Topic: Energy and Environment

The “Fairly Impeccable” Case for (Revenue Neutral) Carbon Taxes

In the course of making his argument that Cato frequently makes counterproductive alliances of convenience (from a strict libertarian perspective, anyway) with corporate special interests, Matthew Yglesias writes at Cato Unbound:

The free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded.

I’m not sure how one might define a “free market case” for a revenue-neutral carbon pricing scheme, but the economic case for it would require evidence that (1) the benefits of the tax shift would exceed the costs, and (2) that the proposed tax shift is a less expensive means of addressing climate change harms than other possible remedies.

Regarding (1), the argument is intuitively plausible but is, in fact, quite problematic.  And you don’t need to be a Cato libertarian to come to this conclusion.  You will find great skepticism about the claim that a tax shift would on balance prove economically positive from economist Lawrence Goulder (a supporter of carbon taxes, by the way).  This seminal piece from economists A. Lans Bovenberg and Ruud de Mooij is also good.  As energy economist Stephen Smith observes after surveying the relevant economic literature on eco-tax shifts:

Ecotaxes are likely to involve distortionary costs at least as high as those involved in raising equivalent revenues through existing taxes. If the question is posed whether we would choose to use energy taxes, in preference for existing taxes on labour and other bases, in the absence of any environmental benefits, then the answer is almost certainly that we would not. Energy taxes would be likely to involve just as much distortion of the labour market as income taxes, and at the same time distort the commodity market. Only if there are expected to be environmental gains can the use of environmental taxes be justified, and the case for ecotax reform must be made primarily on the basis of the environmental gains that would result.

Read that last sentence again.

So, are the benefits that might flow from a carbon tax (defined at the monetarized value of the temperature reductions that might follow) greater than the costs of the same?  Energy economist Richard Tol’s review of the published economic literature suggests that the monetarized damages that follow from a ton of carbon emissions at the margin (if mean estimates of future climate change from the IPCC are to be believed) likely works out to about $2.  Hence, if a carbon tax is set above $2 dollars, it will may very well deliver more social costs than benefits.

Regarding (2), Indur Goklany makes a strong case that adapting to climate change and applying targeted public policy initiatives to directly address subsequent harms is much cheaper – and much more effective – than a policy of reducing greenhouse gas emissions.  Moreover, Goklany points out that this conclusion holds even if we accept the worse-case scenarios spun-out in the Stern Review on the economics of climate change.

Of course, Matthew Yglesias is free to disagree with the above.  But the case for a revenue-neutral carbon pricing scheme is not “fairly impeccable” … from an economic perspective, anyway.  There are ample grounds for disagreement … and that’s true even if we ignore the debate about the underlying science.

Today at Cato

Article: “Mark-To-Model, Into The Twilight Zone,” by Steve H. Hanke and John A. Tatom in Investor’s Business Daily

Daily Podcast: “Rail Versus Gas,” featuring Randal O’Toole on

Article: “Questionable Deals in a Volatile Region,” by Malou Innocent and Christopher Preble in The South China Morning Post

Radio Highlight: Robert A. Levy discusses the constitutionality of the bailout on WBAL’s “The Ron Smith Show” (Baltimore)

Hot Air in the Senate Bailout

What does global warming have to do with the liquidity “crisis?” Nothing!  But not according to the Senate, whose bill includes a provision, Section 117,  directing the National Academy of Sciences to “undertake a comprehensive review of the Internal Revenue Code of 1986 to identify the types of and specific tax provisions that have the largest effect on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects.”  For this, The National Academy  is appropriated $1.5 million.

In other words, somehow the government’s purchase of bad loans is related to global warming? This is a naked attempt by environmental extremists to use people’s fears of financial collapse as an excuse to ultimately skew the tax code in such a way that it makes energy even more expensive. Some bailout! 

