Posts in Category: Climate change

Microeconomics of Green Jobs

Does a particular green policy create more jobs than it destroys?

A policy is green if it lowers our use of resources and/or environmental impact.  If a green policy is also a net creator of jobs, everyone should agree that it is a good policy. It should be implemented.  End of story.  Green policies which destroy jobs, on the other hand, will require further analysis as to whether the environmental and health benefits outweigh the economic losses.  That’s a question which requires putting relative value on various benefits, and cannot be resolved purely by economic reasoning.  But  the first point bears repeating: if a green policy is also net job creator, everyone should agree that it is a good policy and should be implemented.  Identifying those policies is simple.

Which Policies are Net Job Creators?

There are two ways a policy can increase or decrease economic activity and hence number of jobs.

  1. Jobs can be created or destroyed by substituting labor for capital, energy, and/or other resources in production.
  2. If a policy increases economic efficiency, it will increase economic activity and create jobs. If it decreases economic efficiency, it will reduce economic activity and destroy jobs.

Substituting Labor for Energy or Capital

Marginal rate of Technical Substitution.

Image Source: Wikipedia

A basic tenet of microeconomics is that there is a tradeoff between capital, labor and natural resources such as energy in the production function. In particular, you can substitute capital for labor (by mechanization) or labor for capital (by using shovels and picks instead of bulldozers.) Now add energy into the mix: you can substitute fossil energy for either capital or labor to attain the same production.

For example, a hybrid car.  It substitutes capital and resources (in the form of an electric motor and batteries) for energy (less fuel consumed to do the same work.) A bus substitutes labor (the bus driver) for capital, resources and energy (lots of cars and fuel consumed.) A green building substitutes labor (better architecture/construction) and some resources (extra insulation) for energy.

From this perspective, any policy that promotes the substitution of labor for energy will create green jobs, since you get more work and less energy consumed. Shifting people out of their cars and onto mass transit will create jobs because there will have to be drivers and people managing the transit system, where before no one was paid to drive. To the extent that the transit system can be paid for out of the reduced fuel costs and car ownership costs of the former drivers turned riders, the number of jobs created will be a pure economic gain.

Multiplier Effects

Which brings us to the other major potential source of jobs from green policies: economic multiplier effects.

To the extent that green policies improve economic efficiency by overcoming the barriers to cost effective green solutions, these policies will result in greater economic activity, and hence more jobs. The strongest critique of “green jobs” initiatives is that they simply shift economic activity from out-of-favor “brown” sectors to more politically correct green ones. Yet when a policy improves economic efficiency, it does not just shift jobs and capital around in the economy: it creates economic activity and jobs.

Not all green policies improve economic efficiency. For example, subsidies for not-yet-economic types of renewable energy like wave power and solar installations may be justifiable on the grounds that they are helping to promote needed future technologies, but they probably come at a net cost to near-term jobs (even if they may create more jobs in the long term by allowing the creation of new types of businesses.)

On the other hand, policies to promote energy efficiency will be strong net creators of jobs, because the cost of energy efficiency is typically only a fraction of the cost of the energy saved. The very existence of opportunities to save significantly on energy bills at modest cost is proof that the energy market is inefficient. In an efficient market, all such opportunities would have already been taken.

After the energy efficiency measure has been installed, the cost savings can be used for useful economic activity, rather than wasted on unneeded fuel. This money will then spur additional activity and stimulate jobs.

Using Fossil Resources to Stimulate Growth is Like Stimulating Growth With Debt

Short term jobs (green or otherwise) should not be the only consideration when forming policy. A short term focus on jobs today can end up doing long term economic harm. For instance, if we spend too much borrowed money to create jobs today, the long term drag on the economy caused by paying back the debt will leave everyone worse off.

Economic growth fueled by the extraction of non-renewable resources — natural gas, oil, coal — is no different from economic growth fueled by debt. When we extract these resources and use them, we increase economic activity today, but their non-renewable nature means that we lose the opportunity to extract and use them tomorrow. Hence, the economic stimulus today comes at the cost of a recession tomorrow, and the future recession will generally be larger than today’s stimulus, since improving technology should allow us to get more benefit from each unit of resource in the future.

Using renewable resources to stimulate growth does not have this problem: Tapping the wind or the sun for energy today does nothing to diminish the wind or sun tomorrow. Hence, to the extent a green job relies on renewable resources and a brown job relies on fossil resources, the green job should be preferred every time, even before taking the environmental benefits into account.

Policy Implications

If we only consider job creation, the focus on policy should be on creating jobs and economic activity, with a preference for green jobs, since those impose less of a cost on future economic activity than jobs based on extractive industries.

