Environmental Economics

Consumption-Based vs. Income-Based Carbon Footprints

The idea of an individual's or a household's carbon footprint is how much that person or household contributes to climate change.  All anthropogenic climate change is caused by humans (by definition), so let's take all the humans who have ever lived and divide up the responsibility for climate change amongst them.  What fraction of climate change is my fault?

To calculate one's carbon footprint, we look at the things we buy and do.  E.g. when I drive my car and burn gasoline, when I run my air conditioner, when I take a flight, or when I eat a steak, I add up all the greenhouse gases emitted in doing those activities and making those products.  All those greenhouse gases thus make up my carbon footprint, and therefore are my "fault."

The notion of a carbon footprint has encountered some controversy.  The argument against it, summarized in this NY Timed op-ed, is that focusing on individuals' or households' carbon footprints is distracting from the fact that climate change is ultimately the "fault" of big corporations, especially fossil fuel companies.  In fact, the notion of a carbon footprint was invented by a PR firm hired by an oil company, BP.  According to this argument, that was done to shift the responsibility from the true perpetrators and onto ordinary people just trying to live their lives in a world that's run on fossil fuel.  Auden Schendler writes, in the op-ed:

Nor was BP alone among the big oil companies communicating this message. A study by Naomi Oreskes and Geoffrey Supran at Harvard published in May in the journal One Earth found that since 1972, ExxonMobil has consistently used “rhetoric aimed at shifting responsibility for climate change away from itself and onto consumers.”

The counter-argument to this argument is that, while the fossil fuel companies and airlines, etc., are the ones emitting all of these greenhouse gases, they're only doing it to sell stuff to consumers.  It's ultimately then the consumers who are to "blame" for climate change; big oil wouldn't be pumping out oil if consumers didn't want to drive cars.  This counter-argument is popular among neoliberals and mainstream economists. It's pretty much what I believed.

But then I read this article, and listened to this podcast interview, both by Matt Huber, a geography professor who is writing a book called "Climate Change as Class War."  Carbon footprints show that the rich are disproportionately contributing to climate change - they consume more, and pretty much everything consumed by anyone has embedded carbon.  But Huber argues that even this degree of regressivity in the contribution of the rich towards climate change is understated, because the carbon footprint is based only on someone's consumption or spending, and not on how they earned the income that they spend.  This excerpt has been nagging at me:

Here’s a hypothetical example: take a CEO of an airline company. This person spends eight to twelve hours per day helping to organize a fleet of thousands of planes that emit millions of tons of carbon dioxide per year. As CEO, their income and stock options are primarily derived from this activity, planning and expanding air travel as a commodity for sale.

Now imagine our CEO goes home in their SUV and eats a steak for dinner. Why is this activity the only one we focus on when talking about “carbon inequality”? Surely the SUV and steak are drops in the bucket compared to their everyday role as a titan of aviation capital.

There is a lot in Huber's article that is Marxist, which is maybe off-putting for some people.  But even if you're not Marxist, there is a core point in there that seems to me intriguing: why is my carbon footprint based only on my consumption and not on my income sources?

This distinction is analogous to distinction between sources-side and uses-side incidence.  Under some policy change, say a tax increase, incidence refers to the distribution of the burden of the tax. There is the uses-side incidence, which is how the tax will affect prices of goods and services.  Then there is the sources-side incidence, which is how the tax will affect income, e.g. through affecting the wage or the return to capital.  The standard definition of a carbon footprint is thus a uses-side carbon footprint.  But can't we also define a sources-side carbon footprint? 

To extend Huber's example from above: consider an executive at a fossil-fuel company who happens to be very "green" in his personal consumption - he walks or bikes to work, is vegetarian.  Consider also a schoolteacher, who has to commute far to work each day to live in an affordable neighborhood, and drives a minivan to take her kids to childcare, so gets low fuel economy.  The teacher has a higher carbon footprint (based on the standard definition). But does she really hold more "blame" for climate change than a fossil-fuel executive?

