An Even Sterner Review

A nice paper by Sterner and Persson points out that analyses like the Stern Review do not take into account the possibility that the prices of environmental goods will rise relative to those of anthropogenic goods and services as they become scarcer. They replace the standard utility function in Nordhaus' DICE model (which assumes infinite substitutability in consumption between environmental and non-environmental goods) with a function that assumes that the elasticity of substitution in consumption between environmental and consumption goods is 0.5. The lower the elasticity of substitution is the steeper the relative price rise will be for a given increase in scarcity. They find that using Nordhaus' high 3% rate of pure time preference results in optimal emissions falling below those based on the Stern Review assumptions by 2080:



and falling to zero before the end of the century.

I've long thought that limits to substitutability in consumption between environmental and non-environmental goods are important. Philibert's article in the ISEE Encyclopedia makes the point that the rising relative price of environmental assets might well negate the effect of discounting on the value of future environmental damages. This paper was on the reading list for my environmental economics course at RPI because the concept didn't seem to be covered elsewhere. The rising value of environmental assets over the course of economic growth was first raised it seems by John Krutilla in his famous paper "Conservation Reconsidered".

Economics: The Open Access, Open Assessment E-Journal

I'm probably late to the party here but have just been looking at the website of Economics: The Open Access, Open Assessment E-Journal. It is an effort to increase access and speed up the refereeing process, which is notoriously slow in economics. The journal has attracted a strong advisory and editorial board and is getting a good share of citations as measured by RePEc.

Only Six Days Left To Go

To vote in my climate change poll! The question is: "How much higher or lower than today do you expect global greenhouse gas emissions to be in 2050?" Note the "global" and that I want to know about "emissions" not "concentrations in the atmosphere". So far 25 people have voted and the distribution is bimodal - people seem to expect change in one direction or the other. Next week, I'll provide a final report on the poll.

Bad Use of Citations

A paper in the British Medical Journal by Steven Greenberg examines the use of citations around a meme in the medical literature. The meme was that beta-amyloid protein "is produced by and injures skeletal muscle of patients with inclusion body myositis". Apparently this is false, but a huge number of papers state that it is true. From the abstract:

"Design A complete citation network was constructed from all PubMed indexed English literature papers addressing the belief that β amyloid, a protein accumulated in the brain in Alzheimer’s disease, is produced by and injures skeletal muscle of patients with inclusion body myositis. Social network theory and graph theory were used to analyse this network.

Results The network contained 242 papers and 675 citations addressing the belief, with 220 553 citation paths supporting it. Unfounded authority was established by citation bias against papers that refuted or weakened the belief; amplification, the marked expansion of the belief system by papers presenting no data addressing it; and forms of invention such as the conversion of hypothesis into fact through citation alone. Extension of this network into text within grants funded by the National Institutes of Health and obtained through the Freedom of Information Act showed the same phenomena present and sometimes used to justify requests for funding."

I've seen a lot of these things going on in economics, including the misrepresentation of my own work on the environmental Kuznets curve meme :) I'm probably guilty of some these practices myself too. And then there is a comment I wrote on someone's paper that I submitted to a journal but that was never published. I thought it would be published and so cited it in one of my papers. The comment has been cited by three people so far according to Google Scholar though the only place the paper actually exists is on my computer.

HT: Peter Martin

Climate Change Institute Open Day

Today, I attended the ANU's Climate Change Institute Open Day. There was a mix of natural and social science presentations ending with a 1 1/2 hour panel discussion featuring Tony McMichael, Warwick McKibbin, Kylie Catchpole, Andrew McIntosh, Brendan Mackey, and Ian Fry. I've found that seminars related to climate change often attract questions from climate change activists or deniers which aren't at all interesting, but I was very impressed today by the quality of both the questions and the responses of the presenters to them. I asked Andrew Blakers about what he thinks about thin-film photovoltaics (PVs). I often hear about how advances in this area are bringing down the cost of PVs but on the other hand the fact that some of these technologies use relatively rare and sometimes toxic elements is a potential issue. He deemed them a "sideshow". Which is more or less the response that a consultant friend in Hong Kong gave me when I asked him the same question last October.

