Environmental Economics

Are you high?

Some economics of jetties (i.e., terminal groins) in North Carolina:

A 2010 jetties study from the legislature found the cost of building jetties from $3.5 million and $10 million, and that up to another $2 million would be spent every year for maintenance that included replacing sand washed away from the backside of the structures. The study, however, also found that over 30 years the economic benefits of the protective structures ranged from $27 million at Ocean Isle to over $320 million at Bald Head Island.

via hamptonroads.com

Ignoring the obvious questions behind the benefit numbers ... discounting the annual costs at 3% over 30 years, taking random numbers from a uniform distribution of the variable costs and benefits, then the average net present value of a jetty is about $200 million. 

Ok, not ignoring the obvious questions about the benefits ... $320 million at Bald Head Island? That is about $3.2 million in benefits for each resident household over 30 years. That number seems unrealistically high. Discounting at 3% over 30 years, it is about a $165,000 annual household benefit. 

My Google search didn't find anything about the study except this summary: http://dcm2.enr.state.nc.us/CRC/tgs/finalrecs.pdf. 

Go ahead, ask me the difference between striped bass and hybrid striped bass

From the American Fisheries Society:

The book provides a first-ever, comprehensive overview of the biology and management of striped bass and hybrid striped bass in the inland waters of the United States.

The book’s 34 chapters are divided into nine major sections: History, Habitat, Growth and Condition, Population and Harvest Evaluation, Stocking Evaluations, Natural Reproduction, Harvest Regulations, Conflicts, and Economics. A concluding chapter discusses challenges and opportunities currently facing these fisheries.

This compendium will serve as a single source reference for those who manage or are interested in inland striped bass or hybrid striped bass fisheries. Fishery managers and students will benefit from this up-to-date overview of priority topics and techniques. Serious anglers will benefit from the extensive information on the biology and behavior of these popular sport fishes.

Page xi in the preface says this:

The economic value of striped bass (and hybrid striped bass) fisheries is often the bottom line for those justifying expenditures to stock and manage an introduced species with assumed high value to anglers. Whitehead (Chapter 32) provides an analysis of the economics of recreational fisheries for these fish. In some systems, concerns about contaminants can have negative impacts on striped bass or hybrid striped bass fisheries; Jakus (Chapter 33) addresses this issue and outlines an approach for conducting benefit-cost analyses of fish consumption advisories. 

Paul and I both draw shifting demand curves in our chapters.

"Bill for a Bombing Can Be Hard to Tally"

From the WSJ's Numbers Guy:

As investigators try to uncover the motives and methods of the alleged Boston Marathon bombers, another mystery may take longer to solve: How much will the attacks harm the economies of Boston and the U.S.? ...

Economists studying terrorism's impact generally try to separate the direct costs of attacks from the costs of responses. Responses, such as military action in Afghanistan against the Taliban or Boston's all-out manhunt for the bombing suspects, are harder to attribute to the initial attacks because they aren't inevitable. ...

Paying the costs of responses also can bring benefits of its own—for example, by preventing more attacks. "Suppose we did not pay them and allowed the terrorism threat to be higher—what would the economy look like?" said V. Kerry Smith, an economist at Arizona State University. ...

Adam Rose, an economist at the University of Southern California, prefers to include only direct costs such as business interruption and property damage. Even there, estimates vary widely. Prof. Rose and colleagues enlisted eight teams in 2009—with funding from the Department of Homeland Security—to each model the economic impact of Sept. 11, and got estimates ranging from $0—if the pre-existing U.S. recession was entirely to blame for economic woes—to $549 billion. Separating the effects of that recession from those of the attacks is one of the main challenges facing researchers.

Disquietingly, the loss of lives isn't the predominant factor, economically speaking. Even using a value of about $7 million to $8 million per life, a typical estimate used by government agencies for cost-benefit analyses of saving lives, the Sept. 11 attacks cost only about $20 billion to $25 billion in human capital. "It's much smaller than business interruptions," Prof. Rose said.

