Gross Domestic Product (GDP) is broken. Robert F. Kennedy said as much in his first major presidential campaign speech. Simon Kuznets, the father of GDP, acknowledged its shortcomings. GDP is an imperfect indicator of human well-being at best, and outright misleading at worst.

Still, we shouldn’t scrap GDP and start over.

Up to a point, GDP does tell us important facts about people’s lives, livelihoods and aspirations. Living on a dollar a day is miserable no matter how you look at it.

Choking on economic growth, of course, is equally bad. There are a few simple, well-established steps we ought to take to bring GDP closer to where we should be. That, by the way, isn’t “Green GDP” or “green accounting.” It’s honest accounting.

Start with accounting for the true value of natural assets still in the ground. We don’t “produce” coal. We extract it. And the fact that the ton of coal extracted today is no longer there for the taking tomorrow should show up in our national income accounts. A ton of West Virginian coal adds about $30 to GDP. Honest bookkeeping would decrease that amount to $15. The same holds for oil, trees, water and all the other valuable natural assets that fuel our economy but are largely treated as free in our GDP accounting.

Then quickly move on to pollution. Every ton of coal, every barrel of oil causes more in external damages than it adds value to GDP. Properly measured GDP ought to reflect that fact.

In the end, policy makers should expand their horizon and look at a dashboard of indicators to get a fuller picture of the true state of the economy, society and the planet. Yet when it comes to GDP itself, the name of the game is fixing it rather than scrapping it. We know how to do that. The U.S. Bureau of Economic Analysis is at the ready. Let’s have a go at it.

See the original post on ensia.com for a perspective from Sir Partha Dasgupta, Frank Ramsey Professor Emeritus of Economics at the University of Cambridge. 

The Office of Management and Budget is nerd heaven: a bunch of people getting their professional kicks from analyzing federal regulation. This bean counting may sound painfully lacking in glamour, but it’s incredibly important. OMB’s annual report to Congress on the benefits and costs of all major rules adopted by most federal agencies over the past 10 years shows how efficiently, or inefficiently, those agencies are functioning.  And the conclusion is clear: the Environmental Protection Agency comes out on top.

 

Source: OMB’s “Draft 2013 Report to Congress on the Benefits and Costs of Federal Regulations”

These numbers are based on the 2013 draft report, so they could still change. But the pattern is the same as in any of theirreports from the past few years, including the final 2012 report that came out last week.

None of this is to diminish the contributions of the other government agencies, but if you are a do-gooder trying to achieve the greatest good for the greatest number of people, EPA is the place to be.

One of the driving forces behind this rule is the Mercury and Air Toxics Standards, an extraordinary achievement for clean air and public health. Because of these standards, all coal fired power plants will for the first time be required to control their emissions of toxic air pollutants — including mercury, arsenic and acid gases. Forty years after the Clean Air Act signed by Richard Nixon, twenty after the landmark Amendments signed by George H.W. Bush, we are finally getting around to regulating mercury from burning coal.

The analysis of the benefits of reducing mercury pollution demonstrates just how much we underestimate the benefits of environmental protections. For example, when it comes to reducing mercury pollution, the benefits are based on EPA’s estimates of increased wages of (higher IQ) children born to families that catch freshwater fish for their own consumption.

Think about that one for a second. Mercury is a potent neurotoxin in all its forms, but the EPA estimates do not include mercury that is inhaled or that enters our bodies through other means. And there is nothing in the estimates about the fact that mercury harms the brains of our kids, regardless of whether it influences their future earning potential.

In a sense, this analysis is the moral equivalent of arguing that we should have child labor laws because keeping kids in school makes for more productive workers later on. This kind of reasoning, alas, is  why economists are often called names unfit for a family-friendly blog. It’s the most reductionist argument you can find in favor of reducing mercury. (In fact, the bulk of the benefits that were quantified by EPA are due to inextricably connected benefits in reducing deleterious particulate pollution.)

