Tuesday, December 16, 2014

Los Angeles' Mayor Anticipates One Fat Tail Event

How much do cities suffer from "fat tail" extreme events such as Hurricane Sandy or Katrina?  The LA Times reports today that the Mayor of LA is forming contingency plans for an ugly scenario where an earthquake in Los Angeles disrupts the aqueducts that carry water into the city.  The Mayor is seeking proposals that offer some "bang for the buck" in terms of reducing the probability of disaster per $ spent.   This is wise planning. How will he pay for this? Will the people of LA (including me) be grateful?   Here the key issue is keeping voters aware of what the actual probability of such fat tail events could be and what we would lose if such an event occurred and we were not ready for it.  A good economist would also ask whether the people of LA are risk lovers or risk averse or risk neutral.   Our ability to imagine our future is one key difference between us and other creatures. An active imagination leads to the search for solutions and means that we are not passive victims in the face of expected natural disaster risk.

Monday, December 15, 2014

Voting with Your Fins (Cod Adapt)

At the NY Times, Michael Wines and Jess Bidgood must have studied some economics.  They playfully recast Tiebout "Voting with your Feet" for Cod saying that these fish "Vote with their Fins" as the fish seek out cooler water.  Climate change has heated up the local waters and reduced the catch of local fishermen.   How good are the Cod at adapting to the new Ocean temperature? That's the job of marine biologists to study this.   The NY Times focuses on place based fishermen and their concerns given their human capital and their place based investments in local mortgages, and their boats and their children's schooling and social network where they live.

How many workers in the Modern U.S economy face such "endogenous migration costs" such that they have locked in to a location specific industry (cod fishing) and a specific housing market whose prices would decline if the local fishermen earn less money?  Let's think about the broader urban economics issue here.

Contrast Portland Maine with Los Angeles.  Los Angeles is a diversified local economy. If one industry collapses (perhaps because of climate change reducing the supply of natural resources to harvest), there are other industries to move to. This transition will be easier for workers with general human capital.  How many of the Cod Fishermen went to college?  Home prices in LA will not decline if "Cod Fishing in LA" (I realize nobody works in this non-existence industry) collapses because LA is a diversified local economy.  Again, do you see my point.   The problem that the Cod Fishermen face in adapting to climate change is that they made a risky gamble as they invested their human capital in an industry whose productivity is a function of climate shocks and they bought a home and planted roots in a community whose value hinges on Cod being abundant.

I have been to Portland Maine.    If the tourist industry can attract enough business then a collapse of Cod Fishing in the region would have less of an impact on local home prices. This raises the issue of what economic activities can the local areas substitute to if their old "bread and butter" industry no longer offers a daily living.

Young workers will see these changes to the local economy and will not move there. The economic incidence of the new news (i.e the Cod swimming away) is borne by local land owners and those middle aged guys who have invested their human capital in this declining industry.  Note that this is a short term effect because younger guys will not enter the industry.


Sunday, December 14, 2014

The Marginal Carbon Footprint of Flying Part Two

A Tufts Agricultural Economist named Parke Wilde has nudged me to write out a few more thoughts about the carbon emissions from flying.  First, some assumptions based on this web source.

Assumption #1:

Los Angeles is 2400 miles from New York City and it costs 10 cents per seat mile on a plane with 120 seats to make this flight. So, the total operating cost is:  $30,000.

Assumption #2:

The airline cancels the flight if its revenue does not exceed the operating costs.

Assumption #3:   First class customers (assumed to be 16 pay $1000 each) and economy class customers pay $350 each.

Assumption #4: The plane uses $2600  of fuel to make the journey. So with $3 gas that equals 866 gallons of fuel

Under these assumptions, the plane will only fly if  16*1000 + N*350 >30000 so the cutoff assuming first class is full is N =56 people.

If fewer than 56 get on, the airline will cancel the flight. I'm ignoring the airline's dynamic reputation concerns.

With 56 people on board, the average carbon footprint in tons = (866*20/2000)/56.  Valuing the social damage of a ton of carbon dioxide at $35 a ton yields an average damage of $5.41 dollars each.  This is not a lot of social damage for the average person on the flight and number shrinks as more people get on the flight.

If more people get on the plane, their marginal footprint is tiny.   If only 1 person got on the plane, this guy would not "be marginal" because the airplane would not fly.   The airline makes the decision over whether to fly the flight or not.  Flights are often cancelled.   Revenue must cover operating costs.  I will not feel much guilt as I fly to Boston in 3 weeks.

If an airline added additional flights because an academic conference was taking place at some location then I agree that the conference caused new carbon emissions.




Severin Borenstein's Excellent LA Times Op-ED

Who knew that the LA Times could cover topics unrelated to Kobe Bryant!  In today's LA Times, Severin Borenstein has an excellent piece about the political economy of California's nascent carbon cap & trade market.  Starting in January 2015, gas refiners will be included under the cap and at $12 a ton for carbon dioxide this will raise the price of California gas by 10 cents a gallon. Severin correctly notes that the refining lobby has over-stated the doom and gloom for Suburban residents and being an excellent economist he is also clear that there is "no free lunch".  Fossil fuel prices will rise in California and this will trigger behavioral change and some pain for middle class suburban households (see Holian and Kahn 2014).  

During a time when gas prices are falling, such suburbanites do not have too much to complain about. Do you remember Thaler's behavioral ideas of asking people to commit to save a % of future raises?  This gas price increase during a time of trending down gas prices is a first cousin and thus should face less backlash.

I agree with Severin's last paragraph of the piece that California is the green guinea pig and its ability to launch this field experiment will provide valuable lessons that the rest of the world has the option to adopt.

Saturday, December 13, 2014

Long Run Trends in Quality of Life by Race

Mark Bittman writes in the Sunday NY Times; "The progress of the last 40 years has been mostly cultural, culminating, the last couple of years, in the broad legalization of same-sex marriage. But by many other measures, especially economic, things have gotten worse, thanks to the establishment of neo-liberal principles — anti-unionism, deregulation, market fundamentalism and intensified, unconscionable greed — that began with Richard Nixon and picked up steam under Ronald Reagan. Too many are suffering now because too few were fighting then."

Those are tough words that many NY Times readers will nod along with as they read them on Sunday morning but are they correct?  Would most minorities voluntarily enter a time machine and live their lives 40 years ago?  Were the 1970s so great?  (We are not talking about Studio 54 here).  Since we don't have a market for time machines, we have no way for people to express the intensity of their preferences. Instead, the NY Times publishes strange nostalgia.   Let's look at some objective facts.

Let's look at life expectancy trends in the USA by race or read this piece.




