Of cap and trade

Brad DeLong thinks about the real world differences between carbon taxes and cap and trade. He clearly has in mind the caps that are in some way subsidized: given away or sold at below market clearing prices.


While carbon taxes and cap and trade ARE theoretically identical if the caps are auctioned by government, they have vastly different equity (but not efficiency) properties when given way. Economists need to be very clear about this.

I would say that to first order cap-and-trade and carbon taxes are the same,
that there are five first-order[second-order?] differences:

Cap-and-trade involves less redistribution because the losses of the
losers are partially offset by their initial awards of tradeable permits.

Cap-and-trade runs the risk that the cap will be set at the wrong place and
so the price will go damagingly above its social optimum value.

Carbon taxes run the risk that the tax will be set too low and so the quantity
emitted will go damagingly above its social optimum value.

Carbon taxes have the advantage that the government gets money that it can use for
good--either to cut existing taxes that have large deadweight losses or to
expand underfunded programs that have large social benefits.

Carbon taxes have the disadvantage that the government gets money that it can use
for ill, and that the recipients and beneficiaries of that ill-used money will then dig in and defend their rent-seeking gains beyond death itself.

and that there are two third-order
differences:

It's easier to get not-too-bright Republicans to vote against something that is actually in their long-run interest if you can demagogue it by calling it a tax.
It's easier to get not-too-bright Democrats to vote for something that actually is not in their long-run interest if you can demagogue it by claiming that it's just a restriction on the behavior
of corporations and not something that directly impacts people.

I don't have a dog in this fight: I think second- and third-order pluses and minuses roughly
offset each other. But the substantive case for action seems very clear--and the
fact that oil has risen above $100 a barrel without killing the economy just
makes it more painful to think of what a hideous waste of opportunity our
failure to take Al Gore's advice back in 1993 and put on a carbon tax that
IIRC was going to max out at $10/barrel...

Chasing your tail

Today's NYT piece on water use in southern Spain points out the problem with many backstops: they are themselves reliant to some degree on the primary resource.

The hundreds of thousands of wells — most of them illegal — that have in
the past provided a temporary reprieve from thirst have depleted underground
water to the point of no return. Water from northern Spain that was once
transferred here has also slowed to a trickle, as wetter northern provinces are
drying up, too.

This suggests that whether modeling alternative energy resources, or water
backstops, a degree of endogeneity is called for. As an example, the cost of
photovoltaics might be given by:

where k, a, and b are constants, N is the installed capacity (learning by doing assumed), t is time (proxy for technical change) and p is the price of oil (because of embedded energy use in manufacturing and installation of PV systems).

Sustainable campus design

A pretty picture ... wonder how it might work in practice.

Get serious: make gas free!

ECON 340/ENVA 300: Final Exam notes

Here's everything remaining about the end of the semester:

The properly formatted document is on the public folders.

1. Final Exam is in the ARC: Sat., May 10, 8:30 – 10:30am
OR Mon., May 12, 11:00 – 1:00pm

2. There is an in-class part of the final exam, and a take home portion (see opposite side). The take home portion must be presented when you take the in-class exam, and must be submitted to Bb before that time. (50 points total)
3. In-Class final exam: closed book, but do bring a calculator. (50 points total).
4. Office hours: Tues, May 6, 3:30 - 5:00 pm
Wed., May 7, noon - 2pm (Econ Barbecue!!), and then until 3pm.
Thursday, May 8, 1pm - 2:30 pm
Friday, May 9, 10:00 - 11:45 am
========================
Review questions: The final is all about using specific economic and scientific knowledge you’ve gained in the course (or elsewhere). In particular, your job is to separate sense from nonsense, and explain the difference. I will ask questions about the following:

A lead article for Earth Day in the local Times Union (April 21, 2008, p. C1) states:
By 2069, if greenhouse gas emissions continue at the current rate, New York’s climate will resemble Georgia’s.... Even if New York is successful at reining in its emissions by switching to clean technologies, we can still expect gradual warming that will make the weather here similar to Virginia’s ....

