Microeconomic Principles For Environmental Management

Environmental Markets (ESM 285) Bren School of Environmental Science & Management University of California, Santa Barbara Winter 2012 December 19, 2011

Professor: Gary Libecap Office: 4412 Bren Hall Phone: 805-893-8611 Email: [email protected] Class meetings: M & W 10:00-11:15 1510 Bren Hall Office hours: M 9-10 or by appointment

Course Objective This course presents the roles of property rights and markets in addressing environmental and natural resource losses associated with the “Tragedy of the Commons.” Topics include:  The open access problem  Traditional Pigouvian tax and regulatory solutions  Ronald Coase, Nobel Prize 1991, and Coasean trading  Environmental markets in fisheries  Environmental markets in water  Environmental markets in conservation credits and tradable development rights  Environmental markets in cap and trade emission permits Other areas, such as environmental benefits in energy markets are not covered due to limited time. Students will learn when rights-based systems are valuable solutions to open access losses and study the range of environmental markets. They will research and describe environmental markets. Course Materials Course readings include journal articles, book chapters, cases, and reports. There will be guest lectures. All materials will be posted on Gauchospace.

Course Requirements Students are expected to complete all of the assigned reading before class. Course discussion will be student led. Requirements:

1. Students are required to turn in a one-two page powerpoint synopsis of the key points in each required reading prior to class via Gauchospace and be ready to lead discussion.

2. Students also will be randomly selected in each class to report on an article or observation from Ecosystem Marketplace found at http://www.ecosystemmarketplace.com/ ; Evolution Markets found at http://new.evomarkets.com/; or bgc Environmental Market. These will be short 3-5 minute reports, no powerpoints or handouts are necessary.

1 3. There will be a final paper due the last day of spring term classes, 5pm, March 16, 2012. Submitted via Gauchospace, 10 pages max with references. Topics to be discussed.

Course Grades Course grades will be based on daily class powerpoints (30%); discussion leadership and market reports (30%); and final paper (40%).

1/09 The Problem of Open Access. This is the fundamental problem that leads to environmental degradation or loss and too rapid and wasteful natural resource extraction. All students will understand this problem. Readings:  Garrett Hardin, 1968, “The Tragedy of the Commons,” Science 162: 1243-8.  H. Scott Gordon, 1954, “The Economic Theory of a Common Property Resource: The Fishery,” Journal of Political Economy 62(2): 128-35 only.  Skim: T.R. Halliday, 1980, “The Extinction of the Passenger Pigeon Ectopistes Migratorius and Its Relevance to Contemporary Conservation,” Biological Conservation 17: 157-62.  Skim: Dean Lueck, 2002, “The Extermination and Conservation of the American Bison,” Journal of Legal Studies, 31 (S2): S609-650.  Skim: M. Scott Taylor, 2011, “Buffalo Hunt: International Trade and the Virtual Extinction of the North American Bison,” American Economic Review, 101 (December ): 3162–3195.

1/11 The Problem of Open Access Continued as Illustrated by the Fishbank Game—MIT and Dartmouth. This game illustrates the problem of open access and of coordination to mitigate its losses.  Fishbank Game—Access information to be provided.

1/16 NO CLASS MLK HOLIDAY

1/18 Traditional Pigouvian Tax and Regulatory Solutions. We briefly review command and control regulation and tax options.  Charles Kolstad 2011, Environmental Economics 2nd Ed, New York: Oxford University Press. Chapter 11, “Regulating Pollution,” 219-240; Chapter 12, “Emission Prices and Fees,” 241-261.  Robert Stavins, 2007 “Market-Based Environmental Policies: What Can We Learn from U.S. Experience (and Related Research), in Jody Freeman and Charles D. Kolstad, eds, Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience, New York; Oxford University Press, 19-47.  Skim: Ian W.H. Parry 2003 “Theory and Application of Externality Taxes: Editor’s Introduction” Public Finance and Management, 3(1), 1-11.  Skim: Hilary Sigman, 2003 “Taxing Hazardous Waste: The US Experience,” Public Finance and Management, 3(1), 12-33.  Skim: James Boyd, 2003 “Water Pollution Taxes: A Good Idea Doomed to Failure,”