The EU: A Climate Leader Headed in the Wrong Direction

I have an article at the International Affairs Forum which notes:

[The EU}, like the lead lemming, [is] headed in the wrong direction. It has emphasized the wrong policies to address climate change. True leadership requires that not only one head the procession and convince others to follow, but that one also take the correct path. For that, the EU needs to develop policies based on rational analysis rather than feel-good gestures that might backfire.

For details, read the article.

Blame Urban Planning

The credit crisis has led to numerous calls for bigger government. Yet the truth is that big government not only let the crisis happen, it caused it.

This truth is obscured by most accounts of the crisis. “I have a four-step view of the financial crisis,” says Paul Krugman. “1. The bursting of the housing bubble.”

William Kristol agrees. His account of the crisis begins, “A huge speculative housing bubble has collapsed.” “The root of the problem lies in this housing correction,” said Secretary of the Treasury Henry Paulson.

So it all started with the bubble. But what caused the bubble? The answer is clear: excessive land-use regulation. Yet while many talk about re-regulating banks and other financial firms, hardly anyone is talking about deregulating land.

The housing bubble was not universal. It almost exclusively struck states and regions that were heavily regulating land and housing. In fast-growing places with no such regulation, such as Dallas, Houston, and Raleigh, housing prices did not bubble and they are not declining today.

The key to making a housing bubble is to give cities control over development of rural areas – a step that is often called “growth-management planning.” If they have such control, they will restrict such development in the name of stopping “urban sprawl” – an imaginary problem – while their real goal is to keep development and its associated tax revenues within their borders. Once they have limited rural development, they will impose all sorts of conditions and fees on developers, often prolonging the permitting process by several years. This makes it impossible for developers to respond to increased housing demand by stepping up production.

In contrast, when cities do not have control of rural areas, developers can step outside the cities and buy land, subdivide it, and develop it as slowly or rapidly as necessary to respond to demand. The cities themselves respond by competing for development – in other words, by keeping regulation and impact fees low. The Houston metro area, for example, has been growing at 130,000 people per year, yet it was readily able to absorb another 100,000 Katrina evacuees with virtually no increase in housing prices.

Before 1960, virtually all housing in the United States was “affordable,” meaning that the median home prices in communities across the country were all about two times median-family incomes. But in the early 1960s, Hawaii and California passed laws allowing cities to regulate rural development. Oregon and Vermont followed in the 1970s. These states all experienced housing bubbles in the 1970s, with median prices reaching four times median-family incomes. Because they represented a small share of total U.S. housing, these bubbles did not cause a worldwide financial meltdown.

In the 1980s and 1990s, however, several more states passed laws mandating growth-management planning: Arizona, Connecticut, Florida, Maryland, Rhode Island, and Washington. Massachusetts cities took advantage of that state’s weak form of county government to take control of the countryside. The Denver and Minneapolis-St. Paul metro areas adopted growth-management plans even without a state mandate. As a result, by 2000, prices of nearly half the housing in the nation were bubbling to four, six, and in some places ten times median-family incomes.

In the meantime, Congress gave the Department of Housing and Urban Development (HUD) oversight authority over Fannie Mae and Freddie Mac. While this was supposedly aimed at protecting taxpayers, Congress knew that HUD’s main mission is to increase homeownership rates, and Congress specifically pressured HUD to increase homeownership among low income families. So HUD responded to the housing bubble by directing Fannie and Freddie to buy increasingly high percentages of mortgages made to low income families, eventually setting a floor of 56 percent. This led Fannie and Freddie to significantly increase their purchases of subprime mortgages, which legitimized the secondary market for such mortgages.

Though everyone knows that the deflation of the housing bubble is what caused the financial meltdown, few have associated the bubble itself with land-use regulation. Back in 2005, Paul Krugman observed that the bubble was caused by excessive land-use regulation. Yet nowhere in his current writings does he suggest that we deregulate land to prevent such bubbles from happening again. Such suggestions have come only from the Cato Institute, Heritage Foundation, and a few other think tanks.

