Kahn on green nudges and environmental ideology

I saw Matt Kahn present this paper at the POWER conference in Berkeley. It is not surprising, but is nevertheless interesting and previously unexplored. There are, as he notes, some important policy implications regarding targeting messages to recipients that are likely to motivate pro-social behavior. Slate has a column on the research here. Kahn provided this abstract of the paper on his blog:

"Nudges" are being widely promoted to encourage energy conservation. We show that while the electricity conservation “nudge” of providing feedback to households on own and peers’ home electricity usage works with liberals, it can backfire with conservatives. Our regression estimates predict that a Democratic household that pays for electricity from renewable sources, that donates to environmental groups, and that lives in a liberal neighborhood reduces its consumption by 3 percent in response to this nudge. A Republican household that does not pay for electricity from renewable sources and that does not donate to environmental groups increases its consumption by 1 percent.

The green jobs myth

Max Schulz writes in the Manhattan Institute's City Journal about the Obama administration's commitment to green jobs. Regrettably lacking in economic reasoning, he does credit Frederic Bastiat with debunking in the 1800s the notion that putting people to work is itself social welfare improving. This notion--that in times of recession and high unemployment we should employ people to dig holes and fill them in again--has been used to promote the green jobs agenda. But spending on green jobs will only improve welfare to the extent the green workers make stuff or provide services that are welfare enhancing. Digging holes and filling them back in doesn't contribute to social welfare.

If saving lives isn't the goal . . . ban DDT

My very first job working for my advising professor was writing a handbook chapter on the economics of pesticides. Lichtenberg and Zilberman proposed the "safety-rule approach" to pesticide policy determination that combines a probabilistic risk assessment model with a safety-rule decision mechanism. It yields estimates of the uncertainty-compensated trade-off between risk and social cost can be used for policy determinations that rely on formal decision criteria like benefit-cost or risk-benefit. In the context if this kind of criterion, it is clear that bans on DDT, particularly in Africa, are suboptimal. The potential to save lives far exceeds the risks of adverse health effects. One million people die from malaria annually and yet malaria was once nearly eradicated by DDT and could today be killed off once and for all. Yet, those who fight to save millions of lives from malaria do so with one hand tied behind their backs. The dubSJ editorialized in defense of DDT yesterday and suggested that some in the environmentalist movement don't share the goal of many in the health world of actually saving lives:

Earth Day founder Gaylord Nelson, a U.S. Senator from Wisconsin, was a leading opponent of the insecticide DDT, which remains the cheapest and most effective way to combat malarial mosquitoes. Rachel Carson's 1962 book, "Silent Spring," misleadingly linked pesticides to cancer and is generally credited with popularizing environmental awareness. But other leading greens of the period, including Nelson, biologist Paul Ehrlich and ecologist Garrett Hardin, were also animated by a belief that growth in human populations was harming the environment.

"The same powerful forces which create the crisis of air pollution also are threatening our freshwater resources, our woods, our wildlife," said Nelson. "These forces are the rapid increase in population, industrialization, urbanization and scientific technology." In his book "The Population Bomb," Mr. Ehrlich criticized DDT for being too effective in reducing death rates and thus contributing to "overpopulation." Hardin opposed spraying pesticides in the Third World because "every life saved this year in a poor country diminishes the quality of life for subsequent generations." For these activists, malaria was nature's way of controlling population growth, and DDT got in the way.

As with other chemical-use policies and regulation of agricultural biotechnology, policy on DDT could benefit from a dose of Zilberman-Lichtenberg cost-benefit logic.

Where are the green jobs?

The dubSJ reports today that cities from Tampa to Honolulu are trying to invigorate their economies with green jobs. Despite the pledges by politicians from Tulsa to Honolulu, the green jobs aren't yet coming. California is, of course, banking on green jobs replacing brown jobs that will be lost with implementation of AB32. But as UC Berkeley's AnnaLee Sexenian says, it may be a bunch of hype:

People are jumping on a bandwagon. . . Washington needs something to sell. It can't be a panacea for everyone.

The green jobs won't replace all the brown jobs she says. Well, duh! It is Le Chatelier's Principle at work.

New tactics needed for today's war on environmental damage

Today's dubSJ features compelling commentary on how the environmental challenges we face today demand a different strategy. Its author is William Ruckelshaus, the first-ever administrator of the U.S. EPA. He contends the job was relatively easy in the 1970s and 80s: the problem was visible ("yellow sludge flowing into blue rivers," "black smudges against the barely visible blue sky") and the benefits of action accrued to those who undertook the costs (the costs of pollution were borne more or less instantaneously in the form of poor health and environmental degradation). Today, Enemy Number 1 is invisible and imposes costs not on the current generation, but on future generations:

On these kinds of issues where the payer and beneficiary are not the same, the American people are ideological liberals and operational conservatives. They are all for the promised results; they just don't want to pay for them. Little wonder that most people will tell their pollsters they are in favor of reducing the impact of our current lifestyle on future generations, but their scant support for policies that will accomplish that belie their commitment.

