Friday, June 29, 2012

Nudists in Munich

Our hotel is a half block from the "Hard Rock Cafe" and a Starbucks.  No matter how far you travel, you are still at home!   As we walked the hot streets of Center City Munich, we spent some quality time at the Englischer Garten.  I can vouch that there are still nudists in this park but everyone that my son and I spotted was a dude!   These guys had good tans in places that usually don't see much sunlight.   The cool thing about the Englischer Garten is the rapid river in the middle of the park.  There were several surfers actively surfacing in this center city park.  You won't find such surfers on a river in any U.S city that I know of.

While there are many reasons that I'm excited about going to Singapore on Monday, I must admit that high on my list is the absence of nude dudes.  I also haven't had Chinese food in a month and I'm ready to eat well again.  A life of only sausage and schnitzel isn't for me.  To my friends at NUS, I'm eager to arrive!

Thursday, June 28, 2012

Economics Research on Green Buildings

I am in the center of Munich drinking beer and eating more sausage.   The City Center is walkable and the people look happy.   I am proud of myself that the thought that Germany should drop out of the Euro crossed my mind before I read the OP-ED by Griffin and Kashyap.   Switching subjects, if you are interested in research on "green buildings"  take a look at this recent post by my friend and co-author Nils Kok.

Wednesday, June 27, 2012

Nora Ephron on Global Warming

The NY Times is devoting a fair bit of its real estate to the life of Nora Ephron.  I understand that the Times is tired of writing about Europe and Syria and a number of its readers must identify with Ms. Ephron.   Gail Collins reports an interesting quote of Ephron's "Once, years ago, we made a list of things to worry about. Her No. 1 was George W. Bush. I mentioned global warming. “Not a middle-aged issue,” she said."

This quote raises a research issue.  Do older people place a low priority on climate change relative to young people?  As the world's population ages, especially in Europe and the U.S, does this make it harder to build the anti-carbon coalition?   

On the adaptation side, younger people are more likely to move across cities than older people --- so today's young who will be middle aged and old when climate change really starts to unfold need to think about what geographic area they want to lock in to.   Their home and their friends will be in this place and it will be more costly to move.  Predicting areas' future quality of life is tricky (think of guessing NYC's quality of life in the 2012 if you were visiting it in 1975).  Abstracting from individual strategies to cope with new shocks, I would bet that cities that continue to attract a larger share of highly educated people will have greater collective ability to adapt to climate change.  These cities will have the funding resources and the political will to make new investments and changes in urban planning to cope.

All Hail the European Economic Review!

In the ever important  battle for "journal impact factor", the European Economic Review will surely take a step forward now that it has published two of my papers in its July 2012 Special Issue titled Green Building, the Economy, and Public Policy Edited by Piet Eichholtz and John Quigley.  In case your subscription to the EER has lapsed, here are my titles and abstracts:

Understanding the Solar Home price premium: Electricity generation and “Green” social status 

  • Samuel R. DastrupaE-mail the corresponding author
  • Joshua Graff ZivinbE-mail the corresponding author
  • Dora L. CostacE-mail the corresponding author
  • Matthew E. KahndCorresponding author contact informationE-mail the corresponding author


This study uses a large sample of homes in the San Diego area and Sacramento, California area to provide some of the first capitalization estimates of the sales value of homes with solar panels relative to comparable homes without solar panels. Although the residential solar home market continues to grow, there is little direct evidence on the market capitalization effect. Using both hedonics and a repeat sales index approach we find that solar panels are capitalized at roughly a 3.5% premium. This premium is larger in communities with a greater share of college graduates and of registered Prius hybrid vehicles.

The nascent market for “green” real estate in Beijing

 Original Research Article
Pages 974-984
Siqi Zheng, Jing Wu, Matthew E. Kahn, Yongheng Deng


In recent years, formal certification programs for rating and evaluating the sustainability and energy efficiency of buildings have proliferated around the world. Developers recognize that such “green labels” differentiate products and allow them to charge a price premium. China has not formally adopted such rating standards. In the absence of such standards, developers are competing with each other based on their own self-reported indicators of their buildings’ “greenness”. We create an index using Google search to rank housing complexes in Beijing with respect to their “marketing greenness” and document that these “green” units sell for a price premium at the presale stage but they subsequently resell or rent for a price discount. An introduction of a standardized official certification program would help “green” demanders to acquire units that they desire and would accelerate the advance of China’s nascent green real estate market.

Maybe I haven't retired from active research?

How Will Los Angeles Adapt to Climate Change?

I offer a few thoughts here.

Tuesday, June 26, 2012

Solar Panels in Germany

I am in Salzburg, Austria.  I have seen Mozart's home and listened to many German tourists.  Today, we took a bus across the border and went to Berchtesgaden, Germany.  We took a long boat ride the beautiful Lake K√∂nigssee.  On the German side of the border, I saw solar panels on roughly 1/2 of the homes.  That's market penetration!    Soon we go to Munich where I will sample beer, pretzels and sausages.  My only complaint is the coffee.  I haven't seen a Starbucks outside of Vienna.  

Saturday, June 23, 2012

Place Based Investment: The Case of California's High Speed Rail

Over the next couple of decades,  California will try to use national tax payer money to construct a high speed north/south train that will connect San Fran to LA to San Diego.  I would guess that the train will stop every 10 miles and won't actually be a quick train but merely a fast train when it is moving.  The LA Times discusses an interesting initial conditions issue.  Should early $ be invested in track infrastructure in the "middle of nowhere" as the Obama Administration wants or should it focus on improving infrastructure where people current live?    It would interest me if real estate developers have bought up large speculative positions in land in Central California (cheap) locations where the railroad may stop.  Are these Don Trumps predicting that future cities will grow like mushrooms around the station stops?  For an economic history example of what I'm thinking about read the intro of this paper.

Self Selection and Diverse Views Over Sea Level Rise in North Carolina

If you are looking for me,  you can soon find me in Salzburg, Austria as I slowly make my way to Singapore.   If I hear some good Mozart, I promise to blog about it but now permit me to discuss this recent blog post at environmental economics.