We know that if the regulation is left in place, housing will bubble again – California and Hawaii housing has bubbled and crashed three times since the 1970s. We also know, from research by Harvard economist Edward Glaeser, that each successive bubble makes housing more unaffordable than ever before – and thus leaves the economy more vulnerable to the inevitable deflation. This is because when prices decline, they only fall about a third of their increase, relative to “normal” housing, before bottoming out.

Thus, median California housing was twice median family incomes in 1960, four times in 1980, five times in 1990, and eight times in 2006. In the next bubble, it will probably be at least ten times. This means homeownership rates will decline (as it has declined in California since 1960), small business formation (which relies on the equity in the business owners’ homes for capital) will decline, and education will decline (children of families that own their homes do better in school than children of families who rent).

Worse, more states are passing growth management laws. Tennessee passed a law in 1998, too late to get into the recent housing bubble but enough to participate in the next one. Legislators in Georgia, North Carolina, and other fast-growing states are being pressured to also pass such laws. Naturally, the planners who promote such laws deny that their actions have anything to do with housing prices.

Even worse, the Environmental Protection Agency has proposed to “integrate climate and land use” – effectively using global warming fears to impose nationwide growth management. Supposedly – though there is no evidence for it – people in denser communities emit fewer greenhouse gases, and growth management can be used to impose densities on Americans who would rather live on quarter-acre lots. The California legislature recently passed a law requiring cities to impose even tighter growth restrictions in order to reduce greenhouse gases – and its implementation will be judged on the restrictions, not on whether those restrictions actually reduce emissions.

Instead of such laws, states that have regulated their land and housing should deregulate them. Congress should treat land-use regulations as restrictions on interstate mobility, and deny federal housing and transportation funds to states that impose such rules. Otherwise, hard as it may be to imagine, the consequences of the next housing bubble will be even worse than this one.

How the IPCC Portrayed a Net Positive Impact of Climate Change as a Negative

And it was done without uttering an untruth!

Arguably the most influential graphic from the latest IPCC report is Figure SPM.2 from the IPCC WG 2’s Summary for Policy Makers (on the impacts, vulnerability and adaptation to climate change). This figure, titled “Key impacts as a function of increasing global average temperature change”, also appears as Figure SPM.7 and Figure 3.6 of the IPCC Synthesis Report (available at Versions also appear as Table 20.8 of the WG 2 report, and Table TS.3 in the WG 2 Technical Summary. Yet other versions are also available from the IPCC WG2’s Graphics Presentations & Speeches, as well as in the WG 2’s “official” Power Point presentations, e.g., the presentation at the UNFCCC in Bonn, May 2007 (available at

Notably the SPMs, Technical Summary, Synthesis Report, and the versions made available as presentations are primarily for consumption by policy makers and other intelligent lay persons. As such, they are meant to be jargon-free, easy to understand, and should be designed to shed light rather than to mislead even as they stay faithful to the science.

Let’s focus on what Figure SPM.2 tells us about the impacts of climate change on water.

The third statement in the panel devoted to water impacts states, “Hundreds of millions of people exposed to increased water stress.” If one traces from whence this statement came, one is led to Arnell (2004). [Figure SPM.2 misidentifies one of the sources as Table 3.3 of the IPCC WG 2 report. It ought to be Table 3.2. ]

What is evident is that while this third statement is correct, Figure SPM.2 neglects to inform us that water stress could be reduced for many hundreds of millions more — see Table 10 from the original reference, Arnell (2004). As a result, the net global population at risk of water stress might actually be reduced. And, that is precisely what Table 9 from Arnell (2004) shows. In fact, by the 2080s the net global population at risk declines by up to 2.1 billion people (depending on which scenario one wants to emphasize)!

