Category Archives: Ecological Economics

Hurricanes, Risk Models, and Insurance

Roger Pielke Jr has an interesting post Are We Seeing the End of Hurricane Insurability? on the Prometheus weblog. The insurance industry uses models of expected losses to set rates for catastrophic losses – from things such as huricanes. However, the models that are properitarity and not open to public evaluation. Now consumer groups are attacking the providers of “catastrophe models” arguing that these models main purpose is to justify increases in insurance rates.

In the past consumer groups have argued:

Consumers were told that, after the big price increases in the wake of Hurricane Andrew, they would see price stability. This was because the projections were not based on short-term weather history, as they had been in the past, but on very long-term data from 10,000 to 100,000 years of projected experience. The rate requests at the time were based upon the average of these long-range projections. Decades with no hurricane activity were assessed in the projections as were decades of severe hurricane activity, as most weather experts agree we are experiencing now. Small storms predominated, but there were projections of huge, category 5 hurricanes hitting Miami or New York as well, causing hundreds of billions of dollars in damage. Consumers were assured that, although hurricane activity was cyclical, they would not see significant price decreases during periods of little or no hurricane activity, nor price increases during periods of frequent activity. That promise has now been broken.

While the catastrophe modelling firms argue:

Given a constant climatological state (or if annual variations from that state are short lived and unpredictable) the activity rate in a catastrophe model can best be represented as the average of long-term history. In this situation there is no need to characterize the period over which the activity is considered to apply because, with current knowledge, it is expected that rate will continue indefinitely. The assumption that activity remains consistent breaks down, however, where there are either multi-year fluctuations in activity or persistent trends. It then becomes necessary to characterize the time period over which the activity in the Cat model is intended to apply.

Pielke argues that the disaster modellers are implying

…that the historical climatology of hurricane activity is no longer a valid basis for estimating future risks. This means that the catastrophe models that they provide are untethered from experience. Imagine if you are playing a game of poker, and the dealer tells you that the composition of the deck has been completely changed – now you don’t know whether there are 4 aces in the deck or 20. It would make gambling based on probabilities a pretty dodgy exercise. If RMS [Risk Management Solutions – a catastrophe modelling company] is correct, then it has planted the seed that has potential to completely transform its business and the modern insurance and reinsurance industries.

What happens if history is no longer a guide to the future? One answer is that you set your expectations about the future based on factors other than experience. One such approach is to ask the relevant experts what they expect. This is what RMS did last fall, convening Kerry Emanuel, Tom Knutson, Jim Elsner, and Mark Saunders in order to conduct an “expert elicitation”.

… RMS conducted its elicitation October, 2005 with the intent that it will shape its risk estimates for the next 5 years. This is wholly unrealistic in such a fast moving area of science. It is unlikely that the perspectives elicited from these 4 scientists will characterize the views of the relevant community (or even their own views!) over the next five years as further research is published and hurricane seasons unfold. Because RMS has changed from a historical approach to defining risk, which changes very, very slowly, if at all over time, to an expert-focused approach, it should fully expect to see very large changes in expert views as science evolves. This is a recipe for price instability, exactly the opposite from what the consumer groups, and insurance commissioners, want.

From the perspective of the basic functioning of the insurance and reinsurance industries, the change in approach by RMS is an admission that the future is far more uncertain than has been the norm for this community. Such uncertainty may call into question the very basis of hurricane insurance and reinsurance which lies in an ability to quantify and anticipate risks. If the industry can’t anticipate risks, or simply come to a consensus on how to calculate risks (even if inaccurate), then this removes one of the key characteristics of successful insurance. Debate on this issue has only just begun.

Hedging ones bets with insurance is a good strategy to deal with risk – where known outcomes are expected to occur with some known probability. However, when confronting more uncertain situations other approaches such as building resilience to potential classes of shock, engaging in experimental management to decrease uncertainty, and accelerating learning by integrating sources of knowledge across a wider variety of domains (e.g. meterology, ecology, and urban planning) and different regions (e.g. Sri Lanka, the Netherlands, and New Orleans).

ATEAM: Modelling ecosystem services

Worldchanging guest writers David Zaks and Chad Monfreda, from Center for Sustainability and the Global Environment at the U of Wisconsin, have a post ATEAM: Mr.T takes on ecosystems services on a project to model ecosystem services in Europe.

