Environmental Economics

Where's my carbon dividend check!? Semi-coherent thoughts on the Inflation Reduction Act

While teaching emissions control policies this last week to my undergraduates, I revisited my signature of the Economists’ Statement on Carbon Dividends (now signed by over 3600 economists). It’s been four years since the origin of the statement, and despite it being the most agreed-upon policy statement in the history of economics, no federal greenhouse gas emissions charge exists today.

At the time (January of 2019), the earth sat at about 1 degree Celsius above long-term average predictions, gaining at about 0.2 degrees Celsius each decade on average. That puts us above the 1.5 degree threshold set by the Paris Agreement in 2015 by around 2050. I’ll be alive for this…

As an aside: when I think about 0.2 degrees in a decade I think about turtles…

“A few degrees make a huge difference. At sand temperatures of 31.1 degrees Celsius (88 degrees Fahrenheit), only female green sea turtles hatch, while at 27.8 degrees Celsius (82 degrees Fahrenheit) and below, only males hatch.” – Buis (2019) “A degree of Concern: Why Global Temperatures Matter”

Back to the point…what initially attracted me to the economists’ statement was its simplicity; the way it seemed to cut through all of the common issues of aggressive climate policy. A carbon tax with a border adjustment and level dividend checks to all US households. Put a bow on it! It avoids all the costly, small-sided, industry-by-industry negotiations of thresholds or a la carte subsidy creation. It’s nearly immune to rent-seeking by lobbyists. In fact, an emissions charge provides the incentive for polluters to do BETTER than these thresholds, avoiding the tax altogether if possible (0 emissions). I was in love.

Then, the Inflation Reduction Act (strange name for a climate bill, but I’ve always enjoyed aligning economic and environmental incentives, so I dig it) dropped in 2022 with no emissions charge. The largest, most coherent climate strategy of all time in the US came to be and the near-entirety* of my profession was ignored! WHAT!?! I’m grateful khakis are coffee-stain colored. How are we to react to this?

My gut was to get pissed at politics. K-street won again... a lot of subsidies in this bill! But, in theory, subsidizing a perfect substitute can serve as an implicit (and equal) tax on the unsubsidized good, ceteris paribus. For example, power generation is a quarter of the GHG emissions problem (EPA). By some estimates, the carbon dividend policy’s emissions reductions would be achieved largely through the power sector (80% of emissions reduced, according to a Columbia University Center on Global Energy Policy report by Kaufman and Gordon, 2018). The Inflation Reduction climate bill provides payments to prevent nuclear decommissions, as well as tax credits for renewable energy generation. According to a blog post by Noah Kaufman just last week, this amounts to a $70/ton implicit emission charge on natural gas and $30/ton charge on coal… not perfect substitutes, but substitutes all the same.

So, perhaps just as the major climate bill is hidden in an inflation bill, our beloved carbon tax is dressed as a subsidy for strong carbon substitutes. If power generators (and perhaps households) do not switch to the cleaner, cheaper inputs, they are taxing themselves. And I do like Paul Krugman’s argument here as well… the carbon tax is good at incentivizing firms to find new ways to reduce emissions (using given tech), but weak in getting firms to discover new technologies to reduce. In his NYT opinion piece, he notes that the massive cost reductions for renewable energy got their big nudge from government aid. That is, of course, in the absence of a carbon tax… we don’t have a world where we observe tech advancements under a carbon tax. But, given the cross-aisle political throwdowns that happen with anything named “tax”, perhaps green energy subsidies (aka implicit dirty-energy taxes) are as good as we can do?

There’s more to pick at in the IRA. For the reasons I disliked clunky, source-by-source regulation, this bill seems to have a lot more transaction costs than a carbon tax would cause. But, I haven’t well-combed the CBOs estimates enough to see if administrative burdens are considered a cost.  Additionally, I supported lump-sum revenue distribution for environmental justice concerns. While it appears the IRA’s subsidies to lower energy costs (and incentivize heat pumps and the like) target the vulnerable, there’s more to study about the distributional impacts of to the tax part of the bill… which, to be fair, is a focus of the bill... for another post. 

*yes, 3600 = ALL of us

How not to answer the question "Why are carbon taxes unpopular with policymakers and politicians?"

I received the question "Why are carbon taxes unpopular with policymakers and politicians?" from a follower on Twitter recently (give me a follow @tim_env_econ). So, I had the brilliant idea to compare how I would answer the question compared to how the new trendy AI-bot ChaptGPT would answer (and I'm thinking to have a contest to see if you could tell if the answer is me or AI). Unfortunately, ChatGPT seems to be overwhelmed right now and is just giving me a sonnet:

Amidst the rush of curious minds, The chatbot ChatGPT stands strong and true, Withstanding the influx of requests, Working hard to fulfill each one's due. But alas, the server cannot cope, And the error message rings loud and clear, "Please check back soon," it gently hopes, As it begs for a moment's reprieve, to reappear. As the chatbot works to restore its might, We wait in anticipation, with hopeful hearts, For the chance to chat and learn, with delight, And see what knowledge and wisdom it imparts. So hold on tight, and wait for its return, For ChatGPT will soon be back, and your patience will be well-earned.