2 Public Finance and Management, 3(1), 34-66

1/23 Property Rights and the Potential for Markets. Environmental markets require some type of property right, formal or informal. What is Property and What are Property Rights?  Gary Libecap, 1989 Contracting for Property Rights, New York: Cambridge University Press, Chapter 2, “Analytical Framework,” 10-28 only.  Yoram Barzel, 1997, Economic Analysis of Property Rights, New York: Cambridge University Press, 2nd ed, Chapter 1, “The Property Rights Model,” 3-11 only.  Harold Demsetz, 1967, “Toward a Theory of Property Rights,” American Economic Review 57(2): 347-59.  Thomas Merrill and Henry Smith, Property, New York: Oxford University Press,1-16, 43-50 only.

1/25 The Potential for Markets: Coasean Bargaining. Markets reallocate resources to higher valued uses and provide price information about alternatives. Coase addresses bargaining regarding environmental problems with different assumptions about transaction costs.  Ronald Coase, 1960, “The Problem of Social Cost,” Journal of Law and Economics 3: 1-44 only.  Nathaniel Keohane and Sheila Olmstead, Markets and the Environment , 2007, Washington: Island Press, “The Efficiency of Markets,” 54-63; Chapter 8, “Principles of Market-Based Environmental Policy,” 125-152; Chapter 9, “The Case for Market-Based Instruments in the Real World,” 153-181.  Charles Kolstad 2011, Environmental Economics 2nd Ed, New York: Oxford University Press. Chapter 13, “Property Rights,” 262-283.

1/30 Guest Lecture: Terry Anderson, Director, PERC, Property and Environment, Research Center, Bozeman, MT: Environmental Markets. Check out the PERC webpage at www. perc .org/

2/01Fisheries: The General Failure of Regulation and Role of Property Rights. Fisheries are the classic common pool resource and a resource where rights-based management has grown dramatically.  Jennifer Devine, Krista Baker and Richard Haedrich, 2006, “Fisheries: Deep-Sea Fishes Qualify as Endangered,” Nature 439 January 5, 29.  Ransom Myers and Boris Worm, 2003, “Rapid Worldwide Depletion of Predatory Fish Communities,” Nature 432, May 15: 280.  Rögnvaldur Hannesson, 2004, The Privatization of the Oceans, Cambridge: MIT Press, Chapter 3, Property Rights in Fisheries, 43-68; Chapter 4, Toward Individual Use Rights, 69-83; and Conclusion 163-78.  Skim: Ronald N. Johnson and Gary D. Libecap 1982. “Contracting Problems and Regulation: The Case of the Fishery.” American Economic Review 72(5): 1005–22.

3 2/06 Fisheries: The Impact of Property rights and their Trade  Christopher Costello, Steven Gaines, and John Lynham, 2008, “Can Catch Shares Prevent Fisheries Collapse?” Science 321., September 19: 1677-78.  Corbett Grainger and Christopher Costello. 2011. "The Value of Secure Property Rights: Evidence from Global Fisheries." NBER Working Paper 17019.  Ragnar Arnason, 2008, “ Iceland’s ITQ System Creates New Wealth,” The Electronic Journal of Sustainable Development 1 (2).  Skim: R. Quentin Grafton, Dale Squires, and Kevin Fox. “Private Property and Economic Efficiency: A Study of a Common-Pool Resource,” 2000 Journal of Law and Economics. 43(2): 679-713.  Skim: Keith E. Casey, James Wilen, and Christopher Dewees. 1995. “The Effects of Individual Vessel Quota in the British Columbia Halibut Fishery.” Marine Resource Economics 10(3): 211-30.  Distributional controversies: http://www.scientificamerican.com/article.cfm? id=progress-in-solving-fisheries-probl  Christopher Costello, Leah Gerber, and Steven Gaines, 2011, Whale Conservation Market, Nature.

