Category Archives: Environment

310 – Additionality can be tricky to assess

Many environmental policies and programs pay public money to people or businesses (or give them tax breaks or discounts) to encourage them to adopt more environmentally friendly practices and behaviours. A seemingly common-sense rule for these sorts of programs is that we shouldn’t pay people to do things that they were going to do anyway, without payment. But it can be quite a hard rule to apply in practice.

The idea that we shouldn’t pay people to do things that they were going to do anyway goes under the name of “additionality”. (It is also related to the with-versus-without principle in Benefit: Cost Analysis, and the concept of market failure – see PD272).

The idea behind “additionality” is that, when a program pays money to people to change their behaviours, the environmental benefits that result should be additional to the environmental benefits that would have occurred anyway, in the absence of the payments.

The reason this matters is that, if we are able to target payments to those behaviours that do result in additional environmental benefits, we’ll end up with greater environmental benefits overall, compared to paying for non-additional benefits – we’ll get better value for taxpayers’ money.

Some environmental programs do a poor job of checking for additionality. As I noted in PD272, much of the money given to farmers in US agri-environmental programs is not additional. In Australia, the Direct Action program for climate change doesn’t consider additionality well when selecting the winning bids in their reverse auctions (it compares practices before vs after signing up to the program, not with versus without).

So, environmental programs that allocate money to people or businesses should worry about additionality, but how? It can be harder than it sounds. It’s all very well to say, “only pay people if they would not have done it anyway”, but how do we know what they would have done anyway?

Sometimes it’s reasonably easy. There are cases where we can be pretty confident that people would not have done the environmental action, and will not start doing it in future, without a payment or regulation. I suspect that most of the work on Australian farms to fence off waterways to exclude livestock would not have happened without payments to cover the cost of fencing materials.

In the US, the Conservation Reserve Program pays farmers to remove agricultural land from production and plant environmentally beneficial species. This is probably mostly buying actions that lead to additional outcomes.

The nature of these additional activities is that they are things that are not normally done by farmers. This is largely because they cost the farmer money.

Judging additionality can be much trickier for environmental actions that also generate enough private benefits to be potentially worth doing by the private individuals or businesses. Zero tillage is a good example. Widespread adoption by farmers of zero tillage in Australia, Canada, the US and some other countries has substantially reduced soil erosion, with a range of off-farm benefits. But the reason this practice has been adopted so widely is that it can be very beneficial to the farmers who adopt it. Paying Australian farmers as a reward for doing zero tillage would be pointless, because most of them are already doing it. The public benefits would not be additional.

But imagine how it was in the early days of zero tillage. From the time when it was first developed, it took several decades for zero tillage to be taken up by most farmers. For the first decade, there were very few adopters. A program looking at subsidising zero tillage in 1990 would probably have judged that the payments would lead to additional benefits, and I would not have blamed them.

In fact, at that time, before the systems and technologies to make zero tillage work as well as it does now had been fully developed, payments in many cases would have satisfied the additionality condition. But only temporarily. At some point, the payments would have needed to be switched off, but judging when to switch them off would have been incredibly difficult. Most likely the payments would have continued for quite a while after additionality was lost.

For some practices, additionality comes and goes. For example, planting perennial pastures sequesters more carbon in soils than is found under annual crops, so it might be worth paying crop farmers to convert. But only if they would not otherwise have done so. The area of perennial pastures in Australia rises and falls over time in response to the prices of livestock products, the performance of available perennial pasture varieties, and the economic performance of cropping. If an agency started to pay farmers to plant perennial pastures, ideally they would keep a close eye on the economics of perennial pastures relative to cropping, in case additionality was lost. If it was lost for a period, then payments for that period are achieving nothing, and could be cut without losing the sequestered carbon.

But how would the agency know? The economics of a mixed farming system are very complex, and highly context specific. I worked on nothing but the economics of mixed farming systems for about 15 years, and it would take me quite a bit of effort to assess the additionality of perennial pastures on a particular farm. It would likely vary from paddock to paddock within the farm. The agency could potentially pay consultants to regularly assess the economics, but the costs of doing so on an individual farm would probably outweigh the value of the additional stored carbon.

What the Australian Government’s Emissions Reduction Fund does instead is a before-vs-after comparison of soil carbon, and it assumes that all of the increase is additional for the life of the agreement. This works initially, but the longer the agreement goes on, the larger the chance that additionality will be lost. If it is lost, then the public money allocated for converting to perennial pastures will just be a gift to farmers who would have done it anyway. The gifts could be small and short term or large and long-term; it’s impossible to know in advance. If it turns out to be large and long term, it is the farmer’s good luck – there is no mechanism in the program to turn the payments off.

