Posts in Policy

What California Can Learn About Drought from the Land Down Under
Alison Grant
Thu, 07/16/2015

USGS image by David Pratt.

As California’s drought enters its fourth year, more than 70 percent of the state is under extreme drought conditions. Just this week, the California Water Commission announced new lawn restrictions for development projects, limiting grass to 25 percent of the landscape. But such efforts amount to merely a drop in what is already a very dry bucket.

Like California, Australia recently experienced a prolonged period of drought. In response, Australia implemented several reforms to promote water markets that allowed water trading to occur across competing uses. But did it work? And if so, could California and other western states do something similar?

Jeff Bennett is an economist at Australian National University and a 2015 PERC Lone Mountain Fellow. He is also the author of the recent report from the Reason Foundation, How to Solve California’s Water Crisis: Lessons from Australia’s Water Reforms, examining Australia’s experience with water markets.

To learn more, we asked Jeff about water market reforms in the “Land Down Under” and what lessons we can learn to address California’s drought.

Q: With California and much of the western United States reeling from drought, some have pointed to Australia as a model for how to deal with water scarcity. What exactly has Australia done?

A: Australia’s water reforms have centered on the Murray Darling Basin, an area of more than 400,000 square miles in the southeast of the continent. Water in the Basin is used for irrigation and domestic use, but it also supports a wide range of wetland, river, and floodplain ecosystems.

Prior to the 1990s, water uses were heavily regulated by government agencies. The result was an over allocation of water for irrigation as politicians sought political favor from the farm sector and an inflexibility in the ways that water was used. Now, property rights to water have been clearly defined and an active market has emerged in which irrigators trade water rights.

The price of water is determined by the interaction of supply and demand. During a drought, as water becomes increasingly scarce, the price of water increases. In response, irrigators ration their use and invest more in water saving technologies. As the price rises to reflect increasing scarcity, less valuable uses of water are given up. For example, irrigated annual crops are not planted, and only the most valuable uses of water are continued. The process ensures that water is used as efficiently as possible.

At the same time, the over-allocation issue was addressed by establishing and funding an agency to buy back water rights from irrigators. That water is now used to provide “environmental flows” that sustain river ecosystems.

Q: Why did Australia move toward this market allocation of water?

A: The over allocation of the waters of the Murray Darling Basin to irrigation became apparent in the 1980s and 1990s. The lack of water began to cause the loss of wetland areas and forests of River Red Gums along the rivers. Increasing levels of soil salinity caused by excessive irrigation were also of concern. Hence, both farming and environmental groups began voicing their concerns about the management of the water resource.

However, it was the “Millennium Drought” of the 1990s and 2000s that brought the situation to a head. The unprecedented conditions brought about by the drought, on top of the stress already caused by over allocation, triggered widespread recognition that urgent action was required to ensure the survival of both the environment of the Basin and its farming communities.

Q: What have been the results of Australia’s reforms? Has it worked?

A: The market for water rights provides remarkable flexibility in the management of water for irrigated agriculture. It allows farmers to cope more effectively with both seasonal and annual variability in water availability.

The structure of irrigated agriculture is evolving in response to the reforms. Lower-valued uses of water such as irrigated pastures and grains have given way to higher-valued crops such as wine grapes and almonds.

So while the overall amount of water used in irrigated agriculture has declined as a result of the reforms, the value of production has remained relatively stable. In this regard, the reforms worked. The environment of the Basin has begun a ”repair” phase, and the early evidence suggests that wetlands and floodplain ecosystems have recovered—although this is harder to judge given that the reforms have so far been implemented across a sequence of relatively wet years.

Q: What were the responses to Australia’s reforms?

A: The crisis situation brought about by the Millennium Drought created a political context in which change was feasible. However, there were winners and losers from the reform process. Farmers who were freed to either buy or sell water did so because they were made better off by their actions. Buyers have built their enterprises to become more flexible and more profitable despite the higher prices of water. Sellers have either left the agricultural sector, downsized their irrigation operations, become more efficient in their use of water, or converted to dryland farming.

Many Australian farmers required that the reform package be “sweetened” by subsidizing some water conservation investments to ensure that production levels could be maintained. However, these sweeteners were not enough to placate some interest groups in the Basin. Protests against reform were mounted in towns across the Basin, citing concerns that some communities would be threatened by reduced irrigation activity on the surrounding farmlands.

It is true that population has declined in some towns. But these losses have not deviated from long-term trends of depopulation in small communities. Some regions have actually grown with the relocation of water rights and the consolidation of rural populations into larger towns.

Those concerned with the condition of the Basin’s environment have been overwhelmingly supportive of the reforms but continue to advocate for more government spending on the purchase of water rights from irrigators for environmental flows.

Q: What about Australia’s cities? How have they dealt with drought?

A: The water reforms implemented in the Murray Darling Basin have not been mirrored in the allocation of water in Australia’s major urban centers. Faced with supply shortages during the Millennium Drought, water supply authorities in cities such as Sydney and Melbourne resorted to use restrictions and supply supplementation investments.

