Category: Uncategorized

Webinar: The Cost of Everything & the Value of Nothing

Webinar: The Cost of Everything & the Value of Nothing

Dates: 9/21, 10/19, 11/16 & 12/14 – 12:00PM – 1:30PM

Cost:  $25 session/$80 full series

Registration:  HERE

Join economist Rachel Bouvier for a four-part webinar series entitled, “The Price of Everything and the Value of Nothing: What Environmental Professionals Should Know About Economics.” A firm grasp of economic principles is necessary to be able to articulate the full social value of environmental preservation and conservation. Using economic language helps ensure that environmental protection is on equal footing with other, more marketable services.

Live webinars will be broadcast every third Thursday of the month (with the exception of December), starting September 21 and ending December 14 from 12:00pm to 1:30pm. Presentations will be one hour, with a half hour for an interactive question and answer period.

Archived presentations will be available for registrants to access at any time.

September 21, 2017: Introduction to Economics for Environmental Professionals

What does it mean to put a value on the environment and why is it important to know how to do it?

  • Why put a value on the environment?
  • An economist’s view of the world
  • Basic concepts of economic value

 

Octoberr 19, 2017: Tools that economists use to “value” the environment

Economists use a variety of tools to value the environment. Learn what those tools are and how they are used to put a value on environmental benefits.

  • Use value / Non-use value
  • Stated Preference / Revealed Preference

 

November 16, 2017: Cost-Benefit analysis and discounting

Cost-benefit analysis and discounting are integral to creating accurate accountings of value. This webinar touches on what they are and how to use them.

  • Steps in a Cost-Benefit Analysis
  • An Introduction to Discounting
  • Value of a Statistical Life

 

December 14, 2017: Using Economics in Advocacy and Communication

Learn how to use economic information to make your work meaningful to your intended audience.

  • How to determine your audience.
  • How do you make the information meaningful to them?
  • What forum is most useful to communicate the information?

 

 

 

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.

Greenwashing or economic sense?

Greenwashing or economic sense?

image

Last week Maine Biz [a business focused newspaper in Maine] published a short piece asking five prominent Maine economists about challenges and opportunities facing Maine in the upcoming year.  For the most part I agree with them: the demographic ”winter,” the decline in manufacturing, the restructuring of our labor market. But one issue stood out for me: the rhetoric surrounding “greenwashing” (aka sustainability) and economic freedom. Both issues were clearly on the mind of Dr. Reisman, one of the contributors.  They are on my mind too, but for different reasons.

Dr. Reisman states that sustainability advocates rarely define the term. Sustainable economic development, in the term’s current usage, was defined by Gro Harlem Brundtland and the World Commission on Environment and Development in 1987 as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Economists (and yes, there are economists, including me, who advocate for sustainable economic growth) differ on how best to achieve that goal. Nonetheless, it is an important guide for economic policy.

Sustainable economic development can best be considered as balancing a portfolio.  We have certain assets which can be used to heighten our economic productivity, including manufactured capital and financial capital, but also including natural capital (our forests, fisheries, and clean air and water), and human capital (our workers and their skills).  So sustainable economic development involves increasing the productivity of our overall economy without compromising the value of our assets.

When economic growth, narrowly defined as increases in GDP, is pursued without thought to sustainability, the consequences can be devastating, even deadly.  Take the Flint water crisis.  A decision was made to lower costs by switching from Detroit’s water system to the Flint River, a water source that was so corrosive General Motors stopped using it months before the government admitted there was a problem.  (Untreated river water is much more corrosive than the treated water from Detroit that Flint had been using for decades.  Flint, like Maine, has old, lead-containing pipes, and corrosive water can cause the lead to leach into the water.  When Flint started pumping the untreated water from the Flint River, it did not follow federal regulations to implement a corrosion control program.)

