The real crisis

a perhaps dim non-economist question: what kinds of spending causes the GNP to shrink? is it sending money out of the country? are there ways of spending money domestically that cause it to “vanish” in some fashion? or is this more a matter of an increase in production that will fail to happen because of climate-related restrictions?

ah, thanks. it seems that’s also assuming that those goods and services can’t be provided in a less carbon-producing form (how much energy as such they use is not necessarily the same as how much CO2 they put out). or is it the very fact that they aren’t, for example, burning oil that makes their market value lower?

Didn’t Russia finally ratify the Kyoto Protocol in part because the post-Soviet contraction meant they’d reach their 2012 target much more easily? If so, maybe there’s a clue for us here: a long, deep recession (almost the consensus view now) might cut carbon emissions somewhat more than the half-measures taken to date.

So, just because we’re distracted by bad financial news now, and will be distracted even more by bad economic news in the coming months, doesn’t mean that the climate “crisis” (more about those scare-quotes below) is going to further elude resolution for lack of attention. If anything, the economic crisis might provide some breathing room for more policy discussion.

Yes, I know: even if all GHG emissions stopped tomorrow, there’d probably be warming for a century just from what’s been put in the air. Yes, I know: the economic slowdown is not going to make a very big dent in on-going emissions, and to the extent that, say, China puts off investments in energy efficiency because of the slow-down, it might even be a wash. All I’m saying is, from a climate policy point of view, there’s a significant silver lining here.

As to “crisis”, what Gore called a “planetary emergency”, although I believe anthropogenic global warming should be addressed with all deliberate speed, calling it a “crisis” only plays into the denialist rhetoric, especially when they speak of “global warming hysteria.” You can argue that these wingnuts matter a lot less now — even if McCain somehow gets elected, U.S. climate policy will shift. But … “crisis”? Is it wise to call it that?

For many years in the software industry, after a 1968 NATO meeting of the greybeard geeks of the day, people spoke of a “software crisis”. Then, one day — I can’t remember who first said it, but somebody did: if you’ve had a crisis for a decade or more, and the far-from-perfect situation is still manageable, why call it a crisis? Why not just call it the status quo? And here we are today, with software projects still failing left and right, still being delivered very late and very buggy, with software engineering pundits still decrying bad practices, but somehow we’re all using much more software than ever before, we’re even (sorry to stretch so far here) getting stuff done with it.

AGW isn’t a “crisis” — it’s a reality, to be coped with. Coping with it will bring unintended consequences, both negative and positive, probably for the rest of our lives, and afterward. There will be specific related crises along the way, but AGW is not a crisis in itself, but a condition.

Finally, although I’m receptive to arguments that developing energy infrastructure takes too long to be considered efficient stimulus, I’m also receptive to the argument (made forcefully by Paul Krugman among others), that the recent trend is for recoveries to be long and jobless, so maybe we can think of 4 years (or more) as no longer being too long in Keynesian “triple-t” terms: it’s temporary enough, it’s timely if we start now, and to the extent that it yields energy efficiency improvements and/or lower carbon emissions costs, it’s reasonably targeted.

In short, the economic crisis now gathering may be more, much more, than a silver lining (from reduced emissions through reduced overall consumption.) If it yields the right stimulus programs, it won’t be so bad having re-employed people back in their cars, burning gasoline, driving every day to jobs — IF those jobs help build a less fossil-fuel-intensive future. The current crisis might be a bonus — an historic opportunity to stimulate economic growth in the short term in ways that have long-term climate benefits. But I’d leave it to economists and energy policy wonks to assess the candidate programs and run the numbers — after all, I’m neither an economist nor an energy policy wonk, I just play one in blog comment sections.

The financial market collapse also provides a useful example for climate change discussions with respect to assessing risks and valuing the costs of their potentially dire consequences. Investment Banks’ collusion/denial enabled them to rationalize away the risks of borrowing and lending on dodgy assets, succumbing to default swaps’ false sense of security (as well as a fallacy of institutional permanence), but they apparently never faced up to the hard reality of costing out the risk of the impending systemic failure.

On the other hand, this analogy also encourages a problematic tendency in this area to monetize all the associated costs/benefits. It’s one thing to focus on economic valuation of greenhouse gas mitigation strategies; it’s quite another to reduce large-scale disease, death, and displacement (when modeling such outcomes) to a monetary scale.

The good discussion here would be even better if it included peak oil and defined it along with climate change as aspects of the Bottleneck E.O. Wilson forecast humanity would have to pass through in this century. (Note also that California is about to ration water.) The Bottleneck recasts the entire debate -and reveals that most economists and policy wonks simply are working with the wrong metaphors/paradigm to see what is unfolding. They’re are not stupid; they’ve got an invalid view of nature underlying their interpretations of data.

Insufficient attention is paid to the role national character will play in the climate crisis. America is a nation that is powered by emergencies. Its citizens lacks the prudent, responsible character to make incremental adjustments to avert future problems. But once an EMERGENCY is declared, anything is possible.

Thus, for anwers to the climate change problem we will very likely have to rely on crash programs and deus-ex-machina salvation schemes of the type described in the current issue of Scientific American:

http://www.sciam.com/article.cfm?id=geoengineering-how-to-cool-earth

Our descendants will likely live or die according to the outcome of these trillion-dollar high-tech geoengineering projects, and there will be very little room for error.

Correctly valued, that is, taking into account the cost of carbon emissions, the value of output for the world as a whole will increase.

Slight quibbly caveat that you probably already know, but that’s only true if the price of carbon under the new regulatory regime more accurately reflects the cost of risk/cleanup than the current “zero” price.

That’s exceedingly likely, of course, but if we overshoot the correct price by a lot or design our regulation badly enough to cause other deadweight losses, output could well decrease even under a more correct valuation.

“I want to again propose a large tax on fossil fuel.”

I guess. I don’t have the same strong objections that I would have to a trading scheme. But really, there are only two kinds of users of fossil fuel, industrial and consumer. You can encourage consumers to make marginal changes, but really, they use whatever infrastructure is available to them. That infrastructure is almost never decided on by the market.

