I grew up in Wyoming and my interest in environmental economics stems from three distinct tensions between the environment and the economy of Wyoming. The first was that many people in my town made their living from extracting coal. The second was controversy over the “let it burn” policy during the severe wildfire in Yellowstone in 1988. And the third was the controversy over reintroduction of the gray wolf into Yellowstone which is the focus of this week’s blog.
Reintroduction of the gray wolf began in 1995, but the original proposals date from the mid-1980s (when I was in high school and many of you weren’t born—yes, I’m that old). 66 gray wolves were reintroduced in 1995.[i] The Fish and Wildlife Service originally set a goal of 150 wolves with 15 breeding pairs.[ii] By 2007 the wolf population in the greater Yellowstone area had reached 1,513.[iii] The Fish and Wildlife service recommended that the wolf be delisted from the set of species protected under the Endangered Species Act (ESA) in Idaho and Montana, but retain federal protection in Wyoming. Conservationist balked and took to the courts, where Judge Donald Malloy (U.S. District Court, Missoula, MT) held that the species had to be listed under the ESA in all states or in none.[iv] In the end, Congress added a rider to a budget bill that delisted the wolf in Idaho and Montana and Judge Malloy upheld that congressional action.[v] Game-Set-Match.
A similar struggle is currently underway with respect to delisting the grizzly bear. Fish and Wildlife recommended the bear be delisted, and it was actually delisted from 2007-2009.[vi] But conservation groups again headed to court and won a partial victory. Judge Malloy (same judge) determined that Fish and Wildlife hadn’t adequately studied the potential effects of a decrease in white pine bark on the grizzly bear or established a sufficient recovery plan if the bear population should decline rapidly.[vii] On November 22, 2011, the appeals court upheld Judge Malloy’s ruling.[viii] So the grizzly bear is back on the endangered species list awaiting further review by Fish and Wildlife or further congressional shenanigans.
The striking similarity in these two cases suggests the debate is not over the science of endangerment; over whether the decrease in the white pine bark will really endanger the grizzly bear. This is a battle over control. As long as the gray wolf or the grizzly bear are listed under the ESA, their management is under federal control. If they are delisted, management returns to the states. And these are RED states. Conservationists feel as though state management plans will not reflect their values and will lean to heavily toward ranchers’ preferences. Indeed, since delisting the wolf, Montana and Idaho have introduced hunting licenses for wolves, which sold out quickly.[ix]
Economics can help here because it presents an alternative mechanism for the conservationists and the ranchers to reach mutually beneficial agreements. Ranchers have always been compensated for cattle whose death can be linked to wolves. Some ranchers argue that the value of the lost cattle doesn’t capture the full cost of the wolves on cattle populations.[x] But a market-based solution to this problem could go much further than compensation for cattle losses.
Imagine you give hunting permits for wolves to ranchers as a function of the historical number of cattle lost to wolves. Then ranchers can sell or buy additional “kill licenses,” they can even sell them to (gasp) conservationists. The rancher places some value on that kill license, based on the expected damages from one wolf. Conservationists place a value on the license too which is based on the value they have for one additional wolf surviving. Let the market sort out who values the wolf more. Could it be any worse than Congress?
[i] Kaufman, Leslie November 4, 2011.“After Years of Conflict, a New Dynamic in Wolf Country,” New York Times. Available at: http://nyti.ms/tYsGWW. Last accessed November 29, 2011.
[v] Remillard, Ashley J. August 5. 2011. “Federal Judge Upholds Legislation Delisting the Gray Wolf.” Endangered Species Law and Policy. Available at: http://bit.ly/sQYLmo. Last Accessed: November 28, 2011.
[viii] Huang, Audrey. November 22, 2011. “Ninth Circuit Affirms Lower Court Decision for Strike Rule Delisting Grizzly Bears” Endangered Species Law and Policy. Available at: http://bit.ly/utNmAO. Last accessed: November 28, 2011.
Imagine you are in the market for a new light truck. Let’s say it’s a new Ford Explorer. You go to your favorite Ford dealer and the helpful salesperson tells you that she has two 2011 Explorers with identical performance and features. One of these cars costs $2000 more and gets 49.6 mpg, the other gets 27.5 mpg. You are the type of driver who buys a new car with cash every 10-12 years and drives it into the ground. So you do some quick calculations using a 7% discount rate and figure that you will save nearly $5,200 in gasoline over the life of the car. That’s a net gain of $3,200 over the life of the car. Moreover, you will recoup your additional expenses in the first four years of ownership. Your friend who is shopping with you, finances all of his vehicles. But you run the calculations for him and discover that even if he finances the car over 60 months, he will save $12 per month during the loan period.
