Category: ENV270 (Page 2 of 2)

New legislation (HR 2772) threatens to roll back progress in solving fisheries problems

October 3, 2011 / Martin Smith / 37 Comments

This week I’m featuring a guest blog by my colleague, Dr. Martin Smith, Associate Professor of Environmental Economics at the Nicholas School of the Environment, Duke University.

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Economists have long understood that the cause of fisheries problems is the inability to exclude users.[1] When no one owns the fish in the sea, fishermen lack incentives to restrain themselves in order to sustain the biological health of the resource and ultimately the long-term economic health of the fishing industry. Each fisherman races to catch the fish before the other guy. Not surprisingly, this race leads to overfishing and economic hardship. [1, 2]

The centerpiece of U.S. fisheries law is the Magnuson-Stevens Fishery Conservation and Management Act.[3] At its core is a mandate to end overfishing by setting catch limits in federally managed fisheries. Historically, this mandate has focused on the symptom of the problem, namely overfishing, without addressing the cause of the problem. [2] By setting catch limits without addressing the exclusion problem, managers began to control biological overfishing but inadvertently worsened the race to fish. Aggregate catch limits can maintain a biologically healthy stock, while fishermen have incentives to build more and bigger vessels to catch fish before their competitors. Managers respond by shortening season lengths, forcing gluts of product onto the market and the need to sell fish frozen rather than fresh. [4] Most notoriously, this economically wasteful derby in the Pacific halibut fishery of Alaska shrunk the season length to less than three days by 1994. [5] In 1995, a solution to address the cause of this problem was introduced: an individually transferable quota program that set the total catch based on biological assessment and divided the catch between resource users into shares that could be traded. Individually transferable quotas were used in only a handful of other U.S. fisheries but appeared to be successful in managing larger numbers of fisheries in Iceland and New Zealand. With the new policy, the Pacific halibut fishery was transformed overnight from a source of tremendous economic waste to one of the great success stories in fisheries management with a season lasting 245 days and a steady flow of fresh high-value product to the market. [2, 5]

The 2007 reauthorization of Magnuson-Stevens provided a means to use new tools like the halibut program in federal fisheries management. [3] These tools are broadly defined as Limited Access Privilege Programs (LAPPs) and include individual fishing quotas (both tradable like in halibut and non-tradable) and territorial use rights in fisheries (TURFs). In policy circles, individual fishing quotas have now been renamed catch shares. LAPPs address the cause of overfishing and not just the symptoms by solving the exclusion problem, thus aligning the incentives of individual fishermen with the objectives of fisheries management.

A new bill in the house (HR 2772) now threatens to undo recent progress in developing LAPPs. [6]The bill’s title is the “Saving Fishing Jobs Act of 2011,” but the bill will effectively make it illegal to develop new LAPPs that generate economic value. Provisions in the bill are likely to lead to unintended consequences that could exacerbate economic hardship in fishing communities rather than prevent hardships. And it could even eliminate fishing jobs rather than save them. Potential vehicles for harm to fisheries in the bill include 1) a problematic definition of eligible fishermen; 2) the way in which “jobs” are implicitly defined; 3) the termination clause for LAPPs; and 4) the language on fee collection for running LAPPs.

The definition of “eligible fishermen” is problematic. HR 2772 defines eligible fishermen as permit holders and requires two thirds of them to approve a new LAPP. In some fisheries I have researched, as much as half of the permitted vessels record minimal or no landings in some years. This means that if one of these fisheries were to transition to a catch share program, non-fishing permit holders would in all likelihood receive no initial allocations of quota. Under HR 2772, the non- fishing permit holders would thus oppose the catch share program. In essence, non-fishing permit holders would easily be able to block the ability of the actual fishery participants to approve a LAPP that would generate economic value for the fishery and the fishing community .

Even in fisheries that experience some consolidation after a LAPP is put in place, the issue of jobs is more complicated than just numbers of fishermen holding permits. Many jobs in fishing are seasonal or part-time in nature. By eliminating the race to fish, catch share programs can convert seasonal jobs into year-around jobs that pay better. Suppose there were 10 fishermen each making $10,000 per year by fishing seasonally before a catch share program for a total of $100,000. After the program, suppose there are 5 fishermen making $40,000 per year fishing year around for a total of $200,000 of income. For both economic growth and supporting secondary industries in coastal communities, the smaller number of fishermen working year around is better. These benefits would need to be weighed against the loss of some part-time jobs. HR 2772 does not have any way to address this issue and would force managers to choose part-time jobs over full-time jobs.