This short term “cost cutting” measure is going to end up costing billions -that’s billions with a “b”-  of dollars to fix.  Hundreds of children and adults may have been exposed to high levels of lead contamination for more than a year. Speaking as a feeling person, this is a human disaster. Speaking as a dispassionate economist, many of our “assets” may have been irrevocably damaged.

The irony? Advocates of “economic freedom” despise the environmental regulations that are put in place to prevent such disasters, as unwarranted intervention in the “free market”.  Now, the National Guard has been called in, and President Obama has declared a state of emergency – a much more intrusive “government intervention.”

The even stronger irony? GDP in the Flint area is likely to go up in the coming months, as the economic activity surrounding the recovery efforts ramp up. The money spent on bottled water, visits to the doctor, infrastructure repair – all that will add to GDP.  The possible brain damage and loss of economic potential does not show up on the national accounts.  GDP increased after the Deepwater Horizon. After Hurricane Sandy. After virtually all environmental and natural disasters.  But is this economic growth?  Not in my book.

So, yes. We may need to worry about the loss of economic freedom and crony capitalism, as Dr. Reisman points out.  But we also need to take care of our assets, including natural and human capital. It’s not greenwashing. Just good economic sense.

[An edited version of this letter appeared in Maine Biz,  January 25, 2016]

Please visit my webpage at rbouvierconsulting.com, visit my linkedin profile, or contact me at rbouvier.consulting@gmail.com.

Investments for Maine’s Future

Investments for Maine’s Future

image

Well,  it’s been a while since my last blog post. September,  to be exact. I taught a class last semester on “Community Economic Development,” and between that and trying to get a new business off the ground it’s been a bit challenging.  But the class is over,  January looks pretty quiet so far,  and so it’s back to the writing board!

There’s a lot to write lately about on the intersection of Maine’s economy and its natural resources. But I’m choosing to write this time about Governor LePage’s surprise decision to release funds for the Land for Maine Future’s program,  funds which he refused to release for about nine months. For those not familiar with the program, or the political controversy that has been swirling around it over much of the past year, I’ll spare you all but the most salient details. What I really want to write about is not the political details,  but the importance of conservation to Maine’s economy,  and,  indeed,  to the economy overall.

The Land for Maine’s program was established in 1987, when Mainers voted for $35 million dollars to conserve land considered “of statewide importance.”  Since then, the program has raised money (through bonds and donations) to conserve land in all 16 Maine counties.  The latest funds,  for $11.5 million, were approved by Maine voters in 2015, but the funds were not released until recently.

Now,  I am an economist.  But I’m an environmental economist, meaning that I consider all of our “assets” to be part of our overall “wealth” (hence,  of course,  the title of my blog).  Let’s consider a few facts about Maine.

We live in (one of? ) the most forested state in the country. But what many people don’t realize is that the vast majority of that land is privately owned.  Some of that is owned by private families, but the lion’s share is owned by private companies. A very small portion of that is owned by the government,  either federal or state.

This means that a large portion of Maine is not protected from development. I have nothing against economic development – we do live in one of the poorest states in the northeast – but I am a proponent of smart development. Of (dare I say it) sustainable development.  To me,  this means maintaining your assets in a sustainable manner. Undeveloped land is one of these assets, and in fact,  one of Maine’s most important comparative advantages. Not only that,  but land protected from development can contribute to a whole host of ecosystem services (habitat provision, flood protection,  soil stabilization,  carbon sequestration, just to mention a few) as well as recreation.  A resource economist can use many different methods to estimate the full economic and social value of a resource. For example, a “return on investment” study conducted by the Trust for Public Land found that for every dollar invested in the Land for Maine’s Future program, $11 was preserved in terms of these ecosystem services.

