what a moustache!

John Stossel has a blog!

Goodbye, Lenin!

Last weekend I saw “Goodbye, Lenin!” directed by Wolfgang Becker.  It takes place in East Berlin, 1989-1990 and centers around a family (mother Christiane, son Alex, daughter Lara).  The basic premise is that Christiane is a fervent supporter of the socialist party, and when she has a heart attack in October 1989, falls into a coma for eight months.  During that eight months the Berlin Wall falls, Germany is unified, and Eastern Germany is transformed.  Therefore when Christiane comes out of her coma and the doctors inform Alex that she cannot withstand any form of excitement, Alex must do everything to keep his mother from discovering what has happened to Eastern Germany.

The most interesting part of this movie (this won’t spoil anything) is that this charade turns into convincing Christiane that Eastern Germany has welcomed new refugees from Western Germany.  West Germans have rejected their capitalist and materialistic lives in search of a good hard working, socialist life.  It is amazing to ponder what Germany would look like today if that was the case, if it wasn’t the East Germans who rejected their way of life, but the West Germans.  If they had truly wanted socialism, and not capitalism.  I, of course, believe that could not truly happen if people knew what their life would be like under socialism, but some people truly believed it would be better. Obviously, those who were taken care of financially, who did not have to work hard, who had political positions, were not as enthusiastic about this new world.

This is all to say, “Goodbye, Lenin!” is definitely worth 2 hours of your time.

sunlight tariff

From Don Boudreaux at Cafe Hayek:

“So do you, Mr. Protectionist, also believe that Uncle Sam should force us Americans to pay a high tariff on sunlight before we are allowed to use it? After all, sunlight is an enormously beneficial product that Americans routinely import at no cost at all! (The sun charges us nothing for the valuable heat and light that it exports to us daily.) Don’t you worry that this dirt-cheap import that floods our market every day unfairly shrinks the market for American-made goods such as light bulbs, flashlights, central-heating units and down blankets?”

grammar & economics

Economics majors should be required to take an english grammar course and english majors should be required to take an economics course.

Washington B.C.

carbon tax

How it works (the basics)

Carbon tax: Congress applies a tax to carbon emissions (either emissions, transporting, extracting, etc).

The case for carbon tax

I am not discounting the possible efficacy of a carbon cap and trade system.  However, a carbon tax can be even more effective in reducing emissions levels.  The most important factor in carbon taxes is that they clearly send a signal that carbon emissions are unfavorable.  What we tax, we get less of.

If a tax is applied to carbon emissions, this sends a clear price signal in the market.  It is similar to when oil prices rise. Even though high oil prices reflect scarcity, high carbon prices (resulting from taxation) will reflect society’s negative value of carbon emissions.  Just as with a cap and trade program, making carbon emissions more expensive will deter firms from emitting.  Then they will have an incentive to find more efficient low-carbon or clean ways of producing energy.  When taxes are applied to carbon emissions, the cost of pollution is constant (and optimally higher than the costs of clean technologies).  Since the cost of emitting is constant and carbon prices will not drastically fall, investing in clean technologies will be more desirable.

Carbon taxes are also simpler than a cap and trade program.  What needs to be decided is:

1. Tax rate/fee
2. Where to apply the tax (extracting carbon, transporting carbon, selling carbon, or on emissions)
3. When to increase the tax and by how much

What makes applying a carbon tax easier is that we already have a tax structure in place.  Even though voters are not enthusiastic about taxes, they know how taxes work, which makes a carbon tax more certain than a cap and trade program.  This will also make carbon taxes less expensive to implement than cap and trade.  Additionally, taxing carbon will only take place between the taxpayer and the IRS (excluding those who set the tax), while cap and trade involves many parties.

Domestically, and internationally, countries have an incentive to enforce taxes (because they collect the revenue).  With cap and trade, countries may have an incentive to sell their permits to others for the revenue, but will not have incentives to enforce the reductions.  If country A sells permits to country B, country A will get the cash, but will have an adavantage over country B because they do not have to reduce emissions.

Carbon taxes set the stage for phasing out greenhouse gases.  Once carbon taxes are in place, it will be easier to build environmental costs into other gases.  For example, we can start taxing other greenhouse gases such as HFCs, CFCs, agricultural fertilizers, etc.  Carbon taxes and cap and trade are viable options for reducing carbon emissions, and the debate is mainly about which one can function more effectively and is less susceptible to poor design decisions.  Carbon taxes are the better option: they are simpler and there are fewer opportunities for bad policy decisions to hinder its effectiveness.