The bill includes a rule that would terminate any new LAPP if the number of permit holders is 15% less the year after the program goes into place. The clause could inadvertently end a program that successfully reduces redundant capacity, generates economic well being, sustains healthy fish stocks, and is popular with fishermen. In my experience working with individual-level data in fisheries, there is considerable natural attrition in permit holders over time due to changing economic circumstances and retirements of fishermen. [7] The language in HR 2772 does not account for such natural attrition and would falsely attribute all attrition to a LAPP.

Finally, the language on fee collection appears to inflate the cost of a LAPP because it includes the costs of observer coverage. By charging fishermen for observer coverage under a LAPP but funding observer coverage otherwise with taxpayer dollars, the LAPP will appear more expensive to fishermen than it really is. Naturally, fishermen would be more likely to oppose a program in spite of its promise to generate economic benefits for the fishing sector and for society at large. Here, we find ourselves legitimately in a bind. Many argue that fishermen should pay for the privilege of harvesting a public trust resource. But a sudden change to full cost recovery could fall victim to political inertia and inadvertently preserve the inefficient status quo.

It took decades for fisheries management to evolve from treating symptoms to addressing the root cause of overfishing. Now in one piece of legislation we risk undoing much of that progress and hindering further improvements.

References

1. Gordon, H.S., Economic theory of a common property resource: the fishery. Journal of Political Economy, 1954. 75: p. 124-142.

2. Wilen, J.E., Why Fisheries Management Fails: Treating Symptoms Rather than Causes. Bulletin of Marine Science, 2006. 78.

3. Magnuson-Stevens Fishery Conservation and Management Reauthorization Act, P.L. 109-479. 2007.

4. Homans, F.R. and J.E. Wilen, A model of regulated open access resource use. Journal of Environmental Economics and Management, 1997. 32(1): p. 1-21.

5. NRC, Sharing the Fish: Toward a National Policy on Individual Fishing Quotas. 1999, National Academy Press: Washington DC.

6. Saving Fishing Jobs Act of 2011, H.R. 2772. 2011.

7. Smith, M.D., Limited-entry licensing: Insights from a duration model. American Journal of Agricultural Economics, 2004. 86(3): p. 605-618.

Flushing Money Down the Toilet?

September 26, 2011 / Lori Bennear, Ph.D. / 32 Comments

Sometimes important questions in environmental economics are not particularly glamorous. Take for example, a recent project I completed together with Laura Taylor, Professor and Director of the Center for Environmental Economics at NCSU and Jonathan Lee, a Ph.D. student at NCSU. This project examines cost effectiveness of a program in Cary, NC that offers rebates to households that replace old toilets with new, low-flow toilets. On good days we call this the “toilet project.” I’ll leave it to your imagination to determine what we call it on bad days!

The Town of Cary (TOC) introduced its High Efficiency Toilet (HET) Retrofit Rebate program in June 2008. During the first 13 months of the program, TOC offered a $150 rebate per toilet for water customers who replaced toilets that use 3.5 gallons or more per flush with WaterSense labeled high efficiency toilets which use 1.28 gallons per flush (gpf).

In June 2010 we mailed a survey to the 305 households that received a rebate during the first year of the program. We received responses from 245 (80.3%) of participants. The survey is structured to let us to compute the water savings that can be attributed to the rebate program.

Before we talk about economics, let’s think about engineering estimates of water savings. On a per-flush basis, an engineering estimate of the water savings is simply the difference in gpf used by the original toilet and the HET. To compute an annual savings, we multiply the per-flush savings by the expected number of flushes per year. Carrying out this multiplication exercise and using data on how many toilets are in the home and how many people live in the home, we estimated an average savings of 4,577 gallons per high efficiency toilet installed.

Why might the water savings from the rebate program differ from these engineering estimates? This is where the economics begins. First, there is the possibility of a “rebound effect.” That is, people install a higher efficiency appliance and they feel justified in using it more. In the case of HETs the concern is probably NOT that they go to the bathroom more, but rather that they flush more because the toilet doesn’t work as well as they would like. Second, some of these toilets may have been replaced even without the rebate. A household doing a complete bathroom remodel may replace their low-efficiency toilets anyway and the rebate is just a windfall gain to that household.

