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Tuesday, September 27, 2011

Hot Prospect

 

The Making of a Tax Break: The Oil Depletion Allowance, Scientific Taxation, and Natural Resources Policy in the Early Twentieth Century

Peter Shulman
Journal of Policy History, Fall 2011, Pages 281-322

"Jimmy Stewart struck oil at 4,180 feet. Tipped off by a geologist in 1949 to prospect around Vernal, Utah, Stewart, along with associates from the nation's film and airline industries, sank $75,000 into a wildcat well that ultimately produced eight hundred barrels of crude a day. Even before their discovery, these investors had reason for optimism. The same geologist directing them to Vernal had already pointed Frank Sinatra to an oil field in Wyoming. When Sinatra's well hit oil, he dubbed it 'Crooner No. 1.' While Stewart was only beginning his career as an oilman, Gene Autry was already completing his sixth well near Wichita Falls, Texas. This successful strike yielded the 'Singing Cowboy' a profitable one thousand barrels a day. Flush with success, he anticipated drilling at least twenty more wells on his land nearby. And Autry was not the only movie star in the Lone Star state. Bob Hope and Bing Crosby pooled their resources and jumped into the oil business together near the town of Snyder. Western lead Randolph Scott operated near Rotan. Not far from either, Don Ameche and friends invested $200,000 into more than 21,000 acres in yet another speculative venture. Of course, not all of Hollywood's oilmen found success in the oil patch - John Huston, Mervyn Le Roy, and Dennis O'Keefe lost nearly $200,000 of their own in a failed well near Los Angeles. Whether a profitable investment or not, oil fever had returned to Hollywood. 'When you see a group of movie people talking on the set,' observed one oil executive, 'you don't know whether they're discussing an oil well or a movie.' In many respects, the oil business resembled Hollywood. Both encouraged investors to risk fortunes on prospects of ever larger rewards. Both attracted flamboyant personalities. Both had roots in southern California, which occasionally, as in this instance, intertwined. But as Stewart, Sinatra, Autry, and the others realized, oil offered something that film never could: tax provisions like the depletion allowance that permitted oil producers - and their film industry investors - to shelter their unusually high incomes from taxation. Since 1926, the depletion allowance, or percentage depletion, had permitted investors to deduct from otherwise taxable income 27½ percent of the gross income earned from oil wells. Percentage depletion proved particularly enticing to some of the nation's most prominent entertainers in 1949 because in the middle of the twentieth century, their hefty incomes faced marginal tax rates in the neighborhood of 80 percent or more. Experts called this strategic oil investing 'drilling with tax money.' For opponents of corporate privilege, by the time Hollywood was drilling with tax money, the depletion allowance had come to symbolize everything that was wrong with American tax policy. The liberal New Republic editorialized in 1951 that it constituted 'perhaps, the most scandalous single grab by Big Business extant.' Erwin Griswold, tax scholar and dean of Harvard Law School questioned whether a different system could avoid 'granting enormous tax advantages to drones and others who take little or no risk' and was 'puzzled why anyone should think that it has a proper place in a fair and equitable tax system.' Leading public figures were similarly critical. 'I know of no loophole in the tax laws so inequitable as the excessive depletion exemptions now enjoyed by oil and mining interests,' wrote Harry Truman in his 1950 tax message to Congress, noting that the system allowed 'a few to gain enormous wealth without paying their fair share of taxes.' And indeed, Truman proposed dramatically reducing the depletion allowance, as had Franklin Roosevelt before him and would John F. Kennedy after, along with numerous members of Congress...In his first testimony before Congress in 1958, Hollywood labor leader Ronald Reagan railed against the steeply graduated income tax, protesting that potentially high earners (like himself) were taxed so highly that they were effectively prohibited from filming more than one or two movies a year as any income from additional films went almost entirely to the Treasury. Reagan, too, connected Hollywood and oil: workers in both industries typically suffered many lean years before landing a few fat ones, and both actors and oil wells had only narrow windows for profitability. 'We feel we are about as short lived as an oil well and twice as pretty,' the future governor and president quipped. Like oil wells, typical actors lost 'market value' the longer their careers, yet unlike oil wells, he added, 'we have no depletion allowance to compensate for the diminishing market value.'"