Why Most Published Research Results are False

A dramatic title to a paper published by John Ioannidis in PLOS Medicine. The arguments seem to be really a variant on the publication bias argument familiar in the economics meta-analysis literature. Imagine a field of study where there are no true relationships among the variables. For example, imagine that no drugs actually have an effect on a particular disease. Different researchers test the effects of different drugs on different groups of people. If they set the significance level for a test of whether an effect is present at 10%, say, then 1 in 10 researchers will find a positive result. If only those researchers who find something publish their results the literature will claim an effect when none really exists. This is publication bias. A meta-analysis that treated all the drugs as equivalents and included all trials or controlled for publication bias might help answer this question more correctly.

But even if all the studies were published would you conclude that it was just noise or that the one drug that seemed to have an effect actually had one? More tests of that drug will help settle the issue - replication. Ioannidis argues that in many areas of medicine there are few true relationships and published research exaggerates the likelihood of some effects existing.

This is probably less of a problem in economics where the focus is more on the size of an effect (despite McCloskey's claims) (though see Granger Causality, unit root testing, spurious regressions etc.). But meta-analysis does show us that the size of effects in many published studies may be near meaningless and that the true confidence intervals around those estimates are much larger than those formally found by the researchers. Large sample sizes and appropriate estimators are necessary for obtaining estimates that are at all meaningful.

Book Review: The Chinese Economy: Transitions and Growth

I have been reading The Chinese Economy: Transitions and Growth by Barry Naughton. It seems to be a nicely balanced objective survey of the Chinese economy covering both its evolution, especially since the key dates of 1949 (founding of the PRC) and 1978 (beginning of liberalization). As the author writes, most commentators seem to either over- or under- estimate China. And as other commenters on the Amazon website say, it is very interesting to read. One of the many things I learnt which I hadn't really realised before is how much economic growth there was in China from 1949 to 1978 though it was largely focused in the (at the time) small urban sector. What happened post 1978 was a doubling of the growth rate rather than the beginning of the era of modern economic growth.

As far as criticisms go, I think the book could benefit from more maps - there are six, five in the early part of the book and one in the final chapter (on the environment) - and some key charts are omitted. I can't remember seeing a chart of GDP or its growth rate over the entire 1949-2005 period (Fig 18.1 does include per capita income from 1953-2000 as part of a chart of the rate of household saving). There tend to be separate charts for many variables for the pre 1979 and post 1979 periods. There is nothing on the transformation of the built environment, especially in the residential sector or other components of changing living standards such as ownership rates of various consumer goods, nutrition etc. Well, I guess it's hard to cover everything about the world's largest country in one book :)

The final chapter cites my argument that the environmental Kuznets curve model does not really explain what is going on in developing economies but then claims it still might be useful to understand what is going on in China despite the evidence marshalled showing that China is working to turn things around environmentally at a relatively low income level.

ANZSEE Conference: Darwin, October 2009

I just submitted my abstract to the ANZSEE Conference in Darwin. Rich Howarth and Bob Costanza are supposed to be attending. The last ANZSEE conference I went to was at Griffith University in 1999. I was ANZSEE treasurer then. I've never been to the Northern Territory so that should be interesting too. And I'm hoping my wife will be able to present at the conference too.

What is Your Erdös Number?

Paul Erdös was a Hungarian Jewish mathematician who published a very large number of papers with a total of 511 collaborators. Those collaborators are assigned an Erdös number of one. Those who collaborated with them but not with Erdös have an Erdös number of two and so forth. Economics Nobel Prize winner Eric Maskin has an Erdös number of two and as a result Partha Dasgupta and Kenneth Arrow have Erdös numbers of three. As I've published papers with people who published papers with Arrow and/or Dasgupta (Charles Perrings and Bob Costanza) my Erdös number is probably five.

