Environmental Economics

Central London is one of the world’s first and largest congestion charge zones.  The zone covers about 22 Km² and comprises 370,000 inhabitants and 1.2 million jobs. While widely viewed as politically successful, the scheme’s economic assessment is more controversial. As a result, there’s a lot to learn from London’s example; policy makers around the world should pay attention.

Policy coverage

The congestion charge was initially introduced in 2003– then, at an amount of £5 per day. In 2005, the charge increased to £8 and currently amounts to £10 (about 18 CAD).

The charge only applies between 7 AM and 18.30 PM on weekdays (the busiest times). For a map of the charge zone, click here.

Central London residents receive a 90% discount and particular types of vehicles are exempt, including motorcycles, buses, taxis, ultra low emissions vehicles, and emergency service vehicles.

The implementation is simple. Motorist pay in advance or within 24 hours of their downtown visit.  A network of cameras monitors the visiting vehicles and issues penalties to individuals who haven’t paid the charges. To facilitate payment, the city allows various methods of payment: online, by phone, by text message, automatic payment, or by postal order.

Distributional Effects & Tax Revenues

Central London is characterized by high land values, internationally significant organizations, businesses, and shopping destination. As a result, the charge mostly affects middle to high-income individuals. However, as will be discussed later, shop owners pay a large portion of the burden as the charge results in fewer patrons and lower sales.

The tax revenues are invested in public transportation improvements, positively impacting everyone’s commute and, in particular, low income individuals.

Policy Effectiveness

Economically speaking, directly taxing congestion is the most effective method of reducing it to optimal levels. It allows individuals to face the true cost of driving. When making a decision to drive, individuals generally do not account for their contribution to congestion, which is bared by others. A congestion charge, however, internalizes this cost so that it enters individuals’ decision-making process. A tax is widely accepted in Economics as a direct solution to negative externalities (the economic term for costs that are not bared by their creator).

Given the strong theoretical support for the congestion tax, it is important to understand whether the policy is effective in practice.

As Transport for London, the implementing agency, indicated in its 2004 report, the impact on congestion was immediate and dramatic: traffic was reduced by 12% overall (34% for cars, while motorcycles, bikes, taxis, and buses increased). Of the 70,000 fewer cars per day in the zone, about half shifted to public transport, about 30% reduced their trips, and the rest made different adaptations, such as travelling at different times. The report also points out that commercial establishments in the area suffered a decrease in revenues. But the report provides alternative explanations for this negative outcome, including a 3-month shutdown of a major subway line and fear of terrorism because of the Iraq war. In the end, the report finds that the tax provided net benefits (including time savings and costs).

In the paper, Changes in the frequency of shopping trips in response to a congestion charge, Schmöcker and other authors conducted surveys to determine the change in shopping frequency and concluded that the primary reason was indeed the congestion charge (2006).

A different study, The London congestion charge: a tentative economic appraisal, by Prud’homme and Bocarejo, concluded that the costs of the congestion charge scheme far outweigh the benefits. The study reached this conclusion by estimating demand and cost curves for road usage and calculating the related gains and losses (2005).

In response to this last study, Charles Raux published comments critiquing the assumptions. He explains that the difference in results between the Transport for London report and Prud’homme and Bocarejo’s report hinges primarily on the value of time. The former study uses €15.6/h while the latter uses different (lower) prices depending on the type of trip, ranging between 12.8€ and 8.8€. Given the makeup of travellers during the congestion charge time interval (higher income and travelling for business), Raux argues (convincingly) for a value of time at least as high as the one used by Transport for London. The author also points to other faulty methodologies and important variables left out by the other study. Nevertheless, Raux acknowledges that the cost of collecting congestion charge revenues in high and detracts from the net gains (2005).

A more recent article in The Economist explains that despite congestion initially falling by 30%, the benefits have eroded and roads are only 8% less clogged than before 2003. Nevertheless, London has become a nicer place to wander around: some streets have been given to pedestrians, pavements have been widened and traffic-light phasing has changed in favor of people on foot (2012).

Overall, despite some controversy, the congestion charge is effective.

