University of California at Santa Barbara

University of California at Santa Barbara Bren School of Environmental Science & Management ESM 204: Economics for Environmental Management Winter 2012

Class: TuTh 10:00-11:15pm (Bren 1414). Sections: T2-3 (BH 2436), T3-4 (BH 3526), T4-5 (BH 3526), W1-2 (BH 3526), W2-3 (BH 1520), W3-4 (BH 1520) Instructor: Professor Charles Kolstad Prof. Kolstad's office hours: Tu 11:30-12:30 (3416 Bren Hall); W 1-2 (2032 North Hall) and by appointment. Teaching Assistants: Trevor O’Grady and Sara Sutherland, both PhD students in environmental/resource economics in Bren. Mr. O’Grady’s office hours: TuW 1-2 (4422 Bren Hall) Ms. Sutherland’s office hours: M9-11, W4-5:30, F9-10 (4520 Bren Hall) Resources and Assignments: gauchospace.ucsb.edu Syllabus: http://www2.bren.ucsb.edu/~kolstad/Courses/ESM204.html

Introduction : What is economics from a practical, problem-solving point of view? And how can economics be used to analyze and solve environmental problems? The answers to these questions are the two central themes of this core course in The Economics of Environmental Management. Broadly speaking, economics is the science of how scarce resources are allocated: how people and firms do this allocation and how society might want to make decisions about scarce resources. When viewed in this way, it is clear that economics might provide a useful framework within which to analyze environmental problems and approaches to solve them. Because many environmental problems are caused by economic activity (carbon emissions, overharvesting renewable resources, toxic releases as a by-product of industrial production, urbanization), we will examine different approaches to adjusting human behavior and therefore the externalities associated with it. The purpose of the course is to give you a solid foundation in those aspects of economics and quantitative policy analysis that are important to environmental and natural resource management and policy. The course will also serve as the foundation in economics for management, economics and policy electives in the Bren School. One could say that the entire purpose of ESM 204 is to give you the economic analysis tools you need to solve generic group projects--the kinds of environmental problems you can expect to encounter as a practicing environmental professional. There is no other reason for taking the course. Consistent with this, there are no homework problems in this course and (I hope) no busy-work. Your main out-of-class assignments are a series of mini-versions of a Bren group project (in fact, most were drawn from past Bren group projects). Workload. This is a graduate level course with significant workload. The pace will be quick and the out-of-class workload will be heavy. (Expect an average of 8-10 hours of work per week outside of class.) Lectures. Lecture slides will be available shortly before the lecture on the class webpage (as pdf files). Hint for conserving paper: print using the “4 pages per side” on the preferences menu when you go to print, as well as double-sided. Readings. Most readings will be available on the course webpage. Those that are not available on the webpage will be available in the RBR (Reserve Book Room in the main UCSB Library). You should read all assigned readings prior to the week of the lectures. Not all readings will be covered in class or section; the readings will be covered on the midterm and final. Several optional texts will be relied upon heavily at certain points in the course; students may wish to acquire some or all of these texts through an internet bookseller. One copy of each will be on 2-hour reserve in the RBR. Several may also be available in the Bren reading room. These suggested textbooks are: 1. Boardman et al: Cost-Benefit Analysis, 4th Ed (Prentice-Hall, 2011) – any edition will do fine 2. Kolstad: Environmental Economics (2nd Edition, 2010)—NOT 1st edition. 3. Hartwick and Olewiler: The Economics of Natural Resource Use, 2nd Edition (Addison- Wesley, 1998) – NOT 1st edition 4. Thomas Sterner, Policy Instruments for Environmental and Natural Resource Management (Resources for the Future, Washington, 2002). A book that covers much of the material in the course at an elementary level is Goodstein: Economics and the Environment (any edition). A copy is in the Bren Commons Reading Room. Video Assignment. To underscore the importance of communicating to others the concepts used in this class, each of you will produce a one minute video explaining a key concept covered in the course to an audience of first year MESM students who have not yet taken any classes at Bren. You may work on a team of two people if you wish and only one of you need be on camera (only one video