The American Taxpayer, Insurer of Last Resort

No, I am not talking about Ted Cruz's display of heroic idiocy (even by Congressional standards), but I am referring to a more subtle, and bipartisan sellout of the American taxpayer: the potential reversal of National Flood Insurance Program reform, a program that takes in $3.6 billion in premiums but pays out $25 billion (actually the Treasury pays it, which is of course, YOU). This blog does not often link to The Weekly Standard, but this week's piece castigating members of both parties ready to undo last year's reforms is right on the money. Bloated millionaires with beach homes that have been reconstructed several times at taxpayer expense is so outrageous, the economics of it is the least offensive part. This is small potatoes compared to health care, but this is what a Tea Party insurrection should target: the most inequitable, most wasteful, and most immoral wastes of taxpayer funding. For the dismal environmentalist in me, this is not just recurring environmental insult, rebuilding expensive beach homes in sensitive habitat, it is taxpayer insurance against one of the ravages of climate change. Why should I, millionaire beach homeowner, care about climate change if YOU, American taxpayer, will bail me out? Alas, the monosyllabic wing of the Republican Party is more interested in green eggs and ham.

American Agriculture Kills People

It was a busy news week last week for environmental lawyers, with the EPA releasing a proposed rule for regulating greenhouse gas emissions from power plants. But another important release last week escaped attention: the Centers for Disease Control released a report on the causes and effects of antibiotic-resistant bacteria infection in the United States. This is a narrower analysis than an earlier World Health Organization report in 2012 that found 63,000 deaths in the United States and 25,000 deaths in EU states plus Iceland and Norway, resulting from antibiotic-resistant infections. The emergence of new bacteria demonstrating resistance to antibiotics is likely due to the overuse and misuse of antibiotics. The CDC study estimated, conservatively, that over two million Americans become infected each year with antibiotic-resistant bacteria, with 23,000 of them dying each year. That is more than the approximately 21,000 people Americans who lost their lives as passenger-vehicle occupants in 2011.

Why do I say that it is American Agriculture that kills people? Isn't it over-prescription of antibiotics that is causing antibiotic resistance? Former Food and Drug Administration commissioner David Kessler reported in a 2012 New York Times op-ed that 80 percent of 2011 reported antibiotic sales went to agriculture, not human health care. Exactly how antibiotic overuse translates into antibiotic resistance is complicated -- different pathways exist for human and livestock transmission of antibiotic-resistant bugs -- but not that different, and not that complicated.With 80 percent of antibiotic use going to livestock growing, certainly more than half of the antibiotic resistance must be the result of ag use. Actually, a better guess is that more than 80% of the antibiotic resistance comes from ag, because they are applied to livestock in a manner that most contributes to resistance, being administered in low doses. David Kessler's estimate of the percentage of antibiotics destined for animals seems on the mark, with Wired.com reporting the same figure. The CDC report does not estimate the percentage at all, just blandly and lamely stating that "[a]ntibiotics are also commonly used in food animals to prevent, control, and treat disease, and to promote the growth of food-producing animals." Clearly, fear of the bullying ag lobby runs deep.

It is a shame that physicians over-prescribe antibiotics. But at least that is a matter of public health. Antibiotics to promote growth, so that chickens can cost pennies less, at the cost of 23,000 American lives a year, is not a shame, but a national tragedy.

Clayton Kershaw, humanitarian

I digress. I will not only digress from being either an environmentalist or an economist, but I will give you a break from my dismal nature. This post is about my favorite baseball player on my favorite baseball team, Clayton Kershaw of the Los Angeles Dodgers. Kershaw is not only having a remarkable (even for him) season, with his ERA at 1.92 more than a quarter of a point ahead of Jose Fernandez of Miami, he is receiving awful run support from his team (3.6 runs per start 68th out of 88 pitchers), something he has never complained about. He  seems to be embarking upon a string of success that has him being compared to Sandy Koufax during his unmatched six-year run. Taciturn Joe Torre glowed about Kershaw: "He's always learning something." Kerhsaw's perfectionism no doubt drives his success as well as his humility.

But Kershaw is not my favorite player because of the way he carries himself as a professional and a baseball player. In 2012, Kershaw became the youngest recipient of the Roberto Clemente award, given to the baseball player that has distinguished himself as contributing to society outside of baseball. This year, he received the Branch Rickey award, also in recognition of his humanitarian work. In 2011, Kershaw's wife Ellen convinced him to go to Africa with him to help in her cause, to help Zambian children orphaned by AIDS. To hear her tell it, between his relentless pursuits to get pitching and training in during the trip, he became wholly engrossed in the cause of helping these children. Kershaw has continued his work with Arise Africa, as part of his Kershaw Challenge fundraising efforts. Most recently, he hosted a ping-pong tournament, in which many of his teammates took part.

