Environmental Economics

Carrots and sticks and taxes and exemptions and non-payments for ecosystem services

The W[orld] B[usiness] C[ouncil for] S[sustainable] D[evelopment] believes that green taxes can deliver environmental improvements, "in some circumstances". But the companies also note that tax exemptions can function like payments for ecosystem services to reward positive conservation efforts. "The difference is that the PES is a direct payment for a service, whereas the exemption is effectively a non-payment (of monies that would otherwise be due as tax)".

via www.euractiv.com

The simple economics are simple: a marginal tax on an undesirable action is the equivalent of a marginal subsisdy on (payment for) the anti-undesirable action.  But, as usual, my guess is that the real world is more complicated than simple economics world and nonpayments (tax exemptions) for not screwing up the environment are not the equivalent of a direct payment for ecosystem services. 

Ostrom's take on the Tragedy of the Commons

Here's a video of Nobel Laureate-to-be Elinor Ostrom explaining the Tragedy of the Commons and her take on institutions and social rules that lessen the Tragedy.

The influence of today's Nobel Prize winner on me

As John pointed out, today's announcement of the Prize in Economics named after Alfred Nobel, but not really a Nobel Prize (or whatever it's called) being awarded to Elinor Ostrom could be interpreted as an award for a pseudo-environmental economist.  As CNN.com puts it:

Ostrom, a professor of political science at Indiana University, was praised "for her analysis of economic governance, especially the commons."

Even though she is in a political science department, Ostrom's work has had significant influence on the field of environmental economics, particularly the recognition that common pool resources don't always collapse under the 'tragedy of the commons' as is predicted by traditional models.  To whit, consider the following quote from the introduction to a highly influential paper:

Economists have tended to view the presence of externalities and other market failures as leading to a private equilibrium that would not be Pareto optimal. In the exploitation of common-pool resources, especially biological resources, this would lead to the much-discussed `tragedy of the commons'. A challenge to this traditional view has emerged from study of the theory and practice of the exploitation of common-pool resources. A considerable body of research shows that, for many common pool resources, a private equilibrium embedded in an endogenous institutional structure has resulted in sustainable harvests and biomass. Evidence for these findings appears in numerous places, including Feeney et al., Ostrom (1990), McCay and Acheson, and Sethi and Somanathan.

Blatant self-promotion alert.  The quote is from: My article with Ted McConnell, "Social Norms and Illicit Behavior: An Evolutionary Model of Compliance.”* The paper concludes:

In general, collective action can result in amelioration of externalities when a social norm influences individual decision-making. Policies aimed at increasing the level of compliance can result in dynamic as well as static adjustment to the level of compliance if individuals react to social norms. Traditional models of management of the commons with regard to pollution treat individual decisions to pollute as independent of social influences. The proposed framework suggests that management decisions that incorporate social interaction into the decision framework can lead to lower cost policy solutions that evolve over time rather than immediately reach the desired steady state equilibrium.

And yes, I use big words when I write academic articles.  That tends to hide the stupidity of the underlying ideas.   An no, the paper isn't really highly infuential.

*Journal of Environmental Management (2002) 66:67-76. 

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.

You can't eat GDP, depression edition

GDP godfather Simon Kuznets was the first to warn about its limitations: "The welfare of a nation can...scarcely be inferred from a measurement of national income as defined above." He wrote that during the last depression. What's really depressing is that we still haven't found something better, and not for a lack of want.

Today's Financial Times analysis leads with one of the worst reasons why GDP shouldn't be used as a measure of how well we are doing as a nation:

Across the world, standard measures of economic performance are suddenly producing terrible results. Maybe it is time to change them.

Fortunately, it gets a lot better from there. The article surveys one of Nicolas Sarkozy's lesser known initiatives:

a 24-member commission of prominent economists led by Joseph Stiglitz and Amartya Sen, both Nobel prize winners, is due to report in April on ways of improving our economic bookkeeping. The aim is to render economic data more comprehensive, more intelligible to the public and more relevant for policymakers by taking into account such factors as environmental degradation and quality of life.

I wouldn't hold my breath for the April report to have all the answers, but who knows, perhaps it takes another depression recession to come up with a better GDP measure.

Are they going to do this for every citation? If so, then I'll be overwhelmed with email ;->

From the inbox:

Dear Dr. Whitehead,

It is our pleasure to inform you that your publication has been cited in a journal published by Elsevier.

Through this unique service we hope we can offer you valuable information, and make you aware of publications in your research area.

Best regards,

Author Support

Your article:
Combining willingness to pay and behavior data with limited information
Whitehead, J.C.
Resource and Energy Economics
volume 27, issue 2, year 2005, pp. 143 - 155

has been cited in:
Public support for reducing US reliance on fossil fuels: Investigating household willingness-to-pay for energy research and development
Li, H., Jenkins-Smith, H.C., Silva, C.L., Berrens, R.P., Herron, K.G.
Ecological Economics
volume 68, issue 3, year 2009, pp. 731 - 742

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.

Would you rather people think the environment is free?

Hey John, Duck, I'm about to go on an ecological econ rant.

Periodic guest blogger at env-econ and full-time blogger at aguanomics, David Zetland, does a nice job of summarizing the case for placing dollar values on environmental assets.  I have a couple of things to add and a small quibble.

We are used to paying for oil, coal, fish and other things "out there" in Nature -- either because someone owns the rights to those resources or its costs money to get them from "the commons."

Contrast our attitudes towards resources with our attitudes to the environment, which we are accustomed to "consume" for free.

As the environment is threatened and becomes more scarce, perhaps we have to think of it as a resource -- and one that is worth paying for.

Exactly.  Prices ration goods.  As long as the price determining mechanism (markets in most cases) fully capture all of the costs and benefits associated with production and consumption, the resulting price will result in an efficient--and in most cases fair (yep, I said it--markets produce fair outcomes in many cases, depending of course on how you define fair)--allocation of resources. 

Principles of micro teachers can thank me later

In our never ending attempt here at Env-Econ to make the jobs of lazy principles of micro teachers easier, here's a story you can use to illustrate: 1) Elasticities, 2) Substitutes, 3) Incidence of taxations, 4) Direct versus indirect externalities and life cycle impacts, 5) Paper or Plastic?  Enjoy.

Mayor Bloomberg wants to nickel and dime you at the grocery store - taxing you an extra 5 cents for every plastic bag you take home.

The controversial charge could raise at least $16 million for the cash-strapped city while keeping tons of plastic out of landfills, city officials said Thursday - but some outraged shoppers aren't buying it.

Nature does not do bailouts

A call for change -- no, not by Barack Obama, by Al Gore.

Gore co-authored a call for Sustainable Capitalism in today's Wall Street Journal:

At this moment, we are faced with the convergence of three interrelated crises: economic recession, energy insecurity and the overarching climate crisis. Solving any one of these challenges requires addressing all three.

The op-ed concludes that:

Today, the sustainability challenges the planet faces are extraordinary and completely unprecedented. Business and the capital markets are best positioned to address these issues.

...as long as the incentives are correct:

We...need to internalize externalities -- starting with a price on carbon. The longer we delay the internalization of this obviously material cost, the greater risk the economy faces from investing in high carbon content, "sub-prime" assets. Such investments ignore the reality of the climate crisis and its consequences for business.