economics and the environment john perez-garcia forest economist
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Economics and The Environment
John Perez-GarciaForest Economist
The Sustainability Paradigm
Meeting essential needs (jobs, food, energy, water and sanitation).
Conserving and enhancing the resource base.
Reorienting technology.Merging environmental concerns and
economics in decision making.
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Presentation Summary
Key Economics IssuesWhat is EconomicsDemand and SupplyEconomic Specifics and the
EnvironmentDecision Making and Cost Benefit
AnalysisSummary of Key Issues
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Key Economic Issues
What is the correct level of environmental protection?
How should this be decided?How should this level be achieved?Who should bear the cost?
Requires an interdisciplinary approach Economics, Ecology and Ethics
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What is Economics?
Allocation of scarce resourcesIf there is no scarcity, there is no
problemScarcity rentExternalitiesWillingness to Pay
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Firms
Households
OutputInput The Economy
Economics and The Environment
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Economics and The Environment
Firms
Households
OutputInput The Economy
The Environment
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Resource Economics
Firms
Households
OutputInput The Economy
The Environment
Energy
Air
Water
Amenities
Raw Materials
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Environmental Economics
Firms
Households
OutputInput The Economy
The Environment
Pollution
Wastes
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Economics and The Environment: Strategies
Firms
Households
OutputInput The Economy
The Environment
Energy
Air
Water
Amenities
Raw Materials
Pollution
Wastes
Conservation
RecycleSubstitutes
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Economics and The Environment: Strategies
Firms
Households
OutputInput The Economy
The Environment
Energy
Air
Water
Amenities
Raw Materials
Pollution
Wastes
Conservation
RecycleSubstitutes
RemediateRestoreRemove
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Environmental Economics
Applying economic theory to environmental goods and services.
Includes the supply of environmental “bads” (Pollution and wastes).
Includes the demand for environmental goods and services that avoid damages from “bad” output.
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Individual Demand = Benefits
Price
Quantity13
Individual Demand
Price$ per unit
Quantity
$5
6
$8
Total Willingness to Pay
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Supply = Cost
Price
Quantity15
Supply
Price
Quantity
Total Cost
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Market Equilibrium = Efficiency
Price
Quantity17
Market Equilibrium = Efficiency
Price
Quantity
Total Net Benefits
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Market-based Solutions
Using economic principles to achieve efficient levels of environmental protection Defining property rights Internalizing environmental costs of
production Creating scarcity
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Economics and The Environment
Market failures and externalities Cost of production
are external to the price of the product
Lack of well-defined property rights
Internalizing environmental values
Price
Quantity
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Economics and The Environment
Market failures and externalities Cost of production
are external to the price of the product
Lack of well-defined property rights
Internalizing environmental values
Price
Quantity
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Economics and The Environment
Market failures and externalities Cost of production
are external to the price of the product
Lack of well-defined property rights
Internalizing environmental values
Price
Quantity
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Economics and The Environment
Market failures and externalities Cost of production
are external to the price of the product
Lack of well-defined property rights
Internalizing environmental values
Price
Quantity
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Decision Making
Cost benefit analysis Project definition Classification of impacts Conversion into monetary terms Discounting Project assessment Sensitivity analysis
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A Cost Benefit Analysis of Forests and Fish Rules:
A Case Study
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Existing Buffers
A sampled section with a single ownership and stream data.26
Proposed Buffers
A sampled section with a single ownership and stream data.27
Net Buffers
A sampled section with a single ownership and stream data.28
Potential Costs Measures of potential costs Lost revenues due to timber asset retirement NPV in dollars for the state Net costs associated with road planning and maintenance
NPV in dollars for the state
Setup costs to delineate riparian management zones, unstable slopes, etc
NPV in dollars for the state
Net income losses due to employment losses. NPV in dollars for the state Set asides for unstable slopes Not estimated, will add to costs Costs associated with the forested wetlands rules Not estimated, will add to costs Costs associated with pesticide restrictions Not estimated, will add to costs Equipment zone limitation costs Not estimated, will add to costs Social and economic dislocation Not estimated, will add to net
income loss figure above Loss recreational and fire control access Not estimated, will add to costs
Potential Costs: CBA
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Cost Estimate
Timber asset, road planning and lost wage costs range from 7.15 to 8.18 billion dollars
No estimates on costs associated with other rules, pesticide restrictions, equipment zone limitation, social and economic dislocation, and other factors
Price
Quantity
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Benefit Estimation
Much less straight-forward
No clear relationship between fish values and forests
Non-market techniques Quantity
$5
6
Total Willingness to Pay
Price
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Table 1. Potential costs and benefits associated with new proposed rule changes. Potential Benefits Measure and Effect Improved fishery resource NPV in dollars for the state Improved habitat for upland wildlife Not estimated, will increase benefits Improved carbon sequestration Not estimated, will increase benefits Improved water quality Not estimated, will increase benefits Reduced threats to public safety from unstable landforms
Not estimated, will increase benefits
Promote viability of industry in view of other alternatives
Not estimated, will increase benefits
Employment benefits from implementing road maintenance plans
NPV in dollars for the state
Tax credit benefits to landowners/harvesters NPV in dollars for the state
Potential Benefits: CBA
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Valuation Methods
Constructed market techniques Contingent valuation methods Choice experiments
Increase Monthly Mortgage
Payments by
Reduced Greenhouse
Gas Emission Reduced Air
Pollution
Reduced Water
Pollution
Reduced Solid Waste Production
Plan A $45 6 tons 15% 5% 15%
Plan B $95 11 tons 0% 25% 5%
Plan C $5 16 tons 25% 15% 25%
Plan D $0 0 tons 0% 0% 0%
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$-
$2
$4
$6
$8
1 2 3 4 5 6 7 8 9 10
5% Increments in Fish Population
Billions
Columbia Freshwater Columbia Migratory
Pacific Freshwater Pacific Migratory
LBP Study: High Status Quo
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$-
$2
$4
$6
$8
$10
$12
1 2 3 4 5 6 7 8 9 10
5% Increment in Fish Population
Billions
Columbia Freshwater Columbia Migratory
Pacific Freshwater Pacific Migratory
LBP Study: Low Status Quo
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Net costs over Current Situation
Net benefits over Current Situation
Low High Low High Foregone timber asset value 2.678 2.678 Road maintenance & stream crossings 2.13 2.13 Lost wages 2.387 3.420 Set up costs 0.154 0.154 0.154 0.154 Hypothetical FIRST 5% increase in fish population after 20 years
7.0
10.3
Increased road construction activity 1.789 2.684 Reduced excise tax 0.154 0.154 0.154 0.154 TOTALS 7.503 8.536 9.097 13.292
Summary Table for Benefit Cost Analysis (Billion dollars)
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CommentsWe are lackingkey data on theproduction function betweenriparian habitat and fish populations.
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CBA Limitations
There are no data that directly links the environmental effects from new proposed rules effects with a change in fish populations.
Programs in other sectors can potentially have a higher impact on the fishery resource than the new forest practices rules, hence higher net benefits. These other programs may also have lower impacts, hence lower net benefits.
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The Key Issues
What is the correct level of environmental protection?
Price
Quantity 39
The Key Issues
How should this be decided?
A combination of market-based approaches and regulations
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The Key Issues
How should this level be achieved?
Using cost effective approaches
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The Key Issues
Who should bear the cost?
Those willing to pay for it.
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The Key Issues
Requires an interdisciplinary approach
Economics, Ecology and Ethics
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