Long time readers of this blog may suspect — and close friends of this blogger probably know — that Okkervil River is one of my favorite bands.  This post has nothing to do with environmental economics so the rest of it goes below the fold…

I have heard the new album.  It is very good.  Fans of the band should get excited.  But manage your expectations — this is less of a full album than a completion of The Stage Names.

From now on this album and TSN should be viewed as a single entity; there are clear thematic links throughout.  This would make The Stand Ins seem like Black Sheep Boy Appendix, but in fact it is much stronger: 8 very good songs and 3 (short) instrumentals.

I cannot say exactly how good it is yet — I have not had time to make out most of the lyrics and these are an enormous part of Okkervil River’s charm.  But based on the quality of the sound alone I would say that TSN/TSI will overtake the (combined definitive) Black Sheep Boy in my ranking of Okkervil River albums.

A few more random thoughts:

1. The name alone is brilliant, coming ever-so-slightly after TSN in an alphabetization. Combine that with the cover art, thematic links, and the (relative) consistency of sound and it is clear these albums should be viewed as one.

2.  Okkervil River has now put out two extremely ambitious and successful concept albums in a row, BSB and TSN/TSI.  But for my money Down the River of Golden Dreams remains their best album.  (For that matter it is probably my favorite album this decade.)

3. I am very curious to read the lyrics to Blue Tulip.  Is it intended to be a member of the “color series”? [In order: Red, Yellow, Black, and Savannah Smiles (Grey).]  The test for me will be whether it continue the OR tradition of having the color song focus on parent-child relationships (although this might be interpreted broadly).

I will be pre-ordering the album as soon as I see it is out.

Jeff Frankel argues that the Democrats are right to oppose off-shore drilling, but for the wrong reasons:

The Democrats have it precisely backwards. The problem with Republican proposals to re-open domestic oil drilling is not that we desperately need the oil right now, whereas new oil discoveries would not come on line for 5 to 10 years. Rather it is that we might truly desperately need the oil in 20 or 30 years, and so don’t want to use it up over the next decade. …

We don’t want to maximize current domestic production. Rather we want to leave the oil underground (or underwater) for decades, until we really need it, until we are so desperate that the economic benefits really do outweigh the costs.

This is the same dynamic that Rich mentioned a couple weeks ago: our decision to leave a bunch of our domestic oil in the ground looks like a pretty good investment decision now that oil is an order of magnitude more expensive than it was a decade ago.

But I am not convinced by Frankel’s argument that oil will march ever upward at astronomic rates and in 30 years we will be happy we left it in the ground. I can imagine states of the world where the price of oil is $20 in 30 years. (Perhaps a result of a battery-powered transportation fleet combined with electricity from renewables, nuclear, and CCS plants.) At the very least economic theory tells us that when both supply and demand are very inelastic that small changes in either can result in very, very large price changes. No one in 1980 thought oil could ever drop to $10 a barrel again. It did.

The dirty little secret of energy policy in the U.S. today is that opening up our domestic reservoirs would almost certainly pass any reasonable cost-benefit test.

The way to perform a cost-benefit calculation is not to assume that you know the future distributions of costs and benefits (as Frankel does). The cost and benefits we measure today are the best estimates we have. We should use them and have an honest debate about whether we want to drill domestically.

This doesn’t mean we shouldn’t try to give our best estimates of the distribution of future costs and benefits. Historically, our preference for environmental quality has risen over time. We should consider that the next generation may place an even greater value on a pristine ANWR or ocean shelf than we do. We should also try to think realistically about what oil prices are going to be.

But recall also that a couple weeks back I pointed readers to a research paper [ungated version here] that found that opening ANWR would lead to benefits of $1141 per person in the U.S., and this was at an oil price of around $53 per barrel. In other words, the environmental costs (or our willingness to pay to prevent environmental damages) would have to be more than $1000 per person if drilling in ANWR were going to fail a cost-benefit test. At current oil prices it seems inevitable that domestic drilling would pass.

