Environmental Economics

Was California's Proposition #2 a case of 'save me from myself'?

We had a departmental seminar yesterday by Professor Dan Sumner of the University of California at Davis and former Assistant Secretary for Economics at the U.S. Department of Agriculture.  He spoke on Proposition #2 in California: the animal welfare proposition*.  In particular, the passage of the proposition requires egg laying hens be housed in cages which allow them to stretch their wings for a majority of the day.  In his discussion Professor Sumner raised an interesting behavioral anomaly (in a scratch-your-head kind of way). Before proposition #2, cage-free eggs were already available in supermarkets alongside traditional cage eggs.  Yet, cage-free eggs accounted for only a tiny portion of total egg sales in California.  Proposition #2 passed with roughly 63% of the vote, thereby banning cage-egg production in California.  If Californians really cared about the welfare of hens, wouldn't they have bought cage-free eggs without the regulation?

Why would 63% of Californians vote to impose a restriction on themselves (and others) which they have failed to reveal when free to make the choice on their own? 

*Here is Wikipedia's summary of Sumner's work on Prop 2: "In July 2008 the University of California, Davis conducted a study through their University of California Agricultural Issues Center (AIC). The study concluded that "the best evidence from a variety of sources suggests that (non-organic) non-cage systems incur costs of production that are at least 20 percent higher than the common cage housing systems". This is due to higher feed costs, higher hen laying mortality, higher direct housing costs, and higher labor costs. The study also estimated that almost the entire California egg industry would relocate to other states during the 5-year adjustment period. The study does not analyze implications for animal welfare. By demonstrating that most egg producers would leave the state, the report estimates that the initiative would not affect how eggs are produced, only where eggs are produced."

We can never have too many explanations of "The Basic Economics of Carbon Permits Versus Carbon Taxes"

The Basic Economics of Carbon Permits Versus Carbon Taxes

via econospeak.blogspot.com

Some interesting takes on social norms in the second half.

Getting farmers on board with Cap and Trade

First a quote:

"Farmers were reluctant when fertilizer was first proposed ... or seed technology ... but they embraced the technology, and the result is agriculture production that is the envy of the world," [U.S. Secretary of Agriculture Tom] Vilsack said. "I understand the concern in farm country, but if [Cap and Trade] is done properly, it is going to ultimately, in the long term, the short term and the medium term, it is going to be a benefit to farmers."

The issues are simple.  Cap and Trade doesn't cover agriculture, but farmers are worried that Cap and Trade in the energy sectors will result in higher energy prices, higher fertilizer prices and ultimately lower profits.  The USDA agrees:

"Ask yourself some questions about climate change and then answer them."

From an Ask the Expert column I wrote for onCampus: The Ohio State University faculty staff information hub (aka on-line newsletter):

What are the basics of the recent energy policy proposals in Congress?
There are two energy bills moving through Congress right now: The American Clean Energy and Security Act in the House of Representatives (*cosponsored by Waxman-Markey) and the Clean Energy Jobs and American Power Act in the Senate (**sponsored by Boxer-Kerry). The meat of both energy policy proposals is a Cap and Trade program for carbon dioxide emissions — a principal greenhouse gas to which climate change is attributed — in the US. Cap and Trade is a program for capping total carbon dioxide emission and creating a market for carbon dioxide (CO2) emissions among potential polluters. Regulators decide the total amount of CO2 society desires (the Cap) and then allocates permits or allowances to emitters totaling that amount. These allowances are fully marketable commodities (the Trade)***.

Read on to find out the potential economic impacts of Cap and Trade and why Ohio (and you) should care...

"A Trove of Externalities"

From the inbox:

I'm just skimming through the morning research feeds, and saw something that might interest you if you didn't see it already. The National Research Council just completed its report on externalities of energy production and use:

The web version is free, but for some reason they charge a hefty fee to download the PDF

From the conclusions to the summary (Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use):

In aggregate, the damage estimates presented in this report for various external effects are substantial.  Just the damages from external effects the committee was able to quantify add up to more than $120 billion for the year 2005. Although large uncertainties are associated with the committee's estimates, there is little doubt that this aggregate total substantially underestimates the damages, because it does not include many other kinds of damages that could not be quantified for reasons contained in the report, such as damages related to some pollutants, climate change, ecosystems, infrastructure and security. 

Yep, you read that run-on sentence correctly--costs of climate change are not included and they still get a pretty big number.  And...

