Midterm

(2) Virtual power purchase agreement (VPPN) for low-carbon power

(2) Virtual power purchase agreement (VPPN) for low-carbon power •Consumer (it may not even necessarily be a consumer of electric power) agrees to provide a "contract for differences", which provides a fixed price per kWh to the power producer over the contract period (for example 20 years) in exchange for the variable price that the electric grid will actually pay •The consumer usually also purchases the "environmental assets", which are the renewable energy credits that the electric power project creates •Often the consumer is a company like Apple or Google or Microsoft, which counts the contract and "environmental assets" toward its promise of net zero carbon emissions Helps power producer to obtain bank financing for the project, since it guarantees a predictable revenue stream

Feed-in tariffs

- Requirement of a high per kWh payment for electricity to anyone who generates it using renewable energy (occasionally, though rarely, interpreted to include nuclear energy) - Payment generally made by the electric utility that distributes the power - Regulatory authorities allow the payment to be passed on to customers - Hence, it increases the cost of all electricity - Tariff paid to producers who use renewable energy (for example a homeowner with a PV array on the rooftop); may be determined by a cost-plus formula (levelized cost to produce the electricity plus a profit margin - This payment is guaranteed for a long-term period such as 15-20 years; since levelized, the tariff in early years is high lMore rarely the payment is determined in some other way, such as the value of the non-polluting electricity (difficult to determine) - Usually requires a second meter - on a home for example - to monitor electricity being sent from the producer to the grid as well as from the grid to the producer (unless kWh netted out) - With guaranteed payment from utility it's easy to get a bank loan, hence profit to generator is virtually assured

Renewable Portfolio Standard (RPS)

- Requirement that a specified percentage of an electric utility's production be attributable to renewable energy (sometimes - though rarely - nuclear energy is included as "renewable") - Any electricity producer may generate electricity from renewables and thereby be credited with renewable energy certificates (RECs) which may be sold, for example to an electric utility that needs to show a higher level of generation from renewables

Incentive pricing methods

- Time-of-day pricing (for example for electricity) - higher price to consumer for use of electricity at times of the day when use is higher (to suppress demand when it threatens to be greater than the utility's generating capacity) - Peaking price - charge for average use plus charge for peak use - Marginal cost pricing (typical for water as well as sometimes electricity) - meant to encourage conservation, higher marginal price at high levels of use (sometimes also called block pricing - low price for first block up to some low level; higher price for each unit of next block; higher price for next; etc.) - Congestion pricing - generally, time-of-day pricing for vehicles using congested roads

1) Ordinary power purchase agreement

1) Ordinary power purchase agreement •Agreement between power user and power producer •Agreement for user to pay pre-set amount per kWh in each future year, for example 20 years (amount may increase by a fixed percentage each year) •Consumer of power may not use exactly that electricity produced by the producer, because it is impossible to tell which electron is produced by which producer once the power is sent to the grid

Examples of problems we can solve and issues we can address with Environmental Economics

1.Avoid being made to look like an idiot by an economist 2.Should a big dam be built 3.Assess the monetary cost of the damage from an oil spill 4.Create incentives to encourage zero carbon-emission energy 5.Think in terms of economics when trying to do good 6.Decide whether and how to implement a company-wide energy conservation plan 7.All-Asia agreement to reduce greenhouse gas emissions to mitigate climate change 8.Why isn't the rainforest being preserved, is it bad & what to do about it 9.Think about how to transition to a low carbon economy 10.Finance preservation of a nature site

Decommissioning sinking fund

A decommissioning sinking fund is a fund that, typically, an electric power producer - such as a nuclear power plant operator - adds to over time out of operating profits to guarantee that enough money will be available when the power plant is no longer operable to dispose of or secure the remains and waste products of its operation Some nuclear decommissioning funds are very large Such decommissioning funds might be required also for solar and wind power plants

Reclamation bond

A reclamation bond is a quantity of money deposited in a fund by a company, often a mining company, to guarantee that the money will be available after its project is completed to clean up the environmental damage that its project may cause and restore the environment to its original health, or better

Command and Control

A type of government intervention in which the government simply tells a polluter (or creator of an externality) what to do - orders them to do it

Power purchase agreements

A way to finance low- or zero-carbon emitting electric power plants (or, for that matter, any power plants, even including non-zero-carbon emitting ones)

Applying the Productivity Method

Applying the Productivity Method To apply the productivity method, data must be collected regarding how changes in the quantity or quality of the natural resource affect: - costs of production for the final good - supply and demand for the final good - supply and demand for other factors of production This information is used to link the effects of changes in the quantity or quality of the resource to changes in consumer surplus and/or producer surplus, and thus to estimate the economic benefits.

BUT! Years of fossil fuel reserves left - CAUTION!

BUT! Years of fossil fuel reserves left - CAUTION! "Reserves" are defined as fossil fuels "that we know with reasonable certainty could be recovered in the future under existing economic and technological operating conditions".* "Reserves represent only some fraction of resources, however; we continue to discover new quantities of coal [and oil, and gas], and with time more becomes technologically feasible to extract."* In fact, fossil fuels were predicted to run out many times during the 20th century, but each time more were discovered or technology improved so more could be extracted economically. But of course, fossil fuels are a finite resource. They must run out sometime or become uneconomical to exploit. However, there is another, urgent constraint on fossil fuels - the carbon dioxide and methane they add to the atmosphere ...

Equilibrium price is the price for everybody. Why?