All of this is interesting (and disturbing to a noneconomist, I'm sure) but I'm left without comment ... except ... one of Adam Rose's teams came back with an answer of $0? I can see how one might really think that in terms of business interruption but there is still the loss of human and physical capital. I hope they gave the money back with submission of their report. 

 

A Cass Sunstein OIRA post-mortem

From The Chronicle of Higher Education:

But from some administrative-law experts and OIRA-watchers, Mr. Sunstein earned praise. He brought "much-needed academic rigor to the position," says Eric Posner, a sometime co-author and a law professor at the University of Chicago, where Mr. Sunstein used to teach. In his reports and memoranda, his supporters say, he laid out a vigorous vision for how government could make itself more accessible and user-friendly, drawing on the latest social science.

In his most controversial case, in September 2011, Mr. Sunstein, at President Obama's direction, returned long-awaited new standards on safe levels of ozone to the Environmental Protection Agency for reconsideration. The president of the League of Conservation Voters told The New York Times the move was "the worst thing a Democratic president had ever done on our issues," environmentalists called the decision nakedly political, and Lisa P. Jackson, the EPA chairwoman, reportedly considered resigning. ...

One target of the critics is cost-benefit analysis itself, which environmentalists believe fails to capture much of what they value. Mr. Sunstein views it as a tool to cut through knee-jerk reactions—Regulations kill jobs! No, they save lives!—and move on to more-analytical terrain. ...

Some conservatives, for their part, have suggested that the agencies' cost-benefit estimates are rigged in favor of government intervention. "Neither of the competing dogmas can be supported by the evidence," he writes in Simpler, citing retrospective economic analysis of federal cost estimates that find some errors but not a pattern of errors.

Two comments:

1. The EPA's own analysis of the ozone standards indicates that the net benefits are roughly zero. 
2. How do you know when benefit-cost analysis is doing a good job? When both sides of the issue are irritated about it.

An example of why we started this blog...and why it is still relevant

Bear with me, this might take a minute to get to the point.  In 2005, John and I started Env-Econ with the following mission:

The Environmental Economics blog is dedicated to the dissemination of economists’ views on current environmental and natural resource issues. We hope this blog will help bring economists’ views on environmental issues further into the mainstream. The intended audience includes the general public and students. Posts are non-technical. [emphasis added]

I added the emphasis to that in light of a comment I received this morning on this post from yesterday.  As background: in the post, I asked an academic colleague to give me a back of the envelope calculation of the social value of beach renourishment.  At the end of the post I linked to the academic article on which my colleague based the back of the envelope calcualtion--mainly to give credit where credit is due and also to let any reader so inclined to take a look at what goes into making the sausage that is Env-Econ.  Anyway, one of our readers was so inclined--and apparently didn't like what  they saw in the sausage factory:

I tried to read and understand Sathya Gopalakrishnan's abstract and I can't. I need an interpreter. I'm pretty sure it's English. Maybe someone could get a "grant" to find out just what percent of the US adult population accurately understands her language? Maybe I'm just dumb. I do have a B.S. degree from a highly regarded university but that was a long time ago.

A few points:

1. What percentage of the US adult population accurately understands her language is irrelevant for the abstract.  The abstract is intended for an audience of academic environmental economists and as such the relevant question is 'What percentage of the world population of those interested in academic issues relevant to environmental economists understand her language?'  Based on almost 20 years of experience (including a stint co-editing the journal in question), I would venture a guess that the percentage is very high--but the denominator in that percentage is pretty small.
2. The commenter has discovered one of the dirty little secrets of academics.  We academics like to use jargon, big words and complicated phrasing to make it intentionally difficult to understand what we are trying to say.  In doing so we create a nice barrier to entry into the profession. It takes years of additional education just to be able to learn the language of our discipline.  That education is costly both in terms of resources and time expended.  But for those who clear the barrier, the level of complication helps to keep the supply of academics who can make things as unnecessarily complicated as we do, and more importantly understand that complication, low.  And we all know that decreased supply increases prices (in this case wages).  So, you see, unnecessary complication is necessary.  It's a means to self-preservation and higher wages.
3. There are usually less complicated ways to explain highly technical stuff without losing the basics of what is being said.  That is the purpose of this blog.  Allow me to illustrate.  Here is an excerpt from the academic abstract in question:

