Lunchtime Links 12-11

December 11, 2009

Jamie gets a deal! (Bloomberg) Prof. Linus Wilson had been estimated that warrants the government got as part of its TARP bailout for JP Morgan were worth $11-$37.  They ended up selling for $10.75. The lower price is most likely because these are not common securities, are illiquid, and therefore worth less than we all thought. Can’t really complain. The market spoke. Dimon looks smart for refusing to negotiate bilaterally with Treasury to repurchase them. Treasury was driving too hard a bargain. IIn retrospect, that means the deals on TARP warrants for the likes of AmEx and Goldman ended up going off much better for taxpayers. But Hank Paulson still did far worse negotiating with banks for emergency capital than Warren Buffett. Shame.

Ginnie Mae’s growth puts taxpayers on the hook (Grow/Goldfarb, WaPo…via Patrick) Ginnie packages FHA mortgages into mortgage-backed securities. It’s the next Fannie/Freddie….

Stratfor: It’s not just Greece, other Eurozone countries (Delivingne, Money Game)

Wealth rebound in Q3, is it sustainable? (EconomPIC data) More fun from the Fed’s flow of funds report.

Why women are hottest in coutries with too few dudes (Hooking up smart) Supply and demand at work.

Craigslist and eBay in legal fight (Hals, Reuters)

The Morgan Freeman chain of command (Maxim)

Bad choice of ClipArt (imgur)

I find this hilarious….a pretty emotional reaction to Return of the Jedi….”do they put R2D2 back together?”


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The best way to get our jobs/economy back is by implementing Carbon Tariffs, and believe it or not, high oil prices … og/

