31 May 2008

Rice, Water, Luck, Wisdom

Each year, rice farmers choose between growing rice or selling the water that they would use to grow rice. This year, both water and rice are valuable, so they face the pleasant task of choosing whether to make a lot of money or more money (article).

On the rice side, prices per hundredweight (100 pounds) are forecast at $25 for the crop going into the ground -- up from $20/cwt now and $13.50/cwt in 2004.

On the water side, cities are offering $200/AF instead of $130-150/AF of past years.

Rice farmers are always sensitive to the charge that they are growing the most water-intensive crop in a dry place, they have too many water rights and/or they pay too little for water.

Although rice does use a lot of water, the farmers grow it on heavy-clay soil that could not be used for other crops. Their water rights are old and abundant, but that's common with farmers in the west who received their water rights through prior appropriation laws from 100+ years ago. They do pay very little for their water: One farmer told me they pay about $7/AF -- basically the cost of pumping the water.

This good fortune makes others want to stop rice cultivation, take away water rights or make the farmers pay more (or sell for less) -- all bad ideas that farmers sometimes diffuse with even sillier nationalist claims, e.g., "I would hate to think the day will come when we're depending on foreign nations to feed us."

Bottom Line: The rice farmers are probably one of the best groups for managing their economic resources. There are many groups (urban, enviro, federal) who could learn a thing or two from them.

Down Mexico Way

If you think that people in California have it bad, read this article on the effects of the dying Colorado River in Mexico:
One hundred years ago, 30-ton steamboats made their way up the mouth of the Colorado. Now, at low tide, there is no longer enough water flowing downriver to float the Cucapa's 20-foot-long pangas and their cargo. For all his hard work, Figueroa ended the day mired in the nearly dry riverbed, a mile short of his destination, his fish losing much of their freshness and value.

"Malo viento," he kept saying. But it was the river, not an "evil wind," that had let him down.

Dams, drought, climate change, urban growth, industrial agriculture and politics on both sides of the border are to blame, and none of those adverse conditions will reverse any time soon.

Reservoirs have been drawn down to historically low levels, and some scientists predict that under the influence of climate change, the river's annual flow could drop by 50% over the next 40 years.

Despite heavy snowfall in the central Rocky Mountains this year, river managers in the U.S. continue to advise the states that depend on the Colorado River to prepare for water shortages within five years.

Measures to shore up U.S. reserves, meanwhile, are likely to make water even more scarce in Mexico.

For many years, Mexico has benefited from an unofficial surplus over its meager original allotment of river flow. The extra water comes from a combination of underground seepage from an unlined diversion canal in California, and storm runoff that makes its way south of the border.

The U.S. is in the process of stanching the fugitive flow by lining much of the All American Canal, a 90-mile-long irrigation ditch in California's Imperial Valley. Plans also are underway to build a small reservoir to catch 60% to 70% of the surplus surface water before it reaches Mexico.

The extra water has been a boon to crops in the arid Mexicali Valley and a godsend to the Colorado River Delta, where the Cucapa and hundreds of other poor fishermen eke out a living. Marine biologists believe that the corvina and other fish rebounded from the brink of extinction largely as a result of periodic high flows that flushed through the mouth of the river.

"To the extent it survives at all, the environment down there lives off the slop, off unplanned releases," said Peter Culp, a water lawyer and consultant to the Tucson-based Sonoran Institute, a nonprofit group that has been working on delta restoration.

[snip]

Across the city, shiny black and blue barrels dot the rooftops of new housing developments, barrels in which residents store water for use when none is flowing through their faucets. Often, the shutdowns last days.

In Lomas de la Presa, a middle-class neighborhood where some houses cost the equivalent of $40,000, resident Raul Natzu said the water flows about four hours a day. "There's enough for essential uses, but no water for flowers or anything outside."

In ramshackle neighborhoods like Puesta del Sol, where people erect makeshift dwellings from plywood, cinder blocks and surplus garage doors, water doesn't flow at all. Instead, residents buy what they can afford from roving trucks. They store the water in rain barrels and dole it out as needed to bathe, flush toilets, and wash dishes and clothes.
The US overallocated the Colorado years ago (setting a baseline that was too high), and -- as today's "high flows" equal yesterday's "average flows" -- those allocations are even more imbalanced. Mexico, as the recipient of "left-overs" is getting less and less, with terrible environmental, economic and social consequences that do not make the gringos look like good neighbors.

Bottom Line: As water in the west gets scarcer, the weak will suffer.

30 May 2008

Guest Blogging 5

On my last day at Environmental Economics, I ask the big questions.

What is Aguanomics?

MBJ sent me this question:
Could you propose a list (or a pointer to) of good economics textbooks dealing with "aguanomics" with some comments on their particular merits?
This question requires a multiple-step answer:
  1. I made up "aguanomics" as the combination of agua+economics (duh!). At first, I wanted aquanomics (from the Latin), but that URL was taken. OTOH, I kinda prefer "agua": More people speak Spanish than Latin :) and the developing world has many water issues.
  2. Aguanomics may seem a narrow focus, but water and economics themes can be found in many places. Sometimes this blog reflects this diversity by addressing seemingly distant topics.
  3. I choose to approach aguanomics from an institutional and social perspective. By this, I mean that I pay attention to the rules of the game, and how we (as humans in social constructs) make, alter, obey and ignore these rules. Many economists who work on natural resource (e.g., water supply and demand) and/or environmental (e.g., water quality, externalities) economics use mathematical models (dynamic optimization, game theory, etc.) or quantitative methods (econometrics, calibrated simulations, etc.) to work on these topics. I have (limited) respect for these methods and their utility. I prefer to look inside the black box -- to see how people act and react in the messy, real world.
Perhaps that's more than anyone wanted to know, but I want to clarify why I recommend some books and put those recommendations into context. So, here's a few:
  • Olson, M. The Logic of Collective Action Harvard University Press (1971): Every environmental or resource economist should read this. (Well, everyone interested in social sciences!) [Amazon]
  • Ostrom, E.; Gardner, R. & Walker, J. Rules, Games, and Common-Pool Resources Ann Arbor Books (1994): An excellent theoretical and experimental book written at the graduate student level. [Amazon]
  • Polanyi, K. The Great Transformation: The Political and Economic Origins of Our Time Beacon Press (2001/1944): I don't agree with many of Polanyi's conclusions, but his insights on the evolution of society are valuable and his passion (similar to Marx) helps you understand the "water is a right" crowd. [Amazon]
  • Reisner, M. Cadillac Desert Penguin Books (1993): A history of water policy in the western US written for a general audience that can be applied elsewhere. [Amazon]
  • Schelling, T. C. The Strategy of Conflict Harvard University Press (1960): Anyone interested in game theory should read this, not only because it will broaden your view of what GT is, but also because it will immunize you to a slavish devotion to closed form solutions. [Amazon]
  • Scott, J. C. Seeing like a State: How Certain Schemes to Improve the Human Condition Have Failed Yale University Press (1998): An powerful analysis of government that gives insights to the dark side of "public control". [Amazon]
  • Smith, A. The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776): Anyone serious about economics should read the latter; anyone serious about society should read the former. Anyone serious should read both :), but they can be dense... [Amazon] [Amazon]
  • Wilson, J. Q. Bureaucracy: What Government Agencies Do and Why They Do It Basic Books (1989): An amazingly powerful analysis of incentives that should be read with Olson and Scott. [Amazon]
Note that I have not recommended "text" books. This is not intentional, but it is also not an accident. I have very little use for most textbooks -- the only ones I still have are Varian and Kennedy, because sometimes I want to know how someone is beating me up. I think that most mathematical economics is "mathturbation" leading to no insight on real humans. OTOH, I do use econometrics and lots of basic game theory, so I think everyone should have a good foundation in applied methods.

You asked for my opinion, right?

Bottom Line: Economics, as a social science, should be applicable here and now. Too much academic research cannot be applied, and the stuff that can be applied frequently is not. Choose sides and get to work.

ps/if you want to recommend a book or four, please comment!

USAID Harms The Poor

...according to the GAO, which says that "a Bush administration initiative to `end hunger in Africa' launched in 2002 effectively amounted to a repackaging of existing programs and came with no new funding."

Even worse, the old programs destabilize production in Africa for the benefit of producers in the US. How? By redirecting funding from building production capacity in poor countries to shipping emergency food when disaster strikes -- as it is likely to do more often. Even worse, the emergency food must be bought from American farmers and shipped on American boats, which cuts purchasing power twice and reduces demand for food grown in poorer countries -- harming farmers even further.

