Based on the data posted here,  the EPA has had an annual nominal budget of roughly $8 billion dollars for each year from 1999 to 2016. Inflation adjusted, this does not look like Leviathan in action.  In fact, the EPA's staffing has shrunk from its peak of 18,000 in 1999 to 15,000 recently.   Here is the main 2016 budget document for the EPA.   Based on the pie chart presented on page 29, 52% of the agency's budget is spent on clean water infrastructure.  While this is a vague category, it provides some insights into what we will lose if President Trump sharply reduces the agency's budget.  I do find this budget breakout to not be that user-friendly.

The economic question is simple;  The U.S now features "green cities".  Will our cities be less "green" if President Trump enacts these cuts?  Will poorer cities bear the brunt as the Flint, Michigans will not have their water quality upgraded while Manhattan's water will still be great?  Who bears the brunt of these cuts?  In the case of the environment, does "money matter"?  Have past investments in the EPA offered us large environmental gains?   In this evaluation of the Clean Water Act, these NBER economists say "no".

Ideally, I would like to know;

A.  For each state in the United States, how much has the EPA invested each year in monitoring pollution and investing to upgrade infrastructure to keep the air and water clean?

B.  For each of its major programs,  Superfund, climate change mitigation, climate change adaptation, the Clean Air Act, the Clean Water Act; how much money is it spending to achieve that program's goals and where is this money being spent? Is it being spent on labor (i. EPA employees) or capital?

With the current EPA budget document, I can't tell which spatial jurisdictions will lose from budget cuts.  If the EPA monitoring of pollution declines, this will help areas that want to recruit dirty activity. In this early paper of mine, I found that manufacturing growth was taking place in counties that didn't monitor air pollution. While economists look for their keys under the street light, perhaps so do the regulators!

Scott Pruitt is the new Chief of the EPA. In this piece, he is quoted as saying that his agency will deliver "regulatory certainty".    How should we interpret this goal?  As a fan of Prescott's "rules over discretion", I full understand the importance of sending clear signals to forward looking investors.

I believe that Mr. Pruitt is worried about the following dynamic.  The U.S Congress passes a vague law requiring "Clean Air" and "Clean Water" for every American.  This vague law empowers an unelected regulatory body (the EPA) to implement new rules.  The bureaucracy in the EPA responds by "over-reaching" and regulating many features of day to day life.  This attempt to engage in regulations until the marginal benefits equal zero (while ignoring the extra costs of each extra piece of this regulation) would mean that our regulators impose "too much" regulation.

To an economist, the solution here would be to require a kosher academic peer reviewed cost/benefit test before specific regulation is enacted.

If businesses anticipate that they will face credible fines for polluting, then they will innovate to economize on their pollution.

While I appreciate that Mr. Pruitt wants to protect U.S firms from "excessive" regulatory exposure, I disagree on a key point.  A key piece of environmental science is learning about new emerging risks.  As public health experts learn (for example we have learned that Pm2.5 is more dangerous than PM10 or TSP particulates), we need to update the rules to reflect this new knowledge about dangers.  Mr. Pruitt's "regulatory certainty" would appear to rule this out because the government would commit to a set of fines and then never change them even as it learns about new risks.

Slightly switching topics, it will interest me if Mr. Pruitt engages in spatial differential regulation. Will he allow highly populated, rich Manhattan to have more stringent environmental regulations than poor rural, Alabama?  If this second area seeks to attract dirty factories (because they bring jobs) to the area, will Mr. Pruitt and Trump allow this?  Will progressives celebrate such income growth or will they complain that the people in Alabama will regret their "Faustian deal"?

To wrap up this post,  regulatory certainty is a good thing!  The issue of moral hazard that plagues many parts of modern government would vanish if government could commit to following pre-specified rules.  Each member of Congress should read and sign (to acknowledge that they have read it and understood most of it) Prescott's Nobel Prize lecture.

At USC, I'm providing more time supplying public goods than I used to at my previous university post.  Yesterday, I spent three hours interviewing high school students who have already been accepted into USC and now are competing to receive a full tuition paid merit scholarship.      I have taught undergraduates at the University of Chicago, Columbia, Harvard, Stanford, and UCLA.   The students I interviewed yesterday were of equal quality to the best students I taught at those other schools.   I discussed game theory and issues of time consistency with one student.  With another student, I discussed Steve Levitt's 1994 JPE paper on testing for whether money matters in politics.    I sensed that the student understood the Levitt identification strategy of studying pairs of candidates who faced each other repeatedly to include pair fixed effects to exploit within pair variation in PAC campaign contributions.  These are the students I want in my classroom and this is why I'm recruiting for USC.     The students I met are quite young but they are mature and articulate.  They are not pre-programmed robots.  They can think on their feet.