We are able to examine real water savings from water utility bills for both program participants and similar households that did not participate. We find little evidence of a rebound effect, the HETs toilets seem to deliver the expected engineering reductions in water use and that each toilet installed saves between 4,000 and 4,500 gallons per year per toilet. The water savings that is attributable to the rebate program, however, is significantly less – approximately 1,750 gallons per year, per toilet installed with a rebate. About 40% of the rebate participants would have replaced their old toilets with an HET even if the rebate had not been available to them. In addition, we find that approximately 20% of rebate recipients would have replaced their old toilets with a new standard toilet (not HET) had the rebate program not been available to them. New toilets are much more water efficient even if they aren’t HET. The water savings of going from a new toilet to a new HET toilet are only 0.4 gpf (1.6 gpf for new toilet – 1.2 gpf for a new HET toilet).

Our final analysis focuses on the cost-effectiveness of the rebate program. By investing in HET toilet replacement through the rebate program, the Town of Cary avoids future costs over the lifetime of the HET (assuming the old toilet would not be replaced in the future). We focus on two measures of the avoided sewer treatment costs associated with fewer gallons flowing back to the system as a result of HET installation. The present value of the avoided costs outweigh the initial investment cost (the rebates) if one assumes all toilets were replaced because of the rebate program. However, if we consider only the water savings that is directly attributable to the rebate program, we find that the rebate program’s benefits to the Town of Cary did not outweigh the initial investment cost.

One way to increase the cost effectiveness is to reduce the up-front cost of the rebate program. Our calculations indicate that if the Town of Cary reduced the rebate to $115 per toilet, the program would have been cost-effective under all scenarios considered. Since the first year of the program, the Town of Cary has reduced its rebate from $150 to $100. Even with the lower rebate, the Town reports that the requests for rebates have exhausted each year’s budget, suggesting the $100 rebate is still a substantial incentive to households. If the $100 rebate results in about 30% of rebate takers being households that would not have replaced their toilet at all without the rebate, and another 20% being households that chose an HET over a new 1.6 gpf toilet as a result of the rebate, then the program is cost-effective.

Questions for Discussion:

One of the analytic challenges for the project was determining what the costs-savings were to the TOC when a toilet uses less water. Our first approach assumed that if they didn’t sell a gallon of water to one of their own households, that was a gallon they could sell to a neighboring utility. However, the central NC utilities have an agreement to sell water to each other at their lowest residential rate. So no profit would be made by selling water to Durham instead of to a Cary resident. We settled on avoided treatment costs. What do you think the benefits to the TOC are? How could the program be adjusted to provide more benefits to the TOC for conservation?
Another strategy for increasing cost-effectiveness of the rebate program is to better target rebates to households that wouldn’t otherwise replace their toilets. Can you think of feasible ways to do that?

The Benefits of Cleaning Superfund Sites

September 19, 2011 / Christopher Timmins, Ph.D. / 36 Comments

This week, I’m featuring a guest post from Christopher Timmins, Associate Professor of Economics at Duke University.

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Prompted by a number of headline cases of hazardous waste contamination in the late 1970s, the US Congress established the Superfund program under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980. Under that program, the Environmental Protection Agency has placed some of the most contaminated waste sites in the country on the National Priorities List, where federal funds are directed towards cleanup when those funds cannot be recovered from a “responsible party”. Since that time, the EPA has identified more than 47,000 hazardous waste sites that potentially require some sort of cleanup action. By 2007, more than 1,500 sites had been placed on the NPL.

Superfund site cleanups are not cheap. Even before the budget crisis in Washington, there were many calls for an evaluation of the costs and the benefits of the program – the former requiring a careful accounting of all the resources that go into a cleanup, and the latter necessitating a non-market valuation exercise. Superfund cleanups do not trade in the marketplace, but the houses surrounding a remediated site do – this provides one of the most simple and straightforward ways in which to look for estimates of the benefits of a Superfund cleanup – property value hedonics. Economic theory tells us that homebuyers’ marginal willingnesses to pay for the remediation of a site can be deduced from what they are willing to additionally pay for a house that is near a remediated site versus a house that is near a site that has not been cleaned up.[1] This seems like it should be a simple empirical problem. Take two houses – one in a neighborhood surrounding a site that has been cleaned up and one in a neighborhood surrounding a site that has not. How do their prices differ? The problem here (and in most hedonic analysis) is that these two neighborhoods may be different in ways that are not observed by (and hence, not controlled for) by the researcher. These unobservables can confound the effect we are trying to measure.[2]

Empirical techniques have been developed to try to deal with these confounding unobservables. In the parlance of applied microeconomists, researchers have looked for “quasi-experimental” data variation. True “experimental” variation would require the researcher to randomize over which sites get cleaned up – something that the real world isn’t quite ready for yet. Quasi-experimental variation is variation in which sites are cleaned that mimics experimental variation in one way or another. One of the cleanest forms of variation used to date in the literature was suggested by Michael Greenstone and and Justin Gallagher.[3] They demonstrated that a twist in how the first wave of sites proposed to the NPL in 1982 were funded led to two batches of sites that were very similar in terms of how the EPA evaluated the hazard they posed, but only one of which received funding. Comparing similar neighborhoods across these two groups allows the researcher to safely assume that unobservables are not the driving force in any differences in housing prices. Rather, those differences must arise from the effect of the treatment being administered by EPA.

