An Idea from Last Time
It makes sense for Bangladesh to have less
stringent pollution regulation than the United
States because in Bangladesh the marginal dollar
spent on pollution equipment would otherwise be
spent on basic needs such as reducing infant
mortality or purifying water supplies in the
countryside.
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The Packet Auction
Highest
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$1563
Packet Auction 2
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6: Externalities
February 7 2016
``Pittsburgh from the Salt Works at Saw
Mill,'' by William T. Russell (1843)
3
4
``Pittsburgh from the Salt Works at Saw
Mill,'' byhttp://www.nationalurbanmedia.com/FORBESCOM-RATESWilliam T. Russell (1843)
PITTSBURGH-NO-1-MOST-LIVABLE-CITY/
Pollution Externalities and
Licenses
5
Licensing vs. Regulation
What groups favor a policy of
limiting output to the efficient
level, Q=80?
What happens if the EPA
requires equipment adding
$.50/unit to cost?
What if the EPA limits
output, but the equipment is
available if companies want to
install it?
6
A Pollution Tax
7
A Pollution Tax with Rising Supply
8
1. Equate social marginal
cost to marginal benefit
(demand).
2. Solve for Q and P.
3. Set the tax equal to
the marginal cost of the
externality at that Q.
Optimal Pollution
9
US Emissions
10
Marginal Damage of Emissions:
Where To Put the Factories
11
Toxic Waste Dump Cleaning
Cost and Benefit
12
Two Firms and Cap and Trade
13
“Abolish Drunk Driving Laws”
“Consider the 2000 federal law that pressured states to lower their BAC standards to 0.08
from 0.10. At the time, the average BAC in alcohol-related fatal accidents was 0.17, and
two-thirds of such accidents involved drivers with BACs of 0.14 or higher....
Once the 0.08 standard took effect nationwide in 2000, a curious thing happened: Alcoholrelated
traffic fatalities increased, following a 20-year decline. Critics of the 0.08 standard
predicted this would happen. The problem is that most people with a BAC between 0.08
and 0.10 don't drive erratically enough to be noticed by police officers in patrol cars. So
police began setting up roadblocks to catch them....
The punishable act should be violating road rules or causing an accident, not the factors that led to
those offenses.”
Do you agree?
14
“Drug-resistant ‘white plague’
lurks among rich and poor”
15
“TB is a bacterial infection that destroys patients' lung tissue, making them cough and
sneeze, and spread germs through the air. Anyone with active TB can easily infect another
10 to 15 people a year...
In 2010, 8.8 million people had TB, and the Geneva-based World Health Organization
(WHO) has predicted that more than 2 million people will contract multi-drug resistant
TB by 2015....
Non-prescription and over-the-counter antibiotic use is rife in India and it may be no
coincidence that the country now has one of the highest burdens on MDR-TB in the
world, with more than 100,000 cases.”
What should be done?
EPA Auctions of SO2 Permits
The U.S. auctions are at “Clean Air Markets,”
http://www.epa.gov/airmarkets/trading/2011/index.html .
16
EPA and EEX Auctions
http://ec.europa.eu/clima/policies/ets/cap/a
uctioning/index_en.htm (Current EU
policies link)
17
Selling Allowances Can Pay
Better than Steelmaking
The Kyoto Protocol of 1997 required signing countries to
reduce their carbon emissions. The European Union in
2005 launched its own cap-and-trade system.
Corus, Europe’s second-largest steel producer, closed its
U.K. steelmaking plant at Redcar, cutting 1,700 jobs.
It has 7.5 million carbon dioxide allowances. At e15/tonne,
that’s worth 112.5 million euros,
Is the plant closing good, or bad?
18
The Summers World Bank Memo
19
DATE: December 12, 1991
TO: Distribution
FR: Lawrence H. Summers
Subject: GEP ’Dirty’ Industries:
Just between you and me, shouldn’t
the World Bank be encouraging MORE migration of the
dirty industries to the LDCs [Less Developed Countries]?
I can think of three reasons:
Summers Memo pp 1, 5
http://ban.org/whistle/summers.html
20
Summers Memo, Excerpts 1
1) The measurements of the costs of health impairing
pollution depends on the foregone earnings from
increased morbidity and mortality.
From this point of view a given amount of health
impairing pollution should be done in the country with
the lowest cost, which will be the country with the lowest
wages.
I think the economic logic behind dumping a load of
toxic waste in the lowest wage country is impeccable
and we should face up to that.
21
Summers Memo, Excerpts 2
2) The costs of pollution are likely to be non-linear as the
initial increments of pollution probably have very low cost.
