6 Externalities Pittsburgh from the Salt Works at

6: Externalities ``Pittsburgh from the Salt Works at Saw Mill, '' by William T. Russell (1843) 1

2 ``Pittsburgh from the Salt Works at Saw Mill, '' byhttp: //www. nationalurbanmedia. com/FORBESCOM-RATESWilliam T. Russell (1843) PITTSBURGH-NO-1 -MOST-LIVABLE-CITY/

IDEA OF THE DAY 3 Taxes and tradeable permits are both good ways to regulate externalities.

Pollution Externalities and Licenses 4

Command-Control 5 Command-control regulation can work with Performance standards-- you cannot emit more than 1 ppm of sulfur dioxide-- or Technology standards-- you must install a Class B-1 z scrubber on your smokestack. These don't give firms flexibility, and give no incentive to reduce emissions any further than required. Pollution taxes and tradable permits, on the other hand, do give flexibility and incentive to reduce emissions as much as possible.

Licensing vs. Regulation What groups favor a policy of limiting output to the efficient level, Q=80? What happens if the EPA requires equipment adding $. 50/unit to cost? What if the EPA limits output, but the equipment is available if companies want to install it? 6

A Pollution Tax 7

A Pollution Tax with Rising Supply 1. Equate social marginal cost to marginal benefit (demand). 2. Solve for Q and P. 3. Set the tax equal to the marginal cost of the externality at that Q. 8

Two Firms and Cap-and-Trade Quantity and Marginal Benefit of Pollution 9

Cap-and-Trade Numerical Example Suppose Capstone Inc. has a marginal benefit from pollution of 50 - 2 C, and Delta, Inc. has a marginal benefit of 8, independent of how much pollution it produces. The government has decided it wants to issue 30 permits. How much should each company get? We want C+D = 30, and 50 - 2 C = 8 (which equates the marginal benefits). Thus, 42 - 2 C = 0 and C = 21, and the remaining 9 permits go to Delta: D = 9. 10

EPA Auctions of SO 2 Permits The U. S. auctions are at “Clean Air Markets, ” Bates College (Bates College) and by year. 11

European Auctions http: //ec. europa. eu/clima/policies/ets/cap/a uctioning/index_en. htm (Current EU policies link) CHART OVER TIME https: //www. theice. com/m arketdata/reports/148, UK auction 12

Selling Allowances Can Pay Better than Steelmaking 13 The European Union in 2005 launched a cap-and-trade system. Corus, Europe’s second-largest steel producer, closed its U. K. steelmaking plant at Redcar, cutting 1, 700 jobs. It had 7. 5 million carbon dioxide allowances. At 15 Euros/tonne, that was worth 112. 5 million euros. Was the plant closing good, or bad?

US Policies Schmalensee and Stavins, JEP (2019) https: //pubs. aeaweb. org/doi/pdfplus/10. 1257/jep. 33. 4. 27 14

IDEA OF THE DAY The Coase Theorem tells us that sometimes externalities don't need to be regulated because people will make deals to eliminate them. 15

A Coase Theorem Example 16 A paper mill is polluting a river. The farmer downstream had been selling trout fishing rights to rich tourists for $20, 000. Now the trout have fled, and he gets zero. The factory could install filtering machinery that would eliminate the pollution, at a cost of $4, 000. 1. Suppose the law says the farmer has the right to a clean river. 2. Suppose the law says the factory has the right to dump its waste water into the river.

What if Pollution Is Efficient in the Trout Example? Let the trout fishing income be $2, 500, not $20, 000. Let the filtering cost stay at $4, 000. If the farmer has the right to clean water, what happens? If the factory has the right to dispose of waste in the river, what happens? 17

THE COASE THEOREM 18 If information is symmetric, negotiation is costless, and contracts are costlessly enforceable, then people will choose surplus-maximizing actions regardless of whethere are externalities and regardless of who has the property rights.

