The one-handed economist

Frank writes*

A flight from Eindhoven to Berlin: 50 euros.
The extra revenue for Berlin’s economy: 300 euros.
Climate change caused by the plane’s emissions [pdf]: 5 euros.
That picture of you, with the Brandenburger Tor: priceless.

Or is it?

Direct emissions from aviation are responsible for roughly 3% of the total carbon dioxide emissions in the European Union. Compared to other forms of public transport [pdf], air travel is one of the most carbon intensive methods of movement. Meanwhile, according to the International Civil Aviation Organization, the number of flights and the total emissions by the industry are only projected to grow in the near future.

In the light of climate change, this has led some to oppose flying, such as flight shaming. According to a survey by the European Investment Bank, a majority of EU citizens favor a ban on short-distance flights. Dutch politicians prefer a European tax on flying, which will result in higher prices that will reduce demand for flights.

European tax legislation is notoriously hard to pass, requiring unanimous approval by all 28 members. Therefore, the Netherlands are planning to introduce a national flight tax. However, a national flight tax introduces its own unique downsides, with the main concerns regarding capital flight (pun intended) from the aviation and tourism industries.

Academics like William Nordhaus, recipient of the 2018 Nobel Memorial Prize in Economic Sciences, argue that we must not “[burn] down the village to save it”. They assert that while the impacts from climate change may be grave, we should also consider the impacts of those measures which we take against it, which can impact the same groups as climate change. According to research by TU Delft, CO2 reductions may not be as large as some proponents boast, but economic damage might also be smaller than opponents fear.

Bottom line: We should not blindly pick one option, but rationally weigh the range of alternatives which we can choose from. This brings about a whole other range of concerns regarding sensitivity to assumptions and decisions on parameters like discount rates, but these fall outside the scope of this blogpost. We may choose to face the full cost of flying to Berlin, and potentially stay home instead, or we may choose a selfie with the Brandenburger Tor. But choose, we must.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Marina writes*

One of the more important actors in the carbon cycle of the world are phytoplankton. Thinking on a global scale, two big carbon sinks stand out. Namely, vegetation and the oceans. Phytoplankton are responsible for most of the transfer of carbon dioxide from the atmosphere and into the oceans, via photosynthesis that produces half the oxygen on Earth.

Phytoplankton also form the foundation of many aquatic food webs. They are food for zooplankton, crustaceans, small sharks, whales and other big fish and mammals indirectly Unfortunately, phytoplankton are disappearing. Research shows that there is a 40 percent reduction in the global phytoplankton population since the 1950s. The rise in global sea temperatures is thought of as the main driver of decline. But much more research is needed to understand the reductions of these populations.

Whales, similarly, act their part in the carbon cycle. This is also referred to as the ‘biological pump’, or the ‘whale pump’. This process removes carbon and nitrogen from the sunlit zone of the sea and sends those elements downwards through a downward flux of aggregates, feces, and vertical migration on invertebrates and fish. Whales, in the process of foraging deep in the oceans and coming up for air to breathe, release nitrogenous nutrients through their urea (pee) and fecal plumes (poo). That process means more nutrients for primary producers such as phytoplankton. Additionally, when whales die, they sink to the bottom of the ocean, taking all that accumulated carbon with them. The whale carcasses also act as a host to a variety of species, such as snails, mollusks and bacteria that live on the bottom of the ocean.

This nutrient cycling has important implications for policy makers, as healthy whale populations can potentially slow or stabilize the decline of phytoplankton and other species. The real-world implications of slow but irreversible ecosystem changes are difficult to predict. Thus, humans should be extra cautious about the ways in which they interact with their environment.

Bottom line: The example of human impacts on whale and phytoplankton populations shows that we do not fully understand the complexities of ecosystems and our impacts on them.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Alina writes*

Cities have become the hubs of human settlement, development, and economic growth over the last two centuries. Globally, urban spaces occupy 1-3% of terrestrial land, yet in 2018, cities accommodated 55% of the world’s population. The percentage is expected to rise to 68% by 2050. Additionally, urban based-economic activities generate an estimated 55%, 73%, and 85% of gross national product in low-, middle-, and high-income nations [pdf] respectively. From these statistics, it is evident that urban environments have become detrimental to natural environments, consuming 78% of the world’s energy and producing 60% of global greenhouse gases. It is critical to make urban landscapes environmentally sustainable in order to mitigate and prevent projected environmental catastrophes.

Eco-cities are a recent urban phenomenon entailing a city built from scratch with a fundamental focus on sustainability embedded in its design, operation, and management.

