Energy engineers are having an interesting fight over whether the US electricity grid can "easily" be 100% renewables (and thus create 0 GHG emissions) in the next 30 years.  A prominent Stanford Engineer and his team says "yes"  while some important critics say no.   In Today's NY Times ("Economics Scene) Eduardo Porter sides with the critics.  The interesting thing here is that no empirical microeconomists who study energy are part of either research team or are quoted in the NY Times.  Yet, at the end of the day --- this is a microeconomics issue.

Here are some of the key issues that both the original study and the critique ignore;

1.  It would be terrific if wind and solar and hydro are so low cost by the year 2050 that we can generate all of our power using them.  Assuming constant returns to scale, how much land would need to be allocated to each of these to generate our expected power demand in 2050?  In a world where land is very valuable close to cities, what land would be set aside for this?  Would current property owners be compensated for this land? Or would this be "roof top solar"?  I do not believe there is any discussion of land markets in the original 2015 PNAS paper or the new critique.  So the opportunity cost of land should be included in all of these calculations.

2.  Assuming the renewables generation is far from cities, where will the transmission lines be built to bring the power to the cities? How will NIMBY issues be solved? How will potential veto power be bought out here?  Or will engineers make a breakthrough such that power can be "emailed" without transmission capacity?

3.  How much induced innovation will be needed to make the green energy production technologies cheaper than natural gas in the year 2050?  So, we need an estimate of dynamic innovation in the dirty sector vs. the clean sector (see the recent work of Daron Acemoglu and co-authors on the "great race").

4.  What will be aggregate electricity demand in 2050?  How many consumers in the residential, industrial, commercial sectors will be signed up for dynamic pricing? How elastic will their demands be for power such that if the price of power rises will they in aggregate reduce their consumption by 2% or by 34%  This plays a key role in determining the feasibility of the green grid!  If demand is highly responsive to higher prices then the green grid is much more viable!  (Why?  If power demand is highly price elastic, then less aggregate power will need to be supplied as the price goes up).   So, now we are back to fundamental issues of the microeconomic determinants of the aggregate demand for electricity

5.  Building on #4;  what will be the aggregate demand of the transportation sector for energy and electricity in 2050? What % of the fleet will be EVs and how many miles will they drive and how many miles per kwh will they achieve? Some of these are micro-economic questions!

6.  Building on #4, what will be aggregate demand for air conditioning during hot summers? What thermostat level will businesses and households cool to?  How efficient will air conditioners be then (see the 1999 QJE by Newell, Jaffee and Stavins on induced innovation; see point #3 above).

7.  I appreciate that the engineers want to debate what is feasible but this overlooks important implementation issues that may raise the cost of introducing their valuable ideas.  For example,
which interest groups would seek to veto the Stanford "vision"? Coal miners will not favor Jacobson's equilibrium.  If Progressives need to buy out West Virginian Senator support for coal, this cost should be added to the full cost of the green economy. Is it included? I doubt it.  Read my 2017 paper with Eyer.  

For those who want to see more "microeconomics of energy" read the UCEI blog.

If you look at these photos,  you might be able to find me in one of them (hint --- look at the dinner photo).  I enjoyed speaking on June 15th 2017.  As I should have guessed, the room was not air conditioned and my students were not that cheery in the heat.  Still, they were a very smart group who posed some interesting questions.  As I discussed the urban economics of climate change adaptation (see here, here, and here);  the PHD students kept talking about co-ordination failures and adjustment costs.

1. co-ordination failures --- we know that Manhattan is a successful co-agglomeration of firms and industries.  Suppose that due to Sea Level Rise that a large % of the land area of Manhattan will be lost. Will aggregate productivity decline because individual firms will not co-agglomerate together again on "higher ground"?   The students want to argue that the answer is "yes". I don't believe this.   Firms face a site selection decision. If they can't co-ordinate their location choices, they can sit down and read Ellison, Glaeser and Kerr's AER paper on co-agglomeration and figure out where to locate. If there are $20 on the ground due to co-agglomeration spillover effects, then a new consulting industry will arise to help firms choose where to go (as long as they gain some of the benefits of these spillovers then they will internalize these gains when they choose where to locate).