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Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies

Stephen Holland et al.
NBER Working Paper, September 2011

Abstract:
Instead of efficiently pricing greenhouse gases, policy makers have favored measures that implicitly or explicitly subsidize low carbon fuels. We simulate a transportation-sector cap & trade program (CAT) and three policies currently in use: ethanol subsidies, a renewable fuel standard (RFS), and a low carbon fuel standard (LCFS). Our simulations confirm that the alternatives to CAT are quite costly - 2.5 to 4 times more expensive. We provide evidence that the persistence of these alternatives in spite of their higher costs lies in the political economy of carbon policy. The alternatives to CAT exhibit a feature that make them amenable to adoption - a right skewed distribution of gains and losses where many counties have small losses, but a smaller share of counties gain considerably - as much as $6,800 per capita, per year. We correlate our estimates of gains from CAT and the RFS with Congressional voting on the Waxman-Markey cap & trade bill, H.R. 2454. Because Waxman-Markey (WM) would weaken the RFS, House members likely viewed the two policies as competitors. Conditional on a district's CAT gains, increases in a district's RFS gains are associated with decreases in the likelihood of voting for WM. Furthermore, we show that campaign contributions are correlated with a district's gains under each policy and that these contributions are correlated with a Member's vote on WM.

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The earliest temperature observations in the world: The Medici Network (1654-1670)

Dario Camuffo & Chiara Bertolin
Climatic Change, forthcoming

Abstract:
This paper presents the earliest temperature observations, scheduled every 3-4 h in the 1654-1670 period, which have been recovered and analysed for the first time. The observations belong to the Medici Network, the first international network of meteorological observations, based on eleven stations, the two main ones being Florence and Vallombrosa, Italy. All observations were made with identical thermometers and operational methodology, including outdoor exposure in the shade and in the sunshine to evaluate solar heating, state of the sky, wind direction and precipitation frequency. This paper will consider only the regular temperature series taken in the shade. The observations were made with the newly invented spirit-in-glass thermometer, also known as Little Florentine Thermometer (LFT). The readings have been transformed into modern units of temperature (°C) and time (TMEC). The LFT has been analysed in detail: how it was made, its linearity, calibration and performances. Since the middle of the LIA, the climate in Florence has shown less than 0.18°C warming. However, although the yearly average showed little change, the seasonal departures are greater, i.e. warmer summers, colder winters and unstable mid seasons. The temperature in the Vallombrosa mountain station, 1,000 m a.m.s.l, apparently rose more, i.e. 1.41°C. A discussion is made on the interpretation of this finding: how much it is affected by climate change or bias. A continuous swinging of the temperature was observed in the Mediterranean area, as documented by the long instrumental observations over the 1654-2009 period. However, changes in vegetation, or exposure bias might have contributed to reduce the homogeneity of the series over the centuries.

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The impact of climate on life satisfaction

David Maddison & Katrin Rehdanz
Ecological Economics, forthcoming

Abstract:
We analyse the influence of climate on average life satisfaction in 79 countries using data from the World Values Survey. Climate is described in terms of ‘degree-months' calculated as the cumulated monthly deviations from a base temperature of 65 °F (18.3 °C). Our results suggest that countries with climates characterised by a large number of degree-months enjoy significantly lower levels of life satisfaction. This finding is robust to a wide variety of model specifications. Using our results to analyse a particular climate change scenario associated with the IPCC A2 emissions scenario points to major losses for African countries, but modest gains for Northern Europe.

