Welcome to ESM 204: The Economics of Environmental Management
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Transcript of Welcome to ESM 204: The Economics of Environmental Management
UCSB Bren School ESM 2041
Welcome to ESM 204: The Economics of Environmental Management
Purpose of the class: to help you solve environmental problemsi.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.
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Instructors Prof. Christopher Costello:
4410 Bren Hall, [email protected] 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, [email protected] 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!
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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.
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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
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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 (2nd Ed)
RBR has recommended books on reserve• Hartwick and Olewiler: The Economics of Natural Resource Use,
2nd Edition (Addison-Wesley, 1998)• Boardman et al: Cost-Benefit Analysis, 2nd Ed (Prentice-Hall,
2001) Lower level book: Goodstein (in RBR)
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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??
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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.
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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
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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
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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
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Making public environmental decisions
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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”
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Project Evaluation
How to make judgments about the advisability of public actionsProposed regulations (e.g., air
regulations)Proposed projects (e.g., habitat
acquisition) Normative issue
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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?
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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
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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)
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Cost-Effectiveness Usually Sufficient for Environmental Problems
EasierOnly need look at cost sideIgnore benefits
Often more realisticClient tells you his/her environmental goalWants you to figure out the best way of
achieving it Don’t use a bigger hammer than you need!
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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?
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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!
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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.
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Examples
1.Tuolumne River preservation2.Drilling in ANWR3.Habitat Protection
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The Tuolumne: A nice place
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Tuolumne: background
Originates in Yosemite Nat’l Park Flows west 158 miles, 30 miles free-flow Many RareThreatenedEndangered species rely on river Historic significance World-class rafting: 15,000 trips in 1982 Recreation: 35,000 user-days annually
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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% waterMunicipal, agricultural, hydroelectric
Rapid growth of region would require more water & more power
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“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)
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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.
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The costs and benefits
Benefits: $188 million annuallyElectricity benefits: $184.2 millionWater yield: $3.4 million
Social Costs: $214 million annuallyInternal project costs: $134 million Lost recreation: $80 million
Without recreation: C(134) < B(188) With recreation: C (214) > B (188)
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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?
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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
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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?
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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
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Results
Locations for 453 speciesBlue: cost-min onlyYellow: site-min onlyGreen: both
Minimize # sites Minimize costs
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Cost-minimizing Problem
jJj
jxc
Subject to 1iNjjx
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
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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 landEcological Linkages Group Project – for TNC