Should the program have been designed differently? As I said earlier, rigorously assessing additionality on each farm over time is probably not feasible for this practice. It would cost so much that the investment in soil carbon sequestration was not worthwhile.

Additionality could be assessed for a region, rather than for many individual farms. That would make it more affordable, but given the high heterogeneity of the economics of perennial pastures within a region, or even within a farm, the assessment would be wrong in many cases. Still it might be judged to be acceptable as a compromise.

The other alternative is not to provide payments for soil carbon sequestration at all. Personally, that would be my recommendation. There are other problems with paying for soil carbon as well – leakage and permanence, not just additionality (Thamo and Pannell 2017) – and I don’t believe it’s possible to develop a sound policy that is worth the transaction costs.

Although assessing additionality can be difficult, I’m not saying that it is irrelevant. It is always worth thinking it through carefully when setting up an environmental program, and sometimes it is feasible to do a reasonably reliable assessment of it at reasonable cost. But not always. If not, then the program managers have to judge whether the risk of non-additionality is so high that it is not worth proceeding with the program. That’s a difficult judgement that should not be made lightly.

Further reading

Thamo, T. and Pannell, D.J. (2016). Challenges in developing effective policy for soil carbon sequestration: perspectives on additionality, leakage, and permanence, Climate Policy 16, 973–992. Journal web page

306 – Economics of green infrastructure in cities: some essentials

During the recent Conference of the CRC for Water Sensitive Cities in Perth, I was interviewed about some of the essential points that non-economists need to be aware of when thinking about the economics of water-related investments in cities. The video is now available.

My team has been part of the CRC since it started back in 2012. In the interview I talk a bit about the work we’ve already done and what we’re doing now, and then identify my three top tips for non-economists: that benefits from an investment relate to the differences in outcomes with versus without the investment (not before versus after); that the timing of benefits and costs can matter greatly to the economic results; and that you need to account to a range of risks that might cause any particular investment to deliver less than you’d hoped.

These issues are spelt out more in the video (13:50 long), which you can see right here.

Further reading

Pannell, D.J. (2015). Ranking projects for water sensitive cities – a practical guide, CRC for Water Sensitive Cities: here

Web site for our CRC project: here

305 – Feeling virtuous: what’s it worth?

We all like to feel good about ourselves. A product that makes us seem virtuous to others, or even to ourselves, would be worth paying more for than its strictly utilitarian value.

That was one of our hypotheses behind a surprising result in some recent research. We were trying to measure the benefits of installing a rainwater tank on an urban property in Perth. We did this by measuring the premium in house sale prices for houses that already had a rainwater tank installed, compared with similar houses that did not.

The results left us deeply puzzled. First, the price premium was enormous: around $18,000. Now the water in a typical tank, when full, is worth about $3, and a tanks lasts for about 15 years. That means that to use enough tank water to make the $18,000 price premium worth paying, you would you would have to use a full tank of water and refill it from rainfall about twice each day every day for the whole 15 years (assuming a 5% interest rate on your home loan). But that’s way beyond actual levels of rainwater use, and it doesn’t rain that much or that frequently in Perth anyway!

We were left scrambling for explanations for the high price premium. As I started off saying, an obvious one is the feel-good factor from knowing that one is contributing to water conservation. It could be a bit like organic food. Some of the price premium for that could reflect people’s concerns about environmental impacts of agricultural chemicals (as well as perceived health impacts).

Another possible explanation is that people may misjudge how much the water captured in the tanks is worth. Water from the tap really is most extraordinarily cheap, whereas the most common experience of paying for water for most people is bottled water, which is most extraordinarily expensive. So it would be understandable to some extent if people got this wrong. We cannot tell from the house sale data what is in peoples’ minds (e.g. about water cost), only the overall result.

A third explanation could be that our statistical analysis was faulty. If you look at the paper you’ll see that we tied ourselves in knots, testing the robustness of the stats in ways that are far beyond my own statistical skills (thanks co-authors), but we couldn’t make the result go away.

There was one more puzzle we couldn’t solve, as well. The price premium for rain tanks is far above the cost of installing a tank, so why doesn’t everybody with a house to sell invest in a rain tank? In fact only a small minority of houses sold do have them. I guess they aren’t aware of the potential price hike.