Oh well. I guess you're going to have to wait to see if I'm smarter than AI.

The Information Value of Pigouvian Pricing

I recently read an article in the journal Economics and Philosophy, written by Lisa Herzog, which has nothing whatsoever to do with environmental economics but nonetheless I think has interesting implications for it and for Pigouvian pricing in particular.  

In case you are unfamiliar with it, the journal Economics and Philosophy is a scholarly journal publishing articles on topics related to (wait for it) economics and philosophy.  And, often, the philosophy of economics.  This is an area that I have become interested in recently, influenced no doubt by my years as an undergraduate philosophy major.  

In the article, Herzog addresses and basically dismantles Hayek's model of the price mechanism in markets as being an efficient way of processing and distilling information necessary for buyers and sellers.  Hayek's idea is basically that the world is a complicated place, and markets have lots of complicated information about costs, benefits, demands, etc.  But, once markets determine a price for something, that price contains all of the information that buyers and sellers need to make their optimal decision. Herzog quotes Hayek: markets process "dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess." 

Herzog's argument is that Hayek is ignoring important pieces of knowledge that buyers and sellers need to make morally informed choices and that are missing from the price signal.  Without this information, or "epistemic infrastructures, market participants do not act as morally responsible agents: when acting in such markets, it often seems fair to say that they do not know what they are doing."  The motivating example is buying clothes made in sweatshops overseas.  The price mechanism contains lots of information about production and transportation costs, etc., but it is missing important moral information, like the conditions of the workers and their outside opportunities.  Without this information buyers cannot make morally complete (and therefore optimal) decisions.

What does this have to do with environmental economics?  Of course, when there are negative externalities (like pollution), the unregulated market price will not reflect those externalities and thus will not provide buyers and sellers the necessary information to make optimal choices.  This is not new; this is Pigou, and even the most die-hard Hayekian would admit that market failures like externalities need to be incorporated somehow into the price signal to achieve efficiency. (Aside: maybe it's not actually Pigou, according to this working paper by my colleague Spencer Banzhaf.) 

But I think there is a deeper and less obvious point than that.  Supposing that there is a Pigouvian price on pollution that accounts for its negative externalities.  Does this price still contain the necessary "epistemic infrastructure" for all buyers and sellers to make morally responsible decisions?  If the Pigouvian price is "right" then it accounts for the spillover costs, but it's not obvious that these costs are all that is morally necessary to make informed choices.   Just like with sweatshops, there potentially are moral considerations above and beyond any cost considerations (even spillover costs) that need to be incorporated.  It it not clear that a Pigouvian price would incorporate any of this. 

Anyways, some Pigouvian price on pollution is still no doubt better than no Pigouvian price on pollution, but there is potentially a strong argument to be made here based on Herzog's article that any Pigouvian price can't get us enough information to make morally optimal choices.  

Daily Demand and Supply: Bill Nye Explains the Law of Demand...and Carbon Pricing, MFers.

Warning:  NSFW (Unless you work at a University and part of your job is to watch stuff like this and post it on a blog).

The highlights of this have been around all week, but most of the clips are just Bill Nye the Science Guy saying "motherf***ers.   But this segment on Last Week Tonight really does a nice job of simply explaining how Carbon Pricing works.  If you don't want to watch the whole thing, just fastforward to the 9:27 mark or so, and sit back and enjoy.

Bill Nye explains the Law of Demand from 10:21 to 10:37.

Now if I can just figure out how to use this in class without trigger warnings.

What's up with folks in Hawaii?

They're worried about sea-level rise or something. From the HuffPost (Hawaii Lawmakers look to protect coast from climate change):

Predicting Honolulu will start experiencing frequent flooding within the next 15 to 20 years, state lawmakers are trying to pass legislation that would spend millions for a coastline protection program aimed at defending the city from regular tidal inundations.

The highest tides of recent years have sent seawater flowing across Waikiki Beach and onto roads and sidewalks lining its main thoroughfare, and interactive maps of the Hawaiian Islands show that many parts of the state are expected to be hit by extensive flooding, coastal erosion and loss of infrastructure in coming decades.

That’s an alarming scenario for a state where beach tourism is the primary driver of the economy, leading some lawmakers to insist that planning for rising tides should start now.

