Category: Policy

The "Copenhagen Accord"

Hard on the heels of the leaked “Danish text” comes the emerging economy response, the “Copenhagen Accord.” Press coverage indicates that it’s a call for -40% of 1990 by 2020 in the developed world, but the actual text (linked at the end of the article at COP15.dk) has no such details.

Mermaid & power plants

The Copenhagen Accord is notable mainly for what it lacks: there are no global goals, and no explicit developing country targets. However, it does affirm the Framework Convention, “to stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” I’m actually not a strong proponent of hard country commitments for 2050, because they are politically so dubious, and will most likely have to be changed anyway. However, I think it’s quite important to at least agree on an objective in general terms. By failing to state a global goal, does this document redefine “dangerous interference” to include whatever emissions trajectory we happen to get, or does it assume that uncoordinated developed country actions (including support of mitigation in the developing world) will be enough to avoid it?

Similarly, page 1 recognizes “that the right to development and equitable opportunity of development are inalienable basic human rights of all nations, and social economic development and poverty eradication are the first and overriding priorities of developing countries.” I think that human rights are for humans, not nations, but apart from that quibble, this is a good principle. However, I fear that the underlying mental model behind this statement is less admirable. Does it mean, for example, that the authors think a 650ppm future is OK, as long as their GDP goes up? To assume that on-market growth can more than compensate for climate impacts is a risky proposition, especially for the poorest countries. Alternately, does it mean that the authors think the supported mitigation actions, financial and technology transfers, and other mechanisms outlined in the text will be enough to permit development without contradiction of the “dangerous interference” objective? If so, the agreement needs to be a lot more specific about how this will work.

This document, and to a lesser extent the Danish text, really reinforces my perception that modelers and other quantitative folks are living on a different planet from those who craft these drafts. The Copenhagen Accord buries a short page worth of principles in 11 pages of obscure jargon. I had to read it several times to even determine whether it suggested concrete targets. Why not just get to the point? The legalese can come later. Sure, some details are important, like who has jurisdiction over financial flows, but list those as principles rather than enumerating every minor point. Needless detail is more than a time-waster; it actually gets in the way of identifying creative solutions by imposing spurious constraints.

Mercifully, the official draft just released by Michael Zammit Cutajar is reportedly only 6 pages.

Danish text – emissions trajectories

Surfing a bit, it looks like the furor over the leaked Danish text actually has at least four major components:

  1. Lack of per capita convergence in 2050.
  2. Requirement that the upper tier of developing countries set targets.
  3. Institutional arrangements that determine control of funds and activity.
  4. The global peak in 2020 and decline to 2050.

These are evident in coverage in Politico and COP15.dk, for example.

I’ve already tackled #1, which is an illusion based on flawed analysis. I also commented on #2 – whether you set formal targets or not, absolute emissions need to fall in every major region if atmospheric GHG concentrations and radiative imbalance are to stabilize or decline. I don’t have an opinion on #3. #4 is what I’d like to talk about here.

There seem to be two responses to #4: dissatisfaction with the very idea of peaking and declining on anything like that schedule, and dissatisfaction with the burden sharing at the peak.

First, the global trajectory. There are a variety of possible emissions paths that satisfy the criteria in the Danish text. Here’s one (again relying on C-ROADS data and projections, close to A1FI in the future):

Global maximum emissions trajectory

Here, emissions grow along Business-As-Usual (BAU), peak in 2020, then decline at 3.75%/year to hit the 2050 target. This is, of course, a silly trajectory, because its basically impossible to turn the economy on a dime like this, transitioning overnight from growth to decline. More plausible trajectories have to be smooth, like this:

Global practical trajectory

One consequence of the smoothness constraint is that emissions reductions have to be faster later, to make up for the growth that occurs during a gradual transition from growing to declining emissions. Here, they approach -5%/year, vs. -3.5% in the “pointy” trajectory. A similar constraint arises from the need to maintain the area under the emissions curve if you want to achieve similar climate outcomes.

