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RICHARD SCHMALENSEE:
--do is talk a bit

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about the politics of regulation
and a bit more about EPA

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00:00:27,120 --> 00:00:30,330
and how it works and
how it has worked.

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Just by way of why are we doing
this in a course on energy

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policy, an awful
lot of energy policy

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is set by environmental
regulation.

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All the-- much of the
discussion of doing

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CO2 controls for climate
change comes down

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to shaping energy policy.

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So you really do need to
think about the environmental

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regulation when thinking
about where energy is going

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and where energy
policy is going.

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And we'll talk about
a trading regime.

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We talked about cap and
trade earlier briefly

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when we talked about
climate change.

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We'll talk about it in the
context of SO2 in the case

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you've all read and
subsequent developments,

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and then say a little bit
about generally what the--

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how the regime looks.

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It's worth stepping
back a minute just

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to relate to some of
the earlier discussions

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we had about politics
and interest groups.

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I like the Wilson piece
because it splits politics

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into recognizable categories.

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I had a little
trouble, I confess,

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as a non-political
scientist getting my head

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around Lowy's four categories.

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Wilson's are easy.

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Who bears the costs?

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Are they concentrated?

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Who bears the benefits?

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Are they concentrated?

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00:01:54,150 --> 00:01:58,530
In the case of where the costs
of regulation are concentrated

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and the benefits of
regulation are concentrated,

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you get classic interest
group competition.

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Cargos between US ports have
to be carried in US ships

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by very long-standing law.

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Those rights are regulated
by the-- those US

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flagships wouldn't
exist but for that law.

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This really affects
people who live in Hawaii

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and who get cargos
from the mainland.

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There are a small
number of shippers.

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There are a small
number of customers.

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They're regulated by the
Federal Maritime Commission

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that you've never heard
of, and they care a lot.

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And that is the ultimate
inside baseball.

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So that's maritime regulation.

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Client politics is where the
benefits are concentrated

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and the costs are dispersed.

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And there's a lot of that.

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We talked about concentrated
versus dispersed interests,

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milk price supports.

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A small number of milk
producers benefit, the costs

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are dispersed among consumers.

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In the old days of
airline regulation,

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it sort of looked like that.

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The reverse-- then he
talks about majoritarian,

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where like antitrust, where
you really can't identify

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the benefits and the costs.

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They're both quite dispersed.

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The interesting case, and
the case we have today,

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is where the costs
are concentrated

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and the benefits are dispersed.

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And by our earlier
discussions of what

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shapes interest group influence,
that shouldn't happen.

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And the examples of
that are cases where

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there was a social movement--

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EPA.

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The Food and Drug
Administration came out

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of scandals in the early
part of the last century.

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And you can talk about
a lot of regulation

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that has that
character, but that

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comes from a social movement.

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He calls it
entrepreneurial, and that's

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because usually an entrepreneur
drove the movement.

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So it's useful to think
about sort of where

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the regulation came from.

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It's also useful to
think about, who does it?

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Does anybody recall
the types that Wilson

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has of people who work
in regulatory agencies?

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Why would you work in
a regulatory agency?

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Yeah.

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AUDIENCE: It's safe [INAUDIBLE].

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Like, it's very--
it doesn't oscillate

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as much with the market.

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RICHARD SCHMALENSEE: So you
might make a career out of it.

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You might say, I want to
work in the Food and Drug

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Administration as
opposed to a drug company

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because it's really
safe and it's steady.

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OK.

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So that's the usual
civil service argument.

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Any other reason?

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David?

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AUDIENCE: Ideally
because you care

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a lot about the environment
in whatever you're doing.

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00:04:52,030 --> 00:04:53,170
RICHARD SCHMALENSEE:
You might care a lot

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about what you're doing.

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You might care a lot
about what you're doing.

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So you might be a--

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I guess an advocate,
which isn't quite what--

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quite one of his categories.

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Anything else you might--
any other reason you might--

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00:05:10,080 --> 00:05:10,866
Ryan?

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00:05:10,866 --> 00:05:12,570
AUDIENCE: Work with
political leaders.

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00:05:12,570 --> 00:05:13,860
RICHARD SCHMALENSEE: You
work with political leaders.

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You might have
political ambitions.

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It doesn't arise
so much at the EPA,

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but it can arise
in other settings.

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You might also-- this is kind
of obscure, but you might--

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why would an economist go to
work for the antitrust division

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00:05:26,370 --> 00:05:29,820
in the Department of Justice,
or a lawyer, for that matter?

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To build a professional
reputation and then move out.

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So Wilson talks about
careerists, politicians,

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and professionals.

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Careerists are those who
really believe in the agency.

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And they're David's people who--

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you work for the EPA because
you care about the environment.

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Politicians want to go
someplace with that,

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00:05:49,200 --> 00:05:52,260
make contacts, and move on.

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And professionals, lawyers,
want to gain status.

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You want to be a
Washington lawyer,

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00:05:58,380 --> 00:06:02,530
you work for a Washington
agency, and you get known.

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Who worked in the EPA early
on, who would you guess?

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David?

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Who would work for the
EPA when it starts?

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AUDIENCE: People who care a
lot about the environment.

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RICHARD SCHMALENSEE: That
means, and it's still true,

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that you know how the
EPA thinks as an agency.

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EPA favors tight rules.

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EPA favors vigorous enforcement
because of the people

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who were there.

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Think about the
Department of Energy.

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Why do you go to work for
the Department of Energy?

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Well, you'd like reliable,
abundant supplies of energy.

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You care about that.

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Maybe you want to move
into the energy industry.

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EPA-- you may want
to move into one

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of the environmental groups.

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The Department of
Energy-- you know how

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they think going into the room.

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If you have a meeting with EPA
and energy, as I had many of,

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you know.

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You don't have to
know who they are.

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You know where
they come from, you

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know how they think because
you know why they got there.

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One needs to think about this.

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Recall when we talked
about biodiesel at MIT.

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We talked about what
do those people do?

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What is their job?

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What is their responsibility?

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You didn't have to
know them to know

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how they'd act in a meeting.

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You had to know where they sat--

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where they sat.

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Where you stand depends
on where you sit.

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OK.

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Just talking now about
EPA, they do water, toxics

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of various kinds, regulation.

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Mostly what we care
about here is air.

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They set national air
quality, ambient air quality

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standards for six pollutants--

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ozone particulates,
carbon monoxide,

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oxides of nitrogen,
SOx and lead.

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All of them-- because the
lead came from leaded gasoline

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primarily-- are
driven by energy use.

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So those standards
and other regulations

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set energy policy, in effect.

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The law requires
them to set standards

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to protect human health with
an adequate margin of safety,

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which presumes a threshold.

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People have said for
30 years and more,

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there aren't any thresholds.

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The law presumes thresholds.

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As we discussed last
time, they control--

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they review state
implementation plans.

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The reference to MIT parking
is to remind me to tell you

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that the Massachusetts
state implementation

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plan limits the number of
parking spots MIT can have.

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And one of the reasons
there's a large garage

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under this building is that
MIT wasn't using its limit

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and was afraid the
limit would be lowered.

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So state implementation plans
can go into great detail

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and are reviewed by the EPA.

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We talked about taxes
to limit pollution.

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EPA has never done that.

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00:09:02,040 --> 00:09:04,920
They do-- early on they
did very little trading.

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We talked about
offsets and so forth.

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00:09:08,480 --> 00:09:10,800
I'll come back to
that in a second.

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Mostly, they set standards.

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Most regulation is so many
grams of this, per unit of that,

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00:09:21,760 --> 00:09:25,100
or use this technology.

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The economist's alternative
is put a price on it,

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or limit its amount and let
people trade the right to emit.

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When might a standard be better?

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Why might a standard be
better in some cases,

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00:09:41,560 --> 00:09:42,820
not to be too dogmatic?

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Yep?

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AUDIENCE: Well, standard,
you're-- you leave the option

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00:09:45,745 --> 00:09:50,620
for the specific
solution to be localized.

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00:09:50,620 --> 00:09:55,390
So if a specific-- is it all
just setting how exactly how

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00:09:55,390 --> 00:09:56,307
they should go about--

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RICHARD SCHMALENSEE:
Well, that's

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a standard versus a technology.

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How about a standard
versus a tax or trade?

212
00:10:03,580 --> 00:10:07,360
Because a standard tells
you what you must achieve--

213
00:10:07,360 --> 00:10:10,203
doesn't necessarily
tell you how.

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00:10:10,203 --> 00:10:11,620
That's an interesting
distinction.

215
00:10:11,620 --> 00:10:12,280
Tell me about why you--

216
00:10:12,280 --> 00:10:12,988
AUDIENCE: Oh, OK.

217
00:10:12,988 --> 00:10:17,650
So for example, cap and
trade, you can get--

218
00:10:17,650 --> 00:10:21,940
when you establish cap and trade
or some sort of taxing, like,

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00:10:21,940 --> 00:10:22,750
you can still--

220
00:10:22,750 --> 00:10:25,630
you're still not going to limit
the amount of pollution, right?

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00:10:25,630 --> 00:10:30,460
So if for whatever
reason, a specific region

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00:10:30,460 --> 00:10:32,110
has a lot of credit,
they can still

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00:10:32,110 --> 00:10:35,650
overpollute, as long as they
get their qualifications

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00:10:35,650 --> 00:10:36,530
in other ways.

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00:10:36,530 --> 00:10:37,030
So I think--

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00:10:37,030 --> 00:10:39,250
RICHARD SCHMALENSEE: So
let me just cut you there.

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00:10:39,250 --> 00:10:41,920
What you're saying
is, it doesn't--

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00:10:41,920 --> 00:10:45,790
you can have intense
pollution in some areas.

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Now, for carbon dioxide that
isn't going to matter, is it?

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00:10:48,490 --> 00:10:50,320
Because it mixes.

231
00:10:50,320 --> 00:10:53,200
But it might matter
if it doesn't mix.

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00:10:53,200 --> 00:10:56,080
So suppose you have a pollutant
that basically travels

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00:10:56,080 --> 00:10:58,168
50 feet from the plant.

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00:10:58,168 --> 00:10:59,710
Then you wouldn't
want to use trading

235
00:10:59,710 --> 00:11:01,720
from plants and
widely separated areas

236
00:11:01,720 --> 00:11:03,130
because you'd have a hotspot.

237
00:11:03,130 --> 00:11:03,760
OK.

238
00:11:03,760 --> 00:11:05,567
So standards can
deal with hotspots,

239
00:11:05,567 --> 00:11:07,150
and that's called
the hotspot problem.

240
00:11:07,150 --> 00:11:08,400
You had a comment, Jacqueline?

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00:11:08,400 --> 00:11:10,280
AUDIENCE: Is there any
hazardous substances?

242
00:11:10,280 --> 00:11:11,260
RICHARD SCHMALENSEE: Well,
that's the same issue.

243
00:11:11,260 --> 00:11:12,880
Hazardous substances,
you might just--

244
00:11:12,880 --> 00:11:15,620
if they're really hazardous,
you might want to ban them.

245
00:11:15,620 --> 00:11:17,698
And if they don't travel--

246
00:11:17,698 --> 00:11:19,490
all that stuff's
hazardous, to some extent.

247
00:11:19,490 --> 00:11:22,790
If they don't travel
and they don't mix,

248
00:11:22,790 --> 00:11:24,650
then you don't want to
say an emission here

249
00:11:24,650 --> 00:11:27,170
is equivalent to
an emission there.

250
00:11:27,170 --> 00:11:30,470
Lots of emissions here, and none
there is the same thing as none

251
00:11:30,470 --> 00:11:31,400
there and lots there.

252
00:11:31,400 --> 00:11:32,510
It may not be true.

253
00:11:32,510 --> 00:11:34,980
People may live over
here, and not over there.

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00:11:34,980 --> 00:11:38,300
So that's the hot spot problem,
where things don't mix.

255
00:11:38,300 --> 00:11:41,360
Any other reason why
you might want to--

256
00:11:41,360 --> 00:11:45,600
suppose you couldn't
measure emissions very well.

257
00:11:45,600 --> 00:11:49,990
Like automobiles-- we don't do
cap and trade for automobiles.

258
00:11:49,990 --> 00:11:54,570
Can we measure what comes out
of the tailpipe of your car?

259
00:11:54,570 --> 00:11:56,370
Not real easily.

260
00:11:56,370 --> 00:12:02,160
We can measure per mile when
you go to get it inspected.

261
00:12:02,160 --> 00:12:06,000
But it's-- aside from
monitoring your driving,

262
00:12:06,000 --> 00:12:08,100
putting a meter
on your tailpipe,

263
00:12:08,100 --> 00:12:09,990
we couldn't do cap and trade.

264
00:12:09,990 --> 00:12:11,895
We can't measure it.

265
00:12:11,895 --> 00:12:13,520
So there are enforcement
issues, right?

266
00:12:13,520 --> 00:12:15,590
If I say to the
power plant, you have

267
00:12:15,590 --> 00:12:17,300
to put this device
on your smokestack,

268
00:12:17,300 --> 00:12:19,700
and it has to be working
when our inspectors come,

269
00:12:19,700 --> 00:12:21,810
that's easy.

270
00:12:21,810 --> 00:12:23,840
I can go check that.

271
00:12:23,840 --> 00:12:27,170
That's why EPA-- one reason EPA
loves standards, particularly

272
00:12:27,170 --> 00:12:29,190
technology standards.

273
00:12:29,190 --> 00:12:30,150
Do you have the box?

274
00:12:30,150 --> 00:12:31,590
Is it working?

275
00:12:31,590 --> 00:12:32,610
Easy.

276
00:12:32,610 --> 00:12:35,610
Not, how many tons
did you produce?

277
00:12:35,610 --> 00:12:37,930
Did you run it the
daytime or night?

278
00:12:37,930 --> 00:12:41,130
So there are enforcement issues,
and there are hotspot issues.

279
00:12:46,380 --> 00:12:47,170
Let me see.

280
00:12:47,170 --> 00:12:52,760
Is there anything
else you can think of?

281
00:12:52,760 --> 00:12:55,090
Did anybody look at the
Sandel piece that's on it

282
00:12:55,090 --> 00:12:57,370
and recommended?

283
00:12:57,370 --> 00:12:58,000
Probably not.

284
00:12:58,000 --> 00:13:00,040
It's late in the semester.

285
00:13:00,040 --> 00:13:05,200
Sandel argues that
none of us would

286
00:13:05,200 --> 00:13:08,530
agree that you ought to
be able to buy a license

287
00:13:08,530 --> 00:13:10,060
to dump garbage in the street.

288
00:13:12,920 --> 00:13:15,980
So he would say--

289
00:13:15,980 --> 00:13:19,100
even if we could
do that, we could

290
00:13:19,100 --> 00:13:21,320
have licenses to just dump
garbage in the street.

291
00:13:24,370 --> 00:13:28,720
But we'd all sort of
think that's wrong.

292
00:13:28,720 --> 00:13:31,810
If you could buy the right to
dump garbage in the street,

293
00:13:31,810 --> 00:13:34,600
you'd eliminate the stigma.

294
00:13:34,600 --> 00:13:38,520
And if you eliminate the
stigma, you eliminate a force

295
00:13:38,520 --> 00:13:40,490
for cleaning up.

296
00:13:40,490 --> 00:13:43,970
So Sandel would say it's
wrong to do trading because it

297
00:13:43,970 --> 00:13:47,700
sort of eliminates the stigma.

