Catastrophic Understanding

A little while back, Josh asked the question ‘how do catastrophes factor into our calculations?’ He asked the question in the context of cost-benefit analysis, but it’s a critical question for almost every facet of climate change research. The journal Nature used this week’s issue to shed some light on the subject. Since you have to pay to access Nature, I recommend the short but informative rundowns of the content from Environmental Capital and RealClimate. According to these studies, if we as a global society want to avoid catastrophe climate change, then we need to cap the world’s emissions at 1 trillion tons of CO2. Considering that we emitted one-third of that in the past 9 years, we could be in for a rough ride.

Science models can only tell us (to a degree of certainty) where to expect a greater chance of catastrophe, but how can we translate that into economic analysis. There are a couple ways to do it. First, you can use a low discount rate to better internalize the possiblity of a major disaster. Discount rates are often huge sticking points for economists arguing about each other’s models (take Bill Nordhaus vs. Nick Stern, for example) and there’s still no consensus as to what is the ‘correct’ rate.

Second, you can use risk analysis to better understand how bad disasters can be. A recent paper by Carolyn Kousky and Roger Cooke of RFF (which you really should read) does an excellent job of laying out some of these risk considerations, and it definitely provides some food for thought. The three major risk considerations are:

1. Micro-correlations – The events of El Nino years are a good example. If you look at events in isolation (heavy rains and mudslides in Cali, poor fishing seasons in Peru, etc), they might not be noticeable, but that would lead you to underestimate your risk of major damages . If you take the broader picture though, you can see that disasters can be correlated and you can accordingly adjust your risk assessments.
2. Fat tails (of a bell curve/normal distribution) – Basically, extreme outcomes are more likely. Disasters and extreme events compound on each other to create fat tails, which increases solvency risk of insurance, meaning that you might have way more damage than you can afford. A good example of that is Florida with their Citizen’s Property Insurance Corp., which has $3 billion to cover its $450 billion worth of exposure.
3. Tail dependence – Tail dependence is essentially the likelihood that bad outcomes occur together. It is distinct from micro-correlations and fat tails, and they explain it much better than I can, but it relates to the idea that insurance lines can be independent of each other until there is a disaster, at which point they become dependent.

If you don’t account for these issues, you can severely underestimate your risk related to climate change. Cost-benefit analyses seem to have a pretty difficult time incorporating these factors, but there is still much research to be done on this front. It could be a while before we have reliable methods for incorporating catastrophes into our modeling. I don’t know about you guys, but I’m still miles and miles away from fully understanding this stuff. At least I can tell the difference between weather and climate, so I got that going for me, which is nice.

Conflation

I keep hearing about how we need really high carbon prices (or a revenue allocation scheme that does not blunt the consumer’s pain) or else we’ll never move from coal to renewables.  But if we cap carbon emissions, how does it matter where they’re coming from?  I realize there are some path dependency issues with coal and scale and (largely unproven) LBD advantages to using renewables now, but in general where do we get this idea that the goal of carbon policy is to end all coal use?  Instead of cap-and-trade, maybe the government should just get the military involved and take out all coal plants.

WaPo vs. Climate Change

If any of you are avid readers of the Washington Post editorial pages, then lately you might have noticed some climate change-related hating. There was of course the well-documented brouhaha back in February surrounding George Will’s spurious climate change articles and the Post’s editorial board refusing to do anything about his painfully incorrect assertions. Accusations and double talk bandied about, arguments were made, a good time was had by all.

This week, Post columnist Robert Samuelson decided to get in on the act as well. His column doesn’t do anything as egregious as question whether global warming is real or not. Instead, he goes after environmental groups that are trying to convince the public that climate change legislation will cost almost nothing. Why is this bad? Because according to him:

The claims of the Environmental Defense Fund and other environmentalists that this reduction can occur cheaply rely on economic simulations by “general equilibrium” models…The trouble is that these models embody wildly unrealistic assumptions: There are no business cycles; the economy is always at “full employment”; strong growth is assumed, based on past growth rates; the economy automatically accommodates major changes — if fossil fuel prices rise (as they would under anti-global-warming laws), consumers quickly use less and new supplies of “clean energy” magically materialize.

