This webpage says that the MacArthur Foundation seeks to fight climate change. San Francisco's Tom Steyer has focused on this policy agenda. Many successful progressives and non-profits seek to "fight climate change" through investing their time and $ resources to reduce our global greenhouse gas emissions through changing public policy.
If coal is the major dirty fuel, then why hasn't this group of actors figured out how to work together to use markets? Right now they are focusing their efforts on changing policies but policies leak across borders. U.S progressives can't change policies in China and India. Suppose that the progressives pooled their ample $ and purchase just one asset called coal. If they could purchase enough of it and keep it in the ground, the price of coal would rise and this would incentivize both green research and development but also fuel switching all over the world. How much $ would this take? Do progressives have enough $ to achieve this? Could they overcome the free rider problem to achieve this? I will leave this to others to figure out.
For a technical overview of these issues read Harstad's 2012 JPE paper.
So, it appears that progressives seek to tax everyone in terms of changing our fuel mix and lifestyle to purchase a reduced exposure to climate change risk. Many Republicans oppose this collective solution. In Coase's work on the lighthouse, one group of people will privately provide a public good (the lighthouse) when their aggregate benefits exceed the costs of providing it. Do coal purchases = a lighthouse? Will progressives unilaterally pay for the climate change mitigation effort and thus remove Republican opposition?
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Here is a nice quote from a recent Wired Magazine article; "And sure, the Paris deal isn’t perfect (it effectively relies on peer pressure to make sure countries comply). But after 50 years of warnings, even a tiny bit of progress feels nice."
So, when is peer pressure effective? When can we achieve "order without law"? Yale's Robert Ellickson has written the best stuff on this subject. When Dora and I were working on social punishment of deserters during the U.S Civil War, we were introduced to his work. In our setting, Union Army soldiers were more likely to survive the war if they deserted and Lincoln didn't severely punish deserters. But, their home towns did especially if the home towns were pro-Lincoln (as revealed by their voting in the 1864 Presidential Election). Our 2007 Journal of Law and Economics paper has never received the attention that I believe it merits.
Fourteen percent of Union Army soldiers were deserters. Were these men, who were known in their home communities to have failed cause and comrades, reintegrated into their communities? We construct a rich micropanel data set of U.S. Civil War soldiers from pro-war and anti-war communities to present new evidence on how community social norms shape soldiers postwar experiences. Relative to control groups, deserters were more likely to leave home, particularly if they were from pro-war communities, to move to anti-war communities and to reinvent themselves by changing their names.
Now return to the year 2016. When China and India exceed their promised carbon targets, who will be the "norm enforcers"? Will these threats be credible on just a "slap on the wrist"? Will any nation credibly threaten a trade war over "excessive emissions"? Could China or Russia use excess carbon emissions by a nearby nation as an excuse to invade in the name of the "green greater good"? I'm half kidding.
In a world featuring multiple international relations issues, will a given nation be "forgiven" for exceeding its GHG emissions if it does good on other criteria such as welcoming war refugees to migrate in? In such a setting, "name and shame" is even less likely to work. Again, who will be the norm enforcer in the carbon case? The Marshall Islands?
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The NY Times reports that parts of York, Leeds and Manchester have recently been flooded. Such natural disasters raise several adaptation questions. First, is this simply bad luck or a leading indicator of a risk that will repeatedly occur in the future? Second, under business as usual development patterns; how much damage does such flooding cause to structures and to urban productivity by disrupting activity? Third, what actions can individuals, firms and local governments take to reduce their exposure to flood risk? How costly will each of these actions be and what will their self protection benefits be? Fourth, do current insurance contracts encourage or discourage investment in such self protection actions? Fifth, has government policy actually crowded out private self protection by encouraging development in flood plains? Sixth, have the British figured out how to use GIS spatial software to make up to date maps of emerging flood plains? Seventh, how do current zoning laws near British rivers now operate? Who enforces them? Eighth, will a "silver lining" of this recent flooding be an increased investment in resilience and new incentives such that future floods will cause less damage to life and capital? While this blog entry has focused on the British floods, these same questions should be asked in the case of every flood region.