298
00:13:47,700 --> 00:13:52,900
Now, carbon dioxide versus
hazardous chemicals--

299
00:13:52,900 --> 00:13:56,640
you may want to argue whether
a stigma is appropriate

300
00:13:56,640 --> 00:13:58,170
as we breathe out CO2.

301
00:13:58,170 --> 00:14:01,830
Maybe that's not such a
terrible thing to be doing.

302
00:14:01,830 --> 00:14:07,050
But the other issue
you might think about--

303
00:14:10,140 --> 00:14:18,390
if I can put a device on
the smokestack and I'm done,

304
00:14:18,390 --> 00:14:22,240
I get no credit
for doing better.

305
00:14:22,240 --> 00:14:26,370
So I get no credit for beating
a standard if a standard is set.

306
00:14:26,370 --> 00:14:29,690
So there's no
reason to innovate.

307
00:14:29,690 --> 00:14:31,490
If you've told me
that all I have

308
00:14:31,490 --> 00:14:35,970
to do to comply with the
law is x, then I'm done.

309
00:14:35,970 --> 00:14:40,220
If you tell me it costs $5
a ton every time I emit,

310
00:14:40,220 --> 00:14:45,330
I have a constant incentive to
figure out ways to avoid it.

311
00:14:45,330 --> 00:14:49,570
So standards ease enforcement.

312
00:14:49,570 --> 00:14:52,860
They avoid the hot spot problem.

313
00:14:52,860 --> 00:14:55,770
Environmentalists don't
like markets traditionally

314
00:14:55,770 --> 00:14:59,610
because they like the stigma,
which I guess would apply--

315
00:14:59,610 --> 00:15:02,310
I think makes more sense
in the case of toxics

316
00:15:02,310 --> 00:15:05,690
than in the case of CO2.

317
00:15:05,690 --> 00:15:08,180
Plenty of people would
like to stigmatize SUVs.

318
00:15:10,950 --> 00:15:15,750
It raises costs-- may raise
costs, which we talked about.

319
00:15:15,750 --> 00:15:18,030
We'll come back to.

320
00:15:18,030 --> 00:15:21,400
And there's no reward
for innovation.

321
00:15:21,400 --> 00:15:25,370
There's no reward for
beating the standard.

322
00:15:25,370 --> 00:15:27,740
OK.

323
00:15:27,740 --> 00:15:30,740
A little bit about
early trading, which

324
00:15:30,740 --> 00:15:32,310
is in the text assignment.

325
00:15:32,310 --> 00:15:34,310
Let me just mention this.

326
00:15:34,310 --> 00:15:37,190
This is before 1990.

327
00:15:37,190 --> 00:15:42,080
Did we have any trading
allowed in the US

328
00:15:42,080 --> 00:15:43,910
apart from the lead phase-out?

329
00:15:43,910 --> 00:15:45,410
Well, there were a few.

330
00:15:45,410 --> 00:15:50,630
Netting says you can
go to your regulator.

331
00:15:50,630 --> 00:15:52,160
You have an oil refinery.

332
00:15:52,160 --> 00:15:55,620
Emissions here are regulated and
emissions there are regulated--

333
00:15:55,620 --> 00:15:57,680
different parts of
the same factory.

334
00:15:57,680 --> 00:15:59,180
And you say to the
regulator, look,

335
00:15:59,180 --> 00:16:02,750
I'd really like to emit a little
more here in exchange for a lot

336
00:16:02,750 --> 00:16:06,530
less there, or maybe it's even.

337
00:16:06,530 --> 00:16:07,670
That's called netting.

338
00:16:07,670 --> 00:16:10,070
It's in the same
internal transactions

339
00:16:10,070 --> 00:16:12,890
or within an entity,
within a plant.

340
00:16:12,890 --> 00:16:14,850
External transactions
are outside.

341
00:16:14,850 --> 00:16:17,180
These are inside.

342
00:16:17,180 --> 00:16:23,270
They happened,
thousands of them.

343
00:16:23,270 --> 00:16:25,370
Offsets-- I think
we talked about.

344
00:16:25,370 --> 00:16:30,230
Offsets are, I'm going
to do more than is

345
00:16:30,230 --> 00:16:31,700
required in my factory--

346
00:16:31,700 --> 00:16:34,190
or less than is
required in my factory,

347
00:16:34,190 --> 00:16:36,980
in exchange for which he'll
do a lot more than is required

348
00:16:36,980 --> 00:16:39,020
in his factory.

349
00:16:39,020 --> 00:16:42,330
He'll do more than
he would have done.

350
00:16:42,330 --> 00:16:44,970
And those are very
complicated negotiations

351
00:16:44,970 --> 00:16:46,920
that happen in Los
Angeles heavily,

352
00:16:46,920 --> 00:16:49,530
because you couldn't
build in Los Angeles.

353
00:16:49,530 --> 00:16:51,960
You couldn't add anything
new in Los Angeles

354
00:16:51,960 --> 00:16:55,140
unless you shut something down.

355
00:16:55,140 --> 00:16:57,680
So if you happen not to
have anything to shut down,

356
00:16:57,680 --> 00:17:00,090
you did a deal.

357
00:17:00,090 --> 00:17:02,130
And the local
regulators would either

358
00:17:02,130 --> 00:17:05,940
approve it on the grounds
that you were actually

359
00:17:05,940 --> 00:17:08,550
reducing emissions over there
more than would have happened

360
00:17:08,550 --> 00:17:10,319
or they'll disapprove it.

361
00:17:10,319 --> 00:17:12,990
Because what the typical thing
is, you take an old factory,

362
00:17:12,990 --> 00:17:16,280
and you pay them to shut down.

363
00:17:16,280 --> 00:17:18,650
And the regulator would say,
but that's an old factory.

364
00:17:18,650 --> 00:17:20,900
It would have shut down anyway.

365
00:17:20,900 --> 00:17:23,060
So prove to me it
wouldn't have shut down

366
00:17:23,060 --> 00:17:24,319
if you hadn't paid it.

367
00:17:24,319 --> 00:17:28,460
Well, that's either impossible
if the burden of proof

368
00:17:28,460 --> 00:17:32,000
is set high, or easy
if it's set low.

369
00:17:32,000 --> 00:17:37,780
Bubbles are where
you take an area,

370
00:17:37,780 --> 00:17:40,020
and you worry about
emissions within the area.

371
00:17:40,020 --> 00:17:41,950
You put a bubble over it.

372
00:17:41,950 --> 00:17:43,420
Some experiments were done.

373
00:17:43,420 --> 00:17:45,940
Banking is where
I'll do more than I

374
00:17:45,940 --> 00:17:48,400
have to today in
exchange for less than I

375
00:17:48,400 --> 00:17:51,500
have to tomorrow-- very
little of that was done.

376
00:17:51,500 --> 00:17:55,510
So these are kinds of trading
that the regulators fiddled

377
00:17:55,510 --> 00:17:59,970
with early on, but
not in high volume

378
00:17:59,970 --> 00:18:05,760
except for netting,
and not much impact.

379
00:18:05,760 --> 00:18:09,460
So let us go to--

380
00:18:09,460 --> 00:18:13,050
oh, one last thing
before I go to the case.

381
00:18:13,050 --> 00:18:17,590
I want to say a little bit about
cost-benefit analysis, just

382
00:18:17,590 --> 00:18:18,340
a very little bit.

383
00:18:18,340 --> 00:18:20,430
We talked about it early on.

384
00:18:20,430 --> 00:18:24,570
But it comes up sort of
in the case, sort of.

385
00:18:24,570 --> 00:18:29,370
EPA has to produce a
cost-benefit analysis

386
00:18:29,370 --> 00:18:32,700
of defending any
regulation at issues.

387
00:18:32,700 --> 00:18:34,740
That's been a
requirement-- really,

388
00:18:34,740 --> 00:18:38,900
the case talks about the
first sort of instances of it

389
00:18:38,900 --> 00:18:39,860
under Carter.

390
00:18:39,860 --> 00:18:42,890
It's been-- every president
has revised this rule

391
00:18:42,890 --> 00:18:45,440
for executive branch agencies.

392
00:18:45,440 --> 00:18:48,950
Usually, however, the
agencies make a decision

393
00:18:48,950 --> 00:18:53,320
and then do a cost-benefit to
prove it was a good idea, which

394
00:18:53,320 --> 00:18:54,877
drives other people crazy.

395
00:18:54,877 --> 00:18:56,710
It's supposed to be
used to make a decision.

396
00:18:56,710 --> 00:19:00,340
It's generally used
to defend a decision.

397
00:19:00,340 --> 00:19:05,050
You never ever have
EPA produce a rule

398
00:19:05,050 --> 00:19:06,910
and say, well, we have
to produce this rule,

399
00:19:06,910 --> 00:19:08,890
but in fact, it has no benefits.

400
00:19:08,890 --> 00:19:12,700
There's always a benefit.

401
00:19:12,700 --> 00:19:14,950
Some controversies,
some of which

402
00:19:14,950 --> 00:19:20,470
are mentioned in the text, EPA
having found carbon dioxide

403
00:19:20,470 --> 00:19:26,650
emissions to be dangerous is
legally obliged to regulate it.

404
00:19:26,650 --> 00:19:32,120
EPA has issued draft regulations
for new power plants.

405
00:19:32,120 --> 00:19:35,540
Those regulations are being
challenged in court for,

406
00:19:35,540 --> 00:19:39,110
among other reasons, being
arbitrary and capricious

407
00:19:39,110 --> 00:19:42,680
because they will
have no benefits.

408
00:19:42,680 --> 00:19:46,010
Regulation of carbon
dioxide from new US power

409
00:19:46,010 --> 00:19:48,170
plants in a slow
growth period when

410
00:19:48,170 --> 00:19:49,850
we're a small part
of the world will

411
00:19:49,850 --> 00:19:52,200
have no detectable benefits.

412
00:19:52,200 --> 00:19:53,700
True fact.

413
00:19:53,700 --> 00:19:57,520
EPA is legally obliged to
issue a regulation, however.

414
00:19:57,520 --> 00:19:59,020
It will be very
interesting to see

415
00:19:59,020 --> 00:20:01,210
how the court rules
on this one, which

416
00:20:01,210 --> 00:20:02,760
is now before the DC Circuit.

417
00:20:05,380 --> 00:20:07,330
There are a set of
controversies about,

418
00:20:07,330 --> 00:20:09,640
well, when you do a
cost-benefit analysis, what

419
00:20:09,640 --> 00:20:12,070
discount rate do you use?

420
00:20:12,070 --> 00:20:14,470
What do you-- do you
value carbon dioxide

421
00:20:14,470 --> 00:20:16,620
emissions as a cost?

422
00:20:16,620 --> 00:20:20,420
And how do you
value a life saved?

423
00:20:20,420 --> 00:20:24,770
There are White House Office
of Management and Budget

424
00:20:24,770 --> 00:20:29,060
directives on all of those that
tell agencies how to proceed.

425
00:20:29,060 --> 00:20:33,370
You could imagine those are the
outcomes of significant fights

426
00:20:33,370 --> 00:20:36,710
within each administration.

427
00:20:36,710 --> 00:20:41,900
Another significant fight
is the senior discount,

428
00:20:41,900 --> 00:20:44,650
which the text talks about.

429
00:20:44,650 --> 00:20:48,460
And the way to
think about this one

430
00:20:48,460 --> 00:20:54,310
is, do you count small particles
that are-- small particulates

431
00:20:54,310 --> 00:20:59,330
that result from
sulfate emissions

432
00:20:59,330 --> 00:21:04,580
cause acute respiratory episodes
under certain conditions.

433
00:21:04,580 --> 00:21:09,480
Those tend to kill
elderly people.

434
00:21:09,480 --> 00:21:15,530
So if you value the average
life saved at, say, $6 million,

435
00:21:15,530 --> 00:21:19,253
how do you value the
life of an 85-year-old?

436
00:21:19,253 --> 00:21:21,170
Some people say, well,
you shouldn't do lives,

437
00:21:21,170 --> 00:21:23,270
you should do life years.

438
00:21:23,270 --> 00:21:26,180
That 85-year-old is only
expected to live a few years.

439
00:21:26,180 --> 00:21:27,740
If, in fact, you
killed a teenager,

440
00:21:27,740 --> 00:21:32,290
you're costing a
lot more life years.

441
00:21:32,290 --> 00:21:35,860
The EPA discussed this at one
point and proposed to do it.

442
00:21:35,860 --> 00:21:38,660
That was the senior discount.

443
00:21:38,660 --> 00:21:41,120
Who votes?

444
00:21:41,120 --> 00:21:43,510
That proposal died.

445
00:21:43,510 --> 00:21:45,430
I think most economists
think, although we're

446
00:21:45,430 --> 00:21:49,840
a little uneasy about this, that
it sort of makes sense to ask,

447
00:21:49,840 --> 00:21:54,640
are you killing somebody two
weeks early or 50 years early?

448
00:21:54,640 --> 00:21:57,970
How you want to deal
with that difference

449
00:21:57,970 --> 00:22:03,570
you can argue about for days,
but it sort of seems to matter.

450
00:22:03,570 --> 00:22:08,310
But the 80-year-old votes,
so the senior discount

451
00:22:08,310 --> 00:22:14,160
seems to have vanished from
government decision-making.

452
00:22:14,160 --> 00:22:21,960
It appears all the time
in academic analysis.

453
00:22:21,960 --> 00:22:25,350
Contingent valuation--
just one last topic.

454
00:22:25,350 --> 00:22:29,820
It's not quite as hot a topic
as it used to used to be.

455
00:22:29,820 --> 00:22:33,330
When we had the big Exxon
Valdez oil spill in Alaska

456
00:22:33,330 --> 00:22:41,020
that was notorious, the question
was, what are the damages?

457
00:22:41,020 --> 00:22:42,900
The damages were
mostly to wildlife

458
00:22:42,900 --> 00:22:45,030
in the natural environment,
and nobody lived there

459
00:22:45,030 --> 00:22:46,780
to a first approximation.

460
00:22:46,780 --> 00:22:49,800
So it would be hard to
say that a lot of people

461
00:22:49,800 --> 00:22:51,020
were directly damaged.

462
00:22:51,020 --> 00:22:53,190
So if you ask-- loss
of fishing revenue,

463
00:22:53,190 --> 00:22:57,720
$6; loss of campsites, $12.

464
00:22:57,720 --> 00:23:01,560
So the following
technique was adopted.

465
00:23:01,560 --> 00:23:06,040
They sent out a survey to
people in the lower 48 states.

466
00:23:06,040 --> 00:23:10,660
How much would you be willing
to pay to undo the damage caused

467
00:23:10,660 --> 00:23:11,920
by the Exxon Valdez?

468
00:23:11,920 --> 00:23:14,910
And then they would
list a bunch of things.

469
00:23:14,910 --> 00:23:18,330
And you get a really big number
when you ask that question

470
00:23:18,330 --> 00:23:19,800
and add it up.

471
00:23:19,800 --> 00:23:22,050
Because most people-- a lot
of people will pay zero.

472
00:23:22,050 --> 00:23:23,730
That's the most common answer.

473
00:23:23,730 --> 00:23:25,980
But among those people
who would pay something,

474
00:23:25,980 --> 00:23:29,560
a standard answer is $20.

