Author: Rachel Bouvier

Second Quarter 2022 Journal Round Up!

Second Quarter 2022 Journal Round Up!

  1. Hynes, et al. 2022. “Estimating the costs and benefits of protecting a coastal amenity from climate change-related hazards: Nature based solutions via oyster reef restoration versus grey infrastructure.” Ecological Economics, vol 194.
Oyster reefs” by USFWS Headquarters is licensed under CC BY 2.0.

While ecologists have known that nature-based solutions to problems like flooding and pollution control are in many cases less expensive and more efficient than human-made solutions, economists have been rather late to the party. A case in point is discovering that so-called “green infrastructure,” like restored wetlands or oyster reefs, can be better in many ways than “gray infrastructure,” or manufactured barriers to wave action. 

This article investigates the recreational value associated with restoring an oyster reef bar that would act as a natural breakwater versus a permanent seawall on a coastal walking trail that is under threat from sea level rise and storm surge. The authors estimated the costs of protecting the walking trail under both scenarios, and found that the benefit-cost ratio of restoring the oyster reef was several times higher than the benefit-cost ratio of the manmade seawall. Moreover, the analysis does not include the positive ecosystem services that the oyster reef could provide above and beyond providing a natural breakwater, such as pollution control or carbon sequestration. 


2. Huang, Yui and Woodward, R. 2022. “Spillover Effects of Grocery Bag Legislation: Evidence of Bag Bans and Bag Fees.” Environmental and Resource Economics (81:711–741) 

This article investigates the unintended consequences of carryout grocery bag regulations by looking at the impact on sales of alternative plastic bags. The unfortunate conclusion of the article is that both the carry out bag ban and the carry out bag fee that they examined led to a significant increase in small plastic trash bag consumption. Whereas previous studies had looked at whether fees on single use plastic bags in grocery stores directly reduced the usage of those bags or increased recycled bag usage, this is one of the first studies to look at the indirect effects of such policies. Their hypothesis is that consumers reuse plastic grocery bags as trash can liners. When those bags either became more expensive or less available, consumers switched to purchasing small trash bags. This article highlights the importance of considering unintended consequences of well-meaning regulations.

Fourth quarter 2021 and first quarter 2022 journal roundup!

Fourth quarter 2021 and first quarter 2022 journal roundup!

This quarter, I focus on three recently published articles that highlight the value of environmental goods and services: regulations to combat the emerald ash borer, the value of agricultural land, and the value of wetland restoration. 

Hope, Emily; McKenney, Daniel; Pedlar, John; Lawrence, Kevin; MacDonald, Heather. 2021. “Canadian efforts to slow the spread of Emerald Ash Borer (Agrilus planipennis Fairmaire) are economically efficient.” Ecological Economics, vol. 188. 

Emerald ash borer” by NatureServe is marked with CC BY-NC 2.0, via Openverse.

The emerald ash borer is an invasive insect that kills most species of ash tree. Managing the spread of the pest can be very expensive, with inconsistent results. The United States Department of Agriculture has actually removed federal regulations designed to slow the spread of the emerald ash borer, citing the high costs and the uncertain benefits. Canadian agencies have likewise been attempting to determine whether the benefits of regulation exceed the cost. The authors developed a model simulating the spread of the emerald ash borer under various conditions, and then modeled the likely effect of different regulations on that spread. Finally, they determined the economic impact of the emerald ash borer by calculating the cost of removing trees in urban areas and replacing 50% of them. (They did not model the cost of insecticide application due to the complexity of modeling such application at a national level.) For rural areas, the authors calculated the cost of the emerald ash borer by using the stumpage value of the trees. 

Regulations designed to slow the spread of the emerald ash borer include limitations on transporting products containing wood from ash trees, treatments for products that are transported, and periodic audits. As the “true” efficacy of the regulations is unknown, the authors modeled the regulations at varying levels of efficacy. Finally, they then determined the net present value of the regulations. Results demonstrate that, even if regulations are only 25% effective at slowing the spread of the emerald ash borer, benefits outweigh the costs. This is the case even though the authors did not include the economic value of a healthy forest. If that were included, the benefits of those regulations would likely be much larger.

Agricultural landscape certification as a market-driven tool to reward the provisioning of cultural ecosystem services

Borrello, M.; Cecchini, L.; Vecchio, R.; Caracciolo, F.; Cembalo, L.; Torquati, B. 2022. Ecological Economics vol 193. 

File:Bessac 16 Polyculture 2013.jpg” by JLPC is marked with CC BY-SA 3.0.

One of the primary difficulties that agricultural landowners face is the high cost of keeping their land in agriculture, relative to other land uses. And yet, agricultural land provides benefits to society beyond just the value of the food produced on that land. It is a classic example of an environmental externality. This article examines the potential of issuing a “traditional agricultural landscape certification” for the preservation of olive groves in Italy. They found that such a certification commanded a price premium in the market, indicating that the cost to farmers of keeping their land in agriculture could be partially rewarded through the market. 

Richardson, M.; Liu, P.; Eggleton, M. 2022. “Valuation of Wetland Restoration: Evidence from the Housing Market in Arkansas,” Environmental and Resource Economics 81:649–683.

Planting live stakes in standing water” by WSDOT is marked with CC BY-NC-ND 2.0.

Continuing with the theme of valuing environmental goods and services, this article examined the value of wetland restoration (through the Wetland Reserve Program) by looking at the housing market in Arkansas. This article adds to the literature on the economic value of wetlands by looking at temporal variations in the housing market relative to the starting and ending date of wetland restoration projects. Therefore, rather than looking at the value of an already existing wetland, this article examines how improvements in wetland quality could impact surrounding property values. Their research finds a substantial increase in property values – an average of 6 to 10%!  They also find that the wetland size and type were likely to influence the magnitude of the effect, with forested wetlands having a larger positive impact on housing values than pond, lake, or emergent wetlands. Interestingly, open water wetlands had a much smaller effect than non-open water wetlands. The reasons why are unclear.