Costs, by the way, are relatively well estimated, since businesses are all-too willing to share them. So yes, there are costs—but they are small relative to benefits. And costs, as opposed to benefits, are typically overestimates. They are largely based on current available control technologies. They don’t consider that industry may invent an entirely new and unexpected way of complying with regulations at lower cost. This happens over and over again, and it comes with a name: entrepreneurial ingenuity. Works every time.

These omissions and shortcomings on either side of the equation only stand to bolster the most important claim: benefits outweigh costs more than 10 to 1 for all major EPA regulations adopted in the past decade.

For every dollar invested, Americans get $10 worth of benefits. I’ll take that ratio any day.

Such nudges are the best kinds of policy interventions: minimum intrusion, maximum freedom of choice, maximum relative impact. But one area in which Nudge comes up short is global warming. Putting smiley faces on your electricity bill as a reward for using less electricity than your neighbor, something oPower has done with utilities around the country, helps bring down electricity use by 1 to 3%. Better than zero, but not the solution by a long shot.

That solution would be making polluters pay: putting a price on carbon dioxide through a direct cap or tax on carbon pollution. Cass Sunstein, who wrote Nudge with Richard Thaler, says as much in his latest piece on the topic. He laments the fact that we don’t seem to be able to get these kinds of taxes passed, and then adds a few items to his running list of things we can do, all under the broad heading of setting “clean-energy default rules”: Change the default printer setting to “print on front and back,” and people will. Enroll people into programs where they spend extra for clean energy (with the option of opting out), and 90% will choose to stick with the clean energy.

All these proposals represent the best of what nudges ought to be. Policymakers need to set defaults either way. So set them in the way that goes furthest toward achieving your goal. Just that there’s still a big gulf between the policies we know are necessary and what appears to be doable.

The plastic bag solution

But there is one policy that seems to bridge the gap between the type of non-intrusive nudges Sunstein champions and the type of policies he knows are ultimately necessary to do something about global warming. They’re called bag taxes.

In 2002, Ireland started charging shoppers 15 eurocents a plastic bag. The result: bag use plummeted 90 percent. That’s a billion bags a year.

In 2010, Washington, D.C., began charging 5 cents per disposable bag, paper or plastic. As a result, plastic bag usedeclined 80 percent within a year by some estimates.

These fees are tiny. Compared to the $100 worth of groceries you’ll be carrying home in your bags, they might as well be zero. The point is that they are not. The fees are big enough to change the default behavior of shoppers. A few pennies (and the odd public information campaign) are all it takes to motivate shoppers to bring reusable bags to the store.

Keep reading at EDF Voices blog.

The solution to global warming — the only real solution — starts and ends with making polluters pay. It does wonders, large and small.

A cap on sulfur dioxide in the 1990s stopped the worst effects of acid rain by removing much of the sulfur dioxide produced by coal-fired power plants. Carbon caps and pricing are helping to decarbonize electricity generation in Europe, California, New Zealand and Australia.

The prices don’t have to be high to show effects. A 5-cent surcharge per disposable bag in Washington, D.C., cut bag use 80 percent within a year by some estimates.

Of course, wishing we had a strong cap on carbon won’t make it so. That’s where decisive, immediate action from President Obama’s administration comes in: everything from applying the Clean Air Act to global warming pollution, as instructed by the Supreme Court, to reining in methane leakage from our natural gas system.

Put together, these administrative actions alone could get us a long way toward where we need to be, until Congress finally gets ready to follow the will of the people to tackle global warming pollution.

Go to the New York Times’ Sunday Dialogue for the full back-and-forth.

Why, then, does virtually every home use efficient compact fluorescent lights (CFLs). Americans and Europeans needed a ban on incandescent bulbs to make the switch. Not so the Thais, where you can still buy cheaper, more inefficient incandescent bulbs at the corner store.

Was it the influence of a higher authority? Thais famously revere their 85-year-old King, the world’s longest-reigning head of state, who happens to be an environmentalist.

The answer is, mostly, no.

Continue reading at EDF’s new blog.

Yes, the rebound effect is real. But it’s also small. And what’s there is actually positive! Why shouldn’t people who can now afford to due to more efficient energy technologies be able to improve their lives?