Restrictions included time-of-day as well as use-type rationing. For example, watering of gardens using fixed hoses was initially restricted to night-time hours and then banned altogether. Major investments were made in desalination plants, and households were subsidized to install rainwater tanks and water-saving plumbing.

With the Millennium Drought now over and water supplies up again, these desalination plants are now unproductive, yet they still place tremendous financial burdens on their cities’ residents because of the need to run them in maintenance mode to preserve their reverse osmosis filters.

The costs of these investments have now been shown to far exceed the benefits they produced. Their impacts could have been achieved at far lower cost through the effective use of price as a means of rationing available supplies among competing uses.

Q: In terms of urban water use, what could be done to promote exchange between higher-value users and lower-value users?

A: The advantages of water trading in the Murray Darling Basin were not experienced by the people of Sydney, Melbourne, and other major urban centers.

People with high values from water use such as gardeners with prize-winning roses were treated just the same as those whose water use was inconsequential. Price was not allowed to act as a signal of water scarcity, and people were not able to react to that signal as they saw fit. Instead, bureaucratic processes dictated what could and couldn’t be done. Rose gardeners, therefore, had to carry buckets of water to their beloved plants, contributing to the emergence of a condition that became known amongst chiropractors as “bucket back.”

This situation could be addressed by allowing urban residents to react to changes in water prices. If the price of water was determined by the level of water in storage, those with high-valued uses of water could simply decide to pay the price while water savings would come from those with low values for water.

Reform would free up trade in water between urban and agricultural users. Given that the value for potable water in urban areas is generally higher than that generated by irrigated cropping, there are potential gains from trade between urban and rural users.

Q: Is Australia’s experience a model for California and other western states dealing with drought?

A: In Australia’s experience, water trading has proven to be a highly effective mechanism for dealing with drought. California and other western states would do well by taking on board the experience “Down Under” as a guide to what could be achieved and how.

The removal of bureaucratic allocation processes and the establishment of water markets in both irrigation and urban contexts would ensure the flexibility needed in drought conditions. Safeguarding the environment through the purchase of water rights from irrigators is also key strategy. It also ensures that irrigators are compensated for the loss of their rights to water.

However, even these environmental allocations should not be removed from the water market. Ongoing trades between consumptive water users and those responsible for environmental flows can be advantageous for all parties.

To read more, see Jeff Bennett’s report “How to Solve California’s Water Crisis: Lessons from Australia’s Water Reforms” at the Reason Foundation.

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Are national parks more popular than ever?
Shawn Regan
Fri, 02/20/2015

Last year, America’s national parks received more visits than ever before, according to new data released by the National Park Service. A record-setting 292.8 million people visited national parks in 2014, breaking the earlier park attendance record set back in 1987.

But a lot has changed since 1987. Population has increased considerably, and so have the number of parks. So how do the new visitation numbers compare once we consider these other factors?

The chart above shows national park visitation as a share of the overall U.S. population. Since 1987, U.S. population has increased by approximately 75 million people. Measured on a per capita basis, national park visitation is about 20 percent less than it was in 1987. As a share of the population, park visitation has gradually declined almost ever since.

This decline is even more pronounced once we consider the growth of the National Park System. Since 1980, more than 70 national park units have been added to the National Park System. Yet these additional parks do not seem to be attracting more overall visits per capita.

As the National Park Service prepares to celebrate its centennial in 2016, there is much emphasis being placed on its ability to attract people to parks – especially millennials. Park visitors can play an important role in funding parks in their next century and helping to address the agency’s $12 billion maintenance backlog. But these data suggest that the National Park Service still has much work to do.

Meanwhile, this week President Obama announced the creation of three new national park units using his executive authority under the Antiquities Act.

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'Thinning the blood' of the national park system
Shawn Regan
Mon, 12/29/2014


Dream Lake at Rocky Mountain National Park, Colorado

Would you pay more to visit your favorite national park? The National Park Service hopes so. The agency is proposing to increase entrance fees at many national parks across the country in an attempt to raise more revenue from visitors to help cover the cost of park operations and maintenance.

The proposal comes at a time when Congress just authorized the largest expansion of the national park system in nearly three decades — but with no plan for how to fund it.

The defense authorization bill, recently signed by President Obama, creates seven new national parks and expands nine existing parks, adding roughly 120,000 acres to the park system. The legislation, however, provides no additional funding for the expansion, which includes Tule Springs Fossil Beds National Monument in Nevada, the Coltsville National Historic Park in Connecticut and the Harriet Tubman National Historic Park in New York.

Meanwhile, the National Park Service faces a $12 billion backlog in deferred maintenance projects…

Read the remainder of the post on The Hill's Contributors blog.

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Better Bred than Dead
Michael `t Sas-Rolfes
Mon, 11/03/2014
Sable Antelope, one of South Africa's conservation success stories
 
The issue of wildlife breeding raises many interesting questions and concerns. To what extent is breeding intervention a legitimate wildlife conservation tool? Are wildlife breeders interfering with nature and to what extent is this justified? To what extent can we condone modern techniques of genetic manipulation and even potential de-extinction of species using emergent DNA technologies? All these issues revolve around questions of ‘wildness’ and traditional views of conservation, which are increasingly being challenged by the circumstances of the Anthropocene era, in which human activity dominates over nature.
 
