Vacation Blog

Filed Under (Environmental Policy) by Don Fullerton on Aug 6, 2011

Carbon Dioxide Causes Global Warming of Climatologists

Dateline: August 6, 2011, Champaign, Illinois

Researchers at the University of Illinois have discovered new environmental damages from the burning of fossil fuel with resulting emissions of carbon dioxide (CO2) and other Greenhouse Gases (GHG).  In particular, when these anthropogenic emissions accumulate in the atmosphere and react with sunlight, they may cause climatologists to become hotter and hotter.  So far, this effect has only been observed experimentally in the laboratory, but these experiments confirm the theory among atmospheric chemists that continuation of such emissions for several decades is bound to result not only in global warming of these climatologists and other environmentalists, but also extreme behavioral events similar to hurricanes, floods, and droughts.  

The next key step of this research program, at the University, is to increase data collection quickly, in order to try to ascertain whether the recent aberrations in climatologists’  behavior is within the normal statistical variations or may in fact already by caused by the existing increases in atmospheric levels of greenhouse gases.  The stronger hypothesis, yet to be tested, is that the increased concentrations of these gasses in the atmosphere is not just predicted globally to cause agitation and warming of these environmental scientists, but that it is already having such effects.  Already, certain climatologists have experienced high blood pressure, increased internal temperatures above 98.6 degrees Fahrenheit, and occasional apoplectic seizures.  These extreme behavioral events could be occurring naturally, however, so the hypothesis is not yet proven that these events can be attributed to anthropogenic greenhouse gas concentrations in the atmosphere.  More research is required, and researchers at the University of Illinois are applying to the National Science Foundation for that research funding, which may require millions of dollars.

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.

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.

Have a policy you really want enacted (or not)? There’s a VSL for that!

Filed Under (Environmental Policy, Health Care, U.S. Fiscal Policy) by Nolan Miller on Mar 9, 2011

Last year, my colleague Don Fullerton blogged about the tradeoffs between dollars and lives saved inherent in doing public policy.  The short version: we don’t have unlimited resources.  Potential government policies differ in the cost of saving a life. We should look for the policies that save the most lives at the lowest cost.

Today, I want to discuss a slightly different take on this problem that was raised in a recent New York Times article.  The article approaches the problem from the other direction.  Namely, how much should we be willing to spend to save one life?  This question is critical for deciding whether or not a particular policy should be enacted.  For example, consider a new workplace regulation that would increase safety.  If the regulations cost $10 billion and save 100 lives, then it spends $10 million to save one life.  Government agencies take this number and compare it to a benchmark “value of a statistical life” (VSL) to decide whether the policy should be enacted.  So, if the VSL is $5 million, the policy that spends $10 million to save a life should not be implemented.  If the FSL is $15 million, it should.

This is an approach to policy making that makes a lot of sense and has been increasingly adopted in recent years.  So, what’s the problem?  Well, suppose you have a vested interest in passing a policy (or not), irrespective of the costs.  An easy way to do this while still ostensibly adopting the cost-benefit approach is to simply adjust the VSL.  If you have a policy that spends $7 million to save a life, then you need to adopt a VSL greater than $7 million in order to enact the policy.  If you don’t want the policy to be enacted, adopt a VSL less than $7 million.  In the end, we have ideology thinly masked by science, or at least math.

The Times article has a number of examples of such changes.  In particular, they discuss how the VSL used by various agencies has increased between the Bush and Obama administrations.  For example, the George W. Bush administration’s EPA put the VSL at $5 million, while the Obama EPA puts it at $9.1 million.  The result?  More EPA regulations on things like air pollution.  The Bush FDA had a VSL of $5 million, while the Obama FDA uses a value of $7.9 million.  Again, the result is more regulation.

Now, the consistently higher VSLs adopted by the current administration could be consistent with a number of stories.  In particular, they are consistent with causality running in either direction.  Either Democrats put more value on statistical lives saved and so they advocate bigger government, or they advocate bigger government and so they choose a bigger VSL in order to justify it.  Further, the same argument could be made about the Bush administration.  Perhaps the small government Republicans used a VSL that was too low to justify laissez faire policies.  (The article quotes Kip Viscusi, a leading academic thinker on the VSL as saying that he thought “agencies have been using numbers that I thought were just too low.”  Viscusi advocates a VSL around $8.7 million.)

Changes in the VSL can change policies,  as the article illustrates:

“It looks like they just cooked the books — they just doubled the numbers,” said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, a trade group for the trucking industry, which faces higher costs under some of the Transportation Department’s new rules. The Bush administration rejected a plan in 2005 to make car companies double the roof strength of new vehicles, which it estimated might prevent 135 deaths in rollover accidents each year.

 At the time, Transportation officials figured that the cost of the roofs would exceed the value of lives saved by almost $800 million. So the agency proposed a smaller increase in roof strength that might save 44 lives a year.

Last year, the Obama administration imposed the stricter and more expensive roof-strength standard, and it published a new set of calculations showing that the benefits outstripped the costs.

Most of the difference came from the increased value of human life. By raising that number to $6.1 million from a figure of $3.5 million in the original study, the Obama administration rendered those 135 lives — and hundreds of averted injuries — more valuable than the roofs.

In addition to problems related to changing the VSL in order to advocate a particular policy position, there are further inefficiencies raised by the fact that different government agencies are using different VSL numbers to guide policy.  So, if FDA places the VSL at $8 million and the EPA puts it at $9 million, then we may find that EPA is spending money to save lives that would save more lives if routed through EPA for environmental projects instead.

