Environmental Economics

Econ 101ism and Environmental Economics

I just finished reading a great book that substantially changed how I think about economics - "Economism: Bad Economics and the Rise of Inequality" by James Kwak.  In a nutshell, the book describes "economism" - which has also been called "Econ 101ism". It is the over-reliance on basic microeconomic principles (the kind I teach in my principles of microeconomics course) and the failure to realize (or admit) that the predictions and prescriptions of these simple models often fail in the real world. 

One of the most popular examples of an Econ 101ism argument is the argument against increasing the minimum wage.  We all know from principles that an increase in the minimum wage will hurt the very people that it is supposed to help, because it will create a surplus in the labor market, i.e. unemployment.  We can even prove that it's true with a nifty graph!  But, it's probably not true. (Here is an excerpt from Kwak's book with more on the minimum wage argument.)

Econ 101ism arguments are usually employed by libertarian-conservative types who argue for less government/more laissez-faire.  Lower taxes, less regulations, etc.  Most Econ 101ism devotees would admit that there are exceptions and instances where government intervention can improve things, like in the case of environmental externalities. 

But, sometimes these 101ism arguments are also employed by the left.  For instance, the left across American and Europe is making a lot of pro-immigration and pro-trade arguments, while many on the right are arguing for isolationism and protectionism.  In this case, it's the left that is on the side of Econ 101ism, since "free trade benefits both sides" is another tenet of 101ism. Of course, that doesn't make it wrong. But we should be wary of arguing about important and complicated issues using simple models that I can teach an undergraduate in 5 minutes.

What does this have to do with environmental policy?  It occurs to me that even we environmental economists may be guilty of relying too heavily on Econ 101ism when arguing for policy.  Specifically, environmental economists often feel that it's their primary mission in life to convince as many people as possible in the virtues of Pigouvian pricing relative to any other environmental policy.  Environmental economists often will go so far as to scoff at any alternative policy.  I've done this myself!  Several times! Even in this blog!

Preferring Pigouvian pricing to command-and-control policies is fine, and most probably taxes are more cost-effective.  But economists may be guilty of letting the perfect be the enemy of the good by constantly reminding everyone around them of the inferiority of alternative policies.  Larry Goulder gave a talk at the AERE luncheon at the ASSA meetings earlier this month in Atlanta, arguing that the "probability of implementation" ought to be a desideratum of environmental policy alongside cost-effectiveness.  If a command-and-control policy, like a federal clean energy standard, is more likely to pass than a tax, that might trump its lack of cost-effectiveness.

Alternatively, environmental economists could think more carefully about making environmental pricing more popular and therefore implementable.  My colleague here at Georgia State University, Stefano Carattini, recently published a comment in Nature describing his research that returning carbon tax revenues to households increases their popularity. 

One of the most illuminating points made by Kwak in "Economism" is that, when making arguments appealing to Econ 101ism, the arguers will often claim intellectual superiority by insisting that anyone who disagrees with them only does so because of their ignorance.  "If you understood economics, you wouldn't support the minimum wage." Some of us environmental economists may be guilty of the same hubris.  Lots of research has been done on the political science of environmental policy, and there is a lot of opportunity for economists learn something from it.

I signed the "Economists' Statement on Carbon Dividends"

Here is the email:

Dear Colleague,

I am writing to invite you to join me, 27 Nobel Laureate economists, 3 other former Chairs of the Federal Reserve and 15 former Chairs of the Council of Economic Advisers as a signatory of the Economists’ Statement that you will find below. Our statement was released today on the opinion page of the Wall Street Journal. A full list of the original co-signatories appears below.

This statement outlines what we believe is the most cost-effective, equitable and politically-viable national climate solution. Now more than ever, it is critical for economists to point the way forward and coalesce around a bipartisan climate policy.

Our goal is to enlist thousands of economists from around the country as additional signatories to demonstrate the breadth of support within the economics profession for this market-based solution. I encourage you to join by clicking the link below.

f you wish to sign on, please do so at your earliest convenience. Also please feel free to share this invitation with your colleagues in the economics profession. Once we have sufficient signatures, a final version of the statement will be posted online, including the names of all signatories.

