Before I do this, I'll issue a disclaimer. I'm not a global-warming denier, or an anti-environmentalist. My concerns are more along the lines of questioning whether we're taking the right approaches in trying to change behavior to make it more environmentally friendly. So here goes:
I opened the SL Tribune today to this article. A Dutch scientist has coined the term "water footprint" to capture the notion that water is an input to the production of many of the goods and services that we consume every day. And if we're trying to conserve water, then we can't just be satisfied by turning off the tap. We should also think about reducing our consumption of other goods and services that use a lot of water.
From the article:
A middle-class American woman who eats an average amount of meat consumes 3,245 cubic meters of water each year in her diet, according to the Dutch quick calculator. If the same woman is an ovo-lacto vegetarian (who avoids meat, but does eat eggs and dairy products), her footprint drops to 2,514 cubic meters.It takes a lot of water to raise livestock, which makes sense although I hadn't really thought about it.
And so what should we do about this? What the "H20 Conserve" folks have done is put together a web site that allows you to compute your water footprint.
This is a fine thing to do, and I'm not criticizing the H20 Conserve people for putting this information out there. More information is better, and it's obviously a huge effort to put this site together.
Is it the best way to conserve this resource?
My answer is no. Why?
One of the problems with this approach is that environmentally committed consumers need to keep enormous mental lists of what products use what resources. We know, for example, that we're supposed to conserve water. And so if you're really serious about conserving water, you need to know what products use a lot of water (so you can reduce use thereof) and what products don't use a lot of water. We also know that we're supposed to reduce carbon. So we need to keep lists of what products use less carbon, and what products don't. The list of environmentally harmful by-products of modern life is long, and the resulting computational burden on the environmentally conscious consumer is large.
There must be a better way, right? And there is.
The better way is to use prices.
For example, let's imagine that we implement a carbon tax. If you emit carbon, you pay. What will this do to the prices of the goods and services we consume? Products that generate substantial carbon emissions will become more expensive to produce. Basic microeconomics says that the prices of these products (to the end user) will rise. Consumer demand will shift --- exactly to the products that don't use a lot of carbon, because prices for these products will stay low! (Which is exactly the consumer behavior we're trying to generate with the "mental lists" approach outlined above!)
Under the "price appropriately" approach, we don't tell consumers "avoid products that use a lot of water, and by the way here's the list". Instead, we tell them "Water is scarce and high-priced as a result. If you want to consume a product that uses a lot of water, you can. But you'll find it's in your own financial best interest to shift consumption to less-water-intensive products."
The "price appropriately" approach has three big benefits over the "mental lists" approach.
Benefit #1: Doesn't rely on public-spiritedness The efficacy of the "mental lists" approach depends on the willingness of people to ignore their own economic interests and instead do what's best for the planet because it's the right thing to do. A lot of people are willing to do this, but not everyone is. If instead we tax environmentally harmful activities, then we won't be relying on public spirit; we'll be aligning self-interest with what's best for the planet.
Benefit #2: Doesn't require mental lists It's hard to be gentle on the planet. You have to do a lot of research into what products use a lot of resources and what products don't. Even for the committed, this can be a big burden.
Benefit #3: Might actually work Did the American people know before the summer of 2008 that consumption of gasoline was environmentally harmful? If so, then why didn't we reduce usage? The fact is that people respond to changes in prices in way that they don't respond to hearing the message "it's really best if you drive less." Yes, gasoline prices rose to frightful levels last summer. But gasoline consumption fell for the first time in years. And it didn't just fall because of people driving less --- it fell because the price increases trickled through the rest of the economy, landing heavily on goods and services that use a lot of gasoline as part of the production process.
So, if you want to fix our planet, fix our markets. And this is why environmentalists should undertake serious study of economics.
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6 comments:
I agree, I think that we fight against the price mechanism far too often. Lots of people feel that you should do good things, like reduce pollution, altruistically, and not have anything else coercing you like higher prices. What is really happening it that the true costs are being reflected in the price. Not such a bad thing. It seems that some people don't like the idea because it could potentially be a regressive tax. Do you think so?
The "regressive tax" concern is one that's commonly raised in response to suggestions of using the price system. I was thinking someone would object on these grounds... but I didn't figure it'd be Stephen Hampton!
Anyway, my view is that this concern confounds the "distributional" role of prices with the "efficiency" role.
To be more specific, higher prices for, say, gasoline will cause people to consume less gasoline. That is, it pushes choice in a more efficient direction. But higher prices will also make people who consume a lot of gasoline poorer. Poor people spend a higher fraction of their income on gasoline than rich people, and so a higher price for gasoline will cause a kind of redistribution in that the poor will feel it more than the rich.
But the way to solve distributional problems isn't through the price system. If we raise gasoline prices and this is really bad for the poor, then we can offset this by redistributing income to the poor through the broader tax system.
Go read, in particular, this article by Robert Frank (Cornell):
http://www.nytimes.com/2008/05/25/business/25view.html
Regarding gas prices, Frank writes: "Of course, when millions of voters feel the pinch of rapidly rising prices, politicians find it hard to stand idly by. But as the late economist Abba Lerner once remarked, the main problem confronting the poor is that they have too little money. The best solution is not to reduce the prices they pay, but rather to bolster their incomes — for example, by selectively reducing the payroll tax for low-income workers or increasing the Earned Income Tax Credit."
You should read Dave Zetland's Auganomics blog. http://www.aguanomics.com. He's a resource economist specializing in water.
The reason people waste water is because it is priced way too low. He has a lot of good data on how the sausage is made (rates are set and lack of real property rights) and it's appalling from an economic perspective.
At the retail level, he suggests having a "basic" allocation of water that is free to overcome the regressive tax objection. Then an increasing block rate. This is in addition to a rational allocation of underlying property rights to water so we can have an actual wholesale market.
Thanks, Kev! I'll put that on the to-read list.
Go ahead and read his thesis for the background on the sausage factory:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1129046
Prof. Schaefer,
What are your ideas on Carbon Tax vs. Carbon Credit (Cap and trade)? I would love to hear you blog on this from an economist's viewpoint someday.
I strongly believe that carbon tax would replicate the price mechanism more efficiently compared to cap and trade. But would love to hear from you on this.
Thanks,
Varun
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