Third Quarter Journal Reviews

Third Quarter Journal Reviews

1. Can proximity to urban green spaces be considered a luxury? Classifying a non-tradable good with the use of hedonic pricing method Edyta Łaszkiewicz⁎, Piotr Czembrowski, Jakub Kronenberg  Ecological Economics 161 (2019) 237–247

In this article, the authors examine apartment rents in Lodz, Poland, to see whether proximity to “green space” (defined as parks, forests, cemeteries, and allotment gardens) could be considered a luxury good, by which the willingness to pay increases disproportionately as income increases. The authors examined how apartment rents varied according to distance to green space, while controlling for other factors such as square footage and other characteristics. Results demonstrate that proximity to parks and forests has a positive effect on apartment rents – in other words, the closer the park or forest, the higher the apartment rent. However, the results demonstrated that proximity to cemeteries has a negative effect on apartment rents. Although the authors did not discuss this, there is an environmental justice component at play here – if proximity to urban green space is considered a luxury good, then low-income housing is likely associated with a lack of urban green space.

2. From supply to demand factors: What are the determinants of attractiveness for outdoor recreation? Lea Tardieua, Laetitia Tuffery  Ecological Economics 161 (2019) 163–175

Sites such as national parks and other outdoor recreation parks must pursue the dual goal of environmental conservation and attracting recreation.   Managers of such sites constantly face the challenge of increasing visitors without destroying the attributes that appeal to such visitors in the first place.  However, models that predict how attractive a site is to recreation are typically different from those that predict how ecosystem services vary by site. Because of this, it is difficult for managers to evaluate land use tradeoffs. The authors of this study combine data on visitation to a national park in France with spatial data showing characteristics of the specific areas that were visited, and simultaneously relied on a model that predicts habitat quality (the InVEST software). The authors find a negative correlation between the attractiveness of a site to recreation and habitat quality, implying that the two goals (increasing recreation and preserving biodiversity and habitat quality) are at odds. This is not terribly surprising. However, the integration of the economic “travel cost” model with the habitat quality model may be helpful to evaluate the trade-offs arising from land use change proposals.

3. Microclimate effects of wind farms on local crop yields Daniel T. Kaffine Journal of Environmental Economics and Management 96 (2019) 159–173

In Maine, as well as in other states, the possibility of using wind farms to generate more renewable electricity has become a key strategy in mitigating climate change. In many cases, wind farms are sited on agricultural farms as a possible added source of income to farmers. However, one of the possible externalities of wind farms – the effect of wind farms on crop yields – has not been much studied in the economics literature. This article examines microclimate effects: the changes in local temperature, moisture, and carbon dioxide concentrations due to “vertical mixing, turbulence, and wakes created by wind turbines that extend well-beyond their local footprint” (p 159). The article itself is fascinating – describing the scientific microclimate effects of wind farms and their resulting effects on crop yields (soy, wheat, corn, hay, and wheat). Fortunately for advocates of wind power, effects of wind farms on crop yields are either positive (in the case of corn, soy, and hay) or statistically insignificant (in the case of wheat). 

4. The effects of recreational cannabis legalization on forest management and conservation efforts in U.S. national forests in the Pacific Northwest Mark Klassen⁎,1, Brandon P. Anthony Ecological Economics 162 (2019) 39–48

A fascinating and timely study, this article considers the effects of recreational marijuana legalization on forest management and conservation efforts.  The authors point out that illicit drug crop cultivation has actually been identified as a “major stressor impacting the management of public lands,” as over half of the marijuana plants eradicated in 2008 had been grown on public lands. The environmental impacts of such illegal cultivation has led to removal of native vegetation, diversion of natural waterways, agro-chemical pollution, and littering. Furthermore, safety concerns organized crime syndicates had made it difficult for national forest employees and researchers to pursue management goals. Finally, the US Forest Service had to spend resources on monitoring and enforcement, meaning that they could not devote those same resources to other pursuits. The authors attempted to discover whether the legalization of marijuana had reduced the amount of illegal grow sites, which in turn would reduce both environmental and safety concerns. They conclude that “the legalization of recreational cannabis is significantly correlated with a reduction in the annual number of discovered grow sites in national forests in Oregon, while found insignificant in Washington (47).”

Five questions to ask before doing an economic analysis

Five questions to ask before doing an economic analysis

Motionhero [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)]

Every so often, I get requests to do an economic impact analysis of a local tourism event, or a new business that’s recently opened in the area. The person that is asking usually knows enough about an economic analysis to know that they need one (or think they do), but not always enough to make sure that it’s done right, or that the results will be helpful. In this blog post, I’ll discuss what an economic impact analysis is, how one is conducted, and some questions your organization should ask to make sure that it is done appropriately.

There is a fair degree of confusion about what an economic impact analysis is – and what it is not. One of the best ways I’ve found to describe it is to tell a story. 

Suppose that a new minor league baseball stadium was proposed to be built in your town. There are proponents and detractors of the idea, and they both have numbers to back up their position. For sure, the minor league stadium will attract visitors, create jobs, and bring in revenue; proponents of the stadium point to all of those good things. But detractors of the stadium point to the fact that even if the stadium were not built, something else would be built in its place. The proper comparison,  then, is not the stadium versus nothing, but the stadium versus the next best alternative. Who’s right?

The answer, of course, is that they’re both right, and that it depends upon the situation. It’s important to understand the types of economic analyses that are out there, both when your organization wants to undertake one and when you’re trying to interpret one.

Here are five questions to consider:

1.  Economic contribution or economic impact analysis?

While the two phrases may sound the same, they are in fact quite different, and may lead to some very different results. An economic contribution analysis looks at gross changes to the local economy as a result of the activity being studied. In other words, an economic contribution analysis considers the revenue associated with an event, but it does not take into account any “crowding out” of other activity that might otherwise have occurred. 

