The value of carbon offsets

Hanna writes*

While the dictionary definition of “offsetting” refers to “something that counterbalances, counteracts, or compensates for something else,” in the context of climate change it refers to the compensation for negative externalities of a specific activity or whole business operations on the environment, especially greenhouse gas emissions.

Carbon offsetting has recently become one of the more popular strategies to contribute to carbon emission reductions for individuals, corporations and institutions alike. In the long run, the ambition is to reach the goal of carbon neutrality.

Now, while there is a trend to offset carbon footprint, there are still many who don’t. Why is that?

Confusion remains on how exactly carbon offsetting is done and whether the sum of small monetary contributions to pay to allow an organisation to plant trees can build towards that goal or if it’s more like greenwashing to polish the annual report or fool customers.

There is actually no one way to do it and options range from the improvement of cooking stoves in households in India to planting trees to strategic investments in the development of renewable energy.

Reasons why people chose not to offset their footprint say when they purchase a flight, are multi-fold. The most common ones are: “I feel like I do enough by reducing my meat consumption and recycling” or “I am not sure if my five euros will actually have an impact.”

These may be valid doubts, but something needs to be done. The first argument puts recycling and offsetting in the same bucket while in reality this is like comparing apple and pears. “Just two hypothetical short-haul return flights and one long-haul round-trip in a given year would outweigh otherwise exemplary behaviour.” The second doubt relates to the effectiveness and the low costs associated with it. But certain measures used to offset, such as providing energy-efficient lightbulbs or cooking stoves are actually quite inexpensive.

The lack of trust in some of the mentioned offsetting schemes stems from insufficient transparency and a lack of internationally recognized standards and regulations. A critical task ahead!

Bottom line: While mindset shift and systemic change are needed to really tackle climate change, every contribution counts. Individual, corporate and public offsetting of all sizes needs to become part of how we go about our lives and prepare the ground for the adoption of regulation and large-scale solutions.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Sacrificing the environment for a few?

Lea writes*

Since the 17th of November 2018, the “gilets jaunes” or yellow vests have been in the streets of France every weekend, to protest against a government, they claim, that only supports the very rich.

At its start, the movement was ignited by a fuel tax, which was supposed to gradually increase the price of diesel by 7.6 cents per litre and the price of petrol by 3.9 cents per litre starting from 2019. The implementation of this tax on top of other unpopular measures, such as a speed limit reduction on country roads from 90km/h to 80 km/h, was enough to push 300, 000 people on the streets to block roundabouts and voice their anger on the streets for the first week of protests.

The protests have since turned sour. It is estimated that 11 people have died as a consequence of the yellow-vests movement, while more than 144 protesters and journalists have been severely injured, as they lost an eye or even sometimes a hand. The cost of the insured damages caused by protesters are evaluated to be around €200 million.

In response, Macron’s government had to make several concessions. It froze its plans of a fuel tax indefinitely, decreased existing taxes on diesel and fuel, and promised to increase the monthly minimum wage by a 100 € before 2020. The prime minister also announced that electricity prices would not increase for several months. On the 25th of April, as the “gilets jaunes” entered their 23rd consecutive week-end of protest, Macron promised tax cuts of €5 billion on the income of average and lower earners.

What is sure is that this fuel tax and the ensuing protest was a disaster for the government who did not predict such an uproar. What is unclear is whether they are any social and economic benefits to any parties as an outcome of the protests, and if the environmental costs of the frozen fuel tax are recoverable or not. Would it have been better to abandon the idea of a fuel tax from the start, as the social costs would be too big?

When Macron pushed for a fuel tax during the summer of 2018, he disregarded the comments of Matthieu Oprhelin, an “En Marche” deputy, whom told him to create a temporary fuel subsidy for people living in rural areas with a low income. Maybe he should have listened.

Bottom Line: The abandoned fuel tax of Macron’s government provides us with an example of a failed environmental policy that put too much burden on those who relied on their cars while failing to meet its environmental purpose. Indeed, only 20% of the money from this tax would have gone to a sustainability fund, raising questions about the policy’s legitimacy.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Should Finland tax meat?

