Environmental Economics

The power of scarcity

Police are warning for businesses and residents to start locking up their taps. California’s drought has gotten so bad, people are stealing water.

Thieves busted the locks on the spigots at a popular Asian shopping center on Barber Lane in Milpitas, just to get their hands on what has become liquid gold.

Palo Alto resident Jason Zhur said he’s shocked it has come this far. “But water’s becoming more expensive than gas,” he said.

via sanfrancisco.cbslocal.com

 

Using Climate Change Denial Logic in Other Situations

Feeling soggy? Last month was the wettest on record for the contiguous United States, according to federal meteorologists.

On average 4.36 inches of rain and snow - mostly rain - fell over the Lower 48 in May, sloshing past October 2009 which had been the wettest month in U.S. records with 4.29 inches. National Oceanic and Atmospheric Administration records go back to 1895.

NOAA climate scientist Jake Crouch calculated that comes to more than 200 trillion gallons of water in May.

via hosted.ap.org

NOAA scientists must have manipulated the data. Afterall, there is a drought in California, so May couldn't have been the wettest month on record.

Right?

Poll Results: California’s Drought

Only one economic expert (a co-editor of the AER) from the IGM forum disagreed:

Californians would be better off on average if all final users in the state paid the same price for water — adjusted for quality, place and time — even if, as a result, some food prices rose sharply and some farms failed.

via www.igmchicago.org

Liberal fantasies

Craig Newmark ("No, Farmers Don’t Use 80 Percent of California’s Water"):

Since I've seen the "80 percent" figure used in a number of places, this piece is timely and useful.

To be clear, whatever the figure, California farmers are using too much water, water whose costs exceed their benefits. But that is because of government subsidies and those subsidies are obtained partly through the farmers' political clout. It's another example of how government often actually works, as opposed to the Liberals' fantasy of how it always works.

via www.newmarksdoor.com

David Zetland at Aguanomics is using the 80% number and I put more trust in Aguanomics than the National Review. But, I agree that the actual number doesn't really matter so I'm scratching my head at the title of that post. 

Being a tie-dye wearing hippie I think I have the authority to comment on liberal fantasies. Yes, money corrupts politics and government. I don't think liberals, or anyone who suggests government intervention when there is a market failure, are naive about this corrupting force. Blaming liberals for California's water problems seems to be a knee-jerk reaction rooted in partisanship, not economics. 

For the record, my liberal fantasy is that farmer subsidies should be removed (and I'm OK with paying the true cost of strawberries) and water should be priced more efficiently for every water using sector of the economy. 

A Common Tragedy

“The demand we’re placing on the aquifer and the deep bedrock drilling, which is going on at an alarmingly fast pace, is really scary,” said Tricia Blattler, executive director of the Tulare County Farm Bureau. “Folks are really concerned we’re not going to be able find water in the groundwater system much longer. We are tapping it way too quickly.”

via www.bloomberg.com

The Tragedy of the Commons results from competition combined with an open access resource. Because a groundwater aquifer typically spans across multiple landholdings and has multiple entry points (in most cases if your land is over an aquifer, you can drill into the aquifer and extract water), there is an incentive to extract water faster than your neighbor...especially during a drought.  Because recharge rates can;t keep up with extraction rates, you end up with a literal race to the bottom. 

The optimal solution?

Rain.

The next best alternative?

Water pricing.

The nextest bestest alternative?

Water rationing.

The last alternative?

Mad Max (yes, I know that was about running out of oil, but you get the idea).

Aguanomics: Thoughts on my Reddit AMA on drought and shortage

We provided a PSA and here is the postcript:

My third "ask me anything" on Reddit was the most popular so far. There were 2,700+ comments (300+ from me) on a range of topics. Many were directed at silver bullet solutions ("reduce demand through vegetarianism!" or "increase supply with desalination!"), many were "what can I do?" or "how screwed are we?", and a good number came from people wanted to work on water issues. About 20-30 percent were about water issues in other countries (India, Saudi, Brazil, Mexico, et al.)

As usual, it was a fun but exhausting 6-7 hours of give and take. 

I am VERY happy that an AMA-bot has collected and formatted the popular questions and my answers, but these were my favorites ...

These are only a few, but there are many more as well as the FAQ-type links I provided at the top of the AMA. (Luckily, it looks like people downloaded around 1,000 copies of Living with Water Scarcity. Free is a good price :)

I'll add here a few things that I should have on the AMA, i.e., a primer on water in California from the Legislative Analyst's Office (source of the figures) and statistics on urban water consumption [my XLXS from here] that show the highest users (above state median of 100 gallons/capita/day -- four times the use of people in Amsterdam) are mostly in southern California. Lawns anyone?

via www.aguanomics.com

More on pricing water

Meredith Fowlie:

The use of moral suasion to encourage conservation is not unique to California. Public appeals for reductions in energy and water use are ubiquitous. And it is easy to see why. For political and jurisdictional reasons, it is often easier to mount a conservation campaign than raise energy or water prices in times of scarcity. But what impact do these interventions actually have on energy and water consumption?

A new E2e working paper explores this question in the context of electricity. More than a year after the Fukishima earthquake, several of Japan’s nuclear power plants were still out of commission and electricity supply was tight. Policy makers were looking for ways to reduce electricity consumption during critical peak times.

Koichiro Ito and his co-authors set out to test the relative effectiveness of an increase in critical peak electricity prices versus “moral suasion”:  a polite request for voluntary reductions in consumption. Customers who volunteered to be part of the study were randomly assigned to one of three groups:

• A price treatment: Higher electricity prices during critical peak hours. Customers were charged prices ranging from $0.65/kWh – $1/kWh (up from a base rate of approximately $0.25/kWh).
• A “moral suasion” treatment: Courteous day-ahead and same-day requests for electricity demand reductions during critical peak days.
• Control group: No notification of/price increases during critical peak events.

