Tragedy Of The Commons

Excerpts from:
"U.S. State CO2 Laws Won't Prevent Coal Boom"
September 01, 2006 — By Timothy Gardner, Reuters via ENN

NEW YORK — U.S. states' plans to reduce greenhouse gas emissions could lead to little change in national carbon output, simply pushing coal-fired power plants and other dirty industries to relocate in states without rules, experts said on Thursday.
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The plan, which would reduce emissions 25 percent by 2020, follows an agreement by seven states in the Northeast to cut greenhouse emissions at power plants by 10 percent by 2019.

Both efforts, which would set up regional emissions markets, come amid an absence of federal regulation on heat-trapping gases after U.S. President George W. Bush withdrew from the Kyoto Protocol early in his first term.

But experts said state efforts may not lead to lower emissions nationwide. They noted that California gets some of its power from plants in Nevada that run on the fuel that produces the most carbon dioxide -- coal.

"I don't think California can ban power from Nevada," said William Pizer, an economist and senior fellow at the Resources for the Future environmental think tank in Washington, D.C.

In addition to existing Nevada plants that export coal-fired power into California, seven more are being planned in the sparsely-populated state, according to the Department of Energy.

Because a ton of CO2 produced in Nevada enters the atmosphere no differently from a ton of CO2 from anywhere else, experts worry the national effect of California's plan could be overridden by the emissions of more coal plants elsewhere.

The Nevada plants are just some of the 120 coal plants being planned in the United States -- the most in decades -- all of which are cheaper to build than nuclear plants, which emit practically no emissions.
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Other carbon-intensive industries California plans to regulate, such as concrete makers, could also be tempted to cross the border into states that don't regulate CO2.

"It's like gated communities," said Jagdish Baghwati, an economics professor at Columbia University, about patchwork state regulations. "They take care of their pollution security, but you and I can get slaughtered for all they care."

"Most states will simply welcome the opportunity to say, 'Look we're going to profit from this,"' he said about the possibility of dirty industries relocating to unregulated states.

Dale Bryk, an attorney for the Natural Resources Defense Council that has advised states on how to regulate emissions, said California is working on stopping dirty power imports from unregulated states -- or "leakage". "We're confident we're going to be able to do that," she said,

The seven states in the Northeast that formed the Regional Greenhouse Gas Initiative (RGGI) also have battled "leakage." The region gets most of its current electricity from natural gas and nuclear.

But Baghwati said stopping "leakage" could be hard. "Typically you get states taking advantage (of the fact that they are not regulated), rather than states falling in line."

RGGI also hopes more states will join. Maryland is set to join in coming years but Rhode Island and Massachusetts, the region's biggest CO2 producing state, dropped out of the program last year. Pennsylvania, a big coal state, was originally interested in joining, but has no plans to do so.

Many environmentalists see the states' carbon efforts as an important first step that could lead to a national CO2 regime. But economists say the patchwork approach runs the risk of entrenching industry and politicians in highly-populated states such as Texas, Florida, Pennsylvania and Illinois to fight harder against a national plan.

"You may wind up undermining a more sensible national policy," said Baghwati.

Global Warming Solutions Act

"Features of California's Landmark Global Warming Bill"
August 31, 2006 — By Reuters via ENN

California is ready to enact the toughest legislation in the United States to tackle global warming after Republican Gov. Arnold Schwarzenegger and top Democrats agreed Wednesday on a landmark bill to cap greenhouse gas emissions.

The following are the main features of the proposed California Global Warming Solutions Act of 2006, which will be voted and most likely approved in the state legislature by Thursday.

- California, the world's 12th largest producer of greenhouse gases, will cap emissions at 1990 levels by 2020, approximately a 25 percent reduction.

- By 2008, the California Air Resources Board will begin requiring reporting of greenhouse gas emissions by the biggest polluters.

- By 2011, the state will set greenhouse gas emissions limits and reduction measures to go into effect in 2012. Failure to comply will lead to penalties.

- The state board is allowed to draw up market mechanisms to achieve greenhouse gas emission reductions, including carbon credit trading.

- The governor can halt implementation of regulations for up to one year in the event of "extraordinary circumstances" like a natural disaster or economic crisis.

"Schwarzenegger Reaches Deal on Greenhouse Gas Emissions"
August 31, 2006 — By Samantha Young, Associated Press via ENN

SACRAMENTO, Calif. — California would become the first state to impose a limit on all greenhouse gas emissions, including those from industrial plants, under a landmark deal reached Wednesday by Gov. Arnold Schwarzenegger and legislative Democrats.