Janet Milne, founding director of Vermont Law School’s Environmental Tax Policy Institute: “In 10 years we will have questions about whether the IRS is auditing enough carbon tax returns, but we won’t be wondering about whether middlemen are making too much money from allowance trading, if investors are manipulating the carbon market, or what new laws we need to guard against those risks.”

carbon caps

How it works (the basics)*

Carbon cap and trade: The US administrators of the c&t program decide an optimal level of pollution and set the “cap” at this point.  These administrators then decide on the optimal quantity of permits to issue.  By either giving out or auctioning permits, each industry/business emitting any carbon will receive x number of permits.  If company A emits below the cap, they can sell the excess permits to company B, who emits more than the cap allows.

The case against cap and trade

The first issue that arises concerning cap and trade is its complicated nature.  In designing a cap and trade system, many questions have to be answered, including (but not limited to):

1. Duration of right (month, year), if companies forfeit permits due to non-use, if companies can bank their unused credits for the future
2. Who gets the initial allocation of permits?  Do they buy from auctions or receive for free?  How many permits to issue?
3. Will the permit trading be free market or regulated, should the trades be private or revealed to the public for information purposes.
4. Will trades need to be approved?
5. Voluntary versus official reporting of emission levels
6. Which agencies have jurisdiction over companies/industries? (EPA, local authorities, state authorities, Congress)
7. Do resource users (emitters) pay all costs associated with c&t? Do taxpayers pay some?
8. What can new entrants to an industry do to obtain permits?  Will new permits be issued?
9. What will be the penalty for non-compliance? How will it be set?

Inefficiencies can easily result from this complicated design process, and inefficiencies always lead to higher costs (for the emitters and for taxpayers).

Cap and trade is also susceptible to shortcomings in the policy process and political arena. In the policy making process, affected industries, special interests, and congressmen representing regional interests can clash and hold up the policy process.  Disputes over polluting rights and costly restrictions to industries are controversial, and often the resulting policy has to include sweeteners to placate all interests involved (industry and environmental interests included).  Because of this, the policy will be written with being passed as the top priority, not economic efficiency (or environmental integrity).  Also, those who would participate in the c&t policy may be hesitant to do so, because of uncertainties in the integrity of the carbon market and the complicated policies governing it.

With c&t, corruption or favoring special interests is quite easy to come by.  Permits can easily be given free of charge to heavy polluters to placate them during the policy making process.  This is why heavy emitters may favor c&t, because they assume they will benefit from free allocation of permits.  Since permit allocations may not be reported in as much detail as tax subsidies or grants, the process is not transparent.  According to Willem Buiter, professor of European Political Economy at the London School of Economics, “Lack of transparency means lack of accountability.”

A perfectly designed c&t scheme is preferable to a carbon tax.  However, it is not feasible to have a 100% perfectly functioning c&t scheme.  One of the main shortcomings of a c&t system is that carbon prices can be very volatile.  The goal of c&t is to phase out carbon emissions, and move towards clean technologies.  This is only possible if carbon is consistently made more expensive than investment in clean technologies.  However, just like oil prices, when carbon prices fluctuate greatly this will not be the case.  If carbon prices fall far enough it will be less expensive to continue emitting carbon. Also, investment in clean technologies will not be attractive.  It is also important for emitters to bear the full cost of pollution, but this will not be possible if the cost of carbon falls drastically.

Cap and trade requires an efficient carbon market, which will have to be created.  As recent financial events show us, financial market efficiency is not guaranteed.  Brokers can participate in speculation, and firms may hoard their permits in anticipation of higher permit prices.  Also, firms may keep their permits in an attempt to harm competitors who emit above the cap and will have to pay a high con-compliance fee if they do not obtain enough permits.

*Assuming this is a US market.

The Russian Revolution and Government Intervention

In the 1890s the Tsar of Russia, Nicholas II, became fearful of Russia’s position among the great European nations. Germany had not renewed its alliance with Russia in 1890, which left Russia vulnerable militarily. As Western European nations were very far into their own Industrial Revolutions and progressing at far greater rates than Russia, the Tsar realized that for Russia to compete it would have to move from agriculture as the main industry to manufacturing. Therefore, the Tsar’s government invested heavily in new factories and manufacturing (mainly with French loans), to accelerate Russia from feudalism into capitalism. Would this be considered good government crowding out? Would it even be crowding out since there were not many Russian financial institutions or businessmen to invest privately?

Non-Sequitur

found through Dr. Greg Mankiw’s blog

Quick Thoughts on Benefit-Cost Analysis and Environmental Policy

“Those who benefit [from environmental regulations] call for ever-stricter standads and more cleanup because they obtain the benefits and bear none of the costs, whereas those who must bear the costs of controlling pollution call for less strict standards.”

A. Myrick Freeman III in Environmental Policy: New Directions for the Twenty-First Century (6th edition)

Mr. Freeman concisely presents an important point that is not discussed enough in the subject of new “green” standards.  It seems that the general public favors strict environmental standards, and new, clean technology was promoted by President Obama during his Presidential campaign (and now in his proposed policies).  However, what has been seriously absent from the debate is that those who value new standards and regulations impose the costs upon those who do not value such regulations.  Is this right?