475
00:23:29,560 --> 00:23:36,320
So since it's not real money,
you multiply that across 60,

476
00:23:36,320 --> 00:23:41,020
70 million people, you get a--
and a few people will put out

477
00:23:41,020 --> 00:23:43,000
$1,000, $2,000, $5,000--

478
00:23:43,000 --> 00:23:45,370
you'll get hundreds
of millions of dollars

479
00:23:45,370 --> 00:23:48,330
easily with a
question like that.

480
00:23:48,330 --> 00:23:51,350
Does that mean anything?

481
00:23:51,350 --> 00:23:53,630
This one was also in court
in a number of cases.

482
00:23:53,630 --> 00:23:56,300
Does that mean anything?

483
00:23:56,300 --> 00:23:59,690
One response to it was to
do surveys where they took--

484
00:23:59,690 --> 00:24:03,110
they asked other people
the same kind of question,

485
00:24:03,110 --> 00:24:06,000
but they doubled the
number of birds killed.

486
00:24:06,000 --> 00:24:08,500
And then they asked other people
the same kind of question--

487
00:24:08,500 --> 00:24:11,510
they cut the number of
birds killed in half.

488
00:24:11,510 --> 00:24:14,690
That didn't affect the answers.

489
00:24:14,690 --> 00:24:17,330
We say, oh, maybe
what I'm getting

490
00:24:17,330 --> 00:24:19,483
is general environment
sentiment that has nothing

491
00:24:19,483 --> 00:24:20,525
to do with this accident.

492
00:24:23,130 --> 00:24:25,770
But then how do I value the fact
that there was enormous damage

493
00:24:25,770 --> 00:24:29,970
to natural systems in wildlife
if I can't relate it to people

494
00:24:29,970 --> 00:24:33,100
and the birds don't vote?

495
00:24:33,100 --> 00:24:35,642
I'd say that remains
an unanswered question.

496
00:24:35,642 --> 00:24:37,600
This notion of asking
people how much would you

497
00:24:37,600 --> 00:24:40,600
pay to save a
million birds gives

498
00:24:40,600 --> 00:24:43,000
answers that seem quite
unreliable, because you

499
00:24:43,000 --> 00:24:44,800
get the same answer
for 1,000, and you get

500
00:24:44,800 --> 00:24:46,480
the same answer for 10 million.

501
00:24:46,480 --> 00:24:48,350
So you say, I don't
know what that means,

502
00:24:48,350 --> 00:24:51,870
but I don't think
it's a real answer.

503
00:24:51,870 --> 00:24:54,920
But then how do you
value the birds?

504
00:24:54,920 --> 00:24:57,960
So a number of
questions, lots of fun.

505
00:24:57,960 --> 00:25:02,670
Let's go to the case.

506
00:25:02,670 --> 00:25:06,300
We passed the 1970
Clean Air Act amendments

507
00:25:06,300 --> 00:25:10,530
and instructed EPA to do
a lot of things, including

508
00:25:10,530 --> 00:25:13,290
the 1971 New Source
Performance Standard

509
00:25:13,290 --> 00:25:15,570
for coal-fired generators.

510
00:25:15,570 --> 00:25:19,470
We talked last time about who
were the interest groups review

511
00:25:19,470 --> 00:25:20,010
the bidding.

512
00:25:20,010 --> 00:25:23,842
Who was involved in
setting the '71 standard.

513
00:25:23,842 --> 00:25:25,050
Who were the interest groups?

514
00:25:29,970 --> 00:25:31,260
We did this last time.

515
00:25:31,260 --> 00:25:32,575
Consult your memory.

516
00:25:32,575 --> 00:25:34,020
AUDIENCE: Earth Day treehuggers.

517
00:25:34,020 --> 00:25:34,340
RICHARD SCHMALENSEE: What?

518
00:25:34,340 --> 00:25:36,215
AUDIENCE: [INAUDIBLE]
Earth Day [INAUDIBLE]..

519
00:25:36,215 --> 00:25:38,548
RICHARD SCHMALENSEE: Well,
treehuggers were very heavily

520
00:25:38,548 --> 00:25:41,352
involved getting the act passed,
but you don't hear them much

521
00:25:41,352 --> 00:25:42,810
mentioned in
connection with making

522
00:25:42,810 --> 00:25:44,640
this administrative decision.

523
00:25:44,640 --> 00:25:45,570
This was lobbying.

524
00:25:45,570 --> 00:25:48,210
Who are the lobbyists?

525
00:25:48,210 --> 00:25:49,420
EPA made the decision.

526
00:25:49,420 --> 00:25:49,920
Casey?

527
00:25:49,920 --> 00:25:52,297
AUDIENCE: The utilities
and the coal producers.

528
00:25:52,297 --> 00:25:53,880
RICHARD SCHMALENSEE:
Were all the coal

529
00:25:53,880 --> 00:25:55,370
producers in agreement?

530
00:25:55,370 --> 00:25:56,070
AUDIENCE: No.

531
00:25:56,070 --> 00:25:58,650
Because eastern coal
has a higher sulfur

532
00:25:58,650 --> 00:26:00,180
content than western does.

533
00:26:00,180 --> 00:26:02,763
RICHARD SCHMALENSEE: So you had
eastern coal and western coal,

534
00:26:02,763 --> 00:26:05,160
and I'm about to lead you
to the next question, which

535
00:26:05,160 --> 00:26:08,270
is, why did that make it hard?

536
00:26:08,270 --> 00:26:12,920
AUDIENCE: Because eastern
coal producers were afraid

537
00:26:12,920 --> 00:26:15,860
that if EPA put a
standard in place

538
00:26:15,860 --> 00:26:18,330
it required heavy emission
cuts without setting

539
00:26:18,330 --> 00:26:21,680
a specific technology in
place to achieve those cuts,

540
00:26:21,680 --> 00:26:24,336
and people would just switch
to using western coal instead

541
00:26:24,336 --> 00:26:25,310
of eastern coal.

542
00:26:25,310 --> 00:26:26,977
RICHARD SCHMALENSEE:
That's the problem.

543
00:26:26,977 --> 00:26:30,500
The coal in the US differs
dramatically in sulfur content.

544
00:26:30,500 --> 00:26:33,200
There's a range,
particularly in the East.

545
00:26:33,200 --> 00:26:35,540
It tends to be low in the West.

546
00:26:35,540 --> 00:26:39,980
So if you say, you have to have
low emissions per kilowatt,

547
00:26:39,980 --> 00:26:41,360
per megawatt hour,
kilowatt hour,

548
00:26:41,360 --> 00:26:44,060
whichever, then
for a lot of people

549
00:26:44,060 --> 00:26:46,850
it'll be cheaper to
switch to western coal.

550
00:26:46,850 --> 00:26:52,580
If you say, what you
have to do is scrub--

551
00:26:52,580 --> 00:26:58,760
that is to say, remove
sulfur from the exhaust,

552
00:26:58,760 --> 00:27:02,990
then particularly if you say the
percentage you have to remove,

553
00:27:02,990 --> 00:27:04,820
it may be cheaper
to use eastern coal.

554
00:27:04,820 --> 00:27:07,520
And the people in the
west will go nuts.

555
00:27:07,520 --> 00:27:09,290
If they're burning
really clean coal

556
00:27:09,290 --> 00:27:13,710
and they have to also clean
the stack, they get angry.

557
00:27:13,710 --> 00:27:16,470
So you have these two very
clearly opposed interests.

558
00:27:16,470 --> 00:27:20,310
The ones in the east favored
a scrubbing standard.

559
00:27:20,310 --> 00:27:25,080
The ones in the west favored
an emissions standard.

560
00:27:25,080 --> 00:27:30,270
The '71 performance standard
was an emission standard--

561
00:27:30,270 --> 00:27:34,890
1.2 pounds of sulfur dioxide
per million BTU burned, of coal

562
00:27:34,890 --> 00:27:37,330
burned.

563
00:27:37,330 --> 00:27:41,720
What was the cost-benefit
analysis behind that standard?

564
00:27:41,720 --> 00:27:43,120
Yeah.

565
00:27:43,120 --> 00:27:45,525
AUDIENCE: People in the west
can burn their clean coal,

566
00:27:45,525 --> 00:27:47,580
and they don't have to
do anything with it.

567
00:27:47,580 --> 00:27:49,400
RICHARD SCHMALENSEE: You're
giving me a political answer.

568
00:27:49,400 --> 00:27:51,230
You're not giving
me the cost-benefit.

569
00:27:51,230 --> 00:27:53,330
Did they do any cost-benefit?

570
00:27:53,330 --> 00:27:56,130
Does the case mention any
analysis of costs or benefit?

571
00:27:56,130 --> 00:27:57,030
No.

572
00:27:57,030 --> 00:27:58,700
No, they didn't.

573
00:27:58,700 --> 00:28:00,470
They just kind of
casually-- you're--

574
00:28:00,470 --> 00:28:02,960
the answer they
gave was, you can

575
00:28:02,960 --> 00:28:05,040
burn most-- you can
scrub most eastern coal

576
00:28:05,040 --> 00:28:06,650
and meet that standard.

577
00:28:06,650 --> 00:28:14,250
That was the thinking, which was
very, very casual, very casual.

578
00:28:14,250 --> 00:28:15,960
This was challenged.

579
00:28:15,960 --> 00:28:20,160
Does anybody recall what the
court challenge was all about?

580
00:28:20,160 --> 00:28:21,320
Wyatt?

581
00:28:21,320 --> 00:28:23,087
AUDIENCE: The
Navajo tribe sued--

582
00:28:23,087 --> 00:28:24,420
RICHARD SCHMALENSEE: Later case.

583
00:28:24,420 --> 00:28:25,560
Later case.

584
00:28:25,560 --> 00:28:27,455
The challenge of this one was--

585
00:28:27,455 --> 00:28:28,830
AUDIENCE: It was
like the sludge.

586
00:28:28,830 --> 00:28:30,870
RICHARD SCHMALENSEE: The
sludge challenge, yeah.

587
00:28:30,870 --> 00:28:33,750
That EPA didn't
adequately consider

588
00:28:33,750 --> 00:28:37,300
sludge that would
result. When you

589
00:28:37,300 --> 00:28:43,780
take the junk out of the
emissions, you get sludge.

590
00:28:43,780 --> 00:28:46,570
And you've got to treat
that or worry about it.

591
00:28:46,570 --> 00:28:48,430
And it went back--

592
00:28:48,430 --> 00:28:49,930
they didn't adequately
consider it,

593
00:28:49,930 --> 00:28:51,860
and it was sent
back to consider it.

594
00:28:51,860 --> 00:28:55,660
And they considered it,
and didn't change the rule.

595
00:28:55,660 --> 00:28:58,240
The requirement isn't about
outcome, the requirement's

596
00:28:58,240 --> 00:28:59,710
about process.

597
00:28:59,710 --> 00:29:01,660
Did you adequately consider?

598
00:29:01,660 --> 00:29:04,880
That requires somebody to
write something that says,

599
00:29:04,880 --> 00:29:05,860
here's what they said.

600
00:29:05,860 --> 00:29:07,110
Here's what we think about it.

601
00:29:07,110 --> 00:29:10,090
Here's why it doesn't
change our conclusion.

602
00:29:10,090 --> 00:29:13,180
You delegate that somewhere
down in the organization.

603
00:29:13,180 --> 00:29:14,230
Deal with this.

604
00:29:14,230 --> 00:29:17,440
Write me five pages.

605
00:29:17,440 --> 00:29:17,940
OK.

606
00:29:17,940 --> 00:29:21,370
Would you have
done anything else?

607
00:29:21,370 --> 00:29:22,900
The case makes the
interesting point

608
00:29:22,900 --> 00:29:25,450
that EPA was doing
a lot of stuff.

609
00:29:25,450 --> 00:29:27,910
Congress does this all the time.

610
00:29:27,910 --> 00:29:31,150
You set up a new agency, or
you pass a comprehensive law

611
00:29:31,150 --> 00:29:32,560
like Dodd-Frank.

612
00:29:32,560 --> 00:29:37,090
And you say to the agencies, we
need the following 5,000 rules

613
00:29:37,090 --> 00:29:39,910
issued within 18 months.

614
00:29:39,910 --> 00:29:43,240
And the agency says,
I've got six people.

615
00:29:43,240 --> 00:29:47,170
And you do what you can, but
you don't spend your lifetime

616
00:29:47,170 --> 00:29:50,470
on this one, because this is
new coal-fired power plants.

617
00:29:50,470 --> 00:29:56,710
We've got this whole problem
with dealing with existing

618
00:29:56,710 --> 00:29:59,110
sources with SIP plans.

619
00:29:59,110 --> 00:30:00,340
What's a SIP look like?

620
00:30:00,340 --> 00:30:02,903
What are SIP reviews,
State Implementation Plans?

621
00:30:02,903 --> 00:30:03,820
What's all that about?

622
00:30:03,820 --> 00:30:05,350
What are our air
quality standards?

623
00:30:05,350 --> 00:30:07,660
And oh, by the way, we've
got to do this thing.

624
00:30:07,660 --> 00:30:10,420
So they did it pretty casually.

625
00:30:10,420 --> 00:30:12,895
Would you-- is it obvious that
there was a better approach?

626
00:30:16,220 --> 00:30:18,220
Would you have done a
scrubbing standard, Casey?

627
00:30:18,220 --> 00:30:20,960
I mean, you were--

628
00:30:20,960 --> 00:30:26,123
AUDIENCE: I think I
probably would not have

629
00:30:26,123 --> 00:30:27,290
done the scrubbing standard.

630
00:30:27,290 --> 00:30:27,590
RICHARD SCHMALENSEE:
You probably

631
00:30:27,590 --> 00:30:30,350
would have done what they did
and said, yeah, this is OK.

632
00:30:30,350 --> 00:30:34,430
We'll kick the
can down the road.

633
00:30:34,430 --> 00:30:35,420
OK.

634
00:30:35,420 --> 00:30:36,500
So this cruises.

635
00:30:36,500 --> 00:30:38,810
This cruises along.

636
00:30:38,810 --> 00:30:42,590
Now, Wyatt, what put
scrubbing on the table?

637
00:30:42,590 --> 00:30:43,970
AUDIENCE: So the Navajos sued.

638
00:30:43,970 --> 00:30:47,810
And they said if they had
made everybody install

639
00:30:47,810 --> 00:30:51,680
scrubbing technology, the
people in the Southwest

640
00:30:51,680 --> 00:30:54,410
would still buy the [INAUDIBLE]
coal because it's cheaper

641
00:30:54,410 --> 00:30:57,183
to ship it, and then that would
overall reduce total emissions.

642
00:30:57,183 --> 00:30:59,600
RICHARD SCHMALENSEE: Would
reduce pollution in their area.

643
00:30:59,600 --> 00:31:02,720
They were particularly worried--

644
00:31:02,720 --> 00:31:05,300
maybe came a little later, but
they were particularly worried

645
00:31:05,300 --> 00:31:07,366
at this point about haze.

646
00:31:07,366 --> 00:31:08,870
And you still see
it in the West,

647
00:31:08,870 --> 00:31:11,510
that you get a lot more
haze than you used to have.

648
00:31:11,510 --> 00:31:14,675
And it's not hazardous to human
health, but it's obnoxious.

649
00:31:14,675 --> 00:31:16,550
Haze in the Grand Canyon
means you just don't

650
00:31:16,550 --> 00:31:18,020
have those wonderful views.

