One size fits all?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on May 27, 2011

Lately, mandates seem to be an increasingly popular choice of policy by the Federal government.  Just the last few years have seen health care mandates, automobile fuel efficiency mandates, and now – coming January 1st, 2012 – light bulbs.  That’s right, those pear-shaped incandescent bulbs have lit American homes for the last 130 years, but they begin phasing out of stores in favor of Light Emitting Diodes (LED) and Compact Fluorescent Light (CFL) bulbs, thanks to a 2007 bi-partisan mandate signed into law by then-President George W. Bush.  As an economist, I cringe when I think of mandates, as they remove incentives for innovation, take choices away from consumers, and put the decision-making into the less-informed hands of the policy makers in Washington. 

The end-goal of the light bulb policy is to reduce polluting emissions.  News stories such as USA Today provide information regarding the extra efficiency of CFL and LED bulbs in comparison to incandescent bulbs.  When the law takes full effect in 2015, the U.S. Department of Energy estimates that “Families nationwide will save nearly $6 billion a year and will help eliminate 30 million metric tons of carbon dioxide emissions annually — the equivalent of taking about 8 million cars off the road each year.”  Other nations already have policies in effect that are more stringent than those here in the United States, including Canada, Russia, Australia, and the European Union.

Limiting families to purchase only these new light bulbs means paying a higher price up-front in order to cut emissions.  But the enacted “ban” applies to everybody, no matter whether the use of the old style bulb might be very important to some individuals.   To ban all incandescent light bulbs is not efficient, if certain individuals could use them with benefits that exceed the social cost.  The alternative is a price incentive, such as a price on greenhouse gas emissions in a cap-and-trade type system.  Then firms and individuals get to decide for themselves whether and how to reduce electricity use and cut emissions most cheaply and effectively.  When government policymakers issue a mandate, they are effectively saying they know what is best for us.  And with heterogeneity among firms and individuals, those policymakers can’t possibly know what single set of abatement methods is best for all different people simultaneously.

South Carolina has seen significant innovation on the part of policy makers in figuring out a way around this new light bulb law that could have ramifications for federal mandates of all sorts.  The Commerce Clause gives the Federal government the authority to regulate commerce between the states.  As Martin Hutchinson from Money Morning writes, “According to the Supreme Court’s 1935 decision in the case of Schechter Poultry vs. United States, the federal government does not have the power to regulate commerce that is entirely conducted within a state.”  In other words, if the state of South Carolina has a manufacturer that produces light bulbs in the state and for sale within the state, they could theoretically escape this mandate. 

The 2007 law doesn’t make incandescent bulbs illegal but instead sets requirements on their efficiency; these standards are proving to be quite difficult for the industry meet.  It is similar to the Corporate Average Fuel Efficiency (CAFE) standards established for the automobile industry, where producers are told to increase the miles per gallon (MPG) of cars produced, but the government does not attempt to dictate how this must be done.

In the long-run, this policy may save families money on their electric bill and reduce emissions.  But any one such law is not a comprehensive co-ordinated policy that chooses the cheapest forms of pollution abatement.  I’d rather see government address the problem in a comprehensive cost-effective way.

Gas prices are back in the news

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Mar 11, 2011

Gas prices are back in the news, simply because gas prices are rising.  Reporters like to discuss WHY gas prices are rising, but who knows?  The price of gasoline or crude oil can vary with any change, either in supply or demand.  We can always point to shifts in demand (like the growing economies of China and India), and we can always point to shifts in supply (like the shutdown of production due to unrest in countries of the Middle East and North Africa).  But it’s very difficult to sort out the net impact of each such factor, since the price is affected daily by so many different changes.

Instead of trying to answer that question here and now, let’s take a step back and look at whether any of the current changes are really that unusual.  Is the price of gas really high by historical standards?  And how much of that gas price is driven by energy policy, taxes, and factors under the control of policymakers?  In other words, let’s just look at the facts for now, and then try to analyze them later!

Here are the facts, for the fifty years since 1960.  The first figure below is from the U.S. Energy Information Administration (EIA).  Look first at the BLUE line, where we see what you already know:  the nominal price of gasoline has risen from $0.31/gallon to what’s now $3.56/gallon.  It’s driving us broke, right?

