"Even in tight-wallet times, a surprising number of consumers have shown they're willing to pay a premium for environmentally friendly products. Hybrid cars have more than doubled their market share in the U.S. since 2005. And spending on energy-related home-remodeling projects has been resilient, despite the housing downturn; it totaled $49 billion in 2009, up 29 percent since 2003, according to Harvard University's Joint Center for Housing Studies. But having paid a little extra to go green, many consumers are now encountering an unexpected irritation: They have to pay more than their neighbors to stay green. The price of maintaining, repairing and even getting insurance for green products can often be higher than for their ordinary counterparts. "There are hidden costs that people don't think about," says Tim Haab, an environmental economist and a professor at Ohio State University. And with many tax credits for energy-efficient upgrades likely to expire soon, some consumers are finding themselves having to recalculate the cost of being eco-conscious."
My name is XXXX, and I am a fact-checker at SmartMoney magazine based in New York. I believe you corresponded with one of our writers, Anna Prior, for an upcoming story. I therefore have a few quick questions, to make sure we don't have any errors. Please let me know ASAP if any of the following is incorrect:
Your name is spelled Tim Haab
From what I understand, you talked about how there can be hidden costs associated with going green that people don't always think about. For example, the price of maintaining, repairing and getting insurance for green products (such as cars, appliances, etc.) can be higher than for non-green alternatives.
You are an environmental economist and professor at the Ohio State University
The W[orld] B[usiness] C[ouncil for] S[sustainable] D[evelopment] believes that green taxes can deliver environmental improvements, "in some circumstances". But the companies also note that tax exemptions can function like payments for ecosystem services to reward positive conservation efforts. "The difference is that the PES is a direct payment for a service, whereas the exemption is effectively a non-payment (of monies that would otherwise be due as tax)".
The simple economics are simple: a marginal tax on an undesirable action is the equivalent of a marginal subsisdy on (payment for) the anti-undesirable action. But, as usual, my guess is that the real world is more complicated than simple economics world and nonpayments (tax exemptions) for not screwing up the environment are not the equivalent of a direct payment for ecosystem services.
As John pointed out, today's announcement of the Prize in Economics named after Alfred Nobel, but not really a Nobel Prize (or whatever it's called) being awarded to Elinor Ostrom could be interpreted as an award for a pseudo-environmental economist. As CNN.com puts it:
Ostrom, a professor of political science at Indiana University, was praised "for her analysis of economic governance, especially the commons."
Even though she is in a political science department, Ostrom's work has had significant influence on the field of environmental economics, particularly the recognition that common pool resources don't always collapse under the 'tragedy of the commons' as is predicted by traditional models. To whit, consider the following quote from the introduction to a highly influential paper:
Economists have tended to view the presence of externalities and other market failures as leading to a private equilibrium that would not be Pareto optimal. In the exploitation of common-pool resources, especially biological resources, this would lead to the much-discussed `tragedy of the commons'. A challenge to this traditional view has emerged from study of the theory and practice of the exploitation of common-pool resources. A considerable body of research shows that, for many common pool resources, a private equilibrium embedded in an endogenous institutional structure has resulted in sustainable harvests and biomass. Evidence for these findings appears in numerous places, including Feeney et al., Ostrom (1990), McCay and Acheson, and Sethi and Somanathan.
In general, collective action can result in amelioration of externalities when a social norm influences individual decision-making. Policies aimed at increasing the level of compliance can result in dynamic as well as static adjustment to the level of compliance if individuals react to social norms. Traditional models of management of the commons with regard to pollution treat individual decisions to pollute as independent of social influences. The proposed framework suggests that management decisions that incorporate social interaction into the decision framework can lead to lower cost policy solutions that evolve over time rather than immediately reach the desired steady state equilibrium.
And yes, I use big words when I write academic articles. That tends to hide the stupidity of the underlying ideas. An no, the paper isn't really highly infuential.
*Journal of Environmental Management (2002) 66:67-76.
High school friend of Env-Econ (Chuck) asks: what are your thoughts on the farm part of this? First an excerpt:
On agriculture, wealthy farmers would get less money from the
federal government -- and none, three years down the line -- under
proposals in Obama's first budget.