651
00:31:18,020 --> 00:31:19,340
So the Navajos sued.

652
00:31:19,340 --> 00:31:20,660
They lost.

653
00:31:20,660 --> 00:31:27,070
The environmentalists-- the
other issue was the court.

654
00:31:27,070 --> 00:31:30,100
Some states in the West
that were in full compliance

655
00:31:30,100 --> 00:31:32,740
submitted state
implementation plans

656
00:31:32,740 --> 00:31:35,170
that let them get
dirtier, but still

657
00:31:35,170 --> 00:31:36,940
be in compliance with the law.

658
00:31:36,940 --> 00:31:39,600
And the courts rejected those.

659
00:31:39,600 --> 00:31:42,700
So what do you do about that?

660
00:31:42,700 --> 00:31:45,568
Because you'd like to
develop in the West.

661
00:31:45,568 --> 00:31:46,360
You'd like to grow.

662
00:31:46,360 --> 00:31:47,740
You'd like to build stuff.

663
00:31:47,740 --> 00:31:53,140
The court says, even if you're
clean, you can't get dirtier.

664
00:31:53,140 --> 00:31:57,710
And people were installing--

665
00:31:57,710 --> 00:32:00,650
the air quality
standards were nearby.

666
00:32:00,650 --> 00:32:04,000
So one of the ways people were
dealing with sulfur dioxide

667
00:32:04,000 --> 00:32:07,480
was to build these
monstrously high stacks, which

668
00:32:07,480 --> 00:32:10,970
would just let the stuff
diffuse over a wide area.

669
00:32:10,970 --> 00:32:15,950
So the standard which is about
concentration wasn't violated.

670
00:32:15,950 --> 00:32:19,310
The environmentalists were
not happy, to say the least.

671
00:32:19,310 --> 00:32:22,790
That just didn't seem like the
right approach to the problem.

672
00:32:22,790 --> 00:32:25,490
That's take the dirt,
spread the dirt.

673
00:32:25,490 --> 00:32:27,080
It's not too dirty
any place, see?

674
00:32:27,080 --> 00:32:28,790
Same dirt, spread.

675
00:32:28,790 --> 00:32:33,770
So everybody-- the Navajos
wanted stuff scrubbed.

676
00:32:33,770 --> 00:32:37,170
The scrubbers were
a potential way

677
00:32:37,170 --> 00:32:39,572
of dealing with this
Western states problem.

678
00:32:39,572 --> 00:32:41,280
There may be other
ways, but in any case,

679
00:32:41,280 --> 00:32:44,160
you had to go-- you
had to reopen the law

680
00:32:44,160 --> 00:32:46,860
to deal with Western states,
to deal with that court

681
00:32:46,860 --> 00:32:50,560
decision that basically didn't
let them build anything.

682
00:32:50,560 --> 00:32:53,160
OK.

683
00:32:53,160 --> 00:32:57,220
Who are the interest
groups here?

684
00:32:57,220 --> 00:33:02,060
We're in-- we're now in
the process of writing--

685
00:33:02,060 --> 00:33:06,980
it shouldn't say NSPS, it should
say Clean Air Act legislation.

686
00:33:06,980 --> 00:33:10,720
So we go through
'76, '77 amending--

687
00:33:10,720 --> 00:33:13,390
the process of
amending the bill.

688
00:33:13,390 --> 00:33:15,100
And I left all that
stuff in the case

689
00:33:15,100 --> 00:33:18,280
because it's interesting,
I think, to see it once,

690
00:33:18,280 --> 00:33:20,950
to see the process of
trying to write something.

691
00:33:20,950 --> 00:33:21,970
It gets passed here.

692
00:33:21,970 --> 00:33:23,650
It gets rejected there.

693
00:33:23,650 --> 00:33:24,610
The session ends.

694
00:33:24,610 --> 00:33:25,720
You start over again.

695
00:33:25,720 --> 00:33:27,700
You try.

696
00:33:27,700 --> 00:33:32,230
Issues get debated
multiple times, often,

697
00:33:32,230 --> 00:33:35,440
before things are
finally passed into law.

698
00:33:35,440 --> 00:33:36,560
And this is an example.

699
00:33:36,560 --> 00:33:40,180
There was the '76 process,
then there was the '77 process.

700
00:33:40,180 --> 00:33:42,559
Who are the players?

701
00:33:42,559 --> 00:33:44,040
AUDIENCE: Sierra Club.

702
00:33:44,040 --> 00:33:44,640
RICHARD SCHMALENSEE:
Sierra Club,

703
00:33:44,640 --> 00:33:46,350
or the environmental
groups, generally.

704
00:33:46,350 --> 00:33:48,630
Notice they're not
marching in the streets.

705
00:33:48,630 --> 00:33:50,160
They're lobbying.

706
00:33:50,160 --> 00:33:54,330
So we've sort of seen the
environmental movement

707
00:33:54,330 --> 00:33:56,730
transformed in
part into something

708
00:33:56,730 --> 00:33:59,430
that looks more like a
conventional interest group.

709
00:33:59,430 --> 00:34:00,960
They have lawyers.

710
00:34:00,960 --> 00:34:02,940
The lawyers are in the details.

711
00:34:02,940 --> 00:34:05,550
The lawyers are in the
lobby talking to people.

712
00:34:05,550 --> 00:34:09,409
They threaten we could have
nine million people write

713
00:34:09,409 --> 00:34:11,159
their congressmen about
this because we're

714
00:34:11,159 --> 00:34:13,175
a grassroots organization.

715
00:34:13,175 --> 00:34:15,300
So they're a little bit of
a social movement still,

716
00:34:15,300 --> 00:34:16,860
but they're lobbying.

717
00:34:16,860 --> 00:34:18,460
Who else?

718
00:34:18,460 --> 00:34:19,830
Anybody else?

719
00:34:19,830 --> 00:34:21,310
Environmentalists
wrote that law.

720
00:34:25,100 --> 00:34:27,379
Coal producers fell asleep.

721
00:34:27,379 --> 00:34:29,660
AUDIENCE: So I guess coal
producers in the East

722
00:34:29,660 --> 00:34:30,487
would be--

723
00:34:30,487 --> 00:34:31,820
RICHARD SCHMALENSEE: Both sets--

724
00:34:31,820 --> 00:34:32,570
East and West.

725
00:34:32,570 --> 00:34:35,420
I mean, we're now back in play.

726
00:34:35,420 --> 00:34:37,880
We're now back in play
worrying about scrubbing,

727
00:34:37,880 --> 00:34:40,730
worrying about high-sulfur
coal, low-sulfur coal.

728
00:34:40,730 --> 00:34:44,750
And of course, the people--

729
00:34:44,750 --> 00:34:46,100
well, in the Western states.

730
00:34:46,100 --> 00:34:47,120
Also the utilities.

731
00:34:47,120 --> 00:34:48,710
I'm not quite sure why I
put the utilities there--

732
00:34:48,710 --> 00:34:50,127
I didn't have the
utilities there.

733
00:34:50,127 --> 00:34:52,100
But the utilities
are also involved

734
00:34:52,100 --> 00:34:54,500
because they're going to
bear the cost of all this.

735
00:34:54,500 --> 00:34:57,240
Scrubbing is not cheap.

736
00:34:57,240 --> 00:34:59,630
So the question
of, do you scrub?

737
00:34:59,630 --> 00:35:00,380
Don't you scrub?

738
00:35:00,380 --> 00:35:03,050
Can you develop in the West?

739
00:35:03,050 --> 00:35:03,550
OK.

740
00:35:08,270 --> 00:35:10,950
Where was the Carter
administration?

741
00:35:10,950 --> 00:35:11,450
You recall?

742
00:35:15,240 --> 00:35:16,080
Yeah, Rory?

743
00:35:16,080 --> 00:35:18,150
AUDIENCE: They wanted to spend--

744
00:35:18,150 --> 00:35:21,630
solve energy problems, and to
do that easily they couldn't

745
00:35:21,630 --> 00:35:23,790
sidestep the environment.

746
00:35:23,790 --> 00:35:26,691
RICHARD SCHMALENSEE: So
they were willing to scrub.

747
00:35:26,691 --> 00:35:29,990
AUDIENCE: [INAUDIBLE].

748
00:35:29,990 --> 00:35:32,210
RICHARD SCHMALENSEE: So
they wanted to scrub,

749
00:35:32,210 --> 00:35:34,970
to sell the environmental
movement on the use of coal

750
00:35:34,970 --> 00:35:36,930
for energy security.

751
00:35:36,930 --> 00:35:39,360
If you made coal too
expensive, people

752
00:35:39,360 --> 00:35:42,672
were still generating a
lot of power from oil,

753
00:35:42,672 --> 00:35:44,130
and they really
wanted to move away

754
00:35:44,130 --> 00:35:46,510
from oil for security reasons.

755
00:35:46,510 --> 00:35:49,550
So, hey, scrubbing costs money,
but it's a security issue.

756
00:35:49,550 --> 00:35:50,050
OK.

757
00:35:50,050 --> 00:35:51,800
So you have the Carter
administration kind

758
00:35:51,800 --> 00:35:53,700
of positioned in favor
of scrubbing, at least

759
00:35:53,700 --> 00:35:55,290
at the White House.

760
00:35:55,290 --> 00:35:58,013
You got Eastern coal that loves
scrubbing, Western coal that

761
00:35:58,013 --> 00:35:58,680
hates scrubbing.

762
00:35:58,680 --> 00:36:02,200
Environmentalists
have come to love it,

763
00:36:02,200 --> 00:36:04,450
because it's now a
technology solution.

764
00:36:04,450 --> 00:36:05,380
It's a standard.

765
00:36:05,380 --> 00:36:07,840
It's the kind of thing
they tend to like.

766
00:36:07,840 --> 00:36:09,610
Put the thing on the smokestack.

767
00:36:09,610 --> 00:36:11,140
Make sure it's running.

768
00:36:11,140 --> 00:36:13,330
That's swell.

769
00:36:13,330 --> 00:36:15,010
Don't give me any nonsense.

770
00:36:15,010 --> 00:36:17,740
The Western states say,
well, whatever you do,

771
00:36:17,740 --> 00:36:19,450
we have to be able to grow.

772
00:36:19,450 --> 00:36:23,980
We have to be able
to build things

773
00:36:23,980 --> 00:36:28,120
in pristine areas, at
least some of them.

774
00:36:28,120 --> 00:36:31,770
So what's the final outcome?

775
00:36:31,770 --> 00:36:35,190
Well, we talk about the
outcome, but who favored it?

776
00:36:35,190 --> 00:36:36,940
What did we get?

777
00:36:36,940 --> 00:36:38,830
We got confused language, right?

778
00:36:38,830 --> 00:36:42,330
We got confused language
as the final outcome.

779
00:36:42,330 --> 00:36:48,180
And the confused language, if
you read that, and I actually--

780
00:36:48,180 --> 00:36:50,820
I did this case out
of a larger piece.

781
00:36:50,820 --> 00:36:53,770
I left out a lot of
detail because there--

782
00:36:53,770 --> 00:36:56,010
this also happens.

783
00:36:56,010 --> 00:37:01,360
Legislation goes to staff, and
you do not see senators at 3:00

784
00:37:01,360 --> 00:37:05,060
in the morning rewriting
details of 1,000-page bills.

785
00:37:05,060 --> 00:37:08,250
You see senators giving
instruction to people saying,

786
00:37:08,250 --> 00:37:11,100
look, the bill has
to get this done.

787
00:37:11,100 --> 00:37:15,210
And so at 3:00 in the morning
over pizza, people are saying,

788
00:37:15,210 --> 00:37:17,360
well, let me just add this.

789
00:37:17,360 --> 00:37:19,280
And then it goes from
the Senate to the House,

790
00:37:19,280 --> 00:37:21,050
and somebody in the House
says, no, we can't have that.

791
00:37:21,050 --> 00:37:22,133
Let me just take that out.

792
00:37:22,133 --> 00:37:23,180
I'll put this in.

793
00:37:23,180 --> 00:37:24,573
And then the bill gets passed.

794
00:37:24,573 --> 00:37:26,990
And then somebody says, well,
but that doesn't read right,

795
00:37:26,990 --> 00:37:29,540
so let me make sure
the report on the bill

796
00:37:29,540 --> 00:37:31,770
says what we really mean.

797
00:37:31,770 --> 00:37:33,740
And then somebody
else says, no, no, no.

798
00:37:33,740 --> 00:37:38,030
So what you got in
this case was confused

799
00:37:38,030 --> 00:37:41,840
language that sort of
seemed to favor scrubbing,

800
00:37:41,840 --> 00:37:45,800
but was sufficiently
ambiguous to give some leeway.

801
00:37:45,800 --> 00:37:47,950
Who liked that?

802
00:37:47,950 --> 00:37:49,420
Who was in favor of that?

803
00:37:49,420 --> 00:37:52,980
Who pushed-- who was happy
at the end of the day?

804
00:37:52,980 --> 00:37:53,890
Who felt they'd won?

805
00:37:57,000 --> 00:37:57,958
AUDIENCE: Western coal?

806
00:37:57,958 --> 00:38:00,802
Because they weren't
shoehorned into using scrubbing

807
00:38:00,802 --> 00:38:02,538
they didn't need.

808
00:38:02,538 --> 00:38:04,580
RICHARD SCHMALENSEE:
Western coal, you're saying?

809
00:38:04,580 --> 00:38:08,180
Nah, it kind of
favored scrubbing.

810
00:38:08,180 --> 00:38:10,070
AUDIENCE: The
ambiguity-- ambiguity.

811
00:38:10,070 --> 00:38:11,000
RICHARD SCHMALENSEE:
Oh, the ambiguity.

812
00:38:11,000 --> 00:38:11,720
Yeah, yeah, yeah.

813
00:38:11,720 --> 00:38:16,790
But they would rather
have had, oh, nothing--

814
00:38:16,790 --> 00:38:19,940
that it's the administrator's
job to set a standard,

815
00:38:19,940 --> 00:38:21,890
and the administrator
had done it once

816
00:38:21,890 --> 00:38:23,990
and that was a
performance standard.

817
00:38:23,990 --> 00:38:27,470
This now said the
administrator also has

818
00:38:27,470 --> 00:38:29,720
to set a percentage removal--

819
00:38:29,720 --> 00:38:32,010
doesn't say it has
to be positive,

820
00:38:32,010 --> 00:38:35,540
but has to set a percentage
removal, has to consider costs,

821
00:38:35,540 --> 00:38:37,610
has to set a
percentage removal, has

822
00:38:37,610 --> 00:38:39,460
to at least look at scrubbing.

823
00:38:39,460 --> 00:38:41,860
The earlier law didn't say
it had to look at scrubbing.

824
00:38:41,860 --> 00:38:42,760
Who would like that?

825
00:38:46,955 --> 00:38:47,455
Yeah.

826
00:38:47,455 --> 00:38:49,640
AUDIENCE: The utilities,
because [INAUDIBLE]..

827
00:38:49,640 --> 00:38:51,640
RICHARD SCHMALENSEE:
Utilities sort of liked it.

828
00:38:51,640 --> 00:38:54,220
Eastern coal sort of liked
it, because the Eastern coal

829
00:38:54,220 --> 00:38:56,950
liked anything that
moved toward scrubbing.

830
00:38:56,950 --> 00:39:02,830
And environmentalists liked it
because it favored scrubbing.

831
00:39:02,830 --> 00:39:09,770
So that's the interesting
little irony, right?