The extent of Sea Level Rise in North Carolina is a random variable and people disagree about the timing and the extent to which it will occur.  In a diverse society, some people believe that it will be severe and these individuals are unlikely to locate in coastal areas even if land there is cheap and these people love the coastal nature experience.  There are other individuals who either have special talents that allow them to reduce their risk exposure or they discount the possibility that they are imposing risks on themselves by living near the coasts. In such a diverse society, the "dare-devils" will be more likely to bear the risk and live in the risky place.  If disaster occurs via climate change, are they victims?

For those who know some labor economics, doesn't this sound like the compensating differentials literature and the value of a statistical life. Kip Viscusi has been the leader in this field as he has built on Thaler and Rosen's original framework.    Hedonic methods have been used to measure the wage "combat pay" that workers receive for working in risky industries where fatality risk is higher.  Dora and I have published a well cited paper on this topic.    The standard hedonic wage paper doesn't examine who self selects into taking the risky jobs.  You don't have to be Heckman to anticipate that these individuals will not be a random sample of the population.  In fact, this 1992 JPE paper argues that the wealthy will avoid these risky jobs while this 2002 JPE paper argues that diverse abilities that protecting one's self against exogenous risks affects who self selects into risky jobs.

If workers are fully informed about the risk of each job, then is OSHA needed to regulate that jobs must become "safer"?  Employers would know that they could pay lower wages (less combat pay) if they could credibly commit that jobs would be safer.  They will invest in such equipment assuming the cost of such equipment is less than the wage premium they must pay if the job remains risky.  In this sense, the free market provides the "optimal" amount of job safety.

The same "assignment problem" arises in the case of climate change.  There are diverse people and there is a set of differentiated geographic areas that differ with respect to their current and future flooding risk. The home price gradient adjust so that one of each of these households lives in each of these homes and so that the gains to trade are exhausted.   Under what circumstances is the ex-ante equilibrium not a pareto optimum?   Why is government zoning needed here?  To justify such zoning, you need to tell a story of "bad learning" and households unable or unwilling to update their probability assessments as "new news" about climate change arises. If people know that they do not know what climate change will do to the NC coast and if they are risk averse, then they will hesitate before buying coastal property.  Only a "Homer Simpson" who doesn't know that the doesn't know about the risk would view the "cheap" coastal property as a steal!  In this case, paternalist zoning regulation could be justified to protect him but the key issue here is what % of the population is Homer Simpson?  As I have argued before, there is a strong "behavioral economic" view lying behind the pessimism about our ability to adapt to climate change.  This view needs to be explored and debated.

Friday, June 22, 2012

Do Co-Ordination Failures Limit the Growth of Natural Gas Cars Replacing Conventional Cars?

Floyd Norris (a cousin of Chuck?) presents a "chicken and egg" story in today's NY Times about the slow growth of natural gas vehicles.  According to Norris, capitalism breaks down in this case and the gains to trade are not exhausted and thus government intervention is needed.  Here is the story.  Given low natural gas prices, drivers would buy and drive natural gas cars if they knew that gas stations would sell them natural gas just like they now sell gasoline.  Gas stations would invest in natural gas pipelines and refueling pumps if they believed that there would be natural gas vehicles to sell to.  The co-ordination failure arises because drivers aren't buying natural gas vehicles because they anticipate that they can't refuel them and fueling stations aren't installing costly natural gas fueling stations because they anticipate that there aren't any vehicles to sell to.   The cliche is that "only government" can step in and solve this co-ordination problem.

An externality lurks here.  If more drivers drove using natural gas vehicles, our trade deficit would be lower, we would be less reliant on the Middle East and our greenhouse gas emissions would be lower.

In the presence of an existing negative externality (associated with gasoline consumption), would Milton Friedman support government regulation to jump start the natural gas vehicle?

A free market guy might say the following;  "The price of gasoline varies across the United States.  In addition, the price of natural gas varies across the U.S and the ability to install new infrastructure in gas stations differs across the U.S.  In those areas where the price of gasoline is high and the price of natural gas is low and where it is easy to install new natural gas refueling stations, these are the "low hanging fruit" and will require the least subsidy to nudge these places to the "natural gas" equilibrium.  Once this first domino falls then other will imitate.

If you insist on government intervention, then government could run a field experiment in which it randomizes the subsidy to existing gasoline stations for building natural gas refueling stations (in the geographic areas I sketched in the above paragraph) and then see which stations accept the subsidy and build the infrastructure and study whether car drivers respond to the pricing incentives and increased access to refueling stations.

Some Simple Heat Wave Adaptation Strategies

Alex Hall's recent work  has triggered some wild LA Times comments.  To counter some of this zany discussion, I have found a few low cost pointers for how to adapt to 100+ degree days.

How To Survive Hot Weather (source)
  • Foods generate metabolic heat when the body breaks it down. So, to beat the heat, avoid larger meals. Instead, have small meals more often. Also, avoid foods that are rich in protein.
  • Eat plenty of spicy food as these stimulate the heat receptors in the mouth and increase the sweating thus cooling the body down.
  • Another way is to keep your wrists under a cold tap of water every couple of hours. This will cool your blood as the main vein passes through the wrists.
  • Before going to bed take a bath in lukewarm water. A cold shower will only generate the heat afterwards to compensate for the heat loss.
  • If there is a basement in the house then you can take recourse in it during very hot days, as basements are generally 15 to 20 degrees cooler than the rest of the house.
  • During hot weather, cotton clothes are the best. Wear loose, lightweight and light colored cotton clothes. This is because synthetic fibers trap the heat while cotton cloths reflect the sun’s radiation. In addition, the cotton also helps in the evaporation of sweat that makes the body cooler.
  • To stop the heat from coming to your house, cover all the doors and windows with curtains.
  • Drink plenty of water and fruit juices throughout the day. Avoid caffeine-based drinks like coffee and also avoid colas as they increase the metabolic heat. Also, stay away from alcohol as it dehydrates the body.
  • Aloe Vera is an excellent moisturizer that you can use to lower the skin temperature.
  • Avoid strenuous activity as it increases the body temperature. During hot weather, it is best to exercise early in the morning or late in the evening.
  • Another method to cool the skin is to use liquid ice. They come with reusable ice wrap that can be directly wrapped on the skin to cool it.
  • Chrysanthemum is a cooling herb that is very effective in reducing the body heat. Drink chrysanthemum tea, three to four times a day to get relief from heat.
  • Invest in an air conditioning unit. This can cool your house thus providing relief from the heat.
  • Apply cold mudpack to the stomach and the eyes twice a day. This will cool down your entire body.
  • Another good option is to go for aromatherapy. This uses essential oils that calm the body.
  • To treat sunburns, mix one tablespoon of aloe vera with three drops of lavender essential oil. Apply this mixture to the affected area.