Conclusion

London’s policy makers have learned a few lessons: first, congestion charges can be politically successful (the mayor that implemented the policy was voted again into office and the following mayor kept the tax). Secondly, they are effective in reducing traffic and improving pedestrian areas. But in addition to the high implementation costs (about 170 million euros), the charge is expensive to the commercial sector that looses customers. This last point isn’t immediately obvious: the motorists subject to the tax are generally viewed as paying the entire burden. Yet, indirectly others are affected. Nevertheless, the effect isn’t necessarily a bad one as it provides an incentive for stores to relocate to areas less affected by traffic.

Hopefully, other cities and countries can follow suit, carefully considering the segments of the population that will be impacted.

Works Cited

“A Capital Idea.” The Economist. The Economist Newspaper, 24 Feb. 2007. Web. 30 Mar. 2014.

Charles Raux. “Comments on ‘The London congestion charge: a tentative economic appraisal.’” Transport Policy 12.4 (2005): 368-371. Print.

“Congestion Charge.” (Official). N.p., n.d. Web. 30 Mar. 2014.

“Keep Moving.” The Economist. The Economist Newspaper, 30 June 2012. Web. 30 Mar. 2014.

Rémy Prud’homme, Juan Pablo Bocarejo. “The London congestion charge: a tentative economic appraisal.” Transport Policy 12.3 (2005): 279-287. Print.

Schmöcker, Jan-Dirk, Achille Fonzone, Mohammed Quddus, and Michael G.H. Bell. “Changes in the Frequency of Shopping Trips in Response to a Congestion Charge.” Transport Policy 13.3 (2006): 217-28. Print.

The Deadliest Catch, a television series broadcasted by the Discovery Channel, shows the dangers of one of the deadliest professions: fishing in the Bering Sea during the Alaskan king crab season. Fishing in these waters had turned into a race so intense that the crab season only lasted a few frantic days. The race caused overfishing and the prices to drop as crab flooded the market.

As Edward Poulsen, director of the Alaska Bering Sea Crabbers, described in an interview with CNN, “the gun went off and everyone scrambled. Some boats loaded too many crab pots and capsized. Others pushed their crews to work too long” (2012). The fatality rate of fishermen in this region was 80 times that of the average profession in the United States.

Since the introduction of the Crab Rationalization (CR) Program in 2005, all that has changed. Overfishing no longer occurs, fishing is now safer and more profitable, and the crab season spans a longer time period.

The CR Program is a form of Individual Transferrable Quota (ITQ).  In this blog, I will discuss the economics and science of ITQs in general and discuss the policy specifics along with its advantages and disadvantages.

The story of crab fishing in Alaska more generally displays the strengths and weakness of ITQs as policy instruments.

The Economics & Science: why fishermen can be made better off with ITQs?

Very simply, fishing represents a classic example of the “tragedy of the commons”, where individuals acting in their own self-interest behave contrary to the group’s long-term interest by depleting a common resource – in this case, fish. The logic behind this outcome is clear: the cost of depleting resources is shared by everyone but the benefit is reaped by individuals.

To add to the economics of fisheries, it is important to recognize the science. The growth of fish stock follows a logistic trajectory: growth increases until it reaches a maximum level and then declines as the fish population reaches capacity. Since fishermen must expend more effort to catch fish in a low-stock fishery for the same harvest, it is clear that fishermen would be better off maintaining stock levels at or beyond the growth peak. For the same effort, they can catch more fish. However, as discussed above, each fisherman is better off over-fishing (irrespective of the group’s actions) making the group worse off. This is the intuition of the Gordon-Schaefer model, which is at the center of bioeconomics.

It is worth noting that at very low fish stock levels, fish mortality rate is greater than the reproduction rate, so the growth rate is negative, leading to the depletion of fish (even in the absence of fishing).

Economists provide various solutions to the tragedy of the commons, the most classic of which is providing property rights. ITQs are a form of property rights: only ITQ owners are allowed to fish and only in the amount specified by the quota. Therefore, fishermen have an interest in good management of the fishery because it increases the value of their share of it. And because the shares can be traded, an efficient allocation of the quota is reached. Further, fishermen who want to catch more can buy additional quotas instead of resorting to brutal fishing tactics.

