Friday, January 25, 2008


Recently I attended a forum on the possibility for local growers to sell agricultural carbon offsets to the Chicago Climate Exchange. Besides the possiblility of extra income, cabon credits would encourage the use of no-till, which preserves the soil structure, reduces runoff and water pollution, and improves biodiversity within the soil. Reduced tillage practices also imply a decrease in fossil fuel use ( it takes much less fuel to no-till corn than to run plows and harrows through the soil). Another environmental benefit of no till is that it favors the use of biotech crops that have superior environmental benefits. Crops resistant to glyphosate herbicide, and those that express the Bt insecticide trait are ideal in no-till situations, and require the use of fewer or no toxic chemicals.

Carbon credits represent a serious approach to climate change policy. As renowned climate economist William Nordhaus states in his review of the Stern Review on Climate Change “proposals resulting in increased fuel efficiency for cars, requiring high efficiency light bulbs, subsidizing solar and wind power ..are largely fluff.” Fuel economy standards can actually have lethal side effects. The National Academy of Sciences 2001 report on CAFE standards estimates that the lethal impact of CAFE related changes in automobile designs resulted in the loss of 1300-2600 lives per year.

Carbon credits effectivly put a price on carbon, which sends a signal to consumers about their ‘carbon footprint.’ Higher carbon prices would provide the incentives for the type of technological change necessary for dealing with climate change.

Wednesday, January 23, 2008


The following link will take you to a video- commentary from scientists and poor subsitance farmers in developing countries.

© 2007 Monsanto Company. All rights reserved. The copyright holder consents to the use of this material and the images in the published context only and solely for the purpose of promoting the benefits of agricultural biotechnology.

I know this is a corporate sponsored site, so critics will have their biases, but I think the testimonials speak for themselves. If ever there were a consensus about global warming, the scientific consensus about the improved safety and benefits of biotech crops more than corroborates the positions held in this video.

While politicians are making political hay with a potential global warming crisis, ( with warnings about food shortages, droughts, etc.) there is very little press about the role biotechnology can play in dealing with not only future changes in climate, but the billion people in the world today living on less than a dollar a day.

Tuesday, January 22, 2008


Carbon taxes are the method preferred by many economists with regard to combating climate change. The other alternative would be a Kyoto style cap and trade system. Both methods can be structured to capture the value of the estimated externality of carbon emissions ( the negative effects of climate change). I tend to favor a cap and trade system, but there are problems with market volatility, and rent seeking. (however there is still a lot of money to be made by favored businesses from regulating carbon, even with a tax).

The problem is balancing the economic costs of policy today today with the economic and ecological benefits of reduced climate change in the future. This can be approached by determining just how to value any negative externality associated with carbon ( or any greenhouse gas). This is not done easily.

This value is estimated by Nordhaus ( Using the DICE-2007 model, and based on the science of the IPCC Fourth Assessment) at about $30/ ton, with the average person in the US generating about 5tons/yr, for a total of about $150/year, or .09 /gallon of gas and .01/kwh for electricity. However, according to Nordhaus, the Stern Proposal for reducing global warming estimates the damage from global warming to be closer to $300/ton carbon for the next two decades. It would reduce the estimated damage from global warming by $13 trillion, but at a cost of $27 trillion. In this case we are looking at increasing gas with a $1.20/gallon tax.

There are also proposals to give vouchers to low income people to compensate them for the increased burden of the tax. But, one of the greatest tools for fighting poverty ( and environmental degradation in many cases) is economic growth and technological change. We should look critically at which policies provide the best science based trade-off.

Note: Nordhaus' findings can be found in his report:
The Challenge of Global Warming: Economic Models and Environmental Policy, William Nordhaus, Sterling Professor of Economics, Yale University 2007.

Thursday, January 17, 2008


If we accept the IPCC 4th Assessment Report as consensus, we get the following conclusions:

9/10 experts agree humans have net warming effect p.4

We are 66% certain human influence has been enough to affect storm patterns p.6

We are 50% certain humans have affected heatwaves and droughts p.6

We are 66% certain we will see drastic climatic events ( cyclones, storms, droughts) p.8

There is a 90% chance we will see increases in temperature extremes p.8

*Probabilities defined on p. 3 of introduction of actual report.

