These are exciting days to be an environmental economist.  Here I would like to offer three recent examples of new research that I find interesting and I didn't even write any of these papers!

Paper #1:   Studies the economic costs of states adopting a Renewable Portfolio Standard for electricity power generation.  As states such as California embrace aggressive (33% RPS!) standards, how much more costly will it be for power generators to supply power? How risky will such wind and solar reliance be?  These guys present a rigorous framework for studying this issue and show there better be significant learning by doing effects for renewable power generators in order for this policy to not have serious unintended consequences.

Paper #2:    Many "consequences of climate change" studies implicitly assume that the average forecast of the future impacts of climate change will actually be the true impacts but climate change's future impact is a random variable with a mean and a variance.  Martin Weitzman has made great progress on this point.   The new NBER paper predicts likely climate change impacts for agriculture in Africa when it incorporates that there are a range of possible climate forecasts in the future.  Intuitively, if there is a "nasty, a moderate, and a nice" possible climate impacts --- we need to know what will be the agriculture outcomes in the future for farmers in each of these three scenarios.  Simply calculate the average (nasty + moderate + nice)/3  and asking how farmers will cope with this "average" future climate is not that interesting if farmer profits are highly non-linear functions of future climate conditions.  The authors predict a very large prediction interval.

A major point of my Climatopolis book is to ask whether those who will be affected by climate change such as  farmers in Africa anticipate the worst case scenarios?  If they do, then they have strong incentives to take actions now (switching crops, investing in different strategies) to reduce their risk exposure. The net effect of this "small ball" is the worst case predictions made by these authors will overstate the impacts because their paper has helped to change rational actors' choices!     You have to admit that it will be ironic but useful when research (by inducing a Hawthorne effect) leads to over-stated predictions because it helped to stimulate precautionary investment!

Paper #3:  Investigates who will actually bear the costs of carbon pricing.  Basic economics tells us that those who can't substitute away from goods that are now taxed will end up facing higher prices due to the carbon pricing.  

As you can see, there is a whole interesting set of research being done that is far removed from the macro economy and yelling about budget deficits.

In today's NY Times, Rob Stavins and I are both quoted in this piece about California's continued effort to launch a serious carbon cap and trade program as part of its ambitious AB32 legislation.   I would love to see this effort succeed but I would like to focus on a slightly different point here.

We all agree that ideas are public goods and that learning offers positive spillover externalites to society.  So, a question arises -- who is the "sucker" who runs the "policy experiment" to generate this new knowledge?

When we know that we don't know the truth and there exists a costly (but we don't know how costly) experiment that can be run (such as cap & trade), the free rider problem will arise.   Everyone will delay running their own experiment hoping that somebody else will run the experiment. If the experiment fails, then others won't imitate California while if the AB32 experiment succeeds then others will join the "coalition of the willing" and cap & trade could diffuse and build up into a national effort.

I have argued that California should be rewarded for running this experiment.  The rest of the country appears to view us as Berkeley hippies who will push ahead with this effort even without an explicit incentive. You may be right about this but the recession and lingering unemployment have pushed many moderate greens to ask tougher questions about whether the California "green push" is good public policy.

Contrast environmental policy with medical clinical trials. If I am suffering from a health problem, I will seek any cure and will be happy to sign up for a randomized trial because I may be randomly assigned to the treatment group and the new pill may help me.  In contrast, in the case of environmental policy --- the people of California know that they cannot single handedly stop climate change.  We are volunteering to be the "green guinea pig" and the lessons we learn here will spread widely.  We need a mechanism where we can "sell" this new knowledge or at least be rewarded for generating this knowledge.  Each Republican should have to take their family for a one month vacation in California each year.  Such a cultural exchange program would generate tolerance and cash for the people of California.

My wife was kind enough to point out this great letter in today's NY Times Magazine.   Permit me to quote it in full:


"In Andrew Goldman’s interview of Larry Summers, my colleague Joseph Stiglitz is cited for saying Summers ignores arguments that he doesn’t like. I have disagreed with Summers on several issues, but I have always found him ready to debate my views, even at Columbia, when, on the celebration of my 75th birthday, he took on me, Paul Krugman and others. He shies away from shoddy arguments that are simply populist, not from debating serious differences with critics his own size. By contrast, I have never succeeded in getting a debate, on or off campus, between Stiglitz and myself."

