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Posts Tagged ‘environmental economics’

If you want to give your children nightmares tonight, maybe reading the summary of the IPCC report that was released last month would be a good idea.

The report states that, ‘it is extremely likely’ that humans have been the dominant influence on observed warming since the mid-20th century. But whether you believe that the effects are man-made or not, the effects are real:

  • The rate of sea level rises have been faster since the mid-19th century than at any point in the previous 2,000 years;
  • 75% (high confidence) of the rise is due to glacier loss and ocean thermal expansion;
  • Global average sea levels rose by 0.19m between 1901-2010 and is expected to rise by 0.26m to 0.98m by 2100 (depending on which concentration path we follow);
  • It is very likely that there will be an increase in heavy precipitation events over most land areas.
  • Most aspects of climate change will persist over centuries, even if we stop CO2 emissions immediately.
  • Both rich and poor nations will be negatively affected.

Given that the effects will happen regardless of our emission path, a policy of adaptation is necessary alongside mitigation strategies.

It is often the case that any type of change brings about new markets – climate change is no different. When so many people see a problem, some people see an opportunity. Welcome to the era of environmental capitalism.

A recent Radio 4 programme called, The Great Global Warming Gold Rush, highlights a few of these entrepreneurs and companies who are making money off climate change. The Dutch water management department of Arcadis are set to benefit greatly from future flood protection schemes; they received $200m in contracts after Hurricane Katrina to prevent another flood happening in New Orleans.

Another Dutch company, Delta Sink is developing amphibious buildings and floating roads. With over 2.5bn people expected to live in coastal cities in the next hundred years, even a minute portion of the market will allow this company to have a pretty secure future.

Essentially, the Dutch have transformed a national vulnerability into a comparative advantage; they have the knowledge, the technology and the skills that they export – and will be exporting – around the world.

The programme also highlighted an example of how we can work with nature for a profit. Jason Drew grows and breeds around 8bn flies that recycle nutrients from waste (that they get paid to take!) and transform it into a cheaper substitute for fishmeal.

Entrepreneurs are by definition those that move faster than the rest of society, and their innovations can help us all adapt to climate change. But Governments need to implement policies that can steer these entrepreneurs to identify the best long term outcomes for us all, rather than just short-term fixes that make a quick buck. 

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UK waters are some of the most ecologically diverse on the planet. On the 21st of November, 27 Marine Conservation Zones (MCZ) were created – the 1st of three designation phases planned to occur over the next three years. These new sites form part of a developing network of marine protected areas, equivalent to around 9% of the UK’s water.

Available scientific knowledge for sites’ ecological and biological features determines whether a site is designated as a MCZ. Essentially, the science draws the line on the map, rather than allowing social reasons to influence the decision process. Restrictions differ depending on what the site is trying to protect; for example, fishing will not be restricted if it does not harm the features being conserved.

Despite the fact that science is the main factor in identifying sites, Impact Assessments are required by law to accompany the designation decisions. An Impact Assessment attempts to identify and quantify/monetise the actual or anticipated social, economic an environmental effects of a decision.

There are 2 important reasons why they are undertaken:

  1. It is important to determine the costs to society of protecting these areas – society should know the implications and costs of protection; and
  2. IAs can help determine management measures within the MCZs i.e. they can highlight a range of available choices on how to manage the area and the strictness of the protection.

Impact Assessments help assess whether the ecosystem offers a valuable service to society (such as offering a safe breeding ground for fisheries) or what the costs of protection are. This information can then feed back in to conducting more scientific research to justify or amend the way sites are managed. For example, if the cost of protecting a certain area of water results in access to a port being severely compromised, there will be a large societal cost. Therefore, makes sense to gather more scientific evidence to identify a scientifically important sub-section to be protected that doesn’t compromise the port.

