Environmental Economics

Another esteemed economist's views on cap and trade, carbon taxes and the double dividend

Alan Randall, preeminent environmental economist (and my Department Chair--yep I'm sucking up), is in the process of putting together a 3rd edition of his popular graduate text, Resource Economics*--this time co-authored with John Bergstrom.  In response to a hallway conversation over Mankiw's double-dividend argument in favor of a carbon tax over cap and trade, Alan sent me this excerpt from the third edition:

A double dividend?  Even if a pollution tax and a quantity control (a standard, or tradable permits) were otherwise equivalent, we might perhaps prefer the tax for fiscal reasons.  Specifically, because government must raise revenues and most revenue-raising mechanisms distort economic incentives, a pollution tax might be argued to do not one but two good things: help clean-up the environment and reduce government reliance on distorting taxes.  However, economists have argued that this "double dividend" is, at least in part, a matter of wishful thinking.  The argument is that, yes, a pollution tax would restore efficiency in the polluting sector and reduce emissions, and reduce reliance on distorting taxes, but it would also introduce an inefficient excise tax on the commodity produced in the polluting process (say, electricity).  Excise taxes, too, are distorting, and it has been argued that workers facing such a tax would demand higher wages, imposing additional costs on the economy.

Stavins on maintaining economic growth and cutting GHG emissions: Yes we can!

From the Wall Street Journal:

As policy makers around the world take action to avoid a predicted climate catastrophe, the debate is turning to the costs of reducing carbon-dioxide emissions. Energy-efficiency measures are often pricey, and alternative energy sources are more expensive than the fossil fuels they replace. A steep price on carbon emissions will ripple through the economy.

Does that mean a serious effort to tackle global warming is incompatible with economic growth? Or can we make significant cuts in greenhouse-gas emissions without causing serious damage to the economy?

We put the question to a pair of experts. Robert Stavins, a professor of business and government at Harvard University and director of Harvard's environmental economics program, says the answer to the second question is yes: Making the necessary cuts need cause little more than a blip in world-wide growth if smart policies are used.

Steven Hayward, a fellow at the American Enterprise Institute for Public Policy Research, says no: Energy use—and the carbon dioxide it emits—is so central to the world's economy that major cuts can't be made without significant damage.

The cheapest way to stop climate change

Efficient (adj): Policy A is more efficient than policy B if policy A achieves the same result as policy B using fewer resources (i.e. same result; lower cost). 

Example: From the UK Telegraph:

Contraception is almost five times cheaper as a means of preventing climate change than conventional green technologies, according to research by the London School of Economics.

Every £4 spent on family planning over the next four decades would reduce global CO2 emissions by more than a ton, whereas a minimum of £19 would have to be spent on low-carbon technologies to achieve the same result, the research says.

The report, Fewer Emitter, Lower Emissions, Less Cost, concludes that family planning should be seen as one of the primary methods of emissions reduction. The UN estimates that 40 per cent of all pregnancies worldwide are unintended.

Phew (wiping forehead in the universal sign of relief), I made it through without an inappropriate and/or immature joke.

Typical of any good economist, I think I support both sides' positions on carbon pricing

On August 19, I was asked by and then subsequently rejected by a pro-carbon pricing group (Repower America) to participate in an energy bill summit for fear that I would point out the costs to Ohio of climate policy.  Later, I was asked by and I turned down the opportunity to particpate in a GOP led energy summit here on campus for fear that my pointing out the costs of carbon pricing policy to Ohio would overshadow my belief in the benefits. 

Like this (from the Columbus Dispatch yesterday):

U.S. House Minority Leader John Boehner and other GOP House members pressed their case in Columbus yesterday against climate-change legislation, charging that it would drive more jobs out of ailing Ohio...Opponents say that "cap and trade" would unfairly harm states such as Ohio that are heavily dependent on coal-generated electricity.

So where exactly do I come down on carbon pricing?  I'm glad you asked. 

Below is an overview from an Executive Summary that I put together back in April of some ongoing research I am involved with on carbon pricing.This executive summary is in the hands of GOP and Democratic representatives from Ohio.

