Environmental Economics

Normally we would release balloons to celebrate a remarkable milestone, but that whole helium shortage thing has made it too expensive

The old saying that "what goes up must come down" doesn't apply to carbon dioxide pollution in the air, which just hit an unnerving milestone.

The chief greenhouse gas was measured Thursday at 400 parts per million in Hawaii, a monitoring site that sets the world's benchmark. It's a symbolic mark that scientists and environmentalists have been anticipating for years.

via www.weather.com

See how I combined CO2 levels and helium?  It's like a chemistry and economics lesson on elements 2, 6 and 8 all in one post.  You're welcome.

"Follow the Plastic Bag Example, Nudge Polluters to Pay"

Gernot Wagner (cross-posted from EDF Voices):

Nudge is the best kind of book. It presents the type of head-slappingly obvious solutions to public policy problems that make you wonder why you needed a book to tell you about them in the first place. Place the veggies before the French fries in the cafeteria, and people will eat more greens. Enroll employees into retirement programs with the option of opting out rather than in and they’ll save more as a result.

Such nudges are the best kinds of policy interventions: minimum intrusion, maximum freedom of choice, maximum relative impact. But one area in which Nudge comes up short is global warming. Putting smiley faces on your electricity bill as a reward for using less electricity than your neighbor, something oPower has done with utilities around the country, helps bring down electricity use by 1 to 3%. Better than zero, but not the solution by a long shot.

Editorializing Europe's carbon market

NY Times:

The European Union became a pioneer in tackling climate change by starting the first major cap-and-trade system designed to reduce carbon-dioxide emissions by putting a price on them. But analysts are increasingly worried that technical mistakes, Europe’s prolonged recession and the failure of policy makers to strengthen the system is undermining its effectiveness.

Like all such systems, Europe’s program caps the overall emissions that power plants, steel mills and other industries can put into atmosphere. The cap, which is regulated through permits, declines every year, forcing businesses to become more efficient or buy permits from another firm or on the open market.

Recently, the price of permits has collapsed to less than 4 euros (around $5.25) per ton of carbon, down from nearly 30 euros in 2008. This is troubling because the low price discourages emitters investing in climate-friendly technologies and fuels. ...

In addition to its trading scheme, Europe has made real progress in dealing with climate change through policies encouraging energy efficiency and renewable sources of power like wind and solar. But nothing would do more to drive down emissions than putting a meaningful price on them, either through a carbon tax or through a cap-and-trade system. Europe’s job is to put that system on a sounder footing to make sure it doesn’t undo the real progress it has made.

I like the way the editorial ends, with a carbon tax and cap-and-trade as substitutes with plusses and minuses. And actually, a quick review of the regulating prices vs. quantities literature suggests that hybrid approaches might be preferred (e.g., cap-and-trade with a trigger price). It is only the naive who think a carbon tax would magically avoid implementation problems. And note, permit auctions can generate government revenue. 

I hate to go all free market on you but ...

Is there a market failure in the tree nursery industry?

Insurance claim money earmarked for rebuilding a tornado-devastated tree nursery in eastern Kentucky may be spent instead to help close a state government budget gap, putting the nursery’s future at risk.

The nursery, one of two operated by the Kentucky Division of Forestry, was flattened by the March 2012 tornado that raked West Liberty in Morgan County. It produces more than 1 million seedlings a year, all native varieties chosen to match the region’s climate and soil. ...

The nursery offers native trees at a reasonable price, said Henry Duncan of Versailles, a past president of the Kentucky Woodland Owners Association, which has about 200 members.

The bare-root seedlings are available in bundles of 10 or 100 and range from $30 to $48 per bundle, according to the agency’s website.

Duncan said some of the work at the nursery seeks to bring back the American chestnut, which was wiped out by a blight in the early 1900s. The nursery also grows most of the trees for planting on reclaimed strip mines, he said.

The only other state nursery, in Western Kentucky, could not meet statewide demand, he said. Commercial nurseries out of state are more expensive and don’t usually offer seed stock that comes from Kentucky trees, which makes them better suited for survival in Kentucky, he added.

via www.courier-journal.com

I can't think of any reason not to expect entry into this market by a private Kentucky nursery firm. The resulting seedling price might be higher without government subsidies but there may be little reason to subsidize tree growing. 

That is, unless the carbon sequestration benefits exceed the cost of the subsidies. But I'd argue this is a role for the federal government and not the states. And those benefits are likely less than the costs since climate change is a global problem, the difference between the number of subsidized public seedlings and private seedlings is likely to have small climate impacts and the impacts are way down the road. 

Call me a faction

David Warsh:

... last week ... former Secretary of State George Shultz and Nobel Laureate Gary Becker, of the University of Chicago, proposed to replace the bewildering  patchwork of existing energy taxes and subsidies (think ethanol!) that has grown up over the years with a single carbon tax levied on all forms of energy, with the idea of “leveling the playing field” among fuels of all sorts, by charging for the amount of atmospheric carbon they emit.

Instead of putting a huge new source of funds at the government’s disposal, however, Shultz and Becker say that the measure should be “revenue neutral,” meaning that whatever sums are realized beyond what the government currently nets should be paid into an account held separate from all the rest, and earmarked to be returned to individual taxpayers.  The aim would be to curb greenhouse gas emissions, nothing more. ...

The real problem has to do with how the issue is to be framed.  Many factions, conservative and liberal alike, see carbon taxation as a means to the end of dealing with US budget problems – as a new source of revenues ...

What is this "huge new source of funds" that would be "at the government’s disposal"? Is this sort of like the "huge new source of funds" (i.e., government budget surplus) that emerged around the turn of the century? The surplus that we debated about what to do with? And then decided to both cut taxes and increase government spending (keeping the bond market liquid) and then the surplus went away?

