Environmental Economics

Throwback Thursday: Water pricing (sigh)

With this post I'm introducing a new gimic ... a "Throwback: [insert day of the week]" post where we recycle content from the old days. The motivation is that [1] environmental problems haven't gone away, [2] we provide the same solutions over and over again, [3] we've already said it and no one listened so why shouldn't we say it again exactly like we did 10 years ago?

The other day, Tim scooped me on the water allocation crisis in the Western U.S. I was working on a post where I wanted to say something about an economic approach to water allocation: pricing. I wonder if the U.S. has made any progress on this issue since 2014. 

Eduardo Porter:

Water is far too cheap across most American cities and towns. But what’s worse is the way the United States quenches the thirst of farmers, who account for 80 percent of the nation’s water consumption and for whom water costs virtually nothing.

Adding to the challenges are the obstacles placed in the way of water trading. “Markets are essential to ensuring that water, when it’s scarce, can go to the most valuable uses,” said Barton H. Thompson, an expert on environmental resources at Stanford Law School. Without them, “the allocation of water is certainly arbitrary.” ...

The price of water going into Americans’ homes often does not even cover the cost of delivering it, let alone the depreciation of utilities’ infrastructure or their R&D. It certainly doesn’t account for other costs imposed by water use — on, say, fisheries or the environment — caused by taking water out of rivers or lakes.

Consumers have little incentive to conserve. Despite California’s distress, about half of the homes in the capital, Sacramento, still don’t have water meters, paying a flat fee no matter how much water they consume.

Some utilities do worse: charging decreasing rates the more water is consumed. Utilities, of course, have little incentive to discourage consumption: The more they did that the more their revenues would decline. ...

While this may seem a mess, it is nothing compared to the incentives facing American farms. ...

Their water rights are primarily subject to state law. In the West, they have been allocated by a method that closely resembles “first come first served.” The first farm that drew water had a right to whatever it needed pretty much forever. Junior users — who arrived later — had to stand in line.

Farmers pay if the government brings the water to the farm, say via an aqueduct from the Colorado River. But the fees are minimal. Farmers in California’s Imperial Irrigation District pay $20 per acre-foot, less than a tenth of what it can cost in San Diego. And the government has often subsidized farmers via things like interest-free loans to cover upfront investments. ...

This is hardly the only obstacle to conservation. A farm that doesn’t use its full allotment of water risks forfeiting it for not putting it to “beneficial use.” And any water saved automatically flows to other farmers with junior rights. ...

Spurred by the sense of crisis, incipient water markets show great promise. Santa Fe, N.M., has required builders to have water rights with their building applications since 2005 — giving farmers an opportunity to sell their rights to developers rather than using them for low-value crops.

In 2003, the San Diego Water Authority cut a deal with the Imperial Irrigation District — a large area of parched farmland near California’s Arizona border — to provide the city with 200,000 acre-feet of water at a price starting at $258 per acre-foot.

Seven states in the Colorado River system are starting a pilot program to explore a market between farmers and urban water authorities to help maintain water volumes in Lake Powell and Lake Mead.

This isn’t quite charging farmers for the water they use. But that may be a bridge too far, considering the tight margins of many farms and the political clout of many farmers.

Still, markets such as those timidly emerging in the West could not only free water for the users who value it more, but they could also provide farmers with the revenue needed to invest in water management technology.

via www.nytimes.com

I like the graphic:

Water, water, nowhere?

Growing up on the east coast, and now living in the mid-west, water quantity has never been an issue for me or my work (water quality is an issue, but quantity, less so). APPARENTLY* water quantity is an issue in the western U.S. So how do you solve the common resource problem when the water sources flow/pass through at least seven states? By ignoring the elephant (California) in the room:

The seven states that depend on the Colorado River have missed a Jan. 31 federal deadline for reaching a regionwide consensus on how to sharply reduce water use, raising the likelihood of more friction as the West grapples with how to take less supplies from the shrinking river.

In a bid to sway the process after contentious negotiations reached an impasse, six of the seven states gave the federal government a last-minute proposal outlining possible water cuts to help prevent reservoirs from falling to dangerously low levels, presenting a unified front while leaving out California, which uses the single largest share of the river.

