Friday, February 29, 2008

Carbon Taxes v. Cap and Trade

A little while back, I linked to the new Congressional Budget Office (CBO) study that examined the relative efficiency of taxes versus cap and trade schemes for achieving carbon reductions. Common Tragedies has a very nice response that both summarizes the CBO argument for preferring carbon taxes and presents several reasons why the author still prefers cap and trade.

Here are some teasers, but I strongly recommend reading the whole thing.

Why the CBO prefers Carbon Taxes:

The reason the CBO prefers a carbon tax goes back to a seminal 1974 paper by Marty Weitzman, Prices vs. Quantities. Weitzman showed that if 1) the marginal benefits curve for abatement is relatively flat and 2) the costs of abatement are uncertain, then a price policy (i.e., tax) is more efficient.

Whoa, econ jargon! What does this mean in English and how does it apply here?

Imagine for the moment that we know that the total cost to society — summed across the entire future and discounted to today — from the next metric ton of CO2 emissions is $20. This is synonymous with saying that the benefit to society of eliminating (abating) that ton of emissions is $20. What about the next ton? Traditionally, we think that the benefit of reducing that ton is also $20. In fact, we think that the benefit of reducing quite a lot of tons would all be pretty close to $20 per ton. This is what is meant by “the marginal benefits curve for abatement is relatively flat.” You could eliminate a significant fraction of the world’s current CO2 emissions — currently running at around 30 billion metric tons, if I recall correctly — and each ton would save you about the same amount in future damages. ($20 in my example.) Dinan summarizes the rationale for thinking this is the case when she says,

Climate change results from the buildup of CO2 in the atmosphere over several decades; emissions in any given year are only a small portion of that total. As a result, limiting climate change would require making substantial reductions in those emissions over many years, but ensuring that any particular limit was met in any particular year would result in little, if any, additional benefit (avoided damage).

Ok, so the benefit of reducing a ton of emissions is a relatively constant figure. What about this “uncertainty of abatement costs”?

Well, abating emissions costs society money: we have to reduce how much energy we use, shift how it is made, etc., etc., and all those changes have costs. Ideally, we’d like to eliminate every ton of emissions we can when it costs less than $20, while still allowing those that cost more. (In this way we balance the costs and benefits of emissions reductions.) The traditional problem faced by regulators is that they don’t have perfect knowledge about how much reductions will cost. Thus the second half of Weitzman’s formulation about the uncertainty of abatement costs also applies.

Why do these two conditions imply that a tax policy will be more efficient? Well, if we set a tax on emissions equal to the benefit from abatement (still $20 in this example), then all the disparate actors in the economy — firms, individuals, etc. — will shift their behaviors in response to the new prices. These shifts will squeeze out emissions where it is cheapest to do so and up to the point where the net cost to society is $20 per ton of emissions, but won’t eliminate more high-value activities where the associated emissions would be costlier to reduce. This process will happen without central coordination, and without anyone needing to know beforehand exactly how it should be done. As I’ve quoted from Hayek before, “The mere fact that there is one price for any commodity… brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.”

Hayek’s quote also illustrates that it’s theoretically possible for a cap-and-trade program to achieve the same outcome. We could set the quantity of emissions allowances (the cap) at a level such the market price of allowances would be $20. This would balance the costs and benefits of reductions. The problem is that actually setting the cap at such a level requires that “one single mind possessing all the information.” Regulator must guess at what shifts will happen, an impossible task when dealing with something as complex as the entire economy. If regulators set the cap and it turns out allowances cost $50 per ton then we will be reducing emissions more than is optimal (because we’re paying $50 for something that only gets us $20 in benefit). And if they’re wrong the other way, and prices are quite low, say $10, then we get fewer reductions than would be best for society, because there are still a bunch of tons of emissions that are doing us $20 in damage and could be eliminated for less than that. With the tax you don’t have to worry about this: once you know the value of emissions reductions (i.e., the total damage from emissions) you can just set the tax equal to that value.

Why the author still prefers cap and trade:

1. Note that this analysis assumes that a carbon tax will be set to equal the marginal damages from emissions. But there is tremendous uncertainty about what these damages actually are. Thus any program is going to have to respond to new information about the future costs of climate change. I think it is going to be more politically feasible to adjust a cap than change a tax rate. When was the last time we changed the gas tax? And cap-and-trade markets may be able to respond to new information before regulators even act.

2. Further, even if we knew what the costs of future damages were, this would not be how a tax rate — or cap level — was set. Either way it is going to happen through a politically negotiated process, meaning that neither a tax nor a cap-and-trade program has much chance of being “optimal” in a “balancing marginal costs and benefits” sort of way.