Do urbanites make the same mistake over and over again? The hallmark of rational expectations is that forecasting errors are uncorrelated. Why? Because if they are correlated, you could make a better forecast and make wiser investments based on this updated forecast. As I have argued before, climate change adaptation will offer the cleanest test of whether rational expectations or behavioral economics offers a better model of explaining and predicting behavior. -
What will be the medium term causal effect of the COP 21 Carbon Mitigation Conference? The NY Times posited that it will save the world. Is this true? How would researchers test for its causal effects? In this blog post, I will sketch some performance metrics.
In previous posts, I have pessimistically argued that the free riding problem is here to stay and that this treaty will not achieve its lofty goals. I would like to be wrong about this but I believe that global greenhouse gas emissions will just keep rising and may even accelerate as India and Africa grow.A young political scientists should conduct the following research project; for each nation what promises did it make at the conference and now does it quickly implement its promises? If "no", why is the clock ticking? Which domestic interest groups are blocking the righteous new regulations? Or have other priorities emerged? If the government does enact the regulation, would the government have enacted this same regulation in the absence of the COP 21? Did the COP 21 spur any new carbon abatement activity?If the government enacts the regulation, what benchmarks will be used to judge whether it is effective? A before/after comparison in the nation's per-capita carbon emissions isn't sufficient because this doesn't allow one to infer the counter-factual. Since we don't have twins for nations, how do observe what the nation's carbon performance would have been in the absence of the COP 21 induced new regulatory rules?An optimist might counter; "Matt, you are not looking in the right places for progress here. The right metric is to examine the acceleration of the pace and diffusion of green technology." Okay, so in this case; researchers who study patent data can look at patenting in green tech and R&D investments by country by year. Will they accelerate because of the COP21? In this age of Big Data, what are the right metrics for judging whether this conference was a "game changer"?At the end of the day, will the COP 21 achieve a game change by shifting expectations and signaling to the world that the "green economy" is coming and this field of dreams creates a self fulfilling prophesy? Or, did progressives need a week of feeling strong and hopeful before returning to the real world challenge of a world in which billions of people need energy services to live their version of the American Dream and the suburbanized United States is unwilling to vote for pricing carbon because our lifestyle would become more costly to continue?UPDATE: As I read the coverage in the NY Times of the COP 21, I saw a large number of individuals participating as negotiators, reporters, academics, and activists who have a personal stake in the success of the meeting. Yes, they want to "save the world" but their own careers and sense of self worth is enhanced by arguing that the conference was a "big deal". So, it is now an empirical question; what is convincing evidence that the COP 21 is changing the world and decarbonizing the world economy? What company will now make a different set of investments because of the treaty? Which households will now make greener investments because of the treaty? Which national, state and local governments will now make greener investments because of the treaty?
As I have argued before, the best success for these meetings is to shift expectations. If there is a common expectation that carbon pricing will happen over the next 30 years, then forward looking economic actors will take actions now to prepare for this and the next effect is that it will be less costly to achieve any GHG reduction goal. But is carbon pricing coming? Who will move first? Who will sacrifice economic growth in the name of mitigating a global externality? -
In his Sunday NY Times, Tyler Cowen has written a nice article about power couple formation and their implications for household income inequality. Back in the year 2000, Dora Costa and I published a QJE paper documenting the rise of power couples clustering in major cities. There are two mechanisms through which such couples could be found in major cities. Either they moved there as a couple or they moved as singles to the big city, met there and married and then chose to remain there. Regardless of the mechanism, big cities allow for greater job matching possibilities and thus allow the "tied spouse" (typically the wife) to sacrifice less of her career ambitions. Universities such as Cornell have faced a challenge recruiting new faculty because the spouse often has trouble finding a good job in tiny Ithaca (this is the flip of our paper's logic). Big cities solve the co-location problem so that universities such as Columbia, USC, UChicago should have an advantage over time competing for faculty against other good schools located in small cities.
