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David Fishman
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The argument over the legitimacy of contingent valuation practice’s ability to quantify willingness to pay curves poses an interesting topic. When using any non-market value valuation technique it is important to remember that there is always some amount of imperfections that will be generated from the technique. These techniques produce estimates and are, as Hausman points out, subject to many biases and other potential issues. However, I do not believe that one can write off contingent valuation methodologies on the bases listed by Hausman. Some of the concerns highlighted by Hausman are factors discussed in class. When conducting a stated preference model, it is not surprising that there would be a discrepancy between willingness to pay and willingness to accept for a good or service. Humans become easily sentimental over their personal belongings and naturally add some amount of value to the price one would accept for the nostalgic asset. Thus, I would guess this could either be controlled for or understood that the wtp values still reflect accurately regardless of a stated wta value. Another principle concern was hypothetical bias. Also discussed in class, by putting detailed comments within the survey that regularly remind the survey takers of the various constraints that they face in reality, rather than hypothetically,the surveyor can minimize the bias risk. Finally, as Whitehead et al points out in his abstract, CVM studies, on average, pass the scope test, providing scant evidence that Hausman’s adding up test can definitively test the validity of CVM models. If this is true, I think Hausman’s work is a poignant example of a researcher data mining for evidence that supports his own hypothesis. According to one of the cited blogs, he “selectively review[s] the contingent valuation literature.” This sort of self-reinforcement can disprove almost anything, and may be part of the reason for Hausman’s results refuting the validity of CVM.
This article serves as a good example of how legislation can impact private market decision making and incentives. The article points to high costs and regulatory hurdles as a principle hindrance for solar powered energy’s proliferation, yet, since California has mandated that one third of the power generated by utility companies must be derived from renewable sources by 2030, investing in solar suddenly has some benefit despite its lack of relative profitability. California, along with the entire Mojave Desert, has the benefit of an abundant physical solar resource stock, which can ensure stability from its solar thermal power plants, making the general area optimal for such capital investments. According to the article, the two towers being built in Riverside, California could generate approximately 200,000 household’s electricity demands per year, in addition to preventing 17 million of additional tons of carbon emission. Undoubtedly, this is a step in the right direction, but, in order to envision solar thermal towers’ proliferation throughout America, one should look at the relative market costs. For example, the Tennessee Valley Authority can produce enough coal-based electricity for 700,000 households at a lower cost. I am not saying this makes coal the preferable option, I am merely stating, that: if not for the California legislation mandating that one third of utilities power needs to be derived from renewable sources, these $2.6 billion capital projects will not be incurred throughout America. Unless, legislation is passed that alters the relative costs. If we, as a society, deem the benefits of sequestering 17 million tons of carbon emissions as something of relative value, then we need to implement a legislative mechanism to account for that value. Say a carbon tax or emission voucher system.
Shawn makes a good point in highlighting the issue that a high volume of wind turbines usually is considered an eye sore by most people. Evidently, as many have already mentioned, it would be interesting to read, in more depth, how the study measures all of the marginal damages and costs. Undoubtedly, it is hard to quantify the reduction in utility directly caused by both the noise and sight of the wind turbines, but revealed preference models that incorporate hedonic pricing (in similar areas that have implemented wind farms) may do a reasonably accurate job in quantifying the loss in utility from the wind farms. Still, as I am sure the study incorporates, by transitioning New York into an economy that generates 78 percent of its energy needs from a combination of wind and solar power, by 2030, the state will prevent around 4,000 premature deaths annually and save $33 billion in health care costs each year. The statistical value of a human’s life, as accepted by policy makers, is approximately $7.5 million. Thus, preventing 4,000 lives per year is an extraordinary saving, and, depending on the magnitude of the discount rate, over time the societal benefit of the savings is phenomenal. The study demonstrates the clear possibility of NY making a mass transition into a renewable based economy. The issue does not reside in the technology or the economics of the situation, rather this will only move forward if policy makers implement the necessary legislation. We know the savings to society, and we know the costs. This article references another article that opens with “Governor Andrew Cuomo will soon decide whether to approve hydraulic fracturing for natural gas in the state.” Although natural gas based energy does significantly reduce emissions relative to coal, policy makers are not yet even considering any proposals based in renewable energy.
