Sunday, September 30, 2007

Chicago: between a rock and a stinky place

In Chicago, the projected greenhouse gas threat in the future is through the roof.

Governor Rod Blagojevich has various policies at hand to consider but all seem to come with high cost. Chicago's chief source for power is there huge coal reserves. Un fortunately, coal is one of the most polluting forms of electricity production. One considered policy for fixing this was to have the factories conain the emissions, rather than send them into the atmosphere. While this is possible, it would raise the cost of power to prohibitively high levels.

What he seems to be wanting to do is build newer coal factories that can constrain emissions more efficiently and cheaply. Going hand in hand with this, of course would be the mandate to reduce output on, or completely shutdown older, dirtier, less efficient factories.

If we have learned anything from the great Depression, it is that paying productive capital not to produce does not work.

What should happen is that we are looking for clean air which can either be classified as public good or a positive externality, either way the policy is the same. The cost of controlling the waste should be subsidized. That way producing more cleanly won't raise the prices. Since newer factories can clean more efficiently, they can "pocket" more of the subsidy. The innefficent older factories will naturally produce less then, for this reason as opposed to producing less for command and control reasons.

The subsidy would be paid by tax payers as a "fee" for enjoying the public good or the positive externality of a cleaner Chicago.

Leaders Weigh Emissions Fund

In a recent article published in the WSJ, leaders of developing and developed countries, met to discuss ways to lower emissions and reduce global warming. The Bush Administration believes that technology improvements would be the fastest way to lower carbon emissions yet at the same time it would expand U.S. equipment sales. The most important agenda is a plan to help fund developing nations with investments for upgrades in energy facilities. China is very interesting in gainingmosr funding as it will become the largest carbon emittor because of its coal power plants. Some at the conference believe that cap and trade emissions reduction program are the key to promoting more investments.

Cap-and-Trade Systems: How It Works
As stated by ucsusa.org, "cap and trade systems draw on the power of the marketplace to reduce emissions in a cost-effective and flexible manner. In practice, cap-and-trade systems create a financial incentive for emission reductions by assigning a cost to polluting. First, an environmental regulator establishes a “cap” that limits emissions from a designated group of polluters, such as power plants, to a level lower than their current emissions. The emissions allowed under the new cap are then divided up into individual permits—usually equal to one ton of pollution—that represent the right to emit that amount."

"Because the emissions cap restricts the amount of pollution allowed, permits that give a company the right to pollute take on financial value. Companies are free to buy and sell permits in order to continue operating in the most profitable manner available to them. So, those that are able to reduce emissions at a low cost can sell their extra permits to companies facing high costs (which will generally prefer to buy permits rather than make costly reductions themselves)."

"A key advantage of a cap-and-trade system compared with other emission reduction strategies is that it gives companies flexibility in the manner in which they may achieve their emission targets. Another advantage is that it sets a clear limit on emissions. Traditional approaches often focus on emission rates or require the best available technology, but do not always require that specific environmental goals be met."

http://www.ucsusa.org/publications/catalyst/page.jsp?itemID=27226959

Incentives
Apparently, intergrating incentives into policies can be an effective way to encourage a correct practice. Instead of trying combat or correct an established or encouraged and damaging practice, policies like the cap-and-trade system can encourage and reward for the correct or "right" behavior by an organization. At the same time, the organization may be able to establish lower operating costs by adopting new policies that align themselves with these rewarding environmental policies.

The Gas Guzzler Tax

The gas guzzler tax is something that has always fascinated me. If you go to the page that my article is linked too, you can view a table that shows how the gas guzzler tax changes with reduced fuel economy. Basically, if your vehicle gets 22.5 mpg or more you are not taxed, and the tax increases (at an increasing rate) until the sub-12.5 mpg category, where the tax is $7700. This is a feeble attempt to discourage people from buying fuel inefficient cars.

