Ecological Economics

Gas Prices Not 'Outrageous'

On mainstream news this morning I heard our Utah Governor declare US gas prices "outrageous". Memorial Day national news coverage labeled them "sky high." Wrong! Gas prices only seem outrageous to we Americans who George W. Bush correctly noted are "addicted to oil".

Europeans, by contrast, have lived with high gas prices for years, using proceeds to fund social programs, re-build infrastructure, etc. In addition, as noted in a May 21 Senate-side Congressional hearing Exploring the Skyrocketing Price of Oil (3 hrs), Europeans used gas tax differentials to correctly steer transportation systems toward diesel and away from gasoline, which proves ever-more important now that clean diesel is available. And to steer transportation system toward mass transit and away from single-vehicle transportation. Meanwhile we Americans sat around watching TV and partying until world market forces pushed prices upward, allowing most of the recent 'surplus' to be captured as record profits, record CEO compensation, etc. by what I'll call the Petrochemical Industrial Complex. Finally, Europeans are now beginning to look toward a future free of dependence on petrochemicals and their commingled carbon-loading propensities.

Even though we Americans are just now beginning to face the reality of high gas prices, the prices themselves are not the problem. In fact "sky high" prices are finally getting us to pay attention, however feebly, to alternative sources of energy that are compatible with global climate systems and human survival. As noted in the Congressional hearing, planet Earth is not in jeopardy, rather it is we humans (along with myriad other species) who are at risk. The Earth has worked its way through five Great Extinctions in the past and arguable done remarkably well. But it is in no way clear that we humans will survive the Sixth Great Extinction. Tragically, we humans may be contributing to our collective demise by clamoring for lower gas prices.

This is not to say that all is well in petrochemical industrial complex, medical industrial complex, financial industrial complex, military industrial complex America. But that is a story for another post (or several hundred posts). In the meantime 3 hours are well-spent viewing the hearing. If you want a sneak peak, go to 2:15 in the videocast and watch Senator Charles Schumer (D-NY) in action, followed by others as the hearing winds up.

'The Story of Stuff'

Tired of being told to "go shopping" whenever a national or international crisis occurs?

Tired of hearing that "recycling" will save us?
  Note: Recycling is a very good idea, just "not enough."

Want to know how our so-called Consumer Society was manufactured?

Want to know why the linear "produce, manufacture, CONSUME" model is so deeply flawed?

Ever wonder how stuff can be so damned cheap? And wonder who is really paying "the freight"?

Want to know more about the pathway to sustainability?

Then you'll be glad to see/hear how Annie Leonard exposes the dark underbelly of our Consumer Society in a little 20 minute educational video titled The Story of Stuff.

Here is a trailer:

More at storyofstuff.com.

PS.. If I'm the last person on the block (the Planet?) to hear about The Story of Stuff—having heard about it over coffee just yesterday—chalk it up to the fact that I'm an old, retired economist living in Utah, just a small step on the far side of nowhere. But damned good scenery!

US Forest Service and Carbon Offsets: Perspective

Writing in High Country News, Rick Craig suggests that the US Forest Service's entry into the carbon offsets game is ill-advised. Here's a snip:

Salvaging the Atmosphere: The Forest Service Joins the Carbon Offsets Game, Rick Craig, High Country News, Oct 15: … On July 25, Forest Service Chief Gail Kimbell announced the launch of the Carbon Capital Fund, which will sell carbon offsets to fund tree planting on national forests. … The idea sounds logical enough. In fact, the theory that forests can suck up excess carbon and cool the planet helps drive a market that doubled its revenues last year to $110 million. But the Forest Service's entry into the carbon offsets game comes as doubts about tree planting mount. Scientists are skeptical about its benefits, and the honesty of the unregulated market has been questioned in congressional hearings. Worst of all, critics feel, is the tacit permission offsets give buyers to continue their carbon-emitting lifestyles.

Visit the Web site of the National Forest Foundation, the Forest Service's nonprofit arm, and its Carbon Footprint Calculator can tell you how many metric tons of CO2 emissions you are responsible for. If the result leaves you feeling guilty, don't worry. For just $6, the fund lets you offset 1 ton of carbon by supporting tree-planting projects on the national forests. The transaction is based on the theory that forests act as "carbon sinks," soaking up the greenhouse gas from the atmosphere.

But in temperate forests, the concept has not held up well to scientific analysis. Forests do take carbon out of the atmosphere temporarily, but they don’t remove it from the active carbon pool, because their carbon is released when they rot or burn. Cambridge botanist Oliver Rackham, author of a history of Britain's forests, has said that telling people to plant trees to stop global warming is like telling them to drink more water to keep down rising sea levels. …

For an agency with increasingly stretched budgets, however, selling that commodity makes a difference. … And with the agency's million-acre reforestation backlog, there's no shortage of places for consumers to relieve their carbon guilt. [NFF hypertlink added]

See also:

Privatization by Many Means: Carbon Offsets Edition, Forest Policy …, Aug 27
Carbon Offsets: Modern Day 'Indulgences'?, Ecological Economics, Feb 20

Cross-posted from Forest Policy …

Tom Friedman Jumps on the Gas Tax Bandwagon

In the NY Times, Tom Friedman wonders aloud why politicans are so afraid of the "T-word" when it comes to what he considers very good rationales for imposing a gas tax sooner rather than later — with sooner being sometime, say, prior to 9/11/01.

Go Green! Without "Corporate Giveaways"

Pro Football's Philadelphia Eagles are not only green in color but "green" in commitment and action, voluntarily reducing their environmental footprint and providing a much-needed precedent in the sports arena. This is the right way to go: no big government inducements, no notions that somehow government and industry are "partners" in regulation. Instead we have an enterprise doing things because people involved think it right and necessary.

Big banks and big timber companies, on the other hand, seem to be fishing for big payoffs from cap-and-trade carbon legislation, to allow them to profit from both their extant ventures and from the very "market-based" regulatory schemes they are petitioning for — the type that are currently being debated as cap-and-trade on Capital Hill in Washington DC. This seems to me to be the wrong way to go.

Environmentally aware cap-and-trade advocates continually stress moving, through time, away from corporate giveaways, else starting without corporate giveaways from the beginning. Still, most legislative proposals allow for some carbon credits to be given to polluter firms as does this week's spotlight bill, the Liberman/Warner sponsored America's Climate Security Act. (S.2191)

Cap-and-trade v. carbon tax was debated in two important forums this week. On Oct 30, The Brookings Institution's Hamilton Project hosted a very lively and informative debate of carbon tax v. cap-and-trade. Policy papers included:

• An Equitable Tax Reform to Address Global Climate Change, Gilbert E. Metcalf
• A U.S. Cap-and-Trade System to Address Global Climate Change, Robert N. Stavins

It isn't clear where any of this is headed in the US: even if a legislative proposal emerges in either form, there is a big question of whether it gets past a G.W. Bush Presidential Veto. Still it is worth the effort to read the policy papers, and even the transcript (pp 1-62 or 103 [PDF]).

