Environmental Economics

Climate change bet: Stand-up Economist vs Library of Economics and Liberty

Bryan Caplan:

... Last week on Twitter, I publicly offered to bet at 2:1 odds that the global warming pause will continue for another 15 years. 

Yoram Bauman has nobly accepted my offer.  Indeed, he offers better terms than I requested: 3:1 odds, and I win if (according to according to ncdc.noaa.gov/cag/time-series) the average global annual land + ocean temperature increase between 2014 and 2028 inclusive is less than or equal to +.05 C.

My main question: Do Bauman's terms raise any red flags?  In particular, does anyone have any problem with his suggested data source?

Otherwise, I propose only cosmetic changes:

1. Since we already have some data from 2014, the bet should run from 2015 to 2029.

2. Yoram proposed Wheat and Chessboard stakes, but I prefer to simply bet my nominal $333.33 against his nominal $1000.

3. If ncdc.noaa.gov/cag/time-series stops publishing data during this period, we call the bet off.  Alternately, Yoram can propose back-up data sources, and we only call the bet off if they all stop publishing data.

My main reservation is the past reluctance of global warming skeptics to bet.  But after a 15-year pause that was not widely predicted in advance (also known as "predicted"), I'm ready to take my chances.

via econlog.econlib.org

Here's some background to this rivalry (Response to Bryan Caplan’s review of Cartoon Climate Change): 

Thanks to Bryan Caplan for his review of my Cartoon Introduction to Climate Change, and double thanks if he cross-posts this response on his blog (although it may mean I have to tweak my jokes about how I’ve been banned by a libertarian blog). [Update: he did!]

As with most academics, Bryan keeps his words of praise to a minimum and instead focuses on criticisms. ...

Make sure you have a sandwich before you read the back and forth.

Photobomb

I was out to eat awhile back with the co-manager of my daughter's U12 soccer team and our wives. We asked the waitress to take our picture so we could thank the parents who bought the gift card for us and let them know how much fun we had. The guy at the next table had some fun and photobombed us. So, assuming he would want as many people as possible to see how photogenic he is ...

 

Where there's smoke...there's fish kills?

The state is investigating a fish kill in an eastern Ohio creek near where a fire occurred at a shale-well fracking site on Saturday.

The Ohio Department of Natural Resources learned yesterday of the fish kill in Possum Creek in Monroe County, said Jason Fallon, an agency spokesman. Fallon said he did not have details about the extent of the kill. “I can’t confirm if it’s related to the gas-well fire,” he said.

Phillip Keevert, director of the Monroe County Emergency Management Agency, said Division of Wildlife agents were inspecting the creek yesterday and confirmed that a kill occurred.

The Eisenbarth well pad caught fire on Saturday because of a malfunction in hydraulic tubing, authorities said. Fire spread to about 20 trucks lined up on the well pad, triggering explosions that spewed clouds of black smoke.

The trucks that caught fire are used in hydraulic fracturing, commonly known as fracking. Statoil North America operates eight wells on the pad.

At the height of the fire, 20 to 25 families that live within a mile of the site were evacuated. They were allowed to return home on Saturday evening.

A number of area residents reported the fish kill yesterday. Jack Shaner, deputy director of the Ohio Environmental Council, said he has been told that the kill stretched for a few miles.

Shaner said he suspects that chemicals used in fracking ran into the creek when firefighters extinguished the blaze.

“It sounds like it was not just smoke and not just fire, but a major fish kill,” he said. “Both the company and state agencies owe the public a full public accounting of what went wrong and how they are going to prevent future occurrences.”

Statoil North America officials could not be reached for comment.

All 17 of the company’s Ohio wells are in Monroe County, state records show.

via www.dispatch.com

Play Ball! An iPhone photo essay

Where have I been for the past week?  Well, I had the privilege (used loosely) of taking the Official Only Son of Env-Econ (OOSEE), and his baseball tea--the Crush Baseball Club--to Omaha, Nebraska to compete in a 12 and under baseball tournament centered around the NCAA College World Series.  This is a national tournament with 34 teams from all over the country.  The boys live the week in a dorm (barracks?) along with two coaches (lucky me...).  Here's the story...

"The value of 'second-best solutions' to global warming"

NPR's Marketplace:

Over the weekend a prominent Republican, former Treasury Secretary Henry Paulson, came out for a more-comprehensive attack on global warming than anything the Environmental Protection Agency has proposed: In a New York Times essay, he called for a tax on carbon. Economist and Times columnist Paul Krugman quickly challenged Paulson: A carbon tax won’t happen because of politics, so will Paulson support “second-best” solutions? 

