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.

Many gas taxes, but falling over time

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Apr 1, 2011

Per gallon of gasoline, are we paying more in taxes over the years, or less?   In my last post, I examined the Federal gas tax and inflation adjustments.  As it turns out, the overall price of gasoline adjusted for inflation just hasn’t changed that much over the past fifty years!  Regarding the Federal tax of 18.4 cents per gallon as a tool to collect revenue, however, the impact is significantly weakened by inflation.  It is a “unit tax” (fixed over time per unit of gasoline), and so it becomes a smaller fraction of price as the gas price rises.  In contrast, any “ad valorem” tax would be a fixed percentage of price (like an 8% sales tax).  When inflation increases the price, an ad valorem tax rises with it.

State and local gas taxes in Illinois are a bit more complicated. In 1990, the State of Illinois raised the gas tax from 16 cents to the current 19 cents per gallon – another “unit” tax.  The flat blue line in the figure below looks at that same fixed 19 cents per gallon since 1990.  The orange line shows its “real” value, adjusted for inflation, all in current 2011 dollars.  It shows that the 19 cents today is really the equivalent of 33 cents back in 1990.  So the real value of the state’s unit tax on gasoline has fallen from 33 cents to 19 cents per gallon.

In addition to the 19 cent per gallon state gas tax, we also pay 2 cents per gallon to the city of Urbana.  Furthermore, gasoline is subject to the general sales tax, which in Urbana is 8.75%.  (It is composed of 5% to the state, 2.25% to the city, 0.5% to the county, and another 1% to the school district). 

Here is how it all works.  Suppose the net-of-tax price of gas kept by the service station is exactly 3 dollars.  Then the combined state and local ad valorem sales tax (8.75%) applies to that $3.00 per gallon.  That tax would be $0.2625 (in other words, 26.25 cents).  Then the federal unit tax is 18.4 cents, the state unit gas tax is 19 cents, and the city unit gas tax is 2 cents.  The total of all those taxes is 75.65 cents per gallon.  These four major taxes per gallon are shown in the table.

Level of Tax

Tax in Cents per gallon

Federal unit tax

18.40

Illinois unit tax

19.00
Urbana unit tax

2.00

Combined sales tax

26.25

TOTAL TAX

75.65

 

That total 76-cent tax adds to the $3 per gallon price, and you pay $3.76 per gallon.   (And actually, a few other minor taxes are ignored here, such as the “Underground Storage Tank” fee and other environmental fees!)

 Yet only the ad valorem sales tax can keep up with inflation.  With every year that a unit tax on gasoline is not updated, the tax loses its value and fails to collect as much real revenue.   The State of Illinois revenue from the 19 cent gas tax is falling in real terms with inflation, as all the necessary expenditures by the State are rising.

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.

Here we go again, …

Filed Under (Environmental Policy, Health Care, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 25, 2011

Yes, I’ve written about the budget before, and perhaps I’m getting repetitive.  But it’s important, and surprising, so I’ll give it another go.  But nevermind President Obama’s recent release of a proposed budget for next year.  That document is already irrelevant!  Let’s start with the current budget. 

Current federal spending now is over  $3 trillion per year.  The deficit is $1.6 trillion.  The U.S. House of Representatives approved a plan to cut spending by $60 billion.  The Republicans chose not to change spending on defense and homeland security, nor entitlement programs like Social Security, Medicare, and Medicaid.  The problem is that then other discretionary spending must be cut for some government agencies by as much as 40%.  And yet that total $60 billion cut is only a drop in the bucket.  It cuts the annual deficit only from $1.6 trillion to 1.54 trillion!

My point is that you can’t get there from here.  First of all, it’s not wise to cast such a wide net, without thinking, making cuts of 40% or more to discretionary programs simply because they are called discretionary.  It means cuts to national parks, environmental programs, and federal employees who provide many public services people want.

Second, who says we need to leave defense and entitlements untouched?   Within just a few years, Medicaid will cost about $300 billion per year, Medicare will cost $500 billion, and Social Security will cost $800 billion, and defense $800 billion.  ALL of domestic discretionary spending will be only $400 billion.  By those round numbers, $60 billion from that last category is a 15% cut.   The same $60 billion cut proportionally from all of those categories would be only a 2% cut.  That’s what I mean by a drop in the bucket.