Of course, the programs make USAID look good ("we're helping starving people") without acknowledging how those same programs are causing their starvation.

Bottom Line: If you wanted to design the worst program for people in developing countries do the most harm to their ability to feed themselves and prosper, you'd be hard pressed to design a worse program than this one. (Getting invaded might be better.) Whoever kills this program (or USAID) deserves a Nobel Peace Prize for reducing world hunger and suffering.

29 May 2008

Guest Blogging 4

Today at Environmental Economics, I argue that Julian Simon would have lost his bet with Ehrlich if they had bet on big picture sustainability.

USDA Sees the Light?

Scientists at the USDA have released a report that says "climate change already has inflicted major damage on large sections of the western United States and predicts impacts will spread to more areas and become more severe."

Here's what they say about arid regions:
  • Extreme Weather: Increased drought, severe rainstorms, and erosion from wind and water, which will help spark desertification across the West's arid lands. "Extreme climate events such as drought may act as triggers to push arid ecosystems experiencing chronic disturbances, such as grazing, past desertification 'tipping points.'"
  • Disappearing Desert Icons: Major losses of signature desert species, such as saguaro cactus and Joshua trees. "Climate change will create physical conditions conducive to wildfire, and the proliferation of exotic grasses will provide fuel, thus causing fire frequencies to increase in a self-reinforcing fashion... the probability of loss of iconic, charismatic mega flora such as saguaro cacti and Joshua trees will be greatly increased."
  • Dwindling Rivers: Rivers and streams will be damaged by a combination of lower water flows, higher water temperatures, silting from erosion and non-native plant invasions. "Riparian ecosystems will likely contract, and in the remainder, aquatic ecosystems will be less tolerant of stress. The combination of increased droughts and floods, land use and land cover change, and human water demand will amplify these impacts and promote sedimentation."
The killer? Temperatures in Utah/Nevada are expected to rise by 9-18 degrees F (versus 2 deg F nationwide). Now that's hot.

Bottom Line: Things are not looking good, and even the USDA admits it. Now all they need to do is end all the stupid USDA programs (e.g., ethanol) that are exacerbating the problems!

H/T to Grist.

28 May 2008

Guest Blogging 3

Today at Environmental Economics, I discuss how Bush's appointee is destroying the EPA from the inside.

Wrong Way Right Way

...to cope with surging food prices.

Hosni Mubarak, dictator of Egypt, has (correctly) blamed misguided ethanol policies for the rise in wheat prices that is making food expensive in his country, but he (and others in the region and world) also messing around with prices, by raising them suddenly, capping them, subsidizing them or otherwise interfering, i.e.,
Mubarak announced a 30 percent salary increase for government employees earlier this month in an attempt to ward off more food unrest. But the government increased fuel prices by more than 40 percent and cigarette prices by 10 percent, raising concerns that the measures would trigger additional inflation and diluting the benefits of the salary increase.

Egypt also got outside help from the United Arab Emirates, which donated a million tons of wheat to the country last week, said the Emirates state-owned news agency WAM.

Egypt is one of the world's largest importers of wheat, and prices shot up by more than 50 percent over the last year.

The Emirates is also struggling with rising food prices. The government has signed agreements with supermarkets to keep prices on more than 30 basic commodities at last year's levels.
Bottom Line: The government's erratic interference with prices, wages, exchange and interest rates will lead to more harm than good. If people (and special interests) can get the government to deliver special treatment to certain sectors -- instead of general policies targeted at "deserving" groups (e.g., cash income transfers to poor people), then people will spend more time lobbying the government for handouts and less time finding ways to cope with changes in the world market for food. OTOH, Mubarak and other dictators probably like it that way -- and that's bad news for the poor.

Photogenic Losers and Fat Cats

Down at IID, reporters have found someone who is suffering as water exports take land out of production:
“It’s a pretty serious deal,” Slaton said of the impacts of fallowing. “When you’re getting your regular paycheck chopped off … it’s hard.”

[snip]

“It does not need to be that complicated. Just show your impacts, give them the money and move on. It needs to go to the people who deserve it,” Rothfleisch said. [Imperial County Farm Bureau]

[snip]

For Slaton, the day he can apply for the money he lost over the last two years will be a good one.

Whether he will get it, is another thing altogether, he said.

“I understand the IID has a lot of things going on. But I think they need to …,” Slaton said, snapping his fingers several times and chuckled. “There’s no good reason for dragging this on. That would be unreasonable.”
The story has moved from the adverse impacts (less work) to the failure of IID to deliver the compensation that it holds for people who are suffering those impacts. Unfortunately, IID has a long history of serving itself instead of the farmers, citizens, and the environment.*

Bottom Line: Give Slaton his money and improve the management of 70 percent of California's Colorado water rights.

* IID administration has delayed disbursing compensation money in the past.

27 May 2008

Guest Blogging 2

Today at Environmental Economics, I discuss Investing in Water (from Lamiadestra's question): Big questions, little answers.

Sustainable Living

Anonymous asks me to comment on this piece in the Washington Post, which describes a sustainable future, i.e., "We'll also have to occupy the landscape differently, in traditional towns, villages and small cities. Our giant metroplexes are not going to make it, and the successful places will be ones that encourage local farming." Anonymous adds:
It seems like the efficiencies of having everyone in one place will keep cities alive... but I'm wondering, what would be the costs and benefits (aguanomically) of moving metropolites out to smaller towns? And generally, what changes do you foresee in our national water framework in the future?
First of all, read this excellent post by a girl who is making her own attempt to live sustainably in urban Pittsburg.

Now... sustainable living requires that you live with fewer energy inputs -- as fuel, imported items, manufactured goods, etc. That does not mean that life is miserable, just that a number of us (including economists) would probably be out of work. Put another way, the diversified labor-force that we have today exists to feed many a need. If people stop watching TV or buying carbon fibre skis, or drinking coffee (imported!), then many of us will have to find other jobs. (That's not necessarily a bad thing -- I like carpentry!)

The one who is credited with the earliest and best discussion of the division of labor and the role of cities is Adam Smith. To paraphrase, he said that dividing one big tasks into many tasks makes us all richer. He also said that the division of labor is limited to the extent (size) of the market. Thus, cities are natural centers of labor diversification, and the people who live in cities are likely to be able to consume and produce a wide variety of goods.

Now we are getting to sustainable living, which is defined by local and -- more important -- low intensity use of resources (oil, water, fish, etc.). It that case, cities will still be where it's at, poets will still be in business, but there will probably not be salmon from Chile.

How is all of this aguanomical?* Well, it can easily be -- mostly because our current uses of water are so messed up that rationalizing water to "higher and better" uses is rather simple. Assign property rights (the people, the environment, farmers), charge full cost of conveyance, allow trading, and sit back. I'd predict that less water would be shipped to desert cities (goodbye Phoenix!) and agricultural production would change by quite a bit (goodbye $1.29/lb beef!).

BTW, I wouldn't bother to move people here and there -- they will migrate on their own as they weighed the costs and benefits of living without food, water, other people, etc. :)

Bottom Line: We can live sustainably with most of the happiness but fewer of the goodies we have today. We'd probably be skinnier from more exercise and better eating. Hmmm... sounds suspiciously nice. Oh yeah, don't forget that global warming will probably kill us.

* what is this monster I have created? :)

26 May 2008

Guest Blogging

This week I'll be guest blogging over at Environmental Economics, a blog run by two distinguished professors in economics (John Whitehead and Tim Haab) that covers environmental topics with an East coast bias. Both John and Tim have expertise in valuing environmental goods, i.e., putting out hard numbers that policy makers can use.

I'm thrilled that John asked me to guest blog with them. Hopefully, we'll get the aguanomics word out to a larger group of readers. My daily strategy is to put one post there and remaining posts here -- guests cannot be too greedy!

Today, I posted on water wars -- with a special Memorial Day comment on leadership.

Black Market Oil

As oil (aka, black gold) gets more valuable, people are coming up with more ways to make a quick buck. The scams range from outright theft of oil, reclassifying oil or gas from one tax category into a cheaper category, and smuggling gasoline around tax collection points. The Department of Transportation estimates that fraud costs $1 to $10 billion/year -- i.e., they don't know how much it costs.

Federal and state tax assessors, road engineers, and bureaucrats are upset because they want that revenue. They are suggesting a broad classification of oil and distillates (to avoid classification games) and taxing oil at the refinery (instead of the retail point of sale). This latter idea is opposed by the refineries "because that would force them to pay taxes before they sold the fuel". This predictable objection is weak.

