Welcome to ESM 204: The Economics of Environmental Management

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 (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) 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: • Project Evaluation: Evaluating public environmental projects and regulations • Measuring benefits and costs • Environmental Regulation • 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 • Dynamic – benefits and/or costs accrue over time, often over space too. • Benefits & costs accrue to different parties. • Uncertainty about future costs or benefits, risk, irreversibility. UCSB Bren School ESM 204

21. Examples Tuolumne River preservation Drilling in ANWR Habitat Protection UCSB Bren School ESM 204

22. 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 RareThreatenedEndangered 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.’” UCSB Bren School ESM 204

29. “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

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 min Subject to For all iεI where J = {jj = 1, ... , n} is the index set of candidate reserve sites, I = {ii = 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. 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 UCSB Bren School ESM 204