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.

Daily Demand and Supply: Answer--because it's cheaper

Question: Why do developed countries import clothes (outsource manufacturing) from developing countries?

Simple graphical answer from CNN:

Daily Demand and Supply: Mary Jane's Last Dance?

With reference to Colorado proposing a 30% tax on recreational marijuana sales (15% excise tax and 15% sales tax),

Jeffrey Miron, an economics professor at Harvard University and a senior fellow at the Cato Institute, a libertarian group ... said that as long as federal marijuana laws continued to be unsettled, collecting taxes would be challenging. Moreover, he said, there is no way to predict how many customers would continue to buy on the black market.

After Prohibition ended in 1933, states levied taxes on alcohol, in part because they were desperate for revenue after the Great Depression. But that shift, Dr. Miron noted, was undertaken with the full support of the federal government.

“It’s easy to get a little overexcited that legalizing marijuana is going to solve the world’s budgetary problems,” Dr. Miron said. “But the question for the tax revenue part of this will be how much the federal government allows these markets to come completely above ground.”

via www.nytimes.com

The revenue collected from a tax will hinge on the relative price-elasticities of demand and supply.  The less price elastic the demand for a good, the more revenue can be collected with a tax--because people still buy the good even at higher prices.  With federal support for marijuana sales it is likely that demand for legal marjuana would be much less price elastic, and a state tax would raise much more revenue for the state than without federal support--making the tax more effective at raising revenue. 

But then again, I guess it depends on whether the goal of the tax is to raise revenue.

And I wonder if the demand for Doritos has increased in Colorado?

If so, maybe they should tax Doritos instead.

 

Daily demand and supply: long run exit

This is a good one:

The main subsidiary of Suntech Power, one of the world’s largest makers of solar panels, collapsed into bankruptcy in a remarkable reversal for what had been part of a huge Chinese government effort to dominate renewable energy industries.

The bankruptcy is a sign of the worldwide consolidation of the solar industry, which has been crippled by a glut of products on world markets and Western tariffs on Chinese products. It also signals China’s unwillingness to continue to subsidize struggling manufacturers in the industry, which is contributing to the steep decline of its green energy pursuits.

More than any other country, China had leaned heavily on renewable energy to solve its problems of severe air pollution and dependence on energy imports from politically unstable countries in the Middle East and Africa.

Suntech, a centerpiece of the country’s efforts, had grown to 10,000 employees in its hometown, Wuxi, on China’s east coast, and even set up a small factory in Arizona to assemble panels. But a tenfold expansion of Chinese solar panel manufacturing capacity from 2008 to 2012 pushed down the price of solar panels about 75 percent, undermining the economics of the business. ...

After Suntech grew spectacularly, with production that soared year after year on heavy investment, and after Western investors bought up its New York-traded shares and its international debt issues, the company was battered by plummeting prices as the overall manufacturing industry sank....

The bankruptcy comes after a dozen solar panel manufacturers in the United States and a dozen in Europe have either failed or cut back production after finding that they were unable to cover their costs at the current low prices for solar panels.

The industry’s problem is that most of the cost of a solar panel lies in building the factory, not in operating the equipment. So when the industry has severe overcapacity, as it does now, each company continues running its factories to cover its tiny operating costs, and at least a small part of the interest on the loans it took out to buy the costly factory equipment.

But when every company pursues that strategy, the whole industry loses money and virtually no business is able to cover its full interest costs.

via www.nytimes.com

The shutdown rule states that, in the short run, firms should continue to operate as long as they cover their variable (i.e., operating) cost. If price is greater than average variable cost then some of their fixed costs (i.e., "interest on the loans it took out to buy the costly factory equipment) are covered. If prices fall below operating costs (i.e., paychecks bounce) firms will shutdown production temporarily hoping that prices will rise.

Temporary shutdowns cannot go on indefinitely. At some point the firm will decide that price will not rise, in this case due to overcapacity, and exit the industry. 

Daily Demand and Supply: Everything you could ever want in one example

Decreasing supply of an input (corn ethanol credits are an input to gas production for refineries),  increasing exports due to relative price decreases in importing countries, decreasing supply of refined gas, inelastic demand for gas...what more intrigue could you want?

Congressional committees are taking note of a massive spike in the price of corn ethanol credits that refiners use to meet the Environmental Protection Agency’s renewable fuels mandate — amid concern it could increase gasoline prices.

