Environmental Econ: Crash Course Economics #22

Adriene: Welcome to Crash Course Economics. I’m Adriene Hill Jacob: And I’m Jacob Clifford. Economics is about choices, and how we use our scarce resources. It’s not just about producing and consuming, it can also be about conserving. Adriene: Maybe counterintuitively, economics has a lot to add to discussions of how we can balance our desire for prosperity and growth, with the need to protect our natural resources. Today we're going to look at environmental economics and think about how economics can help us keep our planet livable. [Theme Music] Pollution is going to happen, it’s a by-product of human existence and there is no way that we can get rid of it all. In fact, one of the ways we know about earliest the societies is by looking at their trash heap, something archaeologists call middens, because it sounds better than “dumps.” But the fact that humans produce all kinds of waste doesn’t mean that we have to embrace islands of trash floating in the oceans, a layer of smog over industrial cities, and toxic chemicals in our rivers. For sake of simplicity though, we’re going to focus on one type of pollution: carbon dioxide emissions. They’re one of the primary greenhouse gases.

These greenhouse gases basically blanket the earth and are causing climate change. CO2 levels are the highest they've been for millions years which is why environmentalists consider it a “planetary emergency.” There's a lot of effort going into how to remove greenhouse gases from the atmosphere, how to make cities more resilient to climate change, but in the interest of time we’re going to focus on efforts to reduce the amount of new pollutants getting spewed into our atmosphere. Jacob: The economic solution is pretty simple. Step one, identify the sources of the most air pollution. Done. We know exactly what it is. It’s factories that burn fossil fuels for energy, industries that use oil and coal to produce things, and vehicles with internal combustion engines. Step two, decrease the supply of these technologies and products or decrease the demand for them. That’s it, it’s simple.

But, the implementation of these policies gets complicated. Let’s look at decreasing supply. As we mentioned in the last video, one of the biggest problems with having countries independently enforce environmental regulations is the Tragedy of the Commons. No one owns the atmosphere, so there is very little incentive for countries to keep it clean and switch to expensive green technologies if no one else is going to. It’s not like there is some global environmental police punishing countries for polluting. While a country like Trinidad and Tobago has a huge carbon output per capita, its small population means it’s only producing a small fraction of global CO2. The other option is to decrease the demand for fossil fuels, possibly by finding alternate green energy sources. But we’re already very reliant on fossil fuels, and markets have made the production of those fuels very cheap. So, any new type of energy will have a hard time beating the established system.

So we can either wait patiently for new technologies to develop and get cheaper, or we can speed up the process by manipulating markets with government subsidies, taxes, and regulations. Adriene: In the case of pollution, there are long-term side effects, like climate change, that consumers often don’t take into account when they buy products. Remember negative externalities? When the full cost of a product doesn’t line up with the costs that manufacturers or consumers pay? Pollution represents a market failure — a situation where markets fail to produce the amount that society wants. To address this, some economists argue that government intervention is not only justified, but essential. There are all kinds of different ways intervention can happen — all of them meant to encourage producers and consumers to choose to pollute less.

One solution is for the government to come out and set very specific rules about how much specific industries can pollute. Forget markets. You're gonna follow our pollution rules. Another way governments encourage people to pollute less is by providing price incentives. Those incentives can encourage individuals to make choices that are better for the environment. The government could add taxes to gasoline purchases, or, on the other hand, provide subsidies for people who drive electric cars. Governments can also create permit markets — basically setting a limit on how much firms can pollute, and allowing those firms to buy and sell pollution permits. You’ve probably heard these called “cap and trade”. Proponents of cap and trade argue that it can successfully limit emissions, without creating hard and fast rules that might hinder economic growth.