Let's put these arguments (and this situation) into perspective: Total state and federal gas taxes in 2005 were $36 billion. The main article quotes road engineers saying that $1.6 trillion of spending is "necessary" over the next five years. If that happens (and tax revenues stay constant), that means that drivers are going to get subsidized for 89 percent of those costs.

Of course, if gas taxes rose to the level that would cover those costs (from the current national average of 47 cents/gallon to, say, $4.50/gallon, i.e., gas that costs about $8.00/gallon), driving would fall below levels we see today (and it's already falling), and gas in the US would cost about the same as gas in Europe NOW. Of course, the rewards for smuggling and dodging gas taxes would also rise -- and governments would spend far greater resources on collecting much higher taxes.

Note that higher taxes would kill three birds with one stone: funding repairs, taxing carbon and discouraging consumption.

Bottom Line: Basic cost-benefit thinking leads us to work harder (to avoid or collect taxes) as the value of those taxes rises. One way or another (through dearer oil or higher taxes), the institutions for managing gas and oil are going to beef up security. Not too far in the future, we will see as much attention on the management of oil as we now see on the management of beer, a product that used to be worth far more than gasoline, is now worth about the same and will probably be worth far less in the near future. (What about water? Wait and see.)

WaterAid

In response to my post on 1,000 Wells, Noumenon says
I donate about 10% of my income to WaterAid because it's one of the few ways to give for water and sanitation (governments control water supply in most places). So maybe you know something about their effectiveness, how they compare to other charities, whether they have strayed from their British water-engineer roots to be more of a typical NGO.
I had not heard about WaterAid, but I took a look at their website. It's immediately obvious that they know what they are doing -- perhaps because they have been in operation since 1981!

Most important to me are their policies and statements on community involvement, where they clearly identify the community's leading role in designing and managing the water project in a way that reflects the community's needs.*

Bottom Line: Thumbs up on WaterAid -- they build the project that the locals want and help the locals design the institutional rules (including charging for water!) that will keep those projects viable. People in the aid business (e.g., Sachs) should pay more attention to such bottom-up projects.

* I was talking to someone recently who mentioned the reaction of men to the installation of a pump in the village that made it much easier for the women to fetch water. Instead of leaving for a one-hour walk, they only needed to cross the village to get water. The men were very pleased with the pump because "before, we had to take care of the children that the women could not take with them. They were so noisy that we could not talk, rest or play our card games. Now that the pump is in the village, we do not have to bother with these children. The pump is a true salvation for us men." :)

25 May 2008

Die! Salton Sea Die!

The California Senate has failed to approve funding for the Salton Sea Restoration Council, which is trying to get $9 BILLION to restore that sea lake toilet. I hate the Salton "Sea" and all the mismanagement, pork and nationalism that it represents. The people who made it the disaster area it is -- IID et al. (see other post today) should pay to "restore" the salton depression into the dry lake bed it was 100 years ago -- before a man-made error flooded it.

I have an idea. IID and other ag districts control 3.85 million AF of annual water allocation from the Colorado River. If they sold the rights to that water at, say, $5,000/AF they wold only need to sell 1.8 million AF to get the $9 billion of money they claim* to need. They have benefited from the water (and the sea/toilet) for the past 100 years -- they should pay the cost of cleaning it up.

Bottom Line: The Pols in Sacramento did the right thing -- no pork spending to clean up a local mess.

*If they were paying with their own money, I bet the cost would fall to about $2 billion. Right now, they want to use OPM, so they are gold-plating the project.

Harvest of Disgrace

The Economist blasts the Farm Bill as a useless tub of pork for rich people (average income of $229,920) that also promises to weaken food security by guaranteeing today's high prices in future years.

Politicians voted in overwhelming numbers to support the transfer of about $300 billion (direct costs; indirect costs will be much higher) over five years from 300 million people to just over 3 million "farmers." That means taking $1,000 from every man, woman and child in the US and giving $1,000,000 to every "farmer," i.e., robbing the poor to pay the rich.

Pathetic.

Correction: $100,000 per farmer. Much better -- NOT!

Acid Ocean

Remember acid rain? Now we're getting acid ocean off the west coast of the US. The cause? More CO2 in the atmosphere means more CO2 in dissolved in the water -- something scientists did not expect to see before 2050. The implications of changing ocean chemistry are not good:
"While this absorption provides a great service to humans by significantly reducing the amount of greenhouse gases in the atmosphere and decreasing the effects of global warming, the change in the ocean chemistry affects marine life, particularly organisms with calcium carbonate shells, such as corals, mussels, mollusks, and small creatures in the early stages of the food chain," said Feely.
In other words, there's no free lunch. Like mussels or oysters? Get 'em while they still have shells. Find out more here.

Bottom Line: This climate change thing is getting worser and worser. Prepare to live in a different world.

Water is Valuable!

In this [NOT] shocking report, we learn that farmers in Imperial Valley are not interested in selling their water to the IID (so IID can meet fallowing commitments necessary to ship the water to MWD and SDCWA) at the low price on offer ($85/AF).

It seems that high grain prices mean that the farmers can get more value from the water by using it to grow food. It also seems that IID has not figured this out:
King said only 22 out of more than 400 farmers in the Valley have volunteered, making the pilot program useless.

[snip]

“It may not be too late. There may be some incentive we can offer. We’re in a new field here — uncharted waters,” he added.
I'll tell you what incentive to offer -- RAISE THE PRICE! The farmers are making the right choice, trying to get as much value for their water as possible, but IID -- searching for incentives to offer -- seems to think that it can offer extra donuts or parking vouchers or something besides money to get farmers to participate. No way -- they need to offer more money.

Bottom Line: Water is valuable and it needs to be allocated to the highest and best use. Cities have argued this for years and have put real money on the table to buy water from farmers. IID (which sells water to San Diego for $250/AF) does not seem to realize that it has to pay to play as well.

Update: IID charges SDCWA just over $300/AF. That means that IID has even more leeway in making an offer to its farmers.

24 May 2008

Message in a Bottle

A Canadian man found a dead fly in an unopened bottle of water and sued for mental anguish. The details (and a well-deserved smackdown) are here.

Although lots of people think he sued because he wanted easy money from the company, I wonder if he isn't a paid agent of the World Tapwater Federation.

You never know...

Customer Service!

In case you didn't notice, I changed the favicon for the blog to a little water drop with some text in it. (In case you lack the vision of Superman, the letters are "Aœ," for Agua + œconomics, which is the geeky way to spell economics.)

I am interested in any suggestions (by email or in the comments) on how to make the website better. Besides telling me to improve my spelling -- or use fewer dashes... or elipses -- please DO tell me what can improve your "surfing experience".

We at aguanomics know that you have many options, and we thank you for flying surfing with us today. :)

Malthus and Carbon Trading

My Economist "feed" has been interrupted by moving about. These articles from last week are worth a read. The first argues that Malthus was (and still is) wrong to worry that humans will "run out of resources," i.e.,
There may no longer be virgin lands to be settled and cultivated, as in the 19th century, but there is no reason to believe that agricultural productivity has hit a buffer. Indeed, one of the main barriers to another “green revolution” is unwarranted popular worries about genetically modified foods, which is holding back farm output not just in Europe, but in the developing countries that could use them to boost their exports.

As so often, governments are making matters worse. Food-export bans are proliferating. Although these may produce temporary relief for any one country, the more they spread the tighter global markets become. Another wrongheaded policy has been America's subsidy to domestic ethanol production in a bid to reduce dependence on imported oil. This misconceived attempt to grow more fuel rather than to curb demand is expected to gobble up a third of this year's maize (corn) crop.
They conclude with "There may be curbs on traditional forms of growth, but there is no limit to human ingenuity. That is why Malthus remains as wrong today as he was two centuries ago." I disagree with this conclusion not because I do not think humans are ingenious, but because I fear that we are hitting too many resource limits too fast. The difference, then, between us is that the Economist thinks that we will continue to consume more (GDP/cap rising), while I think we will have to get used to consuming less (GDP/cap falling). Besides all the problems with measuring GDP, happiness, etc., this difference will not be so important if people change the way they think about progress, GDP, the good life, etc.

In the second, the Economist discusses the troublesome details of trading carbon permits, i.e., the clean development mechanism (CDM) created out of the Kyoto treaty is leading to a lot of "credit gaming" by businesses in poor and rich countries that is making a lot of money but NOT reducing carbon outputs at all/in the cheapest way:
Michael Wara of Stanford University calculates that the credits from cleaning up refrigerant production are twice as valuable as the refrigerants themselves. This would have given firms an incentive to produce more trifluoromethane, simply for the sake of cleaning it up, had the UN not amended its rules to exclude new factories from participating in the CDM. Nonetheless, Mr Wara maintains, the riches on offer from the CDM are discouraging governments in the developing world from taking easy steps to reduce their countries' greenhouse-gas emissions.