The figure below summarizes the average impacts of the two treatments on household electricity consumption during critical peak hours (relative to the control group). Effects are summarized by treatment “cycles”.  Each cycle consists of three non-consecutive critical peak event days, so the graph helps to illustrate how the effect of the treatments persist (or not) across repeated critical peak days throughout the season.

Average effect of treatment on peak electricity consumption

It probably will not shock you to learn that the price treatment had a much larger impact on consumption as compared to moral suasion.  ...

These qualitative results are compelling – and pertinent to a crisis we are currently facing here in California.

We are in the midst of the most severe drought on record. ... 

An executive order issued last week signals a move in this direction.  The order  imposes mandatory water restrictions designed to achieve a 25 percent reduction in potable water use by urban residents.

Hitting this conservation target will be difficult – if not impossible – to achieve with only public appeals and hard-to-enforce restrictions. So, to echo arguments that have been made again and again on this blog (we are a persistent bunch), the time is ripe for water prices that reflect the true cost of water use.  ...

This approach is painfully obvious to economists.

One approach to mitigating problems association with drought is painfully obvious

Greg Mankiw:

There has been a lot of discussion of the drought in California and the new regulations that the state is putting in place.  But there has been little mention of the obvious (to an economist) solution: Raise the price of water.

This would do more than any set of regulations ever could.  For example, the governor is not going to force people to replace their old toilets with newer, more water-efficient ones.  But a higher price of water would encourage people to do that.  A higher price would also give farmers the right incentive to grow the most water-efficient crops. It would induce entrepreneurs to come up with new water-saving technologies. And so on.

Some may worry about the distributional effects of a higher price of a necessity.  But the revenue from a higher price could be rebated to consumers on a lump-sum basis, making the whole system progressive.  We would end up with more efficiency and more equality.

via gregmankiw.blogspot.com

And here is more from David Zetland:

Even far over here, amidst rainstorms, I am hearing about California's water shortage and the Governor's "order" to reduce use by 25 percent.

Sadly, his orders appear to mix up agricultural (80%) with urban (20%) use, i.e., he talks about lawns and urban prices (two worthy targets!) while "missing" the role of agriculture.

Let me help: farmers use 80 percent of "developed" water... and more if you consider groundwater. Therefore, I suggest that Brown shut down irrigation and pay off farmers [for surface water], so there's more water for cities people. Here are further, useful details.

And this:

In my haste to push for action yesterday, I forgot to elaborate on how to re-allocate water from farmers to cities.

The quickest move is to seize the water -- the property of the People of California -- under eminent domain, but that process would lead to lawsuits.

Given that almond crops produce a profit of $1,500/acre with the consumption of 4 acre feet of water,* it seems reasonable to pay $375/af of water, but let's be generous and say $1,000/af. I'm pretty sure that that offer would probably get so many volunteers that the Gov wouldn't even need to condemn the water.

How would this action undermine California agriculture ("one of the world's great food producers")? I don't know, but I bet that plenty of farmers -- the ones happy to export crops all over the world for profit -- would jump at the huge profits from "farming water."

It's been done before and it will work again.

Those excerpts are full of links so go to Aguanomics for more.

While I was away, the Buckeye Lake Dam story stayed

I was able to get away last week for a week of rest and relaxation (field research?).  On the flight back, I sat next to a nice dude who had recently finished building a house on family land on Buckeye Lake in Ohio.  Needless to say, he had some strong opinions on the Army Corp of Engineers' report that the Buckeye Lake Dam is in imminent danger of collapse and the subsequent decisions to leave the lake at winter pool levels (unboatable) until a solution is found (likely 3-5 years) and the Governor's decision to commit the state to build a new dam.  Unsurprisingly, the story is receiving a lot of local coverage:

The story is so compelling because we can all relate to what these folks are going through — on both sides.

From the lake side, it’s about the economy, property values and recreation.

If your livelihood were invested in a marina or restaurant on the lake, your world would be upside down with the prospect of the water being permanently drained. If you worked at one of the lake-dependent businesses, you’d be worried sick about your financial future.

If you had a home on the lake and had invested your life savings in the place, this news would have you pulling your hair out (unless you have a hairline like mine, and nature’s already done it for you).

From below the dam, it’s about public safety: protecting life and property.

If your home were in harm’s way should the dam fail, you really wouldn’t care about someone else’s home value or whether some people wouldn’t get to use their Jet Skis over the summer. You’d want to know that your family was safe, that you could sleep at night without worrying about the dam giving way.

And if you’re the government official responsible for the dam, your obligation is to protect life, period.

via www.dispatch.com

Update on Ohio's Dam Mess

“There aren’t hard-and-fast solutions yet, but from my early conversations with the director, there are really only two options: Drain it and leave a big hole, and that’s not really an option. Or spend hundreds of millions to replace it. I think that’s what will occur.”

[State Sen. Jay Hottinger] said he’s heard that a new dam would take 15 to 18 months to start, then three to five years to complete.

“I believe the [Ohio Department of Natural Resources] director is very committed to doing what’s necessary to create a healthier, stronger, better asset than we have today,” he said. “It’s going to be painful to get there. But at the end of the day, it will be a much nicer Buckeye Lake.”

via www.dispatch.com

"Drain it and leave a big hole" vs. "Return the area to its natural state displacing the invasive species known as humans and reducing the risk to life to zero."

Tomato, To-mah-toe.