The EU "Airline Tax" on Flights in and out of the EU

The charge that airlines will have to pay for flying in and out of the EU is not a "tax" at all, but the cost of airlines having to hold tradable emissions permits under the EU Emissions Trading System. Starting January 1, 2012, airlines will have to hold permits for the carbon dioxide their airplanes emit during the entire length of a flight that originates or terminates in the EU zone [see EU reg]. Since it has to pay for a permit that is traded on an open market, the price is not known. It is not a tax.

In my recent interview on Seattle Public Radio KUOW, I received a question from a caller who claimed to have had to pay a "carbon tax" of something like $600. That sounded high to me, as it did to host Steve Scher, but I should have done the back-of-the-envelope calculation and concluded she was nuts. Here is the simple arithmetic of the cost to an airline of flying in or out of the EU. Boeing reports that a 747-400 consumes about 5 gallons per mile, assuming a flight of about 3500 miles, about the distance from JFK airport to Heathrow. A direct flight from Seattle to Heathrow is longer, 4780 miles, but we'll assume that the fuel burn rate is about the same, even though it could well be longer because the plane would have to carry more fuel to fly the longer distance. The carbon content of jet fuel is 9.57 kg of CO2 per gallon, or 0.052746 tons per mile (5 x 9.57 x conversion factor for kg to short tons). Thus, a 4780-mile flight from Seattle to Heathrow would emit about 250 tons of CO2 for the flight. The 747-400 seats about 416 passengers in a 3-class configuration, so assuming that there are 350 passengers on board (a generous assumption given the fullness of flights these days), each passenger would account for about 0.72 tons of CO2. EUETS allowances have been trading at about 8 or 9 Euros lately, or about 11 US dollars. So the "tax" for this Seattle passenger going to visit family in the UK should really have been about eight or nine U.S. dollars. Of course, British Airways may mark up the cost a bit, but that is still two orders of magnitude off from her estimate of $600. And I suppose that the price of the EUETS permits are relatively low right now, and the Euro is taking it in the shorts, so maybe it is not a fair calculation to make right now. Perhaps, an estimate of fifteen or twenty U.S. dollars is more realistic over the long run. But on the other hand, even this estimate might be high; the EUETS might not cost passengers anything in 2012, because for the first year of the airlines' participation in EUETS, allowances equal to 97% of historical emissions will be allocated free, and 95% in 2013. There may not be any costs to pass on to passengers in 2012 and 2013!

So there you have it. For most passengers flying in and out of the EU, the cost of their airline having to comply with the EUETS will likely be close to zero for the first two years, and rising up to something on the order of fifteen or twenty dollars. Makes the threatened lawsuit by Chinese air carriers and the threatened US Congressional attempt to fine American carriers for complying with the EUETS mandate  seem more than a little hot-headed.

A Loss for All of Us

I try not to get personal or off-theme on this blog, but the passing of a fine person in the Canadian oil industry is reason for us to pause and reflect on a legacy that above all is best described as civility in the maelstrom of controversy. The loss of Rick Hyndman, formerly a senior economist with the Canadian Association of Petroleum Producers, is a loss not only to the varied stakeholders that have engaged with the Canadian oil industry, be they green, brown, or any other colour. Rick was exceptionally knowledgeable about the world oil business, savvy about Canada's role in that global industry, but in all of his dealings polite and respectful, even when, as he recalled six years ago, he was labeled a "climate criminal" by some green groups. The best of the greens, know better, though. In 2005, I headed up a panel on energy policy as part of a CIAJ conference, and invited Rick and now-Ecojustice legal advocate Karen Campbell. Rick accepted that invitation, as he did a more recent one from me, with the response that he "would be honoured to participate," a humbleness that masked his vast storehouse of knowledge and razor-sharp intellect. It was a highlight of my career to remember, as Rick and Karen had their lively and fruitful exchange during the conference, B.C. Supreme Court Justice Bruce Cohen, the eminent chair of the conference organizing committee, turning to me and whispering excitedly, "these guys are great!"

Without impugning Rick's views, positions, and work, I would like to say that they have for me served as a source of inspiration not only for substantive views, but a commitment to civilized and mutually respectful discourse. There was something utterly Canadian about Rick in that regard.

Why Not a Carbon Tax? Some thoughts from my students

I assigned parts of my book to my students in my climate change seminar, and challenged them to come up with arguments against a carbon tax, or at least some suggestions on how to implement a carbon tax. They rose to the challenge. Here are some of the best arguments:

A carbon tax needs to be part of comprehensive tax reform, not a stand-along policy. A carbon tax simply is not politically feasible at this point, except if it is offered as part of a comprehensive package of tax reforms aimed at lowering overall tax burden. Income taxation in Canada is too complicated, and in the US is inexcusably complex. A carbon tax to displace some income taxation would be a good thing.

A carbon tax only reinforces the idea that climate change is going to cost people money. There is considerable research now that suggests that people are choosing to discount the costs of climate change because they see it as an unambiguous cost. But if climate policy were more about developing exciting new breakthrough technologies such as fusion, then maybe people would be more willing to engage with the issue instead of pushing it into the "it's too depressing to think about" category.

A carbon tax could be accomplished anyway by focusing on co-pollutants instead of carbon dioxide. Focusing on climate change is that it detracts from the other problems from polluting industries, particularly stemming from coal-fired power plants. The irony is that we just focused on reducing pollution, we would almost certainly reduce greenhouse gas emissions as well.

It is kind of interesting that all of the suggestions I get, and all of the critiques that I get about a carbon tax somehow tie into psychology. Be it "people just don't like taxes," or "people have trouble understanding climate change," or anything else, it all comes back to some cognitive gap when it comes to climate change or taxes.

Canada's Carbon Capture and Storage Mandate, part III -- command-and-control

I derive most of my funding, at this point, from Carbon Management Canada, a research unit funded by provincial and federal government to advance the development of upstream fossil fuel technologies, including most prominently at this point, carbon capture and storage technology. This is the third post, however, criticizing the federal government's mandate of carbon capture and storage technology for coal-fired power plants.

I remain skeptical of carbon capture and storage (CCS) technology. However, if Canada were to push technology CCS along, this clumsy command-and-control initiative is absolutely the wrong way to do it. If any coal-fired power plants actually take the federal government up on the regulation and install CCS, it will be committing considerable expense to a specific CCS technology. If Canada will be asked to contribute more emissions reductions in the future -- as it almost certainly will -- the firms that installed CCS technology will be saddled with an expensive piece of equipment that will have become obsolete. And this equipment will become obsolete quickly: the proposed standard only requires a 30% carbon dioxide removal efficiency. What will the owners of these plants with CCS do if Canada is pressured by its trading partners to further reduce emissions from its electricity generating sector? They will eat costs, and Canada will eat crow. This is the classic example of how command-and-control regulation hurts regulated businesses.