So, either climate change doesn’t exist or it’s a great way for those evil enviro-types to lie to us all with their voodoo economics models, according to the WaPo editorial stable. Samuelson’s claims don’t hold up much better than Will’s, though. Just like Will got pummeled by the blogosphere, Paul Krugman rides into the picture to lay an editorial pimp-slap on Samuelson, saying:

I don’t think there’s a single thing there that’s right. What on earth do business cycles have to do with it? The models may assume growth based on past trends, but they DO ask whether emissions policy would greatly slow growth — and the answer is no. Consumers aren’t assumed to “quickly” use less — the time frame in these models is decades long. And new supplies don’t “magically” appear — they respond to price incentives, which is what economics usually says…this column exemplifies a strange thing about the climate change debate. Opponents of a policy change generally believe that market economies are wonderful things, able to adapt to just about anything — anything, that is, except a government policy that puts a price on greenhouse gas emissions.

Well said, Dr. Krugman. Needless to say, if you are looking for a well thought-out and robust discussion about the pros and cons of climate change legislation, perhaps it would be wise to steer clear of the Washington Post.

Climate change vs. your weekend

On your list of things that climate change could possibly ruin, be sure to add weekends. If you read Env-Econ, which I presume a lot of you readers out there do, then you know than Tim scooped me on talking about my own climate change and recreation paper. That’s an illustration of why he and John are the big dogs and I’m still a wee pup. I’ll just add two quick points to what Tim already highlighted:

1. Recreation resources are going to become more and more scarce due to climate change, but demand is likely going to continue to increase. More people are into outdoor sports than ever before and that’s probably not going to drop off anytime soon.
2. Adaptation is key, but figuring out to implement strategies effectively, especially related to natural ecosystems is going to be a huge challenge.

National Parks are an excellent illustration of the challenges we’re already starting to face. Not only could they be canaries in the coalmine as far as major ecosystem shifts are concerned, but they also show how much federal agencies can struggle to deal with environmental issues under constrained resources. So, if you want to see a glacier in Glacier National Park, or even a Joshua tree in Joshua Tree National Park, you might want to make travel plans soon.

I’m in good company!

In another congratulatory post on recent John Bates Clark medal winner Emmanuel Saez, Brad DeLong writes, “But perhaps Emmanuel’s most impressive accomplishment is that he has been personally denounced on the editorial page of the Wall Street Journal.”

But has he been called a “schoolboy” by the Wall Street Journal? FTW. The AEA should should clearly prepare to put my name on the, er, trophy in 15 years (assuming I actually make it through my PhD program).

The editorial denouncing Saez can be found here.

EIA AEO minutia of the day

One of the annoying features of the EIA’s Annual Energy Outlook is that it has to model policies exactly as the law is currently written. For example, even though the production tax credit for renewable generation had been extended almost every years since its inception (after the requisite political brinksmanship), these extensions are only on an annual basis, so EIA assumes they expire when it forecasts what the world is going to look like in the future.

Which is why I was surprised to come across this footnote in Table 13.5 (Regional RPS requirements), in the AEO 2009 Assumptions documentation: “California is not projected to meet RPS targets because of funding limitations.”

Now I’ve expressed skepticism of California’s state RPS in the past, but it certainly says something when the hyperliteral folks at AEO call your bluff.

Oh technology policy, how could I ever leave you?

I’m checking in (but don’t call it a comeback*) because there was a big announcement by Obama at the National Academy of Sciences yesterday.  By now you all should know I can’t resist a good R&D policy post:

The president laid out an ambitious plan to invigorate the country’s pipeline for innovation, from grade-school classrooms to corporate, government and academic research laboratories.

Mr. Obama’s plan includes fulfilling commitments dating from the Bush administration to double the budgets of the National Science Foundation, the science office of the Department of Energy and the National Institute of Standards and Technology.

