Don't Give Away Carbon Permits

© 2009 Joshua Stark

I need to be blunt with this title, so forgive the lack of imagination.

Basically, here is a short article from the authors of a report on the impacts of free allocation of carbon permits through grandfathering, in which they say it's a bad idea. Additional comments on the issue and the report from Jim Roumasset (occasional guest blogger at Environmental Economics) can be found here, and they are well worth the read.
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"Grandfathering" in pollution terms is where you let older equipment pollute more for free because it's older. The ethical foundation of this concept is that the impact to such older equipment and facilities will be too difficult for them, and so they would more likely shut down than re-tool, thus causing horrible unintended consequences to these communities. The ethical scales, then, weigh more heavily on jobs and community financial security than they do on the physical health of the community and/or global warming.

Matt Kahn posted a fascinating take on durable equipment and it's damaging environmental impacts, which I unfortunately cannot link straight to, because he doesn't separate his comments into pages (dang it), but you can read his blog here, which is generally good, except for the parts about famous people (unless you like that sort of thing). His entry is on November 23rd. Basically, he said that durable equipment, because of longer lifespans, drag our move towards less pollution, because they are dirtier than newer equipment. It's an interesting notion, even though I'm not completely convinced that making things break down faster is necessarily a good idea. It is also a notion that is exacerbated by incentives, like grandfathering, that encourage people to keep the older stuff around.

However, the costs of global warming are going to be borne, and putting a price tag on carbon is a good, huge step towards lessening it, but only if it is done right! What is right? First, it can't be cheap; second, its revenue has to be redistributed in a way to alleviate the regressive nature of its impact on poor folks.

Grandfathering fails both of those tests. In fact, the purpose of grandfathering is to make the process cheap, and this creates horrible distortions. Consider the two possible scenarios: 1) Carbon pricing is made cheap for everybody, or 2) carbon pricing is made expensive, but grandfathering is included.

In the first scenario, carbon is still emitted into the atmosphere, while revenues are collected either by the government or by private companies who got free permits. Conclusion: Consumers pay companies or the government more through what is effectively a sales tax, while more carbon is emitted into the atmosphere. Presumably, we are trying to cut carbon emissions, so this is a big, fat failure.

In the second scenario, free permits are given to companies, but the emissions have a lot of value because carbon is made expensive (through cutting the total amount allowed). If it is true that the older equipment cannot be made cleaner, then the company, very soon, will have a huge incentive to cease operations and sell off their permits, effectively pocketing the carbon tax from consumers AND leaving the communities stranded. The carbon price would come from the economy, which, considering that oligopolies/monopolies account for the vast majority of our markets, means that consumers would pay a disproportionate amount, and poorer people paying a disproportionate amount of that.

In the end, if we put a price on carbon, it's a tax - it is a government-mandated price and cap. If its purpose is to cut carbon emissions into the atmosphere, then it is going to have to be expensive. The first ethical question then, is: Should companies collect tax revenue, or should your government collect it?

Now the title of my post should be clear.

Environmentally damaging connections

© 2009 Joshua Stark

A couple of unfortunate stories to point out here, but the eye-opening is important.

Emily Green has a great blog, in general (check it out), and a few weeks back posted an amazing story on the connection between a well-known California Senator and a powerful "farming" family. Amazing, and sad on at least three levels for me, because pomegranates are my favorite fruit.
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Today, Capitol Weekly and Capitol Alert both reported on recent campaign donations to a group called "Californians for a Fresh Start", which is supporting a change in term-limits laws. Specifically, the change in the law would lower the limit from 14 years (two Senate terms and three Assembly terms) to 12 years, while allowing all the time to be served in one house. My guess is that it would also include a "fresh start" for currently-serving legislators. The three contributors are the L.A. Chamber of Commerce, the L.A. County Federation of Labor, and Majestic Realty.

Why is this an environmental & ethics concern? It just so happens that Majestic Realty directly benefited from a last-minute law which exempted its proposed NFL stadium from state environmental regulations (CEQA, to be specific). So, don't be offended if one sees this as Majestic Realty spending $300k (it's donation) to a proposition that would exempt current legislators from a law that everybody else has to abide by as a token of its appreciation for being exempted from laws that everybody else has to abide by. Of course, the other two organizations benefit from the exemption (temporarily), but they all lose (along with the rest of us) by creating a horrible precedent, further poisoned by this new twist.

