Environmental Economics

Just your friendly periodic reminder that mileage taxes create disincentives for fuel efficiency.

If there's been one consistent thread since the beginning of Env-Econ.net, it's our endearing commitment to helping you understand the incentives of gas taxes vs. mileage taxes. 

Well, the debate is back in the news again as the governments debate ways to overcome...  

...the myriad hurdles U.S. states face as they experiment with road usage charging programs aimed at one day replacing motor fuel taxes, which are generating less each year, in part due to fuel efficiency and the rise of electric cars.

So here's a[n updated] view from the wayback machine at some of issues that arise from a mileage tax:

It's been [over 16] years now (May 8, 2007) and people still aren't listening to me. 

Taxing miles creates perverse incentives for fuel efficiency.  A $0.015/mile tax (the size of the tax mentioned in the article) is the equivalent of a $0.015 * X tax per gallon where X is mpg.  In words, a mileage tax increases the tax per gallon the more fuel efficient the car.  Now granted, with higher mpg you use fewer gallons to drive an equivalent number of miles, and in the end, everyone driving 100 miles will pay the same tax.  And from a revenue perspective, that might be OK.  But there might be a way to kill fewer birds with one stone.

As I have written a number of times, a more straightforward proposal is to simply raise the gas tax.  Reaising the gas tax accomplishes a number of things 1) It raises revenue, 2) It discourages miles driven, and 3) It increases the incentive for higher fuel efficiency. 

Because my previous posts on this have been written with an ironic twist (I propose a mileage tax that is inversely proportional to fuel efficiency and then show that such a tax is the equivalent of a $1/gallon gas tax), here's the direct, non-ironic version:  A $1/gallon gas tax...

...places a higher burden on those driving less fuel efficient vehicles--that should satisfy those blaming the SUV drivers for all of the problems*.

...places a higher burden on those driving more.  By increasing the marginal cost per mile driven, total miles driven should decrease.

...assuming fuel efficiency and income are negatively correlated--that is, the rich tend to drive larger, more expensive, less fuel efficient cars--[higher gas taxes] place a higher burden on higher incomes.

...provides an incentive for drivers to switch to more fuel efficient vehicles.

It's really simple.  Why worry about complicated milage programs?  The gas tax infrastructure is in place.  Raise the gas tax and meet multiple public policy and economic goals simultaneously.

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. 

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.

The benefits of environmental regulations cannot be simply willed away (and why I'm too slow to be an Ivy-Leaguer)

A couple of weeks ago, soon after EPA Administrator Pruitt's announcement to introduce a rule changing the role of cost-benefit analysis in design of environmental regulations, I wrote an op-ed and submitted it to the NYTimes for consideration.  They politely declined (by ignoring the submission) so I submitted it to the Washington Post.  They too, politely declined (by ignoring the submission).  Finally I sent it to The Conversation and they politely declined (for real this time), basically saying I was too slow and Joe Aldy beat me to it. 

D'Oh--damn Ivy-Leaguers.

So although this repeats a lot of what Joe said in his piece for The Conversation, here's my take on why reducing the role of cost-benefit analysis at the EPA is dangerous. 

In 1981, President Reagan signed Executive Order 12291 requiring both the costs and benefits of any new major regulation be considered prior to federal implementation.  For the decade prior to Executive Order 12291, federal and state environmental regulators struggled to find cost effective ways to implement environmental regulations imposed by the Clean Air and Clean Water Acts of the early 1970’s.  Unfunded mandates imposed on states resulted in inertia that saw few environmental improvements during the decade after the Clean Air and Clean Water Acts were passed, and regulatory stalemates were a regular occurrence due to the perceived high cost of implementation.  By requiring cost-benefit analysis, Reagan’s Executive Order promised to reduce the cost of regulation by selecting only those regulations that promised to provide benefits in excess of costs, thus promoting environmental improvements without over-burdening economic growth after the lean economic times of the 1970’s.