Because of the assumption of transparency and perfect competition. "Law of one price."

Benefit Transfer Method

Benefit Transfer Method • Estimates economic values by transferring existing benefit estimates from studies already completed for another location or issue • Simple example from my own experience: For a calculation I made in 1987 of future water use in metropolitan Denver in the U.S. state of Colorado, I needed a price elasticity of demand for water; I didn't have any estimate of the price elasticity of demand for water in Denver so I used one that had been made in a 1967 journal article for the city of Tucson, Arizona.

Case #1— Soil Erosion in Korea

Case #1— Soil Erosion in Korea The Situation As relatively flat farmland in Korea is lost to urban growth and industrial development, farming has moved into the hilly upland areas. Heavy soil erosion has occurred on these upland areas, due to inadequate soil management techniques and errors in field layout and construction. The Challenge Resource managers needed to evaluate the benefits of proposed new soil management techniques. These benefits include the benefits of retaining the soil and nutrients on the upland areas, and the benefits of protecting downslope areas from damage by the eroded soil. The Analysis The replacement cost method was used, with the costs of physically recovering and replacing lost soil, nutrients, and water taken as a measure of minimum benefits from preventing erosion and the resulting soil, nutrient and water losses. Researchers measured the cost of physically replacing lost soil, nutrients, and water in upland areas, and the cost of compensating for downstream losses. First, the researchers calculated the annual soil loss per hectare, nutrient loss/hectare, and water runoff/hectare. Second, they calculated the expected losses, in terms of replacement costs, if the new management practices were not implemented. The cost of recovering and replacing eroded soil was estimated as W80,000 per hectare per year; the cost of fertilizer and spreading to replace lost nutrients was estimated as W31,200 per hectare per year; the cost of annual field maintenance and repair was estimated as W35,000 per hectare per year; the cost of damage to downstream fields in lost production (valued at market price) was estimated as W30,000 per hectare per year; and the cost of supplemental irrigation to replace lost water was calculated as W92,000 per hectare per year. Thus, the total cost of soil erosion under existing management is W268,200 per hectare per year. The net present value of the annual replacement of soil and nutrients with existing practices, using a 15 year time horizon, was calculated as W2,039,662. Next, the researchers calculated costs with the new management techniques. These costs included the cost of compensation payments, soil replacement, nutrient replacement, and mulching. The net present value of the costs of new management techniques was estimated to be W1,076,742. The Results The researchers found that the cost of new management techniques is about half the replacement cost. Thus, the proposed preventive steps are worth implementing.

Catastrophe bonds

Catastrophe bonds are issued to ensure that a sum of money is available sufficient to cover any damages that might be incurred by a catastrophe such as a typhoon or earthquake or tsunami. Reinsurance companies or other issuers such as the World Bank or governments issue catastrophe bonds to the public to insure against such catastrophic losses The money invested by purchasers of catastrophe bonds is invested in very safe government securities, but their low interest is supplemented by premiums (similar to insurance premiums) paid by the issuer

Complements. If an increase in the price of good A reduces the demand for good B, then A and B are complements. Hence, peanut butter & jelly are complements.

Complements. If an increase in the price of good A reduces the demand for good B, then A and B are complements. Hence, peanut butter & jelly are complements.

Contingent Valuation

Contingent Valuation The contingent valuation method (CVM) is used to estimate economic values for all kinds of ecosystem and environmental services. It can be used to estimate both use and non use values, and it is the most widely used method for estimating non-use values. It is also the most controversial of the non-market valuation methods. The contingent valuation method involves directly asking people, in a survey, how much they would be willing to pay for specific environmental services. In some cases, people are asked for the amount of compensation they would be willing to accept to give up specific environmental services. It is called "contingent" valuation, because people are asked to state their willingness to pay, contingent on a specific hypothetical scenario and description of the environmental service. The contingent valuation method is referred to as a "stated preference" method, because it asks people to directly state their values, rather than inferring values from actual choices, as the "revealed preference" methods do. The fact that CV is based on what people say they would do, as opposed to what people are observed to do, is the source of its greatest strengths and its greatest weaknesses.

Contingent Valuation and Lost Passive Use: Damages from the Exxon Valdez Oil Spill

Contingent Valuation and Lost Passive Use: Damages from the Exxon Valdez Oil Spill A survey (questionnaire) was carefully designed over a period of 18 months to be given to a national (U.S.) sample of interviewees, who would be interviewed face to face. "The central part of the survey instrument was the valuation scenario that described the damages caused by the Exxon Valdez oil spill" (from journal article titled as above). Structure of the final questionnaire: Initial questions: At the beginning of the interview, respondents did not know that the main subject matter of the survey was the Exxon Valdez oil spill. This allowed the interviewers to measure respondent's attitudes about various types of public goods and their prior awareness of the spill before revealing the purpose of the survey. Respondents were then given a description of Prince William Sound, a description of the wildlife in the area that were harmed, and an explanation of an "escort ship" plan that would prevent such a spill in the future but that would cost money, and everyone would have to pay some of that cost. Respondents were then carefully questioned about their willingness to pay, and how much. Respondents were informed that the program would be funded by a one-time tax on the oil companies that take oil out of Alaska and that households like theirs would also pay a special one-time federal tax that would go into a Prince William Sound Protection Fund... To obtain responses to a range of amounts, four different versions (A through D) of the instrument were administered to equivalent subsamples. The investigators then applied a complicated statistical model to construct a "willingness to pay" curve (like a demand curve) and calculate the total amount that could be collected if the participants in the survey - and, thus, the general population that they represent - were actually willing to pay those amounts.