What every CCS advocate will tell you is that while government assistance for CCS research, development, and deployment is nice, there is one thing that is absolutely necessary for CCS to thrive: a carbon price. As the U.S. Interagency Task Force of Carbon Capture and Storage concluded in its commissioned report:

The lack of comprehensive climate change legislation is the key barrier to CCS deployment. Without a carbon price and appropriate financial incentives for new technologies, there is no stable framework for investment in low-carbon technologies such as CCS. Significant Federal incentives for early deployment of CCS are in place, including RD&D efforts to push CCS technology development, and market-pull mechanisms such as tax credits and loan guarantees. However, many of these projects are being planned by the private sector in anticipation of requirements to reduce GHG emissions, and the foremost economic challenge to these projects is ongoing policy uncertainty regarding the value of GHG emissions reductions.

It is ironic that the Canadian federal government, while trying to spare Canadian businesses any costs whatsoever, is actually harming them. This cuts against a grain of economic thinking that posits that cost savings at any time can only benefit a business. But it is not a good thing to try and insulate Canadian businesses from a geo-political environment in which greenhouse gas reductions will be pursued with much more seriousness. Some far-sighted businesses may anticipate the future foreign pressures that will be visited upon Canada to undertake more emissions, and those businesses may plan accordingly. But for a private business, that is a risky proposition to justify to shareholders. Capital expenditures, some of them very expensive and therefore sticky, will have to be made in a highly uncertain regulatory environment, and some businesses that might otherwise heed signals may wind up just taking in current policy as an indicator of future policy. The danger is that this kid gloves approach will lull some Canadian businesses to invest capital in a climate policy environment that errantly assumes regulatory life will always be this easy.

Canada's Carbon Capture and Storage Mandate, part II

The Canadian federal government's first baby-step on curbing greenhouse gas emissions, first blogged about by me in August, the setting of a performance standard of 375 tonnes CO2/Gwh for Canada's 53 coal-fired electricity generating units promises little. There are several "flexibilities" (Environment Canada's term) built into the proposed regulation: they don't apply to existing units until they are "old" -- 45 years old and at the end of a power purchasing contract. Existing units are otherwise grandfathered. Also, "new" units built before 2015 are not subject to the performance standard.

How many units are we talking about? In the analysis for the regulation, Environment Canada says that 35 units -- 66% of the total number of units currently in operation will become "old" by 2025. That's a long ways away. How many are old now? Environment Canada projects that 21 plants will be retired by 2015, but 15 of those are slated for retirement as a result of Ontario's provincial mandate to phase out coal-fired units, so it's not as if the federal government can take credit for it. So presumably 6 units become "old" by 2015, and another 14 become old in the decade following. The rest are grandfathered.

Tyler Cowen's Marginal Reservations About a Carbon Tax

A Twitter discussion broke out last week on carbon taxes. The question was, "do all serious economists favor a carbon tax?" Mostly the answer was yes. Tyler Cowen, on his Marginal Revolution blog, also favors a carbon tax, but posted some of his reservations. They are worth addressing (they are covered in my new book).

1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness. 
This is true but perhaps the more relevant questions is, is a carbon worse than the alternatives? It so happens that a carbon tax will have greater pollution reduction co-benefits than the alternatives. Then, a second-order set of questions is, does a carbon tax permit, under international trade rules, sanctions against counties that don't follow suit? The answer is maybe, but a carbon tax is legally a better base form which to take trade actions than alternatives like cap-and-trade.

2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse. Yes, possibly, see #1, and plus, this may be overstated.... see Leveling the Playing Field, by Trevor Houser and others.

3. There is Jim Manzi’s point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers.  Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they’ve done no better than stop the growth of carbon emissions; see Robert Bryce’s Power Hungry, which is in any case a useful contrarian book for considering this topic. I think that reducing greenhouse gas emissions will not require so much game-changers but much smaller, less noticeable increments in conservation and efficiency, most notably in Sweden. Sweden may not have perfected nuclear energy, but it has a much more innovative environment for conservation. Kristianstad, an  80,000-person city has reduced its carbon footprint to virtually zero. Obviously, not every city can do this, but some can, which is better than none. http://www.nytimes.com/2010/12/11/science/earth/11fossil.html?ref=beyondfossilfuels

4. Especially for large segments of the transportation sector, there simply aren’t plausible substitutes for carbon on the horizon. Except conservation. There is a paper by Hammar, Lofgren and Sterner that found that not only do low gas prices beget high consumption, but high consumption begets low gas prices. The explanation is a political economy one -- once people get used to high consumption, and once an infrastructure gets build around low gas prices, people demand low gas prices. But that's not a reason to keep gas prices low. As Herb Stein once told Richard Nixon, "If something can't go on forever, it won't"

5. A tax on energy is a sectoral tax on the relatively productive sector of the economy — making stuff — and it will shift more talent into finance and other less productive sectors. See #2.

6. Oil in particular will become so expensive in any case that a politically plausible tax won’t add much value (careful readers will note that this argument is in tension with some of those listed above). You can't both argue that a carbon tax is harmful and that is won't have any effect.

7. A carbon tax won’t work its magic until significant parts of the energy and alternative energy sector are deregulated.  No more NIMBY!  But in the meantime perhaps we can’t proceed with the tax and expect to get anywhere.  Had we had today’s level of regulation and litigation from the get-go, we never could have built today’s energy infrastructure, which I find a deeply troubling point. Again true, but the point is, is a carbon tax better than the alternatives? At least a carbon tax is the least regulatory of all the options, including cap-and-trade, which still must monitor emissions trading.


8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax. Somewhat true, but generally overstated -- see recent work by Metcalf, Fullerton, and others, which show that for *some* lower-income people, their income is derived from governmental benefits that are indexed to inflation, and would therefore grow with price increases brought on by a carbon tax. Also, work by Sarah West and Rob Williams studied gas prices and substitution, and found that even very modest revenue recycling would remove regressive effects.

9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.  But a carbon tax could be big enough to constitute an oil price shock? A $30 per ton CO2 tax amounts to about $0.25 per gallon.