Consider Governor LePage’s favorite topic when it comes to land conservation: Howard Hill.  It’s a 164 acre forested lot near the State House.  LePage believes the Land for Maine Future program paid way too much for that plot of land based on its assessed value (the difference in estimates of what the land is worth depends on current use versus “highest and best use,”  as explained cogently in this article).  But neither current nor highest and best use accounts for the value of those ecosystem services, or for the “willingness to pay” or “utility” of those who visit Howard Hill.  That utility is likely heightened by the fact that Howard Hill is a wooded oasis in an otherwise busy,  developed area.  Finally,  is the fact that properties adjacent to open space see higher market values than those that aren’t.  If the full economic value – including the ecosystem services and what economists call “non-use” value – of Howard Hill were determined, it might end up being one of Land for Maine’s Future’s most valuable investments.

Are you interested in determining the full economic, environmental and social value of a natural resource? Perhaps to convince funders, grantors,  stakeholders,  legislators,  or the interested public in the value of a resource?  Leave a comment or contact me!

What’s in a view?

What’s in a view?

image

View of Casco Bay from the former Portland Company Site. Photo by David Harry of the Forecaster.

What’s in a view?

Recently, a controversy has arisen in Portland over the proposed development at the site of the former Portland Company.  The controversy has arisen because the proposed development may block the view of some neighbors (and the general public) of Casco Bay.

As always, the story is more complicated than it first appears. 

It is true that if the development were to block the view of some neighboring properties, that could result in a lower property value, as the view is part of what makes the property so desirable.  Economists call this “amenity value.”  Take two houses, identical in all aspects, except one has a gorgeous view and the other does not.  The difference in the housing price would be the “shadow price” of the view.  Environmental economists can determine this shadow price by regression analysis:  inputting all recent house sales and relevant property characteristics (square footage, lot size, age of the property – and the presence or absence of a view) into a statistical program, then “regressing” the sale price of each house on its characteristics.  Theoretically (under certain conditions), the researcher would then be able to isolate the effect of each characteristic on the housing price, and thus determine the “shadow price” of the view.  If that view were to somehow disappear (say through development), then the property owner would experience a loss, equal to that shadow price.

What happens when a developer (Mr. A) builds something that obstructs another property owner’s (Ms. B.’s) view, and thus inflicts a cost on Ms. B, equal to the shadow price of the view?  Theoretically, again, the developer could offer to compensate the home owner, and the two parties could come to Some mutually agreeable compromise.  (If you were fortunate enough to have studied environmental economics, you would recognize a version of the Coase theorem.)
Alas, real life is rarely as simple as economic models might suggest.  In real life, of course, such negotiation rarely takes place.  Instead, what we might expect to see are lawsuits, heated rhetoric, and an outcome that is hardly beneficial to all.

Let’s take a look at the facts in the case. A private developer is looking to build on the former site of the Portland Company on Fore Street. Neighbors (specifically a group calling itself the” Soul of Portland”) contend that the proposed development would block the view of Casco Bay from Fore Street, and thus deprive passers-by of the beautiful view.  Notice that the main argument here is not that the development would harm property values, but that the development would take away something that makes Portland unique. This is different from the pure “property value” route, and a good tactic for the “Soul of Portland” to take, as it doesn’t -on the surface- reek of self-interest.  It’s worth looking into the economic merits of this argument. How would we go about valuing the loss of this view not only to the private property owners, but to the general public?

Now, this becomes a case of non-market valuation. If the view (the “environmental good,” if you will) belongs to the public, and a private developer is going to deprive us of that good, then we need to determine by how much the public ‘s “well-being” would be affected. We might do this by asking people: “what would you be willing to pay to preserve this view?”  (Economists call this “contingent valuation.”)  The kicker, of course, is that people are rarely willing to pay what they say they are in surveys.  If the view is in a park, then economists might be able to conduct a travel cost study – finding out how far people travelled to see that view, and backing out the value of the view from there.  Planners can then decide whether or not to preserve that view, informed by the knowledge of the benefit that the community derives from that view on the one hand, and the benefit that would arise from development on the other.