And, governments can subsidize the development of a specific technology or industry—in an effort to make that technology more competitive with the alternatives. A country might help support the development of solar or wind energy. As of 2014, around 10% of the energy consumed in the United States came from renewable sources, which is pretty much in line with the global average. Current predictions are that by 2040 15% of the world energy consumption will come from renewable sources. But, alternative energy sources, for the most part, just aren’t cheap enough yet, so the majority of our energy is likely to continue to come from non-renewable sources, at least for now. Jacob: We don’t have the time to sit back and wait for new technologies to get cheaper, and there's no guarantee that the technologies that the government picks will be cost effective. Perhaps the solution is not to get rid of fossil fuels, but instead be more efficient with those fuels. But that has drawbacks, too. Some energy economists argue that the expected gains from energy saving technologies, are offset by something called the rebound effect. Let’s go to the Thought Bubble.

Adriene: Let’s say Hank uses a gallon of gas to drive to work everyday. Then, partially to help the planet but mostly to help his wallet, he buys a new fuel efficient car that only takes half a gallon of gas for the same commute. He saves money and there's less pollution. It is a win-win. But the rebound effect says that the benefits of energy efficiency might be reduced as people change their behavior. With the money he saves, Hank might start driving more than he normally would or he might go on a vacation in Hawaii. That leads to more consumption and possibly even more emissions. Also, if greater fuel-efficiency makes driving less expensive it might encourage more people to buy cars and increase the overall use of gasoline. And even if people didn't increase their driving, the new fuel efficiency could decrease the demand for gas, making fossil fuels cheaper and more readily available for other uses. The possibility of the rebound effect doesn’t mean we shouldn’t invest in energy saving technologies. It just means that we have to keep in mind how consumers will behave. It’s also the reason why it's important to have economists involved in the discussion of environmental policy.

The tools of economics can help analyze the incentives and figure out what might work best. Thanks Thought Bubble. Okay, so we’ve identified another problem. But before you get so angry that you kick over a barrel of oil and light it on fire, keep in mind that there is hope. Most countries are actively trying to address the problem of greenhouse gases. The international community has been trying for decades to work together to protect the environment with varying success. There are international treaties that commit countries to reducing greenhouse gas emissions. UN negotiations are underway to create a new climate change agreement — that could be adopted in December 2015. Private companies and governments are also funding research into green technology. In the U.S. the American Recovery and Reinvestment Act of 2009 allocated billions to fund renewable energy.

China is also vowing to clean things up, and, in fact, leads the world in renewable energy investment. So, now that most countries recognize there is a problem, the hope is that they’ll figure out a way, or more likely a lot of ways, to start addressing it. Environmental economists say that is not just governments and producers that need to change, it’s also consumers. Conserving and consuming more thoughtfully likely need to be a part of our daily lives if we want to protect the environment. But just bringing our reusable grocery bags to the store isn’t going to save the planet, even if it says it on the bag. Bigger and more costly interventions like improving insulation and changing thermostats might have more impact, but we need to recognize individual action alone isn’t going to be enough. Industries, governments, and individuals; we’re in this together. Thanks for watching, we’ll see you next week.

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Kansas: Conservation, the “5th Fuel” (ENERGY QUEST USA)

Narrator: Kansas, a land of wheat, and corn, and cattle. In the heart of the country, it's number 48 out of all 50 states in energy efficiency. So this is a place where energy conservation can really make a difference. Come on, girls. Our region is a region of farmers. We are famously conservative and we have talked from the beginning about putting the conserve back in conservative. Narrator: According to a study by the Natural Resources Defense Council, improvements in energy efficiency have the potential to deliver more than $700 billion in cost savings in the U.S. alone. But, they say motivating consumers to take action is the key to unlocking this potential and that was the aim of Nancy Jackson's Climate and Energy project, with its Take Charge! Challenge. Kansans are patriotic, Kansans are hardworking, Kansans are humble.

Narrator: And Kansans are competitive. You all are competing against Ottawa, Baldwin City, and Paola, so really, you gotta beat those guys, yes? Do you want to help us beat Manhattan? Narrator: 2011 was the second year for the Take Charge! Challenge, a friendly competition among 16 communities arranged in four regional groups aiming to reduce their local energy use. Some of the lowest cost, most effective ways that you can take ownership of your energy future is taking ownership of the efficiency and the conservation of your house or your business. Narrator: Ray Hammarlund's office used federal stimulus dollars to fund four prizes of $100,000 for each of the four regions in the competition. Just as important as the grand prize, $25,000 went to each community to fund local coordinators who took the lead in galvanizing grassroots efforts.