One example is the Songdo eco-city, which is actually a district within Incheon, South Korea. At its heart, Songdo strives to have a substantially smaller carbon footprint than traditional cities and to be highly energy and resource efficient. Sustainable elements include, but not limited to:

• Sustainable building designs, especially for large-scale buildings. Songdo buildings claim to have 30% lower energy use in comparison to same-size traditional buildings.
• Pneumatic waste disposal systems with underground waste sorting, recycling, and burning for energy
• Street sensors to detect levels of carbon monoxide, fine dust particles, nitrogen oxides, sulphur oxides, and ozone)[pdf]
• Wide pedestrian and bike lanes
• Abundant electric vehicle charging stations
• Vegetation covering 40% of the district

These sustainable aspects sound great on paper. However, it is worth evaluating the extent to which an eco-city is more sustainable than a traditional city.

A major shortcoming of Songdo and other eco-cities is that building an entire city or urban district from scratch is incredibly challenging. It requires a large chunk of empty land which is suitable for urban development and hefty upfront investment costs. Songdo’s capital cost was worth $40 billion making it one of the most expensive private developments in the world.

Additionally, the majority of the cities in the world are already built, meaning they have locked-in unsustainable infrastructure, and are unlikely to be torn down and rebuilt sustainably. Thus, it could perhaps be more beneficial to optimise existing cities by implementing sustainable elements into them rather than creating eco-cities from scratch.

Bottom line: Songdo could be the blueprint of future eco-cities; however, it is still just a pilot version. Eco-cities have considerable potential to solve urban environmental problems, but most cities – which are traditional and non-sustainably designed – will continue to operate unsustainably due to infrastructural lock-ins.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Emil writes*

The Netherlands is famed for its water management prowess. This is not for nothing, from the construction of the Afsluitdijk after the Zuiderzeevloed in 1916, to the Delta works after the Watersnoodramp in 1953, water is, and always has been, a genuine threat to livelihood in the Netherlands. Through this decorated history of water management, the Netherlands has built up a complex network of governmental institutions that divide the responsibilities of domestic water management. An important responsibility of this network is flood management. The relevant institutions use a multilayer safety framework, in which flood prevention takes priority over spatial design (tailored to flood damage curtailment) and crisis management (in case of flooding).

In 2017, the norms of flood prevention were updated through the adoption of the new Waterwet (Water Law). Flood management must now be assessed based on risk, which is defined both by the probability of a flood occurring, and the consequences that flooding entails. Based on this, the probability of flooding must be low in places where the consequences would be great in order to minimize risk. Risk is calculated per dike trajectory, of which the Netherlands has 255. (A “dike trajectory” is a set of dikes for organisational and management purposes in the larger institutional framework. A trajectory ranges from 0.2 km to 47 km in length.)

The accepted probability of a flood occurring is calculated based on two different methods: Local Individual Risk (LIR) and Societal Cost Benefit Analysis (SCBA). LIR refers to the probability of death by flooding and must be ≤0.00001 death per year. Mortality is a constant between zero and one, determined on a neighborhood scale. It represents the average mortality by flooding based on historical data. The highest mortality value within an area behind a dike trajectory determines the mortality constant for the whole trajectory. The evacuation fraction is the estimated proportion of the human population behind a single dike trajectory that can be evacuated preventatively. With these equation terms, the flooding probability for a dike trajectory can be calculated as:

LIR = Flooding probability * Mortality * (1 – Evacuation fraction)

Just like LIR, the SCBA [pdf] calculates flooding probability per dike trajectory, but based on economic value. It is a very complex cost benefit analysis, but notable factors include a discount rate of 5.5% and “value of a statistical life” of € 6.7 million.

For each dike trajectory, the lowest probability calculated, by either LIR or SCBA, is used for the entire dike trajectory. Whether a dike trajectory meets the required safety norm is determined through annual inspection but can change over time. Land subsidence or sea level rise could alter the flooding probability. With the determined flooding probability, it is possible to calculate the economically optimal time to initiate flood defense construction. The flooding probability sharply decreases after the construction of new defense works, after which it increases slowly for the aforementioned reasons. The flooding probability follows a downward trend over time because of increasing population and economic value behind the dikes, which therefore increases the risk of flooding.

The Netherlands’ flood defense management seems impeccable, but the costs of defending against sea level rise of 45 cm to 85 cm by 2085 may be steep.

Bottom Line: Facing a 1/100000 chance of dying in a flood, every year, may seem terrifying, but it’s subjective and should make you grateful for being born here and not in another low-lying, coastal area.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Miqui writes*

The shoes are recycled, upcycled, organic, vegan, made in the EU, and come with a promise to plant two trees! The fashion industry is pushing our buttons and pulling our levers to temp us to purchase new shoes, without guilt. The green movement has become trendy and hip as it’s expanded beyond hippies. In Green consumption: the Global rise of Eco-chic, Bart Barendregt argues that green lifestyles are now part of capitalist society. Now elites combine their environmentalism with taste and personal wellness.