3. I agree with Tim Haab: Cap and trade is politically feasible; a carbon tax is not. (And no, Tim, I don’t think Evan was mocking you.)

4. It’s possible to make make a cap-and-trade program mimic many of the efficiency features of a tax program. This is what’s meant by the CBO’s “flexible cap-and-trade” program; for example, allowing banking and borrowing of allowances prevents unimportant annual fluctuations in things like the weather (and hence energy demand) from causing large spikes and falls in the price of allowances. As we quoted Billy Pizer and Ian Parry in the previous link from their article in Regulation,

…the key distinction is not really between CO2 taxes and emissions trading systems per se. Rather, it is between policies that raise revenues — and use revenues wisely — and have limited price variability (i.e., CO2 taxes or auctioned permits with safety valves and emissions trading over time), versus nonrevenue-raising instruments with no provisions to limit price variability (i.e., traditional permit systems).

5. I think it’s interesting that “pure econ” guys (e.g. Mankiw) tend to support a carbon tax, while, at least in my experience, finance guys like Felix think more favorably about cap and trade. I think finance guys are comfortable that a flexible cap-and-trade program that allows banking and borrowing will have an extremely efficient market for allowances. Fundamentally, emissions allowances will be just another commodity that will have an entire range of financial implements — calls, puts, futures, derivatives — that will let entities manage their compliance obligations pretty efficiently. Now, you can probably write some of this enthusiasm off as self-interest — I’m sure there are plenty of traders salivating at the thought of a several hundred billion dollar market getting created overnight — but I also think they’re on to something here.

In summary, the choice we face isn’t between a first-best carbon tax and a cap-and-trade system. At best it’s between a very imperfect carbon tax and an also imperfect — but somewhat flexible — cap-and-trade program. And in my estimation it’s most likely that the choice is between an imperfect cap-and-trade system and nothing at all. I think we can do significantly better than nothing.

George Monbiot Doesn't Like Cost-Benefit Calculations

A Guardian op-ed takes on a topic discussed in both classes -- cost-benefit analysis. A cost-benefit approach was used to justify flattening a village to add a runway at Heathrow, and the author is not happy about it.

The article starts by noting the acceptance of this method:
But while the runway's opponents don't like the results, most people seem to agree that weighing up economic costs and benefits is a sensible method of making this decision. The problem, they argue, is that the wrong figures have been used.
And it's use in the Stern Review. Upon closer review of Stern's methods, though, the author is appalled:

Stern's methodology has a disastrous consequence, unintended but surely obvious. His report shows that the dollar losses of failing to prevent a high degree of global warming outweigh the dollar savings arising from not taking action. It therefore makes economic sense to try to stop runaway climate change. But what if the result had been different? What if he had discovered that the profits to be made from burning more fossil fuels exceeded the social cost of carbon? We would then find that it makes economic sense to kill people.


Against this is set the economic benefit of a new runway. Part of this benefit takes the form of shorter waiting times for passengers. The government claims that building a third runway will reduce delays, on average, by three minutes. This saving is costed at between €38 (£28.50) and €49 per passenger an hour. The price is a function of the average net wages of travellers: the more you earn, the more the delays are deemed to cost you, even if you are on holiday.

Consider the implications. On one side of the equation, human life is being costed. On the other side, the value of delays to passengers is being priced, and it rises according to their wealth. Convenience is weighed against human life. The richer you are, the more lives your time is worth. The people most likely to be killed by climate change do not live in this country. Most of them live in Africa and south Asia. Hardly any of the economic benefits of expanding Heathrow accrue to them. Yet the government has calculated the economic benefits to Britain, weighed them against the global costs of climate change and discovered that sacrificing foreigners - especially poor ones - is a sensible economic decision.

I can accept that a unit of measurement that allows us to compare the human costs of different spending decisions is a useful tool. What I cannot accept is that it should be scrambled up with the price of eggs and prefixed with a dollar sign. Human life is not a commodity. It cannot be traded against profits or exchanged for convenience. We have no right to decide that others should die to make us richer.

In response, the Free Exchange blog provides a defense of cost-benefit analysis:

But hold on. If we cannot place a monetary value on life, we're stuck with an insoluble equation. We're left to conclude that any life is too dear to sacrifice, and so all activities contributing to global warming--or any other potentially fatal economic process--should be halted. Mr Monbiot doesn't want this, but the placement of any monetary value on life, no matter how high, essentially values that life in terms of consumption. If a life is worth $10 million and a burger worth $1, then we cannot avoid saying that a life is worth 10 million burgers, unappealing as that sounds.