This does not imply we should necessarily drill. There are many metrics besides dollar values for making decisions about our environmental management and energy policy. But I have yet to see anyone in this debate honestly state the facts about domestic drilling. The lie Republicans will tell you is that domestic drilling will lower oil prices. The lie Democrats will tell you is that because it won’t it’s not worth doing.

It just hit my inbox:

“Climate Change added you as a friend on Facebook…”

I blame Tim Haab.

1. How huge is a “huge chunk”? In a recent Rolling Stone interview, Barack Obama said that he would rebate a “huge chunk” of carbon auction revenue back to taxpayers. I heard this through Peter Barnes’ cap and dividend website. For previous commentary on cap and dividend see here and here.

2. What the hell does T. Boone Pickens want? I’m sure you’ve all seen his new wind commercial:

Am I the only person who finds this ad creepy? He doesn’t even ask for anything. Does he want subsidies for the 4 GW worth of wind turbines he just bought? Also, what’s with the “I’m T. Boone and this is my ad” moment at the end?

3. This sounds familiar. Finally, I started reading Rabbit is Rich last night and here’s how the book, which is set in the 1970s, opens,

Running out of gas, Rabbit Angstrom thinks as he stands behind the summer-dusty windows of the Springer Motors display room watching the traffic go by on Route 111, traffic somehow thin and scared compared to what it used to be. The fucking world is running out of gas.

Monday I got an email from Dan Lewer, co-founder of a brand new company called Carbon Retirement. From the email:

We buy EUAs from the EU Emission Trading Scheme and retire them on behalf of our customers. Voluntary retirement of EUAs reduces industrial emissions by a measurable amount and pushes up the carbon price, encouraging companies to invest in clean technology. The service is packaged as an offset: you can retire any amount and match it up with the emissions from flights or driving, for example.

While this is possibly a good idea, I’m a little skeptical about the actual benefits of such a scheme for two reasons. First, as Daniel pointed out in an email to me, European companies can already substitute CDM offset credits (CERs) for EUAs. Now the assumption might be that CDM supply is somewhat fixed in the short run. Otherwise it seems like retiring EUAs would have very little effect on European emitters’ decisions (This is really Daniel’s area of expertise, so I’m sure he’ll chime in if I’m messing this up).

Secondly, and the real point of this post, I’d be weary about the assumption that once allocated, the permit supply is absolutely fixed. I know that during RGGI negotiations many stakeholders and legislators were worried about “green” outside actors coming in and retiring permits (In such negotiations this outsider is invariably referred to as “George Soros”). The threat of this was somewhat controlled for with safety valve like provisions. Yet, at the end of the day, I think most parties involved just figured that if this ever became an issue they’d simply correct for it legislatively or loosen the cap.

Which brings me to Carbon Retirement’s plan. While its totally feasible for them to purchase permits and hold them, I think there’s probably a political limit to just how much they’ll be allowed to influence prices. When caps are set, it’s assumed that they’ll be binding, and the level of allowed emissions is the result of a long, complicated political process. Some of us may feel that this process is corrupt and the outcome is unjust, but our ability to significantly alter this political equilibrium outside of political channels is limited. If annual emissions start coming in well below the cap or the price gets to high, government could pass a law making it a crime to retire permits or it could simply print more to achieve the initial level. At the very least they would start factoring an expectation of retired permits into future negotiations.

In the long run it’s probably impractical to fully restrict ownership of carbon permits if the carbon market is to function properly. And there is certainly a case to be made that non-use of a privately purchased good is just as reasonable as using it. But for the time being I think its important to recognize the very fragile tenets upon which current cap and trade programs are being agreed to, and to respect the fact that this asset’s value is derived from political decree, which can be altered pretty quickly.