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When Climate Models Agree: The Significance of Robust Model Predictions

Wendy Parker
Philosophy of Science, October 2011, Pages 579-600

Abstract:
This article identifies conditions under which robust predictive modeling results have special epistemic significance - related to truth, confidence, and security - and considers whether those conditions hold in the context of present-day climate modeling. The findings are disappointing. When today's climate models agree that an interesting hypothesis about future climate change is true, it cannot be inferred - via the arguments considered here anyway - that the hypothesis is likely to be true or that scientists' confidence in the hypothesis should be significantly increased or that a claim to have evidence for the hypothesis is now more secure.

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Recent Wyoming temperature trends, their drivers, and impacts in a 14,000-year context

Bryan Shuman
Climatic Change, forthcoming

Abstract:
Wyoming provides more fossil fuels to the remainder of the United States than any other state or country, and its citizens remain skeptical of anthropogenic influences on their climate. However, much of the state including Yellowstone National Park and the headwaters of several major river systems, may have already been affected by rising temperatures. This paper examines the historic climate record from Wyoming in the context of ∼14,000-year temperature reconstructions based on fossil pollen data. The analysis shows that 24 of 30 U.S. Historical Climatology Network records from the state show an increase in the frequency of unusually warm years since 1978. Statewide temperatures have included 15 years (50%) from 1978 to 2007 that were greater than 1σ above the mean annual temperature for 1895-1978. The frequent warm years coincide with a reduction in the frequency of extremely low (<-20°C) January temperatures, and are not well explained by factors such as solar irradiance and the Pacific Decadal Oscillation. Linear regressions require inclusion of atmospheric greenhouse gas concentrations to explain the multi-decadal temperature trends. The observed warming is large in Yellowstone National Park where 21 years (70%) from 1978 to 2007 were greater than 1σ above the 1895-1978 mean; the deviation from the mean (>1°C) is greater than any time in the past 6,000 years. Recent temperatures have become as high as those experienced from 11,000 to 6,000 years ago when summer insolation was >6% higher than today and when regional ecosystems experienced frequent severe disturbances.

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Green and Good? The Investment Performance of US Environmental Mutual Funds

Francisco Climent & Pilar Soriano
Journal of Business Ethics, October 2011, Pages 275-287

Abstract:
Increased concern for the environment has increased the number of investment opportunities in mutual funds specialized in promoting responsible environmental attitudes. This article examines the performance and risk sensitivities of US green mutual funds vis-à-vis their conventional peers. We also analyze and compare this performance relative to other socially responsible investing (SRI) mutual funds. In order to implement this analysis, we apply a CAPM-based methodology and find that in the 1987-2009 period, environmental funds had lower performance than conventional funds with similar characteristics. However, if we focus on a more recent period (2001-2009), green funds achieved adjusted returns not significantly different from the rest of SRI and conventional mutual funds.

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Retail Gasoline Price Ceilings and Regulatory Capture: Evidence from Canada

Anindya Sen, Anthony Clemente & Linda Jonker
American Law and Economics Review, forthcoming

Abstract:
We evaluate the efficacy of price ceiling legislation by employing weekly data on retail gasoline prices for eight cities in Eastern Canada between 1999 and 2007. The use of these data allows us to pool "treatment" cities in the Atlantic provinces with "control" cities in Ontario and Quebec. Ordinary least squares and instrumental variables estimates demonstrate that the enactment of such regulation is significantly correlated with higher prices. A potential explanation for these results is that price ceilings act as "focal points" enabling firms to set higher prices, thus suggesting the possibility of regulatory capture.