Between Estimates of the Environmental Kuznets Curve

I submitted this paper to JEEM today. It follows up on a paper published earlier this year in the journal by Vollebergh et al. They argued that existing estimates of the environmental Kuznets curve are contingent on the treatment of the "time effects". Traditional panel data regression estimators assume that there is a different intercept for each country and often that there is a intercept for each time period which is common to all countries. Instead, one could assume that there is a different linear time trend in each country. Neither assumption though is likely to be true. In general the state of technology will be a different "stochastic trend" in each country.

Vollebergh et al. address this problem by assuming that the time effects (and the function of income) are the same in each most similar pair of countries in the OECD. For example, Belgium and the Netherlands. This allows a lot of heterogeneity across countries. But it isn't entirely unconstrained.

My approach is to use the "between estimator". First we find the mean of each variable over time in each country and then we carry out the regression on the means. The time effects are thus converted to constants (and any serial correlation in the residuals is also wiped out). We can, therefore, estimate the long-run coefficients of the model while making no assumptions about the nature of the time effects or the residuals.

This chart shows the time effects estimated using the between estimator for sulfur emissions in the OECD (I only show twelve of the trends to keep things simple):



(the y-axis is measured in natural logarithms). The lower the trend is the cleaner the country is on an income-adjusted basis. The results are pretty similar to those in my 2005 paper where I used a much more complicated structural time series model of a production frontier to estimate the trends.

Applied econometricians have largely shunned between estimates because either they think that they throw away a lot of information (I used to be in this camp) or they are worried about a potential correlation between the residuals and the regressors due to omitted variables. However, econometric research, discussed in the paper, shows that the traditional fixed effects estimator is just as likely to suffer from this problem and that the between estimator performs very well in realistic Monte Carlo simulations.

I'm planning to use this estimator for my ongoing Environmental Economics Research Hub project.

Citations to Book Chapters

There are very few. At least that's what I've found so far in my career. Only around 1.5% of the citations I've received are to the book chapters I've published, though I've published something like 14 of them (including chapters in encyclopedias like the Encyclopedia of Energy) which is more than a third of the number of journal articles I've published. About 11% of my citations are to working papers and other online publications, like my chapter in the ISEE Online Encyclopedia. I think this shows the importance of electronic access to publications. I usually only consider writing a book chapter as a draft for a journal article.

China and Japan Dominate Alternative Energy Innovation

This chart from a Thomson-Reuters report on patenting activity in alternative energy compares 1997-1999 with 2006-2008. EP is patents submitted to the European Patent Office. The most obvious trends are the amazing growth in Chinese activity (and to a lesser extent American, Korean, and British interest) and a swing towards wind energy innovation. The report also splits patenting among origins in large companies, small companies and the academic-government sector. Chinese and Japanese universities completely dominate the latter sector. And almost all of the activity is very recent.

A second report reviews patenting for related technologies:



Here Japan is the leader and has greatly increased its activity. China has also dramatically stepped up R&D but remains in 3rd place. Chinese universities again have a plurality of the academic-government R&D but are less dominant than for in the solar-wind-marine energy nexus:

China Update 2009

Today I attended the 2009 China Update at ANU. It's a day of presentations by researchers from Australia, China, and the US on the latest economic situation in China. We received a book edited by Ross Garnaut, Ligang Song, and Wing Thye Woo containing most of the papers presented. However, the best two presentations of the day, in my opinion - the first and last presentations of the day, aren't in the book.

The first one was by Wayne Swan, the Australian Treasurer (Federal Finance Minister). Maybe it wasn't that good, but after sitting through various boring such presentations by other politicians in the past I thought this was the best I'd seen. Most politicians go through endless lists of legislation and spending decisions relevant to the conference topic that they have been involved with and then take no questions. Swan talked at a higher level about the goals of government policy and then took ten minutes of questions which he answered extremely well with none of the usual political evasions.

