Environmental Economics

"Scott Pruitt is now waging a war on economics"

Rob Verchick ("a professor at Loyola University New Orleans College of Law and president of the Center for Progressive Reform in Washington. He served as deputy associate administrator for policy at the Environmental Protection Agency) in the LATimes:

As head of the Environmental Protection Agency, Scott Pruitt has wriggled from one colorful scandal to the next, using agency staff to help his wife land a Chick-fil-A franchise and enlisting members of his security detail to pick up his dry cleaning and search for his favorite moisturizer.

But these ethical breaches pale in comparison to the real scandal: Pruitt’s sustained effort to help polluting industries by hocking America’s natural environment and public health for a song.

His latest ploy is a proposal to change how the EPA calculates the costs and benefits of environmental regulations, a process that those industries have consistently criticized. In a notice inviting the public to comment on whether and how to change the cost-benefit analysis, released on June 7, Pruitt appears to be laying the groundwork for reforms that would allow the EPA to hide the real-world value of protections by downplaying or leaving out many of the benefits they provide.

Like Pruitt’s war on science, which culminated in a plan to ignore an entire category of scientific studies when measuring environmental risks, his war on economics could erode regulatory protections. If it moves forward, the scheme is likely to make it much easier to block new standards and endanger many of the ones we already have. The stakes could not be higher. We’re talking about air that’s clean enough to breathe and water that’s safe to drink.

As a former EPA official, I know the critical roles that science and economics play in shaping the agency’s decisions. To protect people and the environment, our laws direct the EPA to establish air and water standards that are within an adequate margin of safety and are, as the law stipulates, “economically achievable.”

To this end, the agency delves into complex questions of science, economics and technology to make sure that these standards satisfy all statutory requirements while being sensitive to needs of the regulated industry. On top of this, the White House requires the EPA and other agencies to lay out the economic costs and benefits of significant regulations to determine how they would affect the overall economy.

Every year, the evidence shows that environmental protections prevent thousands of premature deaths, thwart countless illnesses and save tens of billions of dollars. A comprehensive study conducted by the EPA in 2011 found that, from 1990 to 2020, the annual benefits of air pollution standards will have exceeded total costs by about 25 times. Even the Trump White House recently concluded that the economic benefits of all major regulations were several times higher than the total costs.

Environmental protection is a great deal for the American public, in other words. But Pruitt’s proposal seems intended to low-ball the benefits, making it easier to portray environmental rules as inefficient and unnecessary.

For instance, the proposal appears to be laying the groundwork for a rule that would disregard indirect benefits in the EPA’s economic assessments. An indirect benefit, sometimes called a “co-benefit,” is an added bonus that was not part of the primary motivation behind a measure.

Imagine that you, like Pruitt, are in the market for a good moisturizer to protect against dry skin. If the most effective moisturizer also has sunscreen and smells good, those are co-benefits. You’d be silly not to consider those pluses as part of the lotion’s value.

The EPA would be similarly foolish not to consider all of the good things that its policies produce. It’s important, for instance, to take into account that vehicle fuel-economy standards not only reduce carbon pollution but also save drivers up to $27 billion in gas each year. It’s also important to note that more efficient coal-fired power plants reduce not only mercury pollution but also the sulfur dioxide inhaled by asthmatic children.

Pruitt’s notice asks for input on whether to consider co-benefits and repeats the criticisms that industries have offered on the practice. Pruitt himself has repeatedly criticized consideration of co-benefits, which every previous White House since the Reagan administration had endorsed. ...

Americans have until July 13 to submit comments on Pruitt’s proposal to undermine cost-benefit analysis at the EPA. We should use the comment period to remind Pruitt that, as EPA administrator, he works for all of us, and that the value of our health and environment must not be discounted.

From the inbox:

I write to highlight the chance to comment on the EPA Proposed Rulemaking “Increasing Consistency and Transparency in Considering Costs and Benefits in Rule Making Process.” The window for comments goes through July 13 (it is possible that this will be extended).  My goal is simply to reduce transaction costs for those willing to bring their professional expertise to this issue.

The process is pretty straightforward:

1. Go to  https://www.regulations.gov/document?D=EPA-HQ-OA-2018-0107-0001 , this takes you to the Proposed Rulemaking document, also posted is the Federal Register content where you can read the complete announcement.
2. Click the link on the center right entitled “Comment Now”
3. Write your comments in the provided space or upload your separate document.
4. Click Submit

All comments become public record, you can see mine or any others who have posted on the website.