Well, not so fast.  The RED line corrects for inflation, showing all years’ prices in 2011 dollars.  So both series stand at $3.56/gallon in 2011, but the red line shows that the “real” (inflation-corrected) price of gasoline back in 1960 was $2.33/gallon.  In fact, compare the red line from 1960 to 2009: over those fifty years, the real price of gasoline only changed from $2.33 to $2.42 per gallon – virtually no change in the real price at all! 

From 2009 to 2011 the real price increased beyond $2.42, rising to $3.56/gallon, but that may be temporary.  You can see that the red line bounces around for the whole fifty year period.   In 1980, the real price was $3.35/gallon, so the current price is not much different from previous upward blips in the real price of gas.

Now look at the U.S. Federal Gasoline Tax Rate, in the next figure.  The red line in the next figure shows that the nominal statutory tax rate was four cents per gallon for years, and then it was increased in various increments to 18 cents per gallon today.  But of course, inflation has changed the real value of that tax rate as well.  Using 2011 dollars again, both real and nominal tax rates are 18 cents per gallon today.  But in 2011 dollars, the 4 cents per gallon back in 1960 was really equivalent to 29 cents today.  In other words, the real gas tax in the green line has fallen from 29 cents per gallon fifty years ago to only 18 cents today.

The gas price may be rising, but not due to any increase in the Federal gas tax.  That Federal gas tax is falling in real terms.  In the next entry, we’ll take a look at the various State gas tax rates, and we’ll look at how many of those taxes are fixed per gallon – so that they fall in real terms as inflation reduces the real value of those State tax rates.

How Much Should Congress Leave to the Regulators?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 11, 2011

The very existence of the Environmental Protection Agency (EPA) has long been a point of contention between the two political parties.  What is, and what ought to be the role of the EPA with regard to policy making?  Congress cannot possibly enact laws that contain every detail about subsequent implementation, monitoring, and enforcement.  And they should not put everything in the law anyway, in order to allow enough flexibility to deal with future contingencies.  Besides, those in Congress don’t have the science background necessary to decide all of the details of some technological aspects of pollution prevention.

The law does not say that every electric power plant must reduce emissions of each pollutant to no more than some number, like 37 micrograms per cubic meter.  Instead, the law from Congress just says that EPA should protect human health to an adequate margin of safety.

Yet some would prefer that the EPA disappear, along with every agency having any regulatory power.  This agency, which was conceived in 1970 under Richard Nixon, has analyzed and supported some of the most important pieces of legislation of the last forty years, ranging from the Endangered Species Act to – more recently – the new emissions standards going into effect this year. 

In 2007, the United States Supreme Court ruled in a 5-4 decision called “Massachusetts vs. EPA”, that the EPA could in fact regulate greenhouse gases under the Clean Air Act, on the grounds that such emissions do affect human health.  When combined with the new Republican-dominated Congress, we have set the stage for yet another ideological battle. 

Throughout the past decade, much of the discussion about controlling carbon dioxide emissions has largely centered around the idea of Cap and Trade.  That system would effectively put a price on each unit of pollution emissions.  It would create a market where the need for emissions and the cost of emissions are balanced in a way that can achieve economic efficiency.  However, the most viable attempt at this in recent years, the Waxman-Markey bill of 2009 (H.R.5454), passed the House and not the Senate.  It would not even get past the House in this term.  

The question then becomes, what exactly are the cards that the EPA retains in their deck? 

A recent article is titled “Greenhouse Gas Regulation Under the Clean Air Act” by researchers at Resources for the Future (RFF, by Burtraw, Fraas, and Richardson).  It seeks to explore the options available to the EPA, in-depth.  What they find is that the EPA can implement measures that will reduce greenhouse gas emissions significantly in a measured and cost-effective manner.  For this to happen, however, they argue that the EPA must become bold and decisive in their actions. 

Bold action may be taken as an example of government overreach, and so the EPA must be careful.

