24 November 2009

A fish here, a fish there. Who cares?

OO says:
I'm a law student researching Entergy v. Riverkeeper where the Supreme Court said EPA can use cost-benefit analysis when determining the best technology available standard for cooling water intake systems.

J. Breyer's concurring opinion posits that it's irrational in a world of stressed resources to force a power plant to spend a million dollars to save one more fish. Wouldn't it be more environmentally beneficial to apply those funds to some other environmental problem (e.g., river restoration, emissions filtering)?

I'd like to explore different institutional options for moving funds to the most environmentally beneficial use.

Your blog is pretty much the extent of my economics education. I'm trying to teach myself. Do you have any resource suggestions that might help me get up to speed? And of course, I'd love to hear your opinion on the case.
Well, there are two issues here:
  1. What should Entergy do to reduce harm at its plant, locally. Let's say that costs $10,000/fish life saved in situ.
  2. Can Entergy spend the same amount of money elsewhere, to get more bang for the buck, say $500/fish life saved in Brazil.*
Now, assuming that Riverkeeper has some sort of mandate (property right) to force the issue, there's going to be a certain amount of money on the table. What happens next depends (typical economist talk)...

If Riverkeeper wants to mitigate the harm to the local community, it will direct the money to option 1.

If Riverkeeper wants to do the world a favor, it will direct that money to option 2, but that option does nothing to redress the harm to the local community. (It also gets into the famous moral "dilemma" -- if you could save ten lives by killing one person, what would you do?)

So, we can see a dichotomy between efficiency and equity. If I had to make a judgment, I'd say go for option 1, because morals can trump efficiency.

Of course, I am not a lawyer, and I am only one opinion.

What do you aguanauts think?
* Let's assume that the marginal value of the fish is the same in both places. Big assumption, but I don't want to get into debates over species, ecosystem and extinction values.**
** Read this [pdf] for more on that (via LP): "The fishing-industrial complex -- an alliance of corporate fishing fleets, lobbyists, parliamentary representatives, and fisheries economists... secured political influence and... nearly $30 billion in subsidies each year -- about one-third of the value of the global catch -- that keep fisheries going, even when they have overexploited their resource base."

Oh, and read A Life Cycle Assessment of Global Salmon Farming Systems (Norway MUCH better than the UK)

12 comments:

Eric said...

This seems to be the multi person prisoner's dilemma once again. Riverkeepers gets donations/adrenaline rush by leaning on Entergy and does not get money for saving fish in Brazil. So Riverkeepers is expected to behave the way that gets them money.

Entergy has a number of approaches that it could take. One of the easiest might be to change their monthly billing statment so that the first item every ratepayer sees is $5.00 'to save fish (Riverkeepers)' In this way ratepayers see an explicit cost on their bill for the support of Riverkeepers. The object is not to kill the fish but to make the externalities obvious. My guess is that there is no law about what a customer's bill looks like.
Another approach, if a settlement takes place, might be to force Riverkeepers to send a registered letter to every customer of Entergy explaining why Entergy should be paying $10,000 a fish out of ratepayers pockets.

Ohter ideas?

Anonymous said...

David

You might have missed my question (or just ignored it)

What are you views on Climategate?

Do you agree (as Tyler and Robin H) say that it's normal academic practice.

Do you think there is cause for concern.?

Josh said...

I've got a couple of problems with this analysis.

First, your footnote that assumes the equality of the two fish throws this whole assessment out. If you want to value the fish, you have to consider their MU, and the closer you get to the last fish, the higher the MU of each individual fish. Also, extinction value does need to be considered, because that is the purpose of the ESA.

Second, you seem to assume that Entergy MUST CONTINUE in its current practice, but they can pull out if they want. That sounds harsh, but if you don't remember that, then the options get distorted. It's harsher to assume that their actions are some sort of natural law. Remembering that they don't have to do what they are doing right where they are doing it, we can then consider the ethics of the local community's harm in a better light, and also see that it would be unethical for anybody to force Entergy to pay to mitigate problems where they didn't cause the problem.

