What is “Sustainability”?

Filed Under (Environmental Policy, Finance, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on May 4, 2012

My own research area is environmental and natural resource economics, which others often call “sustainability”.  That’s actually embarrassing, because I don’t know what it means.  For a renewable resource like timber, it seems pretty easy:  you just plant trees, let them grow, cut them down, and then plant trees again.  For a nonrenewable resource like oil, it’s impossible: once a barrel of oil is consumed, it’s gone forever.  The only way to make oil “sustainable” is not to use it, which does not make any sense, because oil has no value at all if it can’t be used.

So, sustainability is either obvious or impossible.  The concept seems to be of no use whatever.  So I turn to people smarter than me, to get some answers.  By “smarter than me”, in this case, I mean (1.) Nobel-Prize winning economist Robert Solow, and (2.) whoever writes for Wikipedia.

Way back in 1991, Robert Solow wrote “Sustainability: An Economist’s Perspective”, in which he says:  “It is very hard to be against sustainability. In fact, the less you know about it, the better it sounds.”   He says he has seen various definitions, but they all turn out to be vague.  So his essay is an attempt to make it more precise.  “Pretty clearly the notion of sustainability is about … a moral obligation that we are supposed to have for future generations.”   But you can’t be morally obligated to do something that is not feasible!  He notes UNESCO’s definition:  “… every generation should leave water, air, and soil resources as pure and unpolluted as when it came on earth.”   But taken literally, that injunction “would mean to make no use of mineral resources; it would mean to do no permanent construction, … build no roads, build no dams, build no piers.”  That is neither feasible nor desirable!

Instead, he suggests that sustainability might be both feasible and desirable if it is defined as “an obligation to conduct ourselves so that we leave to the future the option or the capacity to be as well off as we are.”   In the final analysis, what that means is that we don’t necessarily have to leave all the oil in the ground, if we leave something else of equal or greater value, some other investment that can be used by future generations to produce and consume as we do, and which they can leave to other generations after them.  It is a holistic concept, both simple and operational.  We only need to add the value of all assets, subtract all liabilities, and make sure that the net wealth we bequeath is not less than we inherited. 

We can use oil, but we should not simultaneously be running huge government budget deficits that reduce the net wealth left to our children and their children.  The measure of “net wealth” should include the value of ecosystems, fresh water supplies, biodiversity, and oil, as well as productive farmland, infrastructure, machinery, and other productive assets.   All those values are extremely difficult to measure, but at least the concept is clear.

Has that message been adopted since 1991?  It certainly does not seem to be part of the thinking of the U.S. Congress and the rest of our political system.   What are they using for guidance?

Wikipedia says  “Sustainability is the capacity to endure. For humans, sustainability is the long-term maintenance of responsibility, which has environmental, economic, and social dimensions, and encompasses the concept of stewardship, the responsible management of resource use.”  Okay, well, that’s still pretty vague, by Solow’s standards.  Let’s see if they make it more specific: “In ecology, sustainability describes how biological systems remain diverse and productive over time, a necessary precondition for the well-being of humans and other organisms. Long-lived and healthy wetlands and forests are examples of sustainable biological systems.”

I’m sorry, that kind of specificity does not make it more operational.   They haven’t read Solow.  In fact, the whole entry seems to read like it is intended to maximize the number of times it can link to other Wikipedia entries!

“Moving towards sustainability is also a social challenge that entails, among other factors, international and national law, urban planning and transport, local and individual lifestyles and ethical consumerism. Ways of living more sustainably can take many forms from controlling living conditions (e.g., ecovillages, eco-municipalities and sustainable cities), to reappraising work practices (e.g., using permaculture, green building, sustainable agriculture), or developing new technologies that reduce the consumption of resources.”

Actually, the only phrase in the whole entry that really struck me was “more sustainably.”  Now, I REALLY do not know that THAT means.  Our current trajectory is either sustainable, or it’s not!  If future generations can live forever, how can they live longer than that?  And if not, well, …

Negative Leakage

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Apr 20, 2012

What is that, a gastrointestinal disorder?   No, it’s the title of one of my recent research papers  (joint with Dan Karney and Kathy Baylis) about unilateral efforts to reduce emissions of greenhouse gases (GHG).   When worldwide agreement is not possible, then the question is whether GHG abatement policy might be implemented by only one country, or bloc of countries (or region or sector).   The fear of any one country or bloc is that they would only raise their own cost of production, make themselves less competitive, and lose business to firms in other countries that may increase production and emissions.  When only one country limits their emissions, any positive effect on emissions elsewhere is called “leakage”.