As our school becomes richer, we will use our resources to attract Ivy League caliber students who want a high quality education in the sunshine.   You should think of USC as Ivy League west (and South of Stanford)!

My son is an outspoken young man who will apply to college soon.  He is well aware that the University of Chicago is a fierce defender of free speech and intellectual debate while Yale and many of the top University of California campuses are not.

Many economists are interested in "product differentiation".  Given how similar are the major universities, will universities that offer the chance for true freedom of debate and expression be rewarded by attracting a select sample of students? Will their interactions at these few campuses have  a "treatment effect" that benefits them, society and the campus?   Will some universities begin to compete to be centers of free speech?  

Intermediate micro students have fallen in love with the following algebra;  MK_k/r = MP_l/w   .  In English, the cost minimizing firm should purchase robots until the extra output it produces per dollar spent on robots equals the extra output it produces per dollar spent on labor.

Bill Gates wants to introduce a tax on robots.    Suppose this raises the price of a robot to r+tax.   The cost minimizing firm will substitute to labor and the new optimality condition will be:

MK_k/(r+tax)  = MP_l/w

How costly will this wedge be for the macro-economy?   Will a future Hsieh and Klenow dare to battle Bill Gates?  Is there an equity vs. efficiency tradeoff?

Michael Jordan is the GOAT on the court but he may be the goat in the front office.  Steve Kerr was not the GOAT on the court but his coaching winning percentage is high.  Magic Johnson was a great player but will he be a great President of the Lakers?     Economists often talk about comparative advantage, do we have any strong predictions in this case?

I live seven miles from Venice Beach.  While there are still many eccentric people walking along the beach paths, the area is gentrifying as leading Internet Startups take root.   The New York Times has written a great piece about Snap and its upcoming IPO that will mint many new super-rich people.

As an environmental and urban economist, permit me to pose a riddle for you.  Why have these "hot startups" located near the beach?  Is there anything inherently productive about being in the sunshine in 75 degree warmth in winter with blue skies and clean air and close to the beach?   No!  Milton Friedman said that the cold winter in Chicago helped the University of Chicago because the nasty weather conditions meant that there was nothing else to do but work!

As I have argued many times,  in this footloose age, areas with great quality of life attract the skilled who create their vibrant companies and then the job centers follow.  Quality of life anchors the skilled city.  Once you attract a density of the skilled , then the cool restaurants and micro breweries cluster nearby and the process feeds on itself.

Shanghai's leaders are aware of this dynamic.  Now, the usual question focuses on gentrification. While the NY Times article celebrates the dynamic now playing out in Venice, as rents soar the New York Times will write another piece saying that the area "is going to hell".

For some of my writing on this broad topic take a look at;

 Siqi Zheng & Matthew E. Kahn, 2013. "Does Government Investment in Local Public Goods Spur Gentrification? Evidence from Beijing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 41(1), pages 1-28, 03.

The National Academy of Sciences has released a brand new report that you can download here that has a definitive feel on stating the academic environmental economics' community consensus on the social cost of carbon.  In this blog post, I will clearly state that I do not believe this number nor do I believe that such a number can be estimated.  It is a moving target that changes every day and it may be actually declining over time.  My recent NBER Paper offers one induced innovation theory for why this can happen.

 Here is the citation;

Suggested citation: National Academies of Sciences, Engineering, and Medicine. 2017. 37 Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide. 38 Washington, DC: The National Academies Press. doi: 10.17226/24651.

I will directly quote from the Executive Summary and then make some points.