The problem with the gas guzzler tax lies in the design of the system itself. According to fueleconomy.gov "The purpose of the Gas Guzzler Tax is to discourage the production and purchase of fuel inefficient vehicles." A corrective tax, such as this one, may actually discourage the purchase fuel inefficient vehicles, but only if it is applied in an appropriate manner. If you read the beginning of the description of the tax, it says that it only applies to cars, not trucks. This means that the average SUV and pick-up truck owners pay no gas guzzler tax. This is absurd because, realistically, these make up most of the fuel inefficient vehicles in the country. Most cars that guzzle gas are niche cars, such as sports cars, and ultra luxury cars. People that can afford these kinds of cars aren't really going to care about a gas guzzler tax. After all, if you are buying that $90,000 dodge viper (with a massive V-10), odds are you can afford to fill your gas tank, and pay the guzzler tax.

All in all the gas guzzler tax is a feeble attempt at the government trying to protect the environment. In order for this corrective tax to be effective it would have to apply to the majority of vehicles that actually guzzle gas!

Interalizing the Cost of Seconhand Smoke.

In a recent article posted on fox news, democrats have chosen to implement a 156 percent increase in the federal cigarette tax, raising the tax from 39 cents a pack to $1 dollar a pack. Some argue that such a tax increase only affects low-income people, because low-income people are more likely to smoke. But I think otherwise. This tax increase is another way of dealing with the everyday frustration that is air pollution. Air pollution caused by the millions of people in America and in this case the thousands in Colorado that pollute the air with their cigarette smoke.

The 156% tax increase is nothing more than an excise tax. For many, many years nonsmokers have been forced to sit, stand, eat dinner or in Colorado walk the streets dealing with secondhand smoke. Second hand smoke is nothing more than a negative externality (A consequence of an economic activity that is experienced by unrelated third parties) produced by smokers.

So what does a 156% tax increase have to do with secondhand smoke and nonsmokers? The tax allows smokers, low-income and smokers of a higher income, to internalize the cost of their air pollution, otherwise known as secondhand smoke. The $1 per pack tax is a shift towards efficiency. Because of the tax, the social cost of second hand smoke is moving steps closer to equaling the private cost of smoking. Efficiency!

The Tax Shift

The Tax Shift

An emerging methodology in the effort to encourage environmentally friendly business practices is the attempt to implement incentives in the tax code. Environmentalists want to modify the tax code in a way that would provide incentives by allowing participants to avoid taxation. The idea is that the current tax code is flawed as it allows for business to pass their pollution expenses on to the taxpayer. One example of this occurrence is the Exxon Valdez oil spill of 1989 in which millions of gallons were spilled in the Prince William Sound. Exxon paid a $1 billion settlement for the damages but the tax code allowed them to deduct the loss as a business expense, passing $250 million of the cleanup costs to the taxpayers. Other examples include the mining and timber industries ability to secure sizeable tax breaks for their specific practices and shift costs in the same manner as Exxon. The tax shift proposal seeks not to abolish these tax code practices but to reform it in a way that allows companies to enjoy tax benefits for their environmental awareness. Furthermore, tax shift ideals include a number of corrective taxes and emphasize the need for the government to act as a corrective state and heavily regulate pollution. This excerpt from the article reveals how much emphasis is placed on corrective taxation in the tax shift proposal.


“New and progressively-graduated taxes could shift 10 percent of the federal tax burden in the next 10 to 20 years. As defined by Alan Thein Durning and Yoram Bauman in their book Tax Shift, and by Redefining Progress in Tax Waste, Not Work, the levies could include: Carbon taxes to decrease the generation of greenhouse gases threatening worldwide climatic change. Governments could impose a tax--say, $50 per ton of carbon emissions--or combine a smaller tax with user fees or revenues from the sale of pollution permits;

Pollution taxes to reduce the contaminants flowing into our rivers and streams, filling our landfills and eroding the quality of our soil. There are an estimated 250 human-made chemicals harbored in the living tissue of the average American;

Point source taxes to reduce pollutants pouring forth from the outflow pipes and smokestacks of sewage treatment plants, factories and incinerators;

Traffic taxes in the form of tolls imposed strictly during rush-hour congestion periods, could promote the use of carpools and mass-transit, as well as flextime work hours;

Higher use fees for resources owned by the public, such as grazing or mining that occurs on public lands.

