Wednesday, September 30, 2009

China's Green Initiative

Thomas Friedman of the New York Times has a great piece on what is perhaps the biggest environmental news of the past few weeks.

Tuesday, September 29, 2009

Equity and valuation

This subject came up in class today and was raised previously by Derek here on the blog:

When we measure value we use "willingness and ability to pay" as our metric. We can take issue with this definition of value because it is "unfair" to those who do not have as much ability to pay. Using this measure, a resource will appear more valuable to someone who has more money (and is willing to spend it). As unfair as it seems, we need a solid measure of value. Without this particular definition, we really have no way of measuring what something is worth.

How do we deal with the unfairness? Can we make adjustments in our measures of value that account for unequal income distributions?

Yes, using something called "equity weights" in cost-benefit analysis. This basically means adjusting value estimates upwards for individuals/nations with lower incomes. The level of adjustment can be based on tax rates (higher tax rate, lower weight) or some other measure.

The following passage discusses the issue nicely:

A key issue that has not been satisfactorily resolved in welfare economics (the branch of economics on which cost-benefit analysis is largely based) is Jeremy Bentham’s utilitarianist principle that actions should be evaluated on the basis of whether they generate the greatest amount of overall happiness for society. Aggregation of individual ‘happiness’ or utility is problematic because of the lack of a common numeraire for the fairly nebulous concept of utility. Utility is not measurable or comparable.

In practice, standard cost-benefit analysis tends to assume that a given change in costs or benefits (for example, $100) arising from a policy or project is valued equally by rich people and poor people and that individuals’ benefits and costs can therefore be aggregated to give an overall measure of net benefit to society. (In technical language, the marginal utility of money is assumed to be constant.) This approach (see, for example, Sugden & Williams 1978: ch. 16) implicitly accepts that the analyst’s role is principally that of an adviser on the efficiency aspects of a policy or project, and that value judgements about equity considerations should be the province of the political decision-maker.

Nevertheless, economists do sometimes advocate the use of income or other equity weights in cost-benefit analysis where it would be helpful to explore adjustments for poorer groups. But such calls are invariably tempered by a strict reminder that a non-weighted analysis should also be provided, to allow the decision-maker to easily determine the effect of including ‘equity’ weights.

Pearce & Nash (1981: 10–11), however, point out that even standard cost-benefit analyses make a value judgement by not using weights because they accept implicitly that the existing distribution of income is an equitable one. While this is true, the standard, unweighted approach is still generally preferable because the current distribution of income in a democratic society reflects (albeit imperfectly) existing social preferences. To introduce any other set of weights risks the adoption of a paternalistic or authoritarian approach by the individual analyst or decision-maker. And where weights are used, transparency requires that the same analysis be presented to the decision-maker without weights so the effect of weighting is clearly discernible.

If the distribution of income across society is considered to be inequitable, the correct solution is to rectify it directly through progressive taxation or other policies, not by distorting the analysis of highly specific projects that may in any case affect only a small section of the community.

In more recent times, the issue of effect on different socio-economic groups has also been addressed more directly by disaggregating the results of cost-benefit analysis to show the potential incidence of the costs and benefits of a government program on various sections of society. This approach is more transparent and allows the decision-maker to weigh equity and political considerations against the overall social benefit achieved.

Excerpted from "Multicriteria Analysis: 'Good Enough' for Government Work?"
by Leo Dobes and Jeff Bennett, Crawford School of Economics and Government at The Australian National University.

John Loomis on Non-Market Valuation

This article appeared in Choices a few years back.

It is well worth the read.

As someone who does valuation as part of my job, I often encounter opposition to the very idea of placing monetary values on environmental and natural resources. We've seen some of that right here on the blog, and no doubt there are others that share the viewpoints of those who are brave enough to be vocal in expressing their opinion. Loomis does a great job of pointing out the merits and shortcomings of non-market valuation.

Friday, September 25, 2009

Economic value in standing forests might just save them

Standing trees store carbon.

Since the world is moving toward a cap-and-trade system, carbon storage is something that polluters need. Polluters, may therefore need trees and will pay for them to remain standing.

Read about REDD mechanisms at CNN.

Krugman on climate change

From yesterday's NY Times

And another perspective (slightly dated) from Bjorn Lomborg at Real Clear Politics.

Monday, September 21, 2009

Everyone please read!

I would like everyone to please read the comments following a post on anthropocentric value, quasi-option value and frogs.

An anonymous poster (let's call him/her "AP") has commented expressing an opinion that arises each semester. In short, the opinion is that the anthropocentric perspective is bad and that valuation of the environment is impossible and silly. AP is concerned that a) we cannot possibly know enough to understand the value of environmental and natural resources, and b) even if we could, we shouldn't try to do it. AP thinks it is crazy to try to understand every component of value and screams for an appreciation of intrinsic value. Finally, AP calls for a fundamental change in the way humans look at the natural world.

