Environmental Economics

Trade with Cap'n Trade

From the Financial Times:

Senior Democrat senators said on Wednesday they would change a provision that imposes carbon taxes on imports following warnings that the clause in the House’s cap-and-trade bill could spark a global trade war.

The House’s bill contained tough provisions to impose carbon tariffs, aimed at protecting American companies’ competitiveness against imports from countries without equivalent carbon emission controls to those in the US.

...

A recent report from the WTO said that such “border tax adjustments” could in theory be made consistent with WTO rules, but trade lawyers stress that crafting such laws is likely to be very difficult in practice

The economics here are simple:  If the U.S. prices carbon domestically (through Cap and Trade), then imports have to be priced accordingly, or the world price for similar products will be lower than the domestic price.  The result will be more domestic purchases of foreign produced carbon intensive products and potentially leakage of U.S. industry to non-carbon pricing nations who potentially produce similar products with lower carbon efficiency than domestic manufacturers currently use.  This has been the U.S.'s stance in international carbon negotiations all along and the primary reason the U.S. never signed onto Kyoto.  Now, domestic carbon policy without border price adjustments puts domestic producers at a competitive disadvantage and will likely result in more imports of carbon intesive products and potentially higher carbon emissions globally. 

I want my money for nothin' and my chicks for free

Ungood news of the day (at least for me) from the Columbus Dispatch:

...Statehouse leaders are expected to further cut higher education to help reduce proposed cuts to libraries, mental-health services and home and community-based services for Medicaid recipients.

 

The solution to a bursted housing bubble is more new houses? etc.

Isn't this the logic that got us in this trouble in the first place (House passes ...)?

[Kentucky] House and Senate leaders negotiated late Tuesday night $68 million in tax breaks for home buyers, new car buyers and active duty military members.

Non first-time homebuyers would be eligible for a $5,000 tax credit on the purchase of a home that has never been occupied.

The credit, which would be capped at $25 million, is intended to move homes that have already been built but have not been sold. If builders can sell some of those homes, they could begin building new ones, which would create construction jobs and increase the sales of materials, proponents said.

Also, the same budget process came up with $37 million in incentives to attract a NASCAR race to Gallatin County (between Louisville and Cincinnati). Last summer at the Hamburg sports mega-event conference I heard Rob Baade argue that mega-events, such as fast car races and important ball games, don't generate much of any economic impact (I also heard the same story where the measure was hotel tax revenue; Dennis Coates, 2008 SEA meetings). Sigh.

Cap'n Trade's archenemy

From an ad heard on ESPN radio* on the drive in this morning (a paid spot by the Industrial Energy Consumers of America):

With the economy in recession and unemployment a stark reality for an increasing number of Americans, one would think that lawmakers in Washington, D.C., would run from efforts that would promote further job loss. Unfortunately, Congress is charting a precarious course with the American Clean Energy and Security Act, more commonly known as the Waxman Markey climate bill. Now is not the time to impose manufacturing businesses with costs that will threaten our competitiveness and jobs. As head of the only manufacturing trade association in the country that focuses exclusively on energy and environment issues, I believe this approach puts the future of the U.S. manufacturing sector at stake — harming employees and consumers. Though the goal of a cap and trade system is supposedly to create jobs by transitioning the U.S. to a clean energy economy, cap and trade will have the opposite effect, displacing U.S. manufacturing jobs and stimulating economies overseas through increased reliance on imported goods...Manufacturers are willing to take action to reduce greenhouse emissions, so long as it is done cost effectively and without putting us at a competitive disadvantage. Unfortunately, the current approach moving through Congress imposes higher costs on manufacturers that will lead to fewer jobs, more manufacturing moving overseas and higher costs for consumers.

A few quick thoughts to get you week started:

1. The Industrial Energy Consumers of America seems to be a misleading name for a self-admitted 'manufacturing trade association.'
2. I have a feeling that, at least to a manufacturing trade group, 'cost-effectively' means 'costlessly.'  Three words: Not gonna happen.
3. Let's be honest--the economic goal of Cap'n Trade is not to create green (clean-energy) jobs.  That is the political goal to make pricing carbon palatable.  The goal of cap and trade is to efficiently price carbon.  Which means...
4. Higher energy prices are an inevitable consequence of carbon pricing.  In fact, higher energy prices are a necessity for reducing carbon emissions. That's not a bad thing.

Ads like this prey on the common economic misconception that there are dollar bills laying on the ground.  Under the guise of protecting American jobs, the IECA argues that clean energy will magically appear without higher prices.  Higher prices are not the enemy--they are the incentive.  Prices that fully reflect all of the costs and benefits of consumption and production will lead to the correct set of incentives and resulting behaviors.  So ask yourself:  Do current energy prices fully capture the costs of consumption and production?  If your answer to that is yes, then oppose Cap'n Trade.  If your answer is no, then ask an economist the least costly way to capture those costs.  Many (unless your name starts with an M and ends in a W) will tell you that Cap'n Trade is a good answer.

*Sheesh, can't my sports be safe from environmental gobbledygook?

A clarification on an old post

From the inbox:

I came across an old post of yours:  http://www.env-econ.net/2006/01/nc_ecosystem_en.html   I am the reader you tipped your hat to, I believe.  I wrote you well before 2006 to discuss environmental mitigation banking. ...

Your lack of skepticism regarding the ecological and economic wisdom of a program like the NCEEP disturbs me a bit.  NCEEP directly compete with private firms, engage in a very controversial practice with lower standards, “In-Lieu-Feed” mitigation, and are regularly subsidizing impacts to the environment with public money.

