06 February 2015

A frustration

One of the central dynamics involved in studying economics as it relates to human behavior is that human beings will respond to incentives. And one of the frustrating aspects of political decisions as they relate to economics is that these decisions to implement policy rarely take these into account when they are formed and enacted. Almost nowhere does this appear more evident than the politics surrounding environmentalism.

A variety of problems occur which should be evident and obvious. A law or regulation is passed which mandates higher energy efficiency standards or fuel economy. The result is that people use more energy or drive more. People will often have in mind a relative fixed budget for energy expenses and when they are below it, it is possible that they will seek to consume the rest of that budget than to seek to save it. Or they may also think that their more efficient vehicle or appliances entitles them to use these devices more often because they will be doing so more effectively than their neighbours. While this may be perfectly reasonable from an individual experience, it has rather unpleasant ramifications if it applied at a social level. Wherein it allows us to claim victories on environmental policies without having actually achieved them. This is not unusual where a policy is passed with the explicit claims of victory over some vast social ill, and then very little is done to assure that indeed that policy did achieve those aims. But since environmental policies and responses relating to climate change could have rather more significant consequences than say, abortion policy, we may want to be sure we are getting something useful for our buck and make sure we are getting something at all.

Suppose we mandate that fuel efficiency standards are high. Many people buy more efficient cars as they need a new vehicle. In theory this should reduce energy consumption. In practice, people then drive them more often (on average). This increases traffic and congestion costs for everyone, including the people who have less efficient vehicles. Traffic and congestion are clear costs to productivity and time, but these costs are not paid by the people imposing them. If you are in a traffic jam, you are part of the problem, but it does not seem obvious that this is true because there are hundreds of others also involved in being part of the problem. None of these people will have good incentives to seek to reduce these costs because they can point to all of those people instead. An economic solution would be to impose congestion-adjusted tolls on controlled access roads (highways), which would assure that when there is high volumes of traffic, the costs will be paid by those accessing the road and it may deter people from driving when they otherwise would. This idea is of course unpopular. Or it could instead be the idea to reduce the incentives for housing to be located away from denser urban areas such that fewer people must commute by car and can commute instead by buses or trains (or even walk to work). Again, this is unpopular.

There are a couple of obvious possible reactions to this. 1) The ideas of economists must not very good solutions; otherwise they would be more popular. 2) The reason they are not popular is they are not pushed forward by other elites (scientists or politicians say), and the rather simple story as to why they are more effective than mandating somebody else pay the cost also provides a clear incentive to individual people (use less energy by driving around less, or at different times, and you will pay less). Economic solutions tend not to get very much airplay and explanation for the general public to discuss and digest them, and this is in part because where environmental policies are concerned, economic solutions require individual people, both as businesses and households, to pay something rather than expecting someone else to do all the heavy lifting. Regardless of who does the lifting however, or even if nobody does any lifting, individual people are paying the costs. Be it in the form of increasingly unpleasant weather conditions or traffic congestion or in not recouping long-term investment costs for energy efficient adjustments to a home or property.

Another example. Suppose we encourage individual people through social coercion or some tax incentive to place solar paneling on their homes as part of a way to avoid using carbon based energy to power their homes (not coal or natural gas). What inevitably happens is that many people respond to that social coercion as the incentive rather than the underlying environmentalist demand that created it. That is: they may ostentatiously display these panels by putting them on the side of the home facing a street to show everyone they did it (and yay for me!). And not placing them on the most beneficial side of the home facing the sun during the core part of the day. This also means that a variety of energy efficient modifications that are not visible, but which may have much higher returns than using current solar technology in most parts of the country, are not used. Such as by well-insulating the property or using a variety of heating and cooling design setups and materials when the home is renovated or constructed. Very rarely is this allowing people to obviously demonstrate their environmentalist concerns in a way that a solar panel does, despite the fact that it may have much better benefits for the environment. If we want a coercive social demand or incentive to work, it should target the actual interest that we want to coerce people into doing and do so fairly directly. A carbon tax does this pretty easily as it directly discourages the consumption of energy produced by burning carbon-based fuels. People might then seek to ameliorate this cost, while still consuming a comfortable energy demand for their homes, by placing solar panels up effectively or by adjusting the design of properties under construction or just by properly insulating a building.

Consider a final point about incentives. One thing that is not often taken into consideration is the demand to do something. If there are not restrictions preventing a project (a business or set of homes) from being built anywhere, they will be built somewhere. It would seem logical for environmental policy that we want these projects and homes built in places where it is efficient for people to live in; that is where the climate is relatively stable and reasonably warm, where there is access to sufficient supplies of clean fresh water, and so on. So, we would prefer that most people probably live in portions of the Midwest or along coastal areas and rivers than in the American Southwest (West Texas, Nevada, Arizona, etc) which is hot and dry, and that we accordingly can place projects to encourage people to live and work in those areas. But if we have rules and regulations that only account for the potential environmental damage of a project going into one place, and not where it will be built instead if it is diverted away from that place, we are failing to account for the potential damage and may end up needlessly restricting construction in one way rather than another. A fairly recent example of this is the Keystone XL pipeline. There are potentially very good economic reasons to object to it, and some philosophical arguments relating to property rights and so on that may be quite good at providing objections. But there aren't actually very great environmental reasons not to simply because it seems clear that human beings (or at least Canadians) are intent on supplying and refining the oil from tar sands projects and a pipeline represents a safer and cleaner alternative to transportation of the materials involved than trains or trucks. The actual source of the damage is not the pipeline itself. It's the continued use of oil as a fuel. If we wish to stop that, then the basis point would be to discourage the use of oil as a fuel (through carbon taxes or higher gasoline taxes at least) or provide better alternatives (cleaner fuels).
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