Environmental Economics

The ex-post ex-ante Mercury Rule benefit-cost analysis might appear today!

About a month ago it seemed as if the Supreme Court delayed the Mercury Rule because the required benefit-cost analysis wasn't ex-ante enough. In effect, the Supreme Court ordered the EPA to go back in time and conduct the analysis again:

EPA spokeswoman Melissa Harrison ... confirmed that the EPA next month plans to finalize a fix to the rule to retroactively apply its cost-benefit analysis in the way the Supreme Court said was necessary.

The court ruled last June that the EPA should have conducted a cost-benefit analysis on the regulation before it even decided to start writing it. The agency did so as part of the regulatory process, but the justices said that was not sufficient.

From this morning's overnight energy email:

The Obama administration is one step closer to putting out its fix for its major power plant pollution rule that the Supreme Court said was illegal.

The White House Office of Management and Budget approved the Environmental Protection Agency's (EPA) measure to fix the rule Thursday, a day before the deadline the EPA gave itself.

The problem with the mercury and air toxics rule, the Supreme Court said was that the EPA should have considered costs and benefits before it even started writing the rule, not just in the process of writing it.

So the EPA has proposed to simply apply its existing cost-benefit analysis -- which shows benefits outweighing costs by nearly 10 to 1 -- to the earlier part of the rulemaking process.

Keep an eye out for the fix Friday.

I eagerly await the "Friday fix." 

Trading jobs: Why the presidential candidates all seem to have it wrong

When talking about outsourcing jobs, why don't politicians ever mention the less expensive goods we get in return?

This from coverage of last night's Democratic debate:

Sanders is no fan of General Electric. He and the iconic American company have been trading jabs ever since Sanders attacked the firm in an interview with the New York Daily News earlier this month for sending jobs overseas...

Let me start my rant here by stating the conclusion.  To paraphrase Gordon Gekko, "Trade is Good!"

Let's take a look at a somewhat simplistic example to illustrate why focusing on jobs when talking about trade is silly.  Suppose four friends, two farmers and two carpenters embark on a fateful trip aboard a tiny ship from a tropic port.  The weather starts getting rough and their tiny ship is tossed.  The ship splits in two, the farmers aboard one half and the carpenters aboard the other half.  Each half runs aground on separate uncharted desert isle, within raft distance of each other. 

At first the two groups don't know the location of their friends, so they take on the task of survival on their own.  The carpenters readily build shelter, but over time, struggle to generate a sustainable supply of food.  They spend a lot of time trying to grow food and in doing so take a lot of time away from building shelter.  So they end up with inadequate food and shelter.

The farmers on the other hand have no problem with their food supply.  Their farming knowledge allows them to quickly work the land on their island and are able to generate a minimally adequate food supply.  If they could focus only on farming, they would have plentiful food, but they need to take much of their farming time and dedicate it to building shelter, something for which they are not trained.  The shelters they build are weak, and are frequently damaged by tropical storms due to their inferior carpentry abilities. 

One day while scavenging for food on a high spot on his island, one of the carpenters sees a nearby island, that looks as if it is reachable by raft.  Using their carpentry skills, the carpenters build a raft, and one of the carpenters sets sail for the other island. 

Upon arrival, the hungry but well-rested carpenter finds his farmer friends, healthy from their adequate food supplies, but weather beaten and tired from their inadequate shelter.  The farmers, glad to see their friend, explain that they are having no problem growing food, and could grow more than enough if they didn't have to waste so much of their time trying to constantly fix their shelter.  The carpenter tells the farmers that they are having no trouble making shelter, but they are starving.  If they had more time, they could build tropical mansions for themselves, but they are constantly using their time to just find enough food to survive. 

So the carpenter makes the farmers a proposition:  If you two dedicate all of your time to farming, you can grow more than enough food for all four of us.  If we spend all of our time building, we can build luxurious shelter for all of us.  So let's do this.  You grow food, we'll build shelter and then we will trade.  In return for some of the food you grow, we will come to your island and build you shelter. 

The farmers agree to the deal.  The farmers outsource their carpentry jobs to the carpenters' island and the carpenters outsource their farming jobs to the farmers' island.  The farmers farm, the carpenters build.

What is the result? 