The Greenstone and Gallagher analysis, while relying on a clean source of quasi-experimental variation in data, suffered from another flaw. In particular, it relied on publicly available data describing housing prices at the level of the Census tract. Census tracts are areas containing several thousand individuals and can have a radius of several kilometers. In their hedonic analysis, Greenstone and Gallagher used the median housing price in each census tract as their housing price measure. While this may seem like an innocuous choice, it can have big impacts. In particular, the externalities associated with many Superfund sites are highly localized – unless contamination works its way into groundwater or leaks into the air, it may not affect people outside a narrow geographical range. Still it could have a big impact on the people it does affect. Given the size of a census tract, it is therefore possible that a tract median price may not be affected at all by the cleanup of a Superfund site, while other parts of the house price distribution could be dramatically affected. Indeed, Greenstone and Gallagher found no effect of Superfund cleanup on median house prices. This result has had big effects on Superfund program policy decisions over the last few years.

In our work,[4] we address this problem of localized externalities on several levels. First, using publicly available census housing price data, we take an extra step to construct other parts of the house price distribution (e.g., the 10^th, 20^th, etc… percentiles of the distribution of house prices in each census tract) and look to see how these vary with site cleanup. Where effects at or above the median become small or disappear altogether, we find big effects of cleanup (e.g., 18.2%) at the bottom end of the of the house price distribution. Within a census tract, it is the cheaper houses that are benefitting from the Superfund program.

Next, we verify this result using restricted-access census block data. Census blocks are much smaller than tracts (think about a typical city block). Data on census blocks can only be used on-site in a Census Bureau Research Data Center, and only after going through a long series of security checks. These data confirmed once again the presence of big cleanup effects on nearby houses (e.g., 19.4% on houses within one kilometer).

Based on these results, we feel confident that Superfund cleanups do, in fact, provide benefits to nearby homeowners. Whether those benefits are big enough to exceed cleanup costs is another question that we are currently studying. Passing a simple cost-benefit test will be made more difficult by the fact that benefits are localized, so a small set of houses will see price increases from cleanup. Whether the benefits to those houses are sufficient to justify the costs is an empirical question. Note that this sort of analysis ignores benefits that might arise from improved labor market conditions if a site cleanup leads to economic revitalization of a neighborhood. It may also ignore health benefits if people aren’t aware of them, and hence don’t build them into their home-buying decisions.

[1] Note to reader – this is a delicately worded sentence. Current research in non-market valuation theory (hedonic theory in particular) is aimed at rectifying shortcomings in the simple hedonic analysis that prevent the researcher from recovering preferences from compensating differentials in housing prices. For example, when a change in a neighborhood is non-marginal (i.e., big relative to the size of the housing market), simple welfare measures are invalid. Moreover, we may expect people to move around (i.e., re-optimize) in response to the change. Simple hedonic techniques are not able to handle either of these possibilities.

[2] Note that research on this question has seldom even bothered trying to compare neighborhoods containing Superfund sites (cleaned or uncleaned) with neighborhoods that contain no sites at all – the thought being that the determinants of housing prices that we can’t see are likely to be very different across these two groups – we should at least restrict those unobservables to be the sort we would find in the vicinity of a site of some type.

[3] Greenstone, Michael, and Justin Gallagher, “Does Hazardous Waste Matter? Evidence from the Housing Market and the Superfund Program,” The Quarterly Journal of Economics, 123 (2008), 951-1003.