Please encourage others to share their professional views.  I firmly believe that the people of America are not best served by basing decisions about how to use benefit-cost analysis for decision making on popular opinion or the most outspoken stakeholders.

Insert commitment mechanism here:

I'll be posting my comments here soon (aka, before July 13). 

The benefits of environmental regulations cannot be simply willed away (and why I'm too slow to be an Ivy-Leaguer)

A couple of weeks ago, soon after EPA Administrator Pruitt's announcement to introduce a rule changing the role of cost-benefit analysis in design of environmental regulations, I wrote an op-ed and submitted it to the NYTimes for consideration.  They politely declined (by ignoring the submission) so I submitted it to the Washington Post.  They too, politely declined (by ignoring the submission).  Finally I sent it to The Conversation and they politely declined (for real this time), basically saying I was too slow and Joe Aldy beat me to it. 

D'Oh--damn Ivy-Leaguers.

So although this repeats a lot of what Joe said in his piece for The Conversation, here's my take on why reducing the role of cost-benefit analysis at the EPA is dangerous. 

In 1981, President Reagan signed Executive Order 12291 requiring both the costs and benefits of any new major regulation be considered prior to federal implementation.  For the decade prior to Executive Order 12291, federal and state environmental regulators struggled to find cost effective ways to implement environmental regulations imposed by the Clean Air and Clean Water Acts of the early 1970’s.  Unfunded mandates imposed on states resulted in inertia that saw few environmental improvements during the decade after the Clean Air and Clean Water Acts were passed, and regulatory stalemates were a regular occurrence due to the perceived high cost of implementation.  By requiring cost-benefit analysis, Reagan’s Executive Order promised to reduce the cost of regulation by selecting only those regulations that promised to provide benefits in excess of costs, thus promoting environmental improvements without over-burdening economic growth after the lean economic times of the 1970’s.

Those in favor of less costly regulation applauded the use of cost-benefit analysis for regulatory decisions.  As a 1981 story in the New York Times put it:

“Administration and business officials and others who applaud the President's decision say that the uniform application of cost-benefit analysis...will stem the tide of unnecessary regulation that they say have been a severe and growing burden to the nation’s economy. “

Opponents of Executive Order 12291 countered that the use of cost-benefit analysis was simply an end-around for those opposing environmental regulation, that putting ‘prices’ on environmental goods diminished the contribution of environmental goods to the collective good, and that comparisons based solely on dollars can be easily manipulated.  

Despite the objections, Executive Order 12291 was issued and cost-benefit analysis has become a standard tool for environmental policy analysis.  In fact, cost-benefit analysis has been so successful as a tool for policy analysis that every administration since Reagan has endorsed its use. 

Until now.

On June 7, EPA Administrator Scott Pruitt, announced the intent to introduce a new EPA rule for public comment addressing cost-benefit analysis that effectively suggests removing the measurement of many co-benefits in consideration of environmental regulations.  In a surprising bit of irony, Administrator Pruitt argues that the measurement of benefits in consideration of environmental regulations has resulted in the implementation of too many costly regulations that harm business and has hampered economic growth—the exact argument that Reagan-era administration and business officials used in favor of cost-benefit analysis in 1981. 

What has changed since 1981? The simplest answer is that economists who specialize in the measurement of the benefits of environmental improvements have clearly demonstrated that there are large and measurable benefits to society of improving environmental quality thus providing justification for economically defensible environmental regulations.

Post-executive order 12291, a burgeoning line of academic inquiry emerged for the measurement of the benefits of environmental regulations.  Putting benefits on equal footing with costs required the measurement of benefits that are not ‘priced’ in typical markets.  Assigning ‘prices’ to non-market environmental outcomes, like the benefits of improved drinking water quality, or the benefits of preventing early deaths from excessive exposure to dirty air proved to be a manageable task, and highly valuable.  By measuring the costs AND benefits of proposed regulations, federal agencies, like the EPA, were quickly able to implement low cost environmental regulations that yielded societal benefits that far exceeded the costs of implementation without stifling economic growth.  For example, in a 2005 retrospective assessment of the costs and benefits of the sulfur dioxide cap-and-trade program in the EPA’s Acid Rain Program implemented under Title IV of the 1990 Clean Air Act, economists found that the costs of sulfur dioxide reductions from coal-fired electricity generation were half of what was expected, and after including the health, recreation, and aesthetic benefits of reduced sulfur dioxide emissions, the benefits of those reductions exceeded the costs of the Acid Rain Program by a factor of 40!  

