Environmental Economics

R.I.P. Kenneth Arrow

Arrow's major influence on my research, other than all of the background welfare stuff that I am too ignorant to understand how to fully make the connection, was as chair of the NOAA Panel on Contingent Valuation. Paul Portney (1994) describes it like this (emphasis added):

Environmentalists insisted that the NOAA rules embrace lost existence values as fully compensable damages and identify the contingent valuation method as the appropriate way to measure them. Not surprisingly, those upon whom these assessments might one day fall—led by the oil companies—pushed hard to exclude existence values and the contingent valuation method from the regulations. Amidst these conflicting pressures, and in recognition of the technical economic nature of the questions at debate, the General general Counsel counsel of NOAA, Thomas Campbell, took an unusual step. He asked Nobel laureates Kenneth Arrow and Robert Solow if they would chair a panel of experts to provide advice to NOAA on the following question: is Is the contingent valuation method capable of providing estimates of lost nonuse or existence values that are reliable enough to be used in natural resource damage assessments? ...

The NOAA panel met eight times between June and November of 1992. This included an extraordinary all-day hearing in August during which it heard statements from 22 experts, including several of the most prominent names in the economics profession, who either extolled the virtues of the contingent valuation method or condemned it. The panel completed its deliberations in December and, on January 11, 1993, submitted its report to NOAA. The report was published in the Federal Register on January 15, 1993.

The NOAA panel may have managed to upset everyone with its report. Those opposed to the use of the contingent valuation method were disappointed by what many took to be the “bottom line” of the panel report. This was the phrase, “ . . . the Panel concludes that CV studies [applications of the contingent valuation method] can produce estimates reliable enough to be the starting point of a judicial process of damage assessment, including lost passive use values.” Not surprisingly, this conclusion was cheered by those government agencies, academic researchers, and others wishing to make continued application of the contingent valuation method in their work.

Nevertheless, the panel reached this conclusion with some reluctance. I believe iIt would be fair to say that none of its members would have been comfortable with the use of any of the previous applications of the contingent valuation method as the basis for actual monetary damage awards. (To reiterate, none of these studies was intended for this purpose.) For this reason, the panel established a set of guidelines to which it felt future applications of the contingent valuation method should adhere, if the studies are to produce reliable estimates of lost existence values for the purposes of damage assessment or regulation.

These guidelines made a number of proponents of the contingent valuation method quite unhappy. In their view, strict adherence to the panel’s guidelines—especially the suggestion that in-person interviews be used to elicit values—would make it very expensive to use the contingent valuation method for damage estimation or regulatory purposes.

The NOAA Panel Report on Contingent Valuation, published as a white paper (in Courier font) and in the Federal Register, has been cited 3914 times according to Google Scholar. I have read and re-read the report a number of times, most recently while preparing Whitehead (2016) where a sub-group of the NOAA Panel makes the basic, yet so very important, point that it is economic, not statistical, significance of the scope test that matters.

Daily Demand and Supply: Calculating an elasticity of demand for sugary drinks

From FiveThirtyEight.com:

Philadelphia supermarkets and distributors say beverage sales have dropped 30 percent to 50 percent after the city instituted a 1.5-cent-per-ounce tax on sugary and diet drinks. On one hand, these are the same people who want to get the tax repealed, and we don’t have hard numbers yet, so take this with a grain of salt. On the other hand, the whole point of the tax is to reduce consumption of stuff that will kill you anyway, so … good job?

To measure the responsiveness of consumers to price changes, economist use what is called the 'price elasticity of demand.' In simple terms, the price elasticity of demand tells us whether consumers react a little or a lot when the price of a good changes.  

In technical terms, the price elasticity of demand is equal to the percentage change in the quantity demanded divided by the percentage change in the price.  Because of the law of demand we know that the quantity demanded and the price will move in opposite directions, so the elasticity demand is a negative number.  To confuse everyone, we report the price elasticity of demand as a positive number (the absolute value).  

If the price elasticity of demand is greater than 1, then we say that demand is elastic and that means that consumers are pretty sensitive to price changes. 