For example, I’ve recently been asked how I would measure the economic impact of a large sporting event that takes place annually in southern Maine and draws people from all over the country, and some from abroad. Hotels and motels are full at that time, and anyone wishing to book a vacation in the area may be out of luck. Where do those “discouraged visitors” go? If they rebook their southern Maine vacation for another time, then those visitors are not “lost” to the region- but if they go elsewhere due to no vacancy, then that should be counted as an economic cost of the event.

While the above example shows the “crowding out” due to an activity, it is sometimes hard to distinguish new economic activity versus just “reshuffled” economic activity.

Another example: the conference I recently analysed used local caterers for its food. Is the money paid to those vendors directly attributable to the conference? Yes, but in the absence of that particular conference, would those vendors have taken other jobs? If yes, then the money paid to those vendors may be a gross contribution to the economic activity in the area, but cannot be considered a net contribution -and therefore could not be considered part of its net economic impact.

Another recent example has to do with a proposed whitewater kayaking park in southern Maine. We could estimate the number of kayakers who might come to such a park, and the amount of money they might spend in the local economy – but would those kayakers have gone to another whitewater kayaking park in its absence? In other words, how much of that economic activity is new, rather than just reshuffled?

2. At what scale should you measure your impacts? 

Most economic impact analyses can be done at the State, county, or regional level, depending on the type of event and the data that are available. For example, I was recently asked to do an economic analysis of a conference that occurred in Portland, Maine, but for which the attendees came mainly from elsewhere in Maine. In that case, it wouldn’t make sense to do  an analysis at the state level, since only a small percentage of the economic activity attributed to the conference came from outside the state. In that case, it was more appropriate to consider the county as the reference region. We then needed to determine how many of the participants came from Cumberland county versus outside the county.

This question is important to answer beforehand, because it may determine the type of data you need to collect from your conference attendees.

3. Should you consider effects on prices? 

Yet another way in which an economic impact analysis differs from an economic contribution analysis is through the former’s emphasis on resulting factor price changes. For example, it might be tempting to measure the economic contribution of a new manufacturing plant moving to town. But if the local economy is already at full employment, and the plant brings in workers from elsewhere, those workers will need a place to live. That may actually increase housing prices in the area, leading to the displacement of local workers. It is perfectly plausible to have a positive economic contribution, and yet have a negative economic impact.  

It might be easiest to see this point if you visualize a new business that happens to use a lot of water (think a craft brewery) proposing to locate in a water-scarce region. It could be that that new demand for water could raise rates for everyone. If that negative economic impact is not considered, then the proposed project would look better for the area than it may actually be.

4. Economic impact or net economic benefit?

It’s important to remember that an economic impact is not the same as a net economic benefit. The net economic benefit of an activity is the degree to which that activity enhances social well-being in an area – and that well being is not always easily measurable in monetary terms. For example, suppose a factory moved into a neighborhood. The economic impact could easily be measured in monetary terms – number of jobs created, amount of revenue generated, etc., but if the pollution from the factory negatively affected people’s health, the net benefit could actually be negative. Environmental economists have ways of accounting for externalities such as pollution and natural resource degradation.

5. Economic benefit for whom?

This is one of the trickiest questions to answer. Let’s consider the manufacturing plant mentioned earlier. Yes, it might create a number of jobs, but if there is a mismatch between the skills needed at the plant and the skills of the local labor force, those jobs might not benefit the local population. Social impact analysis, whereby the distribution of benefits and costs among different sub- groups of the population are considered, could help answer that question.

Conclusion

There are many questions to consider when either undertaking or interpreting an economic analysis. These are only a few. If your organization is considering one,  please give us a call. We’d be happy to help.

The Rising Cost of Hurricanes

The Rising Cost of Hurricanes

The hurricane season of 2017 has been a severely damaging one. Hurricane Harvey devastated parts of Texas, Maria savaged Puerto Rico, and Hurricane Irma dealt a punishing blow to an already-reeling Florida (not to mention Nate and Jose). As I write this, Hurricane Ophelia – the tenth named storm in a season that was predicted to be “less active than usual” – is brewing in the eastern Atlantic. Whatever the cause of this increase in hurricane frequency, though climate change is a likely culprit, no one can deny that these storms are growing more costly

The World Health Organization estimates that the global cost of hurricane damage per season is rising by 6% a year. (That’s in real dollars, not nominal, by the way, so inflation doesn’t factor into it.) If storms are increasing in strength and frequency, why is more not being to mitigate the costs?

Two words: incentives and avoidance.

Economists believe that people respond to incentives. Make an activity less expensive, and more people will engage in it. Make an activity more expensive, and the level of activity will drop off. Why is that important here?

It turns out that if policy makers make it relatively inexpensive to build your house in a floodzone, lo and behold, more people are going to build their houses in floodzones. Houses that are built in floodzones are, no big surprise, more prone to flooding. According to the Economist magazine’s recent article, Harris County, Houston’s home, has allowed 8,600 homes to go up in the 100-year floodplain. (The 100 year floodplain is not, despite its name, an area where a flood is expected to occur every 100 years. A 100 year floodplain is an area that has a 1 percent chance of being flooded in any given year. That means, over the life of a 30-year mortgage, the change of a such a flood occurring is just about 26 percent.) The more houses located in a floodplain, the greater the expected cost of such a flood. Simple math.

Not only that, but by developing in the floodplain, much of that land was converted from prairie land to impermeable surfaces, like roads, driveways, and sidewalks. Coastal prairie land can absorb large amounts of rainfall. Concrete and asphalt cannot, leading to more flooding and more runoff, and more erosion of existing soil, as the velocity of the water is increased by those impermeable surfaces. The act of putting more development in vulnerable areas is a double whammy – you’re putting more homes in harm’s way, and you’re taking away the natural infrastructure that helps protect against flooding in the first place.