9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax.  Maybe we won’t adopt green energy until it’s really quite cheap, in which case let’s just focus on the subsidies. There a case for limited R&D subsidies because fossil fuel industries already have a much greater market share than renewables, so renewables need some R&D subsidies just to keep up. See work by Acemoglu et al, and by David Popp. But who believes that subsidies are really, on the merits, a great idea? If carbon is what we are worried about, shouldn't we just price carbon instead of trying to lower the price of everything else?

10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage. More than subsidies? More than cap-and-trade? The Waxman-Markey bill doled out $378 billion in allowances given away to industries that were at the table. It was virtually co-written with the Edison Electric Institute.

On Jon Huntsman

Last night, during the Republican presidential candidates debate, former Utah Governor Jon Huntsman said this:

"When you make comments that fly in the face of 98 out of 100 climate scientists, to call into question the science of evolution, all I am saying is that in order for the Republican Party to win, we can't run from science. By making comments that basically don't reflect the reality of the situation, we turn people off."

I have been asked what it would take for carbon taxes to become a reality. What it will take is for a legion of sensible Republicans to say what Jon Huntsman has said. Arnold Schwarzenegger, John McCain, Lindsey Graham, Bob Inglis, and Lamar Alexander are all Republicans that have at some point acknowledged climate change. Some versions of Mitt Romney have also done so, although other versions of Romney are more equivocal. I am not going to call Jon Huntsman's statement "courageous," because that should be reserved for statements that are less popular than Huntsman's position. If just a small number of distinguished Republicans are willing to lead the party and play ball on climate change, then carbon taxes will be seen as the most palatable policy option. This will especially be true in the foreseeable future, in which government balance sheets will be under scrutiny, and not just from Standard and Poor's.

Physical, Human, and Social Capital, and Their Effects on Social and Economic Change

My PhD advisor, Jim Wilen, has already cemented his place in economic history as one of the great thinkers and researchers in fisheries economics and policy. I won't recount the numerous honors that have rightly recognized his contributions to this vitally important area of public policy. Nor will I attempt to list those of his students that have benefited from his intellectual stewardship.

My unfinished idea about environmental law derives from Wilen's groundbreaking work on the role of capital in fisheries economics. In one of the most influential unpublished papers ever, Common Property Resources and the Dynamics of Overexploitation: the Case of the North Pacific Fur Seal," (1976) Wilen sets out a bioeconomic model of the fur seal industry, combining a biological model of fur seal reproduction and an economic model of the fur seal harvesting industry. In my mind, Wilen's big idea in this paper is that fishing capital is "sticky" and that this is what makes overexploitation so persistent in some cases. Especially in fishing (and chasing after other marine resources), there tend to be huge sunk costs and relatively low variable costs, so that boats can be going out and chasing species that have already crashed, and are in danger of permanent overfishing (i.e., for most purposes, extinct); if there is no real alternative use for the capital, then there is nothing to be lost by going out even when the target species has already crashed, and trying to catch the very last of that species. That is the great danger of overcapitalization in fishing and other marine exploitations -- the tendency to lock in certain behaviors that will persist long after the economic warning signals have sounded about overexploitation.

Wilen's works co-exists and stands on the shoulders of many other fisheries economists -- Anthony Scott, H. Scott Gordon, and Colin W. Clark, to name just a few. But in terms of value-added applied impact on fisheries policies, I think this contribution stands on its own.

My project is to extend this insight to other areas of environmental and natural resource policy. Climate change is one of several areas that must grapple with questions about capital. Many have written about how the energy infrastructure of most of the world's advance economies is "sticky" because of the expensive, long-lived nature of electricity generation plants. Insofar as that is unchangeable, we have indeed locked in high emissions for decades, and we owe that to the physical capital that has been constructed, the human capital that is narrow and specific to certain electricity generation technologies, and the social capital that seems to be predicated on certain industries, practices, and methods of electricity generation (like coal mining). Capital is sticky, and that is what makes change hard.

Canada Turns to Carbon Capture and Storage. Why?

In a speech on Friday, August 19, Canadian Environment Minister Peter Kent announced that the federal government was going to implement carbon dioxide emissions standards on coal-fired power plants. The standard is a performance standard, which requires coal-fired power plants to emit carbon dioxide at a rate not to exceed 375 tons of CO2 per Gigawatt-hour of electricity generated. At this time, this rate is unattainable by coal-fired power plants without carbon capture and storage (CCS). The timeline is not very ambitious: it requires owners of existing coal-fired power plants to ramp up to CCS by 2025, requiring owners to produce all kinds of documentation, plans, corporate resolutions, economic and technical analyses, showing a sincere intent to actually implement it by 2025, not just a say-so that carbon capture and storage will be installed. Whether these reporting requirements will actually sniff out those plants just playing along to get a 14-year reprieve is anybody's guess.


The curious thing is why is the Conservative Canadian Prime Minister is taking this course. Ideologically, it doesn't make sense -- I found it ironic that the late NDP leader Jack Layton (who passed away this past weekend) was stumping for a cap-and-trade system while the Prime Minister, the purported economist, has been moving towards something command-and-control all along. Politically, it doesn't make sense -- oil sands executives in the PM's home province, crucial to the PM's political fortunes, have called (if a bit weakly) for a carbon tax, in part to help raise money to pay for carbon capture and storage. Economically, it doesn't really make sense, since a carbon tax would be a fairly innocuous way of penalizing the oil sands for its emissions, one that most oil sands companies can easily absorb. Politically (again), it isn't consistent with Canada's behavior vis-a-vis the United States, with which it wants to harmonize climate policy, but this regulation puts Canada ahead of the United States in terms of what the US is likely to do with its own carbon dioxide regulations under the Clean Air Act. 


So what's up?

The Politics of Carbon Pricing

Barry Rabe and Christopher Borick have come out with a new paper on the politics of carbon pricing in the United States and Canada. They acknowledge the large body of work of economists that have largely concluded that carbon taxes are generally the best approach, for a number of reasons. Rabe and Borick's analysis suggests that although people would actually be willing to pay some sort of a "user fee" that scales with carbon dioxide emissions, they still do not accept the concept of a carbon tax. Whether that is because of the politics of climate change or the politics of energy taxation, they stop short of guessing, but they observe that despite the unfavorable politics of carbon taxation, people actually do pay a large variety of fees, charges, and taxes that are already embedded in fossil fuel extractions and transfers, that have the effect of a carbon tax. Moving forward, Rabe and Borick seem to be suggesting that various jurisdictions will "slouch" towards carbon taxation, essentially accomplishing by stealth what cannot be accomplished in an open political process.