[4] Gamper-Rabindran and Timmins (2011). “Does Cleanup of Hazardous Waste Sites Raise Housing Values? Evidence of Spatially Localized Benefits.” http://econ.duke.edu/~timmins/Gamper_Rabindran_Timmins.pdf

Jobs Versus Children’s Health—A false choice

September 9, 2011 / Lori Bennear, Ph.D. / 22 Comments

In January 2009 I was awoken by the sound of my eldest child wheezing and gasping for air. We called 911 and emergency personnel arrived to give her some oxygen. After a short time they determined it was a severe croup episode and not, as I feared, a first asthma attack. But that is a night I will never forget. The fear you feel as a parent when your child cannot breathe is intense. Millions of parents live with that background fear on a daily basis because their children suffer from chronic asthma. The Centers for Disease Control estimate that 7.0 million children (9.4%) have asthma as do 17.5 million (7.7%) adults.[i] Asthma results in 17.0 million health visits per year, 450,000 inpatient hospital stays with an average length of 3 days, and 3,447 deaths.[ii]

What does all this have to do with Environmental Economics?

President Obama recently asked EPA Administrator Lisa Jackson to withdraw a proposed refinement of the National Ambient Air Quality Standards (NAAQS) for ground level ozone that would have lowered allowable ozone levels from 0.84 parts per billion (ppb) to a range of 0.60 to 0.70 ppb. Ground level ozone (not to be confused with stratospheric ozone which has the big hole) is also known as smog, and is a key contributor to asthma and other illnesses and deaths.

To be fair, the ozone NAAQS will be revisited in 2013, so Obama’s decision really only put off the debate for two years. But why delay two years when the rule was ready to go forward now? Must be economics. Or is it?

In announcing his decision, President Obama said “I have continued to underscore the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover.”[iii] The announcement was made shortly after a bad jobs report was issued which further enhances the appearance that the postponed regulation was a “job killer.” But the jobs versus environment rhetoric is just that—rhetoric. It has no basis in economic analysis because economic analysis is not based on counting up jobs!

A good economic analysis compares the costs of complying with the regulation to the benefits resulting from the regulation. The benefits in this case are the health benefits associated with reduced incidence of asthma and other health impacts. Compliance costs include costs of purchasing new pollution control equipment, changing fuel sources, changing operational practices, and so forth. The jobs analysis is really a non-starter. Could we lose some jobs if we require more regulatory expenditures—certainly. Could we gain jobs in industries that are selling and developing pollution control equipment–certainly. Are these exactly a wash—probably not. But we will also reduce hospitalizations, school days missed, and even deaths from asthma and other illness. The key is that economic analysis is not “jobs analysis.” We do our best to measure the benefits and the costs of compliance in dollars. Then we can compare dollars spent to dollars gained and not compare jobs to asthma cases.

So what did the economic analysis of the proposed ozone rule say about the costs and benefits of tightening the standard? Not a lot that is useful, unfortunately. This is not because the economic analysis is badly done (although I might quibble a bit on a few points), but rather because there is significant uncertainty over both costs and benefits of the proposed rule. There are at least three major sources of uncertainty in the economic analysis.

Modeling uncertainty: Ozone isn’t a pollutant that gets directly emitted from smokestacks or tailpipes. Ozone is the result of combining two other pollutants, NOx and VOCs, with sunlight. As a result, you have to model the ozone-generating process and estimate how many counties might not be in compliance when the rule becomes binding in 2020.
Cost uncertainty: Once you estimate which counties would exceed the standard you need to come up with estimates of compliance. But for some counties it was estimated that compliance was not possible with known technologies. Compliance in 2020 relies on technologies that we don’t know about in 2011 and cannot accurately price. It also relies on estimates of how costs of current technologies may change over the next 9 years.
Benefits uncertainty: The benefits estimates rely on models of the relationship between ozone levels and deaths and illnesses. There are several different models available in the peer-reviewed literature including three meta-analyses, yet these models still give answers that vary significantly.

These uncertainties mean that for each of the standards considered there is a large spread in estimated costs and estimated benefits such that the range of possible net benefits (benefits minus costs) always straddles zero. The figure below captures the highest and lowest benefit and cost estimates for each standard. You can see that the uncertainty in benefits is greater than the uncertainty in costs at all levels and that the uncertainty in both benefits and costs increases as the standard becomes more stringent.

click image to enlarge

Figure Source: United States Environmental Protection Agency. Summary of the updated Regulatory Impact Analysis (RIA) for the Reconsideration of the 2008 Ozone National Ambient Air Quality Standard (NAAQS). January 1, 2010. Available at: http://www.epa.gov/ttnecas1/regdata/RIAs/s1-supplemental_analysis_full.pdf. Last accessed, September 7, 2011.

With this much uncertainty in both costs and benefits, reasonable people could certainly disagree about the best course of action. I personally was very disappointed in President Obama’s decision. I would strongly support an increase in stringency for the ozone standard based on the economic analysis presented in the Regulatory Impact Analysis.