Yes, that’s a word in economics, see http://en.wikipedia.org/wiki/Leakage .

In efforts to “abate” or to reduce GHG emissions, the fear of lost business has pretty much deterred any attempt at unilateral climate policy.  That positive leakage might be called a “terms of trade effect” (TTE), because unilateral policy raises the price of exports and reduces the price of imports.   But our recent research paper points out a major effect that could offset part of that positive leakage.  The “negative leakage” term in the equation might be called an “abatement resource effect” (ARE).   That is, one additional thing happening is that the domestic firms face higher costs of their emissions, and so they want to substitute away from GHG emissions and instead use other resources for abatement – such as windmills, solar cells, energy efficient machinery, hybrids, electric cars, and even “carbon capture and sequestration” (CCS).  Thus they have at least SOME incentive to draw resources AWAY from other sectors or other countries.  If that effect is large, the result might shrink those other sectors’ operations overall, and thus possibly SHRINK emissions elsewhere.

I don’t mean to oversell this idea, because it probably does not completely offset the usual  positive “terms of trade effect”.  But in some circumstances it COULD be large, and it COULD result in net negative leakage.  The best example is probably to think about a tax or permit price for carbon emissions only in the electricity generating sector, within one country.  For simplicity, suppose there’s no trade with any other countries, so the only choice for consumers in this country is how much to spend on “electricity” and how much to spend on “all other goods”.   Demand for electricity is usually thought to be inelastic, which means consumers buy almost the same amount even as the price rises.  If firms need to produce almost as much electricity, while substantially reducing their GHG emissions, they must invest a lot of labor AND capital into windmills, solar panels, and CCS.  With any given total number of workers and investment dollars in the economy, then fewer resources are used to produce “all other goods”.

The ability of consumers to substitute between the two goods (electricity vs “all other”) is called the “elasticity of substitution in utility.”  The ability of firms to substitute between GHG emissions and those OTHER inputs is called the “elasticity of substitution in production”.  If the former is bigger than the latter, then net leakage is positive.  If the latter is bigger than the former, then net leakage can be negative.

Okay, too technical.  But the point is that other researchers have missed this “abatement resource effect” and overstated the likely positive effect on leakage.  And that omission has led to overstated fears about the bad effects of unilateral carbon policy.  What we show is that those fears are overstated, in some cases, where leakage may not be that bad.  With some concentration on those favorable cases, one country might be able to undertake some good for the world without fear that they just lose business to other sectors.

Expensive Houses for Low-Income Families?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 3, 2012

A recent NY Times has an article about SOL Austin, an acronym for Solutions Oriented Living.  This housing development is interesting for at least two reasons.  First, the designs and materials are intended to be “sustainable” (whatever that means), but also “net zero” (which I gather means that it will produce all the energy consumed).  The houses have solar panels and geothermal wells.

Second, however, it is interesting because it is in east Austin, the low-income part of town.  In fact, a 1928 “city plan” decided that east Austin would be “designated African-American”.  The 1962 construction of Interstate I-35 further divided east from west.  The relatively flat east side of Austin had all the industrial blight, pollution, and low-income housing.  In fact, it was quite cheap!  The hilly west side of Austin had the fancy new upscale houses with views of the Hill Country.

One would think that the intellectual-academic, left-leaning, high-income households of west Austin might be more interested in sustainable housing that could go “off the grid.”  Why then are these developers building super-energy-efficient houses in east Austin?

Well, for one thing, the 2010 census showed a 40% increase in east Austin’s white population and a drop in minority population.  In correlated fashion, land prices in east Austin have risen considerably.  In fact, a different article in the NY Times tells about a study based on the 2010 census finding that all residential segregation in U.S. cities has fallen significantly.  Cities are more racially integrated than at any time since 1910.  It finds that all-white enclaves “are effectively extinct”.  Black urban ghettos are shrinking. “An influx of immigrants and the gentrification of black neighborhoods contributed to the change, the study said, but suburbanization by blacks was even more instrumental.”

