Environmental Economics

"The SO2 trading program is dead. Long live the SO2 trading programs."

That is Richard Woodward's title in a remarkable post to the RESECON listserv. Here it is in its entirety (links added):

ResEconers,

Some of you may have noticed in the news today mention of new regulations by the USEPA on SO2 and NOx emissions.  The title of the articles could have been, "The SO2 trading program is dead. Long live the SO2 trading programs!"

Since many of us use the SO2 program as the epitome of what a trading program should look like and teach about it in our classes, I thought you might be interested in a quick overview of what led up to yesterday´s announcement and what it means for trading in the future.  I am not an expert in this area, but have been watching these developments for some time.

Climate Federalism (call me an optimist)

An article in today's NYTimes wonders what's up with climate federalism? in the context of California's cap-and-trade experiment:

California’s climate change law, passed in 2006, was once seen as a beta test for a national push to limit greenhouse gases. Cast as a market-driven strategy that was preferable to a tax, cap and trade drew considerable bipartisan support before the nation’s political landscape shifted, climate legislation fizzled in Congress and the economic model became a focus of derision for ascendant Republican conservatives.

Quote of the Day

"[The Regional Greenhouse Gas Initiative] is nothing more than a tax on electricity, a tax on our residents and on businesses with no discernible effect on our environment," [New Jersey Gov. Chris Christie] said. "We remain completely committed to the idea that we have a responsibility to make the environment of our state and world better. We're not going to do it by participating in gimmicky programs that don't work."

via www.delawareonline.com

Well, at least he recognizes the Env-Econ 101 equivalence between a tax and cap'n trade.  That's something. Right?

I know, right?*

From the blog formerly known as Green, Inc:

Hoping to find a way around the current political impasse on climate change and energy policy, a former top adviser to President Obama has devised a policy proposal to drive down greenhouse gas emissions from the utility industry over the next 20 years.

The plan, “Promoting Clean Energy in the American Power Sector,” borrows from a range of policy proposals, including President Obama’s latest clean energy policy, the cap and trade plan that foundered in Congress last year, and state-level clean electricity mandates. The proposal sets goals based on emissions intensity — the amount of carbon dioxide emitted per unit of electricity generated — an idea pursued both by the Chinese government and by former President George W. Bush.

The plan’s author, Joseph Aldy, a professor at Harvard University’s Kennedy School of Government and a former White House staff member on energy and economic issues, said that his proposal could help untie the political knot that has doomed all previous attempts at a comprehensive energy and climate policy.

It would give utilities incentives for converting to cleaner forms of electricity without top-down mandates from the federal government or penalties for failure to comply.

It would require Congressional action and would take the place of Environmental Protection Agency regulation of power plant emissions, a program that has generated intense opposition from Republicans in Congress, utility companies and manufacturers. It would also pre-empt the clean energy mandates adopted by 29 states and the District of Columbia.

Mr. Aldy is presenting his plan, drawn up under the auspices of the Hamilton Project at the Brookings Institution, at a symposium in Washington on Wednesday.

via green.blogs.nytimes.com

The first politician who calls this a tax (i.e., provides the necessary distortion) gets a congratulatory letter from env-econ.net and a chocolate cookie.

Note: May 17 Urban Word of the Day.

Note to self

I'm running the Anderson and Stafford (SEJ, 2000) pollution permit trading game in my MBA class (managerial economics) tonight. Here are my discussion questions (taken from the 2000 paper):

1. What is the effect of regulation (output restrictions, pollution permits) on profits? Is this bad for the economy?
2. What is the effect of permit trading on profits, relative to regulation?
3. If you bought a permit, why? Use this information to draw the permit demand curve.
4. If you sold a permit, why? Use this information to draw the permit supply curve.
5. Does demand and supply change when permits are allocated in different ways (random allocation, rewarding new tech firms, rewarding old tech firms, auctions)? [We also ran the Veconlab permit experiment. Results are here and here. One of these graphs shows that it doesn't matter whether you are given your permits or must pay for them, each allocation mechanism generates an opportunity cost for the permit.]
6. Does demand and supply help explain permit trading (i.e., price and quantity)?

Next, we'll run the abatement subsidy and pollution tax scenarios and have an in-class final exam (where teams of students turn in answers and teams can discuss their answers with teams). The in-class "final" is worth 3.33% of their grade.