I also mentioned “avoidance” as one of the reasons why hurricane costs have been increasing. It’s no surprise that most people tend to avoid thinking about negative information, and that applies to getting insurance. According to the Insurance Information Institute, only 12 percent of American homeowners had flood insurance in 2016. While most banks and mortgage companies require flood insurance if your home is in a high-risk area, federal law does not require coverage in a moderate to low risk area and almost 25% of all flood-related claims come from those areas. Why is that? Maybe they see it as too expensive, or they’re putting it off. Maybe they’ve simply made a bad bet. Or perhaps they expect the federal government to foot the bill. Even if the government does cover some of the damage (and the federal government did cover about 80% of Hurricane Katrina’s damages), that still means that taxpayers may be subsidizing an increasingly risky bet.

And those bets are becoming riskier. What was once considered a 100-year storm – that is, where the probability of one occurring is one percent annually – is now occurring more frequently. Scientists estimate the likelihood of a storm of a certain size occurring based on historical figures – and we know that more intense storms are happening more often. (For a great discussion of how the US Geological Survey draws the “flood maps,” see this piece from Five Thirty Eight.)

It’s not only the insurance companies, the homeowners, or the federal government who shoulders the increasing costs of hurricanes and other natural disasters. Municipalities can see a blow to their tax base, a rise in the cost of borrowing, and even the possibility of litigation if it’s found that the municipality issued building permits or approving subdivisions that increase the potential of flooding.

What can be done to stop these costs from continuing to increase? Well, for a starter, communities need to take a good long look at their land use regulations. We need to stop subsidizing bad risks. It should be more, not less, costly to build in flood plains. We need to stop subsidizing the conversion of wetlands and other buffer zones to development. We need to preserve our natural infrastructure. And, we need to implement more resiliency efforts.

Municipalities should also make sure that businesses and homeowners fully understand the potential costs of not having flood insurance We need to make sure that the people involved in these kinds of decisions have a clear understanding of the full social and environmental costs of their actions. These moves make economic sense as well as environmental sense.

rbouvier consulting’s mission is to promote a more transparent economy by making sure that social and environmental costs are included in economic decisions. Visit our website to find out more.

Waters of the United States: What’s economics got to do with it?

Waters of the United States: What’s economics got to do with it?

On June 27, 2017, the Environmental Protection Agency proposed a rule that would change the definition of the Waters of the United States (WOTUS).  On whose advice did they do this?  Why, economists’, of course!

Huh?

Let me back up.  In 2015, then-President Obama issued a document redefining which rivers, streams, lakes and marshes fell under the jurisdiction of the EPA and the Army Corps of Engineers.  This rule has come to be known as the Waters of the United States rule.

Non-policy wonks can be forgiven for wondering: 1. how a government can redefine what comprises that waters of the US, and 2. why the move would be so controversial.

The 2015 rule (which was never actually implemented, as it was stayed by the U.S. Court of Appeals for the 6th Circuit) was called by then-speaker of the House of Representatives John Boehner as “a raw and tyrannical power grab that will crush jobs… and places landowners, small business, farmers, and manufacturers on a road to a regulatory and economic hell.” A pretty strong statement.

What the 2015 rule would have done was to clarify (or extend, depending upon your point of view) exactly which waterways the EPA and the Corps can oversee under the Clean Water Act.  Prior to 2015, the Clean Water Act covered only “navigable waters,” such as large lakes and rivers but did not necessarily include tributaries, wetlands, or smaller streams.  The rule of 2015 expanded that definition to include protections for tributaries that may or may not run all year round, such as small streams and wetlands.

But why did economists get involved?  Every proposed rule by the Executive Office must undergo a benefit-cost analysis, demonstrating that the benefits of the proposed rule outweighs the costs.  Bill Clinton first imposed this test in the 1990s, to protect against overbearing regulations.  Leaving aside the merits and drawbacks of imposing such a test, let’s look at what that would involve in this instance.

First, we would need to look determine which bodies of water would now be included under the 2015 definition.

Second, we would need to examine the costs needed to comply with the rules for these newly regulated waters and the potential economic effects of imposing these costs (loss of profitability, job losses, etc).

Next, we would need to investigate the benefits of including the new waters under the regulatory umbrella.  And finally, we would have to compare the benefits and the costs – not as easy as it sounds, especially if the benefits and the costs occur at different times.

As with many environmental regulatory cost-benefit analyses, the costs of imposing a new regulation are relatively easy to calculate.  In this case, they include permitting costs, administrative costs, associated environmental compliance costs, and wetland and stream mitigation costs.  They may also include project relocation costs, if a proposed development were to be located in one of these newly-regulated areas.  These are measurable and concrete costs, and they are not insubstantial. The new definition could have potentially affected municipalities, ranchers, farmers, golf courses, and home owners, among others – anyone with a stream or a wetland on their property (of course, assuming that those waters aren’t already regulated by the state, as they are in Maine).

Benefits are more difficult.  What would have been the benefits of including tributaries, transitory stream, and wetlands under the federal regulatory umbrella?  According to supporters of the 2015 rule, benefits would have included the increased health of larger bodies of water (and by extension, improved human health as well as ecosystem health).  In order to protect a lake or a river, the argument goes, you can’t just regulate what goes into the mainstem of the river – you have to monitor what gets into the tributaries as well. But making that link from reduced pollution to improved aquatic health to ecosystem benefits is anything but straightforward.  That’s what many environmental and resource economists spend their careers doing.

Benefits could include the avoided costs of drinking water filtration, better flood control, avoided risks of cleanups from spills or other damage, and increased health of fish and shellfish populations.  To estimate these benefits, economists at the EPA used “ecosystem services” (see my blog post here).  They identified peer-reviewed economic literature that estimated the value of protecting, preserving, replacing, and increasing the size of wetlands.  Then, from that literature, they arrived at a per-acre value and multiplied that by the number of acres projected to come under the enlarged jurisdiction.