How could I feel so strongly given all the uncertainties? The reason is that historically we have systematically underestimated benefits from air pollution regulations and overestimated costs. The retrospective benefit-cost analysis of the Clean Air Act from 1970-1990 estimated total benefits attributable to air regulations between 5.6 and 49.4 trillion dollars with a central tendency of 22.2 trillion. The total costs were roughly 0.5 trillion. That means that we are better off by around 21.7 trillion dollars because of these regulations.[iv]

Furthermore, most of the “unexpected” gains in benefits came from regulations of particulate matter. The proposed ozone rule lowers emissions of NOx which also results in lower emissions of small particles (PM2.5) which are very harmful for health. So if I had to bet on where we were likely to end up on the “distribution” of net benefits I would place my bet on higher end of the range. And that means I’m betting that we are better off as an economy with more stringent ozone regulations. I wish President Obama hadn’t caved to political pressures and supported his EPA Administrator in making that same bet.

[i] Centers for Disease Control and Prevention. Fast Stats: Asthma. Available at: http://www.cdc.gov/nchs/fastats/asthma.htm. Last Accessed: September 8, 2011.

[ii] ibid

[iii] White House. Office of the Press Secretary. Statement by the President on the Ozone National Ambient Air Quality Standards. September 2, 2011. Available at: http://www.whitehouse.gov/the-press-office/2011/09/02/statement-president-ozone-national-ambient-air-quality-standards. Last Accessed: September 9, 2011.

[iv] United States Environmental Protection Agency. The Benefits and Costs of the Clean Air Act, 1970 to 1990. Executive Summary. pp: ES-8. Available at: http://www.epa.gov/oar/sect812/1970-1990/812exec2.pdf. Last Accessed: September 8, 2011.

Fracking Externalities and the Coase Theorem

September 5, 2011 / Lori Bennear, Ph.D. / 25 Comments

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.

Discussion questions:

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.

[iii] ibid

[iv] ibid.

Making the Planet Notice

August 29, 2011 / Lori Bennear, Ph.D. / 46 Comments

My colleague and friend, Dr. Gernot Wagner, has a new book coming out, But Will the Planet Notice?: How Smart Economics Can Save the World (available in hardback and kindle editions on October 5^th). The premise is that individual actions, like changing incandescent light bulbs to compact fluorescent, using groovy (yes, I said groovy) reusable grocery bags instead of plastic, and buying local food may make us feel better about our environmental impact, but actually do very little to reduce global climate change, resource use, or improve overall environmental quality. To make the “planet notice” we need systematic and collective changes in behavior.

In this class you will learn that, contrary to popular opinion, economists don’t believe unregulated markets will naturally supply this type of systemic and collective behavioral change. We also don’t put a lot of faith in the powers of moral suasion (even by the former Vice President). Instead we believe in the power of incentives—the power of the price signal. If carbon emissions are costly (through a carbon tax or from a cap-and-trade system), then goods produced using more carbon are more expense. By the law of demand, when prices rise, quantity demanded falls. So if carbon-intensive goods are more expensive, fewer of those goods will be consumed and less carbon will be emitted. Less carbon is emitted not because people care deeply about the impacts of climate change (although some may), but because they care deeply about their pocketbook. Note that unregulated markets don’t result in the correct price signals; we do need public policy to address environmental problems. We do need the big R—Regulation!

Let’s bring this discussion home to Duke. If you go to sustainability.duke.edu you will see a carbon footprint calculator. This tool asks you a series of questions about your eating habits, travel, and electricity consumption. Questions include things like: How far do you drive per trip to work? How much of your food is locally produced? Do you turn off your computer at night? These are all very reasonable questions and clearly linked to each individual’s carbon consumption. But perhaps we should also be asking: How many letters have you written your congressman demanding action on climate policy? How many community meetings have you organized to explain climate policy to your neighbors and friends? The “true believers” doing a lot won’t solve our problem. We need carbon to be priced in order to affect behavior sufficiently to reduce overall carbon emissions. How else can we “make the planet notice?”

I have lately been pondering the specific question of what Duke should do. I have been asked to serve on the Campus Sustainability Committee and have agreed. Universities are frequently leaders in sustainability efforts. But even if Duke cut carbon emissions to zero, the planet would not notice. Does this mean Duke should stop trying to lower its carbon footprint? What is the role of the university in promoting environmental change? Feel free to share your ideas for me to take to this committee.