The April 28, 2008 issue of Time is labeled a "Special Environment Issue" and the lead article is "How to Win the War on Global Warming." Here is the key excerpt:
The steady deterioration of the very climate of our very planet is becoming a war of the first order, and by any measure, the U.S. is losing. Indeed, if we're fighting at all—and by most accounts, we're not—we're fighting on the wrong side. The U.S. produces nearly a quarter of the world's greenhouse gases each year and has stubbornly made it clear that it doesn't intend to do a whole lot about it....
The rub is, if the vast majority of people increasingly agree that climate change is a global emergency, there's far less consensus on how to fix it..... Money will get us part of the way there, but what's needed most is will.... No one yet has a comprehensive plan for how we could do so again, but everyone agrees on what the biggest parts of the plan would be. Here's our blueprint for how America can fight—and win—the war on global warming.
First, Price the Sky
The most important part of a blueprint to contain climate change is to put a charge on carbon emissions. As long as the sky is free, renewable energy will never beat fossil fuels. But put a price on carbon, and suddenly the alternatives look a lot better. The most feasible way to do this is through a cap-and-trade system .... The effect is that overall carbon levels fall, and there is even money to be made by being greener than the next guy.
National Geographic has a special issue out titled "Changing Climate." The Table of Contents lists the three major articles: Signs of Change
The Science is In, and
Solutions.
Here’s the description of "Solutions":
From wind farms to solar farms, electric cars to light-emitting diodes, the latest green revolution has already begun, what communities are doing to cut their collective emissions, and why a carbon-neutral world might just be healthier, happier, and more profitable for all.

And, a calculation like this: A new wastewater reclamation plant in Orange County (near Los Angeles) has just been completed. Here are the benefits and costs of running it this year and each of the next four years. Should it be operated?
Benefits: $10 million each year.
Costs: $ 8, 9, 10, 11, and $15 million in year’s 0, 1, 2, 3, and 4, respectively.
Evaluate using a 5% discount rate.
==========================================================
Final Exam: Take home part
The work presented must be entirely your own, and submitted to Blackboard before you take the in-class final. The hard copy of your responses are due at the in-class final exam. Please omit exam questions in your file, as it complicates checking for the originality of your writing.

There have been heated discussions regarding eliminating much of the existing tax on gasoline for the summer "driving season." Evaluate a proposal to reduce gas taxes by 50 cents per gallon for three months, clearly distinguishing equity and efficiency impacts.
Use the technical economic concepts from the course, using appropriate language and organization. Most good responses will include appropriate graphs. You may consult written material on the current controversy, but it must be fully and appropriately cited.

List the benefits and costs from one class project, in a manner consistent with what we learned about benefits and costs in class. Clearly identify the author and subject matter.
(a) Define strong sustainability.
(b) Identify a project which evaluates impacts through the perspective of strong sustainability. Explain how this strong sustainability relates (or should relate) to the author’s evaluation of their policy alternative.

4. (a) Define weak sustainability.
(b) Identify a project which evaluates impacts through the perspective of weak sustainability. Explain how this weak sustainability relates (or should relate) to the author’s evaluation of their policy alternative.

The Park is closed (1st edition)

Foiled. I just wanted to walk on the Hudson.

Away from the traffic.

But one of my favorite agencies, NYSOPRHP, thinks I shouldn't do this after work. CLOSED

Happily, I found a better place. Or open at least.

And this is supposed to be a developed country we live in.

ECON 340/ENVA 300: Exam 2 Review

Exam 2 Review

The exam will be closed book, but do bring a calculator. There will be lots of emphasis on DOING the various examples we've worked on in class. The exam focuses on material since the first exam: see both the original and revised course outline for specifics.
Here is my outline for the exam:
1. Climate footprint: work through a problem on how a change in behavior changes carbon emissions.
2. Why do environmental problems occur? Use the idea of externalities.
3. Discount a stream of future benefits.
4. Complete a simple benefit cost example.
5. Summarize the basic conclusion of the Stern Review of Climate, "mainstream" conclusions in the economics literature on addressing climate change, and Weitzman's critique of the Stern Review.
6. Outline Lomborg's basic argument and rhetorical approach (McKibben helps understand this) that we should not commit to costly policies to reduce climate impacts, at least at this time.
7. Illustrate the idea of increasing abatement costs on a graph.
8. What does the equimarginal principle mean? Illustrate on a graph.
9. What is the basic idea of an emission standard?
10. What is the basic idea of how pollution taxes work?
11. How does cap and trade work?
12. Which policy is not consistent with the equimarginal principle? Consequence?
13. Show behavior under each of these policies given a numerical example (i.e. given an abatement cost schedule for two firms.)
14. Show consequences: cost-effectiveness/efficiency and equity.
15. What do weak and strong sustainability mean? Implications for climate?