Alexander van der Byl may have been South Africa’s first effective wildlife breeder. In 1837, he enclosed an area of around 6,000 acres on his farm ‘Nacht Wacht’ near Bredasdorp to protect a herd of 27 bontebok. Without Mr. van der Byl’s intervention the bontebok would most likely have followed the fate of the blaubok to extinction – the latter species, a smaller relative of the roan and sable antelopes, was exterminated by hunters in the late Eighteenth Century in its natural range in the South-Western Cape.
 
Two other South African examples of species that were reduced to a single population are the Cape mountain zebra and the southern white rhino. In both instances they were initially confined to a single protected area in which their numbers could increase through natural breeding, but subsequent expansions relied on a more strategic approach to establish new genetically viable founder populations in additional areas of suitable natural habitat. Examples include Przewalski’s horse, Père-David’s deer, the American bison, and the Arabian oryx.
 
Whereas wildlife breeding such as van der Byl’s bontebok initiative and white rhino protection in the Hluhluwe-Umfolozi Park may have started as a passive activity, the gradual emergence of new technologies that allowed sedation, translocation and other genetic and veterinary interventions has led to an increasingly sophisticated suite of options.
 
Dr. Mark Stanley Price is the former chair of the IUCN’s Reintroductions Specialist Group and played a key role in returning the Arabian oryx to the wild. A recent thought-provoking article he co-authored with David Mallon in the journal Oryx entitled ‘Fall of the Wild’ argues that most animal populations today are subject to some form of human intervention and that rather than question whether they are ‘wild’ it makes more sense to consider simply whether they are ‘lightly’ or ‘intensively’ managed. According to Yolan Friedmann, CEO of the Endangered Wildlife Trust, many large mammal species in South Africa effectively exist under fairly intensive management, especially those that are rare and endangered.
 
Mallon and Stanley Price point out that the question of wildness is not just of theoretical interest, but has practical implications for international agreements such as CITES and the Convention on Biological Diversity, as well as for meeting objectives under national legislation and monitoring by, for example, the IUCN’s Red List. Citing the example of the Arabian oryx, they note that it has been upgraded from ‘extinct’ in the 1970s to merely ‘vulnerable’ in 2011, but that this has drawn criticism, as most animals now survive in fenced enclosures under active management. They share Friedmann’s observation that most South African wildlife ranching takes place in fenced enclosures and note that regarding these situations as ‘non-wild’ would have massive implications for Red-list assessments – requiring some significant changes to existing records.
 
The spectacular growth of South African game numbers since the 1960s is well documented, including the recovery of threatened species such as white rhino, black wildebeest, roan and sable antelope – largely thanks to the efforts of private breeders. Apart from the issue of enclosure, further concerns to conservationists relate to the use of non-native subspecies (e.g. roan and sable from other parts of Africa) and the introduction of species such as nyala and blesbok to areas outside their historical range.
 
This question is especially relevant in Africa, where projected forecasts of human population and economic growth – coupled with needs of food security – suggest that the pressure on wildlife will only intensify. It is also instructive to look at examples of North African antelope species such as the addax, dama gazelle, and scimitar oryx – the “three amigos”. Researching their historical fate in their home ranges in North Africa, one finds that they were mostly exterminated for food by hungry locals during times of civic unrest. Ex situ commercial breeding for trophy hunting in Texas has provided a hedge against extinction for these species, and provides a possible source for re-introduction.
 
White rhinos are being bred in China and there are proposals to move animals to Australia for breeding and safe-keeping. Does this make more conservation sense than applying further intensive and assisted breeding strategies within South Africa? To what extent can we accept that motivations for breeding are not based solely on pure ‘conservation’ goals, but also the commercial potential of tourism viewing, trophy hunting, and production of commodities such as rhino horn?
 
Opinions on such questions will vary widely between animal welfarists, conservationists and commercial wildlife breeders, but there is no doubt that wildlife breeding will continue to play a vital role in both species conservation and the broader South African land-use economy.
 
Check out the original article on pages 22-26 of the full issue (electronic edition at www.wrsa.co.za) for a pictorial guide to the African wildlife discussed in this article.
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Wilderness as economic stimulus? A closer look at the evidence
Shawn Regan
Mon, 10/06/2014

This is part of a series of posts for The Hill by Shawn Regan, who is a contributor to their blog. The full article is posted in The Hill's Contributors section.

There are many good reasons to love wilderness. The Wilderness Act, which passed 50 years ago this year, describes several of them: outstanding opportunities for solitude, primitive and unconfined recreation experiences, and the preservation of special places "where the earth and its community of life are untrammeled by man."

As a former wilderness ranger, these values resonate with me. More than 100 million acres of land have been designated as "wilderness" since 1964, and in my view they include some of the most spectacular landscapes imaginable.

