Environmental Economics

Follow the opportunity costs

Suppose Farmer Joe owns a piece of land that nets $40,000 a year.  Suppose further that a) the private development rights to that piece of land are worth $150,000 a year and b) the state has a conservation program that establishes the social value of the land remaining in agriculture at $100,000 a year.

1) What should the rational farmer do?

2) Suppose an economic downturn reduces the development value of the land to $100,000.  What should the rational farmer do?

Read on...

Lookie what I found

As I drove to work this morning in my car of unknown ownership, I wondered what effect this would have on gas prices over the next couple of weeks (from CNN.com):

Continental shelves beneath the retreating polar ice caps of the Arctic may hold almost double the amount of oil previously found in the region, scientists say.

In new findings, the U.S. Geological Survey estimates the Arctic may be home to 30 percent of the planet's undiscovered natural gas reserves and 13 percent of its undiscovered oil.

A team of scientists at the USGS collaborated with international researchers to conduct the first-ever comprehensive assessment of undiscovered oil and gas reserves within the Arctic Circle.

Unless a weekend of breathing ceramic tile dust and adhesive fumes has dulled my economic senses, an upward revision of future potential oil discoveries, along with it's promise of lower future gas prices, should decrease the demand for gas today and put downward pressure on as prices, oh about, now.

And another thought: might that global warming thing everyone is talking about make it easier to get to that undiscovered oil once it's discovered?  Y'know, with less ice to get in the way and all.  Talk about a vicious (arctic?) circle.

Friedman on Payments for Environmental Services

From the NYTimes:

More than any nation I’ve ever visited, Costa Rica is insisting that economic growth and environmentalism work together. It has created a holistic strategy to think about growth, one that demands that everything gets counted. So if a chemical factory sells tons of fertilizer but pollutes a river — or a farm sells bananas but destroys a carbon-absorbing and species-preserving forest — this is not honest growth. You have to pay for using nature. It is called “payment for environmental services” — nobody gets to treat climate, water, coral, fish and forests as free anymore.

Small quibble:  Friedman's use of the term 'payments for environmental services' (or PES) differs slightly from the way I have come to understand it.  Friedman seems to imply a strict polluter pays interpretation, but PES encompasses payments for using environmental services by consumers of the environment and payments to potential uses to prevent use.  For example, I've been working on a project recently to design payments to upland farmers in Ecuador and Guatemala to undertake sustainable farming practices to prevent downstream water quality issues. 

Ok, back to Friedman:

As we debate a new energy future, we need to remember that nature provides this incredible range of economic services — from carbon-fixation to water filtration to natural beauty for tourism. If government policies don’t recognize those services and pay the people who sustain nature’s ability to provide them, things go haywire. We end up impoverishing both nature and people. Worse, we start racking up a bill in the form of climate-changing greenhouse gases, petro-dictatorships and bio-diversity loss that gets charged on our kids’ Visa cards to be paid by them later. Well, later is over. Later is when it will be too late.

OK Already!

From the inbox:

Macro policy, B-ball & beer make env-econ but not the Omnibus Public Lands bill (the largest expansion of wilderness lands in 15 years).

It hits Obama's desk this afternoon.

"This is one of the most important wilderness bills Congress has ever considered, and it will leave a lasting legacy for future generations.”
-Paul Spitler, an associate director with the Wilderness Society

Here it is in The Caucus blog: Huge Lands Bill ...

The Biofuels Myth?

George Monbiot at The Guardian writes:

Is there any trade crazier than the liquid biofuel business? Apart from a handful of cars and vans running on used chip fat, it exists only because of government rules and subsidies....

So here's what we gain from the biofuels trade:

1. Global environmental destruction
2. Higher greenhouse gas emissions
3. Mass starvation
4. The loss of hundreds of millions of dollars
5. The prospect of a new trade war.

He then asks:

Is there anyone out there who still thinks they are a good idea?

In response, I present to you the three signature focus areas in the 2009-2013 Strategic Plan for the College of Food, Agricultural and Environmental Sciences at The Ohio State University:

• Food Security, Production, and Human Health:  Focused on improving agricultural production; enhancing the quality of food and feed; ensuring an adequate, affordable, and safe food supply; and maintaining agrosecurity to ensure food security and the basics of nutritional health for a growing global population.
• Environmental Quality and Sustainability: Working to understand, protect, and remediate the environment and ecosystems to ensure long-term sustainability.
• Advanced Bioenergy and Biobased Products: Developing biomass-based advanced energy technologies and value-added biobased products such as fuels, specialty chemicals, and fiber products.

So yes, George, someone still thinks biofuels are a good idea.

Phosphate vs Wetlands: Round 117

I was a member of the Board of Directors of the Pamlico-Tar River Foundation (I'm a life member!) when we boarded a bus and took a tour of the PCS Phosphate mine (it ain't pretty) in Aurora, NC as they tried to convince us their reclamation efforts were actually restoring wetlands. Soon after, the Southern Environmental Law Center filed suit on behalf of PTRF.

Here is one stark example where increasing increasing environmental quality reduces employment (albeit in the short run, in a particular region):

PCS is seeking federal permits to continue its mining of phosphate ore along the Pamlico River in Beaufort County for 30 more years. Phosphate is used for fertilizer, animal feed supplements and for food additives.