Echoing what everyone else has said so far, it is both ironic and unfortunate that the debate over cap-and-trade type policies has become demonized and a very partisan issue. The article points out that this market-based approach was, in fact, the output of both Reagan and Bush Sr.’s terms. Jack points out that a principle reason for this schism is that conservatives are obstinately trying to portray themselves as the party of lower taxes. Hence, the “cap-and-tax” rhetoric touches home with a lot of supporters. Still, there seems to be a viable solution to ameliorate the tax aspect while maintaining the cap aspect…just distribute the permits (based on some equitable method) rather than auctioning them off. That way, although firms will suffer from the subsequent abatement costs, they are at least partially compensated with a new asset on their balance sheet. This asset will find some form of productive use for the firm, generating some compensation, thus a middle ground for the two parties to stand on. Whether the partisan gridlock continues or not, there is substantial evidence that the Clean Air Act of 1990, especially Amendment Title IV, demonstrated the success that a marketable permit system can generate. The program reduced SO2 and NOx emissions while inducing greater efficiency gains within the industry than expected. This success relates to the Porter hypothesis: the theory that strict environmental regulation provokes innovation that heightens productivity and other efficiency gains within an industry. The article points to better than expected savings of about $250 million a year, reiterating the benefits of this market-based program that reduces harmful emissions that negatively impact our standard of living. A point that we can only hope will be conveyed accurately to the political party that once so adamantly stood for market-based solutions.
Toggle Commented Mar 11, 2013 on Another Political Football at Jolly Green General
American Electric Power’s updated version of its 2007 settlement (originally filed in 1999) continues the trend away from coal powered utilities toward natural gas and other renewable based energy sources. The underlying reason for the litigation highlights the benefits of an ambient cap-and-trade system. The three coal plants based in the Midwest—Ohio, Indiana, and Kentucky—were inadvertently deteriorating the standard of living for people residing east of the power plants. The jet stream would carry the sulfur dioxide, mercury, and carbon dioxide emissions to the east inducing asthma and other respiratory illnesses, often leading to premature death and diminished quality of life. An ambient based system of permits considers the influence that emissions in one region have on other regions. By accounting for the regional effects, this type of cap-and-trade system more efficiently internalizes social costs to individual’s health. Whether litigation such as this AEP example, a pigovian tax on carbon, or a cap-and-trade system become increasingly intertwined into our energy markets, this article also serves to illuminate the trade-off between marginal abatement costs and marginal damages that factor into these sort of policies. Coal plants supply 32 percent of the nation’s electricity, and these coal based utilities are subsequently the largest source of emissions. The emissions are directly linked to heart and respiratory illness along with an acceleration of climate change. The article begins to account for the marginal damages, which drive the lawsuit, by explaining that the termination of these three plants will “prevent 203 early deaths, 310 heart attacks, 3,160 asthma attacks.” Still, the abatement costs need to be considered as well. The article highlights that the Ohio plant will spend $5 billion in capital expenditures and other expenses to comply with pollution control standards as well as eliminating approximately 2,011 megawatts of coal-burning capacity. Although the health, climate, and abatement costs are not entirely quantified, the article still serves as a good reminder of the balance in producing the optimal equilibrium when considering an externality.
The success and efficiency gains that the nine states, which compose approximately 20 percent of the U.S.’ Gross Domestic Product, who participated in the “Regional Greenhouse Gas Initiative” have experienced since the programs implementation in 2008 is a clear reiteration that market forces can generate pareto improvements. The success of R.G.G.I. has been so encouraging that the program has announced a new set of carbon-reduction goals. The program intends to foster “a reduction of the 2014 regional CO2 budget, “RGGI cap”, from 165 million to 91 million tons – a reduction of 45 percent. The cap would decline 2.5 percent each year from 2015 to 2020.” This cap and trade policy has demonstrated such effectiveness over its tenure, reducing carbon emissions among the participating states by 20 percent, that the authorities are confidently raising their goals. During 2008-2011, it is estimated that the program generated $1.1 billion of savings on energy bills, benefitting the consumer. Additionally, it has been estimated to have supported over 10,000 job years. Moreover, these estimates believe that retail electricity rates merely have risen by 43 cents per month for the average ratepayer since 2011 (I wonder what the number is relative to 2008-2011 though). From the article, it is clear that the efficiency that properly structured economic incentives can foster, while mitigating misallocation of resources, is often optimal, especially regarding emissions that have an optimal level above 0. Kathryn brings up a good point. Although the article mentions that the program was less of the typical bureaucratic nightmare that plagues American legislature, it will be difficult to have this cap and trade system permeate the remaining states. Yet, the nine states have very convincing evidence; eventually, these state or region-wide successes will translate into national policy. Ideally, this change would occur without a catalyst, but only time will tell.
The inception of R.G.G.I. 8 years ago has undoubtedly demonstrated the effectiveness and efficiencies that can be derived from actionable pollution permits. The program has raised $952 mm in revenue, which Scott pointed out, that has been reinvested in sustainable energy programs. Moreover, average annual emissions decreased by 23 percent after three years. Considering that the emissions reduced are direct contributors to the Climate Change issue, there is abundant evidence that this sort of program works. From a simply theoretical standpoint, these marketable permits heighten efficiency by equating firms’ marginal abatement costs across the industry, through intercompany transactions. Additionally, the cap created from the emissions permits incentivizes firms to invest in technology and various cost-cutting measures to increase efficiency without generating more pollution, a dual win for the environment and the consumer (relatively speaking). Another benefit that does not receive as much attention as it should is the revenue generated from the auction of these permits. Rather than just distributing permits, which creates a valuable asset on the firm’s balance sheet, these auctions raise revenue for the government. The value of this sort of Pigouvian Revenue is clear. While better equating Marginal Private Costs with Marginal Social Costs, the government is increasing its net revenues. These revenues can be reinvested in sustainable energy (as they are currently), used to pay off debt, used to offset tax cuts in a revenue neutral approach, etc. The important take-away is that during the contemporary political scene where ballooning deficits coupled with sovereign austerity measures are a heated point of contention, the R.G.G.I. system, and other economic incentives like it, can be part of a feasible austerity program that has the dual mandate of social efficiency along with deficit reduction…ostensibly, a rather marketable platform.