But as hard-fought wilderness bills languish in Congress, some are claiming there's another reason to love wilderness areas – they're good for local economies.

This economic argument is a central part of wilderness advocacy today. Protecting lands from development, many say, provides a much-needed boost to rural communities. These lands attract workers, entrepreneurs and investors across all sectors while boosting income and employment in surrounding areas.

But what does the research actually say about the economic effects of wilderness designations? I took a close look at the peer-reviewed academic research and found few rigorous studies and little evidence to support the claim that wilderness leads to economic stimulus. As we celebrate the 50th anniversary of the Wilderness Act, consider what the best available research says.

First off, there is disagreement on how natural amenities such as wilderness should affect economic outcomes in theory. On the one hand, wilderness designations limit resource development and could hinder income and employment in extractive industries. On the other hand, wilderness could improve quality of life and attract new businesses, migrants and tourists. Adding to the confusion, there is evidence that workers might accept lower wages, longer periods of unemployment and higher land prices to live in areas rich in natural amenities such as wilderness.

So there's confusion about the theory, but what do existing studies find when they look at the data? In short, not much. The first empirical study, published in 1998, found no evidence that wilderness had an effect on employment or population growth in Western counties during the 1980s. A similar study in 1999 found no effect of wilderness on income, population or employment growth in rural counties in several Western states. Two more studies in 2002 and 2003 were no different: Wilderness had no effect on employment or wage growth.

More recent studies come to similar conclusions. A study in 2006 by Ray Rasker of Headwaters Economics champions the role that public lands play in stimulating income growth in the West, but a closer look reveals that he is unable to demonstrate a statistically significant effect associated with wilderness lands. Another study by Rasker and his colleagues, published in 2013, emphasizes that protected public lands (including wilderness) had a small positive relationship with three measures of income. Less obvious was the fact that seven other economic measures they examined had zero effect.

So what about the popular claim that wilderness drives economic growth? Studies that reach this conclusion are based on simple correlations. None are rigorous enough to suggest that wilderness causes growth. Two studies that are often cited — one by Paul Lorah and Rob Southwick in 2003 and another by Patrick Holmes and Walter Hecox in 2004 — report a positive correlation from wilderness and population, income and employment growth. But once additional factors are controlled for in more detailed studies, these positive relationships disappear.

More research is needed to better understand the effects of wilderness. But a critical look at the existing studies makes this much clear: There is little or no evidence that wilderness bolsters economic growth. When environmentalists invoke economic arguments to support wilderness, they are exaggerating the best-available research and undermining other more compelling wilderness values.

Wilderness advocates shouldn't hang their hats on economic arguments. There are plenty of good reasons to love wilderness areas — but there's just no evidence that economic arguments are one of them.

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Q&A with Frank Wolak on U.S. Coal Exports and Climate Change
Shawn Regan
Wed, 08/27/2014

If there’s one fact to explain our modern energy system, it’s this: America is awash in cheap and plentiful natural gas. Thanks to advancements in hydraulic fracturing and horizontal drilling, natural gas production has risen sharply in the United States, increasing 35 percent since 2005. This boom is causing U.S. utilities to use more natural gas instead of coal to supply the nation’s electricity.

But America’s natural gas revolution is affecting more than the domestic market. It’s also fueling the debate over coal exports. As natural gas displaces coal in the United States, energy companies are looking to export more coal oversees – much of it headed to China and other Asian markets. Doing so requires the approval and construction of several new coal export terminals on the Pacific coast.

Environmental groups, for the most part, have opposed U.S. coal exports over concerns about their effect on climate change. Last week, Oregon officials rejected a permit to construct a terminal that would export 8.8 million tons of coal each year – mostly over local environmental concerns. Several larger terminals, however, still await approval.

How would these additional U.S. coal exports impact climate change? It’s not so simple, says Frank Wolak, a 2014 PERC Lone Mountain Fellow. Wolak is a professor of economics at Stanford University, where he is also the director of the Program on Energy and Sustainable Development. He has published extensively on competition and regulation in energy and environmental markets. We asked Prof. Wolak about coal exports during his research fellowship at PERC this summer. Some of his answers may surprise you.

Q: Over the past several years, U.S. natural gas prices have plummeted, causing electric utilities to shift to using more natural gas-fired generators instead of coal. What has the U.S. natural gas revolution meant for the rest of the world?

A: Because there are no liquefied natural gas (LNG) export facilities currently operating in the United States, this natural gas is trapped in the United States until at least one of the export facilities currently under construction begins operation. As a result, current prices of natural gas in Europe are 2 to 3 times higher than those in the United States, and LNG prices in Asia are 3 to 4 times U.S. prices. However, the shale gas revolution and resulting decline in domestic natural gas prices has led to a significant decline of coal use in the U.S. electricity sector, which has led to a decline in domestic coal prices. These lower coal prices have contributed to increased U.S. coal exports to Europe and Asia.

Q: You have argued that U.S. coal exports to China and other countries will actually reduce greenhouse gas emissions globally. Why is that?