Riverkeeper's mandate may also prohibit it from sending money outside the community.

Last, trying to internalize every externality is going to be a problem for a couple of reasons, one of which being that it won't be possible for some, and so their value will get distorted by the artificial market-like mechanisms we will contrive to price the others.

Eric said...

@ Josh
Thanks.
I do not know about Entergy but many large companies just close operations in one locality when they can't make a profit, even a small one, there.
They close because they have to. Their shareholders, citizens across the country, demand it.

Josh said...

Eric, that is true, and that is the marketplace. If a community wants to attract a certain business, then that community must work to provide the appropriate infrastructure.

However, communities don't just weigh the pros & cons of one business at a time, they (often) start with values they hold for their community first. In the case of the U.S., we've decided that ecosystem values in the form of species-specific protections are important. In California, we've determined that a public process which takes into consideration environmental quality is important. From there, we balance other factors, too, which is why we allow for mitigation, but we understand that those entities have value. At the very least, they improve real estate monetary value, all other things being equal.

Your suggestion that Entergy show consumers how much the fish cost them is interesting, but it would need to be factual, too. In almost any market, Entergy wouldn't be able to pass on all the costs to mitigation, but would have to eat some of it.

Eric said...

@Josh

I am assuming, for lack of any other knowledge, the Entergy would be factual.

From the utilities that I know about 'eating the costs' translates to incorporating the costs into a revised rate structure. So each of Entergy's customers end up paying their fraction of the costs. Costs are renegotiated state by state, often at 5 year intervals except in emergencies.

Josh said...

If Entergy has to compete at all, then it will eat some of the costs to mitigation at the profit margin, and pass some along. Of course, it's market share and control will determine the amount it must take up internally, but that is the way it works. Media perceptions and pro-business advertisements may have folks thinking that all those costs are borne by consumers, but it's just a smokescreen.

Eric said...

Is Entergy a local utility here or a electricity generator that sells into the spot market and into long term contracts? Is its profit margin regulated by law? Utilities tend to run as cost plus. Separate electricity generating companies run on a mixture of long term contract rates and some spot pricing.
I think that if the part of Entergy that is being sued, which may legally be a local utility not a big company, is a utility then its increased 'fish costs' are passed on to the customer. If the part of Entergy that is being sued is an electricity supplier running on a small profit margin and selling most of its electricity into long term contracts, it might be able to claim that in order to pay any potential judgment it would have to break most or all of its long term contracts. Breaking these contracts would create a huge legal mess.
The idea that Entergy has a pile of money lying around, like Scrooge McDuck's vault, is likely to be wrong.

So, a jury, out of pique, could award a large verdict to Riverkeepers, larger than could actually be paid easily. If that happened all kinds of unintended consequences seem likely to occur. One of these consequences could be that owners of Entergy stock who belonged to Riverkeepers would see their stock price drop dramatically as Entergy's earnings per share decreased due to a potential judgment. In this scenario, Riverkeepers would win a judgment that Entergy could not pay and would lose income because Riverkeepers' members depended on a high value for Entergy stock.

It would be a Pyrrhic victory all around.

Lots of other scenarios could also occur.

My is not about who is 'right' or who will win at law. My point is that lots of economic consequences could easily be coupled to any verdict.

Josh said...

If they do not have a large pile of money, or the ability to access somebody's large pile of money, they aren't long for this world, regardless of this lawsuit.

If Entergy has to tank because its practices were so egregious that it couldn't adequately defend itself, it may be unfortunate (or not), but that is the decision-making process we've come to create here. Once you open up the "economic" considerations, then so many facets come into play that it is hard to say whether this is ultimately good or bad. For example, since this ruling sets precedent for energy production that would now have to price in the externality of river damage, Entergy has to play on a more level field with alternative energy methods.

It's both true that the level of market competition determines the amount of cost that the company would have to eat from profits for this misbehavior (I agree with you here), and also true that, if the company has been mismanaged, or the damages so huge (extremely, extremely rare to happen), then the company may fold. If it is the latter, then again, unfortunate, but not the end of the world. The community just determined that Entergy's misdeeds don't belong there.