Those in favor of less costly regulation applauded the use of cost-benefit analysis for regulatory decisions.  As a 1981 story in the New York Times put it:

“Administration and business officials and others who applaud the President's decision say that the uniform application of cost-benefit analysis...will stem the tide of unnecessary regulation that they say have been a severe and growing burden to the nation’s economy. “

Opponents of Executive Order 12291 countered that the use of cost-benefit analysis was simply an end-around for those opposing environmental regulation, that putting ‘prices’ on environmental goods diminished the contribution of environmental goods to the collective good, and that comparisons based solely on dollars can be easily manipulated.  

Despite the objections, Executive Order 12291 was issued and cost-benefit analysis has become a standard tool for environmental policy analysis.  In fact, cost-benefit analysis has been so successful as a tool for policy analysis that every administration since Reagan has endorsed its use. 

Until now.

On June 7, EPA Administrator Scott Pruitt, announced the intent to introduce a new EPA rule for public comment addressing cost-benefit analysis that effectively suggests removing the measurement of many co-benefits in consideration of environmental regulations.  In a surprising bit of irony, Administrator Pruitt argues that the measurement of benefits in consideration of environmental regulations has resulted in the implementation of too many costly regulations that harm business and has hampered economic growth—the exact argument that Reagan-era administration and business officials used in favor of cost-benefit analysis in 1981. 

What has changed since 1981? The simplest answer is that economists who specialize in the measurement of the benefits of environmental improvements have clearly demonstrated that there are large and measurable benefits to society of improving environmental quality thus providing justification for economically defensible environmental regulations.

Post-executive order 12291, a burgeoning line of academic inquiry emerged for the measurement of the benefits of environmental regulations.  Putting benefits on equal footing with costs required the measurement of benefits that are not ‘priced’ in typical markets.  Assigning ‘prices’ to non-market environmental outcomes, like the benefits of improved drinking water quality, or the benefits of preventing early deaths from excessive exposure to dirty air proved to be a manageable task, and highly valuable.  By measuring the costs AND benefits of proposed regulations, federal agencies, like the EPA, were quickly able to implement low cost environmental regulations that yielded societal benefits that far exceeded the costs of implementation without stifling economic growth.  For example, in a 2005 retrospective assessment of the costs and benefits of the sulfur dioxide cap-and-trade program in the EPA’s Acid Rain Program implemented under Title IV of the 1990 Clean Air Act, economists found that the costs of sulfur dioxide reductions from coal-fired electricity generation were half of what was expected, and after including the health, recreation, and aesthetic benefits of reduced sulfur dioxide emissions, the benefits of those reductions exceeded the costs of the Acid Rain Program by a factor of 40!  

Since the environmental movement of the 1960’s and 1970’s, economists have largely come down in support of the use of efficient regulation, based on cost-benefit analysis, to address environmental concerns.  A 1990 survey of members of the American Economic Association found that 60% of economists surveyed disagree with the statement “Reducing the regulatory power of the Environmental Protection Agency (EPA) would improve the economic efficiency of the U.S. economy.”  Only 12% agreed with the statement.  These numbers remained largely unchanged when the survey was repeated in 2000.  A more recent survey of members of the Association of Environmental and Resource Economists found that 96% of those surveyed disagree with the statement that “Unregulated markets provide public goods in optimal quantities.”  This was the single statement that yielded the highest level of agreement among the economists surveyed—a group notorious for being unable to agree with each other.  In short, there is a surprising degree of agreement among economists that environmental regulation is not only good for the environment, but when designed properly is defensible on economic grounds and unlikely to limit economic growth. 

Contrary to early fears, putting a ‘price’ on the environment has encouraged decision makers to recognize the scarce nature of our natural capital.  Rather than reducing “all decisions to simple-minded weighing of dollars,” the pricing of nature has forced everyone to recognize that the alternative to pricing nature is assuming it is free to exploit.  Assigning dollar values to the benefits of our natural and environmental resources allows us to use the power of markets and economics to design policies and regulations that benefit all. 

