Environmental Economics

"The Benefits of a Gas Tax"

Mark Thoma:

MIT energy economist Christopher Knittel says a gas tax would pay for itself, or nearly so, with the benefits the tax would bring:

Fuel for thought, by Peter Dizikes, MIT News Office: ...Christopher Knittel ... is the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management...

Knittel’s research addresses a clutch of practical and linked questions: How much progress have automakers made on fuel efficiency? (More than you might think.) How do car owners respond when fuel prices rise? (They really do ditch their gas-guzzlers.) How large are the collateral health benefits of removing dirty vehicles from the nation’s fleet? (Very large.) ...

...

Cars and light trucks produce about 15 percent of U.S. greenhouse gases. The best policy for reducing energy consumption from those sources, Knittel believes, would be higher fuel prices. “That would incentivize all the things we want,” Knittel says. “When gas prices go up, people shift to more fuel-efficient cars, they drive fewer miles, and insofar as there are lower-carbon-intensive fuels out there, people shift to them. They get rid of their clunkers faster.”

That’s not just an assumption; Knittel has studied the responses of auto owners nationwide to rising gas prices from 1999 to 2008 in another research paper, “Pain at the Pump,” co-authored with Meghan Busse and Florian Zettelmeyer of Northwestern University. The researchers found that with each $1 rise in the price of gas, purchases of highly fuel-efficient autos increase 21 percent, while purchases of gas-guzzling vehicles drop 27 percent.

A shift to newer, more fuel-efficient vehicles would actually help people in another way, besides releasing fewer greenhouse gases: It would reduce the amount of harmful local pollution in the air, as Knittel detailed in a paper written with Ryan Sandler of U.C. Davis, based on a study of California from 1998 to 2008. “When gas prices go up, you’re getting bigger mileage reductions from cars that are worse in terms of these pollutants,” Knittel observes.

That produces significant health benefits beyond the problems associated with climate change. “We’re talking about asthma attacks and respiratory problems,” he adds. “This isn’t just a matter of helping the world two generations from now. You can point to this and say, ‘Here is a more immediate, salient reason for a gas tax.’” According to Knittel and Sandler, 70 percent of the costs of a gas tax of $1 per gallon could be recouped by immediate health benefits from reduced pollution. Other possible benefits from the tax — reductions in climate change, traffic congestion and accidents — could make it a net winner for people

Intervention

Matt Kahn:

My Chicago teachers were wrong about one key point.  You can get work done in the sunshine.  I work harder here than I did when I was a graduate student in Chicago, or when I worked in New York City or when I worked in "glamorous" Cambridge.  The state's budget crisis will end, UCLA will become "self-sufficient" (i.e privatize) and order will be restored to the Star Wars galaxy.  This is paradise.  Life is too short to be miserable 9 months of the year (we did like Boston's May, September and October).

via greeneconomics.blogspot.com

Matt,

We get it. UCLA is awesome and you are glad you made the move. That's cool. But, now it is time to move past the mantra and simply live the dream. The folks back in Chicago, New York and Boston who (apparently) give you a hard time about not being serious anymore (you moved to California, you blog, you write books) are likely jealous that you have broken the chains and are now soarly freely. Try to ignore their jabs and don't look back.

Sincerely,

John W.

Republicans for Environmental Progress: An Endangered Species

For most of modern American history, the two major political parties in America have largely agreed on the desired long-term environmental outcomes for the country: there was a consensus among Republicans and Democrats that it was a good thing to press for cleaner air and water, less toxins in the environment, biodiversity preservation, and mitigation strategies for clean energy and, mostly recently, climate change.

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.

Market Forces >> Good riddance CCX

Yes, I'm afraid it is a hostage pic, John. Thanks for the plug. This just in over at Market Forces:

The Chicago Climate Exchange, one of the first voluntary cap-and-trade programs, is shutting down next month. That's bad news for the planet, isn't it? Just take a look at today's Wall Street Journal editorial page for an apparent confirmation. There the news is being celebrated as "cap and retreat." Check.

That should indeed be confirmation enough. Sadly, what's good for theJournal tends to be bad for the planet. Here that may not hold, although it's not for the reasons the Journal thinks.

One among many

The full editorial is behind a firewall. That's just as well. The rest is as wrong as the beginning. Let's start with the only direct quote. The Journal opinionators say the CCX advertised itself as "North America's only cap and trade system for greenhouse gasses." In fact, CCX's own webpage says it's "North America's only cap and trade system for all six greenhouse gases." That makes all the difference.

Carbon dioxide, the main greenhouse gas, is or will be covered in at least 15 states. RGGI covers 13 Northeastern states with its carbon cap, and Californians just reaffirmed with a clear vote of 60 to 40 to put in place theirs (which also covers all six greenhouse gases). New Mexico has announced similar plans.

Volunteerism won't do

There's also a much larger point here. The CCX was voluntary. Companies volunteered to sign up. It doesn't take a Ph.D. in economics to realize that the only companies who sign up for reasons other than marketing purposes are the ones that have allowances to sell. Those that need to buy them, stay as far away as possible.

No market can operate under these conditions. If anything, it's surprising the market held up as long as it did—no doubt due to companies' willingness to write off their participation as a marketing expense. Why else would the price for a ton of emissions ever be much above zero?

Thanks for the memories

CCX did provide some valuable lessons for participants. Chief among them, how to implement such a trading system internally, how to minimize emissions and make money, and whether and how it would be different from SO2 trading, something many CCX participants did successfully for over a decade.

But CCX was never meant to be anything other than a precursor for a U.S.-wide system.