The larger failure in this argument, however, is a lack of recognition that material progress contributes to material welfare, including reduced mortality. The capitalistic push for ever more consumption has done wonders for global economic output, allowing the earth to sustain billions more people than it could a century ago at a higher standard of living than ever before. We don't set the value of life against income because income is more precious than life. We set life against income because income sustains life.

Tim Haab also responds:

But there are two problems with this indignant moral stance:

  1. Moral indignation fails to recognize that valuation methods are not valuing individuals but are valuing changes in risk.
  2. States and individuals make implicit trade-offs of life versus wealth/consumption/production all the time. Moral indignation arises when those trade-offs are made explicit.

On the first point, I give a simplistic introduction to the method for valuing statistical lives here:

To value the reduction in mortality, we will calculate the Value of a Statistical Life (VSL). VSL's are not an attempt to value a particular person's life, like the courts would do in a wrongful death lawsuit. VSL's instead give an average value of a 'statistical' anonymous person.

The method is simple, we observe trade-offs that people make between the risk of death and money. For example, people will take riskier jobs in return for more pay, or people will accept lower prices for less than perfect meat inspection programs. Using these risk/money trade-offs that individuals make, we can infer the average value that market participants place on an 'average statistical' life. Better put, individuals are making the choices, economists just use those choices to infer the implied population value of a life. So if moral indignation is in order it is to be aimed at the individual for being willing to make that trade-off and not the economist for using it.

To the second point, we can use Montbiot's trick of the contra-example to see that acting to protect human life at all cost involves just as morally reprehensible a judgment as monetizing the risk of dieing. Suppose we pass a blanket policy stance that human life is sacred and all human life should be protected. Despite invoking money, such a stance places an infinite monetary value on life and any cost is swamped by the implied benefit of protecting life.


And in the case of climate change, acting regardless of the value of lives lost, may (or may not, but the possibility at least needs to be considered) lead to an increased risk of dieing for others. Changes in the economic infrastructure structure required for reductions of carbon emission may require massive public expenditure--through direct expenditures on infrastructure and indirect expenditures on incentives for research and development of new technologies. From where will these expenditure come? Social welfare programs? Universal health care programs? Other environmental programs? Might not reducing such expenditures increase risks to other subpopulations. How then do we weigh the tradeoffs of different lives?

Any regulation that involves a change in risk to humans implicitly places some value on life. Value of Statistical Life methods just make the trade-offs explicit. And that's a good thing. Because then we start debating policy solutions and stop debating perceived moral imperatives.

Thursday, February 28, 2008

Protect Workers Not Jobs

The movement of the Democratic primaries to Ohio has shifted focus to trade agreements and worker protection. Barack Obama's policies and language have received the most criticism from economists. In particular, two economists called one of his proposals "reactionary, populist, xenophobic and just plain silly". Mark Thoma has collected a number of responses to this comment that seem to think this language is over the top.

However, there is a larger and important issue at work. Should we protect workers or specific jobs. Thoma also quotes Oliver Blanchard on this important distinction:

...It is one thing to say that labor market institutions matter, and another to know exactly which ones and how. Humility is needed here... Nevertheless, even if one cannot pretend to have much confidence about the optimal overall architecture, much has been learned... We know much more about the incentive aspects of unemployment insurance on search intensity and unemployment duration... We know more about the effects of decreasing social contributions on low wages ... We know more about the effects of employment protection, ... From both the macro evidence and this body of micro–economic work, a large consensus—right or wrong—has emerged:

  • It holds that modern economies need to constantly reallocate resources, including labor, from old to new products, from bad to good firms.
  • At the same time, workers value security and insurance against major adverse professional events, job loss in particular. While there is a trade-off between efficiency and insurance, the experience of the successful European countries suggests it need not be very steep.
  • What is important in essence is to protect workers, not jobs.
  • This means providing unemployment insurance, generous in level, but conditional on the willingness of the unemployed to train for and accept jobs if available.
  • This means employment protection, but in the form of financial costs to firms to make them internalize the social costs of unemployment, including unemployment insurance, rather than through a complex administrative and judicial process.
  • This means dealing with the need to decrease the cost of low skilled labor through lower social contributions paid by firms at the low wage end, and the need to make work attractive to low skill workers through a negative income tax rather than a minimum wage.

This consensus underlies most recent reforms or reform proposals ... These measures are probably all desirable...

Obsolete Skills

In light of the discussion of technology in class lately, here's a list of obsolete skills like adjusting rabbit ears on a TV or making a collect call from a pay phone.

