D.C. bag tax collects $150,000 in January for river cleanup

And bag usage went down from 22.5 million to 3 million in a month. A good time, I think, to read Daniel Ariely on the psychological power of zero.

Energy and the Next Big Economic Thing

Geoff Styles makes a common point that usually comes up when talking about the clean energy "race":

While we shouldn't be shocked if another country leads in some aspects of energy technology, we also shouldn't lose sight of the larger context, because energy isn't an end in itself. Even if clean technology turned out to be the computer industry of this decade--in reality and not just hype--and we didn't come in first in the cleantech race--a result I'm not prepared to concede, yet--energy remains the servant of the rest of the economy. That's where the race that matters most will be won or lost.

Megan McArdle says something similar when talking about green jobs. I've always been puzzled by this argument, though, which can be restated thus: Staking an economic boom on energy is misguided because our focus should be on lowering the proportion of our economy devoted to energy production, not raising it; we could, after all, solve our employment problems by putting people to work on farms, but that wouldn't be a net gain for our economy.

What's puzzling to me about this is, couldn't you say this about any sector or industry? The health care sector, for example, grew from being a trivial part of the economy to a massive part in the last century; and while getting health care costs under control is necessary, no one, I think, would deny that at least some of that past growth has been a good thing. You don't, of course, want growth in one sector to choke off others: Rather, you want all of your sectors to become more efficient. Thus, for example, farming used to take up the majority of the US economy, and now its share is very tiny. That's not because it was "choked off" by manufacturing or whatever, but because the US economy grew, developed new markets, and saw enormous productivity gains, along with the rest of what is now the developed world. Even farming has benefited from these changes: Modern farms yield far more crops than those in the 19th century, even though there were far fewer people and much more available land.

The question, then, with respect to building out green energy, is: Does making large-scale investments in renewables, efficiency, etc. entail putting people and capital to less productive uses? In other words, is the analogy between green energy and the computer industry that Styles mentions not valid? I have my doubts about that assertion: If there were another potential source of major economic growth in the offing, at least in the developed world, that would be reason to have some pause about the green economy as the next big thing. On the other hand, the last two economic booms in the US have turned out to be based on speculative bubbles; and unlike the tech boom, the last one didn't have much in the way of side benefits -- just a lot of exurban houses that no one can afford. So making energy the focus of our economic labors doesn't strike me as a bad idea. And that's not even considering the moral case for greening our energy supplies, which is the topic for another blog post.

Quote of the Day

Mike Konczal:

It’s worth noting that the biggest benefit of the large bank mergers for consumers as pointed out in this celebratory song is that there are more credit card logos to choose from. That’s an argument not brought up enough, and I’ll grant it to them. A political science friend pointed out to me in gchat that “you can’t get just any logo; you probably couldn’t get a card with a Tamil Tigers emblem on it.” That’s a decent point, but it doesn’t acknowledge the huge innovations in card logo technology that has occurred over the past decade while the financial system has both merged into a top-heavy systematically risky mess while massively leveraging up to keep returns high. So I give them this point entirely. But in retrospect, was it a fair tradeoff?

I have never had a credit card, but thankfully Bank of America has extended this concept to debit cards: I was able to have a Wilderness Society logo put on my card, so that BoA, I think, makes a donation to them every time I use it. Certainly makes up for wrecking the economy, doesn't it?

More seriously, my experience with BoA has been generally positive, but after reading this account of its shadier side, I'm seriously considering dropping it in favor of a credit union. Any good ones in Maryland?

The Chimera That Is Chimerica

I'm currently reading Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It. It's interesting, in that it starts out as a fairly standard history of post-Maoist China, then abruptly turns into a disquisition on the inadequacy of traditional economic statistics in an age of transnational capitalism and production chains that span continents. Think of it as a gearshift book.

It's also interesting as a kind of non-fiction prequel to Firefly/Serenity, which posits a world in which Chinese and American cultures have intermingled: White characters curse in Mandarin, and so forth. But of course China and America haven't even arrived yet at a consensus about the nature of their relationship, much less begun cross-breeding their civilizations. You could argue, as Karabell does, that Chimerica as a bi-national self-conception is not so different than the sense of continental identity that animates the EU, which was also far-fetched when first proposed. Yet the physical and linguistic proximity, &c. of most European nations makes agglomeration a much more feasible task than in the case of Chimerica -- and even the EU is still disturbingly fragile, as the case of Greece demonstrates.

For the present, Chimerica is mainly the partnership of Chinese labor and American capital, as well as that of Chinese savers and American borrowers. As the late unpleasantness has shown, this isn't a very sustainable dynamic.¹ The question is, how do we build on the current relationship in order to find more mutually beneficial terms of cooperation? In part, it's a matter of how the Chinese and the Americans conceive of themselves, and of each other. The current trade imbalance is viewed by many as a bad thing, not least because many Americans find it distasteful that any foreign country, let alone China, has so much potential influence over the US. (And the feeling seems to be mutual, if Chris Hayes is correct.) Getting past that discomfort means viewing interdependence as something to be desired rather than to be avoided, if only as a steppingstone to better things. America will be a better country for allowing China (and India, Brazil, et al) to assume a more prominent role in world affairs, rather than trying to maintain a stranglehold on hegemony.