Since the environmental movement of the 1960’s and 1970’s, economists have largely come down in support of the use of efficient regulation, based on cost-benefit analysis, to address environmental concerns.  A 1990 survey of members of the American Economic Association found that 60% of economists surveyed disagree with the statement “Reducing the regulatory power of the Environmental Protection Agency (EPA) would improve the economic efficiency of the U.S. economy.”  Only 12% agreed with the statement.  These numbers remained largely unchanged when the survey was repeated in 2000.  A more recent survey of members of the Association of Environmental and Resource Economists found that 96% of those surveyed disagree with the statement that “Unregulated markets provide public goods in optimal quantities.”  This was the single statement that yielded the highest level of agreement among the economists surveyed—a group notorious for being unable to agree with each other.  In short, there is a surprising degree of agreement among economists that environmental regulation is not only good for the environment, but when designed properly is defensible on economic grounds and unlikely to limit economic growth. 

Contrary to early fears, putting a ‘price’ on the environment has encouraged decision makers to recognize the scarce nature of our natural capital.  Rather than reducing “all decisions to simple-minded weighing of dollars,” the pricing of nature has forced everyone to recognize that the alternative to pricing nature is assuming it is free to exploit.  Assigning dollar values to the benefits of our natural and environmental resources allows us to use the power of markets and economics to design policies and regulations that benefit all. 

The benefits of many environmental regulations and the resulting environmental improvements are large, demonstrable, and economically defensible and cannot be simply willed away.

"Why a minor change to how EPA makes rules could radically reduce environmental protection"

Joe Aldy:

Since the Reagan administration, federal agencies have been required to produce cost-benefit analyses of their major regulations. These assessments are designed to ensure that regulators are pursuing actions that make society better off.

In my experience working on the White House economic team in the Clinton and Obama administrations, I found cost-benefit analysis provides a solid foundation for understanding the impacts of regulatory proposals. It also generates thoughtful discussion of ways to design rules to maximize net benefits to the public.

On June 7, Environmental Protection Agency Administrator Scott Pruitt proposed changing the agency’s approach to this process in ways that sound sensible, but in fact are a radical departure from how government agencies have operated for decades.

As the agency frames it, the goal is to provide “clarity and real-world accuracy with respect to the impact of the Agency’s decisions on the economy and the regulated community.” But I see Pruitt’s proposals as an opaque effort to undermine cost-benefit analysis of environmental rules, and thus to justify rolling back regulations. ...

Read the rest here: https://theconversation.com/why-a-minor-change-to-how-epa-makes-rules-could-radically-reduce-environmental-protection-98042

 

At What Cost? Legislators come up with solutions to Harmful Algal Blooms. Environmental Economists come up with cheaper solutions.

The Legislature of the State of Ohio is currently considering legislation to reduce Phosphorous loadings into Lake Erie by 40%.  This is a good thing, as reducing Phosphorous going into Lake Erie will reduce the incidence and impact of Harmful Algal Blooms in the Western Lake Erie Basin.  

The proposed legislation establishes a Clean Lake 2020 plan that includes:

A significant new Clean Lake Capital Fund that may appropriate up to $100 million per year for five years for both Lake Erie algae reduction, and agricultural best practices.  Funding may include establishing facilities to improve manure application processes, projects to reduce open lake disposal of dredged materials, funds to local governments for water quality-based green infrastructure, water management projects to help reduce nutrient and sediment runoff impacting the lake and other strategies.

A new Soil and Water Support Fund, with some of the funding provided directly to soil and water conservation districts to assist farmers in soil testing, nutrient management plans, installing edge of field drainage devices, encouraging inserting of nutrients (subsurface placement), and agreed to conservation methods that may include riparian buffers, filter strips and cover crops.

To the casual observer, this all looks good.  The proposed bill has widespread support among agricultural groups, and local and state authorities. As one of the bill's sponsors notes:

“These are not brand new ideas, just a greater sense of urgency to implement them,” Arndt said.  “There appears to be widespread agreement with state officials, environmental and agriculture groups, tourism advocates and business leaders that many of these strategies will make a big difference.”

And he is right, these strategies could make a big difference. 

But as economists we are trained to ask, 'At what cost?' 