How the Coase Theorem Assumptions Break Down Farmer benefit from trout: $20, 000. Factory filtering machinery cost: $4, 000. If information is symmetric (that is, the players don’t differ too much in their information). . . If negotiation is costless (that is, not too costly). . . If contracts are costlessly enforceable, (that is, not too costly). . . If the assumptions fail, the law does matter to surplus maximization 19

The Town of Cheshire Buyout American Electric Power had a coal plant in Cheshire, Ohio, that produced bothersome air pollution. The company bought most of the town for $20 million, supposedly for plant expansion. Most of the 221 residents of Cheshire left. 90 homeowners were paid three times the value of their houses. They signed away their right to sue. 20

Applications of the Coase Theorem 21 1. Bees and crops that need pollination. http: //pollinationconnection. com/beekeepers 2. Inefficient contract law is not so harmful as inefficient tort law. If the standard contract rule is not value-maximizing, the two parties can write in a special clause. Binding arbitration, for example. 3. Coase’s example of two adjacent radio frequencies interfering with each other. Clear property rights are enough. 4. Buying out bad employees (IU presidents, coaches)

Extortion: Save. Toby. com 22 Click through to this website, for its eloquent language: https: //web. archive. org/web/20050405074158/htt p: //www. savetoby. com/ Here, clear property rights are a bad thing. It induces extortion. If Toby’s owner can’t sell his rights, he won’t make people unhappy or take their money. “Toby Has Finally Been Saved!!!!!” http: //blog. ericgoldman. org/personal/archives/2006/12/savetobycom_the. html

Optimal Pollution 23

Marginal Damage of Emissions: Where To Put the Factories 24

US Emissions 25 2018 25 Xxx 10. 3 2. 7 58 16 5

Where is the air pollution nowadays? 26 The Plume Labs World Air Map. https: //air. plumelabs. com/en/

The Summers World Bank Memo DATE: December 12, 1991 TO: Distribution FR: Lawrence H. Summers Subject: GEP ’Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons: 27

Summers Memo pp 1, 5 http: //ban. org/whistle/summers. html 28

Summers Memo, Excerpt 1 “ 1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that. ” 29

Summers Memo, Excerpt 2 “ 2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I’ve always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste. ” 30

Summers Memo, Excerpt 3 31 “ 3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under 5 mortality is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is abou visibility impairing particulates. These discharges may have very little dire health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable. ”

IDEA OF THE DAY Climate engineering is a cheap way of dealing with global warming that reduces the free rider problem. 32

Reasons for Concern 33 Carbon dioxide emissions have quadrupled since 1950. The preindustrial amount of atmospheric CO 2 was 280 ppm (parts per million). Since 1960 it’s increased steadily from 315 to 410 ppm. https: //climate. nasa. gov/vital-signs/carbon-dioxide/ Average global temperature rose 1 degree Centigrade 19701998, slowing 1998 -2015 but then sharply rising. The sea level rose 90 mm from 1940 to 1980, before warming got going, and another 90 mm by 2015, a slight increase in rate. https: //climate. nasa. gov/vital-signs/sea-level/

Human Sources of Carbon Dioxide 34 http: //www 3. epa. gov/climatechange/scienc e/indicators/ghg-concentrations. html

Global Temperatures Note that the vertical axis anomalies, not average temperature. Source: https: //www. rossmckitrick. com/uploads/4/8/0/8/4808045/model_obs_comp_nov_2019. pdf 35

Temperature Rise: . 02 C/year The world temperature rose about 1 degree C 1970 -2020 (1. 8 F). The IPCC in 2018 projected temperature to keep rising at 0. 2 C unless emissions fall--- so a total of 2 C (3. 6 F) by 2070 and 3 C (5. 4 F) by 2120. https: //www. ipcc. ch/site/assets/uploads/sites/2/2019/05/SR 15_SPM_vers ion_report_HR. pdf (p. 4) 36

Temperatures Now in the USA A 2020 increase of 5. 4 degrees F would push us down one color band. Indiana’s weather would be like Tennessee’s. 37

Bloomington Temperatures 38 Note that the unadjusted data is warmer. NASA has changed its adjustment methods in a way that increases warming over the years. Is that good? It depends on your trust level. NASA’s map for world weather station time series is at http: //data. giss. nasa. gov/gistemp/station_data/.