Although economics doesn’t dictate whether a site is created, it plays an important role in terms of how it is managed; eftec has many years of experience in completing, and contributing to, Impact Assessments concerning the marine environment. In 2011, eftec completed an analysis of the potential impacts of creating a marine protected area around the Pitcairn Islands (see previous blog post on this). We have also created Impact Assessments for the Joint Nature Conservation Committee – enabling a sounder understanding of decisions to nominate marine Special Conservation Areas (2007, 2009 and 2013).

eftec are currently developing economic evidence for Defra on the gains to society of meeting government targets concerning seabed habitats in UK waters. We are also excited to be working with the Marine Management Organisation to help value the marine environment by attempting to quantify the benefits that certain ecosystems offer to society. Finally, we are part of a team to assess the social, economic and environmental impacts of achieving a good ecological status in certain French waters. This project will help determine which measures should be prioritised as part of the French government’s commitment to the Marine Strategy Framework Directive.

Creating networks of ecosystems in seawaters is important due to the mobility of life within the marine environment. It is important to look at marine sites as a network, as the value of a network can be larger than the sum of the parts. Therefore, when conducting Impact Assessments, we attempt to know how different sites link with one another so that a realistic value can be determined. Cumulative assessments should account for network effects and we should not have a narrow mind when performing these studies.

We really appreciate comments. Please think about these questions and offer any thoughts.

Do you value an individual site more if you know it is part of a network?

What kind of information would you regard as most important when designating a marine site? 1. The effect of the site on other species; or 2. The effect of the site on humans? 

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The recently-finished Medmerry managed realignment scheme, on the South Coast, is an excellent example of how society can work with nature for the benefit of all parties.

The £28m scheme involved building 7km of sea walls up to 2km inland and then  ‘making a hole’ in the existing sea wall, thus allowing the seawater to naturally come into the land. This will now protect over 300 homes, local caravan parks and businesses, a water treatment plant and a main road from a once-in-a-thousand year flood. This area was previously prone to flooding; therefore the avoided damage from this scheme will be valuable.

An important reason for the water being allowed to come inland was to create a 180Ha saltwater marshland, thus offsetting the habitats that were lost in the flood protection projects of larger cities such as Southampton and Portsmouth. The creation of this rare saltwater marsh will bring in numerous species. As well as the wildlife reserve, footpaths, cycle paths and bridleways will be opened. As a result, nature-based tourism in the area is hoped to increase, which will benefit the local economy.

By working with nature, rather than against it, the project has benefited both humans and the environment. The scheme has given a home, or resting spot, to wildlife, whilst providing recreational, protection, participation, and tourism benefits to the local community. It is an excellent example of how incorporating nature-based values into decision making can improve society as a whole.

This is the biggest scheme of its kind in the UK to date and it will be observed closely to see if it can be applied to other regions that are threatened by rising waters.

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The Pitcairn Islands are a British Overseas Territory, comprising of four small islands in a remote area of the Pacific Ocean. The permanent population of around 50 people all reside on Henderson Island. It is most famous for being the last settling point where mutineers on the Bounty settled in the 1780s; the current inhabitants are direct descendants of these hardy few.

At the 3rd International Marine Protected Areas Congress in Marseille, France, this week and on the PEW Charitable Trusts website, is the proposed Pitcairn Marine Reserve- which plans to establish one of the World’s largest protected marine reserves. Based on its 2012 report, on the economics of the proposed Pitcairn Reserve, eftec has contributed to this discussion.

The conclusions from the report helped lay the foundation for the current proposal, Protect Pitcairn: An Underwater Bounty.

In our report, we devised and compared 3 development options open to Pitcairn.

  1. The Baseline: where the current situation continues (no marine reserve and no fishing licenses).
  2. Marine reserve: the waters up to 200 miles off-shore, equating to 836,000km2 (or the size of Alaska and California combined) is established as a reserve and only local artisanal fishing is allowed.
  3. Exploitation: no reserve is created. Instead, a fishing license regime develops, thereby allowing commercial access to Pitcairn’s waters.

Currently, the islanders fish in a traditional fashion for subsistence and local trade, and there are very few commercial fishing vessels in the proposed area due to its remoteness.

