Monthly Archives: May 2010

Sarasota FL and Other Counties Place Their Bets To Fight the Climate Crisis

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The International City/County Management Association just came out with an report, Getting Smart About Climate Change, that’s a nice example of Principle #2, Place Your Bets. It uses case studies to illustrate nine strategies cities and counties are using to combat global warming:

1. Create more sustainable and resilient communities
2. Green the local economy
3. Engage the community in the climate change planning process
4. Approach climate change planning on a regional level
5. Address transportation through transit-oriented development and complete streets
6. Promote density through infill development and brownfield redevelopment
7. Adopt green building policies
8. Preserve and create green space
9. Plan for climate adaptation

One of the more interesting case studies was of Sarasota County, Florida, which has adopted the Architecture 2030 Challenge,

which is built around the goal of achieving carbon neutrality for county operations by 2030…

As staff members began examining what it would take to succeed on that challenge, they quickly realized that land use and community design were every bit as critical to carbon neutrality as energy use in public buildings. In just one example of how that realization translated into a different way of thinking about policy, county staff members looked at the amount of driving that residents were doing and saw that it was largely predetermined by the pattern of development. The task of reducing VMT became not just an issue of housing demand but also a matter of housing need: where does the county need to locate housing and what form does the housing need to take?

That insight, and the fact that folks in Sarasota care about “protecting the area’s natural systems, the county developed a 2050 plan that

proposes the development of “2050 Villages”–compact developments designed to preserve open space and reduce driving–as well as an initiative emphasizing strong transit connections and TOD.

to get a sense of what kind of carbon emission savings Smart Growth can offer, a few steps from the report:

Transportation accounts for one-third of all greenhouse gas (GHG) emissions, more than any other single end-use sector. Between 1990 and 2006, GHG emissions from the transportation sector accounted for 47 percent of the increase in overall U.S. GHG emissions…

SMARTRAQ [Strategies for the Metro Atlanta Region’s Transportation and Air Quality] found that people living in neighborhoods that were rated as the least walkable drove about 30 percent more—and produced about 20 percent more GHG emissions—than those living in the areas rated most walkable….

The greater location efficiency offered by redeveloped brownfields can reduce VMT by 33 to 58 percent over greenfield developments….

Residential buildings account for 21 percent of all CO2 emissions. A detached single-family home uses 54 percent more energy for heating and 26 percent more for cooling than a multifamily home. Homes in compact developments use, on average, 20 percent less energy than homes in sprawling development.

Will all of this stop the climate crisis? No, because right now the efforts are too scattered and diffuse. But what if the environment movement and folks like Obama were doing everything they could to encourage and provide resources for these local experiments? We could make a hell of a lot more progress much more quickly than we can with all the energy being spent on a probably doomed effort to pass cap and trade.

Come to think of it, if Obama, the enviros, and Obama’s amazing social network of folks who organize to get him elected were focused on these kinds of climate crisis fights at the local level, it might create serious increase the odds of getting something serious done at the national level — corporations might decide he was worth cutting a serious national deal if only to slow down local efforts. These are the kinds of options we lose when we follow Krugman and other economists’ market-based framework.

Values-based vs. Market-based: Conclusion

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[Part 7 of Values-based vs. Market-based Approaches to the Economy]

The case I’ve laid out over the last six posts is not an argument against using markets as a tool. As I’ve said, for example, despite all the problems with cap and trade it’s certainly possible that this usage of markets could be an important piece of a larger solution. What I’ve been arguing against is the idea of using a market-based framework.

I think it’s also important to be clear that I’m not arguing that many of our solutions won’t be embedded in or operate alongside of a market. They will be — and so would an approach that relied primarily on regulations.

I’m still struggling with defining what exactly a values-based framework is. But after playing with values-based vs. market-based frameworks for a few weeks, I think it has some real potential. And making the comparison sets some useful boundaries on the scope of what I’m trying to do — which is a really good thing when tackling something this complex.

Finally, I think my first draft of a values-based framework gets around one of the issues I have with some of the other attempts to put values at the center of talking about the economy. These approaches often get off to a strong start, but they run out of gas/bio diesel pretty quickly; they don’t do a good job of handling the inherent challenges of acting on our values in something as complex as the economy.