The U.N. Intergovernmental Panel on Climate Change's 4th assessment report (2007) predicts that the sea level may rise between 18 and 59 cm (~ 7-23 inches dividing by 2.54) by 2100 (p.13, summary for policy makers).

So, according to the major consensus view, there is still quite a bit of uncertainty about the effects of global warming, and these consequences are predicted to be much milder than “sea levels rising by more than 20 feet with the loss of the shelf ice in Greenland and Antarctica, devastating coastal areas worldwide” as depicted in ‘An Inconvenient Truth. While this may happen, the time frame is over thousands of years as opposed to the ‘consensus’ view for the next century.

What economists must do then, is take this consensus science into account, and approximate what the price of carbon should be to limit economic damages from CO2. This level will be achieved where the marginal cost of reducing carbon emissions is equal to the benefits of decreased damages from climate change in the future.


Wednesday, January 09, 2008

EXTERNALITIES: Holes in Markets

In previous posts I’ve discussed that when resources become scarce prices rise and they are used in a way that is more sustainable. I also noted how free markets incorporate the consideration of future generations when resources are used. The conclusion is that free markets are consistent with the optimal use of resources, and the crisis mentality that calls for massive government intervention is unfounded. Many critics of this position claim that there are many ‘holes’ in markets that call for government action.

Theoretically, many holes in arguments for markets have been described as negative externalities or commons problems. An example would be the consumption of pork. In producing and consuming pork, the producer and consumer may not take into account the impact that a concentrated animal feeding operation may have on air or groundwater pollution. It would appear that in this case a negative externality exists because there is a divergence between the private and social costs of producing and consuming pork.

Whenever the cost of one’s behavior is not factored into a price by which a choice can be valued, a commons problem or negative externality exists. As Coase (1960) and Demsetz (1967) point out, with the establishment of property rights and markets (bargaining) the externality of the commons can be internalized. Behavior is changed or altered to account for the negative impact our choices impose on others. This framework, part of what is known as the Coase Theorem, closes many of the holes in arguments for free markets.

Relating to our pork example, if negative externalities exist, it is due to the fact that there are poorly designed property rights to water and air. Groups like Ducks Unlimited and the USDA have caught on to this and are using market incentives to mitigate such pollution problems. Recently the USDA implemented a Water Quality Credit/Trading program. Even the KYOTO Treaty is based loosely on this logic with CO2Cap and Trade provisions.


Jerry R. Skees
J. Roy Black
Ben M. Gramig
American Agricultural Economics Association, 2003

Towards a Theory of Property Rights.
Harold Demsetz
The American Economic Review. Volume 57, Issue 2. May, 1967

The Problem of Social Cost
R. H. Coase
Journal of Law and Economics, Vol. 3, Oct., 1960 (Oct., 1960), pp. 1-44

Wednesday, January 02, 2008


In a previous post, I mentioned that policies can be evaluated by the net benefits that they produce. Does this analysis consider the impact on future generations? How do we deal with situations in which costs are imposed on people in the future as a result of our actions today. Alternatively, how do we justify incurring costs today, for the benefit of future generations. ( both of these questions are relevant in the case of global warming).

The benefits of future generations are compared to the costs of current generations via the present value concept.

Example: If a policy implemented today (such as CO2 emissions caps) produces benefits equal to ‘x’ trillion dollars in the future, then we take the present value of ‘x’ billion dollars and compare it to the costs of the policy today. If the policy produces net benefits in present value terms then it may be a favorable pursuit.

Note, discounting future benefits back to today’s dollars does not imply that we are giving greater weight to our well being today vs. the well being of future generations. PV discounting only allows us to compare costs today with benefits tomorrow in ‘common units.’ It also recognizes that there are opportunity costs to devoting resources today to certain policy ends. ( i.e. often the appropriate discount rate used in PV analysis for public policy may be reflect the opportunity cost of capital. This is relevant because productive capital itself can have a mitigating effect on environmental problems such as global warming).