Niskanen Notes
The Role of Co-Benefits: Rethinking The Costs and Benefits of Climate Change Mitigation
Although there is a growing consensus that deep reductions in greenhouse gas emissions are necessary in order to reduce the impacts of climate change, the hurdles to enacting any meaningful climate change mitigation policy remain strong. Chief among them is that the economic costs of climate action will be borne immediately and will be transparent to consumers, while the benefits of reducing emissions will be both uncertain and accrue for generations hence.
But climate action won’t just pay off in better weather in 2100. There are a range of co-benefits of policies that would reduce GHG emissions. Co-benefits, in this sense, are outcomes not directly targeted by the policy, such as reductions in non-targeted pollutants improving air quality and public health. When you bring these benefits into the equation, the case for climate action looks ironclad.
A study published in Nature Climate Change presents an analysis of three alternative policy scenarios for CO2 emissions from the power sector and compares them to a reference case that includes all planned air quality policies. The study demonstrates how reductions in CO2 will contribute to lower concentrations of PM2.5, a pollutant with well-documented health and environmental impacts, resulting in rapid and localized improvements in health-related outcomes.
The study used a combined model of the energy system and air quality to evaluate how climate policies would influence air quality. The following figure shows the relative improvements in ambient concentrations of PM2.5 for a modest improvement in efficiency rates at coal plants (the policy being contemplated by the EPA as a replacement for the Clean Power Plan) and a more stringent intervention akin to the Clean Power Plan or a meaningful carbon tax.
Figure 1: Maps for the USA of the difference in annual average concentrations of PM2.5 in 2020 under modest climate policy (left) and more stringent policies (right) for the power sector.
In general, the modeling shows that more stringent climate policy results in greater co-benefits, but that the particular policy framework does matter. In comparing the co-benefits from their Clean Power Plan case and a carbon tax (levied at $42 per ton), the study finds that carbon pricing policy option results in significantly more reductions in metric tons of CO2 per year for a similar degree of co-benefits. The authors chalk the difference up to increased use of coal with CCS and less investment in energy efficiency under a carbon tax.
The lack of investment in demand-side energy efficiency and the expansion of coal due to CCS systems are fairly large assumptions, especially when considering recent LCOE analysis comparing alternative energy technologies to traditional fossil fuel technologies. The LCOE of alternative technologies has fallen to the point where full lifecycle costs of building and operating renewables-based projects have dropped below the operational costs aloe of conventional coal technologies, which will lead to a significant deployment of alternative energy capacity. Carbon pricing does not deter investment in demand-side energy efficiency mechanisms and would certainly correct market failures that keep the price of coal artificially low.
Although monetizing the health co-benefits brought on by these policies goes beyond the scope of this paper, the authors do mention that they expect the monetary benefits of avoided premature deaths to exceed the cost of compliance for either the Clean Power Plan or a meaningful carbon tax. Understanding that the monetary value of the co-benefits will outweigh the compliance cost of the policies should make it more attractive to the public as well as policymakers.
There is no doubt that the global nature of climate change presents a unique problem that makes it all the more challenging to enact sensible climate policy. It is often argued that costs of mitigation are felt domestically while the benefits accrue globally, a perfectly global “free-rider” problem. Thus, efforts to emphasize the localized and immediate benefits of combating climate change are essential in order to spur public support and political will for enacting climate policy, and highlighting the co-benefits of these policies will only bolster the argument for deep reductions in CO2 emissions.
What is the safety impact of car tariffs?
Yesterday morning, E&E News reported that officials at the EPA and DOT argued back and forth about how losing fuel efficiency requirements for cars would affect fleet safety. While EPA officials argued that loosening the standards would actually increase roads deaths by 17 people per year, DOT won out in the end and justified loosening fuel restrictions with its estimate that doing so would prevent 1,000 deaths per year.
The main argument from DOT is that increasing fuel standards raises the cost of new cars and prevents consumers from buying newer and safer cars. According to the proposed rule (p. 23), “compared to the proposed standards today, the previously-issued standards would increase average vehicle prices by about $2,100.” The problem with this, we are told, is that:
As prices increase, the market-wide incentive to extract additional travel from used vehicles increases. The average age of the in-service fleet has been increasing, and when fleet turnover slows, not only does it take longer for fleet-wide fuel economy and CO2 emissions to improve, but also safety improvements, criteria pollutant emissions improvements, [and] many other vehicle attributes that also provide societal benefits take longer to be reflected in the overall U.S. fleet as well because of reduced turnover. (P. 23.)