2.  Adjustment Costs --- My European students appear to believe that nobody is "at the margin" that nobody adjusts their behavior and moves when they face new risks.  I argued that even if some of us inelastically supply ourselves to a point in space that everyone eventually gets old.  So, at most this is a one generation problem because in an OLG model today's old will not be alive next period and today's middle aged will be old.  So, in an intergenerational economy ---- those who are the children of tomorrow's old will bear extra costs if their loved ones live in increasingly risky areas.  They have the right incentives to protect their parents from such anticipated trends. To repeat my point, if your mom is stuck in place (perhaps because she loves her network and place) and if climate science highlights that the place will face new record heat or sea level rise, you have the right incentives to seek solutions (stilts, air conditioning) that helps to protect your mother from these place based risks. Your daughter (the young generation) will not lock in and make the same place based bet as your mother. She will have the right incentives to seek out a safer location.

While I made these points to the students, I also said that both of these are valuable future research topics. As I listened to the students, I kept being concerned that they were giving "political answers" rather than PHD economics answers.  The separation theorems must hold. We must be able to use our economic logic independent of our political ideologies concerning how we wish the world works.  As usual, even this very smart group appeared to be unwilling to separate the normative issue of "how can we reduce GHG emissions" from the positive economic issue of how does  a macroeconomy (that consists of self interested households and firms) adapt to an emerging threat.  The group appeared to fear the logical implications of neo-classical economics.  That interests me.

I haven't been blogging because I've been traveling around France. I return to my sunny home very soon.   Some random observations;

1.  High speed trains do create nice synergies between small and medium sized cities and Superstar cities (the Paris to Renne train proves this).

2.  French food is quite good but I do not like "veal kidney".   My wife had thought the special was a veal cutlet and I ordered that.

3.  Tourism is a major source of revenue for millions of people throughout Europe.

4.  French people do not wake up early.

5.  Starbucks stores cluster in the tourist parts of big cities and attracts Americans and Chinese nationals.  Starbucks does not exist in smaller French cities.

6.  The print edition of the New York Times in Europe is mostly focused on bashing President Trump.


A personal announcement.   By mid-August 2017,  Dora will be the Chair of UCLA Economics and I will be the Chair of USC Economics.  Can you name another case in which a married couple were simultaneously chairing major economics departments?  I can't.  We will each serve for two years in our respective jobs and then go on leave for a while.  A Chair's role is hard work and we both know that our research productivity will suffer.   I will be focusing on improving the educational mission of my department and engaging in fund raising.

The Fed of Richmond has published an excellent interview with Janet Currie.    Janet has written several high quality papers investigating the consequences of pollution exposure but this work raises the issue of why people choose to expose themselves to pollution.  In this blog post, I will pose several possibility and sketch some of my old research.

1. Hypothesis #1;   People have rational expectations of how pollution affects them but people differ with respect to their income and poor people choose to live in cheap rent (high pollution) places and are injured by the pollution.

2.  Hypothesis #2;   Minorities face racial discrimination in housing markets and are forced to live in "bad areas" that often feature high levels of pollution.

3.  Hypothesis #3;  People are unaware of the consequences of pollution and they are unaware of how areas differ with respect to their pollution so even though there is self selection of neighborhoods, there is a randomization of exposure levels because people are not sorting on this location specific attribute.

4.  Hypothesis #4;   People live in certain areas and build their social networks there. People face migration costs because they want to remain with their friends.  Evolving politics and local industrial shifts lead to noxious sites to pop up in specific areas (i.e to not be uniformly distributed)  and this leads certain demographic groups to be exposed to more pollution.  For example, blacks disproportionately live in the South Side of Chicago. If a mayor chooses to zone the south side for industrial sites, then blacks will be exposed to more pollution than whites (who tend to live on the Northside).

Let me point you to some of my papers;

 Sun, Cong & Kahn, Matthew E. & Zheng, Siqi, 2017. "Self-protection investment exacerbates air pollution exposure inequality in urban China," Ecological Economics, Elsevier, vol. 131(C), pages 468-474.