Since I’m visiting here in Austin, Texas, it is easy enough to go see the new development.  As you can see in the snapshot below, the houses have a modern box-like style.  They range from 1,000 to 1,800 square feet.  That explains the article’s reference to “matchbox” houses.    But the roofs are sloped enough to hold photovoltaic arrays and to channel rainwater into barrels.  

The developers said they wanted to “examine sustainability on a more holistic level, that would not just look at green buildings, but in our interest in affordability, in the economic and social components of sustainability as well.”  As stated in the NY Times article, the developers “hammered out a plan with … the nonprofit Guadalupe Neighborhood Development Corporation, to sell 16 of the 40 homes to the organization.  The group, in turn, sold eight of the houses at a subsidized rate to low-income buyers (who typically were able to buy a house valued at more than $200,000 for half price).”  Each of those 16 subsidized homes has a photovoltaic array on the roof, though not necessarily large enough to produce all of the needed power for the house.

Of the “market-rate” houses, all sold at prices in the low $200,000’s.  Eleven have been sold, and thirteen have yet to be built.  Because of the financial and housing crisis, however, the “holistic” development ideas have not worked perfectly.  Homeowners got rebates from Austin Energy and tax credits from the federal government. So far, however, only four market-rate house owners paid the extra $24,000 for photovoltaic arrays substantial enough to fully power a house.  Only one is also heated and cooled by a geothermal well.  But they all have thermally efficient windows, foam insulation, and Energy Star appliances.

So far, only one couple paid to install the geothermal well and the extra energy monitoring system:  a systems engineer and a microbiologist.  So, “sustainability” in low-income neighborhoods might still require some gentrification.

The WSJ is “Wrong”: The U.S. is NOT a Net Exporter of Petroleum

Filed Under (Environmental Policy, Finance, Other Topics, U.S. Fiscal Policy) by Don Fullerton on Dec 2, 2011

Just a couple days ago, the Wall Street Journal reported that “U.S. exports of gasoline, diesel and other oil-based fuels are soaring, putting the nation on track to be a net exporter of petroleum products in 2011 for the first time in 62 years.”  Taken literally, this fact is strictly “correct”, but it is misleading.  It is therefore very poor reporting.  The authors either don’t understand the words they use, or they are deliberately trying to mislead readers.

The reason it is misleading is because the article implies the U.S. is headed toward “energy independence”, and that implication is wrong.  It goes on to say:  “As recently as 2005, the U.S. imported nearly 900 million barrels more of petroleum products than it exported.  Since then the deficit has been steadily shrinking until finally disappearing last fall, and analysts say the country will not lose its ‘net exporter’ tag anytime soon.”  That statement and several expert quotes in the article clearly imply the U.S. is headed toward “energy independence”.   

Strictly speaking, the WSJ is correct that the U.S. exports more “petroleum products” than it imports, … but “petroleum products” do not include crude oil!!  “Petroleum products” include only refined products like gasoline, diesel fuel, or jet fuel.  The implication is only that the U.S. has a large refinery capacity!

The U.S. is a huge net importer of crude oil, and a huge net importer of all “crude oil and petroleum products” taken together, as you can see from the chart  below (provided by the U.S. Energy Information Administration).   In other words, we import boatloads of crude oil, we refine it, and then we export slightly more refined petroleum products than we import of refined petroleum products.  Big deal.

If the WSJ reporters knew what they were talking about, or if they were not trying to mislead readers, then they should have just stated that the U.S. is a huge net importer of all “crude oil and petroleum products” taken together.  They didn’t.  That is why I conclude they do not understand the point, or that they are trying to misrepresent it. Neither conclusion is good for the Wall Street Journal.

They are simply wrong when they say:  “The reversal raises the prospect of the U.S. becoming a major provider of various types of energy to the rest of the world, a status that was once virtually unthinkable.”  Just look at the figure!


To Reduce Energy Use, Buy an 8-cylinder 1980 Bonneville!

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Nov 4, 2011

My green choice is to get about 12 miles to the gallon.  Here is why it’s so green.

Some people think it’s obvious that I ought to buy a hybrid or other fuel-efficient vehicle.  But that’s just wrong.  Certainly some drivers should have a hybrid car to reduce emissions and energy use, namely somebody like my brother who has an hour commute each day, driving 20,000 or more miles per year.   But not everybody.   Take for example a person like me who lives near work, rides a bicycle, and doesn’t like spending hours in the car – even for a road trip to the Grand Canyon or Yosemite.  I use the car once a week for the grocery store, or a restaurant, driving less than 5,000 miles per year.

