The BP catastrophe has certainly brought more than its share of discussion on the issue. Paul Krugman weighs in on the side that the continuing spill is Exhibit A that liability is a failure the private sector needs a stern regulatory hand to guide it. Tyler Cowen frames the argument and takes Krugman to task on one point:
There is in fact an agency regulating off-shore drilling and in the case under question it totally failed.
Of course, not all regulation is as inept as the Minerals Management Service (MMS) seems to be in this case. One problem is that MMS is charged both with regulating environmental and safety concerns AND is responsible for approving leases to the provide sector.
Minerals Management Service officials, who can receive cash bonuses in the thousands of dollars based in large part on meeting federal deadlines for leasing offshore oil and gas exploration, frequently changed documents and bypassed legal requirements aimed at protecting the marine environment, the documents show.
Emphasis is mine, though the point sort of jumps out at you, doesn’t it? But, it’s not like the appearance of financial impropriety is a new thing with the MMS. On the heels of the spill, in fact, President Obama recommended bifurcating the agency to mitigate the clear incentive compatibility problem.
The American Power Act is the latest climate bill making its way through the Senate. For both of my classes this term we have talked about the tradeoffs between policies that economists like and policies that might have a chance of passing. Ted Gayer at Brookings definitely puts the APA in the latter camp:
The bill auctions only 24.8 percent of the allowances in the early years (the share devoted to auctions is highlighted in blue), the remainder of the allowances being given away to such things as electricity local distribution companies, trade-exposed industries, refiners, commercial developers of carbon capture and storage, and a National Industrial Innovation Institute. The auctioning ramps up to 79.5 percent of allowances in 2030, and then full auctioning only occurs in 2035
By failing to use a full allowance auction to offset economically harmful taxes and deficits, the Senate bill sacrifices economic gain for political support from interest groups.
Robert Stavins, on the other hand, seems to look up at the sky and see a different color. Stavins is perhaps the most prominent environmental economist in the field, and he seems pretty upbeat about the whole thing:
Over the entire period from 2012 to 2050, 82.6% of the allowance value goes to consumers and public purposes, and 17.6% to private industry. Rounding error brings the total to 100.2%, so to be conservative, I’ll call this an 82%/18% split.
I’m going to have to side with Gayer on this one. It may well be the case that on average the “value” goes to some “public purposes,” but it sure doesn’t seem that way looking at the early splits (Here’s the blown up version for those of you preparing to squint).
For the first 13 years of the program, more than half of the allowances are going to industry, it appears. Not until 2025 do we see the industry percentage phased out (rapidly) and the auction percentage jump (also rapidly). So, to put it another way, today’s Congress is committing the 2025 Congress to implement the tough changes that will accompany climate change. I am going to put the odds on this commitment being credible as “improbable.”
Here we have yet another example of why law professors should simply not be allowed to practice law and economics or moral philosophy without a license–and of how Cass Sunstein has never bothered to do the work necessary to acquire a license to practice law and economics.
Both pieces are interesting reads alongside our work in Econ 280 this week on The Stern Review and William Nordhaus’s critique of it.
Wait, what’s that? You don’t know what OIRA is? Well, it’s the Office of Information and Regulatory Affairs, housed in the White House’s Office of Management and Budget. These are the folks who review agency regulations twice (!) during the federal rulemaking process. The OIRA is charge, among other things, with helping agencies to work through benefit-cost analysis — the source of Professor DeLong’s ire in this case.
So if administrative regulation piques your interest, this is your lucky day.
… is certainly worth a barrel of cure. Instead of having these guys with big yellow boots (I thought only 4-year old boys ran around in public in galoshes out of season), perhaps it would pay to have more egghead types crunching data on safety risk. That was the message I gave in both my classes this week, as we sat down to read Shultz and Fischbeck’s “Workplace Accident and Compliance Monitoring: The Case of Offshore Platform Inspections,” from RFF’s Improving Regulation. In that paper, they identify a set of factors (using factor analysis and a logistic regression model) that does a pretty good job of identifying the high-risk platforms. Pretty good compared to what? Well, certainly much better than random chance, and also better than the Minerals Management Service inspectors who were extensively interviewed for the project.