In this age of great concern about income inequality, another implication of power couples forming and working in big cities is that household income inequality increases. In a world where there is "positive assortment" (in english; the educated marry the educated), such marriage patterns mean that rising income inequality is accentuated by marriage patterns. This even further under-estimates household inequality because people who come from "old money" tend to marry those from families with "old money" --- this means that household labor income at a point in time under-states the family's true balance sheet because the family's capital stock isn't counted.
One important counter-point that merits mentioning is Enrico Moretti's important paper on Real Wage Inequality. Consider young renters who live in an expensive city such as San Francisco, yes the couple's nominal income is high but their rents are also very high. These rents are paid to some home owner but these renters enjoy a lower consumption stream (i.e pizza) than would be supposed by just looking at their nominal earnings.
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I am sitting in the greater Santa Barbara area patrolling the beach after having spent a week in NYC and another week in New Delhi. In February, I will turn 50 and this unfortunately leads to some introspection and some sad thoughts about how time just keeps ticking. To cheer myself up, I have a checklist of some good work that I will release over the next couple of months;
1. Dora Costa and I have thoroughly revised our "Death and the Media" paper based on the comments we received at the University of Chicago media conference.
2. Costa and I have a new paper on the persistence of social networks that we will release as a NBER working paper pretty soon.
3. Daxuan Zhao (Remnin) and I have a new paper about the social cost of carbon and endogenous climate change adaptation technology.
4. Rhiannon Jerch, Shanjun Li and I have a new paper on the cost of public services.
5. Jerry Nickelsburg and I have a new paper on the fuel economy dynamics of airplanes.
6. Hashem Pesaran, Jui-Chung Yang and I have a new paper examining the impact of temperature on economic growth that will challenge a recent literature.
7. Siqi Zheng, Weizeng Sun and Jiangfeng Wu and I have cleaned up our industrial parks paper and have the start for a second paper on a related topic.
8. Ed Glaeser and I have a setup for an interesting project on urbanization in the developing world and climate change adaptation.
9. Devin Bunten and I have figured out how to clean up our durable capital paper and "the Future of Miami" project.
10. Siqi Zheng and I will publish our Princeton Press book in May. While I'm quite proud of our book , I don't view this to be an accomplishment for 2016. This work is now completed.
11. Paul Rhode, Leah Boustan and I have a good project on the consequences of natural disasters which has taken us a while but we now have a good plan.
12. Randy Walsh and I have a very strange project that I'm looking forward to completing. The project is a tribute to my UCLA colleague Walker Hanlon.
13. Josh Graff-Zivin, Reed Walker and I are working together on firm productivity in the face of climate change.
14. Peng Liu and I are finishing two papers focused on how hotels adapt to the heat.
15. I have the sketch for an idea at the intersection of national security politics and international trade in energy.
So, I'm keeping busy and setting up the groundwork such that my decade from age 50 to 60 will be my strongest as an academic economist. No deadwood!
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I am sitting in a Newark Airport Hotel after flying for 15 hours from Delhi back to the USA. My flight left Delhi at 1130pm and landed at 440am --- a long red-eye flight. I was in the Delhi area for 6 days. On Wednesday of last week, we toured Delhi. On Thursday, Ryan Kellogg and I traveled to Agra and the Taj Mahal. On Friday, we visited the Finance Ministry and then went off to the Neemrama Fort where our 2.5 day conference took place. On Monday, I attended a roundtable talk and then arrived early at the airport. I naively thought that I could hide out in the business class lounge but was told that I could only enter the airport and get rid of my suitcase 5 hours before my flight. So, I was sent to a "bullepen" where I sat and quietly watched the movies I had loaded on my travel computer.
Some observations on India in no particular order;
1. I prefer U.S Indian food to Indian Indian food.
2. The air pollution in Delhi was much worse than anything I have experience in Beijing. There were open fires on the street, cars and bikes belching out smoke and a general haze such that the sun's light was highly refracted.