Let’s suppose a hybrid gets 50 miles per gallon, so my 5,000 miles per year would cost about 100 gallons ($300 per year).   The standard non-hybrid gets 25 miles per gallon, which would cost twice as much ($600 per year).  I’d save $300 per year in the hybrid.  But that doesn’t mean I should buy a hybrid.  A new hybrid like a Toyota Prius costs about $6,000 extra to get that great fuel-efficiency (about $26,000 instead of $20,000).    In other words, it would take twenty years for my $300-per-year savings to make up for the extra $6,000.  It’s not worthwhile for me.  If my brother drives four times as much, however, he could break even in just five years.

So far, that means I should not buy a hybrid.  Does that mean I buy the normal new car with 25 mpg for $20,000?  No!  I should buy a beaten old 8-cylinder Bonneville, which looks like a tank and gets only half the mileage!  That Bonneville may be headed for the junk heap, so it’s certainly cheaper, even if I have to pay more for gas.

But even ignoring the price of the Bonneville, I claim that the fuel-use of the Bonneville is less than the fuel use of the normal new car!  Why?  Consider the emissions from fuel used in production.  The fuel used to make the Bonneville back in 1980 is a “sunk cost”, a done deal that does not change whether that car gets junked now or later.  In other words, keeping that Bonneville off the junk heap requires no extra fuel and emissions to produce it.  But buying a new car does involve more fuel and emissions just to produce it.  Think about all the emissions from the steel mill, the tire factory, the glass furnace, and the electric generating plant that provides power for the tools and machinery to make the new car.

In other words, I can reduce total fuel use and emissions much more if I purchase the 1980 Bonneville and drive it 5,000 miles per year, than if I buy a new car with twice the mpg.  Now all I need is a bumper sticker for my 1980 Bonneville to say how green I really am!


A Global Problem with No Solution

Filed Under (Environmental Policy, Finance, U.S. Fiscal Policy) by Don Fullerton on Sep 25, 2011

If one town’s water pollution flows into another town, the two towns can negotiate a solution with no need for the state to intervene.  But if all towns are polluting all neighboring towns, the lines of communication are too complex to negotiate – requiring the state to pass a law to solve the problem.

If one state’s water pollution flows into another state, the two states can negotiate a solution with no need for Federal intervention.  But if all states are polluting all neighboring states, the lines of communication are too complex to negotiate – and it takes a national government to solve the problem.

In other words, those problems have solutions.  If one nation’s water pollution flows into another nation, then (potentially, at least) the two nations can negotiate a solution with no need for a global government to intervene.  But if all nations are polluting all neighboring nations, the lines of communication are too complex to negotiate – and no global government exists to solve the problem.

I’m currently pessimistic about two of the worst problems the world has faced: global climate change, and global financial contagion.  Both are “externalities” in the classic sense.  Each nation’s greenhouse gas emissions pollute the whole world, and the only really effective solution is a worldwide global agreement to reduce emissions.  In fact, we don’t really “need” all nations to reduce emissions; all we really need is an agreement among all nations saying that if SOME countries reduce emissions then the other countries won’t increase emissions to steal their business.  But the lines of communication are too complex to negotiate – and no global government exists to solve the problem.

Environmental policy is my usual bailiwick.  At the moment, however, I’m even more worried about global financial contagion.  It seems that one small country can have lax financial regulations that allow banks or investment companies to take on too much risk.  Or a small country can overspend, taking on too much debt.  In the olden days, that country could go down in flames, with no big problem for the rest of the world.  With tremendously increased globalization, however, all financial markets are highly integrated.  One country’s borrowing may come from any or all other countries of the world, and one nation’s problem become the world’s problem.  If banks in other countries loan to that small country, then a financial crisis in that small country may create fear about the financial well-being of the banks that lent to them, causing a run on the banks in all those other countries.  Moreover, globalization means much more trade in commodities.  If one small country faces severe financial difficulties and must cut back all spending, that reduces aggregate demand worldwide, and can spread a recession worldwide.

A strong global government could rein in the poorly managed countries by requiring larger capital requirements, careful financial scrutiny, and only tax-financed spending.  But we don’t have any such global government.  As a result, even a small country like Greece can over-spend for years without oversight.  The situation in Greece may be made worse when banks in other countries raise the rate at which Greece can turn over its debt and borrow again, making the financial situation in Greece even worse.

