Vertical fiscal externalities and the environment

We show that imposition of a state-level environmental tax in a federation crowds out pre-existing federal taxes. We explain how this vertical fiscal externality can lead unilateral state-level environmental policy to generate a welfare gain in the implementing state, at the expense of other states, even absent any environmental benefits. Using a computable general equilibrium model of the Canadian federation, we show that vertical fiscal externalities can be the major determinant of the welfare change following environmental policy implementation by a state government. Our numerical simulations indicate that – as a consequence of vertical fiscal externalities – state governments can reduce greenhouse gas emissions by over 20 percent without any net cost to themselves.     

Externalities, pigouvian corrections, and risk attitudes

We examine the influence of risk attitudes on the provision of an externality and on the proper size of Pigouvian correction when the externality is a random variable whose distribution is affected by an observable externality-generating activity. An intervening technology relates changes in this observable activity to the probability distribution of the relevant externality. Unlike the now-standard result in the theory of the firm involving the influence of risk attitudes on output levels, we cannot conclude that increases in risk aversion will lead necessarily to a reduction in the level of the externality. Our results are applied to a wide range of market failures.     

Green clubs

This paper treats programs in which firms voluntarily agree to meet environmental standards as “green clubs”: clubs, because they provide non-rival but excludable reputation benefits to participating firms; green, because they also generate environmental public goods. The model illuminates a central tension between the congestion externality familiar from conventional club theory and the free-riding externality familiar from the theory on private provision of public goods. We compare three common program sponsors—governments, industry, and environmental groups. We find that if monitoring of the club standard is perfect, a government constrained from regulating club size may prefer to leave sponsorship to industry if public-good benefits are sufficiently low, or to environmentalists if public-good benefits are sufficiently high. If monitoring is imperfect, an important question is whether consumers can infer that a club is too large for its standard to be credible. If they can then the government may deliberately choose an imperfect monitoring mechanism as a way of regulating club size indirectly. If they cannot then this reinforces the government's preference for delegating sponsorship.     

Green clubs

This paper treats programs in which firms voluntarily agree to meet environmental standards as “green clubs”: clubs, because they provide non-rival but excludable reputation benefits to participating firms; green, because they also generate environmental public goods. The model illuminates a central tension between the congestion externality familiar from conventional club theory and the free-riding externality familiar from the theory on private provision of public goods. We compare three common program sponsors—governments, industry, and environmental groups. We find that if monitoring of the club standard is perfect, a government constrained from regulating club size may prefer to leave sponsorship to industry if public-good benefits are sufficiently low, or to environmentalists if public-good benefits are sufficiently high. If monitoring is imperfect, an important question is whether consumers can infer that a club is too large for its standard to be credible. If they can then the government may deliberately choose an imperfect monitoring mechanism as a way of regulating club size indirectly. If they cannot then this reinforces the government's preference for delegating sponsorship.     

Cost-benefit analysis of implementing policy measures for reducing PM and O3 concentrations: the case of Israel

This paper aims to identify the most suitable and economically feasible policy measures to reduce concentrations of particulate matter (PM) and ozone (O₃) in Israel. It describes a comprehensive methodology that takes into account the effects of PM and O₃ and describes the overall costs and benefits expected from their reduction. Cost-benefit analysis of a series of proposed policy measures allows us to identify and recommend those that are most feasible and effective. These policy measures have a significant impact on reducing air pollution on one hand, while constituting the highest net benefit to the economy on the other.     

Winners and Losers in a World with Global Warming: Noncooperation, Altruism, and Social Welfare

In this paper, global warming is an asymmetric transboundary externality which benefits some countries or regions and harms others. We use a simple two-country model to analyze the effects of global warming on resource allocations, the global-warming stock, and national and global welfare.     

Nonseparability and the voluntary approach to externality problems

Ronald Coase asserted that voluntary two-party bargaining with zero transaction costs results in an optimal resource allocation, which is invariant with respect to the liability rule. It has been argued that nonseparabilities destroy the validity of Coase's theorem. In this paper it is shown that this criticism is based on implausible assumptions about the externality-receivers adjustment to the externality level.     