DIRECT QUOTE

The social cost of carbon (SC-CO2) is an economic metric intended to provide a 4 comprehensive estimate of the net damages—that is, the monetized value of the net 5 impacts, both negative and positive—from the global climate change that results from a 6 small (1-metric ton) increase in carbon-dioxide (CO2) emissions. Under Executive Orders 7 regarding regulatory impact analysis and as required by a court ruling, the U.S. 8 government has since 2008 used estimates of the SC-CO2 in federal rulemakings to value 9 the costs and benefits associated with changes in CO2 emissions. In 2010, the Interagency 10 Working Group on the Social Cost of Greenhouse Gases (IWG) developed a 11 methodology for estimating the SC-CO2 across a range of assumptions about future 12 socioeconomic and physical earth systems. 13 The IWG asked the National Academies of Sciences, Engineering, and Medicine 14 to examine potential approaches, along with their relative merits and challenges, for a 15 comprehensive update to the current methodology. The task was to ensure that the SC- 16 CO2 estimates reflect the best available science, focusing on issues related to the choice 17 of models and damage functions, climate science modeling assumptions, socioeconomic 18 and emissions scenarios, presentation of uncertainty, and discounting. 19 Integrated assessment models (IAMs) are currently used by the IWG to estimate 20 the economic consequences of CO2 emissions. The IAMs define baseline emission 21 trajectories by projecting future economic growth, population, and technological change. 22 In these IAMs, a 1-metric ton increase in CO2 emissions is added to the baseline 23 emissions trajectory. This emissions increase is translated into an increase in
atmospheric CO2 concentrations, which results in an increase in global average 25 temperature. This temperature change, as well as changes in other relevant variables, 26 including CO2 concentrations and income, is translated (either explicitly or implicitly) to 27 physical impacts and monetized damages. These damages include, but are not limited to, 28 market damages, such as changes in net agricultural productivity, energy use, and 29 property damage from increased flood risk, as well as nonmarket damages, such as those 30 to human health and to the services that natural ecosystems provide to society. Because 31 most of the warming caused by an emission of CO2 into the atmosphere persists for well 32 over a millennium, changes in CO2 emissions today may affect economic outcomes for 33 centuries to come. Streams of monetized damages over time are converted into present 34 value terms by discounting. The present value of damages reflects society’s willingness 35 to trade value in the future for value today. 36 The IWG methodology combines tens of thousands of SC-CO2 results obtained 37 from running three IAMs using five different socioeconomic and emissions projections, a 38 common distribution of equilibrium climate sensitivity (a parameter that characterizes the 39 relationship between CO2 concentrations and long-term global average temperature 40 change), and distributions for other parameters. These results yield three distributions of 41 SC-CO2 values for three different discount rates, from which the IWG calculated an 42 average value for each discount rate. The IWG’s current estimate of the SC-CO2 in the 43 year 2020 for a 3.0 percent discount rate is $42 per metric ton of CO2 emissions in 2007 44 U.S. dollars. If, for example, a particular regulation was projected to reduce CO2 45 emissions by 1 million metric tons in 2020, the estimate of the value of its CO2 emissions 46 benefits in 2020 for this SC-CO2 would be $42 million dollars.


1.  So,  Robert Pindyck's warning about not relying on CGE models have been ignored and the NAS has doubled down by solely relying on these models to generate "the number".   Here is a quote from Dr. Pindyck's 2013 paper

Climate Change Policy:What Do the Models Tell Us?

Robert S. Pindyck

Very little. A plethora of integrated assessment models (IAMs) have been constructed and used to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies. These models have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g., the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models’ descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading. ( JEL C51, Q54, Q


2. The word adaptation appears 68 times in this 400 page document but it is never quantified.  This entire document is subject to the Lucas Critique again.   The Lucas Critique from 1976 argues that economic agents reoptimize as the "Rules of the Game change".  As Mother Nature changes the climate conditions, risk averse forward looking people will seek out "higher ground" and safety.  This is adaptation.

As I explain in this paper, here is the core issue;  The mathematical modelers who built the core model used in the NAS study must take a strong stand in the year 2017 that they know the following functions;


A.  What will the world's population and per-capita income be each year in the future?
B.  How population and per-capita income together determine aggregate greenhouse gas emissions and thus future atmospheric carbon dioxide concentrations.
C.  how rising carbon dioxide concentrations affect the population's well being and per-capita income.

DO you see that this is an impossible prediction exercise?  Yet, the modelers press ahead under the assumption that they can model each of these pieces.  The confidence intervals on each of these equations would be enormous.

This last function (called "C" above) is the "damage function".  As I have argued here, here and here, the spatial economy is constantly reorganizing driving this slope of   the damage with respect to CO2 concentration function closer and closer to zero.  This is the algebra of adaptation.

To provide one example;  this peer reviewed study documents that deaths from heat waves are falling sharply over the 20th century in the U.S as air conditioning diffuses widely. This is adaptation and this is missing in all of the calculations listed above because the flow of technology cannot be predicted ex-ante.