Since I advocate for carbon taxes over cap-and-trade, I'll post up this one comment from the transcript, from panel moderator Sebastian Mallaby (Council of Foreign Relations):

… [I]f people focus in on [the debate over "carbon tax" and "cap and trade"] more and they perceive the cap and trade mechanism as being partly a way to distribute free vouchers to industry, as consumers wake up to that, they may prefer the tax system with a rebate that Gib [Metcalf] is talking about. So the political dynamic could flip when consciousness goes up.

On Nov 1, Amy Goodman, Democracy Now hosted Carbon Trading: Practical Solution to Global Warming or Corporate Greenwash? A Debate. Goodman engaged Annie Petsonk (International counsel with Environmental Defense) and Daphne Wysham (Fellow at the Institute for Policy Studies). The debate gives us some insight into why both sides strongly support their positions. Supporters, like Petsonk believe that carbon taxes and cap-and-trade leglislation without some "give" to corporate pollutors are non-starters.

Dissenters, like Wysham (and me) believe that cap-and-trade while well-intentioned will never get to desired results due to the overly-complex nature of the proposals and the inability to ratchet up the "caps" through time, and ratchet down the "corporate giveaways" through time. Here are Snips from the "debate":

… ANNIE PETSONK: We've had great experience with cap-and-trade for controlling air pollution in this country since 1990, when Congress passed the Clean Air Act amendments. We put a cap on acid rain pollution and adopted this kind of system to cut acid rain pollution from coal-fired power plants. So, in that program, we essentially put the training wheels on the bicycle and learned how to ride the bicycle. That program has cut acid rain pollution far faster than industry and many environmentalists predicted could be done. And it's done so at a fraction of the cost that people projected.

Setting up a carbon trading system for the world and for the United States is more complicated. There are more polluters. I agree with Daphne that companies should not be allowed to get credit in a developing country which has no caps on emissions for doing what they were supposed to do anyway. … [O]ne of the reasons why we're looking forward to the markup [of the Liberman/Warner "America's Climate Security Act"] in the Senate Environment and Public Works Committee today is that the bill now being considered there doesn't create that system. It's better than that. …

DAPHNE WYSHAM: I tend to disagree with that perception, as do quite a few number of groups. Friends of the Earth has recently produced an analysis on the windfall profits in the Lieberman-Warner global warming bill [FOE Press Release], and according to their calculations, 38% of the giveaways, the free giveaways in this bill, would benefit the fossil fuel industry over the lifetime of the program. That's — and roughly $268 billion of that would go directly to the coal industry alone. …

[O]ne of the failures of the EU emissions trading system is that they essentially — the governments essentially gave the right to pollute to certain industries. They set the tap high, and as a result industry was able to emit as much as they had been emitting in the past and make a profit buying and selling these emissions rights. Similarly, in this — and there was no auctioning.

Now, in the current Lieberman-Warner bill, there is some auctioning, but about 50% of all of the permits are just being given away for free. Now, these permits are valuable. They are basically being turned into a commodity. So now what we have is essentially the most carbon-intensive of the fossil fuels, the coal industry, is one of the largest beneficiaries of the Lieberman-Warner bill. And an additional $522 billion will potentially go to what they call zero and low carbon energy technologies. Now, if we are optimistic, we would say, "Wonderful! That's going to go to renewables." However, the legislation is vague. It could go to either the fossil fuel industry for carbon capture and storage, which is a very expensive and unproven technology, or it could go to the nuclear energy. And that is not specifically ruled out in this legislation.

So we have problems with this also because it essentially is a tax on the working poor. It's not a tax on the very corporations that are causing the problem.

AMY GOODMAN: How is it a tax on the working poor?

DAPHNE WYSHAM: Well, because we will see the windfall gains. Instead of having those go to, say, subsidize an increase in the price of power or to public transportation or to other incredibly important solutions to the climate problem, we will see billions and billions of dollars worth of profits going back to the very industries that are causing the problem.

AMY GOODMAN: Annie Petsonk?

ANNIE PETSONK: We believe that the Americas Climate Security Act that's going to be voted on this morning in the Environment and Public Works Committee is a very good first step. Is it perfect? No. Are senators moving to improve it? Yes. Senator Lautenberg announced yesterday he wants to broaden the coverage of the bill so that more parts of the economy come under that cap on fossil fuel emissions. …

DAPHNE WYSHAM: … I think it's important to take some specific examples. I think it’s instructive to look at, for example, the World Bank, which I have been monitoring for over ten years now. Now, they have invested over fifteen times as much in fossil fuels as renewable since 1992. Originally, it was a hundred to one. Now, they are getting into the carbon trading market. The US Treasury back in 1997 said this is a clear conflict of interest for a financial institution to both profit from financing fossil fuels and profit from carbon trading. They're actually charging somewhere on the order of 13% commission on all carbon trading transactions. Now, what the World Bank could have done and should have done instead of getting into the carbon trading market is they should have set a higher energy efficiency standard, they should have stopped subsidizing fossil fuels, they should at the very least be calculating their climate footprint, which they are not doing. So they're calculating the carbon credits, but they're not calculating the carbon debits.

Now, if you globalize that particular model and look at how that would play out with bank after bank, whether it's Citibank or the European Bank for Reconstruction and Development or other public or private banks, you see how these banks are going to be gaming the system. They will be profiting from selling — from giving loans to the likes of Chevron, and then they'll be profiting again from charging a commission on the CO2 that is captured from those operations in developing countries or potentially in the US.

So, you know, what I think people need to understand is, yes, the time is urgent. We need to take action very soon on this issue. However, we need to learn the lessons from the failures of the EU emissions trading system. And the bill that's on the Senate floor this morning is not the best way to move forward. It's a corporate giveaway, and we need to do better. Boxer needs to hear from people on this

AMY GOODMAN: Last word, Annie Petsonk, on this. Is this just a corporate gift, a subsidy, a giveaway?

ANNIE PETSONK: If America doesn't take the lead, beginning to tackle our global warming pollution — excuse me — other nations won't either. I strongly support getting rid of fossil fuel subsidies for big coal-fired power plants in China and India and in the US. We've got to start. We cannot afford to delay. This bill is not a corporate subsidy or giveaway. It's a first step in getting America on a track to a cleaner energy future and a safer climate.

AMY GOODMAN: Fifteen seconds, Daphne Wysham, then what's your alternative, since you are so critical of this?

DAPHNE WYSHAM: Well, I think, you know, what we have is a political opportunity here. We know that the President is going to veto any kind of legislation that comes from the Senate. He has made clear his opposition to any kind of legislation —

AMY GOODMAN: Even Lieberman and Warner?

DAPHNE WYSHAM: Even Lieberman and Warner. So why aren't the Democrats — why are they just — why are they kowtowing to Bush? Why aren't they pushing forward the most aggressive piece of legislation that they can get as a benchmark and say this is what we're going to be pushing for in the next administration? And, you know, we can do better. We should be debating these issues. We should be setting much more stringent targets, at least 80% below 1990 levels by 2050. This bill gets us nowhere near that. And so, that's my concerns with it.

