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If you could see dimly into the future—which you can!—and calculate in dollars the benefits of actions preventing utter destruction and chaos, what would you call this price?
You might call it "the alpha price," the price of having a safe future. 1/n
You might call it "the alpha price," the price of having a safe future. 1/n
Economists famously are not physicists, who name things on the idea that there's no name for it but you have to call it something. Physicists have strange quarks, charm quarks, up and down quarks, WIMPS, gluons, strings, and economists have...
"the social cost of carbon" 2/
"the social cost of carbon" 2/
So, this social cost of carbon, this "alpha price" (
) needs a new name, or at least a stage name, because it might help bring attention to something that is very difficult to see let alone calculate:
) needs a new name, or at least a stage name, because it might help bring attention to something that is very difficult to see let alone calculate:
The absolutely astonishing, hard-to-pinpoint influence that inertial bureaucratic and professional conventions have on the prolonging fossil-fuel dependency. 3/
The s̶o̶c̶i̶a̶l̶ ̶c̶o̶s̶t̶ ̶o̶f̶ ̶c̶a̶r̶b̶o̶n̶ alpha price is a regulatory tool (yawn) that addresses an important disparity, which is the difference between market prices for fossil fuels and the value of the damage they inflict on the world. By calculating the alpha price...
and using it as a "benefit" in cost-benefit analyses, government can make sure that they truly understand the costs and benefits of new policies. They ensure that demonstrably incorrect market prices for fossil fuels are not obscuring the real benefits of action.
It's a complicated thing, calculating the alpha price, which brings us to the question of how bureaucratic inertia and professional conventions perpetuate thinking we don't need anymore.
Hold your breath, we're free-diving now deep into the bowels of regulatory bureaucracy. n/n
Hold your breath, we're free-diving now deep into the bowels of regulatory bureaucracy. n/n
In 2003, the Bush WH wrote a piece of paper, call it "Circular A4." (The A stands for* alpha) (*j/k). What this piece of paper does it sets guidelines for pricing out the cost and benefits of regulations.
Btw, you're doing great! We're almost thru the part that hurts the most!
Btw, you're doing great! We're almost thru the part that hurts the most!
And in this Circular A4 piece of paper, the WH says lays out how regulators should understand changes in the value of money over time. This is the "discount rate," the living embodiment of Wimpy (not the physics particle) saying he'd gladly pay you Tuesday for a hamburger today
[INTERMISSION: Having serious doubts about this whole enterprise now but there's no going back]
Economists calculating our alpha price have picked the lower rate specified in Circular A4—3%—for reasons I'm not going into. They do this to approximate the return on 10y Treasuries
Economists calculating our alpha price have picked the lower rate specified in Circular A4—3%—for reasons I'm not going into. They do this to approximate the return on 10y Treasuries
But guess what! In the 18 years we've Circular A4, 10y Treasuries no longer return what they used to! The same year Circular A4 came out, Treasury issued new inflation-adjusted products (TIPS) that since then have returned 1%, not 3%
These data come from Greenstone and Carleton, who last week suggested at least two ways that the WH can fix and modernize the social cost of carbon, which n/n https://epic.uchicago.edu/research/updating-the-united-states-governments-social-cost-of-carbon/
Biden began on Wednesday with two Exec Orders. One resuscitates a federal group that calculates the alpha price and gives them deadlines.
The other calls for Circular A4 to be modernized in a way to reflect that... coming to the point... n-3/n
The other calls for Circular A4 to be modernized in a way to reflect that... coming to the point... n-3/n
The bureaucratic standard for cost-benefit analysis, 3%, no longer reflects the reality of capital markets, which are returning just 1%.
This is *HUGELY IMPORTANT* to how the U.S. govt values the future. A lower discount rate yields a higher alpha price and vice versa.
This is *HUGELY IMPORTANT* to how the U.S. govt values the future. A lower discount rate yields a higher alpha price and vice versa.
So: The old way of calculating the alpha price (Greenstone & Carleton argue) is dependent on an old bureaucratic practice no longer reflecting empirical market reality. Interview with Greenstone here: https://www.bloomberg.com/news/articles/2021-01-22/how-do-you-put-a-price-on-climate-change-michael-greenstone-knows
Which brings us to the punchline: Is there a better way to bring about a net-zero, safe future without even relying on an alpha price? Is applying a cost-benefit analysis to climate change itself a part of the bureaucratic and professional conventions that
are holding back climate progress? Maybe! That's why (I think!) @noahqk et al have given us Near-Term to Net-Zero and (I think) why @GernotWagner et al have given us declining CO2 price paths.
(Greenstone et al would point out that the controlling key here is having a cost-benefit analysis rooted in empiricism, but gimme a break this is a tweet thread and I've already out stayed my welcome.)
Ending with this: What other bureaucratic/professional conventions do we mindlessly adhere to just bc that's how it's done? In govt? In investing? In corporate executive compensation? In journalism? In military procurement?
It's all hands on deck. Get your hands on deck.
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It's all hands on deck. Get your hands on deck.
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