Interpreting Sustainability in Economic Terms: Dynamic Efficiency Plus Intergenerational Equity

Economists have expended considerable effort to develop economically meaningful definitions of the somewhat elusive concept of “sustainability.” We relate such a definition of sustainability to well known concepts from neoclassical economics, in particular, potential Pareto improvements (in the Kaldor-Hicks sense) and inter-personal compensation. In the inter-temporal realm, we find that dynamic efficiency is a necessary but not sufficient condition for a notion of sustainability that has normative standing as a goal for public policy. We define sustainability as dynamic efficiency plus intergenerational equity. Further, we argue that it is not unreasonable for economists to focus on the efficiency element, leaving equity considerations to the political process. The analogy to the relationship between potential Pareto improvements and (intragenerational) transfers can facilitate discussions about sustainability, both within the economics community and as part of an interdisciplinary discourse, and makes the basic concepts easier to operationalize.

The Political Economy of Greening the National Income Accounts

While the United Nations and many other countries are actively exploring green accounting, official efforts in the United States have come to a virtual halt. In 1994, Congress commissioned a high-level study reviewing the Bureau of Economic Analysis's (BEA) work on its Integrated System of Environmental and Economic Accounts (ISEEA), but since its publication in 1999 has ignored the results and continued to bar BEA from its efforts. The debate surrounding green accounting in the U.S. should be freed from the partisan struggle in Washington and moved in the hands of the scientific community. Green accounting efforts should seriously focus on including ecological services as well as mere resource depreciation, but in line with the recommendations of Nordhaus and Kokkelenberg (1999), the existing national income and product accounts framework should be used as a point of departure, and the creation of official accounts should employ an incremental approach, giving first priority to areas where the necessary research is available

Turn Toward Climate Safety

The science is compelling. We are heading in the wrong direction, and we are running out of time. In the critical period from now until 2020 global emissions must start to decline. The sooner we make the turn, the greater the chance that we can avoid the most dangerous consequences. This paper lays out the steps we can take now to achieve the turn toward safety

Going Green but Getting Nowhere

High school science tells us that global warming is real. And economics teaches us that humanity must have the right incentives if it is to stop this terrible trend. Don’t stop recycling. Don’t stop buying local. But add mastering some basic economics to your to-do list. Our future will be largely determined by our ability to admit the need to end planetary socialism. That’s the most fundamental of economics lessons and one any serious environmentalist ought to heed

For Young College Students, the Case for Economics

Five years ago, top Harvard College graduates flooded Wall Street. They were small cogs in a race-car engine, except the car was speeding over a cliff. It’s no wonder that today’s graduates are reconsidering their career choices. They should start with economics. When most people think about economics, their minds turn to business and finance. But economics goes beyond these fields, and the difference between business and economics goes beyond size. Economics is about a way of thinking. Published on Washington Post's On Innovation on January 3rd, 2012

Cut Power Plant Pollution

No president, and no country, can stop global warming singlehandedly. President Obama isn’t going to halt the rise of the oceans in his second term. And with Congress hostile to cap and trade and most other ideas for slowing, let alone rolling back, global warming, it will be difficult for him to do what’s necessary. If Obama wants to make real progress, he’s going to need to use every rhetorical skill in the playbook to tell Americans that this issue matters for their lives. Published in Foreign Policy on January 4th, 2013

When dealing with global warming, the size of the risk matters

Climate change is both high-impact and high-probability. Probabilities matter. Take strangelets as one extreme. They are particles with the potential to trigger a chain reaction that would reduce the Earth to a dense ball of strange matter before it explodes, all in fractions of a second. That’s a high-impact event if there ever was one. It’s also low-probability. Really low probability. At the upper bound, scientists put the chance of this occurring at somewhere between 0.002% and 0.0000000002% per year, and that’s a generous upper bound

Tackling Global Warming

The solution to global warming — the only real solution — starts and ends with making polluters pay. The prices don’t have to be high to show effects

Declining CO2 Price Paths

Pricing greenhouse-gas (GHG) emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. While decision making under risk and uncertainty is the forte of financial economics, important insights from pricing financial assets do not typically inform standard climate–economy models. Here, we introduce EZ-Climate, a simple recursive dynamic asset pricing model that allows for a calibration of the carbon dioxide (CO2) price path based on probabilistic assumptions around climate damages. Atmospheric CO2 is the “asset” with a negative expected return. The economic model focuses on society’s willingness to substitute consumption across time and across uncertain states of nature, enabled by an Epstein–Zin (EZ) specification that delinks preferences over risk from inter-temporal substitution. In contrast to most modeled CO2 price paths, EZ-Climate suggests a high price today that is expected to decline over time as the “insurance” value of mitigation declines and technological change makes emissions cuts cheaper. Second, higher risk aversion increases both the CO2 price and the risk premium relative to expected damages. Lastly, our model suggests large costs associated with delays in pricing CO2 emissions. In our base case, delaying implementation by 1 y leads to annual consumption losses of over 2%, a cost that roughly increases with the square of time per additional year of delay. The model also makes clear how sensitive results are to key inputs

Air conditioning is not the enemy

Carbon pollution is. Air conditioners account for around 5 percent of electricity used in the U.S. The need for more air conditioning is one of the costliest effects of global warming. Its use, in turn, leads to more warming, which leads to a greater need for air conditioning. Published on Ensia.com on August 8th, 201