Another Unique Perspective: Environment

Showing posts with label Environment. Show all posts

Saturday, July 30, 2011

Infrastructure Development - Where to Begin

For a government, its businesses, other organizations, and citizens to flourish, its people, goods, and information must have the ability to move and interact freely in an integrated, cost efficient, resilient, and effective manner. Reliable, responsive infrastructure helps make this possible. Infrastructure includes the physical structure, components, and systems that provide the energy generation, transmission, and distribution, transportation network, digital communications network, water treatment and distribution, wastewater treatment, flood control, solid waste disposal, and educational function of the government’s territory. Determining the proper mix of infrastructure investment by type and cost to be provided by government within its jurisdiction requires careful consideration and analysis of a significant amount of information.

Typical U.S. local elected officials[1] should acknowledge that much of their constituencies’ infrastructure—its roads, sidewalks, streetlights, bridges, dams, public schools and colleges, public hospitals, the electrical grid, the water system, the storm water system, the sewage system, and many other major societal support systems—have been neglected for far too long. In order to address this neglect, they should seek to invest in revamping most of the old and constructing some new infrastructure in their communities. First, they should inventory the current infrastructure in their jurisdictions, assess its scope and extent, and catalogue the histories and timelines of its construction, maintenance, and operation, including each system’s direct and indirect costs. Next, they should categorize their jurisdictions' infrastructure wants and needs based on (1) these current inventories and their current providers (i.e., private sector, my jurisdiction, or another (special district or differing level) jurisdiction), (2) the current and projected adequacy (or inadequacy) of this infrastructure to meet expected needs, (3) the current states of repair and remaining expected lives of this infrastructure, (4) the current and expected future unmet infrastructure wants and needs (based on historic failures, internally anticipated inadequacies, and surveys of the constituency), (5) the current and projected funding sources[2] (and its adequacy or inadequacy) for current and anticipated infrastructure that includes planning, construction, maintenance, and operation over the full life-cycle, and (6) special considerations such as zoning and other laws and regulations, environmental concerns and constraints, and public safety issues.

Once this information is collected, they should work with other elected officials to rank potential infrastructure investment based on a combination of societal need, public safety, sustainability, public desire, and life-cycle funding source adequacy, respectively.

[1] Since much of American infrastructure is built and operated by local or state governments, state or local officials are the main intial drivers of infrastructure development.

[2] These may include direct taxes, user fees, grants, bonds, private-public partnerships, or combinations thereof.

Monday, March 28, 2011

Climate Change and Discount Rates

Image via Wikipedia

Global Mean Surface Temperature Difference Data

Many analysts have observed that the range of the expected future impacts of anthropogenic climate change is highly dependent upon discount rates. Depending upon the time horizon and discount rate selected, one can derive almost any desired outcome. Given this observation, it is crucial that one carefully consider and document one’s reasoning related to choice of discount rate and time horizon when attempting to make credible, defensible climate change projections.

In most benefit-cost analyses (BCA), the application of discount rates to the proposed project’s entire life-cycle costs versus alternative uses for its proposed investment calculates the net present values of the cost and benefit flows of the project and its cash flows[i] versus alternative “risk free” uses of capital[ii]. When the net present value of the project exceeds alternative uses, the project is deemed feasible.

There are at least three methods for determining the discount rate that can be selected—the opportunity cost method, the social time preference method, and the intergenerational method. Often, public sector officials evaluate investments by using the opportunity cost method. In this method, discount rates are based upon market rates[iii] in order to avoid crowding out private sector investments. The actual numbers used are often determined based on investment advisors’ surveys of market rates. Discount rates selected by this method, if not carefully calibrated, do not adjust for externalities such as the costs of pollution, rising global temperatures, and market power dynamics such as monopolies. Thus, this type of discount rate is usually inappropriate in climate change modeling.

Another, more appropriate method of discounting is by social time preference discounting. This concept of discounting arises from the observation that people prefer immediate to deferred satisfaction. The compensation (or increased utility) that a person (or group) requires in order to defer immediate consumption is measured. The discount rate is the percentage measure of this compensation per unit time. This rate is largely a measure of the pure rate of time preference, but it also has implicit elements of relative risk aversion (i.e., the uncertainty in climate change estimates) and of consumption growth rates (i.e., correlated variables that drive the variables which slow or quicken the speed and direction of climate change). By addressing many timing and input uncertainties and the asymmetry of drivers and impacts, social time preference discounting is an improvement over opportunity cost discounting.

A third, more controversial method of discounting is the intergenerational method. It can be argued on an ethical basis that there should be no preference between the value of a benefit (or cost) now and the same benefit (or cost) in the future after allowing for the expected probability of the extinction of human beings, such that an intergenerational discount rate might be about 0.1 percent per annum[iv].

[i] That include allowances for risk by using a “risk free” discount rate (such as T-bills) or by using probability ranges to calculate ranges of net present expected values.

[ii] The proxy for this is simulating an investment in a risk-free investment such as Treasury bills in an allocation whose maturities correspond with the project’s expected life cycle.

[iii] Social discount rate and liquidity preference (i.e., one’s asset preference distribution (wherein the distribution is by their ability to be easily transferred—i.e., cash is the most liquid of assets)) largely determine market interest rates. Market interest rates can also be thought of as the discount rate for appraisal of an investment or the cost of capital to the investor with a risk adjustment. Cost of capital can be calculated as the weighted average of its cost of equity and debt, with the proportion of debt is limited by the risk of insolvency.

[iv] This might also be viewed as the most extreme social time preference method.

Sunday, August 22, 2010

Fiddler Crabs as Pollution Markers after Oil Spills

Male crab showing off his one big arm to a female.

Image via Wikipedia
In 1969, the oil barge Florida ran aground in Massachusetts, and it released approximately 200 thousand gallons of fuel into Cape Cods' Buzzards Bay. The spill killed many fish and lobsters, damaged sensitive oyster and clam beds, and devastated the local marshlands. Today, signs of the disaster remain. In particular, fiddler crabs that normally burrow deep down, funneling oxygen to the roots of marsh grass, stop digging in Buzzard Bay when they reach oil , turn sideways, and burrow back to the surface. More than 40 years after the spill, they still act “drunk’’ from the oil they ingest, and predators can catch them more easily, research from Woods Hole Oceanographic Institute shows. Many think that the Deepwater Horizon event will play out differently than Buzzards Bay, perhaps involving more of a shorter-term "smothering" effect due to the light crude oil rather than the longer-term penetration and persistence of the diesel fuel. But, no one knows. We'll have to wait and see. And fiddler crabs will be a major "canary in the coal mine."

Wednesday, June 2, 2010

MMS Acting Director Bob Abbey

The new Acting Director of the Minerals Management Service (MMS), Bob Abbey, fired an environmental whistleblower, Earle Dixon, in a previous job with BLM. Dixon had complained about lax environmental standards. Here's a link to the settlement with Dixon. Let's hope it was an aberration. Regardless, interesting choice in the wake of the current oil spill ... .

Dixon Settlement

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