Republicans are currently in discussion to introduce the Energy Tax Prevention Act of 2011 .  They recognize that the EPA holds some powerful cards after the Supreme Court ruling in 2007, and they want to take that power away.  This Act would shift the EPA’s ability to regulate from the Agency to the legislative branch.  Yet such an action could take any decision-making ability from the scientists and put it in the hands of the politicians.  As EPA leader Lisa Jackson said, “Politicians overruling scientists on a scientific question – that would become part of this committee’s legacy.’”  Herein lies a problem with democracy.  The people in charge of making the decisions that affect us all, often have little knowledge of the actual issues at hand.  After all, Republicans from oil-rich states like Oklahoma still claim global warming is nothing but a hoax.

Uncertainty About Climate Change (Part II)

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jul 30, 2010

In my last blog, I pointed out the inherent nature of uncertainties in climate projections, and the long list of reasons for particular uncertainties about the effects of anthropogenic greenhouse gas emissions on the change in future temperature levels, droughts, severe storms, sea level rise, and about measures of economic damages from any such event.  The range of possible outcomes is enormous, but I argued that the uncertainties are not a reason to wait and do more research before enacting legislation to reduce those emissions.  Indeed, the huge range of probability outcomes is a big reason to act now to reduce the possibility of such costly events.

In this blog, I want to expand that point to talk about the various kinds of uncertainties and what to do about them.  I just read an interesting blog by Keith Kloor that lists five kinds of reactions to uncertainty.  I will describe HIS five points, but what they bring to mind for me are the FIVE STAGES OF GRIEF (when a loved one dies, for example).  I’m sure you’ve heard these before:

1-Denial

2-Anger

3-Bargaining

4-Depression

5-Acceptance

Well, those approximately label his five reactions to uncertainty about climate change.  First, one could DENY the uncertainty, which might be done to try to further some political agenda.  Those who want environmental protection might say we KNOW that anthropogenic greenhouse gas emissions will cause significant global warming, and therefore we must act to prevent it.  That’s just wrong; we don’t KNOW that global warming will be significant and highly costly.

In fact, “uncertainty deniers” have done a great disservice to their own cause.  The claim that global warming is certain just gives the other side the opportunity to point out correctly that it’s NOT certain!  But that whole argument is irrelevant!  The relevant problem is that global warming MIGHT be significant and highly costly!

Second, one could react by trying to REDUCE the uncertainty, such as through herculean research efforts to make better predictions.  Research might well be worthwhile, and it might help reduce some of the uncertainties, but it will not reduce all of them, and it might introduce new uncertainties that we’ve not yet considered!

Third, one could try to SIMPLIFY the uncertainties, such as to explain in simple terms the complex scientific reasons for the inherent uncertainties listed in my previous blog.  It’s not wrong to try to explain complex uncertainties, and even to fit them into a finite set of categories, but the danger is that such simplification be taken as a replacement for consideration of all the complexities.   The problem is that simplification may in effect minimize those uncertainties.  Anyway, this kind of reaction is somewhat like bargaining: “maybe if we make up simple categories for these complex uncertainties then they might not seem so daunting.”

Actually, Kloor’s fourth reaction sounds even more like bargaining, when he says “Uncertainty detectives – well all scientists should work hard to understand, represent, and reason about uncertainty (. . .). The conflict is when political opponents seize on this uncertainty as an excuse for inaction.”  Now that is a cause for depression!

Anyway, of course, the fifth and final reaction to uncertainty is ACCEPTANCE: “include uncertainty information in rational decision support systems and policies.”  We need to know what is known, and what is unknown, to be able to make rational decisions as a society to adopt policies that can insure us against the worst possible outcomes.  We at least need to make the right tradeoffs between the costs of that insurance and the benefits of reducing those risks.  We need to undertake any available low cost measures to reduce fossil-fuel-fired electricity generation, to increase energy efficiency of vehicles and appliances, to increase alternative fuel use, to build water storage that can help deal with a possible increase in the number of droughts, and to build levees that can help deal with a possible increase in the number of severe storms.

Accepting the fact of uncertainty means giving up the idea of building in those protections because we know things will get worse.  Instead, it means building in those protections because things might get worse, and they might get a lot worse.

Uncertainty is not a reason to wait, but MORE reason to act!

