Environmental Economics

AERE 2019 Summer Conference

The schedule of papers for the AERE 2019 Summer Conference is now online (just in time!)

Lots of good papers!  Not sure which sessions I will attend, but I will do my best to attend the session that I am presenting in.

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.

NPS Visitor Use Statistics

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

 

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

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

 

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

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

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

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

This work is not a product of the United States Government or the United States Environmental Protection Agency, and the author is not doing this work in any governmental capacity.  The views expressed are those of the author only and do not necessarily represent those of the United States or the US EPA.

 

 

 

ERE Special Issue on Benefit Transfer

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

 

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

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

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

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

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

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

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

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

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

 

This work is not a product of the United States Government or the United States Environmental Protection Agency, and the author is not doing this work in any governmental capacity.  The views expressed are those of the author only and do not necessarily represent those of the United States or the US EPA.

 

 

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!

 

Identity Economics and Environmental Policy

I recently got around to reading the 2010 book "Identity Economics: How our Identities Shape our Work, Wages, and Well-Being," by George Akerlof and Rachel Kranton.  It is a lay summary of some of the work that Akerlof and Kranton have been doing to incorporate identity and social norms into economic modeling of decision-making.  Basically, identity economics modifies a person's utility function - in addition to caring about the normal stuff like consumption, people also care about how their actions conform to the norms of the identity that they belong to.  For example, if an employer wanted its workers to work harder or better, standard economic theory would suggest that the employer could modify the contract and include standard economic incentives like merit pay or output-based bonuses, since workers respond to these incentives.  Identity economics suggests that the employer alternatively could attempt to create norms for the workplace and encourage workers to identify with those norms, such that the norms themselves and workers' identities would provide incentives for working hard.  I might work hard or long hours because I get paid more to do it, or I might do so because I feel like I am an important part of a team, and I believe in the mission of the firm, etc.

After reading it I was struck by the potential application to environmental policy.  We want people to reduce their energy consumption, say, by purchasing fuel efficient cars or appliances.  Standard economic theory (Pigou) would suggest that we can price the externalities from energy consumption correctly so that everyone's incentives are such that they purchase the right amount of fuel efficient cars and appliances based on financial considerations alone.  Looking out my window, it seems pretty obvious that lots of people who buy fuel efficient cars like hybrids and electrics (perhaps most of them) are doing so for other reasons - and perhaps the financial reasons aren't a part of it at all.  People buy a hybrid because they are (or want to be seen as) a "green" - this doesn't mean that they're image-obsessed jerks, but it does mean that identity economics seems to play a part in these decisions.

This is somewhat related to the idea of intrinsic motivation, and how it may be crowded out by government policy (some people have studied this in relation to environmental policy).  And it's also kind of related to the huge "behavioral nudge" literature on environmental policy (maybe). 

But I think there's something innovative about the approach of identity economics that can yield some insights into the optimal design of environmental policy.  Someone should write a paper, I decided, incorporating identity economics into a model of optimal externality policy.

Then a few days ago I see that someone basically did.  "Environmental Policy When Consumers Value Conformity," by Alistair Ulph and David Ulph, has recently been online-published by JEEM.   Their model is one in which consumers value conformity - sticking with the norms of a group.  This is similar to the modification of the utility function in identity economics, though (I think) they don't have in their model the endogeneous creation of norms for different identity groups (e.g. the greens and the browns).  This yields some striking policy implications, including the fact that the Pigouvian tax could be welfare-reducing.

High Modernism, Metis, and Pigou

I just finished reading Seeing Like a State by James C. Scott.  I've been thinking quite a bit about its implications for environmental policy and in particular the standard neoclassical policy prescriptions for the environment (i.e. Pigouvian taxes and/or cap-and-trade).  

The book has somewhat of a libertarian/conservative/small-government angle to it, though it's a captivating read and worth checking out especially if you don't encounter arguments like that very much.  The basic premise is a critique of certain types of government interventions into the market and into society.  The type of interventionist policy that Scott criticizes he calls "high modernism," which involves a faith in science and technology to re-order and re-shape society and the economy in a way that improves people's lives. The motivating examples of high modernism include the Bolshevik Revolution and major planned cities like Brasilia. Scott argues that high modernism ignores local and individualized knowledge and as a result often results in spectacular failure that can make people's lives substantially worse.

Rather than relying on high modernist technocrats, Scott puts more stock into what he calls "metis," the local, practical knowledge that high modernism ignores.  It's been noted elsewhere that this argument is somewhat Hayekian, but it also strikes me as very Burkean: a fundamental reason for trusting traditional institutions is that they capture the accumulated metis of a society.

So, what are the implications for environmental policy, and what are neoclassical Pigouvians like myself supposed to get out of this?  Pigouvian neoclassical welfare economics and its policy implications seem like textbook examples of high modernism - technocrats (like me!) are overruling the locals and telling them how the economy ought to be run, at least when it comes to environmental externalities like carbon pollution.  However, it also seems like market-based policies like pollution taxes and cap-and-trade programs respect metis in an important way that command-and-control policies don't, since they still give freedom to people and businesses to more or less make decisions on their own (the only interference being a slight tweak of the market incentives from the policy instrument). 

Would a metis-loving, high-modernist-hater like Scott approve of Pigouvian taxes?  I would like to think that he would.  The fact that there is a growing conservative push for market-based climate policy, including a GOP Representative recently sponsoring a carbon tax bill, makes me think so.

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

EU ETS Cap-and-Trade attempts to stabilize price with a reserve

The European Union's Emissions Trading Scheme, the world's largest greenhouse gas cap-and-trade program, will be taking a new step to stabilize permit prices.  Starting in January 2019, the Market Stability Reserve will go into effect, which aims to stabilize price by reducing the long-standing permit surpluses that have plagued the ETC. 

The reserve will:

address the current surplus of allowances

improve the system's resilience to major shocks by adjusting the supply of allowances to be auctioned.

Also,

The reserve will operate entirely according to pre-defined rules that leave no discretion to the Commission or Member States in its implementation.

So that's a win for the rules side in the rules vs. discretion debate.

In the Financial Times (maybe paywalled), Mark Lewis writes about the need for and likely effects of the implementation of the reserve.

The recent carbon-market reform introduces a so-called Market Stability Reserve (MSR). In effect, this is a central bank for carbon that will remove surplus inventory at a rate of 24 per cent per year over 2019-23 and at 12 per cent per year thereafter. For the first time in its history the EU-ETS will have a mechanism to modulate supply, thereby enabling the absolution of the EU carbon market’s original sin: that of fixed supply in the face of varying demand. The start-up of the MSR from January 2019 will create the biggest supply squeeze the EU-ETS has ever seen. The market surplus is set to fall by more than 1bn tonnes (or more than 60 per cent) over 2019-23, and with power generators and airlines structurally short, and other sectors likely increasingly reluctant to sell their accumulated surpluses, we see a need for material emissions abatement in the power sector over 2019-23.

All that I've read about the MSR indicates that it's not so much a cyclical policy, designed to smooth out abatement costs or increase efficiency in the face of fluctuations in costs or other economic variables. Rather, it seems to be in response to a long-run surplus of permits that has been persisting since the start of the program. 

This is all very much related to the economics literature on cost containment for carbon pricing schemes, which discusses proposals like safety valve prices, price floors, and banking and borrowing.  It's also perhaps a little bit related to the literature on business cycles and climate policy.  I have a paper in this literature, arguing that either a tax or a quantity policy ought to adjust to cyclical fluctuations.  Who knows? Maybe the EU-ETS read these papers and used them in designing their reserve.

 

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.