832
00:39:09,770 --> 00:39:13,280
I mean, you had
environmentalists

833
00:39:13,280 --> 00:39:19,250
and Eastern coal favoring
the use of a dirty fuel.

834
00:39:19,250 --> 00:39:20,660
That's an alliance.

835
00:39:20,660 --> 00:39:22,670
And the great
quote in the case--

836
00:39:22,670 --> 00:39:28,100
you almost never hear anything
like this, it's just amazing--

837
00:39:28,100 --> 00:39:30,710
says, "It made sense for
the dirty coal producers

838
00:39:30,710 --> 00:39:34,130
to abandon their campaign to
weaken standards and support

839
00:39:34,130 --> 00:39:36,560
the most expensive possible
clean air solution,

840
00:39:36,560 --> 00:39:38,780
universal scrubbing,"
which is what they

841
00:39:38,780 --> 00:39:41,360
thought they got from Congress.

842
00:39:41,360 --> 00:39:43,640
They thought they got
universal scrubbing.

843
00:39:43,640 --> 00:39:46,120
You could read the law that way.

844
00:39:46,120 --> 00:39:48,910
And this is a Sierra
Club-- a lawyer

845
00:39:48,910 --> 00:39:50,560
on behalf of the Sierra Club.

846
00:39:50,560 --> 00:39:56,020
He condemned that 1.2 pound
standard because, quote,

847
00:39:56,020 --> 00:39:58,870
"Eastern high-sulfur coal,
which is now available,

848
00:39:58,870 --> 00:40:01,240
is having a hard time
getting a market because

849
00:40:01,240 --> 00:40:03,130
of the comparative
cheapness of bringing

850
00:40:03,130 --> 00:40:06,550
in Western low-sulfur coal."

851
00:40:06,550 --> 00:40:08,830
Eastern dirty coal
isn't selling well

852
00:40:08,830 --> 00:40:15,810
because Western clean coal is
cheaper, says the Sierra Club.

853
00:40:15,810 --> 00:40:17,670
OK.

854
00:40:17,670 --> 00:40:21,150
This is a picture of politics.

855
00:40:21,150 --> 00:40:25,230
People are getting what they
can get, building coalitions.

856
00:40:25,230 --> 00:40:27,990
This is not the Sierra Club
trashing the environment,

857
00:40:27,990 --> 00:40:31,520
this is the Sierra
Club pushing scrubbing.

858
00:40:31,520 --> 00:40:35,160
The Sierra Club wants
scrubbing, and to get

859
00:40:35,160 --> 00:40:39,390
scrubbing they have an alliance
with Eastern coal producers

860
00:40:39,390 --> 00:40:41,155
who also want scrubbing.

861
00:40:44,270 --> 00:40:46,412
You might say, gee,
wouldn't the Sierra Club

862
00:40:46,412 --> 00:40:48,620
serve the environment better
if the Sierra Club said,

863
00:40:48,620 --> 00:40:51,728
just tighten the standard.

864
00:40:51,728 --> 00:40:54,020
Well, they weren't going to
get it because Eastern coal

865
00:40:54,020 --> 00:40:56,560
producers were too strong.

866
00:40:56,560 --> 00:40:59,760
So what they thought they could
get was scrub the dirty coal--

867
00:41:03,360 --> 00:41:07,200
maybe cynical,
maybe not cynical.

868
00:41:07,200 --> 00:41:09,060
Was it irrational?

869
00:41:09,060 --> 00:41:12,660
Well that's-- people jumped
up and down about this.

870
00:41:12,660 --> 00:41:16,110
What a bizarre alliance.

871
00:41:16,110 --> 00:41:18,340
The environmental
interest groups,

872
00:41:18,340 --> 00:41:21,180
arm in arm with the
dirty coal producers.

873
00:41:24,330 --> 00:41:27,110
Well, they both got
what they wanted--

874
00:41:27,110 --> 00:41:28,490
scrubbing.

875
00:41:28,490 --> 00:41:30,920
Or they thought
they got scrubbing.

876
00:41:30,920 --> 00:41:33,980
OK, I'll walk a little bit,
just in the interest of time,

877
00:41:33,980 --> 00:41:38,090
through how we got to the New
Source Performance Standard,

878
00:41:38,090 --> 00:41:42,950
because I want to spend
more time on 1980.

879
00:41:42,950 --> 00:41:45,455
So what you had in the
administration was a split.

880
00:41:48,060 --> 00:41:53,850
The air office says, these
guys won in Congress.

881
00:41:53,850 --> 00:41:56,400
They went in trying to get
scrubbing, they got scrubbing.

882
00:41:56,400 --> 00:41:58,080
Let's give them a scrubbing.

883
00:41:58,080 --> 00:42:00,150
We'll set the New Source
performance Standard

884
00:42:00,150 --> 00:42:03,560
as requiring 90% scrubbing.

885
00:42:03,560 --> 00:42:06,980
The economists, always
the heroes of my story,

886
00:42:06,980 --> 00:42:10,730
the Department of Energy, the
planning office in the EPA

887
00:42:10,730 --> 00:42:13,460
said, why don't we just
tighten the standard?

888
00:42:13,460 --> 00:42:16,040
The law says we have to
consider a percentage removal.

889
00:42:16,040 --> 00:42:17,830
We'll make it zero.

890
00:42:17,830 --> 00:42:21,670
Tighten the standard from
1.2 pounds per million BTU

891
00:42:21,670 --> 00:42:24,962
to 0.55 pounds per million BTU.

892
00:42:24,962 --> 00:42:27,450
You do it in the West,
with low-sulfur coal.

893
00:42:27,450 --> 00:42:28,800
You do it in the East--

894
00:42:28,800 --> 00:42:30,030
it's a little tough
to do it in the East,

895
00:42:30,030 --> 00:42:31,697
but we're going to
tighten the standard.

896
00:42:33,810 --> 00:42:36,117
That's the split within
the administration.

897
00:42:36,117 --> 00:42:37,950
EPA's rules are reviewed
by the White House.

898
00:42:37,950 --> 00:42:40,290
The Department of Energy
gets to sit at the table.

899
00:42:40,290 --> 00:42:43,410
Everybody has fun.

900
00:42:43,410 --> 00:42:46,560
Would require scrubbing, yes,
but not with Western coal--

901
00:42:46,560 --> 00:42:48,600
not much scrubbing
with Western coal.

902
00:42:48,600 --> 00:42:51,060
You could-- some Western coal
you could meet that straight.

903
00:42:51,060 --> 00:42:52,590
Most of it you'd have to scrub.

904
00:42:52,590 --> 00:42:57,870
But you wouldn't have to remove
90% of the sulfur to get it.

905
00:42:57,870 --> 00:42:59,370
How had they shifted?

906
00:42:59,370 --> 00:43:02,130
Well, this gets interesting.

907
00:43:02,130 --> 00:43:05,330
The environmentalists could
count the 0.55 standard

908
00:43:05,330 --> 00:43:07,690
as a win.

909
00:43:07,690 --> 00:43:11,410
So they now didn't much
care about scrubbing.

910
00:43:11,410 --> 00:43:14,140
What was on the table now,
both of those were wins.

911
00:43:14,140 --> 00:43:16,330
The 0.55 would
probably be cleaner--

912
00:43:16,330 --> 00:43:19,610
would be cleaner than 1.2.

913
00:43:19,610 --> 00:43:22,750
So the environmental
movement switched.

914
00:43:22,750 --> 00:43:27,370
Eastern coal wanted scrubbing.

915
00:43:27,370 --> 00:43:29,770
The utilities, for some
reason that I don't quite

916
00:43:29,770 --> 00:43:31,145
understand because
I didn't think

917
00:43:31,145 --> 00:43:33,430
it was the cheapest
alternative, the utilities

918
00:43:33,430 --> 00:43:34,930
sided with Eastern coal.

919
00:43:37,690 --> 00:43:41,800
So you have a switch
when it went from passing

920
00:43:41,800 --> 00:43:44,790
the law to making the rule.

921
00:43:44,790 --> 00:43:48,570
The environmentalists
switched sides.

922
00:43:48,570 --> 00:43:50,670
They were allied with the
Eastern coal interests

923
00:43:50,670 --> 00:43:52,980
in the legislative process.

924
00:43:52,980 --> 00:43:55,500
They switched in the
administrative process

925
00:43:55,500 --> 00:43:58,080
as the agenda changed.

926
00:43:58,080 --> 00:43:59,990
Again, this is not a picture--

927
00:43:59,990 --> 00:44:02,750
this is kind of a particularly
striking case, which

928
00:44:02,750 --> 00:44:05,040
is why it's here, and
it matters for energy,

929
00:44:05,040 --> 00:44:06,660
which is why it's here.

930
00:44:06,660 --> 00:44:10,460
But it's not that unusual
that interest groups switch

931
00:44:10,460 --> 00:44:13,640
sides for tactical reasons.

932
00:44:13,640 --> 00:44:16,970
This is-- there's no
religious issue here.

933
00:44:16,970 --> 00:44:18,530
This isn't pro or anti.

934
00:44:18,530 --> 00:44:20,450
This is, how do you get forward?

935
00:44:20,450 --> 00:44:22,820
They wanted cleaner air
and they wanted scrubbing.

936
00:44:22,820 --> 00:44:23,540
OK.

937
00:44:23,540 --> 00:44:25,100
Once you get really
clean air, we'll

938
00:44:25,100 --> 00:44:27,290
give up on scrubbing, let
the Eastern coal guys go.

939
00:44:27,290 --> 00:44:34,050
The utilities now have a
distinct point of view.

940
00:44:34,050 --> 00:44:38,100
The new NSPS, just
to go to it quickly,

941
00:44:38,100 --> 00:44:40,740
we had a two-tier solution.

942
00:44:40,740 --> 00:44:46,200
You could either scrub
90% and emit 1.2 pounds,

943
00:44:46,200 --> 00:44:50,420
or you could scrub 70%
and emit 0.6 pounds.

944
00:44:50,420 --> 00:44:52,310
It's a little weird
if you look at it.

945
00:44:52,310 --> 00:44:56,210
Why not just require
these plants to be clean?

946
00:44:56,210 --> 00:44:58,340
It's a political solution.

947
00:44:58,340 --> 00:45:02,330
It made Eastern coal
economical in the East,

948
00:45:02,330 --> 00:45:05,810
and Western coal
economical in the West.

949
00:45:05,810 --> 00:45:07,850
Nobody's thrilled.

950
00:45:07,850 --> 00:45:11,990
Not clear that those 70%
scrubbers actually work.

951
00:45:11,990 --> 00:45:14,330
People have a tendency
to do this in Washington.

952
00:45:14,330 --> 00:45:15,770
They've heard
about a technology.

953
00:45:15,770 --> 00:45:20,410
They'll require it even if
it's not necessarily proven.

954
00:45:20,410 --> 00:45:23,050
That's a political-- I
won't press you on that one.

955
00:45:23,050 --> 00:45:24,760
What would you
have done instead?

956
00:45:24,760 --> 00:45:25,630
Who knows?

957
00:45:25,630 --> 00:45:27,960
It's a political answer.

958
00:45:27,960 --> 00:45:29,190
It's a political answer.

959
00:45:29,190 --> 00:45:30,840
OK.

960
00:45:30,840 --> 00:45:36,330
Let me go-- after that,
let me pass out the B case.

961
00:45:36,330 --> 00:45:39,480
New sources under this--
we talked about this--

962
00:45:39,480 --> 00:45:43,032
under the '70 act and today
have to meet stricter standards

963
00:45:43,032 --> 00:45:43,740
than old sources.

964
00:45:43,740 --> 00:45:46,560
Old sources have to be
approved by the state.

965
00:45:46,560 --> 00:45:51,400
There are plenty of really dirty
power plants still running.

966
00:45:51,400 --> 00:45:57,390
So by the mid-'80s, this
is called new source bias

967
00:45:57,390 --> 00:46:00,060
and leads to this wonderful
question on which I spent some

968
00:46:00,060 --> 00:46:03,360
time in Washington, the outcome
of which I cannot remember

969
00:46:03,360 --> 00:46:05,760
because it was so stupid.

970
00:46:05,760 --> 00:46:07,830
What changes can you
make to an old plant

971
00:46:07,830 --> 00:46:10,700
before it becomes a new plant?

972
00:46:10,700 --> 00:46:13,220
The Environmental
Protection agency's position

973
00:46:13,220 --> 00:46:15,080
was if you replace
a piece of capital

974
00:46:15,080 --> 00:46:18,440
equipment like, oh, say, a
faucet, it's a new plant.

975
00:46:18,440 --> 00:46:20,030
It's not the same as it was.

976
00:46:20,030 --> 00:46:21,020
It's a new plant.

977
00:46:21,020 --> 00:46:23,830
It has to meet new
source standards.

978
00:46:23,830 --> 00:46:25,480
The Department of
Energy's position

979
00:46:25,480 --> 00:46:28,900
was, well, if there's still
a brick from the old plant,

980
00:46:28,900 --> 00:46:34,050
it's an old plant as long
as there's something left.

981
00:46:34,050 --> 00:46:36,480
We reached a compromise
that was challenged in court

982
00:46:36,480 --> 00:46:37,913
by both sides and upheld.

983
00:46:37,913 --> 00:46:39,330
And I cannot tell
you what it was,

984
00:46:39,330 --> 00:46:42,030
because that's a question
that has no answer.

985
00:46:42,030 --> 00:46:43,050
What can you do in old--

986
00:46:43,050 --> 00:46:48,120
that's-- there is no principled
answer to that question.

987
00:46:48,120 --> 00:46:49,310
It's a compromise answer--

988
00:46:52,020 --> 00:46:54,300
an enormous waste of time.

989
00:46:54,300 --> 00:47:00,270
But in any case, so by the
mid-1980s, we had more than 80%

990
00:47:00,270 --> 00:47:04,470
of the SO2 emitted was
emitted by power plants that

991
00:47:04,470 --> 00:47:08,300
failed the '71 standard.

992
00:47:08,300 --> 00:47:12,630
Because people-- and this
is ages of power plants.

993
00:47:12,630 --> 00:47:15,260
We saw that at the
start of the semester.

994
00:47:15,260 --> 00:47:16,790
There's an awful
lot of coal fired.

995
00:47:16,790 --> 00:47:19,010
It's black, for
symbolic reasons--

996
00:47:19,010 --> 00:47:21,770
a whole lot of old
coal-fired plants

997
00:47:21,770 --> 00:47:25,790
put in place before 1970 still.

998
00:47:25,790 --> 00:47:27,850
There were a lot more in 1985.

999
00:47:27,850 --> 00:47:31,990
So all this hullabaloo about the
New Source Performance Standard

1000
00:47:31,990 --> 00:47:33,550
isn't actually going to do much.

1001
00:47:33,550 --> 00:47:38,380
You know, you're not huge growth
in capacity here in the '80s.

1002
00:47:38,380 --> 00:47:40,480
It's growing, but not rapidly.

1003
00:47:40,480 --> 00:47:44,920
So nobody-- people want to
extend the lives of old plants.

1004
00:47:44,920 --> 00:47:46,090
The old plants are dirty.

1005
00:47:46,090 --> 00:47:48,040
People aren't
building new plants.

1006
00:47:48,040 --> 00:47:52,750
And acid rain gets
to be an issue.