Crude? No doubt. Developing a country-wide estimate on the value of protecting wetlands is not a pretty process.  But at least it gives a number, an estimate of value.  If we consider wetlands to be assets, then protecting more of those assets against harm should have some sort of value. The Obama EPA found that the benefits of expanding the definition of the waters of the United States exceeded the costs by a ratio of at least 1.3:1 (under the most conservative assumptions) to as much as 3:1.

When the Trump Environmental Protection Agency proposed rescinding the 2015 rule (thus reverting to the “state of the world” before the 2015 rule), they needed to show that the benefits of rescinding the rule exceeded the costs. They couldn’t accept the Obama EPA’s numbers, because what was previously a benefit would now become a cost, and vice versa.  So what did they do? They cast doubt upon the Obama EPA’s estimate of the benefits of protecting ecosystem services, in part by saying that some of the studies were too old and out-of-date, and in part by questioning the methodology.  That’s fine – economists regularly squabble about methodology.

Here’s the kicker, though.  Rather than try to improve the methodology, or arrive at a “better” number somehow, they did not include the benefits of protecting ecosystem services at all.  Because the number was “uncertain,” they literally wrote “uncertain” in the column for ecosystem services, and then proceeded to add up the numbers anyway.  In other words, they assigned protecting wetlands and tributaries a value of 0. ZERO.  Anyone looking at the “bottom line” and not bothering to read the entire document would not have caught the error.

Estimating the benefits of environmental protection and conservation is not an easy job. And many environmental advocates feel a little queasy at the prospect of assigning a “value” to ecosystems.  However, by not assigning a value to them we are allowing others to do so – and the value that they choose could be zero.  If we’re serious about protecting our valuable ecosystems from increasing threats, then we need to demonstrate that environmental protection has an economic value – and that it’s not zero.  Only once we can talk about regulations confidently in terms of benefits and costs, can we hope to adequately measure the impact of our (in)actions.

What do you think? Do you have any experience with WOTUS – good or bad?

Economic Resiliency in the Face of Climate Change

Economic Resiliency in the Face of Climate Change

gardiner-flood-300x171

Climate change is expected to have a number of effects in Maine, including coastal flooding, sea level rise, and changing precipitation patterns, among others.  Many efforts are already underway to help protect communities from those effects, including zoning changes, new building requirements, armoring or elevating critical infrastructure, and the like. These efforts all fall under the heading “climate resiliency planning,” as they make a community more resilient to the disruptions wrought by changing weather patterns.

Ensuring that a local economy is resilient to climate disruption is nearly as important as physical resiliency. The local economy is a complex web of interactions between customers, workers, businesses, non-profits, and government agencies within the region. Economic resiliency planning can help to make sure that that web does not break – or, at least, is easily rebuilt – after a disaster.

Current approaches to assessing the impact of climate change too often ignore economic changes that are likely to occur.  Climate change poses physical threats to current businesses, true, but it also poses economic ones, as supply chains dry up, input prices rise, or competitive advantages shift. Focusing on preserving the economic status quo will do little good if advancing sea level rise and increasingly variable weather patterns result in a markedly changed economic landscape.

The first step in developing an economic resiliency plan for a local economy is to anticipate the likely physical changes that will accompany climate change, by taking a look at what areas of a particular municipality are likely to be impacted by certain events.  If you’re located on the coast, or if your town center is situated near a river, as is the case for many Maine towns, flooding from hurricanes or other large storms might be a priority.  Or, access may be more of an issue.  If your town has one or two main routes in and out of town, how likely are these routes to be block by high water, or by downed trees from wind damage? Many communities have already begun this work, through projections from the National Oceanic and Atmospheric Administration (NOAA) or from the United States Environmental Protection Agency.  Through this work, communities can get an idea of what physical assets are at risk from climate-related events.

Next, establish a baseline.  What are the largest employers in the municipality? What are the largest sources of tax revenue? What are the key industries, and what is the sectoral composition of the economic base? Where do most of the non-resident employers live, and what routes are they likely to take to work?  This will create a starting point to assess the local economy’s vulnerability to climate-related disruption.  The results may not always be what you think.

For example, many of Maine’s historically most important industries – agriculture, forestry, fishing, and tourism – depend heavily on the climate.  The output from these industries is likely to be directly impacted by any climate disruptions.  Agriculture, for example, could be both positively and negatively affected by climate change, as higher temperatures lead to a longer growing season, but also to increased need for irrigation.  These are the industries that are deemed “climate-sensitive in supply” by economists.

But there are also industries that are “climate-sensitive in demand” – where consumer demand for goods and services is likely to be affected by changing weather patterns or the physical effects that come with them.  Tourism, certainly, is one of these (both positively and negatively).  Energy is another.

Less obvious, perhaps, are the effects of underlying price changes and linkages between industries.  Let’s give an example.  Suppose that an increase in hot, humid weather in the northeast leads to increased demand for air-conditioning.  (Most areas in Maine now see fewer than four days a year when the heat index rises above 95 F, but that is predicted to change under most projections.)  The increased demand for air-conditioning will likely lead to increased electricity prices.  Those higher prices will ripple through the economy, affecting everything from family’s budgets to food prices to costs to businesses.

Finally, labor productivity might be affected by climate change.  Why? For those of us who have jobs in air-conditioned buildings, and as such are relatively shielded from the climate, the outdoor temperature might not affect our productivity.  But for the proportion of Maine workers who work outside, or do not have access to air conditioning, heat-related stress can be a factor, much as it is for livestock in Maine. Moreover, the effect of warmer temperatures on growing seasons works for pollen-producing plants as well, leading to increased rates of asthma and allergies. The spread of insect-borne diseases, such as Lyme, may affect productivity as well (not to mention impacting the health care sector).