Eric said...

If the communityy determines that Entergy does not belong there and Entergy leaves, don't the electric lights go out in the community, at least for a while.

On the big pile of money argument,many companies appear to have a big pile of money but the net money (free cash flow) is small. So to meet a judgment, the company often has to fire workers. Many of the workers fired are likely to come from the communities that brought the law suit. They will come from this community not because the company is evil but because the employees used to work at the local plant that was just forced to close. Essentially, jobs at the power company have moved far away. So the local former workers are either unemployed or have to move from the land that they just defended so that the workers can continue to eat.

Is laying off of local workers to meet a judgment and closing of a local plant with at least temporary loss of electricity a fine solution?

Would it be OK if the electricity came anonymously over a transmission line but was generated far away by a company that was environmentally destroying their region? The judgment would essentially be trading the devil that the locals knew for a far away devil that might be much worse but that the locals did not know?

Thanks for the discussion. I have wanted to have this discussion with a thinking person like you. I have wanted to have it for a while.

Eric said...

http://www.carbonoffsetsdaily.com/usa/how-carbon-bill-would-hit-valero-energy-30482.htm?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CarbonOffsetsDaily+%28Carbon+Offsets+Daily%29&utm_content=Google+Reader

A relevant post from the head of Valero Energy. Posted at Carbon Offsets Daily.

Josh said...

Eric, you write like you haven't wanted to have the discussion we are having here as much as you've wanted to have an idealized discussion in your head where you call out something as NIMBY. That's understandable, because you are obviously an intelligent person, but that isn't the case here.

Yes, there are tradeoffs to all of our decisions. What happens, for example, to the fishery based on the fish this company destroyed? What other water quality events are occurring that didn't trigger any law or regulation, but that harmed people in the community? These are just two of the myriad questions that arise from environmental degradation issues that we currently address through measures like ESA.

You are assuming that locals would prefer a system that destroys a local habitat for a few jobs, and you are also assuming that this electricity (or electricity that is damaging somewhere else) is the only game in town. That is way overly-simplifying real-world effects.

Example: When the Rancho Seco nuclear power plant (where my father was working at the time) shut down, did the people of Sacramento lose electricity until SMUD could find some other source? Of course not, that ain't how it works.

Yes, there are tradeoffs, but, just as when the whale oil market crashed, we found alternatives, we do in other cases of environmental degradation, too, and the paternalistic prophecies of doom and gloom on a community by a major business rarely come to pass. Example: The timber industry in California didn't go away because of spotted owls, it went away because we cut enough large-diameter logs that it was no longer worth it for the companies, and internationally cheaper timber (from Canada esp.) drove down prices. And don't argue that prices in Ca. were higher due to regs., it wasn't the case.

My comments still stand: Major companies that don't have access to big capital will die, regardless. They may scream and blame a lawsuit, but if they don't make it, they were destined as dinosaurs, anyway. That's the market.

The underlying problem is that we over-rely on one company, in this case, and then we are over a barrel when it mismanages its resources and obligations. If Entergy and all the others had to consider environmental degradation at the front-end, then the community would get better choices. Hence the cost savings and profit increases from things like CEQA.

And now, some NIMBY comments. The alternative to NIMBY is what, to say, "ooh! Pick me for your water polluting ways!"? Why don't wealthy communities have to contend with these problems? Because they front the finances for quality of life (like CEQA, only with cash), because the MU of their money offers them the ability to do that. What mechanism does this for poorer communities (when it happens)? Our regulatory processes, like the ESA and the Clean Water Act.

And, although my arguments above are not based in NIMBY, I do have some simplistic questions for you: Would you let a criminal live in your house? In your back yard, then? When you pushed him out, would you be mad/sad that he was staying somewhere else? If it were 2,000 miles away, would you drive out there and do something about it?

NIMBY comes from backlash to "limousine liberals" & wealthy white liberal conscience-salving, and I get that, but nobody has proposed a sufficient alternative. At some point, you have to choose your priorities, and if they don't start at home, you will have problems.