If this deal sounds good to you, you are in luck. This is exactly the deal that the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA) claim to be offering in their newly proposed regulation for increased fuel efficiency standards, laboriously titled “2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards” [FactSheet, Full Notice of Proposed Rulemaking (800+ pages)].
The goal of the proposed NHTSA rule is to increase the average industry fleet-wide fuel economy for cars and light trucks to 40.1 mpg by 2021 and to 49.6 mpg by 2025. The simultaneous rule by EPA, which is based off the fuel economy standards proposed by NHTSA, limits greenhouse gas emissions from vehicles to 163 grams per mile (g/m) by 2025. The claim is that these standards can be met and in so doing, consumers will actually save an average of $3,200 per vehicle over the life of a new car. We are from the government and we are here to help!
There is a lot of flexibility built into this rule. There are options to earn credits for over-compliance, which can both be carried forward (banking) and carried back (borrowing). There are allowances for credit transfer between cars and light trucks and even credit trading across manufacturers. There is also plenty of flexibility built into the GHG standards allowing for credits for air-conditioning improvements, off-cycle improvements, an electric vehicle multiplier, and credits for hybridization of full size trucks. All of these sources of regulatory flexibility should lower the costs of attaining the standard and allow each manufacturer to attain the standard in a cost-effective way given its fleet.
Still, the presentation of benefits and costs suggests a free lunch. Actually, a lunch that you are paid $3,200 to eat. Even with all of these cost-lowering flexibility measures, this seems hard to swallow. And it should be, because it is wrong.
To see why the costs are much higher than the analysis suggest, image you are back at the Ford dealer. The salesperson presents a new 2011 Explorer, which gets 27.5 mpg and tells you that this car retails for $22,000. Then she shows you a 1997 model-year Ford Explorer that has never been driven or owned (the odometer reads 0), but this 1997 Explorer has been tweaked to get 49.6 mpg. She’ll sell you this modified 1997 model Explorer for $24,000. What do you choose? Many of you will get the 2011 model with the worse gas mileage. Some of you might buy the 1997 model car with the better gas mileage, but clearly your cost is not just $2000. It’s the monetary costs ($2,000) plus the difference in performance/features between the 1997 and the 2011 model.
What the benefit-cost analysis conducted by NHTSA and EPA says is that by 2025 the car manufactures can produce a car that has the same performance as 2011 cars on the market today, but gets double the gas mileage. This car will cost $2,000 more than cars sold today. But nobody expects that absent this regulation 2025 models will perform like 2011 models. We expect innovation in performance, features, safety, etc. The real cost of the regulation is how much of this we will give up between now and 2025 in order to get a doubling of the fuel economy of vehicles.
I have blogged before about my frustration that the right insists that all regulation is job-killing. But I’m equally frustrated when the left insists that regulations are costless. Maybe doubling fuel economy is a good idea. Maybe the benefits to us of reduced carbon emissions, reduced oil consumption, increased national security, are worth trading off more horsepower, torque, or other features. Maybe not. But that is what a benefit-cost analysis should be helping us decide. We want jobs, economic growth, clean air, clean water, good schools, etc. The challenge is how to balance out those competing desires with our limited resources. It may not be a great sound bite, but it is the truth.
This week, I’m featuring a guest blog by my colleague, Dr. Jeffrey Vincent, the Clarence F. Korstian Professor of Forest Economics and Management at the Nicholas School of the Environment at Duke University.
Most people would agree that it’s a good thing to improve governance: to make governments more accountable, bureaucracies more efficient, corruption less common, and property rights and the rule of law stronger. Most people probably wouldn’t think about the effect of improved governance on the environment, but people in the environmental policy community do, and they think it’s good, too. The forest sector has been the focus of most of this attention. Over the last decade, a raft of international organizations have launched initiatives to improve law enforcement and combat corruption related to forest resources. If you haven’t heard of these initiatives, it might be because many are under the banner of one of the worst acronyms ever written: FLEGT.
There’s empirical support for the idea that improved governance can reduce deforestation. In 2000, UC Santa Barbara economists Henning Bohn and Bob Deacon published a paper in the American Economic Review that investigated the relationship between deforestation and ownership risk in 62 developing countries. They found significant evidence that countries where ownership risk was higher lost forests more rapidly between 1980 and 1985 than countries where this risk was lower.
One of my hobbyhorses is the belief that deforestation is caused by logging. This seems logical—if you cut down trees, then there’s no forest left, right?—but it forgets the fact that a forest is a renewable resource that has the ability to recover from disturbance. Although logging can sometimes lead to the permanent loss of forest cover, in most cases deforestation results not from demand by loggers for trees, but rather from demand by farmers for the land the trees grow on. When I heard Bob Deacon present a draft version of the AER paper at a seminar at Harvard in the late 1990s, I immediately began wondering whether the results applied to logging. Does improved governance reduce timber harvests, and not just deforestation?