Contingent Valuation: Stated willingness to pay

Contingent Valuation: Stated willingness to pay Based on surveys, questionnaires, referendums, laboratory experiments and focus groups A "stated preference" method - hence controversial —What people say they would be willing to pay is only vaguely related to what they would really pay —Often they don't know until they actually take out their pocketbooks —They may have an incentive to lie in surveys, questionnaires or experiments - they might want to appear to be environment-friendly, but actually wouldn't pay anything to save it

Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods

Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods Estimate economic values based on costs of avoided damages resulting from lost ecosystem services, costs of replacing ecosystem services, or costs of providing substitute services. The damage cost avoided, replacement cost, and substitute cost methods are related methods that estimate values of ecosystem services based on either the costs of avoiding damages due to lost services, the cost of replacing ecosystem services, or the cost of providing substitute services. These methods do not provide strict measures of economic values, which are based on peoples' willingness to pay for a product or service. Instead, they assume that the costs of avoiding damages or replacing ecosystems or their services provide useful estimates of the value of these ecosystems or services. This is based on the assumption that, if people incur costs to avoid damages caused by lost ecosystem services, or to replace the services of ecosystems, then those services must be worth at least what people paid to replace them.

Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods Some examples of cases where these methods might be applied include:

Damage Cost Avoided, Replacement Cost, and Substitute Cost Methods Some examples of cases where these methods might be applied include: •Valuing improved water quality by measuring the cost of controlling effluent emissions. •Valuing erosion protection of a forest, hillside or wetland by measuring the cost of removing eroded sediment from downstream areas (substitute cost), or the economic value of damages from erosion that the protection avoids (damage cost avoided). •Valuing the water purification services of a wetland by measuring the cost of filtering and chemically treating water. •Valuing storm protection services of coastal wetlands by measuring the cost of building retaining walls. Valuing fish habitat and nursery services by measuring the cost of fish breeding and stocking programs.

ESG investing and sustainability indexes

ESG stands for environment, social, and governance Applies mainly to equity (stocks / shares) investing but also to bonds. Corporate issuers are rated by third party companies as to how "friendly" their practices are toward the environment (such as low carbon emissions, or setting targets for lowered emissions); ethical social practices (hiring women and minorities, justice along the supply chain, ethical behaviour toward "stakeholders", not just stockholders); and governance (diverse representation on board, fair division of compensation between executives and workers, etc.) Investment portfolios may be rated by the average ESG rating of companies in them "Sustainability indexes" contain the stocks of companies with high ESG ratings Some negatives: ratings vary greatly from rater to rater; investment management fees much higher for ESG funds than for simple index funds; much "greenwashing"

Elinor Ostrom's main insight

Effective management of a common property resource can be achieved, and has been achieved, by collectives without government intervention or privatization, if the collective is small enough and it self-organizes a way to manage the resource.

Productivity Method Example

Example 1: Value of reducing pollution of city water by agricultural runoff (see http://www.ecosystemvaluation.org/productivity.htm) A reservoir that provides water for a city's drinking water system is being polluted by agricultural runoff. Agency staff want to determine the economic benefits of measures to eliminate the runoff. The productivity method was selected because this is a straightforward case where environmental quality directly affects the cost of producing a marketed good—municipal drinking water. This example is one of the simplest cases, where cleaner water is a direct substitute for other production inputs, such as water purification chemicals and filtration. Step 1: The first step is to specify the production function for purified drinking water. Water cost (low quality input) = a1 x (reservoir cost) + a2 x (chemical cost) + a3 x (filtration cost) + ... Step 2: Second step is to specify the production function when reservoir is protected from runoff. Water cost (high quality input) = a1 x (reservoir cost) + a2 x (chemical cost) + a3 x (filtration cost) + ... Difference is the benefit of protecting the reservoir from runoff.

Excludable:

Excludable: You can stop people who don't pay from consuming the good.

Externality

Externality: A cost or benefit not paid or received by the individuals making the production or consumption decisions. Such markets have equilibria in which the quantity produced does not maximize economic welfare. In these cases, society can do better by devising policies to move the quantity in the right direction.

Green bonds

Green bonds are bonds issued by a corporation, a government, or an international organization like the World Bank, with the promise that the proceeds of the bond will be used for specific "green" projects. There are three certification systems to certify that a bond is "green" (that is, that the proceeds will go to certified green projects and that the fiscal management of the funds will be performed in accordance with certain standards: Green Bond Principles; Climate Bonds Standard; or the Chinese Green Bond Standard

Hedonic Pricing Method

Hedonic Pricing Method The hedonic pricing method is used to estimate economic values for ecosystem or environmental services that directly affect market prices. It is most commonly applied to variations in housing prices that reflect the value of local environmental attributes.

Hedonic Pricing Method (Extended)

Hedonic Pricing Method The hedonic pricing method is used to estimate economic values for ecosystem or environmental services that directly affect market prices. It is most commonly applied to variations in housing prices that reflect the value of local environmental attributes. The general idea: -The value (price) of a bundled good (typically, a house) is the sum total of its bundle of characteristics -No one characteristic can be unbundled from the price to determine its stand-alone price (value) -But the value of each characteristic may be inferred, by finding the price of many instances of the bundled good in the marketplace, each with different characteristics, and analyzing them statistically Pi = a + v1 qi1 + v2 qi2 + ... + vn qin where Pi is the price of the i'th bundled good vj , j=1,...,n, is the value of the j'th characteristic of the i'th bundled good and qij are the quantities of characteristic j included in the i'th bundled good. In other words, this is a multiple regression. The characteristics could be, for example: • Ambient air pollution in the location • Proximity to a nature site • Proximity to a waste dump • Etc.