Better food supply, better shelter and EVERYONE REMAINS FULLY EMPLOYED doing what they are good at doing*.

And that is the point of trade. 

Trade makes everyone better off.  The fact that some jobs move to places where those workers can specialize is a good thing for everyone.  In return, we get cheaper goods and services, and we get the opportunity to produce those goods and services for which we have the comparative advantage.  Everyone wins. 

Trade is not a zero sum game.  It's not 'if we export, we lose and they win.' 

Yes, some jobs will shift. 

They always have.  Here's a nice picture from a couple of years ago that illustrates the point:

In 1840, almost 70% of the U.S. workforce was in agriculture.  That number steadily declined ever since.  Where did all of those jobs go?  Do we have thousands of unemployed agricultural workers? 

No.  As the U.S. developed a more educated workforce, jobs shifted initially to manufacturing and then jobs shifted from manufacturing to the service industry. 

As these shifts have occurred, agricultural products got cheaper and manufactured goods got cheaper and services got cheaper. 

And overall employment rates really haven't changed much:

So what's my point? 

Trade and jobs should be independent discussions.

The question isn't whether we lose jobs to trade.  We do.

But we also gain jobs from trade.  It's just that those jobs are different.

And different makes people uncomfortable. 

The U.S. is now a service based economy. 

And that's a good thing.

But, are we providing the educational and job training opportunities for those caught up in the churn to succeed in the service economy?

If not, some will be left behind. 

And that's not a good thing.

Let's stop worrying about which jobs are outsourced and what we are trading and instead focus on providing the education and job training for the future.

Rant over.

*And if you're wondering why one of the carpenters doesn't move to the farmers' island and one of the farmers move to the carpenters' island to make everyone better off, well, that would be immigration.  And we all know what we think of immigration.

 

 

 

 

 

 

"As Oil Nations Consider a Freeze, Looking for Tensions to Thaw"

For your cartels and game theory lecture:

When officials from OPEC, Russia and some other oil-producing countries meet this weekend in Doha, Qatar, to discuss freezing petroleum production at current levels, the session’s significance might have more to do with style than substance.

The fact is that the two biggest players at the meeting — Saudi Arabia and Russia — are already pumping virtually flat out. They have little room to increase production even if they wanted to.

But signals the two countries have sent recently, indicating they would rather discuss cooperation than continue cutthroat competition, have buoyed oil prices well above their lows in mid-January, when the Brent crude international benchmark dipped below $30 a barrel. On Monday Brent crude was trading above $41.

Analysts, oil buyers and speculators will be watching the Doha meeting mainly to see whether the 13 members of the Organization of the Petroleum Exporting Countries and Russia show signs of being able to cooperate enough to exercise market discipline — and maybe even to cut production at some point, if necessary, to bolster oil prices.

Signs of disharmony, or a last-minute cancellation of the summit, might send oil prices plummeting yet again, and possibly stir up the broader financial market anxieties that accompanied the winter sell-off.

via www.nytimes.com

"ExxonMobil CEO Relieved It Finally Too Late To Do Anything About Climate Change"

Good ol' Rex:

Saying the multinational oil and gas conglomerate had “really dodged a bullet,” ExxonMobil CEO Rex Tillerson told reporters Wednesday how relieved he was now that it was finally too late to do anything about climate change.

The 64-year-old petroleum executive, who acknowledged that throughout his career he had feared the public might take action to curb rising temperatures by imposing emissions restrictions or mandating a switch to alternative energy, said he was just happy that the window for avoiding the planet’s environmental destruction had closed, and that the entire industry was now free to carry on as usual.

“I was really worried for a while there that some kind of law would be passed to stop us from releasing all those hydrocarbons into the atmosphere, but I guess not,” said Tillerson, describing how he felt as if a tremendous weight had been lifted from his shoulders now that catastrophic climate change was an inescapable certainty. “Seriously, it’s a huge load off. There were a number of real tense years after the recycling movement picked up momentum when we thought people might all turn away from fossil fuels next. But it’s just so reassuring to know that we passed the point where it’s no longer possible to stop global warming through environmental regulation or green energy or anything like that.”

“Now I can finally just relax,” he continued. “This really makes things so much easier.”