needed from a two person team). You will be graded on (1) effectiveness of your presentation in conveying concepts, (2) your explanation of the problem you are explaining, (3) the correctness and completeness of your presentation, (4) the difficulty of the concept you are explaining, and (5) the overall pedagogic effectiveness of your video. The maximum length of time (excluding title and credits) is one minute (this is important). You don’t need any special equipment – you can use your cell phone for this if you wish. Your video must be uploaded to Gauchospace with a title that includes the surnames of the students responsible. Deadline: the last day of class (no exceptions). Project Assignments . A new project is assigned once a week (approximately). You need only complete four of these (your choice). For most of these the deliverable is a one-page memo (typed, single spaced, 12 point) to your policy-maker boss and an appendix with details. Upload a pdf of your entire assignment to Gauchospace (TA can answer questions on procedures). Make sure your name(s) are in the title of the file. These projects are a very important part of the course (as reflected in their contribution to your final grade). I expect to see high quality, polished, professional work. Writing quality counts! Assignments are typically due at the end of the week. Late work will not be graded (unless an exception has been granted prior to the due date). The TA will grade the assignments and return them to you promptly (within a week in most cases). You may work in a team of two on your assignments but you cannot keep the same partner for more than one assignment – keep moving! Although seven of these assignments will be made over the term, you need only complete four of them. If you complete more than four, your top four grades will be counted. Help from the TA or the instructor prior to the deadline will be limited to answering pointed questions. Do not expect the TA to lead you through the process of doing the project. We aren’t being mean! Figuring out how to answer the question posed is an important part of the course. Exams. The midterm will be in class on Feb 14♥ and the final will be take-home, due at noon March 21. The midterm will be closed book though you may bring one single sheet of paper (8.5”x11”) with notes (on both sides) to the exam. The midterm will cover the material through “valuation” (week 5). Grading. The course requirements are a midterm (15%), final exam (20%), homework/mini- projects (40%), video (10%) and class/section participation (15%). The last time I taught this class the mean grade was B+ with a few students receiving A+ and a similar number receiving C+/B-. Honor Code and Joint Work. Collaboration with your homework/project partner (who changes with every assignment) is obviously encouraged. Homework/project collaboration beyond this is not appropriate and in fact constitutes a violation of the Bren Honor Code. I know there is a temptation when solving a homework problem to shout “Eureka” and share your insights with your fellow students. However, this defeats the purpose of the homework – to find a path to a solution on your own. Furthermore, with grading on a curve, sharing of answers effectively reduces the grades of those doing the sharing. So do your homework on your own and keep it to yourself! It goes without saying that the exams are your own individual work and you are on your honor to execute your exam individually and neither give nor receive aid. Prerequisites . You are assumed to be fluent in multivariate calculus and to have completed a sequence in intermediate microeconomics at the level of Varian, Intermediate Microeconomics. At UCSB, this would be Econ 10A and 100B. Alternatively, ESM 251 provides adequate preparation. If you do not have the prerequisites, you should defer taking the course until prerequisites have been satisfied. You are also expected to be conversant with Excel, particularly graphing and solver. If not, please take the time to learn it or hire someone to teach it to you. Course Outline The 10 weeks of the course are divided roughly as follows: 1) Market Failure – when the market works and when it doesn’t [1 week] 2) Making Decisions about Environment Protection [4 weeks] i) Measuring the Costs of Environmental Projects ii) Discounting and Risk iii) Measuring the Benefits of Environmental Protection (“Valuation”) 3) Regulating Polluters [3 weeks] i) Approaches to regulation ii) Enforcement iii) Spatial Dimensions of Regulation iv) The Environment and Developing Countries 4) Renewable and Exhaustible Natural Resources [2 weeks] i) Rent ii) Renewable Natural Resources – fisheries and forests iii) Exhaustible Natural Resources – minerals and energy