I’ve always thought that under-populated countries in Africa
are vastly UNDER-polluted, their air quality is probably
vastly inefficiently low compared to Los Angeles or Mexico
City.
Only the lamentable facts that so much pollution is generated
by non-tradable industries (transport, electrical generation)
and that the unit transport costs of solid waste are
so high prevent world welfare enhancing trade in air pollution
and waste.
22
Summers Memo, Excerpts 3
23
3) The demand for a clean environment for aesthetic and
health reasons is likely to have very high income elasticity.
The concern over an agent that causes a one in a million
change in the odds of prostrate cancer is obviously going to be much higher
in a country where people survive to get prostrate cancer
than in a country where under 5 mortality is 200 per thousand.
Also, much of the concern over industrial atmosphere discharge is about
visibility impairing particulates. These discharges may have very little direct
health impact. Clearly trade in goods that embody aesthetic pollution
concerns could be welfare enhancing. While production is
mobile the consumption of pretty air is a non-tradable
THE COASE THEOREM:
But why do we need the government to establish licenses?
If information is symmetric,
negotiation is costless, and
contracts are costlessly enforceable,
then people will choose surplus-maximizing actions regardless
of whether there are externalities and regardless of
who has the property rights.
24
A Coase Theorem Example
25
A paper mill is polluting a river. The farmer downstream
had been selling trout fishing rights to rich tourists for
$20,000.
Now the trout have fled, and he gets zero.
The factory could install filtering machinery that would
eliminate the pollution, at a cost of $4,000.
1. Suppose the farmer has the right to a clean river.
2. Suppose the factory has the right to dump its waste
water into the river.
What if Pollution Is Efficient in the
Trout Example?
26
Let the trout fishing income be $2,500, not $20,000. Let
mitigation cost stay at $4,000.
If the farmer has the right to clean water, what happens?
If the factory has the right to dispose of waste in the river,
what happens?
How the Coase Theorem
Assumptions Break Down
Farmer benefit from trout: $20,000.
Factory filtering machinery cost: $4,000.
If information is symmetric (that is, the players don’t
differ too much in their information) . . .
If negotiation is costless (that is, not too costly) . . .
If contracts are costlessly enforceable, (that is, not
too costly) . . .
If the assumptions fail, the law matters to surplus
maximization
27
The Town of Cheshire Buyout
American Electric Power had a polluting coal plant in Cheshire,
southeast Ohio, that locally produced bothersome air pollution.
The company bought most of the town for $20 million,
supposedly for plant expansion.
Most of the 221 residents of Cheshire left. 90 homeowners
were paid three times the value of their houses. They
signed away their suing rights.
28
Applications of the Coase
Theorem
29
1. Bees and crops that need pollination.
http://pollinationconnection.com/beekeepers
2. Inefficient contract law is not so harmful as inefficient tort
law. If the standard contract rule is not value-maximizing, the
two parties can write in a special clause. Binding arbitration, for
example.
3. Coase’s example of two adjacent radio frequencies
interfering with each other. Clear property rights are enough.
4. Buying out bad employees (IU presidents, coaches)
Extortion: SaveToby.com
30
http://www.rasmusen.org/g406/save-toby-com.pdf
http://www.theregister.co.uk/2005/04/13/rabbit_extortion/
“Toby Has Finally Been Saved!!!!!” http://www.savetoby.com/.
The Science of Global Warming
Carbon dioxide is generated when people burn coal, oil,
or wood, or make cement from calcium carbonate.
Carbon dioxide is absorbed when plants grow.
If the earth has high carbon dioxide and water vapor levels,
that keeps heat from leaving, a “greenhouse” effect.
(Greenhouses keep heat from leaving an enclosed space.)
We do not really know what causes Ice Ages.
31
Reasons for Concern
32
Carbon dioxide emissions have quadrupled since 1950.
The preindustrial amount of atmospheric CO2 was 280ppm
(parts per million). Since 1960 it’s increased steadily from 315 to
390 ppm.
Average global temperature rose 1 degree Farenheit from
1980 to 2000.
The sea level rose 80mm from 1970 to 2000.
Human Sources of Carbon
Dioxide
http://www3.epa.gov/climatechange/scienc
e/indicators/ghg/ghg-concentrations.html
33
Human Sources of Carbon
Dioxide
34
Global Temperatures 1880-2015
35
Look at the vertical axis: it is anomalies, not average temperature. Source:
http://data.giss.nasa.gov/gistemp/graphs_v3/
World Temperatures 1996-2014
http://data.giss.nasa.gov/gistemp/graphs_v3
36
U.S. Temperatures 1880-2010
http://data.giss.nasa.gov/gistemp/graphs_v3, 2000 version, 2015
version
37
Bloomington Temperatures
NASA’s map for world weather station time series is at
http://data.giss.nasa.gov/gistemp/station_data/.
