Green Economics

In this file photo Courtney Lombardo drinks a glass of tap water at Charlie's Chili restaurant in Newport Beach, Calif. Newport Beach lies in Orange County, a district that has created the Groundwater Replenishment System, a $480 million dollar water treatment system that converts sewage water into drinking water. Recurring droughts, population growth and a decline in imported water supplies have overwhelmed local water supply. (Mary Knox Merrill/The Christian Science Monitor/File )

Would you drink toilet water?

By Matthew Kahn, Guest blogger / 02.11.12

Do you trust the engineers to develop new solutions for addressing society's challenges?  UCLA has an excellent engineering school and thousands of young, sober students attend the engineering classes taking notes and hopefully thinking.  Can these young people figure out how to take "dirty water" (think of your toliet after you use it) and transform it into drinkable water?  

If the answer is yes, and if the public believes that the answer is yes then we have another strategy for adapting to climate change.  Such recycled water offers us another way to increase our supply of scarce resources.  In Climatopolis, I talk at length about how human ingenuity will substitute for those resources that Mother Nature will be less generous with supplying in our hotter future.  I believe in directed technological change.  We foresee a challenge, we see the benefits of coming up with a solution for the challenge and we hold a competition. If 100 entrants submit a new idea, the best idea in the set will emerge and it will be quite good and it will broadly diffuse and the idea's creator will become rich.  Good dynamic incentives!

In the case of "toliet to the tap", there has been resistance to this approach before but now the NY Times reports that this gross out is easing.  Why? Sociologists should work on this.  If water prices rise, this would encourage water consumers to give the engineers the benefit of the doubt.  Perhaps the experience of nations such as Singapore has taught the rest of us that such solutions can be effective. In this case, Singapore is a useful "green guinea pig". 

A man walks his baggage through empty lines to pass through security in the main terminal in a quiet Denver International Airport. Kahn spends a quiet afternoon in a roomy airport and ponders the lure of sprawl. (Cyrus McCrimmon/AP/The Denver Post)

The upside to sprawl?

By Matthew Kahn, Guest blogger / 02.09.12

I am at the enormous new Sacramento airport waiting to fly back to LA.  I have learned my value of time.  I could have paid $120 to take a 3 hour earlier flight to LA but I said no and I have gotten a lot of work done in this quiet airport that offers free wifi. I can even vouch for the men's bathroom quality and space.  Roomy!  Maybe sprawl and new infrastructure has its advantages as there are almost no people at this airport but infinite amounts of space and cushy seats and electric sockets for plugging stuff into.  The folks at JFK airport in NYC should visit Sacramento to compare their craggy airport to this one.

I have more mixed feelings about Amtrak. To start on  a positive note, this morning I took a $9 dollar ride from Davis to Sacramento on Amtrak.  But, Amtrak kept me up last night. My hotel was in the middle of downtown Davis and the railroad stops downtown and the train tracks are right there.  As trains travel through Davis , they blow their horn and I kept waking up.  The same thing happens to me in Berkeley and when I was in Raleigh recently, I was told that the same thing happens there.  I don't know if Amtrak blows that horn for safety reasons but does have some noise pollution effects.

This file photo shows a box of biodegradable garbage bags. Kahn argues that those who see climate change as a hoax and government intervention as intrusive on the matter actively oppose the green market. (Globe Newswire/File)

Green Big Brother? Why the backlash against environmentalism has grown.

By Matthew Kahn, Guest blogger / 02.07.12

"Down the road, this data will be used against you."  Or so says one opponent of mandated installation of smart meters into homes.   This quote comes from this article  spelling out Tea Party opposition to "green initiatives" seeking to reduce our carbon footprint.  If you view climate change as a hoax and government intervention as intrusive on individual liberty then I can certainly see that such individuals could be bothered by such new "green mandates".