Green jobs can be created either by substituting labor for energy and capital, or by reducing energy waste so that the money previously wasted on energy can be put to more productive uses. For policy makers who wish to create green jobs, the implications are clear.

Green job programs should focus on two types of opportunities:

  1. Industries where labor can usefully be substituted for energy or capital, like mass transit.
  2. Breaking down the barriers to energy efficiency which can stimulate economic activity by allowing money that would otherwise have been wasted.

The converse is also true: if the goal is to create jobs and stimulate economic activity, subsidies and other policies which encourage the substitution of capital and energy for labor should be ended, especially those subsidies which encourage the extraction of non-renewable resources which only create jobs today at the cost of future jobs.

The most cost effective policies for creating jobs will be those that break down the barriers to the adoption of cost-effective green technologies, especially energy efficiency. Ironically, most energy subsidies have gone into capital intensive sectors such as nuclear and extractive sectors such as oil and gas.

A very cost effective way to produce jobs would then simply be to remove subsidies from fossil fuels and nuclear energy and redirect them towards the most cost effective clean technologies.

Increased support for and promotion of public transit could do much more to reduce our dependence on imported oil than support for domestic natural gas drilling (which will only make us more dependent on imported oil in the future by using up domestic resources sooner) while also creating jobs.

Meanwhile, energy efficiency programs such as cash for caulkers can cost-effectively reduce energy bills and free up money for other sorts of consumption while also creating jobs in the depressed housing sector.

Climategate goes to Richmond

Rector and Visitors of the University of Virginia v. Cuccinelli (Va. Mar. 11, 2011):

The Virginia Supreme Court agreed to consider the Virginia Attorney General’s request for documents concerning the so- called climategate controversy concerning grant applications of a former University of Virginia climate change scientist. In May 2010, the University filed a lawsuit objecting to a subpoena served by the Attorney General on the University concerning five grants received by a professor previously employed by the University who was involved in the so-called climategate controversy. In August 2010, the presiding judge held that four of the five grants were federal grants and thus the Attorney General could not question the professor about them. In addition, the court held that the document requests were not specific enough because they did not show sufficient reason to believe incriminating documents existed.

American Electric: CAA preempts the new federal common law

Connecticut v. American Electric Power (June 20, 2011)

In an 8-0 opinion, the U.S. Supreme Court held that federal common law nuisance claims cannot be brought against utilities for their greenhouse gas emissions given that the Clean Air Act and EPA regulations displace federal common law in this area. The lawsuit alleged that under common law, the companies’greenhouse gas emissions constitute a public nuisance in contributing to climate change. The plaintiffs sought injunctive relief requiring each power company to cap its greenhouse gas emissions and reduce them by a specified percentage each year. The district court dismissed the lawsuit in 2005, holding that the claims represented a political question not under the jurisdiction of the courts. In 2009, the Second Circuit reversed, holding that the plaintiffs could proceed with their lawsuit.

The Court affirmed in part and reversed in part.  It held that at least some plaintiffs had Article III standing under Massachusetts v. EPA,which permitted state to challenge refusal of EPA to regulate greenhouse gas emissions, and no other threshold obstacle barred review.  Significantly, the Court flatly rejected the argument that a claim for damages caused by climate change represented a political questions beyond the jurisdiction of the courts.

Second, the Clean Air Act (CAA) and the EPA actions it authorizes displace any federal common law right to seek abatement of carbon dioxide emissions from fossil-fuel fired power plants.  However, the Court left open the possibility that such a claim under state nuisance law, leaving that issue for consideration on remand.