To this assessment I would only add that the problem is also a function of the fact current generations that do not contribute to solutions share in the benefits. The basic problem, then, is that in both a spatial and a temporal dimension, the benefits of action on climate change are not fully internalized to the actors. I do believe most would act to protect their offspring if they knew with some degree of certainty that costly action was necessary to protect future generations and if they knew others wouldn't be allowed to free ride. The fact that GHG emissions are a global public bad (that span's traditional political jurisdictions), then, is the biggest obstacle to a climate change solution. It isn't the delay in reaping rewards.

Ruckelshaus is in favor of Pigouvian taxes, roughly speaking, and opposed to heavy regulation in order to solve current environmental problems:

We need more democracy, not less. Trying to enact rules centrally to control the behavior of hundreds, sometimes thousands of people in a watershed when their individual contribution is minuscule, but collectively overwhelming, is futile. We have been trying a command-and-control, top-down approach for the past four decades to control non-point sources of water pollution. The examples of the Great Lakes, Chesapeake Bay and Puget Sound are grim testimony to our failure. If one solution doesn't work, the answer is not to push it harder but to look for new approaches.

This suggests he opposes the current EPA administrator's efforts to regulate carbon emissions under the Clean Air Act. He also suggests that getting good information in the hands of the public will lead them to make "correct" decisions. I am not so convinced, but this premise is something I am currently trying to test empirically in several different contexts. In the end, Ruckelshaus is an optimist, having faith that we can "harmonize human prosperity and growth with environmental protection."

The UK Telegraph, in an unsigned editorial, doesn't want climate scientists to get off so easy after an investigation this week found them innocent of any intentional wrong doing:

A majority of scientists maintain that global warming is a man-made phenomenon. However, they must be prepared to acknowledge that there is another view, for which evidence can also be adduced, even if it seems to conflict with the received wisdom. The findings of the Oxburgh inquiry are not an excuse for again closing down the climate-change debate to the exclusion of those who take a sceptical attitude to what is arguably the most important issue facing the world.

How many carbon emissions has the icelandic volcano caused?

Yikes! At least all that ash is expected to cool the planet in the short run.

Is climate change policy still alive?

I had thought climate change legislation would be way on the back-burner at least until after the mid-term elections. After the bruising health care debate and Obama's movement on education reforms, I suspected, as did others, that the political capital needed to move another big policy had been depleted or diverted elsewhere. Now, however, Reuters is reporting that we may see a vote on climate change this summer. It sounds like the leadership is not ready to commit to passage before the mid-terms, particularly with Democrats facing a tough election cycle (Mid-terms are generally difficult for the party in the White House) and the economy still in recovery mode:

Once the senators formally sketch out their bill, Senate Democratic Leader Harry Reid will decide the next steps in a year crowded with competing legislative priorities and congressional elections in November.

The bill could face stiff opposition from lawmakers in states with economies heavily dependent on oil and coal.

The proposed legislation would end state and regional carbon policy and preclude the U.S. EPA from regulating carbon under the Clean Air Act, according to Reuter's sources.

'Hockey Stick' used "inappropriate" methods

The Financial Times reported Wednesday that the famed 'hockey stick' paper by Michael Mann that purports to show tremendous warming in recent years is, in fact, based on "inappropriate" methods. Climate change skeptics have seized on the hockey stick and the 'Climate Gate' emails that suggest a "trick" was used in Mann's analysis to "conceal the decline" in temperatures. President of the Royal Statistical Society David Hand cautioned that the conclusions of a report by the University of East Anglia and the Royal Society should not be construed as dismissing global warming. As the report states:

It is very surprising that research in an area that depends so heavily on statistical methods has not been carried out in close collaboration with professional statisticians.”

An ongoing review will determine whether British freedom of information laws were violated by the cadre of scientists collaborating with Phil Jones, the head of the Climate Research Unit and East Anglia University, who has reportedly been suicidal since Climate Gate erupted shortly before the winter holidays last year.

What economics tells us about AB32

This week I received an email seeking signatures for an "open letter from economists to the people of California in support of the state's efforts to reduce global warming emissions." The letter comes from Jasmin Ansar, of the Union of Concerned Scientists, and already bears the signatures of several people from my department, including a member of my research committee, Max Auffhammer. The letter itself is fairly mundane (I have pasted the full contents at the end of this post), but two sentences cry out for some commentary.

First, there is this:

In fact, being an early mover to reduce emissions could yield economic (as well as climate) benefits for California.

This is the green jobs argument that has been articulated by backers of AB32 ad nauseum.  But as I have begun to argue in an op-ed that will likely never be published anywhere except in this space, the green jobs that will be produced in order to feed demand for green products in California need not be located in California. In fact, one might expect green goods to be produced outside California because even the production of green products causes greenhouse gas emissions, which will be priced in California but not elsewhere. As the Wall Street Journal noted in an op-ed against AB32 this week, the Air Board's own analysis concedes our dirty firms are especially mobile and therefore likely to leave. So Californians will be compelled to invest in green products from Nevada and Texas in order to avoid energy costs increases induced by AB32. The claim of economic benefits to California is dubious.