Outi writes*

In the Western diet, meat has for a long been a fundamental source of protein on people’s plates. However, research has revealed that in the we consume more meat than we should from the perspective of public health, and the climate. In fact, a study published in Science [pdf] finds that a vegan diet is the most efficient means of reducing one’s impact on the planet. Besides the greenhouse gas emissions, agriculture, and production of meat and dairy in particular, is also “the largest source of human-related nutrients in the Baltic Sea”, and is therefore one of the major causes behind the toxic algae blooms, which made the Baltic Sea unswimmable last summer, not to mention the impacts on the sensitive ecosystem.

In economic jargon, the cost of meat production for the environment would be described a negative externality, since it affects third parties who did not incur the cost. Due to this property, the free market is inefficient in allocating the socially optimal quantity, leading to too much of meat being produced. In the graph below, the lower supply curve represents the production cost without externalities, and the upper line is the social production cost where the externalities are taken into account.

Thus, economic theory suggests that a tax that reflects the external costs to the third parties could internalize these externalities and bring the production to the socially optimal level, as seen from the graph. Or would it? According to a study [pdf], the value added tax on sugary products in Finland did not reduce their consumption, which is accounted to the inelasticity of demand since there are no close substitutes.

Although every supermarket nowadays has an ever-increasing variety of meat-substituting products, many still have a suspicious attitude towards them, and do not deem them as viable option, although people and the food industry would probably adjust in the long run. Therefore, a drastic increase in prices might be necessary to truly change people’s behavior, as the graph illustrates. Increases of the prices of such a staple good would also make the tax regime more regressive, thus hurting the people with lower incomes. Currently, meat substitutes are quite expensive. This is because the volume of production is low, and the competition is oligopolistic since there are only few producers who produce differentiated products.

In the future, if the market for meat substitutes grows, the price might decrease due to increased competition and economies of scale. On the other hand, if the tax increased the demand for meat substitutes, their prices might increase. Therefore it is somewhat tricky to forecast how much the consumers would be hurt if the tax would force them to move to meat substituting products. It might also be the case that some people would then replace lean meat products with sausages, or other processed meat products with even worse nutritional values. If people would not be willing to move to meat substitutes, adjusting the tax so that it accounts for the different health and environmental impacts of different meat products could be a good policy solution, but implementing such tax regime would also be costly and complicated.

On the supply side, the tax would obviously hurt the Finnish meat producers. Due to its Northern location, the production of plant-based protein in Finland is also relatively costly, and the meat producers are therefore worried that moving to production of plant-based proteins would be difficult, although the industry has been developing at a fast-pace in Finland. Importing plant-based protein would obviously be an option but might hurt the security of supply of protein before the production of plant-based proteins is advanced enough.

Bottom line: Meat production has many externalities, which could be internalized with a tax. However, especially in the short run, the demand for meat might be relatively inelastic, and the farmers and people with low incomes might be hurt, which is why costs and benefits of different meat tax regimes should be evaluated carefully.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Revenue trumps environment

 Tory writes*

High-Occupancy vehicle (HOV) lanes have been constructed on many U.S. highways throughout recent decades. These lanes were originally open to public transport and vehicles with two or more passengers. The intention was to provide these vehicles a less congested lane to travel in and thus, reduce travel time in comparison to the ‘non-HOV’ lanes. Additionally, researchers have pointed towards alternative aims of these lanes with broader implications. Schijns and Eng (2006) [pdf] proposed that HOV initiatives, by promoting carpooling, are “increasing the person-carrying capacity of the roadway, reducing per-capita emissions and energy consumption, and promoting a more sustainable urban transport situation”. The intentions of HOV lanes described above highlights the all-encompassing nature of this policy initiative. These lanes are attempting to tackle congestion and travel time issues, while also trying to drive behavior change in an ‘environmentally friendly’ direction. On the outside, approaching policies with multiple aims seems like it could be beneficial across a wide variety of issues. However, in attempting to ‘do it all’ this policy initiative has, in many instances, failed in meeting any of the aims it set out to achieve.