Obama's proposed fiscal year
2010 budget "phases out direct payments over three years to farmers
with sales revenue of more than $500,000 annually," according to the
At present, "direct payments are made to even large
producers regardless of crop prices, losses or whether the land is
still under production."
But according to the list, "Large
farmers are well-positioned to replace those payments with alternative
sources of income from emerging markets for environmental services,
such as carbon sequestration, renewable energy production, and
providing clean air, clean water, and wildlife habitat."
proposed budget cuts the Market Access Program which provides "funding
for overseas brand promotion." It cuts cotton subsidies and "proposes
to eliminate the requirement for the government to pay the storage
costs of cotton that is put under loan by the USDA. Cotton is the only
commodity for which this assistance is provided."
My thoughts? Jublilation. Joyous vindication. Disciplinary pride.
Reducing or removing inefficient farm income policies is long overdue...with the added bonus of cheaper food. Sounds like a win-win to me.
GDP godfather Simon Kuznets was the first to warn about its limitations: "The welfare of a nation can...scarcely be inferred from a measurement of national income as defined above." He wrote that during the last depression. What's really depressing is that we still haven't found something better, and notforalackofwant.
Today's Financial Times analysis leads with one of the worst reasons why GDP shouldn't be used as a measure of how well we are doing as a nation:
Across the world, standard measures of economic performance are suddenly producing terrible results. Maybe it is time to change them.
Fortunately, it gets a lot better from there. The article surveys one of Nicolas Sarkozy's lesser known initiatives:
a 24-member commission of prominent economists led by Joseph Stiglitz and Amartya Sen, both Nobel prize winners, is due to report in April on ways of improving our economic bookkeeping. The aim is to render economic data more comprehensive, more intelligible to the public and more relevant for policymakers by taking into account such factors as environmental degradation and quality of life.
I wouldn't hold my breath for the April report to have all the answers, but who knows, perhaps it takes another depression recession to come up with a better GDP measure.
That is why economics is known as the dismal science. We strange economists are most adept at recognizing the opportunity costs of various decisions. No one else really seems to care if opportunity costs offset some, or all, of the benefits of a good idea.
Opportunity cost is a strange notion to some (especially intro micro students) ... it is the value of the next best alternative whenever a choice is made. For example, if I purchase a $1000 flat panel LCD TV, the true cost of the TV is not $1000, but what I could purchase instead (such as $500 in each kid's college education 529 plan [sorry kids]).
In the case of green energy subsidies, if you are an economist then you must at least wonder if this is the best way to spend the money. There are benefits of pushing down the costs of green energy (e.g., improved air quality), and there are opportunity costs. Ignoring the opportunity costs is likely to lead to wasteful spending. Considering the opportunity costs is likely to lead to better social decision making -- regardless of whether the benefits of the subsidies exceed the costs.
The notion of opportunity cost, its recognition and the inevitable result that not all great sounding ideas are really great ideas, is the most important thing that economists bring to many policy discussions. Pointing out the unpleasantantries of opportunity cost is one of the purposes of this blog. The dismal part of the dismal science can not be avoided.
We are used to paying for oil, coal, fish and other things "out there" in Nature -- either because someone owns the rights to those resources or its costs money to get them from "the commons."
Contrast our attitudes towards resources with our attitudes to the environment, which we are accustomed to "consume" for free.
As the environment is threatened and becomes more scarce, perhaps we have to think of it as a resource -- and one that is worth paying for.
Exactly. Prices ration goods. As long as the price determining mechanism (markets in most cases) fully capture all of the costs and benefits associated with production and consumption, the resulting price will result in an efficient--and in most cases fair (yep, I said it--markets produce fair outcomes in many cases, depending of course on how you define fair)--allocation of resources.
"This blog aims to look at more of the microeconomic ideas that can be used toward environmental ends. Bringing to bear a large quantity of external sources and articles, this blog presents a clear vision of what economic environmentalism can be."
... the Environmental Economics blog ... is now the default homepage on my browser (but then again, I guess I am a wonk -- a word I learned on the E.E. blog). That is a very nice service to the profession. -- Anonymous
"... I try and read the blog everyday and have pointed it out to other faculty who have their students read it for class. It is truly one of the best things in the blogosphere." -- Anonymous