Tax incentives would be offered to invest in energy efficiency and technological improvements. For example, a system of new taxes and permits may dramatically reduce global warming gases and non-point source pollution, which is toxic runoff into rivers and streams. Taxes could be levied on development resulting in loss of biodiversity in wilderness areas. Other new taxes, some of which have already been proposed on the state level (see sidebar), are levies on carbon dioxide emissions and gasoline, taxes on pollutants, taxes on virgin materials and increased fees for using public resources.

Advocates of the tax shift have opted for the corrective route rather than embracing Coase’s ideals. Looking to tax breaks for environmentally conscious business practices and corrective taxes for polluting activities. Coase’s ideas of private resolution through negotiation seem to have been discarded entirely by the tax shift ideology. At the national level, and certainly when dealing with greed stricken corporate entities, it seems this method might be the best way to regulate pollution generated by big business. Private negotiation just might not work with Exxon Mobil and the small hotel down the river so why not try and provide Exxon with tax based incentives to avoid pollution? If the tax breaks are substantial, and I think they would have to be, I suspect that in the interest of profits they’ll make every attempt to procure them.
Jordan Ford

Sharing the Wealth
If We Shift the Tax Burden From Work to Waste, Everyone Benefits

by Brian Dunkiel, M. Jeff Hamond, and Jim Motavalli
http://www.emagazine.com/view/?456

Water is a dying resource

Water is an increasingly scare resource all over the world, thereby an excellent example of supply and demand, and conservation for future generations. Because water is scare, demand for the resource is increasing, driving up the price. Residents in Washington D.C. pat about $350 for approximately 480 cubic meters of water, whereas that same amount of water would cost approximately $1700 in Guatemala City. The price people pay for water is determined by transport costs, the total demand for the water, and price subsidies. An example of a transport cost is in China. China is constructing 3 canals to transfer water from the Yangtze River to Beijing and other growing northern provinces. Water markets exist in some portions of the world. Where these markets exist, it is evident how high the scarcity of water can be. For example, in India, water scarcity has encouraged farmers to profit by selling their water instead of the goods from farming. This promotes a rapid drop in the underground water tables which is a “back-up” resource of water. Because of the drop in the underground water tables, water is not being preserved for future generations in India. Water subsidies can be very large. For example, water revenues in Delhi are less than 20% of what it spends on water each year. Oftentimes, residents in urban slum areas have no access to municipal water and must purchase their water from private surveyors who bring the water in by truck. The price for this water is exceeding $1 per cubic meter. The poorest households in Uganda spend approximately 22% of their income on water, while those in El Salvador and Jamaica spend more than 10% of their income on water. Water subsidies also exist in California and Utah. The price of the water subsidies provides for a good example of the scarcity of water. One way to avoid the subsidy problem is to use a block rate pricing system where a low level of consumption is very cheap, while prices increase at higher levels of consumption. If there is a way to make the use of water more efficient, then it will be relatively inexpensive and will save water and energy.

-Erin Kelly
-http://www.globalpolicy.org/socecon/gpg/2007/0307waterprices.htm

Saturday, September 29, 2007

Solar Energy for a few!