And that is how a net positive impact of climate change is portrayed in Figure SPM.2 as a large negative impact. The recipe: provide numbers for the negative impact, but stay silent on the positive impact. That way no untruths are uttered, and only someone who has studied the original studies in depth will know what the true story is. It also reminds us as to why prior to testifying in court one swears to “tell the truth, the whole truth and nothing but the truth.”

Figure SPM.2 fails to tell us the whole truth.

Hints of the whole truth, however, are buried in the body of the IPCC WG 2 Report as evidenced by the following quote from Section 3.5.1, p. 194, of that report. Note that Arnell (2004b) and Arnell (2004) are identical.

In the 2050s, differences in the population projections of the four SRES scenarios would have a greater impact on the number of people living in water-stressed river basins (defined as basins with per capita water resources of less than 1,000 m3/year) than the differences in the emissions scenarios (Arnell, 2004b). The number of people living in severely stressed river basins would increase significantly (Table 3.2). The population at risk of increasing water stress for the full range of SRES scenarios is projected to be: 0.4 to 1.7 billion, 1.0 to 2.0 billion, and 1.1 to 3.2 billion, in the 2020s, 2050s, and 2080s, respectively (Arnell, 2004b). In the 2050s (SRES A2 scenario), 262-983 million people would move into the water stressed category (Arnell, 2004b). However, using the per capita water availability indicator, climate change would appear to reduce global water stress. This is because increases in runoff are heavily concentrated in the most populous parts of the world, mainly in East and South-East Asia, and mainly occur during high flow seasons (Arnell, 2004b). Therefore, they may not alleviate dry season problems if the extra water is not stored and would not ease water stress in other regions of the world. [Emphasis added]

But even this acknowledgment seems grudging, and leaves a misleading impression, as can be seen by the following annotated version of the above quote. [My annotations are indicated within the quote in square brackets and are in bold.]

In the 2050s, differences in the population projections of the four SRES scenarios would have a greater impact on the number of people living in water-stressed river basins (defined as basins with per capita water resources of less than 1,000 m3/year) than the differences in the emissions scenarios (Arnell, 2004b). The number of people living in severely stressed river basins would increase significantly (Table 3.2). The population at risk of increasing water stress for the full range of SRES scenarios is projected to be: 0.4 to 1.7 billion, 1.0 to 2.0 billion, and 1.1 to 3.2 billion, in the 2020s, 2050s, and 2080s, respectively (Arnell, 2004b). [COMMENT: note that the IPCC text fails to mention that the reductions in populations at risk of water stress due to climate change are projected to be substantially higher — 0.6 to 2.4 billion, 1.8 to 4.3 billion, and 1.7 to 6.0 billion in the 2020s, 2050s and 2080s, respectively. See Table 10 from the original source.] In the 2050s (SRES A2 scenario), 262-983 million people would move into the water stressed category (Arnell, 2004b). [COMMENT: The corresponding figures for the population moving out of water stress category are 191 to 1,493 million. See Table 9 from the original source.] However, using the per capita water availability indicator, climate change would appear to reduce global water stress. This is because increases in runoff are heavily concentrated in the most populous parts of the world, mainly in East and South-East Asia, and mainly occur during high flow seasons (Arnell, 2004b). Therefore, they may not alleviate dry season problems if the extra water is not stored and would not ease water stress in other regions of the world. [COMMENT: One should expect that societies would take action to store water if that’s what is necessary to avoid water stress. Such actions are not rocket science; they are probably as old as humanity itself, and have a successful track record going back for millennia. Moreover, if the IPCC’s emission scenarios, and the economic growth rates they assume are to be believed, these societies would be much wealthier in the future and should, therefore, have access to more capital to help adapt to such problems. See here (pp. 1034-1036, Tables 1 and 10).]

[Note that the Arnell paper is discussed in some detail here (pp. 1034-1036; Table 4), among other places.]

To summarize, with respect to water resources, Figure SPM.2 — and its clones — don’t make any false statements, but by withholding information that might place climate change in a positive light, they have perpetrated a fraud on the readers.

