Welcome to ESM 204:
The Economics of Environmental Management
 Purpose
of the class: to help you
solve environmental problems
 i.e.,
to help you solve generic group
projects.
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Our goal is to help you see the
economic dimensions of environmental
problems and use that information to
generate solutions.
UCSB Bren School ESM 204
Instructors
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Prof. Christopher Costello:
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TA: Zack Donohew
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4410 Bren Hall, costello@bren.ucsb.edu
Office Hours: Th 10:45-12:00
Environmental and natural resource economics, fisheries,
forestry, biodiversity, property rights, environmental mgt.
3308 Bren Hall, donohew@gmail.com
Office Hours: Tue/Wed 1:00-2:00
Property rights, water, common pool resources
Plan to attend office hours! We want to get to know
you!
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UCSB Bren School ESM 204
Course Vitals
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Prerequisites: Calculus & ESM 251 or Econ 100AB
20 lectures, Tuesday & Thursday, 9:30-10:45
1 discussion section per week, run by TA
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Section WILL be held this first week
You should be familiar with Excel SOLVER
You are expected to attend all lectures and 1
discussion per week.
Powerpoint slides typically posted a few hours prior to
class
Workload: Significant. Expect 8-10 hours per week
outside of class, on average.
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UCSB Bren School ESM 204
Grading
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Homework Assignments .. 45%
 Choose 4 “mini-group-projects”: may/should work with a partner, submit 1
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Class/section participation .. 15%
Midterm..20%
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In class – Feb 11
Final Exam..20%
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copy of answer with both names
If you do more than 4, your best 4 grades will be counted
Pay attention to due dates – late assignments will be penalized.
May not use the same partner twice (ie, keep moving!).
Zack covers submission guidelines
Work should be your own!. Do not share outside your team!
Take-home (dist’d March 11, due March 17).
Cheating/plagiarism will not be tolerated
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UCSB Bren School ESM 204
Readings & Preparation
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Readings: most available on web.
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Many readings only available from bren.ucsb.edu domain.
Use snoop if you have to
Several books will be used a lot
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Required:
• Kolstad: Environmental Economics (2nd Ed)
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RBR has recommended books on reserve
• Hartwick and Olewiler: The Economics of Natural Resource Use,
2nd Edition (Addison-Wesley, 1998)
• Boardman et al: Cost-Benefit Analysis, 2nd Ed (Prentice-Hall,
2001)
Lower level book: Goodstein (in RBR)
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UCSB Bren School ESM 204
Preparation
Please come to class prepared.
 Preparation: read the assignments
listed for the day on the webpage.
 I will call on you in class. Please help
make this an interactive experience.
 Questions??
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UCSB Bren School ESM 204
Course Approach
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VERY hands-on
Every lecture designed to help solve a generic group
project.
Lecture Style
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Begin with brief overview from last class + questions.
Motivate new material.
• I will always motivate material with a hypothetical group
project
• If I can’t think of a good use for the material in a real-world,
group-project-like setting, you should not bother learning it.
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Cover new material; ask about readings
Open discussion throughout.
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UCSB Bren School ESM 204
First: What is
environmental economics?
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Environmental Resources:
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Economy and Environment
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Air, water, marketed species (fisheries, timber), non-marketed
species (birds, frogs), natural areas, exhaustible resources
People gain well-being from environment
Environment absorbs waste
Firms use environment to produce goods & services
Firms and individuals subject to environmental regs
People gain well-being from goods & services
Environmental Economics: study of interaction between economy
and natural environment
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UCSB Bren School ESM 204
Two Basic Kinds of
Questions
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Positive: describes what will happen or why something happened
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Normative: describes what should happen
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Why did US drop out of Kyoto?
What firms will leave LA if air regs are tightened?
How will farm profits be affected by a change in average temperature?
How much habitat should be set aside for Gnatcatcher?
What should be the level of GHG controls in the US to balance costs
and benefits?
Economists generally conduct positive analysis
Policy making is supported by normative analysis
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UCSB Bren School ESM 204
What will we cover in Course?
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Course broken into 4 sections:
1.
2.
3.
4.