If you're dismal, this is a puzzle: why does the best young pitcher in baseball (who still wants to lead in the grueling race to be still better), devote as much time and effort as he does to helping orphaned African children? It's not even as if he is doing something that has a remote chance of ever redounding to his benefit: he is not helping out a teammate, a baseball player, an Angelino, or even an American. The Kershaws are not helping people in any "group" that they would conceivably be a part of. If the Kershaws had never happened upon the cause of helping African orphans, they would be no different.

If you're not dismal, then you can just enjoy this bit of philanthropy inside professional baseball, which very much needed a story like this.

Milton Friedman is Dead, Long Live Milton Friedman! Rand Paul doesn't know that Milton Friedman died seven years ago

Kentucky Senator Rand Paul is often mentioned as a Presidential candidate, and he is clearly and actively campaigning despite his official line that he is not yet running. He is starting to realize that he has to also be, in addition to fiery and opinionated (on Secretary of State Hilary Clinton, "If I had been president...I would have relieved you of your post.") somewhat knowledgeable to be President of the United States. He took a step backward on that score, in a recent interview on Bloomberg News, when asked by Joshua Green on who his ideal Federal Reserve Chairman would be:

Green: Who would your ideal Fed chairman be?
Paul: Hayek would be good, but he’s deceased.

Green: Nondead Fed chairman.
Paul: Friedman would probably be pretty good, too, and he’s not an Austrian, but he would be better than what we have.

Green: Dead, too.
Paul: Yeah. Let’s just go with dead, because then you probably really wouldn’t have much of a functioning Federal Reserve.

I know, I'm an economist, and Friedman is, even if many economists disagree with him, still an economic icon. But if someone is running for President, a self-proclaimed student of Hayek and von Mises, that person should know that the great American icon of limited government, Nobel Laureate Milton Friedman, is dead! Paul not knowing that suggests to me that he is still getting his economic advice from non-economist, ideological, political hacks. Not good for someone who seeks to lead the largest economy in the world.

By the way, as a native New Jerseyan, I have to boast that Friedman was also a native of the Garden State: a 1928 graduate of Rahway High School, and a 1932 graduate of Rutgers University.

Do you want to pay a carbon tax or a higher tax?

On Tuesday, President Obama announced that he has ordered EPA to develop a new set of greenhouse gas emissions regulations for power plants, which commenters have guessed might actually mean power plants and other emitters as well. Certainly, it will include new and existing power plants (which have never before been even discussed as a target for greenhouse gas regulation), and my guess it that the EPA will have its hand plenty full without trying to expand its list of enemies.

As I have continued to stump for a carbon tax, it has become clear that messaging has to be directed at politicians that do not believe climate change is actually happening. There are plenty of Republicans and fossil-state Democrats that say they don’t believe the science is settled, but don't believe it, but do feel like they cannot antagonize Tea Party voters that will punish heretics. The new stump speech has to be oriented at providing cover to those who know a carbon tax is the right thing, but are afraid of a challenge from Tea Party candidate who is adroit enough to avoid use of the word "rape" in a sentence.

Part of my new stump speech is this: the Clean Air Act is not going away. The Obama Administration has set a timeline that will pretty much ensure that regulations will be in place by the time he leaves office. The key to that is the deadline June, 2016, by which date states will be required to submit their State Implementation Plans required under section 110 of the Clean Air Act. After that, you can bet that the new EPA regs will be here to stay.

President Obama did not reveal any details of what the new regulations will look like, a bit of a disappointment to environmental organizations. But it is clear that the new regulations will include a New Source Performance Standard for new power plants and a regulation for existing power plants as well, the latter being the most controversial part. The new regulation will be a rate standard, requiring that power plants emit no more than a certain rate of emissions per Megawatt-hour, and most watchers believe that the standard will be something like 1,000 pounds of carbon dioxide per Megawatt-hour. There will also likely be a threshold emissions amount, below which a power plant would not be regulated, and if the tailoring rule is any indication, that threshold emissions amount be 25,000 tons of CO2 per year. If all of the above turns out to be true, then there will be approximately 1,000 power plants that will have to do something to comply with the regulation (plants that emitted at least 25,000 tons of CO2 and emitted CO2 at a rate of more than 1,000 pounds per Megawatt-hour.

