Market design for the environment, by Cantillon and Slechten

 Here's a recent NBER working paper, to start the year off on an optimistic note:

MARKET DESIGN FOR THE ENVIRONMENT, by Estelle Cantillon and Aurélie Slechten, NBER Working Paper 31987, http://www.nber.org/papers/w31987

Abstract: The main argument in favor of markets in environmental contexts is the same as in other contexts: their ability to promote efficient allocations and production. But environmental problems bring their own challenges: their underlying bio-physical processes - and the technologies to monitor them - constrain what is feasible or even desirable. This chapter illustrates the main design dimensions in environmental markets, the trade-offs involved and their impact on performance, through the lens of a regulated market for pollution rights (the EU emissions trading scheme) and a voluntary market for the provision of environmental services (the global market for carbon credits). While both markets eventually contribute to climate change mitigation, their organisation as a “pollution market”, for the former, and as a “provision market”, for second, means that different design considerations take precedence. Both markets also face challenges: volatile prices in the EU emissions scheme and low trust for voluntary carbon markets. We discuss how alternative design options could address those.

From the Introduction:

"This chapter reviews existing and developing uses of markets for natural capital from a market design perspective. We first provide a typology of environmental problems for which markets can provide a solution. This leads us to distinguish between overexploitation, degradation and underprovision problems. Overexploitation and degradation problems happen when the goods and services provided by Nature are not excludable and property rights are shared or nonexistent. Underprovision problems arise when the natural resource, over which well-established access and usage rights exist, creates positive externalities for agents who do not benefit from any property rights to the resource. We argue that each natural resource is characterized by its specific bio-physical process which constrains the definition of what can be traded and the choice of design to support the goals of the market.

"We illustrate these considerations in the context of climate change mitigation, where compliance markets for emissions reduction and voluntary carbon markets are playing an increasingly important role. The history of the EU emissions trading scheme over the past 20 years illustrates how apparently small design decisions can impact the performance of a market and the challenges of generating an informative and stable price signal, an important desideratum to foster cost efficiency. The current discussions around the integrity of voluntary carbon markets show the importance of the definition of what is traded, and how technology and nature constrain it."

Market Shaping at the University of Chicago: Promoting needed innovation

 One of many exciting talks yesterday at the first day of the New Directions in Market Design conference was by U. Chicago's Rachel Glennerster who announced the new market design initiative at U. Chicago:

Introducing the University of Chicago's Market Shaping Accelerator. Designing market shaping mechanisms to spur innovation to help solve some of the biggest global challenges.

"Accelerating Innovation

"Threats to the global community — such as climate change and pandemics — demand urgent innovation and action at scale. But when commercial incentives for innovation trail behind the social value, market shaping instruments are required to credibly signal demand and spur and scale up innovation.

"The Market Shaping Accelerator aims to harness the momentum and interest in these tools generated from global successes in vaccine development to accelerate their adoption by governments, multilateral institutions, and philanthropies to solve the world’s most pressing challenges.

"Nobel Laureates, Leading Scholars and Innovators Advance the Use of Market Shaping Instruments to Address Global Challenges​

"The Market Shaping Accelerator brings together the world’s leading market shaping experts. The team behind the Accelerator has contributed to both foundational research and prominent policy successes of market shaping mechanisms, including the Pneumococcal and Frontier Advanced Market Commitments (AMCs)."

Rachel Glennerster speaking about market shaping

Wild coffee and climate change

 Climate change is threatening coffee crops. But there are some wild variants that show signs of robustness:)

The NYT has the story:

What Climate Change Could Mean for the Coffee You Drink  By Somini Sengupta

"The two types of coffee that most of us drink — Arabica and robusta — are at grave risk in the era of climate change.

"Now the good news. Farmers in one of Africa’s biggest coffee exporting countries are growing a whole other variety that better withstands the heat, drought and disease supersized by global warming.