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jul 25, 2010

Nobody has any doubt that climate forecasts are uncertain.  They are uncertain with or without anthropogenic (human caused) effects of greenhouse gas emissions.  Then, when trying to gauge the effects of humans, we have to take the difference between the uncertain climate forecast with extra emissions and the uncertain forecast without extra emissions.  That only compounds the uncertainty!

Suppose for example that without our extra carbon dioxide and other greenhouse gas emissions, the temperature in 2050 is predicted to average 50°F plus or minus 5°.  And suppose the temperature with our current rate of emissions is predicted to average 52°F plus or minus 5°F.  Then the difference (the effect of emissions) is not just 52-50 = 2°F.  Rather, it could be anywhere between 57-45 = 12°F, at the high end, or 47-55 = -8°F, at the low end.  We just don’t know.

That simplified example is overstated.  But look at the figure from the IPCC Fourth Assessment Report’s “Summary for Policymakers”.  It shows a set of model simulations with a range of results anywhere from no global warming to about 4°C (which is about 7°F).   That is a lot of uncertainty, but that figure does not reflect all possible uncertainties.  Those include (but are not limited to): uncertainties about the amount of GHG emissions in the future, about the effect of those GHG emissions on ambient atmospheric concentrations, about the effect of ambient atmospheric concentrations on air temperature, about the effects of air temperature on ocean water temperature at different depths, about the feedback effects of ocean water temperature back on air temperature, the effects of all those changes on polar ice caps, the effects of polar ice caps on sea level rise, the effects of sea level rise on millions of miles of coastline around the world, and the effect of all those changes on economic damages.

ipcc-ar42

Many have taken this inherent uncertainty as a reason not to act now, but instead to wait, to undertake more research, and to try to reduce that uncertainty.

That may be a natural initial reaction, but it is not a good one.  It assumes that uncertainty reduces the need to act, when in fact increases in uncertainty only increase the need to act!  That is not to say research is unwarranted, or that we have nothing more to learn. We can and should try to find out more and try to reduce uncertainties.  But a lot of that research may raise additional considerations and uncertainties!  Uncertainty is inherent to the problem and will never disappear, so waiting for resolution of the uncertainty means waiting forever and doing nothing forever.

Uncertainty itself is a problem we need to face, as it raises additional costs we can reduce.  A single hot summer or drought is a problem with which we have learned to cope.  But now we don’t even know whether we are facing that same level of heat and drought, or perhaps much more heat, reduced rainfall, extreme storms, huge loss of landmass, etc., etc., etc.  It is the unknown possibility of such loss that ought to make us act now to protect ourselves.

To the extent that anthropogenic GHG emissions raise uncertainties about future climate, the more we need policies that are resilient to those uncertainties: policies that increase our abilities to deal with drought, to make it possible to increase crop production with less rainfall, and to protect ourselves against the possibility of storms worse than Katrina.

Which brings us to the key distinction between adaptation and mitigation.  One way to protect ourselves is to adapt to droughts and storms, as just mentioned.  But another way to protect ourselves against those adverse possibilities is to start now to mitigate climate change by reducing GHG emissions.

Wind Power is a Lot of Wind

Filed Under (Environmental Policy) by Don Fullerton on May 19, 2010

You probably read about “Cape Wind”, a proposal to build 130 wind turbines off the coast of Massachusetts.  They will be 440 feet tall, covering 24 square miles of Nantucket Sound, with a cost of more than $1 billion. 

Yes, we need to shift from carbon-intensive fossil fuels to other cleaner renewable fuels.  But is this the way to do it?  An article in the NYTimes says “Opponents have argued that the venture is too expensive and would interfere with local fishermen, intrude on the sacred rituals and submerged burial grounds of two local Indian tribes and destroy the view.”

Yes, all those environmental costs need to be taken into account, but I think all those complaints are just a lot of wind.   I could care less about affecting the view of some rich Kennedy’s beachfront property.  No, for me, the problem is in later paragraphs, which say:

“The current price tag for a fully installed offshore wind system is estimated at $4,600 a kilowatt, nearly double the $2,400-a-kilowatt price for a land-based system, … .  By comparison, production tax credits and other incentives have driven the cost of land-based wind power to less than 5 cents a kilowatt-hour in some places, and that’s still more expensive than other sources like coal and hydropower.”

