New EPA fracking study - the debate continues

Yesterday the US EPA released a draft report regarding the effect of fracking on drinking water.  EPA states that this report is the most complete compilation of scientific data to date on the impacts of fracking on drinking water.  Here is the executive summary for those who don't want to read the whole report.


The bottom line is twofold:

1. "hydraulic fracturing activities in the U.S. are carried out in a way that have not led to widespread, systemic impacts on drinking water resources"

2. "there are potential vulnerabilities in the water lifecycle that could impact drinking water."

Basically, EPA found that fracking has led to some damage to groundwater supplies , but the damage is not systematic and it is not widespread.  The number of incidents where groundwater is affected is described as "relatively low" given the number of wells that have been drilled.   In terms of potential impacts, the study suggests that handling the wastewater from fracking will pose more problems than the fracking activity itself.

Given the mixed news, anti-fracking and pro-fracking sides are declaring victory.  

Read about it:

Article at the WP
Article at the NYT
Article and voice-cast at NPR 
Article at the N&O



 

Valuation

The main topic for this week is non-market valuation.

Here are links to some good sources:

Why Economics Matters for Endangered Species Protection (Shogren et al., 1998)

The Role of Economic Valuation in the Conservation of Tropical Nature (Naidoo, 2008)

Conservation Pays (Yuskavitch, 2007, Defenders of Wildlife)

Marine Conservation: How Economic Valuation of Ecosystem Services Can Help (Environment Matters, 2008)

Can Environmental Economic Valuation Techniques Aid Ecological Economics and Wildlife Conservation? (Loomis, 2000, Wildlife Society Bulletin)

Of additional interest:

Economic Incentives and Wildlife Conservation (Bulte et al., 2003)

Tons of references and links here:  Economic Valuation References WRI

Reefs here and here and here

Valuation and the endangered species act here.

This is a tiny fraction of what's out there. What are your thoughts on valuation?  I'd especially like to see if students from different backgrounds look at valuation differently. When you post a reply, let us know your primary field of study. 

An incentive-based program from Duke Energy

Today our household joined the "EnergyWise" program from Duke Energy. By signing up for this program we are agreeing to let Duke install device on our AC unit that signals the unit to use less energy during periods of peak demand (but never on weekends or holidays).  In exchange for this, we get a small monetary rebate ($25) each year and a "free" LED light bulb.  This program falls under the category of incentive-based programs, but unlike most, this one is not created by government, but by the private sector.  My question to you:  Why would Duke Energy pay customers to use less energy? Don't they make profit by selling more energy?  What's going on here? 

John Forbes Nash, 1928-2015

John Nash and his wife died in a car accident this past Saturday in New Jersey.  If you've studied economics (or math, or computers, or politics or biology....), you've been influenced by John Nash. He was awarded the Nobel Prize in Economics in 1994 for his contributions to game theory.

Here is the obituary at the NYT.

Here is a story at BBC News

Here is a story at the WP

Externalities and energy

Externalities occur when the costs or benefits of a good sold in a market are not entirely paid or received by the market participants.  Negative externalities occur when someone other than the buyer or seller incurs a cost when a good is produced or consumed. Many forms of pollution can be classified as generating negative externalities. For example, when you power your car with gasoline, you pay the price at the pump, but other people "pay" a real cost because your consumption leads to air pollution which harms human and ecosystem health.  How much is that external cost?  A new study from Duke suggests that the external cost is an additional $3.80 per gallon of gasoline and $4.80 per gallon of diesel.  These external costs include healthcare costs, loss of workforce productivity, damage to crops, lost school days and higher insurance costs. This means that the "true" price of gasoline is more than $6.00 per gallon.  Society is heavily subsiding the use of fossil fuels.  Is this really a "free market"?  What is a potential policy change that could remedy this obvious market inefficiency?   

Positive externalities occur when someone other than the buyer or seller realizes a benefit from the production or consumption of a good. The use of renewable energy sources can be seen as providing external benefits to society in the form of pollution reduction and economic growth through job creation.  We know that when a market generates positive externalities, the efficient quantity will not be provided.   What is a potential policy change that could remedy this market inefficiency?  

Economics and the environment

As students begin to study the discipline of natural resource economics, there is often confusion about what the subject is about. This is especially the case when students are coming from backgrounds with only limited exposure to economics (e.g. Environmental Studies, where most student have had only one or two econ classes before this one).