But he is also seeking increases in direct federal investment in medical and energy research, and he would make permanent what has been a sporadic research and experimentation tax credit offered to companies that push beyond the quest for quarterly profits to pursue breakthroughs.

Obviously the increased NSF, DOE, and NIST budgets are really important.  I’ve discussed in the past that some of that money will probably go to increasing the incomes of R&D labor, and today N-Greg-Mankiw cites a kind of quick and dirty paper by Goolsbee to poo-poo this).  This is due to the extremely inelastic supply of highly-skilled labor.  You can’t just see increased salaries and decide to be a particle physicist.  At the same time, at least some of the extra funding is going to go toward funding research that was shelved to lack of money and also toward equipment to increase the quantity of quality-adjusted R&D.  In addition, Ryoo and Rosen (JPE 2004, sorry but it’s gated) find that the choice of an engineering career path is plausibly a combination of static (cobweb) and rational expectations models.  The decision to become an engineer is determined jointly by current career prospects, and tempered by the assumption that others will behave similarly.   That is, a spike in engineering income will result in more freshman choosing engineering, but this enrollment surge will be dampened by the subtle understanding that more of their classmates will also choose engineering and drive down wages in the future.  I would guess, however, that the first-order effect will dominate due to its notably lower informational demands.  Thus, we can expect that of the youths who are deciding between studying physics and a field likely unaffected by the income shock, say ethnic studies, this short-term income spike associated with new NSF/DOE/NIST $$$$ will likely draw some of them toward the hard sciences.

So beyond the fun in the skilled labor market, I think that Obama’s decision to pursue a permanent R&E tax credit is outstanding.  Certainty is always really important for firms and organizations.  There’s just the whole planning/budgeting aspect that yearns for a more reliable policy.  However, it’s also important because a tax credit can grant firms the ability to maintain an unambiguously higher rate of R&D.  Of course, some firms will substitute away (i.e. R&D is cheaper, so do the same amount or slightly more and shift the money saved into other parts of your business), but the income effect will stand as well.  In general it is often forgotten that you can’t just decide to do a bunch of R&D one day.  There is capital that must be invested to expand R&D, whether in terms of facilities, equipment, support staff, or skilled R&D labor.  Thus, knowing for sure that you’ll be able to count on tax credits for R&D done in the future, you’re more likely to invest in the fixed costs necessary to carry out a higher level.

So yeah.  Obama.  R&D $.  Woo!

*swish

What wouldn’t you be willing to give up?

This is a question that I think about frequently in the context of climate change.  Over the last few years I have become more conscious of my daily activities and their larger climate impacts.  I make sure to turn off the lights etc when I leave the house and have modified my daily life to be more climate conscious.  Most of these aren’t very difficult to remember, and take very few personal sacrifices. 

However, there are also things that I would not give up.  For example, I know that eating meat generates a lot of greenhouse gasses, but I do it anyways.  I also am a big fan of hockey in D.C. even though I know cooling down a 20,000 person arena to 60 degrees in late April is a huge waste of energy.  In the end, there are some things I just am not going to stop doing regardless of how much someone wags their finger at me. 

The truth is that everyone has their own set of preferences and their own list of things they wouldn’t give up.  So, I’m curious, what wouldn’t you give up?  I plan to come back to this topic with an actual intellectual lens at some point, but it is Friday, and I have a hockey game to go to.  

Bizarro politics

So let me get this straight. Today, Al Gore came and testified before Congress on the merits of markets (pricing externalities). And Newt Gingrich voiced his strong preference for government picked winners and subsidies rather than market mechanisms. Just checkin.

Sense is elsewhere

Clearly I’m not doing a very good job of quitting CT. That’s because there’s too much insanity going on in DC these days and, honestly, I need to vent. Today I’m particularly riled up by this report from the WSJ on the “cap and haggling” going on behind the scenes of the Waxman-Markey bill.