If you want to know what to think about the EPA's move to relax fuel economy standards ...

My knee jerk reaction was faux anger -- everything Pruitt seems to reek and the 2012 standards were supported by benefit-cost analysis (1, 2). But for some reason I decided to wait and see what someone who know more about this issue (i.e., someone at RFF) had to say. I'm glad I did as Virginia McConnell and Alan Krupnick wrote this on Friday (We Need to Take a Longer View of Fuel Economy Standards):

The announcement this week that the Trump administration is reopening the CAFE/GHG rules for light-duty vehicles was expected. The widely known stance of the administration on climate change, Environmental Protection Agency (EPA) Administrator Scott Pruitt's criticism of the Obama policy, and the dramatic reductions in oil imports (thereby diminishing the energy security rationale for fuel economy standards) all contributed to the reconsideration of the 2022-2025 model year standards. But what happens next is key for whether the Trump administration and the auto companies can be part of the solution for addressing long-term climate policy. ...

And if you want balance and benefit of the doubt that last sentence is it since it seems clear that the Trump administration does not want to be part of the solution for addressing long-term climate policy. They go on to describe problems with fuel economy standards and how they can be improved (more flexibility). A balanced view suggests that the current fuel economy standards can be improved.

Yet, I'm a little disappointed because they start from the presumption that technological standards are inevitable in the automobile sector. Maybe so but it is never a bad time to point out that, even with the built in flexibility, a higher gas tax would efficiently solve many of the problems with imposing fuel economy standards on the auto industry. Here is what I wrote back in 2011:

Note that fuel economy standards are not the most cost-effective way to cut emissions and reduce oil imports. Cap and trade and carbon tax policies could achieve the exact same environmental and national security goals at a lower cost. The reason is that economic incentive-based policies provide the signal (in the form of higher energy prices) to improve fuel economy and pursue other ways of reducing emissions. If the other ways are cheaper, consumers and firms will have incentives to go down those paths. It is a shame that the political system makes higher fuel economy standards more feasible to achieve.

Of course, my initial reaction was correct. The current EPA does not deserve the benefit of the doubt and this move is simply designed to weaken environmental regulations because there are regulatory costs that industry doesn't like (even if the costs are less than the benefits). There is no economic analysis involved this decision. This is a business decision.

(1) Here is the EPA announcement: GHG Emissions Standards for Cars and Light Trucks Should Be Revised.

(2) Background: Here is Joshua Linn and Alan Krupnik commenting after Pruitt's Congressional testimony before the inauguration: Fuel Economy Standards: Take the Time to Get It Right. 

This article at Vox summarizes everything that I've been trying to say at this blog for the past 10 years (and have been too apoplectic to say during the past year)

David Roberts:

President Donald Trump’s administration has been on a deregulatory bender, particularly when it comes to environmental regulations. As of January, the New York Times counted 67 environmental rules on the chopping block under Trump.

This is not one of Trump’s idiosyncrasies, though. His administration is more ham-handed and flagrant about it, but the antipathy it expresses toward federal regulation falls firmly within the GOP mainstream. Republicans have been complaining about “burdensome” and “job-killing” regulations for so long that their opposition to any particular health, safety, or environmental regulation is now just taken for granted.

For instance, why would the Environmental Protection Agency close a program investigating the effects of toxins on children’s health? Is there some evidence that the money is wasted or poorly spent? Why would the EPA allow more unregulated disposal of toxic coal ash? Don’t people in coal regions deserve clean air and water? Is there any reason to think coal ash is currently well-regulated?

These questions barely come up anymore. Republicans oppose regulations because they are regulations; it’s become reflexive, both for the party and for the media the covers them.

As it happens, though, we know something about the costs and benefits of federal regulations. In fact, Trump’s own administration, specifically the (nonpartisan, at least for now) White House Office of Management and Budget (OMB), just released its annual report on that very subject. (Hat tip to E&E.)

The report was released late on a Friday, with Congress out of session and multiple Trump scandals dominating the headlines. A cynical observer might conclude that the administration wanted the report to go unnoticed.

Why might that be? Well, in a nutshell, it shows that the GOP is wrong about regulations as a general matter and wrong about Obama’s regulations specifically. Those regulations had benefits far in excess of their costs, and they had no discernible effect on jobs or economic growth. ...

