A Tax on Gore: Truth and Carbon Taxes,

Al Gore, in a recent speech at New York University about the appropriate response to global climate change said:

“For the last fourteen years, I have advocated the elimination of all payroll taxes – including those for social security and unemployment compensation – and the replacement of that revenue in the form of pollution taxes – principally on CO2. The overall level of taxation would remain exactly the same. It would be, in other words, a revenue neutral tax swap. But, instead of discouraging businesses from hiring more employees, it would discourage business from producing more pollution.
Global warming pollution, indeed all pollution, is now described by economists as an ‘externality.’ This absurd label means, in essence: we don’t to keep track of this stuff so let’s pretend it doesn’t exist.”?

It sounds like a neat trick, killing two birds with one stone. Certainly, I am open to taxing externalities based on the difference between their social and private costs. In contrast to Mr. Gore’s aspersion on economists, the word “externality”? doesn’t mean we should pretend it doesn’t exist, it means the relevant actors (the polluters) pretend it doesn’t exist, which is a problem because it does.

Economists suggest several alternatives. Nobel Prize winner Ronald Coase suggests establishing legally enforceable property rights. The reason we have air pollution is because nobody owns the air. The reason we have less land pollution (e.g. dumping) hither and yon is because people do own the land.

The problem of course is (a) establishing ownership of the air and (b) tracking air pollution back to its source so that polluters can be legally charged.

The second solution is regulatory. With regards to traditional “criteria”? pollutants in the US (ozone, carbon monoxide, oxides of nitrogen, sulfur dioxide, lead, and particulates), tailpipe pollution is regulated by the Environmental Protection Agency, and cities have to ensure their transportation plans don’t pollute beyond a certain threshold. Currently, CO2 is not a criteria pollutant because it does not have health effects, at least not in the same way. This is a quantity-based strategy. Mr. Gore advocates this when he suggests “freezing”? carbon emissions.

A third solution, as Mr. Gore also suggests, is taxing pollution. In its pure form, we would allow anyone to pollute as much as they want, so long as they pay the carbon tax, which if properly set, would constrain the amount of pollution produced by providing the correct incentives. That tax (say X$/ton) would equal the social effect of the pollution. Establishing that social cost is not simple, nor is it uncontroversial. About 10 years ago I read a book about this by William Nordhaus, (the updated version is Warming the World: Economic Models of Global Warming by William D. Nordhaus and Joseph Boyer). The tax per ton would rise over time (as presumably would the impact of climate change, and our ability to pay for it). This is a price-based solution. The recent emergence of emissions trading combines quantity and price-based solutions.

Figuring out the proper level of the tax is no simple matter either. We can think about it in terms of damages: if the pollution went unprevented, what would it cost to fix. Or we can think about it in terms of prevention: how much would it cost to avoid the damage. If the cost of damage exceeds the cost of prevention, we should prevent, if the cost of damage is less than the cost of prevention, we should accept the damages. In practice we may prevent some damage and accept some damage.

Another point is that an externality requires two actors: the polluter and the pollutee. If I pollute, but no one is damaged, no harm is done. Think about noise: As the old koan goes, If a tree falls in the woods and no one is there to hear it, does it make a noise? No, the noise externality is only present if someone hears it and is harmed. By moving into the way of the harm, you are imposing costs on the polluter. Another example is the conflict that occurs with suburbanization into agricultural areas. As much as our politicians romanticize the family farm, farms smell. This isn’t a problem so long as only cows and farmers live there, but when suburbanites move in, this becomes a problem. Should the farmer pay, after all it is his farm producing the externality? Or should the suburbanites bear the cost, since without their presence, no externality would exist?

With climate change, because of its global nature, we might think consider the polluter clearly at fault. But what about people who move into low-lying, flood-prone areas? If no one lived below sea level in New Orleans, the economic and social damage of Hurricane Katrina would have been much less. Who should pay, the polluters (worldwide), who changed the climate and according to Mr. Gore, made the hurricane more likely, or those who moved into a vulnerable position? If you say some combination of both (which is of course the right answer), what is the combination?

So even if we have achieved consensus that we are spewing CO2 into the atmosphere, and are in agreement about the direction of that effect (it will make things warmer rather than colder in general), we are still in disagreement about the magnitudes of the climate effects resulting from that CO2, and in even greater disagreement about the economic cost that the climate effects imposes. I have worked with enough large-scale models to conclude that a plethora of assumptions founded on inadequate evidence must produce huge uncertainty.
Into this environment, Mr. Gore proposes a multi-part acronym-filled scheme that would make a Washington policy wonk swoon. Which leads us back to the carbon tax, which, if set correctly, is perhaps the most effective strategy. Mr. Gore proposes eliminating the Social Security payroll tax and replacing it with a carbon tax, ensuring the policy is “revenue neutral”?. This reminds me a lot of 1980 presidential candidate John Anderson’s proposal for a 50 cent tax on a gallon of gasoline in exchange for dropping the Social Security tax. So the idea is at least 26 years old.

