29 Feb 2008

Tricky Questions

In a comment to my earlier post, AG asks:
  1. what does it mean when someone says "sustainable business practice" or "green power"? Does a clear definition exist for these terms? How would you define these terms? What metrics do you need to use to distinguish between "unsustainable" or a fuel that is not green?
  2. How will consumers know that a company or industry is using sustainable business practice or that the fuel that they are putting in their car is "green"?
  3. Do you need to worry about induced economic effects? For example, suppose a carbon tax causes an entire industry to move overseas where environmental regulations are lax or non-existent and thus society starts to import goods/services that transfers pollution to another other country. What do you do now? Do you apply the tax still?
  4. How will equity concerns be addressed?
Nice questions. Here are my thoughts:
  1. what does it mean when someone says "sustainable... To me, it means that they have accounted for all meaningful externalities, i.e., they are paying (and charging) when their business generates pollution that affects the environment. This does not mean zero pollution, but zero meaningful pollution, i.e., pollution that stays around. If, for example, a taco seller throws beans and rice in the gutter, it is not meaningful pollution because it will be eaten, washed away or decay. If he throws a plastic bag there, it is meaningful. (Street cleaning is a solution to pollution, not a human right, so we don't say "it's someone's job to pick up the trash.")
    Getting back to pollution, I want to evoke the common law idea that we all have a right to enjoy our private and communal property in the condition we found it. We can modify our private property (chop a tree) without notice to others, but we cannot do that in the commons without causing offense. That's why the commons need to be protected/policed in some way (see Ostrom for lit).
    So -- power and energy are green or sustainable if their short-term effects (inhaling smoke) and long-term effects (acid-rain, global warming, wildlife death) doesn't harm us. The bad news is that almost all fossil fuels have bad long-term effects if used faster than the environment can absorb them. (I've always thought of resource economics for telling us the optimal way to use something and environmental economics for telling us the impact of those uses on other things.) And we have been doing that for awhile. Nuclear power has no global warming effects (besides generating heat, but we get that from the sun too) -- its effects are harmful when we die of radiation poisoning. Nasty.
    Should we all go back to log fires? No -- or not possible. All we can do is try to minimize pollution from power generation and energy. The economist notes that US gasoline prices are among the lowest in the world -- lower, even, than China's. Cheap energy will be used more than expensive stuff.
    I could go on....

  2. How will consumers know... Tricky. We rely on labels to tell us that food is organic or that a TV is made in Mexico, but who confirms those labels are true? That's an important job but not necessarily a government job (Kosher food has been certified for a long time by independent contractors rabbis.) Note the principal-agent and free-rider problem. If the producer pays for certification, we (sometimes) get outcomes like the sub-prime mess (bond issuers pay Moodys, et al. to get AAa ratings, etc.) If consumers need to pay, some will want to let others pay for certification and then use the information without paying (public goods problem). The solution is when middlemen can pay for certification and then charge consumers. It's called branding :)
    Unfortunately, there is "greenwash" branding ("hybrid" SUV?) and other forms of deception. My guess is that the market can take care of branding, labeling, etc but that there is some role for a non-profit that will aggregate and distribute information on the quality of branding.

    One more thing -- use basic economics to tell the difference. If it costs the same to ship something across the road as it does to go across the country, there's something wrong. Now consider that the USPS charges the same to send a letter but UPS changes the rates based on distance. That's the government at work -- killing the environment. (Yes, I know that one-price stamps are easier, but there are ways to handle that AND the whole idea sends a bad signal to people/gets them in bad habits -- like all-you-can eat restaurants!)

  3. Do you need to worry about induced economic effects? The old "pollution haven"/exporting pollution effect, eh? In theory, there's definitely a reason for polluting industries to move to places that are more lax. Some trade-protectionists use this reason to require that trade partners reach "our level" of green and clean, but that's often a reason to prevent trade.
    Even assuming there is a difference, that difference serves the poor country because it gives them an opportunity to earn money and improve their lives. Pollution will go up for a time, but then fall -- if they have political and property rights (will it happen in China? in time for the Olympics?) This "environmental Kuznets curve" has some empirical support, but its mostly a theoretical response to the pollution haven theory.
    Another factor to consider is this: What if we do not trade TVs with country X because they have no EPA? Do they set up an EPA to get trade going with us? No, they probably get into the nuclear waste storage business. If our trade is off the table, they have to find the next-best partner. Allowing them to trade with us gives them better options and that competition means they will move to the most profitable business ASAP. Profits include losses from pollution, so they will go green ASAP as well.