Do see the convergence taking place over the last 40 years?  I see progress during the 1970s, not in the 1980s but sharp progress in black life expectancy from 1995 to 2010.  I assume the vertical axis is not correctly labeled. It should say "life expectancy".  

Let's look at trends in home ownership since 1990:


While the black home ownership line declines since 2004, I again see overall progress and some convergence.

For other optimistic evidence on Median income by race and poverty trends by race look at this Pew Report and you will see similar evidence of black progress especially with respect to the % living below the poverty line and in terms of educational attainment.

As an environmental economist, I suggest that you also look at trends in urban air pollution exposure. Blacks live closer to the city center than whites and there have been large air and water pollution and toxics pollution reductions in center cities.

Crime rates tend to be higher in center cities than in suburbs and this means that blacks live in areas with higher levels of crime. As crime has fallen in these areas, this means that blacks have been disproportionately exposed to less crime relative to whites who tend to cluster in suburbs.   This has not been a free lunch for renters as gentrification in Harlem demonstrates.

I understand that there are important policing questions that need to be asked and debated but Mr. Bittman's confidence in his own statement is a pinch amazing.   Is the world "going to hell"?  I don't think so.  In our imperfect world, we are making progress and our standard of living is improving.  If you want to go back in time, where do you want to go?  Germany in 1941?    To join Lincoln in 1861?  To join Archie Bunker in 1973?     You have to go somewhere.  I think you would pick the USA in 2014.  


Friday, December 12, 2014

Cities vs. Farmers: Who Can Adapt to Climate Change?

I have been arguing for five years now that urbanization will protect us from many of the blows that climate change will cause.  Cities (relative farming) have an edge in adapting to climate change. Cities always compete for talent.  Those cities that figure out how to adapt (either due to natural advantage or good ideas) will thrive and will attract talent.   This competition will protect footloose urbanites.  An urbanized world will suffer less from climate change and this is especially the case in world featuring economic growth.  Economic development through urban growth is our best defense for adapting to climate change.  You can read my thoughts here and here.  

I have also done recent work that liberal Democrats are more likely to live in center cities while Republicans tend to be in the suburbs and this suburban group will have to pay more for carbon legislation because they live a more carbon intensive lifestyle than tofu eating walkers who live in small apartments in downtown San Fran.   These spatial lifestyle patterns provide another reason for why Republicans vote against carbon mitigation legislation.  Now, Slate provides a new argument.  Slate points out an irony that farmers tend to be Republicans and that their districts tend to oppose carbon mitigation even though the claim is that they will suffer the most from climate change.   First, it should be pointed out that 80% of Americans live in metropolitan areas so there are not that many Republican rural Congressmen.  I agree that farming interests and ideology could have a greater impact on the Western Senators where each state just has 2 senators.

So, the irony here is that Slate wishes that Republicans voted their long run "self interest" rather than their ideology.   To recap, Slate is saying that Rural Republicans will have a brighter future if they fight climate change now but that Rural Republicans are not playing ball.   Does this pursuit of "ideology" over "self interest" surprise my fellow Chicago economists trained in the Becker,Stigler, Peltzman tradition?

Thursday, December 11, 2014

Does Gov. Jerry Brown Believe that Carbon Mitigation offers a "Free Lunch" for California?

Read Gov. Jerry Brown's piece in today's LA Times.  He is an optimist about the role that carbon regulation plays in stimulating an economy.  I believe that the WSJ would disagree with the following direct quote from his piece.

"Last year, our four governments — the states of California, Oregon and Washington and the Province of British Columbia — reached a landmark agreement to align climate and energy strategies for 54 million Americans and Canadians.

The Pacific Coast represents the world's fifth-largest economy, with a GDP of $2.8 trillion. By working together we are transforming our economies and influencing world markets for the better. Our regional model shows that it is possible to take serious action on climate change and simultaneously expand an economy with well-paying jobs."

Note the last sentence where the Governor and his co-authors discuss "our regional model".  I have a feeling that he is talking about a computable general equilibrium (CGE) model for predicting how the California economy will evolve as AB32's measures are phased in.

After the Great Recession, does the governor still have such confidence that economists can predict the future with such accuracy?  If he were to add footnotes to his OP-ED, he would need to name the actual model that he is talking about and the dozens of behavioral elasticities embedded in that model.

While I hope he is right, he is showing great faith in an untested (and unestimated calibration model).  While I recognize why he likes the idea that carbon pricing and AB32's other measures could offer a free lunch for California, I have trouble believing that the measures embodied in AB32 (and I am a supporter of AB32) will deliver the economic gains that he names in this piece.

As an economist, I would like to see a more nuanced policy position that this regulation will be costly but that its benefits as a demonstration project exceed its costs.    In contrast, the Governor is selling this regulation as having "negative costs".  Yet, across the country as the price of gasoline declines middle class households are celebrating the rise in their purchasing power.  Doesn't this suggest that there is a contradiction here?   AB32 will raise gas prices in California. It will raise electricity prices in California. A key question is; "by how much?"  How easy will it be for consumers of electricity and gasoline to substitute away to more efficient products in the short term and medium term?  Does the regional model that the Governor mentions have predictions on these microeconomic effects? I believe that the answer is no.


Congressman Kevin Cramer Asks the Right Questions on the Real Cost of Embracing "Green Energy"

In today's WSJ,  Congressman Kevin Cramer (R, Norh Dakota) asks the following questions;  1.  how costly will it be for the stability of the U.S electricity grid to swap out low cost, dirty and reliable coal for more expensive, clean, and intermittent renewables such as wind and solar?  2.  How much will residential and industrial and commercial electricity prices rise by because of this power composition shift?  3.  Could the EPA's estimate of an annual energy efficiency gain of 1.5% be achievable or does this over-state the efficiency gains?  These are fair questions that serious economists should be factoring in as we try to conduct prospective cost/benefit studies of shifting towards "green power".

For details on the President's Clean Power Plan read this.

Peng Liu, Nils Kok and I will soon release a paper where we study energy efficiency trends for hotels that are part of the same chain.  Our results both provide some support for the President's optimism and other of our results support Mr. Cramer's more pessimistic view.  Why are hotels interesting?  they allow us to conduct a "apples to apples" comparison of similar pieces of the capital stock and observing their trends in energy efficiency over time.

Note the technological optimism implicit in the President's plan.  The impact on U.S firms who require 24 hour a day consistent access to power hinges on the rise of affordable battery technology to store power generated by intermittent wind and solar.  

Wednesday, December 10, 2014

Climate Adaptation and the Movies

The NY Times published an OP-Ed by Jason Mark that reviews recent Hollywood movies (think of Interstellar, Elsyium, Waterworld!) about the end of the world.