Ambiguity,reasoned determination,and climate-change policy

This paper examines climate-change benefit-cost analysis in the presence of scientific uncertainty in the form of ambiguity. The specific issue addressed is the robustness of benefit-cost analyses of climate-change policy alternatives to relaxation of Savage's original axioms. Two alternatives to subjective expected utility (SEU) are considered: maximin expected utility (MEU) and incomplete expected utility (IEU). Among other results, it is demonstrated that polar opposite recommendations can emerge in an ambiguous decision setting even if all agree on Society's rate of time preference, Society's risk attitudes, the degree of ambiguity faced, and the scientific primitives. We show that, for a simple numerical simulation of our model, an MEU decision maker favors policies which immediately tackle climate change while an IEU decision prefers “business as usual”.“Each agency shall assess the costs and benefits of the intended regulation, and recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its cost.” Executive Order 12866 of the US President.     

Evaluating the environmental impacts of an urban wetland park based on emergy accounting and life cycle assessment: A case study in Beijing

In this paper, emergy accounting (EA) and life cycle assessment (LCA) methods are employed to investigate a typical urban wetland park, the Green Lake Urban Wetland Park (GLUWP) of Beijing, in terms of its environmental and capital inputs, ecosystem services and organic matter yields, environmental support, and sustainability. The LCA method is also used to obtain a quantitative estimation of the environmental impact of discharges during the entire life cycle of the GLUWP. Various emergy-based indices, such as emergy yield ratio (EYR), environmental load ratio (ELR), emergy sustainability index (ESI), net economic benefit (Np), and environmental impacts of process-based LCA, including global warming potential (GWP), eutrophication (EU), nonrenewable resource depletion (RU), energy consumption (EN), acidification potential (AP), photochemical oxidant creation potential (POCP), particulate matter (PM) and wastes (W), are calculated. The results show that the GLUWP has higher proportions of renewable resource input, less pressure on the environment, more environmental support and better ecological and economic benefits, which can be considered as an environment-friendly and long-term sustainable ecological practice, compared with another constructed wetland in Beijing. Meanwhile, the dominant environmental impact is induced by POCP with the construction phase contributing the most on the entire life cycle. It is expected that increasing green area, extensively using environment-friendly materials, optimizing construction techniques and reducing power consumption can promote the sustainability of the GLUWP.     

Effect of risk aversion on prioritizing conservation projects

Conservation outcomes are uncertain. Agencies making decisions about what threat mitigation actions to take to save which species frequently face the dilemma of whether to invest in actions with high probability of success and guaranteed benefits or to choose projects with a greater risk of failure that might provide higher benefits if they succeed. The answer to this dilemma lies in the decision maker's aversion to risk—their unwillingness to accept uncertain outcomes. Little guidance exists on how risk preferences affect conservation investment priorities. Using a prioritization approach based on cost effectiveness, we compared 2 approaches: a conservative probability threshold approach that excludes investment in projects with a risk of management failure greater than a fixed level, and a variance‐discounting heuristic used in economics that explicitly accounts for risk tolerance and the probabilities of management success and failure. We applied both approaches to prioritizing projects for 700 of New Zealand's threatened species across 8303 management actions. Both decision makers’ risk tolerance and our choice of approach to dealing with risk preferences drove the prioritization solution (i.e., the species selected for management). Use of a probability threshold minimized uncertainty, but more expensive projects were selected than with variance discounting, which maximized expected benefits by selecting the management of species with higher extinction risk and higher conservation value. Explicitly incorporating risk preferences within the decision making process reduced the number of species expected to be safe from extinction because lower risk tolerance resulted in more species being excluded from management, but the approach allowed decision makers to choose a level of acceptable risk that fit with their ability to accommodate failure. We argue for transparency in risk tolerance and recommend that decision makers accept risk in an adaptive management framework to maximize benefits and avoid potential extinctions due to inefficient allocation of limited resources. El Efecto de la Aversión de Riesgo sobre la Priorización de Proyectos de Conservación     