The link http://www.miamiherald.com/business/v-print/story/251785.html

Last Wednesday former President Clinton and Florida Gov. Charlie Crist, announced plans for a solar power plant aimed at reducing Florida’s carbon emissions. This solar plant is expected to reduce the carbon emissions by 2 million tons over five years and is a part of a 2.4 billion dollar clean energy program. The first thing that caught my eye was the question of, who is going to front the bill for this? Well, if it’s a state run program then the citizens of Florida are going to pay. The citizens are also paying right into the pockets of the utility company owned by the FPL Group. The FPL Group has a three step plan for this carbon emission reduction escapade. First they are planning to spend 500 million dollars to develop 4.3 million Smart Meters so there customers can track their electricity usage each day online to help control their energy usage. To me this sounds absolutely ridiculous. Every month customers get a bill and are charged according to how much they use, how would knowing daily what your usage is differ from knowing monthly? If people were really interested in how much they used they could walk outside to the meter on the side of the house and take a look. But, these are my value judgments and I guess convenience isn’t worth 500 million dollars to me.
The second part of the plan is to start with a 10 megawatt solar plant and then increase it to 300 megawatts in Florida and another 200 megawatts somewhere else. To let everyone know solar energy is more expensive to produce per kilowatt than other energy producing sources already in place and requires of course, sunlight. ''As we all know, Florida is one of the sunniest places in America, but this is the sort of thing, if they can prove it works, it can be done in sunny places all over the world,'' Clinton said. ``If you mix it in to your overall power mix, the extra cost is not particularly great.'' On a side note, Clinton said “if they can prove it works”. What? They don’t know if it’s going to work? Looks like a huge gamble to me. Back to the issue, yes it will cost more and there are going to be in the end 500 megawatts available. This leads into the third phase of FPL Group’s master plan. Next year FPL is planning on selling Renewable-energy credits nationwide. Renewable-energy credits are credits that prove that energy bought was offset by renewable energy sources. People can now chose to buy electricity at a higher price and get the satisfaction of knowing that it was offset by renewable electricity and they are saving the world from impending doom at the same time! What a fantastic idea, until one comes back to reality. Why would anyone buy more expensive electricity? I had a hard time understanding this from the article so I looked up Renewable-energy credits and found out that in other states they have mandated some companies to have purchased so many of these Renewable-energy credits or they are fined. This is the transferable pollution credits in action just as a different flavor.
My main point of this whole thing is; I see a government subsidized monopoly rising to power. Here is my logic. First, the utility company is owned by the company FPL Group which is already a kind of monopoly second of which is being subsidized by part of the 2.4 billion dollar clean energy program. In perfect competition a company wouldn’t willingly spend $500 million to create convenient ways to help people reduce their consumption of the company’s product. A company in perfect competition that is going to sell a completely homogeneous product like electricity is not going to employ higher priced capital such as a solar plant. To put it plainly, I think this company is using its somewhat existing monopoly power as the utility company and a little natural monopoly (the sunny state of Florida) to gain more profit. They are having the tax payers pay for their solar power plant. Then the company is going to sell electricity at a higher price and get away with it because it is a government mandated product that other companies have to purchase. I think that there is a clear market failure being created by the government and it’s going to hurt the tax payers and the companies that are required to by the credits, but it will reduce carbon emissions and that’s what the legislation is trying to do.
Robbe Uhrhammer

Marekt for Carbon Emission Permits

From the New York Times Online
http://www.nytimes.com/2007/09/26/business/26bank.html

This week a group representing the world’s leading banks urged the United States and other industrial nations to move rapidly to introduce a lightly regulated system for trading carbon emissions permits. Yet, the banks, failed to make a strong argument as to the reason why the U.S. and other industrialized nations should adopt this Kyoto style of idea. This essay will try to make the point, from an economic standpoint, that the U.S. should adopt a system for trading carbon emissions permits. However, to understand why industrialized nations should start trading these permits, it is first necessary to know the basics about this new system.

Under this newly proposed plan, all polluters are required to have permits in order to discharge pollution. Each permit will state the exact amount of pollution a business may emit. The key idea here though is that the permits can be freely transferred between firms. The control authority will allot the number of permits needed to reduce emissions to the preferred level. Any company that pollutes in excess of the allowed permit requirements would then be fined.

Now if the controlling body issued the permits very precisely and every company received the right amount of permits, there would be no reason for a market in emissions permits. However, it is not a perfect world, were there is perfect knowledge, so permits would need to be traded to make up for the over or under allocation of permits to certain companies. With this system, the world now would have a cost-effective allocation without having even the slightest knowledge about control costs. When using this system the affected governments can now meet there policy objectives while still allowing for greater flexibility in reducing pollution. However, with any new market, especially one on such a large scale, there are bound to be a few drawbacks.