The proposed pact between the other six states (Arizona, Colorado, Nevada, New Mexico, Utah, and Wyoming) lays out a plan to preserve water in Lake Mead (Nevada) and Lake Powell (Arizona):

The Consensus-Based Modeling Alternative includes, but is not limited to, the following modeling criteria for [Bureau of Reclamation] to consider and analyze:

• Adjustments to the existing ‘07 Guidelines, including reduced releases from Lake Powell and Lake Mead to ensure the deliverability of water downstream and power production.
• Adjustments to Lower Basin contributions required under Drought Contingency Plan.
• Accounting for more than 1.5 million acre-feet of losses within the Lower Basin that are necessary to protect infrastructure.
• Additional combined reductions of 250,000 acre-feet to Arizona, California and Nevada at Lake Mead elevation 1,030 feet and below.
• Additional combined reductions of 200,000 acre-feet to Arizona, California and Nevada at Lake Mead elevation 1,020 feet and below, as well as additional reductions  necessary  to protect Lake Mead elevation 1,000 feet.
• Actions outlined within the Upper Basin State’s Drought Response Operations Agreement.
• Additional voluntary conservation measures that take into account hydrologic shortage in the Upper Division States.

It's going to be interesting to water whether the group of six can hold together their coalition against the influence of California:

“While our goal remains achieving a seven-state agreement, developing and submitting this consensus based alternative is a positive step forward in a multi-phased environmental review process critical to protecting the Colorado River system.” said John Entsminger, Southern Nevada Water Authority General Manager.

*Facetious

Is Climate Change Fair?

Just got around to reading the Hsiang et al piece in Science on the inequitable economics impacts of climate change.  Here's the abstract:

Estimates of climate change damage are central to the design of climate policies. Here, we develop a flexible architecture for computing damages that integrates climate science, econometric analyses, and process models. We use this approach to construct spatially explicit, probabilistic, and empirically derived estimates of economic damage in the United States from climate change. The combined value of market and nonmarket damage across analyzed sectors—agriculture, crime, coastal storms, energy, human mortality, and labor—increases quadratically in global mean temperature, costing roughly 1.2% of gross domestic product per +1°C on average. Importantly, risk is distributed unequally across locations, generating a large transfer of value northward and westward that increases economic inequality. By the late 21st century, the poorest third of counties are projected to experience damages between 2 and 20% of county income (90% chance) under business-as-usual emissions (Representative Concentration Pathway 8.5).

Here's a pretty picture (with a really long caption) that sums things up:

Caption: County-level median values for average 2080 to 2099 RCP8.5 impacts. Impacts are changes relative to counterfactual “no additional climate change” trajectories. Color indicates magnitude of impact in median projection; outline color indicates level of agreement across projections (thin white outline, inner 66% of projections disagree in sign; no outline, ≥83% of projections agree in sign; black outline, ≥95% agree in sign; thick white outline, state borders; maps without outlines shown in fig. S2). Negative damages indicate economic gains. (A) Percent change in yields, area-weighted average for maize, wheat, soybeans, and cotton. (B) Change in all-cause mortality rates, across all age groups. (C) Change in electricity demand. (D) Change in labor supply of full-time-equivalent workers for low-risk jobs where workers are minimally exposed to outdoor temperature. (E) Same as (D), except for high-risk jobs where workers are heavily exposed to outdoor temperatures. (F) Change in damages from coastal storms. (G) Change in property-crime rates. (H) Change in violent-crime rates. (I) Median total direct economic damage across all sectors [(A) to (H)].

Env-Econ Summary: We're all screwed, just some of us are screwed more than others.   

Raise your hand if you want to work with me...

The Department of Agricultural, Environmental, and Development Economics (my department) in the College of Food, Agricultural and Environmental Sciences (my college) at The Ohio State University (my university) is hiring for four new faculty positions--and I am not ashamed of taking advantage of this blog to promote the positions.  If you have (or are close to earning) a PhD with interests in agricultural economics, environmental economics, regional economics, development economics or some combination of those fields along with other interests, then we can probably align your interests with one of our four positions. 

Come join me in a top rated department (according to the National Research Council at least) in a top 20 public university (according to US News at least) in the Best Opportunity City in the U.S. (according to Forbes at least).

Our open positions are:

• Assistant or Associate Professor in Global Economic Modeling: a tenure-track assistant/associate professor position in the area of global economic modeling and integrated assessment. Economic modeling approaches of particular interest include dynamic optimization and computable general equilibrium modeling, as well as familiarity with approaches for handling decision making under uncertainty. Individuals with experience integrating economic models with physical/biological models are encouraged to apply.
• Assistant or Associate Professor in Sustainable Food and Farm Policy:  tenure-track assistant/associate professor position to conduct innovative research on policies related to food, farming and sustainability and to provide intellectual leadership to the Department and to the University’s Discovery Theme Initiatives in the area of sustainable food and farm policy. 
• Assistant Professor in Agribusiness: a tenure-track assistant professor with teaching and research responsibilities in agribusiness.  Applicants with interests in agricultural markets and marketing, finance, supply and demand analysis, industrial organization, international trade or agricultural and food policy, that complement a primary interest in agribusiness are encouraged to apply.
• Assistant or Associate Professor in Sustainable Development and Economy: an assistant/associate professor, tenure-track position to develop an internationally recognized program of research and teaching focused on sustainable development and the trade-offs among economic development, social equity and environmental protection in international or regional contexts.  Areas of interest include, but are not limited to: economic growth; equity; resource use; technological change; socio-ecological systems; sustainable and resilient communities. 