[snip]

Some [bankers and brokers] say the UN should offer less onerous monitoring for projects that would be willing to accept fewer credits than originally requested. Others want the UN to abandon the concept of additionality, the stumbling block for about half the rejected applications. It is impossible to say with any certainty what would have happened in the absence of the CDM, they argue, so all decisions based on that premise are inevitably subjective. They would prefer that the UN simply set technical standards for qualification, allowing all cement plants of a certain efficiency to qualify, say, or all renewable-energy projects.
The carbon bureaucracy is learning by doing and will make mistakes. I think that these mistakes (and the gaming) are inevitable but necessary. Although a global market in carbon and climate credits is what we are after, issues of rights, measurement, transactions, etc. require some form of oversight for the market to function.

Bottom Line: With so much at stake and so little precedent, it's hard to get robust "spontaneous" solutions to the massive problems related to global resources (air, water, climate). That means that some "managed" coordination mechanism are necessary to get started. Although I am a market fundamentalist at heart, these early stumbles are not nearly as worrying as other disastrous government interventions (ethanol in the US, farm policy in most countries, carbon pricing) that we have seen recently. Governments are not bad all the time.

Cornering the Market

The Onion* breaks this story on market power: "Nation's Poorest 1% Now Controls Two-Thirds Of U.S. Soda Can Wealth," and we should worry about this disturbing trend:
the disproportionate distribution of soda-can wealth is greater than ever before, and has become one of the worst instances of economic inequality in the nation's history. Data showed that over-salvaging of cans by a small and elite group of can-horders has created a steadily growing and possibly unbridgeable gap between the rich and the mega-poor.

[snip]

"Members of this exclusive group come from exceedingly poor backgrounds and have access to outrageously low levels of education, which makes them much better prepared to reap the benefits of digging around in garbage," Pierce added.

The report details several key factors involved in the lopsided distribution of container wealth, including aggressive foraging, which leads to higher returns on deposits and a tendency to reinvest can profits in additional redeemables, such as beer. In addition, the report found that those involved in the returnable-gathering industry often minimize financial risk by diversifying between aluminum cans and glass-bottle holdings.

[snip]

"The typical American spends an average of $65 on beverages for every dollar he or she earns back through redeemable deposits, and the rest of that money goes to the country's can and bottle barons," the report stated. "Americans who are at a foraging disadvantage due to over-employment and home ownership therefore have limited access to these discarded commodities, causing the market to unfairly favor those with an exclusively disposables income."
Bottom Line: The story notes that the US Congress is looking for ways to redress this obvious abuse of market power. Please call or email your congressman in support of reforms designed to redistribute this precious natural resource. Think of the children!

* a satirical paper

Feeling a Need

...to do something does not mean that you should. Over at Grist, a questioner asks:
We are doing a NW Earth Institute discussion course on sustainability here at work, and someone asked, "Is it necessary for us to conserve water here in Portland despite seeming abundance and replenishment? If so, why?" My response was not as strong or compelling as I would like. Can you help?
The answer from Umbra is well meaning ("we should save every precious resource") but misplaced, IMO. (She also mixed up her facts in framing the problem; see "First" just below.) Here's my comment:
First, I want to point out an inconsistency: "Here in North America, we have 7 percent of the world's population and 15 percent of the world's fresh water, but we are doing a great job wasting this bounty; within the next 10 years, water shortages are expected in 36 U.S. states."

You are including Canada (LOTS of water) with the US (not nearly as much per capita esp. when you consider population densities...) -- so the problems with water management are much bigger than "15 percent" implies.

Second, I think that the questioner's dilemma reflects an important fact -- where water is abundant, water management is not so important BUT we all want to feel like we are doing everything we can for the environment.

I think that this thinking is misplaced. Despite all the excellent reasons offered about why people in Portland should conserve water, the abundance of water means that conservation is not so important -- relative to OTHER issues (e.g., car congestion, forests, population growth, etc.)

The reason that people in the SW are more aware of water issues is that water is far more important in the SW relative to minor issues (how do I get enough sunshine :)

So, my answer would be to go find a real problem.

23 May 2008

Desalination as an Investment

Businessweek has a pro-desalination article that claims $64 billion will be spent on desalination by 2016. The article covers the typical drawbacks of desal (energy intensive, waste disposal problems, etc.) as well as the scientific consensus that desal is a niche product. It ends on a disconcerting note, i.e., by mentioning the companies that stand to capture a share of that $64 billion in spending.

Think about it.

If most of our water problems are not supply-related but institutional -- we need to figure out how to reallocate adequate water from current users (mostly farmers) to cities, environment, etc. -- then the "problem" of water could be fixed with a few clever changes in the law. BUT, if that were to happen, then the market for desal projects would shrink and so would those $64 billion in anticipated sales.

If you were a GE or Veolia executive, how would you feel about losing your potential market? Badly, I'd think, and your natural reaction would be to try to "save" those future, potential sales by opposing attempts to fix the institutions of water management. One easy way to do this is to continually remind people of water wars, water scarcity, aqueducts in earthquake-prone regions, etc -- problems that, conveniently, would not plague the clever water manager who bought a desal plant. Another way would be to support those who oppose reform of water institutions -- often those who stand to lose from "efficient" allocation of water. (With markets, they would be compensated, but some of those people do not trust in that outcome.)

Bottom Line: The cheapest solution is not always the solution that is put into place -- especially when there is money to be made, bribes to be paid, etc. Although desalination is useful as a niche product (e.g., on nuclear subs and islands), it is just as sensible as using a chainsaw to chop a tomato -- or starting a war in a distant country to force one guy to retire...

Elasticity of Demand

Anonymous asks in yesterday's post:
"Water managers need to do the same thing if they want customers to use less water."

If the extra revenue from an excess tax doesn't cover the elasticity of demand for water, should the water managers be subsidized?
How can we get people to pay more towards the full price of the resource if water managers may have an economic disincentive to do so?
I wrote a little about elasticity [wikipedia] back in the dark ages (April!), so let me add some more comments here.

I think anonymous is referring to the old problem of zero-profits in the water business, i.e., set price such that total cost = revenue = price * quantity. we know (Law of Demand) that price increases lead to a reduction in quantity demanded; the only question is by how far it will fall (a lot = elastic; a little = inelastic). If quantity demanded falls "too far" then total revenue will fall by more than total costs, negative profits result, and subsidies are necessary to cover costs.

Let me comment on this in several ways:
  1. The problem usually occurs in a drought, when people cut back use by "so much" that revenue falls faster than costs -- mainly because most costs are fixed, i.e., they do not fall when quantity does. The "solution" in those cases is to raise prices.
  2. I am suggesting going from the other direction, i.e., raising prices FIRST and then getting the reduction in quantity demanded. Given price elasticity of water is nearly zero for indoor use (and around 0.6 for outdoor use; see page 21 in my dissertation), higher prices will lead to higher revenue.
  3. My suggestions for pricing water is to move prices up by 200-500 percent. Given this HUGE jump, it's more likely that outdoor use (we are talking urban, not ag -- that would be an interesting story, since fixed costs in ag are lower, there's groundwater, etc....) will drop by, say, 50 percent. (Indoor use would drop by nothing since I would exempt "basic use"/indoor use from the price increase.) Given a 200 percent increase in price, it's feasible that this move would lead to higher revenue. (Academic but important caveat: elasticities are point estimates for small changes in price, and 200 percent is NOT a small adjustment.)
  4. Worst case scenario is that revenues would drop. I suggest covering the difference with property taxes. (This is the flip-side of my suggestion that excess revenue be distributed on a per capita basis.)
Bottom Line: Our smallest problem is how to pay for water service. Since we pretty much pay nothing (what percent of your annual income goes to water?) right now, the key idea is to raise prices so that people DO start paying attention.

Fat Cats or Skinny Cats?

This article describes some dubious behavior at the water district serving the southern Silicon valley. The general manager has expanded staff, paid staff the highest salaries in a California water district, hired friends into highly-paid, unadvertised positions, etc.

The board of directors that is supposed to oversee this manager appears to have lost touch with its responsibilities. One reason may be that many of them have held their positions for more than 10, 15 or even 25 years. Outsiders suggested that Board members step down 12 years, but:
board members rebuffed the idea of putting term limits on the ballot.

"I have met all kinds of folks, and not one person came to me and talked about term limits. No one's ever told me they have a problem with term limits, and I'm out there 7-24," said board member Dick Santos of Alviso.