So, anyone who argues for a later peak is in effect arguing for (a) faster reductions later, or (b) weaker ambitions for the climate outcome. I don’t see how either of these is in the best interest of developing countries (or developed, for that matter). (A) means spending at most an extra decade building carbon-intensive capital, only to abandon it at a rapid rate a decade or two later. That’s not development. (B) means more climate damages and other negative externalities, for which growth is unlikely to compensate, and to which the developing countries are probably most vulnerable.

If, for sake of argument, we take my smooth version of the Danish text target as a given, there’s still the question of how emissions between now and 2050 are partitioned. If the developed world shoots for 20% below 1990 by 2020, the trajectory might look like this:

Developed -20% below 1990 in 2020

That’s a target that most would consider to be modest, yet to hit it, emissions have to peak by 2012, and decline at up to 8% per year through 2020. It would be easier to achieve in some regions, like the EU, that are already not far from Kyoto levels, but tough for the developed world as a whole. The natural turnover of buildings, infrastructure and power plants is 2 to 4%/year, so emissions declining at 8% per year means some combination of massive retrofits, where possible, and abandonment of carbon-emitting assets. If that were happening in the developed world, in tandem with free trade, rapid growth and no targets in the developing world, it would surely mean massive job dislocations. I expect that would cause the emission control regime in the developed world to crumble.

The -20% in 2020 trajectory creates surprisingly little headroom for growth in the developing world. Emissions can grow only until 2025 (vs. 2020 globally, and 2012 in the developing countries). Thereafter they have to fall at roughly the global rate.

Developing with global and developed targets

What if the developed world manages to go even faster, achieving -40% from 1990 by 2020, and -90% by 2050? Surprisingly, that buys the developing countries almost nothing. Emissions can rise a little higher, but must peak around the same time, and decline at the same rate. Some of the rise is potentially inaccessible, because it exceeds BAU, and no one really knows how to control economic growth.

Developing with developed -20% vs -40%

The reason for this behavior is fairly simple: as soon as developed countries make substantial cuts of any size, they become bit players in the global emissions game. Further reductions, acting on a small basis, are very tiny compared to the large basis of developing country emissions. Thus the past is a story of high developed country cumulative emissions, but the future is really about the developing countries’ path. If developing countries want to push the emissions envelope, they have to accept that they are taking a riskier climate future, no matter what the developed world does. In addition, deeper cuts on the part of the developed world become very expensive, because marginal costs grow with the depth of the cut. On the whole everyone would be better off if the developing countries asked for more money rather than deeper emissions cuts in the developed world.

There’s a deeper reason to think that calls for deeper cuts in the developed world, to provide headroom for greater emissions growth in developing countries, are counterproductive. I think the mental model behind such calls is a mixture of the following:

  1. carbon fuels GDP, and GDP equals happiness
  2. developing countries have an urgent need to build certain critical infrastructure, after which they can reduce emissions
  3. slow growth fuels discontent, leading to revolution
  4. growth pays for pollution reductions (the Kuznets curve)

Certainly each of these ideas contains some truth, and each has played a role in the phenomenal growth of the developed world. However, each is also fallacious in important ways. The elements in (1) are certainly correlated, but the relationship between carbon and happiness is mediated by all kinds of institutional and social factors. The key question for  (2) is, what kind of infrastructure? Cheap carbon invites building exactly the kind of infrastructure that the developed world is now locked into, and struggling to dismantle. (3) might be true, but I suspect that it has as more to do with inequitable distribution of wealth and power than it does with absolute wealth. Rapid growth can easily increase inequity. The empirical basis of the Kuznets curve in (4) is rather shaky. Attempts to grow out of the negative side effects of growth are essentially a pyramid scheme. Moreover, to the extent that growth is successful, preferences shift to nonmarket amenities like health and clean air, so the cost of the negatives of growth grows.