Neither Shultz nor Fischbeck have been in the press too much, but yesterday we finally did hear from one of them here:
Data problems date back at least a decade. According to John Shultz, who as a graduate student in the late 1990s studied MMS’ inspection program in depth for his dissertation, the agency’s data infrastructure was severely limited. “The thing I regret most is that, to my knowledge, MMS has not fixed the data management problem they have,” said Shultz, who now works in the Department of Energy’s nuclear program. “If you have the data you need, the analysis becomes fairly straightforward. Without the data, you’re simply stuck with conjectures.”
Anyone interested in taking a look at the Shultz and Fischbeck is welcome to contact me, for the paper or for a PowerPoint of their work. Anyone interested in doing research or an independent study related to transportation fuels regulation should also contact me.
No, this isn’t a post about the goodies at this-coming Monday’s Econ TeaBA (where, rumor has it, Professor Galambos will explain the competitive market model to Professor Corry in 15 minutes. Whether he can make good on this promise remains to be seen. In either case, please, no wagering at the TeaBA).
This is a post about who will benefit and who will lose from the climate legislation. We have been talking about the distributional issues in Economics 280 for a couple of weeks, that there are many ways to get the same “quantity,” but who wins and who loses can vary radically. The projected shares are a big key to determining political feasibility — businesses like free permits much more than auctioned permits, and certainly much more than (egads) paying a tax. On this front, we will be reading a paper called “Carbon Geography: The Political Economy of Congressional Support for Legislation Intended to Mitigate Greenhouse Gas Production” in our political economy course next week. The basic idea here is that representatives from states with high per-capita carbon emissions are less likely to support costly carbon restrictions. (Actually, I haven’t read the paper yet, but I would have bet a dollar that’s what it says. That is, I would bet a if I hadn’t discouraged wagering in the previous paragraph).
As for the distribution front, Ted Gayer from Brookings has some preliminary estimates on who is going to capture the value of freely-allocated and auctioned permits over the first 20 years of the program. The program will start with about 75% of the permits being handed out and more than half of the value of those permits accruing to electric utilities. Less than 10% of the revenue will flow to deficit reduction or to offset other taxes. Between 2026 and 2027, however, the percentage of auctioned permits jumps and ascends from 20% to a full 100%. And, if you believe that is a credible commitment, I would encourage you to sleep it off and rethink your position tomorrow. Consumer relief — that is, higher prices reduce consumer benefits — stays steady about 10% throughout. Believe him or not, Gayer’s short brief is worth reading precisely because he hits the heart of the environmental policy debate.
A few weeks ago, Povolny Lecturer and funnyman Yoram Bauman stood up for the “cap and tax” proposal. He didn’t literally propose a tax, but emphasized that the higher price associated with the cap was the incentive to reduce energy consumption.
On the other side of the pond, there actually is a cap & trade system in place, and it is really all over the price. Carbon prices have ranged from €8 to €30, and the volatility can stymie long-term investments. In other words, there is likely to be an inverse relationship between carbon prices and the payoff to greener (or at least lower-carbon) energy sources. If investors don’t believe that carbon prices will be high, then green investments simply won’t be as attractive.
Enter the British Conservative Party, which has proposed a “Cap and Tax” of its own. The basic idea is that because of the tendency for carbon prices to bottom out, a carbon tax would kick in if permit prices went below a certain level. This would provide some stability to the market, as well as a potential revenue source.
That’s pretty clever.
Now, getting a government to make a credible commitment to a long-term tax is another story.
It is too bad that as we begin looking at benefit assessment in my environmental and regulatory classes that we have this gusher gushing up the Gulf Coast providing us with such a vivid real-time example. So how do we go about valuing environmental benefits? Well, here’s a recycled piece from Slate.com, here’s Trudy Cameron at at The New Palgrave Dictionary of Economics, and here’s the guys over at www.env-econ.net with some estimates of lost fishing value. That should get you started.
As you know (or should know), there are a couple of ways of doing this. One is through market-type valuations, and another is through “contingent” valuation methods. We economists typically prefer watching what people do rather what they say they would do in some hypothetical situation, but sometimes we get what we get.
