Sin: The Price is Not Right

by on August 9, 2012 at 11:51 am in Uncategorized | Permalink

Here is an excellent New York Times story on payments to firms that destroy HFC-23, a by product from the creation of air conditioning coolant. The gas is 11,700 times worse for climate change than C02 so the UN set a price for destroying the gas 11,700 times higher than for eliminating C02. N.B. In a real market prices are based on supply and demand not just demand! Hi jinx ensue:

…since 2005 the 19 plants receiving the waste gas payments have profited handsomely from an unlikely business: churning out more harmful coolant gas so they can be paid to destroy its waste byproduct. The high output keeps the prices of the coolant gas irresistibly low, discouraging air-conditioning companies from switching to less-damaging alternative gases.

…The production of coolants was so driven by the lure of carbon credits for waste gas that in the first few years more than half of the plants operated only until they had produced the maximum amount of gas eligible for the carbon credit subsidy, then shut down until the next year, United Nations reports said. The plants also used inefficient manufacturing processes to generate as much waste gas as possible…

The invisible hand is subtle and difficult to duplicate with manufactured markets. The UN is trying to stop the payment program but, as usual, the rents attracted rent seekers who are now using their profits to lobby to keep the system in place.

In other offset news, Ted Frank’s chicken offset will let you eat at Chick-fil-A and still keep your liberal conscience clean.

H/t: Carl Danner.

E. Barandiaran August 9, 2012 at 12:19 pm

Alex, according to Public Choice 101, the UN’s invisible hand is missing in the functions for which the UN was created. Its visible hand can be seen in other activities and I bet that its own bureaucracy and their relative are profiting from the scheme (they cannot stop the rent-seekers! What a surprise. And we cannot stop the fraudulent clowns to claim that they build THAT!)

Roy August 9, 2012 at 2:55 pm

If only the fraudulent clowns were actually funny, as time goes by the humor begins to escape me.

Enrique August 9, 2012 at 12:29 pm

So, there we finally have it, after all these years, a falsification of the Coase Theorem!

Ray Lopez August 9, 2012 at 12:37 pm

LOL surely you jest of course. You must realize that these theorems work over the long haul–and a few years data is not the long haul. Over the short term all sorts of counter intuitive things happen in economics, as Keynes recognized. The trouble with rent seeking as opposed to market seeking solutions is that it’s cheaper to lobby Washington DC to change a law to ‘fix’ the market rather than waiting a decade or so for the long term. Cheaper in the short run but not in the long run IMO.

k August 9, 2012 at 12:55 pm

How is this a falsification of the Coase theorem?

The fact that the UN must set a price is an indication that the cost of the price system was too high to outweigh its benefits.

david August 10, 2012 at 3:13 am

Coase originally used the example of a train which gives sparks off the railway, passing through a wheatfield. His argument was that regardless of whether the train company needs to pay the farmer for the right to throw off sparks, or for the farmer to pay the train company not to travel through the area, the outcome is efficient as long as the contracted agreement is enforced, and the change in property rights only shifts endowments.

He was right as a matter of static analysis. He did not realize that dynamically, the train company may be incentivized to give off as many sparks as possible (to extort a higher payment) or the farmer to plant as flammable a wheat as possible (likewise). The problem is that the act of recognizing a Coasean tradable right is itself subject to dynamic inconsistency.

k August 10, 2012 at 11:55 am

“the outcome is efficient as long as the contracted agreement is enforced, and the change in property rights only shifts endowments.”

Saying “as long as the contracted agreement is enforced” equals “transaction costs = 0″, yes? If this statement is true, then I don’t believe the Coase argument is being violated, whether static or dynamic, because this is *not* the argument.

The argument is that “transaction costs ~= 0″, so none of the conclusions above will follow necessarily. As I said, given that the UN has to set a price, there must be substantial costs to setting up a market for the pollutant – which is why the market isn’t there in the first place.

If you read Coase’s 1960 paper fully, he says that regulation is the organization of last resort (not in those precise words) when the costs of transaction are so great that even an integrated firm will not find it worthwhile to conduct the transaction. This point is not well recognized.