The CEO remarked that, back when it was still possible to halt the devastating effects of climate change, he constantly feared that the energy industry would be forced to make costly concessions toward sustainability, perhaps investing in expensive technology that would reduce oil and gas companies’ environmental impact, and thereby severely harm his corporation’s bottom line.

Tillerson told reporters that growing public interest in wind and solar energy gave him “a pretty good scare” for a while, but noted how he eventually came to realize the public’s engagement was largely limited to vocalizing support for the initiatives rather than taking any substantive action to move the overall energy sector in those directions. He also admitted to losing sleep in 2009 when Congress considered regulating carbon emissions with a cap-and-trade system, although he said he now felt silly for ever believing that might actually happen.

via www.theonion.com

Getting Crabs: A Tragedy of the Commons

This is almost enough to make me move back to Baltimore:

Marylanders could have an easier time finding — and affording — local crabs this summer, a survey of the Chesapeake Bay blue crab population suggests.

There are more than 550 million blue crabs in the Chesapeake Bay, an increase of more than a third over this time last year and one of the highest counts of the past two decades, according to state officials.

Maryland Blue Crabs are a classic example of a common pool resource.  A local delicacy, Blue Crabs have historically been overharvested in the Chesapeake Bay due to open access of the water of the Chesapeake.   If the Chesapeake were privately owned (which I am not advocating for, but using as an example of what proper management of the Blue Crab stock would look like), the private owner would harvest Blue Crabs in such a way as to ensure sustainable populations of crabs year after year.  Because the Bay is not privately owned, but rather anyone can access the Bay and the Blue Crab fishery, race to extract crabs before their competitors.  The result is low crab populations, high crab prices, and unhappy Baltimorons.

Here's a graph from the Virginia Institute of Marine Science representing Chesapeake Bay Blue Crab harvest since 1990:

 A noticeable trend.  Part of that trend is due to overfishing, but part is due to regulation of the fishery.  In order to grow Blue Crab populations, and increase harvests, it is necessary to regulate the fishery to restrict harvests.  The irony in restricting harvest is that it will eventually increase harvest.  Absent regulation, the sustainable Blue Crab harvest is low (and possibly zero), because open-access overfishing will lead to smaller populations and smaller growth rates.  With regulation, the crab population can be maintained at higher levels, thus increasing the potential annual harvest. 

That seems to be what is going on now:

[State officials] credit favorable weather and past harvest restrictions for a second straight year of strong crab population growth.

"We fully anticipate a robust crab season this year," said Dave Blazer, fisheries survey director for the Maryland Department of Natural Resources.

And of course with good news comes calls to loosen harvest restrictions:

Officials plan to explore whether the increasing numbers should prompt regulators to loosen harvest restrictions or lengthen the crabbing season.

 But of course, those damn scientists and conservationists (and economists?) have to be party poopers:

Scientists and conservationists said that while the survey results are encouraging, they don't eliminate concerns about the health of the bay and blue crab reproduction.

"We are in a much better place than we were," said Thomas Miller, director of the state's Chesapeake Biological Laboratory in Solomons. But he said the crab population isn't yet "up to consistent levels of abundance that will support a sustainable fishery into the long term."

...

State Natural Resources officials plan to confer with watermen, conservationists and other stakeholders to consider whether changes to the length of the crabbing season or limits on harvesting female crabs are warranted. Watermen are generally limited in how many female crabs they can harvest, and they're prohibited from harvesting any females late in the season.

Chance said watermen welcome those discussions. They have accepted new restrictions in the past with the understanding that regulations could be loosened if crab populations rebounded, he said.

Scientists, though, said changes should come only after a careful analysis. They say people shouldn't assume the survey numbers mean the crab population can handle a bigger harvest. In 2012, for example, surveys showed a record number of juvenile crabs, but so many of them died it didn't translate into a long-term population boom.

"We have to understand whether this brings the population ... above a threshold which suggests it's no longer overfished," said Donald Boesch, president of the University of Maryland Center for Environmental Science.

In coming weeks, state scientists will continue to analyze the data gathered in the survey.