So, why not set uniform standard?  It comes back to policy advocacy (note: OMB policy quoted here  was enacted in 2004 and continues to be in effect.  So, it is bipartisan):

The Office of Management and Budget told agencies in 2004 that they should pick a number between $1 million and $10 million. That guidance remains in effect, although the office has more recently warned agencies that it would be difficult to justify the use of numbers under $5 million, two administration officials said.

Close observers of the process point to two reasons for the variation in numbers. First, they say that setting a single standard is not worth the high-stakes battle that would be required with advocates on both sides. The Obama administration, like its predecessors, has preferred to deal with the issue informally, on an agency-by-agency basis.

Second, they say the lack of a standard preserves flexibility.

Flexibility, yes.  Consistency and efficiency … not so much.

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.

Without Climate Legislation, We Might Get More Regulations!

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

On Tuesday October 19, the Center for Business and Public Policy (CBPP) presented a panel of experts on “Environmental Regulation: Building a Low-Carbon Economy.”  It was sponsored by the College of Business and the MBA Program with financial support from State Farm.  This blog may help tie our virtual audience to activities at the “brick and mortar” University, with a few reflections of my own.

Climate legislation recently failed in this Congress, so the U.S. will not soon adopt any cap-and-trade policy.  To provide incentives for Congress to act, however, the Obama Administration had said that otherwise the EPA will act to reduce carbon emissions using other forms of regulation under the Clean Air Act.   The key question here is what can or should be done without climate legislation.  The Panel members were asked to discuss the future of energy use, its role in creating a low carbon economy, and what future energy policies and regulations will be needed.

The first speaker was William A. Von Hoene Jr., the Exelon Corporation’s Executive Vice President for Finance and Legal.  Exelon has 17 nuclear reactors at ten locations, as well as other plants powered by hydro, wind, solar, landfill gas, and fossil fuels.  Their electricity is relatively low in carbon emissions, with 5.4 million customers primarily in Illinois and Pennsylvania.  They favor carbon pricing because it reduces overall abatement costs relative to a patchwork of tax credits for certain technologies and mandates such as “renewable portfolio standards.”   Those policies might not target the cheapest form of abatement, whereas a carbon tax or cap and trade price would provide clear and crisp signals to reduce emissions in any of the cheapest ways.  He also talked about their “Exelon 2020” business strategy of greening their operations, helping customers reduce emissions, and producing more low-emission electricity.

A problem, of course, is that none of these other technologies are very cheap.  Protections for nuclear power may prevent any new plant, and the U.S. has no long term storage plans anyway.  Other renewable options like wind or solar are not cost-effective unless the cost of coal-fired electricity is raised by a carbon dioxide tax of more than $30 per ton.

The second speaker was Mark Brownstein, Deputy Director of the Energy Program for the Environmental Defense Fund.  He talked first about “what went wrong” with climate legislation in Congress.  Divisions were not just by party but by region, since the President’s plans were offset by a coalition of Republicans and coal-state Democrats.  The recession also added to perceptions that markets don’t work, which spills over to carbon permit markets.  He also talked about “what’s next”, including renewed effort to put climate legislation back on track, with eyes on state action and EPA regulations.   Finally, he discussed “what’s the focus” at EDF.  Besides continued discussion of climate policy and EPA, they are interested in energy market reform.  For example, smart grid technology that links various electricity markets can allow more people to buy power from areas that have newer and cleaner production.

The third speaker was Jon Anda, UBS Securities’ Vice Chairman and Head of Environmental Markets.  He also extolled the virtues of carbon pricing, because it would encourage new technology that could help the U.S. compete internationally.  It would “decarbonize” production at the least cost, minimize leakage, and realize various “co-benefits” (reductions in other pollutants).   In particular, he pointed out that a carbon permit system should not apply to utilities only, because reduced emissions among utilities would be offset by increased emissions elsewhere (“leakage”).  It needs to cover all use of all fossil fuels. 

For example, carbon pricing for utilities only would raise the price of electricity, but that could discourage the use of electric vehicles.  Carbon pricing also needs to apply to gasoline, for drivers to make the right tradeoffs between whether to buy an electric car or a fuel-efficient gasoline car.

Pensions: Not a Pretty Picture

Filed Under (Uncategorized) by Keven Waspi on Jun 25, 2010

While all eyes were on the public flogging of Tony Hayward on June 17, you may have overlooked something.  A small story in the Wall Street journal titled, “Pension Bombs Need Spotlight”.  It’s the Governmental Accounting Standards Board ”Preliminary Views on Potential Improvements to Pension Standards”.   When you couple this with the excellent article, “Pension Roulette?” by Alexandra Harris at Northwestern’s Medill School of Journalism (a MUST READ) you’ll be able to paint a not so pretty picture. 

First brush stroke; watch the state’s lobbyists try to keep GASB from requiring these changes, for as the first paragraph of the public notice states in part, “The purpose of the document is to obtain comments from constituents on those views before developing more detailed proposals for changes to existing accounting and financial reporting standards”

 Second brush stroke; watch so many exceptions get into the final standards that it becomes (like most financial regulation) a burden for those who play by the rules and a gaping hole that lets the largest violators flow right through. 

Third brush stroke; the State of Illinois’ financial statements become too embarrassing for even S&P, Moody’s, Fitch, et.al.to maintain the current rating.