I get quite cynical at times, and get discouraged about whether people deserve the democracy with which they have been endowed, and hard-won in the distant past. As a descriptive matter, Rabe and Borick may be right, but I still believe that the best way forward on pricing carbon is to be transparent. Among other benefits, a public discussion on carbon pricing and climate policy may not necessarily soar to rhetorical heights, but it will never be very good if governments do the right thing and then try to hide it from their constituents. Per my forthcoming book, I think the framing problem with carbon taxes can be overcome, and not just by renaming a carbon tax a "fee," a "charge," or something else. I think the problem that carbon taxes have, that it shares with other public finance problems, is a lack of a proper accounting in the costs and benefits of different policies. Start by making every climate policy ask what it will cost and what it will accomplish.

A Suggestion for the Deficit Supercommittee: Carbon Taxes

Introduce a carbon tax, but offset it with income tax decreases. Wouldn't that be something for Republicans to take back to their supposedly over-taxed constituents? Lower income taxes?

The six Republicans that will be on the "Deficit Supercommittee," the Joint Select Committee on Deficit Reduction, have been named -- three by House Speaker John Boehner (Reps. Fred Upton, Jeb Hensarling, and Dave Camp) and three by Senate Minority Leader Mitch McConnell (Sens. Rob Kyl, Rob Portman, and Patrick Toomey). They will join the three Democrats that have been named so far (Sens. John Kerry, Max Baucus, and co-chair Patty Murray). The committee is charged with presenting recommendations for cutting at least $1.5 trillion over ten years. If the committee cannot agree, or if Congress fails to adopt its recommendations, in their entirety (no amendments allowed), then a series of automatic "trigger cuts" will take place, imposing deep cuts to military spending (to supposedly incentivize Republican cooperation) and to nonmilitary programs, including Medicare (to supposedly incentivize Democratic cooperation). Many hands have already been wrung about how hopeless the task, and how the committee members named thus far do not inspire confidence. Politico has pointed out that all six have signed Grover Norquist's anti-tax pledge. New revenues would appear to be out of the question.

I can't solve the problem (I think it is a problem) of getting Republicans to agree to new revenues. I wish there were a way to persuade Republicans to abandon ethanol subsidies, subsidies for oil exploration, and the Bush tax cuts for the rich. But I don't see that happening. What I do see as a possibility is that revenues might be introduced in a new way -- carbon taxes -- that might be viewed as less offensive. The seeds of a possible compromise might involve a new carbon tax, coupled with further income tax reductions. The latter is certain to be a condition of accepting a carbon tax; if there are any Republicans that would accept a straight carbon tax, they are laying low for now. I am convinced that there are Republicans that accept the need for new revenues; they are just too shy to come out of the closet right now. If Tom Coburn can acknowledge the need for increased revenues from reducing what he calls "special giveaways," then there are many more out there who also feel the need to increase revenues. At any rate, I am accepting without agreeing that new revenues would have be offset by more tax cuts. In principal a revenue-neutral carbon tax -- one that recycles the proceeds so that no new net revenue is taken in -- should not be an affront to even Norquist, who at least in 2006 reportedly supported the idea of increasing gasoline tax in exchange for reducing other taxes. That should make the six Republicans feel a little freer of the bonds of their pledge to Norquist.

A carbon tax coupled with income tax cuts can nevertheless be surprisingly tricky to set up. Treasury won't know until tax returns are in and all carbon tax proceeds are processed, exactly how much of each was collected. In other words, there is no way to guarantee that carbon tax proceeds will be completely offset by income tax breaks. In fact, since there is no way of knowing the baseline counterfactual -- how much income tax proceeds would have been collected without tax breaks -- it is impossible to know if there will be a one-for-one offset.

But so what? What if the American public, the Supercommittee, and at least a majority of both chambers can accept a little uncertainty about revenues? That is going to be the case anyway, as income tax revenues are hard to predict ex ante in any case. The Supercommittee just has to agree, and get a majority of the House and Senate to agree, that in reasonable scenarios, the proceeds from a carbon tax would be about the same as the reduction in proceeds from a further tax cut. It could and should take into account that carbon tax proceeds would likely decline over time, as people and firms and the entire economy adjust to higher prices. Initially, carbon tax proceeds should be more than income tax reductions. Over a ten-year period, it would be reasonable to expect carbon tax proceeds to be greater than income tax reductions over the first five years, and the reverse to be true over the last five years.

One thing I don't know is whether Republicans could stand the United States not being an international pariah for inaction on climate change.

Why We Hate Consumption Taxes, Part II

Building on my last post on why the British Columbia provincial HST is in trouble, I wonder, even when some environmental regulation is accepted as being necessary, why environmental taxes are so disfavored. Among the federal political parties in Canada, we have the anomalous situation of the governing Conservative Party favoring some sort of a command-and-control approach to climate change regulation, while the last-century-liberalism NDP favors a cap-and-trade approach. Neither party is being honest, of course; the Prime Minister will hand out opaque sweetheart deals on a sector-by-sector basis, producing no emissions reductions, and stricken NDP leader Jack Layton promises that a cap-and-trade program will not raise energy prices which, of course, would therefore produce no emissions reductions. And the party that has championed a carbon tax, the Liberals, swooned to their lowest Parliamentary representation in recent history in the recent election.

Why is "tax" a dirty word? In my forthcoming book on carbon taxes, I argue that people harbor certain psychological biases in evaluating policy instruments. First, people have demonstrated a propensity to "do no harm" not only in their private lives, but in choosing policy instruments. The "do no harm" phenomenon, most thoroughly studied by Jonathan Baron, suggests that people prefer to allow more harm to occur by omission than they would permit to allow by an affirmative act or policy. So, for example, a Baron and Ilana Ritov study showed that there was a policy bias in favor of letting children die of the flu than for allowing children to die from a vaccination policy. How does this make taxes unpopular? I argue in my book that an environmental tax more obviously harms people than any other policy instrument. More than any other policy instrument, a voter can imagine and visualize somebody that would be harmed by an environmental tax -- it is often themselves that they can see being harmed by a tax! By contrast, a command-and-control-style regulation very effectively conceals from voters the true cost of regulation. People tend to harbor the illusion that imposition of a regulatory costs will stay where it is imposed, an illusion that Jack Layton either harbors himself or actively perpetuates for political gain.

Second, people also harbor an "identifiability bias" in favor of harming people that are less tangible, less noticeable, and less identifiable. George Loewenstein has most extensively studied this, finding that even a tiny increment of information -- the addition of an id number, without a name, face or any other identifying information -- tended to elicit more sympathy from research subjects than those without an id number. How does this cast a shadow over environmental taxes? Environmental taxes harm identifiable people, as opposed to other instruments, that harm unidentifiable people. Command-and-control, and even cap-and-trade, impose amorphous costs on people and firms that do not exist as clearly in most peoples' minds.