Equally dubious is the suggestion that AB32 will yield climate benefits to California. Greenhouse gases are a global public bad, which means emissions anywhere affects people everywhere. So reducing emissions in California affects California's climate only in so far as it causes a (very) marginal reduction in global emissions and that marginal reduction in emissions causes a reduction in climate change. Roughly, California emits 6% of all U.S. emissions and the U.S. emits 20% of worldwide emissions. So California is responsible for about 1% of worldwide emissions. If we reduce our emissions by 25% as per the intent of AB32, then we will reduce annual world emissions by one-fourth of one percent by 2020. If we extrapolate from the IPCCs A2 scenario, this means AB32 will reduce temperatures by 0.002 degrees Celsius per year. I am guessing no one will notice of California is 0.002 degrees cooler than it otherwise would have been in 2020. By 2100, it will be 0.16 degrees cooler than without AB32--and this only if we assume there is no leakage and AB32 succeeds. Some climate benefit! I find it stunning that such respected people in my profession would sign onto a statement that is just so objectively wrong.

There is one context in which AB32 will provide real benefits to California, and it is included in the letter's list of AB32 merits:

Furthermore, policies that reduce global warming pollution are likely to provide immediate benefits to the health and welfare of residents by reducing local pollutants.

 This is true. Carbon, itself, is not a pollutant (in spite of what the U.S. EPA may say as it tries to regulate carbon under the Clean Air Act). It is naturally occurring chemical that is harmless to humans. Still, carbon emissions are correlated with emissions of chemicals that are pollutants and are hazardous to people, plants and animals. To the extent we send our carbon-intensive industries away, we also send our pollutants away. OK. Fine. But that is about the only sliver of truth in this letter, which has already been signed by a nobel-laureate. Is the consensus among climate scientists also based on this kind of empty rhetoric?

Here is the rest of the letter (and below it, the email that brought the letter to my attention):

The Most Expensive Thing We Can Do is Nothing
An Open Letter on Clean Energy and Global Warming from Economists


We believe that the state of California should proceed to control global warming gases and not delay as some are advocating.

In a 2006 letter, many of us stated that "Global warming gases will be best managed through a combination of policy approaches. Emissions caps combined with a range of regulatory and market-based implementation mechanisms offer a particularly potent strategy because they provide clear incentives for changes in business practices and the development of new technologies." We continue to believe this.

While global climate change poses significant risks to the California economy, we believe that well-designed and judiciously phased-in strategies to limit global warming pollution can reduce emissions substantially in the long run at modest cost to the state. In fact, being an early mover to reduce emissions could yield economic (as well as climate) benefits for California. Well-designed strategies can stimulate innovation and efficiency, which could help the state become a technological leader in the global marketplace.

We continue to support the efforts of the California Air Resources Board to implement the 2006 state law, the Global Warming Solutions Act.

The current recession and the very high unemployment rate in California present daunting challenges. Some have argued that these economic conditions warrant suspending the implementation of emission reduction policies. We disagree. Delaying action now and waiting for the future before initiating accelerated action to reduce global warming gases will be more costly than initiating action now. Acting now is more likely to limit further environmental degradation, lower the cost of mitigation, and spur innovation in renewable energy and conservation technologies. Furthermore, policies that reduce global warming pollution are likely to provide immediate benefits to the health and welfare of residents by reducing local pollutants.

For these reasons we urge continued support for policies that reduce greenhouse gas emissions. These policies can improve our energy security, create new business opportunities and more jobs, and provide incentives for innovation.

Signed by,

Kenneth J. Arrow
Stanford University
Nobel Laureate, Economics

Maxmillian Auffhammer
Professor of Agricultural and Resource Economics
University of California, Berkeley

Anthony C. Fisher
Professor of Agricultural and Resource Economics
University of California, Berkeley

W. Michael Hanemann
Chancellor's Professor
Department of Agricultural & Resource Economics
University of California, Berkeley

Charles Kolstad
Professor of Economics
Department of Economics & Bren School of Environmental Science and Management
University of California, Santa Barbara

Jasmin Ansar
Western States Climate Economist
Union of Concerned Scientists

The email I got forwarded:

 -------- Original Message --------
Subject:    Economist letter in support of CA global warming policies
Date:    Thu, 08 Apr 2010 14:06:48 -0700
From:    Larry Karp
To:    are-faculty@lists.berkeley.edu

Colleagues,
I am forwarding an email that solicits signatures for a petition in
support of California's climate change policies.  (Some of  you have
already signed, I know.)

