Environmental Economics

A: Because it's better than acting like an obnoxious teenager

When I mention what I do (come up with ways to estimate the value of environmental goods and services), I sometimes get a response like this:  

It really is irritating that some people need to use economic measures to value our environment.

The reality is our environment, air, water, seas, national parks & Great Barrier Reef are truly priceless & must be treated as such ie no cost benefit BS studies needed.

My response is really quite simple.  If we don't measure the value of environmental goods and services and place them on par with marketed goods, we risk some acting as if the environment is free. 

It's like the nice neighbors who are going to be out of town on Halloween, so they leave a bowl of 'free' candy out for the neighborhood kids.  Most of the kids (mainly the supervised ones) are good citizens and only take one or two pieces of 'free' candy.  But it only takes one obnoxious teenager to recognize that 'free' means take all you can, and everyone loses out.  

So think of those who treat the environment as 'free' as the obnoxious teenage neighbor who needs more adult supervision.  

Or, start charging for your Halloween candy.

"The Pattern is Clear": Economic research is being driven out of D.C.

Consider:

• Earlier this year, President Trump proposed significant cuts to the USDA's Economic Research Service--50% cuts in fact:

Funding for ERS would be slashed by 50 percent, to $45 million, in part by eliminating "low-priority research" that the administration said was already being done by the private sector or nonprofits. The administration asks for the ERS to focus on core programs of data analysis and forecasts.

These cuts were restored by Congress in later versions of the budget--but that wasn't the end (see the third bullet below).

• In June, the Environmental Protection Agency announced the elimination of three science advisory committees including the Environmental Economics Advisory Committee:

The SAB approved retiring the Ecological Processes and Effects Committee (EPEC), the Environmental Economics Advisory Committee (EEAC) and the Environmental Engineering Committee (EEC).   When issues arise in these three areas, the current make-up of the Board sufficiently represents expertise to oversee work on these subject matters and convene panels as statutorily authorized.

By my count, only three of the 43 current members of the Science Advisory Board have advanced degrees in economics.  I will leave it to you to decide whether that is sufficient.

In a recent editorial in Science, Kevin Boyle and Matthew Kotchen--both members of the now-defunct Environmental Economics Advisory Committee--write:

...in June 2018, the EPA's Science Advisory Board (SAB) eliminated its Environmental Economics Advisory Committee (EEAC). The agency should be calling for more—not less—external advice on economics, given the Trump administration's promotion of economic analyses that push the boundaries of well-established best practices. The pattern is clear: When environmental regulations are expected to provide substantial public benefits, assumptions are made to substantially diminish their valuations.

• On August 15, the USDA announced their intent to realign and relocate the Economics Research Service, out of Washington D.C. The announcement caught more than a few people, well, off-guard:

Secretary Sonny Perdue’s surprise announcement last week that the department’s National Institute of Food and Agriculture and the Economic Research Service would be packing up and moving from D.C. was news to an important group of people — the staff members themselves. Department staff were informed of the plan about an hour before USDA unveiled it to the public...

But economists inside and outside ERS told POLITICO they are skeptical of the administration’s motives and worry that it will eventually lead to their work being overlooked, underfunded and potentially more susceptible to political influence.

Echoing the words of Boyle and Kotchen, the pattern in indeed clear:  Objective economic research is being driven out of D.C.   

What Air Pollution is Costing Us

Pollution and health have always been directly linked, both environmentally and medically, but few people consider the economic impact felt by countries afflicted with poor outdoor air quality. The World Health Organization estimates that the cost of disability and premature death from air pollution in Europe totalled close to $1.6 trillion USD in 2015. Each form of pollution presents its own unique challenges, while resulting in a hefty expense and posing a threat to human health.

Particle pollution is a major air quality concern. Microscopic fibers from combustion, dust, and debris are spread through the air in a mix of solids and liquid droplets. Activities like industrial processes, construction, and burning emit particles that are easily inhaled or consumed. Particle pollution becomes increasingly dangerous when it includes harmful toxins like asbestos, which has direct ties to cancerous conditions including peritoneal mesothelioma. Natural disasters, demolition, and climate change can all contribute to particle pollution, sometimes causing levels to spike during certain times of the year.

Due to worsening conditions, gaseous air pollution like ozone and carbon monoxide have been hot topics in recent years. Levels often increase during the summer when higher temperatures and sunlight stimulate chemical reactions in the lower atmosphere. Gases like ozone can aggravate the respiratory system, resulting in conditions such as chronic obtrusive pulmonary disease (COPD) and worsening asthma and emphysema. Although urban areas are often the most affected, the impact of air pollution reaches far into the rural and natural world.