Regulatory Context

In the United States, the Magnuson-Stevens Act (MSA), originally enacted in 1976, is the primary law governing marine fisheries management in federal waters. The MSA created eight regional fishery management councils – including the North Pacific Fishery Management Council (NPFMC), which is responsible for Alaska among other regions. The CR Program is managed by the state of Alaska and reviewed by the NPFMC.

Another important agency is the NOAA’s National Marine Fisheries Service (NMFS), which “assesses and predicts the status of fish stocks, ensures compliance with fisheries regulations and works to reduce wasteful fishing practices.”

In 2006, the MSA was amended to include new major requirements: the use of annual catch limits (TAC) and accountability measures to prevent overfishing.

CR Program Summary

Under the CR Program, the NMFS issued harvest shares (QS) to harvesters and processor quota shares (PQS) to processors. QS are percentages of the total allowable catch (TAC) and dictate the number of yearly quotas received by each owner of quota shares. Of the QS, 90% are Class A shares that require delivery to the processor holding the respective PQS, and the other 10% are Class B shares that can be delivered to any processor.

The program allocated 10% of the shares to affected communities and 90% to qualifying participants based on historical participation in the fishery.

The matching of QS with respective PQS and the allocation of shares proved controversial, as will be discussed later.

Policy Fact Sheet

Policy name: Crab Rationalization (CR) Program

Policy type: Individual Transferable Quota

Implementation date: Fall 2005

Geographical reach: Bering Sea and Aleutian Islands (BSAI)

Biological reach: King and Tanner Crab

Catch Limits: limits vary by year and fishery.

Mechanism for trading quota: none.

Enforcement mechanism: Aircraft deployment, at-sea boardings, investigations of violations reported by fishermen, and fee issuance for violations.

Effectiveness

According to the five-year review of the CR program prepared by the NPFMC, since the implementation of the crab rationalization program, the total allowable catch has never been exceeded (unlike during the previous derby-style system). Further, according to the review, “the program is meeting its goals, and findings have been used to design additional improvements to the program” (NPFMC, 2010).

Impacts

The review reported significant levels of discarding, as fishermen sort their catch for the most valuable crab and discard the rest. This is a common side effect of ITQs and it is problematic, since it increases the mortality of crab discarded and results in fishermen expending extra effort to fish (which is economically inefficient).  The problem is further exacerbated by the fact that most valuable crab – the cleanest and largest – is also the most likely to mate, further reducing the fishery’s growth.

Other impacts include the effect on Alaskan communities, in particular where fishing is the primary economic activity. As Alaska Report, a news agency, explains, the CR Program marked a shift in the industry toward market ownership by multinational processing companies. This outcome can be explained by the ITQ’s poor design.

First off, because class A shares (which represent 90% of total QS) must be delivered to a pre-specified processer, fishermen cannot unload their harvest to the highest bidder and, therefore, have little market power over prices.

Further, the regulation is very complex and burdensome, making it harder for small fishermen to compete.

Additionally, communities, which are important stakeholders of Alaskan fisheries were only allocated 10% of the total allowable catch. The rest was allocated according to historical catch.

A positive impact is, of course, the increased safety for fishermen who no longer resort to brutal fishing tactics to maximize their catch in short spans of time.

Looking Forward

The CR Program is in need of improvement. First, the regulation must be simplified, starting with eliminating the PQS. These shares are meant to provide stability for processors but are unneeded and hurt fishermen. Compliance must also be cheaper, especially for small fishermen. Further, the CR Program must implement a mechanism for trading quotas.

Broader Implications & Context

Despite the negative implications of the CR Program, ITQs have proven a successful model around the world. In combination with other fishing policies, ITQs have aided in the recent recovery of species including the New England scallops, mid-Atlantic bluefish and summer flounder, and Pacific lingcod.

Works Cited

“Alaska Crab Rationalization Program.” Alaska Crab Rationalization. N.p., n.d. Web. 23 Mar. 2014.

“Crab Rationalization.” North Pacific Fishery Management Council. N.p., n.d. Web. 23 Mar. 2014.

“The Deadliest Earmark.” – The Dark and Dirty Side of the Bering Sea Story You Won’t See on the Discovery Channel By Terry Haines. N.p., n.d. Web. 23 Mar. 2014.