The agreement marks a clear break with the Bush administration and puts California on a path to reducing its emissions of carbon dioxide and other greenhouse gases by an estimated 25 percent by 2020.

The bill still needs lawmakers' approval, but that appears likely, given that Democrats control the Legislature.

The deal gives Schwarzenegger a key environmental victory as he seeks re-election this fall.

"The success of our system will be an example for other states and nations to follow as the fight against climate change continues," Schwarzenegger said in a statement.

The bill would require the state's major industries -- such as utility plants, oil and gas refineries, and cement kilns -- to reduce their emissions of the pollutants widely believed to contribute to global warming.

A key mechanism driving the reductions would be a market program allowing businesses to buy, sell and trade emission credits with other companies.

The agreement came after weeks of negotiations and was announced by the governor's office and Democratic leaders in the Senate and Assembly. The bill is expected to be sent quickly to the Senate floor.

The bill was praised by environmentalists as a step toward fighting global climate change but criticized by some business leaders, who say it would increase their costs and force them to scale back their California operations.

Republicans in the Legislature say climate change should be addressed at the national level, not on a state-by-state basis.

"Adopting costly and unattainable regulations will drive businesses and jobs out of California into other states and even into other countries with no commitment to improve air quality," said Assembly Republican leader George Plescia, a LaJolla Republican.

Schwarzenegger and the Legislature's Democratic leadership have embraced a cap on vehicle and industry emissions as a way to make California a trendsetter in fighting global warming.

The nation's most populous state is the world's 12th-largest emitter of greenhouse gases and could suffer dire consequences if global temperatures increase only a few degrees. Reports by state agencies indicate that a 2- to 3-degree rise in temperature could melt the Sierra Nevada snowpack earlier each year, leading to flooding in the Central Valley and threatening the state's long-term water supply for cities and farms.

The two sides overcame obstacles including election-year politics to make the deal happens, said Sen. Don Perata, an Oakland Democrat and the chamber's president pro tem.

"This is not anecdotal legislation; this is rooted in fact," he said at a news conference. "The facts are if we do not do something to stop carbon emissions in this world, we will see a diminution in the quality of life."

Schwarzenegger had insisted that the California Air Resources Board, which will oversee the program, be required to implement the market-based strategy. The agreement does not make the system mandatory, as the governor wanted, but it does strengthen the Democrats' original language to make it easier for the air board to implement such a system.

Schwarzenegger has tried to position himself as a leader in the fight against global warming. Last year, he issued an executive order calling for the state to reduce its greenhouse gas emissions to 2000 levels by 2010, 1990 levels by 2020 and to 80 percent below 1990 levels by 2050.

He organized a team that recommended a statewide cap and last month signed an accord with British Prime Minister Tony Blair in which California and Britain will work together to research cleaner-burning fuels and technologies.

During the negotiations over the California cap, Schwarzenegger sought to appease his supporters in the business community by arguing for safeguards for the industries that would be most affected.

Administration officials have spent weeks seeking assurances that any legislation would require a market program similar to those in the European Union. The idea would allow businesses to buy, sell or trade emission credits with other companies instead of making their own reductions if those cuts were considered too costly or technology difficult.

Such a program could help industries that may not be able to meet their targets through energy efficiency practices or the use of alternative fuels.

The negotiated bill included a provision allowing the governor to push the cap deadline back by one year "in the event of extraordinary circumstances, catastrophic events or threat of significant economic harm."

Assembly Speaker Fabian Nunez said he hoped industry representatives would be "much more comfortable" with the bill once they had a chance to read it.

Excerpt from:
"California tackles global warming"
August 30 -- By Gregory Mankiw

Based on the article (and a similar one at the Washington Post), the proposed new system for carbon emissions appears to be exactly the sort of pollution permit market discussed in chapter 10 of my Principles text and which economists have long endorsed.

The article does not say how these permits would be allocated. Ideally, they would be sold. A sale provides the government nondistortionary revenue that can be used to reduce distortionary taxes. If that is the case, I will make Arnold honorary president of the Pigou Club.

In many similar cases, however, the permits are given out for free to established firms. This is surely second-best from the standpoint of economic efficiency. And it is questionable on the grounds of equity: Why should established polluters get a free ride while future polluters have to pay for the right?

Here is the Bill: AB 32 Bill Text

Prisoner Mops Clean-Up Oil

Excerpts from:
"Inmates Shave Heads to Mop up Philippine Oil Spill"
August 30, 2006 — By Pedro Uchi, Reuters via ENN

MANILA — Thousands of prisoners have been shaving their heads and chests to donate hair to help mop up the Philippines' worst oil spill, officials said on Wednesday.