Take, for example, the HOV lanes in California. This state-led initiative was two-pronged in that it aimed to reduce traffic congestion and improve air quality. However, as studies using census data have shown, carpooling continues to decrease in popularity. Moreover, as Schijns and Eng (2006) concluded in their study, there has been no HOV implementation whereby a transformation of single-occupant drivers into carpoolers has made a significant impact on congestion issues. In response to this policy failure, the State of California has allowed single-occupant drivers to use these lanes, for a price. This simple change in policy undermines the environmental intentions of the original designing of the HOV lanes. The ‘pay-for-access’ adjustment also signifies the social value of HOV lanes. Faster travel time, even if one must pay for it, is more attractive than altering one’s transport to be more ‘sustainable’. Moreover, this seemingly minor adjustment only addresses one of the aims it set out to achieve, namely reducing travel time. However, this was exclusionary in nature as only those who could afford the fee were able to take advantage of the lanes. If the aim of reducing emissions was of focus, the State would need to address deeper issues rooted in a lack of infrastructure for public transportation and changing the norms of behavior surrounding what transportation looks like. In this instance, reducing emissions seemed to take a back-seat to reducing travel time for some individuals.

So, has the State of California addressed this seemingly forgotten environmental aspect of this initiative? Why would they? In 2017, San Francisco Bay Area governments collected over 9 million dollars from HOV lanes. It would be difficult to imagine the State having any incentive to change a policy that is providing a source of revenue. From this perspective, the pay-for-access drivers and the government are benefitting off a policy at the expense of environmental action.

Bottom Line: HOV lanes were implemented with the aims of decreasing congestion and reducing emissions. However, the ‘pay-for-access’ adjustment to the policy undermined the environmental aspect of this initiative. This has resulted in revenue for the government at the expense of the planet.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

A flower market without flowers

Willem writes*

Founded in 1862 along the historic Singel canal, the Bloemenmarkt in Amsterdam was the world’s only floating flower market and a landmark of the city of Amsterdam. Some tourism blogs call it a must-see, but on TripAdivsor the market only receives 3.5 out of 5 stars, most recent reviews being bad. TripAdvisor user 678mvi calls the market a “terrible disappointment”, mostly selling “cheap merchandise for tourists”.

Tourists take photos of flowers at the stall of the Bloemenmarkt’s last florist (Source).

On the 16th of April 2019, Dutch newspapers reported that the last florist of the Bloemenmarkt had closed down. “The tourists have ruined my business”, he told a reporter. According to municipal policy, only 25 percent of the products sold at Bloemenmarkt flower stalls are allowed to be ‘related products’, but this policy is not enforced. In reality, most stalls focus on selling souvenirs which tourists can easily take home, such as plastic tulips, tulip bulbs, or marihuana seeds.

The Bloemenmarkt is illustrative of the effects of an unsustainable form of tourism which many popular destinations face. According to the World Tourism Organization, sustainable tourism is tourism which meets “the needs of present tourists and host regions while protecting and enhancing opportunity for the future”. Both tourists and residents are attracted to the Bloemenmarkt because of its cultural value, but because the market attracts so many tourists who photograph but don’t buy fresh flowers, the unique floating flower market transforms into a bunch of floating souvenir shops. As a result of this, Amsterdam’s cultural environment is damaged, needs of tourists and residents cannot be met (the TripAdvisor reviews are testimony to this) and future opportunity to visit this cultural heritage is lost.

With regard to the negative externalities of tourism, the Bloemenmarkt is only the tip of the iceberg. In other parts of Amsterdam, tourism causes congestion and pollution, and pushes up house pricescausinggentrification and transforming the character and ‘livability’ of many neighborhoods. With the number of visitors expected increase even more rapidly in the future, the pressure on the municipality of Amsterdam to design policies to put a stop to this unsustainable form of tourism is rising. Whether any of these policies will lure the florists back to the Bloemenmarkt, however, remains to be seen.