Climate Change and the Common Law

The recent line of climate change cases presents the question of whether climate change is sufficiently unique to enjoy immunity from tort law. It would seem odd to think that it is. The rules of tort are well established, and courts have historically applied these rules to fill in the gaps in federal environmental legislation. Yet, every district court to consider these claims has held that they raise non-justiciable political questions committed to the political branches. This note examines the political question doctrine and its application to public nuisance claims asserted in climate cases. It concludes that “the thicket of global warming” does not present a political question, and that courts have been too quick to embrace the political question doctrine as grounds dismissing these causes of action.
The Cases: Public nuisance or political question?
In American Electric Power, state plaintiffs sought an injunction to reduce GHG emissions from six coal-fired electricity plants. The threshold question in the case was whether such a remedy presented a nonjusticiable political question outside the scope of the court’s jurisdiction – in short, whether the court could impose a cap on the defendants’ GHG emissions. The political question doctrine requires federal courts to avoid deciding matters better left to the political branches. The district court dismissed the case on this ground, noting that the injunction was “impossible” without an “initial policy determination”: namely, the “identification and balancing of economic, environmental, foreign policy, and national security interests,” which the court determined to be a question for the political branches, not the judiciary.
The Second Circuit vacated the dismissal. It emphasized the absence of a “textually demonstrable constitutional commitment” of the nuisance issue to a political department, and that judicial standards were capable of crafting an appropriate injunction. It further rejected the defendants’ arguments that allowing the case to proceed would result in a national emissions policy or undermine the separation of powers. Because the EPA had not yet regulated greenhouse gas emissions in such a way that “speaks directly” to the issue that the plaintiffs raised, the federal common law of nuisance was an appropriate cause of action.
The state plaintiff in California v. General Motors Corp., charged various automakers with the public nuisance of “creating, and contributing to . . . global warming.” Unlike the state plaintiffs in American Electric, California sought compensation for damages it would incur as a result of global warming. Distinguishing American Electric as a suit for equitable relief, the district court determined that it could not hear California’s claim for damages without an “initial policy determination” from the executive or legislature. The court further concluded that the California’s claim was nonjusticiable because it implicated interstate commerce and foreign policy, areas constitutionally committed to the political branches of government. With the case awaiting review by the Ninth Circuit, the federal government stepped in. EPA acknowledged that “greenhouse gases are a public health danger and must be regulated,” and the President directed the Department of Transportation to “establish higher national fuel efficiency standards in line with the standards California had sought to implement.” Consequently, California voluntarily dismissed its appeal in 2009.
Climate change, as Chief Justice Roberts observed in his dissent in Massachusetts v. EPA, “may be a crisis, even the most pressing environmental problem of our time.” One problem with climate change is that its causes and effects are not equally distributed. It is caused much more by some than by others. While its impacts are global, its costs are distributed unevenly, bearing most acutely on the poor and the politically disenfranchised. Some have nowhere to turn but to the courts. For example, in City of Kivalena v. Exxon Mobil, the Alaska Native Village of Kivalena brought nuisance claims against a dozen energy companies. The plaintiffs claimed that the defendants’ GHG emissions contributed to global climate change, rendering their coastal village uninhabitable. The plaintiffs sought compensation for the estimated $400 million it would cost to relocate their entire community before it melts—schools, churches, streets, businesses, and polar bears —into the
Arctic Ocean. Finding that these allegations presented a non-justiciable political question, the Northern District of California dismissed the case.
In Comer v. Murphy Oil USA, fourteen private citizens filed a class action law suit against 147 oil, chemical, power, and insurance companies in Mississippi, for their contribution to the destruction of plaintiffs’ private property. Plaintiffs alleged that by emitting greenhouse gases, defendants contributed to increased sea levels and Hurricane Katrina’s increased ferocity, which in turn damaged the property in question. Proceeding under state common law claims, The Fifth Circuit ruled that these claims did not present a nonjusticiable political question.
In its analysis, the Comer court explained why public nuisance claims for climate change impacts must be considered justiciable, at least for the immediate future. The court noted that until the federal government responds to the climate change issue with legislation or regulations, “there is no commitment of those issues exclusively to the political branches of the federal government by the Constitution itself or by federal statutes or regulations.” Even if Congress does enact comprehensive GHG legislation, it might very well preserve state common law remedies, as the CWA did. Thus, while the EPA’s recent regulatory actions may preempt claims under federal common law, nothing in the Clean Air Act prevents future tort claims under state law. Consequently, common-law climate change litigation remains a viable action-forcing mechanism.