(I'm putting scare quotes around words like "blame" and "fault" to keep in mind that there aren't objectively correct answers to how we divide this up - the climate doesn't care who is responsible for the greenhouse gases, it just keeps warming.  I'm not suggesting that the income-based footprint might be "more correct" than the consumption-based on, just that they are two alternate ways of defining footprints.)

 

Pragmatic and existential concerns about the social cost of carbon

There is a great new policy forum article in Science defending the use of the social cost of carbon (SCC) in climate policy analysis, written by four great environmental economists (Joe Aldy, Matt Kotchen, Robert Stavins, and James Stock).  While I enjoyed reading the article, I am not sure that I endorse its conclusion.

The background: for the last thirty-plus years, the economics profession has been studying climate change through integrated assessment models (IAMs), pioneered by William Nordhaus, who was awarded the Nobel Prize in 2018.  These IAMs include specifications of the costs and benefits of reducing greenhouse gases, and so they can be used to calculate the "efficient" path of emissions reductions (i.e. the path that maximizes net benefits according to the model) and to calculate the marginal damages of each unit of carbon emitted along the efficient path, the so-called SCC.  Then, this SCC can be smacked on to carbon emissions in the real world to get the real world to behave like the efficient outcome in the model.

Then, there have been some critics of the use of IAMs and the SCC, including from among the economics profession.  Robert Pindyck has been very critical of the false level of certainty implied by IAMs. (He has a paper titled "Climate Change Policy: What do the Models Tell Us?", and the first sentence of the abstract answers "Very little.")  Pindyck writes:

These models have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g., the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models' descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading.

More recently, Nicholas Stern and another Nobel-prize winner, Joseph Stiglitz, have released a working paper that also criticizes IAMs and the SCCs they produce for neglecting, among other things,

...the immense risks and impacts on distribution across and within generations; the many failures, limitations or absences of key markets; and the limitations on government, both in offsetting these failures and distributional impacts.

Stern and Stiglitz propose an alternative to the SCC, which can be called a "target-consistent price."  The SCC uses the costs and benefits in the IAM to calculate the efficient level of emissions and associated price.  The target-consistent price treats the target as exogenous, whether that target is a specific emissions reduction level, or a specific temperature threshold, and then uses the IAM to calculate the cost-effective (i.e. least-cost) path to achieve that target.  The target-consistent price is the associated price of carbon for that cost-effective path.  So the difference between the SCC and the target-consistent price is that the SCC uses a cost-benefit analysis while the target-consistent price uses a cost-effectiveness analysis.  

These critiques of IAMs and the SCC by economists are similar to critiques by non-economists, who have argued that IAMs like Nordhaus's DICE model have yielded policy prescriptions that are not nearly ambitious as they should be.  

The recent article by Aldy, Kotchen, Stavins, and Stock defend the use of IAMs and calculation of the SCC.  The basic idea is that SCCs are fundamentally sound, and we (scientists and economists) should be working to improve the calculation of the SCC and its use in climate policy design rather than throw it out and settle for mere cost-effectiveness analysis.  It was the Trump administration, after all, that effectively rewrote the rules to set the SCC to near-zero, while the Biden administration is bringing back legitimate policy analysis and science in its calculation.

I like the article and agree with most of the points it raises but am not sure that I endorse its conclusion.  There are two ways of defending or attacking the SCC: on pragmatic grounds and on existential grounds.  In either case, I don't know that we need or want an SCC, or that an SCC is preferable to something like Stern and Stiglitz's target-consistent price.

The pragmatic question is: which type of analysis is going to make the world a better place, which in this context means which is going to lead to more aggressive climate action? (Assuming here that we are all on the same page and want aggressive climate policy, relative to what's actually been enacted.)  The implication in the recent Science piece is that relegating ourselves to setting exogenous policy goals and only using economics for cost-effectiveness analysis will put us at the mercy of political whims or administrations who can willy-nilly throw out any justification of aggressive policy.  But that is true when using an SCC too!  That's just what the Trump administration did.  Furthermore, the longstanding critique of DICE and other IAMs is that they are not aggressive enough because they omit many difficult-to-quantify costs of climate change, like tipping points, and they tend to ignore or downplay distributional and equity concerns.  This is the heart of Stern and Stiglitz's, as well as Pindyck's, critique of IAMs.  Setting clearly-defined policy goals, like a maximum temperature increase, seems likely to increase the support and possibility of getting aggressive climate action done.  Of course, that is an open question that will be hard to answer (which type of policy analysis will lead to more aggressive policy?), but it is by no means obvious that the SCC wins.