But it's also worth asking how this interdependence -- which certainly has benefited the Chinese -- benefits Americans, especially those who aren't members of the investor class. It's hard to see, for example, a world in which American labor competes with Chinese labor on an apples-to-apples basis; at the least, the dollar would need to depreciate by a lot and the renminbi would need to appreciate by a lot. But how do we get there with the minimal amount of dislocation? It doesn't seem like anyone has a good answer for that.

¹ See, for example, Tyler Cowen's column on a possible bubble in Chinese manufacturing, and what its bursting could mean for the US.

Paris. Notre Dame Cathedral Tower. Chimeras and Man originally uploaded to Flickr by Cornell University Library.

Green Power and Deregulation

Speaking of responsible conservatives, E.D. Kain of David Frum's New Majority website makes several good points about electricity deregulation and clean energy:

Obviously the government will have its role to pay in the green revolution, but we should limit that role to laying pipes and power lines, and ensuring that when laws are broken, the perpetrators are punished. The government needs to establish fair-play rules and create a grid, but beyond that they need to let markets work, and allow competition to flourish. A lasting green revolution needs to benefit not only the earth, but the people who live on it as well. Too often the economic costs of environmentalism are overlooked, and too often it is the poorest among us who bear the brunt of those costs. Real cost-saving competition can help change that.

Stated that way, the case for deregulated energy markets seems quite strong. The problem with deregulation, however, has less to do with the desirability of moving away from closed markets (Brad Plumer's article on the roadblocks to distributed generation provides a wealth of examples in that vein), but with how we get to open ones -- and the record in the US has been pretty poor on that mark. California's troubles with deregulation have become legendary, with massive price spikes and Enron-driven market manipulation. In my own state of Maryland, deregulation wasn't quite so dramatic a process, but the problems were similar in many respects: Price caps largely prevented competition from emerging, and ultimately didn't prevent massive price spikes for Baltimore Gas & Electric customers from happening once the caps were removed -- though Gov. Martin O'Malley and the General Assembly did manage to delay, then dampen, the effect of the rate hike. There were also some shady dealings between Constellation Energy, which owns BGE, and the then-Republican-controlled Public Service Commission; but even so, deregulation in Maryland, like in many other states, was not well designed.¹

What's baffling about all this is that even the more successful examples of a deregulated electricity market have been running into problems. For example, the UK, which deregulated in the early 1990s, is now finding that generators may not be able to keep up with demand -- possibly even leading to blackouts. Moreover, pace Kain's hope of open markets and green power going hand in hand, these generators have been skimping on renewable energy development. Back in 2000, Severin Borenstein co-authored a paper (ungated version here) on deregulation which essentially argued that, until we get up and running a smarter grid, including real-time pricing for consumers, the electricity market will remain vulnerable to volatility and manipulation. In other words, to get free markets in electricity, there'll need to be a great deal more government-directed investment. Carbon pricing will likely also be essential to giving renewable energy a leg up among generators.

¹ Ironically, competition for generators is finally starting to emerge -- particularly in renewable energy -- yet Gov. O'Malley is now said to be considering re-regulating the industry.

Friday Video

Misha Glenny discusses the rise of organized crime in the post-Cold War era:

Waxman-Markey and Cost-Benefit Analysis

I just got around to reading the Institute for Policy Integrity's new report (PDF) that does a cost-benefit analysis of the Waxman-Markey climate bill, with an eye toward emphasizing the benefits of the legislation as much as the costs. To date, the major studies of W-M, including those from the CBO, EPA, and EIA, have shown that the costs of reducing carbon emissions under the bill would be eminently affordable, with the average cost per household being in the range of less than a hundred to a couple hundred dollars per year. Even so, those studies haven't included the benefits of reducing carbon emissions -- that is, the value that less global warming would have for Americans and for the world. This is what the IPI report does include, working from a federal interagency task force's estimate that the social cost of carbon (SCC), or the marginal benefit to reducing emissions, is about $19/tCO₂. From this, the IPI report shows that W-M would produce about $1.5 trillion in benefits from 2012 to 2050, while costing about $660 billion over the same period; in other words, it would produce $2.27 in benefits for every dollar spent.

It's an excellent report, one that addresses a critical, and much under-discussed, aspect of dealing with climate change. At the same time, as I was reading it, I was reminded that cost-benefit analysis (CBA) is an incredibly difficult task, as one's choice of assumptions can produce vastly different results. For example, simply changing the discount rate used in IPI's analysis can change the benefits of W-M from as low as $400 billion to as high as $5.5 trillion.¹ The SCC, meanwhile, is based on a global estimate of the benefits of carbon emissions reductions, while the costs of W-M are strictly national in scope. There are also several benefits not counted, including improved health and energy security. Each of these elements is, suffice to say, controversial, and CBA doesn't provide us with a tool for figuring out where to come down on these controversies: Often it's simply a matter of what can measured in monetary terms, regardless of its importance to the problem at hand.

