Ecuador, non-renewables and Coase

In a post that covers pretty much the entire environmental economics course in one way or other, Ecuador has suggested that the developed world pay it $350 million a year not to pump any more crude oil, thereby avoiding further pollution of its eastern rainforest.

Is this a Coasian bargaining problem? Who are the suffers and who are the polluters?

It is difficult not to be sceptical - will the West actually pay up? Can the Ecuadorian government be trusted? Will it not take the money now but find the bounty beneath the ground to tempting to pump out later? Will the individuals in Ecuador that have experienced the largest suffering actually see any of the $350,000,000?

Ecuador’s startling oil proposal [Chinadialogue]

Oil has been pumped from here for almost four decades and the result, say environmentalists, is 1,700 square miles (4,400 square kilometers) of industrial contamination, with rivers poisoned, wildlife wiped out and humans falling sick.

But now, mindful of the environmental and political cost, the state has made a startling proposal: if wealthy nations pay Ecuador $350 million a year -- half of the estimated revenue from extraction -- it will leave the oil in the ground.

Supporters say it is an idea whose time has come, a logical step forward from carbon offsetting, in which rich polluters in developed countries compensate for environmental damage caused by their consumer habits.

Since the proposal was first floated in June, there have been promising signals, said Alberto Acosta, a former mining minister and close ally of president Rafael Correa. The German and Norwegian governments have expressed interest, as have parliamentarians from Italy, Spain and the European Union. “This could be a historic accommodation,” he said. Donors could pay in cash, debt relief or other indirect ways.

Some greens champion the proposal as a way to protect biodiversity and combat global warming while allowing a poor country to develop. “It’s not utopian, it’s realistic,” said Esperanza Martínez, of the Quito-based organisation Acción Ecológica (Ecological Action).

But others are sceptical. They predict that rich countries will not stump up the money and that Ecuador’s government will ultimately find its oil bounty too tempting to pass up. The government and oil companies already are eyeing another chunk of Amazonian rainforest, the Yasuní national park, a UNESCO-designated biosphere reserve. Beneath part of the 982,000-hectare park lie the Ishpingo-Tambococha-Tiputini (ITT) oilfields, with an estimated one billion barrels of heavy crude. For the cash-strapped government, this is a tempting bounty potentially worth up to $700 million a year.

“It's a ploy; we don’t trust the government on this,” said Anita Rivas, the mayor of Coca, a town on the edge of the park. Like many in the Amazon, she scorned the notion that oil revenues would ease poverty, a mantra of successive governments worn thin by decades of stolen or wasted revenues. “Where are the benefits?” said Ms Rivas.

Even Acosta said: “We don't want to develop it because we know there will be damage. But if we have no other choice then, lamentably, we will do it.”

The costs of Ecuador’s oil industry are all too visible in those parts of the jungle where crude has been drilled, spilled, pumped and dumped -- a vision of what might be in store for Yasuní park.

Between Coca and Lago Agrio, bleak oil-rush settlements carved out of the bush, oil is never far away. It is in the 300-mile (480-kilometre) pipeline stretching through valleys and mountains. It is in the air in the form of rain and waste gas burnt by flares. It is in 1,000 or so waste pits of black sludge that leak into the water supply. It is in the soil in the form of congealed tar that stunts trees.

It is in the bodies of residents, according to several scientific studies, in the form of tuberculosis and other diseases that make hamlets such as San Carlos, adjacent to a refining plant, zoom off the medical charts. “Two-thirds of my patients have contamination-related illnesses,” said Rosa Moreno, a nurse at a small clinic.

Oil is even in the name Lago Agrio. It means Sour Lake and is taken from the Texas hometown of Texaco, the United States oil giant that drilled in the region from 1972 to 1992 and operated as a mini-state.