Finally, the famous endowment effect, pioneered by Daniel Kahneman, Jack Knetsch, and Richard Thaler, seemed to indicate that people had a much higher valuation for goods that they already had, as opposed to goods that they didn't have. Some economists have expressed this people having a higher willingness to accept than they have a willingness to pay, but from my perspective, I think it demonstrates that people have a status quo bias -- phraseology not original to me, but most useful for me purposes. And the connection to taxes? At bottom, the endowment effect is a reluctance to trade, and a tax, more than any other policy instrument -- signals a trade. The trade could well be a beneficial one, as many environmental taxes can be demonstrated to produce much more benefit than cost, but it is a trade nonetheless, and people don't like trading away from their current situation. Again, what is so glaringly obvious about an environmental tax is that improving the environmental will cost. The fact that the cost is less than the benefit is a calculation that is a second-order calculation that is dominated by the fact of the cost.

The HST in trouble: why do we hate consumption taxes?

In British Columbia, a referendum is being held on the Harmonized Sales Tax, or HST, which has boosted the effective sales tax on most goods and services in the province. The previous system of a Provincial Sales Tax (PST) and a federal Goods and Services Tax (GST) was a bit confusing, but lower.

There has been considerable grumbling about the way that the BC HST came to be, and in fact led to the resignation of Premier Gordon Campbell. But process concerns aside, most of the unhappiness over the HST is really about unhappiness with higher taxes. The next sentence might ordinarily be, "of course, nobody likes higher taxes." But why? Would taxpayers really prefer, for example, to see their government default rather than pay higher taxes? In the case of the absurd stubbornness of the Tea Party Republicans in the US, how many rich people -- say, households with more than $250,000 in gross income -- would actually object to higher taxes from repeal of the Bush tax cuts? Certainly, they be better off paying higher taxes than having their federal government default. But, I suppose, Tea Party activists would reply that the alternative is not default, but reduced spending.

But do we really want reduced spending? Do Americans know that the decades-old Reading is Fundamental literacy program, government spending that has leveraged private support, and costs the American taxpayer a measly $25 million per year, has been thrown under the bus? Are we really so adamant about getting rid of such government "waste"?

This is British Columbia, of course, and probably the childish theatrics of Washington DC do not extrapolate well to Victoria, BC. But undoubtedly the same anti-tax sentiment cuts across both Americans and British Columbians, and in both cases, cuts across political party lines. Much of the HST-bashing has been at the behest of the left BCNDP, as opposed to the right Tea Party. But there is a populism in both cases that plays to what I think is a pathology about taxes.

Public opinion polls generally ask voters to make false choices, like choosing between higher taxes and lower taxes. Because polls intrude upon the private time of respondents, the nuances of public policy choices are omitted, so the condition of lower taxes -- less government programs -- is omitted. And taxes are the most conspicuous targets of opportunistic politicians, because it is so easy to conceal the tradeoffs of paying taxes. Ask yourself this: if it was put to American voters whether they would be willing to pay 8 cents per year to continue Reading is Fundamental, would most Americans vote for it? Of course they would. Everybody loves programs, and everybody hates taxes.

The question I have for opponents of the HST is this: what exactly would you propose to make up for the lower government revenue? Would it be higher income taxes, or less government programs? And tax whom higher, or cut which government programs? Be specific. See? It's not simple, is it?

What do Tony Abbott and Carole James have in common?

Who?!

Residents of my home province of British Columbia remember Carole James as the former leader of the British Columbia New Democratic Party, the opposition party now for over a decade. Her scowling, smug demeanor is believed widely enough to be a reason for the BCNDP's failure to return to power that she was ousted recently on favor of Adrian Dix. Of course, it could also just be the refusal of the feel-too-much-think-too-little BCNDP to grow up that has kept it from governing. It was Carole James at the helm of the BCNDP during which then-Premier (that's Canadian for "Governor") Gordon Campbell instituted the controversial BC carbon tax. Back to that in a moment.

Tony Abbott is the leader of Australia's opposition, the main threat to the government currently headed by Prime Minister Julia Gillard. The fact that his firebrand, feel-too-much-think-too-little conservatism makes him an implausible leader for Australia has given Gillard the political room to institute a carbon tax. It is true that Gillard needed to do something anyway because her Labour Party governs only with the cooperation of Australia's Green Party, and they have demanded that Gillard do something about climate change.

So the two major non-European carbon tax proposals of the last several years have been instituted when the opposition is weak. Notice also that in one case the opposition has been too far left -- the BCNDP -- and in the other case the opposition has been too far right -- Tony Abbott and his knaves.

Perhaps there is a correlation between extremism and opposition to carbon taxes. After all, conservative Canadian Prime Minister Stephen Harper and Canadian NDP leader Jack Layton have ganged up on Liberal party leaders that have proposed a federal carbon tax. Looks like centrism and pragmatism are so last decade in Canada.

American Electric Power IS the canary in the coal mine..

Used to an industry, coal mining, in which canaries were exploited for their sensitivity to dangerous air, it might be a little ironic to suggest that American Electric Power has become the canary in the most gaseous, noxious, and foul environment of all: climate debate.

Last week AEP announced it will abandon plans to capture carbon dioxide emitted from its relatively new (31 year-old) Mountaineer coal-fired power plant in West Virginia. Having already sunk $100 million private dollars into the CCS project, and expecting $334m more federal dollars, it was a surprise, and yet it wasn't a surprise that AEP backed off. The reason is that it gave up on a childish Congress coming up with any climate plan to price carbon, which CCS needs desperately to be economical.

AEP CEO Michael Morris, originally a lawyer, is one of the most forward-thinking power chiefs in the world. To turn around the biggest carbon dioxide-emitting firm in the world and make it approach the next century as if it will be a carbon-limited one, is like turning an aircraft carrier around on a dime. For the head of the company that could absorb the largest cost of all from carbon pricing to call for carbon pricing, is not just forward-thinking, it is, incredibly, the right thing. A puerile Congress could use someone like Morris.

Australia's carbon tax -- go get 'em, Julia, we're right behind you....

Is it possible to feel sorry for a prime minister who, by most accounts, stabbed her colleague Kevin Rudd in the back to get her job? Well, yes, if you have a soft spot for anyone outside of Europe who proposes a carbon tax, which she has. The fact that she has run out of almost all other political options does detract a bit from the political courage of posting a carbon tax. She, after all, has promised the Green Party something on climate change, and cap-and-trade has already died a Kerry-Lieberman death in Australia.