The benefits of many environmental regulations and the resulting environmental improvements are large, demonstrable, and economically defensible and cannot be simply willed away.

At What Cost? Legislators come up with solutions to Harmful Algal Blooms. Environmental Economists come up with cheaper solutions.

The Legislature of the State of Ohio is currently considering legislation to reduce Phosphorous loadings into Lake Erie by 40%.  This is a good thing, as reducing Phosphorous going into Lake Erie will reduce the incidence and impact of Harmful Algal Blooms in the Western Lake Erie Basin.  

The proposed legislation establishes a Clean Lake 2020 plan that includes:

A significant new Clean Lake Capital Fund that may appropriate up to $100 million per year for five years for both Lake Erie algae reduction, and agricultural best practices.  Funding may include establishing facilities to improve manure application processes, projects to reduce open lake disposal of dredged materials, funds to local governments for water quality-based green infrastructure, water management projects to help reduce nutrient and sediment runoff impacting the lake and other strategies.

A new Soil and Water Support Fund, with some of the funding provided directly to soil and water conservation districts to assist farmers in soil testing, nutrient management plans, installing edge of field drainage devices, encouraging inserting of nutrients (subsurface placement), and agreed to conservation methods that may include riparian buffers, filter strips and cover crops.

To the casual observer, this all looks good.  The proposed bill has widespread support among agricultural groups, and local and state authorities. As one of the bill's sponsors notes:

“These are not brand new ideas, just a greater sense of urgency to implement them,” Arndt said.  “There appears to be widespread agreement with state officials, environmental and agriculture groups, tourism advocates and business leaders that many of these strategies will make a big difference.”

And he is right, these strategies could make a big difference. 

But as economists we are trained to ask, 'At what cost?' 

5 out of 7 continents isn't bad, right?

We're working on PhD recruitment this week (if you applied to OSU AEDE and were accepted, join us, we're FUN!).  I put together a Google map with our PhD placements since 2007.  A bit scary that I might be influencing thinking for this many people and this wide an area.   

 

Cleaning up marine debris is expensive. Leaving it there is expensive too.

Good to know I can still publish (or at least I'm smart enough to team up with talented people who can publish and then attach my name to it):

Christopher G. Leggett, Nora Scherer, Timothy C. Haab, Ryan Bailey, Jason P. Landrum, and Adam Domanski, "Assessing the Economic Benefits of Reductions in Marine Debris at Southern California Beaches: A Random Utility Travel Cost Model," Marine Resource Economics (Published online 2/14/2018: https://doi.org/10.1086/697152)

A random utility maximization (RUM) travel cost model is used to characterize trips to beaches by residents of Orange County, CA. The authors collected on-site measurements of marine debris at 31 beaches in the Orange County area. These data, combined with data on beach trips obtained from a general population survey, were used to estimate a RUM model capable of isolating the impact of marine debris on beach choice. The model is used to estimate the economic benefits associated with several hypothetical reductions in marine debris. The estimated per capita seasonal benefit associated with a 25% reduction in marine debris at all beaches in the choice set is $12.91 (aggregate benefits of $29.5 million in 2013 dollars), while the estimated per capita seasonal benefit associated with a hypothetical improvement potentially associated with the full implementation of the Los Angeles River Trash total maximum daily load (TMDL) is $20.36 (aggregate benefits of $46.5 million).

Wither coal (despite all attempts to the contrary)? What's next?

In our Env-Econ 101 series (to the left), we have a lengthy two part explanation (Part 1, Part 2) of the Hotelling rule for depletable natural resources which is basically summarized as:

For a non-renewable, exhaustible resource with completely known stock, no discoveries possible, no alternatives, no recycling, private ownership and constant costs of extraction, the price of the resource will increase at the interest rate over time.