AP makes one great point (I'll leave it up to you to figure it out and comment on it). Unfortunately, I think there is a great deal of misunderstanding by AP (and by many of you as well) regarding the anthropocentric perspective of value and the notion of valuation.

To clarify a few things:

1. "Value" simply means what something is worth. In economics, value is measured by willingness and ability to pay. "Pay" does not necessarily imply monetary payments. You can "pay" with your time, energy or via trade. When you recycle, donate your time to environmental causes, etc... you are showing your value for the environment.

2. The anthropocentric perspective on value simply means that when we try to figure out what something is worth, we try to estimate what it is worth to humans.

3. Humans can and do value the well-being of other creatures. Humans can and do value the well-being of ecosystems. Humans can and do value the environment for intrinsic purposes.

Hence (and here is a huge source of misunderstanding), intrinsic values associated with the environment are perfectly compatible with the anthropocentric perspective. Numerous human cultures and religions emphasize harmony with nature and treating all living things as equal. Many people value care of the environment and promote conservation simply for the sake of conservation. Please note that these are human cultures, human religions and human values and therefore any respect, worship or other values held by people are examples of the anthropocentric perspective, not evidence against it.

4. The economic perspective of value (and a main thrust of natural resource economics) is that we should try to understand, and in some cases measure, all components of value. Market value, non-market value, use value, non-use value, ecosystem service values, etc...

5. Resource economists don't just go around trying to put a dollar value on everything on earth. We attempt to measure the value of things when there are trade-offs involved (its all about scarcity right?). That is, we engage in valuation when there is a need. For example, if a particular natural resource is under threat from pollution, development, etc... a valuation exercise can help us understand the opportunity cost (what stands to be lost) of that market activity. This lends clarity to the trade-offs we face as a society and therefore helps policy makers understand what is at stake.

Questions about the above?

Back to AP... From what I can gather, he/she seems to be worried that valuation will somehow cheapen the environment. To this, my reponse is: many people now look at the environment as FREE (it doesn't get any cheaper than that). Valuation can show everyone that their actions or inactions have a real cost. AP also is concerned that if we put a dollar value on the environment it is sure to be wrong because our understanding of things is incomplete at best. To this I ask: would you rather have an estimate or no estimate at all?

I don't mind the misunderstandings noted above, but here's where AP's comment gets me: AP really wants people to understand that nature has an intrinsic value, that it is indeed worth a great deal when conserved. But then he/she argues vehemently against the one sure way to deliver that message: measure and express that value in dollars.

Final note: If AP had not posted anonymously, I wouldn't use him/her as an example like this. But, since this person chose to remain hidden, I consider this fair game. Heck, for all you know, AP is me, and I'm just trying to get two of the quietest classes I've had in 12 years to start talking!

Friday, September 18, 2009

Trash on Masonboro Island

From today's Star News, a trash/pollution issue that needs a solution.

Masonboro Island is an 8.4 mile long barrier island between the Intracoastal Waterway (to the west) and the Atlantic Ocean (to the east) that lies between Wrightsville Beach (to the north) and Carolina Beach (to the south). The island is completely undeveloped and is protected as part of the North Carolina Estuarine Research Reserve. You can only reach the island by boat (or if you're daring, by swimming or paddling across Masonboro Inlet or Carolina Beach Inlet).

It is a beautiful place. Check out some pics here. It is home to several endangered bird species and is a nesting beach for loggerhead and green marine turtles. Most often there are very few people there, and you can have miles of perfect beach all to yourself. Camping on Masonboro is great, especially in the late spring or early fall when the mosquitos aren't so bad. However, during the summer holidays (Memorial Day, July 4, Labor Day), the island is hugely popular with partying boaters. If you've been there during these times, you know... the bay adjacent to Masonboro looks like a boat parking lot. Lately, the parties have been huge and people have been leaving loads of trash on the island.

Questions related to recent class topics:

What are the basic economics behind this environmental problem?

What are some potential solutions? Pros and cons of these?

What categories of value might we need to measure in order to understand the economic value of Masonboro Island?

Wednesday, September 16, 2009

New fuel economy standards coming in 2016

The basics from the Raleigh News and Observer.

More quotes and such from the N.Y. Times

More detail on the economics from Business Week.

What is novel here is that for the first time national automobile standards include a provision for CO2 emissions (California has done this for a while).

Notice the consideration of demand and supply in the Business Week article.

(Side note: I must mention that I get a little irritated when journalists say "The law of supply and demand"... because of course, there is no law of supply and demand. There is a law of demand, and a law of supply. Econ prof pet peeve I guess.)

Anyway, the article also points out a need for the true price of gasoline to be reflected in the price we pay at the pump, otherwise, the new regs may only serve to create a glut of tiny cars that no one wants.

These standards in question are called C.A.F.E. standards (Corporate Average Fuel Economy), and raising them may have an unintended consequence. Can anyone see it?