In this case, however, I don’t think there’s any need to go that far.  Not 30 yards from the section of Fore Street from which the view may be blocked stands Fort Allen Park, a publicly owned, open-access park with the same (if not better) views, benches, binoculars, and a gazebo (where once I witnessed a tango club practicing – pretty cool!).  An even better, up close and personal view can be had from the other side of the Portland Company, from the Eastern Prom Trail, which will be preserved in any case, city officials assure us.

As any economist knows, something that is unique has great value. Something that has many close substitutes does not.  For what it’s worth,  my opinion is: develop the site with care. Use it to bring people to Portland to enjoy the beautiful views that we are extremely fortunate to have in many places around our beautiful city. Be sensitive to issues such as view corridors, public access, historic use, and affordable housing, if applicable.  But don’t deprive the city of a well-thought out development opportunity in favor of a special interest.  And to be honest, when I walk up the hill on Fore Street past the Portland Company site, I’m more interested in catching my breath than catching the view.

What do you think?

So what is a resource economist?

So what is a resource economist?

image

“So what is a resource economist (or an environmental economist) anyway?”

Many people ask me this.  They may know what an economist is (or think they do, anyway – an economist is a social scientist, not an accountant or a financial analyst), but they may be flummoxed when I say I was trained an environmental economist.  “What does the environment have to do with the economy?” they might ask.  To me, it’s an odd question. My answer would be “everything.”  All you have to do is read the paper or watch the news, and the stories just leap out at you.  Internationally?  Try the recent “island building” by China, which has to do with strategic control of the South China Sea, but also with control of valuable mineral deposits on continental shelves.  Nationally?  If the California drought weren’t enough (see lead article), think of fracking, or President Obama’s recently proposed clean water regulation.  Locally?  Recent proposals to change mining regulations in Maine.  Closure of the scallop fishery. The Regional Greenhouse Gas Initiative. The list goes on.

An economist is someone who studies the ways in which people and societies choose to allocate their scarce resources. We may make recommendations on how to do that most efficiently, or most equitably, or in order to maximize “consumer surplus.”  As a resource economist (or an environmental economist – it is a somewhat artificial distinction, and I am trained in both), I specialize in integrating environmental issues into planning and policy, in order to make more effective and responsible economic decisions.

It’s not always easy – environmental services like flood control or groundwater recharge, or environmental damages like pollution-induced asthma or damage to wetlands are not easily translated into economic terms. But what is not measured cannot be well-managed.  I believe in and advocate for sustainable economic development – using our resources in such a way so that future generations can be at least as well off as the current generation.  That phrase -sustainable economic development – has been misused, misaligned, and is, as Nobel economist Robert Solow once put it, “an essentially vague concept.”  But he also noted that vague does not mean useless or empty.  We should use the concept of sustainability as a guide to policies on investment, conservation, and resource use.  Since resource use includes all consumption and production activities, that covers a lot of ground.  All of economics, as a matter of fact.  So rather than a sub-discipline of economics, I prefer to think of it as the “uber-discipline.” 

What do you think?

Invasion of the Green Crabs!

Invasion of the Green Crabs!

image

Since I was away on vacation, there have been many things going on that have implications for both the economy and the environment in Maine. As it turns out, the very area where I and my family were camping is actually Ground Zero for one of the most potentially important invasions in Maine’s local history: the green crab.

The green crab, of course, is not new to Maine waters. According to a lecture I attended at the Gulf of Maine Institute, given by Professor Brian Beal of the University of Maine at Machias, green crabs first arrived in Maine in the holds of boats from northern Europe. But a combination of events has made the green crab, in Professor Beal’s words,”the consummate invader of new ecosystems.”

Their first weapon? Incredible fecundity. Again, according to Professor Beal, a small  (two inch) female green crab can lay as many as 165,000 eggs at a time. That’s a lot of eggs! And a larger female can lay more eggs than that. The females reach sexual maturity at 2 or 3 years, and they typically live for up to 6 years.  Doing some simple math, then, the average female could lay up to 660, 000 eggs in her lifetime.

