Environmental Economics

The Nobel Prize in forest economics?

Congratulations to the authors! From the inbox:

We are glad to announce that the 2012 Sören Wibe Prize was awarded to Christopher C. Moore, Thomas P. Holmes and Kathleen. P. Bell, for their article "An attribute-based approach to contingent valuation of forest protection programs":

Journal of Forest Economics 17 (2011):35-52

The article provides a well-structured, well-written, and innovative piece of research in applying contingent valuation of welfare effects of forest conservation in the special case of Eastern Hemlock in the United States. The article presents an "attribute based" CV method to study the welfare gains, to carry out cost-benefit analysis, and to inform the distribution of mitigation effort over land units. One of the key questions studied is the preference of the citizens concerning ecologically valuable sites versus recreational sites. The results indicate, interestingly, that people are willing to provide "substantial support" to programs that protect ecological sites, in spite of their description "difficult for visitors to access". For practical policy planning, the results are interesting. First of all, welfare effects from conservation clearly exceed the low conservation costs, and almost any program with positive welfare effects would pass the cost-benefit test. More importantly, when the welfare effects of the weighted optimal allocation of conservation sites are compared to the actual program, it turns out that the current allocation is strongly biased towards human-use sites as compared to a much larger share of ecological sites of the optimal allocation. The study demonstrates that although many conservation programs may pass the cost-benefit tests, significant welfare gains are possible if the preferences of the public are correctly accounted for in the allocation of conservation measures to forest sites with different environmental benefits.

The 2012 Award Selection committee comprised of: Sashi Kant, Jari Kuuluvainen and David Newman (chair).

Thanks to the support of Sören Wibe's family, the Journal publisher Elsevier, and the Department of Forest Economics at the Swedish University of Agricultural Sciences, the prize winners will receive a cash amount of € 2 000, and will be invited to give a lecture at the Swedish University of Agricultural Sciences.

Yours sincerely,

Runar Brännlund, Ola Carlén, Peichen Gong
Editors Journal of Forest Economics

 

The name of our department is Agricultural, Environmental and Development Economics, and this story has them all.

This looks like they are sending up the benefit/cost bat signal:

Four Nigerian farmers and the environmental group Friends of the Earth took oil giant Shell to court Thursday in the Netherlands to demand a proper cleanup and compensation for pollution in the Niger Delta.

The farmers want the Anglo-Dutch multinational to "clean up the oil pollution in their fields and fishponds" and make sure their pipelines are maintained and kept secure to prevent leaks in the future.

The civil case has been filed against the Nigerian subsidiary of Shell, the Shell Petroleum Development Company (SPDC), and its international headquarters in the Netherlands, Royal Dutch Shell.

Based on "years of oil pollution in three villages in the Niger Delta," it could have "major legal consequences internationally," the Dutch branch of Friends of the Earth, known locally as Milieudefensie, said in a statement ahead of the first hearing.

The three villages concerned are Goi, hit by a spill in 2004, Oruma, affected by a spill a year later, and Ikot Ada Udo, hit by various spills in 2007, according to Friends of the Earth.

Shell argues that it has cleaned up the spills to the satisfaction of the Nigerian authorities, and has no case to answer.

But Friends of the Earth says that oil pollution has had a devastating and continuing impact on vegetation, water supplies and local fishing ponds.

The campaign group says this is the first time a Dutch company has been brought before a court in the Netherlands over environmental damage caused abroad.

via www.cnn.com

EO 12291: those were the days

While teaching benefit-cost analysis (ECO 4660/5660) the other day I googled Reagan's EO 12291 and found a New York Times article from November 1981. It sounds like many of the hopes and fears never materialized:

When President Reagan signed Executive Order 12291 on Feb. 17, he transformed with a stroke of his pen what had been a useful economic tool into an imperative of Federal decision making.

The order is designed to reduce the burden that Federal regulation places on the economy. Among other things, it provides that, to the extent the law permits, ''regulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society.''

Cost-benefit analysis has been used for some years by economists, including Government analysts, as an aid to efficient decision making. But by making the quantification of the pluses and minuses of Administration action a central element of policy making, the President has touched off an intense economic, political and philosophical debate.

Administration and business officials and others who applaud the President's decision say that the uniform application of cost benefit analysis, which simply looks at the returns that come from any action in relationship to the cost, will stem the tide of unnecessary and excessive regulations that they say have been a severe and growing burden to the nation's economy. 

They insist that without it the nation has been forced to spend many billions of dollars on actions that do not return anywhere near commensurate benefits to society.