The final presentation was by Li Cheng of the Brookings Institution. He presented an analysis of the two major factions in the Chinese Communist Party and the role of the "fifth generation". The presentation was entertaining and interesting and filled out my picture of political issues in China. He also expressed the opinion that the CCP will collapse peacefully within 10-15 years as "none of the children of the current leaders are involved in politics".

Presentation: Monday 13th July

I'm giving a presentation at the School of Economics, University of Queensland, tomorrow - Monday 13th July at 11:00am, Room 114 Colin Clark Building. The slides are here.

Vaclav Smil

I'm having a look at a recent book by Vaclav Smil: Global Catastrophes and Trends: The Next Fifty Years . I'm very surprised to find that there is no Wikipedia article on Smil. I'm also a bit shocked by his criticism of other authors. On Jared Diamond's Collapse, he writes: "a derivative, unpersuasive, and simplistically deterministic book". Almost at in the same class as Taleb. The book is a lot more reasonable than George Friedman's efforts. Generally, I agree with most of Smil's assessments of current and future trends - for example peak oil is probably less imminent and less serious a problem than the doom and gloomers think - though I find myself somewhat less pessimistic - for example on the relative decline of the United States.

Presentation Slides

As promised, here are the slides for my presentation on Monday from the image above. It's not as long as it seems because several of the slides are duplicated to allow me to put bullet points one after the other onto the screen. But it still seems too long for my time (40 minutes + questions) so I may yet make some changes.

Economics Search Engine

Maybe a bit anti-interdisciplinary, but here is an economics search engine.

Posting this reminded me of koogle - the ultraorthodox Jewish search portal (whose English search engine doesn't seem to work). But it certainly could be useful if you don't want to read about the NBA Commissioner :)

Job Talk Abstract

Here is the abstract for my upcoming presentation:

Modelling Global Trends in Emissions and Energy Efficiency

Abstract
The environmental Kuznets curve has been a popular simple model of the relationship between economic growth and environmental quality. It is plagued, however, by significant econometric issues and explains relatively little about the differences in emissions between countries. In this presentation I will: 1) present an improved version of the EKC that overcomes the econometric issues, 2) present an alternative approach based on production frontiers including results for sulfur emissions in the OECD, 3) discuss modelling the factors that affect a country’s choice of energy or environmental efficiency.

Roger Pielke Jr.

I'd never heard of either Roger Pielke Sr or Roger Pielke Jr until I read very critical commentary on both of them on the Climate Progress blog. I've looked through a lot of Pielke Junior's blogposts, his paper in nature with Wigley, and slides from a recent presentation he gave. Most of what I read seemed entirely non-controversial from my perspective. In no way is the guy a "climate denier". Rather, he seems concerned that:

1. Proposed policy is too ineffective and instead more measures should be taken to directly encourage innovation.

2. Scientific results are used incorrectly by many climate policy advocates. This reduces the credibility of science in the eyes of the public when they realise "they've been had".

So I don't see what all the fuss is about.

BTW on the question of the jokes Romm uses I get both the references though I've never seen Dr Strangelove (I was born the year it was released - 1964 in London) and never read the novel about Ripley (I've only heard the catchphrase due to the movie of it which I haven't seen either). I'm pretty sure my wife (born 1975 in Tianjin) wouldn't get either reference :) Literary allusions are hard to pull off in this internet age...

Another Climate Policy Poll

John Whitehead ran a survey on RESECON asking:

"Considering two economic incentive-based environmental policies that could
be used address climate change, which do you prefer?"

Not so surprisingly, unlike the general public, the majority of respondents preferred a carbon tax:



Dale Jorgenson also prefers a carbon tax:
.

Designing a Job Talk

I just heard this afternoon that I have a job interview on Monday. The deadline was just last Friday! I've never seen an academic job search move this fast. Anyway, I now need to prepare a presentation for Monday. I'm somewhat dissatisified with the last two presentations I did as bases for this one. This post will be something of a stream of consciousness thing...