CEQA, by the way, is billed as an environmental law, and its focus is environment, but it is really a good-governance law, because it creates a process by which institutions and businesses must be clear about their impacts, and it offers the public the opportunity to weigh in on decisions that may impact them.

This is another story that is sad to me on a few levels. First, I like football, and I treat folks who don't with suspicion. Second, I love CEQA, and this precedent means that a serious fight is coming over a good law that gives regular folks a voice. Third, I'll just come right out and say it: I don't like term limits, because they create bad distortions in public representation, and (more importantly) they infringe on my right to representation as expressed through the 1st Amendment's freedoms of speech, petition, and assembly.

I won't be voting for the "new" idea because it doesn't eliminate term limits, it just further ensconces one particular group of individuals, while reinforcing the appearance of impropriety between large financial interests and our representative form of government. But, it's sad that is has had to come about the way it did.

A landowner's take on the ESA

© 2009 Joshua Stark

A great post over at Rich Fletcher's blog on conservation, the Endangered Species Act, and the concept of "highest and best use", one of those driving forces that have, historically, pushed lands to develop into suburbs and the like. It's a good read, I highly recommend it.

What I really like about it is that it comes from a landowner. The pressures these folks must feel whenever they try to do real conservation on their land must be tremendous. Remember, conservation is the noun form of "to use sparingly", and that is the proper definition when it comes to folks who have land that they can put to various uses. Farming, especially for the landowner who doesn't have tens of thousands of acres, can be a frightening business, because you are on the bleeding edge of margins, smack between the Scylla of oligopoly and the Charybdis of oligopsony*.
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Mr. Fletcher's point is that laws like the Endangered Species Act help to re-define the highest and best use of a property. I'll second that, and say thanks for pointing it out.

*An oligopoly is a market with few producers, an oligopsony is a market with few buyers, and Scylla and Charybdis are the proverbial "rock and hard place" from Greek myth.

My Problem with Pigou

© 2009 Joshua Stark

Nowdays, there is a movement afoot in economics right at the junction of economics, ethics, and the environment, based on the works of an obscure (to normal humans) economist.
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Arthur Cecil Pigou was a prominent economist of the early to mid-20th century, and his work has influenced a number of studies in economics, but the one that is coming to prominence in recent years is the push to "internalize externalities." Pigou proposed a tax on transactions with negative externalities, because they are cases of market inefficiency.

There are two ethical claims here: 1) Economists believe it is unfair for someone to be hurt by other people's transactions; and 2) economists believe that market inefficiencies are wrong behaviors. The second one is a little more debatable, but I believe that the first one is just about as universally held a belief as one will find on Earth.

What a Pigouvian tax is, then, is a tax on a transaction intended to help mitigate the effects of its negative externality. Here is an example:

Say you buy 50 gallons of diesel fuel for your truck. As you drive off, the exhaust from your truck aggravates a kid's asthma. That child is rushed to the hospital, and her life is saved.

Who paid for the hospital trip? Who should pay? The visceral reaction is to feel at least partially responsible for the problem. Of course, in the real world, we pretend that we can't really determine these causes and effects so cleanly, but it's really because we can't determine whose specific particle aggravated the asthma, not because we don't think the situation is wrong.

But we do know that diesel exhaust is bad. We, as a society, are picking up the tabs for diesel's effects (called social costs), especially when the child doesn't have health care. This is a negative externality resulting from the purchase of diesel; the deal was between you and Chevron, the kid had nothing to do with it, and yet, she goes to the hospital, and I have to help pay.

Economists see this as a market failure, and some have proposed that, to help alleviate that failure, we should tax the item. The tax will raise the price of the item, lowering its quantity demanded in the market. In the case of diesel, this means that less diesel exhaust will occur in the air, because people will buy less of it.

The Pigouvian tax is widely accepted in economic circles, it crosses ideological lines, and in fact, there exists a Pigou Club of economists and wonks who believe in its use.

So, what's my beef with it? Well, first, it's a regressive tax, like all sales taxes. A regressive tax is one that has a larger percentage impact on poorer people than richer people. In our example, a person making $10k/year would pay a higher percentage of her income to the diesel tax than a person making $100k/year. My ethical claim is that poorer people should not pay a higher percentage of tax than richer people. Worse yet, some are calling for Pigouvian taxes to take the place of income taxes, which are progressive taxes (that is, the rich pay a higher percentage than the poor). This is an untenable long-term revenue situation for government, and it's bad macroeconomic thinking, too, for a couple of reasons.