Expressly deciding not to “enter the global warming thicket,” district courts dismissed each case as presenting a non-justiciable political question. In other words, the cause of action was dead on arrival. There was no answer, no discovery, no hearings, no proof, and no opportunity for the plaintiff to present her case. Case closed. The courts reasoned that federal courts lack jurisdiction over climate cases because climate change is textually committed elsewhere, there are no judicial standards to apply, and the elected branches have yet to render an initial policy determination about the subject. These summary conclusions seem inaccurate, and inappropriate in light of how the doctrine has been applied in the past.
The political question doctrine does seem applicable to a very narrow class of cases. Applying the doctrine involves “a delicate exercise in constitutional interpretation” to be conducted on a “case-by-case inquiry.” It is to be used sparingly in the context of demonstrable “political questions”devoted to the elected branches, not simply to cases that involve political issues. Indeed, the Supreme Court has used the doctrine only six times in more than two centuries. Traditional questions into which courts “ought not enter the political thicket” include political apportionment and gerrymandering, impeachment, constitutional amendments, and treaty abrogation. Even among clearly political cases it is rarely raised. For example, the Court made no mention of the doctrine while resolving issues arising from Florida’s recount of votes in the 2000 presidential election, despite the fact that the Constitution vests in Congress the authority to count electoral votes, and further provides for selection of the President by the House of Representatives if no candidate receives a majority of electoral votes.
Ideally, Congress would address climate change. It could force the energy and automotive industries to adopt clean technologies or bare the economic externalities of their climate-altering activities. It could apportion the costs of the property damage, health care, and community relocation resulting from climate change. Sadly, it does not seem that such measures are likely anytime soon. Some states have responded with their own measures to reduce GHG emissions. But states have little means either to require technological solutions or to recover their response costs. The costs to states and individuals for responding to climate change will likely be unlike anything we have seen in kind or degree. And without a comprehensive system for allocating those costs, this much we can count on: the most-damaged states and individuals will also be the poorest.
Potentially, these litigations could help to shape a viable legal and policy framework for climate change in the United States. By resolving issues of liability and remedies in the court system, these suits may succeed where the federal government has failed in seeking to merge environmental protection and human injury into an actionable legal theory. Since Georgia v. Tennessee Copper, federal common law for public nuisance has served as a meaningful cause of action for states and individuals to stop harmful interstate pollution and recover their costs. Climate change seems like a natural fit for the doctrine. It is indifferent to political boundaries. Legislation providing for injunctive measures or compensation is nonexistent. A hodgepodge of state common law would lack consistency. And of course, the common law is not without its own problems. Federal common law is unwieldy and nebulous. It is hardly the only or most efficient societal response to climate change. But it is a valid response. Climate cases, if they are to fail, should fail on other grounds, such as plaintiffs’ failure to prove causation, or that its damages are “unreasonable,” or because the claims have actually been displaced by an appropriate act of Congress or the executive.
Access to the judicial process should trump concerns about the future implications of a positive verdict for two main reasons. First, political question challenges occur early in the process, well before plaintiffs have the chance to gather and present evidence in support of their claims. In cases hinging on a nexus between the defendant’s contributions to climate change and the plaintiff’s injuries, most plaintiffs are unlikely to survive summary judgment. In this context, the elements of nuisance — causation and unreasonableness – seem particularly difficult to prove. Plaintiffs do, however, deserve access to discovery to help establish their claims.
Second, even when some plaintiffs eventually prevail, the implications could be limited. For instance, the district court could have crafted its holding to apply only to the residents of Kivalina. Alternatively, multidistrict litigation could help keep the amount of cases manageable, or courts could adjust tort compensation schemes for climate change rulings. In any event, no decision a court might issue would prevent Congress from preempting it, for example, by setting a standard level of emissions below which companies could not be held liable. Simply allowing discovery to occur in these cases will add to the costs and risks of emitting large amounts of greenhouse gases for corporations, perhaps prompting them to take mitigating actions. If the costs and risks are great enough, it might even prompt Congress to pass national legislation.
Certainly the complexities of climate change would be better addressed through comprehensive legislation and planning. Yet until this happens, a court can apply tort law. Compensation schemes and equitable remedies could be adjusted specifically for climate change-related damages. In turn, Congress can override any illogical or unreasonable court decisions by passing legislation.
In conclusion, the Constitution does not reserve climate change to Congress or the executive. Federal common law contains a long history of judicial standards in cases involving interstate pollution disputes. The elected branches have made initial policy determinations about climate change policies. Furthermore, there is good reason to question whether the political question doctrine was ever meant it to be applied to federal common law in general, and to climate cases in particular. While federal common law is not the ideal way to resolve the problems of climate change, it is still a legitimate forum for these plaintiffs. Until Congress passes climate change legislation, political question doctrine does not warrant the dismissal of their cases.