And for those of you who think this is no big deal, it would appear that you are wrong.
Well, the Department of Interior finally got around to approving a wind farm off Cape Cod. This seems to be an executive branch move, though I suppose Congress could rescind it legislatively (if it could override a veto) or cut funding to Interior for implementation. The long-running, and I do mean long running, standoff pitted on the one side former Senator Ted Kennedy and like-mined people living there who think windmills are something of an eyesore. Others, such as Kennedy’s nephew, Robert, call them a financial “boondoggle,” that will cost Massachusettsians a lot of money in additional energy costs.
On the other side is an odd coalition of business and environmental groups. Businesses like money and environmental groups like wind, so there you have it.
Obviously, the monied interests will not throw in the towel after fighting this for nine years — they are going to sue sue sue.
Lawrence alum, George B. Wyeth, will kick off thePovolny Lecture Series this Tuesday, April 20, at 7 p.m. in Science Hall 102. Mr. Wyeth picked up his B.A. from Lawrence back in 1973, notably serving as editor-in-chief of The Lawrentian. He leveraged his success here into a Masters in Public Policy at UC-Berkeley and a law degree from Yale. After a stint in the private sector, he joined the U.S. Environmental Protection Agency in 1989 and is now the Director at the National Center for Environmental Innovation.
Well, to be accurate, right now he is the the Stephen Edward Scarff Memorial Visiting Professor, teaching a course on policy implementation with Professor Chong Do-Hah. His talk is “Change isn’t Easy: An Inside Perspective.” Like his course, the talk will address the public administration challenges of addressing environmental problems.
Good news on the clean air front — it’s getting cleaner. In fact, it’s been getting cleaner for a long, long time. Don’t believe me? Well, then go check out the new EPA Air Quality Trends that was released earlier this week. Of the six criteria pollutants (NOx, SOx, CO, PM, O3, and Pb), the trend is continually downward. Hazardous air pollutants (HAPs) are also on their way down. That’s despite a growing population, growing vehicle fleet, and (until recently) a growing economy.
Almost makes me want to go out and eat a big hand full of dirt.
Twelve students and four professors just finished lunch with five Lawrentians who have become successful consultants. During the three hours before lunch, we learned a lot about consulting, about careers in the consulting world, and about how Lawrence students can get their foot in the door. Students who came got invaluable advice and made connections with Lawrence alumni. If you weren’t there, you missed out–make sure you come to the next event on the banking industry on February 13th (Saturday of reading period). And you might want to take a look at the Pyramid Principle by Barbara Minto.
We continue to reap benefits from our subscription to The Economists’ Voice. The site provides short, readable pieces on economics and public policy topics of the day, typically from some of the top scholars in the field.
For those of you interested in environmental issues (or simply a preview to Econ 225), the latest edition has several articles on incentive systems for reducing carbon emissions. For those of you not up to speed on the lingo, the basic mechanisms are “command-and-control,” where the regulator typically specifies some cleaner technology; a per-unit tax on emissions; and a “cap-and-trade” system, where the regulator picks a maximum quantity of emissions (the cap) and uses a market that allows firms to sort out which has the lowest cost of reducing emissions (trade). A basic result is that under the right conditions, the pollution tax and the cap-and-trade systems give equivalent outcomes. However, in practice, the cap-and-trade seems to be the route that is taken.
Don Fullerton and Daniel Karney start out The Economists’ Voice articles by looking at issues associated with the allocation of pollution permits within the US. Should they be handed out for free or auctioned off to the highest bidder? What are the distributional impacts? That is, are poor people hardest hit because increased firm costs are passed on in the form of higher energy prices.
Next, Ozge Islegen and Stefan J. Reichelstein look at the economics of carbon capture This is an interesting technology that involves capturing carbon before it goes into the atmosphere, compressing it into a supercritical state, and then “sequestering” it underground or under the sea for time eternal. The pro side of this is that we can still burn fossil fuels without having increased atmospheric carbon concentrations.
Lee Friedman and Jeff Deason discuss whether regulators are markets are better fit to determine when carbon emissions are reduce. And, finally, Éloi Laurent looks at France’s pending carbon tax. Ah, the French.