Bottom line: Tourism to Amsterdam in its current form threatens the livability of the city and the opportunities of future generations of tourists and local reisdents to enjoy the city’s cultural heritage.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Chinese investments in Ethiopia

Jade writes*

Last summer, I spent a month in Ethiopia. My family and friends thought my travel plans were surprising, but upon arrival in Addis Ababa, I learned that I didn’t attract much attention from the Ethiopians. They are used to seeing Chinese faces like mine. The value of Chinese investment projects in Ethiopia reached an estimated 4 billion USD last year. China is Ethiopia’s largest trade partner in terms of  exports (16% of the total, worth 344 million USD) and imports (33% of the total, worth 2.65 billion USD). These numbers reflect two sets of policies.

First, Ethiopia wants to attract foreign investments by improving its investment and business climate. Favourable policies combined with a big domestic market and a strategic location in the Horn of Africa make Ethiopia attractive for foreign investors.

Second, China huge Belt and Road Initiative (BRI) means that trillions of dollars in infrastructure financing are flowing to developing countries. On the one hand, BRI can be seen as a massive development project, providing unprecedented economic growth. On the other, BRI might result in unsustainable debts to Chinese creditors [pdf] and lost sovereignty. These are the two main narratives around Chinese investment in Africa.

It is indisputable that foreign investments have brought economic growth to Ethiopia. It has the fastest growing economy in the region, but growth has not necessarily brought higher incomes or better living conditions for the poorest citizens of one of the poorest countries in the world

This relationship may resemble the picture of foreign investors swooping into African countries to plunder natural resources with the cooperation of local elites, but Ethiopia’s story seems different. For one, Ethiopia does not have fossil fuels or rare earth minerals. Its main export is coffee, and  Chinese investments are focused on infrastructure and manufacturing. Second, the crackdown on corruption under Prime Minister Abiy seems effective. Our usual suspects, the resource curse and corruption, are not the main perils facing high-growth Ethiopia.

So is it just a matter of time until economic growth ‘trickles down,’ or are  new industrial parks, power plants and railways only benefitting Chinese companies and employees? And what other adverse effects might there be?

I was in the northern Afar region. Here, Afar men have worked for generations to extract blocks of salt in the sweltering desert heat. The salt is then transported by camels to the nearest market. The trek takes several days. When I was there, I saw many trucks marked with Chinese characters. New tarmac roads were just under construction, with the promise of more efficient transport. But infrastructure developments could have huge environmental impacts.

Will these developments destroy the environment and traditional ways of living, or bring prosperity? In the end, it is probably a combination of both.

Bottom line: Chinese investments in Ethiopia have brought economic growth, but development is a more complicated story.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Inequalities and industrialisation

Alex writes*

Inequality in Europe changed with 19th century industrialisation. At that time, wealth was concentrated amongst the upper echelons of society, but the industrial bourgeoisie used their profits to join the landed aristocracy [pdf]. 

Work in cities led to rapid urbanization of Western Europe throughout the 19th century. Terrible conditions led people to call for more rights. This was first met by deaf ears, but the Communist Manifesto of 1848 mobilised the workers to call for decent working and living conditions. Stronger labour rights meant less working hours for children  and reasonable salaries for adults. Politicians in Western Europe supported such reforms to compete with rising social democratic and socialist political parties. Germany’s Bismarck, for example, enacted laws in 1883-84 that compensated workers for sickness and accidents. The development of labour rights led to political rights. Voting rights in Germany were granted universally in 1919 under the Weimar Republic.

The changing norms in society led to new institutions, the labour rights movement, universal voting rights, and the welfare state. These changes increased economic development as prosperity benefited more people. Changing norms in Germany and Sweden (where men could vote in 1919 and women in 1921) gave rise to notions such of “Gemeinschaft und Volk” or “Samhälle och Folk” (Community and People), which led to institutions such as “Folkhemmet,”  a political idea that presented the Swedish welfare state as a home for the people and means of development.