Anyway, that plan would still cut the deficit only from $1.6 trillion to $1.54 trillion.  The ONLY way to make any sizeable dent in the huge $1.6 trillion deficit is to look at all the current spending, not just at $400 billion of domestic discretionary spending, but at the $800 billion of defense spending, $800 billion of social  security, $500 billion of Medicare, and/or $300 billion of Medicaid.

And who says taxes are sacrosanct?  A $1.6 trillion deficit means we are spending more than our income, so one just MIGHT think that problem can be approached from both ends.

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.

Daniel Hamermesh on Recycling

Filed Under (Environmental Policy) by Nolan Miller on Jan 31, 2011

Daniel Hamermesh has an interesting post over on the Freakonomics blog about his recent trip to Germany and their approach to recyclingGermany has quie strict recycling rules, and Germans are required to separate their “excess” into bio, packing, paper, white glass, green glass, brown glass, and everything else.  As in the US, the recycling requirements raise the prices of recyclables (e.g., think of the deposit tacked onto cans and bottles in many states).  However, Hamermesh points out the additional benefit.  The extra effort needed to property sort and recycle everything (and he reports there’s no recycling on Sundays) probably discourages people from buying recyclables in the first place.  This latter effect, he proposes, might be more important for the environment than the actual recycling.

This got me thinking about ways we could kill two birds with one stone in this country.  Environmental economists like to think about “double dividends” such as how environmtal taxes have the dual benefits of helping the environment and allowing the government to reduce other taxes.  Well, what about if we required, say, 10 push-ups every time a person used a plastic water or soda bottle?  This would help people get in shape, and, given our national aversion to exercise, would probably result in a large reduction in bottle use as people move to reusable containers and find other ways to avoid a little exercise.  Think about it.  The possibilities are endless …

The State of the Union may be strong, but the state of America’s energy policy is less clear

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 28, 2011

On Tuesday night, President Obama gave the State of the Union (SOTU) Address (transcript) before a joint session of Congress.  The speech drew upon imagery from the Cold War past in order to spur action regarding America’s energy policy.  “This is our generation’s Sputnik moment,” the President declared, and thus he will send a budget to Congress that invests “especially [in] clean energy technology, an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”  To deal with this “Sputnik moment”, the President set forth two goals: (1) become the first country to have a million electric vehicles on the road by 2015; and (2) get 80% of America’s energy from clean sources by 2035. 

(Not quite as inspiring as President Kennedy’s urging on May 21, 1961 that “this nation should commit itself to achieving the goal, before the decade is out, of landing a man on the moon and returning him safely to the earth.”  On July 20, 1969, Apollo 11 landed on the Moon and Neil Armstrong took his first step on the lunar surface.)

I have three issues with the President’s approach.  First, the wording of the goals in the SOTU Address needs to be parsed carefully in order to understand their meaning or lack of meaning.  For instance, does “electric vehicles” mean all-electric vehicles or do hybrids count towards that goal?  Similarly, what is the definition of “clean sources”?  Fortunately, in this case we have an answer later in the Address.  As the President admits, “Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all.”  However, ambiguity still exists because clean coal and natural gas technologies can be deployed with or without carbon capture and sequestration technologies.

Second, the President did not offer details about HOW to achieve these goals.  The Address includes references to investments in clean energy technology, but it specifies neither investment level nor investment horizon required to meet the stated goals.  He did not say, for example, $10 billion annually for 10 years.  If clean energy is really a priority for the President, and given concerns about the fiscal deficit, then clarity about the needed investment level would be helpful so that other programs can be identified for cuts in order to balance the budget.  Also, the President said that “clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.”  I agree.  However, an efficient, well functioning market requires a price signal.  This brings me to my last point.

Third, the President did not directly address environmental policy when setting his goals.  If the President really means “low-carbon” or “no carbon” when he says “clean”, then the absence of a carbon policy in the Address becomes conspicuous.  Specifically, the President did not indicate if he would again push for a cap-and-trade bill.  Given the composition of the new Congress, a cap-and-trade bill or any other piece of legislation that puts either an explicit or implicit price on carbon emission seems politically infeasible.  To have a market for these clean energy technologies, where is the price signal going to come from?  