The problem may be caused by Greece or not.  Regardless of “fault”, if Greece any small country were to go into default in years past, then the cost would be primarily on that small country.  Now Greece could go bankrupt and impose horrible costs on the entire World?!?

Green Taxes Part III: Potential Revenue for Illinois?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jul 15, 2011

In my last two blogs, I wrote about ways to meet the Illinois state revenue needs, ways that might work better than the increase in the income tax.  This blog continues the list of possible “green taxes”.  In general, a green tax applies either directly on pollution emissions or on goods whose use causes pollution.  For raising a given amount of revenue, the basic argument for green taxes can be summarized by the adage: “tax waste, not work”.   That is, a tax on pollution might have good effects on the environment, because it discourages pollution.  In contrast, an income tax discourages earning income.

In early January 2011, the State of Illinois enacted legislation to raise the personal income tax rate from 3% to 5% and to increase the corporate income rate from 4.8% to 7%.  Along with a cap on spending growth, these tax increases reduce the state’s projected budget deficit in 2011 by $3.8 billion (from $10.9 to $7.1 billion).  The governor justified the tax increases on the grounds that the State’s “fiscal house was burning” (Chicago Tribune, January 12, 2011).  In my piece with Dan Karney for a recent IGPA Forum, we don’t debate what caused the fiscal crisis in Illinois, nor argue the merits of cutting spending versus raising revenue.  Instead, we just take it as given that politicians decided to raise revenue as part of the solution to the State’s deficit.  Then we analyze the use of a few green taxes as alternative ways to raise revenue.

While many green taxes are possible, we focus on four examples that have the potential to raise large amounts of revenue: carbon pricing, gasoline taxes, trucking tolls, and garbage fees.  Indeed, as we show, a reasonable set of tax rates on these four items can generate as much revenue as the income tax increase.  We apply each hypothetical green tax directly to historical quantities of emissions (or polluting products) in order to obtain an approximate level of potential revenue generation. 

In a short series of blogs, one per week, we now discuss each of the four green taxes and their potential for revenue generation.  In past weeks we covered Carbon Pricing and Gasoline Taxes.  This week we cover Trucking Toll and Garbage Fees.

Every day hundreds of thousands of vehicles crowd Illinois’s roads and highways.   Data from the Federal Highway Administration indicates that over 50,000 trucks (six tires and over) cross into Illinois from neighboring states along the interstate highway system.  While these trucks bring needed goods to Illinois, they also congest the roads, degrade the road surfaces, and fill the air with soot.  They also become involved in vehicle accidents that cost the lives of many in Illinois.  To compensate the state, Illinois can impose a toll for long-haul trucks using Illinois’s highways.  For example, a $5 per truck toll on 50,000 trucks daily would raise almost $100 million annually.  (In comparison, the existing Illinois toll road system generates approximately $600 million annually.)  The truck toll can be implemented using existing transponder technology deployed at weigh stations along the interstate highways.  (As an aside, we note, the constitutionality of state trucking tolls is not clear, because the federal government determines the rules of interstate commerce; however, major portions of the existing interstate highway system are subject to tolls, including the heavily travelled I-95 corridor in Delaware. )

Next, residents of Illinois generate approximately 19 million tons of garbage per year (or more than one ton per person per year), and 60 percent of that waste ends up in landfills.  Currently, large municipal waste landfill operators currently pay state fees that total $2.22 per ton of solid waste dumped.  But few municipalities in Illinois charge fees designed to discourage the creation of waste by residents (Don Fullerton and Sarah M. Miller, 2010, “Waste and Recycling in Illinois,” Illinois Report 2010, pp.70-80). 

However, empirical evidence shows that taxing garbage at the residential level does reduce garbage production (Don Fullerton and Thomas C. Kinnaman, 1996, “Household Responses to Pricing Garbage by the Bag,” American Economic Review, 86, pp. 971-84).  Yet the exact garbage taxation mechanism varies by program.  For instance, a fee can be levied on garbage bags themselves or on the containers that hold the garbage bags.  Regardless, a tax rate equivalent to one penny per pound of garbage would generate almost $240 million in revenue per year, or 6.3% of the expected revenue from the income tax increase.

