Tag Archives: environmental economics

Analyses of California’s extended cap and trade program


I believe that California’s passage of the extended cap and trade program was a generally good compromise. Most importantly, it decoupled the cap and trade market from separate legislation to regulate local emission impacts. As I wrote earlier, earlier proposals failed on this aspect.

Here’s the two best analyses I’ve seen so far, one legal and the other economic (by a former Michigan classmate), of the legislation.

A response to Environmental and Urban Economics on impact of climate change on counties


I follow Matthew Kahn, now at USC, post on June 30 about the how the “Lucas Critique” undermines a recent study forecasting how counties across the U.S. might be affected differentially by climate change. Quoting the New Palgrave Economic Dictionary, “The ‘Lucas critique’ is a criticism of econometric policy evaluation procedures that fail to recognize that optimal decision rules of economic agents vary systematically with changes in policy.” In other words, individuals within the economy are able to anticipate changing events, including government decisions, and can mitigate the impacts of those events when compared to continuing with the status quo. Kahn puts great faith in the Chicago School premise that individuals can readily adapt to all conditions without government or collective decisions.

However, Kahn ignores two important points. First, he misses the distributional focus of the study, and instead focuses on the overall efficiency gains from the net changes. That’s not the point of the study. We can see on example that land can’t be moved from one county to another, so landowners can’t adapt in anticipation of climate change without significant investment to protect their land. Homeowners will lose value in their homes, and others will find their asset value stranded. Sure, the overall economy will adapt and certain counties may gain enough to offset those losses, but residents within the net loss counties will be worse off. Economics for too long has focused solely on net gains without parsing the impacts and considering how to manage better outcomes for the losers. (I see this failure as one aspect of dissatisfaction driving Trump voters–which brings me to my second point.)

And second, if the Lucas Critique was truly valid, coal miners in Appalachia would have long abandoned their towns as they saw the decline of coal, and the need to satisfy West Virginia coal miners would not be driving national policy today. Instead, we see that people are myopic and these changes are likely to have significant consequences.



Creative Pie Slicing To Address Climate Policy Opposition | Energy Institute at Haas

Severin Borenstein’s post raises an important issue that economists have ignore for too long. I posted the following comment there:

We gave politicians the tool of benefit-cost analysis which they have used to justify their policy objectives, but we completely failed to drive home the requirement that those parties who are on the losing end need to be compensated as well. I looked in my edition of Ned Gramlich’s book on Benefit-Cost Analysis (who taught my course), and the word “compensation” is not even in the index! Working on environmental regulations, I regularly see agency staff derive large positive ratios for the “general public” and then completely dismiss the concerns of particular groups that will be carrying all the burdens of delivering those benefits. If we’re going to teach benefit-cost analysis, we need to emphasize the “cost” side as much as the “benefit” that politicians love to extol.

Source: Creative Pie Slicing To Address Climate Policy Opposition |

Repost: Learn Liberty | Blame outdated rights for California’s water woes.

A good explanation of how regulation differs from litigation, and how California’s water rights differ from other systems.

Source: Learn Liberty | Blame outdated rights for California’s water woes.

Using tariffs to achieve valid goals


President-elect Trump has called for imposing significant tariffs to “bring back jobs to America.” Unfortunately, this will be a fool’s errand. The Smoot-Hawley Tariffs in 1930 were imposed to “save” farming jobs, but instead exacerbated the Great Depression as shown in the chart above. There’s no valid reason to think tariffs will work any better this time around.

Yet, there are a set of valid reasons to impose tariffs, that in a roundabout way could lead to job growth in the U.S. These tariffs could be useful tools to pursue other policy goals by forcing other nations to play on a level field with U.S. industries. The tariffs could be adjusted downward as those countries adopt policies in line with those in the U.S. The World Trade Organization (WTO) allows these types of tariffs if properly designed. Just trying to save jobs doesn’t count, but achieving valid policy goals does.

The policy areas where using flexible tariffs could be fruitful include:

  • environmental and climate change
  • labor and employment
  • product standards

Tariffs to encourage nations to comply with global greenhouse gas reduction goals is one type of environmentally oriented use. Since U.S. companies comply with a wide range of environmental regulations, many of which are intended to preserve natural habitat that has worldwide value, asking other countries to do the same seems to be a valid request. Those nations can ignore those standards if they choose, but U.S. businesses should be allowed to compete as though imported products have incurred similar compliance costs.