A direct quote:

"Perhaps the best of this bunch is “Snowpiercer,” the Korean director Bong Joon-ho’s fable about social injustice and environmental hubris. Released earlier this year, “Snowpiercer” imagines that civilization — in a botched attempt to reverse the effects of global warming via atmospheric geoengineering — has turned Earth into something like the ice world of Hoth from “Star Wars.”

The survivors are stuck on a train that rattles in an endless circle around the planet. The folks in first class get spa treatments and dance parties, while the proletariat in the caboose have to choke down protein bars made of ground-up bugs. Inevitably, the underclass revolts."

Is this your children's future?

I don't think so.  On Planet Earth, there is competition; between individuals, between firms and between cities.  This competition takes place through markets (not the battlefield) and the net effect is a type of safety net for all.  I am especially confident about this prediction for urbanites in nations with many cities to choose from.  The system of cities is both a simple idea and a powerful idea (although it doesn't have the potential to lead to a good movie).   In my humble opinion, my "Climate Change Adaptation: Lessons from Urban Economics" offers a clearer vision of our medium term future.




Tuesday, December 09, 2014

Applied Environmental and Urban Economics Research at RSUE

I'm happy to announce that I've accepted an offer to be a Co-Editor of Regional Science and Urban Economics.     Dan McMillen, Yves Zenou and Giovanni Perri will continue as "the Editors".   My role will be to review and edit submissions related to applied environmental and urban economics.  My good friend, mentor and co-author John Quigley was the editor of this journal for many years and I'm proud to follow in his footsteps.  I encourage young researchers writing new papers on environmental and urban topics to submit their applied work to RSUE.

In the past, I have published seven papers in RSUE and I believe that all of them are very good.

The first paper has 91 Google Scholar citations, #3 has 63 cites, #5 has 61 cites, #2 has 45 cites and the other papers are pretty recent.

  1. Kahn, Matthew E., 1997. "Particulate pollution trends in the United States," Regional Science and Urban Economics, Elsevier, vol. 27(1), pages 87-107, February. 
  2. Cragg, Michael I. ; Kahn, Matthew E., 1999. "Climate consumption and climate pricing from 1940 to 1990," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 519-539, July.
  3. Kahn, Matthew E., 2003. "The geography of US pollution intensive trade: evidence from 1958 to 1994," Regional Science and Urban Economics, Elsevier, vol. 33(4), pages 383-400, July.4
  4. Kahn, Matthew E., 2009. "Regional growth and exposure to nearby coal fired power plant emissions," Regional Science and Urban Economics, Elsevier, vol. 39(1), pages 15-22, January.
  5. Zheng, Siqi; Kahn, Matthew E. & Liu, Hongyu, 2010. "Towards a system of open cities in China: Home prices, FDI flows and air quality in 35 major cities," Regional Science and Urban Economics, Elsevier, vol. 40(1), pages 1-10, January.
  6. Zheng, Siqi  Kahn, Matthew E. & Sun, Weizeng & Luo, Danglun, 2014. "Incentives for China's urban mayors to mitigate pollution externalities: The role of the central government and public environmentalism," Regional Science and Urban Economics, Elsevier, vol. 47(C), pages 61-71
  7. Kahn, Matthew E. Kok, Nils, 2014. "The capitalization of green labels in the California housing market," Regional Science and Urban Economics, Elsevier, vol. 47(C), pages 25-34.
Paper #1 was the first paper in the Clean Air Act's unintended consequences literature. This paper was floating around before Vern Henderson's 1996 AER paper or Michael Greenstone's 2000 JPE.

Paper #2: is my first LasPeyres Price index paper for non-market local public goods (in this case climate amenities).

Paper #3: is a good paper examining gross flows of trade between the U.S and other nations.  African nations emerge as pollution havens for goods that are cheap to ship.  Arik Levinson has worked on some of the ideas presented in that paper.

Paper #4 is an underrated paper.   The coal power plants are in the Northeast and Midwest and the population is moving away from these dirty sources.  This means that regional migration shifts are reducing Pigouvian externalities associated with pollution exposure.

Paper #5 is one of my first China papers and covers several issues including documenting a negative correlation between FDI and urban air pollution in the 2000s and documenting an environmental kuznets curve within China across its major cities.

Paper #6 is likely to start a literature on urban leadership's role in determining pollution outcomes. We document that Chinese mayors' chances of being promoted are now tied to local pollution progress and energy efficiency progress.

Paper #7 has been widely discussed in the blogosphere related to the real estate returns to green housing. 



The Urban Smart Grid and the Low Carbon City

The NY Times has published a nice piece highlighting investments made in Copenhagen Denmark to create a "smarter, greener" city.  New sensors have been installed and they are providing real time data that leads the local residents to make "better choices".

A direct quote:

"On a main artery into the city, truck drivers can see on smartphones when the next light will change. And in a nearby suburb, new LED streetlights brighten only as vehicles approach, dimming once they pass.

Aimed at saving money, cutting the use of fossil fuels and easing mobility, the installations are part of a growing wireless network of streetlamps and sensors that officials hope will help this city of roughly 1.2 million meet its ambitious goal of becoming the world’s first carbon-neutral capital by 2025.

Eventually, the network will serve other functions, like alerting the sanitation department to empty the trash cans and informing bikers of the quietest or fastest route to their destinations. It’s all made possible through an array of sensors embedded in the light fixtures that collect and feed data into software."

While I applaud the quality of life benefits of each of these nudges, I question whether they will add up to create a carbon neutral city.  For any city to be carbon neutral, all of its power must come from renewables and all of its transportation must be electric vehicles whose energy comes from renewables.  How does the introduction of  Cisco sensors help to bring about these first order changes?

The real way that smart meters can decarbonize a city will be through introducing dynamic electricity pricing.  Cost minimizing households will compare their total costs of purchasing gasoline and power from conventional sources versus buying it from themselves through solar panels and fueling their own vehicle at home.

While the article celebrates the biking culture of Copenhagen,  how do senior citizens manage? How much time is spent shopping for goods each day because people cannot buy in bulk and carry it home on a bike?  Is the low carbon city really a transfer to young mobile, healthy people?  In an aging society, how can it be low carbon?  Will the Mayor of Copenhagen subsidize EV purchases or further tax gasoline?   Gasoline currently costs $8 per gallon in Denmark.    The NY Times does not mention that fact.  Who loses from such a price?

I would also like to know how the pursuit of the zero carbon goal affects housing prices in this city.  Will suburban development be discouraged and will this raise rents?



Saturday, December 06, 2014

Could the Social Cost of Carbon Decline Over Time?

