Gernot Wagner

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  • Why a carbon cap should be the next US stimulus
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  • Carbon cap beats tax
  • If you want to limit carbon emissions, do exactly ...
  • The world can (and must) innovate its way out of t...
  • Environmental economics blogging
  • Economics can smooth path towards global climate d...
  • Smart tariffs can help towards goal of lower emiss...
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January 14, 2010

America.gov debate on low-carbon economic development

I'm debating AEI's Steve Hayward at the U.S. State Department's site, america.gov, arguing why low-carbon development will create economic opportunities all over the world.

Continue reading America.gov debate on low-carbon economic development at its permanent location.

Posted by Gernot Wagner on Thursday, January 14, 2010. 1 comments.

November 05, 2009

Turn toward climate safety

The science is compelling. We are heading in the wrong direction, and we are running out of time. The critical period is from now until 2020, when global emissions must begin to decline. The sooner the turn, the greater is the chance that we can avoid the most dangerous consequences.

Continue reading Turn toward climate safety at its permanent location.

Posted by Gernot Wagner on Thursday, November 05, 2009. 0 comments.

April 10, 2009

Why a carbon cap should be the next US stimulus

Bridges vol 21, April 2009 / OpEds & Commentaries

The United States and many other countries' stimulus packages include provisions for green investments. That's good. After all, the economic and climate crises are intimately related. They share a similar structure - with greenhouse gas emissions and energy waste replacing toxic debt as the element that has gotten us into trouble. But green stimuli alone are not enough. A cap on carbon could provide the missing link.

President Barack Obama's stimulus package contains provisions to the tune of $100 billion in direct appropriations and tax breaks for green energy and energy efficiency. McKinsey, the management consultancy, estimates that the United States alone will require $1 trillion in added investment by 2020 to guide it onto a low-carbon pathway and meet climate policy goals. We cannot have one stimulus per year, every year between now and 2020, to meet the climate goals.

Similarly, we cannot depend on government spending alone to jump-start the economy. As a number of economists have argued, the key to pulling the US and world economies out of the Great Recession is what Larry Summers has called "the universal demand agenda." Where will that demand come from? Even if 10 stimuli might be out of the question, US lawmakers have already been talking about a second one. But government spending alone cannot be the answer.

A successful recovery will depend on massive investment by the private sector. That is where a cap on emissions comes in. The credit crunch obviously provides the biggest barrier to investment. But as the supply of credit begins to loosen up, we must also do everything we can to stimulate demand for investment. While the economy collapses, businesses - especially in the energy and manufacturing sectors - have held back investments in part because they are waiting for clear rules of what is going to happen in climate policy. By passing climate legislation that puts a cap on carbon, Congress can clear up regulatory uncertainty and help get capital flowing into clean energy.

Yes, consensus model estimates project that the economy would grow slightly more slowly under climate policy than under "business as usual" - although this effect amounts to only a few months of growth over two decades; and when you do an economic model that far into the future, the margin of error is likely too big to know if the cap will have any effect. Moreover, none of those models include the huge cost of allowing climate change to accelerate unchecked. Once you take the costs of inaction into account, it is far better, from an economic point of view, to act and act quickly.

Yet, most importantly, the "business as usual" path of these models is a Panglossian world with full employment of resources like labor, land, and capital. In such a world, any government policy is bound to be a drag on growth, since the modeled economy is humming along at full speed. This is clearly not the world we live in at the moment with skyrocketing unemployment, boarded-up homes, and shuttered factories.  In the world of the Great Recession, a government policy that stimulates investment - like a cap on carbon - could well boost growth rather than slow it.

A carbon cap has another important feature that a carbon tax or other climate policies do not. A cap - even one that goes into effect in, say, 2013 - would help put assets on companies' balance sheets now. Businesses are holding back on investments in part because they need cash on hand to pay back their existing debt, since banks aren't giving out as many loans due to the credit crunch. The exact effect will depend on the detailed accounting rules, but give businesses additional assets and the financing equation will change in favor of increased spending and investment.

This holds true regardless of whether carbon allowances are given away for free or sold in an auction. Most businesses would, of course, prefer free allowances. Yet even auctioned allowances have benefits. The cost of these auctioned allowances would affect company balance sheets at the beginning of the program, while every incremental investment in low-carbon technology increases the value of carbon assets on the books now.

Of course, a carbon cap won't be a free lunch. Emitters will need to find ways to cut global warming pollution. There are lots of low- and even many no-cost opportunities available to do so, but some efforts clearly cost money and require additional investments. The point is that new investment is exactly what we want to have happen right now, when we face such massive underemployment of resources.

Dire economic headlines these days are only matched by equally worrisome news that our climate is changing faster than expected. The United States must lead in finding solutions to both crises. Deploying a cap-and-trade program to repower our economy should be an integral part of the way forward.

Continue reading Why a carbon cap should be the next US stimulus at its permanent location.

Posted by Gernot Wagner on Friday, April 10, 2009. 0 comments.

March 17, 2009

Docking into a global carbon market: Clean Investment Budgets to finance low-carbon economic development

by Gernot Wagner, Nathaniel Keohane, Annie Petsonk, and James Wang
Environmental Defense Fund
Forthcoming in: The Economics and Politics of Climate Change (Oxford University Press, 2009)

Financing the transition to low-carbon economic development must be the focus of any framework to encourage developing countries’ participation in the global carbon market. It needs to do so with the aim of eventual full participation in carbon markets while maintaining the core market’s integrity and meeting the environmental goal of avoiding long-term warming in excess of 2°C above pre-industrial levels. This paper proposes a mechanism to achieve these goals: Clean Investment Budgets (CIBs).

Under this proposal, emerging economies could adopt binding limits on greenhouse gas emissions, set above current levels but within economic and environmental constraints. Such a step would enable these nations to access carbon finance immediately and far more efficiently than existing and proposed mechanisms. Moreover, the growth increment – the portion of the CIB in excess of a nation’s actual emissions – provides a pool of readily available emissions allowances that could be leveraged in carbon markets, financing investments in renewable and low-carbon energy generation, energy efficiency, and technology transfer. CIBs would thus reward early action taken by emerging economies, providing them with a source of capital to enable a rapid transition to a low-carbon economic development path.

Full paper in PDF.

Continue reading Docking into a global carbon market: Clean Investment Budgets to finance low-carbon economic development at its permanent location.

Posted by Gernot Wagner on Tuesday, March 17, 2009. 0 comments.

March 04, 2009

Carbon cap beats tax

Continue reading Carbon cap beats tax at its permanent location.

Posted by Gernot Wagner on Wednesday, March 04, 2009. 0 comments.

January 07, 2009

If you want to limit carbon emissions, do exactly that

Letter to the Editor, Financial Times, January 7, 2009.

Sir,

You are absolutely right to argue for prices and against too much direct government meddling within the set of "Green options for US energy policy" (editorial, January 2). You then go on to say that an explicit carbon tax would be best. Yet cap-and-trade is much more than an "implicit carbon tax".

Both sides of the debate have good arguments in favour of their positions. I myself wrote an editorial on these pages (April 26 2007) throwing the FT's support behind a tax, but I have since changed my views, for several reasons.

Most significantly, the US and the European Union cannot solve this problem alone. At the very least, the largest emerging economy emitters need to limit their pollution as well. A carbon market can make these commitments in the economic self-interest of all parties involved; a tax cannot. Second, smart market design - including provisions for banking and borrowing of allowances - would dampen feared price volatility, and well-known market instruments can iron out the rest.

Third, the most important missing link in turning climate change from a problem into an unprecedented market opportunity is innovation. A cap taxes entrepreneurs to look for breakthrough technologies at any price. A tax caps innovation.

Lastly, almost all new scientific evidence over the past two years has shown that the climate problem is worse than previously feared. We do not have time to experiment with tax rates to achieve the desired results. If you want to limit emissions, do exactly that: cap them.

Gernot Wagner,
Economist,
Environmental Defense Fund,
New York, NY, US

Continue reading If you want to limit carbon emissions, do exactly that at its permanent location.

Posted by Gernot Wagner on Wednesday, January 07, 2009. 0 comments.

July 31, 2008

The world can (and must) innovate its way out of this slowdown

Response to "The world cannot grow its way out of this slowdown" by Kenneth Rogoff (Financial Times, 30 July 2008) in the Financial Time's Economists' Forum.

I agree with Ken Rogoff’s analysis (and Martin Wolf’s interpretation) of the global imbalances leading to the current crisis. One point I do not agree with is that high commodity prices are “prima facie evidence that the global economy is still growing too fast” and that “it will probably take a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels (perhaps $75 per barrel in the case of oil, down from the current $124).”

High oil prices are not a sign that we have grown too fast, they are a sign that demand for oil has gone up. Yes, the two are closely related, but there’s a crucial degree of freedom in play: energy intensity.

High oil prices in the 1970s prompted a decrease in oil per unit of output, a trend that has continued to a lesser extent since then. It is no secret that climate change, one of the other major crises facing the world at the moment, will require us to make large strides in that direction. (McKinsey introduced the useful concept of “carbon productivity” and shows why it needs to – and, crucially, how it can – rise tenfold by 2050.)

Energy prices – and oil in particular – have risen so dramatically for a deep underlying reason, albeit one that’s possible to express in simple terms: demand has gone up, while the resources themselves are becoming ever scarcer.

The best answer to high oil prices is using less oil, not scaling back the use of capital and labour to bring oil prices down to “trend.”

Continue reading The world can (and must) innovate its way out of this slowdown at its permanent location.

Posted by Gernot Wagner on Thursday, July 31, 2008. 0 comments.

July 30, 2008

Environmental economics blogging

I began contributing to the Environmental Economics blog on a semi-regular basis a couple of weeks ago. So far, I have written about White House scrubbing of EPA rules, doled out some unsolicited investment advice (since confirmed), thought about fancy titles, and -- the all-time blogger's favorite -- provided some uncommented links.