An economist would ask:  1. for each of these; how costly is to adopt in terms of $, and time spent implementing it and discomfort from doing it?  2.  If you implement each of these, how much do they together "offset" the heat exposure?

Proof that Academics Have a Good Life

Anne-Marie Slaughter is a very successful academic.  Here is her long essay on the tradeoffs of joining the Obama Administration.  I am surprised that she didn't investigate the time requirements for the job before she accepted it.  Academia offers personal freedom that "real jobs" don't.  That's a tradeoff and different people self select into the different types of jobs.

In a world where it is costly to transmit information (say from one doctor to another doctor about a patient's health), it is impossible to "share work".  We need folks putting in 13 hour days and there is a question of who can and is willing to do it. I'm not!  I like the academic "soft" life!

Wednesday, June 20, 2012

Do Heat Waves Cause Deaths?

All scientists seek to make "causal statements" rather than simply uncovering correlations.  The U.S northeast is in the midst of a heat wave and the NY Times has made a strong causal statement about last year's August heat wave.  "The last time the temperature broke 90 in New York was in August, as part of a heat wave that claimed at least 31 lives in the city."

How does the NY Times know that 31 people would still be alive had there not been that heat wave?  This is the "causality" challenge.  I acknowledge that it is certainly possible that 31 people did die during the dates of the heat wave but note the causality that the NY Times attributes to the heat wave.   Using Google, I found this Ph.D study of Ireland  .    It does a better job investigating the statistical patterns between heat and death.

Economists have made an important point about studying these correlations.   Read this paper by Enrico and Olivier.   Heat waves cause harvesting as they tend to lead to deaths of people who were vulnerable and would have died soon after the heat wave had the heat wave not taken place.   

Here is  a quote from the authors

"While it is clear that mortality spikes in days of extreme hot or cold temperature,
the significance of those deaths in terms of reduction in life expectancy is much less
clear. The number of deaths caused by extreme temperatures on a given day could be
compensated for by a temporary fall in mortality in the subsequent days or weeks, if
extreme temperature principally affects individuals whose health is already compromised.
This could happen if extreme temperature precipitates the health condition of individuals
who are already weak and would have died even in the absence of the shock. In this case
the only effect of the weather shock is to change the timing of mortality by a few days or
weeks, but not the number of deaths in the longer run. Such temporal displacement is
sometimes referred to as the “harvesting” effect.  Thus, the excess mortality observed on
cold and hot days does not necessarily imply significant permanent reductions in life

UPDATE:  My UCLA colleague Alex Hall's work on predicting climate change's localized impacts for Los Angeles received a nice write up in the LA Times today.   Note that he predicts that West LA won't heat up that much as measured by the count of days exceeding 95 degrees.  So, the adaptation strategy is to allow for high rise buildings in this "temperate" part of the city.  We need the land use zoning laws to be flexible to meet changes in demand.  Right now, the liberal city of Santa Monica makes it quite difficult to build new housing there or to build multi-family housing there.  Both, need to change in our hotter future.

Alex's work is linked to this column about heat waves deaths because he is predicting more heat in East L.A.  An adaptive population needs to have the opportunity to migrate and build high rises in "safer" more pleasant areas.  Such areas exist and self interested people in the future will find them.  Let's see if government induced supply side constraints limit the gains to trade between land owners, real estate developers and households seeking to live well in the hotter future.   The free market can handle these trades if government intervention doesn't inhibit such trades.   The net effect is easier adaptation.

The Climate Wars

I just skimmed through Michael Mann's book "The Hockey Stick and the Climate Wars".   A couple of thoughts flashed through my head.  First, Dr. Mann has tenure at an excellent University (Penn State) and should have no fear of being "blacklisted".   All publicity is good publicity.  I don't know how much time it has taken him to defend himself in the midst of all of this "climategate" and that is time lost.

Second, academics are not naive.  In this Internet age, we know that the "blogosphere" is waiting patiently for the nerds to generate interesting (and perhaps sexy?) results that it can then pontificate about and amplify.   There is a symbiotic relationship between core researchers and bloggers.   Dr. Mann must have been aware that his research would be debated.   Some strong economists have entered this debate.  My friend Ross McKitrick is one of the debaters and here is his work.     I certainly do agree that Dr. Mann has the right for his private emails to remain private but all academics now understand (and should have anticipated) that any private communication can become public.  When I want to have a private conservation, I email a person that I need to call him/her and then we talk.  

UPDATE:  For those interested in the "hockey stick" debates (and I am certainly no expert on these time series processes), here is the recent editorial in the WSJ by a Berkeley physicist who agrees with Mann and had been a "skeptic".

Slightly Switching Subjects:  

Dr. Mann is part of a coalition seeking to educate the public to support policies to reduce the world's GHG emissions.  I am a full supporter of the "big goal" here. Mitigation is a much easier option than adaptation.  But, I'm on record that mitigation won't work so we have to tackle adaptation head on.  Neither the U.S nor India nor China is on board with reducing emissions. If they don't play ball, good luck with Russia and the others.  The IPCC is the leading organization of "low carbon nerds" leading the intellectual fight for decarbonizing the globe.   I have mixed feelings about the IPCC's work.   

I will admit upfront that I am biased. I was nominated to serve on the new panel but must have been rejected.   It is known that I'm an optimist concerning our collective ability to adapt to many of the challenges that climate change will pose.  The IPCC takes peer reviewed studies and boils them down to a single sentence each.  A lot is lost in translation.  The IPCC produces translational research but in truth the policy makers already know their positions and I doubt that the insights from the IPCC informs their positions. So, if I'm right, who is the marginal person who the IPCC is trying to influence?  The Koch Brothers?  Joe Romm?  Neither.     For an example of what the IPCC produces; read this recent paper.