Beyond the pragmatic justification of the SCC, there is an existential issue with it.  Namely, is the SCC in fact a real thing, a meaningful concept for which a concrete value exists in the world (say, $45 per ton), and we just need to find out what it is?  Or, is the SCC itself a construct, which exists only within and because of the methodological framework of neoclassical welfare economics?  The Science article takes for granted that the SCC is a real thing.  But that claim assumes that a valuation of damages to the environment exists.  The existence of that valuation is essential to neoclassical welfare economics, but a large literature in ecological economics and philosophy questions its existence.  

I am especially interested in this issue since I'm currently in the middle of reading Elizabeth Anderson's 1995 book Value in Ethics and Economics. This is a must-read for economists interested in alternative ways of thinking about policy analysis.  Like many ecological economists and some political philosophers like Michael Sandel, Anderson is critical or skeptical of the authority of economic valuation techniques across numerous domains.  She and others defend value pluralism, or the incommensurability of values - it is not appropriate to simply put a dollar value on the damages caused by climate (even if those dollar values come from revealed preference studies of people's willingness to pay) and toss that into a benefit-cost analysis.  She writes

... Goods can be plural, ... they can differ in kind or quality; they differ not only in how much we should value them, but in how we should value them

It could be that the SCC is bad, not because of the problems and limitations of IAMs that are raised by Stern and Stiglitz and other critics, but because the entire philosophical infrastructure of the valuation of environmental damages is unsound.  It's hard for me to fully accept this view, since I've been trained for the past 20 years in neoclassical economic orthodoxy.  But there are many compelling arguments in favor of value pluralism that are worth struggling with.

Or, it could be that the existential questions about the SCC aren't important and what matters is the pragmatic effects of using or not using an SCC or cost-benefit analysis in climate policy.  

In either case, I think it's an open and important question to ask whether the SCC is worth pursuing or not.

Stand-up economist: Grading Economics Textbooks on Climate Change

Yoram Bauman: 

This is the fifth such review I’ve been involved in and it is almost certainly the last review I’ll be doing, for the simple reason that the vast majority of textbooks now have excellent content on climate change! (If desired you can skip directly to the report card, or read on for some context and big-picture thoughts.)

The state of affairs today is very different from that of 10 years ago—my previous reviews were in 2010, 2012, 2014, and 2017—much less 20 years ago, when I had an astonishing and hilarious email exchange with University of Houston professors Roy Ruffin and Paul Gregory about the wacky climate-skeptic claims (“no matter how much contrary evidence is presented, it just doesn’t matter”) in their now-defunct textbook.

In past years I have given out a Ruffin and Gregory Award for the Worst Treatment of Climate Change in an Economics Textbook, and I am pleased to say that no book merits that award this year. 

This is good news ... the economics profession won't be participating (as much) in the training of undergraduates in climate skepticism.

Mnuchin vs. Thunberg vs. Neoclassical Economics

Last week Treasury Secretary Steven Mnuchin insulted climate activist and Time Person of the Year Greta Thunberg by claiming that she shouldn't talk about climate policy before studying economics and college.  When asked about her suggestion for public divestment from fossil fuel companies, Mnuchin said:

Is she the chief economist, or who is she? I'm confused. It's a joke. After she goes and studies economics in college she can come back and explain that to us.

Many environmental (and other) economists were quick to pounce on Mnuchin's comment.  Their point was that in fact the theory of market failure is a central component to college economics courses, even introductory or Econ 101 courses.  Climate-change-causing pollution is a textbook (literally) example of a negative externality that causes market failure.  To claim somehow that taking a college economics class will teach you that we shouldn't regulate climate change is idiotic, goes this argument.  Paul Krugman even wrote a NY Times column on the subject: 

One can only surmise that Mnuchin slept through his undergraduate economics classes. Otherwise he would know that every, and I mean every, major Econ 101 textbook argues for government regulation or taxation of activities that pollute the environment, because otherwise neither producers nor consumers have an incentive to take the damage inflicted by this pollution into account.