If the price elasticity of demand in greater than one, then we say that demand in unit elastic (the percentage change in the quantity demanded is exactly equal to the percentage change in the price).

If the price elasticity of demand is less than one, then demand is price inelastic and that means that consumers are not very sensitive to price changes.  

One reason we care about the price elasticity of demand is because there is a relationship between price elasticities and revenues collected.  If demand is inelastic, an increase in the price will increase revenues.  If demand is elastic, a similar percentage increase in the price will decrease revenues.  The reverse is also true.

This is why we see goods with elastic demand (furniture, groceries, clothing) going on sale more than goods with inelastic demand (gas, liquor).

So what does this mean for the sugary drink example above?

Let's look at the numbers (and make some assumptions).  The tax imposed on sugary drinks is $0.015 per ounce.  For a 12 ounce soda (pop?) that's an increase in the price of $0.18.  To make the math easy let's say a 12 ounce soda costs $0.50 ($3.00 a six pack?) before the tax.  An $0.18 increase in the price is a 36% increase in the price.  That's pretty big.

How much does the quantity demanded react.  If grocery stores are to be believed, the quantity demanded fell between 30% and 50% in reaction to the tax increase.  That means the elasticity of demand is between 0.83 (30/36) and 1.39 (50/36).  

So it looks like demand is slightly inelastic to elastic.

Now we can ask question like:  

• If the goal is to raise tax revenues, will an increase in the tax increase, or decrease tax revenues?
  • Tax revenues will increase if demand is inelastic and decrease if demand is elastic.
• If the goal is to decrease sugar consumption, how effective will an increase in the sugar tax be?
  • It looks like consumers might be price sensitive, so an increase in the tax might be pretty effective at reducing sugary drink consumption

 

 

Graphic of the Day: How to torture a colorblind researcher

I pulled up preliminary data from a survey I currently have in the field.  Here is one of the summary charts:

I'm colorblind...

...and confused.

Kenneth Arrow 1921-2017

Here is my obligatory Ken Arrow story upon hearing the news of his passing.

Arrow was foundational in the field of welfare economics, a field on which most of environmental valuation (my field) is based.  A while back--I want to say a decade or so, but really I have no idea--I had the opportunity to present a paper at a workshop at Stanford.  In the audience, center of the front row, was Ken Arrow.  He fell asleep.

That's the extent of my interaction with one of the giants.

RIP Ken Arrow 

This large reusable grocery bag that will immediately identify me as a dork came in the mail today

Can you imagine how bad it will be when I'm NOT a prime-age male worker?

From a journal editor:

I will make the correction. But this is now your third correction post-submission, which reflects poorly on your carefulness as a researcher.

My only possible reply:

Indeed. It is very embarrassing. 

Or maybe the 25-54 thing is not a hard and fast rule and the decline in productivity is already happening. 

The U.S. job market continues to change

And there is not much anyone can do about it:

Roughly 163,000 oil jobs were lost nationally from the 2014 peak, or about 30 percent of the total, while oil prices plummeted, at one point by as much as 70 percent. The job losses just in Texas, the most productive oil-producing state, totaled 98,000.

Several thousand workers have come back to work in recent months as the price of oil has begun to rise again, but energy experts say that between a third and a half of the workers who lost their jobs are not returning. Many have migrated to construction or even jobs in renewable energy, like wind power. ...

Indeed, computers now direct drill bits that were once directed manually. The wireless technology taking hold across the oil patch allows a handful of geoscientists and engineers to monitor the drilling and completion of multiple wells at a time — onshore or miles out to sea — and supervise immediate fixes when something goes wrong, all without leaving their desks. It is a world where rigs walk on their own legs and sensors on wells alert headquarters to a leak or loss of pressure, reducing the need for a technician to check.

And despite all the lost workers, United States oil production is galloping upward, to nine million barrels a day from 8.6 million in September. Nationwide, with a bit more than one-third as many rigs operating as in 2014, production is not even down 10 percent from record levels.

Some of the best wells here in the Permian Basin that three years ago required an oil price of over $60 a barrel for an operator to break even now need about $35, well below the current price of about $53.