The report estimated that if Pitcairn were to open their waters to fishing, and sell fishing licenses, it could only generate around $(US) 32,000 p.a.

eftec’s report argued that it is likely that the benefits of establishing the marine reserve would far outweigh this revenue.

The proposed marine reserve would significantly enhance Pitcairn’s image on the global stage. The resulting increase in tourism, particularly in numbers of cruise ships visiting, could generate significant revenue for such a small economy. Furthermore, branding itself as one of the World’s largest marine reserves would enable the island to increase the price of existing products.

As well as monetary benefits, there would be substantial non-market values from establishing the marine reserve. The National Geographic expedition in 2012 claimed that the ocean around Pitcairn is how it was a thousand years ago, with pristine reefs and clear waters, visibility is 75 metres- the highest in the Pacific. The team’s 16 underwater cameras, each covering a few square metres for 5 hours, saw 57 species of fish- 8 of which were new to science! Imagine how many more are lurking in the 836,000km2 of water that could be protected.

Therefore, the unexploited marine ecosystem may provide essential services of great value to the World, beyond what we can currently monetise. The islanders voted unanimously in favour for the ‘Protect Pitcairn: An Underwater Bounty’ to be presented to the British government for approval.

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A shipping lane is being proposed which would go through the Great Barrier Reef so as to improve access to a mining complex.

We must ask some questions that help decide whether the proposed lane should go through the reef or not. Who will benefit or lose out in each scenario, when, and for how long, and by how much?

In economic analysis, as £1 now is worth more than £1 in the future, future costs and benefits are discounted to create a Present Value for each impact, which you can then weigh against each other.  For a project to be recommended on economic analysis grounds only, its benefits over time need to outweigh its costs. In economic terminology Net Present Value (benefits minus costs) > 0 or Benefit Cost Ratio > 1. There are of course many other considerations in making a decision about a project that economic analysis can capture. But let’s see how we can think about this project if we were attempting to do an economic analysis (cost benefit analysis in this case).

Let’s briefly look at the case where the shipping lane does go through the reef. This will not cost the company anything extra than they had already planned. It may, however, have an economic cost to society (a negative externality); reef damage, caused by the ships, will reduce tourism in the area- a huge source of local GDP and employment in Queensland.

We can also look at the case where the shipping lane is diverted to avoid the reef. The tourist numbers and revenues don’t change, but the diversion would cost extra money to the mining and shipping companies in the form of fuel and time.

The comparison of cost of diversion and avoided damage (benefit of diversion) to the reef can conclude:

(a)    if the cost of diverting ships is less than the lost money from tourism and other marketable impacts, the shipping lane should be diverted.

(b)   if the cost of diverting ships outweighs the lost money from tourism and other marketable impacts; the direct lane should go ahead on efficiency grounds.

But hang on a minute, it’s not that simple!

We have to think about the characteristics of the reef that generate values other than the market price and revenues. It’s these social values that are not paid for in a market that are often most important to people and are what make the Great Barrier Reef, well, GREAT.

It’s not that different to what people care about when their house burns down. Do people care about the games console or the expensive pair of new jeans? No, it’s the family photos, the postcards from friends, and the paintings your son made when he was 4 years old that hang in the kitchen.

The same goes for the reef; it’s the bio-diversity, cultural heritage, national pride, the wonder and mystery, and the sheer size of it that are the most ‘valuable’.

These characteristics lead to types of value that cannot be bought, such as: Option value (I may be willing to pay to have the option to see the Reef in the future, even though I have no intention going now); Existence value (I may be willing to pay for the knowledge that the Reef exists without any intention to ever see); and Bequest value (I may be willing to pay so that my descendants can see the Reef).

By including these values, we can build a better understanding of the Total Economic Value of the Reef. ‘But how do you measure them if we can’t buy or sell them?’ I hear you cry. This is where environmental economists earn their money; they realise that these values may be hidden within the price of another good/service that is bought and sold and thus can extract it. Another method is to survey people’s preferences of different scenarios regarding the environmental asset and their associated income in each scenario.

By eliciting these values, we can monetise damage done to the reef that isn’t seen through the market and incorporate it into the decision process.