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Intensification of seasonal extremes given a 2°C global warming target

Bruce Anderson
Climatic Change, forthcoming

Abstract:
Current international efforts to reduce greenhouse gas emissions and limit human-induced global-mean near-surface temperature increases to 2°C, relative to the pre-industrial era, are intended to avoid possibly significant and dangerous impacts to physical, biological, and socio-economic systems. However, it is unknown how these various systems will respond to such a temperature increase because their relevant spatial scales are much different than those represented by numerical global climate models-the standard tool for climate change studies. This deficiency can be addressed by using higher-resolution regional climate models, but at great computational expense. The research presented here seeks to determine how a 2°C global-mean temperature increase might change the frequency of seasonal temperature extremes, both in the United States and around the globe, without necessarily resorting to these computationally-intensive model experiments. Results indicate that in many locations the regional temperature increases that accompany a 2°C increase in global mean temperatures are significantly larger than the interannual-to-decadal variations in seasonal-mean temperatures; in these locations a 2°C global mean temperature increase results in seasonal-mean temperatures that consistently exceed the most extreme values experienced during the second half of the 20th Century. Further, results indicate that many tropical regions, despite having relatively modest overall temperature increases, will have the most substantial increase in number of hot extremes. These results highlight that extremes very well could become the norm, even given the 2°C temperature increase target.

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Cleaning the Bathwater with the Baby: The Health Co-Benefits of Carbon Pricing in Transportation

Christopher Knittel & Ryan Sandler
NBER Working Paper, September 2011

Abstract:
Efforts to reduce greenhouse gas emissions in the US have relied on Corporate Average Fuel Economy (CAFE) Standards and Renewable Fuel Standards (RFS). Economists often argue that these policies are inefficient relative to carbon pricing because they ignore existing vehicles and do not adequately reduce the incentive to drive. This paper presents evidence that the net social costs of carbon pricing are significantly less than previous thought. The bias arises from the fact that the demand elasticity for miles travelled varies systematically with vehicle emissions; dirtier vehicles are more responsive to changes in gasoline prices. This is true for all four emissions for which we have data - nitrogen oxides, carbon monoxide, hydrocarbon, and greenhouse gases - as well as weight. This reduces the net social costs associated with carbon pricing through increasing the co-benefits. Accounting for this heterogeneity implies that the welfare losses from $1.00 gas tax, or a $110 per ton of CO2 tax, are negative over the period of 1998 to 2008 even when we ignore the climate change benefits from the tax. Co-benefits increase by over 60 percent relative to ignoring the heterogeneity that we document. In addition, accounting for this heterogeneity raises the optimal gas tax associated with local pollution, as calculated by Parry and Small (2005), by as much as 57 percent. While our empirical setting is California, we present evidence that the effects may be larger for the rest of the US.

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The economics (or lack thereof) of aerosol geoengineering

Marlos Goes, Nancy Tuana & Klaus Keller
Climatic Change, forthcoming

Abstract:
Anthropogenic greenhouse gas emissions are changing the Earth's climate and impose substantial risks for current and future generations. What are scientifically sound, economically viable, and ethically defendable strategies to manage these climate risks? Ratified international agreements call for a reduction of greenhouse gas emissions to avoid dangerous anthropogenic interference with the climate system. Recent proposals, however, call for a different approach: to geoengineer climate by injecting aerosol precursors into the stratosphere. Published economic studies typically neglect the risks of aerosol geoengineering due to (i) the potential for a failure to sustain the aerosol forcing and (ii) the negative impacts associated with the aerosol forcing. Here we use a simple integrated assessment model of climate change to analyze potential economic impacts of aerosol geoengineering strategies over a wide range of uncertain parameters such as climate sensitivity, the economic damages due to climate change, and the economic damages due to aerosol geoengineering forcing. The simplicity of the model provides the advantages of parsimony and transparency, but it also imposes severe caveats on the interpretation of the results. For example, the analysis is based on a globally aggregated model and is hence silent on intragenerational distribution of costs and benefits. In addition, the analysis neglects the effects of learning and has a very simplistic representation of climate change impacts. Our analysis suggests three main conclusions. First, substituting aerosol geoengineering for CO2 abatement can be an economically ineffective strategy. One key to this finding is that a failure to sustain the aerosol forcing can lead to sizeable and abrupt climatic changes. The monetary damages due to such a discontinuous aerosol geoengineering can dominate the cost-benefit analysis because the monetary damages of climate change are expected to increase with the rate of change. Second, the relative contribution of aerosol geoengineering to an economically optimal portfolio hinges critically on, thus far, deeply uncertain estimates of the damages due to aerosol forcing. Even if we assume that aerosol forcing could be deployed continuously, the aerosol geoengineering does not considerably displace CO2 abatement in the simple economic optimal growth model until the damages due to the aerosol forcing are rather low. Third, substituting aerosol geoengineering for greenhouse gas emission abatement can fail an ethical test regarding intergenerational justice. Substituting aerosol geoengineering for greenhouse gas emissions abatements constitutes a conscious risk transfer to future generations, in violation of principles of intergenerational justice which demands that present generations should not create benefits for themselves in exchange for burdens on future generations.

