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March 13, 2007

Global Warming and Econ 101

Michael Mandel

I've added a chapter on the environment and energy to my textbook. I'm going to devote a fair bit of space to the economics of global warming and alternative energy, since I'm sure that will be a hot (groan!) topic for the foreseeable future.

Open question: What's the most useful thing(s) to teach non-major, intro econ students about global warming and alternative energy?

09:13 AM

Teaching

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As far as economics goes? That it is a negative externality. It would be worth discussing that some economists are working to make the environment no longer an externality.

Posted by: Brandon W at March 13, 2007 10:03 AM

That unintended consequences dominate (soaring prices for tortillas). That governments on a mission are invariably captured by special interests (Vinod Khosla).

Posted by: CK at March 13, 2007 01:18 PM

The Tragedy of the Commons.

Posted by: David R at March 13, 2007 01:18 PM

Econ 101 -- negative externalities that may come back to bite us.

Biz 101 -- plenty of people focus on the Threat. What are the Opportunities created by alternative energy?

Posted by: Adam at March 13, 2007 03:33 PM

The most important things would be :

1) Market forces are the only thing that would move us away from oil, coal, etc. Altruism and even legislation, will not work.

2) China generates 4.3 times as much greenhouse gas as the US, per unit of GDP. Their total GH gas emissions will exceed that of the US in a few years.

3) Most of the so-called environmental movement is political and anti-US. Hence the 'groups' will criticize the US even after China exceeds the US in GH gas emissions. Students must learn to judge which initiatives are genuine and which are just luddite/anti-American/anti-capitalism movements.

4) Here is a prospective timeline for energy adoption :

http://futurist.typepad.com/my_weblog/2007/02/a_future_timeli.html

Posted by: Kartik at March 13, 2007 06:50 PM

I think the most important thing to discuss in an introductory econ textbook is the role and potential of economics in the global warming - alternative energy debate.

Basically, like any externality, it's up to "society" to determine just how bad, if at all, carbon emissions are. It's also up to them to determine viable solutions, like alternative energy. The role of the economist, at least at the most fundamental level, is in figuring out what the best way is to induce a shift away from carbon, towards alternative energy sources. This puts the current debate in terms that freshman econ students can (or should be able to) understand -- deadweight loss of certain programs, efficiency of government policy, who's made better off, who's made worse off, etc.

The biggest challenge seems to be emphasizing what economics is in this situation, as well as what it isn't. Economics can't call global warming "bad," but it can say, if you want a reduction in carbon emissions by X percent by year t, here's the most efficient way to do it."

Posted by: Ryan at March 13, 2007 09:05 PM

Good news on global warming and for future economic activity. Even in the face of overwhelming social responsibility a corporation's DNA demands every corporation seek to maximized it's return on investment. The economic concept of corporate sustainability works well for dealing with these growing problems. Our best response is to let creative corporations fulfill a natural economic fact in response to global climate change and any ecological dislocation. What corporate sustainability is may end as a footnote, but it is growing as a response that business will embrace, and it will be mandated as an answer to those ecological dislocations.

Posted by: Mike Reardon at March 13, 2007 09:53 PM

I think those who have mentioned externalities have a good point, since it is an intro to econ class.

you could mention the effects of technology on production (i.e alternative energy and productivity). But that might be something more for intermediate.

Posted by: eric at March 14, 2007 09:42 AM

One point needs to be driven home to economics students repeatedly:

People respond to incentives.

This single principle must be kept in mind always. It must be at the forefront when considering the intended goals of any environmental policy, and also when considering the unintended consequences.

That unintended consequences are part and parcel to any public policy is another fundamental principle that should be drilled into imprssionable students' heads. The ethonal racket is a perfect example of this. It is also a perfect example of hijacking by special interests, which could serve as a third fundamental principle worth driving home.

Posted by: Raging Ranter at March 16, 2007 12:00 PM

Government intervention could mean an artificial reduction in supply of energy resulting in higher cost for that energy. Millions of people at the fringes die because they can't afford to supply electricity for their fridge or because they can't get to work, or because the price of food is just plain higher due to the energy cost of making it. Short run

Long run: we invest in new forms of energy and energy becomes cheaper than before the reductions.

Posted by: Joe Cushing at March 19, 2007 01:39 AM

Thanks all, for the suggestions. I'm wondering if it's appropriate to explain the social discount rate to intro students.

