Lynne Kiesling
I haven’t had time to read and think systematically about California’s proposed carbon policy, but I encourage you to read this post and this post at Environmental Economics, as well as the comments on them. I’ll probabably have something to say later, and it will likely riff off of John’s two posts.
Michael Giberson
In addition to the wind energy developments that Lynne noted a few days ago, in Texas the Public Utility Commission is working to implement changes to that state’s renewable energy law. The Houston Chronicle reports that a battle has broken out over how to count mandatory and voluntary purchases of renewable energy for purposes of determining whether utilities in the state are satisfying renewable energy requirements.
Some of the battle is over interpretation of Texas Senate Bill 20, passed last year, which increased requirements for purchase of renewable energy. I have no particular expertise in interpreting Texas law, so I won’t venture an opinion on what the law does or does not require. I do, however, have a passing familiarity with the requirements of logic, and it was a matter of logic that caught my eye while reading the Chronicle story. To wit, consider:
Reliant’s position could limit the development of renewable energy sources in Texas, forcing those who want to buy clean energy voluntarily to look outside the state, according to comments from the EPA filed with the PUC.
According to the story, Reliant Energy is of the view that voluntary and mandatory purchases should be added together to determine whether or not the state’s energy consumers are paying for enough renewable energy to meet state goals. This perspective makes some sense — if the requirement is for X amount of renewable energy to be produced in the state, and consumers voluntarily purchase amount Y, then the remaining “mandatory” purchase should be X – Y.
Opponents of this view assert that only mandatory purchases should be counted toward meeting state requirements. This position also makes some sense. After all, “voluntary” implies doing something beyond or other than what is required, right?
But, and here is where the logic thing comes in, I couldn’t see how Reliant’s position would force “those who want to buy clean energy voluntarily” to look outside the state. Other comments suggested that a policy of adding mandatory and voluntary purchases together would make it harder for consumers to voluntarily buy renewable energy. Neither of these positions seemed logical to me, at least at first.
Lynne Kiesling
Usually in the week before Labor Day we see gas prices rise relative to their mid-summer levels. Not this year: gas prices are declining, to the lowest nominal levels since November 2005 (WaPo, registration required). Unlike normal summers when the seasonal change in demand elasticity provides the dominant effect on prices, this year saw lots of supply-side policy effects.
The recent price drop was particularly pronounced because this year’s driving season was greeted by rising prices caused by several factors. Prices for ethanol, an additive increasingly used by refineries, shot up this year. Demand grew sharply after the Energy Policy Act passed by Congress last summer prompted refineries to switch from methyl tertiary-butyl ether, or MTBE, to corn-based ethanol as a gasoline additive. As demand rose, ethanol prices climbed to more than $4 per gallon.
Lynne Kiesling
Today’s Wall Street Journal has an article on Stockholm’s road congestion pricing pilot experiment (subscription required). Stockholm is a city of islands, so the road network is subtantially a set of bridges. Not surprisingly, congestion often ensues.
From January through July, Stockholm tested one of the world’s most sophisticated traffic-management systems as part of a plan to reduce gridlock, lower smog levels and improve quality of life in the city. Unlike most other traffic-control plans in place in cities such as London and Rome, Stockholm used a dynamic-pricing system in which drivers were charged different amounts depending on the time of day. If Mr. Astrom, for example, left the city center at the busiest time of the afternoon rush, from 4 to 5:29, he would have paid the equivalent of $2.76. But by waiting until 6:30 p.m., he traveled toll-free. “People changed their habits,” he said.
Traffic volume fell from 9% to 26% at the major tollgates.
The engineering to make this system work is substantial. IBM is one of the technology partners that developed the ability to identify a car within milliseconds at one of the 23 tolling gates around the city.
Mr. Westman [of IBM] worried that the system wouldn’t be able to identify cars in the harsh Stockholm winters because of all the salt, snow and dirt on the roads and vehicles. But the trial period went smoothly and the cameras functioned well in the winter months. IBM’s customer-service center, which anticipated 30,000 calls a day, fielded just 2,000 a day; and few appeals of charges were filed to the tax authorities.
Stockholm officials also found evidence of a basic tenet of economics: people change their behavior in the face of changes in relative prices. Take the case of public transportation, which is extensive in Stockholm.