We use the empirical results to parameterize a dynamic optimization model of beach nourishment decisions and show that the predicted interval between nourishment projects is closer to what we observe in the data when we use the estimate from the instrumental variables model rather than OLS. As coastal communities adapt to climate change, we find that the long-term net value of coastal residential property can fall by as much as 52% when erosion rate triples and cost of nourishment sand quadruples.

To the non-academic (hopefully many of our readers), that reads as follows:

We use the [blah] to [blah-blah] of beach nourishment decisions and show that the [blah] between [blah] is closer to [blah] when we use the [blah-blah] from the [HOLY S***]. As coastal communities adapt to climate change, we find that the [blah] of coastal residential property can fall by as much as [a bunch of made-up crap].

So in good Env-Econ fashion allow me to interpret the abstract:

Using a bunch of complicated statistics and math that no one else has thought to use, we find that beach house prices fall when beaches wash away or when the cost of putting more sand on the beach goes up.

That, our dear readers, is why we started this blog.

No need to thanks us.

Standing on the shoulders of...er...John

Following up on John's post from earlier on the potential value of beach renourishment projects (and the bad use of benefit cost analysis by policymakers), I sent the following message to one of our outstanding young faculty members (in my opinion of course), Dukie (we don't hold that against her), and bright mind thinking about coastal issues and the interplay between ecological and economic systems, Dr. Sathya Gopalakrishnan: 

Sathya...Do you have any idea (rough guess will do) of the welfare gains per dollar spent on renourishment?

Sathya's response:

I haven't seen any estimates of return on nourishment investment. 

My back of the envelope calculation based on just the hedonic valuation in NC would be $3 per dollar spent. 

For an average ocean front property valued at approx $800000, the semi log hedonic coeff (accounting for endogeneity of width) of 0.11 suggests a value of $8800 per foot of beach width. With the cost of nourishment sand is approx $5 per cubic meter and fixed cost of $1000000. The cost per foot of nourishment per ocean front home would be approx 2300 (assuming costs are distributed across 50 homes along a 1km stretch of the coastline, and a limiting nourishment depth of 10m). That would be $6500 net gain, which is approx a $3 for every dollar spent. 

And in good self-promotional fashion:

We used a similar calculation of net benefits in [our] JEEM paper simulations. 

Well played Sathya.  I'm sure you recognized the influence our blog will have on your readership.

We won't rest until every public official takes a benefit-cost analysis course

If only Congress would mandate more frequent and longer vacations we could increase the number of jobs (sarc):

According to the American Shore & Beach Preservation Association (ASBPA), which publishes the peer-reviewed “Shore & Beach,” the travel and tourism industry accounts for 10 percent of the U.S. job market, “more than all U.S. manufacturers combined.”

While officials including U.S. Rep. Mike McIntyre (D-NC7) have said every dollar invested in beach nourishment returns $320 in tax revenues, ASBPA in a press release Tuesday said the return in 2012 was as high as $570.

via portcitydaily.com

That number, 320/1, sounds high, but even so taxes are transfers so the net effect is zero. Beach nourishment spending should be compared to the consumer surplus gains of the beach trips and the value of protected property to determine if nourishment is a good idea. 

Defining value: One giant panda at a time

Some insights into values as defined by panda preservation:

Who wouldn’t want to fly across the world and spend a week with giant pandas? They are undeniably cute.

...

Well, I'm assuming a lot of people, since not many people actually do fly across the world to spend a week with giant pandas.  That's the p[oint of revealed preferences.  Actions reveal preferences.  Now I know what you are thinking: I would go if I could afford it!  But that's really the point of understanding economics--you can't afford everything, otherwise everything would be free.  So you make decisions based on your preferences and your constraints: budget and time.  The trade-offs you make among those things you want reveal the relative value you place on those things. 