This effort is being coordinated by the Climate Leadership Council, of which original co-signatories Ben Bernanke, Martin Feldstein, N. Gregory Mankiw, George Shultz, Lawrence Summers and I are Founding Members. Any questions can be directed to [email protected].

Thank you for seriously considering this invitation.

Janet Yellen

Here is the statement:

Economists' Statement on Carbon Dividends

Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations.

I. A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future.

II. A carbon tax should increase every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government. A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services.

III. A sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient. Substituting a price signal for cumbersome regulations will promote economic growth and provide the regulatory certainty companies need for long-term investment in clean-energy alternatives.

IV. To prevent carbon leakage and to protect U.S. competitiveness, a border carbon adjustment system should be established. This system would enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing.

V. To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in “carbon dividends” than they pay in increased energy prices.

One might quibble with different parts of this but don't let the perfect be the enemy of the good. 

Here is the link where you can sign: https://www.econstatement.org/sign-the-statement (I think this will work ...).

Here are the videos from the "Tips for Students and Newish Economists" AERE@SEA session, November 2018

• "Appling Design Concepts to Increase the Impact of your Presentations"
  Jill L. Caviglia-Harris, Salisbury University
• "Adding Logic and Proof Concepts to Your Intro Courses"
  Christopher F. Dumas, University of North Carolina - Wilmington
• "Social Media but in a Way That's Kind of Useful"
  Sarah Andrea Jacobson, Williams College
• "Writing Grants is a Skill: Tips for Success"
  Will Wheeler, U.S. Environmental Protection Agency
• "Consulting on the Side"
  John C. Whitehead, Appalachian State University

Thanks to Jessica Post for the videos!

Don't forget your macroeconomics when analyzing U.S. greenhouse gas emissions

From the WaPo (U.S. greenhouse gas emissions spiked in 2018):

U.S. carbon dioxide emissions rose an estimated 3.4 percent in 2018, according to new research — a jarring increase that comes as scientists say the world needs to be aggressively cutting its emissions to avoid the most devastating effects of climate change.

The findings, published Tuesday by the independent economic research firm Rhodium Group, mean that the United States now has a diminishing chance of meeting its pledge under the 2015 Paris climate agreement to dramatically reduce its emissions by 2025.

The findings also underscore how the world’s second-largest emitter, once a global leader in pushing for climate action, has all but abandoned efforts to mitigate the effects of a warming world. President Trump has said he plans to officially withdraw the nation from the Paris climate agreement in 2020 and in the meantime has rolled back Obama-era regulations aimed at reducing the country’s carbon emissions.

The sharp emissions rise was fueled primarily by a booming economy, researchers found. But the increase, which could prove to be the second-largest in the past 20 years, probably would not have been as stark without Trump administration rollbacks, said Trevor Houser, a partner at Rhodium. ...

Rising emissions are not just a U.S. problem. Global emissions also reached a record high in 2018, and the increase in the United States goes hand in hand with rising emissions in other countries, such as China and India, said Michael Mehling, deputy director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology.

“It’s not an isolated phenomenon,” Mehling said, adding that the trend makes it difficult to solely blame the Trump administration’s deregulatory push and its dismissal of climate action for the change. ...

The key issue now is how all of this plays out over the next two years, leading up to 2020. That is both the year when the United States can formally exit the Paris climate agreement and the year when member countries need to announce more-ambitious climate plans.

That leaves a world facing a make-or-break decade for emissions reductions still unsure of exactly what role the United States will play, if any.

“Other countries are going to be looking at the [2020 presidential] campaign,” Wirth said. “If you’ve got all presidential candidates with the exception of one running for election saying, ‘I’m prepared to commit to bigger reductions,’ then that will resonate.”

The headline is likely an overstatement. Did emissions spike? Emissions in 2018 are still below the pre-Great Recession peak and below several years since the decline began (again, due to the Great Recession). There may be some sort of cyclical pattern here too. In other words, there have been three "spikes" since the peak. The most recent may be related to the 2018 tax cut. As that wears off we might get closer to the Copenhagen Accord target in 2019 and a recession in 2020 might really nail it. 

An estimate of the demand elasticity of Saudi oil exports

WSJ (Saudis Plan New Export Cuts in Hopes of Lifting Oil to $80 a Barrel): 

Saudi Arabia is planning to cut crude exports to around 7.1 million barrels a day by the end of January in hopes of lifting oil prices above $80 a barrel, according to OPEC officials.