All in all, not a bad “stumbling towards.”

Values-Based Principle #3: Everybody Gets a Real Say

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[Part 6 of Values-based vs. Market-based Approaches to the Economy]

One of the fundamental principles underlying a market-based framework is that through consumer choice, everyone gets a say. Some bureaucrat doesn’t decide what shoes you get to wear, you do. If you decide hot pink ballerina slippers or combat boots — or hot pink combat boots — best express who you are, you get to make that call. If you have the cash, that is, and if it’s profitable for someone to make hot pink combat boots. For this kind of freedom, the argument goes, the market is pretty effective.

But as Krugman said in Building A Green Economy, there are limits to how much real freedom markets can provide for all.

Now, efficiency isn’t everything. In particular, there is no reason to assume that free markets will deliver an outcome that we consider fair or just. So the case for market efficiency says nothing about whether we should have, say, some form of guaranteed health insurance, aid to the poor and so forth. But the logic of basic economics says that we should try to achieve social goals through “aftermarket” interventions. That is, we should let markets do their job, making efficient use of the nation’s resources, then utilize taxes and transfers to help those whom the market passes by.

The “aftermarket” approach runs into two problems. The first is what almost happened in Chula Vista. In Chula Vista, the fuel plant’s owner planned on spewing toxins close to folks’ homes and their kids’ schools. Doing something about it afterwards would be too late. And although there was a city plan that should have protected these folks, the owner of the fossil fuel plant simply ignored it He knew that unlike my or Krugman’s neighborhood, politicians wouldn’t crush him. He figured these folks didn’t have enough political power to protect themselves.

We can see the same market calculus at play with BP. BP figured it didn’t have to worry that not paying enough attention to safety would wipe out the company, because in 1990 Big Oil got Congress to cap their liability at $75 million (although there’s a chance there may be a way around the cap).

The same is true for the finance industry, which back under Clinton managed to gut the rules stopping them from taking insane risks without getting rid of their bailout safety net.

In short, a market-based framework gets into trouble because it doesn’t take power seriously enough. It pretends that power isn’t at the heart of markets, that it isn’t central to the shaping of markets. It doesn’t deal with the critical question, who gets to define what counts as “efficient”? One person’s market “failure” may be another person’s market success.

That’s also why many folks who are fans of the market-based framework end up proposing fairytale solutions. Take people like Tom Friedman, who says the best way to stop the climate crisis is create a carbon tax and then let the market do its magic. Even if the word “tax” wasn’t political suicide for Republicans now, there is no way a carbon tax large enough to do any good will happen in the US. Suburban folks who live far from their jobs and rural folks will stomp any politician who votes for it because it would devastate their lives.

A values-based framework puts power at the center. If you’re going to talk about what values should shape our economy, you’ve got to talk about who gets to decide which values. And if you believe in fairness and justice and freedom, that leads you to say, everybody should have a real say.

There are some great side benefits to this approach. If you empower many voices, more likely to explore a broader range of solutions. It also acts as a check on policy mistakes — if everyone has a real say, it’s harder to hose people.

Mind you, figuring out what “everybody should have a real say” means isn’t always straightforward. You could probably get most Americans to agree, big corporations shouldn’t be the ones who get to make all the big decisions — few people would argue the fuel plant’s owner should have been able to run over the folks in Chula Vista. On the other hand, I don’t want to live in a world where every decision is ground through a never-ending series of neighborhood community meetings. It’s hard to see how you end up with a world filled with interesting startups if you did. Ditto for NIMBYists, who essentially argue that people who live in a place today have veto power over the people who might live there tomorrow.

But pretending the complexities of power in the economy don’t exist doesn’t make them go away. All that gets you is the crazy, dysfunctional mess we have today. Better we own up to the difficulties and stumble towards a better answer.

