written by Joshua De Santiago
When the Caribbean and Gulf skies cleared after Hurricane Isaac, fishermen set out to reap a harvest from the reefs with the blessing of ocean biologists and seafood chefs. The fishermen are actually doing a much-needed service to the tropical reefs by whittling at the prolific and venomous lionfish, an invasive species that poses a serious risk to the fragile ecosystem, and restaurants are serving up lionfish with gusto. As a native Floridian, I endorse this unusual method of environmental stewardship – as long as the fishing is kept in check to protect the other reef wildlife. But how did this peculiar way of species control appear?
The lionfish (Pterois volitans and Pterois miles) arrived in the American East Coast sometime in the early 1990’s, speculated to have been released by well-meaning aquarium owners no longer willing to deal with the fish’s poisonous and painful spiky fin rays. A native of the South Pacific and Indian Ocean, the lionfish has few natural predators in the Atlantic and its voracious appetite has made it a grave threat to tropical reefs in the Gulf of Mexico, the Caribbean, and the East Coast. The worst case scenario according to a study from Oregon State University’s Department of Zoology and the NOAA’s National Centers for Coastal Ocean Science is that the lionfish outcompetes the ecologically and environmentally important snapper and grouper populations and eats the coral reef ecosystem into demise. The lionfish’s population could prove to be too great of a stressor on reefs that are already subject to overfishing.
In 2010, the Florida Keys National Marine Sanctuary opened up its waters to fishermen with a license to catch as many lionfish as they can in a day in an attempt to reel in the lionfish’s growth. These “lionfish derbys” are now sponsored by the Reef Environmental Education Foundation (REEF) and occur several times a year. Cash prizes are awarded to boats with the biggest hauls and scientists take samples of the captured fish in order to learn more about them. Meanwhile, the majority of the fish are sold to restaurants and chefs on shore who cook them in a variety of ways for the crowds that gathered for the fun activities that form part of the lionfish derby. I can tell you from experience that these derbys bring in a huge haul – the biggest usually tally around 1000 lionfish – and each and every one is delicious. Though even a light prick from the spines can produce an intense pain, it is usually not fatal to humans. The venom denatures when cooked and the flesh has no venom concentrations.
Lad Akins of REEF confirms that diving fishermen are effective at keeping down the population of lionfish at the sites they frequent, though there are still upwards of 300,000 fishin the Florida Keys alone. The Oregon State Zoologists suggest that the most effective method of management is actually limiting fishing of and providing marine reserves to the few species that can feed on the lionfish. I believe a combination of both of these methods would protect the reefs best. The presiding Floridian fishing authorities should work with the REEF and NCCOS centers to create permits that allow for a greater number of fishermen to bring in lionfish. Additionally, restrictions should be developed on fishing species that predate upon the lionfish and the fish that compete with lionfish for food. Though humans may be as voracious as the lionfish, we will need to develop new policies to keep their population in control and protect our reefs.
Last Thursday, I had the pleasure of listening to Hunt Alcott, Assistant Professor of Economics at NYU, present some new work on the impact of taxation when consumers are inattentive to certain types of price signals.
Earlier in this course we learned about different types of taxes: corrective taxes that “correct” a market failure and increase social welfare and distortionary taxes that raise revenue, but decrease social welfare. Dr. Alcott and co-authors’ provocative hypothesis is that when consumers make mistakes in thinking about different types of prices, you can construct taxes that are not corrective, but nonetheless increase social welfare. Literally, you are taxing people to make them better off. This is “We’re from the government and we’re here to help” taken up a notch.
To understand this hypothesis we need to define the particular type of mistake that consumers are making. This mistake is what the authors call “inattention.” Drawing on the literature, they argue that people are often more price responsive to purchase prices than to other implicit prices or ancillary costs. For example, people are more responsive to purchase price than shipping and handling costs or sales tax rates. They argue that the long run fuel costs associated with operating a vehicle are similar ancillary costs and consumers may be inattentive to these costs when making their car purchase decision.