Calculating the True Cost Of Global Climate Change

When climate legislation died last summer in Congress, one cause was the powerful drumbeat of claims that the bill would bring economic disaster. The legislation would amount to a massive tax hike, devastating an already crippled economy and throwing more people out of work, charged Senator James Inhofe (R-Ok) and Glenn Beck. It would be “the final nail in the coffin of the American middle class,” proclaimed an ad from the Conservative Society of America. Despite supporters’ protests that the price tag of greenhouse gas curbs would be modest, voters’ fear of hits to their pocketbooks forced even many Democrats to backpedal.

The heated argument about economic costs, however, barely touched one vitally important issue: the costs of NOT taking action on climate. What if last summer’s Russian heat wave and drought, which destroyed one third of the country’s wheat crop, or the catastrophic floods in Pakistan and China, or category 5 hurricanes like Katrina are just glimpses of future havoc from warming left unchecked? As Kevin Trenberth, head of the Climate Analysis Section at the National Center for Atmospheric Research, observes, “Certain events would have been extremely unlikely to have occurred without global warming, and that includes the Russian heat wave and wild fires, and the Pakistan, Chinese, and Indian floods.”

The economic costs of such disasters could make even inflated estimates of the legislation’s price tag look small, says University of California, Berkeley, economist Michael Hanemadebate. There’s a deeply rooted perception in the U.S. that the economy will suffer little damage from climate change. Yet Congress didn’t seem to care. “The question of damages from climate change never penetrated the debate in There’s a deeply rooted perception in the U.S. that the economy will suffer little damage from climate change. Washington,” Hanemann says.
Why not? Partly, it was a conscious political calculation. Polls show that scare tactics work better to block legislation than to bring sweeping change. The Obama Administration and environmentalists decided to tout the clean energy industries that could be created and boosted by the climate bill, rather than warn of withered crops or drowned cities from heat and rising sea levels. “The assumption has been that focusing on short-term job creation would be a more compelling political argument,” says Dan Lashof, director of the Natural Resources Defense Council’s climate center.

More importantly, there’s a deeply rooted perception that the U.S. economy will suffer little damage from climate change. That view dates back to work from the mid-1990s by the influential Yale University economist William Nordhaus. Nordhaus took what was known about the science of climate change, then constructed an economic model to estimate the monetary harm. The model put the economic cost to the U.S. of raising global temperatures by 2.5 to 3 degrees C (expected by about 2100) at about ¼ to ½ percent of GDP. “There are both good and bad impacts, but they offset each other,” explains Robert O. Mendelsohn, professor of forest policy and economics at Yale University and a frequent collaborator with Nordhaus.

The original economic model wasn’t complete, Nordhaus readily acknowledges. It didn’t include some sectors of the economy or “non-market” damages — effects that economists can’t easily quantify, such as loss of species. “We basically guessed on those, and that got us up to between 1 and 2 percent of GDP,” says Nordhaus — still relatively small. Since then, Nordhaus has worked extensively on the analysis, but the general conclusion is the same. There’s little threat to U.S. GDP. “Do I think that the measured GDP of the U.S. or Britain or Japan is seriously at risk from global warming over the next 100 years?” Nordhaus asked in an interview. “No,” though he adds that “GDP is a poor indicator of economic welfare.”

Other experts see the hit to GDP as much greater. “We did a survey of top economists in the country, asking what they think about the costs and benefits of climate legislation,” says Michael Livermore, executive director of the Institute for Policy Integrity at New York University School of Law. “They said that climate change is a clear threat to America and the global economy.” Adds Berkeley’s Hanemann: “I don’t want to be Dr. Gloom, but our complacency in the U.S. is wrong.”

An earlier version of this debate flared into public view and the media for a short time in 2006. A report prepared for the British government by economist Sir Nicholas Stern found that the cost of unconstrained global Top economists surveyed say climate change is a clear threat to America and the global economy. warming would be huge — up to a 20 percent drop per year in the world’s GDP by 2050. The widely disparate conclusion compared to Nordhaus’, however, turned largely on one single factor: Stern put a higher value on costs far out in the future — and on the future return from climate change reduction investments made today — than Nordhaus did. Or in economists’ jargon, he used a lower discount rate. “You can change the discount rate and get a totally different answer,” explains NRDC’s Lashof.

Who’s right? The late climate scientist Stephen Schneider liked to ask economists if they really do value their grandchildren far less than their children, as implied by a higher discount rate. Nordhaus, who dismissed the Stern report in a 2007 book as “political in nature,” with “advocacy as its purpose,” says that’s not a fair comparison. “The argument is not how we value our grandchildren, it’s primarily about the return on capital,” he says. “My view is that the return on capital is high, so that the threshold is pretty high if we are going to compete with other uses of our investment dollars.” That makes efforts to fight global warming seem less cost-effective.

But the tiff over discount rates is really a sideshow. There are now new critiques of the low estimates of the costs of climate change that challenge core details of how those damages were calculated, such as whether the analyses correctly included the costs of heat waves, more intense hurricanes, and other extreme events predicted to become more common. The original work “has been enormously influential, but for a number of reasons, I think the analysis is profoundly wrong,” says Hanemann.