"For years, they’ve just been mixing it into bags of low-priced robusta. This year, they’re trying to sell it to the world under its own true name: Liberica excelsa.

...

"If it works, it could hold important lessons for smallholder coffee farmers elsewhere, demonstrating the importance of wild coffee varieties in a warming world. Liberica excelsa is native to tropical Central Africa. 

...

"While Arabica and robusta are the two widely cultivated species of coffee, more than 100 species grow in the wild."

Blue water, green water and climate change

 Much of the discussion of redesigning the markets for water focus on "blue water," i.e. surface water in rivers and lakes, and runoff from rain, and resulting accumulation in reservoirs, snowpacks, and ground water.

Here's a paper in Nature pointing out that, particularly as climates change, we also have to think of "green water," namely water from evaporation and rain, and how to manage that.

Rockström, Johan, Mariana Mazzucato, Lauren Seaby Andersen, Simon Felix Fahrländer, and Dieter Gerten. "Why we need a new economics of water as a common good." Nature (2023).

"Water managers have always had to deal with natural variability, building larger reservoirs and tapping aquifers to fight scarcity, for example. But current challenges and trends in the rest of this century demand a completely different approach: a radical shake-up in how water is governed, managed and valued, from local to global scales, including a re-evaluation of human water needs (see Supplementary information, Box S1).

"Today, the sector concentrates on flows of ‘blue’ fresh water — liquid that runs off the land and is stored in rivers, lakes, reservoirs and underground aquifers. Utilities capture and extract this water locally for drinking and sanitation, agricultural irrigation and industry.

...

"Managing fresh water on a global scale means going beyond our current fixation on capturing blue water, which constitutes 35% of all fresh water on land, to also encompass green water, which makes up the remaining 65% (see Supplementary information, Fig. S1). Flows of moisture and vapour from land and vegetation are essential for regulating the water cycle and securing future rainfall, as well enabling carbon sequestration in soils and forests.

"Globally, up to half of terrestrial precipitation originates from green water evaporated over land, with the rest from evaporation over the ocean3. Thus, landscape changes can alter water supplies in regions downwind, as well as changing local climates and streamflows. For example, deforestation in the Congo Basin lowers rainfall in neighbouring countries, and even across the Atlantic in the Amazon. Heavy irrigation of crops in India can boost the streamflow of the Yangtze River in China, through moisture transported downwind4.

"By analogy with watersheds on land, researchers refer to ‘precipitationsheds’ and ‘evaporationsheds’ in the atmosphere. Simply put, a precipitationshed is where rain comes from and an evaporationshed is where evaporation goes to. (Here, evaporation refers to total evaporation from the ocean and green water flows from land, including from soil and water bodies, as well as transpiration from vegetation.)"

Lab grown meat: taking slaughter out of the food chain

 Come a day, we'll be able to eat chicken meat that wasn't grown in a chicken...

The Guardian has the story:

US declares lab-grown meat safe to eat in ‘groundbreaking’ move. The government’s approval will open the market for a food praised for being more efficient and environmentally friendly. by Oliver Milman 

"The US government has cleared the way for Americans to be able to eat lab-grown meat, after authorities deemed a meat product derived from animal cells to be safe for human consumption.

"The US Food and Drug Administration (FDA) will allow* a California company called Upside Foods to take living cells from chickens and then grow them in a controlled laboratory environment to produce a meat product that doesn’t involve the actual slaughter of any animals.

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From the FDA

*FDA Completes First Pre-Market Consultation for Human Food Made Using Animal Cell Culture Technology. Before Entering the U.S. Market, the Food Must Meet Other Federal

"The voluntary pre-market consultation is not an approval process. Instead, it means that after our careful evaluation of the data and information shared by the firm, we have no further questions at this time about the firm’s safety conclusion."

Drought, hunger, and early marriage in Ethiopia

 Sometimes the problem is hunger, and early marriage is seen as the solution.

