Economic

On March 29th, I make my comeback as an environmental economics teacher. To prepare for this big day (and the 200 registered students), I'm vanishing and heading up to Berkeley for 10 days of solar panels and Prius watching and no blogging. I will be thinking about this WSJ piece that debates the consequences of the Congress' refusal to pass credible anti-carbon legislation. The article argues that there is a huge amount of "green investment" sitting on the sidelines and not happening because of the fundamental uncertainty about what are the "rules of the game".

This is a key application of the deep ideas of investment under uncertainty. Robert Pindyck outlines these ideas in this very nice survey piece. In a nutshell, when uncertainty about the direction of public policy increases --- a business will delay making an irreversible investment and wait until the uncertainty is resolved. While this is individually rational, it can be socially costly if there is a core challenge (i.e climate change) that grows more dangerous with further delays in battling it.

Imagine if a block of adjacent liberal/green states such as California, Oregon and Washington formed a "Regional Green Trading Block" where they collectively enacted the equivalent of California's AB32 .

This collective effort would feature a large number of people (perhaps 45 million) and cover a large land area. If this "Green Region" committed to only purchasing new high average MPG vehicles and demand a large share of electricity to be produced from renewables, then this consumer push would attract the green investment that the WSJ claims is sitting on the sidelines. The old "home market" effect from International Trade would kick in as this 45 million person region would be large enough to sell to even if the rest of the nation continued to side with Dick Cheney.

The Green Home Market Effect would even offer a convenient story to convince my liberal/green region that our next great export base (forget movies) will be shipping green products to the rest of the nation and China.

In this sense, a green trading bloc could be a building block to achieving a national carbon policy. In this case, the green region would pre-commit to be the guinea pig and if the learning by doing effects actually exist for "green" products then the rest of the country will be happy to adopt them after the learning takes place in my West Coast Lab (i.e California, Oregon, and Washington). My friends in Canada, if you want to join this coalition of the willing, you are welcome. The greater the size of the home market --- the greater the economic opportunities for suppliers.