Their second weapon is resilience. The larvae have an incredible tolerance for a wide range of temperature and salinity , meaning that they can survive conditions that might have killed other, less hardy species.

Third weapon? Voraciousness. These things eat virtually anything. And I mean anything. Most concerning, from an economic viewpoint, is their effect on the soft shell clam industry. One green crab can eat up to 40 soft shell clams a day. That’s a lot of clams! They also have been known to eat lobster larvae and baby lobster, and compete with them (and win) for food sources as well.

In addition, green crabs can wreak devastation on eelgrass beds as they burrow into banks along the edges of tidal flats. The destruction of the eelgrass has two negative effects: erosion of the banks surrounding tidal flats, and removal of habitat for juvenile fish.

Given that the soft shell clam industry in Maine brings in $15 million a year, and given that an estimated 1,700 soft shell clam harvesters rely on the critters for their livelihood, that’s a huge impact. Add to that the effect on the lobster industry (no need to tell you how big that is in Maine), and you have the makings of an economic catastrophe, not just an ecological one.

Do I exagerrate? Possibly. After that very harsh winter we endured in Maine, it’s possible that the green crab population will not be quite so robust this year. However, there is some evidence that climate change may be responsible, in part, for the warmer waters that prove so hospitable to the invasive species. If that’s the case, then we can expect fewer cold winters like the one we just went through to keep the green crab population in check. We may have gotten a respite this year. We should take it to research methods of either protecting the soft shell clam industry from the invaders, replanting eelgrass in protected areas, finding a way of reducing the green crab population so that it doesn’t rebound again) or a combination of the three. Creating a demand for the green crabs – either as food for humans or as lobster bait – may go some way towards alleviating the damage. But the invisible hand of the market can only go so far in this case.

Carbon trading in the Northeast: The Regional Greenhouse Gas Initiative

Carbon trading in the Northeast: The Regional Greenhouse Gas Initiative

image

The Regional Greenhouse Gas Initiative  (RGGI, pronounced “Reggie” for short) holds its next auction on March 11th.  I’m going to devote this post (and possibly the next one) to what RGGI is, the economic theory behind it,  and what it means for the state of Maine. (A little caveat is in order here: like all my blog posts,  this one is meant to educate and entertain,  but it is not meant as a rigorous economic analysis. I do this in my free time,  after all.  ☺)

RGGI is a multi-state carbon-trading exchange. Pollution trading markets have been in existence for decades, most notably (at least here in the US) the sulfur dioxide market that was established in 1995 and existed in its original form until 2011, when it morphed into a few different programs. But that’s another blog post for another day.

Carbon dioxide trading programs (or greenhouse gas trading programs more generally) have been around since 2005, when the first phase of the European Union’s Emissions Trading System was created under the Kyoto Protocol.

The general idea is that some central authority sets a “cap” on the amount of pollutants (usually measured in tons) that an entity such as a state or a country can emit in a given year. Then, the units that are subject to the cap (usually a subset of firms or companies that emit carbon dioxide) look at the going price per ton of emissions, compare that to the cost of abating a ton of emissions, and then decide whether to engage in abatement or to buy “permits,” each allowing them to emit one unit of emissions.  Theoretically, at least, if the price of a ton of carbon is set high enough, more firms will engage in pollution reduction.

As you can imagine,  the questions surrounding the development of a new market like this are complex,  fascinating to me and other economists, and mind numbing to the general public. I’ll spare you the details.  Fortunately,  RGGI is well-established,  so for our purposes they don’t matter anyway.

According to its website, RGGI is “a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce CO2 emissions from the power sector.” (http://www.rggi.org/)  Although there are plenty of other entities that emit CO2 (most notably transportation, production of metal and mineral products such as steel, iron, and cement, and the manufacture  of chemicals), the power generating industry is the largest single source of CO2 emissions in the US at 38%. (Transportation is not far behind, though, at 32%.)