Together with three co-authors (Ken Gillingham at Yale, Dave Rapson at University of California, Davis, and Matt Kotchen, currently on leave from Yale to serve as Deputy Assistant Secretary for Environment and Energy at the U.S. Treasury), I surveyed a bajillion+1 energy efficiency rebound studies. Nature then made us cut down those references to 6. We settled at 9.

We couldn’t find a single study that has the rebound be above 100% or anything close to it, what’s necessary to nix energy efficiency savings. The maximum number you can get is 60%, and that’s already quite a stretch. Think 30% as the upper bound for actual behavioral responses. Yes, we are more efficient today than we were a hundred years ago, and we also use more energy today. But that’s far from talking about the rebound effect. It’s simply economic growth.

Establishing a causal link between efficiency and energy use isn’t quite as simple. In the end, the rebound effect comes in four forms. Buy a more fuel-efficient car, and driving that next mile just became cheaper. The result: a bit more driving, to the tune of 5 to a maximum of 30%, although most likely much closer to 5-10% of the initial fuel savings. Then there’s the indirect effect: Drivers may now use some of the savings to buy other products that consume energy.

You can already see that we can’t just add these two effects. If you spend some of the gas money on driving more, you have less to spend on that plane ticket, and vice versa.

Then there are two macroeconomic effects: one via the price and one via technological advances. They are the trickiest to pin down and could, in theory, be the largest. But theory lends a helping hand in getting an upper bound: the basic demand-and-supply relationship tells us that the macroeconomic price effect can’t be more than 100%.

And once again, all these effects aren’t anywhere near that threshold. 60% is as high as it gets for the combined effect, and only in rare circumstances. For the most part, it’s much closer to 5 to perhaps 30%.

So where does that leave us?

When designing energy efficiency policies like clean-car standards, consider the rebound effect, much like the government already does. The Department of Energy’s model uses a highly appropriate 10% rebound figure for the car standards. And that’s about it. Not much else to see here.

If you did want to take it a step further — full disclosure: a step I couldn’t convince my three co-authors to take in the Nature piece itself — everything else equal, the existence of the rebound effect may prompt us to use even stricter energy efficiency standards. If you have an overall target in mind, and the rebound effect shaves off a bit, you ought to consider using a slightly stricter target to get back to where you wanted to be.

For more, check out the full Nature piece. Well worth the $32 to put the rebound effect in its rightful place once and for all.

The president can start by setting an example in his own house, quite literally. Based on Executive Order 13514, signed in October 2009, Obama established a 28 percent emissions-reduction goal for the federal government by 2020. While working toward this goal, the administration should take the opportunity to implement a tried-and-true market approach: Follow the lead of some big corporations like Microsoft and make each part of the government financially accountable for its greenhouse gas emissions by putting a price on carbon dioxide — at least the roughly $20 per ton established by the federal government’s own interagency working group as the single best value. That would allow the government to meet its overall target the most cost-effective way possible.

Read the full article at ForeignPolicy.com.

When it rains, it pours. First came Sandy, the incarnation of the Rumsfeldian “unknown unknowns.” Then came the political hurricane, with three-term New York City Mayor Michael Bloomberg endorsing Barack Obama for his second.

Bloomberg’s endorsement is unusual for a number of reasons, not least because the famously tri-partisan mayor eschewed an endorsement four years ago, has slapped the president’s wrist in the past, and all but snubbed him when Obama offered to tour the devastation in New York City, leaving the president to embrace New Jersey Governor Chris Christie, one of Mitt Romney’s most outspoken surrogates.

Here’s the kicker: Bloomberg titled his endorsement, published in his eponymous news outlet, “A Vote for a President to Lead on Climate Change.”

[...]

One possible indication of where we are heading: The same day as the mayor’s endorsement, Bloomberg’s BusinessWeek put Sandy on its cover, under the headline: “It’s Global Warming, Stupid.”

It is.

Read the “[...]” middle at foreignpolicy.com.

Call them “black swans,” “unknown unknowns,” “fat tails,” or “10-foot women.” Whatever you call them, they’re bizarre events. They shouldn’t happen. Usually they don’t happen, but every once in a while they do happen, and then their impact makes daily events mere noise.