In their forthcoming book called “Accelerating Energy Innovation: Insights from Multiple Sectors”, Rebecca Henderson and Richard G. Newell look at lessons from the histories of innovation in other industries and implications for the energy industry.   The introduction says: “Taken together the histories point to three key factors as critical to accelerating innovation: (1) well funded, carefully managed public research that is tightly linked to the private sector; (2) rapidly growing demand; and (3) antitrust, intellectual property and standards policies that together promote vigorous competition and the entry of new firms.”

How many people would ‘demand’ electric vehicles at a high price, just out of the goodness of their hearts?  Or would that demand depend on the existence of a policy that raises the price of burning fossil fuels?

The President noted that when Sputnik was launched, NASA did not exist.  Yet, the Department of Energy has existed for many years, and America’s energy policy is still unclear and uncertain.

In Writing this Blog, I Have a Conflict of Interest

Filed Under (Environmental Policy, Finance, Health Care, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 14, 2011

In his documentary movie about the financial crisis called “Inside Job”, and in his article in “The Chronicle of Higher Education,” Charles Ferguson talks about “the hugely damaging conflicts of interest of the senior academic economists who move among universities, government, and banking.”   Indeed, he says that these conflicts of interest are “what is wrong with economics, with academe, and indeed with the American economy.”

Before going any further, let me note that I am a senior academic economist, and I am a former Deputy Assistant Secretary of the U.S. Treasury (for Tax Analysis).  I’m mostly interested in trying to do good research, and trying to help make good economic policy that will increase general economic well-being.  For this reason, I do very little if any consulting, and I’m not on any corporate boards.  However, I will NOT claim to have no conflicts of interest.

Indeed, that’s the point.  We ALL have conflicts of interest.  When a student asks me a question, I may respond “please work it out on your own.”  But we have no way to know how much of that response is intended to save me the time and effort of explaining, or to help the student learn the material.  It’s both.  But the student will certainly remember it better by active problem solving than by passive listening. 

I do have my own political views, and I don’t doubt that some of them seep into my economics research.  It would be incredibly naïve to think that such research is void of personal biases.  All we can do is try to state findings as objectively as possible, and let others pick it apart or use their own models and data to find competing results.  Then we’ll discuss it!

Thus, I think Ferguson is beyond hyperbole when he says that this “revolving door … is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.”   Scandal?   Really?   A scandal is something previously kept hidden.   Did anybody not know that academic economists often take a leave-of-absence to work for the government, or that they often do consulting for business?  It’s really not news when he says: “Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby.”

That is not to say his article has no validity, however.  Despite the hyperbole, his points are basically right, and it’s worthwhile to remind readers and the public to be aware of potential conflicts of interest.  Indeed, you should already be aware of HIS conflict of interest: he is writing a somewhat sensationalized story, in order to draw attention to himself and his movie, in hopes you’ll pay money to see it.  He’s not wrong to do that; it’s just an inherent and unavoidable conflict of interest.

To be clear, I’m not trying to claim that all is right with academia.  Much more relevant and bothersome is when professors don’t disclose specific financial conflicts of interest.  That part of Ferguson’s story may point to potential scandals that somebody is trying to hide.  That’s the part of the story that Ferguson should have focused upon.  And yet, if professors are not revealing financial conflicts of interest, then that’s the part of the story most difficult to document.

Ferguson’s overstatements may induce some to dismiss his story, and not hear the important and correct point he makes. It’s not wrong to have conflicts of interest; it’s wrong not to disclose them.

I would hope to think that most professors do routinely reveal financial conflicts of interest, and that we can use their resulting research to learn something useful – as I said above:  “let others pick it apart or use their own models and data to find competing results.  Then we’ll discuss it!”

As long as it is revealed, we can USE inherent conflict of interest to help students learn about how to interpret such results. Consider the following two published articles in refereed academic journals about the costs of the oil spill from the Exxon Valdez in 1989:

Hausman, Jerry A., Gregory K. Leonard, and Daniel McFadden (1995), “A Utility-Consistent, Combined Discrete Choice and Count Data Model: Assessing Recreational Use Losses Due to Natural Resource Damage,” Journal of Public Economics 56: 1-30. 