To improve local air pollution, Delhi must consider adopting U.S regulatory standards and this will have implications for emissions control from transportation, industry, households and the power sector. What will be the marginal cost of adopting such policies? As India's value of a statistical life increases, I'm optimistic that such policies will pass a cost/benefit test. On the cost, side the U.S experience with low air pollution technologies must have significantly reduced the cost of adopting them. The issue is durable capital. Many poor people in India are the source of the pollution as they set fires, litter and commute using dirty technologies. How can they be incentivized to "go green" without significantly lowering their purchasing power (i.e income/prices they pay).
3. The Indian economists and policy makers are quite smart but keep alluding to "politics" that precludes efficiency enhancing policy adoption. I couldn't tell what stops the "political coase theorem" from taking place but Ken Arrow would understand what is going on based on his early work on social choice.
4. If "politics" precludes efficiency enhancing policy adoption, then what is the job of the modern applied economist? So many NBER economists study the world in order to improve it, how cynical should we be moving forward if leading LDC nations face extremely complicated political environments?
At both the macro and micro level, what do we know about policy reform? What role do;
A. Great leaders
B. Crisis
C. Trust
play in causing reform and the adoption of pareto improving policies? I have added "Trust" to this list because imagine a case in which a policy gives me $300 but costs you $100. This is hicksian pareto optimal and you would support it if there was trust and a mechanism through which I would transfer you at least $101. But, if this mechanism does not exist, you have a strong incentive to oppose this policy reform.
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A major newspaper rejected this editorial submission that I "publish" below. While rejection stings, I think I am making a new point that the climate change concerned media doesn't want to talk about.
No More Free Riders? Lessons from the Paris Climate Change TreatyMatthew E. KahnUSCDepartment of EconomicsIn December 2015 in Paris, 195 nations agreed to take actions to limit the increase in the world’s average temperature to two degrees Celsius. China has promised that it will reduce its coal power plants’ emissions by 60% by the year 2020 and India has promised that it will reduce its emission intensity of GDP (total emissions divided by GDP) by 33-35 percent from the 2005 levels by 2030. If each nation delivers on its promised actions, then the risk of serious climate change will decline. In the absence of credible international verification and enforcement, do individual nations have strong incentives to honor their promises?For the last 25 years, I have taught my environmental economics students about the “free rider” hypothesis. When facing a global challenge such as climate change, it may be in the individual interest of each nation to take no costly steps such as reducing coal use or discouraging driving while hoping that every other nation bears these costs to achieve the common goal. In such a case, the free rider gains the benefits of mitigated climate change risk while bearing none of the costs in terms of facing higher energy prices and less freedom of choice over private mobility or suburban living. The free rider hypothesis posits that the COP 21 Meetings will have little impact on slowing climate change. After watching the success, the toasts and the delight at the Paris Meetings, do I now owe my past students a tuition refund?To overcome the free rider challenge, each major polluting nation must ask itself, “do the private benefits of meeting the promise we stated in Paris exceed the costs our economy will incur in the process?” If the answer is “yes”, then the nation is much more likely to stick to its promises.In the case of China, the powerful central government recognizes that a byproduct of heavy reliance on coal for electricity production and winter heating is both local air pollution (measured by particulate levels) and greenhouse gas emissions. Exposure to local air pollution lowers day to day quality of life and raises mortality rates. A richer China can afford to move up the energy ladder and substitute away from dirty coal and use more cleaner natural gas. As many of China’s cities transition from heavy industry to high tech services, clean air becomes less costly (measured in terms of sacrificed economic activity) and in fact becomes a productive input in helping the rising number of highly educated people remain productive in the knowledge economy. As China looks for new export markets, the possibility of becoming a leader in electric vehicle, solar panels and wind turbine exports creates incentives for this nation to pursue the green agenda. As anyone who has walked into a Walmart