Environmental Economics

We must have faces made for blogging

Browsing through the streaming videos available on Amazon Prime last night, I came across a documentary series called "wetheeconomy."  I'm probably slow to the party but the series features a series of short (5-10 minute) documentaries introducing basic economic topics like supply and demand, measuring GDP, what is money,...  Of particular interest to this blog, one of the documentaries is titled "A Bee's Invoice: The Hidden Value in Nature," which is designed to answer the question: Are natural resources vital to the economy?  

The environmental economist in me is excited to see environmental valuation included in Chapter 1 of a series introducing a wide array of economic topics.  Maybe, this whole environmental economics thing is gaining some traction. 

The jealous, rapidly aging human in me is jealous that the film features appearances by two economists, both of whom have interacted on our blog, and neither of whom is named Whitehead or Haab. Anyway, nice work Gernot Wagner and Jodi Beggs* in promoting the cause.  I presume they were chosen because the producers thought  John and I were unavailable--either that or they wanted younger faces to attract a different demographic than the epitome of boring middle-class soccer/baseball dads.

*Jodi once called us cool, and Gernot stoops so low as to occasionally contribute to Env-Econ.  I'm going to go as far as say we had a part in launching the careers of these two film stars.  Hopefully they remember us when the riches start to flow.

Is it time to rethink recycling?

Once a profitable business for cities and private employers alike, recycling in recent years has become a money-sucking enterprise. The District, Baltimore and many counties in between are contributing millions annually to prop up one of the nation’s busiest facilities here in Elkridge, Md. — but it is still losing money. In fact, almost every facility like it in the country is running in the red. And Waste Management and other recyclers say that more than 2,000 municipalities are paying to dispose of their recyclables instead of the other way around.

via www.washingtonpost.com

Early on (late 1980's, early 1990's) the problem with recycling was the time cost to households.  The burden of separating paper, plastic, cans and bottles fell to the household and most households simply couldn't be bothered sorting and carrying 4 or 5 different bins to the curb (or in some cases, taking the bins to a recycling facility).  With advances in sorting technologies and the realization that recycling might be profitable, municipalities made it easier on households to recycle:  Just throw everything recyclable into the single big blue bin and we will do the rest.  The problem now is that households don;t always know what is or isn't recyclable and sorting costs have increased, while the demand for recyclable inputs has decreased.  The result:  recycling is far less profitable (and perhaps now even unprofitable).

If this is more than a cyclical downturn in the recycling sector, it might be time to think about how to increase the cost of recycling to households. 

Is paying fair value the same as paying the full value?

Snark warning.

CONGRESS long ago established a basic principle governing the extraction of coal from public lands by private companies: American taxpayers should be paid fair value for it. They own the coal, after all.

...let them be received, Not without fair reward (Timon of Athens I.ii.189)

Lawmakers set a royalty payment of 12.5 percent of the sale price of the coal in 1976.

...seems fair to me.  You?

Haab on HABs (yes, they are pronounced the same)

Last week I mentioned I mentioned that I would be presenting (yesterday) to The Ohio State University Environmental Professionals Network Breakfast Club on the topic of "Ohio's Water Resources and Citizens at Risk - Ag-related Practices and Policies to Prevent Harmful Algal Blooms, Post-Toledo."  I (along with each of two other panel members) was given 5 minutes to give opening remarks before moderator driven Q&A. Rather than my normal rambling unstructured style of presentation, I decided to give a speech--which means actually writing a speech.  So here is the speech I gave (speech I read is probably a better way of putting it) to a audience of 230 representatives of ag and non ag sectors.  I'm told there will be video at some point.  I will let you know if video emerges--provided it doesn't make me look like a complete bungling idiot.

We’ve heard a lot today about solutions for high phosphorous loads in Lake Erie and the resulting harmful algal blooms.  As an environmental economist, I’m told my role in this discussion is to provide a balanced look at the potential costs of reducing phosphorous loadings into Lake Erie, the benefits of those reductions to society, and the burden of the costs of phosphorous reductions.

Some of you may be wondering, what is an environmental economist? An environmental economist is an economist who applies the science of economics to environmental issues.  I am not an environmentalist.  Don’t get me wrong, I care about the environment.  But I am realistic about the role that incentives, trade-offs, and profits play in finding solutions to environmental issues that lead to sustainable human well-being.   I recognize the reality that the economy and the natural environment are inextricably linked and attempting to separate the study of each creates a situation in which neither is sustainable.  Economic, social and environmental sustainability requires the realization that no single solution exists.

So what then, from my perspective as an environmental economist, is the fundamental issue surrounding harmful algal blooms?  Excess nutrient loads into Lake Erie are the result of misalignment of incentives.  The profit incentives of the on-farm sector fail to fully capture the costs of nutrient application decisions to the non-agricultural sectors.  The cost-savings incentives of industrial and municipal sources of run-off fail to fully capture the downstream costs of urban run-off.  The consume-now incentive of today’s consumers fails to fully capture the cost of today’s decisions on future generations.