The board voted for more public hearings on the topic, without setting a timetable.

"I've seen more good people pushed to the sidelines through term limits. It's pretty sad. It's arbitrary," said Joe Judge, a board member who has served 22 years.
Bottom Line: Although we want managers, staff and directors who are knowledgeable about the business, we do not want people who are so secure in their jobs that they forget why they have them. Term limits are appropriate in any elected position because they force organizations to establish clear institutional guidelines, bring new blood (and ideas), and remind managers, staff and directors who they are working for. Throw the bums out!

22 May 2008

Ethanol is Dumb, part 54

James and Stephen Eaves wrote this piece [PDF] last fall but apparently nobody read it, since we have seen almost all their analysis and predictions supported by recent events, i.e.,
When we assume the ethanol production process is fully renewable, it would take all the corn in the country to displace about 3.5 percent of our gasoline consumption — only slightly more than we could displace by making sure drivers’ tires are inflated properly. There are also ethical considerations. In particular, the United States is responsible for over 40 percent of the world’s corn supply and 70 percent of total global exports. Even small diversions of corn supplies to ethanol could have dramatic implications for the world’s poor, especially considering that researchers believe that food production will need to triple by the year 2050 to accommodate expected demand. Furthermore, ethanol would not necessarily be a more reliable source of fuel. By displacing gasoline with ethanol, we are displacing geo-political risk with yield risk, and historical corn yields have been about twice as volatile as oil imports.
James Eaves graduated from my department (Go Aggies!) a few years ago. He and his brother deserve congratulations for pointing out that the emperor has not been wearing clothes for quite some time. Too bad the politicians have continued to ignore the factual stupidity of ethanol in favor of shoving more pork down the swollen gullets of their agribusiness campaign contributors -- while the poor and hungry of the world grow more angry....

Bottom Line: Anyone who says "I didn't see it coming" needs to have his head examined. The only good thing about the ethanol program is that the evidence of its stupidity is so vast that we may be able to end it quickly. We cannot wait for wisdom in the Congress. Tell them to stop the disaster.

Conspiracy to Emit....

...climate changing gases? This article discusses a lawsuit brought against energy companies not only for damages, but consipring (with political officials) to cover up the cause and extent of those damages:
the suit also accuses eight of the firms (American Electric Power, BP America, Chevron, ConocoPhillips, Duke Energy, ExxonMobil, Peabody Energy, and Southern Company) of conspiring to cover up the threat of man-made climate change, in much the same way the tobacco industry tried to conceal the risks of smoking—by using a series of think tanks and other organizations to falsely sow public doubt in an emerging scientific consensus.

[snip]

The energy industry’s ties to government, like the tobacco industry’s, have been unusually tight, and its lobbying efforts demonstrably effective. Philip Cooney, a liaison between the Bush administration and federal environmental agencies, edited uncertainty into reports on global warming by top government scientists from 2001 until 2005, when he resigned after examples of his changes were published by The New York Times. Before joining the White House, Cooney had worked for the American Petroleum Institute; a week after his departure, Exxon­Mobil announced he was joining the company. “In a sense, ExxonMobil walked right into the room of the science program,” says Rick Piltz, the federal official who blew the whistle on Cooney. A government memo obtained by Greenpeace outlines a State Department official’s talking points for a meeting with energy-company lobbyists: the president, the memo says, “rejected Kyoto, in part, based on input from you.”
This case is interesting as yet another example of using disinformation to manipulate public policy -- something that I covered in my dissertation, i.e.,
In 1923 -- one year after proclaiming Los Angeles had four times its water requirements -- Mulholland proposed that a Colorado River Aqueduct (CRA) bring water from the Colorado River to "parched" Southern California... Los Angeles's decision to go for water was politically astute. If LA wanted to get power, it needed a dam. Although money was not available for dams, it was available for water.
Those of you familiar with the plot in Chinatown will recall the "artificial shortage" that allows the local water mafia to use tax dollars to build an aqueduct to their private land in the San Fernando Valley. The real story was not about water, but (electrical) power, i.e., Los Angeles claimed a water shortage to get the Hoover Dam built so that LA could buy the electricity. Thus, we find that two of the largest engineering projects in the Southwest (Hoover Dam and the CRA) were built for power, not water. We are still suffering the effects of that decision: Organizations and agreements made "for water" were poorly designed because the real goal was power.

Bottom Line: Political manipulation of information to serve ulterior motives has a long and shameful history. I see no reason why energy companies now (as in the 1920s) would not deceive the public over the implications of actions -- pretending to "serve" the public while ripping it off.

Speaking of Carbon

The March issue of Finance & Development (IMF) has many stories on global warming, carbon taxes, etc. Read the stories, and consider these pictures [click to view at full resolution]:



The picture above describes which countries will bear the costs of carbon reduction under different carbon trading systems. Note that allocation of permits on a per capita basis in a cap and trade system results in a slightly positive (!) economic impact, with most of the gains going to China. Carbon controls by taxes have the biggest, negative impact. All methods result in similar decreases of world GNP, i.e., about -0.6 percent. Not too much to ask to save the world, eh?



This picture shows that people closer to the equator will suffer more from global warming. They are, by and large, the poorer people.

Bottom Line: These pictures, and the models behind them, make a very useful contribution to the debate over "what to do" about global warming. The poor of the world will suffer the most, so poorer countries have an incentive to negotiate a global solution. The choice of solution matters because it will have different impacts on different countries. China, especially, does better with per capita allocation of emissions permits and the worst with a uniform carbon tax. That's disappointing to me (I am a tax fan), but it may indicate that the politically-expedient solution (get China on board) will be to implement permits on a world-wide basis. OTOH, we can see why rich countries may not care about a solution. The US, e.g., will not suffer as much from global warming, and per capita permit allocation is the "worst" option for the US. I wonder if it will be possible to overcome national selfishness and reach a global solution.

21 May 2008

Local Markets

This article quantifies the impact of higher food and fuel prices on the "locavore" movement in Florida. Seems that consumers and suppliers are indeed responding to higher prices:
The number of Local Harvest members in Florida, which includes farmers markets, family farms and other sources of local foods, has jumped to 250 this year from 68 in 2004, said Guillermo Payet, founder and president of Local Harvest, which is based in Santa Cruz, Calif.

U.S. membership is more than 13,740, almost triple the 5,412 members in 2004.

"I've been saying for years that the buy-local movement will really take off when the price of agribusiness-produced and long-distance-transported foods goes up substantially due to high energy prices," Payet said. "That's starting to happen."
In an echo of a post from earlier this week, we see food production techniques going "back to the future"
In the days before agriculture became larger and more industrialized, just about everybody had a small farm or backyard garden, or had a neighbor who did, he said.

Now, what's actually nothing new is being reinvented, with more people interested in producing food, even in urbanized areas such as South Florida.
Bottom Line: Supply of industrial food is shifting up (higher costs, everywhere) and demand for local food is shifting out (willing to pay more, everywhere) -- a combination that spells good news for the local food producers. Hear hear!

Agricultural Policy

Yesterday, Fixed Carbon mentioned an article in which the author says the poor (and hungry) were subsidizing the rich (and obese). That sounds familiar, I thought to myself. Where have I read about it recently? Oh, here's the passage that I read in the morning:
Statistics are frequently cited to show that agriculture is at a disadvantage because its per capita income is much lower than that of the industrial population. Aid to agriculture is therefore advocated on the basis of this information. When examined closely it will be found that agriculture is not a homogeneous industry. It consists of at least two entirely different sections: a commercial section in which incomes are reasonably comparable to those of industry and a subsistence section in which incomes are very low indeed. There is practically no justification therefore for aid to agriculture as a whole for the simple reason that agriculture is not a whole.

[snip]

Unfortunately agricultural policy, designed to support prices, helps the rich farmer more than it does the poor farmer. Here is a curious deficiency in our information system. Agriculture has obtained a sympathetic hearing in its claims for support because of its low average incomes. The poor farmers, however, whose low incomes bring down the average, have benefited very little from the policies designed to raise agricultural incomes. Because we have thought of "helping agriculture" rather than of "helping the poor" we have actually used the poverty of the poor to justify policies which have in effect subsidized the rich.
That passage was written by Kenneth E. Boulding in his 1958 book The Skills of the Economist. Boulding, winner of the John Bates Clark Medal, is credited as the founder of evolutionary economics.

Yes, that's right. Top economists were saying fifty years ago* that agricultural policies benefit industrial farmers -- not the "poor farmers" that the USDA and politicians like to parade around when they are looking to increase the pork deliveries to their fat friends.