Up next: conclusion

Rethinking the GDP

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This week’s New York Times Magazine also had fascinating article about efforts to come up with an alternative to the GDP — i.e., how to put a number on how our country is doing. For years, economists and activists have criticized the GDP as a bad way to measure how we’re doing. For example, Katrina was a terrible tragedy, but it showed up as an increase in the GDP because of all the building, emergency supplies, etc. that it generated. If the GDP is a wrong way to go, why is it worth spending the time to come up with an alternative? Economist Joseph Stiglitz explains,

“Too often, particularly I think in an American context, everybody says, ‘We want policies that reflect our values,’ but nobody says what those values are,” Stiglitz told me. The opportunity to choose a new set of indicators, he added, is tantamount to saying that we should not only have a conversation about recasting G.D.P. We should also, in the aftermath of an extraordinary economic collapse, talk about what the goals of a society really are.

For example:

Do we want government to help us increase our sense of satisfaction? Or do we want it to help us get through our days without feeling misery? The two questions lead toward two very different policy options. Is national progress a matter of making an increasing number of people very rich? Or is it about getting as many people as possible into the middle class?

A better way of measuring how we’re doing might also change how we think about the past.

In [Stiglitz's] view, Americans would have had a much clearer picture of our progress over the past decade if we had focused on median income rather than G.D.P. per capita, which is distorted by top earners and corporate profits. “When you have increasing inequality, median and average behave differently,” Stiglitz said. Real median household income has actually dipped since 2000. But G.D.P. per capita, he noted, has gone up. A president could go on the podium, Stiglitz said, and point to G.D.P. as proof that Americans are doing very well. But if you looked instead at median income, he said, “you could say, a) it’s not sustainable; and b) most people are actually worse off.” We need to focus on those median figures, he insisted.

The same is true for comparing us with the rest of the world.

It has long been the case, for example, that the G.D.P. of the United States outpaces that of European countries with higher taxes and greater government spending; it has thus seemed reasonable to view our economic growth as a vindication of a national emphasis on free markets and entrepreneurship. But things look different if you see the measure itself as flawed or inadequate. We take shorter vacations than Europeans, for instance, which is one reason their G.D.P. is lower than ours — but that could change if our indicators start putting a value on leisure time. Some of the disparity, meanwhile, between the U.S. and various European countries, Stiglitz argued, is a statistical bias resulting from the way G.D.P. formulas account for public-sector benefits. In other words, the services received from the government in a country like Sweden — in public education, health care and child care, among other things — are likely undervalued. Rejiggering the measures of prosperity would almost certainly challenge our self-perceptions, Stiglitz said, perhaps so much so that in the U.S. we might begin to ask, Is our system working as well for most people as we think it has been?

Where many folks who’ve been wrestling with an alternative to the GDP end up is arguing that a single stat just won’t do.

Suppose you’re driving, Stiglitz told me. You would like to know how the vehicle is functioning, but when you check the dashboard there is only one gauge. (It’s a peculiar car.) That single dial conveys one piece of important information: how fast you’re moving. It’s not a bad comparison to the current G.D.P., but it doesn’t tell you many other things: How much fuel do you have left? How far can you go? How many miles have you gone already? So what you want is a car, or a country, with a big dashboard — but not so big that you can’t take in all of its information.

Incorporating a broader range of indicators also gives you at least a little help with tackling difficult if not impossible issues such as trying to measure/incorporate happiness.

while our current economic measures can’t capture the larger effects of unemployment or chronic depression, providing policy makers with that information may influence their actions. “You might say, If we have unemployment, don’t worry, we’ll just compensate the person,” Stiglitz told me. “But that doesn’t fully compensate them.” Stiglitz pointed to the work of the Harvard professor Robert Putnam, who served on the Stiglitz-Sen-Fitoussi commission, which suggests that losing a job can have repercussions that affect a person’s social connections (one main driver of human happiness, regardless of country) for many years afterward.

As a result, some of the more promising efforts such as the State of the USA have ended up creating a very large list of indicators — up to 300 — that people can mix-and-match to suit a particular purpose.

The size of the indicators panel is not a stumbling block; if anything, he argued, it’s an asset for an information-based society. The G.D.P. and other indexes, Hoenig said, are “an artifact of a world before the Web.” For his part, Stiglitz sees the State of the USA as a complement to any future dashboard system. A small dashboard of indicators could be useful for some purposes, a large panel for others. “When you go to a good doctor today, they don’t just look at one or two vital signs,” he said. “They look at a hundred statistics.” State of the USA, he told me, could be a “rich diagnostic tool” for evaluating the health of the country.