See how far we've come.

Wednesday, February 27, 2008

How Do the Really Rich Spend Their Money?

The Big Picture blog points to an interesting table on the spending habits of households with >$10M:

Dollars Spent Category - 2007 Spending per Affluent Elite Household
Category Category
Spending Spending
Summer Spending * 2007 * 2005 Change 2007/2005
Activity % $ Spent % $ Spent $Change %Change
Yacht Rentals 10.60% $384,000 9.50% $317,000 $67,000 21.14%
Redecorating 44.90% $129,000 30.90% 137,000 ($8,000) -5.84%
Villa Rentals 15.70% $106,000 13.80% $79,000 $27,000 34.18%
Excursions 25.80% $103,000 22.70% $79,000 $24,000 30.38%
Jewelry/watches 73.70% $94,000 63.20% $63,000 $31,000 49.21%
Luxury Cruises 47.50% $92,000 43.10% $71,000 $21,000 29.58%
Charitable Giving 97.50% $82,000 98.40% $52,000 $30,000 57.69%
Vacation Home
Rentals 12.10% $82,000 11.80% $64,000 $18,000 28.13%
Out-of-Home Spa
Services 67.70% $61,000 48.70% $49,000 $12,000 24.49%
Entertaining 93.90% $56,000 92.40% $39,000 $17,000 43.59%
Luxury Hotels 95.50% $48,000 93.40% $36,000 $12,000 33.33%
Luxury Resorts 84.80% $41,000 82.60% $23,000 $18,000 78.26%
At-Home Spa
Services 53.50% $38,000 47.40% $26,000 $12,000 46.15%
Apparel/accessories 92.40% $34,000 86.80% $16,000 $18,000 112.50%
Audio/visual 51.50% $31,000 50.70% $14,000 $17,000 121.43%
Wines and Spirits
for Social
Entertaining 86.90% $24,000 77.00% $19,000 $5,000 26.32%
Wines and Spirits
for Personal
Consumption 84.80% $17,000 74.30% $11,000 $6,000 54.55%

2007 2005 $Change %Change
Total Luxury Summer
Spending/Household $622,202.02 $399,187.50 $223,015 55.87%

*Percentage of those surveyed spending in this category
Survey of Households with Net Worth $10 Million +

Prince & Associates (2007)

ECON 260: Jeff Sachs on Global Cooperation in R&D

Economist Jeffery Sachs makes an argument for significantly larger investments in R&D. I encourage you to think about the assumptions in his argument. Here's a teaser:

We are used to thinking about global cooperation in fields such as monetary policy, disease control, or nuclear weapons proliferation. We are less accustomed to thinking of global cooperation to promote new technologies, such as clean energy, a malaria vaccine, or drought-resistant crops to help poor African farmers. By and large, we regard new technologies as something to be developed by businesses for the marketplace, not as opportunities for global problem solving.

Yet, given the enormous global pressures that we face, including vastly unequal incomes and massive environmental damage, we must find new technological solutions to our problems. There is no way, for example, to continue expanding the global use of energy safely unless we drastically alter how we produce electricity, power automobiles, and heat and cool our buildings. Current reliance on coal, natural gas, and petroleum, without regard for carbon-dioxide emissions, is now simply too dangerous, because it is leading to climate changes that will spread diseases, destroy crops, produce more droughts and floods, and perhaps dramatically raise sea levels, thereby inundating coastal regions.

The National Academy of Engineering identified some possible answers. We can harness safe nuclear energy, lower the cost of solar power, or capture and safely store the carbon dioxide produced from burning fossil fuels. Yet the technologies are not yet ready, and we can't simply wait for the market to deliver them, because they require complex changes in public policy to ensure that they are safe, reliable, and acceptable to the broad public. Moreover, there are no market incentives in place to induce private businesses to invest adequately in developing them.

ECON 365: Promoting Income Mobility

We will, at some point in the near future, turn to discussing growing income inequality, stagnant income mobility, and the appropriate government response to it (if any). Rather than wait until then and provide a bunch of links all at once, I am going to start trying to build your interest now.

To start, here is an interesting discussion of ways in which the government currently promotes income mobility and a discussion of several policies that might produce "a bigger mobility bang for the buck". Here is a little teaser to, hopefully, get you interested:

A recent report (pdf) by the Economic Mobility Project attempts to answer this question. The report groups federal government spending into three broad categories: (1) expenditures aimed, at least in part, at promoting mobility; (2) expenditures on income maintenance, such as social security, health care, welfare, and housing support; (3) expenditures on public goods such as defense, environment, and transportation. As of 2006 about one fifth of federal spending — $740 billion, or 6% of GDP — was in the mobility-promotion category. Most of this takes the form of tax subsidies rather than direct expenditures.