In one sense, though, the debate over climate legislation boils down to dueling cost-benefit analyses: We must believe that decarbonizing our economy will make us better off than any other alternative; else why would we bother about climate change? And although CBA tends to be disparaged by environmentalists (often with good reason), it's an essential tool to making the case that climate legislation will be good for all of us; as Mark Kleiman recently said, all policy analysis is a kind of cost-benefit analysis.

If nothing else, knowing CBA will be useful in smacking down dishonest numbers from right-wing ideologues. Case in point: Declan McCullagh's breathless assertion that the Obama administration has "privately concluded" that cap-and-trade would cost each American household $1,761 a year. In reality, the Competitive Enterprise Institute (the folks who brought you "They call it pollution. We call it life") got hold of a US Treasury document that mentioned that the administration's proposed cap-and-trade plan would net $100-$200 billion a year in revenue from auctioning off all of its pollution permits. You'll recall that the administration also proposed rebating most of that revenue to taxpayers, in the form of the Making Work Pay tax credit. More importantly, you'll also recall that the Obama administration's plan isn't on the table anymore; Waxman-Markey is, and it only auctions off a small percentage of permits.

Facts, however, are stupid things, so McCullagh just takes the $200 billion number, divides it by the number of households in the US (roughly 113 million), and voila! A $1,761 a year tax hike, a new scary number to be endlessly repeated by the likes of John Boehner and Glenn Beck. I must say, it's pretty easy to do cost-benefit analysis if you just add up the costs; even easier if you grossly misrepresent one policy proposal in order to smear a completely different policy proposal. In such an environment, it's good to know that several reputable organizations have done more honest assessments, even if they aren't perfect.

Next up on my reading list: the new Congressional Research Service paper on the costs of climate legislation.

¹ At some point in the future, I need to write about the philosophical arguments contained in CBA: How what one's choice of discount rate says about one's view of intergenerational justice, that sort of thing. The more I get into the weeds of CBA, the more I realize that there's a stronger connection between my undergraduate education and my graduate education than even I had previously known.

Emissions Trading: A Frankenstein's Monster?

Aw, would you listen to the gibberish they've got you saying, it's sad and alarming! You were designed to alert schoolchildren about snow days and such.

-- Professor Frink, The Simpsons

So some of the economists who invented the concept of pollution emissions trading, including Thomas Crocker and the late John Dales, were profiled in the WSJ recently as being against the use of emissions trading to fight climate change. Such an event has an obvious man-bites-dog element to it, but it's worth noting that the specific objections that these éminences grises have to using cap-and-trade for climate change are rather pedestrian: According to the article, they argue that 1) cap-and-trade was designed to handle local pollutants like sulfur dioxide, not global pollutants like carbon dioxide and methane; and 2) uncertainty about the costs of climate change make it hard to determine a cap on emissions, and changing the size of the cap to comport with new data would be difficult. Instead, Crocker and David Montgomery, another progenitor of emissions trading, recommend using a carbon tax.

On both of these, I'm with John Whitehead: The problems with actually existing cap-and-trade programs -- which is what Crocker, et al are describing -- would likely prevail with actually existing carbon tax programs. In fact, I would go further and say that the thing we need most is not this or that mechanism for reducing carbon emissions, but institutions capable to recognizing the threat posed by climate change and acting decisively on it. The rules of the US Senate arguably matter as much as the particular structure of a US cap-and-trade system that it would consider. Internationally, negotiations on climate change reflect the state of international institutions as a whole: Often efforts to act on global issues devolve into acrimony between the developed and the developing countries -- or between the US and everyone else -- and to the extent consensus is reached, there is no internationally recognized authority to enforce agreements.

This is why the negotiations in Congress over health care reform have been so depressing: Despite a clear need for change in how we finance health care, and a majority in both chambers in general support of a plan to do that, legislation is still being held hostage by the whims of Max Baucus and the now-routine use of the filibuster. And yet, the system does at times work swiftly -- if you're an investment bank or an agribusiness giant. If you can't get health insurance, or you live in a poor country at risk of climate change-induced drought or flooding, not so much.

Life After People

Gregory Clark's column on the future of unemployment seems to have gone over like a lead balloon; both left and right have given it a good pummeling. To recap: Clark argues that continuing technological progress, particularly in computers, will make the unskilled portion of the labor force unemployable. As he puts it:

So, how do we operate a society in which a large share of the population is socially needy but economically redundant? There is only one answer. You tax the winners -- those with the still uniquely human skills, and those owning the capital and land -- to provide for the losers.

Now, there's certainly a kernel of truth to this: As Mike Konczal notes, the long-term unemployment rate is at an all-time high, and the trend seems to point to the continued disappearance of unskilled workers from the work force. But Clark seems to have closed off any possibility of our society adjusting to technological progress in the way that every generation since the onset of the Industrial Revolution has adjusted: Some jobs disappear, but new ones are created, and people train to fill those jobs. The process by which this happened, to be sure, was messy and often unjust, but one can't deny that each generation since the onset of the Industrial Revolution adapted in this manner; and that, outside of major financial crises, the developed world has not been afflicted with a large underclass of the permanently unemployed.