None of these statements are judgments on the intent of individual farmers, or municipal decision makers or society today in making decisions that impose excess costs on others.  In fact, in my experience, most people want to do the right thing.  Farmers care about environmental issues.  Municipalities care about water quality.  Today’s generation cares about the future.  Yet when consumption and production decisions are made, reality differs from intent. 

For example, when I drove here this morning, I gave no thought to the cost my car exhaust imposes on others.  I know that my exhaust contributes to increased atmospheric pollution.  I know that by driving I increase the likelihood of health issues for those with breathing issues.  I know that my driving contributes to long-term climate change.  Yet, other than being a genuinely nice person, I have no incentive to incorporate those external costs into my driving decisions.  The price of driving does not fully reflect the external costs.

Prices are the economy’s rationing mechanism.  It is prices that drive economic decisions.  Prices provide signals.  It’s prices that serve as a market’s way of reflecting the value of something.  And if prices fail to fully reflect the current and future costs and benefits of production and consumption, markets will misallocate society’s scarce resources. 

In political and social discussions we hear a lot of talk about the need for less government regulation, the need for free markets.  In general I agree with free market advocates.  But in order for a market to do its job of allocating society’s scarce resources today and into the future, that market must capture ALL costs and benefits.  Otherwise a market is not truly a free market.

In the case of the environment, we can think of the problem as one of the failure of markets to properly price the services the environment supplies.  In effect, the environment is treated as a free input in production and consumption.  It is only natural that if something is free we will use more than we would if it were priced at its true value.  If gas were free, I would use a lot more of it. 

Because the cost of environmental degradation is not captured in markets, we use more of it than we would otherwise.  It might be tempting then to conclude that markets are the problem.  I agree to a certain extent.  Markets are failing to properly account for costs and benefits.  But markets are also the solution. 

To solve the harmful algal bloom problem, we need to find ways to better capture the external costs of using nitrogen and phosphorous in the markets in which they are used—and then allow the resulting incentives to work to solve the problem.  To do so, we can focus on the quantity of phosphorous, or we can focus on the price.  Quantity restrictions are effective if monitored effectively, but effective monitoring is difficult.  Effective quantity restrictions will reflect in market prices.  However, ill-designed quantity restrictions can result in regulatory costs that are higher than needed. 

Regulating prices, on the other hand, allow the users to make decisions that reduce their own costs.  By allowing the freedom to choose how to adapt to higher prices, price-based policies can achieve the same outcomes as quantity restrictions at lower cost.  Prices also provide incentives for innovation.  As prices rise to reflect the full costs, users will have the incentive to find lower cost alternatives.  New investments in research and development will lead to new lower-cost technologies.  Market-based price regulations allow the market to allocate society’s scarce resources efficiently.

However, many price-based solutions have a negative reputation.  As I mention each of these, I’m sure each will garner some sort of negative reaction:  taxes, subsidies, cap and trade, user fees.  But as an environmental economist, I recognize that solutions that build environmental costs into market decisions allow individuals to make the decisions that are in their own best interest. The result is what’s best for society.

Unfortunately, we are talking about a problem of magnitude that hoping people will do the right thing is not an option.  While voluntary programs are attractive politically, achieving a 40% reduction in Lake Erie phosphorous loadings, if that is indeed the goal, is going to require more than reliance on goodwill.  Real, sustainable, solutions are going to require a recognition that prices need to capture the full social costs of nitrogen and phosphorous use.  Anything short of that will lead right back here in the future, hoping the problem solves itself.

Tax Miles? I still think I have a better idea...

The California Legislature is looking at a voluntary program that would tax motorists for every mile they drive.

KCAL9’s Bobby Kaple reports that Sen. Mark DeSaulnier, D-Concord, introduced a bill to test out the vehicle miles traveled (VMT) tax because the state’s gas tax was no longer bringing in the revenue it used to due to people driving more fuel efficient vehicles.

via losangeles.cbslocal.com

It's been almost exactly 7 years now (May 8, 2007) and people still aren't listening to me. 

Taxing miles creates perverse incentives for fuel efficiency.  A $0.015/mile tax (the size of the tax mentioned in the article) is the equivalent of a $0.015 * X tax per gallon where X is mpg.  In words, a mileage tax increases the tax per gallon the more fuel efficient the car.  Now granted, with higher mpg you use fewer gallons to drive an equivalent number of miles, and in the end, everyone driving 100 miles will pay the same tax.  And from a revenue perspective, that might be OK.  But there might be a way to kill fewer birds with one stone.

As I have written a number of times, a more straightforward proposal is to simply raise the gas tax.  Reaising the gas tax accomplishes a number of things 1) It raises revenue, 2) It discourages miles driven, and 3) It increases the incentive for higher fuel efficiency. 

Because my previous posts on this have been written with an ironic twist (I propose a mileage tax that is inversely proportional to fuel efficiency and then show that such a tax is the equivalent of a $1/gallon gas tax), here's the direct, non-ironic version:  A $1/gallon gas tax...

...places a higher burden on those driving less fuel efficient vehicles--that should satisfy those blaming the SUV drivers for all of the problems*.

...places a higher burden on those driving more.  By increasing the marginal cost per mile driven, total miles driven should decrease.