Once the likely changes to the local economy are anticipated, policies can be put in place to help reduce risks.  Some of these policies might include encouraging local businesses to engage in disaster preparedness with others rather than in isolation, developing a directory of local businesses that can assist in rebuilding after a disaster, and identifying alternative procurement routes in case of a disruption in transportation infrastructure.

Planning for economic resiliency is less about rebuilding the day after a disaster, and more about planning so that economic disruptions are minimized should a disaster occur.  And it doesn’t have to be a stand-alone process.  In fact, it shouldn’t be.  Planning for economic resiliency should be integrated into planning efforts at all levels, from economic development to housing and infrastructure planning. While a disaster almost by definition is unpredictable, we do have the ability to anticipate the changes that will come with a changing climate.  We should take the time now to ensure that those changes don’t derail the local economy.

*Photo Credit: Maine Emergency Management Agency. Flooding in Gardiner, Maine. 2013.

Can Maine benefit from mining?

Can Maine benefit from mining?

With Maine’s forested lands and iconic rocky shoreline, the notion that forestry and fishing were once the mainstays of Maine’s economy should come as no surprise to anyone familiar with the state. But mining?

Well, yes – although you wouldn’t know it from looking at today’s employment figures.  But in addition to the geological phenomena that endowed Maine with its rocky soil and many lakes,  Maine was also blessed with an abundance of minerals from volcanic activity – at least in certain areas. In the late 1800s, Maine experienced something of a mini-boom in metallic mining – mining for iron, silver, copper, and zinc. However, a sudden drop in prices led to the abrupt decline of the industry, and Maine did not experience much mining activity until World War II.

In the mid-1970s, however, increased mineral exploration led to the development of several important caches, mainly copper, zinc, and lead. Those deposits have not been mined – yet. Why? The answer is complicated, but it has to do (at least partially) with the Callahan Mine, near Brooksville, ME in Hancock County.  After the zinc and copper mine ceased operation in 1972, the area was found to be contaminated with polychlorinated biphenyls (PCBs), arsenic, and lead, among other heavy metals. The Environmental Protection Agency began a remedial investigation in 2004, with remedial action beginning in 2010. Clean-up is on-going, with passive treatment systems installed within the tailings impoundment and the removal of contaminated soils, either disposed of off-site or placed within a confined aquatic disposal (CAD) cell in another abandoned mine pit (Goose Pond). Full cleanup is expected to cost at least $23 million.

Unfortunately, even though remediation activities are ongoing more than 40 years after the site closed, groundwater at the site is still considered unfit for human consumption, and shore birds and other organisms are at risk. Part of the former mine site is located within the Goose Pond Estuary.

Within this context, the Maine legislature passed mining restrictions in the early 1990s that effectively prohibited metal mining. As a result, any mining activity in Maine was restricted to non-metallic mining (quarrying for rock, for example), at least until 2012.  While there still has been no active metallic mining since the 1990s, there sure has been a lot of activity.

In 2012, the Maine Department of Environmental Protection was directed by the Legislature to “modernize” the state’s 20 year old mining rules.  The new rules consisted of two parts: a section requiring permits for mineral exploration; and a section regarding the permitting process for mining-related activities.  The first part was adopted in 2013, but the second part was not approved by the legislature, hence creating an inconsistency between the existing mining rules and the Mining Act. The result has been a regulatory mess. In May of 2015, the Legislature’s Environment and Natural Resource Committee voted 8-5 to amend these rules again, but the resulting amendment failed to pass the Legislature.  By this time, both pro- and anti- mining positions were firmly entrenched.

Most recently, the Board of Environmental Protection voted unanimously to endorse a new set of regulations.   The proposed regulations attempt to resolve some of the shortcomings that had been pointed out last year. However, questions remain.

As an environmental and natural resource economist, my job is to look at the potential costs and benefits of any proposed legislation.  On the benefits side are the potential jobs and increased tax revenue that could come about from any development. On the costs side, of course, are the possible negative effects on the environment.

Let’s take a look at the benefits side of the equation. Anthony Hourihan, director of land development for Irving (a mining company with interests in Bald Mountain, one of the sites at the center of this debate), suggested that allowing this type of mining in Maine could result in 300 direct jobs and 400 indirect jobs, and a projection of $126 million in state and local taxes. Given that the proposed mining area lies in Aroostook county, an area of the state that experiences chronic persistent poverty and currently has an unemployment rate of 5 percent (as compared to 3.8% statewide and only 3.1% in Cumberland County), that is no small benefit.

But who will get these jobs?  Mining is not primarily a blue collar occupation any more -in fact, writes Phillipe Dolzone , a writer for the Balance, an online financial advice site, “The increasing complexity of the mining process and involved technology nowadays requires a much higher level of skills, including computer literacy.  As a result, most of the mining groups will more likely hire recently graduated students from high school programs in mining or technical school programs.”  Currently, Maine has none of these. So the first step in ensuring these jobs go to locals is to encourage any mining company that wants to establish a presence in Maine to incorporate a local training program, perhaps by partnering with a local Community college or trade school. One of the pitfalls of this “potential jobs” argument is just that- the jobs are potential. The job of a good economic development director is to ensure that those promised jobs do, in fact, materialize.

While a return to the days of mining camps is unlikely in Maine, companies may find it less costly to import talent from elsewhere rather than to foster it locally.  That may also be a boon to the area -if families come to Aroostook county for the mines and decide to stay, that itself is economic development.  It really depends on how long the mining activity is expected to last at a particular site. That,  in turn,  depends on the amount of reserves at the site and the rate of extraction, which in turn is determined by the price of the minerals and the cost of the technology needed to remove them.