and seen the words “Made in China” on a product knows, China has demonstrated great strength as an export powerhouse. The Paris Conference highlights the great desire for green products for potential customers from around the world.In the case of India, there are hundreds of millions of people who need more energy services to provide them with the basics for life ranging from lighting, heating, air conditioning, cooking and transportation services. As these individuals increasingly urbanize and become richer, they will increasingly demand more energy services. To decouple greenhouse gas emissions increases from rising energy demand requires that this power be generated by renewables, nuclear power and natural gas rather than by coal and gasoline. Economists are optimistic that in a world of over 7 billion people seeking “low carbon” products that directed technological change will lead entrepreneurs such as Elon Musk and many others to invest in experimentation and trial and error to find new solutions. In this sense the Paris Meetings send signals to entrepreneurs to invest more time and capital on creating green products.While the COP 21 Meetings signal new “rules of the game” that entrepreneurs will find willing buyers for high quality electric vehicles, solar panels and wind turbines, the free rider challenge lives on. Those nations who believe that their economic growth will be slowed by decarbonizing will be less likely to deliver on their promises. Those nations who believe that their geography and adaptation potential limits their exposure to climate change damage have an incentive to free ride. An interesting case of “name and shame” will arise. For those nations who are named for not meeting their stated emissions targets, will they be shamed into taking more costly steps? Economic theory says "no". A good game theorist might argue that "its complicated". If China gains a good reputation for playing nice on climate change, will this help it with its other strategic goals such as regional influence in Asia? In this age of soft power and issue bundling, will the simple economic model of free riding be refuted? Stay tuned. -
Elizabeth Kolbert has a new piece in the New Yorker; that focuses on the future of Miami. It raises questions about how much we will suffer from sea level rise and who will suffer and who will gain. I first quote her and then I discuss my research on this topic.
A direct quote from the press release;
As Temperatures Climb, So, Too, Will Sea LevelsIn “The Siege of Miami” (p. 42), Elizabeth Kolbert reports from South Florida, a region which has been called “ground zero when it comes to sea-level rise,” and examines the flooding that threatens to dramatically change Miami by the century’s end. “For the past several years, the daily high-water mark in the Miami area has been racing up at the rate of almost an inch a year, nearly ten times the rate of average global sea-level rise,” Kolbert writes. “It’s unclear exactly why this is happening, but it’s been speculated that it has to do with changes in ocean currents which are causing water to pile up along the coast.” To cope with recurrent flooding, the city of Miami Beach has already spent roughly a hundred million dollars. According to Hal Wanless, the chairman of the University of Miami’s geological-sciences department, this is money down the drain. “Sooner or later—and probably sooner—the city will have too much water to deal with,” Kolbert writes. Even before that happens, Wanless believes, insurers will stop selling policies on the luxury condos that line Biscayne Bay, and banks will stop writing mortgages.“Scientists who study climate change (and the reporters who cover them) often speculate about when the partisan debate on the issue will end,” Kolbert writes. “If Florida is a guide, the answer seems to be never.” Aides to Florida’s governor, Rick Scott, reportedly instructed state workers not to discuss climate change, or even use the term. Al Gore, who recently visited southern Florida during a series of high tides, tells Kolbert, “When the governor of the state is a full-out climate denier, the irony is just excruciatingly painful.” Gore thinks Florida ought to “join with the Maldives and some of the small island states that are urging the world to adopt stronger restrictions on global-warming pollution.” Instead, Kolbert writes, the state is doing the opposite, noting that in October Florida—along with some two dozen other states—filed suit against the Environmental Protection Agency, seeking to block new rules aimed at limiting warming by reducing power-plant emissions.Miami Beach’s mayor, Philip Levine, says that he believes in “human innovation,” adding that, thirty or forty years from now, “We’re going to have innovative solutions to fight back against sea-level rise that we cannot even imagine today.” But Philip Stoddard, the mayor of South Miami, tells Kolbert that he expects that the area, which is currently experiencing a real-estate boom, will eventually have to