A: I have argued that expanding western U.S. port capacity to allow a significant increase in exports of Powder River Basin coal to Asia will likely lead to reduced global greenhouse gas emissions. This argument relies on the fact that China has virtually no natural gas-fired electricity generation units and a limited amount of nuclear, hydroelectric, and wind generation units. However, China currently obtains more than 80 percent of its electricity from coal-fired generation units. During each of the past ten years, China built more than the installed generation capacity of California—approximately 60 gigawatts—in new coal-fired power plants. These generation facilities have a useful life of more than 30 years, so China’s demand for coal is unlikely to decline in the foreseeable future.

Although there is plenty of coal available in Indonesia, Australia, and South Africa to meet China’s and the rest of Asia’s imported coal needs, increasing western U.S. port capacity can allow a significant amount of Powder River Basin coal to be sold in Asia. The increase in U.S. coal demand caused by these exports will increase domestic coal prices and further increase the relative price of producing electricity from coal relative to natural gas in the United States. Consequently, increased coal exports to Asia will yield no net change in greenhouse gas emissions from China and other Asian countries. Instead, they will yield a reduction in U.S. greenhouse gas emissions because of the shift from coal to natural gas-fired generation brought about by the higher U.S. coal prices caused by the substantially higher coal exports to Asia.

Q: Some say that blocking coal exports would keep U.S. coal reserves underground and therefore reduce global carbon emissions. Is that not the case?

A: The total amount of coal consumed globally is a major driver of global greenhouse gas emissions. Over the past decade, coal has been the world’s fastest growing fossil fuel and virtually all of this growth has occurred in developing countries. There is plenty of coal available outside of the United States to meet this rapidly growing global demand. Blocking U.S. coal exports is therefore unlikely to have a noticeable impact on global coal consumption, only the total employment in the U.S. coal sector and port sector.

Q: Others argue that blocking coal exports will encourage China to look for cleaner energy sources or adopt energy efficiency measures. 

A: China already has the most wind generation capacity of any country in the world and the most energy-efficient fleet of coal-fired generation units in the world, largely because the vast majority of these units have been built in the past ten years. It is unrealistic to expect China to abandon its massive investments in coal-fired generation capacity over the past decade, particularly given that there is plenty of coal available to meet its needs for the foreseeable future.

Q: What prevents China and other countries like Australia and Indonesia from switching to natural gas, as the U.S. has done?

A: Currently, China has no significant domestic natural gas supplies. Australia relies primarily on coal-fired generation units, in spite of having significant natural gas reserves, because it also has extremely inexpensive-to-extract brown and black coal reserves.

Asian countries are willing to pay oil-indexed prices for Australia’s natural gas, so very little is currently used to produce electricity. A similar situation exists in Indonesia, which also exports natural gas and coal. This state of affairs could change as these countries attempt to exploit their shale gas reserves.

The U.S. Energy Information Administration estimates that China has even larger shale gas reserves than the United States. Consequently, China could potentially become a major producer and consumer of natural gas if it is able to exploit these reserves.

Q: If China has such large shale gas reserves, what are the prospects for a future natural gas revolution in China – or anywhere else?

A: How fast China will develop its shale gas reserves is anyone’s guess. There are a number of reasons to believe that it will be a slow process. First, shale gas exploration requires significant volumes of water, which is in short supply in China. Second, the property rights regime in China is not as conducive to landowner support of shale gas exploration as they are in the United States. Finally, the geology of China’s shale gas reserves is significantly different from that in the United States.

However, it’s worth noting that Chinese firms are significant partners in a number of U.S. shale gas plays. In addition, virtually all major U.S. oil and gas firms are currently involved in partnerships to develop China’s shale gas reserves.

Q: Where does renewable energy fit into all of this?

A: Wind and solar generation units produce approximately 5 percent of U.S. electricity consumption. In contrast, coal, natural gas, and nuclear generation units produce more than 80 percent of U.S. electricity consumption. At current U.S. coal and natural gas prices, wind and solar technologies cannot compete with natural gas and coal-fired generation units on a levelized cost basis (lifetime average cost per kilowatt-hour) without government support, and it is unclear whether state and federal governments will continue to provide financial support for renewables at current levels. Consequently, it is reasonable to expect that the U.S. electricity sector will continue to depend primarily on fossil fuel generation units.

Editor's Note: Frank Wolak's answers are based on a forthcoming paper with coauthor Michael Miller.

Related articles from PERC:

Gary Libecap, “Three Cheers for Fracking,” Defining Ideas, March 5, 2014

Daniel Benjamin, “The Fracking Revolution,” PERC Reports, February 7, 2013

Shawn Regan and Fred Thomas, “Coal Export Restrictions Harm Tribe and Montana,” Billings Gazette, November 6, 2013

Terry Anderson and Carson Bruno, “Property Rights Save the Environment,” Defining Ideas, May 20, 2014

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Some Taxes are Good, But the Good Die Young
Bobby McCormick
Mon, 06/30/2014
There is a budding bipartisan proposal to increase the federal highway gas tax. A Republican senator from Tennessee, Bob Corker, and a Democratic senator from Connecticut, Chris Murphy, are co-sponsoring a bill to raise the highway gas tax 6 cents per gallon twice over the next two years, a 12-cent total increase.
 