38
A Badly Located Weather
Station
http://www.surfacestations.org/
39
Satellite-Measured Temperature
40
Source: Roy Spencer, http://www.drroyspencer.com/latest-global-temperatures/.
Sea Level
41
What’s Happened, Summary
42
The preindustrial amount of atmospheric CO2 was 280ppmv.
Since 1960 it’s increased from 315 to 380 ppmv, to
0.038% of the atmosphere.
Average global temperature rose about 1 degree Farenheit
from 1980 to 2000. It also rose .5 degrees from 1910 to 1940.
The temperature has risen very slowly since 2000.
The sea level rose 100mm from 1970 to 2000. It also rose
100mm from 1880 to 1970.
Costs of Global Warming
43
Decreased water except at high latitudes and moist tropical areas.
Loss of coastland and coastal swamps.
Less food production at low latitudes.
Coral death from more acidic oceans.
The biggest question is how temperature affects water patterns. Humidity
will rise, but be unevenly spread.
http://www.ipcc.ch/publications_and_data/ar4/syr/ en/mains3-3-1.html
Global Warming Costs and the Discount Rate
http://rasmusen.org/g406/older/discounting.xls
The Nordhaus Plan
44
Reduce carbon dioxide 15 percent 2015-2050 relative to what it
would be without regulation. Reduce by 25 percent after 20502100 and 45 percent after 2100.
Since without regulation emissions would grow, they would still
rise under this plan, but more slowly. He suggests a carbon tax
of $28 per ton ($8/ton of CO2). Americans emit 5 tons per year
on average now. That means 9 cents per gallon on gasoline,
and a 10% tax on coal-generated electricity. At current levels,
this would raise $50 billion per year of revenue.
http://nordhaus.econ.yale.edu/dice_mss_072407_all. pdf
Costs– in Numbers
The IPCC, a U.N. organization, says that if carbon dioxide isn’t
stabilized till the late 21st century, the temperature will increase about
7.2 degrees Farenheit .
(http://www.ipcc.ch/publications_and_data/ar4/syr/en/spms3.html,
“A1F1 scenario,” worst-case, Table SPM-1.)
http://www.carbonbrief.org/blog/2014/04/degrees-of-change-the-ipcc%E2%80%99s-predictions-for-future-temperature-rise/
Yale economist William Nordhaus says that we should spend a
present value of $2 trillion on abatement, saving $5 trillion in
warming costs. He estimates there will still be a present value of
$17 trillion in warming costs that aren’t worth preventing.
http://www.econ.yale.edu/~nordhaus/homepage/Balance_2nd_proofs.pdf, p. 14-15.
That’s equivalent at a 5% discount rate to spending $110 billion per
year on abatement.
45
EPA vs. Massachusetts
In 1999, 19 private organizations filed suit demanding that
the EPA regulate greenhouse gas emissions.
Fifteen months later, the EPA requested public comment.
It received more than 50,000 comments.
The EPA concluded that carbon dioxide was not an “air
pollutant,” so it had no authority to regulate it.
The EPA’s denial was challenged in court, and the EPA lost
in the Supreme Court. In 2009 it issued an endangerment
finding, and it has started regulating mileage of cars. It
can only use command-and-control.
46
Can the EPA Regulate Carbon
Dioxide?
47
US Code 42. §7521. “Emission standards for new motor
vehicles or new motor vehicle engines” says:
(1) The Administrator shall by regulation prescribe (and
from time to time revise) in accordance with the provisions
of this section, standards applicable to the emission of any
air pollutant from any class or classes of new motor
vehicles or new motor vehicle engines, which in his judgment
cause, or contribute to, air pollution which may reasonably
be anticipated to endanger public health or welfare.”
48
The Garden
Hose to the
Sky
http://freakonomics.com/201
1/09/02/finally-a-gardenhose-to-the-sky/
http://www.intellectualventure
s.com/about/leadership/natha
n-myhrvold/
Solutions to Global Warming
1. Reduce carbon emissions: Taxes, tradable permits,
command and control. Cost: $2.2 trillion (Nordhaus)
2. Subsidize nuclear energy, wind, solar.
3. Carbon sequestration: Plant trees.
4. Carbon sequestration: Lock carbon up under the ground.
5. Geoengineering: Fertilize the ocean with iron.
Cost= $300-500 billon. (5% discount rate)
6. Geoengineering: Put light-blocking substances into
the atmosphere. Cost: $20-160 billion. (Barrett 2008)
7. Amelioration: air conditioning, shifting to different
crops, higher sea walls, and so forth.