Posted by: Mike Mandel at March 19, 2007 05:57 PM

In addition to the many good items listed above (externalities, tragedy of the commons, technological response to incentives, etc.):

1) Carbon tax versus emission trading schemes. 2) Public choice theory and the trade-offs as seen by different segments of society (current vs future generations, developed vs developing economies, labor vs capital, different industries, etc.).

3) Introduce cost-benefit analysis for assessing alternative policies (for me CBA is the core of 'economic' thinking)

Posted by: JC3 at March 29, 2007 09:54 PM

Useful things to teach list:

1) Long-term and cyclical patterns in real commodity prices and markets

2) Prior case study of impact from first Clean Air Act (and MSHA Act) on coal industry and translation of those impacts on other energy sectors

3) Impact of technical change on sectors--see First Solar Corp. technology and financials

4) Natural vs. man-made shortages, are we really running out of recoverable oil or coal and will we set new conditions on them that shifts price effects to natural gas, solar, and wind sources

5) What are the implications for terms of trade if the US and EU shun fossil fuels and other regions do not?

6) What would a 50 cent or one dollar increase in US gas tax do to vehicle sales mix, consumer confidence, and domestic auto industry?

7) How would a massive shift in energy policy interact with other financial pressures in the the works, namely baby boomer social costs and other deferred social costs.

Posted by: econguy at April 11, 2007 12:46 PM

The old joke about economists that goes something like why they have two hands, will have to be expanded to n hands as global warming drives the mutation rate and the likelihood of seeing three armed economists looses its novelty...

Posted by: Julio at April 24, 2007 12:24 AM

Test

test

Posted by: wunsacon at April 28, 2007 03:15 AM

Kartik,

>> 1) Market forces are the only thing that would

>> move us away from oil, coal, etc. Altruism and

>> even legislation, will not work.

Somehow, you overlooked the fact that the whole concept and marketability of private property exists because of laws -- "legislation" -- defining those rights. Legislation carves private interests out of the commons and creates markets (e.g., broadcast frequencies, carbon credits, etc.).

>> 2) China generates 4.3 times as much

>> greenhouse gas as the US, per unit of GDP.

In this country, "free checking" is added to GDP. Lord knows what else, like all those McMansions paid for with exotic mortgages to be repaid with a currency that's going to implode.

Carbon laws must be set per capita. Not on accounting measures that can be distorted both intentionally and unintentionally.

>> Their total GH gas emissions will exceed

>> that of the US in a few years.

As it should. They have 3x the people.

>> 3) Most of the so-called environmental movement

>> is political and anti-US. Hence the 'groups'

>> will criticize the US even after China exceeds

>> the US in GH gas emissions. Students must learn

>> to judge which initiatives are genuine and

>> which are just

>> luddite/anti-American/anti-capitalism

>> movements.

That's a load of malarkey and keep your jingoist claptrap to yourself. This is entirely related to fairness.

Pollution and standard of living are closely correlated. Caps should be set per capita. Anything else, such as "per unit of (debatable) GDP", binds *individuals* in developing nations to lower standards simply because those nations didn't develop earlier. So, not only do you already have an advantage of being in a developed nation, now you’re trying to extend/institutionalize your advantage at the expense of individuals in undeveloped nations. I’ll elaborate…

First, you're in a developed country that, thanks to polluting for 100+ years, already built up its infrastructure at the expense /tragedy of the commons. This is what's made your GDP/pollution metric favorable *now*. China is just now building towns and cities –- stuff you take for granted -- for 400 million rural people. What’s their GDP/pollution ratio going to be like? It’s going to be more like the US 40+ years ago. (Are they not entitled to this, oh master?)

Second, with your head start advantage established, it seems you want to grant yourself the right to *keep* polluting more per capita. That means you can pollute on the job more than someone in China. In turn, your wealth should grow faster than someone in China. So, not only did the last few generations of polluting Americans give you a head start, now you want to leverage it into what could very well be a self-sustaining advantage. (Sounds pretty selfish, huh?)

Further, I don’t expect anyone in China and India to volunteer to pollute less than you. So, while the far righties dream and obstruct reasonable climate deals, the climate is not getting better. (Classic tragedy of the commons.)

In sum, the eco crowd sees your position as extremely selfish and ultimately doomed.

Joe Cushing, innovators will respond to government policies limiting greenhouse gases. Create carbon taxes or trading and investment will flow into alternative energy. I'm an optimist in our ability to innovate -- but not the atmosphere's ability to keep absorbing carbon.

Posted by: wunsacon at April 28, 2007 03:22 AM


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