Project Evaluation: Evaluating public
environmental projects and regulations
Measuring benefits and costs
Environmental Regulation
Managing renewable and non-renewable
resources
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UCSB Bren School ESM 204
Making public
environmental decisions
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UCSB Bren School ESM 204
Why are we studying this?
All group projects are fundamentally
about making decisions about how to
best solve an environmental problem
 Our goal today: look at ways of
evaluating different solutions to
environmental problems: “project
evaluation”
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UCSB Bren School ESM 204
Project Evaluation
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How to make judgments about the
advisability of public actions
Proposed regulations (e.g., air
regulations)
 Proposed projects (e.g., habitat
acquisition)
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Normative issue
UCSB Bren School ESM 204
Example: Gnatcatcher
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Gnatcatcher lives on California Coast
To protect species, must set aside coastal habitat
and protect from housing development
Questions to ask:
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How much land to set aside?
Who should pay for land set-aside?
How to answer questions (i.e., make social
decisions)
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Vote? Who should vote? Majority rules?
• Coastal residents, LA residents, State of CA, US?
Future generations?
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Look at overall benefits and costs?
Bren School ESM 204
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Other
methods to UCSB
decide?
Methods for Project
Evaluation
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Cost-effectiveness – cheapest way to achieve a goal
Cost-benefit – balance pluses and minuses of project
Multi-criteria – looks at ways of achieving multiple goals
Precautionary Principle – how to act faced with great
uncertainty*
Sustainability – only do things that can be continued in
perpetuity*
*Difficult to implement
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UCSB Bren School ESM 204
Cost effectiveness vs.
Cost benefit
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Cost effectiveness analysis:
Start with a goal (e.g., AB32: reduce GHG
emissions to 1990 levels by 2020)
 Given this goal, what is the least-cost way of
achieving it?
 Note: Cost effectiveness says nothing about the
appropriateness of the goal.
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Cost benefit analysis: Weighs costs and benefits
to determine the optimal (i.e. most efficient) level.
(e.g. optimal gas tax)
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UCSB Bren School ESM 204
Cost-Effectiveness Usually
Sufficient for Environmental
Problems
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Easier
Only need look at cost side
 Ignore benefits
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Often more realistic
Client tells you his/her environmental goal
 Wants you to figure out the best way of
achieving it
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Don’t use a bigger hammer than you need!
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UCSB Bren School ESM 204
Cost effectiveness not as
obvious as you might think
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Suppose each student is a polluting firm,
each emits 100 tons of NOx per year.
80 students x 100 tons = 8,000 tons.
2 types of polluters: 40 high abatement cost
($1,000/ton), 40 low cost ($100/ton).
Arnold wants to reduce (abate) NOx
emissions by 50%, down to 4,000 tons.
What policy should Arnold use?
UCSB Bren School ESM 204
Evaluate 2 options
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Option A: Everyone reduces by 50%.
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Option B: Low cost firms shut down emissions.
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Low cost firms: 40 firms*50 tons*$100/ton =
$200,000.
High cost firms: 40 firms*50 tons*$1,000/ton =
$2,000,000.
Total Cost = $2,200,000.
Total cost = 40 firms*100 tons*$100/ton =
$400,000.
Option B achieves the goal at a much lower
cost!
UCSB Bren School ESM 204
Cost-Benefit Analysis
1.
2.
3.
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Dynamic – benefits and/or costs accrue over
time, often over space too.
Benefits & costs accrue to different parties.
Uncertainty about future costs or benefits, risk,
irreversibility.
UCSB Bren School ESM 204
Examples
1.
2.
3.
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Tuolumne River preservation
Drilling in ANWR
Habitat Protection
UCSB Bren School ESM 204
The Tuolumne: A nice place
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UCSB Bren School ESM 204
Tuolumne: background
Originates in Yosemite Nat’l Park
 Flows west 158 miles, 30 miles free-flow
 Many R T
E
species rely on river
 Historic significance
 World-class rafting: 15,000 trips in 1982
 Recreation: 35,000 user-days annually
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are
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hreatened
ndangered
UCSB Bren School ESM 204
Hydroelectric power
generation
River’s steep canyon walls ideal for power
generation
 “Tuolumne River Preservation Trust” lobbied
for protection under Wild & Scenic
 1983: existing hydro captured 90% water
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Municipal, agricultural, hydroelectric
Rapid growth of region would require more
water & more power
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UCSB Bren School ESM 204
“Saving the Tuolumne”
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Dam proposed for hydroelectric power generation.