Cost/benefit analysis of government policy requires policy economists who evaluate the policy to take strong stands on how they quantify the costs and benefits of a proposed policy. Both the benefits and the costs of a policy that have not been implemented yet are random variables.   Consider the case of judging the merits of policies that intend to reduce greenhouse greenhouse gas emissions.  Such policies impose costs (such as higher fossil fuel prices) but they offer future benefits.  Economists have tried to quantify these benefits using the ugly name of the "social cost of carbon".      Adaptation efforts will mean that this social cost of carbon could actually decline over time.

Consider two case:

Case #1:   Global GHG concentrations (which now stand at roughly 400 ppm) continue to rise and we make no progress in adapting to climate change impacts.  In this case, the social cost of an extra ton of carbon is rising over time because the global economic damage imposed by rising GHG concentrations is a convex function.

Case #2:  Global GHG concentrations rise at a dampening rate because of the substitution from coal to natural gas and renewables and the rise of electric vehicle use and at the same time our cities around the world make progress in adapting to climate change and endogenous technological change further helps us to adapt (i.e more efficient cheaper air conditioning).   In this case the social cost of an extra ton of carbon is declining over time. 

How will the researchers who wrote this 2014 Science piece  incorporate Case #2 into their analysis?

By "linearizing" the problem and declaring a single number (i.e a constant marginal damage of $35 per ton),  the authors are making many implicit assumptions that I would hope they will be explicit about.

The key point here is that the Social Cost of Carbon hinges on what are the marginal benefits of reducing carbon by a ton.  Given that the benefits function is a highly non-linear function of many random variables; a universal "constant" (i.e some physics parameter) is not going to emerge. Yet,  policy analysts are eager to collapse this problem down to a single number (such as $35 a ton). Successful adaptation would mean that the marginal benefits from reducing a ton of carbon decline.

Should the AEA Cancel Our Boston Meeting in January 2005 to Reduce our Aggregate Carbon Footprint?

In January 2015, thousands of academic economists will gather in Boston for the Annual AEA Meetings.  Dora and I will be there and we will be presenting new papers and discussing other researchers' work.  I look forward to speaking to  a few hundred friends of mine in the profession.  The NY Times reports today that such meetings are selfish and dangerous for the health of the planet.  

A bioethicist named Laurie Zoloth (she is the president of the American Academy of Religion) wants to cancel her organization’s conference for one year in order to reduce the globe's carbon footprint.

Am I impressed?   Answer = slightly but let's think about the marginal sustainability impact of her well meaning proposal.

For everyone who would have attended her field's annual conference roughly 90% will fly in and flying is carbon intensive but the airplane still would have flown the same route even if the attendees were not on the flight.

The people who attend the sessions will be living in close proximity and walking around the convention center for the 3 days that this "new urbanist" city (the conference) exists for.

Think opportunity cost.  The religion scholars who stay home are likely to be driving around in their home communities.

So, I actually would conjecture that the aggregate carbon footprint of holding the conference is lower than if the same people stay home.  Again, I'm valuing the carbon footprint from flying at zero because the same planes would have flown even without the conference.   I realize that this point can be debated.

I respect that her Society of Intellectuals is "making a statement" but is this a statement?   Does the phrase "drop in a bucket" mean much to you?   In the big scheme of things, the cumulative emissions of this elite group of scholars is really tiny.

People who know my work know that I'm quite interested in hypocrisy and internal consistency of choice.   Here is one of my more highly cited papers on this topic.   Greens do walk the walk but I believe it is important to tradeoff costs and benefits and face to face interaction still has value in early 2015!






The Benefits of Sprawl: Evidence from Northern Dallas

In yesterday's WSJ, there was an advertisement pointing to the new Phillips Creek Ranch development in Northern Dallas.  Here is a list of the new homes currently for sale.     Located 30 miles from Center City Dallas,  you can buy a 3500 square foot house for $500,000 ($143 a square foot).  Suppose a household pays a down payment of $125,000  and finds a 30 year mortgage at 4%, this household's monthly mortgage payment would be $2200.   If a household head makes $90,000 per year (Texas has no state taxes) and pays 35% in total taxes, this household clears  4,875 per month so this house expenditure would be 45% of after tax earnings.   Given that the local schools are excellent, this household would not us private schools.

What does this household get for making this investment? While I have never visited this area, the website does a great job boasting of all of the amenities and the new community that has been built.   By buying the house, one is also buying a natural environment and a community and a set of local  public goods such as a pool,  athletic gym and other amenities. People will meet each other at these locations and social capital will be built. The developers have figured out how to create a new city within driving distance of the "old city".   The cheapest home in the development will be $480,000 and thus there is a range of the income distribution who cannot afford to live there.   Should the developers feel guilty about that or is that another attractive feature of their new community?

How have the developers been able to offer so much good stuff for so little $?  The further land is located from a city center, the cheaper it is and supply side forces (competition between developers) plays out.

I will write a second blog post on the social cost of such development.

Friday, December 05, 2014

News from India and Nashville

An old debate in environmental economics focuses on the Environmental Kuznets Curve (EKC).  In a very well cited 1995 QJE paper,  Grossman and Krueger run cross-national pollution regressions of the form:   Air pollution indicator =  c + b1*(Per-Capita GNP) + b2*(Per-Capita GNP Squared)  + U .  A "Kuznets Curve" arises if b1 is greater than zero and b2 is less than zero.   I have estimated these statistical relationships using cross-city data in China and found evidence of such an inverted U shape in the relationship between a city's air pollution level and its per-capita income.

Arik Levinson has written the best two papers explaining the offsetting scale and technique forces at work here and in beating up on the original Grossman and Krueger empirics.  
The EKC embodies pessimism and optimism about the causal effect of economic growth on the environment.  Taken literally, it says that as poor nations grow richer their pollution increases but once they grow past "the turning point" that further economic growth helps to clean up the environment as new regulation is past.

Until recently, it appeared that India was a data point for this hypothesis with the optimistic piece that India had reached the "Turning point" early.  India's GNP per-capita of roughly $5,300 is below what Grossman and Krueger estimated the "turning point" to be but in recent years India has been enacting air pollution regulation.   Greenstone and Hanna have published a recent AER paper documenting health pollution progress in India brought about by the nation's vehicle regulations.  But, in today's NY Times there is an  India update.  The new leadership has prioritized economic growth over environmental protection and thus must believe that the cost of industrial regulatory compliance is high.  An interesting question concerns what it believes these costs are and how does it know them? Are their estimates based on the U.S experience?  Why aren't the health and human capital gains brought about by cleaner air worth those extra regulatory compliance costs?