Benefits of Investing in Ecosystem Restoration

Measures aimed at conservation or restoration of ecosystems are often seen as net‐cost projects by governments and businesses because they are based on incomplete and often faulty cost‐benefit analyses. After screening over 200 studies, we examined the costs (94 studies) and benefits (225 studies) of ecosystem restoration projects that had sufficient reliable data in 9 different biomes ranging from coral reefs to tropical forests. Costs included capital investment and maintenance of the restoration project, and benefits were based on the monetary value of the total bundle of ecosystem services provided by the restored ecosystem. Assuming restoration is always imperfect and benefits attain only 75% of the maximum value of the reference systems over 20 years, we calculated the net present value at the social discount rates of 2% and 8%. We also conducted 2 threshold cum sensitivity analyses. Benefit‐cost ratios ranged from about 0.05:1 (coral reefs and coastal systems, worst‐case scenario) to as much as 35:1 (grasslands, best‐case scenario). Our results provide only partial estimates of benefits at one point in time and reflect the lower limit of the welfare benefits of ecosystem restoration because both scarcity of and demand for ecosystem services is increasing and new benefits of natural ecosystems and biological diversity are being discovered. Nonetheless, when accounting for even the incomplete range of known benefits through the use of static estimates that fail to capture rising values, the majority of the restoration projects we analyzed provided net benefits and should be considered not only as profitable but also as high‐yielding investments. Beneficios de Invertir en la Restauración de Ecosistemas     

Spatial cost–benefit analysis of blue restoration and factors driving net benefits globally

Marine coastal ecosystems, commonly referred to as blue ecosystems, provide valuable services to society but are under increasing threat worldwide due to a variety of drivers, including eutrophication, development, land-use change, land reclamation, and climate change. Ecological restoration is sometimes necessary to facilitate recovery in coastal ecosystems. Blue restoration (i.e., in marine coastal systems) is a developing field, and projects to date have been small scale and expensive, leading to the perception that restoration may not be economically viable. We conducted a global cost–benefit analysis to determine the net benefits of restoring coral reef, mangrove, saltmarsh, and seagrass ecosystems, where the benefit is defined as the monetary value of ecosystem services. We estimated costs from published restoration case studies and used an adjusted-value-transfer method to assign benefit values to these case studies. Benefit values were estimated as the monetary value provided by ecosystem services of the restored habitats. Benefits outweighed costs (i.e., there were positive net benefits) for restoration of all blue ecosystems. Mean benefit:cost ratios for ecosystem restoration were eight to 10 times higher than prior studies of coral reef and seagrass restoration, most likely due to the more recent lower cost estimates we used. Among ecosystems, saltmarsh had the greatest net benefits followed by mangrove; coral reef and seagrass ecosystems had lower net benefits. In general, restoration in nations with middle incomes had higher (eight times higher in coral reefs and 40 times higher in mangroves) net benefits than those with high incomes. Within an ecosystem type, net benefit varied with restoration technique (coral reef and saltmarsh), ecosystem service produced (mangrove and saltmarsh), and project duration (seagrass). These results challenge the perceptions of the low economic viability of blue restoration and should encourage further targeted investment in this field.     

Uncertainty and allocation decisions involving unique environmental resources

The implications of the treatment of uncertainty in the definition of optimal investment criteria for irreversible allocations of unique environmental resources are considered herein. This analysis argues that the single-project, orientation of conventional cost-benefit analysis can lead to inconsistent decisions because it fails to take account of the potential for risk pooling across projects. In the models discussed in this paper uncertainty arises because the planner must estimate the net benefits associated with a mix of developed and preserved natural environments. The results suggest that the criteria for optimal investment plans will be affected by those factors influencing this uncertainty. Both the scale and timing of optimal investments may be altered from those prescribed with the conventional (Fisher-Krutilla-Cicchetti rule) framework when the potential for risk pooling is introduced. Thus, it is important to consider as a part of the specification of the objective function the factors which give rise to uncertainty.     

Preventing the Spread of Invasive Species: Economic Benefits of Intervention Guided by Ecological Predictions

Abstract:  Preventing the invasion of freshwater aquatic species is the surest way to reduce their impacts, but it is also often expensive. Hence, the most efficient prevention programs will rely on accurate predictions of sites most at risk of becoming invaded and concentrate resources at those sites. Using data from Vilas County, Wisconsin (U.S.A.), collected in the 1970s, we constructed a predictive occurrence model for rusty crayfish ( Orconectes rusticus ) and applied it to an independent data set of 48 Vilas County lakes to predict which of these were most likely to become invaded between 1975 and 2005. We nested this invasion model within an economic framework to determine whether targeted management, derived from our quantitative predictions of likely invasion sites, would increase the economic value of lakes in the independent data set. Although the optimum expenditure on lake protection was high, protecting lakes at this level would have produced net economic benefits of at least $6 million over the last 30 years. We did not attempt to determine the value of nonmarket benefits of protection; thus, our results are likely to underestimate the total benefits from preventing invasions. Our results demonstrate that although few data are available early in an invasion, these data may be sufficient to support targeted, effective, and economically rational management. In addition, our results show that ecological predictions are becoming sufficiently accurate that their application in management can produce net economic benefits.     