Nevertheless, increasing populations may mean that economists have it right, and regulating the commons to maximize long term economic profit will actually increase Blue Crab populations more than biologists and conservationists would recommend.  Afterall, as John said back in 2005: Economists are better fish conservationists than biologists.  As John put it:

So, imagine an unregulated fishery. Boats fish until there is no more profit to be earned. This occurs when the catch, revenues, and stock of fish are at low points. Fishers don't make much money. Biologists try to improve on this by regulating for the "maximum sustainable yield" (MSY) MSY is the maximum catch that can occur every year. In effect, MSY maximizes revenues.

When economists enter the picture they scratch their heads and wonder why biologists regulate to maximize revenues instead of profits. In other words, why do biologists ignore the costs of fishing? Economists promote the "optimal sustainable yield" (OSY) where the effort level is set where the difference between revenues and costs is maximized. As it turns out, the OSY effort level is usually below the MSY effort level. Lower effort leads to less catch and healthier fish stocks.

That is why I think I can get away with saying that economists are better fish conservationists than biologists.

 

Daily demand and supply: the vanilla shortage

The Onion:

Top vanilla producer Madagascar is experiencing a shortage of the plant due to rising global demand for natural flavorings, potentially leading to a spike in ice cream prices this summer.

What do you think?

“I have this six-year-old bottle of extract in my cupboard, if that helps things.” Don Buckley, Systems Analyst

“Edy’s can gouge me all they want for that real slow-churned stuff.” Chet Baisell, Unemployed

“We should be able to get through this. There’s no vanilla in pizza.” Eva Landiss, Element Namer

"There's no vanilla in pizza." Truer words were never spoken.  

"A Look at Six State Proposals to Tax Carbon"

Dallas Burtraw:

As the political likelihood of passing comprehensive national climate policy has remained low, many states have taken up the mantle. This devolution of climate policy has been further reinforced by the US Environmental Protection Agency’s (EPA’s) efforts to regulate carbon dioxide from existing power plants under the Clean Power Plan, which requires states to develop their own plans for compliance with emissions standards.

Certainly there is no shortage of policy ideas in the “laboratories of democracy” that indirectly aim at carbon emissions by promoting technology adoption or energy efficiency. Currently, two prominent examples of subnational policies aimed specifically at carbon emissions exist: California’s cap-and-trade system and the Northeast’s Regional Greenhouse Gas Initiative (RGGI), which also employs a cap-and-trade approach. Recently, six states have each proposed legislation to introduce a comprehensive state-wide carbon tax: Massachusetts, New York, Oregon, Rhode Island, Vermont, and Washington. (Vermont has a second legislative proposal that is more stringent but has less support in the legislature at this time.) And in California, where there is a robust cap-and-trade program, some legislators have suggested a transition to a tax.

It should not come as a surprise that these proposals have been introduced by Democratic members of state legislatures, and that these states have a history of ambitious greenhouse gas (GHG) mitigation goals. ...

Despite the similarities in political conditions across these six states, the designs of their proposed policies are heterogeneous—differing, for example, in terms of the pollutant covered by the policy. Historically, most policies have focused on targeting carbon dioxide emissions exclusively, as these are responsible for the majority of GHG impacts and are easiest to measure. Half of the states—Oregon, Washington, and Vermont—cover only carbon dioxide with their tax proposals. The others—Massachusetts, Rhode Island, and New York—go a step further and also include methane emissions, which make up a smaller proportion of total atmospheric warming emissions but are more potent. New York also proposes to include other nitrous oxides and any combustion-related GHG emissions.

The stringency of the proposed policies also varies across the states. As highlighted above, the coverage of pollutants differs. All else equal, the policies of those states with fewer pollutants covered are relatively less stringent. In addition to the coverage, the price (tax rate) also determines a policy’s stringency. The initial price level varies from $10 per ton of carbon dioxide equivalent (tCO2e) in Massachusetts to $50 per tCO2e in New York, with the other proposals falling in between. More important, however, is a policy’s price path, which determines how the tax rate evolves over time. The bills from Rhode Island and Washington both include automatic increases at the same rate as the Consumer Price Index (CPI), ensuring that the rate does not get outpaced by inflation. By 2026, in real terms (i.e., assuming no inflation), the price of the proposed policies varies from $15 per tCO2e in Rhode Island to $185 per tCO2e in New York (see figure). ...

via www.rff.org

"Signs Are Promising That Economies Can Rise as Carbon Emissions Decline"

Be careful not to confuse the first and second derivatives (I think that is the correct mathematical expression*):

Throughout the 20th century, the global economy was fueled by burning coal to run factories and power plants, and burning oil to move planes, trains and automobiles. The more coal and oil countries burned — and the more planet-warming carbon dioxide they emitted — the higher the economic growth.