More research should be conducted on the political economy of adopting environmental regulation in LDC nations.

Switching subjects; Nashville is in the news.  Steve Haruch argues that his beloved small town's quality of life is taking an ugly turn because of the rise of income inequality (a NY Times favorite theme).  Here is a direct quote:

"And yet, starting about 20 years ago and picking up pace over the last 10, Nashville has moved inexorably in that direction. Money, especially from the entertainment industry and health care, has poured in. We built a 78-mile, sprawl-inducing ring highway instead of investing in mass transit; we built not one but two massive stadiums downtown; we spent a half-billion dollars on a convention center the size of an aircraft carrier.

These two tendencies — save our soul, but grow grow grow — are now colliding in a bizarre form of hyper-gentrification. Neighborhoods close to downtown once drew teachers, writers and musicians with well-built, well-priced Craftsman homes. But with the influx of wealth has come a new kind of buyer, often an investor offering cash well above asking price. A house that went for $40,000 a decade ago might now go for 15 times that amount.

Even worse, for many of these new gentrifiers, the old Craftsman homes are just too small, so developers have been buying up these small houses, then demolishing and replacing them with much larger ones. In many cases, the lots are stuffed from property line to property line with a new species of local housing: “two-on-ones,” also known as “tall-and-skinnies” — ugly conjoined properties that look like a duplex that’s been sliced in half and partly reattached at the rear.

But even the most cutthroat developers understand, somehow, that history and tradition are still important in this little river town. So the enormous new homes are often clad in the trappings of the humbler bungalows they replaced: clapboard siding, knee braces at the gables, exposed beam-ends. The results can be grotesque, as if the skin of a small house has been stretched over a much larger one."

Are we on a "Highway to Hell"?  I don't think so but it continues to amaze me how many people are nostalgic for the "good old days".  Were they that good?



Friday, November 28, 2014

Why Did Republicans Become Anti-Environmentalists? (or Are they "Private Greens"?)

Mark Thoma and Paul Krugman ask a great question.   In this post, I will sketch an answer.  You won't be shocked that the answer relates to public goods versus private goods.  Republicans are not "anti-environment".   They breathe air and many play golf on pretty courses.  They boat and they vacation in very nice places.  Their homes tend to feature tidy pretty yards.   They seek out safe food.

I conjecture that many Republicans seek to maximize their own income and to then spend it on the goods (including environmental services) that they want to buy. They prefer this outcome to giving government a larger % of their income and then delegating a purchase decision to government officials who they do not trust to do their job efficiently.  So, in a nutshell --- Republicans understand the concept of opportunity cost and anticipate that if government is smaller that they will have greater after tax income to spend on private goods that they seek to consume.  This group recognizes that public goods are not "free" to purchase and instead are actually expensive because the public sector inefficiently supplies them (i.e monopoly power for public transit and high public sector pay and clumsy command and control regulations).  Rather than purchasing such inefficiently supplied public goods that are not likely to be targeted to their needs, Republicans tend to support a smaller government that gives the $ back to the earners who can then spend it on the private goods they want.  Several of these goods will be related to environmental protection but will be privately provided.

Back in 1997, John Matsusaka and I studied voting on California's environmental initiatives. California engages in direct democracy and this allows researchers to learn something about the preferences of different groups.  A challenge arises because the unit of analysis is not an individual voter so there are legitimate questions about what to learn from such ecological regressions.

By including an income quadratic in our regressions, we found that richer people were more likely to vote against public goods focused on the environment than middle class people.  We conjectured that the rich use private markets (Club Med) rather than relying on public goods to meet their desires for environmental goods.  We also found that Republicans consistently voted against the environmental public goods initiatives.  This doesn't mean that they are anti-environment. We interpreted these results as saying that Republicans support the private provision of environmental services.  In such a setting, you get what you pay for.

This old work of ours relates to what Paul Krugman says at the end of his piece in the NY Times.  

"And environmental protection is, in part, a class issue, even if we don’t usually think of it that way. Everyone breathes the same air, so the benefits of pollution control are more or less evenly spread across the population. But ownership of, say, stock in coal companies is concentrated in a few, wealthy hands. Even if the costs of pollution control are passed on in the form of higher prices, the rich are different from you and me. They spend a lot more money, and, therefore, bear a higher share of the costs.

In the case of the new ozone plan, the E.P.A.’s analysis suggests that, for the average American, the benefits would be more than twice the costs. But that doesn’t necessarily matter to the nonaverage American driving one party’s priorities. On ozone, as with almost everything these days, it’s all about inequality."

Krugman gets a B+ for this discussion.   He is making the cliche statement that "fat cat Republicans" own shares in the fossil fuel economy and would lose capital gains if they face new environmental taxes.

This is an incomplete answer.  He is forgetting Tiebout sorting.   Yes, every regulation has "aggregate costs" and "aggregate benefits" but individual voters will compare their costs and their benefits from a specific piece of regulation.   Even in Beijing residential areas differ with respect to their air pollution level on the same day.  Within Los Angeles, there is huge variation in air pollution levels with the wealthy living in areas with much lower PM2.5 than the poor who live closer to freeways and further from the beach.   This separation means that the rich know that they have good air and that enforcing Clean Air Act regulations is a type of redistribution to land owners whose real estate is located in areas (such as homes close to highways) where pollution will decline if new regulations are enforced.  Such land owners will be able to charge more their apartments near highways if highway pollution declines due to the regulation.

In the case of climate change adaptation, richer people have access to more self protection strategies and this provides implicit insurance. I recognize that not all rich people are Republican but a correlation exists.  If one anticipates that one can adapt to environmental challenges, then this diminishes the "all for one and one for all" spirit of tackling a challenge using government.

The answer to this blog post's title is that the Republican party is a mixture of libertarian, who foresee that government policy often has unintended consequences and creates dangerous precedent concerning the growth of the state, and individuals who can use markets to protect themselves from environmental hazards.

Supporters of environmental regulation would be more likely to attract Republican support if they pursue cost-effective aims such as using pollution permit markets rather than command and control.

Paul Krugman (who won the Nobel Prize in part for his work on economic geography) needs to think about the residential geography of where different people live and how they are affected by different environmental threats.  How much of suburban home value is due to its nice environmental conditions that are in relatively low supply?  Dr. Krugman can't forget general equilibrium.  If successful environmental regulation reduces pollution then the scarcity value of such suburbs would decline and they may actually lose some value! So, there is an element of redistribution taking place as local environmental policy is enacted.

Matt Holian and I discuss some of these issues in this 2014 NBER paper but we focused on carbon emissions not local pollution issues.