1007
00:47:52,750 --> 00:47:56,310
So acid rain says, particularly
with high smokestacks--

1008
00:47:56,310 --> 00:47:57,960
the stuff blows
hundreds of miles

1009
00:47:57,960 --> 00:48:02,410
was the argument, and damages
lakes in the Northeast.

1010
00:48:02,410 --> 00:48:05,780
So what do you do?

1011
00:48:05,780 --> 00:48:09,740
Well, in the '80s, what you
did was debate legislation that

1012
00:48:09,740 --> 00:48:13,640
required old plants to scrub.

1013
00:48:13,640 --> 00:48:16,670
And those laws didn't
get anywhere in part

1014
00:48:16,670 --> 00:48:20,600
because the costs
varied so enormously.

1015
00:48:20,600 --> 00:48:22,495
You have to have land
to put a scrubber in.

1016
00:48:22,495 --> 00:48:23,870
Some plants didn't
have any land.

1017
00:48:23,870 --> 00:48:25,792
They just have to shut down.

1018
00:48:25,792 --> 00:48:27,130
Does that make any sense?

1019
00:48:29,307 --> 00:48:30,890
And then the question
was, how are you

1020
00:48:30,890 --> 00:48:32,473
going to pay for
this monstrous thing?

1021
00:48:32,473 --> 00:48:36,160
How about we put on a
national electricity tax?

1022
00:48:36,160 --> 00:48:37,940
We didn't burn much
coal in New England,

1023
00:48:37,940 --> 00:48:39,820
so you could imagine the New
England response to that.

1024
00:48:39,820 --> 00:48:40,320
Let's see.

1025
00:48:40,320 --> 00:48:42,610
You're going to tax us
so Ohio can clean up.

1026
00:48:42,610 --> 00:48:43,220
Good idea.

1027
00:48:43,220 --> 00:48:43,720
Hmm.

1028
00:48:43,720 --> 00:48:45,460
No.

1029
00:48:45,460 --> 00:48:46,870
So the politics were bad.

1030
00:48:46,870 --> 00:48:49,930
And of course, the
Senate Majority leader

1031
00:48:49,930 --> 00:48:53,020
was from a Eastern
coal-producing state,

1032
00:48:53,020 --> 00:48:55,300
and the president
was Ronald Reagan.

1033
00:48:55,300 --> 00:48:58,180
So nothing was going
to pass, and nothing

1034
00:48:58,180 --> 00:49:00,880
was going to be signed.

1035
00:49:00,880 --> 00:49:06,360
But it was a question to do--

1036
00:49:06,360 --> 00:49:07,140
what do you do?

1037
00:49:07,140 --> 00:49:11,250
So that case, the B
case, which you have,

1038
00:49:11,250 --> 00:49:14,550
describes the
process that got us

1039
00:49:14,550 --> 00:49:21,280
to the trading position, the
trading provision, title IV,

1040
00:49:21,280 --> 00:49:26,690
in the 1990 Clean Air Act.

1041
00:49:26,690 --> 00:49:29,870
One environmental group, the
Environmental Defense Fund,

1042
00:49:29,870 --> 00:49:32,720
decided the only way we
could deal with this problem

1043
00:49:32,720 --> 00:49:35,580
was to put in place
trading, which

1044
00:49:35,580 --> 00:49:38,310
the environmental movement
had traditionally hated

1045
00:49:38,310 --> 00:49:41,970
because it removed stigma,
license to pollute, trading

1046
00:49:41,970 --> 00:49:45,660
and filth, et cetera,
markets and garbage,

1047
00:49:45,660 --> 00:49:48,750
all kinds of great slogans.

1048
00:49:48,750 --> 00:49:52,120
But once they saw there
was no other way to do it,

1049
00:49:52,120 --> 00:49:54,840
and we suddenly had a Senate
Majority Leader from Maine who

1050
00:49:54,840 --> 00:49:57,870
cared about acid rain, and
a president who had a summer

1051
00:49:57,870 --> 00:50:00,930
home in Maine who
cared about acid rain,

1052
00:50:00,930 --> 00:50:03,020
we were going to get a bill.

1053
00:50:03,020 --> 00:50:06,810
So this was the way forward.

1054
00:50:06,810 --> 00:50:09,890
It was a wild scramble
for the tradable things.

1055
00:50:09,890 --> 00:50:11,120
I was involved in this.

1056
00:50:11,120 --> 00:50:15,610
It was horse trading
at its worst,

1057
00:50:15,610 --> 00:50:18,160
but didn't affect
equal marginal costs.

1058
00:50:20,670 --> 00:50:23,400
We talked about national
trading for some pollutants.

1059
00:50:23,400 --> 00:50:25,170
It doesn't make sense
for all pollutants

1060
00:50:25,170 --> 00:50:29,290
because of the hotspot problem.

1061
00:50:29,290 --> 00:50:34,030
But in any case, this law, which
was a national cap and trade

1062
00:50:34,030 --> 00:50:35,980
for sulfur dioxide,
which by the way,

1063
00:50:35,980 --> 00:50:38,620
doesn't mix like carbon dioxide.

1064
00:50:38,620 --> 00:50:41,200
It doesn't mix around the globe.

1065
00:50:41,200 --> 00:50:44,880
It travels maybe a
few hundred miles.

1066
00:50:44,880 --> 00:50:47,010
Sulfur dioxide emitted
in Miami does not

1067
00:50:47,010 --> 00:50:49,153
affect the forests
in Maine at all--

1068
00:50:49,153 --> 00:50:51,570
affects the oceans, but doesn't
affect the forest in Maine

1069
00:50:51,570 --> 00:50:53,370
directly.

1070
00:50:53,370 --> 00:50:57,570
And sulfur dioxide
emitted in Arizona,

1071
00:50:57,570 --> 00:50:59,610
boy, there may be a few
molecules who get east,

1072
00:50:59,610 --> 00:51:03,060
but not that-- that get
east, not that many.

1073
00:51:03,060 --> 00:51:06,940
So it took effect in 1995.

1074
00:51:06,940 --> 00:51:09,130
So we're now after that B case.

1075
00:51:09,130 --> 00:51:12,400
If you have any questions
about it, about the case,

1076
00:51:12,400 --> 00:51:12,952
let me know.

1077
00:51:12,952 --> 00:51:14,410
I've got a bit to
cover, and I want

1078
00:51:14,410 --> 00:51:16,130
to make sure I get it done.

1079
00:51:16,130 --> 00:51:18,000
So here's what happened--

1080
00:51:18,000 --> 00:51:19,000
one thing that happened.

1081
00:51:21,580 --> 00:51:25,540
The law created an asset,
this tradable allowance,

1082
00:51:25,540 --> 00:51:28,710
and it gave it away.

1083
00:51:28,710 --> 00:51:30,870
Now that's interesting, right?

1084
00:51:30,870 --> 00:51:32,800
That's interesting.

1085
00:51:32,800 --> 00:51:36,650
It gave away the rights
to emit sulfur dioxide.

1086
00:51:36,650 --> 00:51:40,790
Now, if it were a
competitive market--

1087
00:51:40,790 --> 00:51:44,150
let's suppose it took
one of those things

1088
00:51:44,150 --> 00:51:47,930
to generate a megawatt
of electricity.

1089
00:51:47,930 --> 00:51:51,590
Then you'd expect the
price of electricity

1090
00:51:51,590 --> 00:51:56,440
to rise by the cost of an
allowance on opportunity cost,

1091
00:51:56,440 --> 00:51:58,090
on an opportunity cost basis.

1092
00:51:58,090 --> 00:52:01,030
If you give it to me for free,
but if I don't use it myself

1093
00:52:01,030 --> 00:52:02,390
I can sell it--

1094
00:52:02,390 --> 00:52:05,350
so the cost of using it is
the price on the market,

1095
00:52:05,350 --> 00:52:07,890
even though I got it for free.

1096
00:52:07,890 --> 00:52:11,400
So what you would expect
is in a competitive market,

1097
00:52:11,400 --> 00:52:14,620
it's a gift.

1098
00:52:14,620 --> 00:52:18,310
In a regulated market,
it's not so clear.

1099
00:52:18,310 --> 00:52:21,220
And states had different
ways of dealing with this.

1100
00:52:21,220 --> 00:52:24,610
This picture illustrates
sort of the distinction

1101
00:52:24,610 --> 00:52:28,810
between the value
of the allowances

1102
00:52:28,810 --> 00:52:32,530
and the cost of cleanup,
which is often a confusion.

1103
00:52:32,530 --> 00:52:37,090
So we have allowances
to emit sulfur dioxide.

1104
00:52:37,090 --> 00:52:39,550
Each one gives you the
right to emit a ton.

1105
00:52:39,550 --> 00:52:42,210
There's a demand for those.

1106
00:52:42,210 --> 00:52:43,680
What's the demand determined by?

1107
00:52:43,680 --> 00:52:47,760
Well, it is determined by the
marginal cost of cleaning up.

1108
00:52:47,760 --> 00:52:49,680
If this is what I would emit--

1109
00:52:49,680 --> 00:52:52,740
this is what the industry
would emit if there

1110
00:52:52,740 --> 00:52:54,750
were no price on allowances.

1111
00:52:54,750 --> 00:52:58,950
And this is what they emit
when the price is higher.

1112
00:52:58,950 --> 00:53:04,020
This curve must reflect the
marginal cost of cleanup.

1113
00:53:04,020 --> 00:53:08,340
Because you will emit
until the cost of cleanup

1114
00:53:08,340 --> 00:53:10,260
exceeds the costs or the--

1115
00:53:10,260 --> 00:53:13,050
you'll clean up until
the cost of cleanup

1116
00:53:13,050 --> 00:53:15,360
exceeds the value
of an allowance

1117
00:53:15,360 --> 00:53:16,360
because I have a choice.

1118
00:53:16,360 --> 00:53:19,740
I can reduce emissions
or buy an allowance.

1119
00:53:19,740 --> 00:53:24,870
So the area-- if this is the
cap, the area under the curve

1120
00:53:24,870 --> 00:53:27,760
to here, and if
this is the price,

1121
00:53:27,760 --> 00:53:31,510
this area must be
the cost of cleanup.

1122
00:53:31,510 --> 00:53:34,840
Just like the demand for a good
is the marginal value consumers

1123
00:53:34,840 --> 00:53:38,260
place on it, here the marginal
value is the cost of cleanup.

1124
00:53:38,260 --> 00:53:41,650
So the cost-- the area under
this curve from here to here

1125
00:53:41,650 --> 00:53:43,210
is the cost.

1126
00:53:43,210 --> 00:53:51,000
This rent is the value of the
allowances that were given out.

1127
00:53:51,000 --> 00:53:56,140
Now, if this were a
competitive, unregulated market,

1128
00:53:56,140 --> 00:53:59,410
and that picture were right--

1129
00:53:59,410 --> 00:54:02,380
well, I don't have the rest of
the story so I can't say that.

1130
00:54:02,380 --> 00:54:07,272
Normally, however, it's a gift.

1131
00:54:07,272 --> 00:54:08,730
You probably haven't
followed this,

1132
00:54:08,730 --> 00:54:13,290
but there's a controversy about
the European carbon trading

1133
00:54:13,290 --> 00:54:17,250
system is now being expanded
to include airlines, which

1134
00:54:17,250 --> 00:54:23,940
requires airlines flying
into Europe to buy allowances

1135
00:54:23,940 --> 00:54:27,380
to cover the carbon
they emit flying in.

1136
00:54:27,380 --> 00:54:32,080
Airlines, including US airlines,
are being given allowances.

1137
00:54:32,080 --> 00:54:34,540
Not enough, but they're
being given allowances

1138
00:54:34,540 --> 00:54:37,590
to cover most of
their emissions.

1139
00:54:37,590 --> 00:54:41,450
The US airlines are
berserk about this.

1140
00:54:41,450 --> 00:54:44,510
The administration is
berserk about this.

1141
00:54:44,510 --> 00:54:47,090
You're taxing our people.

1142
00:54:47,090 --> 00:54:50,540
The analysis done
over in Building E19

1143
00:54:50,540 --> 00:54:55,290
concludes very persuasively that
the US airlines will, in fact,

1144
00:54:55,290 --> 00:54:59,960
make money because they're being
given almost enough allowances,

1145
00:54:59,960 --> 00:55:02,240
and the price of
airline fares is

1146
00:55:02,240 --> 00:55:05,390
going to go up to cover
the opportunity cost--

1147
00:55:05,390 --> 00:55:09,500
not the out-of-pocket
cost, the opportunity cost.

1148
00:55:09,500 --> 00:55:12,890
Even if I've been given it,
the cost of using it to me

1149
00:55:12,890 --> 00:55:15,830
is the market price.

1150
00:55:15,830 --> 00:55:18,740
The price I charge will
have to cover that.

1151
00:55:18,740 --> 00:55:20,750
My profits will go up.

1152
00:55:20,750 --> 00:55:23,830
US airlines hate this analysis.

1153
00:55:23,830 --> 00:55:25,240
They paid for it.

1154
00:55:25,240 --> 00:55:28,170
They now reject it
as fatally flawed.

1155
00:55:28,170 --> 00:55:31,560
It is, if you think about it
for a little while, pretty

1156
00:55:31,560 --> 00:55:37,770
simple economics, a little more
complicated under regulation.

1157
00:55:37,770 --> 00:55:39,290
So what else happened?

1158
00:55:39,290 --> 00:55:41,630
Question on this?

1159
00:55:41,630 --> 00:55:42,130
OK.

1160
00:55:42,130 --> 00:55:43,210
What else happened?

1161
00:55:43,210 --> 00:55:45,820
Well, this is the
pretty picture.

1162
00:55:45,820 --> 00:55:49,030
These were-- this was actual
emissions, US emissions

1163
00:55:49,030 --> 00:55:49,930
in millions of tons.

1164
00:55:49,930 --> 00:55:54,610
These were-- you can estimate
that pretty well by the fuel

1165
00:55:54,610 --> 00:55:55,390
they burned.

1166
00:55:55,390 --> 00:55:58,170
After 1995, they had
monitors on the stack,

1167
00:55:58,170 --> 00:55:59,620
so we know it for sure.

1168
00:55:59,620 --> 00:56:02,830
Here's the cap, this line here.

1169
00:56:02,830 --> 00:56:04,960
It went down over time.

1170
00:56:04,960 --> 00:56:07,140
It's a little complicated
because more units were

1171
00:56:07,140 --> 00:56:10,080
covered, which is one reason--

1172
00:56:10,080 --> 00:56:13,800
a lot of things happened,
but this is the aggregate cap

1173
00:56:13,800 --> 00:56:14,910
pretty clearly.

1174
00:56:14,910 --> 00:56:16,530
These are some
estimates of what might

1175
00:56:16,530 --> 00:56:18,450
have happened absent the law.

1176
00:56:18,450 --> 00:56:22,890
The law was passed
in 1990, but there

1177
00:56:22,890 --> 00:56:26,970
was some anticipation of it
and some investments made.

1178
00:56:26,970 --> 00:56:29,130
But the key thing
is in the oval.

1179
00:56:29,130 --> 00:56:31,970
Look at what happened
to emissions.

1180
00:56:31,970 --> 00:56:34,820
Environmental programs
don't do that.

1181
00:56:34,820 --> 00:56:36,050
People litigate.

1182
00:56:36,050 --> 00:56:36,890
They resist.

1183
00:56:36,890 --> 00:56:38,930
The devices don't work.