'Happiness' as Government Policy?

To move our ethics/policy conversation along further, let's cut to the chase and talk about 'happiness'. Here is some background reading (from debatingmatters.com). What caught my attention today, however, was this from Mark Thoma (Economist's View):

Should We be Happy with Research on Happiness?

What does research on happiness tell us?:

Don’t ask the state for happiness, by Helen Johns and Paul Ormerod, Commentary, Financial Times: The idea that government policy should be focused more explicitly on promoting happiness has been gaining support. Proponents of this view argue that happiness indicators, based on surveys that purport to measure how happy people feel, have stagnated over decades. An important reason is that governments have aimed to maximise ... gross national product, rather than a more holistic indicator of welfare based on happiness.

This premise is clearly false. Politicians have always sought to achieve many things that are not designed to increase GNP. The most recent public service agreements on the British Treasury website, for example, spell out government commitments to ... increase participation in the arts...

A decades-long flat happiness trend could be showing that government policies in general fail... But this would be a depressing conclusion. Instead, happiness advocates make a scapegoat out of GNP and argue that economic growth is irrelevant or detrimental to happiness.

The alternative view is that the happiness data over time contain little or no genuine information. ... Indeed, they show no correlation with a whole range of factors that might reasonably be thought to improve well-being, such as a massive increase in leisure time, a tendency to live longer and a decline in gender inequality.

Income inequality is often claimed to be a strong determinant of happiness, and this “fact” used to argue for more progressive taxation. Yet we do not see any change in recorded happiness when inequality goes up or down. ...

Government attempts to increase measured happiness, rather than making life better for us, may well do the opposite: create arbitrary objectives that divert civil service energies from core responsibilities; give many people the message that happiness emanates from national policy rather than our own efforts; and create pressure for government to appear to increase an indicator that has never before shifted systematically in response to any policy or socioeconomic change. These are exactly the mistakes of the target-driven mentality that now pervades the British public sector. ...

More sinisterly, the happiness view of the world has tendencies that are inherently anti-democratic. The expert with his or her clipboard and regressions knows better than ordinary people themselves what makes them happy. So local democratic or individual decisions can be overridden with a clean conscience. ...

Government does not fail because it does not measure happiness; it fails when its energies are misdirected on the basis of poor quality information.

Should these data be used to draw conclusions such as government intervention may not improve well-being and may actually make things worse? John Quiggin at Crooked Timber has written about the data used to make these assessments:

What’s wrong with happiness measurement?, by by John Quiggin, Crooked Timber …

A quick Google search turned up The pursuit of happiness is so problematic by Stephen King. I think my sentiments lie pretty much with King: The pursuit of happiness is indeed problematic! We are not going to get there by attempting to add it up. Better, I think, to work it out as we go about our culture-forming (institutions) and our personal and family and community decision-making, which too can not be reduced to formulae.

Continuing with the theme of "problematic", let me conclude with these quotes on happiness which help us understand the paradoxes embedded in the term. Better to base one's life on kindness methinks, than happiness. Perhaps a rule of thumb might be: kindness through service begets happiness, but kindness/service alone is not enough. There are other things that come into play, like "purpose," "integrity" …

James Hansen Pleads for: Better Policy, Better Government, Less Spin

Every now and again I see something that strikes close to home. In addition to good policy recommendations for global climate change, James Hansen adds additional recommendations for use of science in policy discussion, including this: "I don't think the Framers of the Constitution expected that when a government employee — a technical government employee — reports to Congress, his testimony would have to be approved and edited by the White House first. But that is the way it works now. And frankly, I'm afraid it works that way whether it's a Democratic administration or a Republican one."

(via Mark Thoma, Economist's View, 4/20/2007)

James Hansen, one of the leaders in raising awareness about global warming, has five recommendations for solving the problem including a call to reduce the gap between what the scientific community understands and what the public and policy-makers are led to believe:

Why We Can't Wait, by James Hansen, The Nation: There's a huge gap between what is understood about global warming by the relevant scientific community and what is known … by … the public and policy-makers. We've had, in the past thirty years, one degree Fahrenheit of global warming. But there's another one degree Fahrenheit in the pipeline due to gases that are already in the atmosphere. And there's another one degree Fahrenheit in the pipeline because of the energy infrastructure now in place—for example, power plants and vehicles that we're not going to take off the road even if we decide … to address this problem.

The Energy Department says that we're going to continue to put more and more CO2 in the atmosphere each year—not just additional CO2 but more than we put in the year before. If we do…, even for another ten years, it guarantees that we will have dramatic climate changes…

I've arrived at five recommendations for what should be done to address the problem. If Congress were to follow these recommendations, we could solve the problem. …

First, there should be a moratorium on building any more coal-fired power plants until we have the technology to capture and sequester the CO2. That technology is probably five or ten years away. It will become clear over the next ten years that coal-fired power plants that do not capture and sequester CO2 are going to have to be bulldozed. …

Second, and this is the hard recommendation that no politician seems willing to stand up and say is necessary: The only way we are going to prevent having an amount of CO2 that is far beyond the dangerous level is by putting a price on emissions. …

But a price on carbon emissions is not enough, which brings us to the third recommendation: We need energy-efficiency standards. That's been proven time and again. …

The fourth recommendation—and this is probably the easiest one—involves the question of ice-sheet stability. …The concern is that it's a very nonlinear process that could accelerate. …[T]his problem with the stability of ice sheets is so critical that it really should be looked at by a panel of our best scientists. Congress should ask the National Academy of Sciences to do a study … The National Academy of Sciences was established by Abraham Lincoln for just this sort of purpose, and there's no reason we shouldn't use it that way.

The final recommendation concerns how we have gotten into this situation in which there is a gap between what the relevant scientific community understands and what the public and policy-makers know. A fundamental premise of democracy is that the public is informed and that they're honestly informed. There are at least two major ways in which this is not happening. One of them is that the public affairs offices of the science agencies are staffed at the headquarters level by political appointees. …

Another matter is Congressional testimony. I don't think the Framers of the Constitution expected that when a government employee—a technical government employee—reports to Congress, his testimony would have to be approved and edited by the White House first. But that is the way it works now. And frankly, I'm afraid it works that way whether it's a Democratic administration or a Republican one.

These problems are worse now than I've seen in my thirty years in government. But they're not new. I don't know anything in our Constitution that says that the executive branch should filter scientific information going to Congressional committees. Reform of communication practices is needed if our government is to function the way our Founders intended it to work.

The global warming problem has brought into focus an overall problem: the pervasive influence of special interests on the functioning of our government and on communications with the public. It seems to me that it will be difficult to solve the global warming problem until we have effective campaign finance reform, so that special interests no longer have such a big influence on policy-makers.