The Stockholm trial produced another insight into a vexing traffic-reduction programs: getting people to use public transportation. Before the trial began, Stockholm spent about $180 million on improvements to public transportation. It bought about 200 new buses, and added rush-hour trains, express bus routes and more park-and-ride lots. But the changes had little impact on the number of people who left their private cars at home. In spring 2006, however, during the trial, use of all forms of public transportation jumped 6% and ridership on inner-city bus routes rose 9%, compared with a year earlier.
If the cost of driving to the consumer more transparently reflects the actual cost of an individual driving, at the margin that cost will change the behavior of those consumers who don’t value being able to drive at that time of day; they either time shift or take public transportation. People respond to incentives.
Stockholm is also using this experiment as an experiment in democracy: they are putting the congestion pricing to referendum. The six-month trial period has ended, and residents will soon vote in a referendum on whether or not to keep the system. Officials say that if a majority votes against the system they will dismantle all of the equipment in which they have invested, which was extremely expensive. But with the reduction in the peak/offpeak commute time ratio from 3/1 to 2/1, many Stockholm commuters are in favor of the system, as are cyclists, who enjoy a less stressful commute, even though the toll has induced more people to ride their bikes to work instead of driving.
Lynne Kiesling
There’s been a lot of interesting wind power news items in the past week or so:
1. An Oregonian article on community wind power investments in smaller-scale projects in rural Oregon: “Although community wind is characterized by its contained scope and local tie-in, it is by no means quaint. The projects use the same high-tech, high-capacity turbines employed by the big boys. And they rely on sophisticated financial arrangements, including outside investors’ ponying up plenty of immediate cash in exchange for federal tax advantages that the projects offer.”
2. Highland County, Virginia, is a new front in the wind power and environmentalism interaction. In this case it’s birds and bats that may be harmed by the installation, especially bats during migratory periods. Here’s a money quote: “Rick Webb of Monterey, a University of Virginia scientist whose Web site lays out potential environmental dangers of turbine development, believes serious conservation could save as much energy as would be generated by wind farms such as the one proposed in Highland.” What is the single policy change that can bring about serious conservation most effectively? Transparent dynamic pricing and the ability of consumers to choose how much price risk to bear over the course of the day/month/year!!!! No mention of that in this article, though.
3. The American Wind Energy Association notes that U.S. wind installations now exceed 10,000 MW of capacity.
4. The demand for new wind turbines is high, leading to tight markets, higher prices, and increased production. High fuel prices, state renewable portfolio standards, and tax incentives have been overcoming the reliability, aesthetic, and wildlife costs of wind power.
5. Chicago’s new 29-story Michigan Avenue Towers condominium building will purchase 100 percent of its power from Midwest Renewable Energy Corp.: “By purchasing the credits for the wind power, the association, in effect, will finance a new wind turbine in Winnebago County …”
Lynne Kiesling
Sunday was the Accenture Chicago Triathlon. I had been hesitating to do this event for years because of the sheer mass of humanity: this year there were 8,000 athletes and 500,000 spectators. Happily, my sprint-distance wave was not too congested, and I was more able to swim than I expected. I had more fun and did better than I expected. Here are some pics:
Results:
Total time: 1hr 42min 41sec. Rank 598 out of 1718 total sprint participants (65th percentile), swim rank 548, bike rank 462 (!), run rank 968, sex rank 191 (although I don’t know how many women participated in the sprint). I had fun, of course the racecourse is the most beautiful city in the world, and even the sheer mass of humanity was fun, because the participants, volunteers and organizers were all great.
Now, back to your regularly scheduled economics content …
Lynne Kiesling
Tea is healthier to drink than water, due to the flavonoids in tea:
These polyphenol antioxidants are found in many foods and plants, including tea leaves, and have been shown to help prevent cell damage. …
Other health benefits seen included protection against tooth plaque and potentially tooth decay, plus bone strengthening.
This from a new UK study. Furthermore, even though tea is caffeinated, its net effect still produces hydration. So it replaces fluids and has antioxidants.
I think I’ll go have another cup!