Rather than following the developed countries down a blind alley, the developing countries could take this opportunity to bypass our unsustainable development path. By implementing emissions controls now, they could start building a low-carbon-friendly infrastructure, and get locked into sustainable technologies, that won’t have to be dismantled or abandoned in a few decades. This would mean developing institutions that internalize environmental externalities and allocate property rights sensibly. As a byproduct, that would help the poorest within their countries avoid the consequences of the new wealth of their elites. Preferences would evolve toward low-carbon lifestyles, rather than shopping, driving, and conspicuous consumption. Now, if we could just figure out how to implement the same insights here in the developed world …

Danish text analysis

In response to a couple of requests for details, I’ve attached a spreadsheet containing my numbers from the last post on the Danish text: Danish text analysis v3 (updated).

Here it is in words, with a little rounding to simplify:

In 1990, global emissions were about 40 GtCO2eq/year, split equally between developed and developing countries. Due to population disparities, developed emissions per capita were 3.5 times bigger than developing at that point.

The Danish text sets a global target of 50% of 1990 emissions in 2050, which means that the global target is 20 GtCO2eq/year. It also sets a target of 80% (or more) below 1990 for the developed countries, which means their target is 4 GtCO2eq/year. That leaves 16 GtCO2eq/year for the developing world.

According to the “confidential analysis of the text by developing countries” cited in the Guardian, developed countries are emitting 2.7 tonsCO2eq/person/year in 2050, while developing countries emit about half as much: 1.4 tonsCO2eq/person/year. For the developed countries, that’s in line with what I calculate using C-ROADS data and projections. For the developing countries, to get 16 gigatons per year emissions at 1.4 tons per cap, you need 11 billion people emitting. That’s an addition of 6 billion people between 2005 and 2050, implying a growth rate above recent history and way above UN projections.

If you redo the analysis with a more plausible population forecast, per capita emissions convergence is nearly achieved, with developing country emissions per capita within about 25% of developed.

Danish text chart

Note log scale to emphasize proportional differences.

Tracking climate initiatives

The launch of Climate Interactive’s scoreboard widget has been a hit – 10,500 views and 259 installs on the first day. Be sure to check out the video.

It’s a lot of work to get your arms around the diverse data on country targets that lies beneath the widget. Sometimes commitments are hard to translate into hard numbers because they’re just vague, omit key data like reference years, or are expressed in terms (like a carbon price) that can’t be translated into quantities with certainty. CI’s data is here.

There are some other noteworthy efforts:

Update: one more from WRI

Update II: another from the UN

The 2009 World Energy Outlook

Following up on Carlos Ferreira’s comment, I looked up the new IEA WEO, unveiled today.  A few excerpts from the executive summary:

  • The financial crisis has cast a shadow over whether all the energy investment needed to meet growing energy needs can be mobilised.
  • Continuing on today’s energy path, without any change in government policy, would mean rapidly increasing dependence on fossil fuels, with alarming consequences for climate change and energy security.
  • Non-OECD countries account for all of the projected growth in energy-related CO2 emissions to 2030.
  • The reductions in energy-related CO2 emissions required in the 450 Scenario (relative to the Reference Scenario) by 2020 — just a decade away — are formidable, but the financial crisis offers what may be a unique opportunity to take the necessary steps as the political mood shifts.
  • With a new international climate policy agreement, a comprehensive and rapid transformation in the way we produce, transport and use energy — a veritable lowcarbon revolution — could put the world onto this 450-ppm trajectory.
  • Energy efficiency offers the biggest scope for cutting emissions
  • The 450 Scenario entails $10.5 trillion more investment in energy infrastructure and energy-related capital stock globally than in the Reference Scenario through to the end of the projection period.
  • The cost of the additional investments needed to put the world onto a 450-ppm path is at least partly offset by economic, health and energy-security benefits.
  • In the 450 Scenario, world primary gas demand grows by 17% between 2007 and 2030, but is 17% lower in 2030 compared with the Reference Scenario.
  • The world’s remaining resources of natural gas are easily large enough to cover any conceivable rate of increase in demand through to 2030 and well beyond, though the cost of developing new resources is set to rise over the long term.
  • A glut of gas is looming

This is pretty striking language, especially if you recall the much more business-as-usual tone of WEOs in the 90s.