The ATEAM (Advanced Terrestrial Ecosystem Analysis and Modeling) project (also here and here) is not made up of rogue soldiers of fortune, but academics in Europe. The scientific assessment correlates changes in human well-being with future changes in climate and land-use. Researchers combined global climate models and land-use scenarios using innovative interdisciplinary methods to show how ecosystem goods and services are likely to change through the 21st century in Europe. ATEAM paints a mixed picture of the continent divided into a vulnerable south and adaptive north. The results are freely available online as a downloadable (PC only) mapping tool that displays the vulnerability of six key sectors: agriculture, forestry, carbon storage and energy, water and biodiversity.Stakeholder input helped to quantify regional adaptive capacity, while climate and land-use models estimated potential impacts. Adaptive capacity and potential impacts together define the overall vulnerability of individual ecosystem services. Even when ‘potential impacts’ are fixed, differential vulnerability across Europe indicates an opportunity to boost ‘adaptive capacity’. Emphasis on adaptation certainly doesn’t condone inaction on climate change and environmental degradation. Rather it stresses resilience in a world that must prepare for surprise threats that are increasingly the norm.

ATEAM is a wonderful example of sustainability science that lets people imagine the possible futures being shaped through decisions taken today. Integrated assessments like ATEAM and the MA (also here) have a huge potential to create a sustainable biosphere by offering solutions that are at once technical and social. Combined with many ideas that WC readers are already familiar with—planetary extension of real-time monitoring networks, open source scenario building, and pervasive citizen participation—the next generation of assessments could help tip the meaning of ‘global change’ from gloomy to bright green.

Greening of Cost-Benefit Analysis

The use of economic discounting for environmental decision analysis is often criticized. Discounting refers to the method of weighing present versus future benefits. Customarily, discounting has been calculated at a constant exponential rate, analogous to the interest rate on a loan. This can lead to absurd results. For example, living resources that grow more slowly than the discount rate (such as redwoods and whales) should be harvested to extinction, according to cost-benefit analyses using constant exponential discounting. Such outcomes have led some scientists and environmentalists to reject cost-benefit analysis for environmental decisions.

However, recent research shows that constant economic discounting is not supported by data for decisions with long time horizons. Proper approaches to discounting yield much greener decisions . Diverse economic models show that future interest rates are highly uncertain. Therefore environmental cost-benefit analyses must consider outcomes over a plausible range of models for future discount rates. When outcomes are averaged, models with relatively severe discounting (such as the constant exponential model) have negligible impact after a long period of time has elapsed. Instead, models that lightly discount the future have greatest impact on decisions. Thus optimal decisions are far greener than previously thought.

The greening effect is especially notable for decisions that involve environmental tipping points, such as species extinctions, freshwater quality, and climate change. Proper economic discounting leads to conservation-friendly decisions in these cases.

Constant exponential discounting has been a powerful obstacle to adaptive ecosystem management, because it downgrades the present value of future information. However, when discounting is done properly then learning has greater weight in decisions, favoring adaptive ecosystem management.

The Millennium Ecosystem Assessment has shown that properly computed cost-benefit analyses would often lead to conservation (rather than conversion) of ecosystems, even using constant exponential discounting. Proper discounting would favor conservation in an even wider variety of cases.

Wetland Mitigation Banking Shortchanges Urban Areas

In a study highlighted in the National Wetlands Newsletter, J.B. Ruhl and James Salzman show that wetland mitigation banking redistributes wetlands from urban areas to rural ones, leaving urban residents with less access to important ecological services provided by wetlands, such as water filtration, erosion protection, and flood control.

Ruhl, J.B. and Salzman, James E., “The Effects of Wetland Mitigation Banking on People” (January 2006). FSU College of Law, Public Law Research Paper No. 179 Available at SSRN).

Wetland mitigation banking is used to ensure no net loss of wetland area under Section 404 of the Clean Water Act. Basically, mitigation banking allows developers who damage or destroy wetlands to buy off-site wetlands as compensation. Many studies have examined whether the new wetlands adequately replace wetland values and functions, but few have examined the social impacts of wetland mitigation banking.

Ruhl and Salzman studied 24 wetland mitigation banks in Florida (accounting for 95% of bank activity, and representing over 900 development projects). They show that in 19 of 24 banks, wetlands “migrated” from urban to rural areas.

“The whole point of wetland mitigation banking – what makes its economic incentives work – is that developers get to wipe out wetland patches in the higher priced land markets and bankers get to establish wetlands banks in the less pricey land markets,” Ruhl said. “It’s not surprising then that development projects using wetland mitigation banking often are located in urban areas and the banks they use are located in rural areas.”

The populations of winners and losers in wetland mitigation banking are quite different, as you might expect. The banks (where wetlands are restored) are, on average 10 miles from the projects (where wetlands are damanged). The average income was nearly $12,000 lower in projects compared to banks, and the average minority population was 13% higher projects.

