Co-presenters (research fellows in Charles University Environment Center): Kateřina Kaprová

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Institute of Economic Studies Faculty of Social Sciences Charles University Prague

Syllabus of Lectures on

JEM 115 „Environmental Economics & Consumer Preferences“

Summer Semester 2014/2015, Thursdays 9:30-10:50, room #105 1 Lecturer

Dr. Milan Ščasný

milan.scasny@czp.cuni.cz

Charles University Prague, Environment Center, José Martího 2/407, Prague 6 Teaching Assistant:

Lukáš Rečka, lukasrecka@gmail.com

Co-presenters (research fellows in Charles University Environment Center):

Kateřina Kaprová [2,3], Martin Kryl [11], Lukáš Rečka [6,7], Jan Weinzettel [12], Iva Zvěřinová [13]

2 Structure of the course

I Valuation: Preference for non-market goods and services

[1] Introduction to the Course. Introduction to Welfare Measures [February 19]

[2] Revealed preferences I: Hedonic Pricing Models (Kateřina Kaprová) [February 26]

[3] Revealed preferences II: Recreation Demand Models (Kateřina Kaprová) [March 5]

[4] Stated preferences I: Theory, Elicitation methods [March 12]

[5] Stated preferences II: Discrete Choice Experiments and Estimation [March 19]

II Regulation, Consumer Behaviour & Impacts of Policies

[6] Instruments of Environmental Policy, Abatement Costs (Lukáš Rečka) [March 26]

[7] Optimal taxation (Lukáš Rečka) [April 2]

[8] Externality: Problem Solution & Quantification, Health Benefits [April 9]

[9] Economics of Climate Change [April 16]

[10] Environmental Impacts: Input-output modelling (Jan Weinzettel) [April 23]

[11] Environmental Justice & Measuring Inequalities (Martin Kryl) [April 30]

[12] Environmental-significant behaviour and savings [May 7]

[13] Behaviour models and acceptability of policies (Iva Zvěřinová) [May 14]

3 Requirements

(1) to write the final test (70 points) (2) to make 2 assignments (2x10=20 points)

(3) critically review one paper on topic relevant to this course (10 points; if not delivered -5 points) You are asked to summarize a) research objective, b) key method(s), c) main result (all in 1 page), and then, d) critically comment either its method(s) and estimation procedure and suggest e) how relevant paper might be improved (1-2 pp), min 500 – max 1000 words.

The article you choose had to be published in a peer-reviewed journal included in Web of Science Thomson Reuters since 2010 (for instance, JEEM, ERE, REEP, Land Econ, JRU, Ecol Econ, Ener Econ, Ener Pol, Ener J, etc.)

Maximal points: 100 Grades:

78 and more A

77 to 64 B

63 to 50 C

49 and less failed ECTS: 6

4 Materials

Visit Moodle at http://dl1.cuni.cz/enrol/index.php?id=1434.

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5 Lectures in Brief

I Valuation: Preference for non-market goods and services [1] Introduction to the Course. Introduction to Welfare Measures

Proper Welfare Measures; Two formulations of Demand Function (Marshallian / uncompensated versus Hicksian / compensated demand); Consumer Surplus, Equivalent Variation and Compensating Variation; Equivalent and Compensating Surplus Due to Changes in Uncontrolled Goods and Services; Classification of Valuation Methods

Readings (obligatory):

Markandya, A. (2004): Economic Principles And Overview of Valuation Methods for Environmental Impacts. In, Ščasný, Melichar., J., ed. (2004), Development of the Czech Society in the European Union. (Proceedings from the Conference held on October 21-23, 2004). Part V, Non-market Valuation Methods in environmental area. Charles University in Prague, Faculty of Social Sciences and Charles University Environment Center, 21-23 October 2004. Matfyzpress, Prague. ISBN 80-86732-35-5; str. 19-41.