“The Deadliest Earmark.” Deadliest Reports. WordPress, n.d. Web. 23 Mar. 2014.

Eilperin, Juliet. “U.S. Tightens Fishing Policy, Setting 2012 Catch Limits for All Managed Species.” Washington Post. The Washington Post, 09 Jan. 2012. Web. 23 Mar. 2014.

Five-Year Review of the Crab Rationalization Management Program for Bering Sea and Aleutian Islands Crab Fisheries. N.p.: NPFMC, 28 Dec. 2010. PDF.

“Lost Property.” The Economist. The Economist Newspaper, 25 Feb. 2012. Web. 23 Mar. 2014.

NEW YORK (CNNMoney) — The Nation’s Most Dangerous Job. “Crab Fishing: Most Dangerous Job Not so Dangerous Anymore.” CNNMoney. Cable News Network, 27 July 2012. Web. 23 Mar. 2014.

“Plenty More Fish in the Sea.” The Economist. The Economist Newspaper, 26 May 2012. Web. 23 Mar. 2014.

“A Rising Tide.” The Economist. The Economist Newspaper, 20 Sept. 2008. Web. 23 Mar. 2014.

Welcome to UBC Blogs. This is your first post. Edit or delete it, then start blogging!

Among failed climate change mitigation attempts, it is a heart-warming to find a success story right here in BC with the carbon tax it enacted in 2008. Hopefully, BC’s policy will serve as inspiration for Canada and the world.

In a lecture on Climate Change, the OECD Secretary-General Mr. Angel Gurría declared BC’s carbon tax to be “as near as we have to a textbook case” of good carbon policy.

Economists and news agencies hailed the tax as a “model of environmental and economic design” (Pollon). For example, Sustainable Prosperity, a research institute, praised BC as “a leader in North America on carbon pricing since it introduced the carbon tax in 2008”. In an article titled “We have a winner: British Columbia’s carbon tax woos sceptics,” The Economist explains that BC’s success shows that a “carbon tax can achieve multiple benefits at minimal cost.”

How does this so highly praised carbon policy work? And what makes it so successful? As climate change is an increasingly pressing matter, understanding these questions is important and will guide world leaders’ future decisions.

BC’s Carbon Tax

BC’s carbon tax started in 2008 as $10 (now $30) per tonne of CO2 equivalent emissions generated from burning fuel. Of course, since each fuel has a different chemical make-up, each fuel faces a different per litre tax. For example, the tax on gasoline is slightly under 7 ¢ per litre while the tax on diesel diesel is almost 8 ¢ per litre. BC’s carbon policy is North-America’s first broad-based, revenue neutral carbon tax. It is part of BC plan to reduce greenhouse gases by 33% below 2007 levels by 2010.

The Economics of Carbon Taxes

First, let’s discuss carbon taxes in general, as economic policy tools. Carbon taxes, together with tradable carbon permits, are considered “first-best approaches” because they directly price the negative impact and lead to efficient economic outcomes (Antweiler). The idea here is that the tax makes carbon emission more expensive, so that firms and individuals will reduce emissions in an effort to decrease costs. After adopting energy conservation and efficiency methods, further emission reductions become more expensive, until firms prefer the tax to further emissions reduction. At some point, it also becomes no longer socially optimal to reduce carbon emissions. For example, home heating during extremely cold weather is important despite carbon emitting. When the tax is priced appropriately (that is, when the tax is equal to the external cost of carbon emissions), firms and individuals will in the aggregate emit the socially optimal level of carbon.

Carbon taxes are also considered market-based instruments. Unlike emission standards, they have better “dynamic efficiency” in reducing emissions. That is, they provide persistent incentives for pollution reduction and for innovation in abatement technologies. By contracts, once an emission standard is achieved, there’s no further incentive to reduce emissions (Antweiler).

Key Characteristics & Reasons for Success

BC’s carbon tax was both politically and economically successful thanks to some keys characteristics.

First off, the tax is revenue neutral. That is, the government has the legal requirement to return the tax revenues to taxpayers through tax reductions. The government even distributed a one-time $100 per head ‘dividend payment.’ Further, the tax amount increased incrementally over the years, allowing individuals and firms time to adjust to the policy. Both of these features sustained the political support of BC residents. The New Democratic Party, which initially opposed the policy, later even said it should have supported it (The Economist).