The Case for Carbon Taxes and Against Cap-and-Trade

(via Greg Mankiw)

In a comment on a previous post, reader James offers a good reason why, if the government is to do something about climate change, a carbon tax is better than a cap-and-trade system:

This just occurred to me, so maybe I'm missing something but there seems to be another big advantage for taxes: they probably are much more likely to be both tax-burden and progressivity neutral.

Here's why: Both carbon taxes and cap-and-trade would affect consumers by raising energy costs. (Approximately equally, although to the extent that cap-and-trade imposes more administrative costs, you might need to add more to the price of energy to achieve equivalent carbon emissions.) Taxes raise the after-tax prices directly; cap-and-trade raises the price indirectly by forcing producers to purchase credits, which raises the cost of producing, and thus purchasing, energy. Raising energy costs harms the poor most, because they spend more of their budget on energy.

The regressive effects of a carbon tax are obvious because they are direct, so it should be relatively easy to convince Congress to make the tax revenue and progressivity neutral by instituting income tax cuts (and hikes in the earned income tax credit) weighted toward the poor. (And there's a great bargain to be struck here between conservatives and liberals. Liberals can say, "We'll keep it revenue neutral as long as you keep it progressivity neutral.")

But this will be much more difficult to do for cap-and-trade programs. The main reason that Congress might choose such a program over a carbon tax is the fiction that, unlike a tax, it does not impose costs on consumers. This fiction ignores the indirect cost imposed on consumers when the program increases the price of producing energy. Given that animating fiction, it seems like Congress would be less likely to make progressive changes in the tax code to offset the regressive effects of cap-and-trade. (Congress couldn't argue that they were just offsetting the costs of cap-and-trade because their choice of cap-and-trade was based on denying that those costs exist.)

Al Gore at the US House of Representatives

Global Warming, March 20, 2007:

Al Gore: … "The Day will come when our children and grandchildren will … ask one of two questions. Either they will ask, "What in God's name were they doing? Didn't they see the evidence? … What were they thinking?  Or, … How did they find the uncommon moral courage to rise above politics and redeem the promise of American democracy — [to] do what's right?"

Hat Tip: Brad Ewing, Environmental Economics and Sustainable Development
More from Grist, The Goracle by Amanda Griscom Little, 3/22/2007

'Absent-minded killers' : Why no big focus on biodiversity?

Jeffery Sachs laments world leaders' lack of attention to the 'Convention on Biological Diversity'. Sachs subtitles "Absent-Minded Killers" this way, "We kill other species not because we must but because we are too negligent to do otherwise."

Guardian Unlimited Comment is Free, Sachs 03/22/07: As a species, human beings have a major self-control problem. We humans are now so aggressively fishing, hunting, logging, and growing crops in all parts of the world that we are literally chasing other species off the planet. Our intense desire to take all that we can from nature leaves precious little for other forms of life.

In 1992, when the world's governments first promised to address man-made global warming, they also vowed to head off the human-induced extinction of other species. The Convention on Biological Diversity, agreed at the Rio Earth Summit, established that "biological diversity is a common concern of humanity." The signatories agreed to conserve biological diversity, by saving species and their habitats, and to use biological resources (eg forests) in a sustainable manner. In 2002, the treaty's signatories went further, committing to "a significant reduction in the current rate of biodiversity loss" by 2010.

Unfortunately, like so many other international agreements, the Convention on Biological Diversity remains essentially unknown, un-championed, and unfulfilled. That neglect is a human tragedy. …

Stern Report Buzz

Almost three months after publication, The Stern Report on the costs of climate change still generates much buzz. Some of the buzz echoes methodological concerns we have aired earlier about use and abuse of cost-benefit analysis. (Or, if in a hurry: Top 10 Reasons why CBA fails ….) Here is an condensed version of Jane Galt's recent commentary:

Discount rates, again, Jane Galt, Asymmetrical Information, 01.09/2007: …[T]hough I essentially agree with the Stern Report's conclusions, I am bothered by its methods. …

It is really, really hard to price the costs of climate change. This is true for many reasons. First, some regions will benefit: Siberia and Canada will probably blossom under global warming. A true cost benefit analysis would net those benefits out, but how do you price them? How do you price losing Bangladesh? Is that a one-time loss, or should be impute to each generation a new cost for not being able to visit Bangladesh, and how do we counterbalance that against the new pleasures of visiting the Minnesota Tropical Rainforest? Should we take into account happiness research which indicates that people are roughly as happy after a big loss as they were before?

The uneven distribution of the benefits presents another pricing problem, particularly since there are wide income disparities between the affected countries. I'm not entirely clear which way this cuts, since Britain and Ireland get hosed along with Bangladesh, but it's hard to dodge the moral injustice that the United States, which produces more carbon per capita than these countries, may end up a net beneficiary of global warming.

The biggest problem is the easiest one to state: what is a cost and what is a benefit? How do you value the changes?

Decision-making Bias Toward Optimism

Ever wonder why politicians, government administrators and policy-makers, CEOs and other power-brokers tend toward over-optimism and illusions of control? Daniel Kahneman and Jonathan Renshon help us understand why. A sampler:

Why Hawks Win, Daniel Kahneman, Johathan Renshon, Foreign Policy, Jan/Feb 2007: Why are hawks so influential? The answer may lie deep in the human mind. People have dozens of decision-making biases, and almost all favor conflict rather than concession. A look at why the tough guys win more than they should…. Social and cognitive psychologists have identified a number of predictable errors (psychologists call them biases) in the ways that humans judge situations and evaluate risks. Biases have been documented both in the laboratory and in the real world, mostly in situations that have no connection to international politics. For example, people are prone to exaggerating their strengths: About 80 percent of us believe that our driving skills are better than average. In situations of potential conflict, the same optimistic bias makes politicians and generals receptive to advisors who offer highly favorable estimates of the outcomes of war. Such a predisposition, often shared by leaders on both sides of a conflict, is likely to produce a disaster. And this is not an isolated example.

In fact, when we constructed a list of the biases uncovered in 40 years of psychological research, we were startled by what we found: All the biases in our list favor hawks. These psychological impulses—only a few of which we discuss here—incline national leaders to exaggerate the evil intentions of adversaries, to misjudge how adversaries perceive them, to be overly sanguine when hostilities start, and overly reluctant to make necessary concessions in negotiations. In short, these biases have the effect of making wars more likely to begin and more difficult to end.

None of this means that hawks are always wrong…. The biases that we have examined, however, operate over and beyond such rules of prudence and are not the product of thoughtful consideration. Our conclusion is not that hawkish advisors are necessarily wrong, only that they are likely to be more persuasive than they deserve to be.

Several well-known laboratory demonstrations have examined the way people assess their adversary's intelligence, willingness to negotiate, and hostility, as well as the way they view their own position. The results are sobering. Even when people are aware of the context and possible constraints on another party’s behavior, they often do not factor it in when assessing the other side’s motives. Yet, people still assume that outside observers grasp the constraints on their own behavior. With armies on high alert, it’s an instinct that leaders can ill afford to ignore.