More dam economics

Another reason to hate Duke (SC Board denies Duke hydro permit):

Regulators in South Carolina refused today to grant Duke Energy a water-quality certification the utility needs to renew its hydroelectric license for the Catawba River. ...

Two environmental groups, the S.C. Coastal Conservation League and American Rivers, had challenged the S.C. certification. They said it would have allowed Duke to release too little water from its dams for aquatic creatures, including the endangered shortnose sturgeon. ...

Duke has worked to renew its Catawba license, first granted in 1958, for several years. License renewal would allow Duke to continue managing the river and 11 Catawba reservoirs for up to 50 more years.

30 premature deaths + 2,000 missed work days + 9,000 coughs = $325 million

From the EPA:

Invista will pay a $1.7 million civil penalty and spend up to an estimated $500 million to correct self-reported environmental violations discovered at facilities in seven states, the U.S. Environmental Protection Agency (EPA) and the U.S. Justice Department announced today. The company disclosed more than 680 violations of water, air, hazardous waste, emergency planning and preparedness, and pesticide regulations to EPA after auditing 12 facilities it acquired from DuPont in 2004.

“By correcting these violations, Invista will reduce harmful air pollution by nearly 10,000 tons per year,” said Catherine R. McCabe, Acting Assistant Administrator of EPA’s Office of Enforcement and Compliance Assurance. “Invista is making a clean start in a settlement that achieves significant environmental benefits, and we encourage other new owners to do the same.”

...The emission reductions resulting from correcting these violations will result in estimated annual human health benefits valued at over $325 million, including 30 fewer premature deaths per year, 2,000 fewer days/year when people would miss school or work, and over 9,000 fewer cases of upper and lower respiratory symptoms.

I'm thinking there are more benefits somewhere* because $501.7 million cost > $325 million in health benefits.

CORRECTION: Reader Matt kindly pointed out my idiocy.  The $325 million is annual.  At 10% interest that's $3.25B in total health benefits.  And according to my finely tuned math senses that's more than $501.7 million in cost. 

*Or self-reported violations aren't subject to BCA?

Shock*: Pricing carbon will cause economic adjustments

Foxnews seems surprised that global carbon pricing would result in changes in the allocation of carbon based production.

In the stultifying** language that is normal for important U.N. conclaves, the negotiators are known as the "Ad Hoc Working Group On Further Commitments For Annex I Parties Under the Kyoto Protocol." Yet the consequences of their negotiations, if enacted, would be nothing short of world-changing.

Fox's concern seems to be over competitive disadvantages caused for high-carbon economies.  There's nothing surprising in a UN report that says that if carbon is priced globally there will be world-wide distributional adjustments.  The real question is, what sorts of policies will need to be enacted to ensure efficient (fair?) outcomes for the countries involved?

Here's how Fox sees it (and then I'll interpret)...

Relative prices, lump sum transfers and Carbon Cap and Trade

Dave Roberts at Grist asks:

How would rebating carbon revenue to taxpayers give anyone incentive to reduce emissions?

Since Dave is such a fan of economics (and me in particular), I thought I would take a shot at explaining this one (given my past sarcasm, I know that might sound condescending.  No condescension is implied.  This is an interesting and important question and something to which I think economists can add valuable insight).

Every president since Reagan has embraced benefit-cost analysis in one way or another

Aguanomics beat me to it:

from the RESECON listserv:

Clinton's Executive Order 12866 dictates when federal agencies must conduct a cost-benefit analysis and submit it to the Office of Management and Budget for review before a regulation can be issued.

President Obama issued a memo to agency heads on January 30, 2009 directing the OMB Director, in consultation with federal agencies, to produce a set of recommendations within 100 days for a new E.O. on Federal Regulatory Review.

A Federal Register notice published on February 26, 2009 opens the process to comments from the general public.

If you have ever wished you could weigh in on the analysis and review process, here is your opportunity. The comment period closes on March 16, 2006.

View the FR notice and submit (or view others') comments here.

[In case the link doesn't work, from the http://www.regulations.gov page, paste OMB-2009-0008-0001 into the search box and you'll get a link to the correct docket. Also, turn off pop-up blockers.]

Are payments for environmental services in the President's new budget?

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 list.

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."

The new 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.