Under these circumstances, taxing gas-inefficient vehicles, or implicitly taxing them through a CAFE standard, can actually make inattentive people better off. The tax increases the relative purchase price of the gas-guzzler and decreases the relative purchase price of the fuel-efficient car. The tax distorts relative prices in a way that makes consumers recognize the long-term costs of operating the vehicle (which they would otherwise be inattentive to) by embedding them in the upfront purchase cost. The increase in social welfare from this type of “internality” tax holds even if there are no externalities (carbon emissions etc.) from the burning of the additional gasoline.
To say that taxing people to make them better off is politically infeasible (and undesirable) is an understatement. But the idea that people make mistakes in trading off current costs and longer terms costs is well-established in the literature. It is worth thinking of less paternalistic ways to help people make tradeoffs that ex post, they would agree made them better off. The authors offer four broad categories of such policies all of which try to target the policy to customers most likely to be inattentive. While any of these may work theoretically it is often quite difficult to target customers who are inattentive. How do you tell if a customer is inattentive to gas prices or really just likes trucks?
Full paper: Allcott,Hunt, Sendhil Mullainathan, and Dmitry Taubinsky “Externalizing the Internality“
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.
On April 20, 2010, 11 workers were killed in an explosion on the Deepwater Horizon rig in the process of drilling the Macondo well off the Gulf of Mexico. The blowout ultimately resulted in between 4 and 5 million barrels of oil leaking into the Gulf of Mexico. Early estimates of the damages from the oil spill are in the range of $20 billion with an addition $17 billion in fines.[i]
Prior to the Gulf oil spill the primary form of regulation of offshore oil drilling was a set of highly prescriptive command-and-control regulations requiring significant redundancy in safety systems; an approach I call “belts and suspenders.” The belts-and-suspenders regulations were coupled with a strict liability regime where the operating company (BP in this case) was strictly liable for damages up to $75 with additional damages covered from a government pool of funds generated through taxes on oil.[ii] Arguable this coupling of regulatory systems should have created the right incentives for companies to manage the human dimension of risk so that risks are minimized. The safety technologies are in place and if you are financially on the hook for damages you should have the right incentives to ensure that all these systems are working properly. Nonetheless, a disaster occurred.
There are plenty of culpable parties in the Gulf oil spill, and the government has not escaped the blame-for-all. Understandably, there was concern that the current system of regulations was insufficient. In the aftermath of the crises, the Minerals Management Service (MMS) was restructured as the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) and BOEMRE quickly issued several revisions to offshore drilling regulations. The first new regulation, the Drilling Safety Rule (DSR), added more belts and suspenders to the previous regulatory regime.
The second rule, the Workplace Safety Rule (WSR), represents a more fundamental departure from the status quo. The WSR is based on the “Safety Case” regulations used in Canada, the UK, Norway, and Australia and requires that each drilling operation have a complete Safety and Environmental Management Program (SEMP). Under the SEMP, each drilling operation must develop a detailed risk analysis and safety plan that demonstrates to the regulators that their proposed operation can be carried out safely and that they have the appropriate contingencies in place to handle any accidents. This type of regulation is referred to as Management-based regulation; regulation that “directs regulated organizations to engage in a planning process that aims toward the achievement of public goals, offering firms flexibility in how they achieve public goals.”[iii]
What do we know about SEMS, the Safety Case, or MBR in genearl? The Chemical Safety Board, an independent government agency tasked with investigating all chemical accidents in the United States, convened a public hearing on regulatory approaches to offshore oil drilling. At the hearing, there was a panel of representatives from the UK, Norway and Australia that discussed the use of the Safety Case in those countries. Without exception the representatives believed that the Safety Case had improved safety and reduced the likelihood of a large-scale disaster in their countries. But almost equally without exception these views were based on anecdotes and some limited (and not fully disclosed) analysis of near-miss data. More detailed research, perhaps using international data on near-misses, could help illuminate the impact of the safety case on offshore drilling risk (dissertation anyone?).
Evidence from academic research is no more conclusive. The theory of management-based regulations suggests that management-based regulations are best suited for situations where there is significant heterogeneity among regulated entities, performance cannot be directly measured, and there is complementarity in management effort and risk reduction/environmental improvement.[iv],[v] All of these conditions are likely to hold for offshore oil drilling.