The new strategy comes as the kingdom seeks to cover a large government spending boost. It said last month that it planned to increase its expenditures by 7% in 2019—the equivalent of about $20 billion—as the country struggles to fund ambitious plans to diversify its economy beyond petroleum products.

Crown Prince Mohammed bin Salman, the de facto Saudi ruler, has faced a sharp decrease in oil prices since October amid a supply glut. The brutal killing of journalist Jamal Khashoggi by Saudi operatives in October has also deterred foreign companies from working in the kingdom and investing in its economic development plans.

The new Saudi budget requires oil prices to rise to as much as $95 a barrel, according to an official with the Organization of the Petroleum Exporting Countries. But the kingdom would be satisfied with prices at $80 to $85 a barrel, a range that would limit its need to dip it into its financial reserves, according to people familiar with its thinking.

To cover proposed expenditures, Riyadh is set to reduce crude exports by up to 800,000 barrels a day from November levels.

Saudi Arabia exported about 7.3 million barrels a day of crude last month. That was already down from around 7.9 million barrels a day in November and 7.7 million barrels a day in October.

Brent crude, the global benchmark, rose 1.2% to just under $59 a barrel and WTI jumped 3.5% to just under $50 a barrel Monday after The Wall Street Journal reported Saudi Arabia planned to deepen export cuts.

The own-price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Here are some calculations from my interpretation of the excerpt above:

• % change in quantity = (7.1 - 7.9)/7.9 = -0.11
• % change in price = (80 - 59)/59 = 0.36

According to me, the elasticity is -0.28. What am I doing wrong?

And one more thing:

The U.S. market will see the largest reduction in Saudi oil exports, according to an OPEC official. Overall, the export cuts would go beyond the six-month commitment it made in early December to OPEC. ...

Oil prices fell below $80 a barrel in October after Saudi Arabia turned up the spigots in response to U.S. pressure to replace sanctioned Iranian oil. The increase turned out to be more than the market needed.

President Trump is going to need to place another phone call to get U.S. gas prices back down. 

NPS Visitor Use Statistics

A while back I was looking for recreation data that I could match to water quality data, particularly in the Gulf. The National Park Service provides visitor park statistics. These provide pretty cool data by park with a lot of detail and background (for example). Here's an example for the Gulf Islands National Seashore:

 

This is great, right? You could pair the visitation data for a bunch of sites with water quality, temperature, hurricane, and other data and that might be pretty cool in a count data model.

The NPS site also has a link for each park with comments on each month's data collection. Let's see if there's anything interesting there.

 

Well, crap. A lot of the data is estimated and some portion of the data is missing due to non-response. And even though I posted a snippet, some sort of comment appears to be made each month.

Kudos to NPS for posting such detailed information about their data. Each park's statistics also include "Visitor Use Counting Procedures," which are a series of PDF files on the methods, which NPS suggests you check to see if a change in procedures could have affected counts. 

I wanted to circle back to a theme that's come up in this blog before, regarding stated vs. revealed preference data. Many economists would dismiss SP data about the Gulf but accept a table of numbers from the government. But this data is really, really messy. I'm not even sure how you would handle it--you'd need to separately control for any changes in count procedures and also estimation by site each month. Maybe beg for the daily data, if those exist?

Note: We didn't use the data, not because it's messy, but because there aren't enough sites across the Gulf.

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.

 

 

 

"What's the Deal with the Green New Deal?

Catherine Wolfram at the Energy Institute Blog:

I’ve heard a lot about the Green New Deal since the midterm elections. And, it’s not just me – Alexandria Ocasio-Cortez, the freshwoman Representative from the Bronx, posted this graph of the number of tweets on the phrase through mid-December. In honor of the 4-day-old, Democratic-controlled House, I figured I would try to dig into it. ...

Here’s what I’ve been able to understand about the economics. With the requisite analogies to the original New Deal, the space race and World War II, the GND calls for a massive mobilization of government (US Federal, given the provenance) spending and policies to, “significantly draw down greenhouse gases from the atmosphere and oceans and to promote economic and environmental justice and equality.” Ocasio-Cortez’s Google Doc lays out some specific goals, including 100% renewable electricity, a national “smart” grid, energy efficiency investments, eliminating GHGs from transportations and other sectors, and a lot of investment in infrastructure.