2/08 Fisheries: Trading and Effects on stock  Richard G. Newell, James N. Sanchirico, and Suzi Kerr 2005, “ Fishing Quota Markets, “Journal of Environmental Economics and Management, 49(3): 437-462.  Rögnvaldur Hannesson, 2008, “Sustainability of Fisheries,” The Electronic Journal of Sustainable Development (2008) 1(2)  Cooperation using Markets for Management on the Central California Coast. http://www.nytimes.com/2006/08/08/science/earth/08fish.html?pagewanted=all  Cooperation using Markets for Management on the Central California Coast. http://www.nytimes.com/2011/11/28/science/earth/nature-conservancy-partners- with-california-fishermen.html  Cooperation using Markets for Management on the Central California Coast. The Nature Conservancy: http://www.nature.org/ourinitiatives/regions/northamerica/unitedstates/california/ho wwework/california-coastal-and-marine-program.xml?s_intc=tab1p3  IFQs (Individual Fishing Quotas). Skim readings in: http://ifqsforfisheries.org/resources/index.php

2/13 Water. Water Rights and Institutions. Water may be the most misallocated and mismanaged resource. The role of property rights and markets.  Gary D. Libecap, 2011, “Water Rights and Markets in the U.S. Semi-Arid West: Efficiency and Equity Issues,” in Daniel Cole and Elinor Ostrom, eds, The Evolution of Property Rights to Land and Other Natural Resources, Cambridge, MA: The Lincoln Institute, Chapter 13.  Gary D. Libecap, 2010, “The Economic Institutions of Water,” NBER Reporter, 4, November.  Gary D. Libecap, 2011, Institutional Path Dependence in Climate Adaptation: Coman’s “Some Unsettled Problems of Irrigation” American Economic Review

4 101: 64-80.  Gary D. Libecap, 2010, “Water Woes: Using Markets to Quench the Thirst of the American West,” Milken Institute Review October: 58-68. • Henry Smith, 2008. “Governing Water: The Semicommons of Fluid Property Rights.” Arizona Law Review 50: 445-78.

2/15 Guest Lecture: Clay Landry, Westwater Research, Boise. Westwater is a major water market broker. Check out the webpage at www.waterexchange.com/

2/20 NO CLASS PRESIDENTS’ DAY HOLIDAY

2/22 Water Markets • Jedidiah Brewer Robert Glennon, Alan Ker, Gary D. Libecap, 2008, “Water Markets in the West: Prices, Trading, and Contractual Flows,” Economic Inquiry 46(2): 91-112. • Howard Chong and David Sunding. 2006. Water markets and trading. Annual Review of Environment and Resources 31:239-264. • R. Quentin Grafton, Gary Libecap, Samuel McGlennon, Clay Landry, and Bob O Brien, 2011, “An Integrated Assessment of Water Markets: A Cross-Country Comparison,” Review of Environmental Economics and Policy 5(2): 219-39.

2/27 Water: Market and Management Issues  Gary D. Libecap, 2009, “Chinatown Revisited: Owens Valley and Los Angeles— Bargaining Costs and Fairness Perceptions of the First Major Water Rights Transfer,” Journal of Law Economics and Organization 25(2): 311-37.  Jedidiah Brewer Jedidiah and Gary D. Libecap, 2009, “Property Rights and the Public Trust Doctrine in Environmental Protection and Natural Resource Conservation,” Australian Journal of Agricultural and Resource Economics ;53:1- 17.  Freshwater Trust: http://www.thefreshwatertrust.org/ • Janet Neuman 2004, ‘The Good, the Bad, and the Ugly: The First Ten Years of the Oregon Water Trust’, Nebraska Law Review, 83, 432, 439–40. • Brandon Scarborough, 2010, Environmental Water Markets: Restoring Streams Through Trade PERC Policy Series 46. • Jeffrey Michael, Richard Howitt, Josué Medellín-Azuara, and Duncan MacEwan , 2010, A Retrospective Estimate of the Economic Impacts of Reduced Water Supplies to the San Joaquin Valley in 2009

2/29 Tradable Development Rights  Nathaniel Keohane and Sheila Olmstead, 2007, Markets and the Environment , Washington: Island Press, “ Habitat and Land Management,” 201-206.  Virginia McConnell and Margaret Walls, 2009, “Policy Monitor: U.S. Experience with Transferable Development Rights,” Review of Environmental Economics and Policy, Summer: 288-303.