The same, of course, goes for most state-wide initiatives. New Mexico's plans will put the state ahead of most others in the U.S., but Santa Fe alone will not prevent China from pulling farther ahead of the U.S. in generating sustainable jobs, or decrease the billions we send to the Middle East every year.

 

The case for strong climate policy is simple. A cap on carbon pollution is, too.

Edward L. Glaeser makes the case for simplicity in addressing climate change. I couldn’t agree more with his premise. The basic economics are indeed simple. Climate change might be the largest market failure the world has ever seen. To correct it, put the right incentives in place: correct the fact that we currently treat the atmosphere as a free sewer for our global warming pollution. Problem solved.

The how and especially the politics are not quite as straight-forward. Glaeser bemoans that the proposed American Power Act has 987 pages and identifies three culprits: that the Act tries to do more than just put a price on carbon, that it uses a cap-and-trade system rather than a tax, and that the problem has an important international dimension. He is broadly right on one and three but not on two: the issue of a cap versus a tax.

A firm limit on global warming pollution does not make the law more complicated. It makes it better.

First, a cap sets a firm upper limit on pollution. Glaeser acknowledges as much by saying that “fixing the number of permits may actually be the right thing to do.” It is.

Second, it’s politics, stupid. There is a good reason why the U.S. tax code has 17,000 pages. Proposing a tax on paper is simple. Getting it through the political process is a different matter altogether. Most significantly, every tax credit, every exemption means an increase in pollution. That’s not the case with a cap. While politics does what politics does best—worry about the allocation of allowances—the upper pollution limit stands.

Third, and contrary to what is sometimes argued by tax advocates, a cap creates a more stable policy environment. Certainty is the sine qua non for energy policy.  While it is true that a cap and trade program can introduce short-term variability into the carbon price, that is unlikely to matter for investments in energy infrastructure.  What matters is certainty over the long run. Capital-intensive investment decisions take years if not decades to pay for themselves (think about a new electric power station).

A well designed cap—especially one with a price floor, which this Act would include—creates this kind of certainty, by guaranteeing that emissions must go down and, therefore, that emissions reductions will have value. A tax is easily revoked, altered, or put "on holiday." A cap has durability. And even if it does have to be amended, market foresight will allow smooth transitions, much more so than a tax would.

Fourth is the international dimension, Glaeser’s last point. A cap makes international coordination easier. It also creates incentives for developing countries to cap their own emissions, in order to gain from selling allowances into a U.S. market and create win-win-win situations for themselves, U.S. companies and consumers, and the atmosphere.

All four of these reasons also appear in America’s Climate Choices, a terrific new study just released by the National Academy of Sciences. It provides the scientific closing argument for the debate unfolding in the Senate. The science is compelling, the urgency to act is clear, and the main solution is equally apparent: put a price on global warming pollution, ideally through a firm, declining cap on emissions.

Interesting links

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• Stay in your lane

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Get off my friggin' back!

Pigou was not a Pigouvian

Guest post from Jim Roumasset:

Krugman’s reproduction of Pigou and the rabbits illustrates that Pigou was not a Pigouvian. This is not surprising since Coase is not a Coasean, just as Keynes was not a Keynesian (Axel Leijonhufvud). Coase is misrepresented by both the weak and strong versions of the Coase Theorem and better represented by the equivalence version whereby the contractual equilibrium, universal market equilibrium (with permits), and the Pigouvian equilibrium with Holterman victim compensation. The equivalence version achieves the Coasean mission of undermining the inevitability of Pigouvian taxation and replaces blackboard economics with a mandate for comparative institutional analysis.

But as Pigou’s reference to the landlord and tenant internalizing spillovers attests, he was clearly aware of the possibility of negotiation, when it is not inhibited by what we now call transaction costs. In this sense, Pigou anticipated Coase’s (and Williamson/Ostrom’s) New Institutional Economics. Surprising indeed.

Who wrecked Copenhagen: China or economists?

Guest post from Jim Roumasset:

A popular guardian.co.uk report is making the rounds, even among economists, to the effect that China wrecked the prospective Copenhagen deal. I think the famous Pogo cartoon is more on the mark -- "We have met the enemy and he is us!"  We economists have yet to come up with a win-win proposal based on recognition of the following:                                

1. Leakage costs are a decreasing and convex function of the percent of the global economy in the mitigating coalition. Existing estimates of leakage costs omit dynamic and strategic effects, including those implied by the green paradox argument.
2. Similarly, mitigation costs are a decreasing  and convex function of the percent of the global economy (by sector) covered by the mitigation policy.
3. Conceding separate payments for carbon sequestration and reduced emissions on forested and agricultural lands, instead of as part of an integrated mitigation agreement, throws away an instrument for making the agreement win-win. 
4. Relatedly, enabling appeals to historical responsibility may assuage guilt but undermines the prospect for a win-win agreement.
5. Many countries, especially China, have more to gain from not signing than signing a partial and limited agreement, even if they plan to join a coalition later on better terms. It may be prudent to hold out while most other countries are (de jure or de facto) holdouts and trade sanctions are weak.             
6.  Arguments about Mankiw and friends making the perfect the enemy of the good disguise how easy it is for political forces to turn a potentially good agreement into a welfare-reducing one.  Lobbying for permit giveaways (instead of recycling the revenue from carbon taxes or auctioned permits) is one example. Loading up the legislation with mandates and subsidies is another.
7. Finally, we have not solved the problem of designing optimal hybrid carbon-price schedules for stock externalities under two-sided uncertainty.  For example, what should be the quantity and the minimum price of the reserve allowances in a reconciled Waxman-Markey/Kerry-Boxer?  

 Best wishes for progress on these problems in 2010.