Calculating "Cost," or Political Calculation?

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A New York Times Magazine piece on Cass Sunstein, the legal scholar who now runs the White House’s Office of Information and Regulatory Affairs, explains how he’s trying to put numbers around the cost of climate change. But as the article shows, “cost” has as much to do with politics — with what’s feasible — as it has to do with science or economics.

A few years ago, the UK asked economist Nicholas Stern to calculate the cost of not responding to the climate crisis.

[Stern] envisioned melting glaciers that would threaten one-sixth of the world’s population, mostly in South Asia, the Andes and parts of China; rising temperatures that would starve much of Africa, where crops would have difficulty growing; and worldwide plagues of malaria and dengue fever. Stern set the discount rate at 1.4 percent, a figure that would call for vast action, immediately.

Sunstein was skeptical.

Sunstein seemed to side with economists like William Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear what direction the risk of error cuts in,” he told me. “If we err, 7 percent could be bad,” he said, but “if we err, 1 percent could be bad also.” A low a discount rate might protect the environment by spurring us to sacrifice now — while damaging the economy, increasing poverty and putting more people out of work.

When an interagency group settled on a number,

Stern’s apocalyptic model was out; Nordhaus’s more moderate model was in. “To enshrine these Pollyannaish studies and never look at the Stern Review — it’s not a technocratic middle of the road; it’s a political choice,” says Frank Ackerman, an environmental economist at Tufts. Ackerman says that the discount rate the government prefers — 3 percent — isn’t low enough. “It nowhere captures the urgency of the science.”

Sunstein won’t defend a discount rate as low as Stern’s — the expenses it would require are, for him, prohibitive. But he says the government has weighed the possibility of environmental catastrophe, of events that are unlikely to occur but not quite dismissible, into the social cost of carbon. The interagency group wanted to recognize, Sunstein told me, “some of the ethical and economic judgments that some economists have that lead to a lower discount rate.”

In other words, if the cost is too expensive, let’s just pretend it’s less.

There’s another basic problem with this whole exercise:

In some cases — in the case of climate change — the problem isn’t just that experts don’t know enough. The problem is that nobody knows enough, and still the government has to choose.

FYI, in the same Magazine, there is also a great article by mathematician John Allen Paulos, on how incredibly tricky using numbers to drive policy can be.

counting depends a great deal on previous assumptions about categorization….

Second, after we’ve gathered some numbers relating to a phenomenon, we must reasonably aggregate them into some sort of recommendation or ranking. This is not easy. By appropriate choices of criteria, measurement protocols and weights, almost any desired outcome can be reached….

Or as he sums it up,

A well-known quotation usually attributed to Einstein is “Not everything that can be counted counts, and not everything that counts can be counted.” I’d amend it to a less eloquent, more prosaic statement: Unless we know how things are counted, we don’t know if it’s wise to count on the numbers.

Values-Based Principle #2: Place Your Bets (Heuristics Over Models )

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[Part 5 of Values-based vs. Market-based Approaches to the Economy]

It’s easy to understand why economists love market-based frameworks: they’re elegantly simple. Set the right prices and everything follows. Or as Krugman wrote about solving the climate crisis:

Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts…. [For example,] When businesses decide how much to spend on insulation, they will take into account the costs of heating and air-conditioning that include the price of emissions licenses or taxes for electricity generation.

But as we saw in Getting Green Done, price incentives often aren’t enough. Even when Schendler could show that switching to compact fluorescent light bulbs would save his company a lot of money, he lost that battle. Part of the reason: “Hotel managers don’t believe they make money by saving — they make money by selling” even though a huge amount of profit gets eaten up by overhead. In other words, people and organizations aren’t calculators.

That’s why, as we saw last year, behavioral economics may be doing well in the press but still isn’t making much headway with most economists — it makes building elegantly simple models close to impossible. Better to pretend it doesn’t exist:

“Behavioral economics has identified a dizzying array of human foibles. We clearly can’t incorporate all of them, and because of that, people feel that incorporating one error into your model may be just as unrealistic as incorporating none,” says Ed Glaeser, a professor of economics at Harvard University.