Induction, however, is a dangerous thing, and it's all too facile to say that the computer revolution (including the Internet, AI, and robots) won't be any more disruptive than previous technological breakthroughs. What can we say about Clark's argument that doesn't dismiss it as neo-Luddism? I find myself borrowing liberally from both Reihan Salam and Ryan Avent for my thoughts on this. Salam, echoing Will Wilkinson and Tim Worstall, points out that economic incentives for low-income households can affect enormously how technological progress impacts their livelihoods -- though I think that government tax and welfare policies have mattered less than automation and globalization have, in terms of mass unemployment among the unskilled.* I like Salam's idea of wage subsidies, so that jobs for the unskilled that pay less than what can be lived on can still be taken; still, he is right to note that financial remedies may not do much about the social disruptions that would take place in the wake of mass automation.

Avent, for his part, says that the dystopia of a robot-run society with billions of superfluous people is likely not even feasible, either physically or economically. That point is important: how our energy policy plays out over the next few decades will be a big determinant of how technological progress will affect low-skilled labor. I can see a world in which oil is over $200/bbl severely hampering the supply chain for computers and robots, along with everything else. Not that that would be insurmountable -- domestic manufacturing, including for robots, could well revive in that environment -- but paying attention to resource constraints is always important when talking about the future.** Too often, we get utopian happy talk that blithely assumes physical abundance will always be with us and that technology will overcome any scarcity issues. In other words, that man-made capital is substitutable for natural capital, rather than being complementary.

Avent also notes that Clark's focus on unskilled labor is bizarre given that computerization is likely to hurt the highly educated as much as, if not more than, the less educated. I'm currently reading A Farewell to Alms (albeit at a glacial pace), and it seems to be a theme of his that social change is the product of social, or even genetic, behavioral traits. The Industrial Revolution happened because Europe, England in particular, was populated with descendants of the rich, not the poor, and thus had the traits needed to build an industrial civilization. So the ability of institutions to improve the lot of the poor is fairly limited: Either you have the social environment for economic growth, something that develops slowly over long periods of time, if at all; or you don't. That may or may not be the case (I'm skeptical, to say the least), but transposing that analysis onto the present day economy, where workers of all backgrounds are in danger of being made redundant, seems to have caused Clark's argument to go astray.

* This points to an ambiguity in Clark's op-ed: Is he talking about just American workers or the world as a whole? The wage differential between the average American worker and the average Chinese worker, say, is pretty large, and I suspect it would take a while for even robots to surpass the Chinese in that respect.

** Of course, if we become less reliant on fossil fuels, unskilled labor may yet have a chance -- let's not forget the green jobs debate. Yet again, automation could make even that moot.

UPDATE: Also read Tom Lee's thoughts on the subject. For myself, if the robot revolution leads to a Star Trek-style socialist utopia, I think I could get on board.

Carbon Tariffs

So a last-minute amendment to the Waxman-Markey bill passed last Friday would require the President, by 2020, to impose a tariff on imports from countries that do not regulate their greenhouse gas emissions. Such a provision has long been controversial (see Tyler Cowen's objection, for one), but as we get closer to actually enacting climate change regulation in this country, I think a carbon tariff needs to be seriously considered.

To begin with, Paul Krugman flags some potentially game-changing news on this front:

There was some question about how the WTO would handle cap-and-trade — whether it would accept the need for carbon tariffs, if some countries (cough China cough) drag their feet, or whether it would adopt a purist free-trade rule. The answer seems to be in — the WTO is going to treat cap-and-trade the same way it treats VATs, with border taxes allowed if they can be seen as reducing distortions.

If you believe, as I do, that international negotiations over climate change can be modeled as an iterated form of the prisoner's dilemma, then a key tool for getting the major polluting countries to cooperate on reducing carbon emissions has to include both positive and negative incentives for compliance — with carbon tariffs being, obviously, a form of the latter. So the WTO ruling is, at first glance, good news.

Having said that, just because something is permissible does not mean that it is necessarily advisable. Even with the WTO's blessing, a trade war with China could easily break out if the US slaps a border tax on carbon-intensive imports. And it's not only US-China relations that we should worry about: Imagine if Waxman-Markey were to fail, support for climate change regulation collapses à la health care reform in 1994, and the EU decides to punish our recalcitrance with a carbon tariff on American exports. It'd be like the just-averted Roquefort War earlier this year, but not nearly as funny.

Some other thoughts:

• Returning to the WTO ruling, a key consideration about a carbon tariff will be one of intent: Is it meant, as Krugman suggests above (and elaborates on here), to merely prevent unfairly privileging carbon-intensive goods — in the same way that a border tax in countries with a VAT prevents unfairly privileging foreign-made goods? Or is it meant to punish non-cooperation, according to the prisoner's dilemma framework? That will likely come down to the size of the tariff: To be simply anti-distortionary, it would have to be set at a rate that restores the trade status quo prior to the implementation of climate change regulation. Of course, that implies that it would have be constantly adjusted to account for non-climate-related changes in the balance of trade. Whether that can be done, and whether the process of setting and adjusting a carbon tariff rate can avoid being abused (as a back-door to protectionism, say), is an open question.