But, I think there is a deeper issue here related to property rights and theory of the second best.  Do individuals have the property rights to continue to produce their current level of greenhouse gas emissions?  Put simply, if you live in the suburbs and drive to work and air condition your large house and if you like to barbecue big steak dinners, you are unintentionally producing a lot of greenhouse gas emissions.  This is even more likely to be the case if your electricity is generated by coal fired power plants.  

In a first best world, we would collectively introduce a carbon tax and you would face higher prices for gasoline, and electricity and you would adjust your behavior responding to these incentives.   We have chosen not to introduce such a tax so we have introduced a large number of piecemeal strategies for trying to nudge households to have a smaller carbon footprint.  These include residential electricity report cards (such as the product that Opower produces), land use controls that encourage people to live a new urbanist life closer to public transit and living in multi-family housing.

The introduction of Smart Meters is a first step in providing households with the information about how much electricity they are consuming each hour of the day.  Households are more likely to make "good choices"  if they have information about the consequences of their actions such as leaving on the lights or not turning off computers at the end of the night.

The NY Times article explains that Tea Party activists are "connecting the dots" and seeing an international entity (the UN) as the mastermind behind trying to sabotage how Americans act to try to make us "more French".   There is some truth to this claim that to reduce GHG emissions we need there to be global convergence to a lower level of emissions and this will require lifestyle change or tremendous innovation in energy efficiency.

I think it would be a very promising field for sociologists to study the backlash against the environmental movement.   Would Tea Party folks really be miserable living a new urbanist lifestyle?  Do they reject the required low carbon lifestyle's components or do they simply feel anger at being lectured to by liberals?"Down the road, this data will be used against you."  Or so says one opponent of mandated installation of smart meters into homes.   This quote comes from this article  spelling out Tea Party opposition to "green initiatives" seeking to reduce our carbon footprint.  If you view climate change as a hoax and government intervention as intrusive on individual liberty then I can certainly see that such individuals could be bothered by such new "green mandates".

But, I think there is a deeper issue here related to property rights and theory of the second best.  Do individuals have the property rights to continue to produce their current level of greenhouse gas emissions?  Put simply, if you live in the suburbs and drive to work and air condition your large house and if you like to barbecue big steak dinners, you are unintentionally producing a lot of greenhouse gas emissions.  This is even more likely to be the case if your electricity is generated by coal fired power plants.  

In a first best world, we would collectively introduce a carbon tax and you would face higher prices for gasoline, and electricity and you would adjust your behavior responding to these incentives.   We have chosen not to introduce such a tax so we have introduced a large number of piecemeal strategies for trying to nudge households to have a smaller carbon footprint.  These include residential electricity report cards (such as the product that Opower produces), land use controls that encourage people to live a new urbanist life closer to public transit and living in multi-family housing.

The introduction of Smart Meters is a first step in providing households with the information about how much electricity they are consuming each hour of the day.  Households are more likely to make "good choices"  if they have information about the consequences of their actions such as leaving on the lights or not turning off computers at the end of the night.

The NY Times article explains that Tea Party activists are "connecting the dots" and seeing an international entity (the UN) as the mastermind behind trying to sabotage how Americans act to try to make us "more French".   There is some truth to this claim that to reduce GHG emissions we need there to be global convergence to a lower level of emissions and this will require lifestyle change or tremendous innovation in energy efficiency.

I think it would be a very promising field for sociologists to study the backlash against the environmental movement.   Would Tea Party folks really be miserable living a new urbanist lifestyle?  Do they reject the required low carbon lifestyle's components or do they simply feel anger at being lectured to by liberals?