cheers
>
>
>
>         
>
> ACTION ALERT
> Sign on: Economist Letter in Support of CA Global Warming Policies
>
> Dear Economist Colleagues,
> 
> I'm writing to ask you to add your name to an *open letter from
> economists
> to the
> people of California in support of the state's efforts to reduce
> global warming emissions *as required by the landmark 2006 Global
> Warming Solutions Act (also known as AB 32).
>
> Join the leaders in this effort, including Nobel Laureate Kenneth J.
> Arrow, Stanford University; Maxmillian Auffhammer, UC Berkeley;
> Anthony C. Fisher, UC Berkeley; Michael Hanemann, UC Berkeley; Charles
> Kolstad, UC Santa Barbara; and myself.
>
> In a 2006 letter, many of us urged California decision makers to take
> action to reduce global warming emissions. Our support helped lead to
> passage of AB 32. This year, state agencies and legislators are
> expected to authorize several critical components of the AB 32 policy
> package.
>
>         
> Support California's landmark climate programs today.
> Please read the economists letter supporting California's global
> warming law and sign it today! We will be accepting signatures until
> May 12, 2010.
> click here to take action
>
> Related Links
> 2006 Economists Letter (pdf)
>
> Threats to California's climate law
>
> Tell A Colleague
> Please encourage your colleagues to sign up
> and help
> increase our effectiveness in creating a healthy environment and a
> safer world. CLICK HERE
> .
>
>
>   
>
> Now, *some who oppose action—including two Texas oil companies— are
> doing all they can to turn back the clock.* They are bankrolling a
> ballot initiative that would prevent California from moving forward,
> arguing that the economic downturn demands delay. We disagree.
>
> Delaying action now and waiting for the future before initiating
> action to reduce global warming emissions will be more costly than
> acting now. Taking action now is more likely to limit further
> environmental degradation, lower the cost of mitigation and
> adaptation, and spur innovation in renewable energy and conservation
> technologies.
>
> *A letter from economics experts, like you, can make a big difference
> in public debates and with state decision makers, as it provides the
> courage to act despite some of the fear-mongering tactics from the
> opposition.*
>
> We will use the letter to engage California decision makers to shore
> up support for the state's forward-thinking policies. For example, we
> will deliver copies to members of the California Air Resources Board,
> state legislators, and other key stakeholders.
>
> The letter is open to economists with a Ph.D. who live or work in
> California, or who have done research or analysis on California
> issues. Please read the letter and sign it today! We will be accepting
> signatures until May 12, 2010.
>
> Please read the letter and sign it today!
> We will
> be accepting signatures until May 12, 2010.
>
> Thank you for joining this important effort. If you have any
> questions, please contact Jasmin Ansar at jansar@ucsusa.org
> or (510) 809-1570 or Chris Carney at
> ccarney@ucsusa.org or (510) 809-1577.
>
> Take Action Today
>
>
>
> Sincerely,
> Jasmin Ansar
> Jasmin Ansar
> Western States Climate Economist
> UCS Climate & Energy Program
>
> P.S. UCS Climate Scientist, Dr. Brenda Ekwurzel will appear on The
> Colbert Report on Comedy Central tonight, Tuesday, April 6 at 11:30
> p.m. EDT. It should be funny and informative. We hope you tune in!
>
> The Union of Concerned Scientists is the leading science-based
> nonprofit working for a healthy environment and a safer world.
>
> UCS is a 501(c)(3) organization. All gifts are tax deductible. You can
> be confident your donations to UCS are spent wisely.
>
>         Union
> of Concerned Scientists
> 2 Brattle Square Cambridge, MA 02238-9105
> phone: 800-666-8276 | Fax: 617-864-9405
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>
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--
Professor Larry Karp, Chair
Dept. Agricultural and Resource Economics
University of California at Berkeley
207 Giannini Hall #3310
Berkeley, California 94720-3310
Phone: (510) 642-7199
Fax: (510) 643-8911
e-mail: karp@berkeley.edu

http://www.are.berkeley.edu/~karp

 

Senate Hopeful Fiorina Proposes Suspending AB32

Following CA Gubernatorial candidate Meg Whitman's lead, Carly Fiorina, the former HP exec who hopes to replace Barbara Boxer in the U.S. Senate, has come out in oppositon to AB32, the Sac Bee reports. Its strange to see these leading Republicans advocate the overturning of a law that has come to define Gov. Schwarzenegger and is viewed in some circles as his crowning achievement. When Schwarzenegger signed the bill, he was in the midst of a difficult re-election fight, with all the unions ganging up against him. His support of the bill was deemed critical to the re-elect. Has the politics of climate change changed so much in just a few years (see yesterday's post), or are these women with fairly weak conservative credentials pandering to primary voters?

Despite health care bill, founder of the Chicago School has "hope" for "change."

Former Reagan Speechwriter Peter Robinson interviewed Gary Becker for the WSJ today. And while Becker doesn't expect the health care mess (and he does think the latest bill is a mess) can be undone, he does think voters will turn back to the markets and away from big government in November. He remarks on the temptation for Americans to trust politicians over capitalists, even though the latter have done more to lift people from poverty:

"Or look at developing countries," he says. "China, India, Brazil. A billion people have been lifted out of poverty since 1990 because their countries moved toward more market-based economies—a billion people. Nobody's arguing for taking that back."

After Robinson quotes Chicago-school co-founder Friedman on the need for this generation to keep the intellectual defense of liberty that Friedman and colleagues provided, Becker says this:

"When I think of my children and grandchildren," he says, "yes, they'll have to fight. Liberty can't be had on the cheap. But it's not a hopeless fight. It's not a hopeless fight by any means. I remain basically an optimist."

Who says climate change has to be taken so seriously?

I chuckled at this post over at Freakonomics.