I do not want to beat a dead horse, so the summary of the above points are accurate: Zetland’s insight that many students do not comprehend that a Pigouvian Tax actually corrects market inefficiencies, rather than creating deadweight losses, is an integral point to understanding economic incentives and their role in mitigating externalities. When MSC>MPC, there is a misallocation of resources that induces an equilibrium where the firm bears less than the socially optimal amount of the cost. Thus, “Pigouvian Taxes correct prices to affect behavior” that provoke, theoretically, the socially optimal equilibrium, eliminating the initial misallocation of resources generated from the market. Since that has already been said, there are two more points I’d like to address. First, the point of if this tax is regressive or not, mentioned previously. The answer is: it depends. I would agree that a gasoline tax, etc, is regressive If individual’s behavior does not change. Yet, if that is true, then economic incentives would be irrelevant. Rather, this tax should induce, especially poorer individuals, to change their mode of transportation along with automobile producers to begin producing more efficient cars ( I can still see how one would argue that by causing poorer individuals to change their behavior drastically, it is regressive from a welfare perspective), or the government could institute revenue neutral Pigouvian Taxes. This is what I find most feasible and tend to prefer. By generating revenue from commodities with inelastic demand that produce externalities from consumption, and using this revenue to pay for tax rate reductions, people will have more discretionary income. Not only that, but they will have more discretionary income and the relative cost of these commodities will be higher, so the price effect will induce individuals to consume less of the commodity and purchase more of something else, not reducing the individual’s level of utility. Lastly, it should be pointed out that Pigouvian Taxes only do not cause dead weight loss if we can accurately quantify the cost of the externality. Let’s be honest, there are wide ranges of values placed on certain externalities, and without concrete market prices we can never be sure…but we can certainy come close. Thus, if the tax is too high, there will be a deadweight loss and if the tax is too low, we will still have a misallocation of resources. Yet, at least an ameliorated version of the misallocation is better than the entire burden.
Toggle Commented Jan 27, 2013 on My Bad..... at Jolly Green General
I agree with Austin’s analysis; the concept of the UN hearing climate change related lawsuits certainly makes me hesitant. The decision that the court held, stating that the liability could not be placed on individual defendants is a logical response. In order to have law suits curbing emissions, there must be precise science that essentially everyone analyzing the data can agree upon. The article refers to “convincing evidence,” if the legal system is going to uphold litigation then there must be certain evidence. Moreover, cross country law suits itself is inherently questionable. How would this even be upheld? As much as there needs to be a heightened sense of cross country accountability, I do not believe that cross country litigation is the solution. Considering how America tends to avoid treaties and topics that it does not agree with, it is difficult for me to envision America abiding by a lawsuit verdict in UN court. Rather, this issue needs to be settled domestically. We need economic incentives that make the cost structure for firms inefficient at high rates of carbon emissions, etc. Primarily taxes and tradable permits, these forms of regulation can incentivize capital expenditures in lower emission technology that promotes a better long-run outcome. Since the firm is profit maximizing—minimize costs, maximize revenue—the firm will invest in a capital stock that reduces its tax liability: low-emission technology.
Thomas Friedman emphasizes the urgency in addressing two main issues facing America. Both the annual federal budget deficit and the amount of carbon dioxide in the atmosphere are increasing at unsustainable rates. Friedman illuminates a possible policy solution that would ameliorate both issues. A carbon tax. As discussed in class, markets do not typically account for externalities, whether positive or negative. Thus, it is the responsibility of legislators to properly induce society to accurately internalize the costs of the given externality. In this case, as the carbon dioxide levels increasingly near the 450 p.p.m level that will foster a climate that is far more sporadic, legislators need to implement legislation that will mitigate this unnatural phenomenon. A carbon tax, as outlined by Friedman, is a viable solution. This directly raises the price of inputs producing carbon emission, so the MPC will shift out to become nearer to the MSC curve. Hence, the tax will more accurately internalize the costs of carbon emissions. Moreover, levying a tax will generate more revenue, reducing the budget deficit. Commodities, such as oil, have a very inelastic demand curve, especially in the short run; thus, this form of pigovian tax will generate a consistent source of revenue. While the tax will also serve as a deterrent to transactions that produce a negative societal externality.
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Jan 10, 2013