Last, there is no guarantee that the revenues will not ruin the impact of the tax on externalities. Consider this: The construction industry lobbies for an exemption to the tax, on the grounds that it impacts jobs; the government exempts the insurance industry by providing an income tax exemption or a subsidy; the company bosses tell their folks to fill up, because they can just write it off at the end of the year. A person can conceive of a situation where more diesel gets consumed than previously (look at ag. subsidies now, if you don't believe that's a possibility).

But, in order for people to have the incentives to make honest economic choices, we need some way to internalize these externalities. We are all paying the social costs, so not having a price tag on their impacts at the diesel pump gives us a false price for diesel when we buy it. Since we can't ask for people's income statements at the pump, what do we do?

The solution I agree with is to help ensure that the tax (placement and revenue) helps alleviate the externality. This can be accomplished through a rebate of the Pigou tax to everybody, a combination of flat-out equal checks to every citizen of the country of a portion of the tax, and improving health care and non-citizen third-party impacts like air and water pollution problems in the wild lands. The rebate takes care of the regressive tax problem, and the projects to improve wild lands will help alleviate externalities there, too.

So, don't go asking me to join the Pigou Club until it comes with these fixes. Though, I doubt seriously that I'd be asked, anyway.

Where I'm From

© 2009 Joshua Stark

The Sacramento Bee has a great article on concerns over the Peripheral Canal (or tunnel, or Isolated Conveyance, same thing) from folks down in the Delta. But, what I mostly like about it is the slant in which it is written. It's a tad fluffy, but that's okay - I've spent my life reading condescending, patronizing, and downright derogatory articles about the Delta my entire life, so it's nice to get more of an insider's feel.

And for the record, there is no sun-tan line on this wrist, either.

Into the weeds a bit on economics & ethics

© 2009 Joshua Stark

I've received a few questions on my post about carbon sequestration and reforestation, mostly regarding the idea of "internalizing externalities". I wrote about externalities here, if anybody is interested, but here is a quick definition of "externalities":

Externalities are effects upon a third party from an economic transaction of two other parties.
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Economists are trying hard to figure out ways to alleviate negative externalities, because they are an inherent market inefficiency (the econ term for failure). So, starting from the beginning (the ethics), most economists believe that individuals in a transaction should be responsible for all the effects of that transaction. If somebody's purchase hurts somebody who wasn't even involved, then the purchaser and seller should have to pay for the damage.

Many economists are trying to figure out market-like ways to most efficiently alleviate the problem of negative externalities. One idea has been to create a market-like mechanism for the thing that causes the externality. In the case of carbon, this is putting a price on carbon emissions because they cause global warming (externality), and then requiring the participants to play in the market-like mechanism. This idea is called "internalizing the externality", because it forces a price into the transaction as a way to both reduce the amount of, and possibly provide revenue to, help mitigate the problems of the externality.

In the past two weeks, however, I've identified a few potential problems with this. First, I've always been leery of made-up markets like carbon, where you really aren't selling a good or service, you are selling the privilege to pollute. However, the polluters (both buyers and sellers) have had this privilege for free for years and years, so getting them to accept a new payment is very difficult. This is a problem when pricing in any externality.

Second, picking and choosing which externalities get priced is tough, too. In my earlier post on reforestation in Europe, I pointed out that if you don't/can't price in every externality, then you create incentives that worsen the remaining, un-priced externalities.

A third problem became apparent in my head after reading this from David Zetland's blog:

"Even if there was a market, we would only know the value "on the margin," which does not capture the (inframarginal) benefits that accrue to users."

Mr. Zetland was speaking about (the lack of) water markets, but the same concept can be applied to carbon, too.

Let me step back and explain: If we were to give carbon a price, what would that price be? Would it be the cost of its effects on the environment? Or, would it be based on the demand and supply for carbon? (Hint: it's the second one.)

This I see as a serious flaw when pricing externalities with a market-like mechanism like cap & trade. Markets work on supply and demand of the good being offered, but the problem we are trying to solve is the effect of an externality. Companies will only pay for carbon up until they would find it cheaper to just stop polluting (there's a great lesson on this at a fun & interesting site here). That price is determined by the company, not by the cost of damage from carbon to the atmosphere.