Take a look at www.env-econ.net for more posts to come.

Continue reading Environmental economics blogging at its permanent location.

Posted by Gernot Wagner on Wednesday, July 30, 2008. 0 comments.

July 09, 2008

Economics can smooth path towards global climate deal

Response to "Why obstacles to a deal on climate are mountainous" by Martin Wolf (Financial Times, 9 July 2008) in the Financial Time's Economists' Forum.

Martin Wolf is right to point to the difficulties inherent in any global deal on climate. Yet there are ways to smooth the path, and smart economics can play an important role.

First though, it is important to keep the distinction between efficiency and cost-effectiveness clear in our minds. Mr Wolf implicitly makes that distinction. Let me restate it more explicitly: efficiency is about weighing the costs and benefits of policies and setting a target; cost-effectiveness is about finding the best way to achieve that target. It is good to have economics on our side to address the former, but given the nature of the problem, economics has a lot more to say about the latter.

The first step is to set a global cap on emissions, which progressively tightens over time. As Martin Weitzman’s paper on the uncertainties around catastrophic climate change makes clear, traditional benefit-cost analysis is an inadequate tool to set the right target. Instead, this debate needs to center first and foremost around climate science. Again, it helps to have economic analysis support the agreement to limit emissions (current science centers around avoiding 2 degrees centigrade of warming, which translates roughly into progressively limiting pollution to arrive at around 20 gigatons of CO2 equivalent greenhouse gas emissions by 2050), but that agreement must be born from scientific necessity and political will.

Economics really enters the picture once that cap is set. For one, markets – in particular a cap-and-trade system – are an important tool to reaching the goal at minimum cost. Another aspect is when it comes to divvying up the room left under this global emission reduction pathway. How do we get countries to agree to individual limits that ensure the integrity of the cap?

One such economic tool could be so-called “premium emissions budgets.” Faced with the prospect of having to cap its emissions in the future, a country could gain significant financial advantage by adopting that exact same cap early. So instead of adopting a cap set at 2017 emissions levels, for example, a country could adopt that exact same cap in 2012 before it has reached the projected emissions levels. In the intervening five years, it could then sell off excess allowances to areas like the EU (and likely the US) with already binding caps, or it could ‘bank’ them itself for later use. The financial gain increases exponentially with every year that the cap is adopted earlier.

Of course, there would only be a limited number of these Premium Budgets to go around under a global cap, which would create an even larger incentive to act early. The first countries to sign on will have larger budgets available to them than the laggards. Early action pays. The sooner a country adopts a certain cap, the larger its financial advantage, and surely also goodwill in international negotiations.

Continue reading Economics can smooth path towards global climate deal at its permanent location.

Posted by Gernot Wagner on Wednesday, July 09, 2008. 0 comments.

January 07, 2008

Smart tariffs can help towards goal of lower emissions

Letter to the Editor, Financial Times, January 7, 2008.

Sir,

You argue against imposing any form of carbon border tariffs by invoking "slippery slope" reasoning ("The greening of globalisation", editorial, January 4): such tariffs, you say, could result in tit-for-tat restrictions. Possible, but most reactionary tariffs would and probably should be struck down by the World Trade Organisation. Yet the WTO would likely allow carbon tariffs combined with domestic caps or taxes, for good reasons. They provide a unilateral solution to an inherently global and complex problem without violating trade rules.

The system would enable globalisation to work for the environment - not, as you fear, prevent it from doing so. Current information deficits encourage consumer backlash against flowers grown in east Africa and flown to London, despite them being more carbon-efficient than those grown in energy-intensive greenhouses in Europe. A smart tariff system would be far preferable to consumers shifting en masse to products labelled "locally grown" - from both an environmental and a free trade perspective.

The economically ideal solution is a global cap or tax scheme, but smart tariffs come in as a close second. In addition, they would ease the transition by inducing poor exporting nations to move towards a path of lower emissions sooner.

Andreas Vogel,
Vice President, SAP Research

Gernot Wagner,
Consultant, Boston Consulting Group

Continue reading Smart tariffs can help towards goal of lower emissions at its permanent location.

Posted by Gernot Wagner on Monday, January 07, 2008. 0 comments.

December 01, 2007

The worth of nations

Worth Magazine, December 2007.

Imagine a business with an annual report containing nothing but revenue figures—and for only some of its operations. That is what happens when we focus on GDP as an indicator of how national economies are doing.

Revenues matter, but costs are equally important in figuring the true health of a business or a country. In a company, materials must be bought, machines lose their usefulness over time, and buildings require repair. Similarly, the economy of a country includes depreciation and the costs of doing business. National accountants adjust GDP to arrive at a net figure that accounts for worn-down roads and bridges, but there is more to a country than its physical infrastructure.

We are aware that trees are important to the environment, for example, but a tree doesn’t factor into GDP unless it is part of a commercial transaction. The sale of a Christmas tree appears in the GDP. An identical tree in the forest does not—at least not until it becomes plywood—and its contribution to a healthy environment does not appear on the country’s balance sheet.

If these factors were included, the adjustments to nearly every country’s GDP could be enormous. The cost of environmental degradation and pollution in China is equal to about 8 to 12 percent of the country’s GDP per year. That wipes out most of China’s impressive annual GDP growth, lately in excess of 10 percent.

China announced earlier this decade that it would start to calculate its green GDP, only to backtrack once the first numbers revealed some bad news. That turn of events is not new. The United States followed a similar path in the 1990s. It first started to measure subsoil assets, such as coal still in the ground. The coal industry did not like the results, and Congress soon bowed to lobbyists and included a line in the appropriations bill barring any such future activity. That ban has since disappeared, but national income accountants are still wary of doing anything too public.

Simon Kuznets—the father of U.S. income accounting who won the 1971 Nobel Prize in economics for his work—was the first to point to the limitations of calculating GDP without factoring in costs. On one hand, it is innocuous if the GDP feeds on a deteriorating environment: Companies produce, which adds to the gross domestic product, and other companies clean up their pollution, which again increases the GDP.

A large problem arises, however, with the way that GDP figures are used. The press, the public and even some economists equate them with statements about a nation’s overall well-being. And, up to a point, material wealth does mean better living conditions. China in the last two decades pulled more people out of poverty faster than any other country in history. Yet the enormous deterioration of its environment is equally unprecedented.

The United States provides another case in which GDP growth and overall welfare might no longer go hand in hand. Recent studies on childhood obesity conclude that children today might not live as long as their parents.

Ideally, we would develop an entire dashboard of indicators—economy, health, environment—and accord them all equal or similar weight in policy decisions. In practice, however, economic decisions often dominate. That is why it is essential to create monetary measurements of the environment or health and education, and integrate them with existing GDP measures.

When it comes to balancing 50 jobs against 50,000 trees, logging companies are able to point to hard economic data while environmental activists must plead for the sympathy vote with pictures of virgin forests and perhaps a fuzzy baby animal. But it is indeed possible to calculate the economic worth of trees left standing. They are natural water and air filters. Providing clean drinking water and removing carbon dioxide from the atmosphere add real value to society. Another sizeable part of the equation is the recreational value of forests and their contribution to the tourism industry.

Green GDP is not the result of green accounting; it is simply good accounting. The more data that the policymakers have to steer a country’s economy, the better. It is technically feasible to create such monetary measurements of our environment. What remains to be done now is the actual counting.

Gernot Wagner, a consultant in New York, served as the 2007 Peter Martin Fellow on the editorial board of the Financial Times.

Continue reading The worth of nations at its permanent location.

Posted by Gernot Wagner on Saturday, December 01, 2007. 0 comments.

September 30, 2007

Response to "Is Energy Independence the Answer?"

This week's NPR show Living on Earth aired some listener responses to the commentary, "Is Energy Independence the Answer?":

GELLERMAN: We got an earful about our recent commentary from Gernot Wagner who made the case that energy independence for the United States is not only unachievable, but undesirable.

Wes Tator, who listens to LOE on New Hampshire Public Radio, emailed to say, 'I thought your speaker was right on.'

But Cat Givens from Portage Lakes, Ohio sent us 'a resounding yes' to energy independence. She tunes in to WKSU and writes: 'The war on terror would be a thing of the past if we close down our dependence on oil and use the energy resources already available to us—like...ethanol, solar, wind, and battery-powered cars. There are green alternatives we can utilize right now.'

Continue reading Response to "Is Energy Independence the Answer?" at its permanent location.

Posted by Gernot Wagner on Sunday, September 30, 2007. 0 comments.

September 15, 2007

Is Energy Independence the Answer?

Living on Earth, National Public Radio's environmental news show, Week of September 14, 2007. (Radio-version of Chicago Tribune op-ed: "Energy goal should be to diversify," June 24, 2007.)

[CURWOOD:] Rudy Guiliani is not the only one talking about energy independence. It seems to be the mantra of just about all the presidential candidates, not to mention other politicians in Washington. For some, the goal is lower gas prices. For others, it's concern that oil-rich regimes hold sway over foreign policy. But commentator Gernot Wagner argues either way, energy independence gets us nowhere.

[WAGNER:] Talk of energy independence misses the point. The goal must be energy security. This is most often achieved by diversifying dependence, not by calling for independence.

President Richard Nixon started the craze with Project Independence in 1973. It has been a losing battle from the start. At the launch of the project, the U.S. imported a third of its oil. Now it imports over 60 percent.

Without draconian measures, energy independence is unachievable. The cheapest available oil, at the moment, is from the Arabian Peninsula. Meeting all need for oil domestically would come with a hefty price tag.

And those willing to pay a higher price in order to extricate foreign policy from perceived oil grip would do well to remember that the regimes they seek distance from will be enriched by that higher price. The market for oil is global. That makes it pointless to try to wean ourselves off particular suppliers.

The U.S. can declare today that it will not import any oil from Saudi Arabia. There is enough oil on the market to avoid shipping directly from Saudi to American ports. Someone else will gladly take the shipments from Saudi Arabia. But as long as there is no universal boycott of Saudi oil, we will be dependent on it – and we will still have U.S. tanks in the Middle East, if not U.S. tankers.