The Guardian has the story

Ethiopian drought leading to ‘dramatic’ increase in child marriage, Unicef warns. With hunger across Horn of Africa and 600,000 children out of school, ‘desperate’ parents push more girls into early marriage by Lizzy Davies

"Three consecutive failed rainy seasons have brought hunger, malnutrition and mass displacement to millions of people in the Horn of Africa, including parts of Ethiopia, Somalia, Kenya and Djibouti.

"Many girls in Ethiopia now face being married at a young age as their parents seek to find extra resources through dowries from the husband’s family, and hope their daughters will be fed and protected by wealthier families, warned Catherine Russell, Unicef’s executive director.

...

"In the East Hararghe zone, home to 2.7 million people, child marriage cases increased by 51%, from 70 recorded during a six-month period in 2020-21 to 106 in the same period a year later.

"It was just one of six drought-affected areas in Oromia to have seen a sharp rise in child marriages, Unicef said. Across those zones, cases have almost quadrupled. According to data received by Unicef this week, 672 cases of child marriage were recorded between February and August last year, whereas in the six months from last September to March this year, that number leapt to 2,282, local government figures showed.

"“We’re seeing increases in child marriage that are quite dramatic,” Russell said, noting that more than 600,000 children are thought to have dropped out of school as a result of the drought.

...

“These people [have their daughters married] because they’re desperate for one reason or another: they’re afraid of violence; they’re afraid for the safety of the girls; they need resources; they can’t afford to feed them,” Russell said.

...

"According to demographic data from 2016, 40% of girls in the east African country are married before the age of 18 and 14% are married before their 15th birthday.

...

"The drought is also pushing up the rates of severe acute malnutrition in the affected areas, with admission rates for children under five years old 15% higher in February this year than February last year."

Blame shifting in methane emission and climate change

 Luke Coffman had a paper in 2011 reporting an experiment in which a participant had an opportunity to play a dictator game with a second participant, but faced punishment by a third party if he was judged to have behaved badly.  It was found that if the first participant "sold" the game to still another player in a way that didn't change the outcome, he faced less punishment. ("Intermediation reduces punishment and reward"AEJ Micro, Nov 2011)

I'm reminded of this by the recent NY Times story about how oil and gas companies are selling their most polluting operations (in which methane is released into the atmosphere) to small companies that continue to operate them.

Here Are America’s Top Methane Emitters. Some Will Surprise You.  Oil and gas giants are selling off their most-polluting operations to small private companies. Most manage to escape public scrutiny.  By Hiroko Tabuchi

"As the world’s oil and gas giants face increasing pressure to reduce their fossil fuel emissions, small, privately held drilling companies are becoming the country’s biggest emitters of greenhouse gases, often by buying up the industry’s high-polluting assets.

...

"In some cases, the companies are buying up high-polluting assets directly from the largest oil and gas corporations, like ConocoPhillips and BP"

Negotiating climate change, by Schmidt and Ockenfels in PNAS

 Now that there's light at the end of the Covid tunnel, we can turn our attention back to big problems:

Focusing climate negotiations on a uniform common commitment can promote cooperation  by Klaus M. Schmidt and  Axel Ockenfels, PNAS March 16, 2021 118 (11) e2013070118; https://doi.org/10.1073/pnas.2013070118

Edited by Lise Vesterlund, University of Pittsburgh, and accepted by Editorial Board Member Paul R. Milgrom

Abstract: International cooperation on the reduction of greenhouse gas emissions, disarmament, or free trade needs to be negotiated. The success of such negotiations depends on how they are designed. In the context of international climate change policy, it has been proposed [e.g., M. L. Weitzman J. Assoc. Environ. Resour. Econ. 1, 29–49 (2014)] that shifting the negotiation focus to a uniform common commitment (such as a uniform minimum carbon price) would lead to more ambitious cooperation. Yet, a proof-of-concept for this important claim is lacking. Based on game theoretical analyses, we present experimental evidence that strongly supports this conjecture. In our study, human subjects negotiate contributions to a public good. Subjects differ in their benefits and costs of cooperation. Participation in the negotiations and all commitments are voluntary. We consider treatments in which agreements are enforceable, and treatments in which they have to be self-enforcing. In both situations, negotiating a uniform common commitment is more successful in promoting cooperation than negotiating individual commitments (as in the Paris Agreement) and complex common commitments that tailor the commitment to the specific situation of each party (as attempted with the Kyoto Protocol). Furthermore, as suggested by our model, a uniform common commitment benefits most from being enforced.