That was the easy part. Now to look at the potential costs. Open pit mining,  which is the most common method and that most likely to be used in Maine, has the potential to expose radioactive elements,  as well as potentially contaminate groundwater and surface water. As minerals may be present in small quantities in a geographic area,  large quantities of ore need to be refined to get at it. Contaminants may be released into the water through separation of the minerals from the surrounding rock, where slurry containing mine tailings, water, and pulverized rock (which may in itself contain toxic or radioactive materials) is created. Other potential environmental costs are disruption to ecosystems and endangered species habitat,  large scale water extraction, and erosion.   Finally, some environmental groups have expressed concern that mining activity could affect Maine’s tourism industry.

To minimize these costs (and to maximize net benefit), the tailings or residue from mining activity must be contained and disposed of in a way that doesn’t adversely affect sediments, groundwater or surface water. Much of the waste that is generated is likely to be toxic or radioactive, and so proper disposal is essential.

Likewise, in order to minimize the harm done,  proper siting techniques need to be used. The mine’s footprint, including any access roads, must be sited in such a way that they don’t impact sensitive areas or endangered species habitat, or have the potential to increase flooding,  deforestation,  or erosion.

The biggest issues in the current fight over mining rules in Maine seem to be about both where mining can and can’t occur,  and what safeguards (environmental and financial) are in place to ensure restoration of the site after mining activities cease, as well as to pay for clean up should a disaster occur.

There are potential benefits and costs to mining in Maine.  The job of good policy is to ensure that institutions are in place to maximize the benefits and minimize the costs – as well as to ensure an equitable distribution of costs and benefits.  These include policies on local hiring, training and education, proper siting, and financial safeguards. Only then should each proposal be evaluated on its own merits.

I personally would like to see more economic development in Aroostook County. But only if that development does not come at excessive cost to the environment and to other industry.

What are your thoughts? Post them here!

The Social Cost of Carbon: Implications for Maine (Part II)

The Social Cost of Carbon: Implications for Maine (Part II)

My most recent blog post, “The Social Cost of Carbon: Implications for Maine (Part I),” went into some of the details behind calculating the social cost of carbon – a number that is used to illustrate the economic damages anticipated by climate change and therefore linked to carbon dioxide emissions.
This blog post will be a bit more policy oriented.  Once we arrive at a social cost of carbon, what do we do with it?  How can we use it to reduce the amount of carbon that’s emitted into the atmosphere?

Essentially, there are three policy options to reduce climate change.  One is what economists like to call “command and control.”  This is standard regulation – where each company or industry is given a standard beyond which they are not allowed to pollute.  If they are found to have polluted beyond that standard, they are then (typically) fined a certain amount.

The second and third option are what economists call “incentive-based regulation.”  Rather than give companies or industries a hard and fast limit, this type of regulation gives the regulated community an incentive to reduce emissions.  The incentive could be in the form of a subsidy for each unit of pollution reduced, or, alternatively, a tax system could be put in place.  In that case, the firm’s incentive to reduce pollution is the avoided tax on each unit. (From an economic perspective, there is actually no difference between a tax and a subsidy when it comes to determining the “efficient level” of pollution.  From a political perspective, of course, there is a huge difference.)

A third option is to implement a trading scheme.  The idea is simple: firms are distributed a certain number of permits or “rights” to pollute. (The permits could be initially distributed free of charge, or the permits could be auctioned off.)  Firms that could then reduce a unit of pollution more cheaply than the permit price would do so, and sell the unused permit on the market to other firms that have a more difficult time reducing pollution.  The firm’s incentive to reduce is the price that they get from selling their permit.  Creating a market like this is not without its difficulties, and markets for pollution have met with varying degrees of success.  One pollution market close to home is RGGI, the Regional Greenhouse Gas Initiative, which is the topic of one of my earlier blog posts.  The revenue gained from auctioning off the permits goes to energy-saving initiatives.

One of the major difficulties in both of these is to set the “right” price – too low, and not enough firms will reduce their emissions; too high, and it can create political dissatisfaction and a drag on the economy.  (A side note: unbridled carbon emissions are already creating havoc with Maine’s economy – but that will be the topic of a later blog post.)

A second major difficulty (what I like to call the “liberal’s paradox) is that implementing a carbon price will necessarily be regressive – the burden of the tax will be felt disproportionately among lower-income households.  A price on carbon – whether it’s a tax or a permit system – will raise the price of carbon-intensive goods and services, such as fossil fuels and conventionally-generated electricity.  Low-income households spend a higher percentage of their income on fuel and electricity than do higher-income households.  What to do? It turns out that what you do with the revenue from the tax (“revenue recycling”) can moderate or even negate the regressivity of the tax.

The think tank Resources for the Future (RFF) has published a series of articles addressing this very topic.  I’m going to address three possibilities for revenue recycling.  Two of them have to do with reducing taxes on other things – shifting the burden from taxing economic “goods” (like income and labor) to taxing economic “bads” (like pollution).  (After all, if part of the point of a tax is to alter behavior, why tax good things like income and employment?)  The third has to do with returning the revenue directly to the people.  So I’m going to focus on three alternatives: tax carbon, but lower the tax on labor income; tax carbon, but lower the tax on capital income; and tax carbon, but return the revenue to the people in the form of a dividend or a lump-sum rebate.

RFF analyzed these three alternatives for their impact on different income groups to see which groups were “better off” after the tax and revenue-recycling scheme, and which were “worse off.”  (It’s important to note that RFF did not analyze the effects of reducing carbon emissions – the primary goal of the tax, after all! – on the welfare of each of these groups.  It’s well-known that low-income populations are the most sensitive to climate change, and therefore the group most likely to benefit from a reduction in greenhouse gas emissions.)

What they find, summarized, is this: the labor tax recycling scenario found that almost all groups ended up slightly worse off (the groups’ welfare or well-being declined by less than a half of a percent), but that the highest income group ended up with the biggest decline in welfare.  The capital tax recycling scheme benefited the highest income group, while generating a reduction in welfare for all other income groups of less than one percent.  And the lump sum rebate scheme benefited the lowest income group by more than three percent, while harming the highest income group by almost two percent.  From an efficiency perspective, the capital tax recycling scheme is the most efficient (that is, the policy that “distorts” the economy the least).

