Yearly Archives: 2015

287 – Farmers like trees

In many parts of the world, the original establishment of farms required removal of the existing vegetation, creating a different, much less natural, environment. There can be a tendency for some people to view farmers as people who don’t value the environment, but rather seek to destroy it for economic gain. In fact, many farmers have a strong affinity for nature. They have to make a living from their land, but that doesn’t mean they are indifferent to the environment around them.

In a recent study in the Australian state of Victoria (Polyakov et al. 2015), we found that farmers and other rural landholders, on average, pay more for land that includes a proportion of woody native vegetation on it compared with land that is fully cleared. They could, perhaps, make more money from land that is fully cleared, but the price of such land in the market is lower than land that includes some native vegetation – generally native forest or woodland.

Of course, this is only true up to a point. They don’t prefer land that is fully wooded because that leaves no room for agricultural production. Figure 1 shows the pattern we discovered.

farmtrees

Figure 1. Effect of the proportion of native woody vegetation on land value by property size

As the proportion of farm area devoted to woody native vegetation increases above zero, the average value of farm land increases. Eventually it reaches a maximum value at some level, beyond which futher increases in native vegetation reduce land value. Beyond a certain proportion of woody native vegetation, we reach a point where the land value is lower than the value with no trees at all.

While the general pattern is the same for all farm sizes, the numbers are quite different. For a small 1-hectare property, land value is highest when it includes about 45% woody native vegetation. Such land is about 25% more valuable than fully cleared land. These high values reflect that the owners of such small properties are probably there mainly for lifestyle reasons, not to make money from farming (Pannell and Wilkinson, 2009).

At the other end of the spectrum, large landholders (e.g. 1000 hectares) are probably mainly conducting commercial agriculture. However, they still like trees. For them, land value is highest when it includes about 20% native vegetation. At this level, land value is about 4% higher than for fully cleared land. For these farmers, land with anything up to 40% tree cover is worth more than fully cleared land.

For other property sizes, the results fall in between these cases but follow the same pattern.

Interestingly, if we look at the absolute area of native vegetation instead of its proportion, the optimal area is larger on larger farms. For example, the optimal area of native vegetation is 0.45 ha on a 1-ha property, 4 ha on a 10-ha property, 30 ha on a 100-ha property and 200 ha on a 1000-ha property.

farmtreepicjpgYou might be surprised that the optimal area of woody native vegetation for large commercial farmers is so high. I was. We think that there are several contributing factors: the high amenity value of woody native vegetation in this region, its contribution to agricultural production particularly through provision of shelter for livestock, and the presence of areas of low-fertility land on many farms meaning that there is little to gain from clearing it. In some cases it may be that farmers are anticipating breaking the land up into small parcels and selling them to lifestylers who value trees highly.

These results are based on statistical analysis of 7,200 property sales in the region since 1992. Of course, not all farmers with the same farm size have the same assessment of the benefits of native vegetation. However, even those who don’t think it is valuable need to be prepared to pay extra for partly wooded land, or else they will be outbid by other farmers who do see value in trees.

The current extent of native woody vegetation in the region is lower than the extent that would maximize its amenity value to many landowners. In other words, the welfare of many people living in this area could potentially be increased by restoring native vegetation on cleared lands. Of course, whether this is worth doing also depends on the costs of restoration.

There is some public investment in vegetation restoration in the region. Because there is high heterogeneity in the private benefits of native vegetation, there is scope for targeting of this investment. Landowners with high private benefits from re-vegetation would be willing to participate at relatively low public cost.

I did an interview with ABC Radio about this post on 27 November 2015. Listen to it here.

Here is a related video from my free online course, Agriculture, Economics and Nature. It’s an interview with farmer Mike McFarlane about his investments in environmental improvement on his farm, and his support for other nearby farmers to do likewise.

The course is available on Coursera at https://www.coursera.org/learn/agriculture-economics-nature.