Chevron, the even-bigger giant that subsequently bought Texaco, is now embroiled in a $6 billion class-action lawsuit brought by 30,000 indigenous people and settlers. They claim that Texaco poisoned the region by dumping billions of gallons of toxic waste-water and want the company to clean it up. It is one of the world’s biggest environmental cases and has been dragging on for 14 years. “What happened here, we can’t let happen anywhere else, least of all Yasuní,” said the plaintiffs’ lawyer, Pablo Fajardo.

Chevron says Texaco broke no law, performed a $40 million clean-up in 1995 and that any contamination must be the fault of other companies that have operated there since then. “Ours was a beautiful operation, very clean. This lawsuit is a farce,” said Rodrigo Perez, a company lawyer.

Regardless of blame, there is no doubt that oil has devastated much of Ecuador’s forests. The question is whether Yasuní -- which is said to have more tree species in an average hectare than there are the US and Canada combined -- will be next.

For the indigenous tribes who call the region home, the untapped wealth far beneath the jungle floor is a threat.

“We wish it weren’t here,” said Wiyame Irumenga, an indigenous leader and forest ranger, tapping a bare foot against the earth. “We wish people would just forget about it.”

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Economics of the Environment in China update

Two articles of note from China Economics Blog.

A Green Awakening in Red China

Green Economics in Red China [Washington Post]

Both articles draw on material from a long post we wrote here on E. Economy's piece on environmental degradation in China.

Elizabeth C. Economy on "The great leap backward?"


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"Responsible China": CSR round-up for China

This blog was never intended to be China-centric but as is the way of the world, when people think of the impact of globalisation on the environment, China is in the front line both in terms or absolute levels of emissions and in terms of feeling the impact of climate change and the affects of pollution on the population.

One blog that specifically deals with Corporate Social Responsibilty (CSR) in China is "ResponsibleChina". The blog's daily roundup of CSR and environmental stories is useful (and I am sure will become the source of some posts on here). Certainly a blog worth sticking in a reader and has been put into our blogroll in the sidebar.

Some example links from today's roundup and one earlier post (FT) that touch on topics often discussed in this blog include:

Chinese local government ignoring national green agenda[edie news centre]

"The central government is committed to achieving the (green) targets but some local governments have turned a blind eye to them," He Bingguang, NDRC deputy director, told China Daily.

According to Mr He, some local governments had been giving preferential treatment to steel, cement and other high energy consuming and polluting industries despite the top leadership's repeated warning that "they are overheated and should be brought under control".

China cancels environmental report[LA Times]

BEIJING — From a public relations standpoint, it didn't look good. In the space of less than a month, China had quashed two potentially embarrassing environmental reports that would have said what most people already know: This is a country facing a costly and increasingly deadly environmental crisis.

First, in early July, reports surfaced that China had successfully lobbied the World Bank to redact portions of an environmental assessment that calculated how many people were likely to die prematurely as a result of air pollution.

Then, late last week, the government announced that it was canceling plans to publish a "green GDP" report that would have calculated the cost of pollution to China's rapidly growing economy, as measured by its gross domestic product.

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Despite relatively strong laws, enforcement of China's environmental policies is patchy at best, largely left to provincial governments that have a stake in local economic growth, regardless of the environmental cost. And it is those officials, some experts believe, who may have put the brakes on the recent reports.

Green vs growth battle in Beijing[The Austrailian]

The Organisation for Economic Co-operation and Development a week ago released a report on China concluding that "rapid economic development, industrialisation and urbanisation have generated severe and growing pressures on the environment, resulting in significant damage to human health and depletion of natural resources".

Wang Jin-nan, the technical head of the project to develop a green GDP, from the Chinese Academy for Environmental Planning, told Beijing News that there had been fierce opposition from local officials eager to maintain high growth figures.

Taking the waters[Financial Times]

Across large swaths of China's rapidly industrialising countryside, polluted water is killing tens of thousands of people every year, threatening the health of millions more and cutting the crop yields of farmers who have few other economic resources to fall back on.