1184
00:56:38,930 --> 00:56:39,770
Look at that drop.

1185
00:56:39,770 --> 00:56:41,600
It dropped below the cap--

1186
00:56:41,600 --> 00:56:45,550
way below the cap.

1187
00:56:45,550 --> 00:56:48,502
Why did that happen
do you think?

1188
00:56:48,502 --> 00:56:50,710
Well, I'll give you the--
yeah, go ahead, Jacqueline.

1189
00:56:50,710 --> 00:56:51,880
AUDIENCE: Was it banking?

1190
00:56:51,880 --> 00:56:52,810
RICHARD SCHMALENSEE:
It was banking.

1191
00:56:52,810 --> 00:56:53,440
Exactly.

1192
00:56:53,440 --> 00:56:54,970
There was banking.

1193
00:56:54,970 --> 00:56:59,290
The cap gets pretty low out here
around 2,000 A lot of people

1194
00:56:59,290 --> 00:57:01,900
said, all right, I'm
going to look to 2,000.

1195
00:57:01,900 --> 00:57:03,460
I'm going to overcontrol.

1196
00:57:03,460 --> 00:57:05,980
I'm going to do more
than I need to do now,

1197
00:57:05,980 --> 00:57:09,700
so that when I come here,
I can notice emissions

1198
00:57:09,700 --> 00:57:10,780
are above the cap here.

1199
00:57:10,780 --> 00:57:13,560
I can draw down the bank.

1200
00:57:13,560 --> 00:57:14,290
I can draw down.

1201
00:57:14,290 --> 00:57:15,165
And that makes sense?

1202
00:57:15,165 --> 00:57:17,100
Yeah, it probably made sense.

1203
00:57:17,100 --> 00:57:19,230
Because you got early
emissions reductions.

1204
00:57:19,230 --> 00:57:21,720
You got early control.

1205
00:57:21,720 --> 00:57:23,400
Cumulative emissions
were the same.

1206
00:57:23,400 --> 00:57:27,260
Eventually, the
bank is exhausted.

1207
00:57:27,260 --> 00:57:31,580
The other thing you saw,
this business about always

1208
00:57:31,580 --> 00:57:33,230
having an incentive to cut.

1209
00:57:33,230 --> 00:57:36,410
The incentive to cut
here was the value

1210
00:57:36,410 --> 00:57:39,747
of the banked
allowance later on.

1211
00:57:39,747 --> 00:57:41,330
The other thing that
happened that you

1212
00:57:41,330 --> 00:57:45,458
wouldn't have had happen in
standards is people innovated.

1213
00:57:45,458 --> 00:57:48,000
Well, you know how I'm talking
about burning high-sulfur coal

1214
00:57:48,000 --> 00:57:49,550
and burning low-sulfur coal.

1215
00:57:49,550 --> 00:57:51,180
People say, wait a minute.

1216
00:57:51,180 --> 00:57:53,660
High-sulfur coal
is now really cheap

1217
00:57:53,660 --> 00:57:56,270
because it's really dirty.

1218
00:57:56,270 --> 00:57:58,830
But I can mix it.

1219
00:57:58,830 --> 00:58:02,280
It's not a trivial thing to
do, but it's not that hard.

1220
00:58:02,280 --> 00:58:05,130
People figured out
how to blend it in,

1221
00:58:05,130 --> 00:58:09,450
which lowered their costs while
still keeping under allowances.

1222
00:58:09,450 --> 00:58:12,270
People invented
new ways to scrub.

1223
00:58:12,270 --> 00:58:16,880
Didn't remove 90%,
but were lots cheaper.

1224
00:58:16,880 --> 00:58:18,400
People did a variety of things.

1225
00:58:18,400 --> 00:58:22,210
Railroad deregulation
brought Western coal east.

1226
00:58:22,210 --> 00:58:26,030
So we had this huge
reduction in emissions,

1227
00:58:26,030 --> 00:58:29,060
and you saw it on the ground.

1228
00:58:29,060 --> 00:58:31,130
Now, it turns out acid
rain wasn't as damaging

1229
00:58:31,130 --> 00:58:33,560
as people thought.

1230
00:58:33,560 --> 00:58:37,880
There was a large study
funded on impact of acid rain.

1231
00:58:37,880 --> 00:58:40,460
It wasn't finished before
the bill was passed--

1232
00:58:40,460 --> 00:58:42,140
hey.

1233
00:58:42,140 --> 00:58:46,910
But in terms of deposition,
you saw a great reduction

1234
00:58:46,910 --> 00:58:48,380
in the Northeast--

1235
00:58:48,380 --> 00:58:51,290
still some hot
spots, but nothing

1236
00:58:51,290 --> 00:58:53,810
like what they were before.

1237
00:58:53,810 --> 00:58:57,270
This was why the fiction worked.

1238
00:58:57,270 --> 00:58:59,670
It was going to be
cheapest to control in here

1239
00:58:59,670 --> 00:59:01,920
and everybody knew it.

1240
00:59:01,920 --> 00:59:06,860
So if you had-- even if you
had a national regime, and yes,

1241
00:59:06,860 --> 00:59:08,075
you could control down here.

1242
00:59:08,075 --> 00:59:09,200
You can control over there.

1243
00:59:09,200 --> 00:59:10,490
You can control up here.

1244
00:59:10,490 --> 00:59:14,400
It was going to be cheapest
to make reductions here.

1245
00:59:14,400 --> 00:59:17,400
And so that's where they
were going to get made.

1246
00:59:17,400 --> 00:59:20,730
All the models said that.

1247
00:59:20,730 --> 00:59:23,370
Everybody was very
quiet about the fact

1248
00:59:23,370 --> 00:59:25,830
that this stuff doesn't mix.

1249
00:59:25,830 --> 00:59:27,960
Because the models
were pretty clear

1250
00:59:27,960 --> 00:59:30,300
that we're going
to get what we want

1251
00:59:30,300 --> 00:59:32,580
because here's where
it's cheap, and here's

1252
00:59:32,580 --> 00:59:35,000
where we want the cuts made.

1253
00:59:35,000 --> 00:59:37,670
But the different-- but
the point to keep in mind

1254
00:59:37,670 --> 00:59:41,000
is even in these regions,
the costs of control

1255
00:59:41,000 --> 00:59:43,800
differed enormously
among plants.

1256
00:59:43,800 --> 00:59:46,620
So yeah, regionally
it's cheapest in there,

1257
00:59:46,620 --> 00:59:49,070
but not plant by plant.

1258
00:59:49,070 --> 00:59:50,970
So trading worked.

1259
00:59:50,970 --> 00:59:53,420
It got it where it was cheapest,
and where it was cheapest

1260
00:59:53,420 --> 00:59:56,780
was where we wanted it.

1261
00:59:56,780 --> 00:59:59,530
This is the price.

1262
00:59:59,530 --> 01:00:02,350
These are the price
of these rights

1263
01:00:02,350 --> 01:00:07,540
to emit a ton running
through the end of 2003.

1264
01:00:07,540 --> 01:00:10,030
The initial estimates
were higher.

1265
01:00:10,030 --> 01:00:13,390
The initial estimates
were about $300 a ton.

1266
01:00:13,390 --> 01:00:20,350
So some mixture of innovation
and cheap Western coal

1267
01:00:20,350 --> 01:00:21,460
held the price down.

1268
01:00:21,460 --> 01:00:24,580
But you will notice the
price bounces around.

1269
01:00:24,580 --> 01:00:27,553
People were making a living
trading these things.

1270
01:00:27,553 --> 01:00:28,720
How could you make a living?

1271
01:00:28,720 --> 01:00:30,750
Well, why did they bounce?

1272
01:00:30,750 --> 01:00:34,600
Well, if you think about
it for just a minute,

1273
01:00:34,600 --> 01:00:36,640
it's sort of like
we talked about oil.

1274
01:00:36,640 --> 01:00:38,590
There's a demand for emissions.

1275
01:00:38,590 --> 01:00:40,660
It depends on the economy.

1276
01:00:40,660 --> 01:00:42,220
It depends on coal prices.

1277
01:00:42,220 --> 01:00:43,700
It depends on a lot of things.

1278
01:00:43,700 --> 01:00:47,510
But in the short run,
it's pretty inelastic--

1279
01:00:47,510 --> 01:00:49,700
short run, a few months.

1280
01:00:49,700 --> 01:00:53,900
You don't change a coal
plant in a few months.

1281
01:00:53,900 --> 01:00:56,030
The supply curve is
that vertical line.

1282
01:00:56,030 --> 01:00:57,650
It's a cap.

1283
01:00:57,650 --> 01:00:59,960
So the supply is
really inelastic,

1284
01:00:59,960 --> 01:01:04,210
the demand is pretty inelastic,
and the price bounces.

1285
01:01:04,210 --> 01:01:07,000
So if you look at it,
you say, well, all right.

1286
01:01:07,000 --> 01:01:09,790
The price moved from,
say, $75 to $200

1287
01:01:09,790 --> 01:01:12,380
over a period of a few years--

1288
01:01:12,380 --> 01:01:13,190
terrible, horrible.

1289
01:01:13,190 --> 01:01:15,260
Oh, by the way, there
were speculators.

1290
01:01:15,260 --> 01:01:16,710
Of course there
were speculators.

1291
01:01:16,710 --> 01:01:19,360
How could there
not be speculators?

1292
01:01:19,360 --> 01:01:20,750
Did the speculators do this?

1293
01:01:20,750 --> 01:01:22,610
Not really.

1294
01:01:22,610 --> 01:01:25,010
They may have amplified,
but the main story

1295
01:01:25,010 --> 01:01:27,020
was inelastic demand
and inelastic supply.

1296
01:01:29,570 --> 01:01:35,520
Industry hated this,
as you could imagine.

1297
01:01:35,520 --> 01:01:39,450
Not such a big deal for sulfur
because it's a small cost,

1298
01:01:39,450 --> 01:01:41,280
but makes it hard
to plan when you

1299
01:01:41,280 --> 01:01:44,310
don't know within
a factor of three

1300
01:01:44,310 --> 01:01:47,850
what that cost is going to be.

1301
01:01:47,850 --> 01:01:49,680
The alternative--
and I will say we

1302
01:01:49,680 --> 01:01:51,300
were asked a lot,
those of us who

1303
01:01:51,300 --> 01:01:56,860
were involved in doing this
thing, why didn't you do a tax?

1304
01:01:56,860 --> 01:02:01,130
Tax would avoid that
kind of uncertainty.

1305
01:02:01,130 --> 01:02:04,340
You buy-- the government
would buy or sell.

1306
01:02:04,340 --> 01:02:06,170
You just put it-- in effect.

1307
01:02:06,170 --> 01:02:09,770
You just put a tax
on SO2 emissions.

1308
01:02:09,770 --> 01:02:13,030
Wouldn't that be better?

1309
01:02:13,030 --> 01:02:14,650
Yes and no.

1310
01:02:14,650 --> 01:02:16,150
It would mean there was a risk--

1311
01:02:16,150 --> 01:02:19,750
the risk would transfer, as
you can see, to quantity.

1312
01:02:19,750 --> 01:02:22,570
The environmentalists
hated that.

1313
01:02:22,570 --> 01:02:26,120
You don't know how much
is going to be emitted?

1314
01:02:26,120 --> 01:02:29,210
Rather not know the price.

1315
01:02:29,210 --> 01:02:33,710
And the utilities
really hated it

1316
01:02:33,710 --> 01:02:37,890
because instead of being
given these rights,

1317
01:02:37,890 --> 01:02:41,260
you'd actually have
to pay out of pocket.

1318
01:02:41,260 --> 01:02:42,010
No, no, no.

1319
01:02:42,010 --> 01:02:43,960
No, no, no, no, no.

1320
01:02:43,960 --> 01:02:47,550
So that was a non-starter.

1321
01:02:47,550 --> 01:02:49,445
That was a nonstarter.

1322
01:02:49,445 --> 01:02:49,945
OK.

1323
01:02:52,850 --> 01:02:54,530
Let us now go--

1324
01:02:54,530 --> 01:02:55,790
I think this is where we go--

1325
01:02:58,860 --> 01:03:00,250
to the C case.

1326
01:03:00,250 --> 01:03:04,470
So what the C case
tells us is the game

1327
01:03:04,470 --> 01:03:07,980
shifted in the early '90s.

1328
01:03:07,980 --> 01:03:09,500
People worried less
about acid rain,

1329
01:03:09,500 --> 01:03:13,980
and they worried a lot more
about small, fine particulates.

1330
01:03:13,980 --> 01:03:17,420
Began to get
epidemiological studies

1331
01:03:17,420 --> 01:03:19,340
that said that fine
particulates kill people.

1332
01:03:19,340 --> 01:03:24,350
Mostly they kill old
people, but old people vote.

1333
01:03:24,350 --> 01:03:27,900
So EPA had to--

1334
01:03:27,900 --> 01:03:34,310
EPA issued a standard for
fine particulates in 1997,

1335
01:03:34,310 --> 01:03:39,770
and it had to figure out how to
meet that standard, the problem

1336
01:03:39,770 --> 01:03:43,460
being the acid rain problem
in different clothing.

1337
01:03:43,460 --> 01:03:48,020
Small particulates are caused
by SO2, among other things,

1338
01:03:48,020 --> 01:03:49,850
and thus, they travel.

1339
01:03:49,850 --> 01:03:52,010
In effect, they travel.

1340
01:03:52,010 --> 01:03:55,670
So EPA, which has
interstate authority,

1341
01:03:55,670 --> 01:04:01,470
had to do something
about fine particulates.

1342
01:04:01,470 --> 01:04:06,920
So what it tried to do
was brilliant in a way.

1343
01:04:06,920 --> 01:04:10,680
It said, we'll tighten
the acid rain program.

1344
01:04:10,680 --> 01:04:13,130
How do we tighten the
acid rain program?

1345
01:04:13,130 --> 01:04:18,110
We require I think it was two
allowances to be emitted now

1346
01:04:18,110 --> 01:04:23,190
for every ton instead
of one allowance.

1347
01:04:23,190 --> 01:04:24,330
How perfect is that?

1348
01:04:24,330 --> 01:04:27,300
We just cut the ceiling--
cut the cap in half.

1349
01:04:27,300 --> 01:04:29,250
Surely that's going
to reduce emissions

1350
01:04:29,250 --> 01:04:32,550
enough to cut these
particulates way back.

1351
01:04:32,550 --> 01:04:34,500
Well, here's what
happened to prices.

1352
01:04:37,050 --> 01:04:38,370
Yeah.

1353
01:04:38,370 --> 01:04:42,960
What I showed you early
on, ran up to about there.

1354
01:04:42,960 --> 01:04:47,430
This drastic tightening
was being debated.

1355
01:04:47,430 --> 01:04:51,870
And that must be somebody
cornering the market,

1356
01:04:51,870 --> 01:04:53,130
but run-up--

1357
01:04:53,130 --> 01:04:53,710
or trying to.

1358
01:04:53,710 --> 01:04:58,770
But the run-up to the shoulders
was fear of this regulation.

1359
01:05:02,080 --> 01:05:05,000
So again, if you
read the C case,

1360
01:05:05,000 --> 01:05:08,680
this was a brilliant idea to
keep the trading system intact,

1361
01:05:08,680 --> 01:05:13,640
to make it deal with the new
problem by tightening it.

1362
01:05:13,640 --> 01:05:16,940
If you want to read-- oh, I
didn't put the citation in.