Don’t call what you're wearing an outfit

The Institute for Energy Research thinks that the "CBO underestimates revenues from expanded oil-and-gas drilling":

The Congressional Budget Office is vastly underestimating the potential revenue that could be achieved by opening more federal lands to oil-and-gas drilling, according a report released Tuesday by the Institute for Energy Research (IER), a conservative think tank. ...

Obama’s plan to avoid the $85 billion of government-wide cuts scheduled for March 1 will likely include ending subsidies awarded to the oil-and-gas industry. Obama and supportive Democrats have said nixing those incentives would save the government $40 billion through 10 years.

But oil industry lobbyists have said the industry’s incentives should not be singled out, saying many other businesses are given deductions and cost-recovery mechanisms. The oil industry also said removing the incentives would stymie domestic energy production.

In all, the IER study said expanding drilling on public lands and waters would increase gross domestic product by $127 billion annually for the next seven years, and $450 billion annually through the following 30 years. It also would boost federal tax revenues by $2.7 trillion through 37 years, the study found.

That paints a different picture than the August CBO report, which said lifting drilling bans would bring in about $7 billion through the next decade, mostly through selling exploration leases.

I don't want to be a jerk, but I'm always skeptical when a study touts something like this:

Job gains would be felt in high-wage, high-skill employment like health care, education, professional fields, and the arts.

I enjoy a good multiplier story just as much as the next guy (in this case "RIMS II final output multipliers" = 2.4 for the U.S.), but how do we know the arts will benefit? Do the oil and gas guys plan to donate 5% of their additional income to the New York arts scene?

Also, I prefer a benefit-cost analysis to an economic impact analysis, especially at the national level. Economic impact studies consider costs of production (i.e., something a business firm would like to avoid) as benefits and doesn't consider environmental costs as a negative part of the activity.

Is the new DENR secretary calling for more benefit-cost analysis?

I'm experiencing a North Carolina Republican Governor for the first* only the second time as a North Carolina resident:

When John Skvarla becomes the new secretary of the state Department of Environment and Natural Resources next month, he will arrive at an agency that’s feeling a little shell-shocked.

Over the past two years, the Republican-controlled state legislature has moved entire divisions into different parts of state government and consolidated other operations. Along with cuts in appropriations that have left the department’s budget about half of what it was just two years ago, Republican lawmakers have been beating up on the agency for what they say is a culture of hostility to business.

A package of regulatory reforms has either streamlined or weakened environmental protections – depending on your point of view – and further rolling back regulations is high on the General Assembly’s agenda next session. ...

For Skvarla, it’s a matter of cost-effective scale. His role, he said, is to determine whether a regulation is beneficial enough to warrant the cost it imposes. “To add an eyelash of value for an extreme cost is a very difficult call,” he said.

“It depends on who your customer is,” he added. “If your customer is the environment, then the answer is you should be an absolute cop. You should be a mean, big bad cop.

“But I’m afraid if it was the environment solely, we would all paddle canoes to work. At some point in time, you have to balance.”

via www.newsobserver.com

Note to DENR: In terms of benefit-cost analysis, the customer is North Carolina citizens whose benefits and costs should be counted in terms of changes in consumer and producer surplus. As I said back in September:

As it turns out, many environmental regulations generate benefits that exceed costs, no doubt partly because some clever economists figured out ways to assign dollar values to things "that are essentially not quantifiable."

Benefit-cost analysis is often thought by some on both sides of environmental issues to be pro-business. This is not so. If it is done correctly benefit-cost analysis is pro-efficiency.

*With a significant birthday on the horizon (beware frequent significant birthday posts), I realize that I've now lived in North Carolina for over half of my life (1963-1967, 1989-now). The only other time that there has been a Republican in Raleigh during the "John Whitehead era" (i.e., 1963-1967, 1989-now) I was an assistant professor with other things on my mind (i.e., tenure).