But even if complete, our various damage estimates would not automatically offer a guide to policy.  From the perspective of economic efficiency, theory suggests that damages should not be reduced to zero but only to the point where the cost of reducing another ton of emissions equals the marginal damages avoided.  That is, the degree to which a burden should reduced depends on its current level and the cost of lowering it:the solution cannot be determined from the amount of damage alone. 

In other words--clean-up is costly.  We have to weigh those costs against the benefits of clean-up (reduced damages).  Policy shouldn't be determined by the shock value of big numbers.

HatTip: Alan Dove

Anyone know of an environmental economist who has experience valuing sports arenas and has opinions on job creation being used as an argument for government policy?

From NBC Los Angeles:

Gov. Arnold Schwarzenegger said he's going to sign an environmental exemption bill that will clear the way for construction of the LA Stadium. 

State senators approved the bill, which would nullify a lawsuit over the project's environmental impact report by citizens in neighboring Walnut. Schwarzenegger is expected to sign the bill in support of the stadium because its impact on the local economy and its ability to generate jobs.

Sounds like a call for a very famous environmental/sports economist...

In the interest of yesterday's Nobel announcement...

Thanks to the Nobel committee for their good timing.  A PhD student of mine, Matt Interis* (now at Mississippi State University) wrote his dissertation on social norms and their role in the management (or mismanagement) of public goods.  He currently has two papers under review dealing with questions surrounding the governance of public goods and the role norms play in the design of efficient public goods policy.  The abstracts for both papers are below.  If you have an interest in reading either paper, let me know...

*Apparently Mississippi State has a dress code.  I'm pretty sure Matt had to borrow a tie for that picture.

Another esteemed economist's views on cap and trade, carbon taxes and the double dividend

Alan Randall, preeminent environmental economist (and my Department Chair--yep I'm sucking up), is in the process of putting together a 3rd edition of his popular graduate text, Resource Economics*--this time co-authored with John Bergstrom.  In response to a hallway conversation over Mankiw's double-dividend argument in favor of a carbon tax over cap and trade, Alan sent me this excerpt from the third edition:

A double dividend?  Even if a pollution tax and a quantity control (a standard, or tradable permits) were otherwise equivalent, we might perhaps prefer the tax for fiscal reasons.  Specifically, because government must raise revenues and most revenue-raising mechanisms distort economic incentives, a pollution tax might be argued to do not one but two good things: help clean-up the environment and reduce government reliance on distorting taxes.  However, economists have argued that this "double dividend" is, at least in part, a matter of wishful thinking.  The argument is that, yes, a pollution tax would restore efficiency in the polluting sector and reduce emissions, and reduce reliance on distorting taxes, but it would also introduce an inefficient excise tax on the commodity produced in the polluting process (say, electricity).  Excise taxes, too, are distorting, and it has been argued that workers facing such a tax would demand higher wages, imposing additional costs on the economy.

Stavins on maintaining economic growth and cutting GHG emissions: Yes we can!

From the Wall Street Journal:

As policy makers around the world take action to avoid a predicted climate catastrophe, the debate is turning to the costs of reducing carbon-dioxide emissions. Energy-efficiency measures are often pricey, and alternative energy sources are more expensive than the fossil fuels they replace. A steep price on carbon emissions will ripple through the economy.

Does that mean a serious effort to tackle global warming is incompatible with economic growth? Or can we make significant cuts in greenhouse-gas emissions without causing serious damage to the economy?

We put the question to a pair of experts. Robert Stavins, a professor of business and government at Harvard University and director of Harvard's environmental economics program, says the answer to the second question is yes: Making the necessary cuts need cause little more than a blip in world-wide growth if smart policies are used.

Steven Hayward, a fellow at the American Enterprise Institute for Public Policy Research, says no: Energy use—and the carbon dioxide it emits—is so central to the world's economy that major cuts can't be made without significant damage.

The cheapest way to stop climate change

Efficient (adj): Policy A is more efficient than policy B if policy A achieves the same result as policy B using fewer resources (i.e. same result; lower cost). 

Example: From the UK Telegraph:

Contraception is almost five times cheaper as a means of preventing climate change than conventional green technologies, according to research by the London School of Economics.

Every £4 spent on family planning over the next four decades would reduce global CO2 emissions by more than a ton, whereas a minimum of £19 would have to be spent on low-carbon technologies to achieve the same result, the research says.

The report, Fewer Emitter, Lower Emissions, Less Cost, concludes that family planning should be seen as one of the primary methods of emissions reduction. The UN estimates that 40 per cent of all pregnancies worldwide are unintended.

Phew (wiping forehead in the universal sign of relief), I made it through without an inappropriate and/or immature joke.