Common Tragedies

Thoughts on Environmental Economics

Archive for December, 2007

The future is (almost) now

Posted by Daniel Hall on December 12, 2007

Tim “Rhymes with Cab” Haab responds to today’s article in the Post about DC’s new peak electricity pricing program:

Too cool. I’m picturing little LED displays on light switches and wall plates that post the current electricity price. Then when my kids charge their cell phones, GameBoys, ipods, portable DVD players, digital cameras…they’ll at least know how much I have to pay. They won’t care, but, at least they’ll know.

But like Mike Giberson over at Knowledge Problem, I’m a little worried about this:

Pepco is about to start sending personal e-mail messages to Jonathan and Lauren Schwabish every few hours that could determine when they do the dishes, wash the baby’s clothes or turn on the air conditioner.

Huh? This is the best they can come up with for notifying customers? Because what I’m picturing is more like what they talk about later in the article:

The Schwabishes and hundreds of others in the D.C. pilot program got another device, too, a “smart thermostat” that will allow Pepco to send a radio signal to their home to cycle down their central air conditioning for 15 or 30 minutes an hour when power prices are high and ramp it back up then they fall.

I love the idea of knowing exactly what I’m paying for electricity in real time. But I’m an enormous nerd. Realistically, it’s unlikely that most people will pay really close attention to it. The idea of automated appliances that can cycle down would be an enormous benefit, particularly as more and more people had them. If all the neighborhoods on a block had them, for example, one-quarter of the houses could automatically have their air conditioning cycled down for only 15 minutes of each hour of peak use, and it would significantly cut down — and smooth — consumption. But, as I’ve been doing my whole life, I’m just going to have to wait a few years for the future to get here.

Update: Lynne Kiesling at Knowledge Problem has more.

Posted in Electricity | 1 Comment »

The New EIA Energy Outlook is here!

Posted by Rich Sweeney on December 12, 2007

The Energy Information Administration just released its 2008 Annual Energy Outlook. This is like the Bible of domestic energy consumption, and provides the base case that almost all policies are compared against. Initial highlights include more renewables and more nuclear. Here’s the press release, and the early release of the report itself. Enjoy.

Posted in Electricity, Energy | Leave a Comment »

Bali news roundup: Deal unlikely for targets, but probable for forests

Posted by Daniel Hall on December 12, 2007

Today’s New York Times and Christian Science Monitor both report that the current UN talks in Bali — intended to design a road map for negotiations on a post-2012 climate architecture to be concluded by 2009 — are unlikely to result in agreement between the EU and the US on a specific target for reductions in greenhouse gas emissions. The EU wants a commitment that industrialized countries will cut emissions by 25 to 40 percent from 1990 levels by 2020, while the US is opposed to including specific targets in the road map, preferring to put off discussion of emissions reduction commitments — and perhaps whether such commitments will be mandatory — until later negotiations.

Over at, meanwhile, there is nice short article on a likely agreement at Bali that would aim to reduce emissions from deforestation. The article is highly recommended for those who want a primer on some of the issues surrounding measuring deforestation and properly encouraging conservation. Here’s an excerpt:

Forestry is one of the least contentious issues at the talks but there has been disagreement over how to give financial incentives to poor countries to retain their trees in the face of illegal logging and other forms of exploitation.

One option would be to grant countries carbon credits for their trees, in the same way that projects such as wind farms or solar power are awarded credits for cutting emissions under the “clean development mechanism” of the Kyoto protocol. However, the United Nations said this would be impossible because if the trees in one area were protected, loggers or farmers could simply move elsewhere.

Another option, which Brazil is understood to favour, would be for countries to be given credit for curbing deforestation at a national level.

For those who are ready for more of a graduate course in reducing deforestation emissions, Environmental Economics recently had a couple of posts that explored this topic. The second, basically a guest post from Brent Sohngen, is particularly recommended. I’m hoping to write more about this topic in the next couple weeks.

Posted in Climate Change, Forestry, International | Leave a Comment »

Can’t we all just get along?

Posted by Rich Sweeney on December 11, 2007

Over on Gristmill Michael Tobis wonders, “should economists rule?”. While that’s clearly a loaded question, his real argument, that we should stop pursuing economic growth, is much more interesting. I’m going to post my response to this on Gristmill as well as below. Looking at the comments on there so far, I realize that this post could provoke a fair amount of rage and anger from those, like Tobis, who are disturbed by a perceived monopolization over public debate by economists of late. Though it probably won’t matter, I’d like to point out that I certainly don’t believe that we should be categorically opposed to non-economic arguments. In fact interdisciplinary dialogue is imperative for solving most policy questions, including those related to the environment. At the end of the day, what matters is how good our answers are, not how we got there. Hopefully we can use this space to narrow some of the economist/ non-economist divide. With that being said, here we go.

