Trump and the California clean air waiver

James Sallee has a nice analysis here. Galling as it is to see Trump trying to revoke California's waiver, which allows the state to impose more stringent gas mileage standards than the national, Sallee suggests that the damage was really done when Trump rolled back the national standards imposed by Obama. The reason has to do with the way the federal CAFE standards interact with California's:

The federal greenhouse gas rule for automobiles, called Corporate Average Fuel Economy (CAFE) standards, require automakers to sell vehicles that, on average, have fuel economy above a certain threshold. If California has its own, stricter greenhouse gas rule, the cars sold in California still count as part of the federal fleet under CAFE. This means that every Leaf, Prius and Tesla sold in California improves the industry’s federal average. That enables automakers to sell more Mustangs and Suburbans in the rest of the country, which means that much, if not all, of the greenhouse gas mitigation that takes place in California will be offset by increased emissions throughout the nation. 

The application of this so called “waterbed effect” to California fuel economy standards was described elegantly in a paper by Larry Goulder, Mark Jacobsen and Arthur van Benthem back in 2012. They studied the implementation of a California-specific fuel economy rule and concluded that between two-thirds and three-quarters of emissions reductions in California would be offset by increases in other states. In the meantime, the burden of complying with strong regulations would fall on Golden State consumers.

At any rate, the issue is now in the courts– of law and of public opinion. The best rule change would follow regime change in the White House.

Was cap-and-trade for SO2 actually worse than command-and-control?

One thing we teach our students in environmental economics and other policy-related courses is that market-based pollution regulation is a great idea: it can be expected to deliver the same reductions in environmental damages as more rigid "command-and-control" regulations at substantially lower cost. Hence economists' strong advocacy of a carbon tax or cap-and-trade for fossil-fuel emissions. (Pope Francis, are you listening?)

Economic theory suggests why cap-and-trade is efficient: The government limits the total amount of pollution by limiting the number of permits to pollute that it issues. Then, firms that can reduce pollution at low cost have an incentive to do so, and sell their excess pollution permits to firms with higher abatement costs. Same overall pollution reduction, less total cost. And that's not all! We have always been able to point to evidence that it really works: the highly successful cap-and-trade program for SO2 reduction implemented by the EPA to cut acid rain.

Now along comes this paper by Chan et al, which if I read it correctly estimates that the SO2 trading scheme was on net actually quite a bit worse than a counterfactual uniform performance standard (command-and-control) that would have achieved the same aggregate emissions. While it's true that the power plants achieved the emissions reductions at lower total cost, these gains were more than offset by worse pollution damages in the form of adverse health consequences. (Side note: the major gains from cleaning up coal did not come from reducing acid rain, but from reducing health problems associated with particulates, etc.)

What went wrong? This finding points to a well-known potential problem with cap-and-trade systems. If it matters where the pollution goes, then administering a permit system that covers a wide area may sometimes lead to more pollution where it does more damage. In this case, the dirty eastern coal plants bought permits from their western counterparts, allowing the eastern plants to pollute more, as the western plants polluted less. Unfortunately, more people live downwind of those eastern plants. It would have saved more lives to force both the eastern and western plants to reduce their pollution by a uniform amount. (Now that we know there is a problem, there are well-known partial fixes to this problem—for example restricting permit trading to a "bubble" within a certain affected region. What is most interesting here is how important these effects turned out to be in practice.)

Now, back to climate change. Fortunately for carbon cap-and-trade (or a carbon tax), the damages associated with greenhouse gases are truly global in scope: The CO2 goes up into the atmosphere, spreads around, and warms the whole planet. So the localized damages are not a concern when it comes to climate change policy, and market-based solutions look pretty good again. Francis, are you still paying attention?

BUT... One caveat. One can never lose sight of the extraordinary, more localized impact of burning coal in places like China, where particulate air pollution causes hundreds of thousands of premature deaths annually. Pricing carbon globally is not the answer to that set of problems.