  4. How will equity concerns be addressed? Equity is my favorite concept these days :) There are several issues. First, can poorer people pay for green fuel? Second, will they be affected more/less than others? The short answer is 100% green fuel (no alternatives) should be sold at the same price to poor as to rich. Compensation should arrive to them via block transfers to their income. That way, the poor will use as little (expensive) fuel as they can. They should be equally well off with the income, which they can put back into fuel or into drugs, cable TV or UC Davis tuition.
    Green programs and sustainability can have bad impacts on the poor. The most-obvious example is the requirement that cars have anti-pollution devices. Cars cost more and the poor have less income for other stuff... I don't know what to say about this except that being poor is a bummer sometimes. (That's why social mobility plays an important in social justice.) Do keep in mind that plenty of "green" ideas are yuppie ideas. My least-favorite example of this is the "restore Hetch Hetchy" people. They want $5 billion of tax money to break down a dam (losing hydropower and storage) and "restore the lost valley". For what? So they can drive their green SUVs all over the place? I prefer the option put forward by an opponent to the scheme -- more urban parks. Poor people don't drive to HH-Yosemite -- they use parks in the city. Unfortunately, they do not vote enough. (Fortunately, the HH idea has been killed as too stupid to consider :)
So -- there are a few thoughts. Forgive typos, vagueness, etc.


Anonymous said...

Quick response on your thought on the sustainability concept:

As far as I am concerned, the concept of sustainability has been overused and abused. It is inherently a dynamic macro concept, not one that can be meaningfully applied to micro agent behavior. For example: The claim that an agricultural producer is unilaterally sustainable, because certain production techniques are used, is nonsense. He/she may be using environmentally gentler practices, but if such practices lead (for example) to greater demand on land area, then it may not be dynamically sustainable or socially desirable to have that kind of production dominate food/fuel production in general.

The value of the future will probably never be part of the externality analysis. So even though a market failure has been "corrected for" (internalized, and people are responding to "correct prices", sustainability in a dynamic macro sense is not guaranteed. Hence, your definition (up-front) is lacking bite and amounts to a static definition of an allocatively efficient/Kaldor-Hicks efficient outcome.


Anonymous said...

Thanks for the response david. Give me some time to respond.

Anonymous said...

Another point on the carbon tax, electric utilities serving local residents can not go overseas. It would be ludicrous to put a coal fired power plant in china and transmit the power over lines to the US. So, even if all the producers move away, all the residential power production facilities will not have that option. Yah, residential electrical power may be a smaller portion of the pie, but it's a portion.

Anonymous said...

"Nuclear power has no global warming effects (besides generating heat, but we get that from the sun too) -- its effects are harmful when we die of radiation poisoning. Nasty."

You're forgetting what nuclear power runs on: uranium. The mining and transportation of this can run up some pretty freakin bad costs in terms of land and community damage and fossil fuel emissions. I don't have figures yet, if they exist, on exactly what these are, but it can be pretty bad. We had a guest speaker on campus last week who was talking about uranium mining on the Navajo Nation lands and the bad health effects it's had. i.e. They knew randon gas in closed mines caused lung cancer in 1950, but didn't protect workers from it even through when the mines closed in 1980s. Mine pits were left open through the 90's. Homes have been built just 1200 feet from a waste tailings pile or using radioactive rock in their construction.

I'm not an anti-nuclear convert yet, mind you, but I'm getting there. I think it's a valid problem that (a) it still uses a non-renewable resource, with all the usual ills of mining operations, (b) that we still haven't cleaned up the last mess we made, and (c) yucca mountain is politically unlikely to happen, but there is no Plan B! Nuclear accidents with radiation, which seem to get the most/only press, are very infrequent, but potentially bad enough to make it unattractive. I think I read somewhere that coal plants actually release more ambient radiation than nuclear plants.

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