Environmental Economics

"Father of 3. Economics Major. Tight End?"

Listen to the 3 minute audio at The Chronicle:

“There are a lot of times I ask myself what I’m doing. You know, I’m 30, playing football. But I enjoy it.”

Daryl Andersen

University of Redlands

Virginia Governor unwittingly makes the case for a mileage tax

From the Autoblog:

... Virginia state governor Bob McDonnell is the latest to offer up another way to secure more revenue from the state's residents to pay for their roads and public transportation. McDonnell's proposal would eliminate Virginia's 17.5-percent gas tax entirely, with funds for infrastructure projects coming from an increase in the sales tax from five percent to 5.8 percent and an annual $100 fee assessed on drivers of alternative-fuel and hybrid vehicles. He would leave in place the tax on diesel fuel, and naturally, the federal gas tax would remain untouched.

... we think there are holes in parts of his plan. Virginia's gas tax is already one of the lowest in the nation, doesn't rise with inflation and hasn't been increased since 1986. According to McDonnell, the revenue from it has 45 percent less purchasing power now than it did 27 years ago, so "It's a tax that's losing its value every year."

Raising it, or getting it adjusted to inflation, is for some reason not on the menu. The 0.8-percent bump in the sales tax would bring in $600 million more per year than the current gas tax does, yet to eliminate the gas tax entirely seems a bit much; it might not pay as much as it used to, but its still a pretty fair and direct usage fee, so why not take advantage of whatever it can provide?

On top of that, to jettison the gas tax but then tax owners of alternative-fuel and hybrid vehicles because "these vehicles generate little federal gas tax revenue and therefore need to contribute their share to fund the roads they use" seems disingenuous. That means the SUV buyer pays for roads at the cash register, while the Honda Insight buyer has to chip in at the register and the Department of Motor Vehicles.

And on top of all that, the move to a sales-tax funded transportation infrastructure unlinks the "fair share" argument from "the roads they use." People who buy more goods will pay more for their roads, not necessarily people who use the roads more. ...

I have only two things to add:

1. Virginia is not a state, it is a Commonwealth.
2. Tim's latest post on the mileage tax is here.

Hat tip: Kurt Rotthoff

The stand-up economist at the 2013 AEA Humor Session

Hyperinflation in Hell ... by Yoram Bauman, Ph.D., "the world's first and only stand-up economist".

Aguanomics: Pigouvian taxes do NOT produce deadweight losses

David Zetland:

For my final exam question, I asked students to compare the pros and cons of cap and trade and Pigouvian taxes for reducing the negative externality from pollution. Many students gave useful answers, but many also made two big mistakes.

The first was to claim that an advantage was their propensity to reduce consumption (an excellent example of rewriting the question as the answer :).

The other was simultaneously frustrating and enlightening to me. Many students claimed that Pigouvian taxes created a deadweight loss, i.e., the tax would reduce surplus-generating activity.* That statement is true, in general, of fiscal taxes designed to generate revenue (e.g., income, property or expenditure taxes) that the government would spend elsewhere,** but it's NOT true of Pigouvian taxes that are designed to reduce behavior that generates harm that is not reflected in the price of the good being taxed, e.g., taxes on cigarettes to pay for additional health costs or taxes on fuels to reduce and/or ameliorate the costs of pollution.***

The trouble that my students encountered -- and many teachers of economics fail to clarify -- is that fiscal taxes distort prices to generate revenue while Pigouvian taxes correct prices to affect behavior. (We explore the tension between these two goals in this paper on groundwater taxes.)

Bottom Line: We use the same word ("tax") to refer to two different policy instruments. Fiscal taxes generate revenue with some reduction in efficiency; Pigouvian taxes generate revenue as they improve efficiency. (That's why they are called win-win, but don't tell that to the people creating the pollution!)

via www.aguanomics.com

How you feeling? (Hot hot hot)

U.S. average temperature has increased by about 1.5° F (0.8°C) since 1895—and notably, more than 80% of this increase has occurred since 1980. The most recent decade was the nation’s hottest on record, and the warming will continue—the report estimates that U.S. temperatures will rise by 2° to 4° F (1.1°C to 2.2° C) over the next few decades.

Of course, the amount of warming will depend on the sensitivity of the climate system — something that remains up for debate — and the rise or fall in carbon emissions we’ll see in the future. Under a high emissions scenario — if the world isn’t able to curb the use of fossil fuels — we could see warming as high as 10° F (5.5° C) by the end of the century.