The good news with this venture is that there is only one main negative aspect, which is foreseeable. The one problem that could arise would be if the industrialized nations over allocated their permits; this would lead to volatility and then a collapse in the price of permits. However, the problem is fixed when the controlling authority auctions its permits, thus ensuring that the permits are scarcer and costlier, than if the controlling authority just gave out a certain number to each company.

With only one drawback, which is easily rectified, the new market for pollution is possibly one of the best moves the U.S. and other developed nations could make in reducing pollution. The new market guarantees that businesses have flexibility to achieve the specified reduction in pollution at the lowest possible cost. Next, this new market would probably grow to the point were it would be the world’s largest commodity market, creating new wealth throughout the developed nations. Finally, pollution would be reduced, and in the grand scheme of things isn’t that what we wanted to achieve in the first place.

Hogs Farmers Against Global Warming

Brendan Miniter in the WSJ ($$$):

North Carolina's global-warming activists are in hog heaven. Late last month, Gov. Mike Easley, a Democrat in his second term, signed legislation mandating that more electric power in his state come from "green" sources such as wind, solar energy, and hog and chicken waste.

Today, North Carolina gets about 2% of its electricity from "renewable resources." By 2021, under the new mandates, Progress Energy and Duke Energy will have to find 12.5% of the power that they sell to Tar Heel residents from renewables. Hog-waste-generated power -- as required by the new law -- will nearly triple to 0.2% of the electricity used in the state over the next decade as farmers capture and sell the methane gas given off from tons of decomposing manure.

Sounds like the kind of idea that might be relevant to a national energy-environmental policy. Do such mandates make any economic sense?

Thursday, September 27, 2007

A search for Cleaner Fuels: A Burden for the Rich to Bear

The Bush Administration opened the President's climate meeting this Thursday with hopes of discussing issues surrounding a global consensus on the need for cleaner sources of fuel. This comes closely following on the trail of the UN who has been underway with it's own climate meeting. There seems to be little difference between the two meetings with the big problem being that developing and industrialized nations seem to have little concern for environmental sustainability and global warming. Ultimately, countries that are in the position to be concerning themselves with global warming, don't want to have to bear the burden of the costs to fix it!

Too Little Too Late
The first question that must be asked is can the Bush Administration effectively make any headway in this battle before their time in office runs out? My response would be no. While the UN may continue to make headway on the issue, or will atleast be able to continue to develop answers with some sort of continuity in their process, the Bush party has effectively no time to get a campaign of this magnitude off the ground. This is something that should have been looked at long before now if the current administration wanted to have a significant impact on the policy decisions of the campaign. The beurocracy that already seems to have developed will take much longer to sift through than the one year the Bush Administration effectively has. Given the current dynamic within presidential candidates and their respective parties, the reality is that we will most likely see a much different approach to this issue with the next person in office. My opinion is that someone should have done a better job of uniting with the UN rather that forming some independent meeting and trying to do it on our own. This is especially true given our current global voice. America no longer runs the world! It's as simple as that. We operate as a global economy now so to try and launch a worldwide campaign all on our own would be wishful thinking at best.

The Economic Implications
Initially it seems to make sense that the whole world should share in a desire to find a cleaner source of fuels. After all, we're all going to reap the effects of not having cleaner fuels right? The supposed acid rain is going to burn my skin here just as much as it is in Argentina right? Right. Well then shouldn't we all have to pay to fix this problem? This is just not the case. But luckily, for those that tend to sway to the side of an efficiency based value judgement, it is a great answer.

The definition of efficiency is to maximize net social benefit. This is a highly subjective terminology since the definition of benefit and the places people put value are going to be extremely varied on a global scale. In many countries just having a meal and electricity is the greatest thing one could ever have. In this and other prosperous countries however, food and electricity is a given and quite frankly we've moved on to the more luxurious things in life like Lazy Boy recliners big screen TVs. Oh and most lately, we want enjoy those things without having to get cancer as a result of their production. It's sort of a conceptual heirarchy of the world's needs.