The most striking of the report’s findings is how little of the federal government’s mobility expenditure goes to those with low incomes. This chart shows the estimated amounts that go to lower-income households (bottom two quintiles of the income distribution) versus middle-and-upper-income households (top three quintiles). In total, only about a quarter goes to the former group.

This seemingly-perverse distribution is not surprising. Spending decisions aren’t made by an omniscient policy czar seeking to maximize opportunity for upward mobility. They are a product of a political system characterized by clashing interests, ideologies, motives, and means.

Perhaps I'll try this

Lie to your students, apparently they like it.

or this, from Justin Wolfers:

Past students of mine have repeatedly told me to be a bit of a bastard in the classroom, as they find the persistent threat of embarrassment (if they are unprepared) to be a useful motivator.

A Carbon Emissions Moral Dilemma

Will Wilkerson faces a moral quandary:
If I don’t fly from London to my sister’s wedding in New Zealand she will be upset, I will cause her pain and so that’s morally bad. If I do fly to my sister’s wedding in New Zealand I will put about four tonnes of carbon dioxide into the atmosphere, which will contribute to climate change, which, according to the World Health Organisation, already causes about 150,000 deaths every year. Clearly that’s also morally bad. Which is the morally correct thing to do?
Tyler Cowen posts an interesting response:
Don't argue the facts of carbon emissions (you can choose another scenario if you wish), focus on the moral dilemma. Will says fly, the plane is going anyway. That makes my brain hurt with game theory and the probability of threshold effects and triggers. (Isn't there some chance that your patronage, eventually, sets another flight in motion, if only stochastically?) Under an alternative approach, say you are allowed some quota of carbon emissions; otherwise suicide or residence in Iceland as a pedestrian would be required.

Your net carbon impact depends far more on the number of children you will have than any other variable; remember good environmentalism uses a zero rate of discount. So people with no biological children should be allowed to fly a lot and people with lots of biological children should not get to fly so much at all. Is that so far from the reality we observe?

Hmm. If you don't procreate, you get to emit more (because you're long run impact on the total amount of carbon diminishes -- and, maybe, I am not sure, because you don't care as much about future generations). That's certainly one way to approach sustainability discussions.

While we're at it, Cowen also points to a New Yorker piece on our carbon footprint.

Tuesday, February 26, 2008

An "Interesting" View of Natural Capital

General Counsel for the Department of Defense, William Haynes II resigned yesterday. Haynes was in charge of the tribunals for Guantanamo detainees and is reported to have said:

"I said to him that if we come up short and there are some acquittals in our cases, it will at least validate the process," Davis continued. "At which point, [Haynes's] eyes got wide and he said, 'Wait a minute, we can't have acquittals. If we've been holding these guys for so long, how can we explain letting them get off? We can't have acquittals. We've got to have convictions.'"

Furthermore, he's one of the primary authors of memos supporting torture and total executive authority (essentially arguing that when the President is acting as Commander-in-Chief he get's to do whatever he wants -- regardless of the law).

But before he got around to torture and detainees Haynes offered a very interesting argument about how bombing natural capital (bird nesting sites) was good because it would increase the value of the remaining natural capital:
In this amazing brief, Haynes argued that bombing a nesting site for migratory birds would benefit birdwatchers, since “bird watchers get more enjoyment spotting a rare bird than they do spotting a common one.” Moreover, he added, the birds would benefit as well, since using their nests as a bombing range would minimize “human intrusion”. The judge’s comment on this novel line of argument: “there is absolutely no support in the law for the view that environmentalists should get enjoyment out of the destruction of natural resources because that destruction makes the remaining resources more scarce and therefore more valuable. The Court hopes that the federal government will refrain from making or adopting such frivolous arguments in the future.” (pp. 27-8)” ...

Rethinking How You Think About Grades

I don't really like assigning grades. It's not that I have any real problem with providing feedback to students, but for whatever reason many (though certainly not all) students take grades personally. That is, they view their grades as a reflection of their personal worth or talents (and not of their effort). As such, they feel bad if they don't get an outstanding grade. I don't particularly enjoy being the party assumed to be responsible for others feeling bad (even though I would argue that blaming the teacher for your feeling bad is misplaced).