Sea Level 39

Costs of Global Warming 40 Decreased water except at high latitudes and moist tropical areas. Loss of coastland coastal swamps. Less food production in countries near the equator. Coral death from more acidic oceans. The biggest question is how temperature affects water patterns. Humidity will rise, but be unevenly spread, climate scientists say. Note: Even if warming and sea level increase is NOT caused by carbon dioxide, that doesn’t mean it can’t be a problem. It does mean, the trend might reverse.

41 Indirect Solutions Command-control and subsidies to carbon substitutes are popular policies. For example: 1. Require cars to have higher mileage. 2. Subsidize electric cars. 3. Subsidize wind and solar power. 4. Ban coal power plants. 5. Require people to use energy-efficient lightbulbs. 6. Encourage people to use bicycles, not to fly, not to heat their houses so much or air condition so much. Notice how a carbon tax would achieve all these things too-and more extensively and uniformly, and with less possible corruption by special interests.

The Nordhaus Plan 42 William Nordhaus (Yale) won the 2018 Nobel Prize in econ. His proposal: Reduce carbon dioxide 15 percent 2015 -2050 relative to what it would be without regulation. Reduce by 25 percent 2050 -2100 and 45 percent after 2100. Emissions would still grow, but more slowly. Nordhaus suggests a carbon tax of $28 per ton. Americans emit 5 tons per year on average now. That means 9 cents per gallon on gasoline, and a 10% tax on coal-generated electricity. At current levels, this would raise $50 billion per year of revenue. http: //nordhaus. econ. yale. edu/dice_mss_072407_all. pdf

Costs– in Numbers 43 Recall that the IPCC estimates 1 degree C of warming every 50 years if nothing is done. Nordhaus cost/benefit: spend a present value of $2 trillion on abatement, saving $5 trillion in warming costs. There will still be a PV of $17 trillion in warming costs that are worth preventing. http: //www. econ. yale. edu/~nordhaus/homepage/Balance_2 nd_proofs. pdf, p. 14 -15. This is a good example of marginalism: take a moderate policy, rather all or nothing. It’s equivalent at a 5% discount rate to spending $110 billion per year on abatement.

44 Newer Estimates As of 2017, Nordhaus raised his estimate to $31/ton of the social cost of carbon, in 2010 dollars (add 18% inflation to get $37) https: //www. pnas. org/content/early/2017/01/30/1609244114 (Weitzman: $40/ton, from concern for low-prob but highcost risks. https: //www. econtalk. org/martin-weitzman-on-climate-change/#audio-highlights , 2015 The province of British Columbia has had a carbon tax since 2008, $40/tonne in 2020). It gives back a lot of the revenue as tax credits-- a fixed dollar amount per adult, and a bigger amount per child. https: //www 2. gov. bc. ca/gov/content/environment/climate- change/planning-and-action/carbon-tax

45 Carbon Cost in Rulemaking “Quantifying Economic Damages from Climate Change” Auffhammer (2018) , J. Ec Persp. https: //pubs. aeaweb. org/d oi/pdfplus/10. 1257/jep. 32. 4. 33

Equality--Future Income Growth 46 The IPCC (2014 report) says that a 1 degree C new increase (on top of the 1 degree so far) in temperature by 2070 would create a loss of 0. 2 -2. 0% of world GDP (p. 19, https: //ipcc. ch/pdf/assessment-report/ar 5/wg 2/ar 5_wg. II_spm_en. pdf ) World GDP per capital more than doubled 1970 -2020 and total GDP went up about 400%. https: //data. worldbank. org/indicator/NY. GDP. PCAP. KDhttps: //data. worldbank. org/indicator/NY. GDP. MKTP. KD Should the present generation sacrifice to help the 2070 generation?