It is even more dangerous to link energy independence with environmental goals. We need to get away from oil and promote alternatives, but decreasing pollution is not the same as decreasing energy imports. Ethanol, for example, can deal with pollution but, for the most part, should not be used to address independence.

At the moment, the best source for ethanol is sugar cane. On environmental grounds, cane beats corn by a long shot. The most sensible environmental policy would be to drop all ethanol tariffs.

But slashing tariffs on ethanol increases our reliance on foreign fuels. Ethanol production shifts to Brazil, which could, at some point, replace Saudi Arabia as the lowest cost producer of the world's fuel of choice. Energy independence would decline. At the same time, energy security would go up. A democratic Brazil is clearly a better energy supplier than an autocratic Middle East. Even so, relying too heavily on Brazil could undermine supply security just as well. The goal should be to diversify.

Calls for energy independence undermine what really matters. The distinction with energy security is subtle, but important. Not only is energy independence unachievable, it is not even desirable.

Continue reading Is Energy Independence the Answer? at its permanent location.

Posted by Gernot Wagner on Saturday, September 15, 2007. 0 comments.

August 17, 2007

Financial Times editorials

For the past four months, I have served as Peter Martin Fellow on the editorial board of the Financial Times in London. There I wrote about economics, energy and the environment.

I cannot post any editorials here, but I will gladly confirm having written well-received ones and will disavow any knowledge of the occasional dud.

Continue reading Financial Times editorials at its permanent location.

Posted by Gernot Wagner on Friday, August 17, 2007. 0 comments.

June 24, 2007

Energy goal should be to diversify

Chicago Tribune, June 24, 2007.

While the U.S. Congress debates the latest energy bill, the eventual outcome amid intense lobbying by all sides is anybody's guess. One part, however, is certain: Calls for energy independence will be aplenty. These pleas will be as passionate as they are misguided. The goal must be energy security. This is most often achieved by diversifying dependence, not by calling for independence.

President Richard Nixon started the craze with Project Independence in 1973. It has been a losing battle from the onset. At the launch of the project, the U.S. imported a third of its oil. Now it imports more than 60 percent. That has not prevented George W. Bush and most major candidates vying to succeed him from pursuing the issue. But regardless of who takes it on, it will be a lost cause.

Energy independence is unachievable -- barring Draconian measures. Economic forces are aligned to exploit the cheapest available energy source, which is not located in the U.S. or in any other major energy-consuming nation. Oil from the Arabian Peninsula comes in second to none.

Moreover, the global nature of oil markets makes weaning ourselves off particular suppliers pointless. If the U.S. uses some oil -- any oil -- produced anywhere in the world, the price it pays will be determined, in part, by potentially hostile regimes. Moreover, U.S. demand for oil will increase that price and -- at least indirectly -- hand money to these regimes.

It would be desirable to shift from oil to alternative sources of energy, but here again, talk of energy independence muddles the issue. Some environmentalists like to link energy independence with the fight to combat climate change. We do indeed need an appropriate, predictable and consistent price on emissions of greenhouse gases, which would tip the balance away from oil and other carbon-intensive energy sources toward cleaner fuels. But decreasing pollution is not the same as decreasing energy imports. Ethanol can deal with the former, but, for the most part, should not be used to address the latter.

Currently the best source for ethanol is sugar cane. Neither the U.S., with its emphasis on corn-based fuel, nor the European Union, with rapeseed and sugar beet as its homegrown sources, can compete with Brazil and some Central American countries, where sugar cane thrives naturally. Cane beats corn, beet and rapeseed by a long shot on environmental grounds. The most sensible environmental policy would be to drop all ethanol tariffs. Given the powerful corn lobby in the U.S. and increasingly strong domestic ethanol lobbies in the EU, this is unlikely to happen. Talk of energy independence only exacerbates this boondoggle. Farm lobbies can now cloak their arguments for maintaining subsidies and import tariffs in the language of environmental concerns and of national security.

Yet slashing tariffs on ethanol would increase U.S. reliance on foreign fuels. Ethanol production shifts to Brazil, which could replace Saudi Arabia as the lowest cost producer of the world's fuel of choice. Energy independence would decline. At the same time, energy security would go up. A democratic Brazil is clearly a better energy supplier than an autocratic Middle East. Nevertheless, relying exclusively on Brazil could undermine supply security just as well. The goal should be to diversify.

Most countries already diversify to some extent in another dimension. The U.S. imports around 10 million barrels of oil directly per day. In addition, the U.S. imports about 1 million barrels a day indirectly, embedded in manufactured goods. China imports oil, burns it to fuel its plants, and the U.S. and others import the final products. If China and other poor manufacturing countries did not produce these goods for export, the U.S. and fellow rich consuming nations would have to import most of the oil or other forms of energy directly to produce the same goods.

Calls for energy independence undermine what really matters. Those arguing for it risk making the nation less secure. Sadly, energy independence is a powerful rallying cry for campaigns. It polls well and motivates people to put energy on top of their political priorities. That agenda-setting factor should not be underplayed. Yet the ends do not always justify the means. Here, the end would be unachievable and, more important, undesirable.

Continue reading Energy goal should be to diversify at its permanent location.

Posted by Gernot Wagner on Sunday, June 24, 2007. 0 comments.

May 09, 2007

Dissertation

Essays on Environmental and Natural Resource Economics: Introductory Chapter

Informed policy circles no longer question whether to use economic instruments to solve environmental problems. Domestic European debates on global climate change focus on whether to use carbon markets or taxes. Even calls for banning incandescent light bulbs are wrapped in arguments of induced technological change and similar economic language. That is part of the problem. Economics is used to justify virtually everything, making it an extremely powerful tool – and increasing the stakes for economists producing environment-related research.

The United States imports around 10 million barrels of oil per day. That number is known and of much concern in the energy and national security communities. It also forms the basis of many studies concerned with macroeconomic effects of foreign energy dependency. Other important research areas in economics are the “pollution haven hypothesis,” based on the fear that dirty industries may migrate to poorer countries in search of lax environmental standards, and the “environmental Kuznets curve,” the conjecture that pollution follows an inverse-U-shaped pattern in relation to income. Demonstrated anecdotally, large-scale studies generally find no support for the pollution haven hypothesis and empirical results for the environmental Kuznets curve are by and large fickle. Research leading to my first paper shows that all three areas may have overlooked an important aspect of the data.

In addition to direct oil imports, the United States imports 0.8 million barrels embedded in manufacturing goods. That number has important national security implications. It also enables a direct way of studying both the pollution haven hypothesis and the environmental Kuznets curve. Relatively richer countries consume more energy-intensive products than they produce. Trade accounts for the difference. Future research needs to show whether that translates into a large-scale pollution haven effect. But at the very least, it shows the importance of choosing the correct model and data, especially since the data are not complicated. Careful accounting can produce the necessary figures and highlight important yet previously overlooked details.

Conventional wisdom says that negative environmental externalities dampen growth. Sick workers are less productive. That is certainly true and an important problem to study. Numerous economic papers have made seminal contributions in this area. The general conclusion seems clear: pollution hampers growth. The second chapter of my dissertation indicates that the opposite could be the case as well. Measured output might grow because of environmental externalities: pollution decreases the availability of previously free environmental services such as clean air. Households satisfy their demand by purchasing air purifiers. This transaction increases economic activity: GDP goes up. But households need to work more to pay for previously free environmental services: welfare goes down. In many ways, this is a problem of mismeasured welfare. A proper welfare indicator, such as comprehensive or “green” Net National Income (NNI) would decrease in this economy, but I do not argue for scrapping GDP altogether. Economic activity goes up, as it should. Welfare in this model does not keep pace with output because people value the environment and their leisure. Green NNI would go down.

One hopes that this issue has not been studied before because broad empirical investigations deemed the effect negligible, but I am afraid one reason is mathematical tractability. The model is extremely complicated, even by growth theory standards, and leaves much room for future theoretical work. But that is not the highest research priority. Instead, further work ought to investigate this phenomenon empirically. An important approach might be to look at natural experiments or case studies where pollution has sparked the adoption of new products or services to defend against negative environmental impacts. While important as a first pass, it will always be possible to find particular cases where consumer products replaced free environmental services. It would be particularly valuable to demonstrate the relative importance of negative externalities in economic growth by using cross-country or cross-regional growth regression, the tools of empirical growth economists, or engage in a large-scale accounting exercise in an attempt to account for defensive expenditures in national income accounts.

My third paper, joint work with C.-Y. Cynthia Lin, underscores some of the same points of theoretical modeling and empirical investigation. In many ways, this paper has the typical format of an economic paper. (It is also the only one of the three papers that has already been accepted for publication in the Journal of Environmental Economics and Management, the top field journal.) The paper revisits the basic Hotelling model of natural resource extraction, which uses the arbitrage condition to show that the value of natural resources in the ground rises at the rate of interest. The basic model assumes no technological progress, no stock effects, no new discoveries, no demand changes, and no market imperfections. None of these assumptions is realistic. We relax the first two and calibrate the model to fit data from 1970 through 2004. I feel fortunate to have co-authored this paper but am fearful that it taps into the same potential fallacies I highlight in my first two chapters.

The modeling choice was largely driven by mathematical feasibility. The choice of time periods was entirely driven by data availability. Our model – like most others looking at the same phenomenon – is silent as to whether the two theoretical extensions are indeed the most important ones in the list. Putting full faith in the model, one can conclude that technological progress had been a powerful force, keeping resource prices constant over long periods of time. Another equally potent force might have been new discoveries. We acknowledge as much throughout the paper, but by virtue of our model’s focus on technological progress are not able to say much more. The same goes for the empirical analysis. Since 2004, prices for most minerals have increased dramatically, defying our observation that prices have remained constant over long periods of time. Is it because technological progress has suddenly stopped? That is what our model seems to suggest. Or does it relate to a host of other factors including rapid demand increases in China and India, which lay outside of our model?