Evan’s post last week about statistical versus economic (I might call it actual) significance reminded me a recent set of articles in Wired magazine that announced “the end of theory“.  The article offered an interesting (if florid) take on “the Petabyte Age”, where huge volumes of raw data make the scientific method obsolete:

At the petabyte scale, information is not a matter of simple three- and four-dimensional taxonomy and order but of dimensionally agnostic statistics. It calls for an entirely different approach, one that requires us to lose the tether of data as something that can be visualized in its totality. It forces us to view data mathematically first and establish a context for it later. For instance, Google conquered the advertising world with nothing more than applied mathematics. It didn’t pretend to know anything about the culture and conventions of advertising — it just assumed that better data, with better analytical tools, would win the day. And Google was right. …

Scientists are trained to recognize that correlation is not causation, that no conclusions should be drawn simply on the basis of correlation between X and Y (it could just be a coincidence). Instead, you must understand the underlying mechanisms that connect the two. Once you have a model, you can connect the data sets with confidence. Data without a model is just noise.

But faced with massive data, this approach to science — hypothesize, model, test — is becoming obsolete. …

There is now a better way. Petabytes allow us to say: “Correlation is enough.” We can stop looking for models. We can analyze the data without hypotheses about what it might show. We can throw the numbers into the biggest computing clusters the world has ever seen and let statistical algorithms find patterns where science cannot.

As you can probably imagine, this prompted some discussion both among natural and social scientists.  (Both those links are worth reading, as are the posts they link to.)  My only specific comment on the Wired articles is that while they do a nice job exploring some fields where data is proving very powerful, the implicit premise seems to be that causation is dead — long live correlation! — and this is oversold.

The link to Evan’s post that I wanted to highlight was that it is exactly this abundance of data (combined with the powerful statistical tools we have to analyze it) that have made for such an intense focus on statistical significance in recent years.  This is completely appropriate when you are just mucking around in data looking for correlations.  After all, if I look at a set of 20 random variables (that have no relationship in reality) then on average I should should find one relationship between them that is significant at the p=0.05 level.  Remember, finding statistically significant correlation at p=0.05 means that there is a 1 in 20 chance that the correlation is just a random artifact.  Well, when you start piling through hundreds (or thousands) of variables and trying out scores (or hundreds) of specifications, random artifacts start showing up! (Everyone who actually understands statistics is now allowed to bang their head against their desk and correct my horribly sloppy and imprecise language in the comments.)

And this gets back to that difference that Evan was talking about.  When you are doing reduced form econometrics and not pretending you have any idea what the relationship between any of your variables should be, you had better show some pretty impressive t stats — and start coming up with a reasonably good post hoc argument — before I pay much attention to your paper.

On the other hand, if theory tells us that there is good reason to suspect that a set of variables share a causal relationship — if we have a model that we think represents reality — then it is quite a different thing to find that there is a 1 in 20 (or even 1 in 10!) chance that our correlation is just random.  When data analysis backs up a theoretical prediction — even with only 90 (or even 80!) percent confidence — then our belief in the theory should get stronger.

The upshot is that I’m not ready to declare that correlation is enough.  Data is great, but it’s a lot better when you combine it with some theory.

Butting in to the C-Ron transfer saga this week, FIFA president Sepp Blatter said that the Portuguese winger should be allowed to leave Manchester United for Real Madrid whenever he wants to, despite the fact that he’s under contract until 2012. Criticizing Man-yoo’s shocking reluctance to simply give away the world’s best player, Blatter said, “I think in football there’s too much modern slavery in transferring players or buying players here and there, and putting them somewhere.”

Yet this “slave” extended his own period of servitude just last fall. And why would any club give a player a multi-year deal if he could just walk away whenever he wanted? A contract would guarantee the player’s wages if his productivity/ market value declined, but would not guarantee the club the player’s services should his market value increase.

Good grief, the sun comes up early here.

In one of it’s less talked recent decisions, the Supreme Court dramatically reduced the ammout of punitive damages Exxon was forced to pay for allowing one of its tankers to spill 11 million gallons of crude oil into the Prince William Sound in Alaska in 1989. Writing for the majority, Justice Souter appeared to substantially limit the use of punitive damages, apparently capping them at the level of awarded compensatory damages. As an economist and someone who’s worked in litigation consulting, I’m inherently weary of our ability to effectively set numerical limits on future damages. While Souter didn’t actually set a dollar cap, capping a ratio seems equally as arbitrary to me. Moreover, in this instance, I’m afraid that the shortcomings of applying such a ratio will be particularly burdensome on the environment.