While MBR may be well-suited, theoretically, to situations where performance cannot be directly measured, the inability to measure performance makes empirical analysis of regulatory effectiveness nearly impossible. In typical program evaluations (also called impact evaluations), the outcomes of the “treated” group are compared to the outcomes of a comparable “control” group. But all of these methods require detailed and comprehensive data on outcomes. For offshore drilling the outcome we are interested in is safety, but it is latent, or not directly observable to the regulator/public. Observing the absence of an oil spill does not necessarily mean the drill rig is safe. Put another way, a very safe and less safe operation may both succeed in drilling without a major oil spill. The absence of an event is not particularly informative about the outcome we are most interested in, namely safety.
We do have empirical evidence on government-mandated MBR in state pollution prevention programs and from voluntary or self-regulatory adoption of MBR through the use of environmental management systems. Summary of this extensive empirical literature suggests that MBR can be effective at inducing firms to improve environmental metrics under some circumstances.[vi] To what extent these findings extend to offshore drilling remain unknown.
My skepticism about SEMS as a regulatory salve concern how SEMS will or will not actually changes the day-to-day decision making on a drill rig. If we assume that decision-makers are profit maximizers (and I’m an economist so I will), then at each decision point with potential safety or environmental consequences the decision maker must weigh the expected costs of following the management plan with the expected costs of not following it. The expected costs of following the plan may be time spent waiting for a second opinion, further analysis, or additional materials and equipment. The expected costs of not following it are some expectation of the damages and fines from any accident resulting from the decision. Accidents are rare and large accidents even rarer, so the likelihood that any one short cut leads to an accident is very low. This is particularly true if you believe that if the short-cut you take turns out badly another safety system will catch that mistake before a significant accident occurs. In essence, the probability of an accident from any one decision is small, and the conditional probability of an accident from that decision given other safety systems may be viewed as close to zero. Of course, if everyone making decisions views the problem this way then things can go very wrong.
What the addition of a SEMS does to change that underlying calculation is not obvious. It may help change the culture of some firms to be more focused on safety. Or it may be a document that quickly collects dust on a shelf. Or, even worse, it may add to the sense of security that others are appropriately avoiding risk, so that taking a cost-saving gamble has no real negative consequences. In other words, it could just be another set of suspenders.
[i] “The Oil Well and the Damage Done,” The Economist, June 17, 2010. Available at: http://www.economist.com/node/16381032. Last accessed: October 14, 2011.
[ii] Steve Hargreaves, “Cap on Oil Spill Damages Under Fire.” CNNMoney. Available at: http://money.cnn.com/2010/05/25/news/economy/BP_liability/index.htm. Last accessed: October 14, 2011.
[iii] Coglianese, C. and D. Lazer “Management-Based Regulation: Prescribing Private Management to Achieve Public Goals” Law and Society Review 37(4): 691-730. DOI: 10.1046/j.0023-9216.2003.03703001.x
[v] Bennear, Lori S. (2006) “Evaluating Management-Based Regulation: A Valuable Tool in the Regulatory Tool Box?” in Coglianese, Cary and Jennifer Nash, eds. Leveraging the Private Sector: Management-Based Strategies for Improving Environmental Performance (Washington D.C.: Resources for the Future Press).
[vi] Bennear, Lori S. and Cary Coglianese “Flexible Approaches to Environmental Regulation,” to be included in: Kamieniecki, Sheldon and Michael Kraft eds. Oxford Handbook of U.S. Environmental Policy, expected publication 2012.
Everywhere you turn these days in the environmental world, people are talking about fracking. Fracking is short hand for hydraulic fracturing, a high tech method of extracting natural gas from shale located 1000s of feet under the earth’s surface. Basically, they drill a vertical well which then curves and goes horizontally, sometimes over a mile from the actual well-head. The entire pipeline is cased in cement and then high pressure fluids—water, sand, and other things—are pushed down the well causing fracturing in the shale. These fractures release the stored natural gas into the well.[i] The folks at the NY Times have got some great graphics that explain it.