This price does not make enforcement any cheaper, either, but, sadly, it does help eliminate the stigma associated with being a polluter, while hiding a regulation over a pollutant in a pretend market.

To alleviate this, the cap & trade mechanism has the "cap" part that tightens over time. As this cap tightens, and fewer and fewer credits are allowed into the system, the price for carbon will increase. Can you see some downstream effects? Like, serious lobbying to loosen that cap, or postpone it just a little bit longer (see here for a great contemporary example)?

Ultimately, what this shows is that we are bending over backwards trying to make the transition to a low-carbon infrastructure as efficient and kind on businesses as possible. Unfortunately, what we might have done by this is:

A) create a decision-making process that favors problems where a market-looking solution is feasible, thus creating new distortions;
B) create a climate where we can call something a market if it appears to be a market, even when it is, in reality, a regulation; and
C) eliminate the stigma attached to paying a fine for polluting by hiding it in a pretend market, or in the case of giving away carbon credits, making taxpayers pay the fine for the companies in addition to helping pay the additional carbon costs whenever we buy anything.

And I'm in favor of a strong Cap & Trade! Weird, huh?

What a Great Idea (read: I'm jealous and wish I'd thought of it)

Hank over at Hog Blog had a link to this, and I feel I must, too: The Western Wanderer's great Christmas ideas. Please check it out.

Humans, labeling, and the Precautionary Principle

© 2009, Joshua Stark

Yesterday, while looking for a Christmas ornament for the top of our tree, my wife pointed out to me, on one of the boxes, the Prop. 65 warning label that came with it: a warning that the wires on the star contain lead, a substance known to cause birth defects. We both expressed our incredulity at the idea, this symbol of life and love during our darkest and coldest days, covered in a substance that we should only handle if we know we aren't going to have babies. And if we don't have young children. And if we have children who know for sure that they aren't going to have babies in the future.
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Now, I'm not overly fanatical about lead, as I grew up hunting and fishing ("just bite down on the tips of the split-shot to open it up"), and I turned out alright. Maybe not all right, but alright. However, I try not to play around with God's dice, to ruin a great metaphor. So we moved on & bought another star.

This morning, I remembered the conversation, and then a story I'd heard struck me as I considered the ramifications of our decision. The story: folks fishing in backwoods lakes in Montana are finding signs at some of the lakes warning them of high mercury levels. When people are given this information, some stop fishing there, a wise decision. Instead, they drive up a few miles to the next lake, the one without a sign. Do you see where this is going?

The lake up the road has no sign because it has not been tested. The tested lake had high levels of mercury, and now the responsible agency must tell the public, but if they'd never tested it, then they cannot say anything, for a number of reasons.

Are they truly making fishing safer for the folks who eat their catch? My guess is that many, many lakes in the region are contaminated from mercury due to mining operations.

Folks get incomplete information, which is bad enough, but the nature of our responses to information given in such an open manner, via signs and warnings on packages, is to assume that we now have complete information, when we don't. What if the star we purchased has one of the hundreds of chemicals that have never been studied, but that causes some physical harm? What if the lake down the road has more mercury?

The precautionary principle would offer a solution here. The chemical one is easy: Require manufacturers to show no harm before they use a chemical. That is not only easy (though expensive), it is something I would expect conservatives and liberals to agree to - complete information before buying something. We are far beyond the ability to personally know who made our products (knowing the local salesman for the made-in-China product doesn't count) or how they are made, so putting the onus on the maker to reasonably show no harm makes sense.

The lake issue is tougher. Personally, I think the long-term damages of mercury poisoning are worth the economic risk to small communities, and I think forcing the issue would pressure folks in positions of authority to get the testing done more quickly. I'm not suggesting shutting down lakes, but instead understanding the nature of mercury on a larger scale, and then posting signs that say this lake has or hasn't been tested, and the results if it had been tested. Again, a bit more expensive. But hey, you can't outsource those jobs.

I will still buy things the origins and contents of which I don't completely know, but that is because, right now, I have to. I have no other options, except for food, which we've been working on improving in this household. This isn't good economic decisionmaking (rewarding the status quo by buying it), and it's ethically dubious, too, but the options are so limited right now, that I really don't have a choice. Over time, however, I anticipate we will move away from those far-away purchases, and buy more and more locally produced goods and services, where we can at least have a better sense of (and some control over) the regulations which guide production.