It’s comforting to know that, while the administration is busy gutting every greenhouse gas and other pollution standard it can get its hands on, this time, at least, they’re doing it for our own good. (By the way, when you drill down into the rule, that $2,100 figure for increased average vehicle cost is true for only Model Years 2026 and 2027; according to the table on pages 598-99, over the 10-year period of Model Years 2021-2030, the average annual cost increase for the current standards over the newly-proposed standards is $1,900.)
Given the administration’s belief that reducing the cost of new vehicles is better for the environment, for vehicle safety, and for the unnamed “many other vehicle attributes that also provide societal benefits”, it is worth noting that the administration’s announced tariffs on imported vehicles, steel and aluminum will increase new car prices by considerably more than what would be allegedly saved by the proposed rule. According to a policy brief from the Peterson Institute for International Economics (as staid a bunch of number crunchers as you can find):
[A]nalysis using industry data, consumer information, and the record of previous tariff hikes indicates that the average price of an entry-level compact car will increase between $1,409 and $2,057. Similarly, the price of a new compact SUV/crossover, the most popular vehicle in America, will rise by $2,092 to $3,066. More upscale versions of the compact SUV/crossover will rise by significantly more, $4,708 to $6,971, because of higher imported foreign content, and hence higher taxes paid, for the typical luxury vehicle.
If we take $2,579 as the mid-range price increase of the most popular class of vehicles (compact SUV/crossover), then between the import tariffs on the one hand, and the vehicle rule on the other, the net result is that the administration is raising the cost of these vehicles by $679 ($2,579 – $1,900).
We’ve all become immune to any pro-environmental claims by this administration. But the obscene aspect of the administration’s justification results from their claim that by making vehicles cheaper, they are making them safer. Why should that hold when greenhouse gas rules are being rolled back and not when we are increasing prices with tariffs? Is the Administration prepared to argue that its trade wars are worth American lives? If not, what are the implications for its car rules?
What We Talk About When We Talk About “Space Force”
Last week, Vice President Mike Pence declared that the creation of a new military service for outer space—a Space Force—is an “idea whose time has come.” But what will the new service do exactly? And is it necessary?
While last year there was a proposal for a “Space Corps” within the U.S. Air Force—similar in structure to the U.S. Marine Corps’ position with the Department of the Navy—the job description of Space Force recruits will not be executing the outer space analogue to the Marines’ amphibious warfare doctrine. Nor will Space Force personnel be engaging in exoatmospheric dogfights.
Space is a supporting domain. It plays a crucial role in American’s national defense. For example, the U.S. military’s command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) capabilities are reliant on satellites. The job of Space Force personnel will be to develop those capabilities.
There is a problem though: satellites are vulnerable. As Paul Scharre of the Center for a New American Security recently explained:
Space is “congested, contested, and competitive” — as many have pointed out — and the U.S. advantages in space are waning. But responding by creating a Space Force is building a castle on a foundation of sand.
Space is an inherently vulnerable and offense-dominant domain. Satellites move through predictable orbits. There simply aren’t many good options for space hardening/defenses.
Defenders can add fuel to a satellite to make it mobile and move and change orbits, but more fuel adds weight and there is no easy way to refuel the satellite once in orbit. The same applies for defenses or armor. Defenders pay for all of that weight in launch costs. Defenders can make satellites stealthy-ish, but if even amateur observers can find secret military satellites, surely nation-state adversaries can. And even if satellites remain hidden, they’re still vulnerable to debris in low earth orbit, a growing problem that isn’t getting better.
Some of these challenges are simply insurmountable. A new uniform cannot change the laws of physics. As Scharre notes, due to the vulnerability of satellites, the military would be better off developing new C4ISR capabilities that are complementary to its satellites—rather than standing up a new services whose parochial interest will be served by the continued development of increasingly vulnerable platforms.
The new service does seem to have some momentum behind it, with Secretary of Defense James Mattis—who was staunchly opposed to the idea a year ago—saying he is now on board. However, the proposal seems to have little support in the Senate. Moreover, the plan the Pentagon has submitted to Congress—which calls for the creation of a new functional combatant command comprised of personnel from the existing services—seems more likely to ensure the status quo. With each service having something at stake in the new command, there is little incentive for innovation. Whereas innovation creates winners and losers, “managerial jointness” among the services leads to cartelization that ensures none of the services loses—even if it requires watering down proposals or creating “Rube Goldberg”-like contraptions to satisfy every interest at the table.