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The Market for Conservation and Other Hostages

Bård Harstad
NBER Working Paper, September 2011

Abstract:
A conservation good, such as the rainforest, is a hostage: it is possessed by S who may prefer to consume it, but B receives a larger value from continued conservation. A range of prices would make trade mutually beneficial. So, why doesn't B purchase conservation, or the forest, from S? If this were an equilibrium, S would never consume, anticipating a higher price at the next stage. Anticipating this, B prefers to deviate and not pay. The Markov-perfect equilibria are in mixed strategies, implying that the good is consumed (or the forest is cut) at a positive rate. If conservation is more valuable, it is less likely to occur. If there are several interested buyers, cutting increases. If S sets the price and players are patient, the forest disappears with probability one. A rental market has similar properties. By comparison, a rental market dominates a sale market if the value of conservation is low, the consumption value high, and if remote protection is costly. Thus, the theory can explain why optimal conservation does not always occur and why conservation abroad is rented, while domestic conservation is bought.

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Self-enforcing strategies to deter free-riding in the climate change mitigation game and other repeated public good games

Jobst Heitzig, Kai Lessmann & Yong Zou
Proceedings of the National Academy of Sciences, 20 September 2011, Pages 15739-15744

Abstract:
As the Copenhagen Accord indicates, most of the international community agrees that global mean temperature should not be allowed to rise more than two degrees Celsius above preindustrial levels to avoid unacceptable damages from climate change. The scientific evidence distilled in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change and recent reports by the US National Academies shows that this can only be achieved by vast reductions of greenhouse gas emissions. Still, international cooperation on greenhouse gas emissions reductions suffers from incentives to free-ride and to renegotiate agreements in case of noncompliance, and the same is true for other so-called "public good games." Using game theory, we show how one might overcome these problems with a simple dynamic strategy of linear compensation when the parameters of the problem fulfill some general conditions and players can be considered to be sufficiently rational. The proposed strategy redistributes liabilities according to past compliance levels in a proportionate and timely way. It can be used to implement any given allocation of target contributions, and we prove that it has several strong stability properties.

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A review of climate geoengineering proposals

Naomi Vaughan & Timothy Lenton
Climatic Change, forthcoming

Abstract:
Climate geoengineering proposals seek to rectify the current radiative imbalance via either (1) reducing incoming solar radiation (solar radiation management) or (2) removing CO2 from the atmosphere and transferring it to long-lived reservoirs (carbon dioxide removal). For each option, we discuss its effectiveness and potential side effects, also considering lifetime of effect, development and deployment timescale, reversibility, and failure risks. We present a detailed review that builds on earlier work by including the most recent literature, and is more extensive than previous comparative frameworks. Solar radiation management propsals are most effective but short-lived, whilst carbon dioxide removal measures gain effectiveness the longer they are pursued. Solar radiation management could restore the global radiative balance, but must be maintained to avoid abrupt warming, meanwhile ocean acidification and residual regional climate changes would still occur. Carbon dioxide removal involves less risk, and offers a way to return to a pre-industrial CO2 level and climate on a millennial timescale, but is potentially limited by the CO2 storage capacity of geological reservoirs. Geoengineering could complement mitigation, but it is not an alternative to it. We expand on the possible combinations of mitigation, carbon dioxide removal and solar radiation management that might be used to avoid dangerous climate change.