The collection was in response to a nationwide drive by the government to amass tonnes of hair and feathers to absorb more than 200,000 litres of industrial fuel that leaked from a tanker when it sank off the central island of Guimaras on Aug. 11.

A Japanese salvage ship was expected to arrive later on Wednesday to help determine the exact location and condition of the 998-tonne Solar 1 under about 640 metres (2,100 feet) of water, Coast Guard chief Arthur Gosingan said.

The 15,000 inmates at a maximum security prison in southern Manila, including 1,000 on death row, began donating hair on Tuesday as health officials ordered the evacuation of residents of a fishing village on Guimaras due to health risks.

"We're collecting plenty of hair to send to Guimaras to solve the oil spill problem," Vergilio Santos, 42, who is serving a murder sentence at New Bilibid Prison, told Reuters television after his head was shaved by a barber.

"This is a contribution even though it's a small part," said Nigel Richard Gatward, a 37-year-old British national convicted of drug smuggling.

The Coast Guard plans to put chicken feathers and human hair in sacks tied to bamboo poles as barriers along the coastlines of affected villages on Guimaras and in nearby Iloilo province.

Residents have been using rice straw in sacks to contain the oil slick, which has affected 46 villages on Guimaras and in Iloilo, as well as a marine reserve.

EVACUATION

More than 40,000 people and 200 km (120 miles) of coastline have been affected by the spill.

Health officials recommended the evacuation of residents living near the shore in Lapaz village on Guimaras after monitoring showed an increase in air pollution in the area.
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Soldiers, who set up checkpoints in Lapaz, asked journalists to wear masks before entering the village.

"Our tests showed high levels of hydrogen sulfide, benzene and toluene," Health Secretary Francisco Duque said. "Prolonged exposure to these can create health hazards to residents."

Contaminated water could cause skin irritation, he added.

At least a 10th of the tanker's cargo of 2 million litres of bunker oil initially gushed out, polluting beaches and the marine park with black sludge, but there have also been signs of fresh leaks from the sunken ship.

South African Fruit

"Global Environment Fund Hears Warnings on Climate Change"
August 29, 2006 — By Associated Press via ENN

CAPE TOWN, South Africa — Climate change risks devastating South Africa's wine and fruit industries, the country's deputy president warned Tuesday at the opening of an international environment conference.

Phumzile Mlambo-Ngcuka said the fight against climate change should be as intense as the struggle against apartheid.

"Because it's a survival issue," she told 1,200 delegates at the Global Environment Facility conference.

The facility, which is a partnership with the U.N. Development Program, the U.N. Environment Program and the World Bank, helps fund projects aimed at combating pollution and promoting sustainable development.

Governments on Monday pledged US$3.1 billion to the fund's operations.

Steen Jorgensen, acting Vice President of Sustainable Development at the World Bank, said the organization envisaged stepping up its environmental grant programs.

Acidic China Rain

"Acid Rain Affects Large Swathes of China"
August 28, 2006 — By Reuters via ENN

Acid rain caused by sulphur dioxide spewed from factories and power plants affected a third of China's vast land mass last year, posing a threat to food safety, Xinhua news agency said citing a parliamentary report.

More than half of the 696 cities and counties monitored had suffered acid rain, in some cases on a daily basis, according to a pollution inspection report submitted to the standing committee of parliament, the official agency said.

"Increased sulphur dioxide emissions meant that one third of China's territory was affected by acid rain, posing a major threat to soil and food safety," Xinhua cited NPC standing committee vice chairman Sheng Huaren as saying.

Discharge of sulphur dioxide in booming China rose by 27 percent between 2000 and 2005 to 25 million tonnes, making the country the world's top emitter of the pollutant.

Sheng told lawmakers that China's sulphur dioxide emissions, caused largely by coal-burning power stations and coking plants, were double the acceptable environmental limit.

According to the report's findings, nearly 650 out of 680 coking plants in Shanxi, the country's main coal-mining province, discharged excessive sulphur dioxide, Xinhua said.

Air pollution, caused mainly by sulphur dioxide and particulate matter, was affecting some 40 percent of Chinese cities, Sheng said.

China has pledged to install desulphurisation facilities in coal-burning power plants and is planning pilot emissions trading schemes to help improve air quality.

The capital, Beijing, has promised to replace its notorious smog with clear skies in time for the 2008 Olympics.

In the same parliamentary report, Sheng also lifted the lid on false reporting of solid waste discharge levels by local governments and companies.

Actual levels of toxic chromium waste in China could be as high as five million tons instead of the 4.1 million reflected in official figures, Xinhua cited the report as saying.

