ESP 162: Environmental Policy

1. ESP 162: Environmental Policy Mike Springborn Department of Environmental Science & Policy [image: USGCRP, 2010]

3. Class Website: • Some Canvas (assignments) • Mainly site below http://www.des.ucdavis.edu/faculty/Springborn/courses/esp162/index.html [Google: “esp 162”]

4. Course readings • K&O: Textbook, Keohane and Olmstead—ebook from library • Additional articles are hyper-linked. • Access on campus or use a VPN for access • One or two readings may require being signed into Canvas—will note.

5. For lab on Wednesday • Classroom experiment:   • “Supply and demand” (Experiment 1) • Reading material posted on class website • Theodore C. Bergstrom and John H. Miller, Experiments with Economic Principles: Microeconomics, 2nd edition, Irwin McGraw-Hill, 2000. • Read pages 3-6 [the first three pages of the PDF] before lab. • *****Complete the Warm-up Exercises and submit on Canvas.

6. Key concepts

7. Conceptual overview map on the website

8. I recommend subscribing to the daily digest of environmental policy news via Greenwire: eenews.net/gw (use UC Davis email account)

9. Public policy analysis  the process of assessing, and deciding among alternatives in public choices based on their usefulness in satisfying one or more social goals or values Adapted from: MUNGER, Analyzing Policy (New York, NY: WW Norton, 2000), p. 6 WEINER AND VINING, Policy Analysis (Upper Saddle River, NJ: Prentice Hall, 1998), p. 27

10. We must take a messy world, select and analyze the essential components and provide policy guidance select and formalize (model) the essential components; analyze using methodological tools (jargon) select findings and translate insights into plain language simplifications, assumptions messy social, political, economic, environmental system provide policy guidance and intuition for environmental management

11. Public policy analysis: reality Czech

12. Benefits and Costs • Costs to the state budget: $403M/year (15.6B CZK) • premature death (forgone income taxes and social security contributions) • sickness (medical costs and sick leave) • lost property from fire • Benefits to the state budget: $553M/year (20.3B CZK) • cigarette taxes receipts • savings on retirement pensions and other government provided services for the elderly because smokers die prematurely • Conclusion: smoking is beneficial for the Czech Republic because it saves the state budget every year about $150M (5.8B CZK) Ross (2003)

13. Philip Morris statement: "All of us at Philip Morris are extremely sorry. No one benefits from the very real, serious, and significant diseases caused by smoking" (English, 7/27/01) Philip Morris CEO: the study showed “a complete and unacceptable disregard of basic human values.” (Sandel, 2009, p. 42)

14. Can we/should we put numbers on things? "In this approach [of assigning dollar values to human life, human health, and nature itself] formal cost-benefit analysis often hurts more than it helps: it muddies rather than clarifies fundamental clashes about values. … [E]conomic theory gives us opaque and technical reasons to do the obviously wrong thing.“ -Ackerman and Heinzerling (2004)

15. Can we/should we put numbers on things? • Over the past several decades rigorous and reliable methods have been developed for estimating how individuals value a broad range of environmental threats and damages. • These methods have been validated and even required by government (Stavins, 2011): • Executive Orders (Reagan, Bush, Clinton, Bush, and Obama) • Federal statutes (Clean Air Act, Clean Water Act, CERCLA) • Best practices (Guidelines of U.S. Office of Management and Budget, U.S. Environmental Protection Agency, and others)

16. Only as objective as the practitioner…. • A 2009 e-mail, written by the U.S. Chamber of Commerce’s senior health policy manager proposes: • spending $50,000 to hire a "respected economist" to study the impact of health-care legislation • "The economist will then circulate a sign-on letter to hundreds of other economists saying that the bill will kill jobs and hurt the economy. … • We will then be able to use this open letter to produce advertisements, and as a powerful lobbying and grass-roots document.“ • Source: “Health bill foes solicit funds for economic study” Michael D. Shear, Washington Post, Monday, November 16, 2009

17. Economics is the study of how society allocates scarce resources • Tools for solving problems (e.g. cost-benefit analysis to compare alternatives) • Insights for making broad philosophical arguments. Willamette Basin, OR current land use Polasky et al. 2008  

18. Scarcity • If it were offered to people at no cost, more would be wanted than is available. • Trade-off • The situation when something must be given up to obtain something valued. (“No free lunch.”) • E.g. More goods  more pollution. • Devoting resources (money, labor, time, etc) to issue A means we can’t focus those resources on issues B, C, D, etc. marginal (incremental) benefits Delhi Sands Flower-Loving Fly, San Bernadino County * $6M to move hospital 250 ft marginal (incremental) costs (L.A. Times, 1998) ESP 162 (quazoo.com)

19. Economics is the study of how society allocates scarce resources • Descriptive and Prescriptive • Descriptive (Positive) • “what was, what is, what will be” • Concerned with causality: understanding how the world works • Prediction: forecasts about what will happen under different conditions • Prescriptive (Normative) • “what should be” • Concerned with optimal outcomes (efficiency) and sometimes equity.