…Even when alerted to context that should affect their judgment, people tend to ignore it. Instead, they attribute the behavior they see to the person's nature, character, or persistent motives. This bias is so robust and common that social psychologists have given it a lofty title: They call it the fundamental attribution error.

The effect of this failure in conflict situations can be pernicious. A policymaker or diplomat involved in a tense exchange with a foreign government is likely to observe a great deal of hostile behavior by that country's representatives. Some of that behavior may indeed be the result of deep hostility. But some of it is simply a response to the current situation as it is perceived by the other side. What is ironic is that individuals who attribute others' behavior to deep hostility are quite likely to explain away their own behavior as a result of being "pushed into a corner" by an adversary. The tendency of both sides of a dispute to view themselves as reacting to the other's provocative behavior is a familiar feature of marital quarrels, and it is found as well in international conflicts….

If people are often poorly equipped to explain the behavior of their adversaries, they are also bad at understanding how they appear to others. This bias can manifest itself at critical stages….

Excessive optimism is one of the most significant biases that psychologists have identified. Psychological research has shown that a large majority of people believe themselves to be smarter, more attractive, and more talented than average, and they commonly overestimate their future success. People are also prone to an "illusion of control": They consistently exaggerate the amount of control they have over outcomes that are important to them—even when the outcomes are in fact random or determined by other forces….

Indeed, the optimistic bias and the illusion of control are particularly rampant in the run-up to conflict….

If optimism is the order of the day when it comes to assessing one's own chances in … conflict, however, gloom usually prevails when evaluating another side's concessions. Psychologically, we are receptive not only to hawks' arguments … but also to their case against negotiated solutions. The intuition that something is worth less simply because the other side has offered it is referred to in academic circles as "reactive devaluation." The very fact that a concession is offered by somebody perceived as hostile undermines the content of the proposal. What was said matters less than who said it. … Some of that skepticism could be the rational product of past experience, but some of it may also result from unconscious—and not necessarily rational—devaluation.

Evidence suggests that this bias is a significant stumbling block in negotiations between adversaries…. [U]nderstanding the biases that most of us harbor can at least help ensure that the hawks don't win more arguments than they should.

Cross-posted from Economic Dreams—Nightmares. See also John Quiggin's Pro-War Bias.

Global Warming Problem Political, Not Economic

"...It is about politics—the politics of getting America to lead a global effort to mitigate the effects of climate change....

The Economist, Global Warming, Economic Cooling [10/30/06]: SIR NICHOLAS STERN, the head of the British Government Economic Service, has produced the world’s first big report on the economics of climate change. But his 700-page effort, although stuffed with figures, is not really about economics. It is about politics—the politics of getting America to lead a global effort to mitigate the effects of climate change.

The purpose of Sir Nicholas’s report—commissioned by Tony Blair—is to deal with the argument of people who accept that climate change is happening, but who say that trying to do anything about it would be a waste of money. This argument is heard occasionally in Europe and frequently in America, where, for added potency, it is combined with the notion that European attempts to tax carbon are part of a conspiracy by socialists determined to undermine the American way of life.

Sir Nicholas’s argument is that, far from undermining the American way of life, attempts to mitigate climate change may help preserve it. He argues this by setting the costs of allowing climate change to happen against the costs of mitigating climate change.

Previous estimates of the costs of climate change—as a result of more hurricanes, more floods and rising sea levels, for instance—have been somewhere between nothing and 2% of global GDP. But Sir Nicholas says those figures were wrong, for two reasons. First, the science has changed, and global warming seems to be happening faster than was previously believed. Second, those estimates have looked only at the likeliest outcomes from climate change, not at the outlying catastrophic possibilities. As a result, Sir Nicholas maintains that if greenhouse gas emissions go on increasing at their present rate, global output is likely to be between 5% and 20% lower over the next two centuries than it otherwise would have been.

Compared with those figures, the costs of mitigating climate change look quite moderate. Sir Nicholas reckons that stabilising concentrations of greenhouse gas equivalent at 550 parts per million (ppm) is a reasonable objective (current levels are at around 380ppm). He reckons that, partly because of falling alternative energy costs, the world could achieve that at a moderate cost. Global output is likely to be around 1% lower by 2050 than it otherwise would have been.

The choice does not look like a difficult one: costs of 5%-20% of global GDP versus costs of 1% of global GDP. Unfortunately, that’s not the difficult bit. The difficult bit is the politics. Climate change is an exceedingly hard issue. It is uncertain: nobody really knows how much it is going to cost. It crosses generations: this generation will have to bear some of the costs while the benefits will accrue to future generations. It crosses boundaries: no one country can solve the problem.

But there is one country towards which Sir Nicholas gestures when he writes of the need for “demonstrating leadership” and “working to build trust”, without which all efforts to deal with the problem will fail: America. (China may well become a bigger polluter than America, but persuading it to do something about climate change will be near impossible if America does not act first). Sir Nicholas does not explain how to solve the difficulty of getting America on board. But if he succeeds in persuading policymakers that the American way of life is better preserved by dealing with climate change than by ignoring it, he himself might be part of the solution.

New Economist adds: The Stern Review's earlier discussion paper, What is the Economics of Climate Change? (PDF) ... argues climate change is a serious and urgent problem, global in its cause and consequences. Current actions are not enough "if we are to stabilise greenhouse gases at any acceptable level". The "economic challenges are complex", and will require a long-term international collaboration to tackle them.

UPDATE: Dissenters are beginning to weigh in:

Greg Mankiw says Raise the Gax Tax

Greg Mankiw says we should raise the tax on gasoline. He's stirring up a bunch of comments on his website. Mankiw's suggestion is a nice followup to yesterday's Eco Econ post. Mankiw:

We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it. Here's why:

The environment. The burning of gasoline emits several pollutants. These include carbon dioxide, a cause of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns.

Road congestion. ... A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.

Regulatory relief. ... A higher gas tax would accomplish everything CAFE standards do, but without the adverse side effects.

The budget. ... A $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue and make a dent in the looming fiscal gap.

Tax incidence. A basic principle of tax analysis ... is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.

Economic growth. Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. Gas is a component of consumption. An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth. It would also encourage firms to devote more R&D spending to the search for gasoline substitutes.

National security. Alan Greenspan called for higher gas taxes recently. "It's a national security issue," he said. It is hard to judge how much high oil consumption drives U.S. involvement in Middle Eastern politics. But Mr. Greenspan may well be right that the gas tax is an economic policy with positive spillovers to foreign affairs.

Gas prices below $3: Are we being played?

Sylvia Tognetti provides a bit of perspective on Peak Oil and the way we are being played by big money and power (yes? no?). Tognetti builds the case from work by and discussions with Daniel Bromley:

No surprise that gas prices are back down below $3/gallon. It's election season. In addition, the debate about whether humans are causing global warming is so over, and, combined with the looming threat of Peak Oil, has provoked serious discussion about the development of alternative energy sources. Now I wonder if that momentum will continue. A few months ago, I had the opportunity to hear a talk by Daniel Bromley - a highly esteemed institutional economist based at the University of Wisconsin. Afterwords he also let me know about an interview he had just done on NPR on the subject of global warming (that you can find here - he joins the conversation in the second half of the program), in which he makes an interesting observation about gas prices, as well as a not so modest policy proposal that would reduce greenhouse gas emissions as well as cure sprawl and protect what little we have left of forests, farmlands, wetlands and healthy streams.