One issue cited by the critics is that the models assume that many of the costs of climate change in the U.S. are balanced by benefits — or that it will be easy to adapt. For instance, heat waves in summer mean higher energy costs and more deaths from heat. However, warmer winters save fuel and lives, so in the economic models, the two generally balance out. And sure, if temperature rises above 95 degrees F, corn pollination starts to fail. But defenders of the models figure cornfields could just move to cooler areas. “If you take adaptation into account, this turns out not be such a big effect,” argues Mendelsohn.

The critics say these conclusions are far too optimistic. Hanemann points out that summer air conditioning requires expensive daytime peak power, while the winter savings come from much cheaper nighttime baseload ‘The damages grow much worse as we get more extreme events,’ says one economist. power. So the overall costs must be higher. Similarly, damages to agriculture from heat waves and droughts are likely to swamp benefits from milder winters and longer growing seasons — and moving crops to better climes may be costly or difficult. Nordhaus partly agrees. “The damages will differ by crop and by region,” he says. “I think the numbers will be large for some regions, such as those now bordering on desertification.”

The models also calculate future harms using predicted average increases in temperature or precipitation. But scientists don’t believe temperatures and precipitation will be uniformly average around the planet. Instead, they foresee more — and more severe — extreme events: more powerful hurricanes and storms, record floods, searing heat waves and droughts, bigger wildfires. In fact, the U.S. has already experienced a higher-than-average amount of warming. A graph showing these events would not only have a long tail (i.e. the events are more extreme), but the tail would also be fatter (i.e. more events). “The damages grow much worse as we get more extreme events,” explains Hanemann. “We need to pay more attention to the tail.”

Nordhaus says that his model doesn’t neglect the idea of extreme events. “It’s completely wrong to say we’ve ignored it,” he says. But even supporters acknowledge that not everything is in the models, including a full treatment of extreme events. “Nordhaus’ model was never intended to be the kitchen sink,” says Mendelsohn.

Critics say that’s a serious flaw. “Many, many of the costs associated with climate change are not included in the models,” says NYU’s Livermore. Additional examples include acidification of the oceans from the absorption of carbon dioxide, which could threaten ocean food chains; loss of glaciers, which could cause water shortages and reduce hydropower; sea level rise, which could flood coastal cities; and mass migrations and increased global tensions, as people move away from regions hit harder by of the effects of climate change. The military takes these possibilities seriously, noting that climate change is a “threat multiplier.”

Harvard economist Martin Weitzman even suggests that the economic costs of a catastrophic event, however unlikely it might be, would be so enormous that it would overwhelm the whole analysis. “Perhaps in the end the climate-change economist can help most by not presenting a cost-benefit estimate for what is inherently a fat-tailed situation with potentially unlimited downside exposure,” he writes.

True, the models don’t include all possible costs or catastrophes, Nordhaus and Mendelsohn respond. For one thing, the models calculate the damages The costs of a catastrophic event would be so enormous that it would overwhelm the analysis. from climate change only in terms of economic activity. They don’t assess damages from non-market effects like loss of species. Take ocean acidification, which makes climate change more worrisome than it appeared to be in the 1990s, Nordhaus says. The direct economic damages from acidification are negligible. “We know the actual economic impacts are almost sure to be small because they involve fisheries, which are already pretty small, and they involve only ocean fisheries that are sensitive to carbon,” Nordhaus says.

Similarly, the calculated damages from extreme events are small, Nordhaus and Mendelsohn say. While the estimated cost of Hurricane Katrina topped $150 billion, hurricanes don’t actually hurt the economy, as measured by GDP. “If your million-dollar house blows away tomorrow, it would not affect GDP,” explains Nordhaus. The reason: spending to rebuild stimulates the economy. “This is one of the ways in which GDP is a flawed measure,” Nordhaus adds. Mendelsohn has spent years trying to figure out what the additional damages from extreme events might be — and he argues that they don’t amount to much. “As long as we didn’t measure this number, the perception was that it was huge,” he says. “But when we actually measure it, it turns out not to be big.”

That assertion is a matter of fierce debate, however. The damages are far higher, Hanemann and others believe. In Hanemann’s analysis, the economic toll from unconstrained climate change in the U.S. is three to four times higher than Nordhaus’ model calculates.

Other new analyses have similar results. Livermore and his colleagues looked at the economic benefits of the Waxman-Markey legislation passed by the House of Representative last year, including the avoided harm from climate change, and compared those benefits to the price tag for the bill. “The benefits outweighed the costs by nine to one,” says Livermore.