I was probably as guilty of this as anyone back in the day, but psychologists have learned that this common approach to grades (which is a byproduct of some of our social structures) is very unhealthy. I concur. I strongly recommend reading this article that outlines the sources and consequences of this problem. Here's a teaser to encourage you to click over:
Our society worships talent, and many people assume that possessing superior intelligence or ability—along with confidence in that ability—is a recipe for success. In fact, however, more than 30 years of scientific investigation suggests that an overemphasis on intellect or talent leaves people vulnerable to failure, fearful of challenges and unwilling to remedy their shortcomings.
Check it out.

Behavioral Economics

In Enviro class yesterday, we briefly discussed the odd discrepancy between WTP and WTA measures of value. One hypothesis for this discrepancy -- known as prospect theory -- argues that people value gains and losses differently. This is one of many odd violations of standard rational agent models that is the focus of an area of economics known as behavioral economics.

I encourage you to learn more about this interesting field by checking out the following links:

(1) Here's an interesting article on the research done by the many interesting behavioral economists at Harvard. In it you will learn things like:

That overwhelming majorities of people would choose to save 200 people with certainty over a one in three change of saving 600, but will choose a one in three chance of saving 600 people over 400 people dying.

That on the same day the price of Shell stock in London traded at a different price than Royal Dutch stock in Amsterdam -- even though they are the same company.

That "if you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit.’" (Probably not that big of a surprise to anyone but 1980s economists.)

That placing a photo of a women on an advertisement has the same effect as 5 percentage point reduction in the interest rate on attracting men to a bank's loan promotion.

That France hates America more than Vietnam does.

And a number of other interesting challenges to the simple, rational, economic agent.
(2) If you are interested in a more dense, academic summary, I recommend this excellent overview by Berkeley economist (and the man mostly responsible for my passing Micro Theory my first year of grad school) Stefano DellaVigna.

(3) Finally, to see how behavioral economics is entering the world of politics and policy, check out this article on Barack Obama's economic advisers.

ECON 365: More on immigration

One of the more interesting aspects of the immigration debate is that places without a lot of immigrants tend to be more anti-immigrant than places with lots of immigrants. Awhile back, I took a more detailed look at this relationship. You can read the old post here.

Monday, February 25, 2008

Carbon Taxes and the IPAT equation

In class last friday, we were discussion the IPAT equation: Environmental Damage = Population * Affluence * Technology. Recall, that they way to offset, say, growing carbon emissions due to growing population and/or consumption per capita is with vastly improved technology.

One of the arguments for carbon pricing (e.g., a carbon tax) goes like this: carbon reducing technologies are subject to increasing returns to scale (as the market gets bigger it gets cheaper to produce them), imposing a carbon tax will dramatically increase the size of these markets leading to substantial declines in the price of these technologies leading to mass adoption of these technologies around the world.

Over at Marginal Revolution, Tyler Cowen is concerned that this process may not lead to a lower total amount of carbon emissions:

It was reading about the new $2500 car, from India, that got me worried. Let's say the new technology is more carbon-friendly than what we do now, but still generates some carbon. (That sounds reasonable, no?) The new energy technology is really cheap, so lots more people -- most of all in China and India and Africa -- enter carbon-using sectors of the economy. Even if the new technology is three times as carbon-efficient, if the world as a whole uses three times more energy, carbon emissions do not go down. The basic problem is the combination of low costs and many people standing on the verge of the carbon-using sector of the economy.

Or to put it another way, eventually gasoline costs become a very important part of the total cost of a car. Then say that cars become much more gasoline efficient. Lots more people can afford cars.

In brief, Cowen is concerned that technology also increases affluence (i.e., the amount consumed per capita), so simultaneously technology may be reducing the amount of carbon emitted per unit but increasing the number of units per person. It is not obvious that the net effect of such a change in lower total emissions.

Wednesday, February 20, 2008

ECON 365: Primer on Immigration

In preparation for the Steinhardt Lecture on Thursday and our subsequent discussion of the topic, here are a few links that describe how economists think about immigration:

Definitely read this New Times Magazine article on the Card/Borjas debate over whether or not immigrants adversely affect low-skilled/low-income workers.

Alex Tabborok's open letter on immigration.

An op-ed from Tyler Cowen (including a discussion of Steinhardt lecturer Giovanni Peri's work). Followed by Cowen's Q&A on immigration.

That should get you started.

Tuesday, February 19, 2008

ECON 365: Climate Change Review

Here are the questions I outlined pertaining to climate change in class last week coupled with some links with further information about many of them.

I. What will occur? What outcomes are possible? How likely are each of these outcomes?

Here's a link to the IPCC website -- probably more than you'd ever want to know there.

Here's a shorter summary from Scientific American on the state of the science.