Read the rest of this entry »

Posted in Economics | 1 Comment »

Congestion suggestions

Posted by Daniel Hall on December 11, 2007

Today’s New York Times has an article about some of the options that Manhattan is considering in place of, or perhaps in addition to, Mayor Bloomberg’s congestion pricing proposal. It sounds like there are three main options on the table:

You wouldn’t be able to hail a cab in Manhattan below 86th Street, where cabs would be allowed to pick up passengers only at taxi stands scattered throughout the area.

You wouldn’t be able to drive in Manhattan on the 5th, the 15th or the 25th of every month if your license plate ends in a 5. And parking on the street would cost you as much as parking in a garage.

It’s not entirely clear to me whether the first proposal would much reduce traffic or if it would just rearrange it. Sorting cabs into stands might help prevent some taxis from cruising and searching for passengers, but the article also points out that cabs may spend more time driving to the busiest stands. And the plan wouldn’t raise any money which could be used to support mass transit and help reduce congestion further.

I’m very skeptical of the second option. Blanket bans sound like they will work well and be easy to enforce, but they tend to create funny incentive structures that people will work around. I suspect that in the specific proposal listed there would be quick development of a secondary market in ‘alternative’ license plates. Alternately, as the article mentions, this could encourage residents to get a cheap second car that has a different license plate number. I’m sure this proposal would cut congestion some — there are always law-abiding citizens willing to play by the rules — but probably by less than a naive calculation would suggest. Further, it would do so without a way to compensate for different levels of inconvenience among affected residents. This is the problem with blanket bans rather than policies that work at the margin — you not only prevent marginal value trips, but you also prevent the very highest value trips.

The third suggestion sounds most promising — indeed, it might be a good idea to implement in addition to a congestion pricing scheme. Although I haven’t read it, Donald Shoup’s book The High Cost of Free Parking apparently argues that up to one-third of traffic in major cities comes from cars circling to look for cheap and convenient curbside parking. While I don’t know what went into that estimate — it strikes me as pretty high — if drivers had to pay $10 per hour for curbside parking rather than $1 or $2, there would certainly be fewer trips into the downtown district, as people substituted towards public transit (or even taxis which wouldn’t have to circle for a space). Further, raising curbside parking rates to match garage parking rates should reduce quantity demanded, allowing the city to eliminate curb parking on some streets and thus improve traffic flow along those streets. And like other pricing schemes, it has the advantage it works on the margin — it eliminates the lowest-value uses, while still permitting high-value trips for those who need them.

Posted in Transportation | Leave a Comment »

What’s the point?

Posted by Rich Sweeney on December 10, 2007

As we move from debating if we should restrict carbon emissions to discussing how we should restrict carbon emissions, one of the more contentious battles is going to be over point of compliance. This is the question of at what point in the supply chain should you regulate carbon. Like much much of the climate policy debate in the US, the issue is currently being hashed out in California. Assembly Bill 32 requires the state to reduce aggregate GHG emissions to 1990 levels by 2020, and the California Public Utilities Commission (PUC) and California Energy Commission (CEC) have been holding meetings for the past year in order to prepare for compliance. These bodies are now knee deep in the debate over point-of-compliance, and the recent arguments of Dallas Burtraw, from RFF, and Richard Cowart, director of the Regulatory Assistance Project, provide a useful insight into issues at hand.****

*** In the interest of full disclosure, I should mention that I currently work for Dallas at RFF. Nevertheless the comments in this piece are entirely my own.

Read the rest of this entry »

Posted in Cap and Trade, Carbon Tax, Climate Change | 2 Comments »

ToC: Washington Metro Edition

Posted by Evan Herrnstadt on December 10, 2007

One of the most interesting aspects of Washington, DC, is the fact that any planning decision falls at a nexus of federal, local, and Maryland and Virginia state interests.

I’ve been reading The Great Society Subway, a history of the Washington Metro system written by George Mason historian Zachary Schrag. The book delves into the nitty-gritty of the planning process; some of the most interesting bits are the intense political struggles.

Washington is not the only American city that has built a postwar rapid transit system (see: BART). However, it is unique in that the federal government, local authorities, Maryland, and Virginia all held a dear interest in its design and construction. Building such a system reminds one of the importance of political economics. The relevant commissions and authorities could not simply design a system that optimized ridership while minimizing net costs and impose it on the region:

Even with the federal government paying the bulk of the expense, local jurisdictions still needed to divide up the local share of the cost. On the one hand, if each jurisdiction paid only for the portion of the system on its own territory, there would be an enormous incentive not to build, and instead to bus one’s citizens to the county line and let them ride someone else’s train into work. One the other hand, if each jurisdiction paid a fixed proportion of the total system regardless of the amount it chose to build itself, a tragedy of the commons would arise: each would be tempted to build as large and extensive a system as it could, knowing that the additional expense would be diffused across the region.

An intermediate cost-sharing solution was eventually designed, and the disproportionately common downtown DC infrastructure was folded into the project’s general expenditures. Although DC faced unique political constraints on its urban policy, this is an instance in which the federal government’s inherent interest made the process more tractable. Hmmm…are there any other tragedies of the commons to which this lesson might apply?

Posted in Books, Political Economy, Transportation | 2 Comments »

An emissions price won’t leave the airline industry grounded

Posted by Daniel Hall on December 10, 2007

Evan Sparks remains skeptical that an emissions price really is the best policy option for reducing aviation emissions, as I averred previously. He maintains that the aviation sector has some unique characteristics that make it particularly susceptible to economic dislocations from a pricing policy. I encourage visitors to go over and read his whole post — he knows a lot about aviation and I found it very educational. I want to work through the basic narrative he tells about why an emissions price won’t sufficiently encourage innovation, because I think it’s a story that sounds like it might apply to many economic sectors. I’m going to argue that although there is some potential for the type of economic dislocation that concerns Evan, in practical terms the problem is not that big. Further, I’m going to argue that you can structure a pricing policy wisely to reduce these dislocations. Evan sums up his story in his last paragraph:

Daniel is right that under standard theory, emissions pricing would lead to more innovation, and it will probably do so in the long run. But in the short run, effective emissions pricing or caps will probably cause massive dislocations in the industry and set it on a poor footing, leaving airlines with fewer resources to invest in the very planes they need to escape the dislocations, in turn forcing aerospace companies to delay or shelve innovative new technologies. We need to take the high transition costs of emissions cuts into consideration when designing policies to ensure that we don’t threaten future innovation.

So the basic story is the carbon tax (or the price of emissions permits) causes a short-run negative shock to profits, depresses investment, and locks the airline industry into a cycle where it isn’t ever able to develop or deploy the new planes it needs to more cost-effectively cope with emissions prices, now or in the future.

Read the rest of this entry »

Posted in Climate Change, Transportation | Leave a Comment »

Gas prices vs. wealth

Posted by Evan Herrnstadt on December 10, 2007

Mark Perry argues that the economy can absorb current gas prices. Even though America has experienced increasing gas prices, the price of gas as a share of per-capita net worth is still lower than it was at any point except the early 1980’s and late 1990’s:

gas prices share of income

This an interesting way to think about the persistence of relatively inelastic demand, even as real oil prices near historic highs. However, Perry fails to consider that the average American lifestyle has changed considerably. According to the Nationwide Personal Transportation Study (as cited by Gordon, et al) , from 1985-2001 the average American’s commute increased from 8.5 to 12.1 miles, a 42 percent increase. Thinking about trends in land use over the past six decades, I would guess that these changes can be extrapolated to some extent through the time series shown in Perry’s graph, although I don’t have hard data that backs this claim. On the other hand, vehicles have also become considerably more fuel efficient since the 1950’s.

Although it does seem that the American economy is doing okay with higher gas prices, we clearly do not live in the 1950’s. Perry’s brief analysis proposes a way of scaling gas prices independent of consumption patterns, but we should be careful comparing the place of gasoline in today’s economy to its role in the immediate postwar era.

H/T: Mankiw.

Posted in Gasoline | Leave a Comment »

Are you sitting down? I’m going to defend W.

Posted by Rich Sweeney on December 8, 2007

Today on NYTimes’ The Board, the editorial board derides President Bush’s opposition to a 15% Renewable Portfolio Standard (RPS) as flip flopping. This is because as Governor of Texas, Bush implemented a very forward looking and successful statewide RPS. Therefore, clearly his opposition to a national RPS can only be the result of Cheney, Rove, and industry “getting to him”. However, while it is certainly possible that some undesirable influence got to Bush, the premise that what’s right for Texas’ electricity market is necessarily right for the country as a whole is far from true. Texas is unique for two important reasons. The first received only cursory mention from the Board, while the second was ignored entirely.

Read the rest of this entry »

Posted in Electricity, Renewables, RPS | Leave a Comment »

Sell me a wind turbine. Do it.

Posted by Rich Sweeney on December 7, 2007

When I was in Russia a few years ago a friend told me a corny, but somehow interesting joke. She told me that the Russian word for a breeze or a draft in a room is pronounced “dooit” (literally, “it blows”). So if you speak both Russian and English, you sometimes say to people, “Close the window. Do it.”, and laugh.

That was a very tangential segue to my second skeptical RPS post of the day. Yesterday I was at a renewables meeting with Peter Bierden, Director of Global Wind Projects at GE Energy. He was going along talking about how great wind energy is when suddenly he dropped this little tidbit of information on the group: GE, by far and away the largest turbine manufacturer in the US, is so backed up that you can’t even place an order for delivery prior to 2010.  Every electricity model out there, RFF’s included, predicts meeting the overwhelming majority of renewable generation requirements with wind energy in the short to medium term. Now Peter didn’t discuss exactly how many turbines were set to be delivered, but the fact that they’re booked solid prior to Congress passing an energy bill does not bode well.

Ironically, Congress’s ridiculous, discontinuous approach the the federal production tax credit (PTC) is probably the main source of GE’s current supply constraints. When a Republican congress allowed the PTC to lapse last, in 2003, GE was left holding the bag on its contracts in progress with suppliers. Now we’re going through this charade all over again, as Congress debates whether or not to extend the PTC. Yet, even if they do decide to extend it another year, according to Bierden’s comments, that won‘t affect wind installation at all, as turbine purchasers today would be concerned with a PTC in 2011.

Posted in RPS, Wind | Leave a Comment »

Thank God for John Whitehead

Posted by Rich Sweeney on December 7, 2007

Commenting on John Edward’s statement on global warming legislation, he writes,

Climate policy won’t create jobs. Whenever a politician mentions a government policy and jobs as a measure of its success or lost jobs as a measure of its failure, put your hands over your ears and say “LaLaLaLa, I can’t hear you” really loud. Jobs and the environment: the non-issue of any political campaign.

Somehow climate policy and employment policy have become inexorably linked in DC, and it is driving me insane.  There is nothing more frustrating than showing your better-than-expected (in terms of costs) climate policy modeling results, only to have one of your proponents point out, “and it will create a lot of jobs”. Huh?

John also had a great post in response to my last green jobs rant, summing up in one sentence what I was trying to get at with 3+ paragraphs.

Jobs aren’t benefits of government policies unless there is some sort of failure in the labor markets.


Posted in Climate Change, Green Collar Jobs | Leave a Comment »

Incorporating adaptation

Posted by Daniel Hall on December 7, 2007

Peter Spotts has a good article in today’s Christian Science Monitor that talks about the push in Bali to incorporate more funding for adaptation into the next global climate change agreement:

High in the Himalayas, Bhutan is scrambling to fend off the onrushing effects of climate change. Two dozen lakes swollen by glacial melting are in danger of bursting their earthen dams and sweeping through the mountain kingdom like an inland tsunami. …

To reduce the risk, the government has set up a flood-adaptation project, splitting the $6.9 million cost with the Global Environment Facility (GEF), which oversees two funds to help developing countries cope with global warming.

The country’s vulnerability – and the effort it’s making to reduce it – highlights one of the hot-button issues at UN-sponsored climate talks here in Bali: The burgeoning need to help developing countries adapt to global warming. Despite mechanisms such as the GEF, demand for adaptation assistance far outstrips the cash on hand to supply it. …

Currently, adaptation money comes from two global funds that rely on voluntary donations from wealthy nations, but falls far short of what is needed. Rich nations have pledged a combined $220.4 million, but as of September had delivered only $116.6 million – a “pathetic” amount, says Ms. Raworth, who puts the immediate needs among the poorest nations at $1 billion to $2 billion a year.

This sounds like a lot of money but is actually not that large when you think about the potential size of a global carbon market. For example, the article points out that the Lieberman-Warner bill now before the Senate would provide about this level of adaptation funding:

The US Senate took a step in that direction Wednesday, when the Environment and Public Works Committee finished its work on the Lieberman-Warner Act. In addition to setting up CO2 emissions targets and a carbon-trading system to help meet them, the bill would earmark $1 billion a year to help poor countries adapt to global warming. The money would come from government auctions of greenhouse-gas emission permits.

How much of the total permit market would $1 billion be? Well, U.S. CO2 emissions are around 6 billion metric tons per year.  If permit prices were around $20 per metric ton — a not unreasonable guess based on modeling work of other similar bills by the EIA — and all permits were auctioned the government would raise more than $100 billion a year.  I think the bill actually auctions around one-quarter of permits initially, so this might be more like $25 or $30 billion a year early on in the program.  Either way, there is certainly a ready and sufficient source for adaption funding; the question then is whether wealthy countries are truly willing to write the checks.

Posted in Climate Change, International | 2 Comments »

Federal technology policy and the developing world

Posted by Evan Herrnstadt on December 7, 2007

Yvo de Boer, executive secretary of the UN Framework Convention on Climate Change called for a redirection of investment and aid dollars toward climate-friendly technologies. That’s not particularly new, but the most interesting bit was his statement that “Over 50 percent of this energy investment will have to go to developing countries.”

The importance of transferring technology to the developing world must be kept in mind as we go forward designing energy technology policy. If this 50 percent figure is truly necessary, achieving it right now seems fairly daunting. Much of the debate about energy technology centers on issues such as whether ARPA-E is better than an Energy Technology Corporation. However, there should probably be more discussion of helping poorer nations develop without horribly exacerbating our current carbon crisis; in effect, instead of aiding their ascent up the development ladder, we might need to build a new parallel ladder which relies on cleaner technologies. Obviously the Clean Development Mechanism is a good move in that direction. Still, I’m wondering how much R&D money actually goes into innovation and developing appropriate technologies for developing economies. Perhaps our federal technology policy should pay more attention to this goal.

Posted in Technology Policy | Leave a Comment »

Good news for people who love Bali news

Posted by Daniel Hall on December 7, 2007

More than 110 countries in the world now have higher per capita incomes than the poorest country that agreed to join Annex I in the Framework Convention in 1990 (when the FCCC negotiation process began).

That’s an incredible testament to the success of the global economic system over the last 15+ years.  But it’s pretty easy to remain skeptical that this will translate into more countries taking on emissions reduction targets.

The source is Joe Aldy over at the ClimatePolicy blog.  He suggests that in response to this reality the successor to Kyoto should include a “variable geometry” of commitments.  He also argues that a successor agreement should provide better incentives for participation and compliance, and should not focus solely on emissions mitigation but should also facilitate adaptation.

Posted in Climate Change, International | Leave a Comment »

RPS quote of the day

Posted by Rich Sweeney on December 7, 2007

“If that passes, I’m stocking up on flashlights.”

That was Pedro Pizarro, senior Vice President of Southern California Edison, yesterday after being asked about the prospect of a 50% RPS in California. This statement highlights a reality that those of us who’ve attempted to model renewable penetration have know for some time. Even if you were to overcome what appear to be substantial renewables supply constraints, the technology itself is still too nascent to play a major role on the grid. Without storage and better input estimates, even a 33% RPS, which is California’s current target, would come with an enormous price tag and intolerably low reliability.

Posted in Electricity, Renewables | 1 Comment »

Watch and learn

Posted by Daniel Hall on December 6, 2007

Billy Pizer of Resources for the Future appears on E&ETV today to discuss the new RFF report, “Assessing U.S. Climate Policy Options.”

He saved his best comment for the end of the interview:

The problem for climate change hinges on very long-term accumulations of gases in the atmosphere. And so in the short run hitting a particular emissions target may not be as important as a price, both from the political salability, but also from the adjustment cost to the economy of having a huge jarring effect if we had a high price, and more importantly driving technology. So I tend to think that over the short run there probably should be more emphasis on prices and over the longer run more emphasis on emissions.

Posted in Climate Change | Leave a Comment »

Yes, Virginia, prices really will work

Posted by Daniel Hall on December 5, 2007

Evan Sparks requests analysis from “the environmental economists at Common Tragedies” on what the EPA should do in response to a request from some states that EPA regulate airline emissions. I get an occult thrill from being referred to as an economist (despite having disclaimed my pedigree as a mere policy wonk, even if one who prefers the tools of economics), so I am impelled to respond. First, an excerpt from the relevant AP article, via the Washington Post:

A coalition of states and environmental groups is urging the federal government to curb global warming pollution from planes and other aircraft.

California, Connecticut, New Jersey, New Mexico, Pennsylvania and the District of Columbia plan to file a petition Wednesday asking the U.S. Environmental Protection Agency to regulate greenhouse gas emissions from domestic and foreign aircraft departing or landing at American airports. …

The petition asks the EPA to develop rules to reduce aircraft emissions by requiring operators to boost fuel efficiency, use cleaner fuels or build lighter, more aerodynamic airplanes.

I’m skeptical there’s much room in the aircraft market for efficiency standards that are economically justifiable. The typical market failures that occur for many consumer products — asymmetric information, principal-agent problems, irrational discounting — are essentially non-existent in the market for aircraft. Airlines want the most fuel-efficient planes they can get; they know exactly how efficient their fleets are and what they are getting when they buy a new plane; and they are willing to pay value for fuel economy — fuels costs are a significant percentage of the operating costs for any airline. It’s conceivable that you could concoct rationales for supporting infrastructure for cleaner fuels — network externalities and whatnot — but not with the current generation of biofuels, at least not in terms of greenhouse gas reductions (as any regular reader of this blog knows).

Evan missteps, however, when he postulates that the best climate policy response for reducing airline emissions is to “stimulate aerospace R&D without penalizing airlines today.” Indeed, in a longer piece at TCS Daily, Evan — who is an editorial assistant at the American Enterprise Institute — repeats what is apparently the latest conservative meme on climate change policy: that reducing emissions through a carbon tax or a cap-and-trade system will be far more economically costly than innovating our way into emissions reductions.

I’ve already spent the majority of today’s blogging disputing this idea and praising the beauty of prices in theory, so I thought I would try to bring the argument to a practical level. Read the rest of this entry »

Posted in Climate Change, Transportation | 1 Comment »

The Hayek club

Posted by Daniel Hall on December 5, 2007

There’s an interesting discussion going on in the blogosphere about what might constitute a conservative response to climate change. This got started by Jim Manzi’s argument at the American Scene against a carbon tax (actually any emissions pricing policy, whether a carbon tax or cap and trade), and in favor instead of a surge in technology development funding. Ryan Avent has responded at Gristmill (and on his own blog) that we can and should price carbon, and notes that it is odd that Manzi, a conservative, is arguing for an “approach to emissions reduction that favors the wisdom of central planning over market allocations,” (i.e., technology development over an emissions pricing policy).

Manzi has written a subsequent post that clarifies his reasons for opposing a carbon tax, and they essentially boil down to this: “It’s complicated! We won’t get it right!” To defend his opposition to a Pigouvian carbon tax he invokes Ronald Coase:

Ronald Coase’s lecture upon receiving the Nobel Prize in economics is very instructive. When discussing one of the two papers for which he won the award, The Problem of Social Cost, he had this to say:

I was exposing the weaknesses of Pigou’s analysis of the divergence between private and social products, an analysis generally accepted by economists, and that was all. … Pigou’s conclusion and that of most economists using standard economic theory was, and perhaps still is, that some kind of government action (usually the imposition of taxes) was required to restrain those whose actions had harmful effects on others, often termed negative externalities. What I showed in that article, as I thought, was that in a regime of zero transaction costs, an assumption of standard economic theory, negotiations between the parties would lead to those arrangements being made which would maximise wealth and this irrespective of the initial assignment of rights. … I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. The significance to me of the Coase Theorem is that it undermines the Pigovian system. Since standard economic theory assumes transaction costs to be zero, the Coase Theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply, when transaction costs are positive, that government actions (such as government operation, regulation or taxation, including subsidies) could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do. My conclusion; let us study the world of positive transaction costs.

Manzi goes on then to claim that what with transaction costs being so large an emissions pricing policy just won’t work. I think he overplays many of of the practical difficulties, but since Ryan’s post anticipated many of these arguments I’ll leave you to read it.

I want to object rather to Manzi’s disingenuous intellectual sophistry in ignoring the actual message of Coase’s quote. Read the rest of this entry »

Posted in Cap and Trade, Carbon Tax, Climate Change, Technology Policy | 5 Comments »

Energy Demand Inelasticity Cartoon of the Day

Posted by Rich Sweeney on December 5, 2007


Posted in Humor, Oil | 2 Comments »