Can the U.S. Government cost-benefit analysis of climate change policies not look outside of the U.S.?

The post by Timothy Taylor, managing editor of the Journal of Economic Perspectives, "Should U.S. Government Cost-Benefit Analysis Look Outside the U.S.?" made me go back to a common question in environmental economy, how to manage externalities. 

Investopedia defines externality as "a consequence of an economic activity that is experienced by unrelated third parties". Basically externalities are any effect of an action done outside of the considered system. While using the word "unrelated" is misleading as if there´s an effect there will be always related, the meaning here is that is  consider unrelated, that is, it is excluded from the analysis. The reason why this is a central problem in environmental economy is that perhaps the most used example of negative externalities is pollution, an effect done by an activity that is usually not considered as part of the analysis of the activity. Externalities however can be also positive.

The relevance of this is because in Taylor's post he comments on whether including global benefits while evaluating a climate change policy of the US makes sense. His conclusion being that a cost-benefit analysis of US policies should make sure it has "benefits that exceed costs for the U.S. population, and then to look at the global dimensions [as something independent]". This agrees with the basic notion that a government has to be held accountable with its population. 

While I agree in general that a government has to put as its first priority its own people, I believe Taylor argument can be criticized at least in 3 ways.

The first critic is the responsibility of US in terms of climate change which has been broadly discussed in the international climate change negotiations. If you break your neighbors fence by mistake, saying you won´t fix it because it doesn´t benefit your family is irresponsible and unethical even if there is no power to enforce justice and make you pay for your damage. The same goes for climate change where the relevance of the U.S. as an emitter of greenhouse gases (GHG) is clear. According to this page of the US Environmental Protection Agency (EPA) "In 2008, the top carbon dioxide (CO2) emitters were China, the United States, the European Union, India, the Russian Federation, Japan, and Canada". A more recent article from the PBL Netherlands Environmental Assessment Agency shows an interesting graph that shows the USA as the greatest cumulative emitter of GHG emissions until 2010, and is still projected to be the greatest historical contributed at least until 2030. As a matter of coherence between domestic and international principles, the US should compensate for the damage that it has caused abroad with their actions.

The second critic to Taylor's argument comes from the global implications of a climate change policy. While in his article Taylor brings Gayer and Viscusi points (from Ted Gayer and W. Kip Viscusi "Determining the Proper Scope of Climate Change Benefits" (June 3, 2014) that considering global benefits vs local costs would lead to policies against the interests of the US population in areas such as migration or social transfers. However the global dimension of the effects of policies as such is totally different from the ones of a climate change policy. While closing the borders to migrants or having subsidies for poor US citizens might have global implications, the main effect is domestic. On the contrary, climate change is a recognized global issue, where the policies taken by the US, as one of the main global emitters, will have clear global implications both at the political and at the environmental level as have been noted at least here, and here.Other than the US reduction in emissions (which is actually not that significant), the mentioned effects include China's commitment to reduce its own emissions and an increased hope for global climate change negotiations which aim for a global climate deal to be agreed by 2015.

Lastly, US has been acting in the world arena as the "world's police" for over half a century now by actively affecting countries all over the world by diplomatic, violent, economic, cultural, and any other available means. The relative weight of US economy in the international arena gives him a big muscle that it has not hesitated to use to influence the world. In this context including global costs and benefits into its analysis makes sense not only from the moral side, but also because the role of the US internationally is so extended that creating global benefits can easily come back to the US as increased support in other policies. While these benefits are really hard (probably impossible) to evaluate, it is evident that they exist as protests to US policies in foreign countries have been common in the past (for example against Afghanistan war and also against the lack of support for global climate change efforts such as the Kyoto Protocol).

From this arguments I would like to raise the same question Timothy Taylor brought from a different perspective. Given the global influence of the US, can the U.S. Government cost-benefit analysis of climate change policies not look outside of the U.S.?

Sustainable Development quotes

I can´t be the only one who enjoys to read quotes, here some that I liked about sustainable development:

• Because we don't think about future generations, they will never forget us - Henrik Tikkanen
• The greatest threat to our planet is the belief that someone else will save it - Robert Swan (first person to walk to both Poles)
• The future will be green, or not at all - Jonathon Porritt
• If something is sustainable, it means we can go on doing it indefinitely. If it isn't, we can't - Jonathon Porritt
• History teaches us that men and nations behave wisely once they have exhausted all other alternatives - Abba Eban
• The future isn't what it used to be - Arthur C Clarke
• You never reach the promised land. You can march towards it - James Callaghan
• Treat the Earth as though we intend to stay here - Sir Crispin Tickell, 1998
• Unless we change direction, we are likely to end up where we are going - Chinese proverb
• You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete - Buckminster Fuller, philospher, futurist and global thinker (1895 - 1983)

These and more quotes about sustainable development can be found here

Can we talk about cost and benefit of avoiding climate change?

