Category Archives: Valuing the environment

Not always in dollars and cents but economics informs us about the trade offs and our willingness to make them

The shaky foundation of benefit-cost analysis

A post by Tim Brennan at RFF on the uncertain foundations of benefit-cost analysis. (Another RFF post explores the question of whether policies should influence preferences.) The bottom line: that we can’t rely on a cut-and-dried economic analysis to define the “most efficient” policy action.

His conclusion is that we need to turn back to policymakers to decide, rather than relying on the “high priests” of economists:

The best alternative may be to use a fair and open democratic process to choose those who would change (or ignore) revealed preferences. This sounds more radical than it is; we do it all the time. We elect officials who directly or indirectly make choices according to noneconomic values based on ethical rights or distributive justice. Moreover, we also cannot forget that though economics takes preferences as given, they have to come from somewhere. Manipulating preferences is already part of public policy, most notably using education to inculcate preferences to be good citizens as well as to acquire useful skills. Although the puzzles mentioned here are real, we may not have the choice to ignore them, much as we might prefer to do so.


Another market mechanism saving the environment

EDF posted a blog about the resuscitation of U.S. fisheries and how two-thirds of those fisheries are now sustainable thanks to changes in management practices. At the core of those programs are market-based incentives with individual transferable quotas (ITQ). Fishermen are allocated a certain amount of catch within a season and they can trade those quotas among themselves. The overall cap maintains the sustainability of the fishery while individual fishermen can catch an amount that best meets their own objectives and constraints.

A second element that’s often part of these programs is a buyout program to reduce the size of the overall fleet. This reduces the risk for the boats that remain in the fleet while compensating those who exit for their losses.

These are examples of successful “cap and trade” programs. These lessons are applicable to managing water rights and reducing GHG emissions.

An economically attractive environmental solution in peril

The agreement to take down PacifiCorp’s dams on the Klamath River is in peril. In 2006 we showed in a study funded by the California Energy Commission that decommissioning the dams would likely cost PacifiCorps ratepayers about the same as relicensing. That mitigated the economic argument and opened up the negotiations among the power company, farmers, tribes, environmentalists and government agencies to came to an agreement in 2010 to start decommissioning by 2020.

The agreement required Congress to act by the end of 2015 and that deadline is looming. Unfortunately, there are still opponents who mistakenly believe that the project’s hydropower is cheaper than the alternatives. In fact, the economics are even more favorable today whether PacifiCorp uses natural gas or renewables to replace the lost power. And this analysis ignores the benefits to the Klamath fisheries from decommissioning. It’s too bad that bad simplistic economics can still get traction in the legislative process.