Bottom Line: Agricultural policies do not help the poor. They distort markets and destroy the environment merely to make the rich richer.

* My dissertation builds on perceptive work that Milliman did in 1955.

Low Impact Living...

...outlines how "excessive" water use is detrimental to the environment and what to do about it. A factual post that does not connect the impacts (first half) and remedies (second half). Raising the price of water would connect them, since people would take the actions in the second half and reduce the adverse impacts in the first half.

Bottom Line: Although readers of that blog will eagerly go out to install gray-water systems, the other 99% will need to be nudged into "doing the right thing" by higher prices.

20 May 2008

Footprints

The Economist blog has a post on water footprints and virtual water; I wrote on them here and here, respectively.

Some commentators think that measuring people's environmental impacts is the next big thing in government control. I disagreed with this:
I think that these concepts (press releases perhaps) are useful as quantitative measures of the externalities (bad/good/neutral) associated with our activities -- and by netting out the numbers -- world trade. If the average American has a large carbon, water, etc. footprint, that indicates that Americans are using more of the environment for their lifestyles (duh!), but it also indicates the "terms of environmental trade" in a way that can be useful -- especially if carbon trading goes global.
Bottom Line: Knowledge is power -- give it to the people.

Central Planning for Lawns

Down in the desert, they grow grass and look at it, but that practice, which is starting to look has always been stupid, is about to change:
Incentives could soon be in store for La Quinta residents who do away with their lush, grassy lawns in favor of more water-saving landscapes.

City officials say they're working with the Coachella Valley Water District to finalize plans for the incentives, which could include $1,000 rebates.

[snip]

this is the first partnership of its kind where residents will personally benefit from going green.

[snip]

"The majority of water usage in the valley is for outside landscaping, as much as 60 to 80 percent," Parks said. "The focus of this conservation plan with the city is to reach the individual homeowner and change people's perspective of what is desirous in landscaping."
There are two things that I disagree with in this article. First, homeowners are not going to "personally benefit from going green" -- they are going to have the option of getting paid to replace their grass lawn with something desert-friendly. Although some may have replaced their lawns without the incentive money, the ones who are switching in exchange for the money are giving up a personal benefit (lawns) for the money -- they are NOT getting money for nothing. (It's like saying that prostitutes are getting a "personal benefit" from being prostitutes. A crude analogy but apt.) Second, this scheme is ALL wrong. It seems that the residents of La Quinta have some sort of Right to Lawns in the Desert (RLD!) that has to be bought out with money. If I was the water manager down there, I'd just raise water prices for "excessive" use and then let people decide if they wanted to pay $200/month to have a lawn. (But, then again, I am a meany economist who thinks that people should pay the full price for the resources that they use.)

Bottom Line: The easiest way to get people to understand that something is scarce is to charge more for it. Water managers need to do the same thing if they want customers to use less water.

Do Farmers Care?

A few months back, someone sent me this comment in response to my rant against the farm bill*:
Others [farmers] do care, though. I know because my dad is a farmer, and we grow a number of crops, including low-input and organic crops up in the Capay Valley. And my dad's employees are indeed Mexican, but extraordinarily stable in their employment. He does things like go to their soccer games and Quincieanera's. They make us things like tamales and other fantastic Mexican food. I hear my Christmas card was on his foreman's fridge last year. Not exactly the Cesar Chavez-type exploitation, seems like.
What I said was this:
I've no doubt that he cares, and small farmers are the ones to look out for. The trouble (as Pollan points out) is that people look for cheep cheep instead of quality in their food. The trouble with trade barriers is they tend to be written for the big guys with big lobbies. Just look at how Cargill / ADM are making a killing on ethanol...
People care about others for two reasons -- intrinsic ("I'm a good person and I do good things, i.e., golden rule") and extrinsic ("I'll do anything for money"), and it's important to keep these motivations in mind. If you live in a "community," both motivations contribute to ethical and reasonable business practices; First, because your customers are also your friends, neighbors and providers; second, because a bad reputation is the kiss of death. If you live in a transactions-based world ("I met this guy on the internet..."), then both motivations are weaker: First, because you are unlikely to know the person behind the customer, and second, because reputation means nothing.

Bottom Line: Industry, scale and development can be very useful for economic efficiency, but one must also watch the incentives that arise in a transactions-based world. Without the glue that exists in a relations-based world, it's all too easy to screw your customers, suppliers, et al. in the quest for "extrinsic dollars".

* Approved by the Congress, and Bush says he'll veto. That would be good and brave, so I have my doubts.

19 May 2008

Water and Wind

Read this good post on how wind power can reduce demand for "traditional" energy sources -- thereby lowering the demand for cooling water.

Purification Technology

Treehugger reports on a low-energy, no clog water filter. The technology is still in the development phase but looks promising. I am not sure if it will work for desalination, but a derivative version probably will and that would be a big deal for those searching for more-reliable water supplies from the sea. [More posts on filters]

Standard Food

What is "traditional" food?

In developing countries, it's the food that people have grown for hundreds or thousands of years. "Modern" food is industrial, monocropped, standardized. In developed countries, traditional food is industrial, monocropped, standardized. "Modern" food is local, organic, etc.

Industrial, monocropped, standardized food requires more water, chemical fertilizers (oil), pesticides, GMO seeds, machines (more oil), etc. Although this type of food has higher yields (on average), it comes with more risk of disaster and an unsustainable dependency on mined inputs. Even worse, it's not biodiverse, seasonal, etc.; cheap and cheerful is not necessarily healthy.

Standardized food allows businesses to simplify their operations, accounting, etc. Standardization allows analysts to project inputs, outputs, market trades and technology budgets with more precision than an operation that uses unique plant genomes that sell under irregular contracts (e.g., farmers markets), are impossible to trade on commodity markets, need to be explained to wholesale/retail buyers, etc. Even worse, they may require more labor or more skilled labor -- something agribusiness avoids like the plague.

Michael Pollan makes the point that we only spend about ten percent of our income on food. Although cheap food certainly leaves more money for big screen TVs (and gas!), it is not necessarily the bargain that we think it is. Consider how sensitive we are to the quality of the car, school, hairstylist, hotel, etc. Why is it that most people look at food as a commodity to be purchased as cheaply as possible? Because they have learned to see food in the same way that industrial agriculture sees it: standardized, maximized, homogenized and sanitized. That view is myopic and tragic: Food is more important than car model, but we give it less attention. If anything, we should pay more attention to what we eat, where it comes from (US, Mexico, China -- that is not an issue for me, but "local" matters to some people), and how it compares to other varieties of the "same" food. Is milk just milk?

Bottom Line: It is useful to apply some conceptual frameworks to other parts of our life, but food is not the place to apply "quantity over quality." Standard may be cheap, but it may also be the lower common denominator. Is that what you want to eat?

Have you changed the way you eat (or drink!) based on quality? Please comment on what have you done/not done, why, and whether it made any difference in your life.

Paternalistic Water Management

An article in the Chronicle of Higher Education presents the case for "soft paternalism," i.e., helping people make choices that they would probably make for themselves but are too lazy to make.

I wonder how to apply this concept to water management, i.e., the idea that people "really do" want to save water but are too lazy to take the steps required. Here are a couple of ways to facilitate "paternalistic" water conservation:
  1. Use low-flow shower heads, faucets and toilets -- if people want to use a lot of water, they need to put in effort. (Not very soft, I admit.)
  2. Start a "water consultant" business where the consultant implements all the water conservation steps (many fixed costs) for you. You want to do it but lack willpower and/or time.
  3. Create water markets and require that "sellers" put all of their rights into the market. If they want to buy back their rights, they have to pay a market price. This method breaks the "it's my water and I pay nothing, so it's free" mentality that underpins endowment effects. (It also makes the cost of risk-aversion explicit. Sellers who are afraid of paying market prices for water will know exactly how much they will have to pay.)
These few ideas are not necessarily that good, but they do give you an idea of some ways that the lessons of behavioral economics can be applied to water management.

Please comment and/or add your own ideas of policies that encourage our "better self."

18 May 2008

Taxes Are Easier...

In response to my support for carbon taxes, Sheryl over at EDF writes
A carbon tax provides price certainty, but not greenhouse gas emissions certainty. What we need is the latter, and that is what a cap-and-trade system provides - emissions certainty. A well-designed cap-and-trade system can provide adequate price flexibility as well.