ECON 300/ENVA 340

(from OECD Glossary of Statistical Terms)

Weak Sustainability

All forms of capital are more or less substitutes for one another; no regard has to be given to the composition of the stock of capital. Weak sustainability allows for the depletion or degradation of natural resources, so long as such depletion is offset by increases in the stocks of other forms of capital (for example, by investing royalties from depleting mineral reserves in factories).

Strong Sustainability

All forms of capital must be maintained intact independent of one another. The implicit assumption is that different forms of capital are mainly complementary; that is, all forms are generally necessary for any form to be of value. Produced capital used in harvesting and processing timber, for example, is of no value in the absence of stocks of timber to harvest. Only by maintaining both natural and produced capital stocks intact can non-declining income be assured.


Source Publication:
United Nations, European Commission, International Monetary Fund, Organisation for Economic Co-operation and Development, World Bank, 2005, Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003, Studies in Methods, Series F, No.61, Rev.1, Glossary, United Nations, New York, para. 1.27.

The cost of ethanol

More on ethanol from the Freakonomics blog. Bottom line if you read the Technology Review article: if oil is $100/barrel, your government's mandate to produce ethanol will cost you 42 cents per gallon of ethanol. But if oil prices fall to $40/barrel the cost to you rises to a whopping dollar a gallon.

Why? Well one way to get a handle on this is to ask what corn is grown for in this country. The Technology Review article reports that current ethanol mandates will require that about 45% of all corn acreage go to fuel, not food by 2015. Think about the consquences of that! (Or of already using 22% of corn acreage for ethanol.)

(The underlying study on all of this is by Wallace Tyner, an agricultural economist at Purdue University.)

ECON 300/ENVA 340: Link to McKibben

Here is the link to McKibben's review (and others) of Lomborg's Cool It! For Tuesday, March 11 you should provide an analysis of three specific points made by McKibben, using the relevant sections of Lomborg. (Double the usual credit - 10 points).

ECON 340/ENVA 300: Discounting problems for March 6 (edit - now Thursday)

I know you have a ton of midterms coming up, but we need to get some practice and understanding of discounting. Please complete and hand in the following in class Tuesday:

1. Using r=4%, find the PV of $100 received
a. 5 years from now.
b. 10 years from now.
c. 20 years from now.
d. 50 years from now.
e. 100 years from now.

2. Repeat 1, using r=1%

3. Graph PV of the $100 vs. time using your answers from (1) and then from (2). This should be done either using graph paper, or a graphing program such as that in Excel. You should show two curves: the first shows how PV declines with a discount rate of 4%, and the second how it declines with a discount rate of 1%.

4. The best explanation I can find on the discount rate(s) used in the influential Stern Review is in its set of FAQS . Go to these and:

a. In section 8 what specifically does it say about the rate(s) used to discount future costs of climate change to the present? Read very carefully and be very precise in you answer.

b. Using other sections of the FAQS, what temperature change does the Stern Review use in estimating damages, and how large are the damages it estimates from climate change?

Just shut up about the virtues of walking ...

Oh dear. Should Dr B stop touting the obvious good of walking rather than driving all over the Siena campus? (Neglecting of course the frostbite we'll all work to avoid over the next few frigid days.) Now we here from John Tierney , based on Chris Goodall, the author of “How to Live A Low-Carbon Life.” :

If you walk 1.5 miles ... and replace those calories by drinking about a cup of
milk, the greenhouse emissions connected with that milk (like methane from the
dairy farm and carbon dioxide from the delivery truck) are just about equal to
the emissions from a typical car making the same trip. And if there were two of
you making the trip, then the car would definitely be the more planet-friendly
way to go.

And paper versus plastic?