The Climate Change climate is changing

At last week's POWER conference at UC Berkeley, hosted by Severin Borenstein of the Haas business school and my own department, I sat at a table of PG&E folks responsible for planning the energy sourcing for the largest utility in the state. I felt sorry for these people who face such tremendous uncertainty about the future of carbon regulation. They seemed hopeful that federal legislation would be forthcoming and that it would put some of the uncertainty to rest. I regretted to tell them that I didn't think they were likely to see anything coming out of Congress anytime soon. As the Economist summarized last week, aggressive climate change regulations face an uphill climb:

The mess at Copenhagen is one reason. So much effort went into the event, with so little result. The recession is another. However much bosses may care about the planet, they usually mind more about their bottom line, and when times are hard they are unwilling to incur new costs. The bilious argument over American health care has not helped: this is not a good time for any bill that needs bipartisan support. Even the northern hemisphere’s cold winter has hurt. When two feet of snow lies on the ground, the threat from warming seems far off. But climate science is also responsible. A series of controversies over the past year have provided heavy ammunition to those who doubt the seriousness of the problem.

To this I would add only that the now legislated and signed health care reform has likely saited American's appetites for government expansion. Combined with the stimulus and financial bailout, Americans must be just about ready for a hiatus from "hope and change." As Charles Khrauthammer colorfully noted two years ago, a takeover of carbon is bigger than a take over of health care:

And having proclaimed the ultimate commandment -- carbon chastity -- they are preparing the supporting canonical legislation that will tell you how much you can travel, what kind of light you will read by, and at what temperature you may set your bedroom thermostat.

My sympathy for all the green investors (who are sitting on the sidelines) and for utility planners amid the policy mailaise is heightened upon review of climate change policy in a climate progressive state like California. The leading contender to replace Governor Schwarzenegger in November has advocated putting on hold the main provisions of AB32--the Global Warming Solutions Act. And a state ballot initiative proposes to repeal it entirely. And when the state's renewable fuel standard was enacted in 2006, it gave utilities until 2020 to generate 20% of load from renewables. A year or so later, the Governator upped that deadline to 2020 and established a 33% RPS by 2020.

If public opinion on climate change is tied to weather outcomes, like snowy winters, then policy prognosticators are in for a rough time--and an even rougher time if the earth is warming and that warming will bring more extreme weather, as the scientists tell us it will. Earlier this month, Gallup polling found that Americans are more skeptical about the seriousness of climate change than they were last year and the year before--48% think climate change claims are exaggerated, up from 31% in 2007.

Even in California, global warming ranks last among twelve issues voters think the Governor should focus on. Not surprisingly given the recession, they think jobs should be job number one for the Guv. But it is surprising that even in California, more people think climate change is not an important issue than think it is "among the most important" issues, according to a new Field poll (link opens pdf). The numbers that think it is either among the most important issues or merely "an important" issue, however, dominates the number of skeptics, 64% to 35%. Importantly, however, the Field poll allowed voters to pick several issues to be "among the most important," so a strong showing for jobs and the budget deficit as top issues did not preclude big numbers for climate change, too. Nevertheless, while 69% and 68% thought jobs and the budget were top priorties, respectively, only 23% felt that way about global warming. And this in California! I hope the nice folks at PG&E aren't holding their breath waiting for Congress to act.

Finally, The Economist also makes the point that uncertainty about the science and its predictions should not lend itself to inaction:

If it were known that global warming would be limited to 2°C, the world might decide to live with that. But the range of possible outcomes is huge, with catastrophe one possibility, and the costs of averting climate change are comparatively small. Just as a householder pays a small premium to protect himself against disaster, the world should do the same.

I'll discount catastrophe, but agree with them on the rest.

The economic costs of CA's global warming law: debate continues

The California Air Resources Board (CARB) yesterday released an assessment of the welfare impacts of AB32, the landmark legislation Governor Schwarzenegger signed in 2006 to reduce the state's greenhouse gas emissions to 1990 levels by 2020--a 25% reduction. The report serves as a rebuttal to analysis reported last fall by a couple of Sac State business school profs (Varshney and Tootelian) that estimated the legislation would impose a dramatic burden on the economy--costing $500 billion and nearly 4 million jobs. The CARB analysis, on the other hand, shows the regulation has virtually no impact on the state's rate of economic growth, its labor demand or income. I'll confess to having read neither report, though I did read the abstract of the Sac State study and the executive summary of the CARB analysis (Hey, this is about as much attention as our legislators will give to these studies!). I have, however, read Matt Kahn's blog post about the reports, as well as his op-ed with Jim Sweeney in the LAT yesterday.

The CARB analysis has the implicit blessing of some of the leading environmental and energy economists in the country (some of whom I have had the opportunity to meet), including Jim Sweeney (Stanford), Chris Knittle (UC Davis), Larry Goulder (Stanford), and Jim Bushnell (Iowa State), who sit on CARB's Economic and Allocation Advosirory Committee. I am inclined to trust these guys on such matters. At the same time, however, I agree with Matt Kahn that these big, "black box" CGE models make me nervous. And, while reading (okay, skimming) the exec summary of the CARB report, I found this amid the three paragraphs devoted to summarizing economic impacts:

While Energy 2020 modeling results show an increase in energy prices (i.e., cost per unit), the increases in efficiency throughout the economy helps reduce fuel expenditures in California relative to the reference case by 4.9 percent by 2020. These results suggest that the increases in energy prices in California from the measures in the Scoping Plan are offset by the resulting decreases in fuel use.

Now, it is surely true that any policies that attempt to internalize the externality associated with GHG emissons will raise energy prices. It is also surely true that, amid higher energy prices, efficiency will be in greater demand. But to suggest the net welfare effect on energy consumers is positive (or at least non-negative) is absurd. The energy consumers will have to invest in energy efficiency to achieve the demand reductions CARB anticipates. These investments will be costly.