The U.S. Environmental Protection Agency is also expected to conclude that inaction is costly. With climate legislation apparently dead, regulation under the Clean Air Act is the only remaining pathway to federal curbs on greenhouse gases. To bolster its case in the face of strong opposition, the agency is working on a more detailed analysis of the costs and benefits of regulation, sources say. Past Administration efforts to assess the economic toll used Nordhaus’ basic approach. But because of the limitations of the economic models, the agency is also planning to examine scenarios of possible climate change, and expects that it will find a large economic toll. “We think the costs of not acting will be huge,” says one EPA official.

Nordhaus acknowledges that the small hit to the GDP of rich nations from climate change predicted by his model is just part of the overall story. “I’ve been working on this a long time,” he says. “The facts have changed, and my view has changed.” For example, “emissions and temperatures are rising faster than earlier models thought and the geophysical impacts look more serious,” he says. So even if direct economic impacts are small, “ecologists and biologists have made a pretty serious case that other things are at risk,” he says. “I think the non-market impacts have turned out larger than I thought and what the community [of economists] thought.” Those non-market impacts don’t show up in the results of the economic models.

In addition, Nordhaus says he now has a greater appreciation for the unknowns, including potential catastrophes. “The uncertainties are enormous,” he says. “If you include them, you can say almost nothing about the second half of the century.”
Nordhaus’ own conclusion is that action on climate is needed, especially since his analysis also shows that the economic costs of reasonable policies are relatively small. Indeed, there’s no longer a debate among economists that action should be taken, says Mendelsohn: “The debate is how much and when to start. If you believe there are large damages, you would want more dramatic immediate attention. The Nordhaus camp, however, says we should start modestly and get tougher over time.”

Regardless of the role played by economists in the global warming debate, the view that climate change is not to be feared has contributed to the delay in the world’s response. Even Nordhaus says he’s “stunned” by the lack of progress in tackling climate change. “It doesn’t matter if I, or Weitzman, or Hanemann are right on this,” says Nordhaus. “We’ve got to get together as a community of nations and impose restraints on greenhouse gas emissions and raise carbon prices. If not, we will be in one of those gloomy scenarios.”


Court Grants Cert in American Electric

The Supreme Court has granted cert in American Electric Power v. Connecticut, the federal common law nuisance case brought by several northeastern states against the electric power injury for damages from climate change.

The petition argued that plaintiffs lack standing to sue, preemption of federal common law by the Clean Air Act, and preclusion under political question doctrine. As the order grants the petition without limitation, the Supreme Court will presumably consider all three claims. Justice Sotomayor took no part in the cert decision, as she sat on the panel in the Second Circuit that decided the case (although she did not participate in the decision itself). This raises the possibility of a 4-4 split decision on the merits, which would ordinarily leave the decision of the Court of Appeals intact.

This is not good news for an attempt to establish the liability of power producers for global warming harms. The Second Circuit decision being reviewed recognized the federal common law nuisance claim, recognized the plaintiffs’ standing, and rejected application of the political question doctrine. At least four justices thus seem ready to revisit the broad standing recognized for States in Massachusetts v. EPA, though it would seem that standing in a damages action is a given: plaintiffs are suing for damages for an actual injury, and if they can prove their injury and entitlement to damages, standing should be no greater a hurdle than establishing the nuisance cause of action in the first place.

The Second Circuit decisions are here and here. The cert petition is here. The Court’s order list, showing the grant of cert, is here.

Deepwater Horizon Report Highlights Faulty Decisionmaking

The presidential panel investigating the causes of the Deepwater Horizon/BP spill in the Gulf of Mexico released one chapter of its report on the critical causes of the blowout, which released over 200 million gallons of oil into the Gulf of Mexico last year. The report is available here. The report blames the blowout on a series of time-saving and cost saving shortcuts approved by BP and Halliburton, as well as lax, or nearly non-existent, oversight by MMS.

The critical conclusion of the report reads:

Decisionmaking processes at Macondo did not adequately ensure that personnel fully considered the risks created by time- and money-saving decisions. Whether purposeful or not, many of the decisions that BP, Halliburton, and Transocean made that increased the risk of the Macondo blowout clearly saved those companies significant time (and money).*
There is nothing inherently wrong with choosing a less-costly or less-time-consuming alternative—as long as it is proven to be equally safe. The problem is that, at least in regard to BP’s Macondo team, there appears to have been no formal system for ensuring that alternative procedures were in fact equally safe. None of BP’s (or the other companies’) decisions in Figure 4.10 appear to have been subject to a comprehensive and systematic risk-analysis, peer-review, or management of change process. The evidence now available does not show that the BP team members (or other companies’ personnel) responsible for these decisions conducted any sort of formal analysis to assess the relative riskiness of available alternatives.