Economic work on the environment wields enormous influence. My brief experience writing for the editorial board of the Financial Times has shown me how decisions with significant public policy consequences are often based on a single economic study. Striving to have one’s work be as inclusive as possible is not merely an academic exercise. Being able to draw conclusions unbound by data availability and modeling choices should be the starting point, not the end result of good economic research in general. It is all the more important in an area where economists answer questions linked to a system much larger than the one we are used to studying. After all, in the words of Senator Tim Wirth, “the economy is a wholly-owned subsidiary of our environment.”

Full dissertation.

Continue reading Dissertation at its permanent location.

Posted by Gernot Wagner on Wednesday, May 09, 2007. 0 comments.

Energy Content of World Trade

Abstract: I construct a comprehensive dataset of oil and total energy embedded in world trade of manufacturing goods for 73 countries from 1978 to 2000. Applying this dataset to debates on the dependency on foreign energy sources makes clear that achieving complete energy independence in the foreseeable future is unlikely to be feasible and may not be desirable. Applying it to the discussion of environmental Kuznets curves (EKCs) highlights an important distinction between production and consumption of energy. Richer countries use relatively less energy in their industrial production yet still consume relatively large amounts of energy indirectly. A further investigation largely excludes structural shifts of production in and out of the manufacturing sector as an explanation for the downward-sloping portion of the EKC. Country-level analyses add caveats but show tentative support for the cross-country conclusions.

Paper, data, and program files.

Continue reading Energy Content of World Trade at its permanent location.

Posted by Gernot Wagner on Wednesday, May 09, 2007. 0 comments.

April 13, 2007

Green Accounting in a Ramsey Model: Undesirable Growth Fueled by Environmental Degradation

Abstract: Green accounting can take on various forms of adjustments to standard output measures. In a Ramsey model it highlights the importance of defensive expenditures and their role in output and welfare calculations. If both labor and environmental quality are included in a standard Ramsey growth model with two kinds of consumption goods, negative externalities increase the steady-state path of per capita output. At the same time, per capita utility – as well as societal welfare – decline. Economy-wide technological progress and population growth further widen this discrepancy between per capita output and utility. Accounting for defensive expenditures in this context enables an accurate description of welfare in that economy.

Full paper

Continue reading Green Accounting in a Ramsey Model: Undesirable Growth Fueled by Environmental Degradation at its permanent location.

Posted by Gernot Wagner on Friday, April 13, 2007. 0 comments.

February 21, 2007

Economics Focus: Bayesian Asset Pricing

The less we assume we know, the smaller the asset pricing puzzles

When physicists test their theories against the real world, they are frequently correct to five decimal places after the comma. Economists tend not to be as lucky. Approximating within an order of magnitude is often all they can hope for when applying their theories to the data. However, even that has proven to be elusive in a quest to explain asset pricing phenomena with economic theory.

This inability to match theory with data has given rise to three related failures of neoclassical economics applied to financial markets: the equity premium, the risk-free rate, and the variability mismatch puzzles. Given historic trends, neoclassical theory for plausible risk parameters predicts that stocks ought to pay less than 0.1% more annual return than the safest assets. In reality, equities pay a premium over 6% above short-maturity U.S. treasury bonds – a discrepancy by a factor of more than 60 – much more than an order of magnitude. Reversing the logic, the risk-free rate for bonds is much too low compared to theoretical predictions. Lastly, the observed variability in the stock market is much higher than reasonable expectations about the economy itself. Yet theory says the two should be the same. Worse still is that attempts to solve one puzzle frequently exacerbate at least one of the others.

A defining characteristic of neoclassical economics is its adherence to the frequentist school of statistics. Frequentists believe that there is an underlying, true structure of asset prices. Their distribution is known; only the correct parameters are uncertain. With enough observations, we can approximate the correct mean and variance around it and act as though the parameters are known.

Bayesian statistics provides an alternative school of thought. Bayesians are not only uncertain about the correct parameters; they also do not know the true structure of the problem. Instead of setting out to accumulate massive amounts of data to approximate an unbiased sample, Bayesians rely on appropriate “priors,” pre-existing assumptions. Reverend Thomas Bayes first presented these ideas in eighteenth century England. Frequentists have managed to sideline them for most of their existence, but Bayesian statistics has experienced a renaissance of late, particularly in areas where data are sparse. Bayesians can draw inferences with as little as one data point.

Asset pricing is not an area that comes to mind in the context of paltry data. Hardly any field in economics can rely on as many observations. With decades of publicly available minute-by-minute pricing information from various stock markets around the world, equities are a fertile ground for frequentist statistical study. This abundance of data seems to have been the demise of theoretical economists trying to explain the asset pricing puzzles in the past. Many economists have suspected that Bayesian structural uncertainty may play a role in explaining these puzzles. Now Martin Weitzman, an economist at Harvard, has carried this idea much further. His paper* shows that all three asset pricing puzzles may be reversed when relying solely on Bayesian statistics. Some added mathematical wizardry brings us to a happy middle ground, where the puzzles disappear into the realm of statistical curiosities rather than massive failures of the theory.


Uncertainty is worse than risk

Mr Weitzman’s argument relies on the fundamental difference between risk and uncertainty. Risk refers to the frequentist worldview of unknown outcomes given known distributions. Uncertainty is linked to the Bayesian idea of unknown outcomes and unknown underlying structures. Poker players face risk. The distribution of a deck of cards is known. The risk of the game comes with not knowing the exact outcome of the next draw. Investors, according to Mr Weitzman, face risk and uncertainty. They do not know the exact outcome. More importantly, though, the underlying structure of the distribution is likewise unknown to some degree.

This distinction is not new to economics. It traces back to Frank Knight’s Ph.D. dissertation**. Mr Knight was a towering figure in early twentieth century economic thought. He went on to lead the Economics Department at the University of Chicago for two decades beginning in the 1920s. Most economists would recognize his distinction between risk and uncertainty. Few have known what to do with it.

Compared to the standard normal distribution often assumed by frequentists, a pure Bayesian analysis results in a “Student-t” distribution with significantly thicker tails. Cataclysmic crashes and miraculous price rallies now have a much larger chance of occurring than neoclassical theory allows. By putting a slightly higher probability on these extreme events, the asset pricing puzzles are even reversed. Pure Bayesian theory would predict a larger equity premium than is seen in reality. At the very least, it is no longer clear what puzzle needs to be explained: excessive equity premiums claimed by frequentists or overly modest premiums observed by Bayesians.

[Insert graph here: Student-t, “Bayesian-t learning”, and standard normal distributions shown in one graph, with decreasing thickness of tails.]

Mr Weitzman creates a hybrid dubbed “Bayesian-t learning” distribution with characteristics of both the frequentist and Bayesian approach. In fact, both are special cases of this more general theory. That is always a good way to find acceptance for one’s research. Instead of declaring past approaches wrong, simply sell your own idea as a generalization subsuming previous work. Most importantly, the task for economists now becomes a matter of model calibration to fit the data, rather than searching for the correct model in the first place.

As with every path-breaking piece of research, the question of why nobody has considered this previously remains. In this case, that question is the real puzzle. Economists needed only to take the ubiquitous warning for stock investments seriously: past performance does not guarantee future results. It appears that investors have stuck to that mantra all along.


* “Prior-Sensitive Expectations and Asset-Return Puzzles”. January 2007.

** “Risk, Uncertainty, and Profit”. 1921. Boston, MA: Houghton Mifflin.

Continue reading Economics Focus: Bayesian Asset Pricing at its permanent location.

Posted by Gernot Wagner on Wednesday, February 21, 2007. 0 comments.

December 11, 2006

Steady-State Growth in a Hotelling Model of Resource Extraction

Abstract: This paper re-examines the Hotelling model of optimal depletable resource extraction in light of stock effects and technological progress. We assume functional forms for cost and demand so that the solution to the Hotelling problem is a steady-state consistent with the empirical observation that the growth rates of market prices have remained zero over a long period of time. We use data on 14 minerals from 1970 to 2004 to estimate the supply and demand functions using SUR and 3SLS and to test the model. We validate the model for 8 of 14 minerals.

Paper, data, and program files.

Continue reading Steady-State Growth in a Hotelling Model of Resource Extraction at its permanent location.

Posted by Gernot Wagner on Monday, December 11, 2006. 0 comments.

May 14, 2006

Green accounting instead of Green GDP

Letter to the Editor of the Financial Times

Sir,

Patrick Hubert interprets your article on China scrapping its "green GDP index plan" (May 10) as a potential case of "breaking the thermometer in order to deny the evidence of rising fever" (May 12). I interpret it as a potentially misleading headline.

After quoting a Chinese government official as saying that green GDP is "virtually impossible to calculate", your article goes on to say that China will still pursue green accounting. In other words, China will create a second thermometer measuring the state of its environment -- a set of "environmental satellite accounts" in the green accounting lingo. That should have been done all along. It will provide much more information than one single index number.

Gernot Wagner

Repsol YPF-Kennedy School of Government Fellow in Energy Policy,
Harvard University,
Cambridge, MA 02138, US

Continue reading Green accounting instead of Green GDP at its permanent location.

Posted by Gernot Wagner on Sunday, May 14, 2006. 0 comments.

February 06, 2006

'Energy tax' is a non-starter – rebrand it 'price stabilisation'

Letter to the Editor, Financial Times, US Edition, p. 14, February 6, 2006.

Sir,

A high oil price is good for the environment, but it does not have to be good "for the totalitarians in Saudi Arabia," as Jacob Weisberg argues ("A Union address that ran on empty", February 2). The solution is simply a variable tax on all crude oil imports aimed to stabilise the final price. Oil price volatility creates a heavy cost for American industry and consumers.