The current federal highway gas tax is 18.4 cents and has been since 1993 (the tax on diesel fuel is 24.4 cents per gallon). These tax revenues, with very important exceptions, flow into an account called the Highway Trust Fund, created in 1956. Prior to that federal subsidies to states for roads and construction came from general revenues. The original tax was 3 cents per gallon. The figure below shows the historical relationship between the federal highway fuel tax and the average price of gasoline.
 
 
At its outset the tax was approximately 10 percent of the price of gasoline. It is now about half that amount. The question is begged: What happened to this great tax, the tax that only the user paid, the tax where the revenues went directly to impact only those who paid it, the tax where anybody who wanted could legally and easily avoid the tax by simply walking, biking, or flying? It's hard to name a better tax than the original highway motor fuel tax.
 
(As if you needed anymore argument, note also that the tax was not applied to motor fuel users who did not use the roads. Farmers, heavy equipment operators, and anyone else using gas or diesel in an “off-road” application did not have to pay the tax. It’s almost a miracle that such a tax ever got passed and lasted so long whole.)
 
Will the gasoline tax increase pass? Maybe. There is a huge hue and cry for additional infrastructure in our country, and anybody who has recently tried to drive in Los Angeles, Atlanta, or Miami surely knows that there isn’t much room for all the cars and trucks trying, even the hybrids and electric ones. And, indeed some of the highway tax money might actually end up building new roads and bridges, or repairing ailing ones. The fly in the ointment is the some might.
 
In 1990, Republican George H.W. Bush signed a bill ending the direct link between the gas tax and highway improvements. That law allocated 2.5 cents of the new tax (from 9.1 to 14.1 cents) to “deficit reduction.” And the user tax had been converted to general revenues, taken from those with and given to those with need. This movement away from a user fee to lack of accountability advanced soon after when Clinton signed an increase from 14.1 cents to the current 18.4 cents with all of the increase going to a common pool of general revenues. Subsequently, Mr. Clinton signed the so-called Taxpayer Relief Act, which reconverted all of that increase back to highways.
 
The highway gas tax is no longer just a highway gas tax but is now also a general revenue sales tax. Over half of the tax still goes to highways, but the rest is lost in the vortex of the general tax feeding pool for any interest group to seek and any politician to oblige. Having lived two-thirds of a century and watched House of Cards, I am certain that I have no capacity to predict politics, but if this gas tax does not pass, and our highways, bridges, and roads continue their decline to third-world status, you can blame the tragedy on the shift of the highway tax from a user fee to general revenue tax. This commenced 25 (or 30) years ago with a Republican president and augmented soon after by a Democratic one. 
 
To some this is sad. There is no party to blame. Instead, history suggests that the inevitable happened. Something good, transparent, simple and powerful got wooed away. There is nobody to blame. The fault lies with process, our constitution, and the never ending desires of people to have other people pay for their stuff. Who can rationally blame the driving public for fighting an increase in the cost of driving when a big chunk of the revenues might or probably will go who knows where for what purpose or cause? Transparency has been lost and a great tax became a good one became, along the way, just another tax.
 
Economists rarely agree on anything, and in general that is good. Healthy debate is valuable. However, my 40-year exploration in public finance theory and evidence suggests that there is an overpowering consensus that direct user fees, such as the original highway gas tax and PERC supported user fees for national and state parks, coral reefs, and many other public arenas, are the best kind of taxation. First, only the people who use the service pay for it. Second, it is avoidable by simply not using the asset in question. Third, people pay for the use of the asset in direct proportion to their use of it (the more your drive the more you pay), and fourth, the tax is basically free of the huge costs of rent seeking (of course, until it isn’t, see 1990).
 
User fees may not be perfect. There are nuances and issues that a thousand or more economists could explain to you if you can find room on the head of their pin. But in its simplest form, a user fee charges only those who use a public service, and if designed with just a little thought and care, in direct proportion to their use. The revenues cover costs, the taxing is transparent, the payers and users can determine with comparative ease whether they like the tax or want more or less of it. The highway motor fuel tax stood tall for 30 odd years. And, a big chunk of it still has those features.
 
Will we see an increase coming out of the congress any time soon? Will the 18.4 cents rise to 24.4 and then 30.4 cents? Perhaps the forthcoming season of House of Cards will give us the answer.
 
One thing is certain: The bill is far more likely to be popular with motorists if the increase is earmarked and dedicated for highways and bridges instead of general tax receipts or, God forbid, “deficit reduction.” Or maybe, just maybe, states will build their own roads instead of using the monopoly power of the federal government to prevent competition in the financing and building of roads. I do not hold much hope for the latter. The lucre is too sweet.
 
And, oh yeah, by the way, go Tigers.
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Climate Change Goes Back to Court
Jonathan Adler
Tue, 10/15/2013

This morning, the Supreme Court granted certiorari in Utility Air Regulatory Group v. EPA concerning the Environmental Protection Agency’s regulation of greenhouse gases under the Clean Air Act. This is quite significant. Although the grant is limited, it focuses on one of the most important legal questions raised by this litigation, and puts some of the EPA’s regulation of greenhouse gas emissions from stationary sources in play.