Further reading

Pannell, D.J. and Wilkinson, R. (2009). Policy mechanism choice for environmental management by non-commercial “lifestyle” rural landholders. Ecological Economics 68, 2679-2687. Journal web page  ♦ Ideas page

Pannell, D.J., Marshall, G.R., Barr, N., Curtis, A., Vanclay, F. and Wilkinson, R. (2006). Understanding and promoting adoption of conservation practices by rural landholders. Australian Journal of Experimental Agriculture 46(11): 1407-1424. Journal web site

Polyakov, M., Pannell, D.J., Pandit, R., Tapsuwan, S. and Park, G. (2015). Capitalized amenity value of native vegetation in a multifunctional rural landscape, American Journal of Agricultural Economics 97(1):299–314.  Journal web page  ♦ Ideas page

286 – Marine reserves and tourism benefits

Last year I made my first visit to Coral Bay, part of the Ningaloo Reef in the north-west of Western Australia. It was stunning to snorkel on the reef and see the richness of marine life there. One reason it’s so amazing is that the area is protected from fishing. (No fishing of any sort is permitted in Coral Bay itself, but shore-based recreational fishing for finfish is permitted in parts of the sanctuary areas.)

Coral Bay and nearby Exmouth are economically dependent on tourism. Without the systems in place to protect the reef, there would still be tourism, but surely not as much. This is one of the arguments in favour of establishing and enforcing marine protected areas, in addition to the benefits for fishers that I discussed last week.

But how significant are the tourism-related benefits that result from a marine protected area? We set out to try to answer that question for a particular case study: the shark sanctuary in Palau.

Palau is a small island state in the western Pacific, about 600 km east of the Philippines. It has several hundred islands, and 21,000 people. In 2009 it declared a ban on all fishing for sharks in its Exclusive Economic Zone – the world’s first shark sanctuary. Since then, shark-related tourism has boomed. There are many operators offering rides out to areas where reef sharks hang out. People go diving with these sharks, for a shot of adrenaline and bragging rights, I guess. The idea doesn’t appeal to me, but there are enough thrill seekers out there to keep lots of Palauans employed on the dive boats.

In addition, the tourists spend money in the other usual ways that tourists do: on hotels, meals, t-shirts, trinkets, and other tourist activities.

shark2Not all tourists who go to Palau are there specifically because of the sharks, of course, but plenty are. In our study, we focused on those tourists who said that they would not have gone there but for the shark-diving opportunities.

We surveyed a sample of tourists about their reasons for visiting Palau, their activities and their spending. Well, I didn’t personally, unfortunately. It was lead author Gabe Vianna who got to go there. He also surveyed tourism operators for more information about tourist spending on different types of trips. And we used government statistics to estimate the total number of tourists, and inferred the total number of tourists coming specifically for sharks, based on our tourist survey.

Economists measure economic benefits in a variety of ways. In this study, our approach was quite simple. We estimated the revenues obtained by businesses directly benefiting from the presence of shark divers (dive and tour operators, hotels, restaurants and souvenir shops). The calculation of the economic benefits from shark diving to the local community were restricted to wages provided by the dive operators to their employees and the revenues obtained by the fishers from selling their catches to shark divers. This approach doesn’t capture all the benefits, and it ignores the costs of providing goods and services, but it’s a useful indicator.

The results were really interesting. We found that shark diving is a major contributor to the economy of Palau, generating US$18 million per year and accounting for approximately 8% of the gross domestic product of the country. Annually, shark diving was responsible for payment of US$1.2 million in salaries to the local community, and generated US$1.5 million in taxes to the government.

Fishers earn more selling fish for consumption by shark divers than they would gain by catching sharks. The revenue generated by shark tourism is thousands of times greater than the revenue that would be generated by shark fishing.

Palau is just one example, of course, but it’s not the only country doing this sort of thing. Indeed, there is something of a boom in the declaration of marine protected areas by small island states, and other countries. Check out the map below (click on it to see a bigger version). These countries are judging that marine protected areas make good sense, not just ecologically, but economically.

mpas_small

Click on map to go to large original version at www.marine-conservation.org

 

Further reading

Grafton, R.Q., Kompas, T. and Van Ha, P. (2006). The Economic Payoffs from Marine Reserves: Resource Rents in a Stochastic Environment, The Economic Record 82(259), 469-480. Journal web site ♦ Ideas page

Vianna, G.M.S., Meekan, M.G., Pannell, D.J., Marsh, S.P. and Meeuwig, J.J. (2012). Socio-economic and community benefits from shark diving by tourists in Palau: a sustainable use of reef shark populations, Biological Conservation 145(1), 267-277. Abstract at journal web site

285 – The collapse of North Atlantic Cod

Humanity has a terrible track record when it comes to managing fisheries. There are many examples where over-fishing has led to the collapse of a fish population. One of the most spectacular collapses was the cod fishery in the north-west Atlantic.