"Many firms report a lower figure for chromium waste for fear of being punished," Sheng said.

One locality had originally reported that it had 3,000 tons of chromium waste but raised the figure to 100,000 tons after learning the government would build reprocessing facilities for them instead of fining them, he said.

Falling Housing Market?

Excerpts from:
"What's that hissing sound?"
Aug 24th 2006--The Economist print edition

A slowing, perhaps even falling, housing market spells trouble for the American economy

If you could watch just one indicator to gauge America's economic prospects over the next few years you should pick house prices. A year ago most economists thought that average prices were unlikely to fall across the nation. Now many of them have begun to worry about the consequences of falling prices for America's economy. Figures out this week from the National Association of Realtors show that average home prices barely rose over the past year, compared with annual growth of around 15% in mid-2005. In some parts of the country, prices are already falling (see article). Adjusted for inflation, the average home is worth less than it was a year ago.

The housing boom has been the main engine of America's economic growth in recent years. Indeed, it is the main reason why the American economy held up better than expected after the stockmarket bubble burst at the start of the decade. Since 2000 the real wages of most American workers have barely budged, yet surging house prices have allowed consumers to keep spending. Over the past five years the total value of American homes has increased by more than $9 trillion, to $22 trillion. These gains helped to offset both the slide in share prices and feeble wage growth.

This is the biggest bubble in American history: in real terms home prices have risen at least three times as much as in any previous housing boom. In the past average nationwide house prices have experienced year-on-year declines for the odd, isolated month, but they have not fallen on a sustained basis since the 1930s. However, most states have seen prices drop at some time in the past three decades. Since the housing market is looking bubbly in more states than ever before, prices could simultaneously fall in enough places to give America its first nationwide price decline since the Great Depression.
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The boom has lifted the economy in three ways: it has boosted residential construction; it has made people feel wealthier and so encouraged them to spend more; and it has allowed home-owners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America's total GDP growth last year. Counting construction, finance and estate agency, the housing boom has also been responsible for one-third of all jobs created since 2001. If house-price rises level off, GDP growth could dip below 2% in 2007. If prices fall, expect a steeper slowdown.

Ben to the rescue?
If house prices do slide, the Federal Reserve will probably slash interest rates so as to save the economy from recession. But the Fed's ability to do this would be limited if inflationary pressures remain strong. And it would surely be wrong for the Fed to support the property market when a slowdown in spending is part of the rebalancing America needs to increase its saving rate. The Fed saw off a fall in spending at the start of this decade after share prices tumbled. To do the same again could damage the long-term health of the economy.

The tech bubble left behind a modern capital stock that continues to yield productivity gains. In contrast, the investment stimulated by a property boom does little to boost long-term growth. Expensive houses merely redistribute wealth to home-owners from non-home-owners. Worse still, the boom has diverted resources away from productive sectors and caused households to save less, exacerbating America's economic imbalances. It is surely better for Americans to start saving in the old-fashioned way by spending less of their income rather than relying on rising asset prices. The party has been fun; but it has to end.

Economics Overview

This week, The Economist published an overview of the previous weeks economic headlines. Here are the overviews:

Economic and financial indicators
The American housing market cooled further, as existing home sales dropped by 4.1% in July, to the lowest level in 2½ years. The National Association of Realtors reported that the median house price was 0.9% higher than in July last year, marking the smallest year-on-year increase since May 1995. Inventories of homes reached 3.9m, a record, which would take over seven months to clear at July's pace of sales.

A weak housing market is dampening the spirits of America's consumers. Sentiment eroded faster than expected, according to the University of Michigan's August index of consumer confidence, which fell to 78.7 from 84.7 in July.

Confidence also dipped in Germany, where the ZEW economic-sentiment indicator, based on a survey of analysts and institutional investors, fell to –5.6, far below its historical average of 35. The Ifo index of business sentiment fell, too, but by less than expected, to 105.0 from 105.6.

Imports to the euro area have increased by 13% in the year to June, a sign of healthy consumption; exports have risen by 8%. Nonetheless, the euro area's merchandise trade balance swung from deficit in May to a surplus of €2.0 billion ($2.5 billion) in June. Meanwhile, new industrial orders in the euro area declined by 2.5% in the same period.

Emerging-Market Indicators
South Africa's GDP grew at an annual pace of 4.9% in the second quarter, or by 3.6% compared with the same quarter a year ago. This was faster than expected—and faster than the central bank, which fears inflation, might have hoped.

Taiwan's economy grew by 4.6% in the year to the second quarter. Chile's GDP grew by 4.5% over the same period.