49
“Copenhagen Consensus on
Climate”
“If the global community wants to spend up to $250 billion per year over the next
10 years to diminish the adverse effects of climate changes, and to do the most
good for the world, which solutions would yield the greatest net benefits?”
50
“The SuperFreakonomics
Global-Warming Facts Quiz”
1. The Earth has gotten substantially warmer over the past 100 years.
2. Even if we were to immediately and permanently stabilize our carbon emissions at the
current levels, or even cut these emissions substantially, climate models predict that Earth
will continue to get warmer for decades.
3. When Mt. Pinatubo erupted in 1991, it spewed millions of tons of sulfur dioxide into the
stratosphere. Scientists believe that the haze generated by the eruption reflected some of the Sun’s
light, causing the Earth’s temperature to temporarily drop as a consequence.
4. Because the half-life of sulfur dioxide in the stratosphere is relatively short (on the order of one
year), the cooling effects of the Mt. Pinatubo eruption faded within a few years.
5. Dark surfaces absorb more sunlight than light surfaces. Thus, all else equal, light surfaces cause
less global warming because more of the sunlight that strikes these surfaces is reflected back into
space.
6. Clouds, which are white or gray, are lighter in color than the oceans, which are blue.
51
“The SuperFreakonomics
Global-Warming Facts Quiz” II
52
1. If the Earth’s warming leads to global catastrophe, that
would be a really bad outcome.
2. Even when there is enormous uncertainty about the likelihood
of future cataclysms, it makes sense to invest now in finding
ways to avoid such cataclysms.
3. Economists estimate that the costs of reducing carbon
emissions are likely to be upwards of $1 trillion per year.
“The SuperFreakonomics
Global-Warming Facts Quiz” III
1. “What is the ‘right’ amount of carbon to emit?”
2. “Is it moral for this generation to put carbon into the air when future
generations will pay the price?”
3. “What are the responsibilities of humankind to the planet?”
4. “How can we most effficiently cool the Earth fast?”
53
Helping Poor Countries
Costs and benefits of warming are unevenly distributed.
Russia, Canada, and the United States could actually benefit
from having less cold winters.
Tropical countries– which are poorer– would lose more.
But for 1 trillion dollars per year, what else could be done to
help poor countries?
Should we reduce economic growth now to help people in
Bangladesh in 2100? Or should we help people in Bangladesh
in 2011?
54
Future Carbon Dioxide
55
Emissions by Region
56
Lots of Countries Produce
Carbon Dioxide (2007)
China produced 22%, the US 20%, the European Union
14%, India 6%, Russia 5%, and Japan 4%.
Other countries producing more than 1% were Canada,
South Korea, Iran, Mexico, South Africa, Saudi Arabia,
Indonesia, Australia, Brazil, and Ukraine.
http://en.wikipedia.org/wiki/List_of_countries_by_
carbon_dioxide_emissions from http://mdgs.un.org/
unsd/mdg/SeriesDetail.aspx?srid=749&crid=
57
Summary
58
The main economic costs of global warming would be from water
changes— drought and flood.
Europe uses cap-and-trade. The EPA is starting to impose
command-and-control. Carbon taxes are another solution. These can all
include sequestration and offsets.
All solutions except adaptation face the problem that countries can freeride. Geoengineering solutions are potentially the cheapest.
The big growth in carbon is in developing countries because of their big
population and income catch-up to developed countries.
End of Chapter Readings
59
1. “The SuperFreakonomics Global-Warming Facts Quiz,” Stephen
Leavitt (2009) http://www.freakonomics.com/2009/10/23/the-superfreakonomics-global-warming-fact-quiz/.
2. “Abolish Drunk Driving Laws: If lawmakers are serious about saving
lives, they should focus on impairment, not alcohol,” Randy
Balko (2010) http://reason.com/archives/2010/10/11/abolish-drunk-driving-laws
3. “Drug-resistant ‘white plague’ lurks among rich and poor,” Reuters
(2012) http://www.reuters.com/article/2012/03/19/us-tuberculosis-idUSBRE82I0D820120319.
5. “Copenhagen Consensus on Climate: Findings of the Expert Panel,”
http://fixtheclimate.com/uploads/tx templavoila/CC FINAL RESULT 02.pdf.
5. “Giant pipe and balloon to pump water into the sky in climate experiment,”
The Guardian (2011)
http://www.guardian.co.uk/environment/2011/aug/31/pipe-balloon-water-sky-climate-experiment .