Under the name of an "energy tax", this proposal has been a political non-starter for decades. Re-branding it as a "price stabilisation" measure aimed at lessening our addiction to oil should have something for everybody.

Gernot Wagner

Repsol YPF-Kennedy School of Government Fellow in Energy Policy,
Harvard University,
Cambridge, MA 02138, US

Continue reading 'Energy tax' is a non-starter – rebrand it 'price stabilisation' at its permanent location.

Posted by Gernot Wagner on Monday, February 06, 2006. 0 comments.

January 15, 2006

World's Toughest Briefs: Hybrid Cars

The Financial Times challenged all creative minds to design an ad campaign to broaden the appeal of hybrid cars. I teamed up with Michael Saji. Here is a sample of our entry.

Hybrids mean freedom from pollution, from high gas bills, from foreign oil. That is common knowledge. Our campaign associates hybrid technology with a new kind of freedom. The freedom associated with SUVs and race cars. "Free to Roam" and "Free to Accelerate" emphasize these aspects. "Free to breathe" shows that the campaign is flexible enough to tie these new-found freedoms back to commonly held believes about hybrid technology. The campaign can be adapted to fit any car company that is currently working on hybrid SUVs, Toyota being only one of many.


Free to Roam

"Next gas, 500 miles." Not a problem if you get 50 miles to the gallon. Even if it is an SUV. Now that I have a hybrid, I'm free to go wherever I please, as far as whim or fancy takes me. And I can take comfort in traffic knowing that.


Free to Accelerate

As I zoom down the tunnel, I enjoy the power of a hybrid V6 engine. People don't realize that with a hybrid, you just get more—more acceleration, more torque, more power, without the poor mileage of a turbocharger. No wonder they're developing hybrid engines for F1 racers.


Free to Breathe

Imagine a world with pollution cut in half. Suddenly your breaths are cleaner, crisper. Freer. Now imagine your cost of gas cut in half. Take a deep breath and enjoy. Hybrid technology gives you both, and much more.

Continue reading World's Toughest Briefs: Hybrid Cars at its permanent location.

Posted by Gernot Wagner on Sunday, January 15, 2006. 0 comments.

October 17, 2005

Website launched

This website was launched on October 17, 2005. Any weblog entries prior to this day were, in fact, not posted on the date indicated in the time stamp, but sometime over the past three months.

Even now, though, this page is not a typical weblog, with daily musings on the latest chatter in cyberspace. It is rather a place for my writing, which is mostly intended for other media. The weblog format makes it very easy to publish all my pieces in one place and solicit reader comments.

For another experiment to turn the idea of weblogs upside-down, please see my green accounting bibliography, also published in form of a blog.

Continue reading Website launched at its permanent location.

Posted by Gernot Wagner on Monday, October 17, 2005. 0 comments.

August 12, 2005

The Case against Happiness

Opinion piece written with fellow Ph.D. student Joe Mazor.

Ask yourself a question: On a scale of one to five, how happy are you?

What did you consider when you assigned yourself a number? According to the latest studies, the average person thinks about family relationships, their financial situation, work, community and friends, and health, in that order - with some thoughts about personal freedom and personal values mixed in. What do we leave out? A comfy bed, three meals a day, central heating, all the creature comforts our mothers kept telling us to be grateful for because somebody somewhere does not have them. We simply take them for granted as the status quo.

Our personal well-being depends on two factors. The first is the daily pleasures that we come to take for granted. This includes not only our creature comforts, but other pleasures - social and mental - which are part of our status quo. Psychologists call this our "adaptation level."

The second is the emotions resulting from the relative comparisons we constantly make to this status quo: what we have relative to what we used to have, what our neighbours have, what we believe we ought to have. When prompted to state their happiness, people focus on the second factor. They do not report the part of well-being that they take for granted.

Confusion around these two factors and how we should measure well-being has sparked a fundamental debate within economics. On one side are traditional economists who focus on consumption as a proxy for well-being. Our spending affords us a certain level of daily pleasures that we quickly get used to. Thus, consumption as measured by gross domestic product (GDP) is an important component of the first factor, the pleasures of the status quo that we take for granted.

On the other side of the debate is a new breed of "happiness economists" who want to wean the economics profession away from an admittedly unhealthy obsession with GDP. They advocate using stated happiness instead as the measure for well-being. Lord Richard Layard's book Happiness: Lessons from a new Science (2005) is only the latest example in this literature. By focusing exclusively on stated happiness, however, they only capture the second component of well-being, emotions associated with comparisons to the status quo.

To understand the distinction between the two components of well-being, think of Lord Layard's central heating, an example he uses in his book. A higher income allowed him to install central heating to keep his house warm. Initially, his well-being increased for two reasons: First, he was happy because this new situation was an improvement over the status quo. Second, he experienced the comfort of his pleasantly warm house.

After many years, Lord Layard has come to take the pleasures of the warmth for granted. Central heating has become part of his status quo, and so no longer makes him happy. Lord Layard clearly recognizes that if we take the heating away, he would be unhappy. What he fails to recognize is that even though his central heating no longer makes him happy, his pleasantly warm house still contributes to his well-being on a daily basis.

A groundbreaking book on well-being edited by psychologist and economics Nobel Laureate Daniel Kahneman formalizes this argument. Even these experiences we are used to contribute to our well-being without adding to our happiness.

It is worth mentioning that not all pleasures are equally easy to adapt to as a warm house. In particular, as Lord Layard recognizes, the pleasures we get from our relationship with family, friends, and God are more complex. Their complexity makes them harder to take for granted. Thus, factors like a good family life can be a continual source of both pleasure and happiness.

If well-being is a combination of our status quo pleasures and our happiness, focusing on either one alone will result in misguided policy. Should we have a higher income tax? If we overlook happiness, as many traditional economists do, we would answer with a resounding no. Higher income taxes create distortions, which lower our GDP. If we overlook the pleasures that we take for granted, as Lord Layard does, the answer is yes. Discouraging work would mean more free time to pursue what truly makes us happy, like a good family life. Since higher income would not make us happier in the long run, nothing is lost.

The truth lies somewhere in the middle. Both the pleasures we take for granted as well as happiness are important to our well-being, and there is often a trade-off between the two. In order to make informed policy such as setting the proper income tax, we need to create a more comprehensive welfare figure than GDP; one that includes both our central heating systems and the quality of our family lives. But we certainly should not abandon GDP altogether and rely on happiness surveys alone.

Continue reading The Case against Happiness at its permanent location.

Posted by Gernot Wagner on Friday, August 12, 2005. 5 comments.

July 30, 2005

From The Answer Desk: Green GDP

The Gross Domestic Product has its share of problems as a welfare indicator. This post to the Environmental Economics blog describes some alternative measures:

Tim Haab asked me to respond to a question by Jonathan Pfeiffer from The Answer Desk:

I'd like to see an overview of ways of measuring economic progress that don't ignore ecological concerns. For example, what alternatives are there to indicators such as gross domestic product? (Alternatives should include indicators that somehow factor environmental data into the equations.)

Continue reading From The Answer Desk: Green GDP at its permanent location.

Posted by Gernot Wagner on Saturday, July 30, 2005. 0 comments.

July 06, 2004

Re: Open Letter to President Summers

To: Richard Melvoin (Harvard Board of Overseers)
Cc: Lawrence Summers, William Fitzsimmons (Dean of Admissions)
Subject: Re: Open Letter to President Summers

Dear Dr. Melvoin:

Thank you for thoughtful response to our open letter to President Summers about Harvard's admissions policy of giving applications from children of alumni an "additional look."

I fully agree that Harvard should maintain its differentiated admissions policy, bringing in people "with a range of backgrounds and experiences." "Meritocracy," as stated in the open letter, is by no means focused solely on academics. I applaud the admissions committee for striking a delicate balance in determining the composition of every entering class.

No matter how differentiated the admissions process, however, it has a binary outcome. One either will attend or will not. For some students, therefore, having parents who attended Harvard may, in fact, be a decisive criteria in being admitted to Harvard College.

Virtually all achievements or characteristics presented in the application package are particular to the student. Some, of course, are inextricably linked to his or her upbringing. Children of alumni will most certainly be strong candidates for admission, and their rate of acceptance will understandably be higher than the overall rate. Why ask for an applicant's parents' college affiliation, if the characteristics that make them a strong candidate for admissions are already reflected in other parts of the application?

The answer President Summers and others have used is that it is instrumental to the kind of "community" Harvard is. This poses the question of which kind of community we would like Harvard to be. I agree that Harvard is Harvard -- and Cambridge, Cambridge -- in part because of some of the aura created by families with impressive genealogies and longstanding ties to Harvard. This, however, is a reflection of a bygone era.

As far as I understand it, the community Harvard tries to create now is indeed one of meritocracy -- whether it is excellence in academics, public service, the arts, or in a number of other areas. It is this commitment to excellence that has propelled Harvard to be one of the premier institutions of higher learning in this country and in the world. Such a position brings with it an enormous amount of power as well as responsibility. President Summers talked at length about how this power can and should be used to combat inequality in the United States. He ended his Commencement Address by calling upon all of us "to ensure that our University affirms its promise to advance the vital quest for equal opportunity in America." Removing the "ever so slight tip" for children of alumni, would further both goals -- creating a community based on merit and excellence, and reaffirming our commitment to equal opportunity.

As you allude to in your letter, the other reason why Harvard should maintain its policy of giving children of alumni an "additional look" is money. (This, of course, again poses the question of which kind of community Harvard would like to be. Would we like to suggest that the "ever so slight tip" in the admissions process might be "bought" in any way?) Harvard does indeed have a remarkable financial aid program. My wife and I will be the first ones to admit this. Without Harvard's generous support, my wife would not have been able to attend. Without its need blind admissions system for international students (to my knowledge, unparalleled in the United States, at the time of my college application), I would not have been able to go to college in this country. We are forever thankful for this.