Generally speaking, economists try to solve problems using a combination of theory, empirical analysis (data, statistics, math), and intuition.  For example, macro economists try to address issues such as how to keep an economy growing without significant inflation.  Micro economists might try to find the best way to maximize profit for a particular firm or industry. Natural resource economists try to solve problems associated with scarce natural resources.

Some examples from my work include:  How to maximize fishery value while balancing the competing needs of commercial and recreational fishers and maintaining a biologically sustainable stock?  How can Caribbean tourism grow without harming coral reef quality or marine turtle populations?  How can tourism serve to enhance the livelihoods of local populations?  How can governments in coastal areas respond to changes in the quality of natural resources?  What hunting regulations would maximize the net gains to society from white tailed deer populations?  Are tourists willing to pay fees to help finance conservation efforts?  What are people willing to pay to view marine turtles in the wild? Will people pay for marine turtle conservation, even if they never see a turtle in the wild?  How can these willingness to pay values be captured and used for conservation? 

Obviously, these are complex issues that require interdisciplinary effort. One of the things that I really love about what I do is that I work side-by-side with biologists, policy makers and resource users to address these problems. 

Something that should also be obvious is that these are potentially contentious issues. It is easy to get caught up in the emotion that surrounds any debate about environmental issues. Please remember that an economists job is to provide objective analysis (i.e. without personal opinion or bias).  

Below are links to two excellent essays that provide a nice perspective on the economic view of the environment.  The second essay covers non-market valuation, which we will cover in detail later in the summer. It makes a good read now however, as it sets the stage for much of what we're covering at the beginning of the class (e.g. the economic view of value).

How do Economists Really Think About the Environment (Fullerton and Stavins, RFF, 1998)
 
Economic Values without Prices (Loomis, Choices, 2005)

What are your thoughts on economics and the environment?  At the beginning of the course, do you see a role for economics in the environmental policy debate? 

Last chance

What were your favorite topics? Least favorite?
What did you gain from the course? 
If you could change the course, what modifications would you make?

Environment and income

The relationship between income and the environment is an interesting topic to consider on many levels.

In terms of per capita income, we might associate higher income with higher concern for the environment for a couple of reasons.  Countries with higher per capita income have already progressed through a long period of economic growth and development, have witnessed loss of environmental quality and may develop preferences for higher environmental quality.  People may develop a sense of environmental awareness only after they've seen damage first hand.  Further, "green" goods and services are often more expensive than goods that create more environmental harm.  In short, wealthier households 1) may have a preference for and 2) can afford to buy organic products, solar panels and electric vehicles.

There is a lot of data that you could use to support these arguments, including time series analysis of polls addressing concern for the environment (note that the dips in the green line are highly correlated with recessionary periods. Also note the spike during the Deep Water Horizon spill), cross section analysis of spending on "green" products by income levels, or membership in environmental organizations by income levels. 

In terms of aggregate income measures, economic growth tends to result in a structural shift away from activities that create a lot of pollution.  In the initial stages of growth, economies tend to transition from the production of raw materials to agricultural products and then to manufacturing (all of which are relatively "dirty" endeavors). Once "developed", nations tend to outsource these activities to nations with lower wages (following the principle of comparative advantage) and focus production on services and high-tech activities which are relatively clean. We can look at growth in emissions, pollution or rates of deforestation to support these claims. Over the course of this semester, we've seen numerous examples of the association between high discount rates and overuse of natural resources.  

The above two lines of thought provide support for the Environmental Kuznets Curve (EKC) hypothesis, which suggests an inverted u-shape relationship between pollution (on the vertical axis) and aggregate income (on the horizontal axis).  Overall however, the evidence is mixed at best.  There is little doubt that richer countries use significantly more energy and have higher ecological footprints on a per capita basis than poorer countries.  Aside:  Here is a fun little quiz to measure your ecological footprint. Mine is pretty bad (144 basketball courts, yikes!), largely due to a lot of international travel, two cars and a fairly large house. 

Why does the relationship between income and the environment matter? What are some research questions that could be addressed on these topics? How might a better understanding of this relationship (at the household or national level) lead to better policy?

Valuation

As we move on to new topics, let's continue to consider the importance of non-market valuation.