Hedonic Pricing Problem Assume house price Pi can be approximated by: Pi = a + v1 qi1 + v2 qi2 + v3 qi3 + v4 qi4 Where: • qi1 = air pollution level near home parts per million (ppm) • qi2 = transport distance to work place in metres • qi3 = house size in square metres • qi4 = school quality on a scale of 1 to 10 Run multiple regression, result is: Pi = a + (-2046.7) qi1 + (-80.6) qi2 + (10106) qi3 + (5188) qi4 Hence we conclude that each ppm of pollution subtracts APPROXIMATELY $2,047 from the value of the house.

Hedonic Pricing Problem Assume house price Pi can be approximated by: Pi = a + v1 qi1 + v2 qi2 + v3 qi3 + v4 qi4 Where: • qi1 = air pollution level near home parts per million (ppm) • qi2 = transport distance to work place in metres • qi3 = house size in square metres • qi4 = school quality on a scale of 1 to 10 Run multiple regression, result is: Pi = a + (-2046.7) qi1 + (-80.6) qi2 + (10106) qi3 + (5188) qi4 Hence we conclude that each ppm of pollution subtracts APPROXIMATELY $2,047 from the value of the house.

Imputed willingness to pay

Imputed willingness to pay - Replacement cost - cost necessary to replace, or substitute for, vital environmental services - Damage cost avoided - costs necessary to avoid negative environmental impacts Example: What is the value of a forest that performs the service of modulating water flow? (prevents flooding and droughts downstream) - Replacement cost - what would it cost to replace these services, for example by building dams? - Damage cost avoided - what would it cost to avoid the damages, for example by building conduits like in Hong Kong?

"Tax equity"

In the United States, because renewable energy projects (wind and solar) are subsidized with tax credits •The developer of a wind farm or solar panel farm (large array of solar photovoltaic panels) asks a bank or investor such as JPMorgan Chase to finance the project by loaning money, and also investing in it in exchange for equity (shares in the profits) •The investor agrees, if it can take the tax credits for itself to reduce its tax liability •The developer agrees because it cannot use the tax credits since it will not have a profit to tax for a while

Feed-in tariffs and renewable portfolio standards

Intended to internalize the negative externalities of polluting fossil fuel technologies by subsidizing better alternatives (renewable energy) instead of - or in addition to - penalizing (e.g., taxing) the polluting technologies Feed-in tariffs are like a negative tax Renewable portfolio standards are more like a negative cap-and-trade system

Levelized cost of energy (LCOE)

Levelized cost of energy (LCOE) This is the "average" cost of energy over a lengthy time period, taking account of the time value of money LCOE: Suppose the front-end cost of an energy-generating power plant (for example an electric power producer) is A and that cost is incurred on day zero of the power plant's life; after that there is an annual cost for fuel and maintenance of C(i) in the i'th year; the power plant will last y years

Market Price Method - Example

Market Price Method - Example Water pollution has caused the closure of a commercial fishing area, and agency staff want to evaluate the benefits of cleanup. 1. The first step is to use market data to estimate the market demand function and consumer surplus for the fish before the closure. 2. The second step is to estimate the market demand function and consumer surplus for the fish after the closure.

Negative externality

Negative externality: There are social costs beyond those paid by producers and consumers, and in this case the socially optimal output level is less than the market equilibrium quantity.

Non-use values, also referred to as "passive use" values, are values

Non-use values, also referred to as "passive use" values, are values that are not associated with actual use, or even the option to use a good or service. Existence value is the non-use value that people place on simply knowing that something exists, even if they will never see it or use it. For example, a person might be willing to pay to protect the Alaskan wilderness area, even though he or she never expects or even wants to go there, but simply because he or she values the fact that it exists.

On hillsides of Nepal, in forests of the U.S. Pacific Northwest (Oregon, Washington states), services trees provide:

On hillsides of Nepal, in forests of the U.S. Pacific Northwest (Oregon, Washington states), services trees provide: • Hold the soil in place, preventing erosion and landslides • • Replacement cost: Retaining walls • Store water and release it gradually, preventing flooding and water shortages downstream • • Replacement cost: Underground dams • Aesthetic value (pleasing to see) • • Replacement cost: Difficult to estimate, possible to estimate only by using "willingness to pay" questionnaires

Option value is the value

Option value is the value that people place on having the option to enjoy something in the future, although they may not currently use it. Thus, it is a type of use value. For example, a person may hope to visit the Alaskan wilderness area sometime in the future, and thus would be willing to pay something to preserve the area in order to maintain that option.