By all accounts, load based allocation (LBA), which is the free assignment of carbon permits to electricity ratepayers, has emerged at the most likely winner of the permit allocation sweepstakes. Both US-CAP and EEI support allocating 40% of permits to ratepayers, and from the looks of the WSJ report, Congress is falling in line. And you know what? LBA is fine. Sure it goes against the full auction Obama pledged repeatedly during his campaign, but this is politics, and compromises must be made to get things done. However, we should understand the implications of this decision:

1) LBA is a subsidy to electricity consumption. It will reduce the price impact felt by electricity consumers (relative to 100% auction), but INCREASE the price impact everywhere else in the economy. That means you, drivers.

2) One thing to keep your eye on is just how these permits will be allocated to ratepayers. There are three possible determinants: per capita, per unit consumption, or per emissions, with combinations also possible. And which dimension we choose to allocate along dramatically affects the outcome for a given region. California has lots of people and few emissions – ei it does really well along one dimension and really poorly along another. Politically, LBA is also being billed as a way to compensate coal dependent regions. That means emissions is looking like the front runner here, which is the least efficient allocation scheme possible. As I’ve written before, when you consider all of the work eco-friendly states have done over the past 20 years, this seems like a pretty effed up definition of equitable allocation.

3) 40% is a lot of permits to give away for free and 10 years is a long friggin time. Even though electricity accounts for 40% of current emissions, the electric power sector is supposed to account for the bulk of emissions reductions in the early years of a climate program. Either we don’t want the electricity sector to do any work (then who will?) or we feel the need to lavishly compensate them for doing so.

So, in sum, who benefits? From a political-realist perspective it clearly says something that electric utilities are lobbying for LBA. And as I described in point 2, any allocation scheme within LBA is going to benefit some states more than others. There’s no free lunch, and somebody is clearly getting pwn3d here.

Yet this is DC, and we only like our policies if they promise that 2+2 can be greater than 4. In that same article compensation is also promised for cement and steel producers and low income families. At the end Nancy Pelosi is quoted as saying: “There should be no cost to the consumer”. Keep telling yourself that, Madame Speaker.

Slate, you disappoint me

Apparently, not everyone took my Earth Day advice. Dozens (ok, like 1 dozen) of intrepid conservative souls managed to find their way down to the EPA main offices here in DC to protest Earth Day. Good for them, sticking it to stupid Earth and everyone who likes it. To be fair, according to Slate, they are not hating on the Earth or its essentially worthless holiday. As for what they are hating on, judge for yourself:

What they oppose is Obama’s environmental tool kit. Instead of regulation-based solutions like cap-and-trade or government-subsidized wind farms or public conservation, they support “market-based environmentalism.”

Can you identify what is wrong with that statement? Are you kidding me? I can understand the protesters themselves not understanding how eye-gougingly stupid they sound, but what the EFF is the journalist doing? If you do bother to read the article, you’ll see that never once does it ever bother to point out the fact that cap-and-trade is a market-based environmental solution. I understand that a lot of people don’t understand exactly how cap-and-trade systems work, but let’s try to be a little informative. Please. That’s sort of the point of journalism, even light, fluffy, feature-style, internet-based journalism. For the love of God, try to be informative.

It’s not that hard to use the googles to figure out how cap-and-trade works. You’d think with the word ‘trade’ in the phrase might make someone think it could potentially involve some sort of economic mechanisms. Sigh.

Happy Earth Day

WWWWWWWWWOOOOOOOOOOOOOOOOOOOOO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Happy Earth Day, everyone. You should go out and celebrate. How? I recommend hugging a polar bear, because it’s really freaking cute and you might not be able to do it for much longer.

See? Really freaking cute. Have fun.

Adapting moral hazard

Insurance is going to play a huge role in getting policymakers and the public in general to get a tangible grip on the effects climate change will have on our daily lives. I’ve blathered blogged previously about some of the interesting moves that state regulators are making to force the insurance industry to be more transparent in how it classifies threats posed by climate change, but don’t think they have it all figured out either.

Last Friday, ClimateWire posted a fascinating little ditty on the current battle in the state insurance regulator world about a national catastophe plan. The issue at hand is whether or not the federal government should accept the risk from increases from swirlier hurricanes, twistier tornadoes, blowier winds, and other incredibly technically-termed problems. This could prove to be a boon for states like Florida, which could rely on the other 49 states if this year’s hurricane season is particularly nasty.