JAGDISH BHAGWATI,
Professor of Economics and Law, Columbia University, e-mail

Now, Ed Glaeser has argued that cities facilitate interaction and thus cause new ideas to be born and accelerate economic progress.  Columbia University (my home from 1993 to 2000) like any other leading University is an "intellectual city".  What aren't such production interactions between leading economists there taking place?

The Miami Heat has proved that a Dream Team can enjoy synergies and work together for common goals.  Can the Columbia "Dream Team" of Sachs, Stiglitz, and Bhagwati enjoy similar group success as Wade, James and Bosh?

This article discusses one of the major questions in social science;  is Brentwood or Beverly Hills the right place for a Los Angeles celebrity to live?  I live in neither area so I can objectively write about this hot button issue.   The NY Times author wants to tell a "tipping point" story focused on the tragedy of the commons.  Apparently, public streets are public property and enterprising business people are sponsoring tours of celebrity streets such as this one.     Here is a preview;


"Heading into Beverly Hills, you will begin to see more gated estates and more elaborate mansions. See the Hilton household where Paris and Nicki grew up. Directly across the street, view the estate of musician Rod Stewart and his daughter, Kimberly Stewart. Drive by Harvard-Westlake High School where Tori Spelling and other famous child actors and actresses attend high school to the tune of $30,000 per semester. See the estate of the first Tarzan, Johnny Weissmuller. This incredible estate looks like a tropical jungle with a pool extending 360 degrees around the entire property. The house is rumored to be haunted and has been sitting vacant for over 14 years. Drive by the Beverly Hills mansion that was transformed into a Bel Air home in the television series Fresh Prince of Bel Air. See the homes of Robert Redford, Nicholas Cage, Sir Elton John, Mick Jagger, George Harrison, and a number of other celebrities. "

As you can imagine, for roughly $40 a ticket there is plenty of demand for these bus tours. I have joked that this is Los Angeles' last growth industry.

The celebrities are not happy. The NY Times article quotes Dr. Phil (remember Oprah?) complaining about being harassed.   These VIPs have convinced themselves that Brentwood is the answer.  I would argue that Brentwood's adjacent neighbor to its East (Westwood) is the correct answer.   Celebrities --- join me in Little Holmby and I will protect your privacy.

The NY Times provides some great data on the head to head operating costs and environmental impact of driving a Nissan Leaf versus a conventional car.



The one detail that I would like to see the NY Times address is the price volatility of gas prices versus electricity and the role that such volatility plays in determining the actual operating cost of each modal choice.    With the rise of the smart grid, electricity prices will vary during the course of the day and smart electric car owners can recharge at night.  This means that the 11 cent per kWh charge discussed above is too high.  The electric car's operating cost will be even lower than is discussed here.

Now, gasoline prices are volatile over time and the electric car acts as a hedge against rising gasoline prices. It will interest me to see how many 2 car households hold a diversified portfolio with one gasoline car and one electric car and how responsive the utilization of these two cars are as gas prices go up and down.  You can't hold gasoline inventories in large quantities in your garage but owning an electric car that you could charge with solar panels or using your neighbor's solar panels would be one way to sharply reduce the gasoline consumption per mile driven.  As the chart above highlights, to really get this right -- -we need the electricity to be generated by low carbon renewable sources. In a high carbon area such as Ohio (where coal may generate 100% of power), electric car use may have a greater carbon factor than conventional cars.

UCLA is still in session and I've been teaching 2 courses this quarter. My undergraduates yawn in class and some of my MBA students wonder what in the heck I am talking about.  I am feeling the effects of aging.   I used to be one of the great teachers but now I hear Bruce Springsteen's song Glory Days (have passed me by) as I look into my students eyes.    Fortunately, I can still write a few serious papers and yell at a few of my loyal Ph.D. students or I would really feel worthless.

So, this article got me thinking about how much I should be investing in slowing down the aging process.  This author claims that her rich friends who have invested in the wonders of modern botox etc. have not anticipated the consequences that they cannot smile anymore.