With more than 1,000 workers, the mine is Beaufort County’s largest employer.

...

The company initially applied in 2000 to expand its mine adjacent to the Pamlico River and South Creek. It sought to mine through wetlands, salt marsh and headwaters of a number of creeks — a plan state regulators said violated state law, causing the issue to be tied up in court until 2006.

Since then, the company has offered a different plan and the permitting process has moved forward.

Since I moved away from the ancient sea floor, er coastal plain, in 2001 and lost touch with PTRF I'm not sure what happend in 2006 to resolve the lawsuit, but I'm betting this conflict will never go away.

 

Note: News and Observer Staff file photo by John Rottet.

Are payments for environmental services in the President's new budget?

High school friend of Env-Econ (Chuck) asks: what are your thoughts on the farm part of this?  First an excerpt:

On agriculture, wealthy farmers would get less money from the federal government -- and none, three years down the line -- under proposals in Obama's first budget.

Obama's proposed fiscal year 2010 budget "phases out direct payments over three years to farmers with sales revenue of more than $500,000 annually," according to the list.

At present, "direct payments are made to even large producers regardless of crop prices, losses or whether the land is still under production."

But according to the list, "Large farmers are well-positioned to replace those payments with alternative sources of income from emerging markets for environmental services, such as carbon sequestration, renewable energy production, and providing clean air, clean water, and wildlife habitat."

The new proposed budget cuts the Market Access Program which provides "funding for overseas brand promotion." It cuts cotton subsidies and "proposes to eliminate the requirement for the government to pay the storage costs of cotton that is put under loan by the USDA. Cotton is the only commodity for which this assistance is provided."

My thoughts?  Jublilation. Joyous vindication.  Disciplinary pride. 

Reducing or removing inefficient farm income policies is long overdue...with the added bonus of cheaper food.  Sounds like a win-win to me.

My best post of 2008

I left a comment on a green jobs post the day after pagan celebration of a Christian holy day:

That is why economics is known as the dismal science. We strange economists are most adept at recognizing the opportunity costs of various decisions. No one else really seems to care if opportunity costs offset some, or all, of the benefits of a good idea.

Opportunity cost is a strange notion to some (especially intro micro students) ... it is the value of the next best alternative whenever a choice is made. For example, if I purchase a $1000 flat panel LCD TV, the true cost of the TV is not $1000, but what I could purchase instead (such as $500 in each kid's college education 529 plan [sorry kids]).

In the case of green energy subsidies, if you are an economist then you must at least wonder if this is the best way to spend the money. There are benefits of pushing down the costs of green energy (e.g., improved air quality), and there are opportunity costs. Ignoring the opportunity costs is likely to lead to wasteful spending. Considering the opportunity costs is likely to lead to better social decision making -- regardless of whether the benefits of the subsidies exceed the costs.

The notion of opportunity cost, its recognition and the inevitable result that not all great sounding ideas are really great ideas, is the most important thing that economists bring to many policy discussions. Pointing out the unpleasantantries of opportunity cost is one of the purposes of this blog. The dismal part of the dismal science can not be avoided.

Ethanol is stupid

From the inbox:

I wanted to pass along a quirky letter to the editor that I saw today on the Concord Monitor’s website.  It was written by a 13-year old, Madeleine Stewart, and is one of those incisive notes that only someone with all the knowledge of youth can write...

Well, here it is (Well done Madeleine, I only hope that I am honing my own kids' economic senses as sharply as Madeleine's parents and teachers obviously have) :

We have been polluting our world too much. Naturally, we have tried to do something about it. What we use to create energy is the big problem, so people have tried to come up with a new, renewable energy source that is easily obtained. We have already figured out several non-polluting techniques: wind, water and solar power. But another attempt is not working out so well: ethanol. The problems start at the very beginning.

Most ethanol is made from corn. However, that corn must be supplied in enormous quantities, and corn is used in much food for humans and animals. If we use corn for fuel, more will need to be grown, on huge farms receiving government subsidies. We are paying extra so that our food can be used for fuel.

The corn is grown using chemical fertilizer, which is awful for the environment. Most pesticides are made from petroleum, exactly what ethanol is supposed to be preventing the use of. Also, the machinery on big farms needs massive quantities of gas.

The next step is even worse. The corn, grown with petrochemicals, must be distilled in factories to become ethanol. These factories need to get their energy from somewhere, and that somewhere is fossil fuels. It takes about nine-tenths of a gallon of fossil fuel to make a gallon of ethanol. Ethanol pollutes the environment about the same amount as if we just used fossil fuel.

To add insult to injury, ethanol is not as efficient as fossil fuel. In short, ethanol is stupid. It just doesn't do what it's supposed to do - namely, reduce our carbon footprint. Our government needs to start focusing its attention elsewhere. Wind, water and solar energy could use some boosting.

MADELEINE STEWART, age 13

I recently was shamed into renewing the recycling habit ...

... and now this:

The economic downturn has decimated the market for recycled materials like cardboard, plastic, newspaper and metals. Across the country, this junk is accumulating by the ton in the yards and warehouses of recycling contractors, which are unable to find buyers or are unwilling to sell at rock-bottom prices. ...