Economists agree that regulating carbon-dioxide emissions like other pollutants doesn’t work. Carbon is everywhere: producing energy, driving cars, making cement. "We’re talking about hundreds of millions of sources," says Robert Stavins, an environmental economist at Harvard, "so the whole notion of trying to reduce those emissions with source-by-source regulations is simply infeasible."

A carbon tax is a tax on carbon sources, proportionate to how much carbon each source emits. "It provides incentives for everyone" to use less carbon, says Stavins, "from the electical generator, to the cement company, to myself, in terms of running the dishwasher."

So a carbon tax is like a bug bomb. Everything else -- the world of second-best solutions -- is running around your apartment with a flyswatter.

MIT economist Michael Greenstone proposes a different metaphor for second-best solutions. "I like to think of all of these policies as kind of a bank shot in the game of billiards," he says. "You’re shooting the ball to one side of the table, although the pocket is on the other."  So it’s harder to make your shot -- and you may hit something you don’t mean to.  

He uses fuel-efficiency standards for cars as an example. Although the standards "do make cars more fuel-efficient," he says, "they also cause people to drive more. You've reduced the cost of driving."

Similarly, because the EPA’s new power-plant regulations aim at carbon-intensity, not carbon emissions, they produce some unintended effects, says University of Colorado economist Daniel Kaffine.  Because gas is less carbon-intensive than coal, the strategy "sort of acts like a tax on coal and a subsidy to gas," he says. "But what we really want is a tax on both coal and gas."

Meanwhile, evaluating the tradeoffs creates work for economists. "You know, given this menu of second-best policies," says Kaffine, "how do they compare against the reference point of doing nothing?"

via www.marketplace.org

Hat tip: Professor Stavins' twitter. And when do I get one of these?

"Depression Economics and Climate Policy"

Paul Krugman:

Ross Douthat attempts to justify the reform conservative backdown on climate policy; John Quiggin isn’t persuaded. But there’s one argument Quiggin, somewhat surprisingly, doesn’t make: Douthat has the economics all wrong.

Douthat’s essential point, as I understand it, is that economic troubles make this a bad time to take on the burden of climate adjustment, that they strengthen the case for waiting to see if we can get by doing less and using cheaper approaches.

But that’s exactly backwards. Yes, we’re having tough times — but the toughness stems from insufficient demand, which has led to an oversupply of both labor and capital. Here’s the real cost of government borrowing:

Climate action would mainly involve investment — especially investment in new or retrofitted power plants, replacing coal-fired plants with lower-emission sources. In good times such investment would mean diverting labor and capital from other useful activities. But in the post-2008 economy we’ve been awash in unemployed labor and capital with no place to go. This is an ideal time to be doing a lot about climate!

via mobile.nytimes.com

There is alot not to like here, beginning with the notion that U.S. economy is in a depession. Whether we call December 2007 to June 2009 the lesser depression or the great recession doesn't matter, what matters is the 2014 economic isn't depressed. It can be described as lousy but not depressed. So Krugman's post title is just inflated rhetoric.

Second, it is a reach to say that environmental policy can act as Keynesian stimulus. In it's simplest terms the GDP of an economy can be expressed by Y = C + I + G + (X-M), where Y is GDP, C is consumption spending, I is investment spending, G is government spending and (X-M) is net exports. Keynes argued that an increase in government spending (G) could raise a country from a depression. Krugman is arguing that environmental policy, which imposes constraints on firms, will increase investment spending (I).

On the surface this sounds perfectly reseasonble. But this is not the type of investment spending that leads to new products and lower costs of production. It is investment spending that replaces a broken window (here is what I said last June [and here] when Krugman made a similar claim about environmental policy and Keynesian stimulus). In short, the productive capacity of the economy hasn't much changed after the additional spending and so it isn't really an investment. Further, prices on energy-intensive goods will rise and consumers will have less money to spend on ordinary goods and services. In effect, consumer spending shifts over to cover increased investment spending and nothing really changes to the overall economy. In fact, there might be small negative effects because of the constraints on the production process (Krugman doesn't really disagree but says that the negative impact would be small).

I tend to agree with the conservatives that you'd rather impose environmental policiy during good macroeconomic times. But, it doesn't seem like the only good time for environmental policy is when the economy is peaking.

Picture of the Day

Photo Credit: Me (in Omaha, Nebraska--more details later).

AER (104,4) p. 1417 - Knowledge Is (Less) Power: Experimental Evidence from Residential Energy Use

An environmental paper in the AER!

Jessoe, Katrina, and David Rapson. 2014. "Knowledge Is (Less) Power: Experimental Evidence from Residential Energy Use." American Economic Review, 104(4): 1417-38.