• It goes without saying that a carbon tariff shouldn't be a measure of first resort. It would be best for the US and China to agree on a path to developing a cleaner energy regime, rather than coercing each other into doing so. I'm no China expert, but it seems that a trade war could be as bad for the Chinese as it would be for Americans: They depend on us buying their exports as much as we depend on them buying our Treasury bills.


• Following on that point, one major objection to a carbon tariff (see Cowen again) is that we cannot credibly threaten to use it. That is, one rationale for a carbon tariff is that it would function as a kind of nuclear option for climate change negotiators — a peaceable solution is more likely if the possibility of a destructive trade war looms in the background. Indeed, according to Brad Plumer at the TNR link above, the threat of a US carbon tariff may be prodding the Chinese to the bargaining table. The problem, however, is that, given the trade dynamic with China I just mentioned, can we really risk provoking a fiscal crisis over even something as portentous as climate change? The Chinese face a similar predicament, of course; despite some rumblings about moving away from dependence on the dollar, it's unlikely they can afford to do it — at least in the near term. Getting our trade deficit down to a manageable level will be just as difficult, if not more so.

Frank on Offsets

Robert Frank's op-ed on carbon offsets in the NYT (and his follow-up blog post) were really disappointing. He's an excellent economist, but his defense of offsets skirts the most important questions surrounding their use, instead focusing on comparatively trivial aspects.

Most of his argument is addressed to those who think, like the proprietors of cheatneutral.com, that buying offsets is essentially a way for people in wealthy countries to shirk their responsibility to reduce their output of carbon emissions. To an extent, this is true: the principle of common but differentiated responsibility dictates that we in the developed world need to take the lead in heading off the rise in global warming pollution — even if China, India, et al. are poised to overtake us this century (indeed, China is already there). But, as Frank rightly notes, it doesn't matter whether a ton of CO₂ is released in Shanghai or in San Francisco; so it makes sense to look for the most cost-effective means of reducing emissions — and often this means promoting clean energy projects in developing countries instead of in developed countries.

But as Brad Plumer points out, the real problem with offsets isn't one of morality or distribution of responsibility, but of simple logistics: To date, offsets providers have done a rather poor job at quality control, i.e., making sure that offsets are funding actual emissions reductions, not wasting money on projects that would have happened anyway. Frank mentions in passing that more stringent standards are gaining ground; however, there's reason to believe that better standards could act as a bottleneck for the expansion of the offsets market.

Then there's the question of whether offset programs, as currently designed, are an effective way to fund emissions reductions in the first place. It may make more sense to do something like just giving money to developing countries to finance clean energy development, as Daniel Hall notes here and here. After all, what developing countries, in general, are looking for is a clear path to economic development; which, they fear, restrictions on carbon emissions would hamper.

The Hundred Dollar Bill on the Sidewalk

David Roberts writes about energy efficiency:

When smart energy advocates claim that shifts in policy can produce large dividends, they’re inevitably dismissed as promising "something for nothing." Dig into that phrase a little and at its root you find faith: the faith that if "something" were available, rational market actors would already have acted to obtain it. The claim that government can make (or induce) investments that offer substantial returns simply doesn’t compute.

But energy efficiency refutes that view. Studies show -- at this point beyond reasonable doubt -- that there is money lying on the ground that nobody’s picking up. Lots and lots of money. This isn’t some marginal phenomenon. We’re talking about "cost-negative" investments that can in the next few decades increase the aggregate efficiency of the economy by 20, 30, 50 percent. That’s enormous. That’s a central fact of our economic life, not a peculiar marginal phenomenon. People are behaving irrationally on a massive, massive scale.

This point is largely correct, but it needs to be said just how it is correct. To begin with, an energy efficiency investment is "cost-negative" so long as you take into account the lower operating costs over some specified payback period, or even over the entire operating life of the investment. Based purely on the sticker price, though, it's rarely the case that the more energy-efficient item costs less than the less energy-efficient one. To be sure, if you go to buy, say, an air conditioner, as I did recently, you'll see attached a yellow slip of paper from the Federal Trade Commission that says what the average yearly cost of operation is, and how it compares to other items in its class. That's helpful, but it doesn't go nearly far enough to overcome the average person's tendency to think primarily of the upfront expense and leave the cost-benefit analysis for later. If we want to encourage more intelligence in our energy consumption, we need to be much more aggressive in prodding consumers into making more energy conscious decisions. (And in case you were wondering, I got a small 5,200 BTU unit; it isn't Energy Star rated, but that was only because there were no such units available in that class when I went to shop -- which, in a way, proves my point.)

At the same time, while changing individual behavior is undoubtedly important (see, e.g., Felix Salmon on Google's new PowerMeter software or my own post on the subject), inducing large-scale increases in energy efficiency will require attacking the problem at, well, a larger scale. This is the rationale behind the push for revenue decoupling for electric utilities in the US, as well as other schemes like energy efficiency portfolio standards and "white certificate" trading programs. (See this Economist article for an overview of the issues involved.) I would also add that, pace Roberts' assertions about the failures of standard economics with respect to energy efficiency, a stronger price signal would go a long way toward making our energy regime more intelligent. The oil price boom certainly convinced many that gas guzzlers are a thing of the past, even after the dramatic dropoff last fall and winter. And while electricity prices have increased significantly over the past decade, that has to be set against the much longer decade-on-decade decline:



Granted, it's also true that energy intensity, both in the US and worldwide, has been declining over the past 30 years or so; but I see no reason why an increase in coal prices, via a carbon cap, couldn't help that process along more quickly.