One of the main functions of punitive damages is to deter entities from taking similar actions in the future.* Compensatory damages, on the other hand, are awarded to place a clamaint in the position he would have been in had the wrongful act not taken place. In this decision, SCOTUS effectively says that the latter can never legally exceed the former. (At least in maritime cases. It’s not really clear to me how broadly this rule will apply). Yet I find Souter’s justification of this ratio deficient for two reasons. First, he never discusses the theoretical relationship between the two types of damages. Second, he sets his cap based on historical ratios, ignoring the endogeniety of risky behaviour with respect to the limit of potential punishment.

In a world where transaction costs were zero, all transactions were legal, and Ricardian intergenerational concerns prevailed, punitive damages would be unnecessary. An intelligent judge could fully and perfectly compensate all affected parties, and society would be indifferent as to whether or not a similar act occurred again. We wouldn’t worry about deterrence, and market forces would prevail.

The real world is, of course, much messier: Transaction costs abound, contracts are imperfect, society outlaws certain acts (like the sale of organs or children), and intergenerational compensation is complicated. On top of all that, our judicial system is a blunt instrument. Court costs and rules of merit/ standing serve to exclude most small or tangential claims. For all these reasons, it seems reasonable that society would seek some additional penalty, beyond just compensation of affected parties, in order to deter acts where the harm extends beyond the parties involved. We recognize that our legal system can’t perfectly compensate all effective parties, but still try to protect fringe claimants by deterring actions that will adversely affect them.

Pegging punitive damages to compensatory damages will dramatically limit our ability to protect potential fringe claimants and bias risky behaviour towards areas that we already do a poor job of valuing. Up until now, assuming the probability of being successfully prosecuted is 1, a firm considering a risky act (in this case, hiring an alcoholic to captain its oil tanker) had to respect the fact that a judge and jury could subsequently tack on punitive damages to the point where the total costs outweigh the benefits. Now however, they would only be deterred up to the point where the value of the risky act is less than 2X prospective compensatory damages. As I just described above, actual awarded compensatory damages become a smaller and smaller component of total damages as the harm done becomes more opaque or spread out over a larger group of individuals. We can surely think of lots of heinous acts where the harm is far away and difficult to directly quantify (although Souter apparently can’t), but right off the bat this seems to obviously describe environmental disasters such as Valdez.

Ok, quickly, on endogeniety and legal rules of thumb. Souter cites a host of statistics on past damages ratios in developing his proposed 1:1 limit. He writes that the majority of these cases were probably decided justly and therefore suggests we just impose this mean amount on the population as a whole in order to curb unfair outliers. However, this assumes that the distribution of acted upon risky endeavors will remain unchanged after the cap is enacted. What he fails to consider is the effect that the threat of unlimited punitive damages had a on preempting particularly harmful acts during the time period he’s studying. Previously, firms were concerned solely with the total damages amount, and the threat of massive punitive damages probably deterred a lot of risky environmental behavior. Now, however, disipated harm looks comparatively cheap, and therefore firms are going to purchase more of it, shifting the very ratio Souter is treating as fixed.

This is something I argue about with Johnny Walker, my Borkish** budding corporate lawyer roommate, all the time. He wants to cap medical malpractice damages, but refuses to acknowledge that this would encourage the most risky behaviour at the tails of the damages distribution. I have a feeling he’ll have something to say about this post. Most likely that I don’t understand the law at all.

* There are other possible legal justifications for awarding punitive damages aside from determent. Souter has a nice overview of the history of punitive damages beginning on p. 17 of the decision.

** Ok he’s not really Borkish at all, just pro tort reform. Speaking of Mr. Bork, for anyone else who thinks they’re for capping torts, I refer you to the single best editorial the New York Times has ever written. Irony isn’t even the word.