Similarly, the U.S. has a wide range of labor employment, workplace and safety standards. Ensuring the well being of those outside of the U.S. if we’re going to buy those products is similarly valid.

Product standards is a third area. Many U.S. products last longer and perform better because they meet stricter standards. The increased longevity of automobiles is largely a byproduct of the increased stringency of emission standards that require engine performance meet those standards for at least 100,000 miles. Improved standards also can lead to reduced waste and increased productivity.

But to justify these tariffs will require that American corporations fully support the application of these standards within the U.S. Whether they can be persuaded to the advantages remains to be seen.

Four articles on uncertainty and unconventional economics

From the current issue of American Economics Review:

Robust Social Decisions: We propose and operationalize normative principles to guide social decisions when individuals potentially have imprecise and heterogeneous beliefs, in addition to conflicting tastes or interests. To do so, we adapt the standard Pareto principle to those preference comparisons that are robust to belief imprecision and characterize social preferences that respect this robust principle. [This paper focused on decisions related to climate change.]

Beyond GDP? Welfare across Countries and Time: We propose a summary statistic for the economic well-being of people in a country. Our measure incorporates consumption, leisure, mortality, and inequality, first for a narrow set of countries using detailed micro data, and then more broadly using multi-country datasets. While welfare is highly correlated with GDP per capita, deviations are often large. Western Europe looks considerably closer to the United States, emerging Asia has not caught up as much, and many developing countries are further behind. Each component we introduce plays a significant role in accounting for these differences, with mortality being most important.

(W)hat proportion of consumption in the United States, given the US values of leisure, mortality, and inequality, would deliver the same expected utility as the values in France? In our results, lower mortality, lower inequality, and higher leisure each add roughly 10 percentage points to French welfare in terms of equivalent consumption. Rather than looking like 60 percent of the US value, as it does based solely in consumption, France ends up with consumption-equivalent welfare equal to 92 percent of that in the United States.

A summary:

(i) GDP per person is an informative indicator of welfare across a broad range of countries: the two measures have a correlation of 0.98. Nevertheless, there are economically important differences between GDP per person and consumption-equivalent welfare. Across our 13 countries, the median deviation is around 35 percent—so disparities like we see in France are quite common.

(ii) Average Western European living standards appear much closer to those in the United States (around 85 percent for welfare versus 67 percent for income) when we take into account Europe’s longer life expectancy, additional leisure time, and lower inequality.

(iii) Most developing countries—including much of sub-Saharan Africa, Latin America, southern Asia, and China—are substantially poorer than incomes suggest because of a combination of shorter lives and extreme inequality. Lower life expectancy reduces welfare by 15 to 50 percent in the developing countries we examine. Combined with the previous finding, the upshot is that, across countries, welfare inequality appears even greater than income inequality.

(iv) Growth rates are typically revised upward, with welfare growth averaging 3.1 percent between the 1980s and the mid-2000s versus income growth of 2.1 percent. A boost from rising life expectancy of more than a percentage point shows up throughout the world, with the notable exception of sub-Saharan Africa. When welfare grows 3 percent instead of 2 percent per year, living standards double in 24 years instead of 36 years; over a century, this leads to a 20-fold increase rather than a 7-fold increase.

Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View:  A common view is that bailouts of firms by governments are needed to cure inefficiencies in private markets. We propose an alternative view: even when private markets are efficient, costly bankruptcies will occur and benevolent governments without commitment will
bail out firms to avoid bankruptcy costs. Bailouts then introduce inefficiencies where none had existed. Although granting the government orderly resolution powers which allow it to rewrite private contracts improves on bailout outcomes, regulating leverage and taxing size is needed to achieve the relevant constrained efficient outcome, the sustainably efficient outcome.

Long-Run Risk Is the Worst-Case Scenario: We study an investor who is unsure of the dynamics of the economy. Not only are parameters unknown, but the investor does not even know what order model to estimate. She estimates her consumption process nonparametrically…and prices assets using a pessimistic model that minimizes lifetime utility subject to a constraint on statistical plausibility…[A] way of interpreting our results is that they say that what people fear most, and what makes them averse to investing in equities, is that growth rates or asset returns are going to be persistently lower over the rest of their lives than they have been on average in the past.




Where Should All the Coal Miners Go? – Pacific Standard

An interesting discussion about the failures and lessons for broad scale retraining programs.

My own thought is that we need to buy out the homes of displaced workers at the higher of either their purchase cost or the assessed value to facilitate moving to a new job location.

Source: Where Should All the Coal Miners Go? – Pacific Standard