In this case,  RGGI sets a “cap” on emissions for the entire multi-state area.  Regulated companies (power utilities with a generating capacity over 25 megawatts) are required to keep permits equal to their emissions. Permits are auctioned off on a quarterly basis, and the proceeds go to programs to increase energy efficiency and “accelerate the deployment of renewable energy technologies.” 

They also allow “offsets,” which is an interesting story in itself.  Offsets allow firms to invest in greenhouse gas reduction activities in order to get a “credit”. Once they apply that credit,  they may not need to buy as many emission permits as they would have.   There’s a lot of controversy about whether credits are actually effective or not,  but I’ll go into that in a later blog post.

So,  is RGGI effective? Turns out that’s a really difficult question to answer. “Effective” could mean, “does RGGI cost less than reducing the same amount of emissions with traditional regulation (command and control) would?” Or, “has it reduced emissions more than in the absence of regulations?”  There are many different ways of asking – and answering – that question.

Let’s start with the cost. There’s no easy way to compare the cost of the program with the cost of traditional “command and control” regulations. (Many people might say that the program is very expensive – which it is – but the relevant question is not how much the program costs, but how much it costs relative to the alternative.)  The problem with traditional regulation, as many economists see it,  is that command and control regulations aren’t flexible. They say something like,  “Thou shalt not emit more than X tons per day,” never mind how expensive it may be for the firm to comply.  Theoretically,  this sort of permit system should be cheaper,  but there’s really no easy way to know.  And, the media is touting the fact that RGGI states managed to reduce greenhouse gasses 20% faster than non-RGGI states, while still increasing their economies.  (Again,  the true test is: how fast would those economies have grown under an alternative regulatory scheme?  But those counter-factuals are difficult to prove.)

What about emissions reduction? Well, under the  EPA’s recently proposed carbon dioxide guidelines, the nine states that make up RGGI would only have to reduce their emissions collectively by 38% by 2030 (from a 2005 baseline), whereas RGGI claims that the collaborative has already exceeded that goal. 

So,  if seems as if RGGI is a success,  at least,  insofar as its own stated goals. There are other criteria by which to measure success as well: equity (meaning,  who bears the costs and who rapid the benefits,  and are they distributed equally), actual effectiveness (as measured by “is it enough to do what needs to be done?”), and perhaps whether it is successful at providing incentives to change behavior as well.

My next blog post will focus on these issues,  at least,  as much as I can.  Stay tuned!

Update to “The Glass Eel”

Update to “The Glass Eel”

image

Like everyone else in Maine, I’ve been distracted by the winter storms, Valentine’s Day, etc., so I missed this little bit of information:  On Tuesday (Feb 12, 2015), there was a hearing at the Department of Marine Resources on regulations around the harvest quota for the upcoming elver season. As I said in one of my earlier posts, the elver (baby eel) fishery in Maine is incredibly lucrative, always controversial, and sometimes even dangerous.

In order to try and protect the elver fishery, the Department of Marine Resources in Maine has implemented two types of regulation: a license system and a quota system. All elver fishermen have to be licensed by the state (poaching is a big problem), and the quota system means that the total allowable catch cannot exceed a certain amount.  For the 2015-2017 season, that quota is set at the amount of the 2014 harvest.  That represents a 13.6% cut from the quota from last year, even though it wouldn’t represent a drop in the landings (http:// http://www.ellsworthamerican.com/maine-news/waterfront/elver-fishermen-face-big-quota-cuts).  However,  the Commission was actually considering shutting down the elver fishery in Maine, so the fact that the quota equals the harvest from last year represents a boon for the industry (http:// http://www.ellsworthamerican.com/maine-news/waterfront/maine-elver-fishermen-see-quota-cut).

One question in my mind: why did half the licensed elver fishermen not fulfill their quota last year?  Economic theory would suggest that a permit to fish elvers is an economically valuable resource – so why were they not used to the fullest? Was it because it was a bad year for elvers market (the price per pound was down substantially from the 2013 season)? Or some other reason?