Be Afraid — Be Very Afraid

Light rail is on the ballot this November in Kansas City and Seattle. Commuter rail is on the ballot in Sonoma and Marin counties, California. BART heavy rail is on the ballot in San Jose.

These rail plans will cost billions of dollars each (hundreds of millions in the case of Sonoma-Marin), yet take few to no cars off the roads. The energy, pollution, and greenhouse gases generated during construction will vastly outweigh any operational savings, which in some cases will be nil. The plans are supported by a baptists-and-bootleggers combination of rail nuts and companies, like Parsons Brinckerhoff, that expect to make millions during construction.

But the real ballot measure to fear is California’s proposition 1A, which would authorize the sale of nearly $10 billion in general obligation bonds to build a high-speed rail network from Sacramento and San Francisco to Anaheim and San Diego. This $10 billion, combined with $10 billion from the feds and $5 billion in private money, was supposed to pay for the $25 billion system. The plan was to turn the system over to the private investors, who would operate it and keep 100 percent of the profits.

The first problem is that even the California High Speed Rail Authority admits that the real cost will be at least $43 billion. Considering the history of similar megaprojects – and this would be the largest state-sponsored megaproject in history – the final cost will probably be at least $60 billion.

The second problem is that the Authority has probably overestimated demand. It projects the system will carry 3 to 6 times as many passengers as Amtrak carries on its Northeast Corridor trains, which serve a higher population.

If the costs are high, the benefits are minuscule even if rail attracts the projected number of riders. The environmental impact statement for the project projects that it will take, at most, 3.8% of cars off the road, reduce air pollution by about 1%, and reduce transport-related greenhouse gases by 1.4%.

Considering the underestimated costs and overestimated ridership, it seems unlikely that private investors will put up $5 billion, much less a 20 percent share of whatever the final cost turns out to be. The danger for California taxpayers is that the Rail Authority will spend its $10 billion building as far as it can and then ask for more money. How far will $10 billion go? Not much further than San Francisco to San Jose.

Nor is there any guarantee that Congress will match the state’s money. But the danger for non-California taxpayers is that it does match the money – which will lead to demands for high-speed rail support from the rest of the country. Ten other high-speed corridors have received official recognition from the Federal Railroad Administration. Then there are various ad hoc proposals, such as Albuquerque to Casper and even Fargo to Missoula.

The likely cost of a national high-speed rail network will be in the hundreds of billions of dollars. Except to the contractors that build it, the benefits will be largely imaginary. We can see that by looking at high-speed rail elsewhere.

Japan’s bullet trains were a feather in that country’s technological cap, but they sent the formerly profitable Japanese National Railways (JNR) into virtual bankruptcy. The government was forced to absorb $200 billion in high-speed debt. Meanwhile, far from attracting people out of their cars, high-speed rail accelerated the growth in driving as JNR raised fares to cope with its losses.

Europe’s record with high-speed rail hasn’t been much better. Though nations in the European Union spend an estimated $100 billion per year subsidizing intercity rail, rail has slowly but steadily lost market share since Italy opened the continent’s first high-speed line in 1978. Today, less than 6 percent of passenger travel goes by rail.

We car-crazy Americans drive for 85 percent of our travel. Europeans drive for 79 percent. Spending several hundred billion dollars to get, at best, 5 or 6 percent of people out of their cars is not worthwhile. The real impact of high-speed rail is that it replaces private air service with heavily subsidized rail service.

Rail is not just a waste of money, it is an intrusion on personal freedom. That’s because it is inevitably accompanied by restrictions on people’s property rights. Buses and airlines can follow demand by changing routes. Rails cannot, so rail agencies conspire with land-use planners to reshape society and make it more “rail friendly.” That means upzoning areas near rail stations to higher-than-marketable densities while downzoning other areas to keep developers from building the kind of low-density housing most Americans prefer.

For more information about high-speed rail, see the Antiplanner, which is blogging about it in a series of nine posts.