I must admit that Republican opposition to carbon pricing slightly surprises me but I believe that the answer is that Republicans tend to live in the suburbs (and thus Holian and Kahn 2014 argument matters) and that Republicans tend to have greater access to income and thus to private adaptation strategies for coping with changing conditions.   Al Gore's embrace of climate change also didn't help as this became a partisan issue rather than a national security issue.




Thursday, November 27, 2014

Red State Farmers Adapt to Climate Change and General Lessons About Knowledge Diffusion

A UC Berkeley Ph.D. student named Liz Carlisle has written a smart  NY Times piece providing some examples of how farmers in rural places such as Conrad, Montana and Valier, Montana are making "greener" choices in production in order to cope with the new conditions they face.  These guys are not Berkeley hippies . Instead, they are profit maximizing business people who need to adapt.  They have the right incentives to experiment and search for new solutions and they are finding them.  That was the whole idea of my Climatopolis book.  This is how we will adapt through experimentation and "small ball".

A quote from the piece:

 "I interviewed people like Jerry Habets, a barley grower in Conrad, Mont. Three dry years at the turn of the millennium left him desperately searching for answers. Bankrupt, divorced and about to lose his family’s 87-year-old homestead, Mr. Habets tried the Bible. Then he went to a psychic. And then he went organic. That improved his soil so it could store more water."

An under-researched topic is local social learning. Now that Jerry Habets has figured out a constructive strategy, how quickly do his neighbors imitate him? How do good ideas diffuse?  Development economists such as Conley and Udry have studied this but we now need similar studies in the U.S.  A serious field experiment research design would use randomization to achieve exogenous initial conditions and then watch for how the idea spreads across space.

In English, take a random sample of 500 farmers and and choose 100 at random to receive the treatment of some trusted excellent advice from the UC Berkeley extension experts at ARE.   Ideally this advice and or new capital equipment would be related to adapting to climate change.  For example, should the farmers grow using different techniques or slightly change their choice of crops.

These farmers would be asked at the time that they are "treated" to fill out a social network roster listing who are their buddies and who the swap ideas with.   Three years after the treatment takes place, the research team would survey their buddies and the treated farmers'  nearest physical neighbors to see if the idea is spreading across communities.  If to implement the idea requires upfront costs then the research team could randomize the size of a subsidy to lower the cost for a farmer to try this new strategy.

The payoff of this research design would be new knowledge concerning our willingness to experiment with new ideas and to adapt on our own solely due to the pursuit of narrow self interest.

The research team could then measure the "treatment effect" of their intervention in terms of the direct impact on productivity of the treated farmer and the spillover effects on farmers in the control group but who are connected to the farmer.   An ambitious research team could further ask the "treated friends" who their friends are and see if the social multiplier effect extends "several generations".

Wednesday, November 26, 2014

The Toaster's Price in 1950 versus 2014: The 99%'s Rising Standard of Living

In 1951, a "High Pop Automatic Toaster" was priced at $21 dollars (nominal $).   In 2014,  Kohl's is selling a better $5 (nominal $) toaster.   I realize that this is a simplified consumer price index but this 76% reduction in price is the tip of the iceberg.   Nominal wages have risen over this 60 year period and real quality adjusted prices of durables have probably fallen by 95%.  To confirm this claim, we would need to do a hedonic quality adjustment (see Pakes) in order to have an "apples to apples" comparison of pricing the same product such as a toaster with a fixed set of attributes at different points in time.

So, why are there such concerns about the standard of living of the middle class?  Does "Black Friday" apply to everything we consume?   No.  College tuition is quite expensive (because it is labor intensive with professors and unionized workers).  Homes in some cities are expensive (both because of supply and demand but in our most expensive cities --- housing supply regulation is the major cause).

For pessimists, what other goods are increasingly expensive?  If you say "meat", I would counter that its quality has improved over time and I would note that food is just 13% of your budget so meat would be only 4% of your budget  -- your "inflation" exposure from this price rise would be tiny and then we would subtract out the deflation in prices for goods such as cell phones, computers, toasters, cars and all other durables in your home.

Paul Krugman and friends should take a sober look at the Consumer Price Index and acknowledge that quality adjusted CPI is falling over time.  The Boskin Report's main findings should not be forgotten.

Here is a technical report written in 2006 by the BLS where it talks about its efforts to keep up with the ever changing economy.

Monday, November 24, 2014

The Benefits of California Coastal Development: The Case of Morro Bay

The NY Times reports  that a defunct power plant's ugly structure remains on Morro Bay.   You don't have to be Don Trump to recognize that a real estate developer would pay the costs of dismantling it and removing it if he/she could then develop on the vacated land.  Can Jerry Brown and the Coastal Commission figure out such a private/public partnership? Or does Gov. Brown and his local equivalents anticipate that Morro Bay would gentrify after such an efficient reallocation of land and thus he would block such a move.  Look at this picture:



The power plant is not a natural part of of the scene but it is within the Coastal Commission's jurisdiction. Have you read my paper on the role of the California Coastal Commission and its regulatory ruling's unintended consequences of raising home prices and limiting new real estate development?

Here is a lot for sale close to the Bay with a view of the power plant.   $279,000 is not much $ to pay for 1/4 acre of California beachfront property.   In Malibu, such a lot would cost $5 to 10 million dollars.    If the power plant wasn't there and if some exciting retail was there, what would be the impact on the local economy's total property value?   Is there any push towards the efficient allocation of scarce resources (i.e land) in California?



Sunday, November 23, 2014

Two Photos Explain Why Coastal California Continues to Be #1

I will spend Thanksgiving in Carpinteria, California.   It is home to some of the world's most pleasant beaches.    Below I present two photos of our own "private beach".  We walk for about a mile along this beach and only occasionally see other people and horses.  In the top photo you get a sense of the sandy beach and the blue sky and the absence of other people and the rugged terrain..  In the bottom photo, you see some horses and their riders taking a peaceful ride and you see how the coastline evolves.   The calm ocean invites even an old guy like me to go out there and paddle around.




Economists understand that these are unique amenities and unfortunately Gov. Jerry Brown also knows this.  He can tax and many people do not run away to Texas because of the unique attributes that California offers.  Read Jan Brueckner's and David Neumark's insightful paper about this topic.  




Saturday, November 22, 2014

Climate Change Adaptation: Lessons from Urban Economics

Paul Romer serves as the Director of NYU's Marron Institute of Urban Management.   I am a Visiting Scholar at this Institute and try to show up there twice a year.   The Institute has just posted my new Working Paper titled: Climate Change Adaptation: Lessons from Urban Economics.    This paper builds on my 2010 Climatopolis book by tracing out my current thinking on the key issue of how cities help us to adapt to climate change.  I have found that a growing number of researchers are starting to work on this topic and I think that I've nudged many of them to think about how Sherwin Rosen's hedonic model helps to better understand this issue.