Interestingly, the President said he has directed EPA to make use of market base instruments in implementing the new rule. What that means is unclear, but it is probably not cap-and-trade, since that is likely not authorized by the Clean Air Act. It could involve some other form of emissions trading, such as allowing permits to be bought and sold to enable individual emitters to comply with the regulation.

How might that work? It is not unprecedented, as EPA had, earlier in its history allowed trading to achieve compliance. EPA's bubbling policy did not seem to offend any legal strictures under the Clean Air Act.

My guess is that the policy will involve emissions trading, but not cap-and-trade, at least not in form. Firms emitting over 25,000 tons of CO2 will have to get their emissions rate down to 1,000 pounds per Megawatt-hour, and they will be able to buy credits to meet that. That is, the emissions rate, measured over a year (that is my guess as to the relevant time period that EPA will set), is just the calendar year emissions divided by the electricity generated during that same calendar year. If a plant emitted 25,100 tons of CO2 in a year, and generated 50,000 Megawatt-hours of electricity that same year, its CO2 emissions rate would be 1,004 lbs/MWhr, over the limit by 4 lbs/MWhr. It cannot "buy" 4 lbs/MWhr, but must instead buy the 100 tons worth of credits necessary to get its rate down to 1,000 lbs/MWhr. My guess is that an emitter would be allowed to buy the credits to get it below 25,000 tons for a year and therefore out from under regulation altogether; that could potentially allow some small but super-dirty emitters to continue to operate for a relatively small tax.

Oddly enough, this could, under some perfect market assumptions, amount to something like cap-and-trade after all. If we assume that there are no transaction costs, and we assume that there will be trading as long as the price of credits is greater than zero, then this program amounts to cap-and-trade. Here is why. Just imagine now that the CO2 emissions and electricity produced from 2009 are fixed, and will be the same in some future regulated year, say 2018. In 2009, there were 1011 plants that emitted over 25,000 tons of CO2 and at a rate exceeding 1,000 lbs/MWhr; 483 below that rate. The total emissions from those 1,493 plants was 2,395,790,827 tons, or about 2.4 Gigatons, or about 4.8 trillion pounds of CO2. Total electricity generated by these plants was 2,777,582,189 MWhrs, for a total, 1493 plant-wide average of 1,725 lbs./MWhr. Something's gotta give in order for all 1493 of these plants to get to 1,000 lbs./MWhr. Some will have to cut back, some will switch to gas, and some will use carbon capture and storage (maybe), but there cannot be enough buying and selling to get everybody under 1,000.

If we assumed that no plant became more efficient in terms of CO2 emissions per MWhr, and we assumed that the exact same amount of electricity produced in 2018 as in 2009, then it would be a straight cap-and-trade with the cap at 2,777,582,189 MWhrs x 1,000 lbs = 2,777,582,189,000 lbs, or 1,388,791,095 tons. That's a reduction of about Gigaton off a baseline of 2.4 Gigatons.

But here is the catch, and it is the big one: if combustion can be made less carbon-intensive, then there could be an increase in emissions. Imagine a natural gas-fired power plant in emitting below the 1,000 lbs/MWhr rate (natural gas-fired power plants generally do) and generating electricity. Such a plant would have excess credits to sell. What if it doubled in size? Then it would have twice as many credits to sell. It could then turn around and sell those credits until its rate creeps up to 1,000 lbs/MWhr. Notice that nothing in this scenario happened except one natural gas-fired power plant doubled its capacity, and all of a sudden the cap is looser.

This has been just an exercise. There are lots and lots of rules and adjustments that EPA would make, many of them to address the problems highlighted by this blog entry. We have seen a lot of them before in the Clean Air Act Amendments creating the sulfur dioxide cap-and-trade program. The upshot is that this is going to be a very complicated piece of regulation, putting a lot of lawyers to work. As a law professor, I guess that is good news. For the rest of you, it is a tax.

Now, does a carbon tax start to sound better?

Fishing in Massachusetts, Coal-mining in West Virginia

Ed Markey, the climate activists' putative hero, is running for the Senate seat vacated by the new Secretary of State John Kerry. People always think Massachusetts people are strong environmentalists. Even Republican governors William Weld and Mitt Romney (as governors) enjoyed respect from environmental quarters.

Is it really true that the people of Massachusetts are so much more environmentally enlightened than the rest of us? Recently, Massachusetts Attorney General Martha Coakley (remember her? It was her race to lose to replace Ted Kennedy, and sure enough, she lost it to Scott Brown) sued the National Marine Fisheries Service over severe reductions in catch limits for cod, haddock and flounder, because they failed to recover as much as had been hoped.