Siqi Zheng & Jing Cao & Matthew Kahn & Cong Sun, 2014. "Real Estate Valuation and Cross-Boundary Air Pollution Externalities: Evidence from Chinese Cities," The Journal of Real Estate Finance and Economics, Springer, vol. 48(3), pages 398-414, April.

Zheng, Siqi & Kahn, Matthew E., 2008. "Land and residential property markets in a booming economy: New evidence from Beijing," Journal of Urban Economics, Elsevier, vol. 63(2), pages 743-757, March.

Matthew E. Kahn, 2000. "Smog Reduction's Impact on California County Growth," Journal of Regional Science, Wiley Blackwell, vol. 40(3), pages 565-582.

 Denise DiPasquale & Matthew E. Kahn, 1999. "Measuring Neighborhood Investments: An Examination of Community Choice," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(3), pages 389-424.

Yes, NYC has an old subway system but that doesn't explain the interesting fact presented in the NY Times today that the C trains are over 53 years old.   Binding budget constraints provide the explanation for why this rich city (that relies on public transit) isn't investing in public capital.  As we document in this NBER Paper,  progressive big cities generously pay unionized public sector workers.   Due to the Buy America Mandate, such cities also pay more than the international price for pieces of capital (read our 2015 JUE paper).  The combination of paying public labor a very high salary and benefits plus high capital purchase costs means that there is little $ left for investing in capital replacement and upgrading.  #budget_contraints_matter

Paul Krugman has written a new column  about President Trump and the climate change mitigation Paris Treaty.  Here is a direct quote:

"The same goes for claims that trying to rein in emissions will do terrible economic damage and destroy millions of jobs. Such claims are, if you think about it, completely inconsistent with everything Republicans supposedly believe about economics.

After all, they insist that the private sector is infinitely flexible and innovative; the magic of the marketplace can solve all problems. But then they claim that these magical markets would roll over and die if we put a modest price on carbon emissions, which is basically what climate policy would do. This doesn’t make any sense — but it’s not supposed to. Republicans want to keep burning coal, and they’ll say whatever helps produce that outcome."

I agree with Dr. K's points here but he is ignoring income effects.  I bet that 98% of Republicans would agree with his points about "substitution effects" (see the first sentence of his 2nd paragraph above).  But, Dr. K is ignoring income effects induced by the ramp up in carbon pricing.   In simple English,  Republicans would suffer a reduction in their suburban house value, an increase in unemployment risk, and a reduction in their capital accounts if carbon pricing is enacted.  

Recall what I stated in my last blog post.


1.  Republicans live in the suburbs and live a "high carbon footprint" lifestyle and thus will bear more of the economic incidence of a higher carbon tax than center city progressives.  So, the average Republican faces a higher price if the carbon tax is enacted.  See my papers here and here.   In a differentiated products model, Republicans may gain greater consumer surplus from their light duty trucks and monster cars while progressives enjoy their fuel sipping Priuses.  In my model, Republicans know what they want from markets and they perceive that progressive regulation will raise the price tag of the red meat, monster car, blasting air conditioner on hot day life style. 

2. Republicans are more likely to work in "high carbon industries" (oil and other fossil fuel extraction industries) and thus may face greater unemployment risk from regulations that make these industries less competitive.  Republicans are also more likely (I bet) to own shares in these companies such as Exxon and thus will suffer a capital gains loss from carbon regulation.

The NY Times has published a long article that contains many interesting ideas focused on why Republicans oppose climate change regulation.  The Koch Brothers make an appearance as the Times reporters argue that the Kochs use their $ to influence public opinion.   In this blog post, I will propose a different theory.

1.  Republicans live in the suburbs and live a "high carbon footprint" lifestyle and thus will bear more of the economic incidence of a higher carbon tax than center city progressives.  So, the average Republican faces a higher price if the carbon tax is enacted.  See my papers here and here.   In a differentiated products model, Republicans may gain greater consumer surplus from their light duty trucks and monster cars while progressives enjoy their fuel sipping Priuses.  In my model, Republicans know what they want from markets and they perceive that progressive regulation will raise the price tag of the red meat, monster car, blasting air conditioner on hot day life style.