The important corollary to the Hotelling rule regarding transition to alternative fuel sources is:

As the price of the depletable resource rises and/or the price of the alternative resource decreases, incentives are created to switch between the resources.  Once the price of the depletable resources rises far enough, the incentive to continue with extraction diminishes and investments in alternative resources increase.  

On Monday, the Guardian (liberal hacks!) illustrated these results in a succinct attack on Trumpian coal policy titled "The war on coal is over.  Coal lost."  While the article itself is a less than veiled attack on President Trump's environmental policies (I will leave it to others to decide whether such attacks are warranted or not--hint:  they're warranted on economic grounds), a graphic in the article gives a nice illustration of the outcomes of Hotelling's rule:

In the U.S., electricity generation by coal has been surpassed by natural gas for two reasons: 1) Coal has become more expensive in an absolute sense (at least partially due to regulations), and 2) Natural gas has become much cheaper relative to coal (at least partially due to increased use of new extraction technologies like fracking).  Also of note from a Hotelling perspective is the upturn in electricity generation from renewable sources (the yellow-line, at least I think it's yellow, don't trust me on colors, I'm color-blind). 

The Guardian expects the trend to continue:

This trend will continue. As old coal plants continue to retire and be replaced by cheaper renewables and natural gas, their share of the US electricity supply will continue to plummet, and coal will become a fossil fuel in every sense of the word. That’s why American companies continue to invest in cheap, clean renewable energy.

I expect the trend to continue too.  Although my level of certainty changes daily depending on which Twitter policy announcement is to be believed on any given day.  

But if the trend continues, the hard work begins.  Economists are notoriously bad at looking at distributional issues.  But as the mix of energy sources changes, the distributional impacts are likely to be significant on regions dependent on outdated technologies and old energy sources.  The Guardian article puts it this way.

The shift away from coal poses a challenge for regions in which the local economy depends on the fossil fuel, but the transition is inevitable.

Ohio State Professors Mike Betz (Consumer Sciences) and Mark Partridge (Ag, Env, and Development Economics) recently summarized the problem similarly:

Communities that have historically relied on coal production, especially in Appalachia, have been suffering major economic and employment losses for decades. Today far fewer miners are needed to produce the coal that we consume, and alternative energy sources like natural gas, solar and wind have chipped away at coal’s cost advantage. Job losses in coal-reliant regions will only intensify as mining becomes more efficient and the nation takes steps to reduce greenhouse gas emissions.

So what then should these communities do?  Betz and Partridge argue there are two options (in my words) 1) Prop up coal dependent communities by subsidizing the coal industry.  However, as Betz and Partridge lay out, such a strategy is likely to result in investments in labor-reducing, efficiency enhancing technologies, and ultimately reduce the labor-force in these regions.  Seems counter-productive to me. 

Option 2) is to invest in 'people and place.'  Here's how Betz and Partridge make the case:

To spur economic development in lagging regions, it is helpful to consider what types of communities are likely to prosper in the future. Today we can predict that successful communities in 2040 or 2050 are likely be entrepreneurial and have well-educated workforces and high-quality schools.

Educated, highly skilled workers can live anywhere. To attract them, lagging regions need to offer a high quality of life and a clean environment. The Trump administration is moving in the opposite direction by weakening environmental regulation of the coal industry, which will make it harder for coal country to prosper in the long run.

We have found that entrepreneurship and creativity are key factors for promoting economic development in lagging areas of Appalachia. To foster them, aid programs should focus on improving quality of life and attracting new, highly skilled residents. One way to do so is by investing in natural resource amenities, such as abandoned mine cleanup. However, Trump’s budget request eliminates grants to Appalachian communities for economic development in conjunction with abandoned mine land cleanup.

 

 

Eighty-percent of environmental economists surveyed think cutting EPA regulations will not benefit the U.S. economy

Apologies to those of you who have missed me the last few weeks (hi mom!) as I have recovered from taking care of some lingering neck issues from my years of head banging to 80's hair bands.  I'm back on my feet (computer) and ready to go (from the confines of my family room).