Finally, consider a Portfolio Approach.  Remember, at issue here is not whether to raise taxes.  We presume the State has decided to raise taxes by $3.8 billion (as done already through the income tax increase).  Here, we merely explore alternative ways to raise revenue other than through the income tax. 

Anyway, instead of implementing only one of the green taxes describe above, Illinois could choose to implement several green taxes simultaneously.   This portfolio approach would keep rates low for each individual green tax, but still generate large amounts of total revenue that can add up to a large share of the total expected revenue from the recent income tax hike.  According to the numbers in all three blogs, one simple and moderate plan would combine the following green taxes and pay for more than  half of the needed revenue:  A carbon tax of $10/ton would collect $1 billion (raising electricity prices by about 7.5%), a gas tax increase of 14 cents per gallon would collect $0.7 billion (raising gas prices by about 4.4%), a trucking toll of $5 would collect $100 million, and a garbage fee of one penny per pound would collect $240 million.  Then the recent income tax increase could be cut by more than half.

Moreover, green taxes have the added benefit that they provide incentives to reduce the polluting effects of carbon emissions, gasoline use, truck exhaust, and household garbage generation.

Green Taxes: Potential Revenue for Illinois?

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

In early January 2011, the State of Illinois enacted legislation to raise the personal income tax rate from 3% to 5% and to increase the corporate income rate from 4.8% to 7%.  Along with a cap on spending growth, these tax increases reduce the state’s projected budget deficit in 2011 by $3.8 billion (from $10.9 to $7.1 billion), according to the University of Illinois and their Institute of Government and Public Affairs (IGPA Fiscal Fallout #5).  The governor justified the tax increases on the grounds that the State’s “fiscal house was burning” (Chicago Tribune, January 12, 2011).  Dan Karney and I wrote a recent piece for the IGPA Forum, but we don’t debate the reasons for the underlying fiscal crisis in the State of Illinois, nor argue the merits of cutting spending versus raising revenue to balance the budget.  Instead, we just stipulate that politicians decided to raise revenue as part of the solution to the State’s deficit.  Then we analyze the use of “green taxes” as an alternate means of raising revenue that could mitigate or eliminate the need for increasing income taxes.

In general, green taxes are taxes either directly on pollution emissions or on goods whose use causes pollution.  In the revenue-raising context however, the basic argument for green taxes can be summarized by the adage: “tax waste, not work”.  That is, taxes on labor income discourages workers from engaging in productive activities and thus hurts society, while taxing waste discourages harmful pollution and thus benefits society.  In addition, the revenue raised from these green taxes can help the State’s fiscal crisis. 

While many green taxes could be implemented, we focus on four specific examples that have the potential to raise large amounts of revenue: carbon pricing, gasoline taxes, trucking tolls, and garbage fees.  Indeed, as we show, a reasonable set of tax rates on these four items can generate as much revenue as the income tax increase.  That is, imposing green taxes can completely fill the $3.8 billion difference between the projected baseline deficit ($10.9 billion) and the post-tax deficit ($7.1 billion). 

Yet we omit many other potentially high-revenue green taxes.  For example, the State could tax nitrogen-based fertilizers that contribute to nitrogen run-off pollution in streams, rivers, and lakes.  These omissions do not imply that other green taxes could not be implemented.  Also, the simple analysis does not include behavioral responses by consumers and businesses.  Rather, we apply hypothetical green taxes directly to historical quantities of emissions (or polluting products) in order to obtain an approximate level of potential revenue generation.  

In a short series of blogs, one per week, we now discuss each of the four green taxes and their potential for revenue generation.  This week: Carbon Pricing.

In 2008, electricity generators in the State of Illinois emitted almost 100 million metric tons of carbon dioxide (CO2) according to the U.S. Department of Energy’s Energy Information Agency (EIA).  See the State Historical Tables of their Estimated Emissions by State (EIA-767 and EIA-906).  While the United States has no nationwide price on carbon – neither a tax nor a cap-and-trade (permit) policy – some jurisdictions within the United States have imposed their own carbon policies.  For instance, a coalition of Northeastern states implemented the Regional Greenhouse Gas Initiative (RGGI) to limit CO2 emissions using a permit policy.  To date, RGGI’s modest effort has already generated close to $1 billion in revenue for the coalition states.