UPDATE:  Using Google, I have found a list of the new IPCC authors.  I have never heard of 85% of the authors listed in the social science chapters.  Geoff Heal and Max Auffhammer are both listed and that is great news but U.S academics appear to have been down weighted perhaps to achieve international representation goals?   I will read chapters 17 and 18 closely when they appear.  

So, at the end of the day --- what are the "climate wars"?  This is a debate about what are the costs of mitigating climate change and what are the benefits of doing so and which nations and people will bear the costs and benefits of a changing climate?  Ultimately much of this is an economic exercise.  99% of economists support a carbon tax but economists have not been clear about about what are the social costs of climate change.  We have "macro estimates" from William Nordhaus and Marty Weitzman and we have other predictions from micro economists (such as myself and Michael Greenstone's recent work on death rates and outdoor extreme temperature).  There is much work left to be done here!

Tuesday, June 19, 2012


I am in the center city of Vienna.   It is not easy to lose weight in this walking city because you offset any exercise with too many calories.  We took a fast train from Budapest to here and now we are seeing the sights.  My son was shocked that a "statue" was really a living human. I told him to give .2 Euros to this "statue" and the "statue" moved and gave him a thumbs up.   How's that for our efforts to jump start the European economy.

A QUICK UPDATE on purchasing power parity.  A Grande Cappuccino costs $3.35 in Westwood Los Angeles and 4 Euros in downtown Vienna.  Given an exchange rate of 1.27 dollars per Euro, Vienna's cost of living is 52% higher than Los Angeles!

In other news, I suggest that you read "Nature: Climate Change".  This wise journal gave a nice writeup  of my carbon geography paper.    For those of you who wonder why in the heck I've moved to Europe for the short term, you can wait for my answer posted here.  

Monday, June 18, 2012

Toronto's Efforts to Supply Electricity While Minimizing Climate Change Shock's Impacts

I am leaving Budapest and on my way to Austria.  My efforts here are to provide aggregate demand to lift Europe from its financial woes.  I am not "small" in this economy but I do take prices as given.   To keep up with events in North America, I use the Internet and read about the Heat-OKC NBA games and I also read this piece about Toronto's pro-active efforts to not allow climate shocks to disrupt its electricity supply.  As you can imagine, I like this piece on several levels.  

Without cherry picking evidence, this is exactly the logic of my Climatopolis playing out.   We are not passive victims of Mother Nature. Instead, we have the right incentives to learn about the "new normal" and adjust our investments to protect ourselves from serious risks that climate change will pose.

Here are some specifics from this Toronto Case Study.

"Do recent severe weather trends represent the “new normal?” How will increased sea level rise and storm surge due to climate change affect power plant management and site selection? How will utilities manage the dual challenges of increasing demand for air conditioning and diminishing water availability for power plant cooling?  Will extreme heat and rains affect electrical substations and underground transformer vaults?
Leading power companies are increasingly looking at how to integrate climate change risks and extreme weather vulnerabilities into existing enterprise risk management approaches.  They are pursuing adaptation strategies to maintain the reliability of electricity supply and reduce the costs of extended power outages in the face of extreme weather events such as hurricanes, tornados, winter storms, and extratropical storms.
Resilience measures include hardening of electrical infrastructure (e.g. flood-proofing of electrical substations) and more natural resilience initiatives such as wetland restoration to reduce tidal storm surge impacts.

In November 2011, the Toronto Environment Office and CivicAction launched the WeatherWise Partnership to better protect the region’s residents, organizations, infrastructure, and environment from extreme weather.  The goal of the WeatherWise Partnership is to identify risks and prioritize areas for action and investment by businesses, communities, organizations and governments as the region faces more extreme weather.  The Partnership has over 50 members from all three levels of government and from many sectors such as finance, insurance, communications, real estate, electricity, universities, energy, transportation, and telecommunications. It has identified the electrical sector as its first priority for improving extreme weather resilience in the Toronto region.

The WeatherWise Partnership recognizes that electrical power is critical to many sectors (e.g. Telecommunication, Transport, Water Supply and Treatment). Likewise, the electrical sector has certain dependencies on other sectors (Roads, Urban Forestry to trim tree branches overhanging, Logistics and Supply Chains).
According to David MacLeod, Senior Environmental Specialist for the City of Toronto Environment Office, current WeatherWise Partnership projects include:

  • A survey of critical infrastructure and service providers’ tolerance to power disruption.
  • A seminar for the electrical sector on climate change risk assessment including a demo of the Toronto Climate Change Risk Assessment Tool.
  • A pilot “Climate Change Engineering Vulnerability Assessment” of a small portion of the City of Toronto’s electrical grid applying the Engineers Canada Public Infrastructure Engineering Vulnerability Committee‘s protocol.
  • A benchmarking study on electricity sector extreme weather resiliency efforts in other jurisdictions.
This is great stuff! 

Some Details About Al Gore's Investment Firm

When I want the facts, I turn to the NY Post.  Today, the Post reports that NYC has made a big investment in a company that Al Gore is associated with.   Wanting to know the facts, I went to Generation Investment Management's webpage and found this report.   But first, here is a quote from Al Gore:

When we founded Generation in 2004, our intention was to show how integrating sustainability research into a long term investment strategy could strengthen fundamental investment analysis. Since then, our conviction on the importance of sustainability in delivering long term performance has only increased.”
Al Gore and David Blood

If you sit down and read through the technical report, it is interesting and could be a useful teaching tool in an environmental economics class. It tries to claim that a bunch of global challenges such as climate change and HIV/AIDS represents "risks" that firms face and that adaptive firms should think ahead about how to reduce their exposure to these risks. This is sound thinking.

The document appears to implicitly assume that carbon pricing at the world level is approaching.  Why? If a firm has an enormous carbon footprint but we have no carbon pricing and no such pricing is on the policy horizon then why do such emissions pose a "risk" for such a firm?

The Report does not report what portfolio of assets this firm has actually invested in.  The sustainable finance literature has doubted that these "green funds" can outperform the stock market as a whole because they can't achieve the same level of diversification as an investor who is willing to invest in "good" and "evil" companies.    The NY Post hints that Al Gore's company may earn a high rate of return because liberal investors give the firm their money because of their love of Clinton/Gore. So this raises a new issue.  In traditional finance, investors invest in the asset or managers offering the highest return for a given level of risk. In the case of Al Gore's firm, Gore creates a type of product differentiation as liberal investors want to be associated with him.  Just as a Mercedes is a name brand car,  Gore's Generation Investment Management is a name brand firm .  Do any Republicans invest in his firm? Does it matter if they don't?