The argument Bromley makes about gas prices is that production rates seem to be adjusted to keep prices at the breaking point, which seems to be about $3/gallon. As serious public discussion begins to be generated about public transportation and alternative sources of energy, the price goes back down, as does the level of interest in developing alternatives. Venture capital simply will not flow into the development of new technology and infrastructure unless there is a consistent set of signals that carbon based fuels will be more expensive in the future. In other words, as he put it, we are all "being played like a cello." (You can find graphs and numbers here, in slides he uses for his course lectures.) However, if peak oil really hits without leaving time for a transition, I imagine that gas prices will just keep going up because there won't be any choices available.

Note to those whose political memories only go back as far as the Reagan administration: we might have had time for a smooth transition had the momentum from the oil crisis in the '70s been sustained, which led to several renewable energy initiatives during the Carter administration. But Reagan pulled the plug on all of that and a lot of smart people who one worked to develop alternative energy sources were forced to change their careers. There is a reason for disgruntled baby boomers... Lets learn some lessons here and change the tape - or turn off the automatic repeat button. …

According to Bromley, research suggests that a 10% increase in the price of gas would reduce gasoline sales by 2.5%. Therefore, a 10% a year increase in gasoline taxes over a 10 year period - which could be earmarked as a dedicated fund for mass transit, would reduce oil consumption in an amount equivalent to that which is now imported, bring prices in the US into line with those now paid in European countries, make public transportation a more appealing option than driving a car, and perhaps even cure sprawl. In fact, the Washington Post reports that with the increase of gas prices and clogged roads, there has also been an increase in the use of public transportation, even in the distant suburbs that have patchy routes. … In some areas, use of public transit has doubled since 2000, after having dropped in the 1990s, largely because of increases in gas prices, but also because of congestion and because more employers have begun to subsidize use of mass transit just as they have parking costs.

Unfortunately, politicians find it much easier to be "for the environment" and "against global warming" - and to arrive at campaign events in hybrid vehicles - than to take a stand in conflicts and controversial policies about future development patterns, particularly when they have constituents stuck in traffic who just want another road. Never mind suggesting anything that remotely resembles a tax on gasoline - an immediate campaign show-stopper. Then there are those who resist redevelopment to higher densities in older suburbs that are now adjacent to subway lines... According to a friend of mine who builds houses, this is politically impossible and is one of the reasons developers build sprawling suburbs - so as to avoid the expense of fighting with owners of existing houses who don't want any more backyards anywhere near their backyard. But actually making some contentious decisions about development patterns and improving mass transit is the key to actually doing anything about global warming and environmental protection. And the longer difficult choices are avoided, the fewer of them we will have to make.

Since I'm not running for anything myself, I'll say what candidates can't - and also get elected. Gas prices should go up faster….They will go up one way or another. If they go up because of a gas carbon tax, rather than a price increase, we will have a source of funds for mass transit. If not, the oil companies make out like bandits. The question is whether we are capable of taking a proactive approach to policy by recognizing trade-offs and actually making a conscious decision rather than looking for silver bullets. …

Samples from a New Blog: Transdisciplanary Journeys

Last night via email Roderic Gill, who directs the Centre for Ecological Economics and Water Policy Research (CEEWPR), introduced me to the new Transdisciplinary Journeys Blog. Gill suggested that our blog journeys seemed to be on parallel paths. After looking at their introductory posts, I agree. Here's a sampler. I also linked them up on our sidebar. Nice to see this thinking getting more air time.

Transdisciplinary Thinking, posted by Roderic Gill

In my view, there is a general tendency in the ecological economics community to spend little time with its core and underlying philosophy of transdisciplinarianism. To me, the transdisciplinary focus is at the heart and root of ecological economics. Little attention though, seems to be devoted to really coming to grips with what the word really means and implies. It is a very powerful concept. And a major challenge for application and procedure. In essence, the ecological economics transdisciplinary focus implies a synergistic alliance between and across conventional disciplinary boundaries. Transdisciplinary is more fundamentally participative than multi-disciplinary (where the agenda for problem definition and the management of cooperation still resides with a disciplinary instigator). The transdisciplinary approach implies cooperation from beginning to end; cooperation at the problem or issue interpretation stage through to the cooperative implementation of results. …

Sustainability and Resilience, posted by Leo Dutra

The goal of sustainable development is to create and maintain ‘prosperous’ social, economic, and ecological systems. These systems are intimately linked: humanity depends on services of ecosystems for its wealth and security and humans can transform ecosystems into more or less desirable conditions. Ecosystem services include provision of clean water and air, food production, fuel, and others. Yet human action can render ecosystems unable to provide these services, with consequences for human livelihoods, vulnerability, and security. Such negative shifts represent loss of resilience.

In operationalising resilience, managing for sustainability in socio-economic systems means not pushing the system to its limits but maintaining diversity and variability, leaving some slack and flexibility, and not trying to optimise some parts of the system but maintaining redundancy. It also means learning how to enhance adaptability, and understanding when and where it is possible to intervene in management. These ‘soft’ management approaches are necessary because ‘hard’ management approaches involving quantitative targets for resource production often do not work. Linear models on which ‘hard’ management depends tend to be incomplete or even misleading in the management of the ecosystems of the world. Equilibrium-based predictive models do not perform well with complex social-ecological systems.

This particular view of resilience is in accordance with the Ecological Economics thinking on sustainability. Sustainable futures are inherently unpredictable and reinforce the idea (proposed by CEEWPR researchers Tony Meppem and Roderic Gill) that sustainability cannot be planned in a rational fashion. In the absence of a linear, mechanical universe that would have permitted simple, rational measures, the best bet for sustainability involves capability for self-organisation and capacity for learning and adaptation.

More resilient social-ecological systems are able to absorb larger shocks without changing in fundamental ways. When massive transformation is inevitable, resilient systems contain the components needed for renewal and reorganisation; they can cope with, adapt to, or reorganise without sacrificing the provision of ecosystem services. Resilience is often associated with diversity—of species, of human opportunity, and of economic options—that maintains and encourages both adaptation and learning.

Social-ecological systems are constantly changing and the design of sustainable futures should encompass this changing nature. Resilience emphasises systems including ‘humans-in-nature’, describing, therefore, a more holistic approach toward sustainability.

Resilience is a useful sub theme of sustainability in that it focuses on bringing together thinking about human systems (short time horizons) with long-term outcomes (ecological systems such as coral reefs). Management that builds resilience can sustain social-ecological systems in the face of surprise, unpredictability, and complexity. Resilience-building management is flexible and open to learning. It attends to slowly changing, fundamental variables that create memory, legacy, diversity, and the capacity to innovate in both social and ecological components of the system. It also conserves and nurtures the diverse elements that are necessary to reorganise and adapt to novel, unexpected, and transformative circumstances. Thus, it increases the range of surprises with which a socio-economic-ecological system can cope.