Climate change will increase the likelihood of water shortages and competition for water, especially in arid but growing areas like the U.S. Southwest. Spring snowpack is on the decline in the mountain West, and we’ll see more seasonal water shortages throughout the country — even in areas where total rainfall will increase.

Some good news: over the next 25 years, the agricultural sector is predicted to be relatively resilient to changes in the climate, including rising temperatures and more sporadic rainfall. That’s important to remember. U.S. farmers have always been the best in the world at getting the most out of their land, but it’s also true that there’s a ceiling to adaptation, and by mid-century, yields of major U.S. crops are expected to decline — seriously bad new for the U.S. and those who depend on American farmers.

via science.time.com

Hey hey, my my, rock and roll will never die

I'm using Tietenberg and Lewis, Environmental Economics and Policy, in my sophomore level environmental and resource economics class this semester. I haven't taught this course in awhile so it seems very fresh. As such, I had some fun with planning out the order of topics. Here it is:

 Chapter 1 – Visions of the Future
 Handout: The Market Forces of Supply and Demand
 Chapter 2 – Valuing the Environment: Concepts
 Chapter 4 – Property Rights, Externalities, and Environmental Problems
 Chapter 5 – Sustainable Development: Defining the Concept
 Chapter 7 – Natural Resource Economics: An Overview
 Chapter 14 – Environmental Economics: An Overview
 Chapter 8 – Energy
 Chapter 15 – Stationary‐Source Local and Regional Air Pollution
 Chapter 17 ‐ Transportation
 Chapter 16 – Climate Change
 Chapter 9 – Water
 Chapter 11 – Agriculture
 Chapter 18 – Water Pollution
 Chapter 12 – Forests
 Chapter 13 – Common Pool Resources: Fisheries
 Chapter 10 ‐ Land
 Chapter 19 – Managing Waste
 Chapter 5 – Valuing the Environment: Methods

Tietenberg and Lewis first cover the basic welfare economics and intertemporal allocation of nonrenewable resources (under the guise of sustainable development). They then present a natural resource economics overview and march through natural resource topics. Next, they present an environmental economics overview, which is really a misnomer since all of the meat and potatoes of environmental policy analysis is contained in this chapter, and then march through environmental topics. 

My rearrangement first covers the basic welfare economics and intertemporal allocation of nonrenewable resources. I pushed the valuation chapter 5 to the end of the course for two reasons: (1) I'm not sure my students really need to know this stuff in detail and (2) I just finished teaching it in my Fall semester benefit-cost analysis course and am a bit burned out by it (i.e., "hypothetical bias, blah, blah, blah"). Then I'll run through the natural resource economics overview chapter quickly and spend plenty of time on the environmental economics "overview".

My guess is that we'll be about halfway through the course at this point. The rest of the course is divided into four modules:

1. Energy and the environment - energy econmics, air pollution and climate change
2. Water resources - water allocation, agriculture and water pollution
3. Renewable resources - forestry and fisheries
4. Land resources - Land use and waste disposal

I tacked on valuation at the end just because at that point I'll bet I'm ready to talk about it (if not before), but I doubt that we'll be able to get that far. 

That is the plan. Comments are most welcome, especially if you see a problem with how I've rearranged the chapters. 

Why Study Environmental Economics? by Jill Caviglia-Harris

I'll be using this prezi in my sophomore level environmental and resource economics course (for non-majors) on Wednesday:

Why Study Environmental Economics?

by Jill Caviglia-Harris on 07 December 2012

This presentation provides the foundation for why environmentalists need to understand the powerful role that economic policies play in succesful environmental initiatives.

Now seems like a good time to remind you of the incentives created by per gallon versus per mile gas taxes

From today's Washington Times:

An on-again, off-again move by the Obama administration to scrap the federal gas tax in favor of a pay-per-mile fee would boost the tab to Americans as high as 250 percent, raising their current tax of 18.4 cents a gallon to as high as 46 cents, according to a new government study.

But without a tax increase, said the Government Accountability Office study, the government's highway fund is going to go dry. One reason the fund is going broke: President Obama's push for fuel efficient cars has resulted in better mileage, and fewer stops at the pump.

The GAO study is just the latest review of federal spending that paints a grim picture of the nation's infrastructure. Just keeping spending at current levels, the GAO said, would require a near doubling of the gas tax to 32 cents a gallon, and that would jump to as high as 46 cents should the federal government add spending to fix crumbling infrastructure and build new roads.