There is nothing surprising about industry shortcutting safety measures and captive agencies approving these shortcuts without substantive review. While the report suggests stronger regulations as an appropriate responsive, lax enforcement and freely granted waivers will always plague an activity like offshore drilling where the dollar stakes are high, and citizen oversight is well nigh impossible.

What I find more fascinating, and troubling, than the series of predictable economic decisions made by the corporate managers at BP and Halliburton is the fact that one of the critical mistakes was made by the crew on the drilling rig itself. The crew chose to ignore a series of “negative pressure tests” that strongly indicated that the cement cap was leaking (and subject to blowout), and instead performed a second test using a different procedure, which gave a more favorable result. Given the ambiguous test results, the drilling rig crew chose to rely on the favorable test even though, by doing so, they put their own lives at risk. Good descriptions of the on-site engineers’ decisionmaking process appears in the report issued today (at pages 105 -109, with a critical evaluation at pages 118-119).

This critical error illustrates one of the challenges of any scheme of environmental regulation in the face of scientific uncertainty: the problem of human cognitive bias. Human beings tend to accept evidence that supports their preconceived factual biases, and to reject evidence that conflicts with those biases. This kind of cognitive bias kicks in at the individual level (drill rig engineers who expect that the cement plug was effective and also want to be able to declare the well job finished) as well as at the collective societal level in a democracy where political scientific truth is established by majority vote. What is frightening about the Deepwater Horizon example is how clearly it shows that cognitive bias will overcome risk aversion even when one’s own life is at stake. It demonstrates the huge challenge faced by our society, which requires political consensus to deal with environmental threats like global warming, and for which the evidence perceived by the voting public is ambiguous. Just as the crew of the Deepwater Horizon put their own lives at risk by choosing to believe a less reliable negative pressure test instead of the standard test, we collective seem to be ready to believe that one snowstorm in December is a more reliable refutation of global warming than a year’s worth of temperature data showing 2010 to be one of the warmest years on record globally. Like the crew of the Deepwater Horizon rejecting the danger signals from the pressure tests, we’d rather believe that we are not responsible for global climate change that threatens the patterns of settlement and agriculture that our global civilization depends on.

EPA Sues BP for Gulf Oil Spill Negligence

EPA today sued BP and four other partners in the Deepwater Horizion drilling rig in federal District Court in New Orleans. A link to the Bloomberg News report is here. The action seeks penalties under Clean Water Act section 311, as well as response costs and natural resource damages under the Oil Pollution Act.

Significantly, the complaint alleges that BP and its partners were guilty of “gross negligence” as well as regulatory violations. These allegations — which based on published reports seem likely to be proven — would remove the liability caps of the Oil Pollution Act, and increases BP et al.’s per-barrel penalty exposure to $4,300 (adjusted for inflation). With 4.9 million barrels of oil spilled, that puts BP’s liability for fines alone at a staggering $21 billion. This is in addition to natural resource damages, economic damages, and cleanup costs recoverable under the Oil Pollution Act.

Clean Water Act section 311 tells the court to consider “the seriousness of the violation or violations, the economic benefit to the violator, if any, resulting from the violation, the degree of culpability involved, any other penalty for the same incident, any history of prior violations, the nature, extent, and degree of success of any efforts of the violator to minimize or mitigate the effects of the discharge, the economic impact of the penalty on the violator, and any other matters as justice may require.” There is a strong case for the maximum penalty here, as the violation was “serious” in that it resulted in extreme environmental and economic harm and BP’s efforts the cap the spill had limited success until four months after the blowout.

The economic benefit inquiry will be an interesting issue — clearly BP derived no direct economic benefit from spilling nearly 5 million barrels of oil into the Gulf. On the other hand, BP did benefit from the cost cutting measures and shortcuts that lead to the spill. In considering the total economic benefit to BP and its partners, it would make sense for the court to consider not just the economic benefit of cost cutting at this one well, but to consider the combined benefits of adopting a Gulf-wide practice of cutting costs. If the theory of assessing economic benefits to the violator is to make sure that it never pays to violate the Clean Water Act, then the polluter should not get the benefit of cutting corners in all the cases where they “get away with it” and only disgorge their savings for the one well where the catastrophe occurs. If the latter approach prevails, than it would still make economic sense to cut corners and take the risk of paying a modest penalty when things go wrong.

On the other hand, the liability and cleanup compensation bill under the Oil Pollution Act may be large enough in this case to eliminate whatever economic incentives BP and their Deepwater friends might have had to cut corners.

In any event, the $40 billion that BP set aside for its liabilities may vanish quickly.

A copy of the complaint is here.

BP Prudhoe Bay Closure: Part Of Alaska Oil Field Closed