Environmental Economics

I knew nothing about "the obscure effort to amend the Montreal Protocol"

Until today:

Negotiators from more than 170 countries on Saturday reached a legally binding accord to counter climate change by cutting the worldwide use of a powerful planet-warming chemical used in air-conditioners and refrigerators.

The talks in Kigali, the capital of Rwanda, did not draw the same spotlight as the climate change accord forged in Paris last year. But the outcome could have an equal or even greater impact on efforts to slow the heating of the planet.

HFCs are just a small percentage of greenhouse gases in the atmosphere, but they function as a sort of supercharged greenhouse gas, with 1,000 times the heat-trapping potency of carbon dioxide. ...

The Kigali deal was seven years in the making, and is a compromise between rich nations and poorer, hotter ones, including some where rising incomes are just starting to bring air-conditioners within reach. Wealthier nations will freeze production of HFCs more quickly than poorer countries, though some nations, including those in Africa, elected to phase the chemicals out more rapidly than required, citing the grave threats they face from climate change.

While the Paris pledges are broad, they are also voluntary, often vague and dependent on the political will of future world leaders. In contrast, the Kigali deal includes specific targets and timetables to replace HFCs with more planet-friendly alternatives, trade sanctions to punish scofflaws, and an agreement by rich countries to help finance the transition of poor countries to the costlier replacement products.

So, narrow as it is, the new accord may be more likely to yield climate-shielding actions by industry and governments, negotiators say. And given the heat-trapping power of HFCs, scientists say the Kigali accord will stave off an increase of atmospheric temperatures of nearly one degree Fahrenheit.

That would be a major step toward averting an atmospheric temperature increase of 3.6 degrees Fahrenheit, the point at which many experts think the world will be locked into a future of rising sea levels, severe droughts and flooding, widespread food and water shortages, and more powerful hurricanes.

Over all, the deal is expected to lead to the reduction of the equivalent of 70 billion tons of carbon dioxide from the atmosphere — about two times the carbon pollution produced annually by the entire world.

via www.nytimes.com

On the surface the economics seem sound. Transfers from the rich to poor and trade sanctions are real incentives. The magnitudes will be key to how successful they are. Does anyone know how much analysis was done to determine the likelihood of achieving the 1 degree F target?

I hear the drums echoing tonight

Just me doing what I do...in Morogoro, Tanzania.

Corrigendum: A Comment on “An Adding Up Test on Contingent Valuations of River and Lake Quality”

I made a basic mistake, one that I've made throughout my depressingly long career [a], in my comment on DMT (2015). In that post I said:

Probit models estimating the effect of the bid on the yes responses with the $10 bid removed are in Table 2. Only two of the five coefficients (B) on the bid variable are statistically significant at the p=.10 level. 

This is incorrect because I'm using a two-tailed test when the proper test should be one-tailed. Theory suggests that the effect of cost on a vote in favor of a policy is negative so the appropriate null and alternative hypotheses are:

H0: B_c = 0

HA: B_c < 0

Where B_c is the coefficient on the cost variable in a regression analysis. This mistake usually doesn't make a difference but if the coefficient is marginally significant in a two-tailed test (e.g., .05 < p < .10) then it will be significant in a one-tailed test (i.e., p = .05 when t = 1.645). Any use of a two-tailed test to argue that statistical results are as statistically significant as they seem when a one-tailed test is more appropriate is overly harsh. 

[a] Most everyone who does nonmarket valuation has made the same mistake and many others. In CVM a scope test should be one-tailed. In TCM the travel cost coefficient should be judged on a one-tailed test. Why do we do this? Do we not trust our theory?

Here is the corrected text:

Visual inspection of the data suggests that in the whole scenario there are three distinct sections to the bid curve. The only statistically significant difference in the yes responses at different cost amounts is between $80 and $125. In a linear probability model the slope of this portion of the bid function, B = -0.00513, is statistically significant at the p=.05 level in a one-tailed test (t=-1.70). The slopes on the upper (cost = $10 to $80) and lower (cost = $125 to $405) portions of the bid curve are B = 0.0004 (t=0.20) and B = -0.0000016 (t=0.003).

Visual inspection of the data suggests that there is a kink in the survival function at the $45 bid amount for each of the incremental parts versions. I estimate linear probability models of the cost variable on the yes responses with (a) the costs greater than $45 removed and (b) the $10 cost removed. All four of the coefficients on the slope between $10 and $45 are statistically significant at, at least, the p=.10 level using a one-tailed test (Table 1). Three of the four coefficients on the cost variables are statistically significant at, at least, the p=.10 level using a one-tailed test from the $45 to $405 bid range. The bid curve for the third increment for bids over $45.  

