Economists vs. Environmentalists: Time for Deténte?

You don’t have to love economics to see it as a possible ally.

Cost-benefit analysis has long been the target of environmentalist ire.  But one lesson of the Trump years has been that economic analysis can be a source of support for environmental policy — it is the anti-regulatory forces who have to fudge the numbers to justify their actions.  Most energy and environmental economists are aghast at Trump’s assaults on climate change regulations — many of them would instead favor stricter regulation over the status quo.  Maybe it’s time for at least a temporary ceasefire while we are allies in resisting Trtump’s rollbacks.

There is little doubt that the Reagan Administration adopted cost-benefit analysis as a tool for reaching its own preferred deregulatory outcomes.  The Office of Information and Regulatory Affairs (OIRA) was put in charge of cost-benefit analysis with the expectation that it would be a death trap for regulations. OIRA seemed happy to oblige.  But the current guidelines for cost-benefit analysis come from the Clinton Administration, not Reagan, and agencies have developed enough economic expertise to fight for their regulations. In the meantime, OIRA’s staff may have become more professionalized and less ideological than it was thirty years ago.

Those developments took place against the background of dramatic changes in environmental economics.  A key critique of economic analysis was the failure to properly account for benefits.  That may still be true, but at least the economists have made considerable progress and adopted methodologies that attach  considerable value to non-market values such as human health and endangered species. Economists have also rethought earlier facile assumptions that overlooked important differences between market goods and the public goods involved in environmental law.  Environmentalists may well have continuing grounds for critique, but the contrast in perspectives is not as stark as it used to be.

Finally, we have now learned that many obstacles to environmental regulation, which have been  blamed on cost-benefit analysis, were instead due to other aspects of OIRA’s review  Part of OIRA’s role is to implement presidential policies, and those efforts will not be to our liking when the presidents are anti-environmental. But that problem doesn’t necessary have anything to do with economic analysis.  OIRA has often been opaque and a source of prolonged delays — but again, that’s due to OIRA, not economics.  And, as it turns out, OIRA’s most important function may be to serve as an input point for the views of other federal agencies, thereby providing a conduit for special interest influence and ideology. But again, that’s not the fault of economists. Most of these problems would remain even if the government stopped doing cost-benefit analysis tomorrow.

Economics provides a language for discussing policy in analytic, data-driven terms. Unfortunately, it’s a language that is inaccessible to many people. It has other flaws as well:  a lack of nuance, a vocabulary that cannot accommodate the richness of human values, and an impoverished set of tools for describing human behavior.  It reminds me to a certain extent of the trade languages that sprang up in Africa and the Americas to allow people with different languages and cultures to do business: fine for trading grain or metals, not much good for poetry or philosophy.  In contemporary society, although people may purport to speak the same language, there are certainly different values and assumptions. Economics may be able to offer a method of communication, limited though it may be, that all sides can understand.

The most valuable contribution of economics, however, also reflects a change in the discipline.  In Reagan’s time, economists in general were obsessed with providing increasingly complicated economic models. Although this remains an important activity, they have turned increasingly toward rigorous empirical studies.  We badly need to know things like how firms actually respond to incentives and what real-world effects economic policies have.  Economists are not the only ones doing these studies, but they have amongst the most sophisticated set of tools.  Whatever values we apply to environmental problems, our decisions still need to be fact-driven.  It has been the enemies of environmental protection who have pooh-poohed the “reality-based community” and embraced “alternative facts.” The last thing we want to do is copy them.

I suspect that there will always be in tension between economics and environmentalism. There are basic differences in perspective involved. To the extent economists think that theirs is the only valid perspective, I must beg to differ.  But in the scheme of things, they are much less the enemy than those who embrace deregulation at all costs in the service of ideology or self-interest.  At least at present, there’s an argument that environmentalist advocates and economists can do more as allies than as opponents.

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Reader Comments

5 Replies to “Economists vs. Environmentalists: Time for Deténte?”

  1. Hi Dan:

    Great post on an important topic.