An even earlier (1985) paper by another University of California economist, Hossein Farzin at UC Davis, in the Journal of Political Economy contained results that suggested the answer might not be yes. One of the two most important ideas in resource economics is Hotelling’s Rule, which implies that a higher discount rate causes resource users to shift extraction toward the present—to accelerate resource depletion. (You’ll need to guess the other idea. Hint: think “Tragedy of the Commons.”) Farzin pointed out that while this was true for a user who had already made the investment required for extraction, the opposite could be true for a potential user still deciding whether to invest. In the latter case, a higher discount rate would reduce the present value of profits from resource extraction, and this could reduce investment. With less investment, there would be less extraction. So, a higher discount rate has opposing effects on resource extraction, and the net effect can be either positive (extraction increases, if the Hotelling effect is stronger) or negative (extraction decreases, if the investment effect is stronger).
What does this have to do with governance? Improved governance reduces risk, and reduced risk reduces the discount rate. So, we can expect improved governance to mirror the effect of a reduced discount rate and to have opposing effects on timber harvests. In 2010, a decade after the Bohn and Deacon paper (research takes time!), my former PhD student Susana Ferreira (now at the University of Georgia) and I tested this hypothesis in a paper, “Governance and Timber Harvests,” published in Environmental and Resource Economics. We compiled annual data on timber harvests, governance, and other variables during 1984-2006 for 67 developing countries. The panel structure of the data enabled us to control for unobserved differences across countries that could potentially confound the effects of governance. If you take Prof. Bennear’s course, ENV 350, “Program Evaluation,” you’ll learn how to do this.
Consistent with Farzin’s paper, we found that improved governance sometimes reduces timber harvests but other times raises them. Interestingly, it tends to raise them in countries with the worst governance. In those countries, where corruption is the most pervasive and law enforcement the weakest, investment in the equipment, roads, and mills or port facilities required for logging is evidently so depressed that it outweighs the Hotelling effect, with the net effect being to reduce timber harvests. Improving governance reverses this and causes harvests to rise.
This is a disconcerting finding for organizations that are promoting improved governance in the forest sector. It suggests that their efforts could wind up raising timber harvests in the very countries they are most concerned about. Now, higher timber harvests provide some important economic benefits, such as increased employment, government revenue, and foreign exchange earnings. These organizations believe, however, that timber harvests are already excessively high and are causing undue environmental harm. Our results suggest that cleaning up governments could make these problems worse.
This is not to say that improving governance is a bad thing. Improved governance provides other benefits, and our results imply that it can indeed be expected to reduce timber harvests in countries with relatively stronger governance. The important lesson is that policy interventions can have unintended consequences. If this is known in advance, then it might be possible to modify the interventions to manage those consequences. In the case of timber, such modifications could include more careful monitoring of logging investments and logging activity. Just improving governance is not enough.
Frank Asche, Atle Oglend, Marty Smith and I have a new paper that looks at the determinants of prices in different shrimp markets–prices for big and small shrimp; prices for brown, white and pink shrimp; and prices for wild-caught shrimp and farmed shrimp. In particular, we look to see whether prices for different categories of shrimp (different sizes, species, and methods of production) move in tandem. Consumer decisions in markets are a function of relative prices of goods. Thus, if the prices of large and small shrimp move in tandem, then the relative prices of the two sizes of shrimp do not change and consumers choices in the shrimp market should remain unaffected. If this is true across all types of shrimp we say the market is integrated.
There are two important facts to know about the shrimp market. First, we consume a lot of shrimp. Shrimp is the leading seafood product by value. In 2006, shrimp accounted for 17% of all global seafood trade (FAO 2009). It is also the leading seafood product by weight. Americans consume 4.2 pounds of shrimp per capita annually. The next largest seafood product is canned tuna of which we consume only 3.3. pounds per capita (NRC 2007). Second, the method by which shrimp is “produced” has changed dramatically over the last decade. As you can see in Figure 1, farmed (or aquaculture) shrimp has skyrocketed in the last decade and now accounts for more than 50% of global shrimp production.