After a long week of deadlines I finally had the time to reading Alex Morale's post on Bloomberg "The Two Numbers Climate Economists Can´t Stand to See Together" with the calm and attention I wanted to give it, after all, I'm an economist working in climate so the title itself got me. 

At the end I got a bit disappointed, not because the article is bad, but mostly because it doesn´t tell you anything new. Cost/benefits estimate for climate change mitigation (and I've calculated some for a few policies/projects myself) are always tricky. The longer the scope, the trickier they get which is unavoidable when trying to estimate the future in such complex systems. Broadly speaking Morale goes into the discussion of whether we should compare the costs of the estimated damage caused by global warming, with the estimated costs of avoiding such warming; then he goes into how this can be misleading as it doesn´t acknowledge the risks of catastrophic natural disasters, regional differences in costs and benefits, changes in technology over time, so called co-benefits (effects in health for example), differences in assumptions, etc. etc. etc. After all these confusing arguments, Morale concludes that whatever the estimates the costs are inevitable and getting higher the longer we wait. The good news is that, those estimates are still useful... as long as you know how to used them.

Global estimations are also misleading because they lack the geographical component: some regions will suffer the damages, other might even enjoy some benefits, and it is not clear who exactly should paid for the solution. However when these estimates are done with a practical intention they can be very useful and beneficial. A good example is Uruguay energy revolution (use the captions -> Translate captions to see subtitles in your language)

The economic analysis for energy source in Uruguay proved that a balance of 90% of renewable energy (75% in dry season) was the answer that gives lest cost and lowers vulnerability. Even without considering the environmental impacts, this option was decided to be the best and will be implemented in the next 15-20 years. This is a great example of how economic analysis can be useful and how environmental policies can also be economical and national security policies.

Well made, protecting the environment is not just a matter of principles, but it provides economic and social benefits that can make it a strategic investment for development.


If you want to get deep into the numbers, check the IPCC report Climate Change 2013: The Physical Science Basis (don´t worry there is a summary)

Sustainable Development: an aspirational goal?

Can Sustainable Development really be achieved or is it just an aspirational goal?

The most quoted definition of Sustainable Development comes from 1987's United Nations World Commission on Environment and Development report "Our Common Future" (commonly named the "Brundtland Report"), popularized at the 1992's UN Conference on Environment and Development, is "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs." Furthermore, it is recognized that sustainable development is a development that includes social, environmental and economic considerations.

However, after over 2 decades of globally recognizing the need for sustainable development, it is still hard to recognize what exactly we mean by those definitions. Several sustainable development indicators have been proposed to be able to recognize countries that are more sustainable developed than others, yet the results among different scales are sometimes contradictory (see Wilson et al, 2007 for a detailed comparison). This makes it hard to even recognize what sustainable development looks like.

The lack of an objective idea of what sustainable development is I believe comes from a very utopic vision of what sustainable development should be. The definition itself is almost impossible to achieve as meeting current needs without compromising future needs means that overtime (any kind of) resources should stay constant or grow, thus sustainable development is not a state but a process. That could explain why we haven´t find (and will never find) some situation that we can recognize as sustainable developed.

This is not necessarily a bad thing, the opposite actually. The fact that sustainable development is a moving target forces us to keep improving and becoming more and more sustainable. In this sense other more restricted programs can give solid steps towards this goal and have some sense of peace by objectively going in the right direction. Ideas like Green Growth, or Low Emissions Development Strategies bring more specific and achievable targets that promote sustainable development and can be an important step stone towards a sustainable future.

What is missing, ironically, is to update sustainable development by including an element implicit "sustainable" that is usually overseen: "steady state". This economic concept means that even if things are dynamic and changing, the indicators' levels stay at a constant level. If we can see this as the basic element of sustainable development, some indicators that measure not sustainable development per se, but "development" in general can be tracked and if they reach an steady state then we could have a measure of sustainable development.

So perhaps the reason why we haven´t found sustainable development is because we are looking for a state while it is actually a process, and as a process it will never be reached so perhaps instead of having the goal to attain sustainable development, we should have to goal to keep developing in a sustainable way.

• Wilson, Jeffrey, Peter Tyedmers, and Ronald Pelot. Contrasting and comparing sustainable development indicators metrics. Ecological Indicators 7 (2007) 299-314.
• World Commission on Environment and Development."Our Common Future, Chapter 2: Towards Sustainable Development"

Value Chain in the for-profit sector vs Project Cycle and Fundraising in the non-profit sector

While working in a paper comparing strategy theory and practice in the for-profit vs the non-profit sector I came to the following reflection that I wish to share and hopefully to get constructive comments about it.