On the other hand, we don’t know what would happen to the premium if the proportion of houses with installed tanks was to increase substantially. It is likely that the greater supply of tanks would drive down the price premium to some extent.

Further reading

Zhang, F., Polyakov, M., Fogarty, J. and Pannell, D. (2015). The capitalized value of rainwater tanks in the property market of Perth, Australia, Journal of Hydrology 522, 317-325. Journal web site ♦ IDEAS page (includes link to freely downloadable version of the paper)

302 – India impressions

In February I spent two weeks on holiday in the north of India, visiting Delhi, Agra, Jaipur and Jodhpur. For many years, I had been reluctant to go there, afraid of being overwhelmed by the culture shock and the poverty. In the end, there was plenty of both, but perhaps less than I expected, and I really enjoyed the visit.

Here are some quick impressions about some of the main things that stood out to me.

Poverty and prosperity

There is plenty of evidence that India is developing rapidly. Between 1980 and 2014 its Human Development Index increased by 68 percent, and its Gross National Income per capita (in constant dollar terms) increased from $1255 to $5497. Their economy is continuing to grow rapidly: at 7.6% (real) in 2016.

Still, there are many people doing it very tough – e.g. sleeping under overpasses or in train stations. There was more begging on the street or at traffic lights than I had previously encountered elsewhere.

On the other hand, there was less of that than I expected. We were able to give to many of the beggars we encountered without feeling like it was overwhelming.

The huge majority of people look like they are doing OK. And there are plenty of people who are clearly doing very well indeed.

Traffic and crowds

The population of India is 1.27 billion, and it’s growing at 1.19% (15 million people) per year. It will overtake China as the world’s most populous country in about 2022.

Sometimes in Delhi it feels like they are all on the streets! Indian traffic is like nothing else I’ve ever encountered. Countless millions of cars, tuk tuks, motorbikes, trishaws, and sometimes buses and trucks. Not to mention cows and pedestrians.

The congestion is absolutely terrible of course, but just as remarkable is the way the traffic works. It feels like one is in a school of fish rather than a flow of traffic. Lanes are completely ignored. One moves forward into any available gap, seemingly no matter how narrow it is. When roads intersect, the cars just sort of inter-mesh and weave their ways through. You can’t wait for a break in the traffic before you cross, because there will never be one. I never got used to the alarming way that our drivers turned left onto roads or into roundabouts – they just drive on, seemingly without even looking whether there is room for them. The traffic just has to make room.

People are also quite relaxed about driving into oncoming traffic if doing so would be convenient. Our own drivers did it several times, and we once encountered a large truck coming straight at us in our lane: the inside lane of a dual carriageway road! Pauline screamed, but our driver was quite unruffled. He just shuffled to the left as if it wasn’t surprising. Because it wasn’t.

Apart from the traffic, it can be pretty crowded for people as well. Walking through the market area in Old Delhi it sometimes seemed about as crowded as being inside a bus in peak hour in Perth, but we were in the open.

Crowding was most intense inside some of the vehicles. I was part of a group of three, and we felt quite packed in in the back of a tuk tuk, but I saw plenty of tuk tuks with about eight passengers and one that surely had more than 10. It was common to see three passengers in the front with the driver, and he only has a single seat. One person would often be sitting under the driver, the other two teetering on a few inches of seat on each side.

On the other hand, we did manage to find plenty of relatively uncrowded places too, particularly some nice parks. The crowds are intense but not continuous.

Animals in the street

I’ve never seen so many different types of animals in urban areas: cows (of course), dogs, camels, horses, donkeys and monkeys are commonplace, and in Jaipur there are elephants. I witnessed a pitched battle between rival monkey gangs near the Taj Mahal.

 Environment

Delhi is famous for its poor air quality. According to the World Health Organisation, Delhi has the worst air quality of any major city in the world.  I had previously visited Beijing and experienced its appalling air quality, but Delhi is 43% worse (in terms of fine particles, which are the most damaging to health).

Fortunately it wasn’t too terrible while we were there, but on average air pollution kills about 1.5 million Indians per year – their fifth highest cause of death.  There is increasing awareness of the problem, but they’ve got a long way to go. For example, burning rubbish (including plastics) in the streets is still common.

The other local environmental issue that stood out was garbage in the streets. Particularly in Delhi and Agra, the garbage situation is absolutely woeful. Jaipur and Jodhpur were much better, apparently due to official efforts to raise awareness and clean things up. They are also much better for air pollution. Hopefully, rising incomes will result in people in other cities wanting to follow the examples of those two.