If we can’t afford to just throw our hands up and say the economy’s too complicated, what do we do? I say, place our bets. Markets can be a great tool, but there are plenty others — many of which also encourage flexibility and creativity:

  • Prime the Pump by funding experiments
  • Work together like the folks in Chula Vista’s Environmental Health Coalition, New York City’s WE ACT, Kentuckians for the Commonwealth, and the Miami Workers Center did to create a collaborative vision of where we want to take our community
  • Use the power of non-market based competition and friendly rivalries like CityFlight 2010
  • Run global corporate accountability campaigns
  • Focus on a particular sector of the economy, such as Architecture 2030 — a campaign by architects whose goal is to ensure that by 2030 all new buildings and major renovations are carbon neutral

And these are just tools for taking on the climate crisis. There are plenty of examples from efforts to solve other problems. Take the case of open source software. If you surf the net, odds are many of the sites you visit it use open source software — an incredibly flexible, creative ecosystem where folks create and give away software and the means for modifying it. It’s one of our economy’s great success stories, and it’s not a market-based solution.

Markets are a good tool, but they are only one of many. If we focus just on markets, we’ll miss out on a lot of opportunities for tackling the major problems we’re facing.

If you’re concerned these other approaches won’t value flexibility and creativity the way markets can, I think you’re missing the point of a values-based framework. If we value flexibility and creativity not just because it’s effective in solving problems but because we intrinsically value it, then there’s no reason why we can’t decide it’s one of our critical values. I don’t know about you, but I want to live in a world where when we take on complicated problems like the climate crisis, we look for solutions that are effective, just, and that allow for flexibility and creativity.

In coming months, I’ll flesh out ways of structuring/chunking these tools and what’s involved in placing our bets. But for now, perhaps a simple way of thinking about the difference between a market-based framework and values-based framework is the difference between a model and heuristics. Economists love simple, clean, elegant models — and I don’t blame them. But if you live in the messy real world, they aren’t enough of a guide. That’s why in my sector of the economy, we tend to use heuristics instead. They aren’t as satisfying, but they get the job done.

Up Next: making sure everyone gets a real say.

Values-Based Principle #1: We're Not As Smart As We Think We Are

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[Part 4 of Values-based vs. Market-based Approaches to the Economy]

If you’ve ever heard someone preach the joys of a market-based solution, odds are at some point they’ve said, government regulations/bureaucrats can’t be smarter than the market — the economy’s just too complicated. But as we saw last week, creating a market-based solution runs smack into the same problem. In case you need a reminder, here’s one last example:

On India’s Bhilangana river, local farmers run a finely-tuned terraced irrigation system that provides them with rice, wheat, mustard, fruits and vegetables. This ingenious, extremely low-carbon system of agriculture is threatened by a new hydroelectric project designed to help power India’s heavy industry. Villagers may have to leave the valley, losing not only their livelihoods but also their knowledge of a uniquely sustainable modern technology.

Is carbon trading stepping in to support the villagers’ piece of the solution to global warming? On the contrary. It’s supporting the hydropower company, which has hired consultants to argue that their dam will result in fewer carbon emissions than would have been the case if it had not been built. The firm plans to sell the resulting carbon emission rights to polluting companies in Europe. The example is typical of the way carbon markets are undermining positive approaches to climate change everywhere.

I’m guessing that’s not what the designers of carbon emission trading markets had in mind.

So what do we do? There’s a simple solution, used every day in software development (my little corner of the economy), industrial design, and many others: you deal with it head on. You start from the assumption that you can’t possibly figure it all out in advance and you go from there.

If I’m trying to build a complicated database, for example, I start by assuming that I won’t really understand what users want, users may not understand what they want, and what they need tomorrow will be different than today. So, I build software iteratively, so my users and I get to find out for real if we are on the right track. I start with mockups rather than actual code; knowing you probably won’t get it exactly right the first time is a lot less scary when you’re throwing away a paper prototype instead of lots of labor-intensive programming. And I use risk management. I come up with a list of things that might go wrong and what we’ll do to mitigate the risk. Then I watch like a hawk for signs of trouble and move aggressively when I see them.