1363
01:05:16,940 --> 01:05:19,670
If you want to read
something really depressing,

1364
01:05:19,670 --> 01:05:23,540
read the circuit
court opinion that

1365
01:05:23,540 --> 01:05:30,790
dealt with the maybe 40 people
who challenged this rule.

1366
01:05:30,790 --> 01:05:33,310
Hundreds of reasons
why you couldn't

1367
01:05:33,310 --> 01:05:35,620
do this, why it was
arbitrary and capricious

1368
01:05:35,620 --> 01:05:37,750
and an abuse of discretion.

1369
01:05:37,750 --> 01:05:41,590
And what the court
did was throw it out.

1370
01:05:41,590 --> 01:05:44,440
And by throwing it out, threw
out the acid rain program.

1371
01:05:47,010 --> 01:05:49,650
You see the little
quotation there.

1372
01:05:49,650 --> 01:05:52,530
It said, "Sources in
Alabama which contribute

1373
01:05:52,530 --> 01:05:55,380
to nonattainment of the
fine particulate standard

1374
01:05:55,380 --> 01:05:57,540
in Davidson County,
North Carolina

1375
01:05:57,540 --> 01:06:00,180
would not need to reduce
their emissions at all."

1376
01:06:00,180 --> 01:06:02,130
They could just buy
the right to emit.

1377
01:06:02,130 --> 01:06:04,980
"Therefore, they could keep
contributing to nonattainment

1378
01:06:04,980 --> 01:06:07,080
in North Carolina.

1379
01:06:07,080 --> 01:06:10,710
Therefore, a rule that
allows that is invalid."

1380
01:06:10,710 --> 01:06:14,460
It doesn't solve the
North Carolina problem.

1381
01:06:14,460 --> 01:06:18,230
You've got to come up
with something that does.

1382
01:06:18,230 --> 01:06:20,840
And what EPA has come up
with and what's in process

1383
01:06:20,840 --> 01:06:24,380
is something that basically
eliminates interstate trading.

1384
01:06:27,110 --> 01:06:31,830
So this is the short happy
life of interstate trading

1385
01:06:31,830 --> 01:06:35,280
of sulfur dioxide allowances.

1386
01:06:35,280 --> 01:06:37,050
It worked.

1387
01:06:37,050 --> 01:06:38,760
It didn't in the
eyes of the court

1388
01:06:38,760 --> 01:06:44,850
solve the next problem that
came along, but it worked.

1389
01:06:44,850 --> 01:06:48,300
So let me say a little bit
generally about the Clean Air

1390
01:06:48,300 --> 01:06:52,770
Act from some EPA propaganda.

1391
01:06:52,770 --> 01:06:54,240
Stepping back from
this program--

1392
01:06:54,240 --> 01:06:56,070
and I'll let you
digest this stuff,

1393
01:06:56,070 --> 01:06:58,740
and we'll have a few
minutes for questions.

1394
01:06:58,740 --> 01:07:02,670
If you look over the long
term, from 1970 to 2005,

1395
01:07:02,670 --> 01:07:04,440
real GDP almost doubled.

1396
01:07:04,440 --> 01:07:07,740
Vehicle miles traveled
almost doubled.

1397
01:07:07,740 --> 01:07:10,380
Lead emissions went
almost to zero.

1398
01:07:10,380 --> 01:07:11,230
Well, that was easy.

1399
01:07:11,230 --> 01:07:12,870
We phased lead out of gasoline.

1400
01:07:12,870 --> 01:07:14,730
That was a good trick.

1401
01:07:14,730 --> 01:07:18,220
But large particulates
went down by 83%,

1402
01:07:18,220 --> 01:07:22,100
but the small
particulates not so much.

1403
01:07:22,100 --> 01:07:26,360
So this problem
is still with us.

1404
01:07:26,360 --> 01:07:28,040
The small particulates
turn out--

1405
01:07:28,040 --> 01:07:29,000
the big ones you see.

1406
01:07:29,000 --> 01:07:31,490
The small ones kill
you, as a shorthand.

1407
01:07:31,490 --> 01:07:35,120
Carbon monoxide is down
better more than half.

1408
01:07:35,120 --> 01:07:39,900
Sulfur dioxide is down half.

1409
01:07:39,900 --> 01:07:42,600
Oxides of-- these are national
emissions, not concentrations.

1410
01:07:42,600 --> 01:07:44,580
Oxides of nitrogen-- 30%.

1411
01:07:44,580 --> 01:07:48,240
That's stubborn because you
get it from automobiles,

1412
01:07:48,240 --> 01:07:51,300
and you got that doubling
of vehicle miles traveled.

1413
01:07:51,300 --> 01:07:54,240
But still down a third.

1414
01:07:54,240 --> 01:07:58,540
Volatile organics down 52%, and
that's catalytic converters.

1415
01:07:58,540 --> 01:07:59,850
So if you look at that--

1416
01:07:59,850 --> 01:08:02,820
again, if you look at that
relative to that paper that

1417
01:08:02,820 --> 01:08:06,840
was so pessimistic about
environmental progress,

1418
01:08:06,840 --> 01:08:08,010
that's not bad.

1419
01:08:08,010 --> 01:08:10,230
If you hadn't had EPA,
it would have been worse.

1420
01:08:10,230 --> 01:08:11,772
Most of this stuff
would have gone up

1421
01:08:11,772 --> 01:08:14,520
with GDP or vehicle
miles traveled.

1422
01:08:14,520 --> 01:08:15,495
Not great.

1423
01:08:15,495 --> 01:08:17,350
Not great.

1424
01:08:17,350 --> 01:08:21,609
You still have ozone, which
involves small particulates--

1425
01:08:21,609 --> 01:08:27,529
stubborn, stubborn-- the
Eastern Seaboard, and of course,

1426
01:08:27,529 --> 01:08:30,620
Southern California.

1427
01:08:30,620 --> 01:08:36,043
But you'll notice Cape Cod
is a nonattainment for ozone,

1428
01:08:36,043 --> 01:08:37,460
not because of the
terrible things

1429
01:08:37,460 --> 01:08:38,880
they do there, because it moves.

1430
01:08:38,880 --> 01:08:39,380
Yeah?

1431
01:08:39,380 --> 01:08:41,410
AUDIENCE: What's a
random [INAUDIBLE]??

1432
01:08:41,410 --> 01:08:43,010
RICHARD SCHMALENSEE:
The random what?

1433
01:08:43,010 --> 01:08:45,783
AUDIENCE: [INAUDIBLE].

1434
01:08:45,783 --> 01:08:46,700
AUDIENCE: In Colorado.

1435
01:08:46,700 --> 01:08:48,075
RICHARD SCHMALENSEE:
In Colorado?

1436
01:08:48,075 --> 01:08:49,750
AUDIENCE: Yeah.

1437
01:08:49,750 --> 01:08:54,000
RICHARD SCHMALENSEE: That, I
believe, is carbon monoxide,

1438
01:08:54,000 --> 01:09:00,022
and it has to do with
automobiles I think.

1439
01:09:00,022 --> 01:09:01,064
I don't think it's ozone.

1440
01:09:01,064 --> 01:09:03,050
AUDIENCE: Is there an
Air Force base there?

1441
01:09:03,050 --> 01:09:04,717
RICHARD SCHMALENSEE:
No, no, no, no, no.

1442
01:09:04,717 --> 01:09:05,750
This is Denver.

1443
01:09:05,750 --> 01:09:07,010
This is Denver.

1444
01:09:07,010 --> 01:09:09,080
Do you have a clue what that is?

1445
01:09:09,080 --> 01:09:12,260
I know there was some there
was some issues with fuel

1446
01:09:12,260 --> 01:09:14,430
formulation there in particular.

1447
01:09:14,430 --> 01:09:16,211
So I think it's a--

1448
01:09:16,211 --> 01:09:20,075
it is a-- I think it's an ozone
or a carbon monoxide problem.

1449
01:09:24,170 --> 01:09:25,234
I could be wrong.

1450
01:09:25,234 --> 01:09:26,359
But there are people there.

1451
01:09:26,359 --> 01:09:27,540
There are people there.

1452
01:09:27,540 --> 01:09:29,240
It's not just skiing.

1453
01:09:29,240 --> 01:09:31,490
Skiing's farther west.

1454
01:09:31,490 --> 01:09:34,490
So there are parts of the
country where the air still

1455
01:09:34,490 --> 01:09:37,279
counts as dirty.

1456
01:09:37,279 --> 01:09:43,040
And that's ozone and other
criteria pollutants are, again,

1457
01:09:43,040 --> 01:09:45,560
in some places.

1458
01:09:45,560 --> 01:09:52,130
You've got the-- well, some
of these are quite unpleasant.

1459
01:09:52,130 --> 01:09:54,600
Southern-- not unpleasant,
but Southern California,

1460
01:09:54,600 --> 01:09:57,380
for instance, persists,
as for that matter,

1461
01:09:57,380 --> 01:10:01,400
does the Pittsburgh
area in nonattainment

1462
01:10:01,400 --> 01:10:03,900
for a number of pollutants.

1463
01:10:03,900 --> 01:10:06,530
So let me pause there.

1464
01:10:06,530 --> 01:10:09,420
That's a lot of ground to
cover and I rushed through it.

1465
01:10:09,420 --> 01:10:15,020
So let me see if you have
questions on any of it.

1466
01:10:15,020 --> 01:10:15,800
Oh, yes.

1467
01:10:15,800 --> 01:10:17,300
AUDIENCE: Can you
go back one slide?

1468
01:10:17,300 --> 01:10:18,633
RICHARD SCHMALENSEE: Absolutely.

1469
01:10:18,633 --> 01:10:19,280
That's easy.

1470
01:10:19,280 --> 01:10:22,065
AUDIENCE: So in California,
like, along the border

1471
01:10:22,065 --> 01:10:23,990
of California and
Nevada, it looks

1472
01:10:23,990 --> 01:10:27,770
like pretty much all of
that border in California

1473
01:10:27,770 --> 01:10:28,430
is really bad.

1474
01:10:28,430 --> 01:10:31,970
But then in Nevada it's
only at the southern tip.

1475
01:10:31,970 --> 01:10:34,530
RICHARD SCHMALENSEE: I think
what you have here is--

1476
01:10:34,530 --> 01:10:39,120
is this maybe Imperial
County, which is gigantic?

1477
01:10:39,120 --> 01:10:43,350
So it may be that the
problem is over here.

1478
01:10:43,350 --> 01:10:44,747
So it's being done by county.

1479
01:10:44,747 --> 01:10:46,580
It's being done-- there's
certain monitoring

1480
01:10:46,580 --> 01:10:47,990
stations in each county.

1481
01:10:47,990 --> 01:10:51,050
And my guess is Death
Valley is probably

1482
01:10:51,050 --> 01:10:53,810
not a nonattainment
area for much.

1483
01:10:53,810 --> 01:10:57,032
But over here near
LA, I'm guessing.

1484
01:10:57,032 --> 01:10:58,240
AUDIENCE: Part of the county.

1485
01:10:58,240 --> 01:10:58,790
RICHARD SCHMALENSEE: Yeah.

1486
01:10:58,790 --> 01:10:59,060
Yeah.

1487
01:10:59,060 --> 01:11:00,518
It's a certain
number of monitoring

1488
01:11:00,518 --> 01:11:02,730
stations sort of thing.

1489
01:11:02,730 --> 01:11:03,230
Yeah.

1490
01:11:03,230 --> 01:11:04,562
AUDIENCE: Can you [INAUDIBLE]?

1491
01:11:07,596 --> 01:11:11,420
Like, what would happen if you
had like a quantity control

1492
01:11:11,420 --> 01:11:15,447
up to, say, 80% of the
cap and then set a tax?

1493
01:11:15,447 --> 01:11:16,530
RICHARD SCHMALENSEE: Sure.

1494
01:11:16,530 --> 01:11:17,030
Sure.

1495
01:11:17,030 --> 01:11:18,830
You could even do
better than that.

1496
01:11:18,830 --> 01:11:21,200
Let me get there.

1497
01:11:21,200 --> 01:11:22,500
Yeah, here.

1498
01:11:22,500 --> 01:11:25,670
Oh, or here, but rather here.

1499
01:11:25,670 --> 01:11:29,600
What people did talk about
in the context of CO2--

1500
01:11:29,600 --> 01:11:32,780
so we talked about there
was a cap and trade bill.

1501
01:11:32,780 --> 01:11:35,060
And environmentalists
said, well,

1502
01:11:35,060 --> 01:11:37,670
the price could get so low there
wouldn't be any incentives.

1503
01:11:37,670 --> 01:11:39,230
And industry said,
the price could

1504
01:11:39,230 --> 01:11:41,390
be so high it would kill us.

1505
01:11:41,390 --> 01:11:43,940
If we had sudden
economic growth,

1506
01:11:43,940 --> 01:11:46,880
we could get really high prices
that would choke off growth.

1507
01:11:46,880 --> 01:11:48,530
Or if the growth
was slow, you could

1508
01:11:48,530 --> 01:11:50,405
have what you have in
Europe, which is really

1509
01:11:50,405 --> 01:11:52,350
slow prices, really low prices.

1510
01:11:52,350 --> 01:11:58,930
So people proposed, how about
we have a floor and a ceiling?

1511
01:11:58,930 --> 01:12:02,920
The floor would be if the
price drops below this floor,

1512
01:12:02,920 --> 01:12:06,620
some agency starts buying
these things on the market.

1513
01:12:06,620 --> 01:12:08,680
If the price gets
above the ceiling,

1514
01:12:08,680 --> 01:12:11,080
we start selling them
at the ceiling price.

1515
01:12:11,080 --> 01:12:13,060
So you stand ready to
buy at the floor price

1516
01:12:13,060 --> 01:12:16,315
and sell at the ceiling price
to limit the fluctuations.

1517
01:12:16,315 --> 01:12:18,190
And if the floor and
ceiling are close enough

1518
01:12:18,190 --> 01:12:21,840
together it looks like a tax.

1519
01:12:21,840 --> 01:12:25,980
So that was a serious
set of proposals

1520
01:12:25,980 --> 01:12:28,890
in the climate context
for exactly the reasons I

1521
01:12:28,890 --> 01:12:30,300
think you're thinking of.

1522
01:12:30,300 --> 01:12:35,010
Too low removes incentives;
too high is very expensive.

1523
01:12:35,010 --> 01:12:38,010
You give up quantity
control, but you give up

1524
01:12:38,010 --> 01:12:41,340
quantity control
sort of at the edges.

1525
01:12:41,340 --> 01:12:46,690
If growth is really slow, then
emissions are going to be low.

1526
01:12:46,690 --> 01:12:48,840
The problem is up here,
if growth is really fast,

1527
01:12:48,840 --> 01:12:51,420
you're going to let
emissions grow some.

1528
01:12:51,420 --> 01:12:54,610
So maybe you want this curve
to be steep up here, a supply

1529
01:12:54,610 --> 01:12:55,110
curve.

1530
01:12:55,110 --> 01:12:56,880
But you could-- there
are very-- there

1531
01:12:56,880 --> 01:13:00,030
are ways to combine these two
and variations on a theme.

1532
01:13:00,030 --> 01:13:01,340
Yeah.

1533
01:13:01,340 --> 01:13:04,300
Anything else?

1534
01:13:04,300 --> 01:13:05,850
OK.