Hammering on the Hummer

If you are in Indonesia (and manage to stay rich), I suggest you to buy Hummer as soon as you can for two reasons: first, these gas-guzzling toys are on the verge of extinction, as the maker, hit by prolonged high gas price, is considering to stop producing it. So it may soon become a rare vintage.

And second, because, after all, many people in Indonesia are always willing to give you gas subsidy --and publicly defend it at all cost.

Hey, where are our friends environmentalists lately?

Problem #1: Microeconomics Exam

In today's Jakarta Post op-ed, Professor Rokhmin Dahuri wrote that capitalism depletes natural resource and precedes global warming. Discuss the flaw, if any, in his argument.

Hint: Use your knowledge of Demsetz's Theory of Property Right,or Coase Theorem (in pdf), or Tragedy of the Commons. No math needed.

Odd Socks

#1. The big Jakarta's flood in February 2007 was due to global warming.
#2. The dengue fever outbreak in Bogor recently was caused by extreme change in precipitation patterns and warming temperature.

But,if the global warming were to blame, why there was no big flood nor dengue fever outbreak in, say, Surabaya, at the same time?

My own stupid analysis: Jakarta's Car Free Day

Sutiyoso's car free day is stupid. And it is bad for the environment, too.

So, the outgoing Jakarta's governor Sutiyoso who seems to think he is an environmentalist, again endorses a silly event that takes place today (Saturday). It is called Jakarta Car Free Day; it seems to be proposed by some environmental groups. The policy is to ban cars in Jalan Sudirman and Jalan Thamrin, the two most important streets in the heart of metro Jakarta. The idea is to be friendly to the environment. The event, I heard, is to be repeated every month. And in every event, they will hold activities like happy biking or things like that. They said this is in solidarity with the "same global movement", World Car Free Day.

I bet in most countries/cities that adopt this event the traffic management and public transportation facility is better than Jakarta. If not, things can be very nasty.

Just like Jakarta today. As of now, I have no idea what is going on in Thamrin and Sudirman, but Gatot Subroto, Slipi, Casablanca, and many other streets in the neighborhood are in total jam. I just came back from Senayan to Shangri-La and it took me one hour travel time. This is probably 'normal' in Jakarta's weekdays. But not in Saturday.

It turns out, people do not halt their activities because of the car-free day (who wants?). They just try to find ways around Sudirman and Thamrin to get to their destination or come back home. I think the numbers of cars not used in respect to the car-free day is negligible, compared to cars trying to make detours around the two main streets.

As I said, this resulted in annoying and tiring traffic jam in almost all streets adjacent to Sudirman and Thamrin. Furthermore -- and let me ask this to the environmentalists who campaign for this event -- which one pollutes more: a heavy traffic jam where cars run 3 kms/hour around car-free (but not bus-free) Sudirman/Thamrin or usual Saturdays in Jakarta when traffic is usually not as bad as weekdays?

Really, even the greens need to understand the power of incentives.

Paper or cloth, honey?

I always think of tissue paper (or paper tissue if you like) as one of the best inventions in the history of man- and womankind (the other being short pants with college name on the back, don’t you think so?).

With tissue, you wipe out your sweat and throw it to trash bin. You sneeze on another sheet and trash it with all the germs inside. You clean your Coke can with another sheet. You can even write on yet another one when you get an idea for your blog. Tissue paper is great.

But some students from one high school in Jakarta disagree. I saw them on TV campaigning the use of ... (cloth) handkerchief! According to one of them, using tissue is not good for the environment. It was not clear why but if I heard it right, she mentioned something about against cutting off too many trees for producing my and your tissues.

Poor kids. How many handkerchiefs do you need in one day? I guess back in the seventies, one. What can you do with one cloth handkerchief in a day? You use it to wipe your sweat, fold it, and slip it back into your pocket. Then you take it out again, sneeze your germs out onto it, fold it again, and put it back inside the pocket. (I guess you don’t want me to tell you what you do with it when you’re having a runny- or stuffy nose!)

(And out there a high school girl is crying having learned that her boyfriend has been cheating big time on her. Look, that little jerk, trying to be romantic, is offering her his ... well, handkerchief!)

Dear environmentalist-wanna-be who campaigned against tissue on TV yesterday. Let me tell you a little secret about handkerchief: you wash it. For that, baby, you need detergent and water and time. Ah, I guess that’s not very environmentally friendly, too...?

Dumpster-thy-neighbor policy

In the "Metropolitan" section, Kompas wrote an article about North Jakarta's failure to receive the Adipura award due to garbage and drainage problem in the city. (Adipura is an annual award given to 'clean' cities -- don't ask me how do they define 'clean').

The mayor said that the problem with North Jakarta is, being in the mouth of some 13 rivers, garbage from the other cities stopped and accummulated there. So, to solve the problem (and win the next Adipura), the mayor has already had a solution: the city will build water gates in the rivers... which will be located in North Jakarta's border with the other cities.

This sounds stupid, but I won't blame the mayor. He just made a rational decision. The incentive (Adipura) is for individual cities. So why should the bother to solve the others' problem?

Environment

Porter Hypothesis

The Economist latest issue takes (again) on the global warming. It includes a story on how yet another big shot goes green -- this time the General Electric. As I said before, the main likely reason why they go green is, well, profit motive. And there's nothing wrong with that. Over at Env-Econ, John Whitehead has his take on what has been called "Porter Hypothesis". It's worth reading.