House and Senate energy panels are eyeing the price of ethanol renewable identification numbers, or RINs, which have skyrocketed from pennies a gallon to more than $1 per gallon in recent weeks. That could cost the refining industry $7 billion this year, according to a Barclays analyst as cited by the Financial Times.

“We’ve talked about how they’ve been skyrocketing,” House Energy and Power Subcommittee Chairman Ed Whitfield (R-Ky.) said last week, though he was unsure what action his panel would take.

Refiners and the ethanol industry disagree about the cause of the price spike.

A spokesman for Valero, the largest independent U.S. refiner, said refiners can do only three things about the spike in the short term: Increase gasoline exports to countries that do not have the added RIN cost, decrease the amount of gasoline refined or shift the costs to gasoline consumers. “I suspect a combination of all three things happening with refiners,” said the spokesman, Bill Day.

That could further restrict domestic supply and raise gasoline prices, which typically rise anyway around the summer driving season.

via www.politico.com

An example of why we started this blog...and why it is still relevant

Bear with me, this might take a minute to get to the point.  In 2005, John and I started Env-Econ with the following mission:

The Environmental Economics blog is dedicated to the dissemination of economists’ views on current environmental and natural resource issues. We hope this blog will help bring economists’ views on environmental issues further into the mainstream. The intended audience includes the general public and students. Posts are non-technical. [emphasis added]

I added the emphasis to that in light of a comment I received this morning on this post from yesterday.  As background: in the post, I asked an academic colleague to give me a back of the envelope calculation of the social value of beach renourishment.  At the end of the post I linked to the academic article on which my colleague based the back of the envelope calcualtion--mainly to give credit where credit is due and also to let any reader so inclined to take a look at what goes into making the sausage that is Env-Econ.  Anyway, one of our readers was so inclined--and apparently didn't like what  they saw in the sausage factory:

I tried to read and understand Sathya Gopalakrishnan's abstract and I can't. I need an interpreter. I'm pretty sure it's English. Maybe someone could get a "grant" to find out just what percent of the US adult population accurately understands her language? Maybe I'm just dumb. I do have a B.S. degree from a highly regarded university but that was a long time ago.

A few points:

1. What percentage of the US adult population accurately understands her language is irrelevant for the abstract.  The abstract is intended for an audience of academic environmental economists and as such the relevant question is 'What percentage of the world population of those interested in academic issues relevant to environmental economists understand her language?'  Based on almost 20 years of experience (including a stint co-editing the journal in question), I would venture a guess that the percentage is very high--but the denominator in that percentage is pretty small.
2. The commenter has discovered one of the dirty little secrets of academics.  We academics like to use jargon, big words and complicated phrasing to make it intentionally difficult to understand what we are trying to say.  In doing so we create a nice barrier to entry into the profession. It takes years of additional education just to be able to learn the language of our discipline.  That education is costly both in terms of resources and time expended.  But for those who clear the barrier, the level of complication helps to keep the supply of academics who can make things as unnecessarily complicated as we do, and more importantly understand that complication, low.  And we all know that decreased supply increases prices (in this case wages).  So, you see, unnecessary complication is necessary.  It's a means to self-preservation and higher wages.
3. There are usually less complicated ways to explain highly technical stuff without losing the basics of what is being said.  That is the purpose of this blog.  Allow me to illustrate.  Here is an excerpt from the academic abstract in question:

We use the empirical results to parameterize a dynamic optimization model of beach nourishment decisions and show that the predicted interval between nourishment projects is closer to what we observe in the data when we use the estimate from the instrumental variables model rather than OLS. As coastal communities adapt to climate change, we find that the long-term net value of coastal residential property can fall by as much as 52% when erosion rate triples and cost of nourishment sand quadruples.

To the non-academic (hopefully many of our readers), that reads as follows:

We use the [blah] to [blah-blah] of beach nourishment decisions and show that the [blah] between [blah] is closer to [blah] when we use the [blah-blah] from the [HOLY S***]. As coastal communities adapt to climate change, we find that the [blah] of coastal residential property can fall by as much as [a bunch of made-up crap].

So in good Env-Econ fashion allow me to interpret the abstract:

Using a bunch of complicated statistics and math that no one else has thought to use, we find that beach house prices fall when beaches wash away or when the cost of putting more sand on the beach goes up.

That, our dear readers, is why we started this blog.

No need to thanks us.

Daily demand and supply: The "crack spread"?

That is a new term for me!

The Energy Department’s in-house number crunchers say recent gasoline price spikes can’t really be laid at the feet of crude oil prices, which generally play a big role in what drivers pay at the pump.