Much of the technology has been developed by the aviation and automotive industries, along with deepwater oil exploration, over more than a decade. But companies drilling on land were slow to adapt until oil prices crashed and companies needed to get efficient quickly or go out of business.

Getting rid of environmental regulations in the energy sector will have several effects. Environmental quality will get worse. Energy sector profits will rise and energy jobs will increase. But the small increase in energy jobs will not be able to compensate for the lost jobs that arise due to technological improvement.  

Oyster Reef Restoration: Is a benefit/cost ratio of 7.6 worth it according to Trumponomics?

WJZ out of Baltimore, Maryland has a cool time lapse video of the impact that Oysters can have on water clarity in the Chesapeake Bay watershed. Here's the story:

The Oyster Recovery Partnership in Maryland is trying to spread the word about the natural filtration powers of oysters.

The organization posted a time lapse video Tuesday that shows how oysters can clean water.

“The magic of oysters is the magic of filtration,” the post says. “Take an oyster, plant it in a viable habitat, and in time it can filter as much as 50 gallons of water a day. Plant thousands of oysters, and you can significantly improve water quality and clarity. Their effectiveness is so impressive, in fact, that many experts consider a thriving population to be vital to the lifeline of the Chesapeake Bay. Both of these tanks were filled with water and algae from the Severn River in Maryland. The tank on the left holds 20 mature oysters. Time lapse was five hours.”

...and here's the video:

According to Google, I grew up about 5 miles from the Severn River and I used to boat, and ski, and swim in the river.  In 2004, Rob Hicks, Doug Lipton and I published a report based on a study we conducted for the Chesapeake Bay Foundation to estimate the benefits of Oyster Reef restoration in the Chesapeake Bay region.  Here's part of what we found.  

"...we estimate the coastal population in [Maryland, Virginia, Delaware, New Jersey and North Carolina] willingness to pay for a 10,000 acre oyster sanctuary with 1,000 acres of constructed oyster reef to be at least $14.91 per household per year with a median estimate of $86.86 per household per year. Aggregating to the general population, we estimate the non-use value of a ten year oyster reef project, consisting of 10,000 acres of oyster sanctuary and 1,000 acres of artificial reef to be at least $114.95 million."

The cost is estimated to be about $15m.

According to Trumponomics, restoration costs money.  

Therefore, it is not worth it.

Message to enviros: chill on the carbon tax (and don't dismiss cap-and-trade so easily)

Charles Komanoff (of the Carbon Tax Center) at The Nation:

Carbon-tax haters can relax. The proposal for a national carbon tax released on February 8 by high-level Republicans, including über-GOP consigliere James Baker, isn’t going anywhere. Financially and ideologically, the American right is wedded to carbon fuels. Trumpism runs on and reeks of them. Predictably, not a single Republican in Congress, and no one in the White House, has uttered a single positive word about the new carbon-tax plan.

Nevertheless, the proposal’s intended audience may not be Beltway Republicans but rather those ordinary Americans, majorities in both parties, who say they want action on climate, and who therefore might yet figure in the political equation over climate policy. That group includes progressives. We should pay attention: Carbon taxes matter. ...

But progressives can’t just walk away from carbon taxes. Carbon taxes are the only policy tool that, by slashing demand in a rapid, predictable way, divests our economy from fossil fuels and enables governments, business, and consumers to make investments in the transition to clean energy. Carbon taxes also have the best chance of catching fire globally.

The carbon tax James Baker brought to the Trump White House on February 8 on behalf of the new Climate Leadership Council has a lot in common with I-732: The Council’s proposal is also avowedly revenue neutral. But rather than lowering an existing tax, it relies on a so-called tax-and-dividend model: As the state of Alaska does with oil revenues, revenues from the Council’s national carbon tax would be returned equally to all American households in quarterly “dividends” digitally deposited in Social Security accounts. The tax would start at $40 per ton of carbon dioxide.