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The Political Economy of Deforestation in the Tropics

Robin Burgess et al.
NBER Working Paper, September 2011

Abstract:
Tropical deforestation accounts for almost one-fifth of greenhouse gas emissions worldwide and threatens the world's most diverse ecosystems. The prevalence of illegal forest extraction in the tropics suggests that understanding the incentives of local bureaucrats and politicians who enforce forest policy may be critical to understanding tropical deforestation. We find support for this thesis using a novel satellite-based dataset that tracks annual changes in forest cover across eight years of institutional change in post-Soeharto Indonesia. Increases in the numbers of political jurisdictions are associated with increased deforestation and with lower prices in local wood markets, consistent with a model of Cournot competition between jurisdictions. Illegal logging increases dramatically in the years leading up to local elections, suggesting the presence of "political logging cycles". And, illegal logging and rents from unevenly distributed oil and gas revenues are short run substitutes, but this effect dissapears over time as political turnover occurs. The results illustrate how incentives faced by local government officials affect deforestation, and provide an example of how standard economic theories can explain illegal behavior.

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The demand for ethanol as a gasoline substitute

Soren Anderson
Journal of Environmental Economics and Management, forthcoming

Abstract:
This paper estimates household preferences for ethanol (E85) as a gasoline (E10) substitute. I develop a theoretical model linking the shape of the ethanol demand curve to the underlying distribution among households of willingness to pay for ethanol. I estimate the model using instrumental variables techniques and data from many retail fueling stations. I find that a $0.10-per-gallon increase in ethanol's price relative to gasoline leads to a 12%-16% decrease in the quantity of ethanol demanded. My findings imply that preferences for ethanol are heterogeneous and that a substantial fraction of households are willing to pay a premium for the fuel. This reduces substantially the simulated efficiency cost of an ethanol content standard, since some households choose ethanol without large subsidies, mitigating deadweight losses.

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Growing State-Federal Conflicts in Environmental Policy: The Role of Market-Based Regulation

Roberton Williams
Journal of Public Economics, forthcoming

Abstract:
In recent years, cases in which state governments chose to override federal environmental regulation with tighter regulations of their own have become increasingly common, even for pollutants that have substantial spillovers across states. This paper argues that this change arose at least in part because of a shift in the type of regulation used at the federal level, from command-and-control regulation toward more incentive-based regulation. Under an incentive-based federal regulation, a state imposing a tighter regulation will bear only part of the additional cost, and thus has more incentive to tighten regulation than it does under federal command-and-control. This difference helps to explain observed patterns of regulation. In addition, it has implications for the choice of regulatory instruments. For a pollutant that causes both local and spillover damage, a federal pollution tax is likely to yield a more efficient outcome than federal command-and-control policy or a federal system of tradable permits.

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The Impacts of the Climate Change Levy on Manufacturing: Evidence from Microdata

Ralf Martin, Laure de Preux & Ulrich Wagner
NBER Working Paper, September 2011

Abstract:
We estimate the impacts of the Climate Change Levy (CCL) on manufacturing plants using panel data from the UK production census. Our identification strategy builds on the comparison of outcomes between plants subject to the CCL and plants that were granted an 80% discount on the levy after joining a Climate Change Agreement (CCA). Exploiting exogenous variation in eligibility for CCA participation, we find that the CCL had a strong negative impact on energy intensity and electricity use. We cannot reject the hypothesis that the tax had no detrimental effects on economic performance and on plant exit.

