Environmental Economics

I think my future boss is telling me I have been doing things wrong my whole career.

Important new discussion paper from a star-studded cast of environmental and resource economists*...

...on the need for the environmental economics discipline to take better care in considering the systemic issues of race and justice in our research published by Resources for the Future:

Our paper argues that systemic racism is such a fundamental force in our world that, if we’re not careful, it will embed itself in the work we do, including well-intentioned efforts to improve environmental quality through research and policy. We define systemic racism as racial discrimination that extends beyond individual beliefs and interactions to pervade institutions, policies, and unwritten norms—in this case, racial discrimination that’s woven into the tools and conventions of environmental and natural resource economics. Even if we don’t think our work is “about” race and racism, systemic racism may be built into that work.

And particularly relevant for my (and John's) pursuit of better measures of willingness to pay and willingness to accept:

Willingness to pay and willingness to accept are two different ways of inferring how much a person values or cares about something...

But these measures embed systemic racism, regardless of the race of the people we’re studying. If people of color are blocked from living in a neighborhood that has plenty of green space because of discrimination, or if people of color know they’ll be made to feel unwelcome there, they will seem to have a low willingness to pay for a house in that neighborhood, and therefore they’ll seem to have low willingness to pay for green space. Another example we give in the paper is that racism can push some people to seek out recreational fishing locations where they’ll be less likely to encounter other races—a behavior that will distort these inferred values, as well.

Notably, a person’s willingness to pay for something is necessarily limited by their ability to pay—and systemic discrimination has limited the income and wealth of people of color, especially Black people. As a result, these groups of people may appear to value environmental and health-related amenities less. This phenomenon also can interfere with the measurement of people’s willingness to accept; for example, people who are constrained in their means and options may be forced to accept worse outcomes, though to a lesser extent.

I'm going to spend the rest of the day staring questioningly in a mirror.

*We are thrilled (some a little too thrilled) that Amy Ando is replacing me as Chair of the Department of Agricultural, Environmental, and Development Economics at Ohio State in July. 

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

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.

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!

 

California mandates solar panels on all new homes

If you want to build a new home in California, you will have to build one with rooftop solar, according to a new mandate from the California Energy Commission. 

The solar rules will apply to new single-family homes and new multi-family housing of three stories or fewer. Under the plan, builders who obtain construction permits issued on Jan. 1, 2020 or later must comply.

Read more here: http://www.sacbee.com/latest-news/article210793889.html#storylink=cpy

This is pretty much a textbook definition of a command-and-control environmental policy, a type of policy that, as I repeat ad nauseam to my undergraduate environmental economics students, is one that is very unlikely to be as cost-effective as an incentive-based environmental policy like a pollution tax or a cap-and-trade market for pollution (which California already has BTW).

Environmental economists tend to dislike command-and-control policies.  Severin Borenstein at Berkeley wrote an email to the energy commission chair voicing his opposition, and James Bushnell at Davis has written and op-ed and a blog post arguing against it.  Both of them know a lot about energy and environmental economics, and about California's electricity markets in particular. 

In addition to not being cost-effective, the policy will likely exacerbate another enormous problem with California's economy: the housing affordability crisis. 

The requirements are likely to add nearly $9,500 to the construction cost per home as state officials have declared a housing crisis. Home prices have soared in California, and housing stock has failed to keep up with demand.

There are some defenders of the policy (not just the energy commission members, who passed it unanimously). There are two main arguments.  The first is a "second-best" or a political economy argument: a cost-effective incentive-based policy may be best but is unfeasible, so let's be happy with the imperfect policy that we got.  Costa Samaras tweets:

Lukewarm take on the Calif solar on homes mandate: should they have done something more optimum instead? Yes- & we should assess objectively. But climate policy/deep decarbonization is about coalition politics, & 2nd (9th?) best policy options often happen instead of the optimum.

A second argument is based on induced innovation: this policy will drastically reduce the costs of solar implementation, so it is effectively subsidizing the under-provided positive externality from knowledge diffusion.

Due to the state’s revolutionary 2019 Building Energy Code requiring solar power to be installed at time of construction for all newly built homes, over time California home buyers could see per unit prices drop to rates approaching that of some of the world’s largest utility scale solar installations ($1/W in the United States).

Some previous research has examined the effects of solar mandates on technological innovation, and my reading of this is that the effect is there not not nearly as big as proponents argue. 