How much reduction, if any, in greenhouse emission would result from banning
plastic grocery bags or forcing stores to recycle them? (The New York City
Council recently passed a bill requiring stores to recycle them.) To come up
with a good number, you’d have to consider what happens to the bags in a
landfill (is the carbon sequestered there, the way it is with old newspapers,
and does the landfill recapture any methane that escapes? You ‘d also have to
consider how much energy, both human and non-human, is expended in recycling the plastic bags or switching to alternatives. I can’t promise these numbers would
matter to the opponents of plastic bags — this sounds to me more like a moral
crusade — but it’d be good to have them.

Indiana does Daylight Savings Time

Question: does DST save energy? Check out Marginal Revolution, which pointed me to a summary of one answer -- from the natural experiment as most of Indiana recently chose to truly side with Eastern Time by including its DST variant.

More on ethanol: No free lunch

Why ethanol? You won't find the answer by adding up either the energy or the economic costs. The latest, via the rarely censored Paul Krugman.

No free lunch? Courtesty of Bloomberg: "U.S. plans to replace 15 percent of gasoline consumption with crop-based fuels including ethanol are already leading to some unintended consequences as food prices and fertilizer costs increase."

1. Use S/D to explain the fertilizer cost increase.

2. Show the consequence in the market for things we eat.

(To start class on Tueday, Feb. 26).

What does the ethanol industry say? Again from Bloomberg,
Bob Dinneen, president of the Renewable Fuels Association in Washington
... whose organization represents ethanol producers including Archer
Daniels Midland Co. "I don't think we have to choose."

Roll back scarcity. Must not exist anymore.

ECON 340/ENVA 300 - Lomborg's "Cool It"

Reading questions on Chs. 1&2 of Bjorn Lomborg's new book Cool It. Due in class Tuesday, Feb. 26. Keep it short, but be VERY specific and focused on the reading.

1. Who says climate change is important? (Just list.)

2. What three things does Lomborg say the "polar bear story" teaches us? Which are basically about scientific claims, and which is about policy?

3. Does Lomborg accept that global warming is "real" and the result of human actions? What does he identify as the best source for information on climate change?

4. What does Lomborg believe should be the fundamental goal of policy, and what does that lead him to say we should address now?

5. Does Lomborg believe that heat waves are an indicator of global warming? Explain.

6. Expalin Lomborg's argument on the effect on European mortality of future global warming.

7. A benefit cost summary is provided for a program to cool the urban Los Angeles area. Look in the notes to find the source for these cost and benefit estimates. (Can you guess what a major cost is which is not included? Hint: this is an area in which I work.)

8. Is the Kyoto agreement itself important for climate? Explain.

For discussion: take a three sentence stab, max, at each of these.

9. Is Lomborg's basic approach to policy consistent with basic economic principles?

10. On page 29 Lomborg gets specific about a carbon tax. What does his "one dollar tax" on CO2 mean in terms of things you and I buy? Does the final paragraph make sense: $1 CO2 tax costs $11 billion, $30 CO2 tax costs $7 trillion?

When traditions aren't green ...

from the Albany Times Union, February 15, 2008

Warming issue makes campus tradition less cool
Saint Rose debates if annual toilet paper prank is defensible in green era

By MARC PARRY, Staff writer
ALBANY -- The toilet paper flies at midnight.

It starts with a countdown. By the time this Halloween ritual is over, hundreds of students have unleashed 30 cases of toilet paper at a College of Saint Rose tree.
"It's quite exhilarating," said sophomore Schuyler Bull, 19, the student association president. "Gets your heart going."
This year, though, students and administrators at the Albany college are debating whether to clean up their "TP the Tree" tradition.
It's an offbeat indication of how colleges are re-examining the environmental impact of their campus activities, even cherished routines of undergraduate rowdiness....
============

So what might the impacts actually be? Well, a case of toilet paper appears to be 96 rolls, and costs about $1 per roll.

==============

Here's what we find in Siena's Environmental Economics class:

Oil prices top $100/barrel

See http://krugman.blogs.nytimes.com/2008/02/19/feeling-a-bit-peaked/ .