For-profit organizations have as their core mission to generate profit through the production of a product or service, for which their receive money in exchange. This is done following a value chain (Research and Development -> Manufacture -> Marketing -> After-service) that transforms inputs into more valuable outputs, and over this framework every company bases their strategy as a way to achieve this in a more efficient way. There are some support activities that allow the for-profit organizations to perform this value activities (such as managerial activities)

Non-profit organizations have as their core mission to make a change based in some ideological premises. To do this they follow the project cycle (Identification of a problem -> Preparation -> Appraisal -> Negotiation -> Implementation and Supervision -> Evaluation and Feedback) which seeks to find and implement the best way to solve a problem (the nature of the problem depends on the ideological perspective followed by the organization).

Every non-profit organization follows the project cycle to achieve their mission, they have a second objective which is the survival which depends on get support to the organization. In theory securing support for the organization would depend on being efficient in creating impact which would bring support from actors supporting their ideology. In reality, this doesn´t happen automatically which require activities outside of the project cycle to get this support (fundraising campaigns, marketing of the results, etc.).

These "extra activities" are not part of the "core activities" of the organization, they are needed for their survival. In some cases these extra-activities might even create conflict with the core activities of the organization leading a non-profit to ethical decisions and probably forcing non-profits to balance their actions between conflicting interests.

A further interesting perspective comes from analyzing competition in this context. While the extra activities have the goal of getting the biggest possible proportion of a scarce (in the economic sense) pool of support (funds, resources, volunteers, etc.), the core activities of the non-profit deal with aspects that doesn´t necessarily face competition (if the change your non-profit is aiming for is made by a different organization, still the non-profit fulfills its mission). The competition in this core activities lies at the ideological aspect in terms of which is the impact that should be done, or what is the best solution to a give situation. Competition in the extra-activities can be compared to competition in the for-profit sector as they compete for a scarce good, competition in the core activities lies complete outside of this discussion.

So if a parallelism between the activities of for-profit and non-profit is made, perhaps it can be made in the following way:

• Research and Development  => Identification of the Problem, Preparation (design of the solution), and Evaluation and Feedback (partially)
• Manufacture => Appraisal (sharing the proposed project to get stakeholders acceptance), Negotiation, Implementation and Supervision
• Marketing => Fundraising campaigns and other public relations activities aimed to secure resources
• After-service => Evaluation and Feedback (partially) from the core activities perspective; public relations activities aimed to raise the status of the organization from the extra activities perspective

A key point of conflict for non-profit organizations lies in linking the outcome of the "Manufacture" with the goals of the "Marketing" since they serve to different goals. This may well be a crucial element in the strategy of a non-profit to guarantee its survival and grow while achieving its mission.

Bigger or more efficient economy?

Conventional economic wisdom says that lowering the price would increase the demand, so when a country is seeking more investment they might try to lower the interest rate on the credits to make people to get more credits to invest more.

However, this doesn´t consider the quality of the investments being made. Having a low "money price" this way can lead to people valuing money less and thus putting less thought on how to use it. This could lead to risky or bad investments that won't improve the economy in the way more investment is expected to. The opposite happens with high interest rate, or at least it seems so from the microcredit experience.

Microcredit are small loans given to low-income people who wouldn't satisfy the requirements of a normal bank to get some credit due to the lack of properties. In order to guarantee that the borrower can be trust they borrow in groups in small communities in such a way that if one in the group doesn´t pay back, all the group is affected (not getting future credit for example). Furthermore they sometimes reduce risk by starting with very small loans and increasing them as the group pays on time. One characteristic is that micro-credit usually have much higher interest compared to other credits, sometimes over 30%. Despite this, the payment rate is very high, reportedly between 95-98%. Microcredit is used to help low-income people to improve their situation by allowing them to start small business. There are critics about this, but the general idea is that low income people need little money to do simple economic activities that can help them get out of poverty. For example, by borrowing $50 a woman could buy chickens and sell the eggs. The chickens reproduce so she can eventually also sell chickens. Even if this is a small business the returns of investment are really high, and it might give enough profit to sustain a family.

So the logic of why microcredit works despite the high interest rate is that people know they have to make a big payment for the money they are getting, so they only get the money if they have a investment opportunity with a good return of investment. If this is true, this would lead to a much smarter use of money and thus an improvement in the overall efficiency of the economy.

So is it better to have a bigger economy or a more efficient economy? Both would be the quick answer, but by increasing the supply of money, its price goes down so there are less incentives to use it in a more efficient way. So perhaps policy that promotes a bigger economy would reduce the efficiency of it.