Industrial users — well, large uses are almost all heavily tied into the political-economic system already. You don’t just build a coal-burning power plant or a large petrochemical facility without a whole lot of consultation with government. So why not just make the necessary changes by fiat? Why pretend that these are market decisions when they really aren’t? No government in its right mind is going to leave provision of basics like electricity to the market, so why maintain this fiction?

Rich, there’s a lot of small industry that doesn’t get much direct government attention. We could reward them for taking initiative to solve our problems.

Why pretend that these are market decisions when they really aren’t?

Because we want to pretend they’re market decisions?

If we put an extra direct cost on fossil fuels, alternate energy gets a boost. Fossil fuel prices will still go up and down a lot but the floor will be higher. That’s good for alternate energy.

Energy conservation gets a boost. Everything that consumers do to conserve energy (from fossil fuels) puts money in their pockets. They’re more likely to do it for the money than for patriotism or for the ecology.

Changes we make by fiat can get unmade by fiat pretty quick. So we don’t want to make those into political issues. Instead create political issues that people can understand.

I strongly disagree with noen. If we assume that stupid voters will shout down anything we do, we will be beaten before we start. Instead we need to frame the issues.

Point 1: We must not be dependent on foreign fossil fuels. Oil-producers are mostly not our friends. There will be much much less oil left within 20 years. *Alternate energy is homland security.*

Point 2: It is patriotic to use less fossil fuel.

Point 3: And we have to fix our balance of trade.

Point 4: And for that matter we can do our part to reduce global warming.

Point 5: Let’s reward patriots who use less fossil fuel.

It shouldn’t be called a tax, that pushes all the wrong buttons. Hmm. OK.

Point 6: The Patriot Relief Program rewards patriots who use less fossil fuel *and* on average it costs consumers nothing. It uses the magic of free markets to reward patriotism.

Everybody will agree that we need to import less oil. It’s in the national interest. It’s good to reward people who use less oil.

Now, it’s easy to tell how much money everybody gets from the PRP every month. It isn’t easy to tell how much of the prices they pay come from PRP collections from fossil fuel companies. In reality, the average mean voter will not be affected. Some fraction of voters will win and some fraction will lose, and we can’t tell how big those fractions are without a lot of information that’s hard to collect. But if it’s patriotic to conserve fossil fuel, then the majority of voters will believe that they are patriots who conserve fossil fuel better than the average voter. So they will believe that they get more out of the PRP than they’d get without it. People will mostly ignore the costs hidden in things that happen to use fossil fuels to make stuff they buy, and will instead focus on gasoline prices. People who drive SUVs, rural people who have to drive long distances, and texans will feel they are unfairly treated. Basicly, that’s hard-core Republicans who will oppose anything that comes from Democrats or from bipartisan efforts. These are the voters we can most afford to alienate.

For everybody else, the argument against the PRP is “We want to stop sending you money every month because we claim when we do that the prices you pay for gasoline etc will go down so much you’ll be better off.”

And what voters will hear is “We want you to have less money — and market magic will make you better off.”

If the good guys can’t sell this, they might as well give up and invade iran.

Meanwhile, make whatever fiat decisions you think are best, and likely the public will ignore them while they’re arguing about which kind of magic market fairy dust works best. And PRP *will* have positive effects beyond your fiat choices which can also have positive effects.

I don’t want to argue about framing — the whole fascination with framing in recent years has brought approximately nothing to the left, as far as I can see. I don’t think a green tax, carbon tax, whatever, is really likely to work in most places. It just didn’t with the whole Canadian Green Shift thing.

Instead, there’s a whole world of infrastructural decisions that most people have no involvement with and that are therefore susceptible to fiat. Electricity generation, automobile design… sure, you can say “Changes we make by fiat can get unmade by fiat pretty quick”, or ” Governments are not, generally speaking, in their right mind” but in fact, these decisions once made are hard to unmake in the short term. Once you’ve invested in a 30-year-lifetime power plant you don’t just change your mind next year. Once you’ve replaced your gas stations with electric power plug-in ones, or something, you aren’t going back in less than decades. Global warming activism assumes that it’s possible to make governments agree to do something by treaty, based on pressure from their constituents and from technocratic knowledge, and the easiest thing to get them to do is to change their long-term infrastructural decisions. Even at the local level, the most effective kinds of things are those like changing building codes to specify greater insulation.

In general, the fascination with bribing people into individually doing the right thing seems to me to be a weird convergence between doctrinaire market-worship and eco-idealist voluntarism. I don’t really like either of them. The government is the means by which our society addresses society-wide concerns of this type, and getting individuals to do individual things either because you’re mystically aligning their costs with societal ones or because you’re calling on them to volunteer seems like evasion.

In general, the fascination with bribing people into individually doing the right thing seems to me to be a weird convergence between doctrinaire market-worship and eco-idealist voluntarism.

Well, why don’t you get yourself into a position to help do things by fiat, and meanwhile the guys who want to argue about market worship etc will tend to help give you cover.

When you can do the right thing without needing people to sign petitions and go on marches and write letters to their legislators etc, then go for it! Meanwhile the more the media circus focuses on something else, the better.

I think what I want to do can do some good and what you want to do can do some good. Neither of them needs to interfere with the other at all. If it turns out that your approach does some good while mine does not, I don’t think I’ll get in your way the least bit. So please don’t argue against me unless you have some reason I shouldn’t continue.

“When you can do the right thing without needing people to sign petitions and go on marches and write letters to their legislators etc,”

But I can’t. Doing things by fiat involves first convincing elected politicians that they should be done.

As for whether approaches would interfere with each other, I can’t say. As I wrote above, the Canadian Green Shift just had a big electoral test, and failed. My guess is that carbon taxes are going to be a loser everywhere, but obviously I don’t know.

“There are things you could do that might cut your gasoline costs in half, and then you’d save $50/month.”

