Environmental Economics

Some bad economics at the Department of Energy

From E&E News (DOE: Major LNG project ‘would not increase’ CO2) from June 2022: 

A proposed liquefied natural gas project in Alaska would not raise greenhouse gas emissions, according to a new federal environmental review that assumes LNG exports elsewhere will continue to meet demand even if the planned pipeline and terminal aren’t built. ...

The Department of Energy’s draft SEIS includes a life-cycle analysis of the greenhouse gas emissions tied to the project’s LNG exports. It finds that “exporting [liquefied natural gas] from the North Slope would not increase GHG emissions when providing the same services to society,” as the No Action Alternative, a scenario where the Alaska LNG project is not developed.

If you don't believe E&E news then here is the screenshot:

So, as asserted earlier, this isn't how markets work. In the no action alternative supply and demand don't move and there is no change in price or quantity of liquidfied national gas (LNG). With a new LNG facility the supply curve shifts to the right and the quantity of LNG increases (and price falls):

If there is no climate impact from the increase in LNG supply as the DOE report claims then either (1) buyers want the same amount no matter the price (i.e., the demand curve is vertical) or, (2) in the no action scenario, someone else magically increases the supply of LNG. Here is how the EPA puts the second scenario in their comment letter: 

Hat tip: Patrick Walsh in response to this post: link.  

The NYT's Willow article allows issue advocates to alternately assume perfectly elastic demand and supply

The decision to allow mining in Alaska is controversial (Biden Administration Expected to Move Ahead on a Major Oil Project in Alaska): 

In one of its most consequential climate decisions, the Biden administration is planning to greenlight an enormous $8 billion oil drilling project in the North Slope of Alaska, according to two people familiar with the decision.

Alaska lawmakers and oil executives have put intense pressure on the White House to approve the project, citing President Biden’s own calls for the industry to increase production amid volatile gas prices.

But the proposal to drill for oil has also galvanized young voters and climate activists, many of whom helped elect Mr. Biden and who would view the decision as a betrayal of the president’s promise that he would pivot the nation away from fossil fuels.

On one side is the "environmental activist" worried about a "carbon bomb" (in fairness to issue advocates, this is not a quote from an activist): 

Still, Willow would be the largest new oil development in the United States, expected to pump out 600 million barrels of crude over 30 years. Burning all that oil could release nearly 280 million metric tons of carbon emissions into the atmosphere. On an annual basis, that would translate into 9.2 million metric tons of carbon pollution, equal to adding nearly two million cars to the roads each year. ...

Environmental activists, who have labeled the project a “carbon bomb” have argued that the project would deepen America’s dependence on oil and gas at a time when the International Energy Agency said nations must stop permitting such projects to avert the most catastrophic impacts of climate change.

Increasing the amount of oil produced would increase the supply of oil if we consider new mines as firms entering the industry. But, the only way that the amount of oil produced would increase the amount consumed by the same amount (the "carbon bomb" scenario) is if the demand for oil is perfectly elastic. In the picture below the additional mining shifts (rotates) the supply of oil from S to S' and buyers in the market snap it up at the existing price. The increased quantity of oil consumed is equal to the increased supply at the market price (both arrows are the same size). 

But, if the demand for oil is sensitive to price (note: it is) then the amount consumed (the bottom arrow) will be less than the supply increase (the upper arrow): 

On the other side is the energy industry making even less sense: 

Kevin Book, managing director of Clearview Energy Partners, a research firm, ... argued that the emissions linked to burning oil drilled from the Willow project would not have been eliminated if Mr. Biden had rejected the project, but simply generated elsewhere.

This quote assumes that there is some demand increase, the source of which I don't know, and a perfectly elastic supply from existing miners. 

If the supply curve is upward sloping (it is) then the increase in consumption would be less than the demand increase. I'm not going to dignify this scenario by drawing this out because I'm not sure where the demand increase is coming from. As far as I can tell, if there is no oil from the Willow project nothing changes in the oil market. 

Happy to be corrected, what have I missed?

The latest attack on private enterprise baffles

If I hear 'woke' used as a slur one more time ... it won't be the last time because, evidently, it is good for ratings (How Environmentally Conscious Investing Became a Target of Conservatives): 

It’s been a widely accepted trend in financial circles for nearly two decades. But suddenly, Republicans have launched an assault on a philosophy that says that companies should be concerned with not just profits but also how their businesses affect the environment and society. 

More than $18 trillion is held in investment funds that follow the investing principle known as E.S.G. — shorthand for prioritizing environmental, social and governance factors — a strategy that has been adopted by major corporations around the globe.

Now, Republicans around the country say Wall Street has taken a sharp left turn, attacking what they term “woke capitalism” and dragging businesses, their onetime allies, into the culture wars.