Florida could use a little help, especially with its state-backed Citizens Property Insurance Corp., which has up to $45450 billion in exposure and about $3 billion to cover it all. For those of you math-challenged, that is 0.67 percent of total exposure that Florida can cover, and non-Floridians can cover the rest. This of course is in lieu of private insurance, which is retreating from coastal Florida faster than a gale force wind.

The regulators haven’t approved the plan yet, not are they anywhere near doing so. Despite the reprieve, there are still reasons to be concorned. While there is not much we can do about existing infrastructure in at-risk areas, we should still reflect the actual risk we face in different areas with insurance premiums.

I know this is radical idea, but I promise I’m not out on this limb all by myself. Howard Kunreuther, an expert in risk management, said the same thing two years ago in a far-more reputable publication than this one. Not reflecting real risk in really risky areas is what we in the business call ex post moral hazard. As climate changes manifests itself in nasty ways, what with the sea level rise and all, we are going to face this type of moral hazard more and more, and we’ll have to decide how to deal with it. Hopefully, it works out better than the last one.

Full article after the jump.

Parlez-vous Francais?

Courtesy of Env-Econ:

Out of sheer paranoia, I like to know what others are saying about us.  From Rationalite Limitee (imagine those French accent thingies on the e’s):

j’espère que ceux qui ont passé hier l’épreuve d’économie de l’agrégation d’économie-gestion ont été des lecteurs assidus de blogs du genre Environmental Economics ou Common tragedies. Avec un sujet comme “Economie de marché et gestion des ressources naturelles”, c’était du tout cuit…

Not being French, here’s the Babel Fish translation:

I hope that those which passed yesterday the test of economy of the aggregation of economy-management were assiduous readers of blogs kind Environmental Economics or Common tragedies. With a subject like “Market economy and natural stock management”, it was cooked whole…

That clears it up.

For the record, it’s better to be complimented in French (sort of) than the alternative:

Also, for the record, the Azzuri flop like choking fish.

The Onion does Offsets

Yep, that sounds about right

Thanks Rich

Earth Day Sale!

While this blog continues to have no official association with RFF, I can’t help but tell everyone about a good sale when I see one (or something like that).   I “found” this little tidbit of information from the RFF press. 

As part of an annual Earth Day sale, RFF Press is offering the opportunity to purchase books at a 40% discount.  Our publications represent some of the leading scholarship on natural resources and the environment.  This year’s sale covers all published books, including works on land and water resource management, forestry, environmental economics, international development, human ecology, and environmental law.  

We invite you to explore our catalog at www.rffpress.org/earthday.  Happy Earth Day!

So, grab a good book this earth day, head outside and enjoy the nice weather.  I know I will.  

Where have all the fish gone?

The BBC ran an early piece on an EU report set to be released tomorrow on the state of European fisheries.  Not surprisingly, among the report’s conclusions are the facts that “30% of EU fish stocks are beyond safe limits,” and “eighty-eight percent of EU stocks are fished beyond their maximum sustainable yield.” Sadly, this status is not unique, but shared by many of the world’s fisheries.

In my last post I might have suggested an undue skepticism of market-based environmental solutions.  On the contrary, and fisheries are a prime example of where economic and environmental goals can be extremely well aligned.  But for the fact that we’ve replaced mammals with fish, and a grassy clearing with oceans, fisheries are an almost exact analogue to  Hardin’s Tragedy of the Commons: non-rival and non-excludable.

According to the BBC, in the face of these damaged fisheries, “one option raised is expanding the use of transferable quotas, where fishermen “own” the right to fish for many years, so gain from managing the stock sustainably.” This type of management regime grants a discrete property right to a portion of the overall quota.  Unlike traditional management where everyone in the fishery races to catch as much of the overall quota as possible, individual quota programs allow quota holders to catch their allocation at their leisure, and allowing quotas to be traded to the most efficient players.