Readings (recommended):

Krutilla, J.V.: Conservation Reconsidered. American Economic Review. 1967. 57: 777-786.

West, S. E., Williams, R.C. III (2004): Estimates from a consumer demand system: implications for the incidence of environmen tal taxes. Journal of Environmental Economics and Management, 47: 535-558.

Willig, R.(1976): Consumer's Surplus Without Apology. American Economic Review, 66: 589-597.

Morey, E. R. (1984):Confuser Surplus. American Economic Review, 74 (1):163-173.

McKenzie, G. W. and I. F. Pearce (1982): Welfare Measurement – A Synthesis. American Economic Review, 72 (4): 669-682

McKenzie, G. W. and I. F. Pearce (1982: Exact Measures of Welfare and the Cost of Living. The Review of Economic Studies, 43 (3): 465-468

[2] Revealed preferences I: Hedonic Pricing Models

The lecture will introduce the historical background of the method and its application on property and labour market. The first and second stage of the model will be introduced, as well as hedonic price function and implicit price. We will focus on practical applications of the hedonic house price method and address also main data requirements and modelling problems.

Day, B., Bateman, I. (2004): The Valuation of Transport-Related Noise in Birmingham. Non-technical report to the DfT. Centre for Social and Economic Research on the Global Environment & Centre for Environmental Risk, School of Environmental Sciences, University of East Anglia, UK. http://webarchive.nationalarchives.gov.uk/20060715203622/http://www.dft.gov.uk/stellent/groups/dft_econappr/documents/page/dft_econappr_032868.pdf Day, B., The Theory of Hedonic Market: Obtaining welfare measures for changes in environmental quality using hedonic market data, Economics

for the Environment Consultancy, 2001. http://discovery.ucl.ac.uk/17583/1/17583.pdf

Bateman, I., Day, B., Lake, I., Lovett, A., The Effect of Road Traffic on Residential Property Values: A Literature Review and Hedonic Pricing Study.

Economic and Social Research Council, 2001.

[3] Revealed preferences II: Recreation Demand Models

After introducing the history of the method, the typology of travel cost models will be explained. We will focus on zonal and individual travel cost method, including random utility models and their utilization in practice. Recreation data availability and reliability will be discussed, as well as the problematics of time and travel cost estimation and main econometric issues in recreation demand modelling.

Hynes, S., N. Hanley, C. O´Donoghue (2009): Alternative treatments of the cost of time in recreational demand models: an application to white water kayaking in Ireland. Journal of Environmental Management 90, p. 1014-1021.

Parsons, G. R. (1999): Familiar and Favorite Sites in a Random Utility Model of Beach Recreation. Marine Resource Economics, 14, pp. 299-315.

http://works.bepress.com/cgi/viewcontent.cgi?article=1015&context=george_parsons

Parsons, G. R. (2003): The Travel Cost Method. In Champ, P. A., Boyle, K. J., Brown, T. C., (eds.) A Primer on Nonmarket Valuation. London: Kluwer Academic Publishers. ISBN 0-7923-6498-8.

Phaneuf, D. J. a Smith, V. K. (2005): Recreation Demand Models, In: Mäler, K. G. a Vincent, J. R. (eds), Handbook of Environmental Economics, Volume 2, Amsterdam: North-Holland.

Ward, F.A., Beal D.: Valuing Nature with Travel Cost Models: A Manual. Edward Elgar: Cheltenham. 2000. ISBN: 1-84064-078-2.

[4&5] Stated preferences: Theory, Elicitation methods

 SP technique in brief

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 History of SP based valuation

 Theory of welfare measures, Theoretical validity, Incentive properties, WTP vs WTA

 Elicitation formats

 SP techniques: Matching vs. Discrete Choice Experiments

 Non-parametric (Turnbull) and parametric estimation of discrete choice data

 Econometric modeling Readings (obligatory):

Haab, T., McConnell, K. E.: Valuing Environmental and Natural Resources: the econometrics of non-market valuation. Edward Elgar: Cheltenham. 2002. ISBN: 1-84376-388-5.