Marty Weitzman, 1942-2019

For many years, Marty and I both had offices on the third floor of the Littauer building at Harvard.  I didn't know him well, but he was a big thinker,  who thought unflinchingly about the tail-end dangers of climate change.

His obit in the NY Times suggests that he was despondent about the future.

Martin Weitzman, Virtuoso Climate Change Economist, Dies at 77
A pathfinder in environmental economics who insisted on factoring in the worst-case scenarios of global warming

"In “Climate Shock: The Economic Consequences of a Hotter Planet” (2015), Professor Weitzman and his co-author, Gernot Wagner, an economist at New York University, wrote: “One thing we know for sure is that a greater than 10 percent chance of the earth’s eventual warming of 11 degrees Fahrenheit or more — the end of the human adventure on this planet as we now know it — is too high. And that’s the path the planet is on at the moment.”

“Most everything we know tells us climate change is bad,” the authors concluded. “Most everything we don’t know tells us it’s probably much worse.”

"His analysis of the economics of climate change became known as the Dismal Theorem."

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Update: here's the Washington Post's obit:


Martin Weitzman, environmental economist who emphasized uncertainty, dies at 77

Will we learn to handle immigration by the time sea levels rise?

Below is a link to a 3-minute video of an interview (in English with Portuguese subtitles) that I gave some time ago on Portuguese TV, but just saw recently...  We talked about populism, immigration, and how we're going to have to learn from our failures today to prepare for future mass movements of people. (It starts with an advertisement, before the interview begins:(


Nobel da Economia em entrevista à TVI critica populismos e alerta para mais migração - 
Alvin Roth referiu ainda que o fenómeno do aquecimento global vai aumentar a migração
[G-translate: "Nobel la Economía in interview with TVI criticizes populism and alert for more migration
Alvin Roth also noted that the phenomenon of global warming will increase migration."

Carbon tax and dividend--now supported by 3300 economists from Aaron to Zykaj

The Financial Times reports on the growing number of U.S. economists who support a carbon tax, with the money to be returned to citizens as equal lump sum rebates.

Surge in US economists’ support for carbon tax to tackle emissions

"The carbon tax proposal, organised by the Climate Leadership Council, is a bipartisan effort that has united senior economists from both parties, and now garnered 3,300 signatures from professional economists and academics across the US."
*************

Here's the statement, and a list of all the signers from Henry Aaron to Blerina Zykaj; it's a long list...

ECONOMISTS’ STATEMENT ON CARBON DIVIDENDS
The Largest Public Statement of Economists in History
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Earlier post:

Thursday, January 17, 2019

Carbon tax with revenue returned through equal lump-sum rebates: open letter

Carbon tax with revenue returned through equal lump-sum rebates: open letter

An open letter from many economists, published today as an op-ed in the Wall Street Journal, proposes a carbon tax with the revenue to be returned to taxpayers, as a way to put incentives in place to deal with climate change.
 Here it is in the WSJ: 
Economists’ Statement on Carbon Dividends--Bipartisan agreement on how to combat climate change.

And you can click through to the oped (ungated) and related articles at https://www.clcouncil.org/?mod=article_inline

ECONOMISTS’ STATEMENT ON CARBON DIVIDENDS

27 Nobel laureates, all 4 former Fed Chairs, and 15 former Chairs of the Council of Economic Advisers unite behind carbon dividends as the bipartisan climate solution.

