Sometimes green incentives can have unintended consequences.
Our story begins in an airport. About to board a flight, an environmentally concerned individual purchases “carbon offsets.” Yes, that flight will pollute the air but the offset could be used to fund a project that reduces emissions. The offset purchase is the incentive. It encourages others to pollute less if the payment is more than the reduction costs. Yes?
Unfortunately, firms that produce air conditioning coolants figured out how to use payments for polluting less to pollute more. Located in countries ranging from India to Mexico, plants producing gases used in air conditioning and refrigeration started making more coolant than they otherwise would have produced. Then, by capturing and destroying harmful waste gases, they could get thousands of “waste gas credits” from the United Nations. Selling the credits made them millions of dollars. Meanwhile the buyer of the credits could now legally pollute. The result? Some of the producers are overproducing the coolant to get huge waste gas credit revenue.
Another air conditioning story that we looked at recently also had unintended consequences. Hoping to reduce pollution, Mexico subsidized low emission air conditioner and refrigerator purchases. Because they were so cheap, though and because electricity was also inexpensive, people ran them longer than the inefficient units they had previously used. The result? More emissions.
But the last chapter of our story has a happy ending. Its unlikely title is the Environmental Kuznets Curve. Connecting more affluence in poor nations to pollution, the curve reflects data showing that as people become richer, first their country pollutes more and then it pollutes less. Why? More affluent households have greater political power. More affluent countries have the resources to lower pollution. The turn around point seems to be average annual income of $11,000 in 2007 dollars.
In a second happy ending, the European Union has announced that it will prohibit coolant producers from purchasing waste gas credits for manipulated emission reductions. I am concerned, though, that people will outmaneuver whatever solution regulators figure out as a replacement.
This academic paper and this paper tell more about Kuznets Curves. My facts about coolant producers are based on this excellent NY Times article. I also recommend 2 Teaching Company lectures from economist Robert Whaples about pollution.
Posted by: adminEcon
Tags: carbon credits, CO2, environment, environmental Kuznets curves, global warming, HFC-23, incentive, India, industrial gases, marginal analysis, pollution, United Nations
Asked by the Pew Center for the People and the Press to rank 21 issues in terms of their significance, global warming was #21. Similarly pessimistic about climate change initiatives, one researcher asked, “How can one seriously suggest that the village kid in India should give up her hopes of prosperity, education, and health care today, in order to prevent rising ocean levels many years down the road?”
What can an environmentalist do?
Maybe… connect current economic benefit to future climate results. Then, the iron law of climate policy is no longer an obstacle.
Described in the NY Times, a recent Science article suggests 14 policies that would have a beneficial economic impact now and also diminish the future global warming that the paper’s authors predict. One proposal would involve farmers in developing nations draining rice paddies more frequently to increase their yield while simultaneously reducing methane emissions.
Described in “Climate Pragmatism,” climate and health care concerns converged in a 2009 Congressional proposal for reducing black carbon soot. Two of the bill’s sponsors were environmentalists while a third sponsor questioned climate change but wanted the health benefits of cleaner air.
The Economic Lesson
Edwin Mansfield, a University of Pennsylvania economist (1930-1967) who studied the impact of innovation concluded that smaller innovations such as new industrial thread had a much greater social rate of return than products and processes that sound more dramatic. Recent suggestions to mitigate global warming also imply that “less is more.”
An Economic Question: How might rice paddy drainage be comparable to the smaller innovations that Dr. Manfield said were so effective?
Asked if they want lower gasoline taxes that make more driving affordable, people typically say, “Yes.” Told that the only electricity for a village in India is from coal-fired plants, most people will say it’s okay.
When making decisions about driving and electricity, we tend to observe the iron law of climate policy. Choosing between economic growth and reducing emissions, we take growth. Or, as a Chinese climate negotiator said during a Peking University speech, “I cannot accept someone from a developed nation having more right than me to consume energy…We do not want to pollute as they [the Americans] did, but we have the right to pursue a better life.” Correspondingly, The Economist asked people in the U.S. how much they would be willing to spend, per household, per year, on a climate bill. While $80 got majority support, $170 did not, and, at $770, opposition was overwhelming.
As The Climate Fix author, University of Colorado professor Roger A. Pielke said, “The iron law of climate policy says that even if people are willing to bear some costs to reduce emissions, they are willing to go only so far.”
How then to break the “iron law?” We will look at proposals tomorrow.
The Economic Lesson
Entering the realm of behavioral economics, science writer Jonah Lehrer suggests that we are less willing to select alternatives that provide short term loss and long term gratification. His example, in How We Decide, was people’s credit card excesses and how “…our emotions…tend to overvalue immediate gains (like a new pair of shoes) at the cost of future expenses (high interest rates).
An Economic Question: How does Jonah Lehrer’s credit card example relate to climate change policy?
A global phenomenon will open up new areas for oil exploration, enable ships to take shortcuts, and provide easier access to world markets for iron ore and other minerals.
The phenomenon? Global warming.
Because of global warming, the polar ice sheet is shrinking. With this summer having been one of the warmest on record, ships are traveling from Murmansk, near Finland, across the top of the world to Asia in record time. Scientists predict that by 2050, this Northeast Passage will be ice-free during the summer.
A navigable Northeast Passage means shorter travel time from Europe to Asia and competition for the Suez Canal. It means previously inaccessible resources can now be drilled and mined and transported.
That takes us to the Arctic Ocean doughnut hole. A huge fishing area that is beyond any nation’s jurisdiction, as it melts, the doughnut hole will attract fishing vessels from around the world.
Our bottom line? Global warming could have environmental positives that would include huge energy and mineral discoveries, and emissions reduction and cheaper transport from shorter routes.
The Economic Lesson
Perhaps one of the first environmentalists, Reverend Thomas Malthus told us in 1798 that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate.
You can see though, that environmental predictions are tough to make. This NY Times Magazine article describes the bet between the boomsters who said we would not exhaust our resource supply and the doomsters who said we would.
An Economic Question: Whenever a transaction between two parties affects a third, uninvolved individual or group, economists see an externality. How does global warming relate to positive and negative externalities?
A warmer Detroit? A wetter New York? In the future world that UCLA professor Matthew Kahn describes, cities will adapt to climate change.
Assuming that warming is gradual, populations will migrate and innovate. If San Diego becomes less habitable, people will leave for a more appealing climate in Detroit. Facing different weather conditions and a changing sea level, NYC would build new sewer and transport systems. Now in New Orleans, Brad Pitt’s “floatable homes” might spread to other water threatened communities. Worsened drought conditions in the Southwest could lead to water efficient technology. Market opportunities could abound for entrepreneurs.
The Economic Lesson
When Simon Kuznets developed national income accounting during the 1930s, for the first time the U.S. could more accurately determine its productive capacity. Consequently, during the Second World War, we were better able to determine how many tanks, for example, our land, labor, and capital could produce.
With a global warming trend, economists again could play a crucial role, assessing newly created incentives, investigating resource allocation, and identifying new markets and mobility.