Imperfect information about product attributes inhibits efficiency in many choice settings, but can be overcome by providing simple, lowcost information. We use a randomized control trial to test the effect of high-frequency information about residential electricity usage on the price elasticity of demand. Informed households are three standard deviations more responsive to temporary price increases, an effect that is not attributable to price salience. Conservation extends beyond pricing events in the short and medium run, providing evidence of habit formation and implying that the intervention leads to greenhouse gas abatement. Survey evidence suggests that information facilitates learning.

via www.aeaweb.org

"Gasoline price calculator"

James Hamilton:

What do recent developments in Iraq imply for the price U.S. motorists should expect to pay for gasoline?

For the last two years I’ve been using a simple summary of the long-run relation (sometimes described as a “cointegrating relation”) between the U.S. retail price of gasoline and the price of crude oil. The relation implies that a $10 increase in the price of a barrel of Brent crude oil is typically associated with a 25 cent increase in the average U.S. retail price of a gallon of gasoline. The relation only captures the long-run tendency, and leaves out seasonal factors that for example brought the price of gasoline temporarily lower this last winter. But since this spring U.S. gasoline prices have moved back in line with what you’d expect given the long-run fundamentals.

Average retail price of U.S. gasoline (black) and price predicted on the basis of price of Brent crude oil (blue). Black: average U.S. price of retail gasoline, all formulations, in dollars per gallon, weekly Jan 10, 2000 to June 16, 2014 (data source: EIA). Blue: 0.84 plus 0.025 times price of Brent, in dollars per barrel, weekly Jan 7, 2000 to Jun 13, 2014 (data source: EIA).

Here’s a little calculator courtesy of Political Calculations that you can use to get the predicted gasoline price plotted in blue in the graph above. Just enter the current price of Brent to see the implied long-run gasoline price. ...

via econbrowser.com

"Conservatives and Climate Change"

Paul Krugman:

On Sunday Henry Paulson, the former Treasury secretary and a lifelong Republican, had an Op-Ed article about climate policy in The New York Times. In the article, he declared that man-made climate change is “the challenge of our time,” and called for a national tax on carbon emissions to encourage conservation and the adoption of green technologies. Considering the prevalence of climate denial within today’s G.O.P., and the absolute opposition to any kind of tax increase, this was a brave stand to take.

But not nearly brave enough. Emissions taxes are the Economics 101 solution to pollution problems; every economist I know would start cheering wildly if Congress voted in a clean, across-the-board carbon tax. But that isn’t going to happen in the foreseeable future. A carbon tax may be the best thing we could do, but we won’t actually do it.

Yet there are a number of second-best things (in the technical sense, as I’ll explain shortly) that we’re either doing already or might do soon. And the question for Mr. Paulson and other conservatives who consider themselves environmentalists is whether they’re willing to accept second-best answers, and in particular whether they’re willing to accept second-best answers implemented by the other party. If they aren’t, their supposed environmentalism is an empty gesture.

Let me give some examples of what I’m talking about.

First, consider rules like fuel efficiency standards, or “net metering” mandates requiring that utilities buy back the electricity generated by homeowners’ solar panels. Any economics student can tell you that such rules are inefficient compared with the clean incentives provided by an emissions tax. But we don’t have an emissions tax, and fuel efficiency rules and net metering reduce greenhouse gas emissions. So a question for conservative environmentalists: Do you support the continuation of such mandates, or are you with the business groups (spearheaded by the Koch brothers) campaigning to eliminate them and impose fees on home solar installations?

Second, consider government support for clean energy via subsidies and loan guarantees. Again, if we had an appropriately high emissions tax such support might not be necessary (there would be a case for investment promotion even then, but never mind). But we don’t have such a tax. So the question is, Are you O.K. with things like loan guarantees for solar plants, even though we know that some loans will go bad, Solyndra-style?

Finally, what about the Environmental Protection Agency’s proposal that it use its regulatory authority to impose large reductions in emissions from power plants? The agency is eager to pursue market-friendly solutions to the extent it can — basically by imposing emissions limits on states, while encouraging states or groups of states to create cap-and-trade systems that effectively put a price on carbon. But this will nonetheless be a partial approach that addresses only one source of greenhouse gas emissions. Are you willing to support this partial approach?

via www.nytimes.com

The answer for most conservatives is "no." Not because they don't like these policies, which they don't, but because they don't think climate policy has benefits greater than costs. Now, if conservatives did think that the benefits of climate policy exceeded the costs they would prefer, er, demand, a carbon tax with revenues that offset an income tax cut. And then liberals would be howlling about the unfairness of it all and would be demanding the usual mish-mash of standards and subsidies.

Anyway, why is it "brave" to advocate for policy that is probably less effective and definitely more efficient.