A lot of the same lessons apply when trying to shove the economy closer towards our values. We start from assuming we won’t get it right and then build tools and systems to help us stay out and get out of trouble.

Take the idea of priming the pump from Auden Schendler’s Getting Green Done. Schendler writes:

government needs examples of how to be environmentally progressive and case studies from which to build policy. Every individual and business matters because we need labs for determining what’s worth pursuing and how best to do it.

So before we know enough to write smart regulations, we can “prime the pump” by funding experiments. That’s how Schendler’s first success at the Aspen Skiing Company happened — he got a grant to fund his pilot project. Later, once we’ve gained enough experience, we can do things like write the first versions of green building codes. But even this will take trial and error to find the right balance.

There are two keys to this approach: holding folks accountable and feedback loops. Instead of assuming that markets will automatically lower emissions, we watch carefully to see if it is actually lowering emissions and then tweak the rules and incentives as we go. Instead of assuming that if Wall Street has plenty of capital and shareholders are happy corporations will automatically create lots of good jobs, we keep a close eye out on what capital is getting used for and whether it’s actually creating good jobs.

It’s not a simple answer. Then again, life isn’t simple. If we start from the principle that we aren’t as smart as we think we are, we are a lot more likely to get to where we want to go.

Up next: placing our bets

Cap and Trade: More Bits and Pieces from around the Net

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While working on yesterday’s post, I found a lot of interesting analysis of cap and trade. In case you’re a glutton for geeky green punishment, a few more tidbits:

A great series by Eric De Place making some of the strongest arguments in favor of carbon emissions trading.

In response to a Wall Street Journal op-ed by her fellow law professors, San Francisco School of Law Professor Alice Kaswan makes an interesting argument for the middle ground:

Ideological claims that “markets work” and “regulations don’t work” miss the point. Schoenbrod and Stewart identify failed regulations and successful markets. I can identify failed markets and successful regulations. For example, the European Union’s European Trading System, its initial foray into greenhouse gas controls, failed to reduce emissions or generate innovation incentives, while many U.S. regulatory initiatives have successfully reduced traditional pollutant emissions. We can all point to examples of success or failure for a given policy instrument. While markets and regulations have differing intrinsic strengths and weaknesses, the most critical factor is how well or poorly they are designed, not the choice between them….

More broadly, while Schoenbrod and Stewart decry the potential role of politics in distorting regulatory programs, what about the politics of market design? Cap-and-trade programs are rife with opportunities for influence that could undermine a program’s effectiveness. Not surprisingly, “politics” are an inevitable part of the democratic process. Politics will influence the cap-setting process, the extent to which offsets are allowed, the types of permissible offsets, the content of and control over offset integrity rules, the choice between freely distributing allowances versus auctioning them and numerous other critical parameters. It is not clear that one or the other policy instrument is more or less subject to potentially abusive political influence.

Along the way, she also points out the numerous ways that market-driven approaches can fail: Continue reading →

Values Vs Market-Based: The Ugly Mess Behind Cap and Trade

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[Part 3 of Values-based vs. Market-based Approaches to the Economy]

As we saw yesterday, the strongest argument for a market-based framework is that it allows for decentralized, flexible, creative solutions vs. what Krugman calls “a ‘command and control’ fix that issues specific instructions in the form of regulations.”

That’s the theory. But step into the nitty-gritty details of creating a market-based solution, and a very different picture emerges. A market-based framework does allow for lots of flexibility and creativity. But the creative energy it unleashes can just as easily be spent making money while undermining the goals the market was supposed to accomplish. This isn’t a showstopper. But to put this destructive creativity in check, you’ve got to create lots and lots of “specific instructions in the form of regulations.”

It’s hard to get a visceral sense of just how much regulation a “market-based” approach requires to actually work. So in this post we’ll take a look under the hood of Krugman’s favorite solution, cap and trade, at five ways it can go south if it isn’t kept in check by lots of regulations.

1) Speculation Pew has a great brief on what it takes to set up an emissions market so speculators won’t blow it up. And baby, it ain’t pretty.