The average driver pays about $96 a year in federal gas taxes, said GAO. Should the administration seek to raise the highway trust fund from $34 billion to the $78 billion needed to fix and maintain roads, that could rise to $248. Translated into a pay-per-mile plan, drivers would face a tax of 2.2 cents per mile compared to the 0.9 cents they pay now. Trucks would pay far more.

But isn't driving less (and thereby reducing the externalities associated with driving) the real goal?  Or is the goal to raise revenue?  If these seem like conflicting goals--they are.  As I noted on May 20, 2011:

...with a per gallon gas tax, total taxes paid will increase with miles driven and decrease as fuel efficiency increases.  The gas tax creates the incentive to Drive Less! and drive more efficiently. 

And a gas tax can't be manipulated as easily [as a mileage tax].

It is also worth noting that a [per mile] driving tax and a [per gallon gas tax] are not equivalent.  A driving tax is a flat rate tax per mile driven for all cars.  The driving tax creates no incentive to increase fuel efficiency (and possibly a disincentive) since increases in fuel efficiency will not reduce miles driven (and may increase them).

The administration's choice of policy will reveal the true motivation behind a gas tax:  If the motivation is to create incentives for better fuel efficiency and reduced externalities, then we will see an increase in the per gallon gas tax.  If the goal is to simply raise revenue regardless of the incentive to reduce externalities, we may see the driving tax.

We're a top 100 finance blog!

From the inbox:

Hi Tim and John,

I just wanted to let you know that I did a (pretty lighthearted) study to work out the Top 100 Finance Blogs, and Environmental Economics got in. You can check out the article I wrote about it here: http://suitpossum.blogspot.co.uk/2013/01/the-100-top-anglo-saxon-finance-blogs.html.

I'm an ex-derivatives broker, and got a book coming out in May called The Heretic's Guide to Global Finance: Hacking the Future of Money. Thanks for the great blog.

All the best,
Brett Scott

I have no idea how we made this list, but we did. Or maybe it is our tight analysis of the secondary market for CO2 permits?

Demonizing cap and trade

In case you missed it (it was in the 12/25 NYTimes):

In recent months, as the start date of the new cap-and-trade program neared, California regulators have fine-tuned the rules, industry by industry, to avoid imposing severe economic hardship while trying to keep the rules stringent. It is a delicate balance. Regulators do not want California companies to lose their competitive edge, because that could make other state governments reluctant to adopt this approach.

Cement plants near Los Angeles compete with plants across the Arizona border. State tomato processors control more than 95 percent of the American market, but they fear that the fast-growing Chinese sector could make inroads.

Officials in affected industries acknowledge they are struggling with how to proceed. As Meredith Fowlie, an economist at the University of California, Berkeley, explained, “Their calculations have to be that we either sit here and emit and pay the cost of doing so, or alternatively we can look at options” like paying for major capital improvements to reduce emissions.

The state’s Air Resources Board is using an array of policies to reach its intended goal of reducing emissions to 1990 levels by 2020. It has tried to structure the cap-and-trade program to encourage industry investment in energy efficiency that could cut costs as well as lower emissions. Investing in energy efficiency may make sense for companies under California’s rules, Dr. Fowlie said, “but if they are making them before their competitors, that could be fatal.”

The rules are relatively simple for producers like Morning Star. At the end of 2014, they must present state-issued allowances — one per metric ton of emissions — for the greenhouse gases they emitted in 2013.

For the 200,000 metric tons of carbon dioxide emitted annually by Morning Star’s three plants, the company is being awarded about 192,500 free allowances the first year; the company must buy the remainder on the open market. In the first allowance auction in November, the allowance price settled at $10.09 a ton, meaning in the first year Morning Star has to pay roughly $75,000 to cover its emissions.

But over the next five years, the number of free allowances will decrease sharply to encourage further emissions cuts. At current rates, that means Morning Star will have to buy 100,000 allowances for both 2017 and 2018, by which time the prices may have doubled or tripled in an open market. The company estimates the law will cost it an extra $20 million over the next seven years.

Nick Kastle, a company spokesman, said it would almost certainly pass on the new costs to makers of ketchup and frozen pizza, which would be likely to share the extra costs with consumers. “People nationwide are going to be affected by AB 32,” he said.

But, isn't that the point? Passing on (some of*) the costs of pollution to consumers encourages consumers to use less of the polluting product.

*Note: Producers aren't able to pass on all of the costs of pollution control. If producers could pass on all of the costs they wouldn't fight so hard to try to avoid them, right? The magnitude of the incidence of regulatory costs depends on demand and supply elasticity.