It’s also pretty clear what the Green New Deal is not. The Google Doc explicitly states that simply relying on something like a carbon tax won’t do the job: “Given the magnitude of the current challenge, the tools of regulation and taxation, used in isolation, will not be enough to quickly and smoothly accomplish the transformation that we need to see.” While it certainly does not rule out carbon pricing, it also calls for more direct government interventions, such as mandates and spending. ...

In general, though, I’m very sympathetic to the idea that the US government needs to do a lot more to address climate change, and the GND’s first steps aren’t totally whacky from an economics perspective. I hope Ocasio-Cortez and others succeed in mobilizing interest and putting climate change back in the political spotlight. And, I hope this is the first of many posts we’ll do on the GND.

Not TOTALLY whacky!

ERE Special Issue on Benefit Transfer

Well, when I drafted this, it was a recent publication I wanted to announce, but now that I have some free time, I can finish it...

 

The March issue of Environmental and Resource Economics is a special issue on "Benefit Transfer: Current Practice and Future Prospects." Most of the papers arose from an EPA-sponsored workshop on benefit transfer; either through direct funding, as comments, or to introduce the issue. Kerry Smith put a ton of intellectual capital into identifying topics and authors for commissioned papers, and he wrote the introduction to the issue:

This paper introduces a special issue devoted to the benefits transfer methods used as part of benefit costs analysis for policy analysis. Benefits transfer methods, as they are applied for environmental policy analyses, use economic concepts together with existing empirical estimates to predict the incremental benefits from a change in some feature of an environmental resource. After giving two examples of the decisions that analysts confront in performing these analyses, I discuss the interconnections between the papers in this issue and the research challenges that emerged from discussions of them.

I helped contribute to organize the workshop and contribute to an EPA overview paper on benefit transfer challenges. I also discussed a paper by Laura Blow and Richard Blundell using non-parametric revealed preference to value environmental quality changes: 

We develop an approach to valuing non-market goods using nonparametric revealed preference analysis. We show how nonparametric methods can also be used to bound the welfare effects of changes in the provision of a non-market good. Our main context is one in which the non-market good affects the marginal utility of consuming a related market good. This can also be framed as a shift in the taste for, or quality of, the market good. A systematic approach for incorporating quality/taste variation into a revealed preference framework for heterogeneous consumers is developed. This enables the recovery of the minimal variation in quality required to rationalise observed choices of related market goods. The variation in quality appears as a adjustment to the price for related market goods which then allows a revealed preference approach to bounding compensation measures of welfare effects to be applied.

This was actually one of harder things I have had to do at EPA. I volunteered to be a discussant because I could recall being exposed to the technique in micro theory (Varian was one of the earlier developers and it's in his textbook). This method has not been used much in environmental economics (I only found four examples) but allows bounding of indifference curves--and therefore welfare measures--without functional form assumptions. Let me try to sketch the logic. In the figure below, there are two goods (superscripted) with one observed choice (subscripted). The shaded area RW is revealed worse, because any choice in that area was attainable but not chosen. The shaded area RP is revealed preferred, because any choice in that area would have strictly more of both goods. The indifference curve must therefore line in the unshaded area. 

Now, if you have more choices, you can narrow the indifference curve. 

There are further details in the paper on how to tighten the estimates of the indifference curves and then bound welfare estimates. The idea for benefit transfer (and let's be clear, this was Kerry's idea) is to use these kinds of estimates to help us benchmark parametric estimates of welfare. But it's a really cool paper!

Also in the issue are a paper by Cathy Kling and Dan Phaneuf on scope and adding up; and a paper by four current or former EPA authors (Steve Newbold, Patrick Walsh, Matt Massey, and Julie Hewitt) that improves a meta-regression framework by imposing theoretically-consistent assumptions on the functional form. And Kevin Boyle and Jeff Wooldridge have a great paper on how to handle errors structures and panel data in meta-regressions. And there are more, but I don't have a lot to say about them.

Important note: Whitehead (2016) gets a lot of love in this issue.

 

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.