For starters, you have to close “the Enron Loophole, the London Loophole, and the Swaps Loophole.” What are they? Trust me, unless the idea of reading sections like “Options for Improving Oversight of OTC [over-the-Counter] and Exchange-based Transactions” makes you feel tingly, you don’t want to know. And this loophole list is just the beginning, based on past speculative tricks. The creative boys and girls at Goldman Sachs are sure to come up with new loopholes.

Mind you, that’s not a reason to avoid using a market-based solution. The point of Pew’s brief is to explain what we need to do to make emissions markets work. And as Krugman pointed out last year,

Any time you have a market, there’s some opportunity for speculation… So, should fear of speculation lead us to ban trading in wheat? Nobody would say that… Now substitute “emission permits” for wheat. It’s exactly the same story.

My point isn’t that a market-based solution can’t work because of speculation. It’s that it will require lots and lots and lots of rules and regulations to keep speculators from blowing it up.

2) Emissions Offsets. The European Union has been running an emissions market, the Emissions Trading Scheme (EU ETS), for half a decade, and they’ve learned some very valuable, painful lessons. One of them is that if you don’t limit the ability of folks to buy offsets, some people will go at them with all the reserve of a crack addict. And we’re not talking some shady Eastern European country, we’re talking about the Netherlands. According to professors Tamra Gilbertson and Oscar Reyes, the Netherlands’s 2008-2012 emissions trading National Action Plan (NAP)

stated its intention to purchase 20 million tonnes of offset credits every year towards its reduction target. This would be equivalent to outsourcing all of its emissions reductions commitments during that period.

At least these supersized offsets help reduce emissions somewhere else, right? Maybe — if you create a bunch of those icky “specific instructions in the form of regulations” plus monitoring & enforcement to ensure the folks who develop and sell these offsets don’t get too creative… Continue reading →

Values- Vs Market-Based: Why Markets Are Supposed to Kick Ass

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[Part 2 of Values-based vs. Market-based Approaches to the Economy]

Last week, I argued that a values-based framework has two big advantages over a market-based framework in setting the agenda. We’re more likely to debate what really matters to us. And we’re more likely to debate who should get to decide — and in turn, that makes it harder for the wealthy and big corporations to hide what they’re fighting for.

In the next few posts, I’m going to try to show that a values-based framework is also better at actually delivering the goods. To understand why, first we need to be clear why smart folks like Krugman favor a market-based framework. Or as Krugman put it,

Textbook economics and real-world experience tell us that we should have policies to discourage activities that generate negative externalities and that it is generally best to rely on a market-based approach.

That said, Krugman isn’t arguing markets are the only game in town. Sometimes banning behavior outright make more sense.

When it comes to direct action, you can make the case that economists love markets not wisely but too well, that they are too ready to assume that changing people’s financial incentives fixes every problem. In particular, you can’t put a price on something unless you can measure it accurately, and that can be both difficult and expensive. So sometimes it’s better simply to lay down some basic rules about what people can and cannot do.

Consider auto emissions, for example. Could we or should we charge each car owner a fee proportional to the emissions from his or her tailpipe? Surely not. You would have to install expensive monitoring equipment on every car, and you would also have to worry about fraud. It’s almost certainly better to do what we actually do, which is impose emissions standards on all cars.

So why rely on markets wherever possible? First, he argues,

A market-based system would create decentralized incentives to do the right thing

And decentralized incentives are critical when you are dealing with an insanely complicated problem like greenhouse gases.

greenhouse gases are a direct or indirect byproduct of almost everything produced in a modern economy, from the houses we live in to the cars we drive. Reducing emissions of those gases will require getting people to change their behavior in many different ways, some of them impossible to identify until we have a much better grasp of green technology. So can we really make meaningful progress by telling people specifically what will or will not be permitted? Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts.

The second reason to use markets:

But while the direct regulation of activities that cause pollution makes sense in some cases, it is seriously defective in others, because it does not offer any scope for flexibility and creativity

In short, a market-based framework allow for decentralized, flexible, creative solutions, “as opposed to a ‘command and control’ fix that issues specific instructions in the form of regulations.”

Up next: market-based theory meets European Union Cap and Trade reality