Placing a value on environmental resources Circumstantial evidence - imputed willingness to pay

Placing a value on environmental resources Circumstantial evidence - imputed willingness to pay - Damage cost avoided - costs undertaken to avoid negative environmental impacts - Replacement cost - cost necessary to replace vital environmental services

Placing a value on environmental resources Contingent valuation - stated willingness to pay

Placing a value on environmental resources Contingent valuation - stated willingness to pay - Questionnaires, surveys and experiments

Placing a value on environmental resources Market Prices - Revealed Willingness to Pay

Placing a value on environmental resources Market Prices - Revealed Willingness to Pay The values of some ecosystem goods or services can be measured using market prices. Some ecosystem products, such as fish or wood, are traded in markets. Thus, their values can be estimated by estimating consumer and producer surplus, as with any other market good. Other ecosystem services, such as clean water, are used as inputs in production, and their value may be measured by their contribution to the profits made from the final good. Some ecosystem or environmental services, like aesthetic views or many recreational experiences, may not be directly bought and sold in markets. However, the prices people are willing to pay in markets for related goods can be used to estimate their values. For example, people often pay a higher price for a home with a view of the ocean, or will take the time to travel to a special spot for fishing or bird watching. These kinds of expenditures can be used to place a lower bound on the value of the view or the recreational experience.

Placing a value on environmental resources Market prices - revealed willingness to pay

Placing a value on environmental resources Market prices - revealed willingness to pay - Market price method - Productivity method - Hedonic pricing method - Travel cost method

Positive externality

Positive externality: There are social benefits beyond those captured by producers and consumers, and in this case the socially optimal output level exceeds the market equilibrium quantity.

Price elasticity of demand

Price elasticity of demand: percentage change in quantity demanded in reponse to a one percent increase in price

Price elasticity of supply

Price elasticity of supply: percentage change in quantity supplied in reponse to a one percent increase in price

Productivity Method

Productivity Method Answers the question: How much more productive (i.e. more profitable, or less costly) will some process that uses a natural resource be if the resource is less damaged? In other words, what is the monetary value of preserving or restoring that resource? Answer by comparing value (profitability as a positive, or costliness as a negative) with and without preservation/restoration of the resourc

Productivity Method Example 2: Valuation of Amazon rainforest

Productivity Method Example 2: Valuation of Amazon rainforest 1) If cleared for timber, cattle grazing, and soybean agriculture 2) If left to remain standing to produce fruits, nuts, resins - Calculate revenue from cleared forest: timber sales, present value of agriculture and cattle grazing - Estimate annual flow of revenues from non-clearing alternative: sales of fruits, nuts, resins etc. - Calculate present value - Compare clearing and non-clearing alternatives • Estimate the annual value of the product (for example, fruits from rainforest trees) • It's easy if the value of the product - let's say P - is the same every year indefinitely into the future • Then the value of the resource is V = P / ( 1 - x) where x = 1 / (1 + d) and d is the discount rate • Do the calculation again but this time for timber, cattle, and soybeans from cleared forest; compare • Suppose the value of fruits, nuts and resins harvested from a hectare of rainforest in a year is $100,000 • Assume a discount rate of 4% • Then the value of the resource is V = P / ( 1 - x) where x = 1 / (1 + d) = 1 / 1.04 ≈ 0.96 Hence, the value is V = $100,000 / (1 - 0.96) = $2.5 million / hectare

Productivity Method Example 3: Valuing wetlands

Productivity Method Example 3: Valuing wetlands (see http://www.ecosystemvaluation.org/productivity.htm) The study focused on valuing marginal changes in acres of wetlands, in terms of their contribution to the production of crabs, scallops, clams, birds, and waterfowl. It was assumed that wetlands provide both food chain and habitat support for these species. 1. First, the productivity of different wetlands types in terms of food chain production was estimated and linked to production of the different species of fish. 2. Second, the expected yields of fish and birds per acre of habitat was estimated. 3. Finally, the quantities of expected fish and bird production were valued using commercial values for the fish, viewing values for birds, and hunting values for waterfowl.

Productivity Method Example 4: cost of air pollution in Hong Kong (productivity loss)

Productivity Method Example 4: cost of air pollution in Hong Kong (productivity loss) • Use visibility and roadside air pollution monitoring data as proxies for ambient pollution • Find statistical dependency of morbidity (loss of health) and mortality data on visibility and roadside data • Place costs on health care and deaths that were statistically associated with pollution proxies • Calculate total cost as a function of level of pollution • See paper uploaded to Canvas, "Air Pollution: costs and paths to a solution"

Public Goods, Common Property Resources and Club Goods

Public Goods. Are non-excludable and non-rival. E.g. National defense. Common property resources: Are non-excludable, but rival. E.g. Open-ocean fisheries. Club Goods: Are excludable, but non-rival E.g. Golf clubs, roads (up to a point). Congestion goods: Non-rival up to a point, but they become rival once many people start using the good.

Rival:

Rival: When one person consumes a unit of the good, others can't consume the same unit.

Similarly, bequest value is the value that

Similarly, bequest value is the value that people place on knowing that future generations will have the option to enjoy something. Thus, bequest value is measured by peoples' willingness to pay to preserve the natural environment for future generations. For example, a person may be willing to pay to protect the Alaskan wilderness area so that future generations will have the opportunity to enjoy it.

Environmental Finance

Some topics that fall within the category of environmental finance: Green bonds; ESG investing; sustainability index; reclamation bond; catastrophe bond; decommissioning sinking fund; wetlands banking. Cap-and-trade - that is, emissions permitting systems - also fall within this category.

Substitutes. If an increase in the price of good A increases the demand for good B, then A and B are substitutes. Hence, chicken and beef are substitutes.

Substitutes. If an increase in the price of good A increases the demand for good B, then A and B are substitutes. Hence, chicken and beef are substitutes.