    I would argue that climate activists have actually relied excessively on economists. The carbon tax, the preferred climate action of most economists, has been by far the most important climate measure advanced by environmentalists, despite its relatively low popular appeal (most recently evidenced by the 56-44 failure of I-1631, the carbon tax 2018 ballot measure in Washington.) The Citizens Climate Lobby now pushes HR 763, which trades a modest carbon tax for a 10 year moratorium on regulation, a terrible bargain in my view, but probably music to the ears of most economists. Regulatory approaches have largely fallen into disfavor in recent decades as a result of the primacy of free-market economic theory, despite their success in dealing with seat belts, airbags, CFCs, LED lightbulbs, etc.

    A key question is who should bear the cost of climate action—the taxpayer or the companies making the products causing the pollution? Putting it on the taxpayer may be more economically efficient, but I-1631 indicates that voters won’t support regressive gas taxes. Shifting cost onto manufacturers via regulation makes sense at a time of high corporate profits and decades of wealth transfer towards the top.

    Economist Jeffrey Sachs’ recent piece in the HIll does a great job laying out the case for more muscular regulatory approaches relative to carbon taxes. https://thehill.com/opinion/energy-environment/432414-the-green-new-deal-isnt-outlandish-its-a-necessity

    Matthew Metz

  2. Setting aside the present Presidential administration, which I view as a bad aberration, and the echoes of administrative damage it might wreak upon the civil service and its institutional knowledge, it seems that economics and environmental policy ought to be more aligned, not separated. A precondition is, of course, that the economics needs to be consistent with environmental reality and not be based upon principles which are either historically embraced, or which make economic analysis easier, or which make policy provisions easier, or are politically palatable. This means that at least the economics needs to be highly behavioral, it needs to shun practices like discounting, or embrace them acknowledging there are risks due to structural changes in economies due to environmental disruption and try to measure them, and it needs to embrace more Schumpeterian insights.

    But beyond that, a true marriage of economics and environmental policy needs to assign tangible value to things like ecological services and biological diversity. This does not mean, frankly, that each and every species is equally valuable, or such species have a veto over plans and decisions, but it does mean these aspects need to be acknowledged and priced. To that end, I’d suggest that value per annum or similar measures are inappropriate, and it might serve to adopt a system based upon survival analysis and hazards. Accordingly, loss can be measured as a hazard function, and value appreciation as a negative hazard function. This avoids fictitious accumulations over long periods under questionable assumption structures. A loss of a species can then be measured as an uptick in hazard function, for the ecological services it can provide.

  3. Thanks for the interesting blog but I do wonder if the differences really provide much of a dichotomy at this point.

    I am concerned about the distortion of policies and lessons learned by all involved through misstatements that impede the serious policy debates ahead. Whether they rise to your reference to alternative facts or not is in the eye of the beholder.

    One of the critical policies often mis-characterized is the revenue neutral carbon fee. Claiming a lack of popularity for the revenue neutral carbon fee policy by citing the flawed Washington State initiatives (without a dividend) or the French carbon tax (without a dividend) ignores the different characteristics of the Energy Innovation and Carbon Dividend Act (HR 763).

    The mis-characterization in the comment above merits correction. Describing a carbon fee as “modest” that starts at $15/ton/CO2 and rises $10/year (or $15) without limit until it reaches 90% emissions reduction by 2050 is not modest.

    Second, claiming it includes a “10 year moratorium on regulation” may excite some but it is inaccurate. The regulatory pause is quite limited to basically stationary facilities (i.e., the Clean Power Plan) and is resumed automatically if emission reduction targets aren’t reached. Why?
    Because a rising carbon fee will phase out coal and gas from utility and other use far faster and more cost-effectively than the regulatory approach. EPA’s regulatory authority otherwise remains intact as do all the other regulatory/subsidy/mandate programs in and out of EPA including the states.