Depletable externalities and pigouvian taxation

In their book Baumol and Oates [“The Theory of Environmental Policy: Externalities, Public Outlays, and the Quality of Life,” Prentice-Hall, Englewood Cliffs, N.J. (1975).] argue that whether an externality is depletable (private) or undepletable (public) is the key characteristic in determining the optimal pricing pattern. They argue that unlike the undepletable case a negative depletable externality requires not only a charge or tax on the generator of the externality but a payment or compensation to the victim in order to achieve Pareto optimality. It is shown that the key characteristic determining whether compensation of victims is required for efficiency is not the depletability of the externality but whether the victim can costlessly control or limit the amount of the damaging substance received.     

The price of innovation: An analysis of the marginal cost of green buildings

Energy efficiency plays an important role in reducing the carbon externality from buildings, but economic analyses of more efficient, green building have thus far ignored input costs. This paper finds that the average marginal cost of green-labeled construction projects is smaller than the value premiums documented in the literature. However, design fees, representing just a fraction of development costs but paid largely up-front, are significantly higher for green construction projects. These projects also take longer to complete. The results provide some insight into the market barriers and market failures that may explain the relatively slow adoption of otherwise economically rational green construction practices.     

Valuation of human health: An integrated model of willingness to pay for mortality and morbidity risk reductions

This paper develops and applies an integrated model of mortality and morbidity valuation that is consistent with the principles of welfare economics. To obtain the integrated model, the standard one-period expected utility model of one person facing the prospect of either being alive or dead is extended to incorporate (1) a third health state (sick) with a utility level that is intermediate to utility if healthy and utility if dead, (2) a family perspective in which a parent makes choices about risk exposure both for herself and for a child, and (3) a multi-period framework that allows for possible parent/child differences in illness latency. Monetary benefits of health risk reduction obtained from the integrated model are compared with those that would be computed using the standard model. The integrated model then is applied using data obtained from two field studies of skin cancer and leukemia to demonstrate how it can be used to estimate health benefits of reduced illness and death risks.     

Those outsiders: How downstream externalities affect public good provision

Some policy problems pit one group?s interests against another?s. One group may determine provision of a project (such as a dam) that benefits group members but hurts others. We introduce a model of such projects. In-group members may contribute to a common fund that benefits them as a public good. Benefits from the project may vary within the group. Provision has negative downstream externalities: contributions hurt agents outside the in-group (“Outsiders”), rendering them anti-social. Many models of social preferences predict that such externalities should reduce provision, although conditional cooperation or a preference for in-group members may counteract this. We test this model with a lab experiment using Outsiders with whom the in-group members have more and less contact. With homogeneous in-group benefits, the presence of negative downstream externalities reduces contributions by half when they have closer contact with Outsiders but not at all when they have had no contact. We introduce a rotating high-return position that allows subjects to trade favors. In this setting, contributions of non-privileged members diminish slightly when faced with the negative externality given closer contact with Outsiders, and not at all with less contact. Reciprocal giving occurs whether or not Outsiders are present.     

The new approach to wilderness preservation through benefit-cost analysis

Over the last 15 years, economists of Resources for the Future led by John Krutilla have been developing a new approach to wilderness preservation. This paper offers a concise exposition of their approach and adds a few steps. The basic ingredient of the new approach is a perception of declining net benefits of wilderness development and rising net benefits of wilderness preservation over time. These alter the entire shape of the benefit-cost analysis of potential development. The new steps involve reversibility, postponability, and recognition of multiple interest rates.     

Substituting pollution taxation for general taxation: Some implications for efficiency in pollutions taxation

Earlier papers have recognized that nonenvironmental benefits will be realized if pollution taxes are substituted for other taxes which impose efficiency losses on society. The purpose of this paper is to investigate the importance of these nonenvironmental benefits for the design of an efficient pollution tax. It is found that the efficient tax may be higher or lower than that conventionally defined as optimal, and that the net benefit from unrestrained pollution can have important implications for the size of the tax.