Bigger or more efficient economy? which one do you think is better or in which conditions one is better than the other one?



Reference and more information about microcredit:

• http://www.grameenfoundation.org/what-we-do/microfinance-basics

Government: to rule or to serve?

Here comes the by-yearly post of this blog!!!!
Just joking... these days I'm doing research on Green Growth so I'll try to update this blog more often in that topic

This morning I had a thought I wanted to share and maybe hear some comments. Governments are so ubiquitous and yet there´s no definitive conclusion as their role in the different aspects of a nation. Several theories support fairly opposite points of view as can be seen from Capitalist vs Socialist in the role of governments in the economic sector, or Realism vs Liberalism vs Constructivism in the role of governments in the international arena. Few, if any, points are accepted by all the people who study this themes, and as normal (and even likable) can this sound for a political scientist, to my engineer mind this is ridiculous, even my managerial side says at least a fairly open framework should be clearly defined and agreed to be able to at least talk about this topic. You can even say that governments are a social construct created in everyone's mind, projected into a social concept space that is imperfectly applied in the set of laws, institutions, organizations, etc. and thus it can't be defined.

So by taking advantage of this common practice of evolving new ideas and putting them in the table without really aiming to build up on previous attempts but more like trying to convince as much people to see the world in my way. Furthermore, differences in conceptualization are important to create change and this is probably the main reason why I think this idea is probably a bit better than the usual ones that I have. What I want to put here is my initial thoughts about how the relationship between the government and society should be.

Usually government is thought as an entity that rules over society. In different ways or different objectives, it is the government who has the authority, in many cases given by society, to basically set the ground for everyone to live. This pyramidal or top-down structure is present even in the most advanced democratic systems where decisions are overseen by society but the function of the government is the same. However, this seems to me a bit an outdated perspective that even doesn´t match with some of the current actions of governments. These days, rather that promoting a collective behavior, many efforts are focusing in the individuals. Human rights, special infrastructure for handicaps, differentiated education, no discrimination, ethnic wars, you name it... many of the practical aspects in which governments all over the world are struggling are about how different people should be different better. Problems between different ethnic groups, races, social levels, and such are probably the consequence of the previous trend of letting everybody do what they want called freedom (which as surprising as it sounds, was not so important a few hundred of years ago, when being part of a group was critical for survival so control was accepted).

I think that government, instead of being a giver, should be a supporter of the people.

If governments aim to support the individual goals of all the people in a society, then you'll have a system that offers you better opportunities. This, however, gives back to the people the responsibility of survival, which is risky, but still that match the elections of many people today, who are eager to detach from their original countries and pursue education or work in a different place. Government should then offer them better means to be successful as the only way to make sure successful people will stay in a country and make it better. Even if migrants might still be a small proportion of the population, the impact of this trend is impressive in some small towns where most men already left searching for better opportunities.

Now, one important clarification is that by government I don´t mean just the people in power. Through all this post when I refer to government I mean the whole system that governs, which includes the people, the institutional structure, and the legal framework. The change in the conceptualization should not be understood as a change of policy, but as a change in the "utopic" vision of what a government should be that would lead the evolution of a government in that direction. As such this can´t be a quick change, but it must be a deep one. Concepts as fundamental as the geographical designation of leaders (local, regional and national) should be rethought, maybe thematic leaders would make more sense?

An important effect of this conceptualization is that government will no longer fail to provide to its society, but will offer different means of support. So for example, a specific social group might require some particular infrastructure. In current conceptualization, they are citizens of a country and the government should provide them with the basic elements to develop their activities, otherwise this group would vote or fight against the ruler. In the new conceptualization, government would do its best to provide the means they need to keep them in his territory and to make them develop, which in turns gives benefits to the government in terms of increased tax or stronger position. Providing services becomes a strategic decision for the government, rather than a requirement to be fulfill. Citizens are no longer allowed to demand services since they can move to a different country to get them. This seems to match better what is happening today and in the long term could lead to a increased efficiency through specialization and competition in the "international market" of governments. 

Using market mechanisms to guide governmental development seems scary at first sight, as capitalism lack any moral grounds that could be considered important for governance. However, wouldn't this be the ultimate democracy? One where people accept and support the government with their action of living in their territory. In this sense the specialization doesn´t happen only in the services offered, but also in the kind of people that live in different areas. Common wisdom says that pleasing everyone is impossible, however if you group in different areas people with similar tastes and then you offer them what they want in a differentiated way, it can be done. This is the ultimate vision and not something that will actually be achieved perhaps, but the underlying idea that could guide the evolution of governance in the future with the ultimate goal of improve as much as possible the quality of living of everyone.