Here are links to some good sources:

Why Economics Matters for Endangered Species Protection (Shogren et al., 1998)

The Role of Economic Valuation in the Conservation of Tropical Nature (Naidoo, 2008)

Conservation Pays (Yuskavitch, 2007, Defenders of Wildlife)

Marine Conservation: How Economic Valuation of Ecosystem Services Can Help (Environment Matters, 2008)

Can Environmental Economic Valuation Techniques Aid Ecological Economics and Wildlife Conservation? (Loomis, 2000, Wildlife Society Bulletin)

Of additional interest:

Economic Incentives and Wildlife Conservation (Bulte et al., 2003)

Tons of references and links here:  Economic Valuation References WRI

Reefs here and here and here

Wetlands here

This is a tiny fraction of what's out there. What are your thoughts on valuation?  I'd especially like to see if students from different backgrounds look at valuation differently. When you post a reply, let us know your primary field of study. 

Incentives, Costa Rica and PES

One of the things we learn in natural resource economics is to look at problems in terms of their costs and benefits.  By asking questions about who gains and who loses (and when, and how) we can gain an important perspective on the causes of natural resource problems. 

While it is certainly true that people behave in ways that we can’t always predict, when given access to private benefits from natural resources, people tend to take actions that promote their own well-being. This access comes in the form of our daily contact with open access and common property resources as well as extraction and habitat conversion on private lands. Individually it does not feel like we’re doing much, but in the aggregate our actions often have significant adverse effects on the environment. 

Yes, some people act in ways that benefit the environment some of the time, but we all pollute in numerous ways to promote our own benefits (comfort, convenience, standard of living), because it’s cheap and easy to do so. As individuals, the costs we pay for access to the world’s resources are low because they are shared by everyone. 

How do we change the calculus?  Let’s try everything and see what works. Education, an appeal to “do the right thing”, and legal mandates on acceptable use, all serve an important role.  Monetary incentives that affect household-level costs and benefits also can be an effective tool in some situations. These incentives come in many forms, most of which we discuss in this course.

One incentive-based method that seems to be gaining favor in developing nations is PES. PES stands for Payments for Environmental Services. The basic idea of PES is to create incentives for conservation of natural resources by transferring dollars from those that benefit from conservation to those who bear the (opportunity) costs of conservation.  

In some PES arrangements government and/or NGOs pay landowners to engage in activities to conserve or restore biodiversity. This can be as simple as letting a cow pasture revert back to its natural state or setting aside lands that would otherwise be used for another purpose. 

Costa Rica is a leader in PES and a great example of the power of this approach. From the 1940s through the 1980s, Costa Rica had one of the highest rates of deforestation in the world.  As recently as 1995, forest cover in Costa Rica was as low as 25 percent of national territory, down from over 85 percent in the early 1900s. The principle causes of deforestation were incentives for the conversion of land to agricultural uses, such as preferable tax treatment for lands used to cultivate crops and support cattle, and heavier tax burdens for “unproductive” lands (i.e. lands not used to produce market benefits). People responded to the incentives they faced. Given the costs and benefits of land use it made sense to convert lands to other uses. 

In 1996, leaders in Costa Rica decided to try to reverse this path of biodiversity loss. The main idea was simple: reward landowners for conservation rather than rewarding them for land conversion. A series of forest laws were enacted, which gave favorable tax treatment to conservation and reforestation, banned the export of primary forest products, mandated that banks provide low-interest loans for reforestation, created a system of national parks and forest reserves and, in 1997, enacted a PES system.  

Costa Rica’s PES system involves direct payments to landowners in exchange for the adoption of land uses and management techniques that provide one or more of four services:  Greenhouse gas mitigation, provision of water or other hydrological services, conservation of biodiversity or provision of scenic beauty for recreation and tourism. Payments are provided by government. Revenues from a fuel tax (ala Pigou) are a primary source of funding. Other sources of funds include sale of carbon credits to other nations and international loans. Between 1997 and 2005, a half-million hectares of forest lands were enrolled in the program. Forest cover is now over 60 percent and rising.

While this progress is exemplary, the Costa Rican Minister of the Environment recently stated that it is getting increasingly difficult to conserve. Without a system of international carbon markets, such as that which might take place through large scale adoption of REDD and REDD+ schemes, he suggested that the Costa Rican path of conservation will soon be unsustainable.

Read more about Costa Rica’s PES experience here at PaxNatura.

Read more about PES here at UNEP and at Ecology and Society.