 Chapter 2.2.1 Parametric Models for Dichotomous Choice Questions (pp. 24-49)

 Chapter 3 Distribution-Free Models for Contingent Valuation, Chapters 3.2, 3.4, 3.6 (pp. 59-83)

Carson, R.T., Louviere, J.J. (2011). A Common Nomenclature For Stated Preference Elicitation Approaches. Environ Resource Econ 49:539–559.

Readings (recommended):

Hanemann, WM (2003): Willingness To Pay and Willingness To Accept: How Much Can They Differ? Reply . American Economic Review, 93(1):

464–464.

Kristrom, B. (2002), Contingent valuation. In: van den Bergh, J.C.J.M (ed). Handbook of environmental and resource economics. Edward Elgar: UK;

777-795.

Bateman, I.J., Carson, R.T., Hanemann, M., Hanley, N., Hett, T., Jones-Lee, M., Loomes, G., Mourato, S., Özdemiroğlu, E., Pearce, D.W., Sugden, R., Swanson, J.: Economic Valuation with Stated Preference Techniques: A Manual. Edward Elgar: Cheltenham. 2002. ISBN: 1-84376-852-6.

Hanley N., Mourato S., Wright E. R.: Choice Modelling Approaches: A Superior Alternative for Environmental Valuation? Journal of Economic Surveys, 15 (3): 435-462.

Louviere, JJ, Flyn, TN, Carson, RT (2010), Discrete Choice Experiments Are Not Conjoint Analysis. Journal of Choice Modelling, 3(3), pp 57-72 Hanley N., Wright E. R., Koop, G. (2002): Modelling Recreation Demand Using Choice Experiments: Climbing in Scotland, Environmental and Resource Economics, 22: 449-466.

Book chapters

Carson, R., Czajkowski, M. (2013), ‘The Discrete Choice Experiment Approach to Environmental Contingent Valuation’. In: Hess, S., Daly, A.

Choice Modelling. The State of the Art and the State of Practice. Edward Elgar. ISBN:1-78100-726-6.

Kristrom, B. (2002), Contingent valuation. In: van den Bergh, J.C.J.M (ed). Handbook of environmental and resource economics. Edward Elgar:

UK; 777-795.

Textbooks

Bateman, I.J., Carson, R.T., Hanemann, M., Hanley, N., Hett, T., Jones-Lee, M., Loomes, G., Mourato, S., Özdemiroğlu, E., Pearce, D.W., Sugden, R., Swanson, J.: Economic Valuation with Stated Preference Techniques: A Manual. Edward Elgar: Cheltenham. 2002. ISBN: 1-84376-852-6.

Freeman, A.M.III.: The Measurement of Environmental and Resource Values: Theory and Methods. Resources for the Future: Washington, DC.

2003. ISBN: 1-89185-362-7.

Garrod, G. Willis, K.G.: Economic Valuation of the Environment. Edward Elgar: Cheltenham. 2000. ISBN: 1-84064-327-5.

Haab, T., McConnell, K. E.: Valuing Environmental and Natural Resources: the econometrics of non-market valuation. Edward Elgar: Cheltenham.

2002. ISBN: 1-84376-388-5.

Markandya, A., Harou, P., Bellù, L.G., Cistulli, V.: Environmental Economics for Sustainable Growth: A Handbook for Practitio ners. Edward Elgar:

Cheltenham. 2002. ISBN: 1-84064-812-0.

Joining stated and revealed preference

Kragt, M. E., Roebeling P. C., Ruijs, A. (2009): Effect of Great Barrier Reef degradation on recreational reef-trip demand: a contingent behaviour approach. The Australian Journal of Agricultural and Resource Economics, 53 (2), pp. 213-229.

