Category: EEcon

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.

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

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.

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

 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.

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

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”.

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.

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