Are the Models Any Good? 47 Robert S. Pindyck, “The Use and Misuse of Models for Climate Policy, ” Review of Environmental Economics and Policy (20 When a model is better than a guess? Are estimate of the social cost of carbon any good? 1. The estimate depends hugely on the discount rate: 0% vs. 1% vs 3%. 2. The estimate depends hugely on climate sensitivity: how the temperat depends on carbon dioxide, a scientific unknown. 3. The estimate depends hugely on the damage function--- how temperatu affects GDP, also speculative. Maybe it even increases GDP. 4. Having a single estimate misses the problem that maybe the real danger a low-probability but disastrous event--- e. g. , the melting of the Siberian permafrost.

EPA vs. Massachusetts 48 In 1999, 19 private organizations filed suit demanding that the EPA regulate greenhouse gas emissions. Fifteen months later, the EPA requested public comment. It received more than 50, 000 comments. The EPA concluded that carbon dioxide was not an “air pollutant, ” so it had no authority to regulate it. The EPA’s denial was challenged in court, and the EPA lost in the Supreme Court. In 2009 it issued an endangerment finding, and it has started regulating mileage of cars. It can only use command-control, not pollution taxes.

Can the EPA Regulate Carbon Dioxide? US Code 42. § 7521. “Emission standards for new motor vehicles or new motor vehicle engines” says: (1) The Administrator shall by regulation prescribe (and from time to time revise) in accordance with the provisions of this section, standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare. ” 49

50 Geoengineering: The Garden Hose to the Sky http: //freakonomics. com/2011/09/02/finally-agarden-hose-to-the-sky/ http: //www. intellectualventures. com/about/leadershi p/nathan-myhrvold/

Two Different kinds of questions 51 (from Super. Freakonomics) 1. “What is the ‘right’ amount of carbon to emit? ” 2. “Is it moral for this generation to put carbon into the air when futur generations will pay the price? ” 3. “What are the responsibilities of humankind to the planet? ” 4. “What is the present discounted dollar cost of a 5 degree increase in temperature? 5. “How can we most efficiently cool the Earth fast? ” http: //freakonomics. com/2009/10/23/the-superfreakonomics-global-warming-fact-quiz/? c_page=7

The People’s Demands for Climate Justice: “Advance 52 real solutions that are just, feasible, and essential” 1. Transform energy systems away from corporate-controlled fossil fuels and other harmful sources such as nuclear, mega-hydro, and biofuels to a clean, safe system that empowers people and communities. 2. Support ecological restoration to recover natural sinks, and stop all projects that are extremely destructive of Earth’s natural capacity to absorb greenhouse gases. 3. Support global efforts for a just and equitable transition that enables energy democracy, creates new job opportunities, encourages distributed renewable energy, and protects workers and communities most affected by extractive economies. 4. Commit to policies that embrace agro-ecological practices and food sovereignty in place of “Climate Smart Agriculture”. 5. Facilitate and support non-market approaches to climate action.

“Reject false solutions” 2. Honor the international Moratorium on geoengineering established by the Convention on Biological Diversity. 3. Reject Carbon Capture and Storage (CCS) and Bioenergy with Carbon Capture and Storage (BECCS) projects, and other technofixes. 5. Reject REDD+, REDD-like projects, Internationally-Traded Mitigation Outcomes (ITMOs), and all forms of carbon trading schemes that undermine human and indigenous rights, including indigenous cultures, territorial sovereignty, and integrity. 6. Stop supporting and promoting burning biomass as renewable energy and reject the substitution of biofuels and bioenergy as an alternative to fossil fuels. 53

I. U. Prof. B. Brabson’s Chart. New Scientist, 5 September, 2009 54

Solutions to Global Warming 1. Reduce carbon emissions: Taxes, tradable permits, command control. Cost: $2. 2 trillion (Nordhaus) 2. Subsidize nuclear energy, wind, solar. 3. Carbon sequestration: Plant trees. 4. Carbon sequestration: Lock carbon up under the ground. 5. Geoengineering: Fertilize the ocean with iron. Cost: $300 -500 billon 6. Geoengineering: Put light-blocking substances into the atmosphere. Cost: $20 -160 billion. (Barrett 2008) 7. Adaptation: air conditioning, shifting to different crops, higher sea walls, and so forth. 55