But here’s where I think this analysis fails. I don’t think that people really can cut their gasoline costs in half. Yes, I know that this is just an example, but the rhetoric later — “you can do whatever you want with that check” — implicitly depends on this being a big number.

My guess is that there is limited elasticity in gas usage, and we’ve already seen most of it just from market rises in price. Most of the rest is infrastructural — people have to drive their cars to get to work — and people can’t do anything about it individually, or over short timescales. So it just becomes a regressive tax.

I once helped with a paper that showed, if my vague memory is correct, that you could get something like a 10% efficiency gain out of U.S. coal-fired electricity generating plants if you just put more modern turbines and other equipment on them. Just think about the amount of effort needed to do that versus the communal effort and hardship needed to get people to drive 10% less overall. There’s no comparison.

A tax does have an effect. I don’t deny that. My problem is quantitative: how much of a change does a tax at a particular level have?

Let’s suppose that we want to cut our carbon emissions by 20% over the course of 20 years. (I think that’s not very ambitious, and almost certainly not enough to prevent disaster, but let’s just start there for the sake of the argument.) How should I set the tax rate to achieve that? Would a 100% increase in the cost of filling my gas tax be enough to convince the average American to cut driving by 50%, as you suggested? I have no idea. I don’t think anyone has any idea. I don’t know how we could even begin to guess whether a gasoline tax should be 10% or 100%.

Two questions for whoever may have a response:

1) Given the economic crisis should Obama cut back on his spending plans, e.g., regarding health care, carbon emissions, and alternative energy or should he go full steam ahead, possibly more, in the name of Keynesian stimulus?

2) If the answer is Keynes (as I think) to what extent should he monetize the resulting deficit?

Matt, I think what I want to do should not be called a tax. Maybe it would be better to call it a tariff.

The intention is to raise the cost of fossil fuels, without actually reducing the average ability to pay. So if your fossil-fuel expenses are up 500% but you have money from the government that pays 400% of it, you *can* just go ahead and pay for it. But you have a much bigger incentive to find alternatives than you did when it cost only 1/5 as much.

I can’t predict how much it would help or how fast it would help because so much of the desired improvement would come from innovations. Find ways to get what you want at reduced expense. More use of existing bicycle lanes? More use of motorcycles with trailers or sidecars? Improved motorcycle designs? Small light-weight cars? Electric cars for short trips? More cogeneration, use waste heat for multiple purposes before letting it waste away? I don’t know what to expect.

I wouldn’t expect people to make giant sacrifices. If the government paid you directly to cut your gasoline use in half, how much money would it take for you to agree to that? $200? $500? $5000? I doubt we could pay enough, unless there were adequate alternatives.

But alternatives tend to languish because when oil prices go high and they get investment money, always we get a period of relatively low oil prices and the alternatives don’t look so good. Why should we let them get whipsawed like that? Put a tariff on fossil fuels large enough to give alternatives a better chance and alternatives will have a better chance. When the price goes low it won’t go as low.

A tariff on fossil fuel is kind of like a subsidy for alternative energy, except we don’t have to decide which alternatives deserve the subsidy. And when we give the money back to voters it doesn’t hurt voters, on average, the way a tax would.

So if the price of gasoline goes up 200% you can spend your windfall money on gasoline or else economise and spend it on something else. If the price of wheat goes up 30% but rice only goes up 10%, then eat more rice if you want to, or else pay the increase. If Pokemon cards go up 50% but Yugigo only 30%, switch if it’s worth it to you. This sort of inflation won’t hurt you much when you get your share of the tax money.

We need to transform our economy into one that doesn’t use much fossil fuel. We don’t exactly know how to do that now, so we must find out how. One of the parallel approaches we should use involves trying to make the things we want be actually profitable once they’re developed.

Tariffs on fossil fuels should start out as something reasonable, say 50%, and go up gradually so they don’t shock the economy. They shouldn’t go up too fast, I’d guess no more than 15% per year, because it’s unkind to squeeze too hard on the people who use lots of fossil fuel. Give them a chance to move to get new jobs, move to new homes, take up new hobbies, etc. If they get impoverished too quick they’ll be way too bitter.

When do you stop increasing the tariff? It hardly matters, but I’d say you could start decreasing it when fossil fuels are mostly not being burned. If we have good alternatives we’ll keep using them even if fossil fuels get cheaper than their maximum. And voters won’t much mind because their handouts will already have been cut way down with the reduced fossil fuel use.

Since the issued are how much the tariff should start at, how fast to increase it, and when to start decreasing it so it will make an acceptably-small shock and will encourage innovation, we don’t have to predict what the maximum rate should be to get some particular reduction in carbon emissions.

Re: 34 The demand for gasoline is more elastic over a longer time frame. Basically demand for gas is roughly a function of price and the car you drive (because it’s really a demand for miles driven, gasoline being just an input into the production of miles). In the short run you’re more or less stuck with the car you drive and the miles you have to drive are pretty inflexible as well (commuting and such). So you don’t respond much to changes in price. With time however – if high gas prices persist – people DO buy more fuel efficient cars and even reduce their total demand for miles.

It’s been a long, long, while since I looked at the exact estimates, but I’m still pretty sure that a 100% sustained increase in gas prices would not be enough to reduce gas consumption by 50%. However, it would put a non insignificant dent in gas consumption. I was a bit disappointed to see 2.07$ a gallon gas today.

Re: 32. You know, this is why some otherwise intelligent people often don’t take this stuff seriously. Too much (stupid) noise in the signal to noise ratio.

“So, I may not understand why you need elected officials for this one. Your regulatory people can just by fiat say that all the new plants have to have modern turbines etc. ”

I think that you answered this yourself further down, but, as Delong says in a different context, the Cossacks work for the Tsar. Regulatory people don’t do anything that the chief (elected) executive doesn’t want them to do — at least, not without being sabotaged. All three scenarios (change via trading scheme, change via carbon tax, and change via fiat) depend on there being the political will necessary to implement them.