The payroll tax has elements of unfairness. However Social Security has nothing to do with climate change (except, I guess, that old people pollute). This is an illogical linkage, and will produce a perverse result. If the carbon tax is successful, we lose our funding base for Social Security, which as popular polls suggest, already fails to engender much faith in its fiscal health.

Two more Nobel Prize winning economists have suggested some rules about managing economic policy:

1) Jan Tinbergen’s rule: Achieving a multiple number of independent policy targets requires an equal number of policy instruments.

2) Robert Mundell’s rule: Each policy instrument should be assigned to a policy target on which it has greatest relative effect.
source 

In other words, these economists posit one policy target per policy instrument (or one stone per bird). Trying to solve two problems requires two policy instruments, and so on.

If we levy a carbon tax, the revenue should be used to fix the damage global climate change causes or to prevent that damage in the first place. The amount of money that should be charged in a carbon tax is independent of the amount of money required for the payroll tax. By making the plan “revenue neutral”? we are either raising too much money (and wasting money by reducing more carbon than would economically efficient) or not enough money (and wasting the opportunity to provide incentives to invest in more carbon-reducing strategies).

That said, Social Security should be financed appropriately as well, but that bird deserves another stone. I believe that there should be one policy analyzed per policy essay.

Maglev crash, growing pains or fatal blow?

The recent German maglev crash today (9/24/2006) is not good news for that emerging technology. CNN Article here.
Taking the long view, it should be remembered that all new transportation technologies have growing pains, some like the first train crash are overcome (the opening ceremonies of George Stepheson’s Rocket on the Liverpool and Manchester Railway railway killed MP William Huskisson from Liverpool (September 15, 1830). However, some like the Hindenberg crash on May 6, 1937, doom the technology.

Transit in Phoenix

A reader writes
Our AZ Senate candidate is very big on light rail and says in debates that it is a good option for our District – NW Phoenix. He thinks ‘commuter rail’ has been effective in Chicago and wants to make a case for light or commuter rail here.
From your perspective, are either methods successful in cities in the US? One measure of success is in terms of reducing some measurable amount of automobile traffic [probably 5% or more] or a different measure is in terms of public investment – such as making the system pay for itself after some period of initial investment.
Commuter and light rail are completely different beasts, like comparing taxis and buses, they both move people, but they move different numbers of people at different speeds for different distances.
Defining success in terms of reducing auto traffic is also a mistake, recalling the Onion headline Report: 98 Percent Of U.S. Commuters Favor Public Transportation For Others (November 29, 2000 | Issue 36•43)
We don’t define airplanes in how many rail passengers they take off the train, or the success of typewriters in how many word processing users avoid computers.
So there are a few measures we might consider. A private firm would ask: Do the marginal private benefits (profit) outweigh the marginal private costs? This is how transit projects were judged back in the day (the late 1800s and early 1900s) when they were private. By marginal we mean does the next dollar invested have benefits that outweigh the cost of one dollar.
Alternatively, does rail provide transportation for their users at a cost they pay for? The answer is clearly no in every US city.
As far as I know, passenger rail now only makes money in Hong Kong. It probably could break even with appropriate management in a few other cities (e.g. New York, London, Paris), but everywhere else it is heavily subsidized (100% of capital costs and two-thirds of operating costs is typical subsidy for rail transit in the US).
We might distinguish “does pay for” and “would be willing to pay for” and consider the notion of subsidies, but I doubt any system (outside New York and a few select routes elsewhere) could break even at their existing costs.
The public asks do the marginal social benefits (MSB) outweigh the marginal social costs. Marginal social benefits in theory might include non-user benefits like congestion reduction, pollution reduction, crash reduction, noise reduction, increased accessibility for non-users, and so on (to the extent these can be accurately measured and monetized) but MSB would primarily be comprised of user benefits (those accruing to the transit riders themselves). The marginal social costs (MSC) are the “private” costs of paying for the infrastructure and service, and any externalities that are created (delay during construction, pollution caused, crashes caused, delay to non-users during operation, etc.).
The monetization of some of these costs depends on personal values, value of time, value of life, value of health, value of quiet, and so on, though economists and engineers have assigned values to these (value of time =$10/hour, value of life =$3 million, …) based on individual choices when making real decisions.
However, we also need to consider the alternative use of resources, the opportunity cost. If we spend money on X we no longer have it to spend on Y. So even if X is good, Y might be better, and resources are scarce.
Again I believe the answer is no, the marginal social benefits seldom outweigh the marginal social costs in fixed-rail transit investments. I have not seen any benefit cost analysis that I believe that has a rail project with marginal social benefits exceeding marginal social costs.
Rail advocates then claim there are non-monetizable factors, civic pride or image, etc. I remain unconvinced.
Alternatively, they may suggest that the values of things are underestimated (e.g. economic development, land use changes), but usually this double-counts benefits that are in the analysis. (land values plus user time, e.g., by and large are representing the same thing, the reason land values are high is because the land is located in a place with better access (less time to more things)).
A final argument concerns environmental benefits. In general cars pollute more than electric trains (though this depends in large part where the electricity for your light rail comes from). But the value of this can be monetized w health expenses. (Or worse, diesel for your trains may be more damaging than auto emissions.) The cost of global warming is another matter which is highly speculative.
Phoenix’s current transit (bus + rail) work trip mode share is 1.9% according to the 2000 Census Transportation Planning Package data. To take 5% more cars off the road, transit mode share would need to be more than 7% (since some of those travelers would come out of carpools, walking, and biking, and non-work mode-share is less than work trip mode share). The problem is compounded by the idea of induced demand, by reducing congestion, some people who previously avoided traveling at peak times would now travel then again (for every 100 trips removed because of transit, maybe 50 or so would then be made, changing time of day or day of week, making longer trips, switching from carpool to drive alone, or switching from other routes, or making trips previously avoided).
The only large US Cities with a 7% or higher transit work trip mode share: New York, Chicago, Washington DC/Baltimore, San Francisco, Philadelphia, Boston. Large portions of these cities were built in the transit era and they have all had long-standing transit systems. Phoenix is not likely to quadruple transit usage without a very large investment (transit service as extensive or more than the cities identified above … I say more because the land use pattern in Phoenix is much less conducive to transit than the cities above) … unless there is a large external shock (e.g. very high gas prices, maybe on the order of $10 gallon).
Phoenix on the other hand has one of the highest carpool share in the US. This may be due to HOV network, but is more likely because of a high number of working class individuals who are sharing cars to get to work. Exploiting this predisposition to carpool seems more promising than trying to jump-start a new mode.
If you want to reduce congestion, you have to increase prices, ideally prices that are targeted by time of day and location, to give people the appropriate signals about the real cost of their travel. If you are unwilling to do this, your congestion is not bad enough.
— dml