The researchers suggest that further examination of wetlands mitigation banking is needed. ” … wetland mitigation banking has been touted as a “win-win” program, but unless someone keeps score we really can’t know whether it truly fits that billing.” For now, it seems that not actively including the value of ecosystem services means inadequately assessing the true costs and benefits of the program.

Ruhl is the Matthew and Hawkins Professor of Property at the FSU College of Law, and Salzman is a professor at the Duke University School of Law and the Nicholas School of the Environment.

Evaluation of ecosystem services provided by multifunctional agriculture in the USA

George Boody and colleagues used a scenario-development exercise to discover that some types of changes in agricultural management can lead to economic benefits as well as improvements in the delivery of multiple ecosystem services.(Boody et al. 2005. Multifunctional agrcitulture in the United States. BioScience 55: 27 – 38.)

The team of 17 members (including farmers, government agency workers, and acadmics from several disciplines) worked with stakeholders in 2 southern Minnesota (USA) watersheds to develop 4 scenarios evaluating the future of agricultural management in the area.

These two watersheds face many of the same issues found in other agricultural regions of the United States: there are fewer farms now than in past decades; farms are growing in size as farmers buy out their neighbors; more land is leased; the diversity of crops is declining; and more land is managed by large companies working on non-contiguous areas, necessitating transport of manure and other items around the region.

The 4 scenarios they developed were (click for maps of landcover in one of the watersheds):

A) continuation of current trends
B) Implementation of BMPs (best management practices)
C) Maximizing diversity and profitability
D) Increased vegetative cover

The team estimated changes in fish populations in each watershed’s streams, greenhouse gas emissions from agriculture, and carbon sequestration in each watershed under the conditions of each scenario. In one watershed, Scenarios B, C, and D all reduced N loading to the Mississippi River by at least 30% (a goal set by the Mississippi River/Gulf of Mexico Nutrient Task Force). In the other watershed, simply implementing BMPs (Scenario B)was not enough to reach this reduction goal.

In addition, the team estimated the short-term economic effects of each of the 4 scenarios, including net farm income, farm production costs, and commodity and CRP payments. Net farm income was greatest in Scenario C or D, depending on the watershed, despite declines in CRP and commodity payments in those scenarios. The authors also estimated externality cost savings due to reduced sedimentation and flooding.

In their conclusions, the authors state (p. 35):

Our analysis indicates that diversifying agriculture on actively
farmed land could provide environmental, social, and
economic benefits.Citizens would be willing to pay for these
benefits.

They also point out the importance of social capital and changes in agricultural policy to the ability to achieve the transitions required to enter Scenario B, C, or D.

More detail about this project can be found in the report here, and more information on other projects related to stewardship of farmland, sustainable agriculture and sustainable communities can be found at the web site of the Land Stewardship Project.

Ecosystem Tradeoffs and Synergisms in Agriculture

How can we feed ourselves without degrading other ecosystem services? This critical question has often been couched as a debate between maximizing production through high input/high efficiency agricultural systems versus minimizing impact by practicing less intensive but more extensive farming. (See Balmford et al. 2005 “Sparing land for nature: exploring the potential impact of changes in agricultural yield on the area needed for crop production” in Global Change Biology 11:1594-1605. or RE Green et al. “Farming and the fate of wild nature” in Science 28:550-555.)

However, a new paper by Pretty and colleagues in Environmental Science and Technology indicates that this debate may miss important opportunities for achieving win-win solution in developing countries. (J.N. Pretty, A.D. Noble, D. Bossio, J. Dixon, R.E. Hine, F.W.T. Penning De Vries, and J.I.L. Morrison. 2006. Resource-conserving agriculture increases yields in developing countries.)

Focusing on the use of seven different resource-conserving technologies (integrated pest management, integrated nutrient management, conservation tillage, agroforestry, aquaculture, water harvesting, and livestock integration) in developing countries, Pretty et al found that farmers could both improve their sustainability and increase production. The mean relative increase in crop yield was 79% across a wide variety of crop types and farming systems. In only 3 cases did yields decrease as a result of implementing sustainable farming practices, all in rice farming systems.

Approaches that allow increases in multiple ecosystem services provided by farmland – increased food production as well as improved environmental services, for example – solves a critical problem for farmers as well as the world at large.

Poor farmers need low-cost and readily available technologies and practices to increase local food production and raise their income. At the same time, land and water degradation is increasingly posing a threat to food security and the livelihoods of rural people who often live on degradation-prone lands.