Efforts in the developed world to restrict and replace coal-fired capacity seem downright quixotic when juxtaposed against China’s (and other developing countries’) coal-expansion plans. Whatever reduction in greenhouse gas emissions is achieved in the world’s developed economies from switching away from coal will simply be overwhelmed by the increase in emissions from new coal-fired plants in China and the rest of the developing world.
Saving the world is a noble motive for going green. But there is another compelling reason to want a carbon-abatement regime in place as soon as possible. It is called good old-fashioned naked economic self- interest. If we can’t agree to save the world for someone else’s benefit, we might as well do it for our own.
That’s admittedly not the way Washington has seen carbon policy in the past. Far from it. The recent Bush administration always dragged its feet on putting a price on carbon emissions, fearing that the American economy would suffer too much from the resulting increase in energy prices. But the fact of the
matter is that the economy has already suffered from the high cost of energy. Just look what is going on in Detroit these days.
Having already paid the economic costs from triple-digit oil prices, why not reap some benefits from your consequent reduction in oil consumption and hence carbon emissions?
Putting a price on carbon emissions when your emissions are falling and your competitors’ emissions are soaring is compelling economics. And what’s even better, it’s economics that can be wrapped in a very green label.
What is the point of shutting down a coal-fired plant at home if another is opening up on the other side of the same planet? The answer to that question takes us back to David Ricardo’s theory of comparative advantage. Countries should do what they are best at. Just as everyone was better off when Portugal, rather than England, focused on turning grapes and sunlight into wine, the whole planet will be in better shape when the countries that are most efficient in burning carbon get to burn the most. That is where their comparative advantage lies in a world where emitting carbon carries an economic cost.
What the Kyoto Accord failed to recognize is that in a world where greenhouse gas emissions are unevenly controlled, the right to emit suddenly becomes a source of huge comparative economic advantage. Manufacturing will quickly migrate from that part of the world where emissions are controlled (and hence cost money) to that part of the world where emissions are uncontrolled (and cost nothing). In exactly the same way that manufacturing jobs flee high wages and high taxes, they also flee expensive carbon.
In other words, Kyoto turns Ricardo’s theory of comparative advantage on its head. Emissions won’t migrate to those who can most efficiently manage them but to those who are simply allowed to emit. And they just happen to be the least efficient emitters. It is comparative advantage by decree and one that flies in the face of where true economic comparative advantage really lies. That’s why US opposition to the Kyoto Accord wasn’t so much about environmental impact as it was about economic impact. Most Americans didn’t think Kyoto provided them with a level playing field, and they were right. Their overseas economic competitors wouldn’t have had to play by the same carbon rules that the accord would have imposed on American firms. In 1990, the benchmark year for the treaty, 70 percent of world greenhouse gas emissions came from inside the OECD. In 2007, that number was 50 percent.
Numbers like that should tell us that the world has changed and so must Kyoto-type accords if they want to do more than move jobs from advanced to developing countries. It is not a question of moral posturing or assigning blame. North Americans and Australians are responsible for about 20 metric tonnes each per capita, while Britons weigh in at about 10 tonnes each (though the British emit more as a result of air travel than anyone else). The moral high ground is just not available to the world’s wealthiest countries.
But as David Ricardo showed nearly two hundred years ago, the developed world does not have to be absolutely cleaner than their competitors to reclaim comparative advantage. They just have to exploit their lead in carbon management—in just the same way that the British exploited their lead in coal use. And the way to do that is by charging a tariff.
It is surely one of the great ironies of the smaller world on the horizon that someone like Ricardo, whose name is often invoked in support of free trade, should furnish us with the idea of charging tariffs on imports, but the world has changed since the days when the items that dominated trade were cloth and wine. Tariffs distort comparative advantage by protecting domestic industries—but a country’s energy mixdistorts comparative advantage in a similar way. Dirty energy is cheap energy, and therefore a subsidy to the industries that use it. So the carbon tariff is really not a tariff at all. It is a countervailing tariff because it levels the playing field rather than tipping it in favor of the home team.
The most direct strategy for halting the seemingly endless growth in global carbon emissions, is not another round of Kyoto talks calling for voluntary cuts. What we need to do is to impose a carbon cost on emitters at home, then impose the same standards on imports.
As simple as that. It may be expensive to get cleaner, but it is going to be a lot more expensive for our competition. Save the world and beat your trade rivals while doing it—can there be a more satisfying win- win than that?
There is already growing talk in Europe of going this route. Since 2004, Western Europe has imposed
economic costs on its own emitters. Today, the right to emit a metric tonne of carbon emissions costs about €13, or a little over $20, on the European Climate Exchange. Those prices are likely to rise as mandated emission cuts in Euroland become increasingly more severe over time. (Emission credits were only recently trading as high as €24, or $40 per tonne prior to the 2008 recession.) When a country like France gets 90 percent of its electricity from low-carbon nuclear generators and hydro, it only makes sense for it to work toward a global economy that favors the countries with comparative advantage in carbon management.
As Europe raises its own bar on emissions, there are calls for a carbon tariff on imports from countries like China that don’t play by the same carbon rules.
If European manufacturers have to pay to do the right thing, they shouldn’t have to pay a second time by giving up competitiveness against trade rivals that underprice them by doing the wrong thing. And what is true in Europe is true in the rest of the developed world, including North America.