Keep reading here: https://www.vox.com/energy-and-environment/2018/3/6/17077330/trump-regulatory-agenda-omb

Here is the link to OMB's report: https://www.eenews.net/assets/2018/02/26/document_pm_01.pdf

My fear is that now that this is underway, any attempts to re-establish objectivity in benefit-cost analysis will be viewed as founded in political gamesmanship rather than objective economic analysis.

Anyone at EPA care to weigh in on the 'new' methods for benefit cost analysis?

I have spent my career developing (hopefully) objective methods for the valuation of environmental benefits and costs.  This is particularly troubling:

The Trump administration’s rollback of environmental regulations has received ample attention in the media. Unfortunately, all the coverage has done little to slow the campaign at the U.S. Environmental Protection Agency (EPA) and the Department of the Interior to relax critical protections and dismantle former President Obama’s environmental legacy. By one recent count, the Trump administration has overturned — or is in the process of overturning — 60 environmental rules.

Less well known is that in its rush to reverse Obama-era policies, Trump’s team is distorting the way that government agencies such as the EPA evaluate and justify regulations. Yet these distortions may end up emerging as an important part of legal strategies to challenge the Trump administration’s assault on environmental regulations and oversight.

To scrap major environmental regulations put in place by prior administrations or enact new rules, the EPA is required to perform cost-benefit analyses. This has been standard government procedure for decades. Under EPA Administrator Scott Pruitt, the response to the requirement has been unwavering: Exaggerate the costs of environmental regulations; downplay the ecological, financial, and health benefits; and come up with numbers that argue for diminishing the rules or abandoning them altogether. The Pruitt approach is now being applied to some of the Obama administration’s signature achievements, including strengthening the Clean Water Act and the imposition of emissions standards under the Clean Power Plan.

As part of the WOTUS rulemaking, Obama’s EPA released its required economic analysis and found that the anticipated benefits of about $450 million per year would exceed the annual compliance costs of nearly $300 million. The vast majority of benefits were those associated with protecting wetlands, including essential services such as flood control, water quality improvements, fish and wildlife habitat, groundwater recharge, and recreational opportunities.

Then in June 2017, the Trump administration’s proposal to rescind WOTUS included its own analysis, which came to the opposite conclusion about the benefits exceeding the costs. In the new analysis, the quantified benefits for the identical policy were estimated at only $50 million per year — a reduction of nearly 90 percent — while the costs remained the same.

What explains the discrepancy? The EPA under Pruitt’s leadership asserted, with surprisingly little justification, that the 10 studies used to estimate the range of benefits associated with wetlands protection were not recent enough to sufficiently reduce uncertainty. All of the studies were conducted between 1986 and 2000, and while there are well-established techniques to update the results of such studies, none were used, nor did there appear to be any effort to search for more recent studies. The result was simply to assign a value of $0 to the largest category of ecological benefits that had been valued by the same agency two years earlier at more $400 million per year. In effect, zeroing out these benefits made it a foregone conclusion that the rule would not pass a benefit-cost test.

Unfortunately we have now entered what I fear is a partisan cycle and politicization of objective economic analysis.  Until now, the EPA has done an admirable job of maintaining, at least, some semblance of objectivity. Sure, political appointees change policies and procedures, but with at least some level of continuity across new administrations.  Since Executive Order 12291 during the Reagan Administration, both Republican and Democratic Administrations have relied on objective benefit cost analyses as an input to the rule- and decision-making process.  Rarely have administrations so blatantly changed the methods to meet a political objective. 

Until now.  

My fear is that now that this is underway, any attempts to re-establish objectivity in benefit-cost analysis will be viewed as founded in political gamesmanship rather than objective economic analysis. 

Benefits and costs of evacuation (under uncertainty)

This is a tough one (Watching a ridge slide in slow motion ...):

The fissure was first spotted in October on Rattlesnake Ridge in south central Washington State, overlooking Interstate 82 and the Yakima River. Since then, a 20-acre chunk of mountainside — roughly four million cubic yards of rock, enough to fill 25 football stadiums to the top of the bleachers, eight stories up — has been sliding downhill. Geologists can measure its current speed — about two and a half inches a day — but they cannot say for certain when, or if, it might accelerate into a catastrophe. And they are powerless to stop it. ...

The usual course of events when nature comes unhinged is for researchers and responders to look back in time, trying to understand what happened, as they assess and address the damage done. Here it is precisely the opposite: They are looking forward in time at a disaster in waiting, in which all is still potential and nothing is certain.

