Environmental Economics

understand how the core principles of economics apply to environmental issues ... Charles D. Kolstad, Environmental Economics, 2nd edition...

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Environmental Economics Lecturer:

Prof. Stephan Kroll, Colorado State University ([email protected])


August 3 -7, 2015

Short description:

This course examines how environmental problems and their solutions can be modelled with microeconomic tools. We will talk about market failures, market solutions, and the incentives humans and societies face when making their decisions to degrade or to protect the environment, in particular air, water, climate and biodiversity. We will survey a) how to calculate the benefits and costs of environmental problems and policies, b) how benefit-cost analysis determines the optimal level of environmental quality (and why markets left to themselves usually do not generate that optimal level), and c) the economic principles behind different environmental policies such as command-and-control, green taxation, cap-and-trade, information programs and negotiations. Throughout the module we will use economic experiments to highlight the role of incentives and institutions. By the end of the week students should be able to  understand how the core principles of economics apply to environmental issues  comprehend the virtues and limitations of markets and allocations through prices  appreciate the role of benefits and costs in (environmental) decision-making processes of individuals and societies  understand that many environmental problems are due to wrongly set incentives

ECTS Credits: 5 Workload/Attendance: 180 h/30 h Grading: 40% Paper (in groups of 2 or 3 students) 40% Final exam 10% Participation in class, including experiments and other class activities 10% Short quizzes and focus questions

TOPICS AND TENTATIVE SCHEDULE All papers (other than the book chapters) are available on https://sites.google.com/site/environmentaleconbochum2015/readings. + readings for daily Focus Questions C other readings covered in class * denotes reading primarily for Master students # optional interesting reading that might help understand the material better) This looks like a lot of readings, but many papers are either short or only optional or for Master students only. - Before each day make sure to read the papers for the daily Focus Questions (marked with +) and skim the relevant chapters from the Kolstad book. - If you still have time before the course or between classes read the abstracts and look at the Figures of the other papers covered in class (marked with C). - The papers primarily for Master students (marked with *) will help them study for their final exam and are optional for Bachelor students. - Finally, the papers marked with # are optional and not relevant for the final exam (unless something from these papers is covered in class), but they might help understand the material better, and they might also provide some ideas the paper and for future research of those students who are interested in pursuing environmental economics beyond this class. Monday, August 3 How Economists See the Environment Short Background Readings: Oates (2006+), Fullerton and Stavins (1998+) Kolstad: chapters 1, 2 Market Experiments Basic Supply-Demand Model of Externalities and Policies Journal Article: Plott (1983C) Short Background Reading: Sedjo (1994C) Kolstad: chapters 3, 4 Distributional Effects of Environmental Policies Short Background Reading: Fullerton (2011C) Tuesday, August 4 Public-Good Experiments The Public-Good Model of Environmental Problems and Policies Journal Articles: Fischbacher et al. (2001+), Kroll et al. (2007*), Kotchen and Moore (2007#) Kolstad: Chapter 5 Valuation Experiments Valuation of Environmental Improvement: Cost-Benefit Analysis, and WTP vs WTA Journal Article: Shogren et al. (1994+) Background Reading on Environmental Justice: Banzhaf (2012C) Kolstad: chapters 6, 7

Valuation Methods: Hedonics Journal Article: Bayer et al. (2009#) Kolstad: chapter 8 Wednesday, August 5 Valuation Methods: CVM Short Background Reading: Carson (2000+) Journal Articles: Loomis et al. (2000C), Kling et al. (2012*) Carson (2012#), Hausman (2012#) Kolstad: chapter 10 Policies: Standards and Voluntary Measures Journal Articles: Videras and Alberini (2000+) Kolstad: chapter 11 Policies: Taxation Journal Articles: Parry and Small (2005C), Kallbekken et al. (2011#) Short Background Reading: Gillingham et al. (2013C) Kolstad: chapter 12 Numerical Coase Example Bargaining Experiments Policies: Coase Bargaining Journal Article: Hoffman and Spitzer (1982#) Thursday, August 6 Tradable Permit and Climate Change Experiments Policies: Tradable Permits Background Reading: Schmalensee and Stavins (2013C) Journal Article: Aidt (2010#) Kolstad: chapter 13 Policies: Comparison, Uncertainty and Double Dividend Short Background Readings: Harrington and Morgenstern (2004+), Parry (2007C) Journal Article: Zhou and Segerson (2012*) Kolstad: chapter 15 Climate Treaty Negotiations Background Reading: Olmstead and Stavins (2012C) Short Background Reading: Newell et al. (2014C) Friday, August 7 Climate Treaty Negotiations Journal Article: Barrett (2013*) Kolstad: chapter 19 Biodiversity/Ecosystem Services

Journal Article: Metrick and Weitzman (1998+), Ferraro et al. (2012C) Ferraro and Simpson (2002#), Busch (2013#), Polasky et al. (2014*) Catch- and Wrap-Up, talk about the paper and the exam Friday, August 14 Exam Paper due (for questions about exam and/or paper I will be available through email and Skype from April 10-13, 17h-20h)