I should say that I don’t like quotas either. The thing to do is to fund infrastructure via normal taxation, and change what industry can build via regulation. If you told car makers that “every new car in the U.S. must be an electric car or, at least, a hybrid” and put out the infrastructure needed to support that, then people could drive all they want.

Regulatory people don’t do anything that the chief (elected) executive doesn’t want them to do—at least, not without being sabotaged.

Sure, but for that all you need is President Gore. The president supports the regulators, the media thinks it’s boring and pushes public attention onto something unrelated, congress does nothing, and the GOP blames the regulations for high energy prices no matter what the prices happen to be.

If you told car makers that “every new car in the U.S. must be an electric car or, at least, a hybrid” and put out the infrastructure needed to support that, then people could drive all they want.

If all you wanted was some arcane regulation of already-regulated utility monopolies, I think it would work fine. But if you tell people they can’t have internal combustion engines a lot of them are going to respond like it was gun control. Don’t go there.

We’ve tried convincing the voters your way. The GOP said there’s no such thing as global warming, or if there is it isn’t human-caused, and any attempts at fixing global warming are really intended to destroy our standard of living. So better to do nothing while we wait for new data. On the whole people believed in global warming right up to the point they might have to make some kind of sacrifice. Then they decided it was better to do nothing while we wait for new data.

Kind of like tobacco smoking. Reputable scientists said smoking tobacco had various bad health effects, and tobacco-industry scientists said it wasn’t proven. How long did it take to convince the majority of smokers? Thirty years?

If you need more than the president, you need an argument people can accept. I say they will accept that national security requires that we must become energy-independent, and we can’t do that with our current energy consumption and our known domestic fossil fuels.

The public can accept a market solution. A tax on people who use more fossil fuel that’s given to patriots who use less fossil fuel *makes sense*. If the result is that within a few years people can’t afford to drive their old non-hybrids, that’s just market forces at work.

Meanwhile we can do whatever regulatory approaches make sense that aren’t too visible. And if they do get visible we already have a consensus that national security demands we get energy independence. That will help.

Also, market approaches have to fail for regulated monopolies, that are allowed profit proportional to their costs. You have no choice but to control them by regulation because market forces do not work on them.

Arguments are easy when you assume your conclusions!

The Australian Treasury presumably has detailed arguments about this. If they did *not* include the hidden costs of continuing environmental destruction, then the result of changing that would be even better than they concluded.

I think a lot of the trouble with this report will turn out to come with their extrapolation to 2050. At that point we’ll *have to* have adequate alternatives to continued emissions, because otherwise we won’t have a lot of fossil fuels left to pollute with.

So if you assume a good alternative then we won’t lose much by switching to it a bit early.

But if we don’t find a good alternative then in the absence of environmental problems in either case we’re looking at an australian per capita GDP of maybe $500 in one case and $700 in the other. (I made up the numbers, but think about how you’d make them up yourself — with little fossil fuel for international trade and little fossil fuel for australia to use, and no good alternative fuel, how much better could you do than the aboriginal culture?)

So here we are, the australian government has looked at the problem and drawn their conclusions. If you want to disagree, why not look at their reports and see what there is to disagree with?

Australia is actually planning to use this study for policy. If you find important flaws in it, you’d be doing the australian government a big favor by telling them just what you found that was wrong.

When railroads came in, the canal operators didn’t argue that railroads would be too expensive. They just watched in shock and horror while the government subsidised railroads heavily and drove the canals out of business. Why can’t our oil companies be more like canal companies?

I still think that this scheme would probably end up being regressive simply because poorer people are forced to use a larger percentage of their income on fossil fuels than rich people.

If 100% of the proceeds are distributed evenly, it isn’t poor people who get hit hardest. It’s poor people who use more than the average amount of fossil fuels.

Small numbers of rich people who use more than their share won’t sweeten the pot that much because there are so few of them. Business use of fossil fuels wouldn’t be compensated, they would be expected to pass their costs on to consumers. So poor people who buy more than their share of energy-intensive products would be hurt.

Middle-class people who live in poorly-insulated homes in cold climates will be hurt. They might wear sweaters or look for ways to add insulation, or move. Middle-class people who have extra-long commutes would be hurt. They might do more aggressive car-pooling and look at the possibility of moving closer to their jobs etc. Bus lines might find some opportunities here. Light rail, whoever has a solution that might alleviate that pain.

It’s hard to come up with approaches to encourage people to change their behavior, while at the same time making sure they are no worse off at all if they fail to change their behavior than if they do. But my approach comes close. If you use no more fossil fuel than the average, you have the choice to take the PRP money and spend it to buy the same things you would have bought before. The extra cost will balance out with the PRP money, and you won’t lose anything. It’s only people who use more fossil fuel than the norm who would suffer, and only until they find ways to use less. Once they are using less than the norm they will get a net increased income from the PRP.

Virgil, after this Presidential campaign and the last eight years, this quote is more funny than you can possibly imagine:

I full well realize that to ask the majority of those who post here to take off their leftist, statist, ideological lenses long enough to face reality, is a near impossible dream, but hey, what’s a heaven for?

He who stands in shit should talk it a little less.

“Why can’t our oil companies be more like canal companies?”

Because, unlike the railroads, alternative sources of energy—even with heavy Govt. subsidizes, cannot provide energy at prices or with efficiency (energy per unit/volume) anywhere near the costs or efficiency of coal and petroleum.

You have not thought this out.

Canal companies were quite efficient, not counting their sunk costs. The problem was that canals had to go where they were going, and not where you wanted them to go. Railroads could go anywhere provided you could build the tunnels and bridges.

But coal and petroleum are dying industries. When the coal and oil are gone, they’re gone. Gone. Officially, US oil reserves are enough to last us something less than 1000 days. But in reality it’s less than that. There was a time when we burned one barrel of oil to pump a hundred barrels out of the ground. Now one barrel burned will get us ten barrels, and it’s getting worse. Our three years of reserves are less than they appear.