II. How good/bad are each of the outcomes? What will it cost to adapt? How much damage/benefit occurs in each of the possible outcomes? How will future generations value these costs/benefits? That is, what will they regard as disastrous, as no big deal, or as improvements? (Note -- this depends on answering the nearly impossible questions -- what are the tastes, preferences, and technology are likely to exist in the future when changes occur? )

III. How much should we care about the future? What's the appropriate discount rate to use when evaluating costs and benefits that are paid/enjoyed by future generations? How much are we willing to pay in order to make them better off?

IV. What can we do to mitigate climate change (i.e., change the probabilities associated with different outcomes)? How much will these actions cost both directly and in terms of opportunity costs?

Several items that relate to the questions in II-IV:

Here's a link to the Stern Review, here's economist Gary Yohe's testimony to the Senate discussing the Stern Review, here's economist William Nordhaus's tome on climate change. These are relatively in depth looks at all the issues.

Here are some shorter readings:

Nobel prize winner Ken Arrow on "The Case for Cutting Emissions."

Paul Klemperer on "Why economists don't know all the answers about climate change."

Scientific American interviews Sir Nicholas Stern, Bjorn Lomborg, and Gary Yohe on the costs of mitigating climate change.

Angus Deaton on the criticism of Stern's use of a zero discount rate.

While not directly addressing climate change, here's Nobel prize winner Robert Solow on an economist's approach to sustainability (aka -- our obligations to future generations). Here's one economist's attempt to directly apply Solow's point of view to climate change.

V. Assuming we think we should act to reduce emissions, what can/should we do? Carbon taxes? Cap and trade? Command and control? And how do we accomplish this on a global scale?

The CBO recently released a study examining the policy options for reducing carbon emissions. They favor a carbon tax.

Several links to discussion of this topic at the Environmental Economics blog.

Mark Thoma on the equity concerns about carbon taxes. Here are several responses to Thoma's argument.

Finally, here's my grad school friend Joe Aldy (and co-author's) description of the challenges of developing global climate change policies.

Tuesday, February 12, 2008

Long Distance Relationships

Here's an interesting article on long-distance relationships. That's perhaps relevant to some of you. The most surprising discovery for me -- that there's an Institute on Long Distance Relationships (ILDR). Who knew?

Unintended Consequences of Smoking Bans

In both classes, we recently discussed smoking bans. Apparently, there are some unintended consequences to these bans -- more drunk drivers:
A rigorous statistical examination has found that smoking bans increase drunken-driving fatalities. One might expect that a ban on smoking in bars would deter some people from showing up, thereby reducing the number of people driving home drunk. But jurisdictions with smoking bans often border jurisdictions without bans, and some bars may skirt the ban, so that smokers can bypass the ban with extra driving. There is also a large overlap between the smoker and alcoholic populations, which would exacerbate the danger from extra driving. The authors estimate that smoking bans increase fatal drunken-driving accidents by about 13 percent, or about 2.5 such accidents per year for a typical county.

Monday, February 11, 2008

ECON 260: Overharvesting Fisheries

I forgot to post this link last week when we were discussing the open-access problem. Last Fall, a couple of economists published an article in Science that pointed out that over-harvesting the fisheries was (surprise) not profit-maximizing for the fishermen. They report:

A new and compelling argument for reducing fish harvests – the profit motive – could persuade world fishers to endure the short-term pain of lower catches for the long-term gain of higher returns for their labor, according to authors of a ground-breaking study on fisheries over-exploitation.

They say their findings, published in the journal Science Dec. 7, will help overcome a key cause of over-fishing – industry opposition to lower catches – by demonstrating that when stocks are allowed to recover, profits take a sharp turn upward.

“It has always been assumed that maximizing fishing profits will lead to stock depletion and possibly even extinction of some commercial species,” says co-author Quentin Grafton, research director at the Crawford School of Economics and Government at the Australian National University (ANU) and one of the co-authors of the paper “Economics of Over-exploitation Revisited.”

“But our results prove that the highest profits are made when fish numbers are allowed to rise beyond levels traditionally considered optimal. In other words, bigger stocks mean bigger bucks.”

The simple reason is “the stock effect”: when fish are more plentiful and thus easier to catch, fishers don’t have to spend as much on fuel and other costs to fill their nets – profits are higher.

Econ 260: Exporting Pollution

In class today, we discussed the case for exporting pollution. One question that naturally emerges from such a discussion is, how much of this is already occurring? Pollution levels in the US are significantly lower today than they used to be, are such reductions due to improved technology or the movement of polluting industries off shore?