But opponents of the measure, including those concerned with the Administration's efforts to reduce environmental, health and safety programs, view the cost-benefit requirement as little more than a justification for deregulating business and industry.

They also complain that the rule requires assigning dollar values to things that are essentially not quantifiable: human life and health, the beauty of a forest, the clarity of the air at the rim of the Grand Canyon.

The intensity of opposition to the use of cost-benefit analysis in the regulatory process ranges from those who oppose any application on the ground that, once adopted, it would reduce all decisions to simple-minded weighing of dollars, to those who think it is a useful tool for administrators but worry about its rigid application. 

There is broad agreement that the process can be manipulated by choosing numbers that will produce the desired results. But some opponents of universal application of cost-benefit analysis concede that it can unmask exceptionally rigid rules.

via www.nytimes.com

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."

A prediction that did not come true

More quotes from the old days:

To Steven Kelman, who teaches public policy at Harvard University's Kennedy School of Government, the problem with costbenefit analysis is that it is blind to such issues as human rights. Parallels in Movie

''It's like the doctors in the movie 'Coma,' '' he said, ''who killed healthy people to use their organs to save other people and defended themselves by saying, 'We saved two people for every one we killed.' ''

Here, he added, was a case of arguing that anything should be permitted if the benefits outweigh the costs.''The very process of placing a monetary value on such things as human life and pristine wilderness devalues those things,'' Mr. Kelman contended.

If the Government starts placing a monetary value on life, he said, ''it will discount the great value we place on saving life, and we will be doing less and less of it.''

via www.nytimes.com

It seems to me that valuing lives has led to stricter life-saving regulations. 

Quotes from the old days

While teaching benefit-cost analysis (ECO 4660/5660) the other day I googled Reagan's EO 12291 and found a New York Times article from November 1981. Here are some great quotes:

''To me, benefit-cost analysis is analytical common sense,'' said Paul R. Portney, senior fellow at Resources for the Future, an environmental research group. ''The idea is that we don't have the resources to do everything. So we have to choose carefully.''

Mr. Portney said critics who said that cost-benefit analysis would always lead to the curtailment of regulation were mistaken. In many cases such analysis might show the need for stricter regulation, he asserted. 

As an example, he said that cost-benefit analysis of the clean air standards would likely show that the rules for auto emissions were unnecessarily stringent to protect human health but those for stationary sources of pollution, such as factories and power plants, were not strict enough.

But he warned that cost-benefit analysis could not simply be a ''mechanistic'' exercise of adding up the numbers and making a decision. ''Qualitative'' factors must also be considered, he said.

Lester Lave, an economist at the Brookings Institution, said that cost-benefit analysis ''is a delightful tool for economists because it is complete, flexible and allows you to look at everything.''

But when the question of society's values enters the equation, the considerations often become political, he noted. The problem with the President's order, he asserted, is that it says ''you shall choose the alternative with the most social benefits.'' 

''Well, anyone who has ever dealt with cost-benefit analysis knows there is never a unique alternative,'' he said, adding that it is better to talk of ''trade-offs'' between social benefits and costs without attempting to be too specific.

via www.nytimes.com

Here is another.

A 38.3" diameter Northern Red Oak on a midwest college campus is worth exactly $401.96 per year

I was recently made aware of signs going up on OSU's campus listing the annual Ecological Benefits of trees on campus (apparently this has been going on for a while, but I rarely venture outside my building, unless I'm getting in my car).  Here is a sign for a Northern Red Oak near my building:

Unfortunately the sign has no information on how the benefits are calculated other than a reference to the website treebenefits.com/calculator which at press-time isn't working.  Nevertheless, this seems like a great project--or at least a discussion example--for a cost/benefit class.  Some questions come to mind:

• What are the appropriate methods for valuing the multiple ecological benefits of campus trees?
• Are benefits additive across services?
• Are benefits additive across trees (that is, is the Northern Red Oak next to the one in this picture worth $402 also? and If so, are the two together worth $804?)
• What is the present value of the annualized stream of benefits (quick estimate--assuming an infinite life for the tree and a 5% dicount rate, the annual benefits of $402 per year in perpetuity are worth $8,040 today)?
• What is the variation in the estimate?
• Why was I not asked to help make these signs?

Feel free to add your questions in the comment section. 

 

When marginal benefits are lower than marginal costs

One of my favorite T/F questions is: "If you can't do something right, then you shouldn't do it at all." The answer, if you interpret "doing something right" as maximizing benefits (i.e., doing it until marginal benefits are equal to zero), is false. Most activities should be done a bit inadequately, where marginal benefits equal marginal costs. Perfection should not be a goal. 