Table 1. Linear probability model slopes

The fitted probabilities for the whole and third scenarios are plotted in Figures 1. The bid curves for the whole and third versions do not exhibit theoretical validity over 91% and 94% of the bid range, respectively. Conduct of any further validity tests (e.g., scope, adding-up) with these two sub-samples is of dubious value.

Figure 1. Fitted probabilities for the whole and third scenarios

 

 

Flashback

A friend says the Tar River won't crest at Greenville until Thursday:

Bands of heavy rain are leading to record-breaking flooding in parts of eastern North Carolina, according to the National Hurricane Center, which may result in life-threatening flooding and flash flooding elsewhere in the region. Forecasters warned that areas along the Neuse River in Goldsboro, N.C., could experience flooding worse than the devastating inundation that followed Hurricane Floyd in 1999. The river was projected to hit 30.9 feet around 2 a.m. on Monday, surpassing the record of 28.9 feet caused by Floyd.

via www.nytimes.com

Reminds me of this: http://www.env-econ.net/2010/09/since-its-a-new-century-i-guess-there-can-be-a-new-flood-of-the-centruy.html.

Hart, Holmstrom [and Holt?] Win Nobel in Economics for Work on Contracts

Far be it from me to point out a typo:

Oliver Hart and Bengt Holmstrom were awarded the Nobel Memorial Prize in Economic Science on Monday for their insights into how best to write contracts, the deals that bind together employers and their workers, or companies and their customers. ...

The two winners spoke via an audio connection to a news conference hosted by the academy. Dr. Holt said he was “very surprised and very happy” to get the news. Asked how his day was going, Dr. Holmstrom said there was “a sense of things being surreal.”

Dr. Hart said that he hugged his wife, woke his son and then spoke by phone with Dr. Holmstrom, whom he has known for years. Both scholars teach in Cambridge, Mass.

“I woke at about 4:40 and was wondering whether it was getting too late for it to be this year, but then fortunately the phone rang,” Dr. Hart said.

via www.nytimes.com

Who is this guy Holt? If that is a typo and it was Hart that was surprised and happy, why did he wake up at 4:40 wondering when he was going to get the call?

(Update) The NYTimes has made a correction: 

Because of an editing error, an earlier version of this article misidentified the professor who said he was “very surprised and very happy” to get the news of the Nobel award. It was Dr. Holmstrom, not “Dr. Holt.” (There is no Dr. Holt among the winners.) Also because of an editing error, the article misidentified the developer of rules for executive pay. It was Dr. Holmstrom, not the other winner, Dr. Hart.

So, Holmstrom (MIT) was surprised. Hart (Harvard) was expecting it.

One thing [on-topic] that bothered me about the second debate

Hillary Clinton:

... you know that we are now for the first time ever energy-independent. We are not dependent upon the Middle East. But the Middle East still controls a lot of the prices. So the price of oil has been way down. And that has had a damaging effect on a lot of the oil companies, right?

via www.nytimes.com

If the Middle East controlled energy prices they would be high instead of low. High prices on a good with inelastic demand (consumption is not very sensitive to price changes) leads to higher profits. Energy prices are low because supply in the U.S. has increased. 

"Wildlife Refuges Boost Home Values" on the 90-Second Naturalist

This study: 

Liu, Xiangping, Laura O. Taylor, Timothy L. Hamilton, and Peter E. Grigelis. "Amenity values of proximity to National Wildlife Refuges: An analysis of urban residential property values." Ecological Economics 94 (2013): 37-43.

Abstract. This research quantifies the property value benefits of National Wildlife Refuges near urban areas on the eastern coast of the U.S.A. Our approach is made possible through access to confidential U.S. Census data identifying property values surrounding all refuges with high geographic resolution. Results from hedonic property value models suggest that the amenity values of refuges located near urbanized areas are capitalized into the value of homes in very close proximity, averaging $11 million per refuge. These capitalized values add directly to the local tax base and are considerable complements to the annual economic value created by the refuge system.

via www.sciencedirect.com

Was picked up by NPR's 90 Second Naturalist (" A daily glimpse into the natural world from Thane Maynard, President of the Cincinnati Zoo and Botanical Garden") on October 7. The podcast is here: http://www.npr.org/podcasts/404960608/the-90-second-naturalist.