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8489.2007.00444.x/pdf

Hynes, S., Cahill, B. (2007): A Combined Stated-Revealed Preference Model of Recreation in Irish Forestry. Rural Economy and Development Programme, Teagasc. Working paper 0710. http://www.agresearch.teagasc.ie/rerc/downloads/workingpapers/07wpre10.pdf

II Regulation, Consumer Behaviour & Impacts of Policies [6] Instruments of Environmental Policy, Abatement Costs

We introduce the concept of emission abatement cost and methods how to estimate the abatement cost.

Policy instruments in Environmental Regulation are classified in four main types: (i) informational (or persuasive), (ii) cooperative, (iii) economic, and (iv) direct regulatory policy instruments. We focus on the direct regulatory instruments and the economic instruments (market-based) that are subdivided into price-based and quantity-based instruments. When one or other should be used? The aim of this lecture is to first classify the instruments and describe main features of each type. Special attention is also paid to flexible instruments, namely EU ETS scheme.

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Then, we discuss pros and cons of each group of instrument; we start with efficiency of instruments (Pigou, Tietenberg principle, Weitzman), potential effectiveness (technology lock-in, R&D deployment, abatement costs vs. tax/permit price), potential to mitigate adverse impacts or involve unnecessary high costs.

Böcher, M. (2012). “A Theoretical Framework for Explaining the Choice of Instruments in Environmental Policy,” Forest Policy and Economics, 16, 14–22

Koch, N. et al. (2014), “Causes of the EU ETS Price Drop: Recession, CDM, Renewable Policies or a Bit of everything?—New Evidence,” Energy Policy, 73, 676–85

[7] Optimal taxation

There are two broad approaches in modeling the interaction between the environment and the economy: linear optimization or partial equilibrium models, and structural macroeconomic models. The later group consists of applied general equilibrium models and macro-econometric models. We present the main features of each type of the model, focusing especially on the later model class.

We introduce theory on optimal taxation focusing on Ramsey and Pigou components of optimal tax and the role of marginal cost of public funds. We also aim at so called environmental tax (or fiscal) reform that policy-makers and analysts have paid attention for last 20 years for. What such a concept is and what are its main features? In this regard, double dividend potential is discussed especially in a revenue-neutral character of the ETR. We define weak and strong double dividend and review theory and empirics on its validity.

Bauman, Y. et al. (2008). “Does Technological Innovation Really Reduce Marginal Abatement Costs? Some Theory, Algebraic Evidence, and Policy Implications,” Environmental and Resource Economics, 40, 507–27

Goulder, L.H. (1995). “Environmental Taxation and the Double Dividend: A Reader’s Guide,” International Tax and Public Finance, 157–83 Oueslati, W. (2014). “Environmental Tax Reform: Short-Term versus Long-Term Macroeconomic Effects,” Journal of Macroeconomics, 40, 190–

201

Fernández, E., et al. (2011), “Optimal Green Tax Reforms Yielding Double Dividend,” Energy Policy, 39 (2011),

[8] Externality: Problem Solution & Quantification, Health Benefits

We begin with definition of the externality making a clear distinction between technological (true say) externality, pecuniary external effect and external relations. After defining the externality we present available methods to quantify environmental externalities (such as top-down approaches, impact pathway and ExternE), specifically the external costs due to airborne pollution. We conclude with valuation methods that an analyst can utilize in order to monetize physical effects and thus derive welfare measures of (not only) environmental changes. We pay special attention here to non-market valuation methods (an interested student is however encouraged to attend a special course just on welfare measurement and on these methods in summer semesters). Is there any optimal level of positive or negative externality? And if so, how this level can be reached? To answer these questions, we utilize economic theory and derive the optimum. We stress whether is there economic rational to intervene market to solve a problem related to pecuniary effects and internal relations. To solve the problem of true externality we explore two fundamental approaches: first based on Pigou optimal tax, the second on Coasian negotiation. We make a distinction between optimisation, compensation, internalisation and regulation of the externality.