Instead of creating a new service or a joint command, policymakers and legislators worried about space would be better served allowing the existing services to compete over missions like C4ISR. A number of scholars have found that competition is often key to military innovation. Creating more competition for existing and future space missions is more likely to produce the advances Space Force advocates want than standing up a new bureaucracy.
Feebate Programs: An Overlooked But Promising Policy Option
The Trump administration’s recent EPA proposal delivered on its promise of rolling back the Obama-era fuel economy regulations by freezing federal fuel economy requirements at their 2020 levels for six years, rather than letting them rise to 50 mpg by 2025. Revisions to the CAFE standards are always going to create controversy, but they can also be used as an opportunity to maintain regulatory certainty and establish flexible policy tools to lower costs and achieve environmental gains. Unfortunately, the EPA’s new proposal does none of the above. The new proposal ignores innovative policy tools relevant to fuel economy regulations, and will reduce the effectiveness of existing flexibility mechanisms.
Perhaps one of the most promising policy tools for improving fuel economy regulatory schemes is a feebate program. A feebate policy sets a pivot point at a certain fuel economy standard level, whereby manufacturers would get a rebate to the extent they outperform the current standard, or pay a fee to the extent they under-comply. The feebate system establishes a fixed value for reductions in fuel consumption and is revenue neutral, as the funds gathered through the fees are used to pay the rebates. It is important to note that the pivot point should be adjusted to represent the average fuel economy standard to ensure that the program remains revenue neutral.
Figure 1: Generalized Depiction of an Idealized Feebate Program
Source: “Best Practices for Feebate Program Design and Implementation” ICCT
The main difference between the current tradable CAFE credits and a feebate system is how they perform under the assumption of technological progress. As cheaper technologies enter the market, making it more cost-effective to adhere to the fuel standard, the price of tradable CAFE credits would plummet. With a feebate, on the other hand, there would be continued incentives to improve and go beyond the standard. Introducing flexibility mechanisms in conjunction with CAFE standards, or replacing these standards with a comprehensive feebating program, should be considered as a viable solution to addressing the wide range of inefficiencies in current automobile regulations.
Unsurprisingly, nowhere in the almost 1,000-page proposal from the EPA is the word feebate even mentioned and there is no indication that similar mechanisms will be implemented under the new proposal . Furthermore, the tradable CAFE credit program will certainly lose its effectiveness. The freezing of fuel economy standards at 2020 levels will shrink the demand for new credits, ultimately forcing new credits to become extremely cheap.
The lack of innovative policy tools—as well as the reduced effectiveness of existing flexibility mechanisms—in the EPA’s new fuel economy regulation sends a clear message of support to hardline conservative groups, with very little consideration given to what consumers or the automobile industry might want.
That Government is Best Which Governs Well (Not Least)
Libertarians are fond of quoting Henry David Thoreau’s aphorism, “That government is best which governs least.” But is it really true?
In a recent post on Medium, I treat Thoreau’s aphorism as a hypothesis and put it up against some empirical measures of size and quality government.
As one measure of “governs best,” I used the Legatum Prosperity Index (LPI), which aggregates dozens of indicators, including not just GDP per capita, but good health; access to food, clean water, shelter and education; safe communities; clean environment; and so on.
As an alternate measure of “governs best,” I used the Human Freedom Index (HFI) from the Cato Institute, which aggregates indicators of freedom of speech and religion, freedom in personal relationships, safety and security, security of property rights, freedom to trade, and so on.
As a measure of “governs least,” I used the ratio of government expenditures to GDP (SGOV) from the IMF World Economic Outlook database. As a check of that ratio, I also looked the Size of Government indicator (SoG) from Cato, which measures expenditures, taxes, and government enterprises. Both indicators of the size of government are placed on a 0 to 10 scale where 10 indicates the smallest government.
The results are not consistent with the hypothesis that small government is associated with greater prosperity or greater human freedom. Here are the scatter plots using SGOV for a sample of 143 countries. (Plots for SoG are similar, although the fit is not as tight.)
If small government does not promote prosperity and freedom, what does? The answer, it turns out, is good government. To measure the quality of government, I used a composite indicator, QGOV, which measures whether a government adheres to rule of law, maintains fair and impartial criminal justice, and is free from corruption. QGOV associates positively with both LPI and HFI, as the next scatterplots show:
My conclusion: Thoreau’s aphorism should be changed from “That government is best which governs least” to “That government is best which governs well.” Quality of government, not size of government, is the key to prosperity and freedom.
For more details on data and methodology, read this two-part series: “Freedom, Prosperity, and Big Government,” and “Quality of Government, Not Size, Is the Key to Freedom and Prosperity.”