Click on the links for full descriptions and application info.  

Political Calculations: Balls Aplenty

Tim's "ballsy math" is "immortalized":

The last time we took on the subject of balls, it was to consider the physics of New England Patriots' quarterback Tom Brady's deflated balls. Today, we're going back to the ball pit because Los Angeles' city government is spending $34.5 million to dump up to 96 million plastic balls into a water reservoir, where the apple-sized floating black spheres are intended to reduce water loss due to evaporation and to reduce the need to treat the water with chemicals to keep algae and bacteria growth at bay.

While it's an open question as to whether the black balls will be successful at their second mission, as other scientists have hypothesized that they might actually promote bacterial growth instead of hindering it, the balls should be somewhat successful in minimizing the loss of water due to evaporation by preventing direct sunlight from reaching and heating the reservoir's water surface. The question is how much might the balls succeed in reducing that evaporation.

Environmental Economics' Tim Haab worked up the basic math, which we're both immortalizing and extending today in a tool designed to answer not just that question, but also how many balls it would take if the city leaders of Los Angeles chose to substitute balls of other sizes for the apple-sized ones they are using. ...

via politicalcalculations.blogspot.com

Water pricing, "free" markets and climate change

Matt Kahn:

Adam Nagourney appears to be an adherent of the ideas of the Club of Rome.  In his NY Times front page piece today, he worries that California cities that encourage growth are exacerbating the "water crisis" by increasing demand during a drought that is likely to persist. What is the fallacy in his logic?

He implicitly assumes that policy reform will not take place in California.  Farmers consume roughly 80% of the state's water.  According to this article, farmers now pay $.0033 per gallon.   Yes, that's .3 cents per gallon.  Residential households such as myself pay .5 cents per gallon.  A gallon of water is a gallon of water. Suppose that the Water Authorities raised the price of water for farmers so that it equals the price that urbanites pay.  Or, allow the farmers to sell their water allocation to urbanites.  This 66% increase would incentivize the sector that consumes 80% of the water to be more efficient and to substitute away from water intensive agricultural output that yields a low market price.

If the state's farming sector could figure out a way to reduce its water consumption by 25%, how many urbanites could move to California?  For a 66% price increase to induce a 25% consumption decline implies a price elasticity = -.38 which strikes me as quite plausible in the medium term and perhaps too inelastic.

34.1 million acre-feet is used by California agriculture each year.  A 25% reduction in CA agriculture water consumption = roughly 8 million acre feet =  8 million *326,000  =  2.6 trillion gallons of water not used.

Suppose that 10 million new people moved to California's cities (so this is a 25% increase in the state's population).  The 2.6 trillion/10 million =   260000 gallons per new person per year = 712 gallons per new person per day.

See how we adapt by introducing market incentives to allocate scarce resources?  The challenge of adaptation is mainly political (not economics). Allow free markets to operate and the NY Times will have to find new doom and gloom headlines.

via greeneconomics.blogspot.com

I only have one quibble. The water market will never be a "free market" in the true sense of the word. A plea to the water authority (i.e., government) to price water more rationally is a plea for policy reform (the term Matt uses earlier) towards a better use of incentives. Free markets only exist when there is no government regulation of buyers and sellers, no taxes, no subsidies and no nothing. An efficient free market for water is a difficult thing to pull off since it is a common-pool resource. It is easier for the pizza market to operate efficiently since pizza is a private good. 

I don't think adaption to climate change can be accomplished efficiently by government taking a hands off approach. You can't privatize much of the natural environment. 

Matt also said this the other day:

Terry Anderson's book Free Market Environmentalism played a key role in my early thinking about Coase and environmental economics.   For years, Terry was in charge of PERC and I greatly benefited from my first visit to PERC in Bozeman MT a few years ago.  Today, some very serious economists will be meeting at Stanford for a 1.5 day conference on the economics of climate change adaptation.  The broad themes of this PERC conference are listed here.

Free Market Environmentalism played a key role in my early thinking about Coase and environmental economics too. My conclusion was that free market solutions wouldn't work. Call me an unserious (inserious?) economist. 

"The key is to keep these balls clean..."

Update on L.A.'s balls:

The benefits are clear, Professor Pradhanang insists, as Los Angeles strives to retain as much water as possible amid the drought. Like other urban cities, such as New York, they also face a constant battle to keep wildlife off the clean water reservoirs, as their feces is the real source of bacteria.