It is, however, the question whether this green movement is actually helping in achieving our environmental goals. Genuine pro-environmental behaviour is severely limited by bounded rationality. With bounded rationality people strive consciously to attain certain goals they have in mind but are also strongly limited in making an optimal choice by things like information gaps, information asymmetries, heuristics and a range of biases.

This bounded rationality is gratefully abused by some parts of the fashion industry. In this, companies make “unwarranted or overblown claims of sustainability or environmental friendliness in an attempt to gain market share”. Because of our bounded rationality people are not well equipped to stand strong against this greenwashing and consequently end up buying products that do not deliver the environmental-friendly result that the ad or label promised.

One thing is clear, sustainable consumption is an oxymoron. Consumption of products practically always involves the use of resources and the production of waste which in an overpopulated earth inevitably harms the environment. Sustainable consumption is no consumption.

Nevertheless, we can reduce our footprint by buying recycled, upcycled, organic, vegan, second-hand and offset emissions. As explained above, we are very limited in making a choice with an optimal environmental result.

For example, the promise of a shoe brand to plant two trees if you buy their product sounds like a great deal for an environmentalist, but do most people know whether these two trees actually compensate in any significant way? It does for your consumer shame but with regard to the environment it is a complicated question. The image of two large, full-grown trees and a pair of shoes probably comforts you with regard to the CO2 emissions. Perhaps those trees actually do compensate for the CO2 emissions but the production and sale of shoes involves much more than the CO2 emissions.

A Life Cycle Assessment (LCA) on footwear tells us that the use of energy, and the raising of cattle in the case of leather shoes, indeed has a huge impact on global warming. However, what this LCA also shows is that there is a striking impact in the solid waste management phase and that cattle raising also results in significant acidification and eutrophication of environments. An important factor in this assessment is the studied production area which considerable affects the impact of production. What this means is that offsetting CO2 by planting two trees does not compensate the wide range of environmental impacts.

With this in mind, is it possible for a mainstream consumer to make a well-intended choice with an optimal environmental result? Arguably not. Most people simply do not have the time, resources and capability to come to such a result. According to Thomas P. Lyon, a business professor at the University of Michigan, says that “the ideal system for regulating green marketing claims would entail comprehensive labeling and certification requirements”. Whether labeling and certifications are helpful in promoting environmental behavior is not clear. Lyon compares it with making right decision in relation to healthy food as he argues that “there’s not a lot of evidence that those nutrition labels have changed America’s eating habits.”

Bottom line: The green movement is turning trendy. More people are developing environmental awareness, and pro-environmental choices are going mainstream. We are on the right track, even if we’re a bit distracted as to what it means.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Shivalika writes*

The Sundarbans — the world’s largest mangrove ecosystem — is shared between India and Bangladesh. With the global mangrove biome increasingly under threat from human exploitation, how India and Bangladesh choose to manage and conserve the Sundarbans could be the difference between preserving these crucial and biodiverse habitats or letting them disappear in 100 years. But the two countries are struggling to manage this resource effectively. A necessary first step is forming a cooperative alliance to collectively manage the resource.

The Sundarbans provide many crucial ecosystem services. They are, for example, the last remaining stronghold for the endangered Royal Bengal Tiger and host several species of mangrove trees that have an intrinsic value of their own. The livelihood of roughly 3.5 million coastal residents depends on the forest. Due to climate change and resulting sea-level rise, the mangroves provide essential flood protection and reduced mortality from floods, tsunamis, and cyclones that are common in the area.

One can, by this point, draw the conclusion that the Sundarbans need to be protected, at all costs. But what are these costs exactly? It is the environmental economist’s duty to quantify the benefits of action and the costs of inaction to inform policy. One simply cannot put “all costs” into one cause.

A cost-benefit analysis is thus called for to make credible policy suggestions to the Indian and Bangladeshi governments in regard to the protection of the Sundarbans. About a quarter of the Indian Sundarbans [pdf] is currently a core protected area – allowing no human activity whatsoever. In the Bangladeshi Sundarbans, 23% of the area is declared protected.

What would the area look like if the entirety of it was protected? This policy appeals to advocates of strong sustainability or preservationists, but there are economic, social, and political consequences to consider.

Take the example of Bengal tiger protection alone. Here, there are economic costs for enforcement and monitoring, social costs because of the tiger-human conflict in the surrounding villages, and political implications of any policy that would effectively be perceived as a prioritisation of the lives of tigers over the lives of people that depend on extractive industries in the Sundarbans or have been hurt or killed by tigers. The intrinsic value of the tiger, or extrinsic value of the ecosystem of which it is a part, are the benefits of this proposed policy. And tigers are only a small part of the Sundarbans. A bigger picture analysis would need to include a host of different factors to consider and monetise.

Bottom line: These costs and benefits are, if at all possible, not easy to monetise. But even a humble attempt at doing so will add to the understanding of the complex nature of the Sundarbans, and the ever more complex consequences of any policy for their conservation.

* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).