5  Margaret Walls and Virginia McConnell, 2007, Transfer of Development Rights in U.S. Communities: Evaluating Program Design, Implementation, and Outcomes, Resources for the Future, September: 8-27, skim 28-131.  Conservation Credit Exchanges: At least 13 states have conservation credits exchanges. South Carolina: http://www.conservesc.com/; Virginia and New Mexico: http://conservationcreditexchange.com/; http://www.vcce.net/; http://dcr.virginia.gov/land_conservation/lpc.shtml; Colorado: http://www.coloradocredits.com/; Georgia: http://glcp.georgia.gov/00/channel_title/0,2094,82613131_114687036,00.html; More generally in Ecosystem Marketplace: http://www.ecosystemmarketplace.com/pages/dynamic/article.page.php? page_id=7546§ion=news_articles&eod=1

3/05 Cap and Trade in Air Pollution Control. This is the most well known environmental market. Two Views  A critical view: Video: Annie Leonard presents the story of cap and trade: http://www.storyofstuff.com/capandtrade/  Nat Keohane presents the facts of cap and trade: http://www.youtube.com/watch?v=fwN1OwdUkgg Readings  A. Denny Ellerman, 2007, “Are Cap-and-Trade Programs More Environmentally Effective than Conventional Regulation” in Jody Freeman and Charles D. Kolstad, eds. Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience. New York Oxford University Press, 48-62.  Tom Tietenberg, 2007, “Tradable Permits in Principle and Practice,” in Jody Freeman and Charles D. Kolstad, eds, Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience, New York; Oxford University Press, 63-94.

3/07 Cap and Trade in Air Pollution Control: National Lead Phase Down  Richard G. Newell and Kristian Rogers, 2007, “The Market-Based Lead Phasedown,” in Jody Freeman and Charles D. Kolstad, eds, Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience, New York; Oxford University Press, 2007, 171-193. SO2 Markets  Nathaniel Keohane and Sheila Olmstead, Markets and the Environment, 2007, Washington: Island Press, “The U.S. Sulfur Dioxide Market,” 183-190.  Nathaniel Keohane, 2007, “Cost Savings from Allowance Trading in the 1990 Clean Air Act: Estimates from a Choice Based Model,” in Jody Freeman and Charles D. Kolstad, eds, Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience, New York; Oxford University Press, 194-229.  Skim: Dallas Burtraw, David A. Evans, Alan Krupnick, Karen Palmer, and Russell Toth. 2005. “Economics of Pollution Trading for SO2 and NOx,” Annual

6 Review of Environment and Resources, 30: 253-289

3/12 Cap and Trade in Air Pollution Control: Regional and Local RECLAIM

 US EPA. 2006. “An Overview of the Regional Clean Air Incentives Market.” Washington,D.C.

 Annual Report/Review: http://aqmd.gov/reclaim/reclaim_annurpt.htm

 Skim: US EPA. 2002. “ An Evaluation of the South Coast Air Quality Management District’s Regional Clean Air Incentives Market - Lessons in Environmental Markets and Innovation” Washington D.C. 1-70.

 Regional Greenhouse Gas Initiative webpage: http://rggi.org/

 New Jersey leaves RGGI: http://www.environmentalleader.com/2011/05/27/new- jersey-pulls-out-of-rggi-bans-coal-plants/

 States Use of Funds http://www.stateline.org/live/details/story?contentId=494460

 Skim: Paul M. Bernstein, W. David Montgomery, and Sugandha Tuladhar.2004, “Economic Consequences of Northeastern State Proposals to Limit Greenhouse Gas Emissions from the Electricity Sector (RGGI).” Charles River Associates Incorporated.

AB32  Overview via CARB: http://www.arb.ca.gov/cc/cc.htm  Michael Hanemann, 2008, “California’s New Greenhouse Gas Laws Review of Environmental Economics and Policy, 2 (1): 114–129  Skim: Emission Permits Allocations 2010  Skim: Controversy--http://suspendab32.org/

3/14 Cap and Trade in Air Pollution Control: International EU ETS  A. Denny Ellerman and Barbara K. Buchner, 2007, The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results,” Review of Environmental Economics and Policy, 1(1): 66–87.  A. Denny Ellerman and Paul L. Joskow. 2008, The European Union’s Emissions Trading System in Perspective. Washington, DC: Pew Center on Global Climate Change.  A. Denny Ellerman and Barbara K. Buchner, 2008, “Over-Allocation or

7 Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data,” Environment and Resource Economics 41:267–287.

3/16 Final paper due, 5 pm. Posted on Gauchospace.