And our oil companies have had a hundred years to create hidden subsidies. Why would alternate energy companies be able to compete at getting subsidies against that head start?

Without alternate energy what can we do? We could sink into a new feudalism. The serfs and soldiers that a prominent owner accepts get whatever perques he gives them, and the rest of the population get whatever they can steal.

Fossil fuels are *dying*. If we want a future beyond them we have to create it. Try to create a future and fail, and we’re no worse off than if we didn’t try. Because riding the fossil fuel wave all the way down is a lot worse than keeping your investments in canals.

Virgil, are you perhaps an old man? I can see you not caring what happens after you die. But the australian government is rightfully considering actions that will affct them in 2050. And in 2050 the choice won’t be between oil and alternate energy. The choice will be between the best alternate energy we can get, versus australia’s ability to grow firewood.

(That isn’t quite true as australia has enough coal to last 280 or so years at current production rates. Australians could cook their food over coal fires and heat their houses with coal and run their buses on coal etc. But over the next 50 years exports will likely increase dramatically. And coal would have to make up the loss of the oil. Australia currently imports around 45% of their oil products, and they’d have to do a lot of substitutions. Would australia use up 280 years of reserves in 40 years? Maybe not. OK, I was stretching it to talk about firewood for australia. It sounded good. But the point is still basicly true.) Fossil fuels are dying, and we might not need to die with them.

Well, the first thing is that what matter is the relative price of gas, not the absolute one. In other words it should be adjusted for overall inflation. If you got it in levels you need to deflate it by a price index like the cpi, and if you’re doing it in logs (which is where you get the elasticity) than inflation needs to be subtracted off. This would basically mean that the changes in gas prices, once adjusted, have not changed as much which would push the elasticity up (and there is a discernible negative slope in that graph). Basically, this would also mean that there’s hasn’t been substantial sustained increases in price.

J Thomas:

Oh, I’d thought out the rails-could-go-anywhere bit alright, and that’s EXACTLY my point; rails were a distinctly measurable improvement over canals immediately–as opposed to alternate energy sources NOT being a measurable improvement in the here and now or even in the near future as compared to coal, gas and nuclear–even taking environmental costs into account. Will/should we begin to transition? Certainly–only I differ from most here as to timing and method–and I am exceedingly wary of the “administrative fiat” style approach which easily can morph into the sort of permanent command-style top down solutions that have proved so disasterous everywhere they’ve been tried. Statist solutions are always beguilingly attractive on the front end, but history has proved that in most cases they have ended up as ossified bureaucratic, inflexible nightmares forever behind the power curve.

Walt:

The fact that personal invective is always the last refuge of a scoundrel aside, perhaps you should visit a site named “Greenie Watch” run by John C. Ray, an Australian PhD
out of Brisbane at: http://antigreen.blogspot.com Read the 2 Nov Posts and then, if you’ve the time, scan back as far as you’re thirst for knowledge and open mind will allow you–you just might learn something outside the lefty paradigmatic universe which you obviously inhabit and find comforting.

Given that you start out insulting everyone who disagrees with you as living in a bubble, Virgil, I’m guessing that it’s never occurred to you that the scoundrel comment may apply to you. And given that you just linked to a page quoting “facts” directly contradicted by the vast majority of the world’s climate scientists, I’m guessing that it’s never occurred to you that the bubble comment applies to you as well. Consider the virtue of self-reflection, Virgil. You may learn something.

Walt/

Vast majority? Really, EZACTLY how many, Walt. I think when you drill down beneath all the verbiage you will find far fewer than the number being bandied about, and most of those are not in the climate field per se, but are computer modelers. Just for starters, what of the initial article itself ? (2 Nov) Do you dispute any of the historical record cited? You’re pretty vague, Walt, just how DOES one explain the complete absence of glaciation on Greenland in the days of the Vikings? Very few SUVs or coal fired power-plants around then, n’cest pas? SOoooo—if it was much warmer then than it is now, how come, how come, how come? Any ideas? Or did all the Viking long-ships have really smokey outboard engines? Most of the really “serious” scientists (and perhaps I should work up an annotated bibliography
for types like you) tend to think the phases of Sun are the prime mover in all this,
but I wouldn’t want you to get “blinded by science”–let alone the Sun.

J Thomas:

But we already have proven nuclear tech in front of us with pebble-bed and molten salt
tech now abuilding in China, so why not let a Government bureaucracy with an impeccable nuclear tech safety record like the US Navy staff, run them and supervise construction? As for CO2, the very thing vital to all life on earth and that we exhale?

I think AGW is insignificant in the sum of things and attachment of all too many to this over-hyped theory based on highly dubious science plays in the desire of those on the left enamored with socialism. (And remember, the world’s worst “polluters” have been the Communist ones. All this “cap and trade,” BTU tax etc., planning is only going to drive industry to places like China who are not going to limit emissions anyway with the net result of the loss of jobs AND more, not less, pollution of all kinds. Already German industry spokesmen are warning that proposed new EU regulations will drive the entire cement industry overseas–but then I guess many on the left would see that as a fine excuse to advocate the initiation of “World Government” wouldn’t they? I mean, after all, pollution IS a world-wide trans-national problem, is it not? Except, of course, the PRC might have something to say about that–unless, of course, THEY were in the driver’s seat.

As for peak oil? I’m actually MUCH more worried about the overfishing of the world’s oceans (about which their is REALLY no doubt) and peak phosphate production (by-by Agriculture–I pointed out here elsewhere an excellent article on this over at The Oil Drum the other day.) Compared to these two far more immediate, potentially REALLY catastrophic trend-lines, our worries about coal and oil are as of nothing–unless, of course, we stupidly restrict our ability to generate power
and bring this nation (and the world) to it’s knees before we bring true substitutes on line(about which is an entirely separate discussion.)

Well, the first thing is that what matter is the relative price of gas, not the absolute one.