By this account, it's climate activists like Thunberg who really understand textbook economic theory, while libertarian-right-wing-small-government zealots like Mnuchin don't (or won't). 

This is all true, and Mnuchin deserves his ridicule.  However, I think there is also a sense in which he is (accidentally perhaps) correct.  While market failures and externalities are taught in every Econ 101 course (I hope), they are often taught as an afterthought or an aside.  The main focus of intro econ courses is more likely the efficient functioning of the market.  Many students come out of Econ 101 (which for most is the only economics course they'll take) thinking that basically economics teaches us that markets are great and go a better job than the government can (with some minor exceptions that I can't really remember).  

The conservative bias in Econ 101 is real.  It's been called Econ 101-ism, or Economism - the idea that the simplest supply and demand, invisible hand, perfectly-functioning markets examples from Econ 101 actually describe the real world, and therefore that the proper policy solution to almost anything is to cut taxes and reduce the size of the government. 

So Mnuchin might actually not be wrong - if Thunberg took a college economics class, she might come away from it convinced of the power of markets (though probably not - she's smart enough to see through that I would think).  This all points to a problem endemic to all of economics (not just environmental economics), which starts with the way it's initially taught.

WAPO: Americans broadly accept climate science ...

Over half say driving cars and burning fossils fuels are major contributors (link). This is In spite of everything [*]:

Americans remain shaky on the details of climate science even as they have grown increasingly concerned about human activity warming the Earth, according to a national poll by The Washington Post and the Kaiser Family Foundation (KFF) that probed the public’s understanding of climate change.

The rising alarm is one of the poll’s most dramatic findings. In just five years, the percentage of people calling climate change a “crisis” has jumped from 23 percent to 38 percent.

More than 3 in 4 U.S. adults and teenagers alike agree that humans are influencing the climate. The overwhelming majority of them said it’s not too late for society to come up with solutions, but a third of adults who say humans are causing climate change don’t think they can personally make a difference, the poll found. ...

[*] If you know what I mean. 

Virtue signaling

I have a few follow-up questions...

There seems to be a climate change pattern emerging...in the administration's response to questions about climate change.

[USDA Secretary Sonny] Perdue told CNN's Vanessa Yurkevich in the interview released Tuesday that "we don't know" the cause of climate change, adding, "and obviously scientists -- many scientists believe that it's human caused, other scientists believe it's not," Perdue responded.

 

"So if it's not human caused, then what is it?" Yurkevich asked.

 

"You know, I think it's weather patterns, frankly. And you know, and they change, as I said. It rained yesterday, it's a nice pretty day today. So the climate does change in short increments and in long increments," Perdue responded.

 

In an interview with CNN's Jake Tapper on "State of the Union" Sunday, Pence repeatedly refused to say if he views the global climate crisis as a threat to the United States.

Follow-up questions:

• Based on your extensive review of the research on climate change, how many scientists 'believe' and how many 'other scientists' do not?
• How do you define 'scientist?'
• Do you follow the stock market?  Does it go up and down from day to day?  What happens over the long-term?  

Quote of the Day: Word Salad

“I did say, ‘Well, the United States right now has among the cleanest climates there are based on all statistics.’ And it’s even getting better because I agree with that we want the best water, the cleanest water. It’s crystal clean, has to be crystal clean clear.”

President Trump to an interviewer after meeting with Prince Charles to discuss climate change

Quote of the Day: Global Heating? Climate Crisis?

The Guardian has indicated that it is changing its guidelines for writing about climate change:  

“We want to ensure that we are being scientifically precise, while also communicating clearly with readers on this very important issue,” said the editor-in-chief, Katharine Viner. “The phrase ‘climate change’, for example, sounds rather passive and gentle when what scientists are talking about is a catastrophe for humanity.”

   

 

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.