Australia's A$23 per ton carbon tax is expected to generate about A$28 billion in revenue, about A$9 billion of which has already been earmarked for high-emitting and trade-exposed such as aluminum smelting, steel, and pulpmaking. Coal mining companies will get about A$1.3 billion. The tax level, already higher than historical trading prices in the European Union Emissions Trading System, is planned to rise by 2.5 percent per year, plus inflation, and switch into a cap-and-trade program in 2015 (I guess nobody is talking about that because too much can happen before then).

The volcanic politics of carbon taxes always makes for great politico-watching. A group called the Energy Collective reports that 8000 in Sydney and 10,000 people in Melbourne rallied in favour of the carbon tax, which is more than opposition leader Tony Abbott can claim. Actually, the world should thank Tony Abbott for being such an implausible leader, which is needed for Julia Gillard's move. Sound familiar? It was the then-nonexistence of a British Columbia NDP that gave then-Premier Gordon Campbell the room to maneuver to put in the BC carbon tax. Doesn't that tell us something? That children at both the extreme left and right have opposed the two significant carbon tax programs in the last three years.

Good luck, Julia. We're right behind you....

NO!!!

YES!!!

Better urban transport: equity versus efficiency

Yesterday the New York Times ran a story on how European cities have tried to make driving as costly and difficult as possible to induce people to take transit, walk, or bike. Whereas American cities synchronize lights to make automobile traffic move as quickly and efficiently as possible, some European cities actually sync lights to slow traffic down as much as possible, timing successive traffic lights to turn red just as drivers arrive from a previous stop at a traffic light. I'm in favor of making drivers pay more; it is difficult to believe that drivers pay for all the external costs of their automobile use, even at high European petrol prices. But this idea that cities should impose time costs instead of monetary costs to discourage driving is interesting. Why not just make drivers pay more?

There are several possible answers. First, gasoline prices are already high in Europe. It could be that pricing incentives are reaching diminishing marginal returns for affecting behavior. And if European cities truly want to make inner cores more pedestrian-friendly, then it must by force and not by price drive drivers out of their cars. It must not only be more costly in terms of money but also time to drive into the inner core. The article suggests that some inner core businesses have seen visitorship increase with a more pedestrian-oriented inner core. The second possibility is a little more speculative, but more interesting. Some people are uncomfortable with the idea that if driving is to be reduced, that it be allocated by ability to pay. Why should it be that driving is the privilege of the rich? There are a lot of responses to that question, but suffice it to say a lot of people feel that way and won't be persuaded otherwise. So the idea of pricing driving in terms of time instead of money is something that appeals a little more to this crowd: we are all endowed with pretty much the same allotment of time -- everybody has 24 hours in his/her day, so if driving is time-costly, it affects everybody the same, regardless of wealth. In fact, if wealthy people have higher opportunity costs of their time, a time-price is likely to affect wealthier people more. That might sound good, but giving less wealthy people greater access to driving doesn't actually effect any income redistribution, like a higher gasoline tax could.

A simple way to reduce carbon tax regressiveness

Don Fullerton, Garth Heutel, and Gilbert Metcalf have a paper out, Does the Indexing of Government Transfers Make Carbon Pricing Progressive? There is a widespread perception that carbon pricing is regressive (meaning that it hurts poorer individuals and household more than rich ones), even among economists that study carbon pricing and think about regressiveness. This is almost certainly true to at least some extent, but this recent paper casts a new light on the question: what if we took into account where the poorest Americans get their income from? The answer is, for the poorest quintile, government transfers. The insight in this paper (and an earlier paper addressing this same question) is that when government benefits are indexed to inflation, increases in energy costs that would be disproportionately borne by poorer individuals and households are offset by the benefit increases. For many of those that derive almost all of their income from indexed programs, there is no net increase in burden. That is not a complete answer, of course. As Fullerton, Heutel and Metcalf point out, not all federal US programs are indexed for inflation. For those that are recipients of government benefits that are not indexed to inflation, the regressiveness problems still stands. Which raises the obvious question: what if we just indexed all low-income government benefit programs for inflation? That would go a long way towards solving the regressiveness problem for carbon pricing for the lowest quintile (or maybe the lowest quartile, now).

I raise a couple of other questions about the regressiveness of carbon pricing. First, what exactly do we mean by "regressive"? Do we demand that every quartile, quintile, or decile be progressively better off relative to each quartile, quintile, or decile above it? Second, what do we use to measure wealth? Relying solely on income is problematic, as it fails to account for vast differences in income at different ages -- rich retirees are often wealthy, but have little income, and students often have little current income but prospects of high future incomes (think medical students, business students, and some law students). Third, focusing on direct energy costs exaggerates the impact on poor individuals and households. Low energy prices are embedded in a wide variety of goods and services, and substituting away from many of these goods and services would be invisible to poor individuals and households (think production processes).

This is not to trivialize the impacts of carbon pricing on the poor. But this is a call to avoid yielding to sympathy entrepreneurs that exploit the issue for political gain.

Keystone XL, part II

The Stanley Cup Finals are over, the Vancouver Canucks emerging as the slightly less violent and significantly less effective team over seven games. Some of us supposedly urbane and gentile Vancouverites, however, seem to be trying to make up for the Canucks being the less violent team. Some appear eager to hear the words "Vancouver" and "Detroit" used in the same sentence, in the hopes that the words "Stanley Cup" might also be appear.

The Keystone XL controversy will be much more drawn out, and perhaps violent and riotous in its own political way. Is there any law to rescue discourse on Keystone? Probably not much. Sometimes I get carried away with being an all-knowing economist, and forget to pontificate about the legal aspects of an environmental problem. Such was the case with my recent posting on Keystone XL.

There are, as I see it, four legal factors involved with oil sands development and the necessity of the Keystone XL pipeline: (1) the legal implications of greenhouse gas emissions; (2) the transboundary pollution issues from the pipeline, (3) the local pollution and resource effects of oil sands development, and (4) environmental assessment practices. None of these seem very constraining on oil sands development, except for the last one.

Keystone XL, the oil sands and the Stanley Cup finals

This blog comes to you from Vancouver, on the night that the Vancouver Canucks' Alex Burrows, le Vampire du Quebec, stunned the Boston Bruins with his second goal a mere 11 seconds into overtime. The City of Vancouver, with its ubiquitous car flags and Canucks jerseys, reminds me of Green Bay the weekend of a Packers game; only this isn't a city of 100,000 people, it's a metropolis of two million.