I have no problem with liberal private investors investing with liberal hedge funds but I do have some concerns about public funds intended to be used for the retirement funds for teachers and cops being invested by intermediaries (perhaps with a political agenda that the voters are unaware of) with celebrities whose good graces they seek.    

Introducing "ideology" into the financial decision process may lead capital to be flowing to the "wrong" investors relative to a world where investors focus narrowly on risk/return.

Saturday, June 16, 2012

Implementing Green Accounting

When economists want to help our students get some sleep, we teach national income accounting. I can't say I remember what are "C", "I", "G" or "X" but I have vague memory that we can add them up so that C + I + G+ X =  toothpaste.  (If we measure GNP in such units then this is correct!).    Now, the environmentalists are quick to remark that non-market natural resources such as clean air and clean water and greenhouse gas emissions are used to create this output.  The greens correctly point out that current national income accounting over-states our standard of living because it doesn't subtract out damage to non-market goods such as clean air.  In contrast, a "true green accounting" approach would subtract off the depreciation to Mother Nature causes in the capitalist production process.

So;  Net National Product (NNP) =  GNP - Depreciation

So, depreciation of machines would be easy to calculate if we could price out the value of the capital stock at each point in time.  But, how do we operationalize measuring the damage to Mother Nature?  The NY Times wrestles with this question today and makes no progress!  Seeing this gap, permit me to provide a sketch of an answer.

One quick answer is that we can cite the Stanford guys (Arrow and Goulder) and you can read their paper here.  

This green accounting exercise is MUCH more challenging when the pollution in question is a local public bad such as air pollution because then the exact geographic location of the production is crucial. Why?  The same factory located in downtown Manhattan will cause much more damage than if the same factory produces in rural Kansas?  Why?  More "victims" are exposed in downtown NYC and each Don Trump is willing to pay more to not be exposed to the pollution than his counterparts in Kansas.

So, to make this a short blog post --- let's focus on a global externality of GHG emissions.   Define "f" as the emissions factor   =  tons of greenhouse gas emissions per dollar of GNP.   Suppose we all agree that each ton of GHG emissions causes $c of damage to the world.

Under these two assumptions;

Green GNP for  nation =  GNP - f*GNP*c   =  GNP*(1-f*c)  

We are done!   Note that f*GNP = total national tons of GHG emissions and each one causes "$c" of damage so multiply them together and f*GNP*c is total pollution damage per year.  Subtract this from GNP to yield "green GNP".

A neo-classical economist would point out that if we introduce a global cap & trade program, then the invisible hand will work great as decision makers all over the world would seek to maximize "Green Income" rather than "Income"   .  

Now, I recognize that GHG emissions represents just one indicator of environmental quality. If you correctly insist that we also subtract out damage done to the air and water then we can't use "macro economics" anymore because we have to track the entire economy (my Kansas example presented above).   Introducing local pollutants into national income accounting is a nightmare.

Some Climate Change Algebra

James Wolfensohn and UCLA's Rob Jensen agree on at least one thing;  cell phones offer substantial benefits.  JW was the President of the World Bank and in today's NY Times he suggests that everyone should have a cell phone.  My 11 year old son would agree!  But, JW's focus is on women in poor nations. He argues that there are at least 300 million of them who would be more productive, safer and more socially connected if they had such a phone.  

As you know, Rob Jensen has written the best academic paper on the consequences of cell phone technology.  But, my focus (as usual) is the environmental consequences of economic activity.

If 300 million women now have cell phones, how much greenhouse gas emissions will this create?

This article claims that it takes 6.5 kWh to charge a phone a year. Multiply that by 300 million and we must generate 2 billion kWh of power to generate the necessary electricity for the extra phones.

In the United States, the median carbon dioxide emissions factor for our natural gas electric utilities is:
837 pounds per MWH ;

So, please double check  my math:

New Tons of CO2 =   (2 billion kwh/1000)*837/2000  = 837,000  per year due to the new JW cell phones

At a marginal social cost of $50 per ton, JW is advocating creating a global externality that causes

$42 million dollars of new pollution a year.  He may certainly be right that his proposal is a good thing but think of the climate!  And folks, wonder why I wrote my climate change adaptation book? If a "World Bank Liberal" unintentionally exacerbates the challenge, what can we expect from everyone else?

Thursday, June 14, 2012

Ranking Major Airports

It is 6am in Budapest, Hungary.  I am near the Castle for the upcoming GDN Conference on Cities.  My 25 minute "plenary speaker" presentation is a work of wonder.  If it is well received, I will provide a link for my slides in the near future.  But, now I would like to celebrate the Munich Airport.   For those of you who believe that Los Angeles has the world's best airport (I'm kidding), permit me to name a counter example.  The Munich Airport has some real charm to it.

1. Clean toliets
2. free newspapers
3. free coffee
4.  good food  (my son ate multiple sausages and I actually enjoyed my pretzel role sandwich).
5.  Swiss Army Knives for sale (my son is now armed with something that has a finger nail clipper along with several other functions).
6. roomy and low population density (I thought Europe was down on sprawl?)

In contrast, Los Angeles airport is like a big bus station. It appears to have built in 1940 and has "the worst of both worlds" feel to it.  It reflects a time when the USA wasn't rich but didn't have style or old world grace either.    Durable capital has real costs.  As a believer in progress, it is sometimes necessary to wipe out the old capital stock and start again.

Switching Subjects:  at the LAX airport the other day, my wife was killing time looking at the magazines for sale. In the new issue of Popular Science, there was a piece by Grist's Dave Roberts discussing climate change adaptation.   I can't find a link on line but my wife and I agree that his points look a lot like my Climatopolis logic .  This makes me happy because when I went to Grist's offices in Seattle in September 2010 (on my ill fated Climatopolis book tour),  the Grist team were dismayed by my points about getting ready for the inevitable of climate change and the productive role that capitalism will play in helping us to adapt.   Perhaps Led Zeppelin was wrong, the "song doesn't have to remain the same".  I would like to see other liberal climate bloggers such as Joe Romm begin to have an honest discussion about adaptation rather than continuing with the diminishing returns to DEBUNKING those who disagree with him.