Buzzkill

Maggie Koerth-Baker:

But, technically, there is no Nobel Prize in economics. Instead, there is the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. It was first awarded in 1969 and is named not after a person, but after the central bank of Sweden — the Sveriges Riksbank — which funds it. The Nobel Foundation doesn’t pay out the award or choose the winner (though the winner is chosen in accordance with the same principles used by the Nobel Foundation), but it does list the prize on its website along with the Nobels, tracks winners the same as Nobel laureates, and even promotes the prize alongside its own. Members of the Nobel family have spoken out against the award.

So why does it exist? Notre Dame historian Philip Mirowski has found evidence that the economics award grew out of Swedish domestic politics. According to Mirowski, in the 1960s, the Bank of Sweden was trying to free itself from government oversight and become independent. One way to do that was to frame economics as purely scientific, rather than political — in which case, government interference could only hurt the bank. Having a Nobel Prize boosted economics’ scientific street cred. And Mirowski isn’t the only academic who is skeptical of whether there should be a Nobel-associated economics prize. Friedrich von Hayek, who won the award in 1974, used his Nobel Banquet speech to critique the prize. “The Nobel Prize confers on an individual an authority which in economics no man ought to possess,” Hayek said. He worried that the prize would influence journalists, the public and politicians to accept certain theories as gospel — and enshrine them in law — without understanding that those ideas have a different level of uncertainty than, say, gravity or the mechanics of a human knee.

via fivethirtyeight.com

Daily Demand and Supply: Oil Glut

AKA Peak oil on opposite day:

Global oil markets are flooded with cheap crude, and concerns about climate change are growing louder. The last thing the world seems to be craving is the discovery of new large oil and natural gas fields.

But such fields have been found in the last month. And two of them are in the United States — one in Texas and the other off Alaska.

The new finds, while still preliminary and in need of more testing, could further cement two realities of the energy business: oil prices could stay low for a long time, and oil companies will keep seeking to increase their reserves for future production.

via www.nytimes.com

Increased supply leads to lower prices.

"A Curious Plan to Fight Climate Change"

Curious and Curiouser:

When Patriot filed for bankruptcy in 2015 — its second time in three years — environmentalists and regulators were prepared for the company to figure out ways to shunt liabilities and maximize returns. But no one could have envisioned what happened next.

Patriot handed over millions of dollars of environmental obligations to a nonprofit company run by a man named Tom Clarke, who owned a chain of nursing homes and a tourist attraction that had fallen behind on its bills. Until that day in April, Mr. Clarke, 61, had never been in a coal mine.

Patriot sold not only the troubled Federal mine to Mr. Clarke, but also several other mines that were no longer in operation, including a sprawling surface mine carved from the top of a mountain in southern West Virginia. Mr. Clarke’s new company agreed to clean up the shuttered mines and reclaim the land that had been ravaged.

As part of the deal, the miners’ union invested $10 million in the Federal mine operation, which was supposed to keep producing coal for Mr. Clarke to sell. But the mine has struggled from low coal prices. ...

Why then, would someone like Mr. Clarke want to take over a troubled mine and the environmental obligations that Patriot Coal was seeking to get rid of? As improbable as it may seem, Mr. Clarke said the Patriot deal had played to his advantage — helping start his grand plan to remake coal mining into a greener industry.

He is not only reclaiming Patriot’s mines that are no longer in use. He has come up with a model, he said, for how the industry can keep producing coal, while reducing its impact on the climate.

The plan involves creating pollution credits by planting or preserving trees around the world to offset the carbon emitted from burning coal. For every ton of coal he sells, Mr. Clarke attaches some of the credits.

Mr. Clarke has had trouble, however, persuading buyers of his coal, like utilities and steel companies, to pay extra for the credits.

Mr. Clarke hoped electric utilities would be able to count his green-coal credits toward the carbon-emissions goals that the Obama administration has set for states in its Clean Power Plan, now before a federal court. But administration officials have effectively ruled that out. ...

Ultimately, Mr. Clarke hopes to offset all of the expected emissions from the coal he is producing with pollution credits. But right now, he is offsetting only 10 percent. That worries environmentalists. “It’s all I can afford,” he said.

Mr. Clarke says he has been absorbing the costs personally until he can persuade utilities and steel mills to agree to pay for credits. He is hoping that states, led by West Virginia, will allow utilities to pass through the costs of his credits to ratepayers. Those discussions are continuing, he said.

via www.nytimes.com

I think the economics is clear. A climate policy based on voluntary contributions (in this case green washing by electric utilities) will not provide enough funding to achieve the efficient amount of pollution reduction (or help Mr. Clarke make money). A carbon tax (or cap-and-trade) with an offset provision would provide the right incentives.