The scale of the problem has been thrown into sharp relief in recent weeks as authorities turn off the taps of whole cities because of a spate of toxic blue-green algae blooms and chemical spills. In a toughly-worded warning this month, Pan Yue, deputy head of the State Environmental Protection Administration (Sepa), said China's "approach of growth through industrialisation" had pushed its environment "close to breaking point".

Mr Pan said 26 per cent of the water in China's seven biggest river systems had been found to be so polluted that it was dangerous to come into contact with or had "lost the capacity for basic ecological function". Sepa also deems seven of nine big monitored lakes polluted to such levels. Water quality is deteriorating even in areas subject to well-funded government clean-ups over the last decade, it warns.

The scandals and the prospect of a worsening crisis have prompted expressions of concern at the highest levels: Wen Jiabao, the premier, has called for the management of fresh water supplies to be treated as a priority "state project". Sepa itself appears determined to seize the moment to push for tougher enforcement of China's existing environmental regulations. This month it announced that it would not issue approvals for new industrial projects in six -cities, two counties and five industrial zones until authorities there cracked down on local companies found to be in violation of water protection rules.

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Corruption, Inequality and the Environment: Theoretical model

As part of some ongoing research the results from these models strike me as potentially interesting and possibly empirically testable.

Our previous theory/empirical paper in this area is "Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?" [Abstract].

Corruption, Inequality, and Environmental Regulation
Date: 2007
By: Jie He (GREDI, Département d'économique, Université de Sherbrooke)
Paul MAKDISSI (Departement d’´economique and CEREF, Universite de Sherbrooke, 2550 boulevard de l’Universite, Sherbrooke, Québec, Canada, J1K 2R1)
Quentin WODON (LCSPR, World Bank, 1818 H Street, NW, Washington, DC 20433, USA)

URL: http://d.repec.org/n?u=RePEc:shr:wpaper:07-13&r=env[PDF]

We develop two public choice models in which environmental regulation is determined endogenously in the presence of agents who are heterogenous in wealth or income. In the first model, regulation is determined by a majority vote, and an increase in inequality induces an increase in environmental standard. In the second model, the environmental standard is chosen by a corrupt bureaucrat. In that model, while the impact of an increase in inequality on the environmental standard is uncertain, a higher level of corruption always reduces the quality of environmental regulation. An empirical analysis using cross-country data confirms the implication of both models.
Keywords: Environmental regulation, corruption, inequality
JEL: Q56 Q58

Environmental Regulations: Is the gap between developed and less developed countries growing or shrinking?

A stylised fact that underlies a large swathe of the "globalisation and the environment" literature is the premise that environmental regulations differ across countries (or indeed regions within a country). An often used assumption in empirical papers is that there is a strong correlation between income and regulatory stringency (including some element of regulation enforcement).

This assumption then allows researchers to see whether firms are relocating from high to low regulation countries - a fairly intuitive hypothesis even if evidence is somewhat harder to come by.

This recent FT article talks about the regulatory regime is Europe. If regulations in the West increase but remain the same (or are at least still as poorly enforced) in LDCs then one might expect to see more pollution haven consistent behaviour of firms.

What is interesting is just how poorly enforced regulations have been in the West. No wonder governments in LDCs find it tough especially given the relatively high levels of corruption.

Goal is a level and clean playing field

Environmental regulation has been tightening in many regions of Europe as concerns grow over pollution and climate change.

Tighter UK regulations mean companies face much heavier fines than in the past. Company directors can be held personally liable for pollution and face jail terms or anti-social behaviour orders if they breach environmental regulations. Individuals can be fined up to £5,000 for failing to dispose of waste correctly.

Changes were brought in partly because companies were ignoring the previous system of fines. There were cases of companies taking payment for disposing of waste, then dumping it in fields because the fines were so small they could pay them and still make profits.