Removing the "slight tip" for children of alumni may indeed decrease the amount of money available in Harvard's financial aid funds. So does the policy of no longer requiring families with incomes of less than $40,000 to contribute to the cost of attending Harvard for their children. Both are initiatives aimed at addressing inequality in the United States, and they (may) come at a price. Both initiatives, however, may also encourage some alumni to donate to Harvard: for example, the signatories of this open letter.

Sincerely,
Gernot Wagner

Cc: President Summers, Dean Fitzsimmons

Continue reading Re: Open Letter to President Summers at its permanent location.

Posted by Gernot Wagner on Tuesday, July 06, 2004. 1 comments.

July 03, 2004

End Legacy Admissions at Harvard

Dear President Summers:

At this year's Commencement exercises, you talked at length about the widening inequality gap in the United States and mentioned a number of initiatives Harvard is taking to address the problem. You also said that the college admissions process is trying to put each student's achievements in the context of his or her "background and the circumstances under which credentials have been achieved," adding that private SAT prep courses are among "the least economically diverse in America." Despite these pronouncements, Harvard College continues to defend its admissions policy of giving applications from children of alumni an "additional look."

Immediately before your speech, Robert G. Stone Jr., chair of the Committee on University Resources, read off the impressive fundraising achievements of Harvard reunion classes. He drew attention to the fact that two college class reunion chairs had the same last name and said that this was the kind of tradition we would like to maintain at Harvard. His proclamation was met with applause from some members of the audience, including briefly from you.

It is wonderful to have successive generations of the same family attend Harvard and then commit considerable time and effort to the university. Their contributions, though, would be even more impressive without the fact that children of alumni get "an ever so slight tip." This "tradition" stands in striking contrast to the university's commitment to educational equality. In the words of The Economist magazine, it is a "helping hand for those who least need it."

With your admirable effort to address the problem of educational inequality, you are sending a strong message that "Harvard is - really and truly - an option for exceptionally talented students whatever their financial means." It is, however, diluted by the conflicting message that children of alumni receive that additional look.

Coming from well-educated and relatively wealthy parents, our (future) children will already have an enormous advantage in the college admissions process. Should they ever decide to apply to and be accepted at Harvard, we would not want them to have any doubt in their minds that it is because of their abilities and future potential - not because their parents are Harvard alumni.

We urge Harvard to end its policy of favoring children of alumni in the college admissions process.

Sincerely,

Gernot Wagner '02
Siripanth Nippita '00

Avik Chatterjee '02
Kimberly L. Collins '02
Rohit Goel '02
Daniel B. Giffin '99
James Grimmelmann '99
Rita Hamad '03
Michael D. Hartl '96
Myung H. Joh '02
Jonathan G. Koomey '84
John L. Larew '91
Darryl Li '01
Tse Wei Lim '02
Erika Lundquist '99
Adam Marlowe '02
Chris Meserole '02
Nicholas Murphy '02
Zuzanna Olszewska '01
Marisa Perez '99
Michael Prokosch '70
Brian Questad '00/'01
Sanjay Reddy '91, A.M. '95, Ph.D. '00
Dianne Reis '93
Lori Rifkin '00
Travis Schedler '02
Dale Shuger '00
Caroline Stanculescu '00
Mary Ann Walter '00
Calvin C. Wei '00

Add your name to this list!


Further readings:

"A Hereditary Perk the Founding Fathers Failed to Anticipate" by Adam Liptak, New York Times, January 15, 2008.

"The New College Try" by Jerome Karabel, Op-ed, New York Times, September 24, 2007.

"The Old College Try - Why do alumni give to universities? To get their kids in, of course," Slate (July 6, 2007).

"Poison Ivy: Not so much palaces of learning as bastions of privilege and hypocrisy," The Economist (September 21, 2006).

The Price of Admission: How America's Ruling Class Buys Its Way into Elite Colleges -- and Who Gets Left Outside the Gates by Daniel Golden, Crown (September 5, 2006).

"Inequality and the American Dream," The Economist (June 15, 2006).

The Chosen: The Hidden History of Admission and Exclusion at Harvard, Yale, and Princeton by Jerome Karabel, Houghton Mifflin (October 25, 2005). Reviews of The Chosen: "Ivory Tower Intrigues: The pseudo-meritocracy of the Ivy League" by James Traub, Slate (October 24, 2005); "Merit in Motion," The Economist (Novemer 26, 2005).

"Getting In: The social logic of Ivy League admissions" by Malcom Gladwell, The New Yorker (October 10, 2005).

Equity And Excellence In American Higher Education by by William G. Bowen, Martin A. Kurzweil, and Eugene M. Tobin, University of Virginia Press (April 15, 2005); "A Thumb on the Scale: The case for socioeconomic affirmative action," Harvard Magazine (May-June 2005), excerpts of chapter seven of the book.

"Ever higher society, ever harder to ascend," The Economist (January 1, 2005); Letter to the editor by William Fitzsimmons, Harvard College Dean of Admissions, in response to the article (January 20, 2005).

"The Legacy of Legacies" by Jerome Karabel, Op-Ed, The New York Times (September 13, 2004).

"Bush, a Yale Legacy, Says Colleges Should Not Give Preference to Children of Alumni," The New York Times (August 7, 2004).

"Herkunft bestimmt Karrierechancen [German: Birth determines career prospects]," Die Presse (August 4, 2004).

"College Admissions and Legacies," Talk of the Nation, National Public Radio (January 15, 2004).

"The curse of nepotism," The Economist (January 8, 2004).

"The Senate and Alumni Admissions" by Josh Gerstein, Op-Ed, New York Sun (November 6, 2003).

"How Affirmative Action Helped George W." by Michael Kinsley, Time (January 21, 2003).

"Family Ties: Preference for Alumni Children In College Admission Draws Fire" by Daniel Golden, The Wall Street Journal (January 15, 2003).

"Legacies in Black and White: The Racial Composition of the Legacy Pool" by Cameron Howell and Sarah E. Turner, NBER Working Paper No. w9448 (January 2003).

"A Second Look: Attacking Legacy Preference" by Jesse Shapiro, Perspective (November 1997).

"Why Are Droves of Unqualified, Unprepared Kids Getting into Our Top Colleges? Because Their Dads Are Alumni" by John Larew, Washington Monthly (June 1991): p. 10-14.

Continue reading End Legacy Admissions at Harvard at its permanent location.

Posted by Gernot Wagner on Saturday, July 03, 2004. 2 comments.

April 09, 2004

Fixing GDP: Green Accounting in the United States

Living on Earth, April 9, 2004, National Public Radio's Environmental News Show. I wrote and produced the story, Steve Curwood voiced it.

Listen to the story in mp3 format (7:45min, 3.8MB).

[background: Wall Street opening bell]

When it comes to counting all the beans on Wall Street and in Washington, D.C., the only cookbook that matters is the Gross Domestic Product, or GDP. If the Gross Domestic Product is going up, people say the economy is growing. If the GDP is falling, they say we're in a recession. Whichever way it goes, investors, business folks, voters and presidential candidates use the GDP as an indicator of how well the nation is doing.

[Wall Street opening bell fades out]

The GDP is supposed to measure the total production and consumption of goods and services in the United States. But the numbers that make up the Gross Domestic Product by and large only capture the monetary transactions we can put a dollar value on. Almost everything else is left out. And that's why some economists have a problem with this influential accounting system.

[background: Cambridge playground]

At a playground in Cambridge, Massachusetts a child is being attended by a daycare center employee. Her wages add to the GDP. Nearby another child is being watched over by his grandmother. But, under GDP accounting rules, granny's contribution has no economic value.

[Cambridge playground fades out]

The concept of the GDP was developed to help steer the US economy out of the Great Depression, and through World War Two.

[Davis:] It was developed as a means of measuring economic output, and in fact for planning purposes during the war period.

Professor Graham Davis is an economist at the Colorado School of Mines.

[Davis:] But the public and the press, and probably some economists, have fallen into the trap of using GDP and, more specifically, growth in GDP as an indication of economic progress.

Prof. Davis cites coal mining as an example of how the Gross Domestic Product number can be a misleading growth indicator.

[Davis:] Every time we mine a ton of coal, GDP goes up by $17 a ton, but that doesn't take into account the fact that we've harvested one ton of coal from the Earth and that ton of coal is no longer there.

So-called green accountants would add in depletion, says Professor Davis. And when you do that, the numbers start to change.

[Davis:] The value to society of that ton of coal in GDP terms would be about $17 for West Virginia coal. In green income terms, it would be about 5 Dollars and 50 cents.

And this adjustment only accounts for the decrease of coal in the ground and the depreciation of the equipment used to mine it. It does not consider a potentially larger, human cost.

[Scarbro:] I contracted black lung, and also bad hearing. I can't hear anything.

James Scarbro is a retired West Virginia coal miner. He spent almost 32 years working in the mines.

[Scarbro:] How does it affect me now? Well I can't do much work. I mean, I can get out here, and I can work a little bit, but I gotta gauge myself as I go about it. I've been into the hospital in and out, for I bet you, in the emergency room 10-15 times, and it was with the symptoms of a heart attack.

But Mr. Scarbo's medical bills aren't subtracted from the economic value of coal. Indeed, under the accounting system used by the Gross Domestic Product, his illness actually adds to the GDP. That's because medical costs to treat black lung disease add to the economy. So does the cost of cleaning up abandoned mines. If a coal slurry impoundment escapes and ruins miles of rivers, cleaning up the mess adds dollars to the GDP, too. So, in this case, environmental degradation looks good for the economy.

[Daly:] We add together benefits and costs, and changes in inventory – everything goes in. We don't subtract anything.

That's Prof. Herman Daly. He's an economist at the University of Maryland School of Public Affairs. He says a key flaw of the GDP is that it ignores core accounting principles of business.

[Daly:] A firm always has two accounts: they have a benefit account and a cost account. They have a revenue account and their expenditure account. They never add the two together. That would be the height of silliness. But that's exactly what we do with GDP.

