Monday, April 26, 2010

Collars on caps

The great virtue of cap and trade over taxes is that the former gives you determinate levels of carbon output. Taxes, as Paul Krugman put it in the NYT a few weeks ago, give you determinate price but indeterminate carbon output. If you are worried about climate, the former wins out over the latter hands down unless you have a mechanism for adjusting taxes to adjust carbon output. But such a mechanism forces legislators to revote and pay the price of such votes – for one big difference between permits and taxes is that the former can be handled administratively unlike the latter. When it comes to cap and trade, there is another trade off – how smooth you want to make market adjustments. One way to achieve that is by gradually tightening caps. Another way is by introducing a price collar that provides both a floor and a ceiling on the traded price of permits. The problem with such a ceiling is that it simply acts to bust the cap unless it is implemented very judiciously. The problem is that once the mechanism is in place, there will always be a temptation to invoke it in response to howls of pain as the caps are tightened. The only way to avoid that, is to tightly specify how and when such a collar kicks in. The current bill under design in the Senate has worrisome features in its collar provisions that should raise alarms – the worst thing would be to have cap and trade with a collar that is so tight that you have no real determinate limits on carbon at all. Indeed that might be worse that a tax!

Monday, April 19, 2010

More on fairness

Last week I wrote about fair pricing. This week is about fairness and a change in pricing regimes. Under what circumstances is a change in pricing fair? At the Rutgers April 9th meeting (which will soon be avaialble online), Frank Felder took up that question directly, while William Hogan proceeded from a conditional : if an existing system is fair, what changes are allowable that would retain its fairness? These are really issues about efficiency and fairness. The easiest cases occur when there is no change in fairness but a gain in efficiency, or even better, a gain in both. Anything else puts the two on a collision course - something we are often hard pressed to take seriously, because the assumptions of standard economics with which we have been raised tell us this is impossible. For that theory tells us that the most efficient outcome is the fairest outcome. But of course that is only true when the idealized assumptions (like equal initial endowments, perfect information and a high number of market participants) of the theory are satisfied. How much should we care if fairness and efficiency do come apart in utility pricing? Must we choose? Philosophers shy away from using rights talk in the premises of arguments for anything but negative rights – the right not to be interfered with. If there is a right to food, housing, or even utility services, these come as the conclusion of arguments. I think these are harder arguments to make than people think. On the other hand, I don’t think it is hard to make the argument that there is a prima facie right to a fair share of such goods. Indeed, I would claim that recognize this right is at the core of what it is to take on the moral “point of view”. Thinking like this makes it easier to ground the idea that in the case of greenhouse gasses, the safe annual global budget (about 18 gigatons) should be divided on a per capita basis, and given as a tradable right. For now we think of this in terms of nation states. But it is not outlandish to imagine the proliferation of information technology that would allow individuals to be assigned such rights and to trade both them, and some sort of associated non-renewable energy allowance. Why do that rather than relying on the existing market? Because as we saw earlier, a market system only marries fairness to efficiency if we can assume an equal endowment of resources, perfect information and the like. Trying to backward engineer that into the existing market is next to impossible. On the other hand, overlaying a market for tradable rights on top of existing markets may allow us to do just that.

Monday, April 12, 2010

Is flat fair?

We held a conference last week on pricing schemes for utilities. The idea of using prices to either smooth out peak demand (and thereby cut capacity) or reduce overall demand has to meet two objections. One is that there are classes of people who have little choice about when they need to use power (eg night shift workers who need to run air conditioners to sleep during the day) or overall demands (eg most dramatically someone on an iron lung). Here the challenge is to identify such people. Some poor people (with a lot of kids) may use a lot of electricity. And some rich people (with second homes) may use very little (in that home). So identifying those in need is not as easy as it seems at first. One interesting suggestion (by Bill Hogan of Harvard) is to reverse the challenge. Assume everyone is needy and then identify those to exclude. That may be just as hard, but at least you err on the side of caution in throwing your net too wide. The other challenge is the claim that flat pricing is more equitable than other systems for pricing – like real time pricing (which charges based on the actual wholesale prince at the time of consumption) or inverted block pricing (which charges more the more you use). I don’t think this argument from equity is very easy to make. But that said, I do think there are arguments that can be made to support the idea that flat pricing and its competitors as alternative ways to share out costs which we can choose between based on primarily pragmatic grounds. Just because electricity is more expensive at some times of the day than others, does not automatically generate an argument that pricing should follow. We may choose to do so on policy grounds, but that in itself does not generate a moral argument. Here is a parallel. Heavy people and light people pay the same prince for airlines tickets. But it costs more to fly heavy people than light people. We could have a policy of charging by the pound and weighing at the gate. We don’t do that. Other considerations outweigh the benefits of doing so.

Monday, April 5, 2010

Unknowns

We held an interesting national working meeting at Rutgers last week on people as citizens as opposed to consumers. I thinK we focus too much on the latter when the key is the former. Acquiescence to government policy is much more important than changing light bulbs. The goal of the meeting was more to throw up questions in need of research than anything else. Among the most interesting:
1.Even if acting as a consumer does not do much goOd directly, does it create more of a commitment to acting as a citizen when it comes to climate policy support?
2.Does a focus on climate adaption increase or decrease the chances of support for mitigation policy?
3.How much do voters vote out of self-interest as opposed to national interest when the two are in conflict?
4.What determines when a partisan legislative issue continues to be contested after lesigslation?