The worst-case scenarios — considered unlikely but possible — have the slide breaking loose suddenly and roaring down toward the Yakima River, blocking the channel and flooding the valley, or burying the interstate that runs along the river, carrying 30,000 vehicles a day. Either would mean big trouble for a rich agricultural district where apples and hops are king, about two and a half hours’ drive from Seattle. ...

By giving scientists, officials and the people who live nearby so much time to stew over what could be happening, the slow-motion nature of the slide — at least so far — has already created tensions. About 75 people have been evacuated from nearby houses that may or may not ever be damaged. The local road at the foot of the hillside has been closed. Irrigation canal operators stand ready to open dams and take water from the river if it is blocked by a rock slide. Alternate highway routes have been mapped out, in case the interstate becomes impassable.

Current projections, based on dozens of motion sensors that have been installed on the ridge, suggest that the collapse is most likely to happen sometime in late February. ...

Mr. Emmons, the emergency management director, says he gets updates every day from state geologists and other experts about the odds and percentage predictions of the slide’s likely path. And then he tosses those odds out the window.

“I can’t rely on percentages, because in my world, 1 percent is still a chance,” he said. “I don’t feel comfortable banking on a percent number for public safety, or life safety. In my view, everything is possible.”

My guess is that if the analysis was done using the expected* benefits and costs then the net benefits of evacuation are less than zero. The economic analysis would suggest no evacuation. But the worst case scenario is likely very large and a risk averse emergency manager (see the last two paragraphs) will likely base the decision on that number. 

*For example, the expected benefits would be estimated as E(B) = p1*B1 + p2*B2 + ... + pn*Bn; where p is the probability, B is the benefit of evacuation and slide scenarios go from 1 to n. 

David Weimer on Richard Thaler's Nobel Prize and benefit-cost analysis

David Weimer (Nobel Laureate Richard Thaler, Behavioral Economics, and Benefit-Cost Analysis):

Rational action lies at the heart of neoclassical economics. Sovereign consumers make choices that maximize their utilities. By observing the tradeoffs implicit in actual choices, or eliciting tradeoffs for hypothetical choices, benefit-cost analysts impute willingness to pay for desirable policy impacts and willingness to accept undesirable ones. Yet, it appears that sometimes consumers seem to make mistakes. The field of behavioral economics seeks to provide a more realistic psychological model of consumers and other economic actors that helps us understand apparent deviations from neoclassical rationality. The 2017 Nobel Memorial Prize in Economic Sciences recognizes Richard H. Thaler’s pioneering contributions to behavioral economics.

A handful of Nobel prizes have gone to scholars who have mounted fundamental challenges to the assumption of rational action––Hebert Simon with satisficing, Robert Schiller with irrational exuberance, and, most fundamentally, Daniel Kahneman with cognitive limits and judgmental biases. Whereas Kahneman is a psychologist who exported these ideas into economics, Thaler imported them into economics, extended them, and in the process helped create the new field of behavioral economics, which treats apparent deviations from individual rationality as the subject of systematic study rather than just anomalies that can be ignored. 

Thaler’s earliest work was both neoclassical and directly relevant to BCA. With his thesis advisor, Sherwin Rosen, he did some of the earliest work that attempted to impute a value of statistical life from observed tradeoffs between occupational risks and wages. Although his prominent work on behavioral finance is a bit removed from BCA practice, his work on the endowment effect, time inconsistency, and other “anomalies” have direct relevance to interpreting both revealed and stated preferences. His articles on the endowment effect, co-authored with Kahneman and Jack Knetsch¹, have been particularly influential in the continuing debates within the BCA community about the implications of the often observed large difference between the willingness to pay for a gain and the willingness to accept compensation for a loss of comparable magnitude.

When consumer choices do not appear consistent with rational action, the usual acceptance of revealed preferences as the basis for estimating willingness to pay comes into question. Often consumers themselves recognize that their weighing of alternatives differ between the time they make a choice (based on their decision utility) and the time they bear the consequences (their experience utility). To the extent that we accept the latter as the basis for individual welfare, choices do not reveal the right preferences. In other words, BCA analysts should not only address the internal and external validity of studies of observed tradeoffs in pursuing benefit transfer but also the validity of assuming these tradeoffs appropriately reveal benefits. 

