Next monday radio listeners in Philadelphia will have a treat. I'll be on the 1020am NPR radio show along with Duke's Gary Gereffi and we will be talking about "green jobs". I anticipate that I will be asked to play "bad cop". Gary has staked out the role of "good cop" based on his November 2008 Green Jobs Study by Duke's Gary Gereffi et. al.

In his report Gary, discusses promising green manufacturing industries;

Chapter 1: LED Lighting
Chapter 2: High-Performance Windows
Chapter 3: Auxiliary Power Units
Chapter 4: Concentrating Solar Power
Chapter 5: Super Soil Systems
Chapter 6: Heat Pump Water Heaters
Chapter 7: Recycling Industrial Waste Energy

For each of these industries, I have a few questions;

1. Are these industries where the "first mover" will have a long run cost advantage? Are there reasons to believe that there are sharp learning by doing effects here such average cost declines with cumulative experience?

2. What human capital is required for workers in such jobs? Do you need a PHD to do these jobs or are these guys hammering green nails?

3. Given that the UAW and other labor unions have sponsored this research, I'm guessing that these will be union jobs. In the short run these will be "high" paying jobs relative to alternative work but in the medium term, will this artificial wage premium push these industries to locate in China and other cheaper countries? How will U.S manufacturing avoid repeating with these green jobs what happened in the car industry?

put bluntly, what is our comparative advantage in producing these goods? If anyone can make then, then these industries will migrate to low wage nations.

4. What government policies do these nascent industries want to help them get off the ground? Would a carbon tax suffice? or do they need government to "pick winners" and offer explicit subsidies?

I agree with Gary that these industries offer the prospects of some job creation but other jobs will be destroyed by carbon taxes. To answer what is the net effect requires some knowledge of the shape of demand curves for various products. If aggregate demand for energy intensive goods is highly price sensititve (elastic demand), then a carbon tax will "destroy" many jobs for this industry as its long run cost function shifts up.

There are some general equilibrium issues that the sociology team needs to think through. Despite this point, I certainly find his study to be interesting.

When is a political leader a "Chicken Little" versus when is he a prudent educator helping the distracted populace have the right priorities and perceive the correct subjective probabilities of future climate change outcomes?

It appears that Energy Secretary Chu is facing this issue. This has allowed me to be quoted at length in today's New York Times click here.

I like my quotes today more than my front section quote in yesterday's Times on economic models of AB32.

If you find my witty sound bites irresistible, then you can find many more here.

Each morning I read the New York Times front section backwards. I start at the editorial page (to learn from Dowd and Krugman) and then move towards the front page. I was reading page A14 today when I saw my name and a quote of mine on the topic of California and climate change. I was thrilled but a little surprised. Here are two paragraphs from this Times Article ;

"But the projections were strongly criticized as unrealistic by the affected industries and by independent economists who reviewed the analysis — including two from the Pew Center on Global Climate Change, which supports the emission reduction goals.

In one withering review, Matthew E. Kahn of the University of California, Los Angeles said the analysis unconvincingly portrayed the law as “a riskless free lunch.” Another economist, Robert N. Stavins of Harvard, said the regulators were “systematically biased” in ways “that lead to potentially severe underestimates of costs.”"

I object to the adjective "withering". As stated it appears that this is my view of "AB32" when instead this is how I view the CGE economic analysis that I was asked to review.

If the reporter had read through my report on the AB32 document here is what she would have read;

Introduction

This memo provides my answers to the set of questions that I have been asked to comment on. Before I present my views I would like to state that I am a 100% supporter of the Air Resources Board’s efforts to translate the broad, vague mission embodied in AB32 to produce a game plan for achieving sharp reductions in California’s greenhouse gas emissions by 2020 and even greater emissions reductions by 2050. I want to see the ARB succeed in achieving its greenhouse gas mitigation goals. By pursuing this effort, California will reaffirm its world leadership in tackling environmental issues. By acting as a “guinea pig”, the state will help to educate governments around the world on cost effective techniques for reducing carbon emissions.

While I support the Governor’s broad AB32 goals, I must admit that I am troubled by the economic modeling analysis documents that I have been asked to read. As presented, AB32 will be a riskless “free lunch” for Californians. These economic models predict that we will enjoy a “win-win” of much lower greenhouse gas emissions and economic growth caused by this regulation. According to my arithmetic 95.6 MMTCO2 reduction or 57% of the AB32 2020 offers a net benefit of $132 million per MMTCO2. This would be a large free lunch! I would like to believe this claim but after reading through the Economic Analysis and the five appendices there are too many uncertainties for me to believe this.

In this review, I will highlight why I believe the current modeling exercise underestimates the costs of meeting AB32’s goals and I will sketch a research methodology for collecting the necessary data to truly test whether the optimistic numbers reported in Table I-2 of http://www.arb.ca.gov/cc/scopingplan/document/economic_appendix1.pdf could be accurate estimates of the expected net costs of this program.

In this review, I will point to other economic modeling efforts being conducted by some expert economists who conclude that the introduction of carbon pricing will entail small but significant costs on our economy. I will also highlight the fundamental uncertainties we face because of the ambitious 33% Renewable Portfolio Standards. Nowhere in this economic document could I find any mention of the words “risk” and “uncertainty”. Yet, each day we buy insurance and hold “safe” portfolios (i.e U.S Treasury Bills) to protect us against unforeseen contingencies. We are risk averse. AB32 is a gamble. It will force us to deviate from our “business as usual” ways of running our economy. This offers potential large benefits but it also raises the potential for bad scenarios whose probabilities and costs if they ensue have not been quantified in the documents I have read through.