Money down the drain? (Part 2)

Money down the drain? (Part 2)

My last blog post was about combined sewer overflows  (CSOs) and how in Portland,  Maine,  millions of gallons of stormwater and raw sewage combined can flow into our rivers and bays after a heavy rain.

In this blog post,  I’ll talk about some of the ways in which municipalities can “fix” CSOs, and in particular,  I’ll talk about Portland’s new stormwater fee and some of its economic implications.
Municipalities have essentially three choices they can use to control CSOs: containment, separation, and “green solutions”. Containment is, as is name suggests, simply “containing” the combined sewage until a better time to treat it. It is essentially increasing the capacity of the system before it overflows –  not “fixing” the CSO, just making it so it’s not needed so often.  This is a relatively low cost option,  although still pretty expensive. If you live in Portland,  you might remember when Back Cove Boulevard was closed for so long.  They were installing these huge storage tanks (conduits) to contain the raw sewage/stormwater cocktail from a heavy rain  until it could be sent to the treatment plant. The one installed in Back Cove has a capacity of 3.5 million gallons – enough to prevent sewage entering the cove in a relatively heavy rainfall,  but there is some speculation that it might not be enough to completely eliminate discharges in some of the intense rains we saw last spring and fall.

Separation involves actually “fixing” the CSO – separating the pipes so that even in a heavy rain, sewage goes to the treatment plant,  while stormwater goes to the ocean/river.  This could be done in new development,  perhaps,  but in a place like Portland,  it would be exceedingly expensive. Effective,  for sure,  but expensive.

“Green solutions” include things like: paving with porous pavement rather than pavement that’s completely impervious (instead of simply running off, rainwater trickles through and is typically filtered by a layer of gravel below,  before seeping into the ground);  rain gardens, which are grasses, plants, and flowers that “like to get their feet wet” in low lying areas,  so that runoff gets filtered before entering any waterways,  and other structures,  like “wet ponds” that retain runoff before releasing it.  A great local example might be the Wishcamper Center at the University of Southern Maine, or,  the beautiful “yardscaping” on the Back Cove trail or at Capisic Pond.

image

Rain garden near Back Cove.  Photo printed in the Portland Press Herald, http:// http://www.pressherald.com/2010/07/04/rain-garden-gives-city-a-green-way-to-stop-flow-of-pollution-_2010-07-04/

These can be expensive options as well,  and wouldn’t be able to be easily ramped up to the scale necessary,  but they have added benefits that are not easily measured: improved flood control, increased groundwater recharge,  habitat and food provision for birds, bees,  and other creatures (berries, flowers,  and seed bearing fruits could be easily integrated into the design), as well as pure aesthetic appreciation.

Portland has chosen to address its CSO issues by a combination of these solutions, with an emphasis on storage. This is reasonable from a financial perspective,  although I personally would like to see more green infrastructure. As always,  the problem is how to pay for it.

Portland has chosen to go with a stormwater fee,  based on the amount of impervious surface a property has.  The more impervious surface (driveways and other paved areas, as well as roofs), the greater the total bill.  (If you live in Portland, you can look up your bill here: http:// http://www.cleangrowthcleanwater.com/calculator.)  Properties with less than 400 square feet of impervious surface are exempt,  and then the fee is levied on increments of 1,200 square feet.  The fee is not levied on public sidewalks or paths,  either.

Now,  most economic policies can be evaluated on the basis of efficiency and equity,  and in this case,  I would add,  ease of implementation and impact on the community. Let’s look at efficiency first.  In this case,  that means “does the fee achieve its goal in a cost-effective manner?”  Here,  I think the question to ask is,  well,  what are its goals? If the goal is to reduce the amount of stormwater runoff from your property,  then I, frankly,  would say no. Let’s take a look at how the fee is structured. It’s based on increments of 1,200 square feet (the first “tier” is 400 to 1,799 square feet).  If I have a property that has, say 1,849 square feet, and I have a dilapidated shed with about 50 square feet of roof surface, then I might be tempted to tear it down to get myself into the lower tier.  But unless you can easily get your property down into the lower tier,  you have no incentive to reduce the amount of impervious surface area that you have. (Except even that example doesn’t work,  because when the city is estimating your impervious surface,  they round to the nearest 1,200 square feet. It would take some serious work to get yourself into the lower tier.) 