Prior to the 1950s, cod had been fished off Canada for hundreds of years without any major decline in fish stocks. From the 1950s, fishing technologies improved and people got greedy.

“The decline began with the arrival of large factory stern trawlers in the late 1950s and the exploitation rate increased dramatically as these vessels were able to harvest cod offshore in winter months and at places where they were never previously caught,” (Grafton et al., 2009).

The numbers of cod caught by Canadian firms skyrocketed in the 1960s, crashed in the 1970s, recovered slightly in the 1980s and crashed to close to zero in the early 1990s.

cod_graph

http://www.grida.no/

The importance of the fishery to local economies in eastern Canada meant that their government was reluctant to take strong action to reduce fishing effort until it was too late. Right to the end, the government failed to respond as dramatically as it should have.

In 1992 they set a quota for cod catch that was more than the total amount caught the previous year. However, this quota was a foolish fantasy. By this stage the fish stock had been reduced to about one percent of what it was before the over-fishing started – there were almost no fish left that could practically be caught. So despite the quota, the government decided to impose a complete moratorium on cod fishing for two years, and since then the catch has been minimal compared to historic levels.

Ironically, the government’s delays in taking strong action were meant to benefit fishers, but this backfired terribly, resulting in huge job losses. The cod fishery had supported jobs for around 35,000 fishers and fish plant workers, although it should never have been that high, of course.

The dramatic reduction in fishing since 1992 has allowed cod stocks to recover a bit, but they remain very scarce compared to their earlier levels. In 2013 there were 10,500 tonnes of Atlantic Cod caught off eastern Canada, about 1% of the peak catch of 810,000 tonnes in 1968.

The loss of a dominant large fish from the marine ecosystem of the north-west Atlantic has had big flow-on effects, resulting in what ecologists call a “trophic cascade”, meaning that the populations of species lower down the food chain are dramatically altered.

codWe learn from our mistakes, if we’re sensible. In a few countries, fisheries management has improved significantly since the cod disaster. For example, New Zealand and Australia are relatively good at it compared to most countries. But globally, we are continuing to over-fish, to our own detriment. According to a 2008 report by the World Bank, “the difference between the potential and actual net economic benefits from marine fisheries is in the order of $50 billion per year – equivalent to more than half the value of the global seafood trade.” And “If fish stocks were rebuilt, the current marine catch could be achieved with approximately half of the current global fishing effort.”

Even in Australia there is more that we could do to secure our fish stocks in the long term. For example, Grafton et al. (2006) find that marine reserves where fishing is banned (Marine National Parks in our current parlance in Australia) can provide financial benefits to fishers in the long run, largely by accelerating the recovery of fish stocks in surrounding waters following an unexpected decline or “shock” (e.g. due to an environmental factor, or poor management).

If a Marine National Park is in place, fishers miss out on fishing in the reserve areas, but in the long run they are likely to be better off due to increased resilience, unless the frequency of shocks is really low.

Grafton et al. (2009) showed that a sizable no-take marine reserve in the north-west Atlantic (e.g. covering 40% of the total cod population) would have prevented the catastrophic crash in cod numbers, and would have been highly beneficial to fishers. However, the current review of zoning in our marine reserve system in Australia seems to be shaping up to reduce the planned area of Marine National Parks. I don’t think that would be in anybody’s interest.