Finally, this report will emphasize the need for more data collection and for field experiments to be conducted so that we can learn about how diverse real Californians and California firms will respond to the incentives embedded in AB32. Whether AB32 offers “negative costs” hinges on a number of micro-economic factors that the documents I have been asked to review do not touch on.

To see my full review go here:

http://mek1966.googlepages.com/publishedpapersandworkingpapers

and click on the first link.

Working with Siqi Zheng and Hongyu Liu of Tsinghua Univ. in Beijing, I have managed to write a new NBER Working Paper on China's Major cities. Starting in the late 1970s with the compensating differentials research of Sherwin Rosen and Jennifer Roback, many urban economists have used U.S data to estimate the implicit prices for non-market goods (i.e air pollution, climate). Intuitively, why are home prices higher in Los Angeles than Detroit by roughly 10 times? You might claim that it is productivity differentials but I don't believe this. I believe the quality of life is higher in LA and this is capitalized into city price differentials. If migration costs are low across cities, there can't be the same housing prices in Detroit and LA because everyone would move from Detroit to LA (arbitrage).

While researchers have studied the U.S too much, there has not been enough research on measuring compensating differentials in a booming LDC such as China. Using unique data sets, this is what we do in this new paper.

Here are our main findings;

1. Across, cities --- ambient air pollution is capitalized into home prices and this price premium appears to be rising over time.


2. Cities with more inelastic housing supply experience greater house price appreciation when local demand for housing increases (Glaeser and Gyourko are right in China)

3. Cities experiencing FDI inflows have lower air pollution. This will surprise the pollution havens crew. One possible explanation for this finding is a greener technique effect.

4. We find evidence of a within sample Environmental Kuznets Curve. Since we only have 35 cities and observe each for 6 years, we estimate a simple air pollution production function. Bigger cities have a higher pollution levels. This population elasticity of .3 to .4 is very similar to U.S estimates. Regressing PM10 on a quadratic in city per-capita income, we find a within sample turning point such that all else equal, richer cities have lower PM10 levels.




Switching gears, here is Marty's work on fat tails and losses from climate change.
Weitzman papers on fat tails and losses from climate change.

Steven Chu is a Nobel Laureate and our new Energy Secretary. He has been quoted as saying that climate change could make water so scarce in California that agricultural production may grind to a halt there by 2100. Today in John Tierney's NYT Article fumbles the ball. He asks a good question. Why is this really smart guy (Chu) making statements that sound extreme? Tierney spends his whole article quoting Roger Pielke. I would have suggested a more diversified academic portfolio. He should have also talked to Marty Weitzman.

Is Dr. Chu simply trying to scare the American people to stop being complacent in order to mobilize political support to take costly anti-greenhouse gas emissions actions today? While this is possible, consider the following.

Climate change may impose some states of the world where our economic and quality of life losses are very large. Given that we know that we do not know the probabilities of these scary states of the world, we face fat tail ex-ante uncertainty about future scenarios. We do not have a "symmetric loss function" with respect to future states of the world. We lose more from extreme weather events and it is important for somebody to make us aware of the possible future states of the world and how little we know about their probability of taking place.

If we sat down with Chu, I doubt that he would say this his "best" modal guess of our future in California is no more water but he is saying that there is some positive probability that this will occur and a rational populace should take steps today to get ready for these potential tough days ahead.

Ever since I published my Green Cities book in 2006, I have thought about writing a sequel on green cities and climate change. In the new edition of MIT's Technology Review, there is a long excellent article on one case study; A "Green City" in the desert .

This weekend we were in Laguna Beach in Orange County. I thought that Santa Monica has a nice beach but Laguna wins. We didn't like the restaurants and we didn't like our hotel. Don't stay at the Hotel Laguna. It appears to have been built in 1875. I don't need antique plumbing. I am a princess.

Switching gears. If you want to see some 3rd party praise for the new Costa/Kahn book then click here or here. We will be doing a 3pm radio interview today on Los Angeles radio. Tune in and maybe I will say something interesting.

What would Larry Summers have to say to Tony Mills? Tony posted this entry at the end of Ed Glaeser's blog post today on the Obama Housing Proposal.

"I’m just kicking myself for not taking on a mortgage I couldn’t afford when I was offered the chance back in 2005. What was the point of being cautious and deciding to rent instead ? What’s in the bailout package for me ? It sounds as though my job now is to help pay the mortgages of people who shrugged off common sense and plunged into debt up to their necks. The losers have become the winners."

— Tony Mills

Some good game theorists should explain how we co-ordinate beliefs when we receive common signals about the economy. Wouldn't we all be better off if we could be convinced that the economy's outlook is improving? Would this be self-fulfilling? Instead, we all read the same bad news from the New York Times. This gloom convinces us that Orphan Annie isn't right that the "Sun will come out tomorrow". How do we co-ordinate our optimism? What sunspot will we fixate on? Who is an influential in our economy who can lead us by solving the coordination problem? Perhaps A-Rod?

Switching gears. Please take a look at Page 3 of today's California section of the Los Angeles Times. You will see an ugly picture of me and a pretty picture of Dora and you will laugh. The article is excellent. The picture is excellent. One of the subjects in the picture just didn't deliver.

Google's letter to the California PUC. Larry and Sergey please get in touch with me. I have a few ideas on how to harness your energy technology. My ideas will promote the public good and will only cause a little bit of evil. I'm hoping that these wealthy men have always aspired to a higher calling such as publishing in the JPE.

On a different subject, I read an important paper by a young, under-appreciated economist today. I suggest that you read it.