Blog-Normal Distribution - Analytic lessons and random observations by John Sall, JMP creator and SAS co-founder

I suggest you spend some time on Earth Day reading about environmental policy.

First, you should get the most recent (April 19, 2009) issue of The New York Times Magazine and read the article "Why isn't the brain green?" by Jon Gertner. The most powerful force in environmental policy is the public’s opinion, and the shaping of this opinion is extremely important. The article profiles the work of CRED, the Center for Research on Environmental Decisions, and the work of Elke Weber and her colleagues. In particular, the work of David Hardistry and the thinking of Baruch Fischhoff could make a huge difference in how to frame the current debate. The article says it could be very politically palatable to act on price, rather than quantity, in climate legislation.

Second, you should be aware of the issue of Nature dated Jan 22, 2009. Notice the article titled “Not so sunny after all” to see that the solar energy market is deeply depressed now, though it was booming a year ago. Then notice the article “Prices plummet on carbon market” to see that the price of a ton of CO2 emission went from more than 30 euros in July 2008 to only 11.65 euros in January 2009. The direction now is not good.

Third, you should read Tom Friedman’s book Hot, Flat, and Crowded. Tom has great insight into most current issues, and his insight into solving the climate problem is very good. He basically says that most actions have very small leverage. If you want effective change, we need to change the laws and policies we operate under.

Fourth, you should read Carbonomics, by Steven Stoft, which puts an economist’s perspective on the current debate. An alternative to buying that book would be to read last year’s economist report by the Congressional Budget Office, “Policy Options for Reducing CO2 Emissions.”

There are two approaches to addressing the climate problem: one is price-centered, the other is quantity-centered, the P and Q approaches, respectively. Most economists say the P approach is better because it is effective, efficient and gradual. The proponents of the Q approach say their way is more politically palatable and has certainty.

The current climate legislation, the Waxman bill, is a Q-side approach of “cap and trade.” It is the work of scientists and politicians, who value certainty and palatability. Power companies don’t object to a Q approach as long as they get a lot of free emissions credits in the deal. Most NGOs, such as the ones that are in USCAP, strongly favor a Q approach, for a variety of reasons. A Q approach did work for sulfur dioxide.

But how is a climate policy supposed to actually work? With a Q approach, you cap Q, auction or give emissions credits, trade them; as limits take hold, there is an artificial scarcity that will raise prices. With higher prices, you get energy conservation and alternative energy generation.

With the P approach, you put a charge on carbon sources to raise prices, leading to energy conservation and alternative energy generation. The P approach is much simpler. The prices in a P approach are much more stable, and stable increasing price is the key to the changes we need in energy conservation and alternative energy.

A Q approach leads to speculation and potentially wild fluctuation in prices, such as we had in the Enron-induced electricity price spike in California some years ago. The Waxman bill specifically fears fluctuations, creating a reserve of credits to sell when the price goes too high, and also ostensibly prohibiting “speculation.” It also leaves blank how credits are allocated, i.e., who gets free credits, which will be arbitrary and political. I don’t think a Q bill can ever be as good as a P bill, even if you load the Q bill down with gimmicks to make it more P-responsible.

SAS Institute made a large investment last year in solar energy: Last December, we started generating electricity from an $8 million, nearly 5-acre 1-megawatt solar farm. For SAS, it is actually economic. We will eventually get a small return on the investment. So is the current system really working? Not really. It is artificial. The only reason that it is economic is due to large tax credits we get on the initial investment, together with favorable green-power rates you can get, as pressured by alternative-energy incentives to power companies. Do we actually use any of that solar electricity at SAS? No. If we had to use it ourselves, it would displace the cheap electricity we buy, and the project would no longer be economic. There is no way we could operate off the solar power, anyway -- it would supply only about 3% of our needs and obviously would not work at night or on cloudy days. If the subsidies and credits went away, we would not invest in solar.

Alternative energy could develop naturally if the price of carbon-based electricity were to rise to several times its current level. That is what we really need: more expensive carbon electricity and more expensive carbon fuel. That is what will be effective in efficiently adjusting to the new future. We need a P signal. A P signal is so much more efficient and businesslike than subsidies and limits.

I happen to care a lot about environmental issues. I remember my first Earth Day in 1970 when environmental conscience-raising seemed new. I was in college and lived in a special-interest house on campus called Ecology House. In the mid-nineties, I became involved with The Nature Conservancy (TNC) and traveled to many conservation sites all over the world with TNC or WWF, including Bolivia, Peru, Venezuela, Mexico, Alaska, Panama, Costa Rica, Brazil, China, Indonesia, Malaysia, Zambia, Namibia and Botswana. My interests led to joining the Board of Directors of TNC, serving under a variety of chairs, including Hank Paulson and John Morgridge, and now I am chair of the Audit Committee there. Between my wife and me, we serve on the boards of TNC, WWF, CARE, and the Nicholas Institute for Environmental Policy Solutions, and I am joining the National Council of Environmental Defense Fund. So that’s my “green card.”

However, all these organizations are on the Q side of the current debate, and I feel a little lonely being a P advocate. But I am an economist and businessman in my head and my heart. So I will stay respectfully opposed to the current Q bill and hope the realism provided by the recession will help focus opinion on better policy.