One I did in March was on elasticities of substitution and covered material from at least two working papers - one on different definitions of elasticities of substitution and the other on meta-analysis of interfuel elasticities of substitution. The latter part of the presentation would need a lot of revision anyway as I substantially rewrote that paper between getting rejected by The Energy Journal and submitting to Energy Economics. I didn't get that job and I feel that the topic of that presentation may have seemed a bit too esoteric.

The second one was more recent in my current department where I provided an overview of my planned research under the Environmental Economics Research Hub. The problem with that one is that I mainly presented old results and plans for future research. I think it went across OK in the context of introducing myself to my department but I think this new presentation should be more about recent results. I do have some preliminary results from my Hub research but they aren't on the core things I plan on doing yet. Instead they are results of applying an estimator - the between estimator - that my meta-analysis research persuaded me is most appropriate for estimating essentially dynamic models in panel data - to the standard environmental Kuznets curve.

I thought of combining parts of the two together but I couldn't come up with a good title. That was a warning sign to me that there would be an issue for the audience in trying to follow what I was doing! I then went on the web and read a bunch of articles about preparing a "Job Talk". This reminded me that I need to put things into a broader context of both the field and my future research and that I need to appeal to a wider audience than might come to a conference presentation. I knew these I guess but it's nice to be reminded. Given this, I'm going to revise the second presentation, which should be less work too. I'll post my slides when I'm done.

Sensitivity Analysis of Climate Policy

Dale Jorgenson et al. did do a sensitivity analysis of their climate policy CGE model in 2000. They found that imposing zero substitutability between inputs had a big impact on the estimated costs of emissions reduction policies compared to their base case model. The impact depended on what they assumed the government did with the revenue from a carbon tax.

When they assumed that the revenue from a carbon tax was "recycled" by paying equal lump sums to all individuals, the price of carbon permits was four times higher over the 2000-2060 policy period and the decline in GDP was twice as much under no substitutability as under the base case.

When they assumed that the carbon tax revenue is recycled by reducing marginal income tax rates their model yields a "double dividend"* - GDP increases in the base case when a climate policy is imposed. And it increases four times more when no substitutability is allowed than when it is!

* The double dividend refers to climate policies that not only improve the environment but also increase GDP by cutting existing distorting (inefficient) taxes (like the income tax) using the revenue from a carbon tax. This has been a very controversial issue as things are not this simple.** My impression is that the consensus is that there is no double dividend in practice but that a revenue neutral carbon tax or auctioned emission permits accompanied by cuts in income taxes is superior to the government giving away permits for free (and therefore being unable to cut other taxes) or using the carbon tax to pay out dividends like the Alaska Permanent Fund as suggested by James Hansen.

** This is one of the papers I set my students at RPI on the topic

What Do the Mitigation Policy Models Assume about Interfuel Substitution? And is it Important?

In my previous blogpost I commented that the elasticity of substitutions between fuels and between energy and capital were likely to be very important in estimates of the costs of emissions reduction policies. I've been trying to find support for, or evidence against, this hypothesis.

Bhattacharya (1996) writes: "It is generally agreed that the elasticity values are the single most important parameters that affect the results. In the economic literature, there is little consensus about different elaticities for energy products." (p159) He notes that some modelers have used sensitivity analysis. It would be nice if he noted which ones :)

Pezzey and Lambie (2001) reviewed a number of Australian CGE models used in climate policy research. Though they differ in the specifics most have low degrees of substitutability between fuels. The GTEM model developed by ABARE and used by Treasury in their advice to government has less substitutability than G-Cubed (Treasury used GTEM, G-Cubed, and MMRF in their research).

Anyway, it looks like I should add sensitivity analysis of climate change policy modeling to my research agenda.