My Brief Talk at Thom Mayne's Morphosis Office

I was given the chance to speak for 5 minutes yesterday at a public event.  Unlike the other speakers, I stuck to my time limit and tried to give a punchy talk about the Future of Los Angeles.  The event took at place at Prof. Thom Mayne's studio called Morphosis Office in Culver City.

Embedded image permalink

Here is a photo of me talking and you can see that I'm having fun and the audience of roughly 45 people are listening.   I stressed four ideas;

1.  Competition
2.  Big Data
3.  Incentives and entrepreneurship
4.  Experimentation and humility among government officials.

1.   In an open system of cities, Los Angeles competes to attract, retain and grow the skilled. If in 2050, Los Angeles is no longer sexy to the mobile young and educated then its future is bleak.

2.  This is the Big Data age, we have an incredible amount of data about urbanites concerning their desires and their activities.   Where is the low hanging fruit in making LA a more energy and water efficient city? I talked about my research with Frank Wolak where we implemented a field experiment where we educated households about the increasing block tariff for which they pay for electricity, we find large reductions in electricity consumption among those who were high baseline consumers

3.  AB32 will raise energy and water prices and will incentivize more Elon Musks to enter the game of designing and marketing green products.  The same induced innovation optimism holds true for products that help us to adapt to climate change.

4.  The Mayor's office should acknowledge that it "knows that it does not know" what are good policies for encouraging sustainability. Such humility is a first step to running pilot field experiments to learn about what policies are cost effective. Since ideas are public goods, those policy ideas (such as dynamic pricing for parking in downtowns) that turn out to work can be replicating everywhere.

Thom Mayne is a really impressive guy.  He gets economics and that's a rare trait at UCLA.


Thursday, November 20, 2014

Work Disruption and Continued Productivity in the Urban Economy

Suppose that upstate New York has a snow blizzard.   What types of workers produce the
same level of output on such a day?   I recognize that guys who operate snow plows are more productive on those days!   But, there more and more indoor workers who are just as productive at home than if they commute to the office for face to face interactions with peers.    A benefit of deindustrializing is that fewer people must work face to face to produce something.  An assembly line's output could not be produced at home son a snowy day.

 Let's consider a couple of cases.  A Buffalo 5th grade teacher will produce less output during the snow blizzard because school will be cancelled.  An economist who teaches at SUNY Buffalo will have her classes cancelled but she will get more research done while working at home.What is the difference?  The school teacher's output requires face to face meeting while the Professor of Economics (who is judged on research and teaching) is able to produce more "output" at home.

My big point is that with the increased ability of more and more workers to work and be productive at home that disruptions to our economy (yes I"m talking about adapting to climate change again) become less costly.   While a dentist can't practice medicine at  home,  a software designer can.  Skype calls can take place rather than face to face meetings.

With the Big Data revolution, more people can work and be monitored at home. Read this China experiment on this topic.  

Weather storms create logistical issues but what are the productivity benefits of bearing the commuting and hassle costs of leaving your house?   For which urban jobs, does face to face communication really matter? If fewer and fewer jobs fall into this category then we are better protected from severe weather shocks.  This is another example of how labor markets evolve to help us to adapt.

Wednesday, November 19, 2014

Ingenuity in Protecting Wild Salmon: All Hail the Salmon Cannon

Professor Jeff Reimer was kind enough to send me a great example of ingenuity at work to protect natural capital in the Pacific Northwest.  Julian Simon would respect  the salmon cannon.  This video from Last Week from John Oliver tells the story.

Jeff correctly points out that the rise of the Salmon Cannon is due to a public/private partnership.  The private company; Whooshh Innovation sells it to state and federal agencies.  This highlights the potential for government to play a positive role in solving the wild vs. domesticated salmon problem.  The company's video is here: http://whooshh.com/fish-handling1.html


Will Paris Build More Tall Buildings?

An honest discussion is now taking place concerning the unintended consequences of limiting new construction.   Paris hasn't allowed many high rise buildings to be built. Would Paris continue to be "Paris" if there were Hong Kong style buildings?   Everyone appreciates the basic prediction of econ 101 that by limiting supply that real estate prices rise in restrictive cities.  People seem only now to be willing to contemplate that a select sample of cities (those that are liberal and run by progressives) are most likely to engage in these policies.

Here are some quotes from Paris:

"But many older Parisians fear that city officials did not learn the lesson of Montparnasse, a building that regularly makes lists of the 10 ugliest buildings in the world. They believe that skyscrapers are simply out of place in the heart of Paris.

“We are not in Dubai,” said Danielle Outreman, 60, who is retired. “I like it that in Paris I am not surrounded by enormous buildings. I think that putting them all in La Défense is just fine.”

So note the generational war.  Those older people who own properties in Paris enjoy the fact that housing constraints inflate their house values and they value the continuity of the city (that it does not change over time perhaps except for a few Starbucks opening up).  The young renters (if they understood general equilibrium effects) are likely to support more real estate construction.    There should be more European economists working on the cross-generational fights across Western Europe concerning what are "good public policies".  In the case of housing supply limits, is this a zero sum game or a negative sum game?  When incumbents control laws through local voting, is the efficient allocation of resources achieved?

Many environmental economists work on the demand for non-market goods. This Paris case raises this same issue.  What is "Paris" with respect to its characteristics?  Which of these attributes would be "injured" if more development took place?  How do we measure the character of a city and its uniqueness?  How do we know if small changes to its architecture and its neighborhoods produce great changes in the local quality of life? If people who live there say this, is that merely cheap talk?  What is the market test that Paris' quality of life is declining?  To an economist, tourism trends would offer one market test. Do mobile tourists continue to visit? If the answer is "yes", then an economist would conclude that Paris still "has it".

Adapting to Extreme Cold Weather

I have read that it is quite cold in Chicago right now.  Cold winters can kill.  How do we protect the urban poor against such climate shocks?  Cook County Chicago has opened up Warming Centers.   Many shut by 5pm and I'm not sure where people are supposed to go then.   A logistics issue also arises concerning how people travel to the Heating Centers.  What is the equivalent of "Uber" for those who don't own cars?  If these issues can be addressed, then this is a clear strategy for coping with extreme weather conditions.  This is how we adapt.