Tuesday, June 12, 2012

Who Pays for the "Nudge"?

The NY Times has a fun piece focused on a Stanford Prof named Balaji Prabhakar.  Dr. Prabhakar seeks to reduce traffic congestion at Stanford University and has figured out a clever nudge for how to achieve a separating equilibrium.  Commuters to Stanford's campus have private information concerning their own desire to arrive on campus at "rush hour" (say 8am to 9am).  Some faculty and staff are in no rush to arrive then while others have a great desire to arrive at that time.

Due to the tragedy of the commons (the roads are common property) traffic congestion ensues as the spike in private vehicles congests the roads.  The typical Econ 101 solution to this problem is to impose a time of use fee such that if you arrive in some "central commuting district" at rush hour that you must pay a congestion fee.  This "solution" nudges drivers who can travel off-peak to reschedule their trip and this in aggregate solves the congestion problem.  But, nobody likes paying this fee.

Enter, Dr. Prabhakar's solution --- the subset of Stanford drivers who choose to drive off-peak are now entered in a lottery and can win a cash prize.  Using Facebook and Social Media, they can show off to Stanford friends that they won the lottery.   At least two questions arise:

1.  Who pays for the lottery prizes? How is this solution "sustainable"?   It appears that grants from the U.S DOT provide the "sugar daddy" cash.  The beauty of a congestion charge is that the "polluter pays" and money is collected. This Professor's scheme exports $ back to lucky lottery winners.

2.  How does Dr. Prabhakar know that he isn't awarding lottery tickets to people who didn't plan to commute at the peak hour?  You only want to give a coupon to those who were just at the margin of buying the product or not.  A firm is wasting $ when it gives a coupon to someone who always buys the product or never plans to buy the product.   He might counter that his information technology allows him to know who is  a peak time commuter but people may drive in a few times at that hour to qualify for the lottery.

3.  As his program succeeds and more people switch over to driving off-peak, each person's probability of winning the lottery declines. If they know this, will they substitute back to peak time driving? Or will the Prof increase the number of winning lottery tickets? If he does this then #1 discussed above becomes more important!  So, for his program to be sustainable --- he either must have a sugar daddy to pay for the prizes or hope that the Stanford faculty can't calculate probabilities!  Funny!

Monday, June 11, 2012

Adaptation Efforts in Flood Zones

Optimists will not be surprised that Norfolk, VA has issued a series of flood maps to highlight which parts of the area are at risk from floods.  Such information is a necessary step to help households and firms adapt to the "new normal".  We are not passive victims. Now that land owners know what challenges they face, they now have no excuses for not searching for solutions.  This creates new opportunities for entrepreneurs. Will some land need to be evacuated? Of course.  Should those land owners be compensated for their loss?  I'm not so sure but the lawyers can settle that one.

For the optimists to sleep well at night, we need the GIS nerds in Norfolk to continue to update their maps to reflect the best climate science.  These maps act as a leading indicator of the challenges that coastal communities face and self interested, forward looking investors have strong incentives to incorporate these new insights in their planning. This is the optimism of Climatopolis at work!

Conservatives and Conservation

A couple of weeks ago, I gave a seminar at Stanford Econ where I focused on my recent research on the role of environmental ideology as a key determinant of behavior in a variety of different private consumer choices ranging from;  using public transit, annual miles driving, probability of owning a Prius, probability of installing solar panels, living in the center city versus the suburbs, electricity consumption, and how a household changes its electricity consumption after receiving a Home Energy Report that benchmarks your household's consumption relative to peers.  In all of these cases,  liberals "walk the walk".   They have a small carbon footprint in their day to day life and there is a logical consistency between how they act in private and how they vote on public legislation.   In a society where we do not introduce Piguouvian taxes, we need such folks to step up.  After all, volunteers are crucial when we have no formal markets to recruit firemen!

My friends at Stanford argued that I was implicitly assuming that political liberals are environmentalists while political conservatives are not.  This "left/right" partition does a good job today but of course it doesn't lead to a perfect partition of people.  I use political party of registration because it is often observable in standard data sets while "environmental ideology" is not easy to observe.

Today's WSJ reviews a book focused on Prince Charles style conservation.

How to Think Seriously About the Planet

By Roger Scruton
(Oxford, 457 pages, $29.95)

Mr. Scruton appears to believe in Downton Abbey style conservation where the Lord (of the Estate not of the Universe) has a desire to conserve nature and to preserve a past lifestyle.  Such a hounds and shooting birds life certainly exists in most quarters but 99.7% of the world's people and activity is focused far from this estate. Instead, the bulk of activity occurs in dense cities far from where the Lord lives.  He has literally built a spatial moat to keep away the common folk.  The real environmental challenges and in a democracy the median voter politics are taking place in the cities and suburbs where people actually live.  
Now, I have been interested in some of Mr. Scruton's themes. I have wanted to work with the National Parks Service to see if visiting a national park helps to shape preferences for preservation of such parks. Is nature an "experience good"?  The Fresh Air Fund is implicitly based on this view.

Sunday, June 10, 2012

Urbanization and Economic Development

Next week, I'll be in Budapest participating in this GDN Network Conference  titled "Urbanization and Development: Delving Deeper into the Nexus".    I will take an indirect route back to LA as I will also make my debut in Singapore to see my friends at NUS.  My co-author Yongheng Deng has invited me to a great conference and I'm hoping to become a regular visitor to Singapore.

What are the "big questions" for urban economists to study in developing nations?  My own recent work has focused on China.   In a series of papers, such as this one ,   this one   , this one  and this one ,   I have worked with my co-authors to create new data sets to test classic urban economics questions in a developing country city.  For example, we have used within city and across city variation in real estate prices to tease out how much households value environmental amenities such as clean air, access to parks and access to public transit.  The big research questions here focus on measuring whether willingness to pay for non-market environmental goods increases sharply as a nation grows richer.  On the supply side, I'm quite interested in whether governments at the national and urban level bother to deliver high quality public goods as the nation grows richer.