Of course, the logic isn’t completely tight, because all I’ve said is “A –> B, so if B happens then A must have happened”. To prove this, you would need to say “A B”. But if there is no market – and it is easy to argue that the costs of setting up this market > benefits – I cannot presently see any other argument for why the UN has to step in.

The wrong type of organization – one that is not a match with the costs of transacting – can result in severe wealth reduction, if the misallocation is severe. This is a natural derivation from the statement that “No transaction costs, so organization doesn’t matter in terms of total output” but obviously transaction costs are significant, organization matters, and the wrong type of organization therefore lessens total output as is happening here.

I don’t see the Coase theorem either being confirmed or denied, because to do that one would need to understand what the right organization form would be, and run the counterfactual experiment.

nickMR August 12, 2012 at 5:29 am

to extort a higher payment

Quite true. Coase made the typical economist’s assumption of a voluntary transaction, but you can’t reliably have a non-coercive transaction without disallowing certain prior allocations of rights. Without disallowing rights to coerce, most kinds of externality can readily be expanded into extortion.

Nor is it easy to distinguish between a voluntary and coercive transactions in this context. By ramping up the such externalities beyond the degree Coase imagined, they can be turned into weapons such that the cost to the weapon weilder is less than the amount extorted, resulting in a negative-sum game, as in the above example. For a fuller analysis, see here.

derek August 9, 2012 at 2:04 pm

Another data point in support of the proposition that Green=Fraud.

BC August 9, 2012 at 2:26 pm

Sounds like great “stimulus”: the green equivalent of paying someone to dig a hole in your yard and fill it back up.

Jason August 9, 2012 at 3:30 pm

Isn’t this *exactly* what happens in markets? The Fed controls the money supply through open market operations but too much stuff that becomes an equivalent to money (say, short term corporate debt) is produced on the side. A panic ensues, no one trusts the corporate debt and the effective money supply (I believe Divisia has a money supply metric that includes corporate debt) shrinks. Recession follows.

The UN controls the carbon credit supply through open market operations but too much stuff that becomes an equivalent to carbon credits (say, destroying HFCs) is produced on the side. A panic ensues, no one trusts the carbon credits and the carbon credit supply shrinks. Recession follows.

The only difference is that we don’t question the rationale behind the creation of money. Maybe we should? When we see violations of the spirit of carbon credits creation, people act. When we see violations of the spirit of money creation, we do nothing until we get a grinding recession. In some sense this carbon credit market may be a healthier market!

Dan August 9, 2012 at 3:57 pm

This is one example of why it’s better just to tax emissions.

k August 9, 2012 at 6:05 pm

and pollution is the firms problem because….

mravery August 9, 2012 at 6:27 pm

They’re producing and marketing a product with externalities?

Enrique August 9, 2012 at 8:50 pm

Coase would say that pollution is really a “reciprocal” problem: people who want clean air are just as much to blame as the factory polluting the air because, if say they sue the factory and prevail, they impose a cost on the factory (and on the consumers who purchase products made by the factory)

Eric H August 9, 2012 at 10:54 pm

… and then something about Transaction Costs.

k August 10, 2012 at 12:04 pm

…and the right way to figure out policy would require us to compare the willingness of people to pay for cleaner air/willingness to accept dirtier air to the cost imposed on the factory to clean up their emissions.

If it costs the factory $100 to install cleaning equipment, but (say) the damage of dirty air is only $80 (in terms of “quality of life” with cleaner air), then the (uncomfortable) declaration is that the factories go on polluting and simply pay those who might get affected.

RH August 9, 2012 at 4:12 pm

Rather than use our current, fossilized, science to set policy, we should reward people for achieving our climate change goals, however they do so. We need diverse, adaptive projects, that take into account our rapidly expanding scientific knowledge.

Alexei Sadeski August 9, 2012 at 5:51 pm

I do sometimes wonder if the advances made with nudging and faux market technology will end with some bizarre dystopia. Social engineering of the worst sort, used to the worst ends?

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