Marginal Damage has (or will have) more.

The Rygg study, pining for the fjords

The DEQ dead parrot skit continues in the Revised Evans EA, which borrows boilerplate from the Morgan EA I reported on yesterday. It once again cites the spurious Rygg study, overgeneralizes its findings, and repeats the unsubstantiated Fairbanks claims. At least in the Morgan EA, DEQ reviewed some alternative evidence cited by Orville Bach, indicating that gravel pit effects on property values are nonzero. In the Evans EA, DEQ omits any review of evidence contradicting Rygg; evidently DEQ’s institutional memory lasts less than 3 months.

Even the review in the Morgan EA was less than coherent. After discussing Rygg, they summarize Bach’s findings and two key articles:

He includes a figure from one of the citations showing the impact on residential property values based on distance of the property from the gravel mine – the closer the property, the greater the impact. Based on this figure, properties less than a quarter mile from the mine experienced up to a 32% decline in value. The impact on property value declined with increased distance from the gravel mine. Properties three miles away (the farthest distance in the analysis) experienced a 5% decline. …

Researchers have used the hedonic estimation method to evaluate impacts to housing prices from environmental “disamenities” (factors considered undesirable). Using this multivariate statistical approach, many characteristics of a purchased good (house) are regressed on the observed price, and thus, one can extract the relative contribution of the environmental variables to the price of the house (Boyle and Kiel 2001). Research has been conducted in many locations in the country, and on many types of disamenities (landfills, power plants, substations, hazardous waste sites, gravel mines, etc.). The study cited by Mr. Bach (Erickcek 2006) uses techniques and data developed by Dr. Hite to evaluate potential effects on property values of a proposed gravel mine in Richland Township, Michigan. Dr. Hite’s study evaluated effects of a gravel mine in Ohio. Both the Erickcek and Hite studies showed decreases in property values resulting from proximity of the property to the mine (Erickcek 2006).

DEQ latches onto one footnote in Erickcek,

However, Erickcek states in footnote 6, ‘Only those owning property at the time of the establishment of the gravel mine would experience a loss in equity. Those purchasing property near an established mine would not experience an equity loss because any negative effects from the mine’s operation would have been incorporated into the purchase price.’

Note that this is a statement about property rights and the distribution of harm. It doesn’t in anyway diminish the existence of harm to someone in society. Evidently DEQ doesn’t understand this distinction, or thinks that Rygg trumps Hite/Erickcek, because it concludes:

Irreversible and Irretrievable Commitments of Resources: The Proposed Action would not result in any irreversible or irretrievable commitments of resources related to the area’s social and economic circumstances.

Could Rygg trump Hite? Let’s consider the score:

Attribute Rygg Hite
sampling ad hoc census
sample size 6+25 2812
selection bias severe minimal
control for home attributes ad hoc 4 attributes
control for distance no yes
control for sale date no yes
statistical methods none proper
pit sites 1 multiple
reported diagnostics no yes
Montana? yes no

That’s Hite 9, Rygg 1. Rygg’s point is scored on location, which goes to applicability of the results to Montana. This is a hollow victory, because Rygg himself acknowledges in his report that his results are not generalizable, because they rely on the unique circumstances of the single small pit under study (particularly its expected temporary operation). DEQ fails to note this in the Evans and Morgan EAs. It’s hard to judge generalizability of the Hite study, because I don’t know anything about local conditions in Ohio. However, it is corroborated by a Rivers Unlimeted hedonic estimate with a different sample.