“The latest data on sea level rise is quite scary and it’s accelerating faster than we ever thought possible,” said state Rep. Chris Lee, a Democrat and lead author of a bill calling for the creation and implementation of the shoreline protection plan. The project would focus on urban Honolulu but act as a pilot program for other coastal communities around the state.

While Hawaii is rarely subjected to direct hurricane hits, Lee’s bill says warmer oceans will increase that risk by creating “more hurricanes of increasing intensity” — and estimates the impact of a major hurricane making landfall at $40 billion.

“The loss of coastal property and infrastructure, increased cost for storm damage and insurance, and loss of life are inevitable if nothing is done, which will add a significant burden to local taxpayers, the state’s economy, and way of life,” says Lee’s bill, which is similar to action taken by New York City after a storm surge from Superstorm Sandy led to $19 billion in damage in 2012.

The Hawaii measure proposes sinking $4 million into the program’s development over the next two years. The bill also seeks more research into a carbon tax that might raise funds and lower the state’s dependence on fossil fuels.

 

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 ...).

Don't Give up on Pigouvian Pricing!

Last week's midterm elections were a mixed bag for environmental policy.  Lots of initiatives went down in defeat, though some passed, and some pro-environmental candidates won.

Most notably for us environmental economists, the state of Washington failed to pass a carbon tax initiative, which would have made them the only place in the US where there is such a tax.  This defeat comes two years after another carbon tax initiative also failed at the ballot box in Washington.

So carbon taxes are now 0 for 2.  Does this mean we should give up on the idea entirely? (Sorry, Pigou)  That's basically what's being argued by several policy wonks, including James Temple at the MIT Technology Review, who writes (or at least his headline-writer writes): "People will never vote for a carbon tax, so let's stop asking."  Costa Samaras tweets that we'll have to settle for a slew of command-and-control policies rather than carbon pricing. 

This seems premature to me.  0 for 2 isn't a great start, but hardly a reason to abandon what economists have known for decades to be the most cost-effective type of environmental policy.  Rather than give up on Pigouvian pricing and start arguing for alternative policies based on their ability to be approved (by the way, plenty of command-and-control policies also failed in last week's election), I think we should work even harder trying to convince people of the merits of carbon pricing and other market-based environmental policies. 

In case you're wondering, 20 teams have come back from being down 0-2 in an NBA playoff series (the 19 teams listed here plus Cleveland last year in the conference finals).  If Lebron can do it, then so can environmental economists!

 

"New Group, With Conservative Credentials, Plans Push for a Carbon Tax"

Let the demogoguery begin: 

Proponents of a market-oriented plan to fight climate change by taxing greenhouse gas emissions and giving the revenue to American taxpayers are starting a campaign to run advertisements as early as this fall and introduce legislation in Congress as early as next year.

The plan’s supporters have formed a group called Americans for Carbon Dividends that will lobby for the proposal. The group plans its first event on Wednesday and includes a number of well-known members, including Trent Lott, the former Senate Republican leader from Mississippi, and Janet L. Yellen, who led the Federal Reserve under President Barack Obama.

The initiative has already won endorsements from some environmental groups, like the Nature Conservancy and Conservation International; fossil fuel giants like Exxon Mobil, Shell and BP; and major companies in renewable and nuclear energy and consumer goods.

“It’s something that may command bipartisan consensus,” Ms. Yellen said in an interview, calling the proposal “a very exciting prospect.” Taxing carbon dioxide emissions to reduce energy use, she added, is “absolutely standard textbook economics.”

The proposal would set an initial tax of $40 per ton of carbon dioxide produced and would increase the price over time. That would raise the cost of a gallon of gas by approximately 38 cents, the group says, with similar effects on household heating and other energy use. That could, in turn, encourage people and businesses to become more energy efficient and curb their use of fossil fuels.

To offset the higher prices, the tax revenue would be returned to consumers as a “carbon dividend.” The group estimates that the dividend would give a family of four about $2,000 in the first year.

The group says the plan could reduce United States emissions even further than the Obama administration pledged under the Paris climate accord.

 

But the leaders of the group are not holding their breath. The notion that the current fractious Congress could pass a bill based on the proposal is not within their fondest expectations. Instead, their strategy is to build public support for the plan while working toward a legislative proposal that could be introduced after the midterm elections, when a new Congress might be more friendly to environmental legislation. ...

Read the rest here: https://nyti.ms/2K0ztP0

 

That slow dog is hit again

We’ll know the smart economists at Georg Mason U are liberated from Koch influences when they can endorse pricing carbon. https://t.co/JetHtvJZao

— Adele C. Morris, Ph.D. (@AdeleCMorris) May 2, 2018

Alternative post titles:

1. When free market environmentalism meets a global public good
2. Actually, this isn't the biggest problem for George Mason economics
3. Climate Liberty?