NB: Post title refers to the old joke about economists:

Two economists are walking down the street. One sees a hundred dollar bill lying on the sidewalk, and says so.

"Obviously not," says the other. "If there were, someone would have picked it up!"

Simple Answers to Simple Questions

Dwyer Gunn over at Freakonomics:

Are Carbon Offsets Too Good to Be True?

Yes.

OK, perhaps that's being too glib. I certainly believe that carbon offsets can play some role in reducing carbon emissions. But as they are currently designed, I would not want them to play a very big role in abating climate change. The several fiascos surrounding offsets are fairly well-known, and tend to revolve around the same problem: The requirement of additionality (that an offset project would not occur absent money from offsets) is difficult, if not impossible to prove, and easy to game. One simple way to address this problem, I think, would be to require that credits be issued only for projects that have not yet been started; it's amazing how many offset projects in the Clean Development Mechanism, say, were approved retroactively, on the theory that the project was built with the anticipation of getting offset funds and would not be "viable" without them.

But even if you enacted that or other reforms aimed at making offsets a more trustworthy proposition, the question then becomes, are offset programs thus more effective? That is, is there a tradeoff between the quality of offsets issued and the speed with which they can be certified and sold? Gunn points to a recent paper (PDF) by Michael Wara and David Victor, who have each written extensively on carbon offsets, that addresses this question specifically. Let me quote from the executive summary:

The demand for [CDM] credits in emission trading systems is likely to be out of phase with the CDM supply. Also, the rate at which CDM credits are being issued today—at a time when demand for such offsets from the European ETS is extremely high—is only one-twentieth to one-fortieth the rate needed just for the current CDM system to keep pace with the projects it has already registered. If the CDM system is reformed so that it does a much better job of ensuring that emission credits represent genuine reductions then its ability to dampen reliably the price of emission permits will be even further diminished.

In other words, a junk-free offset program couldn't issue nearly enough credits to allow developed countries to cheaply meet their emissions reductions requirements. And remember, the CDM is one of the more responsibly run offset programs out there.

I'm trying not to be so negative about carbon offsets, but it's rather hard to avoid these conclusions. My experience in grad school, for example, of exploring the possibility of using offsets to finance putting out coal fires in developing countries was one of trying to finesse the conceptual difficulties in order to come up with a workable outline of how it could be done.* But if Wara and Victor are right, then it seems that even when those conceptual difficulties are solved, the logistics of using offsets are too big to overcome.

* Asking whether an emissions reduction project is additional is a bit like asking whether, if your parents had married other people, you would be a different person. It's not something you can really prove one way or another, but you have to make some sort of assumption in order to proceed. The question is, do you want to make decisions about the future of this planet on such assumptions?

More on Shrinking Cities

Both Ryan Avent and Matt Yglesias had posts this weekend on how to manage the decline of cities like Flint, Michigan, noting the difference between the situation of a place like Flint, where the entire region is shrinking, and places like Baltimore, which is an island of poverty amid a sea of relative prosperity. In short, whereas Baltimore could and ought to become a more integrated part of the regional economy, Flint has no recourse but to shrink to a more sustainable size. It's a good point to make; obviously, just as a growth policy has to be well suited to a particular region, so a shrink policy, as it were, has to have some flexibility with respect to local differences. That's why I think the idea of a federal land bank would be useful in this regard, as it would give cities in decline the resources to pull back development, while still having the decision-making in the hands of the communities affected.

Markets in Everything

Now that the EPA has declared greenhouse gases a threat to public health and welfare under the Clean Air Act (as well as begun efforts to potentially restrict CO₂-related ocean acidification under the Clean Water Act), we're due for a discussion of the relative merits of fighting climate change through command-and-control regulation, as the EPA would likely do, or through market-based mechanisms, as President Obama and Congress would want to do through a cap-and-trade system. As it happens, Robert Stavins provided a good starting point last week in a post that tried to explain why enthusiasm for market-based mechanisms like cap-and-trade has been on the rise among environmentalists. As glossed by Danny Morris over at Common Tragedies, Stavins' reasons are:

1. Increasing pollution control costs
2. Strong support from parts of the environmental community
3. Market-based solutions were designed to reduce pollution
4. Separate consideration of goals and policy instruments
5. No status quo exists for unregulated pollutants, so there is not constituency to fight for them
6. Political shift to accept markets as ways to solve social problems
7. Luck put the right people in the right place

Both Morris and Tim Kidman's commentary on Stavins are worth reading, and I'm largely in agreement with them about the limits of applying economic theory to environmental problems. I would add that, in addition to markets not being a universal solution, market-based mechanisms like cap-and-trade aren't even markets. That is, it may be more accurate to say that a cap-and-trade system is a simulacrum of a market or, less charitably, an instance of "political capitalism," to use Will Wilkinson's phrase. Unlike ordinary markets, where there is no overarching goal except the interests of the individual participants, cap-and-trade has an explicit end: reduce pollution. While governments may set rules to ensure that ordinary market transactions are fair and efficient, they must design a pollution market from scratch -- after all, firms seldom reduce their pollution output voluntarily. And whereas ordinary markets generally tend to grow over time, cap-and-trade systems must get smaller and smaller (in terms of the volume of pollution credits traded) if they are to achieve their goals.