A few characteristics make this carbon policy economically successful. First, as explained above, by directly taxing carbon emissions, the tax creates appropriate economic incentives. Further, administrative and compliance costs are minimal since the carbon tax is applied and collected in a similar way as motor fuel taxes. Moreover, the policy also addresses the concern that low-income families will be impacted the most, by providing additional tax credits to these families.

It is worth noting that the tax only covers 70% of carbon emissions, since, in BC, 30% of carbon emissions are not from fossil fuel. Nevertheless, BC plans to extend the carbon tax to emissions beyond fuel burning and integrate the tax with other climate action initiative.

The BC Ministry of Finance’s website indicates that the tax has the “broadest possible base” and that there are “no exemptions, except” (a choice of words I found interesting) a few cases for administrative reasons.

Impact/Results

According to the most recent Climate Action Progress to Targets report, “gasoline, diesel, natural gas, coal and oil have all gone down since 2007, and my more than the Canadian average.” The report also points to “high rates of clean technology sector growth, hybrid vehicle adoption, and construction of green buildings.” For example, BC’s hybrid car adoption was 2.1 times greater than the Canadian average rate. While BC reduced emissions at a faster paste than Canada as a whole, its population and GDP growth was above the Canadian average. These results indicate, as the report points out, that carbon policy and strong economic performance can be compatible.

While the results of BC’s carbon policies is overwhelmingly positive (at least according to the report), it is important to remember that the carbon tax is only one of the various BC programs aimed to reduce emissions. Therefore, it is not clear what portion of the success can be attributed to the tax. Further, these are short-term results; it will be more interesting to see whether they’re part of a long-term trend or only temporary. Moreover, using the rest of Canada as a benchmark can be problematic (even when looking at percent changes from a base year). BC’s economic performance and emission reductions may be due to BC-specific factors that are independent with the carbon policy. Therefore, the evidence in the Climate Action Progress to Targets report is not conclusive (but, nevertheless indicative of progress).

Going Forward

There’s still a lot more that BC can do. As BC’s Ministry of Finance explains, “the carbon tax will not, on its own, meet B.C.’s emission-reduction targets, but it is a key element in the strategy.”  The carbon tax must also be extended to emissions beyond fuel burning.

Further, to change individuals’ and firms’ behavior, the tax must be more aggressive. 7¢ per litre of gasoline will not do much to reduce driving or incentivize people to buy more efficient cars, but it’s a start.

Overall, BC has set a good example for carbon policy that will hopefully inspire others to follow suit.

As a former resident of California, I was happy to see that BC’s climate mitigation policies have earned it the title of “the California of Canada” (The NY Times).

Works Cited

Antweiler, Werner. Elements of Environmental Management. N.p.: n.p., n.d. PDF. The book has not been published yet. It’s only available to Prof. Antweiler’s students.

British Columbia Carbon Tax Review. Ottawa: Sustainable Prosperity, Sept. 2012. PDF. http://www.sustainableprosperity.ca/dl891&display

Gurría, Angel. “Secretary-General – OECD.” Secretary-General – OECD. OECD, n.d. Web. 08 Mar. 2014. http://www.oecd.org/about/secretary-general/The-climate-challenge-achieving-zero-emissions.htm

Lake, Terry. Making Progress on B.C.’s Climate Action Plan. Vancouver: British Columbia, 2013. PDF. http://www.env.gov.bc.ca/cas/pdfs/2012-Progress-to-Targets.pdf

Marshall, Christa. “British Columbia Survives 3 Years and $848 Million Worth of Carbon Taxes.” Editorial. The New York Times 22 Mar. 2011: n. pag. Web. 08 Mar. 2014.

Pollon, Christopher. “The Tyee – Has BC’s Carbon Tax Worked?” The Tyee. N.p., 23 Nov. 2011. Web. 09 Mar. 2014.

“We Have a Winner.” The Economist. The Economist Newspaper, 23 July 2011. Web. 08 Mar. 2014.

“What Is a Carbon Tax?” Province of British Columbia. BC Ministry of Finance, n.d. Web. 08     Mar. 2014. http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm