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From whence innovation?

Posted by Daniel Hall on January 14, 2008

I have been sitting on this post for almost two weeks now, trying to work out a satisfactory (and clever) way to do a back-of-the-envelope calculation that would help me get a rough handle on the degree to which innovation gets spurred by regulation versus emerging from the rigors of the competitive market. Alas, I haven’t come up with anything yet, so I’m choosing to post a more qualitative discussion for now.

The Free Exchange blogger who first alerted me to Arik Levinson’s VoxEU post I discussed two weeks ago goes a bit too far when discussing the implications of this research:

This finding is key for three reasons. First, it demonstrates that regulations are an effective way to generate innovation. Second, it shows that tighter regulations can be consistent with continued output growth. And finally, it reveals that tighter regulations in developed countries need not lead to massive leakage of production and pollution to places with loose pollution rules.

Well, that sure sounds nice — regulations are good for you! — but it’s not necessarily what this research implies. The problem with claiming that “regulations are an effective way to generate innovation” is that Levinson isn’t trying to disentangle cause and effect; indeed, he notes early in his post the inherent challenges facing those who set out to conduct causal analyses. Levinson’s research shows that technological improvement (innovation) has accounted for 60% of the decline in U.S. manufacturing emissions from 1972 to 2001. (The rest is due to changes in what we consume and changes in where things are made.) But how or why this technological innovation has occurred is a much different question than assessing its relative contribution to total reductions.

Environmental regulations may be driving technology innovation, but Levinson’s analysis doesn’t shed light on whether or to what extent this is the case. Companies have private incentives to reduce emissions to a degree as well — for example, efficiency improvements that save companies money are a big part of the reason why there is a secular trend towards a more energy-efficient economy. This question — does regulation induce innovation? — is an important and interesting one, but it needs a more direct treatment before we jump to an answer.

Enter reader Tidal, who comments that:

I think it rather important to note that he does not consider CO2 as a manufacturing emission. US CO2 emissions have risen quite dramatically over that time frame, albeit with falling “intensity” vs. GDP. Granted, there have been fewer incentives for US manufacturing firms to reduce CO2 over the same period.

This is where I hoped to develop some type of numerical back-of-the-envelope estimate of the reduction in CO2 emissions and compare it to the pollutants that Levinson is looking at. What is going on with CO2 emissions over the same time period, and can it tell us something about how much unregulated emissions may have improved (or worsened) on their own?

Read the rest of this entry »

Posted in Pollution, Research, Technology Policy | 5 Comments »

The primacy of technology for reducing pollution

Posted by Daniel Hall on January 2, 2008

We’ve discussed the environmental Kuznet’s curve (EKC) here at CT previously, most directly in a post where I worried that if emissions were being reduced primarily through offshoring manufacturing then eventually the world was going to run out of places to shove their pollution off on. Arik Levinson allays those fears today with an excellent post at VoxEU describing his results in a new working paper. He examines manufacturing emissions in the U.S. between 1972 and 2001, which declined by 58% while manufacturing output simultaneously increased by 71%. He estimates that 60% of the reductions in U.S. emissions between 1972 and 2001 have come from improvements in technology; at most 28% of the emissions reductions have been produced by international trade (increases in net imports). This is good news, because it implies that improved manufacturing and pollution control technologies should be able to lower the environmental impact of manufacturing regardless of where it occurs. In Levinson’s words:

If the 75% reduction in pollution from US manufacturing resulted from increased international trade, the pundits and protestors might have a case. Environmental improvements might be said to have imposed large, unmeasured environmental costs on the countries from which those goods are imported. And more importantly, the improvements in the US would not be replicable by all countries indefinitely, because the poorest countries in the world will never have even poorer countries from which to import their pollution-intensive goods. The US clean-up would simply have been the result of the US coming out ahead in an environmental zero-sum game, merely shifting pollution to different locations. However, if the US pollution reductions come from technology, nothing suggests those improvements cannot continue indefinitely and be repeated around the world. The analyses here suggest that most the pollution reductions have come from improved technology, that the environmental concerns of antiglobalization protesters have been overblown, and that the pollution reduction achieved by US manufacturing will replicable by other countries in the future.

Much more, including a cool graph, at Levinson’s original post. Do read it.

H/T: Free Exchange, of which further discussion in a subsequent post.

Posted in Pollution, Research | 2 Comments »

Regulating from abroad and the EKC

Posted by Evan Herrnstadt on December 12, 2007

The New York Times reported today that China has agreed to increase American oversight of food safety procedures:

The safety accord, part of several aimed at easing economic tensions with China on a number of divisive subjects, would impose new registration and inspection requirements by Chinese food exporters for 10 specific products, with the United States government maintaining a public list of the exporters’ records.

Interestingly, HHS Secretary Michael Leavitt is optimistic that U.S. FDA officials will eventually be embedded in Chinese bureaucracy to help expedite the development of good practices.

Let’s join Leavitt in his optimism for a second and suppose this limited development takes hold and expands, thus revolutionizing food safety oversight in China. If this occurs, it is a good example of the U.S. using its trade and economic power to encourage regulatory progress in a developing nation. I was intrigued by this development — many have claimed that importer outrage is one avenue by which trade can raise standards across the developing world. So why do we not see such substantial, public developments occurring in the arenas of labor and environmental standards? Read the rest of this entry »

Posted in Green Trade, Pollution | Leave a Comment »

I thought DVD players just appeared in stores magically

Posted by Evan Herrnstadt on October 16, 2007

Well, to continue pigeonholing myself as a purveyor of British transportation-related climate change news, the Independent reports that shipping emissions might be higher than we thought — perhaps comprising a larger proportion than aviation:

Shipping, although traditionally thought of as environmentally friendly, is growing so fast that the pollution it creates is at least 50 per cent higher than previously thought. Maritime emissions are also set to leap by 75 per cent by 2020. The International Maritime Organisation, the UN body set up to regulate shipping, has set up a working group due to report this year. Research seen by the group suggests previous calculations, which put the total at about 600 million tonnes per year, are significantly short. The true figure is set to be more than one billion tonnes…

This one is going to be tricky. Read the rest of this entry »

Posted in Carbon Tax, Climate Change, Government Policy, International, Pollution, Transportation | Leave a Comment »

A deal to help ozone and climate

Posted by Daniel Hall on October 5, 2007

Catching up on some news from a couple weeks back:

Nations have come to agreement on an accelerated phase-out schedule for hydrochlorofluorocarbons, a group of ozone-depleting substances that also contribute to climate change:

A deal by 191 nations to eliminate ozone-depleting substances 10 years ahead of schedule is a “pivotal moment” in the fight against global warming, Canadian Environment Minister John Baird said on Saturday.

Delegates at a U.N. conference in Montreal struck the deal late on Friday. The agreement will phase out production and use of hydrochlorofluorocarbons (HCFCs) for developed countries to 2020 from 2030 and to 2030 from 2040 for developing nations.

This is significant because it should help reduce a perverse incentive that the Kyoto Protocol was creating in its attempt to incentivize emissions reductions in the developing world through the Clean Development Mechanism (CDM).

The CDM allows projects to be conducted in the developing world that reduce emissions and generate offset credits that can be purchased by countries with binding Kyoto targets. One of the categories of projects — accounting for ~40% of currently registered CDM reductions and about one-quarter of the current expected total “pipeline” of CDM reductions — consists of destroying a manufacturing byproduct of one of the most common hydrochlorofluorocarbons, HCFC-22. This byproduct is a potent greenhouse gas, about 12,000 times more potent than carbon dioxide. Several commentators, particularly Michael Wara, have noted that there is a strong possibility projects to destroy this byproduct are creating a perverse incentive to expand or maintain HCFC-22 production: given current prices for CDM credits and the low abatement costs for the byproduct, the profits from selling the CDM credits are greater than the value of the HCFC-22 production itself. Read the rest of this entry »

Posted in Climate Change, Government Policy, International, Pollution | Leave a Comment »

Benefit-cost analysis of crap in my surf

Posted by Daniel Hall on September 25, 2007

A California town is trying to clean up the water at Rincon Point, out near my old graduate school stomping grounds. What I found interesting about the article was the implied recreational value — and elasticity of demand — among surfers for use of one of the best point breaks in the country:

In Southern California, it is common practice for people to stay out of the water for days after rain because of runoff pollution. But surfers often opt to take their chances in places like Rincon Point and Malibu, which has problems similar to Rincon Point’s. …
Wayne Babcock, a cofounder of Clean Up Rincon Effluent, said that the beach at Rincon Point was “notorious” for making surfers sick and that the homeowners should be forced to stop using septic tanks. When asked why they continue surfing here, Mr. Babcock and other surfers waxed poetic. “You don’t have a choice,” Mr. Babcock said. “It’s Rincon. There’s nothing like it.”

You don’t have a choice.” I never really was able to get into surfing, but this sounds like a pretty high use value to me. Of course, given the median income of the surfers I knew, it is perhaps reasonable to question an effectively infinite stated use value.

Posted in Pollution, Water Resources | Leave a Comment »

Will the EKC hold for non-democratic governments?

Posted by Daniel Hall on September 21, 2007

Reader Greg leaves an interesting comment in response to my post on the environmental Kuznets curve (EKC) hypothesis:

This may be me misunderstanding, but one problem I have with EKC is that it seems like an economic explanation of a primarily political phenomenon. … [Y]our explanation seems like an argument that rising incomes allow different preferences to be expressed in the marketplace. It seems to me, though, that the primary thing that actually moves environmental quality, at least over the past forty years, is government regulation (including, obviously, market-based regulations).

I certainly agree with Greg that regulation has been the major driver of improved environmental quality in the developed world. In terms of his comment about the EKC being an economic explanation of this political phenomenon, I have a couple things to say. The first is that for researchers the EKC hypothesis is an observation, not an explanation; it is a question of empirics, not theory. Indeed, one of the slightly odd things about the EKC literature is how replete it is with caveats that the authors are not forwarding a theoretical explanation. The second thing is to acknowledge that this is not very satisfactory; people want to know why something happens. Just saying that an empirical relationship exists but refusing to explain it is — I suspect — a big part of why some people think economists are BOR-ING! Since to my mind being boring is far worse than being wrong, I will wade into murky waters and speculate on why.

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Posted in Government Policy, Pollution, Research | 4 Comments »

The limits of the environmental Kuznets curve?

Posted by Daniel Hall on September 21, 2007

National Geographic News has a series of photos of the 10 most polluted places on Earth. Like they say, a picture is worth a thousand words, and it’s hard not to look and think, “There, but for the grace of God environmental Kuznets curve, go we.” These places are almost all in poor countries, and the environmental Kuznets curve seems to promise that things will get better once people get richer, as happened in the United States. But I wonder if there are not limits.

The environmental Kuznets curve (EKC) hypothesis posits an empirical U-shaped relationship between pollution and income (i.e. per capita GDP).* Although the research literature has tried to stay away from theoretical models and focus on the empirics, the popular explanation is that countries start out poor but with a relatively pristine environment, go through a phase of economic growth and pollution, and then once they get rich enough develop a taste for environmental quality and so clean up, thus generating the U-shaped relationship.

Read the rest of this entry »

Posted in Pollution, Research | 3 Comments »