UCSB Bren School ESM Welcome to ESM 204: The Economics of Environmental Management Purpose of the class: to help you solve environmental problems i.e., to help you solve generic group projects. Our goal is to help you see the economic dimensions of environmental problems and use that information to generate solutions.

UCSB Bren School ESM Instructors Prof. Christopher Costello: 4410 Bren Hall, Office Hours: Th 10:45-12:00 Environmental and natural resource economics, fisheries, forestry, biodiversity, property rights, environmental mgt. TA: Zack Donohew 3308 Bren Hall, Office Hours: Tue/Wed 1:00-2:00 Property rights, water, common pool resources Plan to attend office hours! We want to get to know you!

UCSB Bren School ESM Course Vitals Prerequisites: Calculus & ESM 251 or Econ 100AB 20 lectures, Tuesday & Thursday, 9:30-10:45 1 discussion section per week, run by TA Section WILL be held this first week You should be familiar with Excel SOLVER You are expected to attend all lectures and 1 discussion per week. Powerpoint slides typically posted a few hours prior to class Workload: Significant. Expect 8-10 hours per week outside of class, on average.

UCSB Bren School ESM Grading Homework Assignments.. 45% Choose 4 “mini-group-projects”: may/should work with a partner, submit 1 copy of answer with both names If you do more than 4, your best 4 grades will be counted Pay attention to due dates – late assignments will be penalized. May not use the same partner twice (ie, keep moving!). Zack covers submission guidelines Work should be your own!. Do not share outside your team! Class/section participation.. 15% Midterm..20% In class – Feb 11 Final Exam..20% Take-home (dist’d March 11, due March 17). Cheating/plagiarism will not be tolerated

UCSB Bren School ESM Readings & Preparation Readings: most available on web. Many readings only available from bren.ucsb.edu domain. Use snoop if you have to Several books will be used a lot Required: Kolstad: Environmental Economics (2 nd Ed) RBR has recommended books on reserve Hartwick and Olewiler: The Economics of Natural Resource Use, 2 nd Edition (Addison-Wesley, 1998) Boardman et al: Cost-Benefit Analysis, 2 nd Ed (Prentice-Hall, 2001) Lower level book: Goodstein (in RBR)

UCSB Bren School ESM Preparation Please come to class prepared. Preparation: read the assignments listed for the day on the webpage. I will call on you in class. Please help make this an interactive experience. Questions??

UCSB Bren School ESM Course Approach VERY hands-on Every lecture designed to help solve a generic group project. Lecture Style Begin with brief overview from last class + questions. Motivate new material. I will always motivate material with a hypothetical group project If I can’t think of a good use for the material in a real-world, group-project-like setting, you should not bother learning it. Cover new material; ask about readings Open discussion throughout.

UCSB Bren School ESM First: 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

UCSB Bren School ESM 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? How will farm profits be affected by a change in average temperature? 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 to balance costs and benefits? Economists generally conduct positive analysis Policy making is supported by normative analysis

UCSB Bren School ESM What will we cover in Course? Course broken into 4 sections: 1. Project Evaluation: Evaluating public environmental projects and regulations 2. Measuring benefits and costs 3. Environmental Regulation 4. Managing renewable and non-renewable resources

UCSB Bren School ESM Making public environmental decisions

UCSB Bren School ESM 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”

UCSB Bren School ESM 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

UCSB Bren School ESM 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?

UCSB Bren School ESM 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

UCSB Bren School ESM Cost effectiveness vs. Cost benefit Cost effectiveness analysis: Start with a goal (e.g., AB32: reduce GHG emissions to 1990 levels by 2020) 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)

UCSB Bren School ESM Cost-Effectiveness Usually Sufficient for Environmental Problems Easier Only need look at cost side Ignore benefits 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!

UCSB Bren School ESM Cost effectiveness not as obvious as you might think Suppose each student is a polluting firm, each emits 100 tons of NOx per year. 80 students x 100 tons = 8,000 tons. 2 types of polluters: 40 high abatement cost ($1,000/ton), 40 low cost ($100/ton). Arnold wants to reduce (abate) NOx emissions by 50%, down to 4,000 tons. What policy should Arnold use?

UCSB Bren School ESM Evaluate 2 options Option A: Everyone reduces by 50%. Low cost firms: 40 firms*50 tons*$100/ton = $200,000. High cost firms: 40 firms*50 tons*$1,000/ton = $2,000,000. Total Cost = $2,200,000. Option B: Low cost firms shut down emissions. Total cost = 40 firms*100 tons*$100/ton = $400,000. Option B achieves the goal at a much lower cost!