The authors think that 3 types of technical improvement were key players in the increased food production:

more efficient water use …; improvements in organic matter accumulation in soils and carbon sequestration; and pest, weed, and disease control emphasizing in-field biodiversity and reduced pesticide … use.

It would be interesting to find out if “green” farming practices would have similar impacts on production in developed countries, too.

What Drives Humanity’s Footprint on the Earth?

I recently read a good paper by Richard York, Eugene A Rosa & Thomas Dietz 2003 Footprints on the Earth: The environmental consequences of modernity. American Sociological Review 68(2) 279-300.

The paper uses the statistical analysis of several competing models of what shapes human impact on the earth. The test models of ecological modernization (that democratic capitalist development is developing solutions to environmental problems – i.e. the environmental kuznets curve), political economic (the neo-Marxian treadmill of production), and ecological models (Impact=Population X Affluence X Technology). They found that population and economy size are the best predictors – by far – of a country’s ecological footprint. There is no evidence of ecological modernization, and a little support for political economic models, such as urbanization increases ecological footprint.

They note

Basic material conditions, such as population, economic production, urbanization, and geographical factors, all contribute to environmental impacts and explain the vast majority of cross-national variation in impacts. Factors derived from neo-liberal modernization theory, such as political freedom, civil liberties, and state environmentalism have no effect on impacts.

and conclude

The sobering note from this analysis is our failure to detect the ameliorating processes postulated by neoclassical economics and ecological modernization theorists. This suggess we cannot be sanguine about ecological sustainability via emergent institutional change.

A key consquence is that because of high levels of consumption in affluent nations, even a slow rate of population growth in these nations is at least as great a threat to the environment as is rapid rate of population growth in less developed nations. After all, the footprint of the typical American is nearly 25 times greater than that of the typical Bangladeshi.

ISI selected Footprints on the Earth as a fast breaking paper in Sociology last year.

A bibliography of their related research is avaiable in the STIRPAT Bibliography.

Global energy metabolism of humanity

Helmut Haberl from the Institute of Social Ecology, at Klagenfurt University in Vienna, who does interesting work on human appropriation of ecological production, has a paper The global socioeconomic energetic metabolism as a sustainability problem in a special issue of Energy 31 (2006) 87–99. In the paper, Haberl some interesting figures that estimate total human energy use over the last 1,000,000 years and since the widespread use of fossil fuel.

Haberl writes:

conventional energy balances and statistics only account for energy carriers used in technical energy conversions as, for example, combustion in furnaces, steam engines or internal combustion engines, production and use of electricity or district heat, etc. That is, energy statistics neglect, among others, biomass used as a raw material as well as all sorts of human or animal nutrition. These are very important energy conversions in hunter-gatherer and agricultural societies, but are still significant even in industrial society.

social ecological energy use over last 1Myears

Global socioeconomic energy metabolism in the last 1 Million years. The increase in socioeconomic energy flows encompasses six orders of magnitude, from 0.001 Exajoule per year (EJ/yr) about 1 million years ago to nearly 1,000 EJ/yr today.

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Asia’s coastal restoration

SciDev.net has on article –The right way to rebuild Asia’s coastal barrier – on plans by tsunami impacted countries to restore coastal ecosystems. It discusses how plans need to consider the economic values of the ecosystem services produced by mangroves as well as the need to design ecologically appropriate mangrove governance strategies.

Now, governments in India, Indonesia, Malaysia, Sri Lanka and Thailand all want to restore what nature once provided for free: they plan to spend millions of dollars replanting thousands of hectares of mangrove forest.

Scientists applaud the ‘greening’ agenda but warn that to succeed, replanting strategies must include workforce training and supervision, maintenance of seedlings, and increased public awareness about coastal land use. Some economists add that we need a better understanding of the relationship between these endangered ecosystems and the communities that rely on them.

“Reforestation is unlikely to succeed in the long term because the underlying policies haven’t changed,” says Edward Barbier, an environmental economist at the University of Wyoming, United States, who has done extensive research on Thailand’s mangroves. Barbier is not surprised that Thailand suffered such extreme damage; since 1961, more than half its mangroves have been removed.

Replanting is critical to restoring ecosystems, he says, but trees alone cannot create the long-term stability needed for sustainable economic growth.

Mangroves tend to be undervalued in economic calculations, which only include the benefits of developing them (such as woodchips or farmed shrimp). This makes it easy for governments to gamble on ‘developing’ the forests. The tsunami clearly raised the stakes — and strengthened the case for protection that ecologists and economists have been making for years.

Previous posts on the tsunami and coastal resilience are: Coral Reefs & Tsunami, Building resilience to deal with disasters, and After the Tsunami.