Market Forces

Jobs, jobs, jobs

By / Bio / Published: December 2, 2010

Co-authored with Nat Keohane.

Marc Gunther lists ten reasons why “Cancun can’t.” We won’t go into his other nine points here, but number three on the list hit home:

Environmentalists have been disingenuous about the climate issue. They’ve argued that regulation of carbon dioxide will create green jobs and grow the economy. Typical is this graphic from Environmental Defense. (“Get a step-by-step picture of how a carbon cap will spark new jobs, lift the economy and clean the air.”) Uh, no. Most economists agree that dealing with global warming will entail short term costs. (See Eric Pooley’s excellent analysis at Slate.)

Talking about jobs is one of the most difficult things to do well in the arena of climate policy. The jobs issue is highly politically charged—and for good reason, given the state of the economy. But it struck us as unfair for Marc to use EDF as his bête noire.

To begin with, the graphic that Marc links to doesn’t make the claim he ascribes to it. We weren’t saying that climate policy was a free lunch. What we were pointing out was that doing something about climate can also create good jobs in some unexpected places. More on that in a minute.

We have bent over backwards to be as balanced and rigorous as possible in our assessment of the economics of climate change.

This turns out to be perfectly illustrated by Eric Pooley’s analysis—the same one Marc links to.

Eric’s indeed excellent analysis makes two points:

First, there is a broad consensus that the cost of climate inaction would greatly exceed the cost of climate action.

That’s the main, often-forgotten point because it seems so obvious: “it’s cheaper to act than not to act.”

We should really stop here and reflect on that for a second. Many—if not most—economists do, in fact, agree on that statement and have for a while.

But that’s not our point here, either. Read More »

Also posted in 1000 words, International, Politics / 1 Response

Not green or brown, just good economics

By / Bio / Published: December 2, 2010

Lord Stern famously calls global warming “the biggest market failure the world has ever seen.” It would only be natural for any introductory economics textbook to prepare budding economists to address this problem.

You would think.

Yoram Bauman, otherwise known as the Stand-up Economist, put together a sobering report: Grading economics textbooks on climate change.

Only four of sixteen books received As.

The others are either out of date, outright wrong, or worse.

It’s frustrating that even the best texts seem to banish the biggest market failure into sidebars or special chapters toward the end. Sadly that’s the typical treatment of environmental issues in introductory economics classes: “First, let’s discuss all the reasons why the economy is doing just fine. Then, if there’s time at the end, we’ll cover some exceptions to those rules.”

Krugman and Wells’s text appears to be the only one that integrates climate considerations into a key chapter, one on “long-run economic growth.” That’s not entirely surprising, given Paul Krugman’s other writings on the topic, but it’s good to know it starts with the introductory text. It would be even better if other texts followed that lead.

(More takes: Mankiw and Env-Econ)

Also posted in Climate science, Markets 101 / Leave a comment

What’s the matter with Arkansas?

By / Bio / Published: November 30, 2010

Midwestern states have traditionally been reluctant to embrace cap and trade. Now it looks like they may well turn into some of the larger beneficiaries of the California cap-and-trade system.

The largest supplier of likely carbon offsets for the California program so far? Arkansas.

Midwestern suppliers

States of origin for CAR credits

Besides California and New York, numbers 2 and 3 on the list, none of the other states currently have cap-and-trade systems in place.

Michael Wara has a terrific blog post on this phenomenon and the ensuing politics of cap and trade. [Update: New graphs and data. The story doesn’t change. The graphs are prettier, though.]

Of the four types of offsets initially allowed in California (landfills, livestock, conservation forestry, and domestic ozone depleting substances), Midwestern states are the main beneficiaries.

Not CDM

How will that change the politics?

The Clean Development Mechanism (CDM), the UN-brokered international offsets system has perverse incentives. It motivates companies supplying large amounts of CDM credits (and receiving billions of dollars in return) to lobby their governments against instituting stricter domestic policies and having cap-and-trade systems on their own, lest they lose their chance of selling exactly those CDM credits. That’s one of the many reasons why the CDM system ought to be radically reformed.

What makes all the difference here is that CDM credits originate mainly from industrial and energy sectors that ought to be part of domestic cap-and-trade systems in the first place. California’s offsets are focused on sectors not covered by its own cap-and-trade system and most likely not covered directly in a US-wide emissions market.

A US-wide cap-and-trade system would only increase demand for these kinds of agricultural offsets and those from ozone depleting substances (ODS), making selling them even more attractive.

That by itself may not revolutionize federal politics, but at least the incentives are working in the right direction. Read More »

Also posted in California, Politics / Leave a comment

CCX, RIP—or is it “good riddance”?