The concept of resilience shifts policies from those that aspire to control change in systems assumed to be stable, to managing the capacity of social-ecological systems to cope with, adapt to, and shape change. Resilience emphasises adaptability of systems and is thus a useful focus for sustainability. Impacts on ecological resilience will affect socio-cultural and economic resilience as well. The decline of cod fisheries in Newfoundland and Labrador (North America) is an example of the resilience links among ‘panarchical’ cycles of socio-economical and ecological variables. The elimination of the cod stock in the North Atlantic led to the collapse of the economy of the region. After 600 years of profitable fishing in that region, local fishermen nowadays rely on government help for livelihood. The traditions around cod fisheries and the techniques utilised by traditional fishermen may be lost when (and if) the cod stock recover.

Resilience is, therefore, not only an issue of sustainability and options for development, in the present and future, but also an issue of environmental, social and economic security.

Building social-ecological resilience requires understanding of ecosystems that incorporate the knowledge of local users. Thus, the ecological ignorance of some contemporary societies undermines resilience. Technological developments and economic activities based on the perception of decoupled social and ecological systems further contribute to the erosion of resilience. This can be counteracted by understanding the complex connections between people and nature, which create opportunity for technological innovations and economic policies aimed at building resilience.

Two useful tools for resilience-building in social-ecological systems are: (i) structured scenarios and; (ii) active adaptive management. People use scenarios to envision alternative futures and the pathways by which they might be reached. Active adaptive management views policy as a set of experiments designed to reveal processes that build or sustain resilience. It requires, and facilitates, a social context with flexible and open institutions and multi-level governance systems that allow for learning and increase adaptive capacity without foreclosing future development options.

Managing for resilience embraces sustainability outcomes in relation to the social-ecological system. A changing, uncertain world in transformation demands action to build the resilience of the social-ecological systems, which embrace all of humanity.

Why Do Government Economists Still Use Cost Benefit Analysis?

What is a decision-maker or a member of the "collaborative public" supposed to do with anything we government economists say under the banner “economic efficiency" as commonly used in Cost Benefit Analysis? How are we supposed to prove-up on any claims that something is "more economically efficient" than something else simply because it has a higher index number (PNV, B/C, etc)? The short answer in the US is that Benefit-Cost Analysis is pretty much required (OMB's Circular A-4 [PDF- 48p]) for many larger projects/programs/policies. Still, we can't just use "requirement" as a justification. Can we? OK, we can. But should we?

If we make such claims of "economics efficiency," why are we not also talking about "social efficiency," "environmental efficiency," and so on? In short, why would we want to talk about economic efficiency in any context other than then normal one of efficient operation of markets? To the extent we do want to talk efficiency at all, are we going to run our talk to ground by explaining, in appropriate context, the inherent relativity of "efficiency?" (See my four questions below).

I don't intend to answer any of these questions here. See instead my earlier posts: Cost Benefit Analysis Failings and Cost-Benefit Analysis: Wonder Tool or Mirage?, or better still the suggested readings below. As a personal aside, I haven't practiced "efficiency analysis" for many years, even before formally announcing my dissent from whatever mainstream there may have been in 1995. I do value my educational experiences wrestling with the efficiency theory and methods, however. They helped me to think more clearly, and to spend some considerable part of my professional life attempting to dissuade people from continuing to prop up government decisions with what seem to be in the main sophomoric cost benefit analyses. Here are links to my 1995 three-part series explaining my dissent from those who advocate for "efficiency analysis." You can read them in the order I provided them back then, or you can skip to my "Economic Advice" directly.

Design For a Sustainable Economics, Robert Gilman
Learning to Practice Economics in Context, Dave Iverson
Economic Advice for Forest Managers, Dave Iverson

In "Economic Advice" I suggest that we answer four questions when dealing with efficiency: Efficient at what? Efficient for whom? Efficient by what standard? Efficient for how long? (And then what?) The "And then what" question is asked repeatedly after any given response from an analyst or decision maker, to daylight the short sightedness embedded in most decisions. It is drawn from Garrett Hardin's little book Filters Against Folly: How to survive Despite economists, ecologist, and the merely eloquent.

Is there a better way to frame things? I think so. Wasn't that Aldo Leopold's plea when he suggested that we "[Q]uit thinking of land as solely an economic problem. Examine each question in terms of what is ethically and esthetically right, as well as what is economically expedient. A thing is right when it tends to preserve the integrity, stability and beauty of the biotic community. It is wrong when it tends otherwise."

This is the approach advocated by Green Economics.For more, see The GAIA Atlas of Green Economics. Here's Wikipedia's take on Green Economics. Green economics is built on a foundation of interdependence spanning local to global and spanning four spheres of action/influence: economics, society, ecology, and ethics. Specifically, "…The economy shapes and is shaped by the society and ecology of which it is a part. And all human activity is guided by ethical considerations, although ethical norms will change in response to economics, social and ecological influences. …" This notion of wholeness and interdependence is what we need to move from a non-sustainable to a sustainable platform for economics.

Can partial economic efficiency analysis help put us on a road to wholeness, interdependence aand a sustainable platform for economics? How? My answer is no. If your answer is yes, I'd love to hear why. If your answer is no, then you may have crossed a personal threshold toward sustainability.

PS. If you want to look deeper into critiques of CBA, take a look at this list of quotable quotes titled Critiques of Cost Benefit Analysis,

Suggested Reading:
Deborah Stone. 2002. Policy Paradox: The Art of Political Decision Making (revised edition).
Margaret Jane Radin. 1996. Contested Commodities
Thomas Prugh. 1995. Natural Capital and Human Economic Survival
James G. March. 1994. A Primer on Decision Making: How Decisions Happen
Elizabeth Anderson. 1993. Value in Ethics and Economics
Andrew Bard Schmookler. 1993. The Illusion of Choice: How the Market Economy Shapes Our Destiny
Herman E. Daly and John B. Cobb. 1989. For the Common Good
A. Allan Schmid. 1989. Benefit-Cost Analysis: A Political Economy Approach
Robert L. Heilbroner. 1988. Behind the Veil of Economics
Mark Sagoff. 1988. The Economy of the Earth: Philosophy, Law and the Environment
Andrew Sayer. 1984. Method in Social Science: A Realist Approach
E.F. Schumacher. 1977. A Guide for the Perplexed
E.F. Schumacher. 1973. Small is Beautiful: Economics as if People Mattered

Ethanol: Whose subsidy? At what cost?