Case #2— Oil Spill Damages

The Situation The Zoe Colocotroni was a ship that spilled oil off the coast of Puerto Rico. The case was taken to court to determine the monetary damages resulting from the spill's effects on the local ecosystem. The Analysis The trustees used the replacement cost method to estimate monetary damages. They first calculated the number of lower trophic organisms killed by the spill, and then added up the cost of purchasing these organisms from a scientific catalog. The Results The US Court of Appeals rejected the use of the replacement cost method in this case, because the trustees did not plan to actually purchase the organisms and restore them to the ocean. In fact, by the time such a plan could have been carried out, the organisms would have restored themselves. Thus, the Court determined that the costs of purchasing the organisms did not accurately measure the actual ecosystem damages.

The income elasticity of demand is ______ for a normal good, _______ for an inferior good.

The income elasticity of demand is positive for a normal good, negative for an inferior good.

The marginal rate of substitution of X for Y is the marginal (that is, very small) number of units of Y a consumer can exchange for one unit of X without changing the consumer's utility.

The marginal rate of substitution of X for Y is the marginal (that is, very small) number of units of Y a consumer can exchange for one unit of X without changing the consumer's utility.

The sum of consumer surplus and producer surplus is sometimes called

The sum of consumer surplus and producer surplus is sometimes called "economic welfare"

The two main categories are use values and non-use, or "passive use" values.

The two main categories are use values and non-use, or "passive use" values. Whereas use values are based on actual use of the environment, non-use values are values that are not associated with actual use, or even an option to use, an ecosystem or its services.

There are three generally accepted approaches to estimating dollar values of ecosystem services. Each approach includes several methods. They are:

There are three generally accepted approaches to estimating dollar values of ecosystem services. Each approach includes several methods. They are: 1. Market Prices - Revealed Willingness to Pay 2. Circumstantial Evidence - Imputed (算的 ?) Willingness to Pay 3. Surveys - Expressed Willingness to Pay

Ordinary ("private") goods have two important features:

They are excludable. You can stop people who don't pay from consuming the good. They are rival. (競爭對手 ?) When one person consumes a unit of the good, others cannot consume the same unit.

Thus, use value is defined as

Thus, use value is defined as the value derived from the actual use of a good or service, such as hunting, fishing, birdwatching, or hiking. Use values may also include indirect uses. For example, an Alaskan wilderness area provides direct use values to the people who visit the area. Other people might enjoy watching a television show about the area and its wildlife, thus receiving indirect use values. People may also receive indirect use values from an input that helps to produce something else that people use directly. For example, the lower organisms on the aquatic food chain provide indirect use values to recreational anglers who catch the fish that eat them.

Travel Cost Method General idea

Travel Cost Method General idea: • Calculate travel cost to a site (one with a positive benefit—such as a scenic site), including value of lost time in travel • Use it to estimate demand curve for visitation to the site • Calculate consumer surplus value of the site

Placing an economic value on environmental goods (and bads)

Use values - Direct uses - Indirect uses - Option value - Bequest value Non-use ("passive use") value - Existence value

Wetlands banking

Wetlands are valuable nature preserves because they help clean the water, provide fish and wildlife habitat, and can help conserve water supplies In some locations - Colorado in the United States for example - if a building project will destroy a wetland, the project manager is required to replace it with a newly constructed wetland somewhere else in the same watershed As a result, when someone - anyone with approval for it - creates a new wetland (for example by "meandering" a stream) can "bank" it for later use or sell the right to apply it to a future project that will have a need to use it to replace a wetland it destroys (this is what is called "wetland banking")

Pareto improvement and Pareto efficiency (also called Pareto optimality) - see next two slides

When two or more "parties" - that is, parties-in-interest; in other words, two (or more) people or two (or more) groups of people or organizations - share a set of goods and/or services ("resources"), and there is a way to reallocate those resources among them so that everyone is at least as satisfied as before (has at least as high a "utility"), and at least one party is more satisfied (has their utility increased), then that is called a "Pareto improvement". If no further reallocation of the resources can bring about a Pareto improvement, then the situation is called "Pareto efficient" or "Pareto optimal" (is on the Pareto frontier).

Why the energy transition?

Why the energy transition? 1. Fossil fuels - coal, oil, and gas - have powered virtually all of the economic growth and development in human history. 2. Fossil fuels are expected to run out in the next 100 years (maybe). 3. Continued use of fossil fuels is expected to cause the climate to warm and change much too rapidly while inflicting damage on human welfare and economies.

1) Consider a simpler version of problem 7 in which there are three groups of suppliers and consumers, consumers willing to pay $80, $90, and $100, and suppliers willing to sell for $80, $90, and $100. Each consumer group again desires 1,000 products and each supplier group can produce 1,000. What will be the producer surplus? (Check one) o $5,000 o $10,000 o $15,000 o $20,000 o $25,000

o $10,000

1) Suppose there are four groups of consumers for a particular product, each demanding an equal number of the product, in a transparent and competitive market, and four groups of suppliers each producing the same equal number. Each of the first group of consumers is willing to pay only $40 for the product, the second group $60, the third group $80, and the fourth group $100. Each of the first group of suppliers can produce it for a cost of $60, the second group $70, the third group $80, and the fourth group $90. Which of these is the most likely price it will sell for in the market? (Check one) o $55 o $65 o $75 o $85 o $95

o $75

1) Now suppose in the previous problem each product sold imposes an externality on society costing $10. If that cost is internalized, how many will be sold? (Check one) o 0 o 1,000 o 1,500 o 2,000 o 3,000

o 1,000

1) In the previous problem, if the quantity of the product each consumer group wants is 1,000, how many will be sold? (Check one) o 1000 o 1500 o 2000 o 2500 o 3000

o 2000

1) At what point is a consumer's allocation of her budget between two goods optimized? (Check one) o At a point where she could make a Pareto improvement by exchanging a unit of one good for the other. o At a point where the price of the next unit of the good will exceed the price of a unit of the other good. o At a point where the consumer's demand for the goods equals suppliers' capacity to supply them. o At a point where one consumer's marginal rate of substitution is equal to the other consumer's marginal rate of substitution. o At a point where the consumer's marginal rate of substitution of one good for the other equals the ability of the consumer's budget to substitute one for the other.