Instead, a brief Energy Information Administration report Monday explains that several factors, such as refinery outages (both planned and unplanned) and growing global demand for petroleum products, account for most of the rise.

These factors have driven an increase in the difference between crude oil prices and wholesale gasoline prices, which is called the “crack spread.” The EIA says the growing gap accounts for “most” of the roughly 45 cents-per-gallon rise in gasoline prices between Jan. 1 and early last week. ...

The EIA, which bases its new report on gasoline price increases through early last week, says as much as two-thirds of the 2013 increase in pump prices is reflected in the increased “crack spread.” From their Monday report:

Between January 1 and February 19, the price of Brent crude oil—the waterborne light sweet crude grade that drives the wholesale price of gasoline sold in most U.S. regions—rose about $6 per barrel, or about 15 cents per gallon. A simple calculation, which modestly understates the role of higher crude prices to the extent that crude price increases during December 2012 were still not fully passed through in retail gasoline prices at the start of 2013, suggests that about two-thirds of the rise in gasoline prices since the start of the year reflects higher gasoline crack spreads.

via thehill.com

Daily Demand and Supply: One person's negative is another person's positive

"So I can drink a beer on my porch? But I can't smoke a joint?" asked marijuana advocate Christian Sederberg.

State Sen. Cheri Jahn, D-Wheat Ridge, said lawmakers would hesitate to regulate something legal people do on private property. What about backyard grills that send the smell of hamburgers into the nose of a neighbor who's vegetarian?, she asked.

via www.google.com

Having just returned from Colorado (where, for the record, I did not partake in the newly legal activities of the state), I read this and wondered: Are there really people out there who don't like the smell of grilled meat?

Blasphemy.

Daily D & S: Are there no MBAs at Beam Inc.?

A follow up to Tim's Maker's Mark post. From the inbox:

Dear Ambassador,

Since we announced our decision last week to reduce the alcohol content (ABV) of Maker’s Mark in response to supply constraints, we have heard many concerns and questions from our ambassadors and brand fans. We’re humbled by your overwhelming response and passion for Maker’s Mark. While we thought we were doing what’s right, this is your brand – and you told us in large numbers to change our decision.

You spoke. We listened. And we’re sincerely sorry we let you down.

So effective immediately, we are reversing our decision to lower the ABV of Maker’s Mark, and resuming production at 45% alcohol by volume (90 proof). Just like we’ve made it since the very beginning.

The unanticipated dramatic growth rate of Maker’s Mark is a good problem to have, and we appreciate some of you telling us you’d even put up with occasional shortages. We promise we'll deal with them as best we can, as we work to expand capacity at the distillery. ...

A good economics student (e.g., an MBA or undergraduate who has taken the managerial econ course) might suggest raising the price (note that it there is a 6 year lag from production to market, supply is perfectly inelastic in the short run). That way, only the Maker's Mark customers who are willing (and able) to pay a dollar or so more would stay with the brand, Maker's Mark makes more money (note: alliteration), and loyal customers won't get frustrated with shortages and try another brand. 

Further reading: Wonkblog.

God Bless America

U.S. oil and gas production is evolving so rapidly — and demand is dropping so quickly — that in just five years the U.S. could no longer need to buy oil from any source but Canada, according to Citigroup's global head of commodities research.

Citigroup's Edward Morse, in a new report, projects a dramatic reshaping of the global energy industry, where the U.S., in a matter of years, becomes an exporter of energy, instead of one of the biggest importers.

The shift could sharply reduce the price of oil, and therefore limit the revenues of the producing nations of OPEC, as well as Russia and West Africa. Those nations face new challenges: Not only are the U.S. and Canada increasing output, but Iraq increasingly is realizing its potential as an oil producer, adding 600,000 barrels a day of production annually for the next several years.

"OPEC will find it challenging to survive another 60 years, let alone another decade," the report by Morse and other Citi analysts said. "But not all of the consequences are positive, for when it comes to the geopolitics of energy, the likely outcomes are asymmetric, with clear cut winner and losers."

The U.S. is a winner in many ways. Its super power status* could be prolonged because of this new growth in oil and shale gas production, made possible by "fracking" and other non-conventional drilling technologies.

via www.nbcnews.com

And as long as I'm on the winning side, I really don't care about the equity of the outcome.

*I've always wanted my own superpower.  Flying always seemed cool, but I think invisibility is more practical.