Environmental Economics

I can't bring myself to get over the embarrassing bailout

Peter Bernstein in yesterday's NYTimes Economic View on the financial bailout:

... two important potential results deserve more attention than they have received.

The first is the risk of moral hazard within the bailout itself. That is, if government is going to make good so many losses throughout the system, why would anyone set limits on future risk-taking? The situation could turn into a free-for-all that makes the recent disregard of risk look like child’s play.

The second problem is more philosophical, involving what the bailout plan reveals about the functioning of the free enterprise system. This raises disturbing questions. Although I agree with President Bush’s observation that “the risk of not acting would be far higher,” we should be aware of the secondary effects of what we are getting into.

The second problem is that the bailout reveals that free markets don't really work well, at least in the sense that free markets won't lead to an avoidance of booms and busts. If unregulated free markets don't really work in the one place where they might, finance, then how are they expected to work well to solve environmental problems and allocate health care efficiently? My opinion is that financial, environmental and health care markets can be nudged toward efficiency with a little bit of regulation.

Comments are open, especially those that suggest I hush up because (a) this is off topic or (b) I don't know enough about financial markets and the current macroeconomic situation to suggest that moral hazard is a problem.

RGGI's first carbon allowance auction ...

... was conducted yesterday. From the RGGI webpage:

Auction Results: The clearing price and number of allowances sold for Auction 1 will be posted here on Monday, September 29th. Additional auction results will be made available to the public after financial settlement on October 8th.

I have a Google Calendar alert ready and willing to remind me to check the auction results page. I suggest that you do the same.

Another Quote of the Day

"Precaution is warranted even in the absence of absolutely final evidence concerning the magnitude of the risk"

Hmmmm...sounds familiar.  But this time it's for cell-phones.  My question:  How much uncertainty is enough to warrant action (or inaction)?

Here's the full context:

The potential link between mobile telephones and brain cancer could be similar to the link between lung cancer and smoking -- something tobacco companies took 50 years to recognize, according to US scientists' warning.

Scientists are currently split on the level of danger the biological effects of the magnetic field emitted by cellular telephones poses to humans.

However, society "must not repeat the situation we had with the relationship between smoking and lung cancer where we ... waited until every 'i' was dotted and 't' was crossed before warnings were issued," said David Carpenter, director of the Institute of Health and Environment at the University of Albany, in testimony before a subcommittee of the US House of Representatives Committee on Oversight and Reform.

"Precaution is warranted even in the absence of absolutely final evidence concerning the magnitude of the risk" -- especially for children, said Carpenter.

Ronald Herberman, director of the University of Pittsburgh Cancer Institute -- one of the top US cancer research centers -- said that most studies "claiming that there is no link between cell phones and brain tumors are outdated, had methodological concerns and did not include sufficient numbers of long-term cell phone users."

Many studies denying a link defined regular cell phone use as "once a week," he said.

"Recalling the 70 years that it took to remove lead from paint and gasoline and the 50 years that it took to convincingly establish the link between smoking and lung cancer, I argue that we must learn from our past to do a better job of interpreting evidence of potential risk," said Herberman.

Do demand and supply still drive oil prices?

Amid all of Wall Street's woes, one bit of significant economic news almost fell through the cracks this week: oil prices increased $16 on Monday, temporarily trading as high as $25 over the previous closing price. This is an all-time record high. Surely, it can't just be demand and supply that determined the price - not on a day when the Dow just happens to fall 370 points. Or can it?

Since 2002, you could take the last digit of the year, add a zero, and get roughly the price of oil for that year: $20 in 2002, $30 in 2003, and so on up to $70 in 2007. Then came 2008, when oil rose to record highs of $140 and above.

Much of that increase (if not all) was driven by simple economics. Led by the awesome rise of China's economy, many more people around the world suddenly started living - and consuming oil - like Americans. Demand went up, and supply hasn't been able to keep pace. Voilà, prices rise.

In May, when oil hit $120 per barrel, public outcry over high prices reached the halls of Congress. Always on the lookout for easy solutions, some lawmakers searched for culprits and mistakenly thought they had found them in oil speculators. The speculation theory would have made sense had we also seen rising oil stockpiles - traders hoarding oil in the hope of selling it for a higher price later. That wasn't the case.

Fortunately, legislation to curtail oil speculators never passed. Unfortunately, the uproar over high oil prices found another victim - the Lieberman-Warner cap-and-trade bill (remember that?) - due to the largely misplaced fear that climate legislation would drive up short-term oil prices even further.

Fast forward to last week. Oil prices fell from their mid-summer highs to as low as $91. That fall was also caused by basic economics. This time, it was the fear of a global economic slowdown caused, in part, by high oil prices. It's Economics 101: Demand projections went down while supply remained steady, so prices fell.

Then came this Monday. Fears of economic slowdown have been all around us, so demand projections, if anything, should point downward. Why would oil jump $25 before settling at a still-breathtaking increase of $16?

This time, one factor might indeed have been speculation - or rather the lack thereof. The broader market jitters caused some traders to close up shop. Fewer trades mean greater price swings. Technicalities in the way oil is traded were likely another factor. The clock ran out on contracts for oil to be delivered in October, which led to the typical end-of-month price spike. Others cited "stupidity" or "manipulation" as reasons. But, as always, fundamentals played a role. This time, it was the supply side that was affected by hurricanes Ike and Gustav.

