability, will be lost":

Why the climate change wolf is so hard to kill off, by Martin Wolf, Commentary, Financial Times: The point of the story of the boy who cried wolf is that, finally, a wolf did appear. ... But it is far away and coming slowly. “If the worst comes to the worst,” mutter the rich to themselves, “we can always let our children cope.”...[H]umanity will change its behaviour only when convinced that the lifestyle the better off enjoy now – and the rest of the world aspires to – remains in reach.

This cynical view of human behaviour is fully consistent with what has happened so far. For it is as if the Kyoto treaty had never been. ... The one point in favour of George W. Bush’s US or John Howard’s Australia is that they were not hypocritical. For the signal feature of most of the commitments made so far has been the failure to meet them (see chart). The vaunted European emissions trading system has been more a way of transferring quota rent to a few big emitters than an effective means of emissions control. ...

Can the world do better in future? Yes, but it will find it hard. If we are to understand why, we must confront the fact that the world is far from a single country. This creates three huge problems: collective (in)action; perceived injustice; and indifference.

Fed Watch: Ignore the Hawks

Tim Duy says if you hear hawks screeching, pay them no mind:

Ignore the Hawks, by Tim Duy: Ignoring hawkish Fedspeak has been the winning strategy in recent weeks as increased market turmoil pointed to another rate cut this month despite repeated warnings from Fed officials. Clear statements that economic weakne