o At a point where the consumer's marginal rate of substitution of one good for the other equals the ability of the consumer's budget to substitute one for the other.

1) Which of the following is not among the main motivations for ESG investing? (Check one) o Doing one's part to help save the environment without having to change one's lifestyle. o For investors, feeling that one's investments are doing good but not sacrificing financial return. o For investment managers, much higher fees than for other investments. o Trying to remedy injustices in society. o Being socially responsible even if it means giving up a little in investment return.

o Being socially responsible even if it means giving up a little in investment return.

1) Which one of the following is not economically efficient in theory? (Check one) o A cap-and-trade program. o A carbon tax. o Command and control. o Supply-demand equilibrium. o A Pareto optimum.

o Command and control.

1) In which one of these does the benefit exceed the cost, using a discount rate of 10%? (Check one) o Initial cost $100; benefit in 10 years (10 years from now) $115. o Initial cost $100; benefit $11 a year for the next 10 years. o Cost $10 a year for 10 years (years 1 through 10); benefit $110 in 10 years (10 years from now). o Cost $20 a year for next 10 years (years 1 through 10); benefit $21 a year for next 10 years (years 1 through 10). o Cost $20 a year for next 10 years (years 1 through 10); benefit $22 a year for subsequent 10 years (years 11 through 20).

o Cost $20 a year for next 10 years (years 1 through 10); benefit $21 a year for next 10 years (years 1 through 10).

1) What is the main reason for the difference between William Nordhaus's estimate of the cost of carbon emissions and that of the Stern Review? (Check one) o Different projections of the costs of climate change. o Different projections of the change of atmospheric temperature for a given level of greenhouse gases. o Different projections of future emissions of greenhouse gases. o Different discount rates. o Different time periods.

o Different discount rates.

1) Which of these is not an example of a positive externality? (Check one) o Emissions of carbon dioxide into the atmosphere cause agricultural crops to grow faster. o Emissions of carbon dioxide cause positive feedback loops, such as less reflection of the sun from polar ice caps. o Noise emitted by internal combustion engines (but not electric engines) causes pedestrians to get out of the way. o When a user joins a social media app it means others can get more use out of the app. o Emissions of sulfur dioxide from coal-fired power plants partially obscure the sun, reducing global warming.

o Emissions of carbon dioxide cause positive feedback loops, such as less reflection of the sun from polar ice caps.

1) If a corporation wanted to raise money to better insulate its buildings, which of these ways of raising money would it probably choose? (Check one) o Reclamation bond. o Catastrophe bond. o Decommissioning fund. o Green bond. o ESG fund.

o Green bond.

1) Farmer 1 and Farmer 2 bought identical land from a company that built a neighboring factory, but Farmer 1 bought twice as much land as Farmer 2. Farmer 1 bought before the factory was built and was "grandfathered" the right to be free of pollution, while Farmer 2 wasn't. The company offered Farmer 1 money to allow it to emit a little pollution on Farmer 1's land, and a direct negotiation between them resulted in the factory paying Farmer 1 for the privilege. Farmer 2 offered the factory money not to pollute and a direct negotiation between them resulted in an agreement. Taking the Coase theorem into account, how much pollution will Farmer 2 experience? (Check one) o Twice as much as Farmer 1. o The same amount as Farmer 1. o Half as much as Farmer 1. o Twice as much per dollar paid. o Half as much per dollar paid.

o Half as much as Farmer 1.

1) Under what circumstances will a carbon tax and a cap-and-trade system theoretically produce the same results? (Check one) o If the government sets the tax equal to the social cost. o An auction allocates permits in the same way that a government would allocate them. o Maximum utility is at the point of tangency with an indifference curve. o If the equimarginal principle applies in both cases. o If at the equilibrium point on a supply-demand diagram taking into account all social costs and benefits the cap equals the quantity and the tax equals the price.

o If at the equilibrium point on a supply-demand diagram taking into account all social costs and benefits the cap equals the quantity and the tax equals the price.

1) If a governmental jurisdiction has a renewable energy standard, which one of the following is not a way for an electric utility to meet its requirement? (Check one) o Generate enough electricity from renewable energy to meet the standard. o Purchase renewable energy certificates from a company that has generated the electricity from renewable sources. o Purchase renewable energy certificates from someone who bought them from someone else. o Install pollution control equipment on its generators. o Pay an environmental organization for renewable energy certificates and retire them (throw them out).

o Install pollution control equipment on its generators.