20. Environmental economics is the application of economic principles to the study of how scarce environmental resources are (descriptive) and should be (prescriptive) managed • Major concerns: • (1) failures of the market system associated with environmental (public) goods, and • (2) evaluate alternative policies designed to correct such failures • Failures typically occur when human activity leads to costs and/or benefits to others which are not included in prices paid, i.e. when there exist “externalities”

21. Land Conservation Decision-making Example ag  Isabella’s 3 parcels forest forest ag ag • Xavi’s • 3 parcels forest “private”: incurred by the decision maker (Isabella) Should Isabella convert her two forest parcels to agriculture? External benefits External costs (Fisher et al. 2015) External External

22. Study env/res econ to understand causes, consequences & solutions K&O • Many causes and consequences of env. degradation are economic. • "Market-based" policy approaches are increasingly common at all levels of government. • Economics plays a central role in environmental policy debates. • Concerns about the cost burden of environmental policy • Grasping principles enables you to formulate or refute economic arguments. Beijing in 2015 (CNN)

23. Herbert Stein: “Economists do not know very much; other people, including the politicians who make economic policy, know even less about economics than economists do…most of the economics that is usable for advising is at about the level of the introductory undergraduate course.” • American economist • Senior fellow at the American Enterprise Institute • board of contributors of The Wall Street Journal • chairman of the Council of Economic Advisers under Richard Nixon and Gerald Ford. 

24. Basic understanding of policy & economics can reduce mistakes that undermine credibility. Environmental Justice Advisory Committee https://www.arb.ca.gov/cc/ejac/ejac.htm

25. Key ideas in economic thinking • Economic incentives: • forces in the economic world that attract or repel people, causing them to change their behavior (e.g. in production or consumption) in some way. • Without incentives that cause decision makers to “feel” the true costs of their actions, few will voluntarily account for all the effects of their choices. www.danspiegel.net

26. Key ideas in economic thinking • Rational choice: • Economic agents (people, firms, etc) are optimizers who make choices to maximize their own payoffs. (Hackett, 2006, pg. 8) • Behavioral economics acknowledges important departures from rational choice. marginal (incremental) benefits marginal (incremental) costs (quazoo.com) ESP 162

27. Key ideas in economic thinking: Cost/benefit and policy analysis • Valuation for public policy • Values and tradeoffs used in public policy should be informed by observations of the same in society. • Willingness to pay (e.g. for environmental quality), willingness to accept (e.g. for environmental degradation), discount rate.

28. Course Outline, Part I • Analytical Tools: What is a market and how does it function? What economic and environmental outcomes are desired? When is there a role for policy (government intervention), i.e. when does an unregulated market fail to generate the desired outcome? • Benefits and Costs, Demand and Supply • Market Equilibrium and Economic Efficiency. • Introduction to market failure: externalities, public goods and the “tragedy of the commons”. • Benefit Cost Analysis • Overview & dynamic issues • Measuring Benefits • Measuring Costs • Application: Climate Change • Application: Arsenic

29. Course Outline, Part II • Policy for Market Failure • Introduction and criteria for evaluation • Decentralized Policies • Command and Control Strategies • Market Based Strategies • Price instruments (e.g. taxes) • Quantity instruments (e.g. cap and trade) • Applications • Climate change • Invasive species • Ecosystem service valuation • Arsenic in drinking water

30. Additional definitions to study on your own

31. Public Policy; Analysis (Webster’s dictionary) Policy: • A definite course or method of action selected from among alternatives and in the light of given conditions to guide and usually determine present and future decisions. • A projected program consisting of desired objectives and the means to achieve them. Analysis: • Separation or breaking up of a whole into its fundamental elements or components or component parts. • A detailed examination of anything complex made in order to understand its nature or to determine its nature or to determine its essential features, through a study.

32. Public policy analysis  the process of assessing, and deciding among alternatives in public choices based on their usefulness in satisfying one or more social goals or values Adapted from: MUNGER, Analyzing Policy (New York, NY: WW Norton, 2000), p. 6 WEINER AND VINING, Policy Analysis (Upper Saddle River, NJ: Prentice Hall, 1998), p. 27

33. Public policy analysis WEINER AND VINING, Policy Analysis (Upper Saddle River, NJ: Prentice Hall, 1998), p. 27 • Policy Analysis is client-oriented advice relevant to public decisions and informed by social values. MAJONE, Evidence, Argument, & Persuasion in the Policy Process, (New Haven CT: Yale University Press, 1989) p. 7 • The job of analysts consists in large part of producing evidence and arguments to be used in the course of public debate. Source: Perreira (2009) http://www.unc.edu/~perreira/guide1.html

34. Environmental economics is a composite field that draws from several subfields in economics: • Microeconomics (core-general theory): the behavior of consumers (individuals) & producers (firms) interacting in markets. • Public economics: how government policies (do and should) effect the economy and individuals (welfare economics, public goods, externalities, taxation). • Macroeconomics (core-general theory): the economy as a whole with an emphasis on understanding growth (expansion/depression), interest rates and employment • Industrial organization: the behavior of firms under imperfect competition • Political economy: behavior of actors in government • Agricultural economics: behavior of the agricultural sector • International trade: international exchange (patterns of imports and exports) and the movement of production between countries. • Development economics: issues of poverty and industrialization in developing countries. • Game theory: the behavior of individuals/firms in the economy who act strategically (make choices accounting for the expected actions of others). • Econometrics: statistical methods employed/developed to answer economic questions.

35. Resource economics: the study of how society allocates scarce natural resources, usually changes to a stock. • either harvest/extraction or emission of resource stock or stock pollutant. • Major concern: problems following from open access