Regulation and pollution havens

One concern about environmental regulation is that "dirty" industries will simply move to less-regulated countries (so-called pollution havens). For example, metal smelting could move from the United States to China. If so, the United States would be cleaning up at the expense of China getting dirtier. Now if China were willing to put up with the pollution for faster economic growth, we might view the situation as win-win... assuming the Chinese decision-makers represent the interests of their people, more or less. But even under that rosy scenario, it's not necessarily win-win if some of the pollution has global impacts, such as greenhouse gas emissions. Then the United States still suffers from China's emissions.

If the pollution haven effect is empirically important, it should be the case that much of the reduction in pollution in, say, the United States, is the consequence of a shift in the composition of U.S. output away from dirty industries toward clean ones, with the dirty products now being produced abroad and imported. Contrary to this hypothesis, however, the evidence suggests that the lion's share of pollution reduction in the United States has occurred within industries, through changes in technique, as is shown quite elegantly in a new paper by Arik Levinson. (Access to the paper is by subscription, but you can view the abstract here.) As Levinson writes in his conclusion:

This simple exercise demonstrates a remarkable change over the past two decades. Air pollution emitted by US manufacturers has fallen by two-thirds, and that cleanup has almost entirely come from reductions in emissions intensity of each of the more than 400 industries that comprise the manufacturing sector rather than from shifts in the shares of those industries in overall manufacturing output – from technique rather than composition...

... the finding runs counter to perceptions about the effects of environmental cleanup in US manufacturing. While I don’t assess the cause of that cleanup here, one natural speculation would be that it has resulted from environmental regulations. If so, those regulations have not worked by reducing the share of polluting industries in the US manufacturing sector – driving those industries overseas or reducing consumption of those industries’ products. Instead, they have worked by reducing the emissions intensities on an industry-by-industry basis. That finding should be welcomed by anybody concerned that US regulations might appear to be succeeding, but only by reducing the menu of products available to American consumers or by shifting pollution from the US to other countries. The results here directly refute that concern.

In other words, while there are good reasons to be deeply concerned about pollution in China (and elsewhere), for the sake of both the Chinese and ourselves, concern that domestic environmental regulation is being nullified by global trade is probably misplaced. Which is good news.

Activated sludge

This would be a great name for a metal band, but it happens to be the key process used in treating urban wastewater... i.e., sewage. An affection for sewage treatment runs deep in my veins (bowels?), as my father, a retired professor of chemical engineering, specialized in researching wastewater treatment for many years (in fact, he wrote the book on it). Among his favorite aphorisms were, "Water, water, every where, nor any drop to drink" and "It may be shit to you, but it's bread and butter to me." Anyway, effective and efficient treatment of wastewater probably deserves a place among the most important advances of human civilization.

On our sustainability tour in Spain we visited one of Seville's EMASESA treatment plants. Our friendly and knowledgeable guide Enrique Toro did his best to explain what was happening, given the language barrier. One interesting thing they do at EMASESA is to use an anaerobic process to obtain methane gas from the sludge. This provides a large percentage of the energy for the plant.

The real action takes place in the activated sludge reactors, where the bugs, as they are known in the business, eat the crap out of the crap, quite literally. Maintaining a healthy culture of bugs is a major task of the plant's employees. Here's where it all goes down:

After the sludge does its work, it settles to the bottom and the clear water flows from the top, in this case in large very humid geodesic domes:

The resulting treated water is not of drinkable quality but is more than clean enough to release into the Guadalquivir River. Old dead sludge that is not consumed by the next generation of bugs, known as "bug bones", is composted for fertilizer. Neat!

Most people don't appreciate how much of modern life depends on the deployment of bacteria and other microorganisms. It's not just the human biome, which is essential to health (90% of your cells are non-human), but the role of biological decomposition, fermentation and related processes. Up next: fermentation on a grand scale...