The law of demand and supply is alive and well - phew, it's really the only law we've got. It also gives me a chance to plug the logical conclusion: The only real way to insulate our economy and pocketbooks from wide swings in the price of oil is to curb demand, ideally through a cap-and-trade system.

Quote of the day

Just give me a call and I'll say something stupid:

John Whitehead, a professor in Appalachian’s Department of Economics, signed up for an exercise class as part of a Health Promotion incentive program three years ago, and has been going ever since. “As you participate, you learn more about your exercise routine and things that will help you get out of a rut,” he said. “There is also a community of people there you see most every time and that helps you get through your work out.”

Source: Appalachian’s Health Promotion program helps improve employee wellness and fitness

Look it's an environmental story, but in the spirit of this week's posts, it's not good news

Finally, something environmental for me to post. 

The world pumped up its pollution of the chief man-made global warming gas last year, setting a course that could push beyond leading scientists' projected worst-case scenario, international researchers said Thursday.

A thick haze covers Jakarta, Indonesia, where carbon dioxide emissions are rising rapidly.

The new numbers, called "scary" by some, were a surprise because scientists thought an economic downturn would slow energy use. Instead, carbon dioxide output jumped 3 percent from 2006 to 2007.

That's an amount that exceeds the most dire outlook for emissions from burning coal and oil and related activities as projected by a Nobel Prize-winning group of international scientists in 2007.

Meanwhile, forests and oceans, which suck up carbon dioxide, are doing so at lower rates than in the 20th century, scientists said. If those trends continue, they put the world on track for the highest predicted rises in temperature and sea level.

The pollution leader was China, followed by the United States, which data show is the leader in emissions per person in carbon dioxide output. And although several developed countries slightly cut their CO2 output in 2007, the United States churned out more.

Still, it was large increases in China, India and other developing countries that spurred the growth of carbon dioxide pollution to a record high of 9.34 billion tons of carbon (8.47 billion metric tons). Figures released by science agencies in the United States, Great Britain and Australia show that China's added emissions accounted for more than half of the worldwide increase. China passed the United States as the No. 1 carbon dioxide polluter in 2006.

I usually leave my computer on all week

From the inbox:

Technology Support Services and the Physical Plant Office of Energy Management have teamed up to take the lead on saving energy for Appalachian State University. You can help us right away by turning off your computer and monitor at night.

What is this going to save?
The PC Energy Report from 2007 estimates that a mid-sized company (roughly the size of ASU) wastes more than $165,000 a year in electricity costs for computers that have been left on overnight. By turning these computers off, an employer can keep more than 1,381 tons of carbon dioxide (C02) out of the atmosphere. Across the nation, this adds up to more than $1.72 billion dollars and almost 15 million tons of CO2.

The cost per ton of carbon is $120?* Sounds high.

*Note: $165,000 divided by 1381 tons equals $119.57.

Where did all the gas go?

I'm out of the loop on this.  We're not having the problem in Ohio.  We lost power to much of the state for a week after Ike and we have no (ok, very few) refineries.  So how are we getting gas and the south not?  John?

The gas shortage suddenly got serious; college football in the Deep South serious.

A petroleum executive suggested Thursday that Gov. Sonny Perdue should cancel Saturday's football game between Georgia and Alabama.

Tex Pitfield, president and CEO of Saraguay Petroleum in Atlanta, said in a radio interview there might not be enough gas in the Athens area for all of the football fans driving to the game.

Gas markets provide wonderful teaching examples

As we observe long lines for gas in Boone, NC (e.g., 23 cars) I told my students today that prices should rise (Gas supplies run short):

With gas supplies running short, AAA Carolinas is urging North Carolinians to conserve gas and be patient.

"We want motorists to know it's a temporary situation," said AAA spokeswoman Carol Gifford. "Within a week to 10 days we should see much more supply available."

She urged people to consider significantly cutting back on driving.

"The big thing is do not go purchase gasoline unless you really need it. If you are filling up or topping off now with anything over a quarter tank, you are taking gas away from people who really need it," she said.

If prices rose there would be no need to implore people to stop hoarding gas.

Note: No where in the article is an explanation of why we are facing a shortage.

Like I said, a policy of bailouts

D'oh:

The House of Representatives on Wednesday approved a $25bn package of low-cost loans to help hard-pressed carmakers and their suppliers finance plant modernisation at a time of restricted access to public capital ­markets.

...

The Detroit-based car­makers have insisted that the loans, known as the Advanced Technology Vehicles Manufacturing Incentive Programme, are not a bail-out because they must be repaid.

But critics have questioned the wisdom of supporting the motor industry with taxpayers’ money, especially in the wake of the huge amounts being provided to Fannie Mae, Freddie Mac, AIG and Wall Street investment banks.

I guess I'm a critic. 

"But," you ask, "what are U.S. car manufacturers supposed to do to compete?"

I have an idea....BUILD A BETTER CAR!

I think I'm angry today.  Anybody have any environmental topics I can talk about?