Stated preference methods, such as contingent valuation, face challenges from non-economic responses. The hypothetical nature of willingness-to-pay elicitations opens the door for non-economic responses because the respondents do not actually bear the consequences of their choices. Further, unlike consumers making actual choices in markets and other institutional contexts, respondents usually do not have an opportunity to learn from experience. Growing up chronologically together, contingent valuation and behavioral economics have been intellectually entwined. Behavioral critiques of contingent valuation, often quite heated in the early days, have propelled it toward methods and craft that better accommodate behavioral responses. Some examples: because of large endowment effects, contingent valuations generally elicit willingness to pay even when willingness to accept better fits the policy impact being valued; because of non-commitment, contingent valuations generally follow elicitations with questions about the certainty of response and use this information to adjust bid acceptances; and despite the desire for more data, contingent valuations generally avoid multiple elicitations because initial choices can affect subsequent choices. These and many other developments in contingent valuation came as responses to behavioral critiques (see Knetsch et al 2012). Although not the direct source of these critiques, Thaler’s contributions, especially on the endowment effect, clearly influenced the debate. Indeed, one might reasonably argue that behavioral economics has had its biggest impact on BCA by driving the evolution of contingent valuation. ...

If you are interested in the last paragraph I recommend this paper by the late Greg Poe:

Poe, Gregory L. "Behavioral Anomalies in Contingent Values and Actual Choices." Agricultural and Resource Economics Review 45, no. 2 (2016): 246-269.

Here is the (free) PDF: https://www.cambridge.org/.../behavioral_anomalies_in_contingent_values_and_actual_choices.pdf

What is contingent valuation?

Hey fisheries/econ people, is contingent valuation really on the way out? What's replacing it?

— Michael C. Russell (@ProfRussellCIE) October 20, 2017

I'd be interested how @johnwhitehead81 and @tim_env_econ would answer this question.

— Ngaio Hotte (@nhotte) October 21, 2017

I went on a rant (the kids call it a "tweet storm") and since I don't know how to thread my tweets (and I don't want to lose them when Congress shuts down twitter) I thought I'd post them here (with spell check turned on). Tim was also in on it. This happened after I presented a paper using "discrete choice experiment" (DCE) data in Tim's department (that was fun!) so the thing was on our minds.

Here we go:

• John: Yes, CVM is out. And “discrete choice experiments” are in. And, they are the same thing (under certain conditions)!
• John: They are the same thing when the chioce is a for/against referendum with varying cost and benefit of a movement away from the status quo.
• Tim: CV is a DCE with variation in one attribute (typically) and the price. DCE is more flexible but subject to potentially more biases.
• John: I’m not sure why folks are describing CVM as something other than DCE, other than to try to avoid BP funded criticism.
• Tim: To understand the criticism, follow the $.
• John: Given all the CVM nonsense, you’re kinda stupid to call your study CVM and not DCE (call me stupid)
• Tim: For fun, let’s write a paper called “Scope Effects in DCE” and just use one attribute and price and see if anyone notices.
• John: First, write the CVM paper and send to Land Econ (or Env Res Econ) and get rejected because of Hausmann, Diamond and McFadden 1/n
• Tim: Then global replace “scope” with “attribute” and “CVM” with “DCE” and get R&R at Env Res Econ (or Land Econ) 2/n
• John: I honestly believe that’s how dumb it’s become 3/n
• John: I’m working on an R&R where a referee says you can’t (i.e., it’s not allowed) to ask a follow up CVM question anymore 4/n
• John: We explicitly test for changes/biases with the second question 5/n
• John: Research is about trying new things and discovery, not following the rules of the authority figures 6/n
• John: The NRDA context is very different than RESEARCH, the consultants and those who read them uncritically don’t care to differentiate 7/7

Here is the brief off-the-top-of-my-head history of thought:

• Mitchell and Carson (Using Surveys to Value Public Goods, RFF Press, 1989) define CVM as a hypothetical yes/no response to a randomly assigned cost variable. Variations in attributes of the policy/program (aka "scope") is one internal validity test.
• Carson and Louviere (Env and Res Econ, 2011) define referendum CVM with a scope test as a special case of DCE (as in the John/Tim tweets above). Payment card and open ended elicitation questions are CVM only. 
• Carson and Czajkowski (chapter 9 in Hess and Daly 2014) make the point in Carson and Louviere a bit more clear
• Zawojska and Czajkowski (J Env Econ Policy 2017) take it one step too far and say that referendum CVM with a scope test is DCE and not CVM.