Clash of Speeds

In the Tofflers’ new book “Revolutionary Wealth“, the discuss the “Clash of Speeds”, saying in an interview
“If you were a cop at the side of the road monitoring the speed of the cars going by, you would clock the car of business,which is always changing rapidly under competitive pressures,at 100miles per hour.But the car of education,which is supposedly preparing our young for the future,is only going 10mph.You cannot have a successful economy with that degree of de-synchronization. “
If education is going 10mph, one might posit surface transportation itself is going 1 mph. The networks we use are perhaps the slowest of institutions to change, the roads we use today are still where we put them a decade, a century, or a millenium (or two) ago. This slow pace of change is a two-way street. If you want to make rapid change, you will be frustrated, but if you want to make lasting change, you will be rewarded.

In praise of landmarks

Yesterday, Apple Computer announced a slew of new products, among them iTunes 7. A key feature of this piece of software is its new user interface, dubbed “CoverFlow”, discussed in this article: Wired News: New UI Showdown: Apple vs. TiVo. You do need to see it to fully understand it, and it is quite a slick way to navigate a music database.
Why am I talking about music databases and album art in a blog about transportation? I think cities are much like databases, and buildings like album covers. We navigate spatially and visually. Cities without redeeming art, architecture or natural landmarks are unpleasant. Not merely because they lack “charm” and the buildings are individually dull, but because of their collective undifferentiatedness, which creates difficulties for navigating (especially if they also lack some spatial regularity like a comprehensible grid network) and spatially locating oneself. Being lost (both not knowing where you are and not knowing either how you got there or how you will get to where you are going) brings a strong sense of unease that creates frustration if not hostility to the place you are lost at.
Cities need the equivalent of album art so that people can explore them. The nature of this art changes if you are walking, biking, taking transit, or driving, as you view it at different speeds and different resolutions.
Skylines have value, more than the simple value to the owner of the individual building. (In economic terms, they provide some positive externality, collectively exhibiting a network effect where the whole is larger than the sum of the individual parts. Measuring this is of course difficult.)
When I am driving around, and see the skyline in the distance from a particular angle, I instantly know what direction I am going. While some of these benefits may be obviated with in-vehicle navigation, the certainty of physical structure outweighs the digital outputs of a machine.
I recall as a freshman at Georgia Tech, taking a night course, leaving some classroom building for the first time out of a door different from where I entered and being completely turned around, until eventually I located the Coca-Cola headquarters building (just southwest of campus). While I still didn’t know exactly where I was, I could figure out where I was going.