In effect, a carbon tariff could affect everything from making steel to manufacturing knock-off Rolexes. The greater the emissions that have gone into producing whatever good is being exported, the higher the tariff that will be charged when that good enters North American or European markets.
A carbon tariff, and the resulting restriction in market access it would bring, may in the end be the only way to get the rest of the world to manage emissions. If China emits greenhouse gases for its own domestic consumption, there is little we can do about it. But if China powers its export industries with carbon- spewing coal-fired generating plants, we can insist that Chinese exporters pay a tariff on those grounds.
As it turns out, China’s export industries are a major and growing source of the country’s world-leading emissions. Recent estimates suggest that a third of the country’s total greenhouse gas emissions come from its export sector. That makes China’s export sector alone the second-largest emitter in the world, next only to the total emissions from the US economy.
Meanwhile, if you live in the United States, you will soon be paying two or three times more for your electricity because your state regulator has forced the utility to burn natural gas instead of coal in order to save the environment from ever greater greenhouse gas emissions. What that means at an international level is that you will be subsidizing another country’s trade advantage by going greener. That is as bad a deal for your own economy as it is for the global environment.
For that reason, trade policy analysts are going to warm up to the idea of a carbon tariff. But others, including the Chinese, will ask whether that is exactly fair. Didn’t we export our own emissions to China when we sent factories overseas and then later imported the very goods that those factories used to produce at home? Can we now penalize China for the emissions that we exported just so we could use their cheap labor to make the things we consume cheaper?
Fair questions. But it does matter where the factories are located, because not all factories are created equal when it comes to carbon emissions. While a factory in China and a factory in the United States emit into the same biosphere, fundamental differences in their energy intensity and in the carbon intensity of the energy they use give rise to very different emission trails.
That’s where economics can become very green.
Because the Chinese economy is so carbon intensive, it is about the least optimal place for the world’s carbon-intensive industries to call home if carbon emissions carry an economic cost. If, for example, China had the same energy intensity as the US economy and its energy had the same carbon intensity, its emission growth since the beginning of the decade would have been one-fifth the 120 percent increase recorded to date. That in turn would have saved the atmosphere a staggering 2.7 billion metric tonnes in greenhouse gas emissions.
Now that concentrations of atmospheric carbon dioxide are approaching critical levels, we would love to have those billions of tonnes back. And as time goes by, we will pay more to get them back.
While it is true that the US exported much of its own emissions to China when it exported much of its heavy industry to cheap Chinese labor markets, that shift occurred when greenhouse gas emissions didn’t cost anything. Once the market is allowed to put a price on those emissions, that shift may no longer make the same economic sense.
Simply replacing China’s manufacturing exports to the States with American production would make a
significant dent in global emissions considering that US industry can produce the same manufactured goods for roughly half the carbon emissions. And shifting production to Europe would be even cleaner.
Environmentalists don’t get many chances to cut emissions in half with the stroke of a pen. But that is what would eventually happen under a carbon-tariff regime. And in the process, it would bring a lot of long- lost jobs back home.
Once again, we can feel the weight of global cost curves shifting, just as they moved in response to exploding transport costs falling out from soaring oil prices. In a world economy facing emission constraints, you want to locate emission-intensive industries not in the cheapest labor markets, but in the countries that have the most carbon-efficient technology, so that the world emits the least amount of greenhouse gases possible for a given level of economic activity. That’s what global carbon-emission management ultimately comes down to: Ricardo’s theory of comparative advantage.
The only reason that economies like China’s can attract emission-intensive industries to their shores is that no one is forcing those countries to pay for the carbon emissions they belch into the atmosphere every day. In the parlance of economics, this is called a “classic market failure,” arising from the fact that the market fails to recognize carbon emissions as an economic cost. The remedy is simple. Put an economic price on emissions, and the market will determine where those emissions will come from.
Once emissions carry a price, they work just like transport costs. The higher the costs of shipping goods from China to North America, the less important China’s wage advantage becomes for whatever is being shipped. Similarly, the higher the price we put on carbon emissions, the less important the wage gap becomes in determining which side of the Pacific most emission-intensive industries will call home.
Given the size of the trade deficit with China, there should be no lack of motive for a higher carbon standard in the United States and Canada. And that’s before even considering the positive fiscal impacts. At $45 per ton of emissions, the US Treasury is collecting a cool $55 billion, enough to finance all manner of green iniatives. All that is required is that the US apply the same carbon standard to its own domestic industries. After all, you can’t call carbon emissions an unfair trade subsidy until you collect on those emissions from your own producers.
There are basically two ways you can put a price on carbon emissions in your economy. The first is through a carbon tax. This works just like a sales tax. You can apply it on just about anything whose production involves burning carbon and hence emitting greenhouse gases into the atmosphere. That means you can apply it to gasoline, or to coal-fired electric power, or even to plastics or fertilizer, since, like so many things today, both are made through burning oil or natural gas.
The other way, which featured among President Barack Obama’s campaign promises, is through what is commonly referred to as a “cap-and-trade system.” That’s what Europe uses today, but the idea was actually pioneered in the US several decades ago in the regulation of emissions from power utilities.