Further reading

Grafton, R.Q., Kompas, T. and Van Ha, P. (2006). The Economic Payoffs from Marine Reserves: Resource Rents in a Stochastic Environment, The Economic Record 82(259), 469-480. Journal web site ♦ Ideas page

Grafton, R.Q., Kompas, T. and Van Ha, P. (2009). Cod today and none tomorrow: the economic value of a marine reserve, Land Economics 85(3), 454-469. Journal web site ♦ Ideas page

World Bank (2008). The Sunken Billions. The Economic Justification for Fisheries Reform. The World Bank. Washington D.C. Summary here

284 – The world food price crisis of 2007

In 2007, the world prices for a number of important food commodities suddenly increased dramatically. Many reasons for the price hike were proposed at the time, but some of them turned out to have little to do with it. One factor that did play a big role was American policy that mandates use of biofuels.

Between 2006 and 2008, the price of rice increased by around 200%, and the prices of maize, wheat and soybeans all increased by over 100%.

food_prices

Figure 1. Index of food prices since 1990.

 

It was estimated that this big jump in food prices pushed an additional 130-155 million people into poverty. People rioted in protest at the high food prices in various countries, including Bangladesh, Mozambique, Egypt, Tunisia, Senegal, Zimbabwe and Haiti.

A number of possible reasons for the price rises were identified, including:

  • Increasing oil and energy prices
  • Drought and climate change
  • Panic buying
  • Export restrictions
  • Increased demand for food in Asia
  • Biofuel policies

food_riotIt was felt at the time that it was the combination of all these things that did the damage. There were so many factors thought to have contributed that some described the situation as a “perfect storm”.

However, we now have the benefit of hindsight and it’s clear that some of these factors played little or no role in the price spike (Wright 2014).

It’s true that the oil price spiked in the first half of 2007, just before the food price spike, so there is at least a smoking gun. Higher oil prices would have increased the cost of agricultural production to some degree, and this could have been passed on to buyers. However, Wright argued that this sequence of events (high oil prices followed by high food prices) was largely coincidence, not a causal link. He noted that prior to this event, there was no notable relationship between oil and food prices:

The 1970s oil spike began after the spike in grain prices was well under way, and another huge oil price surge starting in 1978 had no counterpart in the grain market. The sharp but forgotten spike in maize and wheat in 1996 was not matched by a similar movement in oil prices. When energy prices doubled after 1998, grain prices on average barely moved until 2006. (Wright 2014, p. 546).

If drought or adverse climate change was a significant cause, we would have seen significant declines in global food production in 2007-08. People observed that there was a big reduction in Australian grain production at just this time, due to the long drought in the Murray Darling Basin. However, Wright showed that there was no major decline in aggregate global production for any of the three major grains, so other countries must have had production increases that offset Australia’s shortfall. Furthermore, looking at past spikes in food prices, he found that (back to 1962) none of them coincided with large production shortfalls. This is intriguing, because a shortage should in theory cause a price increase, but it seems to have been overwhelmed by other factors in past years at least.

There was “panic buying” by several countries (Bangladesh, The Philippines, Nigeria and some Gulf countries) who increased stocks in an attempt to contain local food prices. This may have made a temporary contribution to higher prices on world markets, but it probably wasn’t a major factor. As evidence of that, I note that panic buying soon ceased, but prices remained high for several years (until about 2014).

A number of countries that traditionally have been exporters of cereal grains imposed a ban on exports during the crisis: Argentina, China, India, Egypt, Pakistan, Russia, Ukraine and Vietnam. This would have reduced the supply of grain in international markets. The World Trade Organisation and International Monetary Fund estimated that prices would have been 13% lower without these restrictions.

Increased demand for food in Asia, especially China, probably contributed. Higher incomes led to higher demand for meat, which led to higher demand for grain to feed to livestock, particularly soya beans. Higher prices for one grain flows through to other grains through substitution in demand. Wright noted that the evidence about the role of higher food demand in pushing up prices in 2007-08 is complex and somewhat confusing, but that it probably did play some role.

Finally, we have biofuels policy, particularly the US policy that caused large volumes of corn to be diverted away from food and livestock production and into the production of ethanol for use as a transport fuel. Although this was ignored by many commentators at the time, it undoubtedly played a significant role in the food price jumps. In addition to pushing up food prices, this policy increased the area and intensity of corn production, which probably led to increased environmental damage in the forms of water pollution, soil erosion and biodiversity loss. And, tragically, even in terms of its contribution to abatement of greenhouse gases, it was (and still is) a very poor policy. The climate benefits provided are small and very expensive.