Individual tradable quotas have become more popular in world fisheries, but are not yet standard practice.  New Zealand, Australia, Iceland, and even the U.S. have pioneered their use over the last several decades with real success, documented in several studies (EDF and one by my old advisor here to name a couple).  Hopefully studies like this will help encourage fishery managers throughout the EU (and the rest of the world) to explore tradable quotas and other assignment of property rights to the world’s fisheries.  Not only do tradable quota systems result in healthier fish populations, but also help resolve some of the other issues that come along with mis-managed fisheries – too many vessels, over-investment in hardware, short seasons.  Of course, the impacts on local communities are not always as clear-cut.  Consolidation of the fishing fleet pushes out the little guy who has relatively high costs and low margins, but that’s an issue for another day.

How do Catastrophes Factor into our Calculations?

I’ve always been fascinated by the idea of including the probability of a catastrophic climate event when calculating the costs and benefits of climate change. Even if the probability is very small, the sheer devastation of such an event can factor into climate estimates. Other models can have tipping points, where once a certain temperature is reached, a chain reaction is triggered which can accelerate CO2 release. I am in no way an expert on models that deal with each of these phenomena, but I did recently see a piece of news which disturbed me greatly.

The article titled “Forests could flip from sink to source of CO2: study” link discussed findings by “35 of the world’s top forestry scientists”

If temperatures climb even further, the consequences could be devastating, according to the report by the Vienna-based International Union of Forest Research Organisations (IUFRO).

“The current carbon-regulating functions of forests are at risk of being lost entirely unless carbon emissions are reduced drastically,” said Alexander Buck, IUFRO’s deputy director and coordinator of the report.

“With a global warming of 2.5 C (4.5 F) compared to pre-industrial times, the forest ecosystems would begin to turn into a net source of carbon, adding significantly to emissions from fossil fuels and deforestation,”

While estimates of devastation due to large temperature increases are not new, these recent warnings are still very scary. A lot of the carbon loss will be in the tropics, an area which captures almost 20% of total carbon emissions according to the article.

This recent finding brings a few questions to mind. First, as another tipping point is identified, how do we account for it in our cost/benefit analysis of climate policy?  Hopefully results such as these will highlight the growing importance of Domestic and International climate agreements.

My second question is about forestry offsets.  Do they not lose some of their value if they might eventually release the CO2 they were supposed to be offsetting?

Endangered(ment) Species

It’s a nice day here in our nation’s capital (one of the few over the past few months), which is making many of us here feel chipper, sunny, and generally at peace with the world. We shouldn’t feel that way though, because we are in DANGER! Well, sort of. The WaPo is reporting that sometime this afternoon the EPA will official announce its findings that carbon dioxide emissions pose a danger to the public’s health and welfare. The endangerment finding, as some in the Beltway bubble call it, is a response to the Supreme Court’s ruling on Massachusetts vs. EPA two years ago, where it found that the EPA can regulate emissions of GHG emissions under the Clean Air Act.

There have been rumors that this was going to drop right around Earth Day, which could ensure a lot of media coverage and much green revelry. Now that it’s official (it needed approval from the OMB), consider it one more spice in the fiery cauldron that is the U.S. response to climate change. If Congress can’t get its act together and pass some kind of legislation passed (Henry Waxman wants his bill through committee by Memorial Day), then the EPA will step up to the plate and regulate, which will be industry’s worst nightmare come true. Truth be told, not many people want EPA to regulate on its own, including EPA head Lisa Jackson. As she says in the article:

The best solution, and I believe this in my heart, is to work with Congress to form and pass comprehensive legislation to deal with climate change. We hope to avert a regulatory thicket where governments and businesses spend an inordinate amount of time fighting. We are not looking for a doomsday solution.

This is a big trump card for the Obama Administration and those in Congress who want to see something passed this year. The way things are going these days, doomsday solutions don’t seem all that unlikely. Stay tuned…

An introductory post/rant from a new contributor

To all of you in the Common Tragedies community I would like to introduce one more tragedy: my presence here as a contributor. My name is Tim Kidman, and I currently work at the Climate Action Reserve – an organization whose views and ideas I make no claim to represent in my posts here. What you read here are my thoughts alone, and do not represent my employer. This post has nothing at all to do with the Reserve. Of course, the Reserve has some pretty great ideas too, so I’d encourage everyone to check out our program. But you know the deal, so the above is my disclaimer.