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Human control of climate change

Varun Dutt & Cleotilde Gonzalez
Climatic Change, forthcoming

Abstract:
The use of analogies and repeated feedback might help people learn about the dynamics of climate change. In this paper, we study the influence of repeated feedback on the control of a carbon-dioxide (CO2) concentration to a goal level in a Dynamic Climate Change Simulator (DCCS) using the "bathtub" analogy. DCCS is a simplification of the complex climate system into its essential elements: CO2 concentration (stock); man-made CO2 emissions (inflow); and natural CO2 removal or absorption in the atmosphere (outflow). In a laboratory experiment involving DCCS, we manipulated feedback delays in two ways: the frequency of emission decisions and the rate of CO2 absorption from the atmosphere (climate dynamics). Our results revealed that participants' ability to control the CO2 concentration generally remained poor even in conditions where they were allowed to revise their emission decisions frequently (i.e., every 2 years) and where the climate dynamics were rapid (i.e., 1.6% of CO2 concentration was removed every year). Participants' control of the concentration only improved with repeated feedback in conditions of lesser feedback delay. Moreover, the delay due to climate dynamics had a greater effect on participants' control than the delay due to emission decisions frequency. We provide future research directions and highlight the potential of using simulations like DCCS to help people learn about dynamics of Earth's climate.

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China's attempts to minimize non-CO2 emissions from coal: Evidence of declining emission intensity

Xunpeng Shi
Environment and Development Economics, October 2011, Pages 573-590

Abstract:
This paper argues that the use of coal can be reconciled with the environment. In the empirical work, three environmental pollutants are considered, using two alternative methods with two sets of Chinese data. CO2 emissions could not be studied because of data limitations. The hypothesis that the use of coal can be reconciled with the environment through declined emission intensity is confirmed by the empirical tests. The decreases in emission intensity are driven by the application of clean coal technologies, which can be encouraged by appropriate regulations and incentives and have both environmental and economic benefits. Therefore it is critical that appropriate legal and fiscal regimes be formulated and that the development and utilization of high-efficiency and clean coal technologies be promoted. The paper also suggests that the use of coal could continue to be reconciled with concern for the environment, even while considering CO2 emissions.

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Optimal Taxes on Fossil Fuel in General Equilibrium

Mikhail Golosov et al.
NBER Working Paper, August 2011

Abstract:
We analyze a dynamic stochastic general-equilibrium (DSGE) model with an externality through climate change from using fossil energy. A central result of our paper is an analytical derivation of a simple formula for the marginal externality damage of emissions. This formula, which holds under quite plausible assumptions, reveals that the damage is proportional to current GDP, with the proportion depending only on three factors: (i) discounting, (ii) the expected damage elasticity (how many percent of the output flow is lost from an extra unit of carbon in the atmosphere), and (iii) the structure of carbon depreciation in the atmosphere. Very importantly, future values of output, consumption, and the atmospheric CO2 concentration, as well as the paths of technology and population, and so on, all disappear from the formula. The optimal tax, using a standard Pigou argument, is then equal to this marginal externality. The simplicity of the formula allows the optimal tax to be easily parameterized and computed. Based on parameter estimates that rely on updated natural-science studies, we find that the optimal tax should be a bit higher than the median, or most well-known, estimates in the literature. We also show how the optimal taxes depend on the expectations and the possible resolution of the uncertainty regarding future damages. Finally, we compute the optimal and market paths for the use of energy and the corresponding climate change.

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Agricultural Land Elasticities in the United States and Brazil

Kanlaya Barr et al.
Applied Economic Perspectives and Policy, Fall 2011, Pages 449-462

Abstract:
The elasticity of aggregate supply of cropland is one key to understanding the degree to which policy-induced increases in demand for biofuel feedstocks or agricultural CO2 offsets will result in higher prices or expanded crop production. We report land supply elasticities for the United States and Brazil estimated directly from recent changes in planted crop acreage and estimated changes in expected returns. The resulting aggregate implied land-use elasticities with respect to price are quite inelastic in the United States and Brazil elasticities have declined sharply in recent years. The estimated elasticities imply that current estimates of land-based CO2 emissions from biofuels expansion may be overstated.

By KEVIN LEWIS | 09:00:00 AM