The toll air pollution takes on the environment is costly. Heightened levels of smog or haze can prevent plants from receiving needed sunlight exposure, while certain chemical emissions, like halons, deplete the upper ozone level that protects us from harmful UV rays. Crop and forest damage are a result of air pollution as well, causing land fertility issues and stunted growth.

Economic Impact

Although some headway has been made in terms of sustainability and cutting back on toxins, pollution from energy production continues to cost the U.S. hundreds of billions of dollars each year. According to a report by the World Bank, this rounds out to about $5 trillion in welfare expenses annually, with developing countries seeing some of the worst effects. Much of this is attributed to healthcare costs, as more people are being exposed to harmful airborne toxins. Additional financial burdens can develop from labor productivity and insufficient crop yields.

A number of studies surrounding the economic result of air pollution recommend policy change. One report from the Organization for Economic Co-operation and Development (OECD) encourages the use of local policies to directly target and break down the issue. Certain global cities like Beijing or Dubai are experiencing increasingly dangerous air quality levels, sometimes resulting in city-wide smog warnings that bring businesses to a halt. Although there may be fears that industrial-centric jobs may be lost while attempting to reduce pollution, the economic model suggests those positions will be balanced out by gains made in other industries, including green building and architecture. Environmentally conscious policy will benefit and stimulate the economy by encouraging efficient use of resources while lessening healthcare costs.

Participating in clean air initiatives and sustainable development are attractive markets for many countries. Those that enter into clean technologies have the advantage of growing and leading the industry, all while improving national health and increasing GDP. Perhaps if those financial gains were highlighted, countries like the U.S. would feel more incentivized to adopt green and non-toxic technologies to help reduce the effects of air pollution.

Emily Walsh 
Community Outreach Director
Mesothelioma Cancer Alliance

"Reporting back: the World Congress for Environmental and Resource Economists in Gothenburg, Sweden"

Sonja Kolstoe at the Society for Benefit-Cost Analysis "On Balance" blog:

This was my first time attending a World Congress. As a non-market valuation economist specializing in revealed and stated preference methods, I enjoyed the opportunity to discuss these methods and network with others from around the globe. For me, the week started off on a high-note as Gina McCarthy, the opening keynote speaker, publicly praised stated preference methods and the rigor with which these studies are conducted. In a benefit-cost analysis (BCA), accounting for benefits of a policy often is more difficult than accounting for the costs, thus making non-market valuation a fundamental part of BCA. Methodological issues transcend differences in institutions, policies and applications, a major point and key takeaway from this conference. (Some of these issues are explored in a symposium in the Spring 2018 issue of the JBCA: The Application of BCA in Europe – Experiences and Challenges.)

Another highlight with direct applications to BCA was the policy session, “Best Practices in Revealed Preference Approaches for Nonmarket Valuation Methods that Inform Environmental Policy,” organized by Catherine Kling (Iowa State/Cornell University). The session included talks on best practices for hedonic property value studies, hedonic wage studies, and recreational demand models. The three papers presented in this session were commissioned by the Review of Environmental Economics and Policy, and will be part of a future symposium on the topic in that journal.

The Best Practices session built on a recently published paper recommending best practices for stated preference studies (Johnston et al. 2017); this large scale effort in turn updated the findings in the report of the NOAA Blue Ribbon Panel on Contingent Valuation in 1993—an early effort that involved Nobel Prize winners Kenneth Arrow and Robert Solow, as well as other prominent economists and sociologists. The papers presented in the session further underscore the importance of work by economists to produce robust estimates of non-market values that can be used in BCAs, and thereby support evidence-based policy decisions. ...

Don't read this if an increase in someone else's utility reduces your own (i.e., you are so jealous that people got to go to the World Congress and you didn't). 

Forthcoming book review

From the inbox:

Thank you! Your proof corrections for AJAR - AUSTRALIAN JOURNAL OF AGRICULTURAL AND RESOURCE ECONOMICS : 12280 : Contingent Valuation of Environmental Goods: A Comprehensive Critique, by Daniel McFadden and Kenneth Train (Eds.). Published by Edward Elgar Publishing, 2017, 319 pages, ISBN: 978-1-78643-468-5, AU$210 have been received.

Just like Coase drew it up?

Brazen in its irony:

As the nation plans new defenses against the more powerful storms and higher tides expected from climate change, one project stands out: an ambitious proposal to build a nearly 60-mile “spine” of concrete seawalls, earthen barriers, floating gates and steel levees on the Texas Gulf Coast.

Like other oceanfront projects, this one would protect homes, delicate ecosystems and vital infrastructure, but it also has another priority — to shield some of the crown jewels of the petroleum industry, which is blamed for contributing to global warming and now wants the federal government to build safeguards against the consequences of it.

