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.