A simple combination of Rygg and Hite measurements would weight the two (inversely) by their respective variances. A linear regression of the attributes in Rygg indicates that gravel pits contribute positively to value (ha ha) but with a mean effect of $9,000 +/- $16,000. That, and the fact that the comparable properties have much lower variance than subject properties adjacent to the pit should put up red flags immediately, but we’ll go with it. There’s no way to relate Rygg’s result to distance from the pit, because it’s not coded in the data, but let’s assume half a mile. In that case, the roughly comparable effect in Hite is about -$74,000 +/- $11,000. Since the near-pit price means are similar in Hite and Rygg, and the Rygg variance is more than twice as large, we could combine these to yield a meta measurement of about 2/3 Hite + 1/3 Rygg, for a loss of $46,000 per property within half a mile of a pit (more than 30% of value). That would be more than fair to Rygg, because we haven’t accounted for the overwhelming probability of systematic error due to selection bias, and we’re ignoring all the other literature on valuation of similar nuisances. This is all a bit notional, but makes it clear that it’s an awfully long way from any sensible assessment of Rygg vs. Hite to DEQ’s finding of “no effect.”

Montana DEQ – rocks in its head?

Lost socks are a perpetual problem around here. A few years back, the kids would come to me for help, and I’d reflexively ask, “well, did you actually go into your room and look in the sock drawer?” Too often, he answer was “uh, no,” and I’d find myself explaining that it wasn’t very meaningful to not find something when you haven’t looked properly. Fortunately those days are over at our house. Unfortunately, Montana’s Department of Environmental Quality (DEQ) insists on reliving them every time someone applies for a gravel mining permit.

Montana’s constitution guarantees the right to a clean and healthful environment, with language that was the strongest of its kind in the nation at the time it was written. [*] Therefore you’d think that DEQ would be an effective watchdog, but the Opencut Mining Program’s motto seems to be “see no evil.” In a number of Environmental Assessments of gravel mining applications, DEQ cites the Rygg Study (resist the pun) to defend the notion – absurd on its face – that gravel pits have no impact on adjacent property values.  For example:

Several years ago, DEQ contracted a study to determine “whether the existence of a gravel pit and gravel operation impacts the value of surrounding real property.” The study (Rygg, February 1998) involved some residential property near two gravel operations in the Flathead Valley. Rygg concluded that the above-described mitigating measures were effective in preventing decrease in taxable value of those lands surrounding the gravel pits.

The study didn’t even evaluate mitigating measures, but that’s the least of what’s wrong (read on). Whenever Rygg comes up,the “Fairbanks review” is not far behind. It’s presented like a formal peer review, but the title actually just means, “some dude at the DOR named Fairbanks read this, liked it, and added his own unsubstantiated platitudes to the mix.” The substance of the review is one paragraph:

“In the course of responding to valuation challenges of ad valorem tax appraisals, your reviewer has encountered similar arguments from Missoula County taxpayers regarding the presumed negative influence of gravel pits, BPA power lines, neighborhood character change, and traffic and other nuisances. In virtually ALL cases, negative value impacts were not measurable. Potential purchasers accept newly created minor nuisances that long-time residents consider value diminishing.”

First, we have no citations to back up these anecdotes. They could simply mean that the Department of Revenue arbitrarily denies requests for tax relief on these bases, because it can. Second, the boiled frog syndrome variant, that new purchasers happily accept what distresses long-term residents, is utterly unfounded. The DEQ even adds its own speculation:

The proposed Keller mine and crushing facility and other operations in the area … create the possibility of reducing the attractiveness of home sites to potential homebuyers seeking a quiet, rural/residential type of living environment. These operations could also affect the marketability of existing homes, and therefore cause a reduction in the number of interested buyers and may reduce the number of offers on properties for sale. This reduction in property turnover could lead to a loss in realtors’ fees, but should not have any long-term effect on taxable value of property. …

Never mind slaves to defunct economists, DEQ hasn’t even figured out supply and demand.

