Not all of my ideas merit publication in a journal. That's why blogs exist.  In this post, I would like to write about the City of Los Angeles' demand for gasoline.   After seeing our Controller speak about his open data policy, I went to this website  and downloaded every expenditure the City has made since 2011 on gasoline. The data provided the date, the quantity, the expenditure (and thus the price per gallon).  I merged to these data, weekly data for California on the price of gasoline.  From basic supply and demand this price of gasoline changes as world events unfold.    I sought to use these data to test:

1.  Does the City of California pay market rates for gasoline?
2.  Does the City purchase less when world shocks to gasoline raise the price?

For those who know some econometrics, I did two simple things;

1.  Correlate(City of Los Angeles weekly price of gasoline, State level price for gasoline in the same week)   and I found a very high correlation;

2.  Two stage least squares:     regress Quantity of gasoline =  a + b*price Los Angeles pays per gallon +  U

first stage:  Price Los Angeles pays =  c + d*state level price +  V

so I used the state level price as an instrument for the average price that LA pays and I found a fairly large negative price effect.

The weakness of my "study" is that I don't know the storage technology that the city of LA has. How much gas can it buy during times when the price is low and simply hold inventories? I also don't know how budgets work.  Do the guys making the procurement decisions get to keep $ they save by buying oil when it is cheap?

I had hoped to write a corruption note that the Government agencies are not responding to market incentives but this is false.

An extension would ask the following;  as the price of gasoline on the national market rises; the sellers of gas have an incentive to raise the price they charge the City of Los Angeles because otherwise they are throwing away revenue but what about the flip case? As the price of gasoline declines, does the non-profit City of LA aggressively seek out cheaper gasoline or does it "over-pay" in the short run because it is lazy?

When I'm back in LA, I will read and blog about this new article that claims that climate change could impose a trillion dollar loss on our coasts by the year 2100.   Two things I would ask readers to think about.  One is discounting,  at an annual interest rate of 3% this future loss has a present discounted value today of $78 billion dollars.   Second, sit down and read my recent paper .   I would bet $10,000 that the authors of this paper ignore the following points;

1. endogenous depreciation
2. general equilibrium

Endogenous depreciation is the idea that if sea level rise is expected to swamp coastal properties then owners stop investing in their upkeep and the actual sea level rise causes less damage when it occurs because the finite lived and depreciating asset that gets destroyed wasn't actually worth much at that time.

General equilibrium:  if coastal Florida floods, other pieces of real estate rise in value because demand is deflected there. These gains in value in the inland higher ground places were caused by the flooding along the coast. In this sense, a type of "zero sum game" emerges such that the losses predicted by the people such as the authors of this report are balanced out by land price gains on higher ground.

Climate scientists who are forecasting the impacts of climate change on the economy and people would be wise to take a course in economics.  Self interested individuals have choices and anticipate the shocks that are likely to take place. We have many options where to build our future cities so that the current distribution of economic activity vastly over-states where we will be in 100 years. We are not the Titanic. We see the iceberg.  Read Climatopolis.

Magali Delmas, Stephen Locke and I have just released a new NBER Working Paper.   Stephen is on the rookie job market this year.   I always try to write "original" papers on subjects where I hope that a new literature will emerge.  Let me sketch this paper's big ideas.

As usual, we are thinking about the economics of climate change.

Point #1:   A cliche in the environmental policy community is the following statement;  "If the United States and the world adopted a carbon tax, then the demand for energy efficient products such as solar panels and electric vehicles would increase."    The logic supporting this statement is simply a comparison of the present discounted value of the operating costs of conventional fossil fueled products versus their "green" substitutes.

Point #2:  As Matt Holian and I demonstrate, suburban households today have  a larger carbon footprint than center city households and they know this and the former group are more likely to oppose carbon pricing.  Given the suburbanization of U.S voters, median voter politics hurts the prospects of a majority U.S coalition supporting low carbon policies.

The starting point of my new paper with Delmas and Locke is the synergistic possibilities offered by jointly owning solar panels and an electric vehicle. Suppose that in the near future that suburban households can supersize their panels to generate enough power for their house and power their EV.  New battery storage would hold the power until night when the car would recharge.  Such a suburban household's carbon emissions would decline to zero.  Based on Point #2, such suburbanites would no longer oppose carbon pricing.

Note that this logic flips point #1 above.  The adoption of green products in the suburbs would increase suburban support for carbon pricing.

Why would the adoption of the EV and solar panels accelerate in the suburbs? That's the point of our new paper.  The product quality is improving (think of Tesla) and the quality adjusted price is falling (and new financing options such as leasing are becoming available).  We study a number of supply and demand side trends that strongly suggest that "accidental environmentalists" (those who seek to own a EV and solar due to cost minimization and product quality rather than because they want to please Al Gore) are a growing share of the buyers of these products and that this part of the potential customer base is ripe for growth.

Such accidental environmentalists provide public goods by accident.  They bought the product because of the private benefits the product offered.

Industrial organization economists often study quality improvements for new goods but they rarely link the quality improvements to mitigating Pigouvian externality challenges or to affecting voting outcomes (i.e support for carbon taxes) our paper represents a "missing link".

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

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

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

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

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

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

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

Assumption #1:

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

Assumption #2:

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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