Seen in this light, the differences between a command-and-control approach and a market-based approach to dealing with climate change aren't quite so distinct from each other. Granted, if the EPA tries to regulate greenhouse gases using the Clean Air Act, it's going to produce much different results than, say, the Waxman-Markey cap-and-trade plan. But in both cases, the importance of having well-designed rules and a competent civil service enforcing them is manifest. And that, in turn, is not a guaranteed outcome.

Financial Innovation in Clean Energy

Yesterday I dinged a Slate article trying to find something good to say about Limp Bizkit* as "contrarianism run amok," a common criticism of the magazine. That said, Daniel Gross today makes a good -- and contrarian! -- argument that what is most needed to advance clean energy in this country is not new technology, as is often claimed, but new ways to finance it:

As Rive has discovered, the future of the alternative-energy industry now depends far more on financial engineering than mechanical engineering. Clean-tech trade publications are filled with breathless coverage of new innovations: thin-film solar technology, advanced batteries, cars powered by hydrogen fuel cells. But money has never been harder to come by, thanks to the struggling capital markets. "The alternative-energy sector is flat on its back," says David Crane, CEO of giant energy producer NRG. "There's no debt financing available from Wall Street." The Cleantech Group reported that in the first quarter of 2009, total green-energy-venture investments fell 50 percent from the first quarter of last year.

Government policy has traditionally played a part in kick-starting new technology, whether by providing land and financing for railroads or commissioning the first telegraph line. When the profit motive kicks in, the private sector begins to fund development. Both types of financial innovation will be needed for the fledgling alternative energy to thrive—and there are already signs of creative breakthroughs.

This is an important point to make; for all the (justified) outrage over Wall Street's use of "financial innovation" in the past decade, an effective climate policy needs to figure out new ways to getting money to alternative energy projects, which often have large upfront costs and, in the case of energy efficiency projects, long payback periods. The obvious tool for this, of course, is carbon pricing, but there are lots of things that we can pursue that get us to the same goal. One way to do this, besides the methods Gross mentions, is through feed-in tariffs, which have helped make a rather cloudy country like Germany a leader in solar power. We also need to reexamine traditional financial instruments and see if we can make them more energy-conscious, as it were. If I may plug my employer for a moment, rolling the costs of energy efficiency investments into people's mortgages would go a long way toward reducing the carbon intensity of the nation's housing stock.

At the same time, we would do well to be wary of too much, or the wrong kind of financial innovation in the alternative energy industry, just as we are of financial innovation more generally. To tie this in to my previous post on the subject, there's a case to be made that the various mandates and tax credits that have been used to subsidize alternative energy thus far have done more harm than good (see the textbook argument here, or the many biofuels debacles). Yet again, our financial system is hardly a free market -- especially these days -- and it's the responsibility of government to ensure that it is serving societal goals, a sustainable energy regime being among them.

* Speaking of Fred Durst, this blog (via Vulture) may be the best thing on the Internets today.

Oil Price Spikes and the Recession

In the last two years we had two major economic shocks: The bursting of the American housing bubble and the resulting breakdown of the global financial system, and a historic spike in commodity prices, particularly for oil. For some reason, though, I've seen no one make the argument that the two may have been in some way connected. That's why I was so interested in a recent paper by James Hamilton (summarized here and here) that attributes almost all of the economic downturn in the last year or so to the run-up in oil prices. That seems rather odd, as even Hamilton acknowledges, but it leads naturally to a discussion of the link between the oil price boom and the credit crunch, as Justin Lahart does in a commentary on the Hamilton paper:

But then again, maybe what happened to oil prices had something to do with credit markets seizing up. The housing bubble saw people of lesser means traveling further afield to buy homes. That gave them long commutes that they were able to afford when gas was $2 a gallon, but maybe they couldn’t at $3. Housing in the exurbs got hit hardest, and one reason why is that high gasoline prices made it hard for people to lived in them [sic] to keep up with their mortgage payments, and hard for them to sell their homes without taking a steep loss. In some meaningful way, that has to have contributed to mortgage problems.