And so it seemed logical that any policy to reduce emissions would also push countries into economic decline.

Now there are signs that G.D.P. growth and carbon emissions need not rise in tandem, and that the era of decoupling could be starting. Last year, for the first time in the 40 years since both metrics have been recorded, global G.D.P. grew but global carbon emissions leveled off. Economists got excited, but they also acknowledged that it could have been an anomalous blip.

But a study released by the International Energy Agency last month found that the trend continued in 2015. In another study published on Tuesday, Nathaniel Aden, a research fellow at the World Resources Institute, a Washington think tank, found that since the start of the 21st century, 21 countries, including the United States, have already fully decoupled their economic growth from carbon emissions. In those countries, while G.D.P. went up over the past 15 years, carbon pollution went down.

via mobile.nytimes.com

In any single time period, any constraint on economic activity will decrease the amount of economic activity. My guess is that GDP is these countries is increasing more slowly than if they could use as much of the dirty, cheap energy sources as they wanted. In other words, what may have been a 3% growth rate is now 2.5%.

That said, it is not unlikely that long term welfare (e.g., income, health, etc) is greater at 2.5% economic growth (and fewer emissions) than 3%.

*Math update (4/12/16):

Let's say Y is a function of X and Z where Y is production of goods and services, X is dirty energy (coal, oil with emissions positively correlated) and Z is clean (solar, wind). The first derivative (the slope of Y) is positive, dY/dX > 0, meaning that emissions and income are positively related. This relationship hasn't changed. The second derivative, the slope of dY/dX, may have changed from positive to negative. Instead of production increasing at an decreasing rate with emissions (meaning that more and more fuel is needed to production one more unit of output, i.e., diminishing returns), we may now be enjoying production increasing at an increasing rate with dirty energy. But that isn't what is really going on. With the substitutability of X and Z, we're using more Z and less X so it is the cross-partial derivative that is complicating things. 

It is still true that a policy that constrains energy use will increase the costs of production in the short run (i.e., until new technology brings down the cost of solar and wind).

 

At least it wasn't the Antonin Scalia School of Holistic Medicine

Too good to pass up:

It must have seemed a straightforward way to honor a U.S. Supreme Court justice who was famous for, among other things, prizing straightforwardness. But then people began to titter about the unintended acronym of the Antonin Scalia School of Law — and now George Mason University has tweaked the name.

The new name for the institution in Arlington, Va., will be the Antonin Scalia Law School, says law school dean Henry N. Butler, citing "some acronym controversy on social media" as the reason for the change. The name will become final in July, pending approval by the State Council of Higher Education for Virginia.

In case you missed it

The court approved the settlement between the government and BP for the Deepwater Horizon NRDA:

Today—nearly six years after the Deepwater Horizon oil spill began—the court approved a settlement with BP for natural resource injuries stemming from the spill. This settlement concludes the largest natural resource damage assessment ever undertaken. We will now begin implementing restoration as laid out in the Trustees’ comprehensive restoration plan.

Under this settlement, BP will pay the Trustees up to $8.8 billion for restoration to address natural resource injuries. The settlement—the largest recovery of damages ever for injuries to natural resources—includes:

• $1 billion already committed during early restoration
• $7.1 billion for restoration over 15-plus years, beginning in April 2017
• Up to an additional $700 million to respond to natural resource damages unknown at the time of the agreement and/or to provide for adaptive management.

Source: http://www.gulfspillrestoration.noaa.gov/2016/04/trustees-settle-with-bp-for-natural-resource-injuries-to-the-gulf-of-mexico/

 

This work is not a product of the United States Government or the United States Environmental Protection Agency, and the author is not doing this work in any governmental capacity.  The views expressed are those of the author only and do not necessarily represent those of the United States or the US EPA.