Nat Keohane, a Ph.D. economist here at EDF, wrote a great post explaining why a tax is the wrong tool for a job and cap-and-trade is the right tool. He wrote this in response to a phone call from the head of the Congressional Budget Office objecting to his review of a study they’d published. This is a good read - take a look
Oh neat, PhD economist debates! I replied with this:
I disagree about the “certainty” aspect of cap and trade. While true in theory, real emissions will be uncertain to the extent that emissions are unmeasured or mismeasured. Take the measurement of population. In the US, the census is considered to be “fairly” accurate, but naysayers complain about various important groups (homeless, migrants, et al.) being unmeasured.

Now consider how most countries do not even know their populations — and multiply that mismeasurement by — say — 120 (census once per decade versus monthly emissions measurements). Carbon taxes are much simpler to enact, measure, and enforce (except for gathering and burning wood — but they are likely to be missed in cap and trade too).

I took a look at Nat’s post. While I agree with him (and my PhD is younger than his), I think he is leaving out another “transactions cost”-related aspect of cap and trade that does not exist with carbon taxes. Say that permits are issued on an annual basis (by auction), that a bank exists, etc. but it’s “suddenly” discovered that too many permits are out there. The next auction must reduce the number of permits AND policing “black market” emissions must increase.

With taxes, the response is only to increase the tax on carbon inputs. That increase can occur on or before the date for the next auction, and there is no need to police emissions, since taxes are part of the prices at the start — not end — of the carbon-generating cycle. It’s much harder to have a black market input (coal from a different mine) than black market output (coal burned in a burner without a permit).

Taxes are better because they are simpler AND easier to adjust. Forget the theory — these systems have to work, worldwide, in reality.
Tell me what you think -- even if you do not have a PhD :)

Buy More Water Filters?

Treehugger has a post on Brita's new ad campaign for water filters. Brita is not so subtle on the amout of oil that you are wasting when you drink bottled (instead of Brita-filtered) water:



Besides the obvious point that tap water uses even fewer resources that filtered water, my comment was this
I stopped using a water filter a couple of years ago (now on tap). One thing that bothered me was tossing all those brita/pur cartridges. Don't they also contribute plastic/waste? Does Brita address that issue?

We need filters made out of recycled diapers or somesuch :)
Does anyone know the "whatever footprint" of Brita or other filters/person/year?

17 May 2008

Tri-State Wars

The Army Corps of Engineers has stepped in with its "solution" to the Georgia/Florida/Alabama water dispute:
The plan, released to lawmakers Tuesday [15 Apr] morning, would allow upstream lakes to retain more water in times of drought by allowing waivers of the current minimum flow requirement of 5,000 cubic feet per second at the Jim Woodruff Dam near the Florida line. The plan also allows for more storage retention in upstream lakes during rainy times.

[snip]

Georgia is fighting to hold back more water in federal reservoirs around Atlanta to serve its growing population.

Florida and Alabama argue that Georgia hasn't adequately planned for growth. The extra withdrawals, they argue, would damage the environment and dry up river flows into their states that support smaller municipalities, power plants, commercial fisheries and industrial users like paper mills.
Sounds to me like the Corps is favoring People over Nature, but it is doing so in the crudest way possible. Like many engineers, it fails to consider the elasticity of demand for water from humans, i.e., the ability of humans to use less of something when the its price increases. [Note that I am NOT talking about "smaller municipalities, power plants, commercial fisheries and industrial users like paper mills."]

Although Nature can go for a few years with less water, below-average flows result in harm that accumulates over time. For humans, below-average flows need not result in any hardship when they can change their habits (washing the car every three weeks instead of every week, killing the lawn, making the power plant or paper mill more efficient, etc.)

It is from this perspective that we can see the mistake in Corps' logic -- by setting aside more water for Atlanta (humans) and less for nature, the Corps is giving water to those who can survive with less and taking water from Nature, which needs it. Pretty sad.

Bottom Line: The Corps should allocate minimum, sustainable flows of water to Nature and then allocate the remaining water, via auction, among the competing human interests. That way, Nature wins and a few less cars get washed.

You WILL Do This

This article reports a bill in Hawaii that will require homeowners to buy solar water heaters. On the one hand, this sounds like fascism; on the other, it appears to solve a legitimate coordination problem. The Economist recently wrote on barriers to making investments in energy efficiency:
Often, consumers are poorly informed about the savings on offer. Even when they can do the sums, the transaction costs are high: it is a time-consuming chore for someone to identify the best energy-saving equipment, buy it and get it installed. It does not help that the potential savings, although huge when added up across the world, usually amount to only a small share of the budgets of individual firms and households. Despite recent price increases, spending on energy still accounts for a smaller share of the global economy than it did a few decades ago.

For all these reasons, homeowners, as Lord Stern pointed out in his climate-change report, tend to demand exorbitant rates of return on investments in energy efficiency—of around 30%. They generally want new boilers or extra insulation to pay for themselves within two or three years, says Mark Hopkins, of the United Nations Foundation, an NGO. Businesses are not quite so demanding, he says, but they still tend to put greater emphasis on increasing revenues than on cutting costs.

Similar stories crop up in the markets for new homes and offices, appliances and vehicles. Builders are not the ones who end up paying the utility bills, so have little reason to add to the construction costs—and hence the price of a home or office—by incorporating energy-saving features. The makers of appliances and cars also know that not all consumers and drivers will think as carefully about running costs as about the purchase price. By the same token, landlords have scant incentive to invest in energy efficiency on their tenants' behalf. And power companies are usually keen to encourage their customers to consume as much power as possible.
That last paragraph contains the key incentive problems. Builders have no incentive to install better insulation, triple-paned glass, fuel efficient appliances, etc., since they are unlikely to recoup the marginal investment in a higher price. (Homeowners do have an incentive to retrofit their houses -- if they plan to stay in the house for five-plus years.) Apartment building owners have the least incentive to invest in better equipment since tenants realize the benefits of action (or costs of inaction) in their monthly bills.

The article goes on to note that some entrepreneurs are offering to finance and install more-efficient equipment in exchange for sharing the saving from lower energy bills, but those businesses need a lot of up-front capital and patience to persevere for 3-5 years on contracts that carry non-trivial risk.

Bottom Line: It is difficult to encourage people to invest in high-efficiency products that save energy (or water). The current consensus is to force adoption (by outlawing less-efficient equipment) or subsidize adoption (by making equipment free and then charging users for the costs of running those programs). Either solution is second-best but perhaps better than nothing at all.

Sachs the Planner

Jeffrey Sachs, friend to Bono, travel buddy to Angelina, has got some screws loose. In this article he advocates not only industrial policy (government money will save the day! governments know how to pick winners!) but also makes a number of factual errors (e.g., limited supplies of coal). After mentioning his favorite "solutions" (solar power, plug-in hybrids, carbon capture and sequestration), Sachs goes on to lament a lack of investment into his babies, i.e.,
For all of these promising technologies, governments should be investing in the science and high costs of early-stage testing. Without at least partial public financing, the uptake of these new technologies will be slow and uneven. Indeed, most major technologies that we now take for granted – airplanes, computers, the Internet, and new medicines, to name but a few – received crucial public financing in the early stages of development and deployment.
In this paragraph, he is wrong twice. First, because government need not make any investment in any technologies. New energy technologies will receive a flood of investments (and already are) in response to higher energy prices. Government investment will not only crowd out private investment (the government doesn't want a return on its money) but will also (probably) back the wrong technologies -- giving us distorted results and screwing everything up (remember the ethanol "solution"? Yep -- it's still screwing things up.)

Second, Sachs's examples (airplanes, computers, internet and medicines) are mostly examples of technologies related to military spending. (Did the government back Viagra?) The military is not known for its investment prowess or usefulness -- witness the $billions thrown at nuclear weapons that have not made life better for any of us.*

Bottom Line: Sachs, as usual, thinks that big projects by central planners paid with your tax dollars are the solution to problems with energy supplies and global warming. He's wrong. The solution is to tax carbon and allow competition in the free market to find ways of minimizing those taxes.

* Unless you include 40-years of mutually-assured-destruction. If you want to go there, let's start talking about CIA-backed coups, etc. On second thought, let's not.

16 May 2008

Carbon Tax or Cap and Trade

Article [PDF] in Regulation magazine discusses both. If credits are auctioned, they generate similar revenue as taxes, but taxes are still simpler to implement -- they just increase price, and price is a good signal for innovation -- see this.

Tyras asks "what do you do with the tax revenue? I don't know the answer."

As I say here, revenues should be rebated to consumers on a per capita basis. A tax on consumption will encourage conservation, but the rebate on a per capita basis will not distort behavior.