Here's how the challenge worked in Iola. The challenge started in January of this year and ends October 1st. You're required to have three community events. We're going to have a lot more than that. Today, we are at the Fight The Energy Hog Festival. Becky Nilges: I love the hog. He was just so ugly that he is cute. He represents energy hogs in your home. You would probably let him in but you don't know the damage he's going to do. Narrator: Competing towns scored points by counting how many cfl bulbs and programmable thermostats were installed and how many professional home energy audits were done. Our job as energy auditors, both for commercial buildings as well as residential buildings is, we're essentially detectives.

What's happening here? Is there a great deal of air leakage? And we're finding that the majority of the houses that we're dealing with actually use a lot more energy than they need to. Narrator: In Lawrence, a house of worship did an energy audit, made changes, and got a pretty nice donation in its collection plate. David Owen: One part of the audit was to contact the power company. Well, during that process we discovered they had been overcharging us. And so we got a check, a rebate check from them for $4,456. Narrator: Other changes start small, but add up. We were a little bit worried at one point that the congregation would not accept the very bright, white type lights. So as an experiment, we took one of these chandeliers and changed all the bulbs in it to the cfls. And then we took the priest over here and we said, "which one did we do?" and he could not tell us.

So that told us it was ok to do them all. Narrator: Changing lights, adding insulation, and upgrading windows paid off. Even though it's an old building, we saved 64% on the consumption of energy in this room. Narrator: Lighting makes up about 15% of a typical home's electricity bill, and lighting all of our residential and commercial buildings uses about 13% of the nation's total electricity. But changing out old bulbs is a lot easier than paying for audits and the energy enhancements they recommend. Here's where the 2011 Take Charge! Challenge promised material assistance using stimulus funds. Ken Wagner: It's a $500 audit that costs you $100. The rest of that $500 is covered under the Take Charge Challenge program through the Kansas Energy Office. We really love the competitive spirit of the program and I think it's really raised a whole awareness of energy efficiency and the importance of energy efficiency to a lot of segments in our community here.

Narrator: Even Baldwin City bankers were grateful for financial assistance from state and federal governments. Dave Hill: Nine months ago, we installed a 14 KW solar power system. I believe the initial cost of the system was basically $65,000 and then we got a substantial grant from USDA, I believe it was $20,000. We have about $18,000 of our own money invested in the system, after all the deductions. We think it will pay out in about 7-8 years. Narrator: David Crane of NRG Energy thinks that kind of approach makes good business sense. Crane: What I say to every businessman who has a customer-facing business, think of a solar panel not only as a source of electricity, think of it as a billboard. You don't even have to write your name on it. Just put it on the top of your store and it will be sending a message to your customers that you're doing the right thing when it comes to sustainable energy. Narrator: Surveys of why conservation is hard to achieve have found that people want one-stop shopping, a place where they can find out what to do and get practical recommendations about who to hire and what it all might cost, just what this new facility was to offer.

Now it's mid-October, time for the results of the 2011 Take Charge! Challenge. MC: Fort Scott. MC: And the winner is Baldwin City. Nancy Jackson: Over 100 billion BTUs were saved as a result of this Challenge, and millions and millions of dollars in each community. Those savings come from measures that have been installed that will guarantee those savings for years to come. So the savings are enormous over time. $100,000 has a nice ring to it and it's a nice cash award for a community of our size. Our challenge now is to continue on with energy efficiency and encourage our community to save. Nancy: One of our real goals was to help people to stop thinking about energy efficiency as the things they shouldn't do, as what not to do, and think about it instead as a tremendous opportunity to both save money in the near term, and to make our electric system more resilient in the long term.

So it's about what we can do, both individually and together, and for us that feels like the real win. The United States today is twice as energy efficient as it was in the 1970s. And I think we have the capability in the decades ahead to become twice as energy efficient again. We believe this is something that can be done really anywhere with great success..