1) Which of these is not a problem with cost-benefit analysis? (Check one) o The discount rate is difficult to choose and can be manipulated o Projections of costs and benefits in the distant future are very approximate o It doesn't take "tail" events into consideration - low-probability extreme outcomes o The result is very sensitive to the discount rate o It always assigns the responsibility for paying the cost to the polluter

o It always assigns the responsibility for paying the cost to the polluter

23) What does it mean that "who pays for an externality depends on who has the property right"? (Check one) o Whoever owns the property that is polluted has to pay for the pollution. o Whoever owns the property, such as a factory, that caused the pollution has to pay for it. o Who pays for the pollution depends on the result of a negotiation between a polluter and a pollutee. o The pollution on a property must be paid for by whoever does not have the right to use the property. o It depends on whether the polluter has the legal right to pollute or not.

o It depends on whether the polluter has the legal right to pollute or not.

1) Which of the following is not one of the main criticisms of ESG investing? (Check one) o It is illegal. o ESG ratings by third-party raters have no consistency. o Many investment funds have been "greenwashed" by being labeled ESG. o It is more expensive than index fund investing. o It implies that necessary reforms can be made by free market corporations without government intervention.

o It is illegal.

23) What is the best definition of "internalize an externality"? (Check one) o Make it part of the private transaction by making those who enter into the transaction pay for it. o Raise the level of general taxation to pay for it. o Make the company that causes it repair the damage. o Make people more aware of the problem of environmental externalities. o Pass laws to regulate all activities that cause environmental damage.

o Make it part of the private transaction by making those who enter into the transaction pay for it.

1) If a government wanted to start a program to encourage zero carbon emitting alternatives to fossil fuel use, which one would it not use for that purpose: (Check one) o Marginal cost pricing. o Feed-in tariff. o Renewable energy standard. o Cap-and-trade program. o Carbon tax.

o Marginal cost pricing.

1) Before moving to a different city to take a new job, you search an online web site, find an apartment with very low rent, and rent it through the internet. When you move into the apartment you find that for an hour or two every day, the neighbor in the next apartment practices a musical instrument very loudly. There was nothing about this in the rental contract. Which of the following solutions would be suggested by Coase? (Check one) o Sue the landlord for not mentioning it in the rental contract. o Offer to pay the neighbor to practice only when you're away at work. o Ask the city's environmental protection authority to cause the neighbor to stop. o Demand payment from the neighbor to compensate for the disturbance. o Sue in court to stop the neighbor from playing the instrument.

o Offer to pay the neighbor to practice only when you're away at work.

1) When a country has a feed-in tariff, why does the cost of electricity increase? (Check one) o Solar energy costs more so those who install it have to pay more. o Other electricity users pay more to pay for the subsidy. o The country increases its income tax to pay for the subsidy. o It is difficult to get financing for solar panels and wind turbines. o The electric utility has to add more of other types of electricity generation.

o Other electricity users pay more to pay for the subsidy.

1) For which of these is price elasticity of demand the highest (demand is very elastic)? (Check one) o MTR and bus tickets o Pizza o Education o Commuter automobile fuel o Funeral parlors

o Pizza

23) For which phenomenon is this not an explanation: "No one wants to pay for a positive externality." (Check one) o Polluters won't pay for their damages unless they are forced to. o Corporations don't do as much research as is needed. o Those who could share a resource may not agree to share the cost equally. o National defense must be paid for by taxes. o It is often difficult to get a tax passed in a city to pay for schools.

o Polluters won't pay for their damages unless they are forced to.

1) Which of the following is not a way to change the way consumers use resources? (Check one) o Time-of-day pricing. o Congestion pricing. o Peak pricing. o Marginal cost pricing. o Renewable portfolio standard.

o Renewable portfolio standard.

Coase Theorem

under "ideal circumstances", when polluters and pollutees bargain, the equilibrium level of pollution is independent of the allocation of property rights. (That is, whether or not the right to pollute other's property is part of the polluter's property rights.) Suppose, for example, that the "pollutee" has all the property rights to the environment. In the absence of any negotiation between the polluter and the pollutee, the former is not allowed to pollute — to do so would infringe upon the pollutee's property rights.

We say that the market is in equilibrium when three conditions are satisfied:

· (Utility maximization): At the market price, each consumer is voluntarily buying his preferred quantity. This is equivalent to saying that the quantity-price pair lies on the demand curve. · (Profit maximization): At the market price, each firm is voluntarily producing its profit-maximizing quantity. This is equivalent to saying that the quantity-price pair lies on the supply curve. · (Market clearing): At the market price the quantity demanded is equal to the quantity supplied.

Assumptions of perfectly competitive markets:

• Each market transaction is small enough so that it does not change the price: There are a large number of buyers and sellers in the market, so that the share of each seller in the market is very insignificant. • Identical or homogenous products: The individual products cannot be differentiated from each other • Transparency: All market participants have equal access to market prices and information • No collusion: Suppliers do not collude (串通) with each other to "fix" prices (and consumers don't either)

Economics of collectively shared resources

• Public goods • Common property resources • Club goods • Excludable / non-excludable • Rival / nonrival • Spillover effects • Free riders

Warming continues

• The sun's energy in the form of short-wave radiation flows through the atmosphere and reaches the earth • The energy that is absorbed by the earth is later sent back toward space in the form of heat (long-wave radiation) • But some of that energy can't get through because of greenhouse gases • If the level of greenhouse gases in the atmosphere stabilizes, the rate at which energy is removed, as the now-higher temperature heat flows back into space, will increase and will eventually equal the rate at which energy arrives from the sun; the temperature will stabilize at a higher temperature • But if the greenhouse gases in the atmosphere keep increasing, the temperature will keep increasing