For this reason, I normalized the price of gas by the median household income. This seems like a natural and effective normalization. Over the period 1998-2007, the cost of 1000 gallons of gas went up from under 3% of the median household income to almost 6%. Yet average household consumption stayed essentially unchanged (2007 consumption is within 1% of the 1998 consumption).

Also, since total demand for gasoline would be a function of both population and income, then it would be a function of aggregate income not median income as in the graph.

It is not clear to me what you are arguing here. If your point is that average income should be used rather than median income, then I find it unreasonable. However, in any case, using average income would produce very similar results, since the changes in those measures over the period were very similar (data).

The entire discussion about climate change is pointedly ignoring the nuclear elephant in the middle of the room. – It would be trivial – Expensive, but very straightforward – to crash our CO2 emissions far below the targets of kyoto in five years if we replaced all our fossile fueled nuclear power stations with nuclear ones.
More importantly – This complete replacement of the use of fossile fuel for the grid can be accomplished essentially for free, although rather more slowly, if the government simply stops issuing licences for the construction of new fossile fuel power stations. The experience of France says that a standardised fleet of nuclear reactors has per kwh costs equivalent to fossile fuels, including capital costs, so if we replace every powerstation that goes offline due to age and obsolesence with a reactor, this will reduce our carbon emissions with no extra costs what-so-ever, and it is pure idiocy that we are still burning coal. (coal kills orders of magnitude more people every year than chernobyl ever will)
And as a bonus, there is no risk of running out of uranium anytime soon – including reprocessing, the mining +seawater reserves are good for thousands of years of powering the entirety of the planet, and after that, breeder reactors can last us another 20k years..

Basically an individual’s demand for gasoline would be something like:
G_i=a*I_i*(p_g/p)^b so total market demand is G=a*I*(p_g/p)^b so in logs
ln G = a + b1*ln I + b2*ln(p_g – p)
or in growth rates
%dG=b1*%dI+b2*%d(p_g-p)=b1*%dI+b2*%dP-g-b2*inflation

so b2 would be the elasiticty. But you gotta subtract of the inflation rate. You can change it around and let the income elasticity differ by level of income or allow for different coefficients on price of gas (p_g) and the price level (p) – which is partly how you can get varying estimates – but inflation’s gotta be in there.

“the complete absence of glaciation on Greenland in the days of the Vikings?”

Really, seriously, how do you expect to convince anyone of anything when you go around making crass statements like that?

Read a detailed account: http://www.archaeology.org/online/features/greenland/

Life there was hardscrabble, confined to coastal settlements – much like where they came from in Norway, where there were plenty of glaciers, just as there were in Greenland then, too. Their connections back to Europe kept them alive: “the Greenlanders exchanged live falcons, polar bear skins, narwahl tusks, and walrus ivory and hides for timber, iron, tools, and other essentials, as well luxuries such as raisins, nuts, and wine.” Polar bears, narwhals, walruses… Not exactly subtropical fauna is it? And they had to get timber shipped in…

The earliest-known trolls were viking trolls, no?

It’s all starting to fit together!

The thing about models like this is that they are essentially pre-Keynesian, with no demand side effects. Now, you might believe that demand constraints are relevant to short-run fluctuations but that long-run growth is governed by entirely different factors. But given a more natural (and empirically supported, AFAIK) view that demand constraints an lower output in the long run, tehre is simply no reason to believe that the type of policies described in this post should lead to lower GDP at all. In fact, in a Keynesian world, where output is consistently below capacity, it’s entirely possible that *both* regulating emissions and shifting toward a less carbon-intensive economy, *and* dregulating and shifting toward a more carbon-intensive one, would raise measured GDP. Simply because any structural shift, if it’s sufficiently far-reaching and expected to persist, will devalue lots of fixed capital and encourage/require major new investment.

Of course I recognize the rhetorical value of saying that even in the most conventional economic framework, the costs of emission reductions are low. But if our goal is actually a better understanding of the world, I don’t see why we should adopt a framework that says demand doesn’t matter, output is always at full capacity over the long run, and the problem of economics is simply the allocation of scarce resources.

I’d like to congratulate Virgil Xenophon for a neatly executed Gish Gallop and encourage everyone else not to feed the troll.

HTH HAND
Luke

Re 43

Middle-class people who have extra-long commutes would be hurt. They might do more aggressive car-pooling and look at the possibility of moving closer to their jobs etc.

You’ve identified why this will be so politically problematic. In the US, road systems, housing, shopping, school systems and the like are all premised upon automobile usage. A carbon-tax will not reverse those infrastructural facts quickly or cheaply. Many middle and lower income people live far from their work because that is where they could afford to live. Slapping a carbon tax at the federal level will not make mass transit appear out of nowhere, or expand access to it where it exists at limited levels. Moving closer to work when rent/prices there become even higher (because of the carbon tax will make them more desirable) will be harder to do.

By contrast, putting modern turbines into new plants won’t do anything about the old plants that still have 20 years left. However, subsidizing the cost of turbine replacement in all plants, if it reduces emissions by 10%, could yield better outcomes than placing a carbon tax on lower-income people who need to commute 30 minutes.

Giving carbon-tax money back won’t necessarily reduce emissions — indeed, it could off-set them. If I pay-out $100 in the carbon tax and get back $200, I can now go and consume another $100 worth of emitting activities and be no worse off financially. To be effective, the carbon-tax must be onerous, or rather, more onerous than conducting business as usual. And that is what raises political hackles.

The Australian study cited above requires a 27% reduction in per capita output by 2020 under the CPRS−5 scenario. For the US, Canada, and Australia, this means annual reductions in CO2 output of roughly 2.6% over 12 years. That’s not horrendous, but it is not easy either.

“Your belief in the existence of a formulation that produces “precise results” is wholly unjustified and is simply a product of indoctrination. In reality any formulation offered would be a very simplistic description of reality, and any claims at being precise are nothing but pretension.”