Barreca A, Clay K, Deschenes O, Greenstone M, Shapiro JS. Adapting to climate change: The remarkable decline in the US temperature-mortality relationship over the twentieth century. Journal of Political Economy. 2016 Feb 1;124(1):105-59.

I am a pinch sad that my Climatopolis work isn't cited.    The world is moving to cities and this migration boosts income and helps to shield the urbanites from the "social costs of carbon".  The mathematical models discussed in this long report do not allow for detailed spatial disaggregation to allow capital and labor to move to "higher ground" such micro adjustment margins are at the heart of my optimism that the social cost of carbon is actually declining over time.

Read my Climatopolis Revisited.


Now, I do agree with the report's authors on one important point.  Holding constant the global atmospheric carbon dioxide level, we grow better at adapting to this challenge each day.  But, at the same time that our adaptation resilience rises, the stock of GHG emissions increase and this means that the adaptation challenge grows more challenging.

By relying on "1970s style" pre-Lucas Critique IAM models,  this report doesn't feel like it embodies frontier academic macroeconomic logic.  It would interest me if any academic macro economists reviewed the piece or would be comfortable with its claims.

UPDATE:  For those who wonder "what is modern macro?"  Read Prescott's Nobel Lecture.

None of the following reviewers  are academic macro-economists.

We thank the following individuals for their participation in the review of this report: 182 Hadi Dowlatabadi, Institute for Resources Environment and Sustainability, University of 183 British Columbia; 184 James (Jae) Edmonds, Joint Global Change Research Institute, Pacific Northwest 185 National Laboratory; Copyright © National Academy of Sciences. All rights reserved. Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide ix Prepublication Copy Uncorrected Proofs 186 Karen Fisher-Vanden, Environmental and Resource Economics, The Pennsylvania State 187 University; 188 Michael Greenstone, Energy Policy Institute at Chicago and Department of Economics, 189 University of Chicago; 190 Anthony C. Janetos, The Frederick S. Pardee Center for the Study of the Longer-Range 191 Future, Boston University; 192 Peter B. Kelemen, Department of Earth and Environmental Sciences, Columbia 193 University, and Lamont-Doherty Earth Observatory; 194 Bryan K. Mignone, Corporate Strategic Research, ExxonMobil Research and 195 Engineering Company; 196 Richard H. Moss, Joint Global Change Research Institute, University of Maryland; 197 Elisabeth Moyer, Department of Geophysical Sciences, University of Chicago; 198 Richard L. Revesz, New York University School of Law (emeritus); 199 David A. Weisbach, Law School and Computation Institute, University of Chicago, and 200 Argonne National Laboratories; 201 Jonathan B. Wiener, Law, Environmental Policy, and Public Policy Law School, 202 Nicholas School of the Environment, and Sanford School of Public Policy, Duke 203 University; and 204 Gary W. Yohe, Economics and Environmental Studies, Wesleyan University.

The NY Times has published an excellent piece about Mexico City's water challenge but a nuanced read of the piece reveals two key points.  The piece ignores demand side management.  The word "water price" does not appear in the long piece and no economists are cited.  Instead, this is an engineering piece focused on the ecological damage that has taken place in Mexico City when a large population uses an increasingly scarce resource that is becoming more scarce because of climate change.  For some facts about Mexico City's water prices read this.

Here is a Direct Quote (from the 2nd cite, not the NY Times piece):

The city’s complex and aging hydraulic infrastructure suffers from numerous failings. Twenty-nine water treatment plants are supposed to assure the suitability of water for normal use, but some 40% of the processed water is lost either to leakage in the primary and secondary networks or to people who do not pay for it. The city has only one industrial-sized wastewater treatment plant, and although more than 94% of households in Mexico City are connected to sewage lines, little of the wastewater is treated.2 The 21 small sewage-processing plants only effectively handle about a tenth of the total discharge. Most of the wastewater is carried out of the city through a drainage system to the Mezquital Valley east of the capital, where it is supposedly dedicated to forage crops and animal use. But an alarming volume of the untreated water is used to irrigate fruits and vegetables that are then shipped to city markets.

Here is my new piece about the Economic effects of California's AB32.    Here is my Harvard Business Review piece that dusts off the Porter Hypothesis and applies its logic to corporate climate change adaptation.   Finally, here is my new co-authored NBER working paper on the adaptation effects of climate skeptics.   This paper was stimulated by my interest in John Campbell's Ely Lecture.