The challenge here is how one convincingly answers these questions.  The randomized control trial methodology does not appear to be easily implemented here. In general, I do not think that there have been enough field experiments run in cities in LDCs focused on the demand and supply for local public goods.  For example, I could imagine in a city such as Bangkok giving households chosen at random a "relocation voucher" that would provide them with 12 months free rent if they move.  A researcher could study the attributes of the new apartment and neighborhood they move to --- this would yield a revealed preference test of what location attributes they value the most.  The population could be surveyed to see where they work and where their friends live.

Friday, June 08, 2012

Doom and Gloom and the Absence of Social Scientists

Nature (an academic journal) is grabbing headlines with a new "big think" piece.  Here is a quote from the LA Times

"A group of international scientists is sounding a global alarm, warning that population growth, climate change and environmental destruction are pushing Earth toward calamitous — and irreversible — biological changes.

In a paper published in Thursday's edition of the journalNature, 22 researchers from a variety of fields liken the human impact to global events eons ago that caused mass extinctions, permanently altering Earth's biosphere.

"Humans are now forcing another such transition, with the potential to transform Earth rapidly and irreversibly into a state unknown in human experience," wrote the authors, who are from the U.S., Europe, Canada and South America."

These scientists could certainly be right about their predictions about global climate patterns but how do they know that we (both people and creatures) have such limited ability to adapt to the "new normal"?   I don't see any social scientists involved in this project.   I would like to see these 22 researchers tell a convincing story for how the trends they highlight will decimate our world and that we will be defenseless to protect ourselves in the face of this change.

I would like to see these "crystal ball" researchers explain in nitty/gritty details the "calamitous" scenarios they envision for us and creatures.  If they foresee this tragedy, are there really no pathways to adapt?  

To quote these guys again,

"The swiftness of climate change is likely to outpace the ability of species to adapt, especially as natural habitat becomes more fragmented, Barnosky said.

All this could produce a biologically impoverished Earth that would rob humans of vital ecological services such as insects that pollinate crops, forests that provide clean water, and tropical species that are the source of new drugs.

"We have created a bubble of human population and economy … that is totally unsustainable and is either going to have to deflate gradually or is going to burst," said co-author James Brown, a distinguished professor of biology at the University of New Mexico. "If it's going to burst, the consequences are really going to be grim for people as well as biodiversity and the rest of the planet."

So, take a look at the middle paragraph. If we anticipate that Mother Nature won't be providing these services anymore, isn't there a profit opportunity for innovators who can deliver a substitute?

I disagree with Prof. James Brown.  He needs to take a class in econ 101 at the Economics Department at UNM.   Capitalism will be the solution here not the problem.

Foreclosure and Home Maintenance Externalities

This article  provides a "teachable moment" for urban economists.    Consider a low home price neighborhood where one home owner defaults on his loan and gives the keys to Bank of America.   BOA faces a transaction cost issue that it doesn't have anybody on payroll who can at relatively low cost go to the property and check whether this asset is "healthy" over time.  For example,  if hoodlums grow pot there or if there is a fire --- how would BOA know this?

Does BOA have an incentive to invest money in maintenance and upkeep?   Suppose that it would cost $100 a month to mow the grass and maintain the home.  If the home's value is expected to decline by 2% a year (because of the ongoing recession) and the home is worth $250,000 then BOA expects to lose $5,000 a year in asset value.  If BOA doesn't view the $1,200 in maintenance expenses as leading to a higher rate of return then it won't make this investment and the home's quality will decline.   Now, the spatial externality here occurs if the homes next to the depreciating home that BOA owns decline more in value because they are next to a "nasty home".  Economists have been estimating hedonic pricing models and augmenting the statistical model to include a count of homes in foreclosure in a vicinity of a given home.  Such statistical models do not attempt to pinpoint why foreclosure has a causal effect on nearby home values. It is possible that a 3rd variable (a neighborhood shock) causes both events rather than the causality being that local foreclosure spills over and lowers nearby home values but this story is intuitive for homes very close to the "pot den". If I live 7 homes away from a foreclosed house, I don't really see how this can lower my home's price unless you believe in a "domino effect" story and my home is the 7th domino.

Wednesday, June 06, 2012

John Quigley Memorial

On June 9th, I will be on the UC Berkeley campus to attend the Memorial Tribute to John M. Quigley.   This will be a special event as we honor his contributions to economics and the University of California.   At his Goldman Public Policy Office, he kept a copy of every Ph.D. dissertation that he served on and I would sometimes sit down and read parts of these theses.   I was always amazed at both the quantity of graduate students he worked with and the breadth of different fields within applied micro that these scholars covered.

The Cost of Achieving "Low Carbon" Goals: Evidence from Harvard and Europe

Exhibit #1 is from the Harvard Crimson.  Harvard had sought to reduce its GHG footprint by 30% below its 2006 baseline level by the year 2016 but its emissions are only down 7%.  Why?  I'm guessing that the university's square footage has increased over the time period and its emissions per square foot hasn't fallen fast enough to compensate and achieve the green goal.  To its credit, Harvard must be paying more for electricity now that it wants to purchase more of its electricity from "green sources".  Here is a quote:

"In November 2009, Harvard became the largest single-institution buyer of wind power in New England when it announced that more than 10 percent of electricity used by its Cambridge and Allston campuses would come from a wind farm in Maine. Meanwhile, improvements to Harvard’s Blackstone Steam Plant, which generates electricity for the University, have made it 31 percent less GHG-intensive since 2006. Harvard’s two chilled water plants are now 19 percent less GHG-intensive than they were in 2006."

To an economist, the funny feature of the article is that it never mentions the cost of "going green".  As Harvard retrofits existing buildings, builds new buildings, and purchases green power --- what is the marginal cost of "going green" versus "staying brown"?

This is a nice transition to Exhibit #2 from the Wall Street Journal.    This piece is a bit over the top as it argues that Europe is bankrupting itself due to the pursuit of being "low carbon".  Yes, the green push raises electricity prices but we need to have an honest discussion of "by how much" and "who bears the incidence of these policies".   On this point, the NY Times had a really strong piece yesterday where it acknowledged a point that Frank Wolak has been making for a while.  

If educated wealthy Californians install solar panels and "get off the grid", who pays for the subsidies that they solar power installers received and who pays the fixed costs for the existing power generation infrastructure?  The awkward answer is that poor people pay this so there is a redistribution from the poor to the wealthy embedded in the incentives and cost recovering rules.  Here is a quote.

