Welcome to ESM 204:

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Nov 8, 2013 (3 years and 9 months ago)

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UCSB Bren School ESM 204

1

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 204

2

Instructors


Prof. Christopher Costello
:


4410 Bren Hall, costello@bren.ucsb.edu


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, donohew@gmail.com


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 204

3

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 204

4

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 204

5

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: Co
st
-
Benefit Analysis
, 2
nd

Ed

(Prentice
-
Hall,
2001)


Lower level book: Goodstein (in RBR)

UCSB Bren School ESM 204

6

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 204

7

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 204

8

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 204

9

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 204

10

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 204

11

Making public
environmental decisions

UCSB Bren School ESM 204

12

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 204

13

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 204

14

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 204

15

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 204

16

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 204

17

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 204

18

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 204

19

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 204

20

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 204

21

Examples

1.
Tuolumne River preservation

2.
Drilling in ANWR

3.
Habitat Protection

UCSB Bren School ESM 204

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The Tuolumne: A nice place

UCSB Bren School ESM 204

23

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 204

24

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 204

25

“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 204

26

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 204

27

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 204

28

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 204

29

UCSB Bren School ESM 204

30

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 204

31

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 204

32

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 204

33

Results


Locations for 453 species

Blue: cost
-
min only

Yellow: site
-
min only

Green: both

Minimize # sites


Minimize costs

UCSB Bren School ESM 204

34

Cost
-
minimizing Problem

j
J
j
j
x
c


Subject to

1


i
N
j
j
x

For all i
ε
I

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 204

35

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