Cap and trade vs carbon tax in the potential California carbon market

Globalwarming.org:

Ironically, the cap-and-trade program has been temporarily halted due to a lawsuit brought forth by other environmental groups, concerned that the CARB did not sufficiently consider alternatives to a C&T program such as a direct carbon tax:

The groups contend that a cap-and-trade program would allow refineries, power plants and other big facilities in poor neighborhoods to avoid cutting emissions of both greenhouse gases and traditional air pollutants.

“This decision is good for low-income communities like Wilmington, Carson and Richmond,” said Bill Gallegos, executive director of Communities for a Better Environment. “It means that oil refineries, which emit enormous amounts of greenhouse gases and contribute to big health problems, cannot simply keep polluting by purchasing pollution credits, or doing out of state projects.”

This logic is odd, as even under a cap-and-trade program, oil refineries won’t simply disappear. It’s possible that they might be required to reduce their own pollution rather than buying permits, but this speaks mainly to the design of the cap-and-trade program. A small carbon tax would likely have the same effect, and if the design of the cap-and-trade program is any hint, it would be difficult to pass a significant carbon tax.

I agree, sometimes it seems like some (most?) environmental groups prefer no regulation to cap-and-trade.

Top 10 worst blog names ...*

Green reviews the top 10 environmental stories of 2010:

Top 10 lists are often relentlessly negative: the 10 most-polluting industrial plants, the 10 most befouled beaches, and so on.

The spirit of this list is slightly different: Good or bad, these are environmental moments in 2010 that are most likely to reverberate in the world of environmental news in 2011 and beyond.

As far as I can tell, we ignored most of the stories either substantially, totally or both.

*I don't really have a top 10 but my #1 is "Green" -- is it a blog about the Crayola crayon? Bermuda grass (in the summer)? "Green, Inc" was much better. Of course, "Environmental Economics" is also in the top 10, as if, Tim and I ARE the field of study.

Obamanomics includes C+T

Ezra Klein describes eight components of implemented Obamanomics and an un-implemented ninth:

What's missing from this list is cap-and-trade environmental legislation, which is perhaps the most notable failure of Obama's first two years. But the administration, though failing to pass cap-and-trade, pursued it in service of a similar theory: The market should factor in the cost of the damage that carbon-intensive activities do. It's failing to do so. That should be fixed.

The long and the short of energy efficiency

Originally on Market Forces:

David Owen asks a provocative question in the current New Yorker: If our machines use less energy, will we just use them more? He more or less says yes. The real answer comes in two parts.

For now—over days, weeks, months, and even years—energy efficiency will decrease energy use and emissions. Screw a compact fluorescent light (CFL) bulb into a socket that used to hold an incandescent and your energy use will go down. Chances are you won't leave the lights on four times as long just because light now costs a quarter.

Over time—years, decades, centuries, and millennia—more energy efficient lights and appliances will indeed mean that more people use more of them. CFLs make light more affordable. That doesn't matter to the typical U.S. household, where few light sockets remain unused because of energy costs. But globally—and over time—it does make a difference.

The Jevons Paradox

Owen goes back to 1865 and William Stanley Jevons who at 28 came up with what has later been called the "Jevons Paradox":

It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.

Jevons is right, of course. We have seen dramatic increases in energy efficiency over centuries while energy use has gone up by orders of magnitude.

Does that mean we shouldn't increase energy efficiency? Of course not. We just need to be clear about what we are getting in exchange.

Continue reading at blogs.edf.org/markets.

I'd rather put a value on nature then assume it's free

Bolivia, among the strongest opponents of the Copenhagen climate accord last year, assailed rich nations at Cancun climate talks on Tuesday but stopped short of threatening to disrupt the two-week conference.

Pablo Solon, the Andean country's ambassador to the United Nations, told reporters he was "deeply concerned" by the early course of the November 29 to December 10 talks at the Mexican resort of Cancun and criticized plans for carbon markets....

...Solon condemned proposals known as REDD+ that would set up a market-based system to pay poorer nations to protect tropical forests.

 "Now they want to put a value on nature ... this is what got us here in the first place," Solon said.

via uk.reuters.com

REDD+ is an offset system whereby forest managers can receive tradeable carbon credits for preservation/carbon sequestration and then sell the credits on the well-functioning worldwide carbon markets. 

Here's a slightly longer explanation:

It's a simple idea: reward the people who manage forest resources so that they reduce emissions of greenhouse gases. We need to make it more profitable to keep forests healthy than to degrade and destroy them. REDD proposes to do this by linking financial incentives for conservation with the carbon stored in forests. Forest owners or managers would receive credits for 'avoided deforestation', based on the carbon that has not been emitted; credits would be tradable in international carbon markets or through other mechanisms that effectively convert the credit to cash.