"Consulting on the side"

That is the title of my talk at the "Tips for Students and Newish Economists" panel at the AERE@SEA meetings. Note that I am defining consulting very broadly. Here is my preliminary outline:

1. Goal
   
   • Enhance your research, teaching, service
   • Don't make it another activity: i.e., research, teaching, service & consulting
2. Community-based research consulting
   • Why? Low budget agencies need economic expertise 
   • Benefit: No cost consulting is community service
   • Benefit: When you include your students you are also teaching
   • Cost: Much of this stuff isn't publishable (but there are exceptions to the rule)
3. Consulting on research grants
   • Why?
     • Principal Investigators don't want to deal with your Office of Sponsored Programs
     • The budget is too small to worry about
     • The agency doesn't pay overhead
     • The turnaround time is too short
   • Benefit: Data and research output (you can't get credit for the report but you can get credit for the publications)
   • Benefit: Less paperwork, zero stupid hoops to jump through, fewer miscellaneous headaches
   • Benefit: Money (but sometimes there is no money but then you can count this as service)
   • Cost: No overhead (i.e., you won't get credit for the work at the university)
   • Cost: No time -- you can't can't buy out courses and have only a limited amount of time to work on the project (some places only allow 4 hours per week ... unless this is what you do in the summer)
   • Cost: No graduate student support
4. Consulting for the primary purpose of making extra money [ugh]
   • Benefit: Money (and that's about it -- unless you can use the examples for teaching)
   • Cost: Before you know it, you're a victim of "sponsor bias" (your work is biased towards the goals of whatever sponsor is paying you)
   • Cost: Your regular research, teaching and service (and, therefore, annual review) suffers
   • Cost: Your colleagues begin to ____ you
     • disrespect
     • resent
     • make fun of

I've been asked to make sure I emphasize that consulting is not something you do instead of your regular job. Done (see the costs of the #4 type of consulting). Any other comments and suggestions are welcome!

AERE sessions at the SEA meetings are posted @AEREorg

There are 17 sessions with 5 papers each (no discussants), 3 student sessions (with discussants, organized by Elaine Frey) and 1 panel discussion (the last session so attendance will be lower than our usual "tips" session):

Tips for Students and Newish Economists

Moderator: Elaine F. Frey, California State University, Long Beach

Panelists:

• Jill L. Caviglia-Harris, Salisbury University, "Applying Design Concepts to Increase the Impact of your Presentations"
• Christopher F. Dumas, University of North Carolina - Wilmington, "Adding Logic and Proof Concepts to Your Intro Courses"
• Sarah Andrea Jacobson, Williams College, "Social Media but in a Way That's Kind of Useful"
• Will Wheeler, U.S. Environmental Protection Agency, "Writing Grants is a Skill: Tips for Success"
• John C. Whitehead, Appalachian State University, "Consulting on the Side"

Here is the link to all of the sessions: https://www.southerneconomic.org/current-year-program/?conferenceId=4&organizationId=2.

 

My benefit-cost analysis reading list for Fall Semester

I'm teaching benefit-cost analysis this semester. The course is for upper level economics majors (ECO 4660) and non-economics graduate students (ECO 5660).  I have 6 books on my shelf but none of them are satisfactory for a variety of reasons (mostly, the theory is too deep and the estimating benefits chapters are dated). So, I'm using the EPA's Guidelines for Preparing Economic Analyses supplemented with the Haab and Whitehead Encyclopedia. Here is the reading list (suggestions welcome!):

	Topic	EPA Guidelines (Required)	Encyclopedia (Recommended)
1	Introduction & Background	Chapter 1, 2; (Boardman et al. Chapter 1)	Benefit–Cost Analysis, Executive Order 12291, Guidelines for Preparing Economic Analyses, Welfare
2	Market Failure	Chapter 3, Appendix A	Externality, Public Goods
3	Decision Rules & Sensitivity Analysis	(Boardman et al. Chapter 7)	Risk and Uncertainty
4	Baseline	Chapter 5
5	Discounting	Chapter 6	Discounting
6	Estimating Benefits	Chapter 7	Averting Behavior, Benefit Transfer, Choice Experiments, Contingent Behavior, Contingent Valuation, Experimental Economics and Valuation, Hedonic Price Method, Meta-Analysis, Nonmarket Valuation, Passive Use Value, Travel Cost Method, Value of Statistical Life
7	Estimating Costs	Chapter 8	Pollution Abatement Costs
8	Economic Impacts	Chapter 9, Appendix C	Green Jobs
9	Distribution	Chapter 10	Environmental Justice, Welfare and Equity
10	Case Studies

RFF: "Questions about the Trump Administration’s Cost-Benefit Analysis for its Proposal to Freeze the CAFE Standards"

Alan J. Krupnick, Joshua Linn, and Virginia McConnell:

In April, we wrote a blog post responding to the Trump administration’s announcement that it was preparing to weaken the fuel economy and greenhouse gas (GHG) standards hammered out in 2011 by the Obama administration. We argued then that although some things have changed since those vehicle rules were established, the agencies should not simply roll back standards, but pursue a strategy to ensure steady long-term reductions in passenger vehicle GHG emissions to address the threat of global climate change.