Bottom Line: I tend to favor carbon taxes because they are simpler to administer and transparent. But cap and trade (auction permits!) would be better than nothing at all.

The Right Stuff

One editorial writer has got it right, i.e., agrees with me:
Using average water use over the last three years would penalize those who were most diligent in conserving water. Residents who have not been careful about water use could cut back 19 percent and still use far more water than conservation-minded neighbors.

[snip]

EBMUD has the ability to gather the necessary data to base conservation on a gallons-per-person basis for residential consumption. That is the fairest method to effectively ration water without imposing undue hardships on those who have been the most responsible in the past in using water.
Bottom Line: Don't reward past waste.

Soviet LA

The LA Times reports that the City of LA is going to implement, regulate and mandate various water conservation techniques and technologies so that people are forced into saving water -- when and where the city decides. What about raising prices?
On the heels of a recent DWP water rate hike, Nahai said no additional increases are anticipated. Most parts of the program can be funded from state water grants, the DWP's existing budget and going after polluters who have fouled city groundwater. But future fee increases may be needed, he acknowledged.
The mayor and LADWP have got it exactly backwards. They are not requiring that citizens buy high-mileage cars to reduce global warming, high-fiber cereal to increase lifespans, etc., so why mandate all these "solutions?" Because they want to do something, and water is too cheap to signal that people should conserve it.

Bottom Line: Increase the price of water by 200-500% on people who use a lot of water, and you will see all of these technologies "miraculously" adopted -- in far more efficient ways than the Command and Control-niks are implementing now.

Uncle Sam the Predator

The US government sued two Idaho farmers, trying to take back rights to water flowing on federal land that the farmers had used since 1865. The farmers resisted, and the BLM persisted, claiming that they would win in court or (if they lost) bankrupt the farmers in the process.

The farmers didn't blink. Ten years and $1.5 million later, they had won the battle, but lost the war: Although feds lost their claim over the water, the Supreme Court declined to consider the farmers' claim for attorney fees that resulted from the government's abuse of power. Consider this summary of the stakes:
The implications of the case for other landowners are huge. A victory would give other farmers, ranchers, landowners, and small businesses the assurance they can stand up for what’s theirs and not risk losing everything, he said. A loss means individuals litigating against the federal government in state water-rights adjudications would be better off abandoning legitimate claims simply because they can’t afford to defend their rights against the government.
The Idaho Farm Bureau has made a video in support of the farmers.

Bottom Line: The white hats and black hats are clear in this episode. The farmers own the rights to the water, as agreed in documents dating back 140 years. The federal government tried to intimidate them (despite being wrong) and lost. This case is just as sickening as the unjust taking in Kelo but has a nasty twist: The government wanted the water but settled for bankrupting the farmers. The Congress should divert some of the $170 million it's wasting on salmon fishermen to these patriots.

15 May 2008

Abuse of Water Rights

In this op/ed, Kathryn Gray laments the actions of
Royal Gorge LLC, the bay area consortium of developers who purchased Royal Gorge Cross Country Ski Resort... [that] actively opposed an ordinance, and a resolution, now passed by the Sierra Lakes County Water District (SLCWD) to prioritize service, and to set a "basement" level for Serene Lakes' drawdown that they will endeavor not to go below.

[snip]

Royal Gorge LLC, represented by not one, but two law firms, and a water consultant, had flooded SLCWD with arguments, both written and oral, as to why, among other things, SLCWD shouldn't consider environmental and aesthetic concerns when passing ordinances and resolutions. Homeowners, by and large, came away from water board meetings with the feeling that there was no depth too low for Royal Gorge LLC when it came to procuring water to enable them to build up to 1000 units on what is yet still a world class cross country ski resort.

[snip]

Royal Gorge LLC will not contract to provide these Big Bend neighbors water that they now desperately need. Royal Gorge LLC has chosen instead, to sell water to Granite Construction Company [GCC] to be used to dampen down dust on the construction job on HWY 80. Yes, you read that correctly - instead of providing water, at a fee of course, to neighboring cabins who have a pressing need for potable water, they've opted to sell pure, clear spring water to dump on the freeway.
I am sympathetic to this opinion, but I wonder how it is that homeowners cannot outbid GCC for drinking water (given that GCC is willing to use recycled water). Royal Gorge is clearly pushing to maximize revenue from its rights, but its exercise of sovereignty appears to exceed "community standards" -- and perhaps the original intention of those who created the rights.

Bottom Line: Property rights are a two-edged sword -- if they are strong, owners have an incentive to invest in maximizing their value, but maximizing value does not always pass the "smell test" for good water allocation. If they are weak, then the resource can be destroyed in the ensuing fight over appropriation.

This case is probably more complicated than it appears to be at first glance. Or isn't it? Please comment.

Good Money after Bad

The Congress, in its infinite stupidity, has allocated $170 million to salmon fishing communities "ruined" by the closure of salmon fisheries on the West Coast. As I said here, they contributed to their own downfall (silly dams, etc. did as well), and this payment makes no sense. If the $170 million is not used to permanently retire those fishermen, the Congress will find itself to have created a new entitlement.

People versus Tigers (or Loggers)

This story fits the familiar framework of Baptists and Bootleggers. Conservationist forces (Baptists) in India are pushing to remove people from "natural reserves" to allow endangered tiger populations to recover. The evictions, however, have given local politicians and their logging buddies (Bootleggers) the opportunity to plant commercial varieties of trees for harvest -- tigers be damned.
While the alleged purpose of the evictions was wildlife conservation, teak and eucalyptus plantations eventually replaced more than 40 of the evacuated hamlets.

[snip]

No cultivation of any kind was allowed, despite the fact that local Adivasi farming practices never cut down trees, plowed land or used pesticides or fertilizers. All hunting was banned and no livestock or pets were allowed. The gathering of tubers, mushrooms and wild vegetables was forbidden, and most sacred sites and burial grounds were placed off limits. However, these limitations did not seem to satisfy all conservation NGOs.

[big snip]

Gujjars and tigers have coexisted in Sariska for thousands of years. The decline in tiger population is a consequence of development —- large dams, iron mines and the shifting appetites of distant elites -— not the lifeways of forest dwellers whose habitats have likewise been threatened by the same phenomena. “Why then punish one victim to save the other?” asks Indian historian Ramachandra Guha.

[snip]

“Conservationists who believe that wildlife can be protected in such circumstances are living in a fool’s paradise,” according to Ashish Kothari. “Even while the rest of the world moves toward environmental policies that reconcile wildlife conservation with human rights and justice, India is headed in completely the opposite direction.”

[snip]

Kothari is part of a global network of pioneers, many of them prophets-without-honor in their own countries, pushing for community-based co-management of conservation, and community-conserved areas where local communities decide on their own to conserve local biodiversity for political, cultural, spiritual or ethical reasons.
Bottom Line: Local people can solve local resource problems if they are given the power to do so. Outsiders and elites are more likely to create problems or extract wealth (respectively) than a community that is given the responsibility of managing its resources. After all, local poor people will live in the area long after the latte-swigging aid workers and rich jet back to their urban enclaves.

14 May 2008

Rationing in NorCal

EBMUD has announced mandatory cutbacks:
The proposal requires water users to cut the number of gallons they use from 5 to 30 percent, depending on the type of user. For instance, a family of four would be required to use 19 percent less water; a golf course 30 percent; a refinery 5 percent. In addition, the proposal would ban the use of water to clean off sidewalks and patios; irrigating on consecutive days; and washing cars with hoses lacking shutoff nozzles.

Along with restrictions on use, the board is expected to discuss proposals for incentives and enforcement measures, which include a temporary 10 percent hike in water rates across the board, fines for those whose use exceeds benchmarks set by the district and, in cases of severe violations, reducing water flows or disconnecting water service. A separate vote on pricing will take place in early July after a period for public comment.
You can see from the article that EBMUD believes that threats of fines and cut-offs are a necessary addition to its wimpy 10 percent increase in prices. As you can also see, EBMUD is requiring the smallest cut from one of its biggest users (the refinery) and the biggest cuts from golf courses. Although I see the economic rationale behind these cuts, I fail to see why anyone should get special treatment on cuts.

I would prefer to see far higher price increases (start at 50% and then move up to 200-300% increases for high volumes -- while leaving "base rates" unchanged to protect/reward watermisers) and no rationing at all. Since rationing is based on past use, it's also based on past waste -- more waste in the past makes it easier to cut by 5-30 percent now.

Bottom Line: EBMUD, like you and I, has no idea of where water savings can be made at lowest cost. It should set higher prices and then let its customers figure out whether it's a good idea to water the sidewalks (or refine more gasoline).