Environmental Economics

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?' 

Daily Demand and Supply: Government prevents entire island population from getting crabs*

From NBC.com:

This community voted overwhelmingly for Donald Trump. But now his immigration changes are killing its livelihood — legendary crabs that are a mainstay of the local economy and a regional delicacy.

For decades, Hoopers Island, known for its crabbing industry, has relied on a federal seasonal work program — known as H-2B visas — to keep its businesses humming. This has allowed employers to hire foreigners, mostly Mexican women, to come temporarily to pick crab meat.

But this year, the cap on H-2B visas — and a shift from the first-come, first-served based model to a lottery system that has disadvantaged Hoopers Island seasonal workers — has left the island without 40 percent of the visas they have needed in the past.

The economics here are pretty straight forward.  The number of workers supplied at any particular wage is equal to the number of domestic workers willing to work at that wage, plus the number of H2B (foreign) workers willing to work at that wage.  For example, if the crab-picking wage is $10 per hour, and the number of domestic workers willing to pick crabs at $10 per hour is 100, and the number of H2B workers willing to pick crabs for $10 per hour is 200, then the total number of workers supplied at a wage of $10 per hour is $300.  If the number of H2B visas are cut by 40%, then the number of H2B crab pickers willing to work at $10 per hour becomes 120, and the total number of workers supplied at $10 per hour is now 220.  In other words, restricting the number of foreign workers results in a decrease in the supply of labor to the crab-picking industry.   So what are the effects of a decrease in the supply of labor in teh crab-picking industry?

 

• Wages for crab-picking will increase.  A decrease in supply of crab-pickers will cause the equilibrium price of crab-pickers to increase.  Those crab-pickers who are hired will get higher wages.
• The number of domestic crab-pickers will increase.  At higher wages, the number of domestic crab-pickers willing to work will increase.  Since the supply of foreign crab-pickers has been reduced, a part of the shortage of workers will be filled by drawing new domestic crab-pickers into the crab-picking jobs.
• The total number of crab-pickers will decrease.  As with any decrease in supply, the equilibrium quantity of workers in the crab-picking market will decrease as the supply of workers decreases.  The gain in domestic workers is more than offset by the loss of H2B workers.  

So in the market for crab-picker we will have higher wages for more domestic workers, with fewer H2B workers in the market, and lower total employment among all crab-pickers.  SO if you are a protectionist, this doesn't sound all bad.  We have more domestic workers employed at higher wages.  Right?

Well, sort of.  We also have to think about what else happens.

Right now we have full employment.  With full employment, those domestic crab-pickers have to come from somewhere. The only place from where they can come are other, similar, jobs.  SO another effect is:

• A decrease in supply of H2B workers in the crab-picking industry will decrease the supply of domestic workers in other industries--driving up those wages as well.

But workers getting paid more is a good thing, right?

Sort of, but we have to remember that workers are an input into the production of outputs.  When the price of an input increase, the supply of the output decreases.  This means:

• A decrease in the supply of any output for which wages have gone up will see higher prices and lower quantities produced/consumed.  The decrease in the supply of labor will cause higher crab (and other food goods) prices.

For reference, here's the current price of crabs at a Baltimore area restaurant: 

Males by the Dozen

• Small (5″-5 ¾″) $30
• Medium (5 ¾″-6 ¼″) $48
• Large (6 ¼″-6 ¾″) $68
• XLarge (6 ¾″-7 ¼″) $101
• Jumbo (7 ¼″-8″) $124

Males by the Bushel

• Small $249
• Medium $309
• Large $379
• Lights (picking crabs) $120

Yikes.

 

*I know that's a cheap joke, but I bet John laughed.

 

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

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.   

 

When you're dealing with the current EPA administration, the humor writes itself

Really, could you have made this up?

Hat Tip: Paul Jakus

 

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.