My reply:

My two comments contain the qualifiers: "it seems" and "?". Please don't infer a lack of skepticism. A post like that is usually designed to raise questions and not endorse projects or programs.

Incentives vs mandates

Over at the Energy Collective Chris Schultz says:

The EPA has a neat website that shows the top purchasers of green power across the private and public sectors, and also academia. The top 50 rankings are by total green power used for electricity, with Intel coming in at #1, Pepsi at #2, and Kohl's at #3. A lot of companies actually purchase 100% of their electricity from green sources such as wind, solar, hydro, geothermal, or biomass. ... You can also view the top green power purchases by federal or local government. It is good to know that the EPA gets 100% of its electricity from green sources. The DOE, however, only gets 3% of its total electricity from green power, which is pretty sad since they should be leading the way. Let's hope that DOE Secretary Chu does something to change this. Come to think of it, I would hope that the Obama administration sets a precedent by mandating that all electricity used by Federal buildings come from the green energy sources listed above. I am a believer that government can and should use its purchasing muscle to create markets for emerging and socially and environmentally beneficial technologies like clean and green energy. ...

I left this comment:

Chris, Instead of mandates I think it would be cool if cap-and-trade (or a carbon tax) were implemented giving federal agencies and everyone else an economic incentive to buy green energy. We'd likely get the same environmental outcome at a fraction of the cost.

Minimum wages cause unemployment

In my basic econ classes I usually use minimum wages as an example of bad government policy.  I tell the class that a binding price floor in the labor market will create a surplus of workers (unemployment).  I go on to explain that the situation is worse than that, because the likely victims of this unemployment are those for whom the minimum wage is binding--low-skilled and teen workers.  In other words, minimum wages cause unemployment among those they are intended to help. 

But any good economist knows that there is plenty of evidence to contradict this.  As a reader asked in a past discussion we had on minimum wages:

...are you all essentially ignoring all of the work by David Card that suggests that in many cases minimum wage increases do not have large employment effects?

My gut reaction was always, well, yes, because price floors have to cause surpluses.  It's just intuitive and it seems that the evidence is just hiding.  Well, it's hiding no longer.  Respected labor economist David Neumark, in today's Wall Street Journal, writes:

Despite a few exceptions that are tirelessly (and selectively) cited by advocates of a higher minimum wage, the bulk of the evidence -- from scores of studies, using data mainly from the U.S. but also from many other countries -- clearly shows that minimum wages reduceemployment of young, low-skilled people. The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults. This is on top of the continuing job losses the recession is likely to throw our way.

Yep, I knew it all along.

 

Guest Post: The Grand Equivalence Version of the Coase Theorem

Jim Roumasset, Professor of Economics, University of Hawaii:

The Grand Equivalence Version of the Coase Theorem

As Tim Haab pointed out in January, 2006, there are multiple versions of the Coase Theorem.  In what follows, I suggest a version that retrospectively fits Coase's agenda.

Have patience, mon ami

Downstream subsidies as a result of a renewable portfolio standard (Progress plans...):

Progress Energy plans to offer up to $20,000 to customers who install rooftop solar panels, helping cut the total cost of one of the most expensive forms of green energy by 75 percent.

The Raleigh power company announced the solar incentives Wednesday as part of a broader solar program that will help businesses and schools defray the cost of installing solar energy. Progress is introducing the programs to comply with a 2007 state law requiring a greater reliance on renewables and conservation to meet the state's energy demand. ...

The Progress rebate will amount to $2 per watt of solar energy, topping out at 10 kilowatts, or $20,000. That will cover about 25 percent of the cost of the panels. Combined with available federal and state incentives for solar energy, a homeowner's savings would come to about three-quarters of the total cost.

A typical household solar rooftop array produces 2.5 kilowatts to 5 kilowatts, which would qualify for $5,000 to $10,000 from Progress. ...

Still, even with the Progress sweetener, it will take as long as a decade to recoup the cost of the investment, said Bob Kingery, co-founder of Southern Energy Management, a Cary solar panel installer.

Kingery expects the Progress incentive to make a difference because it would take several years off the time it takes to break even on solar costs.

Wow, 10 years to break even? Most consumer discount rates cancel out anything past 7 years ... this might be more difficult than we think.

The Beverly Hillbillies approach to budgeting in Ohio

From the Columbus Dispatch:

The Salt Fork State Park lodge offers a special "evening of romance" for couples, but Ohio's oil and gas companies are looking for a long-term relationship.

Perched atop a rich reservoir of natural gas and crude oil in Guernsey County, Salt Fork is surrounded by wells drilled on private lands. Inside the 20,200-acre park, there are only a handful of wells installed years before the Ohio Department of Natural Resources took ownership in 1960.

Inspired by rising fuel prices, the state's oil and gas industry has tried several times now to change state law and gain greater access, not just to Salt Fork, but to a total 600,000 acres within state parks, forests and wildlife areas.

Their sales pitch, that state parks would get $20 million in rent over the next two years, enticed Senate lawmakers to include an industry-backed plan in their version of the proposed state budget. It passed the GOP-controlled Senate on a 20-11 party-line vote yesterday.

"The state is (Ohio's) largest landowner, and it's having a very difficult time maintaining its properties," said Tom Stewart, vice president at the Oil and Gas Association. "You have an obligation to consider the full value and potential of your properties on behalf of the citizens of Ohio."

In other words, drill for tiny amounts of oil to pay for park upkeep.  My analysis: BRILLIANT! (sarc).