One example is the goal of the 1972 Clean Water Act to eliminate all discharges into navigable waterways (or something like that). Here is another:

Mark Teague Road near Pittsboro in rural Chatham County is a half-mile-long strip of gravel that cuts through some woods and then dead-ends at a vacant brick ranch house surrounded by farmland.

The state road looks more like a driveway for Elizabeth Hopp, whose family lives in one of three houses off the lane. When crews showed up recently to widen the road bed, build erosion control for a pond and get ready to pave the road with asphalt, she wondered why the state was upgrading a road that goes nowhere. The cost to taxpayers: $225,000.

“I don’t really see the need for this,” Hopp said. “Maybe this is some kind of progress, but it seems sort of strange to me.”

The state’s deputy chief roads engineer, Jon Nance, said the Department of Transportation is just following orders from the General Assembly.

Indeed, DOT will spend millions this year in an ongoing mission, launched in 1989 by lawmakers and then-Gov. Jim Martin, to improve and pave every state-maintained dirt and gravel road in North Carolina.

The state has spent hundreds of millions in the past two decades to blacktop 13,000 miles of roads, bringing asphalt to the driveways of nearly 200,000 homes, DOT records show.

Crews are still at it and now are reaching the bottom of the list, with only 1,842 miles still eligible for paving. They are working in the most rural and least populated spots, such as Mark Teague Road, and in hard-to-pave, mountainous terrain in the west, such as at Lower North Fork Road in Jackson County near the Tennessee border.

Note that the state of North Carolina is not flush with cash.

The least that I can do is CAIR*

Benefit-cost analysis be darned:

The fallout has begun just one day after a federal appeals court scrapped a major EPA rule designed to curb long-distance drifting power plant pollution — and Louisville’s air quality may pay the price.

A Western Kentucky utility told the Kentucky Public Service Commission Wednesday that it intends to abandon pollution controls that would have allowed it comply with the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule, also known as the transport rule. 

Henderson-based Big Rivers Electric Cooperative, which owns and operates four generating stations and a 1,266-mile transmission system, could save its customers about $225 million by dropping pollution controls required for the transport rule, said Marty Littrel, cooperative spokesman.

via www.courier-journal.com

Stavins and Schmalensee conclude:

Existing studies providing estimates of the Transport Rule’s benefits and costs consistently find that benefits outweigh costs, on a national basis, often by a wide margin.

*With apologies to Kid Rock.

Behavioral economics and benefit-cost analysis

Ted Gayer:

A recent wave of government regulations mandates the energy efficiency levels of a wide range of consumer and business products, including passenger cars and commercial vehicles, clothes dryers, air conditioners, and light bulbs. The ostensible purpose of these regulations is to reduce pollution, notably greenhouse-gas emissions. But our recent examination of a number of these regulations reveals that, by the agencies’ own analyses, the regulations have only a negligible effect on greenhouse gases, and the environmental benefits are vastly outweighed by the costs of compliance.

The agencies attempt to mask this finding by claiming that the regulations save consumers and firms money, by forcing them to buy more expensive energy-efficient products. By asserting, with little to no supporting evidence, that consumers and firms are making irrational decisions in their purchases of energy-intensive products, the agencies can then claim that energy-efficiency regulations provide private benefits by correcting for this irrationality, and they then use these benefits to justify the expensive regulations that yield minimal environmental gains.

This dismissal of consumer choice deviates from the long-standing methodological practice of cost-benefit analysis—and runs contrary to the guidelines set out by the Office of Management and Budget—in which it is assumed that informed citizens are better able than government bureaucrats at making private purchasing decisions that affect their own bottom line. This is not to say that people are infallible; only that the baseline assumption—supported by much empirical evidence—is that in most contexts consumers with heterogeneous preferences, financial resources and personal situations, are better equipped than analysts and policymakers to make market decisions that affect themselves.

The agencies instead assert consumer and firm irrationality with a generalized appeal to the behavioral economics literature. ...

via www.brookings.edu

I'm a fan of consumer sovereignty. My guess is that consumers don't buy energy efficiency products due to problems with business firms, not irrationality. For example, if is quite often difficult to believe that the product will last as long, or work as well, as advertised. When savings are a function of longevity, or quality, this uncertainty makes it perfectly rational not to purchase the energy efficient product.  

It seems that behavioral economics doesn't much belong in benefit-cost analysis. 

Hat tip: Newmark's Door

Where was Whitehead?

As only Tim may be able to tell from the picture I've been in the Emerald City (working with Craig Landry on an "economic values of coastal erosion management" project).