2. Republicans are more likely to work in "high carbon industries" (oil and other fossil fuel extraction industries) and thus may face greater unemployment risk from regulations that make these industries less competitive.  Republicans are also more likely (I bet) to own shares in these companies such as Exxon and thus will suffer a capital gains loss from carbon regulation.

3.  Republicans may be more optimistic about their ability to adapt to climate change.   Progressives have  a greater trust in government while Republicans tend to believe in individual freedom and smaller government.  If Republicans are more optimistic about their ability to individually adapt to the new challenges of climate change, then this would mean that their benefits of carbon mitigation is lower than the benefits that progressives believe they would gain.

Note that my explanations here have a very different vision than the more sinister NY Times narrative. I am explicitly discussing the self selection of Republicans into specific geographic areas and specific cities (Houston) and industries.   The New York Times needs to think more carefully about the diverse mix of Americans and how each of us makes choices based on our own conception of the good life.  The New York Times wants to argue that the Republicans have been duped by expert manipulators.  That's an interesting theory but my theory is more plausible.  I agree with the NY Times that John McCain's efforts in 2008 to build a Republican coalition supporting carbon mitigation efforts was laudable.   For any politician, there is always an issue of why voters back him.  If a candidate takes a stand on 200 positions, his supporters may agree with him on 4 key ones and ignore his views on the other 196.


Note that my theory does not invoke "crazy beliefs" or ingesting "fake news".  Instead, my theory rests on pursuing self interest.

UPDATE:  Jonathan Eyer makes a nice point related to point #2 above. He says that progressives (think of Twitter) work in industries that are less affected by future climate change while agricultural interests will be more affected by future climate change.     I would say that the costs of climate change are uncertain and in the future (and thus are discounted).  Voters who are risk neutral will downplay these.  Yes, I know the literature on "fat tail" risk but the Weitzman fat tail argument ignores spatial economics.  We can retreat to Montana.  There is no "Montana" in the one sector growth model that  Nordhaus and Weitzman use.  Read my 2014 lecture.

For those who are interested in environmental and urban economics, you might enjoy reading through my slides for the three lectures that I will give in Rennes, France in mid-June.

What problems do entrepreneurs target to work on? Put simply, if there were no bald men on the planet or if the bald men all had no $, would any drug company invest in R&D to cure baldness?  No.  In the case of the "green economy", low energy prices reduce the incentive to invest in green goods such as the next Prius.  High energy prices raises operating costs for using a car to drive 15,000 miles a year. If your current car achieves 15 MPG and the price of gasoline is $10 a gallon, you would be paying $10,000 a year on gas and even Republicans would seek a greener alternative.  This arithmetic highlights that the real point of carbon pricing is to induce innovation.

The key counter-factual here is the following; "Now that the U.S is out but California and other progressive states are still "in", how much will green innovation slow down?"   If the answer is not much, then President Trump's decision is not costly in terms of our collective fight against severe climate change.  We need to have a serious discussion about the pace of advance in innovation with and without a global carbon tax.  Did Elon Musk build Tesla because he expected there would be a global carbon price? Will his company's stock price crash to zero if the price of carbon is zero?  I don't think so.    How the green economy evolves in a world without a co-ordinated anti-carbon policy is a crucial question.  To answer this question will require that economists write down models of firm investment behavior under uncertainty.   My bet is that different firms will make different bets and greener products will continue to appear.

The rhetoric in today's NY Times would lead a space alien to conclude that the green economy is now dead. I do not believe that the U.S is such a central point in world events.  In our decentralized capitalist economy,  individual decision makers are looking to the "Commander" for signals of what to do next. Individual experimentation plays a key role in creating our luck and discovering the next generation of technological improvements.  

I go to Paris soon.  While I can't speak French, here is what I will say to those who ask me about President Trump's decision.   First, I do not support his decision but the issues here are much more nuanced than either he  or the New York Times argues.