    Regulatory approaches have not fallen out of favor so much due to “the primacy of free-market economic theory” but due to the findings that the regulatory policies and programs have been inequitable (Borenstein et al), expensive (CA Legislative Analysts Office) and limited effectiveness (rebound, free riders). The regressivity of regulatory programs is substantial. The most regressive is the electric vehicle (EV) subsidy program where 90% of the tax credits went to the upper quintile of households and 0% to the bottom three quintiles.

    A final common mis-characterization is describing the revenue neutral fee and dividend policy as “regressive gas taxes”. First, the Energy Innovation and Carbon Dividend Act (HR 763) is highly progressive with two-thirds of households coming out ahead or held harmless unlike the Washington State Initiative I-1631. Second, it isn’t a gas tax (which is usually unpopular). It is a tax on carbon at the mine, well and port of entry.

    The final economic misconception is the question “who should bear the cost of climate action” It is not a matter of either producer or consumer (when imposed upstream at the mine, well or port of entry). It falls on all to varying degrees (see Ganapati, Shapiro). And, as noted, consumers’ dividends ease the transition.

    Finally, it is not either-or for a carbon fee and selected regulation. With a carbon fee as the necessary foundation policy, there will be sub-sectors where the fee does not reach or is not strong enough to achieve desired outcomes. In such situations, regulation will be necessary, e.g., rental housing (principal-agent issue), etc.

    1. The UN estimates that effective carbon prices need to be between $135 and $5,500 a ton to keep warming at 1.5 degrees. HR 763 would just bump against the very bottom of that range.

      Section 211 of the CAA which covers cars doesn’t explicitly authorize GHG regulation. So not clear that the moratorium in Sec 300 of HR 763 would not cover mobile sources.

      I was not suggesting subsidy-based regimes, but rather standards such as the ZEV regulation which require increasingly higher standards.

      Gasoline demand is highly inelastic, so it is very unclear that drastic emissions reductions would result from what would amount to about a $1.25 a gallon gas tax increase over 10 years. It is unlikely to spur the necessary frenzy of infrastructure development necessary for EVs.

      Regarding the ballot results in Washington State, note that I-1631 followed the even more unpopular I-732 on the 2016 ballot which did have a revenue neutral carbon fee and lost 59-41.

      The David Leonhardt piece which just came out in today’s New York Times makes many of the same points. https://www.nytimes.com/interactive/2019/04/09/magazine/climate-change-politics-economics.html

      Regarding the impacts on who the tax should fall, better it should fall on manufacturers and purchasers of new vehicles rather than the average taxpayer.

      I do agree that it is not either-or. For that reason, carbon tax initiatives should not seek to limit regulation, just as regulatory initiatives should not seek to block carbon taxes.

      Given that HR 763 has only one Republican co-sponsor at this point, it seems unwise for the bill to include a major concession regarding regulation without broad bipartisan support. Given what it would likely take to get a deal, negotiations from that low starting point would likely require lower carbon taxes and higher levels of regulatory relief.

      1. The difference in our comments is one addresses ZEV–the transportation sector–which is not enough and the other addresses all fossil fuel (coal, oil and gas) emissions (and other climate emissions) and consequently decisions made throughout the economy.

        Such Zev regulation might be effective and complementary. Other regulations (such as the Clean Power Plan for power plants) would be redundant and mostly add cost and inefficiency. Why include a pause on a redundant regulation? For economic reasons as mentioned but also for political reasons to gain bi-partisan support. The Republican support is wider than recognized in the House and many are waiting for the “jail break” when conditions allow enough public support without getting primaried.

        Much of the climate discussion is U.S. centric and fails to address the global problem. The carbon fee and dividend’s third component–the Border Carbon Adjustment–is critical to maintain U.S. industrial competitiveness and the support or neutrality of U.S. industrial interests for carbon pricing. The regulatory approach cannot provide the carrot-stick essential to motivate other major economies. As said previously, regulatory approaches are justified where the carbon price doesn’t reach or isn’t strong enough. Auto transportation is probably one such sub-sector.

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Dan Farber

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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