ECON 340/ENVA 300: Reading on biofuels

Read the following on the GHG impacts of U.S. ethanol production for Thursday, Feb. 21:

Start with an abstract in the periodical Science::

http://www.sciencemag.org/cgi/content/abstract/1151861

Now read this summary from the New York Times:


February 8, 2008
Studies Call Biofuels a Greenhouse Threat
By ELISABETH ROSENTHAL
Almost all biofuels used today cause more greenhouse gas emissions than conventional fuels if the full emissions costs of producing these ''green'' fuels are taken into account, two studies published Thursday have concluded.
The benefits of biofuels have come under increasing attack in recent months, as scientists took a closer look at the global environmental cost of their production. These latest studies, published only by the journal Science, are likely to add to the controversy. These studies for the first time take a detailed, comprehensive look at the emissions effects of the huge amount of natural land that is being converted to cropland globally to support biofuel development.
The destruction of natural ecosystems -- whether rain forests in the tropics or grasslands in South America -- not only releases greenhouse gases into the atmosphere when they are burned and plowed, but also deprives the planet of natural sponges to absorb carbon emissions. Cropland also absorbs far less carbon than the rain forests or even scrubland that it replaces.
Together the two studies offer sweeping conclusions: It does not matter if it is rain forest or scrubland that is cleared, the greenhouse gas contribution is significant. More important, they discovered that, globally, the production of almost all biofuels resulted, directly or indirectly, intentionally or not, in new land's being cleared for food or fuel.
''When you take this into account, most of the biofuel that people are using or planning to use would probably increase greenhouse gases substantially,'' said Timothy Searchinger, lead author of one of the studies and a researcher in environment and economics at Princeton.
These plant-based fuels were originally promoted as better than fossil fuels because the carbon released when they were burned was balanced by the carbon absorbed when the plants grew. But even that equation proved overly simplistic because the process of turning plants into fuels causes its own emissions -- for refining and transportation, for example.
The clearance of grassland releases 93 times the amount of greenhouse gas that would be saved by the fuel made annually on that land, said Joseph Fargione, lead author of the second paper, and a scientist at the Nature Conservancy. ''So for the next 93 years you're making climate change worse, just at the time when we need to be bringing down carbon emissions.''
In the wake of the new studies, 10 eminent United States' ecologists and environmental biologists on Thursday sent a letter to President Bush and the speaker of the House, Nancy Pelosi, urging a reform of biofuel policies. ''We write to call your attention to recent research indicating that many anticipated biofuels will actually exacerbate global warming,'' the letter said.
The European Union and a number of European countries have recently tried to address the land-use issue with proposals stipulating that imported biofuels cannot come from land that was previously rain forest.
But even with such restrictions in place, Dr. Searchinger's study shows, the purchase of biofuels in Europe and the United States leads indirectly to the destruction of natural habitats far afield.
For instance, if vegetable oil prices go up globally, as they have because of increased demand for biofuel crops, more new land is inevitably cleared as farmers in developing countries try to get in on the profits. So crops from old plantations go to Europe for biofuels, while new fields are cleared to feed people at home.
Likewise, Dr. Fargione said that the dedication of so much cropland in the United States to growing corn for bioethanol had caused indirect land use changes far away, for instance, by increasing pressure on Brazil to meet soybean demand. ''Brazilian farmers are planting more of the world's soybeans -- and they're deforesting the Amazon to do it,'' Dr. Fargione said.
Industry groups, like the Renewable Fuels Association, immediately attacked the new studies as ''simplistic.''
''Biofuels like ethanol are the only tool readily available that can begin to address the challenges of energy security and environmental protection,'' said Bob Dineen, the group's director, in a statement after Science released the reports.
But the papers suggested that, if land use is taken into account, biofuels may not provide all the benefits once anticipated.
Dr. Searchinger said the only possible exception he could see for now was sugar cane grown in Brazil, which take relatively little energy to grow and is readily refined into fuel. He added that governments should focus on developing biofuels that did not require cropping, such as those from agricultural waste products. ''This land-use problem is not just a secondary effect -- it was often just a footnote in prior papers,'' Dr. Searchinger said. ''It is major.''
Copyright 2008 The New York Times Company


We will start class with a brief quiz on the material.

Extra material of interest: many academics and others find the "mainstream media" such as the New York Times to be an increasingly poor source of news and analysis. The right weblogs are starting to take over in terms of accuracy and representation of key viewpoints. (This is neither a liberal or conservative comment -- it's primarily about quality.) Compare the NYT article above, for example, this one at WiredScience. Here we learn about key assumptions (particularly growth in crop yields), and work by other, competing research groups. Interestingly, neither mentions the subsidies , mandates (that's command and control), and tariffs which are the reason we produce ethanol in the first place!