With so many people to fit in, you have to go looking for relatively natural areas. We went to Keoladeo National Park south of Agra, and it was absolutely fantastic. The range of birds, especially water birds, was just amazing, and there are plenty of other animals as well. We saw jackals, mongooses, deer, antelopes and bats. Highly recommended.

Selling

I’m completely hopeless at haggling. When buying small items, my heart is not in it, because fundamentally I am quite happy not to pay the lowest possible price, on the basis that it is still cheaper than I’d be happy to pay in Australia, and these people need the money more than I do. Add to that the fact that Indian sellers are masterful and incredibly persistent persuaders, and you can see the risks I faced. Oh well, it was an experience. I’ve always wanted 12 crudely hand painted plastic elephant key rings.

Food

I love Indian food. There were lots of great dishes you never see at an Indian restaurant in Australia.

Health

I used to always get really sick in developing countries, but over time I’ve developed a relatively effective strategy: carry hand wash and use it regularly, be cautious when choosing where to eat, and take Travelan before each meal. (And of course only drink bottled water.) I’ve now used this approach in Indonesia, Vietnam and India without getting a single serious stomach problem. In India I added another element to the strategy: only eat cooked vegetarian food. This was no hardship at all, given how good their vege food is.

Crime

We read a bunch of horror stories about the dangers before we went there, but never felt in any danger (apart from on the roads). Our guides warned us a lot about pickpockets, but we kept our valuables in pickpocket-proof bags, with metal reinforcing, so felt safe.

Overall, it was a great experience. Despite the various challenges, I’m really glad I went.

299 – Are higher house prices a benefit or a problem?

In the research reported in PD298, we used the impact on house prices as an indicator of the benefits of an investment in a public amenity. This is a well-established approach, but twice in recent times I’ve encountered an attitude that higher house prices are more of a cost than a benefit. Could that be right?

The issue that people have in mind when they raise this concern is housing affordability. This certainly is something that is worthy of attention. House prices in many parts of Australia (and other developed countries) are often so high that they place great financial stress on buyers with relatively low incomes or they result in too many people being excluded from the housing market.

However, talking to a former government minister last year, she said that measuring improved local amenity by the resulting rise in house prices was not acceptable because rising house prices are a problem for housing affordability.

housingAlthough I applaud her concerns for the welfare of low-income groups, her rejection of rising house prices as a measure of community benefits is not sound at all.

For one thing, it implies that rising house prices are a bad thing regardless of the cause of the rise. The logical extension of that thinking is that we would prefer completely impoverished suburbs with no amenities or services for residents. Let’s encourage crime, leave road potholes unrepaired, remove all street trees and encourage toxic industries to set up in urban areas. That would certainly result in affordable housing! This is obviously not the solution to the housing-affordability problem.

The second flaw in the politician’s logic was that it confused measurement with objectives. Improving the amenity of a suburb does result in benefits for the residents, and these benefits are reflected in the prices that people are willing to pay to become residents in that area. So the change in house prices that is attributable to the improved amenity is a sound quantitative measure of the benefits. There may also be spillover effects that are viewed as being negative, but the requirement then is to measure those negatives as well, not to reject the valid measurement of the benefits.

Thirdly, the politician is implicitly suggesting we should aim to achieve two different policy objectives (affordable housing and improved urban amenity) using only one policy mechanism, the decision about whether to invest in urban amenity. An important economic insight, known at Tinbergen’s Rule, says that you need at least one policy mechanism for each policy objective – in this case, one related to urban amenity (e.g. investment in drain restoration) and a different one related to affordable housing (e.g. increased land releases). If you try to achieve two objectives with only one mechanism, the community will end up worse off overall than it might have been.

I was completely unprepared for the ex-minister’s comment at the time, and so dazzled by its many problems that I wasn’t able to quickly provide a very coherent counter-argument. I’ll be better prepared if it comes up again.

Further reading

Borrowman, L. Kazakevitch, G. and Frost, L. (2014). Measuring Housing Affordability: What Types of Australian Households are in Stress? Discussion Paper 42/14, Department of Economics, Monash University. Full paper ♦ IDEAS page

Polyakov, M., Fogarty, J., Zhang, F., Pandit, R. and Pannell, D. (2016). The value of restoring urban drains to living streams, Water Resources and Economics Journal web site ♦ IDEAS page