I thought the article would point out how certain people in Congress were concerned that the government was investing people's money in underperforming companies for reasons other than maximizing returns but I didn't find that. All it says is this:

It is unclear whether applying environmental and social principles to investing is actually good for business. Some studies have shown that companies that embrace environmental and social goals outperform their peers in the long run. But other studies show the opposite. And as the stock market slumped last year, oil and gas stock prices rose sharply.

If private investment companies choose to avoid the oil and gas industry for long run climate change reasons, it seems that is a free market decision that certain people in Congress should not be getting upset about. It seems that all that these certain people in Congress care about is that people keep investing in oil and gas companies.

David Leonhardt reviews the successes and failures of President Biden's economic team as it transitions

David Leonhardt reviews the successes (low unemployment) and failures (inflation) of President Biden's economic team as it transitions in the NYT's what I think used to be called the the Morning Brief but now it is The Morning. After mentioning infrastructure investment we get this:

Close readers may have noticed that the above list of investments left off one category: clean energy. I think it is important enough to highlight. Given the extreme costs and dangers of climate change, Biden’s investments to accelerate the transition away from greenhouse gases may end up being the most important part of his economic legacy.

The link takes you to July when Senators Schumer and Manchin made a deal: 

The package will include tax credits to speed up the development of wind, solar, hydrogen and nuclear power; a tax credit to reduce the price of new electric vehicles; and money to address the disproportionate burden of pollution on low-income communities and communities of color.

I had totally missed the last part on environmental justice. Can anyone point me to what they did there?

Lael Brainard on climate change

From Reuters* (Biden to name Fed's Lael Brainard as top economic adviser): 

U.S. President Joe Biden is expected to name Federal Reserve Vice Chair Lael Brainard to the White House's top economic policy position as early as Tuesday, a source familiar with the matter said on Monday. ...

Markets' response was muted in Asia hours, with bonds and the dollar steady along with U.S. futures, and analysts said the implications of the appointment weren't very clear.

"We don't know what to infer from this," said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.

"Under normal circumstances I would have thought that her advice to Biden would be very pro stimulus," he said.

First, ignoring the fact that that last quote might be flippant or taken out of context, under normal circumstances an economy doesn't need stimulus, right? An economy might need stimulus during a recession, but that is an abnormal situation. 

Second, my first question was -- what about climate change? So I Googled. Here she is discussing climate change in an speech at the October 2021 Federal Reserve Stress Testing Research Conference titled "Building Climate Scenario Analysis on the Foundations of Economic Research": 

Economic analysis suggests that climate change could have profound consequences for the level, trend growth, and variability of economic activity over time and across regions and sectors. Some of these effects could occur gradually, while others could occur relatively quickly in the presence of "tipping points." Policy, technology, and behavioral responses could similarly have material financial consequences. Against this backdrop, the Federal Reserve is carefully considering the potential implications of climate-related risks for financial institutions and the financial system, with scenario analysis emerging as a potential key analytical tool for that purpose.

Climate change is projected to have profound effects on the economy and the financial system, and it is already inflicting damage. The Sixth Assessment Report by the Intergovernmental Panel on Climate Change (IPCC) notes that "if global warming increases, some compound extreme events with low likelihood in [the] past and current climate will become more frequent, and there will be a higher likelihood that events with increased intensities, durations and/or spatial extents unprecedented in the observational record will occur."

We can already see the growing costs associated with the increasing frequency and severity of climate-related events. The total cost of U.S. weather and climate disasters over the last 5 full years exceeds $630 billion, which is a record. During this period, massive flooding in the Midwest has caused billions of dollars in damages to farms, homes, and businesses. The California Department of Insurance has documented growing problems with the availability of fire insurance for homeowners, and the state legislature provided new protections for wildfire survivors. Last year was the sixth consecutive year that the United States experienced ten or more billion-dollar weather and climate disasters.6 And this summer, Hurricane Ida alone is estimated to have caused more than $30 billion in insurance losses.

The pandemic is a stark reminder that extreme events can materialize with little warning and trigger severe financial losses and market disruptions, and the IPCC Sixth Assessment Report is a reminder of the high uncertainty and potential costs associated with climate-related risks. It will be important to systematically assess the resilience of large financial institutions and the broader financial system to climate-related risk scenarios. ...

So, no surprise, the National Economic Council will be led by someone who takes climate change seriously. But still, good to know.

*The WSJ article is better but it might cost money. 

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

Carbon offsets: a guide to avoiding food poisoning

The MIT Climate Portal describes carbon offsets in this way:

Carbon offsets are tradable “rights” or certificates linked to activities that lower the amount of carbon dioxide (CO2) in the atmosphere. By buying these certificates, a person or group can fund projects that fight climate change, instead of taking actions to lower their own carbon emissions. In this way, the certificates “offset” the buyer’s CO2 emissions with an equal amount of CO2 reductions somewhere else.