So some economists would argue that these are examples of some fundamental problems with the Gross Domestic Product: we don't measure unpaid work or services that may benefit society, we treat expenses as income, and we often fail to value natural resources. Back in 1993 the Bureau of Economic Analysis, the official bookkeeper of the U.S. economy, began responding to concerns that the GDP needed retooling.

Director Steve Landefeld says the agency began working on a green accounting system called Integrated Environmental and Economic Accounts.

[Landefeld:] We went forward trying to do in a best-practice kind of way a set of basic accounts where we began with the frankly more easily measurable commodities, such as petroleum and other mineral resources. In 1994, what we did was we tried to put together what we called a prototype set of accounts. The estimates were fairly significant.

[background: Capitol Hill hallway]

These initial results released in 1994 showed that GDP numbers were overstating the impact of mining companies to our nation's economic wealth. Mining companies didn't like those results, and it didn't take long for Capitol Hill to react.

Alan B. Mollohan, a Democratic House Representative from West Virginia's coal country, sponsored an amendment to the 1995 Appropriations Bill that stopped the Bureau of Economic Analysis from working on revising the GDP and that's where things stand today. The Bureau of Economic Analysis is still not doing any work on revising the GDP in a way that considers such things as environmental impact accounting.

[Capitol Hill hallway fades out]

By the way, if the Bureau had focused its first work exclusively on forests instead of looking at coal and oil, the numbers might have been more appealing to present critics. Natural re-growth of trees has increased the economic value of our nation's forests by approximately 2 to 3.5 percent annually over the last half century. So, in some instances, accounting for the environment might actually boost economic indicators.

[Background: Cambridge playground]

Meanwhile, back at the playground in Cambridge, we are reminded of the work of sociologist Juliet Schor. She has been counting up the unpaid service part of our economy, from meals cooked at home to volunteers at local hospitals.

[Cambridge playground fades out]

[Schor:] It turns out that the stuff we do that we don't get paid for is almost as big, not quite anymore, because the market sector has been increasing the fraction of human labor that it covers. Now people are spending more and more time in the market. But it's a very, very large economy that's not included, almost as large as the one we measure.

If the meal cooked at home is worth as much - or more - as the one served by a single mother employed at the local fast food joint, it changes the calculus of such programs as workfare. And if a tree that is growing is worth as much or even more than one that is cut, that changes the calculus of forestry.

Rethinking of how we measure our economy raises broad questions. But Juliet Schor cautions that new statistics alone are not the answer.

[Schor:] We need new statistics, without question, but if we got the new statistics tomorrow, it wouldn't have solved the problem. We need a lot more than that. We also need a new set of incentives, we need new awareness, we need new kinds of human behavior, we need new power relationships. Those other things are really fundamental to making new statistics effective.

Still, professor Herman Daly says one needs to start somewhere with correcting these statistics.

[Daly:] This really has nothing to do with green or brown or anything, it is just good economics.

Download transcript as a PDF.

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Posted by Gernot Wagner on Friday, April 09, 2004. 0 comments.

February 01, 2004

The Economics of Tree Hugging

Interview printed in GSAS Bulletin 33 (6), February 2004, Graduate School of Arts and Sciences, Harvard University.

How did you develop your environmental awareness?

Like for most people, it started quite early, with recycling in kindergarten and so on. But the first time I became aware of the interplay of the environment and the economy was in tenth grade in Austria when my English teacher handed me a copy of Al Gore's Earth in the Balance. Basically, it's a manifesto on what we ought to do to save the planet. There was this one paragraph in which he talked about how the most fundamental economic measurement is GDP, and that how we deal with GDP right now is completely at odds with the goal of the environmental community.

In what way?

There's nothing wrong with GDP as a proxy for economic power or economic output. But in many ways, the focus on boosting GDP is contrary to what is important to overall well-being. For example, environmental degradation adds to GDP. If Brazil cuts down its entire rainforest and sells off its trees this year, GDP would jump by an enormous amount because the market value of all those trees gets added to GDP. But nobody subtracts the fact that... those trees are no longer there.

Is green accounting an alternative to GDP?

No, ideally it would supplement our current economic accounts. Again, there's nothing wrong with GDP as a measure for economic output. But in many cases that's not what it is being used for. We use GDP figures as a proxy for how well we are doing as a nation, [as if it is] a proxy for overall well-being or even happiness.

GDP doesn't measure non-market goods and services. That's where the "green accounting" work comes in. I believe most economists would say that [green accounting] doesn't have anything to do with being green or being environmental, or being anti- or pro-industry. It's simply good economics: accounting for all inputs, including our environment. You account for how much labor is out there in the economy. You account for machines and other capital. But one big item missing [from our accounts] is natural capital. Green accountants would argue that, in addition to having capital and labor accounts, there should be accounts for natural capital: timber, subsoil assets, water resources, and clean air.

Where is green accounting being done?

Sadly, it often depends on the initiative of private groups or foundations. There are a few official case studies and some governments, such as the Netherlands or the Philippines, are producing semi-official numbers. But basically no country does it seriously, as in publishing quarterly figures, [and saying] here's our GDP and here's our GDP adjusted for environmental measures.

Why not?

Because of a lack of will and lack of knowledge. Traditional economic accounts haven't been around for that long either. It was actually a Harvard professor, Simon Kuznets, who came up with the theory of how we should measure economic output. That effort in a sense helped pull the US out of the Great Depression. Before that, we didn't know how well we were doing in [terms of] economic output. Kuznets came up with the first accounts, and [output] has been measured ever since.

Unfortunately, governments don't see a similar urgency for greening GDP. Even though in the '50s or '60s Kuznets was one of the first and most vocal advocates in saying, "GDP is good, but use it for measuring economic output and economic output only. Don't use it as a proxy for societal well-being because that's not what it's intended to do."

On a technical level, it's immensely difficult to agree on appropriate measures. Should we just stick to things that you can touch, like forests, coal, oil, natural gas? Or should we also measure open space or clean air? The question is: What do we care about? It gets complicated pretty quickly.

What do you think should be included in the measures?

That's a tough one. Most importantly, we should make sure to create a separate account for [each resource]. If you don't believe in the clean air account, then add up everything else and use that as your measure.

In terms of what should actually be reported, ideally it would be some sort of multidimensional measure. Say, GDP went up by 7.2 percent last quarter. But people are working more and [taking] less vacation; the timber stock is going down; and [the environment is becoming] more polluted. Then you might say [that] economically we are doing better, but everything else is worse, so maybe we should try to scale down our economic activity for a while and try to focus on other factors.

Do you approach your scholarship from an activist's viewpoint?

I wear Birkenstocks, if that counts for anything. But seriously, the question is always: Where can you have the most impact? No matter which topic it is in the environmental movement, your influence stops as soon as economics starts. You can argue for preserving trees [until] it goes against, say, employment and you have real, hard economic data that 100,000 people are going to be out of work because you are trying to save trees. If you're an environmentalist, you have to [ask yourself] am I an environmentalist because I care about trees or because I care about people? I would say I'm an environmentalist because I care about people.

It's tough then to make choices. You can really only make [them] as soon as you actually compare apples to apples. As in, you have hard economic data supporting the fact that you lost 100,000 jobs, so you need hard economic data saying that these trees are actually worth something in real dollar figures. With green accounting, you could determine the economic value of these trees [because] they purify water, provide watershed protection, and produce oxygen. They also have timber value and provide recreational benefits, which you can put a dollar value on.

Some people would say there's a lot of carbon monoxide in the air but it hasn't killed me yet, or we took out ten acres to build a WalMart but I can buy a DVD player for only $29. How do you combat that kind of disdain for environmental and ecological factors?

In the end, it comes down to valuing human life. Economists usually have a tough time selling this, but what they talk about is a statistical life. We would never say one person is worth a million bucks, another is worth two million, and a young and healthy person is worth eight million bucks. You would never say that individually, but statistically we do put a dollar value on human life.

Say one human life in the US, statistically speaking, is worth $3.8 million. How many lives do you save by decreasing carbon monoxide emissions per pound, and how many trees do you need to plant to do that? If you plant a thousand trees to save one life, then every tree's air purification services are worth $3,800.

Do you have a mentor?

I have been fortunate to have Professor Dale Jorgenson as my advisor. He was the first person to introduce me to the academic side of green accounting.

Other professors at Harvard are also working on this issue: Robert Stavins, Bill Clark, David Cutler, and Martin Weitzman, who pretty much started the entire field. He showed that it makes theoretical sense to use comprehensive, annual income figures as a proxy for overall well-being. I'm still trying to understand his latest book on the subject, but once that happens, I'll be knocking on his door again.

Download February 2004 GSAS Bulletin as a PDF.

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Posted by Gernot Wagner on Sunday, February 01, 2004.

December 04, 2003

How Well Are We Doing?

New York Times, 4 December 2003, Letter to the Editor, p. A-38.

To the Editor:

I would like to add one more statistic to your "Index of Missing Economic Indicators" (Op-Ed, Nov. 30 ["The Productivity Paradox" and "The Unemployment Myth"]): a true welfare measure. Gross domestic product and its cousin gross national product have long been used as proxies for how well we are doing as a nation, even though they had never been intended for this purpose.

Gross domestic product per capita is a good proxy for economic prowess, but as long as environmental degradation, increased military budgets and other "defensive expenditures" add dollars to the gross domestic product, equating it with societal well-being is woefully misleading.

Gernot Wagner
Cambridge, Mass., Nov. 30, 2003

Continue reading How Well Are We Doing? at its permanent location.

Posted by Gernot Wagner on Thursday, December 04, 2003. 0 comments.

April 01, 2003

Der Rest der Welt [German: The Rest of the World]

Mein erstes Buch ist im Ueberreuter Verlag erschienen. Wie der Titel vermuten lässt, ist das Ganze leider nicht allzu ernst zu nehmen: Der Rest der Welt: Ein Reiseführer für überzeugte Daheimbleiber. Mehr dazu auf der Seite zum Buch.