This week, one did happen. Sandy and its aftermath have all the characteristics that make fat tails such unique and frightening events.

Continue reading at wsj.com.

Sadly, Klein misses two important points.

First, it’s not a question of if but when humanity will be compelled to use geoengineering, unless we change course on our climate policies (or lack thereof). Second, all of this calls for more research and a clear, comprehensive governance effort on the part of governments and serious scientists – not a ban of geoengineering that we cannot and will not adhere to. (See point number one.)

Saying that we ought not to tinker with the planet on a grand scale – by attempting to create an artificial sun shield, for example – won’t make it so. Humanity got into this mess thanks to what economists call the “free rider” effect. All seven billion of us are free riders on the planet, contributing to global warming in various ways but paying nothing toward the damage it causes. No wonder it’s so hard to pass a sensible cap or tax on carbon pollution. Who wants to pay for something that they’re used to doing for free – never mind that it comes at great cost to those around them?

It gets worse: Turns out the same economic forces pushing us to do too little on the pollution front are pushing us toward a quick, cheap fix – a plan B.

Enter the Strangelovian world of geoengineering – tinkering with the whole planet. It comes in two distinct flavors:

• Sucking carbon out of the atmosphere;
• Creating an artificial sun shield for the planet.

The first involves reversing some of the same processes that cause global warming in the first place. Instead of taking fossil fuels out of the ground and burning them, we would now take carbon dioxide out of the atmosphere and bury it under ground. That sounds expensive, and it is. Estimates range from $40 to $200 and more per ton of carbon dioxide – trillions of dollars to solve the problem.

That brings us to the second, scary flavor, which David Keith, a leading thinker on geoengineering, calls “chemotherapy” for the planet. The direct price tag to create an artificial sun shield: pennies per ton of carbon dioxide. It’s the kind of intervention an island nation, or a billionaire greenfinger, could pay for.

You can see where economics enters the picture. The first form of geoengineering won’t happen unless we place a serious price on carbon pollution. The second may be too cheap to resist.

In a recent Foreign Policy essay, Harvard’s Martin Weitzman and I called the forces pushing us toward quick and dirty climate modification “free driving.” Crude attempts to, say, inject sulfur particles into the atmosphere to counter carbon dioxide already there would be so cheap it might as well be free. We are talking tens or hundreds of millions of dollars a year. That’s orders of magnitude cheaper than tackling the root cause of the problem.

Given the climate path we are on, it’s only a matter of time before this “free driver” effect takes hold. Imagine a country badly hit by adverse climate changes: India’s crops are wilting; China’s rivers are drying up. Millions of people are suffering. What government, under such circumstances, would not feel justified in taking drastic action, even in defiance of world opinion?

Once we reach that tipping point, there won’t be time to reverse warming by pursuing collective strategies to move the world onto a more sustainable growth path. Instead, speed will be of the essence, which will mean trying untested and largely hypothetical techniques like mimicking volcanoes and putting sulfur particles in the stratosphere to create an artificial shield from the sun.

That artificial sunscreen may well cool the earth. But what else might it do? Floods somewhere, droughts in other places, and a host of unknown and largely unknowable effects in between. That’s the scary prospect. And we’d be experimenting on a planetary scale, in warp speed.

That all leads to the second key point: we ought to do research in geoengineering, and do so guided by sensible governance principles adhered to be all. We cannot let research get ahead of public opinion and government oversight. The geoengineering governance initiative convened by the British Royal Society, the Academy of Sciences for the Developing World, and the Environmental Defense Fund is a necessary first step in the right direction.

Is there any hope in this doomsday scenario? Absolutely. Country after country is following the trend set by the European Union to institute a cap or price on carbon pollution. Australia, New Zealand, South Korea, and also California are already – or will soon be – limiting their carbon pollution. India has a dollar-a-ton coal tax. China is experimenting with seven regional cap-and-trade systems.

None of these is sufficient by itself. But let’s hope this trend expands –fast – to include the really big emitters like the whole of China and the U.S., Brazil, Indonesia, and others. Remember, the question is not if the “free driver” effect will kick in as the world warms. It’s when.