Monthly Archives: May 2013

Gross Domestic Product: Grossly incomplete, but we can fix it

Via EDF Voices. This first appeared online in an article posted at ensia.com.

Gross Domestic Product (GDP) is broken. Robert F. Kennedy said as much in his first major presidential campaign speech. Simon Kuznets, the father of GDP, acknowledged its shortcomings. GDP is an imperfect indicator of human well-being at best, and outright misleading at worst.

Still, we shouldn’t scrap GDP and start over.

Up to a point, GDP does tell us important facts about people’s lives, livelihoods and aspirations. Living on a dollar a day is miserable no matter how you look at it.

Choking on economic growth, of course, is equally bad. There are a few simple, well-established steps we ought to take to bring GDP closer to where we should be. That, by the way, isn’t “Green GDP” or “green accounting.” It’s honest accounting.

Start with accounting for the true value of natural assets still in the ground. We don’t “produce” coal. We extract it. And the fact that the ton of coal extracted today is no longer there for the taking tomorrow should show up in our national income accounts. A ton of West Virginian coal adds about $30 to GDP. Honest bookkeeping would decrease that amount to $15. The same holds for oil, trees, water and all the other valuable natural assets that fuel our economy but are largely treated as free in our GDP accounting.

Then quickly move on to pollution. Every ton of coal, every barrel of oil causes more in external damages than it adds value to GDP. Properly measured GDP ought to reflect that fact.

In the end, policy makers should expand their horizon and look at a dashboard of indicators to get a fuller picture of the true state of the economy, society and the planet. Yet when it comes to GDP itself, the name of the game is fixing it rather than scrapping it. We know how to do that. The U.S. Bureau of Economic Analysis is at the ready. Let’s have a go at it.

See the original post on ensia.com for a perspective from Sir Partha Dasgupta, Frank Ramsey Professor Emeritus of Economics at the University of Cambridge. 

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Benefits of Clean Air and Water Dwarf Costs 10 to 1

(This post was first published on EDF Voices.)

The Office of Management and Budget is nerd heaven: a bunch of people getting their professional kicks from analyzing federal regulation. This bean counting may sound painfully lacking in glamour, but it’s incredibly important. OMB’s annual report to Congress on the benefits and costs of all major rules adopted by most federal agencies over the past 10 years shows how efficiently, or inefficiently, those agencies are functioning.  And the conclusion is clear: the Environmental Protection Agency comes out on top.

 

Source: OMB’s “Draft 2013 Report to Congress on the Benefits and Costs of Federal Regulations"

These numbers are based on the 2013 draft report, so they could still change. But the pattern is the same as in any of theirreports from the past few years, including the final 2012 report that came out last week.

None of this is to diminish the contributions of the other government agencies, but if you are a do-gooder trying to achieve the greatest good for the greatest number of people, EPA is the place to be.

One of the driving forces behind this rule is the Mercury and Air Toxics Standards, an extraordinary achievement for clean air and public health. Because of these standards, all coal fired power plants will for the first time be required to control their emissions of toxic air pollutants — including mercury, arsenic and acid gases. Forty years after the Clean Air Act signed by Richard Nixon, twenty after the landmark Amendments signed by George H.W. Bush, we are finally getting around to regulating mercury from burning coal.

The analysis of the benefits of reducing mercury pollution demonstrates just how much we underestimate the benefits of environmental protections. For example, when it comes to reducing mercury pollution, the benefits are based on EPA’s estimates of increased wages of (higher IQ) children born to families that catch freshwater fish for their own consumption.

Think about that one for a second. Mercury is a potent neurotoxin in all its forms, but the EPA estimates do not include mercury that is inhaled or that enters our bodies through other means. And there is nothing in the estimates about the fact that mercury harms the brains of our kids, regardless of whether it influences their future earning potential.

In a sense, this analysis is the moral equivalent of arguing that we should have child labor laws because keeping kids in school makes for more productive workers later on. This kind of reasoning, alas, is  why economists are often called names unfit for a family-friendly blog. It’s the most reductionist argument you can find in favor of reducing mercury. (In fact, the bulk of the benefits that were quantified by EPA are due to inextricably connected benefits in reducing deleterious particulate pollution.)

Costs, by the way, are relatively well estimated, since businesses are all-too willing to share them. So yes, there are costs—but they are small relative to benefits. And costs, as opposed to benefits, are typically overestimates. They are largely based on current available control technologies. They don’t consider that industry may invent an entirely new and unexpected way of complying with regulations at lower cost. This happens over and over again, and it comes with a name: entrepreneurial ingenuity. Works every time.