When my friend Danny asked me to join the blog I immediately jumped at the opportunity. I am constantly intrigued by the power of economic theory to explain behavior and environmental issues, but I am far more amazed by the ingenuity and creativity of thinkers to employ these same theories to develop innovative remedies and policy mechanisms for the very same problems.

Now, none of what follows is to say that environmental economics is not one of the most valuable and powerful tools we have available to us today. I truly believe it is. What follows is simply to say that we need to always ask the question: are we trying to fit a square problem into a round solution? Because the truth is, no matter how many problems are round, a few are definitely square.

So, in my introductory post/rant I would like to echo a cautionary sentiment about market mechanisms, or at least our relationship with them, that Danny posted yesterday: “They are not a panacea, however, so don’t be afraid to be a little skeptical now and then.” The neatness and coherence of viewing environmental issues through a purely economic lens has immense intellectual appeal. It is scientific, structured, and at first glance offers a utopian vision of freedom, choice, environmental integrity, and that ever-present word – efficiency.

In grad school I definitely fell into this optimistic, almost religious faith in the ability of economics to explain and fix environmental problems as disparate as over-fishing and climate change – two that I actually believe it is particularly well suited for. In that context, I believe it served me and my classmates well; it allowed us to dig deeper, learn more, and think creatively without the constraints of the “real world.” But now that I am back in the real world, that optimism has been tempered. I still have faith in market mechanisms and am a strong believer in a cap-and-trade system. However, and this brings me back to Danny’s point, I think it’s important to recognize that certain issues, or certain aspects of issues, simply do not lend themselves to market mechanisms.

At a carbon conference a few weeks ago, Carl Pope of the Sierra Club stood up in front of a room of 850 attendees, and told us all that markets were not the only answer. It was, in my opinion, the best speech of the event. This was a room full of offset project developers, brokers, investors, regulators, and non-profits, all of whom had a vested interest in seeing the carbon market mature (myself included). It took courage to stand up as a keynote speaker and speak openly to this audience, but more than that it highlighted a paradigm shift that I think has gone largely unnoticed.

For decades, the environmental community and certain groups in particular have had the reputation of being idealistic, stubborn, and unwilling to place pragmatism over righteousness. In contrast, industry and investor advocates have cautioned against unbridled idealism and regulation– often very transparently – arguing instead that a pragmatic approach which balances societal and environmental goals should be considered. (I by no means condone the industry lobbying that has taken place, or the often disingenuous opinions proffered, but instead use this only to illustrate a point)

So back to Pope. The new environmental community, the one founded on economic theory, market mechanisms, pragmatism, and which has aligned itself much more closely with industry, risks falling into the same traps as past movements if we are not vigilant. Unbridled optimism and commitment to a single framework is risky. Whether that is a call for regulation, boycotts and protests, or a call for markets, no single framework provides all the answers. It may provide many, and I’d say most, but not all. Interestingly, it was an outspoken advocate of more traditional conservation that most recently brought this consideration into relief, grounding all of us and reminding us that results may be more important than the means.

Markets are great, and economics is a useful lens. But in the name of our ultimate goals, pragmatism and reality require that we recognize certain limitations. There are some issues that markets are simply ill-suited to solve. True, markets may not work because of imperfect information, too many players, etc. (not the theory itself, but rather its implementation), but if we really want to get something done then it is important to recognize that a different mechanism may be more appropriate. Skepticism of market mechanisms is important not just when considering the details of their implementation, but I would argue, even at the level of assessing their very appropriateness.

I recognize that this is a bit of a downer, especially for a first post, but I don’t intend it that way. There are more problems that can be and should be solved by employing and considering environmental economics than I can list. And because of that, it is important that as practitioners we focus our energy on those.