I also have to quibble with Kahn a bit. On his blog, he talks about how California (in partnership with other climate change progressives like Washington and Oregon) can create a home market effect to justify our leadership in carbon regulation. The benefits of the home market effect, he contends, can overcome the risks associated with being the nation's laboratory and the costs of investing in a "non-appropriatable" future benefits. I don't doubt that these states form a big enough market to generate green investment. Our state regulators have long held the view that California is big enough to make the markets respond to us, and they are probably right. But incenting change alone does not secure benefits to Californians. And there is little evidence that California will be able to export green goods that are costly to transport and assocated with significant scale economies--as is required to establish a "home-market effect."

To comment generally on Khan, CARB, and Varshney/Tootelian, it seems to me quite obvious that our existing industry will experience welfare losses under AB32. If we consider AB32 as essentially a tax on energy (or a price on the right to emit GHGs), then producer surplus will decline. Some firms may leave the state and take their jobs and tax dollars with them. This is the big cost of AB32.

The benefits may be two-fold: climate change mitigation and the recruitment of green jobs to California. On CC mitigation: it is unclear that California's unilateral action (to essentially adopt the Kyoto Protocol by 2020) will have any impact on climate change--or even on GHG emissions. The principle of "leakage" predicts that carbon intensive firms will relocate where regulation is more lax. When a country adopts regulation, the leakage problem may not be a big concern because the costs to frms or relocating in other countries (and transporting goods and services across national borders) may be too great. But when a state like California does it unilaterally, the costs of relocating (e.g. to Nevada or Texas) are much lower. Because GHGs are global pollutants, it doesn't matter where they are emitted; they contribute to climate change and to global welfare losses whether they are emitted in San Diego or San Antonio. Imagine that as AB32 is implemented, it imposes higher costs on in-state energy producers. Our energy production can all be done out of state and transported in-state essentially at no cost, so that higher costs could shift supply of our energy to out of state firms who do not face the costs of GHG regulation. If our energy production does move out of state, the net effect of AB32 will be to have reduced GHG emissions from energy production not at all, but to have reduced the stock of jobs in California. This leakage problem is a real concern. It means that not only may we not see cooler temperatures for our forward-leaning policy, but we may not even see reduced GHG emissions.

The second potential benefit of AB32, which we here a lot about today in the context of the federal stimulus, US EPA efforts to regulate carbon, and congressional proposals for climate change legislation, is green jobs. It is certainly true, as Kahn argues, that California's AB32 will attract green investment and create jobs researching new solar panels and installing new windmills. But these jobs need not be created in California. They can be created in other states with friendlier business climates, like states that don't tax the carbon emitted in production of green technologies! There is no reason to expect that all of the green jobs created to serve demand for green products in California will be given to Californians. True, we have been a leader in innovation, and Silicon Valley is ready to become the Green Capital of the World. But we are far from the only ones hoping to capitalize on the green economy created by regulation. With the energy example again, AB32 doesn't even guarantee work to install green technologies in California, let alone to invent them. Green energy capacity could all be installed out of state and then put on the grid to power our homes--a boon to the green economy but not to California's.

In their op-ed, Sweeney and Kahn say of the Varshney/Tootelian study:

First, they assume there will be no increase in innovation in the world of clean energy technology. While innovation is hard to measure, it is completely misleading to assume there will be none. Few in California would debate the powerful impact of innovation on our state's economy. Policies like AB 32 create market incentives. Everyone in a market economy responds to these incentives, but Varshney and Tootelian assume instead that California businesses and consumers will suddenly become oblivious to market forces. This defies 200 years of economic logic dating to Adam Smith.

Second, their study assumes that all investments in "greening" California homes and businesses are simply dollars tossed out of the state's economy, with no positive impact on its bottom line.

Some such investments may go out of state -- for example, the builder of a new net-zero-energy house might purchase solar panels from Oregon. But others will not. When a family pays for those solar panels to be installed, or for a weatherizing company to improve their home's energy efficiency, that money goes to California salaries and supplies. Workers and suppliers then buy their own goods and services locally, and the ripple effect continues. With the California economy now experiencing more than 12% unemployment, such economic stimulation should not be ignored.

Sweeney and Kahn kind of acknowledge my point about leakage, but what struck me is how this argument sounds an awful lot like the argument for government paying people to dig holes and fill them in. It gives people jobs that give them money to spend on things other people make. To the extent this recruits new money into the economy (e.g. from the green investors Kahn notes are standing on the sidelines pending resolution of GHG regulation uncertainty), then it has a short-term stimulus effect, but it only has a real benefit if the investment is in something worthwhile. Now, I don't intend to suggest installing solar panels is as worthless as digging holes only to fill them in again. Its not if you assume, as I do, that cleaner energy is a good thing. But the fact that jobs are created does not in and of itself guarantee real benefits accrue. If leakage means there are no GHG emissions reductions from all of this new investment, then the difference between building windmills and digging holes is not so great.