To quote the author;    "We are now in the position of watching politicians and newscasters talk about disturbing issues — like, say, the state of our education system, or environmental degradation — yet they cannot muster signals of concern, much less dismay."

I have not had any of these procedures and I can certainly signal dismay.   Economists are vain and well paid. How many of us invested in these procedures?   The Hammer has taught us that beauty pays off in the labor market.  Given that Columbia Business School is demanding "full disclosure" of consulting arrangements, I think we should take the next step and also disclose our past investments in self improvement.

Is a penny only a penny?  We see firms pricing products for $9.99 to avoid "double digits" or $99.99 to avoid a "triple digit" price tag.    These firms must believe that consumers see a "jump" between the price of $9.99 and $10 and that consumers will be less likely to buy the "expensive" product even if it costs just 1 penny more.   In this new NBER paper, Lacetera, Pope and Sydnor have managed to access a 22 million observation used car data set and they document a very funny new fact.

When they graph the used vehicle's sales price with respect to its odometer reading, they see a sharp reduction (a discontinuity in nerdspeak) at salient cut points such as 10,000 mile intervals (so 10,000, 20,000, 30,000 etc).   This suggests that folks are engaging in "rounding" off significant digits.  So consider two identical used 2004 Volvos.  One has an odometer reading of 59,967 and other is at 60,012.  These researchers are claiming that a typical buyer does not view these vehicles as identical because the buyer thinks; "the first car has 50,000 miles while the 2nd car has 60,000" miles.  This is what I mean by "rounding" -- not rounding up but just working with 1 significant digit.  If buyers view the 59,967 mile vehicle as a 50,000 mile vehicle then they will be willing to pay more for it and these researchers will observe a higher used vehicle price for the 59,967 mile vehicle relative to its 60,012 mile twin.  Their regression statistical techniques are simply averaging over these pair comparisons.

My question for the authors is whether the used vehicle sellers are aware of this dynamic? If so, then the authors  should see "too many" used vehicles being sold that have a "9" in their 2nd digit if the vehicle has <100,000 miles or a 9 in the 3 digit for vehicles that have > 100,000 miles.   In these cases, the sellers could extract extra $ from "dumb" buyers.

Is this an important result?  Yes.  22 million observations is pretty serious.  Now, I don't know how steep is the price/mileage capitalization effect.  In English, for every extra 1,000 miles on the odometer how much a price discount does a used car sell for?   The larger this is then the larger is the "mistake" the buyers are making when they "miss out" that they just purchased a 59,950 mile vehicle that they incorrectly viewed as a 50,000 mile vehicle.  In this case, they are handing out free $ to the seller.   Maybe they are altruistic?

Now all authors want to believe that their findings generalize.  Do these results generalize?  What other settings could be studied?

There are plenty of exciting popular economics books being released each month.  An author faces the challenge of how you "stay relevant" when you face such high quality competition.    Here is my most recent effort.    Permit me to preview a few of my quotes about Climatopolis;

"My starting point is that we have to be honest that we have collectively chosen to run a dangerous experiment. The book’s first chapter is titled “Too Much Gas.” As India and China and other developing countries achieve their version of the “American Dream,” global greenhouse gas emissions will continue to rise. Climate change poses many potentially nasty threats for different parts of the world.


In 2006, the Brookings Institution Press published my Green Cities: Urban Growth and the Environment. That book focused on how local pollution challenges such air pollution, water pollution, and access to green space evolves in a growing economy.

Today, such local indicators of environmental quality are all improving in the United States. Rising income and technological advance and shifts in the location of manufacturing of goods have allowed us to enjoy both ongoing growth and improved environmental quality at the same time.


Climatopolis is meant to be a sequel to Green Cities. While predicting the future is challenging, the book sketches a logical set of claims for how our free market system will facilitate migration and innovation and behavioral change at the individual and firm level that collectively will help us to adapt to the evolving threat of climate change."