The Stanley Cup finals isn't the only thing that is getting Canadians and Americans worked up about their relationship. Controversy continues to roil the fate of the Keystone XL pipeline, the planned $13 billion pipeline that would transport crude from Canada's oil sands ("tar sands," to some inclined to criticize it), to refineries in the Gulf Coast. Tensions are particularly high after the US Department of Transportation ordered Canadian pipeline builder and operator TransCanada to shut its smaller Keystone 1 pipeline after leaks were detected [NYT story].

The pipeline is the flashpoint for a much bigger controversy: Canadian development of its oil sands in Northern Alberta. This blogger recently toured Suncor oil sands facility in Fort McMurray, a guest of Suncor and Carbon Management Canada, which provides some research funding for this blogger. What I learned on this trip was nothing eye-opening or surprising. In fact, it should surprise no one that Suncor, in conducting some 150 tours a year of its oil sands refinery, is fully prepared for people that are extremely critical of the whole business.

Oversimplifying a bit, the Canadian oil sands industry literally draws bitumen from the oil sands, or the sandy soils of Northern Alberta, which are especially rich in bitumen content. Northern Alberta's oil sands are estimated to contain as much crude oil potential as the world's total reserves of conventional oil. The process requires that huge chunks of earth be dug up, and run through a "upgrading" process in which steam and hot water are used to separate the bitumen from the sand, which is thereafter refined into petroleum and petroleum products. There are a lot of "primers" out there, and what is interesting is that people can disagree vehemently about whether we should be doing this, but they seem to agree on descriptions of the process. This primer by Environment Northeast, and environmental NGO, seems helpful.

Here are a few facts worth knowing about oil sands, some courtesy of the Director of Sustainability for Suncor, who helped lead the tour:

• Although most oil sands facilities recycle water repeatedly, the upgrading process is extremely water-intensive. Suncor's water recycling rate is about 95% -- 95% of the water going into the upgrading process goes back into water that will be used again. And yet, about 2.5 to 3 barrels of water is required to produce one barrel of oil. If water were not recycled, it would require something more like 50 or 60 barrels of water to produce one barrel of oil.
• Suncor, with an old, fully depreciated facility (about 40 years old now at Fort McMurray), can produce a barrel of crude for $30 to $35 per barrel. This is compared to the $5 to $8 that it costs producers in Saudi Arabia to produce a barrel. With oil prices at around $100 per barrel, though, this is a highly profitable business.
• Suncor's direct greenhouse gas emissions are about 0.099 tons of CO2 per barrel. But over a lifecycle analysis, according to Environment Northeast, total emissions are more like 4 tons. This is about 5 to 10 percent more over the lifecycle emissions of conventional crude oil production.

So what do these facts tell us? Is this worth doing or not? And what does this have to do with the Stanley Cup??

It is easy to look at the impacts of oil sands and conclude that this is not worth doing. We are talking about ripping up entire forests and sucking the oil out of it, then trying to put it back. It sounds preposterous. And the footprint is huge: over the 40-year life of the Suncor Millenium facility, about 17,800 hectares have been disturbed. 1200 have been reclaimed. And the water consumption is hard to get around. The current oil sands production output is about 1 million barrels a day, which means it is consuming about 2 to 3 million barrels of water per day.

But that's a little too blithe. As behemoth an enterprise as the oil sands is, it is still a price taker on world oil markets, as everybody is. Shutting down the oil sands will accomplish nothing. And for Canada, it would be extremely disruptive economically.

But what seems more important to observe about the oil sands is that Canadian supply of oil to the US is, on the whole, a much less disruptive relationship than that presented by alternative suppliers, even the second-largest US supplier, Mexico. There is something important about doing something right, and as environmentally disruptive as the oil sands are, my adoptive country is doing it about as well as it can, and undertaking much greater care than any oil producer in the world. If you start thinking about the oppression, corruption, and political upheaval that oil has produced in the Middle East and in places like Nigeria, ripping up huge swaths of northern boreal forest starts to look less and less evil.

And finally, as an American transplant living in Canada, I can say that Canadians are just a little too insecure about what they bring to the table in a bilateral relationship with the US. Some might say that the obsession with oil sands is a manifestation of that insecurity. Alberta Premier Ed Stelmach recently said, "A good neighbour lends you a cup of sugar. A great neighbour supplies you with 1.4 million barrels of oil per day." That's a little clumsy and more than a little self-serving, but there is something valuable about this co-dependency: a reason for the two countries, which share the largest undefended border in the world, to value each other is important for a whole host of reasons beyond environmental and economic ones. It makes possible the positive excitement over a transboundary Stanley Cup, which hasn't happened very often recently. Could you imagine what International Cricket would be like if Pakistan and India actually got along?

Technological innovation that will increase greenhouse gases?

Ralph Winter has a new draft paper out, Innovation and the Dynamics of Global Warming, which warns us that well-intentioned technological innovation reducing greenhouse gas emissions may perversely increase the probability of climate change. This counter-intuitive result derives from two factors: (1) the "rebound effect" of emissions-reducing technological changes, in which emissions reductions are partially offset by resultant cheaper fossil fuel prices and concomitantly greater utilization, and (2) the possibility that in the short term, a rebound could be so severe as to create a "backfire" in which the rebound more than offsets the first-order emissions reductions, it increases emissions. Winter's dynamic model is very interesting. What he has done is model the long-term expectations about fossil fuel prices in the wake of a technological innovation; in his model, if the innovation is significant enough, and the long-term expectations are fully capitalized in fossil fuel prices, the result really could be a temporary uptick in fossil fuel usage. There has been much work on the rebound effect, but Winter's model is unique in incorporating this long-term capitalization effect.

And if there is an uptick, even a temporary increase in greenhouse gases could trigger a positive feedback effect that causes global warming to increase. What is an example of a positive feedback effect? There are many, but one is that warmer temperatures will cause northern Arctic systems to release more methane, which is much more powerful greenhouse gas than carbon dioxide, and which would further warm the planet. This incorporation of positive feedback effects is the other new idea in Winter's paper. What he is essentially saying is that technological innovation, even if it produces a temporary increase in fossil fuel utilization and a temporary increase in greenhouse gas concentrations (carbon dioxide is effectively resident in the Earth's atmosphere for almost a century) could produce a runaway feedback effect that would not have occurred without the technological innovation.