Bottom line: The normative changes that Europe has experienced throughout the 19th and early 20th century are largely due to industrialisation. Wealth inequalities and a growing workforce demanding more labour rights led to a more equal distribution of wealth. Hence a shift from solely economic growth to better economic development. These labour rights then further translated into voting rights, changing values, and a welfare state that would protect workers and citizens from the hazards of life. 

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Accountability and development

Dyma writes*

One of the main outcomes of the Revolution of Dignity in Ukraine was the removal of a Russian puppet government. It was believed that the Russian grip on Ukraine’s economy was so strong that it was almost solely to blame for the country’s bad economic performance. After the revolution and a period of deep recession and inflation, the first quarter of growth relieved the country. However, in the years to come GDP growth was nowhere near as fast as some predicted or hoped for (Trading Economics, 2019). Ukraine was also lagging in development measures. Why?

Let us start with one of the root causes of the problem. In order to stay in power, the government had no problems with popularity right after the revolution, given the alternatives. After time, however, leaders had to defend their position, and they did this by avoiding responsibility for slow or missing progress. The government had two groups to please: normal people and economic elites. Normal people have no problem starting another revolution. Economic elites have a lot of political leverage due to the double balance problem (North et al., 2006).

In order to please the people, the government subsidises communal utilities: water, electricity, natural gas, and internet. In order to please the oligarchs, the government effectively subsidises their economic activity: usage of the national railway system, their businesses and factories, including the commodities that they need such as natural gas and coal (Evans, 2006). As a result, commodities used by the heavyweight industries owned by the oligarchs are available at below-market prices.

But what’s the connection between too low prices and slow development?

Let us use natural gas as an example. If it can be bought for less than the market price by people and industries, then two things happen. First, the subsidy money is usually extracted from another government controlled industry, which makes that industry uncompetitive. Secondly, the industry that ends up purchasing the cheap gas becomes uncompetitive too, should the price of gas increase because of a higher market price or a reduced subsidy. The reason for this being the fact that gas may constitute half of the price of the final product – an increased cost or a decreased market price for that product disables the business to some extent.

Uncompetitive businesses, in turn, do not invest into R&D, innovation, education, infrastructure and technology, which slows down growth and development. Apart from the lack of ability to invest, there is usually lack of incentive too. If the gas is that cheap, why would you look for more advanced technology?

Bottom Line: After a revolution and a period of recession Ukraine is not experiencing fast growth or development rates that one would expect or hope for. The mechanism that is preventing the improvement from happening has its root in the government’s need to avoid responsibility to the people and oligarchs. Through subsidising communal utilities as well as the large-scale economic activity of big economic players in the country, the government effectively makes those industries uncompetitive. Which, in turn, prevents any investment into R&D, innovation, education, infrastructure and technology.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Transitional privatization

Jorn writes*

Privatization has occurred in many countries and throughout different types of economies, but is most prominently featured in transitioning economies that move from a planned system to a market-led one. There are multiple ways to go about privatization. Which methods are employed determines for a large part which types of stakeholders are advantaged. This impacts ownership structures and consequently efficiency. The goals of economic growth and development are often at odds when choosing between methods.

This post first discusses common privatization methods. Secondly, it addresses the main considerations for governments deciding between these methods. Finally, it highlights the tension between growth and development.

Common forms of privatization are the public sale of shares and auctions of whole companies. The former enables more citizens to take part in the privatization, but risks dispersion, which tends to inhibit restructuring efforts. The latter is expected to create the highest value for the government and more efficient business governance, as ownership is with a large party that can easily replace inefficient managers.

When companies have a strategic importance, states often privatize via public tenders or direct negotiations. Their benefit is the control the government exerts over assets vital to the country and the guarantee that companies will have large ownership blocks, allowing for restructuring. It is also easier to limit foreign influence via these methods. A downside is that these processes are easy to be politicized, which creates advantages for the incumbent political elite.