Lynne Kiesling
Hal Varian makes a persuasive argument and does us all a great service with his Economic Scene column in today’s New York Times (registration required). He focuses on two specific aspects of the workings of oil and gasoline markets: storage arbitrage and the role of speculators.
Storage arbitrage explains why, even if you have gasoline in storage that you paid a lower price for, you’ll still raise your price to buyers. Your incentive to do that is independent of whether or not the market in which you operate is competitive, an oligopoly, or a monopoly:
To spell out the argument, imagine that you own a storage tank full of gasoline that is currently worth $2 a gallon at wholesale prices. It is widely believed, however, that the price of gasoline will be $2.10 next week.
You would be crazy to sell your gasoline now: just wait a few days and the higher price will be yours. But if everyone waits a few days, there is no gasoline to be sold now and the resulting shortage pushes the price of gasoline up.
How high does it have to go? The answer is $2.10 a gallon. That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week.
This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price.
Varian also debunks the idea that ill-informed and naive speculators will contribute to systematic increases in the prices of commodities like oil; sure, they may push prices in one direction or another in the short run, but if they don’t profit they will exit. Thus the involvement of speculators in the market actually serves to stabilize prices; they are part of a self-regulating system. He reminds us that Milton Friedman made this argument long ago, and that notwithstanding some criticism, his argument has been borne out:
Mr. Friedman’s argument was applied to currency trading, but the same reasoning works here. If speculative trading tends to push prices higher when they are already high and lower when they are already low, then traders must be buying high and selling low.
That would mean that traders have to lose money on average — which does not seem very likely. To the contrary, speculative traders try to buy low and sell high, activities that by their nature tend to push prices up when they are too low and down when they are too high.
Yes yes yes.
Lynne Kiesling
One of the most important, and least understood, economic relationships is tax incidence. Policymakers often hold the mistaken belief that when they impose a tax on a particular type of income, the people who create and earn that income are the ones who pay the tax. What they fail to understand is that this is usually not true, because even if someone nominally has a tax imposed on their income, the tax changes behavior and spreads far beyond the people that the policymakers had targeted in their sights.
Some simple examples: If the tax is on the income that comes from selling a particular good, and the demand for that good is inelastic, then the people who buy that good will bear the burden of the tax. Even if the intention was to tax the income of “greedy, evil corporations”, the reality is that the consumers pay the price, because they really want the good and they are not very sensitive to changes in its price. Alternately, if the tax is on income from selling a good for which demand is elastic, the producer will not be able to pass on the tax increase, and the firm will bear most of the burden of the tax (as an aside, when firms face elastic demand, they are often operating on small profit margins, so imposing a tax may lead to firms leaving the market, leading to higher prices and less consumption of that good. How’s that for an unintended consequence?).
In reality the effects are even more subtle and complex. Take, for example, this analysis from the Congressional Budget Office of the incidence of the corporate income tax. The unintended effect that really drives the tax incidence is that at the margin, the corporate income tax induces capital owners to relocate capital outside of the US. Changing the US income tax changes the relative rate of return to capital, inducing some of it to move.
But here’s the real kicker in the unintended effects department. Remember that to a very large degree capital and labor are complements, not substitutes, so more capital means more ability to hire labor and higher productivity of the labor that is hired. Higher productivity means higher wages. When capital leaves, it reverses that effect, reducing worker productivity and lowering wages. Thus the result the CBO finds:
Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden. Domestic landowners receive a small benefit. At the same time, the foreign owners of capital bear slightly more than 70 percent of the burden, but their burden is exactly offset by the benefits received by foreign workers and landowners.
Thus the incidence of the corporate income tax falls extremely largely on workers. Do you think Congress realizes that the corporate income tax harms precisely the people to whom they demagogue? More importantly, do you think the workers harmed realize this? Or do politicians succeed in using the fog of rhetoric to obfuscate this subtle relationship?
Hat tip to Greg Mankiw for the link to the CBO study.
Lynne Kiesling
Do they not understand that lobbying is the inevitable, inescapeable product of a massive federal government? … If Franks is really concerned about corporate power and corruption in Washington, the best way to address his concerns would be to stop giving Washington so much power, and so much discretion to distribute that power. Shrink the federal government, return power and money to the private sector, castrate Congress, and drown the regulatory state.
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