That's a very interesting theory, one that cries out for regression analysis. My sense, though, is that it wouldn't hold up to examination. Certainly higher gasoline prices make exurban housing less viable, but it's hard to see how the two spikes in 2005 and 2006 would have been enough to drive a critical number of homeowners into foreclosure, thus turning countless numbers of mortgage-backed securities and related assets into garbage. The sustained high prices in 2007 and 2008 no doubt hit particularly hard those having trouble making their mortgage payments, as well as those in exurban areas; but as a causal factor in the financial crisis broadly understood, I suspect high gas prices played, at best, a minor role. Remember, for one thing, that the housing bubble wasn't confined to exurban areas; even dense environments like Chicago and Baltimore got caught up in it as well. Besides, the nature of a bubble is that it is unsustainable: Gas going from $2 to $3 may have been enough to push a significant number of homeowners into foreclosure, but what really got this crisis going were the banks and hedge funds who made 20-to-1 or 30-to-1 leveraged bets on those mortgages and lost their shirts. In such an environment, any shock to the system, no matter how small, could bring everything crashing down. So if it had not been the oil price boom, it would have been something else.

Having said that, it's entirely fair to say that both the housing bubble collapse and the oil price boom have, rightly, called into question the bias in US housing policy toward sprawling, automobile-centric development. The days of cheap gasoline are no longer as assured as they once were, and we have seen that homeownership can be as much a curse as a blessing. We need to carry both insights with us going forward; but I am not sure of their applicability to resolving the current crisis.

Social Insurance and Carbon Pricing

Hendrik Hertzberg's latest column on a payroll tax holiday begins to explore the possibilities of a green tax shift at the end, arguing that it's time to revisit the foundations of Social Security and Medicare anyway:

The payroll tax now provides a third of federal revenues. And, because it nominally funds Social Security and Medicare, some liberals regard its continuance as essential to the survival of those programs. That’s almost certainly wrong. Public pensions and medical care for the aged have become fixed, integral parts of American life. Their political support no longer depends on analogizing them to private insurance. Besides, the aging of the population, the collapse of defined-benefit private pensions, the volatility of 401(k)s, and pricey advances in medical technology mean that, no matter what efficiencies may be achieved, Social Security and Medicare will -- and should —- grow. Holding them hostage to ever-rising, job-killing payroll taxes is perverse.

This is all true, to a point. But I think part of the reason Social Security and Medicare have been politically popular -- besides the innate appeal of these programs -- has been on the strength of the analogy to insurance. They are not welfare programs, which Americans have historically been cool to, but are part of a social compact between generations. Everyone contributes their fair share during their working years, and in return, everyone enjoys a measure of comfort in retirement based on what they contributed. That's the ideal, anyway; my understanding is that Social Security, at least, is mildly redistributive in its effects, even though it is funded by a regressive payroll tax.

Decoupling funding for Social Security and Medicare from a payroll tax and shifting to either general revenues or a dedicated carbon tax or whatever would require us, I think, to revisit this narrative. We could get rid of the insurance analogy, of course, but preserving a connection between the money we pay into the system and the benefits we get out of it is crucial -- not merely for the viability of Social Security and Medicare, but of all government programs, as Mark Schmitt argues in his column today. This is why I think rebating all or most of the revenue from a cap-and-trade schemes is the best, and perhaps only, way to do carbon emissions regulation in the US. You could structure it so that it would be functionally identical to dropping the payroll tax for a carbon tax, as Hertzberg proposes, but the connection between pricing dirty energy and rebates given back would be much stronger.

Full World Blogging

It was a little weird to see Tom Friedman, of all people, dabble into ecological economic thought as much as he did in his column last week; even so, it was refreshing to see a mainstream pundit grapple seriously with the idea that our consumption of natural resources can't go on forever at its current rate -- not without significant changes to our economy. At the same time, transitioning to a new state of affairs, as Geoffrey Styles points out, is going to take a long time, and (at least in the energy sector) it will take the form of gradual shifts, rather than something cataclysmic. This means developing a more sustainable energy regime will require overcoming the natural human urge to pay more attention to cataclysmic events, while still maintaining a sense of urgency when it comes to dealing with climate change and other ecological threats.

I want to also make two points related to this. First, Styles talks about moving from fossil fuels to renewable energy, but it's worth mentioning that the question of ecological limits encompasses a lot of things, including minerals (e.g., phosphorus), water, and arable land, and there are not necessarily close substitutes available (certainly not for the latter two things) if we cannot provide enough to feed, clothe, and house the world's population -- which is expected to reach 7 billion by 2012 and 9 billion by 2050. Second, any discussion of ecological limits has to take into account the question of lifestyles: A developed world lifestyle likely isn't possible for everyone on Earth; but it's also intolerable to say that Europeans and Americans should downgrade their lifestyles, or that Africans and Asians should be barred from enjoying the fruits of industrial civilization to the same degree that we have. It's an extremely delicate question, at least for those of us in the developed world, but if we're going to leave a livable planet to our children and grandchildren, we'll need to screw up our courage and address it in one way or another.

Random Thought About Externalities

I am convinced that there is something in the behavioral economics literature that compares the relative effectiveness of resolving positive externalities through subsidies vs. resolving negative externalities through taxes. (E.g., subsidizing renewable energy vs. taxing fossil fuels.) My hypothesis runs like this: when you apply theories of loss aversion to energy consumption, people will tend to react more strongly (i.e., consume fewer fossil fuels) to the lost purchasing power that comes from paying more for fossil fuels than they would to the gain in purchasing power that comes from paying less for renewables. I have so far found no papers on Google Scholar or elsewhere that address this specific matter, but I think it would make for an excellent experiment.