Earmarking all of the revenue to these dividends creates the political will to raise the tax every year, since the dividends rise in tandem with the tax rate. Ramping up the tax by $5 a year would shrink the use of carbon fuels so drastically that, by my calculations, US carbon emissions in 2030 would be 40 percent less than they were in 2005 (a standard baseline year).

Government policy revolves around trade-offs, and on balance James Baker’s carbon tax is worth supporting.

Yet this progress comes with a catch. The council would phase out much of the Environmental Protection Agency’s regulatory authority over greenhouse gases and would outright repeal President Obama’s Clean Power Plan to cut emissions from electricity generation. It would also immunize fossil-fuel companies from lawsuits for damages done by their products—lawsuits such as those bound to arise from the revelations that ExxonMobil and other companies knew for decades about the climate damages their products cause, and lied about it.

But government policy revolves around trade-offs, and on balance the council’s carbon tax is worth supporting. After all, well over 80 percent of the Clean Power Plan’s targeted reductions for 2030 were already achieved by the end of 2016. Thus trading away the Clean Power Plan for a tax that could scour fossil fuels from the entire economy is like swapping an aging ballplayer for the next superstar. ...

With Republicans tightly lashed to climate denial, the value of Baker’s carbon-tax proposal may be less as a gateway to legislation and more as a spur for progressives and other citizens to take a clear look at carbon pricing.

I agree that "progressives" need to get on board the carbon tax train. One hang up might be labeling this as a "conservative" approach. I'm not sure why this is being labeled a "conservative" carbon tax. If there is anything conservatives don't like these days, it is higher taxes. The "conservative" proposal for a carbon tax used to include revenue-neutral tax recycling -- lowering income taxes with an equal amount of carbon taxes raised. Now "conservatives" want to give the money back to the public as dividends. I guess both of these options differ from the "progressive" approach to the government keeping the revenue. Whatever, I don't think the ideological labels are helpful. 

One big quibble (er, a big quibble is probably not a quibble, it is more like a beef): "Carbon taxes are [not] the only policy tool that, by slashing demand in a rapid, predictable way, divests our economy from fossil fuels and enables governments, business, and consumers to make investments in the transition to clean energy." I added the bracketed term because cap-and-trade could do the exact same thing.

The Carbon Tax Center has six objections to cap-and-trade. The style is to compared an idealized textbook carbon tax with the sort of cap-and-trade that might actually be put in place by Congress (e.g., Waxman-Markey):  

1. Whereas carbon taxes lend predictability to energy prices, cap-and-trade systems aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we don’t have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
4. Carbon taxes aren’t easily subject to manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
5. Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
6. Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.

I think the first five of these are easily debunked:

1. A price collar can limit the carbon permit price volatility. 
2. This is an assertion that assumes a carbon tax would not have lengthy negotiations. 
3. Markets are not all that difficult to understand and I need to see some empirical evidence that transparent and easily understandable leads to increased public support. 
4. I would predict that special interests would make try to make sure that there are loopholes so that they don't pay the flat tax rate. It is a bit naive to think otherwise. 
5. Why can't cap-and-trade cover every sector too? Answer: it can. 

Number 6 takes a little more discussion. Carbon permits in a cap-and-trade system can be auctioned off to collect just as much revenue as a carbon tax. I'm not sure why you would choose cap-and-trade over a carbon tax with full permit auctions since there would be no trading as firms would bid up to their marginal abatement cost. Cap-and-trade with freely distributed permits would provide polluters with an asset. Relatively clean firms will make money as they sell their permits. I'm not sure why the always-evil "lawyers and consultants" will make more money off a real-world cap-and-trade plan than a real world carbon tax. 

To summarize, two points:

1. The carbon tax with dividends is a great proposal. 
2. The cap-and-trade option should not be dismissed as easily as some would like to dismiss it.

I voted green energy

I'm glad to be influencing policy in Australia. From twitter:

How should government spend $5 billion of taxpayer money currently used on green energy

— Sen. Malcolm Roberts (@SenatorMRoberts) February 16, 2017

In general, I think that taxes or cap-and-trade are more efficient than subsidies. But, I wasn't given that option.