As Baby Boomers age, their aggregate demand for products will create new markets for innovators.  Acemoglu and Linn (2004)  have anticipated future news stories such as this one.  I believe that the same dynamic will unfold in the case of climate change adaptation.  Billions of people will be seeking strategies to help them cope with climate change and the best ideas in the market will rise to the surface and deliver.  Which ones will they be? I'm not that smart but I understand the law of large numbers and the power of ideas as public goods.   To quote myself;


Urban Adaption to Climate Change


My book titled Climatopolis: How Our Cities Will Thrive in the Hotter Future was published in fall 2010. In it, I examine how urban quality of life will be affected by climate change. Assuming free market capitalist growth and the fundamental worldwide free rider problem, global greenhouse gas emissions will continue to rise. Facing this reality, what will climate change do to our urban economy?

Although I cannot predict what will happen to a city such as Moscow in the year 2050, I am confident that the insights generated by NBER research have direct implications for the complex challenge of climate change adaptation. Microeconomics provides a powerful tool for thinking about how we will cope with this emerging ambiguous threat. The book's core thesis is that urban capitalism will play a crucial role in helping us to adapt to the challenge posed by climate change.

For example, climate change is likely to raise the average temperature in certain cities. Because of that, cities such as Detroit and Buffalo will have an easier time competing against Sun Belt cities whose warm winter temperatures have acted as a magnet, attracting population migration.¹⁵

In Climatopolis, I argue that households will learn from climate scientists about the new challenges that different cities will face. If specific cities do experience a decline in their quality of life, then their real estate prices will decline, and they will suffer a net outflow of people. Households will "vote with their feet" and this nimbleness will help them to cope with the evolving challenge of climate change. Cities compete to attract and retain the skilled. If a city's quality of life declines because of climate change, then the skilled will leave and economic growth will slow.

My book emphasizes the potential for endogenous technological advance to play a key role in helping us to adapt. The billions of people who will be affected by climate change create a large market opportunity for entrepreneurs who can serve this market. In the presence of fixed costs to develop new products, the scale of the market is a key determinant. If billions of people seek an energy efficient air conditioner to offset hot summers, then there will be sharp incentives to invest in developing such products. Some of these producers will succeed. In a globalized world market, the pay-off to the successful entrepreneur will be huge. In new research, I will continue to explore microeconomic issues related to climate change mitigation and adaptation.

Is Chicago the last bastion of rational planning?   I don't think so.  Self interest will nudge even those who don't work in Hyde Park to anticipate how climate change will affect their lives.  Chicago has paid some consultants to provide a crystal ball study of how their city is likely to be affected.   As new infrastructure decisions are made, the consulting report will provide useful hints for how to make irreversible investments that the city won't regret in the year 2070.  The report claims that 1000s may die each year in future heat waves.  While possible, merely by alerting people of this possible horrible scenario can be sufficient to sharply reduce the probability that the event ever takes place.

If people foresee such nasty heat waves, they will buy the air conditioners and demand access to ventilated places so that they can ride out such a future storm. Yes, such adaptation will increase electricity demand and yes that could exacerbate climate change if the electricity is generated using fossil fuels -- but if by the year 2050 we have made free market progress in renewable power generation then we can enjoy the win-win of adapting without exacerbating the real threat of climate change.   Increased air conditioning is likely not to be sufficient for fending off Chicago's expected heat.  Urban planners will play a role in thinking through how to increase green space and reducing the Urban Heat Island effect by smashing up concrete.   We will fumble our way around in this learning process by experimenting to learn what works and the best ideas will spread to all cities.

I argue in my Climatopolis  book that free market capitalism will greatly ease the pain that cities such as Chicago suffer because of climate change.  If a city such as Chicago does not make adaptation plans while competitor cities such as Boston do, then Chicago will lose the skilled and jobs to other cities that become more livable and land owners in a suffering city such as Chicago will suffer a sharp drop in property values. Capitalism punishes those that don't step up in a changing environment.

The New York Times story linked to above tells a nice prospective story about Chicago but the proof is in the pudding as time passes and climate change unfolds -- will Chicago sink in the quality of life rankings or will it rise?   I predict that proactive urbanites and proactive city governments will experiment and learn how to handle this emerging threat. Adaptation won't be a "free lunch" but our collective capacity to adjust to new situations and to harness capitalism's innovation will allow cities such as Chicago to continue to thrive in our hotter future.