These omissions and shortcomings on either side of the equation only stand to bolster the most important claim: benefits outweigh costs more than 10 to 1 for all major EPA regulations adopted in the past decade.

For every dollar invested, Americans get $10 worth of benefits. I’ll take that ratio any day.

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Follow the Plastic Bag Example, Nudge Polluters to Pay

(This post was first published on EDF Voices.)

Nudge is the best kind of book. It presents the type of head-slappingly obvious solutions to public policy problems that make you wonder why you needed a book to tell you about them in the first place. Place the veggies before the French fries in the cafeteria, and people will eat more greens. Enroll employees into retirement programs with the option of opting out rather than in and they’ll save more as a result.

Such nudges are the best kinds of policy interventions: minimum intrusion, maximum freedom of choice, maximum relative impact. But one area in which Nudge comes up short is global warming. Putting smiley faces on your electricity bill as a reward for using less electricity than your neighbor, something oPower has done with utilities around the country, helps bring down electricity use by 1 to 3%. Better than zero, but not the solution by a long shot.

That solution would be making polluters pay: putting a price on carbon dioxide through a direct cap or tax on carbon pollution. Cass Sunstein, who wrote Nudge with Richard Thaler, says as much in his latest piece on the topic. He laments the fact that we don’t seem to be able to get these kinds of taxes passed, and then adds a few items to his running list of things we can do, all under the broad heading of setting “clean-energy default rules”: Change the default printer setting to “print on front and back,” and people will. Enroll people into programs where they spend extra for clean energy (with the option of opting out), and 90% will choose to stick with the clean energy.

All these proposals represent the best of what nudges ought to be. Policymakers need to set defaults either way. So set them in the way that goes furthest toward achieving your goal. Just that there’s still a big gulf between the policies we know are necessary and what appears to be doable.

The plastic bag solution

But there is one policy that seems to bridge the gap between the type of non-intrusive nudges Sunstein champions and the type of policies he knows are ultimately necessary to do something about global warming. They’re called bag taxes.

In 2002, Ireland started charging shoppers 15 eurocents a plastic bag. The result: bag use plummeted 90 percent. That's a billion bags a year.

In 2010, Washington, D.C., began charging 5 cents per disposable bag, paper or plastic. As a result, plastic bag usedeclined 80 percent within a year by some estimates.

These fees are tiny. Compared to the $100 worth of groceries you’ll be carrying home in your bags, they might as well be zero. The point is that they are not. The fees are big enough to change the default behavior of shoppers. A few pennies (and the odd public information campaign) are all it takes to motivate shoppers to bring reusable bags to the store.

It’s quite a leap from plastic bags to carbon prices. The principle is the same: It’s the price that counts—a price that is directly connected to an action. Change the action (stop using plastic bags) and you avoid the fee. Similarly, increase the price of carbon, watch carbon pollution fall. This price-up-demand-down relationship is so well established, it’s one of the very few actual “laws” economists have. Violations are tough to find. Plastic bags and carbon certainly don’t violate this common sense principle.

Bag fees and carbon prices have this important feature in common. They don’t just nudge, they also charge consumers for the cost of their—our—actions. For carbon dioxide, there are plenty of studies that estimate the cost to society of this type of pollution. The right price for each ton of carbon dioxide would be at least about $20. Given the fact that the average American emits his body weight worth of carbon dioxide every day and a half, that comes out to about $1 per day. Double it to account for the fact that there are plenty of damages we haven’t yet incorporated in the official number, and doing something serious about global warming is still a bargain at $2 per person per day.

As an insurance policy against the worst effects of global warming, that’s tiny. Never mind how small a price, though, the politics of actually doing it are tricky, to say the least. The plastic bag lobby just isn’t as important as the fossil lobby. And bag fees can be implemented on the local level. A carbon price can’t. It requires Congressional action, a seeming oxymoron these days. Even with carbon, though, states—if not cities—can lead the way. Look no further than California and its comprehensive cap-and-trade system. It limits carbon pollution with a firm, declining cap, giving Californian businesses maximum flexibility in how to make their operations more efficient and innovate their way out of the high-carbon, low-efficiency bind. That ought to be a template for the nation.

Meanwhile, we can do a lot worse than look to plastic bag fees as a model for the kinds of policies that we know are necessary to tackle global warming. Cass Sunstein, the co-author of Nudge, and Cass Sunstein, the policy analyst calling for a price on carbon pollution, would approve.

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