Now, the UK has a "pretty tough regime", said Brian Hall, head of the environmental group at Clifford Chance, the law firm..

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As some environmental crimes can cross borders, the European Union has been trying since 1999 to find ways of plugging loopholes between the national legal systems. But, national sovereignty in this area is a sensitive topic. While the European Commission tabled a proposal in 2001, it was ignored when justice ministers adopted their own plan in 2003. The Commission went to court to prove it should have been involved and won at the European Court of Justice last year.

Whether governments agree, by majority voting, to accept its new directive depends on how close it is to their original proposal. It prescribes minimum penalties for the most serious crimes, those in which those liable were negligent and caused death or acted as part of a gang. They extend up to 10 years in prison.

Fines for companies or other institutions should be between €750,000 ($971,000, £493,000) and €1.5m. Only those governments that wish to recognise the criminal liability of people acting for a company need do so, however. Other penalties include winding companies up, excluding them from aid and forcing them to clean up.

"Criminal sanctions are not in force in all member states for all serious environmental offences even though only criminal penalties will have a sufficiently dissuasive effect," the directive says. Spain and Greece apply civil law only to the illegal shipping of waste.

Elsewhere in the world, there is a mixed picture on enforcement. The dumping of waste, ranging from toxic to radioactive material, in developing nations is an increasing problem. China has been cracking down on some polluters - for in-stance, PetroChina was handed its biggest fine last month, according to the Xinhua news agency - but critics complain that the law is too weak.

India claims to have good environmental laws but campaigners raised an international controversy over conditions in shipbreaking yards there, when France tried to send the Clemenceau to India for disposal

Getting a world wide agreement on regulations is next to impossible. Europe would be a start.

Economists offered CASH to dispute IPCC report

If we thought Exxon and the oil companies had changed their ways we had better think again.

In a disappointing story from today's Guardian come news that:

Scientists offered cash to dispute climate study

Scientists and economists have been offered $10,000 each by a lobby group funded by one of the world's largest oil companies to undermine a major climate change report due to be published today.

Letters sent by the American Enterprise Institute (AEI), an ExxonMobil-funded thinktank with close links to the Bush administration, offered the payments for articles that emphasise the shortcomings of a report from the UN's Intergovernmental Panel on Climate Change (IPCC).

I have checked my post twice today but still nothing. How does one qualify?

Travel expenses and additional payments were also offered.

Intriguing - additional payments for what?

The AEI has received more than $1.6m from ExxonMobil and more than 20 of its staff have worked as consultants to the Bush administration. Lee Raymond, a former head of ExxonMobil, is the vice-chairman of AEI's board of trustees.

The letters, sent to scientists in Britain, the US and elsewhere, attack the UN's panel as "resistant to reasonable criticism and dissent and prone to summary conclusions that are poorly supported by the analytical work" and ask for essays that "thoughtfully explore the limitations of climate model outputs".

Climate scientists described the move yesterday as an attempt to cast doubt over the "overwhelming scientific evidence" on global warming. "It's a desperate attempt by an organisation who wants to distort science for their own political aims," said David Viner of the Climatic Research Unit at the University of East Anglia.

This is a great quote though:

Ben Stewart of Greenpeace said: "The AEI is more than just a thinktank, it functions as the Bush administration's intellectual Cosa Nostra. They are White House surrogates in the last throes of their campaign of climate change denial. They lost on the science; they lost on the moral case for action. All they've got left is a suitcase full of cash."

What is depressing is just how much it is possible to buy for a suitcase full of cash.
It appears that other oil sponsored think-tanks will be hard on their heels:

On Monday, another Exxon-funded organisation based in Canada will launch a review in London which casts doubt on the IPCC report. Among its authors are Tad Murty, a former scientist who believes human activity makes no contribution to global warming. Confirmed VIPs attending include Nigel Lawson and David Bellamy, who believes there is no link between burning fossil fuels and global warming.