UCSB Bren School ESM Cost-Benefit Analysis 1. Dynamic – benefits and/or costs accrue over time, often over space too. 2. Benefits & costs accrue to different parties. 3. Uncertainty about future costs or benefits, risk, irreversibility.

UCSB Bren School ESM Examples 1. Tuolumne River preservation 2. Drilling in ANWR 3. Habitat Protection

UCSB Bren School ESM The Tuolumne: A nice place

UCSB Bren School ESM Tuolumne: background Originates in Yosemite Nat’l Park Flows west 158 miles, 30 miles free-flow Many R are T hreatened E ndangered species rely on river Historic significance World-class rafting: 15,000 trips in 1982 Recreation: 35,000 user-days annually

UCSB Bren School ESM Hydroelectric power generation River’s steep canyon walls ideal for power generation “Tuolumne River Preservation Trust” lobbied for protection under Wild & Scenic 1983: existing hydro captured 90% water Municipal, agricultural, hydroelectric Rapid growth of region would require more water & more power

UCSB Bren School ESM “Saving the Tuolumne” Dam proposed for hydroelectric power generation. The “tension”: valuable electricity vs. loss in environmental amenities. Benefits: hydroelectric power, some recreation. Costs: environmental, rafting, fishing, hiking, other recreation. Question: Should the dam be built? Irrigiation district did CBA supporting dam Influential second CBA by Environmental Defense/EDF (R Stavins)

UCSB Bren School ESM Economic evaluation Irrigation district first does CBA – project a “good idea” EDF economists further evaluate costs and benefits, including environmental costs Traditionally, environmental losses only measured qualitatively. Difficult to compare with quantified $ Benefits.

UCSB Bren School ESM The costs and benefits Benefits: $188 million annually Electricity benefits: $184.2 million Water yield: $3.4 million Social Costs: $214 million annually Internal project costs: $134 million Lost recreation: $80 million Without recreation: C(134) < B(188) With recreation: C (214) > B (188)

UCSB Bren School ESM Tuolumne River: epilogue Clavey-Wards Ferry project dams were not built….partly due to formal CBA. Intense lobbying forced the political decision to forbid project. Pete Wilson was senator. Stavins said: “[Wilson] couldn’t say ‘I did it because I love wild rivers and I don’t like electricity’, but he could do it by holding up the study and saying, ‘look, I changed my vote for solid economic reasons.’”

“Oil and the Arctic National Wildlife Refuge” (Kotchen & Burger) 7.7 Billion barrels (about US consumption in 2007), at $100/barrel Takes decades to develop Almost no price difference Distribution: Most benefits to industry profit and AK state taxes, not federal taxes Potentially large environmental effects $613B in benefits from drilling – allocate portion to environmental causes? (e.g. could increase from $7B in climate change activity in 2008). Quid pro quo tradeoff that environmentalists willing to make? Same issue with oil platforms off Santa Barbara? UCSB Bren School ESM

UCSB Bren School ESM Ando et al: Species Distributions, Land Values, and Efficient Conservation Basic Question: are we spending our species conservation $ wisely? Habitat protection often focuses on biologically rich land Focusing on biologically rich land results in fewer acres of habitat to protect species

UCSB Bren School ESM Cost-effectiveness Analysis Goal Provide habitat to a fixed number of species No issue of how many species to protect Compare two approaches Acquire cheapest land to provide protection Acquire smallest amount of land to provide protection Why is this an interesting question?

UCSB Bren School ESM Approach Conduct analysis at county level in US Use average ag land value for price of land Use database of species location by county (endangered or proposed endangered) Assume if land acquired in county where species lives  species is protected

UCSB Bren School ESM Results Locations for 453 species Blue: cost-min only Yellow: site-min only Green: both Minimize # sites Minimize costs

UCSB Bren School ESM Cost-minimizing Problem Subject to For all iεI where J = {j j = 1,..., n} is the index set of candidate reserve sites, I = {i i = 1,..., m} is the index set of species to be covered, Ni is the subset of J that contain species i, cj is the loss associated with selecting site j, and xj = 1 if site j is selected and 0 otherwise. min

UCSB Bren School ESM Conclusions For 453 species Cost per site 1/6 under cost-minimizing Result similar to Santa Clara River Group Project FWS had $8 million from NRDA settlement Wanted to use to buy habitat Chose species rich coastal land Much more bang choosing interior low quality/low price land Ecological Linkages Group Project – for TNC