How realistic is the model? It is hard to say. Most rebound effect research seems to find that the effect less than completely offsets the first-order emissions reductions, and that backfire is rare. But much of this research has focused on fairly marginal improvements in vehicle fuel efficiency. What if we are talking about one of these "game-changers" that are supposed to magically rescue us from climate change, like biofuels, that could displace petroleum-based gasoline? A big change in that technology could shake up the energy markets of the world enough to increase emissions. Also, it is worth noting that rebound or backfire should not occur if the technological innovation only came about as a result of a price signal, and not a government subsidy. If a carbon tax were instituted, and technological innovation discovered thereby, emissions would not increase, because the innovation would never have taken place if emitters were going to have to pay more in carbon taxes thereby (I hedge with the words "should not" because I can imagine an exception for those with very low discount rates, but I can't imagine anybody with a very low discount rate).

So let's not go out there and pick winners, ok? Just price carbon emissions.

Direct air capture of carbon dioxide -- more and less than meets the eye

The American Physical Society released a report last week on direct air capture of carbon dioxide by essentially running ambient air over a chemical sorbent that binds the ambient carbon dioxide, thereby removing it from the air and preventing it from warming the planet. It has been pointed out that the advantage of such an approach is that unlike emissions reductions, it can be deployed unilaterally or by a "coalition of the willing" to reduce the ambient concentration of CO2, without having to worry so much about what China or other supposedly climate recalcitrants or doing, making it a "backstop technology." The APS report is somewhat skeptical, having found that the costs of direct air capture to be in the neighborhood of $600 per ton of CO2, but it is quite possibly much less, as University of Calgary researcher David Keith has estimated it to be only 50% more than post-combustion carbon capture and storage. In fact, Keith has issued a response to the APS report that challenges some of the perhaps unnecessarily conservative assumptions made in the APS report.

For climate policy wonks, the development of air capture is heartening in that it offers the potential to insulate the climate change problem from the comedic vicissitudes of domestic politics and international climate negotiations. If this one technology can be developed, then there is no need to have subsequent Monty Python conferences such as Copenhagen, and no need to fret about what other countries do. As I have written, the emissions mitigation question has up to now posed mostly strategic questions; what the US (China) or Canada should do has everything to do with what China (the US and Canada) will do. What if we could avoid these inconvenient strategic questions? Air capture offers not only the prospect of avoiding strategic problems, but also potentially un-doing some of the harm that we have already done. With an effective greenhouse life of about a century, just reducing emissions right now does nothing about the existing stock of emissions, which may already be too high.

But there is still also less than meets the eye. Development of air capture technology and deployment is still going to be costly. One country, or a coalition of the willing, undertaking development and deployment is very likely not going to be a magic bullet to the climate change problem. With development of air capture technology, there will likely be little incentive for countries to reduce consumption to reduce greenhouse gas emissions. Imagine the US (China), sucking CO2 out of the air just fast enough to keep pace with emissions from China (the US). Is that likely to be politically sellable?

For that reason, two things must accompany air capture: a carbon price, preferably in the form of a carbon tax, and a truly global collaborative effort on development of air capture technology. Were a carbon tax in place, then the capture of CO2 from the ambient air would, under a sensible policy, qualify for a subsidy, as a mirror image of the carbon tax. And with global cooperation of air capture R&D, there is not only the prospect of international buy-in, but also better economies of scale in R&D spending. While air capture R&D may not seem worthwhile from an individual country's perspective, that cost-benefit analysis changes if a cooperative agreement to share research is reached, so that the costs remain the same, but the potential benefits are doubled, or trebled, in accordance with the number of countries on board with the R&D effort. That is presumably one driver for a US-China carbon capture and storage partnership between the Pacific Northwest National Lab and the Chinese Academy of Sciences. But even more importantly, a joint global research effort is necessary so that all of the major emitting countries can have some buy-in to the idea of reducing ambient GHG concentrations. For air capture to have a chance at success, there can be no leakage (in the economic sense).

National Wildlife Federation GDP resolution

In its 75th annual meeting in April, the National Wildlife Federation adopted a resolution to urge "the President,  the Congress, and state Governors and legislatures to take immediate steps to redesign the use of the Gross Domestic Product as an indicator of economic well-being, and to take all necessary action to develop and implement in its place a system of economic accounting that gives a more accurate measure of overall economic and ecological well-being..." This is actually not all that radical, nor is it the "game-changer" that Center for the Advancement of a Steady State Economy says that it is. It is a recognition that non-market values are not a part of GDP, and should be, somehow. 

Now, the preamble and the staff analysis National Wildlife Federation fall into the trap that I contend environmental organizations often fall into, that of equating economic growth with environmental degradation. The preambles claim that "GDP misleads [in] ... that it systematically counts costs of ecosystem damage as economically beneficial..." (my emphasis) and that "[some] GDP measures consists of defensive and remedial expenditures that do not contribute to well-being, but instead are directed to repairing or preventing losses caused by economic development...   [as] vividly illustrated in the expense of cleaning up and otherwise remediating the damage from the Deepwater Horizon blowout, explosion and spill, with British Petroleum alone spending $11.2 billion for that purpose, all of which counts as a positive contribution to GDP..." 

Pooh pooh, cleanup costs. This illustrates a profound misunderstanding of very basic economics, even one that this inexpert macroeconomist recognizes: spending money on cleanups does contribute to the economy, even if it is not the way we would like to spend it. The right way to think about Deepwater Horizon is that yes, we spent $11.2 billion on cleanup, but we would really liked to have spent it somewhere else. You don't subtract the $11.2 billion because it is prevention or remediation -- by that reasoning, we should also subtract policing and incarceration costs -- but you can try to count the real costs, including the damage to natural capital. And I think NWF is mistaken in thinking that if this $11.2 billion weren't spent on cleanup, it would not be spent elsewhere. Besides, GDP will not completely devoid of accounting for this tragedy: future incomes from many activities in the Gulf will be diminished. It is just that GDP will not account for all of the losses.

On this score, NWF has actually been quite consistent in its position. It has supported the use of contingent valuation methodology, a way of valuing non-market goods using surveys. It is never easy to describe CVM in a way that is both understandable and yet also does justice to the hundreds of CVM researchers and thousands of research papers that have been done on CVM. Polemicists in environmental law decry the use of CVM, mocking the idea of asking random people on the street what they would be willing to pay to save whales. But it is easier to make fun of things that are hard to do, and easier still to peddle this disinformation to other environmental lawyers that don't understand it at all. It is a lot harder to appreciate that markets work to reveal prices, and harder still to make CVM work like markets. The upshot of CVM is this: it is an imperfect but still developing way of accounting for non-market environmental goods that we still don't know how to count. And if the NWF resolution helps us get there, then all the better.