LITERATURE: During the summer school, there will be relatively little time to prepare and recap the lectures. It is therefore essential to come prepared to the summer school by having read most of the reading in advance. At the beginning of each class there will be a short set of “Focus Questions” about one of the day’s readings (those denoted with +); at the end of each class there will be a short quiz with a few easy multiple-choice questions about that day’s material Textbook for background reading: Charles D. Kolstad, Environmental Economics, 2nd edition. Oxford University Press. 9780199732647 Readings for the Focus Questions (+): Oates, Wallace (2006). An Economic Perspective on Environmental and Resource Management: An Introduction. In: Oates WE (Ed). The RFF reader in environmental and resource policy. Washington, DC: Resources for the Future, xv-xx. Fullerton, Don and Robert Stavins (1998). How Economists See the Environment. Nature 395, 6701, 433-434. Fischbacher, Urs, Simon Gächter and Ernst Fehr (2001). Are People Conditionally Cooperative? Evidence from a Public Goods Experiment. Economics Letters 71, 397-404. Shogren, Jason F., Seung Y. Shin, Dermot J. Hayes, and James B. Kliebenstein (1994). Resolving Difference in Willingness to Pay and Willingness to Accept. American Economic Review 84/1, 255-270. Carson, Richard T. (2000). Contingent Valuation: A User’s Guide. Environmental Science and Technology 34, 1413-1418. Videras, Julio and Anna Alberini (2000). The Appeal of Voluntary Environmental Programs: Which Firms Participate and Why? Contemporary Economic Policy18/4, 449-461. Harrington, Winston and Richard D. Morgenstern (2004). Economic Incentives versus Command-and-Control. Resources 152, 13-17. Metrick, Andrew and Martin L. Weitzman (1998). Conflicts and Choices in Biodiversity Preservation. Journal of Economic Perspectives 12/3, 21-34. Other Readings Covered in Class (C): Plott, Charles (1983). Externalities and Corrective Policies in Experimental Markets. Economic Journal 93, 106-127. Sedjo, Roger A. (1994). The Global Environmental Effects of Local Logging Cutbacks. Resources 117. Fullerton, Don (2011). Perspective: Six Distributional Effects of Environmental Policy. Risk Analysis 31/6, 923-929.

Banzhaf, Spencer (2012). Environmental Justice: The Experience of the United States. Encyclopedia of Energy, Natural Resource and Environmental Economics, Elsevier Publisher. Loomis, John, Paula Kent, Liz Strange, Kurt Fausch and Alan Covich (2000). Measuring the Total Economic Value of Restoring Ecosystem Services in an Impaired River Basin: Results from a Contingent Valuation Survey. Ecological Economics 33, 103-117. Parry, Ian W.H. and Kenneth A. Small (2005). Does Britain or the United States Have the Right Gasoline Tax? American Economic Review 95/4, 1276-1289. Gillingham, Kenneth, Matthew Kotchen, David S. Rapson and Gernot Wagner (2013). The Rebound Effect is Overplayed. Nature 493, 475-476. Schmalensee, Richard and Robert N. Stavins (2013). The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment. Journal of Economic Perspectives 27/1, 103-122. Parry, Ian W.H. (2007). Should We Abandon Cap and Trade in Favor of a CO2 Tax? Resources Summer 2007, 166, 6-13. Olmstead, Sheila M. and Robert N. Stavins (2012). Three Key Elements of a Post-2012 International Climate Policy Architecture. Review of Environmental Economics and Policy 6/1, 65-85. Newell, Richard, William Pizer and Daniel Raimi (2014). Carbon Market Lessons and Global Policy Outlook. Science 343, 1316-17. Ferraro, Paul J., Kathleen Lawlor, Katrina Mullan, and Subhrendu K. Pattanayak (2012). Forest Figures: Ecosystem Services Valuation and Policy Evaluation in Developing Countries. Review of Environmental Economics and Policy 6/1, 20-44. Readings primarily for Master Students (*): Kroll, Stephan, Todd Cherry and Jason F. Shogren (2007). Voting, Punishment and Public Goods. Economic Inquiry 45/3, 557-570. Kling, Catherine L., Daniel J. Phaneuf and Jinhua Zhao (2012). From Exxon to BP: Has Some Number Become Better than No Number? Journal of Economic Perspectives 26/4, 326. Zhou, Rong and Kathleen Segerson (2012). Are Green Taxes a Good Way to Help Solve State Budget Deficits. Sustainability 4, 1329-1353. Barrett, Scott (2013). Climate Treaties and Approaching Catastrophies. Journal of Environmental Economics and Management 66/2, 236-250. Polasky, Stephen, David J. Lewis, Andrew J. Plantinga, and Erik Nelson (2014). Implementing the Optimal Provision of Ecosystem Services. Proceedings of the National Academy of Sciences 111/17, 6248-6253.

Optional Readings (#): Kotchen, Matthew J. and Michael R. Moore (2007). Private Provision of Environmental Public Goods: Household Participation in Green-Electricity Programs. Journal of Environmental Economics and Management 53, 1-16. Bayer, Patrick, Nathaniel Keohane, ChristopherTimmins (2009). Migration and Hedonic Valuation: The Case of Air Quality. Journal of Environmental Economics and Management 58, 1-14. Carson, Richard T. (2012). Contigent Valuation: A Practical Alternative when Prices Aren’t Available. Journal of Economic Perspectives 26/4, 27-42. Hausman, Jerry (2012). Contigent Valuation: From Dubious to Hopeless. Journal of Economic Perspectives 26/4, 43-56. Kallbekken, Steffen, Todd L. Cherry and Stephan Kroll (2011). Do You Not Like Pigou, or Do You Not Understand Him? Tax Aversion and Revenue Recycling in the Lab. Journal of Environmental Economics and Management 2011, 62/1, 53-64. Hoffman, Elizabeth and Matthew L. Spitzer (1982). The Coase Theorem: Some Experimental Tests. Journal of Law and Economics 25/1, 73-98. Aidt, Toke S. (2010). Green Taxes: Refunding Rules and Lobbying. Journal of Environmental Economics and Management 60, 31-43. Ferraro, Paul J. and R. David Simpson (2002). The Cost-Effectiveness of Conservation Payments. Land Economics 78(3), 339-353. Busch, Jonah (2013). Supplementing REDD+ with Biodiversity Payments: The Paradox of Paying for Multiple Ecosystem Services. Land Economics 89/4, 655-675.