Anyway, I know John posted about our article that (finally) came out in the Review of Environmental Economics and Policy, describing the set of issues upon which a sample of AERE members appear to have consensus, and those for which they don't.  Here are a few highlights from the survey in light of President Trump's budget, keeping in mind that the survey was conducted before the thought of a Trump presidency was even a twinkle in the eye, and some of my thoughts on the results.

• 96% of respondents feel that unregulated markets do not provide public goods in optimal quantities.

Thought: I contend that many people who advocate for free markets fail to recognize the important distinction between 'free' markets and 'unregulated' markets.  From most economists' perspectives, a truly 'free' market is a market in which all of the costs and benefits associated with production and consumption (current and expected future) are fully encumbered by actors in that market today.

Too technical?  

Ok, try this:

'Free' markets have no unintended consequences.  

Still too technical?  

OK, how about one more:

'Free' markets have no spillovers.

I could go one, but hopefully you get the point.  If there are benefits or costs that come from making or consuming something, and those benefits or costs can't or aren't captured in the market from which they originate, the market is failing to do it's job.  That's why we call it a market failure.

An externality occurs when a cost or benefit from making or consuming something ends up costing or benefiting someone else, and that someone else has no choice in the matter.  For example, the health effects of air pollution from coal-fired electricity production in Ohio on the good people of Boston (I assume there are at least some good people in Boston), or the effects of second-hand smoke on those stuck in an airplane with a smoker, or the spill-overs from improved workforce productivity and social benefits of decreased crime from increased education.  

Each of these is an example of a cost or benefit that is generated by activity in a market, but spills over to people outside the market.  The result is that, in these cases, unregulated markets tend to underproduce good things and overproduce bad things (too much pollution, too much second-hand smoke, too little education).  

Why then don't the people in the markets, through generosity, just do the right thing?  

Unfortunately market forces are powerful.  If a good-hearted electricity producer in Ohio decided to voluntarily absorb the costs of pollution, the Ohio electricity-producer's costs of production will go up.  The producer then has the choice of trying to charge higher prices to those buying electricity, or settle for lower profits.  If they choose to raise prices, they are now at a competitive disadvantage to the less-good-hearted producers. Most consumers don't really know (or care?) where they get their electricity, so they are going to choose to buy from the cheapest seller, which now causes a big dilemma for the good-hearted producer: raising prices is off the table, so I either settle for lower profits or I abandon my morals and pollute.

Stakeholders are going to be less than pleased with lower profits, to the point that voluntarily lowering profits is not a long-term sustainable business strategy.  So ruling that out, the good-hearted producer has to either pollute or shut down.

Sorry, that was a long way to go to make the point that this is NOT a 'free' market.  It is an 'unregulated market.' And in the case of an externality, an unregulated market will overproduce bad things and underproduce good things (in the case of education, do you consider the positive benefits you provide to society when you decide how much education to get?  Or do you just consider your personal benefits?).

That is why, 96% of AERE members who responded to our survey think that unregulated markets fail to provide optimal quantities of public goods (an extreme form of externalities).  And it is also why:

Eighty-percent of environmental economists surveyed think cutting EPA regulations will not benefit the U.S. economy

Environmental economists are not market-killers.  In fact, most are advocates for truly free markets: markets that fully capture all benefits and cost of production and consumption through market-based regulations.  Afterall,

Eighty-six percent of respondents agree that emissions taxes or marketable emissions permits are a more economically efficient approach to pollution control than emissions standards.

Sensible market-based regulations make sense.  

 

My advice to the EPA Administrator? Use science.

I am an appointed member of the EPA Science Advisory Board Environmental Economics Advisory Committee. As a committee, our charge is to provide "independent advice to the EPA Administrator, through the chartered SAB, regarding the science and research to assess public benefits and costs of EPA’s environmental programs."

My independent advice to the EPA Administrator?

Use science.

That's all.