Carson, Richard T., Robert C. Mitchell, Michael Hanemann, Raymond J. Kopp, Stanley Presser, and Paul A. Ruud (2003), “Contingent Valuation and Lost Passive Use: Damages from the Exxon Valdez Oil Spill,” Environmental and Resource Economics 25: 257-86

Hausman et al find that the cost is about $3 million.  That’s a lot of money, if it arrived in my own personal bank account.  But that’s million, with an “m”.  Carson et al find that the cost is about $3 billion.  That’s billion with a “b”.  Is somebody joking here?  No, and in fact, they both are correct!  They are just measuring different things.  Hausman et al measure the lost “use” values of the few thousand Alaskans who will not be able to use that area for recreational hunting, fishing, hiking, and boating.  In contrast, Carson et al measure the lost “NON-use” values of 300,000,000 Americans who likely never visit Alaska but who nonetheless feel badly for the damaged ecosystem and wildlife, and who would be willing to help pay for protection of that natural environment.

The example is an opportunity to teach students about how properly to interpret academic research and to understand the different perspectives of different researchers.  And although it shouldn’t really surprise anybody, here are the quotes from those two papers’ acknowledgement footnotes, with proper revelation of financial interests:

Hausman et al, finding that the cost is $3 million: “This paper reports on research funded by Exxon Company, USA. It should not be interpreted as representing the views of any parties other than the authors.”

Carson et al, finding that the cost is $3 billion:  “The State of Alaska provided funding for this study. … All opinions expressed in this paper are those of the authors and should not be attributed to the State of Alaska, the Alfred P. Sloan Foundation, or the authors’ home institutions. The authors bear sole responsibility for any errors or omissions.”

Cost-Benefit, Not in Dollars, But in Lives

Filed Under (Health Care, Other Topics, U.S. Fiscal Policy) by Don Fullerton on Dec 31, 2010

Many non-economists complain that economists care only about money.   Not true.  I care a lot about money, but that’s not ALL I care about!  For a case in point, consider the proposal of the National Highway Traffic Safety Administration (NHTSA) that would require rearview back-up cameras by 2014 on all new cars, pickups and SUVs.  An article here says “The rule was demanded by legislation passed in 2007, called Cameron Gulbransen Kids Transportation Safety Act. The act was named after a 2-year-old boy who was killed, when his father accidentally backed over him in the family’s driveway.”   Yikes!

No warm-blooded human being could possibly oppose such a rule!  The article says that rule would save about 100 lives per year!  Don’t even LOOK at the cost, right?  It would certainly seem hard-hearted to oppose such a rule, no matter the cost, when human life is at stake.  We don’t want to trade off lives against dollars.   You might not even care to know that “the addition of rear-view camera equipment would cost between $159 to $203 per car” so that the “total approximate cost to equip their estimate of 16.6 million vehicles sold in 2014, would be between $1.9 billion and $2.7 billion.”

On the other hand, we can’t go passing legislation with no consideration for cost whatever.   Plenty of traffic fatalities could be avoided by spending more on guardrails, or by widening dangerous roadways, or adding traffic lights, or spending more on patrol cars to catch speeders and drunken drivers.  Why aren’t we spending THAT money?

The fact is we DO make such tradeoffs, when we DON’T spend all that money on all those life saving measures.  YOU make those choices, when you vote, or when you fail to write your Member of Congress.  It’s not just economists.

The stumbling block seems to be not the tradeoff of lives for money, which we all do through our legislators.  Rather, perhaps, the stumbling block is just the effort of economists to make that tradeoff explicit.   Personally, I do think we ought to be explicit in how we analyze and vote for such policy measures.  But that explicit tradeoff does not need to be in dollars at all!

Instead, consider the tradeoff JUST in lives lost.  Compare policies directly to each other (as in the paper by Kip Viscusi in the Journal of Economic Perspectives in the Summer of 1996).    For the $2 billion per year, we could save 100 lives, which is $20 million per life.  Is that worthwhile?  Write your legislator!  It is not up to economists to make that trade.  