It seems to me that, while climate change policies are probably a good thing because man-made global warming is probably happening (Even if you doubt anthropogenic climate change, so long as you place a non-trivial probability on it occuring, then some investment in mitigation is worthwhile.), Californians are getting stuck holding the bag in a big way with AB32. We may not reduce GHGs, but we''ll pay for it in energy prices and jobs. This, of course, is why an international consensus on climate change is so difficult to create. The argument among proponents of AB32 is that California, by taking the lead, can induce others to follow. To some extent, this has been our track-record. But by imposing green regulations on our economy, we give other states (and countries) a comparative advantage in the brown economy. In essence, our leadership on climate policies reduces their incentives to adopt GHG emissions policies. The Chinese, no doubt, are chearing as leaders in California, the U.S., Europe take the lead in this arena. Its a gift to their industries.

GHG emissions are correlated with emissions of pollutants, like particulate matter and sulfur dioxide that are harmful to human and environmental health. To the extent AB32 reduces emissions of these pollutants, Californians will benefit. These benefits accrue to the GHG emission reducer neighbors, not the entire world.

Is PG&E moving to more efficient electricity pricing?

The San Francisco Chronicle reports today that PG&E has proposed to change its five-tier electricity rate structure in order to "make it simpler and more equitable." The move follows outcry from Bakersfield, Calif., where residents typically pay high rates in the fifth and most costly tier of the electricity rate schedule because of high energy demand in the summer. The average rate in hot, hot, Bakersfield during the summer is $413. PG&E is proposing to reduce the rate schedule to three tiers and impose a $3 connection fee on all customers. The new schedule would reduce top tier rates and increase the base rate. It would thus erode a decades-long policy in California of incenting energy conservation by subsidizing a basic level of energy consumption with penalties on high levels of consumption. The average resident of Bakersfield will see summer electricity bills decline $65 (!!!) if the new rates are approved by the California Public Utility Commission (CPUC). A Bay Area resident will see the monthly bill climb $3.45. The average PG&E customer will face a $10 higher bill.

I find the equity argument here to be a bit bogus. Theory suggests weather and climate attributes are captalized into housing prices. Thus, residents in cool San Francisco have already paid for the priviledge of low energy bills with the relatively more costly purchase price of their homes. The new rate structure, however, can be applauded on efficiency grounds as it seems like a move toward the two-part tariffs that L.S. Friedman advocates in Richard Gilbert's Regulatory Choices: A Perspective on Regulatory Choices. Efficiency is served by an electricity price equal to marginal cost and the imposition of a connection fee to recover total costs when average cost is above marginal cost. The use of the $3 fee and the reduction in price distortions at low and high consumption tiers would seem to be a step in the right directon.

Why this blog?

This blog will serve as a virtual rooftop--a place from which I can shout my opinions and share my thoughts on contemporary issues relating to the economics of agriculture and the environment. I find it cathartic to write when I read about a decision, a policy, or an analysis that just strikes me as wrong. Hence, I have a folder on my MacBook Pro replete with submitted op-eds. I'll now start submitting those op-eds to this blog and expect they will get published. So, in a way, this blog is as much for me as it is for any readers who may stumble upon it. I'll hope to provide you commentary that is occaisionally insightful and maybe even intentionally funny from time to time. In addition to the slew of unsubmitted op-eds that I have written, there are the submitted and rejected op-eds I have written, some with my advising professor David Zilberman. Our ideas have been good--and while our submissions have been rejected, some of the ideas we expressed have subsequently been incorporated into the unsigned editorials of the major newspapers that rejected our submissions. What is that they say about imitation and flattery?

In starting this blog, I am inspired by Greg Mankiw, the crew at Freakonomics, and Matt Kahn, all of whom set a high bar for drive-by contemporary econ analysis. I don't intend to compete, though I may try to emulate. Its hard to say how this blog will evolve. I'm not imposing any rules on myself at the outset. I'll hope to post regularly, but I can't yet say what "regularly" means. Hoping to go on the job market in the fall, finishing my dissertation and getting my other research out the door are my top priorities. If I have successfully lowered expectations, then let me also say I welcome feedback on the blog and the commentary it contains.

Rational Environmentalism

Spending my formative years in California--a state endowed with natural beauty and tremendous natural resources--instilled in me an appreciation for the environment, but it was my training in economics at UC Berkeley that gave me an appreciation for the role of motivated citizens and their elected officials in preserving the environment. I call myself a “rational” environmentalist in order to both acknowledge my training as an economist and distinguish myself from other environmentalists who reflexively oppose human impacts on the natural environment. I believe we can be good stewards of nature and still take advantage of the many services nature provides.

I credit a former boss for really getting me interested in environmental policy. I took a one-year break from school between my undergraduate coursework and my graduate studies during which time I had the opportunity to work in the Cabinet Office of Governor Arnold Schwarzenegger. The office is responsible for developing and carrying out the Governor’s policies,and I was responsible for conducting policy research and preparing briefings for the Governor. I had the good fortune of working for Terry Tamminen, who moved from his post as Secretary of Cal EPA to be the Governor’s Cabinet Secretary. I got to travel around the state with Terry as he promoted the Governor’s environmental priorities, and I heard him speak of how California would lead the world with forward‐leaning policy and technology development.