Well, I don’t really want to argue about this but it’s not like we’re positing some super meta theory of human existence and action but are merely talking about how responsive is gasoline consumption to the price of gasoline, once one controls for other things. And basically your results are going to be more “precise” – in the sense that you will be able to predict future changes better – the more adequately you control for other things. And the main other thing here is overall inflation.

“It is unclear why you believe your formulation is any more “precise” than a simpler model that does not involve the need to measure CPI”

And the reason that the main other thing here is overall inflation is because what matters for how much gasoline people consume is not just the price of gasoline but the price of gasoline relative to other goods in the economy. If inflation of everything else was 100% while price of gas stayed constant then that would’ve meant that gas has gotten really really cheap in relative terms. But it doesn’t have to be CPI, basically any average of % changes in prices of other consumer goods will do. Arguing about CPI in this context is just a red herring. So yes, if your example held (prices of other goods (inflation) and gas prices both change by same amount, then your graph would be accurate. But if prices of other goods change at a different rate than gas prices then that matters.
Also, as you point out, if b1=b2 then you get essentially your version. But that doesn’t mean my version’s arbitrary, just that is more general. If in fact, b1=b2 in the real world, then controlling for inflation wouldn’t matter and you’d get the same result.

BTW, so are you using real median or nominal median income? If the price elasticity is constant then you can write the demand for gas either as
ln G = ln (I_real) + a ln (P-P_g)
or as
ln G = ln (I_nominal) + b1* ln (P_g) + (b1-1)*ln(P).

But either way, non gas prices are in there and they got to be controlled for.

so are you using real median or nominal median income?

I used nominal (current) dollars throughout.

non gas prices are in there and they got to be controlled for

Yes, I imagine that if non-gas prices decreased dramatically that could have somehow increased gas consumption by giving the household more available income to spend on gas. In reality, of course, this did not happen.

If inflation doesn’t matter […]

Of course inflation matters, but, again, the reliable, reasonable normalizer is not the CPI but the median household income. Taking the ratio between two nominal dollars quantities washes out any change in the value of the dollar.

demand for gas is a) downward sloping

I do not see any negative slope in the graph. Again – a 2x increase in the real cost of gas (as measured by ratio to median income) since 1998 – produced essentially no decrease (less than 1%) in the household consumption of gas.

I do not doubt that if gas price is, say, $30/gallon, consumption will drop significantly. However, this would involve very serious hardship for the average household. As things stand, there are no easy substitutes for driving.

Sortition, I get the impression it’s hard for economists to understand consumer logic. I’ll try to explain. I’m kind of like homo economicus myself, and I’ve studied my wife who is not.

Say I’m shopping for groceries with my wife at the nearby grocery store. She picks up a can of Spaghettios. I say, “Put that back, we can get it for thirty cents cheaper at WalMart.” Knowing me, she says “But Walmart is 6 miles farther away. That’s an extra 12 miles round trip. And you only save 30 cents. Anyway, it isn’t the same stuff.” And I say, “No, the kids like the WalMart kind more, the sauce has less tomato and more sugar. And I’ll buy two dozen cans and save money. And if we get cheese and bread at the same time that will pay for the extra gas. And if we go the special way I found we save three tenths of a mile both ways.” And she says, “You don’t know how the traffic and the lights will go. You optimise the things that are easy to measure and not the things that are important.” And I have to admit she’s right.

So, my car gets about 20 mpg. That isn’t enough money to justify a new car that got better mileage. I burn about 25 gallons a month. Until recently that cost me about $100/month, but now that’s down to more like $70/month. If I think about driving an extra 12 miles, that costs around $1.50. I have to balance what it costs versus the benefit I get. So I think it out carefully. I arrange triangle trips, when I go in one direction I try to go all the places I need to in that one trip. (Buying frozen food needs to be one of the last things.) I pay a little more to drive less. But my wife doesn’t think that way. If she wants to go to Fresh Foods etc she just gets in the car and goes. Then if the car gets low on gas she expects me to fill it up. It just isn’t worth it to her to figure out complicated plans that will probably save me less than a dollar a day. And neither of us thinks about the indirect costs, the tires that wear out faster, wear-and-tear on the car, etc. Those are hard for me to measure. Should they add up to 50 cents a mile? I don’t know, easier not to think about it.

If gasoline cost me $20/gallon then I’d think differently. At a dollar a mile I’d be much more careful driving long distances or extra trips. If I went to Walmart or Costco I would find people who wanted to carpool with me. It would be a big inconvenience. I would take the shuttlebus more, unless its price went up too much. I would walk more. I’d think carefully about a car that got better mileage — except at those prices I couldn’t afford one.

If I paid $20/gallon but the government gave me $400/month to spend as I pleased, I *might* just spend $500/month on gasoline and not change anything else. Or if I could lease a car for $250/month that got 40 mpg, I might do that and use half the gasoline. Or I might change my habits considerably. I pay more attention to $500 than I do to $70.

My wife doesn’t like to pay attention to sums of money that are too small. I tell her if we’re very careful and we save $20/month then over the years it will add up. She isn’t interested. But when it’s more money she notices. If gasoline cost $100/gallon but we had an extra $2400 a month to spend on that or on anything, she would get interested in a bicycle or a moped etc. Even though we could keep living exactly the same way, using gasoline would have a great big opportunity cost that it doesn’t have now.

But it wouldn’t work to send everybody enough money to let them buy the same amount of gasoline they buy now. And it wouldn’t seem fair to the people who already conserve it. It would be simple and fair and almost-workable to send everybody the same amount. But then the people who use a lot of gas would be hurt badly.

So anyway, people using gasoline make some big decisions — where to live, how far to commute — that are hard to change. And they make little decisions — one more trip to the grocery store etc — that are individually trivial. And the difference between spending $50/month and $100/month for gasoline is only critical for the poorest people who drive. If your take-home is $1000/month the difference is $5% of your income. If you can’t afford an extra $50/month you can’t really afford a car. So it’s no big surprise if that price doubling had little effect.