By / Bio / Published: November 20, 2010

Chicago Mercantile ExchangeThe Chicago Climate Exchange, one of the first voluntary cap-and-trade programs, is shutting down next month. That’s bad news for the planet, isn’t it? Just take a look at today’s Wall Street Journal editorial page for an apparent confirmation. There the news is being celebrated as “cap and retreat.” Check.

That should indeed be confirmation enough. Sadly, what’s good for the Journal tends to be bad for the planet. Here that may not hold, although it’s not for the reasons the Journal thinks.

One among many

The full editorial is behind a firewall. That’s just as well. The rest is as wrong as the beginning. Let’s start with the only direct quote. The Journal opinionators say the CCX advertised itself as “North America’s only cap and trade system for greenhouse gasses.” In fact, CCX’s own webpage says it’s “North America’s only cap and trade system for all six greenhouse gases.” That makes all the difference.

Carbon dioxide, the main greenhouse gas, is or will be covered in at least 15 states. RGGI covers 10 Northeastern states with its carbon cap, and Californians just reaffirmed with a clear vote of 60 to 40 to put in place theirs (which also covers all six greenhouse gases). New Mexico has announced similar plans.

Volunteerism won’t do

There’s also a much larger point here. The CCX was voluntary. Companies volunteered to sign up. It doesn’t take a Ph.D. in economics to realize that the only companies who sign up for reasons other than marketing purposes are the ones that have allowances to sell. Those that need to buy them, stay as far away as possible.

No market can operate under these conditions. If anything, it’s surprising the market held up as long as it did—no doubt due to companies’ willingness to write off their participation as a marketing expense. Why else would the price for a ton of emissions ever be much above zero?

Thanks for the memories

CCX did provide some valuable lessons for participants. Chief among them, how to implement such a trading system internally, how to minimize emissions and make money, and whether and how it would be different from SO2 trading, something many CCX participants did successfully for over a decade.

But CCX was never meant to be anything other than a precursor for a U.S.-wide system.

The same, of course, goes for most state-wide initiatives. New Mexico’s plans will put the state ahead of most others in the U.S., but Santa Fe alone will not prevent China from pulling farther ahead of the U.S. in generating sustainable jobs, or decrease the billions we send to the Middle East every year.

Also posted in Cap and Trade Watch / Leave a comment

Gung-ho about cap and trade

By / Bio / Published: November 17, 2010

“Why are you so gung-ho about cap and trade? Don’t you realize it’s a corporate takeover of the atmosphere?”

I’m paraphrasing here, but this was the gist of an audience question I got while moderating a panel on Getting Carbon Market Governance right from Day One at the International Anti-Corruption Conference on Friday. The rest of the discussion was a frank exchange of ideas on how to ensure a workable, transparent carbon market. More on that later. For now a quick response to this question because I think it gets to the heart of why we do what we do. Why are we so “gung-ho” about cap and trade?

We ought to be polluting less because it’s the right thing to do, not because someone else limits pollution and hands out allowances to companies. Well, yes. If everyone woke up tomorrow and decided that global warming pollution was bad and that we ought to stop dumping billions of tons a year into the atmosphere, far be it for me to stop them.

Things aren’t quite that easy. We clearly ought to be moving toward a more coherent climate ethic. One of our panelists, ethicist Don Brown, made exactly this point. The question is how to get there.

No volunteers, please

Volunteerism simply won’t do. Misguided collective action got us into this mess. Properly guiding collective action is the only way out. That means polluters ought to pay. Pollution must not.

There may be academic debates to be had on cap-and-trade versus carbon taxes, but fundamentally the best way in the real world is to put a firm limit on pollution. It worked for combating acid rain in the 1990s. A version of it works for combating overfishing. And the EU has shown that it works for carbon on a large scale.

Carbon markets around the globe

Global carbon markets operating, likely, and under consideration.Cap and trade might be “dead” in Washington at the moment, yet it is clearly alive and well and spanning the globe: from existing systems in the EU, the Northeastern US, Alberta in Canada, and New South Wales in Australia, likely systems in California, South Korea and Japan, to systems under discussion or in planning stages in Mexico, Chile, Brazil, and Russia—not to forget China, which will likely at least experiment with cap and trade as part of its 12th five-year plan, in place starting in 2011.

Good for the environment, good for business

Will there be business interests pulling for cap-and-trade? Hopefully. The task is to guide a $5 trillion-a-year fossil-fuel-based energy sector into a cleaner, leaner future. There better be—and there will be—plenty of money to be made in the greener economy.

Yet far from being a corporate takeover of the atmosphere, a well-designed carbon market is a way to make polluters pay for the costs they now shove off onto others by treating the atmosphere as a free dumpster.

Also posted in Markets 101 / 7 Responses