There is some good basics on C.A.F.E. standards here from NPR. Notice that we have not raised the standards in a long time.

Tuesday, September 15, 2009

Litter & dumping in Barbados

Nicholas Cox of the Barbados Advocate has a thought-provoking piece in today's paper.

Lots of issues here:

Environmentally "bad" and "good" behaviors as a function of income, education as a means to alleviate "bad" behaviors, individual obligations to "do something" when they are able... This is all The Tragedy of the Commons, no?

I was thinking about these same issues recently, in anticipation of an upcoming lecture (Mark your calendars for October 6). The issues that I'll be talking about (litter, beach erosion, tourism, species protection) are very similar to those that we deal with here in southeastern N.C. And, indeed, the problem seems to be different depending on the socio-economic status of the adjacent populous.

Here's an example: Wrightsville Beach and Carolina Beach are only separated by about 15 miles. CB is about twice as big and there are roughly twice as many people in CB than in WB, yielding the same population density. However, the people who live at WB are much better off. The median household income at WB is US$67,083 vs. US$45,194 at CB (source:

OK, who has been to both? Did you notice any differences in environmental quality? How does the causality flow?

Other examples?

Friday, September 11, 2009

Is this a technology standard or a performance standard?

From the N.Y. Times: "Feds, California look to Cut TV Energy Use"

Bahamas (finally) offers full protection for sea turtles

Here is a short article from the St. Lucia Star

What kind of regulation are these?

Notice the quote about turtles being worth more alive then dead... what information would we need to collect in order to empirically test this assertion?

Thursday, September 10, 2009

Wind farm planned for the Outer Banks

From the Myrtle Beach Sun News: Outer Banks wind farm planned.

Costs and benefits?

The article cites some huge R&D costs. What will we need to learn in order to understand whether or not this passes the cost-benefit test?

Wednesday, September 9, 2009

Maldives to introduce green "tax" on tourists

From Reuters: Maldives to introduce green tax on tourists

What's going on here? Is this a Pigouvian tax or something else?

Charging tourists an extra "environmental fee" in hopes of raising funds for conservation efforts (or simply for adding to general revenues) is nothing new. Examples are found all over the world.

Tourism can create significant environmental impacts and can exacerbate the depletion of natural resources. In that sense, a Pigouvian tax is an appropriate means for internalizing a negative externality.

We should also expect (following the law of demand as the supply curve shifts back) that any increase in price will decrease quantity demanded, resulting in less crowding and better environmental quality (or at least a slowed rated of environmental degradation).

The fee therefore seems like a win-win... does anyone see a down-side?

Other examples of such fees? Have they been sucessful?

Tuesday, September 8, 2009

Monday, September 7, 2009

Welcome CERMES students!

Hi everyone,

I just want to extend a welcome to the students from the Centre for Resource Management and Environmental Studies (CERMES) University of the West Indies - Cave Hill, who are joining our blog as of this week.

CERMES students, if you scroll down to prior posts, you'll see that we've been discussing a few issues so far. Please feel free to join the discussion by clicking on comments, and then writing and posting your comment.

I'll be incorporating some Caribbean natural resource issues into the blog and I hope the UNCW students will join in that conversation as well.


Friday, September 4, 2009

Rainforest, cows and cash.

Here is an interesting article from the NY Times regarding deforestation in Brazil, and an attempt to mitigate deforestation by paying landowners not to cut.

Basic econ here: costs and benefits. How does this story fit in with our discussion of externalities?

Wednesday, September 2, 2009

Seems like we were just talking about this...

From Bloomberg: BP makes 'Giant' Oil Discovery in Gulf of Mexico.

Predicted effect on the price of oil? (feel free to make some assumptions about other factors)

Effect on the conservation push?

hat tip: Tim Haab at env-econ

Tuesday, September 1, 2009

Speaking of bans...

Europe bans incandescent bulbs (from the NY Times).

We're going to talk quite a bit about the efficiency of command-and-control regulation (such as this) vs. incentive-based systems.

Anyone care to take a shot at the pros and cons of this ban?

N.C. to ban plastic bottles in landfills

Starting October 1 of this year! Are we ready?

Also included in the legislation is a ban on wooden pallets, used oil and antifreeze, oyster shells, tires and certain types of batteries.

Read short news articles about it here and here and here.

The full legislation is here.

What is the intent of this legislation?

Do you think the ban will accomplish that goal?
(Be sure to consider N.C. recycling rates in your answer)

Do you think the legislation will result in any unintended consequences?

The larger issue is of course, why do we throw away so much trash (and why do we recycle so little)? We'll get to the details of these later in the semester... but it's all about costs and benefits.

What will happen to the demand for organic food?

Suppose that this is true... what will happen to the marginal benefits (demand) that consumers receive from organic foods? Price effect? and then...?