And here's my take:

“Porter Hypothesis” (Porter, 1991) is a three-level hypothesis. First, a strict environmental regulation can benefit the firms providing environmental services (e.g. scrubber producers) on their customers (e.g. electric utilities). Second, a stricter regulation benefits some regulated firms (i.e. more competitive ones) at the cost of other regulated firms (i.e. less competitive ones). Finally, stricter regulation would enhance the competitiveness of a nation as a whole. Porter and van der Linde (“PL”, 1995) extend the discussion of environmental policy and technology adoption by introducing the notion of “innovation offsets”. They argue that the costs of complying with environmental standards might be offset (partially or fully) by innovation induced by the regulations. This is supported by the fact that the activity to reduce pollution is in many cases coincident with productivity improvement with regards to resource use. Therefore, they conclude, firms may achieve net benefits from more stringent environmental regulations.

I find this argument flawed. Coincidence between reducing pollution and improving productivity is not sufficient to accept the hypothesis that strict regulations can enhance competitiveness. One needs to systematically prove this conjecture before reaching such strong conclusion. Innovation offsets, albeit theoretically possible, are rare in practice. PL argue that emissions and discharges of pollution are the manifestations of inefficiency. Instead of dealing with them, firms can enjoy substantial innovation offsets by improving their resource productivity, and this can be obtained through technology adoption. I agree. However, I barely see any reasons to expect that this can only (or, better) be achieved by environmental regulation.

PL believe that loose regulation can be complied with secondary treatment. Stricter regulation, on the other hand, forces firms to comply more seriously with fundamental solutions so as to lead them to innovation. They argue further that the potential for innovation offsets may exceed the cost of complying with stricter regulation so it is possible that net cost of compliance decrease as regulation becomes more stringent. It may even become net benefit. Again, I find this argument weakly supported and highly speculative. I believe that as one acts rationally, she would choose to innovate, provided that it pays her some positive benefit, and this may have nothing to do with regulation. A study by Altman (2001), for example, proves that there is no reason not to expect that a firm will be reluctant to “becoming greener”, if such transformation is costly and only serves to offset the private costs. In addition, Khanna and Zilberman (1997) find that even in the absence of any environmental policy, a firm may adopt technology that reduces emission when some “precision technology” is available.

That said, I believe that not all idleness are wasteful. It seems that PL overlook the concept of “slack capacity” (Oi, 1981). Idleness may occur in equilibrium state due to some opportunity costs (for example, why schools are closed at weekend?). Forcing a stricter regulation may only deteriorate the existing condition.

Ref:

• Altman, Morris. 2001. When Green Isn’t Mean: Economic Theory and the Heuristics of the Impact of Environmental Regulations on Competitiveness and Opportunity Cost. Ecological Economics. 36:31-44.
  
• Khanna, M. and D. Zilberman. 1997. Incentives, Precision Technology, and Environ-mental Protection. Ecological Economics 23:25-43.
  
• Oi, W.Y. 1981. Slack Capacity: Productive or Wasteful? American Economic Review. 71(2):64-69.
  
• Porter, M.E. April 1991. America’s Green Strategy. Scientific American. 264:168.
  
• Porter, M.E. and C. van der Linde. Fall 1995. Toward a New Conception of the Environmental-Competitiveness Issue. Journal of Economic Perspectives. 9(4):97-118.

Big Shots Go Green

When Goldman Sachs goes green:

The big investment banking firm has announced a policy that details how its 24,000 employees - be they bankers, analysts or purchasing agents - should promote activities that protect forests and guard against climate change,

i'm really not surprised that it does that voluntarily. Was there a pressure from the government? No, the "pressure" comes from J.P. Morgan and Merrill Lynch:

This year, J. P. Morgan Chase set out strict environmental dos and don'ts for each part of its business. And Merrill Lynch now includes environmental issues in the due-diligence checklist its bankers use before underwriting stock issues.

I remember a conversation between my student ("him") and me in Env-Econ class:

Me: I happened to visit two big, export oriented companies located in East Jakarta. They told me, they're green. The first company allocated some fraction of its annual sales to fund environmental cleanup. The second established an environmental awareness program in its community. I curiously asked them, why they did that -- as far as I knew the government had not issued any regulation for that. They said, well, their competitors did that, too.
Him: Yeah, right. But you didn't know what their intention was, did you? It's probably just a pure profit motive -- you know, to build good image, than attract buyers.
Me: I don't give a damn to "intention". What I know is, they were green. I don't care with the motive.

My point was, and is, that competition can play a role in favor of the environment. You don't really need government.

Of course there are times when such good competition might not be possible. For example, in areas that suffer from environmental injustice, the community might not be able to get attention from private companies. In this case, a little role of the government might have its justification. Some kind of taxation is a case in point. Here's a paper I co-wrote on this issue.

Env-econ is, well, economics!

This blog pretty much reflects the position I share -- though I might disagree with some of theirs -- on environment and economics. One good post that has triggered interesting debate is this. Even today, I find it amazing (and amusing, I should add) that many people think environmental economics is all about tree-hugging. At best, we are thought of as double-agents: environmentalists accuse us as being unethical ("Who are you to put price on the environment?") while "mainstream economists" (for lack of better term) calls us a sect.

This is an exam I once gave in class. And this is my frustration. (Today, I still find it at odds that some environmentalists oppose fuel price increase that follows a subsidy cut!).