Health Impact Valuation and Mortality Risks

QALY/DALY vs WTP approach; Cost-of-illness; Dis-welfare due to mortality and morbidity; Value of premature mortality (mortality risk vs life extension), hedonic wage and stated preferences, Value of statistical life

Verhoef, E. (1994), External Effects And Social Costs of Road Transport. Transportation Research A. Vol. 28A, 4, pp. 273-287

Verhoef, E.T. (2002), Externalities, in: van der Bergh, J.C.J.M. (ed.), Handbook of Environmental and Resource Economics. Edward Elgar, Cheltenham, pp. 197-214.

Viscusi, W. K., Aldy J. E. (2002): The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World. Harvard law School John M. Olin Center for Law, Economics and Business Discussion Paper Series. Paper 392.

http://lsr.nellco.org/cgi/viewcontent.cgi?article=1180&context=harvard_olin

[9] Economics of Climate Change

Costs of Inaction: How much cost climate change? Time preference: Discounting

Climate change and its impacts are the most often discussed and hot environmental issue. We start with a problem description and then jump to economics of climate change. We devote this lecture mostly to costs of carbon: market price of carbon, abatement costs, and social costs of carbon. We focus on the main sources of uncertainties, paying a spatial attention for treatment of intra-generational equity and distributional aspects of climate change impacts.

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Discounting is well-known approach to economists that is used as a rate of impatience that weights future costs and benefits. It can be however also considered as a kind of a rate of altruism towards future generations for long-standing projects. This is especially relevant when we expect damage in very long period such as those related with decommission of nuclear power or climate change impacts. We follow discussion in this field and discuss the problem of zero discounting, discounting with declining rate, or time inconsistency. It is obligatory required active participation of student on this lecture (by reading and summarizing one of the papers, and discussing the issues at the lecture).

Tol, R. S. J., 2009. The economic effects of climate Change," Journal of Economic Perspectives, American Economic Association, 23 (2), 29-51.

OECD (2008), Costs of Inaction on Key Environmental Challenges. OECD, Paris.

Other recommended readings on discounting:

Heal, G. (2005), Intertemporal Welfare Economics and the Environment. In: Mäler K G and Vincent J R (ed), Handbook of Environmental Economics, 3, Elsevier B.V., 1105-1145.

Heal G (2009), The economics of climate change: a post-stern perspective. Climatic Change (2009) 96:275–297.

Weitzman, ML (2001),Gamma Discounting, American Economic Review, March 2001, pp. 260-271.

Sterner, T., Persson, M. (2007), An Even Sterner Review: Introducing Relative Prices into the Discounting Debate, Discussion Paper, Resource For the Future, RFF DP 07-37; also presented at the 17th EAERE Conference, Gothenburg, June 2008.

Gollier, C. (2003). Maximising the expected net future value as an alternative strategy to gamma discounting. [Online] Available at:

http://idei.fr/doc/wp/2003/go_dt1_0903.pdf

Hepburn, C. & Groom, B. (2007). Gamma Discounting and the Expected Net Future Value. Journal of Environmental Economics and Management.

Vol 53. pp. 99-109

[10] Environmental-significant behaviour and savings

Consumer demand modelling (AIDS, LES); curtailment vs. energy efficient stock; rebound effect;

We will also discuss so called rebound effect. Rebound effect has been a very important and highly debated topic among environmental economists, policy-makers, environmental protectionists and energy experts over the last 30 years or so.

Originating in the area of energy-efficiency, the notion of rebound effect is used to denote a puzzling fact that actual energy- savings achieved through increased energy-efficiency are almost always smaller than what would engineering predictions suggest because people's consumption of energies changes once the energy efficiency is introduced. This raises many important questions such as: can we really save energy by introducing energy-saving technologies?; how much energy we can actually save that way?; and what can we do to prevent rebound effect?