...assuming fuel efficiency and income are negatively correlated--that is, the rich tend to drive larger, more expensive, less fuel efficient cars--[higher gas taxes] place a higher burden on higher incomes.

...provides an incentive for drivers to switch to more fuel efficient vehicles.

It's really simple.  Why worry about complicated milage programs?  The gas tax infrastructure is in place.  Raise the gas tax and meet multiple public policy and economic goals simultaneously.

Well it's about dang time...

In the mail yesterday--get yours today (it will help our publisher recoup our whopping advance):

What in the world will I ever use this for? Integration

Another in our WWWTF (What in the World Will I ever use This For?) series:

Math Concept: Integration

Having spent multiple hours over the past week helping official oldest daughter of Env-Econ (OODEE) work through calculus problem after calculus problem in preparation for the pending AP exam, I thought it might be helpful to see how she might eventually move past solving math problems to applying the concepts. Right now I'm going to focus on integration, and hopefully later I will come back and talk about differentiation (seems backwards, but integration is fresh in my mind right now).  In what follows, I assume a working knowledge of basic integral calculus--otherwise why would you care what you use this for?

As a reminder, a definite integral is defined as:

where f'(x) is the derivative of the function f(x) with respect to the variable x.

Graphically, the integral represents the area under the function y=f'(x) over the closed domain [a,b]. 

An example might help.  Consider the simple linear function f'(x)=6-2X.  What is the definite integral of f'(x) over the closed domain [1,3]?

What does this look like graphically?

 

 

Notice that for this case of a linear function (a line), the area under the function makes a triangle.  A simple way to check your integration is to just find the area of the triangle on the graph. 

The area of the triangle is  .5(Base x Height) = .5(2 x 4) = 4.  This is the same result we got for the intergral.  For more complicated functions (non-linear), the area under the function isn't a nice neat geometric shape.

I know what you're thinking: Nice pictures and it's great fun to think about math, but WWWTF? (What in the World Will I ever use This For?).  Keep reading for an application to environmental economics.

Graphic of the Day: Is it getting close to time to redefine the term 'Public' University?

From the Chronicle of Higher Education:

Incorporating ecosystem services in marine planning

I think if we tried harder, we could've squeezed a few more co-authors onto this one:

Incorporating ecosystem services in marine planning: The role of valuation

By: Tobias Börger, Nicola J. Beaumont, Linwood Pendleton, Kevin J. Boyle, Philip Cooper, Stephen Fletcher, Tim Haab, Michael Hanemann, Tara L. Hooper, S. Salman Hussain, Rosimeiry Portela, Mavra Stithou, Joanna Stockill, Tim Taylor, Melanie C. Austen

In: Marine Policy, Volume 46, May 2014, Pages 161-170.

Abstract: This paper scrutinises the use of ecosystem service valuation for marine planning. Lessons are drawn from the development and use of environmental valuation and cost-benefit analysis for policy-making in the US and the UK. Current approaches to marine planning in both countries are presented and the role that ecosystem service valuation could play in this context is outlined. This includes highlighting the steps in the marine planning process where valuation can inform marine planning and policy-making as well as a discussion of methodological challenges to ecosystem service valuation techniques in the context of marine planning. Recommendations to overcome existing barriers are offered based on the synergies and the thinking in the two countries regarding the application of ecosystem service valuation to marine planning.

EPA greenhouse gas emission limits on new power plants may not be cost minimizing

Shame on you! This appears to be a situation where the marginal abatement costs are not equalized:

While details of the E.P.A.’s proposal remain confidential, experts predict that it will include separate standards for carbon dioxide emissions from plants fired by natural gas and by coal. Plants using comparatively clean gas would be permitted to emit perhaps 1,000 pounds of carbon dioxide per megawatt-hour, a ceiling within easy reach using modern technologies.

Coal-fired plants, meanwhile, may be allowed to emit as many as 1,400 pounds per megawatt-hour. But coal is so heavily laden with carbon that meeting even that higher limit would require operators to scrub carbon dioxide from their emissions before they reach the smokestack, and then pump it into permanent storage underground.

via www.nytimes.com

One of the more useful things about the field environmental economics is that it can help reduce the costs of achieving any environmental quality target. When there are multiple sources of pollution, costs are minimized when the last unit of abatement costs the same for each source. In other words, when the marginal abatement costs are equalized total costs are minimized. To see this imagine if the last unit of abatement for a new coal plant is higher, say $80, than for a new natural gas plant, which is $50. Costs would be reduced by $30 if the natural gas plant was required to reduce one more unit and the coal plant reduced one less unit. Environmental quality does not suffer and money is saved. 

The article goes on to say that 1400 pounds per megawatt hour might not be technically feasible. This suggests that the marginal abatement cost for natural gas is lower than the marginal abatement cost for coal at these standards. Therefore, costs of achieving the policy goal would be lowered if the standard for natural gas plants is tightened (i.e., fewer pounds of CO2 per megawatt hour) and the standard for coal is loosened. Regulating by prices (e.g., carbon tax) or quantities (e.g., cap-and-trade) are two ways to achieve equalized marginal abatement costs without knowing what the marginal abatement cost curves look like.