Now, the Trump administration is proposing to freeze the fuel economy and GHG standards at model year (MY) 2020 levels until MY 2026 (the standards are set based on model years, which typically begin in the Fall of the preceding calendar year). This is an abrupt change from the Obama standards, which would have continued reducing emissions. Given current policies, this change would increase greenhouse gas emissions during that period and beyond. Fuel economy regulations were first established to reduce fuel use for more energy security (this rule would increase fuel use in new cars) and then concerns about climate change became an additional consideration (this rule would increase GHG emissions). The Trump administration downplays the GHG benefits of the Obama standards and claims that those standards would increase traffic accidents.

We will issue a series of blog posts discussing various aspects of the new proposal and the cost-benefit analyses underlying it. ...

The National Highway Traffic Safety Administration (NHTSA) is conducting the benefit-cost analysis instead of the Environmental Protection Agency:

The Trump administration’s modeling, inputs, and underlying assumptions behind the analysis of this new rule are quite different from those behind the analysis of the earlier rule finalized in January of 2017 at the end of the Obama administration. EPA models, assumptions, and focus on greenhouse gas emissions reductions tended to dominate the earlier analysis of the proposed rules for 2021 to 2025 MYs. The current proposed rule under the Trump administration uses models developed by National Highway Traffic Safety Administration (NHTSA) to evaluate benefits and costs. The NHTSA analysis emphasizes the effect of the new rule on fuel use, vehicle miles traveled, and accidents by the entire fleet. The effort to set standards for vehicles has always been plagued by the problem of having two masters—improving fuel economy on the one hand and reducing GHG emissions on the other. The two are closely linked, but the agencies that regulate them have different jurisdictional authority and perspectives. What is needed is a unified effort to address the societal costs of consuming fuel with clear goals and consistent modeling and analysis.

To its credit, NHTSA attempts to expand the scope of the benefit-cost analysis, which could improve the accuracy of the evaluation. For example, NHTSA has introduced a dynamic stock model that includes effects of the rule not just on new vehicle technologies and costs, but on the number of new and used vehicles predicted to be on the road and how much they are driven. The model also allows for variation in the mix of cars and light trucks in the fleet in response to changes in the rule.

The NHTSA is making stuff up:

However, while expanding the scope of the analysis is good in theory, in reality there are important questions about both the way the model is used and the underlying assumptions. For example, the analysis finds that in going from the Obama rule (stricter standards each year through MY 2025) to the Trump rule (no change in standards after 2020), the overall size of the vehicle fleet falls even though new vehicle prices are lower. On its face, this is inconsistent with economics. Further, NHTSA predicts that total vehicle miles travelled also falls during this period, appearing to assume that households choose how many miles to drive their vehicles independently of the number of vehicles they own. This assumption is also inconsistent with economics. The agency is arguing that looser standards decrease the size of the on-road fleet and decrease total driving. We’re not aware of any real-world evidence supporting this argument. These new elements of the model are key because they result in significant reductions in external costs (such as congestion) and increases in safety from the change in vehicle ages and decreased driving under the proposed new rule.

Costs of CAFE regulation are inflated:

In addition, changes in how and when new technologies are introduced may have a significant effect on estimates of total technology costs. In the current NHTSA analysis, the technology costs are predicted to be more than two times higher for the Obama standards than the Obama analysis predicted for its rule in 2016. However the per vehicle costs in the new assessment are only about 50 percent higher ($1300 vs. $1950 in 2016 dollars). The NHTSA analysis provides some explanations for why these per vehicle costs might be higher, but it is not clear why total technology costs would be so much higher. ...

And, it ain't over:

In future blogs we will address other topics related to the proposed freezing of the standards, such as the effect of gasoline prices on fuel economy standards, assumptions about greenhouse gas emissions and other air pollutants, and the possible use of a safety valve if there is concern over high costs of meeting the standards.

Here is the link: http://www.rff.org/blog/2018/questions-about-trump-administration-s-cost-benefit-analysis-its-proposal-freeze-cafe