My work in the Governor’s Office spanned a variety of topics. I am perhaps most proud of promoting a cap and trade program to reduce air pollution at California ports and of drafting the executive order for the San Joaquin Valley Partnership, which developed an inter‐agency task force to address economic and environmental challenges facing residents in the San Joaquin Valley.

In addition to pursuing my PhD in agricultural and resource economics at UC Berkeley, I am
also training for the Olympics as a member of the U.S. national triathlon team. My experiences as a triathlete have heightened my interest in environmental policy. Quite simply, my “office” is the outdoors, and my training puts me into contact with the natural environment more than just about any other career. Triathlon has also given me the opportunity to travel to dozens of countries—from Ecuador and Chile to Hungary and Turkey—and to see astounding natural amenities and the consequences of poor environmental policies. I’ve swum in lakes for competitions, for instance, that are so polluted with agricultural chemicals that the athletes didn’t dare touch the water until the start of the race.

My training as a resource and environmental economist has defined my outlook on environmental policy by introducing me to the market failures that lead to suboptimal outcomes in the natural environment. While economic theory certainly provides a strong justification for government policy to protect natural resources amid missing markets, it also provides a method for ranking environmental policies according to their efficiency and offers a framework for determining which, if any, policies should be pursued. While some in the environmental movement advocate a “kitchen sink” and “at any cost” approach to environmental preservation, my training and my research lead me to a more pragmatic approach to environmentalism that (1) advocates the least intrusion necessary to achieve optimal levels of resource protection, (2) prefers market oriented regulation to command and control regimes, (3) strives for maximum policy efficiency in recognition of the fact that resources for protecting environmental amenities are, themselves, scarce, (4) considers the costs and benefits of environmental policy, including use and non‐use benefits of natural resources, and (5) acknowledges that use of the natural environment is necessary to sustain life and that changes in the natural environment can have unpredictable effects on nature’s capacity to sustain life.

I think we can achieve significant reductions in natural resource demand without dramatically altering our way of life. I’ve spent the past several years advocating these types of changes. I was a charter member of the Green Team at the U.S. Olympic Training Center in Chula Vista, California in 2009. At the Center, athletes live and eat for free. Washing machines and dryers are free, and the laundry room is stocked with detergent. Rooms are serviced daily by housekeeping staff. As all economists know, when the marginal cost facing the user is zero, resources are over‐consumed. I recommended that the default policy of washing athletes’ towels daily be amended so that towels were only washed upon request, as is the policy in many hotels. Climate control systems also operated in public areas even after they closed for the day. I called attention to this wastefulness and the Center staff responded by setting the climate control systems to timers, saving energy and money. And I advocated contests to reward the dorm buildings at the Center that best conserved water and energy. I also urged an educational campaign to convey to residents that money saved by resource conservation would translate into a higher level of services elsewhere at the Center.

Much of my research at Berkeley has drawn attention to the flaws in conventional thinking on the leading environmental policy issues of day. For instance, in 2006, my advising professor and I were among the first to point out that increasing biofuel production would have deleterious consequences for food supply and biodiversity; Energy would compete with agriculture and nature for a fixed stock of land. Today it is well understood that ethanol production raised food prices, contributing to a food crisis in 2008, and led landowners in Brazil to raze rainforest in order to meet demand for sugarcane for ethanol. We have written many more papers on the economics of biofuels and issued a report to the Renewable Fuels Agency of the UK. In addition, I co‐authored a theoretical paper that calls attention to the potential worsening of environmental outcomes if carbon policy is not matched with policy
to correct the negative externalities associated with land‐use change. In short, we show that if the price of carbon is regulated to be inclusive of external costs of carbon emissions and the external costs of land use change are not internalized, then carbon policy leads to suboptimal habitat preservation, as biofuels substitute for fossil fuels.

In a recent article, I presented an environmentalist argument against locavorism, the push local food production that has garnered support in the movie theater, in best‐selling books, at our schools, and in the White House. I noted that our present system of food production capitalizes on comparative advantage in crop production, enabling states to produce crops for which their costs, inclusive of opportunity costs, are lowest. The current system, therefore, minimizes demand for land and chemical inputs in order to produce a given quantity of food. I suggested that a shift to local production, while minimizing carbon emissions from food transportation, may not improve environmental outcomes, particularly if biodiversity loss is a bigger threat today than climate change, as some academics have argued.

My dissertation research centers on developing a theory to explain the disparate estimates of genetically modified seeds on crop yields and chemical dependency. While some have highlighted small yield effects in developed countries like the U.S., theory suggests developing countries will benefit the most from genetically modified seeds and experience the greatest environmental gains in terms of reduced demand for land and chemicals. Drawing on a unique set of data, I demonstrate that genetically modified crops alleviate the pressure for converting land to agriculture that is caused by growing populations and demand for alternative fuel. In this paper, presented at the National Bureau of Economic Research in March, I showed that genetically modified seeds can provide considerable environmental benefits and improve the sustainability of biofuels.

Another track of my research focuses on non‐coercive mechanisms for inducing conservation in societies. This work takes a behavioralist approach to economics and considers the motivations for conservation behavior, recognizing the public good nature of pro‐social behaviors like resource conservation and the incentive to free‐ride on the conservation of others. This research, in progress, will show if simple changes to the “choice architecture” that surrounds us can induce substantial and persistent reductions in demand for scarce resources.