With that said, the definition of efficiency leads us right to the economic realities of whether or not we will actually see a global response to the necesity for cleaner fuels. In order to maximize net social benefit each country will choose to maximize whatever it puts the biggest value in and gets the biggest benefit from. For some this will be eliminating poverty by any means possible. For others this will be ensuring that we don't drown from polar ice caps melting. Whatever the allocation, net social benefit will be maximized provided some world power doesn't evolve and force everyone under on global clean fuel policy and then have a way to enforce it.

It's Ours
In class we used a model of efficiency where whoever had the means of controlling pollution was the one that did the controlling. The solution is very much the same on a global scale. Prosperous nations have both the incentive and the means to find cleaner sources of fuel while developing and industrialized nations have neither. Therefore, the burden is ours to bear. If the UN and President Bush and whoever else wants to see a solution to the dirty fuel problem, they are going to have to be the change they want to see.

-brendon

Wednesday, September 12, 2007

Tuesday, September 11, 2007

Navajos vs. Enviornmentalists

If there was one group in America that you think would be concerned about the environment it would be the Native Americans. Yet, it is the Navajos that are promoting the building of a new bigger better coal-fired power plant on reservation land.They say that it will bring in over $50 million, produce hundreds of jobs and better lives for the 200,000 people that live in the reservation.
The construction of this plant is not going up without opposition. Everyone from the Sierra Club to the Governor of New Mexico has something to say about this plant. They say that it will emit the same amount of carbon dioxide and 1.5 million cars.
Should the plant be built? I think that it should be. Yes, it is going to be bigger and thereby emitting more carbon dioxide but the new plant will be cleaner and more efficient than the old plant. Even if they do not build a new plant the old plant will still be running emitting the same amount of carbon dioxide and burning coal less efficiently. Not building the plant is not a solution to eliminating green house gases. The same gases are going to be emitted with the old factory. The Navajos that live on the reservation are going to be directly effected by this plant and if they see that it is worth it and are willing to take the trade offs then they should build the plant.

Blogging Assignment Illustrated

If you want to see a couple of examples of what I'm looking for with your blogging assignments, then you might take a look at this post of mine as well as this post by a former student.

Energy Guzzling

Tim Habb:
I read things like this one out of England:

THE Conservatives will propose banning plasma screens and other energy-guzzling electrical goods in a report to be unveiled next week.

...and I slam my head against the wall screaming "Why, Why...WHHHHHYYYYY!?"

Bans on non-deadly goods are bad economic policy. Period.

Consumers choose their energy usage based on what it costs them--not others. If energy use imposes costs on others and that cost is not captured in the price of energy, then fix the price. Banning products does nothing to fix the real problem--screwed up incentives to consume energy.

Well said.

Tuesday, September 04, 2007

the waste dilemma

From a science perspective, the topic of waste management is not as hotly debated as maybe Global Warming. Essentially, it comes down to the capacity for the earth to absorb wastes and the cost to implement this degradation, which can be modeled using various methods. An article from Nature magazine (Energy and the Entropy Business) makes the point that “The type of waste acceptable depends on a society’s priorities.” Also, the world is starting to realize that it is not realistic to remove all of the ammonia from wastewater, all of the phosphorus from soil, or all the carbon dioxide from the air. Therefore, the question remains: what levels for waste are acceptable? People from different disciplines will give many different answers, surely. However, this article acknowledges a scientific and realistic view:

“Wastes are disorder, entropy. They are, almost by definition, of little use or value. Any effort, energy, time, or other investment to handle and manage them implies cost. Economic forces have, therefore, argued for minimal waste management. However, this changes when other factors, notably space, become limiting: survival in a limited space requires appropriate waste handling….One can strive for total dissipation of molecular species and structures, possibly with minimal energy expenditure (or even energy gain)….The future options for waste treatment and management thus depend on the availability (price) of energy.”

http://www.nature.com/nbt/journal/v17/n2s/pdf/nbt0399supp_27.pdf