I’ll replicate RFF’s graphic here:

Source: 2015. Williams, Roberton C., Burtraw, Dallas, and Morgenstern, Richard. “The Impacts of a US Carbon Tax across Income Groups and States.” Washington, DC: Resources for the Future).

Why such differences?  Largely, it has to do with where individuals earn their income.  Generally speaking, high-income households get a larger percentage of their income from capital (stocks, bonds, and property), while middle-income people rely more heavily on income from labor.  Low-income people typically get a larger percentage of their income from transfer payments, which not only include food stamps and unemployment insurance but also Social Security.  That explains why lowering the tax on capital would exacerbate the regressiveness of the carbon tax, while lowering the tax on labor would be slightly progressive.

What about here in Maine?  I wasn’t able to get data directly for Maine, but only for New England as a whole.  As it turns out, all the schemes end up diminishing the welfare of New England residents, but the lump-sum rebate actually performs the worst.  Why?  The answer mainly has to do with the fact that, overall, New Englanders receive a relatively high percentage of their income from capital as opposed to labor.

How about Maine, though?  Is that the case? Looking at the Bureau of Economic Analysis for 2015, I noticed that Mainers as a whole received about 60% of their personal income from wages and salaries.  An additional 22.5% comes from personal transfer receipts, which include Social Security benefits, medical benefits, veterans’ benefits, and unemployment insurance benefits.  (By far the majority of these personal transfer receipts are retirement income and income from other benefits, excluding unemployment insurance benefits and income maintenance programs such as general assistance.)  A little less than 18% comes from capital and property income.

By contrast, Connecticut receives about 66% of its personal income from wages and salaries, 12.8% from transfer payments, and over 21% from capital and property. This implies that lowering the tax on capital would not benefit the average Mainer as much as the average person from Connecticut – but without doing the calculations, I can’t be sure whether the labor tax recycling scheme or the lump sum dividend would be more or less welfare changing.

Of course, the election on November 8 may have made this a moot point.  Passing a carbon tax (or fee, as some like to call it) has had a difficult time in the past, and the election of Donald Trump has made that possibility more remote.  Any action now is likely to arise at the state level – which is why state level analysis is crucial.  Climate change will likely have a disproportionate effect on those who are least able to protect themselves.  Any actions to mitigate climate change should not increase the injury.

The Social Cost of Carbon: Implications for Maine (Part I)

The Social Cost of Carbon: Implications for Maine (Part I)

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(This will be the first in a series of blog posts on carbon emissions, their costs and implications for Maine, and existing and proposed policy prescriptions.)

Last week, an article made the rounds entitled “the social cost of carbon“. This is of special interest to me right now, because I recently began teaching Environmental Economics at the University of Southern Maine. (Being a professor used to be my full-time job. Now I’m an economic and sustainability consultant, but teaching that class one day a week keeps me up to date on the most recent articles in my field.)

The concept of “social cost” in economics is nothing new, of course.  Economists have long recognized that the production and consumption of certain goods produces negative externalities, or costs imposed on “third parties” who are not directly involved in producing or purchasing that good.  Such externalities can be called social costs, and while it’s difficult to measure such social costs, environmental economists do their best (see, for example, my recent blog post on ecosystem services).

So why this new article on the social cost of carbon, and why is it taking on a new importance now? Because the social cost of carbon has now been upheld by a federal appeals court.

The details of the case are not particularly important for our purposes here. Suffice it to say that, every time a federal agency imposes a regulation, they are required to demonstrate that the benefits of the regulation exceeds the costs.  This particular case was about improving the efficiency of commercial refrigeration equipment.  But if the government (in this case, the Department of Energy) wants to tighten efficiency standards, they need to show that the costs of meeting the new efficiency standards aren’t exceeded by the benefits.

The costs of meeting the proposed standards are relatively easy to calculate. Refrigeration equipment companies might have to use new technologies or inputs, which are presumably more expensive than current methods. But how to calculate the benefits of tighter energy standards?  Enter the social cost of carbon.

The social cost of carbon is, according to the EPA, “meant to be a comprehensive estimate of climate change damages and includes, among other things, changes in net agricultural productivity, human health, property damages from increased flood risk and changes in energy system costs.” Yet the EPA admits that the social cost of carbon does not include all damages, because “of a lack of precise information on the nature of damages and because the science incorporated into these models naturally lags behind the most recent research.”

The economic and scientific calculations that went into arriving at  the social cost of carbon are mindboggling. The estimates used three well-known (well, well-known in certain circles) integrated assessment models that consider the linkages between climate processes and economic growth. These models translate emissions into atmospheric greenhouse concentrations, from there into changes in temperature, and finally from there into economic damages.

It is an ambitious undertaking, and some would say an impossible one. There are so many uncertainties in any step along that chain. For example, the models are ill-equipped to deal with non-linearities or “tipping points.”.  In addition, the damages from an additional unit of CO2 is unlikely to have a linear effect (as a price per ton of carbon would imply), but increase as more carbon is emitted into the atmosphere. Dealing with future costs is difficult as well, as it involves “discounting the future,” a sticky ethical and legal problem as well as an economic one.

I am of the school of thought that “some number is better than no number.” Yes, the social cost of carbon as it stands now is highly imperfect and probably a gross under-estimate of the full social damages caused by a ton of carbon dioxide in the atmosphere.  However, it is better than assigning a cost of zero, which would be the implicit price had the social cost of carbon not been considered.

This blog is supposed to focus on the links between the economy and the environment in Maine. So far this blog post hasn’t done that – but be  patient!. The next blog post will focus on some of the possible solutions in terms of mitigation of climate change via a tax or a trading scheme (specifically for Maine), and the last will sketch out what’s at stake for the state. Stay tuned!