Harvard’s Richard Lazarus comments:

The Court’s jurisdictional ruling is significant in terms of both what the Court granted and did not grant. The regulations the Court has agreed to review represent the Obama Administration’s first major rulemaking to address the emissions of greenhouse gases from major stationary sources across the country. At the same time, the Court declined to review EPA’s determination that greenhouse gases from new motor vehicles endanger public health and welfare and therefore has left intact the government’s current regulation of motor vehicles emissions to address climate change.

I largely agree, but would go farther in certain respects.

Here’s some background (see also my prior posts here and here). Various states, industry groups, and activist organizations had filed cert petitions – nine in total – and others filed amicus briefs (including yours truly) urging the Court to take this case. The Court was asked to consider many different questions, but only agreed to consider one of its own devising. Specifically, the Court granted six of the nine petitions and agreed to consider the following question: “Whether EPA permissibly determined that its regulation of greenhouse gas emissions from new motor vehicles triggered permitting requirements under the Clean Air Act for stationary sources that emit greenhouse gases.” In other words, the Court wants to know whether the EPA was required to apply Section 165 and Title V of the Act to greenhouse gases once it regulated GHGs from motor vehicles. If not, the EPA need not have rewritten these portions of the Act to avoid the “absurd results” of applying these provisions to carbon dioxide.

In my view, the grant is welcome, despite the limitations. Many of the questions for which industry sought review, such as whether the EPA properly considered the relevant scientific research or set permissible standards for vehicular emissions under Section 202 of the Clean Air Act, were not cert worthy. The issue embodied in the Court’s reformulated question presented, on the other hand, most definitely is. While I would have liked the Court to reconsider Massachusetts v. EPA, particularly given that decisions adoption of faulty premises about how the Clean Air Act works, such a grant would have been a heavy lift. The Court does not lightly reconsider its own statutory interpretations. This is still a welcome grant. (That’s my view, however, as I suspect Professor Lazarus disagrees.)

So the Court will not reconsider Mass v. EPA in this case, but the question presented will force the Court to confront the consequences the Mass decision. In particular, this case will force the Court to reconsider the assumption made by Justice Stevens in Mass v. EPA that application of the Clean Air Act to GHGs would not produce absurd results. As we’ve since learned, applying the CAA to GHGs does produce such results, particularly if the regulation of GHGs under Section 202 requires regulation of GHGs under the Clean Air Act’s Title V and PSD provisions. These portions of the Act expressly require the EPA (and state permitting authorities) to regulate more facilities than it could ever hope to have the resources to regulate. The EPA has used this fact to justify rewriting the Act in its regulations, and so the Court’s grant presents the opportunity to question whether the EPA should have at least considered an alternative construction of the Act. In other words, the Court now has the opportunity to force the EPA (and the D.C. Circuit) to adopt an interpretation of the CAA that vindicates the Court’s interpretation in Mass v. EPA by avoiding the absurd results EPA’s approach has generated. We’ll see whether the Court actually takes that opportunity.

A final note. The D.C. Circuit rested portions of its decision below on the conclusion that industry petitioners lacked standing to pursue certain claims against the Timing and Tailoring rules limiting the application of Title V and the PSD provisions to stationary sources. It will be interesting to see whether the standing question is handled in the merits briefing. Stay tuned.

UPDATE: Here are additional perspectives from UCLA’s Ann Carlson at LegalPlanet and RFF’s Nathan Richardson.

Cross-posted from the Volokh Conspiracy.

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Conservatives and Environmental Regulation
Jonathan Adler
Thu, 10/03/2013

There is fairly broad opposition to centralized environmental regulation within the Republican Party today.  Conservative activists in particular focus their ire on the Environmental Protection Agency and federal efforts to maintain or enhance environmental quality.  It was not always so.  The American conservation movement has roots on the right side of the political spectrum and much of today’s environmental architecture was erected under Republican leadership.  President Nixon signed the National Environmental Policy Act and created the Environmental Protection Agency while President Bush (41) supported and signed the 1990 Clean Air Act Amendments, the most expansive (and expensive) piece of environmental legislation to date.  Today Republicans in Congress are fairly united in their opposition to using the 1990 Clean Air Act to regulate greenhouse gases.

Judith Layzer’s Open for Business: Conservatives’ Opposition to Environmental Regulation chronicles the rise of anti-regulatory conservatism. I review Layzer’s book in the Summer issue of The New Atlantis. As Layzer notes, the fervor anti-regulatory sentiment on the political right has not been matched by a commitment to developing alternative approaches to environmental protection. Indeed, it seems that many conservatives are content to accept that regulatory stringency and expansiveness is a sound proxy for environmental protectiveness. This is one reason that anti-regulatory conservatism has not been particularly successful politically.