A man stands in front of a windmill at the Gansu Jieyuan Wind Power Company on the outskirts of Yumen, northwest China's Gansu province, in this file photo. According to Kahn, China's short term environmental future is benefited by a more knowledgeable population with rising environmental expectations. (Jason Lee/Reuters/File)

China's short term environmental future is bright

By Matthew Kahn, Guest blogger / 02.06.12

China's water quality is suffering from a recent industrial spill.  The simple economics of self protection offers a productive approach for studying this issue. Let's return to the classic Ehrlich and Becker 1972 model.   In the past, when Chinese officials anticipated that environmental disasters caused by industrial negligence would be suppressed so that the world wouldn't find out about it, such officials had little incentive to regulate industry to engage in costly precautions.

Now that China is growing richer and this means that the value of life and the willingness to pay to avoid risk is rising and with the rise of micro blogging and accountability, officials now know that when disasters take place that government officials will be held accountable.   When government environmental officials anticipate ex-post punishment when disasters do take place, they now have strong incentives to do their job ex-ante and to take regulatory actions that reduce the probability that industrial disasters occur in the first place.

This rise of "good" green dynamic incentives is an example of why I am optimistic about China's short term environmental future. Note the two driving mechanisms here.  Increased access to information about the consequences of industrial activity and the desire for health and quality of life among China's rising urban class.

Green Cities in China will be a new repeated theme of this blog!  Stay tuned.

A money changer shows some one-hundred U.S. dollar bills at an exchange booth in this file photo. Kahn predicts that pension investors will soon have a vested interest in the health of developing countries like Egypt. (Issei Kato/Reuters/File)

Pension investing and developing countries

By Matthew Kahn, Guest blogger / 02.03.12

In the developed West, individuals seek to have a comfortable retirement and have saved trillions of dollars in private savings and mutual fund holdings and retirement plans.   The institutional investors are aware that U.S Treasuries pay 0% right now.  Will the U.S Stock Market yield a 7% annual return over the next decade?  It is possible but this would mean that the Dow Jones will be rise to 25,000 in the year 2022.  If the Dow Jones experiences such a rise, then Glassman and Hassett will be selling more copies of their 2nd edition of Dow 36,000.

So, I predict that institutional investors will turn to the developing world seeking higher returns but what are the risks of seeking those returns?  Will Moodys and S&P invest in highly trained institutional analysts so that Western investors actually know the true risks that they face in investing in the developing world?

I predict that the asymmetric information issues that we faced with the mortgage backed securities in the U.S will be even more severe here.

There is also the issue of political risk.  How will the ratings agencies use econometric models to predict whether there will be a coup in Egypt and whether the new government will renege on foreign debt?  I recognize that if investors know that they don't know these risks that they will demand  a larger risk premium in terms of higher interest rates.

As the U.S has trillions invested in certain LDC nations, will we ask our military to get involved to protect our interests in these nations?  In the past, there were multinational companies such as Exxon who had invested in irreversible capital in such nations but I'm anticipating that moving forward that hundreds of millions of Americans will have a financial stake in the health of these LDCs because the productive growth is taking place there and our capital has been invested there.  Will this "skin in the game" make our people more interested in foreign affairs?  Will more Congressmen get a passport?

In this file photo, Gan Golan, of Los Angeles, dressed as the "Master of Degrees," holds a ball and chain representing his college loan debt, during Occupy DC activities in Washington. In the face of reduced funding, public universities may be forced to raise out of state tuition rates. (Jaquelyn Martin/AP/File)

Public universities to hike tuition?

By Matthew Kahn, Guest blogger / 02.01.12

This WSJ article about Penn State raises some interesting issues.  Ambitious public universities are finally recognizing that state governments will no longer fund them.  Anticipating that overhead from the NIH and NSF is about to dry up, such schools are aggressively raising out of state tuition.  Parents of potential out of state freshmen have the right to ask themselves; "am I getting my money's worth at School X?"

 
Each public university (including UCLA and Penn State) is running an experiment where it sketches out its demand curve.  In the case of UCLA, we have sharply raised our tuition and applications have increased!  One convenient explanation for this violation of the law of demand is that "all else isn't equal".  There is an exogenous increase in foreign applicants as India and China grow richer and as UCLA collects more tuition $ it raises its quality and such quality improvements translates into increased demand to attend.