But here is a thought to consider before you vote or write your Legislator.  Transportation specialists can list a lot of possible proposals to save lives, some of which are not that expensive.  The real tradeoff is not whether to spend $2 billion to save 100 lives, but rather, where to spend our $2 billion – on this proposal to save 100 lives, or on some other proposal that would save 200 lives!

Let’s at least look at all those traffic safety measures.  Guardrails in the right locations might be cheap per life saved.  Improving certain intersections might be cheap per life saved.  Let’s look at everything!  Viscusi mentions other kinds of safety expenditures as well, like emergency floor lighting, unvented space heaters, industrial benzene emissions, and seat cushion flammability.

Resources are inherently limited.  We can’t spend infinite amounts.  Even YOU might not agree to spend $2 billion on back-up cameras to save 100 lives, if that meant not spending $2 billion on something else that would save 200 or more lives per year.

Green Business: The Case of the Nissan Leaf

Filed Under (Environmental Policy) by Dan Karney on Oct 4, 2010

Water drips ominously from an icicle…

A glacier menacingly cleaves into the sea…

A lonely polar bear floats on a solitary iceberg…

Soft but eerily urgent music plays in the background…

No, this is not a trailer for the sequel to Al Gore’s “An Inconvenient Truth”, but the beginning of a television commercial for the Nissan Leaf (seen here).  Eventually, the camera focuses on a man and his new Leaf, where the polar bear – whom the viewers follow throughout the advertisement – hugs the man.  The announcer proclaims, “The 100% electric Nissan Leaf.  Innovation for the planet.  Innovation for all.”

Indeed, the Nissan Leaf is scheduled to be the first mass produced all-electric, plug-in vehicle sold in the United States starting in December 2010.  With an MRSP of $32,780, the Leaf is relatively expensive for its size, performance characteristics, and Nissan brand.  Federal tax credits for electric vehicles offset some of the high cost, but buyers will still pay a premium for the Leaf.  In exchange for the purchase price premium, the Leaf offers a reduction in the fuel cost per mile driven.  And, yes, the Leaf does burn “fuel” in the form of electricity purchased from the grid.

Another reason for the Leaf’s price premium comes from its green credentials.  Clearly, Nissan’s “polar bear” advertisement is meant to play-up the car’s greenness.  However, the electricity used to charge the Leaf creates pollution too, so the true green credentials of the Leaf takes some analysis.  Since the commercial implies that the Leaf reduced greenhouse gases, I limit my analysis of “greenness” to carbon dioxide (CO2) emissions.

To begin, I calculate the CO2(kg)/mile of a new conventional passenger car.  According to government agencies, the average new passenger car gets 31 miles/gallon and each gallon of gasoline combusted emits 8.86 CO2(kg).  Doing the division yields 0.295 CO2(kg)/mile.

Next, calculating the CO2(kg)/mile for the Leaf is a bit trickier and requires some assumptions.  First, I assume that coal-fired power plants meet all the MARGINAL demand for electricity due to charging the Leaf.  This is approximately true in all regions of the country during off-peak hours.  Second, I assume a heat rate of 10,500 for coal plants.  Third, I take Nissan’s word that the Leaf has a 100 range from a full 24kwh battery charge.  (Critics point out that the effective range of the Leaf might be quite less under certain weather and driving conditions.)

Using these assumptions, along with the CO2 emission factor of coal combustion, I find that the Leaf gets 0.238 CO2(kg)/mile.  This represents a 20% improvement over a conventional new car.  Thus, the Leaf is not an “emission free” vehicle, but potentially provides modest gains in the rate of CO2 emissions per mile driven.

However, the Leaf may not reduce total CO2 emissions for (at least) two reasons.  First, the cheaper per mile operating cost of the Leaf could lead to more driving, and thus more emissions.  This phenomenon is often referred to as the “rebound effect”.  Second, due to the limited range of the Leaf (only 100 miles), a second car might be purchased to fulfill the transportation needs of some consumers.  That is, the introduction of electric cars could increase the total number of cars, all else equal, and recall that all cars are manufactured from emission intensive inputs like steel, aluminum, and plastics.

In the end, Nissan is a profit-maximizing firm responsible to its shareholders.  Running their “polar bear” commercial to boost sales must be seen by the company as a way to increase profits, regardless if the Leaf is really green or not.