Interfuel Substitution and the Costs of Climate Change Policy

A meta-analysis is an analysis of existing empirical studies rather than another original primary study. The aim of a meta-analysis is to find out what is the average size of some parameter or effect in the existing literature - for example the average estimated damage from climate change or the elasticity of demand for gasoline - and what are the factors that cause there to be differences between the various studies.

The interfuel elasticity of substitution indicates how hard it is to replace one fuel with another when, for example, the price of one fuel goes up.* My meta-analysis of 46 empirical studies of this issue finds that at the level of individual industries it is probably not so hard to substitute between fuels (the elasticity of substitution is greater than one). At least some of the models, for example the G-Cubed model, used to assess the costs of climate change policy assume that it is a lot harder than this.

As far as I understand, this should mean that they overestimate the costs of climate change policy. The harder it is to replace fossil fuels with electricity or coal with natural gas the costlier it should be to adjust to a carbon tax or cap and trade scheme. But how sensitive are their results to the values of parameters such as the interfuel elasticity of substitution? Is there any research on this out there? (Yes, please point me to it!) Or is this a topic I should include in my research agenda? In fact I've been surprised in the past (back when Mick Common and I were debating ABARE in the run up to Kyoto) that the estimated costs of climate change policy aren't higher given the low substitutability assumptions built into these models.

* It's more complicated than that of course :)

Wordle

Wordle is a fun website which allows you to convert text into "word clouds". I used Wordle to create this graphic by pasting my entire PhD dissertation into the applet :)

The Public Prefers More Economic Pain

Of course they don't see it this way. A large majority of the US public support regulation of greenhouse gas emissions. Fewer support a cap and trade scheme and I'm sure even less support a carbon tax. A carbon tax with few exceptions and recycling of revenue by cutting existing distorting taxes is under the uncertainty of the real world the most economically efficient way to reduce carbon emissions (and with support for innovation in energy efficiency and carbon sequestration research maybe even better). Regulation is the worst. Yes, a real world carbon tax will probably have as many holes in it as Waxman-Markey or the Australian CPRS...

But a carbon tax is the most in your face and regulation the least regarding the costs. People prefer the nasties they don't see. Of course, there's nothing novel in this "political acceptability" is accepted as a key factor in explaining existing environmental policies and designing new ones.

Climate Change Lunch

We met today for the monthly "Climate Change Lunch" that we hold at ANU - if you are in Canberra and interested in meeting to discuss climate change policy and economics please contact Jack Pezzey. Among the topics we discussed was my poll. In particular, we wondered why the distribution is bimodal. There are positive responses and negative responses, but no-one chose the class "0-25%". The one person who chose "no change" was me :) The mean response is -1%. We didn't come to any firm ideas about the clustering of responses. If you have any idea post it in the comments here. You can still vote in the poll too.

We did discuss the possibility of a collapse in human population driving lower emissions. I said that the only way I saw that happening in the next 40 years was from some new pandemic disease. Jack Pezzey pointed out that those most likely to die from any climate stress related population decline are probably fairly small per capita emitters in the poorest developing countries so that this wouldn't have a big effect on emissions.

Does the Grant System Discourage Innovation?

Many of those interviewed for this New York Times article think so. I believe the same applies in many or most scientific fields. The majority of the comments also support that view. Even the supporters of the current U.S. process seem to be agreeing with Winston Churchill's comments on democracy. An alternative often mentioned in the comments is to support strong individuals rather than strong proposals. My impression is that the ARC (Australian Research Council) leans much more in this direction than the U.S. funding institutions do through Future Fellowships, Federation Fellowships, and other fellowships in the Discovery Program. Another interesting proposal was to give applications an initial screening for completely bad proposals and then award the money among the acceptable proposals by lottery. Nobody cited any academic research on the grants process but I am sure there must be plenty?

Delays for Clean Coal

Interesting article by Gregg Easterbrook on delays in implementing more energy and carbon efficient approaches to electricity generation from coal. It sounds like perverse regulation is getting in the way of what the market is willing to do...