Economist Arik Levenson addresses this very question and finds:

Over the past thirty years, while the real value of US manufacturing output has increased by more than 70 percent, the total annual air pollution emitted by US manufacturers declined substantially, by 58 percent for the sum of four common air pollutants.4

One explanation for the clean-up of US manufacturing is that the protesters are correct, and that thanks to freer trade, the US now imports polluting goods it once produced domestically, and concentrates domestic manufacturing on goods less likely to incur environmental regulatory costs. Of course, there is an alternative explanation: thanks to improved technology (cleaner fuels, end-of-pipe abatement, process changes, etc.) US manufacturers may now be able to produce more output using less pollution. Which of these explanations, trade or technology, accounts for the dramatic clean-up of US manufacturing pollution?


What is the bottom line? Increased net imports of polluting goods account for about 70 percent of the composition-related decline in US manufacturing pollution. The composition effect in turn explains about 40 percent of the overall decline in pollution from US manufacturing. Putting these two findings together, international trade can explain at most 28 percent of the clean-up of US manufacturing.

Why should we care?

If the 75% reduction in pollution from US manufacturing resulted from increased international trade, the pundits and protestors might have a case. Environmental improvements might be said to have imposed large, unmeasured environmental costs on the countries from which those goods are imported. And more importantly, the improvements in the US would not be replicable by all countries indefinitely, because the poorest countries in the world will never have even poorer countries from which to import their pollution-intensive goods. The US clean-up would simply have been the result of the US coming out ahead in an environmental zero-sum game, merely shifting pollution to different locations. However, if the US pollution reductions come from technology, nothing suggests those improvements cannot continue indefinitely and be repeated around the world. The analyses here suggest that most the pollution reductions have come from improved technology, that the environmental concerns of antiglobalization protesters have been overblown, and that the pollution reduction achieved by US manufacturing will replicable by other countries in the future

Hey Ladies, Go Ahead and Settle

... so argues Lori Gottleib in this Atlantic article. While I've argued that people may get too swept up by fairy tale romance in the past, I am not convinced that settling is a great idea. People would likely benefit from having more realistic expectations about what they can find in the marriage market, but I don't think it is crazy for women (the group focused on in the article) for women to expect than some help around the house from their partners.

I think an article that helped women manage their expectations about guys (e.g., here's the reality of what you are likely to find out there and here's how a bunch of women have coped with these "typical male flaws" to create lasting happy relationships) would be far more helpful.

Update: Here's the same author taking a very different point of view prior to having her child. This may suggest that being a single mother increases the desire to settle.

ECON 365: Stern Report

Please take a few minutes to familiarize yourself with the basics of the Stern Report, and the Copenhagen Consensus before class on Tuesday.

Wednesday, February 06, 2008

Changing Arctic Ice

Curious about how much change there's been in Arctic ice during my little sister's lifetime: click here.

Want to watch the Arctic's record melt during 2007. Click here (it's a pretty big file, so it takes awhile to load)

ECON 260: The Summers Memo

Please read the memo below before class on Friday. It is the complete text of the memo Larry Summers memo discussed in Chp. 5.

DATE: December 12, 1991
TO: Distribution
FR: Lawrence H. Summers
Subject: GEP

'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons:

1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.

3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.

The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.

Monday, February 04, 2008

Econ 365: Upcoming Schedule

Tuesday (2/5) -- Budget Analysis (Chp 4)

Wednesday (2/6) -- Review session for Take home 1 (Howard 205)

Thursday (2/7) -- Externalities (Chps 5 & 6)

Friday (2/8) -- Take Home 1 due by 3 PM (my mailbox)

Tuesday (2/12) -- Externalities (cont)

Thursday (2/14) -- In class Quiz 2, Quiz 2 Take home out (due 2/21); Public
Goods (Chp 7)

Econ 260: New Schedule

Today (Monday) in class, we'll try and finish the material from Chapter 3 and
move into Chapter 4 on the efficiency standard.

Wednesday, we'll continue talking about the efficiency standard and start
talking about the safety standard (Chapter 5)

Friday, there will be an in class quiz (lasting 20-25 minutes) that may cover
any material from chapters 1-5. At that time, I will also hand out the take
home part of quiz 1 (which will be due the following Friday).

My office hours this week are moving from Monday to Wednesday -- 3-5 PM.

Friday, February 01, 2008

ECON 260: Classes canceled today

I'm pretty sick. Rather than subject you to a lifeless performance and lots of nasty germs, I think it best to cancel classes today and pick up again Monday. Sorry for the inconvenience.

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