"Even some consumer advocates who frequently challenge the utilities are arguing that it is time to rethink the generous rate structure, which was initially put in place to encourage the industry at a time when solar systems were far more expensive to install. With those costs down, it now takes much less time to pay off the investment.
“The goal of net metering should not be to give the shortest possible payback period; we’re not trying to shower people with free money,” said Matthew Freedman, a lawyer at the Utility Reform Network, a California advocacy group that works on behalf of residential ratepayers. “We want to make it a reasonable investment while protecting the interests of all the other customers on the system who have to pay for it.”

Tuesday, June 05, 2012

Return to Sender: Address Unknown (Harvard Economists Offer a Tribute to Elvis)

Read this new paper by Andrei Shleifer and his co-authors and tell me that you don't start singing the Elvis song "Return to Sender".   Before I tell you about the Shleifer paper, I suggest that you review the lyrics of the King.

I went to Andrei's webpage because he recently released a very good NBER paper on exploring why more educated people complain more about government incompetence.   This correlation interests me very much because I believe that environmental regulation will become more effective in LDC nations as the populace becomes more educated because these urbanites will do a better job holding politicians accountable and self interested politicians will be aware that they are now on the "hot seat" and will deliver public goods. Put simply, shirking will decline as monitoring costs fall.  The agent will obey the principal!

As I understand it, Andrei's team mailed letters to hundreds of nations to see if the letter was "returned to sender" because the senders intentionally sent to a wrong address.    This funky approach creates  an objective apples to apples metric of government quality.  As the nephew of a postal worker, I find this clever and funny.

To quote the paper; "First, we constructed new objective measures for

the quality of government in 159 countries, those based on return of incorrectly addressed
international mail.  These measures correlate with other indicators of the quality of government,
yet have the advantage that we know more precisely what goes into them.
Second, we used these measures to argue that an important reason for poor government in
developing countries is not corruption or patronage, but rather the same basic low productivity
that plagues the private sector in these countries as well.  Such low productivity is related to
inputs and technology, but also to management."

Again, this is creative work and the King would approve.  His cite count would rise.


The Rural Windfall from Leasing Land to Energy Extraction Companies

The NY Times is a "city slicker" newspaper as it focuses on Mayor Bloomberg's paternalism over big gulp sugar drinks and debates whether San Francisco is becoming uncool as it attracts too man Twitter type firms.  But, today it turns its attention rural Ohio and discusses the windfall that land owners there are collecting as energy companies seek to access the land.  The article hints that the rural folk may not understand the fine print of the contract they signed and that there will be nasty environmental externalities (such as polluted water) caused by the new drilling.

A free market guy might counter that these energy companies have an incentive for developing a reputation as a good safe neighbor because if their operations create a mess then they will have more trouble buying land at the next rural town they seek to enter.

The other interesting point here is "ideology".   Are the people of rural Ohio Republicans?  It has been suggested to me that libertarian/Republicans are more comfortable with the idea that land should be used to extract resources than liberal/environmentalists who seek to "conserve" land.   This ideological difference in vision concerning the stewardship of land (if true), could create an interesting spatial map that liberal/environmentalists will live in protected areas featuring high home prices while republican areas will be mined and extracted areas and that this separating equilibrium will reflect both a residential sorting effect and a "treatment effect" (due to differences in zoning and public policies).

Monday, June 04, 2012

The Rural to Urban Transition: The Case of Thailand

Next month, I will spend a fair bit of time in Singapore.  This will bring me pretty close to Thailand so this article caught my eye.  Young Thai people are revealing a taste for moving off of the farm and moving to the big air conditioned city.  This isn't shocking.  This is an example of how cities shield us from climate risk.  Farmers face more output volatility due to climate shocks and farming is hard work spent outside.  In contrast, urbanites work inside and spend more time inside and can choose when they want to be outside.  If more people urbanize, who will grow the food?  In a world of international trade, some folks in some geographical locations will specialize in food production but the general urbanization trend helps to shield more and more people from climate shocks.    This is free market adaptation to climate change.

Sunday, June 03, 2012

Republicans and Environmentalism

Tom Friedman reminds us that the Republican Party used to support environmental causes.  Teddy Roosevelt's conservation efforts and Richard Nixon's Clean Air Act are offered as an example of the past "G (reen) OP".  So, what happened?     Why is today's Republican Party the "anti-environmental policy" party?

My favorite explanation focuses on a spatial separating equilibrium.  The Democrats live in center cities while Republicans cluster in Suburbs.   The Center Cities (due to their high density) suffer from pollution problems that require collective action (such as tighter air quality and water quality standards) while the suburbs are "green" (the solution to pollution is dilution).  The Republicans have (on average) created a moat between themselves and pollution.  The Republicans are not "anti-environment" but they can use private markets to purchase environmental access (ski resorts , Club Med) when they want to have a  "green moment".

Turning to the challenge of climate change, the typical Republican household has located in the suburbs in a big house and drives a lot of miles while the typical Berkeley household has a small carbon footprint and can relatively easily adapt to carbon pricing while the Republican households recognize that they will face a higher "carbon tax" to keep their lifestyle up and going in a carbon pricing world.    Such a household's price of meat will rise, price of air conditioning, price of driving --- all will rise more than for Liberals in a carbon constrained world because of the spatial sorting discussed above.

My recent research has examined how political ideology influences household choice over location and lifestyle.   See this paper and this one.

Saturday, June 02, 2012

Celebrating Harold Demsetz's Contributions to Economics

I just attended a two day conference at UCLA where leading economists discussed Harold Demsetz's core contributions.  As you can see from his Google Scholar citations, there is a lot to talk about.  Harold and Rita Demsetz attended the conference and Harold had a lot to say!   I heard some very interesting talks by Oliver Hart, Oliver Williamson, Sam Peltzman, Bob Topel, Dennis Carlton and Boyan Jovanovic. Several of his past students attended the conference and supplied amusing stories about him as a teacher and mentor.  To my surprise, I can't find a conference program to link to but that's how UCLA does things.

Harold is a role model for me and many other members of the UCLA faculty.  Not all 82 year old economists are so active and clear thinking.  In the Chicago tradition, he asks tough, clear questions.   I always try to have lunch with him and he is always willing to hear me out and debate any of my crazy ideas.