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Behaviour models and acceptability of policies (Iva Zvěřinová)

The objective of the presentation is to give an overview of factors influencing environmentally significant behavior, including consumer behavior. While some theoretical models of behavior focus on internal factors influencing behavior, such as attitudes, habits and emotions, other models deal with external factors like fiscal and regulatory incentives, institutional constraints and contextual forces. The main questions are whether and how can social psychological approaches enrich economic approaches, which mostly do not seek to explain motivations underlying individual preferences.

I. Environmental psychology and sociology

II. Microeconomic theory and social-psychological theories – brief comparison

III. Attitudes and behaviour (Does Change of Attitudes towards the Environment lead to Change of Behaviour?) IV. Factors influencing environmentally significant behaviour

[12] Environmental Impacts: Input-output modelling (Jan Weinzettell)

Input-output analysis (IOA) is a macroeconomic tool, which is based on tracking flows of products among economic sectors. It groups products and activities of the entire economy into a manageable number of product groups and economic sectors. These groups are treated as being homogeneous, and the differences between products within one group are neglected. This simplification enables to cover all economic activities and products. Input-output analysis is widely used for allocating environmental interventions of production to final consumers, as it assures equity between the total environmental interventions of economic sectors and those attributed to final consumption (no interventions are lost because of the cut-off criteria, as it happens for process based analysis and double counting is avoided as well through a consistent approach).

Recently, IOA has been widely applied in a consumer responsibility framework and in an analysis of the displacement of environmental interventions through international trade.

Outline:

1. Introduction (computational framework of LCA, based on IOA) 2. Supply and use tables

3. Symmetric input output table

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4. Input coefficients (technology) matrix 5. Leontief inverse matrix

6. Simple price effect modelling 7. Environmental extension

8. Contribution analysis, structural path analysis 9. National environmental footprints

Eurostat, 2008. Eurostat Manual of Supply, Use and Input-Output Tables. European Communities, Luxembourg.

Hertwich, E.G., 2005. Life cycle approaches to sustainable consumption: A critical review. Environmental Science & Technology 39, 4673-4684.

Lenzen, M., Moran, D., Kanemoto, K., Foran, B., Lobefaro, L., Geschke, A., 2012. International trade drives biodiversity threats in developing nations. Nature 486, 109-112.

Peters, G.P., Minx, J.C., Weber, C.L., Edenhofer, O., 2011. Growth in emission transfers via international trade from 1990 to 2008. Proc. Natl.

Acad. Sci. U. S. A. 108, 8903-8908.

[13] Environmental Justice & Measuring Inequalities (Martin Kryl)

The lecture will introduce the concept of environmental justice focusing mainly on the distribution of environmental goods and bads. Out of many conceptual and methodological approaches, we will focus on the domain of inequality indicators (amongst others the well known Gini, Theil, Herfindahl, etc.), their suitability for the analysis of environmental inequalities and also on recent efforts aiming to develop inequality indicators for ordinal data. The application of the methods will be demonstrated on a distribution analysis in selected Czech cities.

Cowell, F. A. (2000). Measuring inequality (3rd ed.). Oxford University Press. Pages 60- 84 as marked in the book, on the basic properties of inequality measures); http://darp.lse.ac.uk/papersdb/Cowell_Measuringinequality3.pdf

Cowell, F. A. (2000). Measuring inequality (3rd ed.). Oxford University Press. http://darp.lse.ac.uk/papersdb/Cowell_Measuringinequality3.pdf Bryant, B. (2003). History and Issues of the Envoronmental Justice Movement. Our Backyard (pp. 3-24). Rowman & Littlefield.

Laurent, Eloi. (2010). Environmental justice and environmental inequalities: A European perspective. OFCE/Sciences Po.

Naga, A., Han, R., & Yalcin, T. (2010). Median Independent Inequality Orderings. Discussion paper.

Stiglitz, J. E., Sen, A., & Fitoussi, J.-P. (2009). Report by the Commission on the Measurement of Economic Performance and Social Progress.