Week.Section Topic Content and Readings (*=required) 1. *Fullerton & Stavins, “How Economists See the Introduction, Environment,” Nature, 395:6701 (1998). 1. Market Failure Markets, Externalities 2. *Kolstad, Ch 2, Ch 3 (except section 3-III), Ch 5 (except V) 3. M Scott Taylor, “Buffalo Hunt” [Sections I and VI only]

1. *John Tierney, “Where the Tuna Roam,” NY Times (Nov 4, 2006). 2. *John Tierney, “How to Save Fish,” NY Times (Sept 18, 2008) 1. Market Failure Open Access 3. *Costello et al, “Can Catch Shares Prevent Fisheries Collapse?,” Science (2008) 4. *Hartwick and Olewiler, "The Economics of Natural Resource Use", Ch 4 1. Robert Stavins, Environmental Defense Fund, “The Tuolumne River: Preservation or Development?” (March 1984). Project 2. Levin. 1997. “Lead in Drinking Water”. Chapter 8 of 2. Decisions Evaluation Economic Analyses at EPA. Edited by R. Morgenstern. 3. * Ando et al., “Species Distributions, Land Values and Efficient Conservation,” Science, 279: 2126-8 (27 March 1998). 1. *Boardman et al., Cost-Benefit Analysis, Ch 1 & 2. 2. *Kolstad, Ch 4 (section III), Ch 6 3. Arrow et al., “Is There a Role for Benefit-Cost Analysis in Efficiency, Environmental, Health and Safety Regulations?,” Science, Surplus & 272:221-2 (12 April 1996). 2. Decisions Doing Cost- 4. Heather Ross: “Clean-Air: Is the Sky the Limit?,” Benefit Resources, #143 (Spring 2001). Analysis 5. * Steven Kelman, “Cost-Benefit Analysis: An Ethical Critique”, with replies from DeLong, Solow and Butters, AEI Journal on Government and Society Regulation (Jan/Feb 1981). 1. *Been, “Unpopular Neighbors,” Resources, #115 (Spring, Incidence and 1994). 3. Decisions Environmental Justice 2. * M. Burns, “Unusual Coalition Pushes for Creek Tax,” Santa Barbara News-Press, 10/23/2000. *Boardman, Cost-Benefit Analysis, Ch 4. Finance, *“What Price Posterity,” The Economist, March 23, 1991. 3. Decisions Inflation & “Acid Rain: The Southern Company (A)”, Harvard Business School Case 9- Discounting 792-060 (costs $ -- sorry). William Goetzmann, An Introduction to Investment Theory, Ch 1. Useful discounting formulae 4. Decisions Risk, *Boardman, Cost-Benefit Analysis, Ch 6. Uncertainty & *Postrel, “Would you Take the Bird in the Hand or a 75% chance of two in Decision- the bush?”, NYT, Jan 26, 2006. making Tversky and Kahneman, “Judgment Under Uncertainty” Science, vol. 185, pp 1124-31 (1974) 1. *Kolstad Ch 7, 8 2. *Maille & Mendelsohn, “Valuing Ecotourism in Madagascar,” J. Env. Mgmt, 38:213-8 (1993). Introduction to Estimating 3. Deacon and Kolstad: "Valuing Beach Recreation Lost in Benefits of Environmental Accidents," J. Water Res. Planning & Mgmt, 126: 374- Environmental 81 (2000). 4. Decisions Protection; 4. Economist, "A Price on the Priceless", (8/17/91). Revealed Preference 5. Rosenberger & Loomis, "Benefits Transfer of Outdoor Recreation Use Approaches Values", Technical document part of US Forest Service Strategic Plan (2000). 