But why focus on prices and market integration? There are at least four reasons why the nature of the shrimp market matters. First, the increased competition from farmed shrimp has lead to trade disputes. The U.S. enacted trade restrictions on shrimp from a group of countries (all in Asia or Latin America) after domestic shrimp fisherman filed anti-dumping complaints (Keithly and Poudel, 2008). Second, diseases have been an issue for farmed shrimp, particularly white spot disease (Anderson, 2003) Third, there are significant environmental shocks that affect the supply of domestic wild-caught shrimp. For U.S. shrimp fishermen the “dead zone” that occurs seasonally in the Gulf of Mexico potentially influences aggregation, production, and the size distribution of shrimp (Craig 2011; Huang, Smith, and Craig, 2010; Huang et al. 2011). Hurricanes Katrina and Rita caused significant shrimp supply disruptions through destruction of shrimp vessels and processing facilities (Buck 2005), while rising fuel prices are particularly costly for wild-caught shrimp because trawling is fuel-intensive (Ran, Keithly, Kazmierczak 2011), Moreover, costs of complying with the U.S. requirement for shrimp trawlers to use Turtle Excluder Devices decreased domestic supply (Mukherjee and Segerson 2011).
The degree of market integration affects how these environmental and economic stressors affect prices. The impact of all of these stressors (trade, production costs, disease, and environmental) will have a strong impact on the price determination process if the markets are not integrated, while the impact will be weaker in a larger and more integrated shrimp market.
We use monthly price series data from June 1990 through December 2008 to investigate market integration. The details of the statistical analysis are available in the paper, but Figure 2 captures the idea graphically. In Figure 2, we plot the price trends for different sizes of brown shrimp caught in the U.S. The graph shows remarkable co-movement in prices of different sizes. Our statistically analysis bears out this observation. Prices of different sizes of brown, pink, and white shrimp move in tandem. Prices of U.S. wild-caught shrimp and imported farm shrimp move in tandem. The shrimp market is remarkably well integrated.
Why should environmentalist care? Market integration has significant implications for how domestic wild-shrimp fisherman can respond to certain environmental supply shocks. In North Carolina (a much smaller market than Gulf of Mexico), there is evidence that hypoxia has decreased shrimp production in the range of 13% but has not increased prices (Huang, Smith, and Craig 2010; Huang et al. 2011). In the much larger Gulf of Mexico, there is emerging evidence that hypoxia decreases the supply of large shrimp and increases the supply of smaller shrimp likely as a result of aggregation on the edge of hypoxic areas (Bennear, Kociolek, and Smith 2011; Craig 2011). Market integration suggests that the decreased supply of large shrimp cannot be offset by an increase in price. Rather, imports of larger farmed shrimp will increase to satisfy demand. Similarly, domestic supply shocks from hurricanes, oil spill, or fuel price spikes cannot be offset by price increases. In particular, market integration suggests that the economic losses from a significant decrease in 2010 domestic shrimp production – assuming this decrease was caused by the Deepwater Horizon oil spill – was not likely offset by a price increase. Market integration thus has important implications for the long-run economic viability of the U.S. shrimp fishery. The losses from supply shocks are more consequential for producers, and the various shocks are additive as economic challenges to the fishery. But U.S. shrimp consumers are essentially unharmed.
Anderson, J.L. 2003. The International Seafood Trade. Cambridge: Woodhead Publishing.
Bennear, L.S., E. Kociolek, and M.D. Smith. 2011. Estimating the effect of hypoxia on the Gulf Coast shrimp fishery. Selected Paper, AERE Summer Conference. Seattle, WA, June 2011.
Buck, E.H. 2005. Hurricanes Katrina and Rita: Fishing and Aquaculture Industries – Damage and Recovery. CRS Report for Congress, RS22241, Washington DC: Congressional Research Service.
Craig, J.K. 2011. Aggregation on the edge: Effects of hypoxia avoidance on the spatial distribution of brown shrimp and demersal fishes in the northern Gulf of Mexico. Marine Ecology Progress Series (in press).
FAO. 2009. The State of the World Fisheries and Aquaculture 2008. Rome: Food and Agricultural Organization of the United Nations.
Huang, L., L.A.B. Nichols, J.K. Craig, and M.D. Smith. 2011. Measuring Welfare Losses from Hypoxia: The Case of North Carolina Brown Shrimp. In Review.
Huang, L., M.D. Smith, and J.K. Craig. 2010. Quantifying the Economic Effects of Hypoxia on a Fishery for Brown Shrimp Farfantepenaeus aztecus. Marine and Coastal Fisheries: Dynamics, Management, and Ecosystem Science. 2:232-248.
Keithly, W. R. Jr., and P. Poudel. 2008. The Southeast U.S. Shrimp Industry: Issues Related to Trade and Antidumping Duties. Marine Resource Economics 23:459-83.
Mukherjee, Z. and K. Segerson. 2011. Turtle Excluder Device Regulation and Shrimp Harvest: The Role of Behavioral and Market Responses. Marine Resource Economics 26: 173-189.
Ran, T., W.R. Keithly, and R.F. Kazmierczak. 2011. Location Choice Behavior of Gulf of Mexico Shrimpers under Dynamic Economic Conditions. Journal of Agricultural and Applied Economics, 43:29–4