Anyways the whole point is that no one ever listens to economists.

 

 

Read more here: http://www.sacbee.com/latest-news/article210793889.html#storylink=cpy

Paying people to live in rural areas

My state, Georgia, has created a Rural Development Council to address the issues facing rural Georgia.  (For instance, access to health care is pretty bad.)

The Council released its recommendations a while back, and among them is a plan to pay people to move to rural Georgia:

To reverse the current population migration trend, the council proposes a "Rural Relocate and Reside” program designed to incentivize rural living, especially for professional, high wage earners through a local and state government partnership that

• Is available in counties experiencing less than five percent population growth over five consecutive years (currently 124 counties)
• Provides a one-time, per person/filing jointly 10-year income tax deduction up to $50,000 for new residents
• Allows local governments to pass a referendum to provide a one-time, 10-year, abated property tax exemption to provide more affordable housing and improved cash flow for new residents to pay back school loans/establish businesses/start medical practices
• Provides a one-time per person/filing jointly, 10-year state income tax exemption up to $100,000 where the local property referendum is in place to draw professional-level, high-wage earners

(There are other policy recommendations, too, like providing broadband internet access.  No discussion of expanding Medicaid eligibility though.)

Sure there are plenty of arguments either way for subsidizing people to move to rural Georgia (and yes, these are government subsidies, though they take the form of tax deductions and exemptions - any public economist can tell you that tax expenditures are equivalent to actual expenditures).  What's interesting to me is the effect on Georgia's environment.  Lots of evidence shows that, all else equal, urbanization is good for the environment, since people who live in cities drive less and consume less energy overall.  (Use this cool map and zoom in to the metro area of your choice to see.)

Paying people to live in rural areas thus has a negative side-effect of effectively subsidizing energy consumption. (My colleague Kyle Mangum shows in this paper that housing policy has basically the same effect.)  This is in addition to any other negative side-effects it might have, like reducing overall productivity by reallocating people from more-productive urban areas to less-productive rural areas. These ought to be traded off against whatever benefits the policy may create.

Well it's about dang time...

In the mail yesterday--get yours today (it will help our publisher recoup our whopping advance):

Republicans for Environmental Progress: An Endangered Species

For most of modern American history, the two major political parties in America have largely agreed on the desired long-term environmental outcomes for the country: there was a consensus among Republicans and Democrats that it was a good thing to press for cleaner air and water, less toxins in the environment, biodiversity preservation, and mitigation strategies for clean energy and, mostly recently, climate change.

All I ever need to know is on my PhD reading list

Economics PhD candidates (likely most of these are at the best schools) are saying silly things about the Ostrom/Williamson (mostly Ostrom) Nobel Memorial Prize in Economic Sciences. Here are my favorites from Economics Job Market Rumors (don't follow the link if you are offended by potty mouth; apparently, PhD candidates at the top schools use profanity when they are angry):

• Multidisciplinary?? Other disciplines are all rubblish. Why let them conteminate (sic) our purity?

I need a shower.

• Never heard of Ostrom in my life. Lame.

All I ever need to know is on my PhD reading list.

• what the [expletive deleted] is "land economics"?

Er, one of my favorite journals?

• The fact that most of us have not heard about her says enough about her contributions.

Er, it says that you don't know everything?

• The Nobel Memorial Prize in Economic Sciences is not a Nobel Prize.

Right on! It is not one of the original Nobel Prizes. Yet, Nobel Prize is a useful nickname for the mouthful of "Nobel Memorial Prize in Economic Sciences."

• I taught environmental economics once. Her work is mentioned in the sections on public goods and tragedy of the commons stuff, particularly with fisheries. Krugman notes that this is a win given for new institutional economics, and I think that's the common thread between her work and Williamson. In my memory from the environmental economics, some of what Ostrom and her colleagues had been doing was trying to understand why in some areas, over-fishing occurred but in others it didn't, even though technically in both situations, the incentives for the tragedy of the commons outcomes was present. I have this memory, but don't have my Tienteberg textbook here to check, that she argued that there was an enforcement mechanism that discouraged over-harvesting when the fishermen were part of the same community, but not when they were part of different communities.

This contribution is an attempt at explaining Ostrom's contribution. But I can't get past the "I taught EE once" without a yuck and a grin.

Hat tip: Aguanomics

How to solve 25% of climate change

Shai Agassi on TED. 18 minutes well spent.