Making public environmental decisions.

What is “environmental economics”? Environmental Resources: Air, water, marketed species (fisheries, timber), non- marketed species (birds, frogs), natural areas, exhaustible resources Economy and Environment People gain well-being from environment Environment absorbs waste Firms use environment to produce goods & services Firms and individuals subject to environmental regs People gain well-being from goods & services Environmental Economics: study of interaction between economy and natural environment

Market Failure Markets generally work fine without any interferences – private goods Environmental problems are different – markets tend to fail because: Externalities: what firms do inadvertently affect others negatively (pollution) Public Goods: Some goods benefit everyone (species preservation) Uncertainty/Asymmetric Information Intervention generally necessary to “fix” market failure – regulation or direct action

Introduction to Project Analysis Cost-effectiveness Cost-Benefit Multi-criteria Sustainabilty Precautionary Principle/Safe Minimum Standard

Why are we studying this? All group projects are fundamentally about making decisions about how to best solve an environmental problem Our goal today: look at ways of evaluating different solutions to environmental problems: “project evaluation”

Two Basic Kinds of Questions Positive: describes what will happen or why something happened Why did US drop out of Kyoto? What firms will leave LA if air regs are tightened? Normative: describes what should happen How much habitat should be set aside for Gnatcatcher? What should be the level of GHG controls in the US? Economists generally conduct positive analysis Policy making is supported by normative analysis

Economic Problems Economics is the study of what to do/what is done when things are scarce: allocation of scarce resources All economic problems have a “tension”. Recipe 1. Identify the tension (what happens if you move too far in one direction or another). 2. Develop a formal model describing the tension. 3. Use model to balance the tension & make policy recommendation.

Identify the Tension in These Examples (Some Positive, Some Normative) Climate change control requires reducing emissions of GHG’s worldwide. Which countries should reduce, and by how much? How much will housing prices rise from Gnatcatcher habitat protection? Recovery of Snake River Chinook salmon required habitat restoration. Which recovery efforts are most efficient? Should the Lower Granite Dam be removed to provide access to historic spawning beds?

Examples cont’d Small furniture strippers in LA emit VOC’s. The SCAQMD imposes tighter regs. Will the strippers move to Arizona/Mexico or stay in LA? The ANWR is a nearly pristine artic preserve, but it also contains large oil reserves. Should we drill for oil in ANWR? A tax on gasoline is one method for reducing domestic oil consumption and reducing pollution. What should the gasoline tax be? One way to reduce local air pollution is to reduce sulfur burning. Should the EPA require sulfur- free diesel fuel in trucks?

Project Evaluation How to make judgments about the advisability of public actions Proposed regulations (e.g., air regulations) Proposed projects (e.g., habitat acquisition) Normative issue

Example: Gnatcatcher Gnatcatcher lives on California Coast To protect species, must set aside coastal habitat and protect from housing development Questions to ask: How much land to set aside? Who should pay for land set-aside? How to answer questions (i.e., make social decisions) Vote? Who should vote? Majority rules? Coastal residents, LA residents, State of CA, US? Future generations? Look at overall benefits and costs? Other methods to decide?

Methods for Project Evaluation Cost-effectiveness – cheapest way to achieve a goal Cost-benefit – balance pluses and minuses of project Multi-criteria – looks at ways of achieving multiple goals Precautionary Principle – how to act faced with great uncertainty* Sustainability – only do things that can be continued in perpetuity* *Difficult to implement – we will later formalize these concepts

Cost effectiveness vs. Cost benefit Cost effectiveness analysis: Start with a goal (eg, 5% reduction in GHG emissions) Given this goal, what is the least-cost way of achieving it? Note: Cost effectiveness says nothing about the appropriateness of the goal. Cost benefit analysis: Weighs costs and benefits to determine the optimal (i.e. most efficient) level. (e.g. optimal gas tax)

Cost-Effectiveness Usually Sufficient for Environmental Problems Easier Only need look at cost side Ignore benefits – they are implicit Often more realistic Client tells you his/her environmental goal Wants you to figure out the best way of achieving it Don’t use a bigger hammer than you need!

How can economics help environmental problem solving? Bren School Group Projects – Recipe for success Important environmental problem Focus to a specific, researchable question Interesting: want to know the answer Don’t know the answer Can find the answer Can Bren GP’s be improved with economic thinking? What decision(s) must be made? What is the tension? How to model & inform the decision?

Bren GP’s: 2007 Developing a Market-Based Strategy for Conserving and Managing Open Space in California's Big Sur Region Conservation Planning for Blue Oak Woodlands in the Southern Sierra Foothills Prototyping a Campus Sustainability Management System Changing the Campus Climate: The Continuation Plan for a Climate Neutral UC Santa Barbara Design and Implementation of Sustainable Water Resources Programs in San Cristóbal de las Casas, Chiapas Climate Focused Institutional Investment Index California's Energy Water Nexus: Water Use Efficiency in the Energy Sector

Bren GP’s, continued Voluntary Initiatives for Reducing Greenhouse Gas Emissions in the United States An Inventory and Evaluation of Environmental and Health Safety Practices in the Nanotechnology Industry Biology and Management of Non-Native Plant Species in the Santa Monica Mountains National Recreation Area Sustainability of Transportation in California -- Strategies Developed Using Future Scenario Planning Evaluation of Rainfall-Runoff Relationships to Inform Development of An Incentive Program for Stormwater Pollution Reduction in South Coast Watersheds Curbing Pharmaceuticals in Wastewater Streams: Assessing the Environmental Benefits of a Drug Recycling Program in Santa Barbara

Cost effectiveness not as obvious as you might think Suppose each student is a polluting firm, each emits 100 tons of NOx/yr. 60 students x 100 tons = 6000 tons. 2 types of polluters: 30 efficient firms with high abatement cost ($1000/ton), 30 inefficient firms with low abatement cost ($100/ton). Want to reduce emissions by 50%, down to 3,000 tons. What policy should Arnold use?

Evaluate 2 options Option A: Everyone reduces by 50%. Low cost firms: 30 firms*50 tons*$100/ton = $150,000. High cost firms: 30 firms*50 tons*$1,000/ton = $1,500,000. Total Cost = $1,650,000. Option B: Low cost firms shut down. Total cost = 30 firms*100 tons*$100/ton = $300,000. Option B achieves the goal at a much lower cost!

Characteristics of most social investments 1. Dynamic – benefits and/or costs accrue over time, often over space too. 2. Benefits & costs accrue to different parties. 3. Public goods – 2 characteristics 1. Non-rival: my use doesn’t diminish your use. 2. Non-exclusive: nobody can be excluded. 4. Rely on public provision (and in few cases private provision). 5. Uncertainty about future costs or benefits, risk, irreversibility.

“Cookbook” conceptual approach to evaluating public projects 1. Identify affected parties – whose benefits and costs should be counted? 2. Determine physical impacts (B & C). 3. Predict quantitative impacts over life of project. 4. Monetize impacts, where possible. 5. Choose time horizon, discount. 6. Add up benefits and costs. 7. Conduct sensitivity analysis. 8. Examine distibutional consequences 9. Examine political feasibility 10. Make recommendation with assumptions explicit.

Readings Read for section this week Remember to get reader at Graffikart. Next time: Examples of economics in public decisions Dams on Tuolumne River Lead in drinking water Efficient species conservation Please come to class prepared to discuss the readings assigned for that day.