56 Cost Estimates The “Clean Power Plan” is the scheme EPA proposed for power plants in 2016 which is under revision in the Trump Admin. The Cost of Reducing Greenhouse Gas Emissions”, Gillingham&Stock (2018 -JEP) https: //pubs. aeaweb. org/doi/p dfplus/10. 1257/jep. 32. 4. 53

Lots of Countries Produce Carbon Dioxide (2014) China produced 30%, the US 15%, the European Union 9%, India 7%, Russia 5%, and Japan 4%. 57

Future Carbon Dioxide 58

Emissions by Region 59

Helping Poor Countries 60 Costs and benefits of warming are unevenly distributed. Russia, Canada, and the United States could actually benefit from having less cold winters. Tropical countries– which are poorer– would lose more. But for 1 trillion dollars per year, what else could be done to help poor countries? Should we reduce economic growth now to help people in Bangladesh in 2100? Or should we help people in Bangladesh

Summary Europe uses cap-and-trade. Command-control and subsidies are increasing in the US. Carbon taxes are another solution. These can all include sequestration and offsets. All solutions except adaptation face the problem that countries can free-ride. Geoengineering solutions are the cheapest. The big growth in carbon is in developing countries because of their big population and income catch-up to developed countries. 61

Extra Slides (no time for them in class) 62

Global Warming 63 Carbon dioxide is generated when people burn coal, oil, or wood, or make cement from calcium carbonate. Carbon dioxide is absorbed when plants grow. If the earth has high carbon dioxide and water vapor levels, that keeps heat from leaving, a “greenhouse” effect. (Greenhouses keep heat from leaving an enclosed space. ) Science does not know much about climate change, but it does predict that more carbon dioxide means warmer temperature. The question is: how much? And is this bad?

World Temperatures 1995 -2019 https: //www. rossmckitrick. com/uploads/4/8/ 0/8/4808045/model_obs_comp_nov_2019. pdf 64

A Badly Located Weather Station 65 A crowdbased effort to locate the "bad" stations turned up many, but fixing that didn't change the US warming trend. http: //www. surfacestations. org/

Satellite-Measured Temperature Source: Roy Spencer, http: //www. drroyspencer. com/latest-global-temperatures/. 66

U. S. Temperatures 1880 -2010, revisions 67 Animation here, article here. The measurements hadn’t changed, but the warming trend is much bigger because of the adjustments. http: //data. giss. nasa. gov/gistemp/graphs_v 3, 2000 version, 2015 version

Other Theories exist, e. g. Pacific Decadal Oscillation Theory 68 Chart from source hostile to theory: https: //www. skepticalscience. com/Pacific-Decadal-Oscillation. htm Spencer, friendly to theory: http: //www. drroyspencer. com/research-articles/global-warming-as-a-natural-response/

“Copenhagen Consensus on Climate” “If the global community wants to spend up to $250 billion per year over the next 10 years to diminish the adverse effects of climate changes, and to do the most good for the world, which solutions would yield the greatest net benefits? ” 69

“Abolish Drunk Driving Laws” 70 “Consider the 2000 federal law that pressured states to lower their BAC standards to 0. 08 from 0. 10. At the time, the average BAC in alcohol-related fatal accidents was 0. 17, and two-thirds of such accidents involved drivers with BACs of 0. 14 or higher. . Once the 0. 08 standard took effect nationwide in 2000, a curious thing happened: Alcohol related traffic fatalities increased, following a 20 -year decline. Critics of the 0. 08 standard predicted this would happen. The problem is that most people with a BAC between 0. 08 and 0. 10 don't drive erratically enough to be noticed by police officers in patrol cars. So police began setting up roadblocks to catch them. . [think of opportunity cost] The punishable act should be violating road rules or causing an accident, not the factors that led to those offenses. ” Do you agree?

Nordhaus comparisons https: //www. econlib. org/library/Columns/y 2018/Murphy. Nordhaus. html https: //www. econlib. org/library/Columns/y 2018/Murphy. Nordhaus. htm, William Nordhaus versus the United Nations on Climate Change Economics 71