When GOMAG (a local action group responding to an explosion of gravel mining applications) pointed me to these citations, I took a look at the Rygg Study. At the time, I was working on the RLI, and well versed in property valuation methods. What I found was not pretty. I’m sure the study was executed with the best of intentions, but it uses methods that are better suited to issuing a loan in a bubble runup than to measuring anything of import. In my review I found the following:

’¢ The Rygg study contains multiple technical problems that preclude its use as a valid measurement of property value effects, including:

o The method of selection of comparable properties is not documented and is subject to selection bias, exacerbated by the small sample
o The study neglects adverse economic impacts from land that remains undeveloped
o The measure of value used by the study, price per square foot, is incomplete and yields results that are contradicted by absolute prices
o Valuation adjustments are not fully documented and appear to be ad hoc
o The study does not use accepted statistical methods or make any reference to the uncertainty in conclusions
o Prices are not adjusted for broad market appreciation or inflation, though it spans considerable time
o The study does not properly account for the history of operation of the pit

’¢ The Fairbanks review fails to consider the technical content of the Rygg study in any detail, and adds general conclusions that are unsupported by the Rygg study, data, original analysis, or citation.
’¢ Citations of the Rygg study and the Fairbanks review in environmental assessments improperly exaggerate and generalize from its conclusions.

I submitted my findings to DEQ in a long memo, during the public comment period on two gravel applications. You’d think that, in a rational world, it would provoke one of two reactions: “oops, we’d better quit citing that rubbish” or, “the review is incorrect, and Rygg is actually valid, for the following technical reasons ….”  Instead, DEQ writes,

The Rygg report is not outdated. It is factual data. The Diane Hite 2006 report upon which several of the other studies were based, used 10 year old data from the mid-1990’s. Many things, often temporary, affect property sale prices.

Huh? They’ve neatly tackled a strawdog (“outdated”) while sidestepping all of the substantive issues. What exactly does “factual data” mean anyway? It seems that DEQ is even confused about the difference between data and analysis. Nevertheless, they are happy to proceed with a recitation of Rygg and Fairbanks, in support of a finding of no “irreversible or irretrievable commitments of resources related to the area’s social and economic circumstances.”

So much for the watchdog. Where DEQ ought to be defending citizens’ constitutional rights, it seems bent on sticking its head in the sand. Its attempts to refute the common sense idea, that no one wants to live next to a gravel pit, with not-even-statistical sleight of hand grow more grotesque with each EA. I find this behavior baffling. DEQ is always quick to point out that they don’t have statutory authority to consider property values when reviewing applications, so why can’t they at least conduct an honest discussion of economic impacts? Do they feel honor-bound to defend a study they’ve cited for a decade? Are they afraid the legislature will cut off their head if they stick their neck out? Are they just chicken?

Companies – also not on track yet

The Carbon Disclosure Project has a unique database of company GHG emissions, projections and plans. Many companies are doing a good job of disclosure; remarkably, the 1309 US firms reporting account for 31% of US emissions [*]. However, the overall emissions picture doesn’t look like a plan for deep cuts. CDP calls this the “Carbon Chasm.”

Based on current reduction targets, the world’s largest companies are on track to reach the scientifically-recommended level of greenhouse gas cuts by 2089 ’“ 39 years too late to avoid dangerous climate change, reveals a research report ’“ The Carbon Chasm ’“ released today by the Carbon Disclosure Project (CDP).

It shows that the Global 100 are currently on track for an annual reduction of just 1.9% per annum which is below the 3.9% needed in order to cut emissions in developed economies by 80% in 2050. According to the Intergovernmental Panel for Climate Change (IPCC), developed economies must reduce greenhouse gas emissions by 80-95% by 2050 in order to avoid dangerous climate change. [*]

Of course there are many pitfalls here: limited sampling, selection bias, greenwash, incomplete coverage of indirect emissions, … Still, I find it quite encouraging that companies plan net cuts at all, when many governments haven’t yet managed the same feat, so top-down policy isn’t in place to support their actions.