Oh! That "huge new source of funds"!

In terms of microeconomic efficiency, a revenue neutral carbon tax is appealing because it replaces an inefficient tax on something good (labor) with an efficient tax on something bad (pollution). So, if all we care about is efficiency then revenue neutrality is great. But if we also care about the level of government debt we might consider a carbon tax that is less than revenue neutral. 

I spit the bait*

Some members of Congress thought that the public would know a bit about how to estimate the social cost of carbon ignoring the vast amount of work that the EPA has been doing (and public funds expended in doing so). I decided not to submit formal comments (an easy decision since it involved zero effort) by April 12 but I did think some more about the questions raised. In terms of #1 and #2, see my SCC link above. In terms of #3, why are we considering returning revenue to the American people? Isn't the government spending more than tax revenue right now? In terms of #4, whatever the federal government does will be inadequate so why not let the states have their fun?

*I feel very stupid** for thinking that a request for public comments was sincere.

**Very, very stupid.

Stand-Up Economist: "If carbon taxes are so great... "

Yoram Bauman:

A good question on Friday from a student at Westminster College:

If revenue-neutral carbon taxes are such a great idea, why has only British Columbia adopted this policy?

I gave what I thought was a decent answer in class, but wanted to put some more thoughts down in writing:

1) People prefer the devil they know to the devil they don’t. ...

2) People don’t (yet) accept that climate change is a serious problem. ...

3) Economists think about the world differently than “normal people”. ...

4) There will be winners and losers. ...

Go read the Standupeconomist.com to get the details.

Me? I think that carbon taxes are a great way to raise government revenue too (especially with a large and growing government debt). So, why hasn't anyone adopted this idea? As far as I can tell there are no good reasons. Here are some bad reasons:

1. Because people like to spend borrowed money
2. Because people would rather not repay borrowed money
3. Some politicians have convinced the public that a tax is a bad thing
4. Some politicians have convinced the public that everyone other than oneself is on the government dole and those government benefits should be cut

Pew wee

E2 Wire blog:

Two-thirds of U.S. residents support construction of the proposed Keystone XL oil sands pipeline, including an apparent majority of Democrats, new Pew Research Center polling shows.

The same poll released Tuesday also shows increasing belief in global warming in recent years, but a dip from 2012 in the share of people who consider it a “very serious problem.” ...

On Keystone, 66 percent of respondents back construction of TransCanada Corp.’s proposed pipeline to bring oil from Canadian oil sands projects to Gulf Coast refineries, while 23 percent oppose it.

Fifty-four percent of Democrats support construction of Keystone, a project under Obama administration review, while 82 percent of Republicans want the project built, according to polling conducted in mid-March. ...

On climate change, 69 percent see “solid evidence” of global warming in Pew’s poll, which is up from the 57-59 percent range a few years ago, but well below the 77 percent range around 2006. ...

Among the 69 percent overall who see solid evidence of global warming, 42 percent attribute it to human activity, 23 percent to natural patterns, and the balance are unsure.

Here is the climate graph:

The Stand-Up Economist makes fun of anti-carbon tax economics

Yoram Bauman:

The National Association of Manufacturers just released a scathing report on carbon taxes (the full report was produced—unfortunately—with the assistance of my friends at NERA), but in reality all their analysis shows is that paying down the Federal debt is the poison pill of economic policy: as long as the economy is struggling to recover, connecting debt payments to any policy will make that policy look terrible.

In other words, it’s a recipe for cooking the books on carbon taxes:

1. Pre-heat the oven with debt-crisis rhetoric. The interest rate for Federal borrowing is incredibly low, but don’t let that stop you from arguing that “[debt reduction] is appealing because this could reduce the interest rate for Federal borrowing”.
2. Mix carbon taxes with debt reduction and tax cuts. Make sure to front-load the debt reduction: “Until 2023, all of the net carbon tax revenues would be used to lower the Federal debt.” Worried that this goes against what just about any economist would recommend at a time when “families [are] struggling to get by as the national unemployment rate hovers just under 8 percent” (emphasis in original)? Simply add a caveat: “We [at NERA] make no suggestion that this particular combination is desirable, politically likely, or that it will produce the best overall policy outcomes.”
3. Cook until burned. “A carbon tax would have a net negative effect on consumption, investment and jobs”.
4. Top with bittersweet glaze. “Factoring in lost revenue from reduced economic activity, the net revenue from a carbon tax available for deficit/debt reduction and lower tax rates is relatively small.” As an added bonus—call-back!—a weakened economy will presumably raise the interest rate for Federal borrowing, so what comes out of the oven will be perfectly circular.

Yum, yum… Boy, that’s rich!

via standupeconomist.com

All of a sudden I'm pulling for the Gators

Actually, I hate to admit it but I have been since the tourney started (got to support the SEC...don't tell Ropicki), but this seals the deal:

If you’re wondering how Florida Gulf Coast University became the first 15th seed in the history of the NCAA men’s basketball tournament to advance to the Sweet 16, look no further than the ur-text of the school’s economics department: Atlas Shrugged.

Embedded in this long, ponderous novel—required reading for all undergraduate economics and finance majors at FGCU—is the formula for transforming your college from a bunch of trailers on a swamp into the most talked-about school in the country. It’s simple, really. All you need to do is practice what Ayn Rand called “rational self-interest.”

via deadspin.com

Yes, Ayn Rand invented rational self-interest.

Here's more. One thing these simplifications miss is that most all economists teach free market capitalism. But, at some point most economists acknowledge that there are certain situations where markets fail to allocate resources efficiently. 

Here is one more written by an economics faculty member comparing FGCU's coach to Hayek. Weird coincidence, I'm working on a piece comparing John Calipari to Joseph Schumpeter ... creative destruction and all that.