Wednesday office hours (Feb. 13)

EDIT: CANDIDATE INTERVIEW HAS BEEN POSTPONED BECAUSE OF SNOW.

Office hours for this Wed. only:

EDIT: 1:30pm - 4:30pm
7:00pm - 8:30pm (added due to Thursday exam)

EDIT: WHEN THE VISIT IS RESCHEDULED, I look forward to seeing you at the candidate's lunch (President's Room, 12:30pm) -- and perhaps also at her research presentation.

ECON 340/ENVA 300: Consumer diary - continued

Starting today, Tuesday, choose one of the areas from your earlier diary in which you might consider reducing your environmental impacts.

Keep a diary through next Monday for this single consumption item.

For Tuesday, Feb. 19, hand in a writeup which includes:

1. Your original consumption diary.
2. Your second diary for just a single item.
3. A calulation of your environmental impact for this single item "before" and "after" you considered the specific impacts of this consumption, using a single impact measure (e.g. water pollution.) Use Table A.5 .
4. An estimate of what proportional change in your total environmental impact you were able to make. (Use Table A-4, and the same impact category as earlier -- e.g. water pollution.)

I will also have you present, using the chalk board, your "before" and "after" calculation in class on either Feb. 19 or Feb. 21. Your presentation day will be scheduled on a signup sheet in class.

ECON 340/ENVA 300: Reading questions for Feb. 4

Reading questions for Tuesday Feb. 4:

Because we are not sure if the course packet will be available, I am using a substitute reading for our look at energy.

We will start from Chapter 7 from the Stern Review Report on the Economics of Climate Change, Cambridge University Press, 2006; see http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm

This is a major and influential report which we will review later in the semester -- for what it says about economics and climate change. For now, we'll look at what it says about energy use.

Questions:

1. Section 7.2:
a. What does CO2 equivalent mean?
b. What proportion of CO2 equivalent emissions are CO2 itself?
c. What does the "power" sector in Figure 7.1 include?
d. How important are cars, worldwide, for GHG (greenhouse gas) emissions? (see Fig. B)
e. Fig. 7.2: estimate the ratio of world CO2 emissions 100 years ago to 50 years ago to today.

2. Section 7.3:
a. Use the primary equation to interpret what is meant by the term "energy intensity."
b. What countries is the U.S. similar to in energy intensity? Rather different from?
c. Use Table 7.2 to explain why U.S. emissions of CO2 are increasing.
d. In what key ways has the EU experience of the past two decades differed fromt the U.S.?

3. Section 7.6:
a. Does Lord Stern's report conclude that oil shortages and soaring prices will have a significant impact on CO2 emissions? Explain.
b. What is an estimate for the price elasticity of energy demand?

2.

ECON 340/ENVA 300: Consumer diary

Over the next week you will be keeping a very simple diary of selected purchases and consumption choices made each day. This diary should cover January 29 - February 5.

Transportation (list miles travelled by each mode: car,bus, foot, etc.)

Major electronics use (# hours turned on: TV, computer, dorm fridge, other?)

Other utility use (minutes in hot shower, # loads of laundry; include just you, not roommates)

Food (servings of beef & pork, poultry, dairy, fruit.)

Set up your diary in a form which is easy to fill out each day, and which will cover a full week. Once the diaries are complete we will be estimating a variety of impacts. Bring yours to class Thursday, Jan. 30, along with any questions.

ECON 340/ENVA 300: IPCC FAQ Summaries

In your group prepare a brief (5-8 minute) presentation/discussion of the aspect climate change science, together with a one page handout for the class, which you chose in class on Jan. 24.You may rely exclusively on the IPCC "FAQ" for your group, which you can find at
http://www.gcrio.org/ipcc/ar4/wg1/faq/index.htm .

You may post questions about the assignment on the blog.

ECON 340/ENVA 300

This question will get us started using the blog, and is also meant to give just a little incentive to start thinking about the natural world in which you live. Provide a one paragraph answer, as a comment to this post, before our next class period; links are welcomed and encouraged. I will scroll through the comments during class.

I gave an example in class today of one way in which the environment provides value to me. In what very specific way does one aspect of the environment provide value to you?