Allocation Oddity

Mining my hard drive for stuff I did a few weeks back, when the Waxman Markey draft was just out, I ran across this graph:

Waxman-Markey electricity & petroleum prices

It shows prices for electricity and petroleum from the ADAGE model in the June EPA analysis. BAU = business-as-usual; SCN 02 = updated Waxman-Markey scenario; SCN 06 = W-M without allowance allocations for consumer rate relief and a few other provisions. Notice how the retail price signal on electricity is entirely defeated until the 2025-2030 allowance phaseout. On the other hand, petroleum prices are up in either scenario, because there is no rate relief.

Four questions:

  • Isn’t it worse to have a big discontinuity electricity prices in 2025-2030, rather than a smaller one in 2010-2015?
  • Is your average household even going to notice a 1 or 2 c/kwh change over 5 years, given the volatility of other expenses?
  • Since the NPV of the rate relief by 2025 is not much, couldn’t the phaseout happen a little faster?
  • How does it help to defeat the price signal to the residential sector, a large energy consumer with low-hanging mitigation fruit?

Things might not be as bad as all this, if the goal (not mandate) of serving up rate relief as flat or fixed rebates is actually met. Then the cost of electricity at the margin will go up regardless of allowance allocation, and there would be some equity benefit. But my guess is that, even if that came to pass, consumers would watch their total bills, not the marginal cost, and thus defeat the price signal behaviorally. Also, will people with two addresses and two meters, like me, get a double rebate? Yippee!

Constraints vs. Complements

If you look at recent energy/climate regulatory plans in a lot of places, you’ll find an emerging model: an overall market-based umbrella (cap & trade) with a host of complementary measures targeted at particular sectors. The AB32 Scoping Plan, for example, has several options in each of eleven areas (green buildings, transport, …).

I think complementary policies have an important role: unlocking mitigation that’s bottled up by misperceptions, principal-agent problems, institutional constraints, and other barriers, as discussed yesterday. That’s hard work; it means changing the way institutions are regulated, or creating new institutions and information flows.

Unfortunately, too many of the so-called complementary policies take the easy way out. Instead of tackling the root causes of problems, they just mandate a solution – ban the bulb. There are some cases where standards make sense – where transaction costs of other approaches are high, for example – and they may even improve welfare. But for the most part such measures add constraints to a problem that’s already hard to solve. Sometimes those constraints aren’t even targeting the same problem: is our objective to minimize absolute emissions (cap & trade), minimize carbon intensity (LCFS), or maximize renewable content (RPS)?

You can’t improve the solution to an optimization problem by adding constraints. Even if you don’t view society as optimizing (probably a good idea), these constraints stand in the way of a good solution in several ways. Today’s sensible mandate is tomorrow’s straightjacket. Long permitting processes for land use and local air quality make it harder to adapt to a GHG price signal, for example.  To the extent that constraints can be thought of as property rights (as in the LCFS), they have high transaction costs or are illiquid. The proper level of the constraint is often subject to large uncertainty. The net result of pervasive constraints is likely to be nonuniform, and often unknown, GHG prices throughout the economy – contrary to the efficiency goal of emissions trading or taxation.

My preferred alternative: Start with pricing. Without a pervasive price on emissions, attempts to address barriers are really shooting in the dark – it’s difficult to identify the high-leverage micro measures in an environment where indirect effects and unintended consequences are large, absent a global signal. With a price on emissions, pain points will be more evident. Then they can be addressed with complementary policies, using the following sieve: for each area of concern, first identify the barrier that prevents the market from achieving a good outcome. Then fix the institution or decision process responsible for the barrier (utility regulation, for example), foster the creation of a new institution (to solve the landlord-tenant principal-agent problem, for example), or create a new information stream (labeling or metering, but less perverse than Energy Star). Only if that doesn’t work should we consider a mandate or auxiliary tradable permit system. Even then, we should also consider whether it’s better to simply leave the problem alone, and let the GHG price rise to harvest offsetting reductions elsewhere.

I think it’s reluctance to face transparent prices that drives politics to seek constraining solutions, which hide costs and appear to “stick it to the man.” Unfortunately, we are “the man.” Ultimately that problem rests with voters. Time for us to grow up.