Foreign Policy, March 7, 2006 features The Green Bullet by Lester B. Lave, W. Michael Griffin. The authors begin: "There's a straightforward way for Washington to end America’s addiction to foreign oil, while reducing greenhouse gas emissions and resolving the impasse on international trade: Turn farm subsides into fuel subsides." Then they offer up minor "economic" and "environmental" roadblocks, that they easily dismiss:

...So what’s the catch? Corn farming is rough on the environment. Soil erosion due to wind and water is rampant. Fertilizer and pesticide runoffs produce algae blooms that result in “dead zones,” including one in the Gulf of Mexico that is so polluted it cannot support aquatic life. Furthermore, building the ethanol processing plants will take 3–4 years, and gas stations would have to commit to providing ethanol. And, because ethanol uses only the starch in corn, not the oil, protein, or other components, converting corn into ethanol is attractive only if there is a market for the byproducts. Opinions differ, but some estimate that byproduct markets could saturate well short of 11 billion gallons of production.

Fortunately, the surplus corn that isn’t economic to convert to ethanol doesn’t have to be grown, because it could easily be replaced with switchgrass. The prairie grass that President Bush mentioned in the 2006 State of the Union Address is naturally resistant to many pests and diseases, requiring far smaller amounts of chemicals and fertilizers. It’s also drought-tolerant and can grow in poor soil. Most important, it can be used to produce ethanol. If the current federal subsidy given to corn were extended to switchgrass, farmers would realize approximately the same income per acre as they do growing corn today. The new crop would use less fertilizer and pesticides, resulting in less erosion. Fertilizer and pesticide runoff would be dramatically reduced, and much of our motor fuel would be renewable.

To be sure, producing ethanol from switchgrass uses new technology that isn’t fully developed. There are pioneer plants in Canada and Brazil, but the costs of commercial production are unclear.

… And the best part: It can be done without Washington spending a dime more than it already does.

Others are not so sanguine. Robert Bryce's Corn Dog, Slate, July 19, 2005, is subtitled "The ethanol subsidy is worse than you can imagine." Bryce cuts quickly to the chase:

...The stickiest question about ethanol is this: Does making alcohol from grain or plant waste really create any new energy?

The answer, of course, depends upon whom you ask. The ethanol lobby claims there's a 30 percent net gain in BTUs from ethanol made from corn. Other boosters, including Woolsey, claim there are huge energy gains (as much as 700 percent) to be had by making ethanol from grass.

But the ethanol critics have shown that the industry calculations are bogus. David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley, co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains.

See also Science Daily, April 1, 2005 , Study: Ethanol Production Consumes Six Units Of Energy To Produce Just One,
And, especially, Ted Patzek's collection of Biofuel Literature.

Obviously my bias lies with the skeptics. Are we wrong?

What is Right? Who Decides?

Assuming for the sake of discussion that we can adequately define and measure degrees of economic allocation, distribution, scale, and depth, what can we say about right allocation, right distribution, right scale, and right depth?  Given the positive economic truths, what are these normative economic rights?  Who decides? 

Because the ecological economists have already put a proposal on the table for three out of the four normative judgments, it might be useful to start with this.  As they see it, economics must seek the appropriate means via market, state, and social processes to the desired ends of efficient allocation, fair distribution, and sustainable scale.  (Herman Daly, Beyond Growth, 45-60; Robert Costanza, et.al., Ecological Economics, 80-83)

Cost Benefit Analysis Failings: Short List

A while back I put together this "top ten list" as to why people like me don't like what we consider over-quantified and over-monetized Cost-Benefit Analysis. Posting them here might jump-start a discussion:

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Top Ten Reasons Why Cost Benefit Analysis Fails in Public Choice Settings!
Dave Iverson
(For more literature references, see my Critiques of Cost Benefit Analysis)

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1. Cost Benefit Analysis (CBA) favors the whims of economic analysts over moral judgments of society. Some claim that CBA replaces moral judgment with a "scientific method" for calculating individual preferences. I put scientific method in quotes, because in common practice, CBA often seems more akin to sorcery than science.

CBA views choice as instrumental, as means toward the end of achieving maximum satisfaction of consumer preferences. In truth, there are many important ends and many means toward any end. Every end is also a means to some other end; no action is purely a means, and no end is purely an end. It proves beneficial to discuss both means and ends, and to attempt to tailor means to ends. Often, however, the push for analysis crowds out dialogue and inquiry.

(See also my Economic Advice for Forest Managers. I champion public cost accounting as an input in public choice, and even support some comparison of costs to receipts. Still, in general I disdain most formalized CBA.)

2. Community and public interest do not show up in the CBA calculus. Instead, public interest is reduced to the sum of private interests.

3. CBA treats "consumers" as sovereign, and "citizens" as absent. Even if we were to ignore communal responsibilities and think only about individuals, there is more to life than markets. All substantive human and/or environmental issues have roots at least as deep in who we are as in what we want.

"Citizenship issues" must be entertained in public deliberation alongside "consumption issues."

4. Values are not "out there" for the plucking like fruit from trees. Social values are developed, shaped, and reshaped through public inquiry and deliberation as well as through direct experience in nature and society. In common CBA practice, by contrast, analysts take values as "given."

5. There is no straightforward way to weigh and balance what is "external" to the CBA calculation—so-called externalities—relative to what is included. Despite disclaimers, CBA in practice tends to ignore things external to the calculation. At a minimum there is seldom any explanation as to how phenomena internal to the calculation relate to phenomena external to it.

6. Equality, fairness, justice issues are ignored or given short shrift in CBA. Instead "trade framing" honors characteristics such as egoism, acquisitiveness, shrewdness, competitiveness....

CBA treats people as caricatures: as atomistic, egoistic, rational, utility maximizing consumers and producers. (Alternatively said, CBA treats people as "mechanistic, self-interest maximizers in a laissez-faire market" (from Margaret Jane Radin's Contested Commodities, at p. 219).

7. Discounting downgrades the importance of environmental regulation—it discounts the future. Despite disclaimers, the norm in CBA analysis is to discount at least some aspects of the future, rather than just to present "opportunity costs for capital," etc. (See also, "Pricing the Priceless: Cost-Benefit Analysis of Environmental Protection" [PDF, 305 kb].

8. Unwillingness to pay must be addressed alongside willingness to pay.Unwillingness to pay" (and particularly unwillingness to even allow markets to be constructed) must be addressed alongside willingness to pay and willingness to set up markets. CBA analysis does not allow for such.

9. In CBA calculations for public choice settings, we can never figure out who is supposed to be selling what to whom. "Willingness to pay" and "willingness to sell" (or "willingness to be compensated for") inquires lead to dramatically different numbers due to our psychological makeup. Normally risk adverse people, for example, will sometimes enter into high-stakes gambles to avoid big losses in what they now have. This dilemma remains even if we decide that markets are the name of the game and CBA the tool of choice.

10. Surprise and uncertainty are too profound to be reduced to futuristic numbers. How are we supposed to guess what the "future" is likely to be, and weigh and balance all in deterministic spreadsheet format? CBA requires such no matter how improbable or surprising the future may appear to us.

Top Ten Reasons Why Cost Benefit Analysis Fails in Public Choice Settings!
Dave Iverson
(For more literature references, see my Critiques of Cost Benefit Analysis)