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The Marginal Costs of Cleaning the Clean

Updated: Jun 14, 2022

by Tim Nadreau, Ph.D.

The Issue:

I remember returning to the PNW from a long trip in New York. I stepped out of the terminal near my hometown and the spring air tasted like honey. I incur large opportunity costs to remain in this Eden, and I’m happy to do so. I want our wilderness to remain, but I recognize the cost of that desire.

Years back we built a CGE model to analyze the effects of a revenue-neutral carbon tax on the Washington economy, yet another push by the state to disincentivize pollution. However, it has always bothered me that the “cleanest” states in the union are the ones pushing for still cleaner environments. This is imprudent, as we are completely neglecting the theory of marginal costs, not to mention the fact that clean states cannot correct for out-of-state, let alone foreign, emissions.

Boyan Slat, founder of The Ocean Cleanup, focused his attention on the dirtiest rivers, knowing that was where he was going to get the biggest bang for his buck. He was identifying the actual trouble spots—the rivers—and fixing them—stopping the pollution from ever getting to the ocean in the first place.

By focusing efforts on a carbon tax, Governor Inslee in Washington and Governor Brown in Oregon are trying to polish the silver while the table is covered in mud. They get all the political clout that comes from “caring” about the environment while doing nothing to improve it in a significant way. Don’t run the dishwasher if the dishes in it are already clean; all you are doing is incurring costs without benefits.

The Theory:

How might considering marginal costs affect environmental action? When economists talk about margins, they are referring to immediate as opposed to average metrics. If you are driving down the road and your speedometer reads 65mph, that’s a marginal speed. Your average speed for the trip might have been 35mph, but tickets aren’t written for average speeds—marginal speeds are what matter. Under this analogy a carbon tax in Washington or Oregon smacks of ticketing a driver for going the speed limit, in a tesla.

So, what do we mean by marginal costs (MC)? We mean the cost for producing the current unit of output—the cost for cleaning up the last MMT of CO2. Because most cost functions have a type of cubic form, the marginal cost curve tends to be “u-shaped,” the upward sloping portion being the supply curve. Economists always say “operate where marginal costs and marginal benefits (MR) intersect.” Why? If you produce one unit less than the point of intersection, the benefits of producing another unit are higher than the costs for producing that unit. If you gain $5, and it only costs $4.50 to produce, your net is 50 cents. But—and this is the key—if you produce one more unit than the point of intersection, if you benefit $5, but it cost you $5.50, you lost 50 cents: you harmed yourself. The only caveat I’ll make here is that, in the context of the environment, we need to think about marginal social costs and marginal social benefits.

I’ll just go ahead and say it: there is an optimal level of pollution, and that level is higher than zero. I am all for innovating and driving down the costs of abatement; after all, that is what Slat did when he invented his Interceptor. Another key discussion embedded in environmental economics is the Environmental Kuznets Curve (Grossman and Krueger 1991). This theory simply shows that particular pollutants decline once real incomes cross a particular threshold. It is not surprising to economists that the dirtiest rivers are in the poorest areas. Slat has his interceptors located in Indonesia, Malaysia, Vietnam, and the Dominican Republic. Slat notes that 1% of rivers are responsible for 80% of the plastic going into the ocean. Another key to abatement is economic development. No one wants to live in a dumping ground, so employing folks in those countries and improving their livelihoods is a sure bet to keeping them from throwing their trash in the river.

The Data:

Figure 2 shows a map of the US highlighted by renewable energy output. The only state “cleaner” than the PNW in terms of energy production is Vermont!

Source: U.S. Energy Information Administration

Figure 2 shows the total reported emissions from large stationary sources. You can see this data more clearly in the EPA FLIGHT data here. We are not looking at Agriculture or Transportation related emissions, and those numbers do matter a great deal, (see this overview by the EPA). We are still working to find a distribution of those emissions.

Source: U.S. Environmental Protection Agency GHGRP

Our View:

This is an extraordinarily high-level overview of a very deep topic. That said, any discussion of environmental policy must be a discussion of margins. The marginal social costs of cleaning an already clean environment are much higher than the marginal social benefits. I’ve never walked through a state or national park in Idaho, Washington, Oregon, or Montana and started picking up trash, or feeling like I was choking on smog. I have felt that in New York, Texas, and Louisiana.

The complexity of weather patterns and environmental degradation are not lost on me, but the complexities of marginal analysis do seem to be lost in the conversation. If marginal costs are greater than marginal benefits, we are not doing anyone any favors by doubling down. Because emissions are not geographically bound, and clear property rights are not established, there is an opportunity for free riding. The tragedy of the commons persists. Nonetheless, Idaho, Washington, and Oregon have done their part and will undoubtedly continue to do so. If they tried to implement their policies in states that are contributing more to emissions, Inslee and Brown might see an environmental and economic improvement.

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1 Comment

Jun 22, 2022

In his book The Voltage Effect, economist John List, argues this same point about marginal cost. While the datasets were different, the principle remains. Judging a project closure date strictly on average cost over the project negates the principle of return on investment. I have work in mining, admittedly not the most green of industries, but I have an internal debate about EPA emissions regulations that stifle fuel economy. If marginal emissions per gallon go down, but overall emissions go up due to decreased fuel efficiency, the program is just present to give people the warm and fuzzies.

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