Accounting for some leeway either side, if the true cost of having a lane directly through the reef i.e. losing all values associated with reef damage, is more than the cost to companies of circumventing the reef, then there is a compelling argument that the direct lane should be shelved.

So what if, even after including these non-marketed values, the damage to the reef is less costly than the cost to the companies of bypassing it?

In reality, we can’t monetise everything and we are never 100% certain what the consequences of reef damage is in the long term; perhaps, with data only available in the future, the costs are found to be so much more than previously thought. In that case, instead of attempting to put a market value on certain attributes, we could just say that, ‘some things are critical for nature and for the people, both now and in the future, and should be protected’.

Yes, economic development may bring us monetary wealth, but perhaps we lose immaterial wealth in the process in terms of wellbeing, morals and principles. Some things are irreplaceable, and should remain that way.

Here is a link to the online petition against the lane.

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I was watching an old Big Bang Theory episode the other day; it was the one where Penny buys Sheldon and Leonard (Star Trek enthusiasts) a Spock Transporter each from the comic book store.

Penny wants to open them up and play with them, which stuns the boys; Leonard says, ‘Once you open the box, it loses its value.’ (Watch the 2 minute clip here)

Here, Sheldon and Leonard realise that things don’t always have a ‘use’ value in the traditional sense of consuming them. They recognise that the toys have an embedded value in leaving them in the box untouched i.e. mint in box. Neither of them may even consider selling them in the future, despite the toys being ‘worth’ more.

Instead, they enjoy looking at them in their pristine condition (a non-consumptive direct use value) and, also, may want to pass them on to their children – if Sheldon knows how to make a child – or donate them to a museum so that others can see them in their original state (a bequest value).

Perhaps, then, we can learn something from comic book enthusiasts and apply their ‘mint in box’ mentality to the environment. Policy-makers now take into account these direct and indirect use and non-use values into project appraisal by considering a project’s total economic value.

People wouldn’t pay as much to visit Yosemite National Park if it wasn’t kept looking beautiful, as they would not derive as much value. Therefore, it makes sense to keep it looking beautiful (see picture below).

Another non-consumptive direct use value that can be compared to the Big Bang Theory example would be improving bathing water standards. People don’t go to beaches to drink the sea water, which would be a consumptive use value. Instead, they derive value from playing in the water. If the water is not safe, then people cannot play in it; therefore there is a benefit (amongst many others) from improving it that doesn’t have a market price.

Later on in the episode, Spock comes to Sheldon in a dream and asks him what the purpose of a toy is. Sheldon replies by saying, ‘to be played with’ and thus comes to the conclusion to open it and play with it. Therefore, we need to think about what the purpose of the environment is before making decisions to change it.

The herd has done some head-scratching over this topic, and we would appreciate your input- do you agree or disagree, can you think of other analogies?

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We are in a global race….. at least if David Cameron’s twitter feed is anything to go by. We must pick up the pace, run, run, run, and to the winner the spoils.

It may seem a flippant metaphor. The problem is that it is complete nonsense, dangerous nonsense.

I will leave an explanation of the dire economic thinking to the IEA.   I will turn to the implications.

A race is a panic. An aggressive, exhausting panic. So dig deep and feel the burn, pick up the pace (I think the ‘pace’ is GDP but I am not sure how far they have thought through the metaphor).

Keep running, the 2015 election is in sight, that’s the finish line….wait we have to keep going…and going….what do you mean never stop? Wish I hadn’t chucked my water away….at least the sponsors will pay up…what no sponsors..

We are not in a race, economies are not zero sum games, your loss is not my gain. Most importantly there isn’t a finish line. We need to be making policies which aren’t going to compromise the quality of life  (within certain limits) of any person 50 or 500 years down the line, no matter if they fit neatly within our national borders.  We are not doing this at the moment, and a fixation on our pace of growth damages us and the next generations.

We need to grow right and some question if at all. But while the political and financial system is wedded to narrow indexes of prosperity and this rhetoric, this may be a race we wish we hadn’t entered.

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