A final method, employed especially in former Soviet and other Eastern European countries, is the use of voucher sales [pdf]. This process entails handing out vouchers with which citizens/employees can obtain ownership of companies. Many former Soviet states chose this method because most citizens possessed too little capital to obtain shares via other methods. The advantage therefore is that equality is promoted. The disadvantage is that the market process has no influence here, thus companies may not be obtained by the most efficient owners.

The dominant literature on privatization argues that private ownership is more efficient than state ownership; management ownership more than employee ownership; outsider ownership more than insider ownership and foreign ownership more than domestic ownership. See for more information this EOCD report on privatization in the Baltics [pdf].

Employees have incentives that collide with profit-maximization, such as the will to retain jobs and high wages. Managers have these incentives to a smaller extent, while the incentives of outsiders are likely to align most with profit maximization. In the case of poorer countries with weak institutions, foreign ownership provides a large advantage to enterprises. The foreign owners have better access to capital, management skills, and international business networks. However, political issues matter too. For privatization efforts to be feasible, they needs support from powerful groups in society and to some extent the population. Moreover, a government may be reluctant towards foreign ownership of its companies, as economic power often leads to political influence.

There thus exists a tension between development-oriented method and growth-oriented methods. The former stimulate for instance employee or management ownership, a form of more equitable, but less efficient ownership. The latter create ownership structures driven by primarily foreign investors. Although these are expected to be more efficient and thus stimulate economic growth in terms of production, they grant less benefits to ‘ordinary’ citizens and may slow down a country’s development.

Bottom line: The choice between methods of privatization is crucial, because it has a large impact on the ownership structure and subsequent development of enterprises. In many instances, growth and development will be at odds here.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Bangkok chokes on growth

Genie writes*

Bangkok had quite a hazy start to 2019. In January, the city was blanketed in smog and had a concentration of PM2.5 particles that was at dangerous levels. The Bangkok Metropolitan Administration (BMA) tried washing up the streets and buildings with water cannons, but the smog persisted. This lead Bangkok residents to express their dissatisfaction on social media platforms. But, was there more that the BMA could have done? Maybe slowing down growth in Bangkok could help.

In the past 250 years, Bangkok grew from a village on the bank of the Chao Phraya River to a megacity with over 14 million residents. Today Bangkok is the centre of economic activity for Thailand. The gross regional product (GRP) per capita for Bangkok is double the national GDP per capita. Bangkok’s GRP also represents 44.2 percent of Thailand’s GDP. The primacy of Bangkok’s economy is a result of government policies that have devoted funding to Bangkok and preference of foreign investors. Bangkok also benefits from being a first-mover agglomeration economy which makes it difficult for other cities to compete with Bangkok.

With Bangkok’s economic growth comes air pollution (related post).  The concentration of economic activity in Bangkok has lead to an increase in the city’s population, and consequently, an increase in the quantity of vehicles needed to transport that population. The lack of adequate public transit developments early on has also made Bangkok residents dependent on private cars. Thailand’s Pollution department estimates that vehicle emissions is responsible for approximately 60 percent of Bangkok’s greenhouse gas emissions and particulate matter. Bangkok’s current air pollution situation is harmful to the health of residents and can cost up to 6.6 billion baht (€180 million) in losses for the healthcare and tourism sector. Thus, improving the air quality is crucial for both Bangkok’s economic growth and development.

The haze is an important wake-up call for Bangkok. Urban experts urge the BMA to improve transport policies and invest in public transportation in Bangkok. However, the growth in Bangkok may no longer be economic. The worsening air pollution is one example of the many challenges that Bangkok faces that has potential to undermine its long-term economic growth and residents’ quality of life. It may be an indicator that the additional costs for Bangkok’s economic growth exceeds the additional benefits, and growth is uneconomic. Bangkok already receives high levels of public investment as the Thai government attempts to uphold its deteriorating quality of life, so it may be worth investing in peripheral regions that can ease pressures in the capital.

Bottom line: Bangkok’s economic growth may no longer be economic because of increasing costs such as air pollution. Therefore, instead of investing more resources in Bangkok’s growth, allocating resources for the development of peripheral regions can help promote Thailand’s development.

* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).