And, though the truck-load of balls cost $34.5 million, it is easily a much cheaper alternative to covering the site in tarps.

But any color would have been better than black.

'As we know, black absorbs heat. So that won't help the thermal blanket,' remarks Professor Pradhanang. 'The key is to keep these balls clean - but that will be a monumental task.' 

via www.dailymail.co.uk

Just braggin' about my ballsy math

On Thursday I used 'blog-quality research to come up with a 'blog-park' figure for how much water might be saved by Los Angeles plan to use millions of ping pong balls to cover the local reservoir to prevent evaporation.  Using rough numbers from swimming pool evaporation, I came up with an estimate of 311 million gallons saved per year.  Well, today I saw this from NBC News:

California has released millions of plastic water-saving 'shade balls' into their water reservoirs in an attempt to prevent evaporation as the state battles record-breaking drought. The effort is expected to save some 300 million gallons of water each year.

Assuming their number is accurate, I came up with a number that was off by less than 4% using nothing more than Google and 15 minutes of my time.  

Just sayin'.

That takes a lot of balls*

Facing a long-term water crisis, officials concerned with preserving a reservoir in Los Angeles hatched a plan: They would combat four years of drought with 96 million plastic balls.

On Monday, Mayor Eric Garcetti of Los Angeles arrived at the 175-acre Los Angeles Reservoir to release the final installment of the project: 20,000 small black orbs that would float atop the water.

The scene resembled something found at a playground — “You turned the reservoir into the world’s largest ball pit? #bestmayorever,” wrote one supporter on the mayor’s Facebook page — but the initiative has serious implications for the city’s water supply.

Mr. Garcetti said that the dark balls would help block sunlight and UV rays that promote algae growth, which would help keep the city’s drinking water safe. Officials also said the balls would help slow the rate of evaporation, which drains the water supply of about 300 million gallons a year. The balls cost $0.36 each and are part of a $34.5 million initiative to protect the water supply.

In a video posted on Monday to Facebook, an official is heard saying, “2, 1 … Shade balls away!” A moment later, the remaining balls skitter down a slope, heading for the reservoir.

via www.nytimes.com

Hmmmm...that's creative.  But is it worth it? Let's do some fuzzy blog-math (which I am sure is wrong):

At $0.36 per ping pong ball, the 96 million balls cost $34.5 million.  According to my in-depth blog-qualified research (a Google search on Los Angeles evaporation rates), LA swimming pools lose water at about 5.46 feet per year due to evaporation.  According to the article above, the LA reservoir is about 175 acres, or 7,623,000 square feet. 

Using these as blog-park figures, without balls the LA reservoir would lose about 41,621,580 cubic feet of water per year due to evaporation (that's 311,351,040 gallons per year). I am going to assume that once LA exposes their balls to the water, no water evaporates.

The article doesn't give any information on how long the balls last, so to be conservative I am going to assume they only last a year (my guess is they last longer, but I don't want to assume anything...stop laughing).  So a top end estimate is that the LA water ball project costs about  $0.11 per gallon per year.   Obviously, (insert condescending duh! here) if the balls last more than one year, the per gallon cost decreases.

Now we just need a benefit (willingness to pay?) per gallon for comparison.  I am tempted to use the price of water in LA as a benchmark, but California water pricing is so screwy that I doubt prices have any correlation whatsoever with benefits (water prices in CA are ridiculously low). Maybe I could use the price of bottled water (but they are ridiculously high).  Rather than guess, I will just leave the conclusion to our trusted readers and hope David Zetland decides to weigh in...if the value of water is greater than $0.11 per gallon then it looks like the putting balls in the water is beneficial.

*Sometimes my headlines write themselves

"On Campus Quads in California, 'Brown Is the New Green'"

Shouldn't the headline be more like green ($) is the new green?

Perhaps it’s a sign of how dire the drought has gotten in California: Water-saving projects long on the drawing board, despite being cheap and easy, are finally coming to campuses. Last month at the University of California at Davis, workers rerouted recycled sewer water to the chiller plant, which supplies air conditioning. The project will save 61 million gallons annually, or almost 10 percent of the campus’s potable-water supply.

The investment? $20,000 in materials and two weeks of staff time.

"We never really did it because our water was relatively inexpensive, so there was never a need to make better use of it," says David Phillips, director of utilities. "The drought was the prompt for us."

via chronicle.com

If the value of a gallon of water is $0.01 (one penny) then the annual benefits are $610 thousand. Let's say the staff is 25 workers making $100 an hour. The cost of two weeks of staff time is then about $200 thousand. And let's assume that rerouting only works for a single year. 

Even with these ridiculous assumptions the net benefits are $390,000 and benefit-cost ratio is almost 3 to 1. 

What sort of inertia causes one to ignore a water-saving project like this one?