Waaaahhhh? Inglés anybody? Since you asked for it: I wrote a book. It's in German, but it got its own English web page.

Continue reading Der Rest der Welt [German: The Rest of the World] at its permanent location.

Posted by Gernot Wagner on Tuesday, April 01, 2003. 0 comments.

March 28, 2003

Interpreting Sustainability in Economic Terms: Dynamic Efficiency Plus Intergenerational Equity

Economics Letters 79 (2003): 339-343. With Robert N. Stavins and Alexander F. Wagner.

This paper tries to lay out the possible contributions of economics to the interdisciplinary debate on sustainability. Economists have long confined the concept of sustainability to allocation decisions across generations. Instead, we argue that any reasonable definition of sustainability should also include the idea of optimality. We cannot use sustainability as the sole policy criterion, if it does not also imply efficiency.

This definition has another advantage. It would enable economists to be humble and play to their main strength. Economics is much better equipped for dealing with efficiency than equity. This, of course, is not a value judgement about the importance of efficiency versus equity. Equity is at least as important as efficiency, but it is best left to the political process.


Abstract: Economists have confined the concept of "sustainability" to intertemporal distributional equity. We propose a broader definition, combining dynamic efficiency and intergenerational equity, and relate it to two concepts from neoclassical economics: potential Pareto-improvements and inter-personal compensation.

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Posted by Gernot Wagner on Friday, March 28, 2003. 0 comments.

June 07, 2002

Global Goals: NPR Commentary on the Parallels between the Kyoto Protocol and Soccer

[Curwood:] Most of the world's nations are enthusiast about it, except the United States. Europeans support it, despite exorbitant costs to their economies. Some governments use it for political gain. And Japan seems to be signing on only for the prestige. We're not talking about the Kyoto Protocol on global warming. No, it's World Cup Soccer, underway in Japan and South Korea this month. As commentator Gernot Wagner explains, there are a few parallels between the world's favorite environmental issue and its favorite pastime.

[Wagner:] After last July's decisive global warming summit in Bonn, the New York Times ran the following headline: "178 nations reach a climate accord; U.S. only looks on." And so goes it for soccer. Billions of people around the planet will tune in the World Cup on TV this month. Only a fraction of them will be in the U.S. Even though at the grassroots level, soccer is a popular sport here. More than seven million youngsters in the U.S. play on soccer teams. Only five million kids play organized baseball.

When you poll most Americans, they'll tell you that climate change is a real and serious problem. But don't mention giving up SUVs or paying higher gas prices. Sacrificing is out of the picture.

It's okay to have kids play the game at the park down the street. But ask TV executives to do without the ads that constantly interrupt U.S. sporting events, and you might be asking too much. Soccer has only one break during its 90-minute run.

On the other hand, consider this parallel between soccer and Kyoto. The U.S. has a knack for developing niche markets that often make sense, but go largely ignored by the rest of the world. For example, the U.S. has long insisted on using market-based mechanisms like emissions trading to cut greenhouse gases. Despite problems with global equity considerations, these trading schemes are a powerful tool in the fight against climate change. In soccer, the U.S. niche is the women's game. As reigning world champions, women's soccer is extremely popular in the States, but is often ignored -- even laughed at -- overseas.

Meanwhile, Japan plays a role on the stage of apparent contradictions. Its upper house of parliament unanimously ratified the Kyoto Protocol a few days ago. But overall, the nation's support for the treaty has been less than enthusiastic. You might say the same about soccer in Japan where baseball players and sumo wrestlers, rather than goalies and strikers, are the heroes. Still, Japan is pouring tons of money into the World Cup, nearly $5 billion alone on new stadiums, which will likely go belly-up when the game is over.

And finally, there are the Europeans. Many EU nations are blindly supporting the Kyoto Protocol, despite predictions of exorbitant costs to their economies. And today, they are paying for the World Cup, too. In Europe, the games air live in the morning through early afternoon. Not surprisingly, when labor statistics are tallied for June, sick days will be up and worker productivity down.

But for those seeking convergence of the parallel worlds of soccer and climate politics, there was encouraging news this week. First, the world was stunned when the White House admitted that global warming was real and humans were the cause of it. A few days later, the world was shocked again when the underdog U.S. soccer team beat fifth-ranked Portugal, sparking a wave of soccer fever here. So perhaps, in soccer and climate politics, parallel lines can one day meet.

[Curwood:] Commentator Gernot Wagner is Living on Earth's occasional webmaster, a recent Harvard grad, and he's pulling for Brazil to take the Cup.

Living on Earth, 7 June 2002, National Public Radio's Environmental News Show, hosted by Steve Curwood.

Listen to the story in mp3 format (1.7MB).
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Posted by Gernot Wagner on Friday, June 07, 2002. 0 comments.

October 09, 2001

U.S. Timber Accounts, 1957-1997

Proceedings of the Symposium on Forest Environmental Value Accounting,
Chinese Academy of Forestry, 9-12 October 2001, Beijing.

In this paper, I calculate the value of standing timber in the continental United States. (The paper formed the main part of my undergraduate thesis.)


Abstract: In the most comprehensive review of green accounting efforts in the U.S. to date, the National Academy of Sciences concluded that extending national income calculations to account for natural resources and subsequently for ecological services is a worthwhile and desirable goal. The study furthermore sees the creation of timber accounts as the next logical step in the implementation of Integrated Environmental and Economic Satellite Accounts (IEESA). This paper attempts to compute such a set of timber accounts for the continental U.S. from 1957 to 1997. Over this period, the monetary value of U.S. timber increased both at a nominal and real level. In computing these accounts, three different approaches were used: the method previously applied by the Bureau of Economic Analysis (BEA), a new method suggested by the National Academy, and the standard present-discounted value method. Given the available data, this paper concludes that the latter approach is most appropriate for implementing U.S. timber accounts.

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Posted by Gernot Wagner on Tuesday, October 09, 2001. 0 comments.

July 12, 2001

NPR Commentary on the Kyoto Protocol

[Wagner:] Diplomats who participate in the climate change circus seem to have a pretty good deal.

[Curwood:] From across the Atlantic, another view on the Kyoto process from Gernot Wagner, a native of Austria.

[Wagner:] They get to travel to places like Kyoto, Geneva, and Buenos Aires. And unlike those who attended the Seattle talks on globalization, the climate change bureaucrats can actually enjoy the cities they visit. So far, there haven't been violent demonstrations to keep the huddled inside; not a lot of stone throwing social crusaders are against the idea of cutting CO2 emissions. And corporate lobbyists are too busy starting phony anti-global warming coalitions to go on the street to protest.

But the upcoming meeting in Bonn will draw lots of protestors, who will get to witness first-hand how the Protocol is buried – alive. The differences among the participants are simply too stark to make it work. Not surprisingly, most of the countries that have already ratified the Kyoto Protocol are island nations in danger of disappearing under the rising sea level. These countries, with populations smaller than the number of physicians trying to keep Dick Cheney alive, have resorted to selling off the internet domain names to make a few bucks before they go under. The U.S., in the meantime, has been adding more than a million SUVs to its fleet, in a desperate attempt to conquer even the most remote shopping mall parking lot.

It's a simple fact that developing countries will feel most of the negative impacts of climate change. Our economies, on the other hand, are profiting nicely from cheap fossil fuel, which lets us enjoy our standard of living at the cost of developing nations. We Europeans do a pretty good job of that. But you have to try pretty hard to be as wasteful as the U.S.

The Kyoto protocol was meant to be a small first step, but the Bush administration insists that China, India and other fast-growing development countries participate in the treaty. The agreement is set to expire in 2012, though, long before even China will catch up to the U.S. in CO2 emissions. After Kyoto, any reasonable treaty should, of course, include these nations, but asking them to pay now for the mess the U.S. and Europe have created, is irresponsible.

Unless the U.S. does an about face, the meeting in Bonn won't be much more than another fruitless attempt to revive the dying Protocol. If you read President Bush's lips, it's dead already. But the European Union can't accept it. Our politicians have to answer to a strong green constituency; and besides, they truly want the treaty to go into effect, preferably, of course, with the U.S., since they also know that any agreement without the world's largest polluter would only amount to a farce.

The Kyoto process will limp through Bonn and perhaps, even crawl into its next meeting in Morocco before it's finally laid to rest. But it might do the Bush administration well to remember that a majority of U.S. voters support the treaty. And a couple of years ago, 2500 U.S. economists, including 8 Nobel Laureates, signed a statement on climate change. They said that preventative steps are not only justified but could be healthy for the U.S. economy – regardless of what other countries do.

So for Kyoto to come into effect it will be necessary for Congress, and the White House, to act according to these voices. And it will be necessary for Americans to slowly let go of the constitutional right to cheap gas.

[Curwood:] Austrian Gernot Wagner studies environmental economics at Harvard University. We also heard from Professor Robert Stavins, who directs the Environment and Natural Resources Program at the Kennedy School of Government, at Harvard.

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Posted by Gernot Wagner on Thursday, July 12, 2001. 0 comments.

May 15, 2001

The Political Economy of Greening the National Income Accounts

Newsletter of the Association of Environmental and Resource Economists 21 (May 2001): 14-18.

Abstract: National income figures currently in use are highly misleading. With some notable exceptions such as owner-occupied housing and government services, income calculations are limited to market activities. However, our economy reaches far beyond its traditional market-boarders. Some negative economic effects on our environment are so large that they pose serious threats to our societal and economic well-being. Green accounting can significantly aid in policy decisions by assigning values to both the depreciation of natural resources and ecological services.

Because of political disagreement, however, official green accounting efforts in the United States have been on hold for the past half a decade. Whether and how to use the actual accounts in policy decisions will undoubtedly be a political issue, but the debate about creating the numbers in the first place should be moved from the political arena back to the Bureau of Economic Analysis (BEA) and the economics community.

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Posted by Gernot Wagner on Tuesday, May 15, 2001. 0 comments.