The “tension”: valuable electricity vs. loss in
environmental amenities.
Benefits: hydroelectric power, some recreation.
Costs: environmental, rafting, fishing, hiking, other
recreation.
Question: Should the dam be built?
 Irrigiation district did CBA supporting dam
 Influential second CBA by Environmental
Defense/EDF (R Stavins)
UCSB Bren School ESM 204
Economic evaluation
district first does CBA –
project a “good idea”
 EDF economists further evaluate costs
and benefits, including environmental
costs
 Traditionally, environmental losses only
measured qualitatively. Difficult to
compare with quantified $ Benefits.
 Irrigation
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UCSB Bren School ESM 204
The costs and benefits
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Benefits: $188 million annually
Electricity benefits: $184.2 million
 Water yield: $3.4 million
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Social Costs: $214 million annually
Internal project costs: $134 million
 Lost recreation: $80 million
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Without recreation: C(134) < B(188)
 With recreation: C (214) > B (188)
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UCSB Bren School ESM 204
Tuolumne River: epilogue
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Clavey-Wards Ferry project dams were not
built….partly due to formal CBA.
Intense lobbying forced the political decision
to forbid project.
Pete Wilson was senator.
Stavins said: “[Wilson] couldn’t say ‘I did it
because I love wild rivers and I don’t like
electricity’, but he could do it by holding up
the study and saying, ‘look, I changed my
vote for solid economic reasons.’”
UCSB Bren School ESM 204
“Oil and the Arctic National Wildlife
Refuge” (Kotchen & Burger)
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7.7 Billion barrels (about US consumption in 2007), at
$100/barrel
 Takes decades to develop
 Almost no price difference
 Distribution: Most benefits to industry profit and AK state
taxes, not federal taxes
Potentially large environmental effects
$613B in benefits from drilling – allocate portion to
environmental causes? (e.g. could increase from $7B in
climate change activity in 2008).
Quid pro quo tradeoff that environmentalists willing to make?
Same issue with oil platforms off Santa Barbara?
UCSB Bren School ESM 204
Ando et al: Species Distributions, Land
Values, and Efficient Conservation
Basic Question: are we spending our
species conservation $ wisely?
 Habitat protection often focuses on
biologically rich land
 Focusing on biologically rich land
results in fewer acres of habitat to
protect species
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UCSB Bren School ESM 204
Cost-effectiveness Analysis
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Goal
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Compare two approaches
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Provide habitat to a fixed number of species
No issue of how many species to protect
Acquire cheapest land to provide protection
Acquire smallest amount of land to provide
protection
Why is this an interesting question?
UCSB Bren School ESM 204
Approach
Conduct analysis at county level in US
 Use average ag land value for price of land
 Use database of species location by county
(endangered or proposed endangered)
 Assume if land acquired in county where
species lives  species is protected
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UCSB Bren School ESM 204
Results
Minimize # sites
Minimize costs
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UCSB Bren School ESM 204
Locations for 453 species
Blue: cost-min only
Yellow: site-min only
Green: both
Cost-minimizing Problem
min
 c x
j j Subject to
jJ
x


j
j Ni
1
For all iεI
where J = {j j = 1, ... , n} is the index set of candidate reserve sites,
I = {i i = 1, ... , m} is the index set of species to be covered, Ni is
the subset of J that contain species i, cj is the loss associated with
selecting site j, and xj = 1 if site j is selected and 0 otherwise.
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UCSB Bren School ESM 204
Conclusions
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For 453 species
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Cost per site 1/6 under cost-minimizing
Result similar to
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Santa Clara River Group Project
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FWS had $8 million from NRDA settlement
Wanted to use to buy habitat
Chose species rich coastal land
Much more bang choosing interior low quality/low
price land
Ecological Linkages Group Project – for TNC
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UCSB Bren School ESM 204