There are many potential externalities associated with fracking. An excellent analysis of potential externalities from methane contamination of groundwater by Osborn, Vengosh, Warner, and Jackson, all from Duke, can be found in this paper. Today’s blog will focus on a different aspect of the fracking debate—the negative externalities associated with radioactive wastewater.
As it turns out, the rock formation that has trapped centuries old supplies of natural gas also contains radionuclides like radium. Some of the hydraulic fluid that is pumped into the well to open the fractures is lost to the rock formation, and some comes back up as wastewater. That wastewater contains elements from the rock formation including radioactive materials.
What happens to the wastewater? In most states it is injected underground. In Pennsylvania however, underground injection in not a viable option. In that state, up to half of it gets trucked to wastewater treatment facilities where it is treated and then discharged into local waterways.[ii] But those wastewater treatment facilities were designed to treat the pathogens and contaminants that come from your household wastewater—the water from your toilet, shower, dishwasher, and washing machine. They are not required to treat for radionuclides and are typically unequipped to do so. The fracking wastewater is treated and discharged into the waterbody, potentially with significant radioactivity remaining.[iii]
Meanwhile downstream there is often a drinking water intake pipe. That drinking water is further treated and tested for a variety of contaminants and sent to faucets in homes. EPA has drinking water standards for radionuclides including a standard of 5 picocuries per liter (pCi/L) for radium. EPA has standard for radium because exposure to radium in drinking water is associated with increased cancer risk. If a community water system violates the radium standard they have to notify their customers. Furthermore the utility has to figure out a way to come into compliance, which generally involves more expensive treatment.
Time for some economics. In last week’s post I argued that economists don’t think free markets can solve environmental problems and we needed regulation. So far, nobody has called me on that one. Probably because this is an environment school and I’m preaching to the choir. But, it turns out, that there is a strain of economics dating back to 1960s that argues regulation is not always necessary. The economist who first articulated this argument was Ronald Coase and he eventually won a nobel prize for this research. Coase would argue that if property rights are well-defined, the actors in my stylized fracking example could sort the problem out themselves through negotiation.
Let’s imagine that the right to dispose of the wastewater is granted to the drilling company. The burden of treating the radionuclides, should they exceed regulated levels, is on the drinking water utility. Coase would argue that the water utility could negotiate with the drilling company (or the wastewater treatment plant) to reduce the radium that is discharged, maybe by offering to pay for a program to recycle some of the wastewater or paying for additional treatment at the wastewater facility. The drinking water utility would choose to do that if those options were less expensive than treatment options at the drinking water plant. Alternatively, if the property rights to radionuclide free water were assigned to the drinking water utility, the drilling company or the wastewater plant could negotiate with the water utility to accept higher levels of radium in exchange for compensation to cover the additional treatment costs. The drilling company and/or wastewater plant would do this if those options were less expensive. Coase’s insight was that as long as property rights are well-defined and transactions costs are low, the parties can sort this out amongst themselves and the government need not get involved.
Notice that the Coasian solution to this problem existed only in the shadow of regulation–the radioactive wastewater imposed higher costs on the drinking water utility because they had to meet the EPA standard. However, in PA the radium standard for drinking water has essentially been nullified. PA water systems are only required to test for radium every 6-9 years and many drinking water facilities downstream of wasterwater plants accepting fracking waste have not been tested since 2005.[iv] We really don’t know how much of the radioactivity from the fracking waste might be making its way into drinking water supplies. Maybe dilution in the river is sufficient to lower radioactivity to levels acceptable by regulation. Maybe not. But perhaps it is time to enforce our existing environmental laws so that we can at least find out.
- In the absence of a binding EPA standard for radium, how well do you think the Coase Theorem will work?
- What would be involved in a non-governmental solution to the radioactive waste problem in the absence of direct drinking water regulation?
- Are there any positive externalities associated with fracking? If so, what are they?
[i] Kerr RA (2010) Natural gas from shale bursts onto the scene. Science 328:1624–1626.
[ii] Urbina, Ian “Regulation Lax as Gas Wells’ Tainted Water Hits Rivers,” New York Times. February 26, 2011. Available at: http://www.nytimes.com/2011/02/27/us/27gas.html?ref=drillingdown. Last accessed, September 1, 2011.