Tuesday, September 25, 2007

Thinking Through Green

Despite this political appeal, we argue that the standards have a cost in terms of efficiency and effectiveness. In particular, we show that an LCFS [Low Carbon Fuel Standard] limiting carbon emissions per unit of energy (the energy-based LCFS) can achieve the first best outcome only under unrealistic assumptions. Moreover, we find that, contrary to the stated purpose, an LCFS can actually raise carbon emissions. Additionally, we show that the second best LCFS—from a regulator’s perspective—“under-taxes” all fuels and may require a nonbinding standard, i.e., the optimal standard may be no standard at all.

That is an excerpt from
a working paper by Stephen P. Holland, Jonathan E. Hughes and Christopher R. Knittel. Reading through the simulated economic effects of environmental policy ideas becomes a difficult exercise. On one side, most everyone admits the externalities from carbon emissions exist and most likely harms long-term global climate. However, dealing with such global issues hardly warrants a “magic wand” approach to the problem.

No one policy can solve all problems. Moreover, having one policy simulated in best-case scenarios with maximum restrictions in place is not only improbable, but also unrealistic. Not even environmental regulations are always efficient. This is where policy fails us.

Once again, what we are seeing in the Low Carbon Fuel Standard is an attempt to affect the free-market. We try to adjust the market so that people favor low carbon fuels, but this essentially makes the price of low carbon fuels so low, that the public uses the fuel to the extent that we end of polluting just as much as we were before.

There is a caveat however. Fore example, giving a corporation a tax break that realizes record profits is not necessarily a logical maneuver economically, albeit logical politically. Luckily, if you did not know, congress has rescinded on those tax breaks. Such tax breaks are of the same ilk as subsidizing already profitable farms.

And if you think policy is the only place where we can get it wrong on the environment, you might need to think again. As Warren Brown recently wrote in the Washington Post, what do we do when the time comes to dispose of the large batteries that come in hybrid vehicles? What are the real costs of the entire hybrid vehicle from its length of life, to its ability for salvage and/or disposal? Rather, would it not be more efficient to simply purchase a small economical gas engine vehicle?

Instead of having these questions of policy and “green” life style externalities answered, and instead of having facts and numbers discussed, the public sees a grandiose delusion about how to “help” the environment. What happened to the good old days where reducing, reusing, and recycling were key elements in not only helping the environment, but also being efficient?

If you read Warren Brown’s article, you’ll understand what he, many others, and I have been saying for quite some time now. The public is simply not ready to discuss the real costs of reducing our use of oil, which would best come by the way of a gas tax.
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