depopulate. “What I want to work toward is a slow and graceful depopulation, rather than a sudden and catastrophic one,” he says. Please see this link; a PDF is attached: http://bit.ly/221sBosSo, how will Miami adapt? Start with a topography map. Is there higher ground? What is the zoning on such higher ground? Can 30 story buildings be built there? For coastal properties, how can they be fortified? If they can't be fortified, then the units will be depreciated and then abandoned. For finite lived capital, the loss will be the present discounted value of the rental stream but the owner will not spend the maintenance cost. The properties will strip out their valuables and nobody will drown.The key to adapting in this case is to figure out how to unbundle the structure from the land so that all of the capital stuck to the land can be recycled. Modular housing would easily allow this to be achieved. For existing non-modular housing, this may take extra work and this will be a cost of adaptation. Yes, submerged land will vanish but based on simple supply and demand models, this will increase the demand for land in Miami in areas on higher ground. So, be smart here --- there are losers and winners. If the structures on the soon to be submerged land can be dragged to higher ground then Kolbert's case borders on being a zero sum game.For some technical details on this discussion read my Miami paper (joint with Devin Bunten). -
Tomorrow I fly to New Delhi. I have not been to India before so I've been watching YouTube videos to get a sense of what quality of life is like there for the rich, middle class and the poor. At the start of my research career, I studied the causes and consequences of green cities in the United States. My 2006 Green Cities book (Brookings Press) presents my main ideas. Over the last decade, I've been thinking about China's cities and my work is summarized in my co-authored 2013 JEL paper and in my forthcoming 2016 book.
Moving forward, I would like to work more on urban environmental challenges in the developing world. India would be a great place to study and learn. India's air pollution levels are some of the highest in the world and its per-capita GHG emissions will only grow worse. Its cities suffer from garbage, poop and dirty water and intense crowding.
I have many questions.
1. Given that India is rapidly urbanizing, why do most development economists continue to focus on the agricultural sector?
2. How quickly will India move up the energy ladder towards natural gas and away from coal? What infrastructure bottlenecks slowdown this obvious transition? What political interest groups favor continuing to rely on dirty coal? How powerful is this interest group in domestic politics?
3. As the urban middle and upper class grows in India's cities, how much does this raise the social costs from high levels of particulate concentrations? The value of a statistical life rises faster than per-capita income growth. As the aggregate willingness to pay for clean air increases, do local and state politicians pay attention?
4. Is there any evidence of brain drain away from the most polluted areas?
5. As the urban poor grow richer, do they move out to areas with more housing space and lower risk of exposure to disease? In the urban slums, what can be done to improve non-market quality of life? Are any politicians responsive to these demands? The YouTube videos claim that insecure property rights are the reason that under-investment is taking place. Is there any precedent for formalizing title to land? What would De Soto do here? Are there any good lessons from South America?
6. Given the large number of motorcycles and other nasty diesel based vehicles, what regulations can be put in place to reduce this sector's emissions? Maureen Cropper, Antonio Bento and Michael Greenstone have all worked on this topic but the open question remains what is the marginal cost of reducing transport emissions and who would bear the incidence of policies that seek to reduce emissions? In my discussion with Paul Romer last Wednesday night at NYU, he voiced the optimism that emissions control regulation is continually growing cheaper due to technological innovation. I hope he is right but this raises the issue of why officials aren't ratcheting up regulation if it is so cheap to do so.
7. In India, are local officials rewarded through the media and elections, for delivering high quality of life? Given that India is not heavily industrialized, why hasn't the state moved faster to improve environmental conditions? If there are worries about the poor's purchasing power declining if dirty fuels become more expensive due to pollution taxes, then why doesn't the state engage in various pricing strategies to protect the poor while encouraging other consumers to face the social costs of their actions (i.e non-linear pricing).
As you can see, there are plenty of interesting questions here. To begin to appreciate some empirical work on India's cities , read Matt Holian's recent paper;