Coal is cheap!  Wind power is extremely expensive by comparison (and solar power is even MORE expensive).  Maybe those renewable alternatives are worthwhile, and maybe they are not.  But how can we ever tell, if policymakers keep trying to decide this issue for us??

Neither Barak Obama nor any other politician has the expertise to decide whether wind power is the right alternative, or something else.  They just want to “do something” about global warming.  Okay, fine, but the thing to “do” is to enact a carbon tax, or a permit price per ton of carbon dioxide emissions that reflects the true social cost of those carbon dioxide emissions.  THEN if wind is cheaper, we’ll get wind power!  And if wind power is still too expensive, then the true experts can get on with the business of finding what IS the cost-effective alternative to burning fossil fuel.

So ALL the arguments both for and against wind power are a lot of wind.   Any decision in the political arena will lead to excess costs.  A carbon price will allow the experts and the market to decide.

Europe vs. America (Travelogue vs. Travelblog?)

Filed Under (Environmental Policy) by Don Fullerton on Feb 22, 2010

This week, I’ve been travelling in Paris, to make a presentation at an OECD meeting on “encouraging low-carbon vehicle technologies”.  Now I’ve moved on to Barcelona, and in a few days fly to Istanbul.  I’ve been sightseeing “old Europe”, with very narrow city streets that are really just alleys at best, where walkers share the space with intermittent bicycles and mopeds.  The occasional delivery van is the only four wheeled vehicle that must venture down some of these alleys, just to reach the shops where they have to deliver their goods.

It is all very quaint, and picturesque.  Anybody who really needs to get somewhere just rides the metro.  Perhaps the dense grid of subway stops is not surprising in a city the size of Paris, but Barcelona has a similar number of stops on many routes, all around the city.  The population is about 3 million.  I don’t think that any city of 3 million in the United States has dug so many subway lines for convenient public transportation.

The narrow streets and convenient subways reflect the culture and history of the place.  Given the topic of my presentation, however, I have to wonder if it reflects the current policies in place.   Has the high tax on gasoline (“petrol”) encouraged these citizens to buy mopeds instead of cars, and to vote more funding for public transportation?  Or has the number of mopeds and subways induced the people to vote for high taxes on petrol?

I don’t know, and it would be very difficult to sort out the direction of causation.  But I do know that “old” Europe is a long way ahead of the U.S. in terms of low carbon footprint.  We in the U.S. see congested highways as an indication that we need to spend more money on highways!  That kind of reaction will never get any of us out of our cars and into public transportation.  For that we need infrastructure, which requires exactly the wording I used above: “culture and history”.  It cannot be built overnight.  The existing trajectory for building of highway infrastructure will put us on the path to future emissions, which sow the seeds of future global warming.

I’m easily as patriotic as the next American.  Last night I cheered when Bode Miller won the gold metal in the men’s “super combined event” at the Vancouver Olympics.  But I really have to wonder if the rest of the world is right that the United States has already caused more than its share of what will be a huge global warming problem, and we’re just not doing enough about it.  It’s not much warmer yet, but CO2 concentrations have already increased enough to guarantee another 5 degrees warmer climate.  If we don’t change our culture of driving, our way of life could be history.

Those with More Income Do Not Hold More Wealth

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 15, 2010

Energy is an integral input to nearly all aspects of our economy.  Energy policies, especially policies aimed at curbing greenhouse gas emissions associated with energy consumption, thus have sizable effects on nearly all participants in our economy.  The distribution of these effects across participants is an important consideration of policy design.

The incidence of the costs of energy or climate policy manifests itself in at least two major ways.  First, policy affects the “uses side” of income, through product prices.  A carbon tax may disproportionately increase the price of gasoline and electricity, two goods that represent a higher share of expenditure for poorer households.  The uses side incidence is then regressive.  Second, policy affects the “sources side” of income, through factor prices.  A carbon tax may be more burdensome to capital-intensive industries and disproportionately reduce the return to capital.  If so, and if capital provides a higher share of income for richer households, then the sources side incidence may be progressive.

In a new working paper, however, Garth Heutel and I find that the sources side burden is regressive – just like the uses side.  The reason is that high income households do not get more of their income from capital than from labor.  The holding of wealth is not the same as the flow of income. 