You can apply for credits,  which is great: if you install a rain garden or detention pond on your property,  you can apply for and hopefully get a credit. Most homeowners probably won’t take advantage of this,  but some larger commercial entities with large parking lots might. So the fee doesn’t give homeowners much of an incentive to reduce the runoff from their property, which a truly effective fee would. (It would be great if they gave you a credit for having a rain barrel, but that gets into ease of implementation – what if you had one but it wasn’t hooked up? Would the city have to go around to make sure you were actually using it? Not likely.)

Moreover,  a perfectly targeted stormwater fee would not only measure the amount of impervious surface,  but also look at the slope of your property, the velocity of discharge,  etc. That doesn’t make a lot of sense from an implementation point of view.

However,  if the goal of the fee is to pay for the improvements to the system in a relatively cost-effective and equitable manner,  then yes,  I would say the fee is efficient.

Let’s look at equity, now.  If a tax, rather than a fee, were implemented,  then any tax-exempt organization would be, well, exempt. That would include universities and religious organizations,  many of which have large impervious surfaces. Also, taxes would go into the municipality’s general fund,  for which there’s usually a lot of competition and changing priorities.  Revenue from the stormwater fee would be dedicated to improving CSOs and reducing stormwater flows. The fee is also (moderately) progressive: though it’s not explicitly tied to income, one would assume that the amount of impervious surface on a property is correlated with income,  although perhaps not exactly. http:// http://www.stormh2o.com/SW/Articles/The_Stormwater_Utility_Will_It_Work_in_Your_Commun_212.aspx

Finally,  let’s consider the impact on the larger community. One of the objections that’s been raised is that this is just another fee that will make Portland uncompetitive. I find that argument pretty unconvincing. Study after study has shown that among factors that influence firms’ location decisions, a well-educated and highly skilled labor force is among the highest,  whereas environmental compliance costs – even taxes – are among the lowest.  In today’s economy,  where a skilled workforce is less and less tied to a particular industral locale, jobs tend to follow workers,  rather than the other way around.   And since Portland consistently ranks among the top cities in which to live, a stormwater fee is unlikely to influence firms’ decisions. Moreover,  most New England cities are dealing with the same issues, which means that Portland is not losing a comparative advantage,  relative to other, similar – sized towns. After all,  dealing with CSOs is a federal law,  not just a local one. In comparison to other town’s stormwater fees,  Portland’s is pretty comparable (www.crwa.org/…_/Stormwater/Municipal_SFM_Case_Studies_Repo.pdf). 

The “uncompetitive” argument also implies that if Portland didn’t implement this fee,  nothing would be done. That’s not the case,  though. Portland needs to do something about its CSOs,  not out of any misplaced “green” notions,  but because of a consent decree with the EPA over 20 years ago. So,  it’s disingenuous to say that the fee is an added cost levied by an overzealous City council. Blame the EPA if you want,  but Portland would have to do something about its CSOs even if it didn’t implement this fee. The alternative is a tax (drawbacks already mentioned), or perhaps a bond (which might affect the City’s rating), or doing nothing (Portland was already fined for something similar not too long ago).

Finally,  consider the impact of the construction and other activity that dealing with the CSO issue will bring about. A study by the University of Maryland Environmental Finance Center, funded by the National Fish and Wildlife Foundation, found that “[c]ivil engineering, landscape architecture, environmental engineering, construction, nurseries and horticulturists, cistern manufacturers and others are among those likely to see increased demand” from all the activity. Smart companies may actually benefit from the increased business – and be able to capitalize on being part of a “green” solution.