But, President Obama's speech the other night highlights that schools will start to be under more pressure to not be too aggressive in raising tuition.   The President seeks to "jawbone" both the health insurance industry and universities into slowing consumer price increases.  He is implicitly making an assumption about how free markets and competition works that he feels that he must get involved.

Returning to Penn State and UCLA, there is the interesting issue of how parents and their teenagers shop around and choose such "products".  We know that the College Rankings matter in terms of perception but I would hope that the decision makers do their homework before making this important investment.  Too many parents seem to focus on the quality of the buildings and local amenities (dorms and gym) and things you can see on a tour.  I would hope that parents are smart enough to scout out the "unobservables" such as whether students really interact with the faculty and what goes on at the dorms late at night.

The Detroit skyline is seen through a sculpture on the riverfront in this file photo. Public investment in "nice parks and piers" both benefits the public and directly benefits the nearby commercial businesses and property owners, Kahn argues. (Melanie Stetson Freeman/The Christian Science Monitor/File)

Building green cities using public/private partnerships

By Matthew Kahn, Guest blogger / 01.30.12

Public investment in urban infrastructure raises the value of nearby private investments.  Examples include new subways and parks in Beijing, seawalls in New Orleans and this example of nice riverside parks in New York City.  The article provides the details about the tug of war of who will pay the bill for the upkeep and maintenance to keep the nearby piers on the West side of Manhattan looking good.

Here is a quote from the NY Times article:

"Capital funds from the city and state have fallen to just $7 million from a high of $42 million in 2008, because of the recession. Meanwhile, two of the park's planned revenue-producing commercial piers have yet to be developed, leaving the Hudson River Park Trust, which runs the park, short of the money it needs for routine maintenance.

Adding to its woes: A lawsuit filed in November by the owners of Chelsea Piers, the sports and entertainment complex, which leases three piers from 17th to 23rd Street from the trust. The suit seeks to force the trust, and by extension taxpayers, to spend "at least $37.5 million" repairing damage its piers have sustained over the past two decades from small marine borers known as gribbles and teredos.

This month, the trust fired back in court with a motion to dismiss, arguing that the lawsuit amounted to nothing more than a "for-profit commercial venture trying to secure a huge public bailout for longstanding problems of its own making and for which it bears the sole legal responsibility.""

The interesting piece of economics here focuses on the fact that the public investment in "nice parks and piers" both benefits the public and directly benefits the nearby commercial businesses and property owners who now attract more people to want to spend time there.  In a "fair world", the commercial real estate owners and residential property owners nearby would be asked to pay for a larger share of these improvements since they will gain a windfall in benefits from higher rents as the amenity improvements will be capitalized into higher rental prices nearby as more people will be demanding services there and want to spend more time there.  

The profit seeking businesses seek to share the costs of the public improvements broadly and then gain the extra revenue.  That's good business!

So, there are really two issues here. 1. What is the optimal level of investment in "greening" the river parks and piers?  2. Who should finance this investment?   If you believe that the beneficiaries should pay, then the nearby land owners should pay more for the local improvements in parks.    Again, as the parks and and river area become nicer --- commercial landlords will be able to charge tenants more for locating there.

The city skyline is seen at dusk on Boston Harbor in Boston in this file photo. Does good urban planning lead to healthier residents? (Michael Dwyer/AP/File)

Can better urban planning make us healthier?

By Matthew Kahn, Guest blogger / 01.26.12

If public universities cap salaries for their Presidents, will they recruit less able leaders? The California State Universities may soon be running this experiment.     The Chronicle also has an interesting article on my UCLA colleague Dick Jackson.  Dr. Jackson is a leading scholar at UCLA's School of Public Health.  Here is a quote from the Chronicle of Higher Education:

"His center had already been dealing with problems that he suspected had origins in the built environment—asthma caused by particulates from cars and trucks, water contamination from excessive runoff, lead poisoning from contaminated houses and soil, and obesity, heart conditions, and depression exacerbated by stressful living conditions, long commutes, lack of access to fresh food, and isolating, car-oriented communities. Treatments could come in the form of pills, inhalers, and insulin shots, but real solutions had bigger implications. "More and more, I came to the conclusion that this is about how we build the world that we live in," he recalls, speaking over the phone from San Francisco."

Can better urban design make us healthier?

This raises a fundamental selection versus treatment question.  Put bluntly, do people with a proclivity to be sick self select to live in nasty neighborhoods featuring bad air quality, little access to good public transit and shopping opportunities?  Or do, people who for random reasons choose to live in those areas subsequently become sick?  The first is a selection effect while the second is a treatment effect.

Consider the example of smoking;  if we observe that smokers tend to suffer from sickness --- again is this selection or treatment or both?  Do the most impatient people in society smoke and such individuals tend to under invest in their health and subsequently are more likely to become sick or does smoking have an independent treatment effect on making you sicker?  The answer is that both effects are likely to be playing out.

I find that public health researchers tend to ignore fundamental issues of self selection on unobserved attributes (one of Jim Heckman's early homeruns) and implicitly assume that households are randomly assigned across space so that any observed differences in outcomes are due to "treatment effects".   In the absence of randomized trials (where residential locational choice is determined at random), this is a hard topic to work on.

Matthew Turner and co-authors have written an under-appreciated paper that was published in the Journal of Urban Economics.   Here is the abstract of their paper titled "Fat City":
"

"We study the relationship between urban sprawl and obesity. Using data that tracks individuals over time, we find no evidence that urban sprawl causes obesity. We show that previous findings of a positive relationship most likely reflect a failure to properly control for the fact the individuals who are more likely to be obese choose to live in more sprawling neighborhoods. Our results indicate that current interest in changing the built environment to counter the rise in obesity is misguided."

Intuitively, Turner estimates a fixed effects regression using panel data where he tracks the same person over time for people who move from the center city to the suburbs or vice versa. If sprawl makes us fat, then the average person who moves from the center to the suburbs should be gaining more weight over time than the people who never leave the center city or never leave the suburbs. Turner rejects this hypothesis.

So, there is plenty of work to be done here but it remains an open question of how urban form affects our behavior. I've been especially interested in this question focused on our carbon footprint as a function of urban form.

This file photo shows a statue of Benjamin Franklin at the University of Pennsylvania in Philadelphia. Franklin may have been one of the first people to note the effect of weather events on climate. (Andy Nelson/The Christian Science Monitor/File)

Ben Franklin: Founding father, inventor, geo-engineer?

By Matthew Kahn, Guest bloggger / 01.24.12

Do you miss the 1990s?  Those were the days before field experiments and RCTs where the typical paper might start, "This paper exploits a natural experiment to study the effect of X on Y."   I have just learned that Ben Franklin was way ahead of us.  Back before the QJE existed,  in 1784 to be precise,  Franklin noted  that after volcano eruptions that temperatures were lower.   Geo-engineering has some empirical basis.  How do I know this? I attended a Freshmen lecture at UCLA today.

To quote Scientific American and Karen Harp, "In 1784, Benjamin Franklin made what may have been the first connection between volcanoes and global climate while stationed in Paris as the first diplomatic representative of the United States of America. He observed that during the summer of 1783, the climate was abnormally cold, both in Europe and back in the U.S. The ground froze early, the first snow stayed on the ground without melting, the winter was more severe than usual, and there seemed to be "a constant fog over all Europe, and [a] great part of North America."

Now that empirical economists are working on climate change adaptation, what other research could be conducted on geo-engineering and its direct consequences and unintended consequences?  Will a future James Bond movie plot focus on Bond having to help or kill a "geo-engineer"?