If Illinois were to adopt its own carbon pricing policy, then even a modest tax rate or permit price could raise significant revenue.  For instance, a $5 per metric ton CO2 price on emissions from electricity producers generates about $500 million in revenue (or 14.4% of the $3.8 billion raised from the state’s income tax hike).  By way of comparison, if the extra $500 million in emission taxes were entirely passed on to consumers in the form of higher electricity bills, then the average consumer’s bill would increase by 3.75%  (where $13.3 billion is spent annually on electricity in Illinois).

Table 1 reports the possible “revenue enhancement” from the $5 per metric ton tax, along with three other pricing scenarios.  Both the $5 and $10 rates are hypothetical prices created by the authors for expositional purposes.  In contrast, the $20 per metric ton price is approximately the carbon price faced by electricity producers in Europe’s Emission Trading System (ETS).  At the $20 rate, a carbon tax in Illinois generates almost $2 billion – over half of the tax revenue from the income tax increases.  Finally, the $40 tax rate (or carbon price) is from Richard S. J. Tol (2009), “The Economic Effects of Climate Change,” Journal of Economic Perspectives, 23(2): 29-51.  It is an estimate of the optimal carbon price that accounts for all of the negative effects from carbon emissions.  At this “optimal” price, the revenue from pricing carbon in Illinois by itself could replace the needed tax revenue from the State’s income tax increase.

Why the U.S. Should Want to Reduce Climate Damage to Other Nations

Filed Under (Environmental Policy) by Don Fullerton on Jun 10, 2011

The usual argument against unilateral U.S. effort to cut greenhouse gas emissions and reduce climate change is that we’d impose significant costs on ourselves, with most benefits going to other countries.   Thus, we should wait for an international agreement.  By the way, an international agreement is not going to happen.  Meanwhile we wait, which means more global warming, sea level rise, and increased extreme weather events like floods, droughts, and hurricanes.   That argument may also include the claim that U.S. agricultural productivity might increase from a little global warming, and the U.S. is rich enough to protect itself against sea level rise. 

According to that logic, we can’t worry too much about damages to other countries, as we can’t take care of the whole world by ourselves.

The problem with that logic is that those costs to other countries will unavoidably become costs on us!  Take two examples.  First, a Reuters article points out that “a third of Bangladesh’s coastline could be flooded if the sea rises one meter in the next 50 years, creating an additional 20 million Bangladeshis displaced from their homes and farms.”   Some large percentage of the nation could disappear under water.  And that’s only one such nation.  Global warming and sea level rise could displace hundreds of millions of poor people.  The U.S. will find itself unable to turn its back on such a disaster, for humanitarian reasons.  Moreover, the costs would come back to haunt us in other ways, through increased wars and other political disruptions of great danger to the U.S. itself.

A second example appears in a recent NY Times article about the effects of global warming on agricultural productivity.   It starts by describing terrific recent technological advances: “Forty years ago, a third of the population in the developing world was undernourished. By the tail end of the Green Revolution, in the mid-1990s, the share had fallen below 20 percent, and the absolute number of hungry people dipped below 800 million for the first time in modern history.”  But those technological advances have leveled off, while growing demands have reflected huge growth in worldwide population and incomes.  The resulting grain price spikes have contributed to the largest increases in world hunger in decades, perhaps 925 million last year (see screen-shot).

What is the role of human-induced climate change?  The level of carbon dioxide in the atmosphere has already increased by 40 percent since the Industrial Revolution.  We are on course to double or triple this level within a hundred years.  This climate change contributes to extreme weather events.  “Many of the failed harvests of the past decade were a consequence of weather disasters, like floods in the United States, drought in Australia and blistering heat waves in Europe and Russia. Scientists believe some, though not all, of those events were caused or worsened by human-induced global warming. …  In 2007 and 2008, with grain stockpiles low, prices doubled and in some cases tripled. Whole countries began hoarding food, and panic buying ensued in some markets, notably for rice. Food riots broke out in more than 30 countries.”

The world’s population was less than 3 billion in 1950.  It is now about 7 billion, and is expected to grow to 10 billion by the year 2100. “Unlike in the past, that demand must somehow be met on a planet where little new land is available for farming, where water supplies are tightening, where the temperature is rising, where the weather has become erratic and where the food system is already showing serious signs of instability.”

Suppose the U.S. is only to look out only for itself.  Forget altruism.  Forget unilateral efforts to save the world.  Wouldn’t we merely be protecting ourselves by doing something now to reduce worldwide political instability that could result from a hundred million refugees and famines of that magnitude?

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.