ucsb bren school esm 204 1 welcome to esm 204: the economics of environmental management purpose of...

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.


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!


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.


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


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)


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??


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.


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


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


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


Making public environmental decisions


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”


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


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


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)


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!


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?


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!


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.


Examples

1.Tuolumne River preservation2.Drilling in ANWR3.Habitat Protection


The Tuolumne: A nice place


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


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


“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)


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.


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)


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?



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


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?


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


Results

Locations for 453 speciesBlue: cost-min onlyYellow: site-min onlyGreen: both

Minimize # sites Minimize costs


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


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

ucsb bren school esm 204 1 welcome to esm 204: the economics of environmental management purpose of...

Documents

ucsb bren school esm

bren hall

environmental economics

calculus esm

environmental resources

rbr slide

class questions

office hours