In cap-and-trade, the government sets an overall environmental target by imposing a limit on the total amount of emissions that can be released from the power industry. You don’t set up the rules and incentives and hope they work—you determine just how much should be allowed to be emitted, then let the emitters figure out the most cost-effective way to hit the target. Those who don’t figure it out end up having to buy emissions credits from those who do. Then the market sets a price on those emissions by allowing utility companies to bid for the right to emit, and rewards companies that cut their emissions fastest and deepest.
Cap-and-trade was originally introduced in the United States in response to the acid rain problem that was threatening the Great Lakes as well as a number of other North American lakes and waterways in the 1970s. The systems proved remarkably successful in bringing about significant absolute reductions in the levels of nitrogen oxide (NOx) and sulfur dioxide (SO2) that were emitted by utilities. Moreover, as the price of
emissions rose, they encouraged emission-reducing technological change, such as bringing down the cost of scrubbers that utilities could put on their smokestacks. But whether an operator buys emission credits or installs emission-reducing technology, putting a price on carbon emissions will have an immediate impact on economic behavior. Every ounce of carbon that goes up a smokestack will flow through to the utilities’ bottom line, making shareholders very green in the process.
Whichever path to carbon pricing the United States takes, one of these days legislators are going to
realize that the US economy actually has a comparative advantage in carbon emissions and should attempt to galvanize that advantage by putting an economic price on them. The higher the price of carbon emissions, the more American-made goods will replace overseas imports that are based on cheap labor and dirty carbon practices. And that’s equally true for Western Europe, Japan, Canada and other advanced economies that employ much cleaner energy practices.
The carbon tariff won’t stop China from burning massive amounts of coal. Two-thirds of China’s coal consumption is for delivering power to its domestic market. But a carbon tariff will ensure that China’s exports receive no commercial benefit from emitting greenhouse gases on world export markets. And that together with the impact of soaring oil prices on transoceanic transport costs could soon change the face of the world economy.
Will the new Obama administration in Washington warm up to the idea of a carbon tariff? Admittedly, most ambitious policy initiatives have not happened at the federal level. Washington and its Environmental Protection Agency (EPA) have always been laggards, not leaders, in setting the pace of US environmental policy.
From banning leaded gasoline to getting rid of PCBs, it’s always been the state legislatures, not the EPA, that have done the heavy lifting when it comes to implementing new and tougher environmental standards and regulations. And it’s certainly no different on the carbon front. Led by California, one of the largest energy markets in the world, most state legislatures in the US have already passed legislation to regulate their own carbon emissions. Most, if not all, have effectively banned the construction of new coal-fired generating capacity.
The story has been the same in Canada, where the province of British Columbia defied political wisdom by implementing a carbon tax while the federal government watched from the sidelines. Other provinces, including Ontario and Quebec, are also moving on the carbon front while the federal government waits to see what course a new administration in Washington will take.
Historically, when the US states lead, the federal government eventually follows when it comes to setting new environmental standards, so it is a good bet that the United States will soon be joining Western Europe in setting a price on its own carbon emissions. And when it does, it will have just raised the bar for all its trading partners, whether they want the bar raised or not.
How high emission prices will rise is still anyone’s guess. Ultimately, that depends on how stringent the American environmental target is. The greater the reduction in emissions mandated by that target, the higher the price the market will put on carbon emissions. And the higher the price the American economy puts on its own emissions, the greater the countervailing tariff the US can apply on the dirty emissions embodied in most Chinese imports.
All of a sudden we have a level playing field. Chinese steel factories can emit all they want, but once they ship their steel to the American or European market, they are going to have to pay, through a carbon tariff, the same carbon costs that domestic steel producers pay. Fair trade now means green trade.
At $45 per metric tonne, for example, the carbon tariff would be somewhere in the neighborhood of 17 percent. Throw in on top of that the extra freight costs that come with $100-per-barrel oil and the impact is equivalent to another 15 percent tariff. At $200 per barrel, the impact would be equivalent to a 25 percent tariff. In the smaller, greener world around the corner the total increase in costs is the same as if the US suddenly slapped an over 40 percent duty on Chinese goods.
That’s a lot more than Senator Phil Gram was calling for in 2000 when he was advocating an all-out trade war with China. It’s about fifteen times the average 3 percent tariff that Chinese imports are currently charged entering the American market. Yet those would be the tariff equivalent rates that Chinese exports would potentially face in a world of not only rising energy costs but also double-sided energy costs. It will soon not only cost a lot more money to buy oil, it’s going to be expensive to burn it as well.
By putting a price on emissions, you will further alter global cost curves. The basic equation for international competitiveness is no longer just about the wage rate. It soon will be a much more complex economic equation about energy efficiency, carbon efficiency and transport costs. And tomorrow, the geography of where factories will be located in the world will be quite different from the economic
geography we know today. That doesn’t mean, of course, that every industry that moved to China in the last twenty years is coming
home. In many labor-intensive industries like footwear, textiles and clothing, there aren’t enough carbon emissions and energy costs embodied in production to make a discernable difference to international competitiveness. And freight costs in those industries are too small for triple-digit oil prices to put the clamps on them. But in a whole host of other industries, ranging from chemicals to metal processing, putting a price on carbon emissions, just like soaring transport costs, will tip the competitive scale back in favor of North American industry.

Posted by Jeff Rubin | Report as abusive

ok… argument #1 for not having comments on the front page.

Posted by Andrew | Report as abusive