Rochelle Toplensky writing for the WSJ's Sustainable Business newsletter (Carbon Credits: Buyer Beware) finds that many carbon offsets fail to deliver on the promise of, um, offsetting carbon: 

Planned paths to decarbonization vary, but many businesses plan to use carbon offsets. These tradable credits ostensibly represent emissions avoided somewhere else around the globe. But they remain controversial.

A Guardian investigation published Wednesday concluded that more than 90% of rainforest offset credits approved by one of the world’s leading voluntary registeries, Verra, don’t represent genuine carbon reductions.

Verra rejects the conclusions and says the newspaper’s analysis “massively miscalculates” its projects’ impact by not including project-specific deforestation risks when estimating what would have happened without the project.

Each side can make a coherent case but neither can conclusively prove what might have been. In the meantime, buyers of the Verra-approved rainforest credits—including BHP, easyJet, Gucci, Salesforce, Shell and the band Pearl Jam—are splashed across the media.

It is a stark example of the reputational risk that has some companies shying away from voluntary carbon offsets. The $2 billion market remains a bit of a Wild West, with a long list of investigations highlighting some projects that don’t do what they promise. The Wall Street Journal recently found most of the cash from a Peruvian project went to middlemen rather than the locals preserving the forest.

...

At best, companies will have a wide-ranging menu of “high-integrity” carbon offsets to choose from. Digging into the details of those offsets might be tough, although price can likely provide a hint about quality. After all, when choosing between a $5 seafood pasta and a $50 one, it is often obvious which one is more likely to give you food poisoning.

Here is the WSJ's product quality guide based on price:

Proof: Things are getting warmer

This:

A sharp spike in Greenland temperatures since 1995 showed the giant northern island 2.7 degrees (1.5 degrees Celsius) hotter than its 20th-century average, the warmest in more than 1,000 years, according to new ice core data.

and this:

“This is an important finding and corroborates the suspicion that the ‘missing warming’ in the ice cores is due to the fact that the cores end before the strong warming sets in,” said climate scientist Martin Stendel of the Danish Meteorological Institute, who wasn’t part of the research.

mean this:

“We should be very concerned about North Greenland warming because that region has a dozen sleeping giants in the form of wide tidewater glaciers and an ice stream,” said Danish Meteorological Institute ice scientist Jason Box. And when awakened, it will ramp up melt from Greenland, he said.

And that means “rising seas that threaten homes, businesses, economies and communities,” said U.S. National Snow and Ice Data Center Deputy Lead Scientist Twila Moon.

I went to 2+ climate change sessions at the ASSA meetings

Peter Coy on the ASSA meetings (How the Coachella of Economics Can Survive Covid) (emphasis added):

The annual three-day meeting is the Coachella of economics. It’s a be-in and a teach-in. In place of music, art and other earthly delights, there are PowerPoint presentations featuring innovations in econometrics. Nobel laureates rub shoulders with future ones. In any given time slot there might be 60 simultaneous sessions on how economics can fight climate change or reduce income inequality or help people save for retirement or rein in the tech giants.

I went to three climate change sessions:

• The first was a 5 loosely connected paper no discussant AEA session that I chaired on the first day. This format is something the AEA was trying to try to boost participation. The authors had heady affiliations but they were all relatively new and (much) younger than me. One of the authors got in late because of flight problems so were were left with 4 papers. We went from a 20 minute presentations with 20 minute Q&A at the end format to a 20 minute presentations followed by 10 minutes of Q&A format. The session was well attended and each of the authors had a good paper/presentation and kept to the time constraints. I vaguely understood one of the papers. 
• The second was an AERE sponsored session on the social cost of carbon. It covered the work behind this paper and it was great. I vaguely understood the whole thing. One of the guys sitting next to me fell asleep.
• The third was a Sunday 8am AEA session that started late because "someone was at some breakfast" (maybe not a totally accurate quote). I left and went to my backup session(s) where I heard a couple of interesting papers. I made it back to the climate session to hear a talk on a social cost of carbon where 2 huge names were co-authors on the paper. This paper was dated and disappointing. The contrast between the latter two sessions reminds me to venture outside an AERE sponsored session to hear environmental economics at a general economics conference with caution. 

Also this shout out to the SBCA (emphasis added):

For economists, this is heaven itself. In a typical year the annual meeting of the Allied Social Science Associations used to draw around 13,000 of them, of which about 30 percent represented institutions outside the United States. The American Economic Association was and is the anchor organization. There are 64 other participating organizations, including the African Finance and Economics Association, the Association of Christian Economists, the Society for Benefit-Cost Analysis and the Union for Radical Political Economics.

I also attended the lone SBCA session on addiction and had dinner with the past-president (oyster po boy at the Acme Oyster Bar -- $24.99 with no sides). The SBCA recently met the membership threshold to have an ASSA session and it was a good one and better attended than some of the random ASSA sessions I wandered in to.

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.)