J Thomas,

Your description makes a lot of sense to me (btw, I am not an economist, I am a statistician). It shows how woefully simplistic are concepts like “elasticity”. They may still be useful (in the operational sense, at least – what would be the reduction in gas consumption if it is taxed at $5/gallon?), but taking them seriously enough to talk about “precision” can only be explained as a product of indoctrination.

Some comments regarding your last paragraph: As the data I linked to above show, the average American household uses almost 100 gallons of gas per month. Thus the difference between, say, $2/gallon and $4/gallon is about $200/month. This is a non-negligible part of median household income. In fact, the data show that over the period 1998-2007 the cost of gas increased from taking about 3% of the median household income to taking over 6% of the income. Again, this is not a negligible change, and yet, consumption did not decrease.

As I wrote above, I don’t doubt that if the price is high enough (making 100 gallons of gas cost as much as 20% of the median household income) people will consume less – the point is that this is going to be a very painful situation for many people. It is also going to allow the rich to keep polluting. Thus, the carbon tax is not fair and not as effective as a quota system. Your government rebate proposal is much better than a simple tax since, like quotas, it guarantees that every person will have enough money to buy a certain amount of gas.

reduction in gasoline consumption has to be achieved through a direct or indirect rise in gas prices.

… or a direct or indirect reduction in the price of gas substitutes, no? Or no changes in prices at all, but changing the factors that make gas a very strong complement to other goods, most importantly housing.

Yes, at the margin there’s some scope for reducing gas consumpton by scheduling trips mroe efficiently, etc., like J Thomas likes to (and his wife doesn’t.) But for the most part it probably doesn’t make sense to think of people as consuming gas, as consuming a package that consists of housing plus car(s) plus gas. In which case even a doubling in the cost of gas may increase the economically relevant price by only a few percent.

But for the most part it probably doesn’t make sense to think of people as consuming gas, as consuming a package that consists of housing plus car(s) plus gas. In which case even a doubling in the cost of gas may increase the economically relevant price by only a few percent.

Lemuel, consumers don’t behave like completely rational economic entities, and so we should design our strategies to take advantage of their economic behavior.

I feel like it would be patriotic for me to buy a Prius, or possibly an american hybrid. But it would cost me a lot of money, and it wouldn’t save me that much in the first few years. My father bought a Prius and the second year he had an accident that totaled it. He replaced it with a different car. How much gasoline did he actually save buying his expensive car?

If gasoline cost me a lot of money, and I also got a lot of money from the government to make up for it, I’d have both a much stronger incentive to buy a new car and also a much stronger ability to do so.

Similarly, I live in a condo and the association pays for the natural gas. Every year they complain more about the cost and tell me they have to raise the rates. But if I use more, it isn’t just the other 9 families in my building that pay for it, it’s the other 90 families in the other buildings. I’ve given very little thought to improving the insulation in my unit. If that cost was *mine* and taxes increased it a lot, I’d certainly look into ways to reduce it — particularly if I had the money that could go either into paying for heat or for paying to use less heat.

Consumers pay attention to the consumption they get billed for. The closer the relationship between the actual product consumed and the bill, the more they notice. In the best case, consumers have both high enough prices to get their attention, and high enough income to invest in alternatives. That’s the case I want.

It could be argued that free market forces will automatically optimise everything. But I don’t see that free market forces will automatically provide the right discount for future events. It’s right to distort the economy away from fossil fuels because first We’re going to run out of them in short order, and second
They release too much CO2, and third
Alternate energy is homeland security.

notsneaky,

And again, if it shouldn’t the data will tell you so there’s no extra (well, like an epsilon) cost to doing it.

As I already mentioned, the list of things you could add to your list of regressors is unlimited – how about the cost of public transportation? or the weather? Adding regressors is not cost free: at the very least it makes the model more opaque. It is much more difficult to understand a three-dimensional graph than a two-dimensional graph. It is also quite likely to increase the uncertainty in any parameter estimate in your regression.

It seems like you’re resisting this only because that elasticity would increase and that goes against your pre conceived notion.

Hardly. My educated guess is that running the regression with or without an additional term for income this will make little difference: CPI adjusted median income hardly budged during the period (less than 2% increase). For ln G to stay fixed while p_g – p increases by a factor of 2, b1 in your formula would have to be equal to about -log_1.02 (2) x b2 or about -35 x b2. So if b2 were even, say -0.1, b2 would have to be 3.5, which would be very hard to believe.

The reason I am “resisting” is that I find it a bad idea to run models without considering whether they make sense – the statistical machinery often obscures rather than illuminates the issues. In fact, as you probably noticed, I didn’t even run a regression for my proposed model. I prefer to let the data speak for itself.

By the way, I listed all the data sources in the linked post – you are quite welcome to run various regressions yourself. I think you will learn very little.

Well, “less than 1%” is still a negative slope.

Clutching at straws, aren’t we? Beyond the obvious fact that 1% could easily be within the noise in the data, even if we assume there is no noise 1% decrease in consumption over a 2x increase in price would imply elasticity of log_2(.99) = -0.015.

If you slap some quotas on gas consumption what do you think that’s going to do? Particularly with a very price inelastic demand? Raise the prices.

According to the standard model, what would matter here is the supply curve – you would in fact expect a decrease in the price of gas, the size of which would depend on the elasticity of supply.

no one’s claiming that that elasticity is on the order of unity

You, above, claimed that elasticity is about 0.58 and one of the papers that you linked to claimed 0.6. John Quiggin said that he believes elasticity is in the 1-2 range. This is what I call “order of unity”.

the variation in relative price of gas, or in “real” price of gas, or in “inflation adjusted” price of gas simply hasn’t been as large as the variation in the dollar price of gas

That is true, but I have not used “the dollar price of gas” – I have normalized the gas price by median household income. It is this ratio (which, btw, tracks CPI adjusted gas price very closely) that made a 2-fold increase over the decade. As I already explained, I think it is clear that adjusting by median household income is safer and more reasonable than adjusting by the CPI, but for the period in question it doesn’t matter – those two adjustment turn out to be very nearly the same.