The data for capital income indicate one major problem with using annual income to categorize families from rich to poor: the group with the lowest annual income has the highest fraction of income from capital.  This group includes a lot of retired individuals who have no labor income and are living off their retirement savings.  These individuals may not really be “poor” on a lifetime basis.  In other words, we would like to classify households by the stock of lifetime wealth, but instead we are classifying them by a flow of annual income.  If individuals smooth consumption over their lifetime, then total annual consumption might be a good proxy for lifetime income (or at least, a better proxy than annual income). 

So we also categorized all households in the Consumer Expenditure Survey by total annual expenditures (as a proxy for permanent income).  Still, however, the group with the highest annual expenditure has a higher ratio of labor income to capital income than does the group with the lowest annual expenditure.

Thus, the sources-side burden is also regressive.  The carbon tax applies to the energy-intensive sector, which uses relatively more capital than labor in production.  Thus it reduces the demand for capital, and it reduces the return to capital relative to the wage rate.  This places less burden on those with more labor income – the high income group.

The same occurs for annual consumption deciles instead of annual income deciles.  Both the uses-side and sources-side incidences are regressive.  When defined by annual consumption groups, however, the uses-side incidence is more regressive than when defined by annual income, and the sources-side incidence is less regressive than when defined by annual income.

This topic could use more research.  But this research so far is one indication that a cap-and-trade system or carbon tax might hurt low-income groups in two ways, instead of just one!

Unemployment and the Environment?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 9, 2010

I would never ever want to be a macroeconomist charged with making economic predictions.  In fact, I’m sorry that anybody makes macroeconomic predictions, because they can’t always be right, and the fact that they turn out wrong gives all economists a bad name!   Yet I particularly like it when some non-economist friend of mine asks  “Do you think the economy is going to improve, or worsen?”  That just gives me a chance to respond, “YES!  That is, yes, I think the economy will improve or worsen.”

So I’m particularly reluctant to write any blog about the poor state of the macro-economy, what should be done about it, and when we are likely to see any turnaround.   But today’s article in the Washington Post is about macroeconomics and environmental policy!  It is called “Obama laments job losses, announces tax credits for clean energy”.   How are those connected to each other?   Only through rhetoric.

Basically, all of the points are valid, as presented by the article and even by the Obama Administration spokespersons.   The economy is bad, and we don’t know when it will improve.  We don’t even know what is the effect of last year’s stimulus bill, because we’ll never know what would have happened without the stimulus bill!  And it’s also true that we might need more stimulus.  And it is furthermore true (even if unrelated) that it might be a good idea to spend more money on green investments, to aid the transition away from burning fossil fuels that worsen global warming, and towards energy efficiency and alternative sources of energy such as solar power.

More specifically, the Washington Post article says:

“The unemployment rate was unchanged at 10 percent, the Labor Department said. Forecasters had expected zero net change in the number of jobs on U.S. payrolls, and some had had expected job growth to return. Those expectations were dashed by a report that — while not without bright spots — suggested that the long slog toward an improved labor market continued in December.”

That paragraph seems unrelated to the prior one:

“As part of an effort to ‘close the clean-energy gap,’ he announced the awarding of $2.3 billion in tax credits to American manufacturers of technologies such as wind turbines, solar panels and cutting-edge batteries. The credits — destined for 180 projects in 40 states — will generate 17,000 jobs and help leverage $5 billion in private-sector investment that would create tens of thousands of additional jobs, while doubling the amount of renewable power over the next three years, Obama said.  …  Since there are far more qualified applicants for the credits than the federal funding will cover, he said, he is calling for investment of an additional $5 billion in the program.”

Yet the Administration might as well link the two, at least to appear to be doing something, and to make headway on another important agenda item.  Just as stated by Obama’s Chief of Staff, Rahm Emanuel, “You never want a serious crisis to go to waste — and what I mean by that is an opportunity to do things that you think you could not do before”.  You can even listen to it on You-Tube, if you click here!

Speaking of “unrelated”, I have another link to suggest.  If you are interested in hearing about progress in Copenhagen toward international agreements on climate change, in the style of Dr. Seuss, click here!