Why do you think that the stocks did not recover? Could it be that the fishermen-dominated forecasts made by the regional fisheries council might have been overoptimistic? No, it couldn't be that. It is just an invidious and "callous disregard for the well-being of New England fishermen" that will lead to the "extinction of an industry that for more than a century has been a part of the commercial and social fabric of New England...."

According to Coakley, the new limits are based on "shaky science" and "fail to consider economic impacts on fishermen." Shaky science -- sounds like the climate deniers from the hills of West Virginia. Is this just Coakley, never the sharpest knife in the drawer? Well, John Tierney (D-MA) says "NOAA has pushed through this regulation and put our historic fishing industry at risk." Democratic governor Deval Patrick supports Coakley's suit. It was Tierney and Barney Frank, remember, who called for NOAA Administrator Jane Lubchenko's resignation because she sought to lower catch limits. Of course Tierney and Frank know more about fish stocks than Lubchenko, an accomplished oceanography professor.

And Ed Markey, the environmental savior running for Senate? Earlier this year, Congressman Markey lobbied hard to get NOAA to allow fishermen to carry over unused quota from 2012 to 2013. Why didn't fishermen catch as much in 2012? Perhaps there weren't enough fish left to chase. Undaunted, Markey lauded "[t]hese steps will soften the current economic blow for Massachusetts fishermen, but we still have a great deal of work to do if we want to help our fishing communities survive."

This questioning of the science, this political attacking of anyone who threatens your marginal industry, looks a lot like climate deniers from coal regions. But you can understand sort of understand, in a cynical way, why politicians from West Virginia line up against climate change. There really isn't a lot else going on economically in West Virginia. But why does the Massachusetts delegation always go to bat so hard for their fishing industry, an industry that has long past fished itself into oblivion?

On Fracking, the Obama Administration, and Climate Change

Greenwire reported recently that Rep. Rush Holt, a physicist and a Democratic Congressman who represents the district in which I grew up in New Jersey, has complained that the Obama Administration's disposition to hydraulic fracturing, or "fracking" on BLM land is overly generous to the oil and gas industries. He has a point. The federal government may lack the jurisdiction to do much regulating of fracking on non-federal lands (see work by my FSU colleague, Hannah Wiseman), it certainly can require firms on fracking on federal land to comply with construction standards and disclose fracking fluids. A rule released last year for fracking on BLM lands was withdrawn after industry complaints that it was going to be too costly. Really? A seminar paper written by one of my law students, Kaitlin Monaghan, dissected the cost-benefit analysis undertaken by the BLM in arriving at its rule. She found that the cost-benefit analysis was fundamentally biased against environmental values. In the analysis, the BLM assumed that the environmental benefits of regulating -- of either/both requiring construction standards and disclosing fracking materials -- consisted of the costs of, in a "low damage" case (only contaminating one or a few wells), just the cost of drilling a new well. In other words, the BLM assumes that it would be costless to leave for dead an existing water well, as long as it was "small." In a "high damage" case -- extensive contamination of a large aquifer or other groundwater source -- the BLM assumed that the cost was remediation of that water source. Missing from that benefit accounting is the harm that would occur between the time of actual contamination and the completion of the remediation. Would people be harmed by consumption of that water in the meantime? Would there be any interim loss of use by farmers or other water users? Would there be any ecological harm in the meantime? The BLM's answer would apparently be "nope."

I've often wondered, beyond Dick Cheney's "Halliburton exemption" if the Obama administration really was a little too sweet on fracking. Why would that be? My guess is that with the failure of Congress to pass federal greenhouse gas legislation, with failing efforts to construct any meaningful international regime, and with the reality that even if the United States manages to reduce its reliance on coal (not a done deal) other nations may not (the European Union has seen an uptick in coal consumption), the Obama administration has quietly decided that natural gas is the carrot they will offer other countries to reduce their greenhouse gas emissions. Combustion of natural gas emits about half the carbon dioxide per unit of energy produced as does coal, and has been frequently, sometimes over-enthusiastically, as a "bridge fuel." So, if you can't get China to reduce its carbon footprint using sticks, how about using carrots? Instead of futilely browbeating the Chinese into weaning itself from coal, why not export cheap natural gas? In the United States, the fracking revolution has accomplished what decades of political fighting has not -- induced electric utilities to switch from coal to natural gas. Fair enough, but there are limits to the carrot approach. Coal is already pretty cheap, so introducing natural gas as a cheaper fuel has its limits. There is always this pushing-on-a-string problem with trying to induce desirable behavior through carrots instead of sticks.