Anti-regulatory rhetoric may be pervasive, but federal environmental regulation has continued to expand, under Democratic and Republican presidents alike. Anti-regulatory conservatives have been able to stem the tide of regulatory initiatives, but only for a time. The failure to develop and advance non-regulatory alternatives to environmental problems has compromised efforts to constrain the EPA’s regulatory authority. There are plenty of Americans who are suspicious of federal regulation, but they nonetheless prefer federal environmental regulation to no environmental protection at all.

The failure of anti-regulatory conservatism is on display in the current fight over federal regulation of greenhouse gases. House Republicans oppose such regulation (and for good reason), but they have not put forward any alternatives (and many refuse to accept that climate change could be a problem). Nonetheless, federal regulation of GHGs marches on. The EPA just proposed another set of rules last month. Blanket opposition to federal GHG regulation failed to prevent (or even appreciably slow) such regulation, and time is running out. As GHG emission controls get imposed, and companies invest in the necessary control technologies, the political support for constraining EPA authority over GHGs will decline. Utilities may not want to give up coal or install costly carbon capture technologies, but once they’ve made these investments they will hardly want to see the regulations removed. If these rules are not stopped soon, it will be too late. This is a reason even those who refuse to accept the likelihood of climate change should consider alternatives to command and control regulation. Shouting “No” is insufficient to ensure success.

Here is how I conclude my review:

Layzer observes that “although most Americans still claim to be sympathetic to environmental goals, resistance to government action in pursuit of those goals is widespread.” To Layzer this is a paradox. To others it may be evidence of a latent public understanding that there is more than one way to advance environmental values. Pursuit of a greener society need not come at the expense of individual liberty or economic growth. By tacitly accepting the conventional assumption that regulatory stringency is a measure of environmental protectiveness, Layzer simplistically assumes that those who would challenge conventional regulatory strategies are opposed to environmental protection in general. The problem for environmental policy is that too many conservatives accept this assumption as well.

Cross-posted at the Volokh Conspiracy.

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Roads As Economic Development
Matthew Turner
Mon, 08/05/2013

Roads and transportation are costly. Building ten miles of a four-lane rural interstate highway costs about $200 million. For an eight-lane urban interstate, it is closer to $1 billion. Roads and transportation also come at a high environmental cost. The transportation sector accounts for about one sixth of world carbon emissions and the absence of roads is central to the process of taming (or spoiling) wild places. On the other hand, roads and transportation are the bedrock of the modern world. They facilitate the trade and specialization of tasks that is fundamental to economic growth since the industrial revolution. Devising transportation policy to balance the economic benefits of roads against their economic and environmental cost is an important and formidable problem.

Over the past several years, my coauthors and I have been conducting research to quantify the impact of road construction on various aspects of our modern world. A past issue of PERC Reports reported on research establishing that the total miles driven in a city each year increases in lockstep with the extent of a city’s road network. Other research done at PERC examines the reasons why driving is faster in some cities than others and estimates the benefits that might accrue to society if we were to adopt a simple scheme for pricing access to roads (as we price access to other goods and services, like candy bars or housing). In a paper forthcoming in the Review of Economic Studies, also supported by PERC, we examine the effect of interstate highway connections between cities and of interstate highways within cities on patterns of trade.  

More concretely, we analyze data describing trade-flows between a sample of large US cities and the interstate highway network. The central statistical problem is that of "reverse causation." If we observe that cities with extensive highway networks trade a lot, we do not know whether the highways are built to accommodate already high trade flows, or if the construction of highways causes trade. Much of our research effort is devoted to developing statistical procedures to solve this problem so that we can be sure that we are estimating the amount of trade that highways actually cause. 

We find a 10% increase in the length of the highway network within a city causes about a 5% increase in the weight of the city's annual exports but no measurable increase in its value. That is, improving a city’s highway network causes a city to become more specialized in the production of things that weight more per dollar of value. We confirm this pattern using 50 years of employment data. Cities with more extensive highway networks employ a higher share of their residents in industries that make heavier goods. It is not obvious that this is a desirable outcome.

We know from other research that an increase in the extent of a city’s highway network has a small effect on the city’s employment: a 10% increase in highway miles causes about a 1.5% increase in employment over 20 years. Taken together these results suggest the construction of new highways in US cities, like the one proposed for Nashville, are unlikely to have the large beneficial effects on economic activity that proponents claim, and that these benefits will not obviously be larger than environmental and construction costs.   

Taken together, the available research on the effect of the interstate highway system, and transportation infrastructure generally, suggests that the “roads as economic development” policy deserves careful scrutiny if not outright skepticism (although it does not address the value of road maintenance, which will likely fare better in a cost-benefit analysis). Among possible investments of public money, new transportation infrastructure (and highways in particular) appears to have far lower and less certain return than alternatives such as education or health care for the young. Although most of the research currently available is based on data from the United States, on the basis of this research the call for developing county infrastructure put forth in the UN's millennium development goals also deserves careful examination.

Matthew A. Turner is a 2013 Lone Mountain Fellow and a professor in the Department of Economics at the University of Toronto. His current research focuses on the economics of land use and transportation.

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