Tuesday, November 18, 2014

Strangely Quoted in the Wall Street Journal Tomorrow

Tomorrow, the WSJ will publish an editorial called "China's Environmental Whitewash".  Here is a quote from their piece that mentions me:

"This is the context for Supreme Leader Xi Jinping ’s pledge last week “to achieve the peaking of CO2 emissions around 2030,” which has U.S. officials rejoicing and academics such as UCLA’s Matthew Kahn enthusing that “China’s political system is more nimble at getting green things done.” So nimble it will take 16 years to start."

The WSJ piece doesn't bother to weblink to the actual article where I was quoted:   Here are my quotes in the article:

From China's perspective, the deal looks smart. "The leader of China is killing three birds with one stone," said Matthew Kahn, an environmental studies professor at the University of California, Los Angeles. First, Chinese President Xi Jinping is showing the rest of the world that his country can be a leader on climate change, the global issue of ultimate importance. Second, a move away from coal -- now a crucial source of China's winter heating and electricity -- will help the country combat the notorious smog problem that has galvanized political protests and threatens to drive some of China's most talented citizens, not to mention foreigners, away. And third, says Kahn, climate change mitigation is "creating a new export market for China," as Chinese-made solar panels and wind turbines head to fields and roofs around the world.

a few paragraphs down

It may be easier for China to achieve its targets than the United States, and not just because it's easier to reach a peak than it is to make a cut. China's command-and-control political system can make big things happen -- and faster -- than the United States' messy democracy. "China's political system is more nimble at getting green things done," said Kahn. For example, he said, mayors will start taking environmental problems seriously because the central government is starting to evaluate them on their respective city's energy intensity (output per energy used), as opposed to simply economic productivity and degree of civil unrest. And mayors want to keep Beijing happy.

a few paragraphs down

It may be easier for other countries to join the climate fight if the United States and China go first. That's because, as Kahn points out, the United States, China, the European Union, and other early actors can show how greenhouse gas emissions can be reduced without flattening the economy. Will China's cap-and-trade schemes work better? Or Europe's? Or California's? Will American coal-plant regulations result in emissions cuts without harming the economy? If China and the United States seem set to meet the emissions targets set out in the new deal and are still able to deliver prosperity to their citizens, even the Indians may be convinced that it's possible.




Monday, November 17, 2014

A Day at UCLA

The Grateful Dead once asked; "Where Does the Time Go?"    Permit me to offer a time diary for today;

1.  I woke up early and worked on a submission for Chuck Mason's journal.  The paper is now titled;  Climate Change Adaptation: Lessons from Urban Economics.

2.  I taught my undergrad Environmental Economics course from 930am until 1040am.  While 90 students are enrolled, I don't believe that all of them attended.  The wild video tapes are available here.  I thought I gave a really good lecture but the students on this Monday morning were tired and sluggish. This made me mad and I told them so.   Here are my lecture notes for today. You judge.

3.  One of my star undergraduates wants to take my wife's Health Economics course this Winter at UCLA.  Her course includes papers that use instrumental variables estimation.   I used Steve Levitt's crime and election cycles paper to teach him the Wald Estimator. We covered the material in 20 minutes.  We discussed imperfect instruments (see Nevo and Rosen).

4. From 1130am until 1pm, I attended an Anderson School lunch presented by Professor Jerry Kang of UCLA Law School.  He gave a talk on the causes and consequences of "Implicit Bias".    He is an excellent public speaker and he melded several peer reviewed pieces of research into a cogent and coherent talk.  The food wasn't good but the ideas were interesting.

5.  From 115pm until 4pm, I worked on the item I mentioned in #1 above

6.  At 430pm, I met with Marlon Boarnet of USC who had given a seminar at UCLA earlier in the day.

7.  At 545pm, I met with my Ph.D. student Devin Bunten and he had some good news about his most recent research.

8.  At 6pm, I attended my first UCLA Chess lesson supplied by a 14 year old phenom named Luke. Read about him here.  I lost two games that I played as I made a series of dumb moves.

9. At 8pm, I took an Uber to pick up my son from fencing.

10.  I received some emails from colleagues giving me some useful comments on #1, I incorporated their ideas into my paper.

11. It is now 907pm PST and I want to watch the end of the Bulls vs. Clippers game.

Is this how you life ticks away?


Sunday, November 16, 2014

Could Utica Rebound Because of Climate Change?

I attended Hamilton College in the mid 1980s.  Utica, at that time, was a depressing declining place.  This article in the NY Times suggests that things haven't changed.  Wikipedia says that its population has declined by 38% since 1930.    Could climate change change that?

With its buildup of its durable housing stock but low demand to live there, home prices are low.   For example,  Here is a house for sale for  $119,000.




187 Victoria Dr,Utica, NY 13501  3 beds,  2 baths1,144 sqft
That works out to $104 a foot which is 90% cheaper than housing near UCLA. These low home prices have attracted new immigrants to live in Utica. I have read in the NY Times that Bosnians have formed a cluster there. As climate change warms up cold upstate New York Winters and if Amtrak increases its speeds to New York City, then this whole area could enjoy a renaissance.    Real estate investors should be thinking through what might be future "hot areas" to live where quality of life will be relatively high.  

Saturday, November 15, 2014

Is Keystone a Bad Investment for TransCanada if China Decarbonizes?

Joe Romm unintentionally poses an interesting question here .   He focuses on the carbon production implications of the Keystone Pipeline.  He is right to raise the old issue that if the oil in the Canada tar sands stays in the ground then this will reduce global GHG emissions.   But, we knew that.   A more interesting question is to ask;  "given that a pipeline is an irreversible investment of 7 billion dollars, will the investors regret this investment if a global carbon treaty is enacted next year?"

Who bears the incidence of carbon taxes?      Is it the buyer of fossil fuel or the sellers of fossil fuels?  Does the expectation of an international deal shift fossil fuel infrastructure investment patterns?

In the medium term, I would expect that the demanders of fossil fuels (so car drivers and electric power consumers) will pay higher prices.

While Al Gore argued that a carbon tax will quickly mean that companies such as Exxon have billions of dollars of stranded assets, in reality such taxes will only slowly rise and if fossil fuel sellers anticipate that carbon taxes will continue to rise in the future then this tax on their future revenue will provide them with an incentive to sell their oil now.  In this case, the tax pattern actually accelerates the short term GHG emissions as the fossil fuel companies "cash out". In general equilibrium such actions will lower global fossil fuel prices and will reduce the diffusion of electric cars in the short run.

Will the fossil fuels say in the ground?  In a world of 7 billion people where each of them would like to have the same energy consumption as the typical American, I doubt it.

What if China is serious about decarbonizing? Doesn't that mean that there will be less demand for Keystone oil?  Oil is sold on a world market and China is 15% of world GNP.  There are many other "thirsty" nations looking to motorize.