6. *Viscusi, “The Value of Risks to Life and Health,” J. Econ. Lit., 31:1912-46 (1993) [skim] *Kolstad, Ch 9, 10. Revealed & Boyce et al., “An Experimental Examination of Intrinsic Values as a Source 5. Decisions Stated of the WTA-WTP Disparity,” Amer Econ Rev, 82: 1366-1373 (1992). Preference * Paul Portney, “The Contingent Valuation Debate: Why Economists Should Care,” J. Econ. Perspectives, 8(4):3-17 (1994). 1. Kolstad, ch 11. 2. * Passell, "Cleaning the Environment Gets Harder, But there are solutions," NYT, 1/5/95. Regulatory 3. Portney & Stavins, Public Policies for Environmental Protection 5. Regulation Options & (RFF, 2000; 2nd Ed), Chs 2 & 3. Efficiency 4. * Sandel: "It's Immoral to Buy the Right to Pollute," NYT, 12/15/97. 5. * Gruenspecht, “Zero Emission Vehicles: A Dirty Little Secret,” Resources, #142 (Winter 2001). 1. *Kolstad, ch 17 2. *Ferraro and Simpson: “Cost-Effective Conservation”, Resources Regulatory #143 (2001) 6. Regulation Innovations 3. Kathleen Segerson and Na Li, “Voluntary Approaches to Environmental Protection,” in Folmer & Tietenberg (Eds), The Intl Yrbk of Env & Res Econ (1999), only pp273-81. In class. Closed book. You may have one sheet of notes (8.5” x 11” 6. Feb 14 MIDTERM double sided). Covers through valuation. Spatial 7. Regulation Dimensions of 1. * Kolstad, chapter 14. Regulations 1. Kolstad , Ch 16. 2. * Alberini et al., “Will Speeding the Retirement of Old Cars Monitoring & 7. Regulation Enforcement Improve Air Quality?,” Resources, #115 (Spring 1994). 3. * Russell: "Monitoring and Enforcement," in Portney (Ed), Public Policies for Env. Protection (1st ed, 1990). 1. Sterner, "Policy Instruments for Environmental and Natural Resource Management", Ch 24. 2. Sterner, "Policy Instruments for Environmental and Natural Resource Management", Ch 25. 3. * Larry Summers, Global Env Pgm Memo, World Bank (December 12, 1991) Regulation in Developed and 4. * Sanger: "World Trade Group Orders US to Alter CAA," NYT, Developing 1/18/96. 8. Regulation Countries, 5. * "Dirt Poor," Economist, 3/21/98. Macro, Green 6. *Kolstad, Ch 20 Accounting 7. * Joy Hecht, “Environmental Accounting,” Resources, #135 (Spring, 1999) 8. Joel Darmstadter, “Greening the GDP,” Resources, #139 (2000). 9. * I. Parry: "Reducing Carbon Emissions: Interactions with the Tax System," Resources, #128 (1997). 10. * Barrett: "Montreal vs. Kyoto," in Global Public Goods, 1999. 1. * Hartwick and Olewiler, "The Economics of Natural Resource Use", Ch 3 Rent, Water, 2. * Hillburg, "State to Get Thirstier", The Daily News of Los Angeles. 8. Resources and Common Property (23 Dec. 2002) 3. * G. Hardin, “Tragedy of the Commons,” Science, 162:1243-1248 (13 Dec 1968). *** 1. Hartwick and Olewiler, "The Economics of Natural Resource Regulating the 9. Resources Use", Ch 5 Fishery

1. * Hartwick and Olewiler, "The Economics of Natural Resource Use", Ch 10 *** Forest 9. Resources Sterner, "Policy Instruments for Environmental and Natural Economics 2. Resource Management", Ch 30.

Nonrenewable 1. * Hartwick and Olewiler, "The Economics of Natural Resource 10. Resources Resources & Use", Ch 8 Energy 2. * Paul Joskow, “California’s Electricity Crisis” (2001) March 21 Final exam – take home. Available March 15; due noon, Final Exam due noon Wednesday, March 21 (submit to GauchoSpace).