• Wall Street Journal op-ed
• Washington Post
• Axios
• Wall Street Journal article

Climate change agreement, on Bloomberg Surveillance this morning

I discussed this weekend's climate change agreement on Bloomberg Surveillance from minute 33 to 41, which you can listen to hereDownload
or here: http://media.bloomberg.com/bb/avfile/News/Surveillance/vDuJ6SlgV5gs.mp3

More or less I said that the Paris deal, which may be all that was politically available, is complex and aspirational—it will be hard for each country to devise ways to cut emissions, it will be hard to measure what was cut, it will be hard to decide what it cost (and so to determine rich to poor country subsidies).

A simpler plan, but not politically feasible (not in the US and not in the world at large) would have been to agree to, say, double the price of carbon over the next few years, by taxing it, and giving back the money to individuals (by reducing other taxes, or by lump sum tax deductions), so that they would still have reason to economize on how much they drive, how they heat their houses, etc.  This would also give a boost to companies that want to produce clean energy and energy saving tech

Climate negotiation design

Axel Ockenfels writes:

David MacKay, Peter Cramton, Steven Stoft and I published a comment on climate negotiation design today in Nature (my stay in Stanford way extremely useful in this respect ;-). 

Here is a link: http://www.nature.com/news/price-carbon-i-will-if-you-will-1.18538

And here is a link to an ebook that we compiled, which has lots of background material by us and others, including Tirole, Stiglitz, Weitzman, and Nordhaus: http://carbon-price.com/

There have been a couple of newspaper articles on that (and more are coming), too, such as:

http://www.bbc.com/news/science-environment-34489266
["If you know a carbon price will apply to all other countries as well as you, it now comes in your self interest to advocate a high carbon price" David MacKay, University of Cambridge]

http://www.faz.net/aktuell/wirtschaft/energiepolitik/oekonomen-sehen-den-klimagipfel-in-paris-zum-scheitern-verurteilt-13851185.html

http://www.sueddeutsche.de/wirtschaft/klimagipfel-scheitern-mit-ansage-1.2692393"
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The Nature comment comes with a picture to illustrate the problem of all pulling together...

Price carbon — I will if you will  David J. C. MacKay, Peter Cramton, Axel Ockenfels& Steven Stoft ,12 October 2015

"Negotiations at the United Nations climate summit in Paris this December will adopt a 'pledge and review' approach to cutting global carbon emissions. Countries will promise to reduce their emissions by amounts that will be revised later. The narrative is that this will “enable an upward spiral of ambition over time”1. History and the science of cooperation predict that quite the opposite will happen.

...

"Success requires a common commitment, not a patchwork of individual ones. Negotiations need to be designed to realign self-interests and promote cooperation. A common commitment can assure participants that others will match their efforts and not free-ride. A strategy of “I will if you will” stabilizes higher levels of cooperation. It is the most robust pattern of cooperation seen in laboratory and field studies of situations open to free-riding"

...

"We, and others, propose an alternative: a global carbon-price commitment7. Each country would commit to place charges on carbon emissions from fossil-fuel use (by taxes or cap-and-trade schemes, for example) sufficient to match an agreed global price, which could be set by voting — by a super-majority rule that would produce a coalition of the willing.

"A uniform carbon price is widely accepted as the most cost-effective way to curb emissions. Carbon pricing is flexible, allowing fossil taxes, cap-and-trade, hybrid schemes and other national policies to be used (unlike a global carbon tax). All that is required of a country is that its average carbon price — cost per unit of greenhouse gas emitted — be at least as high as the agreed global carbon price.

"Unlike global cap-and-trade, carbon pricing allows countries to keep all carbon revenues, eliminating the risk of needing to buy expensive credits from a rival country. Taxes need not rise if a nation performs a green tax shift — reducing taxes on good things such as employment by charging for pollution. Shifting taxes from good things to bad things could mean there is no net social cost to pricing carbon, even before counting climate benefits"