One lesson from this is that we need to be careful in drawing conclusions about the reasons for changes in market prices. It is easy to be misled by simple correlations, such as that between 2007 oil prices and food prices. A plausible story is not sufficient evidence.

Another lesson is the importance of thinking through policies before committing to them. The failure to do that for biofuels policy in the US and Europe probably resulted in them doing more harm than good.

Further reading

Wright, B.D. (2014). Data at our fingertips, myths in our minds: recent grain price jumps as the ‘perfect storm’, Australian Journal of Agricultural and Resource Economics 58, 538-553. Journal web site ♦ Ideas page for this paper

283 – Whose environmental values matter?

One of my pet issues is how to decide which the environment projects should receive public funding. One of the factors influencing this decision is (or should be) the importance or value of the environmental outcomes that would be delivered. But whose judgements about importance or values should be taken into account?

There are at least three groups whose values might be influential:

  1. Environmental experts.
  2. The general public.
  3. Politicians.

Environmental experts, such as ecologists, are crucial to decisions about environmental investments. We need their advice about threats to environmental assets, and about the effectiveness of different ways of managing them. However, they often also provide advice on priorities, which are, at least implicitly, value judgements. In my observation, many environmental scientists don’t appreciate how much of their own preferences and values they are injecting into this advice. This matters because studies have shown that the preferences of environmental experts are often rather different from the preferences of the general public (e.g. Seymour et al. 2011; Rogers 2013). The experts tend to be greener, and they emphasise factors that don’t matter as much to others.

seagrassThe general public’s views about the relative importance of different environmental outcomes should be considered because (a) they pay the bills and (b) this is a democracy. The way that economists tend to approach Benefit: Cost Analysis implies that values expressed by the general public are the only values that should matter in these decisions. I don’t agree with that because, like many environmental scientists, I think that the ignorance of the general public is an important consideration. For example, people may feel that sea grass is not very important, but only because they are unaware of its contributions as a source of food and shelter for many marine organisms, or of its roles in stabilising the sea floor and maintaining water quality. Basing decisions on people’s expressed values could result in outcomes that they themselves are not happy with. At least some in the community are aware of their ignorance and feel that their own views are not sufficient to base decisions on (e.g. Clark et al. 2000).

Finally, there are politicians. Ministers have more influence than anybody else in the determination of environmental decisions. In principle, their decisions should reflect community preferences and expert advice, and sometimes they do. However, their own preferences and values also impinge. For example, this was starkly evident in the Abbott government’s decision making about climate change.

Although environmental values are crucial to sound public decision making, there is no clear-cut “correct” way to combine the values of these various groups. Somehow we need to factor in the preferences of the general public, but also account for the greater knowledge of experts, even though we know that their personal values may be different. (Politicians’ views should not matter in principle but inevitably will in practice.)

The INFFER framework (Pannell et al. 2012 – www.inffer.com.au) embodies a particular way to combine public and expert input when prioritising environmental projects. It’s not the only option, of course, but it does work quite well at bringing the values discussion to the surface.

Further reading

Clark, J., J. Burgess, and C. M. Harrison. 2000. I Struggled with this Money Business: Respondents’ Perspectives on Contingent Valuation. Ecological Economics 33 (1), 45–62. Journal web site

Pannell, D.J., Roberts, A.M., Park, G., Alexander, J., Curatolo, A. and Marsh, S. (2012). Integrated assessment of public investment in land-use change to protect environmental assets in Australia, Land Use Policy 29(2), 377-387. Journal web site ♦ IDEAS page for this paper

Rogers, A.A. (2013). Public and expert preference divergence: Evidence from a choice